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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI PRASHANT MAHARISHI & SHRI K.N.CHARY
O R D E R PER PRASHANT MAHARISHI, A. M.
These are the 6 cross appeals filed by both the parties for three consecutive assessment years in case of one assessee involving similar issues, argued together by both the parties raising common arguments and therefore as a matter of convenience all these six appeals are disposed of by this common order.
For assessment year 2005 – 06 , history shows that the coordinate bench disposed off vide order dated 27/9/2013 ITA number 5257/del/2010 filed by the assessee and ITA number 5528/del/2010 filed by the revenue Page | 2 against the order of the Commissioner Of Income Tax (Appeals) LTU , New Delhi dated 30 September 2010 wherein the assessee challenged the order of the learned assessing officer passed u/s 143 (3) of The Income Tax Act [ The Act] dated 31 December 2007. The coordinate bench vide its order has set aside the issue with respect to the assessee‟s claim of depreciation on the leased out power plant and claim of power purchase charges back to the file of the learned assessing officer.
Therefore the learned assessing officer passed an order on 17th of February 2014 titled as order giving effect to ITATs order u/s 254 (1) of the income tax act 1961. Thus the issue before the learned assessing officer was with respect to the allowability of power charges and depreciation on power plant for which the issue was set aside to the file of the AO with a direction to make the de novo assessment after considering the additional evidences admitted by the coordinate bench.
In the original proceedings the learned assessing officer disallowed of ₹ 143,238,163 comprising of disallowance of the power charges of ₹ 35 lakhs and depreciation on the power plant of ₹ 139,738,163/–.
5. In the original proceedings before the learned CIT – A he dismissed the claim of the depreciation on the power plant as well as confirmed the disallowance of power charges of ₹ 35 lakhs.
Consequent to that the assessee preferred an appeal before the coordinate bench who after admitting the additional evidences filed by the assessee restored the issue back to the file of the learned assessing officer with a direction to decide the issue afresh.
Pursuant to that the learned assessing officer passed an order u/s 143 (3) read with Section 254 of the act dated 17th of February 2014 wherein the learned assessing officer made a disallowance of ₹ 143,238,163 comprising of disallowance of the power charges of ₹ 35 lakhs and depreciation on the power plant of ₹ 139,738,163/–.
The brief facts of the case show that assessee is a company who set up plant and machinery comprising of a captive thermal Power Plant during the year. It leased out at the close of the assessment year to another group company namely M/s Keshav Power private limited. Assessee entered into a power purchase agreement with Keshav Power private limited and during the year it paid ₹ 35 lakhs as power charges. It also claimed depreciation on power plant as it has leased out the same in the previous year stating that in the Memorandum of Association, it has one of the main object of carrying out leasing business as one of the businesses, Resolutions were passed commencing that business, Proper Lease agreement was entered in to and leasing business has started. The leased assets is a power plant which is already in existence on which lease rental is earned, offered for taxation and therefore the power plant is owned by the assessee, used in its leasing business, therefore depreciation there on is allowable.
The learned assessing officer disallowed the payment of power charges of ₹ 35 lakhs as well as the depreciation on the power plant alleging that the assessee has not installed the power plant by 31st of March 2005 itself and therefore depreciation to the assessee cannot be allowed. Similarly as the power plant is not installed before 31st of March 2005, assessee could not have purchased power from M/s Keshav Power Ltd and therefore power charges paid by the assessee to that company were also disallowed. The main reason for holding that assessee has not installed power plant before 31st of March 2005 is that the assessee has submitted the evidence of installation of the power plant in the form of letter of the chief electrical inspector wherein inspection was conducted on 26th of March 2005 and such letter was dated 30th of March 2005 and therefore the AO was of the view that in terms of this letter the assessee company could not have complied with the same by 31st of March 2005 itself and hence depreciation cannot be allowed.
He further held that the lease deed represented an agreement between two related parties i.e. assessee as well as Keshav power private limited, hence, presumably it is not at arm‟s-length and further the lease agreement was signed on 24th of March 2005 making it effective from 15th of March 2005.
Therefore the learned assessing officer was of the view that the entire decision of leasing out of the power plant was to make a claim of depreciation on the power plant and it is purely a device of tax avoidance.
This was the decision of the learned assessing officer in the first assessment order passed u/s 143 (3) of the act against which the assessee preferred an appeal before the learned CIT – A confirmed the disallowance holding that as the assessee company has not been able to show that the power plant has been put to use by the lessee i.e. case of Power Ltd and no justification has been given as to why lease deed was made retrospective from 15th of March 2005 and it was executed on 24th of March 2005. In that order the learned CIT appeal also noted that though substantial amount has been paid for installation of the power plant, the lease rent was fixed in app similarly low amount of ₹ 8,037,500 per month for reasons not known. Therefore the order of the learned assessing officer disallowing the depreciation on the power plant as well as the disallowance of lease rent was upheld.
The assessee aggrieved with that preferred an appeal before the coordinate bench wherein the assessee submitted certain additional evidences and based on these additional evidences the coordinate bench set-aside the issue back to the file of the learned assessing officer to decide the issue of allowability of depreciation on power plant and allowability of power charges paid to Keshav Power private Limited.
Based on this history of the assessment for assessment year 2005 – 06 the learned assessing officer passed an order on 17th of February 2014 wherein he once again rejected the claim of the assessee of the depreciation and also disallowed the power charges. The learned assessing officer did so giving the reason that additional evidences filed by the assessee were in support of the various steps undertaken by the assessee company to comply with the provisions of Section 293 (1) (a) of The Companies Act 1956 like seeking the approval of the shareholders for releasing of the plant and it is merely a statutory formalities which do not bring on record any evidence to the effect that the said power plant was ready for commission on the said date. He further held that there is no reason given by the assessee for making the lease deed effective from retrospective effect. He further reiterated that the whole transaction entered into by the assessee is with the sole object of claiming the depreciation on the power plant. Thus the original order passed by the learned assessing officer was also repeated in the second assessment order passed by the learned assessing officer.
The assessee aggrieved with the same preferred an appeal before the learned CIT – A. This time the learned CIT – A allowed the claim of the assessee granting the depreciation on the power plant stating that assessee being a lessor of the power plant, has satisfied all the conditions of being the owner of the asset and having put to use the assets by assessee in the leasing business during the financial year 2004 – 05. Thus, he allowed the claim of depreciation on power plant on the ground that assessee is a lessor, carrying on the business of leasing, the asset is owned by the lesser and it has put to use the assets of the power plant in the leasing business during the financial year 2004 – 05. On the allowability of the power charges of ₹ 35 lakhs paid to Keshav Power Limited, he held that the power plant could not have been put to any operation from 15th of March 2005 to 29th of March 2005 and therefore the power charges paid for the period from 15th of March 2005 to 29th of March 2005 paid by the assessee to Keshav Power Ltd are held to be unreasonable and excessive as no power could have been generated out of the said captive power plant prior to 30th of March 2005. Therefore out of the total power charges for 16 days, he proportionately allowed the claim of the power charges only for two days.
Therefore the revenue as well as the assessing officer both are in appeal before us. Ld AO is aggrieved by order of LD CIT (A) granting depreciation on the power plant to the assessee and the assessee is aggrieved where LD CIT (A) has restricted allowance of power charges proportionately instead of fully.
The assessee has raised the following grounds of appeal in Assessment Year 2005-06:- “1. That on the facts and in the circumstances of the case, the Learned CIT (Appeals) has grossly erred in holding that the payment of power charges made by the Appellant Company to Keshav Power Private Limited (hereinafter referred to as „KPL‟) for the period from 15-03-2005 to 29-03- 2005 are unreasonable and excessive.
2. That the Ld. CIT(A) has grossly erred in ignoring the Power Purchase Agreement (PPA) entered into between the Appellant Company and KPL pursuant to which the Appellant Company had made payment of power charges to KPL for the period from 15-03-2015 to 31-03-2015, while arriving at the conclusion that the payment of power charges for the aforesaid period are excessive and unreasonable.
3. That any relief due to the company in consequence of the foregoing grounds and any other relief, to which it is entitled under the law, may be directed to be granted to it.
4. That the above grounds of appeal are without prejudice to one another.” Page | 6
The revenue has raised the following grounds of appeal in for Assessment Year 2005-06:- “1. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the disallowances of depreciation of Rs. 13,97,38,163/- made by AO in respect of newly installed building, plant and machinery comprising a captive thermal power plant which was not put to use in the Financial Year 2004-05 relevant to AY 2005- 06.
2. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in giving part relief to the assessee on account of addition of Rs.35,00,000/- made by AO in respect of disallowance of power charges paid to M/s KPL.”
19. The learned authorised representative firstly explained history of the case and thereafter referred to the order of the learned CIT (A). He took us to paragraph number 6.2 of Appellate order and submitted that lease transactions cannot be held to be sham as the learned assessing officer accepted the same nature of the transaction in the subsequent year. He submitted that the lease deed was only for 15 days during the year which was disputed by the learned assessing officer holding it to be a sham and tax avoidance instrument whereas same lease agreement has been accepted by the learned assessing officer in subsequent years. He further submitted that in this assessment year the learned assessing officer has disallowed the depreciation i.e. assessment year 2005 – 06 whereas in subsequent assessment year on the leased assets i.e. power plant, assessing officer has granted depreciation according to the income tax act. He therefore submitted that the action of the learned assessing officer treating the lease agreement is sham is devoid of any merit.
20. He further referred paragraph number 6.3 of Appellate order wherein the learned CIT – A carried out detailed enquiry by issuing commission u/s 131 of the act to Commissioner Of Income Tax Trichy who got the inquiries conducted by the officers of the income tax department and forwarded the report in the matter as per letter dated 20/3/2014. According to that enquiry it is clearly established that 27 MV power plant was in operation since financial year 2004 –
05. Further certain other evidences were given in that enquiry report in the form of boiler test report and certificate dated 2nd March 2005 and the letter from Tamil Nadu pollution control board wherein Page | 7 the consent for establishment and consent for operation of new power plant at the time of installation was issued. He further submitted that Keshav Power private limited has maintained electricity generation records which were also examined and found in order by the enquiry report. Lessee Keshav Power Ltd has also submitted Sales tax returns and is also assessed to sales tax up to the year 2012 – 13. Further on the lease rent Income the tax has been deducted and deposited with the income tax department. He further stated that the enquiry report clearly shows that the payment for contractors and salaries for operation and maintenance of the power plant was also verified by the enquiry officer and therefore there was a bona fide operation of the power plant by the assessee before 31st of March 2005. He further submitted that for assessment year 2007 – 08 till 2010 the production details of the cement in assessee‟s Dalmiapuram plant and consumption of electricity and power purchases from Tamil Nadu Electricity Board as well as Keshav Power Ltd were also examined. In those years the cement production increased and the power consumption of Tamilnadu Electricity Board drastically reduced and the power supplied by Keshav Power Ltd significantly increased. He submitted that this fact itself proves that the power plant was in operation and the power was purchased by the assessee.
21. He further referred to the paragraph number 6.5 of Appellate order wherein the regulatory compliance with respect to the leasing business of the assessee was also complied stating that assessee is a public limited company and all these records are available in public domain. He further referred to the minutes of the meeting of the board of directors dated 28/12/2004 which clearly shows that the lease deed entered into by the assessee on 24th of March 2005 was made effective from 15th of March 2005 and therefore it cannot be an afterthought. He also referred to the consent of the shareholder to lease out the assets of the company. He further submitted that there is nothing wrong which prevented the assessee in entering a lease agreement subsequently by making it effective retrospectively just by a week‟s time because when lease deed was entered in to the understanding of the parties were already there.
22. He further referred to the provisions of Section 32 Of The Income Tax Act and submitted that assessee is in the leasing business as already stated and the asset was leased out to another party and therefore on these lees doubt assets which is used for the purpose of the leasing business of the assessee is entitled to claim depreciation thereon. He further referred to the decisions of the honourable Supreme Court wherein assets leased out in the leasing business of the assessee are entitled to depreciation.
23. With respect to the use of coal and water for the purposes of production of the power by the lessee he submitted that assessee is a manufacturer of cement with a turnover of more than 5000 crores and coal and water are important input materials required for cement production which were also used for production of power as assessee is maintaining huge stock of coal and water. He submitted that both the cement manufacturing unit and Power generation unit are in the same industrial complex and are separated by wall only. He therefore submitted that the action of the learned assessing officer in disallowing the depreciation is not valid. 24. Coming to the issue of allowability of power charges of ₹ 35 lakhs in full he submitted that the learned CIT – A was guided by the report of the inspector which has given an approval on 30th of March 2005 with effect from 26th of March 2005. Merely because the inspector has issued the report after four days of the inspection, cannot restrict the claim of the power charges paid by the assessee. He further submitted that such power charges are fixed power charges i.e. minimum power charges paid according to the lease agreement and therefore restricting it on the number of days is not correct. Therefore he submitted that assessee should have been granted the total power charges paid of ₹ 35 lakhs as a deductible expenditure. 25. The learned CIT DR vehemently supported the order of the learned assessing officer and submitted that the learned assessing officer has clearly disallowed the depreciation as the power plant was not put to use before 31st of March 2005. She further referred to the assessment order and submitted that:- i. As per page number 9 of the order electric inspector certificate was given to the assessee on 30th of March 2005 and therefore it is apparent that the plant could not have been commenced for production by 31st of March 2005. ii. Referred lease agreement which did not mention that the lessor, assessee owns a running power plant but it specifically says that the lessor proposes to build. Therefore at least till the date of signing of the lease agreement the power plant was not ready to commence. iii. Referred power purchase agreement and submitted that it also did not refer that lessee had a power plant which is in operation. It also says that it is proposed. iv. Submitted that the balance sheet of lessee did not show any power production for the year ended on 31/3/2005 therefore the power plant was not in operation. v. Merely because lease income shown by the assessee and offered for taxation, it does not entitle the assessee to claim depreciation on the power plant. vi. The whole transaction is a perfect case to apply the ratio laid down by the decision of the Supreme Court in McDowell & Co Ltd versus commercial tax Officer 154 ITR 148. She further relied upon the several judicial precedents mentioned by the learned assessing officer. vii. With respect to the claim of payment of power charges by assessee of ₹ 35 lakhs she referred to the power purchase agreement and submitted that in the financial year ended on 31st of March 2005, that company when did not produce a single unit of power, there are no goods to be supplied by that company to the assessee, therefore any payment made by the assessee to that company cannot be said to be payment for purchase of power. viii. She further submitted that there is no justification for payment of ₹ 35 lakhs by the assessee to that lessee which is also not supported by any clause of the agreement. She submitted that power purchases price was to be paid for minimum commitment, however, when there is no production of power there was no supply of power by the lessee to the assessee, there cannot be any payment of power purchase price by assessee to the lessee and hence even part payment allowed by the learned CIT – A is also devoid of any merit. ix. Therefore, it was submitted that as power plant itself was not in existence as on 31st of March 2005, there is no production of power till then, there is no record of the coal and water consumed for production of power and therefore the power plant was not put to use and hence depreciation was correctly disallowed by the learned assessing officer. x. Submitted that the learned CIT – A has also incorrectly given the benefit of assessee being the largest cement plant and having the huge stock of coal et cetera which does not prove that the Keshav Power Ltd had the coal and water for production of the plant. She further challenged the enquiry conducted by the learned CIT – A and submitted that the enquiry was conducted in the year in which the appeal was heard before the learned CIT – A and therefore it could not have given any finding with respect to the existence of the power plant in the year ended on 31st of March 2005.
Thus she vehemently supported the order of the learned assessing officer and submitted that the claim of the depreciation allowed by the learned assessing officer and restricted allowance of power purchase price paid by the assessee was also incorrect.
In rejoinder the learned authorised representative i. Referred page number 83 of the paper book which is the memorandum of Association of the company wherein he referred to the main object clauses where the leasing is also main object of the assessee. ii. Stated that it is the prerogative of the CIT – A to get any enquiry conducted by him and assessee does not have any say. In fact he supported that the order of enquiry was issued u/s 131 of the Income Tax Act by the CIT – A to his counterpart in Trichy who got inquiries conducted. He submitted that the enquiry report cannot be doubted by the revenue now. iii. Even otherwise, except disputing inquiry report No infirmity is pointed by the revenue. Thus, on subject , same remains unchallenged, iv. Lease agreement is document that has to be read as a whole and the revenue cannot approbate and reprobate the same transaction in two different assessment years. He submitted that the lease agreement has been accepted by the revenue in the subsequent years and the same lease agreement is held to be sham in this assessment year. v. Referred to the power purchase agreement entered into by the assessee, power purchase agreement and the lease agreement are required to be looked into together. vi. Assessee has offered the lease rent of the plant to taxation which has been taxed by the revenue. For this proposition he referred to the profit and loss account of the assessee company wherein in other income the lease rent is shown as income.
During the course of hearing the bench raised a query about the annual accounts of Keshav power Ltd for the year ended on 31st of March 2005 and also how the power was produced by That Company. The bench also asked about the use of coal and water and its consumption which is specifically doubted by the LD AO. The coordinate bench also referred to the balance sheet of Keshav power Ltd for the year ended on 31st of March 2006 wherein were held disclosing the details of the previous year, the power income was shown at ₹ 35 lakhs however the units of power generated was shown as Nil.
On the next date of hearing the learned authorised representative i. submitted balance sheet of the Keshav power Ltd for assessment year 2005 – 06 (i.e. year ended on 31st of March 2005) ii. With respect to the consumption of coal and power he submitted that the cement plant and power plant of the assessee are located at the same place and therefore the coal and water was consumed from the cement production is only.
iii. With respect to the movement of coal he submitted that both these plants are separated by a common wall only. iv. Submitted the balance sheet of Keshav power Ltd and stated that it did not generate any power during the previous year ended on 31st of March 2005 and therefore for that year supply of coal and power by the assessee to Keshav power Ltd does not arise at all. v. Stated that this issue does not impact the claim of the assessee on account of depreciation on the power plant. vi. stated that leasing being one of the object set out in the memorandum of Association the requirement of the term „used for the purpose of business‟ is satisfied as soon as the power plant was leased out to Keshav power Ltd through statutory process coupled with the power purchase agreement which are both the registered documents during the previous year ended on 31st of March 2005 itself. vii. Submitted that even otherwise the term „used for the purpose of the businesses is to be given a wider meaning which included „active‟ as well as the „passive use‟ and if the power plant is „ready to use‟ even then the depreciation is allowable to the assessee as lessor. viii. Submitted that the permission was given by the Chief Electrical Inspector on 30th of March 2005 to commission the electrical installation inspected by the authority on 26th of March 2005 which itself proves that the power plant was ready for use on 26th of March 2005 itself and even otherwise on 30th of March 2005 there is a permission to commission the power plant. ix. Submitted that if the power plant is not ready it cannot commission on 30th of March 2005 itself proves that the power plant was granted the permission to commission it. x. referred to the lease agreement and the power purchase agreement and stated that the lease rental are taxable in the hands of the assessee, payments on account of power generated by Keshav Power Ltd are supplied to the assessee for use in the manufacturing of the cement and assessee is entitled to depreciation on the power plant being the „owner‟ thereof and used it into the leasing business. xi. Relied on several judicial precedents to support his argument. Therefore he submitted that the assessee is entitled to the depreciation and also the claim of the power purchase price of ₹ 35 lakhs in full.
We have carefully considered the rival contention and perused the orders of the lower authorities.
As per ground number 1 of the appeal of the learned assessing officer the grievances that the learned assessing officer has disallowed depreciation of ₹ 139,738,163/– on the power plant in respect of newly installed building, plant and machinery comprising of a captive thermal power plant which was not put to use in the financial year 2004 – 05 according to the assessee and therefore no depreciation is allowable to the assessee for this year i.e. assessment year 2005 – 06. The basically the fact shows that assessee has constructed a power plant in the financial year 2004 – 05. Assessee has shown that in its main object in the memorandum of Association of the assessee company, there is a clause of leasing business as the main business. Accordingly the wanted to lease this power plant. Therefore on 21 December 2014 and notice of the board of meeting was given to the Kolkata, Mumbai, Chennai and National stock exchange wherein it was stated that the meeting of the Board of Directors of the company is to be held on 28th of December 2004 at New Delhi to consider and decide on approaching the shareholder of the company for obtaining up of appellate for releasing out the proposed thermal power plant being installed at the Dalmiapuram unit of the assessee. Consequently the board of directors passed the resolution on 28 December 2004 resolving to lease the land, buildings, plant and machinery and other assets comprising the proposed captive power plant of the company to any party for a period not exceeding 20 years. The shareholders of the company also passed the resolution on fifth day of February 2005 approving the proposal to lease out the power plant. Consequently on 14/2/2005 the board of directors of the company decided to lease out the power plant to Keshav Power private limited for a period of 10 years at monthly lease rent of 18. 375 lakhs per month. On 14 February Page | 14 2005 resolution was passed to enter into the power purchase agreement with Keshav power Ltd and for fixation of the power tariff. It was further noted in that board resolution that the power tariff being offered by Keshav Power Ltd would result in substantial savings to the assessee company over the power purchased from Tamil Nadu Electricity Board and the rates offered by lessee are far more competitive. For this proposition for the sources of the power and respective tariff as well as the competitiveness of the tariff offered by lessee and outside consultant was also retained based on its advice the power purchase agreement could be entered into. This consultant submitted a report on 18 January 2005 to the assessee. Consequently lease deed was entered into by the assessee with lessee on 24th day of March 2005 which is made effective from 15th day of March 2005 as per the lease agreement clause number 2.
1. The lease rent was provided in clause 3 at monthly lease rent of ₹ 1,837,500 per month. However the lease rent for the broken period from 15th of March 2005 to 31st of March 2005 was determined at ₹ 918,750 which is for 15 days. The details of the power plant are also provided in schedule 1 which shows in nomenclatures of machinery and equipment, quantity and the details of the manufacturer/supplier. Scheduled 2 shows the details of lease rent as well as tenure and the commencement date. The commencement date is stated to be 15th day of March 2005. Further power purchase agreement also entered into between these parties on 24th day of March 2005 where the effective date is 15th day of March 2005 wherein the power purchase price was to be paid at the rate of ₹ 1.75 per KWHP based on the Load factor. Further the minimum commitment to be paid by the assessee to lessee was from 15th of March 2005 to 31st of March 2006 minimum off take commitment of 4 million units per month and thereafter it was 152 million units for fully. Based on this, the amount payable for 15th of March 2005 till 31st of March 2005, by the assessee is ₹ 35 lakhs. This sum is paid by the assessee to the lessee, the lessee has offered this for taxation. Similarly the lease rent of ₹ 918,715 was paid by the lessee to the assessee and same has been offered to taxation by assessee and claimed as deduction by the lessee. Boiler which is the main component of the power plant, for this provisional order u/s nine of the Indian boilers act 1923 was issued on second of March 2005 by the Deputy Chief Inspector of Tiruchirapally. This permission was granted for six months from second of March 2005 to 1 September 2005. The electrical inspectorate of government of Tamil Nadu on 30th of March 2005 issued a certificate Under the Indian electricity act 2003 and Indian electricity rules 1956 with respect to the electrical installation of 27 MV generators with addition and alteration. The date of inspection was 26th of March 2005 and approval was accorded to the assessee. The assessee under rule 63 of the Indian electricity rules 1956 was granted and approval to commission the electrical installation inspected on 26th of March 2005. No doubt the above certificate was issued subject to compliance with the terms and conditions of the supplier. The certificate also instructed the assessee to inform the office about the date of energisation of the installation. Based on these certificates the learned assessing officer noted that as on 30th of March 2005 the assessee did not have the installation certificate and further this installation certificate also referred to compliance with the certain terms and conditions of the supplier, the power plant of the assessee could not have commenced on 31st of March 2005 and therefore it has not been put to use by the assessee. Further the lease agreement entered into by the assessee with Keshav Power Ltd and also power purchase agreement entered into with that party, which is stated to be a related party by the learned assessing officer, he therefore stated that these are the sham agreements entered into by the assessee for claim of depreciation for financial year 2004 – 2005 (assessment year 2005 – 06) on the power plant which did not commence production till 31st of March 2005. He further looked at the availability of water and coal in the hands of the lessee to be supplied by lessor, and found that no such water and coal is supplied by the assessee and therefore there could not have been any power produced by the lessee. Hence, according to the learned assessing officer the power plant was not commissioned on or before 31st of March 2005 and therefore no depreciation could be granted to the assessee. Further with respect to the claim of the assessee that the main object of the assessee is the business of leasing, assessee has leased out its power plant which is backed by the proper resolution of the Board of Directors and also of the shareholders of the company, assessee is a public listed company, therefore there cannot be any afterthought in executed in the lease agreement as well as the power purchase agreement and therefore even in the leasing business when the assets are leased out the assessee is entitled to depreciation thereon. The learned assessing officer brushed aside the passing of the resolution et cetera holding that they are merely statutory formalities. Thus, the depreciation was disallowed by the learned assessing officer on both the counts that the power plant has not commissioned on or before 31st of March 2005 and the claim of the leasing business by the assessee is merely a statutory formality. Further the payment of power purchase price by the assessee to Keshav Power Ltd was also disallowed by the AO amounting to ₹ 35 lakhs Under the pretext that when the power has not been proved produced by Keshav Power Ltd, it could not have been sold to the assessee, therefore there could not have been any purchase of power by the assessee and therefore the power purchase price paid by the assessee of ₹ 35 lakhs cannot be allowed as deduction.
On appeal before the learned CIT – A, he held on both these counts as Under:-
“6.2 The Ld. AO, in the current assessment year, had disallowed the depreciation allowance as also the power charges paid to M/s KPL, on various grounds, inter alia (i) the appellant could not have commissioned the plant during the current F.Y. (ii) the entire lease transaction was an 'after thought' and 'sham transaction'. The Ld. CIT(A), while deciding the appeal in the first ground had also held that the said lease transaction was 'sham' or an 'after thought‟ Understandably, with regard the first objection namely that the plant was not commissioned during the F.Y., the issue requires to be examined on facts for the current year. However, if such leasing transaction were to be 'sham' and an 'after thought', then the same nature of the transactions should have been continued in the subsequent assessment years as well. However, in the assessment year 2006-07 onwards, the Ld. AO has allowed depreciation allowance on the plant and machinery and other equipments relating to the said captive thermal plant, even though having made the disallowance in respect of power charges. As the AO, on detailed scrutiny, had allowed the depreciation allowance for A.Y.2006-07, understandably the twin conditions under Section 32 of 'ownership' and 'put to use' have been duly found to be Page | 17 satisfied. That being the case, such leasing transaction cannot be held as 'sham' and 'after thought' as was held by the Ld. AO in the impugned order based on by my Ld. Predecessor in the, first round of appeal. In view of this, such transaction cannot be held as a colorable device and the reliance of the Ld. AO on the decision of CIT Vs MacDowell and Co. Ltd. Vs Commercial Tax Officer (supra) and the case of Siddho Mal Vs CIT (supra) was misplaced. 6.3 This issue had come up for adjudication before me with regard the appeal filed by the appellant against the assessment orders for A.Y.2007-08, 2008-09, 2009-10 and 2010-11, in which disallowance of depreciation and power charges was made by holding the leasing agreement with M/s KPL as 'sham' and 'after thought'. In order to ascertain the correct facts relating to existence and operation of the captive power plant, which is the subject matter of dispute, commission under Section 131 was issued to CIT, Trichy. The CIT, Trichy got the enquiries conducted by the Income Tax Inspector and forwarded the report in the matter vide letter dated 20.3.2014. The enquiry got conducted by the CIT, Trichy shows that the 27 MW power plants were in operation since FY 2004-05. Further, other evidences in the form of Boiler Test Report and Certificate dated 2nd March 2005 and the letter from the Tamil Nadu Pollution Control Board regarding consent for establishment and consent for operation of new power plant at the time of installation of 27 MW plant were also acknowledged. Further, it was also found out that the KPL maintains electricity generation records, which were found to be in order. Furthermore, it was also ascertained that KPL is raising bills towards cost of electrical energy supplied to DCBL every month and is maintaining separate set of books of accounts, which were found to be regularly audited. Further, KPL has also been found to be regularly submitting online sales Tax returns and has obtained the Sales Tax Assessment order up to the year 2012- 13. In respect of lease rental, it is informed that the KPL has been deducting and paying TDS every month. Lastly, the enquiry report shows that in respect of payment for contractors and Salaries for operation and maintenance of the power plant, TDS is being deducted and E-filling of quarterly return for TDS is being made. Keeping in view the above, the bonafide of the operation of the captive power plant stands duly established.
6.4 In the appellate orders for A.Y.2007-08, 2008-09, 2009-10 and 2010, I have verified the production details of cement in the appellant's Dalmiapuram Plant, details relating to consumption of electricity and power purchases from TNEB and supply of power by the KPL in pursuance of the said lease agreement. Based on a detailed data analysis, I had held in those years that the appellant's cement manufacturing operations have increased significantly, whereas its power consumption from TNEB has drastically reduced, while at the same time the power supplied by KPL has significantly increased. Understandably, the appellant could not have produced higher amount of cement in subsequent years, while there was a significant reduction of the power supply from TNEB. Therefore, the fact that the power was purchased from KPL also stands duly proved. 6.5 Further, in order to counter that such transactions were in the nature of a 'sham transaction' or were not an 'after thought', as was held by my Ld. Predecessor while deciding the first round of appeal for the current year, the appellant had filed additional evidences before the Hon'ble ITAT. These evidences buttress the fact that before leasing out the power plant, the appellant company had made regulatory compliance with the statutory obligations laid down by the Companies Act 1956 as required in the case of a listed company. The appellant company had more than 15,000 shareholders and therefore, the requirement of obtaining their consent through postal ballot, which in was itself is a mammoth exercise, cannot be concocted by the appellant, only for booking the depreciation allowance for A.Y.2005-06, as alleged by the AO, just for the sake of tax avoidance, more so, when in the immediately subsequent assessment year, i.e. A.Y.2006-07, the AO had himself allowed depreciation allowance on the power plant. By very nature, the additional evidences are the ones, which are in the public domain as required under the Companies act, 1956. The Ld. AO, while passing the impugned order, has referred to the said evidences in Para 15, 16,17,18,19,20 & 21 of the impugned order. The Ld. AO has held that the Minutes of the Meeting of the Board of Directors dated 28.12.2004 do not prove the allegation as to why the appellant company made the lease deed dated 24.03.2005 effective from 15.03.2005 and as to why the same may not be treated as an 'after thought'. It was also observed by him that such additional evidences are merely statutory requirements, which indicate the consent of the shareholders to lease out the assets, but do not explain as to why the same was leased out w.e.f. 15.03.2005. Regarding the Page | 19 Board's decision to approve and taking into the power purchases agreement with KPL prepared on 24.03.2005, the AO was of the view that in the absence of competitive rates, such lease to the related person, i.e. KPL cannot be held at arm's length basis. 6.5.2 On careful consideration of the above facts, I observe that the id. Ld AO has not addressed the crux of additional evidences filed by the appellant before the ITAT. His only reservation with regard such additional evidences was that the same do not explain as to why the lease agreement dated 24.03.2005 was made effective from 15.03.2005. This, in itself, cannot be a valid reason for disregarding the additional evidences and for disallowing the depreciation allowance, since even if the lease agreement was to be made operative from 24.03.2005, the appellant would have been eligible for the same amount of depreciation allowance. Moreover, it is understandable that in order to take a decision to lease out a captive power plant to another party, a limited company is required to follow due statutory process. However, once that procedure is complete, to make it operative from a particular date is an operational decision, which does not require shareholder's consent or the decision of the Board of Directors as it is only an operational decision on the ground. The main requirement of commencement of operation of a power plant is completion of statutory processes under Companies Act, 1956, obtaining regulatory technical approval from the State Govt, and in particular the Chief Inspector of Electricity. Since the power plant is adjacent to the appellant's cement manufacturing plant, once the letter of approval is issued by the competent authority, the said plant, which is fit to commence operation, is made eligible to do so. In the case of the appellant, the additional evidences only support fulfillment of statutory process under the Companies Act, 1956, which show that the said leasing transaction was neither 'sham' nor an 'after thought' as was alleged by my Ld. Predecessor, while deciding the first round of appeal. The additional evidences filed before the Hon'ble ITAT were not intended to explain as to why the power plant was made retrospectively effective from 15.03.2005, therefore the Ld. AO's observation that such evidences do not explain as to why the plant was made effective from 15.03.2005, was not relevant, as these additional evidences did not intend to do so.
Keeping in view the above facts, the bonafide of the leasing transaction of the said captive power plant to M/s KPL, stands proved and therefore, such transaction cannot be held as 'sham' or 'after thought'. This is supported by the fact that in all the subsequent assessment years, on similar facts, depreciation was granted by the AO and the leasing arrangement has been held as bonafide by the Department. 6.6 As per the Section 32 of the Act, there are two essential contentions for allowing depreciation allowance namely; (i) Ownership of the assets; and (ii) The asset having been 'put to use'. The appellant company evidently is the 'owner' (and the lessor) of the plant and machinery and the equipments comprised in the said power plant. It‟s Memorandum of Association and objects clause allows it to enter into the leasing business. The factum of lease of the power plant has been established by the AO in the subsequent assessment years by allowing depreciation allowance on lease of such assets. In the business of an operating lease, the starting point of the business is entering into a contract by the lessor with the lessee, in terms of which it is to make available, in an unconditional and unrestricted manner, access to the said assets to the lessee, upon the lessee making due payments to the lessor in terms of the lease agreement. Once the lease agreement is signed, the possession of the lease agreement had been handed over to the lessee and the lessor derives the right to receive lease charges in respect of the leased out assets, the business of 'leasing' commences. In the case of the appellant company, evidently, the appellant had entered into a lease agreement dated 24.03.2005 with M/s KPL, which was duly registered on which stamp duty was also paid and in terms of which the appellant company was paid lease charges by the lessee, M/s KPL for the part-year. The appellant had received the provisional approval from the Deputy Chief Inspector of Boilers under the Indian Boilers Act, 1923 dated 02.03.2005, by which the permission to use a boiler in the captive power plant was given. Boiler is an important ingredient of the power plant, without which the power plant cannot function. Subsequently, the Chief Electrical Inspector had inspected the installed plant and machinery on 26.03.2005 and accorded his permission to energies the same, which was eventually conveyed vide his letter 30.03.2005. Therefore, there is no dispute that as on 30.03.2005, the plant and machinery including the boiler installed were ready for use. Under the circumstances as on Page | 21 30.03.2005, as the lessor had already given possession to the lessee of the power plant to be put to use in the business of generation of power for which no regulatory prohibitions remained anymore, after issue of approval by Chief Electrical Inspector, the appellant company was eligible to claim depreciation allowance, in its "leasing" business, keeping in view the decision of the Hon'ble Supreme Court in the case of CIT Vs Shaan Finance (P) Ltd (supra) and in the case of M/s ICDS Ltd. Vs CIT (supra) and M/s CIT Vs Kotak Mahindra Finance Ltd. (supra) and several other decisions on the same ratio, which have been cited by the Ld. Appellate Counsel in the written submissions. 6.6.2 Without prejudice, The adverse observation of the AO that there was no evidence of supply of coal and water for this purpose cannot be held as an adverse finding on the use of the asset by the appellant in the leasing business. Moreover, it is evident that the appellant is a manufacturer of cement with a turnover of over Rs. 5,000 crores. Coal and water are important input materials required for such cement production. With a view to keep the cement plant in readiness for operation, the appellant is required to maintain huge stock of coal and water, apart from the main ingredients. Therefore, there is no requirement for the appellant to produce evidence of specific purchase of coal only for the purpose of making supply of coal to the power plant on 30.03.2005. 6.6.3 Keeping in view the above facts, I find that the appellant being a lessor of the power plant has satisfied all the conditions, namely; (i) being the owner of the assets and (ii) having put to use the assets in the leasing business during the F.Y.2004-05. In view of this, I hold that its claim of depreciation allowance was bonafide and allowable as per law. The Ground No.l is accordingly, allowed in favour of the appellant.”
Thus on the basis of the above finding of the learned CIT – A, the claim of the depreciation of the assessee was allowed. Looking at the report of the inspector who has granted the permission to for commissioning of the power plant, he referred to the conditions of the supplier to be fulfilled, there was no condition which was required to be fulfilled of the inspector. Further the inspection was carried out on 26th of March 2005 and the balance inspection fees was paid on 29th of March 2005 and thereafter on 30th of March 2005 the commission certificate was issued to the assessee. Therefore it is apparent that on 26th of March 2005 power plant of the assessee was ready for commissioning. The assessee has entered into a Page | 22 power purchase agreement on 24th of March 2005 and as well as the lease agreement also on the same date and both have been made effective from 15th of March 2005. For both these the assessee has relied upon the fact that by 15th of March the power plant was ready might have been inspected on 26th of March 2005 but that does not show that the power plant was not ready for commissioning on 15th of March 2005 but was only ready for commissioning on 26th of March 2005. It was the claim of the assessee that assessee has received the lease rent from 15th of March and Keshav Power Ltd has been paid power purchase price from 15th of March and therefore the power plant was ready on 15th of March 2005. In fact the boiler is permitted to be used by certificate dated second of March 2005. Therefore we do not find any reason to agree with the contention of the assessee that power plant was ready to be used on 15th of March 2005. Therefore the moot question that arises whether the power plant was commissioned on or before 31st of March 2005 or not. For this the learned CIT – A what inquiries conducted from his counterpart Commissioner of income tax Trichy, who in turn got inquiries conducted and found that the power plant was commissioned in financial year 2004 – 05, in subsequent years it supplied power to the assessee. This enquiry report has been dealt with in detail by the learned CIT – A. The learned CIT DR has not disputed the content of this enquiry report but has argued that that only inspector was debited and further the year of hearing of the appeal was far later on then the year in which the plant was commissioned and therefore the income tax Department could not have given a finding that the plant and machinery has commenced production or even ready to commence the production for the year ended on 31st of March 2005. We find that the enquiry has been referred by the Commissioner of income tax appeals, he referred to the Commissioner of income tax Trichy, where the plant is situated, enquiry report was submitted and gave a finding that plant and machinery commence the operations for the year ended on 31st of March 2005. Now two dispute by the revenue of the report of not of the CIT – A , but of the CIT Trichy, that too without any evidence contrary to that, cannot be accepted. Even against the assessee there is no evidence that plant and machinery i.e. power plant was not commissioned on or before 31st of March 2005 at least was not ready to be used on or before 31st of March 2005. The report of the Inspector did not say that power plant was not ready to be commissioned on or before 31st of March 2005 in fact it certifies that on 30th of March 2005 the power plant is ready to be commissioned. Further, so far as the claim of depreciation is concerned in the hence of the assessee even if the plant is ready to be used on or before 31st of March 2005, assessee is entitled to depreciation on that in assessment year 2005 – 06. Further the assessee has shown that assessee has the business of leasing as one of the main objects of the business, assessee has carried out the leasing business by leasing the plant and machinery i.e. power plant to Keshav Power Ltd. It is not that as on the date of leasing of the power plant it was not in existence. In fact on 26th of March 2005 it was inspected by the Inspector. Based on this he issued a certificate on 30th of March 2005 that plant is ready for commissioning. The lease deed was entered into on 24th of March 2005 which is just two days before the date of inspection by the Inspector, therefore, it is certain that the plant was in existence as a complete asset at least on 26th of March 2005. Therefore, the assessee has leased out an asset to Keshav Power Ltd which is ready for producing power on 26th of March 2005. Now it is the prerogative of lessee, to how to use that plant. Therefore, so far as allowability of depreciation is concerned in the hands of the assessee, the power plant was existence on 26th of March 2005 ready to be used, leased out to another entity, shows that the assets are owned by the assessee and are used in the leasing business of the assessee and therefore the assessee is entitled to the depreciation on the same. When the assets are leased out by lessor to lessee, to claim the depreciation by the lessor on assets owned by it, it is not necessary that lessee should have used that particular asset for the business of the lessee. Further the lease agreement and power purchase agreement are not held to be sham by the AO but it is only disputed the retrospective applicability in both these agreements, i.e. both these agreements were entered into on 24th of March 2005, made it applicable from 15th of March 2005. We do not find any reason to disallow the depreciation in the hands of the assessee. As such we have also held that the assets came into existence only on 26th of March 2005, it is a matter between these two parties to enter it into with retrospective effect from 15th of March 2005 the parties have agreed to, it does not make any impact on the allowability of depreciation in the hence of the assessee. It is also to be seen that the Keshav Power Ltd has deposited a sum of ₹ 60 crores as security deposit. No doubt, this clause was not there in the lease deed entered into. However this fact does not impact the allowability of this allowability of depreciation on the power plant in the hence of the assessee for assessment year 2005 – 06. Further no doubt the availability of coal and water for purchasing of the power are to very relevant factors for production of power, however they may be relevant in determining the allowability of the power purchase price paid by the assessee to Keshav Power Ltd, but does not have any impact on the allowability of depreciation to the assessee on leased out assets. In view of this, we find no infirmity in the order of the learned CIT – A in deleting the disallowance of depreciation of ₹ 139,738,163/– to the assessee on power plant which is leased out by the assessee in its business of leasing to Keshav Power Ltd during financial year 2004 – 05 relevant to assessment year 2005 – 06. Accordingly ground number 1 of the appeal of the learned assessing officer is dismissed.
The second ground of appeal
of the assessing officer and ground number 1 – 2 of the appeal of the assessee with respect to allowability of the power charges paid by the assessee to Keshav Power Ltd. As per the facts stated above, the assessee has paid power charges for the period 15th of March 2005 to 31st of March 2005 amount in all to ₹ 35 lakhs for purchase of power. The learned assessing officer disallowed the same holding that the power plant has not commissioned on or before 31st of March 2005, as the water and coal is not supplied by the assessee to Keshav Power Ltd, there is no detail of production of power by that company, the power charges paid by the assessee to Keshav Power Ltd are disallowed.
35. The learned Commissioner of income tax (appeals) decided the issue as Under: 6.7 Regarding the Ground No.2 of the appeal regarding the disallowance of power charges of Rs.35 lakhs in terms of the said lease agreement, I find that the Ld. AO has acknowledged the fact that the appellant had received lease charges against the lease of the power plant from M/s KPL from 15.03.2005 to 31.03.2005 Page | 25 during the current year. Such income has not been excluded by the Ld. AO by making a general observation that such income may have been for some other source. However, such observation is vague and devoid of support of evidence. I found that in terms of the said lease agreement, the appellant company was required to make payment of power charges to M/s KPL. The said M/s KPL is a group company, however, the appellant has pleaded before me that in terms of the provisions of Section 40A(2)(b), it cannot be held as a rotated concern, as none of the contentions of that section are satisfied. However, undoubtedly, the said company is a company of the appellant's group. The Ld. AO had serious objection as to how the lease agreement dated 24.03.2005 could have been made effective-front 15.03.2005. I am also not convinced with: the said retrospective applicability of the lease agreement w.e.f. 15.03.2005. In my view, at best the agreement could have been made applicable with effect from 24.03.2005. Moreover, as the appellant could not have operated the power plant without the approval of the Chief Electrical Inspector, Govt, of Tamilnadu, understandably, the agreement would not have been made operable before 30.03.2005. The approval given by the Inspector dated 30.03.2005 clearly shows that for this purpose, the Chief Electrical Inspector had inspected the plant and machinery on 26.03.2005 and approved the same on the said date itself i.e.26.03.2005. Therefore, effectively, the power plant was fit to be 'put to use' even on 26.03.2005 itself. However, the order in writing was issued on 30.03.2005. Under the circumstances, there is no reason to believe that the appellant company and M/s KPL, who must be keen to start generation of power from the said newly built captive power plant immediately, may not have made efforts to receive this letter immediately and hence, the company may not have started generation of power on or before 31.03.2005. In any case, there are no adverse facts on record to hold that the power plant was not put to use by the appellant company on or after 30.03.2005 in its leasing business. However, prior to this, for the period 15.03.2005 till 29.03.2005, it cannot be held that the said power plant could have been put to operation. Therefore, the power charges for the period 15.03.2005 to 29.03.2005 paid to M/s KPL are held to be unreasonable and excessive, as no power could have been generated out of the said captive power plant prior to 30.03.2005. In view of the above, the AO is directed to allow the power charges on proportionate basis only for 2 days out of the total period of 16 days, for which such charges were paid. The appellant gets part-relief accordingly. Regarding the other grounds of appeal, in view of the above discussion, no specific adjudication is called for thereon.” Page | 26
36. We have carefully considered the rival contentions and orders of the lower authorities. We find that looking to the annual accounts of Keshav Power Ltd the income of power supply has been offered as income of ₹ 35 lakhs, the lease rent has been claimed as an expenditure of ₹ 918,750 and also claim certain operation and maintenance charges et cetera as well as lease deed expenses expenditure. The annual accounts of that company shows that the company has entered into a power sale agreement for sale of power produced by it to the assessee. Under the terms of the agreement, the entire power produced and generated by the Keshav Power Ltd is to be supplied to the assessee. Assessee is also under an obligation to supply coal and water at its cost under the terms of the aforesaid agreement. The power purchase agreement as per Section 6.1.3 provides that for the period of 15th of March 2005 – 31st of March 2006 the minimum off take commitment would be 4 million units per month. Therefore for 15 days from 15th of March 2005 – 31st of March 2005 the minimum off take was considered at 2 million units per month and the power purchase rate was determined at ₹ 1.75 per unit therefore, assessee paid ₹ 35 lakhs to Keshav Power Ltd for purchase of power and claimed it as a deduction as power purchase price. The letter dated 24 December 2013 submitted by the assessee before the assessing officer which is placed at page number 93 of the paper book at para number 2 points 2 merely shows that there is no power purchased by the assessee for financial year ended on 31st of March 2005. Further the minimum off take can be considered only when there is a production of power by Keshav Power Ltd. The annual accounts of Keshav Power Ltd for the year ended on 31st of March 2006 which is placed at paper book as per annexure 6 of the paper book wherein looking at notes to accounts in [B][7] where the details regarding production and sale of power is mentioned it specifically shares that the production of power in the previous year ended on 31st of March 2005 is Nil and the value received is ₹ 35 lakhs. We have not been shown any clause in the power purchase agreement that when assessee does not produce any unit of the power, the minimum off take requirement obligation of the assessee would trigger and assessee is required to pay Keshav Power Ltd minimum off take power bill. Further this is evident that assessee has shown that it would be beneficial for it to buy power from Keshav Power Ltd then to consume power from Tamil Nadu Electricity Board. Even then assessee does not purchased power from Keshav Power Ltd is clearly evident because the Keshav Power Ltd has not produced any unit of the power. Therefore, we do not agree with the order of the learned CIT – A in allowing even the proportionate amount of power charges to the assessee wherein there is no production of power by the supplier. Merely because Keshav Power Ltd has a power plant from which no power is produced, and assessee willingly pay something to Keshav Power Ltd, such payment made by the assessee does not become allowable in the hence of the assessee. It is immaterial whether such income is offered to taxation by the Keshav Power Ltd. In the result we reverse the order of the learned CIT – A, restores the order of the learned assessing officer disallowing the power purchase price of ₹ 35 lakhs and allow ground number 2 of the appeal of the AO and dismiss ground number 1 – 3 of the appeal of the assessee.
Accordingly for assessment year 2005 – 06, ITA number 1044/del/2015 filed by the assessee is dismissed and appeal of the learned assessing officer in ITA number 1036/ Del/ 2015 is partly allowed. Assessment year 2006 – 07 38. For assessment year 2006 – 07 both the parties filed a cross appeal against the order of the Commissioner of income tax (appeals) taxpayers unit, New Delhi dated 8/10/2010.
The assessee has raised the following grounds of appeal in for Assessment Year 2006-07:- “1 That on the facts and in the circumstances of the case, the Learned CIT (Appeals) after upholding the action of the Assessing Officer in disallowing depreciation for Assessment Year 2005-06, has erred both on facts and in law by not giving specific direction to allow depreciation for Assessment Year 2006-07 on the actual cost as existing in Assessment Year 2005-06 rather than the WDV transferred to Assessment Year 2006-07..
2. (A) That on the facts and in the circumstances of the case, the learned CIT (Appeals) has grossly erred in disallowing expenditure of Rs. 9,78,49,164/- incurred by the assessee company on payment of power charges without appreciating that power purchased in terms of power purchase agreement has been utilised by the Appellant for manufacturing cement, the sale revenue whereof has been credited in Profit & Loss Account of the Appellant. (B) There was no justification either on facts or in law to treat the lease agreement as “Sham” when the transaction in question was at arms Page | 28 length between the parties, duly supported by evidence requisitioned by the tax authorities during the proceedings and relevant case laws. 3. That any relief due to the company in consequence of the foregoing grounds and any other relief, to which it is entitled under the law, may be directed to be granted to it.” 40. The revenue has raised the following grounds of appeal in for Assessment Year 2006-07:- “1. On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow the expenditure incurred by the appellant of Rs.45,15,026/- to various sales organizers for rendering marketing services with regard to sale of non-levy cement.
2. (a) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow maintenance and pooja expenses of colony and nearby temples of Rs. 18,49,152/-. (b) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow expenditure incurred of Rs.9,30,557F/- on employees‟ recreation activities, festivals, get- togethers, annual day function, excursion trips at various factories. (c) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow payment of Rs.30,000/- to Dakshina Bharat Hindi Prachar Sabha for conducting Hindi classes. (d) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow payment of Rs.92,411/- to Dalmia Animals & Ecological Welfare Association for supply of milk and maintenance of gardens.
3. On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow depreciation @ 25% instead of 10% by treating the water works and water installation system as part of building.
4. On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow deduction u/s. 80IA of Rs.6,68,55,000/-.
5. On the facts and circumstances of the case and in law, the CIT(A) has erred in directing the AO to allow depreciation on assets comprising the leased power plant.”
41. Facts shows that the assessee filed its return of income on 29/11/2006 declaring total income of ₹ 613,939,734/– as per normal computation wherein deduction u/s 80 IA of the act was claimed of ₹ 63,915,000. Was also determined at Rs 107,92,43,796/–. The assessment order u/s 143 (3) of the act was passed on 23/12/2008 against which the assessee preferred an appeal before the learned Commissioner of income tax (appeals) who passed an order on 8/10/2010 against which the appeal is been filed by both the parties.
We have heard the learned authorised representative and the learned departmental representative. Both the parties agreed that outcome of the appeal of the assessee in assessment year 2005 – 06 has impact on the appeal of the assessee for this year whereas the issues in the appeal of the revenue are covered against the revenue by the order of the coordinate benches in assessee‟s own case for earlier years. The learned authorised representative also furnished a chart showing status of various issues in the appeal of the revenue.
We first take up the appeal of assessee wherein the first ground of appeal
is with respect to the written down value of the power plant on which depreciation is to be granted. This issue has already been decided in the case of the assessee for assessment year 2005 – 06 by this order. The learned assessing officer is directed to compute the written down value of the power plant after granting assessee depreciation on power plant at respective rates and then compute the written down value on which the depreciation should be granted in this assessment year. Accordingly this ground of appeal does not survive. Therefore same is allowed for statistical purposes.
44. The second ground of appeal is with respect to disallowance of expenditure of ₹ 97,849,164 incurred by the assessee on payment of power charges. The learned assessing officer disallowed the above charges holding that the whole transaction of leasing of the power plant as well as the power purchase agreement between the assessee and Keshav Power Ltd is sham. Therefore he disallowed the payment of ₹ 97,849,164/– paid by the assessee to Messer‟s case of power Ltd. The learned CIT – A also disallowed the same based on his own order for assessment year 2005 –
06. Now we find that the transaction of purchase of power is backed by the power purchase agreement and lease agreement of power plant leased out to Keshav Power Ltd has also been executed. As in assessment year 2005 – 06 we have held that there is no infirmity in either the power purchase agreement or in the lease agreement. Further in the set-aside proceedings for assessment year 2005 – 06, the learned CIT – A has allowed the depreciation to the assessee as well as the deduction of proportionate power purchase charges, therefore, the above disallowance made by the lower authorities in this year is now not sustainable. Further now it is an established fact that assessee has purchased power from power plant leased out to Keshav Power Ltd at the competitive rate which are neither excessive not unreasonable, therefore there is no reason that why this power purchase expenditure incurred by the assessee should be disallowed. Accordingly we direct the learned assessing officer to delete the disallowance of ₹ 97,849,164/– being power purchased by the assessee from Keshav Power Ltd. Thus ground number 2 of the appeal is allowed.
45. Ground number 3 is general in nature and same is dismissed.
Accordingly appeal filed by the assessee in ITA number 5258/del/2010 for assessment year 2006 – 07 is partly allowed.
Now we come to the appeal of the learned assessing officer in ITA number 5529/del/2010 wherein several grounds of appeal
raised.
48. First ground of appeal is against the deletion of the disallowance of ₹ 45,15,026 paid to various sales organizations for rendering of marketing services with regard to sale of non-levy cement. The learned assessing officer allowed this expenditure for the reason that the issue is covered in favour of the assessee by the order of the coordinate bench in assessee‟s own case for assessment year 2001 – 02 and there are no changes in the facts and circumstances of the case. The learned authorised representative as the learned departmental representative both agreed to this fact and therefore we dismiss ground number 1 of the appeal of the AO.
49. Ground number 2 is with respect to the deletion of the disallowance of maintenance and Pooja expenses of colony and nearby temples amounting to ₹ 8,049,152, expenditure of ₹ 930,557/– on employee‟s recreation activities such as festivals get-togethers annual day functions et cetera and a sum of ₹ 30,000 paid to Dakshina Bharat Hindi Prashant Sabha for conducting Hindi classes. The learned CIT – A deleted the disallowance on account of ₹ 1,849,152 as well as the sum of ₹ 930,557 as the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 1997 – 98 to 2002 –
03. Both the parties agreed that there is no change in the facts and circumstances of the case and therefore we do not find any infirmity in the order of the learned CIT – A deleted the above disallowance.
50. The next issue involved is the disallowance of payment of ₹ 30,000 made for conducting Hindi classes to one organization and payment of ₹ 92,411/– for supply of milk and maintenance of the guidance. Both these expenditure are also been considered by the learned CIT – A incurred wholly and exclusively for the purposes of the business of the assessee as well as the same are also covered by the decision of the coordinate benches in earlier years in the assessee‟s own case where expenditure of similar nature are allowed. The learned departmental representative could not show us any reason to deviate from the decision of the learned CIT – A. accordingly we confirm his order.
51. In the result ground number 2 of the appeal of the learned AO is dismissed.
52. Ground number 3 is with respect to the disallowance of depreciation on water works and water installation system is the learned assessing officer held them as part of building and allowed depreciation at the rate of 10% whereas the assessee claimed that this is part of plant and machinery and therefore depreciation should be allowed at the rate of 25%. The learned CIT – A also allowed the depreciation to the water works and water distribution installation at the rate of 25% as the issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 1986 – 1987. Therefore we do not find any infirmity in the order of the learned CIT – A. Accordingly ground number 3 of the appeal of the learned assessing officer is dismissed.
53. Ground number 4 is with respect to the direction of the learned CIT – A to allow the deduction u/s 80 IA of the income tax act of ₹ 66,855,000. This issue has this been decided in favour of the assessee by the coordinate bench in assessee‟s own case for assessment year 2003 – 2000 for and 2004 – 2005 in ITA numbers 4342/del/2006 and in ITA number 4796/del/2007. Both the parties agreed that there is no change in the facts and circumstances of the case. We have also not been shown any reason to deviate from the orders of the coordinate bench in earlier years. In view of this we confirm the order of the learned CIT – A and dismiss ground number 4 of the appeal of the learned AO.
54. Ground number 5 and 6 of the appeal, the learned authorised representative as well as the learned departmental representative did not press any argument, therefore, those are dismissed.
In the result appeal of the LD AO is dismissed. 56. In the result, for AY 2006-07, Appeal of the assessee is partly allowed and appeal of the LD AO is dismissed. AY 2007-08
For assessment year 2007 – 08 assessee as well as the learned AO has filed cross appeals against the order of CIT appeals – LTU, New Delhi dated 19/05/2014 58. The assessee has raised the following grounds of appeal in for Assessment Year 2007-08:- “1. That on the facts and in the circumstances of the case, the Learned CIT (Appeals) has erred in holding that the suo-moto disallowance of Rs. 5,00,000/- made by the appellant company u/s 14A of the Income tax Act, 1961 in its return of income is without any reasonable basis.
2. That on the facts and in the circumstances of the case, the learned CIT (Appeals) has grossly erred in upholding the disallowance made u/s 14A of the Income-tax Act, 1961 to the extent of Rs. 51,23,311/-.
3. That the learned CIT (Appeals), while determining the amount of disallowance u/s 14A of the Income-tax Act, 1961 has failed to appreciate that: - (i) entire amount of interest paid by the assesse company in an amount of Rs. 53,96,44,059/- has been incurred on the term loans and other borrowings made by the assesse company for the purposes of its business of manufacture of commodities and no portion of the same was to be disallowed; (ii) the Assessing Officer has not brought anything on record to support his contention that borrowed funds of the company had been diverted for purposes of making investments in shares and securities and thus certain amount of interest is liable to be disallowed under section 14A of the Income- tax Act, 1961; and (iii) while considering the amount of salaries disallowable as expenditure for the purpose of calculation of disallowance under section 14A of the Income- tax Act, 1961, the amount of salaries relatable to all the employees of the Finance Department ought not to be included inasmuch as the company had clearly intimated salary paid to specific employees placed in the said Department who were exclusively handling the work relating to investments of funds in shares and securities. Page | 33
4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) has grossly erred in confirming the disallowance of Rs. 51,23,311/- u/s 14A for the purpose of computation of book profit u/s 115JB of the Act.
That any relief due to the company in consequence of the foregoing grounds and any other relief, to which it is entitled under the law, may be directed to be granted to it. 6. That the above grounds of appeal
are without prejudice to one another.”
59. The revenue has raised the following grounds of appeal in for Assessment Year 2007-08:- “1. On the facts and circumstances of the case and in taw Ld. CIT(A) has erred in deleting the addition of Rs.94,47,701/- made by AO on account of disallowance of remuneration paid to various field/sales organizers.
2. On the facts and circumstances of the case and in law. Ld. CIT(A) has erred in deleting -the addition of Rs. 19,67,307/- made by AO on account of "disallowance of temple maintenance and pooja expense.
3. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in deleting the addition of Rs. 12,00,177/- made by AO on account of disallowance of expenditure reimbursed by the assesses to- staff recreation clubs.
4. On the facts and circumstances of-the case and in law ld CIT(A) has erred in deleting the addition of Rs.8,49,41,000/- made by AO on account of disallowance of deduction claimed u/s'80IA.
5. On the facts and circumstances of the case and in-law Ld.CIT(A) has- erred in deleting the addition oT-Rs.27,37,42,954/-made by AO on account of disallowance of power charges paid to M/s. KPPL. 5.1 On the facts -and circumstances of the case and in law Ld. CIT(A) has- erred in deleting the addition of Rs.27,37,42,954/- made by AO on account of disallowance of power charges paid to M/s KPPL by accepting the report of income tax inspector Trichy without affording opportunity in the matter to the AO.
6. On the facts and circumstances of the case and in law Ld. CIT(A) has erred in-reducing the addition of Rs.9,56,00,000/- to -Rs.51,23,311/- made 'by AO under normal .provisions on account of disallowance u/s 14A. 6.1 On the facts and circumstances of -the case and in law Ld. CIT(A) has erred in reducing the addition of Rs.9,56,00,000/- to Rs.51,23,311/- made by AO under-section 115JB on account of disallowance u/s 14A.”
60. Assessee filed its return of income declaring a total income of ₹ 94,29,28,376 on 31 October 2007 the assessment u/s 143 (3) of the income tax act was passed by the learned assessing officer on 30 December 2009 wherein several additions/disallowances were made. The assessee preferred an appeal before the learned CIT – A wherein the assessee was granted substantial relief and therefore the learned AO is aggrieved by the relief granted to the assessee and assessee is aggrieved by the additions/disallowances sustained by the AO.
61. Both the parties are heard on the issues. The orders of the lower authorities were also perused the learned authorised representative and the learned departmental representative both agreed that that ground number 1 – 4 of the appeal of the learned assessing officer are covered by the decision of the coordinate bench in assessee‟s own case. On other issues they represented the counter arguments. 62. We first deal with the appeal of the learned assessing officer. Ground number 1 is with respect to the disallowance of ₹ 9,447,701/– of remuneration paid to various field sales organizers. This issue is identical to ground number 1 of the appeal of the learned assessing officer for assessment year 2006 – 07 wherein we have confirmed the order of the learned CIT – A deleting the above disallowances wherein the learned CIT – A relied upon the order of the coordinate bench in assessee‟s own case for earlier years and the learned departmental representative could not point out any major difference in the facts and circumstances of the case. Therefore for the similar reasons we dismiss ground number 1 of the appeal of the learned AO. 63. Ground number 2 and 3 are with respect to the deletion of the disallowance by the learned CIT – A with respect to the temple maintenance and Pooja expenses as well as amount paid to staff recreation clubs. This is identical to ground number 2 raised by the assessee assessing officer for assessment year 2006 2007 wherein the learned CIT – A deleted the above disallowance relying upon the decision of the coordinate bench in assessee‟s own case for earlier years. There are no changes in the facts and circumstances of the case pointed out before us. As the issue is squarely covered in favour of the assessee by the decision of the coordinate bench which is been relied upon by the learned CIT – A, we do not find any infirmity in his order in deleting the above disallowance. Accordingly ground number 2 – 3 of the appeal are dismissed
64. Ground number 4 of the appeal of the assessee is with respect to the allowance of deduction u/s 80 IA of the income tax act of ₹ 84,941,000 disallowed by the learned assessing officer but allowed by the learned CIT – A following the decision of the coordinate bench in assessee‟s own case in assessment year 2006- 2007. This ground is identical to the ground number 3 of the appeal of the learned assessing officer for assessment year 2006 – 07. While deciding this issue for assessment year 2006 – 07 we found that the learned CIT – A allowed the claim of the assessee made on the decision of the coordinate bench in assessee‟s own case, similar is the fact in this year in this ground. As the issue squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case, respectfully following the same we direct the learned assessing officer to allow the claim of the assessee u/s 80 IA of the income tax act, we confirm the order of the learned CIT – A and dismiss ground number 4 of the appeal.
Ground number 5 and 5.1 with respect to the deletion of the disallowance of power charges paid by the assessee to Messer‟s Keshav Power Ltd amounting to ₹ 273,742,954. Now the argument of the learned authorised representative is that the learned CIT – A has accepted the report of the income tax inspector without affording any approach and 82 the learned assessing officer in the matter. We find that this issue is identical to the issue in the case of the assessee for assessment year 2006 – 07 wherein we have held that the assessee has paid power charges to Keshav Power Ltd based on the validly executed power purchase agreement. The assessee has also shown that in earlier years the consumption of power purchased from Keshav Power Ltd has resulted into substantial benefit to the assessee. It is also demonstrated that the rates paid to Keshav Power Ltd are comparable and beneficial to the assessee. The issue has been decided in the favour of the assessee for assessment year 2006 – 07 and the learned departmental representative fairly agreed that there is no change in the facts and circumstances of the case. This ground of appeal
is identical to ground number two of the appeal of the assessee wherein we have held that the power charges paid by the assessee to Keshav Power Ltd are allowable as deduction to the assessee. In view of this we do not find any reason to deviate from our decision for assessment year 2006 –
07. Accordingly ground number five of the appeal of the learned assessing officer is dismissed.
66. Ground number 6 of the appeal is with respect to the disallowance made by the learned assessing officer u/s 14 A of the income tax act of ₹ 95,600,000 which has been reduced by the learned assessing officer to the extent of ₹ 5,123,311 and therefore the learned assessing officer is aggrieved. The briefly stated the facts shows that during the year the assessee has earned dividend income of Rs. 2 .68 crores and long-term capital gain exempt of ₹ 21.55 crores. The learned assessing officer questioned the assessee to explain why disallowance u/s 14 A read with rule 8D shall not be made. The assessee objected to the same, the learned assessing officer rejected the contentions of the assessee and held that there cannot be a situation where the assessee has not incurred any expenditure for earning exempt income therefore such expenditure is required to be disallowed. Accordingly he noted that assessee has already made disallowances of ₹ 5 lakhs in the computation of income and the computation as per rule 8D comes to ₹ 9.56 crores and therefore he made a further disallowance of ₹ 9.5 crores. On appeal before the learned CIT – A it was apparent that the provisions of rule 8D does not apply to the impugned assessment year i.e. assessment year 2007 – 08 the learned assessing officer further noted that appellant has made an estimated disallowances of ₹ 5 lakhs however no reasonable basis has been made and therefore he proceeded to make the disallowance u/s 14 A of the act. He disallowed interest expenditure of ₹ 53,867,386/– and also the administrative expenditure of ₹ 8,788,727 he proportionately applied the ratio of exempt income comprising the dividend on long-term capital gain by the amount of book profit as per the profit and loss account and accordingly computed the total disallowance u/s 14 A of ₹ 5,123,311 and thereby granting relief of ₹ 89,976,688. Accordingly both the parties are in appeal before us. The learned assessing officer is challenging the deletion of the disallowance to the extent of ₹ 89,976,688 whereas the assessee is challenging the addition sustained by the learned CIT – A and above sum of ₹ 5 lakhs made by the assessee itself.
The learned authorised representative vehemently submitted that the assessee has disallowed a sum of ₹ 5 lakhs on its own as an exempt income, the learned assessing officer has not recorded any satisfaction with respect to the correctness of the claim of the assessee with respect to examination of the books of accounts. Therefore it was submitted that in absence of any sum satisfaction recorded by the learned assessing officer, the disallowance cannot be made as held by the decision of the honourable Delhi High Court in case of CIT versus Taikisha engineering India Ltd [ supra].
The learned departmental representative vehemently supported the order of the learned assessing officer and CIT – A to that extent that the said assessee has not submitted any working of the Suo Moto disallowance of ₹ 5 lakhs and therefore the disallowance has been made after recording the correct satisfaction.
We find that the learned assessing officer at the time of making a disallowance has just stated that the assessee has earned dividend income and long-term capital gain which is exempt and therefore the provisions of Section 14 A read with rule 8D applies and straight away proceeded to make disallowance. At the time of making the final edition, he merely reduced the total addition by Suo Motu disallowance made by the assessee. Therefore it is apparent that the learned assessing officer has not recorded any satisfaction with respect to the correctness of the claim of the assessee of incurring expenditure of ₹ 5 lakhs for earning of exempt income. Such is the mandate of honourable Delhi High Court in case of CIT V Taikisha engineering Co Ltd (supra). In view of this we dismiss ground number 6 of the appeal of the learned assessing officer. This also takes care of ground number 1 – 3 of the appeal of the assessee. Thus ground number 6 of the appeal of the learned AO is dismissed and ground number 1 – 3 of the appeal of the assessee are allowed.
Ground number 4 of the appeal of the assessee is against the order of the learned CIT – A in confirming the disallowance of ₹ 5,123,311/– u/s 14 A for the purpose of computation of the book profit u/s 115 JB of the income tax act. The ground number 6.1 of the appeal of the learned assessing officer is against the order of the learned CIT – A the learned assessing officer made disallowance u/s 115 JB on account of Section 14 A amounting to ₹ 95,600,000 which was reduced by the learned CIT – A to ₹ 5,123,311/–. Though we hold that the provisions of Section 14 A to be made applicable in the hands of the assessee for making any disallowance Under that Section the learned assessing officer should have recorded the satisfaction above the incorrectness of the claim of the assessee of voluntary disallowance offered. However now the question is whether the same disallowance made in the normal computation of total income by the learned assessing officer can also be imputed under the provisions of Section 115JB of the act. The special bench of ITAT in ACIT versus Vireet investment private limited 82 taxmann.com 415 has categorically held that the disallowance made u/s 14 A read with rule 8D cannot be the subject matter of disallowance while determining the book profit u/s 115 JB of the act. Therefore, so far as the quantum is concerned, determined by the learned assessing officer and the learned CIT – A which was based on the provisions of rule 8D cannot be upheld as such disallowance cannot be imputed under the provisions of Section 115JB of the act. However it is also important to note that the disallowance needs to be made with respect to the expenditure incurred with respect to the exempt income in terms of the provisions of clause (f) to Section 115 JB of the act while determining the book profit. Honourable Calcutta High Court in the case of CIT versus JayShree tea industries Ltd ITA number 1501 of 2014 dated 19/11/2014 and 2019 (7) TMI 33 - GUJARAT HIGH COURT THE PRINCIPAL COMMISSIONER OF INCOME TAX 3 VERSUS M/S NIRMA CHEMICALS WORKS PVT LTD.Dated:- 24-6-201 held that the disallowance regarding the exempted income needs to be made as per clause (f) to explanation 1 of Section 115JB of the act independently. Therefore it is imperative that though the provisions of rule 8D of the IT rules cannot be applied to the provisions of Section 115 JB of the income tax act however disallowance need to be made and to be confirmed with respect to the expenses debited in the profit and loss account with respect to the exempt income earned by the assessee for working out the book profit taxation u/s 115JB of the act. We do not find that there is any mechanism available either in the income tax act or under the income tax rules for working out such disallowance; however that does not deter us as it is merely a fact-finding process on examination of the books of accounts of the assessee. In fact the investment made are out of the own fund and cash surplus generated year-on-year basis. The fact also shows that the