2020 (6) TMI 564 - AT - Income Tax

Treatment of expenditure - Revenue or capital expenditure - assessee is engaged in the business of manufacturing and sale of on-road automobiles, agricultural tractor implements, engine parts and accessories of motor vehicle rendering services, property development activity, financing, investment and transport solutions - HELD THAT - Expenditure incurred in connection with acquisitions, shall have to be treated as capital expenditure and shall form part of cost of investment which the assessee could claim as cost at the time of sale of investment. A sum as represent expenditure incurred in respect of acquisitions which never materialised and hence, squarely allowable as revenue expenditure in as much as no capital asset came into existence of the assessee which would derive enduring benefit of the assessee. Allowability of deduction towards provision for warranties - HELD THAT - There is no dispute with regard to the claim of deduction for provision for warranty based on scientific working and analysis made by the assessee and in order to avoid multiplicity of proceedings we are inclined to allow the claim of provision for warranty - ground raised by the assessee is allowed. Disallowance u/s 14A r.w.r 8D - HELD THAT - Both the parties fairly agreed that only those investments which had actually yielded exempt income during the year to the assessee are to be considered for the purpose of working out the disallowance made in the third limb of Rule 8D(2) of the Rules. This issue is now very well settled by the decision of ROTORK CONTROLS INDIA (P) LTD. VERSUS COMMISSIONER OF INCOME TAX, CHENNAI 2009 (5) TMI 16 - SUPREME COURT , we direct the ld. AO to consider only those investments which had actually yielded exempt income during the year while working out the disallowance under third limb of Rule 8D(2) of the Rules. Transfer pricing adjustment made in respect of corporate guarantee fee - HELD THAT - ALP of corporate guarantee fee in respect of old guarantees to be determined at 3% in line with the decision take by this Tribunal for A.Y.2009-10 as the matter is pending before the Hon ble Jurisdictional High Court in assessee s own case. In respect of fresh guarantees issued during the year, the ALP of the same should be determined at 1%, being the same rate already disallowed by the assessee in the return of income, despite the aforesaid jurisdictional High Court decision holding the rate to be at 0.5%.While recomputing this disallowance, it is needless to mention that the ld. AO should reduce the amount already disallowed towards guarantee fee by the assessee in the return of income. ALP adjustment made in respect of interest on loan to AE - HELD THAT - DR submitted that let the ld. TPO be directed to adopt LIBOR 300 basis points for benchmarking international transaction in respect of loan given to AE. But we find that this Tribunal in assessee s own case for the A.Y.2009-10 had specifically directed to consider only LIBOR rate at the relevant time and determined the ALP of the said transaction accordingly. Respectfully following the said judicial precedent, we direct the ld. AO accordingly Disallowance made u/.s.40(a)(ia) of the Act in respect of year end provisions - HELD THAT - Entire break-up had been duly submitted by the assessee before the lower authorities and the same are enclosed in page 234 of the paper book and the figures mentioned thereon are fairly ascertainable and are not mere adhoc provisions. Respectfully following the said decision of the Tribunal in assessee s own case for A.Y.2009-10, 2019 (4) TMI 1867 - ITAT MUMBAI we have no hesitation in directing the ld. AO to delete the disallowance u/s. 40(a)(ia) Treatment of industrial promotion subsidy incentive to be treated as capital receipt - See SHREE BALAJI ALLOYS 2016 (4) TMI 1161 - SC ORDER and M/S. CHAPHALKAR BROTHERS PUNE 2017 (12) TMI 816 - SUPREME COURT Treatment of industrial promotion subsidy incentive - Revenue or capital receipt - HELD THAT - As relying on PONNI SUGARS CHEMICALS LTD. 2008 (9) TMI 14 - SUPREME COURT we direct the ld. AO to treat the receipt of industrial promotion subsidy incentive under the 2007 incentive scheme as capital receipt Disallowance of deduction of difference in exchange rate - exchange loss debited to 'Foreign Currency Monetary Item Translation Difference Account' is written-off to the profit loss account over the life of the corresponding foreign currency loans - HELD THAT - Foreign currency loans utilised for acquiring fixed assets and overseas investments is to be capitalised and correspondingly depreciation need to be granted to the assessee. In this, the exchange loss pertaining to the period till the asset was put to use should alone be capitalised and thereafter, the same should be allowed as revenue expenditure. Foreign exchange loss attributable to other monetary items debited to FCMITA as per AS 11 of ICAI should be allowed as revenue expenditure. Allowability of expenses on Employees Stock Options (ESOP) - HELD THAT - We find that the ld. AR fairly submitted that in principle, this issue is decided in favour of the assessee by the Special Bench in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE but still in the interest of justice, a specific direction need to be given to the ld. AO to allow deduction in respect of all options exercised during the year equal to the difference between the exercise price and the market price at the time of exercise of the option, as held in the case of Biocon Ltd, instead of the market price at the time of grant of option. We find lot of force in the said argument of the ld. AR and direct the ld. AO accordingly. Accordingly, the concise ground raised by the assessee is allowed for statistical purposes. Deduction of provision for post retirement scheme for housing and for post retirement medical schemes - HELD THAT - This issue under dispute is squarely covered in favour of the assessee by the coordinate bench decision of this Tribunal in the case of Hindustan Petroleum Corporation Ltd. 2014 (7) TMI 290 - ITAT MUMBAI . We have gone through the said Tribunal order and find that this issue is squarely decided in favour of the assessee on similar facts and circumstances. We also find that assessee had filed a modified ground of appeal before us on without prejudice basis that in any case, at least the actual payment made during the year towards post retirement scheme for housing and post retirement medical benefit should be allowed as deduction. We find that assessee is indeed entitled for deduction on provision basis itself and hence, it is not required to adjudicate the modified ground of appeal filed before us and the ld. AO is hereby directed to grant deduction for provision for post retirement scheme for housing in the sum and post retirement medical scheme in the sum while giving effect to this order. Scheme of reduction for legal fees recovered but disallowed on gross basis - HELD THAT - It is not the case of the revenue that the claim made by the assessee herein to reduce the same is ingenuine. We would like to place reliance on the decision of the Hon ble Jurisdictional High Court in the case of Pruthvi Brokers and Shareholders Pvt. Ltd.. 2012 (7) TMI 158 - BOMBAY HIGH COURT and accordingly, entertain the claim of the assessee and direct the ld. AO to reduce a sum of ₹ 3,33,56,000/- from the total income while giving effect to this order. Taxability of interest income on tax free bonds - HELD THAT - It is not in dispute that the said interest income is not liable for taxation. Merely, because the assessee had erroneously offered a particular sum for taxation, the revenue cannot take advantage of the ignorance of the assessee and bring to tax a receipt which is outside the ambit of definition of income under the Act. Direct the ld. AO to exclude from the total income a sum towards interest on tax free bonds by granting exemption for the same while giving effect to this order. Capital gain computation on sale of land - reference to DVO - AO adopted the valuation determined by the Stamp Valuation Authority and observed that the sale is higher than the sale consideration received by the assessee and accordingly computed the capital gains in terms of Section 50C - allowability of the tolerance limit of 5% to 10% range variation - HELD THAT - We find that the ld. AR made elaborate arguments disputing the valuation report given by the DVO by suggesting various reasons. He also pleaded that any variation in full value of consideration between the DVO report and the actual sale consideration cannot be automatically treated as income and tolerance limit of 5% to 10% range should be granted to the assessee. We find that valuation report of DVO had been received after the order of ld. DRP and hence, the ld. AO did not have the benefit of the said DVO report either while framing the assessment or while giving the effect to the order of ld. DRP. Hence, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue to the file of the ld. AO with a direction to recompute the capital gains on sale of land in terms of Section 50C(2) of the Act based on the reports obtained from DVO in respect of the subject mentioned properties. The assessee is at liberty to make all arguments including seeking relief of the tolerance limit of 5% to 10% variation in sale consideratiuon vis- -vis the consideration fixed by the Stamp Valuation Authority or consideration adopted by the DVO. Deduction u/s.80IC in respect of Rudrapur unit of the assessee - HELD THAT - We find for A.Y.2009-10, reference to Transfer Pricing Officer under the category of specified domestic transactions, were not provided for in the statute at the relevant point of time. Whereas for A.Y.2013-14 i.e. the year under appeal, the statute had duly provided for determining of arm s length price in respect of specified domestic transactions. It is not in dispute that the transactions of Rudrapur Unit duly fall within the ambit of specified domestic transactions . Hence, we hold that once the profitability disclosed by the assessee for Rudrapur unit had been accepted to be at arm s length by the ld. TPO in the transfer pricing adjustment, the same cannot be further disturbed by the ld. AO by making some disallowance or by adopting different method of determining the profitability and especially in view of the fact that no adverse findings were recorded by the lower authorities, with regard to profitability of Rudrapur Unit. In view of the aforesaid findings, we direct the ld. AO to accept the claim of deduction u/s.80IC of the Act made by the assessee in the return of income. Determination and carry forward of long term capital loss in respect of shares held in Mahindra Shubhlabh Services Ltd., arising upon reduction in share capital by that company - HELD THAT - We find that the lower authorities had not allowed the loss by placing reliance on the decision of the Special Bench of Mumbai Tribunal in the case of Bennett and Coleman Co. Ltd., 2011 (9) TMI 1 - ITAT MUMBAI wherein it was held that capital loss on reduction of share capital cannot be allowed. We find that the ld. DRP erred in holding that requisite evidence was not available during the hearing to substantiate that Mahindra Shubhlabh Services Ltd., is not a wholly owned subsidiary of assessee company. AR submitted that assessee holds 83.05% shares in Mahindra Shubhlabh Services Ltd., which was duly substantiated before the ld. DRP. We find that reduction of share capital had taken place in paid up value of equity shares in terms of Section 100 of Companies Act 1956. We find that there was extinguishment of the rights of the assessee and hence, this reduction has resulted into a capital loss in the hands of the shareholder i.e. assessee company. In the instant case, there is absolutely no dispute that the assessee company i.e. Mahindra and Mahindra Ltd., received no consideration on reduction of capital - Decided against assessee Additional ground for non-taxability of interest on tax free bonds - computation of income for both under normal provisions of the Act as well as in computation of profits u/s.115JB of the Act - HELD THAT - Additional ground deserves to be admitted as it does not involve verification of the primary facts on record and more especially in view of the undisputed fact that the entire details of interest income had been duly filed before the ld. AO by the assessee during the course of assessment proceedings. Admittedly, the said interest income included interest earned on tax free bonds which is not liable for taxation at all both under normal provisions of the Act as well as in the computation of book profits u/s.115JB Merely because, the assessee had erroneously offered the same in the return of income, the same cannot be brought to tax by the revenue. The law is now well settled that only just and right tax should be collected from the right person by the revenue. Hence, we deem it fit and admit the additional ground and direct the ld. AO to reduce the sum towards interest income on tax free bonds both under normal provisions of the Act as well as in the computation of book profits u/s.115JB of the Act. We also place reliance on the decision of Pruthvi Brokers and Shareholders Pvt. Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT in support of the proposition. Accordingly, the additional ground No.2 raised by the assessee is allowed. Allowance of weighted deduction u/s.35(2AB) - HELD THAT - To grant additional deduction of ₹ 106.59 Crores u/s.35(2AB). The assessee to furnish amended form 3CL issued by DSIR in respect of Swaraj R D complex and on verification of the same, the ld. AO is directed to decide the allowability for claim of deduction u/s.35(2AB) of the Act thereof. TDS u/s 194H - dealer incentive paid by the assessee - disallowance u/s.40(a)(ia) - HELD THAT - Relationship of principal and agent does not exist between the company and dealer. Since the dealer does not render any services to the company, in lieu of incentives received by them, the question of deduction of tax at source on the said payment within the ambit of Section 194H of the Act does not arise. We find that the ld. AO however, did not agree to the said proposition of the assessee and concluded that the dealer has rendered services in the course of buying and selling of vehicles by acting in the capacity of agent and that there is no difference between the term discount and commission . With these observations, the ld. AO concluded that the said payment would fall within the ambit of Section 194H of the Act warranting deduction of tax at source, for which there would be disallowance u/s.40(a)(ia) of the Act was made in the assessment. We find that this issue has already been decided in favour of the assessee for A.Y.2008-09 as confirmed by SC 2018 (7) TMI 635 - SC ORDER Seeking benefit of set off of brought forward loss and unabsorbed depreciation relating to demerged business of Mahindra Automobile Distributor Pvt. Ltd. (MADPL) - HELD THAT - We find that assessee company had claimed set off of brought forward loss and unabsorbed depreciation relating to demerged business of MADPL in the return of income. However, the ld. AO had allowed the said benefit based on the assessed loss of MADPL. We find that MADPL is in appeal for differential amount of loss. In case if MADPL succeeds in appeal and becomes entitled to the full or part loss of ₹ 108.13 Crores then, correspondingly, the availability of business loss and unabsorbed depreciation loss in the hands of the assessee company for set off would also increase. Hence, in the interest of justice and fair play, we deem it fit and appropriate to give the direction to the ld. AO to modify the assessment order and allow the loss to the assessee company as consequential effect consequent to determination of final loss of MADPL.

Summary

Issues Involved:
1. Treatment of expenditure as capital or revenue.
2. Allowability of deduction towards provision for warranties.
3. Disallowance made under Section 14A of the Income Tax Act.
4. Transfer pricing adjustment for corporate guarantee fee.
5. ALP adjustment for interest on loan to AE.
6. Disallowance under Section 40(a)(ia) for year-end provisions.
7. Weighted deduction under Section 35(2AB).
8. Disallowance under Section 40(a)(ia) for dealer incentives.
9. Taxability of industrial promotion subsidy incentive.
10. Deduction for difference in exchange rate.
11. Allowability of ESOP expenses.
12. Deduction for post-retirement schemes.
13. Reduction for legal fees recovered.
14. Taxability of interest income on tax-free bonds.
15. Capital gains on sale of land.
16. Deduction under Section 80IC for Rudrapur unit.
17. Credit for TDS, TCS, and foreign tax.
18. Set-off of brought forward loss and unabsorbed depreciation.
19. Additional grounds for non-taxability of interest on tax-free bonds.

Detailed Analysis:

1. Treatment of Expenditure as Capital or Revenue:
The assessee incurred expenses amounting to ?17,45,55,863/- for various acquisitions. The Assessing Officer (AO) treated these expenses as capital expenditure, which was upheld by the Dispute Resolution Panel (DRP). The tribunal partly allowed the assessee’s appeal, treating ?7,71,46,633/- as capital expenditure forming part of the cost of investment and ?9,74,09,230/- as revenue expenditure since no capital asset came into existence.

2. Allowability of Deduction Towards Provision for Warranties:
The assessee made a provision for warranties amounting to ?50,11,63,331/-. The AO treated this provision as unascertained and uncrystallized liability. The tribunal allowed the provision based on scientific working and analysis, referring to the Supreme Court decision in Rotork Controls India Pvt. Ltd. vs. CIT.

3. Disallowance Made Under Section 14A:
The AO disallowed ?39,21,14,000/- under Section 14A, which was confirmed by the DRP. The tribunal directed the AO to consider only those investments that yielded exempt income during the year for disallowance purposes.

4. Transfer Pricing Adjustment for Corporate Guarantee Fee:
The AO determined the ALP for corporate guarantee fee at 3%, upheld by the DRP. The tribunal directed the AO to apply 3% for old guarantees and 1% for fresh guarantees issued during the year, despite jurisdictional High Court decisions holding the rate at 0.5%.

5. ALP Adjustment for Interest on Loan to AE:
The AO applied LIBOR plus 5% basis points for benchmarking the interest on loans to AE. The tribunal directed the AO to consider only the LIBOR rate at the relevant time, following the precedent in the assessee’s own case for A.Y.2009-10.

6. Disallowance Under Section 40(a)(ia) for Year-End Provisions:
The AO disallowed ?33,78,54,976/- for year-end provisions, upheld by the DRP. The tribunal deleted the disallowance, following its decision in the assessee’s own case for A.Y.2009-10.

7. Weighted Deduction Under Section 35(2AB):
The AO did not grant the weighted deduction for certain R&D expenses. The tribunal directed the AO to grant additional deduction of ?106.59 Crores and verify the amended form 3CL for ?26.96 Crores.

8. Disallowance Under Section 40(a)(ia) for Dealer Incentives:
The AO disallowed dealer incentives under Section 40(a)(ia), upheld by the DRP. The tribunal allowed the appeal, following the jurisdictional High Court and Supreme Court decisions in favor of the assessee.

9. Taxability of Industrial Promotion Subsidy Incentive:
The AO treated the industrial promotion subsidy of ?45,36,95,084/- as revenue receipt. The tribunal held it as a capital receipt, following the Delhi Tribunal decision in LG Electronics India Pvt. Ltd. and Supreme Court decisions in similar cases.

10. Deduction for Difference in Exchange Rate:
The AO disallowed the exchange fluctuation loss of ?119,37,27,592/- as notional and contingent. The tribunal allowed depreciation on the capital portion of the exchange fluctuation loss and treated the remaining as revenue expenditure.

11. Allowability of ESOP Expenses:
The AO disallowed ?47,03,67,525/- towards ESOP expenses as capital expenditure. The tribunal allowed the deduction, following the Special Bench decision in Biocon Ltd.

12. Deduction for Post-Retirement Schemes:
The AO disallowed provisions for post-retirement schemes amounting to ?751,45,000/- and ?206,30,000/-. The tribunal allowed the deduction based on actuarial valuation, following the decision in Hindustan Petroleum Corporation Ltd.

13. Reduction for Legal Fees Recovered:
The AO disallowed the claim for reduction of ?3,33,56,000/- in legal fees recovered, upheld by the DRP. The tribunal allowed the reduction, following the jurisdictional High Court decision in Pruthvi Brokers and Shareholders Pvt. Ltd.

14. Taxability of Interest Income on Tax-Free Bonds:
The AO taxed ?5,29,12,192/- as interest income on tax-free bonds, upheld by the DRP. The tribunal directed the AO to exclude this amount from taxable income, following the jurisdictional High Court decision in Pruthvi Brokers and Shareholders Pvt. Ltd.

15. Capital Gains on Sale of Land:
The AO adopted the valuation by the Stamp Valuation Authority for computing capital gains. The tribunal remanded the issue to the AO for recomputation based on the Departmental Valuation Officer’s report.

16. Deduction Under Section 80IC for Rudrapur Unit:
The AO restricted the deduction under Section 80IC to ?57,01,61,441/-. The tribunal allowed the assessee’s claim for ?135,35,79,000/-, as the transactions were subject to transfer pricing assessment and no adverse findings were recorded.

17. Credit for TDS, TCS, and Foreign Tax:
The tribunal directed the AO to verify and allow the credit for TDS, TCS, and foreign tax as claimed by the assessee.

18. Set-Off of Brought Forward Loss and Unabsorbed Depreciation:
The tribunal directed the AO to allow the set-off of brought forward loss and unabsorbed depreciation based on the final determination of loss for Mahindra Automobile Distributor Pvt. Ltd.

19. Additional Grounds for Non-Taxability of Interest on Tax-Free Bonds:
The tribunal admitted the additional ground and directed the AO to exclude ?3,47,19,107/- towards interest on tax-free bonds from taxable income.

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, and the appeal of the revenue was dismissed. The tribunal provided specific directions for each issue, ensuring compliance with legal precedents and principles.