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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the order dated 25.03.2019 by Ld.CIT(A)-7, Bangalore for assessment year 2013-14 on following grounds of appeal: “1. General Ground 1.1 The learned Deputy Commissioner of Income Tax- Circle 7(1)(1) (`A0'), Bangalore has erred in passing the assessment order under section 143(3) of the Income Tax Act, 1961 (`the Act') in the manner passed by him and the Commissioner of Income Tax-(Appeals)-7 (`CIT(A)') has erred in partly confirming the said assessment order. The said order to the extent prejudicial to the appellant is bad in law and liable to be quashed.
2. Grounds relating to disallowance of deduction under section 80JJAA of the Act 2.1. The learned AO has erred in disallowing deduction under section 80JJAA amounting to Rs. 13,14,23,244/- Page 2 of CIT(A) has erred in confirming the said disallowance. On facts and circumstances of the case and law applicable, deduction under section 80JJAA should be allowed as claimed in the return of income. 2.2. The learned AO and CIT(A) have erred in not appreciating and ignoring the intention behind introduction of section 80JJAA. 2.3. The learned AO and CIT(A) have erred in concluding that: a) appellant is not engaged in manufacture or production of an article or thing. b) regular workmen were not employed for 300 days in the appellant company. 2.4 The learned AO and CIT(A) have erred in not appreciating that introduction of second proviso to Explanation (ii) of section 80JJAA(2) by Finance Act, 2018 with effect from 1.4.2019 is retrospective and benefit of the said proviso should be allowed for the year under consideration.
3. Grounds relating to disallowance of share of loss of A2E2 3.1. The learned AO has erred in disallowing the share of loss arising from M/s A Squared Elxsi Entertainment LLC (A2E2), USA amounting to Rs, 1,06,55,000/- and the learned CIT(A) has erred in confirming the said disallowance. 3.2. The learned AO and CIT(A) have erred in not appreciating and ignoring the accounting treatment of losses of joint venture A2E2 as per Accounting Standard 27. 3.3. The learned CIT(A) has erred in concluding that the claim of share of loss from A2E2 by the appellant is legally not sustainable. 3.4. The learned AO and CIT(A) have erred in not treating the share of loss of A2E2 Rs. 1,06,55,000/- as deduction under section 37 of the Act. 3.5. Without prejudice, the learned AO and CIT(A) have erred in not treating the loss of A2E2 as loss in the hands of the appellant to the extent of share of the appellant under section 28 of the Act.
4. Grounds relating to disallowance of guarantee payments made 4.1. The learned AO has erred in disallowing the payments made to CITI Bank with respect to guarantee given for outstanding dues of A2E2 amounting to Rs. 15,89,57,000/- and the learned CIT(A) has erred in confirming the said disallowance.
Page 3 of 4.2. The learned AO and CIT(A) have erred in not appreciating and ignoring that payment of guarantee arose from commercial expediency and the same should be allowed under section 37 / 28 of the Act. 4.3. The entire basis, reasons and rationale given by both AO and CIT(A) in disallowing the impugned payment is incorrect, contrary to facts, bad in law and liable to be quashed.
Levy of interest under section 234B 5.1 The learned AO and CIT(A) have erred in confirming the levy of interest under section 234B. On facts and circumstances of the case and law applicable, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B.
Prayer 6.1. In view of the above and other grounds to be adduced at the time of hearing, the appellant company prays that the order passed by the learned Commissioner of Income tax (Appeals) 7, in so far it is prejudicial to the appellant, be quashed Or in the alternative (i) Deduction under section 80JJAA Rs. 13,14,23,244/- be allowed as claimed in the return of income; (ii) Deduction of share of loss of A2E2 Rs. 1,06,55000/- be allowed as claimed in the return of income. (iii) Deduction of guarantee paid Rs. 15,89,57,000/- be allowed as claimed in the return on income. (iv) Interest levied under section 234B be deleted. The appellant prays accordingly.”
Brief facts of the case are as under: Assessee is a company engaged in the business of distributed systems, design and development of hardware and software and digital content creation. It filed its return of income for year under consideration on 29/11/2013 declaring total income of Rs.18,55,24,290/-. The case was selected for scrutiny and notice under section 143(2) and 142(1) of the Act were issued. 2.1.During the scrutiny proceedings Ld.AO noticed that assessee claimed deduction of Rs.13,14,23,244/-under section 80 JJAA of the Act. Ld.AO rejected the claim of assessee for non- fulfilment of following 2 conditions:
Page 4 of • that assessee is not engaged in manufacture or production of an article or thing as per the conditions laid down under section 80JJAA. And; • the condition of 300 days to be fulfilled by the regular workmen as per the provisions does not stand fulfilled. 2.2. The Ld.AO disallowed the claim by holding that only new workmen employed for a period of 300 days in relevant previous year are eligible for deduction under section 80 JJAA of the Act. 2.3. Ld.AO observed that assessee debited Rs.1,06,55,000/- towards share of loss from M/s.A Squard Elxsi Entertainment LLC. Ld.AO accordingly called for details in respect of the same and found noted that assessee has not been allotted shares in M/s A Squard Elxsi Entertainment LLC, USA (hereinafter referred to as A2E2) during the year under consideration. It was noted by him that the loss claimed by assessee was not in accordance with provisions of the Act and accordingly the claim was disallowed. 2.4. The Ld.AO further observed that assessee claimed Rs.15,89,57,000/- as exceptional item of expenditure. It was noted by him from Note 21 to the statement of accounts that the said expenditure was towards payment of financial guarantee by assessee towards the financial dues of M/s.Squared Elxsi Entertainment LLC USA. The Ld.AO after considering the submissions was of the opinion that the claim of assessee cannot be allowed as the expenditure claimed was not in accordance with provisions of the Act and accordingly the claim was disallowed. Aggrieved by order of Ld.AO, assessee preferred appeal before the Ld.CIT(A).
The Ld.CIT(A) in respect of the claim under section 80JJAA and claim of loss from M/s.Squared Elxsi Entertainment LLC USA followed Page 5 of the order passed in assessing officer for preceding assessment year by his predecessor and confirmed the disallowance made by the Ld.AO. 3.1. In respect of the disallowance of guarantee payment by assessee in respect of payment due from M/s.Squared Elxsi Entertainment LLC USA, the Ld.CIT(A) held as under: “6.1 The submission of the appellant has been considered. The assessee has claimed an amount of Rs 15,89,57,000 as exceptional item of expenditure in P&L account and it is mentioned in notes on account that this amount paid to bank represents financial guarantee given by the assessee company towards financial dues of M/s A Squared Elxsi Entertainment LLC (A2E2), USA. Thus, the assessee claims to have signed a JV with an American company 'A Squared Entertainment LLC, USA (A2) 'pursuant to which a new company ' A Squared Elxsi Entertainment LLC, USA (A2E2)' has been formed. The assessee company claims paying of share application money to acquire shares of A2E2 which has not yet materialized. It is submitted that on allocation of equity shares of A2E2 to the assessee, the same company will be a subsidiary of the assessee company. However, due to non fulfillment of its obligations by the JV partner A2, the allocation of equity shares of A2E2 to the assessee company could not happen. Meanwhile, as per written submission of the appellant filed in this office on 10-082015. the appellant company has terminated its association with A2 and A2E2 with efiect from 22-06-2012. With this background, the assessee company claims that it had given a financial guarantee towards outstanding dues of Rs 1589.57 lakhs ( USD 30.19 lakhs) of A2E2 availed by the new company A2E2 from City Bank which has been settled by the appellant company and claimed the amount as exceptional expenditure in its P&L account for the year. 6.2 During the hearing of the appeal, the AR was asked to file the copies of the JV agreement, Guarantor agreement and the Demand Note/ Letter of the bank issued to the appellant company. Copies of these documents tiled by the appellant have been perused. i. The JV agreement dated 30-09-2011 between the appellant Tata Elxsi Ltd (TEL) and A Square Entertainment LLC, USA (A2) has been signed by the MD of TEL and Mr Andy Heyward and Ms Amy Page 6 of Moyinhan Heyward, co-presidents of A2. The agreement provides, interalia, that Share capital of the new company will be of USD 2 Million out of which TEL will contribute USD I Million and 42 and its co-presidents will transfer certain rights, IPR valued at USD 1 Million The new company (A2E2) will employ Mr Andy Heyward and Ms Amy Moyinhan Heyward, co- presidents of A2 as co-presidents of the new company (the amendment no. 1 dated 09-10-2011 to JIB agreement provides that Mr Andy Heyward and Ms Amy Moyinhan Heyward as co-presidents of the new company shall have all powers and authority to operate the new company A2E2) The new company A2E2 will pay USD 936000 to Mr Andy Heyward and Ms Amy MOvinhan Heyward who have advanced this amount to 42. This amount will be paid out of capital contribution made by TEL. TEL shall arrange unsecured loan of USD 3 Million to the new company through a commercial bank. TEL shall provide loan of minimum USD 3 million and maximum USD 4 million per year after the first year of JV and in the event of default by TEL, the membership interests of TEL in new company i.e. A2E2 will automatically terminate. ii. The copy of the 'Corporate Guarantee' agreement dated 02-12-2011 mentions that the agreement is made between the Citi Bank and the principal (A Square Entertainment LLC) but it is only signed by the MD and Corporate Manger (Finance) of the assessee company TEL as guarantor. There is no signatory on behalf of either the principal (A2E2) or the Bank. iii. The copy of 'Uncommitted Line of Credit agreement' dated 09-12-2011 between A2E2 and Citi Bank does not have the signature on behalf of the Citi Bank. iv. The letter from Citi Bank dated 25-09-2012 to Tata Elxsi Ltd mentions that following a. default under the agreement, the principals' obligation are now due and payable to the Bank in fill! amounting to USD 30,17,660.65/-. However, the Corporate Guarantee Agreement dated 02-12-2011 provides that the guarantor (TEL) agrees to indemnify the Bank any cost, loss or liability in the event of the Principals (A2E2) obligations being invalid or becoming irrecoverable, unenforceable or void. But, there is no mention in the Page 7 of 25-092012 sent by the Bank to the appellant company (TEL) as regards any action/inaction on the part of the principal that prompted the Bank to ask the guarantor for payment of the outstanding liability of the principal (A2E2). 6.3 Thus, on appraisal of the totality of the facts involved, it appears the entire gamut of creation of JV with A2, employment of both the co-presidents of A2 as co-presidents of the new company as a condition of JV, Cash investment in share capital of the new company only by the appellant, advancing of loan by A2 to the new company A2E2 only to be paid back to the Co- presidents of A2 and the appellant extending financial guarantee for loan from Citi Bank to the new company as a condition of JV and within a few months making payment of USD 30.17 Million to the Bank and above all - non allocation of equity shares of the new company to the appellant, are designed to benefit the Co-presidents of A2 only. Under these facts and circumstances, allowability of the claim of the appellant of the payment amount to the Bank as an exceptional item of expenditure and also claiming the share application money as share of business loss, do not stand to legality of IT provisions as these expenditures are not incurred wholly and exclusively for the purpose of business. 6.4 The American company A2E2, as mentioned already, is neither a subsidiary of the appellant company nor a sister concern. At the other hand, the appellant Tata Elxsi Ltd (TEL) being a technology company is engaged in product design and engineering services, systems integration and support services. Providing corporate guarantee is not the business activity of the assessee nor it is an objective sanctioned by the memorandum of the company. Theretbre, it cannot be said that providing corporate guarantee was in the normal course of the business. The appellant has relied on following decisions where it is held that payment made by the assessee to the Bank to discharge the debt of sister concern/subsidiary is allowable as business loss : WS Industries India Ltd 12811'D 98 ITA T, Chennai Wires and Fabrics Lta 17:4T Kolkata. JK Synthetics Ltd 55 taxmann.com 254, HC Allahabad Rudra Industrial Commercial Corporation 20 taxmann.com 611, HC Karnataka, However, as discussed already the American company A2E2 is neither a subsidiary nor .a sister concern of the appellant company. Therefore, these decisions will not be applicable in the case of the appellant. 6.5 In view of above, the payment of Rs 15,89,57,000/- claimed as exceptional item of expenditure cannot be allowed. The disallowance made by the AO is confirmed. The grounds of appeal
is dismissed.” He thus upheld the disallowance made by the Ld.AO. Aggrieved by order of Ld.CIT(A), assessee is in appeal before this Tribunal.
4. The Ld.AR submitted that, Ground No.1.1 is general in nature, therefore do not require adjudication.
5. Ground No.2.1 to 2.4 is in respect of disallowance under section 80JJAA of the act amounting to Rs.13,14,23,244/-. Ld.AR submitted this issue has been considerd by this Tribunal in assessee’s own case for assessment year 2012-13 in by order dated 05/11/2020 on identical facts Tribunal remanded the issue back to the Ld.AO for verification. 5.1. The Ld.DR placed though placed reliance on observations of Ld.CIT(A) , did not object for the issue to be remanded to authorities below for verification. We have perused submissions advanced by both sides in light of records placed before us. 5.2. We note that the Ld.AO denial of benefit to assessee is based on the reasoning that assessee was denied benefit against these employees in the 1st year of their employment and that assessee Page 9 of being a software development company is not eligible for deduction. We note that this Tribunal has expressed a view in case of Texas Instruments (India) Pvt.Ltd vs ACIT reported in (2020) 115 taxmann.com 154 and that this issue has been remanded by this Tribunal in assessee’s own case by observing as under: “We note that the Ld.AO denial of benefit to assessee is based on the reasoning that assessee was denied benefit against these employees in the 1st year of their employment and that assessee being a software development company is not eligible for deduction. “5.1.We note that the 1st of objection of Ld.AO regarding non- satisfaction with respect to additional wages paid to new employees in the 1st year of employment is concerned, this Tribunal has expressed following view in case of Texas Instruments (India) Pvt.Ltd vs ACIT reported in (supra): "9. We have given a very careful consideration to the rival submissions. The only reason given by the AO for denying the benefit of deduction u/s.80JJAA of the Act, which is the reason that survives for consideration by the Tribunal is according to the AO since the additional wages paid to these 287 employees were not eligible to deduction u/s.80JJAA of the Act because these employees did not work for more than 300 days in FY 2006- 07 relevant to AY 2007-08, the wages paid to these employees in AY 2008- 09 will also not qualify for deduction u/s.80JJAA of the Act. In other words according to the AO if the condition for grant of deduction u/s.80JJAA of the Act is not satisfied with reference to additional wages paid to new employees in the first year of their employment, then the additional wages paid to such new employees will not allowed in the second and third Assessment Years also. As pointed out by the learned counsel for the Assessee, this approach of the revenue authorities is contrary to the AO's stand on claim for similar deduction u/s.80JJAA of the Act in AY 2007-08. In the order of assessment passed by the AO for AY 2007- 08, he has while disallowing the claim for deduction u/s.80JJAA of the Act for that AY, accepted the position that on additional wages paid to new workmen employed during the previous year relevant to AY 2005-06 who have worked more than 300 days during the previous year relevant to AY 2007- 08, the Assessee is entitled to Page 10 of deduction u/s.80JJAA of the Act. In the decision rendered in the case of Bosch Ltd. (supra) the Bangalore ITAT at paragraph 23 of the aforesaid order the Tribunal observed that the deduction u/s.80JJAA of the Act is allowed for three years including the year in which the employment is provided. Hence, in each year it has to be seen that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour. Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more. By the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two Assessment years, if he works for more than 300 days each, then the deduction u/s.80JJAA of the Act has to be allowed. It is not proper to say that if the deduction is refused in the first year of employment of the new employee then for the next two succeeding Assessment Years also, the benefit of deduction will not be available. Such an approach defeats the very purpose for which deduction u/s.80JJAA of the Act is allowed for three consecutive Assessment years. This aspect has now been clarified in the Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to Sec.80JJAA of the Act. Even prior to such curative or clarificatory amendment, we are of the view that the claim for deduction u/s.80JJAA of the Act cannot be and ought not to have been disallowed on this ground. We therefore direct that the deduction claimed by the Assessee should be allowed." 5.2. From the above observations, there is no doubt that assessee cannot be denied deduction under section 80JJAA of the Act, provided that, such employees fulfils the condition of being employed for 300 days for year under consideration , even though such employees do not fulfil the condition of being employed for 300 days in the immediately preceding assessment year. 5.3. We also note that, details fulfilment of number of days of such employees, on whose salary deduction has been claimed by assessee, are not available on record. Therefore, we are unable to verify, whether necessary condition of 300 days stands fulfilled. We are therefore of Page 11 of Ld.AO to verify these details in terms of new employees having satisfied the 300 days criteria during the year. 5.4. We direct assessee to provide all details regarding number of regular workmen/employees, number of new workmen/employees added for each of the immediately three preceding assessment years to Ld.AO. Ld.AO is then directed to analyse fulfilment of the condition in respect of new employees/workmen against whom the claim has been made by assessee under section 80JJAA of the Act. Ld.AO is then directed to allow deduction under section 80 JJAA of the Act. Accordingly this ground raised by assessee stands allowed for statistical purposes.” Respectfully following the above with similar direction to assessee as well as the Ld.AO, we remand this issue back to the Ld.AO for due verification. Accordingly this ground raised by assessee stands allowed for statistical purposes.
6. Ground No.3.1. to 3.5. is in respect of not allowing the loss claimed in respect of assessee's share from A2E2 amounting to Rs.1,06,55,000/- that was claimed during assessment proceedings. At the outset, both parties admit that various details in respect of the claim has not been verified by Ld.AO as the same was made by way of submissions during assessment proceedings. 6.1. Brief facts as has been submitted by assessee in respect of this issue is that assessee entered into a joint venture agreement with M/s.A Squad Entertainment LLC having its headquarters at California, USA. It has been submitted that the joint venture was for the purpose of creating venture companies named A2E2 which was incorporated as per the law is off USA on 16/06/2011. It has been submitted that in terms of the agreement share holding of assessee with A2E2 would be the Page 12 of USD 2 million comprising of 2 million shares of USD 1 each. Assessee had agreed to pay cash of USD 1,000,001 words 1,000,001 shares of A2E2 and balance of 999,999 equity shares would be allotted as to M/s.A Squad Entertainment LLC in consideration of it assigning its rights to certain animated proprieties to A2E2. Assessee accordingly remitted USD 1,000,001 words its share of equity contribution in A2E2 during November 2011. M/s.A Squad Entertainment LLC delayed and pertaining the requisite no objection certificate from the respective assigned for assignment of assessee's rights to A2E2 that prevented the board of management and allotting equity shares to both the joint venture partners in A2E2. 6.2. It is submitted that A2E2 opted to be assessed at partner's level. Ld.AR submitted that A2E2 was considered as a pass through entity and that the profits or losse arising from A2E2 was assessable in the hands of joint venture partners during the year under consideration. The Ld.AR submitted that the loss claimed by assessee is assessee's share in the loss suffered by A2E2 during the year in USA. On identical facts this Tribunal in assessee’s own case for assessment year 2012-13 by order dated 05/11/2020 held as under: “6.3. With the above factual background, we note that authorities below rejected the claim as assessee assessee was not allotted shares in the LLC wherein it was a partner. In our view this issue needs to be remanded to Ld.AO to consider the claim of assessee in light of evidences/documents, joint venture Agreements, declaration by the U.S. LLC before the tax authorities therein etc, OECD commentary is in respect of the same, the manner in which such incomes/loss as the case may be are treated in USA being the source country and the manner in which such income/loss are to be treated as per Indian income tax act. Ld.AO shall take a view based upon all the documents Page 13 of in light of the provisions applicable during the relevant period under the act. Needless to say that proper opportunity of being heard shall be granted to assessee in accordance with law Filed by assessee, accordance with law. 6.4. Accordingly, the issue is remanded to Ld.AO. Assessee is directed to file all requisite details in support of its claim in accordance with law which shall be considered by Ld.AO upon verification. Respectfully following the above with similar direction to assessee as well as the Ld.AO, we remand this issue back to the Ld.AO for due verification. Accordingly, this ground raised by assessee stands allowed for statistical purposes.
7. Ground No.4.1. to 4.3 is in respect of the guarantee fee paid by assessee to the bank in respect of payment due from M/s.A Square Entertainment LLC. The Ld.AR submitted that in the present case, the payment was made to the City Bank amounting to Rs.15,89,57,000/- on behalf of M/s.A Square Entertainment LLC. It is submitted by the Ld.AR that the business of assessee and M/s.A Square Entertainment LLC were complementary to each other as they were engaged in creation of digital animation content. They therefore decided to form a joint venture to form a new entity by the name M/s. Squared Elxsi Entertainment LLC for creating, producing and exploiting animated content through multiple platforms and channels of distribution such as DVD, TV gaming, online, licensing branded merchandise etc. A sum of Rs. 518.30 lakh equivalent to Rs.10,00,001 USD was contributed as share application money to A2E2 and assessee agreed to guarantee the borrowings of A2E2. The Ld.AR thus submitted that the repayment of the borrowings as a guarantor was therefore on account of commercial expediency. On the contrary, the Ld.DR submitted that this issue is connected with the loss claimed by assessee in respect of the assessee’s share in Page 14 of A2E2 considered in ground 3.1 to 3.5. He thus submitted that this issue may be remanded to the Ld.AO for verification. We have perused the submissions advanced by both sides in light of records placed before us. Admittedly this issue is connected with the loss claimed by assessee that is disallowed by the revenue. We also note that the Ld.CIT(A) noted that the objects of the assessee in the memorandum do not support providing of corporate guarantee. In our view, this also needs to be verified. In the interest of justice, we remand the issue back to the Ld.AO for de novo consideration in light of documents/evidences filed by assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. In the result the appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 28th February, 2022.