DCIT, NEW DELHI vs. M/S. MALANA POWER LTD., NEW DELHI

ORDER PER BEENA PILLAI, JUDICIAL MEMBER: A. First, we take up Revenue’s appeal in I.T.A.No. 5478/Del/2012 (Assessment Year 2008-09):

The present appeal has been preferred by the Revenue against the order of Ld. CIT (A)-IX, New Delhi wide order dated

2 I.T.A.No. 5564 & 5478/Del/2012 20.07.2012 for assessment year 2008-09 on the following grounds of appeal:

“1. The order of the learned CIT(APPEALS) is erroneous & contrary to facts & law.

2. On the facts and in the circumstances of the case and in law, whether the learned CIT (Appeals) has erred in deleting the proportionate disallowance of 50% of the common expenses amounting to Rs.8,25,500/· paid to two related parties ignoring the reasons given in the assessment order. 2.1. Whether, the CIT (Appeals) has erred in admitting the additional evidences regarding the basis of apportionment of above expenses without providing the AO any opportunity to rebut as per the provisions of Rule 46A.

2.1 Assessee is a company incorporated under companies act and is engaged in the generation of hydroelectric power and development of hydropower projects. It has set up its hydraulic plant at village Chuaki Post, Jari District, Kullu, Himachal Pradesh. The assessee filed its return of income on 30.09.2008 declaring nil income which was processed under section 143 (1)

3 I.T.A.No. 5564 & 5478/Del/2012 of the act. Subsequently the case was selected for scrutiny and notice under section 143 (2) was issued to the assessee the Ld. assessing officer completed the assessment by making following additions:

1.leave encashment Rs. 14,93,924/- 2. ROC fees Rs. 2,64,776/- 3. U/s. 14 A Rs.1,39,72,500/- 4. Common expenses Rs. 8,25,500/- 5. Continuity loyalty bonus Rs. 15,95,349/- 2.2 Aggrieved by the order of the Ld.AO the assessee preferred an appeal before the Ld.CIT(A). 2.3 The Ld. CIT (A) allowed the claim of common expenses as well as deleted the addition made by the Ld. AO under section 14 A read with rule 8D (2) of the act. The Ld. it CIT (A) however confirmed the addition made by the Ld. AO in respect of the interest income earned on FDRs not being eligible for deduction under section 80 IA of the act. 2.4 Aggrieved by the order of the Ld. it CIT (A) the assessee as well as the revenue is in appeal before us now.

3. We shall first take up the appeal filed by the revenue: Ground No. 1: This ground raised by the revenue deals with the addition being deleted by the Ld. CIT (A) in respect of the common expenses paid to related parties amounting to Rs.8,25,500/-. 3.1 The ld. DR submitted that the assessing officer has rightly disallowed 50% of the common expenses on the ground that there is no justification for claiming that such expenses as claimed by the assessee under the head common expenses when it cannot be ascertained that they have been incurred for 4 I.T.A.No. 5564 & 5478/Del/2012 assessee’s business as per the provisions of section 37 (1) of the act. The Ld. AO disallowed the expenses as the assessee had shown these expenditure claimed on an ad hoc basis and is not an allowable expenses as per the provisions of the act. 3.2 On the contrary the Ld.AR submitted that, these expenses included reimbursement of common expenses made to the group companies. The Ld. AR has submitted that the apportionment is based on the area occupied and the strength of staff employed in each company resulting into the benefits derived by the respective company. He further submitted that the expenses reimbursed to the group companies are included in respective heads of expenditure and there is no separate deduction under the head common expenses as believed by AO. The Ld. A.R. submitted that these expenses, are incurred by one group company and later on apportioned to all group companies on the basis of area occupied by each individual companies. He submitted that the Ld. AO is wrong in invoking the provisions of section 40A(2)(b), for disallowing the expenditure claimed, as the apportionment is on ad hoc basis. He thus submitted that these expenses incurred are wholly for the purposes of business and should be allowable. 3.3 We have perused the orders passed by the authorities below and the arguments of submitted by both the parties. On perusal of the order of Ld. CIT (A) it is observed by him that the assessee had submitted details of each of such expenditure and had contended that the same were incurred for the corporate office of the assessee. It has been explained that since the group companies have their corporate office at one place, the 5 I.T.A.No. 5564 & 5478/Del/2012 expenses were incurred by one group company and the same were later on apportioned to all the group companies on the basis of the area occupied by and the number of employees working in each such company. It is observed by the ld.CIT (A) that the assessee has also filed a certificate from the group company in incurring the expenditure confirming the aforesaid fact. 3.4 It is observed that the assessing officer has disallowed 50% of the expenditure claimed on the ground that, basis of apportionment appears to be ad-hoc. The Ld. AO has further failed to bring on record any justification as regards to the disallowance of 50% of the expenditures claimed. He has not recorded any finding in the assessment order, as to how the transactions between the group companies were unreasonable and not at the fair market value, which is the prerequisite for invoking the provisions of section 40A(2)(b). Even before us the Ld. D R is not in a position to bring out any material on record to prove that the expenses incurred by the assessee were not wholly for the purposes of business. Under such circumstances we are inclined to uphold the findings of the Ld.CIT (A). Accordingly this ground raised

by the revenue stands dismissed. Ground No. 3:

4. This ground relates to the addition being deleted made under section 14 A read with rule 8D of the act. 4.1 The Ld. AO has disallowed Rs.1,39,72,400/- under section 14A read with rule 8D in the hands of the assessee 4.2 The Ld. D R supported the order of the Ld. AO.

6 I.T.A.No. 5564 & 5478/Del/2012 4.3 On the contrary the ld.AR submitted that during the year under consideration assessee has invested Rs.353.85 crores in its subsidiary company being M/s A.D. Hydropower Ltd, out of which rupees to 32.20 crores was sourced through shareholders fund received as share capital with the assessee and the balance amount of Rs.121.65 crores was funded by the company out of its own generated funds. The Ld.AR thus submitted that no borrowed funds were utilized by the assessee for such investment in its subsidiary company being M/s. A.D. hHdropower Ltd. He thus submitted that section 14 A cannot be invoked resorting to rule 8D of the act as the assessee has not earned any exempt income which do not form part of the total income under the act. 4.4 We have perused the orders passed by the authorities below and the submissions made by both the parties. It is an undisputed fact that the assessee has not used any borrowed funds for making the investment in its subsidiary company. As per the audited financial statement of the assessee for year ending 31/03/2008, which is placed at pages 6 to 34 of the paper book, it is evident that the assessee company had enough funds generated from its own operations. It is a case of the assessee that the assessee had sufficient funds available in the form of share capital, reserve and surplus for making the investment in shares and that the assessee has not earned any exempt income, which do not form part of the total income. 4.5 The precondition sub clause 1 of section 14 A of the act is that, there should be an income which does not form part of the total income under the act. Further with respect to sub sub

7 I.T.A.No. 5564 & 5478/Del/2012 clause 2 and 3 of section 14 A, the assessing officer has to determine the expenditure incurred in relation to such exempt income if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in earning such exempt income. Since in the assessee’s case the exempt income as nil, the expenditure for earning would also be nil and therefore section 14 A (2) and (3) cannot be applied. We are therefore inclined to uphold the findings of the Ld.CIT (A). In the result the ground raised by the revenue stands dismissed

5. In the result the appeal filed by the revenue stands dismissed.

B. Now we shall take up the appeal filed by the assessee in I.T.A.No. 5564/Del/2012 (Assessment Year 2008-09):

6.1 It is found that this issue stands covered against the assessee by the decision of Hon’ble Supreme Court in the case of liberty India Vs. CIT reported in 317 ITR 218 whereby the 8 I.T.A.No. 5564 & 5478/Del/2012 Hon’ble court has held that the duty drawback receipts and DEPB benefits do not form part of the net profits of eligible undertaking for the purposes of deduction under section 80-IA, 80-IB, 80-IC of the act. Similarly Hon’ble Supreme Court in the case of Panday and chemicals Ltd reported in 262 ITR 278 has held that interest derived by the industrial undertaking of the assessee on deposits could not be said to flow directly from the industrial undertaking itself and was not profits or gains derived by such undertaking for the purposes of deduction under section80HHC. Respectfully following the decisions of Hon’ble Supreme Court we are inclined to confirm the addition made by the Ld. AO and hold that interest on FDR cannot be considered for the purposes of deduction under section 80 IA of the act. Accordingly this ground of appeal stands dismissed

7. In the result appeal filed by the assessee stands dismissed. Order pronounced in the open court on 10th May, 2016. Sd./- Sd./- (G. D. AGARWAL) (BEENA A. PILLAI) VICE PRESIDENT JUDICIAL MEMBER Date: 10.05.2016 Sp. Copy forwarded to:-

1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy. By Order (ITAT, New Delhi)

9 I.T.A.No. 5564 & 5478/Del/2012 S.No. Details Date Initials Designation 1 Draft dictated on Sr. PS/PS 2 Draft placed before author 5/5 Sr. PS/PS Draft proposed & placed before 3 JM/AM the Second Member Draft discussed/approved by 4 AM/AM Second Member Approved Draft comes to the 10/5/16 5 Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement 10/5 Sr. PS/PS 7 File sent to Bench Clerk 10/5 Sr. PS/PS Date on which the file goes to 8 Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order