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

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “C”: NEW DELHI BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 973/Del/2015 (Assessment Year: 210-11) M/s. Guajarat Guardian Ltd, Vs. DCIT, 4-7/C, DDA Shopping Centre, Circle-12(1), (Now Circle- New Friends Colony, 10(2), New Delhi CR Building, IP Estate, PAN: AAACG1622K New Delhi (Appellant) (Respondent)

ITA No. 1106/Del/2015 (Assessment Year: 210-11) DCIT, Vs. M/s. Guajarat Guardian Ltd, Circle-12(1), (Now Circle-10(2), 4-7/C, DDA Shopping CR Building, IP Estate, Centre, New Delhi New Friends Colony, New Delhi PAN: AAACG1622K (Appellant) (Respondent)

Assessee by : Shri Neeraj Jain, Adv Ms. Shaily Gupta, CA Revenue by: Smt Meeta Singh CIT DR Date of Hearing 14/05/2018 Date of pronouncement 16/08/2018

O R D E R PER PRASHANT MAHARISHI, A. M. 1. Assessee has filed this appeal against the order passed by the Ld. Deputy Commissioner Of Income Tax, Circle 12 (1), New Delhi [The LD AO] dated 26 – 12 – 2014 passed under section 144C Of The Income Tax Act, Page | 1

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 1961 [The Act] for assessment year 2010 – 11 pursuant to direction of the Ld. Dispute Resolution Panel –iV, New Delhi [The Ld DRP] dated 21/11/2014 under section 144 C (5) of the Act. The Ld. assessing officer is also aggrieved by the direction of the Ld. Dispute resolution panel and therefore he has filed an appeal before us. 2. The assessee has raised the following grounds of appeal in ITA NO. 973/Del/2015:- “1. That the assessing officer erred on facts and in law in completing the assessment under section 144C of the Income-tax Act, 1961 („the Act‟) at an income of Rs.91,19,37,560/- as against the income of Rs.70,51,03,214/- returned by the appellant. 2. That the Dispute Resolution Panel („DRP‟) / assessing officer erred on facts and in law in disallowing expenses of Rs.90,44,496/- alleging the same to be incurred for earning exempt dividend income of Rs.7,10,41,503/- from investment in mutual funds, invoking provisions of section 14A of the Act read with Rule 8D of the Rules. 2.1 That the DRP / assessing officer erred on facts and in law in holding that investment activity was not passive activity but was well informed and coordinated activity involving input from the various sources and acumen of senior management functionary and hence there was cost in-built into such investment activity. 2.2 That the DRP / assessing officer erred on facts and in law in holding that, the appropriate cost of composite funds needed to be allocated towards earning of exempt income. 2.3 That the DRP / assessing officer erred on facts and in law in not appreciating that apportionment of expenses is not allowed under section 14A of the Act and only expenses having direct/ proximate nexus with earning of the dividend income could be disallowed. 2.4 That the DRP / assessing officer erred on facts and in law in not appreciating that only expenses to the extent of Rs.3,17,216/- were incurred for earning the aforesaid dividend income from the investment made in mutual funds. 2.5 That the DRP / assessing officer erred on facts and in law in holding that the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the assessee and not of the revenue. Page | 2

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 2 6 Without prejudice, that the DRP / assessing officer erred on facts and in law in applying sub-section (2) of section 14A without recording his satisfaction about the correctness of the claim of the assessee in respect of the expenditure incurred for earning the said income. 3. That the assessing officer erred on facts and in law in holding the expenditure to the extent of Rs.81,94,914/- out of total expenditure of Rs.5,85,35,098/- incurred on Cold Tank Repair, claimed as revenue expenditure by the appellant, as capital expenditure. 3.1 That the assessing officer erred on facts and in law in not appreciating that the said expenditure of Rs.81,94,914/- incurred on repair of cold tank was charged to revenue in line with the generally accepted accounting principles. 3.2 That the assessing officer erred on facts and in law in not appreciating that the payment of second installment of engineering fees in terms of agreement dated 06.09.2007 to M/s Guardian International Corp. Ltd. („Guardian‟) became due on acceptance of the detailed drawings and specifications provided by the Guardian. 3.3 That the assessing officer erred on facts and in law in holding that the ratio of 86:14 to apportion expenses into capital and revenue was made on estimate basis. 3.4 Without prejudice, that the DRP erred on facts in not appreciating that the objection raised before them was in respect with treatment of part of engineering fees paid to Guardian as revenue expenditure and not with respect to claim for depreciation @15% on the said expenditure. 4. That the assessing officer erred on facts and in law in disallowing deduction of Rs. 18,35,10,396/- as claimed under section 80IA of the Act, on the ground that the appellant has neither maintained books of accounts nor complied with the requirement of audit as prescribed in section 80IA(7) of the Act in respect of the Windmill Undertakings. 4.1 That the assessing officer erred on facts and in law in not appreciating that proper books of accounts were maintained which were duly audited by an independent auditor and the report of auditor was filed before the assessing officer both in the assessment proceedings and the remand back proceedings. 4.2 That the assessing officer erred on facts and in law in not appreciating that books of accounts along with documents/ vouchers were produced before the assessing officer both during the assessment proceedings and the remand back proceedings.

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 4.3 That the assessing officer erred on facts and in law in not appreciating the process of generation and transmission of power vis-a-vis recognition of revenue by the appellant in respect of the Windmill undertakings. 4.4 That the assessing officer erred on facts and in law in not appreciating that there is no requirement in the Act which makes it mandatory for the appellant to recognize revenue on the basis of a sales invoice and not on the basis of a credit note which was issued by a third party viz. Gujarat Electricity Board („GEB‟) being the nodal agency of Gujarat Government.” 3. The revenue has raised the following grounds of appeal:- “1. Whether Hon‟ble DRP was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 4425571/- made by the AO on account of disallowance of claim towards deduction under section 80IA of the draft order. 2. Whether the Hon‟ble DRP is right directing the Assessing Officer to delete the disallowance made out of misc expenditure being horticulture expenditure, Horticulture expenditure colony, Computer Supply (peripherals), software purchase expenditure and security services colony.”

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 87, 174 was disallowed. Certain other disallowances were also made with respect to the claim of the assessee under section 80 IA of the income tax act and deduction under that section was disallowed. Consequently the draft assessment order was passed by the Ld. assessing officer at a total income of Rs. 103,30,11,907 against the returned income of the assessee of Rs. 71,11,87,750/–. The assessee preferred an objection before the Ld. Dispute resolution panel, which passed its direction on 21/11/2014. Consequently the final assessment order was passed by the Ld. assessing officer on 26/12/2014 at an income of Rs. 91,19,37,556/– against the returned income filed by the assessee of Rs. 71,11,87,750/–. Now disputes that remains to be adjudicated are a. Disallowance under section 14 A of Rs. 90,44,496/– b. Disallowance of engineering fees of Rs. 81,94,914/–. c. Disallowance under section 80 IA(4) (IV) made by the Ld. assessing officer of Rs. 18,35,10,396/–. 5. Therefore, assessee aggrieved by the order of the Ld. assessing officer and the Ld. AO aggrieved by the direction of the dispute resolution panel has preferred these appeals before us. Now we 1st take up the appeal of the assessee. The first ground of appeal is 6. challenging the composite order of the Ld. assessing officer. Therefore, this ground is general in nature and no specific arguments were raised before us. In view of this, we dismiss the same. 7. The 2nd ground of appeal divided into 6 segments with respect to the disallowance under section 14 A of the income tax act. During the year the assessee has earned dividend income of Rs. 7,10,41,503/– . During the course of assessment proceedings, the assessee was asked to file the details of the expenditure incurred for earning dividend income and applicability of the provisions of section 14 A as well as rule 8D. The assessee submitted Page | 5

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 that it had made investment only in Debt mutual funds to earn income by way of dividend. It was further stated that assessee has no borrowings and investments in mutual funds were made out of own funds. The assessee further suo Motu disallowed Rs. 3,17, 216/– being 20% of the salary of one accounting person along with 5% remuneration of the finance director. The assessee further submitted the working of the aforesaid disallowance made. The Ld. assessing officer rejected the explanation of the assessee and stated that disallowance is to be made according to the provisions of section 14 A read with rule 8 D of the income tax rules. Consequent to that the Ld. assessing officer worked out the total disallowance of Rs. 93, 61, 712 and as assessee has disallowed on its own Rs. 3, 17, 216/– made the further disallowance of Rs. 90,44, 496/–. The Ld. Dispute resolution panel on objection filed by the assessee confirmed the above disallowance and therefore the Ld. assessing officer incorporated the same in the final assessment order. The assessee is aggrieved by that disallowance. Therefore, it is contested by ground No. 2 of the appeal. 8. The Ld. authorized representative submitted a detailed chart of issues and with respect to the above ground submitted that The provisions of section 14A of the Act are, it is respectfully submitted, not applicable in the facts and circumstances of the present case for the reasons stated that Investment in mutual fund was made out of own surplus fund, from which exempt dividend income of Rs.7,10,41,503 was earned. The appellant company is a “zero-debt” company and has no borrowing or loans. The appellant has made investment only in Mutual Funds and has earned income by way of dividends. No investment has been made by the appellant in equity-oriented mutual funds. Mutual Funds are required to pay dividend distribution tax on dividends distributed in debt-funds and only net income (after payment of dividend distribution tax) has been received as dividends by the appellant. Page | 6

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 Mutual funds are governed by SEBI regulations. The Mutual Funds charge fund management charges, as permitted by SEBI under the scheme. Out of the income earned by the Fund, fund management charges are deducted and net income is available for distribution to unit holders. During the year under consideration, only the net income of Rs.7,10,41,503 (after deduction of fund management charges) was received by the appellant. It was further stated that No effort or time, etc., was utilized in receiving the dividend income. The investment activity only requires filling-in of Mutual Fund‟s standard printed requisition forms/ slips and issue of cheque or debit instructions to the bank. The dividends/ maturity proceeds are directly credited to appellant‟s bank account and accounting is done on the basis of computerized statements received from Mutual fund. The appellant is not having any separate department or persons exclusively engaged in investment activity and the same is being carried out by Accounts Department as integral part of the day-to-day accounting & finance activity. In this background, the appellant offered to disallow amount of Rs.3,17,216, being 20% of the salary of one accountant and 5% remuneration of the Finance Director, which could be said to have been incurred for earning such dividend income. Interest expenditure of Rs.27,07,351 was on dealer‟s deposit and Rs.67,267 was on loan obtained from bank towards working capital requirement. No part of the interest expenditure relates directly/ indirectly to the investments made in various mutual funds. Tax Auditor has certified/ quantified the disallowance under section 14A of the Act at Rs.3,17,126/- as referred above. Coming to other expenses, it will kindly be noticed that the assessee had on a reasonable basis apportioned the salary cost of employee and finance director looking after investment positions towards earning of dividend income and disallowed the same. The balance expenses were incurred in relation to Page | 7

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 other business functions carried on by the appellant and no portion thereof can be attributed towards the earning of dividend income. Reliance in this regard is placed on the decision of Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT: 347 ITR 272 wherein the High Court has analyzed the scope of provisions of section 14A and the powers vested with the assessing officer before invoking the same. The High Court held, that the expression “expenditure incurred” refers to actual expenditure and not to some imagined expenditure. It was held, that the provisions of sub- section (2)/ (3) of section 14A read with Rule 8D of the Rules can be applied from assessment year 2008-09 and onwards, only if the assessing officer “returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure”. Meaning thereby, that the AO must first reject the claim of the assessee of either having not incurred any expenditure in relation to earning of exempt income and/ or the quantum of such expenditure, with cogent reasons. In other words, the onus is on the assessing officer to establish nexus of expenses with exempt income, before rejecting the claim of assessee and computing disallowance under section 14A as per Rule 8D of the Rules. Reference is further made to the decision of the Delhi High Court in the case of H.T. Media Ltd. vs. PCIT: [2017] 399 ITR 576 (Delhi) wherein the Court placed reliance on the decision of the Apex Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (supra) and held that where there was a failure by Assessing Officer to comply with mandatory requirement of section 14A(2) read with rule 8D(1)(a) and record his satisfaction as required there under, question of applying rule 8D(2)(iii) did not arise. Further attention in this regard is invited to the decision of Delhi High Court in the case of PCIT vs. U.K. Paints (India) (P.) Ltd. [2017] 392 ITR 552 (Delhi) wherein the court held that the assessing officer cannot re-compute disallowance under section Page | 8

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 14A by invoking rule 8D without elucidating and explaining why assessee's voluntary disallowance is unreasonable and unsatisfactory. It would be pertinent to mention that the above issue has been decided in favour of the appellant by the Tribunal in assessment year 2009-10 in ITA No.3554/Del/2014 and 3596 & 3595/Del/2014. The relevant extracts of the decision were read out by him , which is as under :

“17 Considering the above undisputed facts material to the issue of validity of disallowance made u/s.14A read with Rules 8D, we are of the view that the learned CIT (Appeals) following the ratio laid down by the Hon‟ble Jurisdictional High Court of Delhi in the case of Maxopp Investments Ltd. (supra) was justified in holding that the Assessing Officer was not right in rejecting the claim of the assessee in a summary manner without verifying the reasonableness of disallowance of Rs.3,04,866/- made by the assessee itself towards the expenses incurred in the form of administrative cost, in the form of any fraction of the salary of the concerned employees were also performing other duties in the finance section and whose job was not exclusively to make investments, keep finance section and whose job was not exclusively to make investments, keep record of it and deposit the income in the bank as well as the important aspect that the dividend received in the mutual funds were deposited in the bank account of the assessee through ECS facility. The view taken by the CIT (Appeals) is well supported by several decision cited by the learned AR hereinabove including the decision of Hon‟ble Jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. (supra) holding that the lack of satisfaction of the Assessing officer should of cogent reasons. In the present case before invoking Rule 8D the Assessing Officer has failed in his duty as per the provisions laid down under section 14A read with Rule 8D to point out any discrepancy in the claim made by the assessee having regard to its accounts. It was the case of the assessee that the dividend income earned by it was with respect to certain investments of its surplus funds in the mutual funds in respect of which the concerned mutual fund charges fund management charges as permitted by SEBI. It was submitted that in Page | 9

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 case of assesse, an amount of Rs.46,00,000/- was charged by the mutual fund which were effectively in the nature of directly related administrative expenses in respect of such investment. The assessee explained that other than this it had only to fill up mutual funds standard printed requisition form and issue cheque. It was submitted that assessee does not have particular persons exclusively engaged in the investment activity and personnel from the accounts department do the same as integral part of the day to day accounting work. Since the first appellate order on the issue is reasoned one and supported with the ratio laid down by the Hon‟ble Jurisdictional High Court of Delhi in the case of CIT Vs. Maxopp Investment Ltd. (supra), we are not inclined to interfere therewith. The same is upheld. The ground no. 1 of the appeal (ITA No. 3595) and the ground of the appeal (ITA No.3596) of the revenue are accordingly rejected.” In view of the foregoing, it is respectfully submitted that on the issue which has been decided in favor of assessee (discussed supra), the disallowance made by the assessing officer calls for being deleted 9. The Ld. departmental representative vehemently relied upon the orders of the Ld. assessing officer. 10. We have carefully considered the rival contentions. The first contention of the assessee is that assessee has suo moto disallowance of certain expenses, given reason for that and without examining the claim of the assessee, ld AO has applied the provision of rule 8D of the act. His main submission is that disallowance cannot be made by invoking Rule 8D without recording satisfaction how the claim of the assessee is not correct. He relied up on plethora of decisions including the decision of coordinate bench in assessee‟s own case on identical facts and circumstances. Further In computation of disallowance made by the Ld. assessing officer has also worked out the disallowance of interest of Rs. 992176/– and amount of expenditure at the rate of 0.5% of the average value of investment of Rs.

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 8369536/–. The total disallowance were worked by the Ld. assessing officer applying the provisions of rule 8D was Rs. 9 361712/–. The main claim of the assessee is that it has the surplus fund amounting to Rs. 4, 24, 06, 75, 537/– in the form of share capital and reserve and surplus and the total investment made by the assessee is only of Rs. 1, 67, 84, 06, 403/–. Therefore, there cannot be any disallowance on account of interest expenses. It was further the contention of the assessee that it has been investing surplus fund in the date mutual funds on which dividend income was on an during the year the assessee has earned dividend of Rs. 7, 10, 41, 503/– from the investment in surplus funds in mutual funds which is exempt and not chargeable to income tax act. The first contention of the assessee is that the Ld. assessing officer has not recorded the satisfaction to show that why the working shown by the assessee for the disallowance under section 14 a is erroneous. It was further stated that identical issue arose in the case of the assessee for assessment year 2009 – 10 in ITA No. 3554/del/2014 and 3596 and 3595/del 2014. The coordinate bench in the assessee‟s own case is held that that the Ld. CIT – A in that particular case has held that the Ld. assessing officer was not right in rejecting the claim of the assessee in summary manner without verifying the reasonableness of the disallowance made by the assessee on its own. The facts of the case are similar to the facts in the case for assessment year 2009 – 10. In the present case also the assessee has made disallowance of Rs. 3, 17, 216/– holding that 20% of the salary of 1 accountant and 5% remuneration of the finance director has been worked out as expenditure disallowable under section 14 A of the income tax act. The coordinate bench in para No. 17 for assessment year 2009 – 10 is considered the whole issue and upheld the order of the Ld. CIT – A where in the disallowance u/s 14A over and above the offered disallowance of assessee was deleted as ld AO failed to Page | 11

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 record the requisite satisfaction. The coordinate bench was further of the view that before invoking the provisions of rule 8D the Ld. assessing officer has failed in his duty as per the provisions laid out under section 14 A read with rule 8D to point out any discrepancy in the claim made by the assessee having regard to its accounts. It is further the fact that investment of the assessee in the mutual fund is out of this para surplus funds. The Ld. departmental representative could not point out any reason to deviate from the order of the coordinate bench in assessee‟s own case for assessment year 2009 – 10. In view of this to delete the disallowance made of Rs. 9 044496/– under section 14 A of the income tax act. In the result ground No. 2 of the appeal of the assessee is allowed. 11. The ground No. 3 of the appeal of the assessee is against the disallowance of Rs. 81,94,914/– out of the total expenditure of Rs. 5,85, 35,098/– made by the assessee on old tank repair claimed as revenue expenditure by the appellant but held to be capital expenditure by the Ld. assessing officer. The brief facts of the issue is that appellant is an original return had claimed deduction of Rs. 5, 85, 35, 098/– being the 2nd installment of engineering fees paid to bludgeon international Corporation USA for old tank repair. The appellant had revised the return of income before the assessing officer wide letter dated 27/11/2011 claiming only Rs. 8 1, 94, 914/– as revenue expenditure and suo Moto capitalizing the balance amount of Rs. 5, 03, 40, 184/–. In the assessment order, the Ld. assessing officer disallowed the same treating the same as capital expenditure. The Ld. DRP also held that entire amount of Rs. 5 853 5098 to be capital in nature and observed that the appellant had claimed depreciation at the rate of 15% amounting to Rs. 81,94,914/– on the said expenditure. The Ld. DRP did not noticed that assessee had bifurcated the said expenditure being 14% of engineering fees amounting to Rs. 8 194914/– is revenue in nature and balance amount as Page | 12

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 capital expenditure. Therefore the claim of the assessee as that engineering fees paid of Rs. 8 1, 94, 914/– is revenue in nature. 12. The Ld. authorized representative submitted that the appellant company commenced commercial production in March 1993. It is a leading glass producer and has a manufacturing facility at Ankleshwar, Gujarat. One of the most important sections of float glass manufacturing line is the melting furnace. The potential life of a float glass furnace is about 15 years. Thereafter it becomes necessary to rebuild the furnace and repair / replace / renovate other sections of the plant. Such major repairs to the plant are termed as “Cold Repair” in float glass industry. This activity typically requires the planning to start about 2-3 years in advance to carry out engineering and procurement activities and be fully ready to carry out the repair at the appropriate time. When actual cold repair takes place, the same requires plant shut down of about 100 days. Cold Repair of a float glass plant requires comprehensive engineering, procurement, and supervision activities, which are quite similar to setting up a new float glass plant. In the financial year 2007-08, the appellant completed 13 years of operations. As a result, the appellant started planning for cold repairs in 2007-08 for which it took necessary steps to prepare itself for undertaking the Cold Repair. As a first step, the appellant entered into agreement with Guardian International Corp. USA (Guardian) in September 2007 for Engineering Services for Cold Repair. The services provided by Guardian, it would be pertinent to mention, were in connection with preparing the appellant to carry out cold tank repair and were not aimed in assisting the applicant in carrying out actual repair (which was undertaken by the appellant in financial year 2010- 11). For the services to be provided by Guardian for Cold Tank Repair project, the appellant agreed to the said fee of USD 5 Million payable in four equal installments. Out of USD 5 Million fee, 1st installment of USD Page | 13

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 1.25 Million was paid in financial year 2007-08 and in financial year 2009- 10 (the assessment year under consideration) 2nd installment of USD 1.25 Million (Rs.5,85,35,098/-) was paid towards the services rendered by Guardian relating to engineering and procurement activities. This amount was accounted for and charged to Profit and Loss account as plant repair expenses. The disclosure about the said expense was also made in Schedule 18 – Note 14(B) of the Audited Accounts as transaction with related party. The payment made to Guardian was not linked with undertaking actual cold tank repair. In fact, the amount of USD 5 million was agreed for services to be rendered by Guardian in relation to following services as per Article 2.1 of the Agreement: a) Engineering design services b) Equipment supply services c) Project financial control services d) Purchasing services e) Heat up services

The detail of work done under the aforesaid services is explained in the Agreement, which was submitted during the assessment proceedings. These services were rendered to prepare the appellant to undertake cold tank repair in the subsequent year. Further, Article 3.2 of the Agreement provides the milestones for making payment of the agreed engineering fees, as under: a) First installment [USD 1.25 million] – after signing of the Agreement; b) Second installment [USD 1.25 million] – after Guardian has delivered and the appellant has accepted the detailed drawings and specifications; c) Third installment [USD 1.25 million] – after commercial production commences;

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 d) Fourth installment [USD 1.25 million] – after the completion of the performance test.

It was the endeavor of the company to take maximum life from the existing furnace and best efforts were made to operate the furnace to the extent technically advisable. During the financial year 2010-11, it was decided to carry out actual Cold Repair. The activity commenced on August 29, 2010 and the whole process took 97 days, during which the float production facility was closed. Consequently, the production re-commenced on December 4, 2010. During the Cold Repair process, glass-melting furnace was fully dismantled and rebuilt and other sections of the plant were suitable repaired, renovated, or modernized. In other sections the equipment were repaired/ replaced or renovated/ refurbished as per technical advice. In terms of melting capacity of the furnace, there was no change in the production capacity of the plant. During the financial year 2010-11, the expenditure incurred on Cold Repair has been capitalized/ charged to revenue, as appropriate, in line with the Generally Accepted Accounting Principles. In case, the plant or machinery has been fully replaced, the same was capitalized and in case the activity was of the nature of repairs and maintenance, the same has been expensed out. After analyzing each expense and considering the nature of the same, out of total Cold Repair expense of Rs.196.54 crores, Rs.169.77 crores (about 86% approx.) were capitalized and Rs.26.77 crores (about 14% approx.) were charged as repairs expense in the financial year 2010-11. In view of the aforesaid, the appellant revised its return of income for the relevant year, which was filed before the assessing officer (since it could not be revised online). The amount paid as 2nd installment of Rs.5,85,35,098/- to Guardian towards engineering fees, which was claimed as revenue expenditure in the original return of income filed, was later on revised and only Rs.81,94,914/- (approx Page | 15

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 14% of the total amount paid) of the engineering fees paid to Guardian was claimed as revenue expenditure under section 37(1) of the Act and the balance amount of Rs.5,03,40,184/- (approx 84% of the total amount paid) was capitalized in the books of accounts. It would be pertinent to mention that the assessing officer, during the assessment proceedings for the assessment year 2011-12, has accepted the bifurcation of total expenditure incurred on cold tank repair as Rs.26.77 crores being revenue in nature and Rs.169.77 crores as capital in nature. Accordingly, the assessing officer ought to accept the bifurcation of the engineering fees, which has, was based on the same principle. Reliance, in this regard, is placed on Para-12 of Accounting Standard-10 “Accounting for Fixed Assets” issued by the Institute of Chartered Accountants of India, the premier accounting body of India, which deals with the accounting treatment of „improvements and repairs‟ carried out with respect to Fixed Assets. As per para 12.1 thereof, only expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance is included in the gross book value, e.g. an increase in capacity. AR further placed reliance in this regard on the following decisions:  Empire Jute Co. Ltd. v. CIT: 124 ITR 1 (SC)  CIT vs. Mahalakshmi Textile Mills 66 ITR 710 (SC)  CIT v. Sarvana Spinning Mills P. Ltd. : 293 ITR 201 (SC)  Comfort Living Hotels (P.) Ltd. vs. CIT: 363 ITR 182 (Del)  CIT vs. Volga Restaurant: 253 ITR 405 (Del)  CIT vs. Delhi Press Samachar Patra P. Ltd.: 322 ITR 590  CIT v. Bharat Cinema : 121 ITR 165 (HC) (P&H)  CIT & Anr. vs. Sagar Talkies : 217 CTR 74 (HC) (Kar)  Tuticorin Spinning Mills Ltd. vs. CIT : 261 ITR 291 (HC) (Mad)  CIT vs. Ooty Dasaprakash: 237 ITR 902 (HC) (Mad)  CIT vs Lake Palace Hotel and Motels P. Ltd.: 258 ITR 562 (HC) (Raj)  CIT v. Wolkem (P.) Ltd. Co. : 258 ITR 350 (Raj) (HC) Page | 16

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015  CIT vs. Karnataka State Road Transport Corporation Ltd. [224 Taxman 188 (Kar – Mag)] [2014]  CIT vs. Nizam Sugar Factory 116 ITR 706 (AP)  ACIT vs. Dyer‟s Stone Lime Co 136 ITR 8 (Del)  CIT vs. Serikella Glass Works: 157 ITR 584 (Pat)  Messrs Dehri Rohtas Light Railway Co. Ltd vs. CIT 46 ITR 533 (Pat)  Rhodesia Railways vs. ITC 1 ITR 227 (PC)  Bansilal Abirchand vs. CIT 31 ITR 427 (Nag)  South Eastern Coalfields Ltd. vs. JCIT: 85 ITD 608 (Nag),  DCIT v. Eicher Motors Ltd.: 67 SOT 306 (Del – Trib)  CIT v. TVS Motors: 364 ITR 1 (HC)(Mad)  CIT vs. Sree Ayyanar Spinning and Weaving Mills Ltd.: 211 Taxmann 534 (SC)  CIT v. Shri Rama Sugar Mills: 21 ITR 191 (Mad.)  CIT v. Norinco (P.) Ltd.: ITA No. 622 of 2014 (Cal)  Super Spinning Mills Ltd. v. ACIT: 357 ITR 720 (Mad)  CIT v. Indian Woollen Textile Mills Pvt. Ltd.: 112 ITR 441 (P&H)  CIT v. Shree Hari Industries: 161 ITR 249 (Raj.)  CIT v. Madras Spinners Ltd.: 177 ITR 498 (Ker.)  CIT v. Tea Estate Pvt. Ltd.: 198 ITR 535 (Cal.)  CIT v. Madras Spinners Ltd.: 207 ITR 35 (Ker.)  CIT v. Sree Bhagvathi Textiles Ltd.: 207 ITR 826 (Ker.)  CIT v. Co-operative Sugars Limited: 235 ITR 343 (Ker.)  CIT v. Udaipur Distillary Co. Ltd.: 268 ITR 451 (Raj.)  CIT vs. Prabhu Spg. Mills (P) Ltd.: 113 TTJ 372 (ITAT) (Chennai)  ACIT v. Shiva Texyarn Ltd.: ITA No. 2231/Mds/2014 (Chennai)  Urban Infrastructure Venture Capital Ltd. v. DCIT: 150 ITD 502 (Mum)  M/s Singh Fab P Ltd Vs ITO : ITA No. 5314/Del/2004, (Trib) (Del)

In the light of the aforesaid discussion, it is respectfully submitted that there is no warrant to make any disallowance of the revenue portion of engineering services, since there can be no doubt or ambiguity about Page | 17

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 rendering of the services before 31.3.2010 and accordingly, 14% of the expenditure should be allowed as revenue expenditure. 13. The Ld. departmental representative relied upon the orders of the lower authority and submitted that disallowance has correctly been made by the Ld. assessing officer. 14. We have carefully considered the rival contentions and find that for assessment year 2009 – 10 the identical issue arose in the case of the assessee in ITA No. 3554/del/2014 wherein wide para No. 21 the coordinate bench is set aside the whole issue back to the file of the Ld. assessing officer as under:-

“21. Having gone through the orders of the authorities below, we find that the Ld. CIT (A) has decided the issue of disallowance of the portion of engineering fees claimed as revenue expenditure to the extent of Rs. 6 9, 04, 582/– under factual premises, besides other that the assessee had not received drawings and specifications, and, therefore 2nd installment of payment of US dollar 1.2 5,000,000 to the Guardian had not become due. The factual observation of the Ld. CIT – A is disputed by the Ld. authorized representative is incorrect that the submission that the claim of the assessee that the above amount was revenue in nature is supported by the evidence that the invoice for 2nd installment was raised on 1/12/2009 and the expenditure was charged to the profit and loss account in the subsequent financial year 2009 – 10 only i.e. the year under consideration. The same therefore has no impact on the allowability of the first internal installment of engineering fees. The further contention of the Ld. AR remained that there cannot be doubt or ambiguity about rendering of engineering services before 31st March, 2009 and accordingly 15% of the expenditure has been rightly allowed by the AO Page | 18

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 as revenue expenditure. Since, as discussed above, the material facts of the issue is in dispute and needs verification, the matter is set aside to the file of the Ld. assessing officer to decide the issue afresh in view of the above discussion after affording opportunity of being heard to the assessing.” 15. As the identical issue arose in assessment year 2009 – 10 which has been set aside by the coordinate bench to the file of the Ld. assessing officer and the issue involved is also similar except the change in the assessment year. The Ld. departmental representative also fairly agreed that the issue has already been sent back to the file of the Ld. assessing officer for assessment year 2009 – 10 therefore there is no reason to not to set aside this ground of appeal of the assessee back to the file of the assessing officer. We have also considered the above arguments of the both the parties and find that if we decide this issue now it will influence the decision of the Ld. assessing officer for assessment year 2009 – 10 where the assessee deserves be given a fair opportunity of hearing as directed by the coordinate bench. There is no reason that this ground of the appeal for this year should also not go back to the assessing officer with similar direction. In view of this, we set aside this ground of appeal back to the file of the Ld. assessing officer with similar directions. Accordingly, ground No. 3 of the appeal of the assessee is allowed with above direction. 16. The ground No. 4 of the appeal of the assessee with is with respect to the disallowance of the deduction under section 80 IA of the income tax act of Rs. 1 8, 35, 10, 396/– as the assessee has allegedly not maintained the separate books of accounts, not complied with the requirement of the audit as prescribed under section 80 IA (7) of the act in respect of the windmill undertakings. The brief facts of the issue is that during the year under consideration the appellant had claimed deduction under section 80 IA (4) Page | 19

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 (iv) of the act being an undertaking which is set up for the generation of the power that had begun to generate power from assessment year 2004 – 05 onwards. Admittedly, the assessee has two windmill projects project No. 1 and project No. 2. In the case of the assessee it has set up windfarm situated about 355 km away from the manufacturing facility for transmission of electricity to its manufacturing facility located at Bharuch . For this purpose, the assessee company entered into wheeling of electricity agreement with the Gujarat energy transmission Corporation Ltd. The Ld. assessing officer based on the agreement noted that Assessee Company is using banking facility only for consumption of electricity for its own manufacturing activities. Revenue is booked only on the basis of the credit notes of units issued by GETCO. Since the company according to the AO is not deriving any profits and gains from the so-called windmill undertaking or enterprise the assessee company was required to show cause as to why the deduction claimed under section 80 IA of Rs. 1 8351 0398 been disallowed. The assessee submitted that that it is maintaining separate books of accounts for both the units, which are duly audited by a chartered accountant in form No. 10 CCB. In addition, it is further stated that deduction is allowable to the assessee. The Ld. assessing officer was of the view that Assessee Company is not deriving any profit gain from the enterprise to claim deduction. It was further held by him that as the assessee company generated power for its own consumption and for this purpose entered into an agreement with the Gujarat energy transmission Corporation Ltd. The assessee was also required to produce the books of account and sales bills based on which the auditor of the company submitted the audit report in form No. 10 CCB. The assessee submitted that assessee is not issuing any bill and form No. 10 CCB was prepared based on the credit not issued by the Gujarat energy transmission Corporation Ltd in terms of units Page | 20

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 only. Therefore, the Ld. assessing officer was of the view that the assessee company has not maintained any books of accounts and therefore the requirement of audit as provided under subsection 7 has not been fulfilled. Therefore he held that since the assessee company has failed to produce the accounts either during the assessment proceedings or as per the direction of the Ld. Dispute Resolution Panel the requirement of subsection 7 cannot be fulfilled and therefore he disallowed the claim of Rs. 1 8, 35, 10, 396/–. 17. The Ld. authorized representative submitted that The appellant was earlier buying entire electricity from Gujarat Energy Development Authority/ Gujarat Electricity Board [“GEDA”/ “GEB”]. Subsequent to the announcement of Wind Power Policy by the Gujarat Government, the appellant had set up Wind Power facility to meet part of the requirement of electricity from in house power generation. The electricity was generated at the appellant‟s wind farms, situated about 350 kms away from the manufacturing facility operated by it. In order to facilitate transmission of electricity to the manufacturing facility, the appellant had entered into an agreement with GETCO, a Government company functioning as the “State Transmission Utility” under the Electricity Act, 2003 for wheeling and banking power on behalf of the appellant. In terms of the said agreement, GETCO would meter and measure the energy generated at the wind farm, which would subsequently be wheeled from the wind farm to the appellant‟s manufacturing units. Any surplus energy will also be injected into the GETCO Grid system and banked for a period of six months. In the wheeling process, the power so generated by the appellant, as measured by GEDA, is acknowledged by GEB by issuing credit certificates, which is thereafter adjusted in the monthly electricity bills. The process is explained hereunder: The detail of power generated and revenue recorded there from in Wind power projects I & II is summarized below: Page | 21

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 Gross 4% Wheeling Net Unit Revenue Remarks generation Charge generation (in units) (in Rs.) I 20,674,006 826,960 19,847,046 118,647,716 Recorded as 'revenue from generation' in the accounts, certified by Tralsawala II 18,215,575 728,623 17,486,952 104,538,829 Associates, Chartered Accountants 38,889,581 1,555,583 37,333,998 223,186,545

The power generated at the appellant‟s wind farms are injected in GETCO grid system and wheeled to local sub-station of GEB. In the process, wheeling charges @4% of units generated by the appellant are deducted to compensate GETCO. For the gross units, GEDA issues monthly certificates for share of electricity generated by wind farms in district Jamnagar, certifying the electricity import/ export recorded at 132KV Bhogat Enercon sub-station. The month-wise breakup of the above detail, specifying the wind farm wise breakup of the monthly power generation certificates issued by GEB for each month, certifying the monthly power generated by each wind farm were filed before the assessing officer vide reply dated 20.12.2013. The benefit/ credit of power banked at 132KV Bhogat Enercon sub–station of GEB, in place of physically being transmitted to the manufacturing units of the appellant is provided as under:

 During the period April - June 2009, GEB gave credit of units generated at wind farms by reducing from the gross units consumed by manufacturing units and raising electricity bill for only net units, i.e., gross units consumed less units generated by appellant;  Thereafter, during July 2009 - March 2010, electricity bill was raised for gross consumption and separately GEB credit notes for power generation.

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 While making payment of bill, the appellant paid bill after adjusting the credit note.

A summary of the monthly electricity bills, the electricity bills for April – June 2009 and electricity bills for July 2009-March 2010 along with credit note issued by Dakshin Gujarat Vij CO. Limited has been submitted before the assessing officer vide reply dated 20.12.2013.It would be appreciated that the appellant, in its books of accounts, records revenues on the basis of the credit notes issued by the Dakshin Gujarat Vij CO. Limited („DGVCL‟) being the nodal agency of Gujarat Government. It is further submitted that AO cannot reject the authenticity of the credit note(s) issued by a third party, on the basis of which revenue is booked in the books of accounts of the Windmill undertakings, without placing on record, any document and/ or by bringing facts to the contrary, negate such credit note(s) which have been issued by a third party itself. In other words, in absence of any evidence brought on record by the AO, which stands contrary to the credit notes provided by the third party, such documents provided by DGVCL cannot be rejected. it will be kindly appreciated that the provisions of section 80IA only requires that “accounts of the undertaking” for the relevant previous year to be audited by a Chartered Accountant and also requires the assessee to furnish report of such audit in prescribed Form No.10CCB along with the return of income. In this regard, it is respectfully submitted that the appellant, during the year under consideration, had maintained separate books of accounts with respect to both the Windmill undertakings. Such books of accounts have been duly audited by an independent auditor viz. Tralsawala Associates, Chartered Accountants and such report of the auditor has been filed before your Honour. The relevant extracts of the audit report have been reproduced hereunder as reference:

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015

“We have checked the books of accounts and other records maintained by M/S Gujarat Guardian Ltd, State Highway 13,Village Kondh, Taluka Valia, District Bharuch, Gujarat in respect of the following undertakings set up by the company for generation of Wind Power;

Name of undertaking Year of Setting up

And Certify as below:

The Company has maintained separate books of accounts in respect of each of the above Wind Power projects from the year of start till financial year 2009- 10.

We have checked attached Profit & Loss Accounts and Balance Sheets prepared by the company for each of the above Wind Power Projects from the year of setting up 31st March, 2010 and found the same to be correct and the same reconciles with the audited accounts of the main company has been arrived at on the following basis;” (emphasis supplied)

Both revenue and expenses recorded in the books of accounts of both the Windmill units of the appellant are duly supported by the credit notes in respect of revenue, bills in respect of direct expenses and working of allocation of expenses in respect of indirect expenses. All such document(s) are verifiable Page | 24

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 from appellant‟s records and were duly filed before the AO vide replies dated 24.12.2014 (also produced before AO on 08.01.2014). Further, there is no mandate in the provisions of section 80IA of the Act that prohibits the appellant from recognizing the revenue generated on the basis of a credit note, which was issued by a third party viz. DGVCL, being the nodal agency of Gujarat Government. It would appreciated that the benefit/ credit of power generated and banked with GEB, in place of physically being transmitted to the manufacturing units of the appellant, is provided by issuing an electricity bill for gross consumption on the appellant and separately issuing credit notes for power generated by the appellant. While making payment of bill, the appellant simply paid bills after adjusting the credit note(s). All the transactions, including transfer of power generated by the power plant to GEB/ GETCO, who banks the power and supplies it further to the other manufacturing unit(s)/ undertaking(s), were undertaken on arm‟s length basis viz. at the rate ordinarily charged by GEB/ DGVCL for supply of power. The transfer of power from the Windmill undertaking was made and recorded in the separate books of accounts on the basis of the credit notes issued by a third party viz. DGVCL being the nodal agency of Gujarat Government at the rate on which GEB sells power to the appellant, being the fair market value of the power supplied, and the statement of profitability for the windmill units were prepared on that basis.It is further submitted that on the basis of unit wise accounts prepared, the appellant claims deduction under section 80IA of the Act, which is duly supported by certificate of the Chartered Accountant. Further, the computation of profits for the purpose of deduction under sections 80IA of the Act is duly certified by the auditors and has been provided as part of the audit report in Form 10CCB. Under the provisions of section 80-IA/ 80-IB of the Act, there is, in fact, no provision/ requirement of maintenance of separate books of account in respect of each eligible undertaking. What is only required is that the assessee has to Page | 25

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 furnish report of a Chartered Accountant in the prescribed Form No.10CCB certifying that deduction has been rightly computed in respect of profit derived from the undertaking. Reliance in this regard is also placed in the decision of the Punjab and Haryana High Court in the case of CIT v. Micro Instruments Co.: 388 ITR 46 (dated 02.09.2016) wherein issue of requirement of separate books of account in respect of units eligible for deduction under section 80IB of the Act has been specifically dealt with by the Court. While dealing with the issue, the Hon‟ble Court has held that the said section does not require an assessee to maintain separate books of accounts for eligible undertakings. The relevant extracts of the decision are given as under: “29. Even as a matter of law, keeping separate books of account is not a condition precedent to a claim for a deduction under Section 80-IB. There was no statutory provision making it mandatory for an assessee to maintain separate books of account. That it may be easier for an assessee to establish a claim for deduction under Section 80- IB in the event of separate books of account being maintained is another matter altogether. That is a question of evidence and not a legal obligation. 30. Section 80-IB itself does not expressly require an assessee to maintain separate books of account to maintain a claim for a deduction thereunder. Nor do we find anything in the section that implies such a requirement. So long as an assessee fulfills all the conditions stipulated in sub-section (2), the section would be applicable. These conditions do not require an assessee to maintain separate books of account in respect of the new undertaking. Nor does sub-section (3), stipulate such a condition. As we will shortly see, where an assessee is required mandatorily to fulfill a particular condition, the legislature expressly included a condition to that effect. 31. As we mentioned earlier, where an assessee keeps separate books of account that fact would, along with other facts, be relevant while considering whether the assessee fulfills all the conditions of Section 80- IB and, in particular, sub-section (2) thereof. It would be relevant, for instance, while considering whether the industrial undertaking concerned is formed by splitting up or a reconstruction of a business already in existence or not. If separate books of account are kept in respect of the new industrial undertaking, it would certainly be a factor in favour of the Page | 26

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 assessee. That, however, relates to the question of evidence in support of the claim and not to the statutory requirement to maintain separate books of account. ……. 37. The contention that the assessees are not entitled to the deduction under Section 80-IB as they did not maintain separate books of account is, therefore, rejected.” (emphasis supplied)

The Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories ITA No. 196/Del/2013 dated 25.04.2016/ [2016] 68 taxmann.com 322 also, inter alia, held that there is no mandatory requirement to maintain separate books of account for the purpose of claiming deductions under sections 80-IB and 80-IC of the Act. To the similar effect are the following decisions:  Banaskantha District Cooperative Milk Producers Union: ITA No.3599/Ahd/2009  Revenue‟s Appeal dismissed in Tax Appeal No. 1813 of 2010 (Guj.)  CIT v. Sabarkantha District Co-operative Milk Producers Union Ltd.: Tax Appeal No. 473 of 2014 (Guj.)  Ajanta (P.) Ltd. v. DCIT: [2017] 77 taxmann.com 227 (Guj.)

Reference in this regard is also made to the decision of the Delhi Bench of the Tribunal in the case of DCIT v. NIIT: ITA No. 1112/Del/2012 wherein books maintained in ERP software accounting system was held to be sufficient compliance for the purpose of claiming deduction under section 10B of the Act. It is pertinent to mention here that appeal filed by the Revenue against the order of the Tribunal the aforesaid issue raised was not admitted by the Hon‟ble Delhi High Court vide order dated 01.03.2016 in ITA No. 897/2015. In view of the above, it is respectfully submitted in light of the principles laid down in the

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 aforesaid decisions, the assessee was not, in law, strictly required to maintain separate books of accounts in respect of the eligible undertakings. In view of the aforesaid, deduction under section 80IA of the Act has been, it is respectfully submitted, erroneously denied to the appellant on the ground that books of accounts were not maintained in respect of the eligible business/undertaking, since the appellant was recognizing sales on the basis of credit notes. Regarding allowability of deduction to be tested in the first year of claim It is, at the outset, submitted that the appellant had begun to claim deduction under section 80IA of the Act in respect of the aforesaid units from the assessment year 2009-10. It is submitted that the claim of deduction under sections 80IA of the Act, was examined and allowed to the appellant during the immediately preceding year. It that the claim of deduction by the appellant under sections 80IA of the Act has been duly examined on all relevant factors, during the assessment proceedings for the assessment year 2009-10, being the first year of claim, and on being fully satisfied, the deduction was allowed. It is, however, during the year under consideration, that the assessing officer denied the claim of deduction made under section 80IA of the Act on the primary ground that the appellant had failed to maintain books of accounts in respect of unit(s) for which deduction was claimed on the ground that the appellant is not having any sales vouchers and sales are computed on the basis of credit notes. In this regard, it is respectfully submitted that it is a well settled proposition of law that where the Act provides for a deduction which is allowable to an appellant for a certain term/ period (such as a period of consecutive ten years in present case), the Revenue is required to examine the eligibility of the appellant and whether all statutory pre-conditions are satisfied in the first year in which the appellant claims such a term deduction. In such cases, without disturbing the assessment for the initial year, it is not open to the Revenue to make disallowance of such deduction in the subsequent year(s), unless there is a Page | 28

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 material change in the fundamental facts. Reliance, in this regard, is placed on the following observations made in the following decisions: - Saurashtra Cement & Chemical Industries v. CIT: 123 ITR 669 (Guj) “No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the Income-tax Officer cannot examine the question again and decide to withhold or withdraw the relief which has been already once granted.”

- CIT v. Paul Brothers: 216 ITR 548 (Bom.) “Either in section80HH or in section80J, there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Hence unless the relief granted for the assessment year 1980-81 was withdrawn, the Income-tax Officer could not have withheld the relief for the subsequent years. (See Gujarat High Court decision in the case of Saurashtra Cement v. CIT: 123 ITR 669. Hence, the approach of the Tribunal on all the counts has been perfectly legal.”

- CIT v Gujarat State Fertilizers Co. Ltd: 247 ITR 690 (Guj.) “Having heard learned counsel for the parties and critically examining the relevant provisions contained in section 80J in the light of the decisions cited before us, we are of the considered opinion that, as in the preceding assessment years, the appellant cannot be denied the benefit of deduction at the prescribed rate under section80J on the capital employed in the form of residential accommodation given to the shopkeepers in the township of the appellant.”

- CIT v. Fateh Granite (P) Ltd.: 314 ITR 32 (Bom.) Page | 29

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 “8. On behalf of the appellant, the learned counsel had drawn our attention to the judgment of the Gujrat High Court in the case of Saurastra Cement & Chemical Industries Ltd v. CIT (1979) 11 CTR (Guj) 139: [1980] 132 ITR 669 to contend that once the revenue had allowed the relief for the previous assessment year, it was not open to disturb the relief for the subsequent years without disturbing the relief granted in the initial year. Our attention is also invited to the judgment of this court in the case of CIT vs. Paul Brothers reported in [1995] 216 ITR 548 where in court was considering the issue for the assessment year 1981-82. This court took a view that for the purpose of Section80-HH or Section80-J, there is no provision for withdrawal of deduction for the subsequent year for breach of certain conditions, unless the relief granted for the earlier year 1981-82 was withdrawn. For the reasons set out earlier, we need not consider this aspect. We find no merit in this appeal and accordingly, the same is dismissed.”

- Similarly, the Hon‟ble Bombay High Court in the case of CIT v. Western Outdoor Interactive Pvt. Ltd: 349 ITR 309, held as under: “We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this Court in the matter of Paul Brothers (supra) and Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the acts warranting a different view for subsequent years. In this case Page | 30

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 for the assessment years 2000-01 and 2001-02 the relief granted under Section10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis a vis the claim to exemption under section10A of the Act. Therefore, it is not open to the department to deny the benefit of Section10A for subsequent assessment yearsi. e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit.”

To the same effect is the decision of the Hon‟ble Bombay High Court in Direct Information Private Ltd. vs. ITO: 349 ITR 150 and the following decisions of the Delhi High Court:

- CIT vs. Escorts Ltd : 338 ITR 435 - CIT vs. Delhi Press Patra Prakashan Ltd. (No.2) : 355 ITR 14 - CIT vs. Tata Communications Internet Services Ltd.: 251 CTR 290 In view of the above, it is submitted that since deduction under sections 80IA of the Act is a deduction admissible for a certain term, the question whether or not the statutory conditions precedent to the admissibility thereof (including the question separate books of accounts are maintained and the basis of computing sales) are fulfilled in the case of an appellant, is required to be examined by the Revenue in the first year in which such deduction was/were claimed. The deduction having been admitted in the preceding year, which have now attained finality, it is not, it is submitted, open to the Revenue to disallow the claim of the appellant for deduction under those provisions for the year under consideration without disturbing the claim for preceding year. In this regard, it will be appreciated that the units were set up in earlier years and deduction in respect of profits derived therefrom was, in principle, allowed in the preceding Page | 31

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 year. In that view of the matter, the deduction claimed by the appellant calls for being allowed in the year under consideration too. He further pressed principles of consistency. As already stated hereinabove, though principle of res-judicata does not apply to income tax proceedings, it is well settled that if there being no change either in facts or in law, as compared to the earlier and subsequent years, the position accepted/ determined by the Department needs to be followed even on the principle of consistency. Reliance in this regard is placed on the following decisions: - CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) - Radhasoami Satsang v. CIT: 193 ITR 321 (SC) - DIT (E) v. Apparel Export Promotion Council: 244 ITR 734 (Del) - CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.) - CIT v. Dalmia Promoters Developers (P) Ltd: 281 ITR 346 (Del.) - DIT v. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) - CIT v. P. KhrishnaWarrier: 208 ITR 823 (Ker) - CIT v Harishchandra Gupta 132 ITR 799 (Ori) - CIT v. SewaBharti Haryana Pradesh: 325 ITR 599 (P&H) o CIT v. Rajasthan Breweries Limited.: ITA 889/2009 (Del) – SLP dismissed. Thus, in view of the above, the department having accepted that the aforesaid units were eligible to claim deduction under section 80IA of the Act in the preceding year, the same stand ought not to be changed/ modified, during the year under consideration, even on the principle of consistency, particularly, when no new fact/ information has been brought on record for the same. 18. Ld. departmental representative also supported the order of the Ld. assessing officer and stated that subsection 7 shows that the books of accounts are required to be maintained by the assessee for such unit which claimed deduction under that section. He further submitted that no details has been produced by the assessee before the assessing officer.

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 19. In the rejoinder, the Ld. authorized representative submitted that details were filed before the Ld. assessing officer and it were placed at the paper book page No. 78 onwards. 20. We have carefully considered the rival contention and perused the orders of the lower authorities. The brief background of the issue shows that assessee has set up two windmills for its captive consumption. On the same assessee claimed deduction under section 80 IA. Before the assessing officer the assessee submitted the audit report in form No. 10 CCB. The assessee started generating power from assessment year 2004 – 05 onwards. For both the windmills the assessee entered into a power purchase agreement, such power generated at the windmill wheeled by that agreement to the manufacturing unit of the assessee, and number of units generated after deduction of the billing charges is granted as set-off in the electricity bill of the assessee. Based on this assessee booked the revenue and burnout profit thereon to derive at the profit generated from the industrial undertaking. During the course of assessment proceedings, the assessee was directed to produce the books of accounts maintained in respect of windmill units, which was produced by the assessee along with the methodology by which the income is booked and expenditure incurred of the windmill. The Ld. assessing officer rejected it on the ground that the appellant is computing sales based on the credit notes and the appellant failed to produce any document vouchers, which could have asserted that the appellant has maintained its accounts separately. Apparently the assessee is booking revenue is based on the credit note issued by the power purchase company wherein the specified number of units generated are shown. Based on that the assessee shows the revenue and further the respective expenditure incurred for the windmill are also recorded in the books of accounts. The assessee has claimed that it is maintaining separate books of accounts with Page | 33

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 respect to both the windmill undertakings and such books of accounts are duly been audited by an independent auditor and such report of the auditor has been filed before the Ld. assessing officer. The main reason for the rejection of the deduction of the assessee by the Ld. assessing officer is that that assessee is booking revenue based on the credit notes. Looking at the nature of the activities carried out by the assessee wherein it has set up industrial undertaking for the purpose of captive consumption of power. For its major requirement, it buys the power from Gujarat electricity board. However to get the benefit of its different industrial undertaking which generates the power, the assessee entered into an agreement with a power transmission company which gives the credit of units generated by the windmill project against the electricity bill of the manufacturing unit of the assessee. Therefore, the assessee is recording the number of units generated by the windmill as unit revenue generated from the industrial undertaking. While paying the electricity bill of the manufacturing unit, such number of units, which were generated by the industrial undertaking such as windmill, was granted as deduction and only the net units charged to the assessee. The assessee has recorded the revenue involved in those units generated by the windmill based on the rate at which power that is supplied to the assessee for the manufacturing unit. According to the subsection 7 of section 80 IA the only requirement is that, the accounts of the undertaking are required to be audited. In the present case, the assessee has submitted the audited accounts. If the auditor has not qualified those audited accounts, there is no reason to reject them at the threshold without making further verification. The Ld. assessing officer should have verified whether the assessee has properly computed the income derived from the industrial undertaking or not. If the assessing officer finds that such working is not proper then only he can say that that the audited accounts of the assessee are not reliable. In Page | 34

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 the present case the revenue has been recorded by the assessee by deriving the units generated based on the credit notes issued by the transmission company, the assessee multiplied those units generated with the power rates for which the manufacturing unit buys the power from an outside agency, reduced the proper expenditure there from to derive at the profits of the industrial undertaking. It is further stated that this is not the 1st year of the claim of the assessee under section 80 IA of the act. In the past years, also the assessee was granted deduction on the similar facts and circumstances by the Ld. assessing officer. The principle of consistency also demands the assessee may be treated as eligible for deduction and it may not be rejected merely based on non-maintenance of books of accounts. Same is also not found as the mandatory conditions for deduction. Therefore, we do not approve the approach of the assessing officer in rejecting the claim of the assessee at the threshold merely on the basis that no separate books of accounts are maintained even when the assessee has submitted the audit report of the accounts of the industrial undertaking which was the requirement of subsection 7. Further, the claim of the assessee has been rejected at the threshold itself without verifying that what is the amount of profits that is derived by the industrial undertaking during the year. The assessee has submitted that these details were placed before the Ld. assessing officer, which is also placed before us at page No. 78 onwards of the paper book. In view of this we set aside this ground of appeal back to the file of the Ld. assessing officer with a direction to verify the claim of the assessee on examination of the audited accounts of the industrial undertaking and then grant deduction under section 80 IA of the income tax act in accordance with the law. In the result ground No. 4 of the appeal of the assessee is allowed with above direction. 21. Accordingly, appeal filed by the assessee is allowed with above direction. Page | 35

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 22. Now we come to the appeal of the Ld. assessing officer, which is against the direction of the Ld. Dispute resolution panel. The 1st ground of appeal is against the direction of the Ld. dispute 23. resolution panel where the addition of Rs. 4,42,55,709 made by the AO on account of disallowance of the claim towards reduction of deduction under section 80 IA(5) in the draft order. The brief facts of the issue shows that during the year under consideration the assessee revised its claim for deduction under that section with respect to the wind power undertaking. The assessee did not set-off claim notionally by brought forward losses of the eligible undertaking for the earlier years. The aforesaid treatment was given by the assessee by way of revised returns filed before the assessing officer. The assessee has also submitted the working of the same before the AO. The Ld. assessing officer in the draft order rejected the revised claim of the appellant on the ground that for granting deduction under section 80 IA that 1st brought forward losses were to be set off against the profit of the eligible unit and the deduction is allowed in respect of balance of profit if any. Accordingly the AO rejected the claim of enhancement of deduction claimed by the assessee from Rs. 1 8, 35, 10, 398/– Rs. 22, 77, 66, 107/–. On objection filed by the assessee before the Ld. Dispute resolution panel the above disallowance was deleted. Against these directions the assessing officer is in appeal before us. 24. The Ld. departmental representative relied upon the orders of the Ld. assessing officer and submitted that such brought forward losses cannot be set off against other income but should be set off only against the income generated of the eligible undertaking only. 25. The Ld. authorized representative vehemently stated that identical issue has been decided in favour of the assessee by the coordinate bench in assessee‟s own case for assessment year 2009 – 10 in ITA No. 3554/del/2014 and Page | 36

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 3596 and 3595/del/2014. It is therefore submitted that the issue is squarely covered in favour of the assessee. 26. We have carefully considered the rival contentions and the orders of the ld AO. We have also verified the direction of the Ld. Dispute resolution panel. The only issue involved in this ground of appeal of the revenue is that whether the Ld. dispute resolution panel is right in directing the Ld. assessing officer to not to set off the brought forward losses of the eligible undertaking against the income of that industrial undertaking before allowing deduction under section 80 IA of the act. The coordinate bench has already decided this issue in earlier years in assessee‟s case wherein relying on the decision of the jurisdictional High Court as well as the circular issued by the Central board of direct taxes in circular No. 1/2016 dated 15/2/2016, it was held that when the assessee exercises option of choosing the initial assessment year which it chooses 10 assessment years out of 15 years, then only the losses of the year starting from the initial assessment year alone are to be brought forward and set off as stipulated in section 80 IA (5) of the act, as loss prior to the initial assessment year which has already been set of cannot be once again reduced from the eligible income of the assessee. In nutshell, it is held that only the holiday period of 10 years starting from the initial assessment year to the last eligible assessment year up to which the assessee is eligible for deduction that is only covered by the provisions of section 80 IA (5) of the act. The Ld. departmental representative also could not show us any other judicial precedent, which forces us to take a different view. In view of this ground No. 1 of the appeal of the revenue is dismissed. 27. The ground No. 2 of the appeal of the revenue is with respect to the direction of the Ld. Dispute resolution panel in deleting the disallowance made out of the miscellaneous expenditure. The brief facts of the case are Page | 37

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 that during the year under consideration the assessee has incurred expenditure aggregating to Rs. 2, 97, 20, 756/– and out of the said expenditure the assessing officer disallowed the expenditure on account of horticulture expenditure incurred by the assessee at plant, horticulture expenditure incurred by the assessee at its residential colony, purchases of the computer supply, software purchase expenses and security services charges paid at the colony. Ld AO held them to be capital expenditure. The Ld. Dispute resolution panel directed the Ld. AO to delete the above disallowance and therefore this ground of appeal. 28. The Ld. departmental representative relied upon the order of the Ld. AO. 29. The Ld. authorized representative submitted that identical issue has been covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for assessment year 2007 – 08 and 2008 – 09 in ITA No. 3215/del/2013 and 3214/del/2014. He further stated that for assessment year 2009 – 10 in ITA No. 3554 and 3596 and 3595/del/2014 this issue is also been decided in favour of the assessee it was further submitted that the assessing officer himself has accepted the claim of the appellant in the subsequent year in assessment year 2011 – 12 and 2012 – 13 wherein the AO had allowed the aforesaid expenditure holding the same to be revenue in nature. 30. We have carefully considered the rival contentions and find that identical issue has been decided by the coordinate bench in assessee‟s own case where the issue of horticultural expenses for plant and staff colony as well as the security service expenses and computer supply charges and software expenses are involved. The coordinate bench has decided the whole issue as under:- “31. Briefly stated, the facts pertaining to ground no. 3 of the revenue for AY 2008-09 are that the AO made disallowance in regard to Page | 38

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 Horticulture expenses (for plant and staff colony), security services expenses (for staff colony), computer supply (peripherals) and software purchase expenses total amounting to Rs.68,40,814 which were deleted by the CIT(A) by allowing ground nos. 4, 5, 5.1, 6, 6.1, 7 & 8 of assessee raised before him i.e. CIT(A) in the impugned order. Now, the revenue re-agitated the above issue in ground no. 3 as reproduced hereinabove. ………..

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 favour of the assessee by the earlier/preceding AY 2007-08 order of CIT(A) and in the present case, the CIT(A) was right in deleting the addition. Hence, we are unable to see any ambiguity or perversity in the impugned order or any other valid reason to interfere with the same.

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 impugned order, as reproduced above, we observe that the CIT(A) granted relief for the assessee on perusal of the details furnished before him but the CIT(A) has not given any finding about the nature of expenditure and facts emerging from details/evidence submitted before him, neither and remand report has been called from the AO. Hence, we find it appropriate to restore this issue to the file of AO with a direction that the AO shall examine the details/evidence of the assessee about this claim of the assessee and adjudicate the issue afresh without being prejudiced from earlier assessment and impugned order. ….……… 43. Apropos software purchase and development expenditure………………regarded to be incurred as revenue expenditure………

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 31. Further for assessment year 2009 – 10 the coordinate bench has decided on the issue of the plantation and horticulture expenditure for plant and colony as under”-

“30. Having gone through the orders of the authorities below, on the issue we find that the condonation of the assessee in support of the claimed expenditure on plantation remained that it was set up in a remote area in the State of Gujarat which is semi dessert State. It was thus required to have dust free environment for the proper manufacturing of the product of the assessee i.e. glass and such expenses were incurred within the factory premises in order to provide necessary landscape and making the environment green and eco friendly. It was submitted that horticulture expenses were also incurred for the staff colony which is in the immediate vicinity of plant and security thereof was also held to be of the same nature. It was submitted that the staff colony is also a business asset of the assessee. Considering all these material aspects of the issue, we are of the view that the Ld. CIT(A) has rightly deleted the disallowance made by the A.O. on account of expenses incurred on plantations in the factory premised and staff‟s colony. The order of the First Appellate Authority in this regard is thus upheld. Ground No. 3 is accordingly rejected.”

Gujarat Guradian Limited V DCIT DCIT V Gujarat Guradian Limited A Y 2010-11 ITA No 1106 & 973/Del/2015 Resolution Panel was of the considered view that issue is squarely covered in favour of the assessee and therefore it directed the AO to delete the disallowance made out of the various expenses. We do not find any infirmity in the order of the Ld. Dispute resolution panel as it followed the decision of the coordinate bench in assessee‟s own case on identical facts and circumstances. In view of this ground No. 2 of the appeal of the revenue is dismissed. 33. In the result, appeal filed by the revenue against the direction of the Ld. Dispute resolution panel is dismissed. 34. Accordingly, both the appeals are disposed off. Order pronounced in the open court on 16/08/2018. -Sd/- -Sd/- (S.K.YADAV) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:16/08/2018 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi