2019 (12) TMI 819 - AT - Income Tax

Disallowance u/s 14A - Sufficiency of own funds - HELD THAT - Only the own funds had been utilized for making investments that had yielded exempt income and hence, there cannot be any disallowance of interest on borrowed funds u/s.14A of the Act. Reliance in this regard was placed on the decision of Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT . We find that with regard to disallowance of indirect expenses, the Co-ordinate Bench of this Tribunal in assessee s own case 2011 (9) TMI 635 - ITAT MUMBAI had remanded this issue to the ld. AO for fresh consideration. The ld. AO vide order dated 09/01/2013 in giving effect proceedings to the said Tribunal order had followed the computation mechanism as was given by the Tribunal for the A.Y.2006-07. In other words, the computation methodology adopted by the assessee which was submitted during the course of assessment proceedings for A.Y.2006-07 i.e. the year under appeal before us before the ld. AO was practically adopted by the ld. AO in giving effect proceedings to Tribunal order for A.Y.2001-02. Hence, the workings of disallowance u/s.14A of the Act given by the assessee before the ld. AO towards disallowance u/s.14A of the Act in the sum of ₹ 59,06,284/- had become final and deserves to be upheld. Set off of unabsorbed depreciation of earlier years while deduction u/s.80IA - HELD THAT - covered in favour of the assessee by the decision of the Hon ble Supreme Court in the case of ACIT vs. Velayudhaswamy Spinning Mills Pvt. Ltd 2016 (11) TMI 373 - SC ORDER wherein the SLP filed by the revenue against the order of the Hon ble Madras High Court was dismissed by holding that loss in years earlier to initial assessment year which were already absorbed against profit of other business cannot be notionally brought forward and set off against profits of eligible business in the Initial Assessment Year as no such mandate is provided in Section 80IA(5) of the Act. It is not in dispute that A.Y.2006-07 is the Initial Assessment Year in respect of Jojo Bera unit in terms of Section 80IA(5) of the Act. It is not in dispute that Jojo Bera Unit is an eligible undertaking and is entitled for claim of deduction u/s.80IA of the Act. We also find that the recent Circular issued by the CBDT vide Circular No.1/2016 dated 15/02/2016 also had endorsed the view taken in the case of Velayudhaswamy Spinning Mills supra and had directed the revenue to withdraw the said ground before various appellate forums. Deduction on prepayment of debentures and its related impact while computing deduction u/s.80IA - HELD THAT - We direct the ld. AO accordingly to give life to the issue of allowability of deduction towards premium on prepayment of debentures based on the final outcome of the appeals of the revenue for the Asst Years 2004-05 and 2005-06. The ground Nos. 3(a) to 3(d) raised by the assessee are disposed off subject to the directions mentioned hereinabove. Disallowance u/s.40A(9) of the Act in respect of payments made to local schools in the locality in which eligible undertakings are situated - HELD THAT - As decided in STATE BANK OF INDIA 2019 (6) TMI 1183 - BOMBAY HIGH COURT assessee is entitled for deduction in the sum of ₹ 38,85,333/- in respect of payments made to schools in which children of the employees of the assessee are studying, among others. Disallowance of discount on issue of Euro Bonds - HELD THAT - AO had observed that in earlier year, the assessee had earned some gain out of this transaction and the same had not been offered to tax as it is notional in nature. We are unable to persuade ourselves to accept to the contentions of the ld. AO that assessee had made certain foreign exchange fluctuation gain in the earlier year which was not offered to tax by the assessee on a totally different footing, whereas the subject mentioned issue in dispute being liability of discount on issue of Euro notes, which has got absolutely nothing to do with the foreign exchange gain which arose in earlier years. Hence, we hold that the ld. AO had grossly erred in disallowing the said sum of ₹ 18,88,103/- towards discount on issue of Euro notes. We find that the action of the assessee is exactly in line with the ratio laid down by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation 1997 (4) TMI 5 - SUPREME COURT . Accordingly, ground No.3 raised by the revenue is dismissed. Disallowance u/s.40a(ia) - payment of retention amount - HELD THAT - The comments made by the Tax Auditors in the tax audit report that tax has not been deducted at source by the assessee at the time of payment of retention amount was in respect of a solitary case of payment made to United Shippers Ltd, where payments were made during the year by the assessee without deduction of tax at source since adhoc payments were made without reconciliation of the amount finally payable to the party. The assessee had even submitted evidence that even in this case i.e. United Shippers Ltd, the short fall of tax amounting to ₹ 11,21,342/- was indeed remitted to the account of Central Government on 07/03/2006 which is before the end of the previous year relevant to A.Y.2006-07. We find that in any case, the ld. AO is absolutely not justified to take the figure of sundry deposits from the balance sheet and treat the same as retention money and thereafter treat 50% of the said sum as retention money. The entire exercise of the ld. AO is absolutely without any basis. We hold firstly that there is absolutely no default committed by the assessee in accordance with provisions of Chapter XVIIB of the Act in the instant case. Secondly, the figures taken by the ld. AO are totally incorrect. Hence, by all force, the disallowance u/s.40(a)(ia) of the Act deserves to be deleted which has been rightly done by the ld. CIT(A) on which action, we do not find any infirmity. Direction of ld. CIT(A) to ld. AO to decide the issue as per the report of ITO International Transaction in respect of TDS on payment to foreign parties - HELD THAT - We find that the ld. AO cannot have any grievance on this direction as admittedly the ld. AO had been merely directed to follow the order passed by ITO International Transaction, TDS Range-2, Mumbai. It is also pertinent to note that the ld. AO had passed an order dated 13/05/2013 giving effect to the order of the ld. CIT(A) wherein he had merely followed the directions of ITO International Transaction, TDS Range-2, Mumbai and granted some relief to the assessee u/s.40(a)(i) of the Act. We find that assessee had not preferred further appeal to this Tribunal against the findings of International Transaction, TDS Range-2, Mumbai. Hence, we do not find any merit in the ground No.5 raised by the revenue and hence, the same is dismissed. Disallowance of prior period expenses - HELD THAT - In the instant case there is no dispute that the entire expenses got crystallized during the year under consideration and hence, we do not find any infirmity in the order of the ld. CIT(A) granting deduction towards prior period expenses to the assessee. Accordingly, ground No.3 raised by the revenue is dismissed. Rectification of mistake - double deduction - Reduction of premium on prepayment of debentures attributable to the eligible undertaking according to the ld. AO, which was reduced by the ld. AO while computing the deduction u/s.80IA of the Act while framing the assessment - HELD THAT - CIT(A) had rightly observed that there is double disallowance of ₹ 2,44,86,356/- pursuant to the said action of the ld. AO in view of the fact that the ld. AO had granted deduction towards premium on prepayment of debentures of ₹ 4,32,67,811/- only while framing assessment and had further reduced this sum of ₹ 2,44,86,356/- from the claim of deduction u/s.80IA of the Act. We find that the ld. CIT(A) had directed the ld. AO to verify the record in this regard and rectify the mistake. We are not able to appreciate the grievance, if any, for the revenue in this regard

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Set off of unabsorbed depreciation of earlier years while claiming deduction under Section 80IA.
3. Deduction on prepayment of debentures and its related impact while computing deduction under Section 80IA.
4. Disallowance under Section 40A(9) regarding payments made to local schools.
5. Disallowance of expenses of shelved projects and feasibility studies.
6. Disallowance of discount on the issue of Euro Bonds.
7. Disallowance under Section 40(a)(ia) for non-deduction of TDS on retention money.
8. TDS on payments to foreign parties.
9. Disallowance of prior period expenses.
10. Double disallowance of premium on prepayment of debentures.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The Tribunal dismissed the assessee's grounds 1(a) and 1(b) as not pressed. For the revenue's ground, the Tribunal noted that the assessee had sufficient own funds to cover the investments that yielded exempt income, thus no interest on borrowed funds could be disallowed under Section 14A. The Tribunal upheld the computation of disallowance at ?59,06,284 as provided by the assessee, rejecting the applicability of Rule 8D for the year under consideration.

2. Set off of Unabsorbed Depreciation under Section 80IA:
The Tribunal found that the AO's action of reducing the brought forward depreciation from the deduction claimed under Section 80IA was incorrect. It relied on the Supreme Court's decision in ACIT vs. Velayudhaswamy Spinning Mills Pvt. Ltd., which held that losses from years prior to the initial assessment year could not be notionally brought forward. Consequently, the Tribunal allowed the assessee's grounds.

3. Deduction on Prepayment of Debentures:
The Tribunal noted that the premium on prepayment of debentures was allowed as a deduction in the earlier year due to a technical quashing of the assessment order. However, the Tribunal directed the AO to reconsider this issue if the revenue succeeds in its appeal for earlier years, thus keeping the issue open for future adjudication.

4. Disallowance under Section 40A(9):
The Tribunal allowed the assessee's claim for payments made to local schools, treating it as staff welfare expenditure. It relied on the jurisdictional High Court's decision in PCIT vs. State Bank of India, which held that genuine staff welfare expenses were not hit by Section 40A(9).

5. Disallowance of Expenses of Shelved Projects:
The Tribunal upheld the CIT(A)'s decision allowing the deduction of expenses related to shelved projects and feasibility studies, noting that similar claims had been allowed in the assessee's case in earlier years.

6. Disallowance of Discount on Issue of Euro Bonds:
The Tribunal upheld the CIT(A)'s decision to allow the discount on the issue of Euro Bonds, noting that the assessee had consistently claimed and been allowed this deduction in earlier years. It rejected the AO's rationale linking this to foreign exchange gains.

7. Disallowance under Section 40(a)(ia):
The Tribunal found the AO's disallowance of ?9.15 Crores for non-deduction of TDS on retention money to be without basis. It noted that the retention money did not accrue to the payee in the year of retention and that the assessee had generally deducted TDS on retention amounts. The Tribunal upheld the CIT(A)'s decision to delete the disallowance.

8. TDS on Payments to Foreign Parties:
The Tribunal upheld the CIT(A)'s direction to the AO to follow the findings of the ITO International Transaction, TDS Range-2, Mumbai, which had examined the payments and determined which were taxable. The Tribunal found no merit in the revenue's appeal on this issue.

9. Disallowance of Prior Period Expenses:
The Tribunal upheld the CIT(A)'s decision to allow prior period expenses, noting that the expenses were crystallized in the year under consideration. It relied on the jurisdictional High Court's decision in CIT vs. Mahanagar Gas Ltd., which supported the consistent accounting treatment of such expenses.

10. Double Disallowance of Premium on Prepayment of Debentures:
The Tribunal upheld the CIT(A)'s direction to the AO to rectify the mistake of double disallowance of ?2,44,86,356, noting that the AO had already allowed the premium on prepayment of debentures as a deduction.

Outcome:
The appeals of the assessee for A.Y. 2006-07 and 2007-08 were allowed, and the appeals of the revenue for the same assessment years were dismissed.