2014 (12) TMI 297 - AT - Income Tax

Interest paid to bank disallowed Applicability of section 43B - merger of non-scheduled bank with scheduled bank - Held that - The loan from Global Trust Bank was taken sometime in 2001 and since then the assessee has been debiting its Profit & Loss Account by the amount of interest payable on the borrowings - in earlier years the liability has been considered and accepted as towards interest - For the first time the AO has changed the character of the liability from interest to dividend which is against the rule of consistency - The AO himself has observed that no fresh loans have been taken during the year under consideration - the AO cannot change the nature of liability during the year under consideration also, the contention of assessee cannot be accepted that the liability is not towards a scheduled bank because the amount has been borrowed from Global Trust Bank - when a bank is taken over by some other bank then all the borrowers of the erstwhile bank have to enter into fresh loan agreement with the new bank - once the Global Trust Bank has been merged with Oriental Bank of Commerce the borrowings of the assessee has to be considered as borrowings from Oriental Bank of Commerce and Oriental Bank of Commerce is a scheduled bank, therefore provisions of section 43B clearly apply on the facts of the case - The disallowance of ₹ 3.25 crores made under section 43B of the Act is confirmed - in subsequent years, i.e. AY 2007-08 the bank has waived the loan and the liability of interest and the assessee has shown the same as its income in AY 2007-08 - If the AO finds that the same has been offered for taxation in AY 2007-08 then the same must be considered as per provisions of law Decided against assessee. Transfer pricing adjustment Computation of ALP - Application of most appropriate method CUP method or TNMM method Held that - Following the decision in Dy. Commissioner of Income Tax Versus Trigyn Technologies Limited 2013 (8) TMI 701 - ITAT MUMBAI - the assessee was having total international transactions with the AE of more than ₹ 5 crores, AO made reference to TPO u/s 92CA(1) for computation of Arm s Length Price (ALP) of the international transaction u/s 92C assessee contended that the TPO adopted TNMM and selected certain comparables to arrive at arithmetic mean of 9.92 % as against CUP method selected by assessee for determining ALP - international transaction of assessee with its AE are at ALP and accordingly deleted the addition made on account of transfer pricing adjustment - the issue requires reconsideration by TPO and therefore the matter is remitted back to the AO for determination of ALP Decided in favour of assessee. Allowability of provision for doubtful debts u/s 36(1)(vii) Held that - The facts indicates that the assessee has actually written off the debts following the decision in M/s. Vijaya Bank Versus Commissioner of Income Tax & Anr. 2010 (4) TMI 46 - SUPREME COURT - any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee - a mere provision for bad debt would not be entitled to deduction u/s 36(1)(vii) - If an assessee debits an amount of doubtful debt to the P&L a/c and credits the asset account like sundry debtor s account, it would constitute a write off of an actual debt - the amount of loans and advances or the debtors at the year-end in the balance sheet is shown as net of the provisions for impugned debt - it is always open to the AO to call for details of individual debtor s account if the AO has reasonable grounds to believe that assessee has claimed deduction, twice over - were a deduction has been allowed in respect of a bad debt or a part thereof u/s 36(1)(vii), then, if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest paid to the bank under Section 43B.
2. Transfer pricing adjustment.
3. Allowance of provision for doubtful debts under Section 36(1)(vii).

Detailed Analysis:

1. Disallowance of Interest Paid to the Bank under Section 43B:
The assessee, engaged in developing software and technical services, filed a return declaring total income as Nil. The AO scrutinized the return and questioned the interest paid to the bank amounting to Rs. 3.25 crores. The AO noted that the interest was paid in lieu of dividends on preference shares, not as an expense chargeable to profit, thus disallowing the deduction under Section 36(1)(iii). The CIT(A) agreed with the AO but also noted that the liability was capital in nature and disallowable under Section 43B as the interest was not paid. The Tribunal upheld the disallowance, emphasizing that the liability was towards a scheduled bank (Oriental Bank of Commerce) post-merger with Global Trust Bank, thus invoking Section 43B.

2. Transfer Pricing Adjustment:
The assessee engaged in international transactions with associated enterprises (AEs) and used the Comparable Uncontrolled Price (CUP) method for transfer pricing. The TPO rejected the CUP method due to lack of comparables and adopted the Transactional Net Margin Method (TNMM), resulting in an upward adjustment of Rs. 3,04,96,436/-. The CIT(A) upheld the TPO's decision, noting the improper application of the CUP method by the assessee. The Tribunal, referencing its decision in the assessee's case for AY 2004-05, set aside the orders and remanded the matter to the AO for fresh determination of the ALP, allowing the assessee to present additional evidence.

3. Allowance of Provision for Doubtful Debts under Section 36(1)(vii):
The AO disallowed the provision for doubtful debts amounting to Rs. 96,11,238/-, treating it as a provision rather than an actual write-off. The CIT(A) reversed this, citing the Supreme Court decision in Vijaya Bank vs. CIT, which allowed such deductions if the debts were written off in the books. The Tribunal upheld the CIT(A)'s decision, confirming that the assessee had indeed written off the debts as per the Supreme Court's guidelines, thus allowing the deduction under Section 36(1)(vii).

Additional Judgments:
- ITA No. 3124/Mum/2012 (AY 2006-07): The issues were identical to those in ITA No. 3123/Mum/2012. The Tribunal dismissed the grounds related to interest disallowance and allowed the transfer pricing adjustment for statistical purposes, following its earlier findings.
- ITA No. 3011/Mum/2012 (AY 2005-06): The Tribunal dismissed the Revenue's appeal against the CIT(A)'s allowance of the provision for doubtful debts, reiterating the Supreme Court's stance in Vijaya Bank vs. CIT.

Conclusion:
The Tribunal upheld the disallowance of interest under Section 43B and allowed the reassessment of transfer pricing adjustments. It also confirmed the allowance of the provision for doubtful debts under Section 36(1)(vii), aligning with the Supreme Court's interpretation. The appeals were partly allowed for statistical purposes, and the Revenue's appeal was dismissed.