2022 (3) TMI 1654 - AT - Income Tax

Challenge to disallowance s.14A r.8D and addition s.115JB allowed; s.80IA remitted; s.35(2AB), s.32(1)(iia) deductions allowed

DCIT – 15 (1) (1) Mumbai Versus M/s. Arti Industries Ltd. And (Vice-Versa)

ITAT allowed the challenge to the disallowance under section 14A read with rule 8D and its addition to book profits under section 115JB, following a prior ... Disallowance u/s 14A r.w.r. 8D added to the book profit u/s. 115JB - HELD THAT:- Respectfully following the above decision [2021 (12) TMI 750 - ITAT MUMBAI] and following the principle of consistency, the view taken by the Tribunal in A.Y.2011-12 is respectfully followed, ground raised by the assessee is accordingly allowed. Deduction u/s. 80IA - Since, the assessee has filed these grounds for the first time before the Tribunal, we deem it necessary to send these grounds to the AO for deciding the same. Accordingly, we send these grounds to the AO with the direction to decide these grounds after affording a reasonable opportunity of being heard to the assessee. Deduction u/s 35(2AB) allowed. Depreciation of foreign exchange loss allowed. Additional depreciation u/s. 32(1)(iia) allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D, when made by the AO, must be added to book profits for computing tax under section 115JB. 2. Whether fertilizer subsidy received under the Nutrient Based Subsidy (NBS) Policy and export incentive under Status Holder Incentive Scrips (SHIS) are capital receipts (non-taxable) for purposes of normal income-tax computation and book profit under section 115JB, and whether these issues require remand. 3. Whether undertakings engaged in generation of steam are eligible for deduction under section 80-IA and whether contested points on this head require adjudication by the Assessing Officer. 4. Whether the assessee was entitled to weighted deduction under section 35(2AB) where formal approvals and forms (Form 3CL/3CM) were on record. 5. Whether depreciation is allowable in respect of opening written down value arising from foreign exchange differences (realized/earlier-year forex loss) where depreciation had been allowed in earlier assessment years. 6. Whether additional depreciation under section 32(1)(iia) is allowable in respect of assets capitalized in an earlier assessment year (claim to be allowed following prior identical findings). 7. Application of the principle of consistency and respect for coordinate-bench/Special Bench decisions in disposing identical issues across assessment years. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Addition of section 14A/Rule 8D disallowance to book profit under section 115JB Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; Rule 8D prescribes method of computing such disallowance. Section 115JB(2) Explanation 1 clause (f) prescribes adjustments to book profit for MAT computation. Precedent Treatment: The Tribunal (Special Bench, Delhi) in the decision relied upon held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resort to the computation under section 14A read with Rule 8D. Coordinate-bench decisions in the assessee's own cases for earlier years applied the same view. Interpretation and reasoning: The Court followed the Special Bench's legal conclusion that section 14A/Rule 8D methodology is not to be imported into clause (f) of Explanation 1 to section 115JB(2). Where identical factual and legal matrix exists, consistency requires following the higher/coordinate Bench ruling; Revenue's acceptance of the earlier tribunal rulings further supports application. Ratio vs. Obiter: Ratio - computation under clause (f) of Explanation 1 to section 115JB(2) must be made without applying section 14A/Rule 8D; addition of Rule 8D disallowance to book profit is incorrect. Conclusion: Disallowance under section 14A read with Rule 8D is not to be added to book profit under section 115JB; the addition is deleted (ground allowed). Issue 2 - Taxability of fertilizer subsidy (NBS) and SHIS export incentive Legal framework: Taxability of subsidies/incentives determined by character of receipt (revenue v. capital) and purpose test; impacts both normal income computation and book profit under section 115JB. Precedent Treatment: Coordinate-bench in the assessee's earlier assessment-year proceedings did not decide substantive character on the record but treated the point as an additional ground omitted from earlier orders and remitted the matter to the AO for fresh decision after opportunity to be heard. Interpretation and reasoning: Where additional grounds (character of subsidy) were raised for the first time before the Tribunal and facts required fresh consideration, the Tribunal rectified the omission and remitted the matters to the Assessing Officer for adjudication, consistent with procedural fairness and fact-sensitive inquiry under the purpose test. Ratio vs. Obiter: Ratio - matters raising question of receipt being capital or revenue that were not decided require remand to AO for determination on merits with opportunity to be heard. Conclusion: Issues regarding non-taxability/capital character of NBS fertilizer subsidy and SHIS export incentives are remitted to the AO for fresh adjudication (grounds allowed for statistical purpose/remitted). Issue 3 - Eligibility of steam-generation undertakings for deduction under section 80-IA Legal framework: Section 80-IA provides deduction for specified industrial/ infrastructure undertakings subject to statutory conditions, including clauses dealing with inter-unit transfer and market value where relevant. Precedent Treatment: Coordinate-bench in earlier assessment-year proceedings rectified omission to decide additional grounds and directed remand to the AO to decide such grounds after hearing the assessee. Interpretation and reasoning: The factual matrix (pricing of inter-unit power transfers, market comparables, and satisfaction of statutory conditions) required AO-level determination. Following the Tribunal's prior course and principle of consistency, the point is remitted to AO for fresh consideration rather than decided by tribunal on incomplete record. Ratio vs. Obiter: Ratio - fact-intensive claims for section 80-IA based on market-value or inter-unit transfer pricing should be decided by AO with opportunity to be heard. Conclusion: Ground on section 80-IA eligibility (steam generation) remitted to AO for adjudication (allowed for statistical purpose pending AO decision). Issue 4 - Deduction under section 35(2AB) for in-house R&D (weighted deduction) Legal framework: Section 35(2AB) permits weighted deduction for in-house scientific research subject to prescribed approvals and compliance (forms 3CL/3CM and DSIR approval often material). Precedent Treatment: Coordinate-bench and Ld. CIT(A) in the assessee's prior assessment years consistently allowed the deduction where approvals and requisite forms were on record; Tribunal followed those coordinate-bench findings in the present appeals. Interpretation and reasoning: On the record the assessee produced formal approvals (Form 3CL/3CM) and there was no change of fact or circumstance. The Tribunal observed that the CIT(A)'s finding aligned with repeated prior holdings; absence of new adverse fact or infirmity warranted upholding allowance. Ratio vs. Obiter: Ratio - where formal approval and prescribed forms are shown and no change in facts, weighted deduction under section 35(2AB) must be allowed. Conclusion: Revenue's challenge dismissed; deduction under section 35(2AB) affirmed (ground dismissed). Issue 5 - Depreciation on opening WDV arising from foreign-exchange differences (earlier-year forex loss) Legal framework: Depreciation is allowable on block of assets as per written down value; treatment of forex differences depends on whether loss was realized and whether assetization adjustments were made in earlier years (section 43A relevance noted). Precedent Treatment: Coordinate-bench decisions in the assessee's earlier years allowed depreciation where AO had allowed depreciation earlier and same facts persisted; Tribunal followed those decisions. Interpretation and reasoning: AO had allowed depreciation for realized portions in earlier years; once an amount has entered the block and formed part of opening WDV, depreciation continues to be allowable unless facts have changed. Revenue did not point to any change of circumstances or factual error; consistency and prior allowance entitled the assessee to depreciation. Ratio vs. Obiter: Ratio - depreciation allowed where opening WDV includes amounts arising from forex differences that were accepted/allowed in earlier years and no change in facts is shown. Conclusion: Impugned disallowance of depreciation on forex loss is set aside; CIT(A)'s order upheld (ground dismissed). Issue 6 - Additional depreciation under section 32(1)(iia) Legal framework: Section 32(1)(iia) permits additional depreciation on specified new assets in the year of acquisition/installation as per statutory conditions; earlier coordinate-bench jurisprudence considered temporal application vis-à-vis capitalization years. Precedent Treatment: Coordinate-benches in the assessee's own cases for earlier years allowed additional depreciation following higher-court/coordinate-bench rulings (including reliance on authoritative High Court decision), and directed AO to allow additional depreciation for the assets in question. Interpretation and reasoning: Identical legal and factual issues having been decided in assessee's favour in prior assessment years, the Tribunal, applying consistency and following the coordinate-bench decisions, set aside the CIT(A)'s contrary findings and directed AO to allow additional depreciation under section 32(1)(iia). Ratio vs. Obiter: Ratio - where coordinate bench has decided identical additional-depreciation issues in favour of assessee and facts are unchanged, additional depreciation under section 32(1)(iia) should be allowed. Conclusion: Revenue's ground dismissed; AO directed to allow additional depreciation. Issue 7 - Application of consistency and treatment of distinguishable authorities Legal framework: Principles of stare decisis and respect for coordinate-bench/Special Bench decisions govern tribunal practice where issues and facts are identical or substantially similar. Precedent Treatment: The Tribunal repeatedly followed coordinate-bench and Special Bench rulings in the assessee's earlier assessment years to resolve identical issues, and declined to apply a cited authority (Everest Industries Ltd.) where it was factually distinguishable. Interpretation and reasoning: Where identical issues had been decided in the assessee's own earlier years, the Tribunal applied the doctrine of consistency and followed those findings unless distinguishing facts or law were pointed out; where a revenue-cited decision was factually distinguishable, it was not applied. Ratio vs. Obiter: Ratio - consistency and following of coordinate/Special Bench decisions governs disposition of recurring issues across assessment years unless materially distinguishable facts or law exist. Conclusion: Tribunal applied prior in-house and Special Bench precedents; distinguishable authority was not followed.