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TMI Blog2018 (2) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd are paying tax at same rate, i.e., whether the transaction is revenue neutral or not, we restore this issue to the file of the assessing officer. If he is satisfied that the impugned transactions are revenue neutral, we direct the AO not to make any disallowance u/s 40A(2)(a) of the Act. Disallowance relates to disallowance of 20% of rental expenses - A.R submitted that the assessee has submitted both the agreements before the AO, but the AO has made the disallowance without verifying the assessee’s claim - Held that:- We find force in the arguments of the Ld A.R. If the assessee is paying rent at the very same rate at which it was payable to the original lessor by M/s Customer Asia India, then the question of payment of excess rent does not arise. We notice that the AO has not examined the relevant agreements in this regard. Hence, for the limited purpose of verification of this claim of the assessee, we restore this issue to the file of the AO. If the AO is satisfied that there is no excess payment, then no disallowance out of rental expenditure is called for. If the AO is not satisfied, he may take appropriate decision in accordance with the law Disallowance of Provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon’ble Bombay High Court in the case of Green Infra Ltd (2017 (4) TMI 185 - BOMBAY HIGH COURT) Adjustment of profits of STP units against loss of non-STP units - Held that:- This issue has since been decided in favour of the assessee in the case of CIT Vs Black & Veatch Consulting P Ltd (2012 (4) TMI 450 - BOMBAY HIGH COURT ) and CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT). Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow deduction u/s 10A of the Act without setting off of loss from non-STP units. Deduction claimed u/s 10A - deduction u/s 10A shall be allowed qua unit wise instead of aggregating profits/losses of all eligible units - Held that:- Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd Vs. DCIT (2010 (4) TMI 206 - BOMBAY HIGH COURT) and CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT). Accordingly we direct the AO to compute deduction u/s 10A qua unit-wise. Addition u/s 14A to confirm the interest expenditure allocated to STP units - Held that:- AO did not disallow the impugned amount of ₹ 36.93 lakhs as presumed by Ld CIT(A) and hence the question of invoking prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed of by this common order, for the sake of convenience. 2. The assessee company is engaged in the business of IT enabled transaction processing services. 3. We shall first take up the appeal filed by the revenue for assessment year 2004-05 in ITA No.3707/Mum/08, wherein the revenue is challenging the relief of ₹ 61.71 lakhs granted by Ld CIT(A) in respect of interest disallowance. 4. We heard the parties on this issue and perused the record. The facts relating to the issue are discussed in brief. The assessee claimed interest expenditure of ₹ 100.10 lakhs. The AO noticed that the assessee has made following fresh investments:- Customer Assets India P Ltd Rs.99,95,23,000/- Series F of convertible preferred stock of First Ring Inc. US Rs.61,72,19,000/- The AO took the view that the assessee has diverted interest bearing loans for making above said investments, which did not yield any income. Accordingly, he computed disallowance of proportionate amount of interest relatable to the above said investments, which worked out to ₹ 61,71,318/- and di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of relief as ₹ 36,93,444/- instead of ₹ 61,71,318/-. Hence the assessee has raised a ground pointing out the said error. However, at the time of hearing, the ld A.R submitted that the Ld CIT(A) has corrected the error in an order passed u/s 154 of the Act. Accordingly this ground of the assesee becomes infructuous. 10. The second part relates to the non-adjudication of issue relating to allocation of interest expenditure between STP unit and non-STP unit. The Ld A.R submitted that the ld CIT(A) did not adjudicate this ground initially and hence this ground was raised. However, the Ld CIT(A) has dealt with the same in the rectification order passed u/s 154 of the Act and he has decided the same against the assessee. Hence this ground also becomes infructuous, as the Ld CIT(A) has adjudicated the same in the rectification order. 11. The third part of the ground relates to the disallowance of interest on delayed payment of P.F. The Ld A.R did not press this ground and hence this ground is dismissed as not pressed. 12. The second ground relates to the disallowance made u/s 40A(2)(b) of the Act. This ground also consists of two parts. The first part relates t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., whether the transaction is revenue neutral or not, we restore this issue to the file of the assessing officer. If he is satisfied that the impugned transactions are revenue neutral, we direct the AO not to make any disallowance u/s 40A(2)(a) of the Act. If he is not satisfied so, he may make appropriate decision in accordance with the law, after affording adequate opportunity of being heard to the assessee. The AO should also consider the claim of the assessee that the amount disallowed would be eligible for deduction u/s 10A of the Act, if he is not satisfied with the original claim. 16. The second part of the disallowance relates to disallowance of 20% of rental expenses. The AO noticed that the assessee has paid rent of ₹ 81.90 lakhs to its sister concern named M/s Customer Asia India P Ltd. Since the assessee did not show that the rent was paid at market rates, the AO disallowed 20% of the rental expenses, referred above. The Ld CIT(A) also confirmed the same. 17. We heard the parties on this issue. The Ld A.R submitted that M/s Customer Asia India P Ltd had entered into a rental agreement with original lessor. Since the assessee was in need of premises, it enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electricity, water and power consump. - ₹ 6,60,000/- (f) Recruitment and training exp. - Rs.42,59,910/- (g) Car hire charges - ₹ 4,70,000/- The AO took the view that mere provision made by the assessee for expenses is not allowable unless it is shown that the liability has accrued during the year under consideration. In the absence of further details forthcoming from the assessee, the AO disallowed the above said claim. The Ld CIT(A) also confirmed the same. 20. The Ld A.R submitted that these expenses have accrued during the year under consideration and hence the provision was created by making reliable estimates. In the subsequent years, these expenses have been paid and the un-paid amount has been taken to income account. He submitted that these provisions were made on account of accounting compulsions under matching principle and hence the same is allowable as deduction. In this regard, the assessee relied on following case law:- ( a) Bharat Earth Movers (245 ITR 428)(SC) ( b) CIT Vs. United Motors (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also confirmed the same, but he accepted the alternative plea of the assessee that the disallowance shall be eligible for deduction u/s 10A of the Act. 25. We heard the parties on this issue. The nature of expenses being Meeting and Seminar Expenses , the major part of expenses shall be incurred towards hotel charges only. We notice that the assessee has furnished all the details before the AO. We further notice that the AO has made adhoc disallowance only on presumption that there may be personal element. It can be noticed that the AO has made the impugned disallowance on surmises and conjectures without showing how personal element is involved in meetings and seminars. Hence we do not find any justification in making adhoc disallowance of 20% from this expenditure. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance. 26. The fifth ground urged by the assessee relates to the adhoc disallowance of 20% made out of Staff welfare expenses. The assessee claimed a sum of ₹ 183.99 lakhs towards staff welfare expenses. The assessee furnished relevant details to the AO. However, the AO noticed that these ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court has held in the case of Green Infra Ltd (supra) that interest income earned on deposit of surplus funds on short term fixed deposits is taxable as business income. It can be noticed that the questions that (a) the impugned deposits are short term or long term and (b) they are made out of surplus funds or not; have not been examined. Under these set of facts, we are of the view that this issue requires fresh examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of decision rendered by Hon ble Bombay High Court in the case of Green Infra Ltd (supra). 31. The seventh ground urged by the assessee relates to the adjustment of profits of STP units against loss of non-STP units. During the year under consideration, the assessee declared profit of ₹ 628.94 lakhs from STP units and loss of ₹ 185.54 lakhs from non-STP units. The assessee claimed deduction u/s 10A in respect of entire profit of STP units. The AO, however, took the view that the loss from non-STP units has to be set off against profits from STP units. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to the disallowance of interest expenditure of ₹ 36.93 lakhs u/s 14A of the Act. We have noticed earlier that the assessee had incurred interest expenses of ₹ 100.10 lakhs. The AO noticed that the assessee has made investments in two of its subsidiary companies. Hence the AO disallowed proportionate amount of interest, which was worked out to ₹ 61.71 lakhs as relatable to investment made in subsidiaries. The AO also further disallowed a sum of ₹ 1.46 lakhs as interest relatable to delayed payment of P.F. The balance amount of interest of ₹ 36.93 lakhs was treated by the AO as relatable to STP units. Since the profit from STP units was exempt, the claim for deduction u/s 10A got reduced by ₹ 36.93 lakhs, i.e., to the extent of interest allocated to STP units. 39. The Ld CIT(A) upheld the decision of the AO by observing that the provisions of sec. 14A will come into play, since the income of STP units are not includible in the total income. Accordingly he held that the disallowance u/s 14A should be computed in accordance with Rule 8D. Accordingly he directed the AO to compute disallowance as per the provisions of Rule 8D. 40. We hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in directions. Hence both the issues urged in this ground are also restored to the file of the AO. In any case, the Ld A.R contended that the claim of the assessee is supported by the decision of Hon ble Bombay High Court rendered in the case of CIT Vs. Gem Plus Jewellery India Ltd (330 ITR 175), which shall be followed by the AO in the set aside proceedings. 44. We shall now take up the appeal filed by the revenue for assessment year 2005-06 in ITA No.2537/Mum/2011. The Ld CIT(A) had restored the following issues to the file of the AO for verification and for taking fresh decision:- (a) Reversal of bonus of ₹ 33,95,454/- not allowed as deduction u/s 43B of the Act. (b) Assessee s claim that the AO erred in not computing deduction u/s 10A of the Act for each unit separately and not from the gross total income of the assessee. (c) Set off brought forward business loss pertaining to previous year. The grievance of the revenue is that the Ld CIT(A) has exceeded his jurisdiction by restoring the issue to the file of the AO. 45. We heard the parties on this issue and perused the record. We notice that the claim of the assessee can be allowed only if a proper veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard. After affording adequate opportunity of being heard to the assessee, the AO may take appropriate decision in accordance with the law. 48. The next ground urged by the assessee relates to the interest income, foreign exchange loss, miscellaneous income etc. The AO has assessed the same under the head Income from other sources as against the claim of the assessee that they are business income. Identical issue was considered by us in the preceding paragraphs while dealing with the appeal of the assessee relating to AY 2004-05 and we have restored this issue to the file of the AO with the direction to examine this issue afresh in the light of decision rendered by Hon ble Bombay High Court in the case of CIT Vs. Green Infra (392 ITR 7). Consistent with the view taken in AY 2004-05, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with identical directions. 49. The next ground urged by the assessee relates to the nature of legal and professional expenses of ₹ 22.40 lakhs. The tax authorities have held it to be capital in nature. The AO noticed that the assessee has taken demand draft for a sum of ₹ 16.19 lakhs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delete the disallowance. 55. The next issue relates to the disallowance made u/s 40A(2)(a) of the Act. As in AY 2004-05, the assessee had made payments to M/s ICICI Bank Ltd towards Common corporate expenses, software professional fees, repairs and maintenance. The AO disallowed 50% of the expenses by invoking provisions of sec. 40(A)(2)(a) of the Act. The Ld CIT(A) also confirmed the same. 56. Identical disallowance was made by the AO in 2004-05 also and we have restored this issue to the file of AO for the limited purpose of verifying as to whether the assessee and M/s ICICI Bank Ltd pays tax at the same rate or not. Since the facts are identical in this year, consistent with the view taken in AY 2004-05, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with identical directions given in AY 2004-05. 57. The next issue relates to the claim put forth by the assessee to allow Provision for expenses on payment basis in AY 2005-06, if the disallowance of Provision for expenses is confirmed. In the preceding paragraphs, while dealing with this issue in AY 2004-05, we have held that the provision for various expenses claime ..... X X X X Extracts X X X X X X X X Extracts X X X X
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