TAMILNADU INDUSTRIAL DEVELOPMENT CORPORATION LIMITED,CHENNAI vs. ACIT, CHENNAI

For ay 2009-10 :

“1. The order of the Commissioner of Income Tax (Appeals) CIT(A) is contrary to law, facts and in the circumstances of the case.

2. The CIT(A) erred in confirming the disallowance of interest expenses amounting to Rs. 7,65,03,412/-. 2.1 The CIT(A) ought to have appreciated that out of the upfront land lease rent from M/s. TrilInfopark a sum of Rs. 83.66 crores has been utilised by the Appellant instead of passing on to the Government. Government of Tamilnadu has treated this amount and charged interest on this amount. Hence the interest was paid in respect of amount used for the purpose of Appellant's business and hence allowable. 2.2 The CIT(A) ought to have appreciated that this interest expense incurred on the term loan used for the purpose of Appellant's business is an allowable expenditure.

3. The CIT(A) erred in confirming the disallowance on provision for enhanced compensation for Rs. 25,66,33,427/-. 3.1 The CIT(A) ought to have appreciated that Appellant acquired 1123.16 acres of patta lands and leased the same to L& T Shipbuilding project. The upfront lease premium was treated as business income and the cost of acquisition was allowed as a deduction. The cost of acquisition of land is in the revenue field. 3.2 The CIT(A) ought to have appreciated that the Sellers of the land had approached the Court for enhanced compensation and as per Sub Court order the enhanced Compensation of Rs.6,25, 13, 1251 - was paid for 220 acres. On this basis, enhanced compensation for the balance area worked out to Rs.25,66,33,427/- which has been claimed as deduction on the basis of provision made for that amount. 3.3 The CIT(A) erred in not appreciating that the additional liability on account of enhanced compensation for the balance land on the basis of the judgement of the sub court was accepted by the Appellant and hence a provision was made for the balance o903.16 acres amounting to Rs.

:-4-: & 1160/Mds/2017 25,66,33,427/-. This is an ascertained liability accepted by the Appellant accrued as on 31.03.2009. 3.4 The CIT(A) ought to have appreciated that out of 1123.16 acres, enhanced compensation amount of Rs.13,39,04,747/- in total have already been paid for 419 acres as on 19.04.2011 in respect of land leased to L&T Shipbuilding Ltd. 3.5 The CIT(A) ought to have appreciated that for the balance 704.16 acres, the owners of land have already filed petition for enhanced compensation through the Land Acquisition Officer (Special Tahsildar) in the Sub-Court, Ponneri and they are certain to get atleast a compensation of Rs.2,84, 150.571- per acre as per the already subsisting judgment of the Sub- Court, Ponneri.

4. The CIT(A) erred in confirming the disallowance of interest towards TIDEL land cost amounting to Rs. 37,98,94,579/-. 4.1 The CIT(A) ought to have appreciated that the appellant depends on the Govt of Tamilnadu for its working fund to carry on the business of promotion and development of industries in the State, as it is a wholly owned undertaking of the Tamilnadu Govt. 4.2 The CIT(A) ought to have appreciated that this arrangement gives rise to various financial transactions between the appellant and the Govt of Tamilnadu. 4.3 The CIT(A) erred in not appreciating the fact that the appellant had some dues from the Govt of Tamilnadu and some dues to the Govt of Tamilnadu. After adjusting these dues, the balance is shown as payable to the Govt. 4.4 The CIT(A) ought to have appreciated that the Govt of Tamilnadu issued Letter No. 14984/MIE.112009-2 dt 29.09.2009 directing the appellant to repay the principal loan amount and interest received from Tidel Park Ltd along with interest at 10% p.a. from the date of receipt from Tidel Park Ltd. 4.5 The ClT(A) ought to have therefore appreciated that the total interest of Rs. 37,98,94,579/- accrued only during the financial year 2008-09 and hence ought to be allowed as revenue expenditure.

5. The CIT(A) erred in confirming the disallowance of assessee’s claim u/s. 10(34) relating to claim towards preference dividend received from JSW Steel Ltd vide letter dated 12.12.2011 amounting to Rs. 5,94,00,000/-.

:-5-: & 1160/Mds/2017

5.1 The CIT(A) ought to have directed the assessing officer to exclude the same u/s. 10(34).”

For ay 2010-11 :

“ 1. The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The CIT(A) erred in confirming the disallowance of Rs. 13,16,26,568/- u/s. 14A r.w. Rule 8D. 2.1 The CIT(A) ought to have appreciated that only the actual expenditure incurred to earn the exempt income has to be disallowed. 2.2 The CIT(A) ought to have appreciated that Section 14A can be invoked only if the assessing officer is not satisfied with the correctness of the claim of the appellant in respect of such expenditure in relation to income which does not form part of the total income. 2.3 The CIT(A) ought to have appreciated that in the present case, the appellant had worked out the expenditure at Rs. 2,04,29,812/-. Further, the appellant has accepted for additional disallowance of Rs. 63,17,6961- vide letter dt 20.12.2012. Hence, without giving any reasons for rejecting the correctness of the claim, the assessing officer cannot work out the disallowance u/s.14A r.w.r.8D. 2.4 The CIT(A) ought to have appreciated that the Assessee had been allotted shares in companies promoted by them in partnership with private parties. The investments have been held by ITA as business assets and hence provisions of Section 14A will not apply to business investments. 2.6 The CIT(A) failed to appreciate that as per Rule 8D, only the average value of investment, income from which does not or shall not form part of the total income, should be taken into consideration for the computation. Investments from which no dividend income was received should not be considered for the purposes for computing the disallowance. Computer Age Management Services (P) Ltd Vs ACIT to 12611Mdsl2014 3. The CIT(A) erred in confirming the disallowance of Rs. 16,02,435/- being prior period expenditure. 3.1 The CIT(A) ought to have appreciated tha approval for the same has been accorded by the competent authority during the financial year 2009-

:-6-: & 1160/Mds/2017 10 relevant to the assessment year2010-11 and hence the liability as expenditure had accrued only in the current year.

4. The CIT(A) erred in confirming the disallowance of interest paid on the term loan from the Government of Tamilnadu amounting to Rs. 79,84,285/- 4.1 The CIT(A) ought to have appreciated that this interest relating to financial year 28.05.2009 to 31.03.2010 has been claimed as expenses through revised return of income filed on 26.09.2011 for AY 2010-11 even though it is paid in the financial year 2010-11 relating to the AY 2011-12. The assessing officer has wrongly disallowed this amount since the nomenclature given is 'Penal Interest'. 4.2 The CIT(A) ought to have appreciated that the expenditure is merely an interest for delayed payment of principal amount and is compensatory in nature though the nomenclature is given as penal interest. The interest expenditure arises out of the contractual obligation between the parties and is not for any purpose which is an offence or prohibited under law and is hence an allowable expenditure. Mahalakshmi Sugar Mills Co Vs CIT 123 ITR 429 SC 4.3 The CIT(A) ought to have appreciated that the assessing officer failed to explain under what section he has disallowed the expense.

5. The CIT(A) erred in confirming the disallowance of Interest paid on Ways and Means Advance amounting to Rs. 37,80,822/- 5.1 The CIT(A) ought to have appreciated that the interest was payable on Ways and Means Advance of Rs. 50 crores received from the Government of Tamilnadu. The Government has changed interest on the ways and means advance utilised by the Appellant in its business and hence an allowable deduction.

6. The CIT(A) erred in confirming the unsuccessful project promotion expenses written off of Rs. 12,11,673/-. 6.1 The CIT(A) ought to have appreciated that the main business of the appellant is promoting and developing Industries in the State of Tamilnadu. 6.2 The CIT(A) ought to have appreciated that the facts in EID parry case 257 ITR 253 is distinguishable. EID Parry is putting up its own" project and not promoting industries. 6.3 The CIT(A) erred in not following the Hon’ble Jurisdictional High Court in Appellant’s own case reported in 215 CTR 90 and Hon’ble Tribunal

:-7-: & 1160/Mds/2017 judgment in the appellant’s own case in (Mds) 2000 dated 04.09.2006.”

“With regard to disallowance of interest payment of Rs. 7.65 Crores in respect of loan from Govt of Tamil Nadu, the loan is the amount recovered from TRIL Info Park which was required to be passed on to the TN Govt, but which was retained by the Appellant.

The Assessee had received upfront lumpsum amount received from M/s TRIL Info park Ltd of Rs. 1412.80 Crores. TIDCO vide their letter dt.25.09.2009 has furnished the inflow and outflow for the receipts of Upfront Land Lease Rent from M/s. TRIL Infopark Ltd ofRs.1412.80 Crore, to the Government of Tami1nadu:

Inflow: Date Rs. in Crore Upfront land lease rent received from TRIL Infopark Ltd 28.05.2008 1412.80 Outflow: Upfront land lease rent 29.05.2008 1320.95 remitted to Government Balance 91.85 Balance was utilized as under: Repayment of Principal - Govt. Ways &Means Advance (availed to meet FD refunds) 27.06.2008 50.00 Repayment of Principal - Govt. 05.06.2008 19.50 Ways &Means Advance (availed for :-8-: & 1160/Mds/2017 subscribing to Right Issue of TITAN) 27.06.20082.82 Payment of Interest on Govt. 29.05.2008 10.63 Ways &Means Advance 05.06.2008 0.33 27.06.2008 0.38 Repayment of Bank Overdraft 6.01 Short Term Deposit with Bank 2.18 Total 91.85 from the above statement, it can be seen that out of the total outflow of Rs.91.85 Crones, a sum of Rs.8.19 Crore is only paid to persons other than Government of Tamilnadu. The sum of Rs.83.66 Crore were paid only to Government of Tamilnadu for the various interest bearing loans taken earlier.

But as per the original directions of Govt of Tamil Nadu, TIDCO was to retain only Rs. 5.5.Crores as their service fees. Hence, the assessee made request to Government of Tamilnadu to treat the balance sum of RS.8634.43 lakh as Term Loan to TIDCO for a period of three years carrying interest @ 10.50% p.a. with effect from 28.05.2008. Govt of TN had agreed for the proposal observing as under:

"Considering the cash flow position, the Government have decided to accept the request of Chairman and Managing Director in paragraph (6) above. Accordingly, the Government direct that the sum of Rs.86,34,43,000 / - (Rupees Eighty six crores thirty four lakhs forty three thousand only) due from TIDCO be treated as Government's Term Loan to TIDCO for a period of 3 (three) years with effect from 28.5.2008, date on which TIDCO received the upfront land lease rent from TRIL, with interest at 10.5% per annum."

Thus the Parties, TIDCO and Govt of TN have considered the amount of loan payable by TIDCO to Govt of TN as loan carrying interest @10.5%

:-9-: & 1160/Mds/2017 from 28.5 2008. Thus, the interest of Rs. 7,65,03,412/ - for the period 28.5.2008 to 31.3.2009 is an allowable deduction for AY 2009-10.

3.1 The decision of the CIT (A) is extracted as under :

“The above submission has been carefully considered. The appellant's reliance on a Government of Tamil Nadu order dated 25.09.2009 wherein the assessee company has requested the Government of Tamil Nadu to treat the additional escalation amount of Rs.86.34 Cr. as term loan for the period of 3 years @ 10.5% of interest and against that the order of the Government were received on 11.03.2010 treating the same as term loan. Relying on this, the appellant argues that the provisions made are as per the Income Tax laws. The assessee has been following mercantile system of accounting. Therefore, any action taken by the assessee based on the above Government order amounts to afterthought since the accounts of the assessee are to be considered for the year ending 31.03.2009 only. The Government G.O. order is released on 11.03.2010 which clearly shows that liability is not crystalised during the AY 2009-10 and therefore, the additional escalated amount received gets classified as current liabilities of AY 2009-10. In view of the G.O., the nature of liability can be treated as thumb rule only from the date of G.O. is released. Therefore, the provision made on account of interest payment on such liabilities pertaining to AY 2009-10 is not as per the law and not in line with the accounting procedures. Accordingly, I confirm the action of the AO treating interest amount of Rs.7,65,03,412/ -which is charged @ 10.5% on escalated amount of Rs.86,34,42,960/ - and debited as interest in P&L account is only a contingent liability and rightly disallowed by the AO and added to the income. The ground of appeal on this issue is therefore dismissed.”

3.2 The AR pleaded that if the impugned interest not allowed in ay 2009- 10, since the appeal related to a y 2010-11 is before this tribunal, the AO may be directed to allow the same. Per contra, the DR relying on the order of the :-10-: & 1160/Mds/2017 CIT(A) and the Government order dt 11.03.2010, supra, submitted that interest ,if any, accrues from such date , prospectively .

3.3 We heard the rival submissions and gone through relevant material.

Although, the assessee retained the money payable to Govt, there was no decision to levy interest till the date i.e., 11.03.2010, the above order was issued . Hence, the interest payable on the retained money accrues from 11.03.2010 , in accordance with mercantile method of accounting employed by the assessee. Hence, the disallowance made by the AO is sustained for this assessment year. Assessee’s grounds are dismissed.

“During the year under consideration the Assessee has acquired 1123.16 acres of land and leased the same to L&T Ship Building Project (L&T). TIDCO arrived at the cost of acquisition of the said land at Rs.37,50, 13,872/ - and upfront lumpsum amount collected from L&T lease amount was Rs.24,62,42,480/-. The Assessee had worked out cost of acquisition of the land at Rs.37,50,13,872/- as under: Original price paid Rs. 3,10,61,322.90. Enhanced Compensation for 220 acres paid as per order of Sub Court for 220 acres was Rs. 6,25,13,1254.99. The Assessee therefore provided for enhanced compensation for the balance 903 acres at the same rate as awarded

:-11-: & 1160/Mds/2017 by the Sub Court and which has been accepted by TIDCO amounting to Rs. 25,66,33,427/-. As the enhanced compensation for 220 acres has been fixed and paid corresponding enhanced compensation for the balance 903 acres would be payable as the enhanced compensation fixed by the Sub Court for 220 acres has been accepted by TIDCO. .Thus, the provision for enhanced compensation of Rs. 25,66,33,427/- is a crystallized liability payable to the balance 903 acres. As this enhanced compensation per acre is ordered by the court and accepted by TIDCO the provision made of Rs.25.66 crores was an ascertained liability to be settled in future. Hence this is an allowable deduction. It may be pointed out that the assessee had in fact paid a substantial portion of this amount over the subsequent period. The payment from 08.04.2009 to 31.03.2012 amounted to Rs.8,89, 19,249/ -. Out of the balance of Rs.16.77 crores RS.145650729/ - was paid on 02.07.2003 leaving a balance of RS.22063449/ - as on 01.04.2014. These payments have not been claimed as a deduction in the years of payment in view of the fact that the Assessee has claimed the entire provisions of Rs.25.66 crores in the assessment year 2009-10. Therefore the provisions made which has been based on reasonable estimate on accepted enhanced compensation should be allowed for the asst year 2009-10. Alternatively direction may be given to allow this payment as and when the same has been paid by the Company. ”

4.1 The decision of the CIT(A) is extracted as under :

“I have carefully considered the appellant's submission. In the assessee's case, the land acquisition process has started as back as in the year 1999. It is clear from the contention of the appellant that some of the aggrieved land owners had moved for enhancement of compensation before their respective Tahsildhars. The appellant had submitted that so far 220 acres of land owners has gone for enhanced compensation. Accordingly, in their cases, the liability of enhanced compensation has crystalized and thereafter it was paid by the assessee also. However, based on estimation and towards balance 903 acres of land the assessee has made provision for enhanced compensation for Rs.25.66 crores. The assessee has not furnished any details

:-12-: & 1160/Mds/2017 before the AO. Now that the possession of the entire land has been transferred to L&T Shipbuilding project more than 10 years has lapsed since the date of land acquisition process started in the year 1999. The assessee is not able to put before the evidences of enhanced compensation for the balance land of 903 acres. Therefore, just because 220 acres of land owners have applied for enhanced compensation cannot be a ground for estimation for balance 903 acres of land. Thus, appellant is not able to justify the claim for provision of enhanced compensation for balance 903 acres of land with supporting evidence, makes it clear that provision made by the assessee company for enhanced compensation is nothing but a contingent liability. However the same is not ascertained liability. Therefore, I confirm the action of AO disallowing provision for enhanced compensation for Rs.25,66,33,427/-. The ground of appeal on this issue is therefore dismissed.”

4.2 Before us, the AR relied on the letter in MS. No. 120 dated 17.05.2007.

The relevant contents of Industries Department letter dated 17.05.2007 is extracted as under:

“ Sub: TIDCO – Acquisition of Land for Petrochem Park Payment of compensation to the land owners before LokAdalat – Proposal – Approved. Ref: 1. From Thiru A. Ramamurthi, Letter dated 10.04.2006 2. Your letter No. LA/PCP/LokAdalat/2006, dated 11.12.2006 and 18.01.2007. I am directed to invite attention to the letter second cited and to convey the approval of Government authorizing TIDCO for settlement of Rs. 3100/- (Rupees Three thousand one hundred only) per cent inclusive of all statutory benefits and in full and final settlement of the claims of the land owners under section 18, 23, 28(2) and any other applicable relevant provisions of the Land Acquisition Act for the Lands acquired in four villages viz., Voyalur, Kattupalli, Kalanji and Puzhuthivakkam villages, PonneriTaluk, Thiruvallur District for petrochem park project and to settle the matter between TIDCO and the Land Owners before LokAdalat. This letter issues with the concurrence of Finance Department vide its U.O. No. 261/SS(KPR)/07, dated 17.05.2007.” and submitted based on this order, the assessee has provided for the enhanced compensation, which is an ascertained liability to be settled in :-13-: & 1160/Mds/2017 future. He invited our attention to the fact that the substantial amount was paid in the subsequent period from 08.04.2009 to 31.03.2012 and on 02.07.2003 and the balance of Rs. 2,20,63,449/- is pending as on 01.04.2014.

The AR submitted what is relevant is whether the liability has accrued or not and in the assessee's case based on the above orders and facts it is accrued.

If at all, there is excess provision, there are sufficient provisions in the Act to charge it at appropriate time. However, if the assessee has not provided, it cannot claim it in the later period as the accrual cannot happen later. Per contra, the DR relied on the orders of the AO/CIT(A).

4.3 We heard the rival submissions. It is clear from the AR’s submission and the available evidences that the enhanced compensation has accrued and accordingly, the assessee has provided. In the facts and circumstances, the assessee’s appeal is allowed.

“The proportionate cost of 1123.16 acres of patta lands leased to L&T Shipbuilding project has been worked out as per details given in the page(3) of the Assessment Order.(extracted in para 3,supra.) As per the details given in the Assessment Order, it can be seen that proportionate Enhanced Compensation paid to 220 acres as per the order of the Sub-Court, Ponneri worked out to Rs.6,25, 13, 124.99. On this basis, average enhanced compensation for one acre works out to Rs.2,84,150.57.

:-14-: & 1160/Mds/2017

Out of 1123.16 acres, so far, enhanced compensation amount of Rs.13,39,04,747/-in total have already been paid for 419 acres as on 19.04.2011 in respect of land leased to L&T Shipbuilding Ltd. For the balance 704.16 acres, the owners of land have already filed petition for enhanced compensation through the Land Acquisition Officer (Special Tashildar) in the Sub-Court, Ponneri and they are certain to get atleast a compensation of Rs.2,84,150.57 per acre as per the already subsisting judgement of the Sub-Court, Ponneri. In fact, the enhanced compensation already settled and paid are due to the mutual agreement between the land owners, the Land Acquisition Officer (Special Tashildar) and TIDCO before the LokAdalat which were confirmed by the Sub- Court, Ponneri. Hence, the liability in this regard is more or less confirmed by the Land Acquisition department of TIDCO. Based on the above information, provision has been made in the accounts for the liability of enhanced compensation of Rs.2,84, 150.57 per acre for 903.16 acres which works out to Rs.25,66,33,427/, which is liability accrued as on 31.03.2009 and provided in accounts by increasing the proportionate cost of patta lands leased to L&T Shipbuilding project. In fact, TIDCO has paid enhanced compensation of Rs.7,13,91,622/- as on 19.04.2011 against the provision amount of Rs.25,66,33,427/-. The details for the above interest amount provided in the books of accounts of TIDCO for the year ended 31.03.2009 are given below:-

Sl.No Particulars Amount in Rs. 1 Interest received from TIDEL Park Ltd and 22,26,87,840 not returned to Government of Tamilnadu from 2003 to 2006 and offered as income of TIDCO for the various financial years 2 Interest payable from the date of receipt 14,46,15,403 of interest / principal upto 31.03.2008 3 Interest due for the year ended 1,25,91,337 31.03.2009 Total 37,98,94,580

:-15-: & 1160/Mds/2017

TIDCO, as already mentioned, is a wholly owned Government of Tamilnadu undertaking and mainly depends for its working fund from Government of Tamilnadu to carry on its business of promotion and development of industries in the state of Tamilnadu. The business of promotion and development of industries in the State of Tamilnadu gives raise to various financial transactions between TIDCO and the Government of Tamilnadu. As on 3l.03.2008, following amounts were due from Government of Tamilnadu to TIDCO.

Sl.No Particulars Amount in Rs. 1 Dues from Government of Tamilnadu 22,20,89,440.65 on account of JLPP upto 31.03.2008 2 Sundry Debtors - JLPC 4,00,01,231.26 3 JLPP - Advance for Advertisement 1,97,300.15 Total 26,22,87,972.06

In order to adjust above dues and dues from Government of Tamilnadu to TIDCO on account of Foreign currency loan settled by TIDCO on behalf of Tamilnadu Industrial Explosives Ltd amounting to Rs.19,60,28,573.15, the Government of Tamilnadu issued Letter No. 14984/MIE.1/2009-2 dated 29.09.2009 directing TIDCO to repay the principal loan amount and interest received from TIDEL Park Ltd along with interest @ 10% p.a. from the date of receipt from TIDEL Park Ltd. Accordingly, the total interest of Rs.37,98,94,580/- accrued only during the financial year 2008-09 and provided in the accounts for the year ended 31.03.2009. This accounting treatment accords with the generally accepted accounting principle. Hence, required to be allowed as revenue expenditure. As TIDCO is required to pay interest on the amount owed to TN State Government in respect of amounts used for the business of the Assessee, the interest accruing during the year of Rs.37,98,94,579 / is an allowable deduction. ”

:-16-: & 1160/Mds/2017 5.1 The decision of the CIT (A) is extracted as under :

“I have carefully considered the appellant's above submission. In the accounts of AY 2009-10, the assessee has shown loan of Rs.21 ,75,00,000/ - due to the Government of Tamil Nadu towards TIDEL Land cost. However, no accrued interest is charged in the same year which clearly shows that the loan is interest free loan. It is only after the Government order dated 29.09.2009 wherein in the said Government order, it is mentioned that TIDCO has to pay the Government of Tamil Nadu on TIDEL land cost loan @ 10% of interest per annum from the date of receipt from TIDEL. The Government order dated 29.09.2009 cannot be given effect to AY 2009-10 as the assessee has been following mercantile system of accounting. Therefore, charging heavy interest pertaining to earlier years on the basis of G.O. and adjusting the same towards dues of Government of Tamil Nadu is not as per the law and not in accordance with accounting principles. As such it was open to the assessee to provide the interest from day one i.e. from AY 2002-03 on the TIDEL land cost loan. The assessee has been following mercantile system of accounting despite that, the same was not done. Therefore, the assessee charging interest from day one on the basis of G.O. in the current year which pertains to the earlier years and there has been no G.O.s in the respective years and therefore, now charging the interest based on G.O. order is nothing but an after thought and not sustainable in the yes of law. If the loans were bearing interest then the interest liability should have come for the respective AY in the balance sheet as the assessee has been following mercantile system of accounting. But the same is not found in the balance sheet of the respective years. Therefore, assessee charging interest based on the G.O. is treated as afterthought and not in accordance with the Income Tax Act or accounting standards laid to the mercantile accounting system. Therefore, I confirm the action of AO disallowing interest provision for Rs.37,98,94,579/-. The grounds of appeal on this issue is accordingly dismissed ”.

5.2 The AR pleaded that the impugned interest is provided as per the Government’s order dated 29.9.2009 and hence the AO may be directed to allow the same. Per contra, the DR relying on the order of the CIT(A) and the :-17-: & 1160/Mds/2017 Government order dt 29.9.2009, supra, submitted that interest ,if any, accrues from such date ,prospectively only .

5.3 We heard the rival submissions and gone through relevant material. It is clear from the Govt. order dt 29.9.2009 , there was no decision to charge interest till the date ie 29.9.2009, the above order was issued. Hence, interest payable on the impugned loan accrues from 29.9.2009 only. Hence, the disallowance made by the AO is sustained for this assessment year.

Assessee’s grounds are dismissed.

6.1 In this regard, the CIT(A) held that this issue is not the subject matter of the assessment order and therefore he dismissed the assessee’s claim. In this regard, the AR invited our attention to the letter filed by the assessee before the Joint Commissioner of Income Tax, Company Range III in Letter No. ACD/AI/IT/A.Y. 2009-10 dated 12.12.2011 , the relevant portion is extracted as under:

:-18-: & 1160/Mds/2017

“ Settlement of arrears of preference dividend from M/s. JSW Steel Limited: During the financial year 2008-09 corresponding to the Assessment year 2009- 10, TIDCO received a cheque for Rs. 5.94 crores from JSW Steel Limited as full and final settlement of the outstanding claim towards arrears of dividend on 15% Redeemable Cumulative Non Convertible Preference Shares held by TIDCO in erstwhile Southern Iron & Steel Company Limited. In the Original Return as well as Revised Return filed by TIDCO, there was an inadvertent mistake that has crept in, in that TIDCO omitted to claim exemption u/s. 10(34) of the Income Tax Act 1961 in respect of an amount of Rs. 5.94 crore received from JSW Steel Limited as full and final settlement of the outstanding claim towards arrears of dividend on 15% Redeemable Cumulative Non Convertible Preference Shares held by TIDCO in erstwhile Southern Iron & Steel Company Limited. We pray to your honours, kindly grant us the deduction available u/s. 10(34) of the Income Tax Act 1961 in respect of the arrears of Cumulative Preference Dividend of Rs. 5.94 crores and render justice. We shall shortly file the revised statement of total income in this regard. A copy of letter dated 01.12.2008 of JSW Steel Limited enclosing the cheque for Rs. 5.94 crore is enclosed.” and pleaded that the AO may be directed to allow this claim. Per contra, the DR relied on the order of the CIT(A) .

6.2 We heard the rival submissions and gone through relevant material. It is clear from the above that the assessee has omitted to claim the same .

However, it claimed the same at the time of assessment. In the facts and circumstances, this issue require re-examination and hence we deem it fit to restore the matter back to the AO for a fresh examination and to pass appropriate order, after affording adequate opportunity to the assessee . On :-19-: & 1160/Mds/2017 such examination, if the above claim is found correct as canvassed by the assessee , the AO shall allow the claim , in accordance with law. The corresponding appeal grounds are treated as allowed.

For ay 2010-11 :

7.1 During the year under consideration, the appellant received income by way of dividend (Others) from Indian companies amounting to Rs.16,96,28,487/-and claimed the said amount as exempt from tax. However, in the return of income filed, the appellant itself has disallowed an amount of Rs.2,04,29,812/- on account of expenditure relatable to dividend income as

per Section 14A of the Act.

While completing the assessment, the Assessing Officer resorted to disallowance of expenses under section 14A with reference to Rule 8D of the Income-tax Rules. During the course of assessment proceedings, the appellant had submitted a letter dated 20.12.2012 in which the appellant had brought to the notice of the Assessing Officer that the average value of investment, income from which does not or shall not form part of total income was only Rs.126,35,39, 104/- and further requested the Assessing Officer to disallow 0.5% of the same viz. Rs.63,17,696/- which was omitted to be :-20-: & 1160/Mds/2017 disallowed in the return be disallowed under section 14A over and above what has been already disallowed by the appellant itself. However, the Assessing Officer took the average value of investment income from which does not or shall not form part of total income at Rs.292,61,41,268/- and proceeded to work out the disallowance under section 14A. He thus determined the disallowance under section 14A at Rs.15,20,56,380/- and after deducting the disallowance made by the appellant in the return, made a further disallowance of Rs.13,16,26,568/-.

Your appellant submits that the working made by the Assessing Officer is totally wrong. The average value of investment adopted by the Assessing Officer for purposes of section 14A disallowance is wrong and would give a distorted figure. The Assessing Officer has failed to note that section 14A prevailed over Rule 8D and when section 14A talks about "income which does not form part of the total income under this Act" the usage of "shall not" is redundant in the rule and that too opening paragraph of the sub-rule 2 of rule 8D and closing line of sub-rule 1 of rule 8D talks about only "income which does not form part of the total income" and the word "shall not" is used only in defining factor "B" and in clause 3 of sub-rule 2 of rule 8D.

Your appellant submits that the entire working under rule 8D requires to be reviewed since loans are directly connected to some specific purposes not related to investments yielding exempt income.

:-21-: & 1160/Mds/2017 Your appellant further submits that when the dividend income received by the appellant was itself in the order of Rs.16,96,28,487 / -, the disallowance made by the Assessing Officer being Rs.15,20,56,380/-, works out to nearly 90% of the dividend income which is totally incorrect considering the total investment made by the appellant under the exempted category with reference to the gross investment.

Your appellant submits that the decision of the ITAT, Delhi in the case of Lloyd Insulation (India) Ltd. (Order dt.9.8.20 12) is applicable to the appellant's case.

Your appellant submits that if the correct amount of value of investment is taken into account, the disallowance under section 14A LW. Rule 8D would work out as under:

1 Expenses directly relatable to income which does not Nil

Form part of total income 2 Interest expenditure incurred by the assessee during the year

A. Total interest debited Rs. 23,44,35,652 B. Average value of investment income From which does not or shall not form Part of total income As on 1.4.2009 Rs.126,35,39,104 As on 1.4.2010 Rs.126,35,39,104 C. Average of total assets: As on 1.4.2009 Rs.483,52,40,680 As on 1.4.2010 Rs.514,82,18,976 Average Rs. 499,17,29,828

:-22-: & 1160/Mds/2017 Therefore A X B / C i.e. 234435652 x 1263539104 = Rs.5,93,41,876 4991729828 Add: one half percent of the average value Of investment Rs. 63,17,695 Total disallowance u/s.14A Rs.6,56,59,571 Less: Amount disallowed by the appellant Rs.2,04,29,812 Balance to be disallowed Rs.4,52,29,759 If at all any further disallowance is to be made under section 14A r.w. Rule 8D, the above sum of Rs.4,52,29,568/- only should be made as against the disallowance of Rs.13, 16,26,568/ - made by the Assessing Officer.

7.2 It is requested that the Commissioner of Income-tax(Appeals) may kindly cancel the disallowance made by the Assessing Officer in toto. If, however, it is held that the disallowance should be made with reference to Rule 8D, the above working which has taken into account the correct amount of investment made by the appellant, may be directed to be adopted.

7.3 The decision of the CIT (A) is extracted as under :

“The appellant's above submission have been carefully considered. The appellant contended that the AO has not correctly work out the disallowance as per Rule 8D. The average value of the investment adopted by the AO for the purpose of calculation u/s 14A r.w.Rule8D(2)(ii) is wrong and gives distorted figures. For this argument the AR claims that some of the loans are directly connected to some specific purposes not related to investments yielding exempt income and for which relies on the Delhi ITAT decision in the case of Lloyd Insulation India Ltd. and further claims that the dividend income received by the appellant is for Rs.16,96,28,487/ -. However, disallowance quantified by the Assessing Officer u/s.14A r.w.Rule BD(2) for Rs.15,20,56,38O / - works out

:-23-: & 1160/Mds/2017 nearly 90%of the dividend income which is totally incorrect considering the total investment made by the appellant under the exempted category with respect to gross investment. The appellant's contention has been carefully considered and I have verified to the calculation of disallowance made u/s 14A r.w.Rule8D(2) by the AO and in doing so, the AO has taken figures supplied by the assessee by way of Balance Sheet and in arriving to a average investment the AO has followed the investment as on 1.4.2009 and the investment year ended 31.3.2009 and arrived to a average investment. Similarly, as regard the average asset the AO has taken the asset as on 1.4.2009 and asset year ended 31.3.2009 and arrived to average assets. The appellant does not qualify for investment for specific purpose, therefore, I do not see any infirmity with the findings of the Assessing Officer . Accordingly, disallowance made by the AO u/s 14A r.w.Rule8D(2) for Rs.15,20,56,380/- is upheld. The assessee on his own has made disallowance u/s 14A r.w.Rule 8D(2) for Rs.2,04,29,812/-, therefore the same is given credit and balance amount Rs.13, 16,26,568/- disallowed by the AO u/s 14A r.w.Rule 8D(2) is hereby confirmed. The ground of appeal on this issue is accordingly dismissed.”

7.4 The AR contended that the AO has not correctly worked out the disallowance as per Rule 8D. The average value of the investment adopted by the AO for the purpose of calculation u/s 14A r.w.Rule 8D(2)(ii) is wrong and gives distorted figures. The AR claims that some of the loans are directly connected to some specific purposes not related to investments yielding exempt income and for which relies on the Delhi ITAT decision in the case of Lloyd Insulation India Ltd. and further claims that the dividend income received by the appellant is for Rs.16,96,28,487/ -. However, disallowance quantified by the Assessing Officer u/s.14A r.w.Rule BD(2) for Rs.15,20,56,38O / - works out nearly 90% of the dividend income which is totally incorrect considering the total investment made by the appellant under the exempted category with respect to :-24-: & 1160/Mds/2017 gross investment. The assesse has also furnished a separate workings. From the above, it appears that the assessee’s claim has not been examined with facts and figures either for acceptance or rejection of the claim. In the facts and circumstances, this issue require re-examination and hence we deem it fit to restore the matter back to the A O for a fresh examination and to pass appropriate orders, after affording adequate opportunity to the assessee, in accordance with law. The corresponding appeal grounds are treated as allowed .

Therefore, the appellant contention that company being a Government owned company, the liability even if incurred in earlier years, will get crystalised only in the year which the expenditure is approved by the competent authority is not the criteria in accordance with the IT Act. Accordingly, he confirmed the action of the AO disallowing prior period expenses for Rs.16,02,435/- for want of evidences.

8.2 Before us, the AR submitted the same plea, as above, and stated that it is a consistent method followed by the assesse. Per contra, the DR submitted that the assessee is maintaining mercantile system of accounting regularly and it cannot maintain mixed system of accounting as per section 145 of the Income Tax Act. The assesse’s conduct of claiming such claim in the revised return makes it abundantly clear that the prior period extends as per annual account submitted does not pertain to the assessment year under consideration. Relying on the orders of the lower authorities, the DR pleaded that the disallowance made may be sustained.

:-26-: & 1160/Mds/2017 8.3 We have considered the rival submissions. The assessee is maintaining mercantile system of accounting and hence, it cannot claim any expenditure which do not relate to the year under consideration. We do not find any reason interfere with the order of the CIT(A). The corresponding grounds are dismissed.

9.1 During the financial year 2008-09 Tidco utilized Rs.86.34 crores being part of the upfront land lease rent received from M/s. Tril Info Park Ltd which was due to the Govt. of Tamilnadu, to meet TIDCO's financial commitments. By the order in G.O.Ms. No.28, Industries (IT) department, dated 11.3.2010 the Govt directed that the sum of Rs.86.34 crores received and utilized by TIDCO be treated as Govt’s term loan to TIDCO for a period of 3 years with effect from Financial year 2009-10. The assesse claimed a sum of Rs. 79,84,285/- being interest paid on Govt. of Tamilnadu, term loan for the period 28.05.2009 to 31.03.2010 for 308 days @ 2.5%. The Assessing Officer has disallowed this sum holding that the amount was paid as penal interest to the Govt. of Tamilnadu which is not allowable as a deduction. On an appeal, the CIT (A) held that the assessee has defaulted in the payment of instalments, as a result , penal interest of Rs.2.5% was payable by the assessee. In the IT Act, any amount paid or payable being penal in nature is not allowable expenditure. Therefore, the AO has rightly disallowed penal interest of Rs.79,84,285/- as the same is not allowable under the Act. The grounds of appeal is therefore dismissed.

:-27-: & 1160/Mds/2017 9.2 Before us, the AR submitted that this claim is based upon the GO Ms. No. 28, Industries (IT) Department dated 11.03.2010. Per contra, the support the order of the lower authorities.

9.3 We heard the rival submissions and gone through relevant material. In para 3.2, supra, we have held that although, the assessee retained the money payable to Govt, there was no decision to levy interest till the date ie 11.03.2010, the above order was issued . Hence, the interest payable on the retained money accrues from 11.03.2010 only and hence the AO is directed to allow the proportionate interest on the retained sum from that date, in accordance with mercantile method of accounting employed by the assessee On the same ratio, we hold that the penal interest claimed for the period 28.05.2009 to 10.03.2010 is not allowable as per the above GO and hence the disallowance made up to this period is sustained. We also hold that the penal interest claimed by the Government is not a penalty but a compensation for its money being enjoyed by the assessee without paying interest periodically and hence, we hold that the penal interest is allowable, provided, the interest itself is allowable. The AO shall verify as to whether there was any default on the interest payable, if any , relatable from 11.03.2010 to 31.03.2010 and if it was so, he shall allow both interest and penal interest from the date of 10.3.2010 onwards only. The grounds are allowed to this extent.

:-28-: & 1160/Mds/2017

10.1 The assessee has contended before the AO that an amount of Rs.50 Crores being advance received from Govt. of Tamil Nadu was already invested in equity shares of TRIL Info Pak Ltd. It is a capital investment. Therefore, the AO gave the finding that the assessee has wrongly claimed this expenditure since the investment is towards capital investment. Therefore the assessee should have capitalised its interest and accordingly disallowed sum of interest for Rs.37,80,822/-.

10.2 After considering the assessee’s submission , the CIT (A) held that it is in the nature of expenditure which qualifies revenue expenditure or capital expenditure and of course not governed by the approval of the Government on particular expenditure as per the IT Act, 1961. The expenditure incurred by the assessee as investment in shares is nothing but capital investment. Therefore, as per expenditure which being capital in nature is not allowable expenditure.

Accordingly, the assessee incurring interest on capital expenditure for Rs.37,80,822/ - is rightly held by the AO as capital expenditure, hence the addition made by the AO on this account is confirmed. The ground of appeal on this issue is dismissed.

10.3 Before us the AR submitted that the assessee faced acute fund position and hence its Chairman by his letter dt 21.11.2008 sought sanction of Ways and Means of Rs 100 crores from the Govt of Tamilnadu. The Govt sanctioned it

:-29-: & 1160/Mds/2017 by GO Ms No 219 dt 10.12.2008, with a condition, inter alia, that the assessee shall pay interest @12% and a penal interest @2.5% per annum . This Ways and Means of Rs 100 crores ultimately shall be adjusted against Govt equity support to TIDCO towards equity contribution to be made by it at Rs 50 crores , each, in DLF & TATA Tidel Park . The assessee was directed to send separate proposal at appropriate time for equity support in DLF & TATA Tidel Park.

Accordingly, the assessee send a proposal for making an equity investment of Rs 50 crores in TRIL Info Park Ltd. The Govt has approved the same in Letter (Ms) No 46 /Inds(IT) dt 15.5.2009 and the assessee has invested it on 09.03.2010 and transferred the Ways and Means advance to capital grant on 09.03.2010. Till the date 08.03.2010 , the TIDCO accounted interest on Rs 50 crores. Later, the Govt by its letter No. 22877 /MIE1 /2010-4, dated 10.03.2011 has communicate deferment of the conversion of the Ways and Means Advance sanctioned for the DLF project, and sought interest on the Rs 50 crores sanctioned for making the investment in Tril Info Park Ltd. Hence, the interest on Ways and Means Advance sanctioned for making the investment in Tril Info Park Ltd for the remaining period ie from 09.03.2010 to 31.03.2010 for 23 days 12% amounting to Rs.37,80,822/- was accounted for in the financial year 2010- 11 ie in ay 2011-12 under the head prior period expenses. Since this portion of the interest is related to ay 2010-11 , the assessee claimed it in the revised return filed for ay 2010-11 as expenses deductible and hence the AR pleaded to allow it on the basis of copies of the orders/ letter filed before us. Per contra, the DR relied on the orders of the AO and the CIT(A).

:-30-: & 1160/Mds/2017 10.4 We heard the rival submissions and gone through relevant material.

It is clear from the above orders/ letter that the assessee has to pay interest on the Ways and Means advance granted by the Govt till the date such advance is converted into equity support. In this case, the conversion of the Ways and Means into equity happened on 09.3.2010.Till 08.03.2010, the TIDCO claimed to have accounted for the interest on the Rs.50 crores.

Therefore, the interest provided for the remaining period ie from 09.03.2010 to 31.03.2010 for 23 days @ 12% amounting to Rs.37,80,822/-, after the conversion of equity , and claimed by the assessee is not correct, not warranted as per the above Govt orders/ letter and hence the disallowance made is sustained. The corresponding grounds are dismissed .

11.1 The main business of TIDCO is to promote and develop Industries in the state of Tamilnadu. The assessee had being investing in several projects and wherever feasible promoting new industrial undertaking. If the new undertaking materialized, the expenses were transferred and recovered from the unit.

However, if the project was unsuccessful, the assessee company wrote off the expenses. During the assessment year 2010-11, it wrote off Rs. 12,11,673/- towards unsuccessful project promotional expenses. The AO disallowed and the CIT(A) confirmed such disallowance. The AR submitted that the jurisdictional High Court in its own case for assessment year 1994-95, 1999-2000 has allowed

:-31-: & 1160/Mds/2017 this claim which is reported in CIT vs Tamilnadu Industrial Development Corporation Limited, 215 CTR 0090. In view of that, we find merit in the assessee’s claim and allow it. The corresponding appeal grounds are allowed.

Order pronounced on Wednesday, the 24th day of January, 2018 at Chennai.