2024 (7) TMI 1682 - AT - Income Tax

Industrial Promotion Assistance incentive treated as capital; specific disallowances allowed as revenue; Section 14A limited; Section 115JB unaffected

ITAT held the incentive under the state Industrial Promotion Assistance scheme to be capital in nature and not taxable as revenue. Disallowances for ... Industrial Promotion Assistance (incentive) received under West Bengal Incentive Scheme - AO brought to tax the incentives so received by the assessee - CIT (A) noted that the incentive was received after commencement of commercial production - HELD THAT:- We find that the impugned issue of taxability of IPA incentive has been adjudicated in assessee’s favor in the cited case of M/s Rasoi Ltd. [2011 (5) TMI 23 - CALCUTTA HIGH COURT]. This decision has considered the decision of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. [1997 (9) TMI 3 - SUPREME COURT] as well as the decision rendered in Ponni Sugars & Chemicals Ltd. [2008 (9) TMI 14 - SUPREME COURT] Merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary, it did not imply that the same was in the form of refund of sale tax paid. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure that makes it fall within capital or revenue. Thus, in the instant case, the amount paid as subsidy was really capital in nature. This decision has been rendered after considering the decision of Sahney Steel & Press Works Ltd. (supra). In the absence of any contrary decision shown to us, we would hold that the impugned incentive as received by the assessee was capital in nature. We order so. The corresponding grounds stands allowed. Disallowance of railway sidings expenses - We direct Ld. AO to allow the expenditure as revenue expenditure after verifying the fact that the assessee has not claimed depreciation on the same in Income Tax Computations in any of the years. The assessee is directed to demonstrate the same. The corresponding ground stand allowed accordingly. Disallowance of Power Transmission expenses -Payment to TANGEDCO for conversion of 22KV feeder line into 110KV between Singapuram sub-station and Vazhapadi Plant in view of increase in power requirement in Vazhapadi Plant from 4500KV to 9000KV - Impugned amount has been paid to TANGEDCO for enhancement of feeder line in view of increase in power requirement at the plant. The expenditure is in the nature of development charges, extension charges etc. and there was no creation of any capital asset. Therefore, this expenditure would be allowable as revenue expenditure subject to verification by Ld. AO that no depreciation has been claimed under Income Tax Act in any of the years. The assessee is directed to demonstrate the same. Expenses incurred due to the fact that the assessee proposed to export 10MW power from Thermal Plant to TANGEDCO Grid - Impugned amount has been paid to TANGEDCO for enhancement of feeder line in view of increase in power requirement at the plant. The expenditure is in the nature of development charges, extension charges etc. and there was no creation of any capital asset. Therefore, this expenditure would be allowable as revenue expenditure subject to verification by Ld. AO that no depreciation has been claimed under Income Tax Act in any of the years. The assessee is directed to demonstrate the same. Expenses incurred so as to facilitate the assessee to export power to TANGEDCO grid - The expenditure is on account of erection and commissioning charges which is clearly capital in nature so as to enlarge the profit making apparatus of the assessee. The fact that the assessee does not have ownership right over the same would be immaterial. This cost is in the nature of cost of laying supply line, bay extension work, construction of control room, cable duct, meter arrangements at the power plant which would bring enduring benefit to the assessee. Therefore, this expenditure, in our considered opinion, is capital expenditure. The assessee would be entitled for depreciation on the same. The corresponding grounds raised by the assessee stand partly allowed. Disallowance u/s. 14A - assessee earned exempt income and offered suo-moto disallowance - HELD THAT:- AR from financial statements, demonstrated that its own funds far exceed the investment made by the assessee. After going through the financial statements of the assessee as placed on record, this fact is clearly brought out. In such a case, the disallowance of interest expenditure could not be sustained in law. We order so. Disallowance of indirect expenditure it is the plea of Ld. AR that only those investments are to be considered which have yielded exempt income during the year as held in various judicial decisions. We concur with the same and direct Ld. AO to re-compute the disallowance only by considering those investments which have yielded any exempt income during the year. This disallowance could not be made u/s. 115JB as per the decision of Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] which held that disallowance u/s. 14A r.w.r. 8D has no application while computing the book profit u/s. 115JB. Respectfully following the same, we direct Ld. AO not to make this adjustment u/s. 115JB. The corresponding grounds raised by the assessee stand partly allowed. Short credit of TDs - In this ground, the assessee seeks credit of correct TDS. It would suffice on our part to direct Ld. AO to allow correct TDS credit to the assessee in accordance with law. Depreciation on windmill components - assessee clubbed various items like transformers, breakers, CTPT, and approach road under this head and claimed higher depreciation - CIT (A) relying on Tribunal order for AYs 2006-07 to 2008-09 decided the issue in assessee’s favor as above items have to be considered as a single unit. Treatment of IPA incentives - CIT (A) decided this issue in assessee’s favor, interalia, by following the decision of Hon’ble Calcutta High Court in Rasoi Ltd. [2011 (5) TMI 23 - CALCUTTA HIGH COURT] Excessive electricity expenditure - We are of the considered opinion that CIT (A) has clinched the issue in correct perspective. The provisions of Sec.40A(2) would have no application to the fact of the case since the payment have been made to electricity board and not to related parties. Even the factual findings, on merits, remain uncontroverted before us. Therefore, we see no reason to interfere in the impugned order, on this issue. The revenue’s appeal for AY 2012-13 stand dismissed. TP Adjustment - assessee carried out certain specified domestic transactions with its associated enterprises which were subjected to determination of Arm’s Length Price (ALP) before Ld. TPO - assessee runs a Thermal Captive Power Plant (CPP) which is integrated with cement plant. The CPP is eligible for benefit u/s. 80-IA - HELD THAT:-The market value of the power supplied by the assessee to its industrial units should be computed by considering the rate at which the State Electricity Board supplied power to the consumers in the open market and not comparing it with the rate of power when sold to a supplier i.e., sold by the assessee to the State Electricity Board as this was not the rate at which an industrial consumer could have purchased power in the open market. It would be clear that the rate at which power was supplied to a supplier could not be the market rate of electricity purchased by a consumer in the open market. On the contrary, the rate at which the State Electricity Board supplied power to the industrial consumers has to be taken as the market value for computing deduction under section 80-IA of the Act. Respectfully following the same, we confirm the adjudication of Ld. CIT(A), on this issue. The corresponding grounds raised by the revenue stand dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether Industrial Promotion Assistance (IPA) received under a State incentive scheme is revenue or capital receipt where the object of the scheme is to promote establishment/expansion of industrial units. 2. Whether expenditure on construction/extension of railway sidings (where the assessee has no ownership or exclusive right of use) is revenue expenditure or capital expenditure. 3. Whether payments made to the State electricity utility for upgrading/strengthening transmission/feeder infrastructure (where ownership remains with the utility) are revenue or capital in nature; and relatedly, whether different components of such payments may have different character. 4. Whether disallowance under section 14A read with Rule 8D can be sustained where (a) investment in exempt-earning assets is funded entirely from own funds (no interest bearing borrowings used), and (b) indirect expenditure disallowance should be computed having regard only to investments that yielded exempt income; and whether section 14A/Rule 8D adjustment applies to computation of book profits under section 115JB. 5. Whether correct credit for additional TDS claimed in revised return was to be allowed. 6. In Revenue appeals: Whether valuation/ALP for captive power (eligible for incentive under section 80IA) should be determined by bifurcating generated power into 'saleable' and 'non-saleable' portions and whether market value for captive consumption should be the price paid by State distribution licensee in the open market or regulated tariff between generator and the Board. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of Industrial Promotion Assistance (IPA) under State incentive scheme Legal framework: Characterisation of receipts as capital or revenue is governed by the purpose/object of the subsidy/assistance; form or mechanism of payment is not determinative. If assistance is given to set up or expand industrial unit, it is capital; if for enabling more profitable running of business, it is revenue. Precedent treatment: Decision of higher fora examining the 'purpose test' and applying it to state incentive schemes was considered and followed. A State High Court decision specifically addressing the same State incentive scheme held the assistance to be capital, having considered earlier apex court authorities. Interpretation and reasoning: The Court examined scheme terms showing incentive was to promote establishment/expansion/modernisation of industry (quantified as percentage of sales tax/VAT up to a cap tied to fixed capital investment). The incentive was not a mere refund of sales tax; its object was expansion/modernisation and thus capital in nature. The manner of computation (linked to sales tax paid) is irrelevant to characterisation. Ratio vs. Obiter: Ratio - where assistance's object is to enable setting up or expansion of unit, it is capital receipt irrespective of being measured by sales tax amounts; form/mechanism irrelevant. Conclusion: IPA received under the scheme characterised as capital receipt and not taxable as revenue; ground allowed. Issue 2 - Railway sidings expenditure (no ownership / no exclusive right of use) Legal framework: Expenditure resulting in creation of asset for third party, of which taxpayer is not owner or exclusive user, is generally revenue in nature; accounting treatment (capitalisation/depreciation in books) is not decisive for tax classification; matching concept and prior tribunal decisions relevant. Precedent treatment: Earlier Tribunal orders in the assessee's own cases and judicial decisions recognising that where enduring benefit does not vest in the payer or the asset is for third party, the cost may be revenue. Interpretation and reasoning: The railway siding agreements expressly prohibited assignment/transfer and showed the railway retained ownership/rights; the same factual matrix had been adjudicated in favour of the assessee in prior years (other AYs). The Tribunal restored the earlier favourable approach where agreements were available. The AO must verify that no depreciation was claimed under the Income-tax Act for these items in any year. Ratio vs. Obiter: Ratio - where contractual terms show no ownership/exclusive right, expenditure on railway sidings is revenue in nature for the payer and allowable, subject to verification of non-claim of tax depreciation. Conclusion: Expenditure on railway sidings to be allowed as revenue expenditure after verification; ground allowed. Issue 3 - Power transmission / electricity infrastructure expenses (payments to State utility) Legal framework: Characterisation depends on whether payment creates enduring benefit/enlarges profit-making apparatus of payer (capital), or is for enabling supply/service where ownership/benefit remains with third party (revenue). Depreciation/ capitalisation in books not conclusive for tax purpose. Precedent treatment: Jurisprudence distinguishes between development/extension costs that confer enduring benefit on payer (capital) and enabling/connection charges where asset remains third-party's (revenue). Interpretation and reasoning: The Tribunal analysed component-wise: (a) payments for feeder upgrade to meet increased consumption (development/extension charges) were found to be in nature of development charges without creation of capital asset for the assessee - therefore revenue, subject to non-claim of tax depreciation; (b) payments to convert a sub-station to grid-substation and erection/commissioning enabling export of power - these works enlarged the assessee's profit-making apparatus and provided enduring benefit, hence capital in nature despite lack of legal ownership; such expenditure qualifies for depreciation. Ratio vs. Obiter: Ratio - characterization must be applied component-wise; absence of ownership does not automatically render expenditure revenue if it enlarges the profit-making apparatus and confers enduring benefit. Conclusion: Part of the payments (feeder upgrade for increased consumption) treated as revenue; part (works enabling export to grid) treated as capital and eligible for depreciation; grounds partly allowed. Issue 4 - Disallowance under section 14A read with Rule 8D and applicability to section 115JB Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D prescribes method for computation of disallowance where separate accounts are not maintained. Questions arise whether interest disallowance under Rule 8D is automatic and whether Rule 8D adjustments apply for computing book profits under section 115JB. Precedent treatment: Authorities establish that Rule 8D is to be applied sensibly; interest disallowance cannot be sustained where investments are funded entirely from own funds (no borrowings used). A Special Bench decision held that disallowance under section 14A/Rule 8D has no application in computing book profits under section 115JB. Interpretation and reasoning: On facts, the assessee's own funds exceeded the investments yielding exempt income; therefore interest disallowance under Rule 8D cannot be sustained. For indirect expense disallowance, only investments that actually yielded exempt income in the year should be considered. Further, following authoritative precedent, Rule 8D disallowance should not be applied when computing book profits under section 115JB. Ratio vs. Obiter: Ratio - interest disallowance under Rule 8D cannot be imposed where no borrowed funds have been used for the investments; indirect expense disallowance must be restricted to investments yielding exempt income; Rule 8D adjustments are not to be made while computing section 115JB book profits. Conclusion: Interest component of Rule 8D disallowance deleted; indirect expense disallowance recomputed limited to investments yielding exempt income; no adjustment to book profits under section 115JB; grounds partly allowed. Issue 5 - Credit for additional TDS claimed in revised return Legal framework: Tax credit claims in revised returns, if validly filed and documentary support is produced, must be given effect in accordance with law. Interpretation and reasoning: Tribunal directed the AO to allow correct TDS credit as per law (no additional factual or legal bar shown in record). Ratio vs. Obiter: Ratio - correct TDS credit to be allowed where substantiated and lawfully claimed. Conclusion: Direction given to allow correct TDS credit. Issue 6 - Revenue appeals: Valuation of captive power for section 80IA / Transfer Pricing adjustments Legal framework: Section 80IA relief for captive power requires valuation at market value; market value must reflect price available to industrial consumers in open market. Transfer pricing ALP determinations for specified domestic transactions require appropriate comparability and primary reliance on actual comparable transactions under CUP method. Precedent treatment: Higher court authority established that market value of captive power is the rate at which the State distribution licensee supplies power to industrial consumers (open market), and not the tariff fixed for sale to the Board; CUP comparisons should use genuinely comparable uncontrolled transactions; PSU/regulatory fixed rates may not be comparable. Interpretation and reasoning: The Tribunal rejected the TPO's artificial bifurcation of generated power into 'saleable' and 'non-saleable' portions and reliance on regulated purchase tariff as ALP for captive consumption. The assessee's CUP-based rates from numerous unrelated third-party transactions (after adjustments for wheeling/transmission) constituted valid comparables; the regulatory tariff between generator and the Board was inappropriate as a market benchmark. The Tribunal also emphasised that the statutory requirement for minimum captive consumption was satisfied and the relief under section 80IA equally applies to captive consumption and sales. Ratio vs. Obiter: Ratio - market value for captive power under section 80IA is to be determined by reference to open-market supply rates to industrial consumers (and comparable uncontrolled transactions), not by using the generator-to-Board regulated tariff; artificial allocation into saleable/non-saleable portions is impermissible for ALP determination where captive consumption meets statutory requirements. Conclusion: TPO/Revenue adjustments to downwardly rework ALP and impose transfer pricing additions were not sustained; revenue appeals on these grounds dismissed.