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2016 (5) TMI 257 - ITAT MUMBAI

2016 (5) TMI 257 - ITAT MUMBAI - TMI - Disallowance of expenditure incurred for obtaining advisory services in connection with the restructuring of bank debts - Held that:- Fee has been paid to the said consultant primarily for rendering advice to reduce the interest burden of the assessee-company by, inter alia, exploring the possibility of identifying a strategic investor/lender. It is a settled proposition that payments made to consultants for obtaining professional services in connection wit .....

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portion of fee relatable to the restructuring and raising of equity share capital was concerned, such expense would fall for disallowance as per the ratio of Brooke Bond (India) Ltd. (supra). In this context, having regard to the entirety of facts and circumstances of the case, in our view, it would be in fitness of things that 10% of the expenditure, i.e. ₹ 5,05,080/- be disallowed and balance of the expense be allowed as a revenue expenditure. - Decided partly in favour of assessee
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TMI 11 - SUPREME Court). Such expenditure is also not covered in the scope of Sec. 35D of the Act, as fairly conceded by the ld. Representative for the assessee. - Decided against assessee

Addition u/s. 28(iv) - waiver of the outstanding principal amount of loan - Held that:- As per a working provided by the Ld. Representative for the assessee such amount is crystallized at ₹ 34.99 crores and the balance of ₹ 4.01 crores is considered as being used for trading operations. .....

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the scope of section 28(iv) of the Act for the reason that the same related to loan funds used for the purposes of trading/business. Quite clearly, the balance of the waiver is relatable to the proportion of loan funds utilized for acquisition of the shares of M/s. Applisoft Inc. and on this aspect the ratio of the judgement of the Hon’ble Bombay High Court in the case of Mahindra and Mahindra Ltd.(2003 (1) TMI 71 - BOMBAY High Court ) clearly supports the plea of the assessee. In this backgrou .....

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T applicability on waiver of outstanding principal amount of loan and interest thereof - assessee claimed that the provisions of section 115JB of the Act do not apply to the income accrued or arising from the business so carried on in the SEZ Unit - Held that:- The difference between the assessee and the Revenue on the application of sub-section(6) of section 115JB of the Act relates to the waiver of outstanding principal amount of loan and interest thereof. The stand of the Revenue is that such .....

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er than the ‘income arising from any business carried on’ and viewed in that light in our view, the impugned income can definitely be said to be falling within the expression ‘arising from any business carried on’ in SEZ Unit. Therefore, in our view, the assessee has to succeed on its plea seeking exclusion of the impugned sum from the purview of section 115JB of the Act on account of sub-section (6) thereof. - Decided in favour of assessee

Benefit of set off of unabsorbed depreciatio .....

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r statistical purposes.

ALP determination - adoption of Transactional net margin method (TNMM) selected by the Transfer Pricing Officer/Assessing Officer in preference to the CUP method adopted by the assessee - Held that:- Similar issue has been considered by the Tribunal in assessment year 2004-05 and it is pointed out that the issue has been sent back to the file of the Assessing Officer for determining the arm's length price of international transaction afresh including the select .....

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arises out of an order passed by Assessing Officer under section 143(3) of the Income Tax Act, 1961 ( in short the Act) dated 05/01/2011. 2. Insofar as the appeal of the assessee is concerned, the Grounds of appeal raised read as under : Following grounds of appeal are without prejudice to each other: 1. The learned CIT(A) has erred in law and on facts in confirming the disallowance of ₹ 50,50,800/- made by the Assessing Officer treating the same as capital expenditure. The Id. CIT(A) oug .....

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essing Officer to allow the aforesaid expenditure of ₹ 10,00,000/ - u/s. 35D of the Act. 4. The learned CIT(A) has erred in law and on facts in sustaining the addition of ₹ 15,35,03,849/- u/s. 28(iv) of the Act, representing the waiver of the outstanding principal amount of loan. The Id. CIT (A) ought to have considered that the loan was obtained and utilized for acquisition of capital assets and, therefore, not liable to be taxed either u/s. 28(iv) or u/ s. 41(1) of the Act. 5. The .....

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the action of the Assessing Officer in not allowing the benefit of set off of unabsorbed depreciation against income from other sources. 8. The learned CIT(A) has erred in law and on facts in confirming the TNMM method adopted by the TPO/AO in preference to the benchmarking done by the appellant following CUP method and in virtually approving the computation of ALP made by the TPO / AO subject to exclusion of three companies. 3. Further, the Ground of appeal raised in the cross appeal by the Rev .....

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der the provisions of the Companies Act, 1956 and is engaged in the business of software development and rendering technical services outside India in the field of computer software. For the assessment year under consideration, assessee company filed a return of income declaring an income of ₹ 8,43,41,285/- which was set-off against brought forward business losses and ultimately the taxable income was declared at Nil. During the year under consideration, assessee had also entered into cert .....

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rtain additions/disallowances. Assessee-company carried such additions/disallowances in appeal before the CIT(A) who allowed partial relief. Assessee is in further appeal before us on the aforestated Grounds of appeal in respect of the reliefs not granted by the CIT(A) whereas Revenue in its appeal has assailed some of the reliefs allowed by the CIT(A). 5. In this background, the rival counsels have been heard and the relevant material perused. We may first take up the Grounds of appeal raised b .....

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ee paid a sum of ₹ 50,50,800/- to M/s. Quartet Financial Services Pvt. Ltd. in respect of advisory services rendered by them with respect to restructuring of bank debt, identification of investor, raising equity capital and structuring of such transactions. Justifying the payment as revenue expenditure, the stand of the assessee before us as well as before the lower authorities is on the following lines. It has been explained that assessee had an outstanding loan liability from Global Trus .....

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ive for the assessee pointed out before us that it was because of the proposals given by the said consultant that assessee was able to restructure its interest bearing debts which resulted in reduced interest costs. 7. The Revenue, on the other hand, pointed out that the expenditure has been incurred on account of capital restructuring and therefore such expenditure was to be considered as a capital expenditure following the ratio of the judgment of the Hon ble Supreme Court in the case of Brook .....

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o 17 of the Paper Book is placed a copy of the mandate letter of the said consultant, which reveals the scope and methodology of the services provided to the assessee. The aforesaid material brings out that the fee has been paid to the said consultant primarily for rendering advice to reduce the interest burden of the assessee-company by, inter alia, exploring the possibility of identifying a strategic investor/lender. It is a settled proposition that payments made to consultants for obtaining p .....

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insofar as the proportion of fee relatable to the restructuring and raising of equity share capital was concerned, such expense would fall for disallowance as per the ratio of Brooke Bond (India) Ltd. (supra). In this context, having regard to the entirety of facts and circumstances of the case, in our view, it would be in fitness of things that 10% of the expenditure, i.e. ₹ 5,05,080/- be disallowed and balance of the expense be allowed as a revenue expenditure. In our considered opinion .....

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te the balance. As a consequence, insofar as Ground of appeal no. 1 is concerned, assessee partly succeeds. 9. By way of Ground of appeal nos. 2 & 3, assessee-company has assailed the disallowance of ₹ 10,00,000/- incurred in connection with issuance of shares. The facts which emerge from the perusal of the orders of authorities below reveal that the impugned expenditure has been incurred in connection with increase in authorised share capital of the assessee-company and raising of sha .....

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ion of the CIT(A) in sustaining the addition of ₹ 15,35,03,849/- u/s. 28(iv) of the Act representing waiver of the outstanding principal amount of loan. In this context, the brief facts are that in an earlier financial year of 2000-01 assessee had obtained credit facilities from Global Trust Banks Ltd., which inter-alia, included raising of Term loans of ₹ 15 crores and ₹ 24 crores totalling to ₹ 39 crores. Upto the year under consideration assessee had repaid certain amo .....

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paid a sum of ₹ 11.25 crores representing repayment of Term loan of ₹ 6.25 crores and redemption of preference share capital of ₹ 5 crores. The balance of ₹ 34.61 crores comprising of ₹ 15.35 crores on account of outstanding principal amount of loan and ₹ 19.26 crores on account of outstanding interest was waived by the bank. Insofar as the waiver of outstanding interest amount of ₹ 19.26 crores is concerned, there is no dispute as an such amount was off .....

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ing liability and accordingly such amount was treated as a benefit chargeable to tax in terms of Sec. 28(iv) of the Act. The aforesaid stand of the Assessing Officer has been further affirmed by the CIT(A) on the ground that the waiver of principal amount of loan amounting to ₹ 15.35 crores was revenue in nature and thus assessable in terms of Sec. 28(iv) of the Act. In this background, the rival counsels have made their submissions before us. 11. Before us, the Ld. Representative for the .....

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be seen in the capital field and not in the revenue field so as to be taxed under section 28(iv) of the Act. It was, therefore, contended that the facts of the present case are similar to those in the case of Mahindra and Mahindra Ltd. vs. CIT, 261 ITR 501(Bom) and thus the action of the lower authorities in relying upon the judgment in the case of Solid Containers Ltd. (supra) is liable to be set-aside. In support of the contention that the Term loans raised from the Global Trust Bank have bee .....

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ted to copies of the foreign remittance certificates evidencing the aforesaid remittances, which have been placed in the Paper Book at pages 3 & 4. Ld. Representative for the assessee pointed out that the aforesaid factual matrix has not disputed by the lower authorities. 12. In this context, the Ld. Departmental Representative for the Revenue reiterated the stand of the income-tax authorities by pointing out that the loan sanction letter of the bank, a copy of which is placed at page 26 of .....

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d (supra). 13. In reply, the Ld. Representative for the assessee pointed out that though the loan sanction letter of the bank reflects the purpose of the term loan as working capital/For acquisition , but ultimately it is the utilization of the loan proceeds which show that the same has been utilized for acquisition of a capital asset, and it has not been used in trading operation. Ld. Representative for the assessee also relied upon the judgment of the Madras High Court in the case of Iskraemec .....

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has been allowed waiver of a portion of the principal amount of loan outstanding and interest thereof. The issue regarding the taxability of waiver of interest is not in dispute before us and the only issue before us relates to the taxability of a sum of ₹ 15,35,03,849/-, which represented the principal amount of the loan outstanding, waived by the bank. In principle we are in agreement with the proposition that in the context of waiver of loan amount, where loan was raised for acquiring .....

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s for importing capital assets. Subsequently, the lender waived the recovery of such loan, which was interpreted by the Assessing Officer to be cessation of liability towards the lender as a benefit taxable under section 28(iv) of the Act. The CIT(A)upheld the aforesaid stand and additionally held that waiver of loan amounted of remission of a trading liability taxable under section41(1) of the Act also. The Hon ble Bombay High Court, in this background held that waiver of loan repayment did not .....

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ent in the case of Mahindra & Mahindra Ltd.(supra) and noted that the same operated in a different fact situation inasmuch as in the earlier judgment, the loan funds were utilized for meeting the cost of import of plant and machinery and, therefore, waiver of such loan did not constitute business. What follows from the aforesaid two judgments is that the taxability of waiver of loan amount would depend upon the purpose for which the loan was put to use. If the loan was for acquiring a capita .....

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sent case. In the instant case, it is quite evident as per the bank sanction letter dated 29/11/2000, copy of which is placed at page-26 of the Paper Book, that the Term loans of ₹ 39.00 crores (i.e. 15.00 crores + ₹ 24.00 crores) were sanctioned for the purpose of working capital/For acquisition . The assessee has been consistently asserting right from the level of the Assessing Officer that upon disbursement of loan, the loan proceeds have been utilized for acquiring shares in M/s. .....

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thorities is that since the purpose of the loan included usage for working capital, therefore, it could not be said that the loan was for acquiring capital asset. In our considered opinion, what is more important is to consider the actual utilization of loan funds and not merely the purpose of the loan, though it may be an important ingredient. In the present case, loan sanction letter does not prescribe that the loan proceeds are to be used only for working capital requirements. Moreover as the .....

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sition of shares i.e. on capital asset was only ₹ 34.99 crores, the balance of ₹ 4.01 crores cannot be said to have been spent for acquiring a capital asset. In this context, Ld. Representative for the assessee quite fairly conceded the above situation that the total amount invested for acquisition of shares was ₹ 34.50 crores which was lower than the total loan raised of ₹ 39.00 crores, but, it has been argued that the issue in question relates to only the principal amou .....

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d for acquiring capital asset is only to the extent of the amount used for purchase of shares of M/s. Applisoft Inc. As per a working provided by the Ld. Representative for the assessee such amount is crystallized at ₹ 34.99 crores and the balance of ₹ 4.01 crores is considered as being used for trading operations. Therefore, having regard to the facts of the present case, the waiver of loan can be said to be relatable to acquisition of capital asset to the extent of the proportion i .....

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er is relatable to the proportion of loan funds utilized for acquisition of the shares of M/s. Applisoft Inc. and on this aspect the ratio of the judgement of the Hon ble Bombay High Court in the case of Mahindra and Mahindra Ltd.(supra) clearly supports the plea of the assessee. In this background of the matter, we, therefore, conclude that so far as the amount used for the purchase of capital asset is concerned, the waiver thereof is a capital receipt not chargeable to tax under section 28(iv) .....

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pressed. 18. The issue in Ground of appeal No.6 relates to the action of the income-tax authorities in brining to tax a sum of ₹ 34,61,28,850/- for the purposes of section 115JB of the Act. The aforesaid amount represented the amount of waiver of principal and interest on bank loan. The plea of the assessee was that the aforesaid amount constituted income arising from business carried on in Special Economic Zone unit (SEZ unit)and, therefore, the same would not fall for consideration unde .....

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elp the assessee. Against the decision of the income-tax authorities in including the aforesaid amount as part of book profit for the purposes of section 115JB of the Act, assessee is in further appeal before us. 18.2 Before us the Ld. Representative for the assessee vehemently pointed out that the only business activity of the assessee was in SEZ Unit and that assessee has no other place of business or office. Referring to the Annual Report for the instant year, the Ld. Representative for the a .....

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hares of Applisoft Inc., which was for the purpose of business and generating higher revenues. In this context, attention was invited to the order of the Tribunal in the assessee s own case for assessment year 2004-05 vide ITA No.4855/Mum/2009 dated 21/8/2013, wherein assessee had explained that the investment in the shares of Applisoft Inc. was for the purpose of business and out of commercial expediency, and this plea was accepted by the Tribunal, though in a different context relating to allo .....

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venue, which we have already noted in earlier para and the same is not being repeated for the sake of brevity. 18.5 The dispute essentially revolves around the provisions of subsection( 6) of section 115JB of the Act, which prescribes that the section would not apply to the income accrued or arising from any business carried on or services rendered by an entrepreneur or a developer in SEZ Unit, as the case may be. In the present case, the assessee is engaged in the business of software developme .....

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Revenue on the application of sub-section(6) of section 115JB of the Act relates to the waiver of outstanding principal amount of loan and interest thereof. The stand of the Revenue is that such income is not generated out of the services rendered by the assessee but is on account of a One Time Settlement with the bank and, therefore, it does not fall in the exclusion contained in the sub-section(6) of section 115JB of the Act . The phraseology of sub-section (6) of section 115JB of the Act pre .....

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impugned sum from the purview of section 115JB of the Act on account of sub-section (6) thereof. We hold so. Thus, on this aspect, the assessee succeeds. 19. The next Ground relates to the action of the lower authorities in not allowing the benefit of set off of unabsorbed depreciation against income from other sources. On this aspect, the facts are that during the year under consideration, the assessee had claimed benefit of set-off of brought-forward business loss and unabsorbed depreciation .....

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ee placed reliance on the judgment of the Hon ble Supreme Court in the case of Virmani Industries Pvt. Ltd., 216 ITR 607(SC). The CIT(Appeals) disagreed with the assessee and accordingly assessee is in further appeal before us. 19.1 Before us, the Ld. Representative for the assessee pointed out that having regard to the express provisions of section 32(2) of the Act, the depreciation allowance of earlier years is deemed to be the allowance of the succeeding year and hence the unabsorbed deprecia .....

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ropriate set-off of unabsorbed depreciation against income from other sources. 19.2 Though the Ld. Departmental Representative for the Revenue has not opposed the prayer of the assessee for setting-aside the matter back to the file of Assessing Officer, yet the orders of the authorities below has been sought to be defended. 19.3 In our considered opinion, in the present case, the only issue agitated by the assessee is in relation to set-off of claim of unabsorbed depreciation, which in our view, .....

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hod (TNMM) selected by the Transfer Pricing Officer/Assessing Officer in preference to the CUP method adopted by the assessee for determining the arm s length price (ALP) of the international transactions entered with its associated enterprise abroad. The primary dispute in this ground relates to the application of CUP method selected by the assessee to benchmark its international transaction for the purpose of determining their arm's length price. The income-tax authorities have applied the .....

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