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2017 (8) TMI 1440 - HC - Income TaxDisallowance of interest being the interest referable to interest free loans and advances given to subsidiary companies - Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment - Held that - We do not see how when the Assessing Officer s views are that in cases of the interest free loans and interest given by the assessee to its subsidiary companies are in the above sums still the principle laid down by this Court that if there are funds available to them interest free and overdraft or loans taken would not apply. This view of the Assessing Officer is ex facie contrary to the settled principle that a presumption would arise that the investment would be out of the interest free funds generated or available with the company. Then the borrowed capital in hand in that case and interest expenditure was deductible under Section 36(1)(iii) - The Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment. It can be presumed that investments were made from interest free funds available with the assessee. This position clearly emerges from the record and for the current assessment year as well. We do not see how a different view in the facts and circumstances can be taken. If the Tribunal had followed the earlier view and on facts then there is no perversity when nothing contrary to the factual material was brought on record by the Revenue. In such circumstances the concurrent view on disallowance of interest was reversed and the appeal of the assessee to that extent was partly allowed. We do not see any substantial question of law arising from such a view of the Tribunal. Claim of depreciation - whether Hon ble Tribunal was right in holding that prior to insertion of Explanation-5 to section 32 the claim of depreciation was optional and could not be thrust on the assessee if it had not claimed it? - Held that - The Tribunal found that going by the wording of the ground and which is identical to question No.6.6 reproduced above it is not permissible to apply the Explanation and therefore the claim of depreciation which was optional could not be thrust on the assessee for the prior period. This is an attempt made by the Revenue even in the assessment year under consideration and in an oblique or indirect manner. It is that finding of fact which has been rendered against the Revenue. No substantial question of law emerging from such an approach of the Tribunal Pre-operative expenses incurred in connection with creation of plant and machinery in units which have not commenced production - Held that - Tribunal held that it has considered identical issue on facts in the prior assessment year 2002-03 and its order dated 28-5-2012 in the appeal pertaining to that assessment year it had turned down the Revenue s request and answered the issue in favour of the assessee. Therefore when identical issue arose and on similar facts for the assessment year under consideration it is on facts that the earlier view was followed. Once the earlier view was followed on facts and the same not being disputed then the settled principle would apply in that the Revenue is bound by the view taken by the Tribunal for the prior assessment years on facts and that applies with full force. More so when it is allowed to gain finality. Disallowance u/s 80M - assessee claimed deduction under Section 80M in respect of the entire dividend income without apportioning any expenditure against the said income - Held that - Hon ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India 1985 (7) TMI 1 - SUPREME COURT it is only the actual expenses incurred for earning the dividend income which ought to be taken into consideration and there is no question of making an estimation or assumption. The above issue was also considered by the Tribunal in the assessee s own case and for the Assessment Year 2001-02 Correct rate of guarantee commission - Held that - The charging of guarantee commission depends upon transaction to transaction and mutual understanding between the parties. A rate of 2.5% for guarantee commission therefore cannot be applied in the absence of relevant and cogent material. The Tribunal therefore came to the conclusion that this exercise of the First Appellate Authority has been carried out to its satisfaction. The assessee itself paid the guarantee commission at the rate varying from 0.25% to 0.6% per annum to third party and when it has not incurred any cost for providing guarantee to the Bank for the loan given to its subsidiary applying the rate of 2.5% by the Transfer Pricing Officer based on external comparables was not justified.
Issues Involved:
1. Disallowance of interest on funds given to subsidiaries. 2. Disallowance of administrative expenses under Section 14A. 3. Deletion of disallowance of interest on funds utilized for exempt investment. 4. Application of disallowance under Section 14A to Section 115JB. 5. Taxability of notional sales tax. 6. Claim of depreciation before the insertion of Explanation-5 to Section 32. 7. Classification of pre-operative expenses as revenue expenses. 8. Disallowance of expenditure incurred for earning exempt income. 9. Reduction of estimated expenditure from dividends for deduction under Section 80M. 10. Transfer Pricing adjustment to consultancy charges. Detailed Analysis: 1. Disallowance of Interest on Funds Given to Subsidiaries: The Tribunal found that the assessee had given interest-free loans to subsidiaries, which were disallowed by the Assessing Officer and the Commissioner of Income Tax (Appeals). The Tribunal, referencing the prior assessment year (2002-03), concluded that the interest-free funds available to the assessee were sufficient to cover the investments, thus the interest expenditure was deductible under Section 36(1)(iii) of the I.T. Act, 1961. The High Court upheld the Tribunal's view, stating that the presumption that investments were made from interest-free funds was valid and no substantial question of law arose. 2. Disallowance of Administrative Expenses under Section 14A: The Tribunal reduced the disallowance of administrative expenses to 1% of the exempt income, contrary to the Assessing Officer's higher disallowance. The High Court found no substantial question of law in the Tribunal's decision, as it was consistent with the materials placed on record. 3. Deletion of Disallowance of Interest on Funds Utilized for Exempt Investment: The Tribunal deleted the disallowance made by the Assessing Officer under Section 14A, based on the principle that the assessee's own funds were more than the investments made. The High Court saw no reason to interfere with this finding, as it was consistent with the facts and the Tribunal's previous decisions. 4. Application of Disallowance under Section 14A to Section 115JB: The Tribunal held that disallowance under Section 14A could not be imported into the provisions of Section 115JB in view of clause (f) to Explanation (1) to the section. The High Court admitted this as a substantial question of law for further consideration. 5. Taxability of Notional Sales Tax: The Tribunal held that the notional sales tax of ?1252,83,84,360/- was capital in nature and not liable to tax. The High Court admitted this as a substantial question of law for further consideration. 6. Claim of Depreciation Before the Insertion of Explanation-5 to Section 32: The Tribunal found that prior to the insertion of Explanation-5 to Section 32, the claim of depreciation was optional and could not be thrust on the assessee. The High Court upheld this view, noting that the Tribunal had correctly applied the Supreme Court's judgment in CIT v. Mahendra Mills. 7. Classification of Pre-operative Expenses as Revenue Expenses: The Tribunal treated pre-operative expenses of ?3,99,96,448/- incurred in connection with the creation of plant and machinery in units that had not commenced production as revenue expenses, consistent with its earlier decisions. The High Court found no substantial question of law in this finding. 8. Disallowance of Expenditure Incurred for Earning Exempt Income: The Tribunal confirmed the deletion of disallowance of ?105.10 crores incurred for earning exempt income. The High Court did not find any substantial question of law in this decision, as it was consistent with the Tribunal's previous rulings. 9. Reduction of Estimated Expenditure from Dividends for Deduction under Section 80M: The Tribunal held that only actual expenses incurred for earning dividend income should be considered, rejecting the Assessing Officer's estimated apportionment of ?47,00,000/-. The High Court upheld this view, finding no substantial question of law. 10. Transfer Pricing Adjustment to Consultancy Charges: The Tribunal upheld the deletion of the Transfer Pricing adjustment made by the Assessing Officer, noting that the facts and circumstances were similar to the previous assessment year. The High Court found no reason to interfere with this factual finding. Conclusion: The High Court admitted the appeals of the Revenue only on two substantial questions of law: the application of disallowance under Section 14A to Section 115JB and the taxability of notional sales tax. The other issues raised by the Revenue were not considered substantial questions of law, and the Tribunal's findings were upheld.
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