2014 (7) TMI 554 - AT - Income Tax

Deduction u/s 80IA of the Act whether the assessee s claim for deduction under section 80IA of the Act could be denied merely on the ground that these D.G. units were catering to the captive power requirement - Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee was engaged in the manufacture and sale of paper and paperboards, multi-layer boards, etc., was also into the business of power generation right from the AY 1996-97 - assessee was in the business of generation of power the decision in Orient Paper Mills Ltd. 1989 (1) TMI 121 - SUPREME Court - the claim of the assessee cannot be denied only on the ground that the DG set manufactured the power only for the captive consumption of the assessee - the provision of section 80IA(8) itself says that where any goods or services of the eligible business are transferred to any other business carried on by the assessee and the consideration, if any, for such transfer is recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. The provisions of section 80IA themselves provide an answer and give a solution where there is a captive consumption of the finished goods of the eligible units - the order of the CIT(A) granting 80IA relief in respect of DG Units I, II, III and IV cannot be found fault with - the assessee has not operated the units by itself but got them operated through outsiders and the assessee is not entitled for 80IA relief is not a right approach - disallowing the assessee s claim for deduction under section 80IA on the ground made out by the Revenue cannot stand Decided in favour of Assessee. Claim of deduction u/s 80IA - Profit of the new Chemical Recovery Boiler whether the steam generated by the assessee, which rotates the turbine for running of machines used for its manufacturing process and also steam alone, is a form of power or not - Held that - The decision in SIAL SBEC BIOENERGY LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX 2004 (3) TMI 342 - ITAT DELHI-C followed - the generation / production of steam is also a form of power and the Unit-6 which is an undertaking set-up for generation of steam for its manufacturing process can be said to be for generation of power - it cannot be held that the assessee has not undertaken the generation of power in the year - The section provides that the assessee must begin to generate power during the period defined under the statue and the impugned assessment year definitely falls within that period thus, the order of the CIT(A) is set aside and the assessee is eligible to claim deduction u/s 80IA with regard to Unit-6 also as a stand alone power generating undertaking Decided in favour of Assessee. Exclusion of tax Determination of transfer price - Whether the Element of tax or levy should be excluded for calculating 'Transfer Price' for the purpose of computation of deduction u/s 80IA in respect of power generating units Held that - The market value of supply of electricity by power unit of the assessee to the paper division of the assessee has to be seen from the angle, if the paper unit has to purchase the electricity directly from the Karnataka Electricity Board (as both the power units as well as the paper units are situated in Karnataka), then what is the price which would be paid by the paper unit to the Karnataka Electricity Board - The transfer of the price as contemplated in section 80IA(8) has to be seen having regard to the arm s length condition i.e., what would be the price under uncontrolled transactions in the open market - the provisions of section 80IA(8) has also not been considered for arriving at a different conclusion - the provisions as contained in section 80IA(8) for determining the market price has to be followed which cannot be arrived by reducing the price by any other factors like taxes, duties, etc., as the same are embedded in the price thus, the order of the CIT(A) is set aside Decided in favour of Assessee. Expenses on repairs and maintenance of Plant and Machinery Building and Other Assets Capital expenses or Revenue expenses Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the expenditure were incurred in connection with the roads, drainages, boundary walls and building, concert platform, plant and machinery, coal yard, bamboo yard etc. - The assessee has filed the details of the disallowance the expenditures have resulted in acquisition of asset of permanent or semi-permanent nature having overlasting values - The expenditure was incurred as part of maintenance expenditure on the existing road, drainages, etc. - having regard to the details furnished, the expenditure in connection is to be considered as revenue in nature Decided in favour of Assessee. Expenses on office taken on lease Capital expenses or not Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee had taken office on lease and to make it fit for use the expenses were incurred on plastering, polishing, false ceiling, electrical fittings, fresh carpets etc. - The expenses were incurred on the assets not owned by the assessee - The expenditure is to give a better look to the office premises and does not result in acquisition of any asset of enduring nature - the expenditure so incurred is directed to be allowed as revenue expenditure Decided in favour of Assessee. Claim of excise duty u/s 43B of the Act CENVAT credit and PLA balance Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee has balance in CENVAT amount and PLA - the assessee had claimed deduction in respect of the said sums u/s 43B on payment basis - the balance lying in the CENVAT account should be allowed as deduction since it is nothing but actual payment - The balance in the CENVAT account is nothing but the excise duty paid on procurement of inputs and the same cannot be treated as advance - In the light of the provisions of section 43B, deduction u/s 43B should be allowed on payment basis irrespective of the year in which the liability is incurred - the deduction claimed u/s 43B on account of CENVAT credit is an allowable expenditure Decided partly in favour of Assessee. Indirect expenses u/s 14A of the Act No expenses incurred on dividend income Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the Tribunal has restored the matter to the file of the AO to verify the source of the investment whether they were out of borrowed funds or own funds - the AO has accepted the fact that no borrowed funds have been utilised for investments capable of earning exempt income and no disallowance of interest has been made - the assessee has made investment out of accumulated or surplus funds thus, the interest should not be disallowed matter remanded back - Decided partly in favour of Assessee. Exclusion of scrap sales from turnover - Internal consumption of power Computation of deduction u/s 80HHC of the Act Held that - Insofar as the exclusion of the scrap sale is concerned, though this issue has been decided against the assessee by the Tribunal in earlier years Relying upon CIT v/s Punjab Stainless Steel Industries 2014 (5) TMI 238 - SUPREME COURT - sale proceeds of scrap cannot be included as part of the total turnover for the purpose of section 80HHC thus, the order of the CIT(A) is set aside and the AO is directed to exclude the scrap sale from the total turnover while computing the deduction u/s 80HHC Decided in favour of Assessee. Reduction of 90% of rental income Processing and other income pertaining to cable division - Held that - CIT(A) has merely followed the appellate order for the assessment year 2001-02 - The Tribunal has decided the issue of exclusion of 90% of the interest from the bank and others and 90% of the rental income from the profits of the business against the assessee - 90% of the rental income from the staff and 90% interest from bank and others should be excluded from the profits of the business in view of the Explanation (baa) for the purpose of computing deduction under section 80HHC - insofar as the 90% of the processing charges and other income pertaining to the cable, the same has been decided in favour of the assessee - the same should not be excluded from the profits while computing the deduction u/s 80HHC Decided partly in favour of Assessee. Reduction of 90% of gross income instead of net income Held that - The decision in ACG Associated Capsules Pvt .Ltd. v/s CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA followed the order of the CIT(A) is set aside and only 90% of the net amount of receipts in the nature as given in clause-1 of Explanation (baa) to section 80HHC should be reduced from the profits. In the present case, the receipts which is included in the profits of the assessee then only the net income same is to be deducted from the profits of the assessee for determining the profits of the business and not the gross amount of 90% of the receipts - the only net income is to be reduced from the rental income as well as interest Decided in favour of Assessee. Deduction u/s 80IA of the Act Reduction of profit of the business Held that - The decision in Associated Capsules P. Ltd. Versus Deputy Commissioner of Income-tax 2011 (1) TMI 787 - BOMBAY HIGH COURT followed - section 80IA(9) does not affect the computability of deduction under various other provisions given under the head C i.e., deduction in respect of certain incomes as enumerated in Chapter-VIA. It can only affect the allowability of such deduction under other provisions so that the aggregate deduction under section 80IA and other provisions under heading C of Chapter-VIA do not exceed 100% of the profit of the business - both the deductions can be allowed independently so that aggregate deduction u/s 80IA and section 80HHC do not exceed the 100% profit of the business thus, the order of the CIT(A) is set aside and the deduction u/s 80IA cannot be reduced from the profit of the business for the purpose of computing deduction u/s 80HHC Decided in favour of Assessee. Deduction u/s 80HHC of the Act Computation of adjusted book profit u/s 115JB of the Act Held that - The decision in CIT v/s Bhari Information Technology Systems Pvt. Ltd. 2011 (10) TMI 19 - Supreme Court of India followed - the deduction claimed by the assessee u/s 80HHC has to be worked out on the basis of adjusted book profit u/s 115JA and not on the basis of profits of the business computed under the normal provisions of the Act, which are applicable for the computation of profit and gain of the business Decided in favour of Assessee. Loss on sale of investment Speculative loss as provided in Explanation to section 73 Held that - The assessee company has made a claim of loss on sale of investments the Tribunal in the earlier assessment year of the same assessee has been held that on correct interpretation of Explanation to section 73, it will not be applicable because the AO himself has stated in the order that the assessee s main business is not for the purchase of sale of shares but consist of paper mill and optical fiber cables - From plain reading of the provisions of Explanation to section 73, it is evident that that once the AO himself has agreed that the assessee is not engaged in the business which consist of purchase and sale of shares and it is mainly an investor, then the deeming provisions, as envisaged in the Explanation will not apply Decided against Revenue. Deduction u/s 80M of the Act - Dividend income from investments made in shares in mutual funds - Held that - The assessee had huge surplus funds which were interest free and also there were availability of interest free funds in the form of sales tax deferred loan, the same has not been disputed - The assessee s investment which has generated dividend income is far less than the availability of interest free funds - there can be no presumption that borrowed funds were utilized for making the investment, so as to warrant any kind of disallowance of interest Decided against Revenue. Expenses u/s 14A of the Act - Sufficient fund available as interest free from sales tax deferral loan Held that - It cannot be made u/s 14A, assessee has huge interest free surplus funds, which is evident from the fact that it has its own funds of ₹ 149.29 crores - it also had sum of ₹ 63.20 crores on account of retention of sales tax difference in this year - the investment to the tune of ₹ 49 crores that too major portion is coming from the earlier years, it can be said to be made out of the surplus funds only Relying upon The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - no disallowance on account of interest can be made. The directors fees and expenses is ₹ 13 lakhs whereas, auditor s remuneration is ₹ 5.53 lakhs - If the ratio on which the Assessing Officer has worked out the disallowance on entire expenditure, then on that ratio, the disallowance under the administrative expenses will come down to ₹ 33,253 - on a reasonable basis, the sum of ₹ 50,000 is quite reasonable for allocating administrative expenses for the purpose of making the investment on which the assessee has earned exempt income Decided partly in favour of Revenue. Incremental wages paid during the previous year Held that - There is no dispute that the incremental wages from the period from 1st January 2003 to 31st March 2004, is an allowable claim - The assessee has debited wages of 15 months in this year in accordance with the AS/4 - contingencies and events occurring after the balance sheet date . In this case, the agreement with the labours was entered on 20th April 2004 i.e., after the closing date of Balance Sheet of 31st March 2003 - the assessee was entitled to make the entry in this year and to claim such an incremental wages even for the period of three months ie., 1st January 2003 to 31st March 2003 in this year only Decided against Revenue. Levy of interest u/s 234B and 234D of the Act Violation of principles of natural justice Held that - The decision in Imami Ltd. v/s CIT, 2011 (6) TMI 163 - CALCUTTA HIGH COURT followed - the amended provision of Section 115JB having come into force with effect from April 1, 2001, the appellant cannot be held defaulter of payment of advance tax - on the last date of the Financial Year preceding the relevant Assessment Year, as the book profit of the appellant in accordance with the then provision of law was nil, we cannot conceive of any advance tax which in essence is payable within the last day of the financial year preceding the relevant Assessment Year as provided in Sections 207 and 208 or within the dates indicated in Section 211 of the Act which inevitably falls within the last date of Financial Year preceding the relevant Assessment Year - Consequently, the assessee cannot be branded as a defaulter in payment of advance tax and it would be nevertheless asked to pay interest in terms of Section 234B and Section 234C of the Act for default in making payment of tax in advance which was physically impossible - no interest u/s 234B and 234D can be levied on the disallowance made u/s 115JB in view of the retrospective amendment Decided in favour of assessee. STCG on DG sets from block of plant & machinery Held that - The short term capital gain arises in case of depreciable assets only if the full value of consideration exceeds the expenditure incurred wholly and exclusively in connection with such transfer to be WDV of the block of assets at the beginning of the previous year and the actual cost of any asset falling within the block of assets acquired during the previous year - It is only then the excess consideration shall be deemed to be short term capital gain CIT(A) has given a categorical finding that the sale consideration is far less than the sum mentioned in the three parameters thus, there was no reason to deviate from the order of the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deduction under section 80IA for power units.
2. Allocation of indirect expenses for computing deduction under section 80IA.
3. Inclusion of certain incomes in total turnover for section 80HHC.
4. Treatment of repair and maintenance expenses.
5. Deduction under section 80JJA for chemical recovery boiler.
6. Calculation of transfer price for power units.
7. Exclusion of certain incomes for section 80HHC.
8. Applicability of Explanation to section 73.
9. Inclusion of sales tax and excise duty in total turnover for section 80HHC.
10. Levy of interest under section 234D.
11. Treatment of incremental wages.
12. Inclusion of MODVAT credit in closing stock under section 145A.
13. Treatment of profits on sale of investments for section 115JB.
14. Deduction under section 80M for dividend income.
15. Netting of interest income for section 80HHC.

Detailed Analysis:

1. Deduction under section 80IA for power units:
The tribunal examined the eligibility of various power units for deduction under section 80IA. It was noted that the assessee had established multiple power units, including captive power units. The tribunal referred to previous decisions in the assessee's own case, which allowed such deductions. The tribunal concluded that the assessee's claim for deduction under section 80IA for units no.2, 3, 4, and 5 was allowable and directed the Assessing Officer to allow the deduction accordingly.

2. Allocation of indirect expenses for computing deduction under section 80IA:
The tribunal upheld the allocation of indirect expenses to the power units for computing the deduction under section 80IA. The allocation was based on the proportion of the total turnover, and this method had been consistently applied in previous years.

3. Inclusion of certain incomes in total turnover for section 80HHC:
The tribunal addressed the inclusion of internal power consumption and scrap sales in the total turnover for computing the deduction under section 80HHC. It was held that internal power consumption should not be included in the total turnover, following previous tribunal decisions. However, scrap sales were to be included in the total turnover, as per the Supreme Court's decision in CIT v/s Punjab Stainless Steel Industries.

4. Treatment of repair and maintenance expenses:
The tribunal examined the nature of repair and maintenance expenses and concluded that such expenses were revenue in nature. The tribunal referred to previous decisions in the assessee's own case, which treated similar expenses as revenue expenditure.

5. Deduction under section 80JJA for chemical recovery boiler:
The tribunal considered the assessee's alternative claim for deduction under section 80JJA for the chemical recovery boiler. However, since the deduction under section 80IA was already allowed for this unit, the claim under section 80JJA was dismissed as infructuous.

6. Calculation of transfer price for power units:
The tribunal addressed the calculation of the transfer price for power units, specifically whether taxes and duties should be excluded. It was held that the transfer price should be based on the market value, including taxes and duties, as these are part of the cost of electricity supplied by the Karnataka Electricity Board.

7. Exclusion of certain incomes for section 80HHC:
The tribunal examined the exclusion of 90% of rental income, interest from banks, and processing income from the profits of the business for computing the deduction under section 80HHC. It was held that 90% of rental income and interest should be excluded, following previous tribunal decisions. However, 90% of processing income should not be excluded, as it was part of the operational income.

8. Applicability of Explanation to section 73:
The tribunal addressed the applicability of Explanation to section 73, which deems certain losses as speculative. The tribunal referred to previous decisions in the assessee's own case, which held that the assessee's main business was not trading in shares, and therefore, the explanation did not apply.

9. Inclusion of sales tax and excise duty in total turnover for section 80HHC:
The tribunal upheld the exclusion of sales tax and excise duty from the total turnover for computing the deduction under section 80HHC, following the Supreme Court's decision in CIT v/s Catapharma India Pvt. Ltd.

10. Levy of interest under section 234D:
The tribunal addressed the levy of interest under section 234D, which was initially decided in favor of the assessee in previous years. However, due to a retrospective amendment, the issue was decided against the assessee.

11. Treatment of incremental wages:
The tribunal examined the treatment of incremental wages arising from a wage revision agreement. It was held that the entire liability for incremental wages, including the period from 1st January 2003 to 31st March 2003, should be allowed in the assessment year 2004-05.

12. Inclusion of MODVAT credit in closing stock under section 145A:
The tribunal addressed the inclusion of unutilized MODVAT credit in the closing stock. It was held that corresponding adjustments should be made in the opening stock, purchases, and sales, resulting in a net effect of nil.

13. Treatment of profits on sale of investments for section 115JB:
The tribunal initially decided in favor of the assessee regarding the exclusion of profits on the sale of investments from the book profit under section 115JB. However, this issue was later covered against the assessee by the Special Bench decision in Rain Commodities Ltd. v/s DCIT.

14. Deduction under section 80M for dividend income:
The tribunal examined the deduction under section 80M for dividend income and concluded that no interest should be disallowed, as the investments were made from surplus funds, following the decision of the Jurisdictional High Court in Reliance Utilities and Power Ltd.

15. Netting of interest income for section 80HHC:
The tribunal addressed the netting of interest income for computing the deduction under section 80HHC. It was held that only 90% of the net interest income should be excluded from the profits of the business, following the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v/s CIT.