TaxTMI 
TaxTMI 
2023 (10) TMI 1133
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.... 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 circumstances of the case and in law, the Lower Authorities erred in confirmi....
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....ort 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 circumstances of the case and in law, the Lower Authorities erred in applying the ratio of Brooke Bond India Ltd (225 ITR 798) in relation to expenditure on issue of shares to other c....
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....d/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 The Income Tax Act, ii. form number 3CA audit report under section 44AB of the act as the accounts of the assessee are audited under the provisions of The Companies Act in which auditor stated that the particulars given in form number 3CD and its annexu....
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....at 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 enterprises i.e. Vedanta limited to meet its plant stock level. Assessee discussed the most appropriate method adopted by it for purchase and sale of fuel stock to determine the arm's-length price and concluded that for determining the arm's-length price Comparable Uncontrolled Price method [CUP] method cannot be applied due to non-ava....
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....penses 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 applicable in the case of the assessee. The learned AO rejected the contention and held that the above expenditure cannot be allowed as revenue expenditure as per the normal computation of total income as section 37 (1) disallows any capital expenditure. LD AO cited three decisions of Honourable Supreme Court to support disallowance. Therefore, in normal com....
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.... 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 above the interest charges. Such charges are in the nature of expenses hence charged to the income statement. iii. The Companies Act 2013 does not specifically cover guidance on foreclosure costs. iv. Accounting standard 30 relating to financial instruments provides that difference between the redemption value and the issue consideration of redeemable preference shares should be recognized in the pro....
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.... 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 paid from it but debited it to the profit and loss account to avoid book profit tax u/s 115 JB of the Act. vii. Once the profit and loss account prepared by the assessee company is not as per The Companies Act, the AO has every right to adjust the book profit. He relied on the provisions of section 52 of The Companies Act. viii. Accordingly, he adjusted the book profit under section 115JB of the act at a loss of Rs. 445,665,451 to the revised the net profit of Rs. 155,43,34,549/-, thereby inc....
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....r 2019. 22. The learned assessing officer based on the above direction passed the assessment order on 31st 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 31st October 2019 was made. 23. Assessee aggrieved with the same and is in appeal before us. The learned authorized representative argued the grounds of appeal at length and further submitted a written submission containing 22 pages and various other judicial precedents were cited compiled in a paper book containing 822 pages. Earlier two volumes of paper books were filed. Learned CIT DR also extensively argued the matter and submitted a written submission dated 16th February 2023. In response to the submission of the learned CIT DR, the learned AR further submitted a written submission contai....
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....inate 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 submission placed at page number 22 of the paper book in para number 5) is that the assessing officer may be directed to allow adjustment of brought forward business loss or unabsorbed depreciation, which is lower as per the direction of the DRP. 29. The learned departmental representative vehemently submitted that the learned assessing officer has followed the decision of the coordinate bench, lower of unabsorbed business loss and unabsorbed depreciation is nil for one of the years, therefore, assessee is entitled for deduction of Only Rs Nil. Therefore, the orde....
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....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 consideration should be recognized in the profit and loss account. Therefore, the above sum is required to be debited to the profit and loss account. iii. in computing the normal taxable income of the assessee, assessee has disallowed it but has not made adjustment in the book profit is the correct treatment. iv. learned assessing officer has cherry picked the tax auditor" s report to hold that foreclosure cost paid by the assessee to its holding company for early redemption of preferential constitute a premium thus required to be set off against share premium available with the assessee ....
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....e 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 is contradictory for the same assessment year in the same computation of total income and therefore same should be rejected on this basis itself. (iv) Decision of honourable Bombay High Court in case of Aditya Prakash entertainment private limited in company petition number 404 of 2016 wherein the honourable Bombay High Court has categorically differentiated between the redeemable preference shares and the debentures. He further referred to the decision of the honourable Supreme Court in case of Anarkali sarabhai 224 ITR 422 wherein it has been held that when preference share is redeemed by a company then the shareholder transfers the shares ....
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....rictly 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 a premium of Rs. 2900 crores. Therefore, the total issue consideration was Rs. 3000 crores. The tenure of the redeemable preference was determined at 10 years and the redemption due date accordingly was 28th of March 2022 at a premium of Rs. 6865 crores. Accordingly, the total redemption consideration was Rs. 6965 crores. 37. In 2015, assessee decided to revise the terms of the preference shares by reducing its tenure. The redemption date was decided on 30 March 2015 but at the foreclosure cost of Rs. 200 crores. Therefore, the total redemption price of the debentures was decided at Rs. 3200 crores (original issue consideration of Rs. 3000 crores plus premium of 200 crores). The assessee debited the....
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....f 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 debited any expenditure of capital nature to the statement of profit and loss during the current year other than as reported above. Therefore, assessee states in form number 3CD that foreclosure cost on account of early redemption of the preference shares and expenses in relation to capital reduction share issue in deduction of preference shares are the capital expenditure debited to the profit and loss account. 41. Form number 3CD is always prepared by the assessee and it is certified by the accountant in form number 3CA that details furnished in that form along with its annexure read together with and subject to the notes therein are true and correct. Therefore, form number 3CD prepared by the assessee, re....
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.... 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) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption 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. 60(3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition60a made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issu....
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....ty 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 equity shareholders is that preference shareholders get preferential right over equity shareholders in distribution of assets at the time of liquidation. However, till the date of redemption of preference shares, preference shareholders do not have a right to ask for redemption. Hence, payment to preference shareholders can also be considered as an equity distribution. 46. Preference share capital is disclosed in Part I as Shareholders" Funds in Schedule III of The Companies Act 2013 under balance sheet. In Part II only the expenses are required to be placed. The Foreclosure cost is neither an expenditure nor an extraordinary item of expenses as explained in Framework. Thus, the Profit and loss account prepared by the Assessee is not in accordance with the provision of the companies act . This is in violation of section 55 of The Compani....
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....aid 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 the propositions raised by assessee. 53. Decision of Honourable supreme court in case of Appollo Tyres Limited [2002] 255 ITR 273 (SC) will only apply if the accounts are prepared in accordance with the companies Act and relevant statutory pronouncements. It is held that the use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. In this case the ld. AO referred to the provisions of the Companies Act and held that he has every right to disturb the audited accounts. Honorable supreme court decision does not prevent ld. AO to disturb profit and loss account when the Capital expenditure is debited to the profit and loss account for avoiding book profit tax and ....
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....he 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 the act. Coordinate bench held that tax audit report is an important document, but it cannot take place of evidence required for claiming the deduction. In the present case, in form number 3CD, assessee has classified the above expenditure as capital expenditure. Form number 3CD is always prepared by the assessee. The report is given by an accountant in form number 3CA or Form No. 3CB. Thus, there is a basic contradiction in the claim of the assessee that tax audit report (form number 3CD) cannot be used by the learned assessing officer for making adjustment under section 115JB. The fact shows that in form number 3CD assessee is stating that foreclosure cost is in the form of premium paid on redemption of redeemable preference shares and is capital expenditure, whereas while computing book profit, assessee pleads that it is a revenue expenditure which can be debited t....
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....ted 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 private limited pertain to share capital issue, Punjab State industrial development Corporation Ltd pertain to amount paid to registrar of companies for an enhancement of capital base and decision of the Hindustan insecticide Ltd also pertain to the sum paid to registrar of companies for enhancement of capital base of the company. Therefore, the appellant" s claim of treating the expenditure as revenue is correct. 63. The learned CIT DR submitted that in form number 3CD the assessee himself has classified the above expenditure as capital expenditure. The AO asked why this expenditure should not be disallowed relying on the decision of the honourable Supreme Court. Assessee in reply, only reliance was made with respect to the decision that MAT provisions are introduced much after the date of the decision and therefore it cannot be applied. 64. We have carefully considered the rival contentions an....
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....ture 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 view of this, we do not find any infirmity in the order of the lower authorities in holding that expense of Rs. 25 lakhs is capital in nature. Further in form number 3CD assessee itself is qualified it to be a capital expenditure and therefore now assessee cannot argue otherwise as form number 3CD is also prepared by the assessee. The claim of assessee is contradictory on the same issue. Therefore, we do not find any infirmity in the orders of the lower authorities in holding that expenditure of Rs 25 lakhs incurred by the assessee is a capital expenditure relying on assessee" s own claim in Form no 3 CD. Accordingly ground number 10 - 12 of the appeal are dismissed. 65. Ground numbers 13 - 15 of the appeal are with respect to the transfer pricing adjustment of Rs. 1,867,424/- on account of sale of fuel stock and Rs. 11,701,150/- on account of purchase of fuel stock. During the year assessee has s....
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....saction 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 appropriate method and for comparability analysis the TIPS data are correctly used by the learned transfer pricing officer. 67. The learned authorized representative submitted that the benchmarking made by the assessee applying the "other method" as the most appropriate method should be accepted and cannot be treated as held by the coordinate bench in case of Toll global versus DCIT 2014 [51 taxmann.com 342 (Delhi)] which has been confirmed by the honourable Delhi High Court. Therefore, the most appropriate method adopted by the assessee should be accepted as "other method" and not CUP. It was further stated that lower authorities are incorrect in applying reference index price from TIPS database which merely provides quotations. With respect to the applicability of CUP method, assessee relied upon the coordinate bench decision in case of Kohinoor foods Ltd versus ACIT (2014) [52 taxmann.com 454 (Delhi)] s....
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....art 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 wherever the prices are found not comparable. No infirmity pointed out in the transactions compared, timing of transactions and on any other parameter of transaction. Therefore, we do not have any hesitation in confirming the adjustment on account of Arm's length price of specified domestic transaction. 72. On the use of TIPS data base, assessee has relied upon decision of coordinate bench in case of Billion Wealth Minerals (P.) Ltd.*[2018] 90 taxmann.com 170 (Mumbai - Trib.), it dealt with this aspect as under :- "6.4 We would also like to mention that the cases relied upon by the DR are not relevant to decide the issue before us. In the case of Tilda Riceland (P.) Ltd. (supra) it was held that TIPS data can also be used for TP purposes. There is no doubt about it but the issue is how it should be utilised. The DRP had specifically pointed out as to how the TIPS data in the case under consideration was not appli....