Religare Finvest Ltd. Vs DCIT (ITAT Delhi)
ITAT Delhi held that Compulsory Convertible Debentures are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on Compulsory Convertible Debentures is allowable as revenue deduction u/s 36(1)(iii) of the Income Tax Act.
Facts- The case of the assessee was selected for scrutiny. Order u/s 143(3) of the Act was passed assessing the income at Rs. 307,17,44,697/- after disallowance of Rs.16,72,58,935/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962, Rs. 9,65,00,120/- on account of depreciation arising out of change in method of accounting of financial lease, addition of Rs. 21,67,50,189/- on accounts of bad debts write off , Rs. 13,75,19,178/- on account of disallowance of interest on Compulsory Convertible debentures (CCDs) and disallowing of Rs. 27,05,83,732/- from support services and reimbursement expenses claimed, aggregating to total disallowances of Rs. 88,86,12,175/-.
CIT(A) upheld the disallowance made by the A.O. to the extent of Rs. 6,40,98,834/- u/s 14A of the Act as against the suo-moto disallowance of 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.
Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- Held that the investment in shares of Karnataka Bank Limited has been made out of own funds of the assessee, we hold that no disallowance can be made out of interest expenditure under Clause (ii) of Rule 8D of the Rules.
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.
Held that Compulsory Convertible Debentures are in the nature of borrowed fund and continued to be debt till conversion thereof into shares and consequently interest on CCDs is allowable as revenue deduction u/s 36(1)(iii) of the Act.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The above ITA No. 4796/Del/2017 (A.Y 2012-13), ITA No. 547/Del/2018 (AY 2013-14), ITA No. 7856/Del/2017 (A.Y 2014-15), and ITA No. 61 16/Del/2018 (A.Y 2015-16) filed by the assessee challenging the order passed by the Commissioner of Income Tax Appeals dated 19/05/20 17, 29/11/2017, 29/09/2017 and 09/07/2018 respectively. The Appeals in ITA No. 5202/Del/2017 (A.Y 2012-13), ITA No. 1005/Del/2018 (A.Y 2013-14), ITA No. 133/Del/2018 (A.Y 2014-15) and ITA No. 7553/Del/2018 (A.Y 2015-16) dated 19/05/2017, 29/11/2017, 29/09/2017 and 09/07/2018 respectively filed by the Revenue.
2. The assessee and the Revenue have raised the following grounds of appeal in their respective Appeals as under:-
2.1. I.T.A. No. 4796/DEL/2017 (A.Y. 2012-13) (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.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 appellant; and (b) investments not actually yielding exempt income during the relevant year, while applying formulae prescribed in Rule 8D of the Rules.
1.3 Without prejudice, the CIT(A)/ assessing officer erred on facts and in law in not excluding investment in the form of share application money in Karnataka Bank Ltd., for the purpose of computing average value of investments while applying formulae prescribed under Rule 8D(2) of the Rules.
1.4. Without prejudice, that on the facts and circumstances of the case, provision for diminution in value of investments amounting to Rs. 5, 77,76,120 is liable to be reduced while computing average value of investments referred to in Rule 8D(2) of the Rules.
Re : Disallowance of depreciation claimed on vehicles given on finance lease
2. That the CIT(A) erred on facts and in law in upholding disallowance of Rs.9,65,00,120 made by the assessing officer being difference of (i) depreciation of Rs.35,07,63,697 claimed on vehicles given on finance lease; and (ii) Rs. 25,42,63,574/- being portion recovery of principal amount of asset included in lease rentals offered to tax; claimed offered by the appellant in revised return of income filed under section 139(5) of the Act.
2.1. That on the facts and circumstances of the case and in law, the CIT(A) grossly erred in holding that the action of appellant in claiming depreciation on vehicles given on finance lease by way of filing revised return of income is outside the scope/ mandate of section 139(5) of the Act.
2.2. That on the facts and circumstances of the case, the CIT(A) erred in observing that the appellant had changed its consistent accounting policy in respect of vehicles given on lease and that such accounting treatment is not verified/ certified by the auditors.,
2.3 That the CIT(A)/ assessing officer erred on facts and in law in disallowing the aforesaid claim for excess depreciation merely for the reason that similar claim qua leased assets was not made by the appellant in earlier years.
2.4. That the CIT(A)/assessing officer erred on facts and in law in disallowing the aforesaid claim of depreciation without disputing that the lessor appellant (a) is the owner of the leased vehicles/ assets and (b) such assets are used for business purpose, and thus eligible for depreciation under section 32 of the Act.
Re: Ad-hoc disallowance of support service fees and reimthursement 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 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 3 7(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 ad hoc 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.
4. That the Assessing Officer erred on facts and in law in levying interest u!s 234D and withdrawing interest granted u!s 244A of the Act.
2.2. I.T.A. No. 5202/DEL/2017 (A.Y. 2012-13) (Revenue)
1. That on facts and circumstances of the case and in law, the Ld. CIT(A)has erred in restricting the disallowance made u!s 14A r.w. rule 8D upto the dividend received.
2. That on facts and circumstances of the case and in law, the CIT(A)has erred in deleting the disallowance of bad debts written off by the appellant of Rs. 21,67,50,189!-
3. That onfactsand circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of interest on compulsorily convertible debentures Rs. 13,75,19,178!-.
2.3. I.T.A. No. 547/DEL/2018 (A.Y. 2013-14) (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. 432,77,074 under section 14A of the Income Tax Act, 1961 (“the Act”) [restricted to dividend income] as against suo-motu disallowance of Rs. 69,98,173 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 subsections (2) and (3) of that section were not satisfied1.2 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, 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 appellant; (b) investments yielding taxable income during the relevant year; and (c) investments not actually yielding exempt income during the relevant year, while applying formulae prescribed in Rule 8D of the Rules.”
2.4. I.T.A. No. 1105/DEL/2018 (A.Y. 2013-14) (Department)
1. “On the facts and under the circumstances of the case, Ld. CIT(A) has erred in law and facts in restricting the disallowance made u!s 1 4A 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 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, 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 appellant; and (b) investments not actually yielding exempt income during the relevant year, while applying formulae prescribed in Rule 8D of the Rules.
Re: disallowance of interest paid on Compulsorily Convertible Debentures
2. That the CIT(A) erred on facts and in law in upholding disallowance of Rs. 16,35,00,000!- made by the Assessing Officer on account of interest paid by the assessee on compulsorily Convertible Debentures (CCDs) subscribed by its holding company, e. Religare Enterprises Ltd.
2.1 That the C1T(A)! assessing officer erred on facts and in law in holding that interest paid on CCDs, issued by the appellant and subscribed by its holding company, is akin to dividend, without appreciating the difference in the nature of CCDs and equity shares.
2.2. That on the facts and circumstances of the case, the CIT(A) erred in lifting! piercing the corporate veil and holding that a colorable arrangement has been entered into between the assessee and its holding company to evade taxes.
Re: Disallowance of bad debts written off
3. That the CIT(A) erred on facts and in law in upholding disallowance of Rs. 138,82,46,030 on account of loans written off, which were lent! advanced in the ordinary course of money lending business.
3.1 That the CIT(A)! assessing officer erred on facts and in law in holding that the aforesaid amount of loans were not actually written off in loan! lenders accounts in the books of accounts of the assessee.
3.2 That the CIT(A)! assessing officer erred in not appreciating that the write off of loans was in accordance with prudential norms prescribed by RBI and is allowable in terms of sections 36(2) !36(l) (vii)! 28 of the Act.”
2.6. I.T.A. No. 133/DEL/2018 (A.Y. 2014-15) (Department)
“On the facts and under the circumstances of the case, Ld. CIT(A) has erred in law in deleting the disallowance of Rs. 8,61,93,391/ – u/s 1 4A 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, 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 appellant; (b) investments yielding taxable income during the relevant year; and (c) investments not actually yielding exempt income during the relevant year, while applying formulae prescribed in Rule 8D of the Rules.
2.8. I.T.A. No. 7553/DEL/2018 (A.Y. 2015-16) (Revenue)
“1. That on facts and circumstances of the case, the Ld. CIT(A) has erred in law and facts in restricting the disallowance made u/s 1 4A r. w. r. 8D upto the dividend received.
2. That on facts and 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. 1,12,08,54,213/-.
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 compulsory convertible debentures ofRs. 16,35,00,000/-.”
3. Since the issues involved in the present appeals filed by the assessee and the Department are identical, for the sake of convenience, brief facts of the case for the Assessment Year 2012-13 are considered. The Assessee filed its return of income for AY 2012-13 on 27/09/2012 declaring income of Rs. 227,96,32,660/- which was subsequently revised on 26/03/2014 at Rs.218,31,32,540/-. The case was selected for scrutiny. Order u/s 143(3) of the Act was passed on 31/03/2015 assessing the income at Rs. 307,17,44,697/- after disallowance of Rs.16,72,58,935/- u/s 14A read with Rule 8D of the Income Tax Rules, 1962 (‘Rules’ for short), Rs. 9,65,00,120/- on account of depreciation arising out of change in method of accounting of financial lease, addition of Rs. 2 1,67,50,189/- on accounts of bad debts write off , Rs. 13,75,19,178/- on account of disallowance of interest on Compulsory Convertible debentures (CCDs) and disallowing of Rs. 27,05,83,732/- from support services and reimbursement expenses claimed, aggregating to total disallowances of Rs. 88,86,12,175/-.
4. Aggrieved by the assessment order dated 31/03/2015, the assessee preferred an Appeal before the CIT(A). The Ld. CIT(A) vide order dated 19/05/2017, upheld the disallowance made by the A.O. to the extent of Rs. 6,40,98,834/- u/s 14A of the Act as against the suo-moto disallowance of 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 made suo-moto disallowance under Section 1 4A of the Act read with Rule 8D of the Rules, of Rs. 77,45,598/-. The Ld. A.O. made disallowance of Rs. 17,50,04,535/-. The Ld. CIT(A), however, restricted the disallowance to Rs. 6,40,98,834/- being the amount of exempt income earned during the year. As against restriction of disallowance the Revenue has raised the ground and as against sustaining the disallowance the Assessee has raised the above grounds.
7. The Ld. Counsel for the assessee submitted that no disallowance be made out of interest expenditure under Clause (ii) of Rule 8D since the investment in shares of Karnataka Bank Limited has been made out of own funds and further submitted that the said issue has been decided in favour of the assessee in Assessee’s own case for Assessment Year 2007-08 in ITA No. 1947/Del/2018, wherein it is held that investment made in shares of Karnataka Bank Limited are out of own funds of the assessee and decided the issue in favour of the Assessee and the disallowance made by the A.O. which has been confirmed by the CIT(A) has been deleted by the Tribunal. Further submitted that the disallowance under Clause (ii)/(iii) of Rule 8D can be made only after considering average of investments which have actually yielded exempt income during the year under consideration and the said stand has been upheld by the Tribunal in Assessee’s own case for the Assessment Year 2010-11 & 2011-12 in ITA No. 2559/Del/2016 and ITA No. 5266/Del/2016.
8. The Ld. Counsel further submitted that the issue involved in the Ground 1 to 1.5 of the Assessee’s Appeal in I.T.A. No. 4796/Del/2017 for A.Y. 2012- 13, I.T.A. No. 547/Del/20118 for A.Y. 2013-14, I.T.A. No. 7856/Del/2017 for A.Y. 2014-15 and I.T.A. No. 61 16/Del/2018 for A.Y. 2015-16, and the Ground No. 1 in Department’s Appeal I.T.A. No. 5202/Del/2017 for A.Y.2012-13, I.T.A. No. 1005/Del/2018 for A.Y. 2013-14, I.T.A. No. 133/Del/2018 for A.Y. 2014-15 and I.T.A. No. 7553/Del/2018 for A.Y. 2015-16 are squarely covered in Assessee’s own case, therefore, submitted that the above-mentioned grounds of Appeals of the Assessee and the Revenue may be disposed off in terms of the said order of the Tribunal.
9. The Ld. Ld. Departmental Representative relied on the orders of the Ld. CIT(A) and sought for dismissal of the Grounds of Appeals of the Assessee and prayed for allowing the Grounds of Appeals of the Revenue on the issue in
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 explanation given in the report of the chartered accountant available on page 85- 86 of the Paper-book. The relevant part of the said report is reproduced as under:
“7.2 In the FY 2006-07, RFL has invested in Equity Shres of KBL amounting Rs. 35.35 crores. The said investments were made on several dates during the said financial year.
Analysis In the assessment proceedings, the Company has stated that the said investment was made out of own funds. On a close scrutiny of the books of account, we find that:
a. The company had received Share Application Money amounting to Rs. 125 crores during the period December 12, 2006 to December 21, 2006.
b. The investment in the KBL shares amounting to Rs.35.35 crores has been made during the period December 27, 2006 to January 5, 200 7/
c. The profits before depreciation and taxes of RFL for the year ended March 31, 2007 amounted to Rs.29.46 crores. If it is presumed that the profits accrue evenly throughout the year, then the profits accruing upto the date of investment in KBL shares on a pro-rata basis, would amount to Rs.22. 09 crores (Approximately)
d. Here, the aggregate of Share Application Moneys and the profits accruing during the year upto the dates of investments in KBL shares are far in excess of the investment in KBL
Having regard to the above facts and the legal principles discussed in paras 6.3 to 6.7 above, it can be safely inferred that the investment in KBL shares is indeed out of own funds.
As a cross-check we have also reviewed the yearly funds flow statement extracted from the audited financials of FY 2006-0 7. The said yearly funds flow statement, showing the incremental funds position for FY 2006-0 7. The said yearly funds flow statement, showing the incremental funds position for FY 2006-0 7 is annexed and marked as Annexure 3. The Summary of the incremental yearly funds position is as under:
(Rs. In Crores) Particulars FY 2006-0 7 Shareholder’s Funds A 112.82 Loan Funds B 86.23 Deferred tax Liability (Net) C 0.22 Total D=A+B+C 199.27 Fixed Assets E 1.67 Investments Tax Free Investments F 35.35 Others G NIL Net Current Assets: H 162.25 Total I=E+F+G+H 199.27 As would be observed from the above, the year in which investment in Equity Shares of KBL has been made, the incremental borrowings (Rs. 86.23 crores) for that year were much lesser then the 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 of Maxopp Investment Ltd. reported in 402 ITR 640(SC) the expenditure on assets which may yield exempt income as well as taxable income, need to be apportioned towards both the exempted and non- exempted income. Thus, the certain interest expenditure towards investment in mutual fund clearly needs to be disallowed, which the assessee has not considered in its suo-motu disallowance. No such breakup of proportionate expenses towards exempted and non-exempted income from investment in mutual funds has been provided either lower authorities or before us. In absence of any such working provided by the assessee, it is not possible for us to quantify the proportionate disallowance out of the interest expenditure incurred for investment in Mutualfunds.
3.13 We find that Hon’ble Delhi High Court in the case of Joint Investment Company Private Limited Vs. CIT: 372 ITR 694 (Del.) has restricted the disallowance under section 1 4A to the extent of the exempted income. Following the finding of the Hon’ble Delhi High Court in the case of Joint Stock Investment Ltd. (supra), The Ld CIT(A) has restricted the disallowance u/s 14A of the Act in the case of the assessee to the extent of excepted income. In the facts and circumstances of the case, we do not find any error in the order of the Ld. CIT(A) on the issue in dispute in following a binding precedent of the jurisdictional High Court. and accordingly, we uphold the same. The grounds of the appeal of the assessee as well as ground No. 1 of the Revenue are accordingly dismissed.”
11. By respectfully following the above ratio and also considering the fact that the investment in shares of Karnataka Bank Limited has been made out of own funds of the assessee, we hold that no disallowance can be made out of interest expenditure under Clause (ii) of Rule 8D of the Rules. Accordingly, we allow Ground No. 1 to 1.5 of the Assessee’s Appeal in I.T.A. No. 4796/Del/2017 for A.Y. 2012-13, I.T.A. No. 547/Del/2018 for A.Y. 2013-14, I.T.A. No. 7856/Del/2017 for A.Y. 2014-15 and I.T.A. No. 61 16/Del/2018 for A.Y. 2015- 16, and dismiss the Ground No. 1 in Department’s Appeal in I.T.A. No. 5202/Del/2017 for A.Y.2012-13, I.T.A. No. 1005/Del/2018 for A.Y. 2013-14, I.T.A. No. 133/Del/2018 for A.Y. 2014-15 and I.T.A. No. 7553/Del/2018 for A.Y. 2015-16.
Disallowance of depreciation on vehicles given on finance lease
12. 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 of fixed assets neither in the year under consideration and nor in earlier years. The allow ability of the claim of the assessee is therefore, unfounded and not verifiable and properly supported. The claim of the assessee is being rejected and the income of assessee shall be adopted as provided in the original return of income. The excess claim of depreciation over and above the excess income declared amounting to Rs.9,65,00,120/- is being disallowed and added back to the income of the assessee.”
13. On the above finding of the A.O., in the Appeal, the CIT(A) held that the action of the A.O. in rejecting the claim is in order and sustained the disallowance of depreciation claimed on vehicles given on financial lease in following manners:-
“5.2. I have carefully considered the assessment order and written submission filed by the Ld. AR. The AO disallowed part of the depreciation claim of Rs. 9,65,00,120/- i.e. the difference between the depreciation of Rs.35,07,63,697/- claimed by the appellant u/s 32 of the Act on the cars given on finance lease and the principle amount of Rs.25,42,63,574/- recovered by the appellant which is offered to tax. The AO held as under.
((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 along with 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 of fixed assets neither in the year under consideration and nor in earlier years. The allowability of the claim of the assessee is therefore, unfounded and not verifiable and properly supported. The claim of the assessee is being rejected and the income of assessee shall be adopted as provided in the original return of income. The excess claim of depreciation over and above 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 26.03.2014 this consistent method was practically abandoned to claim depreciation of Rs.35,07,63,697/- on the leased assets and the principal amount of loan recovered for vehicles given on finance lease of Rs. 25,42,63,574/- was offered to tax.
5.5. The critical issue for consideration is whether the appellant could make such a claim in the revised return of income filed u/s 139(5) of the Act and whether it can be considered to be an omission or any wrong statement in the original return of income. Section 139(5) is reproduced as under:
“139[(5) If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, 66adiscovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier”
Provided that where the return relates to the previous year relevant to the assessment year commencing on the Ist day of April, 1988, or any earlier assessment year, the reference to one year aforesaid shall be construed as a reference to two years from the end of the relevant assessment year.”
5.6 In my view the mandate of Section 139(5) is clear, that a revised return can be filed only if the person (the appellant) discovers any omission or any wrong statement in the original return. The appellant is consistently method of accounting and its book results, depreciation claims etc. have been duly verified and certified by the statutory/tax auditors under the Companies Act and u/s 44AB of the Income Tax Act. Admittedly, there is a decision of the Hon’ble Apex Court on depreciation claim by the lesser in the finance lease arrangement, but this decision in anyway does not make out the case for the appellant to claim depreciation on assets which were never shown in the books of accounts and subject to any verification by the statutory/tax auditors. The appellant cannot suo moto change its accounting system, as there is no way to verify the tax implication arising from such a claim made in the revised return of income. Recovery of principal amount of loan cost of assets depreciation claimed thereon, opening and closing WDV of these assets are items of facts which are verified and certified by statutory/tax auditors. In the absence of 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 afundamental 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 company and it is held that since the scope of Section 139(5) does not mandate admission of a claim of Such nature which can be termed as mistake or omission in the original return of income, and is not legally sustainable. Further, there is no way to verify the implication arising out of the change of accounting system resorted by the appellant only for the limited purpose of claiming additional depreciation. Unsettling of a settled and consistent accounting method without any certification/verification merely by revising the return, is not an acceptable proposition. The AO’s action in rejecting the claim is in order and is sustained. This ground of appeal is ruled against the appellant.”
14. The above finding and the conclusion of the CIT(A) in under challenge before us. The Ld. Counsel for the assessee submitted that the issue of allowability of depreciation of vehicles given on lease stood decided in favour of the assessee vide order dated 12/05/2023 by in Assessee’s own case for the Assessment Year 2011-12 in ITA No. 857/Del/2019. Therefore, prayed for allowing the Ground No. 2 to 2.4 of the assessee in ITA No. 4796/Del/2017. Per contra, the Ld. Departmental Representative relied on the orders of the Lower Authorities.
15. We have heard both the parties and perused the material available on The Coordinate Bench of the Tribunal while deciding the issue of disallowance of depreciation claimed on vehicle on finance lease in Assessee’s own case for the Assessment Year 2011-12 in ITA No. 857/Del/2019 vide order dated 12/05/2023 held as under:-
“4. We have heard both the parties and perused the records. We find that the Ld CIT(A) has duly taken the note that after issuance of AS-i 9 issued by the ICAI, the CBDT vide Circular No. 2/200i dated 9 February 20i i has clarified that capitalization of assets acquired under the finance lease by the lessees in their books of account will not have any bearing on the allowance of depreciation on those assets under Section 32 of the Income Tax Act and also states that the ownership of the asset is determined by the terms of contract between the lessor and the lessee. Further, as per the above circular the owner is entitled to depreciation, whether he is lessee or lessor, depending upon the terms of the contract.
4.1 Further, the Ld. CIT(A) taken the note of the Hon’ble Supreme Court in the case of ICDS 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 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 20 12-13) 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:-
In addition to the aforesaid, following expenses were also recovered by REL, on cost-to-cost basis, from the Assessee:
Thus, for the year under consideration, the Assessee made a total payment of Rs.79.81 crore (Rs. 63.55 Cr + 16.25 cr) to its group companies for provision of support services. The assessing officer made an ad-hoc disallowance of 25% of the support service fee paid by the assessee to its group companies under section 40A(2) (b) of the Act on the grounds that the Assessee had failed to explain the reasonableness of the payment made on account of support service by provided by the group companies holding that: justification for incurring such expenditure was not explained properly by the Assessee and the Assessee failed to furnish cost allocation key and list of expenses reimbursed by Assessee and the Assessee had failed to deduct tax at source on certain expenses reimbursed.
18. On appeal, the Ld. CIT(A) sustained/ confirmed the disallowance made by the assessing officer holding that Assessee had failed to prove that the said expenditures were incurred wholly and exclusively for the purpose of the business of the Assessee. However, taking note of the computational error in the assessment order, the CIT(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 disallowing 25% of the expenditure incurred. The Ld. Counsel for the assessee has also submitted that, the CIT(A) erred in not considering following corroborative evidenced placed on record by the assessee to demonstrate that the services were rendered for the smooth functioning of business of the assessee.
