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Income Tax Appellate Tribunal, DELHI BENCH ‘E’: NEW DELHI
Appellant By Sh. Ajay Agarwal, CA Respondent by Sh. Sumit Kumar Verma, Sr. DR ORDER PER ANADEE NATH MISSHRA, AM:
(A) This appeal by Revenue is filed against the order of Learned Commissioner of Income Tax (Appeals)-6, Delhi, [Ld.
CIT(A)”, for short], dated 15.06.2017 for Assessment Year 2013-14.
Grounds taken in this appeal of Revenue are as under:
“1. Whether on facts and in circumstances of the case, the Ld. CIT(A) is legally justified in deleting 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 revenue expense by ignoring the fact that the assessee had failed to discharge its initial onus
ACIT vs. NTPC Tamilnadu Energy Company Ltd. under section 37 (1) of the Act that the expenses were incurred wholly and exclusively for business purpose? 2. Whether on facts and in circumstances of the case, the Ld. CIT(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 deduction. The Assessing Officer noted that the roads were not owned by the assessee; in view of which, he disallowed the expenses incurred on construction of the road. During the assessment proceedings, the assessee placed reliance on decisions of various courts, including on decision in the case of L.H. Sugar Factory & Oil Mills (Pvt.) Ltd. vs. CIT 125 ITR 293 (SC). The underlying ratio in most of the decisions was that the expenditure incurred for improving the working conditions of the area inhabited by the employees and for promoting its business is allowable.
However, the assessee’s claim was rejected by the Assessing Officer on the ground that the assets (roads) were not owned by the assessee. Vide impugned appellate order dated 15.06.2017, the Ld. CIT(A) deleted this addition. The relevant portion of the impugned appellate order dated 15.06.2017 passed by the Ld. CIT(A) is reproduced as under:
“3.2.3 The facts of the case and the submissions of the AR have been carefully considered. There is no dispute that the appellant has incurred the expenditure for construction of approach road from power plant gate to Athipattu Pudunagar railway station. The power plant of assessee is located at a far away distance from the city and highway. The expenditure on infrastructure facilities which are not owned by the appellant but are owned by State Government Authorities are incurred for smooth, efficient and successful operation of power plants of the appellant. The State/local authorities who are supposed to maintain the infrastructure/roads are not able to maintain such facilities in good working conditions on which the development of the plant is dependant. These infrastructure facilities though not owned by the appellant, but are being used for operation of its normal business. The expenditures on construction/strengthening/widening of approach road as to facilitate transportation of man and material at the power plant and also to provide better facilities to the project affected people to avoid any disruption in running the power plant. All such expenditure has been incurred for the necessity and benefit for the purpose of running its business.
Besides, it is observed that the similar addition on expenses incurred on assets not owned by the company was also deleted by the then CIT(Appeals) in the case of M/s NTPC Ltd. for A.Y. 2009-10 (Appeal No. 396/11-12) relying on the decisions of Hon’ble SC in the case of L.H.
ACIT vs. NTPC Tamilnadu Energy Company Ltd. 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 Court in the case of L.H. Sugar Factory & Oil Mills (Pvt.) Ltd. vs. CIT, 125 ITR 293 (SC) and Hon’ble Delhi High Court in the case of Airport Authority of India vs. CIT (2012-TIOL-09-HC-Del-IT-LB). The Ld. Counsel for the assessee further informed at the time of hearing, that in the case of ACIT vs. NTPC Tamilnadu Energy Company Ltd. NTPC Ltd. for Assessment Year 2009-10, the matter is still pending before the Bench of Income Tax Appellate Tribunal, Delhi vide Appeal No.5198/Del/2014. However, he submitted that on an identical issue in the case of NTPC Ltd. itself, for Assessment Year 2005-06 (in appeal vide identical issue has already been decided by the Co-ordinate Bench of ITAT, Delhi; vide order dated 25.04.2019; in favour of the assessee. A copy of the aforesaid order dated 25.04.2019 was filed during the appellate proceedings in Income Tax Appellate Tribunal. The Ld. Counsel for the assessee drew our attention to the following portion of the aforesaid order dated 25.04.2019 of Co-ordinate Bench of ITAT, Delhi in the case of NTPC Ltd.:
“13. Assessee claimed the deduction of expenditure of Rs.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.
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 assessee.
Ld. CIT (A) decided the issue in controversy in favour of the assessee by returning following findings:-
“4.5.5 There is no dispute that NTPC has incurred the expenditure on construction of railway track, railway siding, electrification work, railway over bridge, approach road, power line, widening of road, water supply system, taxi stand and erection of sub station, the infrastructure facilities which were not owned by NTPC. The power plants of NT PC are mainly situated in remote areas, which are located at far-away places from the cities/ towns and highways. The expenditure on infrastructure facilities 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.”
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 L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT 125ITR 293 (SC) and Hon’ble Delhi High Court in cases of Airport Authority of India vs. CIT - 2012-TIOL-09-HC-DEL-IT-LB and Bikaner Gypsusms Ltd. vs. CIT - 187 ITR 39, which are applicable to the facts and circumstances of the case as the Hon’ble Supreme Court has 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. 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 ACIT vs. NTPC Tamilnadu Energy Company Ltd. 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.”
(B.2.1) We have heard both sides, we have perused the materials on record. We find that the identical issue has already been decided against Revenue and in favour of the assessee vide aforesaid order dated 25.04.2019 in the case of NTPC Ltd. Respectfully following this order of Co-ordinate Bench of ITAT, Delhi; we uphold the order of the Ld. CIT(A) on this issue. The first ground of appeal is accordingly dismissed.
(C) Second ground of appeal is regarding the disallowance of Rs.69,80,737/- out of excess interest claimed by the assessee.
Third ground of appeal is regarding disallowance of Rs.1,87,456/- out of community development and welfare expenses claimed by the assessee as deduction. The Assessing Officer was of the view that this expenditure was in the nature of Corporate Social Responsibility, and was not allowable. In the impugned appellate order dated 25.04.2019 of the Ld. CIT(A), both the aforesaid additions of Rs.69,80,737/- and Rs.1,87,456/- were deleted by the Ld. CIT(A). The relevant portion of the order of the Ld. CIT(A) is reproduced as under:
“3.3 Ground No. 3 The Ld. assessing officer erred in disallowing interest expense of Rs.69,80,737/- charged to revenue due to change in debt equity ratio. Your appellant submits that there cannot be any disallowance of aforesaid 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 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 31.03.2013 the amount of debt and equity is as follows:
Debt: Long term borrowings: 49,90,95,86,888 Other Current Liabilities: 2,50,42,94,874 TOTAL: 52,41,38,81,762 Equity: Share Capital: 22,87,21,22,240 Share application Money: 20,00,00,000 TOTAL 23,07,21,22,240 This result in a ratio of: 69.44% - Debt 30.56%- Equity It may be noted that above ratio is for the entire project for 3 units. CERC allows only cash expenditure in gross block for the purpose of tariff determination. The gross block considered for tariff is Rs. 3382.78 Crores against Rs.3645.79 Crores on accrual basis. The interest on 70% of 3382.78 Crores for 123 days at debt equity ratio of 70:30 has been taken to Profit and Loss Account. Hence, the ratio for the total project is slightly different from the ratio used for Capitalisation of unit-1. Detailed working is also attached herewith."
From the above, it can be observed that in the reply furnished by the assessee on 17.02.2016, the assessee has revised the debt equity ratio from 70:30 as claimed in profit & loss account to 69.44:30.56 now. The assessee has also furnished the detailed calculation in support of this revised ratio, which has been attached by the assessee with the above reply as Annexure-A. Perusal of Annexure-A reveals that consequent upon this revision in debt equity ratio, the claim of interest as per the revised calculation of interest on accrual basis comes to Rs. 87,25,92,166/-, which results in reduction in the admissible claim of interest by an amount of Rs. 69,80,737/-, which has also been worked out by the assessee itself. Accordingly, the excess claim of interest amounting to Rs. 69,80,737/- is disallowed as revenue expenditure and the same is added to assessee's total income..."
3.3.2 The AR of the appellant vide his written submission has stated that:-
"Appellant company has transferred interest of Rs. 430.31 Crores to expenditure during construction period out: of total finance cost of Rs. 519.11 Crores. Balanceinterest of Rs. 88,79,60,473/- has been transferred to profit and loss account and claimed as revenue expenditure as per Note- 24 of Balance Sheet.
The funds for the entire power 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 31.03.2013 the amount of debt and equity is as follows: Debt: Long term borrowings: 49,90,95,86,888 Other Current Liabilities: 2,50,42,94,874
TOTAL: 52,41,38,81,762 Equity: Share Capital: 22,87,21,22,240 Share application Money: 20,00,00,000 TOTAL 23,07,21,22,240 This result in a ratio of: 69.44% Debt 30.56%- Equity It may be noted that above ratio is for the entire project for 3 units. CERC allows only cash expenditure in gross block for the purpose of tariff determination. The gross block considered for tariff is Rs. 3382.78 Crores against Rs. 3645.79 Crores on accrual basis.
The interest on 70% of 3382.78 Crores for 123 days at debt equity ratio of 70:30 has been taken to Profit and Loss Account. Hence, the ratio for the total project is slightly different from the ratio used for Capitalisation of unit-1. Detailed working is also attached herewith." (Refer page no. 65 to 68 of paper book)
From the above detailed working it is clear 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 as per auditor's certificate submitted to CERC for tariff fixation. 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, appellant company should have charged interest to revenue following debt equity ratio of 69.44:30.56 on the total capitalised value (accrual basis) of Rs.3,645.79 Crore since appellant company is following mercantile system of accounting. Thus it is apparent that the appellant company has not charged excess interest expense of Rs.69,80,737/- to revenue.This amount was worked out by the appellant during assessment proceedings on the specific request of the id. assessing officer only for theoretical purpose.
In view of the above factual position, the appellant company has not claimed excess interest 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, the appellant has not charged excess interest expense of Rs.69,80,737/- to revenue. This ground of appeal is, therefore, allowed.
3.4.1. Ground No. 4 The Ld. assessing officer erred in disallowing community development and welfare expenses of Rs.1,87,456/- considering the same as part of Corporate Social Responsibility (CSR).
Your appellant submits that the aforesaid expenses are not part of Corporate Social Responsibility (CSR) as the appellant has incurred loss during the year and therefore appellant is not required to spend certain percentage of its profit on CSR as per provisions of Companies Act. Thus these expenses are allowable u/s 37(1) of I.T. Act. 3.4.1The Assessing Officer stated in the assessment order as under:- "During the course of assessment proceedings, the ARs of the assessee were asked as to why the expenditure of Rs.1,87,456/- on community development & welfare expenses, etc., which is in the nature of corporate social responsibility expenses may not be disallowed.
The AR of the assessee furnished the ledger account vide letter dated 08.01.2016 and stated that "It is a Public knowledge that the Government of India-through BPE (Bureau of Public Enterprises) had issued guidelines to the effect that companies should spend certain percentage of their profit (linked to quantum of profits) to discharge their Corporate Social Responsibility (CSR) towards fulfillment of the National Plan goals and objectives as well as the Millennium Development Goals adopted by the country to ensure gender sensitivity, skill enhancement, entrepreneurship development and employment generation by co-operating value with local intuitions/people and community Development etc. In fact the same has since been made a part of the Companies Act 2013 and extended to all companies. Accordingly, the company has incurred expenditure on medical camp and refreshment expenses on the occasion of Republic Day. The community development expenses may be allowed u/s 37(1) of the Act." The reply of the assessee has been duly considered, but it is not found to be acceptable. The assessee company is engaged in the business of production of thermal power. The contention of the assessee is that expenditure incurred in respect of community development and Corporate Social Responsibility expenditure was covered u/s 37(1) of the Income Tax Act, 1961. However, the 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 provide deductions such as under section 35AC and under section 80G on certain expenditure on account of such activities after fulfillment of certain conditions. In view of the above discussion, the expenditure claimed in the profit and loss account amounting to Rs. 1,87,456/- on account of corporate social responsibility is disallowed and the same is added to assessee's total income...."
3.4.2 The AR of the appellant vide his written submission has stated that:- "Appellant company has incurred a sum of Rs. 1,87,456/- on community development and welfare expenses etc. during the year. The said expenses have been incurred on organising various medical/Health check-up camps during the year and distribution of sweet and snacks on the occasion of Republic Day.
The Ld. Assessing officer disallowed the aforesaid expenses considering the same as expenses incurred on account of Corporate Social Responsibility and disallowed the same u/s 37(1) of the Act.
During assessment proceedings, the appellant company submitted a copy of ledger account of the said expense vide letter dated 08.01.2016 to the Ld. Assessing officer and also appraised him that these expenses are not in the nature of Corporate Social Responsibility as the same is not applicable since the company has not earned any profit during the year. Therefore the said expenses incurred for business purpose are allowable u/s 37(1) of the I.T. Act.
In view of above factual and legal position, the aforesaid expenses incurred on community development and welfare expenses are allowable u/s 37(1) of the I.T. Act. Therefore, appellant prays to delete the said addition. 3.4.3 The facts of the case and the submissions of the AR have been carefully considered. It is observed that these expenses are not in the nature of Corporate Social Responsibility as the same is not applicable since the company has not earned any profit during the year. Therefore,
ACIT vs. NTPC Tamilnadu Energy Company Ltd. the said expenses incurred for business purpose are allowable u/s 37(1) of the I.T. Act. This ground of appeal is, therefore, allowed.”
(C.1) At the time of hearing before us, the Ld. Departmental Representative relied on the order of the Assessing Officer.
(C.2) The Ld. Counsel for the assessee relied on the impugned order dated 15.06.2017 of the Ld. CIT(A).
(C.2.1) We have heard both sides. We have perused the materials on record. We find that the order of the Ld. CIT(A) in respect of the aforesaid issues regarding allowability of Rs.69,80,737/- and Rs. 1,87,456/- are in accordance with law in the facts and circumstances of the case. No material have been brought for our consideration from either side, Revenue or the assessee, to persuade us to take a view different from view already taken by the Ld. CIT(A) in the impugned appellate order dated 15.06.2017 on these issues. Therefore, we decline to interfere with the impugned appellate order dated 15.06.2017 of the Ld. Ld. CIT(A); and dismiss grounds 2 and 3 of appeal.
(D) In the result, this appeal by Revenue is dismissed.