2021 (8) TMI 422 - AT - Income Tax

Depreciation disallowance on the power plant in respect of newly installed building, plant and machinery comprising of a captive thermal power plant which was not put to use in the financial year 2004 05 - HELD THAT - The power plant was existence on 26th of March 2005 ready to be used, leased out to another entity, shows that the assets are owned by the assessee and are used in the leasing business of the assessee and therefore the assessee is entitled to the depreciation on the same. When the assets are leased out by lessor to lessee, to claim the depreciation by the lessor on assets owned by it, it is not necessary that lessee should have used that particular asset for the business of the lessee - lease agreement and power purchase agreement are not held to be sham by the AO but it is only disputed the retrospective applicability in both these agreements, i.e. both these agreements were entered into on 24th of March 2005, made it applicable from 15th of March 2005. We do not find any reason to disallow the depreciation in the hands of the assessee. It is also to be seen that the Keshav Power Ltd has deposited a sum of ₹ 60 crores as security deposit. No doubt, this clause was not there in the lease deed entered into - this fact does not impact the allowability of this allowability of depreciation on the power plant in the hence of the assessee for assessment year 2005 06 - no doubt the availability of coal and water for purchasing of the power are to very relevant factors for production of power, however they may be relevant in determining the allowability of the power purchase price paid by the assessee to Keshav Power Ltd, but does not have any impact on the allowability of depreciation to the assessee on leased out assets. In view of this, we find no infirmity in the order of the learned CIT- A in deleting the disallowance of depreciation to the assessee on power plant which is leased out by the assessee in its business of leasing to Keshav Power Ltd during financial year 2004 05 relevant to assessment year 2005 06. Accordingly ground number 1 of the appeal of the learned assessing officer is dismissed. Allowability of the power charges paid by the assessee to Keshav Power Ltd. - HELD THAT - We have not been shown any clause in the power purchase agreement that when assessee does not produce any unit of the power, the minimum off take requirement obligation of the assessee would trigger and assessee is required to pay Keshav Power Ltd minimum off take power bill. Further this is evident that assessee has shown that it would be beneficial for it to buy power from Keshav Power Ltd then to consume power from Tamil Nadu Electricity Board. Even then assessee does not purchased power from Keshav Power Ltd is clearly evident because the Keshav Power Ltd has not produced any unit of the power. We do not agree with the order of the CIT A in allowing even the proportionate amount of power charges to the assessee wherein there is no production of power by the supplier. Merely because Keshav Power Ltd has a power plant from which no power is produced, and assessee willingly pay something to Keshav Power Ltd, such payment made by the assessee does not become allowable in the hence of the assessee. It is immaterial whether such income is offered to taxation by the Keshav Power Ltd. In the result we reverse the order of the learned CIT A, restores the order of the learned assessing officer disallowing the power purchase price and allow ground of the appeal of the AO. Written down value of the power plant on which depreciation is to be granted - HELD THAT - This issue has already been decided in the case of the assessee for assessment year 2005 06 by this order. The learned assessing officer is directed to compute the written down value of the power plant after granting assessee depreciation on power plant at respective rates and then compute the written down value on which the depreciation should be granted in this assessment year. Accordingly this ground of appeal does not survive. Therefore same is allowed for statistical purposes. Disallowance of expenditure incurred by the assessee on payment of power charges - AO disallowed the above charges holding that the whole transaction of leasing of the power plant as well as the power purchase agreement between the assessee and Keshav Power Ltd is sham - HELD THAT - Now it is an established fact that assessee has purchased power from power plant leased out to Keshav Power Ltd at the competitive rate which are neither excessive not unreasonable, therefore there is no reason that why this power purchase expenditure incurred by the assessee should be disallowed. Accordingly we direct the learned assessing officer to delete the disallowance being power purchased by the assessee from Keshav Power Ltd. Thus ground number 2 of the appeal is allowed. Disallowance of payment made for conducting Hindi classes to one organization and payment for supply of milk and maintenance of the guidance - HELD THAT - Both these expenditure are also been considered by the learned CIT A incurred wholly and exclusively for the purposes of the business of the assessee as well as the same are also covered by the decision of the coordinate benches in earlier years in the assessee‟s own case where expenditure of similar nature are allowed. The learned departmental representative could not show us any reason to deviate from the decision of the learned CIT A. accordingly we confirm his order. Disallowance of depreciation on water works and water installation system - AO held them as part of building and allowed depreciation at the rate of 10% whereas the assessee claimed that this is part of plant and machinery and therefore depreciation should be allowed at the rate of 25% - HELD THAT - CIT A also allowed the depreciation to the water works and water distribution installation at the rate of 25% as the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 1986 1987. Therefore we do not find any infirmity in the order of the learned CIT A. Accordingly ground number 3 of the appeal of the learned assessing officer is dismissed. Disallowance u/s 14A - mandation of recording satisfaction - HELD THAT - AO at the time of making a disallowance has just stated that the assessee has earned dividend income and long-term capital gain which is exempt and therefore the provisions of Section 14 A read with rule 8D applies and straight away proceeded to make disallowance. At the time of making the final edition, he merely reduced the total addition by Suo Motu disallowance made by the assessee. Therefore it is apparent that AO has not recorded any satisfaction with respect to the correctness of the claim of the assessee of incurring expenditure for earning of exempt income. Such is the mandate of honourable Delhi High Court in case of CIT V Taikisha engineering Co Ltd 2014 (12) TMI 482 - DELHI HIGH COURT - Appeal of the assessee are allowed. Disallowance u/s 14 A for the purpose of computation of the book profit u/s 115 JB - motive the amount of the administrative expenditure incurred by the assessee for earning of the exempt income - HELD THAT -The assessee itself has SUO Moto considered a sum of ₹ 5 lakhs as expenditure incurred by it for earning the exempt income. As the issue involved before us is pertaining to assessment year 2007 08 which is related to the period prior to 15 years from today, this is the last assessment year where the provisions of rule 8D are not applied, therefore in the interest of justice we uphold that a sum of ₹ 5 lakhs which is also admitted by the assessee by making a disallowance Under the provisions of Section 14 A incurred by the assessee for earning of the exempt income, is also required to be added to the book profit of the assessee u/s 115JB of the income tax act.

Summary

Issues Involved:
1. Depreciation on leased-out power plant.
2. Disallowance of power charges.
3. Disallowance of remuneration to sales organizers.
4. Disallowance of maintenance and pooja expenses.
5. Disallowance of staff recreation expenses.
6. Disallowance of payment for conducting Hindi classes.
7. Disallowance of payment to Dalmia Animals & Ecological Welfare Association.
8. Depreciation rate on water works and water installation system.
9. Deduction under Section 80IA.
10. Disallowance under Section 14A.
11. Disallowance under Section 115JB.

Issue-wise Detailed Analysis:

1. Depreciation on Leased-out Power Plant:
The primary issue was whether the power plant was commissioned and put to use before 31st March 2005. The assessee claimed depreciation on the power plant leased to Keshav Power Ltd. The AO disallowed the depreciation, arguing that the plant was not installed by 31st March 2005. However, the CIT(A) allowed the depreciation, stating that the plant was operational and the lease agreement was genuine. The ITAT upheld the CIT(A)'s decision, confirming that the plant was ready for use by 26th March 2005, and thus the depreciation was allowable.

2. Disallowance of Power Charges:
The AO disallowed ?35 lakhs paid as power charges, arguing that the plant was not operational before 31st March 2005. The CIT(A) allowed the charges proportionately for two days, but the ITAT reversed this, disallowing the entire amount since no power was produced by Keshav Power Ltd during the relevant period.

3. Disallowance of Remuneration to Sales Organizers:
The AO disallowed ?45,15,026 paid to various sales organizers. The CIT(A) deleted the disallowance, citing the coordinate bench's decision in the assessee's favor for earlier years. The ITAT upheld the CIT(A)'s decision, confirming that the payments were genuine and allowable.

4. Disallowance of Maintenance and Pooja Expenses:
The AO disallowed ?18,49,152 for maintenance and pooja expenses. The CIT(A) deleted the disallowance, referencing the coordinate bench's decision in earlier years. The ITAT agreed, finding no reason to deviate from the earlier decision.

5. Disallowance of Staff Recreation Expenses:
The AO disallowed ?9,30,557 for staff recreation activities. The CIT(A) deleted the disallowance, and the ITAT upheld this decision, following the precedent set in earlier years.

6. Disallowance of Payment for Conducting Hindi Classes:
The AO disallowed ?30,000 paid to Dakshina Bharat Hindi Prachar Sabha. The CIT(A) allowed the expenditure, and the ITAT confirmed this decision, finding it to be for the business purposes of the assessee.

7. Disallowance of Payment to Dalmia Animals & Ecological Welfare Association:
The AO disallowed ?92,411 paid for supply of milk and maintenance of gardens. The CIT(A) allowed the expenditure, and the ITAT upheld this decision, citing earlier years' decisions.

8. Depreciation Rate on Water Works and Water Installation System:
The AO allowed depreciation at 10% on water works and installation systems, treating them as part of the building. The CIT(A) allowed depreciation at 25%, treating them as part of plant and machinery. The ITAT upheld the CIT(A)'s decision, following the coordinate bench's ruling in earlier years.

9. Deduction under Section 80IA:
The AO disallowed the deduction under Section 80IA. The CIT(A) allowed the deduction, referencing the coordinate bench's decision in earlier years. The ITAT upheld the CIT(A)'s decision, confirming the deduction.

10. Disallowance under Section 14A:
The AO disallowed ?9.56 crores under Section 14A. The CIT(A) reduced the disallowance to ?51,23,311, stating that Rule 8D did not apply for the relevant year. The ITAT upheld the CIT(A)'s decision, noting that the AO did not record satisfaction about the incorrectness of the assessee's claim.

11. Disallowance under Section 115JB:
The AO made a disallowance under Section 115JB based on Section 14A. The CIT(A) reduced the disallowance. The ITAT held that while Rule 8D does not apply under Section 115JB, expenses related to exempt income must still be added back to book profits. The ITAT upheld the CIT(A)'s reduction but confirmed the need for some disallowance.

Conclusion:
The ITAT's detailed analysis confirmed the allowability of depreciation on the leased power plant and other business expenses while ensuring compliance with statutory provisions for disallowances under Sections 14A and 115JB. The decisions were largely in favor of the assessee, following precedents and detailed factual analysis.