2019 (7) TMI 125 - AT - Income Tax

Disallowance of expenditure incurred towards village development - expenditures were in the nature of donation or in the nature of gratuitous payments not incurred for business exigency - CIT(A) has deleted following earlier year orders - HELD THAT - In order to earn goodwill of the people residing in the neighbor-hood area and to keep social relations with residents, assessee company has to incur certain expenditure, which would ultimately facilitate the assessee s business, otherwise there would be friction or law and order situation which would arise if it adopt continuous unfriendly approach with the residents residing in the surrounding areas. In order to show good gesture, it has repaired certain village roads and given donations during social occasions. To our mind, such incurrence of expenditure are essential in running factory smoothly and the CIT(A) has rightly deleted disallowance. In the past similar expenditures were claimed, which have been allowed by the ld.CIT(A), and orders of the CIT(A) were upheld by the ITAT. Taking into consideration this consistent approach in the past, we do not see any reason to interfere in the orders of the CIT(A). Disallowance on account of contribution to Refrigerant Gas Manufacturer Association - HELD THAT - In the past, similar expenditures have been allowed to the assessee. Therefore, respectfully following the order of the ITAT in earlier years, we do not see any reasons to interfere in the orders of the CIT(A) on this issue. All these grounds are rejected. Disallowance of loss occurred due to fluctuation of foreign exchange - HELD THAT - As decided in assessee's own case 2013 (11) TMI 1268 - ITAT AHMEDABAD has examined this issue and held that as per judgment of the Hon ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT if there is a loss on account of foreign exchange fluctuations and liability was in the revenue account, then such loss is to be allowed to the assessee. The department has not demonstrated before us that this claim made by the assessee was not in revenue account in all these three years. Therefore, we are of the view that the ld.CIT(A) has rightly deleted the disallowance Income from share transactions - Capital Gain or business income - HELD THAT - The higher volume is because some of the investments were made by the assessee for strategic holding in the sister concerns, and therefore, this one factor alone be not construed that the assessee was trading in shares. It is pertinent to observe that when any explanation or a defence of an assessee based on number of facts supported by evidence and circumstances required consideration whether explanation is sound or not must be determined not by considering the weight to be attached to each single fact in isolation but by assessing the cumulative effect of all the facts in their setting as a whole. If all the factors discussed above are considered conjunctively then it would give an inference that the investments made by the assessee were for the purpose of achieving long term benefit and on sale of such investment any gain or loss is required to be assessed under the head capital gain . Similarly, we do not find force in the grounds of appeal raised by the Revenue that on sale of mutual fund profit be assessed as business income. CIT(A) has rightly held that on sale of mutual fund only capital gain arise to the assessee. As in all the earlier years assessee be treated as investors and on sale of shares/mutual funds, profit/loss be assessed under the head capital gain/loss. AO shall give effect accordingly. Disallowance of expenses on professional fees - HELD THAT - In the foregoing paragraphs, we have rejected the Revenue contentions and upheld order of the CIT(A) that gains from transactions of securities are to be taxed as capital gain, therefore, the expenditure towards professional fees whose disallowance was upheld by the ld.CIT(A), deserves to be upheld. Disallowance u/s 14A - HELD THAT - Expenses has a direct nexus, but it is neither discernible from the assessment order nor from the CIT(A) s order. Major part of the expenses i.e. ₹ 91,63,869/- has been deleted by the CIT(A) by following judgment of Hon ble Bombay High Court in the case of Reliance Utilities and Powers P.Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT on the basis that the assessee was having more interest free funds, than the investment. In this situation, part expenditure cannot be culled out unless a direct nexus has been demonstrated. It is neither discernible in the assessment order nor in the CIT(A) s order. We have extracted relevant finding of the ld.CIT(A). In view of the above discussion, we are of the view that this disallowance is not discernible. Consequently, ground of appeal raised by the Revenue is rejected, whereas ground of appeal raised by the assessee is allowed. Accrual of income - interest on refund - HELD THAT - Whatever effect is being given to the orders of the higher appellate authorities in earlier years as well as this year, authorizing the assessee to receive refund, then interest be calculated according to the amount of refund, if any, accrued to the assessee. In other words, according to the assessee, this issue requires to be decided against the assessee, but the amount of refund be determined after giving effect to the appellate orders, and accordingly, interest be computed on such refund. We direct the AO to carry out this exercise while determining the exact amount of interest accrued to the assessee on the basis of the refund. In this way, this ground is allowed for statistical purpose. Capital expenditure allowability - HELD THAT - Assessee has taken land on lease at Noida for the purpose of business from New Okhla Industrial Development Authority. The said authority requires that construction should be done within the prescribed time limit. However, due to various commercial reasons, the company has deferred the construction plans, and thus, the assessee needed to pay fees towards extension of time limit to such authority in the Asstt.Year 2005-06. It has claimed extension charges of ₹ 9,60,000/- whereas in the Asstt.Year 2006-07 it has claimed such charges at ₹ 3,20,000/-. This claim of the assessee was not allowed by the AO. According to the AO, it was a capital expenditure, whereas the assessee has submitted that it was a paid for protecting the title of the land. Asessee has contended that this issue has been decided against the assessee consistently from the Asstt.Year 2002-03. Disallowance u/s 14A - HELD THAT - Gross investment by the assessee in the Asstt.Year 2006-07 is of ₹ 53,081 lakhs. It has reserves surplus of ₹ 71,153 lakhs. Thus, it has far more interest free funds than the investment. We find that the ld.CIT(A) has noticed the profit earned during the year at ₹ 97 crores. Compensation received under Montreal Protocol at ₹ 8.68 crores. The ld.CIT(A) thereafter made reference to the decision of Hon ble Bombay High Court in the case of Reliance Utilities Power P.Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and observed that if the share capital and reserves surplus including profit for the current year are higher than the amount of investment, no disallowance is required out of interest expenditure. We have upheld verbatim finding in the Asstt.Year 2005-06 in the foregoing paragraphs. Therefore, taking into consideration our discussion on this issue in the Asstt.Year 2005-06, we do not find any merit in this ground of appeal. It is rejected. As far as disallowance at the rate of 0.5% of average investment for taking care of administrative expenses is concerned, we do not find any error in the finding of the AO. The finding of the ld.CIT(A) is being modified to the extent that against working of such disallowance a set off of the amount which the assessee has disallowed itself in all these three years. This ground of appeal is partly allowed all three years. Entitled for deduction u/s 80IA on the value of the captive power generated by it - HELD THAT - AO has adopted the purchase rate of GUVNL at ₹ 3.2 per unit as market value of the power produced by the assessee in the captive power, whereas the case of the assessee is that value of such power be calculated at the rate at which the assessee has been purchasing power from GUVNL.We have dealt with this issue in earlier assessment years as well as Asstt.year 2012-13, 2013-14. These grounds of appeals are allowed in the same term and the AO is directed to follow order of the ITAT in the Asstt.Year 2012-13 and 2013-14. Receipt of proceeds on sale of carbon credit deserves to be treated as capital receipt and requires to be excluded from taxable income - See ALEMBIC LIMITED 2018 (3) TMI 1764 - GUJARAT HIGH COURT Addition regarding claim of capital loss - shares in Inox Global Services Ltd - redemption of the preference shares by subscribing fresh shares - HELD THAT - The ld.CIT(A) took note of the facts how the assessee has subscribed preference shares in the F.Y.2001-02 and 2002-03, and how they have been redeemed by subscribing fresh cumulative redeemable preferential shares. In fact, there is no loss to the assessee except loss computed on account of indexation. In order to get the return on old investment, it has redeemed the shares by subscribing fresh shares with better return and term. It is decision for the benefit of the company. Simply because it is reducing taxable income does not mean that it will become bogus. After considering the finding of the ld.CIT(A), we do not find any error in it, and this ground of appeal raised by the Revenue is rejected. Disallowance of depreciation with aid of section 40(a)(ia) r.w.s. 194C - purchases of wind turbine - HELD THAT -Thus, for the purpose of 14 numbers of wind turbines, there was a separate contract and it was only for supply of goods. On this purchase price, the assessee was not required to deduct TDS u/s 194C. The ld.CIT(A) has made reference to the Circular of the Board bearing no.681, and thereafter followed various orders of the ITAT on this point. The AO has erred in construing the purchases of 14 numbers of wind turbine as a work contract on whose payment the assessee was to deduct TDS. We have extracted finding of the ld.CIT(A), wherein the ld.CIT(A) has considered all aspects on this issue. After going through the finding we do not find any error in it. Accordingly, we do not find any merit in the grounds of appeal raised by the Revenue. Depreciation on consultancy fee capitalised - consultancy agreement with Mckinsey Co. HELD THAT - There is no dispute with regard to obtaining of report as well as recognizing payable amount to MC . Now this expenditure is either allowed as a revenue expenditure or it is to be capitalised. If others have claimed the revenue expenditure, then, the AO should specify it, and if it has not been claimed by any-one than the assessee has capitalised, then it could not be partly allowed to the assessee. Therefore, the CIT(A) has committed an error in restricting the allowance to 20%. This order, therefore, is not sustainable. We allow both the grounds of appeal raised by the assessee and reject the grounds raised by the Revenue. We direct the AO permit the assessee to capitalised the payment made by the assessee to MC and allow depreciation consequentially in both the years. Disallowance of long term capital loss - sale of cumulative preference shares - HELD THAT - A perusal of the finding of the ld.CIT(A) would indicate that the ld.CIT(A) has considered all contentions of the assessee, and also CBDT circular 704 of 1995. It is pertinent to note that total shares were not owned by the assessee, rather on receipt of money in instalment from the purchaser, HISL, it would buy from others. Thus, assessee was not in position to deliver the shares physically. The ld.CIT(A) has recorded a categorical finding that transaction did not materialize in this year. Transfer of ownership as per share transfer form took place on 9.4.2008 i.e. financial year relevant to the Asstt.Year 2009-10 and not 2008-09. Assessee is not entitled to claim loss on sale of IGSL shares. The loss has rightly been denied and we do not find any merit in this ground of appeal. It is rejected. Penalty u/s 271(1)(c) - pre-operative expenses paid to M/s.Mckinsey Co. - loss in respect of share of IGSL - HELD THAT - If we examine the facts of the present case, then it would reveal that the assessee has entered into transaction for transfer of such shares on 1.2.2008. It construed the transaction as taken place in the Asstt.Year 2008-09; whereas the AO disagreed with the assessee on the ground that physical delivery of shares as well as payment has taken place in subsequent assessment year i.e. in April, 2008. Therefore, the assessee is not entitled for claiming the loss in the Asstt.Year 2008-09. To our mind, the assessee has not withheld any information. It is a difference of opinion between the assessee as well as the AO about the allowability of loss in a particular year. It does not deserve to be visited with penalty on such aspect. Therefore, we allow the appeal of the assessee and delete penalty imposed on the assessee on both the issues.

Summary

Issues Involved:
1. Disallowance of village development expenses.
2. Disallowance of contribution to Refrigerant Gas Manufacturer Association.
3. Disallowance of loss due to fluctuation of foreign exchange.
4. Treatment of income from sale and purchase of shares (capital gain vs. business income).
5. Disallowance under section 14A of the Income Tax Act.
6. Deduction under section 80IA(4) for captive power plants.
7. Disallowance of consultancy fees paid to McKinsey & Co.
8. Disallowance of depreciation under section 40(a)(ia) r.w.s. 194C.
9. Treatment of carbon credit proceeds as capital receipt.
10. Penalty under section 271(1)(c) for furnishing inaccurate particulars of income.

Detailed Analysis:

1. Disallowance of Village Development Expenses:
The Tribunal noted that the assessee incurred village development expenses to maintain cordial relationships with the residents of the surrounding village, which was necessary for smooth business operations. The expenses were considered essential and consistent with past years where similar expenditures were allowed. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, deciding against the Revenue.

2. Disallowance of Contribution to Refrigerant Gas Manufacturer Association:
The Tribunal referenced past decisions where similar contributions were allowed. The expenses were deemed necessary for the business and not resulting in any capital asset creation. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, rejecting the Revenue's grounds.

3. Disallowance of Loss Due to Fluctuation of Foreign Exchange:
The Tribunal referenced the Supreme Court's decision in the case of Woodward Governor India Pvt. Ltd., which allowed such claims if the liability was in the revenue account. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, deciding against the Revenue.

4. Treatment of Income from Sale and Purchase of Shares:
The Tribunal considered various factors, such as the intention at the time of purchase, treatment in books, frequency of transactions, and the nature of funds used. It concluded that the assessee's activity should be treated as investment, and gains/losses should be assessed under capital gains. The Tribunal set aside the CIT(A)'s contrary findings for certain years and upheld the CIT(A)'s favorable findings for other years. The Tribunal rejected the Revenue's grounds and allowed the assessee's grounds.

5. Disallowance Under Section 14A of the Income Tax Act:
The Tribunal noted that the assessee had sufficient interest-free funds to cover investments, following the Bombay High Court's decision in Reliance Utilities & Power Ltd. It deleted the disallowance of interest expenses but upheld the disallowance of administrative expenses at 0.5% of the average investment, allowing a set-off of amounts disallowed by the assessee. The Tribunal partly allowed the assessee's grounds and rejected the Revenue's grounds.

6. Deduction Under Section 80IA(4) for Captive Power Plants:
The Tribunal referenced past decisions and the Gujarat High Court's decision in Alembic Ltd., which allowed deductions based on the rate at which the assessee purchased electricity from the open market. The Tribunal upheld the CIT(A)'s decision to allow the deduction and rejected the Revenue's grounds.

7. Disallowance of Consultancy Fees Paid to McKinsey & Co.:
The Tribunal found that the consultancy was for the assessee's business and allowed the capitalization of the entire consultancy fees, rejecting the CIT(A)'s partial allowance. The Tribunal allowed the assessee's grounds and rejected the Revenue's grounds.

8. Disallowance of Depreciation Under Section 40(a)(ia) r.w.s. 194C:
The Tribunal found that the supply of wind turbine generators was a contract for the sale of goods and not a work contract, and thus not subject to TDS under section 194C. The Tribunal upheld the CIT(A)'s decision to delete the disallowance of depreciation and rejected the Revenue's grounds.

9. Treatment of Carbon Credit Proceeds as Capital Receipt:
The Tribunal referenced the Gujarat High Court's decision in Alembic Ltd., which treated carbon credit proceeds as capital receipts. The Tribunal allowed the assessee's grounds and directed the AO to treat the proceeds as capital receipts.

10. Penalty Under Section 271(1)(c) for Furnishing Inaccurate Particulars of Income:
The Tribunal found that the disallowance of depreciation and capital loss was due to a difference of opinion and not due to concealment or furnishing of inaccurate particulars. The Tribunal deleted the penalty imposed on the assessee.

Conclusion:
The Tribunal comprehensively addressed each issue, referencing past decisions and relevant legal principles. It upheld the CIT(A)'s favorable decisions for the assessee and rejected the Revenue's grounds, providing detailed reasoning for each conclusion. The Tribunal's decisions were consistent with legal precedents and provided clarity on the treatment of various expenses and income for tax purposes.