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TMI Blog2023 (4) TMI 1087X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in respect of sale of unit otherwise than amalgamation/demerger. 2. The Commissioner of Income Tax (Appeals) erred in upholding that to determine standard rent of property under the Bombay Rent Control Act the reasonable rate of return should be @ 12% of market value of land and investment in building as against 6% on land and 7% on investment in building as per the report of architects, M/s Sykes & Divecha. 3. (a) The Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs.33,08,680/- being interest on borrowed funds out of total interest of Rs.48.54 crores, on the ground that under section 14A it represented expenditure by the assesse in relation to income which did not form part of total income. (b) The Commissioner of Income Tax (Appeals) erred in rejecting the appellant's contention that share capital and free reserves of the appellant are far in excess of investments made and profits before depreciation for any year are also far in excess of amount invested from time to time in such investments and accordingly, the learned Assessing Officer was not justified in making the aforesaid disallowance under section 14A of the Act. 4. The Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) to allow deduction of Rs.60,00,150/- under section 35D of the Act; (ii) to consider the rate of return on land at 6% and on investment at 7% as per the report of architects, M/s Sykes and Divecha; (iii) to delete the disallowance of a sum of Rs.33,08,680/- under section 14A of the Act; (iv) to allow set off of short term capital loss of Rs.3,88,449/-; (v) to not consider the provision for doubtful debt amounting to Rs.1,78,27,482/ while computing book profit under section 115JB of the Act; (vi) to delete an addition of Rs.1.79,50,000/- under section 92CA(3) of the Act; (vii) to delete the addition of Rs.20,79,881/- in respect of swap charges and interest On loan; and to modify the assessment in accordance with the provisions of the Act. 9. Each of the above grounds of appeal are independent and without prejudice to each other. 10. The appellant craves liberty to add, to alter and/or amend the grounds of appeal as and when given." 3. We shall deal with the above issues ground wise. 4. At the outset, with regard to Ground No. 1 which is in respect of Ld.CIT(A) upholding the action of Assessing Officer in not allowing deduction u/s. 35D amounting to Rs..60,00,150 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the previous year in which the business commenced or as the case may be the previous year in which the extension of the undertaking is completed or the new unit commenced production or operation. The past history of the assessee was that there is no dispute insofar as the eligibility criteria of the assessee is concerned. The preliminary expenses were incurred by the assessee in assessment year 1996-97, which was the first year of the claim of 1/10th of the expenditure. Since then 1/10th was claimed and allowed till assessment year 2001-2002. The impugned assessment year, i.e., M/s. Raymond Limited. assessment year 2005-2006 is the last assessment year, i.e., the tenth year of claim of deduction, which has been denied since the Steel Unit has been sold by the assessee. On a perusal of section 35D shows that the Act is silent in the case when a unit is sold. Section 35D(5) of the Act refers to the transfer before the expiry of the period of 10 years to another Indian company in a scheme of amalgamation and section 35D(5A) refers to the transfer before the expiry of the period in a scheme of demerger. There is no clause in the section which debars the assessee from claiming th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opy of the order is placed on record. Ld.AR of the assessee further brought to our notice recently in assessee's own case in ITA.No.1973/Mum/2009 dated 20.02.2019 the Coordinate Bench followed the decision for the A.Y.2005-06. Ld. AR of the assessee prayed that the same may be adopted for the year under consideration. 9. On the other hand, Ld. DR has fairly accepted the submissions of the Ld.AR. 10. Considered the submissions and material placed on record, we observe from the record that identical issue is decided for the A.Y.2004-05. While deciding the issue, the Coordinate Bench of the Tribunal in ITA.No. 1973/Mum/2009 dated 20.02.2019 held as under: - "16. We find that on this issue, the assessee has made the following submissions: In the assesse' s own appeal for A.Y. 1995-96 the CIT (A) has held to determine the annual value of the property @ 12% of the cost of land & building and dismissed the ground of Assessee. Said Judgment is confirmed as well as followed by ITAT from A.Y. 1994-95 to A.Y. 2001-02, A.Y. 2003-04, A.Y. 2005-06 and A.Y. 2006-07. 17. In this regard, we may gainfully refer to the adjudication of this issue in the assessee's own case for A.Y. 2003-04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the property determinable as per the relevant provisions of the Rent Act and modify the A.O.'s order accordingly. In this regard, the assessee's contention is that the direction should be given in accordance with the earlier year ITAT order that the annual value of the property should be 12% of the cost and the land and building. In this regard, we note that it is the plea of the Revenue that making an annual value as a percentage of the cost of the land and building forever will lead to annual value fixed for eternity which can never be permitted. We find that the ITAT earlier had confirmed the same direction. The matter is already before the Hon'ble Jurisdictional High Court. We do not find any cogent reason to depart from the earlier order of the Tribunal in the assessee's own case. Hence, we follow the same and direct that the ITAT's order in assessee's own case on this issue be followed, as the same has not been reversed by the Hon'ble Jurisdictional High Court." 11. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee's own case for the A.Y. 2004-05, we direct the AO to follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds have been utilized for the purpose of investment in mutual funds and therefore, there can be no disallowance of interest U/s. 14A of the Act. Further, Assessing Officer by following the Ld.CIT(A) order on earlier Assessment Years proceeded to disallow the interest as under: - Details Rs. in Crores 1) Total Funds 1426.34 2) Borrowed Funds 531.08 3) % 37.23% 4) Investment from which dividend is exempted U/s. 10(33) a) Subsidiary Company 2.20 b) In other companies 0.08 c) Units of UTI 3.94 d) Non trade investment 3.51 (A) 9.73 5) a) Foreign Company (Investment from which dividend is made taxable) 15.29 b) EBG India (P) Ltd. (Investment made as part of sales consideration for sale of Steel Division) 25.40 (B) 40.69 6) (A) + (B) 50.42 7) Borrowed funds invested in Rs. 9.73 crores is 37.23% (item 3) 3.62 8) Total interest paid 48.54 9) Total borrowings as on 3 1.03.01 531.08 10) Average Cost of borrowings 9.14 11) Interest to be disallowed u/s. 14A (9.14% of Rs..3.62 Crores) Item 7 33,08,680 16. Aggrieved, assessee preferred an appeal before the Ld.CIT(A). Ld.CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o interest expenditure is disallowable u/s. 14A of the Act. 19. On the other hand, Ld.DR relied on the orders passed by the lower authorities. 20. Considered the rival submissions and material placed on record, we observe from the informations submitted by the assessee clearly indicates that the various investments were made by the assessee in earlier Assessment Years which is backed with the details of the non interest borrowing funds available with the assessee in the respective years. Therefore, assessee has brought to our notice clearly that assessee has enough funds at their disposal to make various investments in the sister concerns as well as with the various investments. In our considered view with the information available on record it clearly indicates that the assessee has utilized non interest borrowing funds for making the various investments. Therefore, the Assessing Officer cannot invoke Rule 8D(2)(ii) of I.T. Rules to disallow the interest expenditure u/s. 14A of the Act, accordingly, ground raised by the assessee is allowed. 21. With regard to Ground No. 4, at the time of hearing, Ld. Counsel for the assessee submitted that Ground No.4 is not pressed, accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the assessee's case as the provision against doubtful debts has not been made against the determined and identified non performing asset. The provision in general has been made against advances and thus is an unascertained liability within the provision of clause (c) of Explanation to Sec. 115JB(2). Accordingly, he made an amount of Rs..1,78,27,482/- to the book profits of the assessee u/s. 115JB of the Act. 25. Aggrieved, assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) after considering the submissions of the assessee sustained the additions made by the Assessing Officer. 26. Aggrieved assessee is in appeal before us and submitted that the Assessing Officer has invoked the clause (c) of Explanation 2 to section 115JB of the Act with the observation that doubtful debts claimed by the assessee is unascertained liability. However, he brought to our notice decision of the Hon'ble Supreme Court in the case of CIT v. HCL Comnet Systems and Services Ltd. [305 ITR 409]. Further, he submitted that new clause (i) was inserted to the explanation (1) to section 115JB as per which "the amount or amounts set-aside as provision for diminution in the value of any as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We noticed that assessee has created similar doubtful debts for Financial Year 31.03.2001 and created provision for Rs..170.36 lacs. We observe from the method of account followed by the assessee is that it created provision every year and carry forwards the same amount to the subsequent year and if there are any actual bad debts it is adjusted during the year. Therefore, from this method of accounting adopted by the assessee clearly indicates that it is only a provision not actually bad debts written off by the assessee. This can be understood from the following extract of the provision for doubtful debt account: - DETAILS OF PROVISION FOR DOUBT FUL DEBTS A/C Rs.. IN LACS 01/04/2001 OPENING BALANCE LESS: PROVISION WRITTEN BACK 170.35 6.62 163.73 ADD: PROVISION FOR THE YEAR 178.27 31/03/2002 CLOSING BALANCE 342.00 (AS PER AUDITED ACCOUNTS) 30. From the above it makes it very clear that assessee has created merely a provision for doubtful debts without there being any actual bad debts which needs to be claimed as bad debts. Therefore, the conclusion reached by the tax authorities are just and proper. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin being operating profit/sales is 14.19% while that of the comparable (6 of them) was 7.90%. The Ld.CIT(A) had called for a remand report on the same which is at pages 234 to 254 of Paper Book I. Based thereon, the Ld.CIT(A) has refused to admit the additional evidence (paragraph 10.2 at page 28 of his order). Independently he has also rejected the assessee's claim of application of TNMM method to commission payment (at paragraph 3 at pages 28 and 29 of his order). 33. Ld. AR submitted in his synopsis in respect of the contention for allowing the ground raised by the assessee, for the sake of clarity it is reproduced below: - "13. The assessee submits that the transfer pricing adjustment for commission payment was not justified in the present case for the following reasons each of which is in the alternative and without prejudice to any others. a. The assessee has paid such commission at the rate of 12% except in respect of exports to Canada where commission has been paid at the rate of 5% of the FOB value of exports. That adoption of the guidelines laid down by Swiss Administration in respect of Liaison Office has no application to the present case, as * this is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Company for purchase or sale of the Products, other than those which have been subject to confirmation and acceptance by the Company, and subject to the Company's Conditions of Sale for the time being operative and will not make any promises, representations, warranties or guarantees with reference to the Products except such as are consistent with such conditions of Sale. (e) shall not offer the Products for sale at prices lower than that for the time being fixed by the Company. shall not sell nor be interested in the sale or representation of goods of any party other than the Company whether of the same nature or not, without the prior consent in writing of the Company. (g) shall promptly bring to the notice of the Company any information received by the Selling Agent as to the financial stability of intending buyers of the Products whose inquiries and orders are transmitted by the Selling Agent to the Company. (h) shall observe all directions and instructions given to it by the Company in relation to the sale, marketing, distribution and exportation of Products. (i) shall not, in selling the goods, make any representation or give any warranties other than those con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d herewith at pages 10 to 11. Further this principle of consistency has been followed in the context of most appropriate method to be adopted for benchmarking a transaction by the jurisdictional High Court in PCIT v Vishay Components India (P) Ltd. (2019) 103 Taxmman.com 421 and CIT v L'Oreal India (P) Ltd. (2015) 53 Taxmman.com 432. Based tereon, it is urged that the Tribunal may be pleased to hold that the TNMM method is most appropriate method for benchmarking the commission payment. Though, the necessary working had been produced as additional evidence before the CIT(A), he had called for a remand report in respect thereof from the TPO. In the said remand report, no defect has been pointed out in the computation of arm's length price. In view thereof, the transfer pricing adjustment may be deleted." 34. In view of the above submissions, Ld. AR of the assessee prayed that the ground raised by the assessee may be allowed and set-aside the order of the Ld.CIT(A) in respect of the above ground. 35. Ld.DR relied on the orders of the lower authorities and submitted that T.P. Adjustment in every assessment year is different and he brought to our notice Para No. 9.8 of the T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d prescribed in the sec.92C of the Act and Rules framed for the determining the ALP. We also observe that TPO considered and equated the present transaction with the liaison office, it is fact on record and the marketing agreement submitted before us clearly indicate that the associated enterprise is not doing any liaison work and does more than marketing by hiring sub-Agents in different territories. This itself shows that it is not a liaison office. Adopting the principle of liaison office for marketing function is not proper. Further we observe that there is no change in the operation and compensation paid for the marketing to the Associate Entity in the subsequent assessment years and in the present assessment year, the same TP study can be adopted considering the fact that there is no major deviation brought on record. Therefore, in our considered view, the benchmarked commission payment by applying the (TNMM) method which has been accepted by the TPO can be applied in the present assessment year considering the fact that no transfer pricing adjustment was proposed by the assessee and also the method proposed by the assessing officer is also not one of the approved method unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest then prevailing at the time of payment. With a view to cap the rate at which interest was to be paid the assessee entered into an agreement with Bank of America for swapping such interest thereby any increase in the rate of interest would be to the account of Bank of America. In this regard, it had paid swap charges to them. The invoice at page 229 of Paper Book I shows that an amount of Rs..17,35,277 represented such swap charges relatable to the period from 19.02.2002 to 31.03.2002. The balance amount of Rs..3,44,603 was provision in respect of interest payable to State Bank of India and Citibank. Since this is an expenditure incurred for the purposes of its business, it has to be allowed as deduction. Mere use of the expression 'provision' would not change the character of expenditure where the amount of swap charges is a necessary outgo and its quantum does not depend upon the happening of any future event. 42. On the other hand, Ld.DR relied on the order of the Ld.CIT(A). 43. Considered the rival submissions and material placed on record, we observe that the assessee had charged to profit and loss on account of interest swap charges paid to Bank of America ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the assessee by the Hon'ble Jurisdictional High Court in the case of CIT v. Raymond Ltd., [2012] 209 taxman 65/21 taxmann.com 60 (Bombay). Copy of the order is placed on record. Ld. AR submitted that the same may be adopted for the year under consideration. 48. Ld. DR fairly agreed that the issue is covered in favour of the assessee and relied on the order of the lower authorities. 49. Considered the rival submissions and material placed on record, we observed that similar issue was considered and adjudicated by the Hon'ble Jurisdictional High Court in assessee's own case for the A.Y.1997-98 in the case of CIT v. Raymond Ltd., (supra) and decided the issue in favour of the assessee. While holding so the Hon'ble Jurisdictional High Court held as under: - "1. This appeal by the Revenue against the order of the Income Tax Appellate Tribunal dated 13 February 2009 relates to AY 1997-98. Two questions of law have been framed by the Revenue which are as follows: (a) Whether on the facts and in the circumstances of the case and in law, the ITAT was right in deleting the adjustment made by the AO relating to Redemption of Debentures Reserve amounting to Rs.18.80 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vs. CIT2 , in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of that concept would have to be gathered from the meaning attached in the Companies Act itself. The following observations of the Supreme Court are of significance: "The debentures were nothing but secured loans. Merely because the debentures were not redeemable during the accounting period, the liability to redeem the debentures did not cease to exist. It was redeemable or repayable at a future date. But it was a known liability. In the form of balance-sheet prescribed by the Act in Schedule VI, the secured loans have to be shown under the heading "liabilities". Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances. The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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