TaxTMI 
TaxTMI 
2022 (11) TMI 1404
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....made by the A.O. on account of Section 14A r.w. Rule 8D by ignoring fact that as per the CBDT's Instruction No. 5/2014 dated 11.02.2014 Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income? 3. "Whether on the facts and in law, the Ld. CIT(A) was right in deleting the disallowance of Rs. 1,49,52,823/- made by the A.O. on account of expenses disallowed u/s 40(a)(ia) of the IT Act."?" 3. In ITA No. 5375/Del/2019, following grounds have been raised by the Revenue: 1. Whether, the Ld. C1T(A) has erred in facts and in law, in holding that "Deepsea Matdrill" is a Ship and not an off-shore installation (RIG), which is excluded from the definition of qualifying ship under section 115VD of the Act? 2. Whether the Ld. CIT(A) has erred in facts and in law, in holding that a drilling rig like 'Deepsea Matdrill' does not require to be fixed, without going into the facts of the case independently? 3. Whether, the Ld. CIT(A) has erred in facts and in law, in deleting the disallowance of Rs. 29,05,22,492/- made by the AO, disallowing the assessee's claim ....
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....ve action of the AO, the appellant filed appeal before the ld. CIT(A). 8. During appellate proceedings, the assessee has made following submissions in respect of the various grounds of appeal. Relevant part of the same is as under: "1. Assessment in the above case was completed at 31,10,78,220/- and book profit at Rs. 97,50,82,483/- as against income returned at NIL under normal provisions and at the booked profit of Rs 3,09,50,291/- against which assessee preferred the appeal raising four grounds of appeal. The issues raised in this appeal have been dealt by your predecessors in AY 2006-07 to AY 2015-16 and have been decided in favor of assessee. The appeals against the orders of your predecessors filed before ITAT were dismissed in AY 2006-07 to AY 2011-12 and further appeal before the Hon'ble Delhi High court was also dismissed. The appeals for AY 2012-13 to AY 2015-16 are pending before TTAT. Kindly find enclosed copy of orders of the Hon'ble Delhi High Court for AY 2006-07 and AY 2007-08 against which revenue's SLP is pending before the Hon'ble Supreme Court at pages 1 to 5 and orders of IT AT and the Hon'ble Delhi High Court for AY 2008-09 to A....
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....ssing revenue's appeal and no appeal filed by the revenue on this issue before the Hon'ble Delhi High Court who dismissed revenue's appeal on other issues. AY 2012-13 and AY 2013-14 by CIT appeal and revenue's appeal before ITAT is pending. AY 2014-15 by CIT appeal following order for AY 2012-13 and AY 2013-14 and revenue's appeal before ITAT is pending. AY 2015-16 by CIT appeal by following ITAT order for AY 2010-11. Para 12.7 of Page 32 by IT AT and High Court order is on 38 to 40. Para 13 of Page 47 to 50 by IT AT and High Court order is on 56 and 57. Para 3 of Pages 62 to 67 by CIT Para 3.2 of Page 93 to 96 by CIT Page 115-116 4. Disallowance u/s 36(i)(va) of Rs. 30,61,331/- on account of late deposit but deposited before the due date of filing. This is issue is covered by the decision of Hon'ble Supreme Court in the case of PCIT vs. Rajasthan State Beverages Corp Ltd 84 Taxmann.com 185 dismissing SLR and confirming the decision of Rajasthan High Court reported in84Taxmann.com 173 following TRF Ltd vs. CIT 323 ITR 397 SC. Enclosed at pages 269 to 273 The provision of Sec 43B is also amended with affect 01/04/2004 any rest....
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....ng at the designated location of its drilling activity. The customer hires it for drilling and not for moving from one place to other. The income from rigs of the assessee is derived from its drilling operations. The assessee himself in his ITR shows the income as drilling income only. Further in his computation of income the assessee itself shows that the turnover from core activities is zero and drilling income does not fall under the incidental activities of shipping income also. She expressed her opinion that the rigs of assessee company have never been used for the transport of goods or cargo, the income derived from such business is actually exempted under the Tonnage Tax Scheme. Just because the assessee claims that they are ships, it is not acceptable that the income derived is exempted under Tonnage Tax Scheme. The income generated by the operation of drilling rig has no correlation with its net tonnage. Therefore Tonnage Tax Scheme is prima facie inapplicable for computing income arising to a rig from drilling operations. The fact that the assessee ships have been registered under Merchant Shipping Act 1958 does not help the case as even the IT Act in 115VD includes in it....
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....d at one place but not moving except Harbor and River ferries and Pleasure Crafts which were excluded due to some other reasons. They have initially also excluded dredgers but later on amended the provision. The vessels who are carrying passengers and cargo are meant to take them from one place to another and are stationary before carrying them to travel. The vessels used for dredging are also stationary when carrying sand from the sea and moving thereafter. The rigs which are used for drilling in offshore are also stationary when they have to take out mud cuts and petroleum from the sea and after taking out the same and work is over they are moving as rightly noticed by the AO to another place where it has to work. Thus vessels are moving when required and are stationary when required for the specific work for which it is assigned. The vessels which are engaged in research are also stationary from time to time and the rigs are also doing the search on petroleum products carrying more than 70-100 persons, having motorboats, canteen, residential quarters/ rooms, lab for doing research work, radio station for signals and so on. They are also carrying specific features for the safety ....
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.... 7. It is submitted that these aspects have been examined in AY 2006-07 and AY 2007-08 if we examine the orders of the lower authorities and nothing new fact have been brought by the AO during the year in concern. The Hon'ble Delhi High Court has decided the issue in favor of the assessee and subsequently this order has been followed by the appellate authorities but not by the AO because the revenue has filed SLP. 8. It is submitted that assessee may kindly be granted benefits of tonnage tax scheme and claim of deduction from the business of operation of ships may kindly be allowed. It is necessary to submit that as per section 115VO the MAT provisions are not applicable on the tonnage tax income and so the same cannot be applied while calculating income under MAT provisions. The loss carrying forward for the last so many years includes unabsorbed depreciation which is required to be adjusted but the AO did not look into those aspects and not adjusted the same. After granting tonnage tax benefits the business loss as well as unabsorbed depreciation would may kindly be allowed to be carried forward. 9. It is submitted that ground no. 2 related to disall....
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....ons/orders of CIT(A), ITAT and Hon'ble High Court, related to the appellant company in the different assessment years, correspondence with the AO during assessment proceedings and other details to substantiate their contentions. 10. The adjudication of the ld. CIT(A) has been examined in detail. Addition on account of shipping business: 11. It is contended by the appellant that it's company is entitled for the benefits of the provisions of section 115VO under the Tonnage Tax Scheme. The AO has made this addition stating that the drilling of Oil is the main operation and it is not provided in the Act that drilling and exploration of Oil will be the shipping income, to be included in computation of income under Tonnage Tax Scheme. It is further stated that just because they are treated as ships, it is not acceptable that income derived is exempt under Tonnage Tax Scheme. After detailed discussions, the AO disallowed the benefits of provisions of Section 115VO. In its submission, as reproduced above, the appellant contends that it is dully entitled for such benefits, relying upon the order of Hon'ble Delhi High Court for the A.Y. 2006-07 & 2007-08, which was furth....
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....s that of the Deepsea Matdrill on which the Hon'ble High Court rendered its decision, Accordingly, ground no. 7 is allowed." 13. Accordingly, looking to the similarity in the facts and circumstances of this case and following the judgment by Hon'ble Delhi High Court in the case of appellant, the ld. CIT(A) held that this addition deserves to be deleted for the year under consideration also. Hence, we decline to interfere with the order of the ld. CIT(A). MAT provisions: 14. The appellant also disputed this addition for Rs. 94,05,22,432/- under the MAT provisions, stating that the same is not attracted under MAT as it is not provided under section 115JB of the Act. In this regard it has referred to the findings of various judicial authorities and the order of CIT(A) for the A.Y. 2014-15 dated 17.11.2016. 15. The ld. CIT(A) for the A.Y. 2014-15 that the then CIT(A) has allowed the appeal in the case of appellant with the followings remarks:- "This ground is consequential to the earlier ground wherein the issue of eligibility of the appellant company to be assessed under the provision of Chapter-XIIG has been upheld by the Hon'ble Delhi High Court for ....
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....son Airlines Limited and at the end of the year there was outstanding debit balances of Rs. 56,64,204/- & Rs. 16,90,627/- respectively. Learned AO has disallowed interest @ 12% of these balances on the ground that since assessee has paid interest on the loans obtained by it and aforesaid sum has been given out of the common pool and there is no commercial expediency. It is submitted that before making the impugned addition the learned AO has failed to prove the nexus between the funds borrowed and the ft advanced to the subsidiary. The Id AO has not established that borrowed funds alone were advanced to the subsidiary. The Hon Gujarat High Court in the case of CIT vs. RL Kalthia Engineering Automobiles (P) Ltd. Reported in (2013) 33 taxmann.com (GUJ) has held that where there was no nexus between the borrow funds and the funds advanced to the sister concern, the disallowance would not be justified. A similar view has been taken by the Mum Bench of ITAT in the case of Dy.CIT vs. Kukreja Development COL (2007) 161 Taxmann 199 (Mum)(Mag) has held that where the AO had not established nexus between interest bearing borrowed funds and interest free advances given by assessee, the disall....
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....may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". Further, following this judgment, the High Court of Delhi, in the case of Punjab Stainless Steel Industries vs. CIT 324 ITR 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its bu....
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....regard the jurisdictional Delhi High Court and various other Courts in the citations mentioned below have held that, where the capital of the company and the interestfree funds with the assessee far exceeded the amounts advanced to the sister concerns or related parties, then no disallowance can be made u/s 36(1)(iii) of the Income Tax Act in respect of interest on loans and borrowed funds utilized for the purpose of business: CIT vs. Gautam Motors 45 DTR 89 (Del) CIT vs. Bharti Televenture Ltd. 51 DTR 98 (Del.) CIT vs. Dalmia Cement (Bharti) Ltd. 29 DTR 138 (Del) CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) Satish Katta vs. Asstt. CIT 13 DTR 237 (JP 'A') Madhu Industries Ltd. vs. ITO 43 DTR 23 (Ahd D) 23. In the case of Hero Cycles Pvt. Ltd. ( Civil Appeal No. 514 / 2008 dated 5.11.2015) the Supreme Court has held that, so long as there is nexus between the expenditure incurred and the purpose of the business of the subsidiary company ( which need not necessarily be the business of the assessee itself ), the revenue cannot justifiably claim to put itself in the arm cha....
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....t the employee's contribution towards EPF/ESI on or before the due date for availing deduction. In the cases before the Hon'ble Apex Court, the employers had belatedly deposited their employees' contribution towards the EPF and ESI, considering the due dates under the relevant provisions of the Act. The Assessing Officer ruled that by virtue of Section 36(1)(va) read with Section 2(24)(x) of the IT Act, such sums received by the appellants constituted "income". It was held that those amounts could not have been allowed as deductions under Section 36(1)(va) of the IT Act when the payment was made beyond the relevant due date under the respective acts. The Income Tax Appellate Tribunal and later the Gujarat High Court dismissed the challenge against this order of AO. In appeal, the court noted that the Kerala High Court has also ruled in favour of revenue on this issue whereas the Hon'ble High Courts of Bombay, Himachal Pradesh, Calcutta, Guwahati and Delhi have favoured the interpretation beneficial to the assessee. The Hon'ble Apex Bench effectively reversed the judgment in Commissioner of Income Tax vs. Alom Extrusions Ltd. (1 SCC 489) relied upon by the assessee. 29. T....
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....rom its liability to deposit the employee's contribution on or before the due date as a condition for deduction." 30. As the issue of payment of employees contribution towards the PF has been ruled against the assessee by the Hon'ble Supreme Court in the case of Checkmate Services P. Ltd. vs. Commissioner Of Income Tax-I in CA No. 2833/2016 vide order dated 12.10.2022. Hence, the appeal of the revenue on this ground is allowed. ITA No. 6872/Del/2018 : A.Y. 2015-16 31. Interest free loans - Appeal of the Revenue on this ground is dismissed as in A.Y. 2016-17. 32. Disallowance u/s 14A - The ld. CIT(A) held that no exempt income has been earned by the assessee, hence, in view of the judgment of the Hon'ble Jurisdictional High Court in the case of Cheminvest Ltd. Vs CIT-IV (378 ITR 33), no disallowance is called for. Hence, we decline to interfere with the order of the ld. CIT(A). 33. Disallowance u/s 40(a)(ia) - TDS - This issue has been examined by the ld. CIT(A) and followed the order for the A.Y. 2012-13 and A.Y. 2013-14. The relevant part of the order of the ld. CIT(A) is as under: "I have given careful consideration to the submissions made. At the outs....
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....39; as given under article 5, sub-article (2)(i) includes furnishing of services including consultancy services, by an enterprise of one of the Contracting States through employees or other personnel in the other Contracting State, provide that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelvemonth period. Perusal of the invoices of Noble Denton Middle East revels that the professionals rendered services ranging from period between 10 to 27 days. Accordingly even under sub-article (2)(i) of Article 5, The services rendered by the foreign consultants cannot be said to amount to a permanent establishment or a fixed place for a business through which the foreign enterprise carries out its business in India, wholly and partly. It is also seen that during the appellate proceedings relating to A.Y. 2011-12 my Ld. Predecessor considered the letter issued by Nobel Denton Middle East Ltd. clarifying that they did not have a permanent establishment in India as per Article 5 of the DTAA and were assessed to tax in the UAE. I also find from the tax audit report for the impugned years placed at pages 28 & ....