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TMI Blog2023 (7) TMI 1148X X X X Extracts X X X X X X X X Extracts X X X X ..... nance lease - HELD THAT:- Hon ble Supreme Court in the case of ICDS Ltd. [ 2013 (1) TMI 344 - SUPREME COURT] as reaffirmed the position that in a leasing transaction it is the lessor and not the lessee, who is entitled to claim deprecation on the leased assets - A.O. disallowed the excess claim of depreciation over and above the excess income - Disallowance of depreciation claimed on vehicles give on finance lease requires to be deleted. Ad-hoc disallowances of support service fee and reimbursement of expenses - HELD THAT:- Considering the fact that the CIT(A) had observed in its order that payment has not been wholly and exclusively for the purpose of business of the assessee without referring to the documents produced by the assessee we are of the opinion that, if the issue involved is remanded to the file of CIT(A) for adjudicating the same afresh after considering all the documents produced by the Assessee, the substantial issue of the assessee is remanded to the file of CIT(A) with a direction to adjudicate the issue afresh after verifying the documents produced by the assessee in accordance with law. Disallowance of bad debts written off - HELD THAT:- As decided in own case [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee) Re : Disalowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 6,40,98,834jMder_section 14A of the Income Tax Act, 1961 ("the Act") as against suo-motu disallowance of Rs. 77,45,598 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ('the Rules') without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied., 1.2 That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act out of interest expenditure without appreciating that no part of borrowed funds was utilized for making any investment. Without prejudice, that on facts and circumstances of the case, the CIT(A)/ assessing officer grossly erred in computing disallowance under section 14A of the Act, inter alia, by wrongly including (a) strategic/ business investments of the appellant; and (b) investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses 3. That the CIT(A) erred on facts and in law in upholding ad-hoc disallowance to the extent :: Rs. 19,95,37,610 being 25% of support service fees and reimbursement of expenses aggregating to Rs. 79,81,50,441/ (Rs. 63,55,67,850- service fee + Rs. 16,25,82,591- reimbursement of expenses) paid by the appellant to group companies. 3.1. That the CIT(A) erpm on facts and in law in holding that the support service fees and reimbursement of expenses paid by the appellant to group companies are not wholly and exclusively incurred for the business of the appellant and hence not allowable under section 37(1) of the Act. 3.2. That the CIT(A) erred on facts and in law in holding that the aforesaid payments to group companies are made on arbitrary and adhoc basis. 3.3. That the CIT(A)/ assessing officer erred on facts and in law in not appreciating that the appellant had placed on record various documentary evidences/ explanation which clearly justified that the support service charges and reimbursement of expenses paid to group companies were reasonable as well as meant for business purposes of the appellant. 4. That the Assessing Officer erred on facts and in law in levyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of bad debts written off by the appellant of Rs. 89,30,64,775/-. 3. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of interest on compulsorily convertible debentures Rs. 16,35,00,000/-". 2.5. I.T.A. No. 7856/DEL/2017 (A.Y. 2014-15) (Assessee) "1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 4,91,93,909/-under Section 14A of the Income Tax Act, 1961 ("the Act") [restricted to dividend income] as against suo-motu disallowance of Rs. 8,60,028/- made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ('the Rules') without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied. 1.2 That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act out of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2015-16) (Assessee) "Re: Disallowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 365,66,026 under section 14A of the Income Tax Act, 1961 ("the Act") [restricted to dividend income] as against suo-motu disallowance of Rs. 74,01,728 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in mechanically computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ('the Rules'), without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied. 1.2. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act out of interest expenditure without appreciating that no part of borrowed funds was utilized for making any investment. 1.3 Without prejudice, that on facts and circumstances of the case, the CIT(A)/ assessing officer grossly erred in computing disallowance under section 14A of the Act, inter alia, by wrongly including (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 19,95,37,610/- being 25% of support service fees and reimbursed of expenses, aggregating to Rs. 79,81,50,411/- paid by the Assessee to group Companies. 5. Aggrieved by the above said sustaining of the disallowance the assessee preferred the Appeal in ITA No. 4796/Del/2017 and as against the restriction of the disallowance u/s 14A, deletion of disallowance of bad debts written off and deletion of disallowance of interest on Compulsory Convertible Debentures, the department has preferred Appeal in ITA No. 5202/Del/2017 on the grounds mentioned above in the respective appeals. Disallowance under 14A of the Act 6. Ground No. 1 to 1.5 of Assessee's Appeal in ITA No. 4796/Del/2017 and Ground No. 1 of Departments Appeal in ITA No. 5202/Del/2017 for A.Y 2012- 13 are in respect of disallowance u/s 14A of the Act. The assessee earned dividend income during the year under consideration of Rs. 6,40,98,834/- earned from investment made in shares of Karnataka Bank Limited. The assessee made suo-moto disallowance under Section 14A of the Act read with Rule 8D of the Rules, of Rs. 77,45,598/-. The Ld. A.O. made disallowance of Rs. 17,50,04,535/-. The Ld. CIT(A), however, restricted the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest expenditure under Clause (ii) of Rule 8D of the Rule since the investment in share of Karnataka bank Limited has been made out of own funds and the similar issue has came for consideration by the Tribunal in the Assessment Year 2007-08 and 2009-10 in ITA No. 1947/Del/2018 and connected Appeals wherein the Coordinate Bench of the Tribunal has decided the issue in favour of the assessee. We have gone through the order dated 24/08/2020 passed in ITA No. 1947/Del/2018 (Assessment Year 2007-08 and 2009-10), wherein it is held as under:- "3.10. In the case, while disallowing suo-moto expenses towards earning exempted income , the assessee has not taken interest expenditure towards allocation for earning exempt dividend income on the ground that investment was made out of own funds rather than borrowed funds. This claim of the assessee as far as investment in shares of 'Karnataka Bank Ltd' (KBL) of Rs. 35.35 crores, is concerned is found to be acceptable from the explanation given in the report of the chartered accountant available on page 85- 86 of the Paper-book. The relevant part of the said report is reproduced as under: "7.2 In the FY 2006-07, RFL has invested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized for the business purposes and not for the purpose of making investments. Therefore, it can be safely inferred that the question of allocating interest u/s 14A of the Act towards investments in the shares of KBL does not arise. In fact, the internal accrual during the said year is much higher than the amount of investments made in KBL." 3.11 The source of the investment in shares of KBL is out of share application money is also evident from the copy of the bank statement available on page 101 of the Paper-book. 3.12. But, we find that the assessee has also made investment in mutual funds. According to the detail of investment available on schedule to the balance sheet on page 24 and 25 of the paper- book, we find that during the year assessee traded in mutual funds worth ₹ 1545.84 crores. The assessee has not explained source of investment in those mutual funds. In view of the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. reported in 402 ITR 640(SC) the expenditure on assets which may yield exempt income as well as taxable income, need to be apportioned towards both the exempted and non- exempted income. Thus, the certain interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income declared amounting to Rs. 9,65,00,120/- and added back to the income of the assessee in following manners:- "3.3. The reply of the assessee has been considered but not found acceptable. The assessee has not been able to furnish the impact of change in accounting method for the last five years. The methodology adopted by the assessee consistently in the past years cannot be changed without mentioning the impact on taxable income for the preceding and subsequent years. The assessee did not answer the specific query raised that what shall be the impact of computation of income if same method of charging depreciation and principal amount be adopted in last 5 years alongwith claiming additional tax withheld. On the other hand the treatment given by the lessee in its books of account and the agreement of the assessee company with the lessee has also not been given. The assessee has not been showing the leased assets in the chart of fixed assets neither in the year under consideration and nor in earlier years. The allow ability of the claim of the assessee is therefore, unfounded and not verifiable and properly supported. The claim of the assessee is being rejected and the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 ITR 527 wherein it was held that it is the lessor is entitled to claim depreciation u/s 32 of the Act in respect of leased out assets, the appellant revised its return of income and claimed depreciation of Rs. 35,07,63,697/- on the cars given on finance lease and offered Rs. 25,42,63,574/- being the principal amount recovered by the appellant from its customers in relation to such cars given on finance lease. 5.4. The appellant company had been consistently following an accounting method as 84 per which the value of assets given on finance lease is shown as a loan recoverable from the lessee. The lease rental amount received by the appellant is split into the principal amount is adjusted against the loan recoverable from the lessee and the interest amount which is credited to the P & L Account. Depreciation was not claimed on the assets under finance lease. However, in the revised return of income filed on 26.03.2014 this consistent method was practically abandoned to claim depreciation of Rs. 35,07,63,697/- on the leased assets and the principal amount of loan recovered for vehicles given on finance lease of Rs. 25,42,63,574/- was offered to tax. 5.5. The critical issue for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t these assets to claim additional depreciation. The sanctity of consistency in accounting and the certification by statutory/tax auditors would be given a complete go by if the claim of the appellant is entertained just by filing of revised return. The Hon'ble Apex Court had observed in Radha Soami Satsang vs. CIT, 193 ITR 321 as under: "We are aware of the fact that strictly speaking res judicata does not apply to income fax proceedings, again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it allow the position to be changed in a subsequent year." 5.7. In view of the above, l do not find any merit in. the claim of the appellant company and it is held that since the scope of Section 139(5) does not mandate admission of a claim of Such nature which can be termed as mistake or omission in the original return of income, and is not legally sustainable. Further, there is no way to verify the implication aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, in the facts and circumstances of the case. We find no reason to interfere with the order of the ld. CIT(A)." 16. Following the above ratio, the disallowance of depreciation claimed on vehicles give on finance lease requires to be deleted. Accordingly, the Ground No. 2 to 2.4 of the Assessee's Appeal in I.T.A. No. 4796/Del/2017 are allowed. Ad-hoc disallowances of support service fee and reimbursement of expenses 17. Ground No. 3 to 3.3 of the Assessee's appeal in ITA No. 4796/Del/2017 (A.Y 2012-13) is regarding ad-hoc disallowances of support service fee and reimbursement of expenses. Brief facts of the case are that: During the previous year relevant to Assessment Year 2012-13, the Assessee had paid business support service fee to the following parties:- S.No. Particulars Amount (Rs.) 1 Religare Enterprises Limited 28,41,84,487 2 Finserve Shared Services Limited 26,81,42,354 3 Religare Housing Finance and Development Corporation Ltd 36,00,000 4 Religare Infra Facilities Limited 7,48,79,953 5 Religare Securities Limited 3,786 6 Vistaar Religare Capital Advisors Ltd. 47,20,265 7 Auriga Marketing Services Private Limited 37,005 Total 63,55,67,850 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure incurred on support service payment cannot be considered to be expenditure incurred wholly and exclusively for the purpose of business within the meaning of Section 37(1) of the Act and thus committed an error in disallowing 25% of the expenditure incurred. The Ld. Counsel for the assessee has also submitted that, the CIT(A) erred in not considering following corroborative evidenced placed on record by the assessee to demonstrate that the services were rendered for the smooth functioning of business of the assessee. Particulars submitted before the AO and CIT(A) Page No of PB Vol. 2 List of employees of the appellant evidencing that all employees of the appellant were involved in core business functions and the appellant did not have employees for business support functions; 712-756 List of employees working in support functions of REL for providing support services to the group companies 757-765 List of employees working in support functions of FSSL for providing support services to the group companies 1011-1021 Copy of agreement(s) governing the provision of support services: - REL 709-711, - FSSL 777-787 - RHDFC 955-987 - REL Infra 1097-1108 - Vistaar RSL a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89,30,64,775/- and Rs. 1,12,08,54,213/- respectively and the Assessee's Ground No. 3 in I.T.A. No. 7856/Del/2017 against upholding of the disallowance of bad debts written off. The Ld. Counsel for the assessee submitted that the said issue stood covered in favour of the assessee in ITA No. 2559/Del/2016 vide order dated 10/12/2021 passed by the Co-ordinate Bench of this Tribunal in Assessee's own case for the Assessment Year 2010-11, wherein the Tribunal has followed the decision of Vijaya Bank Vs. CIT(A) reported in 323 ITR 166 and held that since the assessee company duly reduced the bad debts from the figure of loss and advances as appearing in the balance sheet, the same could not be treated as merely creating provision and was in the nature of bad debts written off. 24. We have heard both parties, perused the materials. The Co-ordinate bench of the Tribunal in Assessee's own case for the Assessment Year 2010-11 vide order dated 10/12/2021 in I.T.A. No. 2559/Del/2016 (A.Y 2010-11), while dealing with the similar issue of disallowance of bad debts written off by the assessee, decided the same in favour of the Assessee in following manners: "12. In the case of Vijaya Bank v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under the section. 13. Having considered the material placed on record, Ld. CIT(A) reached a conclusion on facts that the assessee had already disallowed in the computation of income the provision for NPA of Rs. 26,06,230/- and general provision of loans to the tune of Rs. 9,07,19,756/-created by it for the financial year 2009-10 which was reported separately in schedule R of the profit and loss account for the said year. Ld. CIT(A) further found that the learned Assessing Officer did not make any 9 adverse comments in respect of the reduction of loans and advances by an amount of Rs. 47,40,16,508/- in the Balance Sheet of the assessee which is clearly a writing off of bad debts in the books of accounts of the assessee. Basing on the record Ld. CIT(A) recorded a finding that the writing off of the loans of Rs. 47, 40,16, 508/-is an actual writing off and not a provision and the same is bona fide and based on its commercial expediency of the assessee. 14. On a careful consideration of the matter and analyzing the facts in the light of the addition of the Hon'ble Apex Court in the case of Vijaya Bank (supra), we are of the considered opinion that in this matter the assessee not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) for the Assessment Year 2012-13 deleted the disallowance of Rs. 13,75,19,178/- made by the assessing officer holding that CCDs are in the nature of loan until the date of conversion into equity shares and accordingly, held that the interest paid thereon could not be treated as dividend. The said finding is under challenge in Ground No. 3 by the Department in ITA No. 5202/Del/2017 for Assessment Year 2012-13. 28. It is found that the similar findings and the conclusion have been arrived by the CIT(A) for the A.Y 2013-14 and 2015-16 in favour of the Assessee, wherein the CIT(A) deleted the disallowance of interest on compulsory convertible debentures of Rs. 16,35,00,000/- each which is under challenge in Ground No. 3 of the Appeal filed by the Department in ITA No. 1005/Del/2018 A.Y 2013-14 and ITA No. 7553/Del/2018 for A.Y 2015-16. 29. It is further observed that in the Assessment Year i.e. A.Y 2014-15 the Ld. CIT(A) has taken a contrary view that was taken in the Assessment Year 2012-13 and by distinguishing the above order of CIT(A) for A.Y. 2012-13, upheld the disallowance of Rs. 16,35,00,000/- made by the A.O. on account of interest paid by the Assessee on compulsory conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not give assured return. Interest is payable irrespective of profits/ losses incurred by the appellant (refer Clause 4.4. of the Subscription Agreement read with Amendment letter dated August 12, 2011 detailing the interest payable on CCDs); -CCD holder (REL) does not have any voting right, which is available only to equity shareholders (refer Clause 4.5); -CCDs' issued to REL are secured by a pari passu mortgage over the appellant's immovable property situated in Gujarat and first pari passu charge on the business receivable of the appellant unlike, equity shares which are not secured by a charge over the assets of the issuer (refer Clause 2.2(b)); -Only upon conversion of the CCDs into equity shares, REL shall become entitled to receive dividend, if any. Till the date of conversion, the appellant will pay interest to the debenture-holders (REL) (refer Clause 4.7(b). Thus the Ld. AR submitted that, in view of the aforesaid salient terms and conditions of CCDs Subscription Agreement, especially: - (i) interest burden on the issuing company; (ii) no voting rights in lieu of debenture holding; security issued; fixed returns, etc., CCDs cannot be equated with shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether it is convertible, or non- convertible, does not militate against the nature of the debenture, being loan, and therefore, the expenditure incurred would be admissible as revenue expenditure." (emphasis supplied)." Further the Department had filed Special Leave Petition against the above said order of the Hon'ble Rajasthan High Court in the case of Security Meters (supra) which has been dismissed by the Hon'ble Supreme Court vide order dated 11/08/2009 in SLP No. 10548/2009. 33.2 Further in the case of CIT Vs. Havells India Ltd. 352 ITR 376 (Del) the Hon'ble Jurisdictional High Court has held as under: "25. The Revenue is in appeal. The main contention on its behalf is that the position should be seen not only with reference to time at which the debentures are issued but the fact that at a future point of time they were to be converted in shares should also be taken note of in order to judge the allowability of the expenditure incurred in connection with the debenture issue. It was submitted that on the facts of the present case, the debentures were to be converted within a period of 15 months, that is on or before 12.6.2006, and that the assessee company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s finding that there was no contingency involved in the accrual of liability with reference to the interest on the debentures. Ld. Commissioner of Income Tax (A) rightly observed that debentures, whether fully or partly or optionally convertible, are nothing but debt till the date of conversion and any interest paid on these debentures is allowable as normal business expenditure. The only uncertainty in the optionally convertible debentures issued by the assessee is whether the debenture holder will go for conversion into shares or will continue to hold them as debentures. Ld. Commissioner of Income Tax (A) rightly held that this uncertainty in no way impacts the assessee company's liability to pay interest till the date of conversion. Ld. Commissioner of Income Tax (A) has rightly held that the case laws referred by the Assessing Officer were not applicable on the facts of the present case, Accordingly, in the background of the aforesaid discussion, we do not find any infirmity in the order of the Ld Commissioner of Income Tax (A) and accordingly, we uphold the same. "(emphasis supplied)." 34. The above said judicial pronouncements clearly laid down the law in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections of AO/TPO are not merely on the basis of Thin capitalization Principle. Their basic objection is this that since the interest is paid on CCDs, this is not an interest on debt but on equity and hence, not allowable. On page 11 of his order for A. Y. 2009-10, the TPO has reproduced certain comments of RBI in 2007 Policy on convertible debentures in which it is stated that fully and mandatorily convertible debentures into equity within a specified time would be reckoned as equity under FDI policy. In view of this RBI Policy, the TPO concluded that these CCDs are equity and not debt and therefore, interest on it is not allowable u's 36 (1) (iii). This finding of TPO is not by invoking Thin Capitalisation principle and therefore, it has to be decided independently. We find that the decision of TPO is bases on RBI policy of FDI. We all know that RBI policy of FDI is governed by this that what will be future repayment obligation in convertible foreign currency and since, CCDS does not have any repayment obligation, the same was considered by RBI as equity for FDI policy. Now the question is that such treatment given by RBI for FDI policy can be applied in every aspect of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with voting rights of share holders during pre-conversion period, the answer will be a big NO. On the same analogy, in our considered opinion, the answer of this question is also a big NO as to whether interest paid on convertible debentures for pre-conversion period can be said to be interest on equity and interest on debentures allowable w/s. 36(1)(iii) of the IT Act." (emphasis supplied)." 37. In view of the above discussions and the aforesaid legal position, we hold that CCDs are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on CCDs is allowable as revenue deduction u/s 36(1)(iii) of the Act. Accordingly, the Ground No. 2 of the assessee in ITA No. 7856/Del/2017 for A.Y 2014-15 is allowed and Ground No. 3 in ITA No. 5202/Del/2017 for A.Y 2012-13, ITA No. 1005/Del/2018 for A.Y 2013-14, ITA No. 7553/Del/2018 for A.Y 2015-16 of the Revenue are dismissed. 38. In the result, -Appeal in ITA No. 4796/Del/2017 for A.Y 2012-13 filed by the assessee is partly allowed for statistical purpose. -Appeals in ITA No. 547/Del/2018 for A.Y 2013-14, ITA No. 7856/Del/2017 for A.Y 2014-15 and ITA No. 6116/Del/2018 for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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