S. 14A & Rule 8D: Investments in subsidiaries to be excluded while computing disallowance

The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(A) shows that out of total investment of Rs. 64.18 crore, Rs. 63.31 crore is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investment made by the assessee in its subsidiary are not to be reckoned for disallowance u/s 14A r.w.r. 8D. The AO is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company

Transfer Pricing: Share application money, though not allotted into shares for a long time, cannot be treated as a “loan” for taxing notional interest

The TPO has not disputed that the transactions were in the nature of payments for share application money, and thus, of capital contributions. The TPO has not made any adjustment with regard to the ALP of the capital contribution. He has, however, treated these transactions partly as of an interest free loan, for the period between the dates of payment till the date on which shares were actually allotted, and partly as capital contribution, i.e. after the subscribed shares were allotted by the subsidiaries in which capital contributions were made. No doubt, if these transactions are treated as in the nature of lending or borrowing, the transactions can be subjected to ALP adjustments, and the ALP so computed can be the basis of computing taxable business profits of the assessee, but the core issue before us is whether such a deeming fiction is envisaged under the scheme of the transfer pricing legislation or on the facts of this case. We do not find so. We do not find any provision in law enabling such deeming fiction

S. 57(iii): Interest paid on a loan taken to avoid premature encashment of a fixed deposit is deductible against the interest earned on the fixed deposit

On these facts, in order to protect the interest earnings from fixed deposits and to meet her financial needs, when an assessee raises a loan against the fixed deposits, so as to keep the source of earning intact, the expenditure so incurred in wholly and exclusively to earn the fixed deposit interest income. The authorities below were apparently swayed by the fact that the borrowings were triggered by assessee’s financial needs for personal purposes and, by that logic, the borrowing cannot be said to be wholly and exclusively for the purposes of earning interest income, but what this approach overlooks is whether the expenditure is incurred for directly contributing to the beginning of or triggering the source of income or whether the expenditure is for protecting, and thus keeping alive, that source of income, in either case it is expenditure incurred wholly and exclusively for the purpose of earning that income. The assessee indeed required that money, so raised by borrowing against the fixed deposits, for her personal purposes but that’s not relevant for the present purposes. The assessee could have gone for premature encashment of bank deposits, and thus ended the source of income itself, as well, but instead of doing so, she resorted to borrowings against the fixed deposit and thus preserved the source of earning. The expenditure so incurred is an expenditure incurred wholly and exclusively for earning from interest on fixed deposits. We are alive to the fact that in the case of a business assessee, and in a situation in which the borrowings against fixed deposits were resorted to for use in business, consideration for end use of funds so borrowed would be relevant because the interest deduction is claimed as a business deduction u/s 36(1)(iii). That aspect of the matter, however, is academic in the present context as the limited issue for our consideration is whether or not, on the facts before us, the interest on borrowings against the fixed deposits could be said to protect the interest income from fixed deposit interest and thus, incurred wholly and exclusively for the purposes of earning such income

No S. 271(1)(c) penalty for failure to compute capital gains as per s. 50C. Direct judgements on the topic have to be followed

There are direct judgements which hold that where addition is made on account of application of s. 50C and there is no material on record to show that the assessee had received more amount than that shown by it on sale of property then penalty u/s 271(1)(c) cannot be levied. The decisions relied upon by the Dept are not directly on the issue and distinguishable on facts. The context in which the decisions have been rendered is entirely different from the context of the present case. The law in this regard is well settled as held in Sun Engineering 198 ITR 297 (SC). When there is a direct decision available on the issue, then it will be appropriate to follow the same particularly when no contrary decision on the same very issue is cited by the opposite side

S. 254(2B): Even though action of the CIT in canceling registration u/s 12AA(3) is illegal, costs cannot be awarded as the said action is in discharge of duty & not mala fide

(ii) The CIT has passed the order u/s 12AA(3) of the Act during the course of discharge of her duty as CIT. While discharging her duty, her action might have caused some hardship to the assessee due to error of judgement but that in our opinion does not warrant levy of cost on the department. In Pooran Mal vs. Director 93 ITR 505 (SC), it was noted that s. 132 causes serious invasion of the privacy of a person. Still it was held that even though the innocent is likely to be harassed by a raid for the purpose of search and seizure, that cannot be helped. In the instant case, there is no such action of search and seizure which causes serious invasion in the privacy of the person. The CIT was discharging her quasi-judicial duty. Further, there is nothing on record to suggest that the action of the CIT was mala fide. Therefore, there is no merit in the claim for award of costs for the action of the CIT in cancelling the registration granted earlier u/s 12AA of the Act (UOI vs. Raja Mohammed Amir Mohammad Khan (SC), Urban Improvement Trust, Bikaner vs. Mohanlal (2010) (1 SCC 512) (SC) & Charanjilal Tak Shyam Parwani vs. UOI 252 ITR 333 (Raj) distinguished)

Transfer pricing implications of interest-free loans, corporate guarantee & export turnover adjustments explained

(i) Interest free loans to AEs: We have no issue of the TPO applying the CUP method. But the problem arises when in the name of applying CUP method; a wholly inapplicable comparable model applied which leads to distorted results. A significant sector of multi-national corporate set up involves creation of subsidiaries and associate enterprises for advancement of their overseas business. They help them in terms of finance by offering soft loans and subsidiary loans; they are primary focused to spread the business of the principal unit. It would have been very reasonable, judicious and appropriate on the part of the TPO to have looked into such type of transactions and applying it as uncontrolled transactions. Re-course straightaway to CRISIL, which deals in hardcore institutional finance transactions that too with clear commercial object of earning out of loans bereft on other considerations, is wholly inapplicable. While the real income theory has no application to a fictional working as provided by section 92 but this being part of the Income-tax Act, the valid consideration for properly assessing a transaction cannot be given a go by. Every fiction has limits to its application. In view thereof, the rate of 13.49% applied solely relying upon a third party opinion by applying on uncontrolled set of transaction is factually not correct and cannot be accepted. The correct comparable which can be applied is of LIBOR rate which is internationally recognized. It is the most appropriate comparable for the relevant periods and being reasonable and scientific uncontrolled comparable to be applied to the assessee’s loan transactions

S. 133A: No addition can be made on the basis of a surrender simplictor even if the surrender is during the course of s. 133A survey proceedings

The issue raised is infructuous inasmuch as even if the surrender is in order but the addition was not warranted on merits, it is only elementary that merely because the assessee has, under misconception of facts or law, surrendered an income, no addition can be made in respect of the same. We have also noted that as evident from the observations of even the AO, there were no specific reasons for making the addition of Rs 10,00,000 save and except for the alleged surrender made by the assessee. The issue in appeal is also covered, in favour of the assessee, by
a coordinate bench of this Tribunal in ACIT vs. Satya Narayan Agarwal (91 TTJ 481) wherein it is held that no addition can be made on the basis of a surrender simplictor even when surrender is made during the course of survey proceedings under section 133 A.

S. 271(1)(c): Relief by CIT(A) on merits (though reversed by ITAT) means claim is debatable

The fact that the claim of the assessee was accepted by the CIT(A) on merit clearly shows that the claim made by the assessee was based on a possible view of the matter. It also shows that the claim for deduction on account of legal expenses was a bonafide claim. In subsequent years, the assessee has capitalized similar legal expenses after having come to know about the disallowance made in the years under consideration. This show the bonafides of the assessee. All material particulars relevant to the claim were fully and truly furnished by the assessee and there is no allegation made by the AO in the penalty order that any inaccurate particulars were furnished by the assessee while making the claim on account of deduction of legal expenses. It is also not in dispute that the legal expenses claimed by the assessee were actually incurred by him and it is not the case of the Revenue at any stage that the expenses so claimed by the assessee were bogus. When no information given in the return is found to be in-correct or in-accurate, the assessee cannot be held guilty of furnishing in-accurate particulars of its income and unless the case is strictly covered by the provision, penalty cannot be imposed. Where there is no finding that the particulars furnished by the assessee in the return are in-accurate or erroneous or false, there is no question of imposing penalty u/s 271(1)(c) of the act merely because the claim of the assessee for deduction is disallowed in the quantum proceedings (Reliance Petroproducts Ltd 322 ITR158 (SC) followed)

S. 68: Primary burden is on AO to show that share application money is assessable as unexplained cash credit. AO cannot sit back with folded hands & simply reject assessee’s evidences

(i) Even if the reopening is sustained, the primary burden that income has escaped assessment is on the shoulder of the AO and after discharging this burden only, the onus shifts to the shoulder of the assessee. There are two types of cases. One in which the AO carries out the exercise which is required in law and the other in which the AO ‘sits back with folded hands‘ till the assessee exhausts all the evidence or material in his possession and then comes forward to merely reject the same on the presumptions. On facts, nothing has been brought on record by the AO to substantiate his serious allegation that these two entries are accommodation entries which was the sole ground and basis for reopening;

S. 147: Retracted statement cannot form the basis of reopening. Protective assessment without substantive assessment is not permissible

(ii) The AO has not made any specific allegations against the assessee. He intended to make a protective assessment on the assessee. However, while there can be a substantive assessment without any protective assessment, there cannot be a protective assessment/addition without a substantive assessment/addition. As no substantive assessment/addition was made in the hands of Subodh Gupta, the protective reassessment assessment on the assessee is not permissible (M.P. Ramachandaran 32 SOT 592 (Mum) & Suresh K Jajoo 39 SOT 514 (Mum) followed)