2019 (8) TMI 287 - AT - Income Tax

Disallowance u/s. 14A - HELD THAT - There is merit in the contentions of Ld. Counsel for the assessee. Accordingly by following the decision rendered by the Hon'ble Bombay High Court in the case of CIT Vs. Godrej Agrovet Ltd 2010 (8) TMI 77 - BOMBAY HIGH COURT we modify the order passed by the Ld. CIT(A) and direct the AO to restrict the disallowance u/s. 14A of the Act to 2% of the dividend income earned by the assessee. Disallowance of expenditure relating to exempt income for the purpose of computing book profits u/s. 115JB - HELD THAT - In the case of Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI held that the amount disallowed u/s. 14A cannot be imported for the purpose of Section 115JB of the Act, meaning thereby, the AO is required to compute disallowance for the purpose of Clause(f) of Explanation (1) to Section 115JB in an independent manner. AR submitted that the investment held by the assessee had been brought forward from earlier years and most of the investments have been made long back. During the year under consideration, the assessee has earned dividend income and has also sold some of its shares. Thus we notice that there is no much of activity for the purpose of earning exempt income. In order to put this issue at rest, we are of the view that the amount of disallowance computed u/s 14A of the Act, in the facts and circumstances of the case, would meet the requirements of clause (f) of Explanation 1 of sec.115JB of the Act. We make it clear that we have held so only to put this issue at rest for the year under consideration, as it is an old matter. Accordingly direct the AO to adopt the 2% of the dividend income for the purpose of computing disallowance under Clause(f) of Explanation (1) to Section 115JB TP Adjustment - comparable selection of M/s. Escorts Ltd.- HELD THAT - TPO has rejected M/s. Escorts Ltd., only for the reason that the data was not available for the period under consideration, since M/s. Escorts Ltd., was following different financial year. Since M/s. Escorts Ltd., is a listed company, the quarterly results published by the said company should be available in the public domain and it should be possible to collate the figures relating to the financial year under consideration. In any case this issue has been restored to the file of AO/TPO in the immediately preceding year by the Tribunal. Following the same, we set aside the order passed by the CIT(A) on this issue and restore the same to the file of AO/TPO for examining it afresh. TP adjustment made in respect of royalty payment - Though the TPO made adjustment in respect of royalty payment, no separate addition was made as the assessee itself has disallowed the same u/s. 40(a)(ia) - HELD THAT - We noticed that Coordinate Bench has restored the identical issue in assessee s own case for the AY. 2004-05 restore this issue to the file of the AO with a direction to verify whether the similar payment of royalty has been accepted in the subsequent years as at arm's length after undertaking the exercise as prescribed in section 92C read with Rule 10B. If it is found that such exercise has been done in the subsequent years, the AO is directed to accept the similar payment of royalty made by the assessee for the year under consideration as at arm's length. However, if it is found that such an exercise has not been done even in the subsequent year, the AO/TPO is directed to do the same in the year under consideration to determine the arm's length price in relation to the royalty paid by the assessee to its associated enterprises. Ground No. 2 of the Revenue's appeal is accordingly treated as allowed for statistical purposes Addition of unutilised cenvat credit - HELD THAT - Provisions of sec.145A require following of inclusive method of accounting the duties and taxes for the purpose of taxation. The assessee has followed exclusive method, by which the Cenvat was accounted separately without including the same with purchases, sales, stock. Both are recognised methods of accounting. The question of making any addition would arise only if the method employed by the assessee is having any effect on profit. The assessee has demonstrated that the net profit amount does not change, even if the inclusive method of accounting is followed. Hence the impugned addition is not warranted. Accordingly we set aside the order passed by Ld CIT(A) on this issue. However, the computations given by the assessee requires verification. Accordingly we restore this issue to the file of the AO for the limited purpose of examining and satisfying himself with the figures furnished in the reconciliation statement filed by the assessee. In case of variation, the AO may make the addition to the extent of variation. Addition made u/s. 50C - HELD THAT - Since the submissions made by assessee relate to factual aspects, we are of the view that the same requires verification at the end of the AO, since the DVO has omitted to consider important aspect that the stamp duty valuation is different for Pillaiyar Koil Street and Old Mahabalipuram Road. When question as to whether this difference was not brought to the notice of Stamp valuation authority, since the Stamp valuation authority also appears to have adopted the valuation applicable to Old Mahabalipuram Road, the Ld A.R submitted that the stamp duty was paid by the purchaser and further the purchaser, being a software company, it was getting concession of stamp duty also. Since the assessee is bringing new facts, we are of the view that this issue requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and restore the same to the file of AO for examining the same afresh by duly referring the matter to DVO in order to consider the contentions of assessee in the matter of valuation of the property. After affording adequate opportunity of being heard to assessee, AO made take appropriate decision in accordance with law. Addition u/s 28(iv)/41(1) in respect of waiver of loan - A company named M/s Rajasthan Polymers and Reisins Ltd was amalgamated with the assessee company - HELD THAT - From the observations made by Ld CIT(A), we notice that the assessee has failed to demonstrate the user of the loans taken from Bank of Baroda, i.e., it was not shown that the loan amount was used for acquiring capital assets. Further it is not clear as to whether the amount so waived was related to principal portion of loan only. If the waived amount was related to interest portion of loan and the said interest had been allowed as deduction in the earlier years, then the provisions of sec.41(1) shall apply. Similarly if the loan taken has been used for trading transactions, then also the provisions of sec.41(1) shall apply. Since the relevant details are not available, in the interest of natural justice, we are of the view that the assessee may be provided with an opportunity to produce the same. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh in the light of discussions made supra. The assessee is also directed to furnish relevant details to substantiate its contentions. Disallowance u/s 40(a)(ia) - HELD THAT - As noticed earlier, the assessee had suomotu disallowed the provision for royalty payment, as it did not deduct tax at source. Hence there was no occasion for the AO to examine this issue. Before Ld CIT(A), the assessee contended that the suo-motu disallowance made by it should be deleted, as it has obtained a legal opinion that there is no requirement to make any disallowance u/s40(a)(ia) of the Act. Since the matter was not examined by the AO, the Ld CIT(A) restored this issue to the file of the AO. Since the matter requires examination at the end of the AO, we also restore the same to the file of the AO.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of expenditure relating to exempt income for the purpose of computing book profits under Section 115JB.
3. Transfer Pricing (TP) adjustment for imported kits and spares.
4. TP adjustment in respect of royalty payment.
5. Addition of unutilized Cenvat credit.
6. Addition under Section 50C for the sale of land.
7. Addition under Section 28(iv)/41(1) for waiver of loan.
8. Disallowance under Section 40(a)(ia).
9. Reduction of revaluation reserve from Book Profit.
10. Reduction of the least of brought forward loss or unabsorbed depreciation from Book Profit.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee received dividend income of ?306.46 Lakhs and claimed it as exempt without making any disallowance under Section 14A. The AO computed a disallowance of ?351.06 Lakhs. The Ld. CIT(A) held that Rule 8D could not be applied for the year under consideration and confirmed a reasonable disallowance of ?19.48 Lakhs. The Tribunal modified this decision, directing the AO to restrict the disallowance to 2% of the dividend income, following the precedent set by the Hon'ble Bombay High Court in CIT Vs. Godrej Agrovet Ltd.

2. Disallowance of expenditure relating to exempt income for the purpose of computing book profits under Section 115JB:
The AO adopted the disallowance made under Section 14A for computing book profits. The Ld. CIT(A) upheld this. However, the Tribunal, referencing the Delhi Special Bench of ITAT in Vireet Investment Pvt. Ltd., held that the disallowance under Section 14A cannot be imported for Section 115JB purposes. The Tribunal directed the AO to adopt 2% of the dividend income for disallowance under Clause (f) of Explanation (1) to Section 115JB.

3. TP adjustment for imported kits and spares:
The TPO rejected one of the comparables provided by the assessee, leading to a TP adjustment of ?122.41 Lakhs. The Ld. CIT(A) confirmed this. The Tribunal restored the issue to the AO/TPO to examine the comparability of M/s. Escorts Ltd., following the decision in the assessee's own case for AY 2004-05.

4. TP adjustment in respect of royalty payment:
The TPO made an adjustment, but no separate addition was made as the assessee disallowed the same under Section 40(a)(ia). The Ld. CIT(A) restored the issue to the AO. The Tribunal directed the AO/TPO to determine the arm's length price for royalty payments, following the procedure in Section 92C read with Rule 10B, as directed in the assessee's own case for AY 2004-05.

5. Addition of unutilized Cenvat credit:
The AO added ?142.05 Lakhs of unutilized Cenvat credit. The Ld. CIT(A) upheld the addition but directed the AO to adjust the opening stock. The Tribunal found that the exclusive method of accounting used by the assessee did not impact profit and directed the AO to verify the figures in the reconciliation statement provided by the assessee.

6. Addition under Section 50C for the sale of land:
The AO adopted the stamp value of ?654.18 Lakhs for computing capital gains. The Ld. CIT(A) directed the AO to use the DVO's valuation of ?646.02 Lakhs. The Tribunal restored the issue to the AO for fresh examination, considering the assessee's contention that the property was accessible from a lane with a lower stamp duty valuation.

7. Addition under Section 28(iv)/41(1) for waiver of loan:
The AO taxed the waiver of a term loan of ?192.50 Lakhs under Section 41(1) or alternatively under Section 28(iv). The Ld. CIT(A) upheld this. The Tribunal restored the issue to the AO to verify whether the loan was used for capital assets or trading transactions and whether the waived amount related to the principal or interest portion.

8. Disallowance under Section 40(a)(ia):
The assessee suo motu disallowed the provision for royalty payment. The Ld. CIT(A) restored the issue to the AO for examination. The Tribunal also restored the issue to the AO for verification.

9. Reduction of revaluation reserve from Book Profit:
The assessee's claim to reduce the revaluation reserve from Book Profit was not adjudicated by the Ld. CIT(A). The Tribunal restored the issue to the AO to follow the order passed by the Tribunal in AY 2004-05.

10. Reduction of the least of brought forward loss or unabsorbed depreciation from Book Profit:
Similar to the revaluation reserve issue, this was not adjudicated by the Ld. CIT(A). The Tribunal restored the issue to the AO to follow the Tribunal's order in AY 2004-05.

Conclusion:
The appeal of the assessee is partly allowed for statistical purposes, and the appeal of the Revenue is dismissed. The Tribunal has provided detailed directions for the AO to re-examine several issues, ensuring adherence to legal precedents and proper verification of facts.