2020 (2) TMI 70 - AT - Income Tax

Income recognition - determining estimated total profit/loss from the project - Extension of Time (EoT) claim excluded from estimated contract value for the purposes of recognizing revenue under Accounting Standard-7 (AS-7) - HELD THAT - Undisputed fact is that the assessee itself has included a sum of ₹ 150 crores as EOT claim on the basis of expected probable realisation of the claim. Though the addition made by the AO has been deleted by ld CIT(A), which has also been confirmed by us, on the basis of AS-7 and surrounding facts, yet the fact remains that the assessee has included a sum of ₹ 150 crores with regard to the EOT claim on the basis of its past experience relating to the settlement of EOT claims. Hence, we are of the view that the principles adopted for deleting the enhancement made by the AO cannot be equally applied to the amount of ₹ 150 crores included by the assessee in the contract receipts on the basis of accounting principles consistently followed by it. Accordingly we confirm the order of Ld CIT(A) on this issue. Corporate Social Responsibility (CSR) Disallowance - addition on the ground that those expenses were not incurred for business purposes - HELD THAT - We set aside the order of the Ld. CIT(A) on the above ground of appeal and restore the matter to the file of the AO to pass an order afresh after (i) following the order of the Tribunal in assessee s own case for AY 2008-09 to AY 2010-11 and (ii) examining whether the expenditure has been incurred for the purposes of business. We direct the assessee to file the relevant documents/evidence before the AO. Claim for set off of share of loss from AOP under the provisions of section 70 against business income the appellant is not allowable - see assessee's own case 2013 (1) TMI 367 - ITAT MUMBAI Deduction u/s 80IA(4) rejected - HELD THAT - This issue was decided against the assessee by the co-ordinate bench of Tribunal in the assessee s own case relating to AY 2003-04 and 2007-08, referred above by holding that the assessee has acted as a Contractor in various projects and not as a developer. Consistent with the view taken in the above said years, we uphold the order of Ld CIT(A) on this issue TP adjustment - assessee advanced an unsecured loan to its AE for the purpose of acquisition of shares - at LIBOR 400 bps OR LIBOR 300 bps on loan given by the appellant to its Associated Enterprise - HELD THAT - The tenure of loan was 3 years and interests were payable @ LIBOR 300 bps on completion of tenure of the loan. The assessee submitted before the TPO that the rate of interest charged by it is more than the prevailing market rate. The TPO has reproduced the submissions of the assessee on comparability of lending to the AE by Exim Bank and by the assessee at page 22 and 23 of his order. The TPO has tabulated at page 23 the comparable security of the two loans. However, we find that the TPO has not examined the submission by the assessee that the security that the assessee had was better than the security obtained by Exim Bank. As the TPO has arrived at the ALP at LIBOR 400 bps, without contradicting the submission of the assessee and the adoption of LIBOR 400 bps is not based on any reasoning, we delete the transfer pricing adjustment TP adjustment - Corporate Guarantee Commission - HELD THAT - We are of the considered view that aptly in the case of Everest Kento 2015 (5) TMI 395 - BOMBAY HIGH COURT while commercial banks were stated to be charging 3% for guarantee, the Hon ble Bombay High Court upheld ALP at 0.5%. Following the same, we hold that the Corporate Guarantee Commission be charged at 0.5%. Thus the 1st to 8th grounds of appeal are partly allowed. Re-compute the disallowance u/s 14Ar.w.r. 8D - CIT-A stating that disallowance not to exceed exempt income - HELD THAT - CIT(A) clearly indicates that he has directed the AO to re-compute the disallowance u/s 14A by following the judicial decisions. We agree with the order of the Ld. CIT(A) on the above issues. Only addition we make is to direct the AO to also follow Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT Excluding disallowance u/s 14A while computing Book Profit u/s 115JB - HELD THAT - CIT(A) has rightly directed the AO to follow the order of the Special Bench of the Tribunal in the case of ACIT v. Vireet Investment Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI for excluding the disallowance u/s 14A while computing Book Profit u/s 115JB.

Summary

Issues Involved:
1. Exclusion of unaccepted EOT Claim from estimated contract value.
2. Disallowance of Corporate Social Responsibility (CSR) expenses.
3. Disallowance under Section 14A of the Income Tax Act.
4. Set off of share of loss from AOP.
5. Deduction under Section 80-IA(4) of the Income Tax Act.
6. Determination of Arm’s Length Price (ALP) for loan to Associated Enterprise (AE).
7. Corporate Guarantee Commission as an international transaction.
8. Re-computation of disallowance under Section 14A for exempt income and strategic investments.
9. Exclusion of disallowance under Section 14A while computing Book Profit under Section 115JB.

Detailed Analysis:

1. Exclusion of Unaccepted EOT Claim from Estimated Contract Value:
The assessee argued that the unaccepted Extension of Time (EOT) claim of ?200 crores should be excluded from the estimated contract value for recognizing revenue under Accounting Standard-7 (AS-7). Both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim based on earlier years' orders. The Tribunal followed its previous decision in the assessee’s own case for AYs 2008-09 to 2010-11, confirming the inclusion of the EOT claim in the contract receipts and dismissed the first ground of appeal.

2. Disallowance of Corporate Social Responsibility (CSR) Expenses:
The AO disallowed CSR expenses of ?2.92 crores, stating they were not incurred for business purposes. The CIT(A) upheld this disallowance based on the Tribunal's decision in earlier years. The Tribunal noted that the issue required fresh examination to determine if the expenses were for business purposes. It set aside the CIT(A)'s order and remanded the matter to the AO for re-examination, directing the assessee to provide relevant documents.

3. Disallowance under Section 14A of the Income Tax Act:
The assessee did not press this ground of appeal. Consequently, the Tribunal dismissed the third ground of appeal as not pressed.

4. Set Off of Share of Loss from AOP:
The AO and CIT(A) both followed earlier Tribunal orders which disallowed the set-off of share of loss from AOP under Section 70 of the Income Tax Act. The Tribunal upheld this decision, referencing the Bombay High Court's ruling in the case of Lalitha M Bhat and dismissed the fourth ground of appeal.

5. Deduction under Section 80-IA(4) of the Income Tax Act:
The AO and CIT(A) denied the assessee's claim for deduction under Section 80-IA(4), asserting that the assessee acted as a contractor rather than a developer. The Tribunal, following its earlier decisions, upheld this view and dismissed the fifth ground of appeal.

6. Determination of Arm’s Length Price (ALP) for Loan to Associated Enterprise (AE):
The AO, based on the Transfer Pricing Officer's (TPO) findings, adjusted the interest rate on a loan to the AE from LIBOR + 300 bps to LIBOR + 400 bps, resulting in an adjustment of ?1,14,19,186/-. The Tribunal found that the TPO did not adequately examine the assessee's submissions regarding the security of the loan. It deleted the transfer pricing adjustment, allowing the sixth ground of appeal.

7. Corporate Guarantee Commission as an International Transaction:
The CIT(A) had deleted the adjustment made by the AO for corporate guarantee commission, treating it as not an international transaction. The Tribunal partially upheld the CIT(A)’s decision but directed that a corporate guarantee commission be charged at 0.5%, following the precedent set by the Bombay High Court in the Everest Kento case. Thus, the Tribunal partly allowed the first to eighth grounds of the Revenue’s appeal.

8. Re-computation of Disallowance under Section 14A for Exempt Income and Strategic Investments:
The CIT(A) directed the AO to re-compute the disallowance under Section 14A, ensuring it did not exceed the exempt income and eliminating strategic investments not earning dividends. The Tribunal agreed with the CIT(A) and added that the AO should also follow the Supreme Court decision in Maxopp Investment Ltd. v. CIT.

9. Exclusion of Disallowance under Section 14A while Computing Book Profit under Section 115JB:
The CIT(A) directed the AO to follow the Special Bench decision in the case of ACIT v. Vireet Investment Pvt. Ltd. The Tribunal upheld this direction and dismissed the eleventh ground of appeal.

Conclusion:
The appeals were partly allowed, with specific directions for re-examination and re-computation on certain issues. The Tribunal upheld several decisions of the lower authorities while providing relief to the assessee on others.