2018 (8) TMI 857 - AT - Income Tax

Disallowance of expenditure u/s 14A read with Rule 8D - assessee has made investments, which has resulted tax free income to the assessee - Held that - Hon ble Court have laid down that if there be funds available; both interest free, overdrafts and loans taken, then a presumption would arise that investment would be out of interest free funds generated or available with the company. The ld.DRP has failed to take note of the ratio laid down in these decisions. It proceeded on the presumption that since funds are mixed, therefore, it is presumed that direct interest expenditure cannot be worked out and Rule 8D is to be applied. - the assessee has demonstrated that it was having sufficient interest free funds which can take care of these investments. Therefore, no interest expenditure is to be disallowed with the help of Rule 8D. - Decided in favor of assessee. Whether the amount disallowed under section 14A read with rule 8D deserves to be added back in the book profit for the purpose of section 115JB - Held that - no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. - Decided in favor of assessee. Nature of consideration received against sale of carbon credits - Held that - receipts received by the assessee on sale of carbon credit are to be treated as capital receipts and not liable to tax. Non-claiming of deduction in the original return - Held that - if a particular item is going to affect taxability of assessee, then a fresh claim can be entertained by the first appellate authority or by the DRP. Thus, we overrule this reasoning of the DRP and direct the AO to treat these receipts in both assessment years as capital receipt. Slump sale - computation of capital gain - assessee company has sold its entire wind energy business to IRL - According to the section 50D the capital gain on sale of such capital asset is to be determined by adopting fair market value of the capital assets on the date of transfer. Under this conception of law, the ld.AO has tried his best to shift the date of transfer from the assessment year 2012-13 to 2013-14. - Held that - it provide mode of computation of capital gain on transfer of an undertaking by way of slump sale. The cost of acquisition would be taken net worth of the assets transferred under this section. Even if it is to be construed for the sake of arguments that transaction has taken place in the assessment year 2013-14, then also the AO cannot replace the sale consideration disclosed by the assessee as per section 50D with fair market value. Since, we have held that fair market value considered by the AO to charge the assessee with capital gain cannot be adopted either with help of section 50D or in assessment year 2012-13. Neither under section 50B nor section 50D, the AO can replace full value of sale consideration with fair market value. The transaction has taken place on 30th March, 2012. The capital gain on transfer of capital asset by way of slump sale is taxable on substantive in assessment year 2012-13 and not 2013-14. The full value of sale consideration would not be replaced with fair market value. - Decided in favor of assessee.

Issues Involved:

1. Disallowance of expenditure under section 14A read with Rule 8D.
2. Addition of disallowed expenditure to book profit under section 115JB.
3. Transfer pricing adjustments.
4. Deduction under section 80IA(4) for captive power plants.
5. Taxability of revenue from sale of carbon credits.
6. Addition on account of late payment of employees' contribution to provident fund.
7. Year of taxability and valuation of capital gain on slump sale of wind energy business.

Issue-wise Detailed Analysis:

1. Disallowance of expenditure under section 14A read with Rule 8D:

The assessee had made investments resulting in tax-free income and claimed that the expenditure related to such income was &8377; 87,96,337/- and &8377; 76,88,997/- for the assessment years 2012-13 and 2013-14, respectively. The AO was not satisfied with the assessee's method and applied Rule 8D, leading to higher disallowances. The Tribunal held that the disallowance should not exceed the exempt income, confirming disallowance of &8377; 1.55 crores for AY 2012-13 and &8377; 75 lakhs for AY 2013-14.

2. Addition of disallowed expenditure to book profit under section 115JB:

The Tribunal followed the decisions of the Hon’ble Gujarat High Court in CIT Vs. Alembic Ltd. and Hon’ble Bombay High Court in CIT Vs. Bengal Finance & Investment P.Ltd., holding that no addition is required to be made to the book profit under section 115JB based on disallowance under section 14A.

3. Transfer pricing adjustments:

The assessee did not press this ground due to the smallness of the amount involved. The Tribunal rejected this ground.

4. Deduction under section 80IA(4) for captive power plants:

The Tribunal upheld the assessee's claim that the market price of electricity supplied by a captive power plant should be determined by the rate at which the manufacturing unit purchased electricity from the open market. The AO was directed to grant deduction under section 80IA(4) accordingly.

5. Taxability of revenue from sale of carbon credits:

The Tribunal, following the decisions of Hon'ble Gujarat High Court in Alembic Ltd. and Hon'ble Karnataka High Court in CIT Vs. Subhash Kabil Power Corporation Ltd., held that revenue from the sale of carbon credits is to be treated as capital receipts, not liable to tax.

6. Addition on account of late payment of employees' contribution to provident fund:

The Tribunal allowed the claim of &8377; 21,47,672/- as the payment was made before the due date. The issue of &8377; 17,22,105/- and &8377; 15,121/- was remanded to the AO for verification.

7. Year of taxability and valuation of capital gain on slump sale of wind energy business:

The Tribunal held that the slump sale transaction took place on 30.03.2012, and the capital gain is taxable in AY 2012-13. The full value of sale consideration disclosed by the assessee (&8377; 1 crore) was accepted, and the AO was directed not to replace it with the fair market value.

Conclusion:

The Tribunal partly allowed the assessee's appeals, providing relief on several grounds including the disallowance under section 14A, addition to book profit under section 115JB, deduction under section 80IA(4), and the treatment of revenue from the sale of carbon credits. The Tribunal also directed the AO to verify certain claims and upheld the year of taxability for the slump sale transaction as AY 2012-13.

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