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Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: Sh. A.D. JainDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The Revenue as well as the assessee have been filed these cross appeals against the separate orders of the Ld. CIT(A)- XVIII, New Delhi, dated 31.03.2014 and ld. CIT(A)-20, New Delhi, dated 31.03.2016 for AY 2006-07 respectively.
In the Revenue has raised following grounds of appeal:
“1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) is justified in deleting the penalty imposed by the Assessing Officer (AO) u/s 271(1)(c) of the Income Tax Act, 1961 (Act) in respect of the additions relating to provisional revision of sales amounting to Rs. 1112,20,00,000/-, disallowance of deduction u/s 80IA amounting to Rs. 422,42,82,000/- and expenditure of assets not owned by the assessee amounting to Rs. 8,89,00,000/- without considering the findings of the AO that the assessee has furnished inaccurate particulars of income?
2. Whether in facts and circumstances of the case and in law, the Ld. CIT(A) is justified in reducing the penalty by Rs. 519,54,82,260/- levied by the AO u/s 271(1)(c) of the Act without considering the provisions of Explanation 1 to Section 27 1(1)(c) of the Act?
3. Whether in facts and circumstances of the case and in law, the Ld. CIT(A) is justified in ignoring ratio dicidendi as laid by Hon’ble Delhi High Court in the case of CIT vs. Zoom Communication Pvt. Ltd. (327 ITR 510)?”
In the Revenue has raised following grounds of appeal:
“1. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in wing the additional depreciation of Rs.4,49,49,17,000/- by relying on the decision of the Hon'ble ITAT in the AY 2005-06 in assessee's own case ignoring the fact that the matter is sub-judice as the Department has preferred an appeal before the Hon'ble Supreme Court on the issue.
2. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in ignoring the fact that the additional depreciation on power generating equipments was available till 1987-88 and also the activity of power generation cannot be considered as manufacture of article and thing.
3. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition of Rs. 4,70,45,00,000/- on account of taxability of Income Tax Recoverable from the State Electricity Boards by relying on its decision in assessee own case in AY 2004-05 ignoring the fact the Department is in appeal in Hon'ble ITAT and the decision is pending.
3.1 On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the above addition by not appreciating the fact that when the assessee created its right to recover the amount from SEBs by debiting them, the income becomes taxable in the hands of the assessee on the mercantile basis immediately.
4. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition of Rs. 72,70,00,000/- on account of Pre Commissioning Sales by hot appreciating the fact that the sales are revenue receipt taxable under the head “Income from Other Sources" and not Capital in nature which can be reduced from the pre -commissioning expenditure.
5. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.1,38,12,00,000/- made on account of disallowance u/s 14A (if the Act, ignoring the fact that the calculation regarding disallowance has been made by the assessing officer as per the provision of the Income Tax Act and the relevant rules in this regard.”
In the assessee has raised following grounds of appeal:
1. On the facts and circumstances of the case, the order passed by the Ld. CIT(A) u/s 271(1)(c) of the Act is bad, both in the eyes of law and on facts.
2. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law in upholding the levy of penalty on account of the addition made by the AO of the amortization of premium paid on purchase of securities amounting to Rs. 41,30,00,000/-.
3. On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the levy of penalty by disregarding the submissions and explanations of the assessee.
4. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law in upholding the levy of penalty despite the issue involved being a debatable and controversial issue.
5. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in upholding the levy of penalty despite the fact that the addition made on account of disallowance of amortization of premium paid on purchase of securities is not sustainable on merits also.
6. On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the levy of penalty despite the fact that there is neither any concealment of income nor furnishing of any inaccurate particulars.
7. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in upholding the levy of penalty ignoring the fact that penalty proceedings are independent proceedings, and as such, mere disallowance or addition could not lead to the levy of penalty.”
In , the assessee has raised following grounds of appeal:
1. On the facts and circumstances of the case, the order passed by the learned Commissioner of income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of AO in making addition of an amount of Rs.1,112.20 Crores by increasing the sale to Rs.26,830.10 Crores as against Rs.25,717.90 Crores shown by the assessee.
(ii) That the addition has been confirmed ignoring the fact that the assessee has been following the same policy consistently and there is no change during the year.
(iii) That the abovesaid addition is unsustainable in view of the judgment of the jurisdictional High Court in assescee's own case where the order passed for assessment year 2005-06 on this issue has been quashed.
3(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming disallowance of an amount of Rs.422.43 Crores being deduction under Section 80-IA claimed by the assessee and allowable under the provisions of the Act.
(ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in not appreciating the contention of the appellant that for the purpose of Section 80IA(5) only the losses incurred by the eligible units after the initial assessment year are to be carried forward and adjusted against profit of subsequent assessment years and not the losses incurred in the year prior to initial assessment year.
4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in giving a contradictory finding by dismissing ground no. 5(iii) despite holding and giving a finding in respect of ground no. 5(i) that appellant company is eligible to claim deduction of Rs.1221.69 Crores in respect of steam units of CCGPS.
5(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming disallowance of an amount of Rs.8.89 Crores made by the AO on account of expenses incurred on assets not owned by the assessee.
(ii) That the observation of the AO that the appellant has not furnished any details is factually incorrect and against the facts on record.
(iii) That the disallowance has been confirmed despite the expenses being incurred wholly and exclusively for the purpose of business.
6(i) On the facts and circumstances of the case, the learned C1T(A) has erred both on facts and in law in confirming addition of Rs.41.30 Crores made by the AO on account of premium paid on purchase of securities.
(ii) The addition has been confirmed despite the assessee following the mercantile system of accounting and following the accounting standards prescribed' Institute of Chartered Accounts of India.”
(Departmental Appeal)
Disallowance of additional depreciation:
The revenue has challenged the action of the Ld. CIT(A) in allowing additional depreciation of Rs. 449.49 cr. on the following two contentions:
(i) that the activity of power generation cannot be considered as manufacturing of an article or thing, so as to be entitled for additional depreciation.
(ii) that the Ld. CIT(A) erred in placing reliance on the decision of coordinate bench of this Hon’ble Tribunal in appellant’s own case for AY 2005-06, ignoring the fact that the matter is sub- judice as the department has preferred an appeal before the Hon’ble Supreme Court on this issue.
Hon’ble Supreme Court in the ease of CST Vs. M.P. Electricity Board, [1970] 25 STC 188 (SC) and in the case of State of AP & Ors. Vs. National Thermal Power Corpn. Ltd. and Ors., 2002 AIR 1895 has held that electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption and use like any other movable property and thus qualifies to be ‘goods’. In view of the said decisions of the apex court, the coordinate bench of ITAT Delhi In appellant’s own case for the immediately preceding year i.e., AY 2005-06 in dated 30.04.2012 has also allowed the appellant’s claim of additional depreciation with the following observations:
“22. The expression “article, thing or goods” are not defined in the Income- tax Act, 1961. Learned Commissioner while treating the electricity as not an article or thing has not made reference to any provisions of the Income-tax Act, 1961, he simply construed the meaning of electricity as not article or thing on the basis of his own inference drawn from the nature of this item but if we evaluate the conclusion drawn by the Learned Commissioner in the light of the decision of the Hon'ble Supreme Court given in the case of Indian Cine Agency. CST \/s. M.P. Electricity Board and State of Madhya Pradesh Vs. NTPC then it would suggest that electric energy has all trapping of an article or goods. The process of its generation is also akin to manufacture or production of an article or thing. It is being generated in huge plants though scientifically one may say it is transformation of one source of energy into the other. But all these aspects have been considered in these three judgments of the Hon'ble Supreme Court wherein Hon’bie Court has explained what is manufacture or production and what is electricity. Learned DR at the time of hearing, had made reference to the order of the IT AT, Chennai and the judgment of the Hon'ble Supreme Court in the case of NC Budhiraja. As far as the judgment of the Hon'ble Supreme Court in the case of N.C. Budhiraja is concerned that has been considered by the Hon'ble Supreme Court itself in the case of Indian Cine Agency (supra). The ITAT in the case of Tamilnadu Chlorates has considered the admissibility of deduction under section 80-HH and in that test held that electricity is not an article. The ITAT has not dealt with these two judgments extensively rather simply observed that decision in the case of Madhya Pradesh Electricity Board was given in the context of the language of a particular statute. The only discussion made by the ITAT with regard to these two judgments of the Hon’ble Supreme Court reads as under:
6. Reference was made to the decisions of Apex Court rendered in the case of M.P. Electricity Board 35 STC 188 (sic). In this case it was held that electricity is goods within the meaning of section 2(3) of Central Province and Virar Sales-tax Act. This decision was rendered in the context of the language of a particular statute. /As such this meaning cannot be extended to the facts of the present case
23. Thus, taking into consideration all these aspects, we are of the view that admissibilitv of additional depreciation cannot be denied to the assessee merely on the ground that electricity is not an article or thing. The order of the Learned CIT(Appeals) is reversed to this extent and the disallowance is deleted.
In the result, the appeal of the assessee is partly allowed. Decision pronounced in the open court on 30.04.2012”.
Further, Hon’ble Delhi High Court has decided the matter in favour of the assessee. in the case of Pr. CIT Vs. NTPC Sail Power Co. Pvt. Ltd. in ITA No. 1290/2018. Relevant observations of the Hon’ble Court in this regard are reproduced below for ready reference:
9. The Tribunal's judgment in NTPC vs. DCIT [relied upon in the orders of the CIT(A) as well as the Tribunal in the present case] followed this judgment of the Supreme Court to hold that electricity has all the necessary trappings of “articles or “things” and the benefit of additional depreciation cannot be denied.
10. As held by the Constitution Bench, electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption and use like any other movable property. Following the same logic, to deny the benefit of additional depreciation to a generating entity on the basis that electricity is not an “article” or “thing” is in our view an artificially restrictive meaning of the provision. The benefit of additional depreciation under Section 32(1)(iia) has, therefore, been rightly granted to the assessee by the concurrent judgments of the CIT(A) and the Tribunal.
11. We also note that, w.e.f. from 01.04.2013, the provision has been amended by the Finance Act, 2012 and assessees engaged in the generation of power have expressly been included in the ambit thereof.
For the above reasons, the Court is of the opinion that no substantial question of law arises. The appeal is dismissed.’’
And also, the following Courts have also decided the matter in favour of the assessee:
Pr. CIT versus M/S Kadodara Power Pvt. Ltd., R/Tax Appeal No. 383 of 2019 [Gujarat High Court] Tenzing Match Works vs. Dy. CIT, Tax Case (Appeal) Nos. 655, 656 and 657 of 2009 [Madras High Court]
Since, the issue under consideration has already been extensively analyzed by coordinate bench of this Hon’ble Tribunal in appellant’s own case for A.Y. 2005-06, the Hon’ble Jurisdictional High Court and other High Court and by the Hon’ble Apex Court, decided in favour of the assessee, we hereby decline to interfere with the order of the Ld. CIT(A).
Recoverable from the State Electricity Boards:
This ground of appeal pertains to taxability of Income Tax Recoverable from State Electricity Boards (SEBs) i.e., at the amount ascertained at the time of filing of return of income (being Rs. 115.85 cr.) or at the amount recorded in the books of accounts (being Rs. 586.3 cr.)
12. With regard to the above, it was submitted that as per para 7 of the CERC guideline, Regulation No. L-7/25(5)/2003- CERC dated 26.03.2004, the incidence of income tax on income from generation of electricity (generation income), is on the customers i.e., here SEBs. In other words, out of the total income of the appellant, the tax on ‘generation income’ is recoverable from SEBs while it is payable by the appellant itself on ‘other income’.
13. The correct amount of tax payable by the appellant on its generation income (as is recoverable from SEBs) is ascertainable only at the time of filing of return when due adjustments to taxable income are made.
Thus, as at the time of finalization of accounts, the amount of tax recoverable from SEBs is recorded on provisional basis, and is reduced from the provision for taxes made in the books of accounts. Thereafter, at the time of filing of return of income, the correct tax liability on generation income is computed and paid on grossing up basis.
In light of the above, for the year under consideration, created a provision of Rs. 586.3 cr. (being 566.6 cr. towards income tax liability and Rs. 17.9 cr. towards Fringe Benefit Tax) as recoverable from SEBs, on estimation basis, in its books of accounts. Since the said amount was recorded in the books only on estimation basis, and the correct amount of tax liability as was recoverable from SEBs was ascertainable only at the time of filing of the return of income, the said amount of Rs. 586.3 cr. was reduced from the Provision for taxes. The same is evident from copy of Profit & Loss account of the appellant for the year under consideration.
Thereafter, at the time of filing of return of income, the correct amount of tax recoverable from SEB was computed and paid on grossing up basis at Rs. 115.85 cr. (being 104.72 cr. towards income tax liability and Rs. 11.13 cr. towards Fringe Benefit Tax).
With regard to the above, it was submitted that the grossing up basis of computing the actual tax liability on Generation income has been followed by the appellant on year to year basis and the same has also been affirmed by the Ld. CIT(A) for AY 2004-05.
The said issue also stands decided in favour of the assessee by the Ld. CIT(A) for A.Y. 1999-2000, A.Y. 2001-02 & A.Y. 2002-03, wherein the department had reopened the cases. Even the Hon’ble Delhi High Court has quashed the reassessment proceedings initiated by the department for A.Y. 1999-2000 to 2003-2004, vide its order dated 10.01.2013.
In view of the above, even the Ld. CIT(A) has decided the issue in favor of the appellant, by noting the following observations:
“{11} Ground of appeal No. 6 has been taken against in making addition of Rs. 470.45 crores on account of income tax recoverable from the State Electricity Boards. In this regard, learned Authorized Representative of the appellant has submitted as under:-
This issue has already been decided by ld. CIT(A) in his order for A.Y. 2004-05 in favour of NTPC. In addition, ld. CIT(A) has also decided this issue in favour of NTPC for AYs 1999-2000, 2001-02 & 2002-03 wherein the Deptt. had reopened the cases.
Further, the Hon'ble Delhi High Court has also quashed the reassessment proceedings initiated by the IT department for AYs 1999-00 to 2003-04 vide its orders dated 10.01.2013 and 07.03.2013 on the same issue.
11.1 As the issue has already been settled by various appellate orders and re-assessment proceedings initiated by Department has already been quashed by Hon'ble Delhi High Court, Ground of appeal No. 6 is allowed.”
20. In light of the above, the impugned addition made by the AO, with the view that, without incorporating the amount of tax liability in its Profit & Loss account, reduction of the taxable profit has been rightly allowed by the ld. CIT(A).
Addition on account of Pre-Commissioning Sales:
21. The revenue challenged the action of the Ld. CIT(A) in allowing capitalization of pre-commissioning expenses, after being netted off with pre-commissioning sales and deleting the addition made by the AO on account of pre-commissioning sales.
22. The issue under consideration has already been discussed at length and thereupon decided in favor by the Ld. CIT(A) for AY 03-04 to 05-06.
23. Relevant observations of the Ld. CIT(A) for AY 03-04 are as under:
”I have examined in detail the reason given by the AO for including the pre- commissioning sales without netting the pre- commissioning expenditure. He has relied on the judgment of Hon’ble Rajasthan High Court in the case of Sarraf Textiles Industries vs. CIT (1998) 217 ITR 207.
This case is fully distinguishable from the facts in the case of the appellant. The business activity, as admitted by the A 0 has already commenced in this instant whereas in case of Sarraf Textiles Industries Ltd. the business activity was not carried out by the assesses and, therefore, the interest received was assessable as income from other sources.
Even if, the pre-commissioning sales were to be treated as income from other sources, the direct expenditure incurred on fuel and consumable has to be netted before charging the amount under The Income Tax Act, 1961.
The alternate claim made by the appellant with regard to allowance of deduction of netting of pre-commissioning expenses after adjustment of corresponding sales cannot be allowed since section 43(1) read with Explanation 10 already provides for reduction of the “actual cost” of the asset by the amount received directly or Indirectly (by whatever name called) relatable to the asset. In the case of the appellant, the SEB’s had met the part cost of the assets in the form of pre- commissioning sales.
In the circumstances, I am in agreement with the appellant’s submission that in case of sale of electricity prior to commercial operation any revenue from such sales (other than fuel cost) shall be taken for reduction in capital expenditure.
This ground of appeal is therefore allowed in favour of assessee.”
24. Further, the decision of the Ld. CIT(A) for A.Y. 2005-06 has also been decided in favour of the appellant by the coordinate bench of the Tribunal, vide para 17-20 of its decision dated 25.04.2019 in ITA No.4754/Del./2015 and ITA No. 4183/Del./2015.
25. In order to maintain the judicial discipline, the Ld. CIT(A) for the impugned assessment year has also decided the issue in favor of the appellant with the following observations:
“{12} Ground of Appeal No. 7 has been taken against addition of Rs. 72.70 crores on account of pre-commission sales. In this regard, learned Authorized Representative of the appellant has submitted as under:-
This issue has already been decided by CIT(A) in orders for A.Y. 2003-04 and 2004-05 in favour of NTPC, Further, A.O. has also subsequently accepted NTPC’s view that no addition on this account is being made in the assessments since AY 2007-08.
12.1 As issue has already been settled at Assessing Officer level. This ground is decided in favour of appellant.”
Since, it has been consistently ruled in favour of the assessee by the Co-ordinate bench of Tribunal and Ld. CIT(A) since A.Y. 2003-04, and also accepted by the AO for all the subsequent years, we hereby decline to interfere with the order of the ld. CIT(A) on this issue.
Addition u/s 14A:
The revenue challenged the action of the Ld. CIT(A) in deleting the disallowance of Rs. 138.12 cr. u/s 14A of the Act. The impugned issue has been decided in favour of the appellant by the Ld. CIT(A) by relying upon the decision of his predecessor Ld. CIT(A) for A.Y. 2004-05. The said decision of the Ld. CIT(A) for A.Y. 2004-05 has also been upheld by the Co- ordinate Bench of ITAT vide its decision dated 04.05.2018 in ITA No. 15/Del/2009. Relevant observations made vide the said order are reproduced below for ready reference:
“14. After considering the submissions of both the parties and the material available on the record, it is noticed that an identical issue having similar facts has been adjudicated in the aforesaid referred to case of DCIT Vs Power Grid Corporation of India Ltd. wherein the relevant findings have been given in paras 10 to 11.5 which read as under:
“10. We have heard both the parties and gone through the facts of the case as also the aforecited decisions relied on by the Id. AR on behalf of the assessee. Indisputably, the assessee did not incur any expenditure by way 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 8D of the I.T. Rules, 1962. There is no material before us, suggesting that the assessee incurred any expenditure by wav 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 8D inserted w.e.f. 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income and is applicable only w.e.f. AY 2008-09 concluded that for the assessment years where Rule 8D does not apply, the AO will have to determine the Quantum of disallow able expenditure by a reasonable method having regard to all the facts and circumstances. Thus, the disallowance made by the AO invoking Rule 8D of the IT Rules, 1962 in the AY 2007-08, is not justified.
11.1. Moreover, Hon’ble Supreme Court in their decision dated 6.7.2010 in CIT vs. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon’ble Apex Court observed in the context of provisions sec.14A of the Act in the following terms:
17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22- 11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is 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 he 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 enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37)……………..”
11.2 Hon’ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd., 323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
11.3 Hon’ble Kerala High Court in their decision in Catholic Syrian Bank Ltd. (supra) held that there being no precise formula for proportionate disallowance, no disallowance is called for out of administrative expenses until Rule 8D came in to force.
11.4 Hon’ble jurisdictional High Court in their decision in Printers House (P) Ltd. (supra) upheld the findings of the ITAT, holding that expenditure cannot be disallowed on the basis of a mere estimate as to what possibly could have been incurred to earn income exempted from tax.
11.5 In the light of view taken in the aforesaid decisions, especially when the Revenue has not placed before us any material in order to controvert the aforesaid findings of the Id. CIT(A) so as to enable us to take a different view in the matter nor even referred to us any material that impugned expenditure was incurred to earn tax free interest income, we are not inclined to interfere with the findings of the Id. CIT(A). In view thereof, around no. 2 in the appeal for assessment year 2003- 04, ground nos. i to iii in the appeal for the AY 2002-03, ground no.2 in the appeal for assessment year 2004- 05 and ground no.1 in the appeal for the AY 2007- 08, are dismissed.”
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. In the result, the appeal of the department is dismissed.
Moreover, relying on the above said decision, the issue was against decided in favour of the assessee by the Co- ordinate Bench of ITAT in assessee’s own case for A.Y. 2005-06 vide order dated 25.04.2019 in and ITA No. 4183/Del/2015.
Owing to the fact that the Tribunal’s decisions in both the said years and placing reliance on the decision in the case of DCIT, Circle-14(1), New Delhi Vs. Power Grid Corporation of India Ltd. (supra), we hereby allow the claim of the assessee.
Addition on account of downward revision of Sales:
The issue under consideration pertains to downward revision of sales amounting to Rs. 1112.20 cr.
The Central Electricity Regulatory Commission (CERC) has notified by regulation in March 2004, the terms and conditions for determination of tariff applicable w.e.f. 01.04.2004 for a period of five years. Pending final determination of the tariff for the period 01.04.2004 onwards, CERC has directed, by notification that on provisional basis, the annual fixed charges as applicable on 31st March 2004 shall be billed at target availability and variable charges based on norms of operation notified in Regulation 2004. The amount billed for the year on this basis was Rs. 26,830.1 cr.
Since, the amount billed is subject to adjustment w.e.f. 01.04.2004, pending final determination of the tariff by CERC, sales amounting to Rs. 25,717.9 cr. for the year have been provisionally recognized on the basis of principles enunciated by the CERC in Regulations, 2004.
Such downward revision of sales of Rs. 1,112.20 cr. reflecting the difference between provisional billing of sales at Rs. 26,830.10 cr. and its downward accounting at Rs. 25,717.90 cr. was disallowed and added back as sale of the year to the total income of the appellant.
It is to be mentioned that the impugned issue arose for the first time in A.Y. 2005-06, wherein though no addition in this respect was made by the AO, however the case on this issue was reopened by the Ld. CIT(A) u/s 263 of the Act.
It is pertinent to mention that initiation of the said re- assessment proceedings were further upheld by Co-ordinate Bench of the Tribunal vide its order dated 30.04.2012.
Against the decision of Co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 05-06 (supra), the appellant preferred an appeal before the Hon’ble Delhi High Court.
As on 31.03.2014, when the Ld. CIT(A) passed his order for the impugned assessment year i.e., AY 2006-07, the matter (with respect to the proceedings initiated under section 263 of the Act) for the immediately preceding assessment year i.e., AY 2005-06, remained decided against the appellant by the coordinate bench of this Hon’ble Tribunal vide its order dated 30.04.2012 (supra), and the pending for adjudication by the Hon’ble Delhi High Court.
Owing to such facts, the Ld. CIT(A) for the impugned assessment year, upheld the addition made by the AO, thereby making the following observations:
“7.3 In this regard, it is found that similar issue was pending before ITAT Delhi, wherein vide para 16 of the order dated 30.04.2012 has decided the issue against the appellant …….
7.4 Against the above order, appellant has filed an appeal before Hon’ble Delhi High Court which is still pending. So, as on date, this issue has been found to be decided against the appellant by the order of ITAT and matter is sub-judis before Hon’ble Delhi High Court. So, respectfully following the order of Hon’ble ITAT, ground of appeal no. 3 is dismissed.”
40. From the above, it is clearly evident that the issue under consideration was decided by the Ld. CIT(A) against the appellant, because as on the date of passing of the order, the matter was sub-judis before the Hon’bie Delhi High Court.
The said issue has now been decided by the Hon’ble Court in favour of the assessee in assessee’s own case for A.Y. 2005- 06 vide order dated 16.04.2014 in ITA No. 507/2013. Relevant observations made by the Hon’ble Court in this regard are reproduced below:
“19. The narrative and discussion of facts in the previous part of this judgment has showed that there was some tentativeness in the CERC Reputations about the tariff rates and conditions that were to be applied for the period 01-04-2004 onwards. The previous Tariff Reputations - framed in 2001 - were to end on 31.03.2004, yet by the latter date, even though the conditions for tariff applicability had been more or less finalized, the final tariff order, notifying the rates and some final principles. had not been brought into force. In these circumstances, the CERC directed that the existing conditions were to be applied till 30.9.2004. The notification of 01.04.2004 thereafter directed corporations like NTPC in the following terms:
"... It is hereby directed that the billing of charges in terms of the Commission’s notification No.L-7/25(7)/2004-Legal dated 30.4.2004, read with the notification of even number dated 11.6.2004, shall be continued on provisional basis for a period up to 31.3.2005 or till disposal of the applications made by the utilities for approval of tariff, whichever is earlier and shall be subject to adjustment after final determination of tariff by the Commission based on such applications.’’
NTPC thus had no choice in the matter but to carry on billing in terms of the previous notification on a provisional basis up to 31.03.2005 or till the approval of tariffs; such billing figures were to be subject to adjustment after final tariff determination. Thus, inherently there was a degree of uncertainty and incompleteness in the process. This was reflected in the return when the adjustment of the billing became necessary on account of the application of the CERC notification. NTPC’s argument that the tariff for power plants from 2004-09 was lower than the tariff norms for 2000-04 has not been disputed by the Revenue. Even a bare look at the later Tariff Regulations shows that the rate of return was revised downwards. NTPC submits that it accounted sales for electricity for Rs. 2212.8 crores based upon the previous experience in tariff fixation orders of CERC. This was even though the billed amount was Rs.2306.6 crores. This estimate was bona fide and made on a realistic assessment of sales estimation that could be realized in terms of accepted tariff notifications. There was nothing erroneous or prejudicial to Revenue’s interest in such estimate.
21. This Court finds that power generation companies owned or controlled by the Central Government are a sub-species of business entities for which a separate provision has been enacted by the Act. There is no dispute that the income of utilities, especially ones subject to stringent public control, are tightly regulated in terms of what are the accounting methods to be adopted, how depreciation is to be claimed, allowances rate of return on capital, etc. All these aspects are subject to CERC Regulations. At the relevant time, i.e. the transition between the old (2001) CERC Regulations, and the later ones (2004-2009). had not been fully worked out by the CERC as to what had to be recovered by NTPC and other entities. It therefore directed that the previous regime be followed. Apparently for a portion of previous accounting periods, provisional figures were being indicated as income estimates, and depending on how the final figures were worked out at times, higher figures would be offered as amounts received in excess of the sum estimated and reported during other periods. An example cited is one for 2006-07 when an excess figure of over Rs. 46 crore was reported and brought to tax. Furthermore, the revision downward - in the present instance - was based on past experience, whenever revision of tariff had taken place. If downward revision were not undertaken, there would have been a likelihood of the higher figure not being realized after tariff finalization.
There is authority, in the form of Supreme Court judgments in Shree Sajjan Mills Ltd v. CIT, (1985) 156 ITR 585, Bharat Earth Movers Ltd v. CIT, (2000) 245 ITR 428 and Metal Box Company of India Ltd v. Their Workmen, (1969) 73 ITR 53, that a provision made on a reasonable basis, it would be in the nature of an ascertained liability and that in a mercantile system of accounting, provision for liability ascertained during the course of the relevant accounting period, which is payable at a future is permissible.
The expression “error of law” resulting in prejudice to the interests of the revenue are not to be given wide connotation, as is sought to be urged by the Revenue here. Where two views are possible, the Commissioner should not exercise his power under Section 263; Leisure Wear (supra) aptly summarizes this power as not enabling a revisional interdict on the mere existence of another view which conflicts with what was adopted by the Income Tax Officer; so long as the tatter’s opinion is a plausible one, exercise of power would be unwarranted. The fulfillment of both preconditions, i.e. error of law, and prejudice to revenue is essential, else the revenue would have wide ranging powers to oversee and re-open almost every assessment order. In the present case, the court is satisfied that the AO’s order was made after appropriate inquiry; the absence of discussion regarding downward revision of sales figures in this case did not make it any less vulnerable to correction under Section 263. The view taken by him is one which is endorsed by law, as the CERC Regulations left the NTPC with little choice to make such revision awaiting a final determination in regard to the whole period after the expiry of the assessment in that instance.
This Court is of the opinion that the question of law framed in this appeal has to be answered in favour of the assessee. The Commissioner acted erroneously in exercising revisional power under Section 263. The orders of the Commissioner and the ITAT are hereby set aside. The order of the AO dated 27.11.2006 is restored. However, the merits of that order, on aspects other than what has been discussed here and pending in appeal, are not being touched upon. The appeal is allowed in the above terms.”
Importantly, the matter concerning the proceedings initiated under section 263 of the Act for A.Y. 2005-06, inter- alia, concerning the impugned issue, even reached the Apex Court, wherein the Hon’ble Supreme Court found no infirmity with the decision of the Hon’ble Delhi High Court dated 16.04.2014 (supra) vide its decision dated 07.03.2017 [Civil Appeal No. 5108 of 20151].
Relying on the above said decision of the Hon’ble Delhi High Court in appellant’s own case for A.Y. 2005-06, even the Ld. CIT(A) on similar issue for A.Y. 2007-08 and A.Y. 2008-09 has deleted the addition made by the AO on account of downward revision of sales. Notably, even the department has accepted this position as no addition in this respect has ever been made in any year post A.Y. 2008-09.
In light of the settled legal position in favor of the assessee, the impugned addition is hereby deleted.
Deduction u/s 80IA –set off of losses:
This ground of appeal pertains to disallowance to the extent of Rs. 422.43 cr., of deduction claimed by the assessee u/s 80IA of the Act, on account of notional set off of brought forward loss of years prior to the 6th year of commencement of the appellant’s business considered by appellant as the initial assessment year for the purpose of such deduction.
For the year under consideration, the assessee claimed deduction u/s 80IA of Rs. 2,567.44 cr., as evident from computation of income. The AO reduced such claim by Rs. 422.43 cr., being notional brought forward losses pertaining to years prior to the initial assessment year (here, the sixth year).
The assessee preferred an appeal before the Ld. CIT(A) placing reliance on various decisions of courts to contend that the provisions of Section 80IA(5) treating the undertaking as a separate sole source of income could not be applied to a year prior to the year in which the appellant opted to claim relief under section 80IA for the first time.
The Ground of appeal raised before the Ld. CIT(A) is reproduced below:
5 (ii) On the facts and circumstances of the case, the Id. AO has erred, both on facts and in law, in disallowing an amount of Rs. 422.42 cr. out of deduction under section 80IA claimed by the assessee on account of units which have no profit left after adjusting brought forward losses.
The Ld. CIT(A) dismissed the appeal of the assessee.
It was argued that the issue under consideration is no longer res-integra and has already been decided by the Hon’ble Madras High Court in the case of Velayudhswamy Spinning Mills, 340 ITR 477, dated 11.03.2010, wherein it was held that the initial assessment year cannot be the year in which the undertaking commenced its operations but has to be the year in which assessee has chosen to claim deduction under section 80- IA for the first time. It was accordingly held that the provisions of section 80-IA(5) treating undertaking as a separate sole source of income cannot be applied to a year prior to the year in which the assessee opted to claim relief under section 80-IA for the first time. The Court concluded that depreciation and carry forward loss relief to the unit which claims deduction under section 80-IA, cannot be notionally carried forward and set off against the income from the year in which the assessee started claiming deduction under section 80-IA. Relevant observations of the Hon’ble Court in this regard are as under:
“18. From a reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplate to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created.’’
The SLP against the above said decision has been dismissed by the Hon’ble Supreme Court in ACIT vs. Velayudhaswamy Spinning Mills Pvt. Ltd. reported in 244 Taxman 58 (SC).
Further, the CBDT vide Circular No.1/2016 dated 15.02.2016 has clarified that the initial assessment year for the purpose of Section 80IA(5) is not the year of commencement of production, but it is the first year of claim of deduction at the assessee's choice out of block period of 10 years.
In fact, taking note of the above said decision of Madras High Court in the case of Velayudhswamy Spinning Mills (supra) and the CBDT Circular No. 1/2016 (supra), a plethora of courts have held that loss in years earlier to the initial assessment year which were already absorbed against the profit of other business cannot be notionally brought forward and set off against profit of eligible business in the Initial AY, as no such mandate is provided in section 80IA(5).
CST vs. M/s G. R. T. Jewellers (India) in TCA No. 176 of 2016 (Madras) South India Corporation Ltd. vs. ACIT in & 75 of 2008 dated 07.01.2019 (Kerala) Tata Power Co. Ltd. vs. ACIT in ITA No.3452/Mum/2012, dated 29.11.2019 (ITAT Mumbai)
Bajaj Electricals Ltd. vs. ACIT in dated 14.10.2019 (ITAT Mumbai) DCIT vs. Birla Corporation Ltd. in ITA No. 971/Kol./2012, dated 25.08.2017 (ITAT Kolkata) M/s. Zaveri & Co. P. Ltd. vs. DCIT in ITA No.1080 & 1081/Ahd./2018, dated 19.03.2020 (ITAT Ahmadabad)
In light of the above, we find that the issue under consideration already stands settled in favor of the appellant by various judicial precedents upto the level of the apex court. Hence the appeal of the assessee on this ground is allowed.
Section 80IA deduction-Steam Turbine Units:
This Ground of appeal pertains to disallowance of deduction claimed under section 80IA in respect of steam units of Combined Cycle Gas Power Plants (CCGPS), with a view that steam turbine units do not constitute independent separate industrial units and the profits derived therefrom do not qualify for deduction under section 80IA.
56. The issue under consideration is already decided in favor of the appellant by the coordinate bench of the Tribunal and the Hon’ble Delhi High Court in appellant’s own case for preceding years. The revenue has accepted the legal position for the A.Y. 2007-08, A.Y. 2008-09, A.Y. 2010-11, A.Y. 2011-12 and A.Y. 2012-13. Keeping in view the accepted factual position by the revenue, the addition made in the instant year is liable to be deleted.
Disallowance in respect of Road, Rail connectivity:
This ground of appeal pertains to disallowance of Rs. 8.89 cr. in respect of expenses incurred on assets not owned by the appellant.
58. Before us, it was argued that during the year under consideration, the assessee had incurred an amount of Rs. 20.74 cr. as expenditure on repairs and maintenance of roads, water supply, rail connectivity and other infrastructure facilities which were not owned by the appellant and claimed the same as its revenue expenditure under section 37(1) of the Act.
During the course of assessment proceedings, the expenses were supported owing to commercial expediency behind incurrence of such expenditure worth Rs. 20.74 cr. by explaining that the power plants of the appellant are mainly situated in remote areas, which are located at a far away distance from the cities/towns and highways. At times, for smooth, efficient and successful operation of power plants, expenditure on such infrastructure facilities which are not owned by the appellant but are owned by State Government Authorities are required to be incurred. The AO accepted the expenditure of Rs. 11.84 cr. incurred by the assessee out of Rs.20.47 Cr. and owing to non-furnishing of details for the impugned expenditure to the extent of Rs. 8.89 cr. The same has been disallowed. The Id. CIT(A) sustained the impugned addition holding that the Assessing Officer has very specifically observed that appellant has not furnished any details so as to establish its claim that expenditure was incurred as per business expediency of the appellant. Since, the purpose of expenditure and the allowability thereof has not been disputed by the revenue, we find that the addition has been made owing to non-furnishing of the details only. Hence, in the interest of justice, we direct the AO to examine the details with regard to the expenditure of Rs.8.89 Cr. The assessee shall submit all the required details to the AO to substantive the claim. Appeal of the assessee on this ground is allowed for statistical purpose.
Amortization of premium paid on purchase of securities:
The assessee has purchased GOI securities from the market having face value of Rs. 455 cr. at Rs. 508.4 cr. i.e., at a premium of Rs. 53.4 cr. It was submitted that these securities were purchased at a premium, as interest rate on these securities was higher than the prevailing market rate. On redemption of such securities, only the face value was to be received.
It was argued that such premium was amortized over the maturity period of the securities, being in line with Accounting Standard 13 and opinion of Expert Advisory Committee of the ICAI issued on this subject. Accordingly, Rs. 41.3 cr. was amortized during the year under consideration.
During the year under consideration, the interest income earned on such securities of Rs. 61.8 cr. However, the appellant offered Rs. 20.5 cr. to tax, being interest earned Rs. 61.8 cr., as reduced by the impugned amount of amortization of premium of Rs. 41.3 cr., as evident from Schedule 20 of the audited Financial Statements.
The AO disallowed by taking a view, that payment of premium made at the time of purchase of securities is a part of cost of acquisition of securities, and the same cannot be set off against interest accrued on securities. Reliance was placed by the AO on the decision of the Hon’ble Supreme Court In the case of Vijaya Bank Ltd. vs. CIT, 187 ITR 451.
Further, appreciating the reliance placed by the AO on the decision of the apex court in the case of Vijaya Bank (supra), the impugned disallowance was also confirmed by the Ld. CIT(A).
Thus, the impugned disallowance has been made by the Ld. AO, and has further been upheld by the Ld. CIT(A) based on the decision of the apex court in the case of Vijaya Bank (supra).
Vide the said decision, the apex court held that the broken period interest, as is accrued till the time of purchase of securities and is paid for purchase of securities, is in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on those securities. The said decision however, does not deal with the scenario of premium paid over the cost price on purchase of securities, as under consideration. The above said contention that the decision of the apex court in the case of Viiava Bank (supra) is not applicable on the facts under consideration involving premium paid on purchase of securities, is also evident from CBDT Circular No. 17 of 2008 dated 26.11.2008 (though issued for assessment of banks), which clearly segregates the two issues as under:
(i) In case of securities purchased at a price inclusive of any accrued interest - no allowance of such interest, as per the decision of the apex court in the case of Vijaya Bank (supra).
(ii) In case securities purchased (as ‘Held to maturity’ and not ‘Held for sale’) at a premium - the premium is to be amortized over the maturity period of securities.
Relevant extract of the above said Circular is reproduced below for ready reference:
“(vi) In cases where an assessee bank purchases securities under capital account at a price inclusive of any accrued interest, the entire purchase consideration is in the nature of capital outlay. Therefore, any interest element included in the purchase consideration is not allowable a expenditure against income accruing on those securities. (Vijaya Bank v/s CIT 187 UR 541 Supreme Court).
(vii) As per RBI guidelines dated 16th October 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation /appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims.”
The above Circular provides for amortization of premium paid on purchase of securities, as the same is in line with the RBI guidelines, governing the assesses being banks. Having regard to the above said Circular and distinguishing the decision of the apex court in the case of Vijava Bank (supra), several coordinate benches of the Hon’ble Tribunal have allowed deduction claimed on account of amortization of premium on purchase of securities, as in the facts of the appellant under consideration. Reliance in this regard is placed on the following decisions:
ACIT vs. Krishna Grameena Bank in (ITAT Bangalore) ACIT vs. Tumkur Veerashiva Cooperative Bank Ltd. in ITA No. 1174/Bang/2014 (ITAT Bangalore)
Reliance in this regard is also placed on the following decisions, wherein also, amortization of premium on purchase of securities has been allowed:
Catholic Syrian Bank Ltd. vs. ACIT 38 SOT 553 (ITAT Cochin) Pr. CIT vs. Kalupur Commercial Co-op. Bank Ltd., R/Tax Appeal No. 782 of 2019 (Guj.)
In light of the above, the decision relied upon the lower authorities for making and sustaining the impugned disallowance is not applicable under the facts of the case. The appeal of the assessee on this ground is allowed.
ITA No.3194 /Del/2016 : Asstt. Year: 2006-07 : Asstt. Year: 2006-07
In view of the above orders, the penalty levied u/s 271(1)(c) is liable to be deleted.
In the result, the appeals of the assessee are allowed and the appeals of the Revenue are dismissed. Order Pronounced in the Open Court on 04/05/2022.