2023 (11) TMI 428 - AT - Income Tax

Disallowance u/s 14A attributed for earning dividend income - HELD THAT - AO is directed to re-work disallowance u/s.14A under rule 8D(2)(iii) on investment which has yielded exempt income. Addition of unutilized CENVAT Credit - HELD THAT - As per Department Appeal for AY 2005-06 2023 (2) TMI 1210 - ITAT MUMBAI irrespective of the method of accounting followed by the assessee, i.e. 'Inclusive method', wherein the taxes are included in the opening stock, purchases, etc. or the 'Exclusive method', the MODVAT credit does not have any impact on the profit of the assessee. Thus, following the ratio laid down in the case of Indo Nippon Chemicals Co. Ltd. 2003 (1) TMI 8 - SUPREME COURT and followed by Diamond Dye Chem Ltd. 2017 (7) TMI 616 - BOMBAY HIGH COURT we set-aside the order of the CIT (A) and direct the Assessing Officer to delete the addition made on account of unutilised MODVAT credit. Nature of receipt - refund of sales tax - Revenue or capital receipt - HELD THAT - Sales tax incentives received by assessee are rightly considered as Capital Receipts by Ld. CIT(A). Excise duty exemption received by assessee are capital receipts both for the purpose of computing income as per normal provision of the Act as well as book profit u/s 115JB of the Act and the addition made by Assessing Officer is deleted. Preoperative expenses - assessee itself had claimed the expenses as capital expenses and added them to its capital work-in progress/fixed assets and there is no provision in Income-tax Act permitting the allowance of such expenses - HELD THAT - It is observed that identical issue was decided by coordinate bench of Mumbai ITAT in the case of holding company of the assessee being Ambuja Cement Limited 2022 (11) TMI 1420 - ITAT MUMBAI held as in the books of account the assessee had capitalised the expenses does not prevent the assessee from claiming them as revenue expenses since the question of allowance of expenses has to be considered in the light of the legal position and the accounting treatment cannot be conclusive.The limited grievance raised by the Assessing Officer is thus devoid of any legally sustained merits, and we reject the same. Additional depreciation u/s 32(1)(iia) - whether additional depreciation is allowable only on new machinery be the first year in which it is put to use? - HELD THAT - It is observed that coordinate bench in its later decision in the case of Ambuja Cement Limited 2022 (11) TMI 1419 - ITAT MUMBAI holding company of assessee has allowed similar claim of depreciation. When coordinate bench of ITAT in its latest decision has decided issue in favour of assessee by holding that assessee is entitled for additional depreciation u/s 32(1)(iia), such later decision would prevail over the decision of Everst Industries Limited 2018 (4) TMI 426 - ITAT MUMBAI relied upon by Ld DR. As a result, since this aspect of the matter is no longer res integra, we see no reasons to take any other view of the matter than the view so taken by the coordinate bench in the group concern s case of the assessee. We uphold the plea of the assessee and direct the Assessing Officer to allow depreciation u/s.32(1)(iia) of the Act. Deduction u/s 80IA on TG-3 located at Wadi allowed - As deduction u/s. 80-IB was granted for an initial assessment year, same could not be rejected for subsequent assessment years unless relief for initial year was withdrawn. Auditor s fee and director s remuneration (indirect expenses) should not be apportioned for computing deduction u/s 80IA - AO is directed to allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis- -vis overall expenditure. Thus, related ground of appeal in departmental appeal is dismissed. Addition of provision for gratuity made while computing book profit u/s 115JB is deleted. Wealth tax provision is not required to be added back while computing Book Profits under Section 115JB. Disallowance u/s 14A cannot be made while computing book profit u/s.115JB . See Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI Expenditure incurred on club entrance fee and subscription fee is allowable revenue expenditure. Nature of receipts - sales proceeds of Voluntary Emission Receipts (VER's) - Sale proceeds from CERs is treated as capital receipts and accordingly, this ground of appeal raised by the assessee is accordingly allowed. Reduction in deduction u/s 80-IA on power generating undertakings due to modification in Market Value of electricity generated - HELD THAT - As observed that while computing the output of the CPP, the Assessing Officer has excluded the transmission loss which was considered by assessee in their calculations but during the course of hearing before bench, assessee conceded the ground on the exclusion of the units lost in transmission for the purpose of computing the turnover of CPP. As observed that Ld AR has filed details regarding rate to be taken based upon decisions referred supra, such working was not available with the file of AO hence on this limited purpose of verification for the year under consideration, the AO is directed to verify the working as submitted by Ld AR before us and directed to consider the market value of power sold by CPP units at the Electricity rate at which CMM units at different location is purchasing electricity from SEBs as held/discussed by various courts. Accordingly, this ground of appeal is allowed for statistical purpose. Deduction u/s.80IA on Rail Infrastructure to be allowed. Delete the Adjustment on account of CENVAT in the profits of the eligible units for deduction u/s 80IA . Proportionate Head Office expenditure while computing deduction u/s 80IA/80IC - Allocate Head office expenses (other than auditor fees and CMA expenses) on the basis of expenditure incurred by the units vis- -vis overall expenditure. LTCG on Sale of Air Pollution Control (APC) Business - sale as slump sale by invoking the provision of sec. 50B - HELD THAT - In the present case, assessee has valued each assets separately in agreement itself and same was already on record of Assessing Officer hence the transaction would be item wise sale and such facts cannot be ignored. Hon ble Madras High court in the case of CIT v. Shiva Distilleries Ltd 2019 (7) TMI 706 - MADRAS HIGH COURT has held that Where transfer price of undertaking was based on individual assets and liabilities, said sale would not qualify as 'Slump Sale' as per section 2(42C). Thus it is found that AO has wrongly invoked provisions of Section 50B of the Act for computing Income from Capital gain on sale of a divisions without transfer of other related business assets and liabilities of undertaking in the year under consideration. The assessee has correctly treated transaction of sale as item wise sale in return of income and computed Income from capital gain as applicable to sale of Individual item of assets. Thus, addition made by Assessing Officer and sustained by CIT(A) cannot be upheld and related ground of appeal is allowed. Denial of claim for deduction of Leave Encashment on provision basis - Hon'ble supreme court in the case of UOI v. Exide Industries Ltd. 2020 (4) TMI 792 - SUPREME COURT has upheld constitutional validity of provision of section 43B(f) for provision for leave encashment liability and considering binding decision of Hon'ble Supreme Court claim cannot be allowed. However, if payment of such provision towards leave encashment is made in subsequent year, deduction may be allowed to assessee in such years if not allowed till date. Therefore, Assessing Officer is directed to verify and the same and allow the same as per our above directions. Write off of CWIP expenditure pertaining to referred projects which are part of existing business activity hence such expenditure is allowable expenditure. The addition made by Assessing Officer is thus deleted and related ground of appeal is allowed. Provision for leave encashment made while computing book profit u/s 115JB is to be deleted. Sales tax and excise duty incentive be excluded while computing book profits u/s. 115JB

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of unutilized CENVAT Credit.
3. Treatment of Sales Tax Incentive as Capital Receipt.
4. Exclusion of Excise Duty Exemption in computing total income.
5. Disallowance of preoperative expenses.
6. Claim of additional depreciation under Section 32(1)(iia).
7. Deduction under Section 80IA for power-generating units.
8. Apportionment of indirect expenses for computing deduction under Section 80IA.
9. Provision for normal gratuity in computing Book Profit under Section 115JB.
10. Provision for wealth tax in computing Book Profit under Section 115JB.
11. Provision for interest expenses to earn dividend income in computing Book Profit under Section 115JB.
12. Disallowance of Club Entrance Fees.
13. Treatment of proceeds from the sale of Voluntary Emission Receipts.
14. Reduction in deduction under Section 80IA on power generating undertakings.
15. Deduction under Section 80IA on Rail System.
16. Disallowance of proportionate CENVAT credit for units eligible for deduction under Section 80IA.
17. Apportionment of Head Office expenditure while computing deduction under Section 80IA/80IC.
18. Long Term Capital Gain on Sale of Air Pollution Control Business.
19. Provision for Leave Encashment.
20. Disallowance of claim of Education Cess.
21. Write-off of assets under construction.
22. Provision for interest on income tax in computing Book Profit under Section 115JB.

Issue-wise Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The tribunal upheld the deletion of disallowance under Section 14A made by the Assessing Officer, considering the Supreme Court's decision in South Indian Bank Ltd. and the jurisdictional High Court's decision in PCIT v. Shapoorji Pallonji & Co Ltd. The tribunal directed the Assessing Officer to rework the disallowance only for investments that yielded exempt income during the impugned year.

2. Addition of unutilized CENVAT Credit:
The tribunal followed the decision in Mahindra & Mahindra Ltd. and held that the unutilized CENVAT credit could not be directly added to the closing stock, thus deleting the addition made by the Assessing Officer.

3. Treatment of Sales Tax Incentive as Capital Receipt:
The tribunal, following the decision in Ambuja Cement Limited and other judicial precedents, held that sales tax incentives received by the assessee are capital receipts and not chargeable to tax.

4. Exclusion of Excise Duty Exemption in computing total income:
The tribunal dismissed the ground raised by the revenue, following the decision in Mahindra & Mahindra Ltd. and Ambuja Cement Limited, holding that unutilized CENVAT credit should not be added to the closing stock.

5. Disallowance of preoperative expenses:
The tribunal upheld the deletion of disallowance of preoperative expenses, following the decision in Ambuja Cement Limited, holding that such expenses should be allowed as revenue expenses.

6. Claim of additional depreciation under Section 32(1)(iia):
The tribunal allowed the claim of additional depreciation, following the decision in Ambuja Cement Limited and other judicial precedents, holding that additional depreciation is allowable on new machinery acquired and installed after 31-03-2005.

7. Deduction under Section 80IA for power-generating units:
The tribunal upheld the claim for deduction under Section 80IA, following the decision in Ambuja Cement Limited, holding that the assessee is entitled to deduction for power-generating units.

8. Apportionment of indirect expenses for computing deduction under Section 80IA:
The tribunal directed the Assessing Officer to allocate Head Office expenses based on expenditure incurred by the units vis-à-vis overall expenditure, following the decision in Ambuja Cement Limited.

9. Provision for normal gratuity in computing Book Profit under Section 115JB:
The tribunal deleted the addition of provision for gratuity made while computing book profit under Section 115JB, following the decision in the assessee's own case for A.Y. 2004-05.

10. Provision for wealth tax in computing Book Profit under Section 115JB:
The tribunal deleted the addition of provision for wealth tax made while computing book profit under Section 115JB, following the decision in the assessee's own case for A.Y. 2004-05.

11. Provision for interest expenses to earn dividend income in computing Book Profit under Section 115JB:
The tribunal deleted the disallowance under Section 14A while computing book profit under Section 115JB, following the decision in Ambuja Cement Limited and the Special Bench decision in ACIT Vs Vireet Investments Pvt Ltd.

12. Disallowance of Club Entrance Fees:
The tribunal allowed the claim for Club Entrance Fees, following the decision in the assessee's own case for A.Y. 2004-05, holding that such expenses are allowable as business expenses.

13. Treatment of proceeds from the sale of Voluntary Emission Receipts:
The tribunal held that the sale proceeds from Voluntary Emission Receipts are capital receipts and not chargeable to tax, following the decision in the assessee's own case and other judicial precedents.

14. Reduction in deduction under Section 80IA on power generating undertakings:
The tribunal directed the Assessing Officer to recompute the deduction under Section 80IA based on the electricity rate at which the Cement Manufacturing Units purchased electricity from SEBs, following the decision in Reliance Industries Limited and Ambuja Cement Limited.

15. Deduction under Section 80IA on Rail System:
The tribunal allowed the claim for deduction under Section 80IA for the Rail System, following the decision in Ultratech Cement Ltd and other judicial precedents.

16. Disallowance of proportionate CENVAT credit for units eligible for deduction under Section 80IA:
The tribunal deleted the adjustment on account of CENVAT in the profits of the eligible units, following the decision in Ambuja Cement Limited.

17. Apportionment of Head Office expenditure while computing deduction under Section 80IA/80IC:
The tribunal directed the Assessing Officer to allocate Head Office expenses based on expenditure incurred by the units vis-à-vis overall expenditure, following the decision in Ambuja Cement Limited.

18. Long Term Capital Gain on Sale of Air Pollution Control Business:
The tribunal held that the sale of the Air Pollution Control business was not a slump sale and should be treated as an item-wise sale, following judicial precedents and the Supreme Court's decision in CIT v. Artex Manufacturing Co.

19. Provision for Leave Encashment:
The tribunal upheld the disallowance of provision for leave encashment, following the Supreme Court's decision in UOI v. Exide Industries Ltd., but directed the Assessing Officer to allow the deduction in subsequent years if payment was made.

20. Disallowance of claim of Education Cess:
The tribunal dismissed the ground as not pressed by the assessee.

21. Write-off of assets under construction:
The tribunal allowed the claim for write-off of assets under construction, following judicial precedents and holding that such expenditure is allowable as revenue expenditure.

22. Provision for interest on income tax in computing Book Profit under Section 115JB:
The tribunal dismissed the ground raised by the assessee, following the decision in Ambuja Cement Ltd.