M/S. SYNTHITE INDUSTRIES (P) LTD. ,ERNAKULAM V. .THE DCIT, CORPORATE CIRCLE-2(1), KOCHI, KOCHI

ITTPA 1/COCH/2023

AI Insights

The case involves Synthite Industries (P) Ltd., which appealed against the order of the Deputy Commissioner of Income Tax, Circle 2(1), Kochi, concerning the assessment year 2017-18. The primary issues revolved around transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and subsequent additions made by the AO. The TPO had proposed additions related to notional guarantee commissions, notional interest on belated trade receivables, and adjustments for the rate of interest charged on loans to subsidiaries. The AO further adjusted these amounts and added disallowances related to R&D expenditure and expenses under section 14A. The Tribunal found that the TPO and AO had not adequately considered the specific circumstances and documentation provided by Synthite Industries, leading to a decision to remit several issues back to the AO for a detailed re-examination.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 31187 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 11-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2017-2018
• Appeal Filed On: 09-01-2023
• Other Referred Cases: Technical ICB House Vs. DCIT, Medrich Ltd. vs. ACIT, Assistant Commissioner of Income Tax Vs. Merchem Ltd, Goetze (India) Ltd Vs. CIT, CIT Vs. Reliance Industries Ltd, South Indian Bank Vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJIT KUMAR DAS
• Assessee Lawyers: THOMAS THOMAS
• Keywords: Set aside; Revised return; Revenue expenditure; Transfer pricing; International transaction; Fair market value; Capital expenditure; Earning of tax free income; Notional interest; Rule 8D; Capital asset converted into stock in trade
• Section: 13; 14A; 144C; 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH : COCHIN BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A No. 01/Coch/2023 Assessment Year : 2017-18 M/s. Synthite Industries (P) Ltd., Kadayiruppu P.O., Kolenchery, Kerala – 682 311. PAN: AADCS5616E Vs. The Deputy Commissioner of Income Tax, Circle 2(1), Kochi. APPELLANT RESPONDENT Assessee by : Shri Thomas Thomas, CA Revenue by : Shri Sanjit Kumar Das, CIT-DR Date of Hearing : 12-09-2024 Date of Pronouncement : 11-12-2024 ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER This is an appeal filed by the assessee challenging the order of the AO dated 22/12/2022 in respect of the A.Y. 2017-18. 2. The brief facts of the case are that the assessee filed their return of income declaring a total income of Rs. 84,47,47,700/-. Since the assessee had international transactions, the AO referred the case to the transfer pricing officer and the Ld.TPO made the order u/s. 92CA(3) of the Act in which the Ld.TPO had proposed the following additions: Page 2 of 17 IT(TP)A No. 01/Coch/2023 i. Notional Guarantee Commission for guarantee given to Bankers of appellant company's subsidiary Rs. 87,78,464 ii. Notional interest on belated trade receivables from Subsidiary Rs. 66,98,645 iii. Towards alleged shortfall in rate of interest charged on loan given to Subsidiary Rs. 5,59,267 Total TP Additions Rs. 1,60,36,376 3. Thereafter, the AO made the draft assessment order u/s. 144C of the Act in which the following additions in addition to the additions proposed by the Ld.TPO was made. i. In the ITR, appellant had claimed weighted deduction of 200% in respect of R & D expenditure u/s. 35(2AB) of Income Tax Act. However, approval of DSIR was pending at the time of filing ITR. DSIR subsequently granted approval, but the amount approved was less by Rs. 73,95,976.55. Hence, during assessment proceedings, appellant agreed to the addition of 200% on Rs. 73,95,976.55, but made alternate claim u/s. 35(2) & 37(1) for the amount of Rs. 73,95,976.55 which was not allowed for weighted deduction of 200%. Hence, out of the total disallowance of Rs. 1,47,91,954, appellant is aggrieved to the extent of declining the alternate claim u/s. 35(2)/ 37(1) for Rs. 73,95,976.55 Rs. 1,47,91,954 ii. Disallowance u/s. 14A Rs. 3,32,27,044 iii. Under Companies Act, appellant is bound to maintain books of account under Ind AS which is notified by the Government. However, under Income Tax Act, the financial statements are to be drawn up as per Income Computation and Disclosure Standards [ICDS]. In the profit & loss account, appellant had credited Rs. Page 3 of 17 IT(TP)A No. 01/Coch/2023 11,76,85,711.78 as mark to market gains on Foreign Exchange contracts which was worked out under Ind AS. However, the mark to market gains worked out under ICDS was only Rs. 9,27,91,905. Hence, in the tax computation statement, Rs. 11,76,85,711.78 was reduced from the profit as per profit & loss account and the amount of gain worked out under ICDS amounting to Rs. 9,27,91,905/- was added back. While completing the assessment, the assessing officer again added back Rs. 11,76,85,711.78 which resulted in double disallowance Rs. 11,76,85,712 4. The assessee filed their objections to the draft assessment order before the Dispute Resolution Panel but the ld DRP without considering the objections had confirmed the draft assessment order made by the AO against which the assessee is in appeal before this Tribunal with the following grounds of appeal: “1. In respect of Transfer Pricing Addition related to Guarantee Commission – Rs. 87,78,464/, 1.1. National Faceless Assessment Centre (NFAC) has erred in making addition of Rs. 87,78,464/-, towards Notional Guarantee Commission in respect of guarantee given by the appellant to its bankers for giving counter guarantee by the Banker to the subsidiary's Bankers. 1.2.The NFAC ought to have considered the fact that the appellant company had fully recovered from its Subsidiary, the guarantee charges collected by appellant's bankers. 1.3. For issuing guarantee to bankers of foreign subsidiary, appellant's banker Axis Bank has charged Guarantee charges of only Rs. 45,99,002/- which is fully recovered by appellant from Subsidiary. As against this, TPO & AO charged Rs. 87,78,464/- which is excersive and unreasonable. 2. In respect of TP addition related to Notional Interest on belated trade receivable from Subsidiary – Rs. 66,98,645: Page 4 of 17 IT(TP)A No. 01/Coch/2023 2.1. The NFAC has erred in charging notional interest amounting to Rs. 66,98,645/- on belated trade receivables from appellant's subsidiary. 2.2. NFAC ought to have considered the fact that the appellant has not charged interest on belated trade receivables in respect of any of the appellant's customers, both domestic and international and hence under Comparable Uncontrolled Transactions Method of Transfer Pricing, no transfer pricing adjustments should have been done. 2.3.Appellant's trade payables to the same Subsidiary as on 31.03.2017 was Rs. 14,42,36,234/- as against trade receivable of Rs. 2,99,72,765/-. Since the net effect is Rs. 11,42,63,469/- payable to the Subsidiary, the NFAC has erred in charging interest on belated trade receivables ignoring the amount payable to the Subsidiary. In this regard, NFAC ought to have considered the decision of Mumbai Bench of ITAT in Technical ICB House Vs. DCIT [ITA No. 487/Mum/2014] wherein it was decided that where amount payable to subsidiary is more than the amount receivable, no addition can be made towards interest. 3. Transfer Pricing addition in respect of alleged shortfall in the rate of interest charged on loan to subsidiary — Rs. 5,59,267: 3.1. The NFAC and TPO has erred in applying rate of interest of 4.82% [LIBOR 0.32% + spread of 4.50%] as against 1.3% charged by the appellant on loan given to subsidiary. 3.2. The NFAC and TPO ought to have considered the fact that appellant itself has taken forex loan from Standard Chartered Bank @ LIBOR 0.99597% plus spread of 0.60%. As against this spread of 0.60%, TPO has adopted a spread of 4.50% which is excessive and unreasonable. 3.3. The NFAC and TPO ought to have considered the fact that interest free trade payables to subsidiary of Rs. 11,42,36,234/- was available with the appellant and hence this should have also been factored in while applying arms length rate of interest. 4. In respect of addition of Rs. 11,76,85,712/- being mark to market gain in forward contracts which is already credited to profit and loss account: Page 5 of 17 IT(TP)A No. 01/Coch/2023 4.1. The NFAC has erred in making addition of Rs. 11,76,85,712/- towards mark to market (MTM) gain on forward contract as per Ind AS when appellant itself has added back MTM gain of Rs. 9,27,91,905/- as required by Income Computation and Disclosure Standards (ICDS) after deducting mark to market gain of Rs. 11,76,85,712/- credited to profit and loss account under Ind AS. 4.2. The NFAC ought to have considered the fact that under section 145(2) of the Income Tax Act, 1961, total income under the Income Tax Act is to be computed according to ICDS and not under Ind AS. 4.3.The appellant had voluntarily added back Rs. 9,27,91,905/- in the ITR being MTM gain computed under ICDS after deducting MTM gain of Rs. 11,76,85,712/- worked out under Ind AS. The action of the assessing officer IN ADDING BACK Rs. 11,76,85,712/- is grossly incorrect as it would amount to double disallowance. 5. In respect of declining appellant's alternate claim for deduction u/s. 35(1) or u/s. 37(1) for the amount not considered for weighted deduction of 200% u/s. 35(2AB): 5.1.Having disallowed weighted deduction of 200% for in- house R & D expenditure due to non-approval of company's full claim by DSIR, Government of India (appellant has no objection to this disallowance made by NFAC as the disallowance was at the instance of the appellant company), the NFAC ought to have considered appellant's alternate claim for normal deduction of 100% in respect of Rs. 73,95,976.55 u/s. 35(1)/ 35(2) and 37(1) of the Income Tax Act, 1961. It is to be noted that no approval of DSIR is required for deduction u/s. 35(1), 35(2) and 37(1). Approval of DSIR is required only for weighted deduction of 200% u/s. 35(2AB). 5.2. The NFAC ought to have considered that the decision of Hon'ble Supreme Court in Goetze (India) Ltd Vs. CIT (2006) 284 ITR 323 relied upon by, it is not applicable for alternate claim as the appellant can make only one claim at a time in the ITR. 5.3. NFAC ought to have considered the decision of the jurisdictional Bench of ITAT, namely Cochin Bench in Assistant Commissioner of Income Tax Vs. Merchem Ltd [ITA No. 08 & 12/Coch/2014 dated 09.05.2014] in this regard. Page 6 of 17 IT(TP)A No. 01/Coch/2023 6. In respect of disallowance u/s. 14A — Rs. 3,32,27,044/-: 6.1.The NFAC ought to have considered the fact that appellant's own funds on 31.03.2017 was Rs. 1019.03 crores as against Investments of Rs. 332.27 crores and since appellant's own funds are many times more than the Investments, NFAC has erred in making disallowance u/s. 14A. Further, appellant's borrowed funds as on 31.03.2017 was only Rs. 599.55 crores and hence based on the following decisions of the Supreme Court, no disallowance can be made u/s. 14A:- i) CIT Vs. Reliance Industries Ltd [410 ITR 466] ii) South Indian Bank Vs. CIT [ 322 CTR 465] — Civil Appeal No. 9606 of 2011. 6.2. Without prejudice to the above ground, the NFAC has erred in including the value of investments in Foreign Subsidiaries, the income of which is taxable in India, amounting to Rs. 65.85 crores in working out the disallowance u/s. 14A by applying Rule 8D. 6.3. NFAC ought to have considered the fact that appellant has not incurred any expenditure for earning the exempt income and that all its borrowings are towards Packing Credit for procuring goods meant for exports and that no part of the Borrowings were used for making the Investments.” 5. At the time of argument, the Ld.AR filed a paper book and also the copy of the written submissions made by the assessee before the DRP and contended that the DRP had not considered the written submissions and prayed to set aside the order of the AO which was made based on the DRP’s order. The Ld.AR also filed the documents in respect of this arguments and also enclosed the copy of the Coordinate Bench order and also the CIT(A) order in respect of the alternate claim made u/s. 35(1) of the Act. Apart from that, the Ld.AR also submitted the financial statements of the assessee and argued that the additions made are not sustainable. On the other hand, the Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal. Page 7 of 17 IT(TP)A No. 01/Coch/2023 6. We have heard the arguments of both sides and perused the materials available on record. 7. First we will take up the issue of the transfer pricing addition related to the notional guarantee commission. We considered the argument that the Axis Bank had given a bank guarantee in favour of Bank of China for the loans taken by the assessee’s subsidiary in China viz., Synthite (Xinjiang) Bio Tech Co. Ltd. for which the Axis Bank insisted the assessee on a counter guarantee in the form of corporate guarantee by the assessee company. Pursuant to the Axis Bank direction, the assessee also provided a corporate guarantee and also recovered Rs. 45,99,002/- from the subsidiary company as guarantee commission which was worked out to 0.75%. The Ld.TPO not accepted the guarantee commission at 0.75% but estimated the same at 2.20% and on that basis, the commission was worked out at Rs. 1,33,77,465/-. Similarly, the assessee also took a bank guarantee from the State Bank of Travancore and Federal Bank for which the assessee paid a guarantee commission of 0.5%. This is a completely uncontrolled transaction and therefore the Ld.TPO had applied a guarantee commission above 0.5% i.e. 2.20%. 8. In support of the arguments, the Ld.AR also filed the copies of the sanction letters issued by the said banks which were available at pages 11, 12 and 13 in which the commission has been mentioned as 0.50%. Further, we have perused the press release of the GST Council dated 07/10/2023 in which the council had stated that if the corporate guarantee is given to related parties, the guarantee commission to be applied is only 1%. We have also perused the DRP order dated 31/05/2024 in respect of the A.Y. 2020- 21 in which the DRP had adopted guarantee commission at 1% which was also accepted by the assessee. As seen from the above said documents filed by the assessee, the guarantee commission may be at the rate given by the banks or at the maximum it can be at 1%. The Ld.TPO had taken the Standard card rates from various banks and had taken the average as guarantee commission and applied the same to the assessee. We do not Page 8 of 17 IT(TP)A No. 01/Coch/2023 understand how the Ld.TPO had taken the rates of the various banks and the arrived the average and applied the same to the assessee without taking into consideration the fact that the rate of guarantee commission is always negotiated by the assessee with the bankers. Even in a case where no documents are available, then the Ld.TPO can rely on some other documents like the press release issued by the GST Council and other methods and not by arriving the average rate and applied the same to the assessee. 9. We have also seen that under the Safe Harbour Rules, the guarantee commission is fixed at 1% as per Rule 10TD(2a) of the Rules. 10. Further, we have also gone through the order of the Bangalore Bench of this Tribunal in the case of Medrich Ltd. vs. ACIT in ITA Nos. 1574 to 1576/Bang/2019 in which the Tribunal had fixed the guarantee commission at 0.5% as the arms length rate. While coming to the said conclusion, the Tribunal had followed the various High Courts as well as the other Tribunal decisions. 11. We have also perused the various Tribunal orders in this issue in which the Tribunals had restricted the corporate guarantee commission at 0.5%, at 0.88% and in no case, the rate has been fixed more than 1%. By taking into consideration the sanction letters issued by banks, the press release issued by the GST Council, the DRP order in the appellant’s own case for the assessment year 2020-21 and also the orders relied on by the assessee, we are also of the view that the corporate guarantee commission is to be taken at 1% and not 2.20% adopted by the Ld.TPO which was confirmed by the DRP. In order to arrive the correct arms length price in respect of the guarantee commission, we are remitting this issue to the file of the AO. 12. The second dispute involved in this appeal is against the transfer pricing additions on notional interest on the belated trade receivables from Page 9 of 17 IT(TP)A No. 01/Coch/2023 the subsidiary. This is only a notional interest arrived by the authorities for the belated receipt from the subsidiaries when there is a delay in payment. As seen from the addition, it is a notional addition calculated by the authorities and on that basis, huge additions was made by the authorities. We have also considered the submission that the assessee’s export sale to the subsidiary is only a minimum when comparing the total export sales made by the assessee. Apart from the delay in receiving the dues from the subsidiaries, the assessee has also got delayed payments from the non- subsidiaries but the fact remains that in the present case, it is the case of the assessee that they had not charged any interest on the delayed receivables and therefore the charging of notional interest on the delayed trade receivables by the lower authorities is without any basis and also against the business practice of the assessee. We have also perused the reasoning given by the Ld.TPO for arriving the notional interest in which the TPO had merely relied on the fact that the trade receivables were received after 180 days and therefore the assessee might have charged interest for the belated trade receivables. Except the above said reason, the authorities below had not pointed out any such charging of interest for the belated receivables by the assessee. 13. We have also perused the RBI Master Circular on exports of goods and services No. 14/2014-15 dated 01/07/2014 which reads as follows: “It has been decided in consultation with Government of India that the period of realization and repatriation of export proceeds shall be 9 months from the date of export for all exports including units in SEZ”. 14. Further, we have also perused the table submitted by the assessee about the trade receivables from the subsidiaries and the total outstanding payables to the subsidiaries which is extracted as below: Total outstanding trade receivables from Subsidiary on 31.03.2017 Rs. 2,99,72,765/- Total outstanding payables to subsidiary as on 31.03.2017 Rs. 14,42,36,234/- Page 10 of 17 IT(TP)A No. 01/Coch/2023 Net payable to subsidiary Rs. 11,42,63,469/- 15. This table was prepared based on the financial statements enclosed by the assessee and as seen from the said table, the outstanding payable to the subsidiary is more than the outstanding receivables and therefore there is no point in charging interest on the trade receivables. We have also perused the letter given by the Standard Chartered Bank for availing the foreign currency loan in which the bank had stated that the loan was sanctioned at LIBOR of 0.99597% + margin of 60 BPS which works out to only 1.59597% whereas the authorities below had applied a very high rate of interest at 5.558%. In such circumstances and considering the various documents submitted by the assessee, we are of the view that the notional interest charged on the belated trade receivables is not correct and also against the documents submitted by the assessee. Since the authorities had not considered the said documents, we are remitting this issue to the file of the ld DRP to consider the issue afresh in the light of the above observations. Accordingly, ground no. 2 is allowed for statistical purposes. Ground No. 3: 16. The next dispute raised by the assessee is in respect of the transfer pricing addition in respect of the alleged shortfall in the rate of interest charged on the loan to subsidiary. In this case, the authorities below had taken the arms length rate of interest at 4.82% after accepting that the LIBOR at the relevant period was 0.32%. In addition to the above, the authorities had added spread of 4.5% and arrived the arms length rate of interest at 4.82%. Inspite of the assessee had furnished the sanction letter of the Standard Chartered Bank while availing the foreign exchange loan in which the bank has stated that LIBOR 0.9957% and the spread at 0.60% the authorities had also not given any valid reasons for adopting this spread at 4.5% as against the Standard Chartered Bank document. In such circumstances, the addition of interest on the loans to the subsidiary requires reconsideration in the light of the foreign exchange loan sanction letter given by the Standard Chartered Bank. Page 11 of 17 IT(TP)A No. 01/Coch/2023 Accordingly, ground no. 3 is restored to the file of the Ld.AO to arrive the correct rate of interest. Ground No. 4 17. The next dispute is in respect of the additions made on the Mark to Market gain in forward contracts. The Ld.AR had filed the copy of the income tax computation statement for the A.Y. 2017-18 and draw our attention to the said statement in which the assessee had added forex gain on forward contracts as per ICDS-VI amounting to Rs. 9,27,91,905.30/-. They further submitted that the said computation was made as per the Indian Accounting Standards as mandated by the Companies Act. The Ld.AR further submitted that while preparing the profit and loss account under the Indian Accounting Standards method, the Mark to Market gain on forward contract was credited at Rs. 11,76,85,712/-. But the section 145(2) of the Act mandates that the total income is to be computed in accordance with the Income Computation and Disclosure Standards. Therefore the assessee reworked its mark to market gain on forward contracts under the ICDS method which comes about Rs. 9,27,91,905.30/-. The said amount was added back to the tax computation but deducted the mark to market gain arrived as per the Indian Accounting Standards while making the tax computation. The Ld.AR submitted that the AO had not considered the said facts but made a further addition of Rs. 11,76,85,712/- which was arrived based on the Indian Accounting Standards. It is the case of the assessee that already the assessee had deducted the gain of Rs. 11,76,85,712/- since the gain arrived by following the ICDS method was added to the tax computation. 18. We have perused the records submitted by the assessee and the arguments advanced by the assessee and the statements filed by the assessee to show that the gain arrived by the authorities again by adding the gain worked out through the Ind AS method is not correct. 19. We have also considered the submission that the gain arrived under the Ind AS method was reduced in the tax computation statement whereas Page 12 of 17 IT(TP)A No. 01/Coch/2023 the gain arrived under the ICDS method is added back in the tax computation. This issue requires a detailed verification of the facts by considering the submissions made by the assessee as well as the documents filed by the assessee. Therefore we are of the view that the matter requires reconsideration and therefore we are remitting this issue to the Ld.DRP for denovo consideration of this issue after hearing the assessee as well as after considering the documents filed by the assessee in support of their case. Accordingly, ground no. 4 is allowed for statistical purposes. Ground No. 5: 20. The alternative claim for deduction u/s. 35(1) or 37(1) for the amount not considered for weighted deduction u/s. 35(2AB) of the Act. The assessee claimed weighted deduction u/s. 35(2AB) of the Act but the DSIR in his report in form 3CL dated 23/10/2020 had certified the expenditure only to the extent of Rs. 8,82,27,000/- as against the claim of Rs. 19,12,45,954/-. Therefore the AO had restricted the eligible weighted deduction at 200% of the amount accepted by DSIR i.e. Rs. 17,64,54,000/- and disallowed the excess deduction claimed by the assessee which comes about Rs. 1,47,91,954/-. The assessee originally filed their return of income on 28/03/2018 and the due date for filing the revised return expired on 31/03/2019. Therefore the assessee could not be able to file the revised return and claimed the excess deduction claim of Rs. 1,47,91,954/-. Therefore the assessee filed a letter on 23/02/2021 and prayed to grant a deduction of Rs. 73,95,976/- u/s. 35(1) and 35(2) of the Act. The Ld.AO not accepted the claim of the assessee for the reason that assessee had not claimed the same in its original return of income and also not claimed the same by filing a revised return and therefore, at this stage, the claim made by the assessee could not be entertained. The Ld.DRP also for the very same reasons confirmed the said finding of the AO and as against this, the assessee has raised the said ground and contended that the approval of DSIR was granted only on 23/10/2020 by which time the period for filing the revised return also expired. The assessee also apportioned the disallowance of Rs. 73,95,976/- and treated Rs. 8.93 Lakhs as allowable Page 13 of 17 IT(TP)A No. 01/Coch/2023 deduction u/s. 35(1)(iv) r.w.s. 35(2) being the capital expenditure on the research and development. The assessee also further submitted the balance amount of Rs. 65.03 Lakhs is in the nature of revenue expenditure and therefore the same is also allowable as normal deduction u/s. 35(1)(i) or section 37(1) of the Act. 21. From the above, it could be seen that the assessee had made an alternate claim for deduction u/s. 35(1) or 37(1) on the amount disallowed u/s. 35(2AB) of the Act. The assessee also relied on the order of the Coordiante Bench of this Tribunal in ITA Nos. 8 & 12/Coch/2014 dated 09/05/2014 in the case of ACIT vs. Merchem Ltd. and also the order of the Ld.CIT(A) in the assessee’s own case for the A.Y. 2014-15. We have considered the arguments advanced by the assessee and also perused the orders of the Coordinate Bench as well as the Ld.CIT(A). In the order dated 09/05/2014, the Coordinate Bench had decided the issue and allowed the assessee to raise the alternate plea in the following words: “8. We have carefully gone through the provisions of section 35(1) and section 35 (2AB) of the Act. If the claim of the assessee u/s 35(2AB) is allowed, then the assessee may not be eligible for further deduction u/s 35(1) of the Act. In this case, the claim of the assessee u/s 35(2AB) was not allowed. Therefore, the provisions contained in section 35(2AB) may not prevent the assessing officer to consider the claim of the assessee u/s 35(1) of the Act. Hence, in exercise of the appellate powers of this Tribunal, the alternative claim of the assessee u/s 35(1) of the Act is remanded back to the file of the assessing officer. The assessing officer shall consider the claim of the assessee u/s 35(1) and decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee.” 22. In view of the above said findings given by the Coordinate Bench, we are also of the view that the assessee can raise the alternative claim u/s. 35(1) or 37(1) of the Act. Considering the claim, this issue is remitted to the file of the AO for passing a fresh order after giving a reasonable opportunity of being heard to the assessee. Accordingly, ground no. 5 is partly allowed for statistical purposes. Page 14 of 17 IT(TP)A No. 01/Coch/2023 Ground no. 6: 23. Disallowance of expenditure made u/s. 14A of the Act. The assessee had earned exempted incomes by making substantial investments in shares, bonds and funds and in the computation of income from the business, the expenses were debited in the P&L account which relates to the exempted income at Rs. 57,37,105/-. In the computation of income also, the assessee has made a disallowance u/s. 14A of the Act Rs. 57,37,105/-. In spite of that the assessing officer proposed to disallow the expenditure as per section 14A of the Act for which the assessee submitted that they had not incurred any expenditure for earning the exempt income. The assessee further contended that all the investments were made out of own funds and not out of borrowed funds and therefore no other costs were incurred for making the investments. In any event, the assessee himself voluntarily disallowed a sum of Rs. 57,37,105/- u/s. 14A of the Act and contended that the disallowance of expenditure is not warranted. The AO not accepted the explanation offered by the assessee and quantified the expenses related to investment activities u/s. 14A of the Act at Rs. 3,32,27,044/-. The AO granted the deduction on the expenditure voluntarily declared by the assessee and arrived a final amount of Rs. 2,74,89,939/-. Even though, the assessee filed their detailed objections before the Ld.DRP, the Ld.DRP had rejected the claim of the assessee and confirmed the addition at Rs. 2,74,89,939/-. The said addition is in dispute before this Tribunal. 24. The Ld.AR argued that the assessee’s own funds are three times of the total investments and therefore the disallowance made u/s. 14A is not correct. The Ld.AR also further submitted that the investments which generated exempt income are only Rs. 56,90,08,894/- and if at all any disallowance is to be made u/s. 14A r.w.Rule 8D of the Act, the AO should have disallowed 1% of the above amount. The Ld.AR also filed a small chart in which the details of the non-current investments and current investments Page 15 of 17 IT(TP)A No. 01/Coch/2023 as on 31/03/2016 and 31/03/2017 are furnished which is extracted as below: 25. The Ld.AR also in support of the above said chart enclosed the financial statements as on 31/03/2017 and contended that the disallowance made by the AO u/s. 14A of the Act by taking wrong figure is not correct. The Ld.AR further contended that the fair market value of the investments was taken for the purpose of disallowance under Rule 8D. But under the Companies Act, accounts are required to be prepared under the IndAS which mandates to revalue the investments in equity instruments at the fair market value. Therefore the assessee had revalued its investments in equity shares at fair market value as on 31/03/2017. But to arrive the quantum of disallowance under 8D of the Rules, only cost has to be considered and not the fair market value. The Ld.AR also submitted that the share value of the Cochin International Airport Ltd. at cost was only Rs. 24,98,40,200/- as against the fair market value of Rs. 148,25,51,747/-. As per the IndAS method, the fair market value of the said share was shown in the balance sheet which were taken by the assessing officer for arriving the disallowance under Rule 8D of the Rules. The Ld.AR further submitted that the assessee also made investments in foreign subsidiaries and the incomes from the said investments is taxable in India and therefore the said amounts could not be considered for disallowance u/s. 14A of the Act. The details of the investments made by the assessee is as follows: Page 16 of 17 IT(TP)A No. 01/Coch/2023 26. Therefore the Ld.AR contended that there are so many mistakes in the computation of the disallowance made u/s. 14A of the Act and infact the assessee had also furnished a statement showing the exact amount to be disallowed u/s. 14A of the Act which is as follows: 27. Finally the Ld.AR also made a submission that the disallowance made by the AO u/s. 14A itself is not correct since the assessee had voluntarily made a disallowance u/s. 14A of the Act. The Ld.AR also relied on the judgment of the Hon’ble Supreme Court reported in 322 CTR 465 in the case of the South Indian Bank Ltd. vs. CIT and prayed to allow the ground. The Ld.DR relied on the provisions and the order of the lower authorities and prayed to dismiss the ground. 28. We have considered the submissions made by the Ld.AR and also the documents filed in support of the said claim and we are of the view that the assessee’s submission about the disallowance made u/s. 14A is correct. Page 17 of 17 IT(TP)A No. 01/Coch/2023 But unfortunately, these details were not produced before the lower authorities and therefore we are of the view that this ground requires a detailed verification by the AO and on such verification, if the assessee was able to establish the fact that the further disallowance made by the AO is not required, the AO is directed to give the benefit to the assessee. Accordingly, ground no. 6 is partly allowed for statistical purposes. 29. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 11th December, 2024. Sd/- Sd/- (WASEEM AHMED) (SOUNDARARAJAN K.) Accountant Member Judicial Member Bangalore, Dated, the 11th December, 2024. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Cochin 5. Guard file 6. CIT(A) By order Assistant Registrar, ITAT, Cochin "