2023 (2) TMI 1211 - AT - Income Tax

Reassessment u/s 147 - reopening beyond four years - escapement on account of claim of deduction u/s 80IA for railway infrastructure and the second being quantification of profits from railway infrastructure - Escapement on account of CENVAT element attributable to consumption of raw material and other services in relation to Captive Power Plants (CPP) - HELD THAT - It is apparent that reassessment notice issued by Assessing Officer on two grounds as discussed herein above, are based upon facts already on record of Assessing Officer and Assessing Officer has not pointed out that there was any failure on the part of Assessee to disclose material facts. The entire reassessment notice issued by Assessing Officer is unstainable in the eyes of law and same is quashed. The consequential addition in Assessment Order does not survive and same are deleted. This ground of appeal is accordingly allowed. Deduction u/s.80IA on Rail Infrastructure - Hon'ble Madras High Court in the case of M/s Tamilnadu Petro Products Ltd. Vs ACIT 2010 (11) TMI 645 - MADRAS HIGH COURT allowed deduction u/s 80IA of the Act where the facility was one of captive consumption. Thus even if the facility was for captive use, deduction u/s 80IA(4) cannot be denied. Thus applying the proposition of law laid down in all these case laws, in the facts of the case we hold that, on merits the assessee is entitled to claim deduction u/s 80IA of the Act. Disallowance of proportionate CENVAT credit availed for units eligible for deduction u/s 80-IA - The fiction envisages under section 80IA(5) is to enable computation of profits on a standalone basis, rather than to increase the scope of profits itself and allocate notional expenditure to the eligible units. When the eligible units are other units are treated as independent of each other, and the profit computations are on a standalone basis, the eligible unit must get the corresponding credit for the CENVAT credits availed by the other units. Viewed thus, not accounting for the CENVAT credit does not, in our considered view, vitiate the profits of the eligible undertaking, as long as all such credits are fully availed by the other units as is the undisputed position anyway. What the assessee has done is that the expenses are debited net of the CENVAT credit availed. To this extent, we see no infirmity in the stand of the assessee. We uphold the plea of the assessee, and direct the AO to delete the impugned adjustment on account of CENVAT in the profits of the eligible units. Disallowance u/s 14A - AO is directed to re-work disallowance u/s.14A under rule 8D(2)(iii) on investment which has yielded exempt income Addition of unutilized CENVAT Credit - As 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 the Hon'ble Bombay High Court in the 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 on account of unutilised MODVAT credit. This Ground of appeal is accordingly allowed. Nature of receipt - refund of sales tax - Revenue or capital receipt - HELD THAT - Sales tax incentives received by assessee are rightly considered as Capital Receipts by Ld. CIT(A). Nature of expenses - pre-operative expenses - whether, even when the expenditure is shown in the books of accounts, it can be treated as revenue in nature? - HELD THAT - As in our considered view, stands concluded in favour of the assessee. In the case of CIT Vs Havells India Ltd 2012 (5) TMI 449 - DELHI HIGH COURT has, in this context, observed, speaking through Hon ble Justice Easwar, that The fact that in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive . The limited grievance raised by the Assessing Officer is thus devoid of any legally sustained merits, and we reject the same. In any event, even on merits, the well reasoned order of the learned CIT(A), in our considered view, does not merit any interference. We approve the conclusions arrived at by the learned CIT(A) on this point and decline to interfere in the matter. Additional depreciation u/s 32(1)(iia) - Whether additional depreciation is allowable only on new machinery i.e. the first year in which it is put to use? - HELD THAT - It is observed that coordinate bench in its later decision in the case of Ambuja Cement Limited 2022 (11) TMI 1419 - ITAT MUMBAI holding company of assessee has allowed similar claim of depreciation. When coordinate bench of ITAT in its latest decision has decided issue in favour of assessee by holding that assessee is entitled for additional depreciation u/s 32(1)(iia), such later decision would prevail over the decision of Everst Industries Limited 2018 (4) TMI 426 - ITAT MUMBAI relied upon by Ld DR. As a result, since this aspect of the matter is no longer res integra, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench in the group concern s case of the assessee. We uphold the plea of the assessee and direct the Assessing Officer to allow depreciation u/s.32(1)(iia) of the Act. Deduction u/s. 80IA of the I.T. Act, in respect of power-generating unit-TG3 located at Wadiif - HELD THAT - As 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. Thus, assessee is entitled to deduction u/s 80IA on TG-2 and TG-3, Wadi unit. Wealth tax provision is not required to be added back while computing Book Profits under Section 115JB Disallowance u/s 14A in respect of exempt income while computing book profits u/s. 115JB - HELD THAT - Eventually, there is no disallowance under section 14A on the facts of this case, and, in any event, the issue is covered, as regards the question of adjustment of book profits under section 15JB for the 14A disallowance, in favour of the assessee, by a special bench decision in the case of ACIT Vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI . Club fees made to promote business interest is an allowable expenditure u/s 37(1) Disallowance of proportionate Head Office expenditure and Research Development expenditure while computing deduction u/s 80IA/80IB/80IC - 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, ground of appeal in assessee s appeal is partly allowed. Long term capital gain on sale of Porbandar Land - absolute owner of land - FMV determination - During the course of appellate hearing, Ld. AR has argued that prior to 1st July, 2012, for the purpose of valuation u/s.55 of the Act, reference cannot be made if value of asset given by assessee was more than market price - HELD THAT - It is observed that assessee company had used the land for manufacturing purpose for certain years but same was not carried out since few years hence Collector, Porbandar has passed the order for re-possessing such land which was in dispute before Hon ble High court. Thus, repossession of land by the State Government cannot be terms as penalty as observed by AO but rights in lands are repossessed by the Government of Gujarat. As Hon ble Gujarat High court has passed the order for obtaining back such possession of land from assessee company in year under consideration, assessee company has rightly computed Long Term Capital gain/loss in year under consideration. Thus, argument of AO that assessee was not absolute owner of land and re-possession of land by State of Gujarat is not transfer u/s 2(47) of the Act cannot be accepted. Copy of such MOU, quantum of consideration received towards such MOU is not on record. Whether such MOU was legal or not or whether assessee company was legally capable of transferring such part of land to other party or not is not subject matter of present appeal as legal issue was already before Hon ble High court as referred supra. It is emanating from the order of Hon ble High court that approximately 35 acres of land came to be transferred in favour of HMP Cement in earlier years hence to that extent of land assessee is not entitled to long term capital loss as he was not having ownership of land to that extent in year under consideration. Considering such facts, AO is directed to re-compute income from long term loss after excluding long term capital loss pertaining to 35 acres of land as was transferred to HMP as referred supra. AO was not justified in considering fair market value of land based upon DVO s report obtained u/s 55A. Assessing Officer is directed to recomputed long term capital loss in the case of assessee. This ground of appeal is accordingly allowed for statistical purpose. Disallowing claim of leave encashment - HELD THAT - Hon'ble supreme court in the case of UOI v. Exide Industries Ltd. 2020 (4) TMI 792 - SUPREME COURT has upheld constitutional validity of provision of section 43B(f) for provision for leave encashment liability and considering binding decision of Hon'ble Supreme Court claim cannot be allowed. However, if payment of such provision towards leave encashment is made in subsequent year, deduction may be allowed to assessee in such years if not allowed till date. Therefore, Assessing Officer is directed to verify and the same and allow the same as per our above directions. Addition of provision for leave encashment made while computing book profit u/s 115JB is deleted Excise duty exemption received by assessee are capital receipts both for the purpose of computing income as per normal provision of the Act as well as book profit u/s 115JB of the Act and the addition made by Assessing Officer is deleted. 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 Interest u/s.244A - Though, in assessee s case, interest u/s.244A charged to Profit Loss account is not recovered by Assessing Officer by passing any order but same is provided based upon past experience based upon assessment orders / appellate orders in case of assessee hence such interest provided in the books of account in actual sense partakes the character of interest as provided in explanation 2 to section 115JB of the act. If assessee would have actually paid amount received u/s.244A to Assessing Officer on account of additions made in assessment order and such interest if would have been debited to P L account, such interest would have been disallowed while computing Book Profit hence on this analogy also provision of interest deserves to be added back while computing Book Profit u/s.115JB of the Act. It is observed that if in later years such amount is actually required to be paid to Assessing Officer, assessee would adjust such interest payable directly to provision of interest appearing in balance sheet and in that scenario also such interest u/s.244A would not have been subject to Book Profit u/s.115JB of the Act which is contrary to the provision of the Act. On this ground also the claim of assessee fails and adjustment made by Assessing Officer is also upheld. This ground of appeal is dismissed. Amount transferred to Debenture Redemption Reserve cannot be added back while computing Book Profits. Assessee has claimed deduction of VAT payment as per provision of section 43B - The issue requires verification at the end of the Assessing Officer

Summary

Issues Involved:

1. Validity of Reassessment Proceedings
2. Disallowance of Deduction under Section 80-IA for Rail System
3. Disallowance of Proportionate CENVAT Credit
4. Disallowance under Section 14A
5. Treatment of Sales Tax and Excise Duty Incentives
6. Disallowance of Pre-Operative Expenses
7. Allowance of Additional Depreciation under Section 32(1)(iia)
8. Deduction under Section 80-IA for Power Generating Units
9. Inclusion of Provision for Leave Encashment in Book Profits under Section 115JB
10. Inclusion of Interest on Income Tax in Book Profits under Section 115JB
11. Exclusion of Sales Tax and Excise Duty Incentives in Book Profits under Section 115JB
12. Inclusion of Capital Profit in Book Profits under Section 115JB
13. Deduction of VAT Paid under Section 43B

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The Assessee challenged the reassessment notice issued under Section 148 of the Act. The Tribunal found that the original assessment order under Section 143(3) was passed after due consideration of all relevant facts. The reasons recorded for reopening were based on material already on record, indicating a change of opinion, which is impermissible. Thus, the reassessment notice was quashed.

2. Disallowance of Deduction under Section 80-IA for Rail System:
The Tribunal upheld the Assessee's claim for deduction under Section 80-IA for the rail system, rejecting the Revenue's argument that the rail system was a private facility. It was held that the infrastructure facility need not be a public facility for claiming deduction under Section 80-IA. The Tribunal relied on the decision in the case of Ultratech Cement Ltd. and other judicial precedents.

3. Disallowance of Proportionate CENVAT Credit:
The Tribunal allowed the Assessee's claim, stating that the CENVAT credit should not be added back to the closing stock. It relied on judicial precedents, including the decision in the case of Ambuja Cement Ltd., which held that the CENVAT credit does not impact the profit of the Assessee.

4. Disallowance under Section 14A:
The Tribunal directed the Assessing Officer to re-work the disallowance under Rule 8D(2)(iii) on investments that yielded exempt income, following the decision in the case of Vireet Investment Pvt. Ltd. It also upheld the deletion of proportionate interest disallowance, relying on the Supreme Court's decision in South Indian Bank Ltd.

5. Treatment of Sales Tax and Excise Duty Incentives:
The Tribunal held that sales tax and excise duty incentives received by the Assessee are capital receipts and should not be included in the taxable income. This was based on the purpose test laid down by the Supreme Court in the case of Ponni Sugars and Chemicals Ltd. and other judicial precedents.

6. Disallowance of Pre-Operative Expenses:
The Tribunal allowed the Assessee's claim for pre-operative expenses, stating that the accounting treatment in the books is not conclusive. It relied on the decision in the case of Havells India Ltd., which held that the expenses should be considered based on their nature and purpose.

7. Allowance of Additional Depreciation under Section 32(1)(iia):
The Tribunal allowed the Assessee's claim for additional depreciation on assets acquired after 01-04-2005, following the decision in the case of Ambuja Cement Ltd. It held that the restriction on claiming additional depreciation only in the initial year was removed by the amendment effective from 01-04-2006.

8. Deduction under Section 80-IA for Power Generating Units:
The Tribunal upheld the Assessee's claim for deduction under Section 80-IA for power generating units, rejecting the Revenue's argument that the units were formed by splitting up or reconstruction of existing business. It relied on judicial precedents, including the decision in the case of Sonata Software Ltd.

9. Inclusion of Provision for Leave Encashment in Book Profits under Section 115JB:
The Tribunal deleted the addition of provision for leave encashment while computing book profits under Section 115JB, following the decision in the case of Bharat Earth Movers and other judicial precedents.

10. Inclusion of Interest on Income Tax in Book Profits under Section 115JB:
The Tribunal upheld the addition of provision for interest on income tax while computing book profits under Section 115JB, stating that such provision partakes the character of interest as provided in Explanation 2 to Section 115JB.

11. Exclusion of Sales Tax and Excise Duty Incentives in Book Profits under Section 115JB:
The Tribunal allowed the Assessee's claim for exclusion of sales tax and excise duty incentives while computing book profits under Section 115JB, following the decision in the case of Welspun Steel Limited and other judicial precedents.

12. Inclusion of Capital Profit in Book Profits under Section 115JB:
The Tribunal directed the Assessing Officer to recompute the taxable long-term capital gains after giving the benefit of indexed cost of acquisition while computing book profits under Section 115JB, following the decision in the case of Best Trading and Agencies Limited.

13. Deduction of VAT Paid under Section 43B:
The Tribunal directed the Assessing Officer to verify and allow the deduction of VAT paid before the due date of filing the return of income under Section 43B, following the decision in the case of Pruthvi Brokers and Shareholders Pvt. Ltd.

Conclusion:
The Tribunal's detailed analysis and reliance on various judicial precedents resulted in a comprehensive resolution of the issues involved, providing clarity on the application of relevant provisions of the Income Tax Act. The decisions were made in favor of the Assessee on most grounds, ensuring that the principles of law were upheld.