2023 (12) TMI 713 - HC - Income Tax

Section 14A requires AO satisfaction before invoking Rule 8D; own-fund investments cap disallowance; Section 80IA(8) permits market value

HC held that Section 14A requires the AO to record satisfaction before invoking Rule 8D; ITAT correctly deleted the disallowance as investments were from ... Disallowance u/s 14A r.w.r. 8D - expenditure incurred on earning exempt income - mandation of recording satisfaction by AO - ITAT deleted addition on the basis that relevant investments are out of assessee's old and own interest free funds, which exceeded tax free investments - HELD THAT:- The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances we are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule 8 would be attracted automatically. We are of the view that the ITAT rightly relied on the decision of the Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] Whether Tribunal is justified in upholding that the disallowance made under section 14A read with Rule 8D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule? - The aforesaid second question is squarely covered by the decision of this Court in the case of Correctch Energy Pvt. Ltd. [2014 (3) TMI 856 - GUJARAT HIGH COURT] In our opinion, no error not to speak of any error of law could be said to have been committed by the ITAT in this regard MAT adjustment on account of disallowance u/s.14A - HEDL THAT:- We hold that no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. We allow this ground of appeal in both the years and delete the additions Deduction u/s.80IA(4) - GEB supplied power to its consumers - Tribunal was of the opinion that the market value of the electricity supplied by the CPP Unit to the general unit would be the same being charged by GEB from the consumers - HELD THAT:- Under sub-Section(8) of Section 80IA of the Act, if it is found that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80IA in case of the eligible business as if the transfer had been made at the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture. Characterization of income - income from realization of carbon credits - revenue or capital in nature - realization from carbon credits has been treated by the assessee itself as revenue income and offered to tax and in fact in actualities they are revenue receipt - HELD THAT:- This issue is squarely covered by decision M/s. Alembic Ltd. [2017 (9) TMI 189 - GUJARAT HIGH COURT] held as decided in Subhash Kabini Power Corporation Ltd. [2016 (5) TMI 793 - KARNATAKA HIGH COURT] and My Home Power Limited [2014 (6) TMI 82 - ANDHRA PRADESH HIGH COURT] that receipts of carbon credit are in nature of revenue receipts. Following the decision of said two High Courts, this question is also not considered. Having considered the question of law and in light of the decision of the coordinate bench of this court which has been relied upon by the tribunal in the order under challenge, no substantial question of law arises for the consideration of this court - Revenue appeal dismissed. Issues Involved:1. Deletion of addition under Section 14A read with Rule 8D.2. Disallowance under Section 14A for mixed funds.3. Disallowance under Section 14A exceeding exempt income.4. Adjustment of disallowance under Section 14A in book profit computation under Section 115JB.5. Deduction under Section 80IA(4) at the rate GEB supplied power to its consumers.6. Treatment of income from carbon credits as capital in nature.Summary:Issue (A) & (B): Deletion of Addition under Section 14A read with Rule 8D and Disallowance for Mixed FundsThe court addressed whether the ITAT was justified in deleting the addition under Section 14A read with Rule 8D based on the assessee's claim that investments were made from old and own interest-free funds. The court referred to the Supreme Court's decision in Maxopp Investment Limited and the Gujarat High Court's decision in Shreno Limited, emphasizing that the Assessing Officer must record satisfaction regarding the correctness of the assessee's claim before applying Rule 8D. The court upheld the ITAT's decision, noting that the requirement of recording satisfaction was not fulfilled by the Assessing Officer.Issue (C): Disallowance Exceeding Exempt IncomeThe court referred to its previous decision in Correctch Energy Pvt. Ltd., affirming that the disallowance under Section 14A cannot exceed the exempt income. The ITAT's decision to this effect was upheld.Issue (D): Adjustment in Book Profit Computation under Section 115JBThe court examined whether the disallowance under Section 14A should be added back in the computation of book profit under Section 115JB. The ITAT had relied on decisions from the Gujarat High Court in Alembic Ltd. and the Bombay High Court in Bengal Finance & Investment P. Ltd., which held that such disallowance should not be added back. The court upheld the ITAT's decision, confirming that no addition to book profit should be made based on Section 14A disallowance.Issue (E): Deduction under Section 80IA(4)The court addressed whether the ITAT was justified in allowing the assessee's claim of deduction under Section 80IA(4) at the rate GEB supplied power to its consumers. The court referred to its previous decisions in Gujarat Alkalies and Chemicals Ltd. and the Supreme Court's decision in M/s. Alembic Ltd., affirming that the deduction should be based on the rate at which GEB supplied power. The ITAT's decision was upheld.Issue (F): Treatment of Income from Carbon CreditsThe court examined whether the income from the realization of carbon credits should be treated as capital in nature. The court referred to decisions from the Karnataka High Court in Subhash Kabini Power Corporation Ltd. and the Andhra Pradesh High Court in My Home Power Limited, which held that such income is capital in nature. The ITAT's decision to treat the income from carbon credits as capital was upheld.Conclusion:The court dismissed the tax appeal, affirming the ITAT's decisions on all issues, and concluded that no substantial question of law arises for consideration.