M/S SCANIA COMMERCIAL VEHICLES INDIA PVT LTFD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(1), BANGALORE

The Assessee submits that during the financial year 2015-16 relevant to Assessment Year 2016-17, the Assessee has created a provision of Rs. 9,18,70,138/- out of which Assessee utilized trust actual warranty expenditure of Rs. 4,67,62,881/- leaving the closing balance of Rs. 4,51,07,257/-. Thus, what is claimed by the Assessee is the balance provision of Rs. 4,51,07,257/- as allowable expenditure. The claim of the Assessee is that warranty expenditure is not contingent in nature which is made on scientific basis and should be allowed as a deduction in view of the decision of the Hon’ble Supreme Court in 314 ITR 62.

The Ld. DR supported the order of the Ld. AO.

We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities. The facts clearly shows that the main assessment year is 2017-18. In Assessment Year 2016-17, the Assessee made a provision of Rs. 9,18,70,138/- out of which the Assessee utilized the provisions of Rs. 4,67,62,881/- leaving the closing balance of warranting provision at the end of the year of Rs. 4,51,07,257/-. This sum becomes opening balance of the warranty provision for assessment year 2017-18. During the assessment year 2017-18, Assessee made a further contribution of Rs. 26,53,18,804/-. Out of the above provisions and provision available at the beginning of the year, Assessee utilized the provision of Rs. 22,49,68,382/- leaving the closing balance of Rs. 8,54,57,679/-. Thus, according to us for assessment year 2016-17, the Assessee must be allowed the deduction of Rs. 9,18,70,138/- and for the assessment year 2017-18, a deduction of Rs. 26,53,18,804/- should be allowed to the Assessee.

Ground no. 19 is with respect to treating the rental income received from leasing and renting of trailers as income from house property. The briefly stated facts show that the selection of the case for scrutiny was for the reason that there is no receipts from house property in income tax return as compared to rental receipt in form no. 26AS. The Assessee was questioned to submit the details of the description of the & 777/Bang/2022 Page 7 of 18 property, details of the tenant and rent details. The Assessee explained that by letter dated 13.01.2021 and Assessee also explained that this is the income received against the offered share of exhibition space and certain other amenities stating that this income is not related to income from house property. The Ld. Assessing Officer rejected the explanation of the Assessee and held that a sum of Rs. 48,51,630/- is treated as income from house property and not as business income. These facts were available from the draft order dated 31.03.2021. The Assessee objected the same before the Ld. Dispute Resolution Panel wherein the Ld. Dispute Resolution Panel directed the Assessing Officer to verify that if the same income has already been offered to tax as profits and gains of business, to reconsider the income computation. The Ld. DRP did not deal with the reason that why it is directing to the Assessing Officer.

The Assessee is in appeal before us.

The Assessee submits that such income is not from the property but income from profits and gains of business. It is submitted that merely because the TDS deduction u/s. 194I which is rental income from renting of trailers, which is business of the Assessee, it cannot be taxed as income from house property. Therefore, it was stated that such income cannot be taxed as income from house property. It was further stated that, that income of Rs. 15,00,000/- is from subletting of exhibition space to the finance company which is also not pertaining to Assessment Year 2017-18, but for Assessment Year 2016-17. The above income is offered for taxation by the Assessee in Assessment Year 2016-17. The Assessee also referred to the fact that such income is indeed against the sales promotion expense.

The Ld. Departmental Representative submitted that the Assessee failed to furnish the requisite details and therefore the income is chargeable to tax under the head income from house property. The & 777/Bang/2022 Page 8 of 18 Assessee did not submit any information about the renting of the trailers. Therefore, there is no infirmity in the orders of the Ld. lower authorities.

We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities. We find that before the Ld. Dispute Resolution Panel, the ground of objection no. 17 clearly shows that the amount of Rs. 28,41,650/- received from M/s. Kailash Carriers Limited and a sum of Rs. 5,09,980/- received from M/s. All Cargo Logistics Limited is amount received from renting of trailers. A sum of Rs. 15,00,000/- is received from M/s. Volkswagen Finance Limited received towards subletting of exhibition space. No doubt on these items, tax deduction at source was made u/s. 194I of the Act. The Ld. Assessing Officer merely because tax is deducted u/s. 194I treated it is as income from house property. It is not the case that the Assessee has not shown this income as business income. Merely because, the tax deducted u/s. 194I, it cannot be the case that the income is always chargeable to tax under the head income from house property. Provisions of section 194I is not talking about only renting of the property but also renting of machinery, plant or equipment. Further, with respect to the sum of Rs. 15,00,000/- received as sub letting charges at a trade exhibition is already shown by the Assessee by netting off the expenditure. Therefore, there is a double addition of all the above three income. Hence, we direct the Ld. Assessing Officer to delete the above addition as income from house property because income has been correctly offered by the Assessee under the head business income. Accordingly, ground no. 19 of the Assessee is allowed.

The Ground no. 20 of the Appeal is with respect to the correct carry forward of losses. The Assessee has computed the carry forward of the losses at Rs. 1,62,04,19,109/- whereas the Ld. Assessing Officer has & 777/Bang/2022 Page 9 of 18 granted carry forward of Rs. 1,61,55,67,479/-. Both the parties confirm that Assessing Officer may be directed to verify and allow correct carry forward of losses. Accordingly, we direct the Ld. Assessing Officer to compute the correct carry forward of losses for any subsequent years to the Assessee.In the result, this ground is also allowed.

In view of this, the Appeals of the Assessee on all the corporate grounds, no. 17-20 is allowed. In the result, Appeal of the Assessee is allowed. is filed for Assessment Year 2018-19 against the Assessment Order passed by the Ld. Assessing Officer on 30.07.2021 by way of draft Assessment Order and subsequently by final Assessment Order dated 08.07.2022 wherein the returned losses of the Assessee of Rs. 1,74,51,63,826/- is assessed at Rs. 4,39,97,09,221/-. The transfer pricing adjustments were already resolved through MAP proceedings and the Assessee has withdrawn the grounds of appeal related to the transfer pricing by filing the revised grounds of appeal which are only with respect to the corporate tax matters. Therefore, now this appeal is alternate to corporate tax matters.

We have carefully considered the rival contentions and perused the orders of the Ld. lower authorities. We find that Assessee has filed additional evidence before the Ld. Dispute Resolution Panel on 10.05.2022 wherein the detailed breakup of payment u/s. 194C and 194J. In this breakup, the Assessee has also given the details of lower deduction of tax certificates obtained by the parties. The Assessee also filed a miscellaneous application before the Ld. Dispute Resolution Panel vide page no. 504 of the paper book. That this miscellaneous application is with relation to the other addition. Further, while reading the direction of the Ld. DRP, we do not find that any such additional evidence were admitted or not admitted by the Dispute Resolution Panel. Therefore, we find that, that the claim of the Assessee that there is not short deduction of tax at source has not at all been considered by the Ld. lower authorities. On verification of the details furnished before us, it is evident that, that Assessee has produced the evidence to that fact that Assessee has deducted tax properly. But, as these details were not verified by the Ld. Authorities, we restore this ground of appeal to the file of the Ld. Assessing Officer with a direction to verify the detail and if found in order to delete the disallowance. In the result, ground no. 2 of the Appeal is allowed.

Assessee specifically submitted that consideration is received from a non- resident and therefore the addition cannot be made. Ld. DRP rejected this argument and confirmed the action of the Assessing Officer and therefore this addition was made in the final Assessment Order. The undisputed recorded facts of the case in the Assessment Order show that Assessee is a company in which the public are not substantially interested. If such company receives, from any resident person, any consideration for the issue of shares that exceeds the face value of such shares, such consideration received if exceeds the fair market value of the shares is income of the Assessee u/s. 56(2)(viib) of the Act. In this case, it is recorded by the Assessing Officer that the shares are issued to its foreign holding company which is a non-resident. Identical issue arose in case of the Assessee for Assessment Year 2020-21 wherein the addition of similar thing was made but u/s. 68 of the Act which was deleted. For that year, no action was taken to tax the above receipt u/s. 56(2)(viib) of the Act. The reading of the provision clearly shows that this provision will apply only if the consideration is received from a resident. Therefore, no such addition could have been made u/s. 56(2)(viib) of the Act. The coordinate bench in 108 taxmann.com in Edulink Private Limited vs. ITO has also & 777/Bang/2022 Page 13 of 18 dealt with this issue and held that, that the provisions of section 56(2)(viib) does not apply on shares of the non-resident. Accordingly, we allow ground no. 3 and direct the Ld. Assessing Officer to delete the addition u/s. 56(2)(viib) of the Act of Rs. 198 crores.

Ground no. 4 is the adhoc disallowance made by the Ld. Assessing Officer on cost of vehicles, repairs expenditure and residual value obligation settlement expenses. We find that the Ld. Assessing Officer has noted that, that Assessee has claimed various expenditure amounting to Rs. 27,86,84,867/- being sum of Rs. 16,80,10,793/- on cost of vehicles on settlement, sum of Rs. 3,84,60,840/- being technical goodwill on repairs and further a sum of Rs. 7,22,13,234/- on residual value obligation settlement expenses. The Assessing Officer questioned the Assessee. But he found that Assessee has furnished neither statements nor documentary evidence and therefore he disallowed 10% of such expenses amounting to Rs. 27,86,84,867/- in the draft Assessment Order. The Assessee challenged the same as per ground no. 8 before the Ld. DRP wherein in Paragraph no. 8, the Ld. DRP has categorically held that, that Assessee has not utilized the opportunity provided for explaining the above expenses with details and therefore the action of the Assessing Officer was confirmed. Thus, in the final Assessment Order, the above disallowance was reiterated. Thus, challenged before us as per ground no. 4.

The Ld. Authorized Representative submitted that, that Assessee is entering into sales and repurchase arrangements with the customers or leasing companies. In these agreements, Assessee agrees to buy back the vehicles sold by it at a predetermined price at a stipulated period. During this period, the customers are entitled to return the vehicles sold. Therefore, the Assessee recognizes the revenue and cost over the period of contract. If the vehicles are returned, then such vehicles are valued at lower of repurchase price or net realizable value.

Further, it was stated that Assessee has sold 11 vehicles to one party which were financed by M/s. SREI Equipment Finance Limited (SREI). SREI finance entered into master buyback arrangement with Assessee on 23.04.2015. According to that, the Assessee is obliged to buyback the vehicles, if the buyer does not pay the same to SREI. In this case, the buyback arrangements were undertook by SREI as the original buyer did not make payment to SREI and therefore Assessee had to repurchase the vehicle and such cost was debited at Rs. 7,22,13,234/-. Therefore, the above claim was based on contractual obligation.

The third issue technical goodwill on repairs is the expenditure which Assessee gives free services for rework and repairs of its vehicles. The Assessee incurred a sum of Rs. 3,84,60,840/-. The Assessing Officer made a similar disallowance in Assessment Year 2020-21. But it was later allowed on explanation. The Ld. Assessing Officer made the disallowance in absence of details furnished at the rate of 10%. Before us, the Assessee submitted that, that by way of an application before the Ld. DRP the Assessee submitted the details but stated to be not submitted. Therefore, the claim of the Ld. Authorized Representative is that above expenditure should not have been disallowed at rate of 10%.

The Ld. Departmental Representative supported the orders of the Ld. lower authorities.

With respect to the cost of vehicles on settlement, the facts are very clear that Assessee has recognized the value of Rs. 17,88,75,992/- and also claimed the expenditure of Rs. 16,80,10,793/-. Therefore, Assessee has offered the income raised out of the same contract which is already taxed by the Assessing Officer. Therefore, merely because of this reason, the disallowance of Rs. 16,80,10,793/- could not have been disallowed. In fact, the Ld. Assessing Officer has disallowed 10% of Rs. 16.80 crores and therefore adhoc disallowance of Rs. 16.80 crores deserves to be deleted. This is also for the reason that, that complete details were provided as per annexure 5 of the statement made by the Assessee before the Ld. Assessing Officer and the Ld. DRP. The additional evidence were placed before the Ld. DRP by a computation wherein all these details are available. It is very important to note that Assessee submitted vide para no. 11, the details of ledger of vehicles on cost of settlement, repair expenditure and residual value obligation settlement expenses. The Assessee further submitted the master buyback agreement entered into with SREI for buyback of vehicles. The details of repurchase of the vehicles were also submitted. The E-mail communication with respect to the repairs are also & 777/Bang/2022 Page 16 of 18 submitted. The Assessee has submitted item-wise details of the expenditure of all these expenses along with the invoices which are not considered by the lower authorities including Ld. DRP and merely disallowed 10% of the above expenses on adhoc basis. We do not find that when the 90% of the expenditure is allowed in the Assessment Order itself why the balance of 10% should have been disallowed. It is not the case that complete expenditure of Rs. 27.86 crores which disallowed by the Ld. Assessing Officer holding that in absence of details, same is not allowable. The details were completely furnished by the Assessee before the Ld. DRP which was not even verified. In view of the above facts, and on the verification of details, we direct the Ld. Assessing Officer to delete the complete disallowance of Rs 27.86 crores. Accordingly, ground no. 4 of the Appeal is allowed.

The Ground no. 5 is with respect to the depreciation claim of Rs. 5,85,75,163/- for the reason that, that the plant and machinery were not put to use. The Ld. DRP held that such plant and machinery have been used for less than 180 days and therefore the Assessing Officer is correct in restricting the depreciation to 15%. However, in the final Assessment Order, the Ld. Assessing Officer has held that Assessee has not furnished any evidence in the genuineness of the claim and therefore the disallowance was made. The fact of the case shows that, that Assessee supplied green bus service in the city of Nagpur as per the directions of the Nagpur Municipal Corporation (NMC) where the Assessee was awarded the contract for operation and maintenance of Ethanol Green buses service as per resolution dated 20.10.2016. According to that, Assessee floated a Special Purpose Vehicle by incorporating M/s. SST Sustainable Transport Solutions Private Limited as its wholly owned subsidiary. That Company started operation on 18.08.2017. The Assessee supplied 58 Ethanol buses under operating lease to SST. The Assessee charged lease rent from the subsidiary company. This lease rent was in consideration for leasing of these 58 & 777/Bang/2022 Page 17 of 18 buses to the subsidiary company. As these buses were rented out, the Assessee claimed depreciation on the same. The Assessing Officer disallowed the same holding that it is not a genuine transaction because the Assessee has purchased the vehicles on the last day and put to use on the same day.

It is the submission of the Assessee that these buses were manufactured by the Assessee and given on operating lease. Therefore, as the Assessee is the manufacturer of these buses, same were removed from the inventory stock and entered as fixed assets. The book entry was made at the end of the year. Hence, the Ld. Assessing Officer disallowed the depreciation. The claim of the Assessee is that the buses were given in the month of August 2017 and therefore complete depreciation for the whole year should have been allowed to the Assessee. The Assessee before us submitted the details of 32 buses and stock transfer invoices of ethanol buses. The details submitted clearly shows that, that buses was put to use on various dates and were removed on respective days from the inventory of fixed assets. The invoices are also shown that these inventories are moved out of the inventory and shown as the fixed assets. We find that the Ld. Assessing Officer has disallowed the depreciation merely because no documents have been shown to prove the genuineness of such claim. The Dispute Resolution Panel has also allowed the disallowance. The Dispute Resolution Panel in paragraph no. 9 is without discussion of the evidence confirmed the action of the Assessing Officer.

On careful consideration of the whole facts, we restore this ground back to the file of the Ld. Assessing Officer with a direction to verify and without questioning the genuineness of the claim, the date of actual vehicles put to use and income offered by the Assessee decide the issue that why Assessee is not entitled to the depreciation as & 777/Bang/2022 Page 18 of 18 claimed by it when the income for the same is already disclosed in the profit and loss account. The Assessee is earning rental income by showing the vehicles leased out then if lease rent is earned for a particular period, we fail to appreciate that why depreciation should not be allowed to the Assessee. The Assessing Officer is directed to verify the same and decide the rate of depreciation on the vehicles. Accordingly, ground no. 5 of the Appeal of the Assessee is allowed.

In view of the above facts, the Appeal of the Assessee is partly allowed.