Income Tax Act, 1961 – Sections 40(a)(ia), 92CA(3) and 194J – Advertisement and marketing expenses – Transfer pricing adjustment – Appellant company is a joint venture between Hindustan Unilever Limited (HUL) and Kimberly Clark Corporation, engaged in business of manufacturing of Infant Care and Feminine Hygiene Care Products – Appellant filed its return of income for AY 2009-10 – Assessing Officer referred matter to Transfer Pricing Officer (TPO) for purpose of benchmarking international transactions reported by Appellant in Form No.3CEB – TPO proposed upward adjustment under Section 92CA(3) of the Act on account of Advertising & Marketing expenses and import of raw material – AO passed draft assessment order by making various additions/disallowances – Dispute Resolution Panel confirmed action of AO – Whether DRP has erred in confirming addition made by AO on account of Transfer Pricing adjustment proposed by TPO in respect of Advertisement and Marketing expenses incurred by Appellant – HELD – Main contention advanced by Appellant is that existence of international transaction cannot be inferred by TPO in absence of any actual transactions – There is no material referred to by lower authorities to show that assessee had incurred advertising and marketing expenses in order to promote brand value of foreign AE – In absence of agreement between Appellant and its foreign AE to incur advertising and marketing expenses to benefit of foreign AE, no inference can be drawn as to existence of international transaction on mere incurring excess expenses on marketing and advertisement as compared to expenditure incurred by comparables – Presumption by lower authorities that benefit had endured to foreign AE is merely based on conjectures – Appeal partly allowed. Issue 2: Import of raw materials – Determination of arm's length price – Whether AO/DRP have erred in making a transfer pricing adjustment with respect to international transaction of import of raw material – HELD – Appellant has imported raw materials from third party vendors under global sourcing arrangement across the world – It is settled position of law that comparison should be between tested party and controlled transaction – Controlled transaction has been defined to mean a transaction entered into between two associated enterprises – Lower authorities were justified in not giving any credence to certificates issued by deemed AEs – In light of additional evidence filed in form of price list obtained from third parties, matter remit back to file of AO/TPO with a direction to undertake exercise of benchmarking the transaction of import of raw material by taking cognizance of price list furnished by assessee and to restrict any TP adjustment only in respect of AE transactions. Issue 3: Reimbursement of salary – Allowable deduction – Whether AO/DRP have erred in considering that reimbursement of actual salary cost of employees of HUL deputed to work under control and supervision of Appellant is in nature of managerial service warranting disallowance under Section 40(a)(ia) of the Act for non-deduction of tax at source under Section 194J of the Act – HELD – Payment was made by Appellant to HUL towards cost of reimbursement of salary of employees who are deputed to Appellant company – AO disallowed expenditure for non-deduction of tax at source by treating same as expenditure under provision of managerial service – There is no material on record to show that HUL had provided any services like technical or managerial in nature to Appellant – Mere reimbursement of salary of employees does not constitute provision of managerial services – When expenditure is a mere reimbursement of salary of employees deputed, question of deduction of tax at source does not arise, therefore, provisions of Section 194J of the Act have no application to subject payment – AO is not justified in invoking provisions of Section 40(a)(ia) of the Act while disallowing subject payment. Issue 4: Disallowance of selling discount – Sustainability – Whether AO/DRP have erred in considering that selling discount extended by Appellant to HUL is in nature of commission payment to HUL for sale of Appellant's products in market warranting disallowance under Section 40(a)(ia) of the Act for non-deduction of tax at source under Section 194H of the Act – HELD – HUL is the distributor of products of Appellant and selling discount was given to HUL towards sale cost – HUL was not responsible for control and conduct of business of Appellant company and no services towards sales were rendered by HUL but merely acted as an independent distribution agent of products – Relationship between Appellant and distributor was that of principal to principal – No services were rendered by distributor to Appellant and what was offered to distributor was discount under sales promotion schemes, therefore, it cannot be said that discount is in nature of commission within meaning of Explanation 1 to Section 194H of the Act – Impugned expenditure does not fall within meaning of ‘commission’ thereby attracting provisions of Section 194H of the Act – AO is not justified in invoking provisions of Section 40(a)(ia) of the Act while disallowing selling discount. Issue 5: Advertisement charges – Disallowance for non-deduction of tax at source – Whether DRP has erred in confirming disallowance of payment made to Star India Pvt. Ltd. towards advertisement charges – HELD – AO disallowed expenditure on ground that no TDS was made on said payment – Merely because Appellant was under a bona-fide belief that TDS provisions was not applicable on payments made to Star India Pvt. Ltd. cannot be a valid reason not to make any disallowance under Section 40(a)(ia) of the Act, since there is no specific provisions not to make any disallowance under such circumstances – There is force in alternative submission made on behalf of Appellant that benefit of second proviso to Section 40(a)(ia) of the Act should be examined by AO after due verification of evidence in support of same – In these circumstances, this ground of appeal is remitted back to file of AO for limited purpose of examining applicability of second proviso to Section 40(a)(ia) of the Act. Issue 6: Payment of dividend distribution taxes – Non granting of credit – Whether AO has erred in not granting credit for dividend distribution taxes paid by Appellant – HELD – Perusal of assessment order make it clear that AO had not granted credit for dividend distribution taxes paid by Appellant without assigning any reason – In these circumstances, this ground of appeal is also remitted back to file of AO with a direction to grant a credit for dividend distribution taxes paid by Appellant after due verification.
Income Tax Act – Section 143 – The Appeal at the instance of the assessee is against CIT (A)’s order on the ground that the AO made an addition (being the interest expenditure disallowed) to the total income - During the year under consideration, the assessee has taken loan and paid an advance to its director, and has debited an amount as loss before interest. Details regarding the same were called for and submissions made by the assessee were examined. Further, it is found that loan taken by the assessee company has not been utilized for the business purpose of the assessee company. Hence, the entire interest debited to the P & L A/c as interest expense is therefore disallowed and added to the income declared by the assessee and brought to tax – CIT (A) had concluded that the A.O. has rightly disallowed proportionate interest expenses - HELD - the borrowed funds by the assessee are only utilized to give advance to the director without any interest. The advances made by the assessee to the director were made prima facie not for the purpose of purchasing a property on behalf of the assessee, but for personal benefit of the director. Therefore, CIT (A) has correctly affirmed the A.O.’s order and the same is upheld. Hence the appeal filed by the assessee is dismissed.
Income Tax Act – Section 143(3), 194IA – Assessee has filed appeal against CIT (A)’s order - the issue raised in this appeal is as to whether the assessee is entitled for claiming deduction on account of cost of acquisition and cost of improvement in respect of (a) Car Parking Charges (b) Club Membership Fees (c) Society Maintenance Charges paid at the time of acquisition of property and immediately thereafter, while computing the long term capital gains on sale of flat – HELD – It is found that CIT(A) had simply ignored the evidences submitted by the assessee - with the consent of both the parties, in the interest of justice and fair play, it is deemed fit and appropriate to remand the issue to the file of the AO for verification of the evidences filed by the assessee and decide the eligibility to claim cost of acquisition and the cost of improvement while computing long terms capital gain, in accordance with law. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.
Income Tax Act – Sections 36(1)(va), 43B - The CIT(A), has held that the amendment to section 36(1)(va) by insertion of explanation 2 and the amendment to section 43B by insertion to explanation 5 by the Finance Bill 2021 was only declaratory / clarificatory in nature and there therefore was applicable with retrospective effect by necessary intendment of deeming nature expressly stated therein and hence upheld the addition made by the AO during the assessment proceedings of the assessee who is in appeal against the order – HELD - explanatory memorandum to the Finance Act, 2021 proposing amendment in section 36(1)(va) as well as section 43B is applicable only from 01.04.2021 – Since, the aforesaid amendment is applicable only prospectively i.e., from 1.4.2021, therefore the impugned additions made u/s 36(1)(va) of the Act, should be deleted - appeal of the assessee is allowed.
Income Tax Act – Section 143(3) – The appeal is filed by Revenue against CIT(A)’s order on account of : i) the action of CIT(A) in deleting the non-apportionment of expenses in respect of its share with holding company; ii) the action of the ld. CIT(A) in deleting the disallowance on account of apportionment of bad debts to holding company; iii) the action of the ld. CIT(A) in deleting the disallowance of bonus paid to employees including the key management persons – HELD - the disallowance on account of non - apportionment of expenses should be deleted as CIT(A) had rightly understood the fact and modus operandi adopted by the assessee. Accordingly, the first ground raised by the Revenue is dismissed - CIT(A) had rightly appreciated the contention of the assessee that it had availed services of holding company only in respect of some assignments and not for all the assignments carried out by the assessee. There is no question of sharing of bad debts written off with the holding company. Accordingly, the second ground raised by the Revenue is dismissed. The bonus was paid to the employees including the key management personnel only in the ordinary course of business and the same are squarely allowable as deduction u/s. 37 of the Act. Hence, no disallowance could be made thereon. Accordingly, the third ground raised by the Revenue is dismissed. Therefore, appeal of the Revenue is dismissed.
Income Tax Act – Section 40(a)(ia), 194A - The issue raised by the assessee in the instant appeal is that the CIT (A) erred in confirming the order of the AO by sustaining the addition to total income on account of non-deduction of tax u/s 194A r. w. Section 40(a)(ia) of the Act – HELD - As per the provision of section 40(a)(ia) of the Act, the disallowance has to be restricted to the tune of 30% in respect of the expenses on which TDS was not deducted by the assessee. Such amendment was retrospective - the 100% of the expenses incurred by the assessee without deducting the TDS cannot be disallowed. Rather disallowance shall be restricted to the tune of 30% only of such expenses. Accordingly, the AO should restrict the disallowance to the tune of 30% of the interest expenses, incurred by the assessee. Hence, the ground of appeal of the assessee is partly allowed.
Income Tax Act – Section 271 (l)(c) - Appeal is filed by the assessee against the order of the CIT(A), CIT(A) has dismissed the appeal of the assessee ex parte against the order of AO levying a penalty u/s 271 (l)(c) for the impugned assessment year for the reason of non - prosecution by the assessee - On the basis of the information received from the sales tax department it was found that the assessee had obtained bogus purchase bills from hawala parties where assessee failed to prove with supporting documentary evidences that material was actually delivered to the assessee – HELD - the CIT(A) has dismissed the appeal for non-prosecution. Such powers are not vested in the first appellate authority. Therefore the decision is required to be given on the merits of the issues raised in the grounds of appeal. It is also true that despite opportunities granted by CIT (A) assessee has not remain present. The assessee should remain present before CIT (A) or make any submission within 90 days of the order, CIT(A) may decide the issue on the merits of the case thereafter. Accordingly, appeal of the assessee is allowed for statistical purposes.
Income Tax Act – Section 36(1)(va), 43B(b), 154 – Appeal is filed by assessee against the order of CIT(A) - issue arising in the instant appeal is the addition of the employee’s contribution to the employee welfare funds for the reason of the same having been deposited beyond the due date specified in its respect u/s. 36(1)(va), even as the same stand deposited by the due date of filing the return of income u/s/. 139(1) of the Act for the relevant year – HELD - The amendments by way of Explanation 5 to section 43B and Explanation 2 to section 36(1)(va) of the act, are to take effect only from AY 2021-22, no question of the said Explanations being read as retrospective, so as to apply for the relevant year, sustaining the impugned additions, which therefore fail. The impugned additions, therefore, could not have been made under the given facts and circumstances of the case, and should be deleted. The assessee’s appeal is allowed.
Income Tax Act – Section 14A, Rule 8D of Income Tax Rules – Deletion of disallowance u/s 14A – Appeal by the Revenue is against the order of CIT(A) and the ground raised is disallowance u/s. 14A of the Act r/w Rule 8D of the IT Rules - The assessee relied on earlier orders of Tribunal and submitted that only exempt income yielding investments were to be considered to compute the disallowance - CIT(A), in the light of favourable decision of the Tribunal for earlier years had directed AO to delete the additional disallowance – HELD - The disallowance as offered by the assessee is in accordance with the earlier decisions of the Tribunal for previous AYs, wherein Hon’ble Court had refused to admit the substantial question of law as raised by the revenue. No infirmity is found in the impugned order and therefore, the appeal is dismissed.
Income Tax Act – Section 54 – Assessee has filed appeal against CIT(A)’s order on the ground that CIT-A has erred in sustaining the disallowance made by AO of deduction u/s 54 on faulty reasoning that assessee has invested in three residential house properties at three different places without appreciating that assessee has admittedly sold three separate units/houses which makes the claim of assessee u/s 54 as completely correct and valid and amendment made by Finance No.2 Act 2014 which is effective prospectively from AY 2015-2016 and has nothing to do with present case where three houses/units are sold separately – HELD – Relying on various favourable judgements of HCs and Tribunal benches, it is held that assessee is eligible for claim of exemption u/s 54 in respect of purchase of 3 different residential houses and amendment brought in the Finance Act, 2014 w.e.f. 01.04.2015 will not be applicable in AY under consideration. Accordingly, the appeal filed by the assessee is allowed.
Income Tax Act – Section 14A, Rule 8 - The appeals are by the Revenue against separate orders of CIT(A) for two AYs respectively -The grievance of the Revenue in both the AYs is that the CIT(A) has erred in deleting the additions made on account of estimation of profit @8% of the work-in-progress. CIT(A) after going through the submissions and books of accounts of the assessee and also based on decision of the Tribunal in the case of the assessee for a previous AY deleted disallowance being interest expenses, and the balance amount being administrative expenses i.e. 05% of average investment was confirmed – HELD – In view of the findings of the ITAT in assessee’s earlier case the tribunal upheld and confirmed deletion of additions on account of estimation of work-in-progress for both the years. Ground No.1 of revenue stands rejected. Action of the AO in making disallowance u/s. 14A r. w. Rule 8D was not justified in view of the fact that the assessee has demonstrated that it has sufficient funds for making investment which yielded exempt income. After examining the explanation of the assessee and based on decision of the Tribunal in assessee’s own case for a previous AY, CIT (A) deleted the interest portion of the disallowance and the balance amount was sustained – No infirmity is found in order of CIT (A). Ground No.2 of revenue stands rejected - both appeals of the Revenue are dismissed.
Income Tax Act – Section 143(1) – Assessee had filed his return of income declaring taxable income after claiming carried forward loss pertaining to previous AY – CPC disallowed the setting off on the ground that return for previous AY was filed beyond the due date - Before the CIT(A), it was submitted that the assessee could not file the return timely owing to severe matrimonial dispute with his wife - CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the intimation issued by the CPC - Aggrieved with such order of CIT(A), the assessee is in appeal – HELD – Since assessee has not filed the return of income for the previous AY within the due date returning the loss, therefore, the same cannot be carried forward to the subsequent AY to be set off against the income – there is no infirmity in the order of CIT(A) upholding the intimation issued by the CPC, rejecting the claim of set off of carried forward loss - The order of CIT(A) is accordingly upheld and the grounds raised by the assessee and hence the appeal is dismissed.
Income Tax Act – Section 139, 143 – The appeals by the assessee are against the order of CIT (A) for three consecutive years - Issue being the additions in respect of the employee’s contribution to the employee welfare funds on the processing of the assessee’s returns u/s. 143(1), despite the same being deposited before the due date of filing the return of income u/s. 139(1) for each of the relevant years – HELD – As per the Finance Bill, 2021, the amendments by way of Explanation 5 to section 43B and Explanation 2 to section 36(1)(va) of the Act, no question of the said Explanations being read as retrospective, so as to apply for the relevant years, being prior to AY 2021-22, sustaining the impugned additions, which therefore fail. The impugned additions, therefore, could not have been made under the given facts and circumstances of the case, and should be deleted. The assessee’s appeals are allowed.
Income Tax Act – Section 54 - The grievance of the assessee in the appeal is that CIT(A) has erred in confirming the addition in the total income towards capital gains earned on sale of residential plot - the assessee has shown NIL income under the head ‘Capital Gains’ after claiming exemption under sections 54D/54EC/54ED and cost of acquisition as against sale consideration - HELD - Capital gain arising out of sale of the said plot of land is long-term capital gain, therefore the matter is remitted back to AO to examine the claim of exemption u/s 54 of the Act - The assessee is directed to furnish necessary evidence in support of his claim – hence, the appeal of the assessee is allowed.
Income Tax Act – Section 271(1)(c) – Appeal filed at the instance of the assessee against CIT(A)’s order, issue being raised by the assessee is that the CIT (A) erred in confirming the penalty in part under the provisions of section 271(1)(c) of the Act instead of deleting the same in entirety – it was contended by the assessee in the ground of appeal that penalty order is not maintainable, barred by limitation and therefore the same is without jurisdiction and that the penalty has been levied without considering the documents available on record and various submissions made by assessee before the authorities - HELD - The assessee has shown purchases from certain parties but failed to support the same based on the documentary evidence - the assessee cannot be escaped from the penalty provisions in a situation where the income was determined on estimated basis - after considering the facts in totality, no infirmity is found in the order of CIT (A). Hence the ground of the assessee and the appeal is dismissed.
Income Tax Act – Section 56(2)(viia) , 263 – Appeal is filed by the assessee against the order of the PCIT on the ground that PCIT has assumed power u/s 263 of the Act holding the assessment order as erroneous and prejudicial to the interest of revenue on the ground that no independent enquiry or examination of the details were made by the AO - HELD - The issue in the present case is about the invoking of provisions of Section 263 of the Act by PCIT. The return of income for the year under consideration was selected for limited scrutiny under CASS for making examination of the issue of investment in unlisted equity shares during the year. The coordinate bench of Tribunal and Hon’ble HC on identical facts had held PCIT was not justified in assuming the jurisdiction. PCIT was not justified in invoking the provisions of Section 263 of the Act to set aside the assessment order passed by AO u/s 143(3) of the Act. The order of PCIT is therefore set aside. Thus the ground of the assessee and the appeal is allowed.
Income Tax Act – Section 263 –Appeal filed by the assessee is against the revision order of CIT (Exemptions) challenging the order passed by the CIT (Exemptions) u/s.263 of the Act for the A.Y under consideration was barred by limitation - HELD - the show-cause notice issued by the CIT (Exemptions) is beyond the period of two years from the end of the financial year in which the assessment was completed as per Section 263(2) of the Act. Hence, the re-assessment framed by the CIT (Exemptions) is barred by limitation – Accordingly, the major grounds raised by the assessee are allowed - The other grounds raised by the assessee are declared as infructuous and appeal of the assessee is allowed.
Income Tax Act – Section 24(b) – During assessment Assessee was asked to furnish documentary evidence with regard to the loan for property – assessee vehemently stated that the said property is a let out property which was purchased out of borrowed funds, therefore, interest paid by the assessee should be allowed as deduction - The submission of the assessee did not find any favour with the AO nor with CIT (A) who confirmed the disallowances – hence the instant appeal - HELD - The assessee may have purchased the property out of borrowed funds, but the onus is upon the assessee to demonstrate that the said borrowed funds have been fully utilized for purchase of the said property and further demonstrate that the payment of interest is in respect of the said borrowed funds. No documentary evidences were furnished before the lower authorities nor before Tribunal. Therefore, there is no reason to interfere with the findings of the CIT (A). The major ground of appeal is, accordingly, dismissed. In respect of balance amount as petty expenditure incurred on day to day maintenance of the building, no details have been furnished - Therefore, the issue is set aside to the file of the AO – Further disallowances were on the ground that the assets have been used for less than 180 days - contention of the revenue that the resort is occupied only during seasons is not tenable, on that basis it cannot be construed that the assets were used only for less than 180 days. The AO should allow depreciation for entire year and addition should be deleted. Therefore, the ground is allowed for statistical purposes. Hence the appeal of the assessee is partly allowed for statistical purposes.
Income Tax Act – Section 14A, Rule 8D of IT Rules – During assessment proceedings AO had asked the assessee to show the disallowance in accordance with Rule 8D of the Rules -The assessee stated that it has not incurred any expenses for earning exempt income, however submitted a working wherein disallowance was offered for disallowance without prejudice. The AO made the disallowance submitted by the assessee u/s 14A of the Act and thereafter passed an assessment order u/s 143(3) of the Act determining the total income of the assessee - Similar disallowance was also made to the book profit u/s 115JB of the Act – CIT (A) confirmed the disallowance – Hence the instant appeal – HELD - assessee has earned exempt income during the year and disallowance under section 14A is required to be made - For the earlier years, the Co-ordinate Bench has set-aside this issue on the identical facts and circumstances to the file of the AO. Accordingly, in the present appeal as well, whole issue is remitted back to the file of the AO on the similar directions - AO should work out disallowance u/s 14A of The Act afresh. Appeal of the assessee is allowed.