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TMI Blog2019 (5) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... :- No illegality or infirmity in the findings returned by the ld. CIT (A) which are based upon the decision of L.H. Sugar Factory Oil Mills (P) Ltd. vs. CIT [ 1980 (8) TMI 1 - SUPREME COURT] and Airport Authority of India vs. CIT [ 2011 (12) TMI 114 - DELHI HIGH COURT] and Bikaner Gypsusms Ltd. vs. CIT [ 1990 (10) TMI 2 - SUPREME COURT] as held that when the roads were constructed around the factory with an amount incurred by the assessee existing on the land owned by Government of UP, the assessee did not acquire any asset of an enduring nature. Assessee is having existing right to carry out the business, any expenditure made by it for smooth running of the business would not lead to acquisition of capital assets. Thus the expenditure incurred by the assessee on construction of road, water supply, rail connectivity and other infrastructure activities on the assets not owned by it but owned by various Government Departments are revenue expenditure. - Decided in favour of assessee. Disallowance of pre-commissioning expenses - HELD THAT:- As the addition is made by the AO following the assessment order of A Y 2004-05, therefore respectfully following the decision of Ld. CIT-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax free bonds and loan to the Government out of its own huge surplus funds, no disallowance can be made - Decided in favour of assessee. - ITA No.4754/Del./2015 And ITA No.4183/Del./2015 - - - Dated:- 25-4-2019 - SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Ved Jain, Advocate And Shri Nischay Kantoor, CA For The REVENUE : Ms. Pramita M. Biswas, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Present cross appeals filed by the assessee as well as by the revenue are being disposed off by way of composite order to avoid repetition of discussion. 2. The Appellant, DCIT, Circle 18(2), New Delhi (hereinafter referred to as the Revenue ) by filing the present appeal sought to set aside the impugned order dated 26.03.2015 passed by the Commissioner of Income-tax (Appeals)-6, New Delhi, qua the assessment year 2005-06 on the grounds inter alia that :- 1. Whether on the facts and circumstances of the case in law, the Ld. CIT(A) has erred in deleting the addition made by the AO by disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Power station on 02.09.2004. Assessee incurred an amount of ₹ 20,60,00,000/- as expenditure on repair and maintenance of roads, water supply, rail connectivity and other infrastructure facilities not owned by the assessee and claimed the same as revenue expenditure u/s 37(1) of the Act. However, AO added back the said expenditure to the total income of the assessee incurred on the assets not owned by the assessee on the grounds that assessee has not posted this expenditure into P L account rather debited the same in computation of income nor the assessee has furnished anything about the nature of the expenditure to work out whether the same is revenue or capital passing the enduring benefit to the assessee. 5. Assessee recorded pre-commissioning expenses to the tune of ₹ 119.1 crores included in fixed assets/capital work-in-progress after adjustment of pre-commissioning sales of ₹ 58.3 crores resulting in the net pre-commissioning expenditure of ₹ 60.08 crores. AO following the order passed in AY 2004-05 held that pre-commissioning expenditure has to be capitalized and any revenue receipt during the pre-commissioning period has to be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 143 (3) of the Act. 11. When we examine para 3.5 of the assessment order for AY 2004-05, available in the separate paper book, and inspection report dated 14.09.2004 prepared on the basis of inspection dated 02.09.2004 has been duly discussed and considered before passing the order. Furthermore, issue in question has already been decided in favour of the assessee for AY 2004-05 by the coordinate Bench of the Tribunal vide order dated 04.05.2018 , available at pages 39 to 48 of the case law paper book, by duly considering the inspection report dated 02.09.2004 by returning following findings:- 5. After considering the submissions of both the parties and the material available on record, it is noticed that an identical issue having similar facts has already been adjudicated by the ITAT Delhi Bench' B', New Delhi in assessee's own case in ITA Nos. 1377 2188/Del/2002 for the assessment years 1998-99 and 1999-2000 respectively. The relevant findings have been given in paras 8 to 11 of the said order which read as under: 8. Rival submissions of the parties have been considered carefully in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to oceangoing vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. We are afraid how the above provisions help the case of the revenue. On the contrary, it helps the case of the assessee. This provision has been relied upon by the Assessing Officer for the submission that profits of each unit has to be determined independently as if such unit were only source of income of the assessee. There is no dispute to such submission. According to such submission, profits of gas unit as well as steam unit must be determined independently as the sale source of income of the assessee and consequently, the expenditure incurred for the generation of electricity by gas unit cannot be shifted to any other unit even by the logic of the Assessing Officer. For the similar re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation. In this sub-section, market value , in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market. Section 80-IA(9): Where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the-date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the gas turbine or steam turbine generated electricity independently and inspection report dated 02.09.2004 does not indicate any new facts. So, we are of the considered view that the ld. CIT (A) has rightly decided the issue in favour of the assessee, hence ground no.1 of Revenue s appeal is determined against the Revenue. GROUND NO.2 IN ITA NO.4183/DEL/2015 (REVENUE S APPEAL) 13. Assessee claimed the deduction of expenditure of ₹ 20,60,00,000/- u/s 37 of the Act incurred on the assets not owned by it but belongs to various State Governments like irrigation, PWD, Electricity Board and in a few cases Central Government like Indian Railways and the amount was paid to various Government Departments for constructing roads, water supply, rail connectivity and other infrastructure facility like extension of power lines etc. to facilitate smooth running of the business. 14. Ld. DR challenging the impugned order relied upon the assessment order and contended that when assets are not owned by the assessee, the expenditure cannot be allowed as revenue expenditure rather it was having enduring benefits to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g nature. Hon ble Supreme Court has also held that assessee is having existing right to carry out the business, any expenditure made by it for smooth running of the business would not lead to acquisition of capital assets. So, we are of the considered view that the expenditure incurred by the assessee on construction of road, water supply, rail connectivity and other infrastructure activities on the assets not owned by it but owned by various Government Departments are revenue expenditure. So, ground no.2 of Revenue s appeals is determined against the Revenue. GROUND NO.3 IN ITA NO.4183/DEL/2015 (REVENUE S APPEAL) 17. AO disallowed pre-commissioning sales amounting to ₹ 58,30,00,000/- out of pre-commissioning expenses of ₹ 119.1 crores netted by the assessee, which has been deleted by the ld. CIT (A) by following the decision rendered in the earlier years for AYs 2003-04 2004-05. 18. The ld. DR for the Revenue challenging the impugned deletion by the ld. CIT (A) relied upon the order passed by the AO. However, ld. AR for the assessee contended that this issue has since attained finality as the del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made by the appellant and also the order of CIT(A) passed for AY 2003-04. I agree with the decision of my predecessor on this issue. The ratio of the judgment in the case of Sarraf Textiles Industries is fully distinguishable from the facts in the case of the appellant, whereas the principals laid down by the Hon'ble Supreme Court in the case of Bokaro Steel is squarely applicable in the present case of the appellant. In view of the above, I have no reason to disagree with the view expressed by my predecessor on the issue and accordingly decide the ground in favour of the appellant. As a result this ground of appeal is therefore allowed in favour of the appellant. Appellant accordingly gets relief of ₹ 43.60 crores. As the addition is made by the AO following the assessment order of A Y 2004-05, therefore respectfully following the decision of Ld. CITCA) this ground of appeal is decided in favour of the appellant and the AO is directed to allow the netting off precommissioning sales against pre-commissioning expenses as claimed by the assessee and delete the addition made as income from other sources. The appeal is allowed in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Haryana High Court in the case of CIT vs Winsome Textile Industries Ltd. 319 ITR 204; (v) Ahmedabad ITAT dated 10.05.2013 in the case of DCIT Vs Gujarat Narmada Valley Fert. Co. Ltd. 2013-TIOL-405-ITATMUM; (vi) Mumbai ITAT in the case of Shopper's Stop Ltd. Vs ACIT 2011-TIOL-581-ITAT-MUM; and (vii) Ahmedabad ITAT dated 05/12/12 in the case of DCIT Vs Jay Chemical Industries Ltd. in ITA No. 97/Ahd/2012. 24. Ld. DR for the Revenue contended that the disallowance is to be made even if no income is earned during the year and relied upon the decision rendered by the Special Bench of the Tribunal in Cheminvest Ltd. vs. ITO (2009) 121 ITD 318 (Delhi)(SB) . Ld. DR filed written submissions which have been made part of the record and has also relied upon the decisions in (i) Indiabulls Financial Services Ltd. vs. DCIT (2016) 76 taxmann.com 268 (Delhi); (ii) DCIT vs. Viraj Profiles Ltd. 156 ITD 72; (iii) NYK Line India Ltd. vs. ACIT 175 TTJ 180; (iv) Super Auto Forge (P.) Ltd. vs. ACIT 156 ITD 467; (v) Vipin Malik vs. ACIT 45 ITR 589; (vi) Punjab Tractors Ltd. vs. CIT 2017-TIOL-353-HCP H-IT; (vii) Godrej Boyce Mfg. Company Ltd. 394 ITR 449 (SC); and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of interest for investment in tax free bonds. In fact, the tax free bonds were acquired on the orders of the Government on conversion of sundry debtors of State Electricity Boards, facing financial crunch. The AO disallowed 2.5 % of the administrative expenses for earning interest income from tax free bonds in the assessment years 2002-03 to 2004-05 while in assessment year 2007-08 disallowance has been made having recourse to provisions of rule 80 of the I. T Rules, 1962. There is no material before us, suggesting that the assessee incurred any expenditure by way of administrative expenses for earning interest income in these four assessment years nor the AO identified any item of such expenditure for earning the interest income. In these circumstances, the estimated disallowance made by the AO, without establishing the nexus between administrative expenses and interest income from tax free bonds, cannot be sustained. 11. We find-that the Hon'ble Bombay High Court in their decision dated 12.8.2010 in case of Godrej Boyce Mfg. Co. Ltd. Mumbai while holding that Rule 80, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation to tax the net income i.e. gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed 'under Chapter IV would fall within section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assessment year 2004-05 and ground no.1 in the appeal for the AY 2007- 08, are dismissed. 15. Since, the facts of the assessee's case are similar to the facts involved in the case of DCIT, Circle-14(1), New Delhi Vs Power Grid Corporation of India Ltd. (supra). So, respectfully following the aforesaid referred to order dated 31.10.2011, we do not see any merit in this ground of the departmental appeal. 29. Perusal of the order passed by the coordinate Bench of the Tribunal in AY 2004-05 apparently goes to prove that identical issue as to disallowance of the expenditure made by the assessee to earn the exempt income from investment in tax free bonds has been decided in favour of the assessee wherein AO has disallowed 2.5% of the administrative expenses for earning income from tax free bonds and the disallowance was ordered to be deleted. 30. When we examine the proposition at hand as to making disallowance of ₹ 123.09 crores by the AO and reduced the same to ₹ 82.67 crores by the ld. CIT (A) in the light of the facts inter alia that AO has not recorded any dissatisfaction as to the working out made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b Haryana in case of CIT vs. Hero Cycles Ltd. - 323 ITR 518 held that disallowance u/s 14A is not permissible where there is no nexus between expenditure incurred and income generated by returning following findings :- Held, dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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