2017 (4) TMI 1489 - AT - Income Tax

Characterization of income - Notional Sales Tax - revenue or capital receipt - HELD THAT - Respectfully following the order of the Tribunal in assessee s own case vis- -vis decision of the Special Bench in case of Reliance Industries Ltd., 2003 (10) TMI 255 - ITAT BOMBAY-J , Shree Balaji Alloys Ltd., 2016 (4) TMI 1161 - SC ORDER , Rasoi Ltd., 2011 (5) TMI 23 - CALCUTTA HIGH COURT , Bougainvillea Multiples Entertainment Centre (P) Ltd. 2015 (2) TMI 21 - DELHI HIGH COURT , Kirloskar Oil Engines Ltd. 2014 (5) TMI 586 - BOMBAY HIGH COURT we do not find any infirmity in the order of CIT(A) for treating the same as capital receipt. Accordingly ground no.1 of revenue s appeal stand dismissed. Depreciation taking WDV of assets as on 01/04/2008 - claim computed on the basis of the WDV as per the appellant - WDV' of the year' after which depreciation had not been 'claimed by the appellant or on the basis of the reduced WDV arrived at by the' AO' after thrusting depreciation upon the appellant in the earlier years - HELD THAT - No infirmity in the order of CIT(A) for directing the AO to allow depreciation by taking WDV of assets as on 01/04/2008, in so far as CIT(A) had followed the orders of Tribunal and Supreme Court in the case of Mahindra Mills 2000 (3) TMI 3 - SUPREME COURT Deduction u/s.80IA on power generation undertaking by adopting price which the industrial consumers paid during the year under consideration for electricity purchased from State Power Distribution Agency - AO has restricted the claim of deduction u/s.80IA by taking 16% return on capital base as per the parameters prescribed by the Regulatory Authorities i.e. State Electricity Board for procuring the electricity - HELD THAT - We found that exactly similar issue has been considered by the Tribunal in assessee s own case for the assessment year 2006-07 wherein issue has been decided in favour of the assessee. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee s own case, we do not find any infirmity in the order of CIT(A) for allowing assessee s claim of deduction u/s. 80IA with reference to power generating undertaking and the power so generated being used mainly for captive consumption. Several decision of the Tribunal listed below have taken a view consistent with a view taken by Tribunal in assessee's own case for A Y 2006-07. In the circumstances, except in the case of Calcutta High Court in M/s. ITC Ltd 2015 (7) TMI 450 - CALCUTTA HIGH COURT there are four judgements of other High Court in assessee's favour and six judgements of Tribunal in assessee favour and no contrary decision of Tribunal. In the circumstance, the appropriate course of action to follow would be the decision of Supreme Court in the case of Thiru Aroovan Sugar Mills 1997 (7) TMI 12 - SUPREME COURT and the decisions of Calcutta High Court which are earlier in point of time and decision of Chattisgarh and Madras High Court and various benches of Tribunals and assessee's own case for the earlier year. Furthermore the Supreme Court has endorsed the view that where there is a conflict between two High Courts the view in favour of the assessee must be adopted. Vegetable Products Ltd 1973 (1) TMI 1 - SUPREME COURT . Disallowance u/s 14A - HELD THAT - As assessee s own funds are far in excess of total investments (which includes investments of ₹ 1,602.11 crares giving rise to exempt income). Therefore, no interest expense can be attributable for making disallowance u/s 14A of the I.T. Act. Disallowance under Rule 8D (2)(iii) - Rule 8D is not applicable in the A.Y. 2007-08. Tribunal in the A.Y. 2006-07 restricted the disallowance at 1% of exempt income after considering the dlsallowances made in the preceding assessment years. In view of earlier orders of ITAT for A.Y. 2006-07 on similar facts and circumstances when rule 8D was not applicable, we direct the AO to restrict the disallowance u/s. 14A of the Act out of administrative expenses to the extent of 1% of exempt Income for the purpose of computation of income under normal provisions of Act in so far as Rule 8D is not applicable to A.Y. 2007-08 under consideration. We direct accordingly. Depreciation on the capitalised value of goods purchased from Durga Iron and Steel and Surajbhan Rajkumar Pvt. Ltd. - HELD THAT - AR fairly conceded that the issue has been decided against assessee by Tribunal in the assessment year 2006-07. As the facts and circumstances during the year under consideration are same, we confirm the action of lower authorities for disallowance of depreciation in the A.Y. 2007-08, 2008-09 2009-10. Disallowance of depreciation of jetties - HELD THAT - We hold that the assessee is entitled for depreciation at the rate as applicable on the cost incurred for construction of jetty at Dahej. Disallowance being Professional fees paid to various companies as being non-genuine - HELD THAT - From the record we found that during the subjected year assessee has availed the services of Shri S. K. Gupta and paid the professional fees and also reimbursed expenses to his companies. The payments towards professional services charges and reimbursement of expenses were contended to be genuine and incurred for business purposes, hence, the same was claimed as deduction u/s 37 of the Act. We found that identical issue has been decided by Tribunal in favour of the assessee in preceding year i.e. A Y 2006-07 wherein the ITAT has deleted the disallowance. International transaction as defined u/s. 92B - CIT(A) in confirming the order of the AO in treating the non funded guarantee given by the assessee to the Bank of America for giving loan to its associated concern Trivera Gmbh as international transaction - HELD THAT - We are of the considered view that the ld. CIT(A) on the facts and circumstances of the case has rightly taken average rate on which the assessee has paid guarantee commission to third party, which comes to 0.38%. Hence, we uphold the order of ld. CIT(A) to charge guarantee commission at the rate of 0.38% being ALP for the guarantee given by the assessee to Bank of America on behalf of its AE Trevira GmbH. Arm s length price in respect of interest payment referable to interest free loans and advances given to its subsidiary companies - HELD THAT - We found in the case of Taurian Iron Steel Co. Pvt. Ltd. 2016 (11) TMI 1302 - ITAT MUMBAI similar adjustment has been restricted at LIBOR 1.50%. Respectfully following the verdicts laid down by Tribunal in these cases under similar facts and circumstances, we direct the AO to restrict adjustment at LIBOR 1.50%. We direct accordingly. TDS u/s 195 - assessee company had paid an amount being interest in FY 2006-07 without deduction of withholding tax - HELD THAT - Appellant company not liable to deduct withholding tax @ 20% in respect of the interest payment of US 1,05,902 to M/s.Deutsche Bank AG. With the result, we hereby quash the order passed u/s.195(2) of IT Act as well as reverse the findings of ld. CIT(A) Disallowance u/s 14A r.w.r. 8D - HELD THAT - For the purposes of calculating the disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the I.T. Rules only those investment have to be considered on which the assessee has received the dividend. In view of the above average of value of investment, income from which does not or shall not form part of the total income has to be considered and not all the investments as done by the AO. We rely on the judgment of Hon'ble Delhi High Court in the case of ACB India Limited 2015 (4) TMI 224 - DELHI HIGH COURT . If only investments on which dividend was received were to be considered, then the disallowance in respect of administrative expenses by applying the provisions of under rule 8D(2)(iii) of the IT. Act @ 0.5% of the value of investments would work out to ₹ 3.37 crore. Accordingly, we direct AO to restrict disallowance of other expenses to ₹ 3.37 crores. We delete the disallowance made on account of interest and restrict the disallowance under Rule 8D (2)(iii) to the extent 0.5% of average value of investment which have yielded dividend during the year under consideration which works out to ₹ 3.37 crores. We direct accordingly. Reduction of profits of the business of the undertaking while computing deduction under section 10B being recoveries of various expenses incurred and charged to Profit and Loss Account of the Undertaking - HELD THAT - We found that a sum credited under the head miscellaneous recoveries are received for Purging, Degassing Charges for Railway wagons tankers of IOCL, BPCL and HPCL and recovery of cost on account of infrastructures facilities provided to GAlL and others. Further a detailed working of per-unit cost incurred for purging and degassing and recoveries made from IOCL, BPCL and HPCL was also filed. The recoveries from the above oil companies were on account of cleaning expenses paid to contractors. The cost incurred has been debited to P L account, which are recovered from IOCL, BPCL HPCL and shown as other income in the P L account of the undertaking. The other income though recovered from the above parties and shown as income in the P L account of the undertaking goes to reduce expenses and increase export profits eligible for deduction u/s.10B of the IT Act,1961. More recovery for cost incurred on Infrastructure facilities provided to GAlL (India) Limited and others, was towards reimbursement of expenses incurred for providing these facilities. The same was debited to P L account. The reimbursement of the same by GAlL goes to reduce the cost incurred by the assessee. We restore the matter back to the file of the AO for finding out the exact nature of income and for deciding the issue afresh as per law. Disallowance of professional fees paid to various parties on the plea that these parties have not rendered services to the assessee - HELD THAT - In view of the finding recorded by the Tribunal in the hands of the recipients Vijay Kumar Gupta and Anish Kumar Gupta, we restore the matter back to the file of AO for deciding afresh the allowability of professional fees paid by assessee.

Summary

Issues involved:
1. Deemed payment of sales tax and its allowance under Section 43B.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D.
3. Disallowance of depreciation on capitalized value of goods.
4. Disallowance of depreciation on jetties.
5. Disallowance of professional fees as non-genuine.
6. Determination of arm's length price for various transactions, including commission and guarantee fees.
7. Treatment of sales tax incentives as capital receipts.
8. Allowance of depreciation on fixed assets.
9. Deduction under Section 80IA for power generation undertakings.
10. Reopening of assessment under Section 147/148.
11. Reduction of profits while computing deduction under Section 10B.
12. Treatment of provision for wealth tax while computing book profit under Section 115JB.
13. Allowance of expenses related to lease rent and gas transportation charges.
14. Treatment of mark-to-market transactions in foreign exchange derivatives.

Detailed Analysis:

1. Deemed Payment of Sales Tax and Allowance under Section 43B:
The assessee claimed that the notional sales tax should be treated as a deemed payment and allowed under Section 43B. The CIT(A) rejected this claim, but the Tribunal found that the issue had already been decided in favor of the assessee in previous years. The Tribunal upheld the CIT(A)'s decision to treat the notional sales tax as a capital receipt not liable to tax, following the Special Bench decision in the assessee's own case.

2. Disallowance under Section 14A Read with Rule 8D:
The AO disallowed a significant amount under Section 14A, which was partially upheld by the CIT(A). The Tribunal found that the assessee's own funds were far in excess of the investments yielding exempt income, thus no interest expense could be attributed to earning exempt income. The Tribunal directed the AO to delete the disallowance of interest and restrict the disallowance of administrative expenses to 1% of the exempt income.

3. Disallowance of Depreciation on Capitalized Value of Goods:
The AO disallowed depreciation on the capitalized value of goods purchased from specific companies, which was upheld by the CIT(A). The Tribunal confirmed this disallowance, noting that the issue had been decided against the assessee in previous years.

4. Disallowance of Depreciation on Jetties:
The AO disallowed depreciation on jetties constructed by the assessee, which was confirmed by the CIT(A). The Tribunal, however, allowed the claim for depreciation, following its own decision in the assessee's case for a previous year, where it was held that the expenditure on jetties was an intangible asset eligible for depreciation.

5. Disallowance of Professional Fees as Non-Genuine:
The AO disallowed professional fees paid to various companies, which was confirmed by the CIT(A). The Tribunal restored the matter to the AO for fresh adjudication, following the decision in the case of the recipients of these fees, where the issue was remanded for verification of the confirmations provided by the assessee.

6. Determination of Arm's Length Price for Various Transactions:
The AO made adjustments to the arm's length price for commission and guarantee fees, which were partially upheld by the CIT(A). The Tribunal confirmed the adjustments for commission but restricted the addition on account of guarantee commission to 0.385%, following its own decisions in previous years.

7. Treatment of Sales Tax Incentives as Capital Receipts:
The AO treated sales tax incentives as revenue receipts, which was reversed by the CIT(A). The Tribunal upheld the CIT(A)'s decision, following the Special Bench decision in the assessee's own case, where it was held that such incentives were capital receipts not liable to tax.

8. Allowance of Depreciation on Fixed Assets:
The AO allowed depreciation on a reduced WDV, which was directed to be recalculated by the CIT(A) based on the WDV as on a specific date. The Tribunal upheld the CIT(A)'s direction, following its own decision in the assessee's case for a previous year.

9. Deduction under Section 80IA for Power Generation Undertakings:
The AO restricted the deduction under Section 80IA, which was allowed by the CIT(A). The Tribunal upheld the CIT(A)'s decision, noting that the issue had been decided in favor of the assessee in previous years.

10. Reopening of Assessment under Section 147/148:
The assessee challenged the reopening of the assessment, which was upheld by the CIT(A). The Tribunal found no infirmity in the reopening of the assessment.

11. Reduction of Profits While Computing Deduction under Section 10B:
The AO excluded certain other income while computing the deduction under Section 10B, which was upheld by the CIT(A). The Tribunal restored the matter to the AO for fresh adjudication to determine the exact nature of the income.

12. Treatment of Provision for Wealth Tax While Computing Book Profit under Section 115JB:
The AO added the provision for wealth tax while computing book profit under Section 115JB, which was confirmed by the CIT(A). The Tribunal upheld this addition.

13. Allowance of Expenses Related to Lease Rent and Gas Transportation Charges:
The AO disallowed part of the lease rent, which was deleted by the CIT(A). The Tribunal confirmed the CIT(A)'s decision, following its own decision in the case of a company merged with the assessee.

14. Treatment of Mark-to-Market Transactions in Foreign Exchange Derivatives:
The AO disallowed expenses related to mark-to-market transactions, which was deleted by the CIT(A). The Tribunal upheld the CIT(A)'s decision.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue, often following its own decisions in previous years or decisions of higher courts. The Tribunal's orders involved both upholding and reversing the decisions of the lower authorities, with several matters being remanded for fresh adjudication.