2023 (8) TMI 1058 - AT - Income Tax

Tribunal upholds CIT(A) decisions on investments, expenses, deductions

ACIT, CIRCLE-14 (1) (2) Versus M/s. Reliance Infrastructure Ltd, Mumbai.

The Tribunal upheld the CIT(A)'s decisions on various issues, including the exclusion of investments in subsidiaries for disallowance under Rule 8D2(iii) ... Disallowance u/s 14A r.w.r. 8D - sufficiency of own funds - HELD THAT:- As decided in the case of South Indian Bank Ltd. [2021 (9) TMI 566 - SUPREME COURT] that in case assessee has surplus fund then it is presumed that investment has been made out of surplus funds and no disallowance u/s 14A can be made on interest expenditure - thus no disallowance on account of interest can be made when assessee has surplus funds. In so far as the ld. CIT(A)’s direction that to re-compute disallowance considering only those investments including investment in subsidies which have earned tax free income during the year, is based on precedents of earlier years of the Tribunal for the A.Y. 2017-18 and 2018-19 supra. Decided against revenue. Nature of expenses - Expenditure on replacement of meters - AO held that expenditure incurred in replacement of meters is a capital expenditure and allowed depreciation thereon as against assessee’s claim as “revenue expenditure” - HELD THAT:- The expenditure on replacement of meters is for facilitating the assessee’s business operations and enables maintenance and conduct of the assessee’s business more effectively or more profitably. The replacement of meter does not increase the assessee’s generation or distribution capacity. Further, replacing old meters by new meters has resulted only in getting better readings of the current consumption and does not in any way enhance the capital assets or the quantity of power supply. Accordingly, the assessee has correctly claimed the expenditure incurred on replacement of meters as revenue expenditure - See Bombay High Court in assessee’s own case [2014 (6) TMI 574 - BOMBAY HIGH COURT] Allocation of head office expenses for computing profit eligible for deduction u/s. 80IA for distribution unit - AO has apportioned the head office expenses to all the units and the eligible profits were re-computed - HELD THAT:- Now this issue is settled in the case of the assessee on the same point by the decision of the Tribunal as well as the Hon’ble Bombay High court in earlier years that profit of eligible undertaking has to be worked out as if such undertaking was only source of income during the previous year and deduction u/s. 80IA is allowable in respect of profits and gains derived from such business. Therefore, head office expenses cannot be deducted from the profits and the gains which had derived from eligible business because it has been found as a finding of fact that these expenses do not have direct and immediate connection with the eligible unit. Accordingly, ground raised by the Revenue is dismissed. Deduction u/s. 80IA restricted to business income instead of total income - HELD THAT:- The Hon’ble Supreme Court [2021 (4) TMI 1237 - SUPREME COURT] has decided the issue in favour of the assessee wherein claim that deduction u/s. 80IA ought to be allowed upto gross total income has been accepted. Thus, in view of the above, we allow the assessee’s claim of deduction u/s. 80IA that it ought to be allowed up to gross total income which has been accepted. Consequently, the ground is dismissed. MAT - computation of book profits u/s. 115JB and disallowance u/s.14A - HELD THAT:- As no disallowance u/s. 14A is required to be made for computing book profits u/s. 115JB. See Vireet Investments P. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] Disallowance of inflated coal expenses - disallowance on adhoc and estimated basis at 12% - HELD THAT:- As all the observations and the finding given by the ld. AO as incorporated these are all based on DRI report which as of now has not been approved by the higher appellate forums and as informed by the assessee, the same are still at the stage of show-cause notice and no final order has been passed. Thus, all the observations of AO has no relevance at all. As observed above, the case of the Revenue is that assessee might have inflated cost of the coal, however, once the cost of the coal is part of tariff price determination by the regulatory authority and once the electricity is sold on the same tariff which has been credited to the profit and loss account and offered to tax, then there is no question of separately taxing the alleged inflated cost of coal. Therefore, no disallowance at all is warranted. Accordingly, the entire addition is deleted and consequently, the Revenue’s appeal is dismissed and assessee’s appeal is allowed. Issues Involved:1. Exclusion of investments in subsidiaries for disallowance under Rule 8D2(iii) and Section 14A.2. Treatment of expenses incurred for replacement of meters as Revenue expenditure.3. Allocation of Head Office expenses while calculating deduction under Section 80IA.4. Deduction under Section 80IA against gross total income versus net business income.5. Disallowance under Section 14A while computing book profit under Section 115JB.6. Disallowance of inflated coal expenses.Summary:Issue 1: Exclusion of Investments in Subsidiaries for Disallowance under Rule 8D2(iii) and Section 14AThe Tribunal upheld the CIT(A)'s direction to exclude investments in subsidiaries that yielded exempt income during the year for the purpose of computing disallowances under Rule 8D2(iii). The Tribunal noted that the CIT(A) followed precedents from earlier years and Supreme Court decisions, confirming that only those investments which earned tax-free income during the year should be considered. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.Issue 2: Treatment of Expenses Incurred for Replacement of Meters as Revenue ExpenditureThe Tribunal confirmed the CIT(A)'s decision treating the expenditure on replacement of meters as revenue expenditure. The Tribunal noted that this issue had been consistently decided in favor of the assessee in earlier years by both the High Court and the ITAT. The Tribunal agreed that the replacement of meters facilitated business operations without enhancing capital assets or increasing power supply capacity.Issue 3: Allocation of Head Office Expenses While Calculating Deduction under Section 80IAThe Tribunal upheld the CIT(A)'s decision not to allocate head office expenses to the eligible 80IA profits. The Tribunal referenced earlier decisions by the High Court and ITAT, which consistently held that head office expenses should not be deducted from the profits of the eligible undertaking, as these expenses do not have a direct and immediate connection with the unit.Issue 4: Deduction under Section 80IA Against Gross Total Income Versus Net Business IncomeThe Tribunal dismissed the Revenue's appeal, confirming that the deduction under Section 80IA should be allowed up to the gross total income. The Tribunal noted that this issue had been settled by the Supreme Court in favor of the assessee in earlier years, and there was no impact on the disallowance by the AO for the year under consideration.Issue 5: Disallowance under Section 14A While Computing Book Profit under Section 115JBThe Tribunal upheld the CIT(A)'s decision to delete the addition made under Section 14A while computing book profits under Section 115JB. The Tribunal referenced earlier ITAT decisions and Special Bench rulings, confirming that no disallowance under Section 14A is required for computing book profits under Section 115JB.Issue 6: Disallowance of Inflated Coal ExpensesThe Tribunal deleted the entire disallowance of inflated coal expenses, noting that the AO's addition was based on a DRI report from earlier years, which had not been substantiated by higher appellate forums. The Tribunal agreed with the assessee that the cost of coal is an integral part of determining the tariff price, which has already been offered for tax. Consequently, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal on this ground.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, confirming the CIT(A)'s decisions on all the issues raised. The order was pronounced on 29th March 2023.