Deduction u/s. 80IA not allowable on interest on Margin Money, I-T refund, employee’s loan

ITAT MUMBAI BENCH ‘I’

Essar Power Ltd.

versus

Additional Commissioner of Income-tax

IT Appeal Nos. 5318 & 5725 (Mum.) of 2007
[ASSESSMENT YEAR 2003-04]

Date of Pronouncement – 9.11.2012

ORDER

Dinesh Kumar Agarwal, Judicial Member 

These cross appeals by the assessee and the Revenue are directed against the order dtd. 22-6-2007 passed by the ld. CIT(A) – V, Mumbai for the A.Y. 2003-04. Both these appeals are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the A.O. observed that the assessee is an infrastructure company which is notified by the Government of India, Ministry of Finance vide their Notification dated 11-3-2004 as claimed by the assessee. The company is in the business of generation and sale of electricity having its 515 MW combined cycle power plant at Hazira, Surat. The company filed return declaring a loss for the year at Rs. 55,39,83,223/- and the book profit u/s 115JB at Rs. 64,79,83,219/-. However, the assessment was completed at a total loss of Rs. 24,76,00,058/- under the normal provisions of the Income Tax Act, 1961 (the Act) and at a book profit of Rs. 76,12,67,288/- u/s 115JB of the Act vide order dtd. 31-01-2006 passed u/s 143(3) of the Act. On appeal, the ld. CIT(A) partly allowed the appeal.

3. Being aggrieved by the order of the ld. CIT(A) the assessee and Revenue both are in appeal before us.

ITA No. 5318/Mum/2007 (By assessee)

4. Ground No. 1 reads as under:-

“1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in not directing to allow the deduction u/s 80IA on the net interest income viz (a) Interest on employee loans & advances, (b) Interest on margin money and (c) Interest income on dues towards Income Tax refund adjustment from Essar Project Ltd.”

5. Brief facts of the above issue are that the A.O. observed that the assessee has declared income of Rs. 1,48,58,920/- under the head ‘interest income’. From the break-up of the same, the A.O. observed that the following items of interest income required to be assessed as income from other sources as the same do not relate to assessee’s power business:-

The assessee was asked to explain as to why the above interest income should not be assessed under the head ‘income from other sources’. It was submitted by the assessee that all these issues have been considered even in the earlier assessment years except in the case of interest on sales tax refund. It was further submitted that even though the A.O. has treated interest income under ‘income from other sources’, the assessee has got relief from the ld. CIT(A) and hence the same view should be considered for the current assessment year also. As regards the interest on sales tax refund the assessee submitted that sales tax is a tax payable in the course of the assessee’s business. The interest received on these refunds due from Sales Tax Department is received in the normal course of business, therefore, interest on sales tax should not be brought to tax under the head ‘income from other sources’. It was also submitted that the sales tax paid by the assessee was, in fact, sales tax on the lease rentals received on plant and machinery given on lease in earlier years, therefore, the interest from this refund have been earned in the normal course of assessee’s business and taxable under the head business income only. However, the A.O. did not accept the assessee’s submission. With regard to the interest income from M/s Essar Projects Limited, Employees loans and advances, bank/margin deposits, the A.O. in line with the stand of the department and in agreement with the reasons given in the preceding assessment years i.e. A.Y. 2001-02 and 2002-03 treated the interest received from Essar Projects Ltd., Employees loans and advances & bank/margin deposits as ‘income from other sources’. With regard to interest income ICD, the A.O. assessed the same under the head ‘income from other sources’. As regards interest on sales tax refund, the A.O. observed that the assesee is in the business of generation of power and interest is earned on the sales tax refund, therefore, there is no co-relation with the assessee’s business activity and, therefore, it cannot be said that this amount is assessable under the head business income and, hence, he treated the said interest on sales tax refund as ‘income from other sources’ and accordingly the A.O. assessed the following interest income under the head ‘income from other sources’:-

6. On appeal, the ld. CIT(A) following the appellate order for the assessment years 2000-01 & 2001-02 held that (a) interest on margin money deposit and interest on employee loans are asses sable under the head income from business or profession, (b) interest from Essar Projects Ltd. and Essar Services Ltd. is asses sable as income from other sources & (c) interest on sales tax refund is asses sable as income from business. He further held that deduction u/s 80IA would not be available on any of the above interest incomes.

7. At the time of hearing the learned Sr. counsel for the assessee, at the outset, submits that the Tribunal in assessee’s own case in Dy. CIT v. Essar Power Ltd. and vice versa in ITA No. 6430/Mum/2003 & 439/Mum/2005 and ITA No. 6395/Mum/2003 & 4448/Mum/2005 for assessment years 2000-01 & 2001-02 order dtd. 11-8-2008 vide para 13 of the order has upheld the order of the ld. CIT(A) on this account. He further submits that since it is a case of loss, therefore, the assessee for the year under consideration is not eligible for deduction u/s 80IA of the Act. He, therefore, submits that the issue may be decided accordingly.

8. On the other hand, the ld. D.R. while relying on the order of the A.O. submits that in view of the decision in the case of Liberty India v. CIT [2009] 317 ITR 218 the assessee is not entitled to the deduction u/s 80IA of the Act.

9. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. On the question as to whether the assessee is entitled to deduction u/s 80IA of the Act on the net interest income on employees loans & advances, interest on margin money and interest income on dues towards income tax refund adjustment from Essar Project Ltd., we are of the opinion that the issue involved in the present case is no more res-integra and is covered by the decision of the Hon’ble Apex Court in the case of Liberty India (supra) wherein it has been held that duty drawback, DEPB benefits, rebates, etc., cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of section 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. It was further held that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of section 80-I/80-IA/80-B of the Act. In the absence of any distinguishing feature brought on record by the learned Sr. counsel for the assessee, we respectfully following the decision of the Honorable Apex Court (supra) hold that the assessee is not entitled to the deduction u/s 80IA of the Act on the interest on employees loan and advances, interest on margin money and interest income dues towards income tax refund adjustment from Essar Power Ltd. case (supra) and accordingly the ground taken by the assessee is rejected.

10. Ground No. 2 reads as under:-

“On the facts and in the circumstances of the case, the learned CIT(A) erred confirming addition made by AO towards, provision for Income Tax Recoverable from GEB and Essar Steel Ltd. while making computation of total Income under normal provisions of the Income Tax Act, 1961.”

11. The A.O. has discussed the above issue at page 5 of the assessment order as under:-

“8. Provision for Income Tax Recoverable – Rs.11.07 crores:

The assessee is supplying power to Gujarat Electricity Board (GEB). As per the power purchase agreement between the assessee and GEB, GEB is supposed to reimburse the income tax payable by the assessee. For the year under consideration, assessee has shown below the line in profit and loss account 11.07 crore as provision for tax recoverable. This amount has not been included in the total income of the assessee.

The assessee has taken a stand that this amount reflects the income tax payable by the assessee which is reimbursed by GEB. Thus, if this amount is brought to tax it would amount to double taxation. The assessee has also submitted that this amount is not receivable if no income tax is payable by the assessee. Thus, this is not in the nature of revenue. It is also submitted by the assessee that it is in the nature of reimbursement of expenditure and hence not income in the assessee’s hand.

The above stand of the assessee is not acceptable as the said amount is being received with regard to sale of power to GEB. The method followed in deciding the amount payable by GEB is immaterial as far as the nature of receipt in the assessee’s hands is concerned. Whether GEB pays this amount as a reimbursement of expenditure or by way of payment for services rendered or as a return on investment of capital, the nature of such receipt cannot be different in the hands of the assessee. Assessee is required to show all the receipts from GEB as revenue and claim deductions applicable under the IT Act. In the instant case 11.07 crores is therefore required to be included from revenue from GEB and reductions if any shall be allowed as per the Act. The said amount is therefore added to the total income. Since income tax is not a deductible expenditure no further deduction is therefore considered. The addition comes to Rs. 11.07 crores.

Since Rs.11.07 crore is income of the assessee as held above, the same considered and added to the book profit for computation u/s. 115JB also”.

12. On appeal, the ld. CIT(A) after considering the submission of the assessee has held as under:-

“3.5 I have gone through the above submissions as well as the findings of the Assessing Officer. I find that the appellant’s argument does not hold good as this reimbursement is nothing but a method of raising the sales invoices towards the generation and supply of power to its customers, which is based on terms mutually agreed by both the parties. Therefore, Income tax recoverable is a revenue receipt and chargeable to income-tax. Therefore, ground No. 4 is rejected and order of assessing officer in this regard is upheld.”

13. The ld. Sr. counsel for the assessee submits that the assessee company is engaged in the generation and distribution of power. During the year under consideration the assessee company has supplied the power to Gujarat Electricity Goard(GEB) and Essar Steel Ltd. In accordance with the agreement of power generation and supply thereof with GEB and Essar Steel Ltd, tax payable by the assessee company is agreed to be reimbursed by both the companies as per copy of agreement appearing at page 3 to 146 of the assessee’s paper book. During the year the assessee company made provision of Rs.11.07 crores receivable from GEB and Essar Steel Ltd below the line. This is towards the tax portion recoverable from GEB and Essar Steel Ltd. The assessee company first computes its taxable Income. On such taxable Income, tax payable is worked out. Such tax payable on production of challan is reimbursed by the power purchasers and, therefore, cannot be treated as income and chargeable to tax again. He further submits that as income-tax is not an allowable deduction under the provisions of the Act, any benefit or reimbursement of the tax liability by the power purchasers is not an income in the hands of the assessee company. He further submits that in the event, no tax is paid by the assessee company, no reimbursement will be made by the power purchasers, therefore, it is reimbursement of what is paid. When payment is not claimed as deduction, its reimbursement should also be not considered as income. He further submits that the assessee company has not claimed expenses in relation to payment of tax. Further the reimbursement receivable is required to be offset against tax payable by the company, therefore no amount of tax recoverable can be added back to income of the year under appeal.

14. The ld. Sr. counsel for the assessee for the proposition that reimbursement is not an income also placed reliance in CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320  wherein it has been held that at placitum 57 page 340 that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. He further submits that similar view has been taken by the Hon’ble jurisdictional High Court in the case of DIT (International Taxation) v. Krupp Udhe GmbH [2010] 38 DTR 251 (Bom) wherein it has been held that reimbursement of expenses is not chargeable to tax. He further submits that in Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 30 SOT 374 (Mum)[SB] it has been held that at placitum ‘D’ page 403 that “Reimbursement of expenses does not have the income element and, hence, cannot assume the character of income deemed to accrue or arise in India.” The ld. Sr. counsel for the assessee after referring to the provisions of section 44BB of the Act submits that in the case of DIT (International Taxation) v. Schlumberger Asia Services Ltd. [2009] 317 ITR 156  it has been held that reimbursement towards the customs duty paid by the assessee, being statutory in nature, could not form part of amount for the purposes of deemed profits, unlike the other amounts received towards reimbursement. He further submits that similar view has been taken by the Tribunal in Dy. DIT v. Mitchell Drilling International Pty. Ltd. in ITA No. 698/Del./2012 for A.Y. 2008-09 order dtd. 31-8-2012 holding that service tax is not part of the gross receipt for the purpose of taxation u/s 44BB of the Act. The reliance was also placed in the case of Asstt. CIT v. Louis Berger International Inc . [2010] 40 SOT 370 (Hyd.) wherein it has been held at placitum A page 397 that reimbursement of service tax cannot form part of the total income of the assessee. He further submits that similar view was taken in case of Islamic Republic of Iran Shipping v. Dy. CIT (International Taxation) [2011] 46 SOT 101 (Mum.)(URO  and in the case of Veolia Eau-Compagnie v. Addl Director of Generale Des Eaux Income-tax in ITA No. 2131/Mds/2010 for A.Y. 2004-05 order dtd. 23-6-2011. Reliance was also placed in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769  wherein it has been held that Excise Duty and Sales Tax are not includible in total turnover.

15. In the light of the above decisions, he submits that reimbursement of income-tax is revenue neutral. There is no element of profit. There is no income and, hence, it should be excluded from the income of the assessee. He further submits that since the income-tax is not the income, therefore, the same is not includible in the receipt and, hence, deduction of the same does not arise. He, therefore, submits that the ld. CIT(A) has erred in upholding the order of the A.O. in treating the provision for the income-tax recoverable as income of the assessee and the same be deleted.

16. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A), at the outset, submits that receipt of income-tax is a part of the tariff realized by the assessee from the company, therefore, it is a part of receipt liable to tax as income of the assessee. He further submits that under the provisions of the Act the provision for income-tax made by the assessee is not allowable i.e. in other words it is not deductible expenditure and, hence, it was rightly treated by the A.O. as income. He further submits that in the case of Louis Berger International Inc. (supra) relied on by the ld. Sr. counsel for the assessee it has been observed by the Tribunal at page 396 that “there is a lot of difference between payment of service tax and income-tax”, therefore, the decision relied on by the ld. Sr. counsel for the assessee is distinguishable and not applicable to the facts of the present case. He further submits that all other decisions relied on by the ld. Sr. counsel for the assessee are in respect of reimbursement of expenses, custom duty and service tax and are not in respect of reimbursement income-tax, therefore, all the decisions relied on by the ld. Sr. counsel for the assessee are distinguishable and not applicable to the facts of the present case. He, therefore, submits that the addition made by the A.O. and confirmed by the ld. CIT(A) be upheld.

17. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the assesse has shown below the line the P&L account Rs. 11.07 crores as provision for tax recoverable and has not included the said amount in the total income computed by the assessee. The case of the assessee is that the said amount reflects the income-tax payable by the assessee which is reimbursed by the Gujarat Electricity Board (GEB) and the same is in the nature of reimbursement of expenses and, hence, not liable to be included in the income of the assessee. Per contra the stand of the Revenue is that it is a part of the tariff payable by the companies, therefore, it is an income/receipt in the hands of the assessee and not in the nature of reimbursement of expenses and, as such, the same is not deductible as an expenditure and, hence, liable to tax.

18. Here it is necessary to consider the relevant provisions of the Act which are as under:-

19. “Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”:

(a) in the case of any assessee –

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains;”

20. This clause provides that notwithstanding anything to the contrary in sections 30 to 38, in the case of any assessee – (i) any sum paid on account of any rate or tax (ii) levied on the profits or gains of any business or profession, or (iii) assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession.

21. “Tax Deducted is income received

198. All sums deducted in accordance with the foregoing provisions of this Chapter shall, for the purpose of computing the income of an assessee, be deemed to be income received :

Provided that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received”.

22. This section provides that the amount of tax deducted at source under the provisions of sections 192 to 196D is, so far as affected person is concerned, to be treated as income received by him. For the purpose of computation of his total income, gross salary, gross dividend or gross interest, etc. i.e. the amount actually received plus the amount of tax deducted at source, will have to be considered.

23. We further find from the copy of agreement dated 30-5-1996 between Gujarat Electricity Board (GEB) and Essar Power limited (assessee) that in Cl. 7.1 of the annexure- IV of Schedule of the agreement appearing at page 3 to 87 at page 81 that the tariff has been determined as follows:-

“TARIFF

The Tariff shall be determined as follows

(a)  Annual Fixed Charges to be determined in terms of Section 7.1.1.

(b) Variable Charges to be determined in terms of Section 7.2

(c) Incentive Payment to be determined in terms of section 7.3

7.1.1 Annual Fixed Charges: Computation and payment.

The Annual Fixed Charge shall be computed on the following basis:

(a) Interest on Debt: ……………………..

(b) Accounting year: ……………………..

(c) Depreciation : …………….

(d) Tax on Income:

Tax on Income shall be determined in accordance with the provisions of the Income tax Act, 1961 every year as under:-

For the purposes of determination of the Annual Fixed Charges, the Tax on Income shall be computed on an estimated basis. Any under or over recovery of Tax on Income shall be adjusted every year on the basis of certificate of documentation of Tax paid and assessment by the Income tax Officer concerned.

(e) Return on Equity (ROE): …………………..

(f) Interest on Working Capital……………….

(g) Base Foreign Debt repayment adjustment mount:……….”

24. From the fair reading of the above, the amount of income-tax calculated and paid by GEB is part of the tariff charged by the assessee on the sale of electricity and not reimbursement of expenses, therefore it is part of the receipts in the hands of the assessee.

25. In Chowringhee Sales Bureau (P.) Ltd. v. CIT [1977] 110 ITR 385 (Cal.) it has been held (Headnote):-

“Held, that the amounts collected by the assessee as sales tax formed part of its trading receipts. However, the liability to pay sales tax arises the moment a sale or purchase is effected and an assessee who maintains accounts on the mercantile system is entitled to deduction of his estimated liability to sales tax, even though they had not been paid to the sales tax authorities”.

26. In Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) it has been held (Head note) :

“(ii) that the amount collected by the appellant as sales tax constituted its trading receipt and had to be included in its total income”;

27. In Chowringhee Sales Bureau (P.) Ltd. (supra) it has been held (Head note):-

“Held, (i) that the sum of Rs. 32,986 realized as sales tax by the appellant in its character as an auctioneer formed part of its trading or business receipts;

(ii) that the fact that the appellant credited the amount received as sales tax under the head “sales tax collection account” did not make any material difference.

It is the true nature and quality of the receipt and not the head under which it is entered in the account books as would prove decisive. If a receipt is a trading receipt, the fact that it is not so shown in the account books of the assessee would not prevent the assessing authority from treating it as trading receipt”.

28. In Emil Webber v. CIT [1993] 200 ITR 483  it has been observed and held at page 486-487 as under:-

“The definition of “income” in clause (24) of section 2 of the Act is an inclusive definition. It adds several artificial categories to the concept of income but on that account the expression “income” does not lose its natural connotation. Indeed, it is repeatedly said that it is difficult to define the expression “income” in precise terms. Anything which can properly be described as income is taxable under the Act unless, of course, it is exempted under one or the other provisions of the Act. It is from the said angle that we have to examine whether the amount paid by Ballarpur by way of tax on the salary amount received by the assessee can be treated as the income of the assessee. It cannot be overlooked that the said amount is nothing but a tax upon the salary received by the assessee. By virtue of the obligation undertaken by Ballarpur to pay tax on the salary received by the assessee among others, it paid the said tax. The said payment is, therefore, for and on behalf of the assessee. It is not a gratuitous payment. But for the said agreement, and but for the said payment, the said tax amount would have been liable to be paid by the assessee himself.

He could not have received the salary which he did but for the said payment of tax. The obligation placed upon Ballarpur by virtue of section 195 of the Income-tax Act cannot also be ignored in this context. It would be unrealistic to say that the said payment had no integral connection with the salary received by the assessee. We are, therefore, of the opinion that the High Court and the authorities tinder the Act were right in holding that the said tax amount is liable to be included in the income of the assessee during the said two assessment years”.

29. Bharat Commerce and Industries Ltd. v. CIT [1998] 230 ITR 733  it has been observed and held as under (page 738-739):-

“Learned counsel for the assessee also relied upon a decision of this court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. The assessee in that case had claimed deduction of interest paid on arrears of sugarcane cess. This was held by this court as a part of the assessee’s liability to pay cess and was held to be deductible. The ratio of this judgment also can have no application here. The payment of sugarcane cess is very much a part of the assessee’s business expense. Any interest on arrears of cess would, therefore, take colour from the cess which is payable. It is an indirect tax which has to be paid in the course of carrying on business. It is required to be deducted in order to arrive at the net profits of the assessee for the relevant assessment year. We are here not concerned with the payment of any indirect tax which the assessee may have to pay in the course of his business. We are concerned with the tax which was required to be paid after the ascertainment of the net income of the assessee for the relevant assessment year. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Income-tax Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income-tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the Income tax Act, which is calculated with reference to the tax on income cannot be allowed as a deduction”.

30. Now let us consider the decisions relied on by the ld. Sr. counsel for the assessee.

31. In Siemens Aktiongesellschaft (supra) it has been inter alia observed and held at placitum 57 to 59 at page 340-341 as under:-

“That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in CIT v. Industrial Engineering Projects P. Ltd. [1993] 202 ITR 1014. The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 (Cal). The learned Division Bench was answering the following question :

“Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dunlop Rubber Co. (India) Ltd. (Indian company) as per agreement dated July 29, 1957, constituted income asses sable to tax ?”

On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilized by the subsidiaries as well as the head office organization would not be income which would be asses sable to tax. A similar view was taken in CIT v. Stewards and Lloyds of India Ltd. [1987] 165 ITR 416.

We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts”.

32. In Krupp Udhe Gmbh (supra) it has been held as under (Para 6):

“6. The question as to whether a reimbursement for expenses would form part of the taxable income is not res-integra in so far as this Court is concerned. In Commissioner of Income Tax V/s. Siemens Aktiongesellschaft5, a Division Bench of this Court held that it was in agreement with the view taken by the Calcutta High Court in Dunlop Rubber Company Limited (supra) and by the Delhi High Court in Commissioner of Income Tax v. Industrial Engineering Projects (P) Ltd. [1993] 109 CTR (Del) 73 : [1993] 202 ITR 1014 (Del). The observations of this court in Siemens (supra) are as follows :

“33. That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in CIT v . Industrial Engineering Products (P) Ltd., (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in CIT v. Dunlop Rubber Co. Limited (supra). The learned Division Bench was answering the following question :

“Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dunlop Rubber Co. (India) Ltd., (Indian company) as per agreement dt. 29th Jan., 1957 constituted income asses sable to tax ?

On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned Court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilized by the subsidiaries as well as the head office organization would not be income which would be asses sable to tax. A similar view was taken in CIT v. Stewarts & Lloyds of India Ltd., (supra).

Consequently, in view of the judgment in Siemens, the first and second issue would not raise any substantial question of law since they are covered against the Revenue”.

33. In Mahindra & Mahindra Ltd. (supra) it has been observed and held at placitum D at page 403 as under:-

“…………Reimbursement of expenses does not have the income element and, hence, cannot assume the character of income deemed to accrue or arise in India”.

34. In Schlumberger Asia Services Ltd. (supra) it has been held (Head note):

“Held, dismissing the appeal, that reimbursement towards the customs duty paid by the assessee, being statutory in nature, could not form part of amount for the purposes of deemed profits, unlike the other amounts received towards reimbursement. Therefore, there was no reason to interfere with the orders passed by the Tribunal affirming the view taken by the Commissioner (Appeals)”.

35. In Mitchell Drilling International Pty. Ltd (supra) it has been held that service tax is not part of the gross receipts that is to be computed for the purposes of taxation u/s 44BB of the I.T. Act.

36. In Louis Berger International Inc. (supra) it has been held that the “the reimbursement of service tax cannot form part of the total income of the assessee.”

37. In Islamic Republic of Iran Shipping (supra) it has been held as under:-

“Therefore, we are of the view, that service tax which is a statutory liability, would not involve any element of profits and a service provider is collecting the same from its customers on behalf of the government and, accordingly, same cannot be included in the total receipts for determining the presumptive income. Therefore, we set aside the order of the DRP in this regard and direct the Assessing Officer not to include the amount of service tax in the total receipts for determining the income u/s.44B”.

38. In Veolia Eau-Compagnie (supra) it has been held that “….. Hence reimbursement of service tax cannot form part of the taxable income of the assessee ……

39. In Sudarshan Chemicals Industries Ltd. (supra) it has been held that (Head note) :

“Under section 80HHC(1) of the Income-tax Act, 1961, it is, inter alia, provided that where an assessee is engaged in the business of export of any goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, “profits derived from exports” also finds place in section 80HHC(3)(a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the assessee carried on a business as 100 per cent. exporter and secondly where the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head “Profits and gains of business”, the same proportion as the export turnover bears to the total turnover. The emphasis is on the words “profits derived from the exports”. Therefore, weight age must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the profit and loss account. In fact, they are shown as liability in the balance-sheet. In the circumstances, the above two items cannot be included in the total turnover. Section 80HHC is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under the Sales Tax Act which is a State levy, cannot be imported into section 80HHC of the Act”.

40. There is no quarrel with the principle enunciated in the aforesaid decisions relied on by the ld. Sr. counsel for the assessee. However, the facts of the present case are entirely different. We are here not concerned with the reimbursement of any expenses allowable under the Act or payment of any indirect tax which the assessee may have to pay in the course of his business. In fact, we are concerned with the tax which was required to be paid after ascertainment of the net income of the assessee for the relevant assessment year, not deductible under the provisions of the Act. Therefore, all the decisions relied on by the ld. Sr. counsel for the assessee are distinguishable and not applicable to the facts of the present case.

41. Under the Act, the definition of income in clause (24) of section 2 is an inclusive definition. Anything which can properly be described as income is taxable unless, of course, it is exempted under one or the other provisions of the Act. It is from the said angle we are of the opinion that the amount paid by the power purchasers by way of tax on the amount of tariff charges received by the assessee can be treated as the income of the assessee. It cannot be overlooked that the said amount is nothing but a tax upon the payments received by the assessee. By virtue of the obligation undertaken by the power purchasers to reimburse the tax to the assessee does not mean that it is not the income in the hands of the assessee. Under these circumstances and keeping in view the ratio of the decisions referred in para 25 to 29 of this order, we hold that the payment of tax received by the assessee is a part of tariff charges as per agreements (supra) and, hence, it is an income in the hands of the assessee and, therefore, the said amount without allowing any deduction is liable to be included in the income of the assessee. Accordingly, the ld. CIT(A) was fully justified in upholding the order of the A.O. in treating the same as income. The ground taken by the assessee is, therefore, rejected.

42. The following additional ground has been taken by the assessee:-

“The learned Assessing Officer erred in levying interest u/s 234B and section 234C on tax payable on book profit computed u/s 115JB of the Income-tax Act to the extent book profit includes provision for doubtful debts.”

43. Since it is a legal ground, we keeping in view of the law laid down in National Thermal Power Corpn. v. CIT [1998] 229 ITR 383 (SC), admit the additional ground taken by the assessee.

44. There is no dispute that the above additional ground has been taken by the assessee for the first time before the Tribunal. The Honorable Madhya Pradesh High Court in the case of CIT v. Tollaram Hassomal [2008] 298 ITR 22  has held as under:-

“Held, that the Tribunal having permitted the assessee to raise four additional grounds treating them to be legal grounds in appeal for the first time, should have set aside the order of the Commissioner of Income-tax (Appeals) and remanded the case to the Commissioner of Income-tax (Appeals) for deciding the appeal afresh on all the issues including on those four grounds raised by the assessee in the appeal before the Tribunal rather than to decide the additional grounds on the merits for the first time by itself.”

45. Respectfully following the ratio of the above decision, we are of the view that, in the interest of justice, the matter should go back to the file of the A.O. and accordingly we send back the matter to the file of the A.O. to decide the same afresh in the light of the decision relied on by the ld. Sr. counsel for the assessee in the case of Emami Ltd. v. CIT [2011] 337 ITR 470  and other cases after providing reasonable opportunity of being heard to the assessee. The additional ground taken by the assessee is, therefore, partly allowed for statistical purpose.

ITA No. 5725/Mum/2007 (By Revenue)

46. Ground No. 1 reads as under:-

“1. On the facts and in the circumstances of the case and as per law, the Ld.CIT(A) erred in deleting the addition of Rs. 1,02,17,687/- made on account of interest income earned under various heads which were treated as income from other sources as against income from business and profession”.

47. At the time of hearing both the parties have agreed that the facts of the above ground are similar to ground No. 1 of assessee’s appeal, therefore, the plea taken by them may be considered while deciding the above ground taken by the Revenue.

48. After hearing the rival parties and perusing the material available on record we find that the facts are not in dispute inasmuch as it is also not in dispute that the impugned issue is covered in favour of the assessee by the order of the Tribunal dtd. 11-8-2008 (supra) wherein vide para 13 of the order, it has been held as under:-

“After considering the facts of the case as discussed above, we are of the opinion that the CIT(A) has rightly held that interest from the margin money kept with the bank as well the interest on the loans to the employees is to be assessed as the business income. We made it clear, as submitted by the ld. Counsel, that for limited purpose of determining the head of income and this issue is not decided on the issue that whether for claiming deduction u/s 80IA/80IB this income should be treated as profits derived from the industrial undertaking. Ground No. 1 taken by the revenue is dismissed.”

49. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the above order, decline to interfere with the order passed by the ld. CIT(A) on this account and accordingly the ground taken by the Revenue is rejected.

50. Ground No. 2 reads as under:-

“On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in allowing the interest paid amounting to Rs.97,63,398/- after obtaining the statement of average cost of funds and working of proportionate interest based on the average cost worked out to 10.19%”.

51. On this issue the ld. CIT(A) after considering the alternative claim of the assessee observed and held in para 1.5 and 1.6 of his order as under:-

“1.5 As an alternative claim Appellant Company has submitted that company has borrowed funds in addition to its own funds, therefore, proportionate interest paid by the company worked out based on the average cost of funds against the interest income needs to be allowed.

1.6 The above issue was dealt by my predecessors appellate Commissioner in the order referred to in earlier paragraph, wherein it has been held that proportionate interest based on the average cost of funds be allowed as deduction against the interest income earned by the appellant company. Appellant company has submitted before me the statement of average cost of funds and working of proportionate interest paid based on the aforesaid average rate. As per the said statement, average rate of interest works out to 10.19% and based on the same proportionate interest paid works out to Rs. 97,63,398/-. In line with my predecessors order, the A.O. is directed to allow the interest paid amounting to Rs. 97,63,398/- base don the average cost of funds after verification”.

52. At the time of hearing, both the parties have agreed that this issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the A.Y. 2000-01 and 2001-02 (supra), therefore, the issue may be decided accordingly.

53. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the parties that the issue is covered in favour of the assessee by the order of the Tribunal (supra) wherein it has been held vide para 14 & 15 of the order dated 11-8-2008 as under:-

“14. Ground No. 2 taken by the revenue reads as under:-

“On the facts and in the circumstances of the case and as per law, the ld. CIT(A) has erred in directing the Assessing Officer to allow proportionate interest calculated on average rate on 11.69% on the amount borrowed for the purpose of lending from the interest income earned of Rs. 9,87,24,470/- on such investment ignoring the detailed reasoning given by the Assessing Officer in his order.”

15. We have heard the parties. The ld. counsel for the assessee submitted that this issue has been decided in favour of the assessee by the CIT(A) following his earlier orders for AYs 1998-99 and 1999-2000 and both those orders were subject matter of appeal before the Tribunal and the Tribunal has decided this issue in favour of the assessee. The ld. counsel also filed copy of the order of the Tribunal in ITA No. 5411 & 5412/Mum/2003 and 5496 & 5497/Mum/2003 dated 22.02.2008. On perusal of the order, it is seen that this issue is decided by the Tribunal in favour of the assessee upholding the order the CIT(A) who has followed the decision of the Tribunal in assessee’s own case for AYs 1996-97 and 1997-98. Respectfully following the order of the Tribunal for AY 1998-99 and 1999-2000 we dismiss ground no. 2 taken by the revenue.”

54. Respectfully following the above decision and the consistent view of the Tribunal, we are inclined to uphold the order passed by the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

55. Ground No. 3 reads as under:-

“3. On the facts and in the circumstances of the case and as per law, the Ld.CIT(A) erred in deleting the addition of Rs.25,84,069/- while computing the book profit u/s. 115JB of the Act without appreciating the fact that it was an unascertained liability and is covered under the clause (c) of explanation to section 115JB of the I.T. Act.

56. At the time of hearing, it has been agreed by the parties that the above ground has been taken prior to the amendment made by the Finance (No. 2) Act, 2009 w.r.e.f. 1-4-2001, therefore, the issue may be set aside to the file of the A.O.

57. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the parties that this issue requires a fresh consideration in view of the retrospective amendment made by Finance (No. 2) Act, 2009 w.e.f. 1-4-2001 wherein under Explanation [1] of section 115 JB it has been substituted under sub-clause (i) “the amount or amounts set aside as provision for diminution in the value of any asset”. In the absence of any modified ground taken by the Revenue in the light of the above amendment, we, in the interest of justice, consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the order passed by the Revenue on this account and send back the matter to the file of the A.O. to decide the same afresh in the light of the aforesaid amended provisions of the Act and according to law after providing reasonable opportunity of being heard to the assessee. The ground taken by the Revenue is, therefore, partly allowed for statistical purpose.

58. Ground No. 4 reads as under:-

“4. On the facts and in the circumstances of the case and as per law, the Ld. CIT(A) erred in deleting the addition of Rs. 11.07 crores for computing income u/s. 115JB of the I.T. Act without appreciating the method provided at Part-II & Part-III of Schedule-6 of the Companies Act 1956”.

59. Brief facts of the above issue have already been mentioned in para 12 of this order. On appeal, the ld. CIT(A) directed the A.O. to delete the above addition of Rs. 11.07 crores made by him while computing the book profit u/s 115JB of the Act vide his finding recorded in para 3.6 of his order which is reproduced as under:-

“3.6 As regards addition of provision of tax recoverable for the purpose of Section 115JB, I agree that what is taxable as book profit under Section 115 JB is the book profit of the year which is subject to certain additions mentioned under the explanation to Section 115JB as also certain reductions mentioned under the said explanation. But only what is specified in the said explanation can be adjusted for computing the book profit that can be charged to tax. Nothing more and nothing less can be added or reduced u/s 115JB. Tax recoverable does not fall into any of these categories, therefore the same can not be added back while computing the Book Profit u/s 115JB of the Income Tax Act. Further the appellant company has worked out the Book Profit based on Profit and Loss account drawn in accordance with Part II of schedule VI of the Companies Act. The accounts of the company are audited by the Auditors of the company. In such a situation the ratio laid down by Honorable Supreme Court in the case of Apollo Tyres Ltd (255 ITR 273) is also applicable. The A.O. has no jurisdiction to disturb the Profit & Loss Account of the company except in the manner provided in Explanation to Section 115JB. In contrast the A.O. has considered this income and recomputed the Book profit which is against the provisions of Explanation to Section 11 5JB as well as against the ratio laid down by Supreme Court in the case of Apollo Tyres. Section 115JB is a special computation provision and has to be interpreted strictly. Recast of Book Profit cannot be done unless within the ratio laid down by the above decision of Honorable Supreme court. The Book Profit can be increased only under the clauses (a) to (f) of Explanation to Section 115JB. The recovery of income tax does not fall under these clauses. In view of this, I hold that tax recoverable of Rs.11.07 crores can not be added back while computing the Book Profit u/s 115JB of the Income Tax Act. Therefore A.O. is directed to delete the above addition of Rs.11.07 crores made by him while computing the Book Profit u/s 115JB of the appellant company”.

60. At the time of hearing, the ld. D.R. supports the order of the A.O.

61. On the other hand, the ld. Sr. Counsel for the assessee relied on the order of the ld. CIT(A).

62. We have carefully considered the submissions of the rival parties and perused the material available on record. There is no dispute that under clause (i) of Explanation 1 to section 115JB of the Act there is a retrospective amendment made by Finance (2) Act, 2009 w.e.f. 1-4-2001, therefore, the book profit has to be recomputed in accordance with the above clause (i) of Explanation 1 to section 115Jb of the Act. In this view of the matter and keeping in view of our finding recorded in para 58 of this order, we are of the view that in the interest of justice the matter should go back to the file of the A.O. and accordingly we set aside the order passed by the Revenue authorities on this account and send back the matter to the file of the A.O. to decide the same afresh in the light of our observation herein above and according to law including the decision of Honorable Apex Court in Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562 after providing reasonable opportunity of being heard to the assessee. The ground taken by the Revenue is, therefore, partly allowed for statistical purpose.

63. In the result, appeals filed by the assessee and Revenue are partly allowed for statistical purpose.