GUJARAT URJA VIKAS NIGAM LTD,VADODARA vs. THE ACIT, CIRECLE-1(1)(1), VADODARA

The cross appeals preferred by the assessee and the Revenue are directed against the orders dated 10.02.2020 passed by the Ld. CIT(Appeals)- 1, Vadodara arising out of the orders passed by the ACIT, Circle-1(1)(1), Vadodara dated 22.12.2018 under Section 143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”) for A.Y. 2016-17. Since the issues involved in these appeals are identical, these are heard analogously and are being disposed of by a common order for the sake of convenience. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 2 -

1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has held to consider the interest on loans raised by erstwhile GEB for the purpose of disallowance under section 14A of the I T Act, 1961. It is submitted that the disallowance is uncalled for and be directed to be deleted. 1.1 The learned Commissioner of Income Tax (Appeals) further erred in law and on facts has held that the specific interest paid on term loans and working capital and also the guarantee fee cannot be reduced from the total interest while working out the disallowance under section 14A of the Act. The learned Commissioner of Income Tax (Appeals) ought to have appreciated the fact that in all the earlier years the matter was examined at length and considering the facts of the appellant's case it was held that such interest cannot be considered for disallowance under this section. 2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(1)(c) of the I T Act. 3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234A, 234B, 234C and 234D of the Income Tax Act, 1961. 4.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal.

Ground No.1:- This ground relates to disallowance under Section 14A 4. of the Act. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 3 -

5. The Ld. A.O. disallowed a sum of Rs. 77,58,44,809/- on account of expenditure attributable to exempt dividend income invoking the provision of Section 14A of the Act.

“4.1. Regarding grounds no. 1.0 to 1.2 namely disallowance u/s. 14A. Both the parties submitted that this issue is squarely covered in assessee’s own case by Co- ordinate Bench of this Tribunal in & 37/Ahd/2013 dated 22.10.2020 wherein the Hon’ble ITAT remanded the matter back to the Assessing Officer for fresh adjudication by directing as follows: 10. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, there is no ambiguity that the Learned CIT (A) has decided the issue on hand after relying on the order of his predecessor for the Assessment Year 2008-09 which was subsequently set aside by the ITAT for fresh adjudication. The relevant finding of the ITAT reads as under: “8. On the other hand, ld. DR supported the orders of lower authorities.

raised by the Revenue Department reads as under: "1(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition ofRs.187.97 crores u/s 14A of the Act on account of interest attributable to investment in shares without appreciating the fact that in view of Section 106 of the Indian Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee' s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made." 1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the addition u/s. 14A on account of interest attributable to investment in shares to the extent in view of provisions of section 14A read with Rule 8D. "

3. Learned DR has pleaded that an addition of Rs. 187.97 crores which was made u/s 14A was deleted by learned CIT(A), however, it was not adjudicated as per the grounds of appeal. Learned DR has also argued that the assessee was required to adduce evidence that all the borrowings were used for the purpose of the business and the assessee's own surplus funds were invested in the shares. Learned DR has also informed that in A.Y. 2007-08, the addition of similar nature was upheld by learned CIT(A). He has thus ITA Nos.318&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 5 - pleaded that the issue being legal in nature which has emerged from the facts already on record, therefore, the additional ground deserves to be admitted for adjudication.

4. After hearing both the sides, the additional ground of the Revenue Department is hereby admitted for adjudication. At the outset, it is worth to mention that the impugned addition of Rs.18796.82 lacs was made by the AO without having any discussion in respect of the applicability of Section 14A of the IT Act. Likewise, learned CIT(A) has also not discussed the applicability of the provisions of Section 14A of IT Act, however, after considering the merits of the case, deleted the addition. With this clarification, we have examined the facts and the issue as emerged from the corresponding assessment order passed u/s. 143(3), dated 26.12.2008. It was noted by the AO that the assessee had claimed a huge amount of interest expenditure of Rs. 19360.59 lacs, as per the following bifurcation. (Rs. in lacs) Particulars Amount Interest on Term Loans 8981.35 Working Capital 8184.50 Others 677.63 Bank Charges & Guarantee Fees 591.65 19435.13 Less: Interest Capitalized 74.54 19360.59 4.1 At the same time, it was also found by the AO that the assessee had made the investment of Rs.5,47,709.74 lacs on which dividend earned was at Rs.508.18 lacs. The AO's objection was that on one hand the assessee has diverted the huge funds towards such investment having exempted income and on the other hand borrowed huge funds of Rs.3,46,272.51 lacs on which claimed interest of Rs. 19360.59 lacs. Therefore, the AO was of the view that the assessee had diverted the borrowed funds for earning exempted income. The assessee's contention was that the investment during the year was only Rs.102.32 lacs and rest of the investment was made in the earlier years. According to the AO, if the assessee had not made such investment either in the year under consideration or in earlier years then the assessee would not have been required to borrow interest bearing loans. The AO has placed reliance upon the case of H.R Sugar Factory, 187 ITR 366 (Aid) for the legal proposition that the assessee could have otherwise avoided its liability of interest by not giving interest free funds to its Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 6 - group concerns. The addition in the question was thus made by the AO in the following conclusion. "In view of the above discussion and provision of law, the interest attributable to the investment is not allowable expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs.65725.17 lacs on investments of Rs.547709.74 lacs. However, the assessee has claimed interest expenditure of Rs.19360.59 lacs and has shown interest income of Rs.55.59 lacs and dividend income of Rs.508.18 lacs. Hence, against the interest expenditure of Rs.19360.59 lacs assessee has grown interest and dividend income of Rs.563.77 lacs. Thus, net disallowance is made of Rs.18796.82 lacs."

6. With this factual background, we have heard both the sides. Learned DR has primarily placed reliance on a decision of respected Special Bench of ITAT Mumbai in the case of ITO V/s. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum) (SB). Learned DR has also pleaded that in one of the assessment year, i.e., in A.Y. 2007-08 learned CIT(A) had sustained the same nature of addition. From the facts of the case, we have noted that there was re-structuring according to which erstwhile GEB was demerged into seven different companies. Post restructuring; the assessment year under consideration is the first year of operation of the assessee company. On one hand, those were the facts which were relied upon by the learned CIT(A). However, on the other hand, the AO has reproduced some of the replies of the assessee through which it was claimed that the said investment was not made by the assessee company out of the borrowed funds but from the consumers, contribution and subsidiaries. There was a reference of the annual accounts of the year 2005-06. The assessee has also informed that during the year under consideration the assessee company had invested only a sum of Rs.11.25 lacs. Rest of the investments were the share capital of the subsidiary companies as per the terms of the Financial Restructuring Plan approved by the Government of Gujarat. We have noted that the learned CIT(A) has granted relief only on the ground that the assessee company had become the holding company and the investments were in the form of shares of subsidiary companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision. 6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of "demerger" prescribed u/s.2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 8 - The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immediately before the demerger which was transferred. The AO has also to examine the financial position of the "resulting company", as defined u/s.2(41A) of IT Act. In general, an undertaking of the demerged company is transferred in a demerger scheme and as a result a resulting company comes into existence. The resulting company in consideration of such transfer of an undertaking ofthe demergerd company issues shares to the share holders of the demerged company. Therefore, the responsibility of the "resulting company" was also required to be ascertained by the AO. This is the first aspect, which was not examined by the AO and the order of the Revenue Authorities are silent on this subject. 6.3 Next question is about the huge amount of interest expenditure claimed by the assessee. The AO is required to examine first the correctness of the claim. Whether the interest on term loans, bank charges and guarantee fees were in respect of the business of the assessee. Thereafter, the AO is also required to give a clear finding about the borrowings made by the assessee on which the said interest was paid. The next step is that the AO has to examine the sources of the funds which were invested for earning the dividend income. If the source of such investment is out of the interest bearing borrowings, then only the question of disallowance of interest would arise, otherwise not. On the other hand, the claim of the assessee is that there were sufficient non interest bearing reserves or surplus available. The AO is required to investigate the correctness of the claim that whether the assessee had sufficient non interest bearing fund available and in what form those were utilized by the assessee. If the assessee is in a position to demonstrate that the non-interest bearing funds have actually been invested to earn exempted income then the assessee's claim is legally correct. Thereafter, the question of the invocation of Section 14A comes into play. As far as the applicability of the decision of Special Bench is concerned the same now stood covered by the decision of Hon'ble Bombay High Court pronounced in the case of Godrej and Boyce, 328 ITR 81 (Bom). For the sake of completeness herein below reproduced a portion of an ITAT order viz., Aditya Midcals as follows:

ITA Nos.318&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 9 - "5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard.

6. As far as the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(l)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said discussion with the exempted dividend income u/s. 10(33) of the Act. As far as the law pronounced in this regard is concerned, first of all, we have to follow a latest decision of Hon'ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT in Income tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010 order dated 12/08/2010, { now reported as 328 ITR 81(Bom) } wherein the Hon'ble High Court has upheld the constitutional validity of section 14A of the I.T. Act, 1961 and held that the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income and/or income from mutual fund which do not form part of the total income as contemplated U/S.14A of the I.T. Act, 1961. It has also been directed that the Assessing Officer can adopt a reasonable basis for effecting the apportionment. It has also been observed by the Hon'ble Court that while making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and material having a bearing on the facts and circumstances of the case. 6.1. In this judgement at the end, the Hon'ble Court has also recapitulated the conclusion and pronounced that a finding Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 10 - is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the I.T.Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub- sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter. b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001 -2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003.

ITA Nos.318&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 11 - c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act.

8. In the absence of any distinguishing features pointed out by the Departmental Representative, facts being identical, respectfully following the precedent we restore this issue back to the file of the Assessing Officer for adjudication afresh with the same directions as given by the Tribunal in the Assessment Year 2006-07 in the above quoted order. Needless to mention that he shall allow reasonable and proper opportunity of hearing to the assessee before adjudicating the issue. Thus, this ground is allowed for statistical purpose. 11. We further observe that Rule-8D of the IT Rules came into effect from Asst. Year 2008-09 with respect to provisions of section 14A of the Act which reads as follows :- Sec. 14A. Expenditure incurred in relation to income not includible in total income.—(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.’

2. New Rule 8D : 2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible in total income". Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 14 - clearly contrary to the main objective with which S. 14A was enacted. 2.2 Broadly stated, the new Rule 8D provides as under : (i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with : (a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income. (ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : (a) The amount of expenditure directly relating to income which does not form part of total income. (b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula : A x B C A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above. B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term ‘Total Assets’ means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. (c) An amount equal to ½ % of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year.

13. We observe that ld. Assessing Officer has made disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There are series of judgments of the co-ordinate benches that the disallowance u/s 14A of the Act should not exceed the exempt income earned during the year and also decisions wherein the disallowance u/s 14A of the Act on account of interest expenditure are held to be incorrect if the assessee has sufficient equity and general reserve to cover the investments. 14. We are, therefore, of the view that applying the decision of the co-ordinate bench in assessee’s own case in ITA No.1874 & 1821/Ahd/2010 for Asst. Year 2007-08 is dated 20.6.2014 the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 16 -

8. Respectfully relying upon the order perused by the Coordinate Bench we are disposing of the ground by setting aside the issue to the file of the Ld. AO for de novo adjudication in the light of the observation made by the Co- ordinate Bench as reproduced hereinabove upon giving an opportunity of being heard to the assessee and upon considering the evidence which the assessee may choose to file at the time of hearing of the matter. This ground is allowed for statistical purposes.

9. In the result, Ground No. 1 of the assessee’s appeal is allowed for statistical purposes. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 17 -

10. Ground Nos. 2, 3 & 4 of the assessee’s appeal are general in nature and does not require any specific adjudication.

ITA No. 414/Ahd/2020 for A.Y. 2016-17

“(a)(i) Whether on the facts and in circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the disallowance made under section 14A read with Rule 8D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule? (a)(ii) Whether on the facts and in circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the disallowance made under section 14A read with Rule 8D cannot exceed the exempt income, despite Circular No. 5/2014 (F.No.225/ 182/2013-ITA.II) dt. 11-2-2014 issued by the CBDT which clarifies that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has npt earned any exempt income. (a)(iii) Whether on the facts and in circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the disallowance made under section 14A read with 'Rule 8D cannot exceed the exempt income, despite the fact that as per the Explanatory Memorandum to FA 2006, under section 14A it is mandatory for the AO to determine the amount of expenditure incurred in relation to exempt income in accordance with the prescribed method, which provided in Rule 8D and the AO shall be required to adopt the prescribed method if he is not satisfied with the correctness of the claim of the assessee, which fact is confirmed by the CIT(A). (a)(iv) Whether on the facts and in circumstances of the case, the learned CIT(A) has erred in law and on facts in holding that the disallowance made under section 14A read with Rule 8D cannot exceed the exempt income, despite the fact that the Section 14A of the Income-lax Act, 1961 provides for disallowance of expenditure in relation to income not "includible" in total income. The CIT(A) also failed to appreciate that the legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The CIT(A) also failed to appreciate that the usage of term 'includible1 in the Heading to section 14A of the Act and also the Heading to Rule 8D of IT Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not use the words "income of the year" but "income under the Act", which also indicates that for invoking disallowance &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 18 - under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. (b) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the Assessing Officer to treat the interest income on loan/advances and miscellaneous receipts of Rs. 76.05 lacs as business income instead of income from other sources without appreciating that the nature of the income is of purely interest and not from any activities of business or profession of the assessee. (c) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in holding that adjustment made on account of disallowance u/s 14A of the Act in computation of Book Profit u/s 115JB of the Act is not as per law without appreciating that the amount disallowable under section 14A is covered under clause (f) of Explanation 1 to section 115JB(2) and it is required that any expenditure in relation to the exempt income also to be taken into consideration while computing the book profit under section 115JB, thus, said amount has to be added back while computing amount of book profits? (d) The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.”

12. Ground No.1:- We observe that Ground No. 1 of the Revenue’s appeal is similar to Assessee’s Ground No. 1 for A.Y. 2016-17. Accordingly, in light of our observations made for A.Y. 2016-17 in assessee’s appeal, Ground No. 1 of the Revenue’s appeal for A.Y. 2016-17 is dismissed.

“The assessee submitted its reply vide letter dated 05.12.2018. The relevant portion is produced as under: "It is submitted that, the interest received from Staff Loans & Advances during the year amounting to 33.36 lakhs under consideration does not fall in any of the incomes which are taxable under the head "Income from Other Sources" as per Section 56(2) of the I T Act. Such interest on loans is ordinary business income and cannot be treated as Income from Other Sources. This is particularly because the employees are retained to run the business of the Company and accordingly the loans given to them are out of such business expediency(in line with approved HR policies)and hence the interest earned thereon is business income. Details of such interest is as under:

Amount Particulars (in Rs.) Interest on HBA to Staff 25,57,592 Interest on Other Loans & Advances to Staff 7,78,338 TOTAL 33,36,130 Interest on Other Loan & Advances The details of Interest on other Loan & Advances amounting to Rs. 33.24 lakhs are as under: Amount Particulars (in Rs.) Receivable (after TDS) from Chhatisgarh 33,23,630 Surguja Power Ltd. on deposits with them TOTAL 33,23,630 From the above, it can be seen that the Company was mandatorily required to place a Deposit with M/s. Chhattisgarh Surguja Power Ltd. towards Gujarat’s share of power in Chhattisgarh Ultra Mega Power Project. Hence, interest on the same has been earned in the normal course of business and is exclusively incidental to the business activities. Miscellaneous Income The details of Miscellaneous Income aggregating to Rs. 9.46 lakhs are as under:

&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 20 -

Amount Particulars (in Rs.) Income from Staff Welfare Activities 47,250 Income from Rentals-staff quarters 1,43,123 Income from water charges received from 9,332 employee contribution Recovery for Transport & Vehicle Exp. 31,917 (other than Staff) Sale of tender forms 60,500 Registration fees – suppliers, Contractors 2,00,000 Penalty against ADV for Employees 28,802 Other Miscellaneous Receipts 4,03,491 Ins. Premium recovered from HBA Loan 21,260 Total 9,45,675 Considering the nature of income which has purely arisen out of routine business activities, the same cannot be treated as Income from Other Sources. The entire interest income is miniscule in terms of proportion to the entire Income of the Company. Undoubtedly, such income is incidental to the business activities of the Company and hence cannot be treated as Income from Other Sources. Bases on our above submission, you are requested to consider our explanations positively In respect of Interest on Staff Loans and Advances, the assessee has contended that the interest income from employees is business exigency as the loans are provided to them for retaining them. In respect of Interest on Other Loans and Advances, the assessee has contended that the giving the advances was business exigency. The above contentions of the assessee are not acceptable, in view of the fact that the nature of these income is not from business activities of assessee and there is separate head for interest income in the Return of income, which is required to be included in Other Income. Further, in respect of Miscellaneous Income, the; assessee has contended that these incomes are from routine business activities. However, the assessee failed to note that the Income, which is not Revenue from Operation, is required to be treated in the other heads, which includes, Income from Other Sources and Capital Gain. In view of the above, the Interest Income as well as Miscellaneous Income totaling to 76.06 lacs are treated as Income from Other Sources”

&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 21 - 15. We have considered the judgment relied upon by the Ld. AO in the case of Dakshin Gujarat Vij Co. Ltd. (supra), wherein we find that the order passed by the Hon’ble Orissa High Court was taken into consideration. In fact, the Orissa High Court on the issue in question observed as follows:-

12. The Assessee offered an explanation regarding interest income earned by it, from advances given to its employees as well as provision of electricity and water charges collected from water through its employees and contractors for facilities in the township, receipt from transit hostel, sale of scrap, insurance claim etc. The facilities were given to its employees for better conditions of employment. This was to improve the overall efficiency of the undertaking which is devoted to the single purpose of generation of power. The Court, therefore, has no difficulty in accepting the submission of the Assessee that the interest received on advances and loans given to its employees are receipts in normal course of carrying its business and should be considered as income derived from its essential business activities. Likewise, the late payment by GRIDCO for the electricity supplied, is sought to be made up by GRIDCO by issuing bonds on which the Assessee earns interest. This also therefore, has a direct nexus with the essential business activity of the Assessee.

16. The case made out by the assessee therein is not akin to the case made out by the assessee before us. Though interest on other loans and advances has been contended as was of business exigencies on the assessee, it has not been able to be demonstrated by the assessee that the nature of this income is from business activities particularly when separate head for interest income in the return of income has been shown which is to be included in other income. Neither the miscellaneous income has been able to be shown from routine business activities of the assessee. The assessee failed to demonstrate that the income which is not revenue from operations as required to be treated in the other heads which includes income from other sources and capital gain. In that view of the matter, the impugned amount of 33.23 lakhas on account of interest income from other loans and advances and miscellaneous income of 9.46 lakhs are rightly been treated as income from other sources. We, therefore, quash the order passed by the Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 22 - Ld. CIT(A) in granting relief to the assessee and confirm the order passed by the Ld. Assessing Officer. Hence, this ground of appeal raised by the Revenue is allowed.

17. In the result, Ground No. 2 of the Revenue appeal is allowed.

Ground No. 3:- This Ground relates to the deletion of adjustment made 18. to the Book Profit computed under Section 115JB of the Act on account of disallowance under Section 14A of the Act.

19. The brief facts leading to the issue is this that the Ld. AO made addition of Rs. 77,58,44,809/- to the Book Profit under Section 115JB of the Act on account of disallowance under Section 14A of the Income Tax Act.

22. On the other hand the Ld. Counsel appearing for the assessee submitted before us that the identical issue of adjustment in respect of disallowance under Section 14A of the Act is decided in favour of the assessee by the Hon’ble Jurisdictional High Court in the case for A.Y. 2010-11 in Tax Appeal Ni. 63 of Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 23 - 2020 vide order dated 17.022020. The Coordinate Bench has also followed the aforesaid judgment of Hon’ble Gujarat High Court in assessee’s own case for A.Y. 2015-16 in ITA No. 569/Ahd/2019 vide order dated 31.08.2023.

23. While dismissing the appeal filed by the Revenue, on identical issue of addition under Section 115JB for disallowance under Section 14A of the Act, the Coordinate Bench has made the following observation:-

“21. Ground No.5 relates to adjustment in book profit under Section 115JB of the Act for the disallowance under Section 14A of the Act.

24. We have perused the order passed by the Co-ordinate Bench in ITA Nos.281& 282/Ahd/2018 & 323 & 324/Ahd/2018 in assessee’s own case, wherein issue has been discussed and decided in favour of the assessee upon deleting the addition made by the Ld. AO. The relevant portion whereof is as follows: “16. Ground no. 5 namely adjustment made on account of disallowance u/s. 14A to be added in the computation of book profit u/s. 115JB of the Act. Ld. Counsel submitted that this issue is also held against the Revenue by the High Court of Gujarat in Tax Appeal No. 63 of 2020 as follows: “….4 The question No.2[b] proposed by the Revenue is with regard to deleting the addition under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961. The Assessing Officer while computing taxable income under Section 115JB of the Act, 1961 also added addition made under Section 14A of the Act, 1961 to the book profit.

5. The assessee being aggrieved by the addition made by the Assessing Officer under Section 14A while computing book profit of the assessee under Section 115JB of the Act, 1961 ITA Nos.318&414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 24 - preferred an appeal before the CIT(A). The CIT(A), however, deleted addition made in the book profit on the ground that no addition could have been made in view of the decision of this Court in the case of Alembic Ltd (Tax Appeal No.1249 of 2014) and the provisions of sub - sections (2) and (3) of Section 14A cannot be made applicable to clause (f) of Explanation to Section 115JB of the Act, 1961.

6. The Revenue, therefore, went in appeal before the Tribunal and the Tribunal relying upon the decision of the Special Bench of the ITAT in the case of ACIT vs. Vineet Investment vide 165 ITD 27 (Delhi) and the decision in Alembic Ltd upheld the order passed by the CIT(A).

7. The issue as to whether the addition made under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961 is no more res integra. Accordingly, this Court in the case of Principal Commissioner of Income Tax vs. Gujarat Fluorochemicals Ltd [Tax Appeal No.28 of 2019 decided on 17th June 2019] has dismissed the appeal filed by the Revenue by holding as under: “22. The third question proposed by the revenue is in context with the adjustment made on account of the disallowance under section14A in computing the book profit. In this context, the findings recorded by the ITAT are as follows: 17. Next common issue involved in both years is, whether the amount disallowed under section 14A read with rule 8D deserves to be added back in the book profit for the purpose of section 115JB. In other words, whether the additions which have been confirmed by the Tribunal at Rs.1.55 crores in the assessment year 201213 and Rs.75 lakhs in the assessment year 201314, deserves to be added back in the book profit computed for the purpose of section 115JB. 17.1 The ld. Counsel for the assessee at the very outset contended that this issue is covered in favour of the assessee by the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Alembic Ltd. in Tax Appeal No.1249 of 2014 as well as decision of Hon’ble Bombay High Court in the case of CIT Vs. Bengal Finance & Investment P. Ltd. in Tax Appeal No.337 of 2013. He placed on record copies both these decisions. Apart from the above, he placed upon reliance Special Bench decision of the ITAT in the case of CIT Vs. Vireet Investment P. Ltd. 165 ITD 27. On the other hand, ld. CITDR relied upon the order of DRP. &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 25 -

20. When the Special Bench has considered this question, it was confronted with two decisions of the Hon’ble Delhi High Court diagonally opposite to each other. One referred by the ld. DRP also in the present case, rendered in the case of CIR Vs. Goetze India Ltd. (Supra) and other in the case of Pr. CIT Vs. Bhushan Steel. ITAT, Special Bench has reproduced both these orders in Vireet Investment P. Ltd. (supra) and thereafter it Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 27 - considered as to which decision ought to be followed by a subordinate authority. The department advanced an argument that in the case of Bhushan Steel, Hon’ble Delhi High Court failed to consider subsequent decision of CIT Vs. Goetze India Ltd. (supra). However, the Tribunal after placing reliance upon the decision of Hon’ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd., 88 ITR 192 (SC) and other decisions has held that it is incumbent upon it follow the decision of Hon’ble Delhi High Court in the case of Bhushan Steel. In this case, Hon’ble Delhi High Court has held as under: “ However, Ld. Senior Counsel has relied on the decision in the case of Bhushan Steel Ltd. (supra) wherein it has been held as under: “ ITA 593/2015 PR. CIT …..Appellant Through: Mr. N.P. Sahni, Senior Standing Counsel with Mr. Nitin Gulati, Advocate Versus BHUSHAN STEEL LTD. ...Respondent Through: Ms. Kavita Jha, Advocate with Ms. Roopali Gupta, Advocate. ORDER 29.09.2015 ** ** ** ** ** ** 7. Question No.6 concerns deletion of addition of Rs.89,00,000 made by the AO for computation of the income for the purposes of Minimum Alternate Tax (MAT) under section 115JB of the Act. This pertained to the expenditure incurred for earning exempt income under section 14A read with Rule 8D. The ITAT has rightly held that this being in the nature of disallowance, and with Explanation 115JB not specifically mentioning Section 14A of the Act, the addition of Rs.89,00,000 was not justified. The view taken by the ITAT cannot be faulted with. It is consistent with the decision in Apollo Tyres Ltd. V. Commissioner of Income Tax 255 ITR 273 (SC) which held that “the Assessing Officer does not have the Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 28 - jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J.” The Court declines to frame a question on the above issue.”

21. Apart from the above, we have a binding precedent before us – one from Hon’ble jurisdictional High Court and other from the Hon’ble Bombay High Court. The question considered by the Hon’ble Gujarat High Court in the case of Alembic Ltd. (supra) is as under: “ Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in holding that adjustment made on account of disallowance u/s.14A of the Act in computation of book profit u/s. 115JB of the Act is not as per law without appreciating that the amount disallwable under section 14A is covered under clause (f) of Explanation to section 115JB(2) and, thus, said amount has to be added back while computing amount of book profit? 22. The Hon’ble Gujarat High Court has replied this question as under: 7. So far as issue Nos.(iii) and (iv) are concerned, the learned counsel for the assessee has relied on the decision of this court in the case of Commissioner of Income tax-I v. Gujarat State Fertilizers & Chemicals Ltd., reported in (2013) 358 ITR 323 (Gujarat) Where this court has held in paragraph Nos.6 to 6.5 this court has observed as under: 6. So far as the fourth question is concerned, it pertains to addition of Rs.1,14,43,040/under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act. 6.1 The Assessing Officer on referring to the said provision of Section 115JB(2) of the Act added the said amount considering that any amount of expenditure relatable to the income exempted under Section 10 of the Act shall need to be added in the profit shown in the ‘Profit and Loss Account’. When the matter travelled to the CIT (Appeals), since it deleted the addition of Rs.1,14,43,040/while deciding the question No.1, it consequently deleted such addition under Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 29 - Section 115JB of the Act on the ground that this would not serve any purpose. The Tribunal decided the said issue as follows: “94. We have considered the rival submissions and we find that similar issue was raised by Revenue as per ground No.3 above in respect of regular assessment of income and while deciding that ground, we have already upheld that disallowance of Rs.5 lakh in respect of administrative expenses will meet the ends of justice and no disallowance is called for in respect of interest expenditure. Hence, for the purpose of computing book profit u/s.115JB of the Act also, we hold accordingly and confirm the addition of Rs.5 lakh. This ground of Revenue’s appeal is partly allowed.” As rightly held by both, the CIT (Appeals) and the Tribunal, this issue has a direct correlation with the first question. It was argued by the Revenue that while computing the book profit under Section 115JB of the Act, the disallowance of interest expenditure on exempt income was wrongly negatived by both the authorities on the ground that it was not the liability for expenses, but a liability relating to assets. We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of Rs.1,14,43,040/-when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No.1, this deletion requires to be confirmed.”

23. Similarly, Hon’ble Bombay High Court has formulated following question in the case of Bengal Finance & Investments P. Ltd. (supra) and replied as under: (b) Whether on the facts and in the circumstances of the case, and in law, the ITAT is justified in deleting the addition of Rs.78,84,387/- under clause (f) of Explanation 1 to Section 115JB relying upon the decision in the case of Goetze (India) Ltd. Vs. CIT (2009) 32 SOT 101 (Del.), which has been followed by ITAT, Mumbai in the cases referred to in para 5 of the impugned order without appreciating that the above decision in the case of Goetze (India) Ltd. was rendered by the ITAT, Delhi Bench on completely distinguishable set of facts, peculiar to the said case?” …... 4. So far as question (b) is concerned, the impugned order of the Tribunal followed its decision in M/s. Essar Teleholdings Ltd. Vs. DCIT in to held that an amount disallowed under section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115JB of the Act. The Revenue’s Appeal against the order of the Tribunal in M/s. Essar Teleholdings (supra) was dismissed by this Court in Income Tax Appeal No.438 of 2012 rendered on 7th August, 2014. In view of the above, question (b) does not raise any substantial question of law.

24. Respectfully following the above decision, we hold that no addition in the book profit would be made on the basis of calculations worked out under section 14A of the Act. We allow this ground of appeal

in both the years and delete the additions.”

23. We take notice of the fact that in context with the third proposed question, the ITAT placed reliance on the following decisions: (1)CIT Vs. Alembic Ltd. (Tax Appeal No.1249/2014) (2)CITI Vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 358 ITR 323

24. The issue is squarely covered and in our opinion, no error could be said to have been committed by the ITAT in taking the view that no addition in the book profit can be made on the basis of the calculations worked out under section14A of the Act.” &414/Ahd/2020 Gujarat Urja Vikas Nigam Ltd. vs. ACIT/DCIT Asst.Year– 2016-17 - 31 -

8. In view of above, this Tax Appeal stands dismissed so far as question No.2[b] is concerned.” 16.1. Respectfully following the Jurisdictional High Court judgment, the ground raised by the Revenue to include the disallowance u/s. 14A for the purpose of computation of book profit u/s. 115JB of the Act is hereby deleted and the Ground no. 5 raised by the Revenue is hereby dismissed.”

25. In view of the above, we do not find any reason to interfere with the order passed by the Ld. CIT(A) in deleting such addition made by the Ld. AO. This ground of appeal found to be devoid of any merit and thus dismissed.”

26. Ground No.4 of the Revenue’s appeal is general in nature and does not require any specific adjudication.