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TMI Blog2017 (8) TMI 1382X X X X Extracts X X X X X X X X Extracts X X X X ..... nsent of both the parties, for the purpose of discussion, the facts of AY 2011-12 have been considered as the lead case and the respective grounds of appeal taken and contentions advanced by both the parties are discussed in succeeding paragraphs. Revenue's grounds of appeal (ITA No. 202/JP/15) "1. Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in deleting addition of Rs. 20,00,000/- made by disallowing contribution to State Renewal Fund. 2. Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in deleting addition of Rs. 1,24,442/- made on a/c of late deposition of EPF after due dates of the relevant PF Act. 3. Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in deleting addition of Rs. 29,17,461/- debited by the assessee in IEC Plan. 4. Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in deleting addition of Rs. 34,29,607/- made by the AO by disallowing expenses on Rural village Electrification (RVE) 2010-11. 5. Whether on the facts and circumstances of the case, the ld. CIT(A) was justified in deleting the addition of Rs. 4,12,500/- made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the State public Enterprises. We are thus of the view that contribution made to the said fund is solely for the purpose of the welfare and benefit of the employees. The Rajasthan high Court in case of CIT V. Rajasthan Spinning and Weaving Mills Limited 274 ITR 465 has observed that it is for the assessee to decide whether any expenditure should be incurred in course of business. The expenditure can be incurred voluntarily and without necessity. Any contribution made by the assessee to a public welfare fund which is connected or related with his business is an allowable deduction u/s 37. Again the court in the case of CIT V. Shri Rajasthan Syntex Limited 221 CTR 410 (Raj.) held that where assessee gave contribution to the employee's welfare fund, the same is allowable as business expenditure. The case relied by AO of CIT V. Jodhpur Co-operative Marketing Society 275 ITR 372 (Raj.) is distinguishable as in this case the amount was set apart for the shareholders of the society whereas in the present case amount was provided for the benefit of the employees. In view of this the contribution made to State Renewal Fund is allowable u/s 37(1)." 5. In D.B Appeal No. 4/2006 dated 29.04.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the due date of filing of return of income, CIT(A) has rightly deleted the addition and thus the ground of the department be dismissed: - CIT Vs. State Bank of Bikaner & Jaipur (2014) 363 ITR 70 (Raj) - CIT Vs. Jaipur Vidyut Vitran Nigam Ltd. (2014) 363 ITR 307 (Raj) - CIT Vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2014) 366 ITR 163 (Raj) 8. The relevant finding of the ld CIT(A) is reproduced as under:- "3.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. Admittedly, contribution to PF has been paid by the appellant, in all instances, before the due date of filing the return of income u/s 139(1). This fact is therefore, not in dispute. In view of the judgments of the Rajasthan High Court in the case Jaipur Vidhyut Vithran Nigam Ltd, 265 CTR 62 (Raj.), CIT Vs. State Bank of Bikaner & Jaipur (2014) 99 DTR 131 (Raj.), and other case laws on this issue, the claim of the appellant is allowable. Accordingly, this disallowance made by the Assessing officer, is directed to be deleted. This ground is allowed." 9. In the present case, admittedly, employees's contribution to PF amounting to Rs. 124,442 for the month of Augu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee, the assessee is mixing application of income with the expenditure when it is a clear cut case of application of income, the expenditure neither has any business expediency nor it is diversion of income by overriding title and merely because something is included in the objects of the assessee cannot justify the allowability of claim u/s 37(1) of the IT Act, 1961. 14. The ld. CIT(A) deleted the disallowance by giving the following findings:- "4.6 ....The appellant is the nodal agency of MNRE for popularizing the usage of renewable energy source (RES) and also the state designated agency for energy conservation. This expenditure under the IEC plan has been incurred for generating public awareness about RES and energy conservation. A part of this expenditure was contributed by MNRE and other agencies while the balance amount has to be contributed by the appellant. It is this sum contributed by the appellant which has been disallowed by the assessing officer without understanding the nature of the business of the appellant and taking into consideration the revenue streams arising from these activities. Therefore, it is held that the above expenditure has been incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration. The expenditure incurred on mass communication and public awareness for the use of the renewable energy sources and energy conservation has thus been incurred for the purposes of the business of the assessee company and is allowable under the provisions of section 37(1) of the Act. In the result, we affirm the order of the ld CIT(A) who has rightly deleted the disallowance made by the AO towards expenditure under the IEC plan. The ground of appeal of revenue is thus dismissed. 18. In its ground no. 4, the Revenue has challenged the deleting of addition of Rs. 34,29,607/- made by the AO towards expenses on Rural Village Electrification (RVE) 2010-11. The ld AR submitted that the State Government of Rajasthan, as an owner of the assessee, directed it to bear 5% share of the cost of systems and cost on account of replacement of batteries of the 'home lighting systems' under the "Rural Village Electrification (RVE) 2010-11" program of Ministry of New and Renewable Energy (MNRE). The object of the program was to provide electrification/lighting through renewable energy sources in unelectrified hamlets of the State of Rajasthan. Accordingly, the assessee, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubted the genuineness of the expenditure incurred. 4.3.3 The expenditure on account of Rural Village Electrification (RVE) for F.Y. 09-10, 10-11 and RVE travelling and vehicle expenses has been incurred in accordance with the programmes of MNRE relating to renewable energy (for which the appellant is a nodal agency for the State of Rajasthan). The appellant has earned income from service charges as well as from application, processing and registration fees from new applicants. Therefore, it is held that the above expenditure have been incurred for business purposes. As regards, the expenditure on RVE for F.Y. 2009-10, the Assessing Officer has also stated that this expenditure relates to an earlier previous year and is in the nature of prior period expenses. The ITAT has held in the case of Rajasthan Sahkari Kray Vikray Sangh Ltd. for A.Y 2003-04, 2004- 05 and 2006-07 that prior period expenses are allowable especially in cases of government companies where approval of expenditure has to be taken from higher authorities before debiting the books which may take time leading to prior period expenses being booked in a later year. This system of accounting of expenditure has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he RVE Program 2010-11. It thus further strengthens the contention of the assessee company in terms of incurring the subject expenditure for its stated objectives and in respect of which revenues have also been generated during the year. In the result, we affirm the order of the ld CIT(A) who has rightly deleted the disallowance made by the AO towards expenditure under the REV 2010-11 program. The ground of appeal of revenue's appeal is thus dismissed. 23. In respect of ground No. 5, the Revenue has challenged the action of the ld CIT(A) in deleting the addition of Rs. 4,12,500/- made by the AO on bio mass fuel supply study expenses. The brief facts of the case are that during the year, Rajasthan Electricity Regulatory Commission (RERC) in the matter of determination of tariff for sale of electricity from Juliflora based bio mass power plants in the State, directed the assessee, being the nodal agency to get the price and price trend of main bio-mass fuel in the State studied/surveyed and to submit a report to it. Accordingly, the assessee issued a work order to Dalkia Energy Service Ltd. for conducting the study. For conducting this study, assessee incurred expenditure of Rs. 4,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions and pursued the material available on record. Being the state nodal agency for development and promotion of renewable energy sources, the assessee, as instructed by Rajasthan State Regulatory Commission, has got a study done on biomass fuels price trend as part of determination of tariff for sale of electricity from Juliflora based biomass power plant in the state of Rajasthan. The AO has held that the expenditure is towards a new line of business as the assessee is engaged in the business of generation of electricity from solar power plant/wind mill and is thus enduring in nature. It is not the case of the appellant that it will start generating electricity from bio-mass fuel in future and has carried out the study in that respect. The case of the appellant is that it is engaged in the business of promotion and development of non conventional energy and renewable energy sources and bio-mass energy is one such energy, the promotion of which has been taken up as part of the State policy. The expenditure on study of biomass is thus an expenditure undertaken as part of development and promotion of renewable energy sources in the State of Rajasthan. Further, the ld CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion fees has become due to the assessee and as it is following accrual system of accounting, he made the addition of Rs. 1,63,00,000/- (Rs.92 lacs + Rs. 55 lacs + Rs. 16 lacs). Being aggrieved, the assessee carried the matter in appeal which has deleted the said addition against which the Revenue is in appeal before us. 30. The relevant finding of the ld CIT(A) which are reproduced as under:- "6.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The assessing officer has added extension fee towards Project No. 25/2004 amounting to Rs. 92 lacs and extension/cancellation fee for two other projects amounting to Rs. 71 lacs. It has been held by the assessing officer that these incomes have not been accounted for by the assessee in spite of the fact that it follows a mercantile system of accounting. The appellant has explained that projects have to be commissioned within a given time. If the project is not commissioned within a given time, then the applicant is liable to pay extension fee/cancellation fee. Before the levy of this fee, an opportunity is given to the applicant to put forth its case before the Board and SLEC. These b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Supreme Court in case of Excel Industries Ltd. 358 ITR 295 such amount cannot be added to the income of the assessee for the year under consideration. 32. We have heard the rival submissions and purused the material available on record. The issue under consideration relates to recognition of extension fee and cancellation fee in respect of certain specified projects as noted above. It is contended that as per the consistent accounting policy followed by the assessee company, such revenues are recognized only when actually received and the same is in consonance with AS-9 as well as well-accepted principle of prudence which has been recognized by the Courts from time to time as part of accrual system of accounting. On perusal of the auditor's report, it is noted that in respect of Enercon India Ltd, it has been stated by the auditors that for the delay in commissioning a part of the project, the assessee company should take action to forfeit the security deposit or levy extension fees of Rs. 16 lacs. Similarly, in respect of Vestas RRB Ltd, the auditors have stated that the assessee company should take appropriate action for recovery of extension fee of Rs. 55 lacs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of the decision of Supreme Court in case of Liberty India Vs. CIT 317 ITR 218. Accordingly, he reduced Rs. 3,21,45,399/- (2,98,62,118+ 22,83,281) from the deduction u/s 80IA claimed by the assessee at Rs. 3,02,06,576/- and thus worked out the deduction u/s 80IA at Rs. Nil. 34. The Ld. CIT(A) after analyzing the expenditure observed that out of the administrative/establishment and other expenses, Rs. 2,61,09,810/- pertains directly to the promotional activities of the appellant (income from promotional and other activity is Rs. 38,84,12,326/-) and Rs. 24,86,561/- is already allocated by the assessee for working out the eligible profit of 80IA units. Accordingly, he held that out of the expenditure of Rs. 4,76,62,463/-, after reducing the amount of Rs. 2,61,09,810/-, the balance amount of Rs. 1,90,68,091/- remains as a common expenditure under the head administrative/establishment and other expenses. He also considered expenditure on payment and provision to employees at Rs. 3,02,06,576/- as the common expenditure. The aggregate of these two amounts totaling to Rs. 4,92,74,667/- was directed to be apportioned between the turnover of power generating units to the total turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee costs and administration, establishment expenses which would have been incurred for both the business of the appellant. The alternate submission of the appellant that this expenditure can be attributed to the power generation business only to the extent of 5% is without any basis. Also, the contention that this expenditure can be apportioned on gross profit basis is not correct because the appellant has not included depreciation while calculating he gross profit on cash basis. Therefore, the only reasonable basis for apportioning this expenditure is on the basis of turnover, as has been done by the Assessing Officer with the only difference being that this apportionment is to be done on common expenditure amounting to Rs. 4,92,74,667/-. This ground is partly allowed." 35. During the course of hearing, ld. AR submitted that the first issue in this ground is whether the expenditure on payment to employees and administrative/establishment expenses needs to be allocated towards the power generating units and if so what should be the basis for such allocation. The second issue is whether deduction u/s 80IA(4) is available on the income received on account of shortfall in the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the involvement of the employees towards power project only 5% of the salary i.e. Rs. 15,10,329/- be considered in working out the deduction u/s 80IA. In these circumstances, considering the specific details, only an amount of Rs. 18,13,289/- can be considered as expenses on salary attributable to the power generating undertakings. 38. So far as expenditure of Rs. 4,76,62,462/- under the head administrative/establishment and other expenses is concerned, it was submitted that the Ld. CIT(A) rightly excluded the expenditure of Rs. 2,85,94,371/- comprising of Rs. 24,84,561/- which the assessee itself considered in working out the profit of power units and Rs. 2,61,09,810/- which is directly related to the promotional and other activities for which income of Rs. 38,84,12,326/- has been declared by the assessee. From the balance expenditure of Rs. 1,90,68,091/-, it can be noted that expenditure of Rs. 1 crores is on account of contribution given by the assessee for construction of Rajasthan Bhawan at Mumbai. This amount has already been disallowed by the AO in computing the total income and the same is confirmed by the CIT(A). Therefore, this amount cannot be again allocated otherwis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricity is paid by the supplier of the plant due to shortfall in the minimum guaranteed generation of power units installed by it. These charges are thus nothing but the income from sale of power only, as it was the commitment of the supplier of the plant that the plant supplied by him would generate minimum guaranteed units of electricity. In case generation is less than fixed guaranteed unit, the supplier has fulfilled the shortfall by making payment of fixed amount per unit which is generated less. Hence, amount so received is nothing but the additional amount realized by the assessee in respect of the electricity generated by its power plant. The amount so received is therefore the profit or gain derived by the power undertaking from the business of generation and distribution of power. In this connection, reliance is placed on the following cases:- CIT Vs. Prakash Oils Ltd. 58 DTR 279 (MP): The Hon'ble Court held as under:- "6. As regards the 'Sauda' settlement income, it was held by the CIT(A) that during the course of the business the assessee has to sometimes pay/receive liquidation damages for not honouring a contract for sale of oil and deoiled cake. It held that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking or business and such subsidies. What is to be seen for the applicability of ss. 80-IB & 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" referred to in ss. 80-IB and 80- IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Therefore, the amount received by the assessee as subsidies qualify for deduction u/s 80-IB & 80-IC. In view of this decision of Supreme Court, the amount received from the supplier of plant against shortfall in the generation of electricity is only to reimburse the cost relating to the generation and sale of electricity and therefore it has a direct nexus with the profit and gains of the power generating undertaking eligible for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under the said provisions." In light of above, what is to be examined is whether there is proximate connection or direct nexus which has been established between the expenditure and the industrial undertaking in the instant case. 44. The expenditure under consideration falls under two broad baskets. The first expenditure relates to payment to and provision for employees amounting to Rs. 3,02,06,576. In this regard, the ld AR has submitted that all the seven power plants have been given to the third party operators for operation and maintenance and the assessee is liable to pay specified amounts as per the agreement executed with them. Therefore, assessee is not required to employ any person for day-to- day operation and maintenance of these plants. It was further submitted that as far as the expenditure of Rs. 3,02,06,576/- on account of payment and provision to employees is concerned, it was submitted that from the employee-wise details of the expenditure under this head, it can be noted that salary to the employees who are exclusively employed towards promotional activities is of Rs. 2,56,29,076/-. The remaining salary of Rs. 45,77,500/- is both towards the promotional act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the balance amount of Rs. 90,68,091/- again has no nexus but the assessee has offered to allocate 5% of the said expenditure before the ld CIT(A) and where the same is not acceptable, it was submitted that the same can be allocated in the ratio of turnover of the power plants to the total turnover of the assessee. We agree with the assessee's contention to restrict the pool of common expenses to Rs. 90,68,091. Given the fact that these are common head office expenses relating to the activities in the nature of management and supervision at the Head office, they have a direct nexus with the activities of the seven plants at the strategic and management level. As we have directed earlier to allocate the salary expenses of the Head office employees, the common head office expenses are also directed to be allocated in the ratio of turnover of the power plants to the total turnover of the assessee company. In our view, this is the most rational and reasonable basis for allocation of common expenses in absence of anything more specific which has been brought on record. In any case, the pool of common expenses has been brought down to a large extent as the expenses which have a direct nex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure so incurred by way of contribution to Rajasthan Bhawan is not wholly and exclusively for assessee's business of generation of renewable energy, the expenditure incurred is not with a view to bring profit or monetary advantage to the assessee and it is a clear cut case of application of income. 51. The ld CIT(A) confirmed the disallowance. The relevant findings of the ld CIT(A) are produced as under:- " 5.3 I have perused the facts of the case, the assessment order and the submission of the appellant. The Assessing officer has disallowed contribution of Rs. Rs. 1,00,00,000/- for Rajasthan Bhawan to be built in Mumbai on the ground that this expenditure is not related to the business of the assessee. The appellant has stated that this guest house has been constructed for the benefit of the employees of Rajasthan Government as well as for the employees of companies of the State Government of Rajasthan, as and when they visit Mumbai. The appellant has relied on the order ITAT, Jaipur in the case of Rajasthan State Industrial Development and Investment Corporation Ltd. (ITA No.324/JP/2006) and the order of ITAT, Jaipur in the case of Rajasthan State Road Development and C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also, expenditure is incurred on the directions of the Government with which assessee has to closely interact for its day to day business activities. Therefore, in the business interest, assessee has contributed such amount and a request is also made to provide the accommodation facility to its officers in the Rajasthan Bhawan. The Ld. CIT(A) has incorrectly held that the decision of Hon'ble ITAT in case of RIICO Ltd. and RSRDC Ltd. is not applicable as in those cases certain rooms were earmarked for the use of its employees for the guest house in New Delhi ignoring that in those cases also contribution was made as per the direction of the Government and it make no difference whether the rooms are earmarked or not. In this decision, a finding is given that the same was required only for running the business and working of the assessee for better interaction with the Government of India and various financial organizations. Copy of the decision in case of ACIT Vs. RIICO in ITA No. 324/JP/2006 order dated 21.08.2007 is at PB 205-213. Hence, the expenditure so incurred is allowable expenditure u/s 37(1). In view of above, the disallowance made by the AO and confirmed by the CIT(A) be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 139(1). This fact is therefore, not in dispute. In view of the judgments of the Rajasthan High Court in the case Jaipur Vidhyut Vithran Nigam Ltd, 265 CTR 62 (Raj.), CIT Vs. Stae bank of Bihaner & Jaipur (2014) 99 DTR 131 (Raj.) and ITAT, Jaipur, in the case of the assessee, the claim of the appellant is allowable. Accordingly, the disallowance made by the Assessing Officer is directed to be deleted. This ground is allowed." "6.3 I have perused the facts of the case, penalty order and the submissions of the appellant. In Assessment Year 2011-12, the CIT(A)-2, Jaipur (Appeal No. 334/13-14) has also decided the matter in favour of the assessee. The CIT(A) has allowed the claim of the assessee by holding as under: "The facts of this issue are similar to the facts in the case of M/s Rajasthan State Seeds Corporation Ltd., in A.Y. 2006-07. In this case, the ITAT, Jaipur (in ITA No. 233/JP/2009) has decided the matter in favour of the assessee by holding as under:- "As per the memorandum of state renewal fund set up by the state government, it is created with the object of providing a safety net for the workers likely to be affected by restructuring in the State Public Enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is available. 2. The learned Commissioner of Income Tax (Appeals) has erred on facts and in law and its own presumptions and ignoring the facts not fully allowing the claim of deduction of Administrative Establishment & other Expenses and payment & Provision for employees U/s 80IA(4) of Income Tax Act, 1961." 58. In respect of ground No. 1, the assessee has challenged the action of the ld CIT(A) in not allowing the claim of deduction of Rs. 5,79,589/- of FDR interest u/s 80-IA of the Act by holding that earning of interest is not directly related to the business for which exemption is available and in ground no. 2, in not fully allowing the claim of deduction of administrative, establishment and other expenses and payment & provision for employees u/s 80-IA of the Act. 59. Brief facts of the case are that the assessee claimed deduction u/s 80-IA(4)(iv) in respect of its power generating undertakings at Rs. 2,85,07,321/-. In the original assessment proceedings, the claim was allowed. However, the case was reopened u/s 147 on the ground that assessee has claimed deduction u/s 80-IA on FDR interest and has not apportioned various head office and other day-to-day management & supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re can be allocated to the power generating business as the same has been outsourced. The relevant finding of the ld. CIT(A) are reproduced as under:- "2.3 I have perused the facts of the case, the assessment order and the submission of the appellant. The Company has taken a loan from the financial institution (PFC) and as per terms and conditions of the agreement executed between them, company was required to maintain a escrow account, wherein receipt of power sales will be credited and out of that credit, company will pay quarterly installment to the institution as considered the first charges on that credit of the financial institution. The company has made the fixed deposit on short terms basis till the installment are due and earned the interest on such surplus funds during the year and claimed such interest income for deduction u/s 10A form the eligible business. During the year under consideration this amount has been claimed that Rs. 5,79,589/-. In support of allowability of this interest the assessee has placed reliance on the following decisions, as appearing, in the assessee's submission at para 5 above. In the case of CIT vs Advance Detergents 2011-339 ITR 81 (Del) w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on such amount for which deduction u/s 80-IA is claimed. This fact is admitted by CIT(A) at Para 2.3 of the order but still she wrongly held that it is not derived exclusively from the eligible business income. In doing so, it was ignored that the interest of Rs. 5,79,589/- is earned by the assessee only on the funds received from sale of power of windmill which temporarily remained unutilized and such interest receipt has reduced the interest burden paid on loan taken from PFC. Thus, such interest is derived exclusively from the eligible business. It is pertinent to note that assessee has also earned interest on FDR of Rs. 2,53,99,995/- but the same is not considered by the assessee himself as derived from the eligible business for claiming deduction u/s 80-IA. Reliance in this connection is placed on the following cases:- Assessee received lease deposits from the lessees which are required to be returned to them upon vacating the premises. Since the possibility of vacating the premises in the middle is always there, as a prudent business policy, the assessee was constrained to keep part of the lease deposits as fixed deposits maintained with banks. Since the lease renta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one each in the district of Rajsamand, Jodhpur and Jhunjhunu. All the plants have been given to the operators for operation and maintenance as per the agreement executed by them. As per the agreement, assessee is liable to pay specified amounts as per the generation of power for operating and maintaining expenses of the plant. Therefore, assessee is not required to employ any person for day to day operation of plant or to incur any other expenditure in relation to it. All the direct expenses relating to these power plants i.e. expenditure on operation & maintenance, repair & maintenance, interest & financial expenses, depreciation, insurance premium and lease rent aggregating to Rs. 21,56,56,752/- has been considered by the assessee for working out the eligible profit of these power generating units. Therefore, no part of the expenditure on payment to employees and administrative/establishment expenses needs to be allocated against the power generating units. 63. It was further submitted that so far as the expenditure of Rs. 1,76,54,963/- on account of payment and provision to employees are concerned, such expenditure is on account of other promotional activities of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted to Rs. 2,06,730/- only. In view of above, the AO be directed to rework out the claim of deduction u/s 80-IA in light of the submission given above. 65. The ld DR is heard who has relied upon the order of the lower authorities. 66. We have heard the rival contentions and perused the material available on record. The Ld A.R contended before us that assessee was required to maintain a escrow account wherein receipt of power sales is to be credited and out of that credit, it is to pay quarterly installment of repayment of loan to PFC. PFC has first charge on the amount lying in this account. The assessee made fixed deposit on short term basis till the installments are due and earned interest on such amount for which deduction u/s 80-IA is claimed. However, the moot point is that the deduction u/s 80-IA is allowed in respect of "Profits and gains" derived from the eligible undertaking. As explained by the Hon'ble Supreme Court in the case of CIT v. Sterling foods reported in 237 ITR 579, for application of the words "derived from", there must be a direct nexus between the profits and gains and the undertaking. In the instant case, the nexus of interest income with the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009-10, the Revenue has taken following sole ground of appeal: "1. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in restricting the disallowance u/s 80IA(4)(i) from Rs. 2,50,95,465/- to Rs. 2,31,13,978/-." 67. Brief facts of the case are that the assessee claimed deduction u/s 80-IA(4) in respect of its power generating undertakings at Rs. 17,67,94,304/-. In the original assessment proceedings, claim was allowed. However, the case was reopened u/s 147 on the ground that assessee has claimed deduction u/s 80-IA on income such as shortfall in generation, low generation & stock of Carbon Financial Instruments Rs. 2,73,48,665/- and other receipts of Rs. 62,45,945/- by incorrectly treating it as profit derived from eligible business and has not apportioned various head office and other day-to-day management & supervision expenses amongst the units claiming u/s 80-IA of the Act. 68. In reassessment proceedings, the AO observed that income on account of shortfall in generation, low generation, stock Carbon Financial Instruments of Rs. 2,73,48,665/- and other receipts (sale of Carbon Financial Instruments) of Rs. 62,45,945/- is not income d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2,97,08,935/- as the common expenditure. The aggregate of these two amounts totalling to Rs. 3,47,41,334/- was directed to be apportioned between the turnover of power generating units to the total turnover of the assessee to work out the profit eligible for deduction u/s 80-IA(4). He did not accept the contention of the assessee that no part of these expenditure can be allocated to the power generating business as the same has been outsourced. 70. The relevant finding of the ld. CIT(A) which are reproduced as under:- "2.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The assessee has included the other income, on account of shortfall in generation, low generation, amounting to Rs. 2,73,48,665/- which also includes stock of carbon financial instruments of Rs. 40,00,000/- as eligible income for deduction u/s 80IA. The deduction u/s 80IA has been denied by the Assessing Officer holding that these incomes cannot be said to be 'derived from' the power generation income and has placed reliance on the decision of the Apex Court in the case of Liberty India vs. CIT 317 ITR 218 (SC). The assessee in its written submissions, stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained that the low generation and short fall was recognized based on the agency report of centre for wind energy test (C-WET) which certifies and quantifies the low generation. Further, this process takes almost a year and therefore the shortfall received may not relate to the shortfall in generation for that particular year. It is also seen that in the assessment year 2011-12 this amount was claimed for the first time by the assessee and excluded from the income eligible for section 10A by the Assessing Officer. The above discussion clearly shows that this income relates to penalties imposed on the seller by the assessee company if the machines do not deliver as per the promised performance. These cannot be said to be directly derived from the business of power generation and do not have a first degree nexus with the eligible business. In view of the above, deduction under section 80IA is not allowable on this amount." "3.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. This ground relates an amount of Rs. 6245945/- relating to other income which was relatable to sell of carbon financial instruments (CFI). However in the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struments and third issue is whether the expenditure on payment to employees and administrative/establishment expenses needs to be allocated towards the turnover of the power generating unit to the total turnover of the assessee and if so what should be the basis for such allocation. 72. In Ground No.1, assessee has challenged not allowing deduction of Rs. 2,73,48,665/- on shortfall in generation, low generation and stock carbon financial instruments. This amount comprise of the following amounts:- (a) Shortfall in generation of electricity Rs.1,80,86,484/- (b) Low generation of electricity Rs.43,02,041/- (c) Stock of carbon financial instruments Rs.49,60,140/- Total Rs.2,73,48,665/- The stock of carbon financial instruments of Rs. 49,60,140/- and the sale of carbon financial instruments of Rs. 62,45,945/- are of same nature and therefore same is dealt in Issue No.2 and the shortfall in generation of electricity and low generation of electricity is considered in Issue No.1 73. In respect of Issue No.1, it was submitted that assessee has awarded the operation, maintenance & generation of all the power undertakings installed by it to the vendors/operators a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low generation of electricity is nothing but the additional amount realized by the assessee to recover the revenue loss incurred by the assessee. The amount so received is therefore the profit or gain derived by the power undertaking from the business of generation and distribution of power. 75. The AO in holding that the compensation so received is not an income derived from the eligible undertaking has relied on the decision of Supreme Court in case of Liberty India Ltd. However, this case is not applicable on facts as it was a case in which it was held that the duty drawback receipt could not be said to be profits and gains derived from an eligible business. Thus, this case was concerned with an export incentive which is far removed from the reimbursement of an element of cost. As against this, in the subsequent decision of Supreme Court in case of CIT Vs. Meghalaya Steels Ltd. (2016) 383 ITR 217, after distinguishing the judgment of Liberty India Ltd., it was held that transport subsidy, interest subsidy, power subsidy and insurance subsidy are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture and sale of its products. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO be directed to allow the claim of deduction u/s 80IA on the amount of shortfall in the generation/low generation of electricity received by assessee. 78. We have heard the rival submissions and pursued the material available on record. Regarding receipts on account of shortfall/low generation amounting to Rs. 2,23,88,525, we have already dealt with the subject issue in AY 2011-12. Our findings and directions contained therein shall apply mutatis mutandis to this year as well. In the result, the assessee company is held eligible for deduction u/s 80IA(4) in respect of receipts on account of shortfall/low generation. 79. In respect of the second issue, i.e. stock of carbon financial instruments Rs. 49,60,140/- and sale of carbon financial instruments Rs. 62,45,945/- is concerned, it was submitted that these instruments by way of carbon emission certificates are received by the assessee on generation of electricity from its wind power projects which helped in low carbon emission. As per the Kyoto protocol the industries which are generating lesser carbon than the prescribed norms gets such credit which can be sold to industries generating higher carbon. The receipt from sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mill out of those allotted to the assessee under an agreement for control of production was capital receipt and not income. Being so, the consideration received by the assessee is similar to consideration received by transferring of loom hours. The Supreme Court considered this fact and observed that taxability of payment received for sale of loom hours by the assessee is on account of exploitation of capital asset and it is capital receipt and not an income. Similarly, in the present case the assessee transferred the carbon credits like loom hours to some other concerns for certain consideration. Therefore, the receipt of such consideration cannot be considered as business income and it is a capital receipt. Accordingly, we are of the opinion that the consideration received on account of carbon credits cannot be considered as income taxable in the assessment year under consideration. Carbon credit is not an offshoot of business but an offshoot of environmental concerns. No asset is generated in the course of business but it is generated due to environmental concerns. Credit for reducing carbon emission or greenhouse effect can be transferred to another party in need of reduction o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Income Tax Act does not do so, our view gets duly fortified by the principles stated in the above decision of Supreme Court. Accordingly this ground of the assessee is allowed and the addition made by the AO is deleted." Following this decision, the Hon'ble Bench in case of RSMM Ltd. in ITA No.144/JP/14 & 124/JP/14 for AY 2010-11 dt.12.02.2016 has again held that the receipt from sale of CER is a capital receipt. 82. This issue is also decided in favour of the assessee by the following Tribunal decisions where such receipts were held to be capital receipts: - M/s. Subhash Kabini Powers Vs. CIT ITA no.258/Banglore/2014, AY 2009-10 dated 28.11.2014 affirmed by Hon'ble Karnataka High Court (2016) 385 ITR 592 - Ambica Cottons Mills Ltd. Vs. DCIT ITA No.1836/Mds./2012 AY 2009-10 dated 16.04.2013 - Sri Velayudhaswammy Spinning Mills (P)Ltd. Vs. DCIT 40 Taxmann.com141 (Chennai)/ 27 ITR (Trib) 106 (Chennai) dated 12.06.2013 - Arun Textile P. Limited V. ACIT 36 ITR(Trib) 300 (Chennai) In view of above discussion, the AO be directed to exclude the sale/stock of carbon financial instruments in computing the total income of the assessee being a capital receipt. 83. We have heard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has suo-moto offered these receipts to tax and included it in its gross total income. In such a situation, the assessee cannot plead now that since the Revenue has denied the deduction holding that such receipts are not derived from the eligible business, the assessee should be allowed to contend that such receipts are not includible in gross total income itself being in the nature of capital receipts. Further, no arguments have been canvassed before us to controvert the findings of the lower authorities that these receipts are not derived from the eligible business of power plants. Infact, the decision of the Hon'ble Karnataka High Court in case of My Home Power Ltd (supra) holds such receipts as not even business receipt at first place. In such a case, the question of such receipts derived from eligible business also doesn't arise. In light of above, we confirm the findings of the ld CIT(A) in this regard and confirm the disallowance of deduction under section 80IA(4) in respect of the income amounting to Rs. 1,12,06,085 received by the assessee company from sale of Carbon Financial Instruments/ stock of such instruments which has been suo-moto offered to tax as business recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the involvement of the employees towards power project, only 5% of the salary i.e. Rs. 14,85,447/- be considered in working out the deduction u/s 80IA. In these circumstances, considering the specific details, only an amount of Rs. 17,44,509/- can be considered as expenses on salary attributable to the power generating undertakings. 86. So far as expenditure of Rs. 88,61,651/- under the head administrative/establishment and other expenses is concerned, an amount of Rs. 33,02,080/- is already considered by the assessee in working out the income from power project and an amount of Rs. 5,27,172/- exclusively relate to the income from promotional and other activities. This has been accepted by the Ld. CIT(A) also. After excluding the same, the remaining expenditures are Rs. 50,32,399/-. These expenditure are in nature of fees and subscription (Rs.4,95,825/- ), legal and professional expenses (Rs.8,63,914/-), printing and stationary (Rs.1,72,703/-) and other expenses like audit fees, electricity charges, fax, courier and photo state expenses, repairs of office equipments/building etc. These expenses have no relation with the power generating undertaking. Still the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in law, the CIT(A) has erred in deleting disallowance of RVE travelling expenses of Rs. 58,221/- as made by AO. 5. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting disallowance of reimbursement of conveyance expenses ( RVE) of Rs. 36,835/- as made by AO. 6. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting disallowance of RVE training expenses of Rs. 3,02,380/- as made by AO. 7. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting disallowance of contribution to Energy Conservation Fund of Rs. 1,00,00,000/- as made by AO. 8. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting disallowance of expenses for information, education and communication plan 2011-12 (IEC) of Rs. 18,50,580/- as made by AO. 9. Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting disallowance of publicity and advertisement expenses Rs. 3,25,71,656/- as made by AO." Assessee's ground ( ITA No. 97/JP/16) In its cross appeal, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contribution made to State Renewal Fund is allowable u/s 37(1)." Following the above judgment, the disallowance on account of contribution to State Renewal Fund of Rs. 20,00,000/- made by the Assessing Officer is directed to be deleted. This ground is allowed." "3.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. Admittedly, contribution of PF has been paid by the appellant, in all instances, before the due date of filing the return of income u/s 139(1). This fact is therefore, not in dispute. In view of the judgments of the Rajasthan High Court in the case Jaipur Vidhyut Vithran Nigam Ltd. 265CTR 62 (Raj.), CIT Vs. State Bank of Bikaner & Jaipur (2014) 99 DTR 131 (Raj.), and other case laws on this issue, the claim of the appellant is allowable. Accordingly, this disallowance made by the Assessing Officer is, directed to be deleted. This ground is allowed." "4.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. In the assessment year 2011-12 in assessee's own case this issue has been dealt with by the CIT(A) as follow:- " The Assessing Officer has disallowed the above expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the disallowance made by the Assessing Officer of the above expenditure, is without any basis and is directed to be deleted. Ground No. 3,6,& 7 are allowed. Following the above judgment, addition made by the Assessing Officer on ground 3,6,7 & 8 is directed to be deleted. Ground No. 3,6,7 & 8 are allowed." 90. In respect of ground of appeal no. 1 to 6, in AY 2011-12, similar grounds of appeal have been raised by the Revenue and after examining the matter in great detail, we have dismissed these grounds of appeal. Our findings and directions contained in ITA No. 159/JP/15 shall apply mutatis mutandis to this appeal as well. The ground of appeal no. 1 to 6 the Revenue are thus dismissed. 91. In respect of ground No. 7, the Revenue has challenged the action of ld CIT(A) in deleting disallowance of contribution to energy conservation fund of Rs. 1 crore. Brief facts of the case are that the assessee contributed Rs. 1 crore to State Energy Conservation Fund to be spent on conservation of energy as and when required. The AO held that the contribution so made is not wholly & exclusively for assessee business of generating renewable energy. He therefore, disallowed the same. On app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority which has been brought to our notice subsequent to the decision of the Coordinate Bench in assessee's own case in AY 2008-09. Respectfully following the decision of the Coordinate Bench referred supra, we affirm the findings of the ld CIT(A) and the ground taken by the Revenue is dismissed. 95. In respect of ground No. 8, the Revenue has challenged the action of ld CIT(A) in deleting disallowance of expenses for Information, Education & Communication Plan 2011-12 (IEC) of Rs. 18,50,580/-. The objective of the plan was mass communication and public awareness for the use of RES and energy conservation for which various tools like newspapers, brochures, leaflets, posters, magazines, television, FM radio, cinema slides, display boards etc. were deployed. For this purpose, assessee incurred expenditure of Rs. 18,50,580/- on account of "IEC Plan 2011-12" and claimed the same in its P&L a/c. The AO made disallowance of Rs. 18,50,580/- by holding that the expenditure has not been incurred wholly and exclusively in connection with the generation of electricity which is the business of the assessee, the expenditure is not incidental to the business of the assessee, the assessee is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... renewable energy sources and promote energy conservation measures. The AO has not doubted the genuineness of the expenditure. Hence, the expenditure incurred by the assessee is allowable to it u/s 37(1). 98. It was further submitted that due to the expenditure incurred by the assessee on such awareness programme, various entrepreneurs have come to Rajasthan for development and generation of electricity through non-conventional sources of energy from whom the assessee has received registration/processing fees on the plants installed by them which is a part of the receipt of Rs. 16.77 crores credited to the P&L a/c. The AO has completely overlooked this revenue stream of the assessee in disallowing the expenditure. In view of above, CIT(A) has rightly deleted the disallowance and thus the ground of the department be dismissed. 99. In ITA No. 202/JP/15 for AY 2011-12, similar ground of appeal have been raised by the Revenue and after examining the matter in great detail, we have dismissed the said ground of appeal. Our findings and directions contained in ITA No. 202/JP/15 shall apply mutatis mutandis to this appeal as well. The ground of the Revenue is thus dismissed. 100. In res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to popularize the usage of Renewable Energy Source & policy deployment too. Further, in the F.Y. 2010-11, the State Government of Rajasthan, Issued "Rajasthan Solar Energy Policy, 2011 Vide Notification No. F.20(6) Energy/2010 dated 19.04.2011 for the promotion the solar energy in Rajasthan, Prior to enactment to this policy, the promotion of solar energy was being done under the policy for promoting generation of electricity through Non-Conventional Energy Sources, 2004. The company was also appointed as Nodal Agency for Single Window Clearance of project of Solar Power project set up in the state of Rajasthan, as per Rajasthan Solar Energy policy, 2011 as notified and issued by the Government of Rajasthan Energy Department vide dated 19.04.2011. The ledger account of the expenditure has been filed and perused. Largely, the expenditure is related to payment to advertising agencies and printing and publishing agencies. A small amount of 3.50 lakhs approx. is fixed for topographic survey Geo technical investigation which has been explained by AR as in pursuance of the promulgation of the new policy. In view of the above the disallowance made by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 80IA has been denied by the Assessing Officer holding that these incomes cannot be said to be 'derived from' the power generation income and has placed reliance on the decision of the Apex Court in the case of Liberty India vs. CIT 317 ITR 218 (SC). The assessee in its written submission stated that the shortfall/low generation are being taken under the Group head 'application/processing/registered fees & others'. The AR was asked to explain the exact nature of income under this head. The AR stated that the company has awarded all the power plants for operation and maintenance and generation of power to the Vendors/operators as per agreement executed between them. "As per execution of the agreements, operators/vendors, who is/are operate to the power plants, company has executed a assurance in the agreement that the vendors/awards that installed power plant will generated a minimum power generation on a particulars wind flow in a specified areas at where power plants are installed. As per the execution of agreement, between the company and power plant operators, if that power plant will not operate or generate a minimum assured power generation, than the operator will compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able on this ground." 107. During the course of hearing, the ld. AR submitted that the two issues are involved. One is whether the income of Rs. 93,32,447/- on shortfall/low generation of power is income derived from business or not and the second issue is whether the indirect power related income is to be included for computing the deduction u/s 80-IA(4) or not and if not, the indirect expenses of HO of Rs. 7,11,35,342/- is to be excluded in computing the deduction u/s 80-IA(4) or not. 108. In respect of issue no.1, it was submitted that assessee has awarded the operation, maintenance & generation of all the power undertakings installed by it to the vendors/operators as per the agreement executed with them. As per the agreement, these vendors/operators have assured that power plant installed by them will generate minimum power on a particular wind flow in the specified area and if they do not operate or generate the minimum assured power generation, then operator will compensate for such fall of generation of power. During the year assessee received Rs. 93,32,447/- on account of shortfall in generation and low generation of electricity on which it claimed deduction u/s 80IA. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts as it was a case in which it was held that the duty drawback receipt could not be said to be profits and gains derived from an eligible business. Thus, this case was concerned with an export incentive which is far removed from the reimbursement of an element of cost. As against this, in the subsequent decision of Supreme Court in case of CIT Vs. Meghalaya Steels Ltd. (2016) 383 ITR 217, after distinguishing the judgment of Liberty India Ltd., it was held that transport subsidy, interest subsidy, power subsidy and insurance subsidy are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture and sale of its products. There is certainly a direct nexus between the profits and gains of the industrial undertaking or business and such subsidies. What is to be seen for the applicability of sections 80-IB & 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor pulled the indirect income like interest, forfeiture of security deposit, etc. on proportionate basis and also considered the indirect head expenses on proportionate basis which is incorrect. Therefore, the income of Rs. 9,40,31,183/- is to be excluded in computing the deduction u/s 80-IA(4) but at the same time the indirect expenses of HO allocated at Rs. 7,11,35,342/- is also incorrect as part of such expenditure is directly related to promotional & other activities. Only expenditure of Rs. 4,56,79,816/- can be considered towards the common expenses and if 5% of such expenses is allocated towards power generating income, only Rs. 22,83,990/- can be allocated towards HO expenses for computing deduction u/s 80-IA(4) as against Rs. 7,11,35,342/- allocated by the cost auditor. On this basis the deduction u/s 80-IA(4) would be worked out at Rs. 9,22,77,975/- (9,45,61,966-22,83,990) as per the calculation enclosed. Hence, the AO be directed to rework the deduction u/s 80-IA(4) of the Act. 114. We have heard the rival contentions and perused the material available on record. Both the issues under consideration have been dealt with in detail in AY 2011-12. 115. Following our findin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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