TaxTMI 
TaxTMI 
2023 (10) TMI 1133
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.... "1. That in the facts and circumstances of the case and in law, the Assessing Officer ("AO") taking into consideration the order passed by the Transfer Pricing Officer ("TPO"), and the directions of the Dispute Resolution Panel ("DRP") (collectively referred to as "Lower Authorities"), erred in law, in assessing the gross total income of the Appellant at Rs 145,63,51,016/- under normal provisions of the Act and Rs. 155,43,34,549/- as revised book profit u/s 115JB of the Act, against the returned income of Rs. NIL and book-loss of (Rs. 44,56,65,452/-), by making the impugned additions/disallowances, on grounds more particularly detailed herein under: That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the AO in making an addition of Rs. 200,00,00,000/- to the book-profit under the head foreclosure on account of early redemption of preference shares'. That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the AO in making an addition of Rs. 25,00,000/- under the head 'share issue expenses'. That on the facts and ci....
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.... 8. That on the facts and circumstances of the case and in law, the Lower Authorities erred in placing partial reliance on the tax audit report to the extent of expenditure categorized as capital in nature, but on the other hand ignoring that in Form No. 29B the tax auditor had not added back foreclosure expenditure in computing book profits, thereby demonstrating a cherry-picking approach. 9. Without prejudice to the foregoing, foreclosure cost was liable to be allowed as a revenue expenditure, based on the jurisdictional Bombay High Court in the case of CIT vs. Aditya Birla Nuovo Ltd. [2017] 246 Taxman 202 (Bombay) and CIT vs. Grind well Norton Ltd. (ITA No. 694 of 2012). Addition of share issue expenses as capital expenditure 10. That on the facts and circumstances of the case and in law, the Lower Authorities erred in holding that share issue expenses incurred towards capital reduction, issue of equity shares and foreclosure on account of early redemption of preference shares was capital in nature, rather than revenue in nature and liable to be allowed as an expenditure under section 37(1) of the Act. 11. That on the facts and circumstan....
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....ses or unabsorbed depreciation while computing book-profit under section 115JB of the Act. The aforestated grounds are each raised in the alternative, and without prejudice to one another. The Appellant craves leave to alter, amend and/or withdraw all or any of the grounds of appeal herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary whether before or at the time of hearing." 3. Brief facts of the case shows that assessee is a company engaged in power generation business and operates 106.50 MW coal-based power plant at Tamil Nadu. It supplies electricity generated from its facilities to the State Electricity Board and other independent third-party customers. 4. Assessee filed its original return of income on 28/11/2015 declaring total income at Rs. Nil and Minimum Alternative tax book Profit u/s 115 JB of the Act the profit was computed at a loss of Rs. 445,665,451/- i.e. loss disclosed in profit and loss account without any adjustment. Assessee further submitted:- i. form number 3CD being a statement of particulars required to be furnished under section 44AB of T....
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....ken only for the purpose of facilitation/administrative convenience and no services have been rendered/availed by the assessee or its associated enterprises, i.e. Vedanta Limited, thus other method as the specified under rule 10 AB can be applied to determine the arm's-length price of such transaction. Number 5.1.4 states that the goods have been supplied by and to assessee at actual cost +1% as load factor for covering the custom duty paid by the respective transacting parties and considering the proviso to section 92C (2) of the act specified domestic transactions entered into by the assessee with its associated enterprises are at arm's-length. 9. Ld.AO referred the matter to The Deputy Commissioner of Income Tax (Transfer Pricing - 3 (2) (1), Mumbai (ld. TPO) for determination of arm's-length price in respect of specified domestic transactions. On examination, assessee submitted that during the financial year 2014 - 15 the assessee company has sold coal of Rs. 101,244,722 its associated enterprises Vedanta limited to meet stock levels for plant of Vedanta limited. Further assessee company has purchased coal and sulphuric acid of Rs. 1,100,322,350 from its associated enterpris....
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....ng an adjustment of Rs. 13,568,574/- on account of arm's-length price of specified domestic transactions of purchase and sale of coal. 13. On examination of Normal computation of Total income, learned Assessing Officer noted that:- i. Assessee has debited capital reduction, share issue and reduction of preference share capital expenses of Rs. 25 lakhs to profit and loss account as revenue expenses. ii. On examination of Form No 3CD, assessee classified it as capital expenditure stating that in clause no 21 (a) of Form no 3CD being details of amount debited to the profit and loss account, being in the nature of capital expenditure classifying this expenditure as capital expenditure . iii. However, while computing total Income, Assessee did not disallow/ add back it. 14. Thus, assessee has claimed this expenditure as allowable expenditure u/s 37 (1) of the Act. The learned Assessing Officer questioned the assessee that above expenditure is not allowable under section 37 (1) of the Act. In response to that, assessee submitted that above expenditure is allowable in view of the fact that decision in case of Brooke Bond Vs. CIT 225 ITR 795 (SC), was not a....
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....king the addition of Rs. 200 crores debited to the profit and loss account as none of the Accounting Standards and provision of The Companies Act allow recognition of any capital expenditure in the profit and loss account. 17. The assessee objected to the same stating that:- i. Assessee, pursuant to approval of members of the company and the preference shareholders, 10 lakhs redeemable cumulative preference shares having a face value of Rs. 100 crores issued at a premium of Rs. 2900 crore aggregating to Rs. 3000 crore on 28 March 2012 and redeemable on 28 March 2022 at a premium of Rs. 6865 per preference shares aggregating to Rs. 6965 crores were fully redeemed by the assessee on 30 March 2015 together with foreclosure cost of Rs. 200 crores on account of early redemption. ii. On revision of the terms of preference shares to redeem it before the due date foreclosure cost of Rs. 200 crores was paid which is against the implicit waiver of the proportionate redemption premium by the preference shareholders. Such charges are not in the nature of redemption premium but in principle similar to the prepayment charges levied by banks for foreclosure of loans over and ....
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....ssessee that such a capital cost is to be allowed as a deduction for computing profit u/s 115JB of the Act. ii. With respect to the scope of scrutiny of profit and loss account and power of the AO, he held that when the accounts are not in accordance with the law, the statute is clear; the AO has all the power to adjust the book profit. iii. Accounting Standard 30 was merely recommendatory in nature and did not allow the computation shown by the assessee. iv. Assessee Company and its holding company have on their own decided on the consent terms pertaining to the prepayment of foreclosure cost in 2015 even though such foreclosure costs were not part of the consent terms between the assessee and its holding company related to redemption of preference shares earlier. Therefore, selective inclusion of such clause of payment of foreclosure cost is made for the individual benefit of the assessee company. v. The AO gave detailed reasons for holding so in paragraph number 8.1 - 8.14 of his order. vi. As on 31/3/2015 the assessee had enough reserves available under the head "security premium account" but the assessee did not reduce the premium p....
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.... an objection with respect to the claim of the assessee with respect to deduction of lower of brought forward losses and unabsorbed depreciation of Rs. 132.49 crore not reduced from the book profit, The learned DRP held that the above issue has not been discussed by the learned assessing officer in the draft assessment order and therefore, the learned assessing officer was directed to verify the facts and take necessary action as per law. 21. Accordingly, the objections of the assessee were decided by passing a direction dated 23^rd September 2019. 22. The learned assessing officer based on the above direction passed the assessment order on 31^st October 2019, wherein adjustment on account of arm's-length price of the specified domestic transaction was retained at Rs. 13,568,574/-, disallowance of Rs. 25 lakhs of share issue expenditure was retained. Accordingly, the total income of the assessee was determined at Rs. Nil as per normal computation of total income. As per the book profit, the adjustment of Rs. 200 crores was retained and revised book profit was computed at Rs. 1,554,334,549. Thus, the final assessment order dated 31^st October 2019 was made. 23. Assessee agg....
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....efore the learned dispute resolution panel we find that assessee submitted that lower of brought forward losses and depreciation allowable to be set off to the assessee is Rs. 132.49 crores. The learned dispute resolution panel directed learned assessing officer to verify the above fact. In the final assessment order dated 31/10/2019 in paragraph number 8.22, the learned assessing officer computed the same for each of the year and held that the amount eligible for deduction for assessment year 2015 - 16 is Rs Nil. The Ld. AO followed the decision of the coordinate bench in Milan intermediates LLP [2018] 96 taxmann.com 338 (Ahmedabad - Trib.)[26-07-2018]. The AO held that Rs. 132.49 crores arrived at by the assessee includes both unabsorbed depreciation and business losses which is not in accordance with the provisions of section 115JB and explanation thereto. According to the AO, the lower of unabsorbed business loss or unabsorbed depreciation is required to be reduced from the book profit. The assessee is not entitled to the benefit if the unabsorbed loss or the unabsorbed depreciation becomes Rs. Nil. 28. Only submission made by the learned AR in this case (as per written subm....
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....tion of the learned assessing officer that assessee has already been granted deduction while computing book profit under section 115JB of the act of lower of unabsorbed business losses or unabsorbed depreciation. 31. Ground number 2 - 9 of the appeal is against the adjustment of the book profit under section 115JB of the Act, where there is an addition of Rs. 200 crores on account of the foreclosure cost was made by the learned Assessing Officer. The argument of the learned Authorized representative is that:- i. If simply calculated the redemption consideration it works out to coupon rate on the redeemable preference shares at the rate of 9% per annum payable cumulative by the end of the tenure of redeemable preference shares. Therefore, when the terms on conditions of the above redeemable preference shares were amended in 2015, the above foreclosure cost of Rs. 200 crores is nothing but implicit waiver of proportionate redemption premium. ii. assessee is entitled to follow Accounting Standard - 30 financial instruments issued by the Institute of Chartered Accountants of India where it provides that difference between redemption value and the issue consideratio....
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....arned lower authorities and submitted that (i) Both companies, issuer company and the preferential shareholder company are closely related to each other and therefore cannot been uniformly equated with the decision taken for issuance of redeemable preference shares in reduction of preferential shares before the maturity time agreed. (ii) Assessee company has issued preference redeemable shares to its holding company which is part of the share capital and cannot be considered as a debenture or other instrument. (iii) Paragraph number 8.10 of the assessment order wherein auditor in the tax audit report has classified the above expenditure on account of foreclosure cost as a capital expenditure and the same has been agreed upon by the assessee company while computing its normal profit and disallowed it under section 37 (1) of the act and being an expenditure of capital nature debited to the profit and loss account by the assessee company admittedly. Therefore, while normal computation of profit, the assessee considers it as a capital expenditure and while computing the book profit it says that it is not a capital expenditure. Thus, the stand of the assessee ....
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....eclosure cost accepting the book profit therefore the learned assessing officer does not have any authority to adjust the book profit. iii. There is no restriction in the companies act with relation to the issuance of preference shares to a related party including the holding company and therefore such an inference cannot go against the assessee. iv. With respect to the decision of the honourable Bombay High Court in case of Aditya Prakashan entertainment P Ltd ( supra) does not apply to the facts of the present case as in that case it was held that a default in redemption of preference shares not give a right to a shareholder to sue for that since redemption can arise strictly be within the confines of the statutory framework. v. Foreclosure cost is like a prepayment of loan and therefore revenue expenditure is in the hands of the assessee. 35. We have carefully considered the rival contentions, relevant and judicial precedents cited before us and the order of the learned AO as well as the direction of the learned DRP. 36. Facts show that assessee has issued redeemable preference shares on 28th of March 2012 having a face value of Rs 100 Crores at ....
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....emption of preference share capital. 39. At the time of preparing the computation of total income for the income tax return, computing the income under the normal provisions of the income tax act, assessee stated that foreclosure cost debited to the profit and loss account of Rs. 200 crores is inadmissible deduction as same is a capital expenditure . (Page number 39 - 40 of the paper book). Along with the income tax return form number 3CD being the statement of particulars required to be furnished under section 44 AB of the act was also made wherein as per Para number 21 (a) (i) wherein it is required to be state specified that amounts debited to the profit and loss account being nature of expenditure of capital nature, assessee stated the details as per annexure E (page number 52 of the paper book). On looking at annexure E (page number 62 of paper book) shows that assessee has disclosed 2 items there in namely (1) foreclosure cost on account of early redemption of the preference shares and amount stated is Rs. 200 crores, (2) expenses in relation to capital reduction, share issue and redemption of preference shares Rs. 25 lakhs. 40. The assessee also states that it is not d....
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....res shall be redeemed unless they are fully paid; (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also*that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. (ii) ....
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....s not in accordance with the provision of section 55 of The Companies Act 2013. 44. The issue arises that when company provides for premium on redemption out of the profits of the company whether it needs to be debited as expenses in the statement of profit and loss account or it is to be deducted from balance of surplus in the balance sheet. It is necessary to consider the Framework for the Preparation and Presentation of the Financial statements. As per the Framework for The Preparation and Presentation of The Financial Statement issued by the Institute of chartered accountants of India, "expenses" is defined as increase in economic benefits during the accounting period in the form of outflow or depletion of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distribution to equity participants. [Para no 77 to 79 of Framework]. The expenses exclude payments as a distribution to equity participants. 45. As per para 49 (1) ( c) of the framework, equity is the residual interest in the assets of the enterprise after deducting all its liabilities, as per The Companies Act the difference between the preference shareholders and equ....
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....e benches it has been held that capital receipt even if credited to profit and loss account cannot form part of book profit u/s 115 JB of The Act. { Ankit metals Limited 416 ITR 591 (cal) } Applying the same analogy if the capital expenditure is debited to the profit and loss account, it is also required to be added back to the book profit U/s 115 J B of The Act. 51. Honourable Karnataka High Court In case of GMR Industries Limited 425 ITR 504 {kar} where in it has been held that expenditure incurred for capital expenditure and also the prior period expense debited to profit and loss account, both are required to be added to book profit U/s 115 JB of the Act despite balance sheet and profit and loss account signed by directors and auditors. 52. Before us assessee could not produce any authoritative pronouncement, which holds that redemption premium paid to preference shareholder is a revenue expenditure and is required to be debited to the profit and loss account. We have already perused the section 55 of the companies Act 2013 and Framework as well as relevant Guidance note which is exactly against the view taken by the assessee, Therefore, we are not in a position accept th....
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....pany acknowledging its receipt to repay the same at a specified rate and also carrying on interest. Therefore, there is a basic distinction between these two instruments and therefore, reliance on those decisions does not help the case of the assessee. Reliance was also placed on the decision of the honourable Bombay High Court in the case of CIT versus Merck Ltd 434 ITR 596 wherein share buyback expenditure incurred by the assessee was allowed as revenue expenditure under section 37 (1) of the act. The issue before the court was whether it was in the nature of capital expenditure or revenue expenditure. Before us, the issue is whether the foreclosure cost in the form of premium under dimmable preference shares redeemed by the assessee is in expenditure which can be debited to the profit and loss account or not. Therefore, these decisions do not help the case of the assessee. 57. The assessee further relied upon the decision of Clarian chemicals India private limited versus ACIT 25 taxmann.com 83 stating that tax audit report is not conclusive for determining the deduction. That was the case before the coordinate bench where the penalty was levied under section 271 (1) (c) of th....
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.... same. The assessee is in appeal in above grounds. 62. The learned authorized representative submitted that the AO has grossly erred in treating the expenditure incurred on capital reduction, share issue and redemption of preference shares expenditure resulting into an enduring benefit so as to be classified as capital expenditure. Reliance was placed on PCIT versus Merck Ltd 120 taxmann.com 361, PCIT versus Bayer private limited 106 taxmann.com 395, Britannia industries Ltd versus income tax (ITA 1789/K/2008). It was also contested by the learned authorized representative that no straight jacket formula can be applied to classify what is capital expenditure and what is revenue expenditure. It has to be decided based on the facts of each case. For this proposition it relied on the decision of the coordinate bench in case of Bhatia Corporation private limited 1044/JP/2017. Thus, it was stated that the learned assessing officer has erred in analyzing nature of expenditure and therefore the reliance on the ruling of Brooke Bond India Ltd and other judgements relied upon by the learned AO are misplaced. The decision of the honourable Supreme Court in case of Brooke Bond India privat....
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....2018 wherein it has been held that that the decision of the honourable Supreme Court was with reference to issue of shares with a view to increasing its share capital and not with respect to expansion of the capital base of the company to meet the need of the assessee for more working funds wherein it has been held that such an expenditure is revenue in nature. Accordingly, it was submitted that the dividing line between capital expenditure and revenue expenditure is very thin, and no straitjacket formula can be applied. However, the learned assessing officer relying on the decision of the honourable Supreme Court in Brooke Bond India Ltd 225 ITR 798, 225 ITR 792 and 250 ITR 338 confirmed disallowance holding that such expenditure as capital in nature. The learned DRP also upheld the findings of the learned assessing officer as per paragraph number 4. 2 of the direction. Undisputedly the expenditure is incurred towards capital reduction and share issue and redemption of preference shares. As per provisions of section 37 (1) of the act, any capital expenditure is not allowable as deduction. Assessee has incurred this expenditure only for the share issue and capital reduction. In vie....
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....nd its related parties, such transaction can be considered to be at arm's-length from an Indian transfer pricing perspective. 66. The learned TPO rejected the benchmarking analysis and held that Comparable Uncontrolled Price [CUP] method is the most appropriate method, he used TIPS database to benchmark the transaction by using that method and accordingly he benchmarked the purchase and sale of fuel stock transaction. With respect to the sale of fuel stock transaction of Rs. 101,244,720, the learned TPO held that except for 1 transaction out of 4 transactions, is not at arm's-length for the reason that the price of sale of fuel stock is higher than the price at which the transactions are undertaken by the assessee and therefore the adjustment of Rs. 1,867,424/- was made. With respect to purchase of fuel stock transaction of Rs. 110.03 crores the learned TPO out of 5 transactions, held that 1 transaction is at arm's-length because of the reason that the price of which is found lower than the price at which the transactions are undertaken by the assessee and therefore he made an adjustment of Rs. 11,701,150/-. The learned dispute resolution panel held that CUP is the most appropri....
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....on, order of the ld. TPO and Direction of DRP. 70. Assessee in Its T P Study report has adopted other method as the Most Appropriate method. However, it is bereft of any comparability analysis. It merely said that the justification of transaction is meeting the requirement of plant level stocks of AE and Assessee and Transaction value is 1 % mark up on the cost. The product Transacted is coal. On careful look at Rule 10 AB of the ITA Rules 1962 introducing "Other method", it merely facilitates considers the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. As assessee has failed follow mandate of section 92CA (3) of the Act, the ld. TPO adopted the Uncontrolled Comparable price Method [CUP], adopted TIPS data base and held part of transaction of purchase and sale at Arm's length price - and without respect of few transactions made the adjustment. The ld. DRP also upheld the TP approach of ld. TPO. 71. The ld. TPO found the comparable prices of the transacted goods and then made adjustment whereve....