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TMI Blog2016 (11) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... of 20% was deducted and credited in the central govt. account - Held that:- The genuineness of the transaction should be provided beyond doubt. There has to be live link with the business of the assessee and the expenditure incurred, the assessee should also be in a position to prove the expenditure with proper records beyond doubt. The assessee has submitted before us the details of commission payment (Refer page 37 of the paper book). From the above statement, we have noticed that assessee had paid 15% of freight as commission payment and deducted 20% as TDS out of the commission. Considering the high value transaction, and such person does not have PAN, it does raise eye brows. The assessee has to prove that such persons exists and why he does not have PAN even though having high value transaction. Unless assessee proves the genuineness of existence of such person, it cannot be held as genuine merely because it paid relevant TDS. Accordingly, we are bound to accept the findings of the DRP and hence, ground raised by the assessee is rejected. Disallowance of share expenses - claim maid u/s 35D - Held that:- The term public issue has wider meaning. It cannot be restricted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out any dispute as claimed by the assessee, but, for AY 2011-12 the above was not allowed by the AO on the plea that such claim can only be made through a revised return and not by way of a letter. Following the said decision of the Hon’ble Delhi High Court in the case of Principal CIT Vs. Western India Shipyard Ltd.[2015 (10) TMI 539 - DELHI HIGH COURT ] we remit the issue to the file of the AO to accept the letter filed by the assessee for claiming the ESOP expenses and decide the issue in accordance with law after providing reasonable opportunity of hearing to the assessee. Accordingly, this ground is allowed for statistical purposes. - ITA No. 117/Hyd/2016 - - - Dated:- 21-9-2016 - SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Shri Y. Ratnakar For The Revenue : Shri V. Srinivas ORDER PER S. RIFAUR RAHMAN, A.M.: This appeal is preferred by the assessee against the order passed u/s section 143(3) r.w.s. 92CA(4) r.w.s 144C of the It Act, 1961, for AY 2011-12. 2. Briefly the facts of the case are that the assessee is engaged in the transportation of goods, logistics including shipping business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led objection before the DRP, who confirmed the said ALP adjustment of ₹ 21,23,380/-. 4. Aggrieved, the assessee is in appeal before us. 5. Before us, the AR of the assessee submitted that the amounts advanced are from out of interest free funds of assessee, hence, calculation of interest is uncalled for. He submitted that giving advance to 100% wholly owned subsidiaries is like giving advance to one self. Charging interest on such advance is wholly discretionary. He submitted that in respect of joint venture company 10% interest rate has already been applied and, therefore, no further addition is necessary. He submitted that in respect of 100% owned subsidiaries even if any notional interest has to be calculated and added, calculation of interest should be restricted to LIBOR rate only. If interest is to be calculated at LIBOR rate, the interest amount works out to ₹ 1,44,114/-. If the same is calculated at LIBOR rate + 2% the interest amount works out to ₹ 4,56,336/-. He relied on the following decisions in support of the LIBOR rate: 1. Micromax Informatics Ltd., Vs. DCIT, ITAT, Delhi Bench, [2015] 1545 ITD 156. 2. PMP Auto Components (P) Ltd., Vs. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is allowed. 8. As regards disallowance u/s 14A read with rule 8D of ₹ 29,66,259/- (grounds No. 7 to 10), the AO made a disallowance of ₹ 29,66,259/- u/s 14A read with rule 8D as under: a) Indirect interest expenditure ₹ 22,55,973 b) 0.5% of average value of exempt investment ₹ 7,10,286 ₹ 29,66,259 8.1 During the proceedings, it was noticed that the assessee made investments of ₹ 12,84,52,151/- the income from which is exempt from taxation. Therefore, the assessee was asked about why 14A disallowance not be made on the above said investments vide order sheet noting dated 23/11/2013. The AR submitted as under: As regards applicability of section 14A we state that no part of the borrowings have been utilized by us for the purpose of acquisition of any investments in shares. You will kindly see that aggregate of our share capital and Reserves and surplus amount to ₹ 315.29 Crores as against investment in shares amounts to ₹ 29.11 Crores only as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP confirmed the disallowance made by the AO u/s 14A r.w.r. 8D. 9. Before us, the ld. AR of the assessee submitted that all dividends are directly credited into the bank account. The cost of collection is Nil. The entire investment is made out of interest free funds. He submitted that the total investment in shares from which dividend received is ₹ 4,80,47,496 against own funds of ₹ 315.29 crores. The assessee company did not have to borrow any funds paying interest for making the investment. 9.1 Coming to the disallowance of 0.5%, ld. AR submitted that even if any disallowance is warranted it should be calculated on the value of investment' in respect of 'which income is received during the year and not on the total value of. investment regardless whether any income is received or not. The ld. AR relied on decision of the Delhi High Court in ACB India Ltd. Vs, A.C.I.T reported in 374 ITR 108 in support. 9.2 Ld. AR submitted that If 0.5% disallowance under rule 8D of the I.T. Rules is restricted to the investment in respect of which the dividend is actually received, the amount to be disallowed works out as under: 0.5% of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brings proper records to show that the specific interest free funds were utilized to acquire the investment which are exempt from tax. In the present case, it is difficult to identify the funds utilization considering the complicated structure of the business. To address this issue, the legislature has introduced Rule 8D for calculation of disallowance relating to direct expenses associated with the exempt income, interest relating to the investment and administrative expenses. 11.1 While carefully reading the rule 8D(2)(ii), the formula given are: A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; In particular, the notes for B clearly states that the average value of investment, income from which does not or shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R submitted bank account statement of the assessee through which the said commission was paid. However, the assessee did not produce Shri CP Sharma nor communicated the reasons for such nonproduction. In light of the above, inference is drawn that Mr CP. Sharma did not carry out any work for the assessee and the payments through Bank might be for the purpose of providing accommodation entries to the assessee. Merely because, payment is made through cheque, the payment cannot be accepted as genuine. Payment through bank is mandatory as otherwise, the assessee would be legally ineligible for making claim of expenditure. However, in any accommodation transaction there could be repayment of the amounts received through cheques for a minor consideration. When Mr. C.P Sharma even does not have PAN and he could not be produced for verification, it is difficult to believe that he is capable of doing large scale business with the assessee. Therefore, the commission payment shown in the name of Mr. CP Sharma is treated as not genuine payment and the amount of ₹ 36,25,927/- is added back to the total income of the assessee. 13. Aggrieved by the above disallowance, the assessee filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat on the basis of the above facts the assessee discharged its burden of proof in establishing the identity of payee, the reason for making the payment and proof of payment. It is therefore submitted that the disallowance is erroneous. 14.4 Without prejudice to the above, the ld. AR submitted that even if any disallowance is called for the entire amount should not have been disallowed and a reasonable amount should have been allowed. 15. Ld. DR relied on the orders of revenue authorities. 16. Considered the submissions of both the counsels and material facts on record. Ld. AR submitted that the commission was paid through banking channels and properly credited in the account of Shri C.P. Sharma and since, Mr. Sharma does not have any PAN, at the rate of 20% was deducted and credited in the central govt. account. Even though proper procedure is followed and proved the genuineness of the expenditure, at the same time, based on the directions of revenue authorities, assessee failed to produce Shri C.P. Sharma and no proper reasons were submitted. In our opinion, the genuineness of the transaction should be provided beyond doubt. There has to be live link with the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure was not allowed as deduction. 19.1 The ld. AR submitted that equity shares were offered through merchant bankers to several institutional investors. The offer was accepted by a company called FID Funds (Mauritius) and the shares were allotted to it. It is submitted that FID Funds(Mauritius) is a qualified institutional buyer. The qualified institutional buyers are classified as investors and form part of large institutional investors community. These institutional buyers normally interact with the merchant bankers and based on the recommendations and feedback from the merchant bankers, the qualified institutional buyers invest in the share capital of several companies. The appellant submits that the expenditure falls under sub clause (iv) to clause(c) . to sub section (2) to section 35D of the I.T. Act. 19.2 The ld. AR submitted that the expression 'public subscription' has not been defined. One advantage of investment by qualified institutional buyers is that funds can be raised within a short span. The AR submitted that Hyderabad I.T.A.T in its decision dated 30-1- 2015 in the case of D.C.I.T Vs. Deccan Chronicle Holdings Ltd. [2015] 60 taxmann.com 240 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision, it was clear that the term public issue has wider meaning. It cannot be restricted to issue of shares/debentures to retail investors, it also applied to institutional investors. Even to issue shares to institutional investors, it involves expenditure. It has to be treated similar to the expenses incurred on issue of shares to retail investors. Respectfully following the coordinate bench decision, we allow the ground raised by the assessee. 21. As regards disallowance of expenses relating to the shipping division of ₹ 59,95,071/- (grounds No. 15 to 18), the AO noticed that common costs of corporate office are apportioned to all divisions except Seaways division under the plea that the division is independently managed. This argument is devoid of merit. Other divisions also have functional autonomy. The Chairman, MD, other directors and their staff as well as the corporate office staff including taxation staff work for all divisions. Therefore, expenditure of corporate office needs to be apportioned in the proportion of turnover to all divisions. Inter divisional Apportionment of administrative expenses is followed by the assessee himself except in case of Seaway ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 59,95,071. 23.3 The Assessing Officer disallowed this amount while computing the income from the remaining divisions on the plea that the said expenses should be considered as expenses pertaining to the shipping. division and since the shipping division income has to be computed under the provisions of section 115VG of the I.T Act, the said expenditure of ₹ 59,95,071 should not be allowed as expenditure while computing the income of the other divisions. The AR contended that all expenses of the shipping division including the administrative expenses are debited to separate accounts of the shipping division. The appellant invites kind attention of the ITAT to the income and expenditure of the shipping division for the period ended 31/03/2011. This is available at page 47 of Vol. II. All expenses are included in the same. 23.4 Ld. AR submitted that the Assessing Officer does not state which expenditure has not been included. No indication is available as to how the total administrative expenses are computed at ₹ 15,17,86,877. The entire exercise is based on the premise that some expenses pertaining to the shipping, division has not been allocated to the shipping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee filed an objection before the DRP that the assessing officer erred in not considering the assessee company's claim allowing deduction of deferred employee compensation under the stock option scheme of the company amounting to ₹ 60,48,569/- as salary expenditure, as the said claim was made by the assessee vide letter dtd: 18/03/2015 without filing a revised return of income. 26.1 The DRP held that the objection of the assessee is not acceptable for the reason that the ratio held by the Hon'ble Orissa High Court in the case of Orissa Rural Housing Development Corporation Ltd vs. ACIT in W.P. (C) No. 4554 of 2011 is squarely applicable to the case of the assessee. The DRP further placed reliance on the ratio held by the Hon'ble Supreme Court in the case of Goetze (India) Ltd and accordingly held that the assessing officer has not committed an error by rejecting the claim made by the assessee vide letter dtd: 18/03/2015. In view of the above, ₹ 60,48,569/- being the ESOP expenses which was not claimed by the assessee in Return of Income and not allowed in the draft assessment order and confirmed accordingly in the final assessment order on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Goetze's case has no application before the appellate authorities. Kind attention is invited to the latest judgment of the Hon'ble Delhi High Court in Principal C.IT Vs. Western India Shipyard Ltd. reported in 379 ITR 289. The Delhi High Court reiterated that the decision in Goetze's case is inapplicable in the appeal proceedings before the Income tax Appellate Tribunal. Ld. AR submitted that the deduction of ₹ 60,48,569 towards ESOP expenses is denied because of the revised return not being filed and not for any other reason. 28. The ld. DR relied on the orders of revenue authorities. 29. Considered the submissions of both the counsels and perused the material facts on record. In the case of Principal CIT Vs. Western India Shipyard Ltd., (supra), on which reliance placed by the ld. AR of the assessee, the Hon ble Delhi High Court held as follows: The said decision in Goetze (India) Ltd. is in the context of the lack of the power of the AO to entertain a claim for deduction, during assessment proceedings, otherwise than by a revised return. The ITAT is right in holding that while there was a bar on the AO entertaining such claim without a revised return ..... X X X X Extracts X X X X X X X X Extracts X X X X
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