TMI Blog2023 (7) TMI 1148X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed the excess claim of depreciation over and above the excess income - Disallowance of depreciation claimed on vehicles give on finance lease requires to be deleted. Ad-hoc disallowances of support service fee and reimbursement of expenses - HELD THAT:- Considering the fact that the CIT(A) had observed in its order that payment has not been wholly and exclusively for the purpose of business of the assessee without referring to the documents produced by the assessee we are of the opinion that, if the issue involved is remanded to the file of CIT(A) for adjudicating the same afresh after considering all the documents produced by the Assessee, the substantial issue of the assessee is remanded to the file of CIT(A) with a direction to adjudicate the issue afresh after verifying the documents produced by the assessee in accordance with law. Disallowance of bad debts written off - HELD THAT:- As decided in own case [ 2022 (7) TMI 374 - ITAT DLEHI] on a careful consideration of the matter and analyzing the facts in the light of the addition of the Hon ble Apex Court in the case of Vijaya Bank [ 2010 (4) TMI 46 - SUPREME COURT] we are of the considered opinion that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012-13) (Assessee) Re : Disalowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 6,40,98,834jMder_section 14A of the Income Tax Act, 1961 ( the Act ) as against suo-motu disallowance of Rs. 77,45,598 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ( the Rules ) without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied., 1.2 That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act out of interest expenditure without appreciating that no part of borrowed funds was utilized for making any investment. Without prejudice, that on facts and circumstances of the case, the CIT(A)/ assessing officer grossly erred in computing disallowance under section 14A of the Act, inter alia, by wrongly including (a) strategic/ business investments of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of support service fees and reimbursement of expenses 3. That the CIT(A) erred on facts and in law in upholding ad-hoc disallowance to the extent :: Rs. 19,95,37,610 being 25% of support service fees and reimbursement of expenses aggregating to Rs. 79,81,50,441/ (Rs. 63,55,67,850- service fee + Rs. 16,25,82,591- reimbursement of expenses) paid by the appellant to group companies. 3.1. That the CIT(A) erpm on facts and in law in holding that the support service fees and reimbursement of expenses paid by the appellant to group companies are not wholly and exclusively incurred for the business of the appellant and hence not allowable under section 37(1) of the Act. 3.2. That the CIT(A) erred on facts and in law in holding that the aforesaid payments to group companies are made on arbitrary and adhoc basis. 3.3. That the CIT(A)/ assessing officer erred on facts and in law in not appreciating that the appellant had placed on record various documentary evidences/ explanation which clearly justified that the support service charges and reimbursement of expenses paid to group companies were reasonable as well as meant for business purposes of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e u/s 14A r.w.r. 8D upto the dividend received. 2. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of bad debts written off by the appellant of Rs. 89,30,64,775/-. 3. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred in law and facts in deleting the disallowance of interest on compulsorily convertible debentures Rs. 16,35,00,000/- . 2.5. I.T.A. No. 7856/DEL/2017 (A.Y. 2014-15) (Assessee) 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 4,91,93,909/-under Section 14A of the Income Tax Act, 1961 ( the Act ) [restricted to dividend income] as against suo-motu disallowance of Rs. 8,60,028/- made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ( the Rules ) without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied. 1.2 That th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91/ - u/s 14A of IT Act ignoring the mandatory nature of Rule 8D and the binding CBDT Circular No. 5/2014 dated 11.02.2014. 2.7. I.T.A. No. 6116/DEL/2018 (A.Y. 2015-16) (Assessee) Re: Disallowance under section 14A of the Act 1. That the CIT(A) erred on facts and in law in upholding disallowance made by the assessing officer to the extent of Rs. 365,66,026 under section 14A of the Income Tax Act, 1961 ( the Act ) [restricted to dividend income] as against suo-motu disallowance of Rs. 74,01,728 made by the appellant. 1.1. That the CIT(A)/ assessing officer erred on facts and in law in mechanically computing disallowance under section 14A of the Act by invoking provisions of Rule 8D of the Income Tax Rules, 1962 ( the Rules ), without appreciating that conditions precedent for applying provisions of the said Rule as contained in sub-sections (2) and (3) of that section were not satisfied. 1.2. That the CIT(A)/ assessing officer erred on facts and in law in computing disallowance under section 14A of the Act out of interest expenditure without appreciating that no part of borrowed funds was utilized for making any investment. 1.3 Without prejudice, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the suo-moto disallowance of Rs. 77,45,598/-, upheld the disallowance of Rs. 9,65,00,120/- claimed on vehicle given on finance lease and also upheld the ad-hoc disallowance to the extent of Rs. 19,95,37,610/- being 25% of support service fees and reimbursed of expenses, aggregating to Rs. 79,81,50,411/- paid by the Assessee to group Companies. 5. Aggrieved by the above said sustaining of the disallowance the assessee preferred the Appeal in ITA No. 4796/Del/2017 and as against the restriction of the disallowance u/s 14A, deletion of disallowance of bad debts written off and deletion of disallowance of interest on Compulsory Convertible Debentures, the department has preferred Appeal in ITA No. 5202/Del/2017 on the grounds mentioned above in the respective appeals. Disallowance under 14A of the Act 6. Ground No. 1 to 1.5 of Assessee s Appeal in ITA No. 4796/Del/2017 and Ground No. 1 of Departments Appeal in ITA No. 5202/Del/2017 for A.Y 2012- 13 are in respect of disallowance u/s 14A of the Act. The assessee earned dividend income during the year under consideration of Rs. 6,40,98,834/- earned from investment made in shares of Karnataka Bank Limited. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals of the Revenue on the issue in hand. 10. We have heard both the parties and perused the material available on record. It is the specific contention of the Assessee that no disallowance be made out of interest expenditure under Clause (ii) of Rule 8D of the Rule since the investment in share of Karnataka bank Limited has been made out of own funds and the similar issue has came for consideration by the Tribunal in the Assessment Year 2007-08 and 2009-10 in ITA No. 1947/Del/2018 and connected Appeals wherein the Coordinate Bench of the Tribunal has decided the issue in favour of the assessee. We have gone through the order dated 24/08/2020 passed in ITA No. 1947/Del/2018 (Assessment Year 2007-08 and 2009-10), wherein it is held as under:- 3.10. In the case, while disallowing suo-moto expenses towards earning exempted income , the assessee has not taken interest expenditure towards allocation for earning exempt dividend income on the ground that investment was made out of own funds rather than borrowed funds. This claim of the assessee as far as investment in shares of 'Karnataka Bank Ltd' (KBL) of Rs. 35.35 crores, is concerned is found to be acceptable from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net increase in the Fixed Assets and Net Current Assets (Rs.163.92 Crores = Rs. 1.67 Crores + Rs. 162.25 Crores). Thus, based on the judicial principles discussed in Para 6 above, it can be said that the borrowings have been fully utilized for the business purposes and not for the purpose of making investments. Therefore, it can be safely inferred that the question of allocating interest u/s 14A of the Act towards investments in the shares of KBL does not arise. In fact, the internal accrual during the said year is much higher than the amount of investments made in KBL. 3.11 The source of the investment in shares of KBL is out of share application money is also evident from the copy of the bank statement available on page 101 of the Paper-book. 3.12. But, we find that the assessee has also made investment in mutual funds. According to the detail of investment available on schedule to the balance sheet on page 24 and 25 of the paper- book, we find that during the year assessee traded in mutual funds worth ₹ 1545.84 crores. The assessee has not explained source of investment in those mutual funds. In view of the decision of the Hon'ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 2 to 2.4 of the Assessee s appeal in ITA No. 4796/Del/2017 (A.Y 2012-13) is regarding disallowance of depreciation claimed on vehicle given on finance lease. The Ld. A.O. disallowed the excess claim of depreciation over and above the excess income declared amounting to Rs. 9,65,00,120/- and added back to the income of the assessee in following manners:- 3.3. The reply of the assessee has been considered but not found acceptable. The assessee has not been able to furnish the impact of change in accounting method for the last five years. The methodology adopted by the assessee consistently in the past years cannot be changed without mentioning the impact on taxable income for the preceding and subsequent years. The assessee did not answer the specific query raised that what shall be the impact of computation of income if same method of charging depreciation and principal amount be adopted in last 5 years alongwith claiming additional tax withheld. On the other hand the treatment given by the lessee in its books of account and the agreement of the assessee company with the lessee has also not been given. The assessee has not been showing the leased assets in the chart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove the excess income declared amounting to Rs. 9,65,00, 120/- is being disallowed and added back to the income of the assessee. 5.3. The Ld. AR has submitted that pursuant to decision of the Hon'ble apex Court in the case of ICDS Ltd. vs. CIT, Mysore, 350 ITR 527 wherein it was held that it is the lessor is entitled to claim depreciation u/s 32 of the Act in respect of leased out assets, the appellant revised its return of income and claimed depreciation of Rs. 35,07,63,697/- on the cars given on finance lease and offered Rs. 25,42,63,574/- being the principal amount recovered by the appellant from its customers in relation to such cars given on finance lease. 5.4. The appellant company had been consistently following an accounting method as 84 per which the value of assets given on finance lease is shown as a loan recoverable from the lessee. The lease rental amount received by the appellant is split into the principal amount is adjusted against the loan recoverable from the lessee and the interest amount which is credited to the P L Account. Depreciation was not claimed on the assets under finance lease. However, in the revised return of income filed on 26.03.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such certification and verification, the appellant suo moto cannot, revise its accounting method consistently followed over the years to claim depreciation on assets which were never recorded in its books of accounts or write back principal amount of recoveries of loans against these assets to claim additional depreciation. The sanctity of consistency in accounting and the certification by statutory/tax auditors would be given a complete go by if the claim of the appellant is entertained just by filing of revised return. The Hon'ble Apex Court had observed in Radha Soami Satsang vs. CIT, 193 ITR 321 as under: We are aware of the fact that strictly speaking res judicata does not apply to income fax proceedings, again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it allow the position to be changed in a subsequent year. 5.7. In view of the above, l do not find any merit in. the claim of the appellant comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CDS Ltd. vs. CIT. The Hon'ble Supreme Court has reaffirmed the position that in a leasing transaction it is the lessor and not the lessee, who is entitled to claim deprecation on the leased assets. Hence, we are of the opinion that the order of the Ld. CIT(A) is in accordance with law, in the facts and circumstances of the case. We find no reason to interfere with the order of the ld. CIT(A). 16. Following the above ratio, the disallowance of depreciation claimed on vehicles give on finance lease requires to be deleted. Accordingly, the Ground No. 2 to 2.4 of the Assessee s Appeal in I.T.A. No. 4796/Del/2017 are allowed. Ad-hoc disallowances of support service fee and reimbursement of expenses 17. Ground No. 3 to 3.3 of the Assessee s appeal in ITA No. 4796/Del/2017 (A.Y 2012-13) is regarding ad-hoc disallowances of support service fee and reimbursement of expenses. Brief facts of the case are that: During the previous year relevant to Assessment Year 2012-13, the Assessee had paid business support service fee to the following parties:- S.No. Particulars Amount (Rs.) 1 Religar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) directed the assessing officer to re-compute the disallowance under section 37(1) of the Act at 25% of the correct amount of Rs. 79.81 crores. Aggrieved, by the same the assessee raised Ground No. 3 to 3.3 before us in ITA No. 4796/Del/2017 for A.Y. 2012-13. 19. The Ld. Counsel for the assessee has filed detailed submission by explaining the services received from each of the group companies and further submitted that the payment for services made to group entities were in respect of regular business functions which were essential for smooth day to day functioning of any company, it was only reduce cost and enjoy benefit of energy among the group over provisions of support services were centralized rather than each company employing their own resources for similar business functions, thereby leading to overall increase in the group operating cost as a whole. Further submitted that the ld. CIT(A) on the basis of incorrect observation held that the entire expenditure incurred on support service payment cannot be considered to be expenditure incurred wholly and exclusively for the purpose of business within the meaning of Section 37(1) of the Act and thus committed an error in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfra 1168-1220 - Vistaar 1235-1242 - Auriga 1245 20. The Ld. Counsel for the Assessee further submitted that, the CIT(A) in his order nowhere considered or refuted the above evidences placed on record by the assessee and without any basis observed that the payment has not been made wholly and exclusively for the purpose of business of the assessee. 21. The Ld. DR relying on the order of the Lower Authorities justified the observation made by the CIT(A), submitted that in the absence of the materials, the CIT(A) rightly held that the payment has not been made wholly and exclusively for the purpose of business of the assessee. 22. We have heard and perused the documents. Considering the fact that the CIT(A) had observed in its order that payment has not been wholly and exclusively for the purpose of business of the assessee without referring to the documents produced by the assessee (mentioned above), we are of the opinion that, if the issue involved in Ground No. 3 to 3.3 is remanded to the file of CIT(A) for adjudicating the same afresh after considering all the documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee as at the end of the year lying in the Balance Sheet was shown as net of provisions for doubtful debt created by way of debit to the Profit and Loss Account of the year. Learned Assessing Officer disallowed deduction on the ground that the entry made by the assessee was a mere provision and could not be equated with actual write off of bad debts in terms of the section. Ld. CIT(A) and the Tribunal allowed the assessee s claim, but the High Court reversed the order of the CIT(A) and the Tribunal. On appeal by the assessee, Hon ble 8 Apex Court, while reversing the order of the High Court and referring to its earlier ruling in the case of Southern Technologies Ltd. v. JCIT: 320 ITR 577 held that the credit entry in each and every individual debtor s account was not necessary to constitute actual write off of bad debts. Hon ble apex Court explained the impact of Explanation to section 36(1)(vii) and the concept of write off as follows: To understand the above dichotomy, one must understand how to write off . If an assessee debits an amount of doubtful debt to the P L Account and credits the asset account like sundry debtor s Account, it would constitute a writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectfully following the order of the Co-ordinate Bench in Assessee s own case for A.Y. 2010-11 (supra), we find no merit in the Ground No. 2 of the Revenue, for A.Y. 2012-13, A.Y 2013-14 and A.Y 2015-16. Further we find merit in Assessee s Ground No. 3 for A.Y. 2014-15, accordingly, Ground No. 2 of the Revenue in I.T.A. No. 5202/Del/2017, I.T.A. No. 1005/Del/2018 and ITA No. 7553/Del/2018 are dismissed and Assessee s Appeal Ground No. 3 in I.T.A.7856/Del/2017 is allowed. Disallowance of interest on compulsory convertible debentures. 26. Ground No. 3 in Revenue s Appeal in I.T.A. No.5202/Del/2017 for A.Y. 2012-13 is regarding disallowance of interest on compulsory convertible debentures. During the year under consideration, the Assessee had issued and allotted 1500, 10.90% Compulsory Convertible Debentures ('CCDs'), having face value of Rs. 1,00,000 each, aggregating to Rs. 150 crores to its holding company, viz. M/s. Religare Enterprises Limited vide the Subscription Agreement dated 30/03/ 2011. The assessee claim to have incurred interest expenditure of Rs. 13,75,19,178/- in respect of the aforesaid debentures. The said amount was paid by the assessee to Religa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein the CIT(A) has taken into account of the order passed by its predecessor for the Assessment year 2012-13 and taken a contrary view, which requires no interference. 31. Per contra, the ld. Assessee's Representative submitted a detailed written submission on the above issue and also relied on various judicial pronouncements to support the contentions of the Assessee. The Ld. AR submitted that the assessee duly withheld tax @ 10% under section 194A of the Act on such interest on CCD and the aforesaid interest aggregating to Rs. 13,75,19,178/- received by REL has been credited to its profit and loss account and was duly included in the taxable income for assessment year 2012-13. Further submitted that the two instruments viz., debenture and shares are mutually exclusive, with separate rights and obligations of both the issuer company and the subscriber, for instance, instrument of debenture is an evidence of existence of a debt with the issuing company. Unlike, debentures, instruments in the nature of shares (be it equity or preference) is not in the nature of debt, but form part of the permanent capital of the company, entitling the holder to certain preferential rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le or not. The said issue regarding allowability of interest paid on Compulsory Convertible Debenture is no longer res-integra. 33.1. The Hon ble Rajasthan High Court in the case of CIT Vs. Secure Meters Ltd. 321 ITR 661 held that the expenses incurred on issue of debentures, whether convertible or not, were deductible as business expenditure under section 37(1) of the IT Act. The Court held that the debenture when issued is a debt, and therefore, whether it is convertible or non-convertible does not militate against the nature of the debenture. The relevant extracts from the judgment is reproduced hereunder: At this stage it was contended by the learned counsel for the revenue, that a distinction should be drawn between the convertible, and non-convertible debentures, inasmuch as if the debenture is converted into shares, then it partakes the character of capital, and in that event, the expenditure would not be revenue expenditure, and would be capital expenditure. Learned counsel for the assessee informs, that though it has not come on record so far, but as a matter of fact the debentures issued were of convertible nature. Then, the learned counsel for the assessee argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in connection with the issue of debentures or obtaining loan is revenue expenditure. Reference in this connection may be made to the leading judgment of the Supreme Court in India Cements Ltd.v. CIT [1966] 60 ITR 52. The question before us however, is whether it is a debenture issue or an issue of share capital involving the strengthening of the capital base of the company. Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue, we are not inclined to take a different view. (emphasis supplied). 33.3. The similar views have been expressed on the issue of CCDs/OCDs were held to be allowable revenue deduction in following judicial pron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been noticed that some Indian companies are raising funds under the FDI route through issue of hybrid instruments such as optionally convertible/partially convertible debentures which are intrinsically debt-like instruments. Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country. It is clarified that henceforth, only instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy and eligible to be issued to persons resident outside India under the Foreign Direct Investment Scheme in terms of Regulation 5 (1) of Foreign Exchange Management (Transfer and Issue of shares by a Person Resident outside India) Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000. 36. On bare perusal of the above circular, it does not re-characterized convertible debentures into equity. The Circular deems CCDS as part of equity/capital merely for the purpose of keeping check on measures used to circumvent the frame work for regulating debt flow in the country. The ITAT Tribunal Bangalore Bench while dealing with the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed and it cannot be disallowed by saying that CCDs are equity and not debt. We hold accordingly. This issue is decided. Apart from relying on this decision of Special Bench of the Tribunal, the ld. DR of revenue in written submissions as reproduced above has mainly reiterated the same arguments which are adopted by the TPO in its order i.e. regarding RBI Master Circular on Foreign Investment in India dated 02.07.2007 and 01.07.2008. We would like to observe that such circular in the context of FDI policy of RBI is in a different context i.e. regarding future re-payment obligations in convertible foreign currency and to have control over such future repayment obligations, the RBI is exercising strict and control so that such future re-payment obligations does not go beyond a point and since in the case of fully convertible debentures, there is no future re-payment obligation, the same was considered as equity for the purpose of FDI policy. In our considered opinion, any definition of any term is to be considered keeping in mind the context in which such definition was given. This definition of convertible debentures given by RBI is in the context of FDI pol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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