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TMI Blog2018 (9) TMI 1545X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1964 (10) TMI 7 - SUPREME COURT] wherein it was held that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the 1922 Act [corresponding to section 28 of the 1961 Act], if it arises out of the carrying on of the business and is incidental to it, and loss must be deemed to have arisen only when the employer comes to know about it and realizes that the amounts embezzled cannot be recovered. Since the loss caused by the embezzlement by the employee and the employment of the employee is incidental to the carrying on of business, then the losses which are incidental to such employment are also incidental to the carrying on of the business. The loss caused by embezzlement by the employee was incidental to the employment and entrustment of duty and should be allowed in computing the business income of the year under consideration, that being so we decline to interfere in the order passed by CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the revenue is dismissed. - ITA Nos.986 And 987/Kol/2017 - - - Dated:- 12-9-2018 - SHRI S. S. GODARA, JM AND DR. A.L.SAINI, AM For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich relate to service charges as business income instead of house property income and allowing deduction of expenses and depreciation instead of deduction of 30% of annual rental value. This ground is common in both the assessment years, that is, in A.Y.2011-12 and A.Y. 2012-13, therefore, we take Revenue s appeal in ITA No. 987/Kol/ 2017, for A.Y. 2012-13, as the lead case. 6. The brief facts qua the issue are that the ld AO assessed the income of ₹ 2,40,28,343/- from rendering services at Barakhamba Road Property at New Delhi for providing security, central air conditioning, electricity and other various services as Income from House Property instead of income from business. The Ld. AO observed that the assessee was providing certain common services for the whole building including their own area and to other owners also for the Barakahamba Property at Birla Tower, New Delhi. The common services include running and maintenance of air conditioners, lifts, pumps, transformers, generators, cleaning and repairing, providing security, water supply etc. Separate charges were received by the assessee for providing such services. The service charges are being realized from: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 31st March 2010. We note that in the earlier years, the ld. CIT(A) have adjudicated the matter in favour of the assessee-company, and held that the receipts from service charges were to be assessed as business income. The ITAT has confirmed such view of matters in the A.Ys 2005-05, 2006-07 and 2007-08. The Departmental appeal before the Hon'ble High Court for the A.Y 2006-07 has also been dismissed by the Hon'ble High Court in the assessee s case [CIT, Kolkata-II Vs National Engineering Industries Ltd ITAT No.188 of 2010 GA No.2777 of 2010]. The relevant portion of the order of the Hon'ble High Court dated 10th September 2010 is as follows: We have heard Mr. Bhowmick, Learned Counsel for the assessee in this matter, who wants us to admit the appeal on the following substantial questions of law: i) Whether on the facts and circumstances of the case, the Learned Tribunal is Justified in law in deleting the addition of ₹ 1,65,46,320/- without considering the provision of Section 23 of the Income Tax Act, 1961 and also the tribunal's own order in the case of NTS (P) Ltd. for the Assessment year 2004-2005 and also the Judgment of the Hon'ble A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Assessment Year 2011-12 and to the tune of ₹ 1,39,69,200/- for Assessment Year 2012-13. In order to adjudicate the said transfer pricing issue, we take the lead case of Revenue s Appeal in ITA No.987/Kol/2017, for Assessment Year 2012-13. 10. The brief facts qua the issue are that Ld. AO / Transfer Pricing officer (TPO) made addition on account of guarantee commission income to the tune ₹ 1,60,24,050/- u/s 92CA(3) read with section 92C(4) of the Act, for corporate guarantee given by the assessee in favour of Capital One, National Association Bank on behalf of associated enterprise Birlasoft Inc.(USA). During the assessment proceedings a report in Form 3CEB was filed by the assessee along with its return of income for A.Y.2012-13. On reference from the Assessing Officer u/s. 92CA(1), the case was taken up for determination of Arm's Length Price in respect of International Transactions entered by the assessee with its Associated Enterprises.On examination of the Transfer Pricing Study Report and Audited Accounts along with Form No.3CEB, it was noted that assessee company has given Corporate Guarantee to its AE, Birla Soft Inc., USA in FY 2010-11 (AY 2011-12) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer noted that there are various decisions of the different ITAT benches which confirms the treatment of transaction in respect of providing corporate guarantee to the AEs as international transactions where ALP has to be determined.In the case of Everest Kanto Cylinder vs. DCIT ITA No.542/M/2012 dated 23.11.2012 and ITA No.7073/Mumbai/2012 dated 25/09/2014, it was held that the transactional benefits to the assessee on account of easy availability of funds not at arm's length would attract TP provisions as the procurement of such comfort/guarantee entails significant costs in the open market. The AEs also rides on the goodwill and market credibility of the assessee in such a scenario. Generation of this goodwill over a period of time has definitely cost the assessee, which are now being made available to the AEs for free. The cost of the assessee has been affirmed in many Judgments, which has not been considered by the ITAT Ahmedabad in while delivering Judgment in the case of Micro Ink Ltd. vs ACIT dated 27/11/2015 (ITA No.2873 of 2010). These citations has also been considered by the Mumbai ITAT while deciding identical principle in the case of Aditya Birla Minacs Worldw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's Length Adjustment Rs.1,39,69,200/- Therefore, the ALP adjustment on account of Corporate Guarantee fee was made to the tune of ₹ 1,39,69,200/- 13. Aggrieved by the order of the ld AO/TPO, the assessee carried the matter in appeal before the ld CIT(A), with success. The ld CIT(A) noted that in assessee s case the guarantee is a shareholder activity hence no TP adjustment on account of corporate guarantee should be required and hence deleted the ALP adjustment on account of Corporate Guarantee Fee ₹ 1,60,24,050/-. 14. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld counsel for the assessee has defended the order passed by the ld CIT(A). 15. We have given a careful consideration of the rival submissions and perused the material available on record, we note that the assessee-company provided corporate guarantee on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he only point which has to be seen in this case is whether the same is at ALP or not. We have already come to a conclusion in the foregoing paras that the rate of 3% by taking external comparable by the TPO, cannot be sustained in facts of the present case. We note that on examination of the Transfer Pricing Study Report and Audited Accounts along with Form No.3CEB, it is noted that assessee company has given Corporate Guarantee to its AE, Birla Soft Inc., USA in FY 2010-11 (AY 2011-12). The total value of corporate guarantee given by the assessee to its AEs was USD 10.5 million. For the A.Y. 2012-13, the assessee has offered an amount of ₹ 20,54,850/- as corporate guarantee fee charged on such loan to the AE. The corporate guarantee fee was determined @0.38% on the value of corporate guarantee.We made it clear that guarantee fee arrangement is an international transaction but the guarantee fee percentage as determined by the TPO @ 3% is not correct on various counts, as explained above. We note that various decisions of Coordinate Benches of Mumbai Tribunal, wherein, the bank guarantee commission has been charged from 0.5% to 1%. List of such decisions, are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of 1% should be chargeable. Here in this case, assessee itself has agreed to charge guarantee commission @ 0.38%% of the outstanding guaranteed amount, accordingly, we also hold that a guarantee commission should be benchmark by taking the rate of 1% of the outstanding guaranteed amount in line with the consistent views taken by the coordinate Benches, from its AE and adjustments should be made accordingly. Thus, this ground raised by the Revenue is treated as partly allowed. 16. Ground No.2 raised by the Revenue in ITA No.986/Kol/2017 relates to loss of embezzlement of goods of ₹ 32,61,237/-. 17. The brief facts qua the issue are that during the assessment proceedings, the ld AO noted that assessee has claimed loss on embezzlement of good of ₹ 32,61,237. The ld AO asked the assessee to explain the nature of loss. In response, the assessee submitted that there was a pilferage of material at Rubber factory in Kolkata amounting to ₹ 32,61,237/- due to collusion between Vedor's and transporters' employees and store keeper employed by the assessee at its Rubber factory. The assessee initiated criminal proceedings against the concerned persons. The amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. Aggrieved by the order of ld Assessing officer, the assessee carried the matter in appeal before the ld CIT(A) with success. The ld CIT(A) noted that the CBDT vide Circular No. No. 35-D (XLVII-20) [F. No. 10/48/65-IT (A-I)] dated 24-11- 1965, wherein it has been provided that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purpose of the business in the place from which it was lost. The ld CIT(A) noted that loss took place in the normal course of business therefore, it should be allowed and hence deleted the addition. 19. Aggrieved by the order of Ld CIT(A), the Revenue is in appeal before us.The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee defended the order passed by the ld CIT(A). 20. We have given a careful consideration to the rival submissions and perused the material available on record, we note that a business especi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A-I)] dated, 24-11-1965, allows such type of losses. The relevant para reads as follows: 1. A reference is invited to the instructions on the above subject contained in the Board's Circular No. 25 of 1939 and Circular No. 13 of 1944 [Clarification 2], In these circulars it was clarified that losses arising due to embezzlement of employees or due to negligence of employees should be allowed if the loss took place in the normal course of business and the amount involved was necessarily kept for the purpose of the business in the place from which it was lost We note that the Hon ble Supreme Court has considered the matter and laid down the law in this regard in two decisions in BadridasDaga vs CIT [1958] 34 ITR 10 and Associated Banking Corporation of India Ltd, v. CIT [1965] 56 ITR 7, wherein it was held that the loss resulting from embezzlement by an employee or agent of a business is admissible as a deduction under section 10(1) of the 1922 Act [corresponding to section 28 of the 1961 Act], if it arises out of the carrying on of the business and is incidental to it, and loss must be deemed to have arisen only when the employer comes to know about it and realizes t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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