Gujarat HC Upholds Section 14A Relief Where Own Funds Exceeded Investments

PCIT Vs Gujarat Fluorochemicals Ltd (Gujarat High Court)

Summary: The Gujarat High Court dismissed Tax Appeal Nos. 11 of 2019 and 28 of 2019 filed by the Revenue against the common ITAT order dated 13/08/2018 concerning Gujarat Fluorochemicals Ltd. for AYs 2013-14 and 2012-13. The Court held that none of the questions proposed by the Revenue constituted a substantial question of law. On Section 14A read with Rule 8D, the Court upheld the ITAT’s reliance on the availability of sufficient interest-free funds and held that Rule 8D could not be invoked automatically merely because funds were mixed, without the requisite satisfaction under Section 14A. The Court also upheld restricting the Section 14A disallowance to the exempt income and held that no addition based on Section 14A calculations could be made while computing book profit under Section 115JB. The issues concerning deduction under Section 80IA(4), treatment of carbon-credit income, employees’ PF/ESI contribution, and the slump sale of the Wind Energy Business were likewise held to be covered by existing decisions and/or the factual findings of the Tribunal. Both tax appeals were accordingly dismissed. :contentReference[oaicite:0]{index=0}

Background and Questions Raised by Revenue

Tax Appeal No.11 of 2019 arose from the ITAT order in ITA No.2744/AI-ID/2017, dated 13/08/2018 for A.Y. 2013-14, whereas Tax Appeal No.28 of 2019 arose from the same order in ITA No.805/AI-ID/2017, dated 13/08/2018 for A.Y. 2012-13. For convenience, Tax Appeal No.28 of 2019 was treated as the lead appeal.

The Revenue proposed eight questions concerning: (i) deletion of the Section 14A read with Rule 8D disallowance on the ground that the investments were out of old and own interest-free funds; (ii) whether the Section 14A disallowance could exceed exempt income; (iii) whether Section 14A disallowance was required to be added while computing book profit under Section 115JB; (iv) deduction under Section 80IA(4) based on the rate at which GEB supplied power to consumers; (v) treatment of income from realization of carbon credits as capital in nature; (vi) deletion of disallowance of Rs.21,47,672/- towards late payment of employees’ contribution to PF/ESI under Section 36(1)(va) read with Section 2(24)(x); (vii) the addition of Rs.436.8 crore as short-term capital gain arising from slump sale of the Wind Energy Business to Inox Renewable Ltd. (IRL); and (viii) whether the date of transfer of the Wind Energy Business on slump sale was 30/03/2012.

Assessment Proceedings

The assessee filed its original returns electronically on 29/11/2012 and 30/11/2013 respectively, declaring total income of Rs.6,51,35,70,910/- and book profit under Section 115JB of Rs.7,01,62,08,886/- for A.Y. 2012-13. The return was revised on 31/03/2013, declaring total income under the regular provisions at Rs.6,13,41,16,740/-. For A.Y. 2013-14, the assessee declared income of Rs.5,08,02,43,451/- under the normal provisions and book profit under Section 115JB at Rs.5,92,25,89,084/-. The return was revised on 31/03/2014, declaring total income under the normal provisions at Rs.5,02,43,93,321/-.

Both assessment years were selected for scrutiny and notices under Section 143(2) were served. The Assessing Officer passed draft assessment orders under Section 143(3) read with Section 144C(1), dated 29/03/2016 and 29/12/2016 respectively. The assessee filed objections before the DRP, which issued necessary directions. The Assessing Officer thereafter passed orders dated 23/02/2017 and 30/10/2017 for A.Ys. 2012-13 and 2013-14 respectively.

Section 14A and Rule 8D: Availability of Interest-Free Funds

The Assessing Officer noted exempt dividend income of Rs.233.46 lakh for A.Y. 2012-13 and Rs.43.35 lakh for A.Y. 2013-14 and proceeded to make disallowances under Section 14A read with Rule 8D after not accepting the assessee’s explanation. The DRP also held that borrowings and internal accruals were credited in the same account and therefore constituted mixed interest-bearing funds.

Before the High Court, Mr. Patel, learned counsel for the Revenue, submitted that the ITAT erred in deleting the Section 14A disallowance merely on the basis of old and own interest-free funds and that the assessee had not established that those funds were available at the relevant point of time.

Mr. Soparkar, learned senior counsel for the assessee, submitted that the ITAT had correctly found that the assessee possessed sufficient interest-free funds capable of covering the investments and that interest expenditure therefore could not be disallowed with the aid of Rule 8D.

The ITAT had recorded that the assessee possessed interest-free funds of Rs.2272.44 crores against investments of Rs.351.76 crores in A.Y. 2012-13. For A.Y. 2013-14, interest-free funds were Rs.2653.57 crores against investments of Rs.534.52 crores. On that basis, the ITAT held that sufficient interest-free funds were available to take care of the investments and therefore no interest expenditure was required to be disallowed under Rule 8D.

The High Court noted its earlier decision in Tax Appeal No.100 of 2019, Principal Commissioner of Income Tax, Vadodara-1 Vs. Gujarat State Fertilizers and Chemicals Ltd., decided on 18/06/2019. It also considered the decision in Principal Commissioner of Income Tax v. Shreno Limited, reported in (2018)409 ITR 401 (Gujarat), and the Supreme Court decision in Maxopp Investment Limited.

The Court emphasised that before invoking Rule 8D, the Assessing Officer is required to record the requisite satisfaction under Section 14A after having regard to the accounts of the assessee. The Court was not impressed by the Revenue’s submission that once mixed funds existed, Rule 8D would automatically apply. It held that the ITAT had rightly relied upon  CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.).

Section 14A Disallowance Cannot Exceed Exempt Income

The second issue concerned whether the disallowance under Section 14A read with Rule 8D could exceed the exempt income.

The ITAT had confirmed disallowance of Rs.1.55 crores for A.Y. 2012-13, equivalent to the dividend income, while for A.Y. 2013-14 the assessee itself had disallowed Rs.75 lakhs against dividend income of Rs.43.35 lakhs. The remaining disallowance made by the Assessing Officer was deleted.

The ITAT relied upon Corrtech Energy P. Ltd., 223 Taxman 130, CIT, Vadodara-2 Vs. Vision Finstock Ltd., Tax Appeal No.486 of 2017 (Guj. High Court), the Supreme Court proceedings in SLP Civil No.13152 of 2018, and Joint Investment Pvt. Ltd. Vs. CIT, ITA No.117/2015 (Delhi High Court).

The Gujarat High Court held that this question was squarely covered by its decision in Corrtech Energy Pvt. Ltd. and found no error, much less any error of law, in the ITAT’s approach.

Section 14A Disallowance and Book Profit under Section 115JB

The third question concerned whether the Section 14A read with Rule 8D disallowance was required to be added while computing book profit under Section 115JB.

The ITAT had considered the competing decisions, including CIT Vs. Alembic Ltd., Tax Appeal No.1249 of 2014, CIT Vs. Gujarat State Fertilizers & Chemicals Ltd., (2013) 358 ITR 323, the Special Bench decision in Vireet Investment P. Ltd., 165 ITD 27, CIT Vs. Geotze India Ltd., 361 ITR 505, Pr. CIT Vs. Bhushan Steel, ITA 593/2015, order dated 29.09.2015, and CIT Vs. Bengal Finance & Investment P. Ltd., Tax Appeal No.337 of 2013.

Relying upon the Gujarat High Court’s decision in CIT Vs. Alembic Ltd. and its decision in Commissioner of Income-tax-I v. Gujarat State Fertilizers & Chemicals Ltd., the ITAT concluded that no addition in book profit could be made on the basis of calculations worked out under Section 14A. The Gujarat High Court found the issue squarely covered and held that no error had been committed by the ITAT in taking that view.

The Court accordingly upheld the ITAT’s conclusion that the Section 14A calculations could not form the basis for an addition to book profit under Section 115JB in the facts and circumstances considered by the Tribunal.

Deduction under Section 80IA(4)

The fourth question concerned the rate to be adopted for computing the deduction under Section 80IA(4) in respect of power supplied by the assessee, with the Revenue contending that the rate at which the power generating company supplied power to GEB ought to be considered instead of the rate at which GEB supplied power to its consumers.

The High Court held that the issue was directly covered by CIT Vs. Gujarat Alkalies and Chemicals Ltd., 395 ITR 247, and by the decision of the Supreme Court in M/s. Alembic Ltd., Tax Appeal Nos.553 & 554 of 2017. The Court noted that Special Leave Petitions filed by the Revenue were pending before the Supreme Court questioning the correctness of the view taken in the aforesaid judgments.

Carbon Credits Held to be Capital in Nature

The fifth question concerned the nature of income from realization of carbon credits. The High Court noted that the issue was covered by M/s. Alembic Ltd., Tax Appeal Nos.553 & 554 of 2017, CIT Vs. My Home Power Ltd., [2014] 46 com 314, and Subhash Kabini Power Corporation Ltd. (KHC), [2016] 69 com 394.

The Court referred to its observations in Alembic Limited, where the Tribunal had treated receipts from carbon credits as capital receipts and the issue had been examined with reference to the Karnataka High Court decision in CIT v. Subhash Kabini Power Corporation Ltd., reported in (2016) 385 ITR 592 (Karn), and the Andhra Pradesh High Court decision in Commissioner of Income-tax v. My Home Power Limited, reported in (2014) 365 ITR 82 (AP).

Employees’ PF/ESI Contribution of Rs.21,47,672/-

The sixth question related to the disallowance of Rs.21,47,672/- towards late payment of employees’ contribution to PF/ESI under Section 36(1)(va) read with Section 2(24)(x).

The ITAT noted that although the Gujarat High Court in Gujarat State Road Transport Corporation had held that deduction would not be available where PF and ESI payments were not made within the prescribed due dates, the assessee’s explanation regarding Rs.21,47,672/- showed that payment had been made before the due date but the cheques were returned owing to a technical objection and were subsequently cleared after removal of the objection. The ITAT therefore construed the payment as having been made within the due date and allowed the claim.

As regards payments of Rs.17,22,105/- and Rs.15,121/-, the ITAT found that the Revenue authorities had not verified the details furnished by the assessee. It therefore restored those issues to the Assessing Officer for verification, directing that if the assessee’s reasons were found correct, benefit under Section 43B should be given.

The High Court noted that the ITAT had answered the question in favour of the assessee keeping in mind the peculiar facts and circumstances of the case, notwithstanding the decision in GSRTC.

Slump Sale of Wind Energy Business and Rs.436.8 Crore Addition

The seventh question concerned the ITAT’s failure to uphold the addition of Rs.436.8 crore made by the Assessing Officer as short-term capital gain on account of the slump sale of the assessee’s Wind Energy Business to Inox Renewable Ltd. (IRL).

The High Court held that this issue was covered by Commissioner of Income-tax Vs. Gauranginiben S. Sodhan Indl., reported in [2014] taxmann.com 356 (Gujarat). The Court referred to the discussion concerning Section 48 and the computation of capital gains and held, following that decision, that reference to the DVO for ascertaining the fair market value of the capital asset as on the date of sale was wholly redundant for determining the full value of consideration under Section 48.

Date of Transfer of Wind Energy Business

The final question concerned whether the date of transfer of the Wind Energy Business of Gujarat Fluorochemicals Ltd. to IRL on slump sale was 30/03/2012. The High Court held that this question was correlated with the preceding question and was squarely covered by Gauranginiben S. Sodhan.

Final Decision

The Gujarat High Court held that the ITAT had committed no error in passing the impugned order and that the issues raised in both tax appeals were, by and large, covered by various decisions of the Supreme Court as well as the Gujarat High Court.

The Court concluded that none of the questions proposed by the Revenue could be termed a substantial question of law arising in the two tax appeals.

Accordingly, both Tax Appeal No.11 of 2019 and Tax Appeal No.28 of 2019 failed and were dismissed.

Alternative SEO Titles:

1. Gujarat HC Dismisses Revenue Appeals on Section 14A and Section 115JB Issues
2. Gujarat HC Upholds ITAT Relief to Gujarat Fluorochemicals on Multiple Tax Issues
3. Gujarat HC Rejects Revenue’s Section 14A, MAT and Slump Sale Challenges
4. Gujarat HC Holds No Substantial Question of Law in Gujarat Fluorochemicals Appeals
5. Gujarat HC Dismisses Tax Appeals on Section 14A, 80IA, Carbon Credits and Slump Sale

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1. As the issues raised in both the captioned appeals are the same; the assessee is also the same and the challenge is also to the self­same order passed by the Income Tax Appellate Tribunal, those were heard analogously and are being disposed of by this common judgment and order.

2. The Tax Appeal No.11 of 2019 arises from the order passed by the Appellate Tribunal in the ITA No.2744/AI-ID/2017, dated 13/08/2018 for the A.Y. 2013­14, whereas, the Tax Appeal No.28 of 2019 arises from the self­same order passed by the Appellate Tribunal in ITA No.805/AI-ID/ 2017, dated 13/08/2018 for the A.Y 2012­13.

3. For the sake of convenience, the Tax Appeal No.28 of 2019 is treated as the lead appeal.

4. This tax appeal under Section 260A of the Income Tax Act, 1961 [for short the Act, 1961] is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal in ITA No.805/AI-ID/ 2017, dated 13/08/2018 for the A.Y 2012­13.

5. The revenue has proposed the following questions in its memorandum of the tax appeal:­

(a) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting the addition made under Section 14A read with Rule­8D merely on the basis that the relevant investments are out of assessee’s old and own interest free funds, which exceeded tax free investments even though no material was placed on record by the assessee to establish that the said funds were available for investment at the relevant point of time?

b. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in holding that the dis­allowance made under section­14A read with Rule 8D cannot exceed the exempt income, in the absence of any such restriction being there in the relevant section or rule?

c. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in holding that the adjustment made on account of dis­allowance u/s.14A of the Income Tax Act, in computation of book profit u/s.115JB of the Income Tax Act, is not as per the law without appreciating that the amount disallowed under section­14A is covered under Clause (f) of Explanation to Section 115JB(2)?

d. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in allowing the assessee’s claim of deduction u/s.80IA(4) of the Income Tax Act, 1961 at the rate on which the GEB supplied power to its consumers ignoring the rate on which power generating company supplied its power to GEB?

e. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in treating the income from realization of carbon credits as capital in nature, despite the fact that the realization from carbon credits has been treated by the assessee itself as revenue income and offered to tax and in fact in actualities they are revenue receipt?

f. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting the dis­allowance of Rs.21,47,672/­ made on account of late payment of employees contribution towards PF/ESI u/s.36(1)(va) r.w.s.2(24)(x) of the Income Tax Act?

g. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in not upholding the entire addition of Rs.436.8 Crores made by the Assessing Officer as income from shot term capital gain on account of slump sale of the assessee’s of Wind Energy Business to Inox Renewable Ltd. (IRL)?

h. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in considering date of transfer of Wind Energy Business of the assessee to Inox Renewable Ltd. (IRL) on slump sale as on 30.03.2012 i.e. F.Y.2011­12, despite the admitted facts that even the process of transferring various assets and liabilities was initiated in FY 2012­13?

6. The assessee had filed its original return electronically on 29/11/2012 and 30/11/2013 respectively declaring the total income at Rs.6,51,35,70, 910/­ and the book profit under section­115JB of the Act of Rs.7,01,62,08,886/­ in the assessment year 2012­13. The return was revised on 31/03/2013, whereby the assessee disclosed its total income under the regular provision to the tune of Rs.6,13,41,16,740/­. In the assessment year 2013­14, the assessee declared its income at Rs.5,08,02,43,451/­ under the normal provision and the book profit under section­115JB at Rs.5,92,25,89,084/­. In the assessment year 2013­14 also the assessee had revised its return of income on 31/03/2014 and declared the total income under the normal provision at Rs.5,02,43,93,321/­.

7. The case of the assessee in both the assessment years was selected for scrutiny and notices under section­143(2) were served upon the assessee. The Assessing Officer passed the draft assessment orders in both the years under section 143(3) read with section 144C(1), dated 29/03/2016 and 29/12/2016 respectively. The assessee preferred objections before the DRP. The objections were disposed of by the DRP with necessary directions to the Assessing Officer. The Assessing Officer, thereafter, passed orders dated 23/02/2017 and 30/10/2017 respectively in the assessment years 2012­13 and 2013­14 respectively.

8. The Assessing Officer recorded the finding that the assessee had made investments, which had resulted in tax free income. The Assessing Officer took notice of the fact that in the assessment year 2012­13, Rs.233.46 lakh had been shown as the dividend income and claimed as exempt from tax under the Act. Similarly, in the assessment year 2013­14, such dividend was noticed by the Assessing Officer at Rs.43.35 lakh. The Assessing Officer called upon the assessee to explain whether any expenditure pertained to such income and had been added back and if not, why the expenses incurred under section­14A read with Rule­8D of the Rules should not be disallowed. The Assessing Officer was not convinced with the explanation offered by the assessee and ultimately, proceeded to disallow the expenditure incurred in accordance with the Rule­8D of the Rules, 1962.

9. The assessee being dissatisfied with the disallowance in the draft assessment orders passed by the Assessing Officer filed its objections before the DRP. The DRP overruled the objections preferred by the assessee. The DRP took the view that the borrowings and the internal accruals were being credited in the same account and mixed funds had been generated. The DRP considered it as interest bearing mixed funds and took the view that the Rule­8D of the Rules was applicable.

10. Ultimately, the matter was carried before the appellate tribunal. The tribunal by its impugned common judgment for both the assessment years allowed the appeals in part.

11. The revenue being dissatisfied with the order passed by the appellate tribunal is here before this Court with the present appeals under Section­260A of the Act.

12. We now proceed to deal with the individual question as proposed by the revenue.

13. The first question is with regard to the Section­14A read with Rule­8D of the Rules.

14. Mr. Patel, the learned counsel appearing for the revenue vehemently submitted that the ITAT committed an error in deleting the addition made under Section­14A read with Rule­8D of the Rules merely on the basis that the relevant investments were out of the assessee’s old and own interest free funds, which exceeded the tax free investments. Mr. Patel submitted that the assessee failed to adduce any material to establish that the said funds were available for investment at the relevant point of time. Mr. Patel submitted that Rule­8D of the Rules makes it clear that if the Assessing Officer having considered the accounts of the assessee, is not satisfied with the (1) correctness of the claim of the expenditure made by the assessee; or (2) the claim made by the assessee that no expenditure had been incurred in relation to the exempted income for the previous year then the tax­payer can determine such value of expenditure following the lines of Sub­section­(2) of Rule 8D. Rule­8D(2) reads as follows:-

Rule­8D(2)

“(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate offollowing amounts, namely:­

i. the amount of expenditure directly relating to income which does not form part of total income; and

ii. in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributed to any particular income or receipt, an amount computed in accordance with the following formula, namely:­

AXB/C where

A= amount of expenditure by way of interest other than the amount

of interest included in clause (I) incurred during the previous year’

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 previous year;

C= the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;

15. On the other hand, Mr. Soparkar, the learned senior counsel appearing for the assessee submitted that the issue as regards the disallowance under Section­14A read with Rule­8D of the Rules has been well dealt with by the ITAT and the ITAT after due consideration of the position of law as well as the materials on record, has recorded a finding that the assessee was able to establish that it was having sufficient interest free funds, which could have taken care of the investments. According to Mr. Soparkar, the ITAT committed no error in taking the view that the interest expenditure could not have been disallowed with the aid of Rule­8D.

16. The findings recorded by the ITAT with regard to the first proposed question are as under:­

11. We have considered rival contentions and gone through the record carefully. Before we embark upon an inquiry on the facts of the present case, in order to determine the amount of expenditure requires to be disallowed under section 14A read with rule 8D for earning tax free income, we deem it appropriate to take note of section 14A. It reads as under:­

14A. (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 sub­section (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.

12. A perusal of this section would indicate that sub­section­1 contemplates that deduction of expenditure incurred by an assessee in relation to income which does not form part of taxable income shall not be allowed. Sub­section (2) casts an obligation on the AO to first examine the claim made by the assessee in its books of accounts and if he is not satisfied with the correctness of the claim, then he would work out the expenditure for disallowance. It is also pertinent to note that in order to remove subjectivity involved in calculating the expenditure, Rule 8D has been provided on the statute book providing a uniform formula for such calculations. The ld. DRP has made a lucid analysis of section 14A in its order passed in the assessment year 2013­14. It has observed that sub­section (3) of section 14A further provides that even if an assessee claims that no expenditure was incurred in order to exempt income, then also sub­section (2) can be applied. As far as interpretation and construction of scope and ambit of section 14A read with rule 8D made by the ld. DRP on the strength of various authoritative pronouncements are concerned, there is no dispute. Dispute between the parties relates to actual working on the basis of meaning explained by the DRP. When the ld. DRP has applied the scope and its application on the facts of the case of the assessee, then it failed to apply correctly. The ld. DRP has totally ignored the judgment of the Hon’ble High Court in the case of CIT Vs. UTI Bank Ltd. (supra) – rather it has not made any discussion on it. Similarly, it has ignored judgment of Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra). The judgment of Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) has been followed by the Hon’ble Gujarat High Court in the case of CIT Vs. UTI Bank Ltd. (supra). The question of law considered by the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) reads as under:

“Whether on the facts and in the circumstance of the case and in law the Hon’ble Tribunal was justified in holding that the assessee­company had sufficient funds of its own for making the investments without using the interest bearing funds even though the Balance Sheet of the assessee­company as at 31­3­1999 shows that the assessee­company has no reserve or own funds for making the investments in the sister concern and therefore, borrowed funds have been utilized and interest on these borrowed funds are rightly disallowed by the Assessing Officer?”

13. The Hon’ble High Court has answered this question in favour of the assessee and conclusion drawn in the judgment reads as under:

“10.If there be interest­free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest­free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.’s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.’s case (supra) where a similar issue had arisen. Before the Supreme Court, it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Wooldcombers of India Ltd.’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest­free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest­free fund generated or available with the company, if the interest­free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT (Appeals) and ITAT.

14. Hon’ble Court have laid down that if there be funds available; both interest free, overdrafts and loans taken, then a presumption would arise that investment would be out of interest free funds generated or available with the company. The ld. DRP has failed to take note of the ratio laid down in these decisions. It proceeded on the presumption that since funds are mixed, therefore, it is presumed that direct interest expenditure cannot be worked out and Rule 8D is to be applied. Whereas, the stand of the assessee is that its interest free funds is far more than the investment. For example, in the assessment year 2012­13, it was having interest free funds of Rs.2272.44 crores and their investment was of Rs.351.76 crores. Similarly, in the assessment year 2013­14, interest free funds are of Rs.2653.57 crores against investment of Rs.534.52 crores. A chart showing availability of these funds and details of investment has been placed on page no.11 of the paper book. It has annexed as annexure A/4 filed before the ld. DRP. The assessee has also compiled the details showing loans and interest for F.Y.2012­13. Similar exercise has been made in the F.Y.2011­12. These details were filed before the ld. DRP. Thus, the assessee has demonstrated that it was having sufficient interest free funds which can take care of these investments. Therefore, no interest expenditure is to be disallowed with the help of Rule 8D.

17. We had the occasion to consider the provision of Section­14A of the Act as well as Rule­8D of the Rules in the Tax Appeal No.100 of 2019 decided on 18/06/2019 [Principal Commissioner of Income Tax, Vadodara­1 Vs. Gujarat State Fertilizers and Chemicals Ltd.]. The very same argument, which is sought to be canvassed by Mr. Patel in the present tax appeal, was canvassed in the Tax Appeal No.100 of 2019. We would like to quote the relevant observations made by us including the submissions, which were canvassed by Mr. Patel and noted by us.

5. Mr. Patel submitted that the Assessing Officer rightly made the disallowance under Section 14A of the Act. He submitted that in a recent decision in the case of Maxopp Investment Limited (supra), the Supreme Court has reiterated that the purpose behind Section 14A of the Act is not to permit deduction of the expenditure incurred in relation to the income which does not form part of the total income. It is to ensure that the assessee does not get double benefit.

6. He further submitted that this Court, in the case of PCIT­II v. Shreno Limited, (2018)409 ITR 401 (Gujarat), has referred to the decision of the Supreme Court in the case of S.A.Builders Limited v. CIT, (288)ITR 1 and observed that the exposition of law made by the Supreme Court in the case of S.A.Builders Limited (supra) and the observations made therein have been applied by this Court on various occasions particularly in connection with the disallowance to be made under Section 14A of the Act and it has been held that if the assessee can demonstrate the availability of the surplus interest free funds for making the investment generating tax free income, the disallowance under Section 14A of the Act would not be justified.

7. Mr. Patel submitted that the decision of the Supreme Court in S.A.Builders Limited (supra) is not applicable to the issue involved in the present case as the decision in the case of S.A.Builders Limited (supra) is with respect to Section 36(i)(iii) of the Income Tax Act, whereas in the present case the issue is with regard to the disallowance under Section 14A read with Rule 8D in the context of the assessee having mixed funds, i.e. interest free as well as interest bearing funds. In the case of S.A.Builders Limited (supra), the relevant assessment years were Assessment Years 1990­91 and 1991­92, i.e. prior to the insertion of Rule 8D in the Income Tax Rules by the Income Tax (Fifth Amendment) Rules, 2008 w.e.f. 24th March 2008. It is also submitted that Section 14A has been inserted in the Income Tax Act by the Finance Act, 2001, with retrospective effect from 1st April 1962.

8. It is further submitted that after the insertion of Rule 8D, in all the cases of mixed funds, i.e. interest free as well as interest bearing funds, the subsequent decision of the Supreme Court in the case of Maxopp Investment Limited (supra), more particularly para 42 regarding the case of M/s.Avon Cycles Limited, would be applicable for disallowance under Section 14A and such disallowance is required to be assessed as per the provisions of Rule 8D only. The decision of this Court in the case of Shreno Limited, which is based on the prior decision of the Supreme Court in the case of S.A.Builders Limited (supra) is, therefore, not applicable to the cases of mixed funds.

9. On the other hand, this Tax Appeal has been vehemently opposed by Mr.Manish Shah, the learned counsel appearing for the respondent – assessee. Mr.Shah submitted that the decision of the Supreme Court in the case of Maxopp Investment Limited (supra) should not be understood as clinching the issue with regard to the interpretation of Section 14A of the Act and Rule 8D of the Rules. He submitted that in the case of Maxopp Investment Limited (supra), the question before the Supreme Court was, whether the disallowance of expenditure under Section 14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. He would submit that such an issue does not arise in the present case so as to make the dictum of Maxopp Investment Limited (supra) applicable to the case on hand. He submitted that Maxopp Investment Limited (supra) should not be understood as laying down a proposition of law that the requirement of sub­rule (1) of Rule 8D of the satisfaction to be arrived at by the Assessing Officer before applying the formula given in sub­rule (2) of Rule 8D is done away. He submitted that the decision of the Supreme Court in Maxopp Investment Limited (supra) does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds, i.e. interest free as well as interest bearing funds, and utilized them for making investments into securities earning tax free income and the rest applicability of Section 14A read with Rule 8D would be automatic.

15. In Maxopp Investment Limited (supra), the Supreme Court has clarified that the satisfaction has to be recorded by the Assessing Officer to show that the voluntary disallowance of the expenditure made by the assessee on the expenditure incurred for earning exempt income is not in order. The Assessing Officer, in such circumstances, is obliged to assign reasons for he not being satisfied having regard to the accounts maintained by the assessee and the suo motu disallowance made by the assessee under Section14A of the Act. We may reproduce the relevant observations of the Supreme Court in this regard thus:

“Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned the expenditure but the Assessing Officer did not accept the assessee’s apportionment. In that eventuality, he will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer.”

16. We also refer to and rely upon a decision of this Court in the case of Principal Commissioner of Income Tax v. Shreno Limited, reported in (2018)409 ITR 401 (Gujarat), more particularly paragraphs 16 and 17, which read thus :

“16. The primary question which the Supreme Court considered in case of Maxopp Investment Ltd., (Supra) was whether disallowance of expenditure under Section 14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. The assessee had contended that the dominant intention for purchasing the shares was not for earning the dividend but to gain control over the business in the company in which the shares were purchased. The Supreme Court held that the purpose for which the shares were purchased was inconsequential. As long as such investment generated tax free income, disallowance of expenditure for making such investment would be justified. This issue does not arise in the present case. However, it is true that while disposing of bunch of appeals by the said judgment the Supreme Court also considered the correctness of the view of the Punjab & Haryana High Court in case of Avon Cycles Ltd. It was the case in which the Assessing Officer had invoked Section 14A read with Rule 8D and apportion the expenditure between investments made for earning tax free income and the rest. The CIT (Appeals) had deleted the entire disallowance upon which in the appeal filed by the Revenue the Tribunal restored portion of the disallowance observing that the funds utilized by the assessee being mixed funds, the disallowance is confirmed in view of the provisions under Rule 8D(2) of the Rules. This decision of the Tribunal was challenged before the High Court. The Court held that the funds utilized by the assessee were mixed funds and the interest paid by the assessee is also an interest on the investments made, was the finding offact and therefore, no substantial question of law arises. This judgment was carried in appeal by the assessee. The Supreme Court dismissed the appeal confirming the decision of the High Court.

17. We do not find that this portion of the judgment of the Supreme Court in case of Maxopp Investment Ltd., can be seen as fundamentally changing the understanding and interpretation of Section 14A and Rule 8D of the Rules adopted by this Court and various Courts, noted above. This judgment does not lay down a proposition that the requirement of sub­rule (1) of Rule 8D of the satisfaction to be arrived by the Assessing Officer before applying the formula given in sub­rule (2) of Rule 8D is done away with. In other words, the judgment in case of Maxopp Investment Ltd., does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds i.e. interest free as well as interest bearing funds and utilized them for making investments into securities earning tax free income and the rest applicability of the Section 14A read with Rule 8D would be automatic. We are conscious that neither in M/s. Max India Ltd., Punjab & Haryana nor in Gujarat State Fertilizer and Chemicals case, this High Court had noticed the judgment of the Supreme Court in case of Maxopp Investment Ltd. Nevertheless in view of the discussion above, in our opinion the situation would not change on account of the said judgment of the Supreme Court.”

17. This Court, in Shreno Limited (supra), has taken the view that Maxopp Investment Limited (supra) cannot be seen or understood to be fundamentally changing the understanding and interpretation of Section 14A and Rule 8D. It went on to hold that the judgment of the Supreme Court does not lay down the proposition that, the requirement of sub­rule (1) of Rule 8D of recording the satisfaction by the Assessing Officer before applying the formula given in sub­rule (2) of Rule 8D is done away with. It clarifies that the judgment in the case of Maxopp Investment Limited does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds and utilized them for making investment into securities earning tax free income, Section 14A read with Rule 8D would be attracted automatically. The assessee has further relied on the judgment in the case of Principal Commissioner of Income Tax v. Gujarat State Financial Services Limited in the Tax Appeals Nos.1252, 1253 and 1255 of 2018 decided on 15^th August 2018, which has followed the decision in the case of Shreno Limited (supra) dealing with the same

18. The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances we are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule 8 would be attracted automatically.

18. We are of the view that the ITAT rightly relied on the decision of the Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.).

19. The second question proposed by the revenue is whether the disallowance under Section­14A read with Rule­8D can exceed the exempt income [administrative expenses]. In context of the aforesaid question proposed by the revenue, the findings recorded by the ITAT are as follows:­

15. Next fold of dispute relates to working out of administrative expenses relatable to earning of exempt income.

16. As pointed out by the ld. counsel for the assessee that Hon’ble Gujarat High Court (in Corrotech) and Hon’ble Delhi High Court in (Chemvest) have concurred with each other that if there is no dividend income or tax free income in a year then no disallowance u/s.14A can be made. This explication was amplified and employed subsequently by ITAT to construe that working of expenditure for disallowance u/s.14A should not exceed more than dividend income itself. In the case of Joint Investment Pvt. Ltd. Vs. CIT (ITA No.117/2015, decided on 25.2.2015) Hon’ble Delhi High Court has observed that by no stretch of imagination can section 14A or Rule 8D be interpreted so as to mean that entire tax exempt income is to be disallowed. The ITAT, Ahmedabad has restricted the disallowance equivalent to exempt income (ITA No.3266/AHD/2015, ITA No.261/AHD/2012, ITA No.1281/AHD/2012 decided on 7.12.2016. The ld. counsel for the assessee agreed for disallowance to the extent of dividend income earned by it in both the years. However, that would give an excessive relief to the assessee in the assessment year 2013­14 because assessee itself has disallowed a sum of Rs.75 lakhs whereas dividend income is only Rs.43.35 lakhs. Thus, we confirm disallowance to the extent of Rs.1.55 crores (Rupees One Crore Fifty Five Lakhs) in the assessment year 2012­13, which is equivalent to the dividend income, whereas in the assessment year 2013­14 the assessee itself disallowed a sum of Rs.75 lakhs which can take care of administrative expenditure of earning dividend income at Rs.43.35 lakhs. Accordingly, both these grounds are partly allowed. We confirm disallowance at Rs.1.55 crores (Rupees One Crore and Fifty Five Lakhs) in the assessment year 2012­13 and Rs.75 lakhs (Rupees Seventy Five Lakhs) in the assessment year 2013­14. Rest of the disallowance made by the AO are deleted.

20. In taking aforesaid view, the ITAT placed reliance on the following decisions:­

i. Corrtech Energy P. Ltd. 223 Taxman 130

ii. CIT, Vadodara­2 Vs. Vision Finstock Ltd. Tax Appeal No.486 of 2017 (Guj. High Court)

iii. CIT, Vadodara­2 Vs. Vision Finstock Ltd. SLP Civil No.13152 of 2018 (SC)

iv. Joint Investment Pvt. Ltd. Vs. CIT (ITA No.117/2015) (Del HC)

21. The aforesaid second question is squarely covered by the decision of this Court in the case of Correctch Energy Pvt. Ltd. (supra). In our opinion, no error not to speak of any error of law could be said to have been committed by the ITAT in this regard.

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.

18. We have duly considered rival contentions and gone through the record carefully. We find that ld. DRP has relied upon the order of the ITAT, Mumbai in the case of DCIT Vs. Viraj Profiles Ltd., (2016) 46 ITR (Trib) 0626 (Mum) and held that addition required to be made in the book profit could be calculated as per Rule 8D of the Income Tax Rules. The ld. DRP thereafter made reference to decision of Hon’ble Delhi High Court in the case of CIT Vs. Geotze India Ltd., 361 ITR 505. According to the ld. DRP, this decision has been considered by the Special Bench in the case of Vireet Investment P. Ltd. (supra) but placed reliance upon Hon’ble Bombay High Court in the case of Vodafone India Services P. Ltd. ACIT, 361 ITR 0531 (Bom) and held that DRP is not bound by the ratio laid down by the Special Bench. The discussion made by the DRP on this issue in the assessment year 2013­14 reads as under:

“10.3 In the case of Viraj Profiles Ltd. [2015] 64 taxmann.com 52 (Mum Trib), the Hon’ble Bench has elaborately discussed the issue and held that the disallowance is liable to be calculated as per Rule 8 D of the Rules. After discussing the decisions which have also been relied on by the appellant, the Hon’ble Bench has concluded that;

“In view of our foregoing discussion, we find no infirmity with the orders of the AO and we hold that the AO has rightly disallowed the expenditure of Rs.73,07,018/­ by invoking the provisions of Section 14a of the Act read with the Rule 8D of Income Tax Rules, 1962 for computing book profit u/s.115JB(2) of the Act read with clause (f) to Explanation 1 to clause 115JB(2) of the Act. We, therefore, set aside the orders of the CIT(A) and restore the orders of the AO. We order accordingly.

In the case of CIT (Central­II) Vs. Goetze (India) Limited, the Hon’ble Delhi High Court has in ITA No.1179/2010 vide order dated 09.12.2013, held that the disallowance u/s.14A is to be taken into consideration for the purposes of calculating book profits u/s.115JB. The relevant paras of the judgment are reproduced below.

“36. By order dated 16th May, 2012, the following substantial questions of law were framed in the present appeals:­

“(i) Whether the Income Tax Appellate Tribunal was right in holding that while computing book profit under Section 115JA (sic. Section 115JB) of the Income Tax Act, 1961, no disallowance under Section 14A was required to be made? ­–

Learned counsel for the respondents­assessee, during the course of hearing, has fairly conceded that the first question has to be answered in favour of the Revenue and against the assessee in view of specific provisions in the Explanation 1 below Section 115JB(2) clause (f).

The Assessing Officer it is stated had made an addition of Rs.88,292/­ to the book profits towards expenditure incurred having nexus with dividend income, which were exempt under Section 10(33). Recording the said statement, the first question is answered in favour of the appellant­Revenue and against the respondent­assessee.”

The assessee has relied upon the judgment of ITAT special bench in the case of Vireet Investment Pvt. Ltd. In this regard, it is pertinent to mention that Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. Additional Commissioner of Income Tax & Ors. (2014) 264 CTR 0030 (Bom) : (2013) 96 DTR 0193 (Bom) : (2014) 361 ITR 0531 (Bom) : (2014) 221 Taxman 0166 (Bom); has held that the proceedings before DRP are extension of assessment proceedings. Therefore, they are not bound by the decision of Tribunals unlike CIT(A) as long as the issue is not acceptable on merit and/or the issue is being contested by the department. In this case, the decision of Hon’ble Delhi High Court in the case of Goetze (India) Ltd cited above is also in favour to the department on this issue which also shows that the view of AO confirmed by the Panel is a plausible view.There were contradictory orders at the end of the Tribunal. Therefore, Special Bench was constituted to consider the following question:

“Whether expenditure incurred to earn exempt income computed under section 14A could not be added while computing book profit under section 115JB of the Act.”

2. 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 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, tge 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

1. 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 fore 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 withExplanation 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 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 Income­tax­I 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 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.”

8. Taking into consideration the evidence on record and considering the decision of this court in the case of Commissioner of Income­tax­I vs. Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos.(iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed.

9. 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 offacts, 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 ITA No.3850/Mum/2010 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 7^th 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 & ChemicalsLtd.
(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.

25. The fourth question proposed by the revenue is with respect to the deduction under section­80IA(4) of the Act at the rate on which the GEB supplied power to its customers ignoring the rate at which the power generating company supplied to the GEB. This issue is directly covered by the decision of this Court in the case of CIT Vs. Gujarat Alkalies and Chemicals Ltd.; 395 ITR 247. It is also covered by the decision of the Supreme Court in the case of M/s. Alembic Ltd. (Tax Appeal No.553 & 554 of 2017. It appears that Special Leave Petitions filed by the revenue are pending before the Supreme Court questioning the correctness of the view taken by this Court in the aforesaid two judgments. So far as the Gujarat Alkalies and Chemicals Ltd, (supra) is concerned, it takes the view as under:­

3. In both the tax appeals though slightly differently worded, the questions concerning the same assessee are identical and concern the issue of deduction under section 80IA of the Income Tax Act granted to the assessee by the Tribunal on captive power generation plant. The second question is with respect to recognising such claim on the basis of purchase price of power from GEB and substituting the rates of 2.47 per unit adopted by the Assessing Officer.

4. Since both the issues are covered by various judgments of this Court, we do not find it necessary to record facts at any length. Division Bench of this Court by judgment dated 22.11.2011 in Tax Appeal No.2092/2010 in somewhat similar controversy observed as under:

3. With respect to Question [B], the issue pertains to sub­Section (8) of Section 80IA of the Income Tax Act, 1961. The assessee had a CPP Unit generating electricity, which was supplying it to a general unit. The electricity generated is being supplied to other consumers also. The CPP unit charged Rs.5.40 ps. per unit from the general unit. The Assessing Officer applying sub­Section (8) of Section 80IA restricted the same to Rs.5.32 ps. per unit and, thereby, restricted the deductions claimed by the assessee under Section 80IA of the Act. This restriction was primarily on the basis that the rate of Rs.5.40 ps. charged by Gujarat Electricity Board ( GEB for short) was inclusive of 8 paise per unit of electricity duty. This component of electricity duty the Assessing Officer discarded for the purposes of ascertaining market value of the electricity generated by the CPP Unit and supplied to its general unit.

4. CIT (Appeals) confirmed the view of the Assessing Officer on the same line of reasoning. The Tribunal, however, on further appeal by the assessee, reversed the orders passed by the Revenue authorities referring to and relying upon the decisions of other Tribunals. The Tribunal was of the opinion that the market value of the electricity supplied by the CPP Unit to the general unit would be the same being charged by GEB from the consumers.

5. Counsel for the Revenue contended that the component of 8 paise per unit was the electricity duty which GEB was not authorized to retain but had to pass on to the Government. In essence, GEB was only collecting 8 paise per unit as electricity duty for and on behalf of the Government. He submitted that the market value of the electricity should be reckoned on Rs.5.32 ps. per unit as was done by the Revenue authority.

6. Under sub­Section(8) of Section 80IA of the Act, if it is found that where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and in either case the consideration for such transfer does not correspond to the market value of such goods as on the date of the transfer, then for the purposes of deduction under Section 80IA in case of the eligible business as if the transfer had been made at the market value of such goods or services. It is in this context that the question of substituting the actual consideration by the market value comes into picture.

26. The fifth question proposed by the revenue whether the income from the Carbon Credits is capital in nature. This issue is squarely covered by the following decisions:­

1. M/s. Alembic Ltd.

Tax Appeal No.553 & 554 of 2017

2. CIT Vs. My Home Power Ltd.

[2014] 46 com 314

3. Subhash Kabini Power Corporation Ltd. (KHC)

[2016] 69 com 394

27. We quote the relevant observations made by this Court in the Alembic Limited (supra) as under:­

“6. The last surviving question pertains to the treatment that the assessee’s income from trading of carbon credits should be given. The Tribunal held that receipts should be in the nature of capital receipts and therefore, would not invite tax. This issue has been examined bytwo High Courts. The Karnataka High Court in case of CIT v. Subhash Kabini Power Corporation Ltd. reported in (2016) 385 ITR 592 (Karn) and Andhra Pradesh High Court in case of Commissioner of Income­tax v. My Home Power Limited reported in (2014) 365 ITR 82 (AP) have held that receipts of carbon credit are in nature of revenue receipts. Following the decision of said two High Courts, this question is also not considered.

28. The sixth question proposed by the revenue is with respect to the disallowance on account of the late payment of employees contribution towards the PF/ESI under section­36(1)(va) r/w. 2(24)(x). The findings of the ITAT in this regard are as under:­

45. After considering submissions of the both the sides, we find that though the Hon’ble Gujarat High Court in the case of Gujarat State Road Transport Corporation (supra) has held that if the payment to PF and ESI are not being made within the due date prescribed under those Act, then deduction will not be available to the assessee. However, in the present case, so far as payment of Rs.21,47,672/­ is concerned, from the explanation of the assessee, it is discernible that it has made payment before the due date, but on account of certain technical objection, cheques deposited have been returned, which ultimately after removal of objection was cleared. Thus, it could be construed that payment was within the due date and therefore, deduction ought to be granted to the assessee. We allow the claim of the assessee qua Rs.21,47,672/­/

46. So far as payment of Rs.17,22,105/­ and Rs.15,121/­ are concerned, we find that the Revenue authorities have not verified the details furnished by the assessee. The reasons explained by the assessee cannot be bruised aside. Therefore, we send back the issue of addition qua these two payments to the file of AO for verification of the details of payments. If on verification the reasons assigned by the assessee are found to be correct, then, the AO is directed to give benefit of section 43B of the Act to the assessee.

29. We take notice of the fact that the ITAT answered this question in favour of the assessee keeping in mind the peculiar facts and circumstances of the case. Though the decision of this Court in the case of GSRTC (supra) is against the assessee.

30. The seventh question proposed by the revenue is with regard to the ITAT not upholding the addition of Rs.436.8 crore made by the Assessing Officer as income from the short term capital gain due to the Slump Sale of Wind Energy Business to the IRL.

31. This issue is also squarely covered by the decision of this Court in the case of Commissioner of Income­tax Vs. Gauranginiben S. Sodhan Indl. Reported in [2014] taxmann.com 356 (Gujarat), wherein in Paragraphs­11 and 12, the following has been observed:­

11. Taking the question of ascertaining the fair market value on the date of sale, we notice that section 48, which is also contained in chapter IV of the Act pertains to method of computation of capital gain. A detailed mechanism has been provided for such computation of the income chargeable under the head Capital Gains. It provides, inter alia, that the income chargeable under the Head Capital Gains, shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the amounts mentioned therein that is the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. Main thrust of section 48 of the Act, therefore, is the full value of consideration received or accruing as a result of the transfer of the capital asset as reduced by expenditure mentioned therein and the cost of acquisition of the asset. Section 55A, as we have noticed, refers to the reference to DVO for ascertaining the fair market value of a capital asset. Such ascertainment of fair market value with the aid of the DVOs report would have no relevance for the purpose of determining full value of consideration received or accruing as a result of the transfer of the capital asset for the purposes of section 48 of the Act.

12. In that view of the matter, the reference to DVO for ascertaining the fair market value of the capital asset as on the date of the sale in the present case would be wholly redundant.

32. The last question proposed by the revenue is whether the date of transfer of the Wind Energy Business of GFL to IRL on slump sale is 30/03/2012. This question is co­related to the question aforesaid and squarely covered by Gauranginiben S. Sodhan (supra).

33. In the overall view of the matter, we are of the view that the ITAT committed no error in passing the impugned order. The issues raised in both the tax appeals are by and large covered by various decisions of the Supreme Court as well as of this Court.

34. We are of the view that none of the questions proposed by the revenue could be termed as substantial question of law arising in the present two tax appeals.

35. In the result, both the tax appeals fail and are hereby dismissed.