Income Tax Appellate Tribunal - Mumbai
Asian Paints Ltd, Mumbai vs Assessee on 12 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" Bench, Mumbai
Before Shri D. Manmohan, Vice President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 408/Mum/2010
(Assessment Year: 2005-06)
M/s. Asian Paints Ltd. A C I T, LTU
6A, Shanti Nagar Vs. 28th Floor, World Trade Centre-I
Santacruz E), Mumbai 400005 Cuffe Parade, Mumbai 400005
PAN - AAACA 3622 K
Appellant Respondent
ITA No. 1937/Mum/2010
(Assessment Year: 2005-06)
A C I T, LTU M/s. Asian Paints Ltd.
28th Floor, World Trade Centre-I Vs. 6A, Shanti Nagar
Cuffe Parade, Mumbai 400005 Santacruz E), Mumbai 400005
PAN - AAACA 3622 K
Appellant Respondent
Assessee by: Shri K. Shivaram
Revenue by: Smt. Usha Nair
Date of Hearing: 12.10.2011
Date of Pronouncement: 31.10.2011
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by Assessee and Revenue against the order of the CIT(A) XIV, Mumbai dated 22.12.2009.
2. Assessee company is engaged in manufacturing of paints and enamels and also leases out the Dealer Tinting system to various dealers. Assessee filed return of income declaring total income of `273.03 cores. In the course of assessment the A.O. made certain additions and determined the total income at `289.08 crores inter alia making certain disallowances and additions. These issues are contested by assessee and Revenue as CIT(A) allowed certain claims of the assessee.
2 ITA No. 408/Mum/2010M/s. Asian Paints Ltd.
3. We have heard the learned counsel Shri K. Shivaram and the learned CIT D.R. Smt. Usha Nair in detail. Their arguments are incorporated wherever necessary. The learned counsel also placed a fact sheet on record to sum up the issues.
ITA No. 408/Mum/20104. In this appeal assessee has raised six grounds on various issues. Ground No. 1 and 2 are as under: -
"1) The learned Commissioner of Income Tax (Appeals) - 15, Mumbai erred in confirming the disallowance of Rs.229 lacs being contractual liability/expenses incurred in respect of setting up a paint plant at Pondicherry being expansion of paint business which was no longer pursued.
2. The Learned Commissioner of Income Tax (Appeals) -15, Mumbai erred in confirming disallowance of Rs.90 lacs being contractual liability/expansion incurred in respect of setting up a paint plant at Taloja (Maharashtra) being expansion of paint business which was no longer pursued."
5. The facts leading to the issue are that the assessee intended to set up a plant in South India in order to cope up with the increase in demand for paints . The project in Pondicherry was considered and started the process and spent an amount of `2.29 crores, the details of which are as under: -
S.No. Name of the Party Particulars Amount
1 Dalal Mott MacDonal Pvt. Piping & Detailed Engg 17,51,550.00
Ltd. Consultancy
2 National Environmental Rapid Environmental 15,00,000.00
Engineering Research Impact Assessment
Institute
3 Unik Engineering Services Design & Detailed 1,45,030.00
Engineering Consultancy
4 Systems & Components Advance for 97 IT 2,56,000.00
(India) Pvt. Ltd. CHILLING PLANT
5 Grasim Industries Limited RAJASHREE 43 Grade 4,61,820.00
Cement
6 C.R. Narayana Rao Architectural Services 4,58,358.00
7 Usha Constructions Construction of 18,00,830.95
compound wall
8 JMC Projects (India) Ltd. Compensation Charges 1,64,47,730.00
9 Foundation for innovation Evaluation of Silo System 1,00,000.00
and Technology Transfer Design
Total 2,29,21,318.95
3 ITA No. 408/Mum/2010
M/s. Asian Paints Ltd.
6. Due to certain problems in getting permission from the Pondicherry administration the said project in Pondicherry was abandoned and was set up at SIPCOT, Chennai, Tamilnadu therefore the expenditures which were spent in earlier years on the project in Pondicherry were debited to the P & L Account and claimed under the head 'miscellaneous expenses'. The issue in ground No. 2 is with reference to the claim of `90 lakhs being provided for M/s. Progressive Civil Construction Co. P. Ltd. as compensation for mobilizing equipments and constructing temporary sheds at its factory site at Taloja, Maharashtra. As there was delay in obtaining government permissions the construction work could not be commenced for a period of four months and ultimately the contract was terminated. The amount of `90 lakhs provided and claimed as miscellaneous expenses. The claim by the contractor was to an extent of `1.80 cores for which provision of `90 lakhs was made in the books. It was stated that ultimately the actual expenses amounting to `75.40 lakhs was settled vide settlement agreement dated 09.10.2005. The details of the expenses paid are as under: -
S.No. Name of the Vendor Nature of Work Net Amount
` in lakhs)
(`
1 Dongre & Dongre Design Consultancy 4.47
Associates
2 Progressive Civil Civil & Structural Work 63.6
Construction Co. Ltd.
3 Metropolitan Traders Pvt. Cement Supply 3.93
Ltd.
4 Bhuwalka Steel Industries Rabar Steel Supply 1.01
Limited
5 Ashtech India Pvt. Ltd. Fly Ash Supply 2.48
Total 75.49
7. The A.O. disallowed the claim of both the above expenses on the ground that these expenses are capital in nature. With reference to the claim of `2.29 crores he was of the opinion that this expenditure was for an abandoned project, therefore, the expenditure is capital in nature and cannot be allowed as revenue expenditure. With reference to the provision made for Taloja plant he was of the opinion that this expenditure even though falls under pre-operative expenditure the deduction under section 4 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
35D(2) cannot be allowed as these were paid to a party which is not approved by the CBDT and further the project was completed in a later year and assessee had treated the amount as part of work-in-progress, therefore, capital in nature.
8. Before the CIT(A) it was contended that both the amounts are to be allowed as revenue expenditure as they pertain to abandoned projects and relied on various case law as under: -
i. CIT vs. Graphic India Ltd 137 CTR 123 (Cal)
ii. CIT vs. Woodcraft Products Ltd. 69 Taxman 415
iii. Excel Industries vs. DCIT 86 TTJ 840
The CIT(A) did not allow the claims holding that capital expenditure continues to be capital whether the project fructifies or not, so that it could not be allowed as deduction in the year of abandonment. He further relied on the decision of the Mumbai Tribunal in the case of Shapoorji S. Pallanji Power Ltd. vs. ITO 318 ITR (AT) 377 wherein various other case law were also referred to.
9. Referring to the facts of the case and submission made before the CIT(A), it was submitted that the company is in the business of paints for a number of years and has different plants at various places in India and also outside India. It was submitted that the project expenditure was for expansion of the existing business and, therefore, it is to be allowed as revenue expenditure and relied on the principles established by the Hon'ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. vs. CIT 333 ITR
18. The learned counsel also relied upon the decision of Jyoti Electric Motors Ltd. 255 IT 345 (Guj) and various other decisions as under: -
- Excel Industries Ltd. vs. DCIT 86 TTJ 840 (Mum)
- CIT vs. Hindustan Machine Tools Ltd. 175 ITR 212 (Kar)
- B.R. Ltd. vs. CTR 113 ITR 647 (SC)
- CIT vs. J.A. Trivedi Bros 117 ITR 983 (Bom)
- ONGC Videsh Ltd. vs. DCIT 33 DTR 22 (Del) (Trib)
- CIT vs. Anjani Kumar Co. Ltd. 259 ITR 114 (Raj)
- Indian Rare Earths Ltd. ITA No. 2058/Mum/2004 dated 13.12.2007.
5 ITA No. 408/Mum/2010
M/s. Asian Paints Ltd.
- CIT vs. Indian Rare Earths Ltd. ITA No. 1950 of 2009 dated 29.08.2011
10. It was further submitted that as far as far as expenditure of Pondicherry project is concerned the project was altogether abandoned whereas the amount paid to M/s. Progressive Civil Construction Co. P. Ltd. was for delay execution of the project. The Taloja project was subsequently came into operation. The cases relied upon will apply to both the facts and the expenditure is to be allowed as revenue expenditure.
11. The learned D.R., however, relied on the orders of the A.O. and CIT(A) to submit that the expenditure is in the nature of capital expenditure and cannot be allowed as Revenue expenditure. It was further submitted that the expenditure cannot be considered as pre-operative expenditure, therefore the same also cannot be allowed under section 35D.
12. We have considered the issue and examined the rival arguments. As stated the assessee is in the business of manufacturing paints. It had various projects in and outside India. The reasons for abandonment of the Pondicherry project was stated to be that the permissions were not granted by the Pondicherry govt. and the expenditure include evaluation, design and part construction. The case law relied upon by the assessee mostly pertain to the expenditure incurred on feasibility study. Feasibility studies/projects reports in the existing line of business of the assessee would have certainly been in the nature of revenue expenditure but in the case of the assessee it is not the expenditure alone on feasibility study or project reports. It is the expenditure of establishing a unit itself. The existing case law on this issue were reviewed by the Hon'ble Delhi High Court in the case of CIT vs. Priya Village Roadshows Ltd. 228 CTR 271 wherein the Hon'ble Delhi High Court not only considered its own order in the case of Triveni engineering Works Ltd. vs. CIT 232 ITR 639 and CIT vs. Modi Industries 200 ITR 341 but also considered the principles established by the Hon'ble Supreme Court in the case of empire Jute Co. Ltd. vs. CIT 124 ITR 1 and the leading case on the issue of Atherton vs. British Insulated & Helsby Cables Ltd. (1925) 10TC 155 and came to a conclusion as under:
6 ITA No. 408/Mum/2010M/s. Asian Paints Ltd.
"10. A harmonious reading of the aforesaid two judgments of this Court, namely, Triveni Eng. Works Ltd. (supra) on the one hand Modi Industries (supra) on the other, would clearly demonstrate that one has to keep in mind the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialised or not. However, if the expenditure is incurred in respect of the same business which is already carried on by the assessee, even if it is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unit of control and a common fund, then such an expense is to be treated as business expenditure. In such case whether new business/asset comes into existence or not would become a relevant factor. If there is no creation of new asset, then the expenditure incurred would be of revenue nature. However, if the new asset comes into existence which is of enduring benefit, then such expenditure would be of capital nature."
As can be seen from the above, if the expenditure was incurred for starting new business which was not carried out by the assessee earlier, then the expenditure is capital in nature. In that event it would be irrelevant as to whether it really materialised or not. However, if the expenditure is incurred in respect of the same business, in such case whether the new business/asset comes into existence or not would become a relevant factor. If there is no creation of new asset then the expenditure incurred would be revenue nature. However, if a new asset comes into existence which is of enduring benefit then such expenditure would be capital nature. The above decision of the Hon'ble Delhi High Court(supra) was in turn followed in the case of Indo Rama Synthetics (I) Ltd. vs. CIT 333 ITR 18 wherein the assessee, a manufacturer of yarn and polyester for number years intended to establish a new unit as part of vertical integration of the business. However, the assessee could not procure allotment of the requisite land from the Government of Karnataka and, therefore, the said project unit was abandoned during the assessment year. It was held by the Hon'ble Delhi High Court that the project related expenses are revenue in nature. Relying on the above principles, since the facts are similar to the present case the expenditure is to be allowed as revenue expenditure. Moreover it is seen that most of the expenditure pertains to the project consultancy and compensation charges except an amount of `18 lakhs for construction of 7 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
compound wall. As far as feasibility study and architectural services are concerned they are, certainly, in the nature of revenue expenditure. As far as other two expenses are concerned an amount of `18,00,830/- pertains to construction of compound wall in which an asset was created, therefore, that part of the expenditure becomes capital expenditure, whereas the balance expenditure, including compensation charges are concerned, no asset was created by paying this amount. Accordingly, except the amount of `18,00,830/- claimed in the above, the balance of the amount is to be allowed as revenue expenditure and, therefore ground is partly allowed to the extent stated above. As far as `18,00,830/- spent for construction of compound wall that has resulted in an asset, relying the principle laid down by the Delhi High Court decision in the case of Priya Villages Ltd. 220 CTR 201 the same cannot be allowed as the expenditure as it will fall under the nature of capital expenditure. Accordingly ground No. 1 is partly allowed.
13. As far as ground No. 2 is concerned even though the learned counsel relied on the entire case law applicable to ground No. 1, it is noticed that the amount was paid as compensation for idle period during pendency of getting permissions. What the assessee has provided in the books of account was only a provision and the claim made by the said contractor was contingent in nature. Not only that as per the admission by the assessee itself the settlement was made on 09.10.2005 which falls in the later assessment year to an extent of `75.49 lakhs and not the entire amount of `90 lakhs. Another fact which is to be considered is that this is part of the work-in- progress of Taloja project, Maharashtra, which was set up and started functioning in later year. Therefore the expenditure cannot be considered as expenditure of abandoned project. Thus as the expenditure has not been crystallised in the year under consideration and further the expenditure is part of the setting up of a plant at Taloja which commenced later, the claim cannot be allowed as revenue expenditure in this year. Therefore, the Assessing Officer's action in treating the same as capital expenditure is upheld. The claim to the extent of `74.49 lakhs is to be examined by the A.O. whether that can be capitalised or not in the year of commencement of 8 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
the Taloja project. With these observations ground No. 2 is rejected. The orders of the A.O. and the CIT(A) on this issue stand confirmed.
14. During the course of argument the learned counsel relied on the decision in the case of CIT vs. J.A. Trivedi Bros 117 ITR 983 (Bom) and also the Tribunal decision in the case of ONGC Videsh Ltd. vs. DCIT 33 DTR 22 (Del) and further in the case of Indian Rare Earths Ltd., ITA No. 1950 of 2009 dated 29.08.2001 (Bombay). In these cases the expenditure is in relation to production of oil and ore and expenditure pertains to mining. Since the facts are entirely different these are not discussed in detail. Suffice to say that all the case law relied upon by the parties were considered. The CIT(A) considered the decision of the ITAT in the case of Shapporji S. Pallanji Power Ltd. vs. ITO 318 ITR (AT) 377 wherein the issue is of setting up of business/commencement of business for the first time. Since assessee is already in the business for a number of years the above case law relied on by the CIT(A) does not apply to the facts of the case.
15. Ground No. 3 pertains to the issue of adhoc addition of `76.72 lakhs on account of non-inclusion of damaged stock in valuation of closing stock. The issue arose as assessee is not valuing the damaged stock while computing the value of closing stock which was segregated and stored at a separate place and was taken into account as and when goods were disposed off. The A.O. has taken 0.4% of the closing stock as value of damaged stock and added to the closing stock.
16. At the outset it was submitted that this issue was covered by the order of the ITAT against assessee in earlier years and the amounts were being allowed in the year of actual sale. The relevant portion of the order is as under: -
"10. Ground No. 2 is in respect of ad hoc addition of Rs.50 lacs on account of non-inclusion of damaged stock in valuation of closing stock.
11. During the course of assessment proceedings, the AO noticed that the assessee had taken the value of unserviceable, damaged and inert stock of goods at Nil. The AO was of the view that the assessee did not follow the correct method of valuation of closing stock as the assessee itself admitted that the assessee totally 9 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
excluded the damaged stock for the purpose of valuation. It was also admitted that as and when such stock was sold, the sale consideration were taken into consideration. The assessee expressed his inability to disclose such sale value of damaged goods in the current year. The AO estimated the realizable value of the damaged stock at Rs.50.00 lakhs, which was about 0.4% of the total stock. The addition made by the AO has been confirmed by the CIT(A).
12. We have heard the learned representatives of the parties and perused the record. The learned A.R. did not argue much on the issue. In principle we agree with the findings of the AO that stock of damaged goods should also be required to be valued at the end of the year. As regards estimation of amount of the said stock we find that there is no material available on record for estimation of the different amount of the stock than estimated by the AO. We, therefore, confirm the orders of the revenue authorities on this issue. Consistent with the above stand, we uphold the order of the CIT(A) and dismiss ground No. 3 of assessee.
17. Ground No. 4 pertains to the issue of disallowance under section 14A of `52.40 lakhs. During the year assessee has earned `15,31,250/- as income from tax free bonds and dividend income of `8,83,63,000/-. The A.O. disallowed `52.40 lakhs under section 14A by applying Rule 8D. On appeal the CIT(A) confirmed the same.
18. The learned counsel submitted that assessee has not incurred any expenditure for the purpose of earning exempt income. The A.O. has applied Rule 8D without giving any reasons for the same. The learned counsel relied on the decision of the ITAT in the case of Godrej Agrovet Ltd. vs. ACIT in ITA No. 1629/Mum/2009 dated 17.09.2010. The facts showed in that case was that assessee had made the investment in shares out of its own funds and the borrowed funds were entirely utilised for the purpose of its business. The investment in shares in the current year was made from a separate bank account where the surplus funds generated in that year was deposited. The argument that assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income was not acceptable in view of CIT vs. Hero Cycles Ltd. 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds 10 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
and not out of borrowed funds, disallowance under section 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds as deleted. The learned counsel relied on above decision.
19. We notice that the A.O. as well as the CIT(A) invoked the provisions of Rule 8D. However, in the case of Godrej & Boyce Ltd. Mfg. Co. VS. DCIT 328 ITR 81 the Hon'ble Bombay High Court has held that application of Rule 8D is only prospective and, therefore, the said rule cannot be applied to A.Y. 2005-06. In the interest of justice, respectfully following the above decision we restore the issue to the file of the A.O. to examine the disallowance under section 14A considering the submissions of the assessee and the facts of the case, law on the subject and decide the issue afresh. Ground No. 4 is considered allowed for statistical purposes.
20. Ground No. 5 pertains to the disallowance of `50,597/- being 1/5th of `2,52,488/- claimed under section 35DDA. Assessee paid an amount of `2,52,488/- on termination of contract in earlier year with various sub- agencies and claimed 1/5th under section 35DDA in this year. Assessee claimed full deduction under section 37(1) in A.Y. 2003-04 but the A.O. allowed only 1/5th of the said expenditure. Assessee went on claiming the balance amount in A.Y. 2004-05 and also in 2005-06. The same was being disallowed by the A.O. as the said expenditure does not pertain to the year under consideration and the provisions of section 35DDA does not apply. The CIT(A), following the earlier years orders, did not allow the expenditure as claimed. Similar issue in A.Y. 2004-05, it was submitted, was not contested by assessee. Even though assessee claimed that it had incurred the expenditure and be allowed as deferred revenue expenditure, the amount cannot be allowed in the year as the expenditure is not in the nature of deffered revenue expenditure. As the expenditure does not pertain to the year under consideration and also similar claim was not allowed in earlier year, which assessee has not contested, there is no need to consider it in this year. Accordingly the ground 5 is dismissed.
21. Ground No. 6 pertains to the issue of withdrawal of interest granted by Department. During the year assessee had paid interest of `38,11,053/- on 11 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
income tax for A.Y. 1993-94. Against the said interest paid of `38,11,053/- for A.Y. 1993-94, assessee netted of interest received in A.Y. 2004-05 of `28,82,581/- for A.Y. 1993-94. The details of interest income for 1993-94 offered for tax in A.Y. 2003-04 is as under: -
S.No. Particulars Amount (`)
1 Taxable income as per order giving effect to CIT(A)'s 23,71,95,233
order dated 10.10.1995
2 Taxable income as per order giving effect to ITAT's 23,37,55,724
order dated 06.11.2003
3 Relief granted by ITAT 34,38,509
4 Refund of Tax (Tax Rate @ 51075%) 17,79,428
5 Total refund Received 46,62,009
6 Balance Interest received 28,82,581
Thus, interest of `28,82,581/- for A.Y. 1993-94 was already offered for tax in the return of income for A.Y. 2004-05.
22. Consequent to rectification orders the amount of interest granted was withdrawn. Therefore the assessee claimed the withdrawn amount as deduction as the same was offered as income in earlier years. Even though assessee has reconciled the amounts and claimed that the amount withdrawn by the Revenue which was offered as income in earlier year be allowed as deduction, the same was not considered by the A.O. and the CIT(A). Assessee relied on the decision in the case of CIT vs. Syndicate Bank 159 ITR 464. On examination of the facts as placed on record and consequential orders given in this regard, we are of the opinion that this issue requires factual examination by the A.O., as consequent to the orders of the ITAT in A.Y.1993-94, some more interest was granted to assessee. Therefore, the A.O. is directed to examine the interest granted to assessee and interest offered by assessee in respective assessment years and rework out the allowable amount if the amount offered to tax stood withdrawn by the Revenue, to that extent. A factual examination is required and the A.O. is directed to decide the issue accordingly. Ground is considered allowed for statistical purposes.
23. In the result appeal is partly allowed.
12 ITA No. 408/Mum/2010M/s. Asian Paints Ltd.
ITA No. 1937/Mum/201024. Revenue has raised the following grounds: -
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the A.O. to consider Rs.3.32 crores for acquiring lease right and Rs.4.77 crores for removal of tenants also as a cost of acquisition for computing short term capital gain for sale of Matunga land.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow notional interest of `1,64,42,400/- on interest free loans to subsidiary companies.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow Rs.10.15,411/- (50% of total expenses) on account of distribution of gift articles.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to allow Rs.6,54,367/- on account of expenditure for repair of school as business expenditure.
5. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in directing the A.O. to allow Rs.2,22,60,000/- the adjustments on account of transfer pricing."
25. Ground No. 1 pertains to the issue of cost of acquisition while computing the capital gains on sale of Matunga land. Briefly stated, assessee acquired perpetual lease rights of the land situated at Matunga (W) from Shri Jayant Manilal Gandhi for a total cost of `3.32 crores on 3rd August 1998. These rights included occupation, development rights and also right to transfer/sale of the said land. There were sub-tenants occupying the land and on 22nd March 2000 an amount of `4.77 crores was paid to the sub-tenants for vacating the land. On 22nd May 2004 assessee acquired reversionary rights from Shri Jayant Manilal Gandhi at a cost of `1.12 crores. On 12.07.2004 assessee entered into development agreement with M/s. Chalet Hotels Ltd. to transfer the land and full development rights for a consideration of `9.3 crores. Assessee worked out the long term capital gains by taking indexation of various amounts paid and arrived at loss of `2,46,35,466/-. The A.O. however, considered that as short term capital gains and while recalculating the short term capital gains he allowed only the cost of `1.12 crores paid on 22nd May 2004 and arrived at the short term capital gain at `8.02 crores. It was AO's contention that the purchase of 13 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
lease rights as well surrender of tenancy was not related to the purchase of land, therefore, the cost paid for that cannot be considered as cost of acquisition. Before the CIT(A) it was contended that assessee had acquired the capital asset by originally paying for complete lease hold rights and subsequently vacating the tenancy by paying an amount of `4.77 crores, which amount should be considered as cost of improvement consequent to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Piroja C. Patel 242 ITR 582. Further the payment for reversionary rights of `1.12 crores was for betterment of existing lease hold rights and all put together assessee has acquired complete rights of the land which it has sold. Therefore, assessee was correct in taking indexed cost of acquisition at `11.66 crores.
26. The learned CIT(A), after considering the submissions and considering the Hon'ble Bombay High Court judgement in the case of CIT vs. Dr. D.A. Irani 111 Taxman 600, which the A.O. also referred, to consider that the expenditure incurred in acquiring the tenancy rights will form part of cost of the property. Therefore, he directed the A.O. to allow the entire cost. However, considering the date of acquisition of the complete rights he directed the A.O. to treat it as short term capital gain as against long term capital loss offered by assessee and arrived at a capital loss of `0.08 crores as against short term capital gain of `8.01 crore determined by the A.O. Revenue is aggrieved.
27. The learned D.R. submitted that there is no correlation between reversionary rights obtained by assessee and the original free hold rights obtained in 1998 and, therefore, the A.O. was correct in denying the amount paid for acquiring the lease hold rights on purchase of tenancy rights. He relied on the order of the A.O. to submit that the capital gain was correctly calculated by the A.O.
28. The learned counsel submitted that what the assessee has acquired is complete rights over the land in Matunga and originally the perpetual lease hold rights of the land were acquired on 03.08.1998 and subsequently tenancy rights were purchased by paying the amount to the tenants the 14 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
thereafter on 22.05.2004 acquired the reversionary rights from Shri Jayant Manilal Gandhi so as to avoid any future litigation as the property was to be developed. Accordingly it was submitted that all the amounts paid for acquiring the rights in the property are correctly allowed by the CIT(A) as cost of acquisition/cost of improvement. Even though the reversionary rights were purchased which the A.O. has allowed, what the assessee has acquired was only part of reversionary rights not the complete title in the property. Therefore, looking into the facts of the case all the three amounts are to be allowed as cost of acquisition. However, assessee's counsel fairly admitted that on the issue of long term capital gain/short term capital gain assessee has not contested the issue and has accepted CIT(A)'s findings that it is short term capital gain.
29. We have considered the issue and rival contentions. After examining the orders of the CIT(A), we are of the opinion that the CIT(A) has correctly considered the issue. The property is nothing but bundle of rights. It is not in dispute that assessee has acquired perpetual lease hold tenancy rights in 1998 itself. The payment for vacation of tenants has to be considered as cost of improvement of the existing tenancy rights as per the decision of the Hon'ble Bombay High Court in the case of CIT vs. Piroja C. Patel 242 ITR
582. Subsequent to the vacation of tenancy in 2000, assessee has complete tenancy rights which are perpetually handed over by the original owner Shri Gandhi. For betterment of the existing title which the assessee has already had, a further agreement was entered into with Shri Gandhi for acquiring reversionary rights so that the title is complete. So when the lessee purchased the leased property from the owner by acquiring the reversionary rights the lease got extinguished. Therefore, the decision of CIT(A) in treating that the complete rights were acquired only in 2004 consequent to the acquisition of reversionary rights can not be faulted. The doctrine of merger was applied resulting in 'drowning' and 'sinking' of inferior right into superior right. Assessee has transferred his complete rights acquired by way of tenancy rights as well as reversionary rights in the property for development. Therefore, we are of the opinion that the CIT(A) has rightly considered the amount of `3.32 crores paid in 1998 and `4.77 crores paid 15 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
for vacating the tenancy as cost of acquisition of the rights transferred. The Assessing Officer's treatment of acquiring reversionary rights alone as cost of acquisition is not correct as what the assessee has acquired in 2004 from the erstwhile owner, who already surrendered tenancy right, is only part of the reversionary rights with him so that the title is complete in all respects as far as assessee is concerned. In view of this we do not see any merit in the claim of the Revenue that the lease rights acquired and tenancy rights acquired should not form part of cost of acquisition. It is also to be noted that AO allowed cost of acquiring 'reversionary rights' as cost of 'purchase of land'. Considering the facts of the case, we do not see any reason to interfere with the order of the CIT(A). Accordingly the ground 1 is rejected.
30. Ground No. 2 pertains to the issue of addition of `1,64,42,400/- under section 36(1)(iii). Assessee has advanced interest free loans to its subsidiary concerns in earlier years as under: -
i) Technical Instruments Mfg. Co. Ltd. ` 77.02 millions
ii) Asian Paints Industrial Coating Ltd. ` 60.00 millions `137.02 millions
31. The A.O., while completing the assessment, considered 12% interest on the amount to be disallowed as assessee has not charged on the amount advanced to subsidiary companies. The CIT(A), following the earlier years orders, gave relief to assessee. It was submitted that the ITAT in earlier years have restored the issue to the A.O. in assessment years 2002-03 and 204-05 and the A.O., while giving effect to the order of the ITAT in A.Y. 2002-03, has allowed the interest. It was further submitted that assessee has sufficient interest bearing funds and these two companies were subsidiary companies and the interest advanced was for the purpose of business and relied on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. CIT 288 ITR 1 and the Hon'ble Bombay High Court judgement in the case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR
340.
32. We have considered the issue. As seen from the facts available on record, assessee advanced interest free loans in earlier years and no fresh 16 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
additional loan has been given in the impugned assessment year. Therefore, the findings given in the earlier year will have a consequential effect in the present assessment year. In A.Y. 2004-05, i.e. immediately preceding assessment year the matter was considered by the ITAT and the issue was restored to the file of the A.O. to examine the matter in the light of the orders in the earlier years. Respectfully following the same the issue is restored to the file of the A.O. to do it in the light of the facts as available on record in earlier years. Ground 2 is considered allowed for statistical purposes.
33. Ground No. 3 pertains to the direction of the CIT(A) in deleting the addition made on account of distribution of gift articles. The A.O., consequent to the orders in earlier years has disallowed 50% of the articles distributed as gift articles. The CIT(A), following the earlier years orders, deleted the said disallowance.
34. It is fairly submitted that the ITAT in A.Y. 2003-04 and in 2004-05 restricted the disallowance to 10% of the total amount distributed as gift articles. Respectfully following the same, we restrict the disallowance made by the A.O. to 10% of the total expenses. Accordingly the order of the CIT(A) to that extent is partly set aside and Assessing Officer's order to the extent of 10% of the total expenses is restored. The ground is partly allowed.
35. Ground No. 4 pertains to the issue of expenditure incurred for repair of school at `6,54,367/-. Assessee had incurred an expenditure of `6,54,367/- towards repairing the school situated in GIDC, Ankleshwar, where company's manufacturing facility is also located. Assessee claimed the expenditure as part of corporate responsibility and claimed the same as deduction. The A.O. was of the view that there is no correlation between the expenditure incurred and assessee's business. After considering assessee's submissions and relying on various case laws as extracted in para 17.1 of the order, the CIT(A) considered that the expenditure claimed is for the purpose of business. He relied on the decision of the Coordinate Bench in the case of Tata International Ltd. in ITA No. 5591/Mum/2005 dated 11.09.2009.
17 ITA No. 408/Mum/2010M/s. Asian Paints Ltd.
36. In the course of argument the learned counsel relied on the decision in the case of Mahindra & Mahindra Ltd. vs. CIT 261 ITR 501 (Bom) and JCIT vs. ITC Ltd. 112 ITD 57 (Kol) (SB) and also JCIT vs. Ranbaxy Laboratories Ltd. 10 DTR 46 (Del) (Trib) to submit that the expenditure is allowable as business expenditure. After considering the rival arguments we are of the opinion that the expenditure incurred on school for repair of the building where employees children are also studying has resulted in creating goodwill/brand image for the assessee, therefore, the expenditure incurred is allowable as revenue expenditure on the principles established by the above referred cases. Therefore, the order of the CIT(A) is confirmed. Ground 4 is rejected.
37. Ground No. 5 pertains to the transfer pricing adjustment made at `2,22,60,000/- on account of corporate guarantee given by the assessee company to the banks. Briefly stated, Berger International Ltd., the associated enterprise had taken loans from 2 different banks, HSBC bank Singapore and Citibank Singapore. In order to enable the banks in Singapore to provide loans to Berger International Ltd. assessee provided corporate guarantee to Indian branch of the Banks on with the those banks provided guarantee to its counter parts in Singapore. As per the facts on record the HSBC India charged 0.35% of the guarantee amount as commission whereas the Citibank of India charged nil for financial year 2004-05 and 0.25% of the guarantee amount as commission in financial year 2003-04. However, the A.O. made a reference to the TPO under section 92CA(1) for computing the arms length price in relation to international transactions. Assessee objected to the issue of treating the guarantee provided as not an international transaction and further submitted the details that assessee also charged a mark up of 0.20% on the entire guarantee commission and recovered an amount of `31,82,729/- in addition to the commission charged by the Indian branches of the bank from the assessee. The TPO, however, on the basis of the details available in the website of the ICICI Bank determined the bank guarantee charges at 3% of the amount and proposed an addition of `2,22,60,000/- as an adjustment. The facts were placed before the CIT(A) and also the fact that the TPO in earlier years has not made any adjustment on 18 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
similar facts. The CIT(A), after considering the submissions, deleted the addition so made by observing as under: -
"26) 1 have considered the submission and perused the assessment order as well as the TPO's order. Guarantee fees or a financial loan guarantee is a commitment entered into by a parent corporation with a third party lender on behalf of the parent company's subsidiary which obliges the parent company to cover the risk of default for the subsidiary should it fail to meet its financial obligation to the third party lender.
26.1 At times this transaction is labelled as gratuitous transaction by the taxpayer and so no consideration is charged. However, it does involve performance or carrying out of service to cover the risk of default and so 'price' has to be charged.
26.2 The TPO has collected data from the Website of Allahabad Bank, HSBC Bank and Robo India Finance and applied the flat rate of 3%. That is to say the TPO has adopted a 'naked quote' without factoring in the qualitative factors which determine the fees. A quotation given by a third party e.g. a Banker does not constitute a CUP since it is quotation and not an actual uncontrolled "transaction". The TPO has adopted a 3% rate or guarantee fees when the Citi Bank Singapore (the bank providing the loan amount) itself has charged interest at the rate of 1.625% only on the loan granted to its AE at Singapore. This makes the stand of the TPO unsustainable as guarantee fees can in no circumstances exceed the rate at which interest is charged on loan.
26.3 The TPO has also ignored the fact that the appellant has recovered the entire amount of bank guarantee commission charged by HSBC bank as guarantee commission from its AE (i.e .35% SGD 17 million) i.e Rs.15,95,849/-. Further the appellant has also charged a mark up of .20% on entire bank guarantee amount of SGD 30 million to its AE amounting to Rs.31,82,729/-. Thus it has only recovered the cost incurred by it i.e, Rs.15,95,849/ but has also charged mark up at the rate of .20% or total loan of SGD 30 million i.e, Rs.31,82,729/- which works out to approx. 100% mark up on cost incurred by Asian Paints. It is also relevant to add that similar transactions were there in the earlier year where the TPO has accepted the same to be at Arms Length. Taking all the above facts and circumstances the appellants transaction in respect of guarantee fees is held to be at Arms Length Price and the adjustment made of Rs.2,22,60,000/- is deleted."
38. After hearing the learned D.R. and the learned A.R. we are of the opinion that there is no need to disturb the finding of the CIT(A). Even though the learned A.R. relied on the decision of Four Soft Ltd. vs. CIT in ITA No. 1495/Hyd/2010 dated 09.09.2011 for the proposition that in the 19 ITA No. 408/Mum/2010 M/s. Asian Paints Ltd.
absence of charging provision section 92B cannot be made applicable in respect of corporate guarantee, we, however, do not intend to go into the judicial expedition on this issue. Suffice to say that on the facts of the case itself, there is no need for making any adjustment. It is on record that HSBC Bank itself has charged an amount at 0.35% totalling to `15,95,849/- on commercial considerations. It is also on record that the Citybank has not charged any amount during the year but charged 0.25% in the immediately proceeding year, the year in which the TPO has accepted the arms length price. Assessee not only recovered the above cost incurred by it from the subsidiary company but also charged a mark up price @ 0.20% and recovered an amount of `31,82,729/-. Therefore, in view of the above facts available on record there is no need for making any adjustment on the basis of the 'naked quote' available in the website of the Allahabad Bank, HSBC Bank and ICICI Bank where even the report itself indicate that the rates varied from 0.15% to 3%. In view of the facts of the case, we are of the opinion that there is no need to make any adjustment in the transfer pricing provisions and the order of the CIT(A) required to be confirmed. Accordingly the ground raised by Revenue is rejected.
39. In the result, appeals of the assessee and Revenue are partly allowed.
Order pronounced in the open court on 31st October 2011.
Sd/- Sd/-
(D. Manmohan) (B. Ramakotaiah)
Vice President Accountant Member
Mumbai, Dated: 31st October 2011
Copy to:
The Appellant
1. The Respondent
2. The CIT(A) - XIV, Mumbai
3. The CIT- LTU, Mumbai City
4. The DR, "A" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.