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2023 (12) TMI 870 - AT - Income TaxDepreciation on land development expenditure incurred on lease hold property - disallowance of and leveling expenses incurred for creating a backup yard is treated as building, wherein depreciation was claimed @ 10% of total cost incurred on land development - HELD THAT:- The issue on hand first arose in the hands of the assessee in the assessment year 2011-12 [2023 (3) TMI 1350 - ITAT AHMEDABAD] In that assessment year, the assessee claimed the depreciation which was disallowed by the AO and subsequently the order of the AO was also upheld by the learned CIT-A. Against the finding of the learned CIT-A, the assessee did not challenge the same before the higher forum. Thus, the finding of the learned CIT-A reached the finality. Now, the controversy arises whether the issue relating to the depreciation can be raised by the assessee in the subsequent year without challenging the initial/ first assessment year as discussed above. The answer stands against the assessee. In simple words, the assessee in its own case has admitted the disallowance of depreciation and therefore the same cannot be agitated in the later years. Hence, the ground of appeal of the assessee is hereby dismissed. Disallowance of deprecation claimed on “right to use leasehold land” - assessee has been allotted land on lease basis by the Gujarat Maritime Board (GMB). The assessee accounted for the right to use leasehold land in the A.Y. 2011-12 at present value of future annual lease and claimed depreciation on the same @ 25% by treating the same as intangible assets - HELD THAT:- It is pertinent to note that the recognition of the right to use lease hold land as intangible asset as per the statement of account and the same was not disputed by the Department at any stage. Thus, the claim of depreciation was correctly made and the same should have been taken into account by the Assessing Officer as well as CIT(A). Thus, this ground allowed. Disallowances u/s 14A - AO has worked out the amount of disallowance u/s 14A as per the provision of rule 8D of Income Tax Rule which includes disallowances on account of interest expenses as well administrative expenses - AO has also made the addition to the book profit calculated under the provisions of section 115JB - CIT(A) restricted the quantum of disallowance under section 14A of the Act to the extent of exempted income only whereas deleted the addition to book profit in entirety - HELD THAT:- It is settled position of law by several competent court that if there are mixed funds or interest free funds exceed the amount of investment then the power of presumption would be that the investment has been made out of interest free funds. In holding so, we draw support and guidance from the judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Torrent Power Ltd [2014 (6) TMI 185 - GUJARAT HIGH COURT] In the case of the present assessee, the interest free fund of the assessee exceeds the amount of the investment yielding the exempted income. Therefore, no disallowance can be made on account of interest expenditure under the provision of rule 8D IT rule in the given facts and circumstances. Disallowance of administrative expenses, in our considered opinion, the contention of the assessee cannot be accepted that no expenditure in relation to the investment was incurred. Therefore, the disallowance of administrative as per rule 8D of the Income Tax Rule needs to be made. As per the provision of rule 8D(2)(iii) the amount of administrative expense shall be equal to 0.5% of average value of the investment, income from which does not or shall not form part of total income. Question arises while computing the average value of investment whether all the investment capable of yielding exempted income shall be considered or only those investments which yielded exempted income during the year shall be considered. The question has been answered in the case of ACIT vs. Vireet Investment (P.) Ltd [2017 (6) TMI 1124 - ITAT DELHI] wherein it was held that only those investment shall be considered which yielded exempted income during the year. Thus amount of disallowance under rule 8D(2)(iii) shall be computed only considering the investment in Kutch Railways Company Ltd of which average value stand at Rs. 4000 Lacs only and accordingly the amount of disallowance shall be at Rs. 20 Lacs only whereas the assessee has already made disallowances of Rs. 25 lacs. Therefore no further disallowance is required to be made - appeal of the assessee allowed. Addition to book profit computed u/s 115JB - We hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of Jayshree Tea Industries Ltd. [2014 (11) TMI 1169 - CALCUTTA HIGH COURT] Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - There is no mechanism/ manner given under clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore, we feel that adhoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. In the given the assessee itself has made adhoc disallowances of Rs. 25 Lacs under normal computation of income in connection with the exempted income earned during the year. Therefore amount which been admitted by the assessee itself as incurred in connection with exempted shall be added to the book profit as per the provion of clause (f) to explanation 1 of section 115JB of the Act. Thus we direct the AO to make the addition of Rs. 25 Lacs as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus, the ground of appeal of the Revenue in relation to addition to book profits is partly allowed. Deduction u/s. 80IAB on sale of scrap - gain on foreign currency derivative swap as eligible income under section 80IAB and holding derivative swap loss as business loss - HELD THAT:- As respectfully following the order of the tribunal in the own case of the assessee as 122 & 167/AHD/2015 for AY 2011-12 [2023 (3) TMI 1350 - ITAT AHMEDABAD], we do not find any infirmity in the finding of the learned CIT(A) and direct the AO to delete the disallowance made by him. Depreciation on the block office equipment @ 15% allowec by following the order of this tribunal in the case M/s Adani Enterprise Ltd. [2019 (2) TMI 2018 - ITAT AHMEDABAD] in ITA No. 1840/Ahd/2012. TP Adjustment - corporate guarantee - an international transaction or not? - HELD THAT:- The provisions of section 92B of the Act define the parameters of what constitute an international transaction. Although, the ambit of international transaction was wide enough, yet due to judicial interpretation, certain classes of transactions were being left out of the transfer pricing net. To tackle the same, by the Finance Act of 2012 an Explanation to Section 92B[2] of the Act was brought in the statute with retrospective effect from 1st April 2002. The explanation is clarificatory in nature and added certain categories of transactions, inter alia, the transaction as specified under clause (c) of explanation (i) to section 92B of the Act within the ambit of international transactions. The corporate guarantee was included within the ambit of international transaction by the Finance Act 2012 with retrospective effect. Thus, there remains no ambiguity to the fact that the corporate guarantee extended by the assessee to its AE is an international transaction and therefore the same has to be benchmarked at the arm length price. We find that in the case of PCIT vs. Redington (India) Ltd. [2020 (12) TMI 516 - MADRAS HIGH COURT] has held that corporate guarantee is covered under the limb of international transaction and having bearing on profit and loss account. Thus we hold that the bank/corporate guarantee extended to AE is an international transaction. Therefore, the same has to be bench marked for determining the ALP. Determine the benchmarking for working out the ALP of the impugned international transaction - Coming to the case on hand, we note that assessee has borrowed loan from the Standard Chartered bank at an effective rate of interest at 4.06% per annum whereas the AE has borrowed loan at the rate of 4.92% per annum despite the corporate guarantee furnished by the assessee The assessee has not obtained any saving of the interest/bank charges. Accordingly, the question arises, whether the assessee should be made subject to the addition for the corporate guarantee furnished by it in the given facts and circumstances. To our understanding, on applying the interest saving approach, it is not justifiable to make any addition on account of furnishing the corporate guarantee to the AE. In other words, the assessee would have saved huge interest cost if it would have advanced money on interest to the AE after borrowing at its own from the Standard Chartered Bank. Hence, we do not find any infirmity in the order of learned CIT-A. Thus, the ground of appeal of the revenue is hereby dismissed. Upward adjustment in TP on account of interest - HELD THAT:- CIT(A) failed to appreciate the fact that in the given case a holding company extended interest free loans and advances to its foreign subsidiary to grow the business. Such a transaction cannot be compared with loan extended by the banks whose main activity is extending loans to generate revenue. In holding so, we draw support and guidance from the judgment of judgment of Hon’ble Bombay High Court in case of CIT vs. Everest Kento Cylinders Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT] The above finding of the Hon’ble Bombay High Court is in relation to extension of corporate guarantee, but the principle laid down can be applied here in the case of extension of loans and advances also. Therefore, in our considered TPO was not right in considering the upfront fee charged by the bank as well adjustment of risk associated with unsecured loan. We also note that in case of M/s Arvind Ltd [2023 (6) TMI 1065 - ITAT AHMEDABAD] where the facts and circumstances were identical to the case on hand, the tribunal after considering series of finding of different tribunal held that in case of loan extended by parent company to foreign subsidiary the reasonable rate of interest should be LIBOR +2% - Thus we hereby hold that suo-moto notional interest offered by the assessee at LIBOR + 2.8 % is ALP and no further adjustment is required to be made. Hence, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the upward adjustment made on account of benchmarking of interest free loan to AE.
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