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2023 (4) TMI 1087 - AT - Income TaxDeduction u/s. 35D - Denial of claim in respect of its Steel Division which was sold in the financial year 2000-01 on the ground that once the unit is transferred, no such deduction would be admissible - HELD THAT - As we observe from the record that identical issue is decided in favour of the assessee for the A.Y. 2004-05 2019 (2) TMI 2078 - ITAT MUMBAI as held that on a perusal of section 35D shows that the Act is silent in the case when a unit is sold. Section 35D(5) of the Act refers to the transfer before the expiry of the period of 10 years to another Indian company in a scheme of amalgamation and section 35D(5A) refers to the transfer before the expiry of the period in a scheme of demerger. There is no clause in the section which debars the assessee from claiming the expenses as a write off on sale of the undertaking. We, therefore, do not find any reason for declining the claim of the assessee - Decided in favour of assessee. Determine the annual value of the property - CIT(A) upholding that to determine standard rent of property under the Bombay Rent Control Act the reasonable rate of return should be @12% of market value of land and investment in building as against 6% on land and 7% on investment in building as per the report of architects - HELD THAT - We observe from the record that identical issue is decided for the A.Y.2004-05 2019 (2) TMI 2078 - ITAT MUMBAI assessee s contention is that the direction should be given in accordance with the earlier year ITAT order that the annual value of the property should be 12% of the cost and the land and building. In this regard, we note that it is the plea of the Revenue that making an annual value as a percentage of the cost of the land and building forever will lead to annual value fixed for eternity which can never be permitted. We find that the ITAT earlier had confirmed the same direction. The matter is already before the Hon'ble Jurisdictional High Court. We do not find any cogent reason to depart from the earlier order of the Tribunal in the assessee s own case. Hence, we follow the same and direct that the ITAT s order in assessee s own case on this issue be followed, as the same has not been reversed by the Hon'ble Jurisdictional High Court - Decided against assessee. Disallowance u/s.14A - Assessee submitted that there is no nexus between money borrowed and investment made in the earlier years and the investments were made out of sale proceeds, therefore no interest can be disallowed u/s. 14A - HELD THAT - Various investments were made by the assessee in earlier Assessment Years which is backed with the details of the non interest borrowing funds available with the assessee in the respective years. Therefore, assessee has brought to our notice clearly that assessee has enough funds at their disposal to make various investments in the sister concerns as well as with the various investments. As assessee has utilized non interest borrowing funds for making the various investments. Therefore, the Assessing Officer cannot invoke Rule 8D(2)(ii) of I.T. Rules to disallow the interest expenditure u/s. 14A of the Act, accordingly, ground raised by the assessee is allowed. MAT - Addition of provision of doubtful debt and advances to book profits of the assessee u/s. 115JB - HELD THAT - We observe from the method of account followed by the assessee is that it created provision every year and carry forwards the same amount to the subsequent year and if there are any actual bad debts it is adjusted during the year. Therefore, from this method of accounting adopted by the assessee clearly indicates that it is only a provision not actually bad debts written off by the assessee. As assessee has created merely a provision for doubtful debts without there being any actual bad debts which needs to be claimed as bad debts. Therefore, the conclusion reached by the tax authorities are just and proper. Therefore, the ground raised by the assessee is accordingly dismissed. TP Adjustment - Disallowance of commission payment paid to its Associate Enterprise being Jaykayorg AG - HELD THAT - The benchmarked commission payment by applying the (TNMM) method which has been accepted by the TPO can be applied in the present assessment year considering the fact that no transfer pricing adjustment was proposed by the assessee and also the method proposed by the assessing officer is also not one of the approved method u/s 92C and Income Tax Rules. No reason not to accept the subsequent year findings in the impugned assessment year. In our view, the assessee also not submitted any study and adopting the tested method in the subsequent year in assessee s own case will justify the proper calculation of ALP for this transaction. Benchmark for agency commission adopted by the TPO in the subsequent year should be the base for the present assessment year under consideration. Therefore, we direct the AO/TPO to adopt the TNMM method for benchmarking for this assessment year also. Hence, the ground raised by the assessee is allowed. Enhancement of assessment by disallowance of an amount in respect of swap charges - HELD THAT - We observe that the assessee had charged to profit and loss on account of interest swap charges paid to Bank of America for relevant period and also incurred interest expenditure, which was payable to State Bank of India and Citibank against the borrowed funds though ECB. These liabilities are ascertained liabilities and period cost for the year end. The nomenclature used by the assessee as Provision, whereas in reality it is ascertained liabilities for the period and the respective banks have charged the interest as well as swap charges considering the billing period. What is relevant is the ascertainment of liability for the period not the nomenclature used to charge the same to the profit and loss statement. Even the Ld CIT(A) while dealing with the Book Profit u/s.115JB, considered the same provisions as ascertained liabilities. One cannot apply two rules to interpret the same nature of expenditure. Delete the enhancement proposed by the Ld CIT(A) in his order. In the result, the ground raised by the assessee is allowed. Increase of book profit by the amount of provision for redemption of debentures - HELD THAT - We observed that similar issue was considered and adjudicated by the Hon'ble Jurisdictional High Court in assessee s own case for the A.Y.1997-98 in the case of CIT v. Raymond Ltd. 2012 (4) TMI 128 - BOMBAY HIGH COURT and decided the issue in favour of the assessee as held mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961 - Decided against revenue.
Issues Involved:
1. Deduction under Section 35D for Steel Division sold. 2. Determination of standard rent under the Bombay Rent Control Act. 3. Disallowance under Section 14A for interest on borrowed funds. 4. Disallowance of short-term capital loss on mutual fund transactions. 5. Provision for doubtful debt under Section 115JB. 6. Transfer pricing adjustment under Section 92CA(3) for commission paid to AE. 7. Enhancement of assessed income for swap charges and interest on loans. Detailed Analysis: 1. Deduction under Section 35D for Steel Division Sold: The assessee argued that the deduction under Section 35D should be allowed despite the sale of its Steel Division. The tribunal noted that similar issues were previously decided in favor of the assessee for earlier assessment years. The tribunal observed that Section 35D does not explicitly disallow deductions upon the sale of a unit, unlike in cases of amalgamation or demerger. Thus, following the principle of consistency and previous tribunal decisions, the tribunal allowed the deduction under Section 35D. 2. Determination of Standard Rent under the Bombay Rent Control Act: The assessee contested the determination of standard rent at 12% of the market value of land and investment in the building, advocating for 6% on land and 7% on building investment as per an architect's report. The tribunal noted that this issue had been consistently decided against the assessee in earlier years, including for A.Y. 2004-05. Following the precedent, the tribunal upheld the determination at 12%, dismissing the assessee's ground. 3. Disallowance under Section 14A for Interest on Borrowed Funds: The assessee argued that no interest-bearing funds were used for investments yielding exempt income. The tribunal reviewed the balance sheet, noting substantial reserves and surplus exceeding the investments. It concluded that the assessee used non-interest-bearing funds for investments, thus disallowing the interest expenditure under Section 14A was unjustified. The tribunal allowed the assessee's ground. 4. Disallowance of Short-term Capital Loss on Mutual Fund Transactions: The assessee did not press this ground during the hearing. Consequently, the tribunal dismissed it as not pressed. 5. Provision for Doubtful Debt under Section 115JB: The tribunal examined whether the provision for doubtful debts constituted an ascertained liability. The assessee argued that the provision was for actual bad debts written off, citing the Supreme Court's decision in CIT v. HCL Comnet Systems and Services Ltd. However, the tribunal found that the assessee habitually created provisions without actual write-offs, thus treating it as an unascertained liability. The tribunal dismissed the assessee's ground. 6. Transfer Pricing Adjustment under Section 92CA(3) for Commission Paid to AE: The assessee challenged the TPO's adjustment based on a 5% mark-up on costs, arguing that the TNMM method used in subsequent years should apply. The tribunal noted that the TPO's method was not one of the specified methods under Section 92C and that the AE's services were more than liaison work. The tribunal directed the AO/TPO to adopt the TNMM method for benchmarking the commission payment, allowing the assessee's ground. 7. Enhancement of Assessed Income for Swap Charges and Interest on Loans: The assessee argued that swap charges and interest were ascertained liabilities, despite being labeled as provisions. The tribunal agreed, noting that the liabilities were period costs and the nomenclature did not change their nature. The tribunal deleted the enhancement proposed by the Ld. CIT(A), allowing the assessee's ground. Revenue's Appeal: 1. Determining Standard Rent of Property: The tribunal applied the same reasoning as in the assessee's appeal, allowing the revenue's ground. 2. Increase of Book Profit by Provision for Redemption of Debentures: The tribunal noted that similar issues were decided in favor of the assessee by the Hon'ble Jurisdictional High Court in earlier years. Following the precedent, the tribunal dismissed the revenue's ground. Conclusion: The appeals filed by both the assessee and the revenue were partly allowed, with specific grounds being upheld or dismissed based on consistency with previous decisions and detailed analysis of the facts and applicable laws.
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