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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member)
The captioned appeal by assessee for Assessment Year [AY] 2010-11 assails the order of the Ld. Commissioner of Income-Tax (Appeals)- 7 [CIT(A)], Mumbai, Appeal No.CIT(A)-7/DCIT-3(3)/IT-41/13- 14 dated 14/11/2014 in denying deduction u/s 80-IA. The assessment was framed by Ld. Deputy Commissioner of Income Tax [AO], Circle 3(3), Mumbai on 27/02/2013. The Grounds of appeal
raised by the assessee reads as follows:-
1. The CIT(A) erred in confirming the order of the Assessing Officer denying the deduction of Rs.1,34,85,051 as claimed u/s 80IA by holding a view that loss and depreciation of earlier years in respect of the eligible wind mills had to be notionally brought forward and set off against profits of eligible business while computing deduction u/s 80IA of the Income Tax Act, 1961.
2. The CIT(A) erred in confirming the order of the AO of excluding the interest income of Rs.1,83,654 and Foreign Exchange Gains of Rs.23,10,796 for the purpose of computing deduction u/s 80-IA of the Income Tax Act, 1961 and assessing combined income of Rs.24,94,451 under the heading “Income from Other Sources”. The Ground Number 2, so far as pertaining to interest income is concerned, has not been pressed by Ld. Counsel for Assessee [AR] during proceedings before us and therefore, the same stands dismissed as being ‘not pressed’ to that extent. 2.1 Briefly stated the assessee being resident corporate assessee, was assessed for impugned AY u/s 143(3) on 27/02/2013 at Rs.2,09,14,500/- as against returned income of Rs.74,49,479/- e-filed by the assessee on Sanjana Cryogenic Storages Limited Assessment Year 2010-11 15/10/2010 which was later revised on 03/02/2011 to Rs.74,21,462/-. The assessee has been denied deduction u/s 80-IA of the Income Tax Act and the same form subject matter of this appeal. 2.2 During assessment proceedings, it was noted that the assessee had wind power unit at Karnataka under the name and style of Sanjana Power Karnataka which was an eligible unit to claim deduction in terms of Section 80-IA. It started generating electricity from AY 2005-06 and incurred losses in AY 2005-06 & 2006-07 to the tune of Rs.4.09 crores & Rs. 2.50 crores respectively, which were adjusted from profits of other business of the assessee in those years. The assessee, generated profits in next three AYs i.e. AY 2007-08, 2008-09 & 2009-10 to the tune of Rs.0.29 crores, Rs.1.37 crores & Rs.0.17 crores respectively, but chose not to claim the said deduction as per 80-IA(2). The assessee generated income of Rs.1.34 crores in impugned AY and the same being 6th year of operation, the assessee claimed the said deduction for the first time in impugned AY. The Ld. AO, applying the provisions of Section 80-IA(5), was of the view that by treating the said business on stand- alone basis, the earlier years losses and depreciation was first required to be brought forward notionally and adjusted from the income of the eligible unit in impugned AY. Since, net cumulative losses of first 5 years were Rs.4.75 crores and the income earned by the assessee from eligible unit in the impugned AY was Rs.1.34 crores and therefore, no deduction could be granted to the assessee u/s 80-IA. 2.3 The assessee contended that Section 80-IA(5) did not apply to depreciation or loss related to a period prior to initial AY opted by the Sanjana Cryogenic Storages Limited Assessment Year 2010-11 assessee and already adjusted in earlier years. The provisions mandated only the loss or depreciation for the initial AY and for any subsequent years and did not allow moving backward. In nutshell, the assessee contended that losses of years earlier to initial AY for which a claim u/s 80-IA has been made and which had already been absorbed against the profits of other business in earlier years need not be notionally brought forward and adjusted from the income of the eligible unit. Reliance was placed on the judgment of Hon’ble Madras High court rendered in Velayudhaswamy Spinning Mills Pvt. Ltd. Vs ACIT [231 CTR 368]. 2.4 However, placing reliance on several judicial pronouncements, Ld. AO concluded that ‘initial year’ for the purpose of Section 80-IA means the year in which the manufacture or production or other activity begins and therefore, rejected the claim of the assessee. 2.5 The Ld. AO, in the alternative, noted that the assessee earned interest income of Rs.1.83 Lacs and Exchange Gain of Rs.23.10 Lacs in respect of Karnataka Power Unit and the same were chargeable under the head Income from other sources and therefore, deduction u/s 80-IA, at least, on these items were not available to the assessee in view of the judgment of Hon’ble Apex Court rendered in Liberty India Vs. CIT [317 ITR 218].
3. Aggrieved, the assessee contested the same without any success before Ld.CIT(A) vide impugned order dated 14/11/2014 where the stand of Ld. AO were confirmed. Aggrieved, the assessee is in further appeal before us. Sanjana Cryogenic Storages Limited Assessment Year 2010-11 4.1 The Ld. Counsel for Assessee [AR], at the outset, drew our attention to CBDT circular No. 1/2016 dated 15/02/2016 to contend that the issue stood squarely in assessee’s favor by the said circular since the circular has clarified the meaning of expression ‘initial assessment year’ for the purpose of Section 80-IA(5). Our attention is drawn to the fact that the said expression would mean the first year opted for by the assessee for claiming deduction u/s 80-IA and not the first years of commencement of operations of the eligible unit. 4.2 The Ld. AR also drew our attention to the following judicial pronouncements where a view favorable to the assessee has been taken:- (i) Hon’ble Karnataka High Court in CIT Vs. Anil H.Lad [45 taxmann.com 98] (ii) Hon’ble Madras High Court in Velayudhaswamy Spinning Mills P. Ltd Vs. ACIT [21 taxmnan.com 95] (iii) ITAT Mumbai in Shevie Exports Vs. JCIT [33 Taxmann.com 446] 4.3 Per Contra, the Ld. DR, while opposing the same, fairly conceded the settled legal position.
5. Heard and perused relevant material on record including cited CBDT circular and judicial pronouncements. After going through the same, we concur with the stand of Ld. AR since the issue has been made crystal clear by the cited CBDT circular which is clarificatory in nature. For the sake of ready reference, the same is reproduced below:-
CIRCULAR NO.1/2016 [F.NO.200/31/2015-ITA-I], DATED 15-2-2016 Section 80-IA of the Income-tax Act, 1961 ('Act'), as substituted by the Finance Act, 1999 with effect from 1-4-2000, provides for deduction of an amount equal to 100 % of the profits and gains derived by an undertaking or enterprise from an eligible business (as referred to in sub-section (4) of that section) in accordance with the prescribed provisions. Sanjana Cryogenic Storages Limited Assessment Year 2010-11 Sub-section (2) of section 80-IA further provides that the aforesaid deduction can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-section (5) of section 80-IA further provides as under— "Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made". In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term 'initial assessment year'. It has been represented that some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80-IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen ( or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80-IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfilment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80-IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. The Assessing Officers are, therefore, directed to allow deduction u/s 80-IA in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in sub-section (5) of that section for which the Standing Counsels/D.R.s be suitably instructed. The above be brought to the notice of all Assessing Officers concerned. Further, Hon’ble Karnataka High Court in the cited case has held that where depreciation and losses of earlier assessment years have already Sanjana Cryogenic Storages Limited Assessment Year 2010-11 been set off in those years and subsequently deduction u/s 80-IA is claimed by the assessee, there is no need to notionally carry forward the same and set off from the income of the current year. Same view has been taken in other judicial pronouncements. Respectfully following the same, we hold that there was no need to notionally carry forward the earlier year’s losses / depreciation to impugned AY before deduction could be granted to the assessee. Resultantly, the first ground of assessee’s appeal stands allowed.
In Ground No. 2, Ld. AR, by alternative submissions, has pressed for deduction u/s 80-IA against foreign exchange gain of Rs. 23.10 Lacs earned by the assessee in the eligible unit.
The Ld. AR, first of all, explained that the assessee obtained certain term loan facility from Robo Bank, Singapore vide credit facilities offer letter dated 31/03/2005 for the purpose of setting up of Wind Farm Project which constitute capital assets in the hands of the assessee. The outstanding term loan is re-casted by the assessee on Balance Sheet dates in Indian Rupees and the same give rise to impugned foreign exchange gains / losses. Therefore, the resultant gains / losses, being part and parcel of assessee’s business, arises out of business operations of the assessee and therefore, assessable under the head Business Income. In support, our attention is drawn to the fact that the assessee earned similar gains in AY-2007-08, 2008-09, 2011-12 & 2012-13 and offered the same to tax as Business Income and assessee’s stand has been accepted by the revenue in all those years in assessment u/s 143(1) as well as under 143(3) and therefore, rule of Sanjana Cryogenic Storages Limited Assessment Year 2010-11 consistency demands that the same treatment is given to the same in the impugned AY.
The Ld. AR further pleaded that the resultant gain, being capital in nature, was not taxable at all in view of several judicial pronouncements on the issue. In the alternative, Ld. AR contended that the resultant gains were eligible for deduction u/s 80-IA.
Per contra, Ld. DR contended that principle of res judicata was not applicable to Income Tax proceedings. Moreover, the assessee himself offered the gains to tax in earlier AYs and therefore, debarred from taking a stand that the same being on capital account, are exempted. Further, deduction u/s 80-IA was available only to the profits derived from the eligible business in view of the settled legal position.
So far as the factual matrix is concerned, the documents placed on record reveal that the assessee obtained term loan facility of USD 17.50 Lacs from Robo Bank, Singapore vide offer of credit facilities letter dated 31/03/2005. The purpose of the same was to finance the setting up of 1.85 MW wind farm project. The loan was repayable in 22 equal quarterly installments after specified period. Against the same, an amount of USD 3,97,727 was outstanding as on 31/03/2009 as well as on 31/03/2010. The differential of exchange rate on these two dates has given rise to the resultant gain of Rs.23.10 Lacs. It is noted that liability in dollar terms as on two dates remains the same.
We have carefully considered the rival contentions and perused relevant material on record. First of all, so far as the head under which forex gains shall be chargeable is concerned, we are convinced with the Sanjana Cryogenic Storages Limited Assessment Year 2010-11 arguments of Ld. AR that the same being part and parcel of assessee’s business operations are assessable as Business income only and also in view of rule of consistency. The revenue in all the other years has accepted the same under the head Business Income. Undoubtedly, the principles of res judicata do not apply to Income Tax proceedings, yet rule of consistency demands that there being no change in facts or circumstances, the revenue is debarred from shifting stands without any cogent reasons as held by Hon’ble Apex Court in Radhasoami Satsang vs. CIT [193 ITR 321]. On the basis of above, we conclude that the foreign gains were assessable under the head Business Income only.
Proceeding further, let us first examine the assessee’s contention that resultant gain was not chargeable to tax at all, being on capital account. At the outset, the issue in hand is not covered by the provisions of Section 43A since the asset has not been acquired from outside India but only a term loan has been taken by the assessee toward setting up the project and therefore, Section 43A has no applicability. This contention is well supported by the decision of Hon’ble Apex Court rendered in CIT Vs. Tata Iron & Steel Co. Ltd. [1998 231 ITR 285] where it has been held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions and therefore, fluctuations in foreign exchange rate while repaying installments of foreign loan raised to acquire asset cannot alter actual cost of asset. As a logical consequence, on the same line, we conclude that fluctuation gain accruing to the assessee bears no relation to the acquisition of capital asset and do not alter the cost of the asset, Sanjana Cryogenic Storages Limited Assessment Year 2010-11 13. Further, in terms of Accounting Standard-11 titled as ‘effects of changes in foreign exchange rates’, such resultant foreign exchange differences were required to be recognized as income / loss in the Profit & Loss Account during relevant accounting period which is fully supported by the decision of Pune Bench of Tribunal rendered in Cooper Corporation Pvt. Ltd. Vs. DCIT [159 ITD 165] where resultant forex losses, in similar situation, has been allowed to the assessee u/s 37(1). Moreover, it may further be noted that the assessee himself has offered the same to tax in all other Assessment Years and therefore, debarred from changing stands since rule of consistency equally applies to the assessee.
In view of the above, we are inclined to conclude that the resultant forex gain earned by the assessee was chargeable to tax and similarly losses accruing to him on this account were allowable to him, being revenue in nature.
The only issue remaining to be decided is whether the deduction u/s 80-IA would be available to the assessee against forex gain. We find that this issue stood squarely against the assessee by the judgment of Hon’ble Apex Court rendered in Liberty India Vs. CIT [317 ITR 218] where the Hon’ble court has held that the words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. Clearly the forex gains in the instant case are not derived from the activity of generation of power Sanjana Cryogenic Storages Limited Assessment Year 2010-11 and therefore, deduction thereof could not be granted to the assessee in terms of Section 80-IA.
The assessee has placed reliance on several judicial pronouncements for various contentions. However, we find all of them distinguishable on facts. The judgment of Hon’ble Bombay High Court in CIT Vs. Rachna Udyog [230 CTR 72] dealt with a situation where forex gains arose directly on export sales transactions which were eligible for deduction u/s 80-IA. Similarly, the judgment of Hon’ble Bombay High Court rendered in CIT Vs. Xylon Holdings Private Limited [ITA No. 3704 of 2010 dated 13/09/2012] dealt with a situation where there was a remission / cessation of liability u/s 41(1) by way of waiver of loan against capital asset. This decision placed reliance on the decision of same court rendered in Mahindra & Mahindra Ltd. Vs. CIT [128 Taxman 394]. Similarly, the decision of Hon’ble Delhi High Court rendered in Logitronix (P) Ltd. Vs. CIT [197 Taxman 394] dealt with a situation where there was waiver of loan taken for acquiring capital asset.
To sum up, we conclude that impugned forex gains earned by the assessee were assessable as Business Income and the same were not eligible for deduction u/s 80-IA. Resultantly, Ground No. 2 of assessee’s appeal stands partly allowed. The Ld. AO is directed to re-compute assessed income of the assessee under normal provisions as well as under Section 115JB, being consequential in nature, in terms of our above order.
In nutshell, the appeal of the assessee stands partly allowed in terms of our above order. Sanjana Cryogenic Storages Limited Assessment Year 2010-11 Order pronounced in the open court on 04th October, 2017.