TaxTMI 
TaxTMI 
2023 (4) TMI 1087
X X X X Extracts X X X X
X X X X Extracts X X X X
....sions of section 35D which do not contain any such provision in respect of sale of unit otherwise than amalgamation/demerger. 2. The Commissioner of Income Tax (Appeals) erred in upholding that to determine standard rent of property under the Bombay Rent Control Act the reasonable rate of return should be @ 12% of market value of land and investment in building as against 6% on land and 7% on investment in building as per the report of architects, M/s Sykes & Divecha. 3. (a) The Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs.33,08,680/- being interest on borrowed funds out of total interest of Rs.48.54 crores, on the ground that under section 14A it represented expenditure by the assesse in relation to income which did not form part of total income. (b) The Commissioner of Income Tax (Appeals) erred in rejecting the appellant's contention that share capital and free reserves of the appellant are far in excess of investments made and profits before depreciation for any year are also far in excess of amount invested from time to time in such investments and accordingly, the learned Assessing Officer was not justified in maki....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted that it is an ascertained liability. 8. The appellant submits that the learned Assessing Officer be directed: (i) to allow deduction of Rs.60,00,150/- under section 35D of the Act; (ii) to consider the rate of return on land at 6% and on investment at 7% as per the report of architects, M/s Sykes and Divecha; (iii) to delete the disallowance of a sum of Rs.33,08,680/- under section 14A of the Act; (iv) to allow set off of short term capital loss of Rs.3,88,449/-; (v) to not consider the provision for doubtful debt amounting to Rs.1,78,27,482/ while computing book profit under section 115JB of the Act; (vi) to delete an addition of Rs.1.79,50,000/- under section 92CA(3) of the Act; (vii) to delete the addition of Rs.20,79,881/- in respect of swap charges and interest On loan; and to modify the assessment in accordance with the provisions of the Act. 9. Each of the above grounds of appeal are independent and without prejudice to each other. 10. The appellant craves liberty to add, to alter and/or amend the grounds of appeal as and when given." 3. We shall deal with the above issues ground....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act relates to amortization of certain preliminary expenses whereby the assessee is allowed deduction of an amount equal to 1/10th of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commenced or as the case may be the previous year in which the extension of the undertaking is completed or the new unit commenced production or operation. The past history of the assessee was that there is no dispute insofar as the eligibility criteria of the assessee is concerned. The preliminary expenses were incurred by the assessee in assessment year 1996-97, which was the first year of the claim of 1/10th of the expenditure. Since then 1/10th was claimed and allowed till assessment year 2001-2002. The impugned assessment year, i.e., M/s. Raymond Limited. assessment year 2005-2006 is the last assessment year, i.e., the tenth year of claim of deduction, which has been denied since the Steel Unit has been sold by the assessee. On a perusal of section 35D shows that the Act is silent in the case when a unit is sold. Section 35D(5) of the Act refers to the transfer before the expiry of the period of 10 years to another Indian co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of architects, M/s Sykes & Divecha. Ld.AR of the assessee brought to our notice that the issue in appeal has been considered by the Co-ordinate Bench of this tribunal in ITA.No. 7793 & 7794/Mum/2010 for the A.Y.2005-06 and 2006-07. Copy of the order is placed on record. Ld.AR of the assessee further brought to our notice recently in assessee's own case in ITA.No.1973/Mum/2009 dated 20.02.2019 the Coordinate Bench followed the decision for the A.Y.2005-06. Ld. AR of the assessee prayed that the same may be adopted for the year under consideration. 9. On the other hand, Ld. DR has fairly accepted the submissions of the Ld.AR. 10. Considered the submissions and material placed on record, we observe from the record that identical issue is decided for the A.Y.2004-05. While deciding the issue, the Coordinate Bench of the Tribunal in ITA.No. 1973/Mum/2009 dated 20.02.2019 held as under: - "16. We find that on this issue, the assessee has made the following submissions: In the assesse' s own appeal for A.Y. 1995-96 the CIT (A) has held to determine the annual value of the property @ 12% of the cost of land & building and dismissed the ground of Assessee. Said....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the submissions of the ld. DR shows that the A.O. has computed the annual value of the property at Rs.3,60,21,880/- and the income chargeable under the property can be Rs.2,56,41,066/-. The ld. CIT(A) on the other hand directed the A.O. to compute the annual value of the property with reference to the standard rate of the property determinable as per the relevant provisions of the Rent Act and modify the A.O.'s order accordingly. In this regard, the assessee's contention is that the direction should be given in accordance with the earlier year ITAT order that the annual value of the property should be 12% of the cost and the land and building. In this regard, we note that it is the plea of the Revenue that making an annual value as a percentage of the cost of the land and building forever will lead to annual value fixed for eternity which can never be permitted. We find that the ITAT earlier had confirmed the same direction. The matter is already before the Hon'ble Jurisdictional High Court. We do not find any cogent reason to depart from the earlier order of the Tribunal in the assessee's own case. Hence, we follow the same and direct that the ITAT's order in assessee's own ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e has never invested in mutual funds before, however, the assessee submitted a statement of investment made in units of mutual funds and according to the assessee never in the past it had invested in mutual funds. It is only after sale of steel and cement divisions investments were made in these funds. As and when the units were sold the proceeds were either reinvested or utilized for business purpose. Thus, no borrowed funds have been utilized for the purpose of investment in mutual funds and therefore, there can be no disallowance of interest U/s. 14A of the Act. Further, Assessing Officer by following the Ld.CIT(A) order on earlier Assessment Years proceeded to disallow the interest as under: - Details Rs. in Crores 1) Total Funds 1426.34 2) Borrowed Funds 531.08 3) % 37.23% 4) Investment from which dividend is exempted U/s. 10(33) a) Subsidiary Company 2.20 b) In other companies 0.08 c) Units of UTI 3.94 d) Non trade investment 3.51 (A) 9.73 5) a) Foreign Company (Investment from which dividend is made taxable) 15.29 b)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 6,138.08 81,252.22 EQUITY SHARES APPLICATION 327.00 31-Mar-02 11,061.08 6,138.08 83,388.27 EQUITY SHARES CURRENT MUTUAL 299.43 31-Mar-02 11,061.08 6,138.08 83,388.27 FUND DIVIDEND OPTION UNITS OF 2,872.34 31-Mar-02 11,061.08 6,138.08 83,388.27 UTI DIV REINVESTMENT LESS: 19.51 31-Mar-02 11,061.08 6,138.08 83,388.27 PROV UNITS OF UTI DIV REINVESTMENT - 181.75 INVESTMENT AS AT 31-03-2002 7,011.61 18. Therefore Ld. AR prayed that as per the above informations submitted before us, it clearly indicates that no interest expenditure is disallowable u/s. 14A of the Act. 19. On the other hand, Ld.DR relied on the orders passed by the lower authorities. 20. Considered the rival submissions and material placed on record, we observe from the informations submitted by the assessee clearly indicates that the various investments were made by the assessee in earlier Assessment Years which is backed with the details of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y which had not already arisen or fallen due but is only a provision with regard to the sum that might become liable to be paid is other reserves' within the meaning of rule 1 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, and should be taken into account in computing the capital of the Company for the purpose of the Act". 24. The Assessing Officer observed that Hon'ble Bombay High Court in the case of Echjay Forging Pvt. Ltd [166 CTR 100] has differentiated the ratio laid by Hon'ble Madras High Court on the facts of the case only and have not decided on legal issue. Further, he observed that the principle laid by Hon'ble Madras High Court following the decision of the Hon'ble Supreme Court in the case of M/s. Jyoti Ltd (supra) is squarely applicable in the assessee's case as the provision against doubtful debts has not been made against the determined and identified non performing asset. The provision in general has been made against advances and thus is an unascertained liability within the provision of clause (c) of Explanation to Sec. 115JB(2). Accordingly, he made an amount of Rs..1,78,27,482/- to the book profits of the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, if an assessee debits provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the 'current liabilities and provisions' on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989. He submitted that the case of the assessee is exactly similar to the above observation made by the Hon'ble High Court that assessee has created only a provision for doubtful debts and actually not written off. 29. Considered the rival submissions and material placed on record, we observe that the assessee habitually calculates provision for doubtful debts and discloses the same in its balance sheet and creates a provision to the same amount. We noticed that assessee has created similar doubtful debts for Financial Year 31.03.2001 and created provision for Rs..170.36 lacs. We observe from the method of account followed by the assessee is that it created provision every year and carry forwards the same amount to the subsequent year and if there are any actual bad debts it is adjusted during the year. Therefore, from this m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt of Rs..179.50 lakh. In the proceedings before the TPO, assessee made submissions with respect to the profitability of the assessee being higher than the profits of similarly placed Indian enterprises. The Assessee submits that this was based on the transactional net margin method (the TNMM) which has been followed by it in the later years. Pursuant thereto, no transfer pricing adjustment in respect thereof has been made for A.Ys. 2003-04, 2004-05 and later years. Therefore, the position is that the TNMM method for benchmarking commission payment has been accepted in the later years. Though, no working in this regard was produced before the TPO, the assessee provided the necessary working by way of additional evidence before the CIT(A) (pages 155 to 172 of Paper Book 1). Therein, it has been pointed out that the assessee's operating profit margin being operating profit/sales is 14.19% while that of the comparable (6 of them) was 7.90%. The Ld.CIT(A) had called for a remand report on the same which is at pages 234 to 254 of Paper Book I. Based thereon, the Ld.CIT(A) has refused to admit the additional evidence (paragraph 10.2 at page 28 of his order). Independently he has also....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) by advertising and by the distribution of printed matter, subject however to the form, manner, extent and wording of such advertising and such distribution matter being previously approved in writing by the Company and without recourse to the Company for any expense incurred unless such expense shall have been specifically authorised by the Company in writing. iii) and generally by doing all such other acts as may be conducive to the promotion and extension of sale of the Products. (b) shall obtain orders for the Products upon the terms contained in the Conditions of Sale as specified by the Company from time to time. (c) shall in all correspondence and other dealing relating directly or indirectly to the sale of the Products clearly indicate that the products are manufactured by the Company or such other party as intimated by the Company. (d) shall not accept orders or make contracts on behalf of the Company for purchase or sale of the Products, other than those which have been subject to confirmation and acceptance by the Company, and subject to the Company's Conditions of Sale for the time being operative and will not make any promises, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... v Dow Agroscience India Pvt. Ltd. dated 10.08.2016 in ITA No. 1443/M/2011 (see pages 39 to 49 of Paper Book II, where the necessary finding is in paragraph 7.2 at pages 46 and 47 thereof.). c. From assessment year 2003-04 onwards, i.e., the immediately next year, the assessee has benchmarked the commission payment by applying the (TNMM) method which has been accepted by the TPO as no transfer pricing adjustment thereof has been made in any later year. The orders passed by the TPO for assessment year 2003-04 and 2004-05 are at pages 223 and 224 of Paper Book I. It is well settled by now that consistency in respect of the most appropriate method applicable to bench mark a particular transaction has to be accepted. In this regard, reliance is placed on judgment of the Hon'ble Apex Court in CIT v Cargill Foods India Ltd. being order dated 28.11.2016 in petition for special leave to appeal being CC No.19007 of 2016(copy handed over separately at the time of hearing) and again enclosed herewith at pages 10 to 11. Further this principle of consistency has been followed in the context of most appropriate method to be adopted for benchmarking a transaction by the jurisdictiona....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ook International Tax Planning Manual by Horwath International as per which it is calculated on the basis of net profit as 5% of the expenses. Therefore, he proceeded to allow the markup of 5% on the costs incurred by the associate entity for the purpose of performing the marketing activity and the T.P.O held that the costs incurred by the associate entity on account of payment of commission to the sub-agents is in the nature of pass through costs. There is no value addition performed by the associate entity on these costs. Therefore, he supported the findings of the T.P.O in this regard. 38. Considered the rival submissions and material placed on record, we observe that the assessee had paid overseas agency commission to its associate entity based on the agreement and these payments are subject matter of dispute. We observe that the assessee had not benchmarked this transaction and the TPO has adopted the principle from the Swiss Administration guidelines, according to us, it is not specified method prescribed in the sec.92C of the Act and Rules framed for the determining the ALP. We also observe that TPO considered and equated the present transaction with the liaison office, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation. Therefore, we direct the AO/TPO to adopt the TNMM method for benchmarking for this assessment year also. Hence, the ground raised by the assessee is allowed. 40. With regard to Ground No. 7 which is relating to enhancement of assessment by disallowance of an amount of Rs..20,79,811/- in respect of swap charges has been raised. Brief facts relating to the issue are, the Ld.CIT(A) in his appellate order has denied the said claim on the ground that it has been debited as a provision in the profit and loss account which means that the liability in respect thereof has not yet accrued. In respect of the same amount, he has held that the book profits are not to be increased by the provision as it is in respect of an ascertained liability (paragraph 11 at pages 29 and 30 of the CIT(A)'s order). 41. Ld. AR submitted that assessee had borrowed funds using the ECB route from State Bank of India and Citibank, where interest was payable every six months. The said interest was payable based on the rate of interest then prevailing at the time of payment. With a view to cap the rate at which interest was to be paid the assessee entered into an agreement with Bank of America for sw....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the property at Rs.3,50,21,280/-. 2. The Ld. CIT(A) erred in directing the AO to reduce an amount of Rs.80 lacs being the provision for redemption of debentures from the book profits u/s 115JB of the Act without appreciating the fact that the liability is unascertained. 3. For this and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the Assessing Officer restored." 46. Ground No.1 of grounds of appeal which is in respect of determining the standard rent of the property. This ground is similar to Ground No. 2 of grounds of appeal raised by the assessee in ITA.No. 2660/Mum/2008 for the A.Y. 2002-03 and the decision taken therein shall apply mutatis-mutandis to the ground also. Accordingly, the ground raised by the revenue is allowed. 47. With regard to Ground No. 2 of grounds of appeal which is in respect of increase of book profit by the amount of provision for redemption of debentures. Ld. AR brought to our notice that similar issue stands covered in favour of the assessee by the Hon'ble Jurisdictional High Court in the case of CIT v. Raymond Ltd., [2012] 209 taxman 65/21 taxmann.com 60 (B....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Corporation Ltd. Vs. Commissioner of Income Tax1 . The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that "the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve". Where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT2 , in holding that since the concept of reserve and of a provision is well known in commercia....