TMI Blog2020 (1) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 - SUPREME COURT] the Hon'ble Apex Court held that it is the duty of the appellate authority to correct the errors in the order of the authorities below, and remit the matter to them with or without direction unless prohibited by law. Considered from the above perspective, the learned DR s plea for taxing the whole amount of forfeiture does merit consideration. However, we also find that if the impugned amount was to be reduced from the cost of assessee s assets, there would be corresponding reduction in assessee s depreciation claim over a few years. Hence, the overall impact would be tax neutral. Hence, we do not find any infirmity in the order of the learned CIT(A) sustaining the disallowance of depreciation by the Assessing Officer. Addition u/s 14A - disallowance on account of interest - HELD THAT:- Hon'ble Jurisdictional High Court in the case of CIT vs HDFC Bank Ltd., 366 ITR 505 [ 2014 (8) TMI 119 - BOMBAY HIGH COURT] and CIT vs Reliance Utilities Power Ltd. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] had expounded that if interest free funds are sufficient to cover the impugned investment, no disallowance on account of diversion of interest needs to be done an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LTD. [ 2009 (9) TMI 989 - DELHI HIGH COURT] held that assessee had not acquired benefit or addition of an enduring nature, because after buyback benefit of addition of an enduring nature would not arise and capital employed had, in fact, gone down and, therefore, expenses were of revenue nature - Decided in favour of assessee. - ITA NO. 4673/MUM/2014 - - - Dated:- 20-12-2019 - Shri Shamim Yahya, Accountant Member And Shri Pawan Singh, Judicial Member For the Assessee : Shri Nitesh Joshi For the Revenue : Shri Amit Pratap Singh ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER These are cross-appeals by the assessee and Revenue arising out of the order of learned CIT(A) dated 26.03.2014 pertaining to assessment year 2009-10. ITA No. 4754/Mum/2014 (Revenue s appeal) 2. In this appeal, Revenue is aggrieved by the following relief granted by the learned CIT(A) :- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest expenditure of ₹ 1,67,27,608/- made under Rule 8D(ii), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961 (in short the Act ) on it. The Assessing Officer, therefore, issued a show cause notice to the assessee and asked assessee to explain as to why the amount of ₹ 19,81,58,000/- be not reduced from the Written Down Value (WDV) of the assets as per Section 51 of the Act. The assessee replied stating that the receipt of ₹ 19,81,58,000/- is a capital receipt which is not chargeable under Section 45 of the Act since there was no transfer of assets and the amount also cannot be reduced from the value of assets as provisions of Section 51 are not applicable. It was also submitted that there was no correlation between the amount retained and the assets remaining with the assessee company and in absence of such correlation, it was not possible to reduce the cost of acquisition of assets under Section 51 of the Act and there was no possibility of reduction of amount retained from the cost of acquisition under Section 43(6) of the Act. The Assessing Officer considered and examined assessee s reply and held that Section 51 of the Act came into play on cancellation of contracts and negotiations and forfeiture of advance received has to be treated as a capital receipt i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.923 millions and the balance amount of ₹ 198.158 millions was claimed to be retained by the assessee. It also appears that assessee sold the major part of the balance equipments to the purchaser for ₹ 2,59,22,878/- and others for ₹ 57,00,000/-, ₹ 66,81,591/- and ₹ 2,31,671/- in subsequent years and offered these amounts for taxation by reducing the written down values in subsequent assessment years. Thus, assessee received the entire contracted amount of ₹ 258.755 millions from the purchaser of the equipment, that is, KPIL as per the terms of original agreement plus additional amount of ₹ 57,00,000/-, ₹ 66,81,591/- and ₹ 2,31,671/- for some of the balance equipments even though late after lapse of certain period of time. Moreover, assessee also operated the contracted equipment on behalf of the purchaser for a fee as per the Toll Manufacturing Agreement (TMA) with the purchaser, allowed the use of its intangible assets to the purchaser of the equipments upto 31/9/2008 and also claimed depreciation under section 32 of I.T. Act, 1961 for AY 2008-09 and 2009-10. Therefore, assessee realised the contracted amount of ₹ 229.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... toll and then agreeing to sell three items of plant and machinery at a Book Value of ₹ 2,59,22,878/- subject to payment of all taxes and duties like sales tax, octroi, VAT etc., as per the applicable law, is indicative of the intention of the assessee in avoiding and evading applicable sales tax, octroi and VAT by showing lesser figure of Book Value in invoice/bills. Moreover, there is no reason for KPIL, the purchaser of the plant and machinery to relegate on his commitment to buy the plant and machinery by not paying the balance amount of ₹ 29.555 millions after paying ₹ 229.200 millions and also paying the fees/toll to the assessee for running plant and machinery for 17 months to the assessee. Thus, assessee as well as KPIL, the purchaser of the plant and machinery have jointly agreed to such terms of conditions which will look and sound legal and legitimate, but will benefit both the seller, that is the assessee and the purchaser, that is,KPIL. Moreover, the issue of sales bill for three items of plant and machinery at Book Value of ₹ 25.923 millions and the accounting treatment by the assessee of treating Book Value of ₹ 25.923 millions as sale va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts of the case is accepted in principle subject to the directions given in balance part of the order that provisions of section 43(6) are applicable and reduction of written down value by ₹ 198.158 and consequently ₹ 25.923 is fully justified. In nutshell, Assessing Officer's action in reducing the written down value of the block of assets of plant and machinery by ₹ 198.158 millions is upheld. Assessing Officer is also directed to check and verify whether written down value (WDV) was reduced by ₹ 2,59,22,878/-, ₹ 57,00,000/- and ₹ 66,81,591/- in current assessment year, that is AY 2009-10 and by ₹ 2,31,671/- in assessment year 2010-11 or not and if not done take appropriate action as per law. Assessing Officer is also directed to check and verify the opening written down value for AY 2010-11 and other assessment years and take appropriate action under law to withdraw excess depreciation u/s. 32 of I.T. Act, 1961 claimed and allowed to the assessee. 6. Against the above order, assessee is in appeal before us. We have heard both the counsel and perused the records. We note that the learned counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is not permissible. He further submitted that it is only by Finance Act, 2014 w.e.f. 01.04.2015 that Section 56(2)(ix) of the Act has been inserted. Hence, he claimed that prior to the said amendment, forfeiture of advance would not have constituted an income. He further submitted that from the annual account of KPIL (the purchaser) it is seen that they have treated the amount forfeited as extraordinary item of loss. Hence, it is wrong on the part of the learned CIT(A) to claim that this amount has been taken by KPIL as cost of acquisition. In rebuttal, the learned DR submitted that under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 he is objecting to the learned CIT(A) s observation that Section 51 of the Act is not applicable. 7. In this regard, we note that the assessee company had entered into the arrangement during March 2007 with M/s. Kloecklear Pentaplast India Pvt. Ltd. (KPIL) for proposed sale of certain capital assets pertaining to its Rigid PVC film unit at Malanpur (M.P) at a total consideration of ₹ 25,87,55,000/-. Assessee received an advance of ₹ 22,92,00,000/-. However, ultimately the arrangement did not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed the use of its intangible assets to the purchaser of the equipment. In the above background, assessee s claim that the sum of ₹ 19,81,58,000/- (₹ 229.200 million) was forfeited by it as KPIL did not honour its commitment has been found by the authorities below to be totally unacceptable. The authorities below are correct in holding that there is no reason that after paying advance of ₹ 22,92,00,000/-, KPIL will jeopardise the said sum and forego ₹ 19,81,58,000/- for not paying balance amount of ₹ 2,95,55,000/-. It is simply beyond preponderance of probability that an entity will forego ₹ 19,81,58,000/- worth of assets for failure to pay a sum of ₹ 2,95,55,000/-. It is also to be noted that even after so-called forfeiture of the said amount of ₹ 19,81,58,000/- by the assessee, the said KPIL was also paying toll fee to the assessee for running the plant and machinery for 17 months. This makes it amply clear that the finding of learned CIT(A) that the assessee as well as KPIL, the purchaser, have jointly agreed such terms and conditions which will look sound, legal and legitimate apparently, but will benefit both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, which read as under :- 51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition : Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. 43(6) written down value means- (a) in the case of assets acquired in the previous year, the actual cost to the assessee; (b) in the case of assets acquired before the previous year, the actual cost to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i). It is fundamental principle that the provisions of the Act have to be construed in a harmonious manner. Considered from this perspective, no contradiction can be attributed in the action of the Revenue authorities. Whereas the Assessing Officer has held that Section 51 of the Act applies to the issue in case, which provides for deduction of the amount such as in present case received by the assessee from the cost of the asset, the learned CIT(A) has accepted the treatment given by the Assessing Officer but on a different plank that the system adopted by the assessee is a colourable device and hence the amount shall go to reduce the WDV under Section 43(6) of the Act. 10. In our considered opinion, it is the substance which prevails over the form. In this case, the issue before us is the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on elsewhere by the court. Hence, the learned counsel for the assessee submission that the sum forfeited cannot be taxed prior to introduction of Section 56(2)(ix) of the Act is not sustainable. 15. In the case of Kapurchand Shrimal vs CIT, 131 ITR 451 (SC), the Hon'ble Apex Court held that it is the duty of the appellate authority to correct the errors in the order of the authorities below, and remit the matter to them with or without direction unless prohibited by law. Considered from the above perspective, the learned DR s plea for taxing the whole amount of forfeiture does merit consideration. However, we also find that if the impugned amount was to be reduced from the cost of assessee s assets, there would be corresponding reduction in assessee s depreciation claim over a few years. Hence, the overall impact would be tax neutral. Hence, we do not find any infirmity in the order of the learned CIT(A) sustaining the disallowance of depreciation by the Assessing Officer. 16. Apropos the issue of disallowance under Section 14A of the Act. The brief facts of the case are that the Assessing Officer noticed from the records that assessee had earned d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt assets for running and carrying on its main business activity of manufacturing plastic goods. Thus, either way, it shows that interest free own funds and not borrowed funds were utilized for making investments from time to time during relevant four financial years for making investments in shares in shares of SPL totalling ₹ 33.37 crores and, therefore, the disallowance of any interest under section 14A of I.T. Act, 1961 read with rule 8D of I.T. Rules, 1962 is not justified in facts of the case and in law. 18. However, as regards disallowance under Rule 8D(iii) of the Income Tax Rules, 1962, he referred to the assessee s activity of investment and held as under :- 7.2.2 ........................... It appears from the facts of the case that assessee has derived dividend income not only from one company SPL, but also from other companies and mutual funds which were made from time to time to maximize returns on investments. For example, assessee has also derived dividends totalling ₹ 37,500/- from three companies and has earned ₹ 17,50,005/- as dividends on investments in units of Unit Trust of India made and liquidated during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the claim of the assessee that it will accept 0.5% disallowance sustained by the learned CIT(A) if it s claim for the strategic investment and some of the investment not yielded any exempt income is considered and proportionate reduction is done. 22. In this regard, we note that the assessee s plea of relief on account of strategic investment is no longer sustainable in view of the Hon'ble Court s decision in the case of Maxopp Investment Ltd. vs CIT, 402 ITR 640 (SC). 23. As regards the claim to consider only those investments which yield exempt income, the same is acceptable on the touchstone of the Special Bench decision in the case of ACIT vs Vireet Investments (P.) Ltd., 58 ITR(T) 313 (Delhi Trib.)(SB) 24. However, since the assessee has not accepted the learned CIT(A) s order and the learned CIT(A) has not adjudicated the issue of lack of satisfaction, we remit this aspect of the issue to the file of the learned CIT(A). The learned CIT(A) is directed to pass a speaking order on this issue raised by the assessee. 25. Apropos the issue of disallowance under Section 80IB of the Act of ₹ 2,94,609/-. Brief f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f packing material which has been claimed as item of expenses in computing profit derived from the industrial undertaking. On this issue, our attention has brought upon the recent judgment of Hon ble Supreme Court in the case of CIT v. Meghalaya Steel Ltd. (supra) wherein it was inter alia observed as under: 28. It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head income from other sources , which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic. The Assessing Officer examined the matter and held that the expenses were incurred in relation to reduction of share capital base of the company and was therefore relatable to the capital of the company and disallowed the expenses of ₹ 52,77,156/- and added it back to the total income. Upon assessee s appeal, the learned CIT(A) summarised assessee s submissions as under :- 10.3.1 Crux of assessee s submissions are that the expenditure is revenue in nature, buy back of shares is akin to issue of bonus shares and buy back of shares is akin to dividend and any expenditure incurred to distribute dividends is revenue in nature and expenditure on buy back was incurred on grounds of commercial expediency and exposes on buy back should be matched with the revenues of the current year. Assessee has relied on various decisions as mentioned in preceding paras in support of its submissions. Thereafter, the learned CIT(A) held as under :- 10.3.2 First of all assessee has itself admitted that the expenditure on buy back was akin to expenses incurred for the issue of bonus shares and was towards reduction of capital to benefit remainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-04 - Assessee-company paid certain amount to one 'M' on account of consultancy charges and claimed deduction of same as business expenditure - Assessing Officer disallowed that amount on ground that 'M' was non-executive director of assessee-company and payment was made just to avoid tax liability and for non-business purpose - On appeal, Tribunal, on basis of material on record, came to conclusion that payment was, in fact, made to 'M' for obtaining consultancy services in field of review of annual accounts, audit review and review of internal controls, etc., and even applicable tax on it at source was deducted and paid by company - Tribunal, therefore, allowed assessee's claim - Whether since it was a pure finding of fact arrived at by Tribunal that consultancy charges were paid by assessee to M against actual services rendered, no question of law arose in that regard - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Assessee-company claimed deduction of certain amount paid to one 'H' for advisory services for regulatory compliance in relation to buyback ..... 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