ITAT allows depreciation, deletes MODVAT additions, upholds power unit deductions under sections 32, 80IA, 115JB

The ITAT Mumbai decided multiple issues in favor of the assessee. The tribunal directed the AO to rework disallowance under section 14A considering only investments yielding exempt income. Following SC precedent in Indo Nippon Chemicals, the tribunal deleted additions for unutilized MODVAT credit, ruling it doesn't impact profit regardless of accounting method. Sales tax incentives were correctly treated as capital receipts. TDS provisions under section 195 were held inapplicable to payments to foreign branches of Indian banks. Additional depreciation under section 32(1)(iia) was allowed following coordinate bench precedent. Deductions under section 80IA for power units were upheld. Various provisions and disallowances in book profit computation under section 115JB were deleted, with directions for proper allocation of expenses.

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Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Addition of unutilized CENVAT Credit.
3. Addition of sales tax subsidy as capital receipt.
4. Exclusion of excise duty exemption in computing total income.
5. Disallowance of interest paid to SBI Bahrain branch.
6. Disallowance of additional depreciation under Section 32(1)(iia).
7. Deduction under Section 80IA for power-generating units.
8. Apportionment of indirect head office expenses for computing deductions under Sections 80IA, 80IB, and 80IC.
9. Validity of reference to the DVO under Section 55A.
10. Addition of provision for normal gratuity in computing book profit under Section 115JB.
11. Addition of provision for wealth tax in computing book profit under Section 115JB.
12. Addition of provision for VRS in computing book profit under Section 115JB.
13. Disallowance of interest under Rule 8D(ii) read with Section 14A in computing book profit under Section 115JB.
14. Disallowance of club expenses.
15. Deduction under Section 80IA for rail facility.
16. Disallowance of leave encashment provision under Section 43B(f).
17. Addition of leave encashment provision in computing book profit under Section 115JB.
18. Non-exclusion of profit on sale of fixed assets in computing book profits under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The Tribunal noted that the Assessing Officer (AO) disallowed Rs. 1.94 crore under Rule 8D(2)(iii) for earning exempt income. The Assessee argued that it had sufficient interest-free funds. The Tribunal directed the AO to re-compute the disallowance only on investments yielding exempt income, relying on the decision in Vireet Investment Pvt. Ltd. [165 ITD 27].

2. Addition of unutilized CENVAT Credit:
The Tribunal upheld the CIT(A)'s deletion of the addition of unutilized CENVAT Credit, following the decision in Mahindra & Mahindra Ltd [2020] 113 taxmann.com 230, which held that such credit cannot be directly added to income.

3. Addition of sales tax subsidy as capital receipt:
The Tribunal upheld the CIT(A)'s decision to treat sales tax incentives as capital receipts, following the Special Bench decision in Reliance Industries Ltd [88 ITD SB 273] and other judicial precedents.

4. Exclusion of excise duty exemption in computing total income:
The Tribunal upheld the CIT(A)'s decision to exclude excise duty exemption from total income, following the decision in Mahindra & Mahindra Ltd [2020] 113 taxmann.com 230.

5. Disallowance of interest paid to SBI Bahrain branch:
The Tribunal upheld the CIT(A)'s deletion of the disallowance, stating that payments to foreign branches of Indian banks are not subject to TDS under Section 195.

6. Disallowance of additional depreciation under Section 32(1)(iia):
The Tribunal allowed the Assessee's claim for additional depreciation on assets acquired before the assessment year, following the decision in Ambuja Cement Limited (ITA No. 6375 and 6405/Mum/2013).

7. Deduction under Section 80IA for power-generating units:
The Tribunal allowed the Assessee's claim for deduction under Section 80IA for power-generating units, following the decision in Ambuja Cement Limited (ITA Nos. 1889 and 1241/Mum/2018).

8. Apportionment of indirect head office expenses for computing deductions under Sections 80IA, 80IB, and 80IC:
The Tribunal directed the AO to allocate head office expenses (other than auditor fees and CMA expenses) based on expenditure incurred by the units vis-à-vis overall expenditure, following the decision in Ambuja Cement Limited (ITA Nos. 1889 and 1241/Mum/2018).

9. Validity of reference to the DVO under Section 55A:
The Tribunal held that the AO was not justified in referring the valuation of land to the DVO under Section 55A, following the decision in CIT v. Puja Prints 360 ITR 697.

10. Addition of provision for normal gratuity in computing book profit under Section 115JB:
The Tribunal upheld the deletion of the addition of provision for normal gratuity, following the decision in Bharat Earth Movers (245 ITR 528) and CIT v. Echjay Forgings (P) Ltd. (2001) 251 ITR 15.

11. Addition of provision for wealth tax in computing book profit under Section 115JB:
The Tribunal upheld the deletion of the addition of provision for wealth tax, following the decision in CIT v. Echjay Forgings (P) Ltd. (2001) 251 ITR 15.

12. Addition of provision for VRS in computing book profit under Section 115JB:
The Tribunal upheld the deletion of the addition of provision for VRS, following the decision in Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC).

13. Disallowance of interest under Rule 8D(ii) read with Section 14A in computing book profit under Section 115JB:
The Tribunal deleted the disallowance of interest under Rule 8D(ii) while computing book profit under Section 115JB, following the decision in Vireet Investments Pvt. Ltd. (82 taxmann.com 415).

14. Disallowance of club expenses:
The Tribunal allowed the Assessee's claim for club expenses, following the decision in Otis Elevator Co (I) Ltd. v. CIT (195 ITR 682) (Bom).

15. Deduction under Section 80IA for rail facility:
The Tribunal allowed the Assessee's claim for deduction under Section 80IA for rail facilities, following the decision in Ultratech Cement Ltd Vs ACIT [(2017) 88 taxmann.com 907 (Mumbai)].

16. Disallowance of leave encashment provision under Section 43B(f):
The Tribunal upheld the disallowance of leave encashment provision under Section 43B(f), following the decision in UOI v. Exide Industries Ltd. [425 ITR 1].

17. Addition of leave encashment provision in computing book profit under Section 115JB:
The Tribunal deleted the addition of leave encashment provision in computing book profit under Section 115JB, following the decision in Bharat Earth Movers (245 ITR 528).

18. Non-exclusion of profit on sale of fixed assets in computing book profits under Section 115JB:
The Tribunal directed the AO to recompute taxable long-term capital gains after giving the benefit of indexed cost of acquisition while computing book profits under Section 115JB, following the decision in Best Trading and Agencies Limited v. DCIT [119 Taxmann.com 129].

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