2017 (8) TMI 1382 - AT - Income Tax

Addition towards contribution to the State Renewal Fund - Held that - State Renewal Fund was set up to provide safety to the employees working under the state owned entities in case of restructuring/wind-up/closure of the undertaking. Based on the study done by the State Government, the assessee has provided an amount of ₹ 20 lacs for the purposes of welfare and benefit of the employees. As following case of Principal CIT vs Rajasthan State Seed Corporation Ltd 2016 (9) TMI 59 - RAJASTHAN HIGH COURT we affirm the order of the CIT(A) who has rightly deleted the disallowance made by the AO towards contribution to State Renewal Fund. Addition made on account of late deposition of EPF after due date of the PF Act - Held that - Admittedly, employees s contribution to PF amounting to ₹ 124,442 for the month of August 2010 has been paid by the appellant on 21.09.2010 within the same financial year 2010-11. Addition rightly deleted Addition of sum debited by the assessee in IEC plan - Held that - The expenditure incurred on mass communication and public awareness for the use of the renewable energy sources and energy conservation has thus been incurred for the purposes of the business of the assessee company and is allowable under the provisions of section 37(1) of the Act. In the result, we affirm the order of the ld CIT(A) who has rightly deleted the disallowance made by the AO towards expenditure under the IEC plan. Addition of expenses on Rural Village Electrification (RVE) - Held that - The appellant is the state nodal agency of MNRE for popularizing the usage of renewable energy sources and as part of its stated business objectives, has incurred the subject expenditure. The expenditure has thus a direct linkage with the activities of the assessee company and has been incurred for the purposes of the business of the assessee company and is allowable under the provisions of section 37(1). From perusal of assessment order, it is also noted that the assessee company has received ₹ 33,50,000 as service charged for electrification of rural hamlets under the RVE Program 2010-11. It thus further strengthens the contention of the assessee company in terms of incurring the subject expenditure for its stated objectives and in respect of which revenues have also been generated during the year. In the result, we affirm the order of the ld CIT(A) who has rightly deleted the disallowance Bio mass fuel supply study expenses - Held that - The expenditure on study of biomass is thus an expenditure undertaken as part of development and promotion of renewable energy sources in the State of Rajasthan. Further, the ld CIT(A) has given a finding that based on this study, appellant has issued work orders to various applicants for which it has received application and processing fees and the said finding remain uncontroverted before us. In the result, we are of the view that expenditure on the subject study is an expenditure incurred in the course of carrying out existing business of the assessee company and not in respect of new line of business, being the main contention of the AO to hold the expenditure as capital and enduring in nature. Extension fee/cancellation fee - Held that - there is clearly no certainty of realization as the action for levy of extension fees itself has not been initiated or pending consideration of the assessee company itself. Once the assessee company initiates the action for levy extension fees, various contractual factors are taken into consideration, the project owners are given an opportunity and they are heard and thereafter, extension fees is finally levied. In some cases, it has been explained that the applicant may opt for cancellation of the project instead of paying the extension fees. In the entirety of facts and circumstances of the case, we donot see any infirmity in the order of the ld CIT(A) who has rightly deleted the addition made by the assessing officer. In the result, both the grounds taken by the Revenue are dismissed. Eligible for deduction under section 80IA(4)(iv) in respect of its seven wind and solar power plants established at various locations in Rajasthan - Held that - These are employees who are involved in the overall management and supervision in technical and financial arena and employed at the Head office and thus have a direct nexus with the activities of the seven plants if not at the operational level but definitely at the strategic and management level. The salary expenses of ₹ 45,77,500/- is thus required to be allocated to the eligible units in the ratio of their turnover to the total turnover of the assessee company. The AO is accordingly directed to allocate common expenditure of ₹ 45,77,500 to the power units out of total expenditure of ₹ 3,02,06,576/- in the ratio of their turnover to the total turnover while working out the eligible profits under section 80IA of the Act. Expenditure which falls under the head administrative/establishment and other relates expenses - Held that - As we have directed earlier to allocate the salary expenses of the Head office employees, the common head office expenses are also directed to be allocated in the ratio of turnover of the power plants to the total turnover of the assessee company. In our view, this is the most rational and reasonable basis for allocation of common expenses in absence of anything more specific which has been brought on record. In any case, the pool of common expenses has been brought down to a large extent as the expenses which have a direct nexus with the promotional activities have already been excluded and the assessee has also accepted this allocation methodology. The AO is accordingly directed to allocate ₹ 90,68,091 out of the total administrative/establishment expenses to the power units in the ratio of their turnover to the total turnover while working out the eligible profits under section 80IA of the Act. Income flows directly from the business of generation of power and is thus eligible for deduction under section 80IA. It represent an amount which is received by the assessee from the supplier of the power plant for the shortfall in the minimum guaranteed generation of power. Had the power plant generated minimum guaranteed power during the year, the assessee would not have been eligible for such revenues. The revenues thus earned have a direct nexus with the running of the power plants and represent the minimum standard of performance of the power plants and compensate the assessee for any shortfall in the generation of minimum guaranteed power. In the present case also, expenditure is incurred on the directions of the Government with which assessee has to closely interact for its day to day business activities. Therefore, in the business interest, assessee has contributed such amount and a request is also made to provide the accommodation facility to its officers in the Rajasthan Bhawan. Hence, the expenditure so incurred is allowable expenditure u/s 37(1). In view of above, the disallowance made by the AO and confirmed by the CIT(A) be directed to be deleted. Deduction u/s 80-IA in respect of interest income - Held that - The instant case is similar to a situation where interest is earned on fixed deposits which are placed with banks for the purposes of availing credit facilities from the bank wherein the Courts from time to time have held that such interest income does not have an immediate nexus with the business of the undertaking. Hence, in our view, the Ld CIT(A) was right in law in rejecting the claim of deduction u/s 80-IA of the Act in respect of interest income. Regarding allocation of employee costs and administrative/establishment expenses are concerned, we have dealt with the issue in AY 2011-12 in great detail. Following the same, common head office expenses pertaining to employees has been stated to be ₹ 16,58,142 and pertaining to administrative/establishment expenses comes to ₹ 41,34,609. The AO is accordingly directed to allocate these common head office expenses to the power generating units in the ratio of their turnover to the total turnover of the assessee company. The grounds of appeal are disposed off with above directions. Assessee company is held eligible for deduction u/s 80IA(4) in respect of receipts on account of shortfall/low generation. AO be directed to exclude the sale/stock of carbon financial instruments in computing the total income of the assessee being a capital receipt. Allocate common expenses to the power generating units in the ratio of their turnover to the total turnover of the assessee company. Disallowance of publicity and advertisement expenses on account of topographic survey, recruitments, technical investigation, printing of energy policy, inviting tenders, etc. - Held that - One of the business objects of the assessee company is to promote and facilitate energy conservation and popularize the usage of renewable energy sources & encourage companies to set up renewable energy plants. As part of its activities, the assessee company has incurred the publicity and advertisement expenditure during the year. CIT(A) has given a findings on perusal of ledger account that these expenditure largely related to payment to advertising agencies and printing and publishing agencies. Eligible for deduction u/s 80IA - Held that - As we have held in AY 2011-12, the common head office expenses need to be allocated to the power generating units based on its turnover as a percentage of total turnover of the assessee company. Given that there is no finding of either the AO or the ld CIT(A) regarding the quantum of common head offices expenses, we are setting aside the matter to the file of the AO to examine the contentions of the assessee company afresh and once the common expenses are determined, the AO is directed to allocate the same to the power generating units based on its turnover. The assessee s grounds are disposed off with above directions.

Summary

Issues Involved:

1. Deletion of addition towards contribution to State Renewal Fund.
2. Deletion of addition on account of late deposition of EPF.
3. Deletion of addition debited by the assessee in IEC Plan.
4. Deletion of addition made by disallowing expenses on Rural Village Electrification (RVE).
5. Deletion of addition made by disallowing expenses on Biomass Fuel Supply Study.
6. Deletion of addition on account of extension fee towards Project No. 25/2004.
7. Deletion of addition on account of extension fee/cancellation fee in the case of M/s RRB Energy and M/s Enercon (India) Ltd.
8. Deduction u/s 80IA(4)(iv).
9. Confirmation of disallowance of contribution to Rajasthan Bhawan.
10. Deletion of addition for depositing the employee’s contribution to PF beyond the prescribed time limit.
11. Deletion of disallowance of expenses on rural village electrification.
12. Deletion of disallowance of contribution to Energy Conservation Fund.
13. Deletion of disallowance of expenses for Information, Education and Communication Plan.
14. Deletion of disallowance of publicity and advertisement expenses.
15. Deduction u/s 80IA on FDR interest.
16. Deduction u/s 80IA on shortfall in generation and sale of carbon financial instruments.
17. Allocation of administrative and establishment expenses and payment & provision for employees.

Issue-wise Detailed Analysis:

1. Deletion of addition towards contribution to State Renewal Fund:
The Tribunal upheld the deletion, stating that the contribution to the State Renewal Fund is for the welfare and benefit of employees, aligning with the business purposes of the assessee. This was supported by previous decisions of the ITAT and the Rajasthan High Court.

2. Deletion of addition on account of late deposition of EPF:
The Tribunal affirmed the CIT(A)'s decision, referencing judicial pronouncements that allowed deductions for employee’s contributions to PF made before the due date of filing the return of income under section 139(1).

3. Deletion of addition debited by the assessee in IEC Plan:
The Tribunal upheld the CIT(A)'s deletion of the addition, noting that the expenditure under the IEC Plan was incurred for generating public awareness about renewable energy sources and energy conservation, which is part of the assessee’s business objectives.

4. Deletion of addition made by disallowing expenses on Rural Village Electrification (RVE):
The Tribunal agreed with the CIT(A) that the expenditure on RVE was incurred as part of the assessee’s business activities and was allowable under section 37(1).

5. Deletion of addition made by disallowing expenses on Biomass Fuel Supply Study:
The Tribunal upheld the CIT(A)'s decision, stating that the expenditure on the biomass fuel supply study was part of the assessee’s business activities and not a new line of business, thus allowable as a revenue expenditure.

6. Deletion of addition on account of extension fee towards Project No. 25/2004:
The Tribunal agreed with the CIT(A) that the extension fee should be recognized as income only when there is certainty of realization, following the principle of prudence.

7. Deletion of addition on account of extension fee/cancellation fee in the case of M/s RRB Energy and M/s Enercon (India) Ltd:
The Tribunal upheld the CIT(A)'s deletion, noting that the fees were recognized as income only when actually received, following the consistent accounting policy of the assessee.

8. Deduction u/s 80IA(4)(iv):
The Tribunal directed the AO to allocate common head office expenses to the power units based on their turnover to the total turnover of the assessee company. It also held that receipts on account of shortfall/low generation of electricity are eligible for deduction under section 80IA(4).

9. Confirmation of disallowance of contribution to Rajasthan Bhawan:
The Tribunal set aside the matter to the AO to examine the assessee’s contention that the contribution was made on the directions of the State Government and should be considered as business expenditure.

10. Deletion of addition for depositing the employee’s contribution to PF beyond the prescribed time limit:
The Tribunal upheld the CIT(A)'s deletion, referencing judicial pronouncements that allowed deductions for employee’s contributions to PF made before the due date of filing the return of income under section 139(1).

11. Deletion of disallowance of expenses on rural village electrification:
The Tribunal upheld the CIT(A)'s decision, stating that the expenditure on RVE was incurred as part of the assessee’s business activities and was allowable under section 37(1).

12. Deletion of disallowance of contribution to Energy Conservation Fund:
The Tribunal upheld the CIT(A)'s deletion, following the decision of the Coordinate Bench in the assessee’s own case for AY 2008-09, where the contribution was held to be a statutory liability and allowable as a business expenditure.

13. Deletion of disallowance of expenses for Information, Education and Communication Plan:
The Tribunal upheld the CIT(A)'s deletion, noting that the expenditure under the IEC Plan was incurred for generating public awareness about renewable energy sources and energy conservation, which is part of the assessee’s business objectives.

14. Deletion of disallowance of publicity and advertisement expenses:
The Tribunal upheld the CIT(A)'s deletion, stating that the expenditure on publicity and advertisement was incurred as part of the assessee’s business activities and was allowable under section 37(1).

15. Deduction u/s 80IA on FDR interest:
The Tribunal upheld the CIT(A)'s decision, stating that the interest income from FDRs did not have a direct nexus with the business of the undertaking and thus was not eligible for deduction under section 80IA.

16. Deduction u/s 80IA on shortfall in generation and sale of carbon financial instruments:
The Tribunal held that the receipts on account of shortfall/low generation of electricity are eligible for deduction under section 80IA. However, it confirmed the disallowance of deduction on income from the sale of carbon financial instruments, following the decision of the Hon’ble Karnataka High Court in My Home Power Ltd.

17. Allocation of administrative and establishment expenses and payment & provision for employees:
The Tribunal directed the AO to allocate common head office expenses to the power units based on their turnover to the total turnover of the assessee company.