2018 (2) TMI 862 - AT - Income Tax

Interest disallowance - CIT-A granted relief to assessee - Held that - Order passed by Ld CIT(A) on this issue does not call for any interference, since the own funds available with the assessee is more than the value of investments made in subsidiaries and further, there is commercial expediency in making investments, since the subsidiary companies are also said to be engaged in the similar line of business activity. Accordingly we uphold the order passed by Ld CIT(A) on this issue. Disallowance made u/s 40A(2)(b) - payments made to M/s ICICI Bank - rental payments made to M/s Customer Assets India P Ltd. - contention of the Ld A.R that both the assessee and M/s ICICI Bank Ltd are liable to pay tax at the same rate and hence the transaction is revenue neutral and no disallowance u/s 40A(2)(a) is called for - Held that - There is merit in the submissions of the assessee. However, the above said claim of the assessee has not been examined by the tax authorities. Hence, for the limited purpose of verifying as to whether the assessee and M/s ICICI Bank Ltd are paying tax at same rate, i.e., whether the transaction is revenue neutral or not, we restore this issue to the file of the assessing officer. If he is satisfied that the impugned transactions are revenue neutral, we direct the AO not to make any disallowance u/s 40A(2)(a) of the Act. Disallowance relates to disallowance of 20% of rental expenses - A.R submitted that the assessee has submitted both the agreements before the AO, but the AO has made the disallowance without verifying the assessee s claim - Held that - We find force in the arguments of the Ld A.R. If the assessee is paying rent at the very same rate at which it was payable to the original lessor by M/s Customer Asia India, then the question of payment of excess rent does not arise. We notice that the AO has not examined the relevant agreements in this regard. Hence, for the limited purpose of verification of this claim of the assessee, we restore this issue to the file of the AO. If the AO is satisfied that there is no excess payment, then no disallowance out of rental expenditure is called for. If the AO is not satisfied, he may take appropriate decision in accordance with the law Disallowance of Provision of various expenses - Held that - We notice that the AO did not examine the details furnished by the assessee in order to demonstrate that the concerned liability did not accrue as at the year end. Hence, we have no other option, but to accept the explanations of the assessee, as the same is in accordance with the accounting principles and requirements. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the expenses relating to provisions, listed above. Adhoc disallowance made out of Meeting and Seminar expenses - Held that - assessee has furnished all the details before the AO. We further notice that the AO has made adhoc disallowance only on presumption that there may be personal element. It can be noticed that the AO has made the impugned disallowance on surmises and conjectures without showing how personal element is involved in meetings and seminars. Hence we do not find any justification in making adhoc disallowance of 20% from this expenditure. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance. Adhoc disallowance of 20% made out of Staff welfare expenses - deduction u/s 10A eligibility - Held that - We notice that the assessee has given details of expenses except for a sum of ₹ 19.95 lakhs. Hence, we are of the view that the disallowance, if any, should be restricted to that portion for which no detail was given. Accordingly we are of the view that no disallowance is called for from out of expenses for which details were given. We are also of the view that the disallowance @ 20% is also on the higher side. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict disallowance to 10% of ₹ 19.95 lakhs, for which details were not given. However, this disallowance shall be eligible for deduction u/s 10A of 10 the Act as held by Ld CIT(A), since the said decision has not been challenged by the revenue. Interest income and miscellaneous income - assessed under the head Income from other sources OR business income - Held that - This issue requires fresh examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of decision rendered by Hon ble Bombay High Court in the case of Green Infra Ltd (2017 (4) TMI 185 - BOMBAY HIGH COURT) Adjustment of profits of STP units against loss of non-STP units - Held that - This issue has since been decided in favour of the assessee in the case of CIT Vs Black & Veatch Consulting P Ltd (2012 (4) TMI 450 - BOMBAY HIGH COURT ) and CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT). Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow deduction u/s 10A of the Act without setting off of loss from non-STP units. Deduction claimed u/s 10A - deduction u/s 10A shall be allowed qua unit wise instead of aggregating profits/losses of all eligible units - Held that - Hon ble Bombay High Court in the case of Hindustan Unilever Ltd Vs. DCIT (2010 (4) TMI 206 - BOMBAY HIGH COURT) and CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT). Accordingly we direct the AO to compute deduction u/s 10A qua unit-wise. Addition u/s 14A to confirm the interest expenditure allocated to STP units - Held that - AO did not disallow the impugned amount of ₹ 36.93 lakhs as presumed by Ld CIT(A) and hence the question of invoking provisions of sec. 14A does not arise. What AO has done is to allocate a part of interest expenditure towards STP units, which in turn, will reduce the amount allowable u/s 10A of the Act. We have noticed that the manner of allocation of interest expenditure shall be on the basis of user of borrowed funds between STP units and non-STP units. We have also noticed that the details relating to user of borrowed funds have not been brought on record. Hence we are of the view that this issue requires fresh examination at the end of the AO. Allocation of expenses to STP units - Held that - Neither the AO nor the Ld CIT(A) has examined the nature of expenses and its nexus between STP unit or non-STP unit. Under these set of facts, we are of the view that this issue requires fresh examination at the end of the assessing officer. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the nexus between the expenditure and the STP or non-STP units. Nature of legal and professional expenses - revenue or capital exp - Held that - As the assessee did not furnish any detail relating to these expenses. Hence we have no other option but to confirm the disallowance. Setting off unabsorbed depreciation pertaining to previous years from the positive income of the units eligible for deduction u/s 10A - Held that - his issue has been decided in favour of the assessee by Hon ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT) and Techno Tarp & Polymers P Ltd (2015 (12) TMI 909 - BOMBAY HIGH COURT). Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to compute deduction u/s 10A/10B without adjusting brought forward depreciation.

Summary

Issues involved:
1. Interest disallowance for AY 2004-05.
2. Disallowance of interest expenses for AY 2004-05.
3. Disallowance under Section 40A(2)(b) of the Act.
4. Disallowance of provision for various expenses.
5. Adhoc disallowance of meeting and seminar expenses.
6. Adhoc disallowance of staff welfare expenses.
7. Assessment of interest and miscellaneous income.
8. Adjustment of profits of STP units against loss of non-STP units.
9. Set off of brought forward losses of earlier assessment years.
10. Disallowance of interest expenditure under Section 14A.
11. Allocation of expenses to STP units for AY 2005-06.
12. Nature of legal and professional expenses.
13. Adhoc disallowance of meeting and seminar expenses for AY 2005-06.
14. Adhoc disallowance of staff welfare expenses for AY 2005-06.
15. Disallowance under Section 40A(2)(a) for AY 2005-06.
16. Adjustment of profit of STP unit against loss from non-STP units for AY 2005-06.
17. Deduction under Section 10A of the Act qua unit-wise.
18. Setting off unabsorbed depreciation from positive income of units eligible for deduction under Section 10A.

Detailed Analysis:

1. Interest disallowance for AY 2004-05:
The revenue challenged the relief of ?61.71 lakhs granted by Ld CIT(A) in respect of interest disallowance. The assessee demonstrated that its own funds exceeded the investments in subsidiaries, and as per the decision in Reliance Utilities & Power (313 ITR 340), the presumption is that the assessee used its own funds for investments. The CIT(A) deleted the disallowance based on commercial expediency and the similar line of business of subsidiaries. The Tribunal upheld the CIT(A)'s order.

2. Disallowance of interest expenses for AY 2004-05:
The assessee's appeal included three parts:
- The incorrect mentioning of relief amount was corrected by CIT(A) under Section 154, making the ground infructuous.
- The non-adjudication of allocation of interest expenditure between STP and non-STP units was addressed in the rectification order, making it infructuous.
- The disallowance of interest on delayed payment of P.F. was not pressed and dismissed.

3. Disallowance under Section 40A(2)(b) of the Act:
- Payments to ICICI Bank Ltd: The AO disallowed 50% of expenses due to lack of written agreement for sharing facilities. The Tribunal restored the issue to AO for verifying if the transaction is revenue neutral and directed AO to consider the claim for deduction under Section 10A if disallowed.
- Rental payments to Customer Assets India P Ltd: The AO disallowed 20% of rental expenses. The Tribunal restored the issue to AO for verifying if the rent paid was at market rates and directed AO to consider the alternative contentions if disallowed.

4. Disallowance of provision for various expenses:
The assessee created provisions for various expenses which were disallowed by AO due to lack of details. The Tribunal accepted the assessee’s explanation that provisions were made based on reliable estimates and directed AO to allow the expenses.

5. Adhoc disallowance of meeting and seminar expenses:
The AO disallowed 20% of the claim on the presumption of personal element. The Tribunal found the disallowance unjustified and directed AO to delete it.

6. Adhoc disallowance of staff welfare expenses:
The AO disallowed 20% of the expenses due to unverifiable nature. The Tribunal restricted the disallowance to 10% of ?19.95 lakhs for which details were not given and directed AO to allow deduction under Section 10A.

7. Assessment of interest and miscellaneous income:
The AO assessed interest and miscellaneous income under “Income from other sources” due to lack of details. The Tribunal restored the issue to AO for fresh examination in light of the decision in CIT Vs. Green Infra Ltd (392 ITR 7).

8. Adjustment of profits of STP units against loss of non-STP units:
The AO set off the loss from non-STP units against profits from STP units, which was confirmed by CIT(A). The Tribunal directed AO to allow deduction under Section 10A without setting off the loss from non-STP units, based on decisions in CIT Vs Black & Veatch Consulting P Ltd (348 ITR 72) and CIT Vs. Yokogawa India Ltd (391 ITR 274).

9. Set off of brought forward losses of earlier assessment years:
The issue was dealt with in the rectification order, making the ground infructuous.

10. Disallowance of interest expenditure under Section 14A:
The CIT(A) invoked Section 14A in rectification proceedings, which the Tribunal found misdirected. The issue was restored to AO for fresh examination based on the user of borrowed funds.

11. Allocation of expenses to STP units for AY 2005-06:
The AO disallowed expenses claimed in non-STP units, assuming they were related to STP units. The Tribunal restored the issue to AO for examining the nexus between expenses and STP or non-STP units.

12. Nature of legal and professional expenses:
The AO disallowed expenses as capital in nature due to lack of details. The Tribunal confirmed the disallowance.

13. Adhoc disallowance of meeting and seminar expenses for AY 2005-06:
The AO disallowed 20% of expenses on an adhoc basis. The Tribunal directed AO to delete the disallowance, consistent with the view taken in AY 2004-05.

14. Adhoc disallowance of staff welfare expenses for AY 2005-06:
The AO disallowed 20% of expenses on an adhoc basis. The Tribunal deleted the entire disallowance as AO did not provide break-up details or point out expenses without details.

15. Disallowance under Section 40A(2)(a) for AY 2005-06:
The AO disallowed 50% of expenses paid to ICICI Bank Ltd. The Tribunal restored the issue to AO for verifying if the transaction is revenue neutral, consistent with AY 2004-05.

16. Adjustment of profit of STP unit against loss from non-STP units for AY 2005-06:
The Tribunal directed AO to allow deduction under Section 10A without setting off loss from non-STP units, consistent with decisions in CIT Vs Black & Veatch Consulting P Ltd and CIT Vs. Yokogawa India Ltd.

17. Deduction under Section 10A of the Act qua unit-wise:
The Tribunal directed AO to compute deduction under Section 10A qua unit-wise, consistent with decisions in Hindustan Unilever Ltd Vs. DCIT and CIT Vs. Yokogawa India Ltd.

18. Setting off unabsorbed depreciation from positive income of units eligible for deduction under Section 10A:
The Tribunal directed AO to compute deduction under Section 10A/10B without adjusting brought forward depreciation, consistent with decisions in CIT Vs. Yokogawa India Ltd and Techno Tarp & Polymers P Ltd.

Conclusion:
Both appeals of the revenue were dismissed. All three appeals of the assessee were treated as allowed.