2017 (11) TMI 1595 - AT - Income Tax

Disallowance u/s 14A - Held that - We direct the AO to disallow 2% of the dividend income u/s 14A of the Act Disallowance of the claim of the appellant u/s 80IA in respect of its power generation plant - as per AO claim of the assessee was wrong as being not as per the provisions of the Act - whether the assessee is entitled to captive consumption of power or not? - Held that - In the case of Tamil Nadu Petro Products Ltd 2010 (11) TMI 645 - MADRAS HIGH COURT it is held the said contention can have no application to the case on hand. Inasmuch as we dealt with the issue in the light of section 80-IA and in particular sub-clause (iv) of the said section which provides for the benefit even in respect of electricity generation plant established by the assessee and the income derived from such enterprise of the assessee, it will have to be held that the assessee fully complied with the requirements prescribed under section 80-IA in order to avail the benefits provided therein. Therefore, the contention based on the interpretation of the expression derived from can have no application to the case where the provisions of section 80-IA get attracted.- Decided in favour of the assessee Disallowance u/s 14A - Held that - In this case, we find that the ld.CIT(A) partly allowed the ground of the assessee by deleting the addition of ₹ 40,84,000/- on account of interest under rule 8D(2)(ii) by considering the facts that the assessee‟s own funds in the business of assessee were far more than the investments from which tax free dividend income was earned to the tune of ₹ 422.79 crores following the decision in the case of HDFC Bank Ltd. V. DCIT (2016 (3) TMI 755 - BOMBAY HIGH COURT) and also the decision in assessee s own case for the assessment years 2008-09 and 2009-10. In our considered view, the issue is squarely covered by the ratio in favour of the assessee Provision for slow and non moving stock disallowed - method of accounting or valuation of stock - unascertainable expenditure allowance - Held that - The assessee itself has duly disclosed all the facts qua stock written off during the year in its audited accounts. Moreover, the stock register was prepared and maintained as per the Accounting Standard followed by the assessee regularly which also duly disclosed all stock in the accounts. Since the assessee is engaged in the manufacturing of chemical, pesticides and powder which are easily evaporable or are susceptible to damage and cannot be used in the finished goods. Besides, the ld. AR submitted that the assessee has been following the accounting method regularly which is also duly disclosed in the audited financial statements. Since, the assessee is engaged in the manufacturing of chemicals and pesticides using inputs in the form of chemical powder and liquid which are evaporative and damageable. After considering the submissions of the rival parties and considering the facts of case, we do not find any infirmity in the order of ld.CIT(A). The case laws relied by the revenue have been examined and found to be not applicable to the present facts. Accordingly, we affirm his order and reject the ground taken by the Revenue. Treatment to expenditure on account of implementing Project Disha - revenue or capital expenditure - Held that - The expenditure incurred by the assessee to an external consultant Ernst and Young as legal and professional charges for DISHA cannot be treated as capital expenditure as the same was incurred to bring overall efficiency and improvement in the existing business of the assessee by undertaking special campaign in the phased manner during the year. In our opinion, the expenditure incurred by the assessee is of purely revenue in nature and cannot be treated as capital nature as has been done by the AO. - Decided against revenue

Summary

Issues Involved:
1. Disallowance under Section 14A r.w. Rule 8D(2)(iii)
2. Deduction under Section 80IA for captive consumption
3. Deletion of disallowance of proportionate interest under Section 14A r.w. Rule 8D(2)(ii)
4. Deletion of disallowance for provision for slow and non-moving stock
5. Treatment of expenditure on "Project Disha" and "Project Eagle" as revenue expenditure

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A r.w. Rule 8D(2)(iii):
The assessee earned a dividend income of ?4,45,56,700 and claimed it as exempt under section 10(34) of the Act. The tax auditor quantified the disallowance under section 14A at ?14,973, but the AO calculated it at ?1,04,82,000, with ?40.84 lakhs under Rule 8D(2)(ii) and ?63.98 lakhs under Rule 8D(2)(iii). The CIT(A) deleted the disallowance under Rule 8D(2)(ii) but sustained the disallowance under Rule 8D(2)(iii). The Tribunal, following its earlier decision, directed the AO to disallow 2% of the dividend income under section 14A, thus partly allowing the grounds.

2. Deduction under Section 80IA for captive consumption:
The assessee claimed a deduction of ?71,69,109 under section 80IA for its power generation plant, which was used for captive consumption. The AO disallowed the claim, stating that savings from captive consumption could not be considered as sales. The CIT(A) upheld the AO's decision. However, the Tribunal, referring to various case laws including the assessee's own case for the previous year, directed the AO to allow the deduction under section 80IA, thus allowing the grounds raised by the assessee.

3. Deletion of disallowance of proportionate interest under Section 14A r.w. Rule 8D(2)(ii):
The revenue challenged the deletion of ?40,84,000 disallowance under Rule 8D(2)(ii) by the CIT(A). The Tribunal, considering that the assessee's own funds were more than the investments yielding exempt income, upheld the CIT(A)'s decision following the jurisdictional High Court's rulings, thus dismissing the revenue's ground.

4. Deletion of disallowance for provision for slow and non-moving stock:
The AO disallowed ?59,97,000 for provision for slow and non-moving stock, stating it was unascertainable. The CIT(A) deleted the addition, noting the assessee's consistent accounting method and the nature of the stock. The Tribunal affirmed the CIT(A)'s decision, finding no infirmity in the order and rejecting the revenue's ground.

5. Treatment of expenditure on "Project Disha" and "Project Eagle" as revenue expenditure:
The AO treated the expenditure on "Project Disha" and "Project Eagle" as capital expenditure, allowing only 25% of it. The CIT(A) directed the AO to treat the entire expenditure as revenue, following the Supreme Court's decision in Alembic Chemical Works vs. CIT and other relevant case laws. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was incurred for improving business efficiency without creating any new asset, thus dismissing the revenue's grounds.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal's orders were pronounced in the open court on 8th Nov 2017.