2019 (4) TMI 1923 - AT - Income Tax

Deduction u/s 80IA - DRP held that the rate at which power was supplied by appellant to State Electricity Board ( SEB ), i.e. ₹ 2.3336 per unit, was the market rate of power for purposes of computation of deduction under section 80IA of the Act - HELD THAT - Issue decided in favour of assessee in own case 2007 (6) TMI 308 - ITAT DELHI assessee as an industrial consumer is also buying power from the Board and the Board supplies such power at the rate of ₹ 3.72 per unit to its consumers. This is the price at which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board, it would have supplied power to the ultimate consumers at rates similar to those of the Board or such other competitive rates, meaning thereby that price received by the assessee would be in the vicinity of ₹ 3.72 per unit i.e. charged by the Board from its industrial consumers/users. Thus, under the given circumstances, it would be in the fitness of things to hold that the consideration recorded by the assessee s undertaking generating electric power for transfer of power for captive consumption at the rate of ₹ 3.72 per unit corresponds to the market value of power. Also see M/S RELIANCE INDUSTRIES LTD. 2019 (2) TMI 178 - BOMBAY HIGH COURT - Decided in favour of assessee. Deduction allowable under section 80IB being profit derived from Rail Universal Beam Mill - HELD THAT - AO has not examined the quantum of deduction allowable under section 80IB being profit derived from Rail Universal Beam Mill we direct the AO to allow deduction under section 80IB in respect of income derived from that unit after verification of the eligible amount as per law. Needless to mention that the AO before determining the eligible amount of deduction shall allow reasonable opportunity of hearing to the assessee. Thus, the ground no.3 of the appeal of the assessee is treated as allowed. Nature of receipt - incentive/ subsidy in the form of exemption from sales tax, entry tax and electricity duty - revenue or capital receipt - HELD THAT - This is a repetitive year issue and in all fairness, it may be pointed out that this issue of treatment of subsidy as capital or revenue receipt has been decided against the Appellant by the Hon ble Delhi Bench of the Tribunal in appellant s own case for assessment year 2004-05 2013 (2) TMI 748 - ITAT DELHI and also in the decision of the Assessee for AY 2008-09 wherein the aforementioned additional evidence has been admitted and thereafter this issue has been decided against the Assessee. Deduction in respect of write back deferment of employee compensation expenditure incurred on account of provision of Employee Stock Option Scheme ( ESOS ) to employees - HELD THAT - 'Special Bench' of the Tribunal in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE after deliberating at length on the issue as to whether the assessee was entitled to claim the discount on ESOS as an expenditure under section 37(1), or not, had therein answered the said issue in affirmative and concluded that the same was allowable as an expenditure under section 37(1) in the hands of the assessee. The claim of the assessee is it has credited ₹ 3,92,93,000/- in the profit and loss account as write back on account of employee stock option scheme (ESOS). The assessee further claimed that when provision was made on account of ESOS in earlier years by way of debit to its profit and loss account the said amount was not allowed as deduction to the assessee in the assessment of earlier years - when an amount is not allowed as deduction when its provision was made in the year of provision then write back of the very same amount in the subsequent year cannot be included in the total income of the subsequent year. We therefore set aside the orders of the lower authorities on this issue and restore the matter back to the file of the AO for adjudication afresh in light of the above observation. The AO shall verify whether the amount written back this year was allowed as deduction or not in the year in which provision for the same was made by the assessee. Disallowance u/s 14A r.w.r. 8D - Assessee made suo moto disallowance - HELD THAT - We find that the condition precedent for invoking provisions of rule 8D is that the AO must record a satisfaction that the amount of disallowance claimed in the return of income is not correct. Without recording such a satisfaction the AO cannot invoke provisions of Rule 8D. Above view finds support from the decision of ABHISHEK INDUSTRIES LTD. 2015 (2) TMI 672 - PUNJAB AND HARYANA HIGH COURT and KAPSONS ASSOCIATES 2015 (8) TMI 1277 - PUNJAB AND HARYANA HIGH COURT . In the instant case on perusal of the impugned order of assessment we notice that no such satisfaction was arrived at by the AO. In the circumstances disallowance under section 14A of the Act of ₹ 21.54 crores in place of ₹ 2,65,715/- claimed by the assessee in the Return Income is bad in law and unsustainable - Decided in favour of assessee. Depreciation on alleged non-functional units - AO disallowed depreciation in respect of 2 generator sets on the ground that those generator sets were not used during the relevant previous year - HELD THAT - The assessee explained before the AO that the 2 generator sets were kept standby for use in the business of generation of electricity so that the continuity of the business is not affected. We find that no material has been brought on record to controvert the plausible explanation of the assessee. It is an established position of law that the asset which have been kept ready for use in business but could not be used for any reason the same is treated as used for the purpose of business. Support for the above view is drawn from the decision in the case of CIT vs. Nahar Exports . 2007 (5) TMI 171 - PUNJAB AND HARYANA HIGH COURT . We therefore delete the disallowance of depreciation of ₹ 42 lacs and allow this ground of appeal of the assessee. Addition of employee welfare expenses under section 40A(9) - Assessee did not submit any further details or supporting evidence - HELD THAT - The opinion of the AO is also supported by the opinion of the Tax Auditor of the assessee. The ld. AR of the assesse has brought no material before us to show that the amount in question was not hit by the provisions of section 40A(9) of the Act. In the circumstances we do not find any good reason to interfere with the order of the AO. Thus the ground no. 8 of the appeal of the assessee is dismissed. Nature of expenses - lease rent expenditure - revenue or capital expenditure - whether DRP failed to appreciate that similar lease rents had been allowed as deduction in earlier assessment years and therefore, there was no reason to deviate from the accepted position during the year under consideration? - HELD THAT - AO observed from the agreement that in clause 21 thereof the assessee was granted right to purchase the said Aircraft at the end of the lease period subject to certain conditions mentioned therein. From the said agreement the AO observed that the lease in question was a Financial Lease and the payment made by the assessee was comprised of two elements i.e. a part towards the Capital cost of the asset and the other part for interest. AO worked out the interest component at ₹ 32,97,554/- and allowed the same . The balance payment was considered as Capital Expenditure . AO further stated that depreciation in respect of the Cost of Capital Asset shall be allowed to the assessee if the assessee moves 154 Petition. AR could not bring any material before us to controvert the finding of the AO. In the circumstances we find no good reason to interfere with the order of the AO. However, we find force in the contention of the Ld. AR that depreciation ought to have been allowed to the assessee in respect of cost of the Asset. We therefore direct the AO to allow depreciation as per law in respect of cost of Asset. Thus this ground of appeal of the assessee is treated as partly allowed. Disallowance of aviation expenses - Whether aircraft expenses were incurred by the appellant wholly and exclusively for business purposes? - HELD THAT - Tribunal in the case of the assessee company itself in the AY 2001-02 has held that travelling expenses incurred to meet customers and prospective customers is allowable as business deduction. In respect of expense of ₹ 4,10,606/- it was explained that the expenditure was incurred in connection with the above journey and all are supported by bills and vouchers. These are incidental expenses like airport duty and taxes and hotel charges for stay of pilot etc. DR could not controvert the submission of the assessee. Thus, we find that the expenses were incurred by the company out of commercial expediency. We therefore delete the disallowance. Disallowance of foreign travel expenses holding the same to be non-business expenditure - addition on the ground that the purpose of the related travel was not furnished and therefore the commercial expedi - hncy of the said expenditure was not established - HELD THAT - As assessee has filed copies of invoices and details of expenses and contended that these documents were filed before the AO to show business connection of the expenditure in question. However, the AO has not considered the same - DR could not controvert the above submission of the assessee. In the circumstances in our considered opinion it shall be in the interest of the justice to restore this issue back to the file of the AO for adjudication afresh after taking into consideration the said documents by passing a speaking order. Disallowance of business promotion expenses - HELD THAT - Expenses was incurred for making gift to bankers customers ,etc. on the occasion of festival of diwali. Such expenditure were incurred to build relationship with business associate for promotion of business. Similarly customary gifts to press reporters attending the business press conference of the assessee was incurred out of commercial expediency. Keeping in view the volume of business of the assessee diwali gift and gift to the press reporters can be held to have incurred out of commercial expediency. In respect of expense incurred for civil construction of shooting range and shooting equipment it is observed that they were incurred for a shooting range at Sonipat where neither the factory or office of the assessee is situated. The assessee could not establish the business connection of the said expenditure. Similarly in respect of balance expenditure in absence of details of beneficiary the commercial expediency of the same could not be established. We therefore delete the disallowance partly. TP Adjustment - arm's length price of the 'international transactions' of interest received from loan advanced to associated enterprise - HELD THAT - We find that the rate which should be adopted by the TPO/AO for benchmarking the loan transactions with the assessee s Associated Enterprises should be the LIBOR rate and not the PLR rate as adopted in the instant case in view of the decision of Hon ble Delhi High Court in CIT Vs Cotton Naturals I. P. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT . The assessee has also submitted that it has made external commercial borrowings at interest rate ranging from 1.63% to 3.72% per annum. The assessee has not provided us the details of external commercial borrowings and that the loans advanced by the assessee to its Associated Enterprises was from these borrowings. The details of LIBOR rate prevailing at the relevant time has also not been provided by the assessee. Therefore, we are unable to adjudicate the issue completely. Hence, we have no other alternative but to remand the matter back to the file of the AO to adjudicate the issue afresh. Transfer Pricing Adjustment on guarantee issued on behalf of the AE - Addition on the ground that no commission has been charged by the appellant for providing corporate guarantee to the lenders on behalf of its Associated Enterprises - HELD THAT - The amendment made to Section 92B by the Finance Act 2012 is prospective in operation and accordingly applicable in the Assessment Year 2013-14 and subsequent years, and not applicable in the impugned assessment year which is the Assessment Year 2009-10. We, therefore, hold that the issuance of corporate guarantee cannot be considered as an international transaction for the year under consideration. Therefore, the addition made is deleted. Thus, this ground of appeal of the assessee is allowed. Not allowing MAT credit under Section 115JAA - HELD THAT - As assessee claimed that MAT Credit as eligible under section 115JAA of the Act has not been allowed to the assessee company. We therefore direct the AO to verify the claim of the assessee as per record and allow credit under section 115JAA of the Act as allowable as per law. Charging interest under section 234B is consequential and mandatory. The AO is directed to provide consequential relief as per law. Admission of additional ground - Additional coal levy relatable to year under consideration paid on account of extraction of coal pursuant to the order(s) of the Hon ble Supreme Court, be directed to be allowed as business deduction - MAT Computation - sum set aside on account of Debenture Redemption Reserve should be excluded from book profits under section 115J - HELD THAT - As in the light of the law laid down by Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT 1996 (12) TMI 7 - SUPREME COURT , there cannot indeed be any objection to an Assessee raising a new legal plea at this stage. This is a pure legal issue and all facts for adjudication of this ground are already on record.

Summary

Issues Involved:

1. Legality of the assessment order.
2. Reduction of deduction under Section 80IA.
3. Deduction under Section 80IB for Rail Universal Beam Mill.
4. Nature of incentives/subsidies as capital receipts.
5. Deduction for write-back of ESOS expenditure.
6. Disallowance under Section 14A.
7. Depreciation on non-functional units.
8. Disallowance of employee welfare expenses under Section 40A(9).
9. Disallowance of lease rent as capital expenditure.
10. Disallowance of aircraft expenses.
11. Disallowance of foreign travel expenses.
12. Disallowance of business promotion expenses.
13. Transfer pricing adjustment on interest from loans to AEs.
14. Transfer pricing adjustment on corporate guarantee.
15. MAT credit under Section 115JAA.
16. Interest under Section 234B.
17. Additional coal levy and Debenture Redemption Reserve under Section 115JB.

Issue-wise Analysis:

1. Legality of the Assessment Order:
- The assessee claimed the assessment order was illegal and bad in law. However, this ground was dismissed as it was deemed general in nature and did not require separate adjudication.

2. Reduction of Deduction under Section 80IA:
- The AO reduced the deduction claimed under Section 80IA from ?4,19,30,71,772 to ?2,52,62,31,398, arguing that the rate at which power was supplied to SEB (?2.3336 per unit) was the market rate, not the higher rate claimed by the assessee.
- The Tribunal found the issue covered in favor of the assessee by previous decisions, including those of the Hon'ble Punjab & Haryana High Court and the Bombay High Court, and set aside the reduction in deduction.

3. Deduction under Section 80IB for Rail Universal Beam Mill:
- The AO disallowed the deduction claimed under Section 80IB, citing the decision in Goetze India Ltd. However, the Tribunal noted that the deduction was a mere enhancement of an existing claim and that the AO should have allowed it. The issue was remanded to the AO for verification and allowance of the deduction.

4. Nature of Incentives/Subsidies as Capital Receipts:
- The AO treated incentives/subsidies as revenue receipts, disallowing ?1,20,74,28,854. The Tribunal noted that this issue had been decided against the assessee in previous years and confirmed the AO's order.

5. Deduction for Write-back of ESOS Expenditure:
- The AO did not allow the deduction for the write-back of ?3,92,93,000 on account of ESOS. The Tribunal directed the AO to verify whether the amount was allowed as a deduction in the year of provision and to allow the deduction accordingly.

6. Disallowance under Section 14A:
- The AO disallowed ?21.54 crores under Section 14A, invoking Rule 8D. The Tribunal found that the AO did not record the necessary satisfaction regarding the incorrectness of the assessee's claim and restricted the disallowance to ?2,65,715 as claimed by the assessee.

7. Depreciation on Non-functional Units:
- The AO disallowed ?42 lacs on depreciation for non-functional units. The Tribunal allowed the depreciation, noting that assets kept ready for use are considered used for business purposes.

8. Disallowance of Employee Welfare Expenses under Section 40A(9):
- The AO disallowed ?54,03,885, treating it as not related to business exigencies. The Tribunal upheld the disallowance, agreeing with the AO and the Tax Auditor's opinion.

9. Disallowance of Lease Rent as Capital Expenditure:
- The AO treated ?1,83,93,480 as capital expenditure related to a finance lease for an aircraft. The Tribunal upheld the disallowance but directed the AO to allow depreciation on the asset's cost.

10. Disallowance of Aircraft Expenses:
- The AO disallowed ?6,34,582, questioning the business purpose of certain expenses. The Tribunal found the expenses to be incurred out of commercial expediency and deleted the disallowance.

11. Disallowance of Foreign Travel Expenses:
- The AO disallowed ?61,65,830, citing lack of business connection. The Tribunal remanded the issue to the AO for fresh adjudication, considering the documents provided by the assessee.

12. Disallowance of Business Promotion Expenses:
- The AO disallowed ?77,33,850, questioning the business purpose. The Tribunal deleted part of the disallowance related to Diwali gifts and press reporters but upheld the rest.

13. Transfer Pricing Adjustment on Interest from Loans to AEs:
- The AO/TPO applied a 16% interest rate, leading to an adjustment of ?21,06,39,195. The Tribunal remanded the issue to the AO to apply the LIBOR rate for benchmarking.

14. Transfer Pricing Adjustment on Corporate Guarantee:
- The AO/TPO imputed a commission rate for corporate guarantees, leading to an adjustment of ?2,16,00,060. The Tribunal held that the amendment to Section 92B is prospective and deleted the addition.

15. MAT Credit under Section 115JAA:
- The Tribunal directed the AO to verify and allow MAT credit as per law.

16. Interest under Section 234B:
- The Tribunal held that charging of interest is consequential and mandatory, directing the AO to provide consequential relief.

17. Additional Grounds:
- The Tribunal admitted additional grounds regarding coal levy and Debenture Redemption Reserve and remanded them to the AO for adjudication.