July 23rd, 2019 Date of pronouncing the order - | Taxsutra

IN THE INCOME TAX APPELLATE TRIBUNAL

KOLKATA ‘C’ BENCH, KOLKATA

(Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Viswanethra Ravi, Judicial Member)

I.T.A. No. 989/Kol/2017 Assessment Year: 2011-12

Assistant Commissioner of Income Tax, Circle-10(2), Kolkata.……....…………....………....Appellant

Vs.

M/s. Philips Carbon Black Ltd..........……………………………………………………………………..Respondent Duncan House 31, N.S. Road Kolkata – 700 001 [PAN : AABCP 5762 E]

Appearances by: Shri Akkal Dudhewala, ACA, appeared on behalf of the assessee. Dr.P. K. Srihari, CIT, Sr. D/R appearing on behalf of the Revenue. Date of concluding the hearing : July 23rd, 2019 Date of pronouncing the order : August 14th , 2019

ORDER

Per J. Sudhakar Reddy, AM :-

This appeal filed by the revenue is directed against the order of the ld.

Commissioner of Income Tax (Appeals) - 22, (hereinafter the ‘ld. CIT (A)’), passed u/s

250 of the Income Tax Act, 1961 (the ‘Act’), dt. 24/02/2017, for the Assessment Year

2011-12.

2. The assessee is a company and is engaged in the business of manufacture and

sale of carbon black and sale of surplus power generated from carbon black

manufacturing process. It filed its return of income on 30/09/2011, declaring Nil

income. Thereafter it filed a revised return of income on 28/09/2012 declaring Nil

income under the normal provisions of the Act and computing book profits of

Rs.164,30,74,568/- u/s 115JB of the Act. The Assessing Officer completed assessment

u/s 143(3)/144C of the Act on 10/03/2015 determining the total income of the

assessee at Rs.24,43,36,070/- under the normal provisions of the Act. Aggrieved the

assessee carried the matter in appeal. The ld. First Appellate Authority granted part

relief.

3. Aggrieved the revenue is in appeal before us on the following grounds:-

1) That the Ld. CIT(A) has erred in law as well as on fact by deleting the disallowance of Rs. 7,47,05,874/- made on account of additional depreciation on energy saving devices.

2 I.T.A. No. 989/Kol/2017

Assessment Year: 2011-12 M/s. Philips Carbon Black Ltd.

2) That the Ld. CIT(A) has erred in law as well as on fact by deleting the disallowance of Rs. 1,63,89,000/- made u/s. 14A of the LT. Act, 1961.

3) That the Ld. CIT(A) has erred in law as well as on fact by deleting the disallowance of Rs. 7,42,95,874/- made on account of foreign exchange fluctuation on unexpired foreign exchange contract.

4) That the Ld. CIT(A) has erred in law as well as on fact by deleting the disallowance of Rs. 92,47,215/- made on account of amortization of recruitment expenditure.

5) That the Ld. CIT(A) has erred in law as well as on fact by deleting the disallowance of Rs. 12,987/- made u/s. 2(24)(x) of the LT. Act, 1961.

6) That the appellant craves to add, delete or modify any of the grounds of appeal before or at the time of hearing.”

4. We have heard rival contentions. On careful consideration of the facts and

circumstances of the case, perusal of the papers on record, orders of the authorities

below as well as case law cited, we hold as follows:-

5. Ground No. 1 is against the disallowance of additional depreciation on energy

saving devices. We find that there are no additions during the year to the block of assets

where the rate of depreciation is at the rate of 80%. The assessee has claimed the

depreciation on the opening written down value as on 01/04/2010. The ld. CIT(A) at

para 2 & 3 of his order at page 22 & 23 held as follows:-

“2. On critical examination of the contentions advanced by the Ld. A.Rs for the appellant, as well as the judicial precedents and case laws relied upon by the Ld. A.Rs, it is to be observed that there is very little merit in the objections as discussed by the Ld. AO in the impugned assessment order. At the very outset, I find that the addition to plant and machinery generating power was made in the FY 2009-10 relevant to AY 2010-11 and the machineries were used for period less than 180 days. In view of proviso second proviso to Section 32(1)(ii) of the Act, the claim of additional depreciation was restricted to 50% of the amount normally permissible under Section 32(1)(iia) of the Act. From the details furnished I find that in the year in which the co-generation systems generating power was installed and put to use, the assessee's claim for additional depreciation u/s 32(1)(iia) at 50% of the normal amount was allowed by the Ld. AO in the order passed u/s 143(3). I therefore find that in the year of "installation and put to use", the Ld. AO did not question the allowability of claim for additional depreciation on the ground that the plant & machinery was not used in the business of manufacture or production of an article or thing.”

5.1. Later he quoted the order of the jurisdictional Bench of the ITAT in the case of

Damodar Valley Corporation vs. CIT (160 ITD 78) and upheld the claim of the assessee.

We find no infirmity in the same. The submissions of the ld. D/R that this case-law does

not refer to a period prior to 01/04/2013, the date on which the amendment has come

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into effect, is not correct. Hence, we uphold the findings of the ld. CIT(A) and dismiss

this ground of the revenue.

6. Ground No. 2 is on the disallowance u/s 14A r.w.r. 8D. This Bench of the Tribunal

in the assessee’s own case for the Assessment Year 2009-10 and 2010-11 in I.T.A. Nos.

1273 & 1274/Kol/2015, order dt. 04/07/2018, has upheld the deletion of the

disallowance made by the Assessing Officer for these Assessment Years on similar facts.

The ld. CIT(A) at para 18 page 49 to 52, considered the issue and decided the matter in

favour of the assessee. For the proposition that, when the assessee has both interest

bearing/and interest free funds, the presumptions is that interest free funds have been

utilised for making investments in exempt income yielding assets, the ld. CIT(A) relied

on the following case-law:-

CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom.)

CIT vs. HDFC Bank (383 ITR 529 (Bom.))

CIT vs. Rasoi Ltd. (ITA No. 109 of 2016) dated 15/02/2017

6.1. The ld. CIT(A), on facts held that the assessee company has duly discharged the

onus by proving that loan funds were utilised for business purpose and not for making

any investments. This factual finding of the ld. CIT(A) could not be controverted by the

ld. D/R.

Similarly, at para 7, 8 & 9, he held as follows:-

“7. The appellant has further argued that before disallowing 0.5% of the average investments by way of administrative expenses incurred allegedly in relation to earning of exempt Income, the Ld. AO did not identify any specific item of expenditure which he found to be relatable to earning of tax free income. The appellant submitted that the dividend was received by the ECS mode wither incurring any collection or bank charges. According to the Ld. A.Rs for the appellant, whatever little administrative expenses incurred for accounting of the income, did not amount to Rs.23.85 lacs. Instead in the appellant's view the disallowance of RS.3,30,170/- offered by it was sufficient and reasonable Alternatively the appellant claimed that even if the disallowance is to be made in accordance with Rule 80(2)(iii), then the average value of investments for the purposes of the Rule be restricted to the opening & closing ·value of investment which actually yielded dividend income during the year. 8. I have examined the claim of the appellant and the various judicial precedent cited before me in support of the appellant's claim. The dividend income derived by the appellant during the year and claimed as exempt u/s 10(34)/(35) was Rs.2,10,14,162/-. In my considered view the disallowance of Rs.3,30,170/- offered by the appellant towards earning of such dividend income could not be said to be sufficient. In absence of the exact quantification of the administrative expense which were incurred for earning of dividend income, I hold that the Ld. Assessing Officer invocation of application of Rule 80(2)(iii) was justified proper. It is however observed that the Hon'ble ITAT, Kolkata in

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the case of REI Agro Ltd Vs DCIT (144 ITD 141) has held that for the purposes of Rule 80 the 'average value investments' should comprise only of investments which actually yielded dividend income in the relevant year. I note that the decision of the Hon'ble ITAT, Kolkata has since been upheld by the Hon'ble Calcutta High Court in ITA No. 220 of 2013. The Hon'ble Gujarat & Allahabad High Courts in the cases of CIT Vs Cortech Energy Pvt. Ltd (223 taxman 130) and CIT Vs Shivam Motors (P) Ltd (230 Taxman 63) similarly held that when no dividend income was earned from the investments during the year, then no disallowance can be made u/s 14A of the Act with reference to cost of such investments. Applying the ratio laid down in the foregoing judicial decisions, the disallowance of Rs.23.85 lacs made by the AO is set aside. The appellant has provided a statement giving the working of the disallowance in accordance with Rule 80(2)(iii) with reference to the dividend yielding investments. From the statement provided by the appellant, I note that the disallowance warranted under Rule 8D(2)(iii) works out to Rs.9.42 lacs. The AO is accordingly directed to restrict the disallowance under Rule 8D(2)(iii)to Rs.9.42 lacs. 9. In view of the above, the disallowance of Rs.9.42 lacs stands confirmed u/s 14A of the Act.”

6.2. We uphold these findings and dismiss this ground of the revenue as the factual

findings of the ld. CIT(A) have not been controverted by the ld. D/R.

7. The next ground is on the issue of deletion of disallowance of foreign exchange

fluctuation loss claimed by the assessee. The ld. D/R submits that, the fact whether the

loss in question, was on revenue account or capital account was neither examined by the

Assessing Officer nor the ld. CIT(A) prior to applying the propositions of law laid down

by the Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor India (P)

Limited [2009] 312 ITR 254 (SC). In reply, the ld. Counsel for the assessee submitted that,

the entire foreign exchange fluctuation loss was on account of export credit and the

details relating to the same were filed before the Assessing Officer. He pointed out that

copies of the same are placed at pages 124 to 127 of the paper book. An examination of

these details, we find that these demonstrate that the loss in question is incurred in the

revenue field. He further submitted that the issue is covered in favour of the assessee by

the decision of the Kolkata Bench of the Tribunal in the assessee’s own case for the

Assessment Year 2009-10 & 2010-11.

7.1. After hearing rival contentions, we find that the ld. CIT(A) had considered the

issue from pages 34 to 38 of his order and at para 10 held as follows:-

“10. I further note that exactly same issue had also arisen in appellant's own case in AY 2009-10. In that year the Ld. AO had disallowed the loss booked by the appellant on MTM of the open forward contracts lying outstanding as on 31.03.2009. On first appeal, the Ld. CIT(Appeals)-4, Kolkata in Appeal No. 113/CIT(A)-4/Range- 10/14-15 dated 27.07.2015 after due consideration of the facts of the appellant's case and judicial

5 I.T.A. No. 989/Kol/2017


precedents available on the said subject, held that the MTM loss recognized at the year-end with reference to unrealized forward contracts was in the nature of real loss and therefore allowable as deduction from the profits of the business. I find that the facts & circumstances involved in this ground is identical to that of AY 2009-10, as also that that there is neither any change in the factual matrix nor in the legal provisions of the Income-tax Act, 1961. In the circumstances following the appellate order passed by the Ld.CIT(Appeals) in appellant's case for AY 2009-10 and also for the reasons set out in the foregoing therefore, the disallowance of Rs.7,42,95,873/- is deleted, and the ground of appeal is allowed.”

7.2. The decision of the ld. CIT(A)-4, for the Assessment Year 2009-10, was upheld by

this Bench of the Tribunal in ITA No. 1273 & 1274/Kol/2015 order dt. 04/07/2018. On

facts we are convinced with the evidence furnished by the assessee in support of its

claim. Consistent with the view taken therein we uphold the order of the ld. CIT(A) and

dismiss this ground of the revenue.

8. The next ground is disallowance of recruitment expenses. After hearing rival

contentions we uphold the contentions of the assessee that under the matching concept,

the expenses have to be allowed during the year. The Assessing Officer disallowed the

recruitment expenses by holding that, disallowed amount shall be allowed in nine (9)

equated annual installments, thus, treating these expenses as deferred revenue

expenditure.

8.1. The ld. Counsel for the assessee argued that the concept of deferred revenue

expenses is not contemplation under the Act and that in case the expenditure is treated

as deferred expenditure, then under the material concept, the income should also be

deferred. He relied on the order of the Hon’ble Delhi High Court in the case of CIT vs.

Vodafone Essar South Ltd. [2015] 55 taxmann.com 289 (Delhi), wherein from para 19 to

23, it has been held as followed:-

“19. The first appellate authority has referred to the distinction between capital and revenue expenditure but did not disturb the final finding of the Assessing Officer that the expense was revenue in nature. Therefore, the discussion distinguishing capital and revenue expenditure was superfluous and inconsequential. When an expenditure is revenue in nature and not capital, then provisions of Section 37(1) of the Income Tax Act, 1961 (Act, for short) would come into play and the expenditure which qualifies and meets the requirements of the said Section has to be allowed as a deduction. It is in these circumstances that the Tribunal has allowed the appeal of the assessee, observing as under:—

'24. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the AO has himself treated the same expenditure as deferred revenue expenditure. AO had allowed 20% during the year and rest is to

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be spread over in the succeeding 4 years. Ld. Counsel of the assessee in this regard submitted that there is no concept of deferred revenue expenditure in taxation laws and expenditure has either to be capitalised or revenue. He has submitted that in this case the AO has not made out the case that the expenditure involved is capital in nature. Ld. Counsel of the assessee submitted that brand launch expenses incurred in the pre- operative period has been added to the pre- operative expenses. He further submitted that the Hon'ble Apex Court decision in the case of Madras Industrial Investment Corporation vs. CIT. (Supra) is not applicable on the facts of the case. In this regard, Ld. Counsel of the assessee referred to decision of this tribunal in ACIT vs. Global Healthline P Ltd. passed in ITA NO. 3319/Del/2012 vide order dated 7.9.2012. In this case, the tribunal has held as under :-

"6. We have heard the rival contentions and perused the records. We find that the case law relied upon by the Assessing Officer in the case of Madras Industrial Corporation Ltd, vs. CIT, 225 ITR 802 is not applicable on the facts of the present case. In the aforesaid case the said Corporation issued debentures in December, 1966 at a discount. The total discount on the issue of 1.5 crores amounted to 3,00,000/- for the assessment year 1968-69. The company wrote off 12,500/- out of the total discount of 3,00,000/-being the proportionate amount of discount for the period of six months ending 30.6.1967 taking into account the period of 12 years which was a period of redemption and discount for 3,00,000/- over the period of 12 years. In these circumstances, the expenditure was held to be deferred revenue expenditure. Hence, we agree with the Ld. Commissioner of Income Tax (A) that the Hon'ble Apex Court's decision in the case of Madras Industrial Corporation Ltd. vs. CIT. (Supra) does not help the case of the Revenue. In our considered opinion, there is no concept of 'deferred revenue expenditure' in the Income Tax Act. The expenditure is either 'revenue' in nature or 'capital'. If the expenditure is of revenue nature and is incurred wholly or exclusively for the purpose of business and has been incurred during the year, the same is allowable expenses subject to condition laid down in Section 30 to Section 37 of the Act. Accordingly, we hold that the impugned expenditure was allowable as Revenue expenditure and hence, we do not find illegality in the order of the Ld. Commissioner of Income Tax (A). Accordingly, we uphold the same."

25. We have carefully considered the submissions. We find that the assessee in this regard has incurred expenditure which are in the nature of brand launch expenses. We note that the said expenditure incurred upto the pre operative period has been capitalised and expenditure incurred after the operation has started have been debited to revenue. AO in this regard, has allowed 20% thereof by treating the same as deferred revenue expenditure. We agree with the contention of the assessee's counsel that there is no concept of deferred revenue expenditure in taxation laws. In the matter of taxation, expenditure is either to be capitalized or is revenue in nature. In this case the expenditure involved is revenue in nature and has been incurred wholly and exclusively for the purpose of business. The amount has actually been incurred by the assessee as such the same is allowable in the entirely. The case law of the Hon'ble Apex Court by the Ld. CIT(A) was in a different context and hence is not applicable, as has been brought out in the tribunal order as above. In the background of the aforesaid discussion and precedent, we set aside the orders of the authorities below and decide the issue in favor of the assessee.'

20. The aforesaid reasoning of the Tribunal is in consonance and as per the ratio in CIT v. Industrial Finance Corpn. of India Ltd. [2009] 185 Taxman 296 (Delhi) wherein it has been held:—

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"22. The judgments on which reliance is placed by the learned Counsel for the Revenue would be of no avail in the instant case. The learned Counsel for the Revenue had strongly argued that matching concept is to be applied, as per which part of the expenditure had to be deferred and claimed in the subsequent years and, therefore, approach of the AO was correct. However, this argument overlooks that even in Madras Industrial Investment Corporation (supra), on which the reliance was placed by Ms. Bansal, the general principle stated was that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business can be allowed in the year in which it is incurred. Some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time as was justifying such spread. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilize the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned Counsel for the Revenue herself:

'The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirely in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. Commissioner of Income Tax, Calcutta-I : (1983) 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."

23** ** **

24. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be

8 I.T.A. No. 989/Kol/2017


allowed only if the principle of matching concept is satisfied, which upto now has been restricted to the cases of debentures."

21. Similarly, this Court in ITA No. 597/2014, CIT v. Spice Distribution Ltd. has held as under:—

"4. The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in Commissioner of Income Tax Vs. Pepsico India Cold Drink Ltd. in ITA No. 319/2010, decided on 30.03.2011 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corporation Vs. Commissioner of Income Tax, 225 ITR 802 (SC) was examined and it was observed that the assessee is entitled to claim deferred revenue expenditure but the Assessing Officer cannot treat the revenue expenditure as deferred revenue expenditure. The reason is that the Act itself does not have any concept of deferred revenue expenditure. Even otherwise, there are a number of decisions that the advertisement expenditure normally is and should be treated as revenue in nature because advertisements do not have long lasting effect and once the advertisements stop, the effect thereof on the general public and customer diminishes and vanishes soon thereafter. Advertisements do not leave a long lasting and permanent effect in the sense that the product or service has to be repeatedly advertised. Even otherwise advertisement expense is a day to day expense incurred for running the business and improving sales. It is noticeable that every year, the respondent-assessee has been incurring substantial expenditure on advertisements. The Assessing Officer, in the assessment order, had referred to the fact that similar additions were also made in the Assessment Year 2008-09. Keeping in view the nature and character of the respondent-assessee's business, very year expenditure has to be incurred to make and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in Commissioner of Income Tax Vs. Salora International Ltd., [2009] 308 ITR 199 (Delhi) and Commissioner of Income Tax Vs. Casio India Ltd., [2011] 335 ITR 196."

22. Referring to the said legal position, this Court recently, in CIT v. SBI Cards & Payment Services (P.) Ltd., [IT Appeal No. 603 of 2014, dated 29-9-2014] observed :—

"16. … Section 145 postulates that accounts should give true and fair picture of the financial position or the income of the assessee. It is further noticeable that the Act i.e. the Income Tax Act, 1961 only refers to capital or revenue expenditure. There is no provision in the Act which postulates or refers to deferred revenue expenditure. Deferred revenue expenditure is, therefore, not as such recognised in the Act. The Act to this extent is at variance and does not accept deferred revenue expenditure as a plausible and acceptable method. Accounting principles or standards have to be applied and adopted and they must disclose fair and true financial position and the income, but they cannot be contrary to the provisions or the mandate of the Act. The Act would then override the accountancy principles. There are several provisions in the Act like Section 43B which provide for different treatment than required under the provisions of the Companies Act or the accounting principles or standards. Reference can be made to Kedarnath Jute Mfg. Co. Ltd. Versus CIT, (1971) 82 ITR 363 where it was held:

"… We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being

9 I.T.A. No. 989/Kol/2017


allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which 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. …"

In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR 172 at page 184, it was observed,

"It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S.C. Footwear Ltd. v. Ridway (Inspector of Tanes) [(1970) 77 ITR 857 (CA)], the Income Tax law does not march step by step in the footprints of the accountancy profession."

It was held by the Bombay High Court in Commissioner of Income-Tax versus Bhor Industries Limited (2003) 264 ITR 180,

"… If (sic, It) is well settled that, ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years. It is only in cases of special type of assets that the spread over is warranted. …"

Judgment of the Supreme Court in Madras Industrial Investment Corp. (supra) was considered and distinguished in CIT vs. Panacea Biotech Ltd., ITA No. 22 & 24/2012 and CIT vs. Citi Financial Consumer Fin Ltd. (2011) 335 ITR 29 (Del.), holding that the assessee's claim to spread over the expenditure over a period of time is tenable provided it is justified as in the case of issue of bonds at a discount. However, the same principle would not apply if the assessee treats the same as revenue expenditure and in fact per Section 37(1) of the Act, the expenditure is revenue in nature and has been incurred or has accrued. This right to claim deferred revenue expenditure is given to the assessee and not to the revenue. In the facts of the present case, as already noticed, the expenditure as per the Commissioner of Income Tax (Appeals) should be partly spread over two years, instead of the year in which it was incurred. But it is accepted and admitted that the expenditure in question was revenue in nature. It had accrued and was paid. Nothing and no acts had to be performed and undertaken in future. It is not shown how and why, if the said expenditure was allowed in the current year, it would not reflect true and correct financial position or income of the assessee in the current assessment year."

23. In view of the aforesaid discussion, we do not find any merit in the present appeal and the same is dismissed.

9. The Hon’ble Supreme Court in the case of Taparia Tools Ltd. vs. CIT [2015] 372

ITR 605 (SC), held as follows:-

“Normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the department cannot deny the same. However, in those cases where the assessee

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himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'matching concept' is satisfied, which up to now has been restricted to the cases of debentures.

In the instant case, the assessee did not want to spread over of this expenditure over a period of five years as in the return field by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permits the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act.”

9.1. As the order of the ld. CIT(A) is in consonance of the propositions of law laid

down in the above case-law, we uphold the same and dismiss this ground of the

revenue.

10. The next issue that arises is the deletion of disallowance of delayed contribution

of EPF/ESI.

11. As the amounts in question have been paid by the assessee before the due date of

filing of the return u/s 139(1) of the Act, the ld. CIT(A) rightly followed the decision of

the Hon’ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. 319 ITR 306 (SC)

and deleted the addition. Thus, this ground of the revenue is dismissed.

12. Ground No. 7 to 11, are on the issue of TP Adjustment on account of

recharacterisation of equity as loan.

12.1. The ld. CIT(A) at para 24 page 63 of his order held as follows:-

“1. I have carefully examined the submissions placed by the Ld. A.Rs for the appellant- company along with other details furnished. I have also perused the observations and findings recorded by the Ld. TPO for recommending the adjustment of Rs.2,47,43,123/- with respect to transaction involved in subscription of shares by the appellant of its AE, PCBL Cyprus. On perusal of the submissions of the appellant and the order of the Ld. TPO, on facts it is seen that that the appellant- company had set-up a wholly owned subsidiary in Cyprus. In the year under consideration the appellant had subscribed to the shares of such foreign company and paid sum of Rs.2994.36 lacs. From the details furnished, I find that the assessee was allotted shares having Face Value of Euro 1 per share at a premium of Euro 367.05 per share. In support of the investment made in the foreign subsidiary, the Ld. A.Rs have furnished the copy of the approval /no-objection certificate issued by the Reserve Bank of India under the FE MA laws. Referring to these documents, the Ld. A.Rs have submitted that the permission was granted by the RBI to subscribe to the capital of the foreign subsidiary and it was not a case where permission was granted to advance loans to foreign subsidiary in lieu of receiving or earning interest income. The Ld. A.Rs also submitted that appellant's transaction with foreign AE towards subscription of

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shares was reported by its auditor in Form 3CEB out of abundant caution even though it firmly believed that the transaction in question did not come within the purview of Chapter-X requiring the assessee to establish that the shares were acquired on arm's length principle. In the course of assessment however the Ld. AO made a reference to the Ld. TPO and the reference was made with regard to the appellant's transaction of acquiring shares of AE in Cyprus. On perusal of Ld. TPO's order, it seen that in his opinion, the assessee's transaction of equity shares of AE in Cyprus was an 'international transaction' which was required to be bench marked on arm's length principle. Accordingly, the Ld. TPO has embarked on conducting enquiry and for the reasons set out in his order, he held that the arm's length price of the equity shares of PCBL, Cyprus was Euro 3.06 per share as opposed to Euro 368.05 per share paid for by the appellant. Since the Ld. TPO found that the appellant paid excessive price for subscribing to the equity capital of AE, he held that the amount paid in excess of ALP was in the nature of 'loan' given by the appellant to its AE which ought to have yielded the appellant interest income @ 20%.

2. In the submissions made by the Ld. A.Rs both in writing as well as orally, it has been vehemently objected to the TPO's order by raising several grounds. The Ld. A.Rs have pointed out that the question as to whether subscription to equity capital in AE constitutes international transaction or requires any adjustment on account of ALP is no longer res integra in view of the judgment of the Hon'ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. v. Union of India (50 taxmann.com 300) & Shell India Markets (P) Ltd Vs Asst. CIT, LTU (51 taxmann.com 519). The Ld. A.Rs also relied on the CBDT Instruction No. 2/2015 [F.NO.500/15/2014-APA-I], dated 29-1-2015 wherein the Board clarified that it had accepted the decisions of the Hon'ble Bombay High Court and accordingly directed the field officers not to act contrary to the decisions of the Hon'ble Bombay High Court.

3. After carefully analyzing these decisions and after perusing the documents record, I find that in the present case the assessee-company was given requisite permission by the RBI for remitting the funds in foreign exchange for acquiring shares in its foreign subsidiary incorporate in Cyprus. Reserve Bank of India is the regulatory authority and the assessee's foreign currency transactions were liable to be governed by the provisions of FEMA and subject to rules & approvals formulated by RBI. In the circumstances once the appellant had obtained permission for remitting the funds for acquiring shares in the wholly owned foreign subsidiary, the TPO could not unilaterally change the character of the investment from 'capital' to 'loan'. There is no statutory authority or power entrusted to the Ld. TPO to re-classify or re-characterize the instrument in which the investment was made, therefore find force in the Ld. A.Rs' submissions that in the guise of determining the ALP of the equity shares, the Ld. TPO exceeded his brief as well as jurisdiction by re-characterizing part of the investment made in equity shares into loans. In my considered view of the matter, this was not permissible under Chapter X of the Income-tax Act, 1961.

4. I further find that the manner in which the Ld. TPO / AO proceeded to estimate the income which the appellant ought to have earned from the component of loan was also based on no cogent material and the adjustment proposed in his order was without jurisdiction. I find that in fact, on similar facts the Hon'ble Bombay High Court had disapproved the Ld. TPO's order proposing adjustment on account transaction involving issuance of share capital in the case of Vodafone India Services Pvt. Ltd. v. Union of India (supra). In the case

12 I.T.A. No. 989/Kol/2017


before the Bombay High Court, the assessee which was an Indian Company had issued shares to foreign holding company carrying face value of Rs.l0 each at a premium of Rs.5509 per share. This transaction involving allotment of equity capital was referred by the Ld. AO u/s 92CA(2) to the Ld. TPO. The Ld. TPO after examining the transaction determined the fair market value of each equity share at Rs.53,775 as against the value of Rs.5,519 determined by the assessee. The shortfall to the extent of Rs.45,256 per share was deemed to be the income of the appellant According the Ld. TPO computed deemed income of RS.1305.91 crores. The Ld. TPO further held that since such sum remained unpaid by the foreign share subscriber, it deemed it to be 'loan' advanced by the assessee to its AE and therefore imputed further interest income of Rs.88.35 crores thereon. On appeal the Hon'ble Bombay High Court held that income arising from an international transaction is subject to the provisions of Chapter X of the Act. The Hon'ble Court observed that the term 'income' has to be understood as per the provisions of Section 2(24) of the Act and therefore capital receipts/ transactions will not fall within the ambit of 'income. The Hon'ble Court thus held that the amount received on issue of share capital including the premium is undoubtedly on capital account. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as 'income'. The Hon'ble High Court therefore agreed with the assessee's case that capital receipts received by the assessee on issue of equity shares cannot be considered as 'income' and therefore cannot be subject to provisions of Chapter X of the Act. Even though the decision of the Hon'ble Bombay High Court in the context of investment made by foreign holding company in its Indian subsidiary; in my considered view, the ratio decidendi in that decision will equally apply to the appellant's case which is an Indian holding company of its Cyprus subsidiary. The principle culled from the judgment of the Hon'ble Bombay High Court which has since been accepted by the CBDT in its Instruction No. 2/2015 [F.NO.500/15/2014-APA-I], dated 29-1-2015 which is reproduced below:

"In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. for A. Y. 2009-10 (WP No. 871/2014), wherein the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment.

2. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgment, it is directed that the ratio decidendi of the judgment must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CIT (Appeals)."

5. For the reasons set out above and applying the judgments cited above and also the Board’s Instruction, I hold that the addition of Rs.2,47,43,213/- made in the impugned order is legally unsustainable and the same is deleted. The ground accordingly stands allowed.”

12.2. This decision is in line with the propositions of law laid down by the Hon’ble

Delhi High Court in the case of Pr CIT vs. PMP Auto Components (P) Ltd. [2019] 103

taxmann.com 284 (Bombay), wherein it is held as follows:-

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“3.1 We shall now deal with individual question raised for our consideration.

4. Regarding Question No.A,

(a) The issue raised in this question is with regard to respondent investing an amount of Rs.2.67 Crores to acquire shares of its AE (subsidiary company), which had a fair market value of Rs.8.19 lakhs. It is this excess payment of Rs.2.58 Crores, when compared to fair market value of the shares which is sought by the Revenue to be brought to tax under the transfer pricing provisions under Chapter X of the Act.

(b) The impugned order of tribunal rejected the contention of revenue on the ground that this issue stands concluded by the decision of the jurisdictional high court in the case of Vodafone India Services (P.) Ltd. (supra). In the above case this court held that investment in shares is on capital account and does not give rise to any income to trigger the provisions of Chapter X of the Act.

(c) Mr. Suresh Kumar, learned Counsel appearing in support of the appeal submits as under:-

(i) The transaction is an international transaction and, therefore, the transfer pricing adjustment is required to be done in terms of Chapter X. It is submitted that the additional investment of capital by respondent in its AE's shares vis-a-vis its fair market value is subject to transfer pricing adjustment as done by the TPO and upheld by DRP;

(ii) The decision of this Court in Vodafone (supra) is in (since-not) applicable to the present facts, as it was concerned with inbound investment and was not in respect of out bound investment, as in this case; and

(iii) In any case the investment made in shares if sold in subsequent years, may give rise to potential loss. This when the respondent sells the shares which have been purchased at a price much higher than its fair market value. Thus, this difference has to be brought to tax as sought to be done by the Revenue.

Therefore, it is submitted that the appeal should be entertained and allowed.

(d) There is no dispute before us that the transaction of purchase of shares by the respondent of its subsidiary company i.e. A.E. at a price much higher than its fair market value would be international transaction as defined in Section 92(B) of the Act. The only issue before us as considered by the impugned order of the Tribunal is whether Chapter X of the Act would at all be applicable in case of any investment made on capital account. This on the premise that the transaction of purchase of equity share capital would not give rise to any income. We note that similar issue was before this Court in Vodafone (supra) and this court inter alia observed that Chapter X of the Act is machinery provision to arrive at the arm's length price of transaction between associated enterprises. However, before the provisions can be kicked in, it is necessary that income must arise under the substantive provisions found in the Act viz., under the heads of salaries or income from house property or profits and gains in business or profession or capital gains

14 I.T.A. No. 989/Kol/2017


and/or income from other sources. Section 92 of the Act requires income to arise from an international transaction while determing the ALP. Therefore the sina qua non is that income must first arise on account of the international transaction.

(e) The view of this Court in Vodafone (supra) has been accepted by the Central Board of Direct Taxes (CBDT) by issue of instruction No.2/2015 dated 29th January 2015.

(f) In this case also, the shares which have been purchased by the respondent assess are on capital account. The revenue is seeking to bring the difference between the actual investment of Rs. 2.67 Crores and fair market value of the shares (investment) at Rs. 8.13 lakhs i.e. Rs. 2.58 Crores to tax. This without being able to specify under which substantive provision would income arise.. In our view, therefore, the issue arising here stands concluded by the decision of this Court in Vodafone India Services (P.) Ltd. (supra). The distinction which is sought to be made by the revenue on the basis of this being an inbound investment and not an outbound investment as in the case of Vodafone (supra) is a distinction of no significance. On principle, if this court has held that Chapter X of the Act is machinery provision and can only be invoked to bring to tax any income arising from an international transaction, then, it is necessary for the revenue to show that income as defined in the Act does arise from the international transaction. The distinction between inbound and outbound investment is a distinction which does not take the case of revenue any further, as the Legislature has made no such distinction while providing for determination of any income on adjustments to arrive at ALP arising from an international transaction.

(g) The further submission on behalf of the revenue that in future the respondent may sell these shares at a loss as they have purchased the same at much higher price than its fair market value. Thus gives rise to reduction of its tax liability in future. This submission is in the realm of speculation. At this stage, it is hypothetical. The issue has to be examined on the basis of law and facts as existing before the authorities in the subject assessment year. No provison of the Act has been shown to us, which would allow the Revenue to tax a potential income in the present facts.

(h) We note that with effect from 1st April 2013, the definition of Income as provided under section 2(24) of the Act was amended to include sub-clause (xvi) therein. It provided as income, any consideration received for issue of shares, if it exceeds the fair market value, as falling under clause (viib) of sub-section (2) of Section 56 of the Act. The amendment/ insertion of section 56(2) (viib) of the Act was with effect from 1st August 2013 and reads as under:-

"56(2)(viib): Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares."

(i) However, as this provision was made effective only with effect from 1st April 2013, and it is not even the case of revenue before the authorities or before

15 I.T.A. No. 989/Kol/2017


us that the said provision would apply for the subject assessment year 2010-11. In the above view, there is no occasion to examine the above amendments in the context of this case. This would be done appropriately in a case arising post the amendment.

(j) In the above view, the view taken by the Tribunal being concluded by the decision of this Court in Vodafone India Services (P.) Ltd. (supra) the question as proposed does not give rise to any substantial question. Thus not entertained.”

12.3. The Kolkata Bench of the Tribunal in the case of M/s. TCG Lifesciences Pvt.Ltd. -vs-

C.I.T. in I.T.A No. 966 & 1053/Kol/2017, order dt. 22/09/2017, had taken a similar view.

Thus, we find no infirmity in the order of the ld. CIT(A). In the result, this ground of the

revenue is dismissed.

13. Ground No. 6 is dismissed as general in nature.

14. In the result, this appeal of the revenue is dismissed.

Kolkata, the 14th day of August, 2019.

Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated : 14.08.2019 {SC SPS} Copy of the order forwarded to: 1. M/s. Philips Carbon Black Ltd Duncan House 31, N.S. Road Kolkata – 700 001

2. Assistant Commissioner of Income Tax, Circle-10(2), Kolkata

3. CIT(A)- 4. CIT- , 5. CIT(DR), Kolkata Benches, Kolkata.

True copy By order

Assistant Registrar ITAT, Kolkata Benches

July 23rd, 2019 Date of pronouncing the order - | Taxsutra

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