M/S. GUJARAT GUARDIAN LTD.,NEW DELHI vs. DCIT, NEW DELHI

Ground No.1 is general in nature and Grounds No.1.1, 4 and 5 relate to the computation of taxable income under normal provisions without considering the business loss which according to the assessee, would be eligible to be set off against assessed business income of the assessee and carried forward in the subsequent years. Grounds No.2 to 2.5 relate to the addition u/s 14A of the Act read with Rule 8D of the Rules; whereas Ground No.3 relates to the disallowance of expenditure incurred on account of cold tank repair to the tune of Rs.1,36,41,862/- and Ground No.6 relates to not allowing the credit of tax deducted at source. Ground No.7 is relating to levy of interest u/s 234B of the Act.

Coming to Grounds No.1.1, 4 & 5, case of the assessee is that in its return of income, it returned loss of Rs.36,46,62,247/- after setting off short term capital gain of Rs.15,38,192/- under normal provisions of the Act and paid tax on book profits of Rs.3,53,91,293/- u/s 115JB of the Act.

Grievance of the assessee is that the learned AO in the impugned assessment order made disallowance to the tune of Rs.2,27,27,987/- and simply added the same to the short term capital gains declared by the assessee and in that process the AO availed the set off of unabsorbed business loss of Rs.36,62,00,247/- and thereby assessed the income of the assessee at Rs.2,42,66,180/- under the normal provisions of the Act.

It is brought to our notice by the learned AR that during the course of assessment proceedings, ld. AO observed that the assessee was allowed to carry forward loss of Rs.36,62,00,247/-, credit was given for pre-paid taxes and applicable interest u/s 234A, 234B, 234C & 234D was charged accordingly. Learned AR, therefore, submits that pursuant to the adjustment of the unabsorbed business loss of Rs.36,62,00,247/- to the assessed income of Rs.2,42,67,180/-, there will not be any taxable income under the normal provisions of the Act and accordingly the tax liability as calculated by the assessee in its return of income under the MAT provisions has to be accepted.

There is no denial of the facts stated by the learned AR on this aspect and it is submitted by the learned DR that a verification is needed based on the record. We, therefore, considering the facts as recorded above, are of the opinion that it would suffice to give a direction to the learned AO to allow the adjustment of business loss against the assessed income on verification of the record, if necessary.

It is not out of place to deal with here the grievance of the assessee vide ground No.6 that the learned AO had not allowed credit of tax deducted at source amounting to Rs.2,33,849/- and based on the record, it has to be allowed. Considering the nature of the grievance, wedirect the ld. AO to verify the record and to grant credit of tax deducted at source available to the assessee. Ground Nos.1.1, 4, 5 and 6 are allowed accordingly for statistical purposes.

Now turning to Grounds no.2 to 2.5 which relate to the addition made by invoking Section 14A read with Rule8, argument of the learned AR has two- fold. Firstly, the invocation of Section 14A of the Act read with Rule 8D of the Rules is without jurisdiction, in the absence of any specific dissatisfaction recorded by the learned AO by pointing out any discrepancy in the claim made by the assessee having regard to its accounts. It is an admitted fact that there is no dispute that in computation of income, assessee made a suo moto disallo9wance of Rs.41,089/- towards 25% of the salary of one accounting person along with 5% remuneration of the Finance Director. Second limb of the learned AR is that as on 31.3.2010 the assessee is possessing its own funds to the tune of Rs.4,62,12,13,345/- whereas the total investment made during the year was Rs.1,66,94,07,819/-. So also, it is submitted that own funds available at the disposal of the assessee is to the tune as on 31.3.2011 were Rs.4,52,99,30,057/- whereas the investment during the year was Rs.1,76,34,63,223/-. Based on this, he submitted that the interest free funds available at the disposal of the assessee were far exceeding the investment during the year and, therefore, no interest component is involved under Rule 8D(ii).

Coming to the first aspect of recording of satisfaction, the impugned order on this aspect reads as under: “During the year, the assessee has earned dividend income of Rs.9,73,31,577/-, the assessee was asked to file details of expenditure incurred for earning dividend income and also to explain as to why disallowance be not made u/s 14A as per Rule 8D vide questionnaire dated 29.10.2014. Vide reply dated 10.2.2015 had submitted explanation to why it should be disallowed. The assessee submitted that it had made investments only in Debt Mutual Funds to earn income by way of dividends. The assessee had no borrowings and investments in mutual funds were made out of own funds. The assessee had suomotu disallowed Rs.4,10,289/- towards 20% of the salary of one accounting person along with 5% remuneration of the Finance Director. The working of the aforesaid disallowance was submitted vide reply dated 22.11.2014.”

Learned AO, thereafter, referred to the provisions u/s 14A of the Act and Rule 8D of the Rules and certain decisions and concluded that in such background the assessee’s claim that it has not incurred any expenditure incurred to earn dividend income was not acceptable and rejected. Accordingly learned AO proceeded to calculate the disallowable portion while following the formula given under Rule 8D of the Rules.

A careful perusal of the order of the learned AO on this aspect shows that the learned AO did not advert to the suo moto disallowance made by the assessee and he did not record any reasons as to why the suo moto disallowance made by the assessee is not acceptable. Straightaway, he calculated the disallowance portion of the expenses as per Rule 8D of the Rules and since such an amount is higher than the amount disallowed by the assessee, he thought it fit to make such an addition.

It is brought to our notice on behalf of the assessee that under similar circumstances in assessee’s own case for Asstt. Year 2009-10 and 2010-11, a coordinate bench of this Tribunal in 3595 and 3596/Del/2014 and ITA Nos.973 & 1106/Del/2015 did not approve the action of the learned AO in proceeding to invoke the provisions of Section 14A of the Act under Rule 8D of the Rules without first pointing out any discrepancy in the claim made by the assessee having regard to its books of account and by recording the reasons for invoking the provisions u/s 14A of the Act read with Rule 8D of the Rules. Further, the Hon’ble jurisdictional High Court, in the appeal preferred against the findings of theTribunal on this aspect for the Asstt. year 2009-10, while noticing the decision of the Hon’ble Apex Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs DCIT, 394 ITR 449 upheld the finding of the Tribunal and dismissed the Revenue’s appeal.

The Tribunal as well as the Hon’ble High Court thought it fit not to sustain the addition made by invoking Section 14A of the Act read with Rule 8D of the Rules based on the binding precedent of the Apex court in the case of Godrej& Boyce Manufacturing Ltd. (supra), which binds us also. In this factual situation, there is no escape for the Revenue from the rigours of law,and while respectfully following the decision of the Hon’ble Apex Court, we are of the considered opinion that it is not open for the learned AO to invoke the provisions of Section 14A of the Act read with Rule 8D of the Rules without 1strecording the reasons for dis-satisfaction as to the claim made by the assessee by pointing out any discrepancy in such claim. We, accordingly, allow these grounds and direct the deletion of the addition.

Now turning to Ground No.3 relating to the disallowance of expenditure to the tune of Rs.1,36,41,862/- in the return of income, assessee claimed a deduction of Rs.1,60,49,250/-, being 14% of the third and fourth instalments of engineering fee aggregating to Rs.11,46,37,500/- paid to M/s Guardian International Corporation for cold tank repair and the balance to be capital expenditure. Learned AO, however, vide draft assessment order dated 17.3.2015 proposed a disallowance of Rs.1,60,49,250/- treating the same as capital expenditure without any cogent reasons. Learned DRP upheld the same.

Facts on this aspect as explained by the learned AR arethus:-The assessee commenced commercial production of float glass in March 1993. One of the most important sections of float glass manufacturing line is the melting furnace. The potential life of a float glass furnace is about 15 years. Thereafter it becomes necessary to rebuild the furnace and repair/replace/renovate other sections of the plant. Such major repairs to the plant are termed as “Cold Repair” in float glass industry. This activity typically requires the planning to start about 2-3 years in advance so as to carry out engineering and procurement activities and be fully ready to carry out the repair at the appropriate time. When actual cold repair takes place, the same requires plant shutdown of about 100 days.Cold Repair of a float glass plant requires comprehensive engineering, procurement, and supervision activities which are quite similar to setting up a new float glass plant.

The ld. AR further submitted that during financial year 2007-08, the assessee completed 14 years of operations,as a result, the assessee started planning for cold repairs in 2007-08 for which it took necessary steps to prepare itself for undertaking the Cold Repair. As a first step, the assessee entered into agreement with Guardian International Corp. USA (Guardian) in September, 2007 for Engineering Services for Cold Repair.The services provided were in connection with preparing the assessee to carry out cold tank repair and were not aimed in assisting the assessee in carrying out actual repair, which was undertaken by the appellant itself during the year under consideration.For the services to be provided by Guardian, the assessee agreed to the fee of USD 5 million payable in four equal instalments. Further, Article 3.2 of the Agreement provides the milestones for making payment of the agreed engineering fees, as under: a) First instalment [USD 1.25 million] - after signing of the Agreement; b) Second instalment [USD 1.25 million] - after Guardian has delivered and the appellant has accepted the detailed drawings and specifications; c) Third instalment [USD 1.25 million] - after commercial production commences; d) Fourth instalment [USD 1.25 million] - after the completion of the performance test.

In view of the above, out of USD 5 million fee, 1st instalment of USD 1.25 million (Rs.4,93,18,441) was paid in financial year 2007-08 and 2nd instalment of USD 1.25 million (Rs.5,85,35,098/-) was paid in financial year 2009-10, towards the services rendered by Guardian relating to engineering and procurement activities. During the year under consideration, the assessee paid 3rd and 4th instalment amounting to USD 2.5 million (Rs. 11,47,37,500) towards the services rendered by Guardian relating to commencement of commercial production and completion of performance test. The disclosure about the said expense was also made in Schedule 18 - Note 14(B) of the Audited Accounts as transaction with related party.

It is further submitted by the ld. AR that the payment made to Guardian was not linked with undertaking actual cold tank repair. In fact, the amount of USD 5 million was agreed for services to be rendered by Guardian in relation to following services: Engineering design services a) Equipment supply services b) Project financial control services c) Purchasing services d) Heat up services e)

According to the learned AR, the detail of work done under the aforesaid services is explained in the Agreement, which was submitted during the assessment proceedings vide reply dated 10.02.2015. These services were rendered to prepare the assessee to undertake cold tank repair during the year under consideration.It was the endeavor of the company to take maximum life from the existing furnace and best efforts were made to operate the furnace to the extent technically advisable. During the current financial year 2010- 11, it was decided to carry out actual Cold Repair. The activity commenced on August 29, 2010 and the whole process took 97 days, during which the float production facility was closed. Consequently, the production re-commenced on December 4, 2010.

It is explained by the ld. AR that during the Cold Repair process, glass melting furnace was fully dismantled and rebuilt and other sections of the plant were suitable repaired, renovated or modernized. In other sections the equipment were repaired/ replaced or renovated/ refurbished as per technical advice. In terms of melting capacity of the furnace, there was no change in the production capacity of the plant. During the financial year 2010-11, the expenditure incurred on Cold Repair has been capitalized/ charged to revenue, as appropriate, in line with the Generally Accepted Accounting Principles. In case, the plant or machinery has been fully replaced, the same was capitalized and in case the activity was of the nature of repairs and maintenance, the same has been expensed out. After analysing each expense and considering the nature of the same, out of total Cold Repair expense of Rs. 196.54 crores, Rs. 169.77 crores (about 86% approx.) were capitalized and Rs.26.77 crores (about 14% approx.) were charged as repairs expense in the financial year 2010-11. The said bifurcation of actual repair expenditure was duly accepted by the assessing officer.

It is further submitted by the learned AR that during the course of assessment proceedings, the details of plant repair expenditure aggregating to Rs.29,66,12,511/- debited to profit & loss account were filed before the assessing officer vide reply dated 23.2.2015. Such an expenditure included Rs.26,76,29,919/- being the component of revenue expenditure incurred on cold tank repair, andthe assessee, vide reply dated 23.2.2015 submitted invoice wise details of repair expenses incurred. The assessing officer, after thorough examination of the details furnished by the assessee, accepted the aforesaid bifurcation of expenditure incurred on cold tank repair without drawing any adverse inference.

It is further submitted on behalf of the assessee that the assessee in its return of income for the relevant year, claimed Rs.1,60,49,250/-, being 14% of the 3rd and 4th instalment of the engineering fees paid to Guardian, as revenue expenditure under section 37(1) of the Act, and the balance amount of Rs.9,85,88,250 (approx. 86% of the total amount paid) was capitalized in the books of accounts. The learned AR further submitted that since the aforesaid bifurcation of total expenditure incurred on Cold Tank repair has been accepted by the assessing officer, then the assessing officer ought to have accepted the bifurcation of the engineering fees which was based on the same principle.The assessing officer, however, in the impugned assessment order dated 29.02.2016, has merely followed the orders of preceding years and disallowed Rs. 1,36,41,862/- after allowing depreciation on Rs. 1,60,49,250/-, being 14% of 3rd and 4th instalments of engineering fees paid to Guardian. In other words, the