2024 (7) TMI 829 - AT - Income Tax

Disallowance of commission expenses paid to different parties by the Appellant - non allowable business expenses - AO held adequate evidence was not furnished by the Appellant to prove the services rendered by the recipients of commission - HELD THAT - We find that the identical issue stands decided against the Appellant by the Tribunal in Appellant s own case pertaining to Assessment Years 1990-1991 to 2002-03, inter alia, on the ground that the Appellant had failed to explain the nature of services and substantiate the claim for deduction for commission expenses. As decided in Assessment Year 1994-95 no such explanations or details have come from the side of the assessee company. Without knowing the exact nature of the services rendered by those parties, it is not possible for us to decide whether the commission payable by the assessee company was a legitimate expenditure permitted by law, and therefore, to be allowed. If such detail are not coming, such payments made in respect of contracts awarded by Public Sector Companies we have to be held as expenses were incurred against public policy, and therefore, not entitled to be deducted in the light o the proviso to Sect 37 - Decided against assessee. Value of Construction Work-In-Progress adopted by the AO - AO held method of valuation followed by the Appellant in respect of construction jobs was not correct and concluded that the valuation of closing Construction Work-In- Progress as on 31/03/2004 was incorrectly reduced the Appellant - HELD THAT - CIT(A) was right in dismissing the issue as being academic in nature since no addition was made by the Assessing Officer on account of adopting higher value of the Construction Work-In-Progress. We do not find any infirmity in the order passed by the CIT(A). Accordingly, Ground No. 2 raised by the Appellant in the present appeal is dismissed. Disallowance of provision for foreseeable loss - Appellant submitted that the provision for foreseeable losses is an allowable deduction - HELD THAT - A claim otherwise not allowable as per the provisions of the Act cannot be allowed merely on the ground of non-materiality of the quantum involved. However, having concluded as aforesaid, we find some merit in the alternative contention of the Appellant. It was submitted that since the Appellant is following project completion method and the projects have been completed, the entire Revenue from the project would have been offered to tax and therefore, in absence of any impact on revenue the settled position should not be disturbed. Even this contention that claim of foreseeable losses made by the Appellant merely resulted in timing difference as by the end of the project entire/actual profits of the project were offered to tax cannot be accepted in absence of any material on record supporting the same. Accordingly, we direct the Appellant to file relevant documents/details before the AO to show that all the 30 projects have been completed and entire revenues from the 30 projects under consideration have been offered to tax leading to no leakage of revenue pertaining to the projects on overall basis. We direct the AO to verify the details/documents submitted by the AO and if satisfied, restrict the disallowance on account of unforeseeable losses pertaining to (a) the projects (mentioned in the list of 30 projects) which have not been completed till date, and (b) the projects which have been completed but entire Revenue has not been offered to tax till date. In terms of the aforesaid, Ground No. 3 raised by the Appellant is partly allowed. Addition u/s 40A(9) - Appellant paid sum to Utmal Employees Welfare Fund to provide for recreational activities for employees at Kansbahal Works, formerly known as Utkal Machinery Limited' in pursuance of a settlement u/s 18 of the Industrial Disputes Act, 1947 - contention of the Appellant was that the payment falls under the exception provided under Section 40A(9) of the Act as the same was made under the law for the time being in force - HELD THAT - As referring to the relevant extract of the decision of the Tribunal in the case of the Appellant for the Assessment Year 1999-2000 2018 (4) TMI 385 - ITAT MUMBAI directed to delete the addition made. Disallowance of depreciation - slump sale transaction - HELD THAT - Both the sides agreed that vide common order 2016 (7) TMI 1696 - ITAT MUMBAI dated 27/07/2016, passed in the cross-appeals for the Assessment Year 1998-99 2016 (7) TMI 1696 - ITAT MUMBAI , the Tribunal has held that the sale of the Undertaking was a transaction of slump sale and not a case of itemized sale as held by the Assessing Officer. Therefore, the very basis on which the WDV and depreciation was re-computed by the Assessing Officer does not survive. Taking note of the aforesaid facts, the Tribunal had decided identical issue in favour of the Appellant and directed the Assessing Officer to accept depreciation as calculated by the Appellant and thereby deleted the addition made on account of reduction of depreciation claimed by the Assessing Officer vide common order passed in a batch of appeals including the appeal preferred by the Appellant for the Assessment Year 2001-02 and 2002-03 2022 (5) TMI 104 - ITAT MUMBAI . Disallowance of interest and other expenses made u/s 14A - as in return of income the Appellant had claimed exemption in respect of dividend and interest income from equity shares/Units of mutual funds and tax free bonds - HELD THAT - While arriving at the enhanced amount of disallowance the CIT(A) has borrowed the computation mechanism prescribed in Rule 8D of the Rules as a reasonable basis even though the aforesaid Rule 8D did not apply to the Assessment Year 2004-05. It is admitted position that the own funds of the Appellant were much more than the investments. Therefore, as per the judgment of HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT no disallowance can be made under Section 14A of the Act (by applying the provisions contained in Rule 8D of the Income Tax Rules). Therefore, the basis on which the CIT(A) has computed the disallowance cannot be regarded as reasonable. While making the disallowance the AO has observed that the burden was on the Appellant to show that the investment were made from own funds. The reasoning given by the CIT(A) is contrary to the judgment of the Hon ble Supreme Court in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT given the facts of the present case noted hereinabove, it would be presumed that investments were made out of own funds and therefore, proportionate disallowance of interest expenses under Section 14A of the Act was not warranted on the ground that separate accounts were not maintained by Appellant for investments and other expenditure incurred for earning tax-free income - Disallowance u/s 14A deleted. Nature of receipt - extinguishment of sales tax deferred loan liability - capital or revenue receipt - HELD THAT - Respectfully following the above decision of the Tribunal in the case of the Appellant 2022 (5) TMI 104 - ITAT MUMBAI we delete the addition made by the Assessing Officer on account of extinguishment of debt being sales tax deferred loan liability inclined to set aside the order of CIT(A) on this issue by holding that receipts is a capital in nature. TP Adjustment - determination of ALP of the transaction of reimbursement of project cost overrun expenses by the Appellant - HELD THAT - Approval granted by the RBI and other authority to the Appellant for making the remittance of project cost overrun expenses was not based upon a threshold rate accepted or determined by RBI/such authority which could have been regarded as an independently determined price for benchmarking the remittances. In any case going by the relevant transfer provisions contained in the Act and rules made thereunder, the Appellant is required to independently benchmark its international transaction to arrive at arm's length price. We note that the Appellant has claimed that the remittance was purely in the nature of reimbursement of cost and therefore, the same should be considered as at arm s length as per Cost Plus Method. However, in effect, the Appellant had remitted 100% of the project cost overrun expenses which can be considered as Appellant s share of project cost overrun expenses of 80% along with markup of 20%. On the other hand, TPO was also required to determine the arm s length price by following one of the method prescribed. Accordingly, we remand this issue back to the file of the TPO/Assessing Officer for determination of ALP of the transaction of reimbursement of project cost overrun expenses by the Appellant to L T Ceylinco and recompute transfer pricing adjustment, if any. In terms of the aforesaid, Ground No. 8 raised by the Appellant is allowed for statistical purposes. Contract executed prior to the introduction of transfer pricing provisions - The actual computation of income and income tax would be made as per the law prevailing on 1st April of the relevant Assessment year. In the case before us, there is no dispute as to the nature/character of the international transaction. Further, the Assessing Officer has applied the transfer pricing provisions as applicable on 01/04/2004, which only affect the computation of income. Further, we note that even the provisions contained in Section 92 of the Act as on the date of the execution of the agreements under consideration provided for determination of arm s length price in case of International Transaction between Associated Enterprises with respect to arrangement for allocation or apportionment of cost or expenses. In view of the aforesaid, we reject the contention of the Appellant that the transfer pricing provision would not apply to the International Transaction reported by the Appellant during the relevant previous year for the reason the same arise out of a contract executed prior to the introduction of transfer pricing provisions. Computation of deduction u/s 80HHC 80HHE - As relying on own case 2000-2001, 2001-02 and 2002- 03 direct the AO to reduce net profits from profits of the business for the purpose of computing deduction under Section 80HHC/80HHE of the Act. Whereas, issues raised relating to reduction of profit of business by 90% of the Miscellaneous income and exclusion of profits of projects eligible for deduction under Section 80HHB of the Act from the profits of the business are concerned, we remit the aforesaid issues back to the file of the Assessing Officer for fresh adjudication in terms of the order passed by the Tribunal in the above said preceding assessment years. Accordingly, Grounds allowed for statistical purposes. Disallowance u/s 14A for the purpose of computing book profit u/s 115JB - HELD THAT - As we have deleted the addition made u/s 14A for the purpose of computing income under the normal provisions of the Act. Therefore, the addition made while computing books profits u/s 115JB does not survive. Accordingly, addition made by the AO while computing the Book Profits under Section 115JB of the Act is deleted.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Valuation of Construction Work-In-Progress.
3. Disallowance of provision for foreseeable loss.
4. Disallowance under Section 40A(9).
5. Partial disallowance of depreciation.
6. Disallowance under Section 14A.
7. Addition on account of gain from extinguishment of sales tax deferred loan liability.
8. Transfer pricing adjustment.
9. Computation of deduction under Section 80HHC.
10. Computation of deduction under Section 80HHE.
11. Disallowance under Section 14A for computing book profit under Section 115JB.
12. Additional grounds regarding computation of deduction under Section 80HHC and 80HHE for determining book profit under Section 115JB.

Detailed Analysis:

Ground No. 1: Disallowance of Commission Expenses
- The Appellant claimed commission expenses of INR 2,94,88,620/- for services rendered by various parties.
- The Assessing Officer disallowed this amount due to inadequate evidence of services rendered.
- The CIT(A) upheld this disallowance based on previous Tribunal decisions against the Appellant.
- The Tribunal, following the precedent, confirmed the CIT(A)'s order and dismissed the ground.

Ground No. 2: Valuation of Construction Work-In-Progress
- The Assessing Officer noted a discrepancy in the valuation of Work-in-Progress, reducing it by INR 54,16,82,032/-.
- The CIT(A) dismissed the issue as academic since no addition was made by the Assessing Officer.
- The Tribunal agreed with the CIT(A) that the issue was academic and dismissed the ground.

Ground No. 3: Disallowance of Provision for Foreseeable Loss
- The Appellant created a provision for foreseeable losses of INR 9,79,40,038/-.
- The Assessing Officer disallowed this, deeming it contingent.
- The CIT(A) upheld the disallowance, stating the provision did not crystallize during the relevant year.
- The Tribunal, while agreeing in principle that foreseeable losses can be allowed, remanded the issue back to the Assessing Officer for verification of project completions and revenue offerings.

Ground No. 4: Disallowance under Section 40A(9)
- The Appellant paid INR 1,50,000/- to Utmal Employees Welfare Fund.
- The Assessing Officer disallowed this under Section 40A(9).
- The CIT(A) upheld the disallowance.
- The Tribunal, following previous decisions, deleted the addition and allowed the ground.

Ground No. 5: Partial Disallowance of Depreciation
- The Assessing Officer reduced depreciation by INR 4,11,94,218/- due to a hypothetical allocation of asset values.
- The CIT(A) confirmed this reduction.
- The Tribunal, following a previous decision that recognized the sale as a slump sale, directed the Assessing Officer to accept the Appellant's depreciation calculation and allowed the ground.

Ground No. 6: Disallowance under Section 14A
- The Assessing Officer disallowed INR 3,18,00,000/- under Section 14A for interest expenses.
- The CIT(A) enhanced the disallowance to INR 12.24 Crores.
- The Tribunal found that the Appellant's own funds were more than the investments and deleted the disallowance, following the HDFC Bank Ltd. case.

Ground No. 7: Addition on Account of Gain from Extinguishment of Sales Tax Deferred Loan Liability
- The Assessing Officer treated the gain of INR 4,25,44,104/- from extinguishment of sales tax deferred loan liability as revenue receipt.
- The CIT(A) upheld this addition.
- The Tribunal, following previous decisions, deleted the addition and allowed the ground.

Ground No. 8: Transfer Pricing Adjustment
- The TPO made an adjustment of INR 4,11,67,000/- based on the Appellant bearing 100% of project cost overrun expenses.
- The CIT(A) upheld this adjustment.
- The Tribunal remanded the issue back to the TPO/Assessing Officer for determination of ALP and recomputation, allowing the ground for statistical purposes.

Ground No. 9: Computation of Deduction under Section 80HHC
- The Assessing Officer reduced 90% of gross interest and miscellaneous income from business profits and excluded profits eligible under Section 80HHB.
- The CIT(A) upheld this computation.
- The Tribunal, following previous decisions, directed the Assessing Officer to reduce net profits and remanded other issues for fresh adjudication.

Ground No. 10: Computation of Deduction under Section 80HHE
- Similar to Ground No. 9, the Assessing Officer's computation was upheld by the CIT(A).
- The Tribunal directed the Assessing Officer to reduce net profits and remanded other issues for fresh adjudication.

Ground No. 11: Disallowance under Section 14A for Computing Book Profit under Section 115JB
- The Assessing Officer added INR 3,18,00,000/- while computing book profit under Section 115JB.
- The CIT(A) upheld this addition.
- The Tribunal deleted the addition, directing the Assessing Officer to compute disallowance based on audited financial statements as per the Vireet Investments Ltd. case.

Additional Grounds 1 & 2: Computation of Deduction under Section 80HHC and 80HHE for Determining Book Profit under Section 115JB
- The Appellant claimed deductions should be computed based on profits as per the Profit & Loss Account.
- The Tribunal admitted these additional grounds and remanded the issues to the Assessing Officer for adjudication.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on several grounds, remanding some issues for fresh adjudication, and maintaining disallowances where precedent dictated.