TMI Blog2015 (12) TMI 1550X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 588.97 crores vis- -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 ₹ 12,35,815/-. Thus in view of the above, ground of appeal raised by Revenue is rejected and that of assessee is partly allowed. Disallowance u/s 14A - determination of 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 - Held that:- There is no exempt income during the year, we are of the view that ld. CIT(A) was not justified in partly allowing this addition made by Assessing Officer and set aside the orders 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, 2359/Ahd/2011 - - - Dated:- 7-12-2015 - S/Shri Rajpal Yadav, JM, Manish Borad, AM. For the Petitioner : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 14A Rs.1,53,13,165/- Total- Rs.13,53,77,456/- 4. The matter was taken up before the CIT(A) and appeal of the assessee was partly allowed and, therefore, both the assessee the Revenue are in appeals before the Tribunal. 5. First we take up Revenue s appeal in ITA No.2359/Ahd/2011 for Asst. Year 2008-09. Ground no.1 : The ldd. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation in respect of RoU Crop compensation 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 Pipelines (Acquisition of Right of User in land) Act, 2000. Similarly, the assessee has obtained right of way from the various authorities along the pipeline route for cros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as part of cost of pipeline and capitalized accordingly and merged with the block of assets (plant and 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 assessee claimed depreciation on the total cost of pipelines (including the cost incurred in relation to acquiring the right of user in land and right of way and crop compensation) as per the provisions of the Act. As regards crop compensation, during the appellate proceedings for Asst. Year 2006-07, Assessing Officer conceded before Hon ble CIT(A) that only in absence of details, depreciation on the element of crop compensation was disallowed during the assessment proceedings and accordingly based on his remand report stating this fact as also on legal grounds Hon ble CIT(A) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 allowable to the assessee in respect of right to use land. Regarding right of way, it was decided by the Ld. CIT(A) that depreciation can be allowed but the revenue is in appeal. It was submitted by the Ld. counsel for the assessee that the order of CIT(A) on this aspect may be reversed and that of the A.O. can be restored. The 3rd aspect is regarding the claim of the assessee of depreciation on crop compensation. 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 such crop or trees standing on the land in addition to the land compensation. In our considered opinion, compensation for such damage to the land owner cannot be adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 progress (CWIP) for ₹ 588,79,26,366/- which is in relation to various projects being set up. As far as capitalization of expenses, in line with section 43(1) of the Act, the company is following the practice of capitalizing all the expenditure incurred directly attributable to such projects. The company is regularly following the practice and is abiding with the Accounting Standard-10 issued by ICAI. During the course of assessment proceedings, vide very first notice u/s 142(1) of the Act learned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 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. Here the expenditure claimed capitalized needs to be compared with expenses taken to revenue head. For example in the car hiring, running and maintenance expenses and travelling 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 Pipeline ) Now, the appellant clearly books all travelling expenses and expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed against income to the capital work in progress and, therefore, 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 of which are reproduced hereunder for your ready reference. .The cost of an item of Fixed Asset comprises its purchase price .and any directly attributable cost of bringing the asset to its working condition for its intended use Which is in line with section 43(1) of the Income-tax Act, 1961 where Actual cost has been defined. Company is complying with the Accounting standards prescribed by ICAI the same is being duly verified by multiple external professionals like Internal auditors, Statutory auditors, Tax auditors C AG auditors. The company is following the practice of capitalizing all the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 335.02 crores in F.Y.2006-07 to ₹ 447.28 crores and vis- -vis profits has also increased from ₹ 89.38 crores to ₹ 99.92 crores and certainly when no specific defect has been pointed out in the revenue of the assessee then Assessing Officer should have appreciated the fact that income of the assessee has also increased by almost 10 crores and earning by share has increased from 1.65 to ₹ 1.81 per share. 25. From above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, 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 ₹ 1,56,00,676/- and reduced the disallowance of ₹ 2,87,511/- already accepted by the assessee in its statement of total income and accordingly made addition of ₹ 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 ₹ 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 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 Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 ₹ 35,57,49,990/- whereas it should have been ₹ 17,78,74,995/-. Here ld. AO has made a mistake in not averaging opening and closing balance of investment. The figure would be ₹ 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 does not tally with the computation as per rule 8D. Rule 8D is to be invoked only if the AO is not satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pto 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 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 ₹ 2,87,511/- in its return of income as per provisions of section 14A by limiting the disallowance to the expenditure on salary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day and the last day of the previous year. Further, the term total assets has been defined to mean total assets as appearing in the Balance Sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. For an Assessing Officer for going ahead to calculate the expenditure disallowable as per the method 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 of computing total income under chapter 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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