TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 355
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....f tax amount. In the above background the appeals came up for hearing before us. Assessment Year 2014-15 2. We would first take up three appeals pertaining to the Assessment Year 2014-15. 2.1. ITA No. 3195/Mum/2019 preferred by the Assessee and ITA No. 3913/Mum/2019 preferred by the Revenue are cross-appeals arising from the order, dated 19/03/2019, passed by the Commissioner of Income Tax (Appeals)-2, Mumbai [hereinafter referred to as "the CIT(A)"] whereby the CIT(A) had partly allowed the appeal preferred by the Assessee against the Assessment Order, dated 29/12/2017, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as "the Act"]. Whereas ITA No. 4579/Mum/2019 is the appeal preferred by the Revenue against the order, dated 15/04/2019, passed by the CIT(A) under Section 154 read with Section 250 of the Act rectifying order, dated 19/03/2019, passed by the CIT(A). 2.2. The Assessee has raised the following grounds of appeal in ITA No. 3195/Mum/2019: "1. Disallowance under Section 14A(2) read with Rule 8D. The Appellant submits that on the facts and in the circumstances of the case and true interpretation of the provisions of Section 14A, ....
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....pplying the ratio of decision given in the case of HDFC Bank Ltd. (2016) 67 Taxmann.com 42 (Bom.) and (2014) 366 ITR 505 (Bom.) which has the impact of making the statutory rule redundant and entering into the legislative realm of redrafting the mandatory rule made by the Parliament. 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to delete the disallowance made by the AO u/s. 14A r.w.r 8D(2)(1) of Rs. 3.22 crore by treating the said amount as indirect interest expenditure as against direct expenditure as was held by the AO. 4. "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to re-compute the disallowance u/s 8D(2)(iii) by considering investments which had yielded exempt dividend income; without appreciating the fact that there is no such exclusions provided under the Act. 5. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in holding that the forex losses should not be accounted for the purpose of valuation of inventory and thereby deleting the addition of Rs. 46,04,86,281/- without considering Accounting Standards based on ma....
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....Rules"], respectively (c) re-computed the disallowance under Section 14A read with Rule 8D(2)(iii) of the Rules by considering yielding exempt income, and (d) deleted the addition of INR 46,04,86,281/- Crores made by the Assessing Officer in relation to valuation of inventory. However, the CIT(A) confirmed the disallowance of INR 48.26 made by the Assessing Officer in relation to the provision for Leave Encashment of INR 48.26 Crores created during the relevant previous year. 3.3. The aforesaid order, dated 19/03/2019, passed by the CIT(A) was rectified by the CIT(A) vide order, dated 15/04/2019 whereby the CIT(A) deleting the disallowance of INR 48.26 Crores made by the Assessing Officer in relation to Leave Encashment. 3.4. Both the Assessee as well as the Revenue are now in appeal before us against the orders passed by the CIT(A). Appeal by Assessee (ITA No. 3195/Mum/2019, AY 2014-15) 4. We would first take grounds raised by the Assessee in the appeal (ITA No. 3195/Mum/2019) against the order, dated 19/03/2019, passed by the CIT(A) along with the connected grounds raised by the Revenue in the cross appeal (ITA No. 3913/Mum/2019). . Ground No.1 of Appeal by Assessee along w....
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....out of surplus funds. In support, the Assessee filed the details of year-wise Profit after Tax plus Depreciation with a comparative data of investments made in each of these years. As per the cash flow statement prepared as per Accounting Standard -3 issued by the Institute of Chartered Accountants of India (ICAI), the cash flow in the year of investment was more than the investments made in each of the years. Further, it was contended that since interest free funds were available with the Assessee were sufficient to meet the investments made it can be presumed that the investments were made from interest free funds as per the judgment of the Hon'ble Bombay High Court Judgment in the case of Commissioner of Income Tax-2, Mumbai Vs. HDFC Bank Limited: [2016] 366 ITR 505 & Commissioner of Income Tax Vs. Reliance Utilities & Power Ltd.: [2009] 313 ITR 340. Further, only investment yielding exempt dividend income are to be considered for the purpose of computing the amount of disallowance as per Rule 8D(2)(ii) of the Act. c. It was also submitted that there was no nexus between the exempt income earned and interest cost incurred. No indirect expenses were incurred. Without prejudice ....
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....ce Utilities & Power Limited (supra) and HDFC Bank Limited (supra), it can be presumed that the investments were made out of interest free funds. As regards, computation of disallowance as per Rule 8D(2)(iii) of the Rules, the CIT(A) directed the Assessing Officer to re-compute the quantum of disallowance by taking into consideration only the investments which yielded exempt income. 4.6. Now, both, the Assessee and the Revenue are in appeal before us. The Revenue is aggrieved by the deletion of disallowance made by the Assessing Officer as per the provisions of Rule 8D(2)(i) and 8D(2)(ii) of the Rules. While the Assessee, not being satisfied with the partial relief granted by the CIT(A), contends that the entire disallowance made by the Assessing Officer as per Rule 8D(2)(iii) of the Rules should also have been deleted. 4.7. We have given thoughtful consideration to the rival submissions advance by the parties, perused the material on record and analyzed the position in law. 4.8. We would first take up Ground No. 3 and 2 raised by the Revenue. We are of the considered view that the Revenue has failed to dislodge the factual findings returned by the CIT(A) while deleting the disa....
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....e CIT(A), the thrust of the submissions made by the Assessee, as recorded in paragraph 5.2 of the order passed by CIT(A), was on the availability of interest free own funds. Accepting the aforesaid contention of the Assessee, the CIT(A) deleted the disallowance made by the Assessing Officer under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules. The order of the CIT(A) to this extent has been confirmed in paragraph 4.8 above. We find merit in the contention advanced by the Learned Senior Counsel appearing for the Assessee that the Assessing Officer has proceeded on incorrect understanding of facts while recording dissatisfaction and invoking provisions of Rule 8D of the Rules. In paragraph 2.4 of the assessment order, the Assessing Officer has made a general statement - "in this facts of matter, I am satisfied, that this is a fit case for invoking provisions of Section 14A of the IT Act". While doing so the Assessing Officer has also made reference to the report issued by the Tax Auditor wherein the disallowance has been quantified. However, no specific observations have been recorded regarding the indirect expenses or administrative expenses disallowed by the Assessee ....
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....d proper reasoning and/or dissatisfaction before invoking, inter alia, provisions contained in Rule 8D(2)(iii) of the Rules. Accordingly, we delete the disallowance of INR 26.31 Crores under Section 14A of the Act read with Rule 8D(2)(iii) of the Rules sustained by the CIT(A). Ground No. 1 raised by the Assessee is, therefore, allowed and Ground No. 4 raised by the Revenue is dismissed. Additional Ground No. 1 raised by the Assessee 5. By way of Additional Ground No. 1, the Assessee has raised a fresh claim for deduction under Section 37(1) of the Act is respect of the loss arising due to Exchange Rate Variation (for Short "ERV") on Foreign Loans used for creating indigenous assets. 5.1. The Ld. Senior Counsel appearing for the Assessee submitted that all the details related to the ERV form part of the assessment records and therefore, adjudication of the Additional Ground would not require enquiring into new set of factual not on record. It was submitted that the Assessee is a public sector undertaking and had capitalized ERV of INR 539,09,00,445/- in the Books of Accounts and had not claimed deduction for the same as revenue expenditure or by way of depreciation. In the retur....
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....sideration the decision of the Tribunal in the case of Cooper Corporation Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, Satara: 159 ITD 165. In terms of the aforesaid, Additional Ground No. 1 raised by the Assessee is allowed for statistical purposes. Additional Ground No. 2 raised by the Assessee 6. Additional Ground No. 2 raised by the Assessee does not require separate adjudication and the same is dismissed as being general in nature. Appeal by Revenue (ITA No. 3913/Mum/2019, AY 2014-15) 7. We would now take up the balance grounds raised by the Revenue in ITA No. 3913/Mum/2019. Ground No. 1 8. Ground No. 1 raised by the Revenue is directed against the order of CIT(A) deleting the disallowance of INR 69,43,14,416/- as capital/revenue expenditure. 8.1. In the return of income the Assessee had claimed deduction for INR 69,43,14,416/- being establishment expenses incurred on Projects Department which oversaw the execution of various Projects undertaken by the Assessee. According to the Assessee, the aforesaid establishment expenses were in the nature of salary etc. incurred on various personnel engaged in supervision and monitoring of various projects at refineries and ....
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....of the aforesaid decision of the Tribunal reads as under: "17. Ground No.8 relates to the establishment expenses charged to Capital Work in-progress. The ld. AR of the assessee argued that the assessee had claimed deduction on normal business expenses e.g. salary, travelling, conveyance etc. incurring in connection with capital work-in-progress for ongoing project in the same business line as revenue expenditure. However, the Revenue authorities has disallowed the claim on the ground that the assessee has charged, thus, expenditure pertaining to capital work-in-progress and is not proved as revenue in nature but the same is capital in nature. The ld. DR for Revenue supported the order of authorities below. 18. We have considered the rival contention of the parties and gone through the order of authorities below. We have seen that AO has treated the Administrative Expenses incurred on Engineering Project and the ld. CIT(A) while considering this ground of appeal concurred with the finding of AO. 19. The Hon'ble Supreme Court in Tuticorin alkali Chemicals and Fertilizers Ltd. vs. CIT (227 ITR 172(SC) held that when the question is whether a receipt of money is taxable or not,....
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....and financial charges can be made part of inventory cost. Therefore, the valuation of inventory should include actual cost to Assessee which would be the landed cost inclusive of foreign exchange loss or ERV. Therefore, the Assessing Officer made an adjustment of INR 46,04,86,281/- holding as under: "3.2 I have considered Assessee's reply. I find that the same issue was decided against the assessee in respect of its assessment proceedings relevant to A.Y 2014-15. Relying upon the reasoning given in the assessment order of AY 2013-14, the sum of Rs. 813,955,831/- is added to the taxable Income of the assessee. The methodology adopted in AY 2013-14 in arriving at the disallowance of Rs. 127,44,42,112/- is followed in AY 2014- 15 which is as under: Particulars Assessment Year 2013-14 Assessment Year 2014-15 Sales (net of subsidy) 1,90,039 2,16,337 Inventories 16,439 18,775 Inventory as %age of sale 8.65% 8.68% Exchange rate Variation (forex loss) 1473 938 Disallowance on account of ERV 127.44 81.40 However, while adding forex loss in closing stock it is imperative to reduce forex loss in opening stock amounting to Rs. 127,44,42,112. Accordingly, a Net ....
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....ue, for example, a biological asset within the scope of IND AS 41 Agriculture; or (b) inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis" d) The Assessing Officer has also failed to appreciate that Section 43(1) of the Act defines "Actual Cost" is in the context of fixed assets and therefore, reliance upon Section 43(1) of the Act read with Explanation 8 thereto was misplaced. 9.5. The CIT(A) took note of the facts that his predecessor had, after accepting identical submission made on behalf of the Assessee in appeal before CIT(A) pertaining to Assessment Year 2012-13 and 2013-14, set aside the adjustment made in the value of the inventories holding that (i) Section 43A deals with only capital asset, (ii) IND-AS 23 has given specific exclusion for the entire manufacturing or producing in large quantity on a repetitive basis for the purpose of valuing the closing stock, and (iii) Press release of Ministry of Corporate Affairs on 02/01/2015, which is relied by assessing officer, was applicable with effect from 01/04/2016. Following the aforesaid orders passed by his predecessor in appeals for the Assessment Year 2012-13, the CIT(A....
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.... amount to be added to the profits as shown in Profit & Loss Account in terms of Clause (f) of Explanation 1 to Section 115JB(2) of the Act to INR 3.22 Crores by accepting the computation filed by the Assessee during the assessment proceedings supported by the report issued by the Tax Auditor. 10.2. Being aggrieved by the above relief granted by the CIT(A), the Revenue is now in appeal before us. 10.3. We have heard the rival contention and perused the material on record. 10.4. We note that the CIT(A) has, following the decision of Special Bench of the Tribunal in the case of Assistant Commissioner of Income Tax Vs. Vireet Investment Pvt. Ltd. : [2017] 165 ITD 27 (Delhi -Trib) (SB), concluded as under: "14.3 I have considered the A.O."s order as well as the appellant"s submissions. I find that the disallowance made by the Assessing Officer is based on importing the provisions of Section 14A to Section 115JB of the Act. In the decision of the ITAT Delhi Bench "H" Bench), in case of Asstt. CIT v. Vireet Investment (P.) Ltd. [2017] 165 ITD 27/82 taxmann.com 415 it has been held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without reso....
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....increase of INR 48.26 Crores as per against the liability of INR 529.09 Crores as on 31/03/2013, a provision of INR 48.26 Crores for Leave Encashment was created in the books of accounts by the Assessee. The Assessing Officer disallowed the aforesaid provision for Leave Encashment created by the Assessee. In appeal preferred by the Assessee on this ground, the CIT(A) vide order, dated 19/03/2019, passed under Section 250 of the Act confirmed the disallowance by, inter alia, observing that the no payment was made by the Assessee to LIC during the relevant previous year. Subsequently, in the rectification application filed by the Assessee, CIT(A) rectified the order and allowed Assessee's claim for deduction for 48.26 Crores observing that the Assessee had made payment of INR 48.38 Crores to LIC during the relevant previous year. 12.2. It is the contention of the Revenue that since the Assessee has merely created a provision for Leave Encashment deduction for the same cannot be allowed. The payment of contribution to LIC cannot be treated at par with the "actual payment". Therefore, as per the provisions of Section 43B(f) of the Act, deduction could not have been allowed to the Asse....
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....ding the constitutional validity of provisions contained in Section 43B(f) of the Act, held as under: "32. Both the grounds are ill-founded. In the basic scheme of section 43B, there is no direct or indirect limitation upon the power of legislature to include only particular type of deductions in the ambit of section 43B. To say that section 43B is restricted to deductions of a statutory nature would be nothing short of reading the provision in a purely imaginative manner. As already discussed above, from 1983 onwards, section 43B had taken within its fold diverse nature of deductions, ranging from tax, duty to bonus, commission, railway fee, interest on loans and general provisions for welfare of employees. An external examination of this journey of section 43B reveals that the legislature never restricted it to a particular category of deduction and that intent cannot be read into the main section by the Court, while sitting in judicial review. Concededly, it is a provision to attach conditionality on deductions otherwise allowable under the Act in respect of specified heads, in that previous year in which the sum is actually paid irrespective of method of accounting." 12.8. ....
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.... INR 48.38 made by the Assessee on 26/09/2013 corresponds to the provision for leave encashment of INR 48.26 Crores created during the relevant previous year. Before the Assessing Officer the Assessee took a position that provision of INR 48.26 created during the relevant previous year was not funded separately. However, before the CIT(A) the Assessee relied upon statement wherein payment of INR 48.38 was reflected. The submission of the Assessee before the Assessing Officer that the fund maintained with LIC already had a balance in excess of Rs. 577.36 Crore, i.e. Rs. 637.19 Crore, and therefore, the provision of INR 48.26 Crores was not separately funded was not taken into consideration by the CIT(A). Accordingly, in the facts and circumstances of the case we remit this issue back to the file of the Assessing Officer with the directions to allow deduction for INR 48.26 Crores, being provisions for leave encashment, to the Assessee during the relevant previous year in terms of Section 37(1) read with Section 43B(f) of the Act provided the Assessee is able to establish before the Assessing Officer that the payment of INR 48.38 Crores made by the Assessee to LIC during the relevant ....
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....ed and justified by AO in assessment order, even though no such reason is recorded in assessment order by AO nor applied such section by AO. b. CIT(A) erred in disallowing u/s 43B (b) on the ground that even though provision is based on actuarial valuation can be allowed only on payment basis. However also recorded that fund created with LIC had sufficient or more than the required balance, and hence fulfils the requirement of availability of funds in separate fund account maintained with LIC. c. CIT(A) erred and failed to appreciate that actuarial report is the best scientific method to account for liability and hence at given date, books need to reflect actual payable and accordingly provision was required as per prudent accounting policies. As LIC fund already had more than the required amount to be paid, the condition of payment gets satisfied and hence allowable u/s 37(1). d. CIT(A) observed and justified disallowance by stating that even if not covered by Section 438(b), no liability exists during the year considering fund had balance more than determined. He failed to appreciate that actuarial report is the best scientific method to account for liability and hence a....
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....the amount of Rs. 107,04,78,000/- being expenditure incurred for supervising and monitoring of execution of new projects are in the nature of revenue expenditure and thereby deleting the said disallowance." 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing to delete the disallowance made u/s. 14A r.w. rule 8D(2)(ii) of the IT Act holding that since investment of assessee is less than own funds therefore, presumption arises that investment are sourced from own funds thereby rejecting the application of rule 8D; and also by applying the ratio of decision given in the case of HDFC Bank Ltd. (2016) 67 Taxmann.com 42 (Bom.) and (2014) 366 ITR 505 (Bom.) which has the impact of making the statutory rule redundant and entering into the legislative realm of redrafting the mandatory rule made by the Parliament. 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in directing the AO to delete the disallowance made by the AO u/s. 14A r.w.r 8D(2)(1) of Rs. 3.65 crore by treating the said amount as indirect interest expenditure as against direct expenditure as was held by the AO. 4. On the facts and in t....
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....NR 71.81 Crores consisting of disallowance of INR 3.65 Crores under Rule 8D(2)(i), INR 39.10 Crores under Rule 8D(2)(ii) and INR 29.06 Crores under Rule 8D(2)(iii). 15.2. Being aggrieved, the Assessee carried the issue in appeal before CIT(A) who granted partial relief. The CIT(A) deleted disallowance of INR 3.65 Crores made by the Assessing Officer holding that the Assessing Officer erred in treating the expenses of INR 3.65 Crores, being indirect expenditure attributable to earning exempt income quantified in the report issued by the Chartered Accountant, as the direct expenses related to earning exempt income whereas the contention of the Assessee was that no direct expenses related to earning of exempt income had been incurred during the relevant previous year. The CIT(A) also deleted the disallowance under Rule 8D(2)(ii) of the Rules holding that Assessee's own non-interest bearing funds by way of Share Capital and Free Reserve & Surplus were more than the investments made by the Assessee and therefore, as per the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Limited (supra) and HDFC Bank Limited (supra), it can be presumed that the inves....
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....the identical issue back to the file of the Assessing Officer with directions. Since both sides agreed that our finding/adjudication in relation to Ground No. 1 raised by the Revenue in appeal (ITA No. 4579/Mum/2019) for the Assessment Year 2014-15 shall apply mutatis mutandis to the ground under consideration, we remit the issue raised in Ground No. 2 back to the file of the Assessing Officer with the directions to allow deduction for INR 21.10 Crores, being provisions for leave encashment, to the Assessee in terms of Section 37(1) read with Section 43B(f) of the Act provided the Assessee is able to establish before the Assessing Officer that the payment of INR 21.10 Crores was made by the Assessee to LIC during the relevant previous year which corresponded to the provision for leave encashment of INR 21.10 Crores created during the relevant previous year. In terms of the aforesaid, Ground No. 2 raised by the Assessee is allowed for statistical purposes. Additional Ground No. 1 raised by the Assessee 17. By way of Additional Ground No. 1, the Assessee has raised a fresh claim for deduction under Section 37(1) of the Act is respect of the loss arising due to Exchange Rate Variat....
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....erred by the Revenue in paragraph 8 to 8.5 above, we have accepted the contention of the Assessee that the aforesaid expenses are revenue in nature. Since there is no change in facts and circumstances during the relevant previous year, taking a view consistent with the view taken while deciding identical issue in appeal for the Assessment Year 2014-15, we confirm the order of CIT(A) deleting the disallowance of INR 107,04,78,000/- holding the same to be expenses of revenue nature by following the decision of the Mumbai Bench of the Tribunal in Assessee's own case in appeals for the Assessment Years 2003-04, 2004-05 and 2005-06, [ITA No. 2736/Mum/2007, 649/Mum/2009, 1186/Mum/2009, 699/Mum/2009 & 1187/Mum/2009] decided by way of common order, dated 23/11/2016. Accordingly, Ground 1 raised by the Revenue is dismissed. Ground No. 5 21. Since Ground No. 2, 3 and 4 were taken up and adjudicated Ground No. 1 raised by the Assessee (ITA No. 3196/Mum/2019), we proceed to take up Ground No. 5 raised by the Revenue which is directed against the order of CIT(A) deleting the adjustment of INR 87,68,03,979/- made by the Assessing Officer on account of inclusion of foreign exchange losses or t....
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....on Hon'ble ITAT order in Appellant's own case for AY 2006-07 wherein Assessing Authority directed to consider / allow after examining CA certificate deduction for AY 2010-11 to AY 2012- 13, even though recorded in his Order on page 13, para 5.2.1. d. CIT(A) erred in applying Rule 8D(ii) i.e. 0.5% of average investment which is nothing but notional indirect disallowance when Appellant suo moto had taken indirect expense disallowance and duly recorded by CIT(A) in his order." 23.3. The Revenue has raised the following grounds of appeal in ITA No. 806/Mum/2020: 1. "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in holding that the amount of Rs. 80,99,68,307/- being expenditure incurred for supervising and monitoring of execution of new projects are in the nature of revenue expenditure and thereby deleting the disallowance" LA. 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing to delete the disallowance made u/s 14A r.w.r 8D(2)(ii) of the I Tact holding that since investment of assessee is less than own funds therefore, presumption arises that investment are sourced from own fund....
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....sessee/Revenue in appeals for the Assessment Year 2016-17. Appeal by Assessee (ITA No. 266/Mum/2020, AY 2016-17) 24. We would first take grounds raised by the Assessee in the appeal. Ground No.1 25. Ground No. 1 raised in appeal by the Assessee pertains to the disallowance under Section 14A of the Act read with Rule 8D(2)(iii) sustained by the CIT(A). 26. Identical ground raised by the Revenue in appeal for the Assessment Year 2014-15 stands dismissed in paragraph 4.9 above. Since there is no material change in facts and circumstances during the relevant previous year, taking a view consistent with the view taken while deciding identical issue in appeal for the Assessment Year 2014-15, we delete the disallowance under Section 14A of the Act read with Rule 8D(2)(iii) of the Rules to the extent is was sustained by the CIT(A). In view of the aforesaid, Ground No. 1 raised by the Assessee is allowed. Appeal by Revenue (ITA No. 806/Mum/2020, AY 2016-17) 27. We would now take up grounds raised by the Revenue in the cross appeal. Ground No. 1 28. Ground No. 1 raised by the Revenue is directed against the order of CIT(A) deleting the disallowance of INR 80,99,68,307/- being th....
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....the aforesaid, Ground No. 2 raised by the Revenue is dismissed. Ground No. 3 & 4 30. Ground No. 3 & 4 raised by the Revenue pertains to computation of Book Profits under Section 115JB of the Act. 30.1. Identical ground raised by the Revenue in appeal for the Assessment Year 2014-15 stands dismissed in paragraph 10 to 10.5. above. Since there is no change in facts and circumstances during the relevant previous year, taking a view consistent with the view taken while deciding identical issue in appeal for the Assessment Year 2014-15, we do not find any infirmity in the order passed by the CIT(A) by following the binding decision of the Special Bench of the Tribunal in the case of Assistant Commissioner of Income Tax Vs. Vireet Investment Pvt. Ltd. : [2017] 165 ITD 27 (Delhi -Trib) (SB). Accordingly, Ground No. 3 & 4 raised by the Revenue is dismissed. Ground No. 5 31. Ground No. 5 raised by the Revenue is directed against the order of CIT(A) deleting the addition of INR 35,03,47,309/- made by the Assessing Officer on account of inclusion of foreign exchange losses or the Exchange Rate Variation (ERV) in the value of inventory. 32. We have already dismissed identical ground ra....