2020 (5) TMI 82 - AT - Income Tax

Addition of Leave encashment claim(s) - Deduction on payment basis or accrual basis - HELD THAT - CIT-DR fails to dispute the CIT(A) s identical lower appellate discussion in these three assessment year(s) has gone by actual payments only u/s 43B(f) of the Act. The CIT(A) has also taken note of the hon'ble jurisdictional high court s decision in Exide Industries Ltd. vs. Union of India 2007 (6) TMI 175 - CALCUTTA HIGH COURT quashing foregoing statutory provision itself as ultra vires and its operation stayed in hon'ble apex court s to conclude that assessee s mere provision of leave encashment does not deserve to be accepted. We find neither any legality nor irregularity in the CIT(A) s action under challenge. The Revenue s identical first substantive grievance in these three assessment year(s) fails therefore. Addition u/s 14A r.w.r. 8D - HELD THAT - There is hardly any dispute that the Rule 8D of the Income Tax Rules comes into play for the purpose of quantification of disallowance of expenditure pertaining to an assessee s exempt income. The same applies from assessment year(s) 2008-09 onwards as held in Godrej Boyee Manufacturing Co. Ltd. vs. DCIT 2017 (5) TMI 403 - SUPREME COURT upholding hon'ble Bombay high court s decision to this effect. Coming to assessee s dividend income, case file(s) suggests that it had declared suo motu expenses. AO's corresponding regular assessment disallowed proportionate interest as well as administrative expenses under Rule 8D(2)(ii)(iii). We proceed in this backdrop and observe that since the assessee could neither explain correctness of its suo motu expense; whether falling under any or all three head(s) nor there was any indication that the corresponding administrative expenditure indirect in nature stated included qua the exempt income yielding investments or not. We make it clear that this tribunal s co-ordinate bench s decision in REI Agro Ltd. vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA holds that the impugned administrative disallowance has to be computed going by the exempt income yielding investments only. We therefore decline the assessee s arguments that the Assessing Officer s action invoking sec. 14A / 8D disallowance was without recording any satisfaction. Computation of the impugned disallowance going by the three head(s) of direct , proportionate interests and administrative expenditures under Rule 8D(2)(ii)(iii) of the Income Tax Rules w.e.f. assessment year 2008-09 onwards, we are of the opinion that the Income Tax Settlement Commission s adjudication in the said preceding three assessment year(s) restricting the impugned disallowance pertaining to three AYs of exempt income does not form a binding precedent being per incarium as per CIT vs. B.R. Constructions 1992 (6) TMI 13 - ANDHRA PRADESH HIGH COURT . We thus reverse the CIT(A) s above lower appellate findings to this effect. Indirect head of administrative expenditure @ 0.5% of average value of investment under Rule 8D(2)(iii) - HELD THAT - Only exempt income yielding investments deserve to be included for the purpose of determining the corresponding figures. We therefore restore the Revenue s instant second substantive grievance to the extent of Rule 8D administrative disallowance computation back to the Assessing Officer. See REI AGRO LTD, KOLKATA VERSUS DCIT CENTRAL CIRCLE-XXVII, KOL 2013 (9) TMI 156 - ITAT KOLKATA No sec. 115JB MAT computation qua the impugned sec. 14A read with Rule 8D disallowance Additional depreciation claim @ 10% u/s 32(1)(iia) since it had put its corresponding fixed assets to use in earlier assessment year(s) than installation thereof in the relevant previous year. TP Adjustment - corporate guarantee amount to an international transaction - HELD THAT - As relying on M/S EMAMI LIMITED 2019 (5) TMI 1371 - ITAT KOLKATA a corporate guarantee as not amounting to an international transactions u/s. 92B of the Act. All these corresponding grounds fail therefore. Provision for foreseeable loss in contract revenue for the purpose of normal as well as MAT computation - AO disallowed the same as a contingent liability since not crystallized in the relevant previous year - HELD THAT - Hon'ble apex court s landmark judgment in Commissioner of Income Tax vs. Chainrup Sampatram 1953 (10) TMI 2 - SUPREME COURT held long back that although the principles of conservatism and prudence in accounting require that no anticipated profits are to be recorded as income until realised, the converse is not true regarding anticipated losses which could be booked at the first sign of reasonable probability. We conclude in view of all these foregoing facts that the assessee was very well justified in claiming the impugned foreseeable liability provision in these two assessment year(s) regarding its project works by in compliance of AS-7 of the Act. The Revenue s instant substantive grievance fails therefore. Disallowing assessee s employees contribution to PF ESI respectively by invoking sec. 36(1)(via) of the Act since the same had not been paid within the due date as prescribed in the specific Acts - HELD THAT - Hon'ble jurisdictional high court in Commissioner of Income Tax vs. M/s Vijay Shree Ltd. 2011 (9) TMI 30 - CALCUTTA HIGH COURT holds that such a disallowance deserves to be deleted in case the assessee has deposited the ESI / PF contribution in question before the due date of filing of its return of income which is not in dispute before us. We thus affirm the CIT(A) s action deleting the impugned disallowance on this count alone. Market-to-market loss derived from the derivative transactions - HELD THAT - CIT(A) has admittedly taken note of various judicial precedents i.e. Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT that the impugned mark-to-market loss is allowable to be recognized in respect of the outstanding derivative contracts pertaining to regular course of business. Hon'ble apex court s decision in CIT vs. Indra Industries 2000 (1) TMI 44 - SUPREME COURT also holds that Board s circular are binding only on the departmental authorities. Coming to sec. 115JB computation relevant to the impugned MAT loss - As decided in Himadri Chemicals 2018 (9) TMI 528 - ITAT KOLKATA such a provision is not a contingent liability and not liable to be included therefore. The CIT(A) s findings are affirmed therefore. Bogus management consultancy services - AO invoked the impugned disallowance mainly on the ground that the payee herein alleged to have provided consultancy services to the assessee s turned out to a shell entry in mere accommodation entry business - HELD THAT - CIT-DR fails to dispute that the assessee had placed on record all the relevant evidence of the said recipient. Hon'ble jurisdictional high court s decision in Inbuilt Merchant Pvt. Ltd. 2014 (3) TMI 1107 - CALCUTTA HIGH COURT has already set identical issue to treat that such a compliance by way of all detailed evidence forms sufficient reason to prove rendering of the services as well as genuineness of payments. We thus affirm the CIT(A) s findings deleting the impugned management consultancy services disallowance as well. Notional interest income addition received / receivable from M/s SPL for loans provided - HELD THAT - No fault in the CIT(A) s action going only by real income principle in view of the various judicial precedents that such a notional income in case of defaulting entity a NPA does not lead to assessment of taxable income. Department could not add any notional income in an assessee s hands just because a payer had deposited TDS qua the same. We wish to re-emphasis here that there is material whatsoever which could suggest payment credit of any interest income in assessee s books. See TOYO ENGG. INDIA LIMITED 2005 (9) TMI 237 - ITAT BOMBAY-J .We thus uphold the CIT(A) s findings under challenge. Adding educational cess u/s 40(a)(ii) - HELD THAT - This issue of educational cess disallowance u/s 40(a)(ia) is no more res integra as in Chembal Fertilizers Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT holds that the relevant statutory provision to this effect as well as the CBDT s circular issued way back on 18.05.1967 do not include Cess .

Summary

Issues Involved:
1. Allowance of Leave Encashment Claims
2. Section 14A/Rule 8D Disallowance
3. Additional Depreciation Disallowance
4. ALP Adjustment for Corporate Guarantee
5. ALP Adjustment for Interest on Loans to AEs
6. Provision for Foreseeable Loss in Contract Revenue
7. Disallowance of Employees' Contribution to PF & ESI
8. Provision for Market-to-Market Loss on Derivative Transactions
9. Disallowance of Management Consultancy Services Payment
10. Notional Interest Income Addition
11. Educational Cess Disallowance

Detailed Analysis:

1. Allowance of Leave Encashment Claims
The Revenue's appeals challenged the CIT(A)'s action allowing leave encashment claims on a payment basis. The CIT(A) relied on the jurisdictional High Court's decision in Exide Industries Ltd. vs. Union of India, which quashed the statutory provision as ultra vires. The Tribunal found no irregularity in the CIT(A)'s decision, rejecting the Revenue's grievance.

2. Section 14A/Rule 8D Disallowance
The Revenue contested the CIT(A)'s restriction of disallowance under Section 14A/Rule 8D to 3% of dividend income. The Tribunal noted that the CIT(A) followed the Income Tax Settlement Commission's order for earlier years. However, the Tribunal reversed the CIT(A)'s findings, emphasizing the statutory formula under Rule 8D(2)(ii) and (iii) and remanded the matter to the Assessing Officer for re-computation.

3. Additional Depreciation Disallowance
The CIT(A) allowed the assessee's claim for additional depreciation on machinery used for less than 180 days in the preceding year. The Tribunal upheld the CIT(A)'s decision, noting that the issue was settled by various judicial precedents, including the jurisdictional ITAT's decisions.

4. ALP Adjustment for Corporate Guarantee
The Revenue challenged the CIT(A)'s deletion of ALP adjustments for corporate guarantees. The CIT(A) held that corporate guarantees do not amount to international transactions. The Tribunal affirmed this view, citing various judicial precedents, including the ITAT's decision in Bharti Airtel Limited vs. Addl. CIT, which held that corporate guarantees provided without cost do not constitute international transactions.

5. ALP Adjustment for Interest on Loans to AEs
The CIT(A) deleted the ALP adjustments for interest on loans to AEs, applying the LIBOR rate as the benchmark. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's interest rates were higher than those for third-party comparables and that the TPO's methodology was inappropriate.

6. Provision for Foreseeable Loss in Contract Revenue
The CIT(A) deleted the disallowance of provisions for foreseeable losses, which were made in compliance with AS-7. The Tribunal affirmed the CIT(A)'s decision, citing judicial precedents that support the recognition of such provisions under the principle of prudence.

7. Disallowance of Employees' Contribution to PF & ESI
The Revenue's disallowance of employees' contributions to PF & ESI was deleted by the CIT(A), as the contributions were deposited before the due date of filing the return. The Tribunal upheld this decision, citing the jurisdictional High Court's ruling in Commissioner of Income Tax vs. M/s Vijay Shree Ltd.

8. Provision for Market-to-Market Loss on Derivative Transactions
The CIT(A) allowed the provision for market-to-market losses on derivative transactions, treating them as real losses. The Tribunal affirmed this view, referencing the Supreme Court's decisions in CIT vs. Woodward Governor India P. Ltd. and other judicial precedents.

9. Disallowance of Management Consultancy Services Payment
The CIT(A) deleted the disallowance of payments made for management consultancy services, holding that the transactions were substantiated with proper documentation. The Tribunal upheld this decision, citing the jurisdictional High Court's decision in CIT vs. Inbuilt Merchant Pvt. Ltd.

10. Notional Interest Income Addition
The CIT(A) deleted the addition of notional interest income, as the penal interest was not demanded or received by the assessee. The Tribunal affirmed this decision, emphasizing the principle of real income and citing relevant judicial precedents.

11. Educational Cess Disallowance
The Tribunal condoned the delay in filing the assessee's cross objections and allowed the claim for educational cess disallowance, following the Rajasthan High Court's judgment in Chambal Fertilizers & Chemicals Ltd. and other judicial precedents.

Conclusion:
The Tribunal partly allowed the Revenue's appeals for statistical purposes and fully allowed the assessee's cross objections, directing the Assessing Officer to recompute the disallowances accordingly.