2022 (1) TMI 174 - AT - Income Tax

Allowable revenue expenses - Claim for deduction for the full amount of initial payments for the leaseholds - 2nd round of litigation - Whether the impugned order is void and deserves to be cancelled, inter alia, for the reason that it contains conclusions contrary to the decision of the jurisdictional High Court in DCIT v. Sun Pharmaceutical Industries Ltd. 2009 (3) TMI 587 - GUJARAT HIGH COURT / - HELD THAT - As in the case on hand we find that the assessee has taken the land for setting up power receipt station in order to further distribution of power to customers and not for the purpose of extraction of the minerals. The issue whether the lease premium is capital in nature depends upon the facts and circumstances of each case. Accordingly, in our humble understanding, the principles laid down by the Hon ble SC PINGLE INDUSTRIES LIMITED 1960 (4) TMI 5 - SUPREME COURT cannot applied in each and every case without examining the necessary and relevant facts. Also in the case of CIT vs. H.M.T. Ltd. 1992 (11) TMI 37 - KARNATAKA HIGH COURT has allowed such lease premium as revenue expenses. In that case the land was acquired on lease for 95 years and the assessee paid upfront lease premium of ₹ 12,09,200/-. Thereafter, the assessee was liable pay lease rent at ₹1 per annum. The Hon ble Karnataka High Court was pleased to delete the addition made by the AO.As the assessee will not be penalized even in the case no tax deducted at source on the amount paid or credited to resident payees if following conditions fulfilled (A) Payee has included the impugned amount on which tax was not deducted/short deducted by the payer in his return of income filed under section 139 and pays the taxes due on returned income and (B) Payer produces a certificate in prescribed form i.e. form 26A from a CA to the effect that the payee has included the income in return and paid taxes thereof. We note that the disallowance cannot be made without referring the provisions as discussed above - we hold that the impugned amount of lease premium expenses are allowable deduction as revenue expenses while computing the business income of the assessee. Hence, we reverse the order of the authorities below and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed. Disallowance u/s 14A r.w.s. 8D - HELD THAT - We hold that no disallowance of interest expense claimed by the assessee can be made on account of investments made in the securities as discussed above. Hence we direct the AO to delete the addition made to the extent of interest expenses. Administrative expenses - We are of the view that some element of the administrative expenses should be considered/ allocated against the exempted income. But the assessee has not done so. Accordingly, the AO has made the disallowance qua the administrative expenses under rule 8D of Income Tax Rules which was subsequently confirmed by the ld. CIT-A. As assessee has not made any disallowance qua the administrative expenses and also failed to justify based on the documentary evidence that it has not incurred any expense, we don t find any reason to interfere in the finding of the ld. CIT-A. Hence, we confirm the disallowance made by the authorities below towards the administrative expenses subject to the limit of the exempted income. Thus the ground of appeal of the assessee is partly allowed. Depreciation on the intangible assets being leasehold right - HELD THAT - As the amount of lease premium was allowed as revenue expenditure. Once the deduction has been allowed to the assessee, the question of allowing either the depreciation or revenue expense does not arise. As such, the issue raised by the assessee becomes infructuous. Accordingly, the ground of appeal raised by the assessee is dismissed as infructuous. Deduction under section 80IA - Insurance receipts - Once the loss has been allowed as deduction in the earlier year, then the receipt against such loss by way of insurance claim should also be treated as income of the assessee. There cannot be different treatment for the loss claimed by the assessee and the income shown by the assessee qua such loss. In addition to the above, we also note that the finding of the learned CIT(A) is not complete. If the learned CIT(A) had a doubt about the character of insurance receipt whether it is on revenue account or capital account, then it was his duty to find out the truth by carrying out the necessary verification. But we find that the CIT (A) without necessary verification had doubted on the impugned insurance receipt. In our considered view, this approach of the CIT(A) seems to be improper. Be that as may be, in the interest of justice and fair play, we are inclined to restore the issue to the file of the AO for limited purpose to verify whether the impugned receipt represents the capital receipt or revenue receipt. If it is of capital in nature, then the assessee should not be allowed as deduction under section 80 IA of the Act and vice-versa as per the provisions of law. Hence the issue raised by the assessee is allowed for the statistical purposes. Streetlight maintenance - As safely concluded that the expression Profit and gain derived from an Industrial undertaking used in sections 80-IA of the Act, will include all the profits and gains earned by the Industrial undertaking by the actual conduct of its business. It would mean that all the income which has a direct nexus with the business of the Industrial Undertaking, will be includible in such profits and gains. Thus, we are of the view that profit and gain earned by the assessee from the services of maintenance of street light are not the profit and gain from the activity or undertaking of generation and distribution of power. As there is no nexus between the business of power distribution and maintenance /service of street light. Thus, we hold that profit and gains derived from street light maintenance services should not be included in amount of deduction under section 80IA of the Act. Hence we do not find any infirmity in the finding of the authority below. Accordingly the assessee s ground of appeal is dismissed. Bad debts recovery - There remains no ambiguity to the fact that the assessee is eligible for deduction under section 80 IA of the Act with respect to the impugned bad debt recovery shown as income in the year under consideration. Thus the ground of appeal of the assessee is allowed. Interest income - As transpired that the assessee has not made fixed deposits under any obligation in the course of carrying on the business of distribution of power. However, it is also a fact on record the impugned interest income was offered by the assessee as business income which was also accepted by the revenue in the assessment proceedings. The provisions of Section 80-IA of the Act provides for deduction of the profits derived from the business by an undertaking or enterprise, engaged inter alia, in generation or generation and distribution of power. But the interest income was not arising to the assessee from the activity of distribution of power. Thus, on the same reasoning given in the relation to streetlight maintenance activity in para no. 38 of this order, the impugned income is not eligible for deduction under section 80-IA of the Act. Therefore the authority below rightly excluded the same from the computation of deduction under section 80IA of the Act. Hence the assessee ground of appeal is dismissed. Delayed payment interest - Once a bill is raised to the customer, it is expected from the customer to make the payment within the time provided therein. In case of any delay, the interest charged by the assessee from the customers represents the compensation for the delay payment. In other words, it is an opportunity loss to the assessee for the delay in the payment, had the money been realized by the assessee in the time, the same would have been exploited in some remunerative activity but the assessee was deprived. Thus the interest was charged which partakes the character of the sale proceeds. Thus to our understanding such amount of interest is very much eligible for deduction under section 80-IA. As relying on NIRMA INDUSTRIES LIMITED 2006 (2) TMI 92 - GUJARAT HIGH COURT the judgment was rendered in connection with the provisions of section 80I of the Act but the principles laid down therein can also be adopted to the provisions of section 80-IA of the Act. In view of the above, we do not find any infirmity in the order of learned CIT (A). Hence the issue raised by the Revenue is dismissed. Unfulfilled guarantee revenue - The fees charged by the assessee from the customers on account of not using the committed units has direct nexuses with the activity of the assessee i.e. distribution of electricity. Had the customer utilized the guaranteed units, there would have been the flow of income from the distribution of power activity which was very much eligible for deduction under section 80-IA of the Act. On the same analogy, the amount paid by the customer on account of the failure on its part for not utilizing the committed units, would partake the character of sale proceeds of power distribution activity. Thus to our understanding such amount of un-fulfilment commitment charges is very much eligible for deduction under section 80-IA. Interest income on late payment which is eligible for deduction under section 80-I of the Act but the principles laid down therein can also be adopted to the provisions of section 80-IA of the Act in the given facts and circumstances. In view of the above we do not find any infirmity in the order of learned CIT (A). Hence the issue raised by the Revenue is dismissed. Rent income - The provisions of Section 80-IA of the Act provides for deduction of the profits derived from the business by an undertaking or enterprise, engaged inter alia, in generation or generation and distribution of power. But the rental income was not arising to the assessee from the activity of distribution of power. Thus, on the same reasoning given in the relation to streetlight maintenance activity in para no. 38 of this order, the impugned income is not eligible for deduction under section 80-IA of the Act. Thus in view of the above discussion we are of the opinion that the rental income received from employee should not be included in the computation of deduction under section 80IA of the Act as the same is not the profit or gain derived from the eligible business activity. Before parting a question arises what about the depreciation claimed by the assessee with respect to such building being the staff quarters. If the income is not eligible for deduction under section 80-IA then in our considered view the corresponding depreciation should also be excluded from the profit of the eligible undertaking. Likewise, the expenses incurred in connection with the maintenance of such staff quarters should also be excluded. Accordingly, we direct the AO to exclude the rental income from the amount of eligible profit net of the expenses qua to such rental income. Hence the ground of appeal of the assessee is partly allowed. Delayed payment charges - The late fees charged by the assessee from the customers on account of delayed payment within the time has direct nexuses with the activity of the business of the assessee i.e. distribution of electricity. Thus to our understanding such amount of delayed payment charges is very much eligible for deduction under section 80-IA of the Act. In holding so we draw support and guidance from the judgment of Hon ble Gujarat High Court in the case of Nirma Industries Ltd. Vs. DCIT 2006 (2) TMI 92 - GUJARAT HIGH COURT - with the interest income which is eligible for deduction under section 80- I of the Act but the principles laid down therein can also be adopted to the provisions of section 80-IA of the Act in the given facts and circumstances. In view of the above we do not find any infirmity in the order of learned CIT (A). Hence the issue raised by the revenue is dismissed. Miscellaneous receipts - whether the amount of scrap sale shown by the assessee is eligible for deduction under section 80-IA? - Admittedly the amount of scrap sale is not arising from the power distribution activity of the assessee. The amount of deduction under section 80-IA of the Act is limited to the extent of the profit derived from the distribution of power in the given facts and circumstances. Accordingly, we are not in agreement with the contention of the assessee. We find lot of force in the arguments of the assessee. The amount of sale of scrap of ₹ 10,04,30,079/- represents the sale of the items which have been classified as fixed assets in the books of accounts. In other words these items pertaining to the relevant block of assets on which the assessee is entitled to claim the depreciation. Accordingly, on sale of these items, the sale proceeds should be adjusted against the relevant of assets and therefore the same should not be treated as income of the assessee. To avoid any ambiguity, the amount of ₹ 1,53,39,539/-being the difference of ₹ 11,57,69,618/- minus ₹ 10,04,30,079/- shall be treated as scrap sale which is not eligible for deduction under section 80-IA of the Act. In view of the above and after considering the facts in totality, the ground of appeal of the assessee and the ground of appeal of the revenue are dismissed. Eligibility to claim of deduction of the items raised in the ground of appeal de novo afresh - Deduction of the education cess paid on income tax u/s 37(1) - Since the claim of the assessee is purely legal claim and entire facts are available on record. Thus it is not justified in not admitting the purely legal ground raised by the assessee for the first time. As the assessee has not claimed this expenditure before the lower authorities, they have not got opportunity to examine the same as per the provisions of Act, thus In the interest of justice, the ground is restored back to the file of the Assessing Officer with a direction to examine assessee's eligibility to claim of deduction of the items raised in the ground of appeal de novo afresh after providing an opportunity of being heard to the assessee and as per the provisions of law. Thus the additional ground of appeal raised by the assessee is allowed for statistical purposes Disallowance on account of fees for the study relating to new project - HELD THAT - From the preceding discussion, we note that the expenditure on the feasibility report was incurred by the assessee for the expansion of the existing business. This finding of the learned CIT-(A) has not been controverted by the learned DR appearing on behalf of the revenue. Therefore, such expenses cannot be treated as capital in nature as these expenses do not fall under the mischief of the provisions of section 35D - See KESORAM INDUSTRIES AND COTTON MILLS LIMITED VERSUS COMMISSIONER OF INCOME-TAX 1991 (3) TMI 28 - CALCUTTA HIGH COURT - thus we hold that the expenditure incurred by the assessee on the study and preparation of the feasibility are allowable expenses under the provisions of section 37(1) of the Act. Thus we do not find any infirmity in the order of the learned CIT-(A). Hence the ground of appeal of the revenue is dismissed. Deduction u/s 80IA - initial assessment year for claiming the deduction with respect to all its units was the year under consideration - HELD THAT - Deduction is available to the assessee at its option for 10 consecutive assessment years out of a block of 15 years effective from the year in which the undertaking begins the activity of renovation and modernization of the existing transmission/distribution lines. It was the 1st time i.e. the year under consideration when the assessee exercised its option for claiming the deduction under section 80IA of the Act. Thus, the period of 10 years shall begin from the year under consideration for which the assessee is entitled for deduction. As per circular CBDT circular No. 1 of 2016 dated 15th February 2016 Assessee has option to choose initial year or first year out of the block of 15 or 20 years as case may be to claim deduction for 10 consecutive years but not the year in which the assessee becomes first time eligible to claim deduction. After considering the facts in totality, we are of the view that there is no infirmity in the order of the learned CIT(A). Accordingly we decline to interfere in his order. Hence, the ground of appeal of the revenue is dismissed. Deduction u/s 80G/80GGB - donation shown in the profit and loss account of the eligible undertaking cannot be claimed as deduction under the provisions of section 80G /80GGB - AO disregarded the contention of the assessee by observing that there remained no taxable profit after claiming the deduction under section 80- IA of the Act in the specified undertaking - whether the assessee can claim the deduction under section 80G and 80GGB of the Act for the donations made by the undertaking eligible for deduction under section 80-IA ? - HELD THAT - There is no dispute to the fact that the amount of donation was claimed by the assessee in the profit and loss account of the eligible undertaking which has been disallowed while computing the eligible profit. Certainly, the profit of the eligible undertaking will increase by the amount of disallowance made by the assessee on account of the donations paid to the institutions which is entitled for deduction under section 80G/80GGB of the Act. It has to be disallowed/added back while computing the eligible profit of the business referred therein under section 80-IA of the Act. It is for the reason that this donation does not relate to the business referred under section 80-IA of the Act which is eligible for deduction. But the same can be claimed as deduction by virtue of the provisions of section 80G/80GGB of the Act separately subject to the conditions specified therein. Hence, we do not find any infirmity in the order of learned CIT (A). Thus, the ground of appeal of the Revenue is dismissed. Computation of deduction u/s 80-IA - As regards the issue of preceding year loss which was not set off by the assessee against the eligible undertaking located at Bhiwandi, we note that the issue is no longer rest integra and settled in favour of the assessee by the judgment in the case of Velayudhaswamy Spinning Mills 2010 (3) TMI 860 - MADRAS HIGH COURT . Hence, the ground of appeal of the revenue is dismissed. MAT computation u/s 115JB on addition u/s 14A - HELD THAT - Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT Determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - There is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts circumstances, we feel that adhoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the Revenue is partly allowed. Enhanced profit which is deductible under the provisions of section 80 IA of the Act on account of the disallowance of the expenses under the provisions of section 14A - claim of the assessee was rejected by the learned CIT (A) by holding that there is no dispute that the disallowances under section 14A will increase the business profit - HELD THAT - The 1st question that arises for our consideration whether the expenses disallowed under section 14A of the Act were attributable to the eligible undertaking or not. But the assessee before us has not brought anything on record suggesting that such expenses which was disallowed under the provisions of section 14 A of the Act were pertaining to the eligible undertaking. Accordingly, we are of the view that no benefit can be extended to the assessee on account of the enhanced profit which is deductible under the provisions of section 80 IA of the Act on account of the disallowance of the expenses under the provisions of section 14A. Addition of provision for doubtful debts to the net profit for the purpose of computation under section 115JB - HELD THAT - The assessee could not have added back the provision for doubtful debts to the net profit for the purpose of computation under section 115JB of the Act in the years prior to insertion of clause (i) as those years had already elapsed and the assessee could not have given effect to the provision, which was inserted at a later point of time. The assessee therefore, could not have added back the provision for bad and doubtful debts to the net profit due to reasons beyond its control. Therefore, no adverse inference could have been drawn against the assessee. In view of preceding analysis, the assessee cannot be penalized for not adding the provisions for bad debts on account of retrospective amendment as discussed above. Hence, the ground of appeal of the assessee is allowed whereas ground of the revenue is dismissed. Addition of amount of contribution made u/s 35(1)(ii) towards the research activity apportioned to Ahmadabad generation unit and Ahmedabad distribution unit in equal proportion - CIT-A deleted the addition - HELD THAT - If the eligible undertaking derives any incomefrom the activity other than those business referred therein, then, the same cannot be allowed as deduction under section 80-IA of the Act. On the same reasoning, if there is any expense/payment made by the non-eligible undertaking which is not in connection with the business referred under the provisions of section 80-IA of the Act, the same expenses/payment has to be excluded for determining the eligible profit. Thus, the amount eligible for deduction under section 80-IA of the Act is determined from the business referred therein only. Coming to the case on hand the contribution under section 35 (1)(ii) of the Act was paid by the assessee against the against the non-eligible undertaking which is not qualified for deduction under section 80-IA of the Act, the same cannot be considered as an expense/payment against the specific business/undertaking eligible for deduction under section 80 IA of the Act. It is for the reason that the contribution under section 35(1)(ii) of the Act does not relate to the eligible undertaking. In other words, the payment under section 35(1)(ii) of the Act is eligible for deduction on account of the payment made to the specific institution irrespective of the business whether it is eligible or non-eligible carried on by the assessee. In holding so we draw support and guidance from the judgment of Zandu Pharmaceuticals Works Ltd. 2012 (9) TMI 620 - BOMBAY HIGH COURT - As the amount of contribution was claimed by the assessee in the profit and loss account of the non-eligible undertaking. Hence, we do not find any infirmity in the order of learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Validity of assessment orders.
2. Disallowance of interest and administrative expenses under section 14A.
3. Depreciation on leasehold rights.
4. Deduction under section 80IA for various incomes.
5. Penalty proceedings under section 271(1)(c).
6. Calculation of book profits under section 115JB.
7. Credit for TDS.

Detailed Analysis:

1. Validity of Assessment Orders:
The assessee challenged the validity of the assessment order passed under section 143(3) read with Section 254, citing that it contradicted the decision of the jurisdictional High Court in DCIT v. Sun Pharmaceutical Industries Ltd. and that the AO failed to carry out the ITAT's directions. The Tribunal did not find merit in these arguments and upheld the assessment order.

2. Disallowance of Interest and Administrative Expenses under Section 14A:
The AO disallowed interest and administrative expenses under section 14A read with Rule 8D, which was upheld by the CIT(A). The Tribunal noted that the assessee's own funds exceeded the investments, thus no disallowance of interest expenses was warranted. However, it upheld the disallowance of administrative expenses, as some element of administrative expenses should be allocated against exempt income.

3. Depreciation on Leasehold Rights:
The assessee claimed depreciation on leasehold rights, treating them as intangible assets. The AO disallowed this, treating the lump sum payment as capital expenditure for acquiring land. The CIT(A) upheld this view. The Tribunal, however, allowed the assessee’s claim, following the Gujarat High Court's decision in Sun Pharmaceutical Industries Ltd., and directed the AO to allow the lease premium as revenue expenditure.

4. Deduction under Section 80IA for Various Incomes:
The AO excluded several incomes (e.g., streetlight maintenance income, bad debt recovery, interest income, rent from employees, miscellaneous receipts) from the eligible amount for deduction under section 80IA, arguing they were not derived from the business of power distribution. The CIT(A) upheld this view for most items but allowed the deduction for delayed payment interest and unfulfilled guarantee revenue. The Tribunal, after detailed analysis, allowed the deduction for delayed payment interest, unfulfilled guarantee revenue, and bad debt recovery, but upheld the AO's exclusion of streetlight maintenance income, interest income, and rent from employees.

5. Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The CIT(A) dismissed this ground as premature. The Tribunal upheld this view, stating that the penalty proceedings were not ripe for adjudication at this stage.

6. Calculation of Book Profits under Section 115JB:
The AO included the disallowance under section 14A in the book profits under section 115JB. The CIT(A) deleted this addition. The Tribunal partly upheld this view, directing the AO to make an ad-hoc disallowance of 1% of the exempted income under clause (f) to Explanation-1 of Section 115JB.

7. Credit for TDS:
The assessee claimed that the AO did not allow credit for TDS amounting to ?13,54,520. The Tribunal directed the AO to verify the claim and allow the credit if found correct.

Conclusion:
The Tribunal allowed several claims of the assessee, particularly regarding the treatment of leasehold payments and certain incomes under section 80IA, while upholding the AO's and CIT(A)'s decisions on others, such as the exclusion of certain incomes from the 80IA deduction and the treatment of administrative expenses under section 14A. The Tribunal also provided specific directions for the AO to verify and rectify certain claims, ensuring compliance with legal precedents and provisions.