2017 (5) TMI 776 - AT - Income Tax

Reduction of deduction u/s 80-IB for the purpose of computing eligible profit for deduction under Section 80HHC of the Act - Held that - The judgment of Madras High Court in SCM Creations v. ACIT (2008 (3) TMI 223 - MADRAS HIGH COURT) would cover the issue. Accordingly, the orders of lower authorities are set aside and the Assessing Officer is directed to decide the issue in the light of the judgment of Madras High Court in SCM Creations (supra) after giving a reasonable opportunity to the assessee. Addition of donation made by the assessee to M/s Public & Political Awareness Trust - Held that - It is not the contribution made by the assessee to the welfare of the employees. It was made to a trust for creating political awareness, therefore, the judgment of Madras High Court in Cheran Engineering Corporation Ltd. (1998 (2) TMI 74 - MADRAS High Court) may not be applicable at all. Hence, we are unable to uphold the order of the lower authority. Accordingly, the same is set aside and the disallowance made by the Assessing Officer to the extent of ₹ 5.50 Crores is restored. Claim of the assessee under the provisions of Section 145A - Held that - Once the assessee changed its method of accounting and consistently followed the same in subsequent years, the Department cannot doubt the method of accounting followed by the assessee. In the initial years, there may be fluctuation in the profit of the assessee due to increase in purchase price by changing the method of accounting. However, when the assessee was consistently following the same, there will be revenue neutral, hence there cannot be loss to the Revenue. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee under the provisions of Section 145A of the Act. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Addition consequent to the block assessment - Held that - The addition made in the present case is in the assessment made under Section 143(3) of the Act. Under the scheme of Income-tax Act, there can be simultaneous assessment one for regular assessment and another for block period. Therefore, as rightly submitted by the Ld. Sr. Standing Counsel for the Revenue, the block assessment made by the Assessing Officer was separate and distinct. However, it needs to be verified whether the same income which formed part of undisclosed income for the block period has been added once again in the regular assessment. For the purpose of verification, this Tribunal is of the considered opinion that the matter needs to be re-examined. Addition under Section 37 - expenses for issue of FCC Bonds - Held that - It is not in dispute that the assessee-company is already in business, therefore, the expenses for issue of debentures need not be amortised under Section 35D of the Act and it has to be allowed under Section 37 of the Act. The CIT(Appeals), in fact, has placed his reliance in India Cements Ltd. (1965 (12) TMI 22 - SUPREME Court ). Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Disallowance towards notional interest on interest free loan advanced to wholly owned subsidiary company - Held that - The fact that the advance was made to foreign countries and shifting of profit to other nation was not examined by the CIT(Appeals). Therefore, the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the transfer pricing adjustment made by the Assessing Officer is remitted back to his file. Double the amount towards management consultancy fee from TCM and CMT - Held that - Unless and until the services rendered by the assessee are brought on record, the business size of CMT and TCM cannot determine the comparability of services rendered and consideration received by the assessee. Therefore, this Tribunal is of the considered opinion that it is obligatory on the part of the Transfer Pricing Officer to bring on record the exact nature of services rendered by the assessee and thereafter has to compare the transaction with other companies in the international transaction with uncontrolled transaction. Since such an exercise was not done, this Tribunal is of the considered opinion that the matter needs to be re-examined by the Assessing Officer after referring the matter to the Transfer Pricing Officer once again. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to TPO once again and determine the arm s length price in respect of services rendered by the assessee in the light of finding and conclusion that may be reached by the Transfer Pricing Officer. Addition towards management consultancy fees paid to M/s Twin Star Holdings Ltd., Mauritius - Held that - Since the actual service rendered by M/s Twin Star Holdings Ltd. was not brought on record by the CIT(Appeals), this Tribunal is of the considered opinion that the matter needs to be re-examined. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the TPO once again and TPO shall examined the actual service rendered by M/s Twin Star Holdings Ltd. to the assessee and thereafter determine the arm s length price after giving a reasonable opportunity to the assessee. Disallowance under Section 14A - Held that - Tribunal is unable to uphold the order of the lower authority. However, since the nature of transaction and the relationship was not brought on record, the matter needs to be re-examined by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the entire issue with regard to disallowance made under Section 14A of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall reexamine the matter afresh and bring on record the purpose for which the investment was made in Balco and the relationship between the assessee and Balco and thereafter decide the issue afresh, in accordance with law, after giving a reasonable opportunity to the assessee. Deduction allowed under Section 80-IA of the Act need not be reduced while computing relief under Section 80HHC Penalty levied by the Assessing Officer under Section 271G - Held that - The orders of the lower authorities are set aside and the issue of penalty levied under Section 271G of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh and bring on record the actual service rendered by the assessee to CMT and TCM and, thereafter decide the issue afresh after bringing on record the failure of the assessee to provide the exact information and documents which are required to be produced for international transaction and, thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee. Deduction under Section 80-IA - Held that - This Tribunal in Mohan Breweries & Distilleries Ltd. (2007 (10) TMI 354 - ITAT MADRAS-B ) examined this issue elaborately and found that even though the power was generated for captive consumption, the assessee was eligible for deduction under Section 80-IA of the Act. A similar view was taken by Mumbai Bench of this Tribunal as well. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee. Hence, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Tsunami Relief Fund of Rajiv Gandhi Relief and National Welfare Trust - Held that - It is common knowledge that the State of Tamil Nadu was very badly affected due to Tsunami and several lakhs of people were made homeless. The assessee is doing business in the State of Tamil Nadu, more particularly in the district of Tuticorin, therefore, there is an obligation on the part of the assessee to give donation to the rehabilitation work so that the assessee can carry on its business activity in a peaceful atmosphere. Therefore, even though technically speaking, the donation is not for earning any business income, it would definitely mitigate the difficulties suffered by the local people who are affected by Tsunami. Therefore, as found by the Madras High Court in Cholan Roadways Corporation Ltd. 1997 (2) TMI 38 - MADRAS High Court has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Disallowance under Section 14A - Held that - It is not in dispute that Rule 8D is not applicable for the year under consideration. As rightly submitted by the Ld. Sr. Standing Counsel, this Tribunal is uniformly estimating the expenditure at 2% before introduction of Rule 8D of Income-tax Rules, 1962. The CIT(Appeals) without any basis has restricted the same to ₹ 5 lakhs instead of disallowing ₹ 27.48 lakhs which comes to 2% of exempt income earned by the assessee. Therefore, this Tribunal is unable to uphold the order of the lower authority. Accordingly we set aside the order of the CIT(Appeals) and restore the order of the Assessing Officer. Addition of loss on account of change in method of accounting - Held that - When the assessee bonafidely changed the method of accounting as per the Accounting Standard adopted under Section 145 of the Act and continues to follow the same, even though there was loss at initial year, the same would not stand in the way of changing the accounting policy. In other words, the loss suffered in the first year would be set off in the subsequent year and there would be revenue neutral. Hence, there can be no loss to the Revenue. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that the addition of ₹ 10.10 Crores on account of fall in net profit due to change in the method of accounting cannot be sustained. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Addition towards prior period expenses - Held that - It is not in dispute that the Tax Audit Report clearly says that the goods were transported in the earlier years, therefore, the payment to be made relates to the earlier assessment year. It is nobody s case that the compensation was paid in respect of loss suffered during the year under consideration. It is also not known how the loss was quantified to pay compensation by the assessee. In the absence of any material available on record regarding the quantification of compensation and liability to pay the same, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the issue of compensation is remitted back to the file of the Assessing Officer. The Assessing Officer shall bring on record the liability to pay compensation by the assessee and the year in which the liability was crystallized and thereafter decide in accordance with law after giving a reasonable opportunity to the assessee. Deduction claimed under Section 80-IB - only contention of the assessee before this Tribunal is that the Assessing Officer changed the year of claim to 9th and 10th year arbitrarily - Held that - The fact remains that the assessee is eligible for deduction from 6th year to 10th year. Therefore, whether the claim is for 7th year or 8th year, so long it falls within the period of 6th to 10th year, the assessee is eligible for deduction under Section 80-IB of the Act at 30%. Therefore, as rightly submitted by the CIT(Appeals), the issue becomes infructuous. Accordingly, the same is confirmed. Management consultancy fee disallowance u/s 40(a)(i) for non-deduction of tax at source - Held that - The assessee has paid management consultancy fees and Representative Office fees to its holding company in UK. In respect of Representative Office fees, the CIT(Appeals) himself found that the payment was made for the service rendered outside India, therefore, it was not liable for taxation in India. Accordingly, the CIT(Appeals) found that there is no need to deduct tax. Coming to management consultancy fees, it is not in dispute that UK company deputed their skilled employees to India to render services to the assessee. In fact, the assessee-company availed services of UK company in India. Therefore, the payment made to the assessee towards management consultancy fees is liable to tax in India. Hence the assessee has to necessarily deduct tax as mandated under Section 9(1)(vii) of the in respect of the payment of management consultancy fees. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Deduction under Section 80GGB - Held that - After referring to the amendment carried out by the Parliament by Finance (No.2) Act, 2009 with effect from 01.04.2010, this Tribunal found that the contribution made by the assessee was to M/s Public & Political Awareness Trust and not to any political party. Accordingly, this Tribunal found that the CIT(Appeals) is not justified in allowing the claim of the assessee. Claim of the assessee under Rule 8D of the Income-tax Rules, 1962 - Held that - The expenditure incurred by the assessee for earning exempt income cannot be allowed as expenditure for earning taxable income. Therefore, certain disallowance has to be made. This Tribunal consistently disallowing the claim at the rate of 2% of the exempt income earned by the assessee before the introduction of Rule 8D of Income-tax Rules, 1962. Therefore, the Assessing Officer is directed to disallow 2% of exempt income earned by the assessee for the year under consideration. Addition on account of bogus steel purchase - Held that - Referring to the order passed by the Assessing Officer for the block period, this Tribunal found that the order passed by the Assessing Officer is barred by limitation. This Tribunal had no occasion to go into the merit of the disallowance made by the Assessing Officer. Accordingly, this issue was remitted back to the file of the Assessing Officer. For the sake of consistency, the order of the CIT(Appeals) is set aside and the issue of claim of bogus steel purchase is also remitted back to the file of the Assessing Officer. Deduction claimed under Section 80-IB - Held that - Though the assessee claimed before the lower authorities that foreign exchange fluctuation on sale of finished goods, this Tribunal is of the considered opinion that profit on sale of finished goods, due to fluctuation in foreign exchange, the same has to be construed as derived from industrial undertaking. In case the profit was on the sale of raw material, the same cannot be taken as income derived from industrial undertaking at all. Since no details/materials are available before this Tribunal, it has to be first ascertained whether profit on foreign exchange fluctuation was due to sale of finished goods or raw material. No material is available on record to suggest that the foreign exchange fluctuation was due to sale of finished goods on export. Therefore, this Tribunal is of the considered opinion that the matter needs to be verified by the Assessing Officer. Unclaimed liabilities written back, the unclaimed liabilities relate to earlier assessment year, due to unclaimed liabilities of the earlier year, the same were written back in the books of account and treated as income of the assessee. This Tribunal is of the considered opinion that deduction under Section 80-IB of the Act is only in respect of current profit. The profit written back in the books of account as unclaimed of the earlier year cannot be construed as profit of current year, therefore, by including the unclaimed liabilities written back in the books of account, the assessee cannot inflate the eligible profit for the purpose of deduction under Section 80-IB of the Act. Interest received from customers, it is not known whether the interest was received on sale of finished goods or interest was received on any other situation. If the interest was received on sale price for delayed payment of sale price, then as found by Madras High Court in Madras Motors Ltd. (2002 (3) TMI 10 - MADRAS High Court ), assessee is eligible for deduction under Section 80-IB of the Act. If the interest was received for any other reason and not for delayed payment of sale price, the same cannot be construed as derived from industrial undertaking. In the absence of any material, the books of account need to be verified and find out whether the interest was received for delayed payment of sale price or for any other reason. Moreover, the scrape sale is concerned, whether the assessee generated the scrape sales during its own manufacturing activity or the scrape sale was a separate business needs to be verified. Interest on employees loan, it has to be ascertained whether the loan given to employees was to reduce the cost of manufacturing activity or not. In the absence of any details, this Tribunal is of the considered opinion that the matter needs to be verified. Accordingly, the orders of the lower authorities are set aside and the claim of deduction under Section 80-IB of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter afresh decide the issue in accordance with law, after giving a reasonable opportunity to the assessee. TDS u/s 195 - payment made to M/s Vedanta Resources Plc, UK - non TDS deduction - Held that - Admittedly, the assessee-company nominated M/s Vedanta Resources Plc, a UK company to represent it in London. The assessee-company availed the services of M/s Vedanta Resources Plc to expand its business operation and interact with its consultant in London. The UK company appears to have not made available any technical knowledge to the assessee-company. The UK company rendered its services only in London Metal Exchange for the purpose of expanding its business operation in London. Since no activity was carried out in India by the foreign company, and entire advice was made by UK company to expand the assessee s business in UK, namely, London Metal Exchange. Therefore, this Tribunal is of the considered opinion that the payment made to M/s Vedanta Resources Plc, UK is not liable to tax in India. Accordingly, the assessee is not liable to deduct tax under Section 195 of the Act. Disallowance of notional interest - Held that - Tribunal found that the advance was made to companies outside India and the lower authorities have not examined whether the advance made to the companies outside India would amount to shifting of profit to other jurisdiction. Accordingly, the matter was remitted back to the file of the Assessing Officer. For the very same reason, the orders of the lower authorities are set aside and the disallowance of notional interest is remitted back to the file of the Assessing Officer.

Summary

Issues Involved:
1. Reduction of deduction under Section 80-IB for computing eligible profit under Section 80HHC.
2. Initiation of penalty proceedings under Sections 271AA and 271G.
3. Addition of ?5.50 Crores donation to M/s Public & Political Awareness Trust.
4. Addition of ?38.83 Crores due to change in accounting method for copper concentrate purchases.
5. Addition of ?14.58 Crores consequent to block assessment.
6. Addition of ?4.44 Crores under Section 37 for FCC Bonds issue expenses.
7. Disallowance of ?2.13 Crores notional interest on interest-free loan to a subsidiary.
8. Addition of ?4.35 Crores management consultancy fees.
9. Addition of ?30.50 lakhs consultancy fees paid to M/s Twin Star Holdings Ltd., Mauritius.
10. Disallowance of ?1.68 Crores under Section 14A.
11. Deduction under Section 80-IA for captive power consumption.
12. Disallowance of ?1 Crore donation to Tsunami Relief Fund.
13. Disallowance of ?27.48 lakhs under Section 14A.
14. Addition of ?10.99 Crores due to change in accounting method.
15. Addition of ?11.08 Crores on depreciation and capitalization of foreign exchange fluctuation.
16. Addition of ?4,00,099/- towards prior period expenses.
17. Deduction under Section 80-IB for Chinchpada and Rakholi units.
18. Disallowance of ?13.38 Crores under Section 40(a)(i) for non-deduction of tax on management consultancy fee.
19. Deduction under Section 80GGB for donations.
20. Disallowance under Rule 8D for exempt income.
21. Addition on account of bogus steel purchases.
22. Deduction under Section 80-IB for other income.
23. Disallowance of notional interest on advances to foreign companies.

Detailed Analysis:

1. Reduction of Deduction Under Section 80-IB:
The Tribunal set aside the orders of the lower authorities and directed the Assessing Officer to decide the issue in light of the judgment of the Madras High Court in SCM Creations v. ACIT, which would cover the issue.

2. Initiation of Penalty Proceedings:
The Tribunal found that mere initiation of penalty proceedings by issuing a show cause notice cannot be a subject matter of appeal before the Tribunal. The CIT(Appeals) rightly considered this as premature, and the Tribunal confirmed the same.

3. Addition of ?5.50 Crores Donation:
The Tribunal concluded that the contribution made to Public & Political Awareness Trust cannot be claimed as a deduction under Section 80GGB as it was not made directly to a political party. The CIT(Appeals) was not justified in allowing the claim, and the disallowance made by the Assessing Officer was restored.

4. Addition of ?38.83 Crores Due to Change in Accounting Method:
The Tribunal found that the company can adopt any permissible method for computing profit, and once consistently followed, the Department cannot doubt it. The CIT(Appeals) rightly allowed the claim under Section 145A, and the Tribunal confirmed the same.

5. Addition of ?14.58 Crores Consequent to Block Assessment:
The Tribunal remitted the issue back to the Assessing Officer to verify whether the same income, which formed part of undisclosed income for the block period, was added again in the regular assessment.

6. Addition of ?4.44 Crores Under Section 37 for FCC Bonds Issue Expenses:
The Tribunal upheld the CIT(Appeals) decision, allowing the expenses for the issue of FCC Bonds under Section 37, following the judgment of the Apex Court in India Cements Ltd. v. CIT.

7. Disallowance of ?2.13 Crores Notional Interest:
The Tribunal remitted the matter back to the Assessing Officer to re-examine whether the advance made to foreign companies would amount to shifting of profit to other jurisdictions.

8. Addition of ?4.35 Crores Management Consultancy Fees:
The Tribunal remitted the issue back to the Assessing Officer to re-examine the actual services rendered by the assessee and determine the arm's length price after referring the matter to the Transfer Pricing Officer.

9. Addition of ?30.50 Lakhs Consultancy Fees Paid to M/s Twin Star Holdings Ltd., Mauritius:
The Tribunal remitted the issue back to the Assessing Officer to re-examine the actual services rendered by M/s Twin Star Holdings Ltd. and determine the arm's length price.

10. Disallowance of ?1.68 Crores Under Section 14A:
The Tribunal remitted the issue back to the Assessing Officer to re-examine the purpose of the investment in Balco and the relationship between the assessee and Balco.

11. Deduction Under Section 80-IA for Captive Power Consumption:
The Tribunal confirmed the CIT(Appeals) decision, allowing the deduction under Section 80-IA, following the Tribunal's decision in Mohan Breweries & Distilleries Ltd. v. ACIT.

12. Disallowance of ?1 Crore Donation to Tsunami Relief Fund:
The Tribunal confirmed the CIT(Appeals) decision, allowing the donation under Section 37, considering it as corporate social responsibility and not in contravention of any law.

13. Disallowance of ?27.48 Lakhs Under Section 14A:
The Tribunal set aside the CIT(Appeals) order and restored the Assessing Officer's order, disallowing 2% of the exempt income earned by the assessee.

14. Addition of ?10.99 Crores Due to Change in Accounting Method:
The Tribunal confirmed the CIT(Appeals) decision, allowing the change in the accounting method as it was bonafide and in compliance with the Accounting Standard adopted under Section 145.

15. Addition of ?11.08 Crores on Depreciation and Capitalization of Foreign Exchange Fluctuation:
The Tribunal remitted the issue back to the Assessing Officer for reconsideration, following the Tribunal's earlier order dated 23.09.2016.

16. Addition of ?4,00,099/- Towards Prior Period Expenses:
The Tribunal remitted the issue back to the Assessing Officer to bring on record the liability to pay compensation and the year in which the liability was crystallized.

17. Deduction Under Section 80-IB for Chinchpada and Rakholi Units:
The Tribunal confirmed the CIT(Appeals) decision, stating that the issue becomes infructuous as the assessee is eligible for deduction at 30% from the 6th to 10th year.

18. Disallowance of ?13.38 Crores Under Section 40(a)(i) for Non-Deduction of Tax on Management Consultancy Fee:
The Tribunal confirmed the CIT(Appeals) decision, stating that the payment made to the UK company for management consultancy services is liable to tax in India, and the assessee must deduct tax as mandated under Section 9(1)(vii).

19. Deduction Under Section 80GGB for Donations:
The Tribunal set aside the CIT(Appeals) order and restored the Assessing Officer's order, disallowing the deduction as the contribution was made to a trust and not directly to a political party.

20. Disallowance Under Rule 8D for Exempt Income:
The Tribunal directed the Assessing Officer to disallow 2% of the exempt income earned by the assessee, following the Tribunal's consistent practice before the introduction of Rule 8D.

21. Addition on Account of Bogus Steel Purchases:
The Tribunal remitted the issue back to the Assessing Officer for re-examination, following the Tribunal's earlier decision on similar circumstances.

22. Deduction Under Section 80-IB for Other Income:
The Tribunal remitted the issue back to the Assessing Officer to re-examine the matter afresh and decide after considering various judgments, including Cambay Electric Supply Industrial Co. Ltd. v. CIT and Pandian Chemicals Ltd. v. CIT.

23. Disallowance of Notional Interest on Advances to Foreign Companies:
The Tribunal remitted the issue back to the Assessing Officer to re-examine whether the payment of interest on the advance made to foreign companies would amount to shifting of profit to other jurisdictions.

Conclusion:
The Tribunal allowed some appeals partly for statistical purposes, dismissed others, and remitted several issues back to the Assessing Officer for re-examination, ensuring a thorough and fair reconsideration of each matter.