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TMI Blog2023 (8) TMI 1058X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by the assessee in the return of income. 2 Whether on the facts and under the circumstances of the case and in law, the Ld CIT(A) was justified in allowing the expenses incurred for replacement of meters as Revenue expenditure? 3. Whether on the facts and under the circumstances of the case and in law, the Ld CIT(A) was justified in allowing the proportionate apportionment and allocation of Head Office expenses while calculating deduction u/s 801A of the Act? 4. Whether on the facts and the circumstances of the case and in law, the Ld CIT(A) was justified in holding that the deduction u/s 80IA of the Act to the extent of gross total income computed and not against the net business income only? 5. Whether on the facts and the circumstances of the case and in law, the Ld CIT(A) was justified in deletion of disallowance made u/s. 14A of the Act while computing book profit u/s. 115JB of the Act? 6. Whether on the facts and the circumstances of the case and in law the Ld CIT(A) was justified in restricting the over valuation of coal price estimated by AO to 50% i.e. over valuation to be taken at 12%, instead of over valuation of coal price taken by AO at 24%. 2. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce should be made because assessee had surplus interest free funds of Rs. 17517.57 crores far exceeding the total value of tax free investments which was Rs. 11,444.74 Crores. However, ld. AO after discussing the assessee's submissions rejected all the contention. Ld. AO has though not disputed this fact that assessee had interest free funds, but he rejected the plea that no disallowance u/s. 14A can be made on the basis of decisions of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd reported in 313 ITR 340; and the two decisions of Hon'ble Bombay High Court in the case of HDFC Bank Ltd. reported in (2014) 49 taxmann.com 335; and (2016) 67 taxmann.com 42, stating that these judgment do not lay down the correct law and he finally, mechanically apply Rule 8D and worked out the disallowance at Rs. 238,59,77,646/- and after reducing suomoto disallowance of Rs. 13,92,89,519/- made disallowance of Rs. 224,66,89,126/-. 7. Before the ld. CIT(A), assessee had relied on the decision of the ITAT in its own case for AY 2013-14 and AY 2014-15, ld. CIT(A) Order for AY 2015-16 in its own case and Special Bench decision in case of ACIT v. Vireet Investments P. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs. Vireet Investments P. Ltd. (ITA No. 502/Del/2012) and C.O. No. 68/Del/2014) (SB) * Principal Commissioner of Income Tax v. GVK Project and Technical Services Ltd. [2019] 106 taxmann.com 181 (SC) * Principal Commissioner of Income Tax, Bangalore v. Sterling Developers (P) Ltd. [2021] 129 taxmann.com 116 (Kar HC) Principal Commissioner of Income Tax - 6 v. Kohinoor Project P. Ltd [2020] 121 taxmann.com 177 (Bom). With respect to the assessee's without prejudice contention that disallowance u/s. 14A ought to be restricted to exempt income earned by the assessee, reliance has placed on the following decisions * Principal Commissioner of Income Tax - 2 v. Caraf Builders & Constructions Pvt. Ltd. [2019] 112 taxmann.com 322 (SC) * Joint Investments Pvt. Ltd. Vs. CIT [2015] (59 taxmann.com 295) (Del.) (HC) * Principle Commissioner of Income Tax v. India Bulls Capital Services Ltd. (SC) [2020] 114 taxmann.com 647 * Principal Commissioner of Income Tax v. Reliance Chemotex Industries Ltd. [2022] 138 taxmann.com 199 (Cal HC) 10. Further, this issue of disallowance under section 14A has been decided by the ITAT in Appeal Nos. ITA No. 476/Mum-2022 and ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial) These meters have to be periodically replaced on account of obsolescence, reading of the meter becoming faulty, meter being burnt etc. Many times on account of manufacturing defects, the entire lot of meters has to be replaced. In the books of account, the assessee capitalizes the cost of these replaced meters as per the governing provisions of the Electricity Act, however in the computation of income, the expenditure incurred on replacement of meters is claimed as revenue expenditure since the replacement of meters only facilitates better reading and does not in any way enhance the capital assets or the quantity of power supply. The assessee has been claiming the expenditure on replacement of meters as revenue expenditure since AY 1999-2000 onwards. 14. Ld. AO held that expenditure incurred in replacement of meters is a capital expenditure and allowed depreciation thereon as against assessee's claim as "revenue expenditure". In sum and substance, his reasoning was that; firstly, that meters are distinct and separate item of expenditure which is different from wiring and switches involved in the same head of expenditure. Meter can be easily replaced, removed and repaired ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's business more effectively or more profitably. The replacement of meter does not increase the Assessee's generation or distribution capacity. In fact assessee replacing old meters by new meters which resulted in better readings of the electricity / current consumption and do not in any way enhance the capital assets or the quantity of power supply. Accordingly, the same is rightly claimed as revenue expenditure. Moreover, this issue has been covered by the decision of Hon'ble Bombay High Court in assessee's own case for AY 2006-07 to AY 2009-10 and also by ITAT Mumbai for AY 2002-03 to AY 2015-16. Accordingly, the disallowance of expenditure made by the AO in both the assessment years is hereby deleted." 18. Since this issue is squarely covered by the decision of the Hon'ble Bombay High Court in assessee's own case for A.Y. 2012- 13 to 2015-16 and therefore, consistent with the binding precedents of Jurisdictional High Court in the case of the assessee, the addition made by the ld. Counsel is admitted and ground No.2 raised by the Revenue is dismissed. 19. In ground No. 3 the Revenue has challenged the finding of the ld. CIT(A) on allocation of head office expenses for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Share of head office expenses Revised profit/dedn u/s 80IA A B = A/TO C=HO*B i. Power Distribution Unit 7203,56,94,524 0.5330242 171,57,07,942 385,6775,999 Total 171,57,07,942 385,67,75,999 7.1.6 Accordingly, the head office expenses to the extent of Rs. 171,57,07,942 are allocated to the unit and the deduction u/s 80IA of the said unit stands reduced to Rs. 385,67,75,999/-. 21. The ld. CIT (A) has allowed the assessee's ground of appeal for non-allocation of head office expenses for computing the eligible 80IA profits following the decision of CIT (A) in assessee's own case for AY 2015-16 and the decision of the ITAT in assessee's own case for AY 2013-14 and AY 2014-15. 22. Before us, ld. Counsel submitted that the head office expenses should not be allocated while computing the profits of the eligible 80IA undertaking. The profit of the eligible undertaking has to be worked out as if such undertaking was only the source of income during the previous year. Further, the deduction u/s. 80IA is allowable in respect of profits and gains "derived" from such business. The assessee had therefore claimed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income derived from the eligible 80IA undertaking. This deduction has been restricted to total taxable income of the assessee in accordance with section 80A(2) of the Act. The ld. AO in the assessment order has stated that the assessee's claim for deduction u/s. 80IA is to be restricted to the extent of business income instead of gross total income. He has further stated that since for the year under consideration, the assessee's claim for deduction u/s. 80IA as per revised return of Rs. 557,24,83,941 was lower than the business income of Rs. 1028, 45,30,159, the issue of restricting the deduction u/s. 80IA to business income does not arise. 28. The assessee had not raised the ground with respect to restricting the deduction u/s. 80IA to the extent of business income instead of gross total income since for the year under consideration the assessee's claim for deduction u/s. 80IA was lower than the business income. 29. Before us ld. Counsel submitted that though there was neither any decision by the CIT(A) nor any impact on the disallowance by the ld.AO, the department has still preferred an appeal on the ground of allowability of set-off of deduction u/s. 80IA against the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * ACIT vs. Vireet Investments P. Ltd. (ITA No. 502/Del/2012) and C.O. No. 68/Del/2014) (SB) * ACIT, Ward 10(2) v. Geometric Software Solutions Co. Ltd. [2022] 140 taxmann.com 647 (Mum. Trib) 34. The issue of disallowance u/s. 14A for computing book profits u/s. 115JB has been decided by the ITAT in Appeal Nos. ITA No. 476/Mum-2022 and ITA No. 2106/Mum-2022 for AY 2017-18 & AY 2018-19 respectively vide their order dated 23.03.2023 at para 78 on page 64 of the order as under: "78. Now coming to issue with regard to disallowance u/s. 14A while computing book profit u/s. 115JB in AY 2017-18. We find that this issue is covered by the decision of ITAT in assessee's own case for AY 2013-14 to AY 2015-16 wherein it was held that no disallowance u/s. 14A is required to be made for computing book profits u/s. 115JB. Apart from that, reliance was also placed in the case of ACIT vs. Vireet Investments P. Ltd. (ITA No. 502 /Del / 2012) and C.O. No. 68 / Del / 2014) (SB) and ACIT, Ward 10(2) v. Geometric Software Solutions Co. Ltd. [2022] 140 taxmann.com 647 (Mum. Trib). Accordingly, this ground is allowed." 35. Accordingly, in view of the ITAT order in assessee's own case which issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO the over valuation of coal has the effect of artificially raising the power tariff fixed by the respective state electricity regulatory commission. By overvaluing the coal imports, the cost of coal purchase have been enhanced which in turn is passed on to the ultimate consumers benefitting the power generation companies. The ld. AO based on the disallowance made in the re-assessment proceedings for A.Y. 2011-12 to A.Y. 2015-16 has added back inflated coal expenses of Rs. 21,38,59,853. The ld. AO has not confronted any adverse material and / or evidence to suggest the so-called inflation of expenses. AO then worked out the the average of % of overvaluation to the CIF value for F.Y. 2011-12 to F.Y. 2014-15 and applied the same to the declared CIF value for F.Y. 2015-16 to work out the disallowance. He has not accepted the assessee's contention that there is no inflation of coal expenses and has added back Rs. 21,38,59,853/-. 40. The ld. CIT (A) has restricted the disallowance to 50%, i.e. the over valuation of coal price has been taken at 12% thereby confirming the disallowance at Rs. 10,69,29,926. The CIT(A) has stated that the ld. AO has not brought out the probability that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt through tariff of electricity sold is offered for tax. Therefore, the disallowance of coal cost has resulted in taxing the recovery of coal cost without allowing the coal cost. Ld. Counsel pointed out that the Adjudicating Authority of Directorate of Revenue Investigation (DRI) had passed an order upholding the show cause notice of DRI for alleged over valuation of Indonesian coal imports in case of Knowledge Infrastructure Systems Pvt. Ltd. which was further challenged before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai by Knowledge Infrastructure Systems Pvt. Ltd. CESTAT vide its order dated 31.05.2018 in Order No: A/86617-86619 / 2018 has set aside the order passed by the Adjudicating Authority of DRI. The facts in case of Knowledge Infrastructure Systems Pvt. Ltd. are similar to the facts of assessee's case and accordingly the findings of the investigation report of DRI would not sustain in assessee's case also. The order of CESTAT dated 31.05.2018 was further challenged by the Additional Director General (DRI) Mumbai before the Bombay High Court. The Hon'ble Bombay High Court also vide their order dated 18.06.2019 in customs appeal no. 7 of 2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e traders raised invoices on the intermediary firms as per the LoAs issued by the latter to them. The Coal, however, was shipped directly from Indonesia to India. 8.3.2 The intermediary firms raised invoices on R-Infra at inflated price mentioned in the LoAs from the latter to the former It appears from the investigation done by Department of Revenue Intelligence that the intermediary firms were merely invoicing agents for facilitating invoice inflation. The intermediary firms appear to have received remittances towards value of invoices raised on the assessee in India, which included the over-valued portion of the price. 8.3.3 Looking at the above case from the perspective of normal commercial prudence and due diligence, payment of such huge amounts running into more than few crores over and above the actual value of the goods appears to be unusual and highly Irregular. When the actual suppliers were selling the Coal, at a much lower value, no prudent business entity would pay so much more than the actual value of the goods to intermediary firms with no known bonafide value addition and more so by foregoing the duty benefit available to the imported goods on production of ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gotiating with actual suppliers in their office at Mumbai and elsewhere by interacting with them. 8.3.6. The conduit companies i.e. Intermediary Firms that have been used are as mentioned below, 1 Reliance Natural Resources Ltd. (RNRL); 2. Larimar Holdings Ltd., Jersey ("LHL"): A British crown dependency and tax haven. 3 3.Epic Alloy Steel Pvt. Ltd, Raigarh, 4. Century Exports Ltd., Hong Kong. ("CEL"): Tax haven, 8.3.7 In respect of the Coal imported by assessee, documentary evidence (Invoices of actual suppliers etc.) pertaining to back-to- back transaction between the intermediary firms and the actual suppliers in relation to consignments imported by assessee are available, based on which the actual value of the Coal invoiced by the Intermediary firms for individual consignments could be estimated. The extent of what appears as artificial inflation of value by the intermediary firms in their invoices, during F.Y.2010-11 to FY.2014-15, is at Column (6) and (7) of the Table below: Sr. No. Name of Importer No.of Vessels Declared CIF Value Rs. Actual Value Rs. Difference Rs. % Inflation 1 2 3 4 5 6 7 1 R-Infra 37 8,60,46,25,154 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to power generating companies: 8.3.11 Based on the data for the earlier years, extent of over-valuation for A.Y 2016-17 relevant to FY 2015-16 is worked out as under: FY Declared CIF value (Rs.) Extent of Over Valuation % of Over Valuation to declared CIF value 2011-12 2,48,63,51,806 32,87,01,976 13% 2012-13 28,41,06,769 6,52,20,632 23% 2013-14 2,35,05,52,646 67,44,36,930 29% 2014-15 52,43,67,834 16,85,39,090 32% Average to be considered for AY 2015-16 24% Declared CIF value for FY 2015-16 89,10,82,719 Extent of Over-valuation @24% 21,38,59,853 9. As discussed above in summary of interconnectedness among the buyers and their authenticity, it is clear that all the buyers have been pre-arranged. If one puts together and sees in totality all that has been discussed above, which is nothing but pure, unadulterated marshalling of hard facts, there emerges undeniable and concrete evidence to suggest that the purchase of coal of Indonesian origin through intermediaries was nothing but a colourable device, rather an outright sham scripted and executed for the purposes of reducing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tains to A.Y.2011-12 to 2015-16 and moreover, no final conclusion or any order has been passed in the case of the assessee therein and it is still at show-cause notice stage. 49. Here in this case, the cost of coal is otherwise an integral part of determining the tariff price and the cost of coal are tariff price and the cost of coal already recovered as part of tariff from the consumers has been credited to the profit and loss account and tariff of electricity sold has already been offered for tax. Though ld. Counsel has pointed out that based on similar show- cause notice issued by the DRI for alleged over valuation of Indonesian coal imports in case of Knowledge Infrastructure Systems Pvt. Ltd., CESTAT has already set aside the order passed by the adjudicating authority of DRI and finally that CESTAT order has also been confirmed by the Hon'ble Bombay High Court, in the sense that the Hon'ble Court has held that appeal was not maintainable. If the ld. AO is heavily relying upon report of the DRI on similar information, then the same has no legs to stand because CESTAT Mumbai in the case of Knowledge Infrastructure Systems Pvt. Ltd has already set aside the order of the adjudica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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