2013 (6) TMI 478 - AT - Income Tax

Deduction u/s 80IA - interest income received against late payment from customers - Held that - This issue came up for consideration before various High Courts and it was pointed out that when the interest is received from delayed payment from customers then it would have direct nexus with such sale and would be eligible for deduction u/ s Chapter VI. As relying on Nirma Industries Ltd. Vs. CIT 2006 (2) TMI 92 - GUJARAT High Court & PHATELA COTGIN INDUSTRIES P. LTD. VERSUS CIT 2007 (5) TMI 226 - PUNJAB AND HARYANA HIGH COURT it becomes clear that when interest is received on account of delayed payments from customers then it would definitely constitute income from eligible business because such interest has direct nexus with the receipt from eligible business. Provision of leave encashment - whether an ascertained liability and therefore, need not to be added back to the book profits u/s 115 JB - Held that - As relying on Bharat Earth Movers v CIT 2000 (8) TMI 4 - SUPREME Court wherein the Court considering the issue where provision for leave encashment was allowable as admissible deduction referred to the another decision of Metal Box Company of India Ltd. V Their Workmen (1968 (8) TMI 53 - SUPREME Court). Thus the principles laid down in these cases show that the provision for leave encashment would constitute a liability and if the same has been determined on the basis of actuarial valuation then same cannot be considered as unascertained liability. Provision for staff incentive - whether unascertained liability or not? - Held that - As no evidence has been filed before AO in respect of particular policy followed by the assessee- company in respect of staff incentive. The copy of scheme has also not been filed before us. However, at the same time the AO also rejected the issue summarily without asking for the scheme for incentive claimed from the assessee and the ld. CIT(A) has allowed the relief without examining the scheme. Therefore remand the matter back to the file of AO with a direction to re-examine the issue after obtaining the scheme of staff incentive from the assessee. Adjustments for working the book profit u/s 115 JB by adding Advance Against Depreciation to the book profits - Held that - As the issue was decided in favour of the assessee by following the decision of case of National Hydro Electric Power Corporation V CIT 2010 (1) TMI 281 - SUPREME COURT wherein held that AAD is income received in advance & since the amount of AAD is reduced from sales, there is no debit to the profit and loss account and the amount did not enter the stream of income for the purposes of determination of net profit at all. Hence clause (b) of the Explanation 1 is not applicable to AAD. The decision is directly on the issue of advance against depreciation and whether the same is required to be added u/ s 115 JB to the book profits & as decision of Hon ble Supreme Court is the Law of land therefore bound to be followed. Sale of scrap from profits for the purpose of deduction u/s 80IA - Held that - No force in the submissions of assessee because the CIT(A) has clearly observed that admittedly scrap was generated out of stores and from repair of plant and therefore, same cannot be said to have been generated during the process of manufacture. Further the decision of CIT V. Bicycle Wheels (2010 (10) TMI 496 - Punjab and Haryana High Court) as relied by assessee involves all together different issue i .e. whether sale of scrap should be included in the total turnover or not? But in the present case CIT(A) has observed that the scrap was not out of manufacture but only from stores and repairs of plants - against the assessee.

Issues Involved:
1. Deduction under Section 80IA of the Act in respect of interest income.
2. Provision for leave encashment as ascertained liability under Section 115JB.
3. Provision for staff incentive as unascertained liability under Section 115JB.
4. Adjustment of Advance Against Depreciation (AAD) to book profits under Section 115JB.
5. Deduction under Section 80IA for interest on FDRs.
6. Deduction under Section 80IA for sale of scrap.
7. Interest received on loans from staff.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA of the Act in respect of interest income:
The Revenue's appeal contested the allowance of deduction under Section 80IA for interest income received against late payment from customers. The AO had denied the deduction, arguing that such income was not derived from the eligible undertaking. The CIT(A) allowed the deduction, reasoning that the interest was inextricably linked to the supply of power and thus part of the sale revenue. The Tribunal upheld the CIT(A)'s decision, referencing various High Court decisions that supported the view that interest on delayed payments from customers has a direct nexus with the eligible business.

2. Provision for leave encashment as ascertained liability under Section 115JB:
The AO had added the provision for leave encashment to the book profits, treating it as an unascertained liability. The CIT(A) disagreed, citing the Supreme Court's decision in Bharat Earth Movers v. CIT, which held that such provisions, when determined by actuarial valuation, are ascertained liabilities. The Tribunal confirmed the CIT(A)'s order, emphasizing that the provision for leave encashment constituted an ascertained liability.

3. Provision for staff incentive as unascertained liability under Section 115JB:
The AO treated the provision for staff incentive as an unascertained liability and added it to the book profits. The CIT(A) held that the provision was ascertained, as it was based on existing policies and related to work done by employees during the year. The Tribunal, however, remanded the matter back to the AO for re-examination, noting that neither the AO nor the CIT(A) had thoroughly examined the specific policy regarding staff incentives.

4. Adjustment of Advance Against Depreciation (AAD) to book profits under Section 115JB:
The AO added AAD to the book profits, but the CIT(A) reversed this decision, relying on the Supreme Court's ruling in National Hydro Electric Power Corporation v. CIT, which held that AAD is a timing difference and not an amount carried to a reserve. The Tribunal upheld the CIT(A)'s decision, affirming that AAD should not be added to the book profits as per the Supreme Court's judgment.

5. Deduction under Section 80IA for interest on FDRs:
The AO denied the deduction under Section 80IA for interest on FDRs, arguing that such interest was not derived from the eligible business. The CIT(A) upheld this view, reasoning that the interest on FDRs did not have a direct nexus with the power generation business. The Tribunal agreed, citing the Supreme Court's decision in Pandian Chemicals Ltd. v. CIT, which held that interest on deposits is a step removed from the business of the industrial undertaking.

6. Deduction under Section 80IA for sale of scrap:
The AO excluded income from the sale of scrap from the business profits for the purpose of deduction under Section 80IA, arguing it was not derived from the eligible business. The CIT(A) supported this exclusion, noting that the scrap was generated from stores and repairs, not from the manufacturing process. The Tribunal upheld this decision, agreeing that the sale of scrap did not have an immediate and first-degree nexus with the power generation business.

7. Interest received on loans from staff:
This issue was not pressed by the assessee during the hearing and was dismissed as not pressed.

Conclusion:
The Tribunal's order resulted in partial allowance of the Revenue's appeals and dismissal of the assessee's appeals and cross-objections. The decisions were based on detailed legal reasoning and adherence to precedents set by higher courts, ensuring that the deductions and adjustments were in line with the applicable legal provisions and judicial interpretations.

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