DCIT vs. M/S KARNATAKA RENEWABLE ENERGY DEVELOPMENT LTD.,,

Brief facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It was a nodal agency of the Government of Karnataka for development of non- conventional energy sources in the State of Karnataka. It is engaged in the business of generation and sale of power and energy. Return of income for the assessment year 2009-10 was filed on 30/09/2009 declaring ‘nil’. Against said return of income, the assessment was completed at total income of Rs.8,44,10,526/- vide order dated 30/09/2011 passed u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. The disparity between returned income and the assessed income is on account of restricting deduction u/s 80-IA(4)(iv) of the Act to Rs.30,90,933/- and also disallowing prior period expenditure of Rs.27,00,464/-, variation amount u/s 80-IA(4)(iv), the amount allowed by the Assessing Officer (AO) only in respect of profits derived from activity of power generation is on account of and also allocation of indirect expenditure by application of turnover key.

On appeal before the CIT(A), the CIT(A) upheld in principle allocation of indirect expenditure but adopted different figures for the purpose of working out deduction. As a result, the assessee was given relief of Rs.30,09,273/-. In respect of prior period expenditure, the CIT(A) confirmed addition only to the extent of Rs.8,06,831/-.

We heard rival submissions and perused the material on record. The only dispute is with regard to method of working out of profits eligible for deduction u/s 80IV(4)(iv) of the Act. There is no challenge as to the eligibility of the unit for deduction u/s 80IA of the Act. The dispute is only with regard to the method of computation of profits eligible for deduction u/s 80IA(4)(iv) of the Act. The bone of contention between assessee and the AO is with regard to allocation of indirect expenditure/corporate expenditure to the activity of power generation. This issue had come up for consideration before the Hon’ble High Court of Calcutta in the case of Tide Water Oil Co.(India) Ltd.(supra) held as follows: “21. We have considered the submissions of the learned counsel for both the parties. It appears to us from the argument of Mr. Poddar appearing for the appellant-assessee that this court should accept the interpretation of section 80-IA of the said Act the expenses incurred at the Silvasa unit should be taken into account for Silvasa alone not that of the Corporate and head office expenses. In this context, we have read the judgment of the learned Tribunal carefully and also that of the courts. We are of the view that in this matter there is no scope for fresh interpretation of section 80-IA for its applicability to the aforesaid relevant assessment years by reason of the fact that the learned Tribunal "D" Bench, Calcutta, in I. T. A. No. 1408 (Kol) of 2003 for the assessment years 1999-2000 (at page 226 of the paper book, volume III) and in I. T. A. No. 2753/Kol/2003 (at page 229 of the paper book, volume II) 2000-01 delivered judgments holding on March 29, 2004 and September 10, 2004, respectively on this issue, that the corporate expenditure essentially ..........1596/B/2013 Page 5 of 11 incurred for the Silvasa unit has to be taken into account for the purpose of allowing the benefit under the aforesaid section. Both the judgments aforesaid were rendered on identical points. These judgments have even accepted by the assessee. We, therefore, quote the relevant portion of the said earlier judgment and order of the learned Tribunal : "We have considered the rival contentions and carefully perused the orders of the authorities below, and deliberated on the case law referred to by both the lower authorities as well as cited at the Bar by the learned authorised representative and the Departmental representative. As per the provisions of section 80-IA, deduction is to be allowed on the profit of an undertaking referred to in sub- section (iv) of section 80-IA. Thus, the intention of the Legislature is to give deduction in respect of the profits and gains from the industrial undertaking or enterprise engaged in infrastructure development, etc. For arriving at the correct profit of the industrial undertaking, the expenditure related to such undertaking is to be properly accounted for. Only by making entry under the head 'corporate expenses', the assessee is not allowed to increase the profit of the industrial undertaking, just by debiting the same in the head office account, the expenses which are actually attributable to the industrial undertaking on the profit of which deduction is eligible under section 80-IA. We had carefully gone through the details of corporate expenditure which has been narrated by the learned Commissioner of Income-tax (Appeals) in his order at page 4 and found that no reasoning has been given by the learned Commissioner of Income-tax (Appeals) for treating this expenditure as not related to the Silvasa unit. No justification has also been given by the learned Commissioner of Income-tax (Appeals) for treating these expenses as corporate expenses and not related to the manufacturing activity of the assessee's unit. After going through the nature of the expenses like salary, wages and bonus of Rs. 56,93,453, it is very difficult to presume that such a heavy salary, wages and bonus will be paid just to maintain a corporate office . . . The Hon’ble High Court upheld the principle of allocation of common expenditure to the eligible units and non-eligible units. The Hon’ble High Court only ruled that application of rule of allocation for the entire head office expenditure may not reflect the correct method. In other words, expenses which are directly related to units should be allocated to that particular unit. In the light of this judgment of the Hon’ble High Court, there is no necessity of referring to the decision of the co-ordinate benches of Tribunal as it is trite law that the decision of the Hon’ble high ..........1596/B/2013 Page 6 of 11 Court is to be preferred to the decision of the co-ordinate bench of Tribunal. In the present case, the AO has applied the turnover key for allocation of common expenditure. We do not find any fallacy in application of turnover key for apportionment of common expenditure as turnover key is held to be good key for allocation of common expenditure. Hence, the ground of appeal is dismissed.

In the result, the appeal filed by the assessee is dismissed.

Being aggrieved by the finding of the CIT(A) by application of turnover key, allocation of common expenditure comes to Rs.98,26,636/- as against Rs.1,28,38,912/- worked out by the AO, the revenue is in appeal (ITA No.212/Bang/2010) raising the following grounds of appeal: 1) The order of the Learned CIT(Appeals) is opposed to law and the facts and circumstances of the case. 2) The C1T(A) erred in restricting the disallowance of unallocated expenditure of Rs.98,29,636/- against the disallowance of Rs. 1,18,38,912/- allowing a relief of Rs.30,09,273/- on allocation of expenditure towards power generation segment without giving any reasons as to how the unallocated expenditure proportionate to the turnover is worked out by him as Rs.98,29,636/-. 3) The C1T(A) erred in restricting the disallowance of prior period expenditure of Rs.8,06,831/- against Rs 27,00,046/- made by the AO thus giving a relief of Rs. 18,93,215/- subject to verification of interest component u/s 244A without appreciating that the assessee is following the mercantile system of accounting and the assessee has not been able to prove the liability has crystallized during the year. 4) For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the C1T(A) be reversed and that of the Assessing Officer be restored.

In the result, the appeal filed by the assessee is dismissed.

The revenue raised the following grounds of appeal in 2010-11:

The assessee raised the following grounds of appeal in its appeal in for assessment year 2011-12:

The grounds of appeal