TaxTMI 
TaxTMI 
2026 (2) TMI 360
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....ment on impugned arm's length interest on the preference share capital of the Associated Enterprise, subscribed by the Appellant, by recharacterising preference shares as a loan. 2. Disallowance u/s 14A :- Rs. 4,86,94,253/- The learned Assessing Officer erred in computing the disallowance u/s 14A as per Rule 8D amounting to Rs. 4,96,40,588/- where the assessee has already disallowed a sum of Rs. 9,46,335/- u/s 14A and erred in disallowing a net sum of Rs. 4,86,94,253/- u/s 14A of the Act. 3. Disallowance of Deduction u/s 80(IA) in respect of captive power plant:- Rs. 40,04,53,625/- The learned Assessing Officer erred in disallowing the deduction u/s 80(IA) of Rs. 40,04,53,625/- in respect of the captive power plants, by relying on the orders for AYs 2008-09 to 2012-13, and by merely reproducing the following observations from earlier orders: i. the assessee has inflated the profit from the said unit by notionally computing profits on sale of steam; ii. the assessee has inflated the profit on sale of power by showing the cost of production at a rate much lower than one as per the Tariff of Gujarat Electricity Board; and ....
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....n foreign country u/s 91, claimed during assessment: Rs. 15,71,220/-. 2. Briefly stated, facts of the case as culled out from the submission of assessee are that Assessee Company is engaged in the business of manufacturing and sale of inorganic chemicals, fertilizers and bio-fuels. The assessee company has been established in 1939 having its Headquarter in Mumbai and regional office across India. The assessee operates an inorganic chemical complex at 'Mithapur' in Gujarat and fertilizer complex at 'Babrala' Uttar Pradesh. The assessee company also has a phosphatic fertilizer complex at 'Haldia' in West Bengal. The assessee company manufactures a variety of products like soda-ash, urea and phosphatic fertilizers, cement, caustic soda, bromine, gypsum, salt etc. 2.1 For the year under consideration, the assessee filed its return of income on 27.11.2015 declaring total income of Rs.663,53,31,056/- under the normal provisions of the Income-tax Act, 1961 (in short 'the Act') and book profit of Rs.637,97,00,001/-. Subsequently, the return filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and complied with. The Assessing Officer noticed ....
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....f USD 100 and carrying a non-cumulative dividend of 5%. Of these, 2,19,500 shares were subscribed directly by the assessee, while the balance 12,65,214 shares were acquired pursuant to amalgamation with Home Field International Pvt. Ltd., Mauritius. The total investment stood at USD 148,471,400, equivalent to Rs.732.34 crore. 4.2 It was further stated that during the year, the assessee redeemed 67,500 preference shares at face value, receiving Rs.39.99 crore. Simultaneously, the assessee subscribed to 51,000 fresh preference shares of USD 100 each, out of which 36,000 shares were allotted for Rs.22.13 crore, while the balance 15,000 shares remained as share application money amounting to Rs.9.29 crore. 4.3 It was submitted by the assessee that since the investee company suffered a loss during the year, so no dividend was declared by them. 4.4 The assessee in its Transfer Pricing Study Report provided details of group shareholding structure indicating Bio Energy Venture-1 (Mauritius) Private Limited is an investment holding company which has made downstream investments in various operating companies in different countries. The profile and functional analysis of the said ass....
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....e AE, the assessee company should receive back such funds by redemption of the preference shares. The assessee company chooses preference share investment for providing non-permanent capital to its AE for assessee's own convenience and flexibility. It was submitted that the assessee company was sole share holder of capital BEV-1 and the assessee company provided the requisite share capital to its AE for the purpose of set up of the AE. The AE BEV-1 is the investment holding company and holds investment in downstream subsidiary in various countries and the AE BEV-1 in terms of provide capital to downstream subsidiary. It was submitted that in view of reason, the capital requirement of AE BEV-1 had to be flexible and the same was provided by the assessee company being sole shareholder through a non-permanent capital in the form of preference share capital. The assessee company further stated that it had not made any specific borrowing for the purpose of investment in preference share of AE. Regarding the show cause that as why the investment in preference share capital of BEV-1 not to be characterized as loan, the assessee company stated that the contribution to the preference share ....
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....he perspective of independent enterprises operating under uncontrolled conditions. (v) Commercial Irrationality of the Transaction The decisive question in transfer pricing is whether an unrelated party would have entered into such a transaction. The answer, in the present case, was clearly in the negative. No independent entity would invest substantial sums in nonconvertible preference shares of a loss-making company, with no realistic expectation of dividend or return. (vi) Borrowing Profile of the Assessee The assessee itself carried substantial borrowings and incurred interest expenditure at an average rate of approximately 10.8% per annum. It was commercially implausible that an independent enterprise would borrow funds at a high rate of interest and deploy the same, directly or indirectly, in an investment yielding no return. (vii) Failure to Establish Source of Funds Although the assessee asserted that the investment was made out of retained earnings and not borrowed funds, it failed to substantiate this claim by producing cash-flow statements or other cogent evidence. Even assuming availability of internal funds, no prud....
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....escribed as preference share capital in form, constituted a loan in substance. Since no unrelated enterprise would have entered into such an arrangement under uncontrolled conditions, the transaction was held to be not at arm's length and liable to benchmarking as a loan transaction. 4.10 After holding the transaction of investment in preference share as loan transaction, the Ld. TPO benchmarked the interest. The arm's length value of the interest to be received was determined applying LIBOR + 2% as the arm's length interest rate and computed the interest amounting to Rs.359,70,375/-. The Ld. TPO also calculated interest on the share application money for preference share which was computed to Rs.2,31,571/-. In this manner, the Ld. TPO proposed total adjustment of Rs.3,62,01,946/- for interest on the investment characterized as loan. 4.11 Before the learned Dispute Resolution Panel ("DRP"), the assessee contended that, in earlier assessment years, the Transfer Pricing Officer had sought to impute interest on preference share investments by re-characterising such preference shares as loans, solely on the premise that those shares had been issued upon conversion of loans earlie....
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....to contend that all preference shares arising from loan conversion stood redeemed. 4.17 The ld DRP found such reliance insufficient and held that, in the absence of share-wise identification, it could not be verified whether the preference shares outstanding during the relevant year pertained to those issued upon conversion of loans or to those subscribed in cash or otherwise. Placing reliance on its findings for assessment year 2010-11, the DRP upheld the action of the TPO in re-characterising the preference share investment as a loan transaction. 4.18 The DRP further affirmed the benchmarking of the notional interest by applying LIBOR plus 200 basis points, as adopted by the TPO. The alternative plea of the assessee, seeking application of LIBOR alone on the ground of absence of incremental risk, was also rejected. Accordingly, the benchmarking at LIBOR plus 2% was confirmed. 4.19 Before us, the learned counsel appearing for the assessee assailed the findings of the Transfer Pricing Officer and advanced the following submissions: (i) It was submitted that the Associated Enterprise had incurred losses during the previous year relevant to assessment year 2014- 15.....
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....either party. (v) Addressing the observation that the assessee lacked sufficient reserves and had incurred substantial interest expenditure, it was contended that the character of a transaction must be determined with reference to its terms and legal form, and not by reference to the source of funds utilised. In any event, the investment was made out of mixed funds, and the assessee had adequate interest-free owned funds available at its disposal. (vi) In response to the allegation that the assessee failed to establish that the investment was made out of retained earnings, the learned counsel submitted that the funds deployed in the preference share investment aggregated to Rs.732.34 crore, whereas the cash profits earned during the year amounted to Rs.830.68 crore. In addition, the assessee's owned funds, comprising share capital and reserves and surplus, stood at Rs.6,043.27 crore, thereby amply demonstrating the availability of internal accruals. (vii) The inference drawn by the TPO that the transaction was, in substance, a loan was assailed as being devoid of factual and legal foundation. It was submitted that the conclusion was contrary to the docume....
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....-existing loan liability. 4.22 It was further contended that, even assuming such historical facts to be relevant, they could not form the basis for recharacterisation of the present transaction, which was an independent and fresh capital subscription, both in form and in substance. 4.23 The learned counsel for the assessee submitted that the investment in preference shares did not constitute an "international transaction" within the meaning of the Act and, therefore, the Revenue lacked jurisdiction to re-characterise the same. It was further urged that the transaction of subscription to preference share capital was clearly on capital account and did not give rise to any income, real or notional. 4.24 It was contended that, for the assessment year under consideration, the statute did not contain any enabling provision permitting re-characterisation of a bona fide capital transaction in the absence of invocation of Chapter X-A dealing with General AntiAvoidance Rules. According to the assessee, none of the statutory preconditions for application of the said provisions stood satisfied, nor had the revenue authorities sought to invoke them. 4.25 In support of these submissi....
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....esented their arm's length value and that redemption of preference shares at par was justified, having regard to the absence of accumulated profits in the Associated Enterprise ("AE"). 4.29 However, the Transfer Pricing Officer, upon examination of the surrounding facts and circumstances, characterised the investment in preference shares as a colourable device for infusing funds into the AE by converting loans into preference share capital. Proceeding on this premise, the TPO treated the transaction as one of lending and benchmarked the same accordingly by applying the Comparable Uncontrolled Price (CUP) method. In this view of the matter, the argument advanced by the learned counsel for the assessee questioning the very existence of an international transaction becomes academic and is liable to be rejected. 4.30 The assessee placed reliance on the judgment of the Hon'ble Bombay High Court in PCIT v. Aegis Ltd. [(2019) 102 taxmann.com 495], contending that subscription to preference share capital cannot be re-characterised as a loan transaction and that the Transfer Pricing Officer is not entitled to question the commercial expediency of such investment. There can be no quarr....
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....e u/s 14A of the Act. 5.1 The facts in brief qua the issue in dispute are that the assessee shown investment of Rs.870.63 crores as on 31.03.2015 in investments capable of yielding exempted income and claimed to have earned exempted income of Rs.100,31,76,746/- from said investments. The assessee suo-motu disallowed a sum of Rs.9,46,335/- as expenditure related to the exempted income. The detail of such suo-motu disallowance filed by the assessee is reproduced as under: Allocation of expenses Amount in Rs. Salary of CFO 27,135,096 Salary of Vice President & Group Corp. Controller 10,291,805 Salay of Dy. GM - Treasury 3,414,602 Salary of other staff in Treasury Dept 9,037,784 Total 49,879,287 1% of salary of CFO, Deputy CFO & Head Treasury 408,415 5% of salary of staff 451,889 Total A 860,304 Other Overheads(10% of total above) B 86,030 Total disallowance u/s 14A A+B 946,335 5.2 Before the ld Assessing Officer, the assessee submitted that no direct expenditure had been incurred for earning the exempt income. As regards indir....
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....ontentions advanced by the assessee were, however, not accepted by the Assessing Officer. The Assessing Officer was not satisfied with the correctness of the assessee's suo motu disallowance under section 14A of the Act. Upon examining the accounts, he recorded his dissatisfaction with the claim made by the assessee and proceeded to invoke Rule 8D of the Income-tax Rules, 1962, 5.8 The Assessing Officer observed that section 14A read with Rule 8D mandates disallowance of expenditure incurred in relation to income which does not form part of the total income, once the Assessing Officer is satisfied that such expenditure has in fact been incurred but has not been properly disallowed by the assessee. The disallowance, according to him, is attracted even where the assessee asserts that no expenditure has been incurred for earning exempt income. 5.9 It was noted that the assessee held average investments of Rs. 867.14 crores in instruments yielding exempt income. According to the Assessing Officer, management of such substantial investments necessarily entails incurrence of expenditure. Investments of this magnitude, he reasoned, cannot be undertaken or managed without specialised....
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....hich does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C the average of total assets as appearing in = the balance sheet of the assessee, on the first day and the last day of the previous year ; 867.14 11513.66 (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 4.34 4.34 Total Disallowance under Section 14A 04.96 5.12 Thus, the total disallowance under section 14A read with Rule 8D was computed at Rs.4,96,40,588/-. After granting credit for the suo motu disallowance of Rs.9,46,335/- already made by the assessee, the Assessing Officer made a net addition of Rs.4,86,94,253/- to the total income. 5.13 In this manner, the Assessing Officer disallowed a sum of Rs.4,96,40,588/- under section 14A of the Act and, after adjusting the amount already disallowed by the assess....
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....nsidered by the DRP in the immediately preceding year i.e. A.Y. 2010-11. The DRP in Para 6.4 on Page 25 has upheld application of Rule 8D in the case of the assessee company. 5.2 The financials of the assessee company reveals that for the current year under consideration the borrowing cost debited in the books of account is Rs. 350.83 Crores. The assessee company has raised loans, both unsecured & secured during the year under consideration, which stands at Rs. 5699.74 Crore as on 31.3.2011. Also, the DRP has noted that the assessee company has earned substantial exempt income, during the year under consideration, the details of which are as under: - Dividend Income Rs. 75,34,73,172 Long term Capital gains Rs. 16,75,14,792 Total Rs. 92,09,87,965 5.3 The DRP has noted that on the basis of the facts of the case, the A.O. has recorded its non-satisfaction with the correctness of the claim made by the assessee company, as mandated by sub-section (2) of section 144. After giving such a categorical finding, the A.O. proceeded with calculating the disallowance as per the prescribed Rule 8D, as the assessee company's case fell under sub-section (3) o....
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.... 14A can be applied. The legislature in its own wisdom, to remove the subjectivity involved in the calculation of disallowance under section 144 has standardized the amount of disallowance to be made under section 144. This amendment was necessary as the Assessing Officers were making disallowances u/s 14A on estimate basis without any scientific and logical reasoning. It is precisely for this reason that Rule 8D has been inserted w.e.f. 24.3.2008. 5.6 In the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081, the Hon'ble Bombay High Court has held that if the AO is not satisfied with the claim of the assessee, then the legislature directs him to follow the method that has been prescribed. The relevant portion of the judgment of the Hon'ble Bombay High Court is reproduced below:- The following principles would emerge from s. 14A: (a) the mandate of s. 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) sec. 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of apportionment....
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.... prescribed. Sub-s. (3) of s. 14A provides for the application of sub-s. (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233 relied on." 5.7 The provisions of section 14A read with Rule 8D ensure that the tax incentive to certain incomes like dividend should not be used to reduce the tax payable on taxable income by debiting expenses incurred to earn non-taxable income against the taxable income. Similar views have been echoed by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr., (2010) 328 ITR 0081, wherein it was held as under:- "Sec. 14A represents a serious attempt on the part of Parliament to ensure that the tax incentive to certain incomes should not he used to reduce the tax payable on taxable income by debiting expenses incurred to earn non-taxable income against the taxable income. In other words, what s. 14A effectuates is that a shareholder should not get the benefit both of an exemption under s....
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....arning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the Memorandum Explaining the Provisions of the Finance Bill, 2006 and the CBDT Circular No. 14 of 2006, dt. 28th Dec., 2006 state that since the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that sub-s. (2) was inserted so as to provide a uniform method applicable where the AO is not satisfied with the correctness of the claim of the assessee. Sub-s. (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. Parli....
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.... as separate classes for computation of income after allocation of expenditure relating thereto and mandates that no deduction in respect of any expenditure shall be allowed against taxable income which is incurred in relation to exетрі income. The underlying object is to compute both the exempt income and taxable income correctly, which is possible only after the expenditure incurred in relation thereto is allocated to them. In other words, s. 14A bars the deduction of expenditure incurred in relation to exempt income out of taxable income, as this would have the effect of artificially inflating the exempt income and thereby deflating the taxable income. The prohibition for allowing the deduction under s. 14A for and from usst. yr. 1962-63 is "in respect of expenditure incurred by the assessee in relation to income" which does not form part of the total income. The term "expenditure" occurring in s. 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The phraseology used in s. 14A prohibiting the deduction in respe....
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....nditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them. AO is statutorily required to compute the disallowance in the manner provided by sub-ss. (2) and (3) of s. 14A. Therefore the orders passed by the CIT(A) and the AO in this behalf are set aside and the matter is restored to the AO for a fresh examination and decision in the light of the provisions of s. 141 including sub-ss. (2) and (3) thereof, in accordance with law. Southern Petro Chemical Industries vs. Dy. CIT (2005) 93 TTJ (Chennai) 161, Harish Krishnakant Bhatt vs. ITO (2004) 85 TTJ (Ahd) 872: (2004) 91 ITD 311 (Ahd), Dy. CIT vs. S.G. Investments & Industries Ltd. (2004) 84 TTJ (Kol) 143: (2004) 89 ITD 44 (Kol) and Asstt. CIT vs. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mumbai) 843 relied on. (Paras 13 to 15 & 17)" 5.11 The plea of the assessee company that no finance cost has been incurred for investing in the shares of group companies is also not borne out from the facts on record. The utilization of ....
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....hey require substantial market research, analysis of market trends and decisions are required to be made with regard to acquisition, retention and sale of such shares/investments at the most appropriate time. They require huge investment and consequential blocking of funds. It is well known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the Board meetings of the company for which administrative expenses are incurred. So, it will not be correct to assume that dividend income can be earned by incurring nil or nominal expenditure. Such expenses, relating to the investments made for earning exempt income have to be disallowed as per section 144 of the Income Tax Act. Further, the intention of the legislature was not to allow any expenditure against the tax free income. Therefore, section 14A was inserted by the Finance Act, 2001 with retrospective effect from 1.4.1962. 5.15 The term "expenditure" has been defined at page 598 of Black's Law Dictionary (Seventh Edition) as: "1. The act or process of paying out disbursement. 2. A sum paid out". There, the term "expense" has been....
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.... u/s 14A is upheld and the ground of objection raised by the assessee company is rejected." 15.2 Material facts remaining same during the year under reference, following the views and findings of the DRP on this issue in earlier years, we upheld the disallowance made by the AO u/s.14A. The ground of objection is rejected accordingly." 5.18 Elaborating further, the learned counsel submitted that the assessee had, on its own accord, disallowed a sum of Rs.9,46,335 as administrative expenditure attributable to earning exempt income. Such disallowance was computed by allocating a reasonable percentage of the salaries of the CFO, Deputy CFO, Head of Treasury, and other treasury staff, together with an allocation of overheads to the extent of 10%. Before rejecting this computation and resorting to Rule 8D, it was incumbent upon the Assessing Officer to record a clear, objective, and reasoned dissatisfaction with the assessee's claim. 5.19 It was emphasised that any deficiency in the recording of such dissatisfaction cannot be cured at the appellate stage, as the validity of invocation of Rule 8D must be tested solely on the reasons recorded by the Assessing Officer. The sa....
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....that Rule 8D can be applied only after the Assessing Officer records satisfaction, having regard to the accounts of the assessee, that the claim made by the assessee is not correct. 5.24 Reliance was also placed on the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640(SC) which reiterated that where the assessee has made a suomotu disallowance, the Assessing Officer must record a reasoned dissatisfaction before rejecting such claim and applying Rule 8D. 5.25 The learned counsel further drew support from decisions of the jurisdictional High Court and of various coordinate benches of the Tribunal, including PCIT v. Bombay Stock Exchange Ltd. (2020) 113 taxmann.com 303 ; PCIT v. Tata Capital Ltd. (2024) 161 taxmann.com 557and CIT v. Sesa Goa Ltd. (2021) 436 ITR 17; VIP Industries Ltd. v. DCIT in ITA No.4135/Mum/2023 ; M/s Greatship (India) Ltd. v. NFAC in ITA No. 650/Mum/2022 for AY 2017-18 and HDFC Bank Ltd., Mumbai-ITAT, AY 2002-03 TO 2020-21, order dt. 28.01.2025, wherein it has been consistently held that a mechanical or presumptive invocation of Rule 8D, without objective satisfaction based on the assessee's accounts, is unsustainable....
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.... explained for estimating 5% of the salary of certain employees, nor were the names or roles of such employees identified. Further, no justification was provided for allocating overheads at 10% of the salary so apportioned. In the absence of any rational or scientific basis, the estimation adopted by the assessee cannot be accepted as reasonable. 5.30 In these circumstances, we find no infirmity in the rejection of the assessee's contention that no dissatisfaction had been recorded by the Assessing Officer. The judicial precedents relied upon by the assessee are distinguishable on facts, as in the present case the Assessing Officer has recorded a reasoned and objective dissatisfaction with the assessee's claim. 5.31 As regards the plea of consistency, it is well settled that the principle of res judicata has no application to income-tax proceedings and each assessment year is a separate and independent unit. The quantum of investments and the extent of investment activity may vary from year to year. Therefore, the acceptance of a particular method of disallowance in earlier years does not preclude examination of the claim on its own merits in the year under consideration. ....
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....earned by it on deposit placed during construction period should be reduced from the capital work in progress and need not be separately reflected as income. In paragraph 3 thereof, the Hon'ble Court has noted that the said additional ground was raised by the assessee as it learned that the interest income was not taxable in view of two orders of the Special Benches of the Tribunal in the cases of Arasan Aluminum Industries (P) Ltd (supra) & Nagarjuna Steels Ltd. (supra). In the case, though the facts as necessary for adjudicating the additional ground formed part of the record, the Hon'ble Supreme Court held that if where investigation of fresh facts is required, the appellate authorities have discretion to allow or not to allow a new ground to be raised. The relevant finding of the Hon'ble Supreme Court is reproduced as under: "5. Under section 254 of the Income-tax Act, 1961, the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is, thus, expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing aut....
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....v. Karamchand Premchand (P.) Ltd. [1969] 74 ITR 254 (Guj.) and CIT v. Cellulose Products of India Ltd. [1985] 151 ITR 499/[1984] 19 Taxman 278 (Guj.) (FB). Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 8. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. We remand the proceedings to the Tribunal for consideration of the new grounds raised by the assessee on the merits." 6.3 Therefore, the fundamental principle which has been laid down is that the appellate authority must be satisfied that the ground raised was bonafide and the same could not have been raised earlier for good reasons. 6.4 Further, th....
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....can be laid down for this purpose." 6.6 Thus the ratio of the above decision is that discretion of permitting or not permitting an additional ground by the appellate authority has to be in accordance with law and reasons. We note that the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra) has considered the decision of the Hon'ble Supreme Court in the case Jute Corporation of India Ltd. (supra). 6.7 We find that the Hon'ble Bombay High Court in the case of Ultratech Cement Ltd. v. Additional CIT reported in 81 taxmann.com 74 (Bombay) upheld the conclusion reached by the Tribunal in that case rejecting the admission of the additional ground for deduction u/s 80IA of the Act raised based on the finding in another year. The Hon'ble High Court in paragraphs 22 and 23 while dealing with the Full Bench judgment in the case of Ahmedabad Electricity Co. Ltd. v. CIT (1993) 199 ITR 351, noted that additional ground in the case before the Full Bench, had been raised in view of a judgment of the Bombay High Court in the case of Amalgamated Electricity Co. Ltd.(supra), wherein, it was held that deduction had to be allowed in respect of amounts transferred to cont....
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....out a case showing good and sufficient reasons for not raising the ground before the lower authorities would be relevant. 6.10 In view of the above decisions, it is evident that if no investigation of the fresh facts is required, then additional ground should normally be accepted by the appellate authorities but where facts relating to the issue raised in the additional ground are not available on record and investigation of the fresh facts is required, the party seeking to raise the additional ground has to satisfy the authority that for good and sufficient reason, the ground could not raised before the lower authorities. 6.11 At the outset, it is beyond dispute that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is wide and enabling, intended to advance the cause of correct determination of tax liability in accordance with law. Equally well settled, however, is the principle that the exercise of such power is discretionary and not automatic, and must be guided by judicial discipline, bona fides of the party seeking indulgence, and the stage and manner in which the plea is sought to be introduced. 6.12 Before us, the Ld. counsel for the assessee ....
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.... of steam has to be computed by taking its market value instead of cost. 6.14 The assessee invited our attention to the application dated 06.02.2024 filed by before the Tribunal on 07.02.2024 inter-alia pointing out that in the course of appeal hearing for AY 2019-20, on 01.01.2024, one of the issues raised by the Hon'ble Bench was why the market price prevailing on the Indian Energy Exchange should not be considered for the purpose of valuing the transfer of power by the eligible undertaking. While carrying out research on the aforesaid aspect, in the month of January 2024, it came across the Tribunal order in the case of Nectar Lifesciences Ltd. v. DCIT in ITA No. 1497/Chd/2019 pronounced on 17.02.2022 by Chandigarh Bench of the Tribunal (see pages 509 to 526 of Paper Book-7). After due consultation with its Counsel and the Chartered Accountants, it decided to file the additional ground which came to be filed along with the aforesaid application. 6.15 Based thereon, the assessee submitted that, prior to January 2024 it genuinely believed that though the sale of steam had to be recorded at fair market value, it had to record the same at cost of producing the same in the ....
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.... for the first time before the Tribunal through additional ground we rely on the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. vs CIT ([1998] 97 Taxman 358 (SC)) where it has been held that - . . . 17. In the given case, the issue raised in additional ground i.e. the claim of deduction under section 80IA towards transfer of steam on the basis of market value is legal issue and that relevant facts pertaining to the same except how to determine the market value of steam are already part of the records. The next question is whether there is any bona fide reason for raising this additional ground before the Tribunal. The assessee in the submissions has stated that the additional ground is raised based on the decision of the Tribunal which the assessee was not aware of at the time of assessment or at the time of appellate proceeding before DRP. We are of the considered view that the assessee has a reasonable cause for not raising the issue before the lower authorities and therefore we are inclined to admit the additional ground for adjudication by placing reliance on the decisions of the Apex Court in the case of Nati....
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....approved by the Board of Directors and presented to its shareholders. This treatment was consistently adopted in the return of income as well as during the assessment proceedings and formed the very foundation of the claim under section 80-IA. 6.21 The additional ground now raised seeks to fundamentally alter this position by contending that the transfer of steam ought to be valued at market value. Such a plea necessarily entails examination of technical, commercial, and factual aspects relating to the alleged marketability of steam and the method of determining its market value-issues which were neither examined by the Assessing Officer nor form part of the existing record. 6.23 Significantly, the assessee has failed to demonstrate any compelling or sufficient reason explaining why this plea could not have been raised earlier. The reliance placed on a subsequent order of a coordinate bench does not, in the facts of the present case, constitute a change in law or a binding judicial development warranting admission of a new ground. The plea sought to be raised is not a correction of an inadvertent legal omission but an attempt to re-engineer the computation mechanism conscious....
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....ilable Energy to do the work", also called as Gibbs free energy or 'G', needs to be taken in consideration to determine the pricing of steam. Based on the Gibbs - Helmholz law, the G is computed for each stream of steam. This Gibbs free energy is converted into equivalent Kilowatt hours (Kwh). And by applying the prevalent rate of Gujrat Electricity Board for Kilowatt hour, the pricing of steam is determined. It is humbly prayed that the said proposition is false and liable to be rejected for the following reasons: i. Firstly, the Gibb's free energy or Availability or Exergy, as referred in Chartered Engineer's certificate, represents the ideal or maximum useful work that can be obtained from a given stream of steam as it is brought to equilibrium with its surroundings. The only way to achieve such ideal or maximum useful work is by employing Carnot Cycle which uses reversible thermodynamic processes. In other words, a theoretical and idealized heat engine working on the Carnot cycle, which employs reversible thermodynamic processes, can only generate such maximum possible useful work represented by 'G'. Since Carnot Cycle represents a theoretical ideal cycle ther....
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....ree Farhenite can generate 8,30,30,415 units of electricity? (152.40 * 5,44,819 = 8,30,30,415). In other words the steam at 1550 psig and 900 Degree Farhenite generates electricity worth Rs.38.2 Crores. And how the same amount of steam at just 15 to 20 psig and 350 degree Farhenite can generate electricity worth Rs. 51 Crores? v. In other words, on relying on the computation of Chartered Engineer, the value of G for steam at 1550 psig and 900 Degree Farhenite comes around 589 BTU per lb, which, if converted further, as per the computation of Chartered Engineer, to the equivalent units of Electricity, the same comes around 20,83,40,000 units of Electricity. In other words, the "Available energy to do the work" for a steam of the given quantity of 5,44,819 metric tonns at 1550 psig and 900 Degree Farhenite is around 20,83,40,000 units of Electricity. However, the actual units of electricity generated is only 6,22,26,000 units of electricity. Thus, assessee's own example makes it clear that the actual efficiency of useful work or energy extracted as compared to maximum possible work output is just around 30%. Further at lesser pressure and temperature like 20 psig and 350 deg....
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....0% was allowable and the unit incurred losses in the initial years, no deduction was claimed in those years. Deduction under section 80-IA was first claimed in assessment year 2013-14 after set-off of past losses. The year under consideration being the third year of such claim, the assessee claimed deduction of Rs.13,28,88,105/- in respect of this unit in the revised return of income. It was submitted that audit reports and audit certificates in Form No. 10CCB, as prescribed under the Income-tax Rules, 1962, were duly furnished. 7.5 The assessee explained the process of electricity generation by submitting that boilers produce steam at very high pressure(1550 Unit), which is passed through turbines to reduce pressure. As the steam passes through the turbines, electricity is generated. The steam, after reduction in pressure( 450, 120, 20 and 15 Units), is thereafter utilised in the chemical plant for production of soda ash. After its utilisation, the steam condenses and is recycled as feed water for fresh steam generation. 7.6 According to the assessee, the captive power plant supplies both electricity and steam to the chemical unit. It was contended that separate accounts wer....
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....sessing Officer, once the entire cost of the plant was allocated to electricity generation, the profit derived from generation of electricity, after reducing the cost of generation from the market value adopted by the assessee, would be nil. Consequently, the deduction allowable under section 80-IA in respect of power generation was also computed at nil. 7.13 On this reasoning, the Assessing Officer denied the deduction claimed by the assessee under section 80-IA of the Act. 7.14 The learned DRP also following its consistent stand, sustained the finding of the Assessing Officer. 7.15 The learned counsel for the assessee, however, extensively argued this ground of appeal and continued his argument on this issue even at the time of the rejoinder. The ld counsel instead of addressing on the cost of electricity generation, which was disputed by the ld AO, he focused his arguments on what should be fair market value of electrical power generated and transferred by the captive power plant to other units of the assessee. 7.16 The learned counsel submitted that assessee is eligible for deduction under section 80 IA in respect of a captive power plant. Though issue was neither c....
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....fetch in the open market [clause (i)] or, where the transaction is a specified domestic transaction, at the arm's length price in terms of section 92F(ii) [clause (ii)]. 7.22 The learned counsel pointed out that the Tribunal, in the assessee's own case for assessment years 2006-07 and 2007-08 (order dated 31.03.2023), had approved adoption of the rate at which power was supplied by the Gujarat Electricity Board to the assessee. The same view was followed for assessment year 2008-09 by order dated 10.11.2023. 7.23 The ld Counsel submitted that this issue again arose in the case of assessee for AY 2017-18, wherein, after treating the transaction to be a specified domestic transaction, the AO had made a reference to the TPO for determination of arms' length price of this transaction. In its Order dated 10.10.2023 the Tribunal has summarized the findings of the TPO The TPO had carried out a FAR analysis of the said transaction to reject its claim. The ld DRP adopted the rate at which power was supplied by Torrent Power Limited to the Gujarat Electricity Board based on determination of such rate by the Gujarat Electricity Regulatory Commission. The Tribunal analyzed the Explan....
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.... 7.26 He reffered to the decision of the Hon'ble Supreme Court in Jindal Steel & Power Limited, where the hon'ble Court construed the expression "open market" to mean a price discovered through voluntary interaction between a willing buyer and a willing seller in the normal course of trade, governed solely by the forces of demand and supply and free from statutory or regulatory compulsion. The Court held that a price fixed under a regulatory regime, where the seller has no freedom of choice as to the purchaser and no scope for negotiation, cannot partake the character of an open market price. Where the assessee is statutorily constrained to sell surplus power only to the State Electricity Board at a tariff unilaterally determined, such price is merely a contracted or imposed price. The absence of competition, bargaining power, and commercial autonomy negates the essential attributes of an open market. Consequently, the tariff fixed by the Electricity Regulatory Commission was held to be an impermissible benchmark for determining open market value. 7.27 He further refffered to the decision of Hon'ble Bombay High Court in CIT v. Reliance Infrastructure Limited. In the said case, t....
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....al in the Appellant's own case for Assessment Year 2019-20. 7.30 He further submitted that in any event, in the present case, the Assessing Officer had made a reference to the Transfer Pricing Officer for determination of the arm's length price of the specified domestic transactions reported in Form No. 3CEB. Pursuant thereto, the Transfer Pricing Officer issued a notice dated 03.11.2017 calling for detailed information. In response, and during the course of the transfer pricing proceedings, the assessee furnished comprehensive submissions dated 30.08.2018 and 18.09.2018, wherein it placed on record the particulars of all specified domestic transactions, the benchmarking methodology adopted for each such transaction, including for the preceding three years, as well as the audited financial statements of the two eligible units claiming deduction under section 80-IA of the Act. Upon due examination of the material so furnished, the Transfer Pricing Officer passed an order dated 30.10.2018 proposing adjustments only in respect of commission on corporate guarantee and interest on preference shares treated as loans. Significantly, no adjustment whatsoever was suggested in respect of ....
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.... Regulatory Commission, in terms of sections 61 and 45 of the Electricity Act, 2003, constitutes the appropriate benchmark for determining market value. 7.34 It was further submitted that, on a functional analysis, the assessee is engaged only in generation of electricity and does not perform the functions of transmission and distribution. Therefore, the rate at which a power distribution company supplies electricity to consumers, which includes costs of transmission and distribution infrastructure, cannot be applied to the present case. Reliance was placed on the decision of the Jaipur Bench of the Tribunal in Shree Cement Ltd. v. ACIT in ITA No. 162/JP/2016 and Others wherein, after considering the amendments introduced by section 80A(6), the matter was remanded to the Assessing Officer for fresh determination of market value. 7.35 The learned Departmental Representative also relied upon the decision of the Hyderabad Bench of the Tribunal in Sanghi Industries Ltd. v. DCIT in ITA (TP) No. 104/Hyd/2022 (order dated 23.01.2025), to submit that the price charged by electricity boards to consumers includes transmission and distribution costs, whereas no such costs are incurred i....
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....bution companies would still be legally untenable. Clause (i) of the Explanation below section 80A(6) defines "market value" to mean the price which the goods or services would fetch if sold in the open market, subject to statutory or regulatory restrictions, if any. It was emphasised that the governing test remains the price discoverable in the open market, and regulatory constraints, if relevant, can only be incidental to such determination and not determinative of it. 7.39 The learned counsel further clarified that the hearing had earlier been adjourned at the instance of the assessee only to enable filing of a comprehensive rejoinder in the light of the impending decision of the Hon'ble Third Member in the case of Aditya Birla Nuvo Ltd. (since amalgamated with Grasim Industries Ltd.) v. DCIT which had been heard but was then awaiting pronouncement. 7.40 In response, the learned Departmental Representative reiterated his reliance on the decision of the Hyderabad Bench in Sanghi Industries Ltd.(supra) and on the submissions earlier advanced before the Hon'ble Third Member in Aditya Birla Nuvo Ltd.(supra), contending that a captive power plant is comparable to a power genera....
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....he DRP, which is impermissible in appellate proceedings. On merits, it was urged that the settled judicial position, consistently affirmed by the Supreme Court and various High Courts, is that the appropriate comparable for determining market value of captive power is the rate at which electricity is supplied by the State Electricity Board or distribution licensee to consumers, and not the rate at which power is sold by a generating company to a distribution company. The latter transaction, it was contended, is regulated, non-competitive, and does not represent an open market price. 7.44 Addressing the Revenue's reliance on statutory amendments, the assessee submitted that the fundamental principle governing "market value"-namely, the price which goods would fetch in the open market-remains unchanged both before and after the amendments. It was pointed out that several judicial decisions rendered for post-amendment assessment years have consistently applied this principle after considering the amended provisions. 7.45 The assessee placed strong reliance on the decision of the Hon'ble Third Member in Aditya Birla Nuvo Ltd., contending that the very issues now sought to be rais....
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....d that, while electricity transferred to other units was valued at fair market value, steam was valued at cost. The bifurcation of costs between electricity and steam was made on the basis of a methodology disclosed in the notes to accounts, which was stated to be founded on internal estimates and assumptions. 7.51 Before us, however, the learned counsel for the assessee did not seriously address the issue of correctness or scientific validity of the cost bifurcation adopted by the assessee. Instead, the emphasis of the submissions was on the determination of the fair market value of electricity transferred by the captive power plant to the assessee's other units. The hearing was even deferred at the request of the assessee to await the decision of the Hon'ble Third Member in Aditya Birla Nuvo Ltd (supra). 7.52 Although extensive submissions were advanced on the issue of determination of market value of electricity, such discussion was necessitated only because of the manner in which the parties addressed the issue; however, upon examination of the assessment record, we find that the disallowance does not rest on valuation of electricity but solely on allocation of costs. ....
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....and sale of the steam at Rs. 675, 008, 454/-. In this manner total sale of the undertaking has been reported at Rs.1, 243, 330, 986/-. For ready reference, said profit and loss account is reproduced as under: "TATA CHEMICALS LIMITED Power Plant ECT - 11 & LPT - 10 Profit & Loss Account for the year ended 31st March 2015 Particulars Schedules Amount (Rs.) Income Sale of Electricity 1 568,322,532 Sale of Steam 2 675,008,454 Total Income (A) 1,243,330,986 Expenses Manufacturing expenses 3 962,413,193 Administrative & Other Overheads 4 6,555,506 Depreciation 5 24,179,494 Total Expenses (B) 993,148,193 Net Profit (A-B) 250,182,793 7.56 Further on page 173 and 174 details of various schedules to the profit and loss account is reproduced as under: TATA CHEMICALS LIMITED Power Plant ECT - 11 & LPT - 10 for the year ended 31st March 2015 Schedule 1: Sale of Electricity Particulars Amount (Rs.) a. Electricity generated and captively consumed [Units] ....
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....; (886,834) Repairs & Maintenances 1,826,052 Administrative Overheads 4,325,940 Total (B) 6,555,506 Total Cost of Producing Electricity & Steam (A+B) 968,968,699 a Outputs & their cost (Approx) (Refer Note 1 below) b Steam 120# MT 181,775 717.9796 130,510,742 c Steam 50# MT 366,158 641.8587 235,021,707 d Steam 20# MT 628,459 492.4363 309,476,005 Electricity (Power) KWH 97,750,700 3.0072 293,960,245 Total Cost 968,968,699 Note 1: Please refer note no. 6 of Notes to accounts for cost allocation between steam & electricity. Note 2: Average cost of generating steam 450# Summary Steam 450# Rate Quantity Amount (Rs.) a TT 9 743.1848 1,729,805 1,285,564,815 b ....
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....tate, cost relationships have been worked out for steam at various pressure and for electricity. These relationships are as under: Pressure of steam generated Relationship (in Rs.) 450 psig steam 1.000 x per Tonne 120 psig steam 0.764 x per Tonne 50 psig steam 0.683 x per Tonne 15 / 20 psig steam 0.524 x per Tonne Electricity 0.0032 x per Tonne Please refer Schedule 3 to Profit and Loss statement for cost allocation between Power & Steam. 7. ....................... 8. The Head Office account shows a debit balance of Rs. 311,67,18,098/- because the surplus arising out of power supply to the other units of the company has been debited to Head office account. 7.58 Similar form No.10CCB and details of computation of profit and loss account and bifurcations of the cost of electricity and steam in respect of power plat TT-12, Mithapur are placed on PB 178 191. For the sake of brevity, we are not reproducing details in respect of the second power plant as the basis of distribution of the cost for steam and electricity is same for both the plants which has been taken on the basis of the audit report of the same auditor. 7....
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....ss supported by cogent technical and financial evidence. In the absence of such evidence, the bifurcation of cost adopted by the assessee is clearly artificial and self-serving. We also note that the value attributed by the assessee to steam exceeds the value attributed to electricity, which prima facie defies commercial logic and the very purpose for which a captive power plant is ordinarily installed. Once the artificially attributed value of steam is excluded, the eligible undertaking results in a loss, as rightly concluded by the Assessing Officer. 7.62 From the records we are also not able to understand whether the left over steam at low pressure has been used by the assessee as a source of power or for chemical reaction as a chemical component. In such circumstances the basis of artificially assigning the cost to the generation of the steam cannot be permitted to the assessee. 7.63 The learned DR made another argument to convey that the steam generated from the plant is not power and therefore not entitled for deduction under section 80IA of the Act. He submitted that the power as defined in textbook of physics is the rate at which work is done or energy is transferred,....
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....cted with a specific economic objective. The objective of Section 80-IA was to overcome the critical shortage of electrical power in the country by encouraging private investment in power plants. The Memorandum explaining the provisions of the Finance Bill, 1993, which introduced this incentive, consistently refers to boosting "power generation" in the context of the national infrastructure deficit. To extend this benefit to a standard piece of industrial equipment like a steam generation would be to completely divorce the provision from its intended purpose. It would transform a targeted infrastructure incentive into an unintended, general industrial subsidy for any process involving heat exchange. This could not have been the intent of Parliament. In this reference, it is relevant to reproduce part of budget speech of 1993-94 of Hon'ble Finance Minister on 27th February, 1993, as under: 5 7. Electricity is a critical input for the future growth of our economy. I therefore propose to introduce a five-year tax holiday in respect of profits and gains of new industrial undertakings set up anywhere in India for either generation or generation and distribution of power. The fi....
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....red allowable as business expenditure, the same would be deductible under section 57 of the Act. 8.3 The assessee explained that the borrowings had been raised in the financial year 2008-09 for the purpose of acquiring General Chemical Industrial Products Inc. (GCIP), USA, a major player in the global soda ash market, for a total consideration of approximately Rs.4,036 crores. It was submitted that this acquisition enabled the assessee to consolidate its position as the secondlargest soda ash producer in the world and marked a significant milestone in the growth of its soda ash business. The acquisition opened new markets in North and South America and other regions, at a time when global demand for soda ash was steadily increasing. The assessee further highlighted that the acquisition of cost-effective natural soda ash assets provided it with a distinct competitive advantage in the global market. 8.4 It was contended that the overseas subsidiary was engaged in the same line of business as the assessee and that the investment had been made as a measure of commercial expediency and for furtherance of the assessee's own business interests. Emphasis was placed on the provisions ....
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....against final assessment orders passed in conformity with the DRP's directions, the issue was decided against the assessee only to keep the matter alive, and such view was followed for later years including assessment years 2013-14 and 2014-15. The assessee's appeals for those years were stated to be pending adjudication before the Tribunal. 8.9 The Assessing Officer, however, did not accept the assessee's explanation. According to him, the investments were reflected in the books of account as capital investments and not as stock-in-trade. He observed that the borrowed funds had been utilised for acquiring and maintaining controlling interest in the overseas subsidiaries, rather than for carrying on the assessee's business. Emphasis was laid on the classification of the shares as investments in the books of account, which, according to the Assessing Officer, indicated that investment in shares was not the business of the assessee. It was further held that the expenditure was not incurred for the purposes of business and was, therefore, not allowable under section 36(1)(iii) of the Act. 8.10 The Assessing Officer further held that dividend income, if any, arising from the subs....
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.... dividend income is taxable as income from other sources, the allowability of interest expenditure under Section 57 has to be considered. In the present case, the main motive of the assessee is not to earn dividend income but to acquire the controlling stake in subsidiary. Since the interest expenditure is incurred to obtaining a controlling interest in a foreign company, the allowability of interest expenditure u/s 57 is also not possible. Reliance is placed on the ratio of the judgment in the case of CIT Vs R.Amritaben Shah reported in 238 ITR 777 (Bombay High Court) which held that expenditure incurred for the purpose of controlling interest is not an allowable expenditure u/s.57(iii) of the Act. The court held as under: "Section 57(iii) provides that in order to get deduction the expenditure should be incurred wholly and exclusively for the purpose 'of making or earning income from other sources' and that it should not be in the nature of capital expenditure. Section 58(1)(a) further provides that no deduction shall be allowed in case the expenditure is in the nature of personal expenses of the assessee. In the instant case, there was no dispute that shares in question....
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....ent Year 2017-18, this very issue has already been examined and conclusively decided by the Tribunal while setting aside the revisionary order passed under section 263 of the Act. The Tribunal recorded a categorical finding that the borrowings were utilised for acquisition of overseas subsidiaries in the same line of business, that the interest expenditure was incurred wholly for business purposes, and that the Assessing Officer had taken a permissible view. The said decision pertains to the same transaction and the same nature of borrowings, and therefore, on the principle of consistency alone, the present claim deserves to be allowed. 8.15 The assessee further submits that the legal position on this issue is no longer res-integra. It stands consistently affirmed by the Hon'ble Supreme Court and various High Courts that, for the purposes of section 36(1)(iii), what is relevant is the purpose of borrowing and not the purpose of investment or the character of the asset acquired. Interest on borrowed capital is allowable so long as the borrowing is for business purposes, even if the funds are utilised for acquiring capital assets or strategic investments, including shares held as ....
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....owance made by the Assessing Officer, therefore, deserves to be deleted and the ground of appeal allowed. 8.20 The ld counsel in support of his contentions relied on various decision including decisions in the case of CIT v. Srishti Securities Pvt. Ltd. (2010) 321 ITR 498 (Bom) and CIT v. Modi Private Limited (1995) 79 Taxmann 428 (Bom) 8.21 Per contra the ld CIT (DR) contended that the funds have been borrowed admittedly for purchasing shares of foreign subsidiaries. The shares of the foreign subsidiaries company yield dividend income and are capable of only earning dividend income. Dividend from a foreign subsidiary is taxable u/s.56 under the head 'Income from Other Sources'. The ld DR submitted that the taxability of any receipt which falls under a particular head of income can only be determined by giving allowable deductions under that head of income only and not under any other head. 8.22 The Ld. DR submitted that assessee is not in the business of investments and it has been made as capital investment into the shareholding of subsidiaries which are independent entities separate from the assessee. They have their own business and paying taxes into the relevant count....
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....he purpose of making or earning dividend income. In this case, the purpose of incurring interest expenditure was not wholly and exclusively for earning dividend income because as per the assessee's own admission such an investment was made to acquire and manage the controlling stake in foreign subsidiary. The ld DR relied on the decision of the Hon'ble Bombay High Court in the case of Amritaben Shah (supra) where in it is held as under: "Section 57(iii) provides that in order to get deduction the expenditure should be incurred wholly and exclusively for the purpose 'of making or earning income from other sources' and that it should not be in the nature of capital expenditure. Section 58(1)(a) further provides that no deduction shall be allowed in case the expenditure is in the nature of personal expenses of the assessee. In the instant case, there was no dispute that shares in question were purchased by the assessee for the purpose of acquiring controlling interest in the company and not for earning dividend. That being so, the expenditure incurred by way of interest on loan taken by the assessee for the said purpose could not be held to be an expenditure incurred wholly a....
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....or the purpose of acquiring companies is allowable expenditure u/s 36(1)(iii) of the Act. But, it is noted that the Coordinate Bench set-aside the order u/s 263 for the reason that PCIT had not controverted the factual and legal submission filed by the assessee. 8.29 Though the assessee in its written submission has filed a long list of cases in support of its contention, but we have considered the cases which were cited during the course of hearing. There can be no quarrel with the legal proposition, as laid down in the decisions relied upon by the assessee, that interest on capital borrowed for the purposes of business is allowable under section 36(1)(iii), irrespective of whether the borrowing is for acquisition of a capital asset or a revenue asset. However, the crucial issue which requires examination is whether the capital so invested forms part of an asset which is directly and integrally employed in the business operations of the assessee so as to generate business income assessable under the head "Profits and gains of business or profession". 8.30 By way of illustration, where an assessee acquires plant and machinery out of borrowed funds, such acquisition, though ca....
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....ion 36(1)(iii) is embedded in the statutory scheme governing computation of business income and, therefore, can be allowed only against income assessable under the head "Profits and gains of business or profession". It cannot be extended to income which is assessable under other heads. The statute itself clarifies that interest on capital borrowed for acquisition of a capital asset is to be capitalised up to the point when the asset is first put to use, and only thereafter does it assume the character of revenue expenditure allowable in accordance with the provisions applicable to business income. 8.32 In our considered view, permitting deduction of interest expenditure against business income, when the corresponding investment yields income assessable under entirely different heads, would be contrary to the fundamental scheme and principles governing computation of income under the Act. 8.33 The borrowed capital in the present case has not resulted in the acquisition of any business asset employed in the assessee's business operations, but has merely facilitated acquisition of controlling interest in subsidiary companies. Consequently, the nexus required for allowance of ded....
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....ies, benefit utilisation pattern, salary escalation, and appropriate actuarial discounting factors. The amount debited, according to the assessee, represented an ascertained liability accrued during the year. 9.3 The Assessing Officer, however, did not accept the above explanation and disallowed the claim on the ground that employee benefit expenditure is allowable only on payment basis in terms of section 43B of the Income-tax Act, 1961. 9.4 The objections raised by the assessee before the Dispute Resolution Panel were rejected, following the DRP's own orders for earlier assessment years 2012-13 and 2013-14. 9.5 Before us, the learned counsel for the assessee reiterated that the assessee as a matter of policy, has been allowing post retirement medical benefit to its retired employees and their family members and consistently followed the mercantile system of accounting and that a reasonable estimate of post-retirement medical benefit expenditure was made on actuarial basis. It was contended that section 43B has no application to the present case. The relevant clauses therein as dealing with payments for the benefits of the employees concerns clause (b) which refers to sum....
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....unsel for the assessee submitted that identical issue in assessment year 2007-08 and 2008-09, was restored to the file of the Assessing Officer for examination and verification of the actuarial valuation report. The relevant finding of the Tribunal is reproduced as under "The ld. AO however, strangely applied the provisions of section 43B of the Act and held that since the said provision made for post retirement medical benefits had not been actually paid by the assessee, the same would become disallowable in terms of Section 43B of the Act. We are unable to comprehend ourselves to understand this contention of the Revenue. On perusal of the provisions of Section 43B of the Act, this expenditure provision made for post retirement medical benefits would not fall under any of the clauses provided in Section 43B of the Act. It is an admitted fact that no fund is created by the assessee in respect of this post retirement medical benefits." (emphasis supplied). 9.10 In said case actuarial valuation report was not submitted before the ld AO during assessment proceedings and as per the directions of the Tribunal the assessee had submitted the actuarial valuation report. Since ....
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....t of Scientific and Industrial Research (DSIR), New Delhi, and approval in Form No. 3CM was granted vide letter dated 30.05.2013, subsequently revised on 10.07.2018, valid up to 31.03.2018. The assessee contended that once the facility was approved by the prescribed authority, it was entitled to weighted deduction under section 35(2AB) on the entire expenditure incurred for in-house scientific research, as certified by its auditors. 10.3 It was submitted that having complied with the requirement and satisfied the prescribed authority, the assessee company obtained the relevant certificates from the prescribed authority, which was sufficient compliance of the provisions in the weighted action should be allowed without further enquiry by the Assessing Officer. It was further contended that the role of the secretary, Department of scientific and industrial research, Government of India (DSIR) is confined to approval of the in-house research facility and that neither the statute nor the rules empower the prescribed authority to determine or restrict individual items of expenditure, except to the extent expressly excluded by the provision itself. 10.4 The Assessing Officer observe....
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.... (A) (B) TCL'S claim Auditor's Report Capital Exp. Revenue Exp. Capital Exp. Revenue Exp. CAT Aligarh 1,431,711 16,431,963 1,431,711 15,132,089 IC- Pune 176,466,216 209,370,798 176,211,907 171,171,391 Sop- Mithapur 71,785,504 5,270,443 71,785,504 2,610,507 R&D Exp. 249,683,431 231,073,204 249,429,122 188,913,987 Total 480,756,635 438,343,109 Variation (A-B) 42,413,526 10.7 The learned DRP, thereafter relied on the earlier orders for AY 2012-13 and 2013-14. For ready reference, relevant finding of the ld. DRP is reproduced as under: 29.1 This issue has come up before DRP in A.Y.2012-13 and 2013-14. DRP directions for A.Y.2013-14 are as under: "42.1 We have gone through the Auditors' Report and it was seen that the in respect of Aligarh Unit, the Auditors have observed as under :- "7. On the basis of our verification of such books of account and other relevant records and documents referred to above, subject to our comments in paragraphs 3 and 6 above and according to the informa....
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....(c) in the audited financial statements / annual report as referred to in note 5 of schedule M. However, attention is invited to the fact that, included therein are expenditure of Rs.141.83 lakhs, as mentioned in the table below, which are not allowable as per the DSIR guidelines. However, management represents that there are court decisions in favour of allowability of such expenses. Particulars Amount (Rs. in lakhs) Building maintenance, Municipal taxes and rental charges being paid 35.48 Others as being not directly related to R&D expenses 106.35 Total 141.83 42.2 Similar issue also came up before DRP in A.Y. 2012-13 wherein the DRP as observed as under : 22.1 On this issue, the DRP has noted that the auditors in Para 7(d) of its audit report specifically qualified that expenditure worth Rs. 24.34 lakhs for the Aligarh Unit and worth Rs. 113.65 lakhs for Pune Unit is not allowable, as per the DSIR guidelines. The DRP has noted that these expenses have been incurred for building maintenance, municipal taxes, rental charges, market research, sales promotion, quality control etc.. The details furnished before the DRP reveals that t....
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....his ground of objection of the assessee company is rejected." 42.3 Before us no specific details of the expenses were furnished, however, the AO has relied on the Auditors' Report for disallowance of expenses. (Para 29.1.5.) The approach of AO appears to be reasonable. 42.4 In view of the auditors finding and following the decision of DRP in earlier year, the action of AO does not require any interference, this objection is therefore rejected." 10.8 Before us, the learned counsel for the assessee explained, item-wise, the nature of the expenses excluded by the auditors and sought to justify their eligibility as expenditure incurred wholly and exclusively for in-house scientific research and development. These included, inter alia, capital items used in the R&D canteen, consultancy and retainership fees paid to technical and support personnel, lease rent and repairs of R&D premises, clinical trial expenditure incurred outside approved premises, foreign patent filing expenses, and other general expenses incurred at the R&D units. Relevant explanation filed by the assessee is reproduced as under: 1. The head of expenses involved in the present ground ....
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....ld also qualify as a part of any expenditure on scientific research. d. Clinical trial activities carried out outside the approved premises as relatable to Aligarh unit of Rs.53,334 - Any research carried out by a research unit has to be validated by clinical trial being carried out. At times, the facility to carry out the clinical trial is not available in house. In such circumstances, assistance of outside agencies needs to be taken. In the present case, such expenditure had to be incurred for validation of research carried out at the Aligarh unit. e. Foreign patent filing expenditure incurred at Pune Rs.28,51,410. This expenditure represents expenses incurred for registration of the patent with respect to the research carried out by the research unit. This is necessary to protect it from someone else exploiting it without authority. f. Expenditure of general nature at Pune Rs.42,51,925 (it majorly includes conference charges, recruitment charges, staff training expenses, legal & registration expenses, transport charges, stationery & printing charges, etc.) - This expenditure also represents expenses incurred at the research and development Unit and, he....
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....rial activities carried outside the approved premises 53,334 Travelling expenses for non R&D staff 17,810 Total 12,99,874 10.14 Lastly, the auditor's certificate pertaining to the Mithapur unit, available at pages 258 to 270 of the Paper Book, indicates a difference of opinion confined to a single item. As noted at page 259, the variance relates to expenditure on manpower in respect of which allocation details were not maintained on a regular basis, aggregating to Rs.26,59,936/-. Particulars Amount in Rs. Expenditure on manpower for which allocation details are not maintained on a regular basis 26,59,936 Total 26,59,936 10.15 The above auditor-identified variations form the sole basis of the adjustments proposed by the Assessing Officer and constitute the factual foundation upon which the impugned disallowance rests. The allowability or otherwise of these expenditures, therefore, falls to be examined in the light of the statutory provisions, the nature of the activities carried on by the respective units, and the evidence placed on record, which we proceed to consider hereinafter. 10.16 It is undisputed that the research facilities of the a....
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....of foreign tax credit in respect of tax withheld in a foreign jurisdiction. 11.1 The assessee earned income of Rs.15,25,40,506/- by way of fees for extending corporate guarantees to its associated enterprises located in various countries. In respect of such income, tax was withheld in Kenya by Tata Chemicals Magadi Limited, amounting to an INR equivalent of Rs.15,71,220/-. 11.2 In the return of income originally filed, the assessee did not claim credit for the foreign tax so withheld. The claim for foreign tax credit was raised for the first time by way of a letter dated 24.12.2018 during the course of assessment proceedings. 11.3 The Assessing Officer rejected the claim on the ground that it was not made in the return of income, placing reliance on the decision of the Hon'ble Supreme Court in Goetze (India) Ltd. v. CIT (284 ITR 323). 11.4 In proceedings before the Dispute Resolution Panel, the DRP directed the Assessing Officer to verify the claim and to allow foreign tax credit in accordance with the applicable Double Taxation Avoidance Agreement, if it was found that the corresponding income had been offered to tax in India. However, in the final assessment order pas....