2021 (12) TMI 989 - AT - Income Tax

Deduction of interest (premium) on Zero Coupon Convertible Bonds(ZCCB) - Disallowances being the proportionate claim of the premium on ZCCBs written off during the tenure of Zero Coupon Convertible Bonds - Assessee is following mercantile methods of accounting - different treatment in books of accounts and income tax computation - HELD THAT - Accounting entries are not determinative of the true nature of the transaction. The accounting treatment has been given in compliance with the companies Act provisions. There is no claim of any violation in this regard. The claim in income tax Act has to be made as per mercantile system and consistent method accounting. A liability which has been accrued has to be provided and allowed. It is not that liability is allowed only on the payment basis. Adverse inference cannot be taken for non deduction of TDS as reasons submitted by the assessee are cogent. As submitted above, these bonds are listed on Singapore Stock Exchange and till redemption on maturity, the beneficiary of the premium is not known. In such circumstances in absence of the identification of recipient and TDS deduction cannot be given credit for. Further, though not directly on this issue the CBDT circular on deep discount bond referred above also provides that on similar issue, TDS has to be deducted on the point of redemption. Furthermore as submitted, at the time of redemption tax was deducted at source in accordance with the provisions of the Act. This submission has not been disputed. Hence, this reasoning for rejection is also not sustainable. The argument of revenue that the amount has not been debited in account is also not sustainable as the assessee has very much been debited in the account to the debit of share premium account. The Companies Act duly permits the same. Hence, the plea that amount is contingent and not debited is not correct, when revenue itself has accepted the debit in this regard of the amount to the share premium account. Revenue authorities cannot take a shifting stand that the amount is correctly accrued and debit to share premium account is correct, but the same is still a contingent amount. The assessee could have very well debited the amount to the profit and loss account, but it has chosen to debit the amount to share premium account in the books, which is also permitted as per Companies Act. No infraction of law in this regard was pointed out. Since revenue has accepted the debit of the premium to share premium account, it is clear that revenue has accepted that redemption premium amount has been accepted as accrued. In the present case there is nothing on record that the borrower had exercised any such discretion. In this view of the matter, the said case law SM HOLDING AND FINANCE P. LTD. 2003 (3) TMI 44 - BOMBAY HIGH COURT is fully applicable on the facts of the case and the liability on account of debenture redemption premium is liable to be deducted from the income and cannot be treated as contingent liability. The amount of debenture redemption premium is accrued and liable to be deducted. Hence, in the background of aforesaid discussion and precedents, we set aside the orders of the authorities below, and decide the issue in favour of the assessee. Disallowance u/s. 14A - suo-moto disallowance made by assessee - HELD THAT - We note that assessee has given the reasons for expenditure, which as per the assessee is disallowable u/s.14A. Assesee has provided the basis of working of disallowance, however, the same has been rejected by the authorities below without cogent reasoning. The AO and Ld.CIT(A) are mentioning that it is difficult to accept that assessee has incurred only that much of expenditure. This is no reason at all. It is settled law that proper satisfaction is necessary in this regard in rejecting assessee s contentions. See M/S. BOMBAY STOCK EXCHANGE LTD. 2019 (11) TMI 105 - BOMBAY HIGH COURT wherein as come to the conclusion that nonsatisfaction as recorded by the Assessing Officer for rejecting the sou motu disallowances claimed by the assessee is not done as required under section 14A(2) . Corporate guarantee commission - TPO has calculated the ALP @ 6.67 - HELD THAT - We note that Hon ble Bombay High Court in CIT vs.Everest Kento Cylinders Ltd. Kanto, 2015 (5) TMI 395 - BOMBAY HIGH COURT has confirmed the ITAT order of 0.5% corporate guarantee commission - Thus we direct that disallowance should be restricted @0.5%

Summary

Issues Involved:
1. Disallowance of proportionate premium on Zero Coupon Convertible Bonds (ZCCB).
2. Disallowance under Section 14A of the Income Tax Act.
3. Upward adjustment of interest on loans to Associated Enterprises (AEs).
4. Adjustment of corporate guarantee fee.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Premium on ZCCBs:
The assessee claimed a deduction for the premium payable on ZCCBs, which was disallowed by the AO on grounds that the expense was not debited to the profit and loss account but adjusted against the share premium account, and no TDS was deducted on such expenses. The AO also treated the liability as contingent, not ascertained, and capital in nature. The CIT(A) upheld the AO's decision, stating that the premium was treated as a contingent liability in the books of accounts and the provisions of the Companies Act do not mandate such an adjustment against the share premium account.

Upon appeal, the ITAT noted that the accounting entries are not determinative of the true nature of the transaction and that the claim in the income tax return should be based on the mercantile system of accounting. The tribunal referred to several case laws, including the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT, which supported the deduction of such liabilities on a pro-rata basis. The tribunal also noted that the non-deduction of TDS was justified as the bonds were listed on the Singapore Stock Exchange, and the beneficiary of the premium was not known until redemption. The tribunal allowed the assessee's claim for deduction of the proportionate premium on ZCCBs.

2. Disallowance under Section 14A:
The AO disallowed additional expenses under Section 14A read with Rule 8D, beyond the amount disallowed by the assessee, on the grounds that it was difficult to accept that the assessee incurred only the amount claimed. The CIT(A) confirmed the AO's order but provided a minor relief on the proportionate interest disallowed.

The ITAT, however, noted that the AO and CIT(A) did not provide cogent reasons for rejecting the assessee's method of disallowance. The tribunal emphasized the need for proper satisfaction under Section 14A(2) before applying Rule 8D, as held by the Bombay High Court in the case of Bombay Stock Exchange Ltd. The tribunal allowed the assessee's ground, setting aside the orders of the authorities below.

3. Upward Adjustment of Interest on Loans to AEs:
The AO and TPO proposed an upward adjustment of interest on loans granted to AEs, applying an interest rate of LIBOR plus 300 basis points. The CIT(A) upheld this adjustment.

However, the assessee did not press this ground during the appeal before the ITAT, and hence, this ground was dismissed as not pressed.

4. Adjustment of Corporate Guarantee Fee:
The TPO calculated the ALP for the corporate guarantee fee at 6.67%, which the CIT(A) reduced to 2%, following his decision for AY 2010-11. The assessee appealed, arguing that the adjustment should be restricted to 0.50% in line with the Bombay High Court's decision in CIT vs. Everest Kento Cylinders Ltd.

The ITAT agreed with the assessee, noting the Bombay High Court's decision that corporate guarantees issued by a parent company to its subsidiary should be treated differently from bank guarantees. The tribunal directed that the disallowance should be restricted to 0.5%.

Conclusion:
The ITAT allowed the assessee's claims regarding the deduction of the proportionate premium on ZCCBs and the disallowance under Section 14A, while restricting the adjustment for the corporate guarantee fee to 0.5%. The grounds related to the upward adjustment of interest on loans to AEs were dismissed as not pressed. The appeals were partly allowed in favor of the assessee.