TMI Blog2016 (12) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. Disallowance u/s 40A(2)(b) - Held that:- It is not disputed that the assessee has not paid any expenditure to which Section 40A(2)(b) can be attracted. In our considered view, ld. CIT(A) has rightly appreciated the factual and legal aspects and held that Section 40A(2)(b) is not applicable. His order is upheld and this ground of the Revenue’s appeal is dismissed. MAT computation - Held that:- Debt redemption fund is to be excluded while computing the book profits u/s 115JB of the Act. See Genus Electrotech Ltd case [2016 (5) TMI 1136 - ITAT AHMEDABAD ] Eligibility of deduction u/s 80IA(4) - Held that:- In view of the Hon’ble Gujarat High Court judgment on the same issue in assessee’s own case, the issue in question that the assessee is eligible for computation of deduction u/s 80IA(4) on the rates charged by it at selling price is no more res integra. - Decided in favour of assessee Income from realization of carbon credits - revenue or capital receipts - Held that:- Merely because the assessee was of the opinion that the receipt was Revenue in nature cannot act as an estoppels against it when the law as interpreted by Hon’ble High Courts takes a view at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground raised by both parties in respective appeals revolves around:- Ld. CIT(A) erred in law and on facts in partly reducing the disallowance u/s 14A from ₹ 75,02,592/- to ₹ 25,66,000/-. The assessee is aggrieved on retention of R.25,66,000/- and revenue is aggrieved on relief of ₹ 49,36,592/- (Rs.75,02,592/- minus ₹ 25,66,000/-). 3.1 The assessee in its grounds of appeal has taken following issues in its support:- a) The assessee had own funds which were more than sufficient for the purpose of making investments; b) The Assessing Officer had not reached appropriate satisfaction as required under law for invoking the provisions of Sec. 14A; c) CIT(A) erred in considering gross interest for the purpose of computation of disallowance u/s 14A. 3.2 At the outset, it may be mentioned that both the Revenue as well as assessee raised following additional grounds of appeal. Revenue s additional ground reads as under:- On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in directing the Assessing Officer to reduce the amount transferred to debenture redemption reserve from the book profit u/s 115JB of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to apply Rule 8D which was resulting in huge disallowance. The assessee contended that its exempt dividend income was meager ₹ 3,18,472/-, the investments therein were acquired in earlier years out of huge own noninterest bearing funds in the form of share capital, reserve and surplus etc. The dividend thus was earned on old investments which are out of non-borrowed funds and reserves. The detailed submissions were made along with case laws available till that time. Ld. AO, however, did not agree and passed the assessment order on 05.07.2011 and notionally worked out a figure on proportionate basis for disallowance and made the disallowance by following observations:- ..Since the assessee itself disallowed an amount of ₹ 2,00,000/-, remaining disallowance of ₹ 75,02,592/- is added to the income of the assessee. The disallowance is also made in book profit u/s 115JB of the Income Tax Act. 5. Aggrieved, the assessee preferred First Appeal where the ld. CIT(A) gave part relief to the assessee by holding that the judgment of Kerala High Court in the case of CIT vs. Smt. Leena Ramchandran (2011) 10 Taxman.com 109 (Kerala) and decision of Mumbai Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses cannot exceed the exempt income which accrued to the assessee. This view is further fortified by the Hon ble Delhi High Court judgment in the case of Joint Investments Pvt Ltd vs. CIT, reported in [2015] 372 ITR 0694 (Delhi). Thus, in the assessee s case, even if all other contentions of the assessee are not accepted, the disallowance in any case cannot exceed ₹ 3,18,472/-, i.e. the exempt income of the year. 6.1 The assessee suo moto disallowed an amount of ₹ 2 lakhs. The ld. AO has not recorded any reasons as to how he is not satisfied in terms of Rule 8D. Reliance is placed on Hon ble Delhi High Court judgment in the case of CIT vs. Taikisha Engineering India Ltd., reported in (2015) 370 ITR 0338 (Delhi). 6.2 Ld. Counsel for the assessee contends that disallowance u/s 14A read with rule 8D cannot made in the instant case inasmuch as the investments in shares/securities are old and not made out of borrowed funds. The assessee owns interest free funds in the form of share capital accumulated profit and reserves, which far too much exceeded the exempt income which is placed on paper book Page 120 121. The accumulated share capital, reserves and sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee s own funds, i.e., equity, reserve and surplus funds amounting to ₹ 32,699.06 lakhs far exceed the tax free investments. The impugned investments are old and out of own funds have not been rebutted. Relying on the Hon ble Gujarat High Court judgments in the case of Hitachi Home and Life Solutions (I) Ltd (supra), Torrent Power Ltd (supra) and other judgments mentioned above, we are of the view that when the assessee possesses own funds much more than the tax free investments, the disallowance u/s 14A read with Rule 8D cannot be made. There is also merit in the plea of ld. Counsel on the count that the burden of establishing the nexus has been wrongly attributed to the assessee and it was for the Assessing Officer to rebut the assessee s contention and demonstrate that the tax free investments were not from own funds but from borrowed funds. In the absence of such rebuttal, it cannot be assumed that the assessee made tax free investments out of borrowed funds. The assessee has suo moto offered ₹ 2 lakhs out of income of ₹ 3,18,472/- as disallowed u/s 14A of the Act. In view of our foregoing observations and relying on Hon ble Gujarat High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act. However, lending money to foreign subsidiary i.e. an associated enterprise amounts to an 'international transaction' under section 92B. Provisions of Chapter X are therefore applicable and any income arising from the international transaction is to be computed having regard to Arm's Length Price. Appellant complied with statutory requirements in this regard by duly reporting the transaction in Form 3CEB and by providing required information in respective columns of the form. Appellant benchmarked arm's length nature of the transaction by using CUP method and applied interest rate of 3.8% being six month's LIBOR + 2% to compute arm's length price. The same was justified since the loan was in foreign currency. Interest rate on a foreign currency loan cannot be compared with interest rate on a rupee loan. Appellant added interest of ₹ 2,95,920/- to its income being the Arm's Length Price of interest on loan to its subsidiary in compliance to requirements of Chapter X of the Income tax Act. AO's action in computing interest @ 12% thereby making addition u/s. 40A(2)(b) of ₹ 6,93,435/- cannot therefore be sustained. Addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 715/Luc/01 749/Luc/01 through Orders dated 21.4.2010 / 21.9.2010 followed decision by ITAT Kolkota in the case of IOL Ltd. 81 TTJ (Cal) 525, decision dated 25.2.2009 in the case of Raymond Ltd. by ITAT Bench, Mumbai [ 2009-TIOL-343-ITAT-MUM] and decision dated 1.10.2007 by ITAT, Mumbai, 'B' Bench in ITA No.5189/Mum/2001 in the case of Mangalore Refinery Petrochemicals Ltd to decide the issue regarding deduction of debenture redemption reserve from book profits u/s section 115J(1) in assessee's favour. Clauses (b) (c) of Explanation 1 below section 115JB(1) are identical to similar clauses in section 115JA and section 115J. Ratio of decisions in the cases of Raymond Ltd., IOL Ltd. and Hindalco Ltd. (supra) would therefore be applicable to deduction of Debenture Redemption Reserve for computing book profits u/s. 115JB. AO's contention that section 115JB has been amended due to insertion of Explanation to clause (b), due to which decision in the case of National Rayon Corporation Ltd. (1997) 142 CTR (SC) 202 would not be applicable is not tenable since there has been no such amendment in clause (b) or (c) of Explanation 1 below section 115JB(1). Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in National Rayon Corporation Ltd. Vs. Commissioner of Income Tax [(1997) 227 ITR 764]. The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve . Where a company issues debentures, the liability to repay arises the moment the money is borrowed. By issuing debentures a company takes a loan against the security of its assets. Though the loan may not be repayable in the year of account, the obligation to repay is a present obligation. Hence any money set apart in the accounts of the company to redeem the debenture has to be treated as monies set apart to meet a known liability. Consequently, debentures have to be shown in the balance sheet of a company as a liability. Being monies set apart to meet a known liability, a Debenture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT [[1981] 132 ITR 559], in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the debt redemption fund is to be excluded while computing the book profits u/s 115JB of the Act. Following the judgment of the Tribunal (supra) and in view of the aforesaid other judicial pronouncements, we see no infirmity in the order of the ld. CIT(A) which is upheld. This ground of the Revenue is also dismissed. 15.1 Since this revenue ground is dismissed, consequentially, the additional ground raised by the Revenue, as admitted by us being only adjunct to this issue of computation of book profit u/s 115JB, also stands dismissed. 16. In the result, the Revenue s appeal is dismissed. 17. The remaining ground of assessee s appeal reads as under:- On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in considering rate other than the selling price charged by distribution licensee companies for working out profit of captive power plant u/s 80IA(4)(iv) of the Act. 17.1 Ld. Counsel for the assessee contends that the issue in question stands covered in favour of the assessee in its own case by the judgment of Hon ble Gujarat High Court vide a consolidated order dated 20.07.2016 in Tax Appeal No. 471 to 474 of 2009, In Tax Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders of the authorities below. In view of the Hon ble Gujarat High Court judgment on the same issue in assessee s own case, the issue in question that the assessee is eligible for computation of deduction u/s 80IA(4) on the rates charged by it at selling price is no more res integra. Respectfully following the Hon ble Gujarat High Court judgment in assessee s own case (supra), this ground of the assessee is allowed. 19. Adverting to the additional ground No.1 in respect of income from realization of carbon credits, which is taxed as Revenue receipt. The ld. Counsel for the assessee, at the outset, contends that the Hon ble Karnataka High Court in the case of CIT vs. Subhash Kabini Power Corporation Ltd, [2016] 69 taxmann.com 394 (Karnataka) dealt with the issue at length and relied on various judicial pronouncements, holding income received from realization of carbon credits as capital in nature. The Hon ble Karnataka High Court in paragraph 6 of its order (supra) has dealt with the issue at length and squarely held that the carbon credits are generated out of environmental concerns which does not have any character of trading activity; therefore, any receipt from an activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, but business income. In his submission, it was stated that on account of running the business of power generation, carbon credit is earned, which is marketable and therefore, it is an income out of business. 9. We cannot accept the said submission for the simple reason that earning of carbon credit is not the business of the assessee nor the same is generated as a by product on account of business activity of power generation, but it is earned on account of concern for environment carbon credit is generated on account of employment of good and viable practices by the assessee. 10. Mr. Aravind, learned counsel for the Revenue also relied upon the decision of the Apex Court in the case of Oberoi Hotel (P) Ltd. v. Commissioner of Income Tax [(1999) 103 Taxman 236 (SC)] and another decision in the case of Kettlewell Bullen Co. Ltd. v. Commissioner of Income Tax [(1964) 53 ITR 261] and contended that unless there is any adverse effect to the trading structure of the business, the income received cannot be termed as capital receipt. 11. In our view, the aforesaid decisions are of no help to the Revenue for the reason that to find out whether the particular amount r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnest. We find merit in the contentions of the ld. Counsel for the assessee that the Hon ble Karnataka High Court in the case of Subhash Kabini Power Corporation Ltd (supra) and the Hon ble Andhra Pradesh High Court in the case of My Home Power Ltd (supra), have taken a view that the carbon credit realization is capital in nature. No contrary judgment is cited. Therefore, respectfully following these judgments, this additional ground of the assessee in respect of realization of carbon credit as capital receipt is allowed. Thus, this additional ground is accordingly allowed. 21 Apropos second additional ground, while deciding the issue about disallowance u/s 14A read with Rule 8D in assessee s and Revenue s appeal, we have held that the amount in question stands restricted to only ₹ 2 lakhs. We have allowed the ground of the assessee in respect of redemption reserves. The issue in question is only a notional disallowance; therefore, it will not be justified to disallow this expenditure of ₹ 2 lacs while computing the book profit u/s 115JB of the Act. In view thereof, the second additional ground of the assessee is also allowed. 22. In the result, assessee s appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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