2017 (8) TMI 852 - AT - Income Tax

Expenditure incurred in connection with the issue of FCCB - nature of expenditure - revenue or capital expenditure - Held that - Expenditure incurred in connection with the issue of FCCB is deductible as revenue expenditure. TDS u/s 195 - Disallowance u/s. 40(a)(i) - non-deduction of tax at source from certain payments - Held that - We notice that the Ld CIT(A) has accepted the contentions of the assessee and accordingly deleted the disallowance made u/s 40(a)(i) of the Act. We also notice that the assessing officer has made the disallowance in a mechanical manner without examining the nature of payments made to USA companies. No material to contradict the submissions made by the assessee was furnished before us. Hence we have no other option, but to confirm the order passed by Ld CIT(A) on this issue. Disallowance to be made under clause (f) of Explanation-1 to section 115JB for addition u/s 14A - Held that - In view of the decision rendered by the Special bench of the Tribunal in the case of Vireet Investment (P) Ltd.(2017 (6) TMI 1124 - ITAT DELHI) AO was not justified in adding the amount computed under section 14A of the Act to meet the requirement of clause (f) of Explanation-1 to section 115JB of the Act. We further noticed that the learned CIT(A) has computed the amount incurred for earning exempt income for the purpose of section 115JB at 10% of the dividend income. Considering the volume of dividend and quantum of addition of ₹ 9.22 crores, in our view the same appears to be reasonable. Accordingly, we uphold the order passed by the learned CIT(A) on this issue.

Summary

Issues Involved:
1. Treatment of FCCB-related expenses as capital or revenue expenditure.
2. Disallowance under section 40(a)(i) for non-deduction of tax at source.
3. Disallowance under clause (f) of Explanation-1 to section 115JB.
4. Disallowance of professional fees for listing of GDR.

Detailed Analysis:

1. Treatment of FCCB-related Expenses:
The primary issue revolves around whether the expenses incurred by the assessee in connection with the issuance of Foreign Currency Convertible Bonds (FCCB) should be treated as capital or revenue expenditure. The Assessing Officer (AO) had treated these expenses as capital expenditure, following the precedent set in earlier years. However, the CIT(A) reversed this decision, allowing the expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that FCCB expenses are akin to debenture issuance costs, which are considered revenue in nature. The Tribunal also observed that FCCB holders did not have voting rights as the bonds were not converted into equity shares during the relevant year.

2. Disallowance Under Section 40(a)(i):
The second issue pertains to the disallowance of ?14.86 crores under section 40(a)(i) for non-deduction of tax at source. The AO disallowed the amount due to non-compliance with TDS provisions. The CIT(A) partially upheld this disallowance but granted relief for certain payments, such as those made to T.T. Forex, UK companies, and USA companies, based on the provisions of the respective DTAAs. The Tribunal confirmed the CIT(A)'s decision, emphasizing that identical payments in earlier years were not subject to TDS, and there was no requirement to deduct tax at source under section 195.

3. Disallowance Under Clause (f) of Explanation-1 to Section 115JB:
The third issue involves the disallowance under clause (f) of Explanation-1 to section 115JB, which pertains to the computation of book profit. The AO added the disallowance computed under section 14A to the book profit, while the CIT(A) estimated 10% of the dividend income as the expenditure related to exempt income. The Tribunal upheld the CIT(A)'s approach, citing the Special Bench decision in ACIT Vs. Vireet Investment (P) Ltd., which held that section 14A disallowance should not be imported into clause (f) of Explanation-1 to section 115JB.

4. Disallowance of Professional Fees for Listing of GDR:
The final issue concerns the disallowance of ?93,060 paid for listing of GDR. The CIT(A) treated this expenditure as capital in nature, and the Tribunal upheld this decision, consistent with the rulings in earlier years.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The key takeaways include the affirmation of FCCB-related expenses as revenue expenditure, relief granted for certain payments under section 40(a)(i) based on DTAA provisions, and the adoption of a reasonable estimate for expenditure related to exempt income under section 115JB. The professional fees for listing of GDR were consistently treated as capital expenditure.