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TMI Blog2015 (12) TMI 1550X X X X Extracts X X X X X X X X Extracts X X X X ..... y this common order for the sake of convenience. 2. Briefly stated the facts of the case are that assessee i.e. Gujarat State Petronet Ltd. (in short GSPL) is in the business of laying and operating natural gas transportation network through pipeline and work is carried out on project to project basis and during the FY some projects are completed and some projects are in the middle of completion. The assessee has filed its return of income 30.9.2009 declaring total income of Rs. 113,56,66,384 and subsequently a revised return of income was filed on 29.3.2010 showing total income of Rs. 114,32,03,874/-. The return was selected for scrutiny and assessment proceedings were completed by the AO under section 143(3) of the I.T. Act, 1961. Details as required by the Assessing Officer were submitted by the assessee during assessment proceedings and income of the assessee was assessed at Rs. 127,85,81,330/-, after making additions of Rs. 13,53,77,456/- in regard to the following :- Total income as per statement of income filed with the revised return of income Amount (i) Disallowance of depreciation on ROU (crop compensation), ROU (related to land users) ROW payments as discussed above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for which it was used before the same was acquired by the government. The ownership rights remain with the original owner from whom the very limited right to use the land are acquired by the government of Gujarat and in turn such limited right to use the land (as per section 5 & section 7 of the above referred Act) are vested in the assessee. As per the practice consistently followed in all the past years, assessee considers the cost incurred towards crop compensation, compensation for acquiring right to use/right of way as cost of laying pipelines and treated as part and parcel cost of pipelines and accordingly capitalized it as cost of plant and machinery and claimed depreciation accordingly. The break-up of the depreciation claimed by the assessee during the year under consideration is as under :- i. RoU-right of user in land - Rs.3,85,82,097/- ii. Crop Cmpensation - Rs.5,25,65,289/- iii. Row Payments - Rs.1,65,68,753/- Rs.10,77,16,139/- In response to the issues raised by the Assessing Officer, the assessee submitted that the cost subjected to scrutiny has been treated as part of cost of pipeline and capitalized accordingly and merged with the block ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). 8. The ld. DR supported the order of Assessing Officer and was of the view that compensation paid for crop should be added to the cost of land and no depreciation should be allowed. 9. On the other hand, ld. AR referred to the order of co-ordinate bench in assessee's own case in ITA No.3222/Ahd/2009 for Asst. Year 2006-07 and others wherein similar issue has been decided. 10. We have heard the rival contentions and perused the material on record. The issue before us is to examine about the allowability of depreciation of Rs. 5,25,65,289/- in respect of payment for crop compensation. We find that similar issue was dealt by the co-ordinate Bench in ITA No. 3222/Ahd/2009 for Asst. Year 2006-07, wherein the co-ordinate bench vide its order dated 23.9.2011 has observed as below - "12. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that the assessee company had to lay down the pipeline on land of 3rd party to whom three types of compensation were paid by the assessee. 1st is right to use of land, 2nd is crop compensation and 3rd is right of way.Ld. CIT(A) has decided that no depreciation is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of 1,08,05,502/- in respect of depreciation of RoW total Rs. 2,88,87,621/- is confirmed out of the total disallowance of depreciation made by the A.O. of Rs. 8,29,90,171/-. Ground no.4 of the assessee's appeal is rejected and ground No.3 of the revenue's appeal is partly allowed." 11. The facts of the case under appeal are exactly similar to the facts discussed in assessee's own case by the co-ordinate bench and applying the same ratio, we are of the considered view that depreciation at Rs. 5,25,65,289/- should be allowed on the cost of compensation paid for damage of crop to the land owner. Accordingly, this ground of Revenue is dismissed. 12. Ground No.2 is as under :- 2. The ld. CIT(A) has erred in law and on facts in deleting the disallowance out of capital work in progress of Rs. 1,23,48,152/-. This ground of appeal is inter linked with ground no.2 of assessee's appeal in ITA No.2286/Ahd/2011 for Asst. Year 2008-09 which reads as under :- 2. The ld. Commissioner has erred in sustaining disallowance of @ 5% of Rs. 12,34,81,520/- of certain revenue expenditure assuming the same as capital expenditure to be included in capital work in progress. Since both the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistrative and other expenses of Rs. 4,71,50,100/-. In total Assessing Officer made addition of Rs. 1,23,48,152/-. 16. Aggrieved, assessee went in appeal before CIT(A) who sustained the disallowance at 5% instead of 10% taken by the Assessing Officer by observing as under :- "5.3 I have considered the issue in its entirety. The following pertinent observations are made : a. There is no doubt that direct expenditure attributable to capital assets is only to be capitalized. b. However, I agree with the AO that the assessee has taken the stand that since its system is maintained in SAP which is an ERP solution, the requirement is fulfilled. However, it is pertinent to note here that under ERP solution, only what is tagged to an expenditure is clubbed together. The tagging remains in the hands of the assessee. If certain expenditure is not tagged as relatable to a project, it will not be clubbed. c. When the assessee says that his company is ISO 9001, OHSAS 18001 company, it wants to take its classification at the face value. There is no denying the fact that once an expenditure is tagged as not connected with setting up a particular asset, the accounting would follow it. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as taken by the AO; which has to be disallowed and direct it to be added to capital work in progress. The AO is directed to work out the resultant relief." 17. Aggrieved, Revenue is now in appeal before the Tribunal. 18. Ld. DR in support of the order of Assessing Officer submitted that in the case of assessee total revenue for the year under appeal is Rs. 447.27 crores whereas total investment in capital work in progress as on 31st March, 2008 amounts to Rs. 588.79 crores and further total work in progress constitute more than 25% of total investment made in various assets as per block of assets and looking to the quantum of business one cannot deny the possibility of application of revenue expenditure claimed against income to the capital work in progress and, therefore, Assessing Officer was correct in holding 10% disallowance of expenditure of Rs. 12,34,81,520/-. 19. Ld. AR submitted that the assessee company is a listed company and is required to prepare financial statement complying with various accounting standards applicable as per law on such types of companies. These standards are compulsory in nature and any variation from the standard leads to qualification in audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Broad analysis of major expenditure heads of P & L along with justification of it being revenue is summarized below for your ready reference. Expenditure Head Amount (Rs.) Remarks Employee cost 7,63,31,420 Employee cost relates to salary & various expenditures incurred in connection with the welfare of employees & does not specifically relate to any PROJECT. Gas Transportation charges 1,44,87,981 It relates to Gas Transportation charges paid to other Gas Transporters, whose services are used by GSPL to transport gas. It is related to our normal business & in no way connected with "under construction pipeline"(project) Connectivity charges 11,21,94,929 It relates to reimbursement of connectivity charges to GSPC, which are paid to GAIL for transportation of natural gas through GAIL's pipeline. It is related to our normal business & in no way connected with "under construction pipeline" (Project) Administrative & other expenses 17,19,63,314 Relates to Admin. Expenses of regular business & admin. Charges to the extent related to Project has already been capitalized as can be observed from annexure-15 to this submission. Operation & maintenance expenses 15,92,10,364 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o see that assessee has shown bifurcation of each type of expenditure along with minute detail as to the application of their expenditure. Details have also been provided for each site falling under the head capital work in progress which has bifurcation of each expenditure as cost element and these details of project-wise capital work in progress apart from including cost of consumption of spares and material also include cost towards advertisement, rent vehicle hiring charges, construction, legal expenses, telecommunication etc. 23. Assessing Officer has not controverted to the fact that assessee company is a public listed company having proper books of account duly audited under the Companies Act by Chartered Accountant and is no deficiency has been pointed out in books of account and nor the provisions of section 145(3) has been invoked. 24. Assessing Officer has also not controverted to the fact that revenue of the assessee has increased from Rs. 335.02 crores in F.Y.2006-07 to Rs. 447.28 crores and vis-à-vis profits has also increased from Rs. 89.38 crores to Rs. 99.92 crores and certainly when no specific defect has been pointed out in the revenue of the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quential. It is submitted that in the fact and circumstances, no interest can be levied u/s 234B & 234C of the Act. It be so held now. 28. Ground No.1 is of general nature, which needs no adjudication. 29. Regarding ground no.3 - ld. AR submitted that while framing the assessment order Assessing Officer applied the provisions of section 14A of the Act and accordingly applied Rule 8D, calculated disallowance u/s 14A at Rs. 1,56,00,676/- and reduced the disallowance of Rs. 2,87,511/- already accepted by the assessee in its statement of total income and accordingly made addition of Rs. 1,53,13,165/- to the income of assessee. However, ld. CIT(A) while sustaining the order of Assessing Officer with minor modification of replacing the investment value taken at Rs. 35,57,49,990/- by an average value of investment i.e. 17,78,74,995/- observed as follows :- "6.2 I have considered the issue in its entirety. The following pertinent observations are made:- a) The fact that no dividend has been earned on the investments during the year does not make any difference to the disallowability of interest u/s 14A. This issue was discussed and decided by special bench in the case of Daga Capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is now in appeal before the Tribunal. The ld. AR submitted that during the year under consideration appellant has not earned any dividend income from the investment made by it. Thus there was no exempt income earned by the appellant during the year under consideration and Ld. AO has made a disallowance vide his assessment order, without rebutting, commenting upon or rejecting the detailed working submitted by the appellant before him. He has disallowed only on the basis that the disallowance made by the appellant is not in line with Rule 8D as prescribed u/s 14a of the Act. While carrying out the calculation of disallowance in line with Rule- 8D, ld. AO has incorrectly considered the average value of investment (schedule -G of the balance sheet) to be Rs. 35,57,49,990/- whereas it should have been Rs. 17,78,74,995/-. Here ld. AO has made a mistake in not averaging opening and closing balance of investment. The figure would be Rs. 17,78,74,995/- due to the fact that investments were made only during the year and opening investment were NIL. It is submitted that the AO has come to conclusion that the appellant's computation of disallowance u/s 14A is incorrect simply because it doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable u/s 14A does not arise. In this regard attention is drawn to the Punjab & Haryana High Court decision in the case of CIT vs. Hero Cycles 323 ITR 158. The AO has directly aken figure from 'balance sheet'whereas that figure needs to be reworked according to the nomenclature in the balance sheet (i.e. current liabilities reduced from current asset needs to be grossed up. Misc. expenditure needs to be eliminated & deferred tax needs to be ignored)". 31. On the other hand, the ld. DR relied on the orders of lower authorities. 32. We have heard the rival contentions and perused the material on record. The issue before us is to examine the quantum of disallowance u/s 14A of the Act as the assessee has accepted disallowance of Rs. 2,87,511/- in its return of income as per provisions of section 14A by limiting the disallowance to the expenditure on salary of employees and general administrative expenses incurred for handling the activities related to investment but did not include disallowance calculated under Rule 8D with reference to interest expenditure as well as 0.5% of the average value of investment and on the other hand, the Assessing Officer has added Rs. 1,36,05,461 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod referred in sub-rule (2) of Rule 8D, he is first required to place on record that he is not satisfied with the correctness of claim of expenditure made by the assessee or the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year. In the case of assessee where the assessee himself has accepted disallowance of Rs. 2,87,511/- u/s 14A, the Assessing Officer has not made any working by way of investigating the books of accounts of assessee to prove any incidence wherein either the interest bearing funds have been applied to make investments or any expenditure which was directly attributable in earning interest income has not been disallowed and has been claimed as revenue expenditure. Rather than making any such effort, he has simply inserted the figures in the formula mentioned in sub-rule (2) of Rule 8D and computed the total expenditure disallowable u/s 14A at Rs. 1,56,00,676/-. In other words there was no proper satisfaction made on the part of Assessing Officer to prove that he was not satisfied with the working of disallowance by the assessee or not satisfied wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of Commissioner of Income Tax v Winsome Textile Industries Ltd reported in (2009) 319 ITR 204 (P & H) in which also the Court had observed as under (Page 207): "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 (P&H) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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