2018 (4) TMI 1925 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - disallowing expenditure incurred by assessee in relation to tax exempt income - HELD THAT - We have noted that the assessee earned exempt income in the form of dividend income. The Hon'ble Delhi High Court in case of Joint Investment Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT held that the window for disallowance indicated in section 14A is only to the extent of disallowing expenditure incurred by assessee in relation to tax exempt income. These proposition or portion of tax exempt income surely cannot swallow the entire amount. Thus the disallowance under section 14A is restricted to the exempt income/dividend income - Assessing Officer is directed accordingly. TP Adjustment of non-interest bearing shareholder deposit - HELD THAT - As relying on assessee s own case for A.Y. 2012-13 2017 (11) TMI 376 - ITAT MUMBAI identical grounds of appeal was allowed in favour of assessee on the same amount of share-holder deposits the Associate Company. Long Term Capital Gain on sale of investment not considered - assessee submits that the Assessing Officer has not considered the Long Term Capital Gain on sale of investment and filed application under section 154 before the Assessing Officer for rectification of order - CIT(A) directed the Assessing Officer to dispose the application of the assessee filed under section 154 in accordance with law - HELD THAT - Keeping in view that the Ld. CIT(A) has already given direction to the Assessing Officer for disposing of the application under section 154 of the Act, filed by assessee which has not been disposed of so far. The Assessing Officer is directed to consider the claim of assessee and pass the order in accordance with law. Needless to say that the Assessing Officer shall grant necessary opportunity of hearing before passing the order. Disallowance u/s 14A r.w.Rule 8D to the computation of book profit under section 115JB - HELD THAT - Considering the decision of Tribunal in assessee s own case for A.Y. 2012- 13 2017 (11) TMI 376 - ITAT MUMBAI and the decision of Special Bench in Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI the Assessing Officer is directed to re-compute the book profit by following the decisions. Transfer Pricing Adjustment towards interest on outstanding balances of the Associate Enterprises - HELD THAT - As in assessee own case for A.Y. 2012-13 observed from the above provision the outstanding debit balances with the associates is not directly covered within the ambit of 'international transaction'. Also, the terms any other transaction having a bearing on the profits, income, losses or assets of such enterprises must be interpreted ejusdem generis with the transactions mentioned in the preceding clause or at least analogous to it and therefore would not include the provision of guarantee for loans taken by associate enterprises. In view of the above, we are of the view that it is the real income and not the hypothetical income which is to be taxed and real income is to be ascertained from the realistic and practical point of view as held by Hon'ble Supreme Court in the case of UCO Bank 1999 (5) TMI 3 - SUPREME COURT Hence, we delete the disallowance and reverse the orders of the lower authorities. TP Adjustment towards this involve in guarantee on loan and advances to Associate Enterprises - HELD THAT - When the guarantee has been given by the assessee results in a direct or indirect benefit to the assessee itself, then there arises no need to charge any commission on the same. Thus, following the decisions of the co-ordinates benches of the Tribunal in own case 2017 (11) TMI 376 - ITAT MUMBAI we, in the present case are of the view that the above transaction does not fall within the purview of international transaction as defined under section 92B of the Act and hence, the orders of the lower authorities are reversed - no illegality or infirmity in the order passed by Ld. CIT(A) in deleting the adjustment in guarantee on loans and advances to Associate Enterprises.This issue of assessee's appeal is allowed.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of interest on shareholder deposits as not being at arm's length.
3. Taxation of Long Term Capital Gain.
4. Long term capital loss on sale of investment not considered.
5. Addition of disallowance under Section 14A to book profit under Section 115JB.
6. Addition on account of Transfer Pricing Adjustment towards interest on outstanding balances of the Associate Enterprises.
7. Addition on account of Transfer Pricing Adjustment towards guarantee on loans and advances to Associate Enterprises.

Detailed Analysis:

1. Disallowance under Section 14A:
The Tribunal considered the submission that Rule 8D cannot apply to Assessment Years prior to 2008-09, supported by decisions from the jurisdictional High Court and the Hon'ble Delhi High Court. The Tribunal noted that the assessee had sufficient interest-free funds and earned only Rs. 28,380/- as exempt income. Following the decision of the Hon'ble Delhi High Court in Joint Investment Pvt. Ltd., the Tribunal restricted the disallowance under Section 14A to the extent of exempt income. Consequently, the disallowance was limited to Rs. 28,380/-.

2. Disallowance of Interest on Shareholder Deposits:
The Tribunal referenced its decision in the assessee’s own case for the earlier year, where it was held that the non-interest bearing shareholder deposits were not an international transaction. The RBI and Government of Indonesia had approved the restructuring agreement, and the statutory permissions implied the arm's length nature of the transaction. The Tribunal reiterated that no addition on account of transfer pricing adjustment could be made for these deposits and allowed the grounds in favor of the assessee.

3. Taxation of Long Term Capital Gain:
The assessee did not press this ground, and it was dismissed as not pressed.

4. Long Term Capital Loss on Sale of Investment:
The Tribunal noted that the Assessing Officer had not considered the long-term capital loss on the sale of investments and had not disposed of the application under Section 154 filed by the assessee. The Tribunal directed the Assessing Officer to consider the claim and pass an order in accordance with the law, ensuring an opportunity for a hearing.

5. Addition of Disallowance under Section 14A to Book Profit under Section 115JB:
The Tribunal referenced the Special Bench decision in ACIT vs. Vireet Investment (P.) Ltd., which held that no disallowance under Section 14A r.w. Rule 8D could be made while computing book profit under Section 115JB. Following this precedent, the Tribunal directed the Assessing Officer to re-compute the book profit accordingly.

6. Addition on Account of Transfer Pricing Adjustment towards Interest on Outstanding Balances:
The Tribunal noted that outstanding debit balances with associates were not directly covered within the ambit of 'international transaction' as defined under Section 92B. It emphasized that real income, not hypothetical income, should be taxed, referencing the Hon'ble Supreme Court's decision in UCO Bank vs. CIT. Thus, the Tribunal deleted the disallowance and allowed the ground in favor of the assessee.

7. Addition on Account of Transfer Pricing Adjustment towards Guarantee on Loans and Advances:
The Tribunal referenced its decision in the assessee’s own case for the earlier year, where it was held that corporate guarantees without any cost to the assessee did not fall within the ambit of 'international transaction' under Section 92B. The Tribunal also noted that even if it were considered an international transaction, providing a corporate guarantee without charging a commission would be at arm's length if it benefited the group. Consequently, the Tribunal upheld the deletion of the adjustment and dismissed the Revenue's ground.

Conclusion:
The Tribunal allowed the appeals of the assessee on most grounds, restricting disallowances and adjustments to the extent of actual exempt income or real transactions, and dismissed the Revenue's appeals, following precedents from earlier decisions and higher judicial authorities.

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