2019 (5) TMI 95 - AT - Income Tax

Entitled to deduction u/s 80I and 80IA - allocating any expenditure to the gas unit to steam unit - HELD THAT - As relying on own case M/S NTPC LTD. 2018 (5) TMI 796 - ITAT DELHI arguments addressed by the ld. DR for the Revenue are misconceived and as such the assessee is entitled to deduction u/s 80I and 80IA without allocating any expenditure to the gas unit to steam unit. CIT(A) has duly thrashed this issue in the light of the findings returned by Hon ble Delhi High Court in assessee's own case for AY 2000- 01 2013 (1) TMI 219 - DELHI HIGH COURT wherein Hon ble High Court has held that both the gas turbine or steam turbine generated electricity independently and inspection report dated 02.09.2004 does not indicate any new facts. So, we are of the considered view that the ld. CIT (A) has rightly decided the issue in favour of the assessee. Deduction of expenditure u/s 37 - expenses incurred on the assets not owned by it but belongs to various State Governments like irrigation, PWD, Electricity Board and in a few cases Central Government like Indian Railways - HELD THAT - No illegality or infirmity in the findings returned by the ld. CIT (A) which are based upon the decision of L.H. Sugar Factory Oil Mills (P) Ltd. vs. CIT 1980 (8) TMI 1 - SUPREME COURT and Airport Authority of India vs. CIT 2011 (12) TMI 114 - DELHI HIGH COURT and Bikaner Gypsusms Ltd. vs. CIT 1990 (10) TMI 2 - SUPREME COURT as held that when the roads were constructed around the factory with an amount incurred by the assessee existing on the land owned by Government of UP, the assessee did not acquire any asset of an enduring nature. Assessee is having existing right to carry out the business, any expenditure made by it for smooth running of the business would not lead to acquisition of capital assets. Thus the expenditure incurred by the assessee on construction of road, water supply, rail connectivity and other infrastructure activities on the assets not owned by it but owned by various Government Departments are revenue expenditure. - Decided in favour of assessee. Disallowance of pre-commissioning expenses - HELD THAT - As the addition is made by the AO following the assessment order of A Y 2004-05, therefore respectfully following the decision of Ld. CIT-A this ground of appeal is decided in favour of the appellant and the AO is directed to allow the netting off precommissioning sales against pre-commissioning expenses as claimed by the assessee and delete the addition made as income from other sources. The appeal is allowed in this ground - Decided against the Revenue. Disallowance u/s 14A - Exemption u/s 10 - Assessee earned an income form tax free interest bonds @ 8.5% and dividend income - HELD THAT - Perusal of the order passed by the coordinate Bench of the Tribunal in AY 2004-05 2018 (5) TMI 796 - ITAT DELHI apparently goes to prove that identical issue as to disallowance of the expenditure made by the assessee to earn the exempt income from investment in tax free bonds has been decided in favour of the assessee wherein AO has disallowed 2.5% of the administrative expenses for earning income from tax free bonds and the disallowance was ordered to be deleted. As to making disallowance of ₹ 123.09 crores by the AO and reduced the same to ₹ 82.67 crores by the ld. CIT (A) in the light of the facts inter alia that AO has not recorded any dissatisfaction as to the working out made by the AO; that the AO has failed to establish any nexus between the tax free income and expenditure incurred; that the assessee was having huge sufficient own funds of ₹ 41776 crores as against the investment of ₹ 16469 crores and the fact that the entire investment was made long back under one time settlement, disallowance made by the AO as well as CIT (A) is not sustainable. There is not an iota of material on file to prove the fact that the assessee has incurred any expenditure by way of administrative expenses for earning the exempt income, which makes the estimated disallowance made by the AO as well as ld. CIT (A) not sustainable. Staff is appointed to manage the surplus funds as well as investment made by the assessee and at the same time, they have also brought on record by way of financials that no expenditure has been incurred in relation to earning such income. Accounts of the assessee are audited by auditor as well as Controller Auditor General (CAG) and when the AO has failed to prove on record material to show that such and such expenditure has been incurred by the assessee to earn exempt income, in the face of the fact that all the investments are old investments that too in tax free bonds and loan to the Government out of its own huge surplus funds, no disallowance can be made - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition by disallowing the claim of deduction under Section 80IA of the Income Tax Act, 1961.
2. Deletion of addition by disallowing expenditure on assets not owned by the assessee.
3. Deletion of addition by disallowing pre-commissioning sales.
4. Allowance of relief by making retrospective application of Rule 8D of the Income Tax Rules.
5. Confirmation of disallowance under Section 14A read with Rule 8D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition by Disallowing the Claim of Deduction under Section 80IA:
The Revenue challenged the CIT(A)'s decision to delete the addition made by the AO by disallowing the deduction under Section 80IA. The AO had restricted the deduction based on the final inspection carried out at the NTPC Faridabad Gas Power Station. However, the Tribunal observed that this issue had already been decided in favor of the assessee in the previous assessment year (2004-05) by the Tribunal, which considered the same inspection report. The Tribunal reiterated that no portion of the expenditure incurred by the gas units could be allocated to the steam unit and upheld the CIT(A)'s decision, determining this ground against the Revenue.

2. Deletion of Addition by Disallowing Expenditure on Assets Not Owned by the Assessee:
The assessee claimed deduction of ?20.60 crores incurred on assets not owned by it but belonging to various government departments for infrastructure facilities necessary for its business. The AO had disallowed this expenditure, considering it as capital expenditure. The CIT(A) allowed the deduction, considering it revenue expenditure based on commercial expediency. The Tribunal upheld the CIT(A)'s decision, citing precedents from the Supreme Court and Delhi High Court, which held that such expenditure for the smooth running of business does not lead to the acquisition of capital assets. This ground was determined against the Revenue.

3. Deletion of Addition by Disallowing Pre-Commissioning Sales:
The AO had added back ?58.30 crores from pre-commissioning sales to the total income, treating it as income from other sources. The CIT(A) deleted this addition, following the decisions for earlier assessment years (2003-04 and 2004-05). The Tribunal upheld the CIT(A)'s decision, noting that the Revenue had accepted this treatment in previous years without appeal. This ground was determined against the Revenue.

4. Allowance of Relief by Making Retrospective Application of Rule 8D:
The AO had disallowed ?123.09 crores under Section 14A by applying Rule 8D retrospectively. The CIT(A) reduced this disallowance to ?82.67 crores. The Tribunal observed that the assessee had sufficient own funds and no expenditure was incurred to earn the exempt income. The Tribunal found that the AO and CIT(A) failed to establish any nexus between the expenditure and the exempt income, and the disallowance was made on an estimation basis. The Tribunal deleted the entire disallowance, determining this ground against the Revenue and in favor of the assessee.

5. Confirmation of Disallowance under Section 14A Read with Rule 8D:
The Tribunal examined the balance sheet and found that the assessee had sufficient own funds to make the investments. It noted that the investments were made long back under a one-time settlement scheme and no new investments were made during the assessment year. The Tribunal reiterated its findings from the previous assessment year (2004-05) and held that no disallowance under Section 14A was permissible without establishing a nexus between the expenditure and the exempt income. The Tribunal deleted the disallowance made by the AO and CIT(A), determining this ground in favor of the assessee.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, confirming that the additions and disallowances made by the AO were not sustainable in law. The Tribunal's decision was based on detailed examination of facts, precedents, and the absence of any nexus between the claimed expenditures and the exempt income.