ASSISTANT COMMISSONER OF INCOME TAX-CIRCLE-3.3.1, MUMBAI vs. JAMNAGAR UTILITIES POWER PVT. LTD., MUMBAI

ORDER \nPER PRABHASH SHANKAR [A.Μ.] :-\nThe present appeal preferred by the Revenue and Cross Objections\nof the assessee emanate from the appellate order dated18.07.2024 as\npassed by the Learned Commissioner of Income-tax (Appeals)/National\nFaceless Appeal Centre, Delhi (hereinafter referred to as “CIT(A)”]\npertaining to assessment order u/s.147 r.w.s.144 of the Income-tax Act,\n1961 [hereinafter referred to as “Act”] dated30.03.2022for the Assessment\nYear [A.Y.] 2014-15.We take up Revenue's appeal in ITA No.\n4766/MUM/2024 first, as below:\n2. The grounds of appeal are as under:-\n“Whether on the facts and in the circumstances of the case, the Ld.\nCIT(A) justified in deleting the addition of Rs.51,19,35,624/- holding\nthat the AO has not brought on records any discrepancy in the\nallocation of interests and finance charges of Rs.95,62,46,575/- to\nInvestment Division and Rs.80,99,58,408/- to Power Generation\nDivision, disregarding the absence of valid response of the assessee to\nthe actual reason which is division of unallocable expenses of\nRs.216.28 Cr out of Rs.311.90 Cr.”\n3. Facts of the case are that the return of income for relevant year was\nfiled by the assessee company declaring loss at Rs.51,71,85,850/- under\nnormal provision of Act and book profit u/s 115JB of the Act at Rs.\n621,87,16,856/-. The assessment order u/s 143(3) of the Act was passed on\n28.12.2016 without making any addition. Thereafter, notice u/s 148 of the\nAct was issued to it on 30.03.2021. In response,it filed return of income on\n26.04.2021 declaring total income at Rs.66,11,81,680/-. The reassessment\norder was passed on 30.03.2022 inter alia making additions of i) Rs.\n51,19,35,624/- in respect of less finance cost debited to power generation\ndivision resulting in grant of excess deduction under section 80IA/80IAB\nof the Act and (ii) Unrealized forex loss of Rs.75,73,89,578/- allowed\nreducing deduction claimed u/s 80IAB of IT Act.\n4. In the subsequent appeal in this regard, the ld.CIT(A) has\ndiscussed the findings of the AO relating to the additional finance cost of\nRs.51,19,35,624/- allocated to 80IAB unit by him resulting in reduction of\nthis claim. The assessee submitted before him that the AO erred in\nconsidering additional finance cost of Rs.51,19,35,624/- as allocable to\nPower Generation Division and thereby reducing claim of deduction u/s\n80IA/80IAB without appreciating the fact that the assessee is maintaining\nseparate books of accounts of the said units claiming deduction u./s\n80IA/80IAB and properly allocated finance cost which is duly audited by\nthe auditors. The assessee submitted that the segment information was\ncomplied in accordance with Accounting Standard -17 “Segment Reporting\n(AS-17)".However the reply of assessee was not accepted by AO who stated\nthat the actual reason on which basis the division of unallocable expenses\nof Rs.216.28 cr. out of Rs.311.90 cr. was made, was not provided by the\nit. During the appellate proceedings, the assessee submitted that additional\nallocation of Rs.51,19,35,624/- made by AO on turnover basis was not in\naccordance with the law. Interest cost allocation on the basis of utilization\nof funds is more appropriate and correct than the allocation on the basis of\nturnover as done by the AO.\n4.1 It was observed by the ld.CIT(A) that the 80IAB unit being the\npower plant in SEZ unit at Jamnagar was set up by M/s Reliance Utilities\nPrivate Limited (RUL) which was later demerged to the assessee company.\nFor its setup, RUL had borrowed a sum of USD 425,000,000 in FY 2006-\n07. The said finance cost was in respect of specific borrowing made for the\npurpose of setting up the power plant. The operations of the unit\ncommenced in FY 2008-09. The unit set up by RUL had claimed deduction\nu/s 80IAB since AY 2010-11 and in subsequent years. RUL has filed\nrelevant Form 10CCB for claiming the deduction u/s 80IAB prior to\ndemerger of its power plant to the assessee in FY 2011-12. The power plant\nunit claiming deduction u/s 80IAB was merged with the assessee on\n01.04.2011. Therefore, all the assets and liabilities of the power plant\ndivision had been transferred from RUL to it from 01.04.2011. Accordingly,\nthe ECB loan amounting to USD 425,000,000 taken for setting up the\npower plant division was transferred from RUL to it. The interest/finance\ncost amounting to Rs.80,99,58,408/- on the ECB loan had been debited to\n80IAB unit. Accordingly, borrowing which had nexus with the 80IAB unit\nis ECB, the interest on the same was debited to the Profit and Loss account\nprepared for the 80IAB unit by the assessee. The AO relied on the segment\nreporting for accounting purpose while coming to the conclusion that\nunallocated interest cost as per segment accounts shall be allocated to all\nunits in turnover ratio.\n4.2 The ld.CIT(A) further observed that Clause 5.6 of this AS-17\nthat prescribed the segment expenses was as under:\n(i)\nThe expense resulting from the operating activities of a\nsegment that is directly attributable to the segment and,\n(ii)\nThe relevant portion of enterprise expense that can be\nallocated on a reasonable basis to the segment, including\nexpense relating to transactions with other segment of the\nenterprise.\n4.3 The ld.CIT(A) further noted that AS-17 further provides that\nsegment expense does not include the interest expense, including interest\nincurred on advances or loans from other segments, unless the operations\nof the segment are primarily of a financial nature. The assessee out of the\ntotal interest and finance expenses debited to profit and loss account,\nallocated an amount of Rs.95,62,46,575/- for investment activities (being\nfinancial nature) to \"Investment division\" and the balance interest\nexpenditure was reported as \"Unallocable\" in accordance with para 5.6 of\nAS-17. In its financial statements for 80IAB unit, allocated Rs.\n80,99,58,408/- to 80IAB unit based on actual utilization of proceeds of the\nborrowings. The assessee, also provided its breakup of borrowings and its\nutilization. It is evident that it utilized only the foreign ECB loan\namounting to USD 425,000,000 for its SEZ unit. Therefore, further\nallocation by the AO to the tune of Rs.51,19,35,624/- to the SEZ unit\nseemed to be incorrect.\n4.4 Further, in the appellate proceedings, the assessee relied on\ncertain case laws i.e. the Hon'ble ITAT Ahmedabad in the case of Sintex\nIndustries Ltd (2786/Ahd/2014) has\nstated about allocation of common interest and financial charges as\nunder:-\n\"We have duly considered rival contentions and gone through the record\ncarefully. The case of the assessee is that financial charges cannot be\nallocated in the ratio of sales, because, the sales have no direct\ninfluence on the interest expenditure. The financial charges are relevant\nto the investment made by an assessee. In other words, suppose an assessee has\nmade investment after borrowing funds due to some reason or market\nconditions he could not effect the sales, then, if we go by the logic of the AO,\nthere would be a lesser allocation. The assessee has allocated the expenditure on\naccount of financial charges, keeping in view the investment in Bhaddi units. In\nother words, these are direct expenditure relatable to Bhaddi units. Therefore,\nthe Id.CIT(A) has rightly deleted the allocation of interest/financial charges in\nthe Bhaddi made on the basis of sales ratio. We do not find any infirmity in the\norder of the Id.CIT(A) on this issue.”\n4.5 The Hon'ble ITAT Mumbai in the case of M/s. Glenmark\nPharmaceuticals Ltd. (ITA No. 1654/Mum/2016) stated that:\n“In these circumstances, when no loan is there for Bhaddi unit and the unit is\ngenerating huge profits, the case law relied by the Id. Counsel of the assessee\nduly support the proposition that only the interest expenses which have direct\nnexus in earning the income of the tax exempt unit should be considered. Since\nthe documentary evidence duly support the plea that there is no direct nexus\nbetween the expenses allocated by the A.O. to the unit, we do not find any\ninfirmity in the order of the Id. CIT(A) in this regard.”\n4.6 The ld.CIT(A) taking note of above decisions further observed\nthat the appellant had identified interest and finance charges amounting to\nRs.95,62,46,575/- directly relatable to investment activities. This interest/\nfinance cost had been allocated to investment division. Further, out of the\nunallocable amount, assessee had allocated interest/ finance cost to the\ntune of Rs.80,99,58,408/- towards 80IA/80IAB unit. This allocation of\ninterest expenses had been directly identified by it towards 80IAB unit and\ninvestment division. The AO has not brought on records any discrepancy in\nthis allocation. Since the AO has not identified any specific defect\npertaining to allocation, there is no basis for further allocation of interest\nexpenses on the basis of turnover. In view of these facts and following the\ndecision of hon'ble ITATs(supra) the addition of Rs.51,19,35,624/-\nmade by AO on account of less finance cost debited by the assessee to\npower generation division was deleted.\n5. Before us, the ld.DR relied on the assessment order and has\nemphasized that the assessee did not provide break up and exact allocation\nof Unallocable expenses. Therefore, the deduction claimed u/s 80IAB\ncould not be considered to be based on correct facts.\n6. Per contra, the ld.AR relied on the appellate order and reiterated\nthe same contentions as made before the first appellate authority.He has\nfurther made oral and written submissions. It is reiterated that the\nassessee is in the business of power generation and investments. In the\nfinancial statements, the assessee reported segmental information in\ncompliance with the Accounting Standard -17 issued by Institute of\nChartered Accountants of India (“ICAI”), for Power Generation segment\nand Investment segment. During the year under consideration, it incurred\ntotal finance cost of Rs.311.90 cr. As per AS-17, the “segment expense\"\nonly include operating expenses directly attributable to the segment. It\nfurther explicitly excludes interest expense \"unless the operations of the\nsegment are primarily of a financial nature”.\n6.1 It is further submitted that the assessee allocated the finance\ncost of Rs.95.62 cr. to the investment segment (being primarily of financial\nnature) and as such interest cost was not allocated to the power generation\nsegment in the segmental presentation given in the financial statements.\nResultantly, interest cost of Rs.216.28 crs. (ie. 311.90 cr. less 95.62 cr.) was\nreported as “unallocable” in the segmental information given in the\nfinancial statements. For the sake of quick reference, the same was\nreproduced as under:\n(i) (Primary Segment information (Business)\nParticulars\nPower\nGeneration\n2013-14 2012-\n13\n(Rs in Crore)\nInvestments\n2013-\n14\n2012-13\nUnallocable\n2013-14 2012-\n13\nTotal\n2013-\n14\n2012-\n13\nSegment\nRevenue\n1463.66 1323.81 169.48 157.08\n1633.14 1480.8\n0\nOperating\nSegment Result\nbefore Interest\nand Tax\n552.42 849.34 72.77 17.60\n(3.79)\n(14.15)\nAdd-Interest\nIncome\n0.71\n0.71\nAdd-Other\noperating income\nnon\n0.00\n0.00\n0.00\n0.00\nLess Interest and\nFinance Charges\n216.28\n133.37 216.28\n133.37\nProfit Before Tax 552.42 849.34 72.77 17.60\n(219.36)\n(147.52 405.83 719.42\n)\n6.2 It is further stated that during the course of re-assessment\nproceedings, the assessee had duly submitted before the AO that:\ni. As per AS-17, the interest cost was only allocated to the Investment Division,\namounting to Rs.95.62 cr.\nii. In FY 2006-07, an external commercial borrowing (\"ECB\") of USD 425\nmillion was obtained by M/s. Reliance Utilities Pvt. Ltd. (“RUL”) for setting up\nof Power Plant at SEZ area at Jamnagar. W.e.f. 1.4.2011, RUL was demerged\ninto the Assessee company. Resultantly, the said ECB was also transferred\nfrom RUL to Assessee company.\niii. For the purpose of computing deduction u/s.80-IAB, the interest on\naforesaid ECB, of Rs.80.99 crs, was allocated to the Power Generation Unit at\nSEZ. However, in view of AS-17, the same was reported as “unallocable\" in the\nfinancial statements, as the power generation business was not primarily in\nnature of finance.\niv. The aforesaid interest cost on ECB of Rs.80.99 crs included the adjustment\nof Rs.61.48 crs towards foreign currency exchange difference to the extent\nconsidered as borrowing cost as per AS-16.\nv. Thus, the interest cost of Rs.216.28 crs categorised as “unallocable” in the\nsegmental information included the interest cost of Rs.80.99 crs allocated to\nthe profits of SEZ unit eligible u/s.80-IAB of the Act.\n6.