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Income Tax Appellate Tribunal, DELHI BENCH “C”, NEW DELHI
Before: Sh. A. D. JainDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The assessee is a Government of India undertaking engaged in the business of development of infrastructure project in the field of Civil Engineering, Electrical Communication and turn key projects in India as well as abroad.
A.Y. 2006-07: (Assessee’s Appeal)
Disallowance of Deduction u/s 80IA:
The assessee earned profit from development of infrastructure project at Srinagar-Barahmulla Rail Project in J&K and PMGSY Patna project wherein roads have been developed in Bihar. The assessee earned total profit of Rs.36,14,02,300/- and claimed the same as deduction u/s 80IA of the Income Tax Act, 1961.
Aggrieved with the confirmation of disallowance of deduction by the ld. CIT(A) who held that the assessee is not engaged in the business of infrastructure facilities and the assessee in fact a contractor, the appeal has been filed before the Tribunal.
3.1 At the outset, we find that this issue has been adjudicated in favour of the assessee and the deduction has been held to be allowable vide the orders of the Co-ordinate of the ITAT for the & Ors 3 M/s. Ircon International Ltd.
A.Ys. 2000-01, 2001-02, 2003-04, 2005-06. For the sake of ready reference, the relevant portion of the order of the ITAT in the combined order in for A.Y 2004-05 and ITA No. 2220/DEL/2011 for A.Y 2005-06 dated 30.01.2020 is reproduced below:
”36. Ground No. 2 relates to the deletion of disallowance of deduction u/s 80IA of the Act amounting to Rs. 26.71 crores made by the Assessing Officer.
The claim of deduction came up for adjudication for the first time in Assessment Year 2000-01 and the co-ordinate bench in held as under:
“3.5 Considering the arguments advanced by the parties and after going through the orders and material placed before us, we hold as under” Regarding the claim of deduction u/s 801A, it is seen that appellant is a company and has entered into contracts with various Central Government, State Government, State Government and Local Authority and other statutory bodies. A close reading of the agreement (for instance agreement with MSRDC enclosed in the paper book) clearly shows that appellant developed the infrastructure facility and has not acted merely as contractor as sought to be made out by Assessing Officer and C1T (Appeals). The Oxford dictionary defines the term developer as a person that designs and crate new products, whereas contractor is a person or a company that has a contract to do work or to provide goods or services. Various clauses of the above referred agreement to which reference has been made by us little below would show that the construction rail over bridge projection (ROB) 23 awarded by MSRDC to the appellant is nothing but development of infrastructure facility, which was to be legally handed over to & Ors 4 M/s. Ircon International Ltd. the Railways and MSRDC after the payment was received. Various clauses of the agreement would show that the jobs done by the appellant were planning, execution, construction and making the infrastructure facility ready for operations. Ld. Assessing Officer has not pointed out any specific clauses of any agreement, which shows that all attributes of development were not present. Making a bald assertion that assessee was a contractor does not serve any purpose. Merely using the terms contractor in the agreement would not make any difference as what has to be seen is the substance. Anybody who enters into a contract is closely called a contractor but that does not mean that such person entering into the contract cannot be developer. The other agreement with MSRDC shown to us as one as instance clearly shows mat appellant was engaged in investigation, planning, organizing and construction of road over bridge within the stipulated time. If the activities undertaken by the appellant cannot be termed as development, we are afraid then what can be called development? Therefore, we do not have any hesitation in holding in view of the arguments advanced from the sides of both parties and decisions relied upon that appellant was developing infrastructure facility and claimed deduction u/s 80IA in respect of income derived from the development of infrastructure facilities. Explanation inserted below section 80IA(13) does not prevent developers in claiming deduction u/s 80IA(4). Similarly showing the receipts as work receipts in the books of accounts of the appellant alone cannot determine the character of the appellant which in our opinion was that of development. The argument of revenue that infrastructure facility should be owned by the appellant is also misplaced in view of ITO vs. Cable 24 Constructions 354 ITR 13 (Guj.) and various decisions relied upon by the Ld. Counsel for the appellant. We also note & Ors 5 M/s. Ircon International Ltd. that the Ld. CIT (DR) tried to raise issues which were not even the case of the assessing officer and this in our considered opinion is clearly impressible. Case laws relied by the revenue are clearly misplaced on facts and are clearly distinguishable. Special bench decision in the case of B. T. Patil (Mum.) 126 TTJ 577 was recalled later on as it did not consider the binding decision of Hon’ble Bombay High Court in the case of ABG 322 ITR 323 (Bom). According to the assessment order, copies of all the agreements were before Assessing Officer yet assessing officer chose to make sweeping observation that the assessee is not developer. Such sweeping and bald assertion cannot be approved by us. Therefore, taking into the facts of the present case, we are the considered view that appellant is entitled to claim deduction 80IA, which was wrongly denied. We set aside the order of the ld. CIT (Appeals) and direct the Assessing Officer to allow deduction u/s 801A has claimed by the appellant. Ground No. 1 is allowed.”
As no new facts have been brought on record for the year under consideration, respectfully following the findings of the co-ordinate bench, we direct the Assessing Officer to allow deduction u/s 80IA of the Act.
Disallowance u/s 14A:
During the year, the assessee had income from tax free bonds of Rs.12.39 crores and claimed the same as exempt u/s 10 of the Income Tax Act, 1961. The AO has disallowed an amount of Rs.91,00,933/- u/s 14A out of the total administrative and operative expenses of Rs.81.68 crores. The issue of disallowance has been a subject matter of appeal before the Tribunal in the earlier years. For the sake of ready reference, the relevant portion of the order of the ITAT in the & Ors 6 M/s. Ircon International Ltd.
combined order in for A.Y 2004-05 and ITA No. 2220/DEL/2011 for A.Y 2005-06 dated 30.01.2020 is reproduced below:
“10. Ground No. 2 relates to the disallowance of Rs. 28,04,000/- made u/s 14A of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'].
While scrutinising the return of income, the Assessing Officer noticed that the assessee has earned dividend income of Rs. 7.38 crores, which has been claimed as exempt u/s 10(33) of the Act. The Assessing Officer further noticed that income from tax free bonds of Rs. 51,00,760/- has also been claimed exempt u/s 10(15) of the Act. The Assessing Officer was of the firm belief that provisions of section 14A squarely apply on the facts of the case. The assessee was asked to show cause as to why reasonable disallowance of expenses should not be made for earning exempt income.
In its reply, the assessee strongly contended that no disallowance should be made as the assessee has not incurred any expenditure in earning exempt income.
13. Not convinced with the reply of the assessee, the Assessing Officer was of the opinion that certain portion of the administrative expenses should go towards earning of exempt income and, accordingly, attributed the administrative expenses towards earning of dividend income in proportion to tax free income to total receipts and computed the disallowance of Rs. 28.04 lakhs.
14. The assessee carried the matter before the ld. CIT(A) but without any success. & Ors 7 M/s. Ircon International Ltd.
Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.
16. Per contra, the ld. DR strongly supported the findings of the Assessing Officer.
17. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we have to state that Rule 8D of the Rules has been held to be applicable from Assessment Year 2008- 09. Therefore, for the year under consideration, there is no formula to compute the disallowance. However, at the same time, we are of the view that reasonable expenditure should be disallowed for earning exempt income. Though the Assessing Officer has attributed the administrative expenses on the ratio of the tax free income to total receipts and computed the disallowance at Rs. 28.04 lakhs, but we are of the opinion that such computation is on the higher side. We, therefore, direct the Assessing Officer to restrict the disallowance to Rs. 15 lakhs which should meet the ends of justice. The assessee will get relief of Rs. 13.04 lakhs.”
In the absence of any change in the judicial pronouncements and in the factual position except the amounts earned, following the earlier order, we hold that Rs.20 lacs be treated as expenses incurred in earning of the exempt income.
Prior Period Expenses:
While scrutinizing the return of income, the Assessing Officer noticed that the auditors have mentioned prior period expenses claimed during the year under consideration. The assessee was asked to justify the claim of prior period expenses. The assessee furnished details of prior period & Ors 8 M/s. Ircon International Ltd.
expenses which pertain to miscellaneous receipts, work expenses, administrative expenses and other expenses of Rs.2,80,38,500/-. Out of this amount, an amount of Rs.1,79,05,300/- being the reversal of income of earlier years and Rs.49,23,100/- recovery by the client in case of AKRE project and the balance of Rs.52,10,100/- has been disallowed by the Assessing Officer. The ld. CIT(A) gave relief of Rs.13,84,200/- and confirmed Rs.38,25,800/- owing to submission of details with respect to the manpower deputed to Mozambique Project. The ld. CIT(A) confirmed the remaining amount of Rs.38,25,800/- owing to non-submission of any detail before the revenue authorities.
Before us, it was argued that the expenses have been crystallized and fully allowable. Since, this expenditure is specific to this year, in the absence of any details produced before the revenue authorities, the claim of the assessee cannot be allowed. In the interest of justice, we hold that this is a fit case to remand this issue to the file of the Assessing Officer with directions to the assessee to submit the details of the AO and claim the deduction in accordance with the provisions of the Act.
Claim of bad debts & Adjustment of Book Profits:
Not pressed.
Income through PE & 115 JB:
The assessee computed the income /profits in accordance with the provisions of DTAA with UK, Bangladesh and Malaysia to Rs.12,26,84,700/-. The AO disallowed Rs.2,75,600/- on account of corporate office expenses which have not been & Ors 9 M/s. Ircon International Ltd.
deducted by the assessee while computing profit from foreign entities.
11. The ld. CIT(A) enhanced this amount to the tune of the total amounts earned from the foreign projects.
12. The ld. CIT(A) while enhancing held that the assessee is a resident of India and due to the state of residency the India has inherent right to tax global income of an assessee as per provisions of section 5 of the IT Act. Sub-clause-(c) of Clause- (1) to section 5 provides that total income of any previous year of a person who is a resident includes all income from whatever source derived which accrues or arises to him outside India during such year. As per provisions of the Act the appellant is a resident assessee of India and because of this income from all sources derived by the appellant within India or outside India has to be included in its total income for taxation purposes in India. Due to state of residency, India has inherent right to tax the global income of the appellant as per provisions of section- 5. As per India’s existing DTAA’s, India has adopted credit method whereby the global income of a resident tax payer is considered which includes income accruing or arising outside India as well, even though on such income a more beneficial tax treatment under the tax laws of host country may have been available. Under this system once the assessee has paid tax under the tax laws of host country, the credit for the tax payments in the host countries is given against the global income of the assessee under Indian Income Tax Act, which includes the overseas income as well. The appellant has claimed that it has permanent establishment in the foreign countries from where the project income have been derived and with India has entered into double taxation avoidance & Ors 10 M/s. Ircon International Ltd.
agreement. The appellant has opted for application of DTAA u/s 90(2). The character of the income earned by the appellant is 'income from business'. Article- 7 of relevant DTAA's which are applicable in the appellant's case are similarly worded. In these DTAAs, it has been provided that the profit of an enterprise of contracting state shall be taxable only in that state unless the enterprise carries on business in other contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in the other Contracting State but only so much of them as is attributable directly or indirectly to that permanent establishment. This Article-7 of the all relevant DTAA is consisting of two parts, i.e., one is that the profit of an enterprise of a contracting state shall be taxable only in that state; and, the second part is that when the enterprise carries on business in the other contracting state through a permanent establishment. In that situation, the profits of enterprise may be taxed in the other contracting state but only so much of them as is attributable to that permanent establishment. Thus, the first part of the Article gives exclusive right to the taxation of business income to the state of residency as the phrase used as 'shall be taxable only'. The second part of this article 7 of the relevant DTAA provides right to taxation of the state of residency as well as to the other contracting state wherein the permanent establishment situated. Thus, the Article 7 provides that in such a situation, the state of the residents does not have exclusive right to tax but it has inherent right to tax such income. The article also provides that the state of the source has also right to tax the business income. It is a non-exclusive right in case there exist a permanent establishment. The phrase used 'may be taxed'. Therefore, the combined reading of the sentences of Article 7 of relevant DTAA means that the & Ors 11 M/s. Ircon International Ltd. state of source has non-exclusive right to tax business income attributable to permanent establishment. In view of this, such income may be taxed as per the domestic laws. This non- exclusive right of state of source does not extinguish the inherent right of state of residency to tax global income of its residents. In the circumstances, where the state of the residents of the taxpayer has given up its inherent right to tax the global income, in such situation, the phrase used in Article 7 of the DTAA is 'shall be taxable only'. Since in all the DTAA applicable in the case of appellant the phrase used is 'may be taxed', therefore, inherent right of taxation of global business income in India is not lost.
The fiscal domicile of the appellant had to be decided in view of the provisions of Treaty. Appellant's contention that its foreign income is taxable income in foreign countries and it cannot be taxed in India is an untenable contention. It is a fallacious view taken by the appellant by wrong interpretation of Article 7 of relevant DTAA.
In the sphere of international taxation, there are two fundamental systems of taxation, one is based on residency of the taxpayer and the other is based on the source of the income. In the international arena, most of the countries follow the residency based taxation system. According to this system, a country can tax its residents on the global income of the taxpayer while the non-residents are taxed only on the income sourced inside the country. The provisions of section 5 as enumerated above give a scope of a total income of the assessee who is resident of India. As per these provisions, the income of the resident taxable in India includes all income from whatever source derived which is received or is deemed to be & Ors 12 M/s. Ircon International Ltd. received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise in India during such year or accrues or arises to him outside India during such year. Thus, the scope of the total income in the case of a resident also extended to the income accrues or arises to him outside India during such year. Under the source based system, a country can tax a person whether resident or non-resident, only on income sourced inside the country. Had all the countries in the world following source based taxation system then the problem of double taxation would not have arisen. However, under the resident based system, there arises a situation of double taxation because countries where the taxpayer is a resident then it will have to pay tax on its global income. To avoid the double taxation, two rules are devised in the DTAA's, i.e., one is by way of providing Distributive Rules under which taxing rights allocated between contracting state with respect to various kinds of income; and the second rule is to put state of residence under an obligation to give either credit for taxes paid in the source state or to exempt the income which is taxed in source state. The taxation law in India follows the credit method for reliving the burden of double taxation. Therefore, appellant ought to have included the overseas income against which credit for taxes paid overseas should have been availed. Therefore, the income received from foreign projects of Rs. 12,26,84,796/- required to be included for taxation purposes under normal provisions of the IT Act and credit for taxes paid in the host countries i.e. Malaysia of Malaysian Ringgets of 2,783,105.90 after converting the same in Indian Rupees as on 31.03.2006 should be allowed. Accordingly, the income to the extent of Rs.12,26,84,796/-has been enhanced. & Ors 13 M/s. Ircon International Ltd.
The ld. CIT(A) has also held that this amount is required to be taxed both under normal provisions and MAT provisions. This issue has been adjudicated by the Tribunal in for the A.Y. 2000-01 and also in ITA No.1825/Del/2005 dated 31.10.2019 and allowed in favour of the assessee. The relevant part of the order of the Tribunal is as under:
“22.2 The Assessing Officer held that adjustment can be made only as provided in Explanation to section 115J as decided by the Hon’ble Supreme Court in the case of Apollo tyres Vs CIT (2002) 255 ITR 273 (SC). According to him, exclusion of DTAA is not provided in that explanation. The Ld. CIT(A) confirmed the action of the Assessing Officer.
22.3 Before us the Ld. Counsel of the assessee submitted that issue in dispute is covered in the favour of the assessee by the decision of the Tribunal in the case of the assessee for assessment year 2000- 01, wherein it is held that when such income is not to be taxed as per DTAA, it cannot be brought to tax indirectly under the deeming fiction under section 115JB of the Act.
22.4 The Ld. DR, on the other hand relied on the order of the lower authorities.
22.5 We have heard rival submission and perused the relevant material on record. The Tribunal in in the case of the assessee for assessment year 2000-01 has adjudicated on the identical issue in dispute involved as under:
“9. We considered the above heard the rival submissions made by the parties in respect of Ground No.7 and it is seen that income earned from permanent establishment in foreign countries is liable to be excluded from the computation of book profit in view of the decision in the case of the bank of Tokyo-Mitsubishi UFJ Ltd vs. ADIT 152 1TD 796 (Del.), which has been affirmed by Hon’ble High & Ors 14 M/s. Ircon International Ltd.
Court of Delhi. When such income is not to be taxed as per DTAA, it cannot be brought to tax indirectly under the deeming fiction under section115JA. Accordingly, this ground of appeal is decided in favor of the appellant.”
22.6 The issue in dispute involved in the present ground of the appeal, being identical to the issue adjudicated by the Tribunal (supra) above, respectfully following the finding of the Tribunal (supra), we direct the Assessing Officer to exclude the income which is subject matter of dispute under this ground of the appeal from the ambit of the computation of book profit under section 115JB of the Act. The ground of the appeal is according allowed.”
Following the orders of the Co-ordinate Benches of the Tribunal, the appeal of the assessee on this ground is allowed. : A.Y. 2006-07 (Dept.)
Provision of maintenance:
15. The assessee has challenged disallowance of provision for maintenance for the project executed by the appellant amounting to Rs. 2,27,42,328/-. The Assessing Officer has held that this provision has been made on estimated basis and unascertained liability. The assessee submitted that it has to maintain or repair the defects in the projects executed by it during the defect liability period as specified in the contract agreement. The assessee claimed that these are mandatory expenses and provision has been made on the basis of its past experience and on scientific basis, therefore, such provision is an allowable expenditure.
It was submitted that the provision for maintenance expenditure is provided to cover the company's expenditure to liability towards defect rectification and/or maintenance & Ors 15 M/s. Ircon International Ltd.
incurred by the company after completion of the contract. Such provision is made taking into account contractual provisions, operating turnover for the year, type of project, period of maintenance, contractual obligations of the subcontractors and other relevant factors, if any. As per the agreement with the client, the company is liable to maintain the works executed by it even after the projects are completed and handed over to the clients, for a period of 12 or 24 months from the date of completion. During this period, all the defects are to be rectified free of cost even though the Company has already handed over completed project to the client. The total project cost i.e. contract receipts, have already been received from the client in respect of the said projects before handing over the same to the client and no separate consideration is receivable. During the year an amount of Rs.2,27,42,328/- has been provided for non-DTAA project and Rs.7,18,000/- for DTAA projects.
The ld. CIT(A) deleted the addition holding that the assessee has been claiming that provision for maintenance has been made taking into account contractual provision, operating turnover of the year, type of project period of maintenance and other relevant factors. It was held that as per contract agreement the appellant is liable to provide free of cost maintenance to the clients for the period mentioned in the agreement. At the time of completion of the contract, liability arises in the hands of the appellant company to provide free maintenance to the various contractees for the period specified in the agreement. This liability arises at the time of the completion of the project itself and obviously the expenditure required can only be estimated on the basis of past experience, nature of the contract, type of the project and turnover of the & Ors 16 M/s. Ircon International Ltd.
appellant in that particular year. The appellant claimed that estimate has been made on best estimated basis based upon the experience in the construction industry. Therefore, the objection of the Assessing Officer that the liability has not arisen during the year as it has been quantified on estimated basis is not correct. It is also a fact not disputed by the Assessing Officer in the assessment order that all along the provision for maintenance of expenses have been allowed to the appellant company except the disallowances made in A.Y. 1985-86 and 1995-96.
We find that the similar matter of provision for maintenance stands adjudicated by the Co-ordinate Bench of the Tribunal. The assessee has been providing for expenses to be incurred on demobilization, maintenance and other expenses since by inception of the Company. The same has been allowed by the Department all along except in the Assessment Years 1985-86, 1995-96 & 2001-02, 2002-03, 2003-04, 2004-05 and 2005-06. In these years, the A.O. disallowed the aforesaid provisions. Further, in appeal before the Ld. CIT(A),in the assessment year 1985-86, 1995-96 and 2001-02 and 2002-03, these were allowed on the basis of the aforesaid judicial analysis.
Since, the decision of the ld. CIT(A) is based on the decision of the earlier years which stands upheld, we decline to interfere with the order of the ld. CIT(A) on this issue.
Prior period Expenses:
This issue has been subsumed in the ground of the assessee and already been dealt in assessee’s appeal in ITA 2401/Del/2013. & Ors 17 M/s. Ircon International Ltd. : A.Y. 2007-08 (Assessee):
Prior period Expenses:
The Assessing Officer disallowed Rs.43,52,514/- under the head “prior period expenses”. Out of which, the ld. CIT(A) held that expenses amounting to Rs.14,21,524/- were crystallized during the year and confirmed the balance amount of Rs.29,30,972/-. Since, the decision of the ld. CIT(A) is based on factual verification for the year in question, we hereby decline to interfere with the decision of the ld. CIT(A).
Income through PE & 115 JB:
This issue has been adjudicated above in A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed. : A.Y. 2007-08 (Dept.):
Disallowance of Deduction u/s 80IA:
Prior period Expenses:
These issues is akin to the grounds adjudicated above in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on these grounds is dismissed.
Technical Know-how:
This issue has been adjudicated in A.Y. 2008-09, hence the same ratio applies. The appeal of the revenue on this ground is dismissed. & Ors 18 M/s. Ircon International Ltd.
DTAA Disallowance u/s 14A:
The appeal of the revenue on this ground is dismissed in view of the ratio laid down with regard to the income through PE and 115JB.
Disallowance u/s 14A:
The assessee earned income of Rs.12,39,83,554/- from tax free bonds which was claimed exempt u/s 10 of the Act. In the earlier year an amount of Rs.20 lacs has been disallowed u/s 14A in for the A.Y. 2006-07. The same ratio applies to the case of the assessee for the instant year. : A.Y. 2008-09 (Assessee): Disallowance of Deduction u/s 80IA:
Income through PE & 115 JB:
These issues is akin to the grounds adjudicated above in A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
(From the order of the ld. CIT(A))
This ground relates to disallowance of expenses under Section 14A by the AO in respect of tax free interest income earned by the appellant amounting to Rs.4,83,21,000. I find that the appellant has earned tax free interest income from investment in bonds amounting to Rs.12,39,83,555. The appellant had not disallowed any expenditure earned for earning the above income, that is why the AO had asked the appellant to explain & Ors 19 M/s. Ircon International Ltd. as to why disallowance under section 14A may not be made. The Ld. Counsel referred to the decision of the Ld. CIT(A) in the case of the appellant for A.Y.2005-06, in which he estimated certain expenses which had proximate nexus with earning of tax exempt income and which were calculated based on estimation of administrative expenses having proximate nexus with earning of tax- exempt income. The Ld. CIT(A), on observing that the meeting of the Investment Committee was held twice during the year, treated 10% of the salary of the members of the Investment Committee towards earning of the tax exempt interest income. The Ld. Counsel had further informed that during the year, the Investment Committee did not meet and hence the appellant had not made any disallowance. The appellant had also made alternative plea that in case the disallowance is confirmed under Rule 8D, without prejudice to the same, in computing the disallowance under Rule 8D, the amount of interest expense to Rs. 4,83,21,000 taken by the Ld. AO may be taken as Nil. Since the appellant company had not paid any interest during the year. Further, the appellant pleaded that under Rule 8D(2)(iii), average of 'net current assets' may be taken in place of average of 'total assets.'
The ld. CIT(A) held, “that there is no doubt that the appellate company is a cash-rich company and the Ld. AO had himself admitted in the assessment order that the appellant company had own funds comprising share capital and reserves aggregating to Rs.9,48,931 million against which the current assets and investment stood at Rs.3,910 million and 2455 million respectively. There is no doubt that the appellant company-had adequate cash balance available for making the investment in tax free bonds. I find that the Ld. AO was not & Ors 20 M/s. Ircon International Ltd.
satisfied with the explanation of the appellant as to why no disallowance was made in respect of expenses relatable to tax exempt interest income, on the grounds that expenses like salary, employee welfare, postage, telecom, conveyance etc. are common expenses which may have nexus with earning of dividend income. I also observe that the Ld. CIT(A)-XIII, while deciding the appeal for 2005-06, had estimated disallowance of salary in respect of certain officers from the Finance Section who were members of the Investment Committee. This fact has also been emphasised by the appellant while making submission before me. However, the appellant pleaded that since there was no meeting of the Investment Committee during the year, it had not made any disallowance. I find that in the absence of Rule 8D, the basis of disallowance adopted by the CIT(A) was by use of a Thumb-rule of taking 10% of salary of certain officials who are involved in investment decision for estimating administrative expenses, which could have proximate nexus with tax exempt income. The endorsement of the method adopted by the Ld. CIT(A)-XIII by the appellant also shows that the appellant also acknowledges that there were indeed administrative expenses incurred relating to earning of tax exempt income though its computation was not easy. The moot point is that certain expenses were incurred for earning exempt income, and therefore, it does not make any difference whether the Investment Committee met twice or four times in a year or did not meet at all. It is evident that investments were made during the year and tax exempt interest income amounting to Rs. 12,39,83,555 was also earned which requires certain level of administration control and execution and financial checks at different levels in terms of monitoring, accounting and further deployment of such income.
Keeping in view the above and particularly by observing that even the appellant had admitted possibility of certain administrative expenses having proximate nexus with the earning of tax exempt income, it is evident that when the Ld. AO rejected the explanation of the appellant it was not on frivolous grounds but on cogent & Ors 21 M/s. Ircon International Ltd. grounds which is evident by appellant's own admission of possibility of incurring of certain administrative expenses for earning tax exempt income. In such circumstances, keeping in view the provisions of sub-Section (2) of Section 14A, the only course of action left open for the AO is to compute the disallowance strictly in accordance with Rule 8D of the I.T. Rule, 1962. Therefore, under the circumstances, I uphold the action of the AO in invoking the provisions of Rule 8D.
However, having held the above, since there was no interest expenditure incurred by the appellant during the Previous Year, no disallowance could have been made under Rule 8D(2)(ii). On the 2nd issue, the appellant's contention that for making such disallowance ought to have taken average of 'net current investment' and not the 'total assets', is not supported by the provisions of Rule 8D which call for taking average of total assets as per the books of the assessee as on the first day and the last day of the Previous Year. The AO is accordingly, directed to recompute the disallowance.
With the change in the legal proposition in the A.Y. 2008- 09 onwards, we decline to interfere with the order of the ld. CIT(A). : A.Y. 2008-09 (Dept.): Provision of maintenance:
This issue is akin to the grounds adjudicated above in A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Technical Know-how:
This amount of Rs.6,85,98,280/- which was treated as capital expenditure in nature by the revenue pertain to charges paid for services of survey and identifying villages as per & Ors 22 M/s. Ircon International Ltd.
PNGS, which requires preparing of DPR consultancy services for soil survey and other detailed activities required for the project. It was also informed that the agency charges were for the purpose of securing contract and the smooth dealing with the client. The assessee furnished detailed ledger account in this regard before the Ld. CIT(A) who held that it is evident that these expenses are regular business expenses which are incidental to the business of the assessee and in no way provide any enduring benefit to the assessee. Therefore, applying the ratio laid down by the Hon’ble Supreme Court in the case of M/s Empire Jute Co. Ltd. Vs. CIT 124 ITR 1, the addition made by the AO in this regard is deleted by the ld. CIT(A).
In the absence of any material contrary to the findings of the ld. CIT(A) brought before us, we decline to interfere with the order of the ld. CIT(A). The appeal of the revenue on this ground is dismissed. : A.Y. 2009-10 (Assessee):
Disallowance of deduction u/s 80IA:
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
During the year, the assessee earned tax free interest amount of Rs.4,09,86,000/-. This issue has been dealt in the & Ors 23 M/s. Ircon International Ltd.
case of the assessee for the assessment year 2008-09 in and the same ratio applies.
With the change in the legal proposition in the A.Y. 2008- 09 onwards, we decline to interfere with the order of the ld. CIT(A). : A.Y. 2009-10 (Dept.):
Provision for Maintenance:
This issue has been adjudicated in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on this ground is dismissed.
Technical Know-how:
37. This issue has been adjudicated in A.Y. 2008-09, hence the same ratio applies. The appeal of the revenue on this ground is dismissed. : A.Y. 2010-11 (Assessee): Disallowance of deduction u/s 80IA:
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
During the year, the assessee earned tax free interest amount of Rs.2,79,91,845/-. This issue has been dealt in the case of the assessee for the assessment year 2008-09 in ITA & Ors 24 M/s. Ircon International Ltd.
No. 2402/Del/2013 and the same ratio applies. With the change in the legal proposition in the A.Y. 2008-09 onwards, we decline to interfere with the order of the ld. CIT(A). : A.Y. 2010-11 (Dept.):
Provision for Maintenance:
This issue has been adjudicated in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on this ground is dismissed. : A.Y. 2011-12 (Assessee):
Disallowance of deduction u/s 80IA:
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
During the year, the assessee earned tax free interest amount of Rs.1,36,47,143/-. This issue has been dealt in the case of the assessee for the assessment year 2008-09 in and the same ratio applies. With the change in the legal proposition in the A.Y. 2008-09 onwards, we decline to interfere with the order of the ld. CIT(A). & Ors 25 M/s. Ircon International Ltd. : A.Y. 2011-12 (Dept.):
Provision for Maintenance:
This issue has been adjudicated in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on this ground is dismissed.
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
During the year, the assessee earned tax free interest amount of Rs.7,83,36,436/-. This issue has been dealt in the case of the assessee for the assessment year 2008-09 in and the same ratio applies. With the change in the legal proposition in the A.Y. 2008-09 onwards, we direct the AO to determine the disallowance in accordance with Rule 8D(2)(ii). : A.Y. 2012-13 (Dept.):
Disallowance of deduction u/s 80IA:
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on these grounds is dismissed. & Ors 26 M/s. Ircon International Ltd.
Provision for Maintenance:
This issue has been adjudicated in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on this ground is dismissed. : A.Y. 2013-14 (Assessee):
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the assessee on this ground is allowed.
Disallowance u/s 14A:
During the year, the assessee earned tax free interest amount of Rs.12,70,61,120/-. This issue has been dealt in the case of the assessee for the assessment year 2008-09 in and the same ratio applies. With the change in the legal proposition in the A.Y. 2008-09 onwards, we direct the AO to determine the disallowance in accordance with Rule 8D(2)(ii).
CSR Expenses:
During the year, the assessee incurred an amount of Rs.9,83,63,858/- on account of Corporate Social Responsibility expenses which have been disallowed by the AO and confirmed by the ld. CIT(A).
This is a straight issue supported by the provisions of the Income tax Act supporting the claim of the assessee. The Explanation 2 to section 37(1) of Income Tax Act 1961 was & Ors 27 M/s. Ircon International Ltd.
inserted in Finance Act 2015 with regard to the disallowance of CSR expenses and it does not have retrospective applicability. Hence, appeal of the assessee on this ground is allowed.
Advances Written off:
This ground relates to disallowance made by the AO amounting to Rs.60,00,000/- on account of advance written off. On the ground that, no details regarding advances written off has been filed by the assessee before the AO.
The ld. CIT(A) allowed an amount of Rs.22,80,890/- pertains to TDS credit which could not be availed and written off and confirmed an amount of Rs.31,44,974/- spent on account of expenditure incurred by the assessee in connection with the joint venture. This amount pertains to the expenses incurred by the assessee for the Joint Venture wherein the expenses had to be irrecoverably written off. This is a sunk cost to the assessee which has been spent from the accounts of the assessee. Hence, the amount is eligible to be written off and to be claimed. In the result, the appeal of the assessee on this ground is allowed. : A.Y. 2013-14 (Dept.):
Disallowance of deduction u/s 80IA:
Income through PE & u/s 115JB:
These issues are akin to the grounds adjudicated above in for the A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on these grounds is dismissed. & Ors 28 M/s. Ircon International Ltd.
Provision for Maintenance:
This issue has been adjudicated in A.Y. 2006-07, hence the same ratio applies. The appeal of the revenue on this ground is dismissed.
Order Pronounced in the Open Court on 28/01/2022.