2023 (3) TMI 714 - AT - Income Tax

TP Adjustment - Addition on account of purchase of MS Ingots - HELD THAT - As we find no infirmity in the order of Ld. CIT(Appeals) in the instant set of facts. CIT(Appeals) has categorically observed that there is a qualitative difference between the MS ingots sold by the AE to the assessee as compared to those sold by the AE to third parties. Assessee has been able to produce substantial evidence to prove that the difference in prices is due to the quality of products sold. TPO has accepted the contention of the assessee for the months of December 2013, February 2014 and March 2014 and the TPO has not made any addition, and TPO has made addition only for the month of January 2014 and that too only on the basis that during the month of January 2014 sales made by the AE to third parties were significantly higher as compared to other months, and therefore, there is in our view no rationale in making the adjustment only for the month of January 2014. Accordingly, we find no infirmity in the order of CIT(Appeals),who after detailed discussion in the order, has deleted the adjustment made by the TPO on this issue. Depreciation on expenses incurred for increase in share capital - assessee admitted that such expenditure was treated as part of fixed assets and depreciation has been claimed of such expenditure, since expenditure is not allowed as revenue expenditure on increase in authorized capital, the assessee cannot claim such expenditure by capitalising the same and claiming depreciation thereon - HELD THAT - The assessee is in appeal before us against the aforesaid addition confirmed by Ld. CIT(Appeals). In the case of International Computers Indian Manufacture Ltd. 2015 (3) TMI 502 - BOMBAY HIGH COURT the Bombay High Court held that Depreciation is not allowable on capitalised expenditure on issue of shares; such expenditure would fall within provision of section 35D. Similar view was held in the cases of Autolite India Ltd Vs CIT 2003 (7) TMI 53 - RAJASTHAN HIGH COURT and CIT Vs Mahindra Ugine and Steel Co Ltd 2000 (2) TMI 26 - BOMBAY HIGH COURT where the Courts have denied depreciation on such expenses which were capitalised. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) on this issue so as to call for any interference. Ground number 1 of the assessee s appeal is dismissed. Addition on account of interest on the basis of Form 26AS offered to tax in subsequent year - HELD THAT - We are in agreement with the view of the Ld. CIT(Appeals) that since the assessee follows mercantile system of accounting, this interest income should have been offered to tax in assessment year 2014-15 as well. However, in the interest of justice, once this interest income is subject to tax in assessment year 2014-15, then consequential relief may be allowed to the assessee by the Revenue if the said interest income has been offered to tax by the assessee in assessment year 2015-16, after carrying out the necessary verifications.

Summary

Issues Involved:
1. Deletion of adjustment/addition of Rs. 2,05,23,752 on account of purchase of MS ingots.
2. Depreciation on expenses incurred for increase in share capital for Rs. 5,24,023.
3. Addition of Rs. 2,16,920 on account of interest based on Form 26AS offered for tax in the subsequent year.

Summary:

Issue 1: Deletion of adjustment/addition of Rs. 2,05,23,752 on account of purchase of MS ingots

The Department's appeal contested the deletion of the adjustment/addition of Rs. 2,05,23,752 on account of the purchase of MS ingots from the assessee's associated enterprise (AE). The assessee argued that the higher prices paid were due to the superior quality of MS ingots compared to those sold to non-related parties. The Transfer Pricing Officer (TPO) had accepted this explanation for all months except January 2014, leading to a downward adjustment for that month. The CIT(A) allowed the appeal of the assessee, noting that substantial evidence, including third-party confirmations, factory test reports, and chemical analysis, substantiated the quality difference. The Tribunal found no infirmity in the CIT(A)'s order, affirming that the qualitative difference justified the price variation and dismissed the Department's appeal.

Issue 2: Depreciation on expenses incurred for increase in share capital for Rs. 5,24,023

The assessee's appeal challenged the disallowance of depreciation on expenses related to the increase in authorized capital. The CIT(A) held that while the AO could not compel the assessee to treat such expenses as revenue expenditure, the depreciation claim on capitalized expenses was not allowable. The Tribunal upheld the CIT(A)'s decision, referencing precedents that denied depreciation on capitalized share issue expenses, and dismissed the assessee's appeal on this ground.

Issue 3: Addition of Rs. 2,16,920 on account of interest based on Form 26AS offered for tax in the subsequent year

The assessee's appeal also contested the addition of Rs. 2,16,920 for interest income not offered in the return but reflected in Form 26AS. The CIT(A) upheld the AO's addition, emphasizing that under the mercantile system of accounting, interest income should be taxed on accrual. The Tribunal agreed but directed that if the interest income was taxed in the subsequent year, the Revenue should grant consequential relief after verification. Thus, the ground was partly allowed.

Conclusion:

The Department's appeal was dismissed, and the assessee's cross objection was partly allowed. The Tribunal upheld the CIT(A)'s findings on the qualitative difference in MS ingots, disallowed depreciation on capitalized share issue expenses, and directed potential relief for double taxation of interest income.