TMI Blog2014 (9) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... additional duty. Thus in view of the decision of this Tribunal for A.Y 2002-03, the Assessee, in our opinion, is entitled for deduction u/s 80IA in respect of the captive power undertaking but for the purpose of ascertaining the profit, market value should be taken in respect of the two power undertakings generating electricity. AO reduced the additional demand charges but the CIT(A) allowed the relief to the Assessee holding that determination of the market value/based on the State Government electricity power tariff inclusive of additional demand charges has been specifically decided by CIT(A) and Tribunal for the A.Y 2002-03 and the Assessee has strictly followed the same. CIT(A) decided this issue in favour of the Assessee. We noted that the Tribunal in its order for A.Y 2002-03 has accepted the rate per unit as worked out by CIT(A). CIT(A) reduced the tariff rate by surcharge and additional duty. Respectfully following the aforesaid decision of this Tribunal, we direct the AO compute the profit eligible for deduction u/s 80IA on the basis of the aforesaid finding given by the Tribunal for A.Y 2002-03. Computation u/s 80IA of profit from power undertakings - HELD THAT:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts are being used by the designated division of the Assessee - Assessee has not included in the credit side of the Profit Loss account any profit while deduction has been claimed on the notional profit - CIT(A) deleted the disallowance - HELD THAT:- As relying on assessee's own case said unit is eligible for deduction u/s 80IC. So far as the issue that no profit has been credited in the Profit Loss account, we noted that CIT(A) has even though decided in favour of the Assessee that the Assessee is eligible for deduction u/s 80IC but has not given any finding whether the income generated from this undertaking stands included in the gross total income of the Assessee. The income need not be separately credited to the Profit Loss account when the income derived from the eligible undertaking has to be computed. The revenue authorities should only ensure whether income from the eligible undertaking is included in the gross total income of the Assessee or not as the basic condition for allowing of deduction u/s 80IC is that the Assessee is eligible for deduction if the gross total income includes any profit and gain derived by the eligible undertaking. We, therefore, restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,47,171/- in relation to A.Y 2008-09. whereas the Assessee has taken the following effective grounds in its appeal: (1) Income Tax Interest Payment: ₹ 2,33,98,296/- For that the learned CIT(A) erred in not allowing the adjustment of interest payment on income tax dues against the interest income on income tax refunds. For that the learned CIT(A) was not justified in upholding the action of the Assessing Officer in disallowing the said adjustment. Relief Prayed: The adjustment of interest payment on income tax dues of ₹ 2,33,98,296/- should be allowed against the interest income on income tax refunds of ₹ 17,31,96,921/-and only the balance amount should be subjected to tax. (2) Proportionate Management Expenses (in the context of exempt income) disallowed under section 14A: (Rs. l3,50,73,500 - ₹ 37,90,800)= ₹ 13,12,82,700/- For that the learned CIT(A) was not justified in arbitrarily upholding the action of the Assessing Officer in disallowing proportionate management expenses as per Rule 8D under section 14A in respect of exempt income since the appellant company was a profitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,67,671/- no TDS was deducted and AO disallowed this expenditure by invoking the provisions of section 40(a)(ia) of the Act. According to assessee, these payments comprised to institutional shareholders i.e. LICI, GIC and UT1 for a sum of ₹ 12 lac in respect of three nominee directors and balance ₹ 13,67,671/- was paid to remaining four individual directors. It was claimed that non-executive directors are only members of Board of Directors and have no power except as delegated to them by the Board or vested in them by the Article of Association of the company. According to assessee, such general function cannot constitute any managerial, technical or consultancy service within the scope of section 194J of the Act. Even these functions do not fall under the provisions of section 194H of the Act, reason being these commission payments do not fall within the definition of commission as given in the explanation to section 194H of the Act. As Ld. Counsel for the assessee cited before us that this issue is covered by the decision of jurisdictional Tribunal in the case of Jahangir Biri Factory (P.) Ltd. v. DCIT (2009) 126 TTJ 567 (Kol.), wherein the issue of TDS on director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held. 12. After hearing the rival submissions and on careful perusal of the materials available on record and taking into consideration that the assessee company has paid this commission to the directors as per their terms of employment for the work done in their capacity as whole-time directors, this commission should have been treated as an incentive in addition to salary, bonus and other perquisites. Therefore, in our considered opinion, the learned CIT(A) is justified in recording the same as not coming within the purview of commission or brokerage as defined in s. 194H nor a fee for professional or technical services as defined in s. 194J of the IT Act. Therefore, we find no infirmity in the orders of the learned CIT(A) on this issue. Therefore, this ground of the Revenue is dismissed. Respectfully following the view taken by jurisdictional Tribunal in the case of Jahangir Biri Factory (P.) Ltd. (supra), we allow the claim of assessee.' Respectfully following the decision of the co-ordinate bench in the case of the Assessee for A.Y 2007-08 we dismiss ground No. 1 taken by the Revenue. 4. Ground No. 2 relates to the claim of deduction u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0IA can be allowed in respect of the steam unit as the Assessee has already claimed deduction for generation of electricity in respect of captive power undertakings. 4.3 In respect of power undertaking - I, Kovai, the AO noted that the Assessee generated 5,43,96,500 units which was transferred at the rate of ₹ 4.10 per unit and while calculating the transfer price, the Assessee has not considered the Electricity Duty paid to the State Government even though the Assessee has paid a sum of ₹ 9.90 lakhs in connection with the aforesaid undertaking. The AO, therefore, re-determined the cost and computed the profit at ₹ 11,24,50,000/-. The AO also reduced the brought forward loss amounting to ₹ 1,03,03,000/- while computing the profit from the Kovai unit as per the provisions of Sec. 80IA(5). Thus, total deduction u/s 80IA was restricted to ₹ 32,33,07,128/- in place of ₹ 69,57,61,000/- claimed by the Assessee. The Assessee went in appeal before CIT(A). CIT(A) took the view in respect of the captive power undertakings that the issue is exactly identical to the one raised in Assessee's own case in A.Y 2002-03 and accordingly, he allowed ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , profit loss a/c and balances sheet and the process flow chart. I also find that in respect of the said facts, the Assessing Officer has accepted the position and had not made any issue. Further, the market value of steam had been properly determined based on a market value report by Price Waterhouse Co. This market value was separately taken as cost as per section 80IA(8) for the computation of deduction for the electricity undertakings. Therefore, there was no case of double deduction. Therefore, in view of the above discussion and finding, I hold that the deduction is fully available to the appellant company in respect of the said Power undertaking VI for generation of steam for captive consumption. 4.5 On the issue of brought forward losses incurred prior to the initial year, CIT(A) took the view that the deduction u/s 80IA has to be computed from the initial year and all losses of earlier years prior to the initial year have to be ignored. 4.6 On the issue of inclusion of additional demand charges for determining the market value, CIT(A) decided the issue in favour of the Assessee in view of the decision of the Tribunal for A.Y 2002-03 in Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of the Revenue is also dismissed. From the said finding of the Tribunal it is apparent that the Assessee has computed the profit for claiming deduction by taking tariff rate @ ₹ 4.45/unit as per the policy of APSEB. This rate of APSEB contains fixed charges which are not directly relatable to the captive plant. CIT(A) reduced this rate by deleting the surcharge and additional duty and worked out the unit rate @ ₹ 4.368. The Tribunal, therefore, confirmed the market rate/unit on the basis of the policy of APSEB as reduced by the surcharge, additional duty. Thus in view of the decision of this Tribunal for A.Y 2002-03, the Assessee, in our opinion, is entitled for deduction u/s 80IA in respect of the captive power undertaking but for the purpose of ascertaining the profit, market value should be taken in respect of the two power undertakings generating electricity. We noted that during the impugned assessment year the Assessee has claimed deduction u/s 80IA after determining the profit on the basis of the power tariff rate as per APERC i.e. ₹ 3.3643/unit. This includes demand charges, additional demand charges and variable charges. The AO reduced the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate computed on the basis of the tariff rate of APSEB but he recomputed the tariff rate @ ₹ 4.368/unit by disallowing certain duty elements which are unique to the State Government power undertakings. The Tribunal agreed with the views of the CIT(A). In this case, we noted that the AO has given a specific finding that the Assessee has provided amount of ₹ 223.86 lacs, ₹ 167.15 lacs and ₹ 19.9 lacs for Bhadrachalam plant, for power undertaking - II and for power undertaking -I, Kovai respectively in connection with the electricity duty on the units generated by the captive plant payable to the State Government but while computing the profit eligible for deduction for these units, these costs are not considered. CIT(A) simply allowed relief to the Assessee relying on the order of CIT(A) for A.Y 2002-03 and the order of the Tribunal. In our opinion, the cost of the electricity duty payable to the State Government has accrued during the year and has to be allowed as deduction while computing the profit of the eligible undertaking. This issue, in our opinion, had neither arisen during the A.Y 2002-03 nor has been decided by the CIT(A) or by the Tribunal. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR contended that the undertaking was a separate undertaking which was producing power in the form of steam which is being transferred to other undertakings at market rate which has been determined on the basis of the arms length analysis. We noted that the Delhi Bench of the Tribunal in SIAL SBEC Bioenergy Ltd. (supra) has held that steam is form of power and shall qualify for the benefit available u/s 80IA(4)(iv). Similarly, in the case of Maharaja Shree Umaid Mills. Ltd. (supra) the Hon'ble Tribunal took the view that there is no doubt that like electricity, steam is also a form of power. These decisions were rendered in the context of Sec. 80IA(4)(iv). Sec. 80IA(4)(iv) mandates that 'an undertaking which is set up in any part of India for generation or generation and distribution of power if it begins to generate power at any time during the period beginning on 1.4.1993 and ending on 31.3.2013 is an eligible undertaking.' Therefore, in our view if power is generated through steam and the undertaking complies with all other conditions as stipulated u/s 80IA, it will be an eligible undertaking for claiming the deduction. We may mention in this regard that the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for producing paper. We noted that when relevant amendment to Sec. 80IA was introduced, the Finance Minister expressed intention of introducing this provision. The relevant part of the speech is reproduced hereinbelow : 57. Electricity is a critical input for the future growth of our economy. I, therefore, propose to introduce a 5-year tax holiday in respect of the profits and gains of new industrial undertakings set up initially in India for either generation or generation and distribution of power. The 5-year tax holiday will begin from the year of generation of power. 58. The 5-year tax holiday in both these cases will be part of Sec. 80IA of the Income Tax Act and at the end of the 5-year period, these units will be entitled to existing deduction u/s 80IA for the remaining period. We have gone through the decision of the Hon'ble Madras High Court in the case of CIT v. Tanfac Industries Ltd. TC No. 1773 of 2008, dated 6-11-2008. We noted that in this case the Assessee was manufacturer of Flourene based chemicals wherein gas was captively consumed and the Assessee claimed benefit u/s 80IA. The Hon'ble High Court took the view that the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - I at Kovai was set up during the financial year relevant to A.Y 2006-07. The Assessee made claim for deduction amounting to ₹ 11,44,40,000/- during the impugned assessment year. The AO set off the brought forward notional loss relating to this unit for the purpose of determining the eligible profit from this unit. When the matter went before CIT(A), CIT(A) directed the AO not to set off the brought forward losses of the said undertaking. After hearing the rival submissions, we noted that this issue is duly covered in favour of the Assessee by the decision of Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills (P.) Ltd. v. CIT [2012] 340 ITR 477/21 taxmann.com 95 in which the Hon'ble High Court has held as under : Held, allowing the appeal, that there was no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). During the relevant period, there was no unabsorbed depreciation or loss of the eligible undertaking and these were already absorbed in the earlier years. There w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at so far as the issue relating to the eligibility of the claim is concerned, this issue is duly covered by the decision of this Tribunal in ITA No. 1054/Kol/2011 for A.Y 2007-08 in Assessee's own case in which this Tribunal vide its order dt. 4.3.2014 under para 5.1 has held as under : 5.1 We have heard the rival submissions and carefully considered the same. We have also gone through the provisions of Sec. 80IC. We noted that it is not denied by the Revenue that the eligible undertaking complies with all the other conditions. The deduction was not allowed to the undertaking merely on the basis that the undertaking was a captive undertaking and was supplying food items to other undertaking carried out by the Assessee. Looking into the provisions of Sec. 80IA(8) as is applicable to Sec. 80IC and as has been reproduced in the finding of CIT(A), we noted that goods and services are permissible to be transferred to other business by the eligible undertaking. In view of this, in our opinion, no interference is called for in the order of CIT(A) and CIT(A) has rightly allowed the claim of the Assessee. We, accordingly, confirm the order of CIT(A) on this issue. Thus, this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under the residuary head. Be that as it may, the question is first whether the interest paid can be allowed as a deduction. Since in the present case the interest was assessed as business income, it is necessary to consider the question whether the interest paid can be allowed as a deduction. The learned Judicial Member has held that it cannot be allowed under section 36(l)(iii) because there is no borrowing by the assessee. There can be no two opinions on the same in the light of the judgment of the Supreme Court in the case of Bharat Commerce Industries Ltd. [1998] 98 Taxman 151. In that case it was held that where the assessee paid tax under the Voluntary Disclosure Scheme in instalments with interest, the interest was not deductible under section 36(l)(iii) of the Act. 11. The next question is whether the interest can be claimed as a deduction under section 37(1) of the Act while computing the business income. On this question also, the judgment of the Supreme Court cited above is in favour of the department. It was also held in that judgment that interest levied for failure to pay advance tax up to the statutory percentage and interest levied for delay in filing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in shares as well as ₹ 23,83,87,373/- as tax free interest. The Assessee submitted that there was no expenses incurred directly for earning of the exempt income. However, it suo moto disallowed a sum of ₹ 37,90,800/- in revised claim. The AO took the view that the disallowance made by the Assessee has no relation with it's accounts and is therefore not correct. According to him, the primary onus is on the Assessee to identify such expenses on the basis of accounts maintained by him which relate to the exempt income. The AO in the absence of being satisfied with the Assessee took the view that the Assessee's case was duly covered by Sec. 14A(2) (3) and therefore he computed the disallowance u/s 14A read with Rule 8D(2)(iii) as under : Value of investment as on 01.04.2007 : ₹ 2855,69,00,000/ Value of investment as on 31.03.2008 : ₹ 2547,25,00,000/ Total : ₹ 5402,94,00,000/ The average of value of inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctures and should not be sustained. Reliance was placed in this regard on the following decisions : (i) CIT v. Walfort Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC) (ii) CIT v. Metalman Auto (P.) Ltd. [2011] 199 Taxman 149/336 ITR 434/11 taxmann.com 51 (Punj. Har.) (iii) Justice Sam P. Bharucha v. Addl. CIT [2012] 53 SOT 192/25 taxmann.com 381 (Mum. - Trib.) 7.2 The Ld. DR on the other hand relied on the order of the AO and contended that the AO has duly satisfied himself in pursuance of provisions of Sec. 14A(2) that it is a fit case with reference to the accounts of the Assessee. Our attention was drawn towards pg. 7, 8 and 9 of the assessment order and it was contended that once the AO is satisfied having regard to the accounts of the Assessee about the incorrectness of the claim of the Assessee, the AO is bound to determine the amount of expenditure incurred in relation to the dividend income by applying Rule 8D. Referring to the method adopted by the Assessee, it was submitted that the basis adopted by the Assessee is not correct and not in accordance with the principles as has been pronounced from time to time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. It is an undisputed fact that the Assessee has got tax exempt dividend income to the extent of ₹ 211,55,72,712/- from investment in shares and mutual funds and tax free interest of ₹ 23,83,87,373/-. The Assessee has computed the disallowance u/s 14A(2) to the extent of ₹ 2,52,700/- but subsequently revised it to ₹ 37,90,800/- as indirect expenses. The disallowance made consists of salary expenses to the tune of ₹ 16,92,688/-, overhead expenses to the tune of ₹ 20,98,097/-. In the earlier years since Rule 8D was not applicable, therefore, disallowance was made @ 1% on the total revenue. The AO was not satisfied with the correctness of the claim of the Assessee, especially the explanation of the Assessee that no administrative, managerial or estab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in Walfort Share Stock Brokers (P.) Ltd. (supra). In this decision we noted that the Hon'ble Supreme Court in that case upheld the view of the Hon'ble Mumbai High Court in the case of Walfort Shares Stock Brokers Ltd. v. ITO [2009] 310 ITR 421. The Hon'ble Supreme Court in this decision, at page-31 of the order held as under : To attract Sec. 14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec. 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.l4A cannot be invoked . 7.3.3 Similar issue had come up before the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. We noted that in this case the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-sec (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) (3) of sec.l4A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi) 7.3.5 The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exempted income merely because some i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. The salary, in our opinion, at the most, could have been apportioned in the ratio which the total investment bears with the total assets. No reason or explanation is either on record or explained to us by the Id. AR as to how the sum of ₹ 73,59,513/- was only been apportioned while the expenditure incurred in respect of this Department is ₹ 1,16,59,453/-. The AO, we noted, has also given a categorical finding in this regard about the incorrectness in the disallowance computed by the Assessee. The primary onus, in our opinion, lies on the Assessee to give the evidence and the material so that the AO can be satisfied. The material and evidences are in the possession of the Assessee. Therefore, the Assessee is duty bound to provide the same when an explanation is called for by the AO as to how he has computed the disallowance and how he has worked out the proximate relationship of the expenses with the total expenditure incurred by him with the investment made. Once the Assessee has submitted the evidences, the onus is on the AO and the AO is duty bound to record the reasons why he is not satisfied with the correctness of the claim of the Assessee in respect of such ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, this decision, in our opinion, will not assist the Assessee. 7.3.9 We have also gone through the decision in Champion Commercial Co. Ltd. (supra). We noted that in this case the grievance of the Assessee was that the disallowance should have been deleted in the entirety on the ground that the AO had not recorded specific satisfaction to the effect that the claim of the Assessee i.e. no expenditure was incurred on earning of tax exempt dividend, was incorrect. We noted that the facts of this case are different from the facts of the Assessee's case. In this case, the Assessee had not shown any expenditure being incurred against the exempt dividend income which was directly credited to the bank account of the Assessee and therefore he argued that the provisions of Sec. 14A cannot be invoked. On this question, the Tribunal took the view that the provisions of Sec. 14A r.w.r 8D has rightly been invoked. In the case of the Assessee, the Assessee claimed the expenses relatable to the exempt income. Therefore, this decision will not assist the Assessee. 7.3.10 We have also gone through the decision of the Mumbai Tribunal in the Raj Shipping Agencies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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