2017 (6) TMI 1181 - AT - Income Tax

Electricity Meter Replacement Costs Treated as Revenue Expenses, Tax Disallowances Upheld

Dy. Commissioner of Income Tax, 14 (3) (1), Mumbai Versus M/s Reliance Infrastructure Ltd.

The High Court upheld the CIT(A)'s decision to treat the replacement of electricity meters as revenue expenditure, not capital, as it does not enhance ... Expenditure on on replacement of meters - nature of expenditure - revenue or capital - Held that:- This issue is covered by High Court judgement in assessee’s own case for AYs 2001-02, 2002-03, 2003-04, 2006-07, 2007-08 and 2008-09 [2013 (7) TMI 1095 - BOMBAY HIGH COURT] in favour of assessee. Apportionment of proportionate expenses of head office and allocation to Goa unit, Samalkot unit and Windmill unit - Held that:- This issue is covered in favour of assessee by assessee’s own case of Hon’ble High Court decision for AYs 2006-07 and 2007-08 and also see [2014 (6) TMI 574 - BOMBAY HIGH COURT] Allowance of transmission and wheeling charges - non deduction of tds - Held that:- Tribunal in assessee’s own case has allowed the claim of the assessee, respectfully following the same and taking a consistent view we dismiss this issue of Revenue’s appeal. Disallowance of foreign exchange loss holding the same as Revenue in character - Held that:- The effects of changes in foreign exchange rates, exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or expenses in the period in which they arise. The loss suffered by the company on account of exchange rate variation as on the date of balance sheet is an ascertained liability valued as per the foreign exchange rate prevailing on the date of balance sheet. Thus it is an ascertained liability allowable u/s. 37(1) of the Act. We find that this issue of the assessee is covered by the decision of Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd.[2007 (4) TMI 118 - DELHI HIGH COURT]. Accordingly, we are of the view that the mark to market loss i.e unrealized loss of ₹ 66,23,70,735/- is allowable. We also finf from the facts of the case that from the chart given above, it can be seen that there was realized loss on of ₹ 6,72,27,910/- which includes in the figure of ₹ 66,23, 70,735/- and thus the unrealized loss was only ₹ 59,51,42,825/-. We direct the AO accordingly. Non applicability of provision of provision u/s 115JB - Held that:- As decided in assessee's own case AY 2001-02 to 2009-10 that assessee is following the accounting policies under the Electricity Supply act and prepared its accounts in view of those very policies. Following those very policies, the accounts in accordance with part II & III of Schedule VI of the Companies Act are not applicable at all. Once there is no possibility for preparing the accounts in accordance with the part II & 11 of Schedule VI of Companies Act then the provisions of sec. 115JB cannot be forced. Disallowance of interest expenses for working out the disallowance expense under section 14A of the Act read with Rule 8D - Held that:- If the capital and reserve is much more than the investment it is presumed that the investment has been made out of own funds and therefore disallowance of interest under section 14A of the Act cannot be made. We find force in the argument of Ld Counsel and in the given facts of the case we are of the view that the CIT(A) has rightly deleted the addition. Disallowance under section 115JB of the Act of expenses relatable to exempt income by invoking the provisions of section 14A - Held that:- We have also considered this issue and find that the provisions of Section 115JB of the Act are not applicable in this case and once the provisions are not applicable no disallowance under this section can be made. We confirm the order of CIT(A) and this issue of Revenue’s appeal is dismissed. Disallowance of exempt income which is not yielded tax from income - Held that:- Set aside this issue back to the file of the AO to ascertain the investment giving rise to taxable income and non-taxable income and accordingly, taxable investments can be excluded while making disallowance. We are in agreement with the argument of the assessee and accordingly, we remand this issue back to the file of the AO. See CIT Versus M/s. Delite Enterprises [2009 (2) TMI 498 - BOMBAY HIGH COURT ] Issues Involved:1. Disallowance on account of replacement of electricity meters.2. Apportionment of proportionate expenses of the head office and allocation to various units.3. Disallowance of transmission and wheeling charges for non-deduction of TDS.4. Disallowance of foreign exchange loss.5. Applicability of section 115JB to the assessee company.6. Disallowance under section 14A read with Rule 8D.7. Disallowance under section 115JB of expenses relatable to exempt income by invoking section 14A read with Rule 8D.8. Disallowance of expenditure on prospecting of methane gas blocks.9. Consideration of investments capable of earning tax-free income for disallowance under section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Disallowance on account of replacement of electricity meters:The Revenue's appeal contested the CIT(A)'s deletion of the disallowance made by the AO on account of the replacement of electricity meters, arguing it was capital expenditure. The CIT(A) relied on earlier ITAT orders for AY 2008-09 and 2009-10, which treated such expenditure as revenue in nature. The High Court also upheld this view, stating that the replacement of meters is a periodic necessity due to obsolescence and does not enhance the generation or distribution capacity of electricity. Consequently, the expenditure was held to be of a revenue nature.2. Apportionment of proportionate expenses of the head office and allocation to various units:The AO apportioned head office expenses to the Goa unit, Samalkot unit, and Windmill unit, reducing the eligible profit for deduction under section 80IA. The CIT(A) followed the Tribunal's order in the assessee's own case for prior years, which did not support such allocation. The High Court had also ruled in favor of the assessee, confirming that head office expenses should not be allocated to these units.3. Disallowance of transmission and wheeling charges for non-deduction of TDS:The AO disallowed the expenditure on transmission and wheeling charges for non-deduction of TDS. The CIT(A) allowed the claim, following Tribunal orders in the assessee's own case for AYs 2007-08 to 2009-10, which held that TDS was not deductible on such charges under sections 194-I or 194-J. The Tribunal upheld this view, dismissing the Revenue's appeal.4. Disallowance of foreign exchange loss:The AO disallowed the foreign exchange loss, considering it notional or contingent. The CIT(A) allowed the claim, distinguishing between revenue and capital losses. The revenue loss of Rs. 66,23,70,735/- was allowed, while the capital loss of Rs. 24,31,73,110/- was disallowed. The Tribunal confirmed this decision, citing the Supreme Court's ruling in Woodward Governor India Pvt. Ltd., which allows for the recognition of such losses as revenue expenditure.5. Applicability of section 115JB to the assessee company:The AO computed book profit under section 115JB, but the CIT(A) held that the provisions of section 115JB were not applicable as the assessee prepared its accounts under the Electricity Supply Act, not the Companies Act. The Tribunal confirmed this view, following consistent rulings in the assessee's favor from AY 2001-02 to 2009-10, citing the Supreme Court's doctrine of impossibility.6. Disallowance under section 14A read with Rule 8D:The AO disallowed expenses related to exempt income under section 14A read with Rule 8D. The CIT(A) deleted the disallowance, noting that the assessee had sufficient own funds to cover the investments. The Tribunal upheld this decision, referencing the Bombay High Court's rulings in Reliance Utilities Power Ltd. and HDFC Bank Ltd., which support the non-disallowance of interest when own funds exceed investments.7. Disallowance under section 115JB of expenses relatable to exempt income by invoking section 14A read with Rule 8D:The AO disallowed expenses related to exempt income under section 115JB by invoking section 14A read with Rule 8D. The CIT(A) deleted the disallowance, following consistent ITAT and CIT(A) orders in the assessee's favor, asserting that section 115JB was not applicable. The Tribunal confirmed this decision.8. Disallowance of expenditure on prospecting of methane gas blocks:The assessee did not press this ground, and it was dismissed as not pressed.9. Consideration of investments capable of earning tax-free income for disallowance under section 14A read with Rule 8D:The CIT(A) considered all investments capable of earning tax-free income for disallowance under section 14A read with Rule 8D. The assessee argued that only investments yielding tax-free income during the year should be considered. The Tribunal remanded this issue back to the AO to ascertain the investments giving rise to taxable and non-taxable income and to exclude taxable investments while making disallowance.Conclusion:The appeal of the Revenue was dismissed, and the appeal of the assessee was allowed for statistical purposes.