2017 (9) TMI 1167 - AT - Income Tax

Disallowance of Proportionate Compensation Paid for mining activity - nature of expenditure - revenue or capital - Held that - We find that the issue under dispute is squarely covered by the decision of this tribunal in assessee s own case for the Asst Year 2006-07 wherein held the payment of compensation to persons whose rights are infringed by the mining activity is revenue in nature. - Decided in favour of assessee. Disallowance u/s 14A - whether only investments from which exempt income was received should be considered - Held that - We deem it fit and appropriate to remand this issue to the file of the ld AO with the direction to consider all investments (excluding investments in subsidiary companies) which yielded dividend income to the assessee for computing disallowance u/s 14A of the Act r.w. Rule 8D of the Rules. Accordingly the grounds raised in this regard are partly allowed for statistical purposes. Taxability of Industrial Promotion Assistance - capital v/s revenue receipt - Held that - It is apparent from the provisions of the 2000 Scheme and the certificate of registration and eligibility certificate that the assistance was to be made available after the commencement of commercial production without any financial cap and was to be adjusted against the sales tax liability of the year of claim. The industrial promotion assistance was clearly not used directly or indirectly to acquire the assets nor any part of the cost of the assets was met directly or indirectly from the industrial promotion assistance. We find that the issue under dispute is squarely covered by the decision of this tribunal in assessee s own case for Asst Year 2007-08 wherein held IPA received by the assessee would have to be construed as a Capital Receipt and the same need not be reduced from the cost of assets in terms of Explanation 10 to Section 43(1) of the Act. Accordingly, the grounds raised by the revenue are dismissed and grounds raised by the assessee are allowed. Adopting of price for working out the amount eligible for deduction u/s 80IA - Held that - We find that during the previous year relevant to the Asst Year 2009-10, the assessee infact sold electricity at rates higher than that charged from it by the State Electricity Board. The assessee nevertheless made the computation for the purpose of section 80IA of the Act with reference to the price charged from it by the State Electricity Board. In such circumstances, we hold that, when it was permissible for the assessee to sell electricity to consumers and distribution licensees at rates higher than that paid by it to the State Electricity Board, the price charged by the State Electricity Board would be a very good indication of the market value of electricity and the assessee did not commit any error in adopting such price for working out the amount eligible for deduction u/s 80IA of the Act. We find that the method adopted by the assessee viz. to take the average rate charged by the State Electricity Board for the previous month is quite appropriate and reasonable for determining the market value for the month of supply. The annual weighted average adopted by the ld CITA would result in variations occurring during the year at different times being made applicable uniformly for the whole year. In our considered opinion, the assessee s method is more appropriate as it factors in variations as and when they take place. Coming to the decision of the ld CIT-A to exclude electricity duty and cess, we find that the same has been addressed by the Hon ble Gujarat High court in the case of CIT vs Shah Alloys Ltd 2011 (11) TMI 762 - GUJARAT HIGH COURT held that the price charged by the Electricity Board inclusive of the amount of Electricity Duty represented the market value even though the assessee was not required to charge electricity duty. We direct the ld AO to accordingly modify the earlier years profits also Treatment of Interest Subsidy - Held that - Respectfully following the said decision of the Hon ble Supreme Court in Balaji Alloys 2011 (1) TMI 394 - Jammu and Kashmir High Court we hold that the interest subsidy is to be treated only as a capital receipt and accordingly the grounds raised by the assessee in this regard are allowed. Allowability of Initial Depreciation (balance 50%) on additions made in earlier years - Held that - As decided in Hindustan Gum & Chemicals Ltd. Versus DCIT 2017 (3) TMI 1173 - ITAT KOLKATA the assessee is entitled for remaining portion of additional depreciation in the asst years 2008-09 and 2009-10 and accordingly the grounds raised by the assessee in this regard are allowed. Exclusion of unabsorbed depreciation of earlier years before the 1st year of claim of deduction u/s 80IA - Held that - We find that the CBDT had clearly issued a Circular No. 1/2016 dated 15.2.2016 explaining the meaning of Initial Assessment Year in the light of decisions rendered by the Hon ble Madras High Court in the case of Velayudhaswamy Spinning Mills P Ltd 2010 (3) TMI 860 - Madras High Court . In view of the aforesaid decisions and CBDT Circular, we hold that the unabsorbed depreciation of earlier years from the eligible unit cannot be set off from the profits of the eligible unit entitled for deduction u/s 80IA of the Act in the years under appeal. We further hold that once the deduction u/s 80IA of the Act is claimed by the assessee from the Initial Assessment Year (as chosen by it), then any loss incurred thereon would have to be set off against the profits of the said eligible unit in the subsequent years while claiming deduction u/s 80IA of the Act in subsequent years. Accordingly the additional ground raised by the assessee is allowed.

Issues Involved:
1. Disallowance of Proportionate Compensation Paid for mining activity.
2. Disallowance under Section 14A of the Income Tax Act.
3. Taxability of Industrial Promotion Assistance.
4. Deduction under Section 80IA of the Income Tax Act.
5. Treatment of Interest Subsidy.
6. Allowability of Initial Depreciation on additions made in earlier years.
7. Provision for Leave Encashment.
8. Exclusion of unabsorbed depreciation of earlier years before the first year of claim of deduction under Section 80IA.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Compensation Paid for mining activity:
The assessee, engaged in manufacturing various goods, claimed compensation paid for mining activities as revenue expenditure. The Assessing Officer (AO) treated it as capital expenditure, while the Commissioner of Income Tax (Appeals) [CITA] allowed the claim, relying on previous tribunal decisions. The tribunal upheld CITA’s decision, confirming that the compensation was revenue in nature.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed expenses under Section 14A, applying Rule 8D, while the assessee argued that the investments were from its own funds and not borrowed. CITA partially allowed the assessee’s claim, restricting the disallowance to investments yielding exempt income. The tribunal remanded the issue back to the AO to consider only dividend-bearing investments for disallowance under Rule 8D.

3. Taxability of Industrial Promotion Assistance:
The AO treated Industrial Promotion Assistance (IPA) received under the West Bengal Incentive Scheme as revenue receipt, while the assessee claimed it as capital receipt. CITA accepted the assessee’s claim, treating IPA as capital receipt but reducing it from the cost of assets under Explanation 10 to Section 43(1). The tribunal held that IPA should be treated as capital receipt without reducing it from the cost of assets.

4. Deduction under Section 80IA of the Income Tax Act:
The AO reworked profits of the assessee’s power plants, substituting the value of electricity transferred for captive consumption with lower figures. CITA directed the rate to be taken on a weighted average basis, excluding electricity duty and cess. The tribunal held that the rate charged by the State Electricity Board should be considered and remanded the issue to the AO to modify earlier years' profits accordingly.

5. Treatment of Interest Subsidy:
The AO treated interest subsidy received under the Rajasthan Government’s Investment Promotion Policy as revenue receipt, while the assessee claimed it as capital receipt. CITA upheld the AO’s decision. The tribunal, following its earlier decision and the Supreme Court’s ruling in Balaji Alloys, held that the interest subsidy should be treated as capital receipt.

6. Allowability of Initial Depreciation on additions made in earlier years:
The AO disallowed the claim for balance depreciation on plant and machinery put to use for less than 180 days in the previous year. CITA upheld the disallowance. The tribunal, following the Karnataka High Court’s decision in Rittal India Pvt. Ltd., allowed the claim for remaining depreciation in the subsequent year.

7. Provision for Leave Encashment:
The AO disallowed the provision for leave encashment, citing the Supreme Court’s stay on the Calcutta High Court’s decision in Exide Industries Ltd. CITA upheld the disallowance. The tribunal remanded the issue to the AO to pass orders based on the Supreme Court’s final decision.

8. Exclusion of unabsorbed depreciation of earlier years before the first year of claim of deduction under Section 80IA:
The assessee sought exclusion of unabsorbed depreciation of earlier years, which was set off against other income, from the computation of deduction under Section 80IA. The tribunal, following the Madras High Court’s decision in Velayudhaswamy Spinning Mills and the CBDT Circular, held that unabsorbed depreciation of earlier years should not be set off against the profits of the eligible unit in the years under appeal.

Conclusion:
The tribunal’s order addressed various issues, providing relief to the assessee on several grounds, remanding some issues for further consideration, and upholding the revenue’s stance on others. The decisions were based on established legal precedents and interpretations of relevant provisions of the Income Tax Act.

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