2018 (1) TMI 1573 - AT - Income Tax

Disallowance u/s 14A - assessee has made the suo moto disallowance - HELD THAT - In Godrej and Boyce Mfg. Company Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT the Hon ble Bombay High Court has held that the provisions of rule 8D are not retrospective in nature and shall apply w.e.f. A.Y. 2008-09. Hence, in the light of the aforesaid decisions and in view of the fact that the suo moto disallowance made by the assessee was allowed by the department in the year 2004-05, we are of the considered view that the suo moto disallowance made by the AO in the assessment year under consideration, which is 10% of the exempt dividend income is reasonable. We therefore, set aside the order of the Ld. CIT (A) and direct the AO to delete the disallowance confirmed by the Ld. CIT (A) and accept the suo moto disallowance made by the assessee u/s 14A of the Act. We accordingly allow the sole ground of appeal of the assessee. Disallowance of interest on advances to subsidiary and group company - AO pointed out that the advance given to the subsidiary companies as sister concern cannot be treated as incurred for the purpose of the business of the assessee - HELD THAT - During the assessment year under consideration, the assessee advanced ₹ 4,79,630/- to Taida Trading and Industries Ltd. and ₹ 18,42,036/- to KTC Hotels Ltd. Since, this issue has been dealt with by the coordinate Bench in assessee s own case for the A.Ys. 2003-04 and 2004-05, we respectfully following the decision of the coordinate Bench partly allow this ground of appeal and set aside the impugned order passed by the Ld. CIT (A) in respect of advance given to M/s Taida Trading and Industries Ltd. and uphold the order deleting the disallowance made by AO in respect of advance given to M/s KTC Hotels Ltd. AO is directed to compute the disallowance of interest in terms of the said order. Disallowance of interest on share application money pending allotment - HELD THAT - As decided in own case 2014 (4) TMI 1097 - ITAT MUMBAI there being no diversion of interest bearing funds for non-business purpose as alleged by the A.O., there was no justification in making any disallowance on account of interest paid on the borrowed funds. It was noted by the Tribunal that the share application money was finally returned to the assessee with interest @ 19% and the interest so received was duly offered by the assessee in the relevant year. A similar view has been taken by the Tribunal in the subsequent years. i.e. assessment years 1996-97 to 2002-03. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years, we respectfully follow the orders of the Tribunal for the said years and uphold the impugned order of the ld. CIT (A) giving relief to the assessee on this . Expenditure on replacement of carpets - HELD THAT - This issue in favour of the assessee in the assessee s own case for the A.Y. 1992-93 - Apart from the decision of the coordinate Bench the Ld. counsel for the assessee relied upon the decision of the Hon ble Rajasthan High Court rendered in CIT vs. Lake Place Hotels and Motel Pvt. Ltd. 2002 (4) TMI 29 - RAJASTHAN HIGH COURT . Since, this issue has already been decided in favour of the assessee, we respectfully following the decision of the coordinate Bench uphold the findings of the Ld. CIT (A) and dismiss this ground of appeal of the revenue. Expenditure incurred on replacement of linen as revenue expenditure and the expenditure not giving enduring benefits to the assessee. Adjustment on account of difference on rates of foreign exchange on deposit placed with Wholly Owned Subsidiary (WOS) i.e. Taj International Hongkong Ltd. (TIHK) - HELD THAT - As decided in own case as per the classification made in AS-11, monetary items mainly include amounts held on current account, such as, cash receivables, payables etc. while non-monetary items include amounts held on capital account, such as, fixed assets, investment in shares etc. In the present case, the shareholders deposit represented the amount held by the assessee on capital account inasmuch as it was convertible into equity shares within a period of 10 years and if not so converted, it was liable to be refunded to the assessee company only after a period of 10 years. In our opinion, the said amount thus was in the nature of non-monetary item which was required to be reported/recognized at the exchange rate prevailing on the date of relevant transaction even as per AS-11 as rightly held by the learned CIT (Appeals). We, therefore, find no infirmity in the impugned orders of the learned CIT (Appeals) deleting the additions made by the AO on this issue. Addition being adjustment on account of interest charged on loan given by the assessee to its associate enterprise M/s Taj International Hongkong Ltd - HELD THAT - This issue has already been decided in favour of the assessee in the assessee s own case for the A.Y. 2003-04 and 2004-05 aforesaid by the ITAT holding that the LIBOR is acceptable arm s length interest rate, we respectfully following the decision of the coordinate Bench decide this issue in favour of the assessee and dismiss this ground of appeal of the revenue. Non charging guarantee fees from AEs by providing letter of comfort to the Bank for the loan granted to the AE - HELD THAT - Since the assessee has not bond itself for repaying the loans in the event of default by the AEs, the issue is covered by the law laid down by the Hon ble Karnataka High Court in the case of United Braveries Holdings Ltd. 2011 (8) TMI 1331 - KARNATAKA HIGH COURT . Moreover, the Chennai Bench of the ITAT in TVS Logistics Services Ltd 2016 (6) TMI 558 - ITAT CHENNAI has held that the letter of comfort is outside the ambit of international transaction. Hence, following the decisions of the Hon ble Karnataka High Court and the Chennai Tribunal, we hold that the letter of comfort issued by the assessee in this case is outside the ambit of international transaction. We, therefore, dismiss this ground of appeal of the revenue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of interest on advances to group companies.
3. Disallowance of interest on share application money.
4. Treatment of expenditure on replacement of carpets.
5. Treatment of expenditure on replacement of linen.
6. Adjustment on account of foreign exchange rates on deposits with a Wholly Owned Subsidiary (WOS).
7. Adjustment on account of interest charged on loans to associate enterprises.
8. Non-charging of guarantee fees from associate enterprises.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of ?6,74,22,061/- under Section 14A, arguing that it had already made a suo moto disallowance of ?1,48,05,348/-. The Tribunal noted that the Assessing Officer (AO) had accepted similar suo moto disallowances in earlier years. The Tribunal held that the suo moto disallowance of 10% of exempt dividend income was reasonable, setting aside the order of the CIT (A) and directing the AO to accept the assessee's disallowance.

2. Disallowance of interest on advances to group companies:
The AO disallowed ?23,21,666/- on advances given to group companies at concessional interest rates. The CIT (A) deleted this disallowance for advances to KTC Hotels Ltd. but upheld it for Taida Trading and Industries Ltd. The Tribunal, following its earlier decisions, upheld the CIT (A)'s deletion of disallowance for KTC Hotels Ltd. and directed the AO to compute the disallowance for Taida Trading and Industries Ltd. accordingly.

3. Disallowance of interest on share application money:
The AO disallowed ?92,800/- on share application money, arguing it was diverted for non-business purposes. The CIT (A) deleted this disallowance. The Tribunal upheld the CIT (A)'s decision, noting that similar disallowances had been deleted in the assessee's earlier cases.

4. Treatment of expenditure on replacement of carpets:
The AO treated ?1,00,87,545/- spent on replacing carpets as capital expenditure. The CIT (A) deleted this addition, treating it as revenue expenditure. The Tribunal upheld the CIT (A)'s decision, citing similar rulings in the assessee's past cases and the decision of the Rajasthan High Court in CIT vs. Lake Place Hotels and Motel Pvt. Ltd.

5. Treatment of expenditure on replacement of linen:
The AO treated ?3,65,88,495/- spent on replacing linen as capital expenditure. The CIT (A) deleted this addition. The Tribunal upheld the CIT (A)'s decision, referencing similar decisions in the assessee's past cases and the Bombay High Court's ruling in PIEM Hotels.

6. Adjustment on account of foreign exchange rates on deposits with a Wholly Owned Subsidiary (WOS):
The AO made adjustments based on AS-11, treating the shareholders' deposit as a monetary item. The CIT (A) deleted this adjustment, considering it a non-monetary item. The Tribunal upheld the CIT (A)'s decision, referencing its earlier rulings in the assessee's cases and confirming that the deposit was a non-monetary item.

7. Adjustment on account of interest charged on loans to associate enterprises:
The AO adjusted ?12,60,80,369/- on loans to Taj International Hongkong Ltd., not considering the interest at arm's length. The CIT (A) deleted this adjustment. The Tribunal upheld the CIT (A)'s decision, noting that LIBOR was an acceptable arm's length interest rate, as held in the assessee's past cases and other relevant judicial precedents.

8. Non-charging of guarantee fees from associate enterprises:
The AO added ?5,77,008/- for non-charging of guarantee fees for letters of comfort provided to banks for loans to AEs. The CIT (A) deleted this addition. The Tribunal upheld the CIT (A)'s decision, referencing the Karnataka High Court's ruling in United Braveries (Holdings Ltd.) and the Chennai Tribunal's decision in TVS Logistics Services Ltd., which held that letters of comfort are outside the ambit of international transactions.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and dismissed the revenue's appeal on several grounds, upholding the CIT (A)'s deletions. The cross-objections filed by the assessee were dismissed as the primary grounds were resolved in favor of the assessee. The final order pronounced allowed the assessee's appeal, partly allowed the revenue's appeal, and dismissed the cross-objections.