2013 (9) TMI 535 - AT - Income Tax

Disallowance of Commission - Held that - similar commission was allowed by the A.O. in A.Y. 02-03, total turn over had gone up during the year - The Board had increased the salary on the basis of extensive knowledge, business skill, managerial experience and capability increasing in net profit and commercial expediency - The Revenue had not brought any material on record which contradicts the factual finding of the year under consideration to A.Y. 03-04 Decided in favour of Assessee. Disallowance of Deduction u/s 80IA - Held that - The market value for electricity would be one at which it was supplied by GEB to other assessees inclusive of duty - Therefore, the rates taken by the assessee for the purpose of supplying electricity from CPP unit to general unit is upheld. The assessee succeeds on this point - Following ACIT vs. Jindal Steel & Power Ltd. 2007 (6) TMI 308 - ITAT DELHI - the market rate postulated by section 80IA (viii) shall be the price at which the assesses purchases electricity from the Electricity Board - the market value postulated by the provisions of section 80IA shall be the price at which the assessee purchases electricity from Electricity Board and not the one which is fixed by the legislative mandate Decided in favour of Assessee. Adjustments u/s 145A - Addition on Account of Modvat Credit in Opening Stock and Closing Stock Held that - Section 145A has been amended and as per Section all the taxes or cess whatever name it was called is to be added in the valuation of the closing stock in preparing the accounts of the appellant Following COMMISSIONER OF INCOME TAX Versus MAHAVIR ALLUMINIMUM LTD. 2007 (11) TMI 41 - HIGH COURT, DELHI - The A.O. only added excise duty / modvat credit in purchase, sale and closing stock but had not allowed any adjustment in opening stock decided in favour of Assessee. Addition of Book Profits u/s 115JB Dividend Stripping u/s 94(7) Held that - As per Section 94(7), any loss on security or unit was to be ignored for the purposes of the computing his income chargeable to tax where the transactions made within a period of 3 months prior to the recorded date and sales these securities within 3 months or within 9 months after such date. Ld. A.O. had given details of security purchased and sold in the assessment order, which were made within 3 months before the recorded date - The Explanation (f) of Section 115JB was clearly applicable in case of the appellant - The amount or amounts of expenditure relatable to any income to which Section 10 (other than the provisions contained in Clause (38) thereof) or Section 11 or Section 12 applied is to be increased by him Decided against Assessee. Notional Disallowance u/s 14A Interest Expenses u/s 115JB - The matter had been already allowed by the CIT(A), particularly, on the calculation of interest which had been accepted by the ld. Counsel in his argument. Therefore, the issue was restored back to the A.O. to re-calculate the disallowance as per the submission made by the appellant - The appellant had borrowed funds which were interest bearing - Therefore it can be said that if there were surplus funds then the appellant could have reduced its interest burden and by not doing so it was very clear that the interest bearing funds were in fact utilized for the purpose investment and therefore the disallowance of interest for earning of dividend income u/s.14A is in order. Disallowance of Depreciation - Held that - The appellant had changed the method of depreciation in A.Y. 02-03, which had been accepted by the department - Now he had changed the method of depreciation from SLM to WDV method on Vareli as well as Jolva power plant - As per sub-section 2 of Section 115JB, the appellant can adopt the method and rate for calculating the depreciation, this shall be same as have been adopted for the purpose of preparing such account including P&L Account and laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956, which was conducted on 28.09.2004 by the Management - on adjustment u/s. 115JB, it was held that the A.O. doesn t have any power to make adjustment except provided in Section 115JB itself - Thus, we direct the A.O. to calculate thebook profit u/s. 115JB on the basis of depreciation WDV method.

Issues Involved:
1. Disallowance of Commission Expenditure
2. Disallowance of Deduction under Section 80IA
3. Addition to Opening and Closing Stock under Section 145A
4. Addition to Book Profits under Section 115JB
5. Notional Disallowance under Section 14A
6. Disallowance of Depreciation due to Change in Method
7. Non-Admission of Additional Grounds of Appeal
8. Under-Valuation of Work-in-Progress
9. Estimation of Profits and Rejection of Books under Section 145

Detailed Analysis:

1. Disallowance of Commission Expenditure:
The assessee was disallowed an expenditure of Rs. 93 lacs paid as commission to its directors. The AO held that the expenditure was not incurred wholly and exclusively for business purposes. The CIT(A) confirmed the AO's decision, citing lack of evidence of services rendered by the directors. On appeal, the ITAT allowed the assessee's claim, referring to a previous decision in the assessee's favor for a similar issue in AY 2003-04, where the commission was deemed justified based on the directors' contributions to the company's growth.

2. Disallowance of Deduction under Section 80IA:
The AO disallowed Rs. 2,47,57,900 claimed under Section 80IA for power generation, arguing that certain charges included in the transfer value of power were not applicable. The CIT(A) upheld this view, stating that demand charges, time use charges, and other charges were not relevant for captive power plants. However, the ITAT reversed this decision, relying on precedents that allowed the market rate for electricity supplied by GEB to be considered for 80IA deductions.

3. Addition to Opening and Closing Stock under Section 145A:
The AO added Rs. 84,11,949 to the opening stock and Rs. 1,28,82,787 to the closing stock under Section 145A, which was confirmed by the CIT(A). The ITAT allowed the assessee's appeal, stating that consistency in accounting methods should be maintained and adjustments should be made to both opening and closing stocks.

4. Addition to Book Profits under Section 115JB:
The AO added Rs. 17,93,339 to book profits under Section 115JB, treating the loss on account of dividend stripping as expenditure incurred for earning exempt income. The CIT(A) confirmed this addition. The ITAT upheld the AO's and CIT(A)'s decisions, stating that the loss was related to the earning of exempt dividend income and should be added back to book profits.

5. Notional Disallowance under Section 14A:
The AO made a notional disallowance of Rs. 19.2 lacs under Section 14A for interest expenses on investments in securities. The CIT(A) confirmed the disallowance but directed the AO to re-calculate the interest. The ITAT restored the issue to the AO for re-calculation based on the actual period of investment.

6. Disallowance of Depreciation due to Change in Method:
The AO disallowed Rs. 16,28,11,000 claimed due to a change in the method of depreciation from SLM to WDV, considering it a colorable device. The CIT(A) upheld the disallowance. The ITAT allowed the assessee's appeal, stating that the change in the method of depreciation was permissible under the Companies Act and should be accepted for calculating book profits under Section 115JB.

7. Non-Admission of Additional Grounds of Appeal:
The CIT(A) did not admit additional grounds regarding the deduction for Deferred Tax liability and Dividend Distribution tax from book profits under Section 115JB. The ITAT dismissed this ground as it was not pressed by the assessee.

8. Under-Valuation of Work-in-Progress:
The AO added Rs. 1,15,63,596 for under-valuation of work-in-progress. The CIT(A) confirmed this addition. The ITAT upheld the CIT(A)'s decision, stating that the work-in-progress calculation by the AO was reasonable and the assessee did not provide sufficient evidence to counter it.

9. Estimation of Profits and Rejection of Books under Section 145:
The AO rejected the books of account under Section 145 and estimated profits by adding Rs. 31,31,87,129 due to discrepancies found. The CIT(A) deleted the addition, but the ITAT partly allowed the Revenue's appeal, directing the AO to re-calculate the income based on a gross profit rate of 10%.

Conclusion:
In summary, the ITAT provided relief to the assessee on several grounds, including the disallowance of commission expenditure, deduction under Section 80IA, and the method of depreciation. However, it upheld the additions related to book profits under Section 115JB and the under-valuation of work-in-progress, while also directing re-calculations for certain disallowances. The ITAT's decisions were based on precedents and the specific facts of the case, ensuring a fair and consistent application of tax laws.

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