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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri K. Narasimha Chary, JM]
ORDER Per Shri K. Narasimha Chary, JM:
These appeals by assessee are arising out of separate orders of CIT(A)-VI, Kolkata vide Appeal Nos.82/CIT(A)-VI/Circle-6/Kol/2011-12 and 221/CIT(A)-VI/Cir6/10-11/Kol dated 21.02.2013 and 28.03.2014 respectively. Assessments were framed by JCIT, Range-6 & DCIT, circle-6, Kolkata u/s. 143(3)/115WE(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AYs 2008-09 and 2009-10 vide their orders dated 01.10.2011 and 29.12.2010 respectively. Since the appellant is one and the same in both the appeals, and also the questions of fact and law facts giving rise to these two appeals are same, we feel it convenient to dispose of these appeals by way of this common order.
I.T.A. No.1656/Kol/2013
Brief facts of the case are that, the assessee is a Public Limited company engaged in the business of generation of power and energy. In respect of the AY 2008-09, the assessee company filed the return of income on 30.9.2008 declaring income of Rs. 2,99,89,226/- under section 115 JB of the Act. Subsequently, the assessee revised the same on 17.9.2009 showing income of Rs.2,88,46,900/- under section 115 JB of the Act as book profit. Again they revised it on 30.3.2010 showing income of Rs. 2,85,99,729/- under section 115 JB of the Act as book profit. The AO by way of order dated 29.12.2010 assessed the income of 2 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 the assessee at Rs. 3,30,41,943/- and after set off of at NIL income and on book profit income of Rs. 4,22,67,189/- under section 115 JB of the Act.
Against the said order of AO the assessee preferred appeal before the CIT(A), who by way of impugned order dated 21.02.2013 sustained to some extent the additions made by AO, inter alia, disallowing the expenditure u/s. 14A read with rule 8D of the I. T. Rules the claim for Rs.12,53,776/-, and calculation of the tax liability of the assessee under section 115JB of the Act, adding Rs. 13,63,105/- debited by the assessee as diminution in value of investments in the P&L Account with corresponding reduction in investments in the balance sheet, Rs.9,66,000/- amount provided for payment on retirement of workers and also levied interest under section 234-B on the additions due to retrospective amendment.
Aggrieved by the impugned order, the assessee approached before the Tribunal on the following grounds:-
“1.0 That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) [here-in-after referred to as Ld. CIT (Appeals)] was not justified and grossly erred in confirming the disallowance u/ s 14A of the Act r.w. Rule 8D of Income Tax Rules, 1962 at Rs. Rs.9,70,627/- in spite of the fact that no such expenditure was incurred for earning the exempt income. 1.1 That on the facts and in the circumstances of the case, and without prejudice to Ground 1.0 taken here-in-above, Ld. CIT (Appeals) was not justified and grossly erred in considering entire interest debited to Profit & Loss account while computing disallowance u/s 14A r.w. Rule 8D, without considering the fact that the borrowings were made for specific purposes. 2.0 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming the disallowance of an amount of Rs. 20,000/ - on account of donation paid in computing total income under normal provisions of the Act. 3.0 That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in confirming the disallowance of an amount of Rs. 4,234/ - claimed as advances written off in computing total income under normal provisions of the Act. 4.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified & erred in confirming that provisions of Sec. 115JB of the Act are applicable on the appellant without considering the fact that, the appellant, being a electricity generating company, is exempt from maintaining its books of accounts in terms of Sec 211(1) of the Companies Act, 1956 read with Schedule-VI and hence provision of Sec. 115JB is not applicable in its case. 5.0 That on the facts and in the circumstances of the case, and without prejudice to Ground 3.0 above, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of diminution in the value of investment amounting to Rs. 13,63,105/ - in computing Book profit u/ s 115JB, without appreciating the fact that the amount debited to the Profit & Loss A/ c represents actual write off in the value of investments.
3 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 6.0 That on the facts and in the circumstances of the case, and without prejudice to Ground 3.0 above, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of provision for payment on retirement of workers amounting to Rs. 9,66,000/- in computing Book profit u/s 115JB, without appreciating the fact that the provision was created on the basis of actuarial valuation report and hence is not an unascertained liability. 7.0 That on the facts and in the circumstances of the case, Ld. CIT(Appeals) was not justified and grossly erred in confirming the levy of interest u/ s 234B after 01-04-2009 on the incremental amount of tax which arose due to retrospective amendment in Sec. 115JB of the Act. Additional ground 1. That on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified & erred in not admitting additional grounds filed before it, without considering that fact that, the additional grounds were merely questions of law on the facts available on record and essential in order to correctly assess the tax liability of an appellant.”
For the AY 2009-10, the assessee company filed its return of income on 29.9.2009 declaring income of Rs. 23,98,647/- under section 115 JB of the Act. Subsequently they revised the same twice on 19.10.2010 and 31.03.2011 showing the NIL income under normal provisions of computation after adjusting the unabsorbed depreciation. Returns dated 29.9.2009 and 19.10.2010 were filed under section 115 JB of the Act whereas in the return dated 31.3.2011 it is alleged that the provisions under section 115JB have no application to the assessee being a Power Generating Company. The AO by way of order dated 01.10.2011 assessed the income of the assessee at Rs. 11,71,31,845/- under section 115 JB of the Act.
Aggrieved, assessee preferred appeal before the CIT(A), who by way of impugned order dated 28.03.2013 sustained to some extent the order of AO, inter alia, disallowing u/s. 14A of the Act read with rule 8D of the I. T. Rules the claim for Rs.15,18,912/- deduction towards expenditure, calculation of the tax liability of the assessee under section 115JB of the Act, adding Rs. 39,19,000/- claim of the assessee of leave encashment, Rs.15,18,912/- disallowing expenditure and also levied interest under section 234-B on the additions.
Challenging the impugned order, the assessee approached this Tribunal in ITA 891/Kol/2013 on the following grounds:-
1.0 That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) [here-in-after referred to as Ld. CIT (Appeals)] was not justified and grossly erred in confirming the disallowance u/s 14A of the Act r.w. Rule 8D of Income Tax Rules, 1962 at Rs. 15,18,912/- in spite of the fact that no such expenditure was incurred for earning the exempt income.
4 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 1.1 That on the facts and in the circumstances of the case, and without prejudice to Ground 1.0 taken here-in-above, Ld. CIT (Appeals) was not justified and grossly erred in considering entire interest debited to Profit & Loss account while computing disallowance u/s 14A r.w. Rule 8D, without considering the fact that the borrowings were made for specific purposes. 1.2 That on the facts and in the circumstances of the case, and without prejudice to Ground 1.0 & 1.1 taken here-in-above, Ld. CIT (Appeals) was not justified and grossly erred in considering entire investment while computing disallowance u/s 14A r.w. Rule 8D instead on only those investments have generated and/or are capable of generating exempt income. 1.3 That on the facts and in the circumstances of the case, and without prejudice to Ground 1.0, 1.1 & 1.2 taken here-in-above, Ld. CIT (Appeals) was not justified and grossly erred in increasing the average value of investments while computing disallowance u/s 14A r.w. Rule 8D, more than the average of the carry in investment as appearing in the balance sheet of the appellant. 2.0 That on the facts and circumstances of the case, the Ld. CIT(Appeals) was not justified & erred in confirming the disallowance of leave encashment claimed on provision basis in computing total income under normal provisions of the Act. 3.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified & erred in confirming that provisions of Sec. 115JB of the Act are applicable on the appellant without considering the fact that, the appellant, being a electricity generating company, is exempt from maintaining its books of accounts in terms of Sec 211(1) of the Companies Act, 1956 read with Schedule-VI and hence provision of Sec. 115JB is not applicable in its case. 4.0 That on the facts and in the circumstances of the case, and without prejudice to Ground 3.0 above, the Ld. CIT(Appeals) was not justified and grossly erred in confirming the addition of expenditure incurred in relation to earning exempt income in computing Book Profits u/s 115JB without appreciating the fact that no such expenditure was debited in the Profit & Loss A/c in the relevant assessment year. 5.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified rather grossly erred in confirming imposition of interest of u/s 234B.”
At the time of hearing Ld. Counsel for the assessee did not press ground nos. 2 and 3 of AY 2008-09. Hence, the same are dismissed being not pressed.
The issue involved in both the appeals of assessee is that the Ld. CIT(A) was not justified in confirming the disallowance on account of expenditure u/s. 14A of the Act r.w. rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”) for earning dividend and interest income, leave encashment claimed on provision basis and interest u/s. 234B of the Act for computing book profit u/s. 115JB of the Act. It is the argument of learned AR that the authorities below are not justified in disallowing under section 14A of the Act r/w 8D of the Rules the expenditure claimed by the assessee as deduction holding it as expenditure incurred for earning exempt income, that the authorities below ignored the fact that the provisions under section 115JB are not at all applicable to the assessee company
5 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 since it is a Power generating company bound by the West Bengal Electricity Regulatory Commission (Terms and Conditions of Traffic) Regulations, 2007 issued pursuant to Electricity Act, 2003 whereunder it is maintaining accounts, but not under Part II and III of Schedule VI of the Companies Act for computing Book Profit, that the authorities are not justified in adding the amounts while calculating the book profit under section 115JB of the Act, and that there is no justification in imposing interest under section 234B on the additions made. Learned DR, on the other side, very vehemently relied on the order of assessment as well as that of the first appellate authority.
It is, therefore, evident that the entire dispute in both the appeals revolves around the disallowance of expenditure u/s 14A r/w Rule 8D, applicability of 115JB of the Act to the Assessee Company and adding certain amounts like diminution in value of investment, provision for payment to the retired workers, Leave encashment provision and deduction claimed u/s. 14A r/w R 8D basing on section 115JB of the Act and levying interest u/s 234B of the Act. Basing on the above facts and contentions, the following issues arise for our consideration:-
Whether the authorities below are justified in disallowing the claim for deduction of expenditure by invoking the provisions under section 14A r/w 8D in respect of the AY 2008-09 and 2009-10? 2. Is the CIT (Appeal) justified in not admitting additional grounds filed before him in respect of AY 2008-09? 3. Are the provisions under section 115JB applicable to the assessee company income in respect of the AY 2008-09 and 2009-10? 4. Are the authorities below justified in disallowing the claim of Leave encashment to a tune of Rs.39,19,000/- in respect of AY 2009-10? 5. Are the authorities below justified in adding Rs. 13,63,105/- debited by the assessee as diminution in value of investments in the P&L Account with corresponding reduction in investments in the balance sheet, while computing book profit u/s 115JB of the Act in respect of AY 2008-09? 6. Are the authorities below justified in adding Rs.9,66,000/- amount provided for payment on retirement of workers in computing Book Profit under Section 115JB of the Act in respect of AY 2008-09? 7. Are the authorities below justified in disallowing the claim of Rs.15,18,912/- under section 14A r/w 8D in computing book profits under section 115JB 8. Are the authorities below justified in imposing interest under section 234B on additions AY 2008-09 and 2009-10? Issue No 1
Argument of the learned AR on merits is three fold on this issue. Firstly, he submitted that the borrowings were made for a specific purpose of earning taxable income, as such, it cannot be said that the amount borrowed could have been invested to earn exempt income for applying Rule 8D of the Rules. To substantiate his submission, learned AR placed before us the documents relating to the term loan of State Bank of India and Yes Bank and Cash credits with Oriental Bank, IDBI, and State Bank of Patiala which were obtained for the purpose of construction of sub stations and working capital. On this aspect, reliance is placed on a decision rendered by a coordinate Bench of this Tribunal in ACIT vs. Champion Commercial Co Ltd. for the principle that once it is found that an expense is specifically relatable to a taxable income, no portion of such an expense can be disallowed under section 14A of the Act.
Secondly, he submitted that sufficient own funds to the tune of Rs. 84.04 Cr as on 31.3.2007 Rs.84.3 Cr as on 31.3.2008 and Cr. 91.37 as on 31.3.2009 were available with assessee whereas the investments generating the exempt income corresponding to such period are Rs. 19.5 Cr, Rs. 1.80 Cr. and R. 1.78 Cr respectively. Basing on this, he argued that when the own funds of the assessee are in excess of the investments made in the securities, the presumption with regard to investment in tax - free securities coming out of the taxpayer's own funds arises even for application of Sec 14A of the Act.
Lastly, he argued that in order to apply Rule 8D, recording of satisfaction by the AO is sine qua non, and the absence of such recording of satisfaction vitiates the application of Rule 8D. For this purpose, he relied on decisions of coordinate Benches of Tribunal in M/s Balarampur Chini Mills Ltd vs. DCIT (2011) 140 TTJ 73, Hindustan Paper Corporation Ltd vs. DCIT (2012) ITA No. 47/Kol/2012. He also placed reliance on a decision reported in MAXOPP INVESTMENT LTD. & ORS. vs. CIT (2012) 247 CTR 0162 (Del) for the principle that even prior to the introduction of sub-ss. (2) and (3), Section 14A would require the AO to first reject the claim of the assessee with regard to the extent of such expenditure, such rejection must be for disclosed cogent reasons and it is only then that the question of determination of such expenditure by the AO would arise.
Further reliance is placed on a decision in the case of CIT Vs. ASHISH JHUNJHUNWALA G.A. No. 2990 of 2013, wherein the Hon’ble Jurisdictional High Court of Calcutta confirmed the following observations of this Tribunal in “While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT (A)”
We have carefully gone through the submissions of both the side, perused the material available in the paper book submitted by the assessee and the orders of the lower authorities. We find that the copy of the Term loan sanction letters dated 10.5.2006 and 7.12.2006 issued by the State Bank of India clearly mention in the terms and conditions that the purpose of the loan was to construct three floors and a conference hall at the Company’s Registered Office and 33/1 1KV sub-station respectively. So also other loan sanction letter dt 2-12-2009 issued by State Bank of Patiala, letter dated 30-9-2008 issued by IDBI, letter dated 2.3.2005 issued by oriental Bank, letter dated 27.9.2007 issued by Yes Bank clearly show that the loans were advanced or overdraft facility was extended for the purpose of meeting working capital of the assessee. All these documents support the contention of the Assessee that the borrowings were made with a specific purpose and not utilized to be invested to generate exempt income.
We have also gone through the Balance sheets of the Assessee Company for the years ended 31.3.2008 and 31.3.2009. We find that the Share Capital and Reserves and Surplus for the years ended 31.3.2007, 31.3.2008 and 31.3.2009 are Rs. 8,408.48 lacs, Rs. 8,430.50 lacs and 9,137.90 lacs respectively, and the borrowed funds were Rs. 2890 lacs, Rs. 5034.18 lacs and Rs. 2640.45 lacs respectively, whereas the investments, as submitted by the learned AR, are only to the tune of Rs. 194.67 lacs, Rs.180.44 lacs and Rs 178.53 lacs respectively. In this factual scenario, we find that the decision reported in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 0505 (Bom) applies on all fours. In that decision it was held that when assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that 8 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 investment made by the Assessee would be out of the interest-free funds available with Assessee, and the additions made by the AO under Section 14A of the Act by disallowing the expenditure, have to be deleted.
From the above discussion, we conclude that own funds of the assessee are sufficiently in excess of both the borrowings and investments, borrowings are proved to be for a specific purpose and there is no possibility of investing them for generating the exempted income, investments that are generating the exempted income were made prior to the relevant previous years, and above all the legal requirement of the AO recording the reasons for resorting to Section 14A r/w 8D in this matter are conspicuously absent. Viewing from any angle, we are convinced that there is no justification for the authorities below to sustain the disallowance made u/s. 14A of the Act in AYs 2008-09 and 2009-10.
For these reasons, while answering this issue in the negative, we hold that the authorities below are not justified in disallowing the claim of the assessee for deduction of expenditure of an amount of Rs.14,08,874/- in respect of the AY 2008-09, and Rs.10,39,339/- in respect of the AY 2009-10 by applying section 14A r/w 8D, and any addition on such score has to be deleted.
In view of our finding in the preceding paragraph, we do not think it necessary to consider the alternative submission of the learned AR that for the purpose of disallowance, the CIT should have considered only the investment generating exempt income, instead of total investments. Hence, ground nos. 1.0 to 1.2 in and ground nos. 1.0 and 1.1 in are allowed in favour of assessee.
Issue No 2 and 3. 21. Issue no. 2 relates to the additional ground in ITA No.1656/K/2013. Issue no. 3 relates to ground no. 3 in and ground no. 4 in ITA No.1656/K/2013.
It is the submission of the learned AR that the assessee submitted before the learned CIT(A) that the provisions of Sec 115 JB of the Act have no application to the Assessee Company since being a Power Generating Company they are governed by the provisions of West Bengal Electricity Regulatory Commission (Terms and Conditions of Traffic) Regulations, 2007 issued pursuant to Electricity Act, 2003, and they are not maintaining their accounts under Part II and III of Schedule VI of the Companies. Grievance of the 9 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 assessee is that such argument was turned down by the learned CIT(A) on the ground that such a contention does not emanate from the order passed by AO under section 143(3) of the Act.
It is the settled principle of law vide decisions in National Thermal Power Co. Ltd. Vs. CIT (1998) 229 ITR 383 SC and Jute Corporation Of India Ltd vs. CIT [1991] 187 ITR 688 (SC) that when a new ground which does not require any further investigation of facts and purely legal in nature, is raised it may be admitted. Rejection of the grounds based on law is not in compliance with the principle laid down in Jute Corporation of India Ltd vs. CIT [1991] 187 ITR 688 (SC). The Ld. CIT(A) should have entertained the grounds urged before him basing on the applicability of section 115JB of the Act.
Now coming to the merits of applicability of Section 115JB of the Act, there is no dispute that the assessee is a Public Limited company engaged in the business of generation/distribution of power and energy and is governed by the provisions of Electricity Act, 2003. Under West Bengal Electricity Regulatory Commission (Terms and Conditions of Traffic) Regulations, 2007 issued pursuant to Electricity Act, 2003, Assessee is under an obligation to prepare its accounts as per the said regulations and not under Part II and III of Schedule VI of the Companies for computing Book Profit. In view of the statutory stipulation to maintain its accounts as per the West Bengal Electricity Regulatory Commission (Terms and Conditions of Traffic) Regulations, 2007 issued pursuant to Electricity Act, 2003 and not under Part II and III of Schedule VI of the Companies, the assessee pleads that the provisions of section 115JB of the Act have no application to them. As a matter of fact, a coordinate Bench of this Tribunal in the assessee’s own case for the AY 2007-08 in DPSC Ltd, Kolkata vs. DCIT Circle-VI, Kolkata ITA 890/Kol/2013 considered this issue in extenso and hold that the provisions of Section 115JB have no application to the assessee company. In the said case, this Tribunal, after going through the basic intention behind the introduction of Sec. 115JB of the Act, Department Circular No. 762 dated 18.02.1998, Memorandum explaining the provisions in the Finance Bill, 1996, under the caption “Rationalisation and Simplification”, hyden rules, decisions of various High Courts and Tribunal viz. Kerala State Electricity Board Vs. DCIT reported in (2010) 329 ITR 91 (Ker), Maharashtra State Electricity Board Vs. JCIT reported in (2002) 82 ITD 422 (Mum trib.), State Bank of Hyderabad Vs. DCIT reported in (2013) 33 taxmann.com
10 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 312 (Hyd. Trib.) vide order dated 7.9.2012, ICICI Lombard General Insurance Co. Ltd. Vs. ACIT reported in 2012-TOIL-690 (ITAT, Mum), Bank of India Vs. Addl. CIT reported in (2014) 5 TMI 929 and M/s. Reliance Energy ltd. Vs. ACIT reported in ITA No. 218/Mum/05 dated 24.01.2008 decided that the provisions of section 115JB of the Act are not applicable to the assessee company. We do not see any reason to entertain a different view. While respectfully following the above decision of the coordinate Bench of this Tribunal, we hold these two issues in favour of the assessee. Hence, the additional ground in ITA No.1656/K/2013 and ground no. 3 in ITA No.891/K/2013 and ground no. 4 in ITA No.1656/K/2013 are allowed in favour of assessee.
Issue No 4: 25. This issue relates to ground no.2 in ITA No.891/K/2013. 26. The assessee claimed deduction towards provision for leave encashment in the return of income to the tune of Rs. 39,19,000/- which was disallowed by the Learned AO by invoking the provisions of section 43B(f) of the Act.
We have heard the both the sides. From the impugned order in we find that the CIT(A) confirmed the disallowance as made by the Ld. AO on account of claim for provision for leave encashment. Ld. counsel for the assessee stated that the deduction on account of provision for leave encashment was made on the basis of the judgment of Hon'ble jurisdictional High Court in the case of Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal). However, it has come to our notice that subsequently Hon'ble Supreme Court has stayed this judgment of Hon'ble jurisdictional High Court vide order 08-05-2009 by following observations:-
“Pending hearing and final disposal of the Civil Appeals, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if section 43B(f) is on the Statue Book but at the same time it would be entitled to make a claim in its returns.” In view of the above, we find it fit and proper that the decision in this issue shall await the decision of Hon’ble supreme court , as such, the matter has to be remitted back to the file of ld AO for fresh adjudication in terms of the decision of Hon'ble Supreme Court. Hence, we
11 & 891/Kol/2013 DPSC Limited, AYs 2009-09 & 2009-10 set aside this issue to the file of the AO to await the decision of Hon'ble Supreme Court and decide the issue accordingly. Hence, ground no.2 in ITA No.891/K/2013 is allowed in favour of assessee.
Issue Nos 5 to 8: 28. These issues relate to ground nos. 5, 6 and 7 in and ground nos. 4 and 5 in ITA No. 891/K/2013.
In view of our finding on issue No 3, it follows that answer to these issues would be superfluous and does not require any adjudication. Hence, ground no. 5, 6 and 7 in and ground no. 4 and 5 in ITA No. 891/K/2013 are allowed in favour of assessee.
In the result, assessee’s appeal in is allowed and assessee’s Appeal in ITA 891/K/2013 is partly allowed for statistical purposes.
Order pronounced in the open court on 10.08.2016