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2018 (1) TMI 1658 - AT - Income TaxAddition being the notional interest and advance given to sister concern - assessee explained before the Assessing Officer that these are strategic investments made by it for the immediate working capital needs of the sister concern - HELD THAT - As in case SA BUILDERS LTD. 2006 (12) TMI 82 - SUPREME COURT held that when the borrowed funds were used for the business of sister concern, then the interest can be allowed as deduction even though the borrowed company has not used the loan amount for its business. The utilization of funds by the sister concern would tantamount to utilization of borrowed funds by the assessee. Therefore, the Apex Court found that there cannot be any disallowance. Moreover, in this case, the assessee claims that sufficient interest free funds were available with it. In those circumstances, this Tribunal is of the considered opinion that the disallowance is not justified. - Decided in favour of assessee. Addition being the contribution towards gratuity scheme - HELD THAT - It is not clear from the orders of the authorities below whether the gratuity fund was created by the assessee itself or it was contributed to the LIC gratuity fund. In the absence of any details of the nature of fund to which the contribution is said to be made, this Tribunal is of the considered opinion that the claim of the assessee cannot be adjudicated. In case the assessee has contributed to the LIC gratuity fund or any other similar fund and the contribution paid by the assessee has gone out of the hands irrecoverably, then the claim of the assessee needs to be allowed. In case the fund, which is said to be paid by the assessee, still remains with the assessee, then it cannot be said that the fund was irrecoverably gone out of the hands of the assessee. For deciding this issue, the nature of fund to which the assessee made contribution towards gratuity scheme needs to be examined. In the absence of any details before this Tribunal, the issue of contribution to gratuity scheme is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter and bring on record the nature of the gratuity fund to which the contribution is said to be made and thereafter decide the issue in accordance with law, after giving a reasonable opportunity to the assessee. TP adjustment on Deduction u/s 80-IA - counsel submitted that the profit of the eligible business shall be computed as if the power generated by captive power plant was transferred to manufacturing industry at the market value - HELD THAT - On identical situation, the issue of deduction under Section 80-IA of the Act was elaborately considered by the Mumbai Bench of this Tribunal in M/s Reliance Industries Limited 2017 (4) TMI 1489 - ITAT MUMBAI after elaborately considering the provisions of Electricity Act for the purpose of deduction under Section 80-IA of the Act, found that the price at which the Electricity Board sells the electricity to its consumer has to be taken as market price for the purpose of computing deduction under Section 80-IA - This Tribunal is unable to uphold the orders of the authorities below. Accordingly, the orders of the authorities below are set aside and the Assessing Officer is directed to adopt the arm's length price of electricity at 6.03 per unit. Determination of purchase of power from subsidiary company located in Karnataka - HELD THAT - The assessee purchased power from subsidiary company, namely, KPR Sugar Mills at Karnataka. The purchase of power is not in dispute. Had the assessee purchased power from State Electricity Board or Karnataka State Electricity Board, it would have paid the price fixed by the respective Electricity Board. Merely because the assessee purchased the power from subsidiary company that cannot be a reason to fix the cost of generation and also the purchase price. We have to determine the purchase price in an estimated market rate at which the assessee would have purchased the power from open market. When the Tamil Nadu Electricity Board sells power at ₹ 6.03 per unit, this Tribunal is of the considered opinion that the assessee could not have paid in the open market at ₹ 7 per unit. Therefore, even though the assessee claims ₹ 7/- per unit, this Tribunal is of the considered opinion that the assessee ought to have purchased the power at ₹ 6.03 per unit from TNEB. There is no justification in fixing the arm's length price at ₹ 3.59 per unit. In view of the above, and the reason stated in the earlier part of the order for deduction under Section 80-IA of the Act, the orders of the lower authorities are modified and the Assessing Officer is directed to fix the purchase price of power from subsidiary company, namely, KPR Sugar Mills Ltd. at ₹ 6.30 per unit.
Issues Involved:
1. Addition of ?7,17,500/- as notional interest on an advance given to a sister concern. 2. Addition of ?23,72,714/- being the contribution towards an unapproved gratuity scheme. 3. Deduction claimed under Section 80-IA of the Income-tax Act, 1961. 4. Determination of the purchase price of power from a subsidiary company. Detailed Analysis: 1. Addition of ?7,17,500/- as Notional Interest on Advance Given to Sister Concern: The first issue concerns the addition of ?7,17,500/- as notional interest on an advance of ?1,43,50,000/- given to the sister concern, M/s Jhanvi Motors Pvt. Ltd. The assessee argued that this was a strategic investment for the working capital needs of the sister concern, which should be considered as using the funds for the business purpose of the assessee. The Assessing Officer disallowed the notional interest on the grounds that the borrowed funds were not used for the assessee's business. However, the Tribunal referred to the Apex Court's decision in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1, which held that using borrowed funds for the business of a sister concern can be considered as using the funds for the business purpose of the assessee. The Tribunal concluded that the disallowance of ?7,17,500/- was not justified and deleted the addition. 2. Addition of ?23,72,714/- Being Contribution Towards an Unapproved Gratuity Scheme: The second issue involves the addition of ?23,72,714/- contributed to an unapproved gratuity fund. The assessee contended that the amount should be allowed under Section 37 of the Income-tax Act, 1961, as it had irrecoverably gone out of the assessee's hands. The Department argued that since the fund was unapproved, the disallowance was justified. The Tribunal noted the lack of clarity on whether the fund was created by the assessee or contributed to an LIC gratuity fund. The Tribunal remitted the issue back to the Assessing Officer to examine the nature of the fund and decide accordingly. 3. Deduction Claimed Under Section 80-IA of the Income-tax Act, 1961: The third issue pertains to the deduction claimed under Section 80-IA for electricity generated by the assessee's windmill and used for its manufacturing activities. The Transfer Pricing Officer (TPO) valued the electricity at ?3.44 per unit, leading to a downward adjustment of ?20,38,45,020/-. The assessee argued that the market value should be ?6.03 per unit, the rate at which Tamil Nadu Electricity Board sells power. The Tribunal referred to the Mumbai Bench decision in Addl. CIT v. M/s Reliance Industries Limited, which held that the price at which the State Electricity Board sells electricity should be considered the market value. The Tribunal directed the Assessing Officer to adopt the arm's length price of electricity at ?6.03 per unit. 4. Determination of Purchase Price of Power from Subsidiary Company: The fourth issue involves the determination of the purchase price of power from the subsidiary company, KPR Sugar Mills Ltd. The assessee paid ?7/- per unit based on the Indian Energy Exchange price, but the Assessing Officer fixed the price at ?3.69 per unit. The Tribunal noted that the power purchase from the subsidiary was not disputed and that the purchase price should be estimated at the market rate. The Tribunal concluded that the appropriate rate should be ?6.03 per unit, the rate at which Tamil Nadu Electricity Board sells power, and directed the Assessing Officer to fix the purchase price accordingly. Conclusion: The appeal was partly allowed, with the Tribunal providing relief on the issues of notional interest and the purchase price of power but remitting the issue of the gratuity fund back to the Assessing Officer for further examination. The Tribunal also directed the adoption of ?6.03 per unit as the arm's length price for electricity generated by the captive power plant.
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