GUJARAT FLUOROCHEMICALS LIMITED.,,VADODARA vs. THE DCIT, CIRCLE-1(1)(1),, VADODARA

Learned Counsel for the assessee pointed out that the issues raised in the above ground relate to disallowance of expenses incurred by the assessee pertaining to exempt income earned, as per the provisions of Section 14A of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] read with Rule 8D of the Income-Tax Rules, 1962, as also the adjustment of the impugned disallowance of expenses under Section 14A to the book profits of the assessee for the purposes of Minimum Alternate Tax (MAT) to be paid on the book profits as per the provisions of Section 115JB of the Act.

At the outset, learned Counsel for the assessee stated that both the issues raised in aforesaid ground were covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in the case of the assessee itself in the preceding year both on the issue of disallowance made while computing the taxable income as per normal provisions of the Act and, for the purpose of adjustment made to the book profits as per Section 115JB of the Act.

Drawing our attention to the facts of the case from paragraph Nos. 4 to 4.3 of learned CIT(A)’s order, it was pointed out that the assessee had shown Rs.51.40 lakhs as Dividend Income exempt from tax under the Act, earned during the impugned year. The Assessing Officer noted that the assessee had interest bearing borrowed funds on which the interest was paid during the year and the business funds were mixed funds. He noted that the assessee did not maintain separate account for source of funds utilized for the investment activities. He, therefore, held that where tax free activities and taxable income

The Assessing Officer further went on to make addition to the book profits of the assessee under Section 115JB of the Act the amount of total disallowance computed under Section 14A of the Act, of Rs.8,73,56,957/-.

Aggrieved by the aforesaid additions made by the Assessing Officer, the matter was carried in appeal before the learned CIT(A), where besides other arguments raised, the assessee pointed out calculation errors in computing the disallowance as per Rule 8D of the Rules, which he pointed out was allowed by the Ld.CIT(A) in A.Y 2011-12 and the DRP in A.Y 2013-14. It was pointed out that the disallowance as per the correct working came to Rs.3,45,82,170/- as against Rs.7,92,83,524/- worked out by the AO. The Ld. CIT(A) found merit in 4 Gujarat Fluorochemicals Ltd Vs. DCIT AY :2014-15 the contention of the assessee and directed disallowance to be reworked as allowed in A.Y 2011-12 after reducing the suo-moto disallowance made by the assessee amounting to Rs.80,73,433/-.

Before us, learned Counsel for the assessee pointed out that the Hon’ble jurisdictional High Court in the case of the assessee itself had held that the disallowance under Section 14A of the Act, in any case, cannot exceed the exempt income. He drew our attention to the decision of Hon’ble jurisdictional High Court in the case of PCIT Vs. Gujarat Fluorochemicals Ltd (assessee before us) in Tax Appeal No. 11 and 28 of 2019 dated 17.06.2019. Drawing our attention to paragraph Nos. 19 to 21 of the order where the issue was dealt with by the Hon’ble High Court, learned Counsel for the assessee pointed out that the question proposed by the Revenue before the Hon’ble High Court was whether the disallowance under Section 14A read with Rule 8D can exceed the exempt income which the Hon’ble High Court held in favour of the assessee following its own decision in the case of Corrtech Energy P. Ltd., 223 Taxman 130. Paragraph Nos. 19 to 21 of the order of the Hon’ble High Court in this regard are as under:-

Next fold of dispute relates to working out of administrative expenses relatable to earning of exempt income.

As pointed out by the ld. counsel for the assessee that Hon'ble Gujarat High Court (in Corrotech) and Hon'ble Delhi High Court in (Chemvest) have concurred with each other that if there is no dividend income or tax free income in a year then no disallowance u/s.14A can be made. This explication was amplified and employed subsequently by ITAT to construe that working of expenditure for disallowance u/s.14A should not exceed more than dividend income itself. In the case of Joint Investment Pvt. Ltd. Vs. CIT (ITA No.117/2015, decided on 25.2.2015) Hon'ble Delhi High Court has observed that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt

In taking aforesaid view, the ITAT placed reliance on the following decisions:-

With regard to the issue of adjustment to the book profits of the assessee by adding the disallowance of expenses made under Section 14A of the Act for the purposes of Minimum Alternate Tax (MAT) to be paid by the assessee on the book profits as per the provisions of Section 115JB of the Act, the learned Counsel for the assessee pointed out that the issue was squarely covered in favour of the assessee by the decision of the Special Bench of the ITAT in the 6 Gujarat Fluorochemicals Ltd Vs. DCIT AY :2014-15 case of ACIT Vs. Vireet Investment Private Limited, reported in [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) as well as by the decision of Hon’ble jurisdictional High Court in assessee’s own case in Tax Appeal Nos. 11 & 28 of 2019 vide order dated 17.06.2019. Our attention was drawn to paragraph Nos. 22 to 24 of the order of the Hon’ble High Court which reads as under:-

Next common issue involved in both years is, whether the amount disallowed under section 14A read with rule 3D deserves to be added back in the book profit for the purpose of section 115JB. In other words, whether the additions which have been confirmed by the Tribunal at Rs.1.55 crores in the assessment year 2012-13 and Rs.75 lakhs in the assessment year 2013-14, deserves to be added back in the book profit computed for the purpose of section 115JB.

We have duly considered rival contentions and gone through the record carefully. We find that ld. DRP has relied upon the order of the ITAT, Mumbai in the case of DCIT Vs. Viraj Profiles Ltd., (2016) 46 ITR (Trib) 0626 (Mum) and held that addition required tobe made in the book profit could be calculated as per Rule 3D of the Income Tax Rules. The ld. DRP thereafter made reference to decision of Hon’ble Delhi High Court in the case of CIT Vs. Geotze India Ltd., 361 ITR 505. According to the Id. DRP, this decision has been considered by the Special Bench in the case of Vireet Investment P. Ltd, (supra) but placed reliance upon Hon’ble Bombay High Court in the case of Vodafone India Services P. Ltd. ACIT, 361 ITR 0531 (Bom) and held, that DRP is not bound by the ratio laid down by the Special Bench. The discussion made by the DRP on this issue in the assessment year 2013-14 -reads as under:

There were contradictory orders at the end of the Tribunal. Therefore, Special Bench was constituted to consider the question:

When the Special Bench has considered this question, it was confronted with two decisions of the Hon'ble Delhi High Court diagonally opposite to each other. One referred by the Id. DRP also in the present case, rendered in the case of CIR Vs. Goetze India Ltd. (Supra) and other in the case of Pr. CIT Vs. Bhushan Steel ITAT, Special Bench has reproduced both these orders in Vireet Investment P. Ltd. (supra) and thereafter it considered as to which decision ought to be followed by a subordinate authority. The department advanced an argument that in the case of Bhushan Steel, Hon'ble Delhi High Court failed to consider subsequent decision of CIT Vs. Goetze India Ltd. (supra). However, the Tribunal after placing reliance upon the decision of Hon'ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., 88 ITR.192 (SC) and other decisions has held that it is incumbent upon it follow the decision of Hon'ble Delhi High Court in the case of Bhushan Steel. In this case, Hon'ble Delhi High Court has held as under:-

Apart from the above, we have a binding precedent before us - one from Hon’ble jurisdictional High Court and other from the Hon’ble Bombay High Court. The question considered by the Hon’ble Gujarat High Court in the case of Alembic Ltd. (supra) is as under:-

The Hon’ble Gujarat High Court has replied this question as under:

So far as issue Nos.(iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Income-tax-1 v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 358 ITR 323 (Gujarat) Where this court has held in paragraph Nos.6 to 6.5this court has observed as under:

So far as the fourth question is concerned, it pertains to addition of Rs.1,14,43,040/- under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act.

Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Income-tax-1 vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos.(iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed.

Similarly, Hon'ble Bombay High Court has formulated following question in the case of Bengal Finance & Investments P. Ltd. (supra) and replied as under:-

So far as question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT in ITA No.3850/Mum/2010 to held that an amount disallowed under section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue's Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No.438 of 2012 rendered on 7th August, 2024. In view of the above, question (b) does not raise any substantial question of law.

Respectfully following the above decision, we hold that no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. We allow this ground of appeal in both the years and delete the additions.”

We take notice of the fact that in context with the third proposed question, the ITAT placed reliance on the following decisions :-

The issue is squarely covered and in our opinion, no error could be said to have been committed by the ITAT in taking the view that no addition in the book profit can be made on the basis of the calculations worked out under section-14A of the Act.”

The learned Departmental Representative was unable to controvert the above contention of the assessee that both the issues were covered by the decision of the Hon’ble jurisdictional High Court and the Special Bench decision of the ITAT as stated by the learned Counsel for the assessee before us

In view of the above, we hold that the disallowance under Section 14A of the Act of expenses incurred for the purposes of earning exempt income be restricted to the extent of exempt income earned by the assessee during the year amounting to Rs.51,40,000/- in accordance with the decision of the Hon’ble jurisdictional High Court in the case of the assessee itself as cited before us. Further, we direct that no adjustment be made to the book profits of the assessee under Section 115JB of the Act of the expenses disallowed under Section 14A of the Act again following the decision of the jurisdictional High Court in the case of the assessee itself as cited before us and the Special Bench of the ITAT in the case of Vireet Investment Private Limited (supra).

The issues raised by the assessee in this regard in Ground No.1 are accordingly partly allowed in above terms.

Ground No. 2 raised by the assessee reads as under:-

Drawing our attention to the facts of the case from paragraph Nos. 5 to 5.3 of the learned CIT(A)’s order, learned Counsel for the assessee pointed out that during the impugned year the assessee had claimed deduction under Section 80IA of the Act amounting to Rs.33,28,49,068/- in respect of Captive Power Generation Plants. The Assessing Officer noted that, for the purposes of computing the said deduction, the assessee had claimed an amount of Rs.1,42,60,85,488/- as total notional revenue of the 80IA claiming Captive Power Plant units from sale of electricity of total 21,89,94,687 KWH units. The assessee had contended that for the different Captive Power Plants (CPP) the rate taken for the units sold to it was on the basis of the variable rate charged by the respective State Electricity Companies, i.e the selling price of the Electricity companies i.e. Madhya Gujarat Vij Company Limited, Dakshin Gujarat Vij Company Limited, etc. The Assessing Officer, however, held that the appropriate rate which the assessee ought to have applied for determining the revenue earned from sale of electricity to the CPP units was the weighted average rate at which GUVNL purchased units. Accordingly, he determined the total revenue from sale of power to CPP units at Rs.83,21,79,811/- as against Rs.1,42,60,85,488/- claimed by the assessee. Accordingly, the eligibility of claim of deduction under Section 80IA of the Act was reworked by the Assessing Officer and the deduction claimed by the assessee was restricted to an amount of Rs.1,30,00,897/- as against Rs.33,28,49,068/- claimed by the assessee. Thus, the claim of deduction under Section 80IA of the Act was reduced by an amount of Rs.31,98,48,171/-.

The matter was carried in appeal before the learned CIT(A) who upheld the disallowance of deduction following the orders of the learned CIT(A) in the case of the assessee itself in AYs 2009-10 & 2011-12 and the directions of the DRP in AY 2013-14. 14 Gujarat Fluorochemicals Ltd Vs. DCIT AY :2014-15 16. Before us, learned Counsel for the assessee contended that this issue was also decided by the Hon’ble jurisdictional High Court in favour of the assessee in its own case in Tax Appeal Nos. 11 & 28 of 2019 vide order dated 17.06.2019. 17. Our attention was drawn to the question framed in this regard to the High Court :

In both the tax appeals though slightly differently worded, the questions concerning the same assessee are identical and concern the issue of deduction under section 80IA of the Income 'Tax, Act granted to the assessee by the Tribunal on captive power generation plant. The second question is with respect to recognising such claim on the basis of purchase price of power from GEB and substituting the rates of 2.47 per unit adopted by the Assessing Officer.

Since both the issues are covered by various Judgments of this Court, we do not find it necessary to record facts at any length. Division Bench of this Court by judgment dated 22.11.2011 in Tax Appeal No.2092/2010 in somewhat similar controversy observed as under:

With respect to Question [B], the issue pertains to sub-Section (8) of Section -80IA of the; Income Tax Act, 1961. The assessee had a CPP Unit

CIT (Appeals) confirmed the view of the Assessing Officer on the same line of reasoning. The Tribunal, however, on further appeal by the assessee, reversed the orders passed by the Revenue authorities referring to and relying upon the decisions of other Tribunals. The Tribunal was of the opinion that the market value of the electricity supplied by the CPP Unit to the general unit would be the same being charged by GEB from theconsumers.

Counsel for the Revenue contended that the component of 8 paiseper unit was the electricity duty which GEB was not authorized to retain but had to pass on to the Government.In essence, GEB was only collecting 8 paise per unit as electricity duty for and on behalf of the Government. He submitted that the market value of the electricity should be reckoned on Rs.5.32 ps. per unit as was done by the Revenue authority.

Under sub-Section(S) of Section 801A of the Act, if it is found that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80IA in case of the eligible business as if the transfer had been made at the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture.”

As is evident from the above, the Hon’ble High Court had held that it was the selling price of electricity which was to be considered for determining the Revenue generated from sale to CPP for the purposes of computing profits eligible to deduction u/s 80-IA(4) of the Act, applying the ratio laid down by it in the case of Gujarat Alkalies (supra).

The learned Departmental Representative was unable to point out any distinguishing facts nor was any contrary decision of the Hon’ble jurisdictional High Court or the Hon’ble Apex Court brought to our notice.

In view of the above, since the issue already stands decided in favour of the assessee in its own case by the Hon’ble jurisdictional High Court, the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) of deduction claimed under Section 80IA of the Act to the extent of Rs.31,98,48,171/- is directed to be deleted.

Ground No. 2 of appeal of the assessee is accordingly allowed.

Ground No.3 raised by the assessee reads as under:-

Drawing our attention to the facts of the case from paragraph Nos. 7 to 7.2 of the learned CIT(A)’s order, learned Counsel for the assessee pointed out that the revenue earned by the assessee from sale of Carbon Credits, net of expenses was held by the Assessing Officer to be taxable in the hands of the assessee as opposed to the assessee returning the same as capital receipts not subject to tax. The learned CIT(A) upheld the order of the Assessing Officer following his order in the case of the assessee itself for AY 2010-11. 17 Gujarat Fluorochemicals Ltd Vs. DCIT AY :2014-15 24. Before us, the contention raised by the learned Counsel for the assessee was that this issue now stood covered in favour of the assessee by the decision of Hon’ble jurisdictional High Court in assessee’s own case in Tax Appeal Nos. 11 & 28 of 2019 vide order dated 17.06.2019. Our attention was drawn to paragraph Nos. 26 to 27 of the said order of the Hon’ble High Court which reads as under:- “26. The fifth question proposed by the revenue whether the income from the Carbon Credits is capital in nature. This issue is squarely covered by the following decisions:

Learned Departmental Representative was unable to controvert the above contention of the assessee - either on facts or in law.

In view of the above, the issue being covered by the decision of the Hon’ble jurisdictional High Court in favour of the assessee in its own case, we hold that the profit earned by the assessee for Carbon Credits is capital in nature; and, the addition made by the Revenue by treating them as revenue in nature is directed to be deleted.

Ground No.3 of assessee’s appeal is accordingly allowed.

In effect, the appeal of the assessee is partly allowed.