AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 1186
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.... in relation to A.Y 2008-09." whereas the Assessee has taken the following effective grounds in its appeal: "(1) Income Tax Interest Payment: Rs. 2,33,98,296/- For that the learned CIT(A) erred in not allowing the adjustment of interest payment on income tax dues against the interest income on income tax refunds. For that the learned CIT(A) was not justified in upholding the action of the Assessing Officer in disallowing the said adjustment. Relief Prayed: The adjustment of interest payment on income tax dues of Rs. 2,33,98,296/- should be allowed against the interest income on income tax refunds of Rs. 17,31,96,921/-and only the balance amount should be subjected to tax. (2) Proportionate Management Expenses (in the context of exempt income) disallowed under section 14A: (Rs. l3,50,73,500 - Rs. 37,90,800)= Rs. 13,12,82,700/- For that the learned CIT(A) was not justified in arbitrarily upholding the action of the Assessing Officer in disallowing proportionate management expenses as per Rule 8D under section 14A in respect of exempt income since the appellant company was a profitable manufacturing company and the said investments had arisen out of profits/surpluses. ....
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....al shareholders i.e. LICI, GIC and UT1 for a sum of Rs. 12 lac in respect of three nominee directors and balance Rs. 13,67,671/- was paid to remaining four individual directors. It was claimed that non-executive directors are only members of Board of Directors and have no power except as delegated to them by the Board or vested in them by the Article of Association of the company. According to assessee, such general function cannot constitute any managerial, technical or consultancy service within the scope of section 194J of the Act. Even these functions do not fall under the provisions of section 194H of the Act, reason being these commission payments do not fall within the definition of commission as given in the explanation to section 194H of the Act. As Ld. Counsel for the assessee cited before us that this issue is covered by the decision of jurisdictional Tribunal in the case of Jahangir Biri Factory (P.) Ltd. v. DCIT (2009) 126 TTJ 567 (Kol.), wherein the issue of TDS on directors' commission was decided vide paras 8 to 12 as under: "8. As regarding the second issue, i.e. commission payment to directors amounting to Rs. 5,94,036, the learned CIT(A) has deleted the sam....
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....t for the work done in their capacity as whole-time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisites. Therefore, in our considered opinion, the learned CIT(A) is justified in recording the same as not coming within the purview of commission or brokerage as defined in s. 194H nor a fee for professional or technical services as defined in s. 194J of the IT Act. Therefore, we find no infirmity in the orders of the learned CIT(A) on this issue. Therefore, this ground of the Revenue is dismissed." Respectfully following the view taken by jurisdictional Tribunal in the case of Jahangir Biri Factory (P.) Ltd. (supra), we allow the claim of assessee.' Respectfully following the decision of the co-ordinate bench in the case of the Assessee for A.Y 2007-08 we dismiss ground No. 1 taken by the Revenue. 4. Ground No. 2 relates to the claim of deduction u/s 80IA made by the Assessee in respect of various captive power undertakings located in the district of Bhadrachalam and Kovai. The AO noted that the Assessee has made claim of Rs. 69,57,61,000/- in respect of 4 power undertakings belonging to it on the basis of form ....
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....per unit and while calculating the transfer price, the Assessee has not considered the Electricity Duty paid to the State Government even though the Assessee has paid a sum of Rs. 9.90 lakhs in connection with the aforesaid undertaking. The AO, therefore, re-determined the cost and computed the profit at Rs. 11,24,50,000/-. The AO also reduced the brought forward loss amounting to Rs. 1,03,03,000/- while computing the profit from the Kovai unit as per the provisions of Sec. 80IA(5). Thus, total deduction u/s 80IA was restricted to Rs. 32,33,07,128/- in place of Rs. 69,57,61,000/- claimed by the Assessee. The Assessee went in appeal before CIT(A). CIT(A) took the view in respect of the captive power undertakings that the issue is exactly identical to the one raised in Assessee's own case in A.Y 2002-03 and accordingly, he allowed deduction to the Assessee by observing as under : "(i) Captive Power Undertaking issue : The entire claim was fully disallowed since the Assessing Officer held that the power has only been supplied to other undertakings of the appellant on a captive basis and not to outsiders. However, I find that this issue is exactly identical to the one raised in....
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....) for the computation of deduction for the electricity undertakings. Therefore, there was no case of double deduction. Therefore, in view of the above discussion and finding, I hold that the deduction is fully available to the appellant company in respect of the said Power undertaking VI for generation of steam for captive consumption." 4.5 On the issue of brought forward losses incurred prior to the initial year, CIT(A) took the view that the deduction u/s 80IA has to be computed from the initial year and all losses of earlier years prior to the initial year have to be ignored. 4.6 On the issue of inclusion of additional demand charges for determining the market value, CIT(A) decided the issue in favour of the Assessee in view of the decision of the Tribunal for A.Y 2002-03 in Assessee's own case. Similarly, in respect of issue whether Electricity Duty should be included while determining the cost, CIT(A) took the view in favour of the Assessee following the decision of the Tribunal for A.Y 2002-03 in Assessee's own case. 4.7 We heard the rival submissions and carefully considered the same. We have also gone through the gist of the submissions filed by the Id. AR as w....
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.....368. The Tribunal, therefore, confirmed the market rate/unit on the basis of the policy of APSEB as reduced by the surcharge, additional duty. Thus in view of the decision of this Tribunal for A.Y 2002-03, the Assessee, in our opinion, is entitled for deduction u/s 80IA in respect of the captive power undertaking but for the purpose of ascertaining the profit, market value should be taken in respect of the two power undertakings generating electricity. We noted that during the impugned assessment year the Assessee has claimed deduction u/s 80IA after determining the profit on the basis of the power tariff rate as per APERC i.e. Rs. 3.3643/unit. This includes demand charges, additional demand charges and variable charges. The AO reduced the additional demand charges but the CIT(A) allowed the relief to the Assessee holding that determination of the market value/based on the State Government electricity power tariff inclusive of additional demand charges has been specifically decided by CIT(A) and Tribunal for the A.Y 2002-03 and the Assessee has strictly followed the same. Accordingly, CIT(A) decided this issue in favour of the Assessee. We noted that the Tribunal in para 10.13 of ....
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....- II and for power undertaking -I, Kovai respectively in connection with the electricity duty on the units generated by the captive plant payable to the State Government but while computing the profit eligible for deduction for these units, these costs are not considered. CIT(A) simply allowed relief to the Assessee relying on the order of CIT(A) for A.Y 2002-03 and the order of the Tribunal. In our opinion, the cost of the electricity duty payable to the State Government has accrued during the year and has to be allowed as deduction while computing the profit of the eligible undertaking. This issue, in our opinion, had neither arisen during the A.Y 2002-03 nor has been decided by the CIT(A) or by the Tribunal. The AO has simply disallowed the deduction u/s 80IA. Therefore, on this issue we set aside the order of CIT(A) and restore the order of the AO and direct the AO to reduce the profit eligible for deduction in respect of the power undertaking Bhadrachalam, power undertaking - II, Bhadrachalam and power undertaking - I, Kovai. The State Electricity Duty which has been debited by the Assessee to the Profit & Loss account be reduced for computing the profit eligible for deduction....
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....supra) the Hon'ble Tribunal took the view that there is no doubt that like electricity, steam is also a form of power. These decisions were rendered in the context of Sec. 80IA(4)(iv). Sec. 80IA(4)(iv) mandates that 'an undertaking which is set up in any part of India for generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1.4.1993 and ending on 31.3.2013 is an eligible undertaking.' Therefore, in our view if power is generated through steam and the undertaking complies with all other conditions as stipulated u/s 80IA, it will be an eligible undertaking for claiming the deduction. We may mention in this regard that the Tribunal in this decision concluded that the word 'power' has to be given a meaning which in common parlance means energy. Energy can be of any form, be it mechanical, be it electrical, be it wind or be it thermal. We also noted that Sec. 80E before its deletion by the Finance Act, 1967 allowed tax holiday to certain specified industries including those engaged in generation or distribution of electricity or any other form of power. Some other sections where similar phrase wa....
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....on and distribution of power. The 5-year tax holiday will begin from the year of generation of power. 58. The 5-year tax holiday in both these cases will be part of Sec. 80IA of the Income Tax Act and at the end of the 5-year period, these units will be entitled to existing deduction u/s 80IA for the remaining period. " We have gone through the decision of the Hon'ble Madras High Court in the case of CIT v. Tanfac Industries Ltd. TC No. 1773 of 2008, dated 6-11-2008. We noted that in this case the Assessee was manufacturer of Flourene based chemicals wherein gas was captively consumed and the Assessee claimed benefit u/s 80IA. The Hon'ble High Court took the view that the Assessee would be entitled to deduction u/s 80IA irrespective of whether the product is sold in the open market or used by the Assessee itself. This decision does not relate to the captive consumption of the steam but refers to captive consumption of gas in a chemical manufacturing undertaking. The AO, even though took the view that the units are functionally integrated as a single unit as far as generation of steam and electricity and Assessee has artificially bifurcated the two units, but CIT(A) inste....
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....y covered in favour of the Assessee by the decision of Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills (P.) Ltd. v. CIT [2012] 340 ITR 477/21 taxmann.com 95 in which the Hon'ble High Court has held as under : "Held, allowing the appeal, that there was no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). During the relevant period, there was no unabsorbed depreciation or loss of the eligible undertaking and these were already absorbed in the earlier years. There was a positive profit during the year. The loss in the year earlier to the initial assessment year already absorbed against the profit of other business could not be notionally brought forward and set off against the profits of the eligible business as no such mandate was provided in section 80-IA(5). The order of the Tribunal was to be set aside." Similar view has been taken by the Hon'ble Karnataka High Court in the case of CIT v. Anil H. Lad [2014] 45 taxmann.com 98/225 Taxman 170. Respectfully following the aforesaid dec....
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....owed to the undertaking merely on the basis that the undertaking was a captive undertaking and was supplying food items to other undertaking carried out by the Assessee. Looking into the provisions of Sec. 80IA(8) as is applicable to Sec. 80IC and as has been reproduced in the finding of CIT(A), we noted that goods and services are permissible to be transferred to other business by the eligible undertaking. In view of this, in our opinion, no interference is called for in the order of CIT(A) and CIT(A) has rightly allowed the claim of the Assessee. We, accordingly, confirm the order of CIT(A) on this issue. Thus, this ground stands dismissed." Respectfully following the said order we are of the view that the said unit is eligible for deduction u/s 80IC. So far as the issue that no profit has been credited in the Profit & Loss account, we noted that CIT(A) has even though decided in favour of the Assessee that the Assessee is eligible for deduction u/s 80IC but has not given any finding whether the income generated from this undertaking stands included in the gross total income of the Assessee. In our opinion, the income need not be separately credited to the Profit & Loss account ....
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.... held that where the assessee paid tax under the Voluntary Disclosure Scheme in instalments with interest, the interest was not deductible under section 36(l)(iii) of the Act. 11. The next question is whether the interest can be claimed as a deduction under section 37(1) of the Act while computing the business income. On this question also, the judgment of the Supreme Court cited above is in favour of the department. It was also held in that judgment that interest levied for failure to pay advance tax up to the statutory percentage and interest levied for delay in filing the return of income were not deductible under section 37(1) of the Act. 12. Thus the question as to whether the interest paid to the income tax department under the provisions of the Income Tax Act can be deducted while computing the business income of the assessee has to be decided against the assessee. 13. The next question which arises is whether on general principles and on the principle of real income the interest received from and paid to the income tax department can be adjusted or netted against each other. On this question there are two judgments, one of the Supreme Court in Dr V P Gopinathan [2001]....
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....& (3) and therefore he computed the disallowance u/s 14A read with Rule 8D(2)(iii) as under : Value of investment as on 01.04.2007 : Rs. 2855,69,00,000/ Value of investment as on 31.03.2008 : Rs. 2547,25,00,000/ Total : Rs. 5402,94,00,000/ The average of value of investment = 1/2 of Rs. 5402,94,00,000/ = Rs. 27,01,47,00,000/ Disallowance u/r 8D(2)(iii) = 0.5% of Rs. 2701,47,00,000/ = Rs. 13,50,73,500/ after reducing the sum of Rs. 2,52,700/- in the return which was offered by the Assessee suo moto, a sum of Rs. 13,48,20,800/- was disallowed. The Assessee went in appeal before the CIT(A). CIT(A) confirmed the disallowance. 7.1 The Ld. AR submitted that the Assessee has not incurred any direct expenditure for earning of the income. The Assessee himself made disallowance and offered to tax proportionate salary and administrative cost of the personnel involved in the Assessee's Corporate Treasury department as the Corporate Treasury department inter alia is responsible for the management of the investment and banking functions of the Assessee company. Therefore, their proportionate salary and related overhead cost was disallo....
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....rder of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec. l4A of the IT Act read with Rule 8D of the IT Rules. Sec. 14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribe....
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....m the Assessee. In the absence of any separate details of the expenses being maintained or accounted for by the Assessee, the AO was of the opinion that the submission of the Assessee is not tenable although he accepted that the Assessee is primarily engaged in manufacturing activity. The AO also noted that the Assessee had made substantial investment. The average investment value income from which is exempt were computed as under : Value of total investment as on 01.04.2007 : Rs. 3,067.77 crore Less: Value of Investment the income from which is not exempt from tax : Rs. 212.08 crore Value of investment the income from which is exempt : Rs. 2,855.69 crore Value of total investment as on 31.03.2008 : Rs. 2,934.55 crore Less : Value of investment the income from which is not exempt from tax : Rs. 387.30 crore Value of investment the income from which is exempt : Rs. 2.547.25 crore 7.3.1 We noted that the AO was of the opinion that the investment decisions are generally taken by the managerial personnel or other professional experts employed for the purpose for which administrative, managerial and establishment ....
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....of sub-sec.(2) & (3) of Sec.l4A of the IT Act. The assessee, being aggrieved, filed appeal as well as Writ Petition challenging the constitutional validity of sub-sec. (2) & (3) and Rule D. The Hon'ble High Court gave the following findings : "1. The provisions of sec. 14A and Rule 8D are constitutionally valid. 2. The provisions of sub-sec. (2) & (3) of Sec. 14A and Rule 8D are prospective and not retrospective, in nature and therefore, would apply from assessment year 2007-08. 3. The basic object of Sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income (page 21). 4. The insertion of sec.l4A was curative and declaratory of the intent of the parliament. The basic principle of taxation is that only net income, namely, gross Income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23). The test which has been enunciated in Wallfort for attracting the provisions of sec.l4A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once ....
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.... are intended to enforce and implement the provisions of sub-sec (1) (pages 50). 10. Even in the absence of sub-section (2) of sec. 14A the AO would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The AO would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstances." 7.3.4 The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon'ble Supreme Court, we are of the view that sec.l4A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income i....
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....f expenditure. The AO rejected even the apportionment of the expenses by the Assessee, the working of which was filed before us: 7.3.6 We also noted that the Assessee has computed disallowance in respect of salaries and the overheads of the Corporate Treasury department. The total salaries of the Corporate Treasury Dept. was Rs. 1,16,59,453/-. Out of this, salary relating to the treasury function was estimated at Rs. 73,59,513/- out of which sum of Rs. 16,92,688/- was allocated towards the disallowance out of salary u/s 14A on the ratio which the total investment bears to the fixed assets + investment + net current assets i.e. 23% thereof but the basis on which the total salary of the Corporate Treasury dept. was allocated to the total salary of the treasury function was neither explained before the AO nor before us even though we raised this specific query to the Id. AR. We also noted that the Assessee has apportioned overheads of the Treasury dept. which are totalling to Rs. 1,44,51,964/-. These were apportioned on the basis what Rs. 73,59,513/- had with Rs. 1,16,59,453/- and taking thereof @ 23%. The Assessee, we do not find, has filed any explanation in this regard giving the ....
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.... through the decision in Maxopp Investment Ltd. (supra) on which the Id. AR has vehemently relied. We noted that the questions involved in this decision were : "1. Whether the expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A of the Income-tax Act, 1961, inasmuch as the dividend received on such shares does not form part of the total income? 2. Whether the provisions of sub-section (2) and sub-section (3) of section 14A, inserted by the Finance Act, 2006, with effect from April 1, 2007, would apply retrospectively to all pending proceedings ? 3. Whether rule 8D, inserted by the Income-tax (Fifth Amendment) Rules, 2008, with effect from March 24, 2008, was procedural in nature and, hence, would apply retrospectively to all pending proceedings ?" This decision relates to A.Y 2002-03; not to A.Y 2008-09. The provisions of sub-section (2) & (3) of Sec. 14A were inserted by the Finance Act, 2006 w.e.f. 1.4.2007. In this decision under para 30 the Hon'ble High Court has categorically held as under : "Sub-section (2) of section 14A o....
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....ome which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same." We have already held that in the impugned case the AO has given a finding that he is not satisfied with the correctness of the claim of the Assessee and therefore, this decision, in our opinion, will support the case of the Revenue and, therefore, AO has the jurisdiction to compute the disallowance in accordance with Rule 8D. 7.3.8 The Kolkata Tribunal in the case of REI Agro Ltd. (supra) has also taken a similar view that to invoke the provisions of Sec. 14A the AO has to first record the reasons why he was not satisfied with the correctness of the claim of the Assessee. We have already held that in the case before us the AO has given a clear-cut finding that he is not satisfied with the correctness of the claim of the Assessee. In the case of REI Agro Ltd. (supra) we noted that ....