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TMI Blog2018 (2) TMI 1909X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that Ld.CIT(A) while deciding the issue has given a finding that by applying functional test that without civil foundation the windmills will not generate power and that civil foundation cannot be separated from windmills and cannot be treated as a separate building. With respect to the cost of erection and commissioning expenditure, Ld.CIT(A) has given a finding that the same cannot be separated from windmills as the same are directly related to the functioning of windmills. The aforesaid findings of Ld.CIT(A) has not been controverted by Revenue. We further find that in the case of CIT Vs. Mehru Electricals and Mechanical Engineers Pvt. Ltd. [ 2016 (7) TMI 708 - RAJASTHAN HIGH COURT ] has held that the rate of depreciation applicable to windmills also applies to civil foundation and electric turbine generator for windmill as they are the part of the windmill. We further find that the Hon ble Bombay High Court in the case of CIT Vs. CTR Manufacturing Industries Pvt. Ltd. [ 2016 (4) TMI 265 - BOMBAY HIGH COURT ] has held that the depreciation of windmill is to be allowed even on the cost like erection and commissioning charges, electric items, application charges etc., whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the aforesaid decision of Hon ble Bombay High Court, the provisions of Rule 8D of I.T. Rules are not applicable to the year under consideration being A.Y. 2007-08. It is also a fact that assessee has suo-motu disallowed ₹ 5 lac u/s 14A of the Act and that the assessee is not in appeal against the aforesaid addition. Further before us, Revenue has not placed any contrary binding decision in its support. In such a situation, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of the Revenue is dismissed. Disallowance of commission u/s 40A(2) - AO can disallow the expenditure made to close associates having substantial interest in the company for goods, services and facilities - HELD THAT:- AO can disallow only that portion of expenditure, which in his opinion, is excessive or unreasonable. Reasonableness of the expenditure has to be seen from the view point of the businessman and not from the view point of Revenue authorities. Before disallowing the expenses, the AO must establish that the payment is excessive or unreasonable and he has to place on record evidences with respect to excessiveness and unreasonableness. He cannot proceed merely on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o of decision relied upon by Ld.CIT(A) while deciding the appeal is not applicable to the present facts. Considering the totality of aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of Revenue is dismissed. - Shri Anil Chaturvedi, AM And Shri Vikas Awasthy, JM Assessee by : Shri C.H. Naniwadekar Shri A.S. Deshpande. Revenue by : Shri Rajeev Kumar, CIT. ORDER Anil Chaturvedi, 1. These cross-appeals filed by assessee and Revenue u/s 253 of the Act, emanate out of the order of Commissioner of IncomeTax (A) 2, Nashik dt.24.02.2014 for A.Y. 2007-08. 2. The relevant facts as culled out from the material on record are as under :- Assessee is a company stated to be engaged in the business of manufacturing of engines, generators, engine parts etc. Assessee electronically filed its return of income for A.Y. 2007-08 on 27.10.2007 declaring total income of ₹ 1,55,61,71,300/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dt.30.12.2009 and the total income was determined at ₹ 1,65,82,98,190/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who vid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be worked. 2. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 45,69,505/-on account of debit balances written off by admitting the new evidences filed by the assessee and without giving any opportunity to the AO to examine the same at his level. 3. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 15,60,235 on account of liquidated damages by admitting the new evidences, without giving an opportunity to the AO to examine the same at his level. 4. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 15,60,823/- on the issue of provision for Liquidated damages, without appreciating that the provision has not been made on a scientific basis? 5.Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in restricting the addition made to ₹ 1,20,90,752/- as against the addition made of ₹ 8,01,87,883/- made on account of administrative and managerial expenses for earning tax free dividends u/s. 14A? 6. Whether on the facts and cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef to assessee by holding as under : 6.2 I have carefully considered the submission of the appellant, and I find it partly acceptable. Considering the fact that an amount of ₹ 7,99,257/- has been paid in subsequent year on account of liquidated damages, the same cannot be treated as ad-hoc provision. On identical issue in AY 2005-06, I had allowed the claim of appellant to the extent of liquidated damages paid in subsequent years. The appellant had filed details of how the provision had been worked out, giving details of the invoice no, customer name, invoice amount, copies of PO showing LD clauses, etc. The provision for liquidated damages had been worked out on terms of purchase orders, delay in executing the customer's order, etc. Out of disallowance of ₹ 37,18,638/-,the appellant had filed details of ₹ 31,68,638/-. No details of ₹ 6,00,000/-(Difference of ₹ 37,18,638/-less ₹ 31,68,638/-) had been provided. Therefore, disallowance of ₹ 6,00,000/- is confirmed. Considering the basis of working of the provision ₹ 15,57,815/- needs to be disallowed, since the same is excess provision. 6.3 The total disallowance will be ₹ 21, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee explained that the liquidated damages had nothing to do with any infraction of law. The major recovery was of ₹ 1,56,62,034/- effected by M/s. Oil India Ltd., who had made the said recovery as the assessee had failed to complete installation and commissioning within the agreed contract schedule. The Assessing Officer held the same to be in the nature of penalty and disallowed the same. In this regard, he placed reliance on the ratio laid down by the Hon'ble High Court of Delhi in Rohtak Textiles Mills Vs. CIT (1997) 226 ITR 485 (Del), wherein payment of liquidated damages were held as non-deductible. As regards the other liquidated damages, since the assessee had only given general submissions, the same was not accepted and the entire claim towards liquidated damages was disallowed. 40. Before the CIT(A), the assessee pointed out that in the purchase order placed by M/s. Oil India Ltd., there was clear stipulation of completion dates and also provision of liquidated damages to be paid at specific rates on account of default in delivery. The damages were thus, in the nature of breach of contract. The assessee also filed a copy of letter dated 20.01.2001 of M/s. Oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer. However, till date, no such appeal effect has been allowed. He referred to page 190 of Paper Book and pointed out that clause (iii) related to charging of interest as per purchase order and he further referred to page 199 of the Paper Book to establish that the amount has been recovered by M/s. Oil India Ltd. And hence, there is no discrepancy in the claim of assessee. He, then, referred to the provision made on account of other party i.e. ₹ 20,82,140/-. He stressed that the said provision was made in respect of sales effected during the year which was customer-wise and the said principle was followed in respect of all the parties and the amounts were paid in the succeeding year and in case those are not demanded, then the provision was reversed. He further stated that out of total sum of ₹ 20,82, 1401-, ₹ 6,09,543/- was already paid during the year by the assessee. The learned Authorized Representative for the assessee further pointed out that the issue raised in the present appeal is covered by the order of Pune Bench of Tribunal in Thermax Babcock Wilcox Ltd. Vs. Addl.CIT (2008) 7 DTR (Pune) (Trib) 162. 44. The learned Departmental Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT(A) in remitting the issue to the file of Assessing Officer to call for relevant particulars. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition of ₹ 6,64,552/-. 47. Now, coming to balance liquidated damages of ₹ 20,82,140/- for which the assessee had made the provision in its books of account. The assessee points out that after effecting sales during the relevant years, provisions are made during the year customer-wise and the said principle has been followed by the assessee from year to year. In other words, the assessee is following the method of accounting, under which provision is made on account of any liquidated damages, which the assessee may have to pay. In case the same are paid in the next year, then the same are debited to provision and if not paid, then the provision is reversed. The assessee having followed the said system of accounting persistently and in view of the fact that the sales have been effected during the year, then where the assessee is aware of its deficiencies and having made the provisions as per purchase order, then such provision of liquidated damages merits to be allowed in the hands of assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appeal of the assessee is partly allowed for statistical purposes. 11. Now we take up Revenue s Appeal in ITA No.963/PUN/2014. 12. First ground is with respect to depreciation on windmill. 12.1. During the course of assessment proceedings, AO on perusing the depreciation schedule noticed that assessee has claimed depreciation of ₹ 10,51,87,561/- on windmill. AO also noticed that the addition made to fixed assets on account of seven windmills was to the extent of ₹ 26,29,68,903/-. The assessee was asked to furnish the details with respect to addition to windmill and the calculation of depreciation on windmill. AO noticed that during the year assessee company had installed seven windmills on 30.12.2006 for generation of power and had claimed 40% depreciation on such windmills. On perusing the details, he noticed that assessee had claimed depreciation on the windmills and also on the cost of transformer, DP, civil construction and others. The submission of the assessee that the entire expenditure with cost of windmills is entitled to higher depreciation as other expenditure incurred are integral part of windmills was not found acceptable to AO. AO was of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellate proceedings, the cost of internal road is approx. ₹ 5 lacs. Relying on the decision on Pune ITAT in Poonawala Finvest Agro Pvt. Ltd. vs ACIT, I hold that depreciation on internal roads will not be allowable at rate of 80% but the same is allowable @ 10%. The cost of foundation will be ₹ 1,24,45,634/- (i.e. cost of foundation ₹ 1,24,95,634/- less cost of roads ₹ 5,00,000/-. The depreciation allowable on roads will be restricted to ₹ 25,000/-. The Assessing officer is directed to delete the addition ₹ 15,90,219/- ( ₹ 16,15,219 less ₹ 25,000). 4.5 The cost of errection commissioning includes errection of wind Energy converters (WEC), Interconnecting the WEC with grid, evacuation of power generated, etc. The cost of erection and commissioning cannot be separated from windmill as the same is directly related to functioning of windmill. In my opinion, cost of errection and commissioning is eligible for depreciation rate which is applicable for windmill as it is integral part of windmill. The Assessing officer is directed to delete the addition ₹ 40,53,812/-. Accordingly, the ground is allowed. Aggrieved by the order of Ld.CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A) and thus, this ground of the Revenue is dismissed. 15. 2nd ground is with respect to deleting the addition of ₹ 45,69,505/- on account of debit balances written off. 15.1. During the course of assessment proceedings, AO on perusing the details noticed that assessee had claimed ₹ 69,53,304/- on account of debit balances written off. AO was of the view that for claiming the deduction debit balances, the amount written off should have been taken into account while computing the income of the assessee. In the present case he was of the view that the written off balances was in the nature of advances, deposits etc., and therefore the same cannot be claimed as bad debts. He accordingly denied the claim of written off debit balances of ₹ 66,81,059/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who decided the issue by holding as under : 5.2 I have gone through the submissions of appellant. The appellant has given explanation only for few items out of various line items appearing in the details provided. 5.3 There was dispute with Karnataka Govt on applicability of Entry tax on inputs required for generation of electricity. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aka Government. He has noted that assessee had filed appeal before Karnataka Bench of the Tribunal and the dispute was decided in favour of the assessee and the entire tax was refunded and the assessee has offered the same as income. In such a situation, Ld.CIT(A) was of the view that the addition of ₹ 38,50,000/- was not warranted. With respect to ₹ 21,11,554/- he noted that since assessee could not furnish the details, he confirmed the addition to that extent. Before us, Revenue has not pointed out any fallacy in the findings of Ld.CIT(A). In view of these facts, we do not find any reason to interfere with the order of Ld.CIT(A) and thus, the ground No.2 of the Revenue is dismissed. 18. 3rd and 4th grounds are inter-connected and are with respect to deletion of liquidated damages of ₹ 15,60,235/-. 18.1. Before us, both the parties submitted that the issue in the present ground is inter-connected with ground No.2 of the assessee s appeal. 18.2. We have heard the rival submissions and perused the material on record. In view of the submissions of both the parties while deciding ground No.2 in assessee s appeal hereinabove, we have decided the issue in favour of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ferrous Industries Limited during the year. The loan has been repaid during this assessment year. Considering these facts and provisions of section 14A, the interest expenses are directly related to earnings of exempt income and needs to be disallowed. Similarly, the appellant stated that other direct indirect expenses related to investments (Mutual Funds) are the salary of employees in the finance department looking after purchase and sale of Mutual Funds. The appellant has estimated these salary expenses at ₹ 5,00,000/-. The appellant has estimated only the salary expenses in the finance department looking after the purchase and sale of mutual funds for the purpose of disallowance. The appellant has not considered the other indirect expenses which are also related to earning of exempt income. Thus, the working/estimate provided by the appellant is not complete. Therefore, additional amount of ₹ 5,00,000/- is considered as other indirect expenses related to the exempt income for the purpose of disallowance u/s 14A. 8.3 After going through the reply of the appellant as well as facts of the case, this issue has been decided by CIT(A) in AY 2004-05, 2005-06 wherein the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. 23.1. During the course of assessment proceedings, AO noticed that assessee had paid commission of ₹ 8,03,65,000/- as commission to executive and non-executive Directors. The assessee was asked to explain the reasonableness of the expenditure of commission in terms of Sec.40A(2) of the Act. Assessee inter-alia submitted that the remuneration has been paid as per the provisions of the Companies Act, 1956 and the actual payments are less than the eligible amounts prescribed under Companies Act. It was further submitted that the remuneration has been offered for tax by the respective Directors and there is no evasion of tax. It was therefore submitted that the commission to the directors was reasonable and fully allowable. The submission of the assessee was not found acceptable to the AO in view of the fact that in A.Y. 2006- 07 assessee had paid an amount of ₹ 6.79 crores as commission and during the year it had paid ₹ 8.37 crores. AO noticed that there was an increase in the commission to the tune of ₹ 1.24 crores and the assessee s explanation for justifying the increase of commission was general in nature. AO thereafter disallowed 10% of the increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the commission was excessive. We further find that Ld.CIT(A) while deciding the issue has noted that the facts for the year under consideration are identical to that of earlier years and in earlier years, the payment of commission was allowed. Before us, Revenue has not placed any material on record to controvert the findings of Ld.CIT(A). We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the ground of Revenue is dismissed. 26. Ground No.7 is with respect to addition on account of warranty expenses. 26.1 During the course of assessment proceedings AO noticed that assessee made a provision of ₹ 1.07 crores for warranties on sale of small, medium and large engines. He also noticed that the provision made was not completely utilized and it was utilized only to the extent of ₹ 91.86 lacs. AO therefore concluded that the provision for warranty to the extent of ₹ 15.16 lacs (₹ 1.07 crore being provision ₹ 91.86 lacs being amount utilized) was not allowable. He accordingly disallowed an amount of ₹ 15,16,618/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who decided the issue by holding as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,07,02,212/- is an allowable deduction. Before us, Revenue has not placed any material on record to controvert the findings of Ld.CIT(A). We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the ground of Revenue is dismissed. 29. Ground Nos.8(a) and 8(b) are inter-connected and are with respect to disallowance of claim of long term capital loss of ₹ 31,24,06,458/-. 29.1. During the course of assessment proceedings, AO noticed that assessee has claimed loss of ₹ 31,24,06,458/- on redemption of cumulative redeemable non convertible preference shares of Kirolskar Ferrous India Ltd., (KFIL). The assessee was asked to justify the claim. Assessee inter-alia submitted that KFIL was a loss making company and was in financial crisis and therefore could not pay the dues to the banks. A restructuring package was designed by which all the dues of KFIL was to be cleared by assessee. The preference shares were allotted to assessee towards financial assistance provided for augmentation of KFIL s long term resources, restructuring of existing liabilities and to fund the adverse liquidity situation. It was further submitted that the preference shares were acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23 of the assessment order) in various years Le. FY 1997-98 to FY 2003-04. The total investment of the appellant is summarised as follows: Sr.No. Particulars Face Value Rs. No. of Shares As on 31.03.2007 (in Rs.) No of Shares As on 31.03.2008 Rs. (in Rs.) 1 Equity Shares 5 27000000 270000 65992002 1634720 2 1% Cumulative Redeemable nonconvertible preference share capital 10 72220000 722200 3 12% Cumulative Redeemable nonconvertible preference share capital 10 32466253 274134 1266334 1634720 The above table clearly indicates that appellant was having huge stake. The appellant was also dependent on KFIL as a major source of raw material and its business would have affected if KFIL would have failed to supply the material. 13.5 I have also noted the fact stated by appellant and AO that KFIL was suffering from losses and had not declared dividend and not paid preference dividend. The appellant had mentioned due to huge losses KFIL entered into restructuring arrangements and KFIL issued preference shares in lieu of its debts to financial institutions (IDBI ICICI) and to KOEL The restructuring of loans was with lenders i.e., IDBI ICICI. The Kirloskar Oil Engines Ltd as a promoter of KFIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier assessment years in which the investment in preference shares was made, the AO had not questioned the transaction. 13.7 I have carefully gone through the Bombay High Court decision in CIT Vs. Enam Securities Pvt. Ltd., (2012) 345 ITR 64 (Bom). The Bombay High Court had held as follows : Transaction was not questioned by the revenue for ten years. Both the assessee and the Company of which the assessee held redeemable preference shares were juridical entities. Mere Fact that both were under common management would not necessarily indicate that the transaction was not genuine. Revenue did not bring any material on record whatsoever to substantiate the transaction was sham. The Judgment of the Supreme Court in Anarkali Sarabhai concludes the issue that redemption of preference shares by a company squarely comes within the ambit of Section 2(47) of the Income Tax Act, 1961, since it amounts to transfer. Section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issue by the Government. The four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression of section 48 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose due to extended indexation. He further submitted that assessee had also received arrears of preference dividends which have also been offered to tax by assessee. He therefore submitted that there was no evidence to prove the alleged tax planning for avoidance of taxes and therefore no interference to the order of Ld.CIT(A) is called for. 31. We have heard the rival submissions and perused the material on record. In the present ground, AO had disallowed the claim of long term capital loss for the reason that the transaction was a tax planning devise to evade taxes. Before us, Ld.A.R. has reiterated the submissions made before lower authorities and has submitted that the preference shares were allotted to assessee due to the restructuring exercise carried out as per the mandate of other public financial institutions. It is an undisputed fact that KFIL was promoted by assessee, is a listed company and had huge accumulated losses. The issuance of preference shares to the assessee on account of restructuring exercise undertaken to revive KFIL is an undisputed fact. It is also a fact that the assessee was issued preference shares in earlier years and in those years the transaction wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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