TaxTMI 
TaxTMI 
2020 (5) TMI 82
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.... same are therefore disposed of vide our ideal common adjudication. 2. Coming to Revenue's three appeals ITA No.217 to 219/Kol/2018, we notice that its first and foremost identical substantive grievance seeks to reverse the CIT(A)'s action allowing leave encashment claim(s) payment basis of Rs.46,11,027/- each in former two and Rs.28,64,737/- in last assessment year 2013-14 out of the alleged disallowance figure of Rs.13,98,000/-, Rs.87,41,000/- and Rs.1,30,76,000/-; respectively. The Revenue's only case is that the CIT(A) has granted excess relief exceeding amount of disallowance made by the Assessing Officer. Learned CIT-DR fails to dispute the CIT(A)'s identical lower appellate discussion in these three assessment year(s) has gone by actual payments only u/s 43B(f) of the Act. The CIT(A) has also taken note of the hon'ble jurisdictional high court's decision in Exide Industries Ltd. vs. Union of India (2007) 292 ITR 470 (Cal) quashing foregoing statutory provision itself as ultra vires and its operation stayed in hon'ble apex court's to conclude that assessee's mere provision of leave encashment does not deserve to be accepted. We find neither any legality nor irregul....
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....3.77 lacs which was liable to be considered for making disallowance under Rule 8D(2)(ii). Accordingly in terms of the formula prescribed in Rule 8D(2)(ii), the AO worked out interest disallowable at Rs. 53.56 lacs. The Ld. AO also made disallowance out of business administrative expenses at 0.5% of the average cost of investments, and thereby disallowed Rs. 202.04 lacs in terms of Rule 8D(2)(iii). 4. In their oral and written submissions, the Ld. A.Rs have strongly contested the invocation of Rule 80(2) by the Ld. AO in the impugned order. The Ld. AR submitted that although the Ld. AO disallowed a sum of Rs.I0.12 lacs under Rule 8D(2)(i), nowhere in the assessment order the AO had identified even a single specific item of expenditure which was directly incurred in relation to earning of exempt income. In all the past assessments the appellant had suo moto disallowed 1% of the dividend income earned as the amount disallowable under Section 14A of the Act. The disallowance offered at the rate of 1% represented allocation of common administrative overheads which might have been incurred by the appellant in relation to earning of dividend. The appellant's offer to....
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....ally more than the investments capable of yielding dividend income and therefore presumption that had to be applied on the facts of the appellant's case is that the investments, yielding tax free income were made or acquired out of appellant's own funds. The appellant's reliance on the recent judgment of the Calcutta High Court in the case of CIT Vs Rasoi Ltd (ITA No. 109 of 2016) dated 15.02.2017 appeared to be very relevant. In this judgment the jurisdictional Calcutta High Court had benefit of considering the earlier judgment of the same Court in the case of Dhanuka & Sons (339 ITR 319) as also the judgment of the Bombay High Court in the case of CIT Vs HDFC Bank (383 ITR 529). In the case of Rasoi Ltd (supra), the High Court found that assessee's own funds were higher than the investments in tax free securities and in that view of the matter, the interest disallowance made u/s 14A read with Rule 8D(2)(ii) which was deleted by the ITAT was upheld by the Calcutta High Court. The relevant findings of the Hon'ble Calcutta High Court was as follows: "It appears for both the assessment years the Appellate Authority held that there was no finding of direct....
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....he appellant's case before the Assessing Officer that the borrowings of the appellant were made for specific business purposes. With reference to the evidenced brought on record, the appellant had demonstrated that the borrowings were made for specific end uses and the borrowed funds were utilized entirely for business purposes and not for the purposes of making investment in shares which yielded tax free dividend income. It was also the pleading of the appellant that the appellant's own funds in the form of capital & free reserves were sufficiently large to meet the cost of investments and therefore no interest disallowance under Rule 8D(2)(ii) was called for. I find that the income-tax assessments of the appellant for AYs 2008-09 to 2010-11 were subjected to proceedings before the Hon'ble Settlement Commission and the Hon'ble Settlement Commission by its order in Application No. WB/Kol/Central-III/2011-12/9/IT dated 07.05.2012 upheld the contention put forth by the appellant. In other words, I find that the Hon'ble Settlement Commission had accepted the assessee's pleading that the loan funds were utilized by the appellant for the specific business purpose....
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....fering the disallowance u/s 14A at the rate of 1% of the gross dividend was followed by the appellant and accepted by the Revenue upto AY 2007-08, but from AY 2008-09 onwards, the Ld. AO rejected tile said basis and sought to make the disallowance under Section 14A read with Rule 8D(2)(iii). This manner of making disallowance was objected by the appellant in the proceedings before the Hon'ble Settlement Commission for AYs 2008-09 to 2010-11. In its order dated 07.05.2012, the Hon'ble Settlement Commission recorded following material findings with regard to disallowance to be made out of administrative expenses: "9.3 Having said as above, when this Bench observed that since the Commission has exclusive Jurisdiction over the years covered by the application as pointed by the Revenue and hence for AY 2008-09 to 2010-11, it has to be satisfied about the correctness of the. Applicant's claim of expenditure to be added back in terms of Section 14A(2) read with Rule 8D, the AR replied that the expenses allocated by the Applicant as per working statement filed is actually less that the amount offered on the basis followed by the AO in earlier years as aforesaid, and he....
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....e's voluntary disclosure only. 5. Learned authorized representative has taken pains to file on record detailed written submissions in support of the CIT(A)'a action. His first and foremost case is that the Assessing Officer has exercised his rectification jurisdiction to correct the corresponding sum(s) involved herein (supra). He clarified that case law of hon'ble Patna high court in Narendra Prasad vs. Commissioner of Income Tax (2010) 322 ITR 171 (Pat) holds that the issue decided by the Settlement Commission is a settled state of affair which could not be disturbed unless there is change in facts and circumstances. Learned counsel then invites our attention to the assessee's multi-folded arguments that the impugned disallowance was not at all warranted since it had not incurred any such expenditure. The Assessing Officer had also not recorded any cogent satisfaction regarding assessee's books of account before invoking Rule 8D disallowance of the Income Tax Rules, 1962. Its interest free funds exceed the interest bearing ones in all these assessment year(s). Its last plea without prejudice to all the foregoing arguments is that only net interest expenditure and investmen....
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....legislature has itself provided for computation of the impugned disallowance going by the three head(s) of direct , proportionate interests and administrative expenditures under Rule 8D(2)(ii)(iii) of the Income Tax Rules w.e.f. assessment year 2008-09 onwards, we are of the opinion that the Income Tax Settlement Commission's adjudication in the said preceding three assessment year(s) restricting the impugned disallowance pertaining to three AYs of exempt income does not form a binding precedent being per incarium as per CIT vs. B.R. Constructions (1993) 202 ITR 222 (AP) (FB). We thus reverse the CIT(A)'s above lower appellate findings to this effect. 8. Next comes equally important aspect of quantification of the impugned disallowance under these three head(s) of direct, proportionate interest and administrative expenditure. The assessee's suo motu disallowance figure(s) of Rs.10.1, Rs.12.04 and 15.97 (in lakhs) falling under the first category of direct expenses only. We thus, uphold the same since Revenue has also failed to rebut correctness thereof. 9. We next proceed to the second limb of proportionate interest expenditure, under Rule 8D(2)(ii) and notice that the assess....
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.... as under:- "26. DECISION: 1. I have carefully considered the submissions of the Learned. ARs in light of the facts available on record. I find that in the return of income for the relevant AY 2011-12, the appellant had claimed aggregate depreciation of Rs. 1,31,14,64,051/- which comprised of additional depreciation of Rs. 17,64,56,401/- on the new assets which were acquire during the relevant year. In the present appeal, the appellant has now raised a claim that in respect of actual cost of machinery installed but put to use for period less than 180 days in the preceding FY 2009-10, on which the additional depreciation was allowed at the reduced rate of 10% in the computation of income for AY 2010-11; that in the relevant AY 2011-12, the remaining 10% of the additional depreciation for which deduction was not allowed in the earlier year, should be allowed under Section 32(1)(iia) of the Act. 2. The Ld. ARs of the appellant have claimed that the above claim is legal in nature and submitted that the first appellate authority has the power to entertain new claim if the grounds raised are bona fide. In support of this proposition the Id. AR relied on plethor....
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....pra), I am of the considered view that the further claim of additional depreciation of Rs. 13,39,47,637/- being bona fide the claim made for the first time in appellate proceedings is admissible for adjudication. 4. Now proceeding to the merit of the appellant's claim, I find that the assessee had purchased and installed new plant and machinery for its manufacturing unit and put to use for a period of less than i.e. 180 days, during the financial year 2009-10 and claimed 50 per cent additional depreciation under section 32(1)(iia) in view of the second proviso to section 32(1)(ii). The balance 50 per cent of additional depreciation on such plant and machinery has been claimed by the assessee company during the year under consideration i.e. FY 2010-11. Bare reading of clause (iia) of section 32(1) applicable with effect from the assessment year 2006-07, provides for allowance of additional depreciation equal to 20 per cent of actual cost of new plant and machinery acquired and installed after 31-3-2005 by an assessee engaged in the business of manufacture or production of any article or thing. Such additional depreciation is to be allowed as deduction under section 32(1....
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....0-11 for less than 180 days. The Id. AO shall also accordingly re-compute the closing WDV of the block of assets for the relevant year which is to be carried forward to the subsequent years. Ground No. 8 therefore stands allowed. " 13. Learned CIT-DR's only case during the course of hearing is that the Assessing Officer had rightly disallowed the assessee's additional depreciation claim @ 10% u/s 32(1)(iia) since it had put its corresponding fixed assets to use in earlier assessment year(s) than installation thereof in the relevant previous year only Mr. Shankar refers to this tribunal's recent decision in Welspun Corporation vs. DCIT and vice versa ITA No.5370 & 5722/Mum/2015 dated 13.12.2019 accepting the Revenue's identical plea. We find no merit either in Revenue's foregoing arguments. This tribunal's yet another co-ordinate bench deciding the very issue in Revenue's favour (2017) 82 taxmann.com 238 (Chennai) Brakes India Ltd. vs. ACIT declining simultaneous additional depreciation claim stands reversed byhon'ble Madras high court in TCA No.55/2017 dated 14.03.2017. Their lordships have made it clear that such a deduction claim is allowable even if in case th....
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.... or assets of the AE, and that even after the law was amended with retrospective effect the effect should also be such as to have a bearing on profits, incomes. Losses or assets of the enterprise. It has also been argued that the impact of the impugned Corporate Guarantee should be on a real basis and not on any contingent or hypothetical basis, and that the onus is upon the Ld. AO to demonstrate that that the transaction has a bearing on the profits, income, loss or assets of the enterprise, and that there has to be cogent material on record to indicate that intra AE international transaction has some impact on the profits, incomes, losses or assets. Most importantly, it has been argued that the Hon'ble ITAT, Delhi, in a ruling in the case of M/s. Bharti Airtel Limited Vs Addl. CIT[2014] 64 SOT 50 (URO) / 43 taxmann.com 50(Delhi) adjudicated on transfer pricing issues arising from the issuance of a Corporate Guarantee to associated enterprises among others in this case, the taxpayer, an Indian company, provided a guarantee to a third-party bank on behalf of its foreign subsidiary for which it did not charge a fee. The taxpayer contended as it did not incur any costs in providi....
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....determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an Independent enterprise or would have performed the activity in-house for itself. Therefore, from the perspective of the recipient, if it were not something that he would have paid for, the activity should normally not be considered as an intra-group service under the arm's length principle. Given that Indian TP law differs from the OECD's approach in certain aspects with respect to the application of the arm's length principle, it would not be out of place to state that this judgment highlights one of them. 3. Be the case, as it may, it has to be said that the Hon'ble jurisdictional ITAT in the case of M/s Tega Industries Vs DCIT in ITA No. 1912/Kol/2012 [Reported as [2016] 76 taxmann.com(Kolkata-Trib)] has adjudicated the matter' and held that where the assessee has provided corporate guarantee to the Bank to fund its subsidiary for acquiring a company(ies) on behalf of the assessee, since the assessee's expectation from loan was that of a Shareholder, and the intention was to protect its ....
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.... corporate guarantee should be required. Accordingly, we direct the Ld. DRP/ TPO to delete the addition." In view of the decision of the Hon'ble jurisdictional !TAT, it has to be said that there is strength in the contention of the appellant-company that in the facts emanating in the case, there may not have been any real justification on the part of the Ld. AO to treat the corporate guarantee given by the appellant to the AE as an international transaction. 4. I have also carefully considered other supplementary arguments of the Ld. A.Rs for the appellant-company in the matter rebutting and challenging the action of the Ld. AO/TPO. The appellant has been able to draw and demonstrate similarity in the factual and legal matrix in the case of Tega Industries and its own case. It has been pleaded that the contention of Tega Industries Ltd is similar to that of the appellant. The objective of Paharpur Cooling Towers Ltd, i.e, the appellant to set up PNRL & SFPL was to undertake the expansion of appellant's operations in South Africa. Tile appellant had set up operating subsidiaries to with the sole intent & purpose of vertically integrating Its core business a....
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.... there can be no element of service in a shareholder's function as there is no benefit derived by the Shareholder in the said business, except that of earning more dividend income, which in any case was taxable In the hands of the said shareholder, 6. I further note that the Id, AR has also forcefully argued that even in case the issuance of corporate guarantee is held to be an 'international transaction', then appropriate internal CUP was available to benchmark the corporate guarantee. The Ld. AR submitted that the appellant had also obtained guarantees from external Banks/FIs to whom guarantee commission in range of 0.35% to 0.5% was paid. In view of the judgment rendered by the Hon'ble Bombay High Court in the case of CIT Vs Everest Kanto Cylinder Ltd (358 ITR 57) rendered on this specific issue, the Id, AR alternatively claimed that the guarantee commission fee of 0.35%-0,5% actually paid by the company to the Bank was a fair & reasonable parameter and the most appropriate benchmark for determining ALP of corporate guarantees issued to AEs. I have taken note of the foregoing argument, but in light of the findings set out in the earlier paragraphs wherein the iss....
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....he assessee submitted before us that extending corporate guarantee for borrowings by subsidiaries was a shareholder activity, that it was not an international transaction, that no fee was warranted since no cost was incurred, and that bank guarantees were not comparable to corporate guarantees since the business of the bank was different from that of a corporate. Before us, ld DR for the Revenue submitted that there are plethora of judicial pronouncements wherein it has been held that the corporate guarantee is in the nature of service provided by the taxpayer to its associate enterprises (AEs) and hence should bear a charge. The judgments have explicitly held that after the Income Tax Act,1961 was amended by the Finance Act, 2012 to include 'guarantee' within the definition of "international transaction" with retrospective effect from 01.04.2002, the corporate guarantee should be benchmarked from arm's length perspective. 10. However, after hearing both the parties, we note that there are plethora of judicial pronouncements wherein it has been held that corporate guarantee does not constitute an international transaction and accordingly there should not b....
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....hat an activity in the nature of shareholder activity, which is solely because of ownership interest in one or more of the group members, i.e. in the capacity as shareholder "would not justify a charge to the recipient companies". It is thus clear that a shareholder activity, in issuance of corporate guarantees, is taken out of ambit of the group services. Clearly, therefore, as long as a guarantee is on account of, what can be termed as 'shareholder's activities', even on the first principles, it is outside the ambit of transfer pricing adjustment in respect of arm's length price. " " .... We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services ... " " .... The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet suc....
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....of the Act ... " "Para 33 .... The onus is on the tax authorities to demonstrate that the transaction is of such nature as to have 'bearing on profits, income, losses or assets of the enterprise' and has to be on real basis even if in present or in future, and not on contingent or hypothetical basis ...." "Para 32.... There can be a situation in which a guarantee default takes place and therefore, the enterprise may have to pay the guarantee amount but such a situation even if that be so is only a hypothetical situation ....." "Para 32 ..... When an assessee extends an assistance to the associated enterprise which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets and therefore it is outside the ambit of international transaction under section 92B(1) of the Act. ..." "Para 35 .... In the case of GE Capital Canada -vs- The Queen, the tax court of Canada has indeed dealt with ALP determination of the guarantee fe....
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....nternal CUP Method. From the Economic Analysis I find that the appellant considered the actual interest rate of 3.6% paid by it on the External Commercial Borrowings procured in US denominated currency to be most appropriate parameter to benchmark the interest rate on the loans advanced to the AEs. The appellant had therefore suo moto offered interest income computed with reference to the ALP interest rate of 3.6% determined on the loans advanced to the AEs. With regard the advances mentioned at SI. No. (c) above, it was the appellant's case that the sum of Rs. 45.95 lacs was in the nature of trade advance given to SFPL in the course of business for purchase of timber and therefore the same could not be equated with a 'loan' and hence no benchmarking exercise was carried out in this regard. 3. On examination of the transfer pricing order, I find that the Ld. TPO was not in agreement with the assessee's contentions and the TP study of the appellant. From the show cause notice CSCN') issued by the Ld. TPO, it appears that according to him the loans should have been bench marked at the probable cost of loan if the AEs had Independently obtained such loans ....
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.... rate of 28.39%. 5. In the paper book furnished, the appellant has enclosed the explanation furnished in response to the SCN issued by the Ld. TPO. I find that in its submissions the appellant substantiated the application of internal CUP and determination of ALP of loans at 3.6%. The appellant further submitted the details of loans subsequently obtained by its AEs from external parties which ranged between 2.25% to 2.6% to show that the ALP of 3.6% determined by it was fair & reasonable. The appellant pointed out the specific defects & fallacies in the methodology put forth by the Ld. TPO in the show cause notice. The appellant also explained the inherent fallacies in the Ld. TPO's determination of cost of funds and also application of ROCE Method. The appellant also brought on record several judgments of the coordinate benches of the Hon'ble Income-tax Appellate Tribunal wherein it has been held that the relevant currency related LIBOR rate was the most appropriate benchmark for arriving at ALP of inter-corporate loans. 6. From the impugned order, I find that having considered the objections raised by the appellant to the SCN, the Ld. TPO himsel....
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....t of mixed pool of funds, he considered the weighted average of return on investments and cost of debt, which worked out to 11.68%, to be the cost of funds of the appellant. 8. After determining the above cost of funds, the Ld. TPO was of the view that such cost of funds of should be further increased by an appropriate spread to cover the risks involved for lending to such vulnerable & low rated AEs. This spread was determined by the Id. TPO at 600 bps. However how did the Id. TPO derive such spread of 600 bps or what was the basis of ascertainment of credit spread has nowhere been spelt out in the impugned order. The Id. TPO has only referred to a loan connector sheet of a Singapore company for the year 2007 wherein the said Singapore company is stated to have obtained a loan facility of USD 200 million at 12.25% to infer that the spread that should be charged by the appellant was 600 bps. However how did the Id. TPO connect these dots between the aforesaid loan connector sheet of Singapore and the loans advanced by the appellant to its AEs in South Africa & Mauritius is nowhere discernible from the impugned order. Nevertheless, the Ld. TPO aggregated th....
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....were far different from South Africa &. Mauritius where the funds were advanced in foreign currency and not in Indian currency. In the circumstances the return on investment in India could not be the basis for determining ALP of an international transaction which was admittedly carried out in far different economic circumstances and that too In foreign currency terms i.e. USD & SA RAND. Even with regard to credit spread of 600 bps added to the cost of funds, I find force in the Ld AR's submissions such inclusion was unwarranted and without any basis. 10. I also find considerable force in the Id. AR's submissions that in determining the ALP of the funds borrowed by AEs, the return on investment earned by the appellant could not be taken into consideration as the relevant factor. More so such "return on investment" could not have been taken into account by the Ld. TPO to determine the "cost of funds". It is apparent from the appellant's balance sheet that substantial portion of its own surplus funds have been deployed in making investments in shares of other bodies corporate as also loans and deposits. The returns derived from the range of investments represent t....
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....arked against the relevant currency denominated LIBOR rate. The relevant judicial precedents in this regard are as follows: • Cotton Naturals (I) Pvt. Ltd. [TS-117-HC-2015 (DEL)-TP] • Tata Autocomp Systems Ltd. (TS-45-HC-2015(BOM)-TP) • Bhansali & Co. (TS-451-ITAT-2010(Mum)-TP) • M/s Four Soft Ltd. Vs. DCIT (ITA No.1495/HYD/2010) • DCIT vs. Tech Mahindra Ltd. (ITA No.1176/Mum/2010) • Mahindra & Mahindra Ltd. vs. DCIT (ITA No.7999/Mum/2011) • Cotton Naturals (I) Pvt. Ltd. Vs. DCIT, Circle-3(1), (ITA No.5855/Del/2012) • Tata Autocomp Systems Ltd. Vs. Assistant Commissioner of Income Tax, (2012-(052)-SOT-0048-TBOM) • Hinduja Global Solutions Ltd. vs. Addl.cit, (ITA No.254/Mum/2013) • Aurinopro Solutions Ltd., vs. Addl. Commissioner of Income Tax (ITA No.7872/Mum/2011) • VVF Ltd. vs. DCIT (2010-TIOL-55-ITAT-MUM) • M/s Aithent Technologies Pvt. Ltd. v/s ITO (2010-TII-134-ITAT-DEL-TP) 14. In view of the above and respectfully following the judgments of the High Courts & Income-tax Appellate Tribunal, I hold that the ALP deter....
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....remaining appeal(s) ITA Nos.218 and 219/Kol/2018 for latter two assessment year(s) 2012-13 & 2013-14; respectively. Its identical 4th substantive ground in both these appeal(s) seek to revive disallowance of provision of foreseeable loss in contract revenue(s) amounting to Rs.6,85,60, 000/- and Rs.2,41,72,439/- (assessment year-wise); respectively made by the Assessing Officer. The CIT(A)'s identical detailed discussion in assessee's favour deleting the same reads as follows:- "23. DECISION: 1. I have carefully considered the submissions of the Ld. ARs in the light of the facts available on record. From the impugned order I find that the Ld. AO had show caused the appellant to explain as to why the foreseeable losses provided in the books of accounts against the contracted revenues should not be disallowed while computing the taxable income for the year. In response the appellant explained that the foreseeable losses were provided in terms of mandatory accounting standards, AS-7, notified by the Institute of Chartered Accountants of India on a fair & reasonable basis and following the established doctrine of prudence. The Ld. AO however not being agreeable to the ....
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....ore I note that the appellant had in fact demonstrated that the provision for foreseeable loss was not only made on the principle of prudence as also in conformity with AS-7, but in fact the appellant incurred such losses on execution of contracts in the subsequent years and in such year no deduction was claimed in the return to the extent the losses were covered by the provision made in AY 2012-13. These facts therefore lead to the conclusion that the provision for loss created by the appellant was not only scientific basis but the same was provided having regard to the facts & circumstances of the case which the appellant was able to demonstrate in reality in the subsequent year. 3. I also observe that the appellant's claim for deduction of foreseeable losses in execution of contracts is an allowable deduction is supported by the following judgments: Mazagon Dock Pvt Ltd Vs DCIT (29 SOT 356) (ITAT Mumbai) "The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered in....
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....epting in principle the assessee's claim as being allowable ...." Asst.CIT Vs ITD Cementation Pvt Ltd (146 ITD 59) (ITAT Mumbai) "14. We have considered the rival submissions and perused the orders of the lower authorities. We have a/so the benefit of going through the AS-7 issued by ICAI. At the very outset, it would not be out of place to consider the provisions of s. 145 of the Act. Sec. 145(2) of the Act provides that the Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. It is a fact that AS-7 has not been notified by the Central Government. This does not mean that the assessee is precluded from following AS-7. A perusal of the provisions of s.145 show that accounting standards which have been notified by the Central Government have to be mandatorily followed by the assessee. But this does not mean that the assessee cannot follow the other accounting standards issued by ICAI. ICAI being the highest accounting body of the country, created by an Act of Permanent, accounting standards issued by it cannot be brushed aside lightly. On the co....
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.... The question that came up for consideration was as to whether the anticipated loss on the valuation of fixed price contract in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress was concerned, it could not be disputed that in view of mandatory requirements of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by the Comptroller & Auditor General of India. Therefore, the observation of the CIT(A) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable. It was not disputed that the Department in earlier years had allowed the loss on e....
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....ses have been brought on records by the Revenue, reversing the findings of the learned CIT(A) , we direct the AO to recompute the business profits by allowing the losses provided by the assessee in its books. The appeal filed by the assessee is allowed Asst.CIT Vs Ashok Buildcon Pvt Ltd (170 TTJ 19) (ITAT Mumbai) 8. At the time of hearing, the learned Representative submitted that a similar situation had arisen before the Mumbai Bench of the Tribunal in the case of Asstt. CIT v, ITD Cementation India Ltd. [2014] 146 ITD 59/[2013] 36 taxmann.com 74 (Mumbai) wherein a provision made for foreseeable losses was allowed as a deduction. Apart therefrom, reliance has also been placed on the decision of the Mumbai Bench of the Tribunal in the case of Mazagon Dock Ltd. v. Jt. CIT [2009] 29 SOT 356 in support of the case of the assessee. In the course of hearing, reference has also been made to the following decisions: (i) judgement of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra) (ii) Bharat Earth Movers v, CIT [20007 245 ITR 428/112 Taxman 61 (SC) and, (iii) Rotork Controls India (P.) Ltd. v. CIT [20097314 ITR 62/180 Taxman 422 (SC). 9. W....
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....n terms of AS-7 issued by Institute of Chartered Accountants of India (ICAI) made a provision for future foreseeable losses and claimed deduction of such a provision. The Revenue disallowed the provision made for such foreseeable losses. The Tribunal concurred with the stand of the assessee that such a provision was an allowable deduction. The relevant portion of the order of the Tribunal is reproduced as under: 12. To the similar effect is the decision of the Mumbai Bench of the Tribunal in the case of Mazagaon Dock (supra) which has also been relied upon by the Tribunal in the case of ITD Cementation Indie Ltd. (supra). Therefore, in view of the aforesaid precedents in principle, it has to be inferred that where an assessee is executing an infrastructure development fixed price contract, the foreseeable losses of future years can be recognized following the rationale of AS-7 issued by lCAI and such a provision is an allowable deduction." 4. Respectfully relying on the foregoing judicial decisions and also having regard to the facts and circumstances of the case discussed in tile foregoing I direct the Ld. AO to allow the deduction for provision for foreseeable l....
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....n the latter assessment year 2013-14. Learned departmental representative fails to dispute that the assessee's impugned provision also confirms AS-7 applicable "accounting for construction contracts" as per various judicial precedents taken note of the CIT(A)'s discussion. Hon'ble apex court's landmark judgment in Commissioner of Income Tax vs. Chainrup Sampatram (1953) 24 ITR 481 (SC) held long back that although the principles of conservatism and prudence in accounting require that no anticipated profits are to be recorded as income until realised, the converse is not true regarding anticipated losses which could be booked at the first sign of reasonable probability. We conclude in view of all these foregoing facts that the assessee was very well justified in claiming the impugned foreseeable liability provision in these two assessment year(s) regarding its project works by in compliance of AS-7 of the Act. The Revenue's instant substantive grievance fails therefore. 22. The Revenue's identical 5th substantive grievance pleaded in both these appeal(s) seeks to revive the Assessing Officer's action disallowing assessee's employees contribution to PF & ESI amounting to Rs.1,....
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....cts as are brought on record by the Ld. ARs of the appellant-company, I note that the disallowance made ill the impugned order was misconceived both on facts and in law. It appears, in my considered observation that the Ld. AO did not bring on record all facts as are necessary to appreciate the controversy at hand. From the material facts on record, I find that the appellant had availed loan in foreign currency to part finance its working capital and at the time of taking the loan it had negotiated for payment of interest which was at floating LIBOR rate plus 230 bps. As such the appellant was exposed to risk of unfavorable movements in LIBOR rate and therefore any increase in LIBOR would have adversely impacted the effective rate of interest for the appellant. In the circumstances to hedge against the probable losses that would be caused by any unfavorable movement in LIBOR, the appellant entered into interest swap arrangement where under the assessee swapped its floating rate loan to a fixed rate loan of 3.35%. Consequent to such swap arrangement, the appellant had to re-state its liabilities expressed in foreign currency as on the balance sheet date which resulted in a loss. I t....
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....overnor India P. Ltd (supra) was considered by the ITAT. Having considered both, the Tribunal held that the view canvassed by the CBOT in its Instruction No.3/2010 was contrary to the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India P. Ltd (supra) and therefore did not represent the correct, decided and accepted legal view and accordingly it was held by the Hon'ble Tribunal that the MTM loss provided in the books by following AS-11 is not contingent or notional loss but real loss which is required to be allowed in computing the business income of an appellant. Since the facts of the appellant's case squarely come within the parameters laid down in the foregoing decisions, I hold that the Ld. AO was not justified in disallowing Rs. 1,17,86,000/-, being MTM loss on derivatives holding it to be notional or contingent. Since I have observed that the MTM loss is real loss, the Ld AO is directed to allowed the deduction therefore in computing income both as per normal computation provisions as well as book profit u/s 115JB of tile Act. Grounds Nos. 15 & 16 are therefore allowed." 24. We have given our thoughtful consideration to ri....
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....f the payee company that the payee was a shell company and was not in existence was also reported that the payee had neither expertise nor the infrastructure provide the services claimed in the audited accounts and there was no compliance on behalf of the payee company. On these facts, the Id. AO of the payee reported that the payee was used for routing unaccounted monies. According to ld. AO the payee had received cheques from the beneficiaries and subsequently equivalent amount was returned back to the broker behalf of the beneficiary companies after completing web of transactions but multilayering of funds. The Id. AO observed that the payee had sub-contracted the work to other fictitious concerns for the purposes of layering of the funds and therefore addition on protective basis were made in the hands of payees. The explanations put forth by the appellant and the evidences produced were rejected by the Id AO on the ground that the Inspector after conducting enquiry did not find existence of RNPL at the given address. On verification of company's master data of MCA database, the Id. AO found that the status of the payee was shown to be "strike-off". The Id. AO ther....
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....f Rs. 6716.69 lacs whereas the amount billed to the appellant was only Rs. 34.01 lacs. In percentage terms the amount billed to the appellant did not even constitute 0.5% of the contractual receipts of the payee company. I also find that the payments were made by the appellant by account payee cheques and the payments were cleared through proper banking channel and documentary evidence in support thereof was filed before the Ld. AO. The payments made inter alia included the service tax levied by the payee on the invoiced value and the payee was duly registered with the Service Tax Department. In the circumstances the primary onus cast on the appellant of substantiating the transactions was discharged by the appellant. In the assessment order the Ld. AO has observed that Inspector deputed to conduct enquiries from the payee could not locate the said company at the given address and this was the reason which prompted the Id. AO to draw adverse inference. However I note that the reason for not finding the payee at the given address has been provided by the Ld. AO himself when he observed that as per MCA data the payee company's name was struck off from the ROC, meaning thereby the....
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.... case before us, besides the fact that payment was made by chegue, there are other pieces of evidence available which are as follows: a) Books of Accounts maintained by the assessee in the ordinary course of business; b) Deduction of Tax at source; c) Deposit of the money deducted at source: d) Particulars of the recipient were duly furnished; We are, as such, of the opinion that the views expressed by the learned Tribunal are unexceptionable. We, therefore refuse to admit the appeal. The appeal is thus dismissed." 4. Similar view was taken by the Gujarat High Court in the case of CIT Vs. Nangalia Fabrics Pvt. ltd (40 taxmann.com 206) involving similar circumstances, the relevant extracts thereof are as follows: "The second question pertains to brokerage commission of Rs. 72,37,808/- disallowed by the Assessing Officer. The Assessing Officer disallowed the commission on the ground that M/s. Shree Shantinath Silk Industries did not maintain its record and its name did not appear on sale bill. When it was challenged before the CIT(A) it was of the opinion that the only one party had been examined by the Assessing Officer ....
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....leted. Ground No. 17 is therefore allowed." 27. We have given our thoughtful consideration to rival pleadings supporting and contesting the impugned disallowance. The Assessing Officer had admittedly invoked the impugned disallowance mainly on the ground that the payee herein alleged to have provided consultancy services to the assessee's turned out to a shell entry in mere accommodation entry business. Learned CIT-DR fails to dispute that the assessee had placed on record all the relevant evidence of the said recipient. Hon'ble jurisdictional high court's decision in Inbuilt Merchant Pvt. Ltd. (supra) has already set identical issue to treat that such a compliance by way of all detailed evidence forms sufficient reason to prove rendering of the services as well as genuineness of payments. We thus affirm the CIT(A)'s findings deleting the impugned management consultancy services disallowance as well. 28. Lastly comes the Revenue's 8th substantive grievance that the CIT(A) has erred in law and on facts in deleting notional interest income addition of Rs.10,23,81,896/- received / receivable from M/s SPL for loans provided. The CIT(A)'s detailed discussion deleting the im....
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....in the year under consideration. Accordingly the Ld. AO made addition of Rs. 10,23,81,896/ -. 2. On careful perusal of the Ld. AO's observations, I find that the conclusions drawn by the Ld. AO suffer from several infirmities, legal as well as factual. The appellant had entered into a loan agreement dated 01.12.2007 with M/s SPL, in terms of which the assessee had given loan of Rs. 15 crores carrying interest rate of SBI PLR (subject to minimum of 12%). The interest was payable at quarterly rests. Clause 3.07 of the loan agreement provided for charging of penal interest in the form of liquidated damages, where the borrower committed default in 3. From the foregoing facts and the sequence of events, I note that the entire addition as made in the impugned order was simply based on book entries passed by the loan debtor in its books without there being any intention on its part to make payment of penal interest at any time. I note that in the impugned order the Ld. AO has justified the addition solely on the ground that the appellant followed mercantile system of accounting and therefore appellant was obliged to recognize the income in the same year in w....
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....n of Rs. 15 crores in December 2007. The agreement prescribed for payment of interest equal to SBI Prime Lending Rate or 12%, whichever is higher. The said agreement also contained clause for payment of liquidated damages in the event the borrower committed default in payment of interest. It was a penal clause incorporated in the agreement to protect the interest of lender and to force the borrower to pay without committing any default. However' such penal clause was never invoked by the appellant and no demand was ever raised on the borrower till 31st March 2013. I also note that SPL was declared as a sick industrial company and referred to BIFR. Accordingly the borrower enjoyed statutory protections from the creditors such as appellant who could not have instituted any legal proceedings for recovery of loan amounts. In such background therefore, I find merit in the AR's submissions that the ground realities were such even the recovery of principal was in serious question and therefore merely because the agreement contained a clause for payment of liquidated damages, income in form of penal interest did not accrue or arise, giving rise to accrual of "real income". The fact....
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..... Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient even though given up the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. This was exactly what had happened in instant case. Here the agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the instant case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. " 6. The same was once again expressed by the Hon'ble Ap....
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....ake steps to recover the dues towards enhanced charges from the consumers during this period Before the expiry of the period of six months the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, and subsequently, it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges. In subsequent representative suit the consumers were challenging the enhancement in charges made in 1963 and had sought a declaration that the assessee-company was not entitled to recover more than 31 paise per unit for light and fans and 20 paise per unit for motive power and the trial court, while decreeing the said suit had given a declaration in these terms. Hence, the said declaration was not confined to the period subsequent to 31-3-1969. The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity had to be considered by taking the probability or improbability of re....
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....e sake of avoiding the repetition, these judicial decisions are not discussed herein. Suffice to say, that it has been Judicially held that subject matter of taxation is and has always been the "real income" and not hypothetical income or notional income and therefore unless in reality the income accrues to an assessee, there cannot be any charge of tax irrespective of entries made in the books of accounts or lack of entries in the books. Having regard to the facts involved in the present case, I find that SPL in default since inception of the loan transaction and being a BIFR declared sick company, the realization of the principal itself was in serious doubt. In the circumstances merely because the assessee followed mercantile system of accounting, the AO could not bring to tax income in the form of liquidated damages although a clause in the agreement provided for payment of such liquidated damages. I also find that a unilateral entry made by the borrower in FY 2012-13 was immediately reversed in the books of the borrowers in the immediately succeeding year and no part of the penal interest was received by the appellant at any time. On these facts therefore I have no hes....