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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED&
PER Ms. MADHUMITA ROY - JM:
The bunch of appeals filed by the assessee and the revenue are directed against the order dated 17.12.2012 passed by the Asstt. Commissioner of Income Tax (Appeals)-1, Baroda under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to “the Act”) and the orders dated 01.09.2013 , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 2 - passed by the ACIT(A)-1, Baroda u/s 143(3) r.w.s 157 of the Act, 1961 for A.Y. 2009-10 & 2007-08 respectively.
Since both the appeals relate to the same assessee, hence the same are heard analogously and are being disposed of by a common order.
A.Y. 2009-10 : Revenue has filed following grounds of appeals:
1. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) eared in holding that the amount of Rs.5,11,39,000/- was a revenue expenditure and not a capital expenditure and thereby deleting the addition amounting to Rs.5,11,39,000/- made on account of disallowance of claim of guarantee fees paid to Government of Gujarat and expenses on cost of raising fund.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of Rs.2,36,35,000/- made on account of disallowance of loss of material through pilferage, shortage of material in transit, shortage arising on physical verification etc. The Ld.CIT(Appeals) erred in not appreciating the fact that the addition was made due to the reason that the assessee had failed to substantiate their claim with documentary evidence, and that such claim cannot be made year after year on its face value.
3. The appellant craves leave to add to amend or alter the above grounds as may be deemed necessary.
Relief Claimed in Appeal The order of the CIT(Appeals) on the above issue may be set aside and that of the Assessing Officer be restored.”
Ground No.1 The revenue has challenged the deletion of disallowance of guarantee fees to the tune of Rs.5,11,39,000/- paid to the Government of ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 3 - Gujarat which has been claimed to be covered in favour of the assessee in assessee’s own case by the order passed by the Co-ordinate Bench for A.Y. 2008-09 in copy whereof has also been submitted before us by the Learned AR. The Learned DR, however, has failed to controvert such contentions made by the Learned AR.
Heard the respective parties, perused the relevant materials available on record and also the order passed by the Co-ordinate Bench in ITA No.761/Ahd/2012. The relevant portion whereof is as follows: “29. In the Revenue’s appeal, the ground no.1 of the appeal is directed against the order of the CIT(A) in deleting the addition of Rs.50,90,96,000/- made on account of disallowance of claim of guarantee fees paid to Government of Gujarat. 30. Brief facts of the case are that the AO observed that the assessee paid guarantee fee of Rs.5,69,35,000/- to the Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loan. Further, the assessee also claimed Rs.21,61,000/- on account of cost of raising finance under the head “cost of raising finance” as per the profit & loss account. 31. In reply to show cause notice to the assessee, the assessee submitted that erstwhile GEB has raised various loans, guarantee of which was given by Govt. of Gujarat, and for the guarantee given by the Govt. of Gujarat, the GEB is required to pay guarantee fees as per rules. After the split of the company, the said loan were still continued, which were guaranteed by the Govt. of Gujarat. Therefore, every year these guarantee fees become payable to Govt. of Gujarat on recurring basis. Regarding the cost of raising finance, the assessee submitted that the finance was raised during the year, and accordingly, the cost incurred for raising finance was charged to current year’s profit & loss account. The AO did not accept the above explanation of the assessee on the ground that the assessee did not furnish the details of the purpose for which the loans were taken for which the guarantee fees were claimed. Further, if the fees paid for loans facility in respect of fixed assets, nature of assets, the date of put-to-use has not been submitted. The assessee also failed to furnish any agreement with the Govt. of Gujarat for charging guarantee fees and method of its computation against the loan amounts. In the absence of these details it was not possible to entertain the assessee’s claim. The AO further observed that the cost of raising the finance can also ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 4 - not be considered as revenue expenses for want of details. He, accordingly, disallowed Rs.5,90,96,000/-.
On appeal, the CIT(A) observed that guarantee fee was an annual recurring expenditure incurred by the assessee. Guarantee fee was payable to Govt. of Gujarat every year in respect of loans taken by the assessee and guaranteed by the Govt. of Gujarat. As held by Hon’ble Supreme Court in the case of India Cements Ltd., 60 ITR 52 (SC), loan cannot be treated as asset or advantage resulting in enduring benefits. Guarantee fees paid to Govt. of Gujarat was in connection with raising of loans and enduring benefit or advantage could not be said to have resulted by taking such loans. Only if the assets acquired out of such loans were not put-to-use till the end of previous year i.e. 31.3.2008, the guarantee fees to such extent i.e. in respect of such loans only could be capitalized as cost of such asset. The assessee has certified that no new project was started or commissioned during the year for which above guarantee was paid, and the guarantee fees was in respect of loans for acquisition of capital assets, which were already put-to-use prior to 1.4.2007. The guarantee fees of Rs.5,69,35,000/- is directed to be allowed as revenue expenditure, subject to verification by the AO of the certificate filed during the appellate proceedings i.e. there was no capital work-in-progress in respect of loans on which guarantee fees was paid.
Regarding cost of raising finance of Rs.21.61 lakhs is concerned, the CIT(A) observed that the same was an allowable deduction and being revenue expenditure, following the decision in the case of India Cements Ltd. (supra) disallowance of Rs.21,61,000/- was cancelled.
The DR supported the order of the AO, whereas, the AR of the assessee supported the order of the CIT(A) and submitted that the issue was now covered in favour of the assessee by the decision of this Tribunal in the case of assessee itself dated 8.5.2015 passed in 2974/Ahd/2010 and 3004/Ahd/2010.
We find that the Tribunal in its order dated 8.5.2015 cited supra has held as under: “6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) decided these issues in paras-5.2 & 5.3 and 6.2 respectively by observing as under:- “5.2. I have considered the submissions of the ld.AR and the facts of the case. The issue relating to whether an item of expenditure lies in the capital or the revenue field has , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 5 - exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of “enduring benefit”. “Enduring benefit” may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit “enduring”, since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such shortlived benefit cannot be categorized as “enduring”. Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt.Ltd. (ITA No.738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt.5.6.2009, following the decision of the Rajasthan High Court in CIT v. Metalising Equipment Co.Pvt.Ltd., 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to the GOG. In view of the totality of the circumstances, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (Rs.8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent on stamp duty, lawyer fees, etc. for obtaining loan secured by charge on its fixed assets is a revenue expenditure, because the transactions were entered into directly to facilitate the business
ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 6 - of the company and payment of consultancy charges was made on ground of commercial expediency. In India Cements Ltd. vs. CIT, 60 ITR 52, the Supreme Court had also held that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of Rs.45,24,582/-, which is directed to be deleted.” 6.1 The ld.CIT(A) has followed the decision of the Tribunal passed in for AY 2006-07 in the case of Himalaya Machinery Pvt.Ltd., dated 5.6.2009 and in the case of Shri Rama Multi Tech vs. ACIT reported at 92 TTJ 568. 6.2. The ld.CIT-DR could not distinguish the facts of the case, therefore we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, these two grounds raised in the Revenue’s appeal are rejected.”
36. DR could not point out any good reason as to why the above quoted order of the Tribunal should not be followed for the year under consideration. In the absence of distinguishing features being pointed out by the DR, and the facts being identical, respectfully following the above quoted decision of the Tribunal, we confirm the order of the CIT(A), and dismiss this ground of appeal of the Revenue.”
Since we find that the identical issue has already been decided in favour of the assessee, in that absence of any change in the facts and circumstances of the case, respectfully relying upon the aforesaid judgment, we confirm the order passed by the Learned CIT(A). Hence, this ground of appeal preferred by the Revenue is dismissed.
Ground No.2 The revenue has also challenged the deletion of 4. disallowance of loss of material through pilferage, shortage etc. to the tune of Rs.2,36,35,000/-.
ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 7 - 5. At the very onset of the proceeding, the Learned AR relied upon the judgment passed by the Co-ordinate Bench in in assessee’s own case for A.Y. 2008-09 whereby and whereunder the identicla issue has been decided in favour of the assessee. A copy whereof has also been submitted before us. The Learned DR, however, failed to raise any serious objection to such contentions made by the Learned AR.
Heard the respective parties, perused the relevant materials available on record and also the judgment passed by the Co-ordinate Bench in for A.Y. 2008-09. The relevant portion of dealing with the identical issue is as follows: “37. The ground no.2 of the Revenue is directed against the order of the CIT(A) in deleting the addition of Rs.1,41,15,000/- made on account of disallowance of loss of material through pilferage, shortage of material-in- transit, shortage arising on physical verification etc. 38. Brief facts of the case are that the AO observed that the assessee has claimed Rs.1,41,15,000/- on account of miscellaneous loss and write offs. In reply to the show cause notice, the assessee submitted that these losses are on account of loss of materials, through pilferage, shortage of material-in- transit, shortage arising on physical verification, obsolescence of materials/stores, loss in sale of scrap etc. It was submitted that the losses have been incurred in the day-to-day business activities and is purely of revenue nature. The AO observed that from the submission of the assessee, it was clear that the assessee’s claim was not substantiated with any documentary evidence. Accordingly, he disallowed deduction of Rs.1,41,15,000/-. 39. On appeal, the CIT(A) deleted the addition and held that similar issue was decided by the CIT(A) in favour of the assessee in assessee’s own case for the Asst.Year 2006-07 and 2007-08. Following the same, he deleted the disallowance of Rs.1,41,15,000/-. 40. The DR relied on the order of the AO. He could not bring any material on record to how that the relief allowed by the CIT(A) in the Asstt.Year 2006-07 and 2007-08 was appealed against before higher forums, and the order of the CIT(A) was varied by any higher authority. In the , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 8 - absence of any such material, we do not find any good reason to interfere with the order of the CIT(A) on this issue, which is hereby confirmed and the ground of appeal of the Revenue is dismissed.”
We find that the Co-ordinate Bench has decided the issue in favour of the assessee. In the absence of any changed circumstances, we find no reason to interfere in the order passed by the Learned CIT(A) and hence case of the Revenue is found to be devoid of any merit and thus dismissed.
Ground No.3 : This ground is general in nature and no order need be passed.
In the result, Revenue’s appeal is thus dismissed. for A.Y. 2009-10: Assessee has filed following grounds of appeals: 1.0 “The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the disallowance of the expenditure of Rs.45,81,84,000/- being the provision made for employees cost for arrears payable upto 31st March, 2009 without considering the facts that such expenditure was pending the decision of 6th Pay Commission based on the provisions of Accounting Standards and generally accepted accounting principles. 2.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts has confirmed the additions of Rs.24,17,88,400/- on account of Capital Grants & Subsidies and Consumers' Contribution on the ground that the appellant should transfer 15% of the total Grants/subsidies/consumer contribution received during the year as against 10% offered by the appellant. 3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs.45,81,84,000/- on account of disallowance made for provisions related to arrears payable to the employees pending the decision of 6th Pay Commission. 4.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of Assessing Officer in treating , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 9 - the interest income from staff loans & advances and others amounting to Rs.1,45,85,000/- as Income from Other Sources as against the Business Income and thereby disallowing the claim of set off of business losses of earlier years against the said income. 5.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(1)(c) of the I T Act. 6.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act, 1961. 7.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal.”
Ground No. 1 The assessee has challenged the confirmation of addition 9. of the expenditure of Rs.45,81,84,000/- being the Provision made for Employees cost of arrears payable upto 31st March, 2009.
It has been submitted by the Learned AR that the issue is covered in favour of the assessee in assessee’s own case for A.Y. 2007-08 by the Co- ordinate Bench by the order passed by the Co-ordinate Bench in which has not been controverted seriously by the Learned DR.
Heard the respective parties, perused the relevant materials available on record. We have also perused the order relied upon, relevant portion whereof is reproduced as follows: “15.1. First ground of assessee’s appeal is against confirming the disallowance of the expenditure of Rs.61,00,00,000/- being the provision made for employees cost for arrears. The ld.counsel for the assessee submitted that this issue is squarely covered in favour of assessee by the judgement of Hon’ble Kerala High Court rendered in the case of CIT vs. Kerala State Financial Enterprises Ltd. reported at (2008) 219 CTR 147(Ker.) and the judgement of Hon’ble Delhi High Court rendered in the , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 10 - case of CIT vs. Bharat Heavy Electrical Ltd. reported at (2013) 352 ITR 88 (Delhi). 15.2. On the contrary, CIT-DR supported the orders of the authorities below. We find that the AO had disallowed the expenditure by observing that “I have considered the submission of the assessee but the same is not acceptable. The liability to pay the arrears of pay had not crystallized during the year under consideration since the final decision to pay the same was still awaited. There was not liability fastened upon the assessee to pay the arrears of 6th pay commission. Since the assessee is following mercantile system of accounting and the liability to pay arrears of 6th pay commission had actually not been crystallized during the year under consideration, a sum of Rs.61,00,00,000/- is disallowed and added back to total income being contingent liability.” The ld.CIT(A) confirmed the finding of the AO by observing that the report of the 6th Pay Commission was submitted to the Government of India in March2008. In respect of the Central Government employees the liability accrued from the day when the report was accepted by the Central Government. In respect of State Governments the report is not binding and it is not to be mandatorily accepted and adopted. In fact, number of State Governments were against accepting the report because of huge financial burden and in fact Government of Madhya Pradesh constituted Pay Commission of its own, to reframe the recommendations. In other words, without acceptance of the report the liability cannot be said to have accrued or crystallized. Crystallization of employee cost liability is contingent upon approval or otherwise from Gujarat Government. The Gujarat Government accepted the six Pay Commission Report in December-2008. In view thereof, in my humble opinion for AY 07-08 the provision towards employees cost for arrears payable upto 31.3.07 is a contingent liability, contingent upon the State Government accepting the report of the pay commission. The Hon’ble Delhi High Court in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra) has observed as under:- “5. In the earliest decision on the question of whether such liability incurred towards employees' services or fulfilment of their terms of employment which may become payable in future but claimed by the assessee in a given previous year is allowable as deduction, the Supreme Court observed as follows in Metal Box Company of India Ltd. v. Their Workmen, 73 (1969) ITR 53: - "The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 11 - it is possible to arrive at a proper discounted present value. Even if the liability is contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account. Contingent rights, if capable of valuation, can similarly be taken into account as trading receipts where it is necessary to do so in order to ascertain the true profits." In Bharat Earth Movers (supra) (decided by the Supreme Court), the question which the Court had to consider was whether the provision for meeting earned-leave-encashment by the employee was an admissible deduction in the hands of the employer. The Court reiterated and applied its previous decision in Metal Box' case (supra) and held as follows: "(I)f a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to quantify and discharge at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied, the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. "” 15.3. Further, the High Court held as under:- “6. In this case, the Tribunal had noticed that there was no dispute as regards the terms of employment of the workers and officers. The only question was the exact quantification of the compensation or wage revision. The Tribunal also held that provision for wage revision was based on past experience, interim Pay Commission of government employees, previous Pay Commission's reports of public sector employees, union demands and other relevant factors. The Tribunal also held that with the expiry of one wage settlement or agreement, invariably, there is a time lag when another fresh wage revision agreement is negotiated and entered. The deduction claimed for that period cannot be termed as contingent because the wage and the probable revision or rates of revision would be within the fair , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 12 - estimation of the employer. In this case, BHEL had the benefit of past experience of such pay revisions. Its liability could not be characterized as contingent but was in fact ascertained; the quantification, however, had not happened.” 15.4. The Hon’ble Kerala High Court in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) held as under:- “ 3. Even though learned standing counsel for the Revenue contended that contractual liability arises only on the date of signing the agreement, we are unable to accept this argument in this case. In the normal course, an agreement called settlement as increase in wages takes effect from the date of expiry of the previous settlement and this case is no exception to it. What is important is not the date of signing the agreement nor the later approval granted by the Government, but the effective date of commencement of the wage revision under the agreement. There is no dispute that the wage increase was granted as a continuous measure from the date of expiry of the previous settlement, i.e. w.e.f. 1st Aug., 1992. Therefore, the liability for wage increase really accrued for the respondent assessee w.e.f. 1st Aug., 1992. The assessee is entitled to claim deduction of such wage increase attributable upto the end of the previous year, no matter exact amount was ascertained and payment made later. In the decision of the Supreme Court referred to above, it is made very clear that what is to be considered is whether the liability is attributable to the previous year or not and it is immaterial if the actual liability was ascertained and settled only in the next year. Even though the other two decisions cited by the assessee are not directly on the point, the principles laid down therein are applicable to the facts of this case. It is clear from the orders that by the time the accounts were finalised and returns were filed, the assessee had ascertained the actual liability attributable to the previous year and therefore the actual amount payable only was claimed based on mercantile system of accounting followed by the assessee.” 15.5. In the present case, the ld.CIT(A) has recorded the fact that the Gujarat Government accepted the 6th Pay Commission in December2008. Therefore, respectfully following the ratio laid down in the judgement of Hon’ble High Court of Kerala in the case of CIT vs. Kerala State Financial Enterprises Ltd.(supra) and in the judgement of Hon’ble High Court of Delhi in the case of CIT vs. Bharat Heavy Electrical Ltd.(supra), the disallowance made by the AO is hereby deleted. Thus, ground of assessee’s appeal is allowed.” , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 13 - In the absence of any change of facts and the circumstances of the case respectfully relying upon the aforesaid order, we grant relief to the assessee by allowing the expenditure of Rs.45,81,84,000/- being the Provision made for employees cost of arrears payable upto 31st March, 2009. The addition made by the authorities below to that effect is, thus, deleted. Hence this ground of appeal is allowed.
12. Ground No.2 The assessee has challenged the confirmation of addition of Rs.24,17,88,400/- on account of Capital Grants & Subsidies and Consumers’ Contribution on the ground that the appellant should transfer 15% of the total Grants/subsidies/consumer contribution received during the year as against 10% offered by the appellant.
The Learned AO finalized the issue by making an addition of Rs.24,17,88,400/- which was, in turn, confirmed by the Learned CIT(A) and added to the total income of the assessee. While confirming the addition, the Learned CIT(A) observed as follows: “6.3 I have considered the submissions. It has been accepted by the appellant that the grants were for capital purpose and for capital projects specified by the Government. In Schedule-3 of the printed balance sheet as on 31.3.2009, it is clearly mentioned that grants were towards cost of capital assets. Appellant's contention that the grants were not actually for meeting cost of assets is therefore not at all tenable. After insertion of Explanation 10 below section 43(1) by the Finance (No.2) Act, 1998 w.e.f. 1.4.1999, decisions relied upon by the appellant in the case of P. 3. Chemicals etc. are no longer applicable and cost of assets met directly or indirectly by the Central Government or State Government in the form of subsidy or grant or reimbursement (by whatever name called) is not to be included in the "actual cost of asset" to the assessee. Accordingly, depreciation is to be allowed only after making necessary adjustment in "written down value"/"actual cost" of block of assets in accordance with Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd. for A.Y.2006-07 referred to by the Assessing Officer, CIT(A) distinguished the treatment to be meted out to , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 14 - revenue grants and capital grants and held that revenue grants are to be taxed in entirety in the year of receipt and capital grant towards assets are to be reduced from "actual cost" of assets as per Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd., after noting that grants were only towards cost of capital assets, CIT(A) had held that such grants ought to have been reduced from the cost of capital assets and by not doing so, extra depreciation @ 15% of grants had been claimed. Since 10% of the grants had already been offered as income by the assessee, in the decision in the case of Dakshin Gujarat Vij Co. Ltd., CIT(A) had directed addition to be made after reducing income already offered from 15% of the grants. The AO has made addition in the present case as per this appellate order. Hence following the same, the addition made by the AO is upheld and this ground of appeal is dismissed.”
However, at the vary onset of the proceeding, the Learned AR has taken us to the order passed by the Co-ordinate Bench in for A.Y. 2008-09 in assessee’s own case where we find that the issue has been set aside to the file of the Learned AO for adjudication afresh after verifying proportionate amount of grant relating to different asset. The Learned AR prayed for similar relief. The argument advanced by the Learned AR has been failed to be contradicted by the Learned DR. We find following observation was made by the Hon’ble Co-ordinate Bench while granting relief to the assessee: “15. The ground no.3 of the appeal of the assessee is directed against the order of the CIT(A) in confirming the action of the AO in transferring 15% of the capital grants as income although the disallowance made under this head has been restricted to Rs.18,93,11,850/- as against the disallowance of Rs.30,97,61,800/- made by the AO.
The brief facts of the case are that on verification of subsidies and grants, the AO observed that the assessee has shown deferred government grants, subsidies, contribution at Rs.7305.70 lakhs as on 1.4.2007 and the assessee had shown Rs.15941.67 lakhs at the end of the year i.e. as on 31.3.2008. On show cause by the AO to explain the treatment in accounts of the subsidy, grants the assessee stated that during the year capital grant received from Government of Gujarat and other. The assessee submitted that in order to improve various functions associated with the generation, transmission and distribution of electricity, and also because the PSUs , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 15 - connected with power section were making consistent losses, the Government decided to introduce reforms in the direction of State PSUs. Accordingly, under the provision of Gujarat Electricity Industrial (Reorgnisation & Regulation) Act, 2000, the erstwhile GEB was split into seven companies, for the purpose of financial restructuring plan, and the approval was accorded to provide some financial/capital support to GUVNL. The grant was given in terms of the power reforms for the overall development of the power sector. Such grant was not granted to actually meet the cost of assets. Further, the grant was given to the holding company, GUVNL and then it was allocated to the assessee company, one of the subsidiary companies. The assessee was not entitled to an amount beyond a certain limit, even if it is spent large amount on purchase of fixed assets. Further, the grant was not with reference to any particular fixed assets. It was further submitted that the resolution sanctioning the grant no where indicated that the grant was meant to offset the cost of the capital assets purchased by the company. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs. P.J. Chemicals Ltd., 121 CTR 201, wherein the decision of the Gujarat High Court in the case of CIT Grace Paper Industries P. Ltd., 83 CTR 1, which was affirmed by the Hon’ble Supreme Court by observing that the amount of subsidies and grants received by the assessee cannot be reduced from the cost of assets. It was further submitted that the subsidy received under scheme cannot be reduced from the actual cost of the assets by applying the provisions of section 43(1) of the Income Tax Act. The AO did not accept the submission of the assessee and held that the submission of the assessee that the grant was not capital in nature, is factually incorrect, and from the resolution, it was clear that the grant received from the State Government was in the nature of capital grant and it should have been reduced from the capital assets. The decisions quoted by the assessee are not applicable after insertion of Explanation 10 of section 43(1) of the Act, as they pertained to earlier years prior to insertion of Explanation 10 of section 43(1) of the Act. After insertion of Explanation 10 of section 43(1) of the Act, the position of law was very clear. Since the assessee failed to reduce the capital grant against the cost of capital assets, and claimed excess depreciation, which was disallowed and worked out at 15% of the capital assets.
On appeal, the CIT(A) held that in assessee’s case, 10% of grant under three heads namely “Subsidy towards cost of capital assets”, “Grants towards cost of capital assets” and “Consumer contribution for capital assets” i.e. the grants appearing in Schedule -3 of the balance sheet as on 31.3.2008 were offered for tax. The amount of grant on which 10% was calculated was on the opening balance of grants of Rs.73,05,70,492/-, and the grants received during the year was Rs.103,56,34,226/-, aggregating to Rs.176,62,04,718/-. As these grants were towards cost of capital assets, 15% , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 16 - of the same should have been reduced from the depreciation claimed on account of making adjustment in the ‘actual cost’ of assts as per Explanation 10 below section 43(1). Since the assessee has already offered for tax, 10% of the opening balance of grants plus grants received during the year under these three heads of Schedule-3 grants, such amount offered for tax was to be reduced from the excess depreciation to be disallowed at the rate of 15% of Rs.176,62,04,718/- i.e. Rs.26,49,30,708/-. The net disallowance on this count worked out Rs.26,49,30,708/- minus Rs.17,20,37,655/-, the amount already offered for taxation i.e. Rs.9,28,93,053/-. Since no portion of grant of Rs.6427.94 lakhs being capital grant for capital support appearing in Schedule-2 of the balance sheet as on 31.3.2008 was offered as income nor it was reduced from the cost of assets, 15% of the same i.e. Rs.964.191 lakh needed to be disallowed as excess depreciation claimed in respect of the same. The total disallowance towards excess depreciation, therefore, worked out to Rs.9.289 crores plus Rs.9.641 crores i.e. Rs.18.93 crores. Thus, instead of net addition of Rs.30,97,61,800/- made by the AO, addition of Rs.18.93 crore was directed to be made on this count.
Before us, the AR of the assessee argued that uniform rate of 15% cannot be applied for making disallowance. He submitted that the grant should be apportioned according to the value of the asset given in the balance sheet. He argued that the rate of depreciation on land was zero percent, building was 5% and the plant & machinery was 15%, and hence, the disallowance at the uniform rate at 15% is not justified.
On the other hand, the DR argued and submitted that the order of the CIT(A) was correct, and he after appreciating the entire facts had reduced the disallowance from Rs.30.97 crores to Rs.18.93 crores.
We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs.18.93 crores being 15% of Rs.176,62,04,718/-, i.e. Rs.26,49,30,708/- minus Rs.17,20,37,655/-, which amounts to Rs.9,28,93,053/-, and 15% of Rs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of 15% adopted by the CIT(A) is not justified. As per provisions of section 43(1) of the Act, the capital grant should be reduced from the cost/WDV of the relevant asset, and thereafter the depreciation is to be calculated. Thus, the capital grant receipt in respect of asset, on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in the above submission of the assessee, which we find is in accordance with law. We, therefore, set aside the orders of the lower authorities on this issue, and restore the matter back to the file of the AO for adjudication afresh after verifying the proportionate amount of grant relating to different asset, and , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 17 - applying the actual rate of depreciation which relate to these assets. Thus, this ground of appeal of the assessee is allowed for statistical purpose.
Hence, in the absence of any changed circumstances as it appears from the records, we find no other alternative but to remit the issue to the file of the Learned AO for re-adjudication of the same and to pass order upon verification of the proportionate amount of grant relating to different assets and upon applying the actual date of depreciation relates to those assets. Hence, this ground of appeal preferred by the assessee is allowed for statistical purposes.
14. Ground No.3 The enhancement of Book Profit u/s 115JB of Rs.45,81,84,000/- in respect of addition made on provision for employees cost has been challenged by the assessee before us.
15. It appears from the records and also from the submissions made by the Learned AR that this issue has already been taken care of by the Hon’ble Tribunal in & 761/Ahd/2012 for A.Y. 2008-09 in assessee’s own case where the Tribunal was pleased to rely upon the order passed by the Hon’ble Tribunal in assessee’s own case for A.Y. 2006-07 and 2007-08. Ultimately, the impugned addition therein was deleted. In fact, the Learned AO observed that the addition in respect of expenditure of 6th Pay Commission under normal provision of the Income Tax Act of Rs.45,81,84,000/- was made and the same was also disallowable from the book profit u/s 115JB since it was the provision made for meeting liabilities other than ascertain liabilities. This particular ground was also consequential to the ground no.2 of that particular appeal. Finally the Learned Tribunal deleted such addition with the following observation:
ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 18 - “21. The ground no.4 of the appeal of the assessee is directed against the order of the CIT(A) in confirming the enhancement of book profit computed under section 115JB of the Act by Rs.75,38,35,000/-.
Brief facts of the case are that the AO observed that the addition in respect of expenditure of 6th Pay Commission under normal provisions of IT Act of Rs.75,38,35,000/- was made, and same was also disallowable from book profit u/s.115JB, since it was a provision made for meeting liabilities other than ascertained liabilities.
23. On appeal, the CIT(A) observed that the liability towards arrear payable to the employees pending decision of the 6th Pay Commission did not crystallize during the financial year 2007-08. The provision made towards the liability other than ascertained are to be added back to the book profit under section 115JB under clause (c) of Explanation 1 below section 115JB. In view of this addition of Rs.75,38,35,000/- being provision made for arrears payable to the employees pending the decision of 6th Pay Commission to book profit computed under section 115JB is confirmed.
24. The AR of the assessee submitted that this ground of appeal
of the assessee is consequential to ground no.2 raised in this appeal. On the other hand, DR supported the orders of the lower authorities. 25.
26. We find that the Tribunal in the case of assessee itself in the Asstt.Year 2006-07 and 2007-08, while deciding similar issue, vide order dated 8.5.2015 passed in 2974/Ahd/2010 and 3004/Ahd/2010 held as under: “12. Ground No.6 is against the direction given to the AO to recompute the book profit u/s.115JB of the Act for the purpose of computing MAT by the ld.CIT(A). The ld.CIT-DR supported the order of the AO and submitted that the ld.CIT(A) was not justified in giving direction to the AO for recomputing the book profit u/s.115JB of the Act for MAT. 12.1 On the contrary, ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that ld.CIT(A) has followed the decision of Hon’ble Jurisdictional High Court rendered in the case of DCIT vs. Vardhman Fabrics (P) Ltd. reported at 122 Taxman 375.
13. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 19 - below. We find that the ld.CIT(A) has decided this issue in paras-12.3 & 12.4 of his order, which are reproduced hereunder:- 12.3 Thus, what is material for the purposes of section 115JB is not the profit & loss account prepared in terms of the Income-tax Act but that prepared in terms of Schedule-VI of the Companies Act. Part-II of Schedule-VI lays down the requirement as to profit and loss account. At item No. 3(iv), it has been laid down that the profit and loss account shall disclose information relating to the amount provided for depreciation, renewals or diminution in the value of fixed assets. Schedule-XIV lays down the rates of depreciation in respect of various assets, both in terms of written down value (WDV) and straight line method (SLM). At the same time, the Department of Company Affairs has issued Circular dt. 7.3.2009 which allows depreciation to be claimed at higher rates on the basis of bona fide technological evaluation. It has been clearly stated therein that the rates prescribed in Schedule - XIV could be viewed as minimum rates. From Part B (wherein notes to the accounts have been disclosed) it is seen at item- 5(vii) relating to depreciation, that the company provides depreciation as per the rates notified by CERC, a regulatory commission by virtue of section 76 of Electricity Act, 2003, which are different from the rates prescribed under the Companies Act, 1956. During the year such rates were reduced, which could not however be implemented by the assessee during the year due to the fact that the notification was received very late. The assessee has complied with the provisions of Schedule-VI of Companies Act while preparing its accounts. 12.4 The Supreme Court has held very clearly in Apollo (supra) as well as Malayala Manorama Co Ltd v CIT, 168 Taxman 471 that the power to make enhancement and reduction u/s 115J is limited only to the specific items provided under clauses (a) to (i) and (i) to (viii). The AO has only to satisfy himself that the provisions of the Companies Act have been complied with while preparing the accounts. The provisions of Income-tax Act with regard to depreciation etc., would not be material to the computation. On similar facts, the jurisdictional High Court of Gujarat in DCIT v Vardhman Fabrics (P) Ltd., 122 Taxman 375 had occasion to consider the Circular of the Company Law Board which clarified that the rates prescribed in Schedule XIV were minimum rates of depreciation and the company could claim higher depreciation on the basis of a bonafide technological evaluation and proper , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 20 - disclosure thereof in the notes forming part of annual accounts. In the instant case, from the facts as above, I am of the opinion that the assessee has complied with the provisions contained in Schedule-VI to the Companies Act read with Schedule-XIY and Circular dt. 7.3.2009 of the Department of Company Affairs. Hence the AO's action in reducing the claim of depreciation under item (ii)(a) by Rs.14,32,02,331/- is held to be unjustified. The AO is directed to recompute the book profit for MAT by allowing the depreciation claimed.” 13.1. The ld.CIT(A) has applied the ratio laid down in the judgements of Hon’ble Apex Court rendered in the case of Apollo Tyres Ltd. (255 ITR 273), Malayala Manorama Co.Ltd. vs. CIT (168 Taxman 471) and the judgement of Hon’ble Jurisdictional High Court rendered in the case of DCIT vs. Vardhman Fabrics (P) Ltd. (122 Taxman 375). The ld.CIT-DR could not distinguish the facts of the case, therefore we do not find any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, this ground of Revenue’s appeal is rejected.” The DR could not point out any distinguishable features in the above quoted order of the Tribunal. Facts being identical, respectfully following the precedent, we delete the addition of Rs.75,38,35,000/- and allow this ground of appeal of the assessee.”
In the absence of changed circumstances relying upon the said order passed by the Hon’ble Tribunal, we find no justification in making enhancement of book profit u/s 115JB to the impugned amount and hence the addition is hereby deleted. In the result, assessee’s ground of appeal is allowed for statistical purposes.
16. Ground No.4: The assessee has challenged the order passed by the Learned CIT(A) in confirming the order passed by the Learned AO in treating the interest income from staff loans & advances and others amounting to Rs.1,45,85,000/- as income from other sources as against the business income and thereby disallowing the claim of set off of business losses of earlier years against the said income. , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 21 - 15. During the course of assessment proceeding, it was found that the assessee has shown interest income in the other income head but in the computation of income it was taken as business loss. It appears from the order passed by the Learned AO that the Learned Authorised Representative of the assessee on 12.12.2011 agreed to this fact that the interest on staff loans and advances of Rs.145.53 lakhs and interest on advances to others to the tune of Rs.32 lakhs be treated as income from other sources. Accordingly, entire amount of Rs.145.85 lakhs has been treated as income from other sources. In appeal, the same was challenged before the first appellate authority particularly when the Learned AO has restricted the claim of carried forward unabsorbed business losses and an unabsorbed depreciation of the earlier years. Taking into consideration certain assessment orders of erstwhile GEB for the A.Y. 2003-04, 2004-05 and 2005-06 as base without considering the appellate orders for the said years as alleged. During the appellate proceeding, it further appears that the assessee submitted the following: “8.1 At the time of appellate proceedings, appellant company made following submissions: "Ground No. 7, 8 & 9 : Treatment of Interest income as Income from Other Sources 1.0 The learned Assessing Officer has erred in law and an facts in assessing the interest income from staff loans & advances amounting to Rs.1,45,85,000/- as Income from Other Sources as against the Business Income and thereby disallowing the claim of set off of business losses of earlier years against the said incomes. 1.1 It is submitted that the interest received from staff loan and advances Rs.1,45,85,000/- during the year under consideration does not fall in any of the incomes which are always taxable under the head "Income from other sources" as per sec 56(2) of the I T Act. Such interest on loans is ordinary business income and cannot be treated as income from other sources. This is particularly because the employees are retained to run the business of the company and accordingly the loans given to them is out of such business expediency and the interest earned thereon is business income. , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 22 - 1.2 In view of the facts and circumstances, the appellant prays that the learned Assessing Officer may be directed to assess the above income as ordinary business income. 1.3 It is further submitted that while allowing the set off of unabsorbed business, the learned Assessing Officer restricted the claim of carry forward of unabsorbed business losses and unabsorbed depreciation of earlier years by erroneously taking certain assessment orders of erstwhile GEB for the Asst. Years 2003-04, 2004-05 and 2005-06 as base without considering the appellate orders for the said years. The learned Assessing Officer failed to appreciate that the appellant had preferred appeals against the orders of all these years and the said appeals have been allowed favorably by the appellate authorities consequent to which the position of carry forward losses and depreciation has gone changed. The appellant, therefore, prays that the learned Assessing Officer may be directed to allow the set off after giving proper effect to the orders passed by the appellate authorities for the Asst. Years 2003-04, 2004-05 and 2005-06.”
However, as it appears from the records that the interest income earned from loan to staff and from other loans has been treated to be the income from other sources since the appellant is not in the business of advancing loans to staff. The nature of business carried out by the assessee and the activities of granting loans to the staff is not in accretably linked with each other thus in the absence of direct nexus between the two, We find no reason to treat the income in question as business income and, therefore, we find no justification in interfering with the order passed by the Learned CIT(A) in holding that the interest income arising out of loans advances to staff and others is income from other sources and not business income. Assessee’s appeal, thus is found to be devoid of merit and hence dismissed.
16. Ground No. 5 to 7: These grounds of appeals are consequential in nature hence no order need be passed. , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 23 -
17. In the result, assessee’s appeal is thus partly allowed. for A.Y. 2007-08 : The assessee filed following ground of appeal: “1.0 The learned Commissioner of Income Tax(Appeals) erred in law and fact has confirmed additions of Rs.8,72,91,000/- on account of Capital Grants & Subsidies and Consumers' Contribution on the ground that the appellant should transfer 15% of the total Grants/subsidies/consumer contribution received during the year as against 10% offered by the appellant. 2.0 The learned Commissioner of Income Tax(Appeals) has erred in law and an facts in confirming the interest income from staff loans & advances and others amounting to Rs.1,77,06,000/- as Income from Other Sources as against the Business Income and thereby disallowing the claim of set off of business losses of earlier years against the said income. 3.0 Without prejudice to the Ground No. 2.0 above, the learned Commissioner of Income Tax(Appeals) has erred in law and on facts in not allowing the set off of unabsorbed depreciation of earlier years against the interest income of Rs.1,77,06,000/- assessed as Income from Other Sources. 4.0 The learned Commissioner of Income Tax(Appeals) erred in law and on facts has set aside the restriction of the claim of carry forward of unabsorbed business losses and unabsorbed depreciation of earlier years by erroneously taking certain assessment orders of erstwhile GEB for the Asst. Yea-s 2003-04, 2004-05 and 2005-06 with the direction to re-verify the claim. 5.0 The learned Commissioner of Income Tax(Appeals) has erred in law and facts in charging interest under section 234B, 234C and 234D of the Income Tax Act, 1961. 6.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal.”
Ground No.1 this Ground has already been decided against the assessee 18. by us in for A.Y. 2009-10 at para 13 hereinabove. In the absence of any change circumstances same shall apply mutatis mutandis.
ITA Nos.633, 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 24 - 19. Ground No.2 this Ground has already been decided in favour of the assessee by us in for A.Y. 2009-10 at para 15 hereinabove. In the absence of any change circumstances same shall apply mutatis mutandis.
20. Ground No.3 This ground relates to the order passed by the Learned CIT(A) in not allowing the set off of unabsorbed depreciation of earlier years against interest income assessed as income from other sources.
It appears from the records that the Learned CIT(A) has already been pleased to direct the Learned AO to allow the set off of unabsorbed depreciation loss against the income from other sources of Rs.1,77,06,000/- and hence the issue has become infructuous and dismissed as infructuous.
22. Ground No.4 The assessee has challenged the order passed by the Learned CIT(A) to revivify the claim of carry forward of unabsorbed business loss and depreciation.
It appears from the records that the Learned CIT(A) has already been pleased to direct the Learned AO to allow the set off of unabsorbed depreciation against the interest income and business income and unabsorbed business loss against the business income of the year under consideration. Hence, the issue has become academic and virtual infructuous. Thus, dismissed.
Ground No.5 and 6: These grounds of appeals are consequential in nature and no separate adjudication is required. , 652 & 2716/Ahd/2013 M/s Gujarat Energy Transmission Corp. Ltd., Baroda. Asst. Year –2009-10 & 2007-08 - 25 -
In the result, assessee’s appeal is partly allowed.
In the combined result, revenue’s appeal in A.Y. 2009-10 is dismissed and assessee’s appeals in & 2716/Ahd/2013 for A.Y. 2009-10 are partly allowed.