TaxTMI 
TaxTMI 
2024 (6) TMI 355
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.... as the Assessee had failed to make payment of 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....
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....erefore, 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. 3.22 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 fo....
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....on of INR 3.22 Crores and INR 42.11 Crores made by the Assessing Officer under Section 14A read with Rule 8D(2)(i) & 8D(2)(ii) of the Income Tax Rules, 1962 [for short "the 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, dat....
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....mat. (ii) It was submitted that the profits made in the year of investment were in excess of amount of investment made in the respective year, and therefore, it is beyond doubt that Assessee has invested 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 ....
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.... 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 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 mat....
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....ssing Officer as per Rule 8D(2)(iii) of the Rules are concerned, we find that the CIT(A) has directed the Assessing Officer to recomputed the quantum of disallowance by taking into consideration only the investments yielding exempt income. We note that before the 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 Asses....
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....013-14) has also accepted similar computation supported by the report of the tax auditor. In view of the aforesaid facts and circumstances, we conclude that the Assessing Officer erred in not accepting the computation of suo motu disallowance and failed to record 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....
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....ment records. Therefore, keeping in view of the above submissions of the Ld. Departmental Representative, we remand the issue back to the file of Assessing Officer for adjudication after verification of facts as averred on behalf of the Assessee and after taking into consideration 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 Departmen....
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....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. The relevant extract 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 ....
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....e Assessing Officer. The Assessing Officer noted that his predecessors have taken a view that substantial part of raw material being crude oil is imported and the cost of import necessarily includes loss/gain due to foreign exchange loss or ERV. As per Indian Accounting Standard - IND AS 23, the borrowing costs 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....
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.... 2. An entity shall apply this Standard in accounting for borrowing costs. 3. The Standard does not deal with the actual or imputed cost of equity, including preferred capital not classified as a liability. 4. An entity is not required to apply the Standard to borrowing costs directly attributable to the acquisition, construction or production of: (a) a qualifying asset measured at fair value, 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, ....
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.... INR 71.63 Crores under Section 14A of the Act read with Rule 8D of the Rules. Therefore, while computing Book Profit under Section 115JB of the Act, the Assessing Officer increased the profits as shown in the Profit & Loss Account by the aforesaid amount of INR 71.63 Crores by invoking the provisions of Clause (f) of Explanation 1 to Section 115JB(2) of the Act. 10.1. In appeal preferred by the Assessee, the CIT(A) restricted the above 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 consider....
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....shment liability with LIC of India on annual basis after determining the liability through actuarial valuation at period end of every financial year. The liability so determined by actuary was then compared with balance in fund with LIC and the difference, if any, was funded by the Assessee. For the relevant previous year, the liability of the Assessee for Leave Encashment was computed at INR 577.36 Crores as per the actuarial valuation report. Since there was 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 ob....
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....ok a position that the additional provision of INR 48.26 Crores was not separately funded. However, during the appellate proceedings before the CIT(A) the Assessee has submitted that a payment of INR 48.38 Crores was made to LIC during the relevant previous year, i.e., on 26/09/2013. Before us the Assessee reiterated the aforesaid position. 12.7. We note that in the case of Union of India Vs. Exide Industries Limited: [2020] 425 ITR 1 (SC)[24-04-2020], the Hon'ble Supreme Court has, while upholding 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 provisio....
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....en the same becomes payable to the employees. Meaning thereby, the liability of the Assessee to make payment towards Leave Encashment would get discharged by making payment to LIC for the purpose of Section 43B of the Act. However, the issue that arises for consideration is whether the payment of INR 48.38 made by the Assessee to LIC corresponds to the provisions of INR 48.26 Crores created by the Assessee during the relevant previous year. From the material on record, it is not clear whether the payment of 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 cons....
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....e Tax Act, 1961, the CIT (A) erred in confirming the disallowance of the AO, of legitimate business expenditure. a. CIT(A) erred on the fact that AO in assessment disallowed the amount by observing "found nothing new in the reply except as few additional details like actuary valuation report/ some accounting entries etc., hence the amount of Rs. 21,09,88,131/- of provision disallowed and added to income. CIT(A) recorded the fact that AO has not discussed Section 43B(f) thus erred in interpreting and justify such disallowance u/s 438(b) as if interpreted 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....
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....to Exchange Rate Variation on Foreign Loans used for creating indigenous assets to be allowed as deduction under 37(1) of the Income Tax Act, 1961, while computing the taxable income. Additional ground No. 2: The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing." 13.3. The Revenue has raised the following grounds of appeal in ITA No. 3911/Mum/2019: 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. 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 ap....
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....fficer by invoking the provisions of Rule 8D of the Rules. 15.1. The facts relevant for adjudication of the grounds under consideration are that during the assessment proceedings, the Assessing Officer noted that the Assessee has earned dividend income amounting to INR 55,09,19,633/- which was claimed to be exempt from tax in the return of income. On verification of the computation of total income, the Assessing Officer noticed that the Assessee had made suo motu disallowance of INR 3.65 Crore under Section 14A of the Act. However, the Assessing Officer rejected the aforesaid sou motu disallowance offered by the Assessee and computed aggregate disallowance as per Rule 8D at INR 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 quantif....
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....15. 16.2. We note that, as was the case for Assessment Year 2014-15, during the previous year relevant to Assessment Year 2015-16, the Assessee created provision for Leave Encashment of INR 21.10 Crores. However, the Assessing Officer disallowed the same in view of the fact that similar disallowances were made in the preceding assessment years and there was nothing new in the reply furnished by the Assessing Officer. The CIT(A) also confirmed the disallowance. Being aggrieved, the Assessee in now in appeal before the Tribunal. While deciding Ground No. 1 raised by the Revenue in appeal (ITA No. 4579/Mum/2019) for the Assessment Year 2014-15 in paragraph 12 to 12.9 above, we have remitted 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 ....
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....er of CIT(A) deleting the disallowance of INR 107,04,78,000/- as capital/revenue expenditure. 20.1. In the return of income the Assessee had claimed deduction for INR 107,04,78,000/- being establishment expenses incurred on Projects Department which oversaw the execution of various Projects undertaken by the Assessee. The Assessing Officer disallowed the aforesaid expenses holding the same to be capital in nature. In appeal preferred by the Assessee on this issue, the CIT(A) agreed with the Assessee allowed claim for deduction as revenue expenditure. The Revenue is now in appeal before us. 20.2. While adjudicating Ground No. 1 raised in appeal (ITA No. 3913/Mum/2019) for the Assessment Year 2014-15 preferred 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 natu....
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....e following grounds of appeal in ITA No. 266/Mum/2020: "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, a. CIT(A) erred by not giving ground of rejection of Appellant's own disallowance instead directly applied Rule 8D in his order. b. CIT(A) erred by not appreciating the fact that Assessing Authority has not recorded any findings on suo moto disallowance basis CA certificate by Appellant with regard to indirect expenses except for interest free funds for which CIT(A) recorded his finding as not applicable. c. CIT(A) erred by not offering any observation / discussion 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 ex....
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....the return filed u/s 139(5) as a valid return without considering the rulings in the cases of CIT versus Andhra Cotton Mills Ltd. 219 ITR 404 (AP) and Sunanda Ram Deka vs CIT 210 ITR 988 (Guwahati) relied upon by the AO; 8. On the facts and in the circumstances of case and in law, the Ld. CIT(A) erred in holding that loss accrued to the due to foreign exchange fluctuation in respect of external credit borrowings taken for acquisition of indigenous assets is a revenue loss." 23.4. During the course of hearing both the sides had adopted the arguments made in relation to corresponding grounds raised in appeal for the Assessment Year 2014-15 and agreed that our findings/adjudication in appeal for the Assessment Year 2014-15 shall also apply mutatis mutandis to grounds raised in appeal preferred by the Assessee/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. Iden....
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....d against the order of CIT(A) deleting the disallowance under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules. 29.1. Both the sides adopted the arguments made in relation to Ground No. 2 raised by the Revenue in appeal for the Assessment Year 2014-15 and agreed that our findings/adjudication in relation to the aforesaid Ground No. 2 shall also apply mutatis mutandis to Ground No. 2 raised in appeal preferred by the Revenue for the Assessment Year 2016-17. Accordingly, 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 confirmed the order of the CIT(A) deleting the disallowance under Section 14A of the Act read with Rule 8D(2)(ii) of the Rules. In view of 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 i....