2023 (2) TMI 1210 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - sufficiency of own funds - HELD THAT - It is observed that AO has not made disallowance u/s 14A applying rule 8D as it was not in statute in the year under consideration. AO has made proportionate disallowance of interest as per formula mentioned in Assessment Order Borrowings/own funds investements . It is observed that Assessee has sufficient own funds in form of share capital and reserves and surplus in comparison with investment in shares made by it. Thus as relying on South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT and Shapoorji Pallonji Co Ltd 2020 (3) TMI 552 - BOMBAY HIGH COURT held that if there are funds available with the assessee, both, interest-free and overdraft and/ or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the assessee if the interest-free funds were sufficient to meet the investments. Ground of appeal filed by Assessee is allowed. Addition of different unutilised CENVAT credit u/s 145A - HELD THAT - , Coordinate bench held in the case of Mahindra Mahindra Ltd. 2020 (2) TMI 62 - ITAT MUMBA the amount of the unutilized Cenvat credit could not have been directly added to the closing stock. The Tribunal has not committed any error. (underlined for emphasis by us) It is evident from the above that irrespective of the method of accounting followed by the assessee, i.e. 'Inclusive method', wherein the taxes are included in the opening stock, purchases, etc. or the 'Exclusive method', the MODVAT credit does not have any impact on the profit of the assessee. Thus, following the ratio laid down by the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT and followed by case of Diamond Dye Chem Ltd. 2017 (7) TMI 616 - BOMBAY HIGH COURT , we set-aside the order of the CIT (A) and direct the Assessing Officer to delete the addition made. Ground of appeal filed by Assessee is allowed. Club entrance/subscription fee for its director expenditure was incurred on account of subscription to clubs for the purpose of promoting and fostering its business relationship and objective of the assessee was to enable its directors to meet various kinds of people in the clubs so that by such meeting they would develop business relationship. Thus expenditure incurred by the assessee wholly and exclusively for the purpose of business and the expenditure is allowable as deduction u/s 37 of the Act. Nature of receipt - amount received on sale of TDR is a capital receipt. Sales tax incentives received by assessee are rightly considered as Capital Receipts by Ld.CIT(A) both for the purposes of normal tax as well for the purposes of computation u/s.115JB of the Act and be excluded while computing taxable income . Provision of Director s retirement benefit Treating the same as unascertained liability - Allowing deduction holding the same to be a liability in praesenti to be discharged at future, capable of being estimated with reasonable certainty. TDS u/s 195 liability on interest payment made to SBI Bank- Bahrain Branch - As settled position that a branch office is part of the entire SBI and not a separate legal entity. Payment to foreign branch of Indian entity tantamount to payment made to Indian company only. Accordingly, provisions of Section 195 are not applicable in respect of payments made to foreign branch of Indian Bank. Considering all we are inclined to accept the findings of CIT(A) for deleting the addition made by Assessing Officer. Nature of expenses - cost of dismantling assets - By incurring expenditure no new assets of enduring nature was brought into existence and hence was claimed as revenue expenditure. Deduction u/s 80IA on two units purchased from Tata Power Limited - deduction is denied on the ground that assessee has not set up any undertaking and same has been formed by transfer of previously used plant machinery - HELD THAT - A settled position that the deduction u/s 80IA is qua undertaking and not qua entity. Every undertaking will be entitled to avail deduction u/s 80IA for a period of 10 consecutive years from 15 years from the commencement of business. There is substance in the argument of assessee that Tata Power Company Limited might not have claimed for deduction u/s 80IA for various reasons and there is nothing on record to prove that said company was not entitled for deduction in respect of 80IA on such power plant. On the other hand, claim of deduction u/s 80IA made by assessee is emanating from notes forming part of return of income for A.Y. 1999-2000 and not disputed by Assessing Officer in assessment proceedings hence there is no reason for not allowing deduction u/s 80IA for TG-2 Wadi. The Hon ble Bombay High court in the case of Simple Food Products (P.) Ltd. 2017 (8) TMI 646 - BOMBAY HIGH COURT has held that if deduction u/s. 80-IB was granted for an initial assessment year, same could not be rejected for subsequent assessment years unless relief for initial year was withdrawn. In view of holistic discussion made herein above, assessee is entitled to deduction u/s 80IA on TG-2 and TG-3, Wadi unit. Thus, related ground of appeal in departmental appeal is dismissed and ground of appeal in assessee s appeal is allowed. Apportionment of the indirect Head Office expenses while computing deduction u/s.80IA/80IB - HELD THAT - AO is directed to allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis- -vis overall expenditure. Thus, related ground of appeal in departmental appeal is dismissed and ground of appeal in assessee s appeal is partly allowed as directed herein above. Addition for provisions for wealth tax, provision for gratuity, provision for leave encashment, provision for Director s retirement benefits, while computing the book profit u/s.115JB is to be deleted. Addition of provision for contingencies while computing the book profit u/s.115JB - As assessee has admitted that this fact that this issue has been covered against the assessee due to insertion of clause (i) to Explanation 1 to Section 115JB vide Finance No. 2 Act, 2009 w.e.f 01.04.2001 - Accordingly, we set aside the finding of the CIT(A) on this issue and restored the issue before the Assessing Officer to decide the issue afresh by giving an opportunity of being heard to the Assessee in accordance with law. Addition made in respect of VRS expenditure pertaining to earlier years in computing Book Profit u/s 115JB is to be deleted. MAT computation on taxable long term capital gains arising on transfer of fixed assets - HELD THAT - As evident that the assessee will be entitled to indexed cost of acquisition while computing capital gains u/s 115JB of the Act. It is also to be noted that in the immediately preceding year Coordinate Bench has held that long term capital gains credited in the books of accounts is taxable to which even the Ld. AR fairly conceded subject to the decisions as relied supra. However, he claimed that the indexed cost of acquisition does not form part of income computed u/s 115JB of the Act. Respectfully following the ratio laid down in Best Trading and Agencies Limited 2020 (9) TMI 94 - KARNATAKA HIGH COURT the Assessing Officer is directed to recompute taxable long term capital gains arising on transfer of fixed assets after giving the benefit of indexed cost of acquisition while computing taxable profits u/s 115JB of the Act. Thus, the related ground of appeal in Departmental Appeal as well as Assessee s appeal is partly allowed subject to the above directions. Deduction u/s 80HHC computed on the basis of book profit u/s 115JB - whether the assessee is entitled the benefit of reducing the profit of the business eligible for deduction under section 80HHC of the Act while computing the book profit under the provisions of section 115JB? - above benefit to the assessee was denied by the Finance Act 2011 with retrospective effect 01-04-2005 - HELD THAT - As decided in Torrent Pharmaceuticals Limited 2022 (3) TMI 340 - ITAT AHMEDABAD Admittedly, at the time of filing the return of income the assessee was entitled for the benefit as discussed above. But on a later date there was an amendment by the finance Act 2011 which denied the benefit to the assessee with retrospective effect. The Hon'ble Supreme Court in the case of Star India Pvt. Ltd vs. Commissioner of Central Excise 2005 (3) TMI 10 - SUPREME COURT has held that the benefit granted under the statute to the assessee cannot be withdrawn by way of retrospective amendment. Any amendment denying the benefit to the assessee cannot be brought under the statute with retrospective effect. Exclusion of amount withdrawn from share premium account while computing book profit u/s 115JB - HELD THAT - We confirm the order of Ld. CIT(A) holding that amount transferred from Share Premium Account to the profit loss account was correctly reduced from Book Profits by the Assessee while computing book profit as per the provisions of Clause (i) of Explanation to Section 115JB(2) of the Act. This ground of appeal in Departmental Appeal is dismissed. Addition being debenture redemption reserve while computing book profit u/s 115JB - Hon ble Bombay High court in the case of Raymond Limited 2012 (4) TMI 128 - BOMBAY HIGH COURT has held that Amount set apart as a Debenture Redemption Reserve (DRR) is not a reserve within the meaning of Explanation (b) to section 115JA. Respectfully following decision of coordinate bench referred supra, we confirm the order of CIT(A) holding that amount transferred to Debenture Redemption Reserve cannot be added back while computing Book Profits. Addition being expenditure incurred to earn dividend income while computing book profit u/s 115JB - HELD THAT - As disallowance made by Assessing Officer u/s 14A is already deleted in proceeding paras hence consequential adjustment made while computing book profit u/s 115JB cannot be made. Exclusion of Premium on Redemption of Foreign Convertible Bond in computing Book Profit u/s 115JB - HELD THAT - Ahmadabad Bench in the case of Sun Pharmaceutical Industries Ltd. 2021 (4) TMI 998 - ITAT AHMEDABAD and .in Mahindra Mahindra Ltd. 2013 (12) TMI 139 - ITAT MUMBAI has treated premium paid on redemption of FCCB is eligible for deduction - Thus it is held that assessee is entitled for deduction of Premium on Redemption of Foreign Convertible Bond in computing Book Profit u/s 115JB. Thus, this ground of appeal is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Addition of unutilized CENVAT credit.
3. Disallowance of club entrance/subscription fees.
4. Treatment of amount received on sale of TDR.
5. Treatment of sales tax subsidy.
6. Disallowance of provision for Director's retirement benefit.
7. Disallowance of interest payment to SBI Bank-Bahrain Branch.
8. Disallowance of cost of dismantling assets.
9. Deduction under Section 80IA for TG-2 and TG-3 Power Plants.
10. Apportionment of indirect Head Office expenses for Section 80IA/80IB.
11. Addition of provisions for wealth tax while computing book profit under Section 115JB.
12. Addition of provision for normal and additional gratuity while computing book profit under Section 115JB.
13. Addition of provision for leave encashment while computing book profit under Section 115JB.
14. Addition of provision for Director's retirement benefits while computing book profit under Section 115JB.
15. Addition of provision for contingencies while computing book profit under Section 115JB.
16. Addition of VRS expenses, capital expenditure debited, and write-down of assets while computing book profit under Section 115JB.
17. Exclusion of profit on sale of fixed assets and investments while computing book profit under Section 115JB.
18. Deduction under Section 80HHC on book profit under Section 115JB.
19. Exclusion of amount withdrawn from share premium account while computing book profit under Section 115JB.
20. Addition of debenture redemption reserve while computing book profit under Section 115JB.
21. Addition of expenditure incurred to earn dividend income while computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A:
The Assessing Officer (AO) disallowed Rs. 15.30 crores under Section 14A for interest expenditure related to exempt dividend income. The CIT(A) directed the AO to recompute the disallowance, considering only those investments generating exempt income. The Tribunal deleted the disallowance, citing sufficient interest-free funds and relying on the Supreme Court's decision in South Indian Bank Ltd.

2. Addition of unutilized CENVAT credit:
The AO added Rs. 16.93 crores of unutilized CENVAT credit to the closing stock. The CIT(A) deleted the addition, referencing the Supreme Court's decision in Indo Nippon Chemicals and ITAT decisions in Hawkins Cooker Ltd. and Ambuja Cement Ltd.

3. Disallowance of club entrance/subscription fees:
The AO disallowed Rs. 17.77 lakhs for club fees, considering it a capital expenditure. The CIT(A) deleted the disallowance, following the Bombay High Court's decision in Otis Elevator Co. Ltd. and ITAT decisions in the assessee's earlier years.

4. Treatment of amount received on sale of TDR:
The CIT(A) considered the amount received on the sale of TDR as a capital receipt. The Tribunal upheld the AO's addition, treating it as taxable income.

5. Treatment of sales tax subsidy:
The AO treated sales tax incentives as revenue receipts. The CIT(A) and the Tribunal, following various judicial precedents, held the subsidies as capital receipts, eligible for exclusion under normal provisions and Section 115JB.

6. Disallowance of provision for Director's retirement benefit:
The AO disallowed Rs. 1.88 crores for Director's retirement benefit, treating it as an unascertained liability. The CIT(A) allowed the deduction, referencing the Supreme Court's decision in Bharat Earth Movers and ITAT decisions in the assessee's earlier years.

7. Disallowance of interest payment to SBI Bank-Bahrain Branch:
The AO disallowed Rs. 1.51 crores for interest payment to SBI Bahrain, citing non-deduction of TDS. The CIT(A) deleted the disallowance, stating that SBI Bahrain is part of SBI, a banking company exempt under Section 194A.

8. Disallowance of cost of dismantling assets:
The AO disallowed Rs. 53.09 lakhs for dismantling charges, treating it as capital expenditure. The CIT(A) allowed the deduction, following ITAT decisions in the assessee's earlier years.

9. Deduction under Section 80IA for TG-2 and TG-3 Power Plants:
The AO denied the deduction under Section 80IA for TG-2 and TG-3, considering them not new plants. The CIT(A) allowed the deduction for TG-3 but denied it for TG-2. The Tribunal allowed the deduction for both units, citing that the undertakings were not formed by splitting or reconstruction.

10. Apportionment of indirect Head Office expenses for Section 80IA/80IB:
The AO allocated indirect Head Office expenses to the eligible units. The CIT(A) directed to exclude specific expenses related to cement manufacturing. The Tribunal upheld the allocation but directed it to be based on the expenditure incurred by the units.

11. Addition of provisions for wealth tax while computing book profit under Section 115JB:
The AO added provisions for wealth tax while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

12. Addition of provision for normal and additional gratuity while computing book profit under Section 115JB:
The AO added provisions for gratuity while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

13. Addition of provision for leave encashment while computing book profit under Section 115JB:
The AO added provisions for leave encashment while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

14. Addition of provision for Director's retirement benefits while computing book profit under Section 115JB:
The AO added provisions for Director's retirement benefits while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

15. Addition of provision for contingencies while computing book profit under Section 115JB:
The AO added provisions for contingencies while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal remanded the issue back to the AO for fresh adjudication.

16. Addition of VRS expenses, capital expenditure debited, and write-down of assets while computing book profit under Section 115JB:
The AO added VRS expenses, capital expenditure debited, and write-down of assets while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

17. Exclusion of profit on sale of fixed assets and investments while computing book profit under Section 115JB:
The AO denied the exclusion of profit on sale of fixed assets and investments while computing book profit. The CIT(A) allowed the exclusion for fixed assets but denied it for investments. The Tribunal upheld the CIT(A)'s decision for fixed assets and remanded the issue of investments back to the AO.

18. Deduction under Section 80HHC on book profit under Section 115JB:
The AO denied the deduction under Section 80HHC on book profit. The CIT(A) allowed the deduction, following judicial precedents. The Tribunal upheld the CIT(A)'s decision.

19. Exclusion of amount withdrawn from share premium account while computing book profit under Section 115JB:
The AO denied the exclusion of the amount withdrawn from the share premium account while computing book profit. The CIT(A) allowed the exclusion, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

20. Addition of debenture redemption reserve while computing book profit under Section 115JB:
The AO added the debenture redemption reserve while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.

21. Addition of expenditure incurred to earn dividend income while computing book profit under Section 115JB:
The AO added expenditure incurred to earn dividend income while computing book profit. The CIT(A) deleted the addition, following ITAT decisions in the assessee's earlier years. The Tribunal upheld the CIT(A)'s decision.