I T C LIMITED,KOLKATA vs. DCIT, CIRCLE - 8, KOLKATA, KOLKATA

Per M. BALAGANESH, AM These are appeals arising out of the order of the Commissioner of Income Tax (Appeals)-VIII, Kolkata, dt. 23.11.2010, passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter the “Act”), for the Assessment Year 2006-07.

3 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited (1) Expenditure on staff welfare disallowed under section 40A(9): Rs.5,46,249/- For that the learned CIT(A) erred in disallowing the expenditure for Staff Welfare under section 40A(9) in respect of employee clubs and co-operatives. For that the learned CIT(A) failed to appreciate that genuine expenditure for Staff Welfare is fully allowable under the Income Tax Act. Relief Prayed: The disallowance of Rs.5,46,249/- should be deleted.

2.1. The ld AR stated that the details of expenses incurred on this account are enclosed in page 3 of the paper book and the issue under dispute is covered by the decision of this tribunal in assessee‟s own case for the Asst. Year 2007-08 in dated 18.11.2011 wherein this tribunal had granted relief for the substantial portion of the expenditure and sustained disallowance only to the extent of Rs.25,800/- being payment made directly for Registrar of Societies. He prayed for similar direction be given to the ld AO to decide the same in the light of the said tribunal order. In response to this, the ld DR fairly conceded for the same.

2.2. We have heard the rival submissions. We find that the issue under dispute is covered by the order of this tribunal in assessee‟s own case for the Asst. Year 2007-08 in dated 18.11.2011 wherein it was held as below:- “4. At the outset, Ld. Counsel for the assessee stated that this issue is squarely covered in favour of assessee and against revenue by Tribunal's decision in assessee's own case for Assessment Year 2005-06 in ITA No.475/K/2010 dated 10.6.2011, wherein Tribunal exactly on same facts, vide para 8 of its order has held as under: "8. We have carefully considered the submissions of the ld. representatives of the parties and the orders of the authorities below. We have also gone through the details of the expenditure aggregating Rs.9,00,111 claimed by the assessee, the break- up of which has already been mentioned hereinabove. We observe that the assessee has made the contribution to Staff Club/ Recreation Club of its employees. On perusal of the details, it is observed that the said amounts were reimbursed by the assessee for 4 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited salary of the staffs employed at the Club, maintenance of library at the Club, expenses for maintenance of indoor game section¸ expenses for conduct of sports competition and their families, reimbursement of expenses towards electricity, expenses incurred on providing cultural recreation to the members/ cultural events, expenses for organizing fete for the members/ families of assessee's employees, expenses incurred on organizing cultural events on different occasions, annual social meets of the employees/ their families, etc., except direct subscription made to one Cooperative Society of Rs.25,800/-. Considering the facts of the case, we do agree with the assessee that in the assessment year under consideration, the assessee has filed the details of the expenses reimbursed to the Recreation Clubs/ Organizations/ Societies of the employees and their families and it was not an expenditure incurred by the assessee towards setting up formation or giving direct contribution to a fund, Trust, Company, Association of Persons, Body of Individuals, Society registered under Societies' Registration Act, 1860 (except to one contribution of Rs.25,800/- as mentioned hereinabove), but the reimbursement is of the expenditure actually incurred for the welfare activities of the employees and their families. Hence, we are of the considered view that the Staff Recreation Club and Staff Club for which the assessee has incurred the expenses are for the welfare of its employees due to business expediency. Staff Recreation Club and Staff Club are a part and parcel of the Organization itself. Considering the earlier decision of ITAT, Kolkata in the case of Chloride Industries Ltd. (supra) and also the fact that the assessee has given the break-up of the expenses 3 ITA 919/K/2011 ITC Limited . A.Y.07-08 incurred/ reimbursed, as mentioned hereinabove, we are of the considered view that the provisions of section 40A(9) of the Act are not attracted for a sum of Rs.8,74,311/- and the said expenditure is allowable under section 37(1) of the Act. Therefore, we allow Ground of appeal taken by the assessee in part by restricting the disallowance to Rs.25,800/- and by deleting the sum of Rs.8,74,311/- out of Rs.9,00,111/-." Ld. Counsel for the assessee before us stated that the similar expenses are in the present year also and he referred to assessee's paper book pages 5 and 6, which are exactly identical like Tribeni Tissues Recreation Club Rs.1,43,000/-, Tribeni Tissues Sports Club Rs.1,00,000/-, ITC Recreation Club Staff Welfare Expenses for ITC Employees Rs.3,00,000/-, Tribeni Tissues Mahila Samity Rs.5,000/-, Tribeni Tissues Employees Recreation Club Rs.1,16,375/-, Tribeni Tissues Management Staff Club Rs.1,75,000/-, Tribeni Tissues Co- operative Credit Society Rs.1,200/-, Tribeni Tissues Co-operative Stores Limited Rs.25,800/-, Triveni Tissues Vidyapith Rs.4,20,000/- and ITC Workmen Welfare Scheme - Staff Welfare Expenses at Cigarette Division Rs.780,080/-. As facts are identical in AY 2005-06 and in present AY, taking a consistent view and respectfully following Tribunal's order, we direct the Assessing Officer to disallow only payment made directly for Registrar of Societies i.e. contribution of Rs.25,800/-. Accordingly, this issue of assessee's appeal is partly allowed.”

Respectfully following the same we set aside the issue to the file of the ld AO to decide the allowability of the expenses in the light of the decision of this tribunal for the earlier year supra. Accordingly, the Ground No. 1 in is allowed for statistical purposes.

3.1. Before the ld CIT(A), the assessee placed reliance on the decision of the Hon‟ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co

6 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited Ltd vs DCIT reported in 328 ITR 81 (Bom) for non-applicability of Rule 8D of the Rules for the year under appeal. However, it stated that although no specific /direct expenses were incurred , the assessee on further analysis of the Treasury Department‟s expenses of Rs. 2,58,87,620/- whose responsibility includes handling all the financial / working capital, investments and banking functions as well as foreign exchange. The assessee submitted the detailed breakup of the functions performed by the employees and the indirect expenses comprised of salaries and overheads which are indirectly linked to the deployment of the surplus funds resulting in the exempt income. The salaries were apportioned on the basis of the investments to the total assets in the balance sheet. The overheads of the Corporate Treasury Department were apportioned on the basis of the salaries determined above (in the context of exempt income) to the total salaries of the entire department. Based on this analysis, the assessee submitted that the total indirect expenditure of the Treasury department that can be considered for disallowance u/s 14A of the Act would amount to Rs.60,39,896/- and requested the ld CIT(A) to adopt the same for disallowance u/s 14A of the Act. However, the ld CIT(A) by placing reliance on certain tribunal decisions directed the ld AO to adopt 1% of exempted income which amounted to Rs.1,58,51,175/- for the purpose of disallowance u/s 14A of the Act. Aggrieved, both the assessee as well as the revenue is in appeals before us on the following grounds:-

(2) Proportionate Management Expenses (in the context of exempt income): (Rs.1 ,58,51,175 less Rs. 60,39,896) Rs.98, 11,279/- For that the learned CIT(A) erred in arbitrarily determining and disallowing proportionate management expenses under section 14A in respect of exempt income since the appellant company was a profitable manufacturing company and the said investments had arisen out of profits/surpluses.

7 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited For that the learned CIT(A) was not justified in making the disallowance @ 1 % of exempt income ignoring the appellant company's computation determining the expenses having some connection to the said exempt income. Relief Prayed: The disallowance of Rs.98,11,279/- should be deleted. & 1. That the Ld. ClT(A) has erred on facts and circumstances of the case and in law by allowing just 1% of exempt income as disallowance and deleting the addition made u/s 14A made by the Assessing Officer even though he has correctly applied Rule 8D as per law in respect of exempt income.

3.2. The ld AR argued that the disallowance u/s 14A of the Act had to be worked out on the basis of some rational workings prior to Asst. Year 2008-09. He argued that even though the tribunal had held that 1% of exempted income would be fair and reasonable for disallowance u/s 14A of the Act, in all those cases, there was no mechanism for making disallowance of expenses incurred for earning exempt income and the assessee had not come forward with its workings for disallowance with scientific basis. In the instant case, the assessee had worked out the disallowance in the sum of Rs.60,39,896/- scientifically on the basis stated hereinabove which has not been considered at all by the ld CIT(A) . He stated that let the workings given by the ld AO be examined and then a rational decision be taken in this regard and accordingly prayed for setting aside of this issue to the file of the ld AO. In response to this, the ld DR vehemently stated that 1% of exempted income alone should be reckoned for disallowance u/s 14A of the Act in respect of assessment years prior to Asst. Year 2008-09.

3.3. We have heard the rival submissions. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. It is not in dispute that Rule 8D of the Rules cannot be applied for Asst. years prior to Asst. Year 2008-09. We find that the ld CIT(A) had directed the ld AO to disallow 1%

8 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited of exempted income u/s 14A of the Act which was agreed upon by the ld DR before us. Hence the ground taken by the revenue before us does not survive. We find that the assessee though did not offer any disallowance suo moto in the return of income u/s 14A of the Act, came forward with petty disallowance of Rs.2,48,600/- during the course of assessment proceedings which was further improved to Rs.60,39,896/- based on some rational workings. Admittedly the said workings have not been examined by the lower authorities. Hence in the interest of justice and fair play, we direct the ld AO to examine the workings given by the assessee before the ld CIT(A) and decide the issue afresh in accordance with law. Accordingly, the Ground No. 2 raised by the assessee is allowed for statistical purposes and Ground No. 1 raised by the revenue is dismissed.

Name of the director Commission amount (Rs.) S.B. Mathur 4,00,000 P.B. Ramanujam 4,00,000 Y.P. gupta/ T.S. vijayan 4,00,000 B. Vijayraghavan 4,00,000 B. Sen 4,00,000 Dr. Ram S. Taneja 4,00,000 24,00,000 Total

The assessee stated that first three payments were made to three persons who are nominees of LIC, GIC and Specific Undertaking of Unit Trust of India respectively and the last three payments are made to three individual non- executive directors. The assessee claimed that the above payments of commission to six persons do not come under provisions of section 194H or 194J of the Act and for these reasons there was no liability to deduct tax at source. The ld AO observed that the assessee would indulge in appointing these directors only after ascertaining the fact that they are independently possessing the requisite professional skills, ability and qualification and accordingly the commission payments made to them would fall under the ambit of provisions of section 194J of the Act. He also held that in any case, the subject mentioned payments would fall under the ambit of commission or brokerage in terms of section 194H of the Act which warrants deduction of tax at source at the rate of 5% and failure to do so would invite disallowance u/s 40(a)(ia) of the Act. Accordingly, he disallowed the commission in the sum of Rs.24,00,000/-, u/s 40(a)(ia) of the Act.

4.1. Before the ld CIT(A), the assessee stated that such expenditure has been repeatedly held for the purpose of business and is fully allowable under the Act and in support of this, it placed reliance on the decision of the Hon‟ble Supreme Court in the case of J K Woolen Manufacturers vs CIT reported in 72 ITR 612 (SC) and Hon‟ble Jurisdictional High Court in the case of CIT vs K C Thapar reported in 157 ITR 212 (Cal). It was stated that no special payments were made to the directors of the company warranting deduction of tax at source in terms of section 194J of the Act. The commission payments were clearly for discharge of the routine responsibilities of the Board and do not fall within the scope of managerial, technical or consultancy services. It was pleaded that provisions of section 194H of the Act are clearly not applicable in the context of the explanation

10 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited to the said section which has defined the term as „payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods …………”. In this case, neither the Rs. 12 lacs paid to Institutional Shareholders nor the other payment of Rs. 12 lacs to the three individual non-executive directors fall within the scope of this definition. The assessee placed reliance on the co-ordinate bench decision of this tribunal in the case of Jahangir Biri Factory (P) Ltd vs DCIT reported in 126 TTJ 567 (Kol) (2009) wherein it was categorically held that the subject mentioned commission payments do not fall either under the ambit of section 194H or u/s 194J of the Act and consequentially no disallowance u/s 40(a)(ia) of the Act would operate. It was further pleaded that the non-executive directors are not employees of the company and therefore the provisions of section 192 of the Act are not applicable. It was also pleaded that Rs. 12 lacs was paid to three individual directors who have submitted confirmations to the effect that commission payments have been fully offered to tax in their personal income tax returns. This is in line with section 191 of the Act which provides for direct tax payment where there are no TDS provisions. In respect of balance sum of Rs. 12 lacs paid to the Institutional Shareholders i.e LIC, GIC and Specific Undertaking of Unit Trust of India, in respect of the nominee directors, there cannot be any scope for TDS even otherwise, since the individual directors have not received any payments. In fact, the said individuals were representing their respective institutions as nominee directors by virtue of the shareholding of the said bodies in the assessee company. Accordingly, it was argued that payments made to the concerned institutions by no stretch of imagination would fall within the scope of section 194H or section 194J of the Act. The ld CIT(A) however concluded that the provisions of Explanation to section 194H defining the term „commission or brokerage‟ is very wide and broader interpretation is to be given to the same and hence the subject mentioned

11 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited payments would fall under the ambit of section 194H of the Act. Accordingly, he upheld the order of the ld AO in this regard. Aggrieved, the assessee is in appeal before us on the following ground:-

(3) Commission to non-whole time Directors disallowed under section 40(a)(ia): Rs.24,00,000/- For that the learned CIT(A) was not justified in disallowing the domestic payment of commission to the non-whole time Directors under section 40(a)(ia) although there are no provisions for deduction of TDS under the Income Tax Act. For that the learned CIT(A) erred in stating that TDS provisions of section 194H for payment of commission are applicable ignoring the provisions of the Income Tax Law.

For that the learned CIT(A) was not justified in making the disallowance in respect of Rs.12,00,000/- (included in the total payment of Rs.24,00,000/-) credited/paid to Institutional Shareholders in respect of three(3) nominee Directors although the payments were not made to the individuals concerned. On the facts and in the circumstances of the case, the Assessing Officer erred in making the said disallowance under the Income Tax Law. Relief Prayed : The disallowance of Rs.24,00,000/- should be deleted. 4.2. The ld AR argued that this payment has been brought within the ambit of section 194J of the Act only with effect from 1.7.2012 and hence not applicable for the earlier years. He stated that the issue is covered in favour of the assessee in assessee‟s own case for the Asst.Year 2007-08 in dated 18.11.2011. In response to this, the ld DR vehemently relied on the order of the ld CIT(A).

4.3. We have heard the rival submissions. We find that the issue under dispute is covered in favour of the assessee in assessee‟s own case for the Asst Year 2007-08 in dated 18.11.2011, wherein it was held as below:-

12 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited 10. We have heard rival contentions and gone through facts and circumstances of the case. We find that the assessee company has paid a sum of Rs.33,67,671/- as commission to ten non- whole time directors i.e. non-executive directors out of which Rs.8 lac was paid to two foreign directors and tax was deducted u/s. 195 of the Act. On the balance Rs.25,67,671/- no TDS was deducted and AO disallowed this expenditure by invoking the provisions of section 40(a)(ia) of the Act . According to assessee, these payments comprised to institutional shareholders i.e. LICI, GIC and UTI for a sum of Rs.12 lac in respect of three nominee directors and balance Rs.13,67,671/- was paid to remaining four individual directors. It was claimed that non- executive directors are only members of Board of Directors and have no power except as delegated to them by the Board or vested in them by the Article of Association of the company. According to assessee, such general function cannot constitute any managerial, technical or consultancy service within the scope of section 194J of the Act. Even these functions do not fall under the provisions of section 194H of the Act, reason being these commission payments do not fall within the definition of commission as given in the explanation to section 194H of the Act. As Ld. Counsel for the assessee cited before us that this issue is covered by the decision of jurisdictional Tribunal in the case of Jahangir Biri Factory Pvt. Ltd. Vs. DCIT 7 ITA 919/K/2011 ITC Limited . A.Y.07-08 (2009) 126 TTJ 567 (Kol), wherein the issue of TDS on directors' commission was decided vide para 8 to 12 as under: 8. As regarding the second issue, i.e. commission payment to directors amounting to Rs.5,94,036, the learned CIT(A) has deleted the same by observing as under: "I have carefully considered the submission of the Authorised Representative and perused the assessment order. On careful consideration of the relevant facts, I am of the opinion that the 'commission' paid to the directors is not the nature of 'commission or brokerage' as is envisaged in s. 194H, nor as 'fees for professional or technical services' considered in s. 194J of the Act. Therefore, there was no justification for disallowing the claim for commission payment to directors, under s. 40(a)(ia) of the Act, which is otherwise an allowable business expenditure. It is a different matter that actually 'commission' should also have been included within 'salary' payable to the directors and taxes should have been deducted at source therefrom. But that issue is not relevant to determine the present issue of disallowability of the payment under consideration in terms of the provisions of s. 40(a)(ia) of the Act. Accordingly, the disallowance made by the AO is deleted. However, the AO may consider the commission payment as salary income of the directors and take suitable action for non-deduction of tax therefrom in case of the assessee."

14 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited Operating License arrangements dated 3.5.1986, the assessee entered into a Settlement Agreement dated 11.5.2005 with ELEL. Simultaneously Consent Terms was signed by both assessee and ELEL before the Arbitrator on 11.5.2005 and in pursuance of the Settlement Agreement, assessee received a sum of Rs.43.10 crores and it in turn handed over the operation of „Hotel Searock‟ to ELEL. The above amount of Rs.43.10 crores included sum of Rs.32,41,96,977/- paid to the assessee company by ELEL which the assessee stated that it was received for „relinquishment of rights to operate the hotel‟ under the Operating License Agreement. The assessee treated this amount of Rs.32,41,96,977/- as Long Term Capital Gain and offered the same in the return of income. The assessee was asked to explain as to why the receipt of Rs.32,41,96,977/- should not be considered as business income. The assessee filed a detailed reply on 18.11.2009 and on subsequent dates. The assessee claimed that the right to operate Hotel Searock, the subject matter of reference for this purpose, which got vested in ITC Ltd by virtue of the Operating License Agreement dated 3.5.1986 was a capital asset in terms of section 2(14) of the Act. It further stated that section 2(47)(i) of the Act states that „transfer‟ in relation to a capital asset includes „the sale, exchange or relinquishment of the asset‟. The assessee had held the said „right to operate the hotel‟ for a period of 19 years. Accordingly the said right / asset is a Long Term Capital Asset in the hands of the assessee as per section 2(29A) read with section 2(42A) of the Act on the basis of the period of holding of the said right. Further the gain arising from the transfer of a right / asset is a Long Term Capital Gain in terms of section 2(29B) of the Act. The assessee also stated that since no consideration was paid by it to ELEL for acquiring the right to operate the Hotel Searock at its inception, the cost of acquisition of the said right had been considered as Nil and the entire amount of Rs.32,41,96,977/- received by it against the relinquishment of the said right was correctly offered to tax as Long Term Capital Gain.

15 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited 5.1. The ld AO observed that the property under consideration as claimed by the assessee is its right to operate „Hotel Searock‟. The assessee never had any ownership right in Hotel Searock. Nor did it pay any non-refundable amount at the time of entering into the agreement dated 3.5.1986. The ownership of the hotel always remained with ELEL throughout the period when the said hotel was being run by the assessee. The assessee was only allowed to operate the Hotel Searock as per the terms of agreement which included payment of 23% of gross turnover of the said hotel to ELEL every year. So when the said hotel was ceased to be operated by the assessee, no transfer in relation to a capital asset took place as no right to carry on the business as such was conferred on the assessee at the time of entering into the agreement dated 3.5.1986 so as to bring the transaction within the ambit of capital gain.

5.2. The ld AO further observed that the amount received by the assessee is even not covered under the head „capital gains‟ as per clause (i) of first proviso below section 28(va) of the Act. The assessee has not transferred any right to carry on any business to ELEL. The word „right‟ inherently means that a person has element of „discretion‟ attached with the concerned property. The assessee had no option to transfer the business of running of Hotel Searock to any other party even if it wanted. It had no ownership over the property and the assessee had to act as per the strict terms of the agreement which is evident from some clauses in the agreement. The ld AO observed that various disputes arose between the assessee and ELEL in relation to / concerning the Hotel and / or the Operating License in respect of which Suit No. 3885 of 1993, Suit No. 3886 of 1993, Suit No. 1877 of 1995 and Suit No. 3832 of 1995 were filed before the Hon‟ble High Court of Bombay. As per the Settlement Agreement, the assessee would promptly withdraw unconditionally and with no order as to costs Suit No. 3886 of 1993 and Suit No. 1877 of 1995 and ELEL would promptly withdraw unconditionally and 16 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited with no order as to costs Suit No. 3885 of 1993 and Suit No. 3832 of 1995 on the files of Hon‟ble High Court of Bombay. He held that the above court cases arose in relation to/concerning the hotel and/or the operating license which means that the above court-cases arose out of the business activity of the assessee in relation to „Hotel Searock‟ and the amount received by the assessee company is also a receipt arising from the business activity. So the sum of Rs.32,41,96,977/- is chargeable to tax as business income. He further observed that Hotel Searock was operated by the assessee as licensee and all receipts from this hotel were credited to the profit and loss account. So when the assessee receives some amount for handing over the operation of the said hotel back to its rightful owner, then the amount so received will definitely be business income.

5.3. The ld CIT(A) held that the right to operate Hotel Searock was a long term capital asset in terms of the provisions of section 55(2) and also section 2(29A) read with section 2(42A) of the Act. The relinquishment of the said right, resulted in transfer of a capital asset in accordance with section 2(47)(i) of the Act liable to tax under the head Long Term Capital Gains. This was, therefore, correctly offered to tax under the head „capital gains; by the assessee in line with the provisions of the Act and the ld AO was not justified in treating the same as business income. Aggrieved, the revenue is in appeal before us on the following ground :- 2. That the Ld. ClT{A} has erred on facts and circumstances of the case and in law by treating receipt from Elel Hotel and Investments Ltd. for relinquishment of the right to operate the Hotel Sea rock as long term capital gain instead of business income. 5.4. The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR referred to the relevant pages of the paper book containing the Operating License Agreement dated 3.5.1986 enclosed in pages 15 to 36 of the 17 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited Paper Book wherein he specifically referred to Article II in page 20 of the paper book which reads as under :- 2.2. It is hereby expressly agreed and understood by the parties that this agreement shall and is meant to confer full and unfettered right to ITC to operate the said Hotel subject to no breach of any of the terms on the part of ITC under this agreement. EHIL hereby irrevocably during the subsistence of this agreement or any renewal thereof, authorizes ITC to do and execute all such acts, deeds, matters, things and documents to conduct and operate the said Hotel, the intention being that ITC shall have an unfettered right to run the said Hotel, so long as ITC does not commit any breach or default of any terms agreed under these presents. 2.3. EHIL shall execute from time to time or as may be required by ITC one or more specific powers of Attorney or such other documents or instruments as ITC may require in order to conduct, operate and run the said Hotel. ITC hereby indemnifies and keeps EHIL indemnified against any loss or damage EHIL may sustain or any costs, charges and expenses EHIL may suffer as a result of any irregular or illegal or mala fide exercise of the powers in the Power of Attorney to be executed by EHIL in favour of ITC.

5.4.1. He also referred to Settlement Agreement (enclosed in pages 37 to 49 of paper book) dated 11.5.2005 between assessee and ELEL by referring to clause 4 „Consent Terms‟ in Page 41 of the Paper book as below:-

CONSENT TERMS 4. The Parties shall promptly sign the terms set out in Annexure A (the “ Consent Terms”) and with diligence request and obtain the Award from the Arbitrator. The terms of Annexure A shall form an integral part of this Settlement Agreement. 5.4.2. He then referred to „Consent Terms‟ in Annexure A at page 54 of the paper book to clause n thereon which reads as below:- n. On or before the execution hereof ELEL has paid to ITC and ITC has received from ELEL :

18 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited (i) The sum of Rs 7.75 crores as and by way of refund of interest free security deposit under the Operating Licence ; (ii) The sum of Rs. 2.29 crores as and by way of reimbursement of expenses; (iii) The sum of Rs 64 lakhs by way of reimbursement of the cost of Stores as set out in Annexure C held by ITC for the purposes of the Hotel; (iv) The sum of Rs 32.42 crores as and by way of relinquishment of rights to operate the Hotel under the Operating Licence . 5.4.3. Later he placed reliance on the decision of the Hon‟ble Madhya Pradesh High Court , Indore Bench , in the case of CIT vs Smt Laxmidevi Ratani reported in (2005) 296 ITR 363 (MP) and Hon‟ble Supreme Court in the case of Oberoi Hotel (P) Ltd vs CIT reported in (1999) 236 ITR 903 (SC) in support of his contentions.

5.5. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee in this regard. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The only dispute is whether the relinquishment of a right to operate the Hotel Searock could be construed as relinquishment of a capital asset so as to fall within the ambit of „capital gain‟. We hold that „right to operate‟ the Hotel under Operating Licence Agreement dated 3.5.1986 wherein the assessee has been given unfettered powers to operate the Hotel in any manner in which it finds suitable. This right , in our considered opinion, is a capital asset within the meaning of section 2(14) of the Act. Hence relinquishment of such right would only result in transfer u/s 2(47) of the Act and hence the resultant gain thereon would only fall under the ambit of „capital gain‟. Since the assessee has been using the said right from 1986 onwards, the resultant gain would only be Long Term Capital Gain. Moreover, the assessee had entered into a Settlement

19 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited Agreement dated 11.5.2005 in order to give quietus to various disputes among the assessee and ELEL with the assistance of an Arbitrator and the said Arbitrator had duly passed an Award wherein the assessee was made to relinquish its right to operate the hotel by receiving a consideration of Rs. 32.42 crores and both the parties unconditionally withdrawing their respective cases filed before the Hon‟ble Bombay High Court. Hence we hold that that the consideration received by the assessee pursuant to this Settlement Agreement in the sum of Rs. 32.42 crores for relinquishing its capital asset (i.e. right to operate the hotel) is to be taxed only as Long Term Capital Gain. We find that the reliance placed on the decision of the Hon‟ble Madhya Pradesh High Court, Indore Bench supra is well founded wherein it was held that :-

6.1. The ld AO disallowed the entire deduction u/s 80IA of he Act for the following reasons :- a) Captive power undertaking is not entitled to the said deduction since it has supplied power only to the paper undertaking and not to outsiders. The assessee stated that the Captive Power Undertaking (PU I) at Bhadrachalam was set up in Asst. year 1998-99 and Power Undertaking II (PU II) was set up in Asst. Year 2005-06. The Captive PU II at Tribeni was set up in Asst. Year 2002- 03. This helped the company in managing the problem of acute power shortage with respect to supply of power to the paper undertakings and ever increasing power cost by reducing the drawal of power from external governmental sources

21 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited i.e Andhra Pradesh State Electricity Board (APSEB) an West Bengal State Electricity Board (WBSEB). The ld AO held that since the power generated by the assessee in its power plant has been captively consumed by it, the assessee is not eligible for deduction u/s 80IA of the Act by placing reliance on the decision taken by him in Asst Year 2002-03. The assessee stated that this issue has been succeeded by the assessee up to the level of tribunal. The ld AO stated that this issue is agitated further by the revenue before the Hon‟ble Calcutta High Court and it was pending. It was also stated that the identical issue has been held in favour of the assessee by the tribunal for Asst. Years 2003-04 and 2004-05. b) Market value issue u/s 80IA(8) of the Act As stated in section 80IA(8) of the Act, the value to be considered for the purpose of deduction in case of transfer from one business to another has to be at the market value . It was stated that in the case of this captive power undertaking, any power which is transferred has to be valued at „market value‟. The assessee applied the rates charged by the State Electricity Boards as market value for power captively consumed in its units for booking the income in power undertaking and consequentially claimed deduction u/s 80IA of the Act thereon. The assessee stated that this issue is also covered in favour of the assessee in Asst. Year 2002- 03 by the order of this tribunal which by placing reliance on the decision of the Hon‟ble Supreme Court in the case of Thiru Arooran Sugars Ltd vs CIT reported in (1997) 227 ITR 432 (SC) had held 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. It was also stated that this issue was held in favour of the assessee for Asst. Year 2004-05 by the tribunal. It was also submitted that pursuant to the amendment in Electricity Act 2003, the assessee company has the liberty to sell power to various third parties and in fact the company has started selling to various third parties like

22 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited Reliance Energy Trading Ltd in subsequent years at highly remunerative prices. The ld AO accepted all these facts in his assessment order. However, the only issue raised in the assessment order relate to the aspect of excluding the cost of transmission and distribution from the said value for ensuring that the computation is correctly done. In this respect, it was submitted that the ld AO erred in making this issue since transmission and distribution costs are not part of the tariff rate for electricity of the State Electricity Board and they are billed for separately.

6.2. The ld CIT(A) by placing reliance on the decisions of this tribunal for the earlier years allowed relief by allowing deduction u/s 80IA of the Act to the assessee. With regard to the market value issue, he held that the ld AO had wrongly made the said adjustment in the computation since the transmission and distribution costs are billed for separately by the State Electricity Boards. The market value has been calculated by the assessee in line with the decisions of the CIT(A) and Tribunal in assessee‟s own case for earlier years and therefore the addition made by the ld AO cannot be sustained. Aggrieved, the revenue is in appeal before us on the following ground:- 3. That the Ld. CIT{A} has erred on facts and circumstances of the case and in law by deleting the disallowance u/s 80lA made by the AO without considering the fact that the assessee's captive power plant does not fulfill conditions laid down in Section 80IA{8} and Section 80IA(1) of the Act to be eligible for deduction u/s 801A. 6.3. The ld DR vehemently relied on the order of the ld AO. In response to this, the ld AR stated that the issue under dispute is addressed by the Hon‟ble Calcutta High Court in assessee‟s own case reported in (2015) 64 taxmann.com 214 (Calcutta) vide order dated 1.6.2015 wherein it was held that section 80IA benefit is for setting up of an undertaking for generation of power during specified period and if such condition is satisfied, deduction u/s 80IA of the Act cannot be denied to the assessee merely because power generated by the assessee is in its entirety

23 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited consumed by other business of the assessee and not sold to outsiders. With regard to the market value issue in terms of section 80IA(8) of the Act, he fairly stated that this aspect of the issue has been set aside to the ld AO by the Hon‟ble High Court and accordingly prayed for setting aside of the issue before us to the file of the ld AO to decide the market rates in the light of directions of the Hon‟ble High Court.

6.4. We have heard the rival submissions and perused the materials available on record. We find that whether the deduction u/s 80IA of the Act is eligible to an assessee engaged in generation of power which has been consumed in its entirety by the other business units of the assessee is settled by the decision of the Hon‟ble Calcutta High Court in favour of the assessee by laying emphasis on the word „generation of power‟ which is contemplated in provisions of section 80IA of the Act. Hence this aspect of the issue is decided in favour of the assessee. With regard to the market value issue, we find that the Hon‟ble High Court had set aside to the file of the ld AO by observing as under :- 18. Clause 2 to the explanation has been added to clarify what was obvious already. The assessing officer was correct in the view he took that the assessee can compute the price of the electricity sold to the paper unit at the market rate and for that purpose he also gave an opportunity to adduce evidence to the assessee. The assessee did not, however, avail the same and contented itself by disclosing the price at which power was purchased by the paper unit of the assessee from the Andhra Pradesh State Electricity Board. The rate at which electricity was purchased from Andhra Pradesh State Electricity Board by the paper unit of the assessee can by no means be the market rate at which the power plant of the assessee could have sold its production in the open market. In the open market the buyer would obviously be a distribution company or a company engaged both in generation and distribution. Therefore, the rate at which electricity is sold to any such company can only be the market rate contemplated by the section. The judgment in the case of Thiru Arooran Sugars Ltd. (supra) has no manner of application for the simple reason that the Court in that case was concerned with the question as to the market value of sugarcane grown by the assessee at home. The Supreme Court was of the opinion that the sugarcane grown at home would be deemed to have been sold to the sugar mill at the same rate at which sugar cane was purchased by the sugar mill. That obviously is correct because if the sugarcane grown at home had not been sold to the sugar mill of the assessee itself, the 24 & 336/Kol/2011 Assessment Years: 2006-07 ITC Limited sugarcane would have been sold in the open market. The rate of sale in the open market would be the same at which sugarcane was purchased by the sugar mill of the assessee. But in the case before us the electricity generated by the assessee could not be sold to anyone other than a distribution company or a company which is engaged both in generation and distribution. The rate at which electricity could have been sold to any such company is not the same at which such companies sale electricity to the consumers. The rate at which electricity can be supplied to a consumer by the distribution licensee and the rate at which the generating companies can sell electricity to the distribution licensee are governed respectively by Sections 61 and 62 of the Electricity Act 2003. There is tariff regulatory commission which fixes both the rates for sale and purchase of electricity by the distribution licensee. There are provisions in Section 62 so that the generating companies can recover expected revenue on the basis of the tariff fixed by the commission. There are similarly provisions in Section 61 so that the distribution licensee can derive reasonable return. There is thus an in-built mechanism to ensure permissible profit both to the generating companies and the distribution licensees. The assessee's generating unit cannot as such claim any benefit under Section 80-IA of the I. T. Act computed on the basis of rates chargeable by the distribution licensee from the consumer. The benefit can only be claimed on the basis of the rates fixed by the tariff regulation commission for sale of electricity by the generating companies.

Order pronounced in the Court on 22.03.2017.