2022 (8) TMI 440 - AT - Income Tax

Tribunal affirms CIT(A) decision on Income-tax Act appeal, emphasizes legal precedent & correct application

The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and vacating the disallowances made by the AO under Sections 80IA(8) and 14A of ... Computation of market value for transfer pricing between group units - application of Explanation to Section 80IA(8) in intra company power transfers - eligibility and computation of deduction under Section 80IA(4)(iv)(a) - disallowance under Section 14A read with Rule 8D of the Income Tax Rules - requirement of recording dissatisfaction before invoking Rule 8D - precedential effect of Tribunal and High Court decisions on identical factual matrixApplication of Explanation to Section 80IA(8) in intra company power transfers - computation of market value for transfer pricing between group units - eligibility and computation of deduction under Section 80IA(4)(iv)(a) - The Assessing Officer was not justified in invoking Section 80IA(8) to deny the assessee's deduction by adopting the price paid by the State Electricity Board to suppliers instead of the market price to a consumer - HELD THAT: - The Tribunal found the controversy to be squarely covered by its earlier decision in the assessee's own case for AY 2008-09 and by the Chhattisgarh High Court's decision in CIT v. Godawari Power & Ispat Ltd., which hold that market value for power supplied to the manufacturer (consumer) must be determined by reference to the rate at which power is available to that consumer in the open market (i.e., the price charged by the Electricity Board to consumers), and not by the price at which the Board purchases power from suppliers. The AO's adoption of rates payable by the Board to suppliers (and his reliance on lower supply rates or offers to the Board) was therefore contrary to the binding judicial precedent and the Tribunal's prior view. As no higher court had set aside or stayed those precedents, the AO was obliged to follow them; accordingly the CIT(A)'s deletion of the disallowance was upheld and the Revenue's grounds (a)-(c) were dismissed. [Paras 6, 7, 8, 10, 11]Challenge to deletion of the disallowance under Section 80IA(8) dismissed; CIT(A)'s order vacating the disallowance is upheld.Disallowance under Section 14A read with Rule 8D of the Income Tax Rules - requirement of recording dissatisfaction before invoking Rule 8D - linkage between interest/administrative expenditure and earning of exempt income - The Assessing Officer's disallowance under Section 14A read with Rule 8D was not sustainable and the CIT(A) was justified in deleting the disallowance - HELD THAT: - The Tribunal agreed with the CIT(A) that the AO failed to establish the requisite nexus between the interest/administrative expenses and the exempt income yielding investments, and did not record the mandated dissatisfaction before applying the Rule 8D mechanism. Further, the assessee had not earned any exempt income during the year; on that basis alone no disallowance under Section 14A could be sustained. The Tribunal relied on relevant High Court decisions to support the proposition that, absent exempt income or proper application of the Rule 8D procedure, the disallowance cannot be upheld. Consequently, the deletion of the disallowance was affirmed and the Revenue's grounds (d)-(i) were dismissed. [Paras 12, 13, 14, 15]Deletion of the Section 14A/Rule 8D disallowance is upheld; Revenue's appeal on this point dismissed.Final Conclusion: Both challenges by the Revenue - the invocation of Section 80IA(8) to reduce the assessee's 80IA deduction and the disallowance under Section 14A read with Rule 8D - were found without merit; the CIT(A)'s deletions on both counts are upheld and the departmental appeal is dismissed for AY 2013-14. Issues Involved:1. Deletion of disallowance of the claim for deduction u/s 80IA(8) of the Income-tax Act, 1961.2. Determination of the market value of power for the purpose of deduction u/s 80IA(8).3. Transfer pricing of goods between units of the same company.4. Deletion of disallowance made u/s 14A of the Income-tax Act.5. Consideration of provisions of Section 14A(3) while deleting the addition.6. Reliance on judicial precedents and their applicability.Issue-wise Detailed Analysis:Issue 1: Deletion of Disallowance of the Claim for Deduction u/s 80IA(8)The department challenged the deletion of the disallowance of Rs.4,38,73,880/- made on account of power supplied to the steel division. The assessee, engaged in manufacturing and trading of sponge iron, steel ingots, and power generation, had claimed a deduction under Section 80IA(4)(iv)(a) of the Act. The AO observed that the assessee transferred electricity to its steel division and associate concerns at a higher rate than the rate at which it sold to the State Electricity Board (CSEB). The AO concluded that this inflated the profits of the power division, which was eligible for deduction, and reduced the profits of the steel division. The CIT(A) vacated the disallowance, and the Tribunal upheld this decision, citing that the issue was covered by the Tribunal's order in the assessee's case for AY 2008-09 and the judgment of the Hon'ble High Court of Chhattisgarh in CIT Vs. Godawari Power & Ispat Ltd.Issue 2: Determination of the Market Value of Power for Deduction u/s 80IA(8)The AO contended that the market value should be the rate at which power was sold to CSEB, which was lower than the rate at which it was transferred to the steel division. The assessee argued that the tariff for sale to CSEB was regulated and not comparable to the market value for internal transfers. The Tribunal, following the precedent set in the assessee's earlier case and the judgment of the Chhattisgarh High Court, held that the market value should be the rate charged by the Electricity Board to consumers, not the rate at which power was sold to CSEB.Issue 3: Transfer Pricing of Goods Between Units of the Same CompanyThe AO's disallowance was based on the premise that the assessee inflated the power division's profits by transferring power at a higher rate. The Tribunal, however, upheld the CIT(A)'s decision, stating that the market value should be based on the rate charged by the Electricity Board to consumers, aligning with the precedent set by the High Court and the Tribunal's earlier order.Issue 4: Deletion of Disallowance Made u/s 14AThe AO disallowed Rs.5,73,515/- u/s 14A r.w. Rule 8D, attributing interest and administrative expenses to investments in exempt income-yielding shares. The CIT(A) vacated this disallowance, noting that the AO failed to correlate the interest paid with the investments and did not record dissatisfaction before applying Rule 8D. The Tribunal upheld the CIT(A)'s decision, emphasizing that no disallowance u/s 14A is warranted if no exempt income is earned during the year, supported by judicial precedents.Issue 5: Consideration of Provisions of Section 14A(3) While Deleting the AdditionThe AO argued that provisions of Section 14A(3) were not considered by the CIT(A). The Tribunal found that since the assessee did not earn any exempt income during the year, no disallowance under Section 14A was justified, thus affirming the CIT(A)'s deletion of the disallowance.Issue 6: Reliance on Judicial Precedents and Their ApplicabilityThe AO did not follow the Tribunal's earlier order or the High Court's judgment, citing ongoing appeals. The Tribunal reiterated that unless set aside or stayed by a higher court, these judgments must be followed. The Tribunal dismissed the Revenue's grounds, upholding the CIT(A)'s order in favor of the assessee.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that vacated the disallowances made by the AO. The Tribunal emphasized adherence to judicial precedents and proper application of legal provisions, particularly in determining market value for internal transfers and disallowances under Section 14A.