Case Law Details

Case Name : Vedanta Ltd. Vs ACIT (ITAT Delhi)
Appeal Number : ITA No. 12/Del/2020
Date of Judgement/Order : 21/09/2020
Related Assessment Year : 2014-15
Courts : All ITAT (7336) ITAT Delhi (1719)

Vedanta Ltd. Vs ACIT (ITAT Delhi)

At the very outside, the Tribunal in the case of National Small Industries Corporation Limited 175 ITD 601 has held that amendments made to section 37 of the Act vide Finance Act [No. 2] 2014 are prospective in nature and hence would not be applicable to the period prior to the said amendment which is the case of the assessee.

Payments made to church, police station, summits, schools, etc cannot be considered to have been spent on CSR.

Though the amendment to Section 37 of the act may be prospective, but at the same time, assessee had to justify the claim of expenditure being spent on CSR. Details mentioned hereinabove do not justify the claim of expenditure on account of commercial expediency. Considering the claim from all possible angles, we do not find any merit in such claim of expenditure. Disallowance of Rs. 50.37 lakhs stands confirmed. This ground is, accordingly, dismissed.A plain reading of the aforementioned detail show that these expenses are either in the nature of charity or donation. In our considered view, these expenses are not in the nature of CSR. Payments made to church, police station, summits, schools, etc cannot be considered to have been spent on CSR.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is directed against the order dated 28.11.2019 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as ‘the Act’ for short]

2.Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides.

3. With Ground No. 1, the assessee has challenged the validity of the assessment order itself on the ground that it is barred by limitation and, therefore, liable to be quashed,

4. Without going into the merits of this contention, we find that an identical challenge was dismissed by the co-ordinate bench in the case of Religare Capital Markets Ltd in ITA No. 1881/DEL/2014 wherein it has been held that final assessment order passed u/s 143(3) r.w.s.144C(13) of the Act would not be covered under the provisions of section 153 of the Act. Respectfully following the findings of the co­ordinate bench, this ground is dismissed.

5. Ground No. 2 with all its sub grounds relates to the transfer pricing adjustments on account of international transactions relating to receipt of Management and consultancy services received by the assessee amounting to Rs. 24,37,43,634/- and Rs. 1,44,69,443/-towards Recovery of costs for SAP maintenance.

6. Facts on record show that the assessee receives Strategic Planning and Consultancy Services from Vedanta Resources Plc. (VRPL.) under a Management Consultancy Agreement dated 29.03.2005. The relevant clauses of that agreement show that VRPL agreed to provide Strategic planning and consultancy services to Sesa Sterlites [now present appellant] and its subsidiaries in various areas of business such that Sesa Sterlites is able to finalize and implement their plans for growth and are able to raise necessary finances.

7. The assessee claimed that services received from VRPL included consultancy services, strategic advices which included a global profile, assistance in formulating and implementing short, medium and long term plans and strategic and assistance on all opportunities for growth and diversification, legal advice and advice on account of financial treasury, marketing, human resource management and I.T. support.

8. In the agreement, it is also provided that VRPL will provide technical and commercial material to Sesa Sterlites to enable it to promote its business and /or raise funds overseas thereby acting as representative office of Sesa Sterlites in UK.

9. In the Transfer Pricing study, the foreign AE was considered as tested party and the benchmarking was done as per TNMM method. A total of 8 comparables were chosen whose return on operating costs worked out to be 7.96%. Since the operating margins of the AEs of the Appellant from the provision of business support services was 5.51% on the operating cost, therefore, the transaction was treated to be at arm’s length.

10. However, the TPO denied the bench-marking done by the assessee on the following grounds:

(i) failure to substantiate actual rendition of services;

(ii) failure to prove benefit derived by the Appellant from the services; and

(iii) failure to provide the basis for the allocation key.

11. The TPO himself allowed 20% of the total sum paid purportedly attributing such share of payment for obtaining strategic advice, considering the services rendered by the top management, with regards to the huge diversification and the acquisition undergone by the assessee. In doing so, the TPO rejected the application of TNMM method by treating management consultancy fee as a separate class of transaction from the strategic and representative office services received by the Appellant.

12. When objections were raised before the DRP, the DRP dismissed the objection and upheld the action of the TPO by holding that the assessee failed to substantiate its claim of payment of management consultancy fees with sufficient evidences. The DRP further observed that no sufficient evidences to support the claim of expenses incurred on account of management consultancy fees are made available and the expenses also fail the tests of benefit and genuineness. The DRP, accordingly, directed the AO that the expenses incurred on account of management and consultancy charges shall also be disallowed on protective basis under Section 37(1) of the Act.

13. Before us, the ld. counsel for the assessee vehemently stated that the evidence / proof of services provided by VRPL were submitted before the lower authorities. It is the say of the ld. counsel for the assessee that the assessee has access to wide range of services and cannot be limited to the services mentioned in the Agreement. The ld. counsel for the assessee further stated that the services rendered by VRPL should not be limited to paper work but should also be considered in the light of constant interaction through the modern communication facilities. It is the say of the ld. counsel for the assessee that in case of intra-group services received on an on-going basis, it is difficult for the taxpayer to provide evidence for support received with regard to day to-day operations. The ld. counsel for the assessee further submitted that evidences are available at critical milestones and not at every step of the process and absence of such evidence should not be construed to mean that the services were not received.

14. In so far as the benefits received by the assessee is concerned, the ld. counsel for the assessee strongly relied upon the decision of the Hon’ble High Court of Delhi in the case of EKL Appliances 345 ITR 241 wherein it has been held that benefits shall be considered from the perspective of the taxpayer. The ld. counsel for the assessee vehemently stated that it is incorrect to segregate management consultancy fee as a separate class of transaction and is clearly in violation of law as was laid down by Hon’ble Jurisdictional Delhi High Court in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. 374 ITR 118.

15. The ld. counsel for the assessee further objected the direction for disallowance u/s 37 of the Act on protective basis as the same was never disputed by the Assessing Officer in the draft assessment order.

16. Per contra, strongly supporting the orders of the lower authorities, the ld. DR stated that the onus is upon the assessee to bring on record evidences to show any services have been rendered by VRPL to the assessee. It is the say of the ld. DR that there are no documents to show that any services have been received from AEs. It is the say of the ld. DR that segregation and bench marking of this transaction has been done by the TPO solely on the fact that this transaction is not closely linked with the business of the assessee and this very fact distinguishes the case of the assessee from the facts of case of Soni Ericcson [supra] relied upon by the ld. counsel for the assessee. The ld. DR further stated that the TPO has not bench marked the entire transaction at NIL and, in fact, has given relief by allowing 20% of the expenditure.

17. We have given thoughtful consideration to the rival contentions and have carefully considered the orders of the authorities below. Before proceeding further, it would be pertinent to look at the past assessment history in so far as management consultancy charges is concerned which is as under:

Assessment Year Amount paid to VRPlc. (Rs.) Allowed / Disallowed Ground of disallowance Status of appeal
2005-06 22,48,00,000 No TP
adjustment on this amount
2006-07 22,30,50,000 No TP
adjustment on this amount
2007-08 22,64,28,500 No TP
adjustment on this amount
2008-09 20,12,06,500 No TP
adjustment on this amount
2009-10 22,95,70,000 No TP
adjustment on this amount
2010-11 23,70,80,500 No TP
adjustment on this amount
2011-12 22,78,81,500 No TP
adjustment on this amount
2012-13 19,17,83,200 Disallowed Assessee had not provided sufficient evidence Pending before Hon’ble ITAT Delhi
2013-14 21,78,04,800 Disallowed Assessee had not provided sufficient evidence Pending before C1T(A)

18. It can be seen from the above chart that upto A.Y 2011-12, no adjustment was made on this account and the Revenue has changed its stand from A.Y 2012-13 onwards.

19. At the very outset, we have to state that the Revenue authorities cannot judge the rendition of services by applying benefit test as laid down by the Hon’ble High Court of Delhi in the case of EKL Appliances [supra]. In our considered opinion, the only consideration in such transaction is rendition of services. All that the revenue authorities have to see is as to whether there is rendition of services by the AE to the assessee. This definitely puts the burden on the assessee to demonstrate that there was rendition of services by the AE to the assessee. At the same time, it is equally true that the assessee cannot furnish evidences for day to day rendition of services, but definitely can demonstrate rendition at crucial points.

20. We are of the considered opinion that merely filing sample emails would not suffice. The assessee has to come with more strong evidences which may be in any form, including electronic forms to demonstrate that the AE has actually rendered services which are mentioned in the agreement. In the interest of justice and fair play, we restore this issue to the file of the Assessing Officer/TPO. The assessee is directed to come with strong evidences to demonstrate that the services were actually rendered by the AE. The Assessing Officer/TPO is directed to examine the issue afresh in the light of evidences that would be furnished by the assessee. This ground is, accordingly, treated as allowed for statistical purposes.

21. Before closing, the ld. counsel for the assessee has also challenged the segregation approach by referring to various judicial decisions of Hon’ble High Courts. We are of the considered view that this transaction is not at all a closely linked transaction and, therefore, the aggregate TNMM would not apply and the lower authorities have rightly treated this transaction as separate transaction on facts of the case.

22. The other part of this grievance relates to reimbursement of SAP and other expenses.

23. Facts on record show that the assessee had incurred certain expenses in the nature of SAP maintenance charges, vehicle, telephone and food expenses, etc. on behalf of its AEs, on a cost-to-cost basis, without charging any mark-up.

24. Before the lower authorities, the ld. counsel for the assessee explained that it incurs the maintenance cost for SAP accounting system used by Vedanta group entities. The relevant extracts of Agreement between Appellant and third party service provider were furnished. The TPO was of the opinion that this transaction is akin to IT enabled services and, therefore, the assessee should have charged a mark-up on the cost incurred by it on behalf of the AEs. The TPO held TNMM to be the most appropriate method and selected five companies as final set of comparable companies and computed the Arm’s Length Margin at 22.34% and proposed an upward adjustment of Rs. 1,44,69,443/-.

25. Objections were raised before the DRP and the DRP upheld the actions of TPO on the ground that the assessee has neither challenged, nor submitted anything with respect to the final set of comparables selected by the TPO; and has challenged the most appropriate method and PLI.

26. Before us, the ld. counsel for the assessee vehemently stated that it is incorrect to say that the assessee never challenged the comparables selected by the TPO. It is the say of the ld. counsel for the assessee that in fact, the comparables selected by the TPO were questioned before the DRP stating that they are not appropriate. The ld. counsel for the assessee further stated that adjudication by the DRP on this objection itself shows that the assessee has challenged the comparables. The ld. counsel for the assessee further stated that not only the comparables but also the methodology adopted by the TPO for selection of comparables was also challenged.

27. The ld. counsel for the assessee continued by stating that the appellant has incurred these maintenance charges as a pass through only and did not provide any services or made any value addition which would warrant a mark-up as in the case of provision of services. The ld. counsel for the assessee further submitted that such transactions are undertaken for commercial expediency and are not intended to be undertaken with expectation of a return. The ld. counsel for the assessee stated that the SAP maintenance charges paid by the assessee are allocated among the group entities using the respective licenses on a cost-to-cost basis on the basis of number of licenses taken by each AE. The ld. counsel for the assessee pointed out that copy of invoices raised by SAP India, on the Appellant and the corresponding invoices/debit notes raised by the assessee on the AE were furnished before the lower authorities.

28. Per contra, the ld. DR strongly supported the findings of the lower authorities.

29. We have carefully considered the rival contentions and have perused the orders of the authorities below. It is apparent from the facts on record that the appellant was incurring these expenses by acting as a facilitator and these reimbursements are “pass through” costs. In our understanding of the facts, such transaction cannot be compared with ITES. From the record, we find the break up of total reimbursement as under:

1. SAP maintenance charges

[cost reimbursement]                       Rs. 5,30,26,217/-

2. Vehicle, telephone, food expenses

[cost reimbursement]                      Rs. 1,17,43,000/-

Total                                                    Rs. 6,47,69,217/-

30. Further, record shows that the assessee group has SAP accounting system used by all group entities for which the assessee incurs maintenance charges in connection with support bug fixes in SAP ERP, changes in ERP functionality. The aforesaid maintenance charges paid by the assessee to third party service providers, is allocated among group entities using licences on cost to cost basis. In our considered opinion, no mark up is warranted on pass through costs as these are reimbursement of primary third party expenses initially incurred by the assessee for which no value addition is done by the assessee and are subsequently reimbursed by the AEs on cost to cost basis. Moreover, in our considered view, such transactions are undertaken for commercial expediency and are not intended to be undertaken with expectation of return.

31. OECD Guidelines also support pass through characterisation of such expenses and recognise that no mark up is required to be earned on such expenses. The relevant extract of OECD guidelines is as under:

“When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the service themselves. In such a case, it may not be appropriate to- determine arm’s length pricing as a mark-up on the cost of the services but rather on the cost of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on. behalf of group members, costs that the group members would have incurred directly hod they been independent In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.”

32. Under UN TP Manual 2017, pass through costs and its arms length pricing has been discussed. The relevant extract is as under:

“In some circumstances an MNE group may decide to outsource some services to an independent entity and to use an associated enterprise to act as an agent for the group to pay the accounts and to then allocate the charges to its associated enterprises on an objective basis. These may be called pass through costs. As an agent, its only role may be to pay the independent service provider and to then allocate the total cost of services among group members on an objective basis. In such a case, it may not be appropriate to determine arm’s length pricing, as a mark-up on the cost of the outsourced services rather on the costs of the agency function itself and allocate the outsourced costs without mark-up.”

33. Considering the nature of expenses in totality, in light of OECD guidelines, we do not find any merit in this adjustment made by the TPO. The same is directed to be deleted.

34. Next grievance relates to the disallowance made u/s 14A of the Act r.w.r. 8D of the rules.

35. Facts on record show that during the year, the appellant received dividend to the tune of Rs. 12,89,44,56,916/- which were claimed as exempt u/s 10(34) of the Act. Party-wise dividend income is as follows:

Name of the Company Nature of
Investment
Amount of
Dividend (Rs.)
Investment
made in FY
Hindustan Zinc Ltd. Equity Investments in Subsidiary 850,37,78,361/- 2002-03 & 2003-04
Cairn India Ltd. Equity Investments in  Subsidiary 438,93,00,000/- 2011-12
Sterlite Technologies Ltd. Equity Investments 12,78,555/- 2000-01 (received
pursuant to  demerger)
Goa Shipyard Equity 1,25,414/- Before 1981
TOTAL 1289,44,56,916/-

36. The assessee, suo moto, disallowed Rs.1.46 crores in respect of the expenditure incurred in relation to the earning of such exempt income u/s 14A of the Act.

37. The Assessing Officer was of the firm belief that Rule 8D of the Rules squarely applies to the facts of the case and proceeded to compute the disallowance u/s 14A of the Act read with Rule 8D of the Rules and proposed a disallowance of Rs. 857.04 crores.

38. Objections were raised before the DRP and it was brought to the notice of the DRP that similar issues were considered in earlier A.Ys and the disallowances were deleted by the Tribunal Panjim Bench. Though the DRP concurred with the submissions of the assessee but confirmed the disallowance stating that the Revenue is in appeal before the Hon’ble High Court of Bombay at Goa against the said decision of the Tribunal.

39. Before us, the ld. counsel for the assessee drew our attention to the decision of the Tribunal for earlier A.Ys and pointed out that similar disallowances were deleted by the Tribunal. It is the say of the ld. counsel for the assessee that merely because the Revenue is in appeal before the Goa bench of Hon’ble High Court, the DRP should not have dismissed the objections of the assessee merely on the premise that appeal against a binding precedent is pending before a higher judicial forum.

40. The ld. counsel for the assessee further stated that all the investments were made in earlier A.Ys and there are no new investments. The ld. counsel for the assessee further stated that no satisfaction was recorded by the Assessing Officer, nor has he demonstrated any nexus between expenditure and exempt income. It is the say of the ld. counsel for the assessee that the shareholders funds/own funds available with the appellant far exceeds the total investments appearing in the financial statements of the assessee. On these facts itself, no disallowance should be made.

41. Per contra, the ld. DR strongly supported the findings of the assessing officer. It is the say of the ld. DR that if the assessing officer is not satisfied with the correctness of the assessee’s claim regarding the expenditure, he has to resort to Rule 8D of the Rules for determination of the expenditure incurred with respect to the exempt income for the purposes of Section 14A of the Act. It is the say of the DR that suo moto disallowance made by the assessee does not have any scientific working nor any basis and suo moto disallowance of Rs.1.94 crores is meagre as compared to the amount of exempt income.

42. We have carefully considered the rival submissions and have perused the orders of the authorities below. It is not in dispute that all the investments are coming from earlier A.Ys as is evident from the chart exhibited elsewhere. The total investments as on 31.3.2014 aggregated to Rs.2186.66 whereas the cash generated from operations stood at Rs.2930.39 crores which is far in excess of the investment. Therefore, it can be safely concluded that the assessee has made investments out of his own funds. Even assuming that the investments have come out of pool of funds, that is own funds and borrowed funds, then, the ratio laid down by the Hon’ble High Court of Bombay in the case of Reliance Utilities and Power Ltd 313 ITR 340 squarely apply on the facts of the case, as in that case, the Hon’ble Bombay High Court has held that if the investments are made from pool of funds, then presumption would be that investments have come out of own funds if own funds are in excess of investment.

43. It is also not in dispute that the Tribunal in assessee’s own case in earlier assessment years have deleted the disallowance and this fact has also been accepted by the DRP. Merely because the Revenue has preferred an appeal before the higher forum would not justify any upholding of the disallowance.

44. The relevant findings of the Tribunal in ITA No. 72 & 85/PNJ/2012 read as under:

“5. Ground nos. 1.1 & 1.2 in the appeal of the assessee relate to the disallowance u/s 14A of the I. T. Act. The brief facts relating to this ground are that AO has noted that the assessee has received dividend income of Rs. 1,42,72,73,668/- exempt from tax. The AO asked the assessee to explain why the disallowance u/s 14A read with rule 8D should not be made for the expenses incurred. The assessee submitted the explanation that he has not borrowed any money for purchase / investment on which dividend is received. No interest has been debited to profit and loss account. Interest and other charges appearing in the profit and loss account relate to Bank charges in connection with collection of outstation cheques. No administration expenditure was incurred on earning dividend income as investment in mutual funds was made just to park the surplus funds. The assessee has already disallowed a sum of Rs. 25,78,156/- in the computation of income. The AO did not agree and he was of the view that the company has made substantial investment in mutual funds. Investment of such magnitude requires proper analysis of the market condition to the stock movement etc. and therefore, the assessee must have incurred substantial expenditure for earning the dividend. The assessing officer by invoking the provision of section 14A read with Rule 8D worked out the disallowance as under:

i. Amount of expenditure directly relating to income which does not form part of total income – Nil

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

[AxB]/C = A. Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year – Nil

B. The average of value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee on the first day and the last day of the previous year Rs.20,00,44,93,634 + Rs.30,19,67,88,502 = Rs.50,20,12,82,136/- Average of the above = Rs.25,10,06,41,068/-

C. The average of total assets as appearing in the balance sheet of the assessee, on the first day of the last day of the previous year – Nil (i) an amount equal to one-half per cent 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 previous year Rs.25,10,06,41,068 x .005 = Rs.12,55,03,205

Less: Administrative expenditure already disallowed Rs. 25,78,156 by the assessee  Rs.12,29,25,049

Accordingly, a sum of Rs.12,29,25,049/- is disallowed u/s 14A read with Rule 8D as expenditure incurred for earning the exempted income and same is added to the total income.

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14. We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribed. Such power is to be exercised if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure mentioned in sub-sec.(1). Before applying Rule 8D, it is apparent that the AO must be satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. Such satisfaction is an objective satisfaction that it has to be judicious and based on the material on record. It cannot be an impression that it is much more than the gossip or hearsay, it means judgment or belief that it is a belief or a connection resulting from what one thinks on a particular question. It must be based on the reasons and ground as seems good to him and while making such satisfaction, the AO must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-sec.(3) provides that provisions of sub-sec.(2) shall also apply where assessee claims that no expenditure had been incurred in relation to income not forming part of the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. This is an undisputed fact that in this case, the assessee has invested in debts mutual funds. The assessee computed disallowance u/s 14A(2) at Rs.25,78,156/- and disallowed the same, while computing its total income. The working of the said disallowance claimed by the assessee is given herein above in the submissions made by the assessee. The AO was not satisfied with the correctness of the claim of the assessee especially the explanation of the assessee that no administrative expenditure incurred on earning the dividend income. Considering the magnitude of the investments and the dividend income received, the AO was of the view that the disallowance made by the assessee u/s 14A of the IT Act towards the administrative expenditure is low on comparing the magnitude of purchase and sales made by the assessee and the investments of large magnitude cannot be made without proper analysis of the market condition/stock movement etc. The revenue was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum).

15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that

(i) 95% of the shares were bonus shares for which no cost was incurred;

(ii) No investment in shares was made in the current year and no disallowance was made in earlier years and

(iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s 14A on prorata basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO Vs Daga Capital Management (P) Ltd 117 ITD 169 (SB) restored the matter to the file of the AO for the consideration in the light of the provisions of sub-sec.(2) & (3) of Sec.14A of the IT Act. The assessee, being aggrieved, filed appeal as well as Writ Petition challenging the constitutional validity of sub-sec. (2) & (3) and Rule D. The Honible High Court gave the following findings;

1. The provisions of sec. 14A and Rule 8D are constitutionally valid.

2. The provisions of sub-sec. (2) & (3) of Sec.14A and Rule 8D are prospective and not retrospective, in nature and therefore, would apply from assessment year 2007-08.

3. The basic object of Sec.14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income (page 21).

4. The insertion of sec.14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23). The test which has been enunciated in Wallfort for attracting the provisions of sec.14A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28)

5. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-sec (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32).

6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79).

7. The effect of sec.14A is to widen the theory of the apportionment of expenditure (page 49).

8. The expression expenditure incurred; in Sec.14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page-50). 9. Sub-sections (2) & (3) of Sec.14A are intended to enforce and implement the provisions of sub-sec (1) (pages 50). 10. Even in the absence of sub­section (2) of sec.14A the AO would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The AO would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstancesi. The said decision of the jurisdictional High Court is binding on us. While deciding this case, the decision of the Honible Supreme Court in the case of CIT Vs Wallfort Shares &Stock Brokers Ltd., 233 CTR (SC) 42 was referred to. In this decision, we noted that the Honible Supreme Court in that case upheld the view of the Honible Mumbai High Court in the case of Wallfort Shares &Stock Brokers Ltd. Vs ITO 310 ITR 421. The Honible Supreme Court in this decision, at page-31 of the order held as under; ―To attract Sec.14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec.14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.14A cannot be invoked.

16. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Honible Supreme Court, we are of the view that sec.14A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) & (3) of Sec.14A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) & (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) & (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. 124 TTJ 577 (Del)(SB).

17. The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exempted income merely because some incidental benefit has arisen towards exempted income. Before making any disallowance u/s 14A, the AO is required to record a satisfaction, having regard to the accounts of the assessee, that claim of assessee that expenditure incurred is not related to the income forming part of the total income is incorrect. Such satisfaction must be arrived at on the objective basis. He is also required to record the reasons for arriving at such satisfaction. The assessing officer in this case, we noted is not satisfied with the correctness of the disallowance made by the assessee even though he has accepted the explanation of the assessee that no interest is incurred with regard to exempt income. He rejected the explanation of the assessee that no administrative expenditure incurred on earning dividend income considering the magnitude of the investments and dividend income received and the disallowance according to him made by the assessee u/s 14A towards administrative expenditure is very less. The assessing officer nowhere pointed out the proximate connection of other expenses not apportioned by the assessee for the earning of the dividend income. He merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to the dividend income has not been brought on record. Even the AO has not pointed out the expenses excluded by the assessee for disallowance has proximate connection with dividend income. In our opinion, the assessing officer before rejecting the disallowance computed by the assessee must give a clear cut finding having regard to the accounts of the assessee how the other expenditure claimed by the assessee out of non exempt income is related with the exempt income. No discrepancy in the claim of the assessee was pointed out. The assessing officer in our opinion in view of the jurisdictional High Court decision is bound to record satisfaction as to how the expenses claimed by the assessee have been incurred on earning dividend income were not sufficient and correct. We have already held that the onus to prove in this regard lies on the assessing officer. Although the Ld. DR had vehemently contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying on the decision of CIT(Appeal) in respect of Explanation bb to sec. 80HHC that 10% of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the assessee as Explanation bb to sec. 80HHC does not recognize amount of the investment made in other receipt to be the basis of computing the expenditure being incurred for the earning of that income. Similar views have been taken by Honible Tribunal in the following decisions also. In the case of DCIT Vs. Jindal Photo Ltd. held in I.T.A.T. Delhi bench dated 7.1.2011 it was held as follows:

“Now as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee‘s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an adhoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In ―CIT Vs. Hero CyclesLi (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions.

In ―ACIT Vs. Eicher Ltd.ri, 101 TTJ (Del.) 369, that it was held that: the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In ―Maruti Udyog Vs. DCIT, 92 ITD 119 (Del.), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In ―Wimco Seedlings Limited Vs. DCITL1, 107 ITD 267 (Del.) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank Vs. DCIT, 103 TTJ 908 (Del.); 2. Vidyut Investment Ltd., 10 SOT 284 (Del.); and 3. D.J. Mehta Vs. Income Tax Officer, 290 ITR 238 (Mum.) (AT) In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected.

In the case of Jindal Photo Ltd. Vs. DCIT held in I.T.A.T. Delhi bench dated 23.9.2011 it was held as follows:

“In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee‘s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A), therefore, erred in partially approving the action of the Assessing Officer.

In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (I.T. Act No.5779/Mum/2006 & 208/Mum/2009) it was held as follows: ―

At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon ble Bombay High Court merely observing that no question arises, it cannot be treated as a decision rendered by the Hon ble High Court on the merit of the issue which is binding on this Tribunal. We are unable to accept this contention of the learned DR. It is well settled proposition of judicial precedents that is appeal the Hon ble High Court considers facts pertaining to the issue and gives approval to the decision of the lower forum, the decision of lower forum gets merged with the judgment and order of the High Court and it becomes binding precedent even though approval to decision of lower forum/court is summarily recorded. Similar situation had arisen for consideration before the Hon ble Gujarat High Court in the case of Nirma Industries Ltd. 283 ITR 402 wherein the effects of summary disposal of appeal by the High Court were analysed and explained by their Lordships. It was clarified that while hearing an appeal even for deciding whether substantial question of law arises or not from the order of the Tribunal, the High Court does not exercise either the original jurisdiction or the jurisdiction to issue writs and the only jurisdiction exercised by the High Court in the first instance decides whether or not substantial question of law arises from the order of the Tribunal, it cannot be said that the High Court does not exercise the appellate powers or that there is no decision on merit when the high court dismisses an appeal holding that no substantial question of law arises from the order of the Tribunal. It was held that whenever an order of the subordinate forum is carried in appeal before the higher appellate forum/court, operative part thereof merges into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be, and the decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present case or that of the case of Delite Enterprise (supra) decided by the Hon’ble Bombay High Court. Accordingly, we decide the common issue involved in all these appeals in favour of the assessees following the decision of jurisdictional High Court in the case of Delite Enterprises (supra) and allow the appeals of all the assessees.

18. We have also gone through the decision relied upon by the learned DR also. The decision of ACIT Vs CITICORP Finance (Ind.) Ltd., 108 ITD 457 (Bom.) is no more relevant, in view of the decision of the Honible Mumbai High Court in the case of Godrej Boyce Mfg Co. Ltd. (Supra). The decision of SPIC Vs DCIT 93 TTJ (Chennai) 161 is not applicable to the facts of the case. As in that case, the assessee was regularly investing in the shares. The assessee has not disallowed any expenditure with regard to the earning of the dividend income. Under these facts, the Hon’ble Tribunal held that whether to invest or not to invest is a very strategic decision and top management involve in taking the decisions. This decision relate to assessment year 2000-01 much prior to the insertion of provision of sec.14A(2) of the IT Act,1961. The decision of ACIT Vs Premium Consolidated Capital Trust 83 TTJ (Bom.) relates to assessment year 1991-92 prior to insertion of 14A(2) hence will not assist the revenue. The other decision relied on are also not applicable to the facts of the case, except the decision of jurisdictional High Court in the case of &odrej & Boyce Mfg. Co. Ltd. Vs DC IT & Another 328 ITR 81(Bom.). In view of our aforesaid discussion and respectively following the decision of the jurisdictional High Court in the case of &odrej & Boyce Mfg. co. Ltd. Vs. DCIT & another 328 ITR 81 (Bom), we delete the disallowance made u/s 14A r.w. Rule 8D and accordingly, the ground taken by the assessee in this regard is allowed.”

45. In light of the findings given in earlier years on identical set of facts, we direct the assessing officer to delete the disallowance of Rs.857.04 crores made under section 14A of the Act read with Rule 8D of the Rules. This ground is, accordingly allowed.

46. Next ground relates to claim of additional depreciation of Rs.9.79 crores.

47. Facts on record show that after the implementation of Scheme of amalgamation and arrangements passed by the Hon’ble High Court of Bombay at Goa and Hon’ble Madras High Court, the copper division, power division and aluminium division merged with the appellant. The assessee, in its return of income, claimed additional depreciation under section 32(1)(iia) of the Act in respect of new plant and machinery acquired and installed by it in all its divisions, that is, mining division, Met coke division, Pig iron division and power division.

48. While scrutinising the return of income, the assessing officer was of the opinion that the assessee is not entitled for additional depreciation as the word ‘manufacture’ as defined in section 2(29BA) of the Act with effect from 1.4.1999 do not take in its purview the claim of the assessee. According to the assessing officer, to claim additional depreciation available under section 32(1)(iia) of the Act, the assessee should be engaged in the manufacture or production of any article or thing. Since the assessee is in the business of mining iron ore and selling thereof, the assessing officer was of the opinion that the process of extraction of mining iron ore and processing the same do not constitute ‘manufacture’ or ‘production’.

49. Referring to the decision of the Hon’ble Supreme Court in the case of Gem India Manufacturing Company 249 ITR 307 wherein the Hon’ble Supreme Court has held that raw and un-cut diamonds is subjected to a process of cutting and polishing which yields the polished diamond but that is not to say that polished diamond is a new article or thing which is the result of manufacture or production. Further, referring to the decision of the Hon’ble Supreme Court in the case of Lucky Minerals Pvt Ltd 116 Taxman 1 wherein the Hon’ble Supreme Court has held that mere mining of limestone and marble and cutting the same before it was sold in the market cannot be considered a manufacturing process or production. In the light of the aforesaid rulings of the Hon’ble Supreme Court, the assessing officer was of the firm belief that the words ‘manufacture’ or ‘production’ used in section 32(iia) of the Act does not include processing of the assessee and accordingly disallowed the claim of additional depreciation.

50. Objections were raised before the DRP but the same were dismissed.

51. Before us, the learned counsel for the assessee drew our attention to the provisions of section 32(1)(iia) of the Act and pointed out that this section lays down the twin conditions, namely plant and machinery must be new and must be installed after 1.4.2005 and must be engaged in the business of ‘manufacture’ or ‘production’ of any article or thing. The ld. counsel for the assessee pointed out that the assessee has claimed additional depreciation only with respect to new plant and machinery acquired and installed after 31.3.2005 and hence first condition is fulfilled. It is the say of the ld. counsel for the assessee that the assessee has explained the process and procedure adopted by it for such extraction and processing of iron ore and as a result of such processes the end product that is procured is distinct from the raw material.

52. It is the say of the ld. counsel for the assessee that the word ‘manufacture’ means to bring into existence any article or a product either by physical labour or by power. And such new products shall have commercially distinctive name, use and character and therefore, the claim should be allowed.

53. Per contra the ld. DR strongly supported the findings of the Assessing Officer and once again drew our attention to the decisions relied upon by the assessing officer.

54. We have considered the rival submissions and have perused the orders of the authorities below. In our considered opinion, the term ‘manufacture’ is understood to mean as bringing into existence a new substance and such new substance should be commercially distinctive name, use and character. Though, the term ‘manufacture’ has been defined under section 2(29BA) of the Act to mean a change resulting in transformation of any article or thing into a new and distinct object but the term ‘production’ has not been defined under the Act. In our considered opinion, the term ‘production’ has been interpreted to be one having much wider connotation in as much as every ‘manufacture’ can be characterised as ‘production’ while every ‘production’ might not amount to ‘manufacture’ as held by the Hon’ble Apex court in the case of NC Budharaja & Co. 204 ITR 412.

55. We find that the Hon’ble Supreme Court in the case of Sesa Goa Ltd 271 ITR 331 [earlier name of the assessee] has held that extraction and processing of iron ore amounts to production. Relevant findings of the Hon’ble High Court to read as under:

“2. The following question raised at the instance of the revenue in an appeal before the Bombay High Court was answered in favour of the assessee :

2. The following question raised at the instance of the revenue in an appeal before the Bombay High Court was answered in favour of the assessee :

“Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that the assessee is entitled to deduction of investment allowance under section 32A of the Income Tax Act, 1961, in respect of machinery used in mining activity ignoring the fact that the assessee is engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing ?”

3. The High Court, while dismissing the appeal preferred by the revenue, held that extraction and processing of iron ore did not amount to “manufacture”. However, it came to the conclusion that extraction of iron ore and the various processes would involve “production” within the meaning of section 32A(2)(b)(iii) of the Income Tax Act, 1961 (hereinafter referred to as, “the Act”), entitling the assessee to investment allowance under the said provision.

3. The High Court, while dismissing the appeal preferred by the revenue, held that extraction and processing of iron ore did not amount to “manufacture”. However, it came to the conclusion that extraction of iron ore and the various processes would involve “production” within the meaning of section 32A(2)(b)(iii) of the Income Tax Act, 1961 (hereinafter referred to as, “the Act”), entitling the assessee to investment allowance under the said provision.

4. According to the revenue, which is in appeal before us, the High Court erred in its conclusion as it failed to consider that extraction and processing of iron ore did not produce any new product. The definition of the word “ore” in Strouds Judicial Dictionary, Volume 3, Fifth edition, has been relied upon in this context. Reliance has also been placed upon the decision of this court in Minerals and Metals Trading Corporation of India Ltd. v. Union of India (1973) 1 SCR 997 : AIR 1972 SC 2551 and on Chapter Note II of Chapter 26 of the Central Excise Tariff Act, 1985.

4. According to the revenue, which is in appeal before us, the High Court erred in its conclusion as it failed to consider that extraction and processing of iron ore did not produce any new product. The definition of the word “ore” in Strouds Judicial Dictionary, Volume 3, Fifth edition, has been relied upon in this context. Reliance has also been placed upon the decision of this court in Minerals and Metals Trading Corporation of India Ltd. v. Union of India (1973) 1 SCR 997 : AIR 1972 SC 2551 and on Chapter Note II of Chapter 26 of the Central Excise Tariff Act,

5. Learned counsel for the assessee, on the other hand, has contended that the High Court had correctly relied upon earlier decisions of this court in arriving at the conclusion it did. We have also been referred to the other provisions of the Act, which are substantially phrased in the same manner as section 32A(2)(b)(iii) of the Act, wherefrorn, according to the assessee, it will be abundantly clear that Parliament had intended to include the mining of ores within the meaning of the word “production”.

5. Learned counsel for the assessee, on the other hand, has contended that the High Court had correctly relied upon earlier decisions of this court in arriving at the conclusion it did. We have also been referred to the other provisions of the Act, which are substantially phrased in the same manner as section 32A(2)(b)(iii) of the Act, wherefrorn, according to the assessee, it will be abundantly clear that Parliament had intended to include the mining of ores within the meaning of the word “production”.

6. At the outset, it may be noted that section 32A(2)(b)(iii) makes it clear that investment allowance is deductible in respect of, inter alia, a plant owned by the assessee which is wholly used for the purposes of the assessees business under section 32A(1) if the plant is installed after 31-3-1976, in an industrial undertaking for the purposes of the business of construction or manufacture or production of any article or thing, except those articles or things mentioned in the Eleventh Schedule to the Act. There is no dispute that the plant in respect of which the assessee claimed deduction was owned by it and was installed after 31-3-1976, in the assessees industrial undertaking for excavating, mining and processing mineral ore. Mineral ore is not excluded by the Eleventh Schedule. The only question is whether such business is one of manufacture or production of ore. The issue had arisen before different High Courts over a period of time. The High Courts have held that the activity amounted to “production” and answered the issue in question in favour of the assessee. The High Court of Andhra Pradesh did so in CIT v. Singareni Collieries Co. Ltd. (1996) 221 ITR 48 (AP), the Calcutta High Court in Khalsa Brothers v. CIT (1996) 217 ITR 185 (Cal) and CIT v. Mercantile Construction Co. (1994) 74 Taxman 41 (Cal) and the Delhi High Court in CIT v. Univmine (P) Ltd. (1993) 202 ITR 825 (Del). The revenue has not questioned any of these decisions, at least not successfully, and the position of law, therefore, was taken as settled.

6. At the outset, it may be noted that section 32A(2)(b)(iii) makes it clear that investment allowance is deductible in respect of, inter alia, a plant owned by the assessee which is wholly used for the purposes of the assessees business under section 32A(1) if the plant is installed after 31-3-1976, in an industrial undertaking for the purposes of the business of construction or manufacture or production of any article or thing, except those articles or things mentioned in the Eleventh Schedule to the Act. There is no dispute that the plant in respect of which the assessee claimed deduction was owned by it and was installed after 31-3-1976, in the assessees industrial undertaking for excavating, mining and processing mineral ore. Mineral ore is not excluded by the Eleventh Schedule. The only question is whether such business is one of manufacture or production of ore. The issue had arisen before different High Courts over a period of time. The High Courts have held that the activity amounted to “production” and answered the issue in question in favour of the assessee. The High Court of Andhra Pradesh did so in CIT v. Singareni Collieries Co. Ltd. (1996) 221 ITR 48 (AP), the Calcutta High Court in Khalsa Brothers v. CIT (1996) 217 ITR 185 (Cal) and CIT v. Mercantile Construction Co. (1994) 74 Taxman 41 (Cal) and the Delhi High Court in CIT v. Univmine (P) Ltd. (1993) 202 ITR 825 (Del). The revenue has not questioned any of these decisions, at least not successfully, and the position of law, therefore, was taken as settled.

7. The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar (1961) 12 STC 150, defined the word “production”, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning “amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort”. From the wide definition of the word “production”, it has to follow that mining activity for the purpose of production of mineral ores would come within the arnbit of the word “production” since ore is “a thing”, which is the result of human activity or effort. It has also been held by this court in CIT v. N. C. Budharaja and Co. (1993) 204 ITR 412 (SC) that the word ,production” is much wider than the word “manufacture”. It was said (page 423) :

7. The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar (1961) 12 STC 150, defined the word “production”, albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning “amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort”. From the wide definition of the word “production”, it has to follow that mining activity for the purpose of production of mineral ores would come within the arnbit of the word “production” since ore is “a thing”, which is the result of human activity or effort. It has also been held by this court in CIT v. N. C. Budharaja and Co. (1993) 204 ITR 412 (SC) that the word ,production” is much wider than the word “manufacture”. It was said (page 423) :

“The word production has a wider connotation than the word manufacture. While every manufacture can be charaterised as production, every production need not amount to manufacture ….

The word production or produce when used in juxtaposition with the word manufacture takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods.”

It is, therefore, not necessary, as has been sought to be contended by learned counsel for the revenue, that the mined ore must be a commercially new product. The decisions and other authorities on the definition of the word “ore”, as cited by the appellant, are irrelevant.

8. Learned counsel appearing on behalf of the assessee, correctly submitted that the other provisions of the Act, particularly section 33(1)(b)(B) read with Item No. 3 of the Fifth Schedule to the Act, would show that mining of ore is treated as “production”. Section 35E also speaks of production in the context of mining activity. The language of these sections is similar to the language of section 32A(2). There is no reason for us to assume that the word “production” was used in a different sense in section 32A.

8. Learned counsel appearing on behalf of the assessee, correctly submitted that the other provisions of the Act, particularly section 33(1)(b)(B) read with Item No. 3 of the Fifth Schedule to the Act, would show that mining of ore is treated as “production”. Section 35E also speaks of production in the context of mining activity. The language of these sections is similar to the language of section 32A(2). There is no reason for us to assume that the word “production” was used in a different sense in section 32A.

9. We are, therefore, of the opinion that extraction and processing of iron ore amounts to “production” within the meaning of the word in section 32A(2)(b)(iii) of the Act and, consequently, the assessee is entitled to the benefit of section 32A(1) of the Act. The question whether the High Court was correct in holding that the activity did not amount to “manufacture” is left open.

9. We are, therefore, of the opinion that extraction and processing of iron ore amounts to “production” within the meaning of the word in section 32A(2)(b)(iii) of the Act and, consequently, the assessee is entitled to the benefit of section 32A(1) of the Act. The question whether the High Court was correct in holding that the activity did not amount to “manufacture” is left open.

The civil appeal is, accordingly, dismissed but without any order as to costs.”

56. In light of the binding decision of the Hon’ble Supreme Court we direct the Assessing Officer to allow claim of additional depreciation. This ground is, accordingly, allowed.

57. The next grievance relates to claim of balance 50% additional depreciation disallowed by the assessing officer amounting to Rs.152.55 crores.

58. Facts show that the assessee had acquired and installed some of the new plant and machinery eligible for additional depreciation under section 32(1)(iia) of the Act and was put to use for a period less than 180 days during FY 2012-13 and, therefore, was allowed depreciation to the extent of 50% of the eligible additional depreciation.

59. In its return for the year under consideration the assessee claimed balance 50% of the additional depreciation amounting to Rs.152.55 crores as the said depreciation was attributable to new plant and machinery used in iron ore division, power division, copper division and aluminium division.

60. While scrutinising the return of income the assessing officer was of the firm belief that the assessee is not entitled for such claim as there is no such provision for carry-over of the balance claim of additional depreciation to the next year. Though there is a reference to the amendment brought in the act vide the Finance Act of 2015, but the assessing officer was of the opinion that third proviso to section 32(1)(ii) of the Act allowing such carry-over to subsequent year is applicable prospectively and disallowed the claim of 50% of additional depreciation.

61. Objections were raised before the DRP. The DRP also concurred with the view of the assessing officer that amendment made vide Finance Act 2015 was prospective in application.

62. Before us, at the very outset, the learned counsel for the assessee stated that an amount of Rs.1.02 crores had already been included/considered while making disallowance under section 32(1)(iia) of the Act and hence to this extent this allowance has been made doubly.

63. The ld. counsel for the assessee further stated that the claim has been disallowed merely on the ground that the claim of depreciation has been disallowed under section 32(1)(iia) of the Act and whereas the said disallowance was only in relation to depreciation pertaining to mining operations under iron ore division.

64. It is the say of the ld. AR that additional depreciation at the rate of 20% on the eligible plant and machinery u/s 32(1)(iia) of the Act has been provided in addition to normal depreciation in order to incentivise capitalisation and therefore, when additional depreciation is restricted to 50% the same should be allowed in the subsequent year and if the same is not allowed, then it would completely defeat the purpose of the said section which was enacted to provide benefit on capitalisation.

65. In so far as applicability being prospective the ld. AR relied upon the decision of the Hon’ble Supreme Court in the case of Allied Motors Pvt Ltd 224 ITR 667 and Alom Extrusions Ltd 319 ITR 306 wherein the Hon’ble Supreme Court has held that beneficial provision/clarifications should be given prospective effect.

66. Per contra the ld. DR strongly supported the findings of the assessing officer and reiterated that there is no such provision of carry­over of balance claim of additional depreciation to the next year.

67. Referring to the decision of the coordinate bench in the case of M/s Shree Jaya Jothi Cements in ITA No. 1932/Mds/2015, the ld. DR stated that in that case the Tribunal has held that claim of additional depreciation has to be given in the first year itself and there is no provision for its postponement or carry forward. The ld. DR further drew our attention to the Memorandum to Finance Act 2015 wherein it has been clarified that this benefit of carry over of balance additional depreciation to the next year was not available prior to this amendment.

68. The ld. DR further drew our attention to the decision of the Hon’ble High Court of Delhi in the case of New Skies Satellite BV 68 com 8 wherein basic test for amendment being retrospective or prospective has been laid down.

69. We have carefully considered the rival submissions and the orders  of the authorities below. It is not in dispute that the plant and machinery on which additional depreciation u/s 32(1 )(iia) of the Act was claimed were purchased in FY 2012-13. Since the additions made were used for less than 180 days, as per provisions of law, the assessee was entitled to only 50% of total depreciation. Since the assessee was allowed only 50% of total depreciation, it claimed the balance 50% in the year under consideration. Since in the earlier ground we have held that the assessee is entitled for claim of additional depreciation, there is no dispute that the claim of additional depreciation is available to the assessee. However, the quarrel is in respect of balance of additional depreciation brought forward from the earlier year and claimed in the year under consideration. It is not in dispute that vide Finance Act 2015, this claim is available to the assessee. So the only quarrel relates to the applicability of the said section as in the amendment it has been clearly mentioned that it is applicable from assessment year 2016-17.

70. Explanation given in the memorandum of Finance Act 2015 reads as under:

“i. Allowance of balance 50% additional depreciation.

ii. To encourage investment in plant or machinery by the manufacturing and power sector, additional depreciation of 20% of the cost of new plant or machinery acquired and installed is allowed under the existing provisions of section 32(l)(iia) of the Income-tax Act over and above the general depreciation allowance. On the lines of allowability of general depreciation, the second proviso to section 32(l)(ii) inter alia provides that the allowance for additional depreciation would be restricted to 50% if the new plant or machinery acquired and installed by the assessee is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in the previous year. Non-availability of full 100% allowance for additional depreciation for plant or machinery acquired and installed in the second half of the year may motivate the assessee to defer such investment to the next year for availing full 100% allowance for additional depreciation in the next year.

iii. To remove the discrimination in the manner of allowing additional depreciation on plant or machinery used for less than 180 days and plant or machinery used for 180 days or more, a new proviso has been inserted to section 32(l)(ii) of the Income-tax Act so as to provide that the balance 50% of the additional depreciation allowance on new plant or machinery acquired and used for less than 180 days which has not been allowed in the year of acquisition and installation of such plant or machinery, shall be allowed in the immediately succeeding previous year.

iv. Applicability: – This amendment takes effect from 1st April, 2016 and will, accordingly, apply in relation to the assessment year 2016­17 and subsequent assessment years.”

71. A simple perusal of the above shows that this amendment takes effect from 1.4.2016. As this amendment is effective from 01.04.2016, therefore, it is clearly not applicable to the year under consideration. As far as the applicability of this amendment having retrospective effect, we are of the view that the Tribunal being last fact finding authority, should refrain from adjudication of retrospective or otherwise of the applicability in the amendment. In our considered view, this should be in the domain of superior courts. Therefore, considering the plain language of the section, we do not find the amendment applicable to the year under consideration.

72. In light of the aforesaid discussion, we are of the considered view  that the assessee is not entitled for claim of 50% of the depreciation brought forward from earlier assessment years.

73. Next ground relates to disallowance of Rs.21.76 crores claimed as deduction u/s 32AC of the Act.

74. As mentioned elsewhere, since the appellant is engaged in the business of manufacture/production of iron ore, aluminium, copper, pig iron and metallurgical coke and power and since the assessee has acquired and installed new assets amounting to Rs.573 crores, it claimed deduction u/s 32AC of the Act aggregating to Rs.2,17,61,32,015/- consisting of Rs.13,99,23,723/- for power division and Rs.7,76,89,482/-for iron ore division respectively.

75. This claim of the assessee was denied by the Assessing Officer solely on the ground that exploration of mines and generation of power were not manufacturing activities as envisaged u/s 32AC of the Act. The said denial was upheld by the DRP on the premise that activities pertaining to mining were not in the nature of manufacture/production and that generation of power was not covered within the ambit of section 32AC of the Act.

76. Before us the ld. counsel for the assessee vehemently stated that
the assessee has fulfilled the conditions laid down u/s 32AC of the Act and the only ground on which the claim has been denied is that the activities carried on in the mining division and power division did not tantamount to manufacture or production of any article or thing. Referring to his submissions made for claim of depreciation u/s 32(1)(iia) of the Act, the ld. counsel for the assessee stated that for the same reason claim u/s 32AC of the act should be allowed.

77. Per contra, the ld. DR strongly supported the findings of the Assessing Officer and reiterated his submissions made for disallowance under section 32(1)(iia) of the Act.

78. We have given thoughtful consideration to the rival contentions. In so far as mining activities is concerned, we have considered an identical issue at Para 56 hereinabove, wherein we have referred to the decision of the Hon’ble Supreme Court holding that the assessee is eligible for claim u/s 32(1)(iia) of the Act. For similar reasons, the assessee is also eligible for allowance u/s 32AC of the Act.

79. In so far as the disallowance made on the ground that generation of power does not amount to manufacture or production of goods, in our considered opinion, this issue is no longer res Integra and has been conclusively settled by the Hon’ble Apex Court in the case of Commissioner of Sales Tax, MP Vs Madhya Pradesh Electricity Board 2SCR939 wherein it has been held that electric energy would be covered under the definition of ‘goods’.

80. The Hon’ble Jurisdictional High Court of Delhi in the case of NTPC Sail Power Company in ITA No 1290/2018 had the occasion to consider a similar issue. Relevant findings of the Hon’ble High Court read as under:

“6. Section 32(1)(iia) of the Act as it stood at the relevant time, read as follows:

“32. Depreciation:

(1) In respect of depreciation of –

(2)

(iia) In the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii). ”

7. Learned counsel for the assessee has drawn our attention to the judgement of the Karnataka High Court dated 16.09.2014 in ITA No.08/2014 [Commissioner of Income Tax vs. The Hutti Gold Mines Co. Ltd.] wherein the question of additional depreciation was considered and it was held as follows:

“3. The material on record shows that the assessee is generating electricity through windmill as a second line of business. It is a product of the assessee company. It is covered under the words “article” or “thing”, which is tradable / identifiable. In other words, the electricity falls within the definition of Sale of Goods Act, 1930, and process of generation of electricity is akin to manufacture or production of an “article” or “thing”. The power generated need not necessarily be used in the production of assessee’s own products namely mining and extraction of gold. The use of electricity in the manufacturing activity of the core business of the assessee is not a precondition for the grant of additional depreciation under the statute. Therefore, we do not see any merit in this appeal. Accordingly, this appeal is rejected.

4. However, we have not gone into the question of applicability of Section 32(1)(iia) of the Income Tax Act, 1961, and the question as to whether clarificatory or not is kept open to be decided at proper time. ”

Although the Karnataka High Court held that it was not going into the question of Section 32(1)(iia) and the question of whether the subsequent amendment was clarificatory, the analysis of the Court is in our view also applicable to the interpretation of the said provision for the purposes of the present dispute.

8. Similarly, it is clear that electricity has been held to be “goods” for the purposes of sales tax in the Constitution Bench judgment of the Supreme Court in State of Andhra Pradesh vs. NTPC Ltd. AIR 2002 SC 1895. The Supreme Court, in that judgment held as follows:

“20. Before we deal with the constitutional aspects let us first state what electricity is, as understood in law, and what are its relevant characteristics. It is settled with the pronouncement of this Court in Commissioner of Sales Tax, Madhya Pradesh, Indore v. Madhya Pradesh Electricity Board, Jabalpur – 1969(2) SCR 939 that electricity is goods. The definition of goods as given in Article 366 (12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which “goods” means all kinds of moveable property. The term “moveable property” when considered with reference to “goods” as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electrical energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under Section 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of “goods”. However, A.N.Grover, J., speaking for three-Judge Bench of this Court went on to observe that electric energy “can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other moveable property”. In this observation we agree with Grover. J., on all other characteristics of electric energy except that it can be storedand to the extent that electric energy can be stored, the observation must be held to be erroneous or by oversight. The science and technology till this day have not been able to evolve any methodology by which electric energy can be preserved or stored.”

9. The Tribunal’s judgment in NTPC vs. DCIT [relied upon in the orders of the CIT(A) as well as the Tribunal in the present case] followed this judgment of the Supreme Court to hold that electricity has all the necessary trappings of “articles” or “things” and the benefit of additional depreciation cannot be denied.

10. As held by the Constitution Bench, electricity is capable of abstraction, transmission, transfer, delivery, possession, consumption and use like any other movable property. Following the same logic, to deny the benefit of additional depreciation to a generating entity on the basis that electricity is not an “article” or “thing” is in our view an artificially restrictive meaning of the provision. The benefit of additional depreciation under Section 32(1)(iia) has, therefore, been rightly granted to the assessee by the concurrent judgments of the CIT(A) and the Tribunal.

11. We also note that, w.e.f. from 01.04.2013, the provision has been amended by the Finance Act, 2012 and assessees engaged in the generation of power have expressly been included in the ambit thereof.

12. For the above reasons, the Court is of the opinion that no substantial question of law arises. The appeal is dismissed.”

81. In light of the decision of the Hon’ble Supreme Court in the case of Sesa Goa and NTPC Sail Power Co. Pvt Ltd [supra], we direct the Assessing Officer to allow the claim of deduction u/s 32AC of the Act. This ground is, accordingly, allowed.

82. The next ground relates to the addition of Rs.1095.93 crores on account of out of books receivables.

83. Facts on record show that during the course of survey conducted under section 133A of the Act on 20.3.2014 at the business premises of the appellant, certain documents were impounded, which contained email exchanges made by the senior executives of the appellant company.

84. From a perusal of the aforementioned emails, the Assessing Officer formed a belief that receivables of Rs.1095.93 crores have not been disclosed by the assessee in its books of account. According to the Assessing Officer, the assessee and its group concerns failed to disclose various receivables in its books of accounts, which were not in the knowledge of the independent auditor as no qualification has been made by the independent auditor in the Annual Reports of the assessee and its group companies. The alleged out of books receivables can be itemised as under:

Insurance claims                                                   Rs. 254 crores

Refund from banks                                               Rs. 160 crores

Drawback related                                                  Rs. 22 crores

Coal tapering                                                          Rs. 169 crores

Tariff fixation Gridco                                            Rs. 295 crores

PAT [Perform achieve and trade scheme]        Rs. 196 crores

Total                                                                         Rs. 1096 crores

85. The Assessing Officer, accordingly, treated the aforesaid amount as business income of the assessee.

86. Objections were raised before the DRP, but the DRP upheld the addition made by the Assessing Officer on account of alleged out of books receivables.

87. Before us, the ld. counsel for the assessee vehemently stated that the entire addition has been made on the basis of certain emails selectively without taking into account the complete email trails showing the context in which the emails were written. The ld. AR stated that senior executives of the appellant were discussing about the tracking mechanism in respect of all those receivables which could not be accounted for in the books of accounts on accrual basis due to uncertainties attached to it and which are to be duly accounted for whenever such receivables are ultimately received. The ld. counsel for the assessee pointed out that on 19.7.2019, before the DRP an affidavit of its Director was filed to the effect that the emails reflected the discussions of the senior executives of the appellant regarding tracking mechanism.

88. Referring to the Accounting Standard [AS]-9 issued by the Institute of Chartered Accountants of India, the ld. counsel for the assessee stated that this Accounting Standard provides that the revenue must be recognised on accrual basis only when there is reasonable certainty about the realisation of such income.

89. It is the say of the learned counsel for the assessee that the action of the lower authorities is clearly in contravention of the settled principles of AS-9. The ld. counsel for the assessee drew our attention to the relevant extract of emails.

90. In the alternative, the ld. counsel for the assessee stated that out of the alleged Rs.1096 crores of receivables outside of books, Rs.261/- crores was related to other entities and further Rs.414/-crores related to Vedanta Aluminium Ltd. which are separate entities and, therefore, no addition could be made to this extent in the hands of the appellant.

91. Per contra, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that the assessee has not denied the genuineness of these emails and correspondence is between the responsible and senior officers of the appellant company. The ld. DR pointed out that there is no ambiguity in the words used “out of books receivables”. Since the information was not available with the auditors, therefore, they had no occasion to examine the same and comment thereon. The ld. DR vehemently stated that the assessee could not furnish any supporting documents before the lower authorities.

92. We have given a thoughtful consideration to the orders of the authorities below and have carefully considered the rival submissions. It would be pertinent to extract the relevant emails with respect to receivables which could not be accounted for in the books on accrual basis which is as under:

Sender Date of email Relevant extracts of email
D.D. Jalan 21.06.2013 “ There are at times some receivable which are not accounted for in books on accrual basis and these are accounted for as and when these ae received like nil inventory insurance claim claims from Bank on account of higher Bank charges, interest of float money etc. and other claims.

How do we keep track of these receivables? I am sure there would be some Memorandum Account Does this gets regularly reviewed in some Forum Can you forward a list of such receivable as on 31st May along with a note on process. ”

Navin Agarwal 25.06.2013 DDJ

Regarding receivables of any kind which do not appear in out books Have we received statements from all our businesses outlining such receivables and the mechanism to track and control this?

Amitabh Gupta 22.6.2013 “Dear Sir,

We essentially have two types of receivables that are out of books: Interest on WPP receivables: There is uncertainty as to their recoverability’ from State Electricity Boards However –e have a robust process wherein interest debit notes are raised on a monthly basis and a memoranda record is kept Tnere is an internal MIS where I gel this on a monthly basis Separately, we do send reminders on a regular basis Insurance claims receivable: Unless there is virtual certainty in receiving these we do not take credit in the PnL Again We track this on monthly basis Mostly these are LOP claims where the amount of the claim is often filed in a much high side. ”

Manish
Dawar
30.6.2013 “DD attached is the listing of off balance sheet receivable that we have There is continuous focus on two large items and we review it regularly.

As a process we are planning to capture this in SAP notes so that the track is not lost. ”

Vinod Bhandawat 02.7.2013 Dear Sir

The details of potential receivable outside the books has been compiled and the total of such amount is Rs 1096 crs. This can be split into the following categories Insurance claim related Rs 254 crs Refunds from banks Rs 160 crs Draw back related Rs 22 crs Coal Tapering Rs 169 crs Tariff Fixation Gridco Rs 295 crs Rs 196 crores towards PAT (perform achieve and trade scheme) at VAL for energy efficiency Some of the insurance claims particularly in VAL may be infated and the progress on PA T scheme from the ministry of power is slow Entity wise split in summary form is attached herewith Such type of receivables which are outside the book’s can be tracked on memorandum basis in SAP. ”

93. A perusal of the aforesaid exchange of emails shows that these are in the nature of a discussion regarding certain premature claims. However, an itemised detail has been mentioned elsewhere. A perusal of the same suggests that some of the items are easily traceable for example insurance claim can be traced back to the damaged assets on which claim has been made and could be easily verified from the Insurance companies. Similarly, claims lodged with banks can be verified from the banks and the nature of claim can also be verified. In so far as duty drawback is concerned, the same being related to government bodies which is also easily verifiable.

94. However, we find that neither the Assessing Officer has done any
exercise nor the assessee has adduced any demonstrative evidences before the lower authorities nor before us. Similar is the situation with the coal tapering claim of Rs. 169 crores, which could have been verified from South Eastern Coal Fields Limited, tariff fixation relating to Power Purchase Agreement with Grid Corporation of Orissa Limited is verifiable from the GRIDCO. Similarly, the Perform Achieve Trade for energy efficiency is also verifiable from the government.

95. As mentioned elsewhere neither the Assessing Officer has done any verification nor the assessee has brought any evidence on record. The entire addition has been made only on the basis of emails without proper verification. On such half-baked facts, it is not possible for us to decide the quarrel. Therefore, we deem it fit to restore the entire quarrel to the file of the Assessing Officer. The Assessing Officer s directed to make verification of the claim from the respective bodies as mentioned here in above, and the assessee is directed to furnish necessary evidences in respect of such claims.

96. Before closing, the claim of the assessee that certain amounts pertained to other group entities, which are distinct entities, cannot be brushed aside lightly. We, accordingly, direct the Assessing Officer to consider only those receivables which pertain to the appellant company. With these directions, this ground is treated as allowed for statistical purposes.

97. Next ground relates to the disallowance of rupees 50.30 lakhs claimed as Corporate Social Responsibility expenditure.

98. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed an expenditure of Rs. 50,36,663/-on account of CSR. The Assessing Officer was of the opinion that expenditure so incurred does not qualify as expenditure incurred for the purpose of business in terms of section 37 of the Act.

99. Objections were raised before the DRP but the DRP confirmed the disallowance relying upon the decision of the Tribunal in the case of Hyundai Motor India Limited 62 com 42. The DRP was of the opinion that Explanation 2 to section 37(1) of the Act which specifically provides that expenditure incurred on CSR was not deemed to be a business expenditure.

100. Before us, the ld. counsel for the assessee vehemently stated that Section 135 of the Companies Act 2013 casts a legal obligation on the appellant company to expend towards CSR. It is the say of the ld. Counsel for the assessee that pursuant to such mandate the company has laid down CSR policy the objective of which is that the company is committed to conduct its business in a socially responsible, ethical and environmental friendly manner and to continuously work towards the improvement of quality of life in the communities.

101. The ld. counsel further stated that expenditure on CSR is also a commercial obligation of the company. The ld. counsel for the assessee vehemently stated that the amendments made to section 37 of the Act are w.e.f from 1.4.2015 and are applicable from A.Y 2015­16 and therefore, the same cannot be imported for disallowance for the year under consideration.

102. Per Contra, the ld. DR strongly supported the findings of the lower authorities.

103. We have carefully considered the rival submissions and have perused the order of the authorities below. At the very outside, the Tribunal in the case of National Small Industries Corporation Limited 175 ITD 601 has held that amendments made to section 37 of the Act vide Finance Act [No. 2] 2014 are prospective in nature and hence would not be applicable to the period prior to the said amendment which is the case of the assessee.

104. Having said that, let us look into the details of the expenditure incurred on CSR by the applicant :

PARTICULARS AMOUNT
1. Goa Swimming Association, Margao 200000
2. Carmel Boys Curtorim, Curtorim 15000
3. Progress High School, Sankhali 15000
4. Goa Salesian Society, ODXEL 10000
5. Everest Expedition, 2013 50000
6. Hampi Utsav, Chitradurga 50000
7. No smoking signage 40163
8. Our Lady of Immaculate Conception of Panjim Church 15000
9. Police station, Sanquelim 2000
0. Police Station, Bicholim 3000
1. Shri Bhanu Talim Sansthan, Miraj 50000
2. Teri Summit, 2014 350000
3. Spandan Foundation 50000
4. Magic Bus India Foundation 500000
5. Sahachari Foundation 2,00000
6. Shiv Ganga Project 2500000
7. Swargheeya Sanji Bhai Rupji Bhai Memorial Trust 1000000
Total 5036663

105. A plain reading of the aforementioned detail show that these expenses are either in the nature of charity or donation. In our considered view, these expenses are not in the nature of CSR. Payments made to church, police station, summits, schools, etc cannot be considered to have been spent on CSR.

106. Though the amendment to Section 37 of the act may be prospective, but at the same time, assessee had to justify the claim of expenditure being spent on CSR. Details mentioned hereinabove do not justify the claim of expenditure on account of commercial expediency. Considering the claim from all possible angles, we do not find any merit in such claim of expenditure. Disallowance of Rs. 50.37 lakhs stands confirmed. This ground is, accordingly, dismissed.A plain reading of the aforementioned detail show that these expenses are either in the nature of charity or donation. In our considered view, these expenses are not in the nature of CSR. Payments made to church, police station, summits, schools, etc cannot be considered to have been spent on CSR.

107. Next Ground relates to addition of Rs 3,22,94,880/- on account of liquidated damages.

108. While scrutinising the return of income, the assessing officer found that during the year the assessee has received liquidated damages of Rs.3,22,94,880/- and in its computation of income, the assessee claimed exclusion of the same from the taxable income on the ground that the same having been received from the suppliers of capital goods in relation to delayed supply of such capital goods. On these facts the sum was treated as capital receipts. The assessing officer was not convinced with the claim of the assessee and was of the firm belief that under section 28(iv) of the Act the said amount is chargeable as revenue receipt. The Assessing Officer further observed that the assessee had failed to submit necessary details of the parties and other documentary evidences to substantiate that liquidity damages were connected with supply of capital goods.

109. Objections were raised before the DRP and some fresh evidences were filed which were sent to the assessee by the DRP. In his remand report, the Assessing Officer examined the copies of agreement with M/s China Aluminium International Trading Company Limited and M/s Guiyang Aluminium Magnesium Design and Research Institute, though copies of the agreements in respect of other persons were not furnished.

110. On examining the two agreements in this remand report, the Assessing Officer mentioned that the agreements were not for supply of any capital goods but transfer of technology, supply of design, engineering manufacture, installation of machinery and erection and commissioning of the plant which are intangible assets. Also agreements related to transfer of technology know-how, patent et cetera for the production process of aluminium smelting which are tangible assets and not plant and machinery. On the basis of these facts the Assessing Officer distinguished the decision of the Hon’ble Supreme Court in the case of Saurashtra Cement Ltd 25 ITR 422.

111. On the basis of the remand report, the additions were confirmed by the DRP.

112. Before us, the learned counsel for the assessee vehemently stated that the assessee has furnished the agreements on sample basis covering more than 75% of the liquidated damages. It is the say of the ld. counsel for the assessee that if the Assessing Officer had insisted for furnishing all the agreements, the assessee would have furnished the same. The ld counsel further stated that neither the Assessing Officer nor the DRP have disputed that the liquidated damages are the outcome of the contracts furnished by the assessee. It is the say of the ld counsel for the assessee that since liquidated damages were on account of capital goods, the same should be treated as capital receipt.

113. On the other hand, the ld. DR strongly supported the findings of the lower authorities and pointed out that the decision of the Hon’ble Supreme Court in the case of Saurashtra Cement [supra] is clearly distinguishable on facts of the case as in that case, damages were received for delay in supply of machinery which is the capital asset.

114. We have carefully considered the orders of the authorities below. When the entire basis of making a decision is that agreements were not for supply of any machinery, but of design, transfer of technology knowhow, patent etc, which are in the nature of intangible assets, but the lower authorities have completely ignored the fact that even intangible assets are capital goods and a specific rate of depreciation is provided in the Income Tax Act. In our considered opinion, and as admitted by the revenue authorities, damages were for intangible assets and intangible assets are also capital goods. Therefore, any liquidated damages received are capital receipts. We, accordingly,direct the Assessing Officer to delete the addition of Rs. 32,29,40,880/-. This ground is accordingly allowed.

115. Next Ground relates to denial of brought forward losses.

116. In its return of income, the assessee has claimed set off of brought forward business losses and unabsorbed depreciation from its income during the year under consideration. The claim was denied by the Assessing Officer on the ground that in earlier assessment years, additions/disallowances have been made which have been confirmed by the DRP. The DRP confirmed the findings of the Assessing Officer holding that the claim could only be admissible once assessment of earlier A.Y is finalised.

117. Before us, the ld. counsel for the assessee stated that there is no dispute that in earlier A.Ys are under appeal but at least the Assessing Officer should have given claim of set off as per assessed income/losses.

118. The ld. DR simply relied upon the findings of the DRP.

119. In our considered opinion, even if the earlier assessment orders are in appeal, the assessee is still entitled for claim of set off as per assessed figures of previous A.Ys. We, accordingly, direct the Assessing Officer to allow set off as per assessed figures of the previous A.Ys. This ground is allowed for statistical purposes.

120. The next ground relates to the applicability of provisions of Minimum Alternate Tax [MAT]

121. Facts on record show that for the year under consideration, the assessee had recorded net profit of Rs. 1076,08,75,131/- in its books of accounts. As against the same, the assessee had declared book loss of Rs. 2623,16,31,045/- in terms of section 115JB of the Act. In support, the assessee has also filed report of the Chartered Accountant in Form 29B. The computation of net profit, book profit and certificate of the CA are placed in the paper book.

122. The assessee submitted the following computation of book profit u/s 115JB of the Act :

Particulars Amount
Net Profit As Profit & Loss Account 1076,08,75,131
Add:-

Provision for Taxes Deferred Tax Provision Expenses in relation to exempted income Impairment of Assets

(1782,09,52,034)

(392,65,08,623)

1,46,21,701

66,84,27,589

(2106,44,11,367)
(1030,35,36,236)
Less:-

Debenture Redemption Reserve

-Dividends (u/s 10)

3,03,36,57,317

1289,44,37,492

1592,80,94,809
Book Profit (2623,16,31,045)

123. During the course of scrutiny assessment proceedings, the assessee was asked to furnish detailed justification of computation u/s 115 JB of the Act, especially in respect of deductions claimed on account of deferred tax, exempt income and withdrawal from reserves. The assessee was also asked to explain as to why the provision for doubtful debts, expenditure disallowed u/s 36(1)(iii) of the Act and forex fluctuation loss should not be added back while computing book profit u/s 115JB of the Act.

124. The assessee filed detailed submissions in support of its computation u/s 115JB of the Act.

125. The written submissions of the assessee and explanation did not find any favour with the Assessing Officer.

126. The Assessing Officer re-computed the book profit as under:

Particulars Amount (Rs)
Profit after tax (as per the P&L A/c) 1076,08,75,131
Add – Provision for impairment of assets 66,84,27,589
Add – Disallowance of expenses incurred in relation to exempt income (u/s) 857,04,00,000
Add – Receivables out of Books 1095.93,00,00
Add – Provision for Bad and Doubtful debts 247,01,13,831
Add – Donation 15,50,36,663
3358,41,53,214
Less     — Reversal of Provision for taxes pertaining to past years credit P&L NIL
Less — Deferred tax income credited to P&L 392,65,08,623
Less – Exempt dividend income u/s 10(34) 1289,44,37,49
Less – Debenture Redemption Reserve NIL2
Book Profits u/s 115JB 1676,32,07,09

127. Objections were raised before the DRP but the DRP confirmed the computation of book profit by the Assessing Officer as mentioned hereinabove.

128. Before us, the ld. counsel for the assessee vehemently stated that the provisions of MAT are a separate code in itself and the powers of the Assessing Officer therein are extremely limited.

129. Strong reliance was placed on the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd 255 ITR 273. It is the say of the ld. counsel for the assessee that once the accounts of the company are examined and certified as complying with mandatory requirements of the Companies Act by the statutory auditors, the company in its AGM and ROC, the Assessing Officer cannot tinker with and make adjustments to the same for the purposes of computing book profits.

130. Per contra the ld. DR strongly supported the findings of the lower authorities.

131. It is the say of the ld. DR that the Hon’ble Supreme Court in the case of Dynamic Orthopaedics Pvt. Ltd. 190 taxman 288 has differed from the judgement delivered in the case of Malayala Manorama 169 Taxman 471 and referred the matter to a larger bench of the court. It is the say of the ld. DR that the issue of scrutiny of profit and loss account, prepared by the company is still open and in that view of the matter, the Assessing Officer can re-scrutinise the account and satisfied himself that these accounts are prepared as per the provisions of the Companies Act.

132. The ld. DR further stated that if the book profit declared by the assessee is not prepared as per the provisions of the Companies Act, 2013, the Assessing Officer can change the book profit declared by the assessee. It is the say of the ld. DR that the book profit should always be prepared by applying the provisions of the Companies Act and as per the Companies Act accounting standards have been prescribed to prepare the financial statement. The company has to adhere to these accounting standards to arrive upon book profit and such book profit has to be increased or reduced by making further addition or reduction to the book profit to arrive upon the book profit as defined u/s 115 JB of the Act. Therefore, there is no error in the computation of book profit by the Assessing Officer and the same deserves to be confirmed.

133. At the very outset it would be appropriate to consider the decision of the Hon’ble Supreme Court in the case of Apollo Tyres [supra]. The relevant findings read as under:

“The Assessing Officer, while computing the book profits of a company under Section 115-J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.”

134. Referring to the decision in the case of Dynamic Orthopaedics Ltd [supra] by the ld. DR, we find that in that case the quarrel was in respect of claim of depreciation. In that case, the assessee claimed depreciation in its profit and loss account as per rates specified in Rule 5 of IT Rules whereas while completing the assessment of income, the Assessing Officer re-computed book profit after allowing depreciation as per Schedule 14 of the Companies Act. As the rates of depreciation specified in Schedule 14 of the Companies Act were lower than the rates specified in the IT Rules, a quarrel erupted between the assessee and the revenue. When the matter travelled up to the Hon’ble High Court of Kerala the Hon’ble High Court was to answer whether the CITA was right in directing the AO to allow claim of depreciation made by the Assessing Officer as per the IT Rules for the purposes of computing book profit. The Hon’ble High Court allowed the appeal holding that the Assessing Officer was right in recomputing book profit after allowing depreciation as per Schedule 14 to the Companies Act.

135. The quarrel travelled upto the Hon’ble Supreme Court and the decision was reversed by the Hon’ble Supreme Court. This issue was reconsidered by the Hon’ble Supreme Court in the case of Dynamic Orthopaedics [supra] and the Hon’ble Supreme Court observed that “In our view, with respect to judgement of this Court in Malayalam Manorama [supra] needs reconsideration for the following reasons:

“In our view, with respect, the judgement of this Court in Malayala Manorama Company Limited vs. Commissioner of Income Tax, reported in [2008] 300 I.T.R.251. needs re-consideration for the following reasons: Chapter XII-B of the Act containing “Special provisions relating to certain Companies” was introduced in the Income Tax Act, 1961, by the Finance Act, 1987, with effect from 1st April, 1988. In fact, Section 115J replaced Section 80VVA of the Act. Section 115J [as it stood at the relevant time], inter alia, provided that where the total income of a company, as computed under the Act in respect of any accounting year, was less than thirty per cent of its book profit, as defined in the Explanation, the total income of the company, chargeable to tax, shall be deemed to be an amount equal to thirty per cent of such book profit. The whole purpose of Section 115J of the Act, therefore, was to take care of the phenomenon of prosperous `zero tax’ Companies not paying taxes though they continued to earn profits and declare dividends. Therefore, a Minimum Alternate Tax was sought to be imposed on `zero tax’ Companies. Section 115J of the Act imposes tax on a deemed income. Section 115J of the Act is a special provision relating only to certain Companies. The said section does not make any distinction between public and private limited companies. In our view, Section 115J of the Act legislatively only incorporates provisions of Parts II and III of Schedule VI to 1956 Act. Such incorporation is by a deeming fiction. Hence, we need to read Section 115J(1A) of the Act in the strict sense. If we so read, it is clear that, by legislative incorporation, only Parts II and III of Schedule VI to 1956 Act have been incorporated legislatively into Section 115J of the Act. Therefore, the question of applicability of Parts II and III of Schedule VI to 1956 Act does not arise. If a Company is a MAT Company, then be it a private limited company or a public limited company, for the purposes of Section  115J of the Act, the assessee-Company has to prepare its profit and loss account in accordance with Parts II and III of Schedule VI to 1956 Act alone. If, with respect, the judgement of this Court in Malayala Manorama Company .Limited [supra] is to be accepted, then the very purpose of enacting Section 115J of the Act would stand defeated, particularly when the said section does not make any distinction between public and private limited companies. It needs to be reiterated that, once a Company falls within the ambit of it being a MAT Company, Section 115J of the Act applies and, under that section, such an assessee-Company was required to prepare its profit and loss account only in terms of Parts II and III of Schedule VI to 1956 Act. The reason being that rates of depreciation in Rule 5 of the Income Tax Rules, 1962, are different from the rates specified in Schedule XIV of 1956 Act. In fact, by the Companies (Amendment) Act, 1988, the linkage between the two has been expressly de-linked. Hence, what is incorporated in Section 115J is only Schedule VI and not Section 205 or Section 350 or Section

355. This was the view of the Kerala High Court in the case of Commissioner of Income Tax vs. Malayala Manorama Company Limited, reported in [2002] 253 I.T.R. 378 (Kerala), which has been wrongly reversed by this Court in the case of Malayala Manorama Company Limited vs. Commissioner of Income Tax, reported in [2008] 300 I.T.R.251.”

136. In our considered opinion, in fact, this decision goes in favour of the assessee, as in this case, the depreciation was charged as per I.T. Rules whereas u/s 115JB of the Act, the book profit has to be computed as per Profit and Loss Account prepared as per Companies Act. Since the accounts were not prepared as per the Companies Act, the Hon’ble Court ruled in favour of the revenue. Whereas, in the case in hand, the statement of accounts have been drawn as per Companies Act itself. Therefore, the ratio laid down by the Hon’ble Supreme Court in the case of Apollo Tyres [supra] squarely applies.

137. The relevant provisions of section 115 JB read as under:

“Special provision for payment of tax by certain companies.

115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of eighteen and one-half per cent.

Following proviso shall be inserted in sub-section (1) of section 115JB by the Taxation Laws (Amendment) Act, w.e.f. 1-4­2020:

Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words “eighteen and one-half per cent”, occurring at both the places, the words “fifteen per cent” had been substituted.

(2) Every assessee,—

(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 (18 of 2013); or

(b) being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:

Provided that while preparing the annual accounts including statement of profit and loss,—

(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;

(iii) the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting in accordance with the provisions of section 129 of the Companies Act, 2013 (18 of 2013) :

Provided further that where the company has adopted or adopts the financial year under the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,—

(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;

(iii) the method and rates adopted for calculating the depreciation, shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including statement of profit and loss for such financial year or part of such financia l year falling within the relevant previous year.

Explanation 1.—For the purposes of this section, “book profit” means the profit as shown in the statement of profit and loss for the relevant previous year prepared under sub-section (2), as increased by—

(a) the amount of income-tax paid or payable, and the provision therefore; or

(b) the amounts carried to any reserves, by whatever name called, other than a reserve specified under section 33AC; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed ; or

(f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or

(fa) the amount or amounts of expenditure relatable to income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86; or

(fb) the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,—

(A) the capital gains arising on transactions in securities; or

(B) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII,

if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in sub-section (1); or

(fc) the amount representing notional loss on transfer of a capita l asset, being share of a special purpose vehicle, to a business trust in exchange of units allotted by the trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or

(fd) the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 11588F; or

(g) the amount of depreciation,

(h) the amount of deferred tax and the provision therefor,

(i) the amount or amounts set aside as provision for diminution in the value of any asset,

(j) the amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset,

(k) the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be;

if any amount referred to in clauses (a) to (i) is debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss.

138. In the light of the aforementioned relevant provisions of the Act and the decisions of the Hon’ble Supreme Court, we are of the considered view that the disallowance made as per provisions of I.T. Act, would not justify in exporting the disallowance for the computation of book profit u/s 115JB of the Act. We will now address to the items considered in the computation of book profit.

I. DISALLOWANCE U/S 14A of the Act ON ACCOUNT OF EXPENSES INCURRED IN RESPECT OF EXEMPT INCOME

139. We have deleted the disallowance made u/s 14A of the Act vide para No. 42. In view of our findings given hereinabove, no adjustment is required on this count.

II. ADDITION ON ACCOUNT OF ALLEGED OUT OF BOOK RECEIVABLES

140. This issue has been restored to the file of the Assessing Officer for fresh adjudication as per the directions given in para No. 93. Therefore, this issue needs no consideration at this stage

III. ADDITION ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS

141. Facts show that the assessee has debited an amount of Rs.247.01 crores in the P&L account under the head “Provision for Doubtful Trade Receivables/Advances and had also added back the same in the computation of total income under the normal provisions of the Act. However, no adjustment of this provision was made while computing book profits u/s 115 JB of the Act

142. The Assessing Officer added the full amount of provision as debited by the assessee while computing the book profit on the premise that the same was in the nature of an unascertained liability and further held that the said provision had to be added back to the book profit in terms of clause (c) as well as clause (i) of Explanation 1 of Section 115JB of the Act.

143. The DRP has only made adjustment referring to clause (c) of Explanation 1 of Section 115 JB of the Act and not clause (i) which means that the DRP has concurred with the view of the assessee that clause (i) of the said section was not applicable to the instant case. We have to consider the adjustment in the light of clause (c) of Explanation 1 of Section 115 JB of the Act which provides for addition of amount other than ascertained liability. In our understanding of the facts, provision for bad and doubtful debts are made against trade receivables and these provisions are not created against any liability/payable of the appellant.

144. The Hon’ble Supreme Court in the case of HCL Comnet Systems and Services Ltd 305 ITR 409, after considering the decision of the Hon’ble Supreme Court in the case of Apollo Tyres [supra] has held as under:

“At the outset, we quote hereinbelow Section 115JA read with clause (c) of the Explanation which defines the expression “book profit” as under:

“Chapter XII-B Special provisions relating to certain companies Deemed income relating to certain companies 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956) :

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):

Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation.-For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by-

(a) & (b) xxx xxxxxx

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d), (e) & (f) xxx xxxxxx;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by, –

(i) to (viii) xxx            xxxxxx

(3) and (4)     xxx          xxxxxx”

From the above, it is evident that Section 115JA of the 1961 Act which refers to “deemed income relating to certain companies” has an overriding effect upon other provisions of the Income-tax Act. It is applicable only in the case of a company. As per Section 115JA, the AO has to first compute the total income of the assessee as per the provisions of the Income-tax Act. Thereafter, he has to compute 30% of the book profit. Then he has to compare the total income as computed as per the provisions of the Income-tax Act with 30% of book profit computed as per Section 115JA. If 30% of the book profit is more than the total income, then 30% of the book profit shall be deemed to be the “total income” of the assessee for such previous year. As per sub-section (2), the assessee has to prepare the `profit and loss account’ for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. The Explanation defines the words “book profit” which means “net profit” as shown in the profit and loss account for the relevant previous year. Such book profit has to be increased by Item Nos.(a) to (f) of the said Explanation if they are debited to the profit and loss account and from such profit Item Nos.(i) to (ix) of the Explanation are to be reduced. The figure arrived at after the above exercise is the book profit of the assessee for the relevant previous years.

This Court has examined the powers of the AO while computing the book profits for the purposes of Section 115J in the case of Apollo Tyres Ltd. v. Commissioner of Income- tax – [2002] 255 ITR 273 (SC) which reads as under:

“The Assessing Officer, while computing the book profits of a company under Section 115-J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.”

From the above, it is evident that the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, which are certified by the Auditors and pressed by the company in the general meeting. The AO has only the power of examining whether the books of accounts are duly certified by the authorities under the Companies Act and whether such books have been properly maintained in accordance with the Companies Act. The AO does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the Explanation. Thereafter, the AO has to make adjustment permissible under the Explanation given in Section 115JA of the 1961 Act. It may be noted, that the adjustments required to be made to the net profit disclosed in the profit and loss account for the purposes of Section 349 of the Companies Act are quite different from the adjustment required to be made under the Explanation to Section 115JA of the 1961 Act. For the purposes of Section 115JA, the AO can increase the net profit determined as per the profit and loss account prepared as per Parts II and III of Schedule VI to the Companies Act only to the extent permissible under the Explanation thereto.

As stated above, the said Explanation has provided six items, i.e., Item Nos.(a) to (f) which if debited to the profit and loss account can be added back to the net profit for computing the book profit. In this case, we are concerned with Item No.

(c) which refers to the provision for bad and doubtful debt. The provision for bad and doubtful debt can be added back to the net profit only if Item (c) stands attracted. Item (c) deals with amount(s) set aside as provision made for meeting liabilities, other than ascertained liabilities. The assessee’s case would, therefore, fall within the ambit of Item (c) only if the amount is set aside as provision; the provision is made for meeting a liability; and the provision should be for other than ascertained liability, i.e., it should be for an unascertained liability. In other words, all the ingredients should be satisfied to attract Item (c) of the Explanation to Section 115JA. In our view, Item (c) is not attracted. There are two types of “debt”. A debt payable by the assessee is different from a debt receivable by the assessee. A debt is payable by the assessee where the assessee has to pay the amount to others whereas the debt receivable by the assessee is an amount which the assessee has to receive from others. In the present case “debt” under consideration is “debt receivable” by the assessee. The provision for bad and doubtful debt, therefore, is made to cover up the probable diminution in the value of asset, i.e., debt which is an amount receivable by the assessee. Therefore, such a provision cannot be said to be a provision for liability, because even if a debt is not recoverable no liability could be fastened upon the assessee. In the present case, the debt is the amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, in our view Item (c) of the Explanation is not attracted to the facts of the present case. In the circumstances, the AO was not justified in adding back the provision for doubtful debts of Rs.92,15,187/- under clause (c) of the Explanation to Section 115JA of the 1961 Act.

For the aforestated reasons, there is no merit in this civil appeal and accordingly the same is dismissed with no order as to costs.”

145. Even if the adjustments made by the Assessing Officer are considered in the light of clause(i) of Explanation 1 of Section 115JB of the Act, a perusal of the same shows that the trigger point for invoking this clause are:

(a) amount should be set aside as ‘provision’,

(b) It should be in the nature of diminution in the value of asset

146. In so far as condition (b) is concerned, it is not in dispute that the same is satisfied in the present case in as much as amount of Rs. 247.01 crores stood reduced from the amount of debtors/trade receivables which tantamount to the diminution in the value of an asset. However, the real test to qualify as provision is that the amount set aside must be in the nature of provision. We find that while debiting the statement of Profit and Loss, the assessee has deducted/written off the same from its trade receivables in the balance sheet which means that no liability was created corresponding to the amount of the provision charged. In our considered opinion, such a reduction from debtor/trade receivables amount to actual write off and once it is actually written off, it loses the character of a ‘provision’.

147. The Hon’ble High Court of Karnataka in the case of Yokogawa India Ltd 204 Taxman.com 305 has held that while computing book profits u/s 115JB of the Act, provision made for bad and doubtful debts cannot be added back in accordance with Explanation (c) to section 115JB of the Act as the same is not an ascertained liability. Relevant findings of the Hon’ble High Court read as under:

“In the instant case, the debt is an amount receivable by the assessee and not any liability payable by the assessee and, therefore, any provision made towards irrecoverability of the debt cannot be said to be a provision for liability. Therefore, item (c ) of the Explanation is not attracted to the facts of the case. Item (c) in section J15JA and 115JB(1) are identical. In order to attract the Explanation the debt which is doubtful or bad should satisfy the requirement contemplated in item (c ) of the Explanation. It is the amount or amounts set aside as provisions made for meeting the liability other than the ascertained liabilities. In the instant case also the bad and doubtful debt for which a provision is made which is in the nature of diminution in the value of any asset would not fall within item (c) o/Explanation (I). It is in that context the appellate Commissioner as well as the Tribunal has granted relief to the assessee. Realising the fatality of the said argument, it is contended now that item (\) cannot amount to satisfaction as provision for diminishing in the value of assets is substituted, if case of the assessee falls under item (c). In meeting the aforesaid case, the assessee brought on record the judgment of the Apex Court in the case of Vijaya Bank v. C1T [2010] 323 ITR 166 / 190 Taxman 257 where the Apex Court had an occasion to consider this Explanation . It accepted the argument on behalf of the revenue to the effect that the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and provision for bad and doubtful debt on the other. A mere debit to the profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the Explanation stood inserted. Prior to the Finance Act, 2001 many assessees used to take the benefit of deduction under section to the profit and loss account per se would not constitute actual write off. The Apex Court accepted the said legal position. However, it was clarified that besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet and consequently, at the end of the year, the figure in the loans and advances or the debtors on the assets side of the balance sheet was shown as net of the provision for the impugned bad debt. Then the said amount representing bad debt or doubtful debt cannot be added in order to compute book profit. Therefore, after the Explanation the assessee is now required not only to debit the profit and loss account but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to section 115JA or 115JB is not at all attracted. In that context even if amendment which is made retrospective the benefit given by the Tribunal and the appellate Commissioner to the assessee is in no way affected. In that view of the matter, there is not merit in this appeal. [Para 8]. The parties to bear their own costs. ”

148. It would be pertinent to refer to the decision of the Hon’ble High Court of Gujarat in the case of Torrent India 423 ITR 455 wherein the Hon’ble High Court was seized with the following substantial question of law:

“Whether on the facts and in the circumstances of the case the ITAT was justified in deleting the disallowance of provision for diminution in value of investment of Rs.13.85 crores while computing book profit u/s 115 JB of the Act? ”

149. The Hon’ble High Court held as under:

“9. The sole question that arises for consideration in this appeal is whether the provision for diminution in the value of investment of Rs. 13.85 crore made by the assessee is required to be added while computing the book profit under section 115JBof the Act.

10. The Explanation to sub-section (2) of section 115JB of the Act says that for the purposes of that section, ‘book profit’ means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by the factors enumerated thereunder. Clause (i) thereof reads as under:—

“(i) the amount or amounts set aside as provision for diminution in the value of any asset; ”

11. What is required to be examined is whether in the facts of the present case, the amount of Rs. 13.85 crores which is provision for diminution in value of assets, required to be added to the book profit while computing the net profit under section115JB of the Act.

12. In this regard it may be germane to refer to the decision of this court in the case Commissioner of Income Tax Vodafone Essar Gujarat Limited (supra), whereinthe court has held thus:—

“18. It can thus be seen that in case of Southern Technologies Ltd. (supra), the Supreme Court explained that if an assessee debits an amount of doubtful debt to the Profit and Loss account and credits the asset account like sundry debtor’s account, it would constitute a write off of an actual debt. On the other hand, if and assessee debits provision for doubtful debt to the Profit and Loss account and makes a corresponding credit to the current liabilities and provisions on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt and in such a case after 1.4.1989, the assessee could claim no deduction under section 36(1) (vii) of the Act.

19. This principle was further clarified in case of Vijaya Bank (supra) by observing that in case on hand, the assessee besides debiting the profit and loss account and creating a provision for bad and doubtful debt, had simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the asset side of the balance sheet and consequently, at the end of the year, the figure of loans and advances or the debtors on the asset side of the balance sheet was shown as net of the provision for the bad debt. Thereafter, the Supreme Court rejecting the Revenue’s contention that for the bank to take benefit of section 36(1)(vii), must close the account of the debtors, decided the question in favour of the assessee.

20. Above decisions of Supreme Court in cases of Southern Technologies Ltd.(supra) and Vijaya Bank (supra) thus bring out a clear distinction between a case where the assessee may make a provision for doubtful debt and a case where the assessee after creating such a provision for bad and doubtful debt by debiting in Profit and Loss account also simultaneously removes such provision from its account by reducing the corresponding amount from the loans and advances on the asset aside of the balance sheet. The later would be an instance of write off and not a mere provision.

21. Karnataka High Court in case of Yokogawa India Ltd. (supra) applying such principle found that case on hand was one of a debt which was an amount receivable by the assessee and not any liability payable by the assessee and observed that clause(c) of the explanation to section 115JA/115JB, would not apply. In context of applicability of clause(I) to the explanation, relying on the decision of Supreme Court in case of Vijaya Bank (supra), the Court observed that there is a dichotomy between actual write off and provision for bad and doubtful debt. A mere debit to the Profit and Loss account would constitute a bad and doubtful debt but it would not constitute actual write off.

However, if simultaneously such amount is obliterated from the accounts by reducing corresponding loans and advances on the asset side, the same would amount to a write off. It was concluded as under:

“…Therefore, after the Explanation the assessee is now required not only to debit the P&L A/c but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s. 115JA or JB is not at all attracted. ”

22. In case of Kirloskar Systems Ltd. (supra), the Karnataka High Court adoptedthe same principle.

23. By way of culmination of above judicial pronouncements and statutory provisions, the situation that arises is that prior to the introduction of clause(I) to the explanation to section 115JB, as held by the Supreme Court in case of HCL Comnet Systems and Services Ltd. (supra), the then existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. Withinsertion of clause (I) to the explanation with retrospective effect any amount or amounts set aside for provision for diminution in the value of the asset made by the assessee, would be added back for computation of book profit under section 115JBof the Act. However, if this was not a mere provision made by the assessee by merely debiting the Profit and Loss Account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset aside of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (I) of the explanation to section 115JB. The judgment in case of Deepak Nitrite Limited (supra) fell in the former category whereas from the brief discussion available in the judgment it appears that case of Indian Petrochemicals Corporation Ltd. (supra), fell in the later category. ”

13. Thus, what the court has held in the above decision, is that if the provision for diminution in value of investment is not a mere provision made by the assessee by merely debiting the profit and loss account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its account by reducing the corresponding amount from the loans and advances on the asset side of the balance sheet and consequently, at the end of the year showing the loans and advances on the asset side of the balance sheet as net of the provision for bad debt, it would amount to a write off and such actual write off would not be hit by clause (i) ofthe Explanation to sub-section (2) of section 115JB of the Act.

14. The facts of the case are required to be examined in the light of the above principles.

15. Before adverting to the merits of the rival contentions, it may be germane to refer to Accounting Standard (AS) 13, which provides for “Accounting for Investments” and deals with accounting for investments in the financial statements of enterprises and related disclosure requirements. Accounting Standard 13 is in three parts, Introduction : comprised of paragraphs 1-3, Explanation comprised of paragraphs 4-25 and Main Principles comprised of paragraphs 26-35. Under the Explanation Part of Accounting Standard 13, paragraphs 14 to 19 fall under the heading “Carrying Amount of Investments”. Paragraphs 14 to 16 thereunder deal with current investments, whereas paragraphs 17 to 19 deal with long-term investments. Paragraph 17, inter alia, says that long term investments are usually carried at cost.

However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the decline. Paragraph 18says that long-term investments are usually of individual importance to the investing enterprise. The carrying amount of long-term investments is, therefore, determined on an individual investment basis. Paragraph 19 says that where there is a decline, other than temporary, in the carrying amounts of long term investments, the resultant deduction in the carrying amount is charged to the profit and loss statement. The reduction in the carrying amount is reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist.

16. Paragraph 25 of the Explanation part of Accounting Standard 13 deals with “Disclosure” and provides thus:

“25. The following disclosures in financial statements in relation to investments are appropriate:

(a) The accounting policies for the determination of carrying amount of investments;

(b) The amounts included in profit and loss statement for:

(i) interest, dividends (showing separately dividends from subsidiary companies), and rentals on investments showing separately such income from long term and current investments. Gross income should be stated, the amount of income tax deducted at source being included under Advance Taxes Paid;

(ii) Profits and losses on disposal of current investments and changes in the carrying amount of such investments;

(iii) Profits and losses on disposal of long term investments and changes in the carrying amount of such investments;

(c) significant restrictions on the right of ownership, realisibility of investments or the remittance of income and proceeds of disposal;

(d) the aggregate amount of quoted and unquoted investments, giving the aggregate market value of quoted investments;

(e) other disclosures as specifically required by the relevant statute governing the enterprise. ”

17. Paragraphs 31 and 32 fall under the heading “Carrying Amount of Investments”in the third part of Accounting Standard 13 viz. Main Principles. Paragraph 32 thereof, which is relevant for the present purpose, says that investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.

18. Paragraph 33 falls under the heading “Changes in Carrying Amounts of Investments” and reads thus:

“33. Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss statement.”

19. The facts of the present case may be examined in the light of the principles enunciated by the Supreme Court as well as this court in the decisions on which reliance has been placed by the learned counsel for the respective parties as well as the above referred provisions of Accounting Standard 13.

20. A perusal of the “Details of provision for diminution in value of investment” for assessment year 2003-04 as reflected in the Balance Sheet (at page 57 of the paper book) shows that provision created in the year is of Rs. 69,46,73,244/- Provision written back on account of rise in value as per paragraph 33 of Accounting Standard.

13 is Rs. 55,61,73,244/-. The net amount of provision debited to Profit and Loss is Rs.69,46,73,244/- minus Rs. 55,61,73,244/-which comes to Rs. 13,85,00,000/.

21. A perusal of the details of “Provision for Diminution in the Value of Investments” as on 31 March, 2003 (page 60 of the paper book) shows that the total provision required as on 31 March, 2003 is Rs. 839,621,779/-; provision available ason 31 March, 2002 is Rs. 701,121,779/-; and the provision for the year ended 31March, 2003 is Rs. 138,500,000/-.

22. Schedule IV of the Schedule annexed to and forming part of the accounts (page31 of the paper book), shows that the total investment as at 31 March, 2003 is Rs.5,742,306,638/-. Deducting the amount of provision for diminution in value of investments viz. 839,621,779/- the total investment as at 31 March 2003 comes to Rs. 4,902,684,859/-. It may be noted that the provision for diminution in value of investment as at 31 March, 2002 is Rs. 701,121,779/- and the provision in diminution of value of investments as at 31 March 2003 is Rs. 839,621,779/-. The difference between the provision for diminution of value of investment as at 31 March2002 and 31 March 2003 is Rs. 13,85,00,000/-. This amount of Rs. 13,85,00,000/-which is the provision for diminution in value of investment for the year under consideration, is duly reflected in the Profit and Loss account. Thus, the entry is routed through profit and loss account.

23. In terms of the accounting standards, in view of the decline in the value of the provisions created in the current year (as shown at page 57 of the paper book) the carrying amount of such investments has been reduced and in case of provisions where there was a rise in the value, the provisions are written back and the net amount of provision has been debited to the profit and loss account. Thus, insofar as the provision for diminution of value of investment to the extent of Rs. 13.85 crores is concerned, the same has actually been reduced from the asset side of the balance sheet and, therefore, is in the nature of a write off. Under the circumstances, the amount of Rs. 13.85 crore though bearing the nomenclature of provision for diminution of value of investment, having been actually written off, cannot be added to the book profit under section 115JB(2)(i) of the Act.

24. Insofar as the contention that the details of the investments in respect of which there was a diminution in value are not provided is concerned, the Commissioner(Appeals) has recorded in the audited Profit & Loss account, on the expenditure side there are provisions for diminution in value of investments of Rs. 13,85,00,000/- (last year NIL); this provision is against the total provision in balance sheet of Rs.83,96,21,779/-; no details are available in any form or category that to which type or kind of investment such diminution is related out of the total provisions. He has further recorded that the assessee’s annual report and audited accounts do not reveal of such write off because, the diminution of asset in the balance sheet at Schedule IV for investment reflect “Provision in Diminution in value of investment of Rs.83,96,21,779/- without specifying the details of type of investment of long term investments and current investments in shares, debentures, mutual funds, Government securities etc. to which such value apply. Further out of this only Rs.13,85,00,000/-was debited in audited profit and loss account as “provision for diminution in value of investments.” There are no details which type of shares, securities, debentures etc. are written off and why out of Rs. 83,96,21,779/- only Rs.13,85,00,000/- is considered. The learned counsel for the appellant has reiterated the above reasoning adopted by the Commissioner (Appeals).

25. In the opinion of this court, the above findings recorded by the Commissioner (Appeals) that no details have been produced, is contrary to the record of the case, in as much as, in the balance sheet which forms part of the paper book, the details of diminution in the value of investment are clearly set out in the statement at page 57of the paper book. The Tribunal, in the impugned order, has after perusing the statement referred to hereinabove which formed part of the paper book, has found that the assessee has duly followed the netting principle in terms of the decision of this court in the case of Commissioner of Income Tax Vodafone Essar Gujarat Limited (supra). Thus, the Commissioner (Appeals) has proceeded on incorrect factual findings, whereas the Tribunal has properly appreciated the material on record while holding that the assessee has duly followed the netting principle propounded in the full bench decision of this court in Vodafone Essar Gujarat (supra).

26. In the light of the above discussion, no infirmity can be found in the view adopted by the Tribunal so as to warrant interference. The question, therefore, is answered in the affirmative, that is, in favour of the assessee and against the revenue.

It is hereby held that the Income Tax Appellate Tribunal was justified in deleting the disallowance of provision for diminution in value of investment of Rs. 13,85,00,000/-while computing book profit under section 115JB of the Income Tax Act, 1961. The appeal, therefore, fails and is, accordingly, dismissed.”

150. In the light of the aforementioned decision of the Hon’ble High Court [supra] we are of the opinion that no adjustment need to be made on this count and the Assessing Officer is directed to delete the same.

IV. ADDITION ON ACCOUNT OF CSR AND DONATION

151. Though we have upheld the disallowance of CSR expenditure vide para 106 we are of the considered view that the ratio laid down by the Hon’ble Supreme Court in the case of Apollo Tyres [supra] squarely apply and therefore no adjustment needs to be made on this count. The Assessing Officer is directed to delete the adjustment.

V. REDUCTION CLAIM ON ACCOUNT OF PROVISION FOR TAXES

152. Facts show that while computing the book profits for the purpose of Section 115JB of the Act, the Assessing Officer reduced the amount of Rs.1782.09 crores from the net profit. The said reduction was made on account of provision for tax credit that was reversed by the assessee in the instant year.

153. Before us the ld. counsel for the assessee vehemently stated that the appellant company had undergone a series of mergers over the past with various entities and some of amalgamating entities had positive net worth and were paying huge amounts of income tax every year and, therefore, these entities were setting aside amounts to the provision for taxes.

154. It is the say of the ld. counsel that post merger of amalgamated companies with the appellant company, the losses of loss-making entities were offset with profit of profit-making entities. Since after the offsets, the profits were reduced considerably and total income of amalgamated entity, that is, the appellant resulted in loss, the income tax was not required to be paid. In these circumstances the ld. counsel stated that since there was no liability to pay huge amount of income tax, the assessee reversed the unutilised provision for taxes in this year which were made/charged by the amalgamating entities prior to amalgamation, and, therefore, prayed for adjustment on this count.

155. Per contra, the ld. DR strongly relied upon the findings of the Assessing Officer and stated that the provisions of section 115JB read with explanation thereon, clearly shows that adjustment made by the Assessing Officer is correct.

156. In our considered opinion, the issue raised by the ld. counsel needs to be considered thoroughly. The break-up of figure of Rs.1782.09 is as under:

Particulars Amount
Provision for current tax of prior years reversed in F.Y 2013-14 1755,08,78,269
Provision for interest u/s 234C of the Act of prior years reversed in F.Y 2013-14 Rs. 27,00,73,765/-
Total tax provision in FY 2013-14 considered in MAT computation Rs. 17,82,09,52,034/-

157. Further break up of Rs. 1755.08 crores mentioned hereinabove is as under:

158. A bare perusal of the afore-stated charts show that the figure of Rs.1782.09 crores pertain to reversal of unutilised provision for taxes in the current year. In our considered view, these factual figures need verification. We, therefore, deem it fit to restore this issue to the file of the Assessing Officer. The Assessing Officer is directed to verify the correctness of figures mentioned in charts hereinabove and decide the issue afresh.

VI. REDUCTION CLAIM ON ACCOUNT OF DEBENTURES REDEMPTION RESERVE AND SURPLUS

159. Facts on record show that and amount of Rs. 303.36 was transferred to the Reserve and Surplus Account by the assessee. The Assessing Officer was of the opinion that this amount is appropriation of profit and not a provision for ascertained liability as the same was not debited to the Profit and Loss Account.

160. Before us, the learned counsel for the assessee stated that the assessee has been setting apart these amounts to Debentures Reserve Account for meeting the future known liabilities of the ld. counsel for the assessee towards the debentures issued by it. The ld. counsel for the assessee referred to the agreements, samples of which are placed in the paper book. It is the say of the ld. counsel for the assessee that in accordance with the mandatory provisions of section 117C of the Companies Act 1956, the assessee is mandatorily required to transfer adequate amounts to the reserve called Debenture Redemption Reserve [DRR] from the profits every year till redemption of the said debentures and, therefore, the DRR is a provision which is in the nature of an ascertained liability. Reliance was placed on the decision in the case of Raymond Ltd [SC] 209 Taxmann.com 65 and National Rayon Corporation Ltd 227 ITR 764.

161. Per Contra the ld. DR stated that this issue has been decided in favour of the revenue and against the assessee by the Hon’ble Jurisdictional High Court of Delhi in the case of SREI Infrastructure Finance Limited 281 CTR 532.

162. We have carefully considered the orders of the authorities below. In our considered view, the ratio laid down by the Hon’ble Supreme Court in the case of Apollo tyres do not apply on this provision. In our humble opinion, the decision of the Hon’ble Jurisdictional High Court of Delhi in the case of SREI infrastructure [supra] squarely apply. The relevant findings of the Hon’ble High Court read as under:

“24. The term “provision” differs from “liability” because liability is certain and definite amount whereas a provision is an amount which is estimated (See Note 3 of Schedule III of the Companies Act, 2013, with reference to the term “current liabilities”). Reserves fall on the other end/side for they are associated with equity. Transfer of such reserves is appropriation of retained earnings rather than expenses. Contingent liability, however, is not a provision or liability. It is less certain than a provision as the possible obligation has not yet been confirmed and the assessed does not have control whether or when it will be confirmed or the amount cannot be measured with sufficient reliability. The potential obligation is so uncertain that it should not be recognized in the accounts. A provision, therefore, is somewhat between accrual and the contingent liability.

25. The argument in respect of Section 45-IC of the Reserve Bank of India Act, 1934 and diversion of income at source is misconceived. The decisions of different courts including the Supreme Court and the Delhi High Court in the case of Molasses Storage Fund are inapplicable. Diversion of income at source by way of overriding title as a principle is applicable when under a statutory or contractual obligation or under the provisions of Memorandum and Articles of Association, the earning is divested and the assessed has no title over a particular receipt. When such charge exists, the amount or income so charged must be excluded from income of the assessed as income never reaches his hands and in fact belongs to a third person. Thus, the income stands diverted at source. Diversion of income at source implies that income or the amount mentioned therein belongs to a third party and was not income of the assessed. Similar question arose before the Supreme Court in Associated Power Co. Ltd Vs. CIT (1996) 218 ITR 195.

The Supreme Court, therefore, concluded that the amount credited to the contingencies reserve was not diverted by reason of overriding obligation or title and, it being a taxable receipt/earning, it must be taken into account.

The reserve, which is required to be created under Section 45-IC, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. The Reserve Bank of India Act, 1934 can permit appropriation in respect of the said reserve. The assessee can also ask for specific directions from the Central Government subject to proviso to sub­section (3) of the said Section.

32. As noticed above, “provision” and “reserves” are different accounting terms. A provision created to meet a known liability is a charge against the profit. Hence, it is debited to the Profit and Loss account and reduces the profit. Provisions should be created, even if there is insufficient profit. Provision is not, therefore, invested. On the other hand, “reserve” is only appropriation of profit and, therefore, it is not debited to the Profit and Loss account. The purpose of reserve is to strengthen the financial position and to meet unforeseen liabilities which may arise in future. The reserves are created out of adequate profits. However, once reserve is created, it reduces divisible profit. This is the amount of profit which is retained for use in business when difficulty arises. Reserves can be invested. The said investments can be even outside the business and in such cases the reserve is called the reserve fund. Reserves are shown on the liability side of the balance sheet and are generally treated as belonging to the proprietor just as capital. It is a sum owned by the business to the proprietor. Reserves themselves are not assets but represent a portion of the assets which the proprietor is free to utilize for business as one likes, i.e. the assets equalling the reserves that are not required to pay liabilities. Generally reserves are created at the discretion of the management as a matter of prudence, but in certain cases a statute can direct creation of special reserves. For the purpose of Section 115JB of the Act, statutory reserves are treated alike and in a similar manner as other reserves

35. In view of the aforesaid reasoning, the two substantial questions of law mentioned in paragraph 7 above have to be answered against the appellant-assessee and in favour of the respondent-Revenue. To this extent, the appeal is dismissed. As the substantial question of law relating to rate of depreciation has been answered in favour of the appellant-assessee, we are not inclined to impose costs.”

163. With the above findings this ground is accordingly decided.

164. Last ground relates to claim u/s 80GGB of the Act.

165. The assessee has made payment of Rs. 15 crores as contribution to political party but added back the same amount while filing the return of income. In the return the assessee could not have claimed deduction u/s 80 GGB of the Act as total returned income was loss. Claim was made before the Assessing Officer but was denied. In our considered opinion, if the assessee is eligible for claim of deduction u/s 80GGB of the Act the same deserves to be allowed. We direct the Assessing Officer to allow the same as per provisions of the law after making necessary verification.

166. In the result the appeal of the assessee in ITA No. 12/DEL/2020 is allowed in part for statistical purposes.

The order is pronounced in the open court on 21.09.2020.

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