TMI Blog2021 (12) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... not known. In such circumstances in absence of the identification of recipient and TDS deduction cannot be given credit for. Further, though not directly on this issue the CBDT circular on deep discount bond referred above also provides that on similar issue, TDS has to be deducted on the point of redemption. Furthermore as submitted, at the time of redemption tax was deducted at source in accordance with the provisions of the Act. This submission has not been disputed. Hence, this reasoning for rejection is also not sustainable. The argument of revenue that the amount has not been debited in account is also not sustainable as the assessee has very much been debited in the account to the debit of share premium account. The Companies Act duly permits the same. Hence, the plea that amount is contingent and not debited is not correct, when revenue itself has accepted the debit in this regard of the amount to the share premium account. Revenue authorities cannot take a shifting stand that the amount is correctly accrued and debit to share premium account is correct, but the same is still a contingent amount. The assessee could have very well debited the amount to the profit and los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n A.Karia For the Revenue : Shri Vatsalya Saxena ORDER PER SHAMIM YAHYA(A.M.).: These appeals by the Assessee are directed against the respective orders of the learned Commissioner of Income Tax (Appeals), Mumbai ( ld.CIT(A) for short) and pertain to the respective assessment years as above. 2. Since the issues are common and connected and the appeals were heard together, these have been consolidated and disposed of by this common order. 3. In assessment year 2009-10, the Ld.CIT(A) has followed his order of AY 2010- 11. Hence, we are taking up AY 2010-11 first. ITA No. 4776/Mum/2016 for AY 2010-11 4. The grounds of appeal read as under:- 1. The Learned Commissioner of Income Tax (Appeals) has erred in partly confirming the action of the Ld Assessing Officer ('AO') and Ld Transfer Pricing Officer ('TPO') proposing an upward adjustment of INR 1,58,66,730 in respect of the international transactions relating to receipt of interest on loan granted to ICX Platform Pty South Africa ('ICX'), Financial Technologies Mid East ('FTME') and Singapore Mercantile Exchange Pte Ltd ('SMX') (ICX, FTME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f TDS on Deep Discount Debenture mutatis mutandi applies to the ZCCBs also. ; 8. The Ld. CIT(A) has erred in confirming the disallowance made by the AO u/s 14A up to the extent of ₹ 4,57,78.992/-. 9. The Id. CIT(A) failed to appreciate that when the appellant itself calculated the disallowances in a scientific manner u/s 14A(1) then he AO could not have applied rule 8D without giving specific finding that the working made by the appellant was incorrect. 10. The learned CIT(A) erred in holding that it is difficult to accept that appellant has incurred only ₹ 32,85,993/- to maintain a huge portfolio without putting any specific finding about the correctness of working made by the appellant u/s!4A(I) of the Act. 11. Without prejudice to ground no. 8 to 10, the Ld. CIT(A) ought to have accepted the alternate plea taken by the appellant to calculate the disallowance u/s 14A at the rate of 1% of dividend income in spirit of decisions of Mumbai Tribunal quoted by the appellant. 12. Without prejudice to ground no. 8 to 11, the Learned C1T(A) failed to appreciate that the investments on which no exempt income could be earned during the year and the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of deferred income or deferred expenses, iv) The assesses is a company is following mercantile methods of accounting. CBDT Notification No. S.O.459(E) dated 30.03.2006; CBDT Circular No. 56 dated 19,03.1971 also confirms that expenses incurred for raising /can / Issue of debentures is allowable as revenue expenditure. As per para 45 of the CBDT circular No. 56 dated 19.03.1971 it may be noted that the provision for amortization is not intended to supersede any other provision in the income - tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures, and such expenditure is admissible as a deduction against profits of the year in which is incurred by virtue of the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, section 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortized against profits over a 10 year period. As a corollary of this, where any expenditure has been included for the purpose of amortization under section 35 D on a claim being made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. [See Kedarnath Jute Manufacturing Co. Ltd. vs. CIT - 82 ITR 363- SC]. Considering the purpose of the bonds aforesaid, the premium would be allowable as deduction subject however to the principle of proportionate write off over its period. [See Madras Industrial Investment Corporation Ltd, V. CIT - 225 ITR 802 - SC in the context of write off of the discount on debentures proportionately each year over the period for redemption]. The allowability or otherwise of the foreign exchange fluctuations would be decided based on the aforesaid principles. Also, needless to add, in the event that such bonds are converted into equity (in which case, no premium would be payable), the deductions so obtained in respect of such liability would become taxable in terms of sect/on 41(3.) of the Act in the year in which such conversion takes place. The following judgment is a directly applicable judgment wherein the issue of payment of premium was considered. In the given case, the assessee had issued convertible debentures/ bonds and had cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re claimed as deduction are appropriated out of securities premium account to the extent of ₹ 32,4i,87,313/- and are not shown as expenses in the profit and loss account (b) No TDS on such expense was deducted and hence such amount cannot be allowed as deduction u/s 40(a)(i) of the Income Tax Act, 1961 and hence I am not allowing the claim of the assessee as deduction. (c) Moreover as against the facts and judgment stated by the assessee the facts in present case are different. In the present case it is not Zero coupon bonds but 'Zero Coupon Convertible Bond'. In the first case the liability to pay interest is predetermined whereas in the later case ft is contingent as it depends whether the bonds are converted in equity or not. As such the claim of the assessee for deduction of interest on repayment of ZCCB cannot be allowed, The sum of Rs, 32,41,87/313/- is added back to the total income of the assessee. Penalty proceedings U/s 271(1)(c) initiated for furnishing inaccurate particulars of income. 9. Against the above order, assessee appealed before the Ld.CIT(A). Upon assessee appeal Ld.CIT(A) noted that assessee s submissions. Ld.CIT(A) repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility and that is the reason such provision was not debited in to profit loss account but was directly reduced rightly form the security premium lying in the reserve and surplus in the Balance Sheet. It is true that the accounting entries are not determinative about the true character of the transaction however, in the present case it was never a case of the appellant company that the accounting entries are wrongly made. The appellant itself mentioned in the audited Financial Statement the liability as a contingent liability and never stated that such treatment in the account was wrongly made. The appellant is a limited listed company and the accounts of the company are published and available in public domain and the Auditors have not objected about the entries were made in the books of accounts about the premium payable on ZCCB, so it is difficult to assume that the accounting treatment is incorrect. This supports the findings already made in para 4.4 above. Further, none of the case law binding over the jurisdiction of Mumbai is applicable in the instant case, relied by the appellant as neither the Hon'ble Supreme Court nor Bombay High Court has ever said that Z ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest was provided, the assessee spread the premium amount over the financial years relevant to A Y 2007-08, 2008- 09. 2009-10, 2010-11, 2011-12 and 2012-13 and claimed the same as deduction. The statement of debit of premium in various years is at page 510- 516 of paper book no 2. The assessee submits that A Y 2010-11 is the first year in which the learned Commissioner of Income Tax (Appeals) has passed speaking order. Except for A Y 2009-10 and 2010-11, appeals for all other years on the said issue are pending before the learned Commissioner of Income Tax (Appeals). In its books of accounts, the assessee debited share premium account and credited provision for premium on ZCCB. The assessee submits that section 78(2)(d) of Companies Act permits such a charge against share premium account. The assessee claimed the same as deduction in computation of total income. The assessee draws attention to computation and financial statements at pages la, 126, 129, 137, 143 and 156 of the paper book. The learned Assessing Officer disallowed the claim for deduction of proportionate premium on ZCCB and the same has been confirmed by the learned Commissioner of Income Tax (Appeals), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nverted into shares in certain specified circumstance, it cannot be said that liability to pay is contingent. It will be appreciated that the liability to pay premium had been incurred the moment funds were raised through bonds. The assessee submits that even on facts, the bonds have not been converted into shares. In this regard, the assessee relies on judgment of Hon'ble Bombay High Court in case of S M Holding 264 ITR 370 and Hon'ble Rajasthan High Court in case of Shree Rajasthan Syntex Ltd 269 ITR 461. In case of S M Holding 264 ITR 370 (Bom), copy enclosed at page 599-601 of Paper book 3, the premium on redemption of debentures was disallowed on the ground that the same is contingent liability. The assessee draws attention to para 5 on page 600 of paper book 3. In case of Shree Rajasthan Syntex Ltd 269 ITR 461 (Raj), copy enclosed at page 551 to 571 of paper book 2, too the contention of the department was that premium is a contingent liability. The Hon'ble High Court has discussed the issue threadbare from page bottom of page 560 to // page 580 and the assessee seeks to draw attention to conclusion in para 10 and 11 on page 579 and 580 of paper b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by ICAI in the notes to accounts. The assessee submits that the amount mentioned in the table below the impugned note is reflected in balance sheet at page 126, in provisions in schedule 10 detailed at page 137 of the paper book. The contingent liabilities are at page 143 and premium on ZCCB is not part of the said schedule of contingent liability. The assessee submits that the premium is correctly reflected in the balance sheet as provision and not reflected as contingent liability. The part extracted by the learned Commissioner of Income Tax (Appeals) is name of AS 29 as given by ICAI and the choice of words are not of the assessee. The assessee submits that proportionate premium on ZCCB claimed as deduction is allowable and prays that the same may be allowed as claimed. 12. Per contra Ld. DR relied upon orders of the authorities below. 13. Further, during the course of hearing, certain quarries were put to the Ld. Counsel of the assessee regarding compliance with provision of companies Act change in stand in income tax computation, Ld. counsel who has submitted following written submission in this regard. Regarding the share premium ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it does not at the commencement of this Act form an identifiable part of the company's reserves within the meaning of Schedule VI, shall be disregarded in determining the sum to be included in the [securities] premium account. 11. The assessee submits that bonds are treated as debentures as per section 2(12) of Companies Act, 1956 which defines debentures as follows: (12) debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not . The assessee submits that though as provided in sub-section (1) of section 78 of Companies Act, 1956, share premium account has to be given similar treatment as share capital and the same cannot be reduced except by due process of law for reduction of share capital, sub-section (2) carves out four exceptions to the same. Clause (d) of section 78(2) clearly provides that premium payable on redemption of debentures can be provided out of share premium account. As per section 2(12), debentures includes bonds. The assessee therefore submits that accounting treatment in books of the assessee of providing premium on redemption Zero Coupon Conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g issue of debentures is allowable as revenue expenditure. Further Page No. 45 of CBDT circular No. 56 has been referred for proposition that the provision for amortization is not intended to supersede any other provision in the income tax law under which the expenditure is allowable as a deduction against profits. Certain case laws have been referred for the proposition that interest/premium can be claimed in the respective year on pro-rata basis. The decision relied upon are as under:- i) Madras Industrial Investment Corporation Ltd. vs CIT 225 ITR 802(SC) ii) National Engineering Industries Ltd. vs. CIT 1236 I TR 577(Cal) iii) CIT vs Tungabhadra Industries Ltd. 207 ITR 553 iv) Taparia Tools, 260 ITR 102 (Bom) Further the submission, as regards the different treatment in books of accounts and income tax computation is that entries made by the assessee in books of accounts are not determinative of the question whether the assessee has earned any profit or suffered any loss. In his regard, decision of Hon ble Supreme Court in the case of Suttej Cotton Mills (supra) and Kedarnath Jute Manufacturing Co.Ltd. (supra) have been referred. Further, it has been ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd. (supra) and ITAT, Mumbai decision in case of Stides Shasun Ltd. ITA NO. 8614/Mum/2011, 08.06.2018 have been referred. 16. In our considered opinion, adverse inference cannot be taken for non deduction of TDS as reasons submitted by the assessee are cogent. As submitted above, these bonds are listed on Singapore Stock Exchange and till redemption on maturity, the beneficiary of the premium is not known. In such circumstances in absence of the identification of recipient and TDS deduction cannot be given credit for. Further, though not directly on this issue the CBDT circular on deep discount bond referred above also provides that on similar issue, TDS has to be deducted on the point of redemption. Furthermore as submitted, at the time of redemption tax was deducted at source in accordance with the provisions of the Act. This submission has not been disputed. Hence, this reasoning for rejection is also not sustainable, 17. Another claim of the authorities is below is that liability is contingent as it depends whether the bonds are converted in equity or not. In this regard, the claim of the assessee is that merely because bonds could be converted into shares in certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d directed the AO to follow the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT where facts of the case are different from those of Supreme Court's decision? Facts 2. During the assessment year in question, the assessee-company had issued zero interest unsecured redeemable convertible debentures of ₹ 100 each redeemable after 10 years at a premium of 100 per cent. These debentures are redeemable after 10 years from the date of allotment at a premium of 100 per cent. Assessee claimed before the AO a spread over, Assessee claimed that the premium payable by it was ₹ 5,47,50,000 after expiry of 10 years. However, the assesses claimed deduction of ₹ 54,75,000 per annum. The said amount was debited to the P L a/c for the accounting year ending 31st March, 1995. In the annual report, a footnote was added that premium on zero interest unsecured redeemable debentures of ₹ 100 each was redeemable after 10 years at a premium of 100 per cent. The AO disallowed the assessee's claim for deduction of ₹ 54,75,000. He added back that figure to the income of the assessee on the ground that the liability w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of 100 per cent had been issued during the assessment year in question. There is no reason for us to discard this note of the auditor. Even in the assessment order, no reasons have been given by the AO for discarding this note of the auditors. Lastly, we may point out that even assuming for the sake of argument that the borrower had a discretion to change the terms of the issued debentures, there is nothing in the record to show that during the assessment year in question the borrower had exercised such a discretion. In the absence of factual matrix; we have no option but to confirm the judgment of the Tribunal. In our view, the judgment of this Court in the case of Taparia Tools Ltd. v. Jt CIT (supra) is applicable to this case. In our view, the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation v. CIT (supra) is also applicable. Order In the circumstances, we answer the above quoted question in the affirmative i.e., in favour of the assessee and against the Department. 6. Accordingly, both the above appeals are disposed of with no order as to costs. 19. We note that in the above case Hon ble Jurisdictional High Court has duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t order. The assessee has filed the return of income wherein certain amount has been disallowed u/s. 14A (1) of the Act. The company has disallowed the following expenses u/s. 14A(1): Nature of expenses Amount Rent 3,00,000 Repairs to computers 15,000 Salary expenses 29,00,993 Electricity and Security Charges 45,000 Telephone Fax Charges 25,000 TOTAL 32,85,993 The assessee has provided the basis of working of disallowance out of actual expenses incurred. The assessee has Identified the other expenses which were incurred to earn exempt Income. The assessee also provided details of interest expenses and corresponding income for which such Interest expenses were incurred. The assessee has identified interest payment and the cause for such payment of interest and corresponding income or receipt thereof. 22. The AO was not satisfied, he was of the opinion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has from its books of accounts identified expenses relating to the said division and quantified the same at ₹ 32,85,993/- and suo moto disallowed the same u/s 14A. The details of the expenditure and basis thereof is extracted at pages 7 to 9 of the assessment order. The learned Assessing Officer, in para 4.5 on page 14, held that it is difficult to accept the hypothesis that only ₹ 32,85,993/- was spent and invoked and disallowed in accordance with Rule 8D. The learned Commissioner of Income Tax (Appeals) in para 10.4 to 10.6 at pages 58 and 59, affirmed the action of the Assessing Officer except that a very small amount of ₹ 29,864/- disallowed out of interest has been deleted. The assessee submits that it has made an honest and scientific approach to identify expenditure incurred to earn exempt income. The assessee submits that over a last few years, it had generated lot of liquidity and a specified treasury department was assigned with the job to invest surplus funds in low risk funds. It will be appreciated that there are many mutual fund schemes where funds are invested in bonds and money market and they are lowest risk funds with very low ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the basis of working of disallowance, however, the same has been rejected by the authorities below without cogent reasoning. The AO and Ld.CIT(A) are mentioning that it is difficult to accept that assessee has incurred only that much of expenditure. This is no reason at all. It is settled law that proper satisfaction is necessary in this regard in rejecting assessee s contentions. In this regard, we note that Hon ble Bombay High court in the case of Bombay Stock Exchange 113 taxmann.com 303 has held as under:- Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of arbitrary approach of applying an interest rate of LIBOR plus 300 basis points based on the Hon'ble Mumbai Tribunal's decision in case of Firestar International Limited (ITA No. 4887Mum72015), without appreciating the facts of the case. 2.4. Without prejudice to above, even if the interest rate is applicable for the loan given to FTME, it should be of 6-months LIBOR rate which is being charged by the appellant to FTME for the same loan from financial year 2009-10. 3. The Ld. AO and / or the Ld. TPO erred in proposing and the Ld. CIT(A) erred in upholding partly adjustment of ₹ 22,90,844/- in respect of issuance of corporate guarantee by the Appellant to FTGIPL, 3.1 The Ld. CIT(A) erred in not appreciating the fact that issuance of corporate guarantee is not covered under the definition of international transaction as provided under section 92BoftheAct. 3.2 The Ld. CIT (A) erred in not considering the fact that corporate guarantee facility is given by the appellant to expand the business operations and achieve overall growth in the business of the appellant itself, the ultimate parent of the group and hence should be considered as a part of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... folio without putting any specific finding about the correctness of working made by the appellant u/s!4A(l) of the Act. 13. Without prejudice to earlier grounds, the Ld. CIT(A) ought to have accepted the alternate plea taken by the appellant to calculate the disallowance u/s 14A at the rate of 1% of dividend income in spirit of decisions of Mumbai Tribunal quoted by the appellant. 14. Without prejudice to earlier grounds, the Learned CIT(A) failed to appreciate that the investments on which no exempt income could be earned during the year and the investments made for strategic purpose cannot be taken into consideration while calculating the amount of average investment for the purpose of computing the disallowance under section 14(2) read with rule 8D of I.T.Rules. 30. At the outset, Ld. Counsel for the assessee submitted that he shall not be pressing ground No.1 to 2. Hence, these issues are dismissed as not pressed. 31. Ground No.3 relates to the issue of corporate guarantee commission. On this issue, the TPO has calculated the ALP @ 6.67. Ld.CIT(A) upon assessee s appeal reduced the same 2% following his decision for AY 2010-11. Against this assessee is in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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