TMI Blog2019 (4) TMI 1840X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. CIT(A),therefore after considering the material fact that interest earned on loan and advances from deposit placed with Mega Power Project towards its sharing of power and interest of UL pool account received from M/s. Power Grid Corporation India Ltd were directly related to the business of the assessee ,therefore, this ground of appeal of the Revenue stands dismissed. Disallowance of provision made of employees cost - enhancement of the Book Profit computed under section 115JB on account of disallowance of Expenses - The assessee company has claimed an estimated liability of ₹ 3339.00 lacs being employee cost and accounted the same on accrual basis. The assessing officer has disallowed the impugned claim on the ground that additional liability was yet to be ascertained. With the assistance of ld. representatives, we have gone through the material on record and it is noticed that the assessee company has made this provisions for arrears payable to the employee for the purpose of wage revision to be made according to the 6th Pay commission. The assessee has stated that the employee s union has submitted their charter of demands and negotiations with the unio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(3) 143(3) r.w.s. 147 of the Income Tax Act, 1961; in short the Act . All the grounds of appeals filed by the revenue and filed by the assessee involved a number of common issues therefore for the sake of convenience all these appeals are being adjudicated together by this common order. At the outset we start with the appeal of the revenue filed vide ITA No. 3358/Ahd/15 for the assessment year 2008-09 as under:- 2. The fact in brief is that assessment u/s. 143(3) of the act was completed on 30th December, 2010 determining the total income at Rs. Nil after setting off of brought forward loss/depreciation of ₹ 137,08,55,763/-. The book profit u/s. 115JB of the act was determined at 155,29,39,190/-. Subsequently, the case was re-opened u/s. 147 of the by issuing notice u/s. 148 of the act on 27th march, 2012. Further facts of the case are discussed while adjudicating different grounds of appeals as under:- ITA No. 3358/Ahd/2015 filed by revenue, Assessment Year 2008-09 3. The revenue has raised following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 40(a)(ia) of the IT Act without appreciating the fact that the amount was actually paid and section 40(a)(ia) is not applicable to amounts already paid before the end of the financial year under consideration. The learned Assessing Officer also failed to appreciate that the Hon'ble ITAT, Ahmedabad in the appellant's own case for earlier years has held that the transmission charges are not liable to TDS under the IT Act, 1961. 7.1. The AO in her order has stated as follows: (5.0) Non Deduction of TDS: During the course of assessment proceedings, it was found that the assessee company paid ₹ 629,26,15,912 to Gujarat Energy Transmission Company Ltd(GETCO) being Transmission Charges. As per the provision of section 40(a)(ia) of IT Act the whole expenditure on which TDS was not made are required to be disallowed. The assessee company vide letter dated 07.01,2013 issued show cause notice as to why the same expense should not be disallowed. The assessee company submitted its written reply which is reproduced as follows: It is submitted that the issue relating to the disallowance of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable where expenditure is paid. It is applicable only in cases where the payments are due and outstanding. Section 40(a)(ia) otherwise being a legal fiction needs to be construed strictly in view of Supreme Court decision in case of CIT vs. Mother India Refrigeration Industries Pvt. Ltd. 155 ITR 71. The CBDT in Circular No. 5/2005 dated 15-07-2005 has also clarified that the provision of section 40(a)(ia) is to augment compliance of TDS provisions in case of residents and curb bogus payment to them. In our case the payments are not in dispute and we have actually made payment of the expenditure. Reliance is also placed on the decision of ITAT Jaipur in case of Jaipur Vidyut Vitran Nigam Ltd. Vs. ITO (TDS) wherein the said views have affirmed by the Tribunal. Hence the provisions of section 40(a)(ia) of the Act are not applicable and no disallowances are warranted. 1.2. It is also submitted that that in the appellant's own case for the Asst. Year 2007-08 to 2009-10, the Hon'ble ITAT, Ahmedabad vide its order dated 14- 12-2012 has categorically held that the no TD5 is liable to be deducted on the Transmission Charges payable by the Company. It may be noted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee for transmission of electricity can be said to be in the nature of technical services so as to attract the provisions of deduction of tax u/s 194J? 8.1. In the case of Jaipur Vidyut Vitran (supra) the Jaipur Tribunal has concluded as under: Assessee, an electricity distribution company, was not liable to deduct tax at source under S.194J from the payment of transmission/SLDC charges to the transmission company RVPN as the operation and maintenance of transmission lines by RVPN and the user of these lines by the assessee for transmitting energy does not result in any technical services being rendered to the assessee, apart from the fact that the payment of transmission/wheeling/SLDC charges is reimbursement of the cost and, therefore, the payments could not be disallowed under s.40(a) (ia); provisions of s.40(a)(ia) are not applicable also for the reason that they apply only when the amount is payable i.e., due whereas the assessee has made actual payment. 8.2 In the case of Maharashtra State Electricity Distribution (supra) the Mumbai Tribunal has relying on the decision in the case of Jaipur Vidyut has held that wheeling and transmiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been controverted by the Revenue by bringing any contrary material on record, therefore,, respectfully following the decision of the Co-ordinate Bench, we do not find any merit in the ground of the appeal of the Revenue, therefore, this ground of appeal is dismissed. Ground No. 2 (Treating interest income of ₹ 13352.48 lacs as business income instead of income from other sources) Ground No. 3 of ITA 3359/Ahd/2015 7. As the facts in both the grounds of appeals are similar, so, we take 2nd ground of ITA No. 3358/Ahd/2015 as lead case and its findings will also be applicable to ground no. 3 of ITA no. 3359/Ahd/2015. 8. During the course of assessment, the assessing officer noticed that as per schedule 14, the assessee has shown other income consisting of interest on loan and advances, incentives from CPSU, cash discount, gain on sale of fixed assets, gain on foreign exchange fluctuation and miscellaneous income etc. amounting to ₹ 13352.48 lacs. The assessing officer was of the view that these income was to be assessed as income from other sources instead of business income shown by the assessee. On query, the assessee explained that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Commission based on the provisions of Accounting Standards and generally accepted accounting principles. 2. The learned Commissioner of Income Tax (Appeals) has erred in law and facts in confirming the enhancement of the Book Profit computed under section 115JB of the Income Tax Act, 1961 on account of disallowance of Expenses of ₹ 3,39,00,000/- being provision made for arrears payable to the employees pending the decision of 6th Pay Commission. 3. The learned Commissioner of Income Tax (Appeals) erred in law and facts and has confirmed the disallowance of prior period expenses of ₹ 2,28,558/- being power purchase on the ground that the same is not an allowable expense. The learned Commissioner (Appeals) has further erred in law and facts in confirming the disallowance of depreciation of ₹ 18,77,000/- and Interest and finance charges ₹ 1,72,56,000/- accounted as prior period expenses without appreciating the fact that such expenditure crystallized during the year. The learned Commissioner (Appeals) has erred in law and on facts in enhancing the disallowance of prior period expenses on account of Administrative and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been furnished by the appellant either during the course of the assessment proceedings or during the course of the appellant proceedings. In view of this, disallowance of this provision is confirmed as per the normal provisions as well as u/s 115JB also, since the liability did not crystallize in this year. 14. We have heard rival contentions on this issue and perused the material on record. The assessee company has claimed an estimated liability of ₹ 3339.00 lacs being employee cost and accounted the same on accrual basis. The assessing officer has disallowed the impugned claim on the ground that additional liability was yet to be ascertained. With the assistance of ld. representatives, we have gone through the material on record and it is noticed that the assessee company has made this provisions for arrears payable to the employee for the purpose of wage revision to be made according to the 6th Pay commission. The assessee has stated that the employee s union has submitted their charter of demands and negotiations with the union representatives were in progress during the year. The Ld. Counsel has submitted that identical issue has been decided in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance of the claim of the assesses on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and cyrstalised in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect or any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gain of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form against the prior period income of the same nature. Accordingly, period expenses amounting to ₹ 130.35 Lakhs had already been netted off with period income and then the expenses were debited in the profit and loss account. Accordingly, the AO had proposed for enhancement of the income by this amount. The AO's report had been confronted with the appellant and in the rejoinder to the remand report, the submission has been made in this regard. The appellant had also failed to establish that the administrative^ expenses debited in the profit and loss account had crystallized during the course of the current year. Under such circumstances, the entire administrative expenses in the nature of prior period expenses are required to be disallowed. Hence, the disallowance made in this regard is enhanced by this amount of ₹ 130.35 Lakhs. 6.4.5. Besides, the prior period income has crystallized in the current year itself as the appellant has not made any submission in this regard. Thus, it is an admitted fact. Moreover, the prior period expenses have not been incurred for earning such prior period income and hence, no set off of such expenses against such income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture claimed by assessee, the advantage being of enduring in nature. (iv) deleting addition of ₹ 187.91 lacs being interest income earned treated as income from other sources, without appreciating the fact that such income was purely interest, not been derived from business activities carried out by asaessee, (v) deleting the addition of ₹ 167.56 lacs made u/s 14A of the IT Act while computing income u/s 115JB of the IT Act, ignoring the fact that the same is covered under Clause (f) of Explanation 1 to Section 115JB(2) of the IT Act as held in the case of Dabur India Ltd. Vs. ACIT (2013), 37 taxmann.com 289 (Mum) Ground No. 1. (Disallowance of ₹ 167.56 lacs u/s. 14A r.w. rule 8D of the IT Rule ), Ground No. 5 (Deleting addition of ₹ 167.56 lacs u/s. 14A while computing income u/s. 115JB of the act), Ground No. 1 of 3338/Ahd/2015, Ground Nos. 1 4 of 3359/Ahd/2015, Ground No. 1 of 3360/Ahd/2015, Ground No. 1 of ITA No. 2014/Ahd/2015 and Ground No. 1 of ITA No. 3339/Ahd/2015, 3438/Ahd/2015 20. In respect of computing income u/s. 115JB of the act, raised in ground no. 5, the disallowance u/s. 14A of the act amountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be said that assessee was having own interest free fund. It was further stated that assessee has failed to substantiate that no interest bearing borrowed funds were used for investment activity. The assessing officer has not accepted the explanation of the assessee that it has offered dividend income for taxation purpose on the ground that same was considered only for the MAT provisions. Therefore, the assessing officer has computed the disallowance of expenses for income not included in the total income as per rule 8D and disallowed an amount of ₹ 167,56,08,000/- u/s. 14A of the act. 23. Aggrieved assesse has filed appeal before the ld. CIT(A). The ld. CIT(A) has directed the assessing officer to compute the disallowance u/s. 14A r.w. Rule 8D after excluding interest amounting of ₹ 124.26 crores and investment in the subsidiary companies amounting to ₹ 128.28 cores. The relevant part of the decision of ld. CIT(A) is reproduced as under:- 3.3 The reasons for making disallowance of ₹ 167.56 crores u/s 14A read with Rule 8D as mentioned by the AO in the assessment order as well as above submission of the appellant's AR have been cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition of shares was in the form of investment and only benefit the assessee derived therefrom was dividend income not assessable under the Act, disallowance u/2 14A was squarely attracted. In view of this, appellant's contention that disallowance was made u/s 36(l)(iii) till AY 2006=07, investment in shares was under Financial Restructuring Plan approved by Government of Gujarat, i.e. investments were for commercial expediency, investments were strategic investments to maintain control of business, no dividend income or meager dividend income was earned from such shares in subsidiaries etc. are not tenable. Appellant's contention that investments in subsidiaries were as per notified balance sheet as on 1.4.2005 by Government of Gujarat, which was accepted by appellant company as it is and the loans etc. were prior to such notification, due to which investments in shares of subsidiaries could not be said to be out of borrowed funds is now taken up. Part of the loans appearing on appellant's balance sheet were in fact raised by erstwhile GEB for acquisition of capital assets for generation, transmission of electricity etc. Under the Financial Restructuring Plan, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (CentraI)-I by Hon'ble High Court of Calcutta (2011) 12 taxmann.com 227 (Cal)-that mere fact that shares were old ones and not acquired recently was immaterial; it was for assessee to show by production of materials that those shares were acquired from funds available in its hand at relevant point of time without taking benefit of any loan and since no such material was produced by the assessee, disallowance of proportionate amount of interest having regard to total income and exempt source was justified. Appellant's contention regarding investments being old and out of interest free funds etc. is therefore not tenable and it is a case falling u/s 14A(2) of the Income tax Act requiring determination of expenditure to be disallowed as per Rule 8D of Income tax Rules. Assessing 2~,cer has apportioned entire interest of ₹ 13122.56 lakhs under Rule 5D(2)(ii); however, the interest to be apportioned under clause (ii) of Rule 5D(2) is ...... interest during the previous which is not directly attributable to any particular income or receipt..... . As per details submitted by appellant, interest of ₹ 167.48 crore was directly attributable to its business of bulk purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in relation to working capital loans for power trading business etc. of the appellant. 3.5 Besides, the appellant has also been able to establish that investments in equity shares made during the current year amounting to ₹ 1280.28 crores in the shares of subsidiary companies were made out of grants received from the State Government of Gujarat. In view of this it can be said that no borrowed capital has been utilized for making these investments. Considering these facts, the investments in subsidiary companies amounting to ₹ 1280.28 crores cannot be considered for making disallowance out of interest funds, but the same has to be considered for making disallowance out of administrative expenses. 3.6 In view of the discussion as made in just earlier paragraphs, the AO is directed to compute the disallowance u/s 14A read with Rule 8D by excluding the interest of ₹ 124.26 crores and also by not considering the investments in subsidiary companies amounting to ₹ 1280.28 crorers. 24. We have heard the rival contentions on this issue. During the assessment, the assessing officer noticed that the assessee has earned exempt dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes. In the light of the above facts and findings following the decision of the coordinate bench as referred avobe we restore this issue to the file of the assessing officer for deciding a fresh as directed in the above cited decision. Therefore, this ground of appeal of the assessee is allowed for statistical purposes. Ground No. 2 (Addition of ₹ 3705 lacs made on account of capital grant being made @ 15% of the total grant of ₹ 2500 lacs), Ground No. 4 of ITA No. 3438/Ahd/2015, Ground No. 6 of ITA No. 3359/Ahd/2015 and Ground No. 3 of ITA No. 3360/Ahd/2015 25. As the facts in all the four grounds of appeals are similar, so, we take 2nd ground of ITA No. 1988/Ahd/2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 27. Aggrieved assesse has filed appeal before the ld. CIT (A). The ld. CIT (A) has allowed the appeal of the assessee. The relevant part of the decision of ld. CIT (A) is reproduced as under:- 6.3 I have considered the facts of the case as well as above submission of the appellant. The appellant has received the capital grant for making investment in equity capital of subsidiary companies. Since the appellant has not acquired any fixed assets, on which depreciation has been claimed and therefore such grants cannot be reduced from the cost of fixed asset of the appellant company. In this circumstance the disallowance of ₹ 37,50,000/- as made by the AO of the 15% of the capital grants is not correct. Accordingly, the same is deleted. Thus, the ground of appeal no. 5 of the appellant is allowed. 28. We have heard the rival contention and produced the material on record on this issue. During assessment, the assessing officer has stated that the asssessee has not received the grant or subsidy during the year but was of the view that the subsidy or grant which was received in earlier years were to be taken to the revenue or to be reduced from the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid amount of grantee fee was paid to the Govt. of Gujarat for the loan raised by erstwhile GEB and the same was allocated to GUVNL post restructuring of GEB. It was further explained that payment of grantee fee was an annual recurring expenditure and not a one-off transaction and the benefit of grantee fee paid was derived for that year only and for not subsequent years. The assessing officer has not accepted the explanation of the assessee and she was of the view that assessee had derived all the benefits in the form of restructuring of the debit, rescheduling of repayment schedule, reduction in interest etc. therefore, treated the entire expenditure pertaining to CDR as capital expenditure and added to the total income of the assessee. 31. Aggrieved assesse has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is reproduced as under:- 7.3 The reasons as mentioned by the AO in the assessment order for making addition of ₹ 3,34,00,000/- being guarantee fees as well as above submission of the appellant have been considered. In this regard it is mentioned that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to our noticed that identical issue on similar facts has been adjudicated by the Co-ordinate Bench in favour of the assessee Vide ITA No. 837/Ahd/2012 for assessment year 2008-09. The relevant part of the decision is reproduced as under:- 38. We have heard the rival contentions and perused the material on record and gone through the decision referred and relied upon by both the parties. Through this ground Revenue has challenged the action of ld. CIT(A) deleting the disallowance of guarantee fees at ₹ 4.76 crores. 39. We observe that ld. AR has referred and relied on the decision of the co-ordinate bench in the case of Gujarat Energy Transmission Corpn. Ltd. (supra), wherein similar issue regarding the claim of guarantee fees paid to Government of Gujarat has been dealt with by the Tribunal as to whether the guarantee fees is an expenditure of capital in nature or revenue in nature and has observed as under :- 35. We find that the Tribunal in its order dated 8.5.2015 cited supra has held as under: 6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (₹ 8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent on stamp duty, lawyer fees, etc. for obtaining loan secured by charge on its fixed assets is a revenue expenditure, because the transactions were entered into directly to facilitate the business of the company and payment of consultancy charges was made on ground of commercial expediency.In India Cements Ltd. vs. CIT, 60 ITR 52, the Supreme Court had also held that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of ₹ 45,24,582/-, which is directed to be deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystallized during the year. Ground No. 2 (Disallowance of prior period expenses) 35. During assessment, the assessing officer noticed that assessee itself disallowed prior period expenses to the extent of ₹ 6.53 crores whereas it has claimed prior period expenses of ₹ 661.29 lacs. Therefore, the assessing officer has disallowed the remaining amount of ₹ 7.60 lacs as the assessee was following mercantile system of accounting. However, the ld. CIT(A) has observed that prior period expenses of ₹ 653.69 lacs after setting off the prior period income of ₹ 7.60 lacs was not added back by the assessing officer therefore the assessee was show caused to explain why not the prior period expenses be enhanced by the above amount of ₹ 653.69 . The assessee has explained that no disallowance can be made on account of prior period expenses and it was further submitted that it has already filed detailed submission from time to time on this issue. After considering the submission of the assessee prior period expenses to the amount of ₹ 12.17 lacs claimed under the head employee cost was deleted considering the same was crysta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.00 iv. Admin Expenses 39.39 Lakhs v. Other Adjustments relating prior period 16.96 Lakhs Accordingly, the assessee company had debited a net Prior Period expense of ₹ 653.69 Lakhs to the Profit Loss a/c, as per in schedule 21. 2) As per the submission of the assessee dated 18/10/2013 the details of prior period income and expenditure is as follows: I Prior Period Income - 7.60 Lakhs Reversal of excess Provisions made for Wage revision in 2008-9 512840.00 Excess provision credited for printers by Stores Dept. in FY 2008-091rectified 242661.12 Excess provision crocheted for fax machines 4590.00 By stores Dept. in FY 2008-09 rectified 760091.12 II) Prior Period Expenditure 661.29 Lakhs i. Power Purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passed on 26/03/2008. Therefore it is seen that, if at all, the liability had crystallized earlier and not during the concerned assessment year. ii) Other Adjustments ₹ 16.96 lacs As per the assessee's submissions-dated 18/10/2003 the same is on account of certain charges paid during the year as the invoices were received during the year or the amount was finally passed apprdved for payment during the year on completion of the work. However, it is clear that, as per mercantile system, even if the invoices are received later in the-period, the expenses are accounted for in the period to which such invoices pertain and not in the year in which the invoices are received. Therefore, plea of the assessee that invoices were received during AY 201011, does not hold good. Considering the facts as mentioned above, your honour may decide the issue on the merits of the case. The ld. CIT(A) has observed at para. 24 of his order that the assessing officer has not made any comment at all on merit in her remand report in respect of prior period expenses of ₹ 12.17 lacs being employee cost and prior period expenses of ₹ 38.39 lacs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate proceedings. (iii) The assessing officer has failed to give any findings as required in the remand report by the ld. CIT(A) (iv) Under the aforesaid circumstances, the ld. CIT(A) has framed his own opinion on the basis of limited details and verification but without specific finding in support of disallowance of prior period expenses. In view of the aforesaid material facts, we are of the view that it will be appropriate to restore this issue to the file of assessing officer for deciding de-novo after verification/examination of the complete details with specific findings/reasons after affording adequate opportunities to the assessee. The assessing officer is also directed to consider judicial pronouncements referred by the assessee on this issue vide ITA No. 996/Ahd/2011 page 113/6 GUVNL vs. ACIT assessment year 1998-99 and ITA No. 573/Ahd/2016 CIT vs. Adani enterprises Ltd. (Guj) page 16-18. Therefore, this ground of the assessee is allowed for statistical purposes. Ground No. 3 (Disallowance of depreciation of computer of ₹ 26.93 lacs) 36. During assessment, the assessing officer that assessee has claimed depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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