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TMI Blog2017 (3) TMI 1565X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(ia)- Held that:- Respectfully following the view taken by jurisdictional Tribunal in the case of Jahangir Biri Factory Pvt. Ltd. (2009 (3) TMI 215 - ITAT CALCUTTA-C ), we allow the claim of assessee. We also find that the subject mentioned payments have been brought within the ambit of section 194J of the Act only with effect from 1.7.2012 and hence the same cannot be made applicable for earlier years. Relinquishment of a right to operate the Hotel Searock - whether could be construed as relinquishment of a capital asset so as to fall within the ambit of ‘capital gain’ or 'business income' - Held that:- We hold that ‘right to operate’ the Hotel under Operating Licence Agreement dated 3.5.1986 wherein the assessee has been given unfettered powers to operate the Hotel in any manner in which it finds suitable. This right , in our considered opinion, is a capital asset within the meaning of section 2(14) of the Act. Hence relinquishment of such right would only result in transfer u/s 2(47) of the Act and hence the resultant gain thereon would only fall under the ambit of ‘capital gain’. Since the assessee has been using the said right from 1986 onwards, the resultant gain wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brief facts of this issue is that the ld AO observed that in the tax audit report filed along with the return of income, the auditors have identified payments amounting to ₹ 16,52,249/- as items of expenses covered by section 40A(9) of the Act. The auditors had also however mentioned that the same is allowable in accordance with the decision of the co-ordinate bench of this tribunal in the case of DCIT vs Chloride Industries Ltd reported in 76 ITD 1 (Kol) ITAT). The assessee filed details of these payments in the course of scrutiny proceedings. The ld AO on perusal of the same observed that the payments have been made to employees welfare funds, staff clubs employees co-operatives and sports committees which is not allowable u/s 40A(9) of the Act. He stated that section 36 of the Act provides that any such sum paid/contributed by the assessee as an employer by way of contribution towards the recognized provident fund or an approved superannuation fund and to an approved gratuity fund is allowable. Details submitted by the assessee do not indicate that any of the payment, except for contribution of ₹ 6,86,000/-towards ITC workmen welfare scheme is covered u/s 36(1)(iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities below. We have also gone through the details of the expenditure aggregating ₹ 9,00,111 claimed by the assessee, the breakup of which has already been mentioned hereinabove. We observe that the assessee has made the contribution to Staff Club/Recreation Club of its employees. On perusal of the details, it is observed that the said amounts were reimbursed by the assessee for salary of the staffs employed at the Club, maintenance of library at the Club, expenses for maintenance of indoor game section¸ expenses for conduct of sports competition and their families, reimbursement of expenses towards electricity, expenses incurred on providing cultural recreation to the members/cultural events, expenses for organizing fete for the members/families of assessee's employees, expenses incurred on organizing cultural events on different occasions, annual social meets of the employees/their families, etc., except direct subscription made to one Cooperative Society of ₹ 25,800/-. Considering the facts of the case, we do agree with the assessee that in the assessment year under consideration, the assessee has filed the details of the expenses reimbursed to the Recre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the Assessing Officer to disallow only payment made directly for Registrar of Societies i.e. contribution of ₹ 25,800/-. Accordingly, this issue of assessee's appeal is partly allowed." Respectfully following the same we set aside the issue to the file of the ld AO to decide the allowability of the expenses in the light of the decision of this tribunal for the earlier year supra. Accordingly, the Ground No. 1 in ITA No. 253/Kol/2011 is allowed for statistical purposes. 3. DISALLOWANCE U/S 14A OF THE ACT Ground No. 2 in ITA No. 253/Kol/2011 for Asst Year 2006-07 - Assessee Appeal Ground No.1 in ITA No. 336/Kol/2011 for Asst Year 2006-07 - Revenue Appeal The brief facts of this issue is that the ld AO observed that the assessee had substantial amount of exempt income including dividend income of ₹ 136,98,28,578/- and income from tax free bonds of ₹ 21,52,88,990/-. The assessee was asked to explain as to why a part of the expenditure claimed in the profit and loss account should not be held to be directly related to the earning of exempted income and accordingly why such expenditure should not be disallowed u/s 14A of the Act read with Rule 8D of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Proportionate Management Expenses (in the context of exempt income): (Rs.1 ,58,51,175 less ₹ 60,39,896) ₹ 98, 11,279/- For that the learned CIT(A) erred in arbitrarily determining and disallowing proportionate management expenses under section 14A in respect of exempt income since the appellant company was a profitable manufacturing company and the said investments had arisen out of profits/surpluses. For that the learned CIT(A) was not justified in making the disallowance @ 1 % of exempt income ignoring the appellant company's computation determining the expenses having some connection to the said exempt income. Relief Prayed: The disallowance of ₹ 98,11,279/- should be deleted. & 1. That the Ld. ClT(A) has erred on facts and circumstances of the case and in law by allowing just 1% of exempt income as disallowance and deleting the addition made u/s 14A made by the Assessing Officer even though he has correctly applied Rule 8D as per law in respect of exempt income. 3.2. The ld AR argued that the disallowance u/s 14A of the Act had to be worked out on the basis of some rational workings prior to Asst. Year 2008-09. He argued that even though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors of company as below:- Name of the director Commission amount (Rs.) S.B. Mathur 4,00,000 P.B. Ramanujam 4,00,000 Y.P. gupta/T.S. vijayan 4,00,000 B. Vijayraghavan 4,00,000 B. Sen 4,00,000 Dr. Ram S. Taneja 4,00,000 Total 24,00,000 The assessee stated that first three payments were made to three persons who are nominees of LIC, GIC and Specific Undertaking of Unit Trust of India respectively and the last three payments are made to three individual nonexecutive directors. The assessee claimed that the above payments of commission to six persons do not come under provisions of section 194H or 194J of the Act and for these reasons there was no liability to deduct tax at source. The ld AO observed that the assessee would indulge in appointing these directors only after ascertaining the fact that they are independently possessing the requisite professional skills, ability and qualification and accordingly the commission payments made to them would fall under the ambit of provisions of section 194J of the Act. He also held that in any case, the subject mentioned payments would fall under the ambit of commission or brokerage in terms of section 194H of the Act whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax returns. This is in line with section 191 of the Act which provides for direct tax payment where there are no TDS provisions. In respect of balance sum of ₹ 12 lacs paid to the Institutional Shareholders i.e LIC, GIC and Specific Undertaking of Unit Trust of India, in respect of the nominee directors, there cannot be any scope for TDS even otherwise, since the individual directors have not received any payments. In fact, the said individuals were representing their respective institutions as nominee directors by virtue of the shareholding of the said bodies in the assessee company. Accordingly, it was argued that payments made to the concerned institutions by no stretch of imagination would fall within the scope of section 194H or section 194J of the Act. The ld CIT(A) however concluded that the provisions of Explanation to section 194H defining the term 'commission or brokerage' is very wide and broader interpretation is to be given to the same and hence the subject mentioned payments would fall under the ambit of section 194H of the Act. Accordingly, he upheld the order of the ld AO in this regard. Aggrieved, the assessee is in appeal before us on the following ground: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maining four individual directors. It was claimed that non- executive directors are only members of Board of Directors and have no power except as delegated to them by the Board or vested in them by the Article of Association of the company. According to assessee, such general function cannot constitute any managerial, technical or consultancy service within the scope of section 194J of the Act. Even these functions do not fall under the provisions of section 194H of the Act, reason being these commission payments do not fall within the definition of commission as given in the explanation to section 194H of the Act. As Ld. Counsel for the assessee cited before us that this issue is covered by the decision of jurisdictional Tribunal in the case of Jahangir Biri Factory Pvt. Ltd. Vs. DCIT 7 ITA 919/K/2011 ITC Limited. A.Y.07-08 (2009) 126 TTJ 567 (Kol), wherein the issue of TDS on directors' commission was decided vide para 8 to 12 as under: 8. As regarding the second issue, i.e. commission payment to directors amounting to ₹ 5,94,036, the learned CIT(A) has deleted the same by observing as under: "I have carefully considered the submission of the Authorised Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been treated as an incentive in addition to salary, bonus and other perquisites. Therefore, in our considered opinion, the learned CIT(A) is justified in recording the same as not coming within the purview of commission or brokerage as defined in s. 194H nor a fee for professional or technical services as defined in s. 194J of the IT Act. Therefore, we find no infirmity in the orders of the learned CIT(A) on this issue. Therefore, this ground of the Revenue is dismissed." Respectfully following the view taken by jurisdictional Tribunal in the case of Jahangir Biri Factory Pvt. Ltd. (Supra), we allow the claim of assessee. We also find that the subject mentioned payments have been brought within the ambit of section 194J of the Act only with effect from 1.7.2012 and hence the same cannot be made applicable for earlier years. Respectfully following the aforesaid order of this tribunal, we allow the ground no. 3 raised by the assessee. 5. ADDITION TOWARDS RECEIPT FROM ELEL HOTEL AND INVESTMENTS LTD Ground No. 2 in ITA No. 336/Kol/2011 in Revenue Appeal The brief facts of this issue is that the assessee acquired the 'right to operate' the Hotel Searock, Land's End, Bandstand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of acquisition of the said right had been considered as Nil and the entire amount of ₹ 32,41,96,977/- received by it against the relinquishment of the said right was correctly offered to tax as Long Term Capital Gain. 5.1. The ld AO observed that the property under consideration as claimed by the assessee is its right to operate 'Hotel Searock'. The assessee never had any ownership right in Hotel Searock. Nor did it pay any non-refundable amount at the time of entering into the agreement dated 3.5.1986. The ownership of the hotel always remained with ELEL throughout the period when the said hotel was being run by the assessee. The assessee was only allowed to operate the Hotel Searock as per the terms of agreement which included payment of 23% of gross turnover of the said hotel to ELEL every year. So when the said hotel was ceased to be operated by the assessee, no transfer in relation to a capital asset took place as no right to carry on the business as such was conferred on the assessee at the time of entering into the agreement dated 3.5.1986 so as to bring the transaction within the ambit of capital gain. 5.2. The ld AO further observed that the amount received by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly offered to tax under the head 'capital gains; by the assessee in line with the provisions of the Act and the ld AO was not justified in treating the same as business income. Aggrieved, the revenue is in appeal before us on the following ground :- 2. That the Ld. ClT{A} has erred on facts and circumstances of the case and in law by treating receipt from Elel Hotel and Investments Ltd. for relinquishment of the right to operate the Hotel Sea rock as long term capital gain instead of business income. 5.4. The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR referred to the relevant pages of the paper book containing the Operating License Agreement dated 3.5.1986 enclosed in pages 15 to 36 of the Paper Book wherein he specifically referred to Article II in page 20 of the paper book which reads as under :- 2.2. It is hereby expressly agreed and understood by the parties that this agreement shall and is meant to confer full and unfettered right to ITC to operate the said Hotel subject to no breach of any of the terms on the part of ITC under this agreement. EHIL hereby irrevocably during the subsistence of this agreement or any renewal thereof, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record including the paper book filed by the assessee in this regard. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The only dispute is whether the relinquishment of a right to operate the Hotel Searock could be construed as relinquishment of a capital asset so as to fall within the ambit of 'capital gain'. We hold that 'right to operate' the Hotel under Operating Licence Agreement dated 3.5.1986 wherein the assessee has been given unfettered powers to operate the Hotel in any manner in which it finds suitable. This right , in our considered opinion, is a capital asset within the meaning of section 2(14) of the Act. Hence relinquishment of such right would only result in transfer u/s 2(47) of the Act and hence the resultant gain thereon would only fall under the ambit of 'capital gain'. Since the assessee has been using the said right from 1986 onwards, the resultant gain would only be Long Term Capital Gain. Moreover, the assessee had entered into a Settlement Agreement dated 11.5.2005 in order to give quietus to various disputes among the assessee and ELEL with the assistance of an Arbitrator and the said Arbitrator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the ld CIT(A) in this regard. Accordingly, the Ground No. 2 raised by the revenue is dismissed. 6. DISALLOWANCE OF DEDCUTION U/S 80IA OF THE ACT IN RESPECT OF CAPTIVE POWER Ground No. 3 in ITA No. 336/Kol/2011 in Revenue Appeal The brief facts of this issue is that the assessee company claimed deduction u/s 80IA of the Act in respect of two captive power undertakings at Bhadrachalam factory, Andhra Pradesh for ₹ 2519.13 lacs and ₹ 3081.05 lacs and one at Tribeni, West Bengal for ₹ 48.62 lacs respectively. The assessee filed the following documents along with the return :- a) Audit Report in Form 10CCB for the said power undertakings along with necessary details in the statutory format b) Audited Balance Sheet and Profit and Loss Account c) Audited particulars of cost and revenue with full details d) Audited statement showing market value of power which is the APSEB/WBSEB rates respectively, based on which section 80IA claim was computed. 6.1. The ld AO disallowed the entire deduction u/s 80IA of he Act for the following reasons :- a) Captive power undertaking is not entitled to the said deduction since it has supplied power only to the pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004-05 by the tribunal. It was also submitted that pursuant to the amendment in Electricity Act 2003, the assessee company has the liberty to sell power to various third parties and in fact the company has started selling to various third parties like Reliance Energy Trading Ltd in subsequent years at highly remunerative prices. The ld AO accepted all these facts in his assessment order. However, the only issue raised in the assessment order relate to the aspect of excluding the cost of transmission and distribution from the said value for ensuring that the computation is correctly done. In this respect, it was submitted that the ld AO erred in making this issue since transmission and distribution costs are not part of the tariff rate for electricity of the State Electricity Board and they are billed for separately. 6.2. The ld CIT(A) by placing reliance on the decisions of this tribunal for the earlier years allowed relief by allowing deduction u/s 80IA of the Act to the assessee. With regard to the market value issue, he held that the ld AO had wrongly made the said adjustment in the computation since the transmission and distribution costs are billed for separately by the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was obvious already. The assessing officer was correct in the view he took that the assessee can compute the price of the electricity sold to the paper unit at the market rate and for that purpose he also gave an opportunity to adduce evidence to the assessee. The assessee did not, however, avail the same and contented itself by disclosing the price at which power was purchased by the paper unit of the assessee from the Andhra Pradesh State Electricity Board. The rate at which electricity was purchased from Andhra Pradesh State Electricity Board by the paper unit of the assessee can by no means be the market rate at which the power plant of the assessee could have sold its production in the open market. In the open market the buyer would obviously be a distribution company or a company engaged both in generation and distribution. Therefore, the rate at which electricity is sold to any such company can only be the market rate contemplated by the section. The judgment in the case of Thiru Arooran Sugars Ltd. (supra) has no manner of application for the simple reason that the Court in that case was concerned with the question as to the market value of sugarcane grown by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the principle that money saved is money earned. The principle is no doubt true but the question is, "which unit of the assessee has saved the money?" Is it the paper manufacturing unit which saved the money? Or is it the power generating unit which saved the money? By installing power generating unit the assessee has benefited itself by getting uninterrupted supply of power and has also benefited itself by getting electricity at a lower cost which otherwise was not possible. Therefore, the money was saved by the paper unit and not by the electricity unit. We are as such unable to agree with the views rendered by the Madras High Court. 21. Our attention was drawn by Mr. Khaitan to an unreported judgment of this Court in the case of CIT v. Graphite India Limited, wherein the assessee had computed the receipts for captively consumed power at the rate at which it had purchased power from the board. That appeal preferred by the revenue was not admitted by this Court and was dismissed at the admission stage without examining of the matter. Therefore, that judgment does not constitute a precedent. Another judgment was drawn to our attention by Mr. Khaitan which is in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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