2010 (9) TMI 1150 - AT - Income Tax

Issues Involved:
1. Reduction of depreciation claim.
2. Disallowance of deduction under section 80IA.
3. Denial of deduction under section 80IB on DEPB Credit.
4. Reduction of profits on account of sale proceeds of DEPB license while calculating deduction under section 80HHC.
5. Adjustment to the Arm's length price.
6. Invocation of Chapter X provisions without demonstrating tax avoidance.
7. Reference to Transfer Pricing Officer (TPO) without providing an opportunity of being heard.
8. Validity of approval granted by CIT under section 92CA(1).
9. Levy of interest under sections 234B and 234C.
10. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Reduction of Depreciation Claim:
The assessee's claim for depreciation was reduced by the AO from Rs. 40,80,04,483/- to Rs. 37,27,25,696/-. The AO's decision was based on the findings from AY 2001-02, where depreciation was allowed despite the assessee not claiming it. The CIT(A) upheld this reduction, and the ITAT confirmed the decision, citing the Special Bench decision in Vahid Paper Converters vs. ITO and the assessee's own case for AY 2003-04. The tribunal concluded that depreciation must be deducted while computing profits and gains for Chapter VI-A deductions, irrespective of whether the assessee opted for it.

2. Disallowance of Deduction Under Section 80IA:
The AO disallowed the deduction under section 80IA on the profits from the New Power Plant, citing the transfer of previously used machinery, which contravened section 80IA(3)(ii). The CIT(A) upheld this disallowance, and the ITAT confirmed the decision, referencing the assessee's own case for AY 2003-04. The tribunal found that the new turbine installed by the assessee did not constitute a new industrial undertaking but was merely an expansion of the existing unit.

3. Denial of Deduction Under Section 80IB on DEPB Credit:
The AO denied the deduction under section 80IB on DEPB benefits amounting to Rs. 3,65,34,766/-, following the jurisdictional High Court's decision in India Gelatine & Chemicals Ltd. The CIT(A) upheld this decision. The ITAT, referencing the Supreme Court decision in Liberty India vs. CIT, concluded that DEPB benefits are not profits derived from the business of the industrial undertaking and thus not eligible for deduction under section 80IB.

4. Reduction of Profits on Account of Sale Proceeds of DEPB License:
The AO did not increase eligible profits by 90% of the profits on the sale of DEPB licenses due to the assessee's failure to meet the conditions in the third proviso to section 80HHC. The CIT(A) upheld this decision. The ITAT, referencing the Bombay High Court decision in Kalpataru Colours & Chemicals, held that the entire amount received on the transfer of DEPB credit falls under section 28(iiid) and is not eligible for deduction under section 80HHC as the assessee did not fulfill the stipulated conditions.

5. Adjustment to the Arm's Length Price:
The AO made an adjustment of Rs. 1,82,97,194/- to the total income based on the arm's length price of international transactions. The CIT(A) upheld this adjustment. The ITAT, referencing the assessee's own case for AY 2003-04, remanded the issue back to the AO for fresh consideration, emphasizing the need for the assessee to justify the arm's length nature of the transactions with adequate documentation.

6. Invocation of Chapter X Provisions Without Demonstrating Tax Avoidance:
The assessee contended that the AO invoked Chapter X provisions without prima facie evidence of tax avoidance. The CIT(A) upheld the AO's action. The ITAT did not provide a separate ruling on this issue but included it in the remand for the adjustment of the arm's length price.

7. Reference to Transfer Pricing Officer (TPO) Without Providing an Opportunity of Being Heard:
The assessee argued that the AO referred the case to the TPO without giving an opportunity to be heard. The CIT(A) upheld the AO's action. The ITAT included this issue in the remand for the adjustment of the arm's length price.

8. Validity of Approval Granted by CIT Under Section 92CA(1):
The assessee challenged the validity of the approval granted by the CIT, arguing it was mechanical and without due diligence. The CIT(A) upheld the approval. The ITAT included this issue in the remand for the adjustment of the arm's length price.

9. Levy of Interest Under Sections 234B and 234C:
The CIT(A) upheld the levy of interest under sections 234B and 234C. The ITAT dismissed the ground, citing the mandatory nature of these interest provisions as affirmed by the Supreme Court in Anjum M. H. Ghaswala and other cases.

10. Initiation of Penalty Under Section 271(1)(c):
The CIT(A) upheld the initiation of penalty proceedings under section 271(1)(c). The ITAT dismissed this ground, stating that mere initiation of penalty proceedings is not appealable.

Conclusion:
The ITAT upheld the majority of the AO and CIT(A)'s decisions, with specific remands for fresh consideration on the adjustment to the arm's length price. The decisions were largely based on precedent cases and higher court rulings, ensuring adherence to established legal principles.

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