ACIT., CIRCLE-5(1), HYDERABAD vs. PENNA CEMENT INDUSTRIES LIMITED, HYDERABAD

The CIT(A) erred in appreciating that the transactions made by the assessee with M/s Lakshin Infradev Pvt Ltd are bogus in view of post inquiry results of the investigation conducted by the Department.

Any other ground(s) that may be urged at the time of appeal hearing."

Succinctly stated, the assessee is a company engaged in the business of manufacturing and sale of cement along with captive generation of power. The assessee company had e-filed its return of income for AY 2017-18 on 29.11.2017, declaring an income of Rs. 228,62,62,070/-. Subsequently, the case of the assessee company was selected for complete scrutiny under the E-assessment Scheme, 2019, for verifying multi-facet issues, viz. (i). disallowance under section 14A of the Act; (ii). allowability of the assessee's claim for deduction under section 80G in respect of CSR donations; (iii). eligibility of the assessee's claim for deduction under section 80-IA of the Act w.r.t its power generation units; and (iv). addition under section 68 in respect of transactions with M/s. Lakshin Infradev Pvt. Ltd.

During the course of assessment proceedings, a reference under section 92CA(1) was made by the AO to the Transfer Pricing Officer (TPO) in respect of specified domestic transactions reported by the assessee company. The TPO, after examining the submissions and documentation furnished by the assessee company, passed an order under section 92CA(3) of the Act, determining the arm's length price (ALP) of the specified domestic transactions and did not propose any adjustment.

Thereafter, the AO, after making certain additions/disallowances, viz. (i) disallowance under section 14A r.w rule 8D: Rs. 74,92,000/-; (ii) disallowance of the claim of the assessee company for deduction under section 80G w.r.t CSR donations: Rs. 1,88,97,644/-; (iii) disallowance of the claim of deduction of the assessee company under Section 801A of the Act: Rs. 24,35,05,411/-; and (iv) addition under section 68 in respect of alleged bogus transactions with M/s. Lakshin Infradev Pvt. Ltd: Rs. 1,29,91,000/-, determined he income of the assessee company vide his order passed under section 143(3) r.w.s 144B of the Act, dated 26/09/2021 at Rs. 256,91,48,125/-.

Aggrieved, the assessee company carried the matter in appeal before the CIT(Appeals). During the course of appellate proceedings, the assessee company filed additional evidence, which was forwarded by the CIT(A) to the AO for verification. In reply, the AO filed a “remand report" dated 09.01.2024. Thereafter, the assessee company filed a rejoinder dated 08.08.2024. The CIT(A), after considering the material on record, deleted all the additions made by the AO. For the sake of clarity, we deem it apposite to cull out the observations of the CIT(A) as under:

Grounds No.1 and 6 are general in nature and hence there is no need of separate adjudication. Ground No.2 is raised against the addition amounting to Rs.74,92,000 made u/s 14A r.w.rule 8D. During assessment proceedings assessee was asked to furnish monthly aver ages of the opening and closing balances of the value of investment. Details of investments are as follows; (Amount in Crores) Name of the Company Investment s as on 31.03.2017 Investment as on 31.03.2016 Remarks Andhra Pradesh Gas Power Corporation Ltd 1.70

32 Note 2 Parasakti Cement Industries Ltd 16.60

60 Note 3 Total Investments 74.92

92 The company replied that investments in equity shares of various companies in earlier years were out of interest free funds in the form of capital and free reserves and the company had not incurred any expenses with respect to the investments made. Further, during the Financial Year 2016-17 the company has not earned any exempt income from the above investments and as such the provisions of section 14A shall not be applicable to the company. Assessing Officer held that, incurring no expenditure, as stated by the assessee above, in managing investments of such huge amounts of requiring not only manpower, but also expertise in the field, decision making and technical expertise as well, fails the test of human probability. Further, as per Section 14A(3), it is also applicable even if no expenditure has been incurred by the assessee. On the issue of whether in the ab sence of exempt income earned/claimed during the concerned year, disallowance could be made under section 14A, the departmental SLP against the order of High Court in IL&FS Energy Development Company Ltd. [2017] 84 taxmann.com 186 (Delhi) was still pending before the Supreme Court. In view of the above, an amount of Rs.74,92,000/- was added to the total income of the assessee.

1 According to the newly inserted explanation to section 14A, notwithstanding anything to the contrary contained in the act, the provisions of section 14A shall apply and shall be deemed to have always applied in a case where the income not forming part of the total income has not accrued or arisen or has not been received during the year and the expenditure has been incurred during the year in relation to such income. In the case of NCC Infrastructure Holdings Limited (ITA No. 144/Hyd/2023), the juri ictional Hyderabad ITAT held that, the amendment of section 14A of the Act which is 'for removal of doubt' cannot be presumed to be retrospective even where such language is used, if it alters or changes law as it earlier stood and concluded that no disallowance under section 14A of the Act can be made if the assessee had not earned any exempt income during the year under consideration. The tribunal relied on the Delhi High Court cases of Era Infrastructure (India) Ltd., (2022) 141 taxmann.com 289 and IL&FS Energy Development Co. Ltd, (2017) 84 taxmann.com 186 and also the memorandum of Finance Bill, 2022 accordingly to clauses 5 to 7 thereof.

2 In the instant case the appellant had invested in subsidiary cement companies as part of expansion of business which are strategic investments and not for the purpose of earning exempt income. As on 31.03.2017 Investment in Pioneer Cement Industries Ltd was Rs.58.32 crores. Pioneer was incorporated in the Financial Year 2010- 11 with the objective of setting-up cement manufacturing plant in the state of Rajasthan and the cement plant is under construction. Further, pioneer is a wholly owned subsidiary of the assessee company and pioneer is still under work-in-progress. Parasakti Cement Industries Ltd in which the appellant company invested Rs.16.50 crores is also engaged in the business of manufacturing and sale of cement. Parasakti is an associate enterprise of the company. These investments were made out of own funds and the company has not earned any exempt income during the Financial Year 2016-17. Investment in Andhra Pradesh Gas Power Corporation Ltd was only Rs.1.70 crores. APGPCL is a government company and the investment was made to ensure supply of power to the cement plants of the company and not for earning any income. Moreover, APGPCL operates on “No Profit and No Loss” basis and do not issue any dividend. In the case of HOLCIM INDIA P. LTD (ITA No. 486/2014 & ITA No. 299/2014), High Court of Delhi deleted the disallowance u/s 14A stating that the respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure was not doubted by the Assessing Officer. Appellant invested its own fund from reserves and surplus in subsidiary cement companies for expansion of business. The company has not received any income or dividends from these investments. Accordingly, there is no question of disallowance of expenses against exempt income. As a result,

Ground No.3 is raised against disallowance of 80G deduction amounting to Rs.1,88,97,644 claimed against CSR expenditure. The company extended following donations out of the CSR expenses; Details of Donations made during the FY 2016-17 Name of the Party Amount in (Rs) Pioneer Education Trust 2,88,45,288 Utkarsh Star Mitra Mandal 50,00,000 Sri Sringeri Peetham Charitable Trust 1,00,000 Sahrudaya Health 10,00,000 Hyderabad Round Table No.8 Charitable Trust 6,00,000 Maha Bodhi Society 22,50,000 Total Donations 3,77,95,288 Deduction eligible U/s 80G 1,88,97,644 The assessing officer held that such a deduction is not allowable as CSR expenditure by the assessee forms a part of the mandatory requirement of the Companies Act, 2013 and consequently not eligible for deduction under section 80G of the Income-tax Act, 1961. That the intent of the legislature is to restrict deduction(if not specifically provided like in case of PM CARES fund) under section 80G, even if the contribution qualifies as CSR expenditure under the CA 2013.

1 Regarding the issue of claiming 80G deduction against CSR expenditure, the juri ictional Hyderabad ITAT has held in the case of Optum Global Solutions (India) Private Limited (ITA-TP Nos. 145 & 482/Hyd/2022) that, coming to the Income Tax Act, 1961, there is no express provision to support the contention of Revenue. On the other hand, section 80G(2)(iiihk) and (iiihl) of the Act expressly provide that such sums donated for Swatch Bharath Kosh and Clean Ganga Fund shall be the amounts other than the sums spent by the assessee in pursuance of CSR, meaning thereby the donations made towards Swatch Bharath Kosh and Clean Ganga Fund spent as a part of CSR are not qualified for deduction under section 80G of the Act. Out of so many entries under section 80G(2) of the Act, only donations in respect of two entries are restricted if such payments were towards the discharge of the CSR. The Legislature could have put a similar embargo in respect of the other entries also, but such a restriction is conspicuously absent for other entries. The irresistible conclusion that would flow from it is that it is not the legislative intention to bar the payments covered by section 80G(2) of the Act which were made pursuant to the CSR, and other than covered by section 80G(2)(iiihk) and (iiihl) of the Act. As stated above, clue can be had from the restrictions by way of section 80G(2)(iiihk) and (iiihl) of the Act. (para 16) We are in agreement with such observations and findings of the Coordinate Bench of the Tribunal and while respectfully following the same, we hold that inasmuch as the assessee satisfied the conditions of section 80G of the Act, the assessee is entitled to claim deduction under section 80G of the Act in respect of such donations which formed part of the spend towards CSR. Respectfully following the juri ictional tribunal, ground no 3 is allowed.

Ground No.4 was raised against the disallowance of deduction u/s 80IA amounting to Rs.24,35,05,411/-. The company is engaged in the business of manufacturing of cement and generation of power. Power generated is being used for manufacturing cement and the profits earned from Power Divisions are claimed as deduction U/s 80IA of the Income Tax Act, 1961. The company has power generation units established in earlier financial years and claimed deduction U/s 801A on the profits earned from the power generation units. Details of Power generation units are as follows; Particulars Amount in Rs. Ganeshpahad Power Division 14,99,27,438 Commencement of business- AY 2009-10. Initial year of deduction AY 2013-14. Ganeshpahad Waste Heat Recovery Plant (WHR) 3,69,04,852 Commencement of business- AY 2015-16. Initial year of deduction AY 2017-18 Boyareddypalli Waste Heat Recovery Plant (WHR) 5,66,73,121 Commencement of business- AY 2015-16. Initial year of deduction AY 2017-18 The assessing officer held that the assessee did not furnish any sanction or approval from the statutory authority which constitute an integral part of the Form-10CCB. On requisitions assessee furnished document from Pollution Control Board which is not permission or sanction letter for running eligible business. The AO further stated that the assessee failed to maintain separate accounts for Power Division and Cement Division as per the records and the omission to do so resulted not only in reduction of taxable income of the non eligible units but also inflated profits to the eligible units. In the remand report dated 09.01.2024, the AO stated that even though the assessee has now submitted the signed financials of Thermal Power Division and WHR Power Divisions as additional evidence, it is seen from the computation of total income of the assessee, that the assessee has balance of income after setting of all its income from eligible income u/s. 801A.

1 The power units started claiming deduction U/s 80IA from the year of profit generation and the same is permissible u/s 80IA. The major concern raised by the AO in the remand report is that the assessee company has not submitted approval / permission / agreement with State / Central Government / Local Authority in accordance with Sub- rule 4 of Rule 18BBB of the Income Tax Rules. Sub-Rule 4 of Rule 18BBB states that “In any other case, the form shall be accompanied by a copy of the agreement, approval or permission, as the case may be, to carry on the activity signed or issued by the Central Government or the State Government or the local authority for carrying on the eligible business”. During the assessment and appeal proceedings, appellant has submitted Consent of Operations, permission for setting-up power plants from Ministry of Commerce and Industry, agreement with Telangana State Power Co-ordinate Committee i.e., approvals, permission, agreement from Central Government as well as state government, which fulfills the conditions specified under Sub-rule 4 of the Rule 18BBB. As a result, ground no 4 is allowed.

Ground No.5 was raised against the addition of Rs.1,29,91,000 shown as sales receipts from M/s Lakshin Infradev Pvt. Ltd., under section 68 of the Act. An inquiry report was received from the Income Tax Investigation – Unit New Delhi that M/s Lakshin Infradev Private Limited existed only as a paper entity and was involved in raising bogus invoices to route funds. The name of the assessee appeared in the list of entities having transacted with M/s Lakshin Infradev Private Limited. Appellant stated that the company have made cement sales to the tune of Rs.1,50,46,520/- to M/s Lakshin Infradev Pvt Ltd and received sale consideration of Rs.1,27,54,960/- and the closing balance as on March 31, 2017 was Rs.22,91,560/-, which was subsequently received in AY 2018-19. These sales are included in the total turnover of the company for the Financial Year 2016-17. Appellant submitted bank statements, ledger extracts and invoices. The assessing officer held that the information received via inquiry report already states that the entity M/s Lakshin Infradev Pvt Ltd is a paper entity involved in raising bogus invoices to route funds, the authenticity of sales of cement as stated by the assessee is in question and hence, the explanation is not satisfactory. Hence, an amount of Rs.1,29,91,000/- was added u/s 68.

1 The appellant submitted all documentary evidences to prove that sales receipts from M/s Lakshin Infradev Pvt Ltd was genuine. Appellant relied on the Judgement of Hon'ble Apex Court in the case of CIT Vs Odeon Builders Pvt. Ltd. [2019] 110 Taxmann.com 64 (SC), where it is enunciated that, “the entire disallowance in this case is based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO who has not provided the copy of such statements to the appellant, thus denying opportunity of cross examination to the appellant, who has prima facie discharged the initial burden of substantiating the purchases through various documentation including purchase bills, transportation bills, confirmed copy of accounts and the fact of payment through cheques, & VAT Registration of the sellers & their Income Tax Return". From the documentary evidences in the form of sale invoices, sales register, ledger extracts and bank statements submitted during the assessment and appeal proceedings it is apparent that sales receipts from M/s Lakshin Infradev Pvt Ltd is already accounted in the total turnover adopted for tax computation. Adding these sales again as unexplained income is tantamount to double taxation. Supreme court has held in the case of Laxmichand Baijnath v. CIT; 35 ITR 416, that amount credited in business books can normally be presumed as business receipts. In this case, receipts from Lakshin Infradev were recorded in the books of the appellant. Receipts recorded in the books of accounts were already part of the income which was already credited in P&L account and the records show that goods were sold to Lakshin Infradev from whom the disputed amount was received. Once the sources are reflected in the books there is no question of unexplained credit as envisaged in section 68 of the Act. As a result ground no 5 is allowed.

In result, the appeal is allowed.”

The revenue aggrieved with the CIT(A) order has carried the matter in appeal before us.

We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements as had been pressed into service by the Ld. Authorised Representatives of both parties to drive home their respective contentions.

Shri. Narendra Naik, Ld. CIT-DR at the threshold of hearing of the appeal, submitted that notwithstanding the fact that the assessee company during the subject year had not received any exempt income, the disallowance under Section 14A of the Act was called for in its case. The Ld. CIT-DR to support his contention has relied upon the judgment of the Hon'ble High Court of Karnataka in CIT, Bangalore Vs. Kingfisher Finvest India Ltd. (2020) 121 taxmann.com 233 (Karnataka). Also, the Ld. CIT-DR had pressed into service the CBDT Circular No. 5/2014 dated 11.02.2014 and submitted that the principle of apportionment should be applied for disallowing the expenses incurred for earning of exempt income.

Per Contra, Shri. Sourabh Soparkar, Ld. Sr. Advocate (for short, "AR"), submitted that as the assessee company had during the subject year not received any exempt income, therefore, no disallowance under section 14A was called for in its case. The Ld. AR to buttress his contention had relied on the judgment of the Hon'ble High Court of Rs. 74,92,000/-, we find that it is an admitted position on record that during the relevant assessment year, the assessee company had not earned any exempt income. Apart from that, the assessee company had also demonstrated before the authorities below that the investments in the exempt income yielding shares in the subsidiary and associate companies for the purpose of expansion of its cement business were made in the preceding years out of its own interest-free funds. The AO had invoked section 14A on the premise that, in all probability, some expenditure must have been incurred in relation to exempt income yielding investments, and had also relied upon CBDT Circular No. 5/2014 dated 11.02.2014. 11. We have given thoughtful consideration to the subject issue, and 16(1), Hyderabad, ITA No. 144/Hyd/2023, dated 12/06/2023, which in turn had followed the judgments of the Hon'ble High Court of Delhi in (Delhi) and PCIT Vs. IL&FS Energy Development Co. Ltd. (2017) 84 taxmann.com 186 (Del), holding that the amendment to section 14A introduced by the Finance Act, 2022, is prospective and cannot be applied to the earlier assessment years.

We find substance in the Ld. AR's claim that as the assessee company had during the subject year not received any exempt income, therefore, as per the pre-amended Section 14A of the Act, as was available on the statute before its amendment vide the Finance Act, 2022 w.e.f 01.04.2022, in the absence of receipt of any exempt income no disallowance u/s 14A of the Act could have been made in the hands of the assessee company. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Madras in the case of No.16194 of 2018 filed by the department before the Hon'ble Apex Court against the aforesaid order of the Hon'ble High Court of Madras in the case of Chettinad Logistics Pvt. Ltd. (supra) has been dismissed by the Hon'ble Apex Court in CIT Vs. Chettinad Logistics (P) Ltd. (2018) 95 taxmann.com 250 (SC). Further, we find that even the review petition filed by the revenue has also been dismissed by the Hon'ble Apex Court vide its order passed in Commissioner of Income Tax (Central) Vs. M/s. Chettinad Logistics Pvt. Ltd. (2019) 105 CCH 226 (SC). Also, we find that the Hon'ble Apex Court has taken wherein the "Special Leave Petition” (SLP) against the order of the Hon'ble High Court of Delhi in the case of Principal Commissioner of of the Tribunal in the assessee's own case for AY 2013-14 & AY 2014- 15 are pending adjudication before the Hon'ble High Court in ITTA Nos. 178/2019 & 179/2019, therefore, the CIT(A) had erred in vacating the impugned disallowance made by the AO under Section 14A of the Act. We say so, for the reason that as the respective orders of the Tribunal vacating the disallowance made by the AO under Section 14A in the ab sence of any exempt income in the assessee's own case for the AY 2013-14 & AY 2014-15 had not been set aside or stayed by the Hon'ble High Court, therefore, the same holds the ground. Our aforesaid view that a mere filing of an appeal by the revenue before the Hon'ble High Court will not render the order of the Tribunal as inoperative is supported by the judgment of the Hon'ble Supreme Court in the case Limited AIR 1992 SC 711. The Hon'ble Apex Court in its order had, inter alia, held that the officers must obey higher rulings unless stayed by a court. It was further observed that filing of an appeal by the department is not a justification for non-compliance.

Before parting on the aforesaid issue, we may observe, that though the legislature vide its amendment made available on the statute by the Finance Act, 2022 has inserted an “Explanation” to Section 14A of the Act, as per which, notwithstanding anything to the contrary contained in the Act, the provisions of Section 14A shall apply in a case where the income, not forming part of the total income under the Act, has not accrued or arisen or has not been received during the subject year and the expenditure has been incurred during the said previous year in relation to such exempt income, but the same is effective from April 1, 2022 and cannot be presumed to have retrospective effect. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of 114 CCH 219 (Delhi) and that of the Hon'ble High Court of Madhya the Act, uphold the same. The Grounds of appeal Nos. 1 & 2 raised by the revenue are dismissed.

We shall now take by the grievance of the revenue that the CIT(A) has erred in law and facts of the case in vacating the disallowance of the claim of the assesseee company for deduction under section 80G of the Act of Rs. 1,88,97,644/- in respect of donations made as part of CSR expenditure.

The Ld. CIT-DR submitted that the AO had disallowed the aforesaid claim of the assessee company on the ground that CSR expenditure is mandatory in nature and allowing deduction of the same under section 80G would result in indirect subsidisation by the Government. The Ld. CIT-DR submitted that section 37(1) of the Act provided that, deduction for any expenditure shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. It was submitted by him that as the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed as a deduction under the provisions of Section 37 of the Act. The Ld. CIT-DR had further drawn our attention to the observations of the AO recorded in the assessment order. It was submitted by him that, as observed by the AO by referring to the intention of the legislature as could be gathered from the “memorandum” to the Finance Act, 2014, the CSR expenditure, being an application of income, could not be allowed as a deduction for computing the taxable income of the assessee company. Elaborating further on his contention, the Ld. CIT- DR submitted that the CSR expenditure is not voluntary, but mandatory in nature. The Ld. CIT-DR submitted that in case CSR expenditure, which, as per the Companies Act, 2013, is mandatory and not voluntary, is allowed as a deduction under section 80G of the Act, then the same will contradict the very nature of the said expenditure. Coming to the claim of the assessee company for deduction of CSR expenditure under Section 80G of the Act, the Ld. CIT-DR submitted that, as there was no specific exemption provided for the type of donations made by the assessee company in respect of its CSR expenses, therefore, its claim for deduction under section 80G had rightly been disallowed by the AO. The Ld. CIT-DR to support his contention, had relied upon the order of ITAT, Delhi, Bench “I” in Agilent Technologies (International) P. Ltd. Vs. ACIT/NFAC, Delhi (2024) 205 ITD 551 (Delhi).

Per Contra, the Ld. AR submitted that there was no blanket prohibition under the Act for claiming deduction under section 80G of the CSR related donations, and the said prohibition was restricted only to the extent of the sums paid by the assessee company as donations towards “Swach Bharat Kosh” and “Clean Ganga Fund” set up by the Central Government in pursuance of Corporate Social Responsibility (CSR) under sub-section (5) of section 135 of the Companies Act, 2013 (18 of 2013) as provided under section 80G(2)(iiihk) and section 80G(2)(iiihl), respectively. Elaborating further on his contention, the Ld. AR submitted that as the claim of the assessee company for deduction under section 80G was not in respect of any CSR related donations made towards either of the aforesaid two funds, i.e, “Swach Bharat Kosh" or