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TMI Blog2017 (3) TMI 817X X X X Extracts X X X X X X X X Extracts X X X X ..... rnative contention of the assessee is accordingly accepted. Reducing compensation received from the actual cost of the plant & machinery - allowing depreciation thereon though the receipt is capital in nature & consequently not chargeable to tax - Held that:- In the instant case before us compensation was given due to non-performance of the machineries at desired level. Therefore the compensation in the instant case before us cannot be treated as capital receipts. Similarly the finding of the ld CIT(A) that the compensation received by the assessee should be reduced from the actual cost is not based on correct law. It is because the cost of the machine has not been met directly or indirectly by the government or any other person as required in Explanation 10 to section 43(1) of the Act. In fact the compensation was given with the sole purpose of reducing the loss which might have incurred by the assessee due to non-performance of the machineries at desired level. At the time of purchase of machineries there was no whisper about the meeting of the cost directly or indirectly by the machine supplier. Therefore, in our considered view the question of reducing the actual cost of mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the Act. 4. Briefly, the facts are that the assessee in the present case is a Limited Company and engaged in the manufacturing business of rising of ore, manufacturing of nitrogen gas and ferro alloys, trading of iron ore and ferro alloys, generation of electricity (wind power Mill) railway siding for captive use. The assessee in the year under consideration has earned dividend income of ₹ 7.10 crores which was claimed as exempted under section 10(34) of the Act. On question by the AO for invoking the provisions of section 14A of the Act with regard to the dividend income, the assessee submitted as under : 1. There was no direct expenditure incurred in earning the aforesaid dividend income as the dividend was received in the bank directly. 2. There was no borrowed fund used in making the investment therefore the question of interest disallowance does not arise. 3. The assessee for the administrative expenses has made the disallowance of ₹ 5.97 Lacs and submitted the details of the same in annexure B and stated that 4 persons salary has been allocated to this. However the AO rejected the contention of the assessee by observing that the law does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us indirect expenses which are required to be disallowed in terms of the provisions of rule 8D read with section 14A of the Act. The decisions of the management for making the investment are very complex in nature. They require day to day market information, research of the information, analysis of market trend, the appropriate time for investment and its duration etc. Therefore the claim of the assessee that no expenditure was incurred as the dividend was received directly in the bank account is not tenable. In view of above, the ld. CIT(A) has confirmed the order of AO by observing as under:- 30. The appellant has incurred an amount of ₹ 208,31,77, as interest during the year and the average of investments amount to ₹ 285,99,07,000/- while the Assessing Officer has disallowed an amount of ₹ 17,16,03,000/- only. The total disallowance amounts to 6% of the average investments. Therefore, in the facts circumstances as discussed and following the judgments of the Hon'ble Appellate Authorities including the Hon'ble jurisdictional High Court in the case of ISG Traders Lt. vs. CIT-III, Kolkata Dhanuka Sons v. CIT (Central)-1; the Hon'ble Sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following orders. Decisions relied : 1) DCIT vs. REI Agro Ltd. (ITAT Kolkata) ITA No.1811/Kol/2012 (pg 1 to 12) 2) CIT vs. REI Agro Ltd. (Calcutta High Court) ITAT No.161 of 2013 (pg 13 14) 3) ACIT vs. Amitabh Sonthalia (ITAT Kolkata) ITA No.1750/Kol/2010 ITA No. 1181/Kol/2011 (pg 15 to 20) 4) Joint Investments ((P) Ltd. vs. CIT (Delhi High Court) IA No.117 of 2015 (pg 21 to 23) Alternatively the ld AR also claimed that the disallowances u/s 14A of the Act should be worked out in respect of those investments which have yielded tax free dividend income during the year under consideration. For this proposition, the ld AR has relied in the following cited orders. Decisions relied : a) REI Agro Lt.d vs. DCIT (ITAT Kolkata) TA No.1331 1423/Kol/2011 (pg 24 to 34) b) Upheld by the Calcutta High Court in the case of CIT, C-II vs. m/s REI Agro Ltd. ITAT No.220 of 2013 (pg 35 to 38) On the other hand, the ld the DR vehemently supported the order of authorities below. 7. We heard the rival contentions of both the parties and perused the materials available on record. The grievance of the assessee in this appeal relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted. Thus, the issue raised by the assessee in its appeal is partly allowed. 8. Next issue raised by the assessee in ground No.4, 5 6 is that Ld. CIT(A) erred in directing the AO to reduce the compensation received from the actual cost of the plant machinery and thereafter allowing depreciation thereon though the receipt is capital in nature consequently not chargeable to tax. 9. The assessee in the year under consideration has received compensation from M/s Suzlon Energy Ltd. (SEL for short) amounting to ₹1928.18 lakh. The compensation was received by the assessee as the wind turbine generators purchased from SEL in the earlier years failed to generate the power units as agreed. As a result, assessee received compensation for non-generation of power units as guaranteed. During the course of assessment proceedings, AO observed that the compensation received was originally offered as revenue receipt in the income tax return filed for the year under consideration. But at the fag-end of assessment proceedings, assessee requested to treat the compensation as capital receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence the provisions of Explanation 10 to section 43 overrides the nature of receipts and it has to be accounted as per these provisions. The appellant has also taken it as an alternate plea. In the facts and circumstances it is held that this receipt of ₹ 19,28,18,00/- as compensation for shortfall in production of electricity is reimbursement as per the provisions of Explanation 10 to section 43. In this case, the seller i.e. SEL has reimbursed ₹ 19,28,18,00/- and as per the provision of Explanation to section 43 this amount will be deducted from the cost of the machinery. The cost will be reduced in the year of receipt since it has crystallised during the current year and has been also paid in this year. The Assessing Officer will reduce the cost of machinery by an amount of ₹ 19,28,18,000/- and calculate the depreciation u/s 32 accordingly. 52. Therefore, in the facts and circumstances and following Explanation 10 to Section 43 it is held to be a reimbursement receipt reducing the cost of the machinery and the claim of depreciation to be allowed accordingly after reducing it from the cost of the assets. This ground of appeal is allowed and the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the machineries and therefore the same cannot be held as income of the assessee, consequently not liable to tax. On the other hand, the ld. DR before us submitted that the assessee never made the claim in the return of income and for such claim no return was revised. The ld. DR also submitted that the intention of SEL was to save the assessee from the incurrence of the loss due to non-performance of the machineries. Therefore the same should be held as revenue receipt. 12. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present ground of appeal is to ascertain whether the compensation received by the assessee from the machine supplier on account of non-performance of Wind Electric Generators (for short WEG) as guaranteed. The assessee has purchased 60 WEG from SEZ vide purchase orders dated 02.12.2004 and 01.06.2005. The SEZ provided guarantee to the assessee that these machines will generate minimum average electricity units for a period of 2 years commencing from 61st day from the date of commissioning of these machines. In the event of any shortfall in the generation of guaranteed units the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause No. 6 of the agreement dt. 1st Sept., 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration. The assessee also failed to justify whether the expenses were crystallized in the year under consideration. Therefore, the Assessing Officer disallowed the same and added to the total income of assessee. 15. Aggrieved, assessee preferred an appeal before Ld. CIT(A). Before Ld. CIT(A) assessee submitted that out of total income prior period of expense of ₹3,86,365/- a sum of ₹17,60,404/- was crystallized in the year under consideration as detailed under:- (i) Rent for the months of January, 2007 to March, 2007, for which the claim had been made by the concerned landlord on 19/07/2007 (out of ₹ 3,24,000 for the six months period from January, 2007 to June, 2007) ₹ 1,62,000 (ii) Maintenance Charges for January, 2007 to March, 2007 in respect of the abovementioned Flat for which the claim was made on 19/07/2007 (included ₹ 10,000 out of ₹ 18,000 charged for six months period from January, 2007 to June, 2007) ₹ 9,000 (iii) Payment of house rent on low cost housing scheme as per the direction of the Ministry of Labour Employment vide letter dated 19/06/2007(out of ₹ 5,8800 for the period from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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