9911796707
TMI Blog2012 (12) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... nses for development of the area as defined by the Collector of the area in which charge the assessee carries out the work. Therefore, it was nobody’s case that the expenses have not been incurred as the amount has been paid to the Government authorities. - Expenditure are being incurred and claimed as business expenditure therefore cannot be disallowed insofar as the claim of the assessee of Rs.5 lakhs paid to the Collector, Bolangir is properly documented. - However, the sum of Rs.20,000 paid as donation to Jharsuguda District Kick Boxing Association, Belpahar Rs. 5,000.00, Organising Committee, Lakhanpur Block Football Championship Rs. 5,000.00, Binapani Yubak Sangha Rs.3,000. Tiger Club, Belpahar Rs.5,000 and V.S.S.Club, Belpahar Rs.2,000, all related to incurring of expenses which may or may not have been called for to be incurred by the assessee as per the requirement of peripheral development committee. Therefore, this amount of Rs.20,000 not relating to periphery development expenses are directed to be sustained as disallowable business expenditure as the assessee has not been able to establish the nexus for periphery development expenses in these cases. Disallowance on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to have taken into account the expenditure incurred against the aforesaid receipts booked as expenses in appropriate recorded heads of accounts & shown in the debit side of the Profit & Loss Account so as to determine the exact income / receipt which could have been subject to tax or to be excluded in computing the deduction of 'power profit' U/s. 801A of the Act. 4. For that the profit on sale of fixed item being not an item for computing normal income under the head business & profession ought to have been excluded from the other receipts. 5. For that the disallowance of Rs.5,20,000 on account of periphery development expenses is based only on presumption, conjecture and surmises contrary to the submissions placed before the Td. A.O. as well as Ld. CIT (A) and as such are arbitrary, unjustified and not tenable in the eyes of law. 6. For that the disallowance of Rs.20,20,000 on account of donations is based only on presumption, conjecture and surmises contrary to the submissions placed before the Ld. A.O. as well as the Ld. CIT (A) and as such are arbitrary, unjustified and not tenable in the eyes of law." 2. The brief facts as have been brought on record and as submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of appearance, the assessee was noticed by the Ld. A.O. proposing to treat the other income as disclosed in schedule-10 of the Audited Accounts, as not eligible for deduction U/s. 80 IA of the I.T. Act, 1961 & hence taxable. Referring to the other income as disclosed in the schedule-10 of the financial statement such as: (i) interest from investment/deposits amounting to Rs. 10,37,36,363 (ii) interest income from employees & others amounting to Rs.37,07,457 (iii) receipt of rent & electricity charges amounting to Rs. 32,31,054 (iv) sundry receipt amounting to Rs. 63,82,041 (v) sale of scraps amounting to Rs. 23,87,971 (vi) Profit on sale of surplus stock Rs. 75,37,380 & (vii) profit on sale of fixed asset Rs. 43,81,289, the undisputed fact remains that all these incomes are nothing but, the outcome of the generation and distribution of power of the assessee company, since the assessee company having only source of income from the business of the industrial undertaking i.e., generation & distribution of power. By way of filing a detailed exhaustive reply along with data, it was further respectfully submitted that all the incomes derived under different heads have been gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only denied the claim U/s. 801A of the IT. Act, 1961, as claimed by the assessee (restricting the same to the tune of Rs. 1,71,69,11,069) but also disallowed the Bond expenses amounting to Rs. 60,48,223, donation to the Chief Ministers Relief fund of Rs. 20,20,000, periphery development expenses to the tune of Rs. 5,20,000. The alternative submission of the assessee company that the income excluded from the 'Power Profits' under different heads having some direct expenses against such income / receipts are to be determined after reducing the cost expended and the receipts are nothing recovery / reimbursement of cost which were also ignored/ not addressed. 3. Aggrieved with the said order of assessment, the assessee company preferred appeal before the CIT(A). Detailed exhaustive written note of submission along with statements & documents were filed explaining the inextricable link between the incomes disclosed under the head other receipts with that of the business of generation of power. It was also prayed that the assessee company is entitled/ eligible to enjoy the benefit of Sec. 801A on the sale of scrap and insurance claim received in view of the various decisions in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the eligible deduction U/s. 80IA of the Act in respect of Profits/ gains derived by the assessee enterprise from business of generation of power i.e., "Power Profits" [for the said year for Rs. 1,50,22,16,908], the taxable income under the normal provisions of the Act was "Nil" and consequently the tax payable under normal computation was "Nil". Accordingly OPGC was liable for MAT U/s. 115JB of the Act and MAT U/s. 115JB of the Act was duly paid. Revised return was filed on 10.05.2005 disclosing total income at Rs.171,69,11,069 all of which was claimed as deduction u/s 80IA. The revised return filed was selected for scrutiny. Accordingly notices U/s. 143(2) & 142(1) of the Act were issued. In response to notice U/s. 142(1)/143(2) of the I.T. Act, the assessee appeared before the Ld. Assessing Officer from time to time. In course of appearance, the assessee was asked to explain as to why the following items booked in schedule-10 of the financial statement under the head 'other income' will not be excluded for deduction U/s. 80IA as these receipts cannot be viewed as derived from business of power generation. Sl. No. Nature of receipt Amount in Rs. i Interest from investment/ d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of tax U/s. 115JB (MAT), the learned A.O. assessed the tax payable U/s. 115JB which was more than the normal tax. But the learned CIT(A) in a routine manner confirmed the assessment except deleting the disallowance of Rs. 60,48,223 under the head expenses on issue of bond written off. 3.2. The learned AR of the assessee continued his submission that aggrieved with the orders of assessment as well as the orders of the Ld. CIT (A), the assessee is in appeal before the Tribunal on various grounds including the ground that the other receipts as disclosed in Schedule -10 of the profit and loss are to be considered as derived income from the business of generation of power. Since consistently, the Assessing Officer in the past has taken the view that the other receipts as disclosed in Schedule -10 of the financial statement including interest income on term deposits/ interest from investments, are not income derived from power business, hence excluded from the claim of deduction U/s. 80IA of the I.T Act, 1961. Keeping in view the various judicial pronouncement, the assessee company has reviewed the elements of other receipt as appearing in the schedule - 10 as stated above and has obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2005] 273 ITR (A.T) 1"- Held- even for determining the profits and gains' derived from any business of industrial undertaking", manufacturing or producing any article or thing include sale proceeds of such article or thing of scrap generated during the course of such manufacturing activity. It is not possible to close eyes to the event which amounts to increase in the sale consideration. After all what is to be determined is the profit and gains of business of industrial undertaking and there is no warrant to stop for the above purpose of sales of main products only. The controversy here is not when manufacturing activity of the assessee was over, but what was the profit and gains of the business of the industrial undertaking and how it to be determined. For determining the above profits of business of industrial undertaking it is not possible to ignore sale of empty drums containers, sale of useless materials which is closely and directly connected with and outcome of the manufacturing process itself". The learned AR of the assessee submitted that it may be appreciated that the profits of the business of the tax payer are not confined only to the items of income commercially kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be considered as derived income. (ii) Rent, water charges & electricity charges received from township Quarters/Market complex etc. of Rs. 3231054. The generation plant of the assessee as stated earlier is situated at a very remote village namely Banerpalli in the district of Jharsuguda. In and around the plant side, there is no accommodation available wherein the assessee can accommodate its employees and their families. As it has been stated earlier the business of generation of power is required to be carried out for twenty four hours 7* 365 days in a year. It is imperative for the assessee company to accommodate its employees near by the plant for continuous operation of the power Plant. Besides above, support services such as maintenance contractors are also engaged and their employees are also accommodated in the township. With the aforesaid object keeping in view the assessee has constructed township for accommodating its employees and employees of support service providers. These accommodations, provided to the employees as above are subject to recovery of rent/ licence fees from the occupants according to the policy of the assessee company. The town ship so constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urance claim received amounting to Rs. 63,82,041. The learned AR of the assessee furnished the break of these receipts as under : Particulars Amount (Rs.) Sale of Tender Papers 5,04,630 Reimbursement of Water Pumping Charges 26,82,737 Liquidated damage Recovered 4,67,206 Vehicle Higher Charges 10,400 Earnest Money Forfeited 20,637 Other Misc. Receipts like penalty, ground 5,97,664 Penalty Recovery from Contractor 20,63,982 Misc Storage Charges Recovery from Contractor 2448 Hire charges of machinery 5792 Insurance claim received 26,545 Total: 63,82,041 (i) In course of its regular business activities the assessee company derives certain receipts / income on sale of tender paper. For operation and maintenance of the plant various tenders are called for from time to time which necessities sale of tender papers. (ii) If the contractor fails to use/utilise their machineries for providing services of maintenance, of the operation of the plant, the machineries of the assessee company are used and the assets commercially exploits generates income under the head sundry receipts. (iii) If at any point of time, in course of operation and maintenance of the plant, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raps is derived income from the industrial undertaking. For denying the claim of the assessee that the sale of scrap and insurance claims are not derived income and as such are not allowable as eligible profits for the purpose of Section 80-IA, the Ld. CIT has placed reliance on the decisions in the case of Pandian Chemicals Ltd V. Commissioner of Income Tax [262 ITR, Page-278 (S.C)] and Commissioner of Income Tax V. Hazarimal Milapchand Surana [ (2004), 270 ITR, Page-450 (Rajastan High Court)]. The learned AR of the assessee submitted that Pandian Chemicals Ltd, is entirely based on different fact, wherein the reference to the Supreme Court was that whether interest and deposits with Tamil Nadu Electricity Board should be treated as income derived by the industrial undertakings for the purpose of Section 80-IA? Whereas in the case of the assessee, it is the receipt of sale of scrap against the cost of container, packing materials which were procured while purchasing raw materials, spares, stores & consumables in course of generation activity of the industrial undertaking. The purchase price of which are part of the total cost of the manufactured product. Therefore, they are clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed by the Commissioner (Appeals).On appeal to the High Court. (iii) That it was an accepted position that the empty containers, which were sold ,were containers in which raw material in bulk had been purchased by the assessee. The cost of the containers was part of the manufactured product and was thus directly relatable to the manufacturing activity of the industrial undertaking .The income from sale of empty containers was entitled to special deduction under sections 80HH and 80-I. 3. Commissioner of Income Tax V. Biotech Medical (P)Ltd (2009), 310 ITR (AT) ,Page-47 (Hyderabad) for the proposition that for the purpose of claiming deduction under section 80-IA /80-IB of the Income -tax Act,1961, the income has to be derived from the industrial undertaking.Therefore ,if there is nexus between the receipt of income and the industrial undertaking, it has to be treated as income derived from the industrial undertaking 4. DEPUTY COMMISSIONER OF INCOME -TAX V. HARJIVANDAS JUTHABHAI ZAVERI AND ANOTHER (2002),258 ITR ,Page-785, vide head Note - NEW INDUSTRIAL UNDER TAKING -SPECIAL DEDUCTION -MANUFACTURE -AMOUNTS RECEIVED FOR JOB WORK,EMPTY SODA ASH BARDANA EMPTY BARRELS AND PLASTIC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Alternatively, the learned AR of the assessee submitted that without prejudice to the above, it is alternatively submitted that all the receipts from different heads such as: interest income from employees and others, receipt of rent and electricity charges, sundry receipts etc, having a definite expenditure, which has been allowed by the learned A.O. in the assessment, the other receipts as above ought to have been reduced from such expenses. Instead of netting off, the assessee company following the principle of accountancy and the provision of the Companies Act, 1956 has disclosed the other receipts in Schedule-10 in the P & L Account for the impugned year. It may be appreciated that the deduction in respect of profit and gain from industrial undertaking as provided U/s. 80-IA provides that where the total income of an assessee includes any profit and gains derived from………………… Therefore, it is apparent that the act does not provide to include gross receipts, but however, only net receipts. Therefore, the only net receipts under these heads can only be excluded for the purpose of 80-IA, not the gross receipt. Hence, the net receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pts, even social and similar other obligations were also required to be considered as part of the business obligations of a businessman. A person is a social animal, who lives in a society and as many facts of life such as: religious, social and political etc. He affects the society and is also affected by the society to be in the society. One has to do certain social duties and responsibilities just not to harm the society, but to do some positive work for social upliftment like people; business or profession is also done in the society. It has also some social duties. That's why expenditures are incurred from the angle of social needs. As such the expenditure are wholly and exclusively for the purpose of business and are to be allowed. Otherwise, because taxes which Government takes from the Public is also for the welfare of social upliftment of the society and if the same work is done for the business houses themselves then it should not be disturbed by any strict approach of the department officers. Hence, the intention behind allowing the expenses cannot be restricted to a particular area &/or particular purpose. The learned AR of the assessee further placed reliance on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness expenditure. Your honour may appreciate that these donations has directly helped the Assessee Company in carrying its business, which resulted benefit to the Assessee business. Thus the payments of the aforesaid amount are in the nature of expenditure incurred by the assessee Company are in revenue nature and laid out & expended wholly and exclusively for the purpose of the business. Hence is allowable as business expenditure. The learned AR of the assessee submitted that without prejudice to above, in any case, the donations to the Chief Ministers Relief Fund, Women Council for Socio Economic Welfare Worldwide fund for Nature India & Ramakrishna Mission should be directed to be allowed appropriately U/s. 80G of the I.T. Act, 1961". CIT (Appeal) has not allowed the deduction alternatively claimed on the ground that the recognition of the Chief Ministers Relief Fund was not available for the present Asst. Year. However a copy of the Grant of Approval of Orissa Chief Ministers Relief Fund u/s 80G(2((iiihf) issued by Commissioner of Income Tax Bhubaneswar is enclosed at Annexure -III in support of Grant of Continuance of approval. 4. The learned DR submitted in respect of Disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. In support of this, he placed reliance on the following decisions. (a) Apex Court in the case of Pandian Chemicals Ltd 262 ITR 278 wherein the court held. The word "derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said: "The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." This definition was approved and reiterated in 1955 by a Constitution Bench of this court in the decision of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 at page 7.' It is clear, therefore, that the word "derived from" in section 8OHH of the Income-tax Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1A and 80-lB as having a common Scheme. On perusal of sub-section (5) of section 80- IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub section (5) of section 80-IA, which are also required to be read into section 80-lB [see section 80-lB (13)]. We may reiterate that sections 80-I, 80-IA and 80-lB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of sections 801A and 80IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to deduction under sub section(1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence apart from eligibility, sub-section(1) purports to restrict the quantum of deduction to a specfIed percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xus to the essential activity of the industrial undertaking. Hence, our answer to first question referred is that the assessee is entitled for deduction u/s. 80- lB on income earned from job work charges but excluding repairs and maintenance charges. Our answer to second question referred is that the income from repair and maintenance cannot be treated at par with the income from manufacturing for the purposes of deduction u/s. 80-lB of the Act. The learned DR submitted that in view of the above judicial pronouncements it is evident and the law in this regard has been well settled that the onus is on the assessee to prove that the income is derived from the undertaking or business. It is also settled that the word derived from in much narrower than attributable to. The law has also been laid down that the income in order to qualify for deduction u/s 801A/801B has to have be from source which is having first degree nexus. 4.2. Having stated the legal aspect in this regard the learned DR submitted that the issue with respect to the Interest receipts, the issue is covered against the assessee by the Hon'ble Income Tax Appellate Tribunal, Cuttack, in its own case for AY 2003-2004 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from misc receipts, sale of tender papers, other recoveries, rent and electricity charges from employees, interest from employees was not eligible for deduction u/s 801A of the IT Act 1961. 4.5. The learned DR submitted in respect of Disallowance of deduction u/s 801A: [Ground No.5] - Disallowance of Periphery Development Expenses, that the A.O. disallowed Rs. 5,20,000 under the head periphery development expenses. The Ld CIT(A) has stated - There is no dispute that expenditure incurred on the development of the periphery of the industry is wholly and exclusively for the purpose of business, since a business cannot function in isolation from the social environment. The issue in this case is slightly different viz. what is the definition of peripheral area? The Government of Orissa has issued guidelines relating to this subject. As on date, peripheral area would mean the district in which the industrial activity is carried out. For A.Y. 2004-05 it was the township/village in which the industry was functioning. It is clarified that an amount of Rs. 5,00,000 was spent for the development of Rajendra Park at Bolangir. The Ld. A/Rs fairly conceded that the company had no industrial a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by the opposite party to the Chief Minister's Relief Fund is not allowable as a business expenditure under section 3 7(1) of the Act." - The reference is, accordingly, disposed of" Respectfully following the decision of the Jurisdictional High Court, the disallowance of Rs. 20,00,000 paid to the Chief Minister 's Relief Fund was upheld. In the alternative, the appellant has claimed deduction towards the same u/s. 80G of the Act. A copy of the receipt issued by the General Administration Department of the Government of Orissa bearing No.22634 on 07.07.2003 was produced before me. The receipt shows that a donation of Rs. 20,00,000 was made by Cheque No. 108810 dt. 20.06.2003. It is however seen from the receipt that the recognition of the fund u/s. 80G of the Act was applicable to A. Y. 2000-01, 2001, -02 and 2002-03. No deduction u/s. 80G can therefore, be allowed." 4.6. In view of the above, the learned DR prayed for upholding the impugned order of Ld.CIT(A) and dismiss the appeal of the assessee. 5. On the submissions of the learned DR, the learned AR of the assessee contended that the learned DR contends the issues to have been covered against the assessee by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e light of the submissions made by both the parties and on going through the material made available to the Tribunal, we find force in the contention of the learned DR that the issue regarding disallowance of other income including interest income [Grounds No.1 to 4] has been dealt with by the Tribunal in assessee's own case for the earlier year wherein the contention of the Assessing Officer and the learned CIT(A) has been upheld. The learned AR of the assessee for the assessee has put forth his contentions regarding misinterpretation of the facts that the incomes which have been shown separately in the P & L account in accordance with the provisions of the Companies Act have been considered by the assessing authorities forgetting the fact that the expenditures have been incurred on those income have been allowed by the assessing authorities as business expenditure. Since the claim of the assessee was on the basis of 100% deduction under the provisions of Section 80IA no portion thereof could be held as earned from other than the business of the assessee. However, the learned AR of the assessee, before us, has conceded the fact that the interest income has been earned from holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bolangir. The learned DR's contention that this amount does not pertain to the area to which periphery development expenses was to be borne by the assessee was of no avail insofar as the Collector of Bolangir would not have called the assessee to pay the same when on the specific demand was made by the Collector so as to complete the work such as lighting arrangement, plantation and other decoration equipments which required for the improvement of the Rajendra Park in Bolangir was acknowledged by the Collector of Bolangir having been borne by the assessee. Therefore, there was no controversy that the assessee was not to be burdened with this periphery development expenses not pertaining to development as submitted by the learned DR but was to be allowed insofar as the learned CIT(A) tried to import the definition of peripheral area the Assessing Officer had denied the claim holding a view that the assessee failed to explain whether it was wholly and exclusively spent for the purpose of business of the assessee. The assessee's business for incurring periphery development expenses for development of the area as defined by the Collector of the area in which charge the assessee carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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