2022 (11) TMI 129 - AT - Income Tax

Nature of expenses - expenses incurred on replacement on spares and parts of machinery - revenue or capital expenditure - CIT(A) granted relief to the assessee by taking view that replacement of part of machinery have not enhanced the capacity of existing facility and in assessee s own case for earlier AYs similar replacement expenses were allowed as revenue expenditure - HELD THAT - As in A.Y. 2012-13 2022 (8) TMI 1021 - ITAT SURAT wherein this combination has held that the assessee has replaced the exiting part of machine or replaced the parts which have become obsolete and the replacement was essential. It was held that the replacement has not increased the existing capacity so entire expenditure was treated as revenue expenditure. - Decided in favour of assessee. Disallowance of depreciation on goodwill - whether goodwill is an asset? - HELD THAT - As for the A.Y. 2007-08 and 2012-13 2022 (8) TMI 1021 - ITAT SURAT held that the issue of depreciation on goodwill no more res integra after the decision of Hon ble Supreme Court in the case of Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT wherein it has been held that goodwill is an asset within the meaning of Section 32 of the Act and depreciation on goodwill is allowablethe amendment brought in the Act by way of Finance Act 2021 will be applicable prospectively and not in the year under consideration.- Decided in favour of assessee. Disallowance u/s 37(1) - expenditure incurred by assessee towards fulfilment of corporate social responsibility - AO disallowed the expenses by taking view that payments was not made for the purpose of business - CIT(A) allowed relief to the assessee by taking view that such contribution was not for doing any charity but for sound business consideration and in building brand image of assessee - HELD THAT - We find that nature of expenses is not in dispute. Further it is not in dispute that the assessee was setup by State Government and incurring similar expenses in earlier years. We find that similar issue has been decided by this combination in assessees own case for the A.Y. 2012-13 2022 (8) TMI 1021 - ITAT SURAT held that CSR is a concept whereby assessee-company integrate social and environmental concerns in their business operations and in their inter-action with their stakeholders on a voluntary basis. The emphasis is that business have to endeavour to become responsible actors in society so that their every action leads to sustainable growth and economic development. The CSR is no longer charity or philanthropy instead it should be imbibed in the corporate culture that leads to responsible business. Assessee stated that the CSR contribution has helped in building brand image of the company and publicity among the agrarian community. The activities implemented in the rural areas are publicized on account of large scale so message reaches to the masses. To ensure that the assessee-company gets better publicity representatives from its team participates in every event like designing the programme discussion with sarpanch gram Sabha Bhoomi Pooja concurrent monitoring evaluation inauguration event etc. for the said project. To get wider acceptability the assessee also installs inaugural stone boards banners etc. wherever and whenever applicable and said project implemented by assessee helps to build a good rapport among the villagers and the agrarian masses. CIT(A) after considering the submissions of the assessee accepted the claim and held that Explanation-2 inserted to section 37 (1) is prospective in nature as the same has been brought in the Act with reference to section 135 of Companies Act. - Decided against revenue. Disallowance u/s 40(1)(ia) - commission payment to dealers - revenue has vehemently supported the order of the Assessing Officer as discount allowed to the dealers are nothing but commissions payment which attracts TDS - HELD THAT - On comparisons of the facts with the facts of earlier years we find that on similar grounds of appeal in assessees own case for the A.Y. 2012-13 2022 (8) TMI 1021 - ITAT SURAT as held no TDS is made on the discount made to dealers - Decided against revenue. Admission of revised/ additional claim - During the assessment the assesse raised additional claim that the steam generated by CPSU in also eligible for deduction under section 80IA - claim of the assessee was not accepted/ considered by assessing officer by taking view that no such claim is made in the return of income and in absence of any claim in return of income such additional claim cannot be raised during assessment - HELD THAT - We find that the ld CIT(A) by following the decision of Jurisdictional High Court in Mitesh Impex 2014 (4) TMI 484 - GUJARAT HIGH COURT admitted the revised/ additional claim and directed the assessing officer to examine the claim and allow the same. We find that on similar issue the Jurisdictional High Court in Jay Chemical Limited 2020 (3) TMI 231 - GUJARAT HIGH COURT held that steam produced by the assessee can be termed as power and would be qualified for the benefit of deduction under section 80IA(4). Thus keeping in view the afforesaid factual and legal position we do not find any infirmity in the order of ld CIT(A) which we affirmed. Consequently the corresponding ground of appeal is dismissed. SDT on transfer of power from captive power plant to manufacturing unit - CIT(A) after considering the submissions of the assessee and following the decision of Gujarat Alkalies and Chemical Limited 2016 (10) TMI 1111 - GUJARAT HIGH COURT while following decisions in Shah Alloys Limited 2011 (11) TMI 780 - GUJARAT HIGH COURT and in Pragati Glass Works Limited 2012 (1) TMI 309 - GUJARAT HIGH COURT held that Profits and gains from infrastructure undertakings deduction under section 80-IA(4) was allowable to assessee for generation of power for captive consumption and same was to be computed considering rate of power on which Electricity Board supplied power to its consumer. Similar view was taken by Bombay High Court in CIT Vs Reliance Limited 2019 (2) TMI 178 - BOMBAY HIGH COURT also held that where assessee had set up a captive power generating unit and provided electricity to its another unit and claimed deduction under section 80-IA in respect of profits arising out of such activity valuation of electricity provided to another unit should be at rate at which electricity distribution companies were allowed to supply electricity to consumers - we do not find any infirmity in the order passed by ld CIT(A) which we affirm. Resultantly the corresponding grounds of appeal raised by revenue are dismissed.

Summary

Issues Involved:
1. Disallowance of expenses on consumption and replacement of stores and spares.
2. Disallowance of depreciation on goodwill.
3. Disallowance under Section 37(1) for corporate social responsibility (CSR) expenditure.
4. Disallowance under Section 40(a)(ia) for commission payments to dealers.
5. Transfer pricing adjustments relating to the transfer of power and steam under Section 80IA.

Detailed Analysis:

1. Disallowance of Expenses on Consumption and Replacement of Stores and Spares:
The Assessing Officer (AO) treated expenses on replacement of stores and spares as capital expenditure. The CIT(A) reversed this decision, considering that such replacements did not enhance the capacity of the existing facility and were allowed as revenue expenditure in previous years. The Tribunal upheld the CIT(A)'s decision, citing consistency with prior years and the Tribunal's own decision in the assessee's case for AY 2012-13.

2. Disallowance of Depreciation on Goodwill:
The AO disallowed depreciation on goodwill, arguing it was not claimed in the return of income but introduced later. The CIT(A) allowed the claim, referencing the scheme of amalgamation approved by the High Court and the Supreme Court's ruling in Smifs Securities Ltd. that goodwill is an asset eligible for depreciation. The Tribunal affirmed this view, noting consistency with previous years and legal precedents.

3. Disallowance under Section 37(1) for CSR Expenditure:
The AO disallowed CSR expenditure, stating it was not for business purposes, though 50% was allowed under Section 80G. The CIT(A) allowed the expenditure, recognizing it as incurred for commercial expediency and brand building. The Tribunal upheld this decision, noting the assessee's history of similar expenses and the Gujarat High Court's supportive rulings in the assessee's own case.

4. Disallowance under Section 40(a)(ia) for Commission Payments to Dealers:
The AO treated discounts to dealers as commission, subject to TDS under Section 194H. The CIT(A) disagreed, viewing the discounts as incentives for timely payments rather than commission. The Tribunal supported the CIT(A), citing consistent treatment in previous years and decisions by higher courts affirming this view.

5. Transfer Pricing Adjustments Relating to the Transfer of Power and Steam under Section 80IA:
- Market Rate as Arm's Length Price: The AO and TPO used average rates from regulatory bodies, rejecting the assessee's use of the State Electricity Board's rate. The CIT(A) sided with the assessee, referencing the Gujarat High Court's decision in Gujarat Alkalies Ltd. that market rates can serve as Arm's Length Prices. The Tribunal upheld this, emphasizing product comparability over functional comparability.
- Deduction for Steam Generation: The AO rejected the assessee's additional claim for steam profits under Section 80IA, citing it was not included in the original return. The CIT(A) admitted the claim, following the Gujarat High Court's decision in Mitesh Impex. The Tribunal affirmed this, recognizing steam as a form of power eligible for deduction under Section 80IA.

Conclusion:
The Tribunal consistently upheld the CIT(A)'s decisions across all issues, emphasizing legal precedents, the principle of consistency, and the factual context of the assessee's operations. The appeals by the Revenue were dismissed, affirming the assessee's positions on all contested points.