2023 (9) TMI 1724 - AT - Income Tax

Relief on s.14A r.w.r.8D, s.115JB book profit, and s.80IA deduction recomputation for assessee following precedent orders

ITAT Delhi allowed the assessee's appeal. It held that disallowance of expenditure under s.14A r.w.r. 8D was unjustified, as the AO failed to record ... Addition u/s 14A read with Rule 8D under normal provisions as well as in computing book profit u/s 115JB - HELD THAT:- AO was not justified in disallowing the expenditure by invoking the provision of Section 14A r.w.r 8D as when the assessee received tax-free investment income on bonds/LTA which was in lieu of long overdue is receivable on account of sales made to the parties and pursuant to the drive-by trade agreement between the assessee, state electricity boards and reserve bank of India the assessee acquired the bonds to ensure timely payment of the warrant use and the investment in NHDC a subsidiary of the assessee, for out of the equity capital and internal accruals/equity/reserves the investment was made, it was necessary for the learned Assessing Officer to record as to why he reached a conclusion that the assessee must have incurred some expenditure that too having regard to the accounts of the assessee. Furthermore, there is no denial of the fact that the investments made by the assessee were even out of its own funds or out of the interest free funds provided by the government and in view of the decisions of Max India Ltd [2016 (11) TMI 1012 - PUNJAB AND HARYANA HIGH COURT] and Winsome textile industries Ltd [2009 (8) TMI 220 - PUNJAB AND HARYANA HIGH COURT] and HDFC bank Ltd [2014 (8) TMI 119 - BOMBAY HIGH COURT] no addition could be made by invoking Rule8D (2) (ii) of the Rules. Disallowance made in computing book profits u/s 115JB for disallowance u/s 14A to be deleted. Disallowance made in computing book profits u/s 115JB on account of depreciation claimed on amortization of land - As decided amortisation of leasehold land was made as per their accounting standard 10 of ICAI amortisation of leasehold land classified as per accounting standards 6 of ICAI and the same has been done to meet the requirement of Companies Act and as such amortisation is permissible under section 115 JB of the Act as the same is in accordance with the provisions of Companies Act. Deduction u/s 80IA - Addition only in respect of profit obtained from generation & distribution of power and not from income earned and shown under the broad head ‘other income’ in the profit & loss account - We find that the issue is covered in favour of the assessee by series of Tribunal orders. We may gainfully refer to Tribunal order in assessee’s own case in AY 2013-14 [2021 (2) TMI 895 - ITAT DELHI] disallowance by the AO and confirmed by the ld. CIT (A) while computing the deduction allowable u/s 80IA is not sustainable and all the items of income qua which deduction has been sought by the assessee u/s 80IA are allowable deduction and order passed by the AO and ld. CIT (A) is not sustainable. So, the order passed by the lower authorities is set side directing the AO to recompute the deduction allowable to the assessee u/s 80IA without excluding amount disallowed by the AO. Consequently, ground is determined in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether disallowance under section 14A read with Rule 8D, made both under the normal provisions and while computing book profit under section 115JB, was sustainable. 1.2 Whether provisions for gratuity, leave encashment, post-retirement medical benefits, LTC, baggage allowance and matching contribution on leave encashment were liable to be added back to book profits under section 115JB as 'unascertained liabilities'. 1.3 Whether depreciation/amortisation of land (including leasehold land) was liable to be added back while computing book profits under section 115JB on the ground that no depreciation is allowable on land. 1.4 Whether 'other income' credited in the profit and loss account, but relatable to the undertaking eligible under section 80-IA, qualified for deduction under section 80-IA. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under section 14A read with Rule 8D (normal provisions and section 115JB) Legal framework (as discussed) 2.1 The Court considered section 14A of the Act read with Rule 8D of the Rules, and its application both under the normal provisions and in the computation of book profits under section 115JB. Interpretation and reasoning 2.2 The Court noted that in earlier assessment years, on identical facts, it had been held that the Assessing Officer could not invoke section 14A read with Rule 8D without first examining the accounts, considering the assessee's explanation, and recording dissatisfaction with the assessee's claim regarding expenditure relating to exempt income. 2.3 In those earlier years it had also been noted that: (i) investments were made out of the assessee's own funds or interest-free funds provided by the Government; (ii) no part of borrowed funds was used for making the investments; and (iii) the Assessing Officer had straightaway applied Rule 8D without recording reasons for rejecting the assessee's computation or claim of no disallowance. 2.4 The Court observed that the prior orders, including reliance on decisions holding that where investments are from own/interest-free funds no disallowance could be made under Rule 8D(2)(ii), squarely governed the present year, and no distinguishing facts or contrary higher-court decisions had been brought on record. Conclusions 2.5 Following the consistent decisions in earlier years, the Court upheld the deletion of the disallowance of Rs.139,00,00,000/- made under section 14A read with Rule 8D, both under normal provisions and in the computation of book profits under section 115JB, and rejected Revenue's ground on this issue. Issue 2 - Add-back of provisions for employee benefits while computing book profits under section 115JB Legal framework (as discussed) 2.6 The Court considered the scope of section 115JB and Explanation 1(c) thereto, dealing with addition to book profits of provisions for unascertained liabilities. Interpretation and reasoning 2.7 The Court noted that the impugned provisions (for gratuity, leave encashment, post-retirement medical benefits, LTC, baggage allowance and matching contribution on leave encashment) had been consistently held in earlier years to represent ascertained liabilities based on actuarial valuation in respect of existing employees. 2.8 It referred to the finding in the earlier order that a provision towards meeting a definite liability to be discharged on a future date, quantified on the basis of actuarial valuation, constitutes an ascertained liability and is not hit by Explanation 1(c) to section 115JB. 2.9 The Court observed that this view had been approved by the jurisdictional High Court in the assessee's own case for an earlier year and had been consistently followed by the Tribunal and Commissioner (Appeals) in subsequent years. There was no change in facts or legal position and no contrary authority was cited. Conclusions 2.10 The Court held that the provisions in question were ascertained liabilities and not liable to be added back while computing book profits under section 115JB. The deletion of the disallowance of Rs.6,68,59,118/- was upheld and Revenue's ground on this issue was dismissed. Issue 3 - Add-back of depreciation/amortisation of land while computing book profits under section 115JB Legal framework (as discussed) 2.11 The issue arose under section 115JB regarding whether depreciation/amortisation of land (including leasehold land) debited in the profit and loss account could be added back to book profits on the basis that no depreciation is prescribed on land under the Companies Act. Interpretation and reasoning 2.12 The Court relied on earlier Tribunal orders, affirmed by the jurisdictional High Court, which held that amortisation of leasehold land, made in accordance with Accounting Standard-10 and other relevant accounting standards to meet the requirements of the Companies Act, is a permissible charge to the profit and loss account for purposes of section 115JB. 2.13 In those earlier years the Tribunal had held that, since such amortisation was in conformity with the Companies Act and the applicable accounting standards, and the issue had already been decided by the jurisdictional High Court in the assessee's favour, no adjustment to book profits under section 115JB was called for. 2.14 The Court noted that this view had been consistently followed in the assessee's case from assessment years 2004-05 to 2013-14, and that the Revenue had not shown any distinguishing facts, nor any reversal or stay of those decisions by a higher forum. Conclusions 2.15 The Court held that depreciation/amortisation of land, as claimed and debited in accordance with applicable accounting standards and the Companies Act, could not be added back while computing book profits under section 115JB. The deletion of the disallowance of Rs.9,03,93,108/- was upheld and Revenue's ground on this issue was dismissed. Issue 4 - Eligibility of 'other income' for deduction under section 80-IA Legal framework (as discussed) 2.16 The Court examined section 80-IA, particularly the difference in phraseology between 'profits and gains derived from' the eligible business and 'profits and gains of the eligible business', as interpreted in earlier decisions. Interpretation and reasoning 2.17 The Assessing Officer had denied deduction under section 80-IA on the 'other income' shown in the profit and loss account, holding that the assessee was eligible only on profits from generation and distribution of power and not on such other income. 2.18 The Court noted that in a series of earlier years, the Tribunal had held, in the assessee's own case, that various categories of 'other income' directly relatable to the eligible undertaking formed part of the 'profits and gains of the eligible business' for purposes of section 80-IA, and that disallowance by excluding such income from the computation of deduction was unsustainable. 2.19 The earlier orders, as reproduced and relied upon, proceeded on the basis that: (i) where such income is assessed under the head 'Profits and gains of business', it cannot be treated differently at the stage of computing deduction under section 80-IA; and (ii) in view of the statutory language and judicial interpretation of section 80-IA in comparable contexts, the eligible profits include such ancillary business receipts of the undertaking. 2.20 The Court observed that these conclusions had been reached after considering binding precedents and had been consistently followed in the assessee's own case from assessment year 2010-11 onwards. The Revenue had not pointed to any contrary binding decision or any reversal of those orders by a higher forum. Conclusions 2.21 Following the earlier coordinate Bench decisions in the assessee's own case, the Court held that the 'other income' in question, being directly relatable to the eligible business, was includible in profits for the purposes of section 80-IA. The disallowance of Rs.8,74,67,641/- was directed to be deleted and the assessee's ground was allowed.