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2024 (7) TMI 1529 - HC - Income TaxAO jurisdiction to go beyond the net profit shown in the Profit and Loss Account - addition made u/s 115JB deleted by ITAT - deletion of foreign exchange transaction difference accrued to the assessee per the financial statement for the relevant previous year in respect of foreign currency monetary transactions -HED THAT - Issue answered by ITAT bearing in mind the judgment passed by the Supreme Court in Apollo Tyres Limited 2002 (5) TMI 5 - SUPREME COURT .wherein it was concluded that the AO did not have the jurisdiction to go beyond the net profit shown in the Profit and Loss Account except to the extent provided under the Explanation to Section 115JA. Foreign exchange rate fluctuation - ITAT has relied on Sutlej Cotton Mills Ltd 1978 (9) TMI 1 - SUPREME COURT and held that any foreign exchange gain or loss on capital asset will be adjusted with the value of such asset. Additions u/s 14A and Section 36(1)(iii) - ITAT correctly observes that the Show Cause Notice SCN itself records that the assessee had not earned any exempt income during the assessment year and even investments were made in its subsidiary for commercial expediency for which no borrowings were specifically undertaken. Therefore, the question of disallowing any expenditure would not arise. The ITAT further held that the interest paid u/s 36(1)(iii) of the Act was an allowable deduction as the borrowed funds were duly utilised by the assessee for its own business. TP Adjustment on interest earned by the assessee in connection with loans granted to its Associated Enterprise - Respondents correctly held with respect to the deletion of the Transfer Pricing Adjustment on account of interest earned by the assessee in connection with loans granted to its Associated Enterprise AE . Cash payments u/s 40A(3) read with Rule 6DD(k) - ITAT correctly deleted addition observing cash payments u/s 40A(3) read with Rule 6DD(k) alongwith development charges, consultancy charges payments made by the assessee and interest paid on amount advanced to various third party companies. Disallowance on interest paid in respect of delay in payment of Indirect Taxes (Service Tax and VAT) - ITAT correctly held interest paid in respect of delay in payment of indirect taxes i.e., Service Tax and VAT is not penal in nature. The decision relied upon by Learned Counsel for the Assessee squarely apply to the facts and circumstances of the case. We, accordingly, set aside the orders of the authorities below and delete the entire addition. Assessment Year of the Composite Scheme of Arrangement and Amalgamation Appointed Date - Attempt to revise the Appointed and Effective Date which were made part of the Scheme - It becomes pertinent to note that the appeal proceeds on the foundation that the transactions should be viewed as pertaining to Assessment Year AY 2012-13 which is clearly misconceived. This, since when one keeps in mind the Appointed Date as being the close of business on 31 March 2011, the relevant AY would be 2011-12. Once we come to hold that the transactions clearly do not form part of AY 2012-13, the questions which are sought to be canvassed clearly disintegrate. Undisputedly, in terms of the Scheme of Arrangement which came to be approved by the concerned High Court on 20 January 2012, the Appointed Date as defined means the closing hours of business on 31st day of March, 2011 or such other date as may be fixed by the High Court of Judicature at Bombay . Insofar as questions pertaining Section 28(iv) of the Act are concerned, it was rightly observed by the ITAT that the net increase in the General Reserves of the respondent-assessee can neither be perceived as a benefit or perquisite nor can it be perceived to have arisen out of carrying on of any business or profession by the respondent-assessee. Addition regarding Section 56(2)(viia) cannot be applied in respect of this transaction as it is a case where the transfer in the case of assessee falls under section 47 (vii) of the Income-Tax Act. We, accordingly, delete the addition under Section 56(2)(viia) also. Thus, it is apparent that the appeal fails to raise any substantial questions of law. It shall consequently stand dismissed.
Issues Involved:
1. Assessment Year of the Composite Scheme of Arrangement and Amalgamation. 2. Validity and genuineness of the Scheme. 3. Applicability of Section 28(iv) of the Income Tax Act, 1961. 4. Addition under Section 56(2)(viia) of the Act. 5. Retrospective application of amendments to Section 47(vii). 6. Applicability of Section 47(vii) to the receipt of shares. 7. Addition under Section 115JB regarding General Reserves. 8. Addition due to foreign exchange transaction differences. 9. Classification of foreign exchange gain as capital account accretion. 10. Addition under Section 14A of the Act. 11. Deduction under Section 36(1)(iii) for interest paid. 12. Transfer Pricing adjustment on interest charged on loans to Associated Enterprise. 13. Addition under Section 40A(3) for payments to M/s Aishwarya Enterprises. 14. Disallowance of consulting charges paid to M/s Siva Ventures Limited. 15. Addition of interest on amounts advanced to M/s Charita City Homes Jaunpur Private Limited. 16. Addition of notional interest on long outstanding balance of imprest. 17. Addition of interest expense on overdraft facility provided as interest-free advance. 18. Addition for development charges paid to M/s Aishwarya Enterprises. 19. Disallowance of interest paid for delay in payment of Indirect Taxes. Issue-wise Detailed Analysis: 1. Assessment Year of the Composite Scheme of Arrangement and Amalgamation: The court noted that the entire premise of the appeal regarding questions 1 to 6 was based on an attempt to revise the Appointed and Effective Date of the Scheme. The court held that the transactions should be viewed as pertaining to Assessment Year (AY) 2011-12, not AY 2012-13. The Appointed Date was the close of business on 31 March 2011, making the relevant AY 2011-12. 2. Validity and Genuineness of the Scheme: The court observed that the Scheme, approved by the High Court, could not be regarded as a colorable device to avoid tax payment. The validity and genuineness of the Scheme were upheld. 3. Applicability of Section 28(iv) of the Income Tax Act, 1961: The ITAT correctly observed that the net increase in the General Reserves of the respondent-assessee could neither be perceived as a benefit or perquisite nor as arising out of carrying on any business or profession. 4. Addition under Section 56(2)(viia) of the Act: The Tribunal rightly observed that the provisions of Section 47(vii) as amended by the Finance Act 2012 were retrospective in nature and clarificatory. The amendment was made to cure a defect in Section 47(vii). The Tribunal held that the provisions of Section 56(2)(viia) could not be applied to this transaction as it fell under Section 47(vii). 5. Retrospective Application of Amendments to Section 47(vii): The ITAT held that the amendments made to Section 47(vii) by the Finance Act 2012 were clarificatory and had retrospective application. This was to cure a defect in the existing provisions. 6. Applicability of Section 47(vii) to the Receipt of Shares: The court upheld that the receipt of shares in consequence of the Scheme fell within the exception provided under Section 47(vii) of the Act. 7. Addition under Section 115JB Regarding General Reserves: The court noted that questions 7 to 9 were answered by the ITAT based on the Supreme Court judgment in Apollo Tyres Limited Vs. Commissioner of Income Tax. The AO did not have jurisdiction to go beyond the net profit shown in the Profit and Loss Account except as provided under the Explanation to Section 115JA. 8. Addition Due to Foreign Exchange Transaction Differences: The ITAT relied on Sutlej Cotton Mills Ltd. Vs. CIT, holding that any foreign exchange gain or loss on a capital asset would be adjusted with the value of such asset. The foreign exchange gain was considered a capital account accretion. 9. Classification of Foreign Exchange Gain as Capital Account Accretion: The ITAT held that the loan advanced by the assessee was a long-term asset, constituting a capital asset, and the relatable foreign exchange gain would be a capital account accretion. 10. Addition under Section 14A of the Act: The ITAT observed that the Show Cause Notice recorded that the assessee had not earned any exempt income during the assessment year. Investments were made in its subsidiary for commercial expediency, with no specific borrowings undertaken. Therefore, disallowing any expenditure was not justified. 11. Deduction under Section 36(1)(iii) for Interest Paid: The ITAT held that the interest paid under Section 36(1)(iii) was an allowable deduction as the borrowed funds were utilized by the assessee for its own business. 12. Transfer Pricing Adjustment on Interest Charged on Loans to Associated Enterprise: The ITAT correctly answered the deletion of the Transfer Pricing Adjustment on account of interest earned by the assessee in connection with loans granted to its Associated Enterprise. 13. Addition under Section 40A(3) for Payments to M/s Aishwarya Enterprises: The ITAT made appropriate observations regarding cash payments under Section 40A(3) of the Act read with Rule 6DD(k) of the Income Tax Rules, 1962. 14. Disallowance of Consulting Charges Paid to M/s Siva Ventures Limited: The ITAT addressed the disallowance of consultancy charges paid by the assessee. 15. Addition of Interest on Amounts Advanced to M/s Charita City Homes Jaunpur Private Limited: The ITAT addressed the addition of interest made in respect of amounts advanced to third-party companies. 16. Addition of Notional Interest on Long Outstanding Balance of Imprest: The ITAT addressed the addition of notional interest in respect of the long outstanding balance of imprest. 17. Addition of Interest Expense on Overdraft Facility Provided as Interest-Free Advance: The ITAT addressed the addition of interest expense pertaining to an overdraft facility provided as an interest-free advance. 18. Addition for Development Charges Paid to M/s Aishwarya Enterprises: The ITAT addressed the addition made in respect of development charges paid to M/s Aishwarya Enterprises. 19. Disallowance of Interest Paid for Delay in Payment of Indirect Taxes: The ITAT held that the interest paid for delay in payment of indirect taxes (Service Tax and VAT) was not penal in nature. The addition was deleted. Conclusion: The court found no justification to interfere with the ITAT's view on questions 7 to 19. The appeal failed to raise any substantial questions of law and was consequently dismissed.
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