Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
PER A. MOHAN ALANKAMONY, A.M:
This appeal is filed by the Revenue against the order of the Ld. CIT(A)-1, Hyderabad in appeal No. 0136/CIT(A)-1/Hyd/2013-14, dated 29/04/2016 passed U/s. 143(3) r.w.s 250(6) of the Act for the A.Y. 2010-11.
The Revenue has raised four grounds in its appeal however the cruxes of the issues are that: -
(i) The Ld. CIT (A) has erred in deleting the addition of Rs. 63,32,610/- towards disallowance of expenditure incurred for issue of bond. (ii) Ld. CIT (A) had erred in deleting the addition of Rs. 2,13,62,500/- towards discount received. (iii) The Ld. CIT (A) has erred in restricting the disallowance U/s. 14A of Rs. 4,07,802/-.
The brief facts of the case are that the assessee is a limited company engaged in the business of manufacture and sale of Jelly-filled Telephone Cables, super enamelled copper rods and wires, infrastructure activities and generating power by windmill filed its return of income for the AY 2010-11 on 29/03/2011. Subsequently, the case was taken up for scrutiny under CASS and the assessment was completed U/s. 143(3) of the Act vide order dated 26/03/2013 wherein additions were made towards (i) disallowance of 1/5th of bond issue expense which works out to Rs.63,32,600/- (ii) discount received on redemption of FCCBs for Rs. 2,13,62,500/- and (iii) towards disallowance U/s. 14A for Rs. 28,46,730/-. On appeal, the Ld. CIT (A) deleted the addition with respect to Rs. 63,32,600/- towards disallowance of amortised expenditure as well as the discount received on redemption of FCCBs however, sustained the addition made u/s 14A of the Act at Rs.4,07,802/-.
Ground No.1: Disallowance of amortised expenditure of Rs.63,32,600/:
During the course of scrutiny assessment proceedings, it was observed by the ld. AO that the assessee company had claimed deduction U/s. 35D of the Act for Rs. 63,32,610/- being 1/5th of the aggregate expenditure of Rs.3,16,63,000/- incurred towards raising 150 foreign currency convertible bonds each worth US$ 1,00,000. The details of the aggregate expense incurred by the assessee of Rs. 3,16,63,000/- is as follows:
a. Sign-on-fees Rs. 11,67,006/- b. Commitment Fees Rs. 22,87,000/- c. Success fees Rs. 1,88,67,750/- Sub-total Rs. 2,23,21,756/- Other expenses Rs. 7,91,302/- Out of pocket expenses Rs. 85,49,942/- Total Rs. 3,16,63,000/-
The Ld. AO disallowed the claim of amortization as it was revealed that the proceeds received from issue of FCC Bonds were advanced to subsidiary companies which the assessee company could not convert with cogent evidence. Before us, on this issue the Ld. AR relied on the decision of the Hyderabad Bench of the Tribunal in ITA No. 99 & 1435/Hyd/2012 wherein the for the AY 2008-09 and 2009-10 had remitted the matter back to the file of Ld.AO to verify whether the expenditure incurred by the assessee was related to the issue of
debentures and if so grant deduction U/s. 37 of the Act. Subsequently, in the MA No.148 & 149 arising out of ITA No. 99 & 1435/Hyd/2012 the Bench modified the orders as under:
“9. MA No. 149/Hyd/2013 – A.Y. 2009-10: Through this MA the assessee seeks for rectification of mistake apparent on record as crept in as the very same ground as in the assessment year 2008-09 with respect to deductibility of a sum of Rs. 63,32,210/- (1/5th of Rs. 3,16,63,058/-) as revenue expenditure deductible under section 37 of the IT Act, 1961 was not adjudicated by the Tribunal. For the reasons stated in paragraph No.4 hear in above, this ground is adjudicated and therefore a sum of Rs. 63,32,210/- is deductible under section 37 of the Income Tax Act, 1961 and accordingly, additional ground in ITA No. 1435/Hyd/2012 is allowed.”
However, on perusing the provisions of section 35D of the Act it is crystal clear that the assessee will not be entitled to claim deduction U/s. 35D of the Act because provisions of section 35D(2)(c)(iv) provides that any expenditure incurred in connection with issue for public subscription, shares, debentures which are in the nature of underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus can be amortized and further any other expense as prescribed will also be allowed. These expenses will be allowable in addition to preparation of feasibility report, project report, market survey or any other survey in the business of the assessee, engineering services related to the business of the assessee, legal charges for drafting any agreement between the assessee and any other person for setting up or conduct of the business of the assessee, legal charges for drafting MoA and AoA, printing expenses of MoA and
AoA, fees for registering the company under the Companies Act. However, it is apparent from the facts of the case that the entire expense is incurred for soliciting the FCCBs which is not in the ambit of section 35D of the Act. It is pertinent to mention that the Act allows expenditure such as underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus towards issue for public subscription, shares, debentures and not any other expenditure related to issue for public subscription, shares, debentures. Further, the finding of the Ld. Revenue Authorities that the entire amount received from FCCBs were advanced to the subsidiary company of the assessee is also not controverted by the assessee with cogent evidence. It is also pertinent to mention that the decisions rendered by the Tribunal on the earlier instance will not be applicable because in that decision the provisions of the Act were overlooked. For the above stated reasons, we hereby confirm the orders of the Ld. Revenue Authorities for disallowing the claim of amortization expenses with respect to FCCBs. Accordingly, this ground raised by the Revenue is allowed.
Ground No.2: Discount received on buy back of FCCB Bonds Rs. 2,13,62,500/- treated as income.
During the relevant assessment year, the assessee company bought back 50 FCCBs out of 150 FCCBs issued by the company on 10/10/2006. In the transaction the assessee company gained an
amount of Rs. 2,13,62,500/- as it had received discount on buy-back. However, due to foreign exchange loss on the very same transaction the assessee incurred loss of Rs. 1,75,05,000/- while making payment for the buy-back of FCCBs. The assessee had set off the foreign exchange loss against the discount received and capitalize the balance amount of Rs.38,51,000/- to the concerned assets viz., plant and machinery. However, the Ld. AO opined that the foreign exchange loss cannot be set off from the gain from discount received on buy back of FCCBs and made addition of Rs. 2,13,62,500/-. While doing so, the Ld. AO further revised the eligible depreciation on Plant and Machinery from Rs. 12,79,49,530/- to Rs. 14,00,50,393/- due to capitalization of foreign exchange loss. On appeal, the Ld. CIT(A) confirmed the order of the Ld. AO by agreeing with his view.
At the outset, we do not find any merit in the orders of the Ld. Revenue Authorities on this issue. From the facts of the case, it is apparent that the loss incurred due to foreign exchange fluctuations is directly related to the buyback of FCCBs and therefore the same has to be set off from the gain accrued to the assessee from the buy-back of FCCBs. The gain arising out of the buyback of FCCBs has to be necessarily treated as the income of the assessee as per section 28(iv) of the Act wherein it is stipulated that the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession has to be treated as the income of the
assessee. There is no doubt that the transaction of issue and buyback of FCCBs have arisen out of the business of the assessee. The argument of the Ld.AR that “waver of loan is a capital receipt similarly discount received on buy back of FCCBs is also capital receipt” does not have any merit. If that being so it will promote entry business ie., by way of obtaining loan from entities having surplus accounted funds and later on waving the same by remission and settling the lender outside the books by cash. Further provisions of Section 56(2)(x) of the Act also may become redundant in very many deserving situations if the proposition suggested by the Ld. AR is accepted. Needless to mention that the business is carried out by any entity either by utilizing its own capital which is tax paid money of the owner of the entity or out of loan which has to be repaid out of tax paid money of the entity. Further from the facts of the case there is nothing on record to suggest that provisions of section 43A is applicable in the case of the assessee because there is no finding whether the Plant and machinery was acquired from outside India. The expenses incurred for acquiring funds through FCCBs is nothing but a financial charge and the same has to be capitalized or treated as revenue expenditure depending upon the date of commencement of the business of the assessee. In the case of the assessee the findings of the Ld. Revenue Authorities are that the funds received from FCCBs were not utilised for the business of the assessee but advanced to the sister concerns of the assessee and the same could
also not be controverted by the assessee. In these circumstances, the surplus or shortfall arising out of the overall transaction of, discount received on buy-back of FCCBs and the loss incurred due to foreign exchange fluctuations has to be treated as revenue-gain or revenue-loss of the assessee as the case may be for the relevant assessment year. Further, these transactions do not affect the cost of acquisition of the plant and machinery in the case of the assessee as the business of the assessee has commenced and hence will not make any impact in the claim of depreciation because the financial cost need not be capitalized. The facts of the case cited by the Ld. Revenue Authorities in CIT vs. Bedi and Co. Pvt Ltd reported in 230 ITR 530 is not identical to the case of the assessee because the issue in the case was that whether the amount received by the assessee was loan or commission or any receipt of business. Similarly, the other decisions cited by the Ld. AO in his order are also not identical to the facts of the case of the assessee. Accordingly, we hereby direct the Ld. AO to sustain the addition to the extent of net gain of Rs. 38,51,000/- in the hands of the assessee out of the aggregate addition made for Rs. 2,13,62,500/- as its income from business, being the net gain accrued to the assessee from discount received on buy-back of FCCBs and loss incurred on foreign exchange fluctuation due to buy back of FCCBS viz.,(Rs. 2,13,62,500.00 - Rs. 1,75,05,000.00).
Ground No.3: Disallowance U/s. 14A of the Act:
It was noticed by the Ld. AO that the assessee had made investment in the equity shares of companies for Rs. 26,08,63,298/-. Since the assessee company had not computed the disallowance U/s. 14A of the Act towards the expenditure incurred for earning exempt income, the Ld. AO invoked the provisions of Rule 8D of the Act and made addition of Rs. 28,46,730/-. On this identical issue the Hyderabad Bench of the Tribunal in ITA No. 1847/Hyd/2017 (AY 2010- 11), dated 15/6/2021 has decided as follows:
“3. The brief facts of the case are that the assessee is a Limited company engaged in the business of power generation. For the A.Y. 2010-11, the assessee-company field its e-return of income on 28/09/2010 declaring total loss of Rs. 5,75,24,496/- under the normal provisions. Thereafter, assessee’s case was taken up for scrutiny and assessment was completed U/s. 143(3) of the Act on 28/02/2013 wherein the Ld. AO invoked the provisions of section 14A r.w. Rule 8D of the Rules and made disallowance of Rs. 24,35,222/- as the assessee company had made investment in various Mutual Funds earning exempt dividend income aggregating to Rs. 3,64,66,440/- by relying on the various decisions of Higher Judiciary cited in the Order. On appeal, the Ld. CIT (A) partially confirmed the order of the Ld. AO by observing as under:- “4. The appellant company has claimed exemption of dividend income of Rs. 3,64,66,440/- and no expenditure was allowed by the appellant for earning the same exempt income. With regard to the disallowance of expenditure U/s. 14A r.w.r 8D of the Act, the AR contended before the AO that it had owned capital and reserves sufficient for making the said investments. Rejecting the claim of the appellant, the AO made disallowance under Rule 8D(2)(ii) of Rs. 6,45,794/- and under Rule 8D(2)(iii) of Rs. 17,89,428/- totalling to Rs. 24,35,222/-. 4.1. The above action of the AO was contested in ground No.3 of appeal. Before me, the AR submitted that the appellant had invested only in the units of Units Trust of India during the year and such investments were made out of its own funds and in fact the appellant had no borrowed funds. In support of the contention, the AR furnished statement of “investments purchased and sold” during the year and also the Balance Sheet as on 31/3/2010 which indicates that there are no loan funds. Since there were no borrowed funds, the question of allocating expenditure incurred which is attributable in exempt income under Rule 8D(2)(ii) does not arise. In support of the contentions, the AR relied upon a number o case laws which have been furnished along with submissions. 4.2. I have carefully considered the issue and the submisions made b the AR. As evident from the balance sheet, it is seen that there are no borrowed funds. Since, no interest expenditure was incurred on account of borrowings, the issue of disallowance of expenditure under rule 8D(2)(ii) does not arise and therefore the disallowance of Rs. 6,45,794/- is deleted.
4.3. Regarding disallowance under Rule 8D2(iii), the AR submitted before me that the expenditure was made only in one Mutual Fund and that too in bulk amounts (total 55 Investments and redemption put together). The few transactions do not involve much time and only one of the finance persons dealt with them and time spent is also very small. Therefore, the AO is not justified in disallowing Rs. 17,89,428/- under rule 8D(2)(iii). 4.4. I have considered the issue and the submissions made by the AR. The provisions of Rule 8D(2)(iii) provide for the disallowance of expenditure relatable to administration and establishment expenses. Since it would not be practicable to precisely arrive at the expenditure incurred for earning the said exempt income on the basis of time / effort devoted by the administration / establishment, the said Rule stipulated 0.5% of the average value of investment, as appearing in the balance sheet on the first day and last day of the previous year, as the disallowance. Though the AR tried to justify that hardly any amount was spent and the said investments yielding exempt income, no qualification or the basis for disallowing the appropriate expenditure was furnished. Since the said Rule provided for nominal disallowance of expenditure as per the given working towards establishment / administration expenses, I do not see any infirmity in the order of the AO in resorting to disallowance under Rule 8D(2)(iii). Thus, the disallowance of Rs. 17,89,428/- by the AO is upheld and the ground of appeal is partly allowed.”
At the outset, the Ld. AR submitted before us that the assessee Company had not incurred any expenditure towards the investment made for earning exempt income. The Ld. Revenue Authorities without considering the prayer of the assessee and without examining the facts of the case had invoked the provisions of section 14A r.w Rule 8D of the Rules and made disallowance of Rs. 24,35,222/- which was further sustained by the Ld. AO to the extent of Rs. 17,89,428/-. On the other hand, the Ld. DR argued in support of the order of the Ld. CIT (A). 5. We have heard the rival submissions and carefully perused the materials on record. The Provisions of section 14A(2) makes it clear that the assessee shall compute the expenditure incurred by it for making investment which earns exempt income and only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee he is authorised to invoke the provisions of Rule 8D of the IT Rules, 1962. In the case of the assessee such exercise is lacking. Factually it is also obvious that the assessee would have definitely incurred some expenditure towards investments made, which earns exempt income, such as:- (i) Interest on interest bearing funds that is utilised for the purpose of making such investment. (ii) Direct and indirect expenses attributable to the process of making such investment such as expenditure incurred for due diligence, managerial expenditure, clerical expense, stationary expenditure and portfolio management expenditure etc.. 6. Therefore, in the interest of justice, we hereby remit the entire matter back to the file of the Ld. AO thereby providing an opportunity to the assessee to compute the actual expenditure incurred by it for making investment which earns exempt income. Needless to mention that any income/loss derived from any commercial/investment activity is not directly proportional to the expenditure incurred on such commercial/investment activity. Since We have remitted the matter back
to the file of Ld.AO, We also hereby directed the assessee to promptly co-operate before the Ld. Revenue Authorities by furnishing the above stated statement of actual expenditure incurred by it for making investment which earns exempt income in order to expedite the proceedings of the Ld. Revenue Authorities failing which the Ld. Revenue Authorities shall be at liberty to pass appropriate order in accordance with law and merits based on the materials on record.”
Following the same ratio, We hereby remit the matter back to the file of the ld. AO to pass appropriate order in accordance with law and merit in the light of the order cited hereinabove after affording the assessee proper opportunity of being heard.
In the result, appeal of the Revenue is partly allowed for statistical purposes as indicated herein above.
Pronounced in the open Court on the 16th December, 2021.
Sd/- Sd/- (S.S. GODARA) (A. MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 16th December, 2021. OKK Copy to:- 1) Dy. CIT, Circle-1(2), B-Block, 7th Floor, IT Towers, Masab Tank, Hyderabad. 2) M/s. Bhagyanagar India Limited, H.No. 1-7-14 to 19, 5th Floor, Surya Towers, S.P.Road, Secunderabad. 3) The CIT(A)-1, Hyderabad. 4) The Pr. CIT-1, Hyderabad. 5) The DR, ITAT, Hyderabad 6) Guard File