ACIT , MUMBAI vs. RELIANCE POWER LTD , MUMBAI

On the facts and in the circumstances of the case and in law, the ld.CIT(A) failed to appreciate the fact that the disallowance of expenses needs to be made which covers not only direct expenses but also all kind of expenses towards earning of the exempt income from such investments.

On the facts and in the circumstances of the case and in law, the ld.CIT(A) failed to appreciate the fact that the Board Circular No.5/2014 dated 11/02/2014 that notwithstanding anything to the contrary contained in this Act, the provision of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.

On the facts and circumstances of the case and in law, if disallowance of expenditure computed as per Rule 8D and made under normal provisions of the Act is not added to the book profit as per section 115JB of the Act as held by the Ld. CIT(A) in this case, it makes the provisions of law in clause (f) in Explanation 1 in Section 115JB of the Act.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in directing the AO to re-compute disallowance u/s 14A of the Act without appreciating the fact that the issue stands squarely covered by the decision Reliance Power Ltd.

Brief stated, the assessee company had filed its return of income on 29.11.2016 declaring business loss of Rs. 89,56,67,127/- under the normal provisions of Act and the book loss of Rs. 5,08,80,699/- under the provisions of section 115JB of the Act. The return of income was subsequently revised disclosing the equity and preference shares details without any change in the returned income. The case of assessee was selected for scrutiny. During the assessment proceedings, after the deliberations, ld. AO made disallowance of interest under section 14A r.w.r. 8D(2)(ii) for Rs. 24,25,66,541/- and disallowance of expenses under Rule 8D(2)(iii) for Rs. 74,75,05,052/- aggregating to total Rs. 99,00,71,593/-. The assessee had already made a suo-motu disallowance of Rs. 36,91,162/- in its return of income, thereby the net disallowance made by the AO worked out to be at Rs. 98,63,80,431/-.

The ld. AO accordingly re-computed the book profit of assessee under normal provisions as well as in terms of provisions section 115JB of the Act. Reliance Power Ltd.

Being aggrieved with the aforesaid addition, assessee preferred an appeal before the ld. CIT(A), who reduced the amount of disallowance by restricting it under section 14A r.w.r. 8D to Rs. 7,33,01,500/-, the relevant observations of the ld. CIT(A) on the issue are extracted as under:

1.1 The submissions filed by the appellant have been perused. It is noted that as per section 14A(2) and 14A(3) of the Act, the provisions of Rule 8D can be applied, where the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claims of the assessee in respect of the expenditure in relation to exempt income. In this regard, it is noted that the AO, having regards to the accounts of the assessee, was not satisfied with the claims of the appellant that no expenditure has been incurred by it which is related to earning of exempt income, and further was not satisfied with the basis of the amount quantified by the appellant for making suo-moto disallowance under section 14A for the reasons as stated in the assessment order. In this regard, the AO has also placed reliance on certain judicial decisions as mentioned in the assessment order as well as CBDT Circular, also. Therefore, the urgent prejudice claim of the appellant that the AO had erred in invoking the provisions of Rule 8D and in ignoring the provisions of section 14A(1) of the Act are not found correct. Accordingly, Ground 4 of appeal is Dismissed.

1.2 The appellant has submitted on a without prejudice basis that no interest disallowance u/s.14A of the Act can be made in case the interest-free funds exceeded the total value of tax free investments. The appellant has pointed out Reliance Power Ltd.

1.3 The appellant has further submitted, on a without prejudice basis, that no disallowance can be made in its case in respect of investments which have not yielded any exempt income. The appellant claimed that during the year under consideration, it has earned exempted dividend income u/s.10(34) of the Act of Rs.279,97,04,750/- only from investments made by it in the equity and preference shares of its subsidiary Rosa Supply Power Company Limited and hence disallowance pertaining to other investments cannot be made. In this regard, the appellant has relied upon the decision of Hon’ble ITAT Delhi Special Bench in the case of Vireet Investment (P) Ltd. (82 Taxmann.com 415), where it has been held that only those investments are to be considered for computing average value of investment, which yielded exempt income during the year. Besides this, the appellant has also relied upon the decision of Hon’ble ITAT Mumbai rendered in its own case for AYs.2009-10 and 2010-11 in ITA Nos. 5694 & 5975/Mum/2012 and 5545 & 5743/Mum/2013 - order dated 31.8.2017, wherein it has been held that only such investments are to be considered for computing average value of investment which yielded exempt income during the year for the purpose of computing disallowance under Rule 8D(iii). The appellant has also relied upon other decisions of Hon’ble ITAT in its group cases, where similar principle was enunciated after placing reliance on the decision of Hon’ble ITAT Delhi Special Bench in the case of Vireet Investment (P) Ltd. (82 Taxmann.com 415). In its subsequent submissions, the appellant has placed reliance on decision of Hon’ble ITAT, Mumbai in its own case in ITA No.3424/M/2023 and Appeal No.3043/Mum/2023 for AY.2015-16 and Appeal Nos. 3423/Mum/2023 and Appeal no. 3044/Mum/2023 for AY.2018-19 – orders dated 22.1.2004. It is noted that Hon’ble ITAT in para 13 of its order have held that “Further the second issue on Reliance Power Ltd.

1.4 Thus, based on the binding precedent of Hon’ble ITAT orders in the case of appellant itself, there can be no disallowance of proportionate interest expenses under Rule 8D(ii) r.w.s 14A of the Act, and the disallowance under Rule 8D(iii) r.w.s 14A of the Act needs to be reworked by considering only those investments, which have yielded exempt income during the year. In this regard, the appellant has submitted its own computation (as quoted above) as per the principle laid down in the above orders of Hon’ble ITAT, on a without prejudice basis. As per the said computation, the revised quantification of disallowance under section 14 A r.w. Rule 8D would amount to Rs.7,33,01,500/-. Since the appellant has already Reliance Power Ltd.

2 Disallowance under section 37/36(1)(iii)/38 of the Act: The appellant has disputed the alternate disallowance made by the AO under section 37/36(1)(iii)/38 of the Act vide grounds 6 to 10 of appeal.

2.1 It is noted that the disallowance made by the AO as per these sections has been made alternatively, on a without prejudice basis ,and not in addition to the disallowance made under section 14A of the Act. The appellant has claimed that this proposed alternative disallowance can only be considered, when there is no disallowance made under section 14 A and that there cannot be two disallowances on the same matter. Thus, the primary argument of the appellant is that once the disallowance u/s.14A is made / sustained / partly sustained, no alternate disallowance under sections 37/36(1)(iii)/38 of the Act can be made. Further, the appellant has claimed that it has entered into six transactions relating to investment activity during the relevant FY and that it had suo-moto disallowed expenses attributable to investment activity in its computation filed w.r.t disallowance under section 14Aof the Act. The appellant has claimed that it Reliance Power Ltd.

2.2 With respect to attribution of interest expenses towards investments u/s.36(1)(iii) of the Act, the appellant has relied upon the decision of Hon’ble Supreme Court in the case of Reliance Industries Limited (2019) 102 Taxmann.com 52(SC). On perusal of this order of Hon’ble Supreme Court, it is noted that the question of law raised before the Hon’ble Supreme Court was that: - “Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under section 36(1)(iii) of the Income Tax Act, 1961 (for short ‘the Act’), when the interest would not have been payable to banks, if funds were not provided to its subsidiaries.”. Hon’ble Supreme Court vide its order dated 02/01/2019 has stated that “The High Court has noted the findings of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investments. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee.” It is noted that the appellant has demonstrated before the AO during the assessment proceedings that it had sufficient interest free funds available to meet its investments, and no adverse inference has been drawn by the AO with respect to this factual claim and nothing to the contrary has been pointed out by the AO. In such circumstances, relying on the above- mentioned order of Hon’ble Supreme Court, it has to be presumed that the investments were made from the interest-free funds available with the assessee. The appellant has also relied upon the decision of Hon’ble Supreme Court in the case of South Indian Bank Limited (2021) 130 Taxmann.com 178(SC), where it has been held that when interest-free funds were available to the assessee which Reliance Power Ltd.

2.3 Further, it is noted that the AO has invoked the provisions of section 37 of the Act which specify that any expenditure (not being expenditure of the nature described in sections 30 to 36 of the Act, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Thus, the expenses incurred should not be capital expenses or personal expenses, not in nature of expenditure specified in sections 30 to 36 of the Act, and should be laid out or expended wholly or exclusively for the purpose of business shall be allowed in computing the income chargeable under the head “Profits and Gains of business or profession”. Similarly, as per section 38(2) of the Act, Building, etc., partly used for business, etc., or not exclusively so used, deductions u/s. 30 to 32 can be restricted to a fair proportionate part thereof. In this regard, the appellant has claimed that the investments made by it are for the purpose of commercial expediency and for the purposes of advancing/furtherance of its power business interest only, since the investments have been made into its subsidiary companies which are into the same line of business, i.e. power generation only. The appellant has submitted that such investments were strategic Reliance Power Ltd.

2.4 Without prejudice to the above , the issue is also being discussed on merits . The claim of the appellant is that it has entered into only six transactions of purchase/sale of investments during the relevant financial year and hence no such huge quantum of administrative expenses, conveyance, rent etc. can be attributed to its investment activity carried out during the relevant financial year and no such substantial expenses can be attributed to its investment activity for the purposes of disallowing the same is found to be justified. However, it is noted that the appellant has also accepted attribution of certain administrative expenses viz. salary, conveyance, telephone, printing, business support services etc. while working out its computation of disallowance under section 14A based on certain estimates. Since there can be some attribution of such expenses including building rent etc. towards investment activity, whose exact quantification is difficult, the mechanism used in section 14A was adopted by the AO for working out the alternate disallowance under section 37/36(1)(iii) /38 of the Act, in the assessment Reliance Power Ltd.

2.5 Based on the above discussion, it is clear that since disallowance u/s.14 A r.w. Rule 8D has already been partly sustained, while deciding grounds 1 to 5 above, no cause of action arises to decide this alternative disallowance made buy the AO under sections 37/36(1)(iii)/38 of the Act. Without prejudice to the above, the alternative disallowance, if made would not exceed the disallowance amount already sustained under section 14A r.w. Rule 8D and hence no separate/higher addition to the returned income would arise, over and above the sustained amount. Based on the above discussion, grounds 6 to 10 are considered as Partly Allowed.”

Since substantial relief is granted to the assessee by the ld. CIT(A), the revenue, being aggrieved had filed the present appeal.

At the outset, the ld. CIT-DR supported the order of ld. AO and requested to set-aside the finding of ld. CIT(A) by restoring the addition made by the ld. AO.

On the other hand the ld. Counsel representing the assessee submitted that the issue is squarely covered by the orders of ITAT, Mumbai in assessee’s own case for the AYs 2013-14, 2014-15, 2015-16 and 2018-19, wherein it is decided Reliance Power Ltd.

We have considered the rival submissions, perused the material available on record and the jurisprudence relied upon by the assessee. On a thoughtful consideration of the facts, law interpreted by special bench of ITAT Delhi, the Hon’ble Courts and decision accorded by ITAT in assessee’s own case, which are duly followed by the ld. CIT(A) in his order, which is fairly accepted in toto by the assessee, thus, in such facts and circumstances of the case in absence of any contradicting fact, evidence or decision brought on record by the revenue, we are inclined to respectfully follow the principles laid down in the case of Vireet Investment Pvt. Ltd. (supra) and therefore concur with the decision of ld. CIT(A).

In backdrop of aforesaid facts and circumstances of the case and our observations therein, we are of considered opinion that the decision of ld. CIT(A) Reliance Power Ltd.

In result, the appeal of revenue is stands dismissed, in terms of our aforesaid observations.