TaxTMI 
TaxTMI 
2014 (9) TMI 1186
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....e assessee's claim for deduction u/s 80IC of Rs. 21,32,47,171/- 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 ap....
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.... AO disallowed this expenditure by invoking the provisions of section 40(a)(ia) of the Act. According to assessee, these payments comprised to institutional 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 t....
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....ssions and on careful perusal of the materials available on record and taking into consideration that the assessee company has paid this commission to the directors as per their terms of employment 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 un....
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....ectricity in respect of captive power undertakings. 4.3 In respect of power undertaking - I, Kovai, the AO noted that the Assessee generated 5,43,96,500 units which was transferred at the rate of Rs. 4.10 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 si....
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.... the position and had not made any issue. Further, the market value of steam had been properly determined based on a market value report by Price Waterhouse & Co. This market value was separately taken as cost as per section 80IA(8) 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....
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....rate @ Rs. 4.45/unit as per the policy of APSEB. This rate of APSEB contains fixed charges which are not directly relatable to the captive plant. CIT(A) reduced this rate by deleting the surcharge and additional duty and worked out the unit rate @ Rs. 4.368. 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 addit....
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....s. The Tribunal agreed with the views of the CIT(A). In this case, we noted that the AO has given a specific finding that the Assessee has provided amount of Rs. 223.86 lacs, Rs. 167.15 lacs and Rs. 19.9 lacs for Bhadrachalam plant, for power undertaking - 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 p....
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....length analysis. We noted that the Delhi Bench of the Tribunal in SIAL SBEC Bioenergy Ltd. (supra) has held that steam is form of power and shall qualify for the benefit available u/s 80IA(4)(iv). Similarly, in the case of Maharaja Shree Umaid Mills. Ltd. (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 ....
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.... "57. Electricity is a critical input for the future growth of our economy. I, therefore, propose to introduce a 5-year tax holiday in respect of the profits and gains of new industrial undertakings set up initially in India for either generation or generation 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....
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....to this unit for the purpose of determining the eligible profit from this unit. When the matter went before CIT(A), CIT(A) directed the AO not to set off the brought forward losses of the said undertaking. After hearing the rival submissions, we noted that this issue is duly 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 a....
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....s held as under : "5.1 We have heard the rival submissions and carefully considered the same. We have also gone through the provisions of Sec. 80IC. We noted that it is not denied by the Revenue that the eligible undertaking complies with all the other conditions. The deduction was not allowed 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 fav....
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....e learned Judicial Member has held that it cannot be allowed under section 36(l)(iii) because there is no borrowing by the assessee. There can be no two opinions on the same in the light of the judgment of the Supreme Court in the case of Bharat Commerce & Industries Ltd. [1998] 98 Taxman 151. In that case it was 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 again....
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....elation with it's accounts and is therefore not correct. According to him, the primary onus is on the Assessee to identify such expenses on the basis of accounts maintained by him which relate to the exempt income. The AO in the absence of being satisfied with the Assessee took the view that the Assessee's case was duly covered by Sec. 14A(2) & (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 h....
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....essee about the incorrectness of the claim of the Assessee, the AO is bound to determine the amount of expenditure incurred in relation to the dividend income by applying Rule 8D. Referring to the method adopted by the Assessee, it was submitted that the basis adopted by the Assessee is not correct and not in accordance with the principles as has been pronounced from time to time. 7.3 We have carefully considered the rival submissions along with the order 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....
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....o the tune of Rs. 16,92,688/-, overhead expenses to the tune of Rs. 20,98,097/-. In the earlier years since Rule 8D was not applicable, therefore, disallowance was made @ 1% on the total revenue. The AO was not satisfied with the correctness of the claim of the Assessee, especially the explanation of the Assessee that no administrative, managerial or establishment expenses was incurred by the Assessee. The AO asked for the details of various expenses from 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 ....
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....re capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s 14A on prorata basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2008] 117 ITD 169 (Mum.) restored the matter to the file of the AO for the consideration in the light of the provisions 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.....
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....ourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79). 7. The effect of sec. 14A is to widen the theory of the apportionment of expenditure (page 49). 8. The expression 'expenditure incurred; in Sec.l4A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page-50). 9. Sub-sections (2) & (3) of Sec. 14A 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) th....
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....to the accounts of the assessee, that claim of assessee that expenditure incurred is not related to the income forming part of the total income is incorrect. Such satisfaction must be arrived at on the objective basis. He is also required to record the reasons for arriving at such satisfaction. The AO, in the impugned case, we noted has categorically recorded that he is not satisfied with the correctness of the disallowance made by the Assessee with reference to the accounts as the Assessee has not maintained any separate details or accounts in respect of the incurrence of 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 curr....
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....Assessee. Even though the Assessee has submitted before us the working of the apportionment but, as we have observed, we are also not satisfied with the working of the Assessee for the allocation of these expenses with reference to the accounts of the Assessee. It is not in dispute that the Assessee has incurred indirect expenses which has proximate relationship with the exempted income. Thus, in our opinion, this is a case where the AO has duly complied with the requirements of Sec. 14A(2), therefore, the AO was within his jurisdiction to apply Rule 8D. 7.3.7 We have gone 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, 2....
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....urred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income 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,....