2019 (9) TMI 728 - AT - Income Tax

Deduction u/s 80IB - commercial production of its original undertaking in the previous year relevant to Assessment Year 2001-02 - company is engaged in the business of a refinery and as it fulfills the required conditions u/s 80-IB(9)(iii) - HELD THAT - Meaning of mineral oil deserved to be considered in a wider manner. Moreover, the meaning of refining should be construed in the context of a refinery and it should not be restricted to simple purification process as opined by the Id AO and upheld by the Id CIT(A). The Id AO and the Id CIT(A) has held that Naphtha , the raw material used by the M S Plant is a Petroleum Product . The Mineral oil would include petroleum and petroleum products. Moreover, the MS Plant of the assessee company is engaged in processes which fall within the meaning of refining , if the intention of the Legislature is considered. Thus, the MS Plant of the assessee company is an undertaking engaged in refining of mineral oil and fulfills all the conditions of section 80-IB(9)(iii) of the Act, as a result of which the assessee company is entitled to benefit of section 80-IB(9)(iii) consecutively for seven assessment years starting from assessment year 2007-08. Based on these facts and circumstances, we direct the assessing officer to allow deduction under section 80-IB(9) of the Act, for the Seven Assessment Years 2007-08 to 2013-14 . Deduction u/s 80IC - special benefit to be given to new undertaking - HELD THAT - Under section 80-IC(2)(iii), a 100% deduction from the profit of an assessee is allowed if the gross total income of the assessee includes profit of an undertaking producing article specified in Fourteenth Schedule subject to certain conditions. Section 80-IC is a special provision in respect of certain undertakings or enterprises in certain special categories states. The intention of the legislation is clear that certain underdeveloped states should be developed to the extent of national level for which special benefit is given to new undertaking in those states under the provisions of the Act. We note that assessee company has satisfied the conditions of section 80IC(2)(b)(iii) of the Act, therefore, entitled to claim deduction under section 80IC(2)(b)(iii) of the Act. It is well settled that that the beneficial provisions should be liberally construed while interpreting taxing statute. Since, section 80-IC is a beneficial provision giving incentives to specified industries in specific states, it has to be interpreted liberally to achieve the objectives for the purpose for which it was enacted. We have relied on a number of decisions, while adjudicating the issue relating to 80IB(9) of the Act that beneficial provisions should be liberally interpreted and such decisions will also be applicable to section 80-IC of the Act. From the facts and issue of law, it is clear that the Id CIT(A) is not justified in upholding the decision of the Id AO is disallowing the benefit of section 80IC of the Act to the assessee company for the assessment years 2008-09, 2009-10 and 2010-11. We direct the AO to allow the deduction under section 80IC(2)(b)(iii) of the Act, for the assessment years 2008-09, 2009-10 and 2010-11. Disallowance of claim of expenses under the head 'Prior Period Exp' - mercantile system of accounting - HELD THAT - We note that in mercantile system of accounting, an assessee had not earlier debited his account with the expenditure which accrued in law in an earlier year, would not, in the absence of a barring provisions under the law, disentitle to debit his account later when an enforceable demand is made by the appropriate authority. There is no express bar in law which disallows expenditure relating to a period other than the previous year In CIT V Khaitan Chemicals Fertilizers Limited 2008 (9) TMI 89 - DELHI HIGH COURT has observed that Accounting Standard (AS-5) stipulates that prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, incomes or expenses relatable to prior period items are those which arise in the current period i.e. the period relevant for the purposes of computing the net profit or loss. Prior period items are to be included in the determination of the net profit or loss. Disallowance of claim of expenses under the head 'Retirement Benefit of Employees' - HELD THAT - in case of Hindustan Petroleum Corporation Ltd. 2014 (7) TMI 290 - ITAT MUMBAI held that provisions of post retirement benefits based on actuarial valuation is an allowable expenses u/s 37(1) of the Act. Therefore, respectfully following the judgment Supra we direct the assessing officer to allow provisions of post- retirement benefits based on actuarial valuation as expense u/s 37(1) of the Act, after due verification and in accordance to law. Deduction of expenditure on account of corporate social responsibility - HELD THAT - ACIT Vs. Jindal Power Limited 2016 (7) TMI 203 - ITAT RAIPUR for the Assessment Year 2008-09, where it has been held that expenditure on Corporate Social Responsibility though voluntary, is allowable as business expenditure. It is also held that Explanation 2 to section 37(1) inserted w.e.f. 01-04-2015 is not retrospective. It applies only to Corporate Social Responsibility expenditure referred to in section 135 of the Companies Act,2013 and not to voluntary Corporate Social Responsibility expenditure. The Tribunal has observed that the amendment in the scheme of section 37(1) which has been introduced with effect from 1st April,2015 cannot be construed as to disadvantage to the assessee in the period prior to the amendment. This disabling provisions, as set out in Explanation 2 to section 37(1), refer only to such corporate social responsibility expenses as under section 135 of the Companies Act,2013 and, as such, it cannot have any application for the period not covered by this statutory provisions which itself come to existence in 2013. Explanation 2 to section 37(1), is therefore, inherently incapable of retrospective operation and prospective in nature. Assessee company is entitled to claim of deduction of its Corporate Social Responsibility expenses u/s 37(1) D isallowance of claim of deduction under the head 'Provisions for Stores and Consumables' and Disallowance of claims of deduction of 'Prior period Depreciation' - HELD THAT - We note that in case of Ahmedabad Electricity Co. Ltd 1992 (4) TMI 29 - BOMBAY HIGH COURT it is held that the basic purpose of an appeal procedure in an income tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, the appellate authority can consider the proceedings before it and the material on record before it for the purpose of determining the correct tax liability of the assessee. There is nothing in section 254 or section 251 which would indicate that the appellate authorities are confined to consider only the objections raised before it or allowed to be raised before it either by the assessee or by the Department, as the case may be. They can consider the entire proceedings to determine the tax liability of an assessee. In case of CWT V Smt. Vimlaben Vadilal Mehta 1983 (10) TMI 3 - SUPREME COURT it is held that when an appeal is filed against an assessment order before the AAC, the assessment case is thrown open and appellate proceedings constitute a continuation of the assessment proceedings. Considering the facts and circumstances narrated above, we direct the assessing officer to allow the prior period depreciation. TDS u/s 194A - Interest payable - addition u/s 40(a)(ia) - HELD THAT - Unilateral action is taken by the assessee company to recognize its liability and a sum of money is kept separately as provisions in its books of account for the liability. The liability is recognized and provided for in the books of account, but the claim of the party is not accepted and communicated to the party is not credited to the account of the party or the amount is not credited to any account whether called interest payable account or suspense account or by any other name in the books of account. Only a liability has been created in the books of account and no income by way of interest is credited to any account. Hence, provisions of explanation to section 194A are not applicable. Since there is a view that interest from part of judgement debt, following the well settled trite of law that if two views are possible, the favourable view to the assessee should be taken, the assessee company deserves benefit of doubt for non-deduction of tax at source under section 194A Addition u/s 14A - HELD THAT - There is no disallowance under Rule 8D(2)(i). Besides under rule 8D(2)(ii) no disallowance can be made as the assessee has own funds which is more than investments made by assessee. However, for disallowance under Rule 8D(2)(iii) only the dividend bearing securities should be considered; for that we rely on the judgment of the Co-ordinate Bench of Kolkata in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA . Therefore, we direct the AO to compute the disallowance under rule 8D(2)(iii) r.w. section 14A, of the Act, taking into account dividend bearing securities. Therefore, we allow these grounds raised by Revenue for statistical purposes.

Summary

Issues Involved:
1. Disallowance of claim of deduction under section 80-IB(9) of the Income Tax Act, 1961.
2. Disallowance of claim of deduction under section 80-IC of the Income Tax Act, 1961.
3. Disallowance of claim of expenses under the head 'Prior Period Expenses'.
4. Disallowance of claim of expenses under the head 'Retirement Benefit of Employees'.
5. Rejection of Additional Ground raised before the CIT(A) relating to claim of deduction of expenditure on account of corporate social responsibility.
6. Disallowance of claim of deduction of expenditure for 'Corporate Social Responsibility'.
7. Disallowance of claim of deduction under the head 'Provisions for Stores and Consumables' and 'Capital work in progress'.
8. Disallowance of claim of deduction for Interest paid u/s 234D of the Income Tax Act,1961.
9. Disallowance of claims of deduction under the head 'Provision for Doubtful Debt'.
10. Disallowance of claims of deduction of 'Prior period Depreciation'.
11. Disallowance of claim of deduction for 'Provision for Allowance for Non-Management Staff'.
12. Disallowance of claim of deduction for 'Other Provisions'.

Detailed Analysis:

1. Disallowance of claim of deduction under section 80-IB(9) of the Income Tax Act, 1961:
The assessee claimed deductions under section 80-IB(9) for a new Motor Spirit Plant commissioned on 25-07-2006. The AO disallowed the claim, arguing that naphtha (the raw material) is not 'mineral oil' and the activities do not constitute 'refining'. The CIT(A) upheld this view. However, the Tribunal found that naphtha is a petroleum product and falls within the definition of 'mineral oil'. The Tribunal directed the AO to allow the deduction under section 80-IB(9) for the assessment years 2007-08 to 2013-14.

2. Disallowance of claim of deduction under section 80-IC of the Income Tax Act, 1961:
The assessee claimed deductions under section 80-IC for the balance three assessment years (2008-09 to 2010-11) after availing deductions under section 80-IB(9) for seven years. The CIT(A) disallowed the claim. The Tribunal, however, held that the assessee fulfilled the conditions of section 80-IC and directed the AO to allow the deduction.

3. Disallowance of claim of expenses under the head 'Prior Period Expenses':
The AO disallowed prior period expenses for the assessment years 2007-08, 2008-09, and 2012-13, arguing that only expenses incurred during the previous year can be considered. The Tribunal, relying on various judgments, held that there is no express bar in law disallowing such expenses and directed the AO to allow the expenses.

4. Disallowance of claim of expenses under the head 'Retirement Benefit of Employees':
The AO disallowed provisions for retirement benefits, arguing they were not ascertained liabilities. The CIT(A) directed the AO to verify the amounts based on actuarial valuation and consider them as ascertained liabilities. The Tribunal upheld this view, directing the AO to allow the expenses after verification.

5. Rejection of Additional Ground raised before the CIT(A) relating to claim of deduction of expenditure on account of corporate social responsibility:
The CIT(A) rejected the additional grounds raised for the first time during appellate proceedings, citing the Supreme Court decision in Goetze(India) Ltd Vs. CIT. The Tribunal, however, held that the CIT(A) has ample power to consider new issues and admitted the additional grounds for adjudication.

6. Disallowance of claim of deduction of expenditure for 'Corporate Social Responsibility':
The AO disallowed CSR expenses, treating them as application of income. The Tribunal, relying on various judgments, held that CSR expenses are allowable as business expenses and directed the AO to allow the deductions.

7. Disallowance of claim of deduction under the head 'Provisions for Stores and Consumables' and 'Capital work in progress':
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

8. Disallowance of claim of deduction for Interest paid u/s 234D of the Income Tax Act,1961:
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

9. Disallowance of claims of deduction under the head 'Provision for Doubtful Debt':
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

10. Disallowance of claims of deduction of 'Prior period Depreciation':
The AO disallowed prior period depreciation, arguing the assessee failed to revise the return. The Tribunal held that the CIT(A) should have considered the matter on merits and directed the AO to allow the prior period depreciation.

11. Disallowance of claim of deduction for 'Provision for Allowance for Non-Management Staff':
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

12. Disallowance of claim of deduction for 'Other Provisions':
The assessee did not press this ground, and the Tribunal dismissed it as not pressed.

Revenue’s Appeals:

1. Claim of deduction for pay revision of non-managerial staff:
The CIT(A) allowed the deduction on payment basis, directing the AO to verify the facts. The Tribunal upheld this decision.

2. Claim of deduction for reversal entry of other provisions:
The CIT(A) allowed the deduction, directing the AO to verify the facts to avoid double taxation. The Tribunal upheld this decision.

3. Disallowance under section 40(a)(ia) for interest provisions:
The CIT(A) held that section 194A was not applicable as the provision was not credited to any account. The Tribunal upheld this decision.

4. Disallowance under section 14A:
The CIT(A) deleted the addition, noting that the AO failed to establish a nexus between borrowed funds and investments. The Tribunal directed the AO to compute disallowance under rule 8D(2)(iii) considering only dividend-bearing securities.

5. Reversal of provision for interest:
The CIT(A) allowed the reversal of provision for interest, noting it was already allowed in earlier years. The Tribunal upheld this decision.

Conclusion:
The Tribunal allowed the assessee's appeals for the assessment years 2007-08 to 2013-14, dismissed the Revenue's appeals for the assessment years 2011-12 to 2013-14, and partly allowed the Revenue's appeals for the assessment years 2014-15 and 2015-16 for statistical purposes.