2017 (4) TMI 1530 - AT - Income Tax

Depreciation on water supply and drainage - assessee is engaged in the business of coal mining and electricity generation - assessee grouped the assets under the head water supply and Drainage consisting of civil construction works like storage tanks, check dams, RCC Aprons and culverts, sewerage and drainage and large size pipelines and bore wells etc. and treated the same as plant and claimed the depreciation @15% - AO was of the view that the allowable depreciation is @10% as applicable in the case of non-residential buildings - CIT(A) allowed the assessee s appeal - HELD THAT - The civil construction in the mines cannot be treated on par with the residential buildings or non-residential buildings used for the purpose of residence or commercial use. They are to be constructed with a special technical requirement for the purpose of mining activity for excavation, generation and transmission as rightly observed by the Ld.CIT(A). The wear and tear is also very high in the mines. The decision KARNATAKA POWER CORPORATION 2000 (7) TMI 72 - SUPREME COURT supports this view. Therefore, we hold that the civil constructions made for the drainage and water supply in the mines are to be treated as plant and entitled for excess depreciation. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. The Revenue s appeal dismissed. Higher rate of depreciation on Electrical installations - assessee claimed the depreciation @15% and the AO restricted the same to 10% and the balance depreciation was disallowed - HELD THAT - We agree with the Ld.CIT(A) that the electrical installations installed for the purpose of excavation, transmission of mining activities required to be considered as a plant as per the decisions relied upon by the assessee. Whereas, the electrical installations installed in the administrative buildings, bus stations, etc., perform the functions of normal transmission of electricity cannot be held as a plant. The assessee also relied on the decision of Kutti Spinners Pvt Ltd 2014 (5) TMI 692 - ITAT CHENNAI . The Co-ordinate Bench of ITAT, Chennai held in the cited case that the electrical cables, fittings and other electrical works connected with the wind mill considered as a single capacity unit and eligible for depreciation @80%. Therefore, the issue is remitted the matter back to the file of the AO and to examine the electrical installations for the purpose of mining activity and installed for the purpose of normal electricity supply such as administrative buildings, canteen and bus stations, etc., and allow the depreciation @15% in respect of the installations made in the mines and 10% in respect of the buildings, Canteen, Bus Station, etc. Accrual of income - Surcharge recoverable from electricity bills - AO found from the Annual Report that the surcharge recovered from the belated settlement of power bills has not reckoned as income since there is uncertainty in realization and the same would be accounted on realization - assessee is following the mercantile systems of accounting - AO held that as per the tripartite agreement entered into by the assessee with RBI, Government of India and the state governments on behalf of Electricity Boards as was no uncertainty in the accrual of surcharge and held that ₹ 118 Cr. is an accrued income required to be brought to tax for the Assessment Year under consideration -whether the recovery of surcharge levied or leviable by the assessee is uncertain or certain? - HELD THAT - There is no doubt regarding the payment of dues when there is binding tri-partite agreement. Some sanctity and credence has to be given to the tripartite agreement. Therefore, we are unable to accept the contention of the assessee that there is no certainty in accrual of surcharge to the assessee company. The assessee has not demonstrated with the facts that recovery through Ministry of Finance is unenforceable. The tariff could not be realized either by Court orders or Government Orders, since there was a decree granted by the Trial Court which was affirmed by the Appellate Court and there was an uncertainty in releasing the dues in the case of Godhra Electricity Co. Ltd. There was no tri-partite agreement, as if, in the case of the assessee to ensure recovery by Ministry of Finance through adjustment in the case of Godhra Electricity Co. Ltd.. Therefore, the case law relied upon by the assessee cannot come to help of the assessee. The tripartite agreement entered in to with the Government of India, Reserve Bank of India and the state Governments has to be given due credence and simply cannot be brushed aside. Considering all the facts and merits of the case we hold that there was no uncertainty in realizing the tariff or surcharge by the assessee company and accordingly we hold that the income is accrued and the assessing officer has rightly brought to tax. Therefore we set-aside the orders of the Ld.CIT(A) and restore the Assessment Order. Appeal raised by the Revenue on the issue of surcharge recovery from Electricity Boards is allowed. Deduction u/s.80IA - AO was of the view that the Unit TPS-I was an expansion of the existing unit and hence not eligible for deduction u/s 80IA - Whether expansion cannot be considered as a new unit? - HELD THAT - As decided in own case 2004 (8) TMI 364 - ITAT MADRAS-B As per clause(iv) of sub-sec (4), deduction in respect of an undertaking which is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on 31st day of March, 2011 shall be 100% of the profit for a period of ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise generates power or commences transmission or distribution of the power. Therefore, deduction is clearly for the profits of an undertaking and not for an undertaking engaged in a new business. Similar expressions as found in sec 80-IA are found in sections 80HH, 80I and 80J. Object of the section was to provide an incentive for selling up of new industries so as to accelerate the process of industrialization and that it does not appear or to have been the intention of the legislature that the benefit of the section would be confined only to parties who had not already set up such industrial undertakings and not to parties who had past experience of running similar industrial undertaking. This principle has since been approved by the Supreme Court in the case of Textile Machinery Corporation Ltd 1977 (1) TMI 3 - SUPREME COURT . Applying the principles of the above decision of the Hon ble Supreme Court, it has been held that mere fact that the second unit manufactured some of the items which were manufactured by the first, did not make it an integral part of the first unit as it could survive independently of the first unit - appellant is entitled to relief under section 80-lA in respect of TPS-l Expansion. The requirement regarding investment in the plant and machinery and other conditions for availing benefit of deduction u/s.80-IA have also been satisfied and the AO has not raised any other objection regarding these conditions. In view of the above factual position and authoritative precedents, the deduction claimed by the appellant us 80-IA is allowed. Accordingly, the ground is allowed. Disallowance u/s.14A - HELD THAT - Insofar as it relates to applicability of Rule 8D for years prior to assessment year 2008-09, stands reversed by Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd vs. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT clearly held in the said decision that Rule 8D which came with effect from 24 th March, 2008, will be applicable only after the period 2008-09. Nevertheless, their Lordship has clearly noted that even prior to that year, A.O. was duty bound to compute disallowance under Section 14A by applying a reasonable method having regard to the facts and circumstances of the case. Therefore, despite the argument of learned A.R. that electricity bonds were taken under compulsion and there was no expenses incurred for earning the interest income, we are inclined to remit the issue back to the file of A.O. for consideration afresh. Disallowance of pre-paid expenditure - Expenditure disallowed by the AO stating that the expenditure was not ascertained - HELD THAT - Both the Ld.DR and the Ld.AR accepted during the appeal hearing that the assessee s case covered by this Tribunal order 2011 (6) TMI 997 - ITAT CHENNAI - Since the issue is covered by this Tribunal order and the Ld.CIT(A) followed the order this tribunal we do not find any infirmity in the order of the Ld.CIT(A) and the appeal of the revenue on this issue is dismissed. Disallowance of Advance Overburden removal of Rajasthan Mine - HELD THAT - As decided in own case 2008 (4) TMI 381 - ITAT MADRAS-C Expenditure on removing overburden in the continuous process of mining lignite from an old open cast mine is not expenditure for prospecting, etc. of minerals within the meaning of s.35E and also not capital expenditure but same is allowable revenue expenditure under s.37(1). Deduction u/s.80IA only on power project TPS-I - interest received from the employees and miscellaneous income derived from industrial entity for the purpose of deduction u/s.80IA OR not? - HELD THAT - The interest received from the employees and miscellaneous income cannot be held to be derived from industrial entity for the purpose of deduction u/s.80IA. The assessee is eligible for deduction u/s.80IA only on power project TPS-I. Handling charges, interest received from employees and miscellaneous income is not inter linked to the industrial activity of power generation Therefore, we do not find any infirmity in the order of the AO and the same is confirmed. The Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT held that the profits on sale of duty drawback are not eligible for deduction u/s.80IA. The word used in Sec.80IA for deduction of the profits and gains derived from undertaking or enterprise from any business referred to Sec.4 of 80IA is used in narrower, connotation and intend to cover not beyond the first degree of the source. Handling charges, interest received from employees and miscellaneous income are not the direct source of income from Power generation. Therefore, we are unable to accept the contention of the assessee to allow the deduction u/s.80IA on the other income. Accordingly, the assessee ground on allowing deduction u/s.80IA on the other income is dismissed. Exclude the expenditure relating to earning the other income for the purpose of computing the deduction u/s 80IA - HELD THAT - Though, the assessee has argued that expenditure related to other income required to be excluded. The Ld.AR of the assessee has not furnished the details of expenditure for earning the other income. The entire expenditure has been debited to the Profit Loss A/c relating to the earning of Gross total Income. Unless a specific details are furnished relating to the expenditure of other income. The assessee request cannot be acceded to. However, the fact cannot be denied that there would be expenses relatable to the earning of income especially in handling charges and other miscellaneous income. Considering the facts and merits of the case, we are inclined to estimate the expenses @10% of other income and direct the AO to exclude 10% of other income as expenses while computing the deduction u/s.80IA.

Summary

Issues Involved:
1. Depreciation on water supply and drainage.
2. Higher rate of depreciation on electrical installations.
3. Surcharge recoverable from electricity bills.
4. Deduction under Section 80IA.
5. Disallowance under Section 14A.
6. Disallowance of prepaid expenditure.
7. Overburden removal expenditure.
8. Exclusion of other income for deduction under Section 80IA.

Issue-wise Detailed Analysis:

1. Depreciation on Water Supply and Drainage:
The first issue pertains to the disallowance of excess depreciation on water supply and drainage for the assessment years (AY) 2007-08, 2009-10, and 2010-11. The assessee claimed depreciation at 15%, treating the assets as plant, while the Assessing Officer (AO) restricted it to 10%, treating them as non-residential buildings. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee’s appeal, holding that the assets serve special technical requirements and qualify as plant. The Tribunal upheld the CIT(A)’s decision, noting that civil constructions in mining activities are constructed with special technical requirements and are subject to high wear and tear, thus qualifying for higher depreciation.

2. Higher Rate of Depreciation on Electrical Installations:
For AYs 2007-08 and 2010-11, the AO disallowed higher depreciation on electrical installations, restricting it to 10% instead of the claimed 15%. The CIT(A) allowed the higher rate, citing the Karnataka Power Corporation case. The Tribunal remitted the matter back to the AO to examine the nature of electrical installations, distinguishing between those used in mining activities (eligible for 15%) and those used in administrative buildings (eligible for 10%).

3. Surcharge Recoverable from Electricity Bills:
The AO added the surcharge recovered from belated power bill settlements to the income, arguing that under the mercantile system of accounting, the income had accrued. The CIT(A) deleted the addition, relying on the Supreme Court’s decision in Godhra Electricity Co. Ltd. The Tribunal reversed the CIT(A)’s decision, holding that the tripartite agreement provided certainty of recovery, and thus, the surcharge income had accrued and was taxable.

4. Deduction under Section 80IA:
The AO disallowed the deduction claimed under Section 80IA for the TPS-I expansion unit, considering it an expansion of an existing unit rather than a new undertaking. The CIT(A) allowed the deduction, citing Supreme Court precedents that expansion of existing business qualifies for relief under Section 80IA. The Tribunal upheld the CIT(A)’s decision, noting that the issue was covered by a previous Tribunal order in the assessee’s favor.

5. Disallowance under Section 14A:
The AO disallowed expenses under Section 14A read with Rule 8D for AYs 2008-09 to 2010-11, related to tax-free bond income. The CIT(A) deleted the disallowance, stating that no expenditure was incurred to earn the exempt income. The Tribunal remitted the matter back to the AO to recompute the disallowance, following a previous Tribunal decision.

6. Disallowance of Prepaid Expenditure:
For AY 2008-09, the AO disallowed prepaid insurance expenditure, considering it related to future liability. The CIT(A) allowed the appeal, following a previous Tribunal order in the assessee’s favor. The Tribunal upheld the CIT(A)’s decision, noting that the issue was covered by a previous Tribunal order.

7. Overburden Removal Expenditure:
For AY 2010-11, the AO disallowed the overburden removal expenditure, treating it as capital expenditure. The CIT(A) allowed the appeal, following a previous Tribunal order that such expenditure is allowable as revenue expenditure. The Tribunal upheld the CIT(A)’s decision.

8. Exclusion of Other Income for Deduction under Section 80IA:
The AO excluded interest income from employees, handling charges for fly ash, and miscellaneous income from the profits eligible for deduction under Section 80IA. The CIT(A) upheld the AO’s decision. The Tribunal agreed with the AO and CIT(A) that these incomes were not derived from the industrial undertaking and thus not eligible for deduction under Section 80IA. However, the Tribunal directed the AO to exclude 10% of other income as related expenses while computing the deduction.

Conclusion:
The Tribunal provided a detailed analysis and rulings on each issue, often referring back to previous decisions and legal precedents to support its conclusions. The appeals were partly allowed, with specific directions for further examination and computation by the AO where necessary.