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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEYAND SHRI N.K. PRADHAN
Date of Hearing – 02.05.2019 Date of Order – 26.07.2019
O R D E R PER SAKTIJIT DEY. J.M.
Captioned appeal has been filed by the assessee challenging the final assessment order dated 17th October 2017, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act") for the assessment year 2013–14, in pursuance to the 2 Alok Industries Ltd. directions of the Dispute Resolution Panel–1 (WZ) (for short “the DRP”), Mumbai.
In ground no.1(a), the assessee has challenged the addition made on account of adjustment to the arm’s length price of the corporate guarantee fee.
Brief facts are, the assessee company is engaged in manufacture and trading of textile products in cotton and polyester segment. During the year under consideration, the assessee had entered into various international transactions with its Associated Enterprises (AE) and benchmarked them in the transfer pricing study report. The Transfer Pricing Officer, in the course of proceedings before him found that the assessee had provided corporate guarantee to its overseas AEs which is continuing from earlier years. After calling for necessary details relating to the corporate guarantee provided to the AEs, he called upon the assessee to show cause why the arm’s length price of corporate guarantee fee should not be computed @ 1.75%. In this regard, the Transfer Pricing Officer also confronted the commission rate obtained from Indian Banks in respect of different guarantees. Though, the assessee objecting to the guarantee commission proposed by the Transfer Pricing Officer @ 1.75% made various submissions, however, the Transfer Pricing Officer did not find merit in them. He
3 Alok Industries Ltd. observed, not only the transactions relating to provision of corporate guarantee to the AEs is an international transaction but he also rejected assessee’s alternative plea of accepting corporate guarantee fee rate of 0.5%. Having done so, the Transfer Pricing Officer proceeded to compute the arm’s length price of corporate guarantee commission by applying the rate of 1.75%. While doing so, he followed the transfer pricing order passed for the assessment year 2012–13. Accordingly, he made an adjustment of ` 14,35,92,450.
4. The learned DRP also sustained the adjustment made by the Transfer Pricing Officer by following its order in assessee’s own case for the assessment year 2012–13.
The learned Authorised Representative submitted, while deciding identical issue in assessee’s own case for the assessment year 2012– 13, the Tribunal following the order passed by it in case of assessee’s sister concerned has held that the rate of guarantee commission has to be fixed @.0.5%. Thus, he submitted, similar direction may be issued to the Assessing Officer in the impugned assessment year.
The learned Departmental Representative submitted, the rate of 0.5% would not apply uniformly to all guarantee commission irrespective of the special facts and features involving in each individual case. He submitted, in the facts of the present case, the 4 Alok Industries Ltd.
Transfer Pricing Officer has applied the rate of 1.75% on the basis of information brought on record through enquiry. Therefore, he submitted, the adjustment made by the Transfer Pricing Officer should be sustained.
We have considered rival submissions and perused the material on record. At the outset, we must observe that at the time of hearing of appeal, the assessee has not raised any dispute with regard to the issue whether the provision of corporate guarantee comes within the purview of international transaction. Therefore, we will proceed on the footing that the provision of corporate guarantee to AE is an international transaction under section 92B of the Act. Having held so, we will deal with the issue whether determination of arm’s length price on corporate guarantee fee @ 1.75% is proper. It is evident, the Transfer Pricing Officer has applied the rate of 1.75% on the basis of certain information obtained from Indian Banks on the rate of commission relating to various guarantee. Further, the Transfer Pricing Officer has also relied upon his own order passed in the assessment year 2012–13. It is also a fact that learned DRP has upheld the decision of the Transfer Pricing Officer by relying upon its order passed in assessment year 2012–13. Pertinently, while deciding assessee’s appeal in assessment year 2012–13 in ITA no.1017/Mum./2017, dated 21st May 2018, the Tribunal has followed its own order passed in case
5 Alok Industries Ltd. of a sister concern of the assessee and held that corporate guarantee fee should be computed @ 0.5%. Facts being identical, respectfully following the aforesaid decision of the Co–ordinate Bench in assessee’s own case, we direct the Assessing Officer to compute the corporate guarantee fee @ 0.5%. This ground is allowed.
8. In ground no.1(b), the assessee has challenged the addition of ` 4,77,76,278, on account of arm’s length price of interest on interest free loans to AEs.
Brief facts are, while considering the objections raised by the assessee against the draft assessment order, learned DRP on verifying the audit report found that the assessee has advanced loans to the AEs without charging any interest. Since the Transfer Pricing Officer had not looked into this aspect, learned DRP issued a notice for enhancement by directing the assessee to show cause as to why the arm’s length price of interest on interest free loan should not be computed. After considering the reply of the assessee and the report called from the Transfer Pricing Officer, learned DRP observed, since the assessee had advanced loan to the AEs in Indian currency, bank interest rate has to be applied. Accordingly, applying the rate of interest of 10.27% to the loan transaction, an adjustment of ` 4,77,76,278, was made.
6 Alok Industries Ltd.
10. The learned Authorised Representative submitted, since the loan was advanced to the overseas AEs in foreign currency i.e., US$, prime lending rate of interest of Indian Banks cannot be applied. He submitted, let interest be computed by applying LIBOR rate.
11. The learned Departmental Representative submitted, if the assessee demonstrates that the loan was advanced in foreign currency, assessee’s plea of applying LIBOR can be considered. Thus, he submitted, the issue may be restored to the Assessing Officer/Transfer Pricing Officer to verify assessee’s claim.
We have considered rival submissions and perused the material on record. Undisputedly, on the basis of an enhancement notice issued by learned DRP, the Transfer Pricing Officer has computed arm's length interest on the loan advanced to the AE applying the PLR rate of 10.27% applicable to the Indian Banks. Though, before learned DRP, the assessee had specifically pleaded that since the loan has been given in foreign currency LIBOR rate should be applied, however, learned DRP has rejected such claim of the assessee on the ground that no evidence was furnished by the assessee to substantiate its claim. In our view, if the loan has been advanced to the overseas AEs in foreign currency, it will be appropriate to compute the interest on such loan by applying prevailing LIBOR with basis points. However, the 7 Alok Industries Ltd.
assessee is required to furnish the necessary supporting evidence to substantiate its claim. In view of the aforesaid, we restore the issue to the Assessing Officer for verifying the primary facts and thereafter considering assessee’s plea of applying the appropriate LIBOR rate of interest. This ground is allowed for statistical purposes.
In ground no.2, the assessee has challenged the decision of the Departmental Authorities in not treating the interest subsidy received by the assessee as a capital receipt.
Brief facts are, during the assessment proceedings the Assessing Officer noticed that the assessee had received an amount of ` 118,09,09,213, as interest subsidy under a scheme floated by the Ministry of Textiles, Government of India. However, by treating it as a capital receipt, the assessee has not offered it as income. The Assessing Officer called upon the assessee to furnish complete details pertaining to the interest subsidy to justify its claim. In compliance, the assessee furnished the required details. On going through the details furnished by the assessee, the Assessing Officer noticed that the Ministry of Textiles, Government of India has formulated Technology Upgradation Fund Scheme (TUFS) for Textile and Jute Industry. Under the said scheme, the interest subsidy is allowed for purchase of machinery for modernization. The Assessing Officer
8 Alok Industries Ltd. observed, applying the purpose test, the subsidy cannot be considered to be for reducing loan or capital cost of the plant and machinery. Therefore, it has to be treated as revenue receipt. Thus, on the aforesaid premises, the Assessing Officer added back the interest subsidy to the income of the assessee.
Learned DRP also sustained the addition made by the Assessing Officer.
The learned Authorised Representative submitted, identical issue arose in assessee’s own case in assessment year 2012–13. He submitted, while deciding the issue, the Tribunal has accepted assessee’s claim that the interest subsidy received by the assessee under TUFS is a capital receipt, hence, not taxable. Thus, he submitted, the issue is covered by the decision of the Tribunal in its own case.
The learned Departmental Representative, though, agreed that the issue has been decided in favour of the assessee in assessment year 2012–31, however, he relied upon the observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused the material on record. The issue whether the interest subsidy under the TUFS is a 9 Alok Industries Ltd.
revenue or capital receipt arose in assessee’s own case for the assessment year 2012–13. In fact, learned DRP while deciding the issue has relied upon its own decision in the assessment year 2012– 13. The Tribunal, while deciding the issue in assessee’s own case for assessment year 2012–13 in ITA no.1017/Mum./2017, dated 21st May 2018, has decided the issue in the following manner:–
“19. We have considered rival contentions and found from record that the main object behind the said subsidy was to upgrade & modernize the Indian textile industry by encouraging it to undertake & adopt modern technological process and / or undertake capacity expansion. In view of the above object, it was argued that the subsidy received was capital in nature. From perusal of the objective and the salient features of the scheme, it can be observed that the Scheme was introduced by the Government to assist the Indian textile industry to meet the challenge, from international competition and to enable the industry to become competitive, cost effective and quality oriented. Thus the objective of such incentive was to give India a platform at a global level and cannot by any stretch of reasoning, be construed as incentives for the benefit of assessee alone so as to treat it as revenue receipt. The issue is no longer res integra, as in an identical situation and for an identical subsidy, the Courts have ruled that the same constitutes capital receipt and therefore not chargeable to tax. The issue under consideration is also covered by the decision of the Co-ordinate Bench in case of Grabal Alok Impex Limited [Sister concern of the assessee] which has been merged with the assessee with effect from 01.04.2011 having similar facts. We found that against the decision of Tribunal dated 08/07/2016 through the department has filed a further appeal before the Hon‟ble High Court, however the decision of Tribunal on the issue of TUF subsidy was accepted by department and no further appeal on this issue was filed before the High Court has been accepted.
10 Alok Industries Ltd.
Type of Relevant Subsidy Citation / ITA Para of Sr.no. Decision ITAT/HC received no. the under TUF decision Scheme Grabal Alok (Now merger with Alok Mumbai Interest 1. 22 to 27 Industries Ltd.) for ITAT Mum./2015 Subsidy A.Y. 2010–11 Credit 200 Taxman Linked 2. Sham Lal Bansal P&H HC 6 14 Capital Subsidy 4375/Mum./ Interest 7, 71 to 3. Dicitex Mumbai 2015 Subsidy 7.5, 8 Manohar Processor Mumbai 7120/Mum./ Interest 4. 2.1 Pvt. Ltd. ITAT 2013 Subsidy Dicitex Furnishings Mumbai 2148/Mum./ Interest 5. 5 Ltd. ITAT 2015 Subsidy ITA Delhi Interest 6. SVG Fashions Ltd. no.8565/Mum 9 to 15 ITAT Subsidy ./ 2010 Credit Delhi 4698/Del./ Linked 7. Shivalik Prints Ltd. 9 ITAT 2011 Capital Subsidy ITA Sutlej Textiles & Interest 8. Chennai no.5142/Del./ 11.15 Industries Ltd. Subsidy 2013 CNV Textiles Pvt. Kolkata Interest 9. ITA no. 8 Ltd. ITAT Subsidy Gloster Jute Mills 766/Kol./201 Interest 10. 7.9 Ltd. 0 Subsidy
For the TUF subsidy being capital in nature, reliance can be placed on the following decisions:-„ 21. In the case of sister concern M/s.Grabal Alok Impex Ltd., the Tribunal have observed as under:- 21. Next grievance of the assessee relates to treating interest subsidy received under Technology Upgradation Fund (TUF) Scheme as revenue receipt. 22. We have considered rival contentions and found that assessee had availed loans from various banks under the TUF Scheme. In order to encourage the upgradation of technology so as to meet the global challenges, the Ministry of Textiles had launched the TUF Scheme from April 1, 1999. Under this scheme the lending agency would reimburse 5% interest cost to the borrowers upon satisfaction of certain conditions. The assessee had received interest subsidy under this 11 Alok Industries Ltd.
scheme during the year which was offered to tax in the return of income. During the assessment proceedings, the Assessee had made a claim for considering interest subsidy received under TUF scheme as a capital receipt not chargeable to tax and requested to exclude the interest income from the income returned by the assessee. However the AO refused to acknowledge the claim of the Assessee on the ground that the claim was made otherwise than by filing a revised return of income. The AO observed that as per decision of the Supreme Court in the case of Goetze (India) Ltd vs. CIT (284 ITR 323) such claim of the assessee cannot be entertained. Accordingly the claim made by the assessee was rejected.
23. By the impugned order CIT(A) rejected the claim of the assessee.
We have considered rival contentions. The Hon‟ble Supreme Court, in the case of National Thermal Power Company Ltd. vs CIT (229 ITR 383) (copy is enclosed at PB Page No. 516 - 519), has observed that even if a claim is not made before the AO, it can be made before the Appellate authority. Further the Bombay High Court in the case of CIT vs Pruthvi Brokers & Shareholders Pvt. Ltd (349 ITR 336), having considered the decisions of the Supreme Court in the case of Goetze India Ltd. (supra) and also National Thermal Power Company Ltd. v CIT (supra), held that the Appellate authorities are entitled to consider the new claim of the assessee and adjudicate upon the same on merits of the case. As all the facts are available on record, we adjudicate assessee‟s claim of TUF subsidy. From the record we found that the assessee has received reimbursement of interest cost as per TUF scheme. The object of the scheme was to encourage the upgradation of technology. Therefore, the income to the extent of duty credit and reimbursement of interest cost under TUF scheme, which though credited to profit and loss account, should be treated as capital receipt, not chargeable to tax. The issue under consideration is squarely covered by the decision of Hon‟ble Punjab & Haryana High Court in the case of Shri Sham Lal Bansal (200 Taxman 14)(P&H).We find that identical issue under the Technology Upgradation Fund Scheme (in short „TUFS‟) of Ministry of Textiles was considered by the Hon‟ble Punjab & Haryana High Court in of 2010 vide decision dated 17.01.2011. Hon‟ble High Court has considered and held the issue as under:-
12 Alok Industries Ltd.
“2. The assessee is engaged in manufacture and sale of woolen garments. It received subsidy for repayment of loan taken for building, plant and machinery under the Credit Linked Capital Subsidy Scheme under Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles, Government of India. The assessee claimed the said subsidy to be capital receipt but the Assessing Officer did not accept the same and added back the same to the income of the assessee holding the same to be revenue receipt. On appeal, the CIT(A) upheld the plea of the assessee, which view has been affirmed by the Tribunal with the following observations: -“Having regard to the aforesaid, in our view, it is quite clear that the objective of the subsidy scheme was to enhance the technology apparatus of the assessee by assisting in acquiring machinery and further that the subsidy so received was utilized for repayment of loans taken by the assessee to set up the new unit, as was the intention of the subsidy.
Considered in the aforesaid light, in our view, the facts of the instant case are on all fours comparable to those considered by the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) and therefore, a natural corollary is that the nature of the subsidy in question is capital. Therefore, both on the issue of the objective of the scheme and on the utilization of the funds received as subsidy, the subsidy is to be viewed as capital in nature having regard to the judgment of the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemical Ltd. (supra).
Reliance placed by the Revenue on the case of Sawhney Steels and Press Works Ltd. & others (supra), in our view, is not appropriate having regard to the aforesaid features of the scheme, which are not in dispute. Moreover, in the case of Sawhney Steels and Press Works Ltd. & others (supra),it was found as a fact that the subsidy was given to meet recurring expenditure and was not for acquiring a capital asset. Whereas in the instant case, admittedly, there is no provision in the scheme to grant subsidy to meet any recurring expenditure and neither such a case has been set up by the Department. The only objections of the Department are that the subsidy has been given after commencement of production and, secondly that it was for repayment of loans. Both these factors do not distract from the nature of the subsidy being treated as capital, as explained by the 13 Alok Industries Ltd.
Honble Supreme Court in the case of CIT vs. Ponni Sugars Chemicals Ltd. [2008] 306 ITR 392 (SC).
3. We have heard learned counsel for the appellant.
Learned counsel for the revenue submitted that the subsidy was not given at the time of setting up of the industry but after commencement of production for repayment of loan. In such situation, the amount should have been treated as revenue receipt as per judgment of the Hon‟‟ble Supreme Courtin Sahney Steel & Press Works Ltd. & Ors. v. CIT (1997) 228 ITR 253.
5. We are unable to accept the submission.
6. The purpose of scheme under which the subsidy is given, has been discussed by the Tribunal. To sustain and prove the competitiveness and overall long term viability of the textile industry, the concerned Ministry of Textile adopted the TUFS scheme, envisaging technology upgradation of the industry. Under the scheme, there were two options, either to reimburse the interest charged on the lending agency on purchase of technology upgradation or to give capital subsidy on the investment in compatible machinery. In the present case, the assessee has taken term loans for technology upgradation and subsidy was released under agreement dated 12.7.2005 with Small Industry Development Bank of India. The relevant clause of the agreement under which the subsidy was given is as under: “Para 8. - to prevent misutilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non interest bearing term loan by the Bank/Fis. The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock in period of three years on a pro-rate basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount.”
7. In view of above, the view taken in Sahney Steel & Press Works Ltd. & Ors., could not be applied in the present case as in said case the subsidy was given for running the business. For determining whether subsidy payment wasrevenue receipt‟ or capital receipt‟, character of receipt in the hands of the 14 Alok Industries Ltd.
assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel & Press Works Ltd. & Ors. itself and reiterated in later judgment in CIT v. Ponni Sugars & Chemicals Ltd. & ors. (2008) 306 ITR 392, referred to in the impugned order of the Tribunal.
In view of above, since the matter is covered by judgment of the Hon‟ble Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd. & ors. [2008] 306 ITR 392(SC) against the revenue, no substantial question of law arises”.
11. Thus we find that on identical issue the matter has been decided in favour of the assessee. In these circumstances, we are of the opinion that as held hereinabove in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence, the subsidy received in this regard falls into capital field. Hence respectfully following the precedent as above we set aside the order of the ld. CIT(Appeals) and decide the issue in favour of the assessee.
In DCIT vs. Gloster Jute Mills Ltd (ITA 766/Kol/2010) order dated 2nd July 2014, Kolkata Tribunal held that in order to sustain competitiveness in the domestic as well as international markets and overall long- term viability of the industry, the concerned Ministry adopted the TUFS scheme envisaging Technology Upgradation of the Industry. Hence the subsidy received in this regard falls into capital field.
Similar view has been taken by Delhi Bench of the Tribunal in the case of DCIT vs M/s. Sutlej Textiles & Industries Ltd (ITA No 5142/Del/2013) dated 3 July 2015; and by Chennai Bench of the Tribunal M/s CNV Textiles Pvt Ltd vs OCIT (ITA 746/Mds/2014) dated 21-11-2014. The issue is also covered by the decision of ITAT Mumbai Bench in the case of SVG Fashions Ltd., order dated 23-12-2015. Recently Hon‟ble Supreme Court in the case of Shree Balaji Alloys held that subsidy by way of refund of excise duty and interest for setting up new industrial undertaking is capital receipt and not taxable as income.
15 Alok Industries Ltd.
In view of the above, respectfully following the decisions of Hon‟ble Supreme Court, High Court and the Tribunal, as discussed above, we set aside the orders of lower authorities and direct the AO to treat the interest subsidy received under TUF Scheme as capital receipt not liable to tax.” 22. From the he judgments, it becomes crystal clear that the subsidy received by the company under the TUF scheme of the Ministry of Textile, Government of India is for helping the growth of textile industries and therefore capital in nature and outside the ambit of section 4 of Income Tax Act. Accordingly, the said receipt cannot be taxed as income of the company.”
Facts being identical, respectfully following the aforesaid decision of the Tribunal in assessee’s own case, we hold that the interest subsidy received by the assessee being in the nature of capital receipt is not taxable, hence, the Assessing Officer is directed to delete the addition.
20. In ground no.3, the assessee has challenged the non–reduction of interest subsidy while computing book profit u/s 115JB of the Act.
As we find from the material on record, identical issue came up for consideration before the Tribunal in assessee’s own case in assessment year 2012–13. The Tribunal while deciding the issue in ITA no.1017/Mum./2017, dated 21st May 2018, has held as under:–
“27. The main charging section provides for levy of income tax only in respect of income of the assessee. Once an item is not considered as income of the person as the same constitutes capital receipt, it shall not be subjected to tax under this Act, Therefore, once the subsidy received under the TUF scheme is held to be capital in nature, it comes outside the meaning of 16 Alok Industries Ltd. the term 'income' and therefore outside the ambit of section 4 i.e, the charging section. Unless, specifically made taxable such subsidy cannot be taxed as income. Once the subsidy received cannot be taxed under section 4, there cannot arise any taxability under section 115JB of the Act, which merely provides for an alternate mechanism for computation of income and tax thereon. Thus, an item which is not otherwise taxable cannot be subjected to tax under the MAT provision without any express authority in this behalf. Also, if we look at Explanation 1 to section 115JB(2), We find that the legislature has defined „book profit‟. For calculation of such book profit, one has to reduce certain items, which inter alia include, item „ii‟ which states that "the amount of income to which any of the provisions of section ‟10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is credited to the profit and loss account". Thus, what can be discerned from above item is that, for calculation of book profit one has to reduce those items of income which do not from part of total income under normal provisions. If that be the case, then it logically follows that those items which do not constitute income at all cannot form part of book profit and no MAT can be levied thereon at all. Even sub-section (5) of section 115JB states that 'Save as otherwise provided in this section, all provisions of this Act shall apply to every assessee, being a company, mentioned in this section. Thus, provisions of section 4 and section 2(24) shall necessarily apply for computation of book profit and MAT u/s 115JB and as such provisions of section 115JB cannot override the provision of section 4, which is the basic charging section. Accordingly, looked at from whichever angle, the subsidy has to be reduced from the book profit for computation of MAT under section 115JB.
We found that issue is covered by the following decision of the Tribunal / High Court, wherein it was held that under the MAT provisions u/s.115JB is not applicable to capital receipts / exempt income. Nature of Relevant Income held to ITAT / Citation / Para of Sr.no. Decision be not HC includible in decision bank profit ITA no. Interest Krishi Rasayan Kolkata 1. 883/Kol./ subsidy being a 19 to 21 Exports Pvt. Ltd. ITAT 2014 capital receipt
17 Alok Industries Ltd.
ITA Sales Tax no.614, Shree Cement Jaipur subsidy for 13.1, 13.4 2. 615 & Ltd. ITAT substantial & 13.8 635/JP/ expansion 2010 Sales Tax Shree Cement Jaipur 152 ITD Subsidy and 3. 40 Ltd. ITAT 561 Receipt from Carbon Credit 80 Excise Duty Sicpa India Pvt. Kolkata taxman 4. Subsidy 24 to 26 Ltd. ITAT n.com (Exemption) 87 Waiver of Loan 923/Ba Mumbai taken for 5. JSW Steel Ltd. ng./200 21, 23 ITAT acquisition of a 9 capital asset Sale of carbon L.H. Sugar Lucknow 46 CCH 6. credit being a 50 Factory ITAT 354 capital receipt 4.3.1, Binani Industries Kolkata 178 Forfeiture of 7. 4.3.2, 4.4, Ltd. ITAT SOT 14 share warrants 4.5 & 4.6 Profits on sale of agricultural Nilgiri Tea Estate Cochin 65 SOT 8. land which is 7&8 Ltd. ITAT 14 not a capital asset Profit arising on Shivalik Venture Mumbai 173 TTJ transfer of 9. 26 to 28 Pvt. Ltd. ITAT 238 development rights 76 Long term Metal & Madras taxman capital gain 10. Chromium Plater 6&7 HC n.com exempt u/s Pvt. Ltd. 229 54EC Capital Gain Kolkata resulting from Sutlej Cotton 45 ITD 11. Special sale of capital 19.2, 19.5 Mills Ltd. 22 Bench asset which was exempt Profit on sale of depreciable asset which was not taxable Frigsales India Mumbai 4 SOT due to purchase 12. 3.2 Ltd. ITAT 376 of another depreciable asset as provided in sec. 50 Mcnally Bharat Kolkata 100/Ko. Retention 13. Engineering Co. 41 to 43 ITAT /2011 Money Ltd.
18 Alok Industries Ltd.
3585/D Income exempt Delhi Gymkhana Delhi 14. el./200 as per doctrine 13 Club Ltd. ITAT 6 of mutuality Share from AOP which was not 7496/M Goldgerg Finance Mumbai taxable under 15. um./20 11 Pvt. Ltd. ITAT normal 13 provisions as per sec. 86.
More importantly, the decision of the Jaipur Tribunal in the case of Shree Lement Ltd. (ITA No. 614 / JP / 2010) has exhaustively discussed the issue under consideration and also referred to the order of Rajasthan High Court wherein the ground taken up by the revenue on this issue was not admitted as not having a substantial question of law. Thus, it can be concluded that this issue is now being settled by a judgment of the Rajasthan High Court. It also distinguished the decision of Apollo Tyres Ltd. vs. CIT 255 A- _ and Rain Commodities Ltd. vs. DCIT 41 DTR 449. Also very recently, Madras HC in the case of Metal & Chromium Plater (P) Ltd. (TCA No. 359 of 2008) has also decided the said issue in the favour of the assessee. The case of Krishi Rasayan Exports Pvt. Ltd. vs. ACIT (ITA No. 883 / Kol / 2014 is on the similar interest subsidy which was required to be excluded from Book profit. We accordingly direct AO to exclude the TUF subsidy while computing book profit u/s.115JB.
Facts being identical, respectfully following the aforesaid decision of the Co–ordinate Bench, we direct the Assessing Officer to exclude the interest subsidy from the book profit computed under section 115JB of the Act. This ground is allowed.
In ground no.4, the assessee has challenged disallowance of ` 7,82,17,001, under section 14A r/w rule 8D.
24. Brief facts are, during the assessment proceedings the Assessing Officer noticed that during the year the assessee has earned exempt
19 Alok Industries Ltd. income by way of dividend amounting to ` 1,94,14,050. Whereas, the assessee has disallowed an amount of ` 24,14,047, under section 14A r/w rule 8D, towards expenditure incurred for earning exempt income. Being of the view that the disallowance made by the assessee is not in accordance with rule 8D, the Assessing Officer proceeded to make disallowance of ` 8,06,31,048, comprising of the following:–
Direct expenditure under rule 8D(2)(i) ` 46.098 2. Interest expenditure under rule 8D(2)(ii) ` 7,47,28847 3. Administrative expenditure under rule 8D(2)(iii) ` 58,56,103
25. The assessee having already disallowed an amount of ` 24,14,047, the Assessing Officer made a net disallowance under section 14A of the Act amounting to ` 7,82,17,001. The aforesaid disallowance made by the Assessing Officer was sustained by learned DRP while disposing of the objections of the assessee.
26. The learned Authorised Representative submitted, the disallowance of interest expenditure under rule 8D(2)(ii) cannot be made as the investments in exempt income yielding assets were made out of own funds. In this context, he drew our attention to the details of surplus fund available with the assessee as referred to in Para–6.4 of learned DRP’s order. Thus, he submitted, as per the ratio laid down in various judicial precedents, no disallowance under rule 8D(2)(ii) can
20 Alok Industries Ltd. be made. As regards the disallowance under rule 8D(2)(iii) is concerned, the learned Authorised Representative submitted, such disallowance may be sustained after reducing the amount already disallowed by the assessee. Further, he submitted, identical issue was decided by the Tribunal in assessee’s own case for the assessment year 2012–13.
27. The learned Departmental Representative relied upon the observations of the Assessing Officer and learned DRP.
28. We have considered rival submissions and perused the material on record. As could be seen from the details of fund available with the assessee as mentioned in Para–6.4 of learned DRP’s order, own funds available with the assessee far exceeds the investment made. Therefore, prima–facie, a conclusion has to be drawn that the investments in exempt income yielding assets were made out of surplus funds available with the assessee. In that event, no disallowance of interest expenditure under rule 8D(2)(ii) can be made. Therefore, we direct the Assessing Officer to examine assessee’s claim factually and delete the disallowance made under rule 8D(2)(ii). As regards the disallowance of administrative expenditure under rule 8D(2)(iii), we are of the view that such disallowance needs to be upheld, as it has been correctly computed by the Assessing Officer.
21 Alok Industries Ltd.
However, the disallowance already made by the assessee under section 14A of the Act has to be reduced. This ground is partly allowed.
29. In ground no.5, the assessee has challenged the decision of the Departmental Authorities in adding the disallowance made under section 14A r/w rule 8D to the book profit computed under section 115JB of the Act.
We have heard the parties and perused the material on record. Now it is fairly well settled that while computing the book profit under section 115JB of the Act, the Assessing Officer cannot make any adjustment by referring to the provisions of section 14A r/w rule 8D. However, the Assessing Officer has the power to make adjustment on account of expenditure incurred for earning exempt income as provided under clause (f) of Explanation–1 to section 115JB of the Act. Therefore, in the facts of the present case, we direct the Assessing Officer to make adjustment to the book profit in terms of Explanation– 1(f) to section 115JB of the Act by restricting it to the amount disallowed by the assessee voluntarily. This ground is partly allowed.
In ground no.6, the assessee has challenged the disallowance of interest expenditure by apportioning it to interest free loan advanced to associate entities.
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Brief facts are, during the assessment proceedings the Assessing Officer noticed that the assessee has advanced interest free loans to its sister concerns. Further, he noticed that the assessee has incurred substantial interest expenditure on outstanding loans. Thus, being of the view that part of the interest bearing funds were utilized for non– business purpose, the Assessing Officer disallowed an amount of ` 87,49,13,686.
Learned DRP while dealing with the objections of the assessee in this regard, sustained the disallowance made by the Assessing Officer.
The learned Authorised Representative drawing our attention to Par–7.3 of learned DRP’s order submitted, surplus fund available with the assessee is far in excess to the interest free advance to the sister concerns. Therefore, he submitted, no disallowance out of interest expenditure can be made under section 36(1)(iii) of the Act. Further, he submitted, while deciding identical issue in assessee’s own case, the Tribunal has deleted the disallowance made under section 36(1)(iii) of the Act.
The learned Departmental Representative relied upon the observations of the Assessing Officer and learned DRP.
23 Alok Industries Ltd.
We have considered rival submissions and perused the material on record. The main contention of the assessee before learned DRP as well as before us is, since it had sufficient interest free fund available with it to take care of the loans advanced to the sister concern, no disallowance out of interest expenditure should be made. On a perusal of Para–7.3 of learned DRP’s order, it appears that surplus fund available with the assessee is far in excess of the investment made in securities and advances to the sister concern put together. If the aforesaid submissions of the assessee is factually correct, then as per the ratio laid down by the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities And Power Ltd., [2009] 313 ITR 340 (Bom.), no disallowance of interest expenditure can be made, as, the presumption would be, the loans and advances to the sister concern was out of interest free surplus fund available with the assessee. In fact, applying the aforesaid principle, the Tribunal in assessee’s own case in assessment year 2012–13, vide ITA no.1017/Mum./2017, dated 10th April 2019, has deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act. As it appears, neither the Assessing Officer nor learned DRP have controverted assessee’s claim regarding availability of surplus fund. What the Departmental Authorities have observed while disallowing interest expenditure is, the assessee failed to establish nexus between the advancement of interest free loan to 24 Alok Industries Ltd.
the sister concern and the business expediency. Thus, in the aforesaid factual position, applying the ratio laid down by the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities And Power Ltd. (supra), as well as the decision of the Tribunal in assessee’s own case cited supra, we hold that no disallowance under section 36(1)(iii) of the Act can be made. This ground is allowed.
In ground no.7, the assessee has challenged the disallowance of employees contribution to Provident Fund (PF) & ESIC amounting to ` 1,90,10,888.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that employees’ contribution to PF & ESIC was paid beyond the due date prescribed under section 36(1)(va) of the Act called upon the assessee to explain why the amount of ` 1,90,10,888, should not be disallowed. In response, it was submitted by the assessee that employees’ contribution to the PF & ESIC was paid within the grace period, hence, should be allowed. However, the Assessing Officer rejecting the submissions of the assessee disallowed the deduction claimed.
Learned DRP while disposing of the objection of the assessee on the issue also sustained the disallowance made by the Assessing Officer.
25 Alok Industries Ltd.
The learned Authorised Representative submitted, all payments relating to employees’ contribution to PF & ESIC was made before the due date of filing of return of income for the impugned assessment year as prescribed under section 139(1) of the Act. Thus, he submitted, no disallowance can be made keeping in view the provisions of section under section 43B of the Act. In support of such contention, he relied upon the decision of the Hon'ble Jurisdictional High Court in Ghatge Patil Transports Ltd., [2014] 368 ITR 749 (Bom.). Further, he submitted, while deciding identical issue in assessment year 2008–09, the Tribunal has allowed the claim of deduction.
The learned Departmental Representative relied upon the observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused the material on record. As could be seen from the factual details relating to payment of employees’ contribution to PF & ESIC reproduced in the assessment order, all such payments were made before the due date of filing of return of income for the impugned assessment year in terms of section 139(1) of the Act. That being the case, as per the ratio laid down by the Hon'ble Jurisdictional High Court in Ghatge Patil Transports Ltd. (supra), no disallowance can be made keeping in view
26 Alok Industries Ltd. the amended provisions of section 43B of the Act r/w the proviso. In fact, following the aforesaid decision of the Hon'ble Jurisdictional High Court, the Tribunal in assessee’s own case in assessment year 2008– 09, has allowed assessee’s claim of deduction towards employees’ contribution on PF & ESIC while deciding the appeal in ITA no.1017/Mum./2017, dated 10th April 2019. Respectfully following the decisions cited supra, we delete the disallowance made by the Assessing Officer. Ground is allowed.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 26.07.2019