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PER RAJPAL YADAV, JUDICIAL MEMBER:
The present two appeals are directed at the instance of revenue against separate orders of the learned Commissioner of Income-tax (Appeals)-9, Ahmedabad dated 02.01.2015 and 05.01.2015 passed for Assessment Years 2010-11 & 2011-12 respectively.
Since, common issues are involved in both the appeals therefore, we heard them together and deem it appropriate to decide by this common order. Since facts on all vital points are common, therefore, for
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the facility of reference, we take the facts mainly from the assessment year 2010-11 i.e. ITA no.1033/Ahd/2015.
In the first ground of appeal, revenue has pleaded that Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.89,206/- and Rs.80,578/- made by the Assessing Officer u/s.14A of the Income Tax Act.
The brief facts of the case are that assessee has filed its return of income electronically, on 14/10/2010 and 30/09/2010 declaring total income at Rs.30,50,790/- and Nil in A.Y. 2010-11 and 2011-12 respectively. The returns of both the years were processed u/s 143(1) and thereafter, cases were selected for scrutiny assessment, notice u/s. 143(2) of the Act was issued and served in both the years. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee has shown tax free dividend income of Rs.2,28,073/- in A.Y. 2010-11, whereas no tax free income is being noted by the Assessing Officer in A.Y. 2011-12. The assessee has made total investment of Rs.19,49,122/- in A.Y. 2010-11 as well as in A.Y. 2011-12. The Assessing Officer with the help of Rule 8D disallowed a sum of Rs.89,206/- in A.Y. 2010-11 and Rs.80,578/- in A.Y. 2011-12. This disallowance made by the AO has been deleted partly by the Ld. CIT(A). The findings of the Ld. CIT(A) recorded in A.Y. 2010-11 on this issue read as under:
“2.2 I have carefully considered the contentions of the appellant. As far as the claim of the appellant that no exempt income has been earned during the year is concerned the same is not accepted since the act provides that the investments
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made by the appellant should be capable of producing or generating exempt income. This issue is amply covered by the decision of Hon'ble Delhi Special Bench in the case of Ken Investment Ltd 121 ITD 318 (2009) (S.B). With regard to the claim that the investments made by the appellant were in the nature of trade investment made with an objective of furthering the business interest of the company, this aspect has been considered by various judicial authorities, in the case of Maxopp Investments Ltd. [203 taxman 185 (Delhi)] the Hon'ble Special Bench has held that sec.14A disallowance is applicable to the interest paid on borrowings used for business related investments. Even though earning of dividend income is only incidental. Reliance is also placed on the decision of Hon'ble Kerala High Court in the case of Smt. Leena Ramchandran reported in 339 ITR 296 and decision of Hon'ble Cochin Bench of ITAT in the case of State Bank of Travancore reported in 124 ITD 332. Honable ITAT CHD [2014] 51 taxmann.com 98 (Chandigarh - Trib.)/[2014] 66 SOT 132 (Chandigarh -Trib.)(URO) in its decision dt 8/08/2014 has held - Held, yes - Whether in case of mixed funds, disallowance has to be made under section 14A, read with rule 8D - Held, yes [Para 8][In favour of revenue] IT: In case of mixed funds, disallowance has to be made under section 14A, read with rule 8D
In the case of Cheminvest Ltd [121 ITD 318 2009(DEL)]Delhi Special Bench held that Sec. 14A disallowance had to be made in respect of interest on loans, which were utilized for investment in shares, even though no dividend income was earned on those shares during the relevant year.
Similarly in the case of Siva Industries & Holding Ltd [TS-438- ITAT-2011(CHNY) and TS-317-ITAT-2012(CHNY)] Relying on the Special Bench ruling in Cheminvest Ltd, Chennai ITAT held that the disallowance u/s 14A was applicable, even though the assessee did not earn any exempt income in AY 2007-08. Similarly reliance is also placed on the finding of case of Technopack Advisors P Ltd [(2012) 50 SOT 31 (Delhi) (URO)] wherein it is held that Even if the investment in shares did not yield any dividend in the year under consideration, the disallowance u/s14A on the expenditure incurred for earning income was disallowable, notwithstanding the fact that no such income was earned.
Appellant's case is clearly a case of mixed fund as highlighted by the A.O. being used for the purpose of earning taxable as well as exempt income. Appellant has not been able to show before the A.O. that no
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interest expenses have been incurred by it in relation to the assets capable of generating exempt income.
It may be pertinent to note here that the Ld.CIT(A)-XI, Ahmedabad vide appellate order dated 02/11/2011 for A.Y.2008-09 in case of the appellant itself has held as under:-
"the appellant during the appellate proceedings submitted that in the year 2005-06, "it had invested a sum of Rs.5,00,000/- in SBI MEG Fund. This investment was switched out to SBI MEG COMMA and fund during the year 2007-08 for Rs.9,48,622/-. It was contended by the appellant that it had not invested Rs.4,48,622/- (948622 - 500000) from the business funds and disallowance of this sum should not be made. I am inclined to agree with the submissions of the appellant to this extent In view of it, it is held that disallowance u/s. 14A be made on an investment of Rs. 15,00,500/- (1949122-448622) only."
In view of these facts, I am inclined to agree with my predecessor. On the contrary I find that sec.14A refers to expenditure on rent, taxes, salaries, interest etc., in respect of which disallowances are provided for. These deductions are for the debits in the real sense. The pay back does not constitute expenditure incurred in terms of sec.14A. in view of these facts, and in view of the decision taken by my predecessor in the case of appellant in A.Y. 08-09, I hold that disallowance for the purpose of sec.14A is to be made against interest expenditure debited in the P & L A/c as per the provisions of Rule 8D of I.T. Rules, 1962 as directed by my Ld. predecessor, In view of it, it is held that disallowance u/s. 14A be made on an investment of Rs. 15,00,500/- (1949122 - 448622) only. The A.O. is directed to modify the disallowance u/s.14A as per the above directions and give necessary relief to the appellant.
Similar finding has been recorded in A.Y. 2011-12.
With the assistance of Learned Representatives, we have gone through the record carefully. Ld. CIT(A) directed the Assessing Officer to modify the disallowance required to be made u/s. 14A because she found that out of the total investment of Rs.19,49,122/- a sum of Rs.4,48,622/- was made out of interest free fund. This amount cannot be
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considered for making the disallowance thus, Ld. CIT(A) has restricted the disallowance required to be made on an investment of Rs.15,00,500/. The assessee has not challenged this finding of the Ld. CIT(A) and after going through the Ld.CIT(A)’s order, we do not find any error in the order of the Ld.CIT(A) in A.Y. 2010-11 which is confirmed. Similar finding has been recorded in A.Y. 2011-12 and therefore, the ground of appeal raised by the revenue in A.Y. 2011-12 is also rejected.
Ground No.2 and 2.1:
In these grounds of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the addition of Rs.43,58,443/- and Rs.37,05,554/-.
The brief facts of the case are that the assessee has installed the windmill and started operations for generating the power from 09/02/2007 i.e. A.Y 2007-08. However, due to heavy depreciation claimed on the windmill, the assessee had made losses from the undertaking and had not claimed any deduction u/s. 80IA(4)(iv). In A.Y. 2010-11, assessee has made claim for grant of deduction u/s.80IA(4)(iv). It has submitted necessary report in Form 10CCB. According to the Assessing Officer, assessee has made a claim of Rs.43,58,443/- however, on appeal Ld. CIT(A) pointed out that this claim was for Rs.41,97,875/-. The Assessing Officer has notionally taken the figure of Rs.43,58,443/-. The Ld. CIT(A) observed that sum of Rs.1,60,568/- was claimed u/s.80G. In A.Y. 2011-12 this claim has been
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restricted by the assessee to gross total income of Rs.37,05,554/-. The Ld. CIT(A) has upheld the allowance to this extent. Thus, grounds mentioned in the appeal are not correct.
The dispute between the assessee and Assessing Officer is that Assessing Officer has notionally brought forward business losses and depreciation of earlier years and notionally set off against the income of the windmill. The case of the assessee is that as per Section 80IA(5) if the deprecation and business losses have already been set off against other income of the assessee before selection of initial year for claiming of deduction u/s.80IA(iv) then such unabsorbed depreciation would not be brought forward notionally and set off against the current year income in which deduction u/s. 80IA(iv) has been claimed. The Ld. Assessing Officer did not accept this contention of the assessee. However, on appeal Ld. First appellate Authority has accepted the claim and allowed the deduction. The findings recorded by Ld. CIT(A) in A.Y. 2010-11 on this issue, read as under:
“4.2 I have carefully considered the rival submissions. I have also gone through the legal decisions relied upon by the appellant and A.O. First of all it is clarified that the deduction claimed by the appellant in respect of its windmill unit u/s. 80IA(iv) is of Rs.41,97,875/- and not of Rs.43,58,443/- as disallowed by the A.O. The amount disallowed by the A.O. also consists of the deduction u/s. 80G of the Act of Rs.1,60,568/-. From the perusal of the assessment order it is seen that there is no discussion and finding of the A.O in respect of the disallowance of deduction u/s. 80G of the Act. Hence, disallowance to the extent of Rs.1,60,568/- is directed to be deleted since factually incorrect.
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In respect of deduction of Rs. 41,97,875/- u/s. 80IA(iv) of the Act, the A.O has disallowed the same in view of the provisions of Sec.80IA(5) of the Act, which reads as under:-
"Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year .relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”
Thus, sub-section (5) of Section 80IA of the Act provides for the quantum of deduction u/s. 80IA(1) of the Act for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year as if the eligible business were the only source of income of the assesses during the previous year relevant to the initial assessment year and to every subsequent assessment years. The A.O. has worked out the income from the eligible unit i.e. windmill as tabulated in the assessment order and after considering the depreciation including unabsorbed depreciation u/s. 32 of the Act in respect of windmill, the A.O has stated that there is no income from windmill for the assessment year 2010-11.
On the other hand the appellant has submitted that the unabsorbed losses including the unabsorbed depreciation of earlier assessment years in respect of the eligible unit being windmill have already been set off against the income from non-eligible business and for the assessment year under appeal, there is no unabsorbed losses of the windmill. Therefore, for computing the deduction u/s. 80IA(iv) of the Act, no adjustment on account of unabsorbed losses of eligible business on notional basis can be made as if there is only one source of income i.e. eligible business (in the present case windmill). If the unabsorbed losses including depreciation loss of earlier years have already been set off against the income of non-eligible business, then such notional adjustment is outside the purview of sec. 80IA(5) of the Act. The ratio laid down in the various case laws relied upon by the appellant also supports the said contention of the appellant.
The Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. Vs. ACIT 231 CTR 368 (Madras) relied upon by the appellant has held that losses and depreciation of the years earlier to the initial
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assessment year which have already been absorbed against the profit of other business cannot be notionally brought forward and set off against the profit the eligible business for computing the deduction under section 80-IA. Further, Hon'ble Bangalore ITAT in the similar set of facts relating to windmill, in the case of Anil H. Lad V. Dy. CIT (2012) 13 (Trib.) ITR 581 (Bang.) has followed the decision of Hon'ble Madras High Court in the case of Velayudhaswamy Spg. Mills (P) Ltd. cited supra and held that the year of commencement alone need not be the initial year, but depending upon the facts of the case and the option exercised by the assessee, the year of claim also can be considered as initial assessment year. The Court further held that where the earlier depreciation and losses have already been set off, those loss and depreciation do not go to reduce the gross total income of an assessee within the meaning of section 80AB and, therefore, bringing the notional concept of carrying forward and set-off will be contrary to the scheme of section 80AB and concept of gross total income. Following the aforesaid judgment, assessing authority was to be directed to grant deduction to the assessee under section 80-IA for the quantum claimed by the assessee without diluting the same by the notional deduction of earlier loss and depreciation.
On the other hand, the reliance placed by the. A.O. on the decision in the case of Liberty India Ltd. Vs. CIT 317 ITR 218 (SC) is not relevant to the facts of the present case and since direct judgments applicable to the facts of the appellant's case are available, the same are followed.
Considering the facts and the legal decisions relied upon by the appellant, I am inclined to accept the same and the A.O. is directed to delete the disallowance of deduction u/s. 80IA(iv) of the Act. Thus, the appeal on this ground is allowed.”
With the assistance of learned Representatives, we have gone through the record carefully. We have find that the issue squarely covered by the decision of Madras High Court referred in the case of Velayudhaswamy Spinning Mills vs. ACIT reported in 340 ITR 477. We deem it pertinent to take note of the relevant discussion made by the Hon’ble Court which reads as under:
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"80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business) there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of an amount equal to hundred per cent, of the profits and gains derived from such business for ten consecutive assessment years.
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution or power or undertakes sub- stantial renovation and modernisation of the existing transmission or distribution lines.
(4) This section applies to—
(i) any enterprise carrying on the business of (i) developing, or (ii) operating and maintaining, or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :—
(a) it is owned by a company registered in India or by a con- sortium of such companies (or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act) ;
(b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, or (ii) operating and maintaining, or (iii) developing, operating and maintaining a new infrastructure facility ;
(c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st April, 1995.
(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub- section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be
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computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."
From a reading of sub-section (1), it is clear that it provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in subsection (4), i.e., referred to as the eligible business, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100 per cent, of the profits and gains derived from such business for ten consecutive assessment years. Deduction is given to eligible business and the same is defined in sub- section (4). Sub-section (2) provides option to the assessee to choose 10 consecutive assessment years out of 15 years. Option has to be exercised, if it is not exercised, the assessee will not be getting the benefit. Fifteen years is outer limit and the same is beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure activity, etc. Sub- section (5) deals with quantum of deduction for an eligible business. The words "initial assessment year" are used in sub-section (5) and the same is not defined under the provisions. It is to be noted that "initial assessment year" employed in sub-section (5) is different from the words "beginning from the year" referred to in sub-section (2). The important factors are to be noted in sub-section (5) and they are as under : "(1) It starts with a non obstante clause which means it overrides all the provisions of the Act and other provisions are to be ignored ; (2) It is for the purpose of determining the quantum of deduction; (3) For the assessment year immediately succeeding the initial assessment year ; (4) It is a deeming provision; (5) Fiction created that the eligible business is the only source of income; and (6) During the previous year relevant to the initial assessment year and every subsequent assessment year."
From a reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the asses-see exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward
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to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created.
In the present cases, there is no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). In Tax Case Nos. 909 of 2009 as1 well as 940 of 2009, the assessment year was 2005-06 and in Tax Case No. 918 of 2008 the assessment year was 2004-05. During the relevant period, there were no unabsorbed depreciation or loss of the eligible undertakings and the same were already absorbed in the earlier years. There is a positive profit during the year. The unreported judgment of this court cited supra considered the scope of sub- section (6) of section 80-1, which is the corresponding provision of sub-section (5) of section 80-IA. Both are similarly worded and, therefore, we agree entirely with the Division Bench judgment of this court cited supra. In the case of CIT v. Mewar Oil and General Mills Ltd. (No. 1) [2004] 271ITR 311 (Raj) ; [2004] 186 CTR (Raj) 141, the Rajasthan High Court also considered the scope of section 80-1 and held as follows (page 314 of 271 ITR) :
"Having considered the rival contentions which follow on the line noticed above, we are of the opinion that on finding the fact that there was no carry forward losses of 1983-84, which could be set off against the income of the current assessment year 1984-85, the recomputation of income from the new industrial undertaking by setting off the carry forward of unabsorbed depreciation or depreciation allowance from previous year did not simply arise and on the finding of fact noticed by the Commissioner of Income-tax (Appeals), which has not been dis- turbed by the Tribunal and challenged before us, there was no error much less any error apparent on the face of the record which could be rectified. That question would have been germane only if there would have been carry forward of unabsorbed depreciation and unabsorbed development rebate or any other unabsorbed losses of the previous year arising out of the priority industry and whether it was required to be set off against the income of the current year. It is not at all required that
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losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-1 for the purpose of computing admissible deductions thereunder.
In view thereof, we are of the opinion that the Tribunal has not erred in holding that there was no rectification possible under section 80-1 in the present case, albeit, for reasons somewhat different from those which prevailed with the Tribunal. There being no carry forward of allowable deductions under the head depreciation or development rebate which needed to be absorbed against the income of the current year and, therefore, recomputation of income for the purpose of computing permissible deduction under section 80-1 for the new industrial undertaking was not required in the present case.
Accordingly, this appeal fails and is hereby dismissed with no order as to costs."
From a reading of the above, the Rajasthan High Court held that it is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income u/s.80-I for the purpose of computing admissible deductions thereunder. We also agree with the same. We see no reason to take a different view.”
On the perusal of the above would indicate that depreciation already claimed by the assessee and set off against the regular source of income cannot be notionally brought forward and set off against the income of windmill for the current year after selection of initial year for claiming deduction u/s. 80IA(iv). In other words, the assessee has been given choice of 10 consecutive years out of 15 years for claiming deduction u/s.80IA(iv). Once assessee has selected initial year then unabsorbed depreciation and losses of that year and subsequent years could be carried forward for set off against the income of those years before computing the deduction admissible u/s.80IA(iv). In the present
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cases, Assessing Officer has brought forward the depreciation of A.Y. 2007-08, 2008-09 etc, which has already been set off against the regular income. He brought forward such depreciation on notional basis, which is contrary to the proposition laid down by the Hon’ble Madras High Court. The Ld. First Appellate Authority has rightly appreciated the controversy and rightly granted the deduction to the assessee. We do not find any error in the order of the Ld. CIT(A) hence, this ground of appeal is rejected in both the years.
In the result, appeals of the revenue are dismissed. Order pronounced in the Court on 6th June 2018 at Ahmedabad.
Sd/- Sd/- (PRAMOD KUMAR) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated, 06/06/2018 Priti Yadav, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-9, Ahmedabad. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, / DR, ITAT, Ahmedabad. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, / ITAT, Ahmedabad.