DCIT, CIR-6, KOLKATA, KOLKATA vs. M/S CESC LTD., KOLKATA

Per Shri A.T.Varkey, JM

These cross appeals filed by the Revenue and assessee are against the order of Ld. CIT(A)-VI, Kolkata dated 21.03.2014 for AY 2010-11. 2. Ground no.1 of the revenue’s appeal is against the order of Ld. CIT(A) in deleting the disallowance of expenses of Rs.10,13,46,162/- on ‘coal washing charges’ made by AO by applying the provisions of section 40(a)(ia) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). 2.1. Briefly stated facts as observed by the AO are that during assessment proceedings he found that the assessee company made a total payment of Rs.10,13,46,162/- to M/s. Crescent Power Ltd. against ‘Coal Washing Charges’ without deducting TDS from the said payments in terms of sec. 194C of the Act. On being asked, the Ld. AR admitted the fact of non-deduction of TDS. Hence, the AO disallowed the expenditure claimed on this issue

2 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 and added back the said sum of Rs.10,13,46,162/- to the total income of the assessee invoking section 40(a)(ia) of the Act read with section 194C of the Act. Aggrieved, assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A) the assessee submitted that it had in fact deducted tax in terms of section 194C of the Act on the payment of coal washing charges but had not deposited the tax in the government account by 30.09.2010, which was normal due date of filing of return, however, the payment (TDS) had actually been made on 06.10.2010 (during the extended period for filing of return as allowed by the CBDT from 30.09.2010 to 15.10.2010) which has been duly mentioned on the relevant TDS certificates and TDS return also. Taking into consideration the aforesaid fact that TDS had been remitted during the extended period for filing of return as allowed by the CBDT from 30.09.2010 to 15.10.2010, the Ld. CIT(A) deleted the disallowance by observing as under: “3.2. Thus, it has been submitted that the appellant had deducted tax in terms of section 194C on the 'coal washing charges' paid by it but had not been deposited in the government account by 30.09.2010 which was normal due date of filing of return applicable to the appellant company. It has been informed that the payment had actually been made on 6.10.2010 which has been mentioned on the relevant TDS certificates and TDS return also. It is seen that during the year under consideration due date for filing of return had been extended by CBDT from 30.09.2010 to 15.10.10 vide order F.N. 225/72/2010/lT(A-II) dated 27.09.2010. In this order it has been mentioned that:- "on consideration of the reports of disturbance of general life caused due to floods and heavy rains, the CBDT, in exercise of powers conferred under section 119 of I. T. Act, 1961, hereby extends the due date of filing of returns of income for the assessment year 2010-11 from 30.09.2010 to 15th October, 2010." Thus, due date of filing of return of income for the assessment year under consideration in the case of appellant was extended from 30.9.2010 to 15.10.10. Since the provision of section 40(a)(ia) refer to due date specified in sub-section (1) of section 139 for filing of return of income, once the due date of filing of return of income has been extended by the Board. In my opinion, the extended date shall also apply for purpose of compliance with section 40(a)(ia). As the Board has extended time for filing of return of income in view of disturbance of general life caused by floods and heavy rains, it is reasonable to consider that the extension shall apply in respect of deposit of TDS as well. The floods & heavy rains would impact activity like deposit of TDS in bank in the same manner as filing of return. Therefore, while order u/s 119 dated 27.9.2010 refers to filing of return and does not specifically refer to section 40(a)(ia), the benefit of extension of due date of filing of return shall, in my opinion, be available even for purpose of section 40(1)(ia). It is well settled position of law that where there is ambiguity and two plausible views exist in a matter, the view favorable to the assessee should be adopted. This has been held in a number of cases including decision of Supreme Court in the case of CIT vs.Vegetable Products Ltd.88 ITR 192 (SC) The appellant has deposited TDS u/s 194C on 06.10.2010 which is well within the extended due date for filing of return of income. Therefore, in my opinion, disallowance of same under section 40(a)(ia) is not proper. It may also be mentioned that even if a view is taken that amount is to be disallowed in this year, then in view of proviso to section 40(a)(ia), deduction for the same would have to be given in subsequent year on payment basis. Thus, over a period of two years, the exercise would be revenue neutral and there

3 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 would be no net impact on income or tax liability. Considering all these factors, the disallowance u/s 40(a)(ia) is deleted. ”

2.2. We have heard rival submissions and gone through the orders of the lower authorities and the materials available on record. Before us, the Ld. AR of the assessee reiterated the same submission as submitted before the lower authorities. Since TDS has been remitted to the Govt. within the extended period for filing of return as vivid from the facts and in any case if disallowed this year, the assessee could have got the claim allowed in the next year on the strength of the TDS certificate as per the proviso to sec. 40(a)(ia) of the Act as rightly observed by the Ld. CIT(A). So in any way the action of Ld. CIT(A) will in no way prejudice the Revenue. We fully agree with the reasoning and factual conclusion of Ld. CIT(A) (supra). Since Ld. DR could not point out any error in the impugned order of Ld. CIT(A), we find no infirmity in his order in deleting the disallowance as made by the AO. Hence, we uphold the order of Ld. CIT(A). Therefore, this ground of appeal of revenue is dismissed.

3.1. Briefly stated facts of the case are that during the course of assessment proceedings the AO observed that the assessee company claimed exempt dividend income of Rs.3,08,00,805/- during the year and added back an amount of Rs.6,25,966/- on account of administrative expenses u/s. 14A in its computation of Income. However, according to AO, the calculation has not been done in accordance with sec. 14A read with Rule 8D of the Rules Being dissatisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to income which does not form part of total income under the Act, the AO computed the disallowance u/s. 14A read with Rule 8D of the Rules which comes to Rs.10,83,17,154/-, (the detailed calculation has been given by the AO in assessment order). Since the assessee company has already added back Rs.6,25,966/- in its computation of income, the AO added back Rs.10,76,91,188/- (Rs. 10,83,17,154/- -

4 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 Rs.6,25,966/-) to the total income of the assessee company. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who following decision of Hon’ble jurisdictional High Court in the case of CIT Vs. REI Agro Ltd. in ITAT 161 of 2013 order dated 23.12.2013 directed the AO to compute the disallowance as per Rule 8D, figure of investment in clause (ii) and clause (iii) only those investments should be taken which have yielded exempt income during the year and accordingly, the disallowance was reduced. Aggrieved, both the revenue as well as assessee is in appeal before us.

3.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee had own funds in form of equity and free reserves of Rs.4882.89 cr. (as at the beginning of the year) and gross sales of Rs.3449.04 cr. which is far in excess of even the total investments as at 31.03.2010 which aggregates to only Rs.678.58 cr. So, assessee has own surplus funds, so presumption is that assessee has used its own funds for investment and not the borrowed funds for investment. We hold that the assessee has got sufficient own funds to make the investments and when that point is not in dispute, no disallowance could be made u/s 14A of the Act read with Rule 8D(2)(ii) of the Rules. Reliance in this regard is placed on the following decisions:-

CIT-vs.- Reliance Utilities & Power ltd. reported in 313 ITR 340 (Bom.)

Interest on borrowed capital- investments by assessee- finding that investments were from interest free funds available with assessee-borrowed capital for the purposes of business- interest deductible under Income Tax Act u/s 36(1)(iii).

G.D. Metsteel Pvt. Ltd. –vs.- ACIT reported in 142 TTJ 641 (Mumbai Tribunal) Held that the investments are made by the assessee’s own funds and have been made in the earlier years, no disallowance u/s 14A is required to be made. The Head Note reads as under:-

“Business expenditure-Disallowance under section 14A-Apportionment of expenditure- When investments are made from own funds, merely because the assessee had to subsequently borrow the funds for business use, it cannot be said that the borrowed funds have been used for the purposes of investments”.

CIT –vs.- HDFC Bank Ltd reported in 366 ITR 505 (Bom.) Held, dismissing the appeal, (i) that the finding of fact given by the Tribunal was that the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This

5 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 factual position was not one that was disputed. Undisputedly, the assessee’s capital, profit reserves, surplus and current account deposits were higher than the investment in the tax free securities. In view of this factual position, it would have to be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee.

Similar views were expressed in the following decisions:-

Woolcombers of India Ltd. –vs.- CIT reported in 134 ITR 219 (Cal.) East India Pharmaceuticals Works Ltd. –vs.- CIT reported in (1997) 224 ITR 627 (SC).

We find that though the decision in the case of Reliance Utilities power Ltd. was rendered in the context of allowability of interest u/s 36(1)(iii) of the Act, the analogy drawn thereon would apply with equal force for adjudicating the issue of disallowance u/s 14A of the Act. We also find that the Hon’ble Bombay High Court in the case of CIT –vs.- HDFC Bank Ltd. reported in 366 ITR 505 (Bom.) had also held the same view.

In view of the aforesaid facts and findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the ld. CIT(A) had erred in directing the AO to compute Rule 8D(ii) on the scrips which yielded dividend and, therefore, we modify the order to that extent and direct no disallowance to be made under Rule 8D(ii) of the Rules read with section 14A of the Act. Accordingly, the ground no. 2 raised by the assessee is partly allowed.

However, coming to Rule 8D(2)(iii) of the Rules, we note that assessee had earned exempt income to the tune of Rs.3,08,00,805/-. We note that the Ld. CIT(A) rightly directed disallowance @ .5% on the dividend earning scrip as held by Coordinate bench in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141. We confirm the Ld. CIT(A)’s order on computation of disallowance under Rule 8D(iii) of the Rules and order accordingly. Therefore, this ground of appeal of revenue is dismissed and assessee’s ground 2 of appeal is partly allowed.

6 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 4. Ground no. 3 of assessee’s appeal is against the order of Ld. CIT(A) in holding that the disallowance made u/s. 14A of the Act by invoking Rule 8D of the Rules will have to be added back while computing the book profit for the purpose of sec. 115JB of the Act.

4.1. We have heard rival submissions and gone through the facts and circumstances of the case. We also note that the issue is squarely covered by the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. Jayshree Tea & Industries Ltd. vide GA No. 1501 of 2014, ITAT 47 of 2014 dated 19.11.2014 wherein the similar question arose which reads as under: “2. Whether on the facts and in the circumstances of the case the Ld. Tribunal has erred in law in upholding the order of CIT(Appeals) that disallowance under Section 14A of the I. T. Act, 1961, amounting to Rs.2,20,15,787/- is not to be considered for book profit for calculation of book profit under section 115JB of the I. T. Act, 1961?” On this question, the Hon’ble High Court has observed as under: “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 u/s. 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal.” We also note that the Special Bench of ITAT Delhi bench in ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 taxmann.com 415 (Delhi.Trib (SB) has held as under:

“6.22. In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) Explanation 1 to section 115JB(2) is to be made without resorting to the computation as contemplated u/s. 14A read with Rule 8D of the Income-tax Rules, 1962.” Respectfully following the orders of Hon’ble High Court and Special bench, (supra), we restore the matter to AO to calculate the book profit u/s. 115JB of the Act as per the dictum of Hon’ble High Court. It is reiterated that the disallowances made under the provisions of Sec. 14A r.w.s 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act. Therefore, the AO shall work out disallowances in terms of the clause (f) to Explanation-1 of Sec. 115JB of the Act independently after considering the expenses debited in the profit & loss account as mandated under the provisions of law. Accordingly, this issue of assessee’s appeal is allowed for statistical purpose.

7 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 debited an amount of Rs.398 lakhs to its P&L Account for leave encashment. Out of this, an amount of Rs.275 lakhs had been paid during the year but the balance sum of Rs.123 lakhs remained unpaid. The AO added back the same by invoking provision of sec. 43B(f) of the Act. On appeal, the Ld. CIT(A) confirmed the disallowance of Rs. 123 lakhs made u/s. 43B(f) of the Act. Aggrieved, assessee is before us.

“4. After hearing rival submissions and going through the facts and circumstances of the case and the order of the Tribunal cited supra, we find that the issue is dealt by the Coordinate bench of this Tribunal as under:

“3. At the outset, ld. senior counsel for the assessee submitted that in all these three appeals, the issue relates to allowability of provision for leave encashment in terms of sub-section (f) of section 43B of the Income Tax Act. The assessee had advanced its claim relying on the decision of the Hon’ble Kolkata High Court in the case of M/s. Exide Industries Ltd. reported in 292 ITR 470. However, the Assessing Officer did not accept the assessee’s claim observing that Department has preferred a Special Leave Petition before the Hon’ble Supreme Court and stay of the order of the Hon’ble Kolkata High Court was granted by the Hon’ble Apex Court. Ld. senior counsel submitted that under identical circumstances, Tribunal has restored the matter to the file of Assessing Officer to decide the issue in accordance with the decision of the Hon’ble Apex Court in the case of DCIT, Circle-8, Kolkata –vs.- M/s. Ernst & Young Pvt. Ltd. in ITA No. 1787/Kol./2008. He, therefore, submitted that the matter may be restored back to the file of Assessing Officer. 4. Learned Departmental Representative did not raise any objection. 5. We have considered the submissions of both the parties and have perused the records of the case. We find that Tribunal on identical issue in ITA No. 1787/Kol./2008 in the case of M/s. Ernst & Young Pvt. Ltd. has observed at para 12 in page 6 as under :- “12. Ground No. 5 of the revenue’s appeal is against the relief allowed by the CIT(A.) in respect of provision for leave encashment which was deleted by the CIT(A.) following the decision of the Hon’ble jurisdictional High Court in the case of M/s. Exide Industries Ltd. (supra). It was pointed out by the ld. DR that the Hon’ble Apex Court in”SLP (Civil) 22889 of 2008 has stayed the operation of the decision of the Hon’ble jurisdictional High Court. In view of the above, we set aside the orders of the authorities below on this point and restore the matter back to the file of the AO with the direction that he will readjudicate this issue as per

8 ITA Nos.1304/Kol/2014 & 1187/Kol/2014 CESC Ltd. , AY- 2010-11 decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (supra)”. Respectfully following the same we set aside the orders of authorities below on this point and restore the matter back to the file of Assessing Officer for adjudication as per the decision of the Hon’ble Apex Court in the case of M/s. Exide Industries Ltd.(supra).

In view of the above and respectfully following the same, we set aside the orders of the authorities below and restore the matter back to the file of Assessing Officer for adjudication as per the decision of Hon’ble Apex Court in the case of M/s. Exide Industries Ltd. (Supra). This ground of appeal of assessee is allowed for statistical purposes.”

Order is pronounced in the open court on 13th June, 2018.

Sd/- Sd/- (M. Balaganesh) (Aby. T. Varkey) Accountant Member Judicial Member

Dated : 13th June, 2018

Jd.(Sr.P.S.)

Copy of the order forwarded to:

Revenue – DCIT, Circle-6, Kolkata. . 1. Assessee – CESC Ltd., CESC House, Chowringhee Square, Kolkata-700 2 001. The CIT(A) - VI, Kolkata (e-mailed) 3. 4. CIT , 5. DR, ITAT, Kolkata. (e-mailed) /True Copy, By order,

Senior Pvt. Secy.