MALCO ENERGY LTD.,MUMBAI vs. ASST CIT CIRCLE-10(2)(2), MUMBAI

This appeal is filed by Malco Energy Limited (The Assessee/ Appellant) for A.Y. 2015-16 against the assessment order passed by The Assistant Commissioner of Income Tax, Circle 10(2)(2), Mumbai [ the ld. AO] on 31stOctober 2019. By Assessment

Assessee has raised following grounds of appeal:-

Assessee filed its original return of income on 28/11/2015 declaring total income at Rs. Nil and Minimum Alternative tax book Profit u/s 115 JB of the Act the profit was computed at a loss of ₹ 445,665,451/– i.e. loss disclosed in profit and loss account without any adjustment. Assessee further submitted:-

This return of income [ROI] was picked up for limited scrutiny by issue of notice under section 143 (2) of the act on 12/4/2016.

Assessee has reported in Form No. 3CEB with its associated enterprises following Specified Domestic transactions [ SDT] with its associated enterprise along with its benchmarking methodologies as under:-

More precisely the transactions were explained in the Transfer Pricing Study Report [ TPSR] in paragraph number 1.3 being the summary of the specified domestic transactions analyzed showing that :-

Ld.AO referred the matter to The Deputy Commissioner of Income Tax (Transfer Pricing – 3 (2) (1), Mumbai (ld. TPO) for determination of arm‟s-length price in respect of specified domestic transactions. On examination, assessee submitted that during the financial year 2014 – 15 the assessee company has sold coal of ₹ 101,244,722 its associated enterprises Vedanta limited to meet stock levels for plant of Vedanta limited. Further assessee company has purchased coal and sulphuric acid of ₹ 1,100,322,350 from its associated enterprises i.e. Vedanta limited to meet its plant stock level. Assessee discussed the most appropriate method adopted by it for purchase and sale of fuel stock to

The learned TPO examined benchmarking made by the assessee of the sale of fuel stock amounting to ₹ 101,244,720 and after examination and on consideration of explanation of the assessee, verified the data from the TIPS database for the reason that assessee did not authenticate the sale price in respect of any global index rises. Therefore, the learned TPO adopted CUP method as The Most Appropriate Method , analyzed transaction on TIPS database and thereafter found that out of 4 transactions, only 1 transaction is found at arm‟s-length and in other 3 transactions the price is found higher than the price at which the transactions are undertaken by the assessee. The

On examination of Normal computation of Total income, learned Assessing Officer noted that:-

Thus, assessee has claimed this expenditure as allowable expenditure u/s 37 (1) of the Act. The learned Assessing Officer questioned the assessee that above expenditure is not allowable under section 37 (1) of the Act. In response to that, assessee submitted that above expenditure is allowable in view of the fact that decision in case of Brooke Bond Vs. CIT 225 ITR 795 (SC), was not applicable in the case of the assessee. The learned AO rejected the contention and held that the above expenditure cannot be allowed as revenue expenditure as per the normal computation of total income as section 37 (1) disallows any capital expenditure. LD AO cited three decisions of Honourable Supreme Court to support disallowance. Therefore, in normal computation of total income the Assessing Officer held that it is a capital expenditure.

While examining the computation of book profit u/s 115 JB of the Act, the ld. AO noted that :-

The ld. AO was of the view that capital expenditure cannot be debited to the profit and loss account and cannot go to reduce the book profit computation u/s 115 JB of the Act, questioned assessee. The ld. AO noted that assessee has classified these expenditures as capital expenditure in its tax audit report , though expenses are debited to the profit and loss account, assessee has put the detail note in form number 3CD treating it as capital expenditure but did not add this to the computation of book profit under section 115JB of the act. Form number 29B submitted contained neither

The assessee objected to the same stating that:-

Accordingly, the objections of the assessee were decided by passing a direction dated 23rdSeptember2019. 22. The learned assessing officer based on the above direction passed the assessment order on 31stOctober

Ground number 16 was against the short credit of tax deducted at source to the appellant. The assessee has claimed the tax deduction at source credit of ₹ 3,030,259/- whereas the learned AO has granted credit of only ₹ 100,848/–.

On hearing Both the parties, we find that this was not the part of the draft assessment order and therefore the assessee came to know only about this adjustment at the time of making of the final assessment order,hence, in the interest of justice, we set-aside it to the file of the learned assessing officer to verify the credit claimed by the assessee in the return of income, if it is found in accordance with the law, the assessee should be granted the above credit. If the learned assessing officer has any reservation on granting the credit of tax deduction at source claimed by the assessee in the return of income, the AO must give opportunity to the assessee to explain its position and thereafter decide the issue on the merits of the case. Thus, ground number 16 the appeal is allowed with above direction.

Ground number 17 of the appeal is with respect to not granting assessee the lower of brought forward losses or unabsorbed decision while computing book profit

Only submission made by the learned AR in this case (as per written submission placed at page number 22 of the paper book in para number 5) is that the assessing officer may be directed to allow adjustment of brought forward business loss or unabsorbed depreciation, which is lower as per the direction of the DRP.

We have carefully considered the rival contention and perused the orders of the lower authorities. In this case the learned assessing officer has passed the final assessment order on this issue at paragraph number 8.18 to 8.23 of the final assessment order. The contentions raised by the assessee were considered after giving an opportunity to the assessee. The assessee submitted that ₹ 134.49 crores is an eligible claim of the assessee. The learned assessing officer as considered the tabulated claim made by the assessee and in paragraph number 8.22 has held that the business loss is ₹ 207.76 crores whereas the unabsorbed depreciation is rupees nil. According to the provisions of section 115JB deduction of lower of unabsorbed loss or unabsorbed depreciation from the book profit is required to be reduced. In this case as the unabsorbed depreciation is rupees nil whereas the unabsorbed business losses are ₹ 201.76 crores and therefore the assessee is entitled to deduction of rupees

Ground number 2 – 9 of the appeal is against the adjustment of the book profit under section 115JB of the Act, where there is an addition of ₹ 200 crores on account of the foreclosure cost was made by the learned Assessing Officer. The argument of the learned Authorizedrepresentative is that:-

Accordingly, the learned CIT DR vehemently stated that the addition made by the lower authorities to the book profit under section 115JB of the act is correctly made and should be upheld.

In the rejoinder the learned authorized representative submitted

Facts show that assessee has issued redeemable preference shares on 28th of March 2012 having a face value of Rs 100 Crores at a premium of ₹ 2900 crores. Therefore, the total issue consideration was ₹ 3000 crores. The tenure of the redeemable preference was determined at 10 years and the redemption due date accordingly was 28th of March 2022 at a premium of ₹ 6865 crores. Accordingly, the total redemption consideration was ₹ 6965 crores. 37. In 2015, assessee decided to revise the terms of the preference shares by reducing its tenure. The redemption date was decided on 30 March 2015 but at the foreclosure cost of ₹ 200 crores. Therefore, the total redemption price of the debentures was decided at ₹ 3200 crores (original issue consideration of ₹ 3000 crores plus premium of 200 crores). The assessee debited these Rs 200 crores as foreclosure cost to the profit and loss account. This expenditurewas not claimed as deductible expenditure in normal computation of Total income. In fact, assessee in form no 3CD prepared by it specifically stated that this

According to share capital structure of the assessee, in the previous year ended on 31st of March 2014, the balance sheet shows that 10,00,00 -9% redeemable cumulative preference shares of ₹ 1000 each fully paid up were outstanding at Rs 100 crores for 10 lakhs shares. The 100 % shareholding of these preference shares was with Sesa Sterlite Limited. These shares were redeemed during the year and therefore in the share capital note as of 31 March 2015, the above shares were not appearing in share capital schedule. As at the beginning of the year, the assessee had securities premium account outstanding of Rs. 4163.20 crores out of which Rs.2900 crores were utilized pursuant to the scheme towards adjustment Rs. of opening deficit in statement of profit and loss account and redemption of preference share capital.

The assessee also states that it is not debited any expenditure of capital nature to the statement of profit and loss during the current year other than as reported above. Therefore, assessee states in form number 3CD that foreclosure cost on account of early redemption of the preference shares and expenses in relation to capital reduction share issue in deduction of preference

Form number 3CD is always prepared by the assessee and it is certified by the accountant in form number 3CA that details furnished in that form along with its annexure read together with and subject to the notes therein are true and correct. Therefore, form number 3CD prepared by the assessee, reports submitted by the accountant in form number 3CA also endorses the view of the assessee. It is interesting to note that form number 3CA certifying that the details in form number 3CD is true and correct is issued by the same person who issued another certificate in form number 29B being a report under section 115JB for computing the book profits of the company.

Under the provisions of section 55 (2) (d) of The Companies Act, 2013 the premium payable on deduction of preferential shall be provided for out of the profits of the company or out of the companies securities premium account before such shares are redeemed. It provides as under :-

Thus, the redemption of preference shares at premium shall always be out of securities premium or the General Reserve in profit and loss account or below the line as appropriation of profit. The premium on redemption of preference share cannot be debited to the profit and loss account. This is also so because the provision for adividend on redeemable preference share is also a below the line item i.e., appropriation of profit. Thus, the accounting treatment of assessee to debit the securities premium to profit and loss account is not in accordance with the provision of section 55 of The Companies Act 2013.

The issue arises that when company provides for premium on redemption out of the profits of the company whether it needs to be debited as expenses in the statement of profit and loss account or it is to be deducted from balance of surplus in the balance sheet.

As per para 49 (1) ( c) of the framework, equity is the residual interest in the assets of the enterprise after deducting all its liabilities, as per The Companies Act the difference between the preference shareholders and equity shareholders is that preference shareholders get preferential right over equity shareholders in distribution of assets at the time of liquidation. However, till the date of redemption of preferenceshares, preference shareholders do not have a right to ask for redemption. Hence, payment to preference shareholders can also be considered as an equity distribution.

Preference share capital is disclosed in Part I as Shareholders‟ Funds in Schedule III of The Companies Act 2013 under balance sheet. In Part II only the expenses are required to be placed. The Foreclosure

Under Guidance Note on Division 1 Non Ind As Schedule III to the Companies Act 2013 [ Revised January 2023 Edition] clearly provides as under :-

Further support to the above contention can also be that when the treatment of preferential dividend is never debited to the statement in the profit and loss account as an expense but is always deducted from the balance of surplus in the balance sheet or as appropriation of profits.

In a series of decisions of the Honourable High courts and Coordinate benches it has been held that capital receipt even if credited to profit and loss account cannot form part of book profit u/s115 JB of The Act. { Ankit metals Limited 416 ITR 591 (cal) } Applying the same analogy if the capital expenditure is debited to the profit and loss account, it is also required to be added back to the book profit U/s 115 J B of The Act.

Honourable Karnataka High CourtIn case of GMR Industries Limited 425 ITR 504 {kar} where in it has been held that expenditure incurred for capital expenditure and also the prior period expense debited to profit and loss account , both are required to be added to book profit U/s 115 JB of the Act despite balance sheet and profit and loss account signed by directors and auditors.

Decision of Honourable supreme court in case of Appollo Tyres Limited [2002] 255 ITR 273 (SC) will only apply if the accounts are prepared in accordance with the companies Act and relevant statutory pronouncements. It is held that the use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. In this case the ld. AO referred to the provisions of the Companies Act and held that he has every right to disturb the audited accounts. Honorable supreme court decision does not prevent ld. AO to disturb profit and loss account when the Capital expenditure is debited to the profit and loss account for avoiding book profit tax and not permitted by the companies Act, relevant standards and Guidance notes.

Assessee has also raised a plea that recipient of Foreclosure cost has offered this as income and paid book profit tax there on. We are not impressed with this because both are separate entities and are responsible for discharging their own liabilities under the Act.

Many judicial precedents cited before us. However, in almost all the cases the issue is payment of premium to the debentures shareholders. Reliance was placed on decision of the honourable Bombay High Court in CIT V Aditya BirlaNuova Limited 79 taxmann.com 2010, CIT versus Grind well Norton Ltd (ITA 694 of 2012). Before us is not the case of premium paid on debentures redeemed but premium paid on redemption of preference shares. Shares have been defined in section 2 (46) of the companies act means a share in the share capital of a company which in turn would represent the contribution of the shareholder in the share capital of the company. On the other hand, debenture is an instrument of debt executed by the company

The assessee further relied upon the decision of Clarian chemicals India private limited versus ACIT 25 taxmann.com 83 stating that tax audit report is not conclusive for determining the deduction. That was the case before the coordinate bench where the penalty was levied under section 271 (1) (c ) of the act. Coordinate bench held that tax audit report is an important document, but it cannot take place of evidence required for claiming the deduction. In the present case, in form number 3CD, assessee has classified the above expenditure as capital expenditure. Form number 3CD is always prepared by the assessee.

In the result we do not find any infirmity in the order of the lower authorities in making addition of Rs 200 crores to the book profit u/s 115 JB of The Act holding that it is statement of assessee that it is a capital expenditure. Thus Ground no 2 to 9 of the appeal are dismissed.

Ground number 10 – 12 are with respect to the disallowance of share issue expenses while computing normal profit treated by the assessee as revenue expenditure and disallowed by the learned assessing officer and confirmed by the learned CIT – A.

Facts show assessee has incurred an expenditure of ₹ 25 lakhs towards capital reduction, share issue and reduction of preference shares which was treated by the assessee as expenditure by debiting it to the profit and loss account and claiming it to be an allowable

The learned assessing officer made a reference to the i. Form No 3CD wherein assessee classified it as the capital expenditure, ii. Relying on decisions of the honourable Supreme Court in case of Brooke Bond India Ltd 225 ITR 798, Punjab State industrial development Corporation Ltd 225 ITR 792, CIT versus Hindustan insecticide Ltd 250 ITR 338,

The learned CIT DR submitted that in form number 3CD the assessee himself has classified the above expenditure as capital expenditure. The AO asked why this expenditure should not be disallowed relying on the decision of the honourable Supreme Court. Assessee in reply, only reliance was made with respect to the decision that MAT provisions are introduced much after the date of the decision and therefore it cannot be applied.

Ground numbers 13 – 15 of the appeal are with respect to the transfer pricing adjustment of ₹ 1,867,424/– on account of sale of fuel stock and ₹ 11,701,150/– on account of purchase of fuel stock. During the year assessee has sold coal to Vedanta Limited of ₹ 101,244,720 and purchased same material from the same party amounting to Rs. 110,03,22,350. The reason for entering into such a transaction as stated in the transfer pricing study report is to meet its stock level for plant operational requirement. It is the claim of the assessee that the specified domestic transaction has been undertaken only for the purpose of facilitation/administrative convenience and no services have been rendered and availed by assessee or the buyer and seller as per paragraph number 5.1.2 of the transfer pricing study report. In paragraph number 5.1.3 the assessee concluded that comparable Uncontrolled Price Method (CUP) cannot be applied due to nonavailability of transaction level data through both internal and external sources. Therefore, the assessee adopted a new method i.e., “Other method” as per rule 10 AB as the most appropriate method. The Assessee

The learned TPO rejected the benchmarking analysis and held that Comparable Uncontrolled Price [ CUP] method is the most appropriate method, he used TIPS database to benchmark the transaction by using that method and accordingly he benchmarked the purchase and sale of fuel stock transaction. With respect to the sale of fuel stock transaction of ₹ 101,244,720, the learned TPO held that except for 1 transaction out of 4 transactions, is not at arm‟s-length for the reason that the price of sale of fuel stock is higher than the price at which the transactions are undertaken by the assessee and therefore the adjustment of ₹ 1,867,424/– was made. With respect to purchase of fuel stock transaction of ₹ 110.03 crores the learned TPO out of 5 transactions, held that 1 transaction is at arm‟s-length

The learned authorized representative submitted that the benchmarking made by the assessee applying the „other method” as the most appropriate method should be accepted and cannot be treated as held by the coordinate bench in case of Toll global versus DCIT 2014 [51 taxmann.com 342 (Delhi)] which has been confirmed by the honourable Delhi High Court. Therefore, the most appropriate method adopted by the assessee should be accepted as „other method‟ and not CUP. It was further stated that lower authorities are incorrect in applying reference index price from TIPS database which merely provides quotations. With respect to the applicability of CUP method, assessee relied upon the coordinate bench decision in case of Kohinoor foods Ltd versus ACIT (2014) [52 taxmann.com 454 (Delhi)] stating that in the absence of application of applicable parameters CUP method adopted by the TPO without citing cogent reason by unduly reviewing his own earlier transfer pricing reports is unjustified. The application of CUP method is to be based on strict comparable criteria and cannot be

We have carefully considered rival contention, order of the ld. TPO and Direction of DRP. 70. Assessee in Its T P Study report has adopted other method as the Most Appropriate method. However, it is bereft of any comparability analysis. It merely said that the justification of transaction is meeting the

The ld. TPO found the comparable prices of the transacted goods and then made adjustment wherever the prices are found not comparable. No infirmity pointed out in the transactions compared, timing of transactions and on any other parameter of transaction. Therefore , we do not have any hesitation in confirming the adjustment on account of Arm‟s length price of specified domestic transaction.

On the use of TIPS data base, assessee has relied upon decision of coordinate bench in case of Billion Wealth Minerals (P.) Ltd.*[2018] 90 taxmann.com 170 (Mumbai - Trib.), it dealt with this aspect as under :-

Thus, it is not the case that TIPS database is not reliable. No evidencewas produced before us that there is any infirmity in the database used by the TPO. Many coordinate bench decisions have held that TIPS database is the appropriate database in determining comparable uncontrolled prices of products.

In the result, the appeal of assessee is partly allowed.