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TMI Blog2016 (7) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of assessee for statistical purposes. Disallowance of Expenses incurred for GDRs - revenue or Capital Expenditure - Held that:- Hon'ble Apex Court in the case of Brook Bond India Ltd. (1997 (2) TMI 11 - SUPREME Court ) has held that even though the increase in capital results in expansion of the capital base of the company and incidentally that would help the business of the company and may also help in profit making, the expenses incurred in that connection still retains the character of capital expenditure since the expenditure is directly related to the expensing of the capital base of the company. In that view of the matter, the aforesaid expenditure incurred by the assessee in the case on hand for listing of GDRs is capital expenditure and the assessee’s claim that the said expenditure be allowed under section 37(1) of the Act is not legally tenable as the share capital of the assessee has increased consequent to the issue of GDRs and the said expenditure incurred is clearly capital in nature. We, therefore, finding no infirmity in the impugned order of the learned CIT(A) uphold the finding therein that the said expenditure of ₹ 49,01,024/- paid to Linklaters, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity case on the assessee in the case on hand to withhold tax under section 195 of the Act on the said payments which, inter alia, constitute payment of legal and professional fees, L/C Commission, arranger fees, etc., incurred in connection with the issue of FCCBs and therefore no disallowance under section 40(a)(i) of the Act is called for. - Decided in favour of assessee Disallowance of STCL on Loan Assignment - Held that:- Following the decision of the Coordinate Bench of this Tribunal in the case of Siemens Nixdorf Informations systeme GmbH (2016 (4) TMI 384 - ITAT MUMBAI) we uphold the order of the learned CIT(A) in allowing the assessee’s claim for STCL on assignment of loan to M/s. Western Power Alliance Ltd. - Decided in favour of assessee - ITA No. 847/Mum/2011, ITA No. 1425/Mum/2011 - - - Dated:- 8-7-2016 - Shri Jason P. Boaz, Accountant Member And Shri Saktijit Dey, Judicial Member For the Assessee : Shri Jitendra Sanghavi Shri Deepak Jain For the Revenue : Shri Jasbir Chouhan ORDER Per Jason P. Boaz, A.M. These are cross appeals, by the assessee and Revenue, directed against the order of the CIT(A)-13, Mumbai dated 26.10.2010 for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,31,115 made to Centre for Investment Business Advisory, Indonesia was liable to tax in India as fee for technical service u/s 9(1)(vii) of the Income Tax Act. Your appellant submits that the payment made to the Indonesian Resident for tax due diligence services in Indonesia is not liable to tax in India under Double Tax Avoidance Agreement (DTAA) between India and Indonesia. Therefore no tax was deductible u/s 195 of the Act and no disallowance u/s 40(a)(i) ought to have been made with regards to this payment. 2. The learned CIT(A) erred in confirming the disallowance of ₹ 49,01,024/- paid as professional fees in connection with listing of Global Depository Receipts (GDRs) holding the same as capital expenditure. Your appellant submits that the said professional fee was paid for listing of GDRs issued in connection with restructuring and reorganization of existing business and not for expansion of capital base. The expenditure ought to have been allowed as incurred wholly and exclusively for the purposes of business. 3. The Learned CIT (A) erred in directing to work out disallowance of administrative expenses u/s 14A at the rate of 6% of average weighte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned A.R. for the assessee submitted that the AO has erroneously taken ₹ 73,115/- while making the disallowance under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act and the correct figure is ₹ 7,31,115/- which has been correctly taken by the learned CIT(A) in the impugned order. The learned A.R. for the assessee submitted that the AO s view was that the said amount was to be disallowed under section 40(a)(ia) of the Act in view of the assessee s failure to deduct tax under section 195 of the Act. According to the learned A.R., while undisputedly the learned CIT(A) was correct in holding that this amount of ₹ 7,31,115/- paid to the Indonesian entity for tax due diligence is exigible to tax in India under section 9(1)(vii) of the Act, the learned CIT(A) has not considered the relevant provision of the India- Indonesia DTAA to see whether the said amount is exigible to tax thereunder. The learned A.R. contends that in the India-Indonesia DTAA there is no Article in respect of FTS and therefore the same payment falls within the ambit of Business Profits in Article 7 of the DTAA. Therefore, the said payment of ₹ 7, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it, i.e. the DTAA or the Act, in accordance with law and after affording the assessee adequate opportunity of being heard and to submit details/submissions in this regard. It is accordingly ordered. Consequently, ground No. 1 of the assessee s appeal is treated as allowed for statistical purposes. 6. Ground No. 2 - Disallowance of Expenses incurred for GDRs - ₹ 49,01,024/- as Capital Expenditure 6.1 In this ground the assessee assails the impugned order of the learned CIT(A) in confirming the disallowance of ₹ 49,01,024/- which were paid as professional fees to Linklaters, U.K. in connection with the listing of Global Depository Receipts (GDR) by holding the same to be capital expenditure. It is submitted that the said expenditure was incurred for listing of GDRs in connection with restructuring and re-organisation of existing business, which were wholly and exclusively for the purposes of assessee s business and not for expansion of capital base and therefore ought to have been allowed as claimed. The learned A.R. for the assessee was heard in support of the grounds raised and prayed that the assessee s claim be allowed. 6.2 The learned D.R. placed strong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made under section 14A of the Act since Rule 8D came into force only from A.Y. 2008-09. Without prejudice to the above averment that no disallowance can be made, it is submitted that if at all, the disallowance ought to have been minimal having regard to the minimal transactions of investments in mutual funds (MF) and passive investment in group company shares. 7.1.2 The learned A.R. for the assessee for the assessee submitted that the AO has passed the order giving effect to the impugned order of the learned CIT(A) vide order dated 11.04.2012 and has worked out the disallowance under Rule 8D(2)(iii) at ₹ 14,80,122/-. According to the learned A.R. for the assessee, in the year under consideration the assessee has made major investments in units of MFs, comprising 53 transactions of investments and redemptions and the earning of exempt income generally does not require the incurring of any expenditure. The investment in shares is stated to have been made mostly in earlier years. In these circumstances the learned A.R. contends that no disallowance under section 14A of the Act is called for. The learned A.R. for the assessee, inter alia, also cited the decision of the Coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 626/2010 dated 13.08.2010) has held that the provisions of section 14A of the Act r.w. Rule 8D of the Rules is not arbitrary or unreasonable, but that it can be applied if the assessee s method is not satisfactory. It has also been held that Rule 8D is applicable from A.Y. 2008-09. For the year in question, i.e. A.Y. 2007-08, Rule 8D of the Rules is not applicable and therefore if the AO is not satisfied with the explanation put forth by the assessee that no expenditure was incurred to earn the exempt dividend income, the disallowance under section 14A of the Act is to be made on a reasonable basis. The Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. Others vs. CIT (347 ITR 162) has expressed an almost similar view. In this view of the matter, the application of Rule 8D of the Income Tax Rules, 1962 in the case on hand by the authorities below is not sustainable. 7.3.3 It is seen that the case on hand is not one where no exempt income was earned by the assessee. In such circumstances, various Coordinate Benches of this Tribunal have observed that in such cases certain percentage of exempt income can constitute the basis for a reasonable estimate for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be equated to short term capital loss. 5. The appellant prays that the order of CTT(A) on the grounds be set aside and that of the AO restored . The appellant craves leave to amend or alter any ground or add a new ground that may be necessary. 11. Grounds No. 1 to 3 - Disallowance of Expenditure on FCCB issue - ₹ 28,58,28,246/- 11.1 In these grounds, the Revenue contends that the learned CIT(A) erred in deleting the disallowance made by the AO of expenditure of ₹ 28,58,28,246/- incurred by the assessee on the issue of Foreign Currency Convertible Bonds (FCCB), since they were capital in nature. It is further contended that the learned CIT(A), while deleting the aforesaid disallowance had wrongly mentioned that the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. (320 ITR 209) was overruled by the Hon'ble Apex Court, when actually it was remanded to the High Court for fresh adjudication. In ground No. 3 Revenue also contends that, without prejudice to the arguments put forth in grounds 1 and 2, even if the aforesaid expenditure incurred on issue of FCCBs is held to be revenue in nature, TDS was not mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indra Ltd. vs. JCIT (2010) 36 SOT 348 (Mum) iii) CIT vs. Secure Meters Ltd. (2009) 175 Taxman 567 (Raj) iv) CIT vs. Tata Teleservices () Ltd. (2014) 47 taxmann.com 238 (Bom) v) CIT vs. ITC Hotels Ltd. (2011) 334 ITR 198 (Kar) vi) CIT vs. South India Corpn. (Agencies) Ltd. (2007) 290 ITR 217 (Mad) vii) CIT vs. Havells India Ltd. (2013) 352 ITR 376 (Del) viii) CIT vs. First Leasing Co. of India Ltd. (2008) 304 ITR 67 (Mad) ix) Gati Limited (ITA No. 749/Hyd/2012 dated 04.01.2013) x) Gati Limited (ITA No. 1325/Hyd/2015 dated 10.03.2016) 11.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that similar issue of treatment of expenses incurred in issue of FFBs on similar facts, as in the case on hand, was dealt with by a Coordinate Bench of this Tribunal in the case of Prime Focus Ltd. in its order in ITA No. 8364/Mum/2011 dated 04.02.2016 at paras 3 to 13 thereof. The Coordinate Bench at paras 8 to 11 and 13 thereof held that the expenses incurred in connection with issue of FCCBs/raising of debts are in principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Hon'ble Apex Court in the case of Hero Cycles P Ltd (supra). Relevant para from the said judgment is extracted as under:- Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another‟ [2007 (288) ITR 1 (SC)]. Once it is established that thereso is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. 11. Legal propositions : Scope of Ld DR - Making out a new case of applicability of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct provides that an assessee has a liability to deduct tax at source only when the remittance to be made to the non-resident is a trading receipt, the whole or part of which is liable to tax in India, at para 10 thereof has reversed/set aside the judgement of the Hon'ble Karnataka High Court for de novo consideration in line with its directions. 13.1 The AO had also held at para 5 of the assessment order, that since the assessee had not deducted tax at source on the payment of expenditure incurred in connection with the issue of FCCBs under section 195 of the Act, the same is disallowed under section 40(a)(i) of the Act. The details of the nature of payments (i.e. arranger s fees, legal and professional fees, L/C commission and trusteeship fees, principal agent fees, etc.), amounts paid and parties names, etc. are also mentioned at para 5 of the order of assessment. On appeal, the learned CIT(A) held that the said payments were not exigible to tax in India by placing reliance on the judicial pronouncements in the case of ITO vs. Prasad Production Ltd., Chennai (125 ITD 263) ( SB Chennai) and VAN Cord ACZ India (P) Ltd. vs CIT (Delhi HC) and therefore the question of making T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loan to M/s. Western Alliance Power Ltd., originally loaned/ advanced to M/s. Reliance Patalganga Power Ltd. by the assessee and claimed as short term capital loss (STCL) without appreciating that the STCL arose because of lesser capital amount received and not on sale of capital gains and therefore could not be equated to STCL. The learned D.R. was heard in support of the grounds raised and placed reliance on the order of the AO on this issue. 14.2 Per contra, the learned A.R. for the assessee supported the findings of the learned CIT(A) on this issue in the impugned order. The learned A.R. for the assessee further submitted that reliance was placed, inter alia, on the decision of the Coordinate Bench of this Tribunal in the case of Siemens Nixdorf Informationssysteme GmbH vs. DDIT (2016) 68 taxmann.com 113 (Mumbai-Trib), wherein the issue of allowing of STCL was considered in the context of an assessee advancing loan to its subsidiary which ran into serious financial difficulties and the assessee sold this debt to another company for less consideration and claimed the difference as STCL. The Coordinate Bench held that the loss arising thereon was to be allowed as STCL. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or profession, except those specifically excluded. The word property does not mean merely physical property, but also means right title or interest in it. Reliance is placed on decision of Bombay High Court in the case of Bafna Charitable Trust v CIT 203 ITR 864 holding that it is clear from the above definition that for the purpose of this clause, property is a word of the widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded . c) Reliance has been made on the following case laws to state that the loan constitute capital asset 1. CIT v Minor Bababhai Alias Lavkumar Kantilal 128 ITR 1 (Guj) 2. CIT v East India Charitable Trust 207 ITR 152 (Cal) 3. Madhya Pradesh Financial Corporation v CIT 132 ITR 884 (M.P.) d) Since the loan (capital asset) has been transferred/assigned to M/s. Western Alliance Power Ltd. resulting in a loss of ₹ 17,75,67,418/-. Therefore the loss on assignment of loan is allowable as Short Term Capital Loss as claimed. 4.4 This ground of appeal is allowed. 14.3.3 Taking into consideration the facts and circumstances of the case, we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... views of Hon ble jurisdictional High Court, there is no reason for us to exclude an advance from the scope of capital asset . An advance given by the assessee is a property in the sense it is an interest which a person can hold and enjoy, and since it is a property and it is not covered by the exclusion clauses set out in Section 2(14), it is required to be treated as a capital asset . Learned counsel s reliance on the decision of Hon ble Gujarat High Court s judgment, in the case of CIT Vs Minor Bababhai alias Lavkumar Kanti Lal [1981] 128 ITR 1/5 Taxman 121, we find that the loss suffered by the assessee, on account of settlement of his dues as unsecured creditor @ 45% of the amount, was allowed as a short term capital loss. Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly soin our opinion, that the debt was not a capital asset. As regards learned CIT(A) s observation to the effect that a loan is a current asset and not a capital asset , we may only point out that the concept of current asset is alien to the law on taxation of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee did not give rise to any capital asset, the transfer of the advance, or the right to recover the advance so given, did not result in any transfer of capital asset. As we have held it to be in the nature of capital asset, the objection raised by the CIT(A) ceases to be relevant anyway. 10. We have noted that the right to recover the money from the Indian entity, in the light of the financial difficulties that the Indian entity was traversing through, was valued at Euro 7,31,000. There is no dispute about bonafides of this valuation. As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bonafides or to show that it s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored. The fact remains that the recoverable from the Indian entity is transferred by the assessee and that it was transferred for an a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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