2024 (7) TMI 1697 - AT - Income Tax

Partial relief in tax appeal: 14A disallowance limited to assessee's computation; 115JB adjustment deleted, 80IA deductions upheld

ITAT Mumbai partially allowed the appeal. The section 14A disallowance was restricted to the assessee's suo-moto computation (Rs.1,17,42,084) and the ... Disallowance u/s 14A and adding the disallowance to book profits under section 115JB - HELD THAT:- AO has not brought anything on record to factually state that the computation of disallowance made by the assessee towards indirect expenses is not correct. We further notice that the AO has proceeded on the basis of incorrect understanding that the assessee has not made any suo-moto disallowance and the observations justifying the disallowance towards indirect expenses are general in nature. We also notice that the AO has not called for any details from the assessee or analysed the workings of the suo-moto disallowance. In view of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] it is clear that no disallowance can be made u/s 14A read with Rule 8D(2)(iii), where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Accordingly we hold that the disallowance towards indirect expenses should be restricted to Rs.1,17,42,084/- as computed by the assessee suo-moto. Adjustment made to book profits under section 115JB towards disallowance u/s 14A deleted. Deduction u/s 80IA - power plants located in Veraval and Chennai - AO noticed that the assessee has not allocated the Head Office expenses to the units and worked out on prorate basis a sum to be reduced from the profits eligible for deduction u/s 80IA - HELD THAT:- We noticed that on identical issues the co-ordinate bench in assessee's own case for AYs 2008-09 to 2010-11 [2023 (1) TMI 608 - ITAT MUMBAI] the fiction envisages u/s 80IA(5) is to enable computation of profits on a standalone basis, rather than to increase the scope of profits itself and allocate notional expenditure to the eligible units. When the eligible units are other units are treated as independent of each other, and the profit computations are on a standalone basis, the eligible unit must get the corresponding credit for the CENVAT credits availed by the other units. Viewed thus, not accounting for the CENVAT credit does not, in our considered view, vitiate the profits of the eligible undertaking, as long as all such credits are fully availed by the other units as is the undisputed position anyway. What the assessee has done is that the expenses are debited net of the CENVAT credit availed. To this extent, we see no infirmity in the stand of the assessee. Treating corporate advertisement as capital expenditure - AO observed during the assessment proceedings that the assessee has incurred expenses on corporate advertising which were claimed as revenue and called on the assessee to explain why the same should not be treated as capital in nature - HELD THAT:-We find that similar disallowance of advertisement expenditure was made in assessment year 2009-10. The Co-ordinate Bench of the Tribunal, following the decision of Asian Paints (India) Ltd. [2016 (11) TMI 258 - BOMBAY HIGH COURT] held the expenditure as revenue in nature. The ld. Departmental Representative has not been able to controvert the findings of then Co-ordinate Bench of the Tribunal in assessee's own case on the same issue. The ground raised by the assessee is hereby allowed. Disallowance of lease equalization charges - as per assessee the said charges being ascertained liability as per the mandatory accounting standard the same shall be allowable as an expenditure under section 37 - HELD THAT:- As decided in own case for AY 2011-12 [2023 (12) TMI 1468 - ITAT MUMBAI] AO had made the disallowance as he was of the opinion that it was a prepaid expense and that it could not be claimed during the year under appeal, that the assessee had claimed the expenditure as per the provisions of AS-19, that the agreement entered into by the assessee was in the nature of operating lease as defined in AS-19, as per the accounting standard in such cases the payments have to be considered as an item of P&L account on a straight line basis over the lease period. FAA had given a categorical finding of fact that the provision of Rs.1.08 crores was in respect of the liability that had accrued during the FY 2009-10. We are of the opinion that, by following AS-19 the assessee has complied with the provisions of the Act, that AS-19 provides that in case of operating leases, the lease rent payment has to be treated as an allowable expenditure. Therefore, in our opinion, the order of the FAA does not require any interference from our side. Ground raised by the assessee in this regard is allowed. Treatment of interest liability as part of Electricity Tax for the purpose of section 43B - HELD THAT:- As decided in own case for AY 2011-12 [2023 (12) TMI 1468 - ITAT MUMBAI] there is no dispute that the assessee has not paid the Electricity Tax and it is also not in dispute that the interest charged on the same is unpaid. The assessee placed reliance on various judicial pronouncements to contend that interest which is compensatory in nature is not part of tax and therefore provisions of section 43B are not applicable to unpaid interest. As in Cuttack Bench of the Tribunal in the case of National Aluminium Co. Ltd [2005 (11) TMI 483 - ITAT CUTTACK] has considered a similar issue in the context of interest on Electricity Duty and held that the interest on electricity duty is compensatory in nature and has to be allowed as a general business expenditure and also that the provision of Section 43B is not applicable for such interest. TP Adjustment - corporate and performance guarantee provided by the assessee to its Associated Enterprises (AE) - It is a settled position that the guarantees given by the assessee to its AE is an international transaction and hence we are not inclined agree with the contention of the assessee that the it is not an international transaction. This contention of the assessee is accordingly dismissed. Further we notice that the co-ordinate Bench in assessee's own case for AY 2010-11 & AY 2011-12 has considered the similar issue and upheld the guarantee commission and @ 0.5% by relying on the decision of Everest Kanto Cylinder Ltd. [2024 (2) TMI 163 - BOMBAY HIGH COURT] The facts being identical for the year under consideration, we see no reason to interfere with the decision of the CIT(A). This, ground of the assessee is dismissed. Claim of Education and Secondary and Higher Education Cess and refund of DDT as per DTAA rates - Issue of allowability of Secondary and Higher Education Cess is covered against the assessee by the decision of the Hon'ble Supreme Court in the case of JCIT vs ChambalFertilisers & Chemicals Ltd [2022 (12) TMI 1098 - SC ORDER] AND Total Oil India (P.) Ltd [2023 (4) TMI 988 - ITAT MUMBAI (SB)] as held that DTAA does not get triggered at all when a domestic company pays DDT under section 115-O. Respectfully following these decisions we dismiss these additional grounds raised by the assessee. Treatment of incentives under Market Linked Focus Product Scheme, fertilizer subsidy and sales tax subsidy as capital receipt under normal provisions of the Act as well as for the purpose of book profits u/s 115JB -assessee has not raised these issues before the lower authorities - Since the AO has not scrutinized these issues and since the issues require factual verification, we are remitting the issues of treatment of incentives under Market Linked Focus Product Scheme, fertilizer subsidy and sales tax subsidy as capital receipt back to the AO for a denovo examination. AO is directed to call for necessary details. Disallowance u/s 40(a)(ia) - AO from the perusal of the Audit Report under section 44AB noticed that assessee has made a provision for the year ended 31.03.2012 on estimated basis pending receipt of bills from the parties - We observe that this issue is recurring and the Tribunal has been consistently deciding the issue in favour of assessee. Since, the facts in impugned A.Y. are similar, we see no reason to take a different view. Addition on account of CENVAT CREDIT - AO during the course of assessment noticed that the assessee has not included the Cenvat Credit in valuation of closing stock of raw materials of various units - We notice that the Co-ordinate Bench in assesee's own case for AY 2011-12 [2023 (12) TMI 1468 - ITAT MUMBAI] decided this issue in favour of the assessee. Disallowance on account of provisions for leave salary / compensated absence - Assessee's own case for AY 2010-11Tribunal allowed relief to the assessee by following the decision of Bharat Earth Movers [2000 (8) TMI 4 - SUPREME COURT] Dehors the issue of constitutional validity of clause(f) to section 43B of the Act, the Co-ordinate Bench after considering the issue on merits has deleted the addition. Allowance of allocation of Head Office expenses for the purpose of deduction u/s 80IA - CIT(A) by holding that the Head Office Expenses cannot be allocated to profits derived from 100% export oriented units falling under section 80IA of the Act and in directing to reduce interest income. We notice that this has been consistently held in favour of the assessee in assessee's own case from AY 2003-04 to 2011-12. Allowance of additional depreciation u/s 32(1)(iia) confirmed. Expenditure in respect of ESOP as revenue in nature. Treatment of certified emission receipt as capital receipt. Treatment of interest subsidy from TUF as capital in nature - We find that in the case of PCIT vs. Nitin Spinners Ltd. [2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] examined the scheme in the light of various decisions and held the subsidy under TUF scheme as capital in nature. Similar view has been taken in the case of CIT vs.Gloster Jute Mills Ltd. [2018 (8) TMI 1474 - CALCUTTA HIGH COURT] Restricting the ALP of guarantee fees in respect of corporate guarantee and performance given to AE - decision of the CIT(A) to restrict the ALP of guarantee fees in respect of corporate guarantee and performance given to AE to 0.5% as against 2.42% and 1.74% as held by AO/TPO - We have while considering Ground No.7 of the assessee's appeal have already upheld the decision of the CIT(A) by placing reliance on the decision of the jurisdictional High Court in the case of Everest Kanto Cylinder Ltd [2015 (12) TMI 683 - ITAT MUMBAI] Therefore these grounds of the revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D(2)(iii) in respect of expenditure attributable to exempt dividend income can be made by the Assessing Officer without recording satisfaction when the assessee has made suo-moto apportionment; and whether any such disallowance is to be added back in computing book profits under section 115JB. 2. Whether deduction under section 80IA must be reduced by increasing input cost to include excise/VAT/CENVAT/service tax credits not routed through P&L (i.e., whether CENVAT credit components attributable to eligible units must be disallowed). 3. Whether corporate advertisement expenditure is capital (enduring benefit) or revenue in nature for deduction purposes. 4. Whether lease equalisation (lease straight-lining) charges accounted under Accounting Standard 19 as P&L debit are deductible under section 37 where claim was not made in the original return but raised later in appeal. 5. Whether interest on electricity tax (interest for non-payment of electricity tax) is part of tax so as to attract section 43B (deduction only on actual payment) or is compensatory/ordinary business expenditure deductible under section 37. 6. Whether corporate and performance guarantees given to Associated Enterprises constitute international transactions attracting transfer-pricing adjustments; and if so, the appropriate arm's-length rate for guarantee/performance guarantee fees. 7. Whether various additional pleas (education cess/secondary & higher education cess, DDT at treaty rates, treatment of various subsidies/incentives and interest subsidy under TUF, treatment of freight/fertilizer/sales-tax subsidies and Market Linked Focus Product incentives, treatment of certified emission receipts/carbon credits) should be accepted, disallowed or remitted for fresh adjudication. 8. Revenue appeals on recurrent assessment issues: applicability of section 40(a)(ia) to year-end provisions, inclusion of CENVAT in stock valuation, allowability of provisions for leave salary/compensated absence, allocation of head-office expenses to 100% EOU/80IA units, additional depreciation under section 32(1)(iia) where asset used