MALCO ENERGY LTD., MUMBAI V. ASST CIT CIRCLE-10(2)(2), MUMBAI

ITA 7314/MUM/2019

AI Insights

Malco Energy Limited appealed against the assessment order passed by the Assistant Commissioner of Income-tax, which included significant adjustments to the company's book profit under section 115JB of the Income Tax Act, 1961, primarily due to the treatment of foreclosure costs related to the early redemption of preference shares and adjustments related to transfer pricing. The Tribunal examined various legal arguments, including the nature of the expenses (capital vs. revenue), the appropriateness of the transfer pricing methods used, and the correct application of TDS credits. The Tribunal's decision involved a detailed analysis of the financial transactions and the applicable legal provisions, leading to a mixed outcome where some adjustments were upheld while others were subject to further verification.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299652 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 15-06-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 28-11-2019
• Other Referred Cases: CIT vs. Aditya Birla Nuovo Ltd., CIT vs. Grind well Norton Ltd., Brooke Bond India Ltd vs. CIT, CIT vs. Merck Ltd, CIT vs. Bayer private limited, Britannia industries Ltd vs. income tax, Kinetic Motors Co Ltd vs. ACIT, Orson Trading (P.) Ltd vs. ACIT, Apollo Tyres Ltd vs. CIT, GMR Industries Limited vs. ACIT, Anarkali Sarabhai vs. CIT
• Laws Referred To: Income-Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation; Revenue expenditure; Capital expenditure; TDS; Liquidation
• Section: 37; 92C; 115JB; 37(1); 250; 144C; 44AB; 43; 48; 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI KULDIP SINGH, JM ITA No.7314/MUM/2019 (Assessment Year: 2015-16) Malco Ener gy Lim it ed Vedanta House, 75, Nehru Road, V i lle- Parle, Mum bai-400 099 Maharash tra, Ind ia Vs. Asst. Commissioner of Income-tax Circle 10(2)(2), Room No.209, 2 nd Floor, Aaykar Bhavan Maharishi Karve Road, Mumbai-400 020 (Appellant) (Respondent) PAN No. AAHCS6896A Assessee by : Ms. Fereshte Sethna, Shri Mrunal Parekh, ARs Revenue by : Shri Manoj Kumar, CIT DR Date of hearing: 16.06.2023 Date of pronouncement : 13.09.2023 R D E R PER PRASHANT MAHARISHI, AM: 1. This appeal is filed by Malco Energy Limited (The Assessee/ Appellant) for A.Y. 2015-16 against the assessment order passed by The Assistant Commissioner of Income Tax, Circle 10(2)(2), Mumbai [ the ld. AO] on 31 st October 2019. By Assessment Page | 2 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 order total income of the assessee was determined at ₹Nil, as per normal computation of total income and book profit under section 115JB of The Income-Tax Act, 1961 (the Act) was determined at ₹155,43,34,549/– against revised return filed by the assessee on 28 th November2015, computing the income as per the normal provisions of the Act at ₹ Nil and book loss under section 115JB of the Act, of ₹ 445,665,451/-. 2. Assessee has raised following grounds of appeal:- “1. That in the facts and circumstances of the case and in law, the Assessing Officer ("AO") taking into consideration the order passed by the Transfer Pricing Officer ("TPO"), and the directions of the Dispute Resolution Panel ("DRP") (collectively referred to as "Lower Authorities"), erred in law, in assessing the gross total income of the Appellant at Rs 145,63,51,016/- under normal provisions of the Act and Rs.155,43,34,549/- as revised book profit u/s 115JB of the Act, against the returned income of Rs. NIL and book-loss of (Rs.44,56,65,452/-), by making the impugned additions/disallowances, on grounds more particularly detailed herein under: That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the AO in making an addition of Rs.200,00,00,000/- to the book-profit Page | 3 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 under the head foreclosure on account of early redemption of preference shares'. That on the facts and circumstances of the case and in law, the Lower Authoritieserred in confirming the action of the AO in making an addition of Rs.25,00,000/- under the head 'share issue expenses'. That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the TPO in making an addition of Rs.18,67,424/-under the head 'adjustment on account of sale of fuel stock'. That on the facts and circumstances of the case and in law, the Lower Authorities erred in confirming the action of the TPO in making an addition of Rs.1,17,01,150/- under the head 'adjustment on account of purchase of fuel stock'. Re-working Book-Profit under section 115JB by adding Rs.200 crores. 2. That on the facts and circumstances of the case and in law, the Lower Authorities erred in making an addition of Rs.200 crores on account of 'foreclosure on account of early redemption of preference shares' to the book- profit of the Appellant and thereby re-computing the book profit at Rs.155,43,34,549/-. Page | 4 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 3. That on the facts and circumstances of the case and in law, the Lower Authorities have erred in recasting the profit and loss account which was duly prepared as per Schedule III of the Companies Act, 2013 and was duly audited and certified by a Chartered Accountant and approved in the Annual General Meeting by shareholders of Appellant company. 4. That on the facts and circumstances of the case and in law, the Lower Authorities erred in not appreciating the fact that debit of foreclosure costs/expenses to the profit and loss was entirely in conformity with the prevailing Accounting Standard -30 'Financial Instruments'. 5. That on the facts and circumstances of the case and in law, the act of the Lower Authorities in redrawing/recasting the profit and loss account is directly in teeth of the judicial precedents laid down by the Hon'ble Supreme Court and jurisdictional High Court. 6. That on the facts and circumstances of the case and in law, the Lower Authorities erred in traveling beyond the 'Net Profit' shown in the profit and loss account thereby transgressing the Explanation to section 115JB of the Act. Treatment of foreclosure costs 7. That on the facts and circumstances of the case and in law, the Lower Authorities erred in disregarding that foreclosure costs on account of Page | 5 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 early redemption of preference shares are akin to pre-payment charges levied by banks/financial institutions/lenders on settlement of loans / borrowings. 8. That on the facts and circumstances of the case and in law, the Lower Authorities erred in placing partial reliance on the tax audit report to the extent of expenditure categorized as capital in nature, but on the other hand ignoring that in Form No. 29B the tax auditor had not added back foreclosure expenditure in computing book profits, thereby demonstrating a cherry- picking approach. 9. Without prejudice to the foregoing, foreclosure cost was liable to be allowed as a revenue expenditure, based on the jurisdictional Bombay High Court in the case of CIT vs. Aditya Birla Nuovo Ltd. [2017] 246 Taxman 202 (Bombay) and CIT vs. Grind well Norton Ltd. (ITA No. 694 of 2012). Addition of share issue expenses as capital expenditure 10. That on the facts and circumstances of the case and in law, the Lower Authorities erred in holding that share issue expenses incurred towards capital reduction, issue of equity shares and foreclosure on account of early redemption of preference shares was capital in nature, rather Page | 6 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 than revenue in nature and liable to be allowed as an expenditure under section 37(1) of the Act. 11. That on the facts and circumstances of the case and in law, the Lower Authorities erred in applying the ratio of Brooke Bond India Ltd (225 ITR 798) in relation to expenditure on issue of shares to other components of expenditure incurred by the Appellant, i.e., capital reduction and foreclosure on account of early redemption of preference shares. 12. Without prejudice to the above, assuming without admitting that share issue expenditure provides enduring benefit and is capital in nature, no enduring benefit was availed by the Appellant from incurring expenditure on account of capital reduction and foreclosure on account of early redemption of preference shares. Adjustment made by the TPO under section 92CA(3) 13. That on the facts and circumstances of the case and in law, the Lower Authorities erred in making an addition of Rs.18,67,424/- on account of sale of fuel stock and an addition of Rs.1,17,01,150/- on account of purchase of fuel stock by arbitrarily rejecting the 'Other Method' applied as Most Appropriate Method ("MAM") as per Rule 10AB of the Income Tax Rules, 1962 ("Rules"). Page | 7 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 14. That on the facts and circumstances of the case and in law, the Lower Authorities erred in applying Comparable Uncontrolled Price ("CUP") method as MAM and applying a reference index price obtained from the TIPS database which merely provides an estimated quotation price and therefore does not reflect the actual price at which the transaction would be consummated. 15. Without prejudice, the Lower Authorities in applying CUP as MAM erred in not allowing risk adjustment in terms of Rule 10B(1)(e)(iii) of the Rules, which are generally involved in a third- party transaction vis-à-vis a transaction between AEs to facilitate and maintain required stock levels and was not a transaction of rendering actual services to an AE. Short grant of TDS 16. That on the facts and circumstances of the case, the AO has erred in granting short- credit of Tax Deducted at Source ("TDS") to the Appellant, i.e., TDS claimed in computation of total income at Rs.30,30,259/-, whereas the credit granted by the AO is Rs. 29,29,411/- resulting in short-grant of TDS of Rs.1,00,848/-. Brought forward loss. 17. That on the facts and circumstances of the case and in law, the Lower Authorities erred in not reducing lower of brought forward losses Page | 8 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 or unabsorbed depreciation while computing book-profit under section 115JB of the Act. The aforestated grounds are each raised in the alternative, and without prejudice to one another. The Appellant craves leave to alter, amend and/or withdraw all or any of the grounds of appeal herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary whether before or at the time of hearing.” 3. Brief facts of the case shows that assessee is a company engaged in power generation business and operates 106.50 MW coal-based power plant at Tamil Nadu. It supplies electricity generated from its facilities to the State Electricity Board and other independent third-party customers. 4. Assessee filed its original return of income on 28/11/2015 declaring total income at Rs. Nil and Minimum Alternative tax book Profit u/s 115 JB of the Act the profit was computed at a loss of ₹ 445,665,451/– i.e. loss disclosed in profit and loss account without any adjustment. Assessee further submitted:- i. form number 3CD being a statement of particulars required to be furnished under section 44AB of The Income Tax Act, Page | 9 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 ii. form number 3CA audit report under section 44AB of the act as the accounts of the assessee are audited under the provisions of The Companies Act in which auditor stated that the particulars given in form number 3CD and its annexure along with the notes are true and correct and iii. Form number 29B report under section 115JB of the Act for computing the book profits of the assessee company wherein as per annexure Aregarding the computation of the book profit was stated to be the net loss as per the profit and loss account of ₹ 445,665,451. 5. This return of income [ROI] was picked up for limited scrutiny by issue of notice under section 143 (2) of the act on 12/4/2016. 6. Assessee has reported in Form No. 3CEB with its associated enterprises following Specified Domestic transactions [ SDT] with its associated enterprise along with its benchmarking methodologies as under:- Seria l num ber Name of the person Descri ption of the trans action Total amount paid as per books of account Arm‟s- length price as compute d by the assessee Method of accounti ng adopted by assessee 1 Vedanta Purch110,03,22,3110,03,22,Other Page | 10 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 Limited ase of fuel stock 50 350 method 2 Vedanta Limited Fore clos ure cost 200 crores 200 crores Other method 7. More precisely the transactions were explained in the Transfer Pricing Study Report [ TPSR] in paragraph number 1.3 being the summary of the specified domestic transactions analyzed showing that :- i. First transactions, Assessee has sale of fuel stock of ₹ 101,245,720/– to the associated enterprisesi.e., M/s Vedanta Limited whichis transacted at actual cost +1% margin. Assessee selected „other method” as the Most Appropriate method and states that this SDT is at Arm‟s length price. In paragraph number 4.2, the assessee explained the functions performed, in paragraph number 4.2.3 the risk analysis was given. ii. Second transaction was of purchase of fuel stock from the associated enterprise amounting to ₹ 1,100,322,350 which is also carried out at actual cost +1%, selecting other method as the Most Appropriate method, stated to be at arm‟s-length. Page | 11 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 8. In paragraph number 5.1.2, transfer pricing study report states that the specified domestic transaction pertaining to purchase/sale of fuel stock by the assessee are undertaken only for the purpose of facilitation/administrative convenience and no services have been rendered/availed by the assessee or its associated enterprises, i.e. Vedanta Limited, thus other method as the specified under rule 10 AB can be applied to determine the arm‟s-length price of such transaction. Number 5.1.4 states that the goods have been supplied by and to assessee at actual cost +1% as load factor for covering the custom duty paid by the respective transacting parties and considering the proviso to section 92C (2) of the act specified domestic transactions entered into by the assessee with its associated enterprises are at arm‟s-length. 9. Ld.AO referred the matter to The Deputy Commissioner of Income Tax (Transfer Pricing – 3 (2) (1), Mumbai (ld. TPO) for determination of arm‟s-length price in respect of specified domestic transactions. On examination, assessee submitted that during the financial year 2014 – 15 the assessee company has sold coal of ₹ 101,244,722 its associated enterprises Vedanta limited to meet stock levels for plant of Vedanta limited. Further assessee company has purchased coal and sulphuric acid of ₹ 1,100,322,350 from its associated enterprises i.e. Vedanta limited to meet its plant stock level. Assessee discussed the most appropriate method adopted by it for purchase and sale of fuel stock to Page | 12 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 determine the arm‟s-length price and concluded that for determining the arm‟s-length price Comparable Uncontrolled Price method [ CUP] method cannot be applied due to non-availability of transaction level data through both internal and external sources. Therefore, it adopted a new method i.e. „Other method‟as the most appropriate method. It was submitted that goods have been supplied by order to the assessee at actual cost +1% as load factor. The additional amount of 1% charged over actual cost is for covering the custom duty paid by the respective transacting entities. Since the arithmetic mean of comparable prices is within 3% of the value of specified domestic transaction between the assessee and its related parties such transactions are at arm‟s-length price. 10. The learned TPO examined benchmarking made by the assessee of the sale of fuel stock amounting to ₹ 101,244,720 and after examination and on consideration of explanation of the assessee, verified the data from the TIPS database for the reason that assessee did not authenticate the sale price in respect of any global index rises. Therefore, the learned TPO adopted CUP method as The Most Appropriate Method , analyzed transaction on TIPS database and thereafter found that out of 4 transactions, only 1 transaction is found at arm‟s-length and in other 3 transactions the price is found higher than the price at which the transactions are undertaken by the assessee. The Page | 13 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 difference for transaction was worked out at ₹ 1,867,424/-as per annexure – I of the order. 11. With respect to the purchase of fuel stock of ₹ 1,100,322,350/-, the learned TPO rejected the adoption of „other method‟ as the most appropriate method, instead adopted CUP as the most appropriate method, analyzed TIPS database and found that out of 5 transaction, only one transaction meets the arm‟s- length price standard and in case of 4 transactions are found to be lower than the price at the which the transactions are undertaken by the assessee and therefore tabulated them in annexure – I and noted that the difference in arm‟s-length price is ₹ 11,701,150/–. 12. Accordingly Transfer Pricing order [ TP Order] under section 92CA (3) of the act was passed on 28/5/2018 proposing an adjustment of ₹ 13,568,574/– on account of arm‟s-length price of specified domestic transactions of purchase and sale of coal. 13. On examination of Normal computation of Total income, learned Assessing Officer noted that:- i. Assessee has debited capital reduction, share issue and reduction of preference share capital expenses of ₹ 25 lakhs to profit and loss account as revenue expenses. ii. On examination of Form No 3CD, assesseeclassified it as capital expenditure stating Page | 14 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 that in clause no 21 (a) of Form no 3CD being details of amount debited to the profit and loss account , being in the nature of capital expenditure classifying this expenditure as capital expenditure . iii. However, while computing total Income, Assessee did not disallow/ add back it. 14. Thus, assessee has claimed this expenditure as allowable expenditure u/s 37 (1) of the Act. The learned Assessing Officer questioned the assessee that above expenditure is not allowable under section 37 (1) of the Act. In response to that, assessee submitted that above expenditure is allowable in view of the fact that decision in case of Brooke Bond Vs. CIT 225 ITR 795 (SC), was not applicable in the case of the assessee. The learned AO rejected the contention and held that the above expenditure cannot be allowed as revenue expenditure as per the normal computation of total income as section 37 (1) disallows any capital expenditure. LD AO cited three decisions of Honourable Supreme Court to support disallowance. Therefore, in normal computation of total income the Assessing Officer held that it is a capital expenditure. 15. While examining the computation of book profit u/s 115 JB of the Act, the ld. AO noted that :- i. Assessee has debited a sum of ₹ 200 crores to the profit and loss account as foreclosure cost Page | 15 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 on account of early redemption of preference shares. ii. In form number 3CD it is stated that these expensesare capital expenditure but debited to profit and loss account as disclosed in clause 21 (a) of Form no 3cd along with share reduction expenses. iii. It is also stated that assessee has not debited any expenditure of capital nature to the statement of profit and loss account during the current year that the as reported above i.e., ₹ 200 crores being foreclosure cost on account of early redemption of preference shares. iv. In form 29B Assessee did not add the capital expenditure of Rs 200 Crores being foreclosure cost of redemption of preference shares. 16. The ld. AO was of the view that capital expenditure cannot be debited to the profit and loss account and cannot go to reduce the book profit computation u/s 115 JB of the Act, questioned assessee. The ld. AO noted that assessee has classified these expenditures as capital expenditure in its tax audit report , though expenses are debited to the profit and loss account, assessee has put the detail note in form number 3CD treating it as capital expenditure but did not add this to the computation of book profit under section 115JB of the act. Form number 29B submitted contained neither Page | 16 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 any note nor any qualification or adjustment to address the above contradiction. Form 29B dated 9/11/2015 certified that book profit computed in accordance with the provisions of this section are true and correct. Therefore, ld. assessing officer issued a notice under section 142 (1) of the act on 20/12/2018 stating that he proposes to take the revised net profit as per the book profit for computing tax liability under section 115JB of the act by making the addition of ₹ 200 crores debited to the profit and loss account as none of the Accounting Standards and provision of The Companies Act allow recognition of any capital expenditure in the profit and loss account. 17. The assessee objected to the same stating that:- i. Assessee, pursuant to approval of members of the company and the preference shareholders, 10 lakhs redeemable cumulative preference shares having a face value of Rs. 100 crores issued at a premium of ₹ 2900 crore aggregating to ₹ 3000 crore on 28 March 2012 and redeemable on 28 March 2022 at a premium of ₹ 6865 per preference shares aggregating to ₹ 6965 crores were fully redeemed by the assessee on 30 March 2015 together with foreclosure cost of ₹ 200 crores on account of early redemption. ii. On revision of the terms of preference shares to redeem it before the due date foreclosure Page | 17 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 cost of ₹ 200 crores was paid which is against the implicit waiver of the proportionate redemption premium by the preference shareholders. Such charges are not in the nature of redemption premium but in principle similar to the prepayment charges levied by banks for foreclosure of loans over and above the interest charges. Such charges are in the nature of expenses hence charged to the income statement. iii. The Companies Act 2013 does not specifically cover guidance on foreclosure costs. iv. Accounting standard 30 relating to financial instruments provides that difference between the redemption value and the issue consideration of redeemable preference shares should be recognized in the profit or loss statement. The above standard is though effective from 1 April 2009 and is recommendatory innature, but the treatment given by the assessee following that standard is correct. v. Reference to form number 3CD wherein the tax audit report says that it is a capital expenditure does not have any bearing on the computation of book profit under section 115JB of the act. Page | 18 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 vi. Form number 2 9B has not made any adjustment, which is also certified by the tax auditor, which is relevant for computation of Book profit u/s 115JB of the Act. Thus, Cherry picking by the AO of report in form number 3CD is not acceptable. vii. Recipient of foreclosure cost i.e., Vedanta Limited has offered this as income, the payer, the assessee has debited in the profit and loss account therefore, when the recipient has already offered the same in book profit tax, it is not required to be disallowed in computing book profit tax of the assessee. viii. Decision of honourable Supreme court in Apollo Tyers Ltd 122 Taxmann 562 (SC) supports the case of the assessee that AO is not required to redraw the profit and loss account by making an addition to the book profit of foreclosure cost of ₹ 200 crores for computation of MAT under section 115JB of the act. ix. In computing the total income, as per the normal computation of the provisions, the assessee did not claim it as allowable revenue expenditure and added it to the normal income. The same is not to be added to the book profit u/s 115JB of the Act. Page | 19 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 18. The learned AO rejected the submission of the assessee and held that :- i. foreclosure cost of ₹ 200 crores paid by the assessee is capital expenditure, cannot be allowed as deduction to the assessee for computation of the book profit under section 115JB of The Act as none of the accounting standard, provisions of the Companies Act , or any other authority to statutory pronouncement supports the argument of the assessee that such a capital cost is to be allowed as a deduction for computing profit u/s 115JB of the Act. ii. With respect to the scope of scrutiny of profit and loss account and power of the AO, he held that when the accounts are not in accordance with the law, the statute is clear; the AO has all the power to adjust the book profit. iii. Accounting Standard 30 was merely recommendatory in nature and did not allow the computation shown by the assessee. iv. Assessee Company and its holding company have on their own decided on the consent terms pertaining to the prepayment of foreclosure cost in 2015 even though such foreclosure costswere not part of the consent terms between the assessee and its holding Page | 20 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 company related to redemption of preference shares earlier. Therefore, selective inclusion of such clause of payment of foreclosure cost is made for the individual benefit of the assessee company. v. The AO gave detailed reasons for holding so in paragraph number 8.1 – 8.14 of his order. vi. As on 31/3/2015 the assessee had enough reserves available under the head „security premium account‟ but the assessee did not reduce the premium paid from it but debited it to the profit and loss account to avoid book profit tax u/s 115 JB of the Act. vii. Once the profit and loss account prepared by the assessee company is not as per The Companies Act, the AO has every right to adjust the book profit. He relied on the provisions of section 52 of The Companies Act. viii. Accordingly, he adjusted the book profit under section 115JB of the act at a loss of ₹ 445,665,451 to the revised the net profit of Rs. 155,43,34,549/-, thereby increasing book profit by Rs 200 Crores paid on redemption of preference shares debited to the profit and loss account despite assessee classifying it as capital expenditure. Page | 21 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 19. Based on this, the draft assessment order was passed under section 144C (1) of the Act on 28 th December2018 wherein the normal computation of total income was made at ₹ nil,and book profit under section 115JB of the Actwas computed at ₹155,43,34,549/–. 20. Assessee objected to the same before the learned Dispute Resolution Panel. The learned Dispute Resolution Panel with respect to the objection a) related to the transfer pricing adjustment, held that the learned TPO is correct in adopting the most appropriate method of comparable uncontrolled price method, for the comparability standard and analysis adopting TIPS data is correct. Accordingly, the transfer pricing adjustment was upheld. b) Related to disallowance u/s 37 (1) of shares issue expenditure of ₹ 25 lakhs holding it to be capital expenditure , the learned DRP held that the above expenditure has been correctly held to be capital expenditure following several judicial precedents and therefore the above expenditure is not at all a revenue expenditure hence, not allowable. Therefore,the objection was dismissed. c) Related to the objection of addition under section 115JB of ₹ 200 crores of Page | 22 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 foreclosure cost on redemption of redeemable preference shares, the learned DRP considering the tax audit report, Companies Act provisions, accounting standards , has held that the foreclosure cost is nothing but a premium paid and has to be set off from the reserves available with the assessee on account of share premium and reserve. Accordingly, the book profit computed by the learned assessing officer by making an addition of the foreclosure cost was upheld. d) The assessee also raised an objection with respect to the claim of the assessee with respect to deduction of lower of brought forward losses and unabsorbed depreciation of ₹132.49 crore not reduced from the book profit, The learned DRP held that the above issue has not been discussed by the learned assessing officer in the draft assessment order and therefore, the learned assessing officer was directed to verify the facts and take necessary action as per law. 21. Accordingly, the objections of the assessee were decided by passing a direction dated 23 rd September2019. 22. The learned assessing officer based on the above direction passed the assessment order on 31 st October Page | 23 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 2019, wherein adjustment on account of arm‟s-length price of the specified domestic transaction was retained at ₹ 13,568,574/–, disallowance of ₹ 25 lakhs of share issue expenditure was retained. Accordingly, the total income of the assessee was determined at ₹ Nil as per normal computation of total income. As per the book profit, the adjustment of ₹ 200 crores was retained and revised book profit was computed at ₹ 1,554,334,549. Thus, the final assessment order dated 31 st October2019 was made. 23. Assessee aggrieved with the same and is in appeal before us. The learned authorized representative argued the grounds of appeal at length and further submitted a written submission containing 22 pages and various other judicial precedents were cited compiled in a paper book containing 822 pages. Earlier two volumes of paper books were filed. Learned CIT DR also extensively argued the matter and submitted a written submission dated 16 th February2023. In response to the submission of the learned CIT DR, the learned AR further submitted a written submission containing four pages supported with several judicial precedents. We have carefully perused those and also considered all the decision cited by the parties. 24. Ground number 1 of the appeal is general in nature wherein all the grounds of the addition/adjustment are contested. However, all those grounds of addition or adjustment with respect to the specified items are also Page | 24 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 covered by specific grounds later on and therefore, there is no requirement of adjudicating this ground of appeal, which is general in nature, therefore, it is dismissed. 25. Ground number 16 was against the short credit of tax deducted at source to the appellant. The assessee has claimed the tax deduction at source credit of ₹ 3,030,259/- whereas the learned AO has granted credit of only ₹ 100,848/–. 26. On hearing Both the parties, we find that this was not the part of the draft assessment order and therefore the assessee came to know only about this adjustment at the time of making of the final assessment order,hence, in the interest of justice, we set-aside it to the file of the learned assessing officer to verify the credit claimed by the assessee in the return of income, if it is found in accordance with the law, the assessee should be granted the above credit. If the learned assessing officer has any reservation on granting the credit of tax deduction at source claimed by the assessee in the return of income, the AO must give opportunity to the assessee to explain its position and thereafter decide the issue on the merits of the case. Thus, ground number 16 the appeal is allowed with above direction. 27. Ground number 17 of the appeal is with respect to not granting assessee the lower of brought forward losses or unabsorbed decision while computing book profit Page | 25 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 under section 115JB of the act. On looking at objection number 5 before the learned dispute resolution panel we find that assessee submitted that lower of brought forward losses and depreciation allowable to be set off to the assessee is ₹ 132.49 crores. The learned dispute resolution panel directed learned assessing officer to verify the above fact. In the final assessment order dated 31/10/2019 in paragraph number 8.22, the learned assessing officer computed the same for each of the year and held that the amount eligible for deduction for assessment year 2015 – 16 is Rs Nil. The Ld. AO followed the decision of the coordinate bench in Milan intermediates LLP [2018] 96 taxmann.com 338 (Ahmedabad - Trib.)[26-07-2018]. The AO held that ₹ 132.49 crores arrived at by the assessee includes both unabsorbed depreciation and business losses which is not in accordance with the provisions of section 115JB and explanation thereto. According to the AO, the lower of unabsorbed business loss or unabsorbed depreciation is required to be reduced from the book profit. The assessee is not entitled to the benefit if the unabsorbed loss or the unabsorbed depreciation becomes Rs.Nil. 28. Only submission made by the learned AR in this case (as per written submission placed at page number 22 of the paper book in para number 5) is that the assessing officer may be directed to allow adjustment of brought forward business loss or unabsorbed depreciation, which is lower as per the direction of the DRP. Page | 26 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 29. The learned departmental representative vehemently submitted that the learned assessing officer has followed the decision of the coordinate bench, lower of unabsorbed business loss and unabsorbed depreciation is nil for one of the years, therefore, assessee is entitled for deduction of Only Rs Nil. Therefore, the order of the learned assessing officer is in pursuance of the direction of the learned dispute resolution panel cannot be found fault with so there is no reason to set- aside it back to the file of the learned assessing officer. 30. We have carefully considered the rival contention and perused the orders of the lower authorities. In this case the learned assessing officer has passed the final assessment order on this issue at paragraph number 8.18 to 8.23 of the final assessment order. The contentions raised by the assessee were considered after giving an opportunity to the assessee. The assessee submitted that ₹ 134.49 crores is an eligible claim of the assessee. The learned assessing officer as considered the tabulated claim made by the assessee and in paragraph number 8.22 has held that the business loss is ₹ 207.76 crores whereas the unabsorbed depreciation is rupees nil. According to the provisions of section 115JB deduction of lower of unabsorbed loss or unabsorbed depreciation from the book profit is required to be reduced. In this case as the unabsorbed depreciation is rupees nil whereas the unabsorbed business losses are ₹ 201.76 crores and therefore the assessee is entitled to deduction of rupees Page | 27 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 nil. The view of the assessing officer is also supported by the decision of the coordinate bench in the case of Milan Enterprises LLP (supra), no infirmity was shown to us that how the order of the AO is erroneous. It was also not shown to us that the decision of the coordinate benches relied upon by the learned assessing officer is incorrect or upset by the decision of the honourable High Court. In view of this, we are not inclined to set aside back to the file of the learned assessing officer because there is no purpose. Accordingly, we dismiss ground number 17 of the appeal confirming the action of the learned assessing officer that assessee has already been granted deduction while computing book profit under section 115JB of the act of lower of unabsorbed business losses or unabsorbed depreciation. 31. Ground number 2 – 9 of the appeal is against the adjustment of the book profit under section 115JB of the Act, where there is an addition of ₹ 200 crores on account of the foreclosure cost was made by the learned Assessing Officer. The argument of the learned Authorizedrepresentative is that:- i. If simply calculated the redemption consideration it works out to coupon rate on the redeemable preference shares at the rate of 9% per annum payable cumulative by the end of the tenure of redeemable preference shares. Therefore, when the terms on conditions of the above redeemable Page | 28 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 preference shares were amended in 2015, the above foreclosure cost of ₹ 200 crores is nothing but implicit waiver of proportionate redemption premium. ii. assessee is entitled to follow Accounting Standard – 30 financial instruments issued by the Institute of Chartered Accountants of India where it provides that difference between redemption value and the issue consideration should be recognized in the profit and loss account. Therefore, the above sum is required to be debited to the profit and loss account. iii. in computing the normal taxable income of the assessee,assessee has disallowed it but has not made adjustment in the book profit is the correct treatment. iv. learned assessing officer has cherry picked the tax auditor‟s report to hold that foreclosure cost paid by the assessee to its holding company for early redemption of preferential constitute a premium thus required to be set off against share premium available with the assessee on the date of payment of foreclosure cost. Ld. AO cannot go behind net profit shown in the profit and loss account except to the extent provided under the provisions of section 115JB of the Act. Page | 29 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 v. Reliance was placed on the decision of the honourable Supreme Court in case of Apollo tyres Ltd Vs. CIT (2002) 122 Taxman 562 and the decision of the honourable Bombay High Court in case of CIT Vs.Adbhut trading company private limited (2012) 20 taxmann.com 419 to substantiate the claim that the learned assessing officer cannot go behind the netprofit shown in the profit and loss account except to the extent provided under the provisions of section 115JB of the act. vi. Assessing officer cannot cherry pick and place reliance on tax audit report by disregarding form number 29B issued by the tax auditor relying on the decision of Clarion chemicals India Ltd versus ACIT 25 taxmann.com 83 Mumbai. The only option left with the learned assessing officer is to reject the books of accounts before adjusting the book profit. vii. Premium paid on premature redemption constitutes a revenue expenditure. For this proposition, she relied upon the decision of honourable Bombay High Court in case of CIT versus Grind well Norton Limited ITA number 694 of 2012, CIT versus Aditya Birla Nuovo limited 79 taxmann.com 2010. viii. Accordingly, the learned authorized representative stated that foreclosure cost paid to preference Page | 30 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 shareholders are analogous to prepayment charges levied by banks for foreclosure of loan and therefore the above charges paid by the assessee are revenue expenditure in nature and therefore should be allowed as deduction and cannot be considered as capital expenditure. 32. The learned CIT DR vehemently relied upon the orders of the learned lower authorities and submitted that (i) Both companies, issuer company and the preferential shareholder company are closely related to each other and therefore cannot been uniformly equated with the decision taken for issuance of redeemable preference shares in reduction of preferential shares before the maturity time agreed. (ii) Assessee company has issued preference redeemable shares to its holding company which is part of the share capital and cannot be considered as a debenture or other instrument. (iii) Paragraph number 8.10 of the assessment order wherein auditor in the tax audit report has classified the above expenditure on account of foreclosure cost as a capital expenditure and the same has been agreed upon by the assessee company while computing its normal profit and disallowed it Page | 31 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 under section 37 (1) of the act and being an expenditure of capital nature debited to the profit and loss account by the assessee company admittedly. Therefore, while normal computation of profit, the assessee considers it as a capital expenditure and while computing the book profit it says that it is not a capital expenditure. Thus,the stand of the assessee is contradictory for the same assessment year in the same computation of total income and therefore same should be rejected on this basis itself. (iv) Decision of honourable Bombay High Court in case of Aditya Prakash entertainment private limited in company petition number 404 of 2016 wherein the honourable Bombay High Court has categorically differentiated between the redeemable preference shares and the debentures. He further referred to the decision of the honourable Supreme Court in case of Anarkali sarabhai 224 ITR 422 wherein it has been held that when preference share is redeemed by a company then the shareholder transfers the shares to the company and capital gain is chargeable. SO, it is capital expenditure in the hands of the issuer company. Page | 32 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 (v) Decision of the honourable Supreme Court in case of Apollo tyres Limited (supra) relied upon by Assessee is in favour of the revenue as there is no ambiguity in the order of the honourable Supreme Court that the first assessing officer has power to examine whether the books of accounts are properly maintained in accordance with the provisions of the companies act and if it is maintained in accordance with the provisions of the companies act thereafter the assessing officer cannot go behind the net profit shown except to the extent provided in the explanation. This is the case when the AO is found that the books of accounts had not been maintained in accordance with the companies act and therefore the AO has only applied the correct provision under the companies‟ act therefore the action of the AO is within the jurisdiction as held by the Supreme Court. 33. Accordingly, the learned CIT DR vehemently stated that the addition made by the lower authorities to the book profit under section 115JB of the act is correctly made and should be upheld. 34. In the rejoinder the learned authorized representative submitted Page | 33 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 i. Relying upon the decision of the honourable Bombay High Court in case of kinetic Motors Co Ltd 262 ITR 330 wherein it has been held that it is not permissible to the assessing officer to make adjustment to the book profit beyond authorized and to recast the profit and loss account. ii. Relying upon the decision of the coordinate bench in Orson Trading (P.) Ltd. 2SOT503 that the report made in form number 29B not carried out any adjustment on account of foreclosure cost accepting the book profit therefore the learned assessing officer does not have any authority to adjust the book profit. iii. There is no restriction in the companies act with relation to the issuance of preference shares to a related party including the holding company and therefore such an inference cannot go against the assessee. iv. With respect to the decision of the honourable Bombay High Court in case of Aditya Prakashan entertainment P Ltd ( supra) does not apply to the facts of the present case as in that case it was held that a default in redemption of preference shares not give a right to a shareholder to sue for that since redemption can arise strictly be within the confines of the statutory framework. Page | 34 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 v. Foreclosure cost is like a prepayment of loan and therefore revenue expenditure is in the hands of the assessee. 35. We have carefully considered the rival contentions, relevant and judicial precedents cited before us and the order of the learned AO as well as the direction of the learned DRP. 36. Facts show that assessee has issued redeemable preference shares on 28 th of March 2012 having a face value of Rs 100 Crores at a premium of ₹ 2900 crores. Therefore, the total issue consideration was ₹ 3000 crores. The tenure of the redeemable preference was determined at 10 years and the redemption due date accordingly was 28 th of March 2022 at a premium of ₹ 6865 crores. Accordingly, the total redemption consideration was ₹ 6965 crores. 37. In 2015, assessee decided to revise the terms of the preference shares by reducing its tenure. The redemption date was decided on 30 March 2015 but at the foreclosure cost of ₹ 200 crores. Therefore, the total redemption price of the debentures was decided at ₹ 3200 crores (original issue consideration of ₹ 3000 crores plus premium of 200 crores). The assessee debited these Rs 200 crores as foreclosure cost to the profit and loss account. This expenditurewas not claimed as deductible expenditure in normal computation of Total income. In fact, assessee in form no 3CD prepared by it specifically stated that this Page | 35 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 expenditure is capital expenditure debited to the profit and loss account. This form 3 CD was also certified as True and correct by the Auditor in Form No 3CA. However, while calculating the book profit under section 115JB of the act, above sum of ₹ 200 crores of foreclosure cost debited to the profit and loss account was not added to the book profit of the assessee. Form number 29B of computation of the book profit made no adjustment of the above amount. Thus, the assessee has debited capital expenditure of ₹ 200 crores and did not reduce it book profit by that sum and thereby as underpaid the book profit tax under section 115JB of the Act. 38. According to share capital structure of the assessee, in the previous year ended on 31 st of March 2014, the balance sheet shows that 10,00,00 -9% redeemable cumulative preference shares of ₹ 1000 each fully paid up were outstanding at Rs 100 crores for 10 lakhs shares. The 100 % shareholding of these preference shares was with Sesa Sterlite Limited. These shares were redeemed during the year and therefore in the share capital note as of 31 March 2015, the above shares were not appearing in share capital schedule. As at the beginning of the year, the assessee had securities premium account outstanding of Rs. 4163.20 crores out of which Rs.2900 crores were utilized pursuant to the scheme towards adjustment Rs. of opening deficit in statement of profit and loss account and redemption of preference share capital. Page | 36 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 39. At the time of preparing the computation of total income for the income tax return, computing the income under the normal provisions of the income tax act, assessee stated that foreclosure cost debited to the profit and loss account of ₹ 200 crores is inadmissible deduction as same is a capital expenditure . (Page number 39 – 40 of the paper book). Along with the income tax return form number 3CD being the statement of particulars required to be furnished under section 44 AB of the act was also made wherein as per Para number 21 (a) (i) wherein it is required to be state specified that amounts debited to the profit and loss account being nature of expenditure of capital nature, assessee stated the details as per annexure E (page number 52 of the paper book). On looking at annexure E (page number 62 of paper book) shows that assessee has disclosed 2 items there in namely (1) foreclosure cost on account of early redemption of the preference shares and amount stated is ₹ 200 crores, (2) expenses in relation to capital reduction, share issue and redemption of preference shares ₹ 25 lakhs. 40. The assessee also states that it is not debited any expenditure of capital nature to the statement of profit and loss during the current year other than as reported above. Therefore, assessee states in form number 3CD that foreclosure cost on account of early redemption of the preference shares and expenses in relation to capital reduction share issue in deduction of preference Page | 37 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 shares are the capital expenditure debited to the profit and loss account. 41. Form number 3CD is always prepared by the assessee and it is certified by the accountant in form number 3CA that details furnished in that form along with its annexure read together with and subject to the notes therein are true and correct. Therefore, form number 3CD prepared by the assessee, reports submitted by the accountant in form number 3CA also endorses the view of the assessee. It is interesting to note that form number 3CA certifying that the details in form number 3CD is true and correct is issued by the same person who issued another certificate in form number 29B being a report under section 115JB for computing the book profits of the company. 42. Under the provisions of section 55 (2) (d) of The Companies Act, 2013 the premium payable on deduction of preferential shall be provided for out of the profits of the company or out of the companies securities premium account before such shares are redeemed. It provides as under :- Issue and redemption of preference shares 54 . 55 55. 56 (1) No company limited by shares shall, after the commencement of this Act, issue any preference shares which are irredeemable. (2) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue subject to such conditions as may be prescribed 57 : Provided that a company may issue preference shares for a period exceeding twenty years 58 for infrastructure projects, subject to the Page | 38 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 redemption of such percentage of shares as may be prescribed 59 on an annual basis at the option of such preferential shareholders: Provided further that— (a) no such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption; (b) no such shares shall be redeemed unless they are fully paid; (c) where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company; and (d) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed: Provided also*that premium, if any, payable on redemption of any preference shares issued on or before the commencement of this Act by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. (ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed. 60 (3) Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition 60a made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed: Page | 39 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 Provided that the Tribunal shall, while giving approval under this sub-section, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares. Explanation.—For the removal of doubts, it is hereby declared that the issue of further redeemable preference shares or the redemption of preference shares under this section shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company. (4) The capital redemption reserve account may, notwithstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares. Explanation.—For the purposes of sub-section (2), the term "infrastructure projects" means the infrastructure projects specified in Schedule VI. 43. Thus, the redemption of preference shares at premium shall always be out of securities premium or the General Reserve in profit and loss account or below the line as appropriation of profit. The premium on redemption of preference share cannot be debited to the profit and loss account. This is also so because the provision for adividend on redeemable preference share is also a below the line item i.e., appropriation of profit. Thus, the accounting treatment of assessee to debit the securities premium to profit and loss account is not in accordance with the provision of section 55 of The Companies Act 2013. 44. The issue arises that when company provides for premium on redemption out of the profits of the company whether it needs to be debited as expenses in the statement of profit and loss account or it is to be deducted from balance of surplus in the balance sheet. Page | 40 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 It is necessary to consider the Framework for the Preparation and Presentation of the Financial statements. As per the Framework for The Preparation and Presentation of The Financial Statement issued by the Institute of chartered accountants of India, „expenses‟ is defined as increase in economic benefits during the accounting period in the form of outflow or depletion of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distribution to equity participants. [ Para no 77 to 79 of Framework]. The expenses exclude payments as a distribution to equity participants. 45. As per para 49 (1) ( c) of the framework, equity is the residual interest in the assets of the enterprise after deducting all its liabilities, as per The Companies Act the difference between the preference shareholders and equity shareholders is that preference shareholders get preferential right over equity shareholders in distribution of assets at the time of liquidation. However, till the date of redemption of preferenceshares, preference shareholders do not have a right to ask for redemption. Hence, payment to preference shareholders can also be considered as an equity distribution. 46. Preference share capital is disclosed in Part I as Shareholders‟ Funds in Schedule III of The Companies Act 2013 under balance sheet. In Part II only the expenses are required to be placed. The Foreclosure Page | 41 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 cost is neither an expenditure nor an extraordinary item of expenses as explained in Framework. Thus, the Profit and loss account prepared by the Assessee is not in accordance with the provision of the companies act . This is in violation of section 55 of The Companies Act 2013, Framework for preparation of financial statements issued by ICAI – and Schedule III of The Companies Act 2013. 47. Under Guidance Note on Division 1 Non Ind As Schedule III to the Companies Act 2013 [ Revised January 2023 Edition] clearly provides as under :- “8.1.1.5. Presently, in the Indian context, generally, there are two kinds of share capital namely - Equity and Preference. Within Equity/Preference Share Capital, there could be different classes of shares, say, Equity Shares with or without voting rights, Compulsorily Convertible Preference Shares, Optionally Convertible Preference Shares, etc. If the preference shares are to be disclosed under the head „Share Capital‟, until the same are actually redeemed / converted, they should continue to be shown under the head „Share Capital‟. Preference shares of which redemption is overdue should continue to be disclosed under the head „Share Capital.‟ Page | 42 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 48. Therefore, the preference shares when redeemed at a premium, such premium cannot be considered as an expense as it is a distribution of equity and hence it should always be deducted from the balance of surplus profit in the balance sheet. 49. Further support to the above contention can also be that when the treatment of preferential dividend is never debited to the statement in the profit and loss account as an expense but is always deducted from the balance of surplus in the balance sheet or as appropriation of profits. 50. In a series of decisions of the Honourable High courts and Coordinate benches it has been held that capital receipt even if credited to profit and loss account cannot form part of book profit u/s115 JB of The Act. { Ankit metals Limited 416 ITR 591 (cal) } Applying the same analogy if the capital expenditure is debited to the profit and loss account, it is also required to be added back to the book profit U/s 115 J B of The Act. 51. Honourable Karnataka High CourtIn case of GMR Industries Limited 425 ITR 504 {kar} where in it has been held that expenditure incurred for capital expenditure and also the prior period expense debited to profit and loss account , both are required to be added to book profit U/s 115 JB of the Act despite balance sheet and profit and loss account signed by directors and auditors. Page | 43 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 52. Before us assessee could not produce any authoritative pronouncement, which holds that redemption premium paid to preference shareholder is a revenue expenditure and is required to be debited to the profit and loss account. We have already perused the section 55 of the companies Act 2013 and Framework as well as relevant Guidance note which is exactly against the view taken by the assessee, Therefore, we are not in a position accept the propositions raised by assessee. 53. Decision of Honourable supreme court in case of Appollo Tyres Limited [2002] 255 ITR 273 (SC) will only apply if the accounts are prepared in accordance with the companies Act and relevant statutory pronouncements. It is held that the use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. In this case the ld. AO referred to the provisions of the Companies Act and held that he has every right to disturb the audited accounts. Honorable supreme court decision does not prevent ld. AO to disturb profit and loss account when the Capital expenditure is debited to the profit and loss account for avoiding book profit tax and not permitted by the companies Act, relevant standards and Guidance notes. Page | 44 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 54. The assessee has also raised an argument that foreclosure cost is just approximately 9 % payout of the preference shareholders. It also equated it with bank loans and debentures. As we have already held that preference shareholders are akin to the equity shareholders, their dividend[ whether preference or equity] cannot go to reduce the profit but is an appropriation of profit, hence the above arguments does not help case of assessee at all. 55. Assessee has also raised a plea that recipient of Foreclosure cost has offered this as income and paid book profit tax there on. We are not impressed with this because both are separate entities and are responsible for discharging their own liabilities under the Act. 56. Many judicial precedents cited before us. However, in almost all the cases the issue is payment of premium to the debentures shareholders. Reliance was placed on decision of the honourable Bombay High Court in CIT V Aditya BirlaNuova Limited 79 taxmann.com 2010, CIT versus Grind well Norton Ltd (ITA 694 of 2012). Before us is not the case of premium paid on debentures redeemed but premium paid on redemption of preference shares. Shares have been defined in section 2 (46) of the companies act means a share in the share capital of a company which in turn would represent the contribution of the shareholder in the share capital of the company. On the other hand, debenture is an instrument of debt executed by the company Page | 45 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 acknowledging its receipt to repay the same at a specified rate and also carrying on interest. Therefore, there is a basic distinction between these two instruments and therefore, reliance on those decisions does not help the case of the assessee. Reliance was also placed on the decision of the honourable Bombay High Court in the case of CIT versus Merck Ltd 434 ITR 596 wherein share buyback expenditure incurred by the assessee was allowed as revenue expenditure under section 37 (1) of the act. The issue before the court was whether it was in the nature of capital expenditure or revenue expenditure. Before us, the issue is whether the foreclosure cost in the form of premium under dimmable preference shares redeemed by the assessee is in expenditure which can be debited to the profit and loss account or not. Therefore,these decisions do not help the case of the assessee. 57. The assessee further relied upon the decision of Clarian chemicals India private limited versus ACIT 25 taxmann.com 83 stating that tax audit report is not conclusive for determining the deduction. That was the case before the coordinate bench where the penalty was levied under section 271 (1) (c ) of the act. Coordinate bench held that tax audit report is an important document, but it cannot take place of evidence required for claiming the deduction. In the present case, in form number 3CD, assessee has classified the above expenditure as capital expenditure. Form number 3CD is always prepared by the assessee. Page | 46 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 The report is given by an accountant in form number 3CA or Form No. 3CB. Thus, there is a basic contradiction in the claim of the assessee that tax audit report (form number 3CD) cannot be used by the learned assessing officer for making adjustment under section 115JB. The fact shows that in form number 3CD assessee is stating that foreclosure cost is in the form of premium paid on redemption of redeemable preference shares and is capital expenditure, whereas while computing book profit, assessee pleads that it is a revenue expenditure which can be debited to the profit and loss account. 58. In the result we do not find any infirmity in the order of the lower authorities in making addition of Rs 200 crores to the book profit u/s 115 JB of The Act holding that it is statement of assessee that it is a capital expenditure. Thus Ground no 2 to 9 of the appeal are dismissed. 59. Ground number 10 – 12 are with respect to the disallowance of share issue expenses while computing normal profit treated by the assessee as revenue expenditure and disallowed by the learned assessing officer and confirmed by the learned CIT – A. 60. Facts show assessee has incurred an expenditure of ₹ 25 lakhs towards capital reduction, share issue and reduction of preference shares which was treated by the assessee as expenditure by debiting it to the profit and loss account and claiming it to be an allowable Page | 47 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 expenditure under section 37 (1) of the act. In Form No 3CD prepared by assessee, it was stated that it is capital expenditure debited to the profit and loss account. Despite this while computing income of the assessee , it was not disallowed. 61. The learned assessing officer made a reference to the i. Form No 3CD wherein assessee classified it as the capital expenditure, ii. Relying on decisions of the honourable Supreme Court in case of Brooke Bond India Ltd 225 ITR 798, Punjab State industrial development Corporation Ltd 225 ITR 792, CIT versus Hindustan insecticide Ltd 250 ITR 338, disallowed the same, learned CIT – A also confirmed the same. The assessee is in appeal in above grounds. 62. The learned authorized representative submitted that the AO has grossly erred in treating the expenditure incurred on capital reduction, share issue and redemption of preference shares expenditure resulting into an enduring benefit so as to be classified as capital expenditure. Reliance was placed on PCIT versus Merck Ltd 120 taxmann.com 361, PCIT versus Bayer private limited 106 taxmann.com 395, Britannia industries Ltd versus income tax (ITA 1789/K/2008). It was also contested by the learned authorized representative that no straight jacket formula can be applied to classify Page | 48 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 what is capital expenditure and what is revenue expenditure.It has to be decided based on the facts of each case. For this proposition it relied on the decision of the coordinate bench in case of Bhatia Corporation private limited 1044/JP/2017. Thus, it was stated that the learned assessing officer has erred in analyzing nature of expenditure and therefore the reliance on the ruling of Brooke Bond India Ltd and other judgements relied upon by the learned AO are misplaced. The decision of the honourable Supreme Court in case of Brooke Bond India private limited pertain to share capital issue, Punjab State industrial development Corporation Ltd pertain to amount paid to registrar of companies for an enhancement of capital base and decision of the Hindustan insecticide Ltd also pertain to the sum paid to registrar of companies for enhancement of capital base of the company. Therefore, the appellant‟s claim of treating the expenditure as revenue is correct. 63. The learned CIT DR submitted that in form number 3CD the assessee himself has classified the above expenditure as capital expenditure. The AO asked why this expenditure should not be disallowed relying on the decision of the honourable Supreme Court. Assessee in reply, only reliance was made with respect to the decision that MAT provisions are introduced much after the date of the decision and therefore it cannot be applied. Page | 49 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 64. We have carefully considered the rival contentions and perused the order of the learned assessing officer as well as the direction of the learned dispute resolution panel. The learned assessing officer has noted that assessee has debited a sum of ₹ 25 lakhs being expenses in relation to capital reduction, share issue and redemption of preference shares, on verification of annexure E as per clause number 21 (a) (i) of form 3CD being details of amounts debited to the profit and loss account being expenditure of capital nature, this sum was stated to be capital expenditure. Therefore the learned assessing officer questioned the assessee that why the above expenditure should not be held to be not allowable as assessee itself has stated that same is capital expenditure. Assessee made a submission vide letter dated 24/12/2018 placed at page number 455 – 469 of the paper book stating that whether the expenditure is a capital expenditure revenue expenditure has to be determined in the light of judicial pronouncements. It cited several judicial precedents and also stated that the courts have held that no straight jacket formula can be laid down to specify as to under circumstances the expenditure would be capital or revenue in nature. Assessee further objected on the stand of the learned assessing officer on placing reliance on the decision of the honourable Supreme Court in case of Brooke Bond India Ltd versus CIT 225 ITR 798 and submitted that the coordinate bench in Bhatia Corporation private limited versus ACIT dated Page | 50 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 23/3/2018 wherein it has been held that that the decision of the honourable Supreme Court was with reference to issue of shares with a view to increasing its share capital and not with respect to expansion of the capital base of the company to meet the need of the assessee for more working funds wherein it has been held that such an expenditure is revenue in nature. Accordingly, it was submitted that the dividing line between capital expenditure and revenue expenditure is very thin, and no straitjacket formula can be applied. However, the learned assessing officer relying on the decision of the honourable Supreme Court in Brooke Bond India Ltd 225 ITR 798, 225 ITR 792 and 250 ITR 338 confirmed disallowance holding that such expenditure as capital in nature. The learned DRP also upheld the findings of the learned assessing officer as per paragraph number 4. 2 of the direction. Undisputedly the expenditure is incurred towards capital reduction and share issue and redemption of preference shares. As per provisions of section 37 (1) of the act, any capital expenditure is not allowable as deduction. Assessee has incurred this expenditure only for the share issue and capital reduction. In view of this, we do not find any infirmity in the order of the lower authorities in holding that expense of ₹ 25 lakhs is capital in nature. Further in form number 3CD assessee itself is qualified it to be a capital expenditure and therefore now assessee cannot argue otherwise as form number 3CD is also prepared by the assessee.The claim Page | 51 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 of assessee is contradictory on the same issue. Therefore, we do not find any infirmity in the orders of the lower authorities in holding that expenditure of Rs 25 lakhs incurred by the assessee is a capital expenditure relying on assessee‟s own claim in Form no 3 CD. Accordingly ground number 10 – 12 of the appeal are dismissed. 65. Ground numbers 13 – 15 of the appeal are with respect to the transfer pricing adjustment of ₹ 1,867,424/– on account of sale of fuel stock and ₹ 11,701,150/– on account of purchase of fuel stock. During the year assessee has sold coal to Vedanta Limited of ₹ 101,244,720 and purchased same material from the same party amounting to Rs. 110,03,22,350. The reason for entering into such a transaction as stated in the transfer pricing study report is to meet its stock level for plant operational requirement. It is the claim of the assessee that the specified domestic transaction has been undertaken only for the purpose of facilitation/administrative convenience and no services have been rendered and availed by assessee or the buyer and seller as per paragraph number 5.1.2 of the transfer pricing study report. In paragraph number 5.1.3 the assessee concluded that comparable Uncontrolled Price Method (CUP) cannot be applied due to nonavailability of transaction level data through both internal and external sources. Therefore, the assessee adopted a new method i.e., “Other method” as per rule 10 AB as the most appropriate method. The Assessee Page | 52 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 stated that the goods have been supplied by and to the assessee at actual cost +1% as load factor. The additional amount of 1% charged over actual cost has been charged for covering the custom duty paid by respective transacting entities. Under proviso to section 92C (2) of the act, if the arithmetic mean of comparable prices, is within 3% of the transacted price, then the transacted prices be treated as the arm‟s- length price. Since, the arithmetic mean of comparable prices is within 3% of the value of the specified domestic transaction between assessee and its related parties, such transaction can be considered to be at arm‟s-length from an Indian transfer pricing perspective. 66. The learned TPO rejected the benchmarking analysis and held that Comparable Uncontrolled Price [ CUP] method is the most appropriate method, he used TIPS database to benchmark the transaction by using that method and accordingly he benchmarked the purchase and sale of fuel stock transaction. With respect to the sale of fuel stock transaction of ₹ 101,244,720, the learned TPO held that except for 1 transaction out of 4 transactions, is not at arm‟s-length for the reason that the price of sale of fuel stock is higher than the price at which the transactions are undertaken by the assessee and therefore the adjustment of ₹ 1,867,424/– was made. With respect to purchase of fuel stock transaction of ₹ 110.03 crores the learned TPO out of 5 transactions, held that 1 transaction is at arm‟s-length Page | 53 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 because of the reason that the price of which is found lower than the price at which the transactions are undertaken by the assessee and therefore he made an adjustment of ₹ 11,701,150/–. The learned dispute resolution panel held that CUP is the most appropriate method and for comparability analysis the TIPS data are correctly used by the learned transfer pricing officer. 67. The learned authorized representative submitted that the benchmarking made by the assessee applying the „other method” as the most appropriate method should be accepted and cannot be treated as held by the coordinate bench in case of Toll global versus DCIT 2014 [51 taxmann.com 342 (Delhi)] which has been confirmed by the honourable Delhi High Court. Therefore, the most appropriate method adopted by the assessee should be accepted as „other method‟ and not CUP. It was further stated that lower authorities are incorrect in applying reference index price from TIPS database which merely provides quotations. With respect to the applicability of CUP method, assessee relied upon the coordinate bench decision in case of Kohinoor foods Ltd versus ACIT (2014) [52 taxmann.com 454 (Delhi)] stating that in the absence of application of applicable parameters CUP method adopted by the TPO without citing cogent reason by unduly reviewing his own earlier transfer pricing reports is unjustified. The application of CUP method is to be based on strict comparable criteria and cannot be Page | 54 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 routinely applied on surmises and by pointing out minor and irrelevant changes. (Para 70 of that order). Accordingly, it was stated that the CUP method adopted by the learned TPO is an incorrect approach. Against the adoption of TIPS data for comparability analysis the assessee relied upon the decision of the coordinate bench in case of ACIT versus Billion wealth minerals private limited [ITA number 1818/M/2015 for assessment year 2010 – 11 dated 19/1/2018] wherein in paragraph number 4.2 and 6.1 it has been held that considering the peculiar facts, the DRP had rightly held that the TIPS data was not available to determine the arm‟s-length price of international transactions of the assessee. Therefore, the assessee submitted that benchmarking analysis made by the assessee should be accepted and by the TPO should be rejected. 68. The learned departmental representative supported the order of the TPO/DRP. He submitted that the assessee has not given any benchmarking analysis but has merely stated that other method is the Most appropriate Method and transaction price is at Arm‟s length price. So, it is no benchmarking at all. 69. We have carefully considered rival contention, order of the ld. TPO and Direction of DRP. 70. Assessee in Its T P Study report has adopted other method as the Most Appropriate method. However, it is bereft of any comparability analysis. It merely said that the justification of transaction is meeting the Page | 55 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 requirement of plant level stocks of AE and Assessee and Transaction value is 1 % mark up on the cost. The product Transacted is coal. On careful look at Rule 10 AB of the ITA Rules 1962 introducing “ Other method” , it merely facilitates considers the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. As assessee has failed follow mandate of section 92CA (3) of the Act , the ld. TPO adopted the Uncontrolled Comparable price Method [ CUP] , adopted TIPS data base and held part of transaction of purchase and sale at Arm‟s length price – and without respect of few transactions made the adjustment. The ld. DRP also upheld the TP approach of ld. TPO. 71. The ld. TPO found the comparable prices of the transacted goods and then made adjustment wherever the prices are found not comparable. No infirmity pointed out in the transactions compared, timing of transactions and on any other parameter of transaction. Therefore , we do not have any hesitation in confirming the adjustment on account of Arm‟s length price of specified domestic transaction. 72. On the use of TIPS data base, assessee has relied upon decision of coordinate bench in case of Billion Wealth Minerals (P.) Ltd.*[2018] 90 taxmann.com 170 (Mumbai - Trib.), it dealt with this aspect as under :- Page | 56 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 “6.4 We would also like to mention that the cases relied upon by the DR are not relevant to decide the issue before us. In the case of Tilda Riceland (P.) Ltd. (supra) it was held that TIPS data can also be used for TP purposes. There is no doubt about it but the issue is how it should be utilised. The DRP had specifically pointed out as to how the TIPS data in the case under consideration was not applicable. It pointed out the deficiencies of the data and the factors that vitiated the comparability. Thus, facts of both the cases are totally different. In the case of Livingstones (supra), the Tribunal has dealt with the method to be adopted for the AE and non- AE international transactions. Considering the peculiar facts of diamond industries it had dealt with the issue of TNMM and CUP methods. In the case of Super House Leather Limited (supra), the matter had been decided considering the facts of that case. In short, none of these cases are of any help to hold that the method adopted by the DRP was not fair.” 73. Thus, it is not the case that TIPS database is not reliable. No evidencewas produced before us that there is any infirmity in the database used by the TPO. Many coordinate bench decisions have held that TIPS database is the appropriate database in determining comparable uncontrolled prices of products. Page | 57 ITA No. 7134/Mum/2019 Malco Energy Ltd.; A.Y.2015-16 74. No infirmity was pointed out in approach of ld. TPO before us other than above, hence Ground numbers 13 – 15 of the appeal are dismissed and transfer pricing adjustment of ₹ 1,867,424/– on account of sale of fuel stock and ₹ 11,701,150/– on account of purchase of fuel stock are confirmed. 75. In the result, the appeal of assessee is partly allowed. Order pronounced in the open court on 13.09.2023. Sd/- Sd/- (KULDIP SINGH) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated:13.09.2023 Sudip Sarkar, Sr.PS/Dragon Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai