TaxTMI 
TaxTMI 
2023 (7) TMI 1148
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.... Appeals dated 19/05/2017, 29/11/2017, 29/09/2017 and 09/07/2018 respectively. The Appeals in ITA No. 5202/Del/2017 (A.Y 2012-13), ITA No. 1005/Del/2018 (A.Y 2013-14), ITA No. 133/Del/2018 (A.Y 2014-15) and ITA No. 7553/Del/2018 (A.Y 2015-16) dated 19/05/2017, 29/11/2017, 29/09/2017 and 09/07/2018 respectively filed by the Revenue. 2. The assessee and the Revenue have raised the following grounds of appeal in their respective Appeals as under:- 2.1. I.T.A. No. 4796/DEL/2017 (A.Y. 2012-13) (Assessee) Re : Disalowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 6,40,98,834jMder_section 14A of the Income Tax Act, 1961 ("the Act") as against suo-motu disallowance of Rs. 77,45,598 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ('the Rules') without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied., 1.2 That t....
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....ly for the reason that similar claim qua leased assets was not made by the appellant in earlier years. 2.4. That the CIT(A)/ assessing officer erred on facts and in law in disallowing the aforesaid claim of depreciation without disputing that the lessor appellant (a) is the owner of the leased vehicles/ assets and (b) such assets are used for business purpose, and thus eligible for depreciation under section 32 of the Act. Re: Ad-hoc disallowance of support service fees and reimbursement of expenses 3. That the CIT(A) erred on facts and in law in upholding ad-hoc disallowance to the extent :: Rs. 19,95,37,610 being 25% of support service fees and reimbursement of expenses aggregating to Rs. 79,81,50,441/ (Rs. 63,55,67,850- service fee + Rs. 16,25,82,591- reimbursement of expenses) paid by the appellant to group companies. 3.1. That the CIT(A) erpm on facts and in law in holding that the support service fees and reimbursement of expenses paid by the appellant to group companies are not wholly and exclusively incurred for the business of the appellant and hence not allowable under section 37(1) of the Act. 3.2. That the CIT(A) erred on facts and in law in holding that the a....
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....nvestments yielding taxable income during the relevant year; and (c) investments not actually yielding exempt income during the relevant year, while applying formulae prescribed in Rule 8D of the Rules." 2.4. I.T.A. No. 1105/DEL/2018 (A.Y. 2013-14) (Department) 1. "On the facts and under the circumstances of the case, Ld. CIT(A) has erred in law and facts in restricting the disallowance made u/s 14A r.w.r. 8D upto the dividend received. 2. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of bad debts written off by the appellant of Rs. 89,30,64,775/-. 3. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of interest on compulsorily convertible debentures Rs. 16,35,00,000/-". 2.5. I.T.A. No. 7856/DEL/2017 (A.Y. 2014-15) (Assessee) "1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 4,91,93,909/-under Section 14A of the Income Tax Act, 1961 ("the Act") [restricted to dividend income] as against suo-motu disallowance of Rs. 8,60,028/- made by the appellant. ....
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....e write off of loans was in accordance with prudential norms prescribed by RBI and is allowable in terms of sections 36(2) /36(l)(vii)/ 28 of the Act." 2.6. I.T.A. No. 133/DEL/2018 (A.Y. 2014-15) (Department) " On the facts and under the circumstances of the case, Ld. CIT(A) has erred in law in deleting the disallowance of Rs. 8,61,93,391/ - u/s 14A of IT Act ignoring the mandatory nature of Rule 8D and the binding CBDT Circular No. 5/2014 dated 11.02.2014." 2.7. I.T.A. No. 6116/DEL/2018 (A.Y. 2015-16) (Assessee) "Re: Disallowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 365,66,026 under section 14A of the Income Tax Act, 1961 ("the Act") [restricted to dividend income] as against suo-motu disallowance of Rs. 74,01,728 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in mechanically computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ('the Rules'), without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-section....
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....gating to total disallowances of Rs. 88,86,12,175/-. 4. Aggrieved by the assessment order dated 31/03/2015, the assessee preferred an Appeal before the CIT(A). The Ld. CIT(A) vide order dated 19/05/2017, upheld the disallowance made by the A.O. to the extent of Rs. 6,40,98,834/- u/s 14A of the Act as against the suo-moto disallowance of Rs. 77,45,598/-, upheld the disallowance of Rs. 9,65,00,120/- claimed on vehicle given on finance lease and also upheld the ad-hoc disallowance to the extent of Rs. 19,95,37,610/- being 25% of support service fees and reimbursed of expenses, aggregating to Rs. 79,81,50,411/- paid by the Assessee to group Companies. 5. Aggrieved by the above said sustaining of the disallowance the assessee preferred the Appeal in ITA No. 4796/Del/2017 and as against the restriction of the disallowance u/s 14A, deletion of disallowance of bad debts written off and deletion of disallowance of interest on Compulsory Convertible Debentures, the department has preferred Appeal in ITA No. 5202/Del/2017 on the grounds mentioned above in the respective appeals. Disallowance under 14A of the Act 6. Ground No. 1 to 1.5 of Assessee's Appeal in ITA No. 4796/Del/2017 and Grou....
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.... of the Assessee and the Revenue may be disposed off in terms of the said order of the Tribunal. 9. The Ld. Ld. Departmental Representative relied on the orders of the Ld. CIT(A) and sought for dismissal of the Grounds of Appeals of the Assessee and prayed for allowing the Grounds of Appeals of the Revenue on the issue in hand. 10. We have heard both the parties and perused the material available on record. It is the specific contention of the Assessee that no disallowance be made out of interest expenditure under Clause (ii) of Rule 8D of the Rule since the investment in share of Karnataka bank Limited has been made out of own funds and the similar issue has came for consideration by the Tribunal in the Assessment Year 2007-08 and 2009-10 in ITA No. 1947/Del/2018 and connected Appeals wherein the Coordinate Bench of the Tribunal has decided the issue in favour of the assessee. We have gone through the order dated 24/08/2020 passed in ITA No. 1947/Del/2018 (Assessment Year 2007-08 and 2009-10), wherein it is held as under:- "3.10. In the case, while disallowing suo-moto expenses towards earning exempted income , the assessee has not taken interest expenditure towards allocation....
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....35 Others G NIL Net Current Assets: H 162.25 Total I=E+F+G+H 199.27 As would be observed from the above, the year in which investment in Equity Shares of KBL has been made, the incremental borrowings (Rs.86.23 crores) for that year were much lesser then the net increase in the Fixed Assets and Net Current Assets (Rs.163.92 Crores = Rs. 1.67 Crores + Rs. 162.25 Crores). Thus, based on the judicial principles discussed in Para 6 above, it can be said that the borrowings have been fully utilized for the business purposes and not for the purpose of making investments. Therefore, it can be safely inferred that the question of allocating interest u/s 14A of the Act towards investments in the shares of KBL does not arise. In fact, the internal accrual during the said year is much higher than the amount of investments made in KBL." 3.11 The source of the investment in shares of KBL is out of share application money is also evident from the copy of the bank statement available on page 101 of the Paper-book. 3.12. But, we find that the assessee has also made investment in mutual funds. According to the detail of investment available on schedule to the balance sheet on page 24 and 25 of t....
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..... 5202/Del/2017 for A.Y.2012-13, I.T.A. No. 1005/Del/2018 for A.Y. 2013-14, I.T.A. No. 133/Del/2018 for A.Y. 2014-15 and I.T.A. No. 7553/Del/2018 for A.Y. 2015-16. Disallowance of depreciation on vehicles given on finance lease 12. Ground No. 2 to 2.4 of the Assessee's appeal in ITA No. 4796/Del/2017 (A.Y 2012-13) is regarding disallowance of depreciation claimed on vehicle given on finance lease. The Ld. A.O. disallowed the excess claim of depreciation over and above the excess income declared amounting to Rs. 9,65,00,120/- and added back to the income of the assessee in following manners:- "3.3. The reply of the assessee has been considered but not found acceptable. The assessee has not been able to furnish the impact of change in accounting method for the last five years. The methodology adopted by the assessee consistently in the past years cannot be changed without mentioning the impact on taxable income for the preceding and subsequent years. The assessee did not answer the specific query raised that what shall be the impact of computation of income if same method of charging depreciation and principal amount be adopted in last 5 years alongwith claiming additional tax wi....
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....d and not verifiable and properly supported. The claim of the assessee is being rejected and the income of assessee shall be adopted as provided in the original return of income. The excess claim of depreciation over and above the excess income declared amounting to Rs. 9,65,00, 120/- is being disallowed and added back to the income of the assessee." 5.3. The Ld. AR has submitted that pursuant to decision of the Hon'ble apex Court in the case of ICDS Ltd. vs. CIT, Mysore, 350 ITR 527 wherein it was held that it is the lessor is entitled to claim depreciation u/s 32 of the Act in respect of leased out assets, the appellant revised its return of income and claimed depreciation of Rs. 35,07,63,697/- on the cars given on finance lease and offered Rs. 25,42,63,574/- being the principal amount recovered by the appellant from its customers in relation to such cars given on finance lease. 5.4. The appellant company had been consistently following an accounting method as 84 per which the value of assets given on finance lease is shown as a loan recoverable from the lessee. The lease rental amount received by the appellant is split into the principal amount is adjusted against the lo....
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....principal amount of loan cost of assets depreciation claimed thereon, opening and closing WDV of these assets are items of facts which are verified and certified by statutory/tax auditors. In the absence of such certification and verification, the appellant suo moto cannot, revise its accounting method consistently followed over the years to claim depreciation on assets which were never recorded in its books of accounts or write back principal amount of recoveries of loans against these assets to claim additional depreciation. The sanctity of consistency in accounting and the certification by statutory/tax auditors would be given a complete go by if the claim of the appellant is entertained just by filing of revised return. The Hon'ble Apex Court had observed in Radha Soami Satsang vs. CIT, 193 ITR 321 as under: "We are aware of the fact that strictly speaking res judicata does not apply to income fax proceedings, again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that pos....
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....led to depreciation, whether he is lessee or lessor, depending upon the terms of the contract. 4.1 Further, the Ld. CIT(A) taken the note of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. CIT. The Hon'ble Supreme Court has reaffirmed the position that in a leasing transaction it is the lessor and not the lessee, who is entitled to claim deprecation on the leased assets. Hence, we are of the opinion that the order of the Ld. CIT(A) is in accordance with law, in the facts and circumstances of the case. We find no reason to interfere with the order of the ld. CIT(A)." 16. Following the above ratio, the disallowance of depreciation claimed on vehicles give on finance lease requires to be deleted. Accordingly, the Ground No. 2 to 2.4 of the Assessee's Appeal in I.T.A. No. 4796/Del/2017 are allowed. Ad-hoc disallowances of support service fee and reimbursement of expenses 17. Ground No. 3 to 3.3 of the Assessee's appeal in ITA No. 4796/Del/2017 (A.Y 2012-13) is regarding ad-hoc disallowances of support service fee and reimbursement of expenses. Brief facts of the case are that: During the previous year relevant to Assessment Year 2012-13, the Assessee had paid busine....
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....of regular business functions which were essential for smooth day to day functioning of any company, it was only reduce cost and enjoy benefit of energy among the group over provisions of support services were centralized rather than each company employing their own resources for similar business functions, thereby leading to overall increase in the group operating cost as a whole. Further submitted that the ld. CIT(A) on the basis of incorrect observation held that the entire expenditure incurred on support service payment cannot be considered to be expenditure incurred wholly and exclusively for the purpose of business within the meaning of Section 37(1) of the Act and thus committed an error in disallowing 25% of the expenditure incurred. The Ld. Counsel for the assessee has also submitted that, the CIT(A) erred in not considering following corroborative evidenced placed on record by the assessee to demonstrate that the services were rendered for the smooth functioning of business of the assessee. Particulars submitted before the AO and CIT(A) Page No of PB Vol. 2 List of employees of the appellant evidencing that all employees of the appellant were involved in core business ....
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....aw. Needless to say, the assessee shall be provided with an opportunity of being heard. Accordingly, the Ground No. 3 to 3.3 of the assessee in I.T.A. No.4796/Del/2017 is allowed for statistical purpose. Disallowance of bad debts written off 23. Ground No. 2 of the Department in I.T.A. No. 5202/Del/2017 for A.Y. 2012-13, I.T.A. No. 1005/Del/2018 for A.Y. 2013-14 and ITA No. 7553/Del/2018 A.Y 2015-16 are against the deletion of disallowance of bad debts written off by the assessee of Rs. 21,67,50,189/-, Rs. 89,30,64,775/- and Rs. 1,12,08,54,213/- respectively and the Assessee's Ground No. 3 in I.T.A. No. 7856/Del/2017 against upholding of the disallowance of bad debts written off. The Ld. Counsel for the assessee submitted that the said issue stood covered in favour of the assessee in ITA No. 2559/Del/2016 vide order dated 10/12/2021 passed by the Co-ordinate Bench of this Tribunal in Assessee's own case for the Assessment Year 2010-11, wherein the Tribunal has followed the decision of Vijaya Bank Vs. CIT(A) reported in 323 ITR 166 and held that since the assessee company duly reduced the bad debts from the figure of loss and advances as appearing in the balance sheet, the same co....
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....stitute a provision for doubtful debt. In the latter case, assessee would not be entitled to deduction after April 1, 1989." -Hon'ble Apex Court observed that if the assessee had not only debited the P&L account but also correspondingly reduced the amount from Debtors A/c on the assets side of the Balance Sheet and, consequently, at the end of the year, the figure shown on the assets side was net of the alleged provision, amounted to actual write off for the purpose of availing benefit of deduction under the section. 13. Having considered the material placed on record, Ld. CIT(A) reached a conclusion on facts that the assessee had already disallowed in the computation of income the provision for NPA of Rs. 26,06,230/- and general provision of loans to the tune of Rs. 9,07,19,756/-created by it for the financial year 2009-10 which was reported separately in schedule R of the profit and loss account for the said year. Ld. CIT(A) further found that the learned Assessing Officer did not make any 9 adverse comments in respect of the reduction of loans and advances by an amount of Rs. 47,40,16,508/- in the Balance Sheet of the assessee which is clearly a writing off of bad debts in t....
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.... officer disallowed the interest expenditure of Rs. 13,75,19,178 incurred by the assessee on the Compulsory Convertible Debentures issued to Religare Enterprises Limited holding that the interest paid on CCDs is akin to dividend as the intent for issuance of Compulsory Convertible Debentures is to issue equity shares. While making the disallowance, the assessing officer relied upon the Circular No. 74 dated 08.06.2007 issued by the RBI under the FDI Policy. 27. On appeal, the CIT(A) for the Assessment Year 2012-13 deleted the disallowance of Rs. 13,75,19,178/- made by the assessing officer holding that CCDs are in the nature of loan until the date of conversion into equity shares and accordingly, held that the interest paid thereon could not be treated as dividend. The said finding is under challenge in Ground No. 3 by the Department in ITA No. 5202/Del/2017 for Assessment Year 2012-13. 28. It is found that the similar findings and the conclusion have been arrived by the CIT(A) for the A.Y 2013-14 and 2015-16 in favour of the Assessee, wherein the CIT(A) deleted the disallowance of interest on compulsory convertible debentures of Rs. 16,35,00,000/- each which is under challenge i....
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.... on the Mandatory Conversion Date which was defined as May 30, 2016, i.e., after 5 years (refer Clause 4.6 of the agreement). -Pertinently, the CCD's shall be converted at conversion rate which was defined as fair market value of shares on the conversion date (refer Clause 4.7 of the agreement). -CCDs' holder (REL) is entitled to interest @ 10.90% p.a. w.e.f. date of allotment to the date of conversion into equity shares unlike, equity shares which do not give assured return. Interest is payable irrespective of profits/ losses incurred by the appellant (refer Clause 4.4. of the Subscription Agreement read with Amendment letter dated August 12, 2011 detailing the interest payable on CCDs); -CCD holder (REL) does not have any voting right, which is available only to equity shareholders (refer Clause 4.5); -CCDs' issued to REL are secured by a pari passu mortgage over the appellant's immovable property situated in Gujarat and first pari passu charge on the business receivable of the appellant unlike, equity shares which are not secured by a charge over the assets of the issuer (refer Clause 2.2(b)); -Only upon conversion of the CCDs into equity shares, REL sh....
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....rsion of debentures results into repayment of loan, and issuance of shares. This is one aspect of the matter. In our view, the other more important aspect of the matter is, that the Hon'ble Supreme Court in India Cement Ltd.'s case (supra) has clearly excluded this aspect from consideration, by holding, that it is irrelevant to consider the object, with which the loan was obtained. Admittedly the debentures when issued is a loan, and therefore, whether it is convertible, or non- convertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure." (emphasis supplied)." Further the Department had filed Special Leave Petition against the above said order of the Hon'ble Rajasthan High Court in the case of Security Meters (supra) which has been dismissed by the Hon'ble Supreme Court vide order dated 11/08/2009 in SLP No. 10548/2009. 33.2 Further in the case of CIT Vs. Havells India Ltd. 352 ITR 376 (Del) the Hon'ble Jurisdictional High Court has held as under: "25. The Revenue is in appeal. The main contention on its behalf is that the position should be seen not only with....
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.... (Bang) - DCIT v. Modern Syntex (India) Ltd.: 95 TTJ 161/3 SOT 27 (Jaipur). 33.4. The Co-ordinate Bench of the Tribunal in the case of DCIT Vs. UAG Builders Pvt. Ltd. 53 SOT 370 dealing with the issue of allow-ability of deduction of interest paid on OCDs observed as under:- "We have heard the rival contentions in light of the material produced and precedent relied upon. We find ourselves in agreement with the Ld Commissioner of Income Tax (A)'s finding that there was no contingency involved in the accrual of liability with reference to the interest on the debentures. Ld. Commissioner of Income Tax (A) rightly observed that debentures, whether fully or partly or optionally convertible, are nothing but debt till the date of conversion and any interest paid on these debentures is allowable as normal business expenditure. The only uncertainty in the optionally convertible debentures issued by the assessee is whether the debenture holder will go for conversion into shares or will continue to hold them as debentures. Ld. Commissioner of Income Tax (A) rightly held that this uncertainty in no way impacts the assessee company's liability to pay interest till the date of conve....
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.... year i.e. A. Y 2009-10 is relevant and therefore, this Para is reproduced for ready reference herein below. 23. As per above paras of this tribunal order, it comes out that even if Thin capitalization Principle is on Statute book of the other country, no disallowance can be made in India by applying this Principle. To this extent, we uphold the finding of CIT (A) by respectfully following this tribunal order. But the issue still remains because, the objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009-10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u's 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and ther....