2015 (12) TMI 515 - AT - Income Tax

Transfer pricing adjustment - Held that - We are not impressed with the contention of the ld. AR about his right to argue against the transfer pricing adjustment of ₹ 36.65 crore as no such addition has been eventually made in the assessment order and consequently this issue cannot be termed as arising from the impugned order. It is only if the AO, in any subsequent proceedings, makes such addition that the assessee will acquire a right to challenge the addition as per law against the outcome of such later proceedings. Since no addition on account of the transfer pricing adjustment has been made in the final assessment order, which has been impugned before us, we desist from adjudicating on the merits of the addition. The grounds challenging this issue, therefore, fail. Disallowance of claim for deduction of performance bank guarantee encashed by Prasar Bharathi due to contractual disputes - Held that - Although the ld. DR has the right to challenge that the amount of encashed bank guarantee is not deductible under the mercantile system of accounting in terms of rule 27, but such contention fails on merits because such an amount is deductible even under the mercantile system of accounting. It is, therefore, palpable that the amount of encashed performance bank guarantee calls for deduction both under cash system of accounting as well as the mercantile system of accounting because not only the liability for this expenditure was incurred, but it also stood discharged/collected during the year resulting in the outgo of the amount from the coffers of the assessee. This issue is, therefore, decided in favour of the assessee. Disallowance of expenses u/s 40(a)(i) & (ii) - Held that - Once the assessee had suo motu made disallowance of ₹ 7.39 crore, there could have been no reason to make a further disallowance of the same amount included in ₹ 7.80 crore. Such double disallowance is hereby deleted. On reducing a sum of ₹ 7.39 crore from the total disallowance of ₹ 7.80 crore, we are left with the remaining disallowance of ₹ 41.51 lac. The AO made such total disallowance of ₹ 7.80 crore by recording that the assessee failed to furnish sufficient evidence in support of the deduction of expenses. The position remains status quo before the Tribunal as well. Under such circumstances, we uphold the disallowance of ₹ 41.51 lac. Ex consequenti, this issue is partly allowed. Addition towards unexplained contribution made by the partners of the assessee firm - Held that - It can be noticed that there is addition in Capital as well as Current accounts of both the partners amounting to ₹ 16.58 lac and ₹ 29.61 crore, respectively, totaling to ₹ 46.19 crore. The assessee has filed an application under Rule 29 before the tribunal filing additional evidence in the shape of confirmations from both the partners and the source of the capital introduced by them in the firm with the help of bank pass books. Since this evidence has not passed through the AO s eyes and placed before us for the first time, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is restored to the file of AO. We order accordingly and direct him to decide this issue afresh in the light of the additional evidence which the assessee has filed or proposes to file in this regard. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Transfer pricing adjustment.
2. Disallowance of claim for deduction of performance bank guarantee.
3. Disallowance of expenses.
4. Addition towards unexplained contribution by partners.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The first issue concerns the transfer pricing adjustment. The assessee, a non-resident partnership firm based in the UK, did not initially report any international transactions nor file Form No. 3CEB. The AO referred the matter to the TPO, who rejected the assessee's contention that transfer pricing provisions were not applicable and recomputed the ALP of certain international transactions at Nil. However, the AO did not make any addition towards transfer pricing adjustment in the final assessment order, leading to no grievance for the assessee on this matter. The Tribunal concluded that since no addition was made in the final assessment order, there was no cause for grievance, and thus, the grounds challenging this issue failed.

2. Disallowance of Claim for Deduction of Performance Bank Guarantee:
The second issue pertains to the disallowance of the claim for deduction of the performance bank guarantee encashed by Prasar Bharathi amounting to Rs. 24.60 crore due to contractual disputes. The AO added this amount to the total income u/s 69C of the Act, which was upheld by the DRP. The Tribunal noted that the assessee followed the cash system of accounting, which was accepted by the DRP. The Tribunal found that the encashment of the performance bank guarantee was for non-performance or improper performance of the contract, and it was not a penalty for violation of law. The Tribunal held that the encashment of the performance bank guarantee was an expenditure incurred wholly and exclusively for the purpose of business and thus deductible under section 37(1) of the Act. The Tribunal allowed the deduction of the performance bank guarantee amount both under the cash system and mercantile system of accounting.

3. Disallowance of Expenses:
The third issue involves the disallowance of expenses amounting to Rs. 7,80,76,387/-. The AO found discrepancies in the documents furnished by the assessee and made the disallowance. The Tribunal observed that the assessee had already made a suo motu disallowance of Rs. 7.39 crore u/s 40(a)(i) & (ii) of the Act. The Tribunal noted that the AO's disallowance resulted in double disallowance to the extent of Rs. 7.39 crore, which was deleted. The Tribunal upheld the remaining disallowance of Rs. 41.51 lac due to insufficient evidence in support of the deduction of expenses.

4. Addition Towards Unexplained Contribution by Partners:
The fourth issue concerns the addition of Rs. 46,19,89,585/- towards unexplained contribution made by the partners of the assessee firm. The AO made the addition in the absence of confirmations from the partners and the source of their capital contributions. The Tribunal noted that the assessee filed additional evidence in the shape of confirmations and bank pass books. The Tribunal set aside the impugned order on this score and restored the matter to the file of the AO for fresh consideration in light of the additional evidence.

Conclusion:
The appeal was partly allowed, with the Tribunal providing a detailed analysis and resolution for each issue. The Tribunal emphasized that the recordings related to the Shunglu Committee Report and the CBI closure report were based on the arguments made by the ld. AR and had no bearing on the issues raised in the appeal.

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