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TMI Blog2022 (3) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) is legally justified in deleting disallowance of Rs. 69,80,737/- on account of excess interest claimed by ignoring the findings of the Assessing Officer (the AO) in assessment order and also by not appreciating the fact that the reduction in admissible accrued interest was worked out by the assessee itself by filing revised debt -ratio furnished during assessment proceedings? 3. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting disallowance of Rs. 1,87,456/- on account of expenses incurred on Corporate Social Responsibility (CSR) by ignoring that the assessee had failed to discharge its initial onus under section 37(1) of the Act that the expenses were incurred wholly and exclusively for business purpose and also by ignoring the contents of Explanation-2 to Section 37 of the Act? 4. That the appellant craves leave to add, alter, amend or forego any ground(s) of the appeal raised above at the time of the hearing." (B) The first ground of appeal is related to disallowance of Rs. 2,50,92,258/- on account of expenses incurred on construction of road {owned by the State Government Authorities} claimed by the assessee as deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on the decisions of Hon'ble SC in the case of L.H. Sugar Factory and Oil Mills Pvt. Ltd 125 ITR 293 and Hon'ble Delhi HC in the case of Air Port Authority of India (2012-TIOL-09-HC-Del-IT-LB). In view of above factual and legal position, the expenses incurred on capital assets not owned by the company is of the revenue nature which are allowable under section 37 of the I.T. Act based on the principle of commercial expediency. Therefore, the addition made by the AO on this account is legally not sustainable. The appeal is allowed in this ground in the favour of the appellant." (B.1) The Revenue has filed appeal in Income Tax Appellate Tribunal against the order of the Ld. CIT(A) on this issue. (B.2) At the time of hearing before us, the Ld. Senior Departmental Representative for Revenue relied on the order of the Assessing Officer. The Ld. Counsel for the assessee relied on the aforesaid impugned appellate order dated 15.06.2017 of the Ld. CIT(A). He further drew our attention to the fact that the Ld. CIT(A), in his impugned appellate order dated 15.06.2017, had followed order in the case of M/s NTPC for Assessment Year 2009-10, relying on the decisions of Hon'ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities which are not owned by NTPC but are owned by State Government Authorities are incurred for smooth, efficient and successful operation of power plants of NTPC. The State/local authorities who are supposed to maintain the infrastructure/roads are not able to maintain such facilities in good working condition on which the development of the plant is dependant. These infrastructure facilities though not owned by NTPC, but are being used for operation of its normal business. All such expenditure has been incurred for the necessity and benefit of NTPC business for the purpose of running its business. In view of the above factual and legal position, the expenses incurred on capital assets not owned by the company is of the revenue nature which are allowable under section 37 of the I.T. Act based on the principle of commercial expediency. Therefore, the addition made by the AO on this account is legally not sustainable. The appeal is allowed in this ground in favour of the appellant." 16. We are of the considered view that there is no illegality or infirmity in the findings returned by the ld. CIT (A) which are based upon the decision rendered by Hon'ble Supreme Court in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id interest expenses due to change in debt equity ratio as the appellant had already claimed lower amount of interest expenses. 3.3.1 The Assessing Officer stated in the assessment order as under:- "It was observed from the finance cost debited to profit & loss account that an amount Rs. 430.31 crores had been transferred to expenditure during the construction period out of total finance cost of Rs. 519.11 crores. Accordingly, during the course of assessment proceedings, the ARs of the assessee were asked to explain the justification for interest amounting to Rs. 88,79,60,473/- transferred to profit & loss account and claimed as revenue expenditure as per note 24. In response to query raised, the ARs of the assessee furnished reply on 17.02.2016, which is summarized as under: "The project is constructed in two phases -Phase I consisting of unit- 1 of 500MW and unit-2 of 500 MW. Phase-2 consisting of unit-3 of 500MW. Loan for Phase-1 and Phase II are from Rural Electrification Corporation The first unit (i.e. Unit-1) was commercialised from 29.11.2012 as per CERC norms and has been in Commercial operation for 123 days. The unit has started earning revenue with e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer plant had been planned to be financed by way of 30% as equity contributions from the shareholder and the balance 70% by raising debt funds from M/s Rural Electrification Corporation Limited. The Ld. Assessing officer disallowed the excess claim of interest expense amounting to Rs. 69,80,737/- charged to revenue, due to change in debt equity ratio from 70:30 to 69.44:30.56 as duly explained in the assessment order. However, appellant company submitted a detailed reply on justification for interest transferred to Profit & Loss A/c vide letter dated 17.02.2016 and the same is reproduced hereunder: "The project is constructed in two phases -Phase I consisting of unit- 1 of 500MW and unit-2 of500 MW. Phase-2 consisting of unit-3 of 500MW. Loan for Phase-1 and Phase II are from Rural Electrification Corporation The first unit (i.e. Unit-1) was commercialised from 29.11.2012 as per CERC norms and has been in Commercial operation for 123 days The unit has started earning revenue with effect from 29.11.2012 and interest pertaining to this period has been charged to revenue. The total loan drawn up to 29.11.2012 is Rs. 4822,32,73,191 As per the Balance sheet as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest expense of Rs. 69,80,737/- to Profit & Loss A/c. Therefore, appellant prays to delete the said addition." 3.3.3 The facts of the case and the submissions of the AR have been carefully considered. It is observed that the capitalised value of unit-1 as on 28.11.2012 was Rs. 3,645.79 Crore and cash expenditure in respect of unit-1 was Rs. 3,382.78 Crore. CERC allows only cash expenditure in gross block for the purpose of tariff determination. The gross block considered for tariff is Rs. 3,382.78 Crore against Rs. 3,645.79 Crore on accrual basis. The appellant company has charged interest to revenue for 123 days (29.11.2012 to 31.03.2013) on the basis of following debt equity ratio of 70:30 on total cash expenditure of Rs. 3,382.78 Crore instead of Rs. 3,645.79 Crore on accrual basis. The appellant company charged interest to revenue on the total cash expenditure since the cash expenditure is considered by CERC for tariff fixation. Actually, the appellant company should have charged interest to revenue following debt equity ratio 0f69.44.30.56 on the total capitalised value (accrual basis) of Rs. 3,645.79 Crore since appellant is following mercantile system of accounting. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main requirement of the provision of section 37(1) is that expenditure should have been laid out wholly and exclusively for the purpose of business. The nexus between the expenditure ahd the business, in connection which expenditure has been incurred, has to be established before the assessee gets entitled to deduction u/s 37(1) of the Act. It is duty of the assessee to discharge its onus in respect of proving its claim of expenditure incurred, but the assessee has failed to discharge the said onus and to establish that these expenses have been incurred for business purpose. Further, the assessee admitted that these expenses have been incurred as per guidelines issued by the Bureau of Public Enterprises that company should spend certain percentage of their profits to discharge their Corporate Social Responsibility. The intention behind these guidelines issued by Bureau of Public Enterprises can be met by the Company by spending certain amount out of its surplus profit after tax and it need not claim these expenses in the books of accounts as expenditure before determining the taxable profit. On the other hand, if the intention is to claim tax deduction, the Income Tax Act also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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