Payment of guarantee fee to Gujarat Government is revenue expenditure

Gujarat State Electricity Corporation Limited Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that payment of guarantee fee to the Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loan is revenue expenditure.

Facts- Revenue has preferred this present appeal contesting that CIT(A) has erred in deleting the addition made on account of disallowance of claim of guarantee fees paid to Government of Gujarat.

Notably, AO observed that the assessee paid guarantee fee to the Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loan. AO did not accept the above explanation of the assessee on the ground that the assessee did not furnish the details of the purpose for which the loans were taken for which the guarantee fees were claimed. Further, The AO observed that the cost of raising the finance can also not be considered as revenue expenses for want of details. He, accordingly, disallowed Rs.5,90,96,000/-. However, CIT(A) allowed the appeal.

Conclusion- Rajasthan High Court in CIT v. Metalising Equipment Co. Pvt. Ltd., 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to the GOG.

Held that in fact the Ld.CIT(A) deleted the above addition following assessee’s own case for the Assessment Year 2008-09 by holding that the guarantee fees is directed to be allowed as revenue expenditure.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

1. These cross appeals are filed by the Assessee and the Revenue as against separate appellate orders both dated 31-08­2018 & 21-08-2015 passed by the Commissioner of Income Tax (Appeals)-1, Vadodara arising out of the assessment orders passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Years (A.Ys) 2014-15 & 2012-13. Since common issues are involved in all the above appeals, the same are disposed of by this consolidated order. First we will take up Revenue appeal in ITA No. 3165/Ahd/2018 relating to Assessment Year 2012-13.

2. The Grounds of appeal raised by the Revenue reads as under:

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow the Guarantee fee after verification disregarding the applicable statutory provisions contained under S 37 of the I.T.Act which do not allow any expenditure of capital nature.”

2. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to treat the interest income/ miscellaneous receipts of Rs. 5648.08 lacs as business income instead of income from other sources without appreciating the fact that the receipt is not covered in clauses (i) to (vii) of S 28 of the Income tax Act under which such income is charged.”

3.”On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in by deleting the addition made on account of prior period income amounting to Rs. 0.48 lacs without accepting the fact that the assessee was following the mercantile system of accounting in which the expenses related to the prior period are not an allowable expense as the assessee company did not offer prior income.”

4.”On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in by directing the AO to work out the revised disallowance u/s. 14A r. w.r. 8D by excluding the interest paid on term loan subject to verification that claim of interest was in relation to term loans by overlooking rule 8D(ii) where it is specifically mentioned the method for determination of amount of expenditure incurred by way of interest during the year which is not directly attributable to any particular income.”

5. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in by deleting the addition made in book profit.”

6. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.

3. Ground No. 1: Disallowance of guarantee fees paid to Govt. of Gujarat of Rs. 93.98 lacs. This guarantee fees paid by the assessee to Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loans.

3.1. Ld. Counsel submitted that this issue is covered in favour of the assessee by Co-ordinate Bench of this Tribunal in the case of Gujarat Energy Transmission Corporation Ltd. in ITA No. 852/Ahd/2018 by order dated 24.08.2022. Per contra the Ld. D.R. could not contravent the above submissions of the assessee.

3.2. The Co-ordinate Bench of this Tribunal on guarantee fees paid to Govt. of Gujarat wherein it was held as follows:

13. We have carefully considered the decision passed by the Coordinate Bench in ITA Nos. 2790 & 2791/Ahd/2015. While deciding the ground in favour of the assessee, the Coordinate Bench has been pleased to observe as follows:

“2. The revised grounds of appeal raised by the Revenue is reproduced hereunder:

“1. “On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of Rs.262.93 lakhs made on account of disallowance of claim of guarantee fees paid to Government of Gujarat disregarding the applicable statutory provisions contained under S 37 of Income tax Act,1961 which do not allow any expenditure of capital nature. The disallowance was made by disallowing the claim as revenue expenditure as it is of enduring nature in the assessee’s business and hence capital in nature.”

2. “On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of Rs.42.86 lakhs made on account of disallowance of claim of cost of raising finance for specialized job as revenue expenditure. The ld.CIT(Appeals) erred in not appreciating the fact that as the result of this expenditure, the assessee had derived benefit of enduring nature, hence the expenditure is of capital nature.”

3. As pointed out on behalf of the assessee, both the aforesaid grounds are covered in favour of the assessee in its own case concerning AY 2008-09 in ITA No. 704/Ahd/2012 order dated 12.06.2015. The relevant para of the order of the Tribunal is reproduced hereunder:

“29. In the Revenue’s appeal, the ground no.1 of the appeal is directed against the order of the CIT(A) in deleting the addition of Rs.50,90,96,000/- made on account of disallowance of claim of guarantee fees paid to Government of Gujarat.

30. Brief facts of the case are that the AO observed that the assessee paid guarantee fee of Rs.5,69,35,000/- to the Govt. of Gujarat in consideration of guarantee issued by it for repayment of unsecured loan. Further, the assessee also claimed Rs.21,61,000/- on account of cost of raising finance under the head “cost of raising finance” as per the profit & loss account.

31. In reply to show cause notice to the assessee, the assessee submitted that erstwhile GEB has raised various loans, guarantee of which was given by Govt. of Gujarat, and for the guarantee given by the Govt. of Gujarat, the GEB is required to pay guarantee fees as per rules. After the split of the company, the said loan were still continued, which were guaranteed by the Govt. of Gujarat. Therefore, every year these guarantee fees become payable to Govt. of Gujarat on recurring basis. Regarding the cost of raising finance, the assessee submitted that the finance was raised during the year, and accordingly, the cost incurred for raising finance was charged to current year’s profit & loss account. The AO did not accept the above explanation of the assessee on the ground that the assessee did not furnish the details of the purpose for which the loans were taken for which the guarantee fees were claimed. Further, if the fees paid for loans facility in respect of fixed assets, nature of assets, the date of put-to-use has not been submitted. The assessee also failed to furnish any agreement with the Govt. of Gujarat for charging guarantee fees and method of its computation against the loan amounts. In the absence of these details it was not possible to entertain the assessee’s claim. The AO further observed that the cost of raising the finance can also not be considered as revenue expenses for want of details. He, accordingly, disallowed Rs.5,90,96,000/-.

32. On appeal, the CIT(A) observed that guarantee fee was an annual recurring expenditure incurred by the assessee. Guarantee fee was payable to Govt. of Gujarat every year in respect of loans taken by the assessee and guaranteed by the Govt. of Gujarat. As held by Hon’ble Supreme Court in the case of India Cements Ltd., 60 ITR 52 (SC), loan cannot be treated as asset or advantage resulting in enduring benefits. Guarantee fees paid to Govt. of Gujarat was in connection with raising of loans and enduring benefit or advantage could not be said to have resulted by taking such loans. Only if the assets acquired out of such loans were not put-to-use till the end of previous year i.e. 31.3.2008, the guarantee fees to such extent i.e. in respect of such loans only could be capitalized as cost of such asset. The assessee has certified that no new project was started or commissioned during the year for which above guarantee was paid, and the guarantee fees was in respect of loans for acquisition of capital assets, which were already put-to-use prior to 1.4.2007. The guarantee fees of Rs.5,69,35,000/- is directed to be allowed as revenue expenditure, subject to verification by the AO of the certificate filed during the appellate proceedings i.e. there was no capital work-in-progress in respect of loans on which guarantee fees was paid.

33. Regarding cost of raising finance of Rs.21 .61 lakhs is concerned, the CIT(A) observed that the same was an allowable deduction and being revenue expenditure, following the decision in the case of India Cements Ltd. (supra) disallowance of Rs.21,61,000/- was cancelled.

34. The DR supported the order of the AO, whereas, the AR of the assessee supported the order of the CIT(A) and submitted that the issue was now covered in favour of the assessee by the decision of this Tribunal in the case of assessee itself dated 8.5.2015 passed in ITA No.1931/Ahd/2010, 2974/Ahd/2010 and 3004/Ahd/2010.

35. We find that the Tribunal in its order dated 8.5.2015 cited supra has held as under:

“6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) decided these issues in paras- 5.2 & 5.3 and 6.2 respectively by observing as under:-

“5.2. I have considered the submissions of the ld.AR and the facts of the case. The issue relating to whether an item of expenditure lies in the capital or the revenue field has exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of “enduring benefit”. “Enduring benefit” may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit “enduring”, since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such shortlived benefit cannot be categorized as “enduring”. Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt.Ltd. (ITA No.738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt.5.6.2009, following the decision of the Rajasthan High Court in CIT v. Metalising Equipment Co.Pvt.Ltd., 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to the GOG. In view of the totality of the circumstances, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (Rs.8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent on stamp duty, lawyer fees, etc. for obtaining loan secured by charge on its fixed assets is a revenue expenditure, because the transactions were entered into directly to facilitate the business of the company and payment of consultancy charges was made on ground of commercial expediency. In India Cements Ltd. vs. CIT, 60 ITR 52, the Supreme Court had also held that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of Rs.45,24,582/-, which is directed to be deleted.”

6.1 The ld.CIT(A) has followed the decision of the Tribunal passed in ITA No.738/Ahd/2009 for AY 2006-07 in the case of Himalaya Machinery Pvt.Ltd., dated 5.6.2009 and in the case of Shri Rama Multi Tech vs. ACIT reported at 92 TTJ 568.

6.2. The ld.CIT-DR could not distinguish the facts of the case, therefore we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, these two grounds raised in the Revenue’s appeal are rejected.”

36. DR could not point out any good reason as to why the above quoted order of the Tribunal should not be followed for the year under consideration. In the absence of distinguishing features being pointed out by the DR, and the facts being identical, respectfully following the above quoted decision of the Tribunal, we confirm the order of the CIT(A), and dismiss this ground of appeal of the Revenue.”

4. In parity with the order of the Tribunal, we are of the opinion that CIT(A) has rightly adjudicated the issue in favour of the assessee. We thus decline to interfere with the order of the CIT(A).”

13.1. In the absence of any changed circumstances, we do not find any reason to deviate from the stand taken by the Coordinate Bench Decision. Hence, we do not find any reason to interfere of the order passed by the Ld. CIT(A) in deleting the guarantee fees paid to the Government of Gujarat to the amount of Rs. 218.28 lakhs. The ground preferred by Revenue is, therefore, fails and thus, dismissed.

3.3. We have gone through the materials available on record as well as submissions made by both the parties. In fact the Ld.CIT(A) deleted the above addition following assessee’s own case for the Assessment Year 2008-09 by holding that the guarantee fees is directed to be allowed as revenue expenditure.

3.4. Respectfully following the Co-ordinate Bench decision, the grounds raised by the Revenue is devoid of merits and the same is hereby dismissed.

4. Ground no. 2: Treatment of interest income and miscellaneous receipts as “income from other sources” as against the claim as “business income”.

4.1. Ld. Counsel submitted that this issue is also covered in favour of the assessee by decision of Co-ordinate Bench of this Tribunal in ITA No. 753/Ahd/2018 by common order dated 24.08.2022 in the case of Gujarat Energy Transmission Corporation Ltd. wherein it was held as follows:

“…………….. 8.1. At the time of hearing of the instant appeal the Ld. Counsel appearing for the assessee with all his fairness submitted before us that the identical issue has been decided by the Coordinate Bench in assessee’s own case in ITA Nos. 2885 & 2886/Ahd/2015 [cited supra]. On this aspect he has drawn our attention to Page 10 of the above order filed before us. However, by and under the order passed by the Hon’ble Orissa High Court in the case of Odisha Power Generation Corporation Ltd. vs. ACIT, Circle-2(2), Bhubaneswar & ors. in ITA Nos. 1, 2, 3 of 2015 and ITA Nos. 24 & 25 of 2009 the issue has been decided otherwise. A copy of the same has also been submitted before us by the Ld. Counsel appearing for the assessee.

8.2. On the other hand, the Ld. D.R. relied upon the order passed by the lower authorities.

9. We have heard the rival submissions made by the respective parties, and we have also perused the relevant materials available on record and also gone through the order passed by the Hon’ble Orissa High Court in the case of Odisha Power Generation Corporation Ltd. (supra). It appears that the Hon’ble Orissa High Court while dealing with the issue the Court was pleased to observe as follows:

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

9.1. In that view of the matter we find it fit and proper to direct the Ld. AO to consider the issue afresh upon examining the same in regard to the head of income upon considering the relevant evidence in the light of the observation made by the Hon’ble High Court as mentioned hereinabove. We, thus, pass order accordingly. This ground is allowed for statistical purposes.

4.2. We have gone through the records and found that ld. CIT(A) held that the miscellaneous receipts of Rs. 5648.08 lacs treated as income from business. However the interest income of Rs. 4.56 crores was treated as “income from other sources”. Considering the judgment of the Orissa High Court in the case of Odisha Power Generation Corporation Ltd., we direct the Ld. CIT(A) to consider the issue afresh and pass orders accordingly. Thus the Ground No. 2 raised by the Revenue is allowed for statistical purpose.

5. Ground no. 3: Disallowance of prior period expenditure of Rs. 48,000/-.

5.1. The Ld. Counsel for the assessee submitted that this issue is also covered by setting aside the same to the file of the Assessing Officer by the Co-ordinate Bench of this Tribunal in ITA No. 753/Ahd/2018 by order dated 24.08.2022. The Ld. D.R. appearing for the Revenue has no objection in set aside the matter back to the file of the Assessing Officer for reconsideration.

5.2. After perusal of records, we find that the Co-ordinate Bench of this Tribunal held as follows:

4. We find that Coordinate Bench on the identical issue disposed of the ground by remitting the same to the file of the Ld. AO to adjudicate de novo with the following observation:

“12. During the course of assessment, the Assessing Officer noticed that assessee company has shown prior period income of Rs. 130.05 lacs after adjustment of prior period expenses for Rs. 408.01 lacs. On query, the assessee has explained that all expenditure booked under this head crystallized in the hands of the company only during the year under consideration therefore same expenditure cannot be added back. The Assessing Officer has not accepted the submission of the assessee stating that assessee was following mercantile system of accounting in which the expenses related to the prior period were not an allowable expenses. Therefore, the prior period expenses amounting to Rs. 408.01 lacs was disallowed and added to the total income of the assessee.

13. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee stating that assessee has not made any submission showing that the prior period income was crystallized in the previous year relevant to the assessment year under consideration.

14. During the course of appellate proceedings before us, the ld counsel has submitted that similar issue in the case of Group concern Gujarat Urja Vikas Nigam Ltd. was adjudicated by the Co­ordinate Bench of the ITAT vide ITA No. 996/Ahd/2011 for assessment year 1988-89 dated 31st May, 2017 and the issue was remanded back to the file of Assessing Officer for deciding afresh in the light of the decision of Hon’ble High Court in the case of PCIT vs. Adani Enterprises Ltd. in Tax Appeal No. 573 of 2016. The ld. Departmental Representative was fair enough not to controvert these undisputed facts and findings of Co-ordinate Bench.

15. With the assistance of ld. representatives, we have gone through the decision of Co-ordinate Bench of ITAT in the case of Group concern Gujarat Urja Vikas Nigam Ltd. vs. ACIT for assessment year 1988-89 wherein similar issue has been set aside to the file of Assessing Officer for adjudicating afresh according to the direction laid down by the Hon’ble Gujarat High Court in the case of Adani Enterprises Ltd. in Tax Appeal No. 573 of 2016. The relevant part of the decision of the Co-ordinate Bench in the Gujarat Urja Vikas Nigam Ltd. supra as cited above is reproduced as under:-

“6. We have carefully heard the rival submissions and perused the orders of the authorities as well the case-laws referred. The assessee is aggrieved by the disallowance of prior period expenses of Rs.53.53crores as per Ground No.4 of its appeal. The disallowance has been made on the ground that the expenses under various heads as noted in the assessment order pertained to earlier years and the assessee which is following system of accounting should have made provision for expenses in those respective years and claimed them as deduction. We have gone through the break-up of the expenses as noted in para-8 of the assessment order and observe that certain expenses declared under the head ‘other adjustments Rs.30.75 crores’; ‘other charges Rs.79.34 lakhs’; ‘depreciation under provided Rs.7.86 crores’ etc. are ostensibly vague and does not indicate the nature of claim with sufficient particularity obscure. We simultaneously note that assessee is a State Government Undertaking and its accounts are subjected to review by CAG and therefore it cannot be postulated that there was any deliberateness in not furnishing relevant details before the revenue authorities. The bonafides of the Assessee is also augmented by the facts that the Assessee has reported staggering carry forward losses in its returned income. Thus, there is no immediate tax advantage accrued to the assessee by the claim of impugned prior period expenses per se. We therefore deem it expedient to restore the issue back to the file of AO for examining the issue de novo after verifying facts as may be considered necessary and expedient in accordance with law. The AO shall bear in mind the ratio laid down by the Hon’ble Gujarat High Court in the case of Adani Enterprises Ltd. (supra) while adjudicating the issue. Needless to say, reasonable opportunity shall be provided to the assessee while adjudicating the issue. Hence, all the contentions of the assessee are kept open. The issue raised as per Ground No.4 is thus set aside to the file of AO in terms of directions noted above. As a result, Ground No.4 is allowed for statistical purposes.”

In the light of the decision of Co-ordinate Bench as cited above, we restore this issue to the file of Assessing Officer for deciding de-novo after verification the facts and material as per the ratio laid down by the Hon’ble Gujarat High Court in the case of above cited case of Adani Enterprises Ltd. As a result, this ground of appeal of the assessee is allowed for statistical purposes. ”

4.1. Respectfully relying upon the order passed by the Coordinate Bench we are disposing of the ground by setting aside the issue to the file of the Ld. AO for de novo adjudication upon giving an opportunity of being heard to the assessee and upon considering the evidence which the assessee may choose to file at the time of hearing of the matter. This ground is allowed for statistical purposes.

5.3. Respectfully following the above decision by Co-ordinate Bench of this Tribunal, this ground no. 3 raised by the Revenue is set aside to the file of the Assessing Officer for de novo adjudication by giving proper opportunity to the assessee for being hearing. Thus this ground no. 3 raised by the Revenue is allowed for statistical purpose.

6. Ground No. 4 Disallowance u/s. 14A r.w. Rule 8D.

6.1. The Ld.Counsel for the assessee submitted that this issue was set aside to the file of the Assessing Officer for fresh adjudication by Co-ordinate Bench of this Tribunal in the case of Gujarat Urja Vikas Nigam Ltd. in ITA No. 406/Ahd/2019 by order dated 14.12.2022 wherein it was held as follows:

“….4.1. Regarding grounds no. 1.0 to 1.2 namely disallowance u/s. 14A. Both the parties submitted that this issue is squarely covered in assessee’s own case by Co-ordinate Bench of this Tribunal in ITA Nos. 11 & 37/Ahd/2013 dated 22.10.2020 wherein the Hon’ble ITAT remanded the matter back to the Assessing Officer for fresh adjudication by directing as follows:

10. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, there is no ambiguity that the Learned CIT (A) has decided the issue on hand after relying on the order of his predecessor for the Assessment Year 2008-09 which was subsequently set aside by the ITAT for fresh adjudication. The relevant finding of the ITAT reads as under:

“8. On the other hand, ld. DR supported the orders of lower authorities.

9. We have heard the rival contentions and perused the material on record. In these grounds raised by the assessee and the Revenue challenge the action of ld. CIT(A). We observe that an addition of Rs.152.46 crores was sustained, made by ld. Assessing Officer which was sustained to Rs.61.46 crores by ld. CIT(A) and, therefore, assessee has raised the ground against the sustained addition of Rs.61.46 crores whereas Revenue has challenged the deletion of Rs.91 crores out of the disallowance u/s 14A of the Act.

10. In ITA No.1874/Ahd/2010 vide its order dated 20.6.2014 the Tribunal adjudicated the issue relating to disallowance u/s 14A and held as under :-

7. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer found that the assessee has earned tax free dividend income of Rs 1283.95 lakhs and that the assessee has claimed interest expenditure of Rs 18,325.41 lakhs. The assessee has not attributed any expenditure towards earning of exempt dividend income. Therefore, by invoking the section 14A read with Rule 8D he made disallowance of Rs 197.80 crores. We find that a similar issue had come up before this Tribunal in assessee’s own case in the immediately preceding Assessment Year 2006-07 wherein the Tribunal restored the matter back to the file of the Assessing Officer for adjudication afresh by observing as under:

“2. At the outset, our attention has been drawn on an additional ground of appeal raised by the Revenue Department reads as under:

“1(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition ofRs.187.97 crores u/s 14A of the Act on account of interest attributable to investment in shares without appreciating the fact that in view of Section 106 of the Indian Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee’ s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made.”

1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the addition u/s. 14A on account of interest attributable to investment in shares to the extent in view of provisions of section 14A read with Rule 8D. “

3. Learned DR has pleaded that an addition of Rs. 187.97 crores which was made u/s 14A was deleted by learned CIT(A), however, it was not adjudicated as per the grounds of appeal. Learned DR has also argued that the assessee was required to adduce evidence that all the borrowings were used for the purpose of the business and the assessee’s own surplus funds were invested in the shares. Learned DR has also informed that in A.Y. 2007-08, the addition of similar nature was upheld by learned CIT(A). He has thus pleaded that the issue being legal in nature which has emerged from the facts already on record, therefore, the additional ground deserves to be admitted for adjudication.

4. After hearing both the sides, the additional ground of the Revenue Department is hereby admitted for adjudication. At the outset, it is worth to mention that the impugned addition of Rs.18796.82 lacs was made by the AO without having any discussion in respect of the applicability of Section 14A of the IT Act. Likewise, learned CIT(A) has also not discussed the applicability of the provisions of Section 14A of IT Act, however, after considering the merits of the case, deleted the addition. With this clarification, we have examined the facts and the issue as emerged from the corresponding assessment order passed u/s. 143(3), dated 26.12.2008. It was noted by the AO that the assessee had claimed a huge amount of interest expenditure of Rs. 19360.59 lacs, as per the following bifurcation.

Particulars	(Rs. in lacs) Amount
Interest on Term Loans	8981.35
Working Capital	8184.50
Others	677.63
Bank Charges & Guarantee Fees 19435.13	591.65
Less: Interest Capitalized	74.54
	19360.59

4.1 At the same time, it was also found by the AO that the assessee had made the investment of Rs.5,47,709.74 lacs on which dividend earned was at Rs.508.18 lacs. The AO’s objection was that on one hand the assessee has diverted the huge funds towards such investment having exempted income and on the other hand borrowed huge funds of Rs.3,46,272.51 lacs on which claimed interest of Rs. 19360.59 lacs. Therefore, the AO was of the view that the assessee had diverted the borrowed funds for earning exempted income. The assessee’s contention was that the investment during the year was only Rs.102.32 lacs and rest of the investment was made in the earlier years. According to the AO, if the assessee had not made such investment either in the year under consideration or in earlier years then the assessee would not have been required to borrow interest bearing loans. The AO has placed reliance upon the case of H.R Sugar Factory, 187 ITR 366 (Aid) for the legal proposition that the assessee could have otherwise avoided its liability of interest by not giving interest free funds to its group concerns. The addition in the question was thus made by the AO in the following conclusion.

“In view of the above discussion and provision of law, the interest attributable to the investment is not allowable expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs.65725.17 lacs on investments of Rs.547709.74 lacs. However, the assessee has claimed interest expenditure of Rs.19360.59 lacs and has shown interest income of Rs.55.59 lacs and dividend income of Rs.508.18 lacs. Hence, against the interest expenditure of Rs.19360.59 lacs assessee has grown interest and dividend income of Rs.563.77 lacs. Thus, net disallowance is made of Rs.18796.82 lacs.”

5. Being aggrieved the matter was carried before the First Appellate Authority who has decided the issue in assessee’s favour in the following manner:

“Thus, the only test to be applied is that of “commercial expediency”. In the instant case, it is seen that no investment was made by the assessee company by using borrowed funds.The entire investment, except minor investment of Rs.11.25 lacs was inherited in the demerger exercise. The investment in shares was due to the restructuring carried out at the behest of GOG. The investments were in the form of shares of subsidiary companies as pan of the financial restructuring plan approved by the Government of Gujarat which was integral to the demerger. This was clearly commercially expedient for the appellant company. The business itself was viable only under the plan of restructuring, which required the company to have cross-holdings in the unbundled companies of GEB. In fact, the appellant became the holding company of the generating and transmission companies. Looking to the facts and circumstances of the case, I am of the opinion that there was no diversion of borrowed funds for non-business purposes. Accordingly, the addition of Rs. 18796.82 lacs is directed to be deleted.”

6. With this factual background, we have heard both the sides. Learned DR has primarily placed reliance on a decision of respected Special Bench of ITAT Mumbai in the case of ITO V/s. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum) (SB). Learned DR has also pleaded that in one of the assessment year, i.e., in A.Y. 2007-08 learned CIT(A) had sustained the same nature of addition. From the facts of the case, we have noted that there was re­structuring according to which erstwhile GEB was demerged into seven different companies. Post restructuring; the assessment year under consideration is the first year of operation of the assessee company. On one hand, those were he facts which were relied upon by the learned CIT(A). However, on the other hand, the AO has reproduced some of the replies of the assessee through which it was claimed that the said investment was not made by the assessee company out of the borrowed funds but from the consumers, contribution and subsidiaries. There was a reference of the annual accounts of the year 2005-06. The assessee has also informed that during the year under consideration the assessee company had invested only a sum of Rs.11.25 lacs. Rest of the investments were the share capital of the subsidiary companies as per the terms of the Financial Restructuring Plan approved by the Government of Gujarat. We have noted that the learned CIT(A) has granted relief only on the ground that the assessee company had become the holding company and the investments were in the form of shares of subsidiary companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision.

6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of “demerger” prescribed u/s.2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immediately before the demerger which was transferred. The AO has also to examine the financial position of the “resulting company”, as defined u/s.2(41A) of IT Act. In general, an undertaking of the demerged company is transferred in a demerger scheme and as a result a resulting company comes into existence. The resulting company in consideration of such transfer of an undertaking ofthe demergerd company issues shares to the share holders of the demerged company. Therefore, the responsibility of the “resulting company” was also required to be ascertained by the AO. This is the first aspect, which was not examined by the AO and the order of the Revenue Authorities are silent on this subject.

6.3 Next question is about the huge amount of interest expenditure claimed by the assessee. The AO is required to examine first the correctness of the claim. Whether the interest on term loans, bank charges and guarantee fees were in respect of the business of the assessee. Thereafter, the AO is also required to give a clear finding about the borrowings made by the assessee on which the said interest was paid. The next step is that the AO has to examine the sources of the funds which were invested for earning the dividend income. If the source of such investment is out of the interest bearing borrowings, then only the question of disallowance of interest would arise, otherwise not. On the other hand, the claim of the assessee is that there were sufficient non interest bearing reserves or surplus available. The AO is required to investigate the correctness of the claim that whether the assessee had sufficient non interest bearing fund available and in what form those were utilized by the assessee. If the assessee is in a position to demonstrate that the non-interest bearing funds have actually been invested to earn exempted income then the assessee’s claim is legally correct. Thereafter, the question of the invocation of Section 14A comes into play. As far as the applicability of the decision of Special Bench is concerned the same now stood covered by the decision of Hon’ble Bombay High Court pronounced in the case of Godrej and Boyce, 328 ITR 81 (Bom). For the sake of completeness herein below reproduced a portion of an ITAT order viz., Aditya Midcals as follows:

“5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard.

6. As far as the Assessing Officer’s action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(l)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said discussion with the exempted dividend income u/s. 10(33) of the Act. As far as the law pronounced in this regard is concerned, first of all, we have to follow a latest decision of Hon’ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT in Income tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010 order dated 12/08/2010, { now reported as 328 ITR 81(Bom) } wherein the Hon’ble High Court has upheld the constitutional validity of section 14A of the I.T. Act, 1961 and held that the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income and/or income from mutual fund which do not form part of the total income as contemplated U/S.14A of the I.T. Act, 1961. It has also been directed that the Assessing Officer can adopt a reasonable basis for effecting the apportionment. It has also been observed by the Hon’ble Court that while making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and material having a bearing on the facts and circumstances of the case.

6.1. In this judgement at the end, the Hon’ble Court has also recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon’ble Court has also pointed out the importance of Rule 8D of the I.T.Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub­sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:-

“a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter.

b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001 -2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003.

c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act.

73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form pan of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination.

Conclusion:

74. Our conclusions in this judgment are as follows;

i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);

ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;

iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid;

iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;;

v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24th March, 2008 shall apply with effect from Assessment Year 2008-09;

(vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

vii) The proceedings for Assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.”

6.4 Due to the decision of the Hon’ble Bombay High Court, it is legally correct to refer this issue back to the stage of the AO to be decided de novo as per the guidelines of the Hon’ble Court. The outcome of the above discussion is that the “Additional Ground” raised by the Revenue may be treated as allowed but only for statistical purpose.”

8. In the absence of any distinguishing features pointed out by the Departmental Representative, facts being identical, respectfully following the precedent we restore this issue back to the file of the Assessing Officer for adjudication afresh with the same directions as given by the Tribunal in the Assessment Year 2006-07 in the above quoted order. Needless to mention that he shall allow reasonable and proper opportunity of hearing to the assessee before adjudicating the issue. Thus, this ground is allowed for statistical purpose.

11. We further observe that Rule-8D of the IT Rules came into effect from Asst. Year 2008-09 with respect to provisions of section 14A of the Act which reads as follows :-

Sec. 14A. Expenditure incurred in relation to income not includible in total income.—(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.’

2. New Rule 8D :

2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a “Method for determining amount of expenditure in relation to income not includible in total income”. Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted.

2.2 Broadly stated, the new Rule 8D provides as under :

(i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with :

(a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or

(b) The claim made by the assessee that no expenditure has been incurred for earning exempt income.

(ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts :

(a) The amount of expenditure directly relating to income which does not form part of total income.

(b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula :

A x B
C

A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above.

B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year.

C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term ‘Total Assets’ means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.

(c) An amount equal to 1/2 % of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year.

12. We also observe that ld. Assessing Officer applied the facts and figures of the assessee company into the method provided under Rule 8D of the IT Rules because assessee was having an average investment of Rs.5529.57 crores , interest paid during the year at Rs.131.22 crores and exempt income of Rs.249 crores. Going through these figures ld. Assessing Officer felt appropriate to applying the method of Rule 8D but did not look into the following facts :-

(i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs.5580.20 crores considering all investment in subsidiary companies at Rs.5336.43 crores, investment in other companies at Rs.243.69 crores and balance in petty investment.

(ii) Opening balance of investment as on 1.4.2007 stood at Rs.5477.16 crores.

(iii) Few investments were made during Financial Year 2005-06 to 2007-08 and in subsidiary companies and funds for the same were partly received from State Government as equity and remaining from net profit earned.

(iv) Interest expenditure of Rs.131.32 crores represents mostly the interest paid on bill discounting of IPPs and working capital loan from banks which are specifically meant for the business purpose; and

(v) Total exempt income earned by assessee during the year stood at Rs.249 crores.

13. We observe that ld. Assessing Officer has made disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There are series of judgments of the co-ordinate benches that the disallowance u/s 14A of the Act should not exceed the exempt income earned during the year and also decisions wherein the disallowance u/s 14A of the Act on account of interest expenditure are held to be incorrect if the assessee has sufficient equity and general reserve to cover the investments.

14. We are, therefore, of the view that applying the decision of the co-ordinate bench in assessee’s own case in ITA No.1874 & 1821/Ahd/2010 for Asst. Year 2007-08 is dated 20.6.2014 the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes.

15. Now we take ground no.3 of assessee’s appeal which reads as below :-

3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs.61,45,72,000/- on account of disallowance made under section 14A of the Income Tax Act, 1961.

16. At the outset ld. AR submitted that this ground relates to the disallowance under section 14A of the Act due to which book profit u/s 115JB was enhanced by ld. Assessing Officer and the fate of this ground depends on the decision to be taken for ground no.1 raised by them.”

10.1 As the facts of the case on hand are identical to the facts of the case as discussed above which has been set aside to the file of the AO for fresh adjudication as per the provisions of law by the ITAT as discussed above. Respectfully following the order of this Coordinate Bench in the own case of the assessee, we set aside the issue on hand to the file of the AO for fresh adjudication in terms of the finding of the ITAT in its own case for the Assessment Year 2008-09 (Supra) as well as in accordance to the provisions of law. Hence, the ground of appeal of the assessee and the Revenue are allowed for the statistical purposes.

4.2. Respectfully following the above decision of our Co-ordinate Bench, for this assessment year 2015-16, we set aside the matter back to the file of Assessing Officer for fresh adjudication by examining the facts and figures and calculate the disallowance u/s. 14A of the Act.

6.2. Respectfully following the above decision of our Co-ordinate Bench for this assessment year 2012-13, we hereby set aside the matter to the file of the Assessing Officer for fresh adjudication by examining the facts, figures and calculate the disallowance u/s. 14A of the Act in accordance with law.

7. Ground No. 5: Deletion of additions while computing book profit u/s. 115JB of the Act on the following counts:

(a) Prior period Expenses of Rs. 7.74 crore and prior period income of Rs. 48,000/-

(b) Addition of capital grant of Rs. 47.17 crore

(c) Addition of Rs. 5.75 crore being excess depreciation

(d) Disallowance u/s. 14A

7.1. (a) Prior Period Expenses, this issue is decided in favour of the assessee in the case of Gujarat energy Transmission Corporation Ltd. in ITA No. 852/Ahd/2018 by order dated 24.08.2022 wherein it was held as follows:

16.1. The brief facts leading to the issue is this that the Ld. AO made addition of Rs. 1,24,73,000/- to the Book Profit under Section 115JB of the Act on account of prior period expenses is also added back to the book profit of the assessee.

16.2. Before the First Appellate Authority the assessee submitted that in assessee’s own case for A.Y. 2012-13 the Ld. CIT(A) has deleted the addition. In that view of the matter considering the order dated 22.09.2015 passed by his predecessor, the Ld. CIT(A) hold that the said addition cannot be made to the Book Profit as this item has not been mentioned in any of the Clauses of the Explanation to Section 115JB of the Act. He, therefore, directed the Ld. AO to delete such addition. He has further relied upon the order dated 15.04.2011 passed by the Co-ordinate Bench in assessee’s own case in ITA No. 1777/Ahd/2009 & 2028/Ahd/2009 for A.Y. 2006-07.

16.3. We have further considered the order passed by the Chandigarh Bench in the case of M/s. Ashirwad Hgiene Pvt. Ltd. vs. ITO in ITA No. 72/Chd/2014 for A.Y. 2010-11 while deciding the issue in favour of the assessee the Coordinate Bench was pleased to observe as follows:

“In the present case the undisputed fact is that the Net Profit shown in the profit & loss account has been arrived at after reducing the prior period expenses. As discussed above, this Net Profit, is in compliance with Schedule-VI Part-II of the Companies Act and the prescribed Accounting Standard, i.e. AS-5. No adjustment, on account of prior period expenses, is required to be made to the same. Moreover, even as per Explanation—1 to section 115JB, no adjustment on account of prior period expenses is required to be made to the net profits reflected in the profit and loss account of the assessee. Therefore we hold that no adjustment of prior period expenses is to be made by the assessee to arrive at the book profits for the purpose of levying tax u/s 115JB. The reliance placed by the Ld. DR on the decision in the case of Sree Bhagwathy Textiles Ltd. (supra) is distinguishable on facts, since in that case it was found the assessee had debited the prior period expenses to the Profit and Loss Appropriation account. The Court in that case held that profit as per Profit and Loss Account is to be taken for computing book profits and any adjustments thereafter in the appropriation account are not to be considered. Since in the present case the prior period expense have been debited to the Profit and Loss Account and not appropriation account the ratio propounded therein will not apply to the present case.

7. In view of the above we hold that no adjustment on account of prior period expenses amounting to Rs. 46,64,504/- is to be made in the net profit of the company for arriving at the book profits u/s 115JB of the Act. The appeal of the assessee is therefore allowed.”

16.4. Having regard to the facts and circumstances of the case and the judgments passed by the different Bench. We do not find any reason to interfere with the order passed by the Ld. CIT(A) in deleting addition. The ground of appeal preferred by the Revenue is found to be devoid of any merit and hence dismissed.

7.2. The Ld. D.R. appearing for the Revenue could not contravent the above decision of this Tribunal. Thus the ground raised by the Revenue is devoid of merits and the same is rejected and addition on this account is deleted.

7.3. (b) Addition of capital grant of Rs. 47.17 crores: This issue is also decided in favour of the assessee in the case of Gujarat energy Transmission Corporation Ltd. in ITA No. 852/Ahd/2018 by order dated 24.08.2022 wherein it was held as follows:

“….17.1. The assessee company has received capital grant of Rs. 2969.47 lacs which was transferred to the Reserve & Surplus account. The Id. Principal CIT was of the view that the same should have been reduced from the cost of assets and since the same has not been done, the company has claimed excess depreciation thereby offering lesser Book Profits.

17.2. We find that the ld. Principal CIT has ignored the fact that the grant in question was received in terms of the Financial Restructuring Plan from the Government and the company has accounted Government Grants in terms of the mandatory Accounting Standard (AS)-12 on “Accounting for Government Grants” prescribed by the ICAI. The relevant part of AS-12 reads as under:-

10. Presentation of Grants of the nature of Promoters, contribution 10.1 Where the government grants are of the nature of promoters ‘ contribution, i.e., they are given with reference to the total investment in an undertaking or by way of contribution towards its total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve which can be neither distributed as dividend nor considered as deferred income.

17.3. The relevant Office Note needs special mention here:-

Sub: Allocation of FRP Grant as Share Capital contribution to subsidiaries.

At the Board Meeting held on 29.06,2009, Board approved to allocate the FRP grant of Rs.250 crores being given by Govt. of Gujarat to GUVNL for system strengthening as Share Capital contribution from GUVNL to subsidiaries. Board further authorized MD, GUVNL to decide the quantum of such equity contribution to each of the subsidiaries. As far as DISCOMs are concerned, their equity requirement is being met through consumers’ contribution and as such there is hardly any equity requirement which is required to be contributed by GUVNL. Moreover, the capita! grant being released by GoG to GUVNL for various DISCOM related projects, the Board at the meeting held on 04.01.2010 has approved to allocate the same to DISCOMs in the form of Share Capital from GUVNL. Since the DISCOM related grants along with consumers ‘ contribution meet with the equity requirement of DISCOMs it is proposed not to allocate the FRP grant to DISCOMs for the F.Y. 2009-10.

As regards to GETCO, they have incurred capital expenditure of Rs.650 crores upto January’10. Against the said capital expenditure, they have received consumers’ contribution to the tune of Rs.87 crores. Further, the Govt. grant creation of transmission lines and sub-stations ofRs.151 crore (RE) is By meant for GETCO. In addition for creation of new Sub-Stations in areas under Sagarkhedu Yojana, Govt. of Gujarat has given Share Capital Contribution of Rs.37.20 crores to GUVNL. The said grant and share capital contribution will be given to GETCO as share capital contribution from GUVNL. In addition, in the revised estimate, Govt. has made a provision ofRs.50 crores as Equity Share Capital contribution to GETCO directly (without routing through GUVNL). Thus, GETCO is already having Equity Share Capital contribution to the tune of Rs. 238.20 crores in addition to consumer’s contribution of Rs. 87 crores whereas in case of GSECL whose equity requirement is substantially higher than that of GETCO, they have been given only Rs. 60.77 crores as Equity Share Capital contribution from GUVNL.

Considering the above position, it is proposed to allocate entire FRP grant of Rs. 250 crores to GSECL as Equity Share Capital contribution from GUVNL for their projects.

17.4. Considering the accounting treatment in the light of the Accounting Standard-12, we do not find any error on facts or in law. Therefore, to this extent the findings of the Id. Principal CIT are reversed.

7.4. Respectfully following the same, this ground of appeal raised by the Revenue is hereby dismissed and the addition is deleted.

7.5. Addition of Rs. 5.75 crores being excess depreciation: The Ld. Counsel submitted that this issue of excess depreciation is decided in favour of the assessee in the case of Kansara Popatlal Tribhuvan Metal Pvt. Ltd. vs. PCIT in ITA No. 1057/Ahd/2015 by order dated 22.07.2022 which is followed in ITA No. 412/Ahd/2018 wherein it was held as follows:

6. We have heard the rival contentions and perused the material on record on this ground. In the case of Malayala Manorama Co. Ltd v. CIT [2008] 169 Taxman 471 (SC), the facts were that in the profit and loss account for the relevant assessment year, the assessee had debited depreciation at the rates prescribed by the Income-tax Rules, 1962. However, the Assessing Officer was of the view that for purposes of section 115J, depreciation should have been calculated in terms of the Companies Act, 1956 and Schedule XIV thereof. Accordingly, he disallowed the assessee’s claim of depreciation charged at the rates prescribed by the Income-tax Rules. The Commissioner (Appeals) as well as the Tribunal allowed the assessee’s claim and directed the Assessing Officer to allow the claim of depreciation as per the Income-tax Rules for the purposes of computing the book profit under section 115J. On reference, the High Court reworked the profits of the assessee under section 115J by substituting the rates of depreciation prescribed in Schedule XIV of the Companies act, 1956. In appeal, the Supreme Court held that where assessee was consistently charging depreciation in its books of account at rates prescribed in Income-tax Rules and accounts of assessee had been prepared and certified as per provisions of 1956 Act, Assessing Officer would not have any jurisdiction under section 115J to rework net profits of assessee by substituting rates of depreciation prescribed in Schedule XIV to 1956 Act. We further note that the jurisdictional Gujarat High Court in the case of DCIT v. Vardhman Fabrics (P.) Ltd. [2002] 122 Taxman 375 (Gujarat) has also adjudicated on this issue in favour of the assessee. The brief facts of the case were that assessee calculated depreciation on plant and machinery at 33.33 per cent as permissible under the Income-tax Rules, 1962 as against 30 per cent depreciation required to be calculated under Schedule XIV of the Companies Act. The Commissioner, acting under section 263, held that rate of depreciation claimed was in excess of the rate under the Companies Act and that excess was to be disallowed. The Tribunal held that Circular of Company Law Board lays down minimum rate of depreciation for purpose of distribution of dividend and company may decide to claim higher depreciation on basis of a bona fide technological evaluation and proper disclosure is to be made by way of a note forming part of annual accounts. The Tribunal further held that, in instant case, proper disclosure was made by way of a note to annual statement of accounts and rates claimed on basis of income-tax records were based on bona fide information of Board of Directors as contained in aforesaid minutes of meeting of Board of Directors. In appeal, the High Court held that the Tribunal was right in holding that depreciation worked out by assessee on basis of income- tax records and debited to profit and loss account was not violative of provisions of Companies Act and ITAT has not erred in cancelling order passed by Commissioner under section 263 of the Act. Again, in the case of CIT Ludhiana v. Sona Woollen Mills (P.) Ltd. 2007] 160 Taxman 22 (Punjab & Haryana), assessee claimed depreciation as per provisions of income tax Act for computing quantum of income under section 115J. The Assessing Officer rejected claim of assessee on ground that depreciation for purposes of section 115J was permissible as per Schedule XIV of Companies Act. The Commissioner (Appeals) allowed claim of assessee holding that depreciation provided under Companies Act was minimum but there was no bar to higher depreciation being claimed by assessee and, thus, for purposes of section 115J, depreciation actually debited could be allowed. The High Court held that in view of Supreme Court decision in Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562, Commissioner (Appeals) was justified in holding that the assessee is eligible to claim higher rate of depreciation and Income Tax Act. The Delhi ITAT in the case of HAL Offshore Ltd [2019] 108 taxmann.com 390 (Delhi – Trib.) held that where depreciation provided in profit and loss account is at same rate as provided for purpose of profit and loss account being laid before Annual General Meeting (AGM), no addition could be made to assessee’s income on ground that while calculating total income as per section 115JB, assessee had adopted rate of depreciation as per Income-tax Act instead of Companies Act in profit and loss account. The Andhra Pradesh High Court in the case of Deccan Tools Industries (P.) Ltd.[2014] 52 taxmann.com 55 (Andhra Pradesh) held that where for purpose of section 115J, assessee claimed depreciation at rates provided under Income-tax Rules, action of Assessing Officer in redrawing profit and loss account and adopting rates prescribed under Companies Act, was totally unauthorized.

6.1 In view of the various decisions cited above, we are of the considered view that in the instant facts, PCIT erred in facts and law in holding that the assessment order was erroneous and prejudicial to the interests of the revenue so far as ground number 3 of the assessee’s appeal is concerned.

7.6. Respectfully following the above decision, therefore the ground raised by the Revenue is devoid of merit and the same is hereby rejected.

7.7. Disallowance u/s. 14A and adjustment in book profit: This issue is covered in favour of the assessee in assessee’s own case in Tax Appeal No. 63 of 2020 vide judgment dated 17.02.2020 relating to Assessment Year 2010-11 wherein Jurisdictional High Court held as follows:

“….4. The question No.2[b] proposed by the Revenue is with regard to deleting the addition under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961. The Assessing Officer while computing taxable income under Section 115JB of the Act, 1961 also added addition made under Section 14A of the Act, 1961 to the book profit.

5 The assessee being aggrieved by the addition made by the Assessing Officer under Section 14A while computing book profit of the assessee under Section 115JB of the Act, 1961 preferred an appeal before the CIT(A). The CIT(A), however, deleted addition made in the book profit on the ground that no addition could have been made in view of the decision of this Court in the case of Alembic Ltd (Tax Appeal No.1249 of 2014) and the provisions of sub-sections (2) and (3) of Section 14A cannot be made applicable to clause (f) of Explanation to Section 115JB of the Act, 1961.

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

7 The issue as to whether the addition made under Section 14A of the Act, 1961 while computing book profit under Section 115JB of the Act, 1961 is no more res integra. Accordingly, this Court in the case of Principal Commissioner of Income Tax vs. Gujarat Fluorochemicals Ltd [Tax Appeal No.28 of 2019 decided on 17th June 2019] has dismissed the appeal filed by the Revenue by holding as under:

“22. The third question proposed by the revenue is in context with the adjustment made on account of the disallowance under section14A in computing the book profit. In this context, the findings recorded by the ITAT are as follows:

……………………………………….

23. We take notice of the fact that in context with the third proposed question, the ITAT placed reliance on the following decisions:

(1) CIT Vs. Alembic Ltd. (Tax Appeal No.1249/2014)

(2) CITI Vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 358 ITR 323

24. The issue is squarely covered and in our opinion, no error could be said to have been committed by the ITAT in taking the view that no addition in the book profit can be made on the basis of the calculations worked out under section 14A of the Act.”

7.8. Respectfully following the above judicial precedent, the ground raised by the Revenue is devoid of merits and the same is hereby dismissed.

8. In the result, the appeal filed by the Revenue in ITA No. 3165/Ahd/2015 is hereby partly allowed.

ITA No. 3125/Ahd/2018 (Assessee’s appeal relating to A.Y. 2012-13)

9. The Ground of appeal raised by the Assessee in ITA No. 3125/Ahd/2018 is relating to A.Y. 2012-13 reads as under:

1.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in setting aside the additions of 793,98,000/- with the direction to re- verify the claim despite the fact that the documents establishing the facts were submitted at the time of appeal hearing.

2.0 The Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed additions of 47,17,19,100/- being 15% of the year-end balance of Capital Grants amounting to 31427.94 lacs on the ground that the appellant should offer the same as income.

The Commissioner of Income Tax (Appeals) failed to appreciate that the appellant has not received any fresh grant during the year and 15% of the original grant has already been added as income in the immediately preceding year. Hence the Commissioner of Income Tax (Appeals) has erred by confirming the additions of 15% of the total grant received without reducing the amount already taxed as income in earlier year.

The Commissioner of Income Tax (Appeals) has not considered the provisions of section 43(1) of the IT Act and has wrongly considered the grant as being received for meeting the cost of Fixed Assets.

3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of Assessing Officer in treating the interest income amounting to 456,05,000/- as Income from Other Sources as against the Business Income and thereby disallowing the claim of set off of business losses of earlier years against the said income.

4.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of prior period expenses amounting to 248,000/- without appreciating the fact that such expenditure crystallized during the year and that the same has never been claimed in earlier years.

5.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the invoking of provisions of section 14A of the IT Act. The learned Commissioner (Appeals) has restricted the disallowances made under that section by treating the interest paid (excluding interest on term loans) as being attributable to the dividend income..

6.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(1)(c) of the IT Act.

7.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B and 234C of the Income Tax Act, 1961.

8.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal.

10. Ground no. 1: Disallowance of guarantee fees paid to Govt. of Gujarat. This issue we have already held in this common order at Para 3 to 3.4 that the guarantee fees is held to be revenue in nature. Thus the ground raised by the Assessee is hereby allowed.

11. Ground No. 2: Addition of Rs. 47.17 crores being 15% of year­end balance of capital grant. The Ld. Counsel for the assessee submitted that this issue was remanded back to the file of the A.O. with specific direction by the Co-ordinate Bench of this Tribunal in Gujarat Energy Transmission Corporation Ltd. in ITA No. 753/Ahd/2018 by order dated 24.08.2022 wherein it was held as follows:

7. We find that on the identical issue as submitted the Ld. A.R. in ITA Nos. 2885 & 2886/Ahd/2015 the Coordinate Bench has been pleased to set-aside the issue to the file of the Ld. AO for adjudication afresh for verifying the proportionate amount of grant relevant to different assets and upon apply the actual rate of depreciation relates to those assets. The relevant observation of the Coordinate Bench is as follows:

“4. During the course of assessment, the Assessing Officer noticed that assessee has shown deferred government grant subsidies amounting to Rs. 81,113.31 lacs as on 01-04-2011 and Rs. 96,653.59 lacs at the end of the year as on 31st March, 2012 and transferred an amount of Rs. 12868.89 lacs to the P & L account. However, the Assessing Officer was of the view that in the earlier years, the assessee has transferred to the P & L account 15% of the total grant yearend balance therefore it was asked to explain why not 15% of the total grant yearend balance amount should be transferred to the total income. The assessee explained that the Government disburse the financial assistance in the form of Government grants and the benefit from the same is accrued to the assessee for over a long period of time therefore the amount is written back every year @ 11.75% of the yearend balance and the same was shown as income as per the accounting policy of the company. It was further submitted that up to financial year 2011-12 the assessee company has written back such amount as income @ 10% of the yearend balance. The Assessing Officer has not accepted the submission of the assessee and stated that the subsidy grant received from the state government was in the nature of capital grant and it should have been reduced from the capital asset as per explanation 10 of section 43(1) of the Act. The Assessing Officer has further stated that the government of Gujarat provide capital grant to GUVNL and GUVNL further passes the grant to its subsidiary i.e. assessee company which was involved in transmission of power and stated that in the case of M/s. Dakshin Gujarat Vij Co. Ltd. the issue has been confirmed by the ld. CIT(A) @ 15%. grant to offer for the P & L A/c. out of every yearend balance. The detailed break-up of the balance government grant/subsidy available to the assessee company was given at page no. 7 of the assessment order totaling to the amount of Rs. 1,03,081.53 lacs out of which the assessee has taken to profit and loss account grant amounting to Rs. 12,868.89 lacs. However, the Assessing Officer has computed the disallowance at 15% of the total grant yearend balance of Rs. 1,03,081.53 lacs which worked out at Rs. 15,462.22 lacs. Accordingly, the remaining amount of Rs. 25,93,63,950/- was added back to the income of the assessee.

5. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee by referring that similar addition was upheld by his predecessor in the case of the assessee for assessment year 2009-10.

6. During the course of appellate proceedings before us, the ld. counsel has contended that similar issue arised in assessee’s own case for assessment year 2008-09 and the Hon’ble ITAT Ahmedabad vide ITA No. 704/Ahd/2012 for assessment year 2008-09 has remanded the matter back to the file of Assessing Officer directing him to work out the disallowance by taking the rate of depreciation applicable on various assets financed through impugned capital grants. In this regard, the ld. counsel has further referred the decision of Co­ordinate Bench of the ITAT in the case of assessee itself for assessment year 2009-10 vide ITA No. 652/Ahd/2013 wherein on the basis of aforesaid decision of the ITAT for assessment year 2008-09 the matter was restored to the file of the Assessing Officer. The ld. Departmental Representative was fair enough not to controvert these undisputed facts reported by the learned counsel.

7. We have gone through the decision of Co-ordinate Bench of the ITAT vide ITA No. 652/Ahd/2013 for assessment year 2009-10 wherein after referring the decision of Co-ordinate Bench of the ITAT vide ITA No. 704/Ahd/2012 for assessment year 2008-09 the issue was restored to the file of Assessing Officer for re-adjudication after verification of the proportionate amount of grant relating to the different assets and upon applying the actual rate of depreciation relate to those assets. The relevant part of the decision of the Co-ordinate Bench of the ITAT is reproduced as under:-

“12. Ground No.2 The assessee has challenged the confirmation of addition of Rs.24,17,88,400/- on account of Capital Grants & Subsidies and Consumers’ Contribution on the ground that the appellant should transfer 15% of the total Grants/subsidies/consumer contribution received during the year as against 10% offered by the appellant.

13. The Learned AO finalized the issue by making an addition of Rs.24,17,88,400/- which was, in turn, confirmed by the Learned CIT(A) and added to the total income of the assessee. While confirming the addition, the Learned CIT(A) observed as follows:

“6.3 I have considered the submissions. It has been accepted by the appellant that the grants were for capital purpose and for capital projects specified by the Government. In Schedule-3 of the printed balance sheet as on 31.3.2009, it is clearly mentioned that grants were towards cost of capital assets. Appellant’s contention that the grants were not actually for meeting cost of assets is therefore not at all tenable. After insertion of Explanation 10 below section 43(1) by the Finance (No.2) Act, 1998 w.e.f. 1.4.1999, decisions relied upon by the appellant in the case of P. 3. Chemicals etc. are no longer applicable and cost of assets met directly or indirectly by the Central Government or State Government in the form of subsidy or grant or reimbursement (by whatever name called) is not to be included in the “actual cost of asset” to the assessee. Accordingly, depreciation is to be allowed only after making necessary adjustment in “written down value”/”actual cost” of block of assets in accordance with Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd. for A.Y.2006-07 referred to by the Assessing Officer, CIT(A) distinguished the treatment to be meted out to revenue grants and capital grants and held that revenue grants are to be taxed in entirety in the year of receipt and capital grant towards assets are to be reduced from “actual cost” of assets as per Explanation 10 below section 43(1). In the case of Dakshin Gujarat Vij Co. Ltd., after noting that grants were only towards cost of capital assets, CIT(A) had held that such grants ought to have been reduced from the cost of capital assets and by not doing so, extra depreciation @ 15% of grants had been claimed. Since 10% of the grants had already been offered as income by the assessee, in the decision in the case of Dakshin Gujarat Vij Co. Ltd., CIT(A) had directed addition to be made after reducing income already offered from 15% of the grants. The AO has made addition in the present case as per this appellate order. Hence following the same, the addition made by the AO is upheld and this ground of appeal is dismissed. “

14. However, at the vary onset of the proceeding, the Learned AR has taken us to the order passed by the Co-ordinate Bench in ITA No. 704/Ahd/2012 for A.Y. 2008-09 in assessee’s own case where we find that the issue has been set aside to the file of the Learned AO for adjudication afresh after verifying proportionate amount of grant relating to different asset. The Learned AR prayed for similar relief. The argument advanced by the Learned AR has been failed to be contradicted by the Learned DR. We find following observation was made by the Hon’ble Co-ordinate Bench while granting relief to the assessee:

15. The ground no. 3 of the appeal of the assessee is directed against the order of the CIT(A) in confirming the action of the AO in transferring 15% of the capital grants as income although the disallowance made under this head has been restricted to Rs.18,93,11,850/- as against the disallowance of Rs.30,97,61,800/- made by the AO.

16. The brief facts of the case are that on verification of subsidies and grants, the AO observed that the assessee has shown deferred government grants, subsidies, contribution at Rs.7305.70 lakhs as on 1.4.2007 and the assessee had shown Rs. 15941.67 lakhs at the end of the year i.e. as on 31.3.2008. On show cause by the AO to explain the treatment in accounts of the subsidy, grants the assessee stated that during the year capital grant received from Government of Gujarat and other. The assessee submitted that in order to improve various functions associated with the generation, transmission and distribution of electricity, and also because the PSUs connected with power section were making consistent losses, the Government decided to introduce reforms in the direction of State PSUs. Accordingly, under the provision of Gujarat Electricity Industrial (Reorgnisation & Regulation) Act, 2000, the erstwhile GEB was split into seven companies, for the purpose of financial restructuring plan, and the approval was accorded to provide some financial/capital support to GUVNL. The grant was given in terms of the power reforms for the overall development of the power sector. Such grant was not granted to actually meet the cost of assets. Further, the grant was given to the holding company, GUVNL and then it was allocated to the assessee company, one of the subsidiary companies. The assessee was not entitled to an amount beyond a certain limit, even if it is spent large amount on purchase of fixed assets. Further, the grant was not with reference to any particular fixed assets. It was further submitted that the resolution sanctioning the grant no where indicated that the grant was meant to offset the cost of the capital assets purchased by the company. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs. P.J. Chemicals Ltd., 121 CTR 201, wherein the decision of the Gujarat High Court in the case of CIT Grace Paper Industries P. Ltd., 83 CTR 1, which was affirmed by the Hon’ble Supreme Court by observing that the amount of subsidies and grants received by the assessee cannot be reduced from the cost of assets. It was further submitted that the subsidy received under scheme cannot be reduced from the actual cost of the assets by applying the provisions of section 43(1) of the Income Tax Act. The AO did not accept the submission of the assessee and held that the submission of the assessee that the grant was not capital in nature, is factually incorrect, and from the resolution, it was clear that the grant received from the State Government was in the nature of capital grant and it should have been reduced from the capital assets. The decisions quoted by the assessee are not applicable after insertion of Explanation 10 of section 43(1) of the Act, as they pertained to earlier years prior to insertion of Explanation 10 of section 43(1) of the Act. After insertion of Explanation 10 of section 43(1) of the Act, the position of law was very clear. Since the assessee failed to reduce the capital grant against the cost of capital assets, and claimed excess depreciation, which was disallowed and worked out at 15% of the capital assets.

17. On appeal, the CIT(A) held that in assessee’s case, 10% of grant under three heads namely “Subsidy towards cost of capital assets”, “Grants towards cost of capital assets” and “Consumer contribution for capital assets” i.e. the grants appearing in Schedule -3 of the balance sheet as on 31.3.2008 were offered for tax. The amount of grant on which 10% was calculated was on the opening balance of grants ofRs.73,05,70,492/-, and the grants received during the year was Rs.103,56,34,2267-, aggregating to Rs. 176,62,04,718/-. As these grants were towards cost of capital assets, 15% of the same should have been reduced from the depreciation claimed on account of making adjustment in the ‘actual cost’ of assts as per Explanation 10 below section 43(1). Since the assessee has already offered for tax, 10% of the opening balance of grants plus grants received during the year under these three heads of Schedule-3 grants, such amount offered for tax was to be reduced from the excess depreciation to be disallowed at the rate of 15% of Rs.176,62,04,718/- i.e. Rs.26,49,30,708/-. The net disallowance on this count worked out Rs.26,49,30,7087- minus Rs.17,20,37,655/-, the amount already offered for taxation i.e. Rs.9,28,93,053/-. Since no portion of grant of Rs.6427.94 lakhs being capital grant for capital support appearing in Schedule-2 of the balance sheet as on 31.3.2008 was offered as income nor it was reduced from the cost of assets, 15% of the same i.e. Rs.964.191 lakh needed to be disallowed as excess depreciation claimed in respect of the same. The total disallowance towards excess depreciation, therefore, worked out to Rs. 9.289 crores plus Rs.9.641 crores i.e. Rs.18.93 crores. Thus, instead of net addition of Rs.30,97,61,800/- made by the AO, addition of Rs. 18.93 crore was directed to be made on this count.

18. Before us, the AR of the assessee argued that uniform rate of 15% cannot be applied for making disallowance. He submitted that the grant should be apportioned according to the value of the asset given in the balance sheet. He argued that the rate of depreciation on land was zero percent, building was 5% and the plant & machinery was 15%, and hence, the disallowance at the uniform rate at 15% is not justified.

19. On the other hand, the DR argued and submitted that the order of the CIT(A) was correct, and he after appreciating the entire facts had reduced the disallowance from Rs.30.97 crores to Rs.18.93 crores.

20. We find that in the instant case, the CIT(A) held that excess depreciation claimed on account of capital grant comes to Rs. 18.93 crores being 15% of Rs.176,62,04,718/-, i.e. Rs.26,49,30,708/- minus Rs.17,20,37,655/-, which amounts to Rs.9,28,93,053/-, and 15% ofRs.6427.94 lakhs amounting to Rs.964.191 lakh. The submissions of the assessee before us is that the uniform rate of 15% adopted by the CIT(A) is not justified. As per provisions of section 43(1) of the Act, the capital grant should be reduced from the cost/WDV of the relevant asset, and thereafter the depreciation is to be calculated. Thus, the capital grant receipt in respect of asset, on which depreciation is allowable at the rate different from 15% should be worked out as per the applicable rate. The DR could not point out any mistake in the above submission of the assessee, which we find is in accordance with law. We, therefore, set aside the orders of the lower authorities on this issue, and restore the matter back to the file of the AO for adjudication afresh after verifying the proportionate amount of grant relating to different asset, and applying the actual rate of depreciation which relate to these assets. Thus, this ground of appeal of the assessee is allowed for statistical purpose.

Hence, in the absence of any changed circumstances as it appears from the records, we find no other alternative but to remit the issue to the file of the Learned AO for re-adjudication of the same and to pass order upon verification of the proportionate amount of grant relating to different assets and upon applying the actual date of depreciation relates to those assets. Hence, this ground of appeal preferred by the assessee is allowed for statistical purposes.”

After considering the above cited decisions of Co-ordinate Benches of the ITAT in the case of the assessee itself we restore this issue to the file of Assessing Officer for re-adjudication as directed above after verification of the proportionate amount of grant relating to different assets and upon applying the actual rate of depreciation relates to those assets, therefore, this ground of appeal is allowed for statistical purposes. ”

7.1. Relying upon the observation and the decision taken by the Coordinate Bench and in order of consistency, we find it fit and proper to remand the issue to the file of the Ld. AO for re-adjudication of the same and to pass orders upon verification of the proportionate amount of grant relating to different assets and upon applying the actual rate of depreciation relates to those assets and to pass orders accordingly. This ground of appeal preferred by the assessee is allowed for statistical purposes.

11.1. Respectfully following the same, this issue is remitted back to the file of the Assessing Officer for fresh adjudication by giving proper opportunity to the assessee. Thus Ground No. 2 filed by the Assessee is allowed for statistical purpose.

12. Ground Nos. 3, 4 & 5 raised by the assessee are identical issues to the Ground Nos. 2, 3 & 4 raised by the Revenue, the same are also disposed of accordingly as held in Para 4 to 6.2 of this common order.

13. Ground Nos. 6, 7 & 8 are initiation of penalty proceedings u/s. 271(1)(c) and charging of interest u/s. 234B & 234C of the Act which are consequential in nature and does not require specific adjudication.

14. In the result, the appeal filed by the Assessee in ITA No. 3125/Ajhd/2015 is partly allowed.

ITA No. 849/Ahd/2018 (Revenue’s appeal relating to A.Y. 2014-15)

15. The Ground of appeal raised by the Revenue in ITA No. 849/Ahd/2018 is relating to A.Y. 2014-15 reads as under:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in by directing the AO to work out the revised disallowance u/s. 14A r. w.r. 8D by excluding the interest paid on term loan subject to verification that claim of interest was in relation to term loans by overlooking rule SD(ii) where it is specifically mentioned the method for determination of amount of expenditure incurred by way of interest during the year which is not directly attributable to any particular income.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow the Guarantee fee after verification disregarding the applicable statutory provisions contained under S 37 of the I.T.Act which do not allow any expenditure of capital nature.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to treat the interest income! miscellaneous receipts of Rs. 5124.64 lacs as business income instead of income from other sources without appreciating the fact that the receipt is not covered in clauses (i) to (vii) of S 28 of the Income tax Act under which such income is charged.

4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the following addition made in book profit:

Prior period expenses of Rs. 722.74 lacs
Excess depreciation of Rs. 6222.00 lacs
Capital Grants and subsidies amounting to Rs. 47,17,19,100!-
Disallowance u!s 14A Rs. 1,26,44,689!-
Liquidated Damages 4980 Lacs

5. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the fact that the issue of liquidated damages, in the case of assessee itself is decided in four of Revenue in the A.Y. 2013­14 and earlier years.

6. The appellant craves leave to add to, amend or alter the above grounds as may be deemed

16. Ground No. 1: Disallowance u/s. 14A read with Rule 8D. This issue is already set aside to the file of the Assessing Officer for fresh consideration vide Para 6 to 6.2 of this common order for the earlier Assessment Year 2012-13. For the present Assessment Year 2014-15 also, the issue of disallowance u/s. 14A r.w. Rule 8D is set aside to the file of the Assessing officer for fresh consideration, however by giving adequate opportunity to the assessee. Thus Ground No. 1 raised by the Revenue is partly allowed.

17. Ground No. 2: Guarantee Fees. This issue is also considered by us in Para 3 to 3.4 of this common order and held that the guarantee fees is directed to be allowed as Revenue expenditure. Applying the same principle for this assessment year, the ground no. 2 filed by the Revenue is hereby dismissed.

18. Ground No. 3: Treatment of interest income/miscellaneous receipts as held by the A.O. as “income from other sources” whereas claimed by the assessee as “business income”. This issue is also considered by us in this common order at Para 4 to 4.2, wherein we have set aside the issue to the file of the Ld. CIT(A) for reconsideration. Respectfully following the same, this ground is set aside to the file of Ld. CIT(A) for reconsideration and pass order in accordance with law. Thus Ground no. 3 raised by the Revenue is allowed for statistical purpose.

19. Ground No. 4: Deletion of additions while computing book profit u/s. 115JB of the Act on the following counts:

(a) Prior period expenses of Rs. 722.74 lacs
(b) Excess depreciation of Rs. 6222.00 lacs
(c) Capital Grants and subsidies amounting to Rs. 47,17,19,100/-
(d) Disallowance u/s 14A Rs. 1,26,44,689/-
(e) Liquidated Damages 4980 Lacs

19.1. The Ld. CIT(A) considered the above issue and held as follows:

“…My predecessor vide order dated 21.08.2015 in the case of the appellant itself in AY 2012-13 contained in Appeal No. CAB-1/301/14015 after relying upon the decision of Hon’ble ITAT, in the case of ACIT vs. Gujarat State Energy Generation Ltd. ITA No. 1777/Ahd/2009 and 2028/Ahd/2009 (AY 2006-07) dated 15.04.2011 has held that the addition of capital grant and subsidies, prior period expenses and prior period income, excess depreciation as per CERC norms and disallowance u/s 14A made under normal provisions, cannot be made to the book profit u/s 115JB because they are not covered by any of the items specifically mentioned in the Explanation 1 of Section 115JB(2). Similarly, disallowance of liquidated damages is also not covered in the items specified u/s 115JB(2). Moreover, some of the additions made under normal provisions stand already deleted and hence, the same cannot be added in the book profit u/s 115JB on that ground also. Since, the facts are almost identical in this year also, I respectfully following the order of my predecessor, hold that the above mentioned additions cannot be made to the book profit u/s 115JB and accordingly, the AO is directed to delete the same.”

20. (a) We have considered Prior Period Expenses in Para 7.1 & 7.2 of this common order thereby deleted the addition. Therefore this ground is devoid of merit and hereby dismissed.

20. (b) We have considered excess depreciation in Para 7.5 & 7.6 of this common order, wherein we deleted the adjustments made by the Assessing officer. Respectfully following the same, This ground raised by the Revenue is hereby dismissed.

20. (c) Capital Grant and Subsidies: This issue is also considered by us in Para 7.3 & 7.4 of this common order. Respectfully following the same, this ground of appeal raised by the Revenue is hereby dismissed.

20. (d) Disallowance u/s. 14A r.w. Rule 8D: The addition made on this account was deleted by us vide Para 7.7 & 7.8 of this common order, respectfully following the Jurisdictional High Court Judgment in assessee’s own case for the Assessment Year 2010-11. Therefore the adjustment made on this account is hereby dismissed and the ground raised by the Revenue is hereby dismissed.

20. (e) Liquidated Damages: The Ld. CIT(A) held that disallowance of Liquidated Damages is not covered in the items specified u/s. 115JB of the Act. Further the very same addition made under the normal provisions already stand deleted, hence the same cannot be added in the book profit u/s. 115JB of the Act. Thus the Ld. CIT(A) deleted the addition of Liquidated Damages of Rs. 49.8 crores from the computation of book profit u/s. 115JB of the Act. The Ld. D.R. could not place any contrary view against the findings of the Ld. CIT(A), therefore we have no hesitation in deleting the above addition and this ground raised by the Revenue is hereby dismissed.

20.1. Per contra, the Ld. Counsel appearing for the assessee relied upon the Hon’ble Supreme Court Judgment in the case of Apollo Tyres Ltd. reported in 255 ITR 273 wherein it was held that once the books of accounts are certified by the Chartered Accountant, Assessing Officer cannot disturb book profit except the item specifically mentioned in Explanation to Section 115JB of the Act.

20.2. We have given our thoughtful consideration and perused the materials available on record. We find that legally valid ground raised by the assessee in deleting the addition of liquidated damages from the computation of book profit u/s. 115JB of the Act on the ground that none of the issue covered in Explanation 1 of Section 115JB(2) of the Act. Since liquidated damages is not covered in the item specified under Explanation to Section 115JB(2) of the Act, the Ld. CIT(A) is deleting the adjustment made in the book profit. Thus the ground raised by the Revenue is devoid of merit and the same is hereby dismissed.

21. Ground No. 5. Deletion of Liquidated Damages of Rs. 49.8 crores under normal computation of income: The Ld. CIT(A) considered the issue of claim of liquidated damages under the normal computation of income and deleted the same observing that the expenses incurred by the assessee which is not an offence under any provisions of law or prohibited by law, but the damages paid for the late commencement of the operation of power plant by observing as follows:

“….Disallowances of expenses on account of liquidated damages at 49,80,00,000/-. At the outset, the appellant has clarified that the liquidated damages were paid for breach of contractual obligations and not for any breach of law. However, in the written submissions filed before the AO, breach of law was mentioned due to a typographical error. Undisputedly, the AO has not doubted genuineness of the expenses incurred on account of liquidated damages and he has disallowed the same only on account of having been incurred for breach of law. On proper appreciation of factual position, I find that in the terms of Purchase Power Agreement (PPA) with Gujarat Urja Vikas Nigam Ltd. (GUVNL) the scheduled date for commercial operation of Ukai Unit No.6 was not achieved and undoubtedly, the operation started only on 8th June, 2013. Accordingly, As per Clause 4.7 of PPA, the appellant was liable for liquidated damages for the delay. Undisputedly, the liquidated damages had been paid to GUVNL for violation of terms and conditions of the above mentioned contract. Thus, it emerges that the liquidated damages were incurred for breach of contractual obligations being a commercial transaction and not for breach of any law. Hence, I hold that the provisions of Explanation below Section 37(1) are not attracted in the case of the appellant. Therefore, the disallowance made by the AO on this account is directed to be deleted.”

21.1. The Ld. D.R. appearing for the Revenue could not able to contravent the above observations of the Ld. CIT(A) on bring different findings in support of his argument.

21.2. The Ld. Counsel for the assessee submitted that the liquidated damages was not on the contraventions of any of the provisions of the law or prohibited by law but because of the delay in scheduled commercial operation of the power plant, the assessee paid by way of liquidated damages as per contractual obligation which is allowable expenditure u/s. 37 of the Act.

21.3. The Ld. Counsel relied upon Co-ordinate Bench decision of this Tribunal in the case of ACIT Vs. Hitachi Hi-Rel Power Electronics Limited in ITA No. 2035/Ahd/2012 dated 10-09-2015 wherein it is held as follows:

“………. 5. We have heard the rival contentions and perused the material on record and gone through the orders of authorities below. There is no dispute with regard to the fact that the goods were required to be supplied during the normal course of business. It is not disputed by the Revenue that as per contract, in case assessee fails to deliver the goods in time, assessee was required to pay penalty on such delay. Now the question is whether assessee is entitled to get deduction of such payments made in pursuance of the contract or not. This fact is not disputed by the Assessing Officer that goods were required to be supplied by the assessee. Therefore, supply of goods is business of assessee. In a commercial contract, if assessee fails to comply with time limit, he would be liable to pay penalty to the party to whom such goods were supplied belatedly. As in the normal course of business delay in supply of goods may cause loss to receiver of the goods. Therefore, this arrangement is purely on the basis of the contract of the parties. In our considered view the penalty paid for delay in supply of goods in agreed time is an expenditure related to the business of the assessee. Undisputedly, under normal routine such delay occur due to transportation hazards etc., therefore, such payments are nothing but liquidated damages paid due to failure to meet the deadline of contract. The Assessing Officer has not brought out any material on record that the payments made came back to the assessee or it was only sham transaction. Under these facts, we do not see any reason to interfere into the order of ld. CIT(A). Same is hereby confirmed. The ground raised in this appeal is rejected.”

22. We have given our thoughtful consideration and perused the materials available on record. It is seen that the liquidated damages of Rs. 49.8 crores were paid by the assessee for breach of contractual obligations in late commencement of power production by the assessee. The Ld. CIT(A) has considered the Purchase Power Agreement (PPA) with Gujarat Urja Vikas Nigam Ltd. (GUVNL) that the scheduled date for commercial operation of Ukai Unit No. 6 was not achieved, but whereas the commercial operation started only on 8th June, 2013. As per the contractual obligation under Clause 4.7 of PPA, the assessee was liable to pay liquidated damages for the delay. This liquidated damages is neither violation of any provisions of law or any Act nor prohibited under the law. As per the contractual obligation entered between the parties, this liquidated damages was paid by the assessee, which in our considered opinion, the provisions of Explanation to Section 37(1) are not attracted and the addition made on this account is liable to be deleted. Thus the ground raised by the Revenue is devoid of merit and the same is hereby rejected.

23. In the result, the appeal filed by the Revenue in ITA No. 849/Ahd/2018 is partly allowed.

ITA No. 787/Ahd/2018 (Assessee’s appeal relating to A.Y. 2014-15)

24. The Ground of appeal raised by the Assessee in ITA No. 787Ahd/2018 is relating to A.Y. 2014-15 reads as under:

1.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the invoking of provisions of section 14A of the IT Act. The learned Commissioner (Appeals) has restricted the disallowances made under that section by treating the interest paid (excluding interest on term loans) as being attributable to the dividend income.

2.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed the disallowance of prior period expenses amounting to 27,22,74,000/-without appreciating the fact that such expenditure was already disallowed in the Return of Income for the year under consideration.

The learned Commissioner of Income Tax(Appeals) failed to appreciate that the Assessing Officer had disallowed/ added the amount of 7,22,74,000/-twice – one on account of Prior Period Expenses and other on account of Prior Period Income. Thus the additions on account of Prior Period Income have been deleted but the additions on account of Prior Period Expenses which were already disallowed have been confirmed resulting into double taxation.

3.0The Commissioner of Income Tax (Appeals) erred in law and on facts has confirmed additions of 247,17,19.100/- being 15% of the year-end balance of Capital Grants amounting to 31427.94 lacs on the ground that the appellant should offer the same as income.

The Commissioner of Income Tax (Appeals) failed to appreciate that the appellant has not received any fresh grant during the year and 15% of the original grant has already been added as income in the immediately preceding year. Hence the Commissioner of Income Tax (Appeals) has erred by confirming the additions of 15% of the total grant received without reducing the amount already taxed as income in earlier year.

4.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of Assessing Officer in treating the Interest income aggregating to 26,17,31,000/- being interest from staff loans and interest from other advances and loans as Income from Other Sources as against the Business Income and thereby disallowing the claim of set off of business losses of earlier years against the said income.

5.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

6.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B and 234C of the Income Tax Act, 1961.

25. Ground No. 1: Disallowance u/s. 14A read with Rule 8D. This issue is already set aside to the file of the Assessing Officer for fresh consideration vide Para 6 to 6.2 of this common order for the earlier Assessment Year 2012-13. For the present Assessment Year 2014-15 also, the issue of disallowance u/s. 14A r.w. Rule 8D is set aside to the file of the Assessing officer for fresh consideration, however by giving adequate opportunity to the assessee. Thus Ground No. 1 raised by the Assessee is partly allowed.

26. Ground No. 2: Though the assessee claimed that the Prior Period Expenses amounting to Rs. 27.22 crores was disallowed by the assessee itself in the Return of Income. However this issue was set aside to the file of the Assessing Officer in Para 5 to 5.3 of this common order. Respectfully following the same, this issue is set aside to the file of the A.O. for de novo adjudication by giving proper opportunity to the assessee. Thus the ground raised by the Assessee is partly allowed.

27. Ground No. 3: Addition on account of Capital Grant. The Ld. Counsel submitted that the assessee has not received any fresh grant during this financial year and therefore not offered any income on account of receipt of grant from the State Government in the Profit and Loss account. The Ld. A.O. without appreciating the above fact made the addition on the premise that the assessee should have offered 15% of the year-end balance of capital grant as Revenue income, since the capital grant is either required to reduce from the cost of fixed assets or grant in the nature of revenue receipt should be offered for taxation in the year of receipts.

27.1. This issue is considered by us in Para 11 & 11.1 of this common order whereby the issue was remitted back to the file of the Assessing Officer for fresh adjudication by giving proper opportunity to the assessee. Respectfully following the same, this Ground No. 3 filed by the assessee is allowed for statistical purpose.

28. Ground No. 4: Treatment of interest income received on loans and advances given to staff members.

28.1. This issue is considered by this Tribunal in Para 4 to 4.2 of this common order, whereby the issue was set aside back to the file of the Ld. CIT(A) to consider the issue afresh and pass orders accordingly by affording opportunity to the assessee. Thus the Ground no. 4 raised by the Assessee is allowed for statistical purpose.

29. Ground Nos. 5 & 6 are initiation of penalty proceedings u/s. 271(1)(c) and charging of interest u/s. 234B and 234C of the Act which are consequential in nature and does not require any specific adjudication.

30. In the result, the appeal filed by the Assessee in ITA No. 787/Ahd/2018 is partly allowed.

Order pronounced in the open court on 18-08-2023