DCIT-CC-8(4), MUMBAI, MUMBAI vs. SAVITA OIL TECHNOLOGIES LIMITED, MUMBAI

6. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee's claim for gratuity expenditure of Rs. 16,67,413/- which was not claimed in the original return of income.

1. Restricted the claim of deduction u/s 80-IA to Rs. 13,46,32,738/- as against the claim of deduction of Rs. 25,02,41,018/-.

2. Disallowance of interest paid on delayed IGST of Rs.78,06,000/- 3. Disallowance of additional claim of deduction u/s 80G of Rs. 13,37,000/-. 4. Disallowance of additional claim of deduction towards gratuity expense of Rs. 16,67,413/-. 5. Disallowance of additional claim of deduction of cess of Rs. 1,38,38,092/-.

4.1. On the issue relating to claim of deduction u/s.80IA(4), it is noted that assessee had 23 windmills units situated in different states. Assessee maintained separate books of accounts for each of the units. Assessee had losses in some of these units which was for years before the initial year for claiming the deduction. These losses were fully set off by the assessee against other income thereby allowing no carry forward of loss in these units. While computing the net profit for each of these units, assessee did not take into consideration the losses of the respective units prior to the initial year u/s.80IA, since the losses were set off against the income of respective years. Based on this working, assessee claimed a total deduction u/s.80IA at Rs.25,02,41,018/-. In the course of assessment proceedings, ld. Assessing Officer by applying provisions of section 80IA(5) held that losses of the years prior to the initial year even though fully set off against other income in the respective years have to be taken into account for working the profits for the purpose of claim of deduction u/s.80IA. He thus, recomputed the deduction by working out accumulated looses in 10 units which resulted into a reduced deduction eligible u/s.80IA(4) amounting to Rs.13,46,32,738/- as against claim of Rs.25,02,41,018/- made by the assessee. Assessee submitted that similar disallowance were made in the preceding assessment years, i.e., Assessment Year 2010-11 to Assessment Year 2016-17 which went in appeal and were allowed in favour of the assessee by holding that losses of the years beginning from the initial year and the years subsequent to such initial year had taken into consideration while working out the profit eligible for deduction u/s.80IA. Losses absorbed in the earlier years cannot be carried forward for adjustment while computing deduction u/s. 80IA for the subsequent years. This issue is a legacy issue and has been decided in favour of the assessee’s own case as listed below, with Sr.No. 01 to 04 by the Tribunal and Sr. No. 05 to 06 by the ld. CIT(A):

3. However, the AO while passing the assessment order for AY 2012-13 held that the losses of the unit in the assessment year preceding the initial assessment year have to be notionally brought forward for the purpose of computing the eligible profits of the first assessment year in the block of 10 years and consequently subsequent assessment years. Accordingly, the AO disallowed the deduction claimed in respect of "Sangli 2" unit.

4. CIT(A) noted that Hon'ble Madras High Court in case of Valayudhaswamy Spinning Mills Pvt Ltd vs CIT (2012) 340 ITR 477 has held that loss in the year earlier to the initial assessment year already absorbed against the profits of other business cannot be notionally brought forward and set off against the profit of the eligible business as no such mandate is provided in section 80-1A(5). The CIT(A) relying of the ratio of above decision has allowed the claim of the Company for AY 2012-13 in respect of deduction u/s 80-IA in respect of Sangli 2 unit as well as other units. The above decision of CIT(A) has also been upheld by ITAT.

5. The appellate authorities I.e. CIT(A) and ITAT in subsequent years upto AY 2016-17 have also allowed the deduction u/s 80-IA on the above principle.

6. To sum up, the gist of the ratio of various decision and the CBDT circular No 1 of 2016 dated 15th February 2016 is as follows: ● Assessee has option to choose the initial / first year from which it may desire the claim of deduction for ten consecutive years out of slab of fifteen years initial assessment year as opted by the assessee ● Assessee shall be entitled to deduction u/s 80-IA for 10 consecutive assessment years from ● Only the losses of the years beginning from the "initial year" and the years subsequent to such "initial year" have to be taken into consideration while working out deduction u/s 80-IA ● Losses absorbed in earlier years (prior to initial assessment year) cannot be carried forward for adjustment while computing deduction u/s 80-IA 4.3. Reference was also made to the CBDT circular No.1/2010, dated 14.02.2016, since treatment given by the ld. Assessing Officer to consider the losses prior to the initial assessment year for working the eligible profits is not in consonance with the said circular. Ld. CIT(A) took note of the factual position of the year under consideration in respect of deduction claimed by the assessee and the judicial precedents as listed above in assessee’s own case where the issue have been held in favour of the assessee. By placing reliance on the decision of Coordinate Bench in assessee’s own case, there being no change in the material facts and the position of law, claim of assessee u/s.80IA(4) was allowed by the ld. CIT(A).

5.1. We have perused the orders of the Coordinate Bench in assessee’s own case as listed above, on which ld. CIT(A) has relied upon. Relevant extracts from the decision of the Coordinate Bench in for Assessment Year 2010-11 is reproduced below for ready reference: "The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture of transformer oils, lubricating oils and other petroleum products besides generation of electricity from windmills.

1. Insofar as the first Ground of appeal is concerned, the same relates to the assessee's claim for deduction of Rs. 6,71,25,876/- u/s. 801A(4) (iv) of the Act in respect of the profits derived from the windmill units. Notably, the assessee owns six windmill units situated in the States of Maharashtra, Karnataka, and Tamil Nadu. In the course of assessment proceedings, the Assessing Officer observed that the profit of the windmill units were not correctly worked out by the assessee as according to him, the losses in the years prior to the 'initial year', though the same have been otherwise set-off against the other incomes of the assessee in those respective years, were required to be taken into consideration in view of Sec. 80IA(5) of the Act in order to work out the profits eligible for deduction u/s. 801A(4)(iv) of the Act. Accordingly, the Assessing Officer worked out the profits of the six respective units as per his interpretation of Sec. 801A(5) of the Act and arrived at a figure of loss in respect of four out of six units and consequently, denied assessee's claim for deduction to the extent of Rs. 5,25,99,585/-Notably, the disallowance has been reduced to Rs. 4,02,23,291/- by the Assessing Officer on account of rectification of a mistake.

2. Before the CIT(A), assessee assailed the working of the Assessing Officer and pointed out that having regard to the provisions of Sec. 801A(5) of the Act, as understood by the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills Pvt. Ltd., 340 ITR 477 (Mad) and other judicial pronouncements, only the losses of the years beginning from the 'Initial year' and the years subsequent to such 'Initial year have to be taken into consideration while working out the profits eligible for deduction u/s 801A(4)(iv) of the Act. Pertinently, the CIT(A) has relied upon the judgment of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. (supra) and a host of other decisions referred to in his order, and concluded that the interpretation placed by the assessee was liable to be affirmed. Against such a decision of the CIT(A), Revenue is in appeal before us.

3. Pertinently, Sec. 801A of the Act, so far as is relevant for our purpose, prescribes for deduction of an amount equal to 100% of the profits and gains derived by an Undertaking or enterprise from an eligible business Act further prescribes that the deduction can be claimed by the assessee, at his option, iness Sub-section (2) of Sec. 801A of the for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the Undertaking commences operation, begins development or starts providing services, etc. stipulated in the section. Sub-section (5) of Sec. 801A of the Act, which is the bone of contention before us, prescribes the manner of determining the quantum of deduction with reference to the initial assessment year. The said section reads as under:

“80-1A(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub- section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.” In the above section, the interpretation to the expression 'initial assessment year' placed by the Assessing Officer is the year in which the eligible business/manufacturing activity had commenced operations. So however, the interpretation placed by the assessee is to the effect that the 'initial assessment year' refers to the year in which the assessee chooses to start claiming deduction as mandated in Sub-section (2) of Sec. 801A of the Act. In the context of the instant case, the Assessing Officer considered the losses incurred in the respective units in the years prior to the year in which assessee opted to start claiming deduction in order to arrive at the profits eligible for deduction. So however, as per the assessee, it is only the losses starting from the initial year, i.e., the first year of claim of deduction and thereafter, which are required to be taken into consideration for arriving at profits eligible for deduction. Factually speaking, there is no dispute that so far as losses considered by the Assessing Officer are concerned, they have otherwise been absorbed against other incomes of the assessee in the respective years. The CIT(A) has upheld the stand of the assessee by relying on the judgment of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. (supra) and even before us, no contrary decision of any High Court has been relied upon by the Revenue. Apart therefrom, we find that the stand of the Revenue is clearly in contrast to the decision taken by the CBDT in its Circular no 1/2016 dated 15.2.2016. The following portion of the CBDT Circular is relevant: "The matter has been examined by the Board. It is abundantly clear from sub- section (2) that an assessee who is eligible to claim deduction u/s 801A has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year would mean the first year opted for by the assessee for claiming deduction u/s 801A. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. The Assessing Officers are, therefore, directed to allow deduction u/s 801A in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 801A shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in sub-section (5) of that section for which the Standing Counsels/D.R.s be suitably instructed."

1. Quite clearly, as per the CBDT, the term 'Initial assessment year' used in Sec. 801A(5) of the Act is to be understood to mean the first year opted for by the assessee for claiming deduction u/s 801A of the Act. Considering in this light also, we find no error on the part of the CIT(A) in allowing the claim of the assessee. Further, it is pertinent to note that the CBDT has clarified that even the pending litigations on the allowability of deduction u/s 801A of the Act should also not be pursued to the extent it relates to interpreting the expression 'initial assessment year contained in Sec. 801A(5) of the Act. Therefore, the prosecution of the aforesaid Ground of appeal by the Revenue before us is in indirect conflict with the directions of the CBDT and, therefore, on this count also we find no merit in the ground raised by the Revenue. The same is hereby dismissed."

5.2. From the above, we note that the issue before us is no longer res integra, as squarely covered by the judicial precedents in assessee’s own case. Respectfully following the same, there being no change in the material facts and position of law, the ground Nos. 01 to 04 raised by the Revenue are dismissed.

6.1. Brief facts in this respect are that assessee as an exporter is entitled to import inputs without payment of customs duty under the import export policy against advanced authorisation. After introduction of Goods and Services Tax (GST), assessee imported some inputs under advanced authorisation. Imports with exemption of customs duty and IGST were allowed either prior to exports or post exports. Customs notification 79/2017, dated 13.10.2017 introduced pre-import conditions under advanced authorisation which was interpreted by Department of Revenue Intelligence (DRI) to mean that for availing exemption of IGST on imports against advanced authorisation must be prior to exports. Based on DRI investigation, assessee was alleged of having not fulfilled pre import conditions for certain imports cleared under bills of entry for which assessee was required to pay IGST with interest thereon. In order to avoid litigation, assessee chose to deposit the amount of IGST of Rs.19.55 crores along with interest there on of Rs.1.33 crores. In the year under consideration, assessee claimed deduction of Rs.78.06 lakhs on account of interest paid on delayed deposit of IGST. According to the assessee, the said claim was allowable u/s.37(1) of the Act, as it did not fell within the exception where the disallowance could be made only when it is in relation to offence or for anything prohibited by law for the time being in force. The said interest payment was compensatory in nature on account of delayed deposit of IGST and is not on account of contravention of any law. The said expenditure is laid out wholly and exclusively for the purpose of business and is revenue in nature, hence allowable.

6.2. Assessee placed reliance on the decision of Hon'ble High Court of Gujarat in the case of Maxim Tubes Company Pvt. Ltd. which dealt with the issue of applicability of notification No. 79/2017 dealt in Special Civil Application No.14558 of 2018 and others whereby the Hon'ble Court struct down the pre-import condition as being ultra vires authorisation scheme. However, ld. Assessing Officer held that the interest payment was for violating the IGST provisions pursuant to enquiry carried out by DRI and hence penal in nature, not allowable in view of Explanation 1 to section 37(1). Ld. CIT(A) dealt with the issue by taking into account the provisions relating to IGST and Customs Act and also referred to the decision of Coordinate Bench of ITAT, Bangalore in the case of Mangalore Chemical and Fertiliser Ltd. in dated 15.10.2024 whereby on similar issue, such interest expenditure was allowed under the provisions of section 37(1) of the Act.

7. Before us, ld. Sr. DR submitted that ld. CIT(A) ought to have enquired if the interest expenditure is penal in nature before giving relief to the assessee. According to him, the said interest expenditure is penal in nature and hence, rightly disallowed by ld. Assessing Officer.

8.1. It is important to note that the question whether there is any in fraction of law or whether the expenditure is incurred for any purpose, which is an offence or which is prohibited by law, is generally to be decided by the authority or the court empowered to do so, under the respective law. In the case before us, it is the levy of interest on the delayed deposit of IGST which has been claimed by the assessee as a deduction u/s.37(1). The said interest paid on delay of deposit of IGST is calculated at certain percentage and on time basis which is nothing but compensation for delay of payment of taxes and accordingly compensatory in nature. Accordingly, considering the above discussion including the fact of the case and the juridical precedents as well as position of law under the respective statute, the interest expenditure so claimed by the assessee is deductible u/s.37(1). We are in agreement with the relief granted by ld. CIT(A). Accordingly, ground no.5 raised by Revenue is dismissed.

9.1. In this regard, it is noted that assessee had accounted for total expenditure towards gratuity payment of Rs.86,87,572/- which in entirety was paid before the due date of filing of return for the year under consideration hence allowable u/s. 43B. It was inadvertently that assessee did not claim the deduction of Rs.16,67,413/- due to bifurcation of the total amount made as per the applicable accounting standard as this amount was parked under the head ‘other comprehensive income’ (OCI) in the profit and loss income. All the facts relating to the said claim were on record before the ld. AO. Assessee made a reasonable attempt of claiming this deduction by putting an additional claim before the ld. AO though he chose not to deal with the same but disallowing it. Ld. CIT(A) has considered this claim of assessee by placing reliance on the decision of Hon’ble Jurisdictional High Court of Bombay in the case of Prithvi Brokers and Shareholders 349 ITR 346 (Bom). Considering the facts on record and the details discussed above, we do not find any reason to interfere with the findings arrived at by ld. CIT(A). Accordingly, ground no.6 is dismissed.

10.1. We have perused the detailed submissions made by the assessee before the ld. CIT(A) as reproduced in the first appellate order and find no reason to interfere with the findings arrived at by ld. CIT(A) while allowing the claim of assessee. Accordingly, ground No.7 is dismissed.

Order is pronounced in the open court on 10 November, 2025