Thomas Cook (India) Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that benefit of indexation of cost of acquisition is to be given to the assessee while computing long term capital gain for the purpose of section 115JB of the Income Tax Act.
Facts- During the year, a compensation of ₹.8,69,06,480/- was paid to the tenant for surrendering of their tenancy right and also stamp duty of ₹.43,76,000/- was paid on registration of this deed. Therefore, total amount spent is ₹.9,12,82,480/-. However, the said amount has been added to the block of Building (10%) and the assessee claimed depreciation on the same. AO observed that premises were let out by the assessee, accordingly he disallowed the depreciation claimed by the assessee.
Further, with regard to addition on account of disallowance while computing the book profits under section 115JB of the Act, during the course of assessment proceedings AO observed that assessee has reduced an amount of ₹.21,98,18,240/- from its book profits and the said item was reduced as others. AO rejected the submissions of the assessee by observing that the provisions of section 115JB of the Act empowers AO to add or reduce only such items which are mentioned in section 115JB of the Act and restricts AO from making any addition / reduction in any other items which is not covered under section 115JB of the Act. Accordingly, rejected the claim of the assessee. Therefore, they added back of ₹.21,98,18,240/- by stating that the benefit of indexation shall not be available while computing the book profits as per provisions of section 115JB of the Act.
Conclusion- Held that the assessee has claimed only the depreciation for the period after surrender of the tenancy rights by the tenant. Therefore, it is not relevant whether actually utilizes for the remaining period, as long as it is in its position and the depreciation can be claimed for utilization as well as based on the concept of passage of time during which the property was in its control and possession. Therefore, the above said depreciation cannot be denied to the assessee.
ITAT Bangalore in Karnataka State Industrial has held that the assessee-company is entitled to the benefit of indexation while calculating long-term capital gains which are to be considered for the purpose of computing tax liability u/s 115JB of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The appeal relating to A.Y. 2016-17 is filed by the assessee against the final Assessment Order of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-2), Mumbai – 2 [hereinafter in short “Ld. DRP)”] dated 18.03.2021 for the A.Y.2016-17. The appeals relating to A.Y.2017-18 and A.Y. 2018-19 are filed against order of directions of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-2), Mumbai – 3 [hereinafter in short “Ld. Ld. DRP”] dated 27.01.2022 and 30.06.2022 for the A.Y. 2017-18 and 2018-19 respectively.
2. Since the issues raised in all these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA No.1218/MUM/2021 relating to Assessment Year 2016-17 as a lead case for adjudication.
ITA No. 1218/MUM/2021 (A.Y. 2016-17)
3. Assessee has raised following grounds in its appeal: –
“1. Transfer Pricing adjustment for adding the notional interest of INR 81,21,14,830 on receivables on account of issuance of NCCRPS (Ground 1.1. to Ground 1.8):
On the facts and in the circumstances of the case, and in law, the Learned Assessing Officer (Ld. AO), following the directions of Hon’ble Dispute Resolution Panel (Hon. DRP), erred in confirming the transfer pricing addition of interest of Rs 81,21,14,830 on deemed receivables which is overdue for the difference in the face value of Non-convertible Cumulative Redeemable Preference Shares (NCCRPS) issued vis-à-vis the market price of the equity share as on the date of issuance (hereby referred as alleged transaction’)
1.1 On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in not adjudicating the jurisdictional requirement, as laid by the CBDT Instruction 3 of 2016, of existing of an income which is a pre-requisite before making a reference to Lt. TPO or proposing an addition on the capital transaction of issuance of NCCRPS. The Hon. DRP/ Ld. AO/ Ld TPO failed to appreciate that in the absence of any income arising on account of issuance of NCCRPS, transfer pricing provisions contained in Chapter X of the Act do not apply to the facts of the present case
1.2 On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in rejecting the reliance placed by the Appellant on the Hon’ble Bombay High Court’s decision dated 10 October 2014 in Writ Petition No. 871 of 2014 in the case of Vodafone Services Pvt Ltd vs UOI [2015] Taxmann.com 286 (Bombay) and concluding that no income arises to it from such a transaction and accordingly transfer pricing provisions contained in Chapter X of the Act will not apply to the facts of the present case.
1.3. On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in not recording any reasons to show that the conditions mentioned in clause(a) to (d) of section 92C(3) of the Act were satisfied, either before initiating the transfer pricing assessment or before the completion of the assessment proceedings.
1.4. On the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO/Ld. TPO have erred in violating the principles of natural justice by not granting reasonable and adequate opportunity, including not issuing show cause notice, as required under provisions of Section 92C(3) of the Act, to the Appellant before passing the order under section 92CA(3) of the Act.
1.5 On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in recharacterizing a legitimate business transaction of issuance of NCCRPS as quasi equity and thus comparing the NCCRPS with equity shares in the absence of any current statutory provisions to support such re-characterization.
1.6. On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in treating the quoted market price of the equity share of the Appellant as the arm’s length price for issuance of NCCRPS which were redeemable at par thereby considering the alleged shortfall arising on account of alleged transaction as a nature of debt/receivable in the hands of the Appellant, thus creating a notional transaction.
1.7 On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in making secondary adjustment that is not permitted under the Indian regulations for the year under consideration i.e. AY 2016-17.
1.8. On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in adopting an adhoc and arbitrary approach in determining the interest rate to be imputed on the deemed receivable determined by the Hon. DRP/Ld. AO/ Ld. TPO without undertaking a benchmarking analysis. An interest rate of 9.945 percent was determined based on the stray interest rates on redeemable NCDs issued by the Appellant
1.9. On the facts and circumstances of the case and in law, the Hon’ble DRP/ Ld. AO/Ld. TPO have erred in not following DRP’s own direction in the Appellant’s case for AY 2015-16 wherein reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Vodafone Services Pvt Ltd. v/s UOI [2015] 53Taxmann.com 286 (Bombay) and concluded that an element of income was a prerequisite for applicability of transfer pricing provisions since they are merely ‘machinery provisions and not charging provisions
2. Disallowance of principal lease payment of finance lease
2.1. On the facts and in the circumstances of the case, and in law, the Ld AO, following the directions of Hon’ble DRP, erred in disallowing Rs 73.02.481 related to “principal lease payment of finance lease under section 37(1) of the Act treating the same as capital expenditure.
2.2 Without prejudice to the above, the Hon’ble DRP erred in not adjudicating alternate prayer of the Appellant to allow tax depreciation on such expenditure under section 32 of the Act in the event Hon’ble DRP upholds the disallowance
3. Disallowing Rs. 7,01,54,021 related to Employee Stock Option Plan
3.1 On the facts and in the circumstances of the case, and in law, the Ld. AO. following the directions of Hon. DRP, erred in disallowing Rs 7,01,54,021 related to Employee Stock Option Plan (ESOP) under section 37(1) of the Act.
3.2 On the facts and in the circumstances of the case, and in law, the Ld. AO and Hon’ble DRP erred in not allowing the additional claim made during the course of assessment proceedings for ESOP expenses (being difference between market price at the time of exercise of options and market price at the time of grant of options) of Rs. 2.48.85,009 under section 37(1) of the Act
4. Disallowance under section 14A of the Act read with Rule SD of the Income-tax Rules, 1962
4.1 On the facts and in the circumstances of the case, and in law, the Ld AO and Hon’ble DRP erred in not appreciating the fact that the Company has not incurred any direct or indirect expenditure during the year in relation to earning the exempt income and making disallowance of Rs. 5,78.21,490 under section 14A of the Act read with Rule 80 of the Income-tax Rules, 1962 (‘Rules”).
4.2 On the facts and in the circumstances of the case, and in law, the Hon’ble DRP erred in directing the Ld. AO to make addition under section 14A of the Act read with Rule 8D of the Rules by exercising powers beyond the jurisdiction conferred under section 144C(8)of the Act
4.3 Without prejudice to the above, the Ld. AO and Hon’ble DRP erred in not considering the contention of the Appellant while computing the disallowance under section 14A read with Rule 8D disregarding the fact that no interest expenditure has been incurred to earn exempt income and sufficient owned funds are available to make the investment
4.4 Without prejudice to the above, the Ld. AO and Hon’ble DRP erred in not considering the contention of the Appellant that only investment from which exempt income is earned during the year should be considered while computing disallowance under section 14A of the Act read with rule 8D of the Rules.
4.5 On the facts and in the circumstances of the case, and in law, the Ld. AO and Hon’ble DRP. erred in disallowing Rs. 5,78.21.490 under section 14A of the Act read with Rule 8D of the Rules while computing the MAT on the book profits in accordance with section 115JB of the Act.
5. Adjustment on Dividend Distribution Tax
5.1 On the facts and in the circumstances of the case and in law, the Hon’ble DRP and the learned AO:
(a) erred in not granting excess Dividend Distribution Tax (DDT) paid erroneously amounting to Rs 3,96,056, arising on account of payment of DDT at the rate of 20.925% on the entire dividend paid, instead of the statutory rate of 20.385% (including surcharge and cess), since as per the provisions of Section 237 of the Act read with Article 265 of the Constitution of India, only legitimate tax could have been retained.
Your Appellant prays that the AO be directed to grant refund of Rs 3,96,056 to the appellant
(b) erred in not appreciating that the DDT paid by the appellant in relation to the dividend of Rs 5,48,24,449 paid to its overseas shareholder je Fair bridge Capital (Mauritius) Limited (FCML) out of total dividend of Rs 13,64,11,665 ought to have been paid at the rate of 5% having regard to Article 10(2) of the India-Mauritius tax treaty as against the rate of 20.925% (erroneously as against the statutory rate of 20.385%) (including surcharge and cess) specified under Section 115-0 of the Income Tax Act 1961.
Your Appellant prays that the AO be directed to apply the applicable rate under Article 10(2) of the India-Mauritius tax treaty being beneficial to the Appellant.
(c) erred in not granting refund of excess DDT paid of Rs 84,34,742 to the appellant in respect of dividend of Rs 5,48,24,449 paid to FCML, since as per the provisions of Section 237 of the Act read with Article 265 of the Constitution of India, only legitimate tax could have been retained
Your Appellant prays that the AO be directed to grant refund of ₹.84,34,742 to the appellant.
(d) erred in not considering the submissions dated 20 November 2019 filed before the Learned AO and was duly furnished before the DRP as well, wherein refund of excess DDT paid of Rs 88,30,798 was claimed by the appellant.
Further, the DRP has erred is stating that no claim in this regard has been made before the Learned AO during the course of assessment proceedings
(e) erred in adjudicating that since there was no variation of income and since there was no adjustment being made to the income of the Appellant in the assessment order, the said claim of refund of DDT could not have been raised before the DRP.
(f) erred in observing that provisions of Section 115-0 of the Act overrides the provisions of Section 90(2) of the Act and hence, beneficial rate as per Article 10(2) of the India- Mauritius tax treaty will not be applicable and hence, erred in subjecting the Appellant to additional income tax in terms of section 115-0 of the Act.
(g) erred in observing that tax as per Section 115-0 of the Act is a tax on net distributed profit of the company and not a tax on dividend income of shareholder. The AO failed to appreciate that the dividend income was that of the non-resident recipient who was governed by the provisions of relevant DTAA
(h) erred in observing that DDT is a secondary tax on corporate profit distributed and not akin to withholding of tax.
6. Short grant of credit of tax deducted at source
6.1 The Ld. AO erred in not granting credit of tax deducted at source as claimed in the return of income amounting to ₹. 14,28,61,602
7. Penalty under section 271 (1)(c)
7.1 The Ld. AO erred in proposing to levy penalty under section 271(1)(c) of the Act for furnishing inaccurate particulars of income
8. Levy of interest under section 234B of the Act
8.1. The Ld. AO erred in levying interest under section 234B of the Act.
The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing so as to enable the Hon’ble Tribunal members to decide these according to the law.
4. Assessee has filed additional grounds on jurisdictional issue, for the sake of clarity it is reproduced below: –
“Ground No. 9:
1. On the facts and in the circumstances of the case and in law, the final assessment order dated 20 April 2021 passed by the under section 143(3) read with section 144C(13) of the Act, having been passed beyond the limitation provided in terms of section 153(1) r.w. section 153(4) of the Act, is illegal, being barred by limitation, void-ab-initio and is therefore liable to be quashed.
Ground No. 10:
2. On the facts and in the circumstances of the case and in law, the directions dated 18 March 2021, issued under section 144C(S) of the Act by the Ld. DRP, not being signed by all the members of the Hon’ble DRP, are illegal, bad in law, void-ab-initio and liable to be quashed.
It is humble prayer of the Appellant that the final assessment order and DRP directions are bad in law, null and void and liable to be quashed, and the entire addition made by Ld. AO/ Ld. TPO/ Hon’ble DRP be deleted.”
5. At the time of hearing, Ld.AR of the assessee submitted that assessee is not pressing the additional grounds of appeal. Accordingly, these additional grounds of appeal are dismissed as such. Therefore, we shall deal with only main grounds of appeal raised by the assessee.
6. We proceed to dispose of the issues raised by the assessee in its main appeal in ground wise.
7. Ground No. 1 is relating to Transfer Pricing adjustment for adding the notional interest on receivables on account of issuance of Non-Convertible Cumulative Redeemable Preference Shares (for short “NCCRPS”). The relevant facts are, assessee filed its return of Income on 30.11.2016 declaring loss at ₹.6,85,08,728/- under regular provision of the Act and Book Loss of ₹.6,48,55,009/- under section 115JB of the Act. The case of the assessee was selected for scrutiny and notices under section 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee.
8. Since assessee has entered into international transactions a reference under section 92CA(1) of the Act was issued to Transfer Pricing Officer – 4(2)(1), Mumbai. The background of the assessee is, assessee is the leading integrated travel and travel related financial services company offering a broad spectrum of services that include Foreign Exchange, Corporate Travel, MICE, Leisure Travel, Insurance, Visa & Passport services and E-Business. During this AY, Assessee has issued 12,50,00,000 Cumulative Redeemable Non-Convertible Preference Shares (NCCRPS) @₹.10/- per share to its AE Hamblin Waste Investment Counsel Limited.
9. The TPO observed from the Form 3CEB that the assessee has not bench marked the above transaction of issue of NCCRPS. With regard to above, transactions, assessee contended that no income arises to it from issue of Non-Convertible Preference shares to its associated enterprise. Therefore, assessee believes that it should not be liable to comply with the requirements embodied in the Transfer Pricing provisions contained in sections 92 to 92F of the Act r.w. Rules 10A to 10E of the I.T. Rules. Assessee heavily relied on the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Private Limited [WP No. 871 of 2014. (2014) 50 taxmann.com 300 (Bombay), dated 10.10.2014.
10. In assessee’s submissions before Transfer Pricing Officer, assessee submitted that T.P. provisions are not applicable to the transaction under consideration and submitted copy of Board resolution indicating the terms of issue and has not submitted any further details including financials of the AE. The Transfer Pricing Officer rejected the submissions of the assessee and he observed that assessee is a listed company and during current assessment year it has issued 12,50,00,000 Cumulative Redeemable Non-Convertible Preference Shares (NCCRPS) @₹.10 per share to its AE on 01.12.2015, which are redeemable at par within a period not exceeding seven (7) years from the date of allotment. The Transfer Pricing Officer observed that the NCCRPS issued by the assessee are in the nature of quasi equity and thus the transaction is squarely covered under the provisions of section 92B(2) and Explanation (i)(c) thereto as introduced by Finance Act, 2012 with retrospective effect from 01.04.2002. He observed that the assessee is required to report this transaction in Form No.3CEB and also should have first benchmarked the same using most appropriate method for determination of ALP. By rejecting the benchmarking and TPSR submitted by the assessee, Transfer Pricing Officer proceeded to benchmark the same using other method. He extracted the points from Board Resolution the similarities in the regular Preference shares and NCCRPS issued by the assessee, for the sake of clarity, it is reproduced below: –
