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TMI Blog2016 (3) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit, which is not justified. In view of this, we hold that the depreciation claimed by the assessee on the above value of ₹ 43,88,000/- in earlier year, which the assessee is not entitled, need to be brought back to tax u/s.28(iv) of the Act as the value of benefit is arising from the business of the assessee. After reducing the said amount of depreciation granted earlier from the amount of ₹ 43,88,000/-, the balance amount is to be reduced from the closing written down value of block of assets. Accordingly, we direct the AO to bring back to tax, the amount of depreciation granted to the assessee in the earlier years on the alleged amount of ₹ 43,88,000/- u/s.28(iv) of the Act and re-determine the closing written down value of block of assets in the year under consideration - Decided in favour of revenue Disallowance of expenses incurred towards premium of premature redemption of debentures - Held that:- Applying the ratio laid down in the case of Madras Industrial Investment Corporation Ltd. V. Commissioner of Income Tax reported in [1997 (4) TMI 5 - SUPREME Court] and National Engineering Industries Ltd., VCIT [1998 (9) TMI 65 - CALCUTTA High Court] where u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also has made a wrong claim of deduction u/s 80HHC by treating the interest receipts as export incentives - Decided against assessee ALP - assessee's claim of adoption of ALP at USD 965/MT rejected - Held that:- In this case, price variation is more than 5%, Assessing Officer is justified in making adjustment of ALP determined by the tax payer and the proviso to sec.92C provides that where more than one price may be determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices. In the instant case only one price has been determined under most appropriate method, the question of application of the proviso does not arise. - Decided against assessee - ITA Nos. 459/Mds/2010 & 904/Mds/2011 - - - Dated:- 22-1-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For The Department : Dr. B. Nischal, JCIT For The Assessee : Shri R. Vijayaraghvan, Advocate ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER These appeals by the Revenue as well as the appeal and the cross-objection by the assessee are directed against different orders of the Commissioner of Income-tax(Appeals) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. 5. The ld. AR submitted that the assessee has reduced the entire cost and not the WDV from the block of plant machinery . As long as the theory of block asset is prevalent, any deletion or adjustment can be done to the block only. Unless and until the block is wiped out, the short-term capital gain/loss arising from the block cannot be offered as income. Hence, the ld. AR submitted that the question of addition u/s.41(1) of the Act does not arise since any change can be effected only in the block. The entire amount reversed will go to reduce cost and lesser depreciation will be claimed to that extent in future. It is also explained that, so far as the depreciation is concerned, which has already been charged in the P L account is neither a loss nor an expenses nor a trading liability as contemplated u/s.41(1) of the Act. For this purpose, he relied on the decision of the Supreme Court in the case of Nectar Beverages Pvt. Ltd. v. DCIT (314 ITR 314). 6. On the other hand, the ld. DR relied on the order of the CIT(Appeals). 7. We have heard both the parties and perused the material on record. In this case, the assessee had obtained the benefit of depreciation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment was nothing but the foreclosure charges paid by the assessee for redemption of debentures. According to the Assessing Officer, the amount paid on premature redemption of debenture cannot be considered as discount or interest paid by the assessee as in the case of Madras Industrial Investment Corporation Ltd. v. CIT [225 ITR 802 (SC)] but can be considered as monetary penalty paid by the assessee to respective lenders. He disallowed the above expenditure in terms of Explanation to 37(1) of the Act (though Explanation is not explicitly mentioned in the order). He has also stated that expenditure would be of capital nature since it would provide enduring business advantage by way of reduced interest payments in future years. Aggrieved, the assessee carried the matter before the CIT(Appeals). 10. On appeal, the CIT(Appeals) observed that the Assessing Officer is not correct in treating the above payment as an expenditure covered under the Explanation to section u/s 37 (1) of the Act. As per the provisions of the Explanation to section 37(1) of the Act, the expenditure incurred for any purposes which is an offence or which is prohibited by law cannot be allowed as a dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure as the above sum has been paid at the time of closure of loan. The Chennai Tribunal in the case of M/s.Overseas Sanmar Financial Ltd v, JCIT reported in 86 ITD 602, on identical facts, has held that deduction of foreclosure premium paid on loan taken in earlier year which was repaid prematurely in full in previous year is allowable as business expenditure under section 37(1) of the Income Tax Act. 1961. 10.2 The CIT(Appeals) observed that the assessee s case is identical to the facts of Overseas Sanmar Financial Ltd. cited supra, After discussing the facts of the case and the rulings of the Apex Court in Madras Industrial Investment Corporation Ltd. [225 ITR 802 (SC)], CIT v. Sivakami Mills Ltd. [227 ITR 465 (SC)] and CIT v. Madras Auto Services (P) Ltd. [233 ITR 469 (SC)], the ITAT, Chennai held as under: Reduction in the rate of interest for fresh loans to be advanced by the financial institutions led the assessee-company to payoff the entire loan that carried the burden of higher rate of interest. The assessee apparently calculated the amount of interest that it would be paying over the years at the agreed rate of interest and compared it with the foreclosure pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s purpose. In our opinion, the same view was taken by the Jurisdictional High Court in the case of CIT v. M/s. First Leasing Company of India Ltd. in TC(Appeal) No.209 of 2006 and TC(Appeals) No.1099 of 2004. Vide judgment dated 22.2.2006, their Lordships observed as follows: 2. It is apt to refer Section 37 of the Income Tax Act, which reads as follows: 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession. 5.1. The questions whether the discount on debenture is the revenue expenditure or capital expenditure and the same could be spread over and that whether the expenditure incurred for the issue of debenture in earlier years has to be spread over and owed as a deduction in future years came for consideration before the Apex Court in the case of Madras Industrial Investment Corporation Ltd. V. Commissioner of Income Tax reported in 225 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision Bench of this Court in the case of Commissioner of Income-tax V. Tube Investments of (India) Ltd. reported in 261 ITR 753, held that pro-rata annual allocation of premium payable on redemption of debentures allowed by the Tribunal is in accordance with the law laid down by the Apex Court in the case of Madras Industrial Investment Corporation Ltd. V. Commissioner of Income Tax reported in 225 ITR 802. 9. Similar view was also taken by the Calcutta High Court in the case of National Engineering Industries Ltd., V. C.I.T. reported in 236 ITR 577, wherein it has been held as follows: There is no distinction between a discount and a premium. The result in both is that something over and above the face value and the specified interest is paid, the accounting procedure in one case being by way of a preliminary deduction from the m oned amount, and the accounting procedure is the other case being an addition at the end over the prescribed and mentioned face value amount. The extra premium is to be spread over all the years which are occupied between the date of issue and the date of ultimate redemption. (emphasis supplied) 10. Applying the ratio laid down in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals). 16. On appeal, the CIT(Appeals) observed that the transfer policy legislation requires a tax payer to determine an arm's-length price of their international transactions. The expression arm's- length price is defined by sec. 92F of the Act to mean a price that is applied or proposed to be applied to transactions between persons other than associated enterprises in uncontrolled conditions. Further, he observed that the section provides that where more than one arm's- length price is determined by applying the most appropriate TP method, the arithmetical mean of such prices shall be considered as the arm's length price of the international transaction. Though the TP legislation does not recognize the concept of an arm's-length range , it provides a limited safe harbour to the tax payers in the form of a (+) / ( -) 5% range. The TP legislation provides an option to the assessee to adopt as arm's-length price any price which fall within (+) / ( -) 5% of the arithmetic mean of the multiple prices discussed above. The CIT(Appeals) also observed that the Arms Length prices determined by her is not more than 5% of the rate paid by the appellant. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to Rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what transactions can be considered as closely linked , since the same would depend on facts and circumstances of each case. So, however, as per an example noted by the Institute of Chartered Accountants of India, in its Guidance Notes on transfer pricing, it is stated that two or more transactions can be said to be closely linked , if they emanate from a common source, being an order or contract or an agreement or an arrangement, and the nature, characteristic and terms of such transactions substantially flow from the said common source. 6. Considering the facts of the present case, we find that all the seven sets of international transactions undertaken by the assessee cannot be considered as closely linked . We, therefore, refuse to accept the contention of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,56,47,000/ as revenue expenditure instead of treating it as capital expenditure. The assessment was completed u/s 143(3) r.w.s 147 on 13 02 2006 wherein no addition was made on the issue on which the assessment was reopened. However, the AO disallowed the provision for bad and doubtful debts, recomputed the deduction u/s 80HHC and denied deduction u/s.80IA. The Id. CIT(A) vide order in ITA No.669/2005 06 dated 01 12 2006 annulled the reassessment as bad in law. The AO once again reopened the assessment by issuing notice u/s 148 on 03 08 2007 mainly based on the letter dated 27 02 2007 from the CIT, Mumbai. The assessee had requested the AO to furnish the reasons for reopening which was duly communicated to it. The objection of the assessee to the reopening was rejected by the AO vide letter dated 19 11 2008. Thereafter, the assessee had filed two writ petitions before the Madras High Court challenging the notice u/s 148 issued on 03 08 2007 and the order rejecting the objections dated 19 11 2008. The writ petitions were admitted and stay was granted. Subsequently, they were disposed off on 17 09 2010 directing the assessee to produce the records and satisfy the AO that there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating expenditure . The Schedule-16 of the profit and loss account giving details of operating expenditure of ₹ 8,28,862,000I- includes compensation paid to M/s Tamilnadu Petro Products Limited for the purpose of termination of supply agreement of ₹ 63,02,47,5931-. Therefore. the same has been claimed as a revenue expenditure in the hands of M/s CIBA India Private Limited since it is being related to the supply of the raw material and the same has been accepted by the Assessing Officer vide assessment order passed u/s 143(3) by the ITO 9(1)(3), Mumbai vide order dated 29.3.2004. Based on the above facts, it is clear that the assessee has not disclosed all the material facts fully and truly before the Assessing Officer in the return of income even though the payment of ₹ 63,02.47,893/- is purely related to the termination of supply agreement of raw material and only ₹ 071 - was related to the compensation paid for the first refusal of the shares. Therefore the contention of the assessee that the entire material facts were available in the return of income is completely wrong misleading the department and the same cannot be accepted. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 143 has been made for the relevant assessment year, which is 2001-02, in this case, no action shall be taken u/s 147 after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by the reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. One has to see as to what failure of the assessee to disclose fully and truly all material facts signify. It is true that every disclosure is not and cannot be treated to be a true and full disclosure. A disclosure can be even false or true. It may be a full disclosure or it may not be a full one. A part disclosure many a times may be misleading one. What is required under the law is a full and true disclosure of all material facts necessary for making assessment for that year. This law was laid down by the Hon'ble Supreme Court in the case of Sri Krishna Pvt. Ltd etc vs ITO Others, 221 ITR 538. The words omission or failure to disclose fully and truly all material facts necessary for assessment for that year postulates a failure of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment is bad in law. The ld. AR relied on the following judgments: i) Rajasthan Syntex Ltd. 313 ITR 231 (SC) SLP dismissed-313 ITR 27(St.) ii) SFIL Stock Broking Ltd. 325 ITR 285(Del.) iii) Prashant Joshi 324 ITR 154(Bom) iv) Corporation bank 254 ITR 791(SC) v) TNTDFC 306 ITR 136 (Mad.) vi) Fenner India 241 ITR 672(Mad.) vii) Mihir Textiles 239 CTR 95 (Guj.) viii) Hind Syntex 331 ITR 36(MP) ix) Kelvinator of India 320 ITR 561(SC) x) A.V.Thomas Exports Ltd. 296 ITR 603(Mad.) xi) Haryana Acrylic Mfg. Co. 308 ITR 38(Del.) xii) Empire Jute 124 ITR 1(SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2001-02 as compensation for premature termination of the contract relating to M/s. Petro Araldite Pvt. Ltd. by releasing M/s. Ciba India Pvt. Ltd. (CIPL) and for surrender of rights for the shares to be sold. Though the assessee company has claimed that the entire amount of ₹ 63.02 crores is capital receipt the facts gathered show that at least a part of it should be on revenue account. M/s. Petro Araldite is joint venture of M/s. CIBA India (Pvt.) Ltd. and the assessee, for manufacture of basic liquid resins with 76.24 share (24% for the assessee) CIBA India Ltd. have sold the entire shares held by them to M/s. Vatico Performance Polymers for ₹ 40 crores and payment, if any, for surrender of right of first refusal would only be small portion of ₹ 63.02 crores paid to the assessee. Therefore, the entire sum of ₹ 63.02 crores could not have been paid to the assessee for surrendering its first right of purchase of CIBA s shares. The assessee company continued to have its shares in Petro Araldite. The substantial part of ₹ 63.02 crores should be in relation to compensation for alleged termination of contracts and it should be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is opinion for taking recourse to section 147 r.w.s 148 of the Act. There cannot be two opinions. The point of time when the reasons are recorded after forming opinion of escapement of income is only relevant. Hence, this plea of the ld.AR is not tenable in the eyes of law. It is true that u/s 147, the Assessing Officer can either assess or re-assess but for taking action thereunder, he has to record reasons that income chargeable to tax has escaped assessment . It is also mandated by section 148(2) to record reasons in writing. The reassessment proceedings u/s 147 are further subject to sections 148,149,150,151,152 and 153. But in the present case, we are required to decide the limited issue regarding the validity of proceedings undertaken after four years of the assessment year in question. The Assessing Officer is required to see if the conditions laid in Explanation 2(c) because in this case the assessment was completed u/s 143(3) are satisfied or not. In case, (i) income chargeable to tax has been under assessed; or (ii) such income has been assessed at too low rate; or(iii) such income has been made the subjective of excess relief under this Act; or (iv) excessive loss or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and truly all material facts necessary for his assessment for that assessment year. There are two other conditions which are not relevant for deciding the legal issue under appeal. We have to see as to what failure of the assessee to disclose fully and truly all material facts signify. The expression failure to disclose material facts has been explained in the Taxman s Direct Taxes Manual Volume 3. It is true that every disclosure is not and cannot be treated to be a true and full disclosure. A disclosure can be even false or true. It may be a full disclosure or it may not be a full one. A part disclosure many a times may be misleading one. What is required under the law is a full and true disclosure of all material facts necessary for making assessment for that year. This law was laid down by the Hon'ble Supreme Court in the case of Sri Krishna Pvt. Ltd etc vs ITO Others, 221 ITR 538. The words omission or failure to disclose fully and truly all material facts necessary for assessment for that year postulates a failure of the assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated above, when the assessee has not disclosed fully and truly the facts necessary for the assessment , this proviso will not come to its rescue. Same is applicable to other reasons records for reopening of assessment. Consequently, we hold that the entire reassessment proceeding in this case is valid and therefore, the action of the Assessing Officer is upheld. The assessee fails on this legal issue. 28. The assessee company claimed that the receipt of ₹ 6302.48 lakhs during the previous year relevant to the assessment year 2001-02 as compensation for premature termination of the contract relating to M/s. Petro Araldite Pvt. Ltd. by releasing M/s. Ciba India Pvt. Ltd. (CIPL) and for surrender of rights for the shares to be sold and treated the same as capital receipt. 28.1. Though the assessee company claimed that the entire amount of ₹ 63.02 crores is capital receipt, the fact gathered show that at least a part of it should be on revenue account. M/s. Petro Araldite is joint venture of M/s. CIBA India (Pvt.) Ltd. and the assessee, for manufacture of basic liquid resins with 76.24 share (24% for the assessee) CIBA India Ltd. have sold the entire shares held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein appellant had adopted the transfer price of US$919.23/-. 4. The Deputy Commissioner of Income tax failed to appreciate that if the average of all the transactions concluded by the assessee during the year is taken as a whole then there is no significant difference inviting adjustment. 5. The Deputy Commissioner of Income tax ought to have taken the rate mentioned in the invoice dated 19-05-2005 being US$ 955.83/MT as comparison as it is nearer to the export invoice dated 08-05-2005 instead of averaging all the transactions entered during the year. 6. The Deputy Commissioner of Income tax failed to appreciate that if the transactions in May month alone is to be taken for comparison then, the transaction rate of U8$ 919.23/mt is well within the 5% variation of the rate of US$965/mt being the weighted average rate of the 5 comparables invoices for the month of May as ALP and hence requires no disturbance. 7. In any event, the Deputy Commissioner of Income tax ought to have granted adjustment of 5% before computing the adjustments to the Transfer Pricing. 31. The facts of the case are that the JCIT, TPO-III, Chennai made adjustments to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The AR in his letter dated 30.08.2010 claimed before the AO that rate of USD 1050 per MT prevailed in March 2005 and hence the same should not be accepted as ALV on 08.05.2010. But such claim is in contradiction to information furnished in assessee's own audited accounts. So far as asseessee's claim that result of accounts should be accepted in entirety is concerned, it may be mentioned that the certificate by Chartered Accountant in form No.3CD does not constitute a bar for application of provisions of IT by the revenue. 33.1 The ld. DR also submitted that as discussed in the preceding para the assessee's claim of adoption of ALP at USD 965/MT had been rightly not accepted by TPO and hence the arguments of the ld. AR that variation between TP and ALP is within accepted range of 5%, is not correct. 34. We have discussed this issue in ITA No.459/Mds/2010 and placed reliance on the earlier order of the Tribunal in ITA No.63/Mds/2008 in the case of M/s. Coastal Energy Pvt. Ltd., wherein it was observed as under: 7. Further, in this case, price variation is more than 5%, Assessing Officer is justified in making adjustment of ALP determined by the tax payer and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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