2023 (11) TMI 738 - AT - Income Tax

Deduction u/s 80IA - rate of electricity transferred by the three captive units to the assessee and the rate which ld. TPO has applied and corresponding adjustment - whether sale of electricity by an eligible unit entitled for deduction u/s. 80IA which has supplied power from its three captive power plants, can the market value be the price which is available for purchase in the open market by manufacturing units? - HELD THAT - This issue has been dealt in detail by the Tribunal in the case of M/s. Tata Chemicals Ltd 2023 (10) TMI 654 - ITAT MUMBAI in detailed which has been finally concluded wherein the Tribunal has clearly held that for the purpose of 80IA(8), clause (i) of Explanation would apply with reference to price at such goods or services would ordinarily fetch in the open market and since power purchaser of power in the facts of the present case is the consumer of the power and not a distributor of the power, the open market rate to be considered in the market where electricity sold to the consumers. Here the assessee has paid the purchase power to DISCOMs at the same rate which it has paid to its captive power plants. Thus, this contention raised by the Revenue is dismissed. Application of safe harbour rules - As held that there is no application of safe harbor rules to Clause (i) of the Explanation to Section 80IA and accordingly, the decision of the Hon ble Jurisdictional High Court in the case of Reliance Industries Ltd. 2019 (2) TMI 178 - BOMBAY HIGH COURT would clearly apply. Can rate of supply of power by the DISCOMS can be held to comparable with the captive power plants unit of the assessee? - As average market value in Indian Energy Exchange platform is less than Rs. 7.64 and Rs. 8.46 adopted by the assessee and therefore, the rate of purchase of power by DISCOMs is more than fair, however, there is no such data which has been provided to us and apart from that, the rates on which power is available through Indian Energy Exchange cannot be applied, because these are not the rates to the consumers but rates to the DSICOMs. Thus, our same reasoning given in the decision of M/s. Tata Chemicals Ltd. 2023 (10) TMI 654 - ITAT MUMBAI will apply to the case of the assessee , this issue is decided in favour of the assessee and consequently the entire adjustment made by the ld. TPO is directed to be deleted. Disallowance of interest paid on Perpetual Non-Convertible Debentures (PNCDs) - HELD THAT - As decided in assessee own case 2022 (12) TMI 1477 - ITAT MUMBAI interest paid on debentures is allowable deduction u/s 36(1)(iii). Disallowance of expenditure incurred on compensatory aforestation - case of the assessee was that, whenever an authorised land is required to be diverted for non-forest purposes, i.e. industry or mining etc., the forest clearance is required to be obtained by lessee or user agency in accordance with the applicable provisions of Forest Conservation Act, 1980 and various guidelines issued by the Ministry of Environment, as forest climate changes from time to time - HELD THAT - As CIT(A) elaborated various prior approvals and procedure laid down by the Ministry as well as Hon ble Supreme Court direction in case of T.N. Godavarman Thirumulipad vs. Union of India Ors 2006 (5) TMI 550 - SUPREME COURT wherein it was observed that compensatory aforestation fund was to be created in which of the monies received from the user agency towards compensatory aforestation, etc., same shall be deposited and such fund can be utilized for undertaking for aforestation and re-generation and production of forest. We find that this issue has been decided in A.Y. 2016-17 and 2017-18 2023 (2) TMI 1215 - ITAT MUMBAI in the favour of assessee as held it is not a case of equity and the issue of perpetual bonds is only borrowing made by the assessee. Since the said borrowing has been used for business purposes of the assessee, the interest paid thereon would be squarely allowable as deduction u/s 36(1)(iii). Disallowance of provision for leave encashment - HELD THAT - We find that assessee in the computation of income has added back sum in the manner provided above. In so far as the amount which has been claimed which has been certified by the auditor comprises of amounts actually paid during the year before the filing the return for A.Y. 2019-20 which is also evident from note 2 of the TAR. Once the claim has been made towards leave encashment on payment basis alone and there is no excess claim of the amount which has been paid during the year and the same has to be allowed. Disallowance u/s 14A r.w.r 8D - computation and allocation of particulars of expenses - assessee has given the entire basis of computation of disallowance which was based on allocation of administrative and management expenses which included employee cost, rent expenses, electricity charges, maintenance expenses and other office overheads and other allocable expenses - HELD THAT - From the perusal of the allocation of expenses, it is seen that assessee has classified cadre of employees involved in investments functions, their roles and responsibilities, their functions, designations, salary and time allocated to investment activity. Apart from that, assessee has also taken proportionate disallowance of rent, electricity, maintenance expenses and other office overheads. On such details and analysis of expenditure and allocation, nowhere ld. AO has rebutted or recorded his satisfaction as to what was the defect in any such allocation having regard to the accounts maintained by the assessee and has given his general remark, like investments cannot be managed without monitoring and research, etc. and has given various observations of the kind of cost which are involved without any further analysis, whether these cost can be allocable for the earning of exempt income when most of the investments have been made in group companies. Such an approach of the ld. AO completely overlooking the detailed analysis and allocation given by the assessee for offering suo moto disallowance and without even examining them having regard to the nature of expenses and accounts maintained by the assessee, cannot be upheld. It is imperative that AO has to record his satisfaction on the claim made by the assessee having regard to the accounts. Certain remarks of the AO that lot of expenses are incurred on market research and survey before making the investments is not applicable on the facts of the present case. Moreover, he has not even analysed the entire working and allocation of the cost given by the assessee and therefore, he cannot proceed to make disallowance mechanically under rule 8D for purpose of section 14A. Accordingly, such a disallowance made by the ld. AO is deleted. Addition u/s. 14A to book profit u/s. 115JB - This issue is now stands covered by the decision of assessee s own case for the A.Y. 2016-17 and 2017-18 2023 (2) TMI 1215 - ITAT MUMBAI and the decision of Hon ble Bombay High Court in the case of CIT vs. Bengal Finance Investment P. Ltd. 2015 (2) TMI 1263 - BOMBAY HIGH COURT Thus, disallowance u/s. 14A in the book profit is deleted. Computation of book profit u/s. 115JB - As assessee submitted that already rectification application u/s 154 has been filed before the ld. AO which is pending. He thus requested that direction to be given to the ld. AO to dispose of the rectification application. Accordingly, we direct the ld.AO to dispose of the rectification application filed by the assessee.

Summary

Issues Involved:

1. Transfer pricing adjustment for the sale of power.
2. Disallowance of interest on perpetual non-convertible debentures.
3. Disallowance of expenditure on compensatory afforestation.
4. Disallowance of provision for leave encashment.
5. Disallowance under Section 14A of the Income Tax Act.
6. Addition of disallowance under Section 14A to book profits under Section 115JB.
7. Claim of deduction of interest on PNCD in computing book profit under Section 115JB.
8. Incorrect computation of book profit under Section 115JB.
9. Grant of available MAT credit.
10. Consideration of interest under Section 244A.

Summary:

1. Transfer Pricing Adjustment for Sale of Power:
The Tribunal addressed the transfer pricing adjustment of Rs. 99,61,45,650/- concerning the sale of power from eligible units (eligible for deduction under Section 80IA) to non-eligible units. The assessee argued that the market value should be based on the price at which non-eligible units purchased electricity from third-party DISCOMs. The Tribunal relied on the decision in Tata Chemicals Limited vs. DCIT, emphasizing that market value could be determined by the price available in the open market or the arm's length price under Chapter X of the Act. The Tribunal concluded that the price paid to DISCOMs, which was also paid to the captive power units, could be considered the market value, thus deleting the adjustment made by the TPO.

2. Disallowance of Interest on Perpetual Non-Convertible Debentures:
The Tribunal examined the disallowance of interest paid on PNCDs amounting to Rs. 266,12,54,846/-. The Tribunal referred to its earlier decisions in the assessee's case for previous assessment years, where it was held that the interest paid on PNCDs is an allowable deduction under Section 36(1)(iii) of the Act. Consequently, the Tribunal decided in favor of the assessee.

3. Disallowance of Expenditure on Compensatory Afforestation:
The Tribunal addressed the disallowance of Rs. 126,19,08,529/- incurred on compensatory afforestation. The Tribunal noted that this issue had been decided in favor of the assessee in earlier years, where it was held that such expenditure is allowable. The Tribunal followed the same reasoning and allowed the expenditure.

4. Disallowance of Provision for Leave Encashment:
The Tribunal reviewed the disallowance of Rs. 151,18,79,819/- for leave encashment. The assessee claimed the amount on a payment basis, which was certified by the auditor. The Tribunal, referring to its earlier decisions, allowed the claim on the basis of actual payments made during the year and before the filing of the return.

5. Disallowance under Section 14A of the Income Tax Act:
The Tribunal examined the disallowance of Rs. 7,09,74,178/- under Section 14A r.w.r. 8D. The assessee had made a suomoto disallowance of Rs. 4,72,25,937/-. The Tribunal found that the AO had not recorded any satisfaction regarding the defect in the assessee's allocation of expenses. The Tribunal deleted the additional disallowance made by the AO.

6. Addition of Disallowance under Section 14A to Book Profits under Section 115JB:
The Tribunal noted that this issue was covered by the decision of the Bombay High Court in CIT vs. Bengal Finance & Investment P. Ltd., which disallowed the addition of disallowance under Section 14A to book profits under Section 115JB. The Tribunal followed this decision and deleted the addition.

7. Claim of Deduction of Interest on PNCD in Computing Book Profit under Section 115JB:
The Tribunal set aside this issue to the file of the AO, following its earlier decisions in the assessee's case for previous years.

8. Incorrect Computation of Book Profit under Section 115JB:
The Tribunal directed the AO to dispose of the rectification application filed by the assessee regarding the computation of book profit under Section 115JB.

9. Grant of Available MAT Credit:
The Tribunal directed the AO to grant the available MAT credit to the assessee.

10. Consideration of Interest under Section 244A:
The Tribunal directed the AO to correctly consider the interest under Section 244A.

Conclusion:
The Tribunal allowed the appeal of the assessee, addressing each issue in favor of the assessee based on earlier decisions and relevant legal provisions. The order was pronounced on 7th November 2023.