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2015 (12) TMI 1550 - ITAT AHMEDABAD

2015 (12) TMI 1550 - ITAT AHMEDABAD - TMI - Disallowance of depreciation in respect of RoU Crop compensation - Held that:- 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 should be allowed on the cost of compensation paid for damage of crop to the land owner. - Disallowance out of capital work in progress - Held that:- No specific defect .....

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xpenditure falling under various heads and also looking to the figure of capital work in progress for the year under appeal at ₹ 588.97 crores vis-à-vis total revenue of the assessee at ₹ 447.27 crores, in order to meet the ends of justice we deem it proper to sustain disallowance @ 1% of total employee cost of the company at ₹ 7,63,31,420/- and 1% of administrative and other expenses of ₹ 4,71,50,100/- and accordingly the sustained disallowance will arrive at ₹ 12, .....

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s of lower authorities and allow this ground of assessee by restricting the disallowance of ₹ 2,87,511/- u/s 14A of the Act which has been accepted by the assessee in its return of income. - ITA No.2286/Ahd/2011 - Dated:- 7-12-2015 - S/Shri Rajpal Yadav, JM, & Manish Borad, AM. For the Petitioner : Shri S. N. Soparkar, AR For the Respondent : Shri Jagdish, CIT- DR ORDER PER Manish Borad, Accountant Member. These two appeals -one by assessee in ITA No.2286/Ahd/2011 and the other by Reve .....

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Commissioner of Income-tax, Gandhinagar Range, Gandhinagar on 29.10.2010. Since both the appeals pertain to the same assessee and the issues are common, these were heard together and are being disposed of by 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 proj .....

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er were submitted by the assessee during assessment proceedings and income of the assessee was assessed at ₹ 127,85,81,330/-, after making additions of ₹ 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. Rs.10,77,16,139/- (ii)Disallowance of expenditure directly attributable to capit .....

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ensation of ₹ 5,25,65,289/-. 6. Ld. AR submitted that the assessee is engaged in the business of laying pipelines and transportation of the natural gas to customers. In order to lay down such pipelines the assessee has to enter the private properties, farmlands, cross national highways etc. to dig up the land and lay the pipelines underneath the ground. For entering the private properties, it has to obtain a right/entitlement from the Government of Gujarat under the Gujarat Water and Gas P .....

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e Right of User in land is acquired by the State Government under the Gujarat Water and Gas Pipelines (Acquisition of Right of User in Land) Act 2000 ( Act ) and in furtherance is vested in to the assessee via issuance of notification in the official gazette. On vesting of such right, the assessee can enter upon the land and lay pipelines or do any other thing necessary for laying of pipeline. The statute governing the grant of right of user in land provides that such land can be used only for l .....

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ment 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 ac .....

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machinery) to which such pipelines have been added and on such combined value, the depreciation has been allowed. In view of the relevant provisions of the statute governing the grant of aforesaid rights, the assessee claimed that the amount of compensation paid to owners/government is in the nature of expenditure incurred in relation to putting asset to use i.e. pipeline and hence has been added such expenditure to the cost of pipelines in view of section 43(1) of the Act. Accordingly, the asse .....

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on his remand report stating this fact as also on legal grounds Hon ble CIT(A) allowed the same in favour of the assessee. Vide orders for Asst. Year 2006-07 & 2007-08 Hon ble CIT(A) has deleted the disallowance made by ld. Assessing Officer in respect of crop compensation as well as RoW payments. However, in a year under consideration, ld. Assessing Officer has disallowed the above incurred costs for RoU-land, crop compensation & RoW on the ground that the assessee had acquired perpetua .....

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hat crop compensation goes towards the cost of pipeline and, therefore, depreciation of ₹ 5,25,65,289/- is allowable on the cost of crop compensation and on the other hand upheld the addition by sustaining disallowance of depreciation at ₹ 385,82,097/- claimed on cost of right of use in land and depreciation at ₹ 165,68,753/- on cost of compensation paid for right of way (RoW). 8. The ld. DR supported the order of Assessing Officer and was of the view that compensation paid for .....

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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 .....

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pensation. We find that crop compensation is payable only to those land owners on whose land there was any standing crop or standing trees. For the purpose of laying of pipeline, the assessee is acquiring the land and not the crop and trees which were standing on the land. But in the process of laying down the pipeline by using the land acquired by the assessee, the crop and trees standing on such land get destroyed and hence, the assessee was required to compensate the land owner in respect of .....

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lling the crop but it would have resulted in delay of the project and to avoid this, assessee agreed to pay compensation for damage to the crop etc. in order to avoid the delay in the project and hence, such compensation should be added to the cost of pipeline and not to the cost of land. In this view of the matter, we do not find any infirmity in the order of Ld. CIT(A) on this aspect. We, therefore hold th at the Ld. CIT(A) has rightly allowed depreciation of ₹ 1,36,89,211/- being spent .....

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ation of 1,08,05,502/- in respect of depreciation of RoW total ₹ 2,88,87,621/- is confirmed out of the total disallowance of depreciation made by the A.O. of ₹ 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 depreciatio .....

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er has erred in sustaining disallowance of @ 5% of ₹ 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 grounds are linked together therefore, we take them together. 13. The ld. DR supported the order of Assessing Officer and vehemently objected to the deletion of impugned disallowance. 14. On the other hand, ld. AR submitted that the balance sheet of the assessee company shows capital work in pr .....

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arned AO had instructed the assessee to appropriate/bifurcate total expenditure debited to the profit and loss account (i.e. ₹ 298,15,11,321) towards such CWIP without seeking information in respect of accounting done by the assessee and without verifying the bifurcation already undergone in this regard in the books of accounts. In response to the said notice, assessee had made a detailed submission vide its letter dated 31st August, 2010 stating that - the company is engaged in business o .....

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ccounting system which duly reflects that all the cost related to that project is capitalized along with the project. It was further stated before the Assessing Officer that expenditure charged in P & L account are expenditure related to Operating & Maintaining the operational pipeline which are already put to use & some administrative expenditure which are not connected with any of the projects. 15. However, Assessing Officer was not satisfied with the explanation of assessee and we .....

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ns 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 re .....

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ling expenses the following details are note worthy: Expenses claimed as revenue Car Fuel Exp. Company Vehicles 2,627,201 Repairs & Maintenance Exp. Vehicles 845,249 Vehicle Hiring charges 12,230,646 Travelling expenses-Director 452,682 Travelling expenses -others 7,202,687 As against the expenses claimed attributable to projects the following expenses have been shown. Vehicle Hire Charges (i.e. ₹ 6,68,207/- in Bhadbhut-Gana Pipeline & ₹ 10,51,557/- in Rajkot-Jamnagar Pipelin .....

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O that the revenue expenditure claimed had an element of cost directly attributable to setting up of projects. The exact quantification is not possible and the disallowance of revenue expenditure and subsequent capitalization can only be an estimate in these circumstances. e. For estimating the disallowance, the following material fact observed by the AO is also of import. Such expenditure is more pertinent when the company in growing and in the process of expansion. This is true for the present .....

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f above, I uphold that certain part of the revenue expenditure claimed had an element of cost directly attributable to setting up of projects but I estimate it to be 5% of ₹ 12,34,81,520/- instead of 10% 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 .....

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Assessing Officer was correct in holding 10% disallowance of expenditure of ₹ 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 auditor s report. As per Accounting Standard 10 Accounting for Fixed Assets , extracts o .....

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s like Internal auditors, Statutory auditors, Tax auditors & C&AG auditors. The company is following the practice of capitalizing all the expenditure incurred for projects. On the other hand expenditure related to operational assets are charged to P & L. Also Company is engaged in business of transport of gas through pipeline for which company constructs pipeline system. Construction work related to the pipeline is given to a contractor on turnkey basis, where all activities (includi .....

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Resource Planning) solution & a world renowned integrated system of recording transaction with stringent controls & accuracy. In this system, each & every project related expenditure is tagged with that project & then whenever that nature of expenditure is booked, the ERP system automatically adds that to the cost of project. Expenditure changed in P & L account are expenditure related to Operating & Maintaining the operational pipeline which are already put to use & .....

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d 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 con .....

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observed from annexure-15 to this submission. Operation & maintenance expenses 15,92,10,364 As can be observed from nomenclature of expenditure head itself that it is operation & maintenance related expense which can be only for operational pipelines & can never be for under construction pipeline (project) Interest & financial charges 81,51,37,556 Out of which ₹ 1.28 crores of financial charges related to project has already been offered for disallowance, as can be seen fr .....

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r, detail of capital expenditure of capital work in progress for each site was made available and assessee has at its own bifurcated the expenditure under capital head which normally are claimed as revenue expenditure. No error has been pointed out by Assessing Officer in these details of capital work-inprogress. 21. We have heard the rival contentions and perused the material on record. Assessee company is a public listed company engaged in the business of transport of gas through pipe lines fo .....

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ncreased by approximate ₹ 152 crores during the year in comparison to the capital work in progress of ₹ 136.78 crores during Asst. Year 2007-08 i.e. F.Y.2006-07. Due to this very reason the Assessing Officer was of the view that some portion of the expenditure claimed by the assessee as revenue expenditure would certainly have been spent for various projects shown under capital work in progress. 22. From perusal of details submitted by assessee and with the help of ld. AR we are able .....

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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 ₹ 335.02 crores in F.Y.2006-07 .....

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Assessing Officer in the books of accounts of assessee maintained as well as details of capital expenditure incurred for the capital work in progress incurred to projects not completed upto the end of the year and also did not controvert to the suo moto allocation by the assessee of certain revenue expenditure which relates to the project under process. However, looking to the size of business of the assessee as well as impossibility of bifurcation of each and every expenditure falling under va .....

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ew of the above, ground of appeal raised by Revenue is rejected and that of assessee is partly allowed. 26. Other two grounds are general in nature. These need no adjudication. 27. Now we take up assessee s appeal in ITA No.2286/Ahd/2011 for Asst. Year 2008-09 wherein grounds of appeal taken by assessee are not in consonance with Rule 8 of ITAT Rules, 1963 as they are descriptive and argumentative. The main issues are - 1. The order passed by the ld. CIT(A) is erroneous and contrary to the provi .....

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the IT Rules. 4. Ld. Commissioner erred in fact and in law in holding that charging of interest u/s 234B & 234C is mandatory but consequential. 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 .....

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erved 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 Capital Management P. Ltd. 117 ITD 169, wherein it was held that whether ultimately income is earned or not does not make any difference. The Hon ble Mumbai .....

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ct as per figures (implied expenditure and investment) given in the balance sheet and P & L a/c. He has gone on to attribute and work out interest disallowable under Rule 8D. d) I do not agree with the assessee that since share applications have been invested after 23.08.2006; therefore, interest pertaining to the loans only should be considered while working out the disallowance under Rule 8D. In that case according to the assessee s log the total assets (excluding earlier assets) in the fo .....

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e appellant that the average investment and not the total investment should have been considered for applying rule 14A. Therefore, the last figure of half percent of the average value of investment taken wrongly of ₹ 35,57,49,990/- has instead to be taken at half percent of ₹ 17,78,74,995/-. I also agree that figure needs to be re-worked according to the nomenclature in the balance sheet (e.g. current liabilities reduced from current asset needs to be grossed up etc.). The AO is dire .....

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nsideration 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) t .....

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. Rule 8D is to be invoked only if the AO is not satisfied with computation of disallowance by assessee and such satisfaction has to be based on the basis applied by the appellant in working out the disallowance. The investments from which exempt income may get generated, came into existence during the year only from 5th March, 2008 as till date the monies were lying in share application money (from August 2006 upto February 2008) on which interest was received by the appellant and was offered f .....

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l interest expenses. In this regard without prejudice it is to be submitted that the investments were made out of own funds in view of the fact that the appellant company had ample own funds as also the fact that the borrowed funds were mostly in form of term loans which were availed for specific projects. The details of the own funds of the appellant are as below : Particulars Amt. (Rs.in crores) As on As on 1/4/2007 1/4/2006 Share capital -at the beginning of the year 543 543 Reserve & Sur .....

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06 upto February 2008 was only f ₹ 35 crores. This fact coupled with the fact that the borrowings are mainly term loans, which are borrowings for projects, clearly indicates that the investments were made out of own funds and not borrowed funds and therefore the question of considering interest expenses as disallowable 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 .....

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/s 14A of the Act as the assessee has accepted disallowance of ₹ 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 ha .....

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nce of investment was NIL at the beginning of the year. 33. Before we go further, let us examine the matter of determining the amount of expenditure in relation to income not includible in the total income as referred under Rule-8D read with section 14A of the Act. The salient features of Rule 8D are as under - As per sub rule 2 of Rule 8D, the expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts - (i) the amount of expenditur .....

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e average of 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. 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. (iii)an amount equal to 0.5% of the average of the value of investment, income from which does not or shall not form part of the total income, as app .....

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cord 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 ₹ 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 i .....

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part of Assessing Officer to prove that he was not satisfied with the working of disallowance by the assessee or not satisfied with the apportionment of expenditure and diversion of fund as discussed above. Further from the perusal of the balance sheet of the assessee company (which is a listed company) we are able to understand that there was NIL investment in the opening balance of the company as on 1.4.2007 and investments in tax-free investment was initiated from August, 2006 to April, 2008 .....

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that company was having sufficient tax-free funds which could have been diverted to tax free investments and no fact against this possibility has been brought before us by ld. DR. 34. Further looking to the fact that assessee had not earned any exempt income during the year then in such case applicability of provisions of section 14A was decided in a similar issue in the case of Agarwal Roadlines P. Ltd. vs. ACIT in ITA No.623/Ahd/2012 for Asst. Year 2008-09 by the Co-ordinate Bench vide its rec .....

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be made u/s 14A of the Income-tax Act. The following observations are worth to note:- Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection( 1) of section 14A provides that for the purpose .....

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