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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI N. K. BILLAIYA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal is filed against the order dated 18/10/2017 passed by ACIT, Circle 17(2), New Delhi u/s 144C (13) read with Section 143(3) of the Income Tax act, 1961.
The grounds of appeal are as under:- CONCISE/ REVISED GROUNDS OF APPEAL
That on the facts and circumstances of the case and in law, the order of assessment framed by the Ld. ACIT, Circle 17(2), New Delhi (hereinafter referred as 'The Ld. A.O.) pursuant to the direction of the Hon'ble Dispute Resolution Panel-I (hereinafter referred as 'the Hon'ble DRP') under section 144C(5) of the Act, is a vitiated order having been passed in violation of principle of natural justice and is otherwise arbitrary and thus bad in law and
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void ab-initio.
That the Hon'ble DRP-2 direction are bad in law to the extent the same are prejudicial to the appellant because: -
(a) That the Ld. TPO erred, on facts and in law, in applying lower turnover filter of INR 1 crore for rejecting the independent companies. Without prejudice, the Ld. TPO erred, on facts and in law, in not applying an upper turnover filter to reject companies having significantly higher turnover vis-a-vis the appellant.
That the Ld. TPO/Hon'ble DRP have erred, on facts and in law, in (b) rejecting Comprehensive objection filed towards the issue related to the SDT.
That the Hon'ble DRP-2 and the Ld. A.O./TPO has erred on facts and law by rejecting the internal CUP method adopted by the appellant towards the internal transfer of power, disallowances of expenses making the entire transfer pricing adjustment of INR 30,91,35,204/- in respect of following specified domestic transactions: (A) The Ld. TPO and Ld. A.O. have erred, in law and facts and making the SDTR adjustment of INR 29,61,28,642/- by erroneously recalculating and re-computing the transfer of Power at the rate on notional basis, which is contrary to provision of section 80IA(8) of I.T. Act regarding the market rate of distribution of power because:-
(i) by not adhering the mandate of section 80IA(8) towards "market rate" which have been settled down by the various courts and Tribunal.,
(ii) by suo-motto rejecting the competitive analysis in the documentation filed by the appellant in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('the Rules') and proceeded to make the transfer pricing addition based on redetermination of the arm's length price of the domestic transaction towards transfer of
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power. by using single year of financial data (i.e. data for FY 2012-13 only) (iii) as against multiple year financial data used by the appellant for determination of arm's length price for the procurement of power. (iv) by rejecting the comparable market rate for procurement of power even from the same CSEB to AE without appreciating the fact that the purchase of power provided by these companies are similar to the functional profile of the appellant.
by selecting certain companies towards sale of power through (v) exchange as comparable without appreciating that the average of power sale price has nothing to do with the present facts and circumstances because those companies have their own way of carrying the business activities.
(vi) by not appreciating that a machinery provision which enables the assessee to avail of a deduction u/s 80IA , conferred by substantive provision in the income tax Act is required to be construed liberally.
(vii) by not affording an opportunity for purporting the rates to be adopted.
(B)The Hon'ble DRP and Ld. TPO/ A.O. have erred in law and facts by erroneously questioned the business prudence making partial addition on account of managerial remuneration 82,27,928/- paid to Smt. Shallu Jindal, Director of the appellant company in term of her contractual advisory services to AE without appreciating the fact that the services provided by her to the company have nowhere disputed, particularly when there is no finding that the salary expense was bogus or not genuine but on the following reasons:-
(i) by selecting other director salary as comparable without appreciating that these director are engaged in other services while the former for the specific services which directly contribute towards company polices
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merchant banking devices, security and stock broking series, loan syndication/ debt syndication and project consultancy services, investment banking services, institutional equities, insurance brokerage, asset management and wealth management, merger and acquisitions advisory, ESOP advisory, equity/debt placement and restructuring, syndication of finance, portfolio management and mutual fund distribution and do not satisfy the functional, asset and risks ("FAR") analysis test vis- a-vis the appellant in relation to the specified Domestics I transaction pertaining to provision of advisory services.
(C).That the Hon'ble DRP and Ld. TPO/A.O. failed to apply his mind on the nature of expense amounting to Rs. 47,78,634/- for generation of power out of which some portion used in captive power unit and the remaining transmitted in the manufacturing of sponge iron etc. i.e. main business of the appellant which requires a lot of expenses resulting in allocation of Expenses on proportionate basis.
The Ld. TPO/Hon'ble DRP have erred on the facts and in law, by making the additions in the nature of by reducing the transfer price of power as well as increase the expenses towards the claim/deduction u/s 80-IA(8) instead of reducing the claim u/s 80-IA(8). The Ld. A.O. has erred on facts and in law instead of computing deduction u/s 80IA(8) afresh has made the additions w.r.t reduction in transfer price of power, disallowances of expenses.
That the Ld. A.O. has erred in facts and in law by disallowing the bank guarantee commission u/s 40a(ia) amounting to Rs. 1,14,085/- despite of the direction given by the Hon'ble DRP towards deletion of such addition made u/s 40a(ia) of I.T. Act. Hence the addition made deserves to be deleted.
The Ld. A.O. has erred in disallowing the depreciation charged by the assessee in respect of electrical installation without appreciating the fact that these electrical installation contributes to essential part of Plant and
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Machinery, despite of the direction of Hon'ble DRP towards the deletion of the issue of depreciation.
The Ld. A.O. has erred on facts and in law by disallowing the CSR expenditure made by the appellant amounting to Rs. 45,04,273/- by holding that it is not exclusively for the business purpose without appreciating the submission made by the appellant that these expenses incurred for environmental hazard as per the mandate of Chhattisgarh Environmental Board (CEB) as well as Ministry of Environment and Forest.
The Hon'ble DRP and Ld. A.O has erred on facts and law by making the addition on account of difference between income as per books of account and income reflecting in Form 26AS, even without appreciating the submission made.
That the Ld. A.O has erred , on the facts and in law, on the circumstances of the case and in law by alleging that the appellant has furnished inaccurate particulars of income, thereby posing to initiate penalty proceedings under section 271(l)(c) of the Act.
That the Ld. A.O has erred on facts and law, by proposing to levy consequential interest u/s 234A, B, C, D and 244A (3) of the Act mechanically and without recording any satisfaction for its initiation.
That the appellant craves leaves to amend, alter or to raise any other ground at the time of hearing.”
The assessee company is engaged in the manufacturing and selling of Sponge Iron, Billets, Wire Rod, Oxygen Gas and generation of power. The assessee company electronically filed its original return of income on 29.11.2013 for the A.Y.2013-14 declaring total income at Rs. 85,22,71,300/-. Subsequently, the case was selected under CASS for Complete Scrutiny. Notice
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u/s 143(2) of the I.T. Act, 1961 was issued on 04.09.2014 and duly served upon the assessee company. Thereafter, notice u/s 142(1) of the I.T. Act, 1961 along with questionnaire was issued on 27.08.2015 and duly served upon the assessee company, wherein certain details were called for. In response to these notices, C.A & AR on behalf of the assessee company, attended hearings from time to time and filed the requisite details/information which has been placed on record. Necessary details with regard to CASS reasons were obtained during the course of assessment proceedings and was examined and duly placed on record by the Assessing Officer. As one of the reasons of CASS was “Large value domestic transaction with associated enterprises (Form 3CEB)”. As per the instruction No. 15 of 2015, the case was therefore referred to the Assistant Commissioner of Income Tax (Transfer Pricing)-2(3)(1), New Delhi after obtaining approval from Pr. CIT -06, New Delhi for the reference. The TPO vide order u/s 92CA(3) dated 28-10-2016 suggested the Assessing Officer to enhance the income of the assessee by Rs. 45,68,87,779/- on account of difference in Arm’s Length Price. During the year under consideration the assessee company has made the domestic transaction with the associated enterprises and a reference in this regard was made to Transfer Pricing Officer, New Delhi u/s. 92CA of the I.T. Act., in respect of international specified domestic transaction entered into by the assessee during F.Y. 2012-13. Draft order u/s 144C(1) of the Income Tax Act, 1961 was passed on 30.12.2016 wherein addition of Rs. 45,68,87,779/- was proposed on account of Transfer Pricing Adjustment. The assessee company filed its objections to the proposed Transfer Pricing Adjustment before the Dispute Resolution Panel-2, New Delhi (DRP) which issued directions u/s 144C(5) of the Income Tax Act, 1961 vide order dated 11.09.2017. Order giving effect to direction of DRP-2, New Delhi was passed by the ACIT, Transfer Pricing Officer-2(3)(l), New Delhi on 11.10.2017 wherein the revised Transfer Pricing Adjustments was made as under :- Segments Adjustment (Rs.)
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On account of managerial 82,27,928/- remuneration Purchase of power 29,61,28,642/- Adjustment on account of allocation of 47,78,634/- expenses Total 30,91,35,204/-
In view of above facts, addition of Rs. 30,91,35,204/- was made on account of Transfer Pricing Adjustments as directed by the DRP-2, New Delhi in its order dated 11.09.2017. The Assessing Officer also made disallowance of bank guarantee commission u/s 40(a) (ia) of the Act, addition in respect of additional depreciation as well as excess depreciation on electrical installations, addition of disallowance on account of corporate social responsibility expenses and addition in respect of disallowance on account of TDS. Thus, the total income of the assessee was assessed at Rs.116,68,68,380/- by the Assessing Officer.
Being aggrieved by the Assessment Order, the present appeal is filed by the assessee.
The Ld. AR submitted that the assessee has taken detailed /comprehensive grounds of appeal but for the sake of arguments the Ld. AR is focusing on the disputed issue as per grounds no. 3 (a, b, c), 4.7, 4.9, 5, 6, 7, 8 and the other remaining grounds are in the nature of supporting of main grounds therefore the Ld. AR focused his argument directly on the issue involved.
As regards Ground Nos. 1 and 2 are general in nature, hence same are dismissed.
The Ld. AR submitted that as regards to Ground No. 3 (a), the assessee company is engaged in the business of manufacturing & selling of sponge iron bullets, wires, oxygen gas & generation of power. It has set up power plants
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primarily for the purpose of generation of electricity for captive consumption inter alia, manufacturing of various iron & steel products. The assessee is regularly claiming deduction u/s 80IA of the Act in respect of profits derived from the captive power plant/ undertaking. The assessee transfers the power for captive use as per the market rate/below on which CSEB selling the power which is @ 4.64 p.u. (per unit). In the previous so many years the department has only one grievances that CSEB rates consists @ Rs.0.38 p.u. on account of electricity tax, cess and for which the transfer price or power price have to be adjusted to that extent by disallowing to that extent and for the remaining the assessee is entitled for transfer price by treating sale price of power transferred for captive use. The matter travelled to the CIT (A) whereas the CIT (A) was not in agreement with the finding of Assessing Officer and finally holding that as per section 80IA(8) clearly shows that the market rate of the transfer of power p.u. which rate it would have been purchased or sold in open market & result the assessee have been given the entire relief on account of transfer of power price for the purpose of deduction u/s 80IA. Against the order the matter has travelled on the instance of department before the Tribunal wherein the Tribunal passed an order in ITA No.736/D/ 2014 relevant for A.Y. 2009-10 dated 24.04.2018 by upholding the finding of CIT (A). The Ld. AR further submitted that as per the new Finance Act, 2013 from A.Y. 2013-14, the domestic transaction has been taken u/s 92C whereas the Assessing Officer adopted a figure that CSEB purchasing power @ 1.89 p.u. on the basis of the information gathered from the CSEB U/s 133(6) even though the circular has not been properly appreciated & made the basis of this circular for addition. In this connection, the TPO has not applied his mind that there are criteria for purchase from State generating station is that if excess production are there then the generating station are under obligation to sale the extra power at the lowest price & this lowest price cannot be considered as equivalent to the market rate as defined u/s 80IA(8) of the Income Tax Act, 1961. The matter further referred to the DRP where the DRP first of all out right the basis for rate adopted by TPO. Thereafter the DRP adopted another approach i.e. the
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averaging of IEX rate just an assumption & presumption.
The Ld. AR further submitted that despite the fact that in previous years CIT(A) admitted the assessee’s appeal but the same was not appreciated. Now the appeal of A.Y. 2009-10 on same issue decided by coordinate Bench relevant for A.Y. 2009-10 and there are no changes in assessee company’s system or method of accounting as appeared from audited books of account. The Ld. AR submitted that once it is established on the record that the assessee is following the same system of accounts and method therefore there is no occasion to disturb it and in support of this, the Ld. AR relied upon the judgment of Hon’ble Supreme Court in case of Radhasoami Satsang vs. CIT 193 ITR 321 and CIT vs. Excel Industries Ltd. 358 ITR 295 based on rule of consistency. 10. The Ld. AR further submitted that during the proceeding pending before TPO/DRP a comprehensive submissions on the issue involved was filed but the same was not considered in right prospective and even the tariff was not considered as provided by the CSRC that neither there are any occasion to distribute the books of account maintained by the assesse nor any adverse view on the submission and evidence place on record. The Ld. AR relied upon various case laws like Godawari Power, Kanoria Chemicals, Jindal Steels, Deepak Fertilizers, Mumbai bench of West Cost papers and crux of all the citation are that on Section 80IA (8) with respect to market rate. The Ld. AR submitted that the IEX rate was even not properly considered. In support thereof, the Ld. AR placed on record of IEX rate for May 2018 as appeared in the newspaper of business standard dated 08.06.2018 wherein it categorically appeared that there are 3 types of rates namely average, minimum, maximum. Therefore SDTR adjustment of INR 29,61,28,642 which is erroneously recalculating and re-computing the price of purchase on notional basis are liable to be deleted.
The Ld. DR submitted that the assessee do not have license to sale power
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in the market. The Ld. DR further submitted that the order of the Tribunal is on different footing. The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee is regularly claiming deduction u/s 80IA of the Act in respect of profits derived from the captive power plant/ undertaking. The assessee transfers the power for captive use as per the market rate/below on which CSEB selling the power which is @ 4.64 p.u. In the previous years the Revenue disputed CSEB rates consists @ Rs.0.38 p.u. on account of electricity tax, cess and for which the transfer price or power price was adjusted to that extent by disallowing to that extent and for the remaining the assessee is entitled for transfer price by treating sale price of power transferred for captive use. The assessee filed appeal before the CIT (A) wherein the CIT (A) allowed the appeal of the assessee. Against the said order the Revenue filed appeal before the Tribunal wherein the Tribunal upheld the finding of CIT (A). The Ld. AR pointed out that as per the new Finance Act, 2013 from A.Y. 2013-14, the domestic transaction took place u/s 92C whereas the Assessing Officer adopted a figure that CSEB purchasing power @ 1.89 p.u. on the basis of the information gathered from the CSEB U/s 133(6). The TPO has not taken into consideration that there are criteria for purchase from State generating station when excess production are there. In such situation, the generating station are under obligation to sale the extra power at the lowest price & this lowest price cannot be considered as equivalent to the market rate as defined u/s 80IA(8) of the Income Tax Act, 1961. The matter further referred to the DRP where the DRP adopted different approach i.e. the averaging of IEX rate but, the DRP has not given any reason for adopting the said rate. The Tribunal in assessee’s own case held as under in A.Y. 2009-10:
We have considered the rival arguments made by both the sides and perused the material available on record. We have also considered the
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various decisions cited before us. The only issue to be decided in the impugned ground is regarding the action of the Assessing Officer in excluding Rs.0.2932/- per unit while computing the market price of power for the purposes of computing deduction admissible to power units u/s 80-1A of the I.T. Act. We find the assessee in the instant case has sold the electricity to its captive plant at the rate of Rs.3.92 per unit i.e. rate at which CSEB was selling to industrial consumers as on 01.04.2008. The above rate of Rs.3.92 included electricity duty at the rate of 8% of energy charges and cess of Rs.0.05 paise per unit. Since according to the Assessing Officer, the assessee has not been making actual sales to its other units because the power generated is consumed captively by other units. According to him, since the assessee is only generating power but it does not have the licence to distribute it, it cannot charge the electricity duty at the rate of 8% and cess 0.05% on the transfer of power. Thus, according to him, the assessee has inflated the sale of power by Rs.0.293 per unit and has accordingly inflated the deduction u/s 80IA by a sum of Rs.3.63 per unit. We find the Id. CIT(A) following various decisions including the decision of the Delhi Bench of the Tribunal in the case of Jindal Steel & Power Limited reported in (2007) 16 SOT 509 decisions of the Mumbai Bench of the Tribunal in the case of D.C.W Ltd. Vs. Addl. CIT(A) vide ITA Nos. 5560 & 5569/Mum/2008 deleted the addition made by the Assessing Officer . We do not find any infirmity in the order of the Ld.CIT(A) on this issue.
We find the Delhi Bench of the Tribunal in the case of Jindal Steel & Power Limited (supra) while deciding an identical issue has observed as under
"3.6.1 Ground no. 6 of appeal is directed against rejections of the prevailing purchase price and adjustments made to the market price for the electricity thereby adding back the sum of Rs. 3,86,93,638/- as excess deduction u/s 80-IA(8) claimed in its power plant. The assessee is engaged in generation of power and the power so generated is transferred to other units of the assessee captively at the rate at which it is obliged to
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purchase from the State Electricity of Board. The assessee has made sales of Rs. 51,73,22,855/- from the power plant and the profit has been arrived at Rs. 18,51,63,515/- against which deduction u/s 80IA has been claimed @100%. The sales of power to other units have been considered at the rate of Rs. 3.92, the rate of which CSEB was selling to industrial consumers as on 01.04.2008. AO observed that the rate of Rs. 3.92 included electricity duty @8% of energy charges and cess @ 0.05% per unit. AO also observed that the assessee has not been making "actual sales" to its other units because the power generated is consumed captively by other units. As such, the sale to other units of the assessee can at best be called notional sales. When actual sales are made, duty @8% and cess @0.05% collected from, consumers is paid to government levies which have actually been not collected and paid to the government cannot be part of the profits of the assessee. Even when the levies are actually collected it does not form part of the revenue and is accounted for separately as liabilities. In the present case, the assessee is only generating power but since it does not have the licence to distribute it, cannot also charge the electricity duty @8% and cess @ 0.05% on the transfer of power. If the duties and cess are excluded from the sale price of Rs. 3.92 per unit, the effective sale price would be Rs. 3.63 per unit. Therefore, the sales of the power plant has been inflated by a sum of Rs. 0.2932 per unit. Applying the above ratio, AO held that assessee has inflated the deduction u/s 80IA by a sum of Rs. 3,86,93,638/- which is accordingly added back to the total income of the assessee as excess deduction u/s 80IA(8) claimed in its power plant. 3.6.2 Therefore, the issue is whether the AO is justifiable in excluding Rs.0.2932 per unit while computing "market price" of power for the purpose of computing deduction admissible to power units under section 80IA of the Act. In this regard sub-section (8) of section 80-1 A of the Act which provides for determination of profits derived from an industrial undertaking where goods from one eligible business are transferred to another business carried on by the assessee reads as under:
"(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried. Off 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, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as
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on the date of the transfer then for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer/in either case, had been made at the market value of such goods or services as on that pate:
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-For the purposes of this sub-seclion, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market."
From the above provision it is clear that the price at which goods are to be transferred from one business of the assessee to another business should correspond to the market value of such goods for computing the profits of the eligible business. The expression 'market value' has been defined in Explanation to sub-section (8) to section 80-IA of the Act, as the price which such goods would ordinarily fetch when sold in the open market. 3.6.3 In the present case, the power generated by the captive plants was consumed by the manufacturing units of the appellant at Raigarh. The appellant accounted for the revenue/profit on transfer of such power to its captive units at the rate of Rs. 3.92 per unit, which is the price charged by CSEB for supplying power to industrial consumers. This rate of Rs.3.92 charged b: the CSEB represents the market price. 3.6.4 It is also noteworthy that had the manufacturing units of the appellant purchased power from CSEB, then, the units would have paid Rs.3.92 per unit. Therefore, for the manufacturing units, Rs.3.92 per units is the..purchase price, i.e. the price at which power is available in the open market. The composition of such market price, is not relevant for the purchaser of the power Insofar as the purchaser is concerned, what is only relevant is the purchase price, i.e. Rs.3.92 per unit, and not its composition. Therefore, whether Rs.3.92 per unit includes any government levies or not is totally irrelevant insofar as the purchaser is concerned. 3.6.5 In the case of Jindal Steel & Power Limited: (2007) 16 SOT 509,
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wherein, too, th. assessee had adopted the price at which power is sold by the SEB as the transfer/ market price power. Hon'ble 1TATDelhi, while approving the profits so computed by the assessee, observe as under:
"15. Therefore, from the aforesaid, it can be deduced that market value is an expression which denoted a price arrived at between the buyer and the seller in the open market wherein the transactions take place in the normal course of trading and competition in contrast to a situation where the price is fixed between a buyer and seller can b understood as denoting 'market price' since the elements of trading and competition exist. Whereas in the case of the latter situation, the price fixed between the buyer and seller cannot be understood as denoting the market price since the elements of trade and competition are conspicuous by their absence.”
……..
Having held so, the natural corollary is to ascertain whether the price recorded by the assessee at Rs. 3.72 per unit can be considered to be the market value for the purposes 0 Section 80- IA(8) of the Act. The answer, to our mind is in the affirmative. This is for the reason that the assessee as an industrial consumer is also buying power from the Boar, and the Board supplies such power at the rate of Rs. 3.72 per unit to its consumers. This is the price at which the consumers are able to procure the power. We may consider hypothetical situation as well. Had the assessee not been saddled with restrictions of supplying surplus power to the State Electricity Board, it would have supplied power t the ultimate consumers at rates similar to those of the Board or such other competitive rates, meaning thereby that price received by the assessee would be in the vicinity of Rs.3.72 per unit i.e. charged by the Board from its industrial consumers/users. Thus, under the given circumstances, it would be in the fitness of things to hold that the consideration recorded by the assessee's undertaking generating electric power for transfer of power for captive consumption at the rate of Rs.3.72 per unit corresponds to the market value of power. Therefore, on this aspect, we uphold the stand of the assessee and set aside order of the Commissioner (Appeals) and direct the assessing officer to allow relief to the assessee under Section 80-IA as claimed. Assessee succeeds on this ground. ”
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We find the decision of the Delhi Bench of the Tribunal has been upheld by the Hon’ble Punjab & Haryana High Court in ITA No.53/2008. Similarly, the Hon’ble Chattisgarh High Court in the case of CIT vs. Godawari Power & Ispat Ltd. reported in 42 taxmann.com 551 has held that where assessee had established a captive Power Plant in State of Chhattisgarh to supply electricity to its steel division, for purpose of section 80-IA deduction market value of power supplied by assessee to steel division should be computed considering rate of power charged by Chhattisgarh State Electricity Board for supply of electricity to industrial consumers. 62. We find the Hon’ble Calcutta High Court in the case of CIT vs. Kanoria Chemicals & Industries Ltd. reported in 35 taxmann.com 566 has confirmed the decision of the Tribunal holding that the price at which State Electricity Board sells electricity to industrial consumers is representative of the price that electricity would ordinarily fetch in the open market and i.e. the price which has been, adopted by the eligible business transferred to its other business for the for the purpose of computation of profits and gains of the eligible business in terms of section 80-1 A(8) of the I.T. Act. 63. We find the Mumbai Bench of the Tribunal in the case of Deepak Fertilizers in ITA No.2116/2013 order dated 30.01.2015 for the assessment year 2010-11 while deciding an identical issue has also taken similar view. The Chennai Bench of the Tribunal in the case of Sri Matha Spinning Mills (P.) Ltd. vs. DCIT reported in (2013) 141 ITD 238 has also taken identical view in favour of the assessee. Under these circumstances, we do not find any infirmity in the order of the Id. CIT(A) in deleting the disallowance made by the Assessing Officer u/s 80-IA(8) of the I.T. Act. We, therefore, dismiss the grounds raised by the Revenue on this issue.
Since the identical issue was decided in favour of the assessee for A.Y. 2009-10 wherein similar facts are involved, there is no need to adopt a different approach as the Ld. DR could not point out the different factual matrix in the
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present Assessment Year. Therefore, Ground No. 3(a) is allowed.
As regards to Ground No. 3 (b), the Ld. AR submitted that the DRP has erroneously questioned the business prudence resulting partial additions on account of managerial remuneration amounting to Rs. 8,22,798 which was paid and already taxed in terms of Ms. Shallu Jindal’s contractual advisory service to AE and whatever the services provided, was not disputed. The Ld. AR submitted that she is the director of the company and is a key personnel in respect of various policy decisions which was reflected in minutes of all board meetings. Thus, the Ld. AR submitted that the basis for disallowances are not sustainable because the competitive figures have no bearing on the present assessee. The Ld. AR further submitted that the remuneration paid to alleged director has not been disallowed in past years and therefore by following the rule of consistency, there is no occasion to disturb the already paid and taxed remuneration. In this regard, the Ld. AR relied upon the Hon'ble Delhi High Court decision in case of Sigma Corporation vs. DCIT being ITA No. 795/2016 order dated 15.02.2017, CIT vs. India Thermic Corporation Ltd. being ITA No. 350/2011 order dated 16.05.2012, CIT vs. Shriram Pistons & Rings Ltd. 181 ITR 230. Therefore, the Ld. AR submitted that the erroneous findings towards managerial remuneration are liable to be deleted. The Ld. AR further submitted that Ms. Shallu Jindal is an individual of high standing and also has a very strong and influential social presence. She is also the founder-president of young FICCI ladies organization. She was also selected by the Government of India to represent the country in Japan as part of twenty people delegation from all over the India. She had also interacted with delegates from Asian countries like Bhutan, Bangladesh, Sri Lanka and Japan on various topics viz. education, politics, women, culture and employment. Therefore, the Ld. AR submitted that it should be appreciated to have such a highly reputed individual as the whole time director of the assessee company. As she represented the company at various high level forums around the world which opened the doors of immense business opportunity for the company to expand
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its business around the world, thus the presence of Ms. Shallu Jindal in the board of Directors of the company is highly beneficial and helped in generating a brand image of the company and as a result the performance of the company which may be appreciated from the comparison with other companies, and which alone shows that the profit of the company has got many folds when compared to other companies. The Ld. AR also pointed out that Ms. Shallu Jindal is professionally qualified as she possess a Diploma in Business Management and also has Entrepreneurship skills and therefore it should be learnt from her primary responsibilities that her role is to promote and develop strategies leading to efficient and smooth running of business activities of the company at present as well as in coming years. The Ld. AR further pointed out that the comparison done by the Assessing Officer between the remuneration paid by the assessee company to Ms. Shallu Jindal with the remuneration paid by Essar Steel Ltd to Sh. Ashutosh Agarwala is not justified and is incorrect considering the facts that on the one hand the assessee company is a profit making venture whereas on the other hand Essar Steel Ltd. is incurring losses year on year. It should also be noted that the company has also complied with all the provisions of The Companies Act, 1956, relating to the payment of managerial remuneration to its managerial personnel appointed and the said payment of managerial remuneration has also been approved by the Board of Directors. The Ld. AR made reference to Circular No. 6P dated 08.07.1968 issued by the CBDT. The Ld. AR submitted that the Assessing Officer also failed to appreciate the fact that Ms. Shallu Jindal is a high net worth individual and a regular income tax assessee and major portion of her income is subject to tax at the maximum marginal rate as is the case of the assessee and the assessee has duly offered the remuneration received to tax. The Ld. AR submitted that there has been no loss of income tax to the exchequer in this regard.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
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We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the partial additions on account of managerial remuneration amounting to Rs. 8,22,798 which was paid to Ms. Shallu Jindal’s contractual advisory service to AE and other services provided by her were not disputed by the Revenue at any point of time. The same is already taxed in the hands of Ms. Shallu Jindal. The Ld. AR pointed out through the documents that she is the director of the company and is a key personnel in respect of various policy decisions which was reflected in minutes of all board meetings. The submission of the Ld. AR was that the basis for disallowance is not sustainable because the competitive figures have no bearing on the present assessee. From the records it can be seen that the remuneration paid to director has not been disallowed in past years and therefore the submission of the Ld. AR that the rule of consistency has to be followed in the present assessment year as well. The case laws relied upon by Ld. AR of the Hon’ble Delhi High Court is relevant to that extent and support the case of the assessee. The comparison done by the Assessing Officer between the remuneration paid by the assessee company to Ms. Shallu Jindal with the remuneration paid by Essar Steel Ltd to Sh. Ashutosh Agarwala is not proper as well considering the facts that the assessee company is a profit making venture whereas Essar Steel Ltd. is incurring losses. It should also be noted that the assessee company has also complied with all the provisions of the Companies Act, 1956, relating to the payment of managerial remuneration to its managerial personnel appointed and the said payment of managerial remuneration has also been approved by the Board of Directors. The reference made to Circular No. 6P dated 08.07.1968 issued by the CBDT is apt in the present case. Thus, the Assessing Officer was not correct in making addition on account of managerial remuneration. Ground No. 3 (b) is allowed.
As regards to Ground No. 3(c) relating to addition on account of
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allocation of common expenses u/s 80IA, the TPO reduced amount of Rs. 44,76,197 and DRP directed to enhance the said amount to Rs. 47,78,634. The Ld. AR submitted that all the additions are baseless as the submissions made on these issues have not been properly considered and appreciated. In relation to the allocation of expenses the Assessing Officer/TPO allocated the following expenditures in the ratio of turnover between eligible and non-eligible units alleging that the said expenses had not been apportioned by the assessee:
Director remuneration amounting to Rs. 97,24,981; A. Salary paid to employees amounting to Rs. 741.40 lakhs; B. Repairs incurred on building amounting to Rs. 1,15,41,000; and C. Internal audit fee paid of Rs. 5, 00,000. D.
The Ld. AR submitted that in the above four expenditures the Assessing Officer/TPO/DRP did not appreciated the fact that the above expenditures had already been allocated to eligible and non-eligible unit on the basis of generally accepted accountancy principles, on the basis of identified cost drivers and in a prudent manner, the Assessing Officer/TPO/DRP re-allocated the expenditure in the ratio of turnover between eligible and non-eligible units without bringing into the light the flaw or inaccuracy or any suitable explanation involved in relation to the method of allocation adopted by the assessee company. The AR relied upon the decision in case of DCIT v. M/s Praveen Industries Ltd. ITA no. 1790/DEL/2013 wherein the decision in case of Delhi Press Samachar Patra Prakashan (P) Ltd. v. CIT (2006) 101 ITD 253 was also considered and is affirmed by the Hon’ble Delhi High Court in favor of the assessee. The Ld. AR submitted that the assessee already segregated and bifurcated all the expenses therefore he prayed that entire additions are liable to be deleted.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
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We have heard both the parties and perused all the relevant material available on record. From the records it can be seen that these expenditures were already allocated to eligible and non-eligible unit on the basis of generally accepted accountancy principles, on the basis of identified cost drivers and in a prudent manner by the assessee company. The Assessing Officer/TPO/DRP re- allocated the expenditure in the ratio of turnover between eligible and non- eligible units without any investigation and without collecting any material. The Assessing Officer/TPO/DRP has not brought on record any discrepancy on part of the assessee company in relation to the method of allocation adopted by the assessee company. The Tribunal (Third Member decision) in case of DCIT vs. Delhi Press Samachar Patra (P) Ltd. held as under: “39. It is clear from the assessment orders that income shown and expenses claimed by the assessee have been duly allowed in the assessment order. None of the expenditure has been treated as ingenuine or not connected or related to the business carried out by the assessee. In the above background and without any material, and without any justification on the part of the AO, some of the expenses claimed by the assessee were held to be inflated in Unit No. I and were deflated in Unit Nos. II and III. Entire case of AO in both the assessment years is based on surmises and conjectures. The learned CIT(A) had passed a fair, rationale and just order. There was no scope to interfere with the impugned orders as rightly held by the learned AM in his proposed order. On similar facts claim in earlier years was allowed to the assessee. ……… 43. I see some parallel between the facts of the abovecited case and case in hand, because profit was disclosed in Unit Nos. II and III on which deduction under s. 80-I was claimed and no profit was disclosed in Unit No. I on which no such deduction was permissible and expenses in aforesaid Unit No. I were much higher than in the other two units. It was probable that more expenses were claimed in Unit No. I and some of the expenses of Unit Nos. II and III were diverted and claimed in Unit No. I. But no presumption under the
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law could be raised that expenses were so diverted. The assessee has produced accounts and details and, therefore, correct position “could have been ascertained from the material statement of relevant persons including management and staff of the assessee could have been examined.” But without any investigation and without collecting any material an arbitrary assessment by holding that expenses in Unit No. I should be proportionate to those in Unit Nos. II and III was made. Assessment based on such inference has to be held as arbitrary. ……… 46. It is evident from above that even when the material produced by the assessee is rejected, the authorities cannot proceed to levy whatever tax they may levy. The assessment must be based on some material. If it is not based on any material then it has to be held to be capricious and arbitrary. The question which is raised in most of the cases before the Tribunal is whether the assessment by the AO have been made in accordance with law. The aforesaid question has be determined objectively and not by raising merely doubts and certainly not by entertaining suspicion against the assessee, or against people connected with the assessment or disposal of appeals. If the Tribunal does not discharge its duties with responsibility as enjoined under the law, the confidence that is placed by the public on the Tribunal would stand eroded. With the aforesaid observations, I agree with the order proposed by learned AM, confirming the impugned orders of CIT()A. Let the matter be now placed before the regular Bench for disposal in accordance with law in both the assessment years.” Thus, from perusal of the Assessment Order/Order of the TPO/Directions of the DRP, in the present case none of the authorities have doubted that there was no expenses. In facts, the Assessing Officer/TPO/DRP re-allocated the expenditure in the ratio of turnover between eligible and non-eligible units without bringing into the light the flaw or inaccuracy or any suitable explanation involved in relation to the method of allocation adopted by the assessee company. Hence, Ground No. 3(c) is allowed.
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As regards to Ground No. 4, the Ld. AR submitted that the Revenue authorities as well as DRP have wrongly reduced the selling price of power even without bringing on the record any admissible evidence to support the observation as well as increased the expenses towards the claim of deduction u/s 80IA(8) instead of reducing the claim u/s 80IA(8) of the Act. The Ld. AR submitted that the AO/TPO/DRP has erred in not allowing the benefit of downward adjustment as provided in the proviso of Section 92C of the Act from the Arm's length price and therefore, resulted the entire addition made just on presumption and assumption. Therefore, the Ld. AR submitted that the finding of Assessing Officer is liable to be deleted.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material available on record. The Revenue authorities reduced the selling price of power even as well as increased the expenses towards the claim of deduction u/s 80IA(8) instead of reducing the claim u/s 80IA(8) of the Act. To arrive at this conclusion, none of the authorities have given any plausible explanation in the orders. The Assessing Officer/TPO while not allowing the benefit of downward adjustment as provided in the proviso of Section 92C of the Act from the Arm's length price, has not given any reason while making this addition. This addition is based on presumption and assumption which is not permissible under the Income Tax Act, 1961. Thus, Ground No. 4 is allowed.
As regards to Ground No. 5 relating to Bank Guarantee commission of Rs. 1,14,085/-, the DRP directed for the deletion by following the CBDT Circular on the footing that bank guarantee commission is not subject to the TDS provisions, but finally the Assessing Officer made the additions in violation of the DRP’s directions even without challenging the finding by the
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department.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material available on record. The DRP has directed to delete the bank guarantee commission and without appreciating the same, the Assessing Officer made an addition which is unsustainable. Therefore, we direct the Assessing Officer to comply with the directions of the DRP and grant the relief to the Assessee. Ground No. 5 is allowed.
As regards to Ground No. 6 relating to depreciation charged by the assessee in respect of electrical installation, the Ld. AR submitted that it is fully covered in assessee’s own case and moreover the DRP has also given the direction for deletion.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material available on record. This issue is covered in assessee’s own case and the DRP also directed to delete said addition. Without appreciating the same, the Assessing Officer made an addition which is unsustainable. Therefore, we direct the Assessing Officer to comply with the directions of the DRP and grant the relief to the Assessee. Ground No. 6 is allowed.
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As regards to Ground No. 7 relating to CSR expenses of Rs. 45,04,273/-, the Ld. AR submitted that the issue is covered in favour of the assessee on the basis of the Tribunal’s order in ACIT vs. Jindal Power Ltd in ITA no. 99/BLPR/2012 wide order dated 23.06.20116 and there are no basic change in factual matrix of the assessee’s case.
The Ld. AR further submitted that the Assessing Officer noticed that the assessee claimed a deduction of Rs. 45,04,273/- on account of expenses incurred by way of different nature of revenue expenses and details thereof, on discharging corporate social responsibility. In response to the questions of the Assessing Officers/TPO/DRP, it was explained by the assessee that these expenditure mainly relate to the expenses incurred on post excavation work, talab repair/beautification, Plantation work, Occasion Celebration Expenses, Other expenses, Distribution Expenses, Vehicle Hiring, construction of school building, devasthan /temple, drainage, barbed wire fencing, educational schemes and distributions of clothes etc voluntarily. In this background, and without much of a discussion on the factual aspects, the Assessing Officer disallowed the claim of CSR expenses even without disputing the factual matrix or bringing on record any adverse material.
The Ld. AR submitted that the AO/TPO as well as the DRP has erred on facts and law by not properly appreciating that Corporate social responsibility, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business is a form of corporate self regulation integrated into a business model. CSR policy functions corporate self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and international norms. The goal of CSR is to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other
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members of the public sphere who may also be considered as stakeholders. CSR is titled to aid an organization's mission as well as guide to what the company stands for and will uphold to its consumers. Developments business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. The Govt. of India has been trying to make it mandatory to spend at least 2% of net profit on CSR, though some corporate vehemently opposed its mandatory nature, made the spending voluntary. But the debate continues. CSR is not philanthropy and CSR activities are purely voluntary. To provide companies with guidance in dealing with the above mentioned expectations, while working closely within guidance in dealing with the above mentioned expectation, while working closely within the framework of national aspirations and policies, voluntary guidelines for CSR and their implementation has been developed. While the guidelines have been prepared for the Indian context, enterprises that have a transnational presence would benefit for using these guidelines for their overseas operations as well. Since the guidelines are voluntary and not prepared in the nature of perspective roadmap, they are not intended for regulatory or contractual use.
The Ld. AR submitted that fundamental objection of the Assessing officer is that the expenses is voluntary, not mandatory and not for business purposes. The Ld. AR further submitted that the expenses being in the nature of voluntary expenses, which are not mandatory, and which the assessee was not statutorily required to incur, are not admissible deduction in computation of business income. The Ld. AR submitted that as long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those necessary that every expense that could be allowed as a deduction should be such as a hardnosed and perhaps devoid of senses of compassion, businessman alone would incur in furtherance of his business
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pursuits. In support of the assessee’s claim towards CSR expenses a guidance from passage from the judgment of House of Lords in the case of Atherton vs. British Insulated & Helsbey Cables Ltd. (1925) 10 Tax Cases 155 (HL) was referred by the Ld. AR which was taken into consideration by the Hon'ble Supreme Court in the case of CIT vs Chandulal keshavlal & co. (1960) 38 ITR 601 (SC).
The Ld. AR further submitted that in view of insertion of explanation 2 to section 37(1), with effect from 1st April 2015, the expenses incurred in discharging corporate social responsibility are not deductible in computation of business income. The Ld. AR further submitted that the amendment should not be treated as clarificatory in nature. The amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation. The amendment u/s 37(1) which has been introduced with effect from 01.04.2015 cannot be construed as to disadvantage to the assessee in the period prior to the amendment. In the course of assessee’s business deductions are not allowed in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies act 2013, and there is thus now a line of discharging corporate social responsibility as for the former, the disallowance under explanation 2 to Section 37(1) comes into play, but as for latter, there is no such disabling provision as long as the expenses even in discharge of corporate social responsibility of voluntary basis, can be said to be "wholly and exclusively for the purposes of business". There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as well as for the basic reason that the explanation 2 to section 37(1) comes into play with effect from 1st April 2015' does not affect adversely and the assessee is entitled for the entire expenses.
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The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material available on record. The Ld. AR relied upon the decision of the Tribunal in case of Jindal Power Ltd. (supra). The Tribunal held as under: “16. We have noted that fundamental objection of the Assessing Officer is that the expenses is voluntary, not mandatory and not for business purposes. As for the contention that the expenses being in the nature of voluntary expenses, which are not mandatory, and which the assessee was not statutorily required to incur, are not admissible deduction in computation of business income, we are of the considered view that as long as expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature. In other words, it is not necessary that every expense that could be allowed as a deduction should be such as a hardnosed, and perhaps devoid of senses of compassion, businessman alone would incur in furtherance of his business pursuits. We find guidance from a passage from the judgment of House of Lords in the case of Atherton vs. British Insulated & Helsbey Cables Ltd. (1925) 10 Tax Cases 155 (HL), referred to with approval by the Hon’ble Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), which reads as follows: "It was made clear in the above cited cases of Usher’s Wilshire Brewery vs. Bruce (supra) and Smith vs. Incorporated Council of Law Reporting (1914) 5 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the
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trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus in effect, though not in terms, negativing the Crowns contentions. I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply." It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively’. Explaining this principle, Hon’ble Supreme Court has, in the case of Sassoon J David & Co. (P) Ltd. vs. CIT [(1979) 118 ITR 261 (SC)] inter aha observed that :"It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made n the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read "any expenditure, laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the
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way of an expenditure being allowed by way of deduction under s. 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law."
The next issue is whether it is for the purposes of business or not. We may, in this regard, usefully refer to the observations of a coordinate bench of this Tribunal, speaking through one of us (i.e. the Accountant Member) and in the case of Hindustan Petroleum Corporation Ltd Vs DCIT [(2005) 96 ITD 186 (Bom)], as follows:
We find that as held by Hon’ble Karnataka High Court in the case of Mysore Kirloskar Ltd. v. CIT [1987] 166 ITR 836 1, while the basic requirements for invoking sections 37(1) and 80G are quite different’, 'but nonetheless the two sections are not mutually exclusive’ Thus, there are overlapping areas between the donations given by the assessee and the business expenditure incurred by the assessee. In other words, there can be certain amounts, though in the nature of donations, and nonetheless, these amounts may be deductible under section 37(1) as well. Therefore, merely because an expenditure is in the nature of donation, or, to use the words of the CIT(A), ‘promoted by altruistic motives’, it does not cease to be an expenditure deductible under section 37(1). In Mysore Kirloskar Ltd.’s case (supra), Their Lordships have observed that even if the contributions by the assessee is in the forms of donations, but if it could be termer) as expenditure of the category falling in section 37(1), then the right of the assessee to claim the whole of It as a deduction under section 37(1) cannot he declined. What is material in this context is whether or not the expenditure in question was necessitated by business considerations or not. Once it is found that the expenditure was dictated by commercial expediencies, the deduction under section 37(1) cannot be declined As to what should be relevant for examining this aspect of the matter, we may only refer to the observations of Hon’ble Supreme Court in the case of Sri Venkata Satyanarayna Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 2:
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* . . any contribution made by an assessee to a public welfare fund which is directly connected or related with the carrying on of the assessee's business or which results in the benefit to the assessee’s business has to be regarded as an allowable deduction under section 37(1) of the Act. Such a donation, whether voluntary or at the instance of the authorities concerned, when made to a Chief Minister's Drought Relief Fund or a District Welfare Fund established by the District Collector or any other fund for the benefit of the public and with a view to secure benefit to the assessee's business, cannot be regarded as payment opposed to public policy It is not as if Tie payment in the present case had been made as an illegal gratification. There is no law which prohibits the making of such a donation. The mere fact that making of a donation for charitable or public cause or in public interest results in the Government giving patronage or benefit can be no ground to deny the assessee a deduction of that amount under section 37(1) of the Act when such payment had been made for the purpose of assessee's business.
In the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 170 1, Hon'ble Madras High Court has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. While doing so, Their Lordships observed as follows:
The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the locality in which business is located in particular. Being a good corporate citizen brings goodwill of
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the local community as also with the regulatory agencies and soc.ety at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill....
Let us now take a look at the undisputed facts of this case. The assessee is a company owned by the Government of India and working under the control and directions of the Government of India. As the statement of facts clearly sets out, the expenditure on 20-Point Programmes was incurred in view of specific directions of the Government of India. This factual aspect is no. even disputed or challenged by the Revenue at any stage, it cannot but be in the business interest of the assessee-company to abide by the directions of the Government of India which also owns the assessee-company. In any event, as observed by the Hon'ble Madras High Court in Madras Refineries Ltd.'s case (supra), monies spent by the assessee as a good corporate citizen and to earn the goodwill of the society help creating an atmosphere in which the business can succeed in a greater measure with the help of such goodwill. The monies so spent therefore are required to be treated as business expenditure eligible for deduction under section 37(1) of the Act. What is the expenditure for the implementation of 20-point plant after all? It is solely for the welfare of the oppressed classes of society, for which even the Constitution of India sanctions positive discrimination, and for contribution to all around development of villages, which has always been the central theme of Government's development initiatives. An expenditure of such a nature cannot but be, to use the words employed by the Hon’ble Madras High Court in Madras Refineries Ltd.’s case (supra), 'a concrete expression of care and concern for the society at large' and an expenditure to discharge the responsibilities of a 'good corporate citizen which brings goodwill of with the regulatory agencies and society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill’.
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We have also take note of the fact that in view of insertion of Explanation 2 to Section 37(1), with effect from 1st April 2015. which provides that “for the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 20 3 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession”, the expenses incurred in discharging corporate social responsibility are not deductible in computation of business income. Learned Departmental Representative submits that this amendment should be treated as clarificatory in nature, as it is stated to be in so many words, and we should, therefore, hold that the expenses in discharging corporate social responsibility were outside the ambit of expenses deductible under section 37(1).
We are unable to see legally sustainable merits in this plea either the amendment in the scheme of Section 37(1), which has been introduced with effect from 1st April 2015, cannot be construed as to disadvantage to the assessee in the period prior to this amendment. This disabling provision, as set out in Explanation 2 to Section 37(1), refers only to such corporate social responsibility expenses as under Section 135 of the Companies Act, 2013, and, as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in'2013. Explanation 2 to Section 37(1) is therefore, inherently incapable of retrospective application any further. In any event, as held by Hon’ble Supreme Court’s five judge constitutional bench’s landmark judgment, in the case of CIT Vs Vatika Townships Pvt. Ltd. [(2014) 367 ITR 466 (SC)] the legal position in this regard has been very succinctly summed up by observing that Of the various rules guiding how legislation has to be interpreted, one established rule is that unless a contrary intention appears, legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a
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current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips vs. Eyre [, a retrospective legislation is contrary to the g rural principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law.” It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre- amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. We have also noted that the amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social
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responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business’’. There is no dispute that he expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case.
Ground No. 3 is also thus dismissed.” 20.
The factual matrix are identical in the present case. Besides this, insertion of Explanation 2 to section 37(1) is applicable w.e.f. 1.4.2015 and thus, the said provision will not be applicable in the present case. There is no dispute that the expenses in question are not incurred under the statutory obligation. The Assessing Officer disallowed the claim of CSR expenses without disputing the factual matrix or bringing on record any adverse material which can be seen from the Assessment Order. Thus, this disallowance does not survive. Hence Ground No. 7 is allowed.
As regards to Ground No. 8, the Ld. AR submitted that the difference on account of 26AS the assessee has already made the submission after reconciliation which has not been appreciated and therefore liable to be deleted.
The Ld. DR relied upon the order of the TPO, directions of the DRP and Assessment Order.
We have heard both the parties and perused all the relevant material
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available on record. The Ld. AR pointed out that the difference on account of 26AS the assessee has already made the submission after reconciliation which has not been appreciated. There is no proper finding to that effect in the Assessment Order, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for proper adjudication. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 8 is partly allowed for statistical purpose.
As regards Ground Nos. 9 and 10, the same are consequential, hence not adjudicated upon.
In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 31st December, 2018.
Sd/- Sd/- (N. K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 31/12/2018 R. Naheed * Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
36 ITA No. 7176/Del/2017
Date of dictation 30 .10.2018
Date on which the typed draft is placed before the 30 .10.2018 dictating Member
Date on which the typed draft is placed before the Other Member
Date on which the approved draft comes to the Sr. PS/PS
Date on which the fair order is placed before the Dictating Member for pronouncement
Date on which the fair order comes back to the Sr. .12.2018 PS/PS
Date on which the final order is uploaded on the .12.2018 website of ITAT
Date on which the file goes to the Bench Clerk .12.2018
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant Registrar for signature on the order
Date of dispatch of the Order