2019 (1) TMI 2043 - AT - Income Tax

Deduction u/s. 80IA(4)(i) on storage tank MDI and storage tank EDA - AO's allegation is that storage tank is devoid of loading and unloading facility and same are not within the premises of Kandla Port Trust and held that MDI-storage tank, for which assessee has claimed deduction is not an enterprise as (a) it is incapable of doing independent business in absence of loading unloading facility (b) no separate accounts has been maintained, as most of expenses are allocated on pro-rate basis - assessee stated that that there is difference in the nature of business in case of MDI storage tank and other tanks at the tank farm - HELD THAT - Assessee stated that storage facility is for loading and unloading of chemical, a copy of storage and terminal agreement with M/s. Dow Chemical International Pvt. Ltd.,is also filed. And the storage tanks are connected with associated pumps, pipelines, connecting hoses, valves, metering and control devices and auxiliary equipment to carry out the loading and unloading functions. Thus, the MDI tanks are special tanks for specific liquid cargo hence has separate dedicated pipeline and pump for the same has been installed. The tanker vessels carrying on the specific chemicals come to Kandla Port for discharge of the cargo. The vessels are berthed at Oil Cargo Jetty and after necessary customs formalities; the cargo is unloaded in the storage tank through pipelines as per permission of Kandla Port Trust. As we can see, that case of the assessee case is squarely falls under the clarification provided in Circular No. 10 of 2005. It is fact that storage tanks are an integral part of Port operations and it can't be utilized for any other non-port operations, Moreover, in AY 2013-14, the AO in his order u/s. 143(3) after physical verification of; the structure, categorically given his finding that the respondent qualified the condition of new infrastructural facility of having structures at the port for storage, loading and unloading. Satellite image/map on the wikimapia.org clearly show the area/boundaries of Kandla Port, within which the Respondent has developed the structure, i.e., storage tanks. The AO's observation that the structure of Respondent is not part of port is incorrect and for Kandla port trust, commissioner of Custom has notified assessee as custodian and therefore the same is stipulated within the Custom Bonded Area i.e. port. Therefore, in our considered opinion, assessee is entitled for deduction u/s. 80IA(4)(i) being the profit from enterprise carrying on the business of developing/operating/maintaining infrastructure facilities i.e. port and also entitled for deduction. Thus, this ground of appeal is dismissed. Addition u/s. 14A - assessee had investment in Shares for which no expenses have been allocated by the assessee - CIT(A) deleted addition - HELD THAT - As seen assessee was having substantial interest free funds, it is fact that as per paper book interest free funds went into investment, which generated exempt income. Therefore, no disallowance can be made u/s. 14A as no interest bearing funds has been deployed to earn exempt income. A.O. had not demonstrated any nexus between the earning of exempt income for such income. Therefore, in our considered opinion, ld. CIT(A) has rightly granted relief to the assessee. But disallowance made under Rule 8D(iii) are confirmed by lower authorities because assessee has not been able to prove one to one nexus of interest free funds as well as investment in securities because such investment require bank charges, clerical work and time of directors. Therefore, we are of the opinion that ld. CIT(A) has rightly confirmed the addition of Rs. 2,23,639/-. Addition u/s. 40A(2)(a) r.w.s. 40A(2)(b) - Terminal Handling Storage Charges paid to Shreeji Power Insulator Pvt. Ltd.- HELD THAT - Payment made to persons other than persons covered u/s. 40A(2)(b) were comparable and inter alia payment to the persons covered u/s. 40A(2)(b) was not excessive either in comparison to the other independent parties as well as to the market rate which can assumed as to nearer to the rates at which the said third parties are being paid. Therefore, in our considered opinion, ld. CIT(A) has rightly granted part relief to the assessee. Disallowance of depreciation on windmill - assessee has claimed depreciation in respect of the common power evacuation charges - As per AO charges were paid to the Suzlon Energy for common power Evacuation infrastructure facility on sharing basis and these charges were not refundable and clear from this bill that respondent has not acquired any asset by paying these charges on which it can claim depreciation - as per AO assessee cannot claim depreciation @ 80% on windmill but assessee stated that in respect of the entire windmill inclusive of civil, electrical items because a powerful thrust of air at any point of time - HELD THAT - As we can see, the ld. A.O. has unnecessarily adopted a very restrictive view wherein he has resorted to dissect the purchase value of the entire windmill assembly in various sub components i.e. land, machinery, labour charges, right to access, etc. and has opined that 80% depreciation will be available only to the windmill proper mentioned in the Depreciation Schedule in the IT Rules. Erecting and operating windmill assembly is not limited to installing a windmill turbine only. Bringing windmill in existence and making it operational requires fulfillment of various sub components like installing and fabricating accessory machineries, electric fitting, civil constructions, hiring labours, getting permission, documentations, getting access to the land, getting power connecting, getting power output connection, getting access to pooling station. As decided in case of CIT vs. Parry Engineering and Electronics Pvt. Ltd 2014 (12) TMI 752 - GUJARAT HIGH COURT wherein it is held that windmill are entitled for depreciation and decided the matter on favour of the assessee. Disallowance of expenditure incurred on consideration for lease land - business expenses or not? - HELD THAT - Assessee has made this payment to Kandla Port Trust as Windmill land charges and same are for business purpose. Therefore, such amount cannot be disallowed and ld. CIT(A) has rightly allowed the claim of the assessee. Addition u/s. 41(2) - amount shown outstanding for such a long period - HELD THAT - As before lower authorities and before us, assessee could not submit any explanation that why these amounts had been shown outstanding for such a long period and what steps have been taken by the assessee to recover these amounts and even before us assessee could not explain about the list in details. Therefore, we dismiss this ground of appeal by the assessee. Disallowance of staff welfare expenses and travelling expense on the alleged ground of personal element - HELD THAT - Since assessee has not submitted any details with lower authorities and even before us, assessee has not submitted any plausible explanation for not submitting details of expenditure of this amount. Therefore, we dismiss this ground of appeal.

Summary

Issues Involved:
1. Disallowance of deduction under section 80IA(4)(i) on storage tanks.
2. Addition under section 14A for disallowance of expenses related to exempt income.
3. Addition under section 40A(2)(a) for Terminal Handling & Storage Charges.
4. Disallowance of depreciation on land and windmill-related expenses.
5. Disallowance of share issue expenses under section 35D.
6. Addition under section 41(2) for outstanding amounts.
7. Disallowance of staff welfare and traveling expenses.
8. Disallowance of interest expenses under section 14A.
9. Delay in filing cross objections.

Detailed Analysis:

1. Disallowance of Deduction under Section 80IA(4)(i) on Storage Tanks:
- AO's Allegation: The storage tanks lacked loading and unloading facilities and were not within the Kandla Port Trust premises, thus not qualifying as an enterprise under section 80IA(4).
- Assessee's Defense: The storage tanks were dedicated to specific chemical storage with necessary facilities as per agreement with Dow Chemical International Pvt. Ltd., and were part of port operations.
- Tribunal's Decision: The storage tanks are integral to port operations and qualify for deduction under section 80IA(4)(i). The AO's observations were incorrect, and the assessee is entitled to the deduction of Rs. 2,25,43,715/-.

2. Addition under Section 14A for Disallowance of Expenses Related to Exempt Income:
- AO's Allegation: Disallowed Rs. 30,94,549/- under section 14A, alleging the assessee failed to prove the investment was made from its own funds.
- Assessee's Defense: The investment was strategic in nature, made in a subsidiary to gain control, not to earn exempt income. The assessee had substantial interest-free funds.
- Tribunal's Decision: The disallowance under section 14A was not justified as the investment was strategic and not for earning exempt income. However, a disallowance of Rs. 2,23,639/- under Rule 8D(iii) was confirmed due to associated bank charges and clerical work.

3. Addition under Section 40A(2)(a) for Terminal Handling & Storage Charges:
- AO's Allegation: The assessee paid excessive charges to a related party, SPIPL, at rates higher than the fair market value.
- Assessee's Defense: Payments to SPIPL were at the same rate as to third parties, and not excessive.
- Tribunal's Decision: The payments were not excessive when compared to market rates and payments to unrelated third parties. The addition was rightly deleted by the CIT(A).

4. Disallowance of Depreciation on Land and Windmill-Related Expenses:
- AO's Allegation: Disallowed depreciation on the grounds that the expenses were not essential for the functioning of the windmill.
- Assessee's Defense: Specialized foundations and electrical fittings are integral to the windmill's operation.
- Tribunal's Decision: Following the Gujarat High Court's judgment, the entire windmill assembly, including civil and electrical works, qualifies for depreciation. The addition was rightly deleted by the CIT(A).

5. Disallowance of Share Issue Expenses under Section 35D:
- AO's Allegation: Disallowed Rs. 2,61,000/- for share issue expenses, stating they were not related to public issue or expansion.
- Assessee's Defense: The expenses were incurred before the commencement of business and were capital in nature.
- Tribunal's Decision: The expenses were for business purposes and allowable. The addition was rightly deleted by the CIT(A).

6. Addition under Section 41(2) for Outstanding Amounts:
- AO's Allegation: Added Rs. 10,07,333/- for long-outstanding amounts from various parties.
- Assessee's Defense: No substantial defense provided.
- Tribunal's Decision: The addition was upheld as the assessee could not explain the outstanding amounts.

7. Disallowance of Staff Welfare and Traveling Expenses:
- AO's Allegation: Disallowed Rs. 50,096/- for staff welfare and Rs. 20,208/- for traveling expenses due to personal elements.
- Assessee's Defense: No substantial defense provided.
- Tribunal's Decision: The disallowance was upheld as the assessee failed to provide details.

8. Disallowance of Interest Expenses under Section 14A:
- AO's Allegation: Disallowed Rs. 30,04,841/- under section 14A.
- Tribunal's Decision: Following the decision in connected appeals, the disallowance was deleted.

9. Delay in Filing Cross Objections:
- Assessee's Issue: Filed cross objections with a delay of 494 days without a cogent reason.
- Tribunal's Decision: The cross objections were dismissed due to the delay.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions in most instances, granting relief to the assessee on several grounds related to deductions and disallowances, while confirming some disallowances where the assessee failed to provide adequate explanations. The cross objections filed by the assessee were dismissed due to delay.