2024 (6) TMI 866 - AT - Income Tax

Addition in respect of notional interest - assessee had given interest free advances to the brokers of NBOT Exchange - HELD THAT - These advances were said to have been given in connection with the future transactions for edible oil. It is noted that, these advances had been assigned to M/s Nova Trading Pvt. Ltd. in FY 2007-08. From the audited financial statements found it is noted that these advances did not exist and stood at NIL as on 01.04.2009 and continued to remain NIL as on 31.03.2010. We therefore note that the assessee has shown that these advances in question neither existed nor were outstanding during the year under consideration. We further note that the audited book results had not been rejected by the AO nor had he invoked Section 145(3) of the Act and held the financial statements to be unreliable. On these given facts, we find merit in the Ld. CIT(A) s finding that, when there was no outstanding balance in the name of these three brokers during the year, the disallowance of notional interest in relation thereto, was erroneous. The reliance placed by the Revenue on the appellate orders passed in assessee s own case in AYs 2006-07 2007-08 are found to be factually distinguishable. In those years, the advances given to the three brokers were very much alive and outstanding in the books of the assessee and therefore the authorities were justified in enquiring into the nature and purpose of these advances and to ascertain whether any interest paid on the borrowings were attributable to such outstanding advances. In the present case before us however, the fundamental fact itself is not present viz., there is no amount outstanding as receivable from these three brokers in the books of accounts for the AY 2010-11. For the aforesaid reasons, we find that the Ld. CIT(A) had rightly held that the impugned disallowance made by the AO following the orders for AYs 2006-07 2007-08 was factually erroneous. Disallowance on account of inflated import purchases made - addition was made relying on the statements recorded under oath during the course of search and seizure action and clearly admitted by the assessee that the same were with paper companies to inflate the turnover - CIT(A) deleted addition - HELD THAT - As assessee had entered into transaction involving high-sea sales of edible oil and its repurchase with its associate concerns. The data set out by the AO at Page 4 of his assessment order reveals that, the assessee had derived gains from the transaction of high sea sales. As noted by the AO, the imports worth Rs. 2380.09 crores had been sold for Rs. 2452.46 crores. It is thus ex- facie evident the transaction of high-sea sales resulted in gain to the assessee and not a loss, as erroneously alleged by the AO. These goods are thereafter noted to have been re-purchased at a price lower than the original import price itself, viz. Rs. 2240.09 crores. As rightly noted by the Ld. CIT(A), these facts show that the transactions had resulted losses in the group/associate companies to whom these high-sea sales were made and from whom thereafter re-purchases were done. The assessee, on the other hand, had in fact derived profits and these transactions did not result in loss or over-charging of any expense. We thus find merit in the factual finding rendered by the Ld. CIT(A) that these transactions neither resulted in any artificial loss to the assessee nor amounted to inflation of purchase and therefore there was no justification for making the impugned disallowance in the hands of the assessee. Revenue is noted to have cited the disclosure of additional income given by the Ruchi Soya Group in the course of search to justify the impugned disallowance made by the AO - As we note that the said disclosure was made in the hands of two different entities namely, M/s Spectra Realities Pvt. Ltd. and M/s Soya Marketing Pvt. Ltd. and therefore the said disclosure was of no relevance to the case of the assessee. It is noted that the Ld. CIT(A) had examined the said disclosure and found that even the issue on which the disclosure was made, was unrelated, and did not pertain to these purchase transactions of edible oil by the assessee. Moreover, unlike the above disclosure wherein the losses incurred in trading of gold commodities were found to be only on paper and thus non-genuine, it is not in dispute, in the present case, that these imports were physically made by the assessee and cleared from the custom authorities. Hence, overall, we countenance the above findings of the Ld. CIT(A) on this aspect. Statements of the two employees cited by the AO in his order - Having perused these statements, we find that these two persons had admitted to the contemporaneous fact that, apart from being employees of the assessee company, they were also directors in the group/associate companies. CIT, DR was unable to show us as to how these statements in any way suggested that the transaction of high-sea sales and re-purchase thereafter was not genuine and more particularly resulted in inflation of purchases made by the assessee. We therefore find merit in the submissions of the Ld. AR that these statements did not contain anything adverse relating to the import of edible oil and high-sea sales and hence were of no relevance to the issue before us. We hold that the finding of the AO that, there was inflation of import prices, was based on incorrect understanding of facts. Overall, it is noted that there was profit derived by the assessee and that the value of purchases recorded in the books was in fact lower and not inflated. Accordingly, the action of the Ld. CIT(A) deleting the impugned addition for these reasons is upheld. Hence, this ground of the Revenue stands dismissed. Assessee has lodged new claims for deduction, which were not made in the return of income originally filed u/s 139 - additional claim/s in the abated assessment - HELD THAT - The assessee is entitled to lodge new claims in the abated assessments u/s 153A of the Act. As noted earlier, the provisions of the Act, which would be otherwise applicable in case of return filed under Section 139(1) of the Act, would also continue to apply in case of return filed under Section 153A of the Act. Hence, ordinarily under the regular provisions, the assessee is legally permitted to raise additional claims before Appellate Authorities, which were not claimed in the return filed u/s 139 of the Act. For this, gainful reference may be made to the decision of Pruthvi Brokers Shareholder 2012 (7) TMI 158 - BOMBAY HIGH COURT as held that an assessee is allowed to raise additional new claims before Appellate Authorities, although not claimed in the return filed u/s 139 of the Act. Having regard to the decisions of B.G. Shirke Construction Technology P Ltd. 2017 (3) TMI 879 - BOMBAY HIGH COURT JSW Steel Ltd. 2020 (2) TMI 307 - BOMBAY HIGH COURT the same analogy would be applicable with equal force in the proceedings u/s 153A of the Act for abated assessments as well. We accordingly hold that the assessee is entitled to raise additional claim/s in the abated assessment for AY 2010-11 in the proceedings u/s 153A of the Act. Accordingly, the Additional Ground No. 7 raised in support of the cross objections is found to be maintainable and the preliminary objection of the Revenue is rejected. Claim of export incentive received under FPS VKGUY scheme as capital receipt in computing tax liability under normal and under section 115JB - HELD YHAT - We find merit in the claim of the Ld. AR that the subsidies received by the assessee under the Foreign Trade Policy was in the nature of capital receipt not liable to tax. Treatment of subsidies while computing book profit u/s 115JB - We find that in the case of PCIT vs Harinagar Sugar Mills Ltd. 2017 (1) TMI 853 - BOMBAY HIGH COURT , has held that these subsidies, being in the nature of capital receipt, cannot be added to arrive at the book profit u/s 115JB Also we agree with the Ld. CIT DR that these details and figures now being provided by the assessee, have not been examined by the AO, and therefore the same warrants verification. The AO is accordingly directed to verify the same and accordingly quantify and exclude the subsidies which were received under the FPS and VKGUY of the Foreign Trade Policy, which has been held to be capital receipt, both while computing income under the normal provisions as well as book profit u/s 115JB of the Act. This additional ground no. 1 of the cross objections therefore stands partly allowed for statistical purpose. Disallowance u/s 14A r.w rule 8D under normal provisions and in computing book profit u/s 115JB - HELD THAT - It is noted that in the case of M/s Nirved Traders Pvt. Ltd. 2019 (4) TMI 1738 - BOMBAY HIGH COURT and HSBC Invest Direct (India) Ltd. 2019 (2) TMI 731 - BOMBAY HIGH COURT has held that the disallowance u/s 14A of the Act cannot exceed the exempt income so earned by the assessee. Following the binding decisions we find merit in the assessee s plea seeking restriction of the disallowance u/s 14A to the extent of exempt income earned i.e. Rs. 62,70,016/-. The AO is accordingly directed to delete the excess disallowance made u/s 14A of the Act of Rs. 2,29,984/- while computing total income under the normal provisions. Addition of Section 14A r.w. Rule 8D, while computing book profit u/s 115JB - Following the decision of Vireet Investments Ltd. 2017 (6) TMI 1124 - ITAT DELHI we hold that the disallowance made u/s 14A read with Rule 8D cannot be added to the book profit computed u/s 115JB of the Act. Hence, the disallowance u/s 14A added to the book profit u/s 115JB is directed to be deleted. Deduction of advances written off bad debts expenditure adjusted by the respondent in the Reserve Surplus in computing book profit u/ s 115JB - HELD THAT - Assessee is entitled to seek deduction for the bad debts and advances written off from Net Profit to arrive at the book profit u/s 115JB of the Act, even though the same was not charged to the Profit and Loss Account, though disclosed in the Notes appended to the accounts. Accordingly, this additional ground of the assessee stands allowed. Claim VAT/Excise Refund/Remission received under different state scheme as capital receipt in computing tax liability under the normal provision u/s 115JB - HELD THAT - From the facts as discussed in the foregoing, it can be safely inferred that the subsidy was granted to the assessee for setting up new unit in the States of Madhya Pradesh and West Bengal. The Hon'ble Supreme Court in the case of Chaphalkar Brothers 2017 (12) TMI 816 - SUPREME COURT has held that the subsidies granted under Government Industrial Scheme to accelerate industrial development and generate employment is capital in nature. Thus we hold that the subsidy received in the form of excise duty refund and remission of sales tax/VAT was in the nature of capital receipt not liable to tax, as the object of granting subsidy was to encourage setting up new industries for industrial growth of industrially non-developed area. Treatment of these subsidies while computing book profit u/s 115JB - Since these subsidies have been held to be in the nature of capital receipt, the same cannot be added to arrive at the book profit u/s 115JB of the Act. Following the ratio laid down in the decisions of Harinagar Sugar Mills Ltd 2017 (1) TMI 853 - BOMBAY HIGH COURT and Ankit Metal and Power Ltd. 2019 (7) TMI 878 - CALCUTTA HIGH COURT AO is directed to exclude the subsidies received by the assessee for setting up new industries, by way of refund of excise duty and remission of VAT/sales tax, from the computation of book profit u/s 115JB of the Act. However, since the relevant facts and figures have not been examined by the lower authorities, we deem it fit to set aside this issue back to the AO for the limited purpose of verifying the details figures placed before us. The AO shall accordingly quantify and exclude the subsidies received by way of refund of excise duty and remission of VAT/sales tax under the Industrial Schemes, which have been held to be capital receipt, both while computing income under the normal provisions as well as book profit u/s 115JB - Ground partly allowed for statistical purpose. Liability to pay advance tax and interest u/s 234B 234C in case the income is held to be chargeable to tax u/s 115JB - HELD THAT - The assessee was not liable to pay advance tax in case of MAT computed u/s 115JB of the Act, in the years prior to the judgment of the Hon ble Supreme Court in the case of Rolta India Ltd. 2011 (1) TMI 5 - SUPREME COURT Admittedly, the assessment year in dispute in case of the assessee is prior to rendering of the said decision of the Hon ble Supreme Court. Hence, respectfully following the above judicial precedents (supra), the AO is directed not to levy interest u/s 234B 234C of the Act, in case the assessee is found to be assessable to MAT u/s 115JB of the Act, while giving effect to this appellate order. This ground is therefore allowed for statistical purposes. Unaccounted profits derived from trading in guar gum and guar seed in a joint venture - CIT(A) deleted addition - HELD THAT - DR unable to show us any specific email exchange/correspondence which referred to the purported joint venture as presumed by the AO or that the transactions discussed in these emails related to trading conducted outside the books of accounts, which would lend certain credence to the theory propounded by the AO regarding the working sheet. We thus note that the Revenue was unable to bring on record any cogent evidence to substantiate their case that the working sheet, which was explained to be estimates/projections by the person from whose possession it was found, was actually a summary of transactions taken place in a joint venture between assessee and Betul Group. We countenance the findings of the Ld. CIT(A) that the entries/summary found noted in the said worksheet being without any reference to date or time period and not corroborated by any other evidence or material, was unreliable. Hence, we agree with the Ld. CIT(A) that it was not possible to drawn any legitimate inference that these notings denoted undisclosed income in the hands of the assessee. Accordingly, we see no reason to interfere with the order of the Ld. CIT(A) deleting the impugned addition made by the AO. These grounds of appeal of the Revenue are therefore dismissed. Disallowance being expend towards employee Stock Options (ESOPs) provided the employees - HELD THAT - It is noted the issue is squarely covered in favour of the assessee by the decision of the Biocon Ltd. 2020 (11) TMI 779 - KARNATAKA HIGH COURT wherein it has been held that the ESOP expenditure is allowable to the assessee under section 37(1) of the Act. It is noted that, similar view has been expressed 2012 (7) TMI 696 - MADRAS HIGH COURT in the case of CIT vs. PVP Ventures Ltd. Respectfully following the same, we hold that the Ld. CIT(A) had erred in confirming the disallowance made on account of ESOP expenses and the AO is directed to delete the same. Accordingly, this ground of the assessee stands allowed. Nature of expenses - disallowance being loss on account of fluctuation in rate of exchange treating it as capital expenditure - HELD THAT - Following the said applicable AS-11, the assessee had consistently debited the foreign exchange loss on such foreign currency loans to the Profit Loss Account upto FY 2010-11 and the same was also accepted and allowed by the Revenue. In the relevant FY 2011-12, the ICAI had modified Para 46A of AS-11 in December 2011, in terms of which the company now had an option to either debit such foreign exchange loss to the Profit Loss Account or capitalise the same to the cost of assets. The assessee, in the present case, chose the latter option. Merely because the assessee chose the later option would not alter the nature of foreign exchange loss viz., revenue in nature. It is by now trite in law that, the entries whether the assessee is entitled to a particular deduction or not depends upon the provision of law relating thereto. The existence or absence of entries in the books of account be decisive or conclusive in the matter. This legal principle has been laid down by the Hon ble Supreme Court in the case of Kedar Jute Mfg Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT Likewise, it is noted that, the Hon ble jurisdictional High Court also while adjudicating the nature and allowability of expenditure incurred on repairs maintenance which were capitalized to fixed assets, have held that the entries in the books of accounts was not determinative to decide whether expenditure was capital or not, but it had to be examined in light of the provisions of the law Therefore, we hold that the lower authorities had erred in disallowing the claim for deduction of foreign exchange loss and thus, the AO is directed to delete the impugned disallowance. This ground is therefore allowed. Nature of receipt - export incentive granted under foreign trade policy as focus product scheme (FPS) Vishes Krishi and Gram Udyog Yojana (VKGUV) as capital receipt in the computation of total income under the normal provisions of the Act as well as in computing the book profit u/s 115JB - HELD THAT - Following our conclusion drawn in A.Y. 2010-11, we hold these incentives to be in the nature of capital receipt. However, as the relevant facts and figures were not placed before the AO, we deem it fit to set this issue aside for the limited purpose of verifying the details figures. The AO shall accordingly quantify and exclude the subsidies received under the FPS VKGUY Scheme of Foreign Trade Policy, which have been held to be capital receipt, both while computing income under the normal provisions as well as book profit u/s 115JB of the Act. AO shall provide an opportunity of hearing to the assessee - This additional ground is therefore partly allowed for statistical purposes. Penalty levied u/s 271(1)(c) - As we have already deleted the addition/s made on account of (i) disallowance of ESOP expenses (ii) disallowance of foreign exchange fluctuation loss and therefore the impugned penalty order passed by the AO now has no legs to stand on. Since the quantum addition/s itself has been deleted, the consequential levy of penalty is held to be unjustified.

Summary

Issues Involved:
1. Scope of assessment u/s 153A.
2. Disallowance of notional interest.
3. Addition on account of inflated import purchases.
4. New claims in cross-objections.
5. Disallowance of ESOP expenses.
6. Disallowance of foreign exchange fluctuation loss.
7. Treatment of export incentives and subsidies as capital receipts.
8. Levy of interest u/s 234B and 234C.
9. Deletion of penalty u/s 271(1)(c).

Summary:

1. Scope of Assessment u/s 153A:
The Revenue's appeal contested the CIT(A)'s narrowing of the assessment scope u/s 153A to only undisclosed income/assets detected during the search. The Tribunal held that the grounds raised by the Revenue did not emanate from the lower authorities' orders, and the AO was free to frame a de novo assessment on all issues in abated assessments. Consequently, these grounds were dismissed as infructuous.

2. Disallowance of Notional Interest:
The AO disallowed notional interest on borrowings attributed to interest-free advances. The CIT(A) deleted the disallowance, noting that the advances were not outstanding during the year. The Tribunal upheld this finding, emphasizing that the audited financial statements showed no outstanding advances, and the AO had not rejected the book results. Hence, the disallowance was erroneous, and the Revenue's grounds were dismissed.

3. Addition on Account of Inflated Import Purchases:
The AO added Rs. 139,18,84,499/- for inflated purchases based on high-sea sales and re-purchases among group companies. The CIT(A) deleted the addition, finding that the transactions resulted in profits, not losses, and were genuine. The Tribunal upheld this finding, noting that the transactions did not artificially inflate purchases or result in losses. The Revenue's grounds were dismissed.

4. New Claims in Cross-Objections:
The assessee raised new claims for deductions in cross-objections. The Tribunal, relying on the jurisdictional High Court's decisions, held that the assessee could lodge new claims in abated assessments u/s 153A. The Tribunal admitted the additional grounds and directed the AO to verify and allow the claims accordingly.

5. Disallowance of ESOP Expenses:
The AO disallowed ESOP expenses, which the CIT(A) upheld. The Tribunal, citing the Karnataka High Court's decision in Biocon Ltd., held that ESOP expenses are allowable u/s 37(1) and directed the AO to delete the disallowance.

6. Disallowance of Foreign Exchange Fluctuation Loss:
The AO disallowed foreign exchange loss on loans for acquiring fixed assets, treating it as capital expenditure. The Tribunal held that Section 43A did not apply as the assets were indigenous, and the loss should be allowed as revenue expenditure. The Tribunal directed the AO to delete the disallowance.

7. Treatment of Export Incentives and Subsidies as Capital Receipts:
The assessee claimed export incentives under FPS and VKGUY schemes as capital receipts. The Tribunal, following the Rajasthan High Court's decision in Nitin Spinners Ltd., held that these incentives were capital receipts and directed the AO to exclude them from taxable income and book profit u/s 115JB.

8. Levy of Interest u/s 234B and 234C:
The Tribunal, relying on the jurisdictional High Court's decision in Mangalore Refinery & Petrochemicals Ltd., held that interest u/s 234B and 234C was not leviable for years prior to the Supreme Court's decision in Rolta India Ltd. if income was computed u/s 115JB. The AO was directed to recompute interest accordingly.

9. Deletion of Penalty u/s 271(1)(c):
The CIT(A) deleted the penalty levied u/s 271(1)(c) for disallowances confirmed in the quantum appeal. The Tribunal upheld this deletion, noting that the quantum additions were deleted, rendering the penalty unjustified. The Revenue's grounds were dismissed.

Conclusion:
The assessee's appeals and cross-objections were partly allowed, and the Revenue's appeals were dismissed.