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TMI Blog2020 (5) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... pt income. The same applies from assessment year(s) 2008-09 onwards as held in Godrej Boyee Manufacturing Co. Ltd. vs. DCIT [2017 (5) TMI 403 - SUPREME COURT] upholding hon'ble Bombay high court s decision to this effect. Coming to assessee s dividend income, case file(s) suggests that it had declared suo motu expenses. AO's corresponding regular assessment disallowed proportionate interest as well as administrative expenses under Rule 8D(2)(ii)(iii). We proceed in this backdrop and observe that since the assessee could neither explain correctness of its suo motu expense; whether falling under any or all three head(s) nor there was any indication that the corresponding administrative expenditure indirect in nature stated included qua the exempt income yielding investments or not. We make it clear that this tribunal s co-ordinate bench s decision in REI Agro Ltd. vs. DCIT [2013 (9) TMI 156 - ITAT KOLKATA] holds that the impugned administrative disallowance has to be computed going by the exempt income yielding investments only. We therefore decline the assessee s arguments that the Assessing Officer s action invoking sec. 14A / 8D disallowance was without recording ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable probability. We conclude in view of all these foregoing facts that the assessee was very well justified in claiming the impugned foreseeable liability provision in these two assessment year(s) regarding its project works by in compliance of AS-7 of the Act. The Revenue s instant substantive grievance fails therefore. Disallowing assessee s employees contribution to PF ESI respectively by invoking sec. 36(1)(via) of the Act since the same had not been paid within the due date as prescribed in the specific Acts - HELD THAT:- Hon'ble jurisdictional high court in Commissioner of Income Tax vs. M/s Vijay Shree Ltd. [2011 (9) TMI 30 - CALCUTTA HIGH COURT] holds that such a disallowance deserves to be deleted in case the assessee has deposited the ESI / PF contribution in question before the due date of filing of its return of income which is not in dispute before us. We thus affirm the CIT(A) s action deleting the impugned disallowance on this count alone. Market-to-market loss derived from the derivative transactions - HELD THAT:- CIT(A) has admittedly taken note of various judicial precedents i.e. Woodward Governor India P. Ltd. [2009 (4) TMI 4 - SUPREM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant statutory provision to this effect as well as the CBDT s circular issued way back on 18.05.1967 do not include Cess . - ITA No.217 to 219/Kol/2018 And C.O No.94-96/Kol/2018 (a/o ITA No.217-219/Kol/2018) - - - Dated:- 28-2-2020 - Shri S.S.Godara, Judicial Member And Dr. A.L.Saini, Accountant Member For the Assessee : Shri Nitish Agarwal, ACA For the Respondent : Shri Vijay Shankar, CIT-DR ORDER PER S.S.GODARA, JUDICIAL MEMBER:- These three Revenue s appeals and assessee s Cross Objection(s) (CO) ITA Nos. 217 to 219/Kol/2018 with CO Nos.94 to 96/Kol/2018 for assessment year(s) 2011-12 to 2013-14, arise against the Commissioner of Income Tax (Appeals)-22 Kolkata s separate order(s); all dated 07.11.2017 passed in case Nos. 30, 31, 32/ CIT(A)-22/11-12/15-16/Kol (assessment year-wise) respectively, involving proceedings u/s 143(3) r.w.s sec. 144C(3) of the Income Tax Act, 1961; in short the Act . Heard both the parties. Case file(s) / paper books forming part of records stand perused. It transpires at the outset that these cases involved almost identical issue(s). The same are therefore disposed of vide our ideal common adjudication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the scaled down the amount disallowed to ₹ 2,55,60,000/- which inter alia included the following: Rule 8D(2)(i) : ₹ 10,1l,201/- Rule 8D(2)(ii) : ₹ 53,56,000/- Rule 8D(2)(iii) : ₹ 2,02,04,000/- TOTAL : ₹ 2,65,71,201/- Less: Already Disallowed ₹ 10,11,201/- Amount Disallowed : ₹ 2,55,60,000/- 2. From the P L Ale of the assessee, the Ld. AO noted that during the relevant year the assessee earned dividend of ₹ 1011.20 lacs in respect of which exemption was claimed. The Ld. AO required the-assessee to provide the details as to how the disallowance u/s 14A offered in the return of income was arrived at. The appellant furnished its reply dated 23.02.2015. The contentions of the assessee however did not convince the Ld. AO and therefore the Ld. AO proceeded to make the disallowance by invoking Rule 8D(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, I find merit in the Ld. AR's arguments. From the plain reading of the assessment order, it is apparent that the AO has not spelt out any single or specific item of expenditure debited in P L A/c which had direct nexus or proximate cause with earning of tax free dividend. Merely because the appellant by following the precedent established in earlier years offered disallowance of ₹ 10.11 lacs being 1% of the gross dividend received did not ipso facto prove that such amount was actually incurred and had direct correlation with earning of dividend. The amount disallowed was out of administrative expenses and the disallowance was based on fair estimate basis and therefore in my opinion the suo moto disallowance offered by the appellant in its return could not be considered as direct expenses disallowable under Rule 8D(2)(i). Accordingly the disallowance made under Rule 8D(2)(i) is directed to be deleted . 6. As regards disallowance under Rule 80(2)(ii), I observe that the appellant has consistently been investing its surplus funds in acquiring shares, securities units of mutual funds from which it has been earning dividend income. I further find that as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in shares giving exempt income out of own funds which is at about 2429 lacs and investment is at ₹ 365 lacs only. Once this fact has not been denied and C!T(A) has categorically observed that the assessee has made investment in shares out of its own funds no disallowance can be attributed qua the interest paid on borrowed funds for investing the same in interest free funds, In view of the above, we confirm the order of CIT( A) on the common issue .. .. . . .. We find that this case has yielded concurrent finding of facts regarding expenditure incurred by the assessee for the purpose of earning the exempt income, by the Appellate Authority and the Tribunal, As such there is no scope for interference with such concurrent findings of facts. We, therefore, are not satisfied that the case involves any substantial question of law. The application and appeal are thus dismissed . I find that the above decision of the Hon'ble jurisdictional High Court squarely applied to the appellant's facts as well. I therefore find sufficient merit in the Ld. AR's contention that since the appellant's own surplus funds were sufficient to meet the cost of investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant Rule on being satisfied that appellant's own funds were sufficient to meet the cost of investments. Having regard to these facts and circumstances therefore, I hold that the Ld. AO was not justified in disallowing interest expense of ₹ 53,56,000/- by invoking Rule 8D(2)(ii). The disallowance is accordingly deleted . 8. As regards disallowance of ₹ 2,02,40,000/- made Rule 8D(2)(iii), I note that the said disallowance has been made by the Ld. AO by applying the rate of 0.5%to the entire cost of investments which were capable of yielding tax free income. I note that the appellant had suo moto offered disallowance of ₹ 10,11,201/- at the time of filing of return. In the course of assessment tile appellant had substantiated the basis adopted for offering the disallowance u/s 14A of the Act. I also note that the methodology adopted by the appellant for disallowing administrative expenses u/s 14A was consistently followed and accepted in the appellant's regular assessments upto AY 2007-08. On perusal of the assessment order, I find that the Ld. AO did not objectively deal with the explanation furnished in support of the basis adopted by the appellant in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant's contention that having regard to facts of the appellant s case as it permeated through the years, the disallowance as per Rule 8D(2)(iii) was not permissible as it led to distorted findings. Having regard to the past history of the appellant and also having regard to the fact that the factual matrix of the appellant's case in the year under consideration is same, respectfully following the decision of the Hon'ble Settlement Commission in the appellant's own case for the preceding years, I direct the Ld. AQ. to make the disallowance at the rate of 3% of gross dividend income which works to ₹ 30,33,603/- 11.In view of the above and for the reasons discussed in the foregoing therefore, the AO is directed to restrict the disallowance u/s 14A to ₹ 30,33,603/- in computing total income as per the computational provisions as also in computing book profit u/s 115JB. Ground No. 4 is therefore partly allowed . 4. Learned CIT-DR vehemently contends that the CIT(A) has erred in law and on facts in restricting the impugned disallowance to that @ 3% of dividend income only despite the statutory formula in Rule 8D(2)(ii) of the Income Tax Rules, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer s corresponding regular assessment disallowed proportionate interest as well as administrative expenses under Rule 8D(2)(ii)(iii). We proceed in this backdrop and observe that since the assessee could neither explain correctness of its suo motu expense; whether falling under any or all three head(s) nor there was any indication that the corresponding administrative expenditure indirect in nature stated included qua the exempt income yielding investments or not. We make it clear that this tribunal s co-ordinate bench s decision in REI Agro Ltd. vs. DCIT (2013) 144 ITD 141 (Kol) holds that the impugned administrative disallowance has to be computed going by the exempt income yielding investments only. We therefore decline the assessee s arguments that the Assessing Officer s action invoking sec. 14A / 8D disallowance was without recording any satisfaction. 7. Next comes the assessee s case that the CIT(A) had rightly gone by judicial consistency keeping in mind the Settlement Commission s adjudication restricting the impugned disallowance to that @ 3% of the gross dividend income (supra). We find no merit in its instant plea seeking to adopt judicial consiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our to revive the impugned proportionate interest expenditure in all these three assessment year(s) involving assessee s positive net interest income deserves to be declined. 10. Coming to the third limbs of indirect head of administrative expenditure @ 0.5% of average value of investment under Rule 8D(2)(iii) of the Act, this tribunal s yet another co-ordinate bench s decision in REI Agro Ltd. (supra) as upheld in hon'ble jurisdictional high court s decision in Revenue s appeal ITA No.161/Kol/2013 dated 23.12.2013 holds that only exempt income yielding investments deserve to be included for the purpose of determining the corresponding figures. We therefore restore the Revenue s instant second substantive grievance to the extent of Rule 8D administrative disallowance computation back to the Assessing Officer. 11. Lastly comes the issue of sec. 115JB MAT computation qua the impugned sec. 14A read with Rule 8D disallowance. This tribunal s Special Bench in (2017) 82 taxmann.com 415 (Delhi) (SB) has stayed Revenue s identical argument. We thus partly accept Revenue s instant second substantive grievance for statistical purposes. 12. The Revenue s identical third sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys, the remaining additional depreciation at the rate of 10% shall be allowed in the subsequent year . - DCIT vs Cosmos Films Ltd ( 139 ITD 628 ) (ITAT Delhi) - Century Enka Ltd Vs DCIT ( 154 ITD 426 ) (ITAT Kolkata) - Universal Cables Ltd Vs DCIT ( 68 SOT 307 ) (ITAT Kolkata) - Birla Corporation Ltd Vs DCIT ( 69 SOT 217 ) (ITAT Kolkata) - ACIT Vs SIL Investment Ltd ( 54 SOT 54 ) (ITAT Chennai) - Ashok Leyland Ltd Vs DCIT (67 taxmann.com 48) (ITAT Chennai) Apart from the above the appellant also referred to the second proviso to Sec 32(1) which also laid down the above proposition and clarified it beyond doubt. 3. Upon giving due consideration to the submissions made by the appellant and having regard to the facts available on record, I am of the considered view that depreciation is a statutory allowance granted under Section 32 of the Act. I agree with the Id. AR's contention that post introduction of Explanation 5 in Section 32 by Finance Act, 2001; that there is no option either to the AO or the assessee in claiming or allowing depreciation and from AY 2001-02 and onwards the depreciation is a mandatory allowance. In the circumstances even if the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50 per cent depreciation In the subsequent year, then impliedly the appellant is legally entitled to remaining 50% of the additional depreciation, because in the year In which the machinery was first put to use the assessee claimed only 50 Per cent of additional depreciation. I find that this proposition is supported by the judgments of the Hon'ble Income-tax Appellate Tribunal, Kolkata in the cases of Century Enka Ltd Vs DCIT (154 ITD 426), Universal Cables Ltd Vs DCIT (68 SOT 307) Biria Corporation ltd Vs DCIT (69 SOT 217) . In all these judgments, identical view has been endorsed by the jurisdictional ITAT, Kolkata that in respect of actual cost of machinery installed but put to use for period less than 180 days, additional depreciation was allowed at the reduced rate of 10% in the earlier year, then the assessee is legally entitled to allowance of the remaining 10% of the additional depreciation for which deduction was not allowed in the earlier year, in the immediately succeeding assessment year. 6. For the reasons set out in the foregoing and respectfully following the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has concluded that ₹ 1,50,45,000/- is to be considered as income in the hands of the appellant-assessee. I have also carefully considered the submissions of the appellant-company made before the Ld. AO / TPO as well as during the appeal proceedings. 2. However, it has also to be examined whether the Corporate Guarantee is an international transaction at all, and amenable to benchmarking. I find that there has been a certain presumption on the part of the Ld. Assessing Officer / TPO in so far as observing that the corporate guarantee provides a certain benefit to the AE and being in the nature of a service it constitutes an international transaction. It is also to be said that as has been pleaded by the appellant, Hon'ble Courts have held that corporate guarantees do not fall within the purview of international transactions. The main reasons for advancing such argument by the appellant is that there are no costs to the assessee in issuing of corporate guarantee, especially in a situation where the assessee could not have realized any money by giving the same to some other assessee during the course of business, and that such an assistance or accommodation does not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on profit, losses or assets of an enterprise cannot be dispensed with even after the explanation was added to the definition of the international transaction by the Finance Act of 2012 since such explanation was merely a clarification. The Hon'ble Tribunal further held that the onus was on the Income Tax Authorities to demonstrate the transaction has a bearing on profits, income, losses or assets of the enterprise. Such an impact on profits, income, losses or assets has to be all a real basis, whether in the present or' ill the future, and not on a contingent or hypothetical basis. Furthermore, there has to be some evidence on record to indicate, even if not to Fully establish, that an international transaction has some impact on profits, income, losses or assets. Taking into consideration the facts of the case, the Hon'ble Tribunal held that' such conditions were not satisfied. The Hon'ble ITAT accordingly ruled that under the facts of. the case, transfer pricing provisions did not apply to the provision of guarantee and therefore the TP adjustment imputing an arm's length guarantee fee is not warranted. This judgement seems to be a departure from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP. The assessee had suo-motto offered interest on such loan at LIBOR+ 100 bps. However, the Ld. TPO disregarded the contentions of the assessee, preferred cost plus method (' CPM ') and made upward adjustments for the same. Aggrieved by the order, the assessee filed an application before the Ld. Dispute Resolution Panel (' DRP '), which confirmed tile order of the Ld. TPO. Further aggrieved, the assessee filed an appeal before the Hon'ble Tribunal. The Hon'ble ITAT inter- alia decided that the assessee had injected loan to its subsidiary and provided guarantee for commercial expediency as the assessee had merged to expand its foreign operations; thus, the loan injected by the assessee was a kind of a quasi-equity i.e. in the form of equity. Further, the Hon'ble Tribunal preferred internal CUP or external CUP as the most appropriate method for applying in such transactions. It may be relevant to quote the necessary portion of the order of the Hon'ble ITAT as follows : As the Assessee's expectation from provision of loan and guarantee are not that of a lender or guarantor i.e. to earn a market share of interest or guarantee fee, rather, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the AEs which were guaranteed by the appellant, were in sum substance obtained by the appellant and that the appellant was actually the principal -debtor. I therefore find substantial force in the Id, AR's submission that the assessee's expectation from the guarantee provided for the third-party borrowings of AEs, was never to earn a guarantee fee. This, according to the appellant is evident as in a third party scenario no entity would have lent any funds to AEs given their skewed debt - equity ratio evident from its Balance sheet, and that on the other hand, AEs could not have taken the loan from any third party lender on a standalone basis had the Appellant not been provided the corporate guarantee for the same. Thus it is clear that the intention of the Appellant for guaranteeing the AEs was that of an investor and not a guarantor, In light of the same, it would be appropriate to classify the guarantee provided to infuse third party funds as a shareholder service meriting no monetary consideration. Therefore, in view of the judgment of the ITAT, there is legal merit in the contention of the appellant that the international transaction pertaining to the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 2012 with retrospective effect 01.04.2012. His further case; without prejudice to earlier stand, is that even if the said foregoing amendment is held as carrying prospective effective only, the impugned ALP adjustment is liable to be upheld at least qua the last assessment year s involved herein i.e. 2013-14. We find no merit in either of the Revenue s arguments. This tribunal s co-ordinate bench s decision takes note the very amendment in ITA No.1958Kol/2017 ACIT Circle-6(2) Kolkata vs. M/s Emami Ltd . dated 03.04.2019 to hold that such a corporate guarantee does not amount to an international transactions even in assessment year 2013-14 as under:- 8. Ground no. 2 to 4 relate to corporate guarantee fee extended by the assessee company to its Associate Enterprise (AE). 9. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved, in respect to corporate guarantee, in the present appeal is no longer res integra. We note that financial guarantee is a promise made by a person (the guarantor) to a lender(guaranteed party) promising to pay the lender the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT-2015 ] (Ahd) wherein the Co-ordinate Bench has held that corporate guarantee does not constitute international transaction as per section 92B of the Act as amended by the Finance Act, 2012. The relevant extracts of the judgment is reproduced as under: On a conceptual note, thus, there is a valid school of thought that the corporate guarantees can indeed be a mode of ownership contribution, particularly when as is often the case, where such a guarantee is given, it compensates for the inadequacy in the financial position of the borrower; specifically the fact that the subsidiary does not have enough shareholders funds. There can be number of reasons, including regulatory issues and market conditions in the related jurisdictions, in which such a contribution, by way of a guarantee, would justify to be a more appropriate and preferred mode of contribution vis-a-vis equity contribution ... ... In other words, these guarantees were specifically stated to be in the nature of shareholder activities. The assessee's claim of the guarantees being in the nature of quasi capital, and thus being in the nature of a shareholder's activity, is not rejected either. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction under section 92B (1) of the Act .... 11. We rely on the judgment of the Co-ordinate Bench of ITAT, Delhi in the case of Bharti Airtel Ltd. vs. ACIT in I.T.A. No. 5816/Kol/2012 , wherein the definition of international transaction in view of the amendments, vide Finance Act, 2012, had been discussed and it was held that the provision of corporate guarantee is not an international transaction. The relevant extract of the judgment is reproduced as under: Para 23 .... The issue whether giving a corporate guarantee amounts to an international transaction' has not been raised or discussed in the cases where ALP adjustments have been upheld and therefore those decisions cannot be put against the taxpayer ..... Para 27 .... The Explanation inserted vide Finance Act 2012 is to be read in conjunction with the main provision and in harmony with the scheme of provision under section 92B of the Act. It is essential that in order to be an 'international transaction' providing corporate guarantee should have a bearing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopt foregoing detailed reasoning mutatis mutandis to affirm the CIT(A) s identical findings under challenge holding a corporate guarantee as not amounting to an international transactions u/s. 92B of the Act. All these corresponding grounds fail therefore. 17. The Revenue s 8th to 9th and 11th to 12th substantive grounds in all these three appeal(s) seek to revive the TPO s proposed action and Assessing Officer s ALP adjustment of interest amount of ₹83,71,497/-, ₹279,79,306 and ₹170,64,590/-; respectively as deleted in the CIT(A) s identical detailed discussion. The same reads as under:- 20. DECISION : 1. I have carefully considered the submissions of the appellant-company in the light of the adjustments made by the Ld. TPO/ AO. The question involved ill the present ground is the determination of the ALP of the loans / advances given by the appellant to its AEs, PML SFPL which was denominated in USD RAND currency respectively. The details of tile loans advances in question are as follows: Name of AE Nature of Transaction Amount Paharpur Mauritius Ltd. Loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P in their booklet for 2002-2004, the TPO concluded that both the AEs were highly vulnerable to risk and therefore any Bank would command significantly high interest rate in order to advance loan to the AEs, if the same is considered on standalone basis. With regard to the trade advances given by the appellant to SFPL, the TPO was of the view that it was in the nature of interest free loan and that the same was also required to be benchmarked along with the loans advanced by the appellant to its AEs. 4. I however note that after elaborately discussing the above methodology of ascertaining the interest rate on loan at the probable cost of loan if the AEs had independently obtained such loans from foreign markets, the Ld. TPO suddenly shifted his track and moved on to propose an altogether new methodology to benchmark the transaction in the same SCN. The Ld. TPO thereafter stated that the interest rate on the loans advanced to the AE should be priced at the cost of funds in the hands of the appellant. For determination of cost of funds, the Ld. TPO was of the view that the Return on Capital Employed (' ROCE ') was the most appropriate method. According to Ld. TPO the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Id. TPO was not in conformity with any of the five methods prescribed in Rule 10B, it was obligatory on his part to grant opportunity of hearing to the appellant. 7. On perusal of the impugned order, I further note that the Ld. TPO did not bring on record any cogent reason or explanation as to why the application of internal CUP by the appellant was not the most appropriate bench marking exercise, particularly when the interest rate adopted by tile appellant was that of a foreign currency denominated borrowings which was actually availed at arm's length by the appellant itself from an unrelated party. Instead it is noted that the Ld. TPO calculated the ALP as a function of cost of funds and an appropriate credit spread thereon. According to Ld. TPO, the cost of funds was now a function of the return on investments and the cost of debt in the hands of the appellant. The Ld. TPO aggregated the various returns in form of interest, dividend, capital appreciation etc. derived by the appellant from its range of investments and stated that such return which it derived from the investments was the cost of the funds since this return represent the return which the appellant had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities, mutual funds, loans deposits etc. had apparently no bearing on determining the cost of funds. Once ell investment is made by an investor, what would be the return on such investments depends on host of economic factors affecting the business of the investee company and there cannot be correlation between the return in the form of dividend on investments with cost of funds. Similarly income by way of capital appreciation can vary from year to year depending on the decision to encash such appreciation in a given year. In such circumstances, capital appreciation realized in anyone given year cannot be taken into account in determining the cost of funds because realization of capital appreciation can vary substantially from year on year basis. Moreover realization in form of dividend, capital appreciation, interest etc. has inbuilt element of risk taken by an investors and that being the case appropriate risk adjustments was then required to be made with reference to each of the investment made, depending upon the nature, periodically, economic activity, risk of the instrument etc. to arrive at the cost of funds. It is noted that no such analysis was conducted by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account as the cost of funds. 11. For the reasons set out above, I agree with the appellant's contention that the methodology adopted by the Ld. TPO suffered from numerous infirmities in as much as the premises on which the working of cost of funds was made was inherently inappropriate and incorrect. Moreover the methodology adopted and the working made was in conformity with the methods prescribed in Rule 10B. In the circumstances therefore I uphold the appellant's objection that the determination of ALP as made by the Ld. TPO in his order u/s 92CA(3) could not be upheld . 12. 1 further find in the Ld. AR's submissions that having regard to the fact the appellant had itself had made the borrowings in USD denominated terms by paying interest with reference to foreign LIBOR rate; ready information was available on the basis of which the loans/advances given to AE could be appropriately benchmarked by following internal CUP Method. In my considered view therefore, the appellant's application of internal CUP and adopting ALP interest of 3.6% was the most appropriate reasonable method. 13. It may be also relevant to add that the question of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the associate enterprise(s) would have obtain loans have to be kept in mind. We find no merit in Revenue s instant grievance. The fact remains that this tribunal s various co-ordinate benches decision have already held that the relevant benchmark in case of loans and advances pertaining to AE has to be the relevant local currency s LIBRO rate (supra). We notice that the TPO s proceedings in all these three assessment year(s) had nowhere followed the same whilst proposing the impugned adjustment. 18. Case file(s) further indicates that the assessee had already benchmarked its interest @ 3.6% as against that involving its very AE and third parties @ rates of 2.25% to 2.6%. Meaning thereby that the assessee had already charged excess of the interest rates involving third party comparables. All these clinching aspects have gone unrebutted from the Revenue side. We thus quote hon'ble apex court s judgment in Commissioner of Income Tax vs. K.Y. Pilliah and Sons (1967) 411 (SC) that the CIT(A) s findings under challenge are liable to be affirmed without going much deeper in the relevant material matrix on all these counts. This identical substantial grievance in all three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in its books of accounts so as to declare true, correct fair profits in its books. The provision for foreseeable losses was created by the appellant in accordance and conformity with AS-7 which was regularly followed by the appellant in the past and therefore in terms of thereof such provision for created in FY 2011-12. The Ld. AO has not brought on record any specific provision of Section 30 to 44 of the Income-tax Act, 1961 which prohibited the appellant from claiming the deduction for foreseeable losses debited in P L A/c on fair, equitable and scientific basis. The mere fact the loss was to be incurred by the appellant over a period of execution of contract and such period spread over more than one accounting year, was not reason enough for the Id. AO to term such loss as contingent one. I also find that in the subsequent assessment year the appellant actually executed these contracts when such losses were incurred. I find that in the subsequent year when the loss was incurred, the provision created by the appellant in the year under consideration was written back and the losses actually incurred were accounted in the books. In the income-tax assessment for AY 2014-15, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in various years. Therefore, in principle, it was not disputed that the estimated 1055 under the present circumstances was an allowable deduction. However, merely because the change in method of accounting was bona fide, it could not lead to the inference that the income was also deducible properly under the Act. This aspect is very evident from the first proviso to section 145 as it stood prior to the amendment by the Finance Act, 1995 with effect from 1-4-1997. It could not be disputed that from the method adopted by the assessee, the assessee's income could not be deduced properly in the year in which the loss had been anticipated. As a matter of fact this aspect was not disputed by the Assessing Officer also. He had swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting was not of much significance in the present context because if the loss had been properly estimated in the year in which the contract had been entered into, then it had to be allowed in that very year and could not be spread over the period of contract. The matching principle is of relevance where income and expenditure, both are to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement, the auditors have provided as under: 'Revenue recognition on contracts Contract prices are either fixed or subject to price escalation clause. Revenue from contracts is recognized on the basis of percentage completion method, and the level of completion depends on the nature and type of each contract including: Unbilled work-in-progress valued at lower of cost and net realizable value upto the stage of completion. Cost includes direct material, labour cost and appropriate overheads; and Amounts due in respect of the price and other escalation, bonus claims and/or variation in contract work approved by the customer/third parties etc. where the contract allows for such claims or variations and there is evidence that the customer/third party has accepted it. In addition, if it is expected that the contract will make a loss, the estimated loss is provided for in the books of account. Contractual liquidated damages, payable for delays in completion of contract work or for other causes, are accounted for as costs when such delays and causes are attributable to the Company or when deducted by the client. ' 17. A similar issue has been considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the period of contract the matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant case, the effect of valuation of WIP would automatically affect the profits of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee's claim as being allowable . 18. A similar view has been taken by the Tribunal in the case of Jacobs Engineering India (P.) Ltd. v. Asstt. CIT (supra) wherein the assessee's claims of foreseeable losses were allowed irrespective of method of accounting in terms of AS-7. In the case of Dredging International (supra), the issue before the Tribunal was whether under s. 37(1) of the Act- provision for foreseeable loss made in accordance with guidelines of AS-7 and duly debited in audited accounts of company is an allowable expenditure. The Tribunal decided the case in favour of the assessee and held that ' yes ' it is an allowable expenditure. The Tribunal while deciding this issue has also considered the decision of Mazagon Dock Ltd. v. Jt. CIT (supra). 19. Considering the facts of the case in the light of the accounting stan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be allowed in the year when it is actually incurred, and because assessee had shown the total income of ₹ 41,92,05,032 from TNRDC for road construction on receipt basis. This aspect of the matter has been Challenged before the CIT(A), who held that the AO was wrong in inferring that the assessee has offered income on receipt basis. The CIT(A) has recorded in para 12 (ii) of his order that assessee company is following mercantile system of accounting and is recognizing income from contracts on percentage of completion method. In our considered opinion, there is nothing to disagree with the CIT(A) on this aspect of the matter. In fact, the financial statements of the assessee company which are placed at pp. 206 to 220 of the paper book also point out that the assessee company is maintaining its accounts on a mercantile system. In so far as the issue of allowability of future foreseeable losses is concerned, a similar situation had come up before the Mumbai Bench of the Tribunal in the case of ITD Cementation India Ltd. (supra). In the case before the Mumbai Bench, assessee was carrying on the business of infrastructure development and the work was executed on a contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t qua foreseeable loss in contract revenue; had been substantially completed and revenue therefrom also stood recognized during earlier years. He thus held that the assessee s provision was against a liability which might arise in future due to any defect in the projects and liabilities incurred by removing those defects. And that in such a liability which was to be incurred by a future rate was in the nature of a contingent liability disallowable u/s 37(1) of the Act. He included it in book profits computation u/s. 115JB Explaation-1 (c) of the Act. He lastly concluded that if at all the assessee had to make any such provision of liability to be incurred in future, the same therefore amounted to a contingent liability only not allowable u/s 37(1) of the Act which deserved to be included in book profits computation as well. The CIT(A) has admittedly reversed the Assessing Officer s action in above extracted detailed discussion. 21. It is in this backdrops of facts that we notice that this assessee; engaged in real estate business as well, had claimed the impugned liability provision based on scientific estimation going by the corresponding tabulation in page-122 of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹117,86,272/- derived from the derivative transactions. The CIT(A) s detailed discussion to this effect reads as under:- 29. DECISION : 1. I have carefully considered the submissions of the Ld. ARs in light of the facts available on record. I have also perused the impugned order passed by the Ld. AO. From the discussion in the assessment order, it is noted that the disallowance of MTM loss of ₹ 1,17,86,000/- was justified by the Ld. AO on the ground that the liability had not crystallized during the year under consideration and the amount debited was mere provision which could not be allowed under Section 37(1) as it was contingent in nature. The Ld. AO in support of the impugned disallowance relied on CBDT's Instruction No. 3/2010 dated 28.09.2010 which inter alia provided that losses on forex derivatives accounted on the basis of exchange rate prevailing on the balance sheet date was notional in nature and therefore not allowable in computing the taxable income, For the same reasons the Ld. AO added such MTM loss in arriving at the book profit of the appellant under Section 115JB of the Act by placing reliance of clause (e) of Explanation 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the appellant in its books towards MTM loss was in conformity with Accounting StandardPage 34 11 prescribed by the ICAI and there was no contrary provision in the IT. Act, 1961 which provided for making disallowance of such MTM loss. In fact I find that the very issue as to whether the loss arising on re-statement of outstanding foreign currency transactions is allowable as real loss or a notional loss was adjudicated by tile Supreme Court in its judgments in the cases of CIT Vs Woodward Governor India P. Ltd (312 ITR 2S4) Oil Natural Gas Corpn. Limited Vs CIT (322 ITR 180) . In both these judgments, the Hon'ble Supreme Court took due note of AS-11, and held that any loss or gain arising from re-statement of outstanding foreign currency transactions including borrowings/payables represents actual or real loss / gain and the same does not constitute notional/contingent loss. 4. As regards the reference made by the Ld. AO to Instruction No. 3/2010, I find that the said Circular was considered by the Special Bench of ITAT, Mumbai in the case of DCIT Vs. Bank of Bahrain Kuwait (41 SOT 290) and ITAT, Delhi the case of Bechtel India Pvt. Ltd Vs. Add!. CIT (32 Taxmann.co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular course of business. Hon'ble apex court s decision in CIT vs. Indra Industries (2010) 248 ITR 338 (SC) also holds that Board s circular are binding only on the departmental authorities. 25. Coming to sec. 115JB computation relevant to the impugned MAT loss, tribunal s co-ordinate bench in Himadri Chemicals Industries Ltd. vs. PCIT ITA No.813/Kol/2018 dated 05.09.2018 holds that such a provision is not a contingent liability and not liable to be included therefore. The CIT(A) s findings are affirmed therefore. 26. Next comes disallowance of ₹34,01,811/- on account of assessee s payment made to M/s Rajshila Nirman Pvt. Ltd. for management consultancy services made by the Assessing Officer after holding that the said payee was a bogus entity already struck off from the muster data. The CIT(A) has reversed the Assessing Officer s action as follows:- 32. DECISION : 1. I have carefully considered the submissions of the Ld. ARs as against the observations made by the Id. AO in the impugned order. In the assessment order the Id. AO observed that during the relevant year the appellant had made contractual payment of ₹ 34,01,811/- to M/s Rajshila Ni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged the payment of service tax and credit therefore was allowed in the indirect tax proceedings without there being any adverse inference. It is further noted that the payee company was issued a certificate u/s 197 of the Act by the Dy. CIT Circle 59 (TDS), Kolkata which showed that not only the existence of the payee company was known to the Income-tax Department but the Ld. AO had issued certificate u/s 197 on being satisfied that the payee would not have any liability to pay tax for the relevant year. 3. In the light of the above documentary evidences, it is difficult to accept the ld. AO's contention that the existence of RNPL remained unproved or that it was a nonexistent company. It is also noted that the payee was assessed to tax and for the relevant year the return of income was filed by the payee. It may be so that in the assessment proceedings, there were non-compliances by the payee company, for which adverse inference could not be drawn against the appellant particularly when the appellant's transactions were supported by proper documentary evidences which are required to be maintained in the ordinary course of business. As admitted by the Id. AO of the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of appropriate reasons. The mere fact that recipient did not reply in some cases or they were not found at the address furnished by the assessee does not in the least prove the fact that they were non existent or that the payments shown to have been made by the assessee were imaginary. With the advancement of technology, it has become possible to sell goods throughout the country through the intern et. For that purpose, agents are required throughout the country. The mechanism in that regard has been disclosed by the assessee and has been recorded in the order of the CIT (Appeals). For the purpose of carrying on its business, the assessee has to recruit the agents. It may not be possible for the assessee to know them personally. Whatever address was furnished to the assessee, has been disclosed to the Income-tax Department. Payments were admittedly made by cheque after deduction of tax. The tax deducted as source has duly been deposited. The judgment in the case of CIT vs. Precision Finance Pvt. Ltd. reported in 208 ITR 465 relied upon by Mr. Bhowmick does not really assist him. The aforesaid judgment is an authority for the proposition that mere payment by account paye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed and revenue's ground of appeal is allowed and revenue's ground of appeal is dismissed. 7. This issue is again based on facts. Essentially the Tribunal ties, with cogent reasons dealt with the issue, no question of law, much less any substantial question of law arises. The Tax appeal is resultantly, dismissed 5. Applying the ratio laid down in these decisions to the facts of the case, I find that the appellant had produced before the Id. AO; all the relevant documents to substantiate its transactions with RNPL. The Ld. AO did not prove any specific falsity or infirmity in these documents. Even though in the impugned order the Ld. AO alleged that the payments made by account payee cheques were returned back to the appellant through multi-layering of the transaction, no supporting evidence to substantiate such allegation was brought on record. Even the cause for nonexistence of the company at the given address was explained by the Ld. AO to the effect that company had been wound up at the time when enquiry was conducted. In view of these facts therefore, I hold that there was no valid for the Ld. AO to make disallowance of ₹ 34,01,811/- and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46,692/- was offered to tax. The said agreement also provided for charging of penal interest by way of liquidated damages in the event there was default on the part of the borrower to pay interest and re-pay principal. It was explained that in FY 2012-13, SPL unilaterally made a provision for penal interest for the entire period of default starting from 2007 amounting to ₹ 10,57,86,112/- and deducted thereon at the rate of 10%. It was the appellant's contention that it had never enforced the penal interest clause demanding liquidated damages at any time during the currency of loan agreement and SPL has unilaterally made provision for such penal interest in Its books without making actual payment. In fact in the immediately succeeding year, SPL had passed necessary entries reversing such penal interest pursuant to the addendum executed between the parties. The explanation put forth by the appellant was however found unacceptable. According to Ld. AO the appellant maintained its books of accounts by following mercantile system of accounting and therefore the income accrued to the appellant since the loan-debtor' had provided interest in its books and tax was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cantile system of accounting, the Id. AO had not made out a case that penal interest was also assessable as income because the appellant followed mercantile system of accounting. In the circumstances I find that even in the regular assessments of earlier years, the AO accepted that penal interest did not accrue to the assessee as income and on that footing no addition was made, there was no legal justification for the Id. AO to assess tire entire arrears of penal interest in AY 2013-14 merely because an entry in the books of accounts was passed by the borrower and that too there being no demand for payment of liquidated damages from the appellant's side. I therefore find merit in the Ld. ARs' submissions that penal interest, if any, for period 1st April 2012 could not have been assessed as income of the appellant in AY 2013-14, merely on the basis of provision made therefore in the books of debtor. 4. Even with regard to the penal interest allegedly pertaining to FY 2012-13, I find merit in the Id. ARs' submissions that such interest did not represent any real income assessable to tax in the appellant's hands. From the conduct of the parties, it is noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore cumulatively show that the appellant had never made any demand for payment of liquidated damages from SPL even though the appellant followed mercantile system of accounting but accounted only the income in the form of normal interest. 5. The Ld. AO has justified the assessment of penal interest or liquidated damages solely on the ground that the appellant followed mercantile system of accounting. The issue as to whether a fictional income or hypothetical income call be assessed to tax, in the hands of assessees, following mercantile system of accounting has been adjudicated by numerous judicial authorities including the Apex Court. The authoritative judgment on the subject was rendered by the Supreme Court in the case of CIT Vs. Shoorji Vallabhdas (46 ITR 144) wherein it was held as follows: Income-tax is a levy on income. No doubt! the income-tax Act takes into account two points of time at which the liability to tax is attracted, vlz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income , whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see-company decided to enhance the rates in 1963 representative suits were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and the High Court and it was only on 3-10-1968 that the letters patent appeals filed by the assessee-company were allowed by the Division Bench of the High Court and the said suits were dismissed But appeals were filed against the said judgment by the consumers in the Supreme Court and the same were dismissed by the judgment of the Supreme Court dated 26-2-1969. Shortly thereafter, on 19-3-1969, the Under Secretary to the Government of Gujarat wrote a letter advising the assessee-company to maintain the status quo for the rates to the consumers for at least- six months. No doubt, the letter addressed by the Under Secretary to the Government of Gujarat to the assessee-company, had no Iegally binding effect but one has to look at things from practical point of view that the assessee - company, being a licensee, Could not ignore the direction of the State Government which was couched in the form of an advice, whereby the assessee-company was asked to maintain the status quo for at least six months ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was true that the assessee had been maintaining his accounts on the basis of mercantile system of accounting. The interest income might have accrued according to the mercantile system, but the issue had to be viewed in the context of commercial and business realities of the situation. The fact remained that from the year 1970 onwards the assessee did not receive any interest as the debtor was unable to pay any interest; income by way of interest was not, in fact, realised by the assessee and had not become his income in the real sense . The assessee was not able to recover the principal, and, accordingly, the charge of interest in such a case would have only inflated the assessee's income and the assessee would have been liable to pay tax on such hypothetical income, when it was not the real income of the assessee and when it really was not reflected in the accounts of the assessee. Hence, the ITO was not right in estimating the interest income of the assessee. 8. Besides the foregoing judgments, the Id. AR of the appellant had relied upon several other judgments wherein the same legal principle has been stated by the Judicial authorities and therefore for the sake of avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no fault in the CIT(A) s action going only by real income principle in view of the various judicial precedents that such a notional income in case of defaulting entity a NPA does not lead to assessment of taxable income. Tribunal s co-ordinate bench s decision in Yash Corporation vs. Income Tax Officer Ward-5(2)(4) Ahmedabad ITA No.95/Ahd/2017 dated 01.01.2019 and Toyo Engineering India vs. JCIT (2006) SOT 616 (Mum) also hold that the department could not add any notional income in an assessee s hands just because a payer had deposited TDS qua the same. We wish to re-emphasis here that there is material whatsoever which could suggest payment credit of any interest income in assessee s books. We thus uphold the CIT(A) s findings under challenge. This Revenue s instant last appeal ITA No.219/Kol/2018 is partly allowed for statistical purposes therefore. 30. This leaves us with assessee s as many cross objections CO No.94 to 96/Kol/2018 filed in Revenue s three appeal(s) raising sole substantive ground challenging correctness of both the lower authorities action disallowing / adding educational cess amounts of ₹1,66,54,761/-, ₹1,54,89,712/- ₹2,24 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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