2015 (5) TMI 930 - AT - Income Tax

Transfer pricing adjustment - DRP directing AO to delete the disallowance made on account of transfer pricing adjustment involving payment of share application money - Held that - This issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee s own case for assessment year 2008-09 wherein it was held by the Tribunal relying on its earlier decision in the case of Vijay Electricals Ltd. V/s. Addl. CIT (2013 (7) TMI 804 - ITAT HYDERABAD) that the amount representing investment made by the assessee company in share capital of its subsidiary outside India was not in the nature of international transaction, as referred to in S.92B of the Act, and therefore, Transfer Pricing provisions were not applicable to such transactions. Thus we uphold the impugned order of the Dispute Resolution Panel directing the Assessing Officer not to make any addition on account of transfer pricing adjustment in respect of the transactions of the assessee company with its AE, involving payment of share application money - Decided in favour of assesse. Disallowance of expenditure incurred on staff welfare and others - DRP allowed the claim - Held that - Similar issue was involved in the case of the assessee for the assessment year 2008-09 wherein held that the department cannot disallow the expenditure merely because there is a clerical error in the bills produced by the assessee towards the expenditure.It was held that if the expenditure is not claimed by M/s. Maytas Properties Ltd., it is fair to allow deduction towards business expenditure in the hands of the assessee. Accordingly, the issue was restored by the Tribunal to the file of the Assessing Officer to verify whether the same expenditure was claimed by M/s. Maytas Properties P. Ltd. and if it is found, on such verification that there is no such double claim, the Assessing Officer was directed by the Tribunal to allow the claim of the assessee of such expenditure - Respectfully following the said decision of the coordinate bench of this Tribunal in assessee s own case,we uphold the impugned order of the Dispute Resolution Panel - Decided against revenue. Disallowance of expenditure for which payments were made in cash - DRP directing the Assessing Officer to restrict the disallowance only to the extent of 10% - Held that - this issue is also squarely covered by the decision of the Tribunal in assessee s own case for assessment year 2008-09, which has been relied upon by the Dispute Resolution Panel to give relief to the assessee on the similar issue involved in the year under consideration, i.e. assessment year 2009-10 - Decided against revenue. Addition of interest allegedly attributed to the advances given by the assessee company to its group concerns - DRP deleted the addition - Held that - all the material facts relevant to this issue as involved in the year under consideration are similar to assessment year 2008-09 in as much as the assessee company had interest free funds in the form of customer advances amounting to ₹ 556.36 crores and debentures and CCDs amounting to ₹ 600 cores, which were sufficient to give the interest free advances to the subsidiaries as well as other companies. - Decided against revenue. Disallowance of expenditure for construction work - DRP allowed the claim - Held that - The issue involved in the year under consideration as well as all the material facts relevant thereto are similar to assessment year 2008-09, we respectfully follow the decision of the coordinate bench of the Tribunal and uphold the impugned order of the DRP giving relief to the assessee on this issue as the entire payment to sub- contractor shall not be disallowed as there is evidence on record for such payment. More so, the assessee has produced payment details and it has been subjected to tax deduction. Being so, considering the totality of the facts and circumstances, we are inclined to allow the claim of the assesse - Decided against revenue. Income recognition - change in the method of recognition of income based on registration of agreements for sale or completion of possession and consequential reversal of revenue on cancellations/legal cases - Held that - As relating to the estimation of budgeted cost for the purpose of determining percentage of completion of project, the same is squarely covered by the decision of the Tribunal in assessee s own case for assessment year 2008-09, wherein it was held that the percentage of completion is required to be worked out on the basis of budgeted cost of construction, as revised from time to time, depending on the facts of the case. Respectfully following the said decision of the Tribunal in assessee s own case for assessment year 2008-09, relevant portion of which is extracted hereinabove, we uphold the impugned order of the DRP on this aspect of the matter. As regards the second aspect of the issue relating to the change in the method of recognition of income adopted by the assessee company, In the present case, as a result of extra-ordinary events witnessed by the Satyam group of companies to which the assessee company belonged in the month of January, 2009, there was uncertainty with regard to the completion of project by the assessee company and delivery of units booked. Keeping in view this uncertainty, some of the agreement holders tendered applications for cancellation of the units booked and demanded refund of the advances paid. Some of the agreement holders also filed cases against the assessee company for cancellation the agreements and refund of the amounts paid by them. The ultimate collection from these agreement holders thus became uncertain and the assessee company, in our opinion, rightly decided to postpone the revenue recognition to the extent of such uncertainty, by adopting the new method of recognition of income on the basis of registration of agreements for sale or handing over of possession of the units, as the same enabled it to assess the ultimate collection with reasonable certainty. As such, considering all the facts of the case, we are of the view that the learned DRP was fully justified in directing the Assessing Officer to accept the change in the method of revenue recognition adopted by the assessee and consequential reversal of revenue on the basis of the cancellations/legal cases, and upholding its order giving relief to the assessee on this issue - Decided in favour of assesse. Disallowance of various expenses - bills produced by the assessee company in support of the said expenses were not in its name, but were in the name of other group companies - Held that - we uphold the impugned order of the DRP directing the Assessing Officer to verify the relevant expenses and if it is found on such verification that the payments are made by the assessee company by cheque and the same expenses are not claimed by the other group companies, in whose names the relevant bills are issued, the same may be allowed as deduction in the case of the assesse - Decided against revenue. Disallowance under S.40(a)(ia) - default on the part of the assessee to deduct tax at the rate of 1% for the payments made to Maytas Infra P. Ltd., instead of 2% - Held that - As decided in CIT V/s. S.K.Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT the provisions of S.40(a)(ia) are applicable for non-deduction of tax and not for short deduction of tax, and no disallowance under the said provision could be made in a case where there is only a short deduction of tax at source. Thus we uphold the impugned order of the learned DRP directing the Assessing Officer not to make disallowance on this issue under S.40(a)(ia). - Decided against revenue. Disallowance under S.40(a)(ia)- failure of the assessee to deduct tax at source from the payment of interest made to MIL ICD, as required under S.194C - held that - As it is observed that a similar issue was involved in assessee s own case for assessment year 2008-09 wherein Tribunal restored this matter to the file of the Assessing Officer with a direction to verify as to whether corresponding interest was duly offered to tax by MIL in its return of income and tax thereon was also duly paid. The Assessing Officer was directed by the Tribunal that if it is found on such verification that tax has already been paid by the payee, on the interest income, the disallowance under S.40(a)(ia) need not be made. As the learned DRP vide its impugned order has remitted this matter involved in assessment year 2009-10 to the file of the Assessing Officer for deciding the same as per the same directions as given by the Tribunal in assessee s own case for assessment year 2008-09, we find no justifiable reason to interfere with the order of the DRP on this issue. - Decided against revenue.

Summary

Issues Involved:

1. Transfer Pricing Adjustment.
2. Disallowance of Expenditure on Staff Welfare and Others.
3. Disallowance of Expenditure for Payments Made in Cash.
4. Disallowance of Interest Attributed to Advances to Group Concerns.
5. Disallowance of Unsupported Expenditure.
6. Disallowance of Payment to Construction Company.
7. Change in Method of Income Recognition and Reversal of Revenue on Cancellations/Legal Cases.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Revenue challenged the deletion of a disallowance of Rs. 8,79,77,255 made on account of transfer pricing adjustment. The assessee had made an investment in the share application money of its wholly-owned subsidiary without charging interest. The Tribunal, in the assessee's own case for the previous assessment year, held that such transactions were not international transactions under Section 92E of the Income Tax Act. Following this precedent, the Dispute Resolution Panel (DRP) directed the deletion of the adjustment. The Tribunal upheld the DRP's order, dismissing Revenue's appeal on this ground.

2. Disallowance of Expenditure on Staff Welfare and Others:
The Revenue contested the DRP's direction to allow expenditures of Rs. 6,02,730 and Rs. 25,19,832 on staff welfare and others. The Assessing Officer (AO) had disallowed these expenses as the bills were not in the name of the assessee company but in the name of another group company. The DRP instructed the AO to verify if the expenses were claimed by the other company and, if not, to allow the deduction. The Tribunal upheld this direction, following its decision from the previous year, dismissing the Revenue's appeal on this issue.

3. Disallowance of Expenditure for Payments Made in Cash:
The Revenue challenged the DRP's direction to restrict the disallowance of Rs. 1,03,32,278 to 10% of the expenditure for which payments were made in cash. The AO had disallowed the entire amount under Section 40A(3) for payments exceeding Rs. 20,000 made otherwise than by crossed cheque or bank draft. The DRP followed the Tribunal's previous decision, which allowed a 10% disallowance for unverifiable expenses. The Tribunal upheld the DRP's order, dismissing the Revenue's appeal on this ground.

4. Disallowance of Interest Attributed to Advances to Group Concerns:
The Revenue contested the deletion of a disallowance of Rs. 7,70,33,626 on account of interest attributed to advances given to group concerns. The AO had disallowed the interest expenditure, assuming the advances were made from borrowed funds. The DRP, following the Tribunal's previous decision, found that the assessee had sufficient interest-free funds and the advances were for business purposes. The Tribunal upheld the DRP's order, dismissing the Revenue's appeal on this issue.

5. Disallowance of Unsupported Expenditure:
The Revenue challenged the DRP's direction to restrict the disallowance of unsupported expenditure of Rs. 5,59,97,114 to 10% of such expenditure paid in cash. The AO had disallowed the entire amount for lack of supporting evidence. The DRP followed the Tribunal's previous decision, which allowed a 10% disallowance for unverifiable expenses. The Tribunal upheld the DRP's order, dismissing the Revenue's appeal on this ground.

6. Disallowance of Payment to Construction Company:
The Revenue contested the deletion of a disallowance of Rs. 6,67,03,479 paid to M/s. Chourasia Construction. The AO had disallowed the payment, questioning its genuineness as the entire construction work was entrusted to another company. The DRP, following the Tribunal's previous decision, found that the payment was genuine and for business purposes. The Tribunal upheld the DRP's order, dismissing the Revenue's appeal on this issue.

7. Change in Method of Income Recognition and Reversal of Revenue on Cancellations/Legal Cases:
The Revenue challenged the DRP's direction to accept the income recognized by the assessee based on registration of agreements or possession and the consequential reversal of revenue on cancellations/legal cases. The AO had rejected the change in the method of income recognition and calculated income based on the original budgeted cost. The DRP, following the Tribunal's previous decision, accepted the change in the method of income recognition due to the uncertainty created by extraordinary events. The Tribunal upheld the DRP's order, dismissing the Revenue's appeal on this ground.

Additional Grounds:
The Tribunal also addressed three additional grounds raised by the Revenue, all of which were dismissed based on precedents and established principles:

1. Verification of expenses claimed by other group companies.
2. Short deduction of tax not attracting disallowance under Section 40(a)(ia).
3. Verification of interest income offered to tax by the payee to avoid disallowance under Section 40(a)(ia).

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the DRP's directions on all grounds. The decisions were primarily based on precedents from the assessee's previous assessment year and established accounting principles.