2022 (8) TMI 88 - AT - Income Tax

Disallowance on account additional depreciation in respect of windmills under the provisions of Section 32(1)(iia) - Proof of manufacturing activity provided or not? - HELD THAT -we note that the Hon ble Madras High Court, in the case of S. Srinivasaraghavan 2022 (5) TMI 1066 - MADRAS HIGH COURT involving identical facts and circumstances for A.Y. 2006-07, has allowed the additional depreciation on windmill considering the activity of generating the electricity as manufacturing in nature. Addition u/s 14 A while calculating the book profit u/ 115JB of the Act - HELD THAT - We note that in the recent judgment of Special Bench of Hon ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB. We hold that the 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 Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently - HELD THAT - We feel that ad-hoc 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 subject to the maximum amount of disallowance made by the lower authorities. 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.

Summary

Issues Involved:
1. Deletion of disallowance of additional depreciation on windmills.
2. Deletion of addition made under Section 14A for computing book profits under Section 115JB.

Detailed Analysis:

1. Deletion of Disallowance of Additional Depreciation on Windmills:

The Revenue challenged the CIT(A)'s decision to delete the disallowance of additional depreciation of Rs. 9,17,06,000/- on windmills. The AO had disallowed this depreciation on the grounds that generating electricity did not constitute manufacturing under Section 32(1)(iia) of the Income Tax Act.

The CIT(A) reversed the AO's decision, citing Tribunal decisions and the Hon'ble Supreme Court's interpretation that electricity generation qualifies as manufacturing. The CIT(A) also referenced the Finance Act 2012 amendment, which clarified that electricity generation is a manufacturing activity, applicable retrospectively.

The Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble Madras High Court's ruling in S. Srinivasaraghavan vs. ACIT, which recognized electricity generation as a manufacturing activity, thus making the assessee eligible for additional depreciation.

2. Deletion of Addition Made Under Section 14A for Computing Book Profits Under Section 115JB:

The AO had added Rs. 14,62,000/- to the book profit under Section 115JB, which was disallowed by the CIT(A). The CIT(A) held that the AO should have used Section 154 to rectify the mistake if the appeal effect was not properly given. The CIT(A) also noted that disallowances under Section 14A should not affect book profit calculations under Section 115JB, based on the ITAT's ruling in Reliance Petroproducts Pvt. Ltd.

The Tribunal supported the CIT(A)'s view, referencing the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investment Pvt. Ltd., which held that disallowances under Section 14A cannot be applied to book profit calculations under Section 115JB. The Tribunal also cited the Hon'ble Calcutta High Court in CIT vs. Jayshree Tea Industries Ltd., which emphasized that Section 115JB is a complete code in itself and should not be influenced by Section 14A.

However, the Tribunal acknowledged that disallowance related to exempt income must still be made under clause (f) to Explanation 1 of Section 115JB. Given the lack of a specific mechanism, the Tribunal directed an ad-hoc disallowance of 1% of the exempt income, subject to the maximum amount disallowed by the lower authorities.

Conclusion:

The Tribunal dismissed the Revenue's appeal regarding additional depreciation on windmills, affirming that electricity generation constitutes manufacturing. For the Section 14A disallowance under Section 115JB, the Tribunal partially allowed the Revenue's appeal, directing a 1% ad-hoc disallowance of the exempt income.