2025 (6) TMI 1990 - AT - Income Tax

Addition of on-money - CIT(A) restricted addition to 25% - AO made addition by taking reference prices from the website 99 acres.com for the corresponding period and of his own reduced 20% to compensate all odds that it preferred location charges floor rise etc and worked out the alleged-on money figure - HELD THAT - We find that the ld CIT(A) restricted the addition to the extent of 25% thereof by following the order of previous assessment year. We find that the assessing officer has not made addition on the basis of any evidence in his possession. Thus on independent examination of facts of the present case we do not find any justification for making addition on the basis of extrapolation hence we uphold the order of ld CIT(Appeals) with our additional observation. In the result this ground of appeal is dismissed. TP Adjustment - Disallowance of interest on debenture and Disallowance of various expenses - HELD THAT - We find that the addition is not based on any evidence found during search action. Rather the assessing officer while making reference recorded that assessment in this case has become time barred on 31.12.2017. Still on the basis of report in Form-3CEB he made reference to TPO for determination of ALP of alleged international transaction - CIT(Appeals) deleted both the additions by taking view that on identical issue in assesses own case for AY 2012-13 the assessing officer made similar addition of Rs. 137 crore in respect of amount received on account of issuance of CCD from Thirdscroll Holding Limited and equity shares to Azapel Holding Private Limited. On appeal before learned CIT(Appeals) the additions were deleted and no further appeal is filed by revenue before Tribunal. It was also held that firstly; transaction of issuance of CCD was a quasi-capital in nature secondly TPO has not determined ALP by following any of the method prescribed under section 92C(1) read with Rule 10AB to determine ALP. Addition on account of interest paid on debenture is concern interest paid to CCD is consequential to the grounds related to the amount received for issuance of CCD to Thirdscroll Holding Limited - Since the main ground of appeal was allowed in favour of assessee therefore charging of interest is consequential. On independent consideration of facts we further find that TPO has not adopted any of the method prescribed in section 92C(1) of Income Tax Act read with Rule 10AB of Income Tax Rules 1962. Thus the adjustment suggested by TPO is not as per the mandate of law. In Shell India Markets (P) ltd 2014 (11) TMI 897 - BOMBAY HIGH COURT it was held by High Court that on issuance of shares by an Indian entity to its non-resident AEs no income arise hence transfer pricing provisions under Chapter X would not be applicable. Hence in view of factual and legal discussions we affirm the order of ld CIT (Appeals) on our additional observations. In the result the ground No. 2 3 of the appeal is dismissed. Disallowance of various expenses - AO made disallowance of of-site expenses miscellaneous expenses travelling and convince expenses sale promotion expenses - All expenses were disallowed by taking view that such expenditure is not incurred wholly and exclusively for the purpose of business - CIT(Appeals) allowed relief to the assessee by holding that all these expenses were incurred wholly and exclusively for the purpose of business. Further none of the expenses is capital or personal in nature. Before us no contrary facts or law is brought to our notice to reverse the finding of first appellate authority. Hence we do not find any reasons to interfere with the order of learned CIT(Appeals). In the result this ground of appeal is also dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Commissioner (Appeals) erred in restricting the addition of 'on money' to 25% of the amount estimated by the Assessing Officer, without fully appreciating the facts and evidence of the case.

(b) Whether the Commissioner (Appeals) erred in deleting the addition of Rs. 116.92 Crore made by the Assessing Officer on account of receipt of funds from issuance of Compulsory Convertible Debentures (CCDs) and equity shares from associated enterprises, particularly in light of transfer pricing adjustments and genuineness of transactions.

(c) Whether the Commissioner (Appeals) erred in deleting the addition of Rs. 32.63 Crore towards interest paid on debentures, which was consequential to the addition on issuance of CCDs.

(d) Whether the Commissioner (Appeals) erred in deleting the disallowance of business expenses including site expenses, miscellaneous expenses, travelling expenses, and sales promotion expenses, which were disallowed by the Assessing Officer on the ground that they were not incurred wholly and exclusively for business purposes.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Restriction of Addition on 'On Money' to 25%

Legal Framework and Precedents: The Assessing Officer made additions on account of 'on money' (undisclosed cash receipts) based on evidence seized during search action and extrapolation using prevailing market rates from the website 99acres.com, adjusted by 20% to compensate for location and other factors. The law mandates that additions in search assessments should be based on direct and cogent evidence found during the search and not on mere presumptions or estimations.

Court's Interpretation and Reasoning: The Commissioner (Appeals) restricted the addition to 25% of the amount estimated by the Assessing Officer, following a precedent in the assessee's earlier assessment year where a similar addition was restricted. The Tribunal noted that the Assessing Officer's addition was based on extrapolation without independent application of mind or specific evidence for the assessment year under consideration. It was held that the Assessing Officer did not possess sufficient evidence to justify the full addition and that the CIT(A)'s restriction was justified.

Key Evidence and Findings: The only direct evidence of 'on money' seized during the search was Rs. 2.02 Crore, declared by a key person of the group. The Assessing Officer's extrapolation to a much higher figure was not supported by direct evidence for the assessment year 2013-14.

Application of Law to Facts: The Tribunal applied the settled legal principle that additions in search assessments must be based on tangible evidence found during the search. Since the Assessing Officer's extrapolation lacked evidentiary basis, the restriction to 25% addition was upheld.

Treatment of Competing Arguments: The Revenue argued that sufficient evidence existed and the addition should be fully upheld. The assessee contended that additions should be limited only to the amount evidenced during search. The Tribunal sided with the assessee's approach, emphasizing the need for evidence-based additions.

Conclusion: The Tribunal dismissed the Revenue's appeal on this ground, upholding the CIT(A)'s restriction of addition on 'on money' to 25%.

(b) Deletion of Addition on Receipt of Funds from Issuance of CCD and Equity Shares

Legal Framework and Precedents: The Assessing Officer made additions based on the Transfer Pricing Officer's (TPO) report which determined the Arm's Length Price (ALP) of the issue of CCDs and equity shares as Nil, alleging the transactions were non-genuine and the investors lacked identity and creditworthiness. The TPO did not apply any prescribed transfer pricing methods under section 92C(1) and Rule 10AB but instead disallowed the transactions on grounds of genuineness. The assessee relied on precedents establishing that issuance of equity shares and CCDs is a capital transaction not subject to transfer pricing adjustments and that the TPO must follow prescribed methods for ALP determination.

Court's Interpretation and Reasoning: The Commissioner (Appeals) deleted the addition by holding that:

• The issuance of CCDs was quasi-capital in nature and not purely debt or debenture.
• The TPO failed to apply any of the prescribed transfer pricing methods and instead rejected the transaction on grounds beyond the scope of transfer pricing provisions.
• The assessee had furnished extensive documentary evidence proving the identity, creditworthiness, and genuineness of the transactions, including bank statements, RBI approvals, valuation reports, and tax residency certificates.
• Similar additions in the assessee's own case for AY 2012-13 were deleted by the CIT(A), and no appeal was filed by the Revenue thereafter.

The Tribunal concurred with the CIT(A), emphasizing that the TPO's approach was not in accordance with the statutory mandate to determine ALP by applying prescribed methods. The Tribunal also relied on authoritative judgments holding that issuance of shares to non-resident associated enterprises is a capital transaction outside the scope of transfer pricing provisions.

Key Evidence and Findings: The assessee submitted detailed documentary proof of the transactions, including the investment cum shareholders agreement, bank remittance certificates, RBI confirmations, and valuation reports. The CCDs were issued at face value without premium, and equity shares issued in earlier years had been dealt with in earlier assessments.

Application of Law to Facts: The Tribunal applied the legal principle that transfer pricing adjustments require application of prescribed methods and cannot be based on subjective doubts about genuineness. The capital nature of the transactions excluded them from transfer pricing adjustments. The assessee's compliance with procedural and documentary requirements was acknowledged.

Treatment of Competing Arguments: The Revenue contended that no valuation was obtained before issuance and the transactions were sham. The assessee rebutted this with documentary evidence and legal precedents. The Tribunal rejected the Revenue's contention due to lack of application of prescribed transfer pricing methods and failure to produce cogent evidence of sham transactions.

Conclusion: The Tribunal dismissed the Revenue's appeal on this ground, affirming deletion of the addition on issuance of CCD and equity shares.

(c) Deletion of Addition on Interest Paid on Debentures

Legal Framework and Precedents: The addition of Rs. 32.63 Crore towards interest on CCDs was consequential to the addition on issuance of CCDs. The assessee claimed benchmarking of interest as per internal CUP method under Rule 10AB, and the TPO did not reject this method nor produced any comparables to justify disallowance.

Court's Interpretation and Reasoning: The Commissioner (Appeals) deleted the addition on interest as consequential to the deletion of the principal addition on CCD issuance. The Tribunal upheld this deletion, noting that the TPO had not followed the prescribed transfer pricing methods and had not rejected the assessee's benchmarking method.

Key Evidence and Findings: The assessee provided evidence of interest benchmarking and accounting treatment consistent with the terms of CCD issuance. The interest was accrued in the relevant assessment year as per accounting principles.

Application of Law to Facts: The Tribunal applied the principle that consequential additions cannot survive when the principal addition is deleted. The absence of any transfer pricing adjustment on interest by the TPO further supported deletion.

Treatment of Competing Arguments: The Revenue supported the addition but accepted it was consequential. The Tribunal agreed with the assessee's submissions.

Conclusion: The Tribunal dismissed the Revenue's appeal on this ground, affirming deletion of the interest addition.

(d) Deletion of Disallowance of Business Expenses

Legal Framework and Precedents: The Assessing Officer disallowed various expenses (site expenses, miscellaneous expenses, travelling, sales promotion expenses, interest on TDS) on the ground that they were not incurred wholly and exclusively for business purposes, invoking section 37 of the Income Tax Act. The assessee contended that these expenses were legitimate business expenses.

Court's Interpretation and Reasoning: The Commissioner (Appeals) held that the expenses were incurred wholly and exclusively for business purposes, were neither capital nor personal in nature, and hence allowable. The Tribunal concurred, noting no contrary evidence or law was brought to its notice to reverse this finding. The Tribunal referred to the Apex Court decision in CIT vs Malayalam Plantations Ltd, which supports allowance of business expenses incurred wholly and exclusively for business.

Key Evidence and Findings: The assessee furnished explanations and submissions that the expenses related to staff welfare, sales pavilion maintenance, business travel, and promotional activities to increase sales.

Application of Law to Facts: The Tribunal applied the established principle that expenses incurred wholly and exclusively for business are allowable deductions. The absence of any evidence to the contrary led to deletion of disallowances.

Treatment of Competing Arguments: The Revenue argued lack of substantiation. The assessee provided explanations and documentary support. The Tribunal sided with the assessee.

Conclusion: The Tribunal dismissed the Revenue's appeal on this ground, affirming deletion of disallowances.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the following verbatim excerpts and core principles:

"The TPO has not followed any of the prescribed method, i.e. CUP, Transaction Net Margin Method, Resale Price Method, Profit Split Method or any other method prescribed in the Act/ Rules. The TPO has merely doubted the identity and creditworthiness of the investor and genuineness of transaction. The learned CIT(Appeals) held that TPO was bound to follow any of the method prescribed in section 92C(1) and Rule 10AB to determine ALP of the transaction, therefore the TPO was not justified in determining the ALP of the transaction on issue of CCD to Thirdscroll Holding Limited at Nil."

"It is settled position in law the additions in case of search assessment should be made only on the basis of evidence found at the time of search and not on the basis of presumption and estimation."

"The issuance of CCD was a quasi-capital in nature, secondly TPO has not determined ALP by following any of the method prescribed under section 92C(1) read with Rule 10AB to determine ALP."

"Expenses were incurred wholly and exclusively for the purpose of business. Such expenditures were not in the nature of capital or personal and were expanded exclusively for the purpose of business."

"The issue of equity shares by assessee-company to its AE located abroad is on capital account and provisions of Chapter X would not apply to such transaction."

Final determinations on each issue were as follows:

• The addition on 'on money' was restricted to 25% by the CIT(A), which was upheld by the Tribunal due to lack of sufficient evidence for full addition.
• The addition on receipt of funds from issuance of CCD and equity shares was deleted as the transaction was capital in nature and the TPO had not applied prescribed transfer pricing methods.
• The addition on interest paid on CCDs was deleted as consequential to deletion of principal addition and due to absence of transfer pricing adjustment on interest.
• The disallowance of business expenses was deleted as the expenses were incurred wholly and exclusively for business purposes.