D.C.I.T CIR - 5,KOLKATA, KOLKATA vs. M/S ESSEL MINING & INDUSTRIES LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

The cross-appeals for the assessment year 2008-09 have been filed by the assessee as well as by the Revenue against the common order of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 01.02.2013. Assessment was framed by Addl. CIT, Range-5, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 22.12.2010.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 2 Shri D.S. Damle and Shri Akkal Dudhwewala, Ld. Authorized Representatives appeared on behalf of assessee and Shri Radhey Shyam, Ld. Departmental Representative represented on behalf of Revenue. 2. At the threshold it is noted that there is a delay of 53 days in filing the appeal by the Revenue. The Revenue has filed condonation petition in this regard stating the reasons that the delay is occurred due to huge pendency of work-load and additional charges. Ld. AR for assessee submitted that considering delay he should not be having any objection to the Bench if considering the delay of condonation. This, in our considered opinion, on the facts and circumstances of the case, i.e., in this case deserves to be considered and same is condoned. First we take up assessee’s grounds of appeal in ITA No.786/Kol/2013. 3. The issue raised by assessee in ground number 1,2,3 and 4 is that ld CIT(A) erred in confirming the order of AO by sustaining the disallowance of Rs.17,15,98,000.00 under the provisions of section 14A of the Act.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 3 in annexure B and stated that 4 persons salary has been allocated to this. However the AO rejected the contention of the assessee by observing that the law does not make any distinction for the disallowance under section 14A of the Act in a case where the dividend was credited to the bank directly. Accordingly the AO invoked the provisions of rule 8D read with section 14A of the Act and has made the disallowance as under i. direct expenses Nil ii. Interest expenses Rs. 1573.03 Lacs iii. Administrative expenses Rs. 143.00 Lacs

5 Aggrieved assessee preferred an appeal to ld CIT(A). The assessee before the ld. CIT-A submitted as under : i. The order of the AO is silent for his dissatisfaction about the suo-motu disallowance made by the assessee. Thus the AO has invoked the provisions of rule 8D read with section 14A of the Act against the provisions of section 14A(2) of the Act. As per the provisions of section the AO has to record his satisfaction after having regards to the accounts of the assessee. ii. The assessee further submitted that in the earlier years only 1% of dividend income was disallowed therefore the same should be applied in the year under consideration on the basis of principle of consistency iii. The assessee further submitted that no borrowed fund has been utilized in making the impugned investment. Hence there is no question of disallowing the interest expenses. However, the ld CIT(A) during the appellate proceedings has observed that the assessee has shown the loan of Rs. 20.06 crores in its balance sheet as on 31st of March 2008 and the interest incurred during the year is of Rs. 208.31 crores. The average investment during the year is of Rs.285.99 crores.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 4 The provisions of rule 8D read with section 14A of the Act are applicable with effect from assessment year 2008-09 which requires the disallowance in a particular manner where the AO is not satisfied with the correctness of the claim made by the assessee after having regard to the books of accounts. In such a situation it is mandatory to invoke the provisions of rule 8D of income tax rules 1962. The investment has been made out of the fund used in the common kitty. There is no documentary evidence showing that the investment has been made out of the exclusive fund of the assessee and no borrowed fund has been used. Besides the interest expenses the assessee has incurred various indirect expenses which are required to be disallowed in terms of the provisions of rule 8D read with section 14A of the Act. The decisions of the management for making the investment are very complex in nature. They require day to day market information, research of the information, analysis of market trend, the appropriate time for investment and its duration etc. Therefore the claim of the assessee that no expenditure was incurred as the dividend was received directly in the bank account is not tenable. In view of above, the ld. CIT(A) has confirmed the order of AO by observing as under:- “30. The appellant has incurred an amount of Rs.208,31,77, as interest during the year and the average of investments amount to Rs.285,99,07,000/- while the Assessing Officer has disallowed an amount of Rs.17,16,03,000/- only. The total disallowance amounts to 6% of the average investments. Therefore, in the facts & circumstances as discussed and following the judgments of the Hon'ble Appellate Authorities including the Hon'ble jurisdictional High Court in the case of ISG Traders Lt. vs. CIT-III, Kolkata & Dhanuka & Sons v. CIT (Central)-1; the Hon'ble Special Bench of ITAT in the case of Cheminvest Ltd. v. Income-tax Officer, New Delhi and the Hon'ble ITAT Delhi bench ‘H’ in the case of Technopak advisors (P) LTd. v. Additional Commissioner of Income- tax, Range-16, New Delhi, the disallowance of Rs.17,16,03,000/- as per Rule 8D read with section 14A is upheld. The Assessing Officer was right in disallowing expenditure of Rs.17,116,03,000/- u/s 14A in relation to the appellant’s exempted income of Rs.7,10,12,674/- n the normal as well as in the computation u/s. 115JB. The Assessing Officer was right in applying Rule 8D for making a disallowance u/s. 14A after stating that he is not satisfied with

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 5 the disallowance made by the appellant u/s. 14A. The Assessing Officer will verify the disallowance figure shown by the appellant in the return whether it was shown at Rs.5,000/- or Rs.87,455/- and give the deduction accordingly from the disallowance calculated as per Rule 8D r.w.s. 14A. The Assessing Officer will also add any direct expenditure incurred on earning of exempted income on account of DEMAT, Interest, specific expenses etc as provided in Rule 8D(2)(i) in addition to disallowance of Rs.17,16,03,000/- u/s. 14A but deducted any expenditure shown on ad hoc basis by the appellant out of Rs.17,16,03,000/-. These grounds of appeal are accordingly decided.”

Being aggrieved by the order of ld CIT(A) assessee is in second appeal before us. 6. The ld. AR before us submitted that the AO cannot make any disallowance under the provisions of rule 8D read with section 14 A of the Act without recording his dissatisfaction about the correctness of the claim made by the assessee. The ld AR further submitted that in the earlier assessment years the disallowance was made at the rate of 1% of the dividend income. Therefore, the disallowance for the year under consideration should be limited to 1% only. The ld AR in support of assessee’s claim drew our attention on page 61 of the paper book where the details of the disallowances made in the earlier years were placed. The ld AR also drew our attention on page 16 of the paper book where the details of the disallowances offered by the assessee for Rs. 5,97,043.00 was placed and demonstrated that no defect in the aforesaid disallowances was pointed out by the lower authorities. The ld AR in support of his claim has also relied in the following orders. “Decisions relied: 1) DCIT vs. REI Agro Ltd. (ITAT Kolkata) ITA No.1811/Kol/2012 (pg 1 to 12) 2) CIT vs. REI Agro Ltd. (Calcutta High Court) ITAT No.161 of 2013 (pg 13 & 14) 3) ACIT vs. Amitabh Sonthalia (ITAT Kolkata) ITA No.1750/Kol/2010 & ITA No. 1181/Kol/2011 (pg 15 to 20) 4) Joint Investments ((P) Ltd. vs. CIT (Delhi High Court) IA No.117 of 2015 (pg 21 to 23)

Alternatively the ld AR also claimed that the disallowances u/s 14A of the Act should be worked out in respect of those investments which have yielded tax

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 6 free dividend income during the year under consideration. For this proposition, the ld AR has relied in the following cited orders. “Decisions relied: a) REI Agro Lt.d vs. DCIT (ITAT Kolkata) TA No.1331 & 1423/Kol/2011 (pg 24 to 34) b) Upheld by the Calcutta High Court in the case of CIT, C-II vs. m/s REI Agro Ltd. ITAT No.220 of 2013 (pg 35 to 38)

On the other hand, the ld the DR vehemently supported the order of authorities below.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 7 fund utilized in the impugned investments. Thus, in such circumstances the AO had no option except to resort to the provisions of section 14A read with rule 8D of Income Tax Rules.

However the ld. AR before us has made an alternative submission that even if the provisions of section 14A read with Rule 8D are applicable in the instant case, then also AO may be directed to compute the disallowance as per Rule 8D by taking into consideration only those shares which have yielded dividend income in the year under consideration. Since this issue raised by the ld. counsel for the assessee as an alternative contention is squarely covered in favour of the assessee by the decision of the Coordinate Bench of this Tribunal in the case of REI Agro Ltd. v. Dy. CIT [2013] 35 taxmann.com 404/144 ITD 141 (Kol.), we direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares, which have yielded dividend income in the year under consideration. The alternative contention of the ld. counsel for the assessee is accordingly accepted. Thus, the issue raised by the assessee in its appeal is partly allowed.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 8 originally offered as revenue receipt in the income tax return filed for the year under consideration. But at the fag-end of assessment proceedings, assessee requested to treat the compensation as capital receipt not chargeable to tax. However, the AO has disregarded the contention of assessee and treated the compensation so received as Revenue in nature because it was worked out at the rate at which MSEB is purchasing the power. Thus the assessee was compensated the loss of revenue. Moreover, the guarantee was provided by SEL only for initial two years and therefore the compensation was not given towards the impairment of fixed assets. Finally, the AO treated the compensation as the revenue in nature and added to the total income of the assessee.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 9 actual cost of the asset to the assessee. Therefore, it is held that although the receipt is revenue in nature but it is also reimbursement to the appellant hence the provisions of Explanation 10 to section 43 overrides the nature of receipts and it has to be accounted as per these provisions. The appellant has also taken it as an alternate plea. In the facts and circumstances it is held that this receipt of Rs.19,28,18,00/- as compensation for shortfall in production of electricity is reimbursement as per the provisions of Explanation 10 to section 43. In this case, the seller i.e. SEL has reimbursed Rs.19,28,18,00/- and as per the provision of Explanation to section 43 this amount will be deducted from the cost of the machinery. The cost will be reduced in the year of receipt since it has crystallised during the current year and has been also paid in this year. The Assessing Officer will reduce the cost of machinery by an amount of Rs. 19,28,18,000/- and calculate the depreciation u/s 32 accordingly. 52. Therefore, in the facts and circumstances and following Explanation 10 to Section 43 it is held to be a reimbursement receipt reducing the cost of the machinery and the claim of depreciation to be allowed accordingly after reducing it from the cost of the assets. This ground of appeal is allowed and the amount of Rs.19,28, 18,000/- is to be deducted from the cost and depreciation to be allowed on the net value of assets.”

Being aggrieved by this, both assessee and Revenue has come up in appeal before us on following grounds:- ITA No.786/Kol/2013 (assessee’s appeal) 4) For that on the facts and in the circumstances of the case, the CIT(A) was unjustified in law and on facts in not accepting the appellant’s contention that the compensation received by the appellant from the supplier of Wind Electric generators was “ capital receipt” which did not reduce the “ actual cost” of the said plant & machinery. 5) For that on the facts and in the circumstances of the case, the compensation received from the Supplier of the Wind Electric Generators not having any connection with “actual cost” of the said capital asset & the said compensation having been paid for breach of performance Warranties, the CIT(A) was not justified in directing the AO to reduce the compensation amount from the actual cost of the Plant & Machinery for the purpose of allowing depreciation. 6) For that on the fact and in the circumstances of the case, the AO be directed to treat the compensation amount of Rs.19,28,18,000/- as pure capital receipt and be further directed not to reduce the said compensation from the WDV of the block of Plant & Machinery for the purpose of allowing depreciation.”

Revenue’s appeal in ITA No.2073/Kol/2013

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 10 3. That the Ld. CIT(A) has erred in accepting the grounds of assessee during the appellate stage regarding adjustment of compensation received though it was not claimed by the assessee in the return of income. 4. That the Ld. CIT(A) has erred in accepting the contention of the assessee regarding the treatment of compensation received from the supplier towards shortfall of electricity generation by applying explanation 10 to section 43. 5. That the Ld. CIT(A) has erred din allowing deduction of the compensation amount from the cost of asset as depreciation since guarantee to pay compensation on account of shortfall in production tantamount to reimbursement of loss of revenue to the assessee and nowhere it is connected to the cost of asset directly or indirectly.”

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 11 Supply Electricity Board. The assessee has shown the compensation in its profit and loss account as income but at the fag-end of assessment claimed the same as capital receipt which is not liable for tax. However, the AO was of the view that the compensation given by the machine supplier is to compensate the assessee for the loss of revenue which the assessee might have incurred due to short fall in the generation of units. Therefore, the compensation received by the assessee is revenue in nature and liable to be taxed. However the ld CIT(A) observed that the compensation received by the assessee is capital in nature and therefore liable to be reduced from the actual cost of the machines in terms of specific Explanation 10 to section 43(1) of the Act. 12.1 On examination of the order of lower authorities and other relevant records, we find that the machines were ordered in the financial year 2004-05 and 2005-6. At the time of purchase, the machine supplier guaranteed for the generation of minimum average units in 2 years. In the event of any shortfall in the guaranteed generation of units the compensation will be provided to the assessee. In the case on hand the machines were first purchased, installed and thereafter actually used for the production of units. In the later years the performance of these machines were quantified and accordingly performance of the machines was ascertained. So the fact is that the compensation was quantified and is received after putting the machine in actual use. Thus, from the above it is clear that the purpose of giving compensation to the assessee was to reduce the loss which the assessee might have incurred. Therefore, it is crystal clear that the compensation was given on Revenue account i.e. to reduce the running loss of the assessee and that too in the course of the business. Thus the impugned compensation has direct nexus with the business of the assessee. In our considered view the facts of the case i.e. CIT Vs. Saurashtra Cement Limited reported in 325 ITR 422 are different from the present case. The relevant facts of the case are enumerated below.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 12 “13. We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No. 6 of the agreement dt. 1st Sept., 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt.”

In the above case, the compensation was given to the assessee for late delivery of machine but in the instant case before us compensation was given due to non-performance of the machineries at desired level. In the former case the machines were not put into the use but in the later case the machines were actually put into use for the production of units. Therefore the compensation in the instant case before us cannot be treated as capital receipts. Similarly the cases i.e. ACIT Vs. RDS Construction Pvt. Ltd. ITA 377 to 383/PN/2013 and DCIT Vs. Xpro India Ltd. ITA 214/Kol/2011 relied upon by the assessee are distinguishable from the present case so far the issue was raised for the determination of actual cost u/s 43(1) of the Act. 12.2 Similarly the finding of the ld CIT(A) that the compensation received by the assessee should be reduced from the actual cost is not based on correct law. It is because the cost of the machine has not been met directly or indirectly by the government or any other person as required in Explanation 10 to section 43(1) of the Act. In fact the compensation was given with the sole purpose of reducing the loss which might have incurred by the assessee due

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 13 to non-performance of the machineries at desired level. At the time of purchase of machineries there was no whisper about the meeting of the cost directly or indirectly by the machine supplier. Therefore, in our considered view the question of reducing the actual cost of machinery does not arise. Hence the ground of appeal of the revenue is allowed and that of assessee’s ground is dismissed.

“(i) Rent for the months of January, 2007 to March, 2007, for which the claim had been made by the concerned landlord on 19/07/2007 (out of Rs.3,24,000 for the six months’ period from January, 2007 to June, 2007) Rs.1,62,000 (ii) Maintenance Charges for January, 2007 to March, 2007 in respect of the abovementioned Flat for which the claim was made on 19/07/2007 (included Rs.10,000 out of rs.18,000 charged for six months period from January, 2007 to June, 2007) Rs. 9,000 (iii) Payment of house rent on low cost housing scheme as per the direction of the Ministry of Labour & Employment vide letter dated 19/06/2007(out of

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 14 Rs.5,8800 for the period from April 2006 to May, 2007) Rs. 5,040 Rs.1,76,040 The appellant submit that since the relevant documents for the abovementioned expenses aggregating to Rs.1,76,040 (out of Rs.3,86,365) clearly show that those got crystallized during the financial year 2007-08 (assessment year 2008-09) the Assessing Officer may kindly be directed to allow Rs.1,76,040 out of the prior period expenses aggregating to Rs.3,86,365.”

The Ld. CIT(A) after considering the submission of assessee has partly allowed relief to assessee by observing as under:-

“33. I have considered the observations of the Assessing Officer in the assessment order, and submissions of the appellant The appellant has submitted in the written submissions that out of rs.1,76,040/- get crystallised during the period relevant to assessment year 2008-09 and produced the copy of the agreement. The perusal of the agreement shows that the rent has been charged with retrospective effect and similarly then other expenses also crystallized during this period. Therefore, it is hold that the expenses of Rs.1,76,040/- although pertains to the prior period but the liability arose only during the current year due to the nature of expenses and in the given facts and circumstances. Therefore, the appellant is allowed prior period expenditure of Rs.1,76,040/- out of Rs.3,86,365/-. The addition is upheld for an amount of rs.2,10,325/- and the appellant gets relief of Rs.1,76,040/-. This ground of appeal is partly allowed.”

Being aggrieved by this, Revenue has come up in appeal before us.

ITA No.786 & 2073/Kol/2013 A.Y. 2008-09 Esel Mining & Inds. Ltd. Vs. DCIT, Cir-5, Kol. Page 15 no infirmity in the order of ld. CIT(A). Hence the ground raised by the Revenue is hereby dismissed.