2023 (12) TMI 870 - AT - Income Tax

Depreciation on land development expenditure incurred on lease hold property - disallowance of and leveling expenses incurred for creating a backup yard is treated as building, wherein depreciation was claimed @ 10% of total cost incurred on land development - HELD THAT - The issue on hand first arose in the hands of the assessee in the assessment year 2011-12 2023 (3) TMI 1350 - ITAT AHMEDABAD In that assessment year, the assessee claimed the depreciation which was disallowed by the AO and subsequently the order of the AO was also upheld by the learned CIT-A. Against the finding of the learned CIT-A, the assessee did not challenge the same before the higher forum. Thus, the finding of the learned CIT-A reached the finality. Now, the controversy arises whether the issue relating to the depreciation can be raised by the assessee in the subsequent year without challenging the initial/ first assessment year as discussed above. The answer stands against the assessee. In simple words, the assessee in its own case has admitted the disallowance of depreciation and therefore the same cannot be agitated in the later years. Hence, the ground of appeal of the assessee is hereby dismissed. Disallowance of deprecation claimed on right to use leasehold land - assessee has been allotted land on lease basis by the Gujarat Maritime Board (GMB). The assessee accounted for the right to use leasehold land in the A.Y. 2011-12 at present value of future annual lease and claimed depreciation on the same @ 25% by treating the same as intangible assets - HELD THAT - It is pertinent to note that the recognition of the right to use lease hold land as intangible asset as per the statement of account and the same was not disputed by the Department at any stage. Thus, the claim of depreciation was correctly made and the same should have been taken into account by the Assessing Officer as well as CIT(A). Thus, this ground allowed. Disallowances u/s 14A - AO has worked out the amount of disallowance u/s 14A as per the provision of rule 8D of Income Tax Rule which includes disallowances on account of interest expenses as well administrative expenses - AO has also made the addition to the book profit calculated under the provisions of section 115JB - CIT(A) restricted the quantum of disallowance under section 14A of the Act to the extent of exempted income only whereas deleted the addition to book profit in entirety - HELD THAT - It is settled position of law by several competent court that if there are mixed funds or interest free funds exceed the amount of investment then the power of presumption would be that the investment has been made out of interest free funds. In holding so, we draw support and guidance from the judgment of Hon ble Jurisdictional High Court in the case of CIT vs. Torrent Power Ltd 2014 (6) TMI 185 - GUJARAT HIGH COURT In the case of the present assessee, the interest free fund of the assessee exceeds the amount of the investment yielding the exempted income. Therefore, no disallowance can be made on account of interest expenditure under the provision of rule 8D IT rule in the given facts and circumstances. Disallowance of administrative expenses , in our considered opinion, the contention of the assessee cannot be accepted that no expenditure in relation to the investment was incurred. Therefore, the disallowance of administrative as per rule 8D of the Income Tax Rule needs to be made. As per the provision of rule 8D(2)(iii) the amount of administrative expense shall be equal to 0.5% of average value of the investment, income from which does not or shall not form part of total income. Question arises while computing the average value of investment whether all the investment capable of yielding exempted income shall be considered or only those investments which yielded exempted income during the year shall be considered. The question has been answered in the case of ACIT vs. Vireet Investment (P.) Ltd 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that only those investment shall be considered which yielded exempted income during the year. Thus amount of disallowance under rule 8D(2)(iii) shall be computed only considering the investment in Kutch Railways Company Ltd of which average value stand at Rs. 4000 Lacs only and accordingly the amount of disallowance shall be at Rs. 20 Lacs only whereas the assessee has already made disallowances of Rs. 25 lacs. Therefore no further disallowance is required to be made - appeal of the assessee allowed. Addition to book profit computed u/s 115JB - We hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - There is no mechanism/ manner given under clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore, we feel that adhoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. In the given the assessee itself has made adhoc disallowances of Rs. 25 Lacs under normal computation of income in connection with the exempted income earned during the year. Therefore amount which been admitted by the assessee itself as incurred in connection with exempted shall be added to the book profit as per the provion of clause (f) to explanation 1 of section 115JB of the Act. Thus we direct the AO to make the addition of Rs. 25 Lacs as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus, the ground of appeal of the Revenue in relation to addition to book profits is partly allowed. Deduction u/s. 80IAB on sale of scrap - gain on foreign currency derivative swap as eligible income under section 80IAB and holding derivative swap loss as business loss - HELD THAT - As respectfully following the order of the tribunal in the own case of the assessee as 122 167/AHD/2015 for AY 2011-12 2023 (3) TMI 1350 - ITAT AHMEDABAD , we do not find any infirmity in the finding of the learned CIT(A) and direct the AO to delete the disallowance made by him. Depreciation on the block office equipment @ 15% allowec by following the order of this tribunal in the case M/s Adani Enterprise Ltd. 2019 (2) TMI 2018 - ITAT AHMEDABAD in ITA No. 1840/Ahd/2012. TP Adjustment - corporate guarantee - an international transaction or not? - HELD THAT - The provisions of section 92B of the Act define the parameters of what constitute an international transaction. Although, the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012 an Explanation to Section 92B 2 of the Act was brought in the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and added certain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92B of the Act within the ambit of international transactions. The corporate guarantee was included within the ambit of international transaction by the Finance Act 2012 with retrospective effect. Thus, there remains no ambiguity to the fact that the corporate guarantee extended by the assessee to its AE is an international transaction and therefore the same has to be benchmarked at the arm length price. We find that in the case of PCIT vs. Redington (India) Ltd. 2020 (12) TMI 516 - MADRAS HIGH COURT has held that corporate guarantee is covered under the limb of international transaction and having bearing on profit and loss account. Thus we hold that the bank/corporate guarantee extended to AE is an international transaction. Therefore, the same has to be bench marked for determining the ALP. Determine the benchmarking for working out the ALP of the impugned international transaction - Coming to the case on hand, we note that assessee has borrowed loan from the Standard Chartered bank at an effective rate of interest at 4.06% per annum whereas the AE has borrowed loan at the rate of 4.92% per annum despite the corporate guarantee furnished by the assessee The assessee has not obtained any saving of the interest/bank charges. Accordingly, the question arises, whether the assessee should be made subject to the addition for the corporate guarantee furnished by it in the given facts and circumstances. To our understanding, on applying the interest saving approach, it is not justifiable to make any addition on account of furnishing the corporate guarantee to the AE. In other words, the assessee would have saved huge interest cost if it would have advanced money on interest to the AE after borrowing at its own from the Standard Chartered Bank. Hence, we do not find any infirmity in the order of learned CIT-A. Thus, the ground of appeal of the revenue is hereby dismissed. Upward adjustment in TP on account of interest - HELD THAT - CIT(A) failed to appreciate the fact that in the given case a holding company extended interest free loans and advances to its foreign subsidiary to grow the business. Such a transaction cannot be compared with loan extended by the banks whose main activity is extending loans to generate revenue. In holding so, we draw support and guidance from the judgment of judgment of Hon ble Bombay High Court in case of CIT vs. Everest Kento Cylinders Ltd. 2015 (5) TMI 395 - BOMBAY HIGH COURT The above finding of the Hon ble Bombay High Court is in relation to extension of corporate guarantee, but the principle laid down can be applied here in the case of extension of loans and advances also. Therefore, in our considered TPO was not right in considering the upfront fee charged by the bank as well adjustment of risk associated with unsecured loan. We also note that in case of M/s Arvind Ltd 2023 (6) TMI 1065 - ITAT AHMEDABAD where the facts and circumstances were identical to the case on hand, the tribunal after considering series of finding of different tribunal held that in case of loan extended by parent company to foreign subsidiary the reasonable rate of interest should be LIBOR 2% - Thus we hereby hold that suo-moto notional interest offered by the assessee at LIBOR 2.8 % is ALP and no further adjustment is required to be made. Hence, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the upward adjustment made on account of benchmarking of interest free loan to AE.

Summary

Issues Involved:

1. Disallowance of Depreciation on Land Development Expenditure
2. Disallowance of Depreciation on "Right to Use Leasehold Land"
3. Disallowance under Section 14A of the Income Tax Act
4. Deduction under Section 80IAB on Sale of Scrap
5. Deduction under Section 80IAB on Gain from Foreign Currency Derivative Transactions
6. Treatment of Foreign Currency Derivative Loss
7. Transfer Pricing Adjustment on Corporate Guarantee
8. Upward Adjustment in Transfer Pricing on Account of Interest

Summary:

1. Disallowance of Depreciation on Land Development Expenditure:
The assessee claimed depreciation on land development expenditure incurred on leasehold property. The AO disallowed this claim, stating that the expenditure could not be amortized under Section 35D of the Act. The CIT(A) upheld this disallowance, and the Tribunal agreed, noting that the assessee had not challenged the initial disallowance in earlier years, making it final. Thus, the ground of appeal was dismissed.

2. Disallowance of Depreciation on "Right to Use Leasehold Land":
The assessee claimed depreciation on the right to use leasehold land, treating it as an intangible asset. The AO disallowed this, stating that land property is not eligible for depreciation under Section 32 of the Act. The CIT(A) upheld this disallowance. However, the Tribunal set aside the CIT(A)'s order, directing the AO to allow the depreciation claim, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12.

3. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed expenses under Section 14A related to exempt income, applying Rule 8D. The CIT(A) restricted the disallowance to the extent of exempt income and directed the AO to adjust eligible profits under Section 80IAB. The Tribunal upheld the CIT(A)'s decision, stating that interest-free funds exceeded investments, and only those investments yielding exempt income should be considered for administrative expenses disallowance.

4. Deduction under Section 80IAB on Sale of Scrap:
The AO disallowed the deduction on scrap sale proceeds, stating it was not derived from eligible industrial undertakings. The CIT(A) allowed the deduction, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12. The Tribunal upheld this decision, finding no distinguishing facts for the current year.

5. Deduction under Section 80IAB on Gain from Foreign Currency Derivative Transactions:
The AO disallowed the deduction on gains from foreign currency derivatives, stating they were not derived from SEZ activities. The CIT(A) allowed the deduction, following the Tribunal's decision in the assessee's favor for AY 2011-12. The Tribunal upheld this decision, noting no distinguishing facts for the current year.

6. Treatment of Foreign Currency Derivative Loss:
The AO treated the derivative loss as speculative and not eligible for business loss deduction. The CIT(A) allowed the deduction, stating the transactions were for hedging purposes and not speculative. The Tribunal upheld this decision, following the Tribunal's earlier decision in the assessee's favor for AY 2011-12.

7. Transfer Pricing Adjustment on Corporate Guarantee:
The AO made an upward adjustment for not charging a guarantee commission on corporate guarantees provided to AE. The CIT(A) deleted the adjustment, stating no cost was incurred by the assessee for providing the guarantee. The Tribunal upheld this decision, noting that the corporate guarantee is not an international transaction requiring benchmarking.

8. Upward Adjustment in Transfer Pricing on Account of Interest:
The AO made an upward adjustment on interest-free loans provided to AE, benchmarking the interest at LIBOR + 370.7 basis points. The CIT(A) upheld this adjustment. However, the Tribunal set aside this decision, directing the AO to delete the adjustment, following the Tribunal's earlier decision in favor of the assessee, benchmarking the interest at LIBOR + 2%.

Conclusion:
The Tribunal's decisions were largely consistent with its earlier rulings in favor of the assessee, except for the disallowance of depreciation on land development expenditure, which was upheld against the assessee. The Tribunal emphasized the importance of following precedents and maintaining consistency in judicial decisions.