2024 (7) TMI 1126 - AT - Income Tax

TP adjustment - notional interest on receivables on account of issuance of Non-Convertible Cumulative Redeemable Preference Shares - Recharacterizing transaction of Non-Convertible Cumulative Redeemable Preference Shares (NCCRPS) as quasi equity - HELD THAT - Since it is already considered as the capital finance transaction as per the definition of international transaction u/s 92B, we are inclined to accept partial finding of the Transfer Pricing Officer that it is a quasi-capital and its cost has to be benchmarked in the international market. In the given case, the Transfer Pricing Officer has already observed that the cost of capital of the assessee is at 9.945% based on the Balance Sheet submitted by the assessee. Since it is an international transaction we cannot benchmark the same at the Indian market rate and as held in the various judicial pronouncements, the international transactions have to be benchmarked at the cost of capital based on the respective Libor rate. In this case, the preference shares are issued for a period of 7 years, however, it is redeemed within 3 years. Therefore, the bench-marking has to be undertaken by adopting the 3 years LIBOR rate. It is normal on the part of the various banks to charge the interest on the basis of Libor rate plus certain basis points considering the risk factors involved in financing the same. However, in the given case assessee has taken financing from its own AE. Therefore, the benchmark has to be done based on the Libor rate i.e., LIBOR basis points adjustment of risk factor, considering the fact that the AE has invested in India without any collateral securities. In this case, the cost involved in the capital financing is 8.5% of dividend. Therefore, it has to be benchmarked on the basis of Libor rate available on the date of issue of preference shares. Accordingly, we direct the Assessing Officer to benchmark the same by adopting the Libor rate (3 years quote) basis as indicated above. Since assessee has incurred the cost of 8.5% in comparison to the LIBOR rate, accordingly, we direct the Assessing Officer / Transfer Pricing Officer to benchmark the same and determine the ALP i.e., the difference of dividend of 8.5% and the LIBOR rate as per above discussion. Accordingly, we are inclined to allow the Ground No.1 raised by the assessee for statistical purpose. Accounting of lease - Deduction under the head any other amount liable as deduction in schedule BP of the returned income, which included principle lease payment of finance - considering the submissions that assessee is not the owner and assessee has to return the assets after the completion of the lease period, tax authorities held that the assessee has claimed portion of principal amount of the installment paid against the assets taken on Finance Lease. Therefore, the principal amount component is a capital in nature and not allowable as revenue expenses u/s 37(1) - HELD THAT - As discussed the various aspects of recognizing the Leases and the case law relied by the assessee are relating to operating lease which is distinct from finance lease, where the main distinction is that in operating lease, the ownership remains with the lessor whereas in the finance lease, the ownership passes on to lessee. Assessee has to explain the various values declared in the depreciation schedule as well as the value adopted in the Computation sheet before AO, even we are not in a position to understand since it was not explained at the time of hearing. In our view, the method adopted by the assessee in following the Accounting standard and calculating the depreciation seems to be right however, the method to claim differently for computation of Income tax i.e., claim the principal repayment instead of relevant depreciation may not be right method. Therefore, it needs proper explanation and verification of various figures declared by the assessee in Depreciation schedule and computation sheet. The right method is to claim only the depreciation as per the depreciation schedule prepared under Income Tax Act because the assessee is the deemed owner of the assets and it has rightly recognized in its books of account. The assessee cannot bifurcate the claim under the I.T. Act separately for interest depreciation. Therefore, we direct A.O to allow only the depreciation on the assets under I.T. Act. Accordingly, we deem it fit and proper to remit this issue back to the file of the Assessing Officer to recheck the claim of assessee as per IND-AS 17 AS-19 and at the same time we also direct the assessee to explain the accounting of leases properly before the AO and we direct AO to verify the same, after verifying the same allow the depreciation as per the above direction after providing adequate opportunity of being heard to the assessee. Accordingly, this ground of appeal is allowed for statistical purpose. Employees Share Option Scheme ESOP - AO rejected the submissions of the assessee and observed that ESOP expenses debited by the assessee in its profit and loss account is not crystalized in the previous year as the same is contingent, notional and capital in nature, hence he rejected the claim of the assessee - HELD THAT - Hon ble Karnataka High Court in the case of CIT v. Biocon Ltd 2020 (11) TMI 779 - KARNATAKA HIGH COURT has decided the issue in favour of assessee and respectfully following the above decision the Coordinate Bench of this Tribunal in assessee s own case for the A.Y. 2015-16 2023 (5) TMI 1354 - ITAT MUMBAI has decided the issue in favour of assessee as held that incurring of the expenditure by the assessee entitles him for deduction under Section 37(1) of the Act subject to fulfillment of the condition.The deduction of discount on ESOP over the vesting period is in accordance with the accounting in the books of accounts, which has been prepared in accordance with Securities And Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. Additional claim on ESOP raised by the assessee the similar issue was considered by the Coordinate Bench in A.Y. 2015-16 2023 (5) TMI 1354 - ITAT MUMBAI and remitted the issue back to the file of the Assessing Officer / Ld. DRP to verify claim of the assessee. Disallowance u/s 14A - assessee has invested substantial amount in investments yielding exempt income in equities and mutual funds - HELD THAT - As we observe that Assessing Officer has invoked the provisions of section 14A r.w. Rule 8D of I.T. Rules and determined the disallowance by applying 1% of the annual average of the monthly average of opening and closing balance of value of investments mechanically. We observe that AO has taken total value of average investments which may include those investments which has not generated any exempt income in the above said total investments made by the assessee, however, it is settled position of law that the AO has to consider only those investments which has actually yielded exempt income - remit this issue back to the file of the AO to consider those investments which has actually yielded the exempt income. Accordingly, Ground allowed for statistical purpose. Adjustment made in the book profit u/s 115JB for disallowance u/s 14A - Section 14A disallowance cannot be part of clause (f) of Explanation (ii) of section 115JB of the Act. We observe that in the case of ACIT v. Vireet Investments Private Limited 2017 (6) TMI 1124 - ITAT DELHI held that the computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s. 14A r.w. Rule 8D of the I.T Rules, 1962. Thus we direct assessing officer to delete the above adjustment made in the book profit u/s 115JB. Adjustment of dividend distribution tax - As at the time of hearing, assessee submitted that this issue is decided by the Tribunal against the assessee. Therefore, we dismiss the ground raised by the assessee. Short grant of TDS credit - Since this issue is factual matter which needs verification on the part of the Assessing Officer, we deem it fit and proper to remit this issue back to the file of the Assessing Officer to verify the claim of the assessee and allow the same as per law. Accordingly, this ground of appeal is allowed for statistical purpose. Addition u/s 68 - cash deposit in Specified Bank Note (SBN) during demonetization period - HELD THAT - Since assessee is in the business of travel agent and tourism where it is dealing in foreign exchange conversion and relevant remittances being authorized dealer across India. As discussed earlier it has 39 branches across India and during demonetization period it has deposited huge cash generated by the 39 branches of the specific bank notes. Since the assessee is in this line of business and dealing in cash transactions it may have carried cash balances which was subsequently deposited through 39 branches in the respective banks. Since it is an authorised dealer assessee is required to maintain books of accounts and details of cash deposits and remittances across the branches and it has to report back to the RBI in regular intervals. Therefore, assessee must be having details of closing cash balances across the branches. These details may be submitted before AO for verification to prove that assessee had sufficient cash balances in the above said specific bank notes and which assessee has deposited across the branches. Ground raised by the assessee allowed for statistical purpose. Determine the value of assets for the purpose of Finance Lease in the books of accounts of the assessee - cars on Finance Lease from Lessors - HELD THAT - Since the assessee has already recognize the values of vehicle in their books, there is no need to revalue or valuation report, the assessee has already adopted the value of the assets, it needs to continue to adopt the same and at the time of foreclosure, the assessee has to settle the value based on the value of assets along with the penalty if there is any as per the lease agreement. Therefore, we are directing the Assessing Officer to adopt the value as per the Balance sheet and reject the valuation submitted by the assessee. Still the Assessing Officer has to verify the recording of lease transaction and relevant adoption of depreciation claim as per the law and adopt the same here for the value for recognizing the value for foreclosure, as such there should not be any difference to the value in the depreciation schedule. Therefore, the controversy of valuation of vehicle will be addressed and the value of assets as on the date of foreclosure in the Balance Sheet of the assessee will be the actual value as per depreciation schedule on the date of foreclosure. Therefore, this ground of appeal also remitted back. Depreciation claim on property Let out - AO observed that premises were let out by the assessee, then how is that depreciation is allowable on the same under the Profits and Gains from Business or Profession - period of addition was considered as less than 180 days the depreciation is worked out as 50% of allowable depreciation - tenant has vacated the portion of office premises and the assessee has occupied the building and claimed the depreciation for the period of reoccupation by the assessee - HELD THAT - The tenancy rights were surrendered at the fag end of the previous year. However, the ownership of the building is still with the assessee and it is not relevant whether assessee occupies the building for the purpose of business or not. It is evident that assessee is owner of the property and it has renovated for the purpose of utilizing the same for its own business, as such assessee is in possession of the building which is under renovation that itself shows that it is under the control of the assessee and it will be used for the purpose of business. Once it has become ready to be occupied by the assessee for running its own business and with that it fulfills the conditions of sec 32, the depreciation is automatically applicable. Therefore, the assessee has claimed only the depreciation for the period after surrender of the tenancy rights by the tenant. Therefore, it is not relevant whether actually utilizes for the remaining period, as long as it is in its position and the depreciation can be claimed for utilization as well as based on the concept of passage of time during which the property was in its control and possession. Therefore, the above said depreciation cannot be denied to the assessee. Accordingly, this ground of appeal is allowed. Claim of indexation while computing book profit - assessee has reduced the indexation cost acquisition of transfer of shares while calculating the book profit u/s 115JB - HELD THAT - While claiming the benefit, the assessee acknowledged that this transfer of shares is exempt from tax u/s 10(38) of the Act and relied on the decision of Hon ble Karnataka High Court in the case of Best Trading and Agencies Ltd (supra) wherein it was held that indexation benefit should be allowed. It was held that the indexation benefit was allowed for the reason that the assessee company was established as SPV for transfer of Land and Building. Further it was held that indexed cost of acquisition is a claim allowed by sec.48 to arrive at the income taxable as per sec.45 at the rates provided u/s 112. Further, it was held that the assessee has to be given the benefit of indexed cost of acquisition as considering the profits on sale of land without giving the benefit of indexed cost of acquisition results in taking the income other than actual/real income. Since the Hon ble court allowed the indexation while determining the book profit u/s 115JB. As decided in Karnataka State Industrial 2017 (1) TMI 675 - ITAT BANGALORE assessee-company is entitled to the benefit of indexation while calculating long-term capital gains which are to be considered for the purpose of computing tax liability u/s 115JB.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Notional Interest on Receivables from Issuance of NCCRPS
2. Disallowance of Principal Lease Payment of Finance Lease
3. Disallowance Related to Employee Stock Option Plan (ESOP)
4. Disallowance Under Section 14A of the Income Tax Act
5. Adjustment on Dividend Distribution Tax (DDT)
6. Short Grant of Credit of Tax Deducted at Source (TDS)
7. Penalty Under Section 271(1)(c) of the Income Tax Act
8. Levy of Interest Under Section 234B of the Income Tax Act

Detailed Analysis:

1. Transfer Pricing Adjustment for Notional Interest on Receivables from Issuance of NCCRPS:
The assessee contested the addition of notional interest on receivables from the issuance of Non-Convertible Cumulative Redeemable Preference Shares (NCCRPS). The Transfer Pricing Officer (TPO) re-characterized the transaction as quasi-equity and treated the difference between the market price and the face value of the shares as a deemed loan, proposing an adjustment of Rs. 81,21,14,830. The assessee argued that the transaction did not generate any income and should not fall under transfer pricing provisions. The Tribunal agreed with the assessee, noting that the TPO incorrectly treated NCCRPS as quasi-equity and emphasized that such transactions should be benchmarked based on the cost of borrowing in the international market, not the market value of equity shares.

2. Disallowance of Principal Lease Payment of Finance Lease:
The assessee claimed deductions for principal lease payments on vehicles taken on finance lease. The Assessing Officer (AO) disallowed these payments, treating them as capital expenditure. The Tribunal noted that under accounting standards, finance leases should be treated as assets and liabilities in the balance sheet, with depreciation allowed on the assets. The Tribunal remitted the issue back to the AO to verify the depreciation claims and ensure the correct accounting treatment of finance leases.

3. Disallowance Related to Employee Stock Option Plan (ESOP):
The AO disallowed the ESOP expenses claimed by the assessee, considering them notional and contingent. The Tribunal referred to the Karnataka High Court's decision in the case of Biocon Ltd., which upheld the allowability of ESOP expenses as a deductible business expenditure. The Tribunal directed the AO to allow the ESOP expenses as claimed by the assessee.

4. Disallowance Under Section 14A of the Income Tax Act:
The AO disallowed expenses under Section 14A read with Rule 8D, related to investments yielding exempt income. The Tribunal noted that only investments generating exempt income should be considered for disallowance under Section 14A. The Tribunal remitted the issue back to the AO to recompute the disallowance, excluding investments that did not yield any exempt income.

5. Adjustment on Dividend Distribution Tax (DDT):
The assessee sought a refund of excess DDT paid, arguing that the DDT should have been calculated at a lower rate as per the India-Mauritius tax treaty. The Tribunal dismissed this ground, noting that the issue had been previously decided against the assessee.

6. Short Grant of Credit of Tax Deducted at Source (TDS):
The assessee claimed that the AO had not granted the full credit for TDS. The Tribunal remitted the issue back to the AO for verification and directed the AO to grant the correct TDS credit after proper verification.

7. Penalty Under Section 271(1)(c) of the Income Tax Act:
The AO proposed to levy a penalty under Section 271(1)(c) for furnishing inaccurate particulars of income. The Tribunal dismissed this ground as premature, noting that the penalty proceedings were not yet finalized.

8. Levy of Interest Under Section 234B of the Income Tax Act:
The assessee contested the levy of interest under Section 234B. The Tribunal noted that this issue was consequential and dismissed the ground.

Conclusion:
The Tribunal provided detailed directions on each issue, remitting several matters back to the AO for verification and proper accounting treatment. The Tribunal's decisions emphasize the importance of accurate benchmarking in transfer pricing, proper accounting treatment of finance leases, and the allowability of ESOP expenses as business expenditures. The Tribunal also clarified the scope of disallowance under Section 14A and the treatment of DDT under tax treaties.