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2024 (12) TMI 1591 - AT - Income Tax


The core legal issues considered in this appeal and cross-objection arising from the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2016-17 are as follows:

(i) Whether the downward adjustment made by the Transfer Pricing Officer (TPO) in respect of deduction claimed under section 80IA of the Income Tax Act, 1961 ("the Act") was justified.

(ii) Whether the amount of compensation paid in connection with mining activity should be treated as capital expenditure or revenue expenditure.

(iii) Whether the disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 ("the Rules") was correctly made by the Assessing Officer (AO), particularly in the absence of any satisfaction recorded by the AO regarding the correctness of the assessee's claim of expenditure incurred in relation to exempt income.

(iv) Whether the disallowance computed under section 14A read with Rule 8D can be added back for the purpose of computing book profit under section 115JB of the Act.

(v) Whether the Commissioner of Income Tax (Appeals) was justified in allowing the claim of Tax Collected at Source (TCS) credit despite the assessee not claiming the same in the return of income.

Issue-wise Detailed Analysis:

(i) Deduction under Section 80IA and Transfer Pricing Adjustment

The legal framework involves the provisions of section 80IA granting deduction for profits and gains from industrial undertakings or enterprises engaged in infrastructure development, including power generation. The Transfer Pricing Officer (TPO) made a downward adjustment of Rs. 2,50,55,12,743/- on account of domestic transactions with associated enterprises, affecting the deduction claimed.

The Court noted that the assessee had set up eligible power generation units and that this issue had been adjudicated in the assessee's favour in earlier assessment years by the Income Tax Appellate Tribunal (ITAT). The Court relied on precedent decisions in the assessee's own case for AYs 2013-14, 2014-15, and 2015-16, which rejected the TPO's downward adjustment.

Applying the principle of consistency and stare decisis, the Court held that the downward adjustment by the TPO was not justified and dismissed the Revenue's grounds on this issue.

(ii) Nature of Compensation Paid in Connection with Mining Activity

The question was whether the compensation paid to landowners for damage caused during mining operations was capital or revenue expenditure. The legal framework included the Rajasthan Revenue Act and the Rajasthan Land Acquisition Act, under which the compensation was determined.

The Court referred to the judgment of the Calcutta High Court in the assessee's own case, which held that the compensation was paid only due to damage caused to the surface of the land and did not confer any interest in the land itself. Therefore, the payment was incidental to the business operation of mining and was revenue in nature.

Following this binding precedent, the Court upheld the treatment of the compensation as revenue expenditure and dismissed the Revenue's appeal on this ground.

(iii) Disallowance under Section 14A read with Rule 8D

Section 14A of the Act empowers the AO to disallow expenditure incurred in relation to exempt income. Rule 8D prescribes the method to compute such disallowance, including a formulaic approach for indirect expenditure.

The AO disallowed Rs. 6,82,71,486/- invoking Rule 8D, while the assessee had offered a suo moto disallowance of Rs. 11,11,114/-. The assessee challenged the invocation of Rule 8D in the absence of any recorded satisfaction by the AO regarding the correctness of the assessee's claim.

The Court examined the relevant precedents, including the Supreme Court decision in Maxopp Investment Ltd., which clarified that Rule 8D applies when the AO records dissatisfaction with the assessee's claim. The Court also considered the decision of the Madras High Court in FL Smidth (P) Ltd., which elaborated on the nature of satisfaction required by the AO before invoking Rule 8D.

In the present case, the AO had recorded satisfaction after examining the assessee's accounts and found the suo moto disallowance inadequate. Thus, the Court held that the AO complied with the procedural requirements under section 14A(2) and Rule 8D.

However, the Court modified the approach to the computation of disallowance. It directed the AO to consider all investments, including those in subsidiaries and mutual funds yielding dividend income, for the purpose of disallowance under Rule 8D(2)(iii), following the Supreme Court's guidance that strategic investments are also subject to disallowance.

The Court rejected the assessee's contention that only dividend-yielding investments should be considered, holding that the AO's approach was justified and consistent with judicial precedent.

Accordingly, the Revenue's appeal on this issue was partly allowed with directions for recomputation, while the assessee's cross-objections challenging the invocation of Rule 8D without satisfaction were dismissed.

(iv) Addition of Disallowance under Section 14A for Computing Book Profit under Section 115JB

Section 115JB provides for Minimum Alternate Tax (MAT) computed on book profit, with Explanation 1(f) requiring addition of expenditure relatable to exempt income.

The AO added the entire disallowance computed under Rule 8D to the book profit. The assessee contended that only disallowance under section 14A(1) is relevant for addition under section 115JB, and Rule 8D disallowance cannot be added.

The Court reviewed conflicting judicial precedents. The ITAT in earlier years had allowed addition of the entire Rule 8D disallowance, but the Court noted authoritative decisions from the Delhi Special Bench (ACIT vs Vireet Industries Ltd.), Karnataka High Court, Delhi High Court, and Calcutta High Court, which held that disallowance under Rule 8D should not be added back for MAT computation.

Respecting these precedents, the Court held that the book profit under section 115JB cannot be increased by the disallowance computed under Rule 8D. Only the expenditure relatable to exempt income under section 14A(1) can be added back.

Therefore, the Court dismissed the Revenue's ground on this issue and upheld the CIT(A)'s findings.

(v) Claim of Tax Collected at Source (TCS) Credit

The assessee claimed credit for TCS amounting to Rs. 70,16,761/-, which was not claimed in the original return of income. The CIT(A) allowed the claim, directing the AO to verify and grant the credit.

The Court held that taxes paid or deducted on behalf of the assessee deserve to be credited, regardless of whether claimed in the return. This position is well-settled in law. Accordingly, the Court upheld the CIT(A)'s order allowing the TCS credit.

Significant Holdings:

On the issue of disallowance under section 14A read with Rule 8D, the Court observed:

"Clause (1) of the said Explanation to Section 115JB requires adjustment of expenditure relatable to exempt income. This expression used in Clause (f) is similar to the expression used in Section 14A(1). Accordingly, only provisions of Section 14A(1) can be imported into clause (1) of Section 115JB. Being a deeming provision, the scope of clause (f) in Section 115JB cannot be enlarged to bring within its ambit sub-section (2) and (3) of Section 14A and consequent Rule 8D."

Regarding the satisfaction required for invoking Rule 8D, the Court cited:

"The Assessing Officer recorded his satisfaction having regard to the accounts of the assessee and proceeded to follow the procedure under Rule 8D of the Rules. Hence, there is full compliance of what is required to be done by the Assessing Officer as pointed out by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd."

On the nature of compensation paid for mining activity:

"The payment in question made by the assessee was in the nature of expenditure for carrying out business operations. No interest in land has been acquired by the respondent/assessee by payment of such compensation. Thus, the payments are in the nature of incidental expenditure to conduct the mining and business operation. Therefore, the expenditure so incurred by the respondent/assessee is revenue in nature."

On the claim of TCS credit:

"It is a settled position that taxes paid by any assessee or deducted on his behalf deserve to be given credit for."

In conclusion, the Court dismissed the Revenue's appeal on all grounds except partially allowing the ground relating to the scope of investments considered for disallowance under section 14A read with Rule 8D, directing recomputation accordingly. The assessee's cross-objections challenging the invocation of Rule 8D without satisfaction were dismissed. The Court upheld the CIT(A)'s treatment of compensation as revenue expenditure, the allowance of TCS credit, and rejected the addition of Rule 8D disallowance to book profit under section 115JB.

 

 

 

 

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