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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR & SHRI WASEEM AHMED, ACCOUNTANT MEMEBR
PER BENCH:
This batch of six appeals filed by the Revenue and assessee and cross objection filed by the assessee are as follows:
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 2 - Sl. ITA/CO No. A.Y. Filed by No. 1 ITA No. 472/Ahd/2013 2009-10 Assessee 2 ITA No. 535/Ahd/2014 2010-11 Assessee 3 ITA No. 1257/Ahd/2015 2011-12 Revenue 4 CO No. 111/Ahd/2015 2011-12 Assessee 5 ITA No. 2463/Ahd/2016 2012-13 Revenue 6 CO No. 207/Ahd/2016 2012-13 Assessee
The issues involved in these appeals are recurring in nature for all the assessment years, since for the sake of brevity ITA No. 1257/Ahd/2015 and CO No. 111/Ahd/2015 relevant to the Asst. Year 2011-12 is taken as lead case for disposal of the above batch of appeals.
The grounds of appeal raised by Revenue in ITA No. 1257/Ahd/2015 for A.Y. 2011-12 read as under:
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred (i) in deleting disallowance of Rs.72,96,816/- made u/s 14A of the IT Act |r.w. Rule 8D while computing Book Profit u/s 115JB of the IT Act, ignoring the provisions of Explanation [1] (f) to Section 115JB of the IT) Act. (ii) (a) in deleting the addition of Rs.4,73,27,345/- (net of depreciation) made on account of capital expenditure in respect of spares (b) in deleting the addition of Rs.46,89,661/- (net of depreciation) made on account of repairs & maintenance claimed. (c) in not applying the ratio of the decisions in the case of Ballimal Naval Kishor vs.CIT 222 ITR 414 (SC) and the Supreme Court decision in the case of CIT us Saravana Spinning Mills Pvt. Ltd. (2007) 293 ITR 201 (SC), to the fact of this case. (iii) in allowing the sundry balance written off amounting to Rs.5,02,042/- while computing deduction u/s 80IA of the IT Act.”
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 3 - 4. The grounds of appeal raised by assessee in cross objection (CO No. 111/Ahd/2015) for A.Y. 2011-12 read as under:
“All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other. 1. The learned Commissioner of Income Tax (Appeals) - 1, Vadodara ["the CIT(A)"] erred in fact and in law in confirming the action of Deputy Commissioner of Income Tax, Circle-1(1), Baroda ("the AO") in reopening the assessment u/s 147 of the Income Tax Act, 1961 ("the Act").
Disallowance u/s. 14A: 2. The learned CIT(A) erred in fact and in law in confirming the action of AO in making disallowance by invoking the provision of section 14A of the Act and also in directing the AO to recalculate the amount of disallowance as per Rule 8D of the Income Tax Rules, 1962 ("the Rules"). 3. Without prejudice to above, the learned CIT(A) erred in fact and in law in rejecting the contention of the Appellant that interest of Rs. 5,501.74 lacs cannot be considered while computing the disallowance u/s. 14A of the Act.
Capital Expenditure: 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing repair and maintenance expenses to plant & Machinery amounting to Rs. 31,45,178/- on the ground that it is capital expenditure despite the fact that no enduring benefit accrued to the Appellant.
Without prejudice to above, the learned CIT( A) erred in fact and in law in not directing the AO to enhance the profits for computing deduction u/s. 80IA by amounts of expenses treated as capital in nature.
Deduction u/s. 80IA:
The learned CIT(A) erred in fact and in law in reducing the following amounts from the profits of the business for the purpose of computing the deduction u/s SOLA on the ground that the same are not derived from the industrial undertaking.
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 4 -
Particulars Surat Plant (Amount in Rs.)
Sale of Scrap 1,47,80,362
Ash Disposal 1,35,51,916
Recovery of Bond Money from 33,05,199 Employees
Recovery from Contractor 1,54,293
Liquated Damages 8,93,582
Insurance Claims 1,75,39,594
Total 5,05,29,419
The learned CIT(A) erred in fact and in law in confirming the action of the AO in reducing the gross income instead of net income for the purpose of deduction us. 80IA of the Act. 8. The learned AO erred in fact and in law in not directing, the AO to allow deduction u/s. 80IA on the enhanced profits on account of disallowance of expenses treated as capital in nature. 9. The learned CIT(A) erred in fact and in law in confirming the action of AO in charging interest u/s. 234B of the Act. 10. The learned CIT(A) erred in fact and in law in confirming the action of AO in charging interest u/s. 234C of the Act. 11. The learned CIT(A) erred in fact and in law in confirming the action of AO in ^charging interest u/s. 234D of the Act. 12. The learned CIT(A) erred in fact and in law in confirming the action of AO in initiating penalty proceeding u/s. 271(l)(c) of the Act.”
As against this disallowances mentioned above, five disallowances were already considered by this Tribunal in ITA No. 3003/Ahd/2010 & ors. relating to A.Ys. 2003-04 & ors.,
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 5 - vide order dated 28.02.2022. It is being agreed by both the parties. The issues are already covered in assessee’s own case in ITA No. 3003/Ahd/2010. However, issue regarding disallowance under s.14A of the Act in computation of book profit under s.115JB of the Act is a new issue to be considered by the Tribunal. The AO while computing the book profit under s.115JB of the Act of Rs.1,20,51,97,223/-. The AO added a sum of Rs.72,96,816/- which was disallowed under s.14A of the Act.
The brief facts of the case are that assessee is engaged in generation of power in the form of electricity. During Asst. Year 2011-127, assessee filed its return of income declaring Nil income and book profit u/s. 115JB of IT Act of Rs.1,20,51,97,223/-. The return of income was processed under s.143(1) of the Act on 07.01.20127. Subsequently, the case reopened by issuing notice u/s.148 of the Act and a detailed reassessment order was passed on 23.01.2014 making the following Disallowances:
(i) Replacement of parts of machines treated as capital expenditure; (ii) claim of deduction u/s.80IA of the IT Act.
(iii) Disallowance under s.14A (iv) In computation of Book Profit u/s. 115JB (v) claim of deduction under 43B (for A.Y. 2009-10 & 2010-11) & (vi) depreciation on Managing Director’s residence. (for A.Y. 2009-10 & 2010-11) &
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 6 - Thus, the Ld Assessing Officer determined the total income as ‘Nil’ under normal computation and book profit u/s. 115JB of the Act of Rs. 1,21,24,94,039/- and demanded the tax of Rs.17,21,980/- which includes interest under s. 234A, 234B, 234C & 234D.
Aggrieved against the same, the assessee came before the CIT(A). The CIT(A) has considered and deleted the addition by observing as follows:
“4.1 With regard to above ground of appeal the relevant part of 5-"mission dated 16/01/2015 of the AR of the appellant is reproduced hereunder for reference: "Ground No. 3: Adjustment in Book Profits U/s. 115JB 25. The AO has also made an upward adjustment in the book profits by the amount of disallowance made u/s. 14A. We have already submitted that no disallowance u/s. 14A can be made. We have a/so stated that disallowance u/s. 14A cannot exceed Rs. 18.26 lacs. Since there is no finding that the Appellant has incurred expenses for earning tax free income we submit that no adjustment u/s. 115JB can be made. 26. We rely on following decisions wherein it has been held that even if disallowance u/s. 14A is made the same cannot be added to the book profits u/s. 115JB. i) Minda Sai Limited v. ITO [ITA No. 2974/Del/13 (ITAT Delhi)] In the above case the AO has made addition of disallowance u/s. 14A for computing book profit u/s. 115JB which was confirmed by the CIT(A). On further appeal, the Hon'ble IT AT, Delhi has deleted the adjustment of disallowance u/s. 14A for computing the book profit u/s. 115JB and held that There is no estoppel against the law. The mere fact that the assessee has accepted this disallowance affects that disallowance only and nothing more than that; it does not clothe such an adjustment, in computation of book profit under section 115JB, with legality. There is no dispute that there is no corresponding tax exempt
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 7 - income. Therefore, the adjustment in question is indeed unsustainable in law.
ii) H5BC Invest Direct (India) Ltd. v. DCIT [ITA Nos. 3485&3944/Mum/2012]
The expenditure disallowed U/S.14A is only that incurred and claimed by the assessee in respect of dividend income, exempt u/s. 10. It is only on this basis, and this basis alone, that we have found Explanation l(f) to section 115JB (s.115JA) to be providing a clear legal basis to the adjustment qua expenditure relatable to dividend income. That the amount disallowed U/S.14A provides a ready basis for determining the amount of such expenditure is another matter. It would be a complete fallacy and a travesty of facts, being without basis and wholly presumptuous to state or consider that the disallowance (u/s 14A) is qua notional expenditure and not against that actually claimed by the assesses and, further, per its books of account. Or does it mean to suggest that the expenditure claimed is outside the books of account? We say so as without doubt the adjustment under Explanation 1 could only be qua sums debited or credited and thus reflected in the accounts. In fact, in this regard, we have also clarified that where and to the extent there is a difference between the expenditure, i.e., as per the assessee's books and that as claimed per its return of income, only the sum debited in books (to the profit and loss account) would hold. Further, the decision by the tribunal in Goetze (India) Ltd. vs. CIT [2009] 32 SOT 101 (Del), followed, inter alia, by the tribunal in Ovira Logistics Ltd. (in ITA Nos. 2439 & 3230/Mum(C)/2012 dated 30.08.2013), stands since reversed by the hon'ble high court in CIT vs. Goetze India Ltd. [2014] 361 ITR 505 (Del); the relevant findings by the hon'ble court appearing at pgs. 529- 531 of its' judgment. We decide accordingly."
4.2 The above submission of the appellant has been considered. In this regard it is held that the Hon'ble ITAT, Ahmedabad in the case of Alembic Ltd. in ITA No. 1928/2010 dated 27/03/2014 for AY 2007-08 has decided the similar issue in favour of assessee and against the Department. The Hon'ble ITAT, Ahmedabad in this referred order has mentioned that for making adjustment u/s 115JB, the ITAT, Mumbai Bench in the case of M/s Essar Teleholdings Ltd. vs DCIT in ITA No. 3850/Mum/2010 for 2005-06 has held that provisions of sub section 2 and 3 of section 14A cannot be imported into clause (f) of explanation to section 115JB of the Act. As per ITAT, Ahmedabad it is held by the Hon'ble ITAT Mumbai Bench that clause (f) of explanation 1 to section 115JB refers to amount debited to P&L Account, which can be added back to the book profit while computing the book profit u/s 1153B. As per Hon'ble ITAT, Ahmedabad similar views have been taken by
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 8 - the ITAT, Delhi Bench in the case of Goetze (India) Ltd. 32 SOT 101. Thus, the Hon'ble ITAT, Ahmedabad has held that adjustment made by the AO is not as per law. Respectfully following this decision of Hon'ble ITAT, Ahmedabad in the case of Alembic Ltd. for AY 2007-08 it is held that the AO is not correct in disallowing Rs. 72,96,816/- while computing book profit u/s 115JB by invoking the provisions of section 14A read with Rule 8D. In view of this the AO is directed to delete the disallowance of Rs. 72,96,816/- while computing book profit u/s115JB. Thus,the ground of appeal no. 3 of the appellant is allowed.”
For the well-considered reasons given in the judgment passed by the Ahmedabad Bench, Mumbai bench and Delhi Bench, we have no hesitation in confirming the deletion made by the CIT(A). Therefore, this ground of appeal raised by the Revenue is hereby rejected.
In the remaining issues, namely, Ground Nos. 1to 3, 5 &6 are being covered in assessee’s own case in ITA No. 3003/Ahd/2010 & ors. relating to A.Ys. 2003-04 & ors., dated 28.02.2022. The findings of the same had been reproduced hereunder:
“14. Issue No.1 regarding Replacement of parts in machineries treated as capital in nature. The Ld AR Mr. Milan Metha appearing for the assessee submission is of two folds [a] that the Accounting method or accounting treatment whether statutorily prescribed under any law or otherwise cannot override the provisions of the Income Tax Act. Further Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd - 82 ITR 363. Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head "current repairs" and treated as Revenue Expenditure. The Ld AR submitted before the Bench a “Technical Write Up” about the machinery and also details of spares consumed at regular intervals for various assessment years as follows:
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 9 - Technical Write up Stage # 1 Bucket Kit- General Electric, USA- G.E.Fr.6 Gas Turbine G.E.Fr.6 (ms6001B) Gas Turbine is 3 Stage turbine having set of Nozzle, Bucket and Shroud in each stage. Bucket set is assembled on turbine rotor in inverted fur- tree slots provided on rotor.
Stage # 2 Bucket Kit consists of 92 buckets which when assembled on the rotor forms a series like wheel. The basic function of Buckets is to convert the heat energy of hot flue gases in to mechanical energy and thereby driving the coupled generator, which generates the POWER.
Stage # 3 Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. The buckets are designed with special profile of airfoil cross section for efficient energy conversion. It is manufactured using precision investment casing process using GTD-1 11 material, which is General Electric. USA proprietary material.
To overcome very high operating temperature, Buckets are coated with proprietary Thermal Barrier Coating (TBC)-GT FN33 and designed with cooling provision.
Because of the above specialties, buckets are designed and manufactured as per General Electric, USA proprietary material and process under very stringent quality control and tests.
For a power generating company, these spares are in the nature of consumables spares only notwithstanding its high cost. It is also to be submitted that the Original Equipment Manufacturer which in the case of the assessee company is BHEL / General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. Further it is also to be stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer viz. General Electric. USA. The landed cost to the assessee company also increases as the same is required to be imported and thus attracts custom duty, air freight, insurance etc.
The details of spares consumed at regular intervals for various Asst. years is as under:
Asst Year Item Description Amount (Rs.)
2003-04 Stage - 1 Bucket Kit, Frame - VI 3,96,92,557
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 10 - PNo. 314B7162G015
2004-05 Stage - 1 Bucket Kit along with set of hardware for Gas Turbine 3,11,38,001 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292 Stage - 2 Nozzle Kit with inter-stage rush seals for FR - 9 Gas Turbine 9,79,20,788 Stage - 2 Bucket Kit, Cutter teeth design for FR - 9 Gas Turbine 6,88,20,943
2005-06 Stage - 1 Bucket Kit along with set of hardware
for Gas Turbine 3,35,44,305 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292
2006-07 Compressor Rotor Blade GT Fr. 6 1,63,26,126 Compressor Stator Blade GT Fr. 6 2,19,65,961 Entr Arm (Excitor) 67,69,358
2007-08 Stage - 1 Nozzle Arrangement for GT FR - 6 1,06,01,677 Stage - 1 Bucket Kit for GT FR – 6 3,25,68,456
2008-09 Stage - 1 Nozzle -Fr-6 Gas Turbine 3,07,10,000 Stage - 2 Bucket for GT FR – 6 2,30,21,000
14.1. The second fold of argument of the Ld. Counsel for the assessee is that the spares consumed during the year under the consideration does not give enduring benefit to the assessee nor it increases the life or capacity of the machines and therefore are in nature of current repairs allowable as revenue expenditure. The assessee being in the business of generation and distribution of power requires specialized machines for generating power. Some of the parts of the machines require replacement from time to time on being used for fixed number of hours. The number of hours after which the machines are to be replaced are prescribed by the original equipment manufacturer (OEM). As soon as the machines complete the prescribed number of firing hours, the same are replaced. Thus the replacement is of parts of
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 11 - machines and not the entire machinery. The classification of spares in the books is not relevant for determining taxability of such items as per Income Tax Act. Further the consumption of spares is 0.50% of the net block of plant and machinery as on 31.03.2005. Every year such expenditure is required to be incurred with regularity considering the nature of business.
14.2. In support of this contention the Ld AR further submitted that this issue is squarely covered by the decision of the co- ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd reported in 2014 [ID2]-GJX-0224- THYD wherein after detailed discussion of Supreme Courts and other Judgements held as follows:
“… … 15. We have heard the submissions of the parties and perused the orders of the revenue authorities as well as other materials placed on record. It is quite evident from the facts emanating from record that the expenditure incurred of Rs.20,21,46,278/- which is subject matter of disallowance was towards repair/replacement of nozzles, buckets, shrouds, bearings, pieces and combustion liners which are parts of the three gas turbines utilized for generating power. It is also a fact that the power generation plant consists of two systems i.e., gas turbines and generating unit. As can be noticed from the process of generation of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is required for getting the maximum equipment availability and optimization of maintenance costs. The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some of its parts are either repaired or replaced as per the maintenance requirement. It is to be noted from the detailed discussion made by the CIT(A) that the assessee has submitted the details of periodic inspection to be made as recommended by the equipment manufacturer. Further
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 12 - it is a fact to be taken note of that the assessee has been claiming such expenditure towards replacement of nozzle, shrouds, buckets etc., from the F.Y. 1998-99 and all along the department has allowed such expenditure. This fact has not been controverted by the learned D.R. It is also a fact that out of the total block of the assets relating to gas turbines of Rs.517 crores, the repair and maintenance to the extent of Rs.20,21,46,278/-. Therefore, considering the quantum of expenditure, it cannot be said that there is replacement of the entire gas turbine so as to bring into existence a completely new asset resulting in enduring benefit to the assessee. It is a further fact on record that the assessee’s contention that there is no enhancement of capacity of the gas turbines or generation of power after replacement/repair of the part of the gas turbines remains uncontroverted.
Therefore, in the aforesaid circumstances, it cannot be said that the expenditure incurred by the assessee in repair/replacement of the parts of the gas turbine, has resulted in bringing into existence of an asset of enduring benefit to the assessee so as to treat it as capital expenditure. So far as the decision in the case of CIT V/s. Saravana Spinning Mills (supra) is concerned, the CIT(A) has clearly brought out the distinguishing features. It is to be noted that in the case of CIT V/s. Saravana Spinning Mills, there is a clear observation of the Hon’ble Supreme Court that the Textile Plant consists of different departments having its own independent plants and machinery which produce different intermediate products. However, in the case of the assessee there is no such intermediate products which requires independent and separate plants and machinery. On the contrary, what the assessee has replaced is certain parts of the gas turbines and the gas turbines as a whole have not been replaced. Therefore, in this context the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills rather favours the assessee. Because the Hon’ble Supreme court in the said decision has held that when certain parts of a air conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, applying the same logic to the facts of the assessee’s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon’ble Supreme Court
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 13 - relied upon by the learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, confirm the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of disallowance of expenditure to the tune of Rs.20,21,46,278/-. 14.3. Per contra the Ld DR appearing for the Revenue could not bring any contrary view on the above preposition but however contented that when the assessee itself claimed the above expenses in its books of account as “Capital” now cannot claim the same as “Revenue” and relied upon the order passed by the Assessing Officer and prayed for confirming the addition since it is recurring in nature.
We have given our thoughtful consideration on the materials placed before us namely Technical Write Up, Details of spares consumed at regular intervals for various Asst. years and the case laws relied by the assessee. We need not labour ourself in coming to a conclusion that the Replacement of parts in machineries treated as Not Capital but “Revenue” in nature for the following reasons:
a. For a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost.
b. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.
c. Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine.
d. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine.
e. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 14 - generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased.
f. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc.
g. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit.
h. Thus this issue is already dealt by the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd wherein after detailed discussion held that expenditure incurred by the assessee cannot be treated as capital expenditure but Revenue expenditure only.
i. Thus, applying the same logic to the facts of the assessee’s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power.
j. Therefore we have no hesitation in holding that the replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected.
Issue No.2 relates to additional claim under section 80IA of the Act. The Ld Counsel for the assessee submitted that there is no dispute that the Assessee has satisfied all the conditions for claiming deduction u/s 80IA of the Act. Only reason for disallowing the claim of Assessee is non-furnishing of audit report along with the return of income. Referring to page nos. 247 to 274 of the paper book the Ld AR stated that the Audit Report was filed before completion of the Assessment. Thus, it is settled law that filing of report during the pendency of assessment proceedings is sufficient compliance for claiming deduction u/s 80IA of the Act and relied on the judgement of the jurisdictional High Court in the case of Gujarat Oil and Allied Industries - 201 ITR 325.
The Ld AR further submitted that regarding the issue of set off of losses as per section 80IA(5) for computation of income of eligible unit, the issue of "Initial Assessment Year" is settled by
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 15 - CBDT Circular No. 1 of 2016 dated 15-02-2016. As per the Circular, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80-IA. As per CBDT Circular, AY 2006-07 would be the Initial Assessment Year since for the SLPP unit, the Assessee has claimed the deduction u/s 80IA for the first time in AY 2006-07. Therefore the requirement of setting off unabsorbed depreciation and losses shall arise from AY 2007-08 i.e. immediately succeeding the initial assessment year i.e. AY 2006-07.
17.1. Relevant portion of CBDT Circular No. 1/2016 dated 15.02.2016 is extracted below:
In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years.
The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 801A. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity.
The Assessing Officers are, therefore, directed to allow deduction u/s 80IA in accordance with this clarification satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 16 - year' as mentioned in subsection (5) of that section for which the Standing Counsels/D.R.s be suitably instructed.”
17.2. In reply, the Ld DR appearing for the Revenue admitted that the above Circular No.1/2016 issued by the CBDT has put to end all the issues following the judgement rendered by the High Court of Madras in the case of Velayuthasamy Spinning Mills.
We have given our thoughtful consideration on the materials placed before us the issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. The Circular further clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus the Assessing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA of the Act.
Following this Circular the SLP filed by the department was also dismissed against High Court's ruling that loss in year earlier to initial assessment year already absorbed against profit of other business cannot be notionally brought forward and set off against profits of eligible business as no such mandate is provided in section 80-IA(5) of the IT Act reported in Assistant Commissioner of Income-tax, Tirupur -Vs- Velayudhaswamy Spinning Mills (P.) Ltd. reported in [2016] 76 taxmann.com 176 (SC). Following the same we hereby reject the Grounds of appeal filed by the Revenue and allow the claim of deduction u/s.80IA in favour of the assessee.
Issue No.3 relates to disallowance under Section 14A of the Act. The Ld Counsel for the assessee submitted that the assessee disclosed tax free income of Rs.65,36,070/-, comprising of dividend income and interest on tax free bond. However there were no administrative expenses were incurred since the tax free income was essentially passive income requiring no efforts on the
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 17 - part of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The adhoc disallowance of 10% on the exempt income under S.14A of the Act made by the AO is against law and the CIT[A] is also not correct in directing to adopt Rule 8D, since the assessment years are prior to the introduction Rule 8D. In the absence of any administrative expenses and no barrowed funds for such investments, the question of disallowance u/s.14A is unwarrented.
Per contra the Ld DR appearing for the Revenue accepted that many rulings by various Court on this issue and however supported the orders of the lower authorities.
We have given our thoughtful consideration on the materials placed before us, the issue is now settled by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. -Vs- Commissioner of Income Tax, New Delhi reported in [2018] 91 taxmann.com 154 (SC) wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 -Vs- Sintex Industries Ltd. reported [2017] 82 taxmann.com 171 (Gujarat) wherein it is clearly held that the Expenditure incurred in relation to income not includible in total income (Administrative expenses) - Whether where assessee already had its own surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D. Further the Hon’ble Court referred the another decision in the case of Pr. CIT v. India Gelatine & Chemicals Ltd. [2015] 376 ITR 553/[2016] 66 taxmann.com 356 wherein it is observed that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified. Thus we clear in our mind the direction given by the Ld CIT[A] to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Thus the Cross Objection filed by the assessee is allowed by deleting the addition made u/s.14A of the Act.
Issue No. 4 relates to depreciation on building used for Managing Director’s residence. Ld AR submitted that as per the depreciation chart in the tax audit report, an addition of Rs.87,27,750/- on account of GIPCL House under the head factory building. The assessee claimed MD’s house is residence-cum-
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 18 - office building is used for the purpose of residence/office of the Managing Director and he discharges his official duties 365 days for official meetings, therefore the rate of depreciation of 10% is claimed by the assessee. Per Contra the Ld DR relied on the orders of the Lower Authorities. 24. We have given our thoughtful consideration on the materials placed before us, as the building is used for official-cum- residential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed. 25. Issue No.5 relates to disallowance of contribution made to various organizations: The assessee claimed payment of Rs.2,00,000/= to SVADES, Rs.95,65,559/= to DEEP and Rs.15,36,500/= to various NGOs the same were disallowed by the AO. But the Ld CIT[A] granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed. 26. In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed. 27. Issue No.6 relates to claim of disallowance under S.43B of the Act. The learned CIT(A) by his detailed order has held that the AO was correct in not allowing the deduction of interest amounting to Rs.2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year. 28. In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed.”
In C.O. No. 117/Ahd/2009, the assessee has not pressed Ground No.1, namely, validity of reopening of assessment. Therefore, this ground of Cross Objection is dismissed as not pressed.
In the result, the captioned appeals are :
ITA Nos. 472/Ahd/2013 & Ors. (Gujarat Industrial Power Co. Ltd. ) - 19 -
Sl. ITA/CO No. A.Y. Filed by Result No. 1 ITA No. 472/Ahd/2013 2009-10 Assessee Allowed 2 ITA No. 535/Ahd/2014 2010-11 Assessee Allowed 3 ITA No. 1257/Ahd/2015 2011-12 Revenue Dismissed 4 CO No. 111/Ahd/2015 2011-12 Assessee Dismissed 5 ITA No. 2463/Ahd/2016 2012-13 Revenue Dismissed 6 CO No. 207/Ahd/2016 2012-13 Assessee Dismissed
This Order pronounced in Open Court on 13/04/2022
Sd/- Sd/- (WASEEM AHMED) (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 13/04/2022 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।