2021 (2) TMI 713 - AT - Income Tax

Disallowance of other income for computation of deduction u/s.80IA - AO excluded other income for the purpose of computing deduction claimed u/s.80IA of the Act, on the ground that said other income is not derived from the business in order to be eligible for claiming deduction - AO was further of the opinion that unless income is having first degree nexus with the main business activity, the income is not eligible for claiming the benefit of deduction provided under the Act - CIT(A) upheld the findings of the AO - HELD THAT - On perusal of the assessment order and also the order of the Co-ordinate Bench of this Tribunal in assessee s own case for earlier assessment years, it clearly shows that the issue in regard to exclusion of other income being handling charges, interest received from employees and miscellaneous income has been held to be not linked with industrial activity of power generation and therefore, in view of the decision of the Hon ble Supreme Court in the case of M/s. Liberty India Ltd., vs. CIT 2009 (8) TMI 63 - SUPREME COURT same did not have a direct link with the business of power generation, and hence, while computing deduction u/s.80IA of the Act, the other income has been excluded. The facts for the year under consideration are similar to the facts considered by the Tribunal for earlier years except to the extent of two new items of income being surcharge from electricity boards and interest from others interest received from Fenner India Limited as per terms of agreement. Therefore, the assessee is not entitled for deduction towards eligible profit u/s.80IA of the Act in respect of other income because said income does not have first degree nexus with the main business activity of the assessee. Surcharge from Electricity Boards , the issue has came up for discussion for the first time in the impugned assessment year and hence, needs to be considered in light of arguments advanced by the assessee that it has first degree nexus with business of generation and distribution of power. We have examined the claim of the assessee in light of proviso to Regulation 5(3) of Central Electricity Regulatory terms and conditions of tariff Regulations 2009 and find that although the assessee claims that it has received surcharge from Electricity Boards for delayed payment of receivables in respect of supply of electricity, but in principle said payment represents interest for delay in payment of dues to the assessee. Therefore, we are of the considered view that interest earned by the assessee for delay in payment of receivables cannot be characterized as income earned from business operations merely for the reason that said receipt is received from supplier. The character of any receipt would not change for the simple reason that the said receipt is received from the first degree supplier who is related to main business activity of the assessee. Hence, we are of the considered view that there is no merit in arguments of the assessee that surcharge received from Electricity Board form part of income from operations, which is eligible for deduction u/s.80IA. Interest from others, we find that the assessee has received interest from M/s. Fenner India Limited as per terms of contract and said interest has been recognized as other income. Although, the assessee claims it had direct nexus with the business operation of the assessee, but on perusal of details, we find that it is simpliciter interest received from the party for delay in payment as per terms of contract. Therefore, the same cannot be considered as income generated from business operations which is eligible for deduction u/s.80IA of the Act Alternative plea of the assessee that in terms of arbitral award - we find that compensation paid in terms of arbitral award is not linked to interest earned by the assessee from the party and hence, the same cannot be set-off against interest earned by the assessee. Therefore, alternative plea of the assessee is rejected. We further note that a similar issue has been considered by the Co-ordinate Bench of the Tribunal in assessee s own case for assessment year 2012-13 in 2017 (8) TMI 1628 - ITAT CHENNAI where under identical set of facts the Tribunal has upheld re-computation of eligible deduction u/s.80IA of the Act, however accepted the plea of the assessee for deduction of 10% expenses towards other income while computing the deduction Assessee is not entitled for deduction u/s.80IA of the Act in respect of other income and consequently confirm the additions made by the AO towards disallowance of excess deduction claimed, however allow the alternate plea of the assessee towards deduction of expenses in relation to earning of other income and direct the AO to allow 10% deduction towards expenses and re-compute deduction u/s.80IA of the Act Disallowance of expenditure u/s.14A - HELD THAT - We find that disallowance of expenditure in relation to exempt income u/s.14A of the Act is recurring issue and is a subject matter of deliberation of the Tribunal in the assessee s own case for assessment years 2007-08 to 2012-13. Further, the Tribunal after considering relevant facts and also following its earlier order has set aside the issue to the file of the AO and directed him to re-adjudicate the issue in accordance with law. Addition towards surcharge recoverable from Electricity Boards - AO as well as the ld.CIT(A) were of the opinion that when there is no uncertainty in realization of surcharge from Electricity Boards, the question of postponement of income for taxation on receipt basis does not arise, when the assessee is following mercantile system of accounting - HELD THAT -The view taken by the AO as well as the ld.CIT(A) has been upheld by the Tribunal in assessee s own case for earlier years, where the Tribunal by considering various clauses of tri-party agreement between the assessee and Government of India observed that, when payment is outstanding for more than 90 days from the date of billing, the same is required to be recovered through adjustment of surcharge and the same can be adjusted out of plan assistance of respective State Governments and hence there was an assurance created through the tri-party agreement and the Government of India for recovery of surcharge from Electricity Boards. Hence, the assessee s contention that there was no certainty in recovery of dues is ill-founded and the quantum of interest is also fixed in the tri-party agreement entered between the parties. Therefore, there is no doubt regarding the payment of dues when there is binding tri-party agreement. Accordingly, held that surcharge recoverable from Electricity Boards is taxable on accrual basis, but not on receipt basis. In this view of the matter and consistent view taken by the Tribunal in assessee s own case for earlier years, we are of the considered view that surcharge recovered from Electricity Board is taxable on accrual basis as and when the assessee has been accounted in the books of accounts. However, if assessee has already offered said amount to tax on receipt basis, due credit must be given to the assessee for the year in which such income is offered to tax. Accordingly, the ground raised by the assessee for both assessment years are dismissed. Deduction claim u/s.80IA in respect of income derived from unit TPS-I expansion is squarely covered in favour of the assessee by series of decisions of Co-ordinate Bench of ITAT, Chennai in assessee s own case for assessment years 2008-09 to 2010-11. Disallowance of excess depreciation on UPS - AO has disallowed excess depreciation claimed on UPS at the rate of 60% on the ground that UPS is not a part of computer system which is eligible for higher depreciation - HELD THAT -This issue is covered in favor of the assessee by the decision of ITAT, Chennai Bench in assessee s own case for assessment year 2012-13, where under identical set of facts the Tribunal by following its earlier order and also by the decision of Hon ble Supreme Court in the case of CIT vs. BSES Rajdhani Power Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT held that UPS is an integral part of computer system eligible for higher depreciation at the rate of 60%. Depreciation on civil structures, water supply and drainage systems - assessee has claimed depreciation at the rate of 15% on civil structures qua water supply and drainage system, on the ground that it is part of plant and machinery eligible for depreciation at the rate of 15% - AO has allowed depreciation at the rate of 10% applicable to buildings and has disallowed excess depreciation claimed over and above 10% on the ground that civil structures qua water supply and drainage system cannot be considered as part of plant and machinery - HELD THAT - We find that the issue of depreciation on civil structures qua water supply and drainage system is a recurring issue which is a subject matter of deliberations by the Coordinate Bench of the Tribunal in the assessee s own case right from assessment years 2007-08 to 2012-13. The Tribunal under identical set of facts has held that civil structures qua water supply and drainage systems is part of plant and machinery and eligible for depreciation at 15% applicable to plant and machinery. Deduction towards insurance spares - Nature of expenditure - HELD THAT - find that the Tribunal has considered an identical issue for assessment year 2012-13 2017 (8) TMI 1628 - ITAT CHENNAI where by following the decision of Jurisdictional High Court in assessee s own case for assessment years 1993-94 to 1999-2000 held that insurance spare consumption to be treated as revenue in nature.

Summary

Issues Involved:
1. Disallowance of 'other income' under Section 80IA.
2. Disallowance of expenses under Section 14A.
3. Disallowance of surcharge recoverable from Electricity Boards.
4. Eligibility of deduction under Section 80IA for TPS-I expansion unit.
5. Depreciation on UPS.
6. Depreciation on civil structures, water supply, and drainage systems.
7. Deduction towards insurance spares.

Detailed Analysis:

1. Disallowance of 'Other Income' under Section 80IA:
The assessee included miscellaneous receipts and surcharge from Electricity Boards under 'other income' for computing deduction under Section 80IA. The AO excluded this 'other income' on the ground that it did not have a first degree nexus with the main business activity. The CIT(A) upheld the AO's findings. The Tribunal confirmed that other income, including surcharge from Electricity Boards and interest from others, did not have a direct link with the business of power generation, thus not eligible for deduction under Section 80IA. However, the Tribunal allowed a 10% deduction towards expenses related to earning 'other income' while computing the deduction.

2. Disallowance of Expenses under Section 14A:
The AO and CIT(A) remanded the issue of applicability of Section 14A for fresh consideration. The Tribunal noted that this issue was recurring and directed the AO to recompute the disallowance of expenses in relation to exempt income, following the earlier orders in the assessee’s own case.

3. Disallowance of Surcharge Recoverable from Electricity Boards:
The AO taxed the surcharge recoverable from Electricity Boards on an accrual basis, despite the assessee’s argument of uncertainty in realization. The CIT(A) upheld the AO's decision. The Tribunal confirmed that the surcharge is taxable on an accrual basis, referencing the tripartite agreement ensuring recovery and the Tribunal's earlier decisions in the assessee’s own case.

4. Eligibility of Deduction under Section 80IA for TPS-I Expansion Unit:
The AO denied the deduction under Section 80IA for the TPS-I expansion unit, treating it as an expansion of an existing unit. The CIT(A) allowed the deduction, following the Tribunal's earlier decisions. The Tribunal upheld the CIT(A)'s decision, confirming that the TPS-I expansion unit is a new industrial undertaking eligible for deduction under Section 80IA.

5. Depreciation on UPS:
The AO allowed depreciation on UPS at 15%, treating it as part of plant and machinery. The CIT(A) allowed a higher depreciation rate of 60%, treating UPS as part of the computer system. The Tribunal upheld the CIT(A)'s decision, following its earlier order and the Supreme Court's decision, confirming that UPS is eligible for higher depreciation at 60%.

6. Depreciation on Civil Structures, Water Supply, and Drainage Systems:
The AO allowed depreciation at 10% on civil structures, water supply, and drainage systems, treating them as buildings. The CIT(A) allowed depreciation at 15%, treating them as part of plant and machinery. The Tribunal upheld the CIT(A)'s decision, following its earlier orders, confirming that these structures are part of plant and machinery eligible for 15% depreciation.

7. Deduction towards Insurance Spares:
The AO disallowed the deduction for insurance spares, treating them as capital expenditure. The CIT(A) allowed the deduction, following the Tribunal's earlier decisions. The Tribunal upheld the CIT(A)'s decision, confirming that insurance spares are revenue in nature and deductible under Section 31.

Conclusion:
The appeals filed by the assessee for both assessment years were partly allowed for statistical purposes, and the appeals filed by the Revenue for both assessment years were dismissed. The Tribunal's decisions were consistent with its earlier orders and relevant judicial precedents, ensuring a thorough and detailed analysis of each issue.