ACIT Vs Hikal Ltd (ITAT Mumbai)
ITAT Mumbai held that when company issues Foreign Currency Convertible Bonds (FCCB) they incurs a liability to pay a larger amount than what is borrowed and such liability to pay the additional amount is revenue expenditure.
Facts- The assessee company had issued Foreign Currency Convertible Bonds in F.Y. 2005-06. These bonds were convertible at the option of the bondholder on or after 01.11.2005 but prior to close of business on 10.10.2010 at a fixed exchange rate.
As the bond holders had not converted any bonds till 31.03.2010 and the possibility of their exercising the option to convert @Rs. 745/- per share was remote, the assessee was certain that it would have to redeem the bonds at a premium.
In the books of account, the said premium was adjusted against the Securities Premium Account, however, the same was claimed as revenue expenditure in the computing the total income. In the assessment completed, the Assessing Officer disallowed the said premium mainly for the reason that it has not been crystallised in the year under consideration and is just a provision and that even the TDS thereon has not been deducted.
Aggrieved by the disallowance of said premium, the assessee preferred appeal before the CIT(A) who deleted the said disallowance. Aggrieved by the same, revenue has preferred the present appeal.
Conclusion- Coordinate bench of Tribunal in the case of Strides Shasun Limited Vs ACIT has held that when a Company issues FCCB, it incurs a liability to pay a larger amount than what is borrowed and such higher amount payable by the Company will be for the purpose of its business in order to generate funds for its business activities. The amounts so obtained are used by the Company for the purposes of its business. Hence the liability to pay the additional amount would therefore be revenue expenditure.
Being, issue in dispute before us identical to the issue decided by the Tribunal (supra) above, respectfully following the finding of the Tribunal, we uphold the finding of the Ld. CIT(A) on the issue in dispute. The ground raised by the Revenue is accordingly dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These two appeals by the Revenue have been preferred against the order dated 25/01/2016 and 14/10/2016 passed by the Ld. Commissioner of Income Tax (Appeals) –8, Mumbai [in short, the Ld. CIT(A)] for A.Y. 2010-11 and 2011-12. As identical issues are raised in these appeals, therefore same were heard together and disposed off by way of this common order for convenience and avoid repetition of facts.
2. First, we take up the appeal of Revenue in ITA No. 2320/Mum/2016 for assessment year 2010 -11. The ground s raised in the appeal are reproduced as under :
*On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s14A of the IT Act at Rs.86,60,051/ – made by the AO in the normal computation of income and us 115JB of the IT. Act without appreciating the fact that the assessee has neither established that no part of interest bearing fund as well as expenses so claimed has found its way into the investments in Mutual Funds/Shares nor adduced any documentary evidences during the course of assessment proceedings before the a O”
2. On the facts and circumstances of the caso and in law, the Ld. CIT(A) erred in deleting addition made by the AO for allocation of H.O. expenses among Non–EOU and EOU units for the purpose of computation of exemptone Ise SOB orthe IT. ACt CITIA) 1961, without appreciating the fact that the assessee has not followed the uniform” criteria while allocating R&D expenses to the EOU and non–EOU units and the A O has allocated the expenses on basis of the turn over from the EOU and Non-
3. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting addition made by the AO on account of interest on bank accounts dividend and misc. income totaling to Rs.178.75 lakhs by holding the interest income claimed by the assessee was neither accrued from such activity nor derived from the activities of the EOU unit relying on the decision of Hon’ble for Supreme Court in the case of Pandiyan Chemicals vs. CIT, 129 Taxman 539.”
4. “On the facts and circumstances of the case and in law, the CIT(A) erred in deleting addition made by tie 40 of the case and in lav, the L50, citA, ere the A0: 8 failed to produce any of the suppliers, brokers or transporters in connection with the assets purchased on which depreciation was claimed in spite of opportunities provided in this regards.”
5. “On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in go g deleting the disallowance of Rs.15,69,80,805/ – made by assessing officer on account of premium on foreign currency convertible bonds without appreciating the fact that above expenditures are provision for premium Of FCCBs and the assessee has made payment in the next year alongwith the TDS thereon.”
6. ” On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 15,69,80,805/ –made by the assessing officer on account of premium on foreign currency convertible bonds without appreciating the fact that FCCB were issued for acquiring the overseas business which is a capital expenditure and the premium on FCCB has been provided from the securities premium account which reflect capital receipts on the and had never be offered for income tax in any of the earlier assessment year.
7. “On the facts and circumstances of the case and in law, the CIT(A) erred in c fl holding that the loss from n- on eligible unit w/s 10B cannot be set off against the profit from eligible unit us 10B for the purpose of determining the allowable par deduction us 10B of the Act, without appreciating the fact that there is no specific restriction u/s 10B or section 70 for setting off business loss from non exempt unit against profit from exempt unit u/s 10B.”
8. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the issue of deduction us 10B, regarding set off the losses of non- eligible unit against the eligible unit in favour of the assessee relying upon the decision of the Hon ble ITAT in assessee’s own case for the A.Y. 200- 4 05, ignoring the fact that the above decision of the Hon’ble ITAT was not accepted by the department and appeal u/s 260A was filed before the Hon’ble High Court and the Hon’ble High court had admitted the issue raised by the Department as substantial question of law vide order dated 19.11.2012 and the same is pending for final decision.”
3. Briefly, the facts of the case are that during the year under consideration, the assessee company was engaged in carrying on business of manufacturing and marketing of organic and agro-chemical products. The assessee filed its regular return of income for the year under consideration on 30.09.2010 declaring total income at Rs. NIL under normal provisions of the Income Tax Act, 1961 [in short “the Act”] after claiming entire business income of Rs.12,87,29,134/- for set off against the brought forward losses and unabsorbed depreciation. The Book Profit u/s. 115JB of the Act was declared at Rs. 59,48,35,167/-. The case of the assessee was selected for scrutiny and statutory notices were issued and served upon the assessee company. In the assessment completed u/s. 143(3) of the Act on 31/03/2013, the Assessing Officer made various additions and computed the total Income at Rs.28,52,31,345/- under normal provisions of the Act and Book Profit at Rs.60,34,95,220/ – u/s. 115JB of the Act. Since the tax determined on Book Profit u/s. 115JB was higher than that under the normal provisions of the Act, the Book Profit determined at Rs. 60,34,95,220/- was taken as the Total Income for the income tax purpose. Aggrieved by various additions made by the Assessing Officer, the assessee company preferred appeal before the Ld. CIT(A) on various grounds who partly allowed the appeal of the assessee. Aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us.
4. The ground No.1 of the appeal relates to the deletion of the disallowance of Rs.86,60,051/ – made u/s. 14A of the Act in the normal provisions of the Act and u/s. 115JB of the Act.
5. Brief facts qua this issue-in-dispute are that the assessee received dividend income of Rs. 34,60 0/- which was claimed as The assessee did not make any suo moto disallowance u/s. 14A of the Act in its return of income. The Assessing Officer rejected the plea of the assessee that no expenditure was incurred in relation to earning exempt income. He observed that the assessee company had made substantial investment in equities which stood at Rs. 18.16 crores and the assessee claimed interest of Rs. 34.83 crores on borrowed funds. The assessee did not establish that no part of interest bearing fund had been utilised for investments in shares/mutual funds. Further, the investment decisions are complex in nature requiring substantial market research, analysis, etc. which lead to incurrence of various administrative expenses as well. Accordingly, he invoked the provisions of section 14A of the Act and applied the computation mechanism provided in Rule 8D of the Income Tax Rules ,1962 [in short, “the Rules”]. However, the ld. CIT(A) deleted the disallowance u/s. 14A on the ground that 98% of the investment is made in appellant’s own subsidiary foreign companies for the purpose of holding controlling stake in the group concerns which are also not covered within the scope of section 14A of the Act and that no new investments are made in the year under consideration whereas the dividend income earned is incidental and miniscule.
6. The ld. Departmental Representative for the revenue argued that the ld. CIT(A) has not appreciated the fact that the assessee has neither established that no part of interest bearing fund as well as expenses so claimed has been found its way into the investments in Mutual Funds/Shares nor adduced any documentary evidences during the course of assessment proceedings before the Assessing Officer. He argued that the onus is on the assessee to prove that no interest bearing funds have been utilised in making investments yielding exempt income and that no expenses at all have been incurred towards earning of exempt income. Accordingly, he submitted that the decisions relied upon by the ld. CIT(A) in his order and that by the ld. Counsel of the assessee in the course of hearing are not applicable and on distinguished facts. In rebuttal, the ld. Counsel of the assessee argued that the dividend earned by the assessee company is only incidental and miniscule. Further, the investments was made out of own funds – Share Capital of Rs. 16.44 crores and Reserves & Surplus of Rs. 382.60 crores against the investments of Rs. 18.16 crores. Even the dividend was directly credited to the appellant’s bank account and no actual expenditure was incurred in relation to earning of exempt income. The ld. Counsel of the assessee also requested to restrict the disallowance to the extent of exempt income only.
7. We have heard the rival contentions and perused the material available on record. The assessee has earned dividend of Rs. 34,600/- in the year under consideration and it has adequate own funds to cover the investments yielding exempt income. The Assessing Officer has invoked the provisions of section 14A of the Act on the premise that one to one nexus of utilisation of interest bearing funds have not been established by the assessee. It is seen that the assessee had a mixed pool of funds and it is now well settled by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) that presumption can be drawn that the investments were made out of own funds where adequate such funds are available with the assessee and that no disallowance u/r. 8D(2)(ii) could be made. Further, we agree with the argument of the ld. Counsel of the assessee that the disallowance u/s. 14A of the Act is to be restricted to the extent of exempt income only as held in even assessee’s own case by Hon’ble Mumbai Tribunal in A.Y.2008 -09 (ITA No. 5387/Mum/2012) and 2009-10 (ITA No. 5388 and 5372/Mum/2012) . The relevant finding is reproduced as under:
“7.2 The Id. CIT(A) in principle upheld the disallowance made u/s.14A of the Act by applying the Rule 8D (2) of the Rules but directed the Id. AO to exclude foreign investments while computing disallowance thereon. Against this order of the Id. CIT(A), we find Revenue has not preferred any appeal and only the assessee has preferred the appeal on the ground that disallowance cannot exceed exempt income. We find that this issue is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 IT 640 wherein it has been held that disallowance u/s.14A of the Act cannot exceed exempt income. The Id. AO is hereby directed to restrict the disallowance u/s.14A of the Act only to the extent of exempt income. Accordingly, the ground No.9 raised by the assessee is allowed.”
7.1 Respectfully, following Tribunal (supra), we direct the Assessing Officer to restrict the disallowance u/s. 14A of the Act to the extent of exempt income of Rs. 34,600/ – in the form of dividend income only.
7.2 Further, disallowance of expenses u/s 115JB of the Act for earning exempted income i s concerned, the Tribunal (supra) in AY 2008-09 and 2009-10 has restored the issue to the file of the Assessing Officer following the finding of Special Bench of Tribunal in Vireet Investments reported in 165 ITD 27. The relevant finding of the Tribunal (supra) is reproduced as under:
“8. The ground No.11 raised by the assessee is challenging the disallowance made u/s.14A of the Act while computing book profits u/s.115JB of the Act. The facts relevant for adjudication of this ground is already detailed by us in ground No.9 above. We find that the Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 had categorically held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed in Clause (f) of Explanation 1 to Section 115 JB (2) of the Act. However, the actual expenses debited in the profit and loss account is required to be identified by the Id.AO as relatable to earning of exempt income. For this purpose, we deem it fit to set aside ground No.11 to the file of Id. AO for denovo adiudication and decide the same in the light of decision of Special Bench of Delhi Tribunal in the case of Vireet Investment decision reported in 165 ITD 27. Accordingly, the ground No. 11 raised by the assessee is allowed for statistical purposes.”
7.3 Respectfully, following the Tribunal (supra) the issue in dispute in the year under consideration, is restored to the file of the Assessing Officer for adjudication following the direction of Tribunal (supra). The ground No. 1 of the Appeal is partly allowed for statistical purposes.
8. The ground no. 2 relates to deletion of addition made for allocation of Head Office expenses among Export Oriented Units (EOU) and non-EOU units for the purpose of computation of exemption u/s. 10B of the Act and that the assessee has not followed the uniform criteria while allocating the R&D expenses to the EOU and Non-EOU units.
9. Briefly, the facts qua this issue in dispute are that the assessee has claimed exemption u/s. 10B of the Act. During the course of assessment proceedings, the Assessing Officer observed that the assessee company had incurred losses in Non -EOU units and gained profits in EOU units. He found that the assessee adopted 3 basic parameters for allocation of Head office and Research and development (R & D) expenses among EOU and non EOU viz.
(i) Manpower cost
(ii) Turnover/Sales
(iii) Fixed asset of each unit/plant.
9.1 In the opinion of the Assessing Officer, the method of allocating expenditure based on different parameters was inconsistent and concluded that the allocation of expenses was not in the proportion of turnover ratio of EOU and Non -EOU units. Accordingly, he also rejected the books of accounts. Further, in respect of allocation of R&D expenses between EOU and Non -EOU units, he observed that while on one hand the assessee boasts of cutting edge R&D to make its product world-class and on other hand, it has not allocated adequate expenditure of R&D to the EOU units. Accordingly, he concluded that the R&D expenses should be apportioned between EOU and Non -EOU units in the ratio of turnover. At para 10 of the assessment order, the Assessing Officer has reallocated the Head Office expenses and R& D expenses between the EOU and Non -EOU units based on the respective turnover and thereby reduced the claim of the assessee u/s. 10B of the Act. However, the ld. CIT(A) allowed the appeal on this issue on the premise that the assessee has been maintaining separate record of expenditure on R&D and other heads pertaining to each unit and, therefore, claim of expenses is based on factual. Further, this system of allocation has been consistently followed since A.Y. 2002 – 03 and even accepted by the Department.
10. Before us, the Ld. Departmental Representative (DR) for the revenue argued that the method of allocation of the assessee adopting mix of different parameters is not any uniform method and the approach of the Assessing Officer in bringing an uniform method of allocation was appropriate. Hence, the Assessing Officer has rightly rejected the books of accounts and the reallocation done for the head office expenses and R&D expenses by the Assessing Officer be upheld.
11. In rebuttal, the ld. Counsel of the assessee argued that the assessee has been maintaining separate records for EOU and Non – EOU units and has been consistently following the same allocation method since A.Y. 2002 -03. In respect of allocation of the Head office expenses based on set of parameters, the ld. Counsel of the assessee drew our attention to the order of Mumbai ITAT in its own case for A.Y. 2006-07 which is again followed in A.Y. 2009 -10. The relevant extract from the ITAT order for A.Y. 2006 -07 in ITA No. 5385/Mum/2012 is reproduced as under:-
“3.1 We have heard the rival submissions and perused the materials available on record. We find that the assessee company is engaged in the business of manufacturing and export of agro chemicals & drug intermediates. The assessee is having the following manufacturing units : –
