2023 (8) TMI 1597 - AT - Income Tax

Assessee wins on guarantee fees, interest income, and liquidated damages under Section 37(1) provisions

Gujarat State Electricity Corporation Limited Versus The DCIT, Circle-1 (1) (1), Baroda. AND (Vice-Versa)

ITAT Ahmedabad allowed assessee's appeal on multiple grounds. Guarantee fees paid to Gujarat government for loan guarantees were allowed as revenue ... Disallowance of guarantee fees paid to Govt. of Gujarat - This guarantee fees paid by the assessee to Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loans - HELD THAT:- This issue is covered in favour of the assessee by Co-ordinate Bench of this Tribunal in the case of Gujarat Energy Transmission Corporation Ltd [2022 (8) TMI 1419 - ITAT AHMEDABAD] holding that the guarantee fees is directed to be allowed as revenue expenditure. Correct head of income - Treatment of interest income and miscellaneous receipts as “income from other sources” as against the claim as “business income” - HELD THAT:- CIT(A) held that the miscellaneous receipts treated as income from business. However the interest income was treated as “income from other sources”. Considering the judgment of Odisha Power Generation Corporation Ltd [2022 (3) TMI 539 - ORISSA HIGH COURT] we direct the Ld. CIT(A) to consider the issue afresh and pass orders accordingly. Thus the Ground No. 2 raised by the Revenue is allowed for statistical purpose. Disallowance of prior period expenditure - HELD THAT:- This issue is also covered by setting aside the same to the file of the Assessing Officer by the Co-ordinate Bench of this Tribunal in [2022 (8) TMI 1419 - ITAT AHMEDABAD] D.R. appearing for the Revenue has no objection in set aside the matter back to the file of the Assessing Officer for reconsideration. Disallowance u/s. 14A r.w. Rule 8D - HELD THAT:- This issue was set aside to the file of the Assessing Officer for fresh adjudication by Co-ordinate Bench of this Tribunal in the case of Gujarat Urja Vikas Nigam Ltd [2022 (12) TMI 1495 - ITAT AHMEDABAD] hereby set aside the matter to the file of the Assessing Officer for fresh adjudication by examining the facts, figures and calculate the disallowance u/s. 14A of the Act in accordance with law. MAT computation - additions while computing book profit u/s. 115JB - Prior period Expenses and prior period income - HELD THAT:- No adjustment on account of prior period expenses is to be made in the net profit of the company for arriving at the book profits u/s 115JB. Addition of capital grant - This issue is also decided in favour of the assessee in the case of Gujarat energy Transmission Corporation Ltd. [2022 (8) TMI 1419 - ITAT AHMEDABAD] Addition being excess depreciation - This issue of excess depreciation is decided in favour of the assessee in the case of Kansara Popatlal Tribhuvan Metal Pvt. Ltd [2022 (8) TMI 618 - ITAT AHMEDABAD] held that where for purpose of section 115J, assessee claimed depreciation at rates provided under Income-tax Rules, action of Assessing Officer in redrawing profit and loss account and adopting rates prescribed under Companies Act, was totally unauthorized. Disallowance u/s. 14A and adjustment in book profit - This issue is covered in favour of the assessee in assessee’s own case [2020 (3) TMI 232 - GUJARAT HIGH COURT] relating to Assessment Year 2010-11 as held no error could be said to have been committed by the ITAT in taking the view that no addition in the book profit can be made on the basis of the calculations worked out u/s 14A. Addition being 15% of yearend balance of capital grant - This issue is remitted back to the file of the AO for fresh adjudication by giving proper opportunity to the assessee. Allowability of Liquidated Damages - liquidated damages paid by the assessee for breach of contractual obligations in late commencement of power production by the assessee - HELD THAT:-CIT(A) has considered the Purchase Power Agreement (PPA) with Gujarat Urja Vikas Nigam Ltd. (GUVNL) that the scheduled date for commercial operation of Ukai Unit No. 6 was not achieved, but whereas the commercial operation started only on 8th June, 2013. As per the contractual obligation under Clause 4.7 of PPA, the assessee was liable to pay liquidated damages for the delay. This liquidated damages is neither violation of any provisions of law or any Act nor prohibited under the law. As per the contractual obligation entered between the parties, this liquidated damages was paid by the assessee, which in our considered opinion, the provisions of Explanation to Section 37(1) are not attracted and the addition made on this account is liable to be deleted. Thus the ground raised by the Revenue is devoid of merit and the same is hereby rejected. Issues Involved:1. Disallowance of Guarantee Fees2. Treatment of Interest Income and Miscellaneous Receipts3. Disallowance of Prior Period Expenditure4. Disallowance under Section 14A read with Rule 8D5. Deletion of Additions in Book Profit under Section 115JB6. Liquidated Damages7. Addition of Capital GrantDetailed Analysis:1. Disallowance of Guarantee Fees:The issue pertains to whether the guarantee fees paid to the Government of Gujarat should be treated as a revenue expenditure. The Tribunal found that the guarantee fees are an annual recurring expenditure and should be allowed as revenue expenditure. The Tribunal relied on its previous decisions, including the case of Gujarat Energy Transmission Corporation Ltd., where it was held that such fees are not of a capital nature and should be allowed as revenue expenditure. Thus, the Tribunal dismissed the Revenue's appeal on this ground.2. Treatment of Interest Income and Miscellaneous Receipts:The question was whether interest income and miscellaneous receipts should be classified as 'business income' or 'income from other sources.' The Tribunal directed the CIT(A) to reconsider this issue, taking into account the relevant evidence and the judgment of the Orissa High Court in the case of Odisha Power Generation Corporation Ltd. The Tribunal allowed the Revenue's ground for statistical purposes, requiring a fresh examination.3. Disallowance of Prior Period Expenditure:The Tribunal addressed the disallowance of prior period expenses, noting that the assessee followed the mercantile system of accounting. The Tribunal set aside the issue to the Assessing Officer for reconsideration, following the precedent set in the case of Gujarat Urja Vikas Nigam Ltd., where similar issues were remanded for fresh adjudication. The Tribunal allowed this ground for statistical purposes.4. Disallowance under Section 14A read with Rule 8D:The Tribunal examined the disallowance under Section 14A, which pertains to expenditure incurred in relation to exempt income. The Tribunal set aside this issue to the Assessing Officer for fresh adjudication, following the precedent in the assessee's own case and other relevant judgments. The Tribunal emphasized the need for the Assessing Officer to examine the facts and figures before making a determination.5. Deletion of Additions in Book Profit under Section 115JB:The Tribunal considered various additions made to the book profit under Section 115JB, including prior period expenses, excess depreciation, capital grants, and disallowance under Section 14A. The Tribunal upheld the CIT(A)'s decision to delete these additions, citing that they are not covered by the items specified in Explanation 1 to Section 115JB(2). The Tribunal relied on the Supreme Court's judgment in Apollo Tyres Ltd., which restricts the Assessing Officer from altering book profits except for specific adjustments mentioned in the Act.6. Liquidated Damages:The Tribunal addressed the issue of liquidated damages, which were paid due to a delay in the commencement of power production. The Tribunal agreed with the CIT(A) that these damages were for a breach of contractual obligations and not for any breach of law. Therefore, the Tribunal held that the provisions of Explanation to Section 37(1) were not applicable, and the disallowance was deleted.7. Addition of Capital Grant:The issue involved the treatment of capital grants received by the assessee. The Tribunal remanded this issue back to the Assessing Officer for fresh adjudication, directing an examination of the proportionate amount of grant related to different assets and the application of the actual rate of depreciation for those assets. The Tribunal followed its earlier decisions in similar cases involving the assessee.In conclusion, the Tribunal's judgment involved setting aside certain issues for fresh consideration, while upholding the CIT(A)'s decisions on others, particularly regarding the treatment of guarantee fees, liquidated damages, and adjustments to book profit under Section 115JB.