2013 (6) TMI 478 - AT - Income Tax

Tribunal Rules on Revenue's Appeals & Assessee's Cross-objections

ACIT Circle, Shimla Versus M/s. Jaiparkash Hydro Power Ltd.

ACIT Circle, Shimla Versus M/s. Jaiparkash Hydro Power Ltd. - TMI Issues Involved:1. Deduction under Section 80IA of the Act in respect of interest income.2. Provision for leave encashment as ascertained liability under Section 115JB.3. Provision for staff incentive as unascertained liability under Section 115JB.4. Adjustment of Advance Against Depreciation (AAD) to book profits under Section 115JB.5. Deduction under Section 80IA for interest on FDRs.6. Deduction under Section 80IA for sale of scrap.7. Interest received on loans from staff.Issue-wise Detailed Analysis:1. Deduction under Section 80IA of the Act in respect of interest income:The Revenue's appeal contested the allowance of deduction under Section 80IA for interest income received against late payment from customers. The AO had denied the deduction, arguing that such income was not derived from the eligible undertaking. The CIT(A) allowed the deduction, reasoning that the interest was inextricably linked to the supply of power and thus part of the sale revenue. The Tribunal upheld the CIT(A)'s decision, referencing various High Court decisions that supported the view that interest on delayed payments from customers has a direct nexus with the eligible business.2. Provision for leave encashment as ascertained liability under Section 115JB:The AO had added the provision for leave encashment to the book profits, treating it as an unascertained liability. The CIT(A) disagreed, citing the Supreme Court's decision in Bharat Earth Movers v. CIT, which held that such provisions, when determined by actuarial valuation, are ascertained liabilities. The Tribunal confirmed the CIT(A)'s order, emphasizing that the provision for leave encashment constituted an ascertained liability.3. Provision for staff incentive as unascertained liability under Section 115JB:The AO treated the provision for staff incentive as an unascertained liability and added it to the book profits. The CIT(A) held that the provision was ascertained, as it was based on existing policies and related to work done by employees during the year. The Tribunal, however, remanded the matter back to the AO for re-examination, noting that neither the AO nor the CIT(A) had thoroughly examined the specific policy regarding staff incentives.4. Adjustment of Advance Against Depreciation (AAD) to book profits under Section 115JB:The AO added AAD to the book profits, but the CIT(A) reversed this decision, relying on the Supreme Court's ruling in National Hydro Electric Power Corporation v. CIT, which held that AAD is a timing difference and not an amount carried to a reserve. The Tribunal upheld the CIT(A)'s decision, affirming that AAD should not be added to the book profits as per the Supreme Court's judgment.5. Deduction under Section 80IA for interest on FDRs:The AO denied the deduction under Section 80IA for interest on FDRs, arguing that such interest was not derived from the eligible business. The CIT(A) upheld this view, reasoning that the interest on FDRs did not have a direct nexus with the power generation business. The Tribunal agreed, citing the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT, which held that interest on deposits is a step removed from the business of the industrial undertaking.6. Deduction under Section 80IA for sale of scrap:The AO excluded income from the sale of scrap from the business profits for the purpose of deduction under Section 80IA, arguing it was not derived from the eligible business. The CIT(A) supported this exclusion, noting that the scrap was generated from stores and repairs, not from the manufacturing process. The Tribunal upheld this decision, agreeing that the sale of scrap did not have an immediate and first-degree nexus with the power generation business.7. Interest received on loans from staff:This issue was not pressed by the assessee during the hearing and was dismissed as not pressed.Conclusion:The Tribunal's order resulted in partial allowance of the Revenue's appeals and dismissal of the assessee's appeals and cross-objections. The decisions were based on detailed legal reasoning and adherence to precedents set by higher courts, ensuring that the deductions and adjustments were in line with the applicable legal provisions and judicial interpretations.