TMI Blog2023 (8) TMI 1058X X X X Extracts X X X X X X X X Extracts X X X X ..... - HELD THAT:- The expenditure on replacement of meters is for facilitating the assessee s business operations and enables maintenance and conduct of the assessee s business more effectively or more profitably. The replacement of meter does not increase the assessee s generation or distribution capacity. Further, replacing old meters by new meters has resulted only in getting better readings of the current consumption and does not in any way enhance the capital assets or the quantity of power supply. Accordingly, the assessee has correctly claimed the expenditure incurred on replacement of meters as revenue expenditure - See Bombay High Court in assessee s own case [ 2014 (6) TMI 574 - BOMBAY HIGH COURT ] Allocation of head office expenses for computing profit eligible for deduction u/s. 80IA for distribution unit - AO has apportioned the head office expenses to all the units and the eligible profits were re-computed - HELD THAT:- Now this issue is settled in the case of the assessee on the same point by the decision of the Tribunal as well as the Hon ble Bombay High court in earlier years that profit of eligible undertaking has to be worked out as if such undertaking was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent : Shri. Sanjay Deshmukh (CIT DR 29-03-2023 ORDER PER AMIT SHUKLA (J.M): The aforesaid cross appeals have been filed by the Revenue as well as by the assessee against order dated 06/09/2022 passed by NFAC Delhi for the quantum of assessment passed u/s. 143(3) for the A.Y. 2016-17. In the Revenue appeal, the following grounds have been raised:- 1. Whether on the facts and under the circumstances of the case and in law, the Ld CIT(A) was justified in directing the AO to exclude the investments made in subsidiaries, being strategic investments which had yielded exempt income during the year and also to re-compute the disallowances under Rule 8D2(iii) of Rules by considering only those investments which had actually yielded exempt income during the year accordingly and thereafter reduce the voluntary disallowance made by the assessee in the return of income. 2 Whether on the facts and under the circumstances of the case and in law, the Ld CIT(A) was justified in allowing the expenses incurred for replacement of meters as Revenue expenditure? 3. Whether on the facts and under the circumstances of the case and in law, the Ld CIT(A) was jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments Ltd. reported in 402 ITR 640 and excluding interest expenses. The disallowance u/s. 14A as per the above working was computed at Rs. 14,08,17,019/-. 6. During the course of assessment proceedings, the assessee was asked to furnish details as per the provisions of section 14A and Rule 8D in response to which the assessee had made submissions vide its letter dated 12.08.2019. The assessee also submitted without prejudice computation of disallowance u/s. 14A as per Rule 8D considering all investments capable of earning exempt income and including interest expenses. The disallowance accordingly worked out to Rs. 238,59,77,646/-. Further, without prejudice to above the assessee had submitted that the disallowance u/s. 14A be restricted to exempt income i.e Rs. 145,93,26,446/-. However, the main argument of the assessee before the ld. AO was that no interest disallowance should be made because assessee had surplus interest free funds of Rs. 17517.57 crores far exceeding the total value of tax free investments which was Rs. 11,444.74 Crores. However, ld. AO after discussing the assessee s submissions rejected all the contention. Ld. AO has though not disputed this fact that ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come, corresponding expenditure could not be worked out for disallowance. The ld. CIT(A) following its predecessor s order for AY 2015-16 in the assessee s own case has directed the ld.AO to re-compute the disallowance u/s. 14A considering only those investments including investments in subsidiaries which have earned tax free income during the year and has deleted the disallowance on account of interest expenses. Thus, ld. CIT(A) has allowed the assessee s ground of appeal on disallowance u/s. 14A for which the department has preferred an appeal before ITAT. 9. Before us, ld. Counsel submitted that the disallowance u/s. 14A ought to be worked out as per Rule 8D considering only those investments on which exempt income has been received during the year as has been allowed in the assessee s own case by ITAT in AY 2015-16. The assessee also placed reliance on the following decisions:- ACIT vs. Vireet Investments P. Ltd. (ITA No. 502/Del/2012) and C.O. No. 68/Del/2014) (SB) Principal Commissioner of Income Tax v. GVK Project and Technical Services Ltd. [2019] 106 taxmann.com 181 (SC) Principal Commissioner of Income Tax, Bangalore v. Sterling Developers (P) Ltd. [2021] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court, no disallowance on account of interest can be made when assessee has surplus funds. In so far as the ld. CIT(A) s direction that to re-compute disallowance considering only those investments including investment in subsidies which have earned tax free income during the year, is based on precedents of earlier years of the Tribunal for the A.Y. 2017-18 and 2018-19 supra. Therefore, there is no infirmity in such direction of the ld. CIT(A) and same is confirmed and consequently, ground No.1 raised by the Revenue is dismissed. 13. In so far as expenditure on replacement of meters of Rs. 12,52,27,442/- as raised ground No. 2, the facts in brief are that the assessee is engaged in the business of distribution of electricity in the suburbs of Mumbai catering to over 2.9 million consumers. The assessee has installed separate meters in the premises of each consumer (either residential or commercial or industrial) These meters have to be periodically replaced on account of obsolescence, reading of the meter becoming faulty, meter being burnt etc. Many times on account of manufacturing defects, the entire lot of meters has to be replaced. In the books of account, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r supply. Accordingly, the assessee has correctly claimed the expenditure incurred on replacement of meters as revenue expenditure. The assessee s claim of expenditure on replacement of meters is allowed by the Bombay High Court in assessee s own case for AY 2006-07 to AY 2009-10 and by ITAT Mumbai for AY 2002-03 to AY 2015- 16. 17. The issue of disallowance of expenditure on replacement of meters has been decided by the ITAT in Appeal Nos. ITA No. 476/Mum-2022 and ITA No. 2106/Mum-2022 for AY 2017-18 AY 2018-19 respectively vide their order dated 23.03.2023 at para 67 on pages 59 and 60 of the order as under: 67. After considering the aforesaid facts and earlier judicial pronouncements in assessee s own case, it is seen that the expenditure has been incurred on replacement of meters which is treated as revenue expenditure for facilitating the business operations and enables the maintenance and conduct of the assessee s business more effectively or more profitably. The replacement of meter does not increase the Assessee s generation or distribution capacity. In fact assessee replacing old meters by new meters which resulted in better readings of the electricity / curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits were re-computed in the following manner:- 7.1.4 Considering the facts of the case, the stand taken in the earlier years, the discussion here-in-above and the position of law, the head office expenses are apportioned over all the units and the eligible profits are recomputed as under: Head Office expenses Rs. 368,21,83,658 Less: Depreciation as per books Rs. 7,88,89,907 Add: Depreciation as per IT Act Rs. 42,59,38,331 Less: Expenses offered for disallowance In the computation of income included in Head Office Expenses Rs. 92,26,23,272 Add: Expenses claimed in computation of Income to be included in Head Office Exp. Rs. 11,22,09,205 Net Allocable H.O. expenses of the Assessee Rs. 321,88,18,015 7.1.5 The working of the allocation of head office expenses in the ratio of the turnover of the unit to the total turnover is as under:- Sr. No. Name of unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e s own case, we find that this issue is now covered by the decision of the Hon ble Bombay High Court in assessee s own case for AY 2006-07 to AY 2009-10 and also by ITAT Mumbai for AY 2002-03 to AY 2015-16. Thus, we direct the AO to allow the deduction u/s. 80IA without allocation of head office expenses. Accordingly, this ground raise in both the assessment years are allowed . 25. On the other hand, ld. DR though admitted that the issue is covered by the decision of the Hon ble Bombay High Court, however, he strongly relied upon the order of the ld. AO. After considering the aforesaid findings of the ld. AO and ld. CIT(A). 26. Now this issue is settled in the case of the assessee on the same point by the decision of the Tribunal as well as the Hon ble Bombay High court in earlier years that profit of eligible undertaking has to be worked out as if such undertaking was only source of income during the previous year and deduction u/s. 80IA is allowable in respect of profits and gains derived from such business. Therefore, head office expenses cannot be deducted from the profits and the gains which had derived from eligible business because it has been found as a fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. 31. In ground No.5 Revenue has challenged the computation of book profits u/s. 115JB and disallowance u/s.14A. Brief facts are that, the ld. AO while computing the book profits u/s.115JB has made further addition of Rs. 224,66,88,126/- u/s. 14A being expenses incurred in relation to exempt income. The disallowance has been computed as per Rule 8D considering all investments capable of earning exempt income including disallowance of interest expenses. The assessee had suo-moto disallowed a sum of Rs. 13,92,89,519 u/s. 14A while computing book profits u/s. 115JB. The ld. AO has made further addition on account of disallowance u/s. 14A of Rs. 224,66,88,126 without appreciating the fact that the assessee has already considered a disallowance of Rs. 13,92,89,519 while computing the book profits u/s. 115JB in the revised return of income filed on 16.02.2018. 32. Ld.CIT(A) has deleted the addition made u/s. 14A of Rs. 224,66,88,126 while computing the book profits u/s. 115JB following the decision of the CIT(A) in assessee s own case for AY 2015-16 and the decision of the Hon ble ITAT for AY 2013-14 and AY 2014-15 in assessee s own case. 33. Before us ld. Counsel su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ury Exports Ltd. (CEL), Hongkong had been supplying imported coal to Dahanu Thermal Power Station at agreed standard terms and conditions since last four years and hence for F.Y. 2015-16 also, the imported coal was purchased from CEL. 37. The Assessee Company has purchased / imported coal from CEL transparently and based on price linked to international coal-indices and therefore it was contended that it cannot be said that the Company has purchased / imported coal at high / inflated price. The assessee s business is a regulated business and the assessee under no circumstances can inflate the cost or reduce its revenue. Information was received from the Directorate of Revenue Intelligence (DRI), Mumbai for AY 2011- 12 to AY 2015-16 that it had investigated a case of over- valuation in the import of coal of Indonesian origin. Accordingly the assessments of the assessee were re-opened for AY 2011-12 to AY 2015-16. 38. The ld. AO merely based on the additions made in the re- opened assessments u/s. 143(3) rws 147 for AY 2011-12 to AY 2015-16 has worked out notional inflated cost of coal expenses by considering the average inflation rate for the earlier years and applied it to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the ld. CIT(A) for restricting the disallowance made by the ld. AO at 50% i.e. Rs. 10,69,29,926/-. 42. Before us ld. Counsel submitted that the ld. AO merely based on the additions made in the previous assessment years i.e. AY 2011-12 to AY 2015-16 has worked out notional inflated cost of coal expenses by considering the average inflation rate for the earlier years and applied it to the declared CIF value for FY 2015-16 to work out the disallowance at Rs. 21,38,59,853/-. 43. Ld. Counsel submitted that the assessee has purchased / imported coal from CEL transparently and based on price linked to international coal-indices and therefore it cannot be said that the assessee has purchased / imported coal at high / inflated price. The assessee s business is a regulated business and the assessee under no circumstances can inflate the cost or reduce its revenue. Ld. Counsel further submitted that the purchase of coal cost is not at inflated price and the disallowance of so-called inflated coal expenses of Rs. 10,69,29,926/- made on an adhoc and estimated basis is wrong and ought to be deleted. He also submitted that the findings of the DRI Report were specifically for AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed inflated coal expenses is wrongly made and ought to be deleted. 46. Before us, ld. DR referred to the observations and the finding given by the ld. AO from pages 20-27 of the assessment order. He submitted that once the information has been received from DRI which has investigated the case of over valuation and the import of Indonesian origin and similar enquiries were conducted on the assessee under the provision of Custom Act. Apart from that, ld. AO has also analysed this issue in detailed in the order. The relevant observation of the ld. AO in this regard as highlighted by him reads as under:- 8.3 Modus Operandi 8.3.1 The Coal Procurement team (CPT) of R Infra floats inquiries for the required quality and quantity of coal and negotiates with the bidders. After settling terms conditions, quality specifications and price, the successful bidders (called as 1st stage traders) were told to route the transactions through certain intermediaries firms. The intermediary firms were given letters of awards (LoAs) by R infra for supply of coal as per specifications finalized by the CPT with the 1st stage traders. Intermediary firms further issued LoAs to the 1st stage t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be apparent from the overall facts of the case as discussed above. It appears that the Reliance ADAG companies, i.e. assessee have colluded with the intermediary firms and have been aided and abetted by various person to import impugned Coal by over-valuation following a well-planned and executed modus- operandi of Trade Based Mis-pricing. 8.3.4 It appears that the intermediary firms were not independent suppliers, per-se, but merely intermediary dummy agents for artificial inflation of invoice for enabling siphoning off of money abroad as a part of the modus-operandi. 8.3.5 The assessee through Coal Procurement Team (CPT) of Reliance ADAG were all along aware of the actual suppliers of the Coal ordered by them on the intermediary firms. In fact, they only dealt with the actual suppliers and finalized the prices. The Coal was shipped directly to India by the actual suppliers and only documents were routed through the intermediary firms. The intermediary firms appear to have executed back-to-back contracts with assessee with overlapping scope and responsibility and supply of the Coal when they were fully aware that these responsibilities were entrusted upon the actual s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - CIF An Amount of Rs. 1,45,01,56,956/- appears to have been siphoned by over-valuation by the assessee. 8.3.8 The Coal of Indonesian origin was exempted from Custom duty with effect from 01.10.2010 subject to submission of Country of Origin certificate in Form-Al issued by Indonesian authorities, Amongst many data fields, the Form-Al' certificate contains the FOB value of the goods. The assessee have, however, in majority of the import consignments, have not availed of the concession eligible to them. It appears that they have deliberately not claimed the concession. because it would have necessitated submission of the Form-AI certificates, which in turn would have revealed the true FOB value of the Coal consignments to the Assessing Officers and would have exposed them to scrutiny for overvaluation. 8.3.9 Further, it is pertinent to mention that the assessee, as the importers of the overvalued Coal, has preferred to pay more Customs duty inasmuch as they have not claimed the exemption under AIFTA for many imports. This eagerness to pay taxes when none or less were payable was apparently for the reason that the taxes formed part of landed cost of the Coal which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but pure, unadulterated marshalling of hard facts, there emerges undeniable and concrete evidence to suggest that the purchase of coal of Indonesian origin through intermediaries was nothing but a colourable device, rather an outright sham scripted and executed for the purposes of reducing the taxable income of the assessee, and thus evading taxes. The information received and facts produced above in detail need to be tested against the touchstone of human probability. After all that has transpired, preponderance of probabilities overwhelmingly suggests, rather firmly establishes, the intention of the assessee to indulge in deliberate wrongdoing, which was given effect by way of purchase of coal of Indonesian origin through Intermediaries at an inflated rate than the actual value of such coals. 9.2 This entire, order thus far has focused solely on facts and evidences, for they form the bedrock of lifting the veil from the sham-transaction. However Income tax proceedings ultimately need to stand the test of judicial scrutiny and facts, when backed by legal precedent and judicial pronouncements, gain substance, weight and meaning. Time and again, in cases of financial and econo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Hon ble Court has held that appeal was not maintainable. If the ld. AO is heavily relying upon report of the DRI on similar information, then the same has no legs to stand because CESTAT Mumbai in the case of Knowledge Infrastructure Systems Pvt. Ltd has already set aside the order of the adjudicating authority, thus, the said information cannot be the basis for any kind of disallowance. 50. In any case, all the observations and the finding given by the ld. AO as incorporated supra these are all based on DRI report which as of now has not been approved by the higher appellate forums and as informed by the assessee, the same are still at the stage of show-cause notice and no final order has been passed. Thus, all the observations of AO has no relevance at all. As observed above, the case of the Revenue is that assessee might have inflated cost of the coal, however, once the cost of the coal is part of tariff price determination by the regulatory authority and once the electricity is sold on the same tariff which has been credited to the profit and loss account and offered to tax, then there is no question of separately taxing the alleged inflated cost of coal. Therefore, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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