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2022 (12) TMI 333 - AT - Income TaxAllowable business expenses - commencement of business - Disallowance of project expenses, depreciation and addition made of interest and misc income earned from the certain projects undertaken by the assessee - AO found assessee not commenced operations - Disallowance for the reason that it was entirely new project set up by the assessee; process of construction was going on, and had not commenced production or generation of electricity - HELD THAT - We hold that all three projects i.e. Akrimota Power Projects, Lignite projects at Bhavnagar and Tadkeshwar are nothing but the continuation of existing projects of the assessee only, and all its expenses incurred therefore in the setting up of these, prior to the commencement of the business in these projects, are to be treated as revenue expenses. Accordingly, the claim of project expenses vis- -vis all three projects along with claim of depreciation on assets in the Tadkeshwar and Bhavnagar lignite projects are directed to be allowed. Claim of depreciation - We find that the assessee s case for claiming depreciation rests entirely on the fact that it had conducted trial run of its machinery during the impugned year. The Revenue does not dispute the allowability of claim of depreciation on the machinery on the basis of trial run conducted. The contention/basis for denying depreciation is refuting the claim of any trial run conducted by the assessee. Assessee had substantiated carrying on trial run, by pointing out that the power generated during the trial run had been sold to GEB which was evidenced by copy of invoices issued by the GEB, meter reading confirmed by the GEB and fact that power generation from the plant being reported in the newspaper. Authorities below clearly chosen to ignore all these very valid evidences. On the contrary, they have arrived at a finding of no trial run for generation of power according to their own whims and fancies ,that there is a huge gap between trial run and production of power, being seven months, for which no reasonable explanation was apparently given by the assessee. Assessee had demonstrated carrying on trial runs with valid evidences, which have not been controverted by the Revenue despite being placed before both the authorities below, we cannot agree with the finding of the Revenue authorities that no trial run was conducted by the assessee. In view of the same, we hold that the assessee had rightly claimed deprecation. Claim of prior period expenses - Assessee fairly admitted that for the Asst.Year 2003-04 also, the ITAT had restored this issue of claim of prior period expenses back to the AO with identical direction to examine which expenses had crystalised during the year and allow claim of the expenses accordingly. He drew our attention to the order passed in the Asst.Year 2003-04 in the case of the assessee 2015 (1) TMI 1461 - ITAT AHMEDABAD - In view of this, the ld.counsel for the assessee fairly admitted that he had no grievance against the direction of the ld.CIT(A) on the impugned issue. Ground of appeal raised by the assessee is therefore dismissed. Disallowances made on account of lease and buy-back arrangement entered into by the assessee with Gujarat State Road Transport Corporation (GSRTC) - denial of depreciation on leased assets - HELD THAT - Since in the present case the assesees lease and buy back arrangement has been held to be a colorable device on the basis of the special bench decision of the ITAT in IndusInd Bank 2012 (3) TMI 212 - ITAT MUMBAI which blanket proposition vis a vis lease and buy back arrangements has since been reversed by the Hon ble apex court and the Ld.DR has not distinguished the said case before us, applying the decision of the Hon ble apex court 2013 (1) TMI 344 - SUPREME COURT . we hold that the assesses is entitled to claim depreciation on leased assets .The order of the Ld.CIT(A) upholding the disallowance of depreciation is set aside and the AO is directed to allow the same. Taxing the lease rentals on accrual basis as held by the Revenue or on cash basis as claimed by the assessee - We find that the solitary basis with the Revenue for taxing lease rentals on accrual basis is that the assessee was following mercantile system of accounting and even section 145 of the Act directs following of either cash or mercantile system and not hybrid system. But as rightly pointed out by assessee, even as per the accrual basis only those amounts certain for recovery are to be accounted for. In the present case the contention of the assessee was that GSRTC being in stringent financial position was not paying lease rentals .This is evident from the fact that the assessee had written off lease rentals of earlier years unrecovered of Rs. 11.75 Crs. Therefore even as per the accrual system of accounting the assessee was not required to account for lease rentals which were not certain of recovery and the method therefore adopted by the assessee of accounting for such income on cash basis was, we hold, justified - Addition made on account of lease rental income and interest on delayed rentals accordingly is directed to be deleted. Claim of bad debts with respect to lease rentals written off - HELD THAT - What derives is that GSRTC was not paying up the amounts due from it to the assessee. And for this reason the assessee had resorted to accounting for lease rental income from GSRTC on cash basis which aspect we have dealt with above. Besides, the assessee had filed resolution of Board of directors approving the write off of debts. The facts on record themselves establish the fact of debts from GSRTC becoming bad. The assessee therefore, we hold, is entitled to claim bad debts -The finding of the Revenue that the assessee had renewed lease agreement with GSRTC which proved that the debts were capable of recovery, has been duly explained by the assessee as being on account of expiry of earlier agreement which in no way effected the recovery of earlier lease rentals. Disallowance of contribution made by the assessee to the Office of Commissioner of Geology Mining, Gandhinagar - HELD THAT - There is no doubt that the contribution made by the assessee to the Office of Commissioner of Geology Mining, Gandhinagar was to assist and for the benefit of the business of mining only. The assessee need not demonstrate derivation of any direct/actual benefit on account of any expenditure claimed as long as intention for deriving benefit from the said expenditure is there. Intention to derive benefit is sufficient to treat the claim as allowable revenue expenditure on commercial principle itself. As rightly pointed out by assessee, the Hon ble apex court ,in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. 1996 (10) TMI 2 - SUPREME COURT settled the proposition with regard to claim of expenses for business, holding that the correct test for such claims is that of commercial expediency alone . That as long as payment is made for the purpose of business and not for infraction of any law ,the same would be allowed as deduction. We hold that the assessee s claim of contribution to the Office of Commissioner of Geology Mining, Gandhinagar being for the purpose of business, is allowable as expenditure under section 37(1). Nature of expenses - Disallowance of claim of expenditure incurred for excavation of river diversion - CIT-A upheld to the extent of 80% by the ld.CIT(A) - sole reason for treating the expense incurred on diversion of a river as capital was that it gave rise to enduring benefit - HELD THAT - As the expense was incurred only for enabling conduct of the business of the assessee, admittedly without any expenditure being incurred on capital account. The ratio settled by the Hon ble apex court in the case of Empire Jute 1980 (5) TMI 1 - SUPREME COURT will therefore squarely apply in the facts of the present case. Accordingly therefore, we hold, that the impugned expenditure is to be treated as revenue in nature.Thus we hold, the assessee s claim of expenses incurred for excavation of river diversion as allowable revenue expense. Addition u/s 14A - disallowance of interest incurred for the purpose of earning exempt income - HELD THAT - As it is a settled law that where sufficient interest free funds are available the presumption is that the investments have been made out of such funds calling for no disallowance of interest under section 14A of the Act. Hon ble Supreme Court in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has laid down the above law. In the present case, therefore, invocation of Rule 8D by the ld.CIT(A), we hold is not in accordance with law. Further, noting that the assessee had sufficient owned interest free funds for the purpose of making the impugned investment, as demonstrated both to the Ld.CIT(A) and also before us and which fact has remained uncontroverted by the Revenue, we hold no disallowance of interest under section 14A of the Act is warranted. Further noting that in identical facts and circumstances the ITAT in the case of the assessee in A.Y 2003-04 had deleted entire disallowance made u/s 14A of the Act, we hold that the disallowance u/s 14A is unwarranted, not in accordance with law and direct the same to be deleted in entirety. Penalty u/s 271(1)(c) - HELD THAT - Additions on which the impugned penalties are challenged by both the Revenue and the assessee since are extinguished, the impugned penalties have no leg to stand, they are accordingly cancelled. In other words, assessee s penalty appeal challenging confirmation of penalty under section 271(1)(c) of the Act is allowed, whereas Revenue s appeal is dismissed.
Issues Involved:
1. Disallowance of project expenses, depreciation, and interest/miscellaneous income. 2. Claim of prior period expenses. 3. Lease and buy-back arrangement with GSRTC. 4. Contribution to the Office of Commissioner of Geology & Mining. 5. Expenditure for excavation of river diversion. 6. Disallowance under section 14A for interest incurred to earn exempt income. 7. Penalty under section 271(1)(c). Detailed Analysis: 1. Disallowance of Project Expenses, Depreciation, and Interest/Miscellaneous Income: The assessee contended that expenses related to Akri Mota Power Project and Lignite Projects at Bhavnagar and Tadkeshwar were part of its existing business. The Revenue disallowed these expenses, treating them as separate undertakings. The Tribunal, relying on the Supreme Court's decision in CIT Vs. Monnet Industries Ltd., held that these projects were a continuation of the existing business due to the unity of control and management. Thus, the expenses and depreciation were allowed, and the income from these projects was to be considered as business income. 2. Claim of Prior Period Expenses: The assessee's claim for prior period expenses amounting to Rs.67,37,949/- was initially disallowed by the AO due to lack of evidence. The CIT(A) restored the issue to the AO for verification. The Tribunal upheld this decision, directing the AO to allow expenses that crystallized during the relevant year. 3. Lease and Buy-Back Arrangement with GSRTC: The Revenue treated the lease and buy-back arrangement as a colorable device, disallowing depreciation on leased buses and taxing lease income on an accrual basis. The Tribunal, referencing the Supreme Court's decision in ICDS Ltd. Vs. CIT, allowed the depreciation claim, stating that the arrangement was genuine. The Tribunal also held that lease rentals should be taxed on a cash basis, given GSRTC's financial difficulties, and allowed the write-off of bad debts amounting to Rs.11,75,96,456/-. 4. Contribution to the Office of Commissioner of Geology & Mining: The AO disallowed the contribution of Rs.53,84,000/- to the Office of Commissioner of Geology & Mining, Gandhinagar, citing no statutory obligation. The CIT(A) upheld this disallowance. The Tribunal allowed the claim, stating that the contribution was for business purposes and fell under commercial expediency, referencing the Supreme Court's decision in Sri Venkata Satyanarayana Rice Mill Contractors Co. 5. Expenditure for Excavation of River Diversion: The AO treated the expenditure of Rs.3,41,80,929/- for river diversion as capital in nature. The CIT(A) allowed only 20% of the expenditure, spreading it over five years. The Tribunal, applying the principle from Empire Jute Co. Ltd. v CIT, held that the expenditure was revenue in nature as it facilitated the assessee's mining operations without creating a capital asset. 6. Disallowance under Section 14A for Interest Incurred to Earn Exempt Income: The AO disallowed Rs.23,50,047/- under section 14A, applying Rule 8D. The CIT(A) upheld this disallowance. The Tribunal, referencing the Supreme Court's decision in CIT(LTU) vs Reliance Industries Ltd., held that since the assessee had sufficient interest-free funds, no disallowance under section 14A was warranted. The Tribunal also noted that Rule 8D was not applicable for the assessment year 2005-06. 7. Penalty under Section 271(1)(c): Given the deletion of the underlying additions, the Tribunal cancelled the penalties under section 271(1)(c) for the assessment year 2005-06. Conclusion: The Tribunal allowed the assessee's claims regarding project expenses, depreciation, bad debts, contribution to the Office of Commissioner of Geology & Mining, and expenditure for river diversion. It also deleted the disallowance under section 14A and cancelled the penalties under section 271(1)(c). The Tribunal's decisions were based on established legal principles and relevant Supreme Court rulings.
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