Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Shri M.Balaganesh, AM ]
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : KOLKATA [Before Hon’ble Shri S.S. Godara, JM & Shri M.Balaganesh, AM ] I.T.A No. 685 /Kol/2014 Assessment Year : 2009-10 M/s ITC Limited -vs- ACIT, Range-8, Kolkata [PAN: AAACI 5950 L] (Appellant) (Respondent)
I.T.A No. 1267 /Kol/2014 Assessment Year : 2009-10 DCIT, Circle-8, Kolkata -vs- M/s ITC Limited [PAN: AAACI 5950 L] (Appellant) (Respondent)
For the Appellant : Shri Md. Usman, CIT DR For the Respondent : Shri J.P. Khaitan, Senior Counsel Shri Bikash Chandra, AR Date of Hearing : 29.08.2018 Date of Pronouncement : 27.11.2018
ORDER Per S.S. Godara, JM
The assessee and Revenue have filed their instant cross appeals against the Commissioner of Income Tax (Appeals)-VIII, Kolkata’s order dated 25.03.2014 in case no. 43/CIT(A)-VIII/Kol/13-14, involving proceedings u/s 143(3) of the Income Tax Act, 1961 ( in short the Act).
2 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 Heard both the parties. Case files perused.
We proceed appeal wise for the sake of convenience and brevity. The assessee’s first substantive ground in its appeal I.T.A. No. 685/Kol/2014 pleads that both the lower authorities have erred in law and on facts in not allowing adjustment of interest payment on income tax dues against the interest income on tax refunds. It seeks to allow interest payment on income tax dues of Rs. 14,09,227/- against the interest income as against the income tax refunds of Rs. 43,12,278/-. Its only prayer seeks only net of two sums to be taxed. The CIT(Appeals) detailed reasoning under challenge denying the impugned netting relief reads as follows: “4.3. I have carefully examined the assessment order, the written submissions and the other material on record. The basic issue involved here is that the AO has denied the claim of the appellant in allowing interest of Rs. 14.09.227/- paid to the Income Tax Authorities to be set off against interest of Rs. 43,12,278/- received from the Income Tax Authorities. The appellant has supported his claim by placing reliance on the decision of the Mumbai Tribunal in DCIT vs. Bank of America NT & SA [2011-TII-114-ITAT- Mum-Intl.] wherein on identical facts the set off has been allowed. The AO on the other hand has relied on the subsequent third member decision of the Pune Tribunal in the case of DCIT vs. Sandvik Asia Ltd. [133 ITD 126 (Pune-TM)(2011)], where it was held that such adjustment was not possible. 4.4. The judicial pronouncement relied upon by the appellant has been overruled in the case of Bank of America N.A., Mumbai vs Department of Income Tax decided on 27th November, 2013. While overruling the pronouncement relied upon by the appellant, the ITAT has stated that the said ruling did not consider certain High Court pronouncements which have been taken into consideration in the case of DCIT vs. Sandvik Asia Ltd. [133 ITD 126 (Pune – TM) (2011)]. Hence the earlier ruling which was given in context of the assessment year 1990-91 cannot be considered good law. In Para 3.3 of the order the ITAT has stated as follows: 3.3. It is clear that in the case of DCIT vs. Sandvik Asia, the issue has been decided against the assessee by following the decision of Hon’ble Jurisdictional High Court in the case of Aruna Mills (Supra), whereas for the assessment year 1990-91 the Tribunal has followed the decision in the case of Delhi Bench of this Tribunal in the case of K.N. Agarwal without considering the decision of Hon’ble Jurisdictional High Court in the case of Aruna Mills (Supra). In the third member decision in the case of DCIT vs. Sandvik Asia the order of the Delhi Bench in case of R.N. Agarwal has been distinguished in view of the decision of Hon’ble Jurisdictional High Court in the case of Aruna Mills Ltd. 2
3 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 (supra). Therefore, we are of the view that this issue is covered against the assessee by the decision of Hon’ble Jurisdictional High Court in the case of Aruna Mills Ltd. (Supra), as well as by the Third Member Decision of this Tribunal in the case of DCIT vs. Sandvik Asia Ltd. (supra). Following the decision of Hon’ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra), we decide the issue against the assessee. From a plain reading of the above pronouncement, it is clear that the appellant’s reliance on DCIT vs. Bank of America NT & SA [2011-TII-114-ITAT-Mum-Intl.] is no longer valid and hence is being rejected. 4.5. Since the ITAT Judicial pronouncement on which the appellant has placed reliance has been overruled and is no longer good law, there is no decision which is in favour of the appellant. Therefore the argument of the appellant w.r.t the judicial discipline in case of conflicting decisions is out of context and hence is not being discussed any further. 4.6. Based on the facts of the case and the judicial pronouncements cited above i.e. DCIT vs. Sandvik Asia Ltd. [133 ITD 126 (Pune-TM(2011)] and Bank of America N.A. Mumbai vs. Department of Income Tax decided on 27th November, 2013, I uphold the action of the AO in denying the claim of the appellant that the interest paid / incurred on Income Tax dues should be adjusted against the interest accrued / received on Income Tax refunds. Ground no. 2 is therefore, dismissed.”
We have heard rival contentions. There is no dispute between the parties about the two sums involved on interest income on refunds and interest expenditure on income tax. The sole question herein is that of netting of these two figures only. Learned CIT(Appeals) has placed a very strong reliance on this tribunal’s order in Bank of America case (supra) for denying, the netting in issue. We find in this factual back drop that the impugned issue is no more res integra as hon’ble Bombay high court decision in the said assessee’s case hold such a netting to be allowable in DIT (International Taxation) vs. Bank of America NT & SA I. T.A No. 177 of 2012 decided on 03.07.2014 vide following detailed discussion: “3. Even with regard to the question No.2 we do not find that it is a substantial question of law. The Tribunal found that the Assessee Bank received interest on refund of taxes paid. It also paid interest on the taxes which were payable. The Assessee sought to set off the interest paid against the interest received and offered the net interest received to tax. We do not see that such findings of the Tribunal are vitiated in law. All that the Tribunal has done earlier and now is that in the case of this Assessee simply because 3
4 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 the exercise carried out by it does not result in loss of revenue and there could not be any prohibition for the same, allowed it. That is how the Assessing Officer's order is set aside. We do not see how any larger controversy or question arises for our consideration. Mr.Pinto would refer to Section 57 of the Income Tax Act, 1961 in that regard and submit that this course would be adopted by other Assessees as well and in that event the order passed by this Court would come in the way of the Revenue in investigating and probing such exercise by other Assessees. 4 We do not see how this order can be cited as precedent inasmuch as the Assessee before the Tribunal and before us paid interest to the Income Tax Department amounting to Rs.I0,26,906/-. The Assessee claimed that this was business expenditure and this should have been allowed. The Assessee has received the interest of Rs.1,07,57,930/-. It was submitted that the amount of interest paid by the Assessee should have been allowed to be set off against the interest deposited with the Department and taxed in the hands of the Assessee. The argument was that the interest paid to and received from is the same party i.e. Government of India and therefore, both transactions should be taken together. 5. We do not find that the Tribunal has, in permitting this exercise, in any way violated any of the provisions of the Income Tax Act, 1961. It was a peculiar situation between the Assessee and the Department. The Tribunal has followed the similar exercise in the case of very assessee on the prior occasion as well. In such circumstances we are of the opinion that the second question also does not raise any substantial question of law.”
Learned CIT- DR failed to revert all these clinching intervening legal developments on the impugned netting aspect. His only case is there lordships never intended to make the said decision as a precedent. We find no merit in the instant plea as Revenue’s very substantial question of law raised in its tax appeal stands rejected. We therefore direct the assessing officer to finalize the assessee’s netting computation qua its interest as taxes paid to the department as against interest income of tax refunds as per law. This first substantive ground raised in assessee’s appeal is taken as accepted in taxpayer’s favour.
Next comes assessee’s second substantive ground seeking to delete section 14A read with Rule 8D(2)(iii) administrative expenditure of Rs. 12,47,65,000/- @ 0.5% of the average value of investments coming to Rs. 2495.30 crores as against its suo moto disallowance of Rs. 43,59,012/-. The assessee’s exempt income derived from its 4
5 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 investments in tax free funds, shares, mutual fund reads a sum of Rs. 208,93,24,198/-. We deem it appropriate at this stage to reproduce the ld. CIT(Appeals) findings under challenge as follows: “6.3. At the outset, I observe that this is a recurring issue is the case of the appellant. Though the issue has been similar in earlier years, the law governing the issue has changed substantially from the assessment year 2008-09 with the introduction of Rule 8D in the Income Tax Rules, 1962. Hence the only relevant year in terms of precedence is the assessment year 2008-09 in which while adjudicating on the similar issue, my predecessor has upheld the action of the AO in invoking the provisions of Rule 8D.
6 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
7 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
It emerges from a perusal of the case file that this taxpayer has preferred its additional ground(s) as well vide petition dated 27.08.2018 reasoning issues section 14A read with Rule 8D disallowance as well as that of ESOPs of Rs. 2,61,73,34,836/- allowable under section 37 followed by its deduction claimed for secondary and higher education cess (es) irrespectively. We quote Rule 11 of Income Tax Appellate Tribunal Rules as well as hon’ble apex court is land mark decision in National Thermal Power Corporation 229 ITR 383 (SC) to conclude that the assessee’s above additional grounds deserve to be admitted to determine its appropriate tax liability. The Revenue’s objections against admission of these additional grounds stand declined therefore.
8 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 6. Learned Senior Counsel submits first of all that there has to be a casual / proximate nexus between the assessee’s exempt income and any expenditure sought to be disallowed than a mere “some connection”. Case law [2018] 402 ITR 643 (SC) Maxopp Investments Ltd. vs. CIT is quoted in support. Mr. Khaitan also refers to ‘casual link’ to “that which in natural continuous sequence, unbroken by any efficient inter meaning cause and without which the relief would not have occurred’ he further states that allocation of salary and overheads of treasury department of the appellant’s company which was responsible for handling all financial functions being working capital, investments, banking as well as foreign exchange, has been used for determining expenses relating to earning of the impugned exempt income. He seeks to treat assessee’s suo moto disallowance figure of Rs. 35,03,000/- only to be having direct nexus with its exempt income. Our attention is invited to original and revised disallowance figures in pages 118,122, 123, 127, 154, 155 and 155D in Paper book. Mr. Khaitan thereafter comes to quantification aspect of the impugned disallowance. He cites this tribunal’s decision in REI Agro Ltd. v. Dy. CIT [2013] 144 ITD 141 as confirmed in hon’ble jurisdictional high court holding that only dividend income yielding investments are to be taken for consideration than all tax free investments. The taxpayer then pleads that the impugned total disallowance in any case should not exceed total cost incurred by the treasury ventical of Rs. 2,06,05,347/- i.e. by not apportioning salary (an in turn overheads) of its treasury figures. Case Law M/s Maruti Traders & Investors vs. ACIT I.T.A. No. 2204/Kol/2016 dated 11.04.2018 is quoted in support for contending that it is incumbent for the assessing authority to verify assessee’s accounts in order to ascertain the correct amount of section 14A read with Rule 8D disallowance.
The Revenue on the other hand places strong reliance on both the lower authorities’ action disallowing the administrative expenses in issue.
9 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 8. We have heard rival contentions. We first of all wish to reiterate that the assessee has admittedly derived exempt income of Rs. 2089324198/- from bonds, shares and mutual funds. Learned CIT(appeals) has admittedly adopted judicial consistency in following his order for immediate preceding assessment year whilst affirming the impugned disallowance. The assessee had preferred I.T.A. No. 1339/ Kol/2012 in the said immediate preceding assessment year. A co-ordinate bench order dated 12.09.2014 reported as [2015] 57 taxman.com 192 (Kol-Trib) upheld the identical disallowance vide following detailed discussion:
Ground No. 2 relates to the disallowance made u/s 14A. The facts relating to this ground are that during the year the Assessee has earned tax exempt dividend of Rs. 211,55,72,712/- on investment in shares as well as Rs. 23,83,87,373/- as tax free interest. The Assessee submitted that there was no expenses incurred directly for earning of the exempt income. However, it suo malo disallowed a sum of Rs. 37,90,800/- in revised claim. The AO took the view that the disallowance made by the Assessee has no relation with it's accounts and is therefore not correct. According to him, the primary onus is on the Assessee to identify such expenses on the basis of accounts maintained by him which relate to the exempt income. The AO in the absence of being satisfied with the Assessee took the view that the Assessee's case was duly covered by Sec. 14A(2) & (3) and therefore he computed the disallowance uls 14A read with Rule 8D(2)(iii) as under: Value of investment as on 01.04.2007 : Rs.2855,69,00,000/- Value of investment as on 31.03.2008 : Rs.2547,25,00,000/- Total : Rs. 5402,94,00,0001 The average of value of investment = 1/2 of Rs. 5402,94,00,000/- = Rs.27,01,47,00,000/- Disallowance ulr 8D(2)(iii) =0.5% of Rs. 2701,47,00,000/- = Rs. 13,50,73,500/- after reducing the sum of Rs.2,52, 700/- in the return which was offered by the Assessee suo moto, a sum of Rs. 13,48,20,800/- was disallowed. The Assessee went in appeal before the CIT(A). CIT(A) confirmed the disallowance. 7.1 The Ld. AR submitted that the Assessee has not incurred any direct expenditure for earning of the income. The Assessee himself made disallowance and offered to tax proportionate salary and administrative cost of the personnel involved in the Assessee's Corporate Treasury department as the Corporate Treasury department inter alia is responsible for the management of the investment and banking functions of the Assessee company. Therefore, their proportionate salary and related overhead cost was disallowed 9
10 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 on the basis of the principles contained in Sec. 14A. The AO incorrectly observed that the Assessee has made ad hoc disallowance. The disallowance was based on certain principles. The AO without recording any cogent reason for the disallowance of the claim just applied Rule 8D while the Assessee has not incurred any direct expenditure for earning of the dividend. Reliance was placed on the following decision: i) Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 (Delhi) ii) CIT v . REI Agro Ltd. (ITAT 161 of2013) Calcutta High Court decision dated 23-12-2013 iii) Cellica Developers (P) Ltd. v. Dy. CIT [2014] 63 SOT 255/45 taxmann.com 367 (Kol.) iv) Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 139 ITD 108126 taxmann.com 342 (Kol.) v) REI Agro Ltd. v. Dy. CIT [2013] 144 ITD 141/ 35 taxmann.com 404 (Kol.) vi) Raj Shipping Agencies Ltd.. v. Asstt. CIT [2014] 146 ITD 277/[2013] 38 taxmann.com 345 (Mum.)
The disallowance of the expenditure u/s 14A r.w.r 8D requires proximate relationship with the tax exempt income. The disallowance is simply based on presumptions, surmises and conjectures and should not be sustained. Reliance was placed in this regard on the following decisions:
(i) CIT v. Walfort Share & Stock Brokers (P) us. [2010] 326 ITR 11192 Taxman 211 (SC)
(ii) CITv. Metalman Auto (P) Ltd. [2011] 199 Taxman 149/336 ITR 434111 taxmann.com 51 (Punj & Har.) (iii) Justice Sam P Bharucha v. Addl. CIT [2012] 53 SOT 192/25 taxmann.com 381 (Mum. - Trib.)
7.2 The Ld. DR on the other hand relied on the order of the AO and contended that the AO has duly satisfied himself in pursuance of provisions of Sec. 14A(2) that it is a fit case with reference to the accounts of the Assessee. Our attention was drawn towards pg. 7, 8 and 9 of the assessment order and it was contended that once the AO is satisfied having regard to the accounts of the Assessee about the incorrectness of the claim of the Assessee, the AO is bound to determine the amount of expenditure incurred in relation to the dividend income by applying Rule 8D. Referring to the method adopted by the Assessee, it was submitted that the basis adopted by the Assessee is not correct and not in accordance with the principles as has been pronounced from time to time.
7.3 We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec. 14A of the IT Act read with Rule 8D of the IT Rules. Sec. 14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally 10
11 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/200 I proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribed. Such power is to be exercised if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure mentioned in sub-sec. (I). Before applying Rule 8D, it is apparent that the AO must be satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. Such satisfaction is an objective satisfaction that it has to be judicious and based on the material on record. It cannot be an impression that it is much more than the gossip or hearsay, it means judgment or belief that it is a belief or a connection resulting from what one thinks on a particular question. It must be based on the reasons and ground as seems good to him and while making such satisfaction, the AO must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-sec. (3) provides that provisions of sub-sec. (2) shall also apply where assessee claims that no expenditure had been incurred in relation to income not forming part of the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. It is an undisputed tact that the Assessee has got tax exempt dividend income to the extent of Rs.211,55,72,712/- from investment in shares and mutual funds and tax free interest of Rs.23,83,81,3731-. The Assessee has computed the disallowance u/s l4A(2) to the extent of Rs.2,52,7001- but subsequently revised it to Rs.37,90,800/- as indirect expenses. The disallowance made consists of salary expenses to the tune of Rs. 16.92.688/-, overhead expenses to the tune of Rs.20,98,0971-.ln the earlier years since Rule 8D was not applicable, therefore, disallowance was made @ l% on the total revenue. The AO was not satisfied with the correctness of the claim of the Assessee, especially the explanation of the Assessee that no administrative, managerial or establishment expenses was incurred by the Assessee. The AO asked for the details of various expenses from the Assessee. In the absence of any separate details of the expenses being maintained or accounted for by the Assessee, the AO was of the opinion that the submission of the Assessee is not tenable although he accepted that the Assessee is primarily engaged in manufacturing activity. The AO also noted that the Assessee had made substantial investment. The average investment value income from which is exempt were computed as under : Value of total investment as on 01 .04.2007 Rs. 3,067.77 crore Less: Value of Investment the income from which is not exempt from tax Rs. 212.08 crore
12 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 Value of investment the income from which is exempt Rs. 2,855.69 crore Value of total investment as on 31.03.2008 Rs. 2,934.55 crore Less : Value of investment the income from which is not exempt from tax Rs. 387.30 crore Value of investment the income from which is exempt Rs.2.547.25 crore 7.3.1 We noted that the AO was of the opinion that the investment decisions are generally taken by the managerial personnel or other professional experts employed for the purpose for which administrative, managerial and establishment expenses are incurred. The Assessee has to identify these expenses on the basis of the accounts maintained by the Assessee. In the absence of separate details or the accounts and taking account of the volume of investment activity, the AO took the view that the disallowance made by the Assessee u/s l4A does not have any relation with the accounts and therefore the Assessee was not correct in computing the disallowance. The AO, therefore, applied Rule 8D and computed the disallowance under Rule 8D(2)(iii). 7.3.2 The Id. AR before us vehemently relied on the decision in Walfort Share & Stock Brokers (P.) Ltd. (supra).In this decision we noted that the Hon'ble Supreme Court in that case upheld the view of the Hon'ble Mumbai High Court in the case of Walfort Shares & Stock Brokers Ltd. v. ITO [2009] 310 ITR 421 . The Hon'ble Supreme Court in this decision, at page-31 of the order held as under : "To attract Sec. l44' there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec. 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec. 14A cannot be invoked". 7.3.3 Similar issue had come up before the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. We noted that in this case the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s l4A. of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was made in earlier years and (iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s l4Aon prorate basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2008] 117 ITD 169 (Mum.) restored the matter to the file of the AO for the consideration in the light of the provisions of sub-sec.(2) & (3) of Sec.l4A of the IT Act. The assessee, being aggrieved, filed appeal as well as Writ Petition challenging the constitutional validity of sub-sec. (2) &(3) and Rule D. The Hon'ble High Court save the following findings : “1. The provisions of sec. 144 and Rule 8D are constitutionally valid. 12
13 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 2. The provisions of sub-sec. (2) & (3) of Sec. 14A and Rule 8D are prospective and not retrospective, in nature and therefore, would apply from assessment year 2007-08.
The basic object of Sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income (page 21). 4. The insertion of sec.l4A was curative and declaratory of the intent of the parliament. The basic principle of taxation is that only net income, namely, gross Income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23). The test which has been enunciated in Wallfort for attracting the provisions of sec.l4A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28) 5. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-sec (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79).
The effect of sec. l4,A is to widen the theory of the apportionment of expenditure (page 49).
The expression expenditure incurred; in Sec.l4A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page-50).
14 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 9. Sub-sections (2) & (3) of Sec. l4A are intended to enforce and implement the provisions of sub-sec (1) (pages 50). 10. Even in the absence of sub-section (2) of sec. 14A the AO would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The AO would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstances." 7.3.4 The Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) therefore at page-2S has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon'ble Supreme Court, we are of the view that sec.l4A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) & (3) of Sec.l4A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) & (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessarily for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) & (3) of sec.l4A and Rule 8D of the IT Act, l96l. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s l0 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi). 7.3.5 The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exempted income merely because some incidental benefit has arisen towards exempted income. Before making any disallowance u/s 14A, the AO is required to record a satisfaction, having regard to the accounts of the assessee, that claim of assessee that expenditure incurred is not related to the income forming part of the total income is incorrect. Such satisfaction must be arrived at on the objective basis. He is also required to record the reasons for arriving at such satisfaction. The AO, in the impugned case, we noted has categorically recorded that he is not satisfied with the correctness of the disallowance made by the Assessee with reference to the accounts as 14
15 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 the Assessee has not maintained any separate details or accounts in respect of the incurrence of expenditure. The AO rejected even the apportionment of the expenses by the Assessee, the working of which was filed before us: 7.3.6 We also noted that the Assessee has computed disallowance in respect of salaries and the overheads of the Corporate Treasury department. The total salaries of the Corporate Treasury Dept. was Rs. 1,16,59,453/-. Out of this, salary relating to the treasury function was estimated at Rs.73,59,513/- out of which sum of Rs. 16,92,688/- was allocated towards the disallowance out of salary u/s l4A on the ratio which the total investment bears to the fixed assets + investment + net current assets i.e.23% thereof but the basis on which the total salary of the Corporate Treasury dept. was allocated to the total salary of the treasury function was neither explained before the AO nor before us even though we raised this specific query to the Id. AR. We also noted that the Assessee has apportioned overheads of the Treasury dept. which are totalling to Rs. 1,44,51,964/-. These were apportioned on the basis what Rs.73,59,513/- had with Rs. 1,16,59,453/- and taking thereof @23%. The Assessee, we do not find, has filed any explanation in this regard giving the basis of this apportionment. During the course of the hearing when we asked how these expenses are co-related with the salary, the Id. AR was unable to convince us and give a proper explanation. We noted that the Assessee agreed that the Treasury dept. spend the time and personnel associated with the Treasury Dept. are responsible for making investment of company's surplus funds in various instruments yielding dividend and interest. The salary, in our opinion, at the most, could have been apportioned in the ratio which the total investment bears with the total assets. No reason or explanation is either on record or explained to us by the Id. AR as to how the sum of Rs.73,59,513/- was only been apportioned while the expenditure incurred in respect of this Department is Rs. 1,16,59,453/-. The AO, we noted, has also given a categorical finding in this regard about the incorrectness in the disallowance computed by the Assessee. The primary onus in our opinion, lies on the Assessee to give the evidence and the material so that the AO can be satisfied. The material and evidences are in the possession of the Assessee. Therefore, the Assessee is duty bound to provide the same when an explanation is called for by the AO as to how he has computed the disallowance and how he has worked out the proximate relationship of the expenses with the total expenditure incurred by him with the investment made. Once the Assessee has submitted the evidences, the onus is on the AO and the AO is duty bound to record the reasons why he is not satisfied with the correctness of the claim of the Assessee in respect of such expenditure in relation to the income. Until and unless the Assessee discharges his primary onus when the AO has asked for it, the onus cannot be shifted on the AO so as to give benefit to the Assessee. Even though the Assessee has submitted before us the working of the apportionment but, as we have observed, we are also not satisfied with the working of the Assessee for the allocation of these expenses with reference to the accounts of the Assessee. It is not in dispute that the Assessee has incurred indirect expenses which has proximate relationship with the exempted income. Thus, in our opinion, this is a case where the AO has duly complied with the requirements of Sec. l4A(2), therefore, the AO was within his jurisdiction to apply Rule 8D.
16 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 7.3.7 We have gone through the decision in Maxopp Investment Ltd. (supra) on which the Id. AR has vehemently relied. We noted that the questions involved in this decision were :
"1. Whether the expenditure (including interest paid on funds borrowed) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section l4A of the Income-tax Act, 1961, inasmuch as the dividend received on such shares does not form part of the total income?
Whether the provisions of sub-section (2) and sub-section (3) of section l4A inserted by the Finance Act, 2006, with effect from April 1, 2007, would apply retrospectively to all pending proceedings ?
Whether rule 8D, inserted by the Income-tax (Fifth Amendment) Rules, 2008, with effect from March 24, 2008, was procedural in nature and, hence, would apply retrospectively to all pending proceedings ?" This decision relates to A.Y 2002-03; not to A.Y 2008-09. The provisions of sub-section (2) & (3) of Sec. l4A were inserted by the Finance Act, 2006 w.e.f. 1.4.2007. In this decision under para 30 the Hon'ble High Court has categorically held as under : "Sub-section (2) of section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered 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. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section l4A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 144, of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in 16
17 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same." We have already held that in the impugned case the AO has given a finding that he is not satisfied with the correctness of the claim of the Assessee and therefore, this decision, in our opinion, will support the case of the Revenue and, therefore, AO has the jurisdiction to compute the disallowance in accordance with Rule 8D. 7.3.8 The Kolkata Tribunal in the case of REI Agro Ltd. (supra) has also taken a similar view that to invoke the provisions of Sec. 14A the AO has to first record the reasons why he was not satisfied with the correctness of the claim of the Assessee. We have already held that in the case before us the AO has given a clear-cut finding that he is not satisfied with the correctness of the claim of the Assessee. In the case of REI Agro Ltd. (supra) we noted that under para 6 the Tribunal has given a clear-cut finding that there was no satisfaction recorded by the AO in the following words : "In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate Bench of this Tribunal in the case of Balarampur Chini Mills Ltd. (supra) no disallowance u/s l4A can be made." Thus, this decision, in our opinion, will not assist the Assessee. 7.3.9 We have also gone through the decision in Champion Commercial Co. Ltd. (supra). We noted that in this case the grievance of the Assessee was that the disallowance should have been deleted in the entirety on the ground that the AO had not recorded specific satisfaction to the effect that the claim of the Assessee i.e. no expenditure was incurred on earning of tax exempt dividend, was incorrect. We noted that the facts of this case are different from the facts of the Assessee's case. In this case, the Assessee had not shown any expenditure being incurred against the exempt dividend income which was directly credited to the bank account of the Assessee and therefore he argued that the provisions of Sec. l4A cannot be invoked. On this question, the Tribunal took the view that the provisions of Sec. l4A r.w.r 8D has rightly been invoked. In the case of the Assessee, the Assessee claimed the expenses relatable to the exempt income. Therefore, this decision will not assist the Assessee. 7.3.10 We have also gone through the decision of the Mumbai Tribunal in the Raj Shipping Agencies Ltd. (supra). We noted that in this decision also the Tribunal has categorically taken the view that for invoking provisions of Sec. l4,A satisfaction has to be recorded by the AO with reference to the accounts. Rule 8D cannot be invoked on estimation/presumptive basis. This decision, in our opinion, will also not assist the Assessee as we have already held that in the case of the Assessee, the AO has recorded satisfaction about the incorrectness of the claim of the Assessee. 17
18 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
7.3.11 We have also gone through the decision in Metalman Auto (P.) Ltd. (supra). This decision relates to the A.Y 2004-05 while the provisions of Sec. l4A(2) & l4A(3) were inserted by the Finance Act, 2006 w.e.f. 1.4.2007. Therefore, in our opinion, this decision will not help the Assessee. In this decision, the Hon'ble High Court followed the decision of the jurisdiction High Court in the case of Hero Cycles Ltd. and held that there should be a finding of incurrence of expenditure for earning the exempt income. 7.3.12 We have also gone through the decision in Justice Sam P. Bharucha (supra). The facts of this case are different from the case of the Assessee. In this case, the Assessee claimed that the Assessee has not incurred any expenditure for earning of the exempt income and the nature of the expenditure was for earning professional income. Therefore, the Tribunal took the view that no disallowance u/s l4A could be made. In the case of the Assessee, we noted that the Assessee himself has disallowed a part of the expenditure being the proportionate management expenses for earning of the dividend. The Ld. AR also did not dispute the working made by the AO under Rule 8D. In view of our aforesaid discussion, we confirm the order of CIT(A). Thus, this ground stands dismissed. In the result, the appeal filed by the Assessee stands dismissed.”
The assessee has filed a detailed compilation chart of all the issues raised along with its written submissions therein. We have already narrated the same in foregoing paragraphs. There is no rebuttal at all to above clinching finding of the co-ordinate bench decision, in preceding assessment year. All of its contentions are therefore found to be repetitive of its arguments raised in assessment year 2008-09 which already stand rejected. We thus find no substance in assessee’s instant substantive ground therefore.
Coming to assessee’s legal argument in view of Maxopp investments Ltd. (supra), it transpires that their lordships had decided proportionate interest disallowance issue in relation to exempt income rather than indirect expenditure in the nature of overheads therein. It has already come on record that the Assessing Officer has not accepted assessee’s books computing its suo moto disallowance of proportionate interest expenditure. He disallowed its administrative expenditure only under the third limb of Rule 8D . We therefore adopt above co-ordinate bench detailed reasoning mutatis mutandis to confirm administrative expenditure disallowance of Rs. 12,04,05,988/-. The assessee failed qua its second substantive ground as well. 18
19 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
Next comes assessee’s additional / third substantive ground seeking to claim ESOPs of Rs. 261737836/- to be wholly and exclusively incurred for the purpose of its business. This tribunal’s special bench in the case of Biocon Ltd. vs. DCIT [2013] 144 ITD 21(Del) has accepted such a claim qua disallownace between fair market value of shares of ESOP and exercise of the option at the instance of the concerned employees to be allowable revenue expenditure. The assessee’s paper book’s pages 104, 105, 107,108, 109, 111 and 117 inter alia comprise of the relevant SEBI guidelines, ICAI note, annual report to this effect; respectively. All this indicates that the assessee had not raised impugned ESOP deduction claim owing to complex legal position on the issue since the tribunal varying opinions leading to special bench (supra). Hon’ble Gujrat high court decision in CIT vs. Mitesh Impex 270 CTR 66 (Guj) has taken into account “NTPC” and Goetz (India) Ltd. vs. CIT (2006) 284 ITR 323 (SC) to hold that if a claim which is available in law is not raised either inadvertently or an account of erroneous plea of complex legal position, such a relief cannot be shut up for all the times to come merely because it is raised for the first time in appellate proceedings in absence of a revised return filed before the Assessing Officer. We therefore accept assessee’s instant additional ground in principle and leave it open for the Assessing Officer to verify all the relevant facts as per law after affording adequate opportunity of hearing in consequential proceedings. This third substantive ground is accepted for statistical purposes.
The assessee’s additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317.0 u/s 37 of the Act. We note that hon’ble Rajasthan high court’s decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) 19
20 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 applies only on taxes such than earn cess(es). We therefore reject the Revenue’s contentions supporting the impugned disallowance . The assessee’s instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee’s appeal I.T.A. No. 685/Ko/2014 is partly accepted in above terms.
We now come on Revenue’s cross appeal I.T.A. No. 1267/Kol/2014. Its first substantive ground seeks to restore the Assessing Officer’s action treating assessee’s receipt of Rs. 9,82,64,664/- derived from sale of carbon credits as business income as per assessment order as reversed in lower appellate proceedings as follows.
21 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
22 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
We have heard rival contentions. The Revenue vehemently contends during the course of hearing the learned CIT(Appeals) has erred in law and on facts in treating the above carbon credit receipts accepted than revenue’s receipts. We find the instant issue is no more res integra as per PCIT vs. M/s L.H. Sugar Factory Pvt. Ltd. 392 ITR 568 (All) as well as various other judicial precedents quoted in the CIT(A) order (supra) make it clear that such receipts as to be treated capital head only. Coupled with this, the legislature has inserted section 115BBG in the Act vide Finance Act, 2017 w.e.f 01.04.2018. We make it clear that this appeal pertains to assessment year 2009-10 only. This is not the Revenue’s case that the above stated legislative amendments carries any retrospective effect. We uphold the CIT(Appeals) finding under challenge in these facts and circumstances therefore. The Revenue fails in its first substantive ground.
23 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 15. The Revenue’s second substantive ground challenges the CIT(A) order reversing Assessing Officer’s action disallowing commission and directors sitting fee on account of non-deduction of TDS. He had invoked section 40a(ia) of the Act to disallow the assessee’s claim of Rs. 67,48,288/- in assessment order. The CIT(A) accepts assessee’s arguments as follows:
24 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10
Suffice to say, we notice that at the outset that this issue is covered in assessee’s favour from preceding assessment years. The Revenue fails to dispute that its very grievance in preceding assessment year 2008-09 (supra) stood declined before this tribunal as well. We therefore adopt judicial consistency to affirm the CIT(Appeals) finding under challenge. The Revenue’s instant second substantive ground is rejected.
The Revenue’s third substantive ground seeks to revive the Assessing Officer’s action disallowing assessee’s section 80IA deduction claim amounting to Rs. 63,02,26,000/- for its eligible captive undertakings. We find the instant issue also to be no more res integra as above co-ordinate bench decision in the immediate preceding
25 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 assessment year upheld the CIT(A) similar findings and left it open for the Assessing Officer to finalize the necessary computation as follows: 4. Ground no. 2 relates to the claim of deduction u/s 80IA made by the assessee in respect of various captive power undertakings located in the district of Bhadrachalam and Kovai. The AO noted that the assessee has made claim of Rs. 69,57,61,000/- in respect of 4 power undertakings belonging to it on the basis of form nos. 100CCB filed by the assessee. In respect of power undertaking at Bhadrachalam the AO noted that the assessee generated 12,02,11,841 units of electricity which was transferred to paper undertaking at a price of Rs. 3.3643/unit as there was no sale to outsider. This price consists of additional demand charges also. The AO was of the view that while computing the transfer price, additional demand charges has to be excluded. Therefore, he decided the total transfer price of Rs. 35,15,93,155/- against the price of Rs. 40,44,26,809/-. The AO also noted that the Assessee is bound to pay to the State Government Electricity Duty on the units generated by the captive plant and he calculated the cost element to be paid to the State Government at Rs. 223.86 lacs. Therefore, he was of the view that this has to be reduced while computing the profit and accordingly he recomputed the profit from power undertaking - I at Rs. 6,42,55,155/- and reduced the deduction accordingly.
4.1 In respect of power undertaking - II, the AO noted that the Assessee generated 8,97,59,276 units and set transfer price at Rs. 3.36/unit. Here also the Assessee has taken into account additional demand charges while computing the transfer price which was re-calculated by the AO. The AO further noted that the Assessee has to pay to the State Government, Electricity Duty on the units generated by the captive plant and he computed the Electricity Duty to be paid at Rs. 167.15 lakhs and to that extent he was of the view that the profit has to be reduced from this captive power plant. Accordingly, the AO recomputed the profit at Rs. 15,69,04,973/-.
4.2 In respect of power undertaking - IV, the AO observed that the undertaking generated steam used for generation of electricity by the captive power undertakings. The AO took the view that the two units are functionally integrated as a single unit so far as generation of steam and electricity and vice versa are concerned. Since the Assessee has artificially bifurcated the two units, therefore, he was of the opinion that no deduction u/s 80IA can be allowed in respect of the steam unit as the Assessee has already claimed deduction for generation of electricity in respect of captive power undertakings.
4.3 In respect of power undertaking - I, Kovai, the AO noted that the Assessee generated 5,43,96,500 units which was transferred at the rate of Rs. 4.10 per unit and while calculating the transfer price, the Assessee has not considered the Electricity Duty paid to the State Government even though the Assessee has paid a sum of Rs. 9.90 lakhs in connection with the aforesaid undertaking. The AO, therefore, re-determined the cost and computed the profit at Rs. 11,24,50,000/-. The AO also reduced the brought forward loss amounting to Rs. 1,03,03,000/- while computing the profit from 25
26 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 the Kovai unit as per the provisions of Sec. 80IA(5). Thus, total deduction u/s 80IA was restricted to Rs. 32,33,07,128/- in place of Rs. 69,57,61,000/- claimed by the Assessee. The Assessee went in appeal before CIT(A). CIT(A) took the view in respect of the captive power undertakings that the issue is exactly identical to the one raised in Assessee's own case in A.Y 2002-03 and accordingly, he allowed deduction to the Assessee by observing as under:
"i) Captive Power Undertaking issue: The entire claim was fully disallowed since the Assessing Officer held that the power has only been supplied to other undertakings of the appellant on a captive basis and not to outsiders. However, I find that this issue is exactly identical to the one raised in the assessee's own case in AY 2002-03. The matter was decided in favour of the appellant company by both the CIT(A) and the Hon'ble Tribunal. In fact, the Assessing Officer has recorded in the assessment order that " ..... the Department has contested against the said Appellate Orders before the higher judicial forums." The CIT(A) and ITAT have also upheld the captive undertaking issue in the appellant's favour in AY 2003-04 and AY 2004- 05 and the CIT(A) has also similarly held for AY 2006-07 and AY 2007- 0S. Therefore, respectfully following the above mentioned decisions 1 hold that the deduction under section 80IA is fully available to the company in respect of the captive power undertakings.' 4.4 In respect of the steam undertaking issue, the CIT(A) noted that one power undertaking VI, Bhadrachalam generates steam for captive use of other undertakings at Bhadrachalam and allowed the deduction by observing as under: "1 find that it has been repeatedly established that steam is power as per the Delhi Tribunal decision in SIAL SBEC Bioenergy Ltd. vs.. DCIT [S3 TT] 866 (2004)] and DCIT v. Maharaja Shree Umaid Mills [120 TTJ 711 (2009)]. Further, the Hon'ble Supreme Court had dismissed the Department's SLP against the judgement of the Madras High Court in the case of Tanfac Industries Ltd. (TC No. 1773 of 2008) [319 ITR 8, 9] wherein the High Court had dismissed the Department's appeal against the decision of the Tribunal which had held the deduction under section 80IA was applicable on the value of steam used for captive consumption. The appellant company has also submitted that it is a separate / independent undertaking which produces power in the form of steam and which is transferred to other undertakings at market value for captive use. This was supported by the audited statutory Form 10CCB report which lists out all aspects related to the said independent undertaking like date of commencement, statutory inspection/clearances, statement of costs, fixed assets, profit & loss a/c and balances sheet and the process flow chart. I also find that in respect of the said facts, the Assessing Officer has accepted the position and had not made any issue. Further, the market value of steam had been properly determined based on a market value report by Price Waterhouse & Co. This market value was separately taken as cost as per section 80IA(8) for the computation of deduction for the electricity undertakings. Therefore, there was no case of double deduction. Therefore, in view of the above discussion and finding, I hold that the deduction is fully available to the appellant company in 26
27 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 respect of the said Power undertaking VI for generation of steam for captive consumption."
4.5 On the issue of brought forward losses incurred prior to the initial year, CIT(A) took the view that the deduction u/s 80IA has to be computed from the initial year and all losses of earlier years prior to the initial year have to be ignored.
4.6 On the issue of inclusion of additional demand charges for determining the market value, CIT(A) decided the issue in favour of the Assessee in view of the decision of the Tribunal for A.Y 2002-03 in Assessee's own case. Similarly, in respect of issue whether Electricity Duty should be included while determining the cost, CIT(A) took the view in favour of the Assessee following the decision of the Tribunal for A.Y 2002-03 in Assessee's own case.
4.7 We heard the rival submissions and carefully considered the same. We have also gone through the gist of the submissions filed by the Id. AR as well as the order of the AO on which the Id. DR has relied. The main submissions of the Id. AR are that this issue is duly covered by the decision of this Tribunal in Assessee's case for A.Y 2002-03. We have perused the ITAT order for A.Y 2002-03 in ITA No. 18/Kol/2006 in the case of the Assessee. We noted that the Tribunal under para 10.13 of its order accepted the rate as has been worked out by the CIT(A) to be the fair market value by holding as under:
"10.13 The Ld. AIR further submitted that in the instant case the assessee would be entitled to determine its profits of the power unit by considering the tariff rate determined at Rs. 4.45 per unit as per the policy of the APSEB. Keeping in view the ratio of the decision of the Hon'ble Supreme Court in Thiru Arooran Sugars Ltd. (supra), we are of the view that the market price in case of a captive unit should be the price that the assessee would have paid to an outsider if the same commodity/services were to be procured by the assessee i.e. the landed cost. However in the instant case the actual price is unreasonably high since the rate of APSEB contains certain fixed charges which are not directly relatable to the captive plant. Further the average rate computed in conjunction with the APGPCL has not been rightly considered by the assessee since the said party is a related party. The tariff rate computed by the assessee in accordance with the guidelines by APSEB is the most reasonable and scientific way to derive the market price. This rate worked out to Rs. 4.45 per unit. The Ld CTT(A) had further reduced this rate by deleting the surcharge and additional duty and worked out the unit rate at Rs. 4.368 which has also been accepted by the assessee. In view of the clear findings by the CIT(A) and the decision of the Supreme Court and the Mumbai Tribunal we are of the view that the decision of the CIT(A) is correct and there is no infirmity in the said decision. Hence this ground of the Revenue is also dismissed."
From the said finding of the Tribunal it is apparent that the Assessee has computed the profit for claiming deduction by taking tariff rate @ Rs. 4.45/unit as per the policy of APSEB. This rate of APSEB contains fixed charges which are not directly relatable to 27
28 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 the captive plant. CIT(A) reduced this rate by deleting the surcharge and additional duty and worked out the unit rate @ Rs.4.368. The Tribunal, therefore, confirmed the market rate/unit on the basis of the policy of APSEB as reduced by the surcharge, additional duty. Thus in view of the decision of this Tribunal for A.Y 2002-03, the Assessee, in our opinion, is entitled for deduction u/s 80lA in respect of the captive power undertaking but for the purpose of ascertaining the profit, market value should be taken in respect of the two power undertakings generating electricity. We noted that during the impugned assessment year the Assessee has claimed deduction u/s 80IA after determining the profit on the basis of the power tariff rate as per APERC i.e. Rs. 3.3643/unit. This includes demand charges, additional demand charges and variable charges. The AO reduced the additional demand charges but the CIT(A) allowed the relief to the Assessee holding that determination of the market value / based on the State Government electricity power tariff inclusive of additional demand charges has been specifically decided by CIT(A) and Tribunal for the A.Y. 2002-03 and the Assessee has strictly followed the same. Accordingly, ld. CIT(A) decided this issue in favour of the assessee. We noted that the Tribunal in para 10.13 of its order for A.Y. 2002-03 has accepted the rate per unit as worked out by Ld. CIT(A). Ld. CIT(A) reduced the tariff rate by surcharge and additional duty. Respectfully following the aforesaid decision of this Tribunal, we direct the AO compute the profit eligible for deduction u/s 80IA on the basis of the aforesaid finding given by the Tribunal for A.Y. 2002-03.”
We adopt the above detailed reasoning mutatis mutandis to decline Revenue’s instant third substantive ground as well. Necessary computation shall follow at the Assessing Officer’s end as per law.
The Revenue’s last substantive grievance is that the CIT(A) has erred in law as well as in facts in allowing assessee’s section 80IC deduction claim of Rs. 38,16,63,000/-. The ld. CIT(Appeals) has admittedly followed his findings in preceding assessment year to allow assessee’s impugned deduction claim. This tribunal’s co- ordinate bench decision in Revenue’s appeal itself in assessment year 2008-09 (supra) had upheld the ld. CIT(A) identical findings qua the very units as follows: “5. Ground no. 3 relates to the claim of deduction by the assessee u/s 80IC. The facts relating to this ground are that the assessee claimed deduction u/s 80IC in respect of the undertaking at Haridwar, Uttaranchal. The AO did not allow the deduction holding that the assessee had not carried out by the designated division of the Assessee. The assessee has not included in the credit side of the profit and loss account any profit while deduction has been claimed on the notional profit. The assessee went in appeal before the ld. CIT(A). ld. CIT(A) deleted the disallowance.
29 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 5.1. The ld. DR relied on the order of the AO while the assessee contended that the allegations are similar to the disallowance made u/s 80IA, this issue has been decided in favour of the assessee in assessee’s own case for assessment year 2002-03 to 2004- 05 and now it is squarely covered in favour of the assessee by its own case for assessment year 2007-08 by the order of this Tribunal wherein it has been held that the respondent is eligible for deduction u/s 80IC for its captive undertaking located at Uttaranchal.
5.2. We heard the rival submissions and carefully considered the same. We have also gone through the order of the tax authorities below. We noted that the AO has disallowed the deduction u/s 80IC on the basis that the said unit situated at Haridwar has transferred the goods and services to the business carried on by the assessee and therefore no business is carried on by the impugned undertaking. Deduction has been claimed on notional profit which has never been included in the credit side of the Profit & Loss account. We noted that so far as the issue relating to the eligibility of the claim is concerned, this issue is duly covered by the decision of this Tribunal in ITA No. 1054/Kol/2011 for A.Y 2007-08 in Assessee's own case in which this Tribunal vide its order dt. 4.3.2014 under para 5.1 has held as under:
"5.1 We have heard the rival submissions and carefully considered the same. We have also gone through the provisions of Sec. 80re. We noted that it is not denied by the Revenue that the eligible undertaking complies with all the other conditions. The deduction was not allowed to the undertaking merely on the basis that the undertaking was a captive undertaking and was supplying food items to other undertaking carried out by the Assessee. Looking into the provisions of Sec. 80IA(8) as is applicable to Sec. 80IC and as has been reproduced in the finding of CIT(A), we noted that goods and services are permissible to be transferred to other business by the eligible undertaking. In view of this, in our opinion, no interference is called for in the order of CIT(A) and CIT(A) has rightly allowed the claim of the Assessee. We, accordingly, confirm the order of CIT(A) on this issue. Thus, this ground stands dismissed."
Respectfully following the said order we are of the view that the said unit is eligible for deduction u/s 80IC. So far as the issue that no profit has been credited in the Profit & Loss account, we noted that CIT(A) has even though decided in favour of the Assessee that the Assessee is eligible for deduction u/s 80IC but has not given any finding whether the income generated from this undertaking stands included in the gross total income of the Assessee. In our opinion, the income need not be separately credited to the Profit & Loss account when the income derived from the eligible undertaking has to be computed. The revenue authorities should only ensure whether income from the eligible undertaking is included in the gross total income of the Assessee or not as the basic condition for allowing of deduction u/s 80lC is that the Assessee is eligible for deduction if the gross total income includes any profit and gain derived by the eligible undertaking. We, therefore, restore this issue to the file of the CIT(A) with the direction that CIT(A) shall re-decide this issue after giving due opportunity to the Assessee of being heard and give a clear-cut finding whether the income derived by the Assessee 29
30 ITA No.1267 & 685/Kol/2014 M/s ITC Limited A.Yr. 2009-10 from the said eligible undertaking stands included in the gross total income of the Assessee. To that extent, the order of CIT(A) is set aside. Thus, this ground is allowed for statistical purpose.”
The Revenue fails to indicate any distinction or facts of law qua the instant issue. We therefore confirm the CIT(A) finding under challenge in view of the detailed discussion on the very issue in earlier assessment year. The Revenue’s last substantive ground is also declined therefore.
This assessee’s appeal I.T.A. No. 685/Kol/2014 is partly allowed and Revenue’s cross appeal is dismissed.
Order pronounced in the Court on 27.11.2018
Sd/- Sd/- [M. Balaganesh] [ S.S.Godara ] Accountant Member Judicial Member
Dated : 27.11.2018
SB, Sr. PS
Copy of the order forwarded to: 1. DCIT,Circle-8, Kolkata, Aayakar Bhawan, 5th Floor, P-7, Chowringhee Square, Kolkata-700069. 2. M/s ITC Limited, 37, J.L. Nehru Road, Kolkata-700071. 3..C.I.T(A).- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.