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Expenses incurred on projects closely connected with assessee’s business activities & projects either not taken off or shelved, classify as business expenses: ITAT

2019-TIOL-1375-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘E’ MUMBAI

ITA No.3036/Mum/2009
Assessment Year: 2003-04

ASSISTANT COMMISSIONER OF INCOME TAX 2(3)
R NO 555, AAYAKAR BHAVAN
MUMBAI-400020

Vs

M/s THE TATA POWER COMPANY LTD
CORPORATE CENTER, B BLOCK, 5TH FLOOR
34, SANT TUKARAM ROAD
CARNAC BUNDER, MUMBAI-400009
PAN NO: AAACT0054A

ITA No.3080/Mum/2009
Assessment Year: 2003-04

M/s THE TATA POWER COMPANY LTD
CORPORATE CENTER, B BLOCK, 5TH FLOOR
34, SANT TUKARAM ROAD
CARNAC BUNDER, MUMBAI-400009
PAN NO: AAACT0054A

Vs

ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE 2(3), AAYAKAR BHAVAN
M K ROAD, MUMBAI-400020

Saktijit Dey, JM & Ramit Kochar, AM

Date of Hearing: February 22, 2019
Date of Decision: May 21, 2019

Appellant Rep by: Shri R Manjunath Swamy & Smt Chaitanya Anjaria & Shri Manish Kumar Singh
Respondent Rep by: 
Shri Nitesh Joshi & Jayesh Desai

Income Tax – Section 37.

Keywords – Business expenses – Projects not taken off or shelved.

THE assessee company, engaged in the business of generation, distribution and transmission of electricity, filed return for relevant AY. The assessee claimed expenditure incurred on shelved project amounting to Rs.1,68,94,456/- and expenses incurred on preliminary studies, feasibility reports etc. on the projects which had not taken off to the tune of Rs. 9,16,589/-, aggregating to Rs. 1,78,11,045/-. The assessee had claimed these expenses as Revenue Expenses while during assessment the AO held the same to be capital expenditure. The AO disallowed these expenses. On appeal, CIT(A) decided the issue in favour of the assessee by holding these expenses to be Revenue in nature. Aggrieved Revenue filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether expenses incurred for the projects which are closely connected with the business activities of the company and projects have either not taken off or are shelved, can be held as business expenses – YES : ITAT

++ the assessee is engaged in the business of generation, transmission and distribution of electricity. The assessee with a view to expand its business activities has incurred expenses for the projects including undertaking preliminarily studies, feasibility reports etc., aggregating to Rs. 1,78,11,045/- but these projects ultimately did not either took off or were shelved due to commercial expediency as they were found to be not profitable.The assessee has claimed these expenses as business expenses as it is claimed by the assessee that all these projects for which expenses were incurred were connected with the existing business of generation, distribution and transmission of electricity. It is not the case of the Revenue that these expenses were never incurred by the assessee or these expenses were bogus expenses, which were claimed by the assessee to defraud revenue. The only claim of the revenue is that these expenses are capital expenditure which cannot be allowed as revenue expenditure because these projects were either shelved or never took off. It was observed that the assessee is in the business of generation, transmission and distribution of electricity. The Revenue is also not contesting that these projects which were shelved or never took off were not connected with the existing business of the assessee of generation, distribution and transmission of electricity. These projects which are shelved are part of the pursuit of the growth opportunities by the assessee company by exploring to start new businesses which are closely connected with the assessee’s company business but due to commercial expediency these projects did not took off or were shelved and hence these expenses were written off in the books of accounts by the assessee. Since these expenses were incurred for the projects which were closely connected with the business activities of the assessee company and these projects had either not taken off or were shelved, these expense are to be held as business expenses as rightly held by CIT(A). It was observed that tribunal in assessee’s own case in ITA no. 3035/Mum/2009 – 2012-TIOL-464-ITAT-MUM for AY 2002-03 has decided this issue in favour of the assessee. Respectfully following the decision of tribunal in assessee’s own case for immediately preceding year for AY 2002-03 in ITA No. 3035/Mum/2009 – 2012-TIOL-464-ITAT-MUM vide orders dated 20.04.2012 and keeping in view that facts and circumstances remaining the same in the year under consideration, it was decided to allow the expenses as business expenses of the assessee and uphold the decision of CIT(A). This issue is decided in favour of the assessee.

Revenue’s appeal partly allowed

ORDER

Per: Ramit Kochar:

These are cross appeals, filed by Revenue as well as by assessee, being ITA No. 3036 & 3080/Mum/2009respectively for assessment year 2003-04, are directed against appellate order dated 27.02.2009 passed by learned Commissioner of Income Tax (Appeals)-XXX, Mumbai (hereinafter called “the CIT(A)”) in Appeal No. CIT(A)-XXX/IT-38/Rg.2(3)/08-09, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 23.02.2006 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2003-04.

2. The grounds of appeal raised by the Revenue in its appeal in ITA no. 3036/Mum/2009 for AY 2003-04 in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”), read as under:-

” On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:

1. The Ld. CIT(A) has erred in allowing the expenses on shelved project amounting to Rs.1,68,94,456/- and expenses on feasibility studies amounted to Rs.9,16,589/- without appreciating that these expenses are capital expenses.

2. The Ld. CIT(A) has erred in deleting the taxation of a sum of Rs.2,31,67,715/- being the foreign exchange gain on repatriation of certificates of deposits (Euro Notes) without appreciating that the assessee itself is following a dual policy in respect of foreign exchange fluctuation gain/loss in various years.

3. The Ld. CIT(A) has erred in deleting the disallowance of provision for wages of Rs.19,81,60,000/- without appreciating the fact that the provision debited by the assessee is contingent in nature and the liability is not accrued and/or crystallized.

4. For these and other grounds that may be urged at the time of hearing, the decision of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored.”

3. The grounds of appeal raised by the assessee in its appeal in ITA no. 3080/Mum/2009 for AY 2003-04 in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-

“The appellant objects to the order dated 27th February,2009 passed by the Commissioner of Income-tax(Appeals) XXX, Mumbai (hereinafter referred to as the CIT(A)) for the aforesaid assessment year on the following grounds:-

1. a. The CIT(A) erred in ignoring “other income” of Rs. 1,40,331 and Rs.23,55,416 in the case of Jojobera 67.5 MW unit and Belgaum 81.5MW unit respectively for the purpose of granting deduction under Section 80IA.

b. The CIT(A) erred in allowing deduction u/s 80IA on the taxable income after setting off brought forward unabsorbed depreciation of the units eligible for deduction u/s 80IA, without appreciating the fact that such depreciation has already been set off against the income of the Company as a whole in earlier assessment years.

c. The learned CIT(A) erred in not appreciating the fact that despite Section 80IA(5), the requirement to treat the undertaking as the only business of the assessee is from the “initial assessment year” and not from the year of commencement of generation/distribution of power.

2. The CIT(A) erred in treating income of Rs.9,81,38,257 on Broadband project during trial runs and income of Rs.1,27,67,139 on scrap sale before capital projects are installed as revenue income instead of setting off such income against capital work-in-progress.

3. The CIT(A) erred in disallowing u/s 40A(9), payments aggregating Rs.29,36,361, made to local schools (set up pursuant to discharging the appellant’s responsibilities at the hydro generating stations), whose students include employees’ children.

4. Each one of the above grounds of appeal is without prejudice to the other.

5. The appellant reserves the right to amend, alter or add to the grounds of appeal.”

4. The assessee is engaged in the business of generation, distribution and transmission of electricity.

4.2 First we are taking up Revenues appeals in ITA no. 3036/Mum/2009 for AY 2003-04.

5. The first ground of appeal raised by Revenue relates to expenditure incurred on shelved project amounting to Rs.1,68,94,456/- and expenses incurred on preliminary studies, feasibility reports etc. on the projects which have not taken off to the tune of Rs. 9,16,589/-, aggregating to Rs. 1,78,11,045/-. The assessee had claimed these expenses as Revenue Expenses while the AO held the same to be capital expenditure. The AO observed that this issue being recurring in nature and in preceding years also these expenses were disallowed, the AO disallowed these expenses in this year also and added the same to the income of the assessee, vide assessment order dated 23.02.2016 passed by the AO u/s. 143(3) of the 1961 Act.

6. The assessee being aggrieved by the additions as were made by the AO carried the matter in appeal before Ld. CIT(A) by filing first appeal. The assessee submitted before learned CIT(A) that these expenses aggregating to Rs. 1,78,11,045/- were incurred on shelved projects and on preliminary studies, feasibility studies etc. on projects which never took off due to commercial expediency as they were found not to be profitable. It was claimed that these expenses were incurred for the projects which were connected with its existing business of generation, transmission and distribution of electricity. The assessee submitted that these expenses are mainly in the nature of pre-bid engineering services. The assessee claimed that Hon’ble ITAT has allowed these expenses in assessee’s own case in preceding year. The learned CIT(A) decided the issue in favour of the assessee by holding these expenses to be Revenue in nature, by holding as under:-

“6.1.1 Expenditure Written off in respect of shelved projects:

The appellant has claimed expenditure incurred in respect of certain projects which were subsequently shelved on grounds of commercial expediency, as revenue expenditure. The appellant has submitted that when it was found that the projects were not likely to be profitable, they were given up in order that the Companies could concentrate on other more profitable projects to facilitate the carrying on of the business of the Companies.

6.1.2 The appellant has furnished the following list of projects which were shelved during the year ended 31st March, 2003

Shelved projectsAmount(Rs.)
Shirwata-Walwhan mini hydel units24,19,427
Flue gas desulphurisation plant for Unit 539,76,867
Essar Power Project5,14,383
Privatisation and utility sector reform project2,36,000
Orissa Power Generating Corpn. Ltd.51,52,635
Bangladesh PDB3,81,440
Ceylon Electricity Board1,07,098
Power Plant at Thailand15,82,097
Power Plant at Dharamtar1,370
Srilanka Project24,25,399
Tender Fee & Bid documents re. Misc. electricity projects97,740
Total1,68,94,456

6.1.3 The appellant has submitted that all the above projects are connected with the existing business of the appellant i.e. generation, transmission and distribution of electricity. The expenses are mainly in the nature of pre-bid engineering services.

6.1.4 The decision relied upon by the appellant, including the decisions of the Hon’ble Tribunal in the appellant’s own case squarely covers the facts of the appellant’s case for the year under reference and hence, this ground is decided in favour of the appellant.

6.2 Expenditure on feasibility reports, preliminary studies etc :

The appellant has claimed expenditure incurred on feasibility reports as revenue expenditure.

6.2.1 The appellant has furnished the following details of expenditureon feasibility reports and preliminary studies incurred during the year ended 31st March, 2003 :

ProjectsAmount
Micro turbine applications41,143
Power Plant at Dharamtar19,360
LNG terminal at Trombay2,58,740
Mulshi Mini Hydel scheme62,247
New intake at Khand-Bhivpuri generating station77,586
Installation of CFBC Boiler for Unit 415,000
Installation of FGD on Unit 63,47,221
Feasibility studies re. misc. power projects95,292
Total9,16,589

6.2.2 The appellant has submitted that the above projects are connected with the existing business of the appellant i.e. generation, transmission and distribution of electricity.

6.3 The decisions relied upon by the appellant, including the decisions of the CIT(A) for A.Y. 2001-02 and the Hon’ble Tribunal in the appellant’s own case squarely cover the facts of the appellant’s case for the year under reference and hence, this ground is decided in favour of the appellant.

6.4 In the result, this ground is allowed.”

Thus, Ld. CIT(A) followed the earlier year decision of leaned CIT(A) for AY 2001-02 and decision of Hon’ble ITAT in assessee’s own case while allowing the claim of the assessee, vide appellate order dated 27.02.2009 passed by learned CIT(A).

7. Now, the Revenue is aggrieved by the decision of learned CIT(A) and an appeal is filed by Revenue before tribunal.

8. At the outset Ld. Counsel for the assessee submitted that this issue has been decided by ITAT for immediately preceding assessment year i.e. AY 2002-03 in favour of the assessee. The Ld. DR submitted that the issue is decided in preceding assessment year i.e. AY 2002-03 in favour of the assessee by tribunal. Our attention was drawn to appellate order dated 22.04.2013 passed by tribunal in ITA no. 3035/Mum/2009 = 2012-TIOL-464-ITAT-MUM for AY 2002-03 in favour of the assessee. The said order of the tribunal is placed in paper book filed by the assessee with the tribunal, at page 278-292.

9. We have considered rival contentions and have observed that the assessee is engaged in the business of generation, transmission and distribution of electricity. The assessee with a view to expand its business activities has incurred expenses for the projects including undertaking preliminarily studies, feasibility reports etc., aggregating to Rs. 1,78,11,045/- but these projects ultimately did not either took off or were shelved due to commercial expediency as they were found to be not profitable.The assessee has claimed these expenses as business expenses as it is claimed by the assessee that all these projects for which expenses were incurred were connected with the existing business of generation, distribution and transmission of electricity. It is not the case of the Revenue that these expenses were never incurred by the assessee or these expenses were bogus expenses, which were claimed by the assessee to defraud revenue. The only claim of the revenue is that these expenses are capital expenditure which cannot be allowed as revenue expenditure because these projects were either shelved or never took off. We have observed that the assessee is in the business of generation, transmission and distribution of electricity. The Revenue is also not contesting that these projects which were shelved or never took off were not connected with the existing business of the assessee of generation, distribution and transmission of electricity. These projects which are shelved are part of the pursuit of the growth opportunities by the assessee company by exploring to start new businesses which are closely connected with the assessee’s company business but due to commercial expediency these projects did not took off or were shelved and hence these expenses were written off in the books of accounts by the assessee. Since these expenses were incurred for the projects which were closely connected with the business activities of the assessee company and these projects had either not taken off or were shelved, these expense are to be held as business expenses as rightly held by learned CIT(A). We have observed that tribunal in assessee’s own case in ITA no. 3035/Mum/2009 = 2012-TIOL-464-ITAT-MUM for AY 2002-03 has decided this issue in favour of the assessee, vide orders dated 20.04.2012, by holding as under:-

“16. Ground No.2 raised by the revenue reads as follows:

“The ld. CIT(A) has erred in allowing the expenses on shelved project amounting to Rs. 17,26,02,558/- and expenses on feasibility studies amounted to Rs. 5,27,462/- without appreciating that these expenses are capital expenses.”

17. As far as expenses on shelved projects of Rs. 17,26,02,558/- and expenditure of Rs. 5,27,462/- on account of feasibility studies are concerned the issue has already been considered by the Tribunal in A.Y 2001-02 in ITA No.4497/M/2008 & ITA No.4572/M/2008 = 2011-TIOL-594-ITAT-MUM and this Tribunal has held as follows:

“30. The assessee has claimed expenditure incurred in respect of certain projects which were subsequently shelved on grounds of commercial expediency, as revenue expenditure. The assessee has submitted that when it was found that the projects were not likely to be profitable, they were given up in order that the Companies could concentrate on other more profitable projects to facilitate the carrying on of the business of the companies. The assessee furnished the following list of projects which were shelved during the year ended 31st March, 2001.

Shelved ProjectsAmount (Rs.)
ACC-Kymore Power Project4,58,113
INDAL- Hirakud Power Projects2,20,281
Haryana Vidyut Prasaran5,00,000
MSEB Power14,66,566
Project POWERGEN2,74,73,477
Bidding regarding RVPNL Power Project-Jaipur8,33,333
Bathinda Power Project1,49,773
Oman Power Project67,130
Hazira Power Projects10,078
Study for evaluation of 2 Hydro projects at Zambia86,546
100MW CCPP at Thakurli1,50,889
Mini Hydro Plant at Khopoli42,216
Total3,14,58,402

Further the assessee, under cover of its letter dated 27th November, 2007 had also furnished a memo from Senior General Manager, Projects dated 18th April, 2001 indicating the jobs which have been closed, on the basis of which, the above expenditure has been charged off. The assessee had clarified vide its letter dated 27th Nov. 2007 that the major amount (Rs. 2,74,73,477) in the above list pertains to POWERGEN. This expenditure was in connection with acquisition of 655 MW combined Cycle Power Plant belonging to POWERGEN in Gujrat. This project was put up for sale of POWERGEN, for which bids had been invited. The assessee was one of the bidders, for which detailed studies were carried out mainly by Arthur Anderson and Little & Co. The project was finally awarded to China Light Power (CLP) and hence, the expenditure incurred in connection with the bidding process was written off as expenditure on shelved project. The other amounts pertain to power projects at the locations indicated there against, which have finally not materialized. The assessee submitted that all the above projects are connected with the existing business of the assessee i.e. generation, transmission and distribution of electricity. The expenses are mainly in the nature of pre-bid engineering services. These expenses have been claimed as revenue expenditure based on the decision of the Madras High Court in the case of B.Nagi Reddy vs. CIT (199 ITR 451) which according to the Assessee was directly on the issue.

31. The assessee has claimed expenditure incurred on feasibility reports as revenue expenditure. The assessee furnished the following details of expenditure on feasibility reports and preliminary studies incurred during the year ended 31st March, 2001.

ProjectsAmount (Rs.)
Augmentation of air conditioning6,46,990
LSHS Tank augmentation7,00,344
Flue gas desulphyurization- 3rd stream3,13,473
LNG Terminal2,30,543
Proposed box culvert in Trombay main drainage18,972
Electro-chlorination plant35,153
Mini Hydro Scheme at Bhira2,56,187
Mini Hydro Scheme at Mulshi2,56,646
Study for evaluation of 2 hydro projects at Zambia17,767
Mini Hydro power plant scheme on tailrace of Khopoli Power Plant1,73,318
Total26,18,393

The assessee also furnished statements indicating the break up of the above expenditure under cover of its letter dated 27th November, 2007 and has provided copies of some of the invoices under cover of its letter dated 18th Feb.2008. The above payments have been made to Tata Consulting Engineers (TCE) for various feasibility reports. The assessee has submitted that the above projects are connected with the existing business of the assessee i.e. generation, transmission and distribution of electricity. The expenses have been claimed as revenue expenditure based on the following decisions:

1. Karnataka High Court in the case of CIT vs. Karnataka State Industrial & Investment Development Corpn. (163 ITR 657)

2. Kerala High Court in the case of CIT vs. Kerala State Industrial and Investment Development Corporation. (182 ITR 62)

3. Calcutta High Court in the case of Keshoram Industries and Cotton Mills Ltd. vs. CIT (196 ITR 845)

4. Gauhati High Court in the case of Dy. CIT vs. Assam Asbestos Ltd. (263 ITR 357)

5. Calcutta High Court in the case of Asiatic Oxygen Ltd. (190 ITR 328)

32. The AO did not allow the claim of the Assessee for deduction as in his view the expenditure was in connection with exploring a different line of business and therefore not incurred wholly and exclusively in connection with the Assessee’s business. The CIT(A) however allowed the claim of the Assessee as he found that on identical issue the Tribunal has already held in Assessee’s case that the expenditure was in connection with the existing line of business of the Assessee and had to be allowed as a deduction. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.3 before the Tribunal.

33. We have heard the rival submissions. It is not in dispute before us that Mumbai ITAT in Assessee’s own case for A.Y’s 1997-98, 1999-2000 and 2000-01 had held that identical expenses on shelved project report was not for starting any new business but it was closely connected with existing electricity generating business of the assessee. Similarly the feasibility report expenses were also held to be not for starting a new business but closely connected with the existing electricity generating business of the Assessee by the Mumbai ITAT in its own case for A.Y’s 1997-98, 1999-2000 and 2000-01. Copies of these orders have been placed in the paper book. In view of the above Gr.No.3 of the Revenue is dismissed.”

Facts and circumstances being identical respectfully following the order of the Tribunal we uphold the order of the CIT(A) and dismiss Ground No.2 raised by the revenue.”

Respectfully following the above decision of tribunal in assessee’s own case for immediately preceding year for AY 2002-03 in ITA No. 3035/Mum/2009 2012-TIOL-464-ITAT-MUM vide orders dated 20.04.2012 and keeping in view that facts and circumstances remaining the same in the year under consideration, we allow the said expenses as business expenses of the assessee and uphold the decision of learned CIT(A). This issue is decided in favour of the assessee and the appeal of the revenue on this ground no. 1 stand dismissed. We order accordingly.

10. The next ground raised by Revenue in its appeal filed with tribunal relates to deletion of foreign exchange gain of Rs. 2,31,67,715/- on repatriation of certificates of deposits (Euro Notes). The assessee has received an income of Rs. 2,31,67,715/- being surplus on buy back of Euro notes. The AO observed that the assessee has issued Euro notes on 19.08.1997 to finance its capital expenditure programme. It was observed by AO that some of Euro Notes were maturing in 2007 while balance of Euro Notes were maturing in 2017. The AO observed that the assessee had bought back Euro Notes during the year ending 31st March 2003 at discount to the face value which resulted in surplus of Rs. 2,31,67,715/-. The assessee contended before the AO that this surplus is not in the nature of income and hence the same was not offered for taxation. It was claimed by the assessee that the gain arose on redemption of debt by the assessee. The AO observed that this issue is recurring issue as it arose in earlier years also in the case of the assessee wherein additions were made on this ground in AY 2000-01 and 2002-03. The AO brought the same to income-tax by adding it to the income of the assessee, vide assessment order dated 23.02.2006 passed by the AO u/s. 143(3) of the 1961 Act.

11. The assessee being aggrieved by an assessment framed by the AO wherein additions to the tune of Rs. 2,31,67,715/- were made to the income of the assessee towards surplus on buy back of Euro Notes by the AO, carried the matter further in appeal before the Ld. CIT(A), who was pleased to allow the claim of the assessee, vide appellate order dated 27.02.2009 passed by learned CIT(A) by following decision of learned CIT(A) in assessee’s own case for AY 2000-01 and also noting that the appeal of the Revenue was dismissed by tribunal for AY 2000-01, by holding as under:-

“Ground No. 3: Surplus on buy back of Euro Notes

The AO has taxed an amount of Rs.2,31,67,715 being surplus on buy back of Euro Notes. The assesses had claimed the same as tax exempt.

7.2 The factual position which is as under, is identical to the position as for AY 2002-03;

a. The appellant had issued Euro Notes on 19 August 1997 to finance the appellant’s capital expenditure programme. Some of the euro notes were maturing in 2007 and the balance in 2017.

b. The appellant had bought back euro notes of US$ 42,444,000 which were maturing in 2017.

c. The euro notes were bought back at a discount to the face value. This resulted in a surplus of Rs. 2,31,67,715.

d. As per the appellant, the surplus of Rs. 2,31,67,715 on buy back of euro notes is not in the nature of “income” as envisaged by section 2(24) of the Income-tax Act, 1961 (“the Act”) and accordingly the same was not offered for tax in the return of income of the appellant.

e. On inquiry from the Assessing Officer, the appellant, vide its letter dated 18th November 2005, had given detailed reasons in support of its claim that the surplus of Rs. 2,31,67,715 was not taxable.

The Assessing Officer has, however, not accepted the claim of the appellant, by relying on the assessment orders for A.Y. 2000-01 and A.Y. 2002-03.

7.3 This ground has been dealt for A.Y. 2000-01 by the CIT(Appeals) and has decided the issue in favour of the appellant. It is noted that the Departmental appeal for that year has been dismissed by the Hon. Tribunal and the order of the CIT(Appeals) has been upheld.

7.4 It may be pointed out that the Hon’ble Tribunal has relied on the decision of the Bombay High Court in the case of Mahindra and Mahmdra Ltd. v/s CIT (261 ITR 501) = 2003-TIOL-427-HC-MUM-IT, where the facts of the case closely resemble those of the appellant and the decision of the Karnataka High Court in the case of CIT v/s Industrial Credit and Development Syndicate Ltd. (285 ITR 310) = 2006-TIOL-484-HC-KAR-IT, which is based on identical set of facts as those of the appellant.

7.5 Respectfully following the decision of the Hon. Tribunal in the appellant’s own case on identical set of facts for A.Y. 2000-01, this ground is decided in the favour of the appellant. This ground of appeal is therefore, allowed.”

12. The Revenue is aggrieved by decision of Ld. CIT(A) granting relief to the assessee, which relief was granted by learned CIT(A) by following decision of learned CIT(A) for AY 2000-01 in assessee’s own case which decision of learned CIT(A) was later upheld by tribunal in assessee’s own case for AY 2000-01. The matter has now reached tribunal at the behest of the Revenue and at the outset Ld. Counsel for the assessee submitted that the issue is decided in favour of the assessee in assessee’s own case by tribunal for AY 2000-01. The Ld. Counsel for the assessee explained that the assessee raised Euro Notes which were redeemable partly in 2007 and remaining in 2017 but these Euro Notes were redeemed earlier and the assessee gained by way of surplus on redemption due to foreign exchange fluctuation. It was prayed by learned counsel for the assessee that since Euro Notes were issued for capital expenditure purposes, the same should not be brought to income-tax. It was submitted that the issue was decided in favour of the assessee by tribunal in AY 2000-01 in ITA no. 6451/Mum/2003 vide orders dated 18.10.2007, wherein the tribunal was pleased to delete the additions by holding as under:

“21. Ground nos. 3 to 5 reads as under:

“3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.37,97,26,000/- made by the AO u/s. 41(1) of the Act representing the surplus on buy back of euro notes and holding that the surplus on repurchase of euro notes is not hit by the mischief of section 41(1)

4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that as the surplus on buy back euro notes is an advantage in capital field the same cannot be brought to tax either u/s. 28 or u/s. 56

5. On the facts and circumstances of the case and in law, the ld. CIT(A) ought to have held that the surplus on buy back of euro notes as the value of any benefit or perquisite, arising from business under section 28(iv) of the Act.”

22. Briefly stated, the facts of the case are that the assessee had issued euro notes on 19.08.1997 to advance its capital expenditure programme. Some of the euro notes were due to mature in 2007 and the remaining in 2017. The assessee bought back euro notes of US$ 60,000,000/- out of which euro notes of US$ 30,000,000/- were due to mature in 2007 and the remaining euro notes of US$ 30,000,000/- in 2017. The euro notes were bought back at a discount to the face value resulting in a surplus of Rs.37,96,26,000/-. The case of the assessee before the Assessing Officer was that the said surplus arising on buy back of euro notes was not in the nature of income of the assessee as envisaged by section 2(24) of the I-T Act. The Assessing Officer, however, did not accept the claim of the assessee. Proceeding on the basis that income/gain/surplus of any kind has to suffer the incidence of tax,the Assessing Officer has held that the provisions of section 41(1) of the I-T Act are attracted, the assessee has become richer by the amount of surplus and that the surplus has changed colour as revenue receipt and therefore it has to suffer tax. The Assessing Officer has also held that the surplus is taxable alternatively as income from other sources.

23. Aggrieved by the aforesaid order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) has decided the issue in favour of the assessee for the reasons given by him at pages 10-12 of his appellate order.

24. In support of appeal, the ld. Departmental Representative has placed reliance on the order of the Assessing Officer.

25. In reply, the ld. Sr. counsel for the assessee has relied upon the order of the ld. CIT(A) and submitted that the order of the Ld. CIT-A fully covered by the following decisions:

i) Mahindra and Mahindra Ltd. v. CIT, 261 ITR 501 (Bom HC) = 2003-TIOL-427-HC-MUM-IT

ii) CIT v. Industrial Cr. & Devlp. Syndicate Ltd., 285 ITR 310(Karn. HC) = 2006-TIOL-484-HC-KAR-IT

iii) Prism Cement Ltd. v. JCIT, 285 ITR 43 (Bom.) = 2006-TIOL-162-ITAT-MUM

iv) Mohsin Rehman Penkar v. CIT, 16 ITR 183 (Bom.)

v) Agarchand Chunnilal v. CIT, 16 ITR 430 (Nag.)

vi) Orient Corpn. v. CIT, 18 ITR 28 (Bom.)

vii) CIT v. Ganesa Chettiar, 133 ITR 103 (Mad.)

viii) CIT v. Kerala Estate Mooriad Chalapurarn, 161 ITR 155 (SC)

ix) CIT v. A.V.M. Ltd., 146 ITR 355 (Mad.)

x) CIT v. Lal Textile Finishing Mills P. Ltd., 180 ITR 45 (Pun.) = 2003-TIOL-1004-HC-P&H-IT

xi) Bhagwat Prasad & Co. v. CIT, 99 ITR 111 (All.) = 2003-TIOL-1011-HC-ALL-IT

26. We have heard the parties and also perused the orders passed by the Assessing Officer and the Departmental authorities. In our view, the facts of case closely resemble with those in Mahindra and Mahindra Ltd. v. CIT, ITR 501 (Bom.) = 2003-TIOL-427-HC-MUM-IT and CIT v. Industrial Cr. & Development Syndicate Ltd., 285 ITR 310 (Karn.) = 2006-TIOL-484-HC-KAR-IT. Both the Hon’ble High Courts have decided the issue in favour of the assessee on identical set of facts. Respectfully following the aforesaid two orders, we hold that the order passed by the ld. CIT(A) is correct on the facts and circumstances of the case. We, therefore confirm the same. Ground nos. 3 to 5 are dismissed.”

The assessee also relied upon decision of Hon’ble Supreme Court in the case of CIT v. Mahindra & Mahindra Ltd. (2018) 302 CTR 213 (SC) = 2018-TIOL-173-SC-IT to contend that these foreign exchange fluctuation gain on buy back of Euro Notes cannot be treated as income chargeable to tax because the Euro Notes were raised for purposes of incurring capital expenditure. On being asked by the Bench, the learned counsel for the assessee submitted that projects for which these Euro Notes were raised were completed and interest payable on Euro Notes was claimed as an business/Revenue expenses while computing income chargeable to tax.The bench directed assessee to file as to the fate of an appeal filed by Revenue for AY 2000-01 with regard to status of this issue with Hon’ble Bombay High Court after the same was decided by tribunal in favour of assessee. The assessee has filed decision of Hon’ble Bombay High Court dated 11th June 2014 in ITA no. 251 of 2012 = 2014-TIOL-1003-HC-MUM-IT, wherein the Bombay High Court while deciding appeal for AY 2001-02 in assessee’s own case held that no substantial question arose from the appellate order passed by tribunal, by holding as under:-

“1] This appeal is directed against the order passed by the Income Tax Appellate Tribunal on 9th September, 2011. The assessment year in question is 2001-02.

2] The limited issue arising out of the question projected as a substantial question of law, is with regard to the use of repatriated funds.

3] The factual position and which appears to be undisputed is that the return of income along with statutory audit report were filed by the respondent assessee on 31st October, 2001 declaring a certain income Subsequently the revised return was filed on 26th March, 2003. During assessment proceedings, Assessing Officer, inter alia, taxed an amount of Rs.45,84,92,096/- being the profit on foreign exchange on repatriation of certificates of deposits. Aggrieved by this exercise and the order of the Assessing Officer, the matter was carried in appeal to the Commissioner of Income Tax (Appeals). The assessee’s appeal was allowed on 25th April, 2008. Against this order, the revenue approached the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal noted the admitted factual position and concurred with the Commissioner of Income Tax (Appeals). It held that the earstwhile Tata Power Co. had issued Euro Notes in 1997 for raising funds for financing the companies’ ongoing and future capital expenditure programmes and for general corporate purposes. The companies intended to expand their generating capacity to meet the growing demand of their existing customers as well as to add new direct customers in the License area. The entire proceeds raised abroad were held in interest for a period of 3 years pending deployment and utilization. During the year ended 31st March, 2001, the funds were repatriated to India as per the requirement of Reserve Bank of India. As a result of the intervening fall in the value of the Indian Rupee, a gain in terms of Indian rupees has arisen to the company on the repatriation of funds. The above gain was credited to Profit and Loss Account. The Assessing Officer has treated the profit on repatriation of certificates of deposit as taxable income.

4] The Commissioner of income tax (Appeals) held that the purposes for which the notes were raised was capital. The gain arose, not in the course of trading activities but merely due to conversion of the currency of one country into the currency of another country. The gain is, therefore, on capital account and not in the nature of income. Further, the gain has arisen at that point of time when the funds were repatriated to India. If the Notes were issued for meeting capital expenditure, and remained outside India, the taxability has to be determined at the point of time when the profit arose. Their subsequent utilization was, therefore, not relevant. It is in that regard that the failure of the assessee to explain the utilization of the funds repatriated was held to be a factor not against the assessee. The facts of the case, therefore, justified the stand of the assessee. Once the admitted purpose was noted and remained undisputed throughout, then, merely because an entry was made in the Profit and Loss Account on the credit side does not change the nature of the receipt. In such circumstances, the view taken by the Tribunal and by the Commissioner of Income Tax (Appeals) cannot be termed as perverse. It is a view in consonance with the factual material placed before both.

Such a view does not raise any substantial question of law. The appeal is devoid of any merits and is dismissed.”

13. We have considered rival contentions and perused the material on record including cited case law. We have observed that the assessee had raised Euro Notes in 1997 towards incurring capital expenditure. The said Euro Notes were partly redeemable in 2007 and remaining in 2017. On being asked, it is admitted by the assessee that the projects for which Euro Notes were raised were completed and interest expenditure has been claimed as an Revenue expenses. The assessee has prematurity redeemed the said Euro Notes at discount in the year under consideration and surplus of Rs. 2,31,67,715/- has arisen on said premature buy back of Euro Notes. We have observed that the tribunal has decided this issue in AY 2000-01 in ITA no. 6451/Mum/2003 vide orders dated 18.10.2007, wherein the tribunal was pleased to delete the additions by holding as under:

“21. Ground nos. 3 to 5 reads as under:

“3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.37,97,26,000/- made by the AO u/s. 41(1) of the Act representing the surplus on buy back of euro notes and holding that the surplus on repurchase of euro notes is not hit by the mischief of section 41(1)

4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that as the surplus on buy back euro notes is an advantage in capital field the same cannot be brought to tax either u/s. 28 or u/s. 56

5. On the facts and circumstances of the case and in law, the ld. CIT(A) ought to have held that the surplus on buy back of euro notes as the value of any benefit or perquisite, arising from business under section 28(iv) of the Act.”

22. Briefly stated, the facts of the case are that the assessee had issued euro notes on 19.08.1997 to advance its capital expenditure programme. Some of the euro notes were due to mature in 2007 and the remaining in 2017. The assessee bought back euro notes of US$ 60,000,000/- out of which euro notes of US$ 30,000,000/- were due to mature in 2007 and the remaining euro notes of US$ 30,000,000/- in 2017. The euro notes were bought back at a discount to the face value resulting in a surplus of Rs.37,96,26,000/-. The case of the assessee before the Assessing Officer was that the said surplus arising on buy back of euro notes was not in the nature of income of the assessee as envisaged by section 2(24) of the I-T Act. The Assessing Officer, however, did not accept the claim of the assessee. Proceeding on the basis that income/gain/surplus of any kind has to suffer the incidence of tax,the Assessing Officer has held that the provisions of section 41(1) of the I-T Act are attracted, the assessee has become richer by the amount of surplus and that the surplus has changed colour as revenue receipt and therefore it has to suffer tax. The Assessing Officer has also held that the surplus is taxable alternatively as income from other sources.

23. Aggrieved by the aforesaid order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) has decided the issue in favour of the assessee for the reasons given by him at pages 10-12 of his appellate order.

24. In support of appeal, the ld. Departmental Representative has placed reliance on the order of the Assessing Officer.

25. In reply, the ld. Sr. counsel for the assessee has relied upon the order of the ld. CIT(A) and submitted that the order of the Ld. CIT-A fully covered by the following decisions:

i) Mahindra and Mahindra Ltd. v. CIT, 261 ITR 501 (Bom HC) = 2003-TIOL-427-HC-MUM-IT

ii) CIT v. Industrial Cr. & Devlp. Syndicate Ltd., 285 ITR 310(Karn. HC) = 2006-TIOL-484-HC-KAR-IT

iii) Prism Cement Ltd. v. JCIT, 285 ITR 43 (Bom.)

iv) Mohsin Rehman Penkar v. CIT, 16 ITR 183 (Bom.)

v) Agarchand Chunnilal v. CIT, 16 ITR 430 (Nag.)

vi) Orient Corpn. v. CIT, 18 ITR 28 (Bom.)

vii) CIT v. Ganesa Chettiar, 133 ITR 103 (Mad.)

viii) CIT v. Kerala Estate Mooriad Chalapurarn, 161 ITR 155 (SC)

ix) CIT v. A.V.M. Ltd., 146 ITR 355 (Mad.)

x) CIT v. Lal Textile Finishing Mills P. Ltd., 180 ITR 45 (Pun.) = 2003-TIOL-1004-HC-P&H-IT

xi) Bhagwat Prasad & Co. v. CIT, 99 ITR 111 (All.) = 2003-TIOL-1011-HC-ALL-IT

26. We have heard the parties and also perused the orders passed by the Assessing Officer and the Departmental authorities. In our view, the facts of case closely resemble with those in Mahindra and Mahindra Ltd. v. CIT, ITR 501 (Bom.) = 2003-TIOL-427-HC-MUM-IT and CIT v. Industrial Cr. & Development Syndicate Ltd., 285 ITR 310 (Karn.) = 2006-TIOL-484-HC-KAR-IT. Both the Hon’ble High Courts have decided the issue in favour of the assessee on identical set of facts. Respectfully following the aforesaid two orders, we hold that the order passed by the ld. CIT(A) is correct on the facts and circumstances of the case. We, therefore confirm the same. Ground nos. 3 to 5 are dismissed.”

We have observed that the assessee has filed a decision of Hon’ble Bombay High Court, dated 11.06.2014 for AY 2001-02 concerning profit on foreign exchange fluctuation on repatriation of proceeds of certificate of deposit to India, while presently we are concerned with gains arising on discount on buy back of Euro Notes due to premature redemption of aforesaid Euro Notes. Thus, issue in both the years were different. We have observed that Hon’ble Supreme Court in the case of Mahindra & Mahindra Ltd.(supra) has held in favour of the tax payer that waiver of loan for acquiring capital asset cannot be brought to tax either by invoking provisions of Section 28(iv) or Section 41(1) of the 1961 Act. While arriving at such conclusion, it was noted by Hon’ble Supreme Court in para 15 of the said judgment in the case of Mahindra and Mahindra(supra) that the tax-payer did not claimed deduction by way of interest expenditure u/s 36(1)(iii). However, in the instant case it is admitted by the assessee that the projects for which Euro Notes were raised were completed and the assessee had claimed deduction towards interest expenses u/s 36(1)(iii) as business/revenue expenses. Thus in our view this matter needs to be restored back to the file of the AO for re-adjudication of this matter denovo after considering the decision of Hon’ble Supreme Court in the case of Mahindra & Mahindra Ltd.(supra) and by applying the ratio of said decisions to the facts of the case.The assessee is directed to produce all relevant facts in detail before the AO. The AO shall also be guided by decision of Hon’ble Madras High Court in the case of CIT v. Ramaniyam Homes Private Limited (2016) 68 taxman.com 289 (Mad 2016) : (2016) 384 ITR 530 (Mad.) = 2016-TIOL-830-HC-MAD-IT and/or any other decision having bearing on the issues. All the contentions are kept open and the assessee will be allowed to submit evidences/explanations in its defence which shall be admitted by the AO and then adjudicated on merits in accordance with law uninfluenced by our observations. Thus, in the result, this ground no. 2 filed by Revenue is allowed for statistical purposes. We order accordingly.

14. The next issue raised by Revenue in its appeal filed with tribunal concerned itself with the disallowance of provision for wages of Rs. 19,81,60,000/- which was debited by the assessee as “Provision for Wages” but claimed as business expenses. As per AO, the said provision for wages was a contingent liability which has not accrued or crystallized during the year under consideration. The assessee submitted before the AO that the assessee review the wage agreement with its employees every four years. The last agreement was finalised till during FY 2001-02 and hence a fresh agreement was under negotiation during the FY 2002-03 and pending finalisation of this negotiation, the assessee had made provision of Rs. 19,81,60,000/- on account of revised wages, which was claimed as business expenses. It was submitted by the assessee that the revision of wages had become due in this previous year relevant to the impugned assessment year. The AO was of the view that these expenses cannot be allowed as business expenses as the assessee had neither paid any additional wages nor the same become due as the wage settlerment bagreement was not finalised by the year end i.e. as on 31.03.2003. The AO observed that aforesaid provision for wages debited by the assessee is contingent in nature and the liability has not accrued/crystallised during the year. The AO added back the said sum to the income of the assessee vide assessment order dated 23.02.2006 passed by the AO u/s 143(3) of the 1961 Act.

15. Aggrieved by the assessment order dated 23.02.2006 passed by the AO u/s 143(3), the assessee filed first appeal before Ld. CIT(A). The assessee submitted before learned CIT(A) that it has entered into wage agreement with the employees which is reviewed every four years. The last wage agreement signed by the assessee with employees expired during FY 2001-02 and the fresh agreement was under negotiation as on 31st March 2003. The assessee submitted that it is following mercantile system of accounting and in view of the generally accepted accounting practice of matching revenue with costs and by following mercantile system of accounting, a provision of Rs. 19,81,60,000/- were made in the books of the account on the basis of past experience and demand made by the employees during negotiations. It was submitted by the assessee that the provision for wages was made was for the services rendered by employees for the period ending up to 31st March 2003 and the said expenditure was incurred for the purpose of earning of the income up to 31st March 2003 and hence the liability towards expenditure was not a contingent liability. The assessee submitted that liability will arise is a certainty and there is no element of doubt regarding such an eventuality. The assessee also filed wage agreement dated 18.03.2004 before learned CIT(A). It was observed by the Ld. CIT(A) that the old wage agreement with employees expired on 31st December 2001 and new settlement has become due from 01.01.2002, which was finally reached on 18.06.2004 and hence in the intervening period, provision for wages was created, based on past experience and the demands made by workers which were under negotiation. The basis of computation of said provision for wages was also enclosed by the assessee before Ld. CIT(A). It was also submitted by assessee before Ld. CIT(A) that similar issue arose for the AY 1999-2000 when the earlier wage agreement had expired and provision had been created in the interim period before finalization of the next agreement. It was claimed that tribunal allowed the said claim in AY 1999-00 vide orders dated 11.07.2006 in assessee’s own case in ITA no. 7485/Mum/2002 and 285/Mum/2003, which led learned CIT(A) to allow the claim of the assessee as facts in impugned assessment year were identical as that of AY 1999-2000 wherein tribunal allowed the claim of the assessee for provision for wages. The said order of tribunal for AY 1999-00 in assessee’s own case is placed in paper book at page 325-337.

16. Revenue being aggrieved by the aforesaid decision of learned CIT(A) in granting relief to the assessee has now filed an appeal before the tribunal.

17. The argument has been advanced by Ld. Counsel for the assessee that this is liability in praesenti which has accrued/crystallised liability and is not a contingent liability. It was submitted that every four years the assessee entered into an revised wage settlement agreement with its employees. It was claimed that the last wage settlement agreement expired on 31.12.2001 and fresh agreement of wage settlement with its employees was to be signed with effect from 1st January 2002. It is claimed that during the assessment year, the negotiations were going on with the employees which did not reached finality and ultimately provision was made towards revised wages keeping in view previous experience and demands raised by workers during negotiations. It is claimed that the assessee is following mercantile system of accounting and based on matching principles, wherein the costs are required to be matched with income, the assessee made aforesaid provision for wages. It is claimed that these wage provisions for wages are nothing but enhanced wages which the assessee will be required to pay to its employees for the year ended 31.03.2003 once revised wage settlement agreement with employees is signed to be effective from 01.01.2002. The assessee submitted that identical situation arose in AY 1999-00 when provisions for wages were made pending execution of revised wage settlement with the employees and the tribunal in assessee’s own case for AY 1999-2000 was pleased to hold that these Provision for wages is an allowable business/revenue expenses. The said decision of ITAT for AY 1999-00 in assessee’s own case in ITA no. 7485/Mum/2002 and 285/Mum/2003 vide common order dated 11.07.2006 is placed in paper book at page numbers 325-337 filed by the assessee with tribunal. The assessee relied upon the decision of Hon’ble Supreme Court in the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428(SC) = 2002-TIOL-123-SC-IT, decision of Hon’ble Bombay High Court in the case of CIT v. Mahindra Ugine & Steel company Limited, (2001) 250 ITR 84(Bom.) = 2003-TIOL-548-HC-MUM-IT and also decision of Hon’ble Bombay High Court in the case of CIT v. United Motors(India) Limited (1990) 181 ITR 347(Bom.). It was submitted by learned counsel for the assessee that finally an memorandum of settlement of wages was entered into with its employees for wage settlement which was signed on 18.06.2004 with effect from 1st January 2002. The said agreement is placed in file. It is claimed that provision was made keeping in view past experience and the liability is an liability in praesenti which is an accrued/crystallized liability and not an contingent liability.

18. The Ld. DR on the other hand relied upon the order of the AO.

19. We have considered rival contentions and perused the material on record including case laws cited before us. We have observed that the assessee is in the business of generation, distribution and transmission of power. The assessee enters into wage settlement agreement with its employees/workers for a period of four years. The last agreement expired on 31.12.2001 and a new wage settlement agreement was to be signed with effect from 01.01.2002 for which negotiation with workers/employees through their unions were underway which ultimately culminated into an agreement dated 18.06.2004.The assessee is following mercantile system of accounting and in order to comply with generally accepted principle of matching concept wherein incomes are to be matched with costs for the relevant period made the aforesaid provision for wages to the tune of Rs. 19,81,60,000/- which represented liability likely to arise for the period ended 31.03.2003 on account of enhanced wages/salary pursuant to revised wage settlement agreement which was under revision/negotiation with workers/employees to be effective from 01.01.2002. The assessee based on its past experience as well demand raised by its workers/employees had made provision for wages for the previous year 2002-03 relevant to impugned assessment year of Rs. 19,81,60,000/-. Under the revised wage settlement agreement, the workers/employees will be entitled for higher wages/salaries and other amenities attached to their employment for which aforesaid provision for wages for likely liability till 31.03.2003 was made for the year under consideration. This increased wages/salaries is infact a liability in praesenti and cannot be called as a contingent liability rather it is a crystallized liability payable by the assessee once revised wage settlement agreement is entered into with its employees/union rather only quantification is postponed. The assessee had made provision for wages/salary based on past experience as well demands raised by its employees while negotiations were going on. Similar situation arose in AY 1999-00 wherein the tribunal was pleased to allow claim of the assessee in ITA no. 7485/Mum/2002 and 285/Mum/2003 vide orders dated 11.07.2006, by holding as under :

“12. The next ground of appeal (No.6) by the assessee is directed against the order of the CIT(A) in treating provision of Rs.27,36,99,200/- for pending wage agreement as contingent liability and thereby disallowing it.

13. The case of the assessee is that CIT(A) failed to appreciate that the provision is not a contingent or future liability, The liability is in praesenti and certain liability, accrued during the Assessment Year 1999-2000, on expiry of the existing wage agreement. Only the qualification of liability was to be done in later date.

14. The learned counsel for the assessee submitted, in the alternative the claim may be allowed on actual payment basis. In this case the wage agreement was signed on 28.01.2000 and the payment in accordance with the term of this agreement was made during the financial year 1999-2000. The Assessing Officer held, this is only a contingent liability being liability on account of wage settlement and it comes into existence only when it is quantifies and not otherwise, Assessee made the provision only on anticipation of wage increase in future and the agreement has been executed in the next financial year only. Hence, the Assessing Officer held, the claim of the assessee is not allowable. Aggrieved by the above order, assessee approached the first appellate authority.

15. The claim of the assessee was rejected by the C1T(A) relying upon the following judgements:-

i) CIT vs. Swadeshi Cotton and Flour Mills P.Ltd. (1964) 53 ITR 134 = 2002-TIOL-1753-SC-IT-LB

ii) GIT vs. Purshottam Gokuldas 237 ITR 115 (Ker)

iii) CIT vs. Roberts Mclean & Co.Ltd. 111 ITR 489 (Cal)

iv) APS Cold Storage & Ice Factory Vs.CIT

v) CIT Vs. Naskarpara Jute Mills Co.Ltd. 141 ITR 384 (Cal)

vi) CIT Vs. Phalton Sugar Works Ltd, 162 ITR 622 (Bom)

vii) CIT Vs. Bharat Fire Bricks & Pottery Ltd. 202 ITR 821,824 (Cal)

Aggrieved by the above order, assessee is in appeal before the Tribunal.

16. The Learned counsel for the assessee relying upon the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers Vs. CIT reported in 245 ITR 428 = 2002-TIOL-123-SC-IT, contended that the claim of the assessee is liable to be allowed. In the case reported in 245 ITR 428 = 2002-TIOL-123-SC-IT, the Hon’ble Supreme Court held, the amount set apart to meet liability and the amount is deductible. In this case the Hon’ble Supreme Court held “if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.”

17. The learned counsel for the assessee also brought our attention to the paper book page 30, in the case of M/s.Tata Sons Vs. DCIT in ITA No.3624/Mum/1991, dated 21.01.2000, wherein similar claim was allowed by the Tribunal. Respectfully following the decision of the Hon’ble Supreme Court, we allow the claim of the assessee. There is no doubt the liability of the assessee is certain. Only the year of payment is subsequent. Hence, appeal by the assessee on this ground is allowed.

It is not the case of the Revenue that the assessee has fraudulently inflated its claim by way of higher wages to defraud Revenue than what will be reasonably expected to emerge under the new revised wage settlement agreement which has to become effective from 01.01.2002. The assessee on its part has given a detailed computation of expected higher wages/salaries under revised wage settlement agreement to be entered into with employees effective from 01.01.2002, based on past experience and demand of workers/employees during negotiations. No fault was found by authorities below in the said computational working submitted by the assessee towards provision for wages made by it. The case of the revenue is that this provision for wages is only a contingent liability and not liability in praesenti, which we respectfully do not concur as in our considered view this is an liability in praesneti and is an accrued/crystallized liability which the assessee will be required to pay as only quantification is postponed to the signing of new revised wage settlement agreement. Under these circumstances we are in agreement with the decision of Ld. CIT(A) in granting relief to the assessee by following the decision of tribunal in assessee’s own case for AY 1999-00 as this liability towards provision for wages is not a contingent liability but a liability in praesenti which is an crystallized/accrued liability of the assessee based on mercantile system of accounting by following matching principle of costs with income. Thus this ground of appeal bearing no. 3 raised by the Revenue lacks merit and is hereby dismissed. We order accordingly.

20. Ground no. 4 raised by Revenue in its appeal is consequential and general in nature and does not require separate adjudication. We order accordingly.

21. In the result, appeal of the Revenue in ITA No.3036/Mum/2009 for AY 2003-04 is partly allowed as indicated above.

Assessee’s appeal in ITA no. 3080/Mum/2009-AY 2003-04

22. The first ground of appeal raised by the assessee in its appeal filed with tribunal pertains to the grievances raised by the assessee that Ld. CIT(A) erred in ignoring “other income” of Rs. 1,40,331/- and Rs. 23,55,460/- in the case of Jojobera 67.5 MW unit and Belgaum 81.5MW unit respectively for the grant of deduction u/s. 80IA. The AO had reduced deduction u/s 80IA by reducing the “other income” from claim of deduction u/s. 80IA to the tune of “other income” of Rs. 83,77,998/- earned for Jojbera unit and “other income” of Rs. 23,55,416/- earned for Belgaum unit which albeit was claimed as deduction u/s 80IA in the return of income filed by the assessee with the Revenue, vide assessment order dated 23.02.2006 passed by the AO u/s 143(3) of the 1961 Act.

23. The matter reached Ld.CIT(A) at the behest of the assessee who allowed the claim of deduction u/s 80IA by considering “other income” to the tune of Rs. 82,37,667/- with respect to sale of scrap and store from Jojobera 67.5 MW unit (division 12) while the rest of “other income” to the tune of Rs. 1,40,331/- earned with respect of Jojobera unit was not allowed as deduction u/s 80IA by learned CIT(A). So far as “other income” relating to Belgaum unit to the tune of Rs. 23,55,416/-, the entire amount was not considered by learned CIT(A) for allowing deduction u/s 80IA of the 1961 Act, which stood disallowed keeping in view that the same was in the nature of interest on staff loan and miscellaneous income details of which were not furnished by the assessee before learned CIT(A). It was held by Ld. CIT(A) that the said “other income” cannot be considered to be derived from industrial undertaking as contemplated u/s. 80IA of the Act, vide appellate order dated 27.02.2009 passed by learned CIT(A).

24. Aggrieved by decision of learned CIT(A), the assessee has filed an appeal with tribunal.

25. The Ld. Counsel for the assessee submitted before the Bench ledger account of Belgaum division which is placed in file and contentions are made that the “other income” of Rs. 23,55,416/- relates to Belgaum unit was not considered by learned CIT(A) for allowing deduction u/s 80IA of the 1961 Act and it represented income from sale of sludge during the period under consideration. It was submitted that the sale of sludge is an income derived from industrial undertaking at Belgaum and to that extent deduction be allowed u/s 80IA. It was submitted that these details were not submitted before the authorities below and it is now submitted before the tribunal for the first time and it was prayed that the matter be restored to the file of the AO for verification. It was submitted that the total income earned from sale of sludge was of Rs. 23,43,201/- and the same should be allowed while rest of the disallowance of claim of the deduction which was confirmed by learned CIT(A) should be upheld. It was submitted that Ld. CIT(A) rightly allowed deduction u/s. 80IA with respect to sale and scrap from the Jojobera unit and thus keeping in view parity, the income earned from sale of sludge from Belgaun unit should be considered to have been derived from industrial undertaking and the same should be considered for grant of deduction u/s 80IA. It was submitted that since this is the first time these additional evidences by way of ledger account of sale of sludge derived from Belgaun unit is produced before the tribunal, the matter may be set aside and restore to the file of the AO and the same should be considered by AO on merits in accordance with law. The assessee relied upon the decision of Hon’ble Madras High Court in the case of Fenner (India) Ltd. v. CIT (2000) 241 ITR 803 (Madras), decision of Hon’ble Punjab & Haryana High Court in the case of CIT v. Micro Turners (2012) 17 taxmann.com 253 (P&H High Court) and decision of Hon’ble Delhi High Court in the case of CIT v. Sadhu Forging Ltd. (2011) 336 ITR 444(Delhi) = 2011-TIOL-361-HC-DEL-IT. Thus it was submitted by learned counsel for the assessee that income arising from sale of scrap qualified for being considered as income derived from the industrial undertaking by learned CIT(A) wherein deduction u/s 80IA was allowed and revenue has not challenged the same before ITAT. It was prayed that similarly income from sale of sludge be considered as derived from Belgaum unit and deduction u/s 80IA be allowed for which the AO can make verification. With respect to balance disallowance, it was claimed that interest was earned from advances to employees and staff. The assessee relied on the decision of Delhi ITAT in the case of Joyco India P Ltd. v ITO (2009) 122 TTJ 940(Del-trib.).

26. The Ld. DR on the other hand relied on the decision of lower authorities.

27. We have considered rival contention and perused the material on record including cited case laws. We have observed that the assessee has earned “other income” to the tune of Rs. 1,40,331/- and Rs, 23,55,416/- in the case of Jojobera 67.5 MW unit and Belgaum 81.5MW unit respectively which was disallowed by learned CIT(A) on the grounds that the details have not been furnished by the assessee and also on ground that certain income arose from the advances given to the employees and staff which could not be considered as income derived from undertaking for allowing deduction u/s 80IA of the 1961 Act. Now the assessee has come forward and has submitted details to the tune of Rs. 23,43,201/- which is claimed to have been earned from sale of sludge arising from Belgaun unit and ledger account of sale of sludge account in books of account of Belgaun unit is produced for the first time before the tribunal. The said document albeit was part of books of accounts was not been verified by authorities below as contention of said “other income” being derived from sale of sludge was not furnished/claimed before authorities below. We have also observed that Ld. CIT(A) has granted relief with respect to income from sale of scrap arising from the Jojobera Unit for granting deduction u/s. 80IA of the Act. Thus in our considered view this issue need to be set aside and restored to the file of AO for verification of the claim of the assessee that said income was earned from sale of sludge which was derived from Belgaun unit eligible for deduction u/s 80IA of the 1961 Act. The assessee shall produce all relevant details before the AO who shall adjudicate the same on merits in accordance with law for granting deduction u/s 80IA of the 1961 Act. With respect to the interest Income on loans and advances granted to the staff and employees by the assessee, we are of the considered view that the said interest income cannot be said to be derived from the industrial undertaking at there is no direct first degree nexus between income of the undertaking and interest income from loans and advances granted to employees as it will be too far fetched to accept that interest on loans to employees is derived from industrial undertaking as the said interest income has first degree nexus with the loans granted by the assessee to the employees rather than industrial undertaking of the assessee. Thus,this ground no. 1(a) filed by the assessee is partly allowed for statistical purposes as indicated above.We order accordingly.

28. The next issue vide ground no. 1(b) and 1(c) raised by the assessee in memo of appeal filed with tribunal concerns itself with regard to allowability by learned CIT(A) of deduction u/s 80IA on the taxable income after setting off brought forward unabsorbed depreciation of the units eligible for deduction u/s 80IA albeit assessee is claiming that said depreciation is already been set off against the income of the company as a whole in earlier assessment years. Further the assessee is aggrieved as in view of the assessee requirement to treat the undertaking as the only business of the assessee is from “initial assessment year” and not from the year of commencement of generation/distribution of power despite provisions of Section 80IA(5) of the 1961 Act. It is observed that this issue had been adjudicated by tribunal in assessee’s own case in ITA no. 3078/Mum/2009 = 2016-TIOL-899-ITAT-MUM for AY 2002-03 vide orders dated 19.05.2016 wherein tribunal vide detailed order to which both of us were part of the Division Bench who pronounced the aforesaid order dated 19.05.2016, wherein both these issues were decided by tribunal in favour of the assessee, by holding as under:-

“10. We have heard the rival contentions, perused the material on record and also carefully gone through the case laws relied upon by both the parties. The power project generating undertaking Jojobera 67.5 MW unit commenced generation of power in the assessment year 1997-98. The said undertaking went into losses till the assessment year 2001-02 and the losses/depreciation of the said undertaking were adjusted and set off against the other business income in the earlier years, which set off was allowed by the Revenue. Thus, in nutshell, there was no carry forward of unabsorbed losses/depreciation of the 67.5 MW Jojobera power project undertaking. With effect from the assessment year 2001-02, the said 67.5 MW Jojobera power project undertaking is directly owned and managed by the assessee company as earlier it was owned by Tata Electric(AOP) whereby the assessee company had 50% shares, while rest of the shares were held by Andhra Valley(30%) and Tata Hydro(20%). Section 80IA of the Act provides that for ten consecutive assessment years out of fifteen years beginning from the year in which generation of power commenced, deduction u/s 80IA is available on the 100% profit of the undertaking derived from generation of power. The assessee company has chosen the assessment year 2002-03 as the ‘initial assessment year’ for the purposes of claiming deduction u/s 80IA of the Act although the 67.5 MW Jojobera power generation undertaking commenced generating power in the assessment year 1997-98. Undisputedly the assessee company 67.5 MW Jojobera power generating undertaking has no unabsorbed business losses/depreciation of the earlier assessment years as they had already been set off and adjusted against the income from other businesses in the earlier years and set-off was allowed by the Revenue. The assessee company has the option to choose the ‘initial assessment year’ and thereafter deduction of 100% of the profit from generation of power is eligible for deduction u/s.80IA of the Act for ten consequent assessment years out of the fifteen years beginning from the commencement of generation of power. The CBDT has now come with Circular No. 1/2016 [F. No. 200/31/2015-ITAI] dated 15-2-2016 which is binding on the Revenue, whereby the Board has clarified the term “initial assessment year” in section 80-IA(5) of the Act wherein it has been categorically mentioned that the matter has been examined by the Board and it is abundantly clear from sub-section (2) of Section 80IA of the Act that an tax-payer who is eligible to claim deduction u/s 80-IA of the Act has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It has been clarified that once such ‘initial assessment year’ has been opted for by the tax-payer, he shall be entitled to claim deduction u/s 80IA of the Act for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, it was clarified by the CBDT that the term ‘initial assessment year’ would mean the first year opted for by the tax-payer for claiming deduction u/s 80-1A of the Act. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus, the CBDT directed all the Assessing Officers concerned to allow deduction u/s. 80-IA of the Act in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s. 80IA of the Act shall also not be pursued to the extent it relates to interpreting ‘initial assessment year’ as mentioned in sub-section (5) of that section. In view of the said Circular, the claim of the Revenue is now not sustainable as the circular is binding on Revenue. The relevant CBDT circular no 1/2016 (F.No.200/31/2015-ITA-1)dated 15-2-2006 is reproduced below Circular No. 1/2016 issued by the CBDT is binding on the Revenue and the same is reproduced below :

Circular No. 1/2016

Government of India 
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes

North Block, New Delhi, the 15th February, 2016

Section 80IA of the Income-tax Act, 1961 (‘Act’), as substituted by the Finance Act, 1999 with effect from 01.04.2000, provides for deduction of an amount equal to 100% of the profits and gains derived by an undertaking or enterprise from an eligible business (as referred to in sub-section (4) of that section) in accordance with the prescribed provisions. Sub-section (2) of section 80IA further provides that the aforesaid deduction can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-section (5) of section 80IA further provides as under-“Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made”. In the above sub-section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term ‘initial assessment year’. It has been represented that some Assessing Officers are interpreting the term ‘initial assessment year’ as the year in which the eligible business/manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years.

The matter has been examined by the Board. It is abundantly clear from sub-section (2) that assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term ‘initial assessment year’ would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. The Assessing Officers are, therefore, directed to allow deduction u/s 80IA in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u s 80 IA shall also not be pursued to the extent it relates to interpreting ‘initial assessment year’ as mentioned in sub-section (5) of that section for which the Standing Counsels/D.R.s be suitably instructed.

The above be brought to the notice of all Assessing Officers concerned.

Sd/-
(Deepshikha Sharma)
Director to the Government of India

(F.No.200/31/2015-ITA-I) Copy to:
1. Chairman and all Members of CBDT
2. PS/OSD to Secretary (Revenue)
3. O/o Pr. Director General of Income Tax(Systems) with request for uploading on official website in public domain
4. All Pr. Chief-Commissioners/Directors-General of Income-tax
5. All Officers and Technical Sections of CBDT
6. ITCC Division of CBDT (3 copies)
7. Addl./Jt. CIT Database Cell for uploading on IRS Officers website
8. ADG(PR,PP & OL) with request to post a tweet on official handle of the Department.
9. Guard File

(Deepshikha Sharma)
Director to the Government of India”

The word ‘initial assessment year’ has been referred in section 80IA(5) of the Act being the year at the option of the tax-payer chosen to be the year from which the deduction u/s 80IA of the Act is to be available for ten consecutive assessment year out of fifteen assessment years commencing form the year when the power undertaking start generating power, and thereafter for the succeeding assessment years onward it will be considered that this undertaking is the only source of income of the assessee company as per section 80IA of the Act. Thus, in our considered view, the assessee company is entitled for deduction u/s 80IA of the Act from the assessment year 2002-03 which has been chosen by the assessee company as the ‘initial assessment year’ without adjusting the notionally brought forward unabsorbed business losses/depreciation of the earlier years which are stated to be already adjusted against the business income of the earlier years and the said set off was also allowed by the Revenue in the preceding years. Our view is consistent with the view recently taken by Hon’ble Madras High Court in the case of CIT v. G.R.T.Jewellers (India) in TCA no. 176 of 2016 = 2016-TIOL-512-HC-MAD-IT vide judgment dated 01-03-2016 as under:

“The Revenue has come up with the above appeal raising the following substantial questions of law :

“(1) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the assessee is entitled to deduction under Section 80IA without setting off the losses/unabsorbed depreciation pertaining to the windmill, which were set off in the earlier year against other business income of the assessee following the decision of the jurisdictional High Court in the case of M/s.Velayudhaswamy Spinning Mills (340 ITR 477) = 2011-TIOL-979-HC-MAD-IT, when the same is pending appeal before the Supreme Court in SLP.Civil No.33475 of 2012 = 2016-TIOL-185-SC-IT?

(2) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the initial assessment year in Section 80IA(5) would only mean the year of claim of deduction under Section 80IA and not the year of commencement of eligible business ? and

(3) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee has the option to choose the first/initial assessment year of claim for deduction under Section 80IA ?”

2. Heard Mr.T.R.Senthilkumar, learned Standing Counsel for the Department. Mr.M.P.Senthilkumar, learned counsel takes notice for the respondent.

3. Even according to the learned Standing Counsel for the Department, this Court has consistently followed the decision in M/s.Velayudhaswamy Spinning Mills (340 ITR 477) = 2011-TIOL-979-HC-MAD-IT, despite the Honourable Supreme Court ordering notice.

4. Interestingly, on the basis of the decision in Velayudhaswamy Spinning Mills, the Central Board of Direct Taxes has issued Circular No.1/2016 dated 15.2.2016. It will be useful to extract the circular in entirety, which is as follows:

Circular No. 1/2016
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi,

the 15th February, 2016

Subject: Clarification of the term ‘initial assessment year’ in Section 80IA(5) of the Income Tax Act, 1961

Section 801A of the Income-tax Act, 1961 (‘Act’), as substituted by Finance Act, 1999 with effect from 1.4.2000, provides for deduction of an amount equal to 100% of the profits and gains derived by an undertaking or enterprise from an eligible business (as referred to in Sub-Section (4) of that Section) in accordance with the prescribed provisions. Sub-Section (2) of Section 801A further provides that the aforesaid deduction can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-Section (5) of Section 801A further provides as under :

“Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of Sub Section (1) apply shall, for the purposes of determining the quantum of deduction under that Sub-Section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made”.

In the above Sub-Section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term ‘initial assessment year’. It has been represented that some Assessing Officers are interpreting the term ‘initial assessment year’ as the year in which the eligible business/manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under Sub-Section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years.

The matter has been examined by the Board. It is abundantly clear from Sub-Section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that Sub-Section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term ‘initial assessment year’ would mean the first year opted for by the assessee for claiming deduction u/s 801A.

However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity.

The Assessing Officers are, therefore, directed to allow deduction u/s 801A in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting ‘initial assessment year’ as mentioned in SubSection (5) of that section for which the Standing Counsel/DRs be suitably instructed.

above be brought to the notice of all Assessing Officers concerned.”

5. Therefore, admittedly, questions of law 2 and 3 are also covered by the above circular. Hence, the appeal deserves to be dismissed.

6. Accordingly, the above tax case appeal is dismissed. No costs.

7. But, we cannot resist our temptation to record one more fact. If an issue is covered by the judgment of the High Court, it is always open to the Department to take it on appeal to the Supreme Court and get the law settled once and for all. But, once a decision is taken at the level of the Board, we do not know why repeated appeals should be filed, only to meet with the same fate as that of a decision, on which, a circular has been issued. The Department shall take note of this for future guidance”.

The Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills Private Limited v. ACIT(2012) 340 ITR 477(Mad.) = 2011-TIOL-979-HC-MAD-IT has earlier held that there will be no adjustment of brought forward notional business losses/depreciation which has already been set off against other income of earlier years against the profit of the undertaking of the initial year chosen by the tax-payer for computing deduction u/s 80IA of the Act, while granting deduction u/s 80IA of the Act as under:

“8. Heard the counsel appearing for the parties and perused the materials available on record.

9. On a perusal of the order of the Assessing Officer, it is seen that the eligible income for deduction under section 80-IA is worked out in all the cases as follows :

Rs.
Tax Case (Appeal) No. 909 of 2009 : 
Net income from Windmill Division 1 (2002-03)1,70,76,945
Unabsorbed depreciation allowance assessment year 2003-048,26,84,110
income from Windmill Division 1 (2002-03) assessment year 2004-0571,16,270
Balance of unabsorbed depreciation allowance7,55,67,840
Unabsorbed depreciation allowance balance(-) 5,84,90,895
Tax Case (Appeal) No. 940 of 2009: 
Net income from Windmill Division2,82,67,370
Unabsorbed depreciation allowance (initial assessment year) assessment year 2003-0412,11,01,360
do- assessment year 2004-051,59,85,972
13,70,87,332
Balance(-) 10,88,19,962
Tax Case (Appeal) No. 918 of 2008 : 
Total loss + depreciation of the units claiming depreciation for all earlier years(-) 24,63,50,426
Less : Current year’s income from the unit10,63,74,164
Balance income available for deduction under section 80-IA(-) 13,99,76,362

10. Thus, the assessee has been setting off the loss against the income of the company for the earlier years. During the assessment year, the assessee exercised the option claim of deduction under section 80-IA of the Act. But the Assessing Officer denied the exemption on the finding that loss or depreciation already allowed and set off against other sources of the income of the assessee has to be notionally carried forward and set off against the current year’s income from the units for which the assessee is claiming deduction under section 80-IA. There is no dispute that during the year, there is a profit. Therefore, the assessee claimed deduction under section 80-IA and the Revenue has no authority to notionally bring forward the unabsorbed depreciation and loss of the earlier year which has been already set off as against the current year profit from the unit.

11. It is pertinent to note that the learned senior counsel appearing for the assessee invited the attention of this court to an unreported judgment of this court dated December 23, 2009, in Tax Case (Appeal) No. 298 of 2004 wherein, this court considered the similar substantial question of law, which reads as follows :

“Whether the Tribunal was right in holding that for the purpose of allowing deduction under section 80-I, the brought forward losses and unabsorbed depreciation, etc., of the new industrial undertaking need not be taken into consideration, once they have been set off against other sources of income, especially in view of the clear provisions of sub-section (6) of section 80-I, the application of which is mandatory ?”

12. By following the various decisions of the apex court, this court, in paragraph 15 of the said judgment, has held as follows :

“The cumulative consideration of the principles set out in the above referred to decisions and the other factors involved in this case, wherein admittedly the entire depreciation allowance and development rebate for the past assessment years were fully set off against the total income of the assessee for those assessment years and no further depreciation allowance or development rebate remain unabsorbed and nothing could be deducted in respect of the set off while determining the deduction under section 80-I of the Act.”

13. The above unreported judgment considered section 80-I and had taken the view that the entire depreciation allowance and development rebate for the past assessment years were fully set off against the total income of the assessee for those assessment years and no further depreciation allowance or development rebate remained unabsorbed and, therefore, nothing could be deducted in respect of the set off while determining the deduction under section 80-I of the Act. Section 80-I was introduced by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. The said sub-section deals with deduction in respect of profits and gains from industrial undertakings after a certain date. Section 80-I reads as follows :

“80-I. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof :

(5) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning or the company commences work by way of repairs to ocean-going vessels or other powered craft (such assessment year being hereafter in this section referred to as the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year :

(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

14. From a reading of the above, it is clear that the benefit is given to the profits and gains derived from the business of the hotel or the business of repairs to ocean-going vessels or other powered craft. The deduction is allowed to the extent of 20 per cent from the profits and gains of the assessee. Sub-section (5) gives deduction for the period of seven assessment years immediately succeeding the initial assessment year. Sub-section (6) deals with computing the deduction under sub-section (1) and it starts with non obstante clause and also it is a deeming provision. The fiction created by the undertaking was the only source of income during the previous year initially and subsequent assessment years. Sub-section (6) was the subject-matter before this court in the above-mentioned unreported judgment, wherein this court had held that while interpreting the above provision, for the purpose of allowing deduction under section 80-I brought forward losses and unabsorbed depreciation of the new industry need not be taken into consideration once they have been set off from other sources of income earlier. In the present case, we are concerned with the provision of section 80-IA. The said provision was introduced by the Finance Act, 1999, with effect from April 1, 2000. The provisions of sections 80- I and 80-IA are also more or less identically worded. Sections 80-I and 80-IA come in Chapter VI-A of the Income-tax Act. Chapter VI-A deals with deductions to be made in computing total income. There are two tax incentives contemplated in Chapter VI-A. One is investment incentive and the other one is profit-linked investment. Chapter VI-A was introduced by the Finance Act, 1965, with effect from April 1, 1965, and it consists of four headings. They are A, B, C and D. Heading “A” is general and it also contains definition. It consists of sections 80A, 80AA, 80AB, 80AC and 80B. Section 80AB deals with “Deductions to be made with reference to the income included in the gross total income”, which reads as follows :

“Where any deduction is required to be made or allowed under any section included in this Chapter under the heading ‘C-Deductions in respect of certain incomes’ in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.”

15. A mere reading of the above provision makes it clear that any income of the nature specified in that section, which is included in the gross total income of the assessee for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provision of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in the gross total income. Section 80AB defines “gross total income” which means the total income has to be computed in accordance with the Act before making deduction under this Chapter. Heading “B” deals with “deductions in respect of certain payments” which consists of sections 80C to 80GGC. Heading “C” deals with “deductions in respect of certain incomes”, which consists of sections 80H to 80TT. The last heading “D” deals with “other deductions” which consists of sections 80U to 80V. Heading “C” is relevant for considering the issue in these appeals. The relevant provisions that are to be considered are sections 80-I, 80- IA and 80-IB. In the case of Liberty India v. CIT [2009] 317 ITR 218 (SC); [2009] 225 CTR (SC) 233 ; [2009] 28 DTR (SC) 73 = 2009-TIOL-100-SC-IT, the apex court considered the scope of sections 80-I, 80-IA and also section 80-IB of the Act, wherein, it has been held that Chapter VI-A provides for incentives in the form of tax deductions essentially belong to the category of “profit-linked incentives”. Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. Further, it has been held that sections 80-IB/80-IA are the code by themselves as they contain both substantive as well as procedural provisions. The Supreme Court further observed in the said judgment that sub-section (5) of section 80-IA provides for manner of computation of profits of an eligible business. Accordingly such profits are to be computed as if such eligible business is the only source of income of the assessee.

16. Section 80-IA reads as follows :

“80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business) there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.

(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution or power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines.

(4) This section applies to-

(i) any enterprise carrying on the business of (i) developing, or (ii) operating and maintaining, or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :-

(a) it is owned by a company registered in India or by a consortium of such companies (or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act) ; (b)it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, or (ii) operating and maintaining, or (iii)developing, operating and maintaining a new infrastructure facility ; (c)it has started or starts operating and maintaining the infrastructure facility on or after the 1st April, 1995.

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

17. From a reading of sub-section (1), it is clear that it provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4), i.e., referred to as the eligible business, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100 per cent of the profits and gains derived from such business for ten consecutive assessment years. Deduction is given to eligible business and the same is defined in sub-section (4). Sub-section (2) provides option to the assessee to choose 10 consecutive assessment years out of 15 years. Option has to be exercised, if it is not exercised, the assessee will not be getting the benefit. Fifteen years is outer limit and the same is beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure activity, etc. Sub-section (5) deals with quantum of deduction for an eligible business. The words “initial assessment year” are used in sub-section (5) and the same is not defined under the provisions. It is to be noted that “initial assessment year” employed in sub-section (5) is different from the words “beginning from the year” referred to in sub-section (2). The important factors are to be noted in sub-section (5) and they are as under :

“(1) It starts with a non obstante clause which means it overrides all the provisions of the Act and other provisions are to be ignored ;

(2) It is for the purpose of determining the quantum of deduction ;

(3) For the assessment year immediately succeeding the initial assessment year;

(4) It is a deeming provision ;

(5) Fiction created that the eligible business is the only source of income; and

(6) During the previous year relevant to the initial assessment year and every subsequent assessment year.”

18. From a reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against the income of the assessee. Looking forward to a period of ten years from the initial assessment is contemplated. It does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created.

19. In the present cases, there is no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). In Tax Case Nos. 909 of 2009 as well as 940 of 2009, the assessment year was 2005-06 and in Tax Case No. 918 of 2008 the assessment year was 2004-05. During the relevant period, there were no unabsorbed depreciation or loss of the eligible undertakings and the same were already absorbed in the earlier years. There is a positive profit during the year. The unreported judgment of this court cited supra considered the scope of sub-section (6) of section 80-I, which is the corresponding provision of sub-section (5) of section 80-IA. Both are similarly worded and, therefore, we agree entirely with the Division Bench judgment of this court cited supra. In the case of CIT v. Mewar Oil and General Mills Ltd. (No. 1) [2004] 271 ITR 311 (Raj) ; [2004] 186 CTR (Raj) 141 = 2003-TIOL-655-HC-RAJ-IT, the Rajasthan High Court also considered the scope of section 80-I and held as follows (page 314 of 271 ITR) :

“Having considered the rival contentions which follow on the line noticed above, we are of the opinion that on finding the fact that there was no carry forward losses of 1983-84, which could be set off against the income of the current assessment year 1984-85, the recomputation of income from the new industrial undertaking by setting off the carry forward of unabsorbed depreciation or depreciation allowance from previous year did not simply arise and on the finding of fact noticed by the Commissioner of Income-tax (Appeals), which has not been disturbed by the Tribunal and challenged before us, there was no error much less any error apparent on the face of the record which could be rectified. That question would have been germane only if there would have been carry forward of unabsorbed depreciation and unabsorbed development rebate or any other unabsorbed losses of the previous year arising out of the priority industry and whether it was required to be set off against the income of the current year. It is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-I for the purpose of computing admissible deductions thereunder

In view thereof, we are of the opinion that the Tribunal has not erred in holding that there was no rectification possible under section 80-I in the present case, albeit, for reasons somewhat different from those which prevailed with the Tribunal. There being no carry forward of allowable deductions under the head depreciation or development rebate which needed to be absorbed against the income of the current year and, therefore, recomputation of income for the purpose of computing permissible deduction under section 80-I for the new industrial undertaking was not required in the present case.

Accordingly, this appeal fails and is hereby dismissed with no order as to costs.”

20. From a reading of the above, the Rajasthan High Court held that it is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-I for the purpose of computing admissible deductions thereunder. We also agree with the same. We see no reason to take a different view.

21. The standing counsel appearing for the Revenue is unable to bring to our notice any relevant material or any compelling reason or any contra judgment of other courts to take a different view. He only relied heavily on the Memorandum explaining the provisions in the Finance (No. 2) Bill, 1980, [1980] 123 ITR (St.) 154 to support this case and the same reads as follows :

“Clause 30(iii). In computing the quantum of ‘tax holiday’ profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such units were an independent unit owned by a taxpayer who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-I even though they may have been set off against the profits of the taxpayer from other sources.”

22. We are not agreeing with the counsel for the Revenue. We are, therefore, of the view that loss in the year earlier to the initial assessment year already absorbed against the profit of other business cannot be notionally brought forward and set off against the profits of the eligible business as no such mandate is provided in section 80-IA(5).

23. Under these circumstances, we set aside the order of the Tribunal and answer all the questions in favour of the appellant/assessee and against the Revenue in Tax Case Nos. 909 and 940 of 2009 respectively. Accordingly, tax cases are allowed. Tax Case No. 918 of 2008 :

24. It is filed by the Revenue by raising three questions of law as stated above. In respect of the second question, which is the same as the issue involved in the above tax cases in Tax Case Nos. 909 and 940 of 2009, we also answer in favour of the assessee and against the Revenue.

25. In respect of questions Nos. 1 and 3, the issues are related to the exercising the option of claiming deduction under section 80-IA. As per the assessee, the assessment year is 2004-05. According to the Revenue, the assessment year is 1999- 2000. From the records it is clear that the assessee claimed deduction under section 80-IA for the first time during the assessment year 2004-05. The Assessing Officer accepted the same and there is no dispute. The deduction under section 80-IA is rejected only on the ground that there was no positive income and it was held by the Assessing Officer that the eligible deduction under section 80-IA after setting off of the loss worked out to nil. Before the Assessing Officer, there was no dispute regarding the claim during the year. Aggrieved by that order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). Before the appellate authorities also there is no dispute regarding the claim during the year. Line 3 in paragraph 2 of the order reads as follows :

“The appellant has claimed deduction under section 80-IA for the first time in the current year, namely, the assessment year 2004-05.”

26. The Revenue has not filed an appeal against the order of the Commissioner of Income-tax (Appeals). It reached finality. Aggrieved by the order of the Commissioner of Income-tax (Appeals) regarding the quantum of deduction, the assessee filed an appeal before the Tribunal. In the assessee’s appeal, the Revenue filed a letter first time before the Tribunal and disputed the fact relating to the assessee’s claim that assessment year 2004-05 is the initial assessment year. The Tribunal found that both the Assessing Officer and the Commissioner of Income-tax (Appeals) had given categorical finding that the assessee claimed deduction for the first time during the year 2004-05 and paragraph 5 reads as follows :

“In the present case, there is a categorical finding by the Assessing Officer and the Commissioner of Income-tax (Appeals) that the first year claimed is from the assessment year 2004-05. At the time of hearing, the learned Departmental representative filed a letter which reads as follows :

The assessee’s claim is that assessment year 2004-05 is the “initial assessment year”. However, from a perusal of records the following facts are observed :

Assessment year 1999-2000 :

The assessee claimed deduction of Rs. 2,15,59,112 under section 80-IA of the Income-tax Act. The Assessing Officer rejected the claim under section 143(3) read with section 263. Aggrieved by the order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) agitating, inter alia, the claim for a deduction under section 80-IA. The Commissioner of Income-tax (Appeals), vide his order in I.T.A. No. 39/2005-06, dated August 4, 2005, in paragraph 12 directed the Assessing Officer to allow the claim under section 80-IA which was accordingly, allowed.

Assessment year 2000-01 :

In this assessment year also the assessee in the computation memo claimed deduction under section 80-IA of an amount of Rs.1,20,19,495 which was allowed in full by the Assessing Officer in the regular assessment order under section 143(3), dated March 28, 2003.

This being the position, the statement of the assessee that the claim under section 80-IA claimed for the first time in the assessment year 2004-05 is totally contrary to the facts as mentioned. This proves that assessment year 2004-05 is not the initial assessment year as claimed by the assessee.

The fact of the matter is that the assessee exercised its option of claiming deduction under section 80-IA in the assessment year 1999-2000 itself. Therefore, the assessment year 1999-2000 is the initial assessment year.’

But this letter is contrary to the findings of the lower authorities. The lower authorities categorically observed that the first year in which deduction was claimed was 2004-05. We have already narrated in the facts of the case that if the facts stated by the Assessing Officer or the Commissioner of Income-tax (Appeals) are wrong the Departmental representative is required to adduce the evidence as per rules 10 and 29 of the Income-tax (Appellate Tribunal) Rules, 1963, which read as follows :

’10. Filing of affidavits.-Where a fact which cannot be borne out by, or is contrary to, the record is alleged, it shall be stated clearly and concisely and supported by a duly sworn affidavit.

29. Production of additional evidence before the Tribunal.-The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.’

These facts are contrary to the facts recorded by the Commissioner of Income-tax (Appeals) and the Assessing Officer. It cannot be considered. The above statement made by the Assessing Officer is not in accordance with rules 10 and 29. Hence, we decline to consider the same.

Adverting to the facts of the case, the initial assessment year in this case starts from 2004-05 since the assessee has opted to claim this deduction only in this assessment year, the initial assessment year cannot be the year in which the undertaking commenced its operations and in this case, the initial assessment year is the assessment year in which assessee has chosen to claim deduction under section 80-IA. Hence, the provisions of section 80-IA(5) treating undertaking as a separate sole source of income cannot be applied to a year prior to the year in which the assessee opted to claim relief under section 80-IA for the first time. Depreciation and carry forward loss relief to the unit which claims deduction under section 80-IA, cannot be notionally carried forward and set off against the income from the year in which the assessee started claiming deduction under section 80-IA. At the cost of repetition, we make it clear that the case law relied on by the Departmental representative are delivered before the amendment to section 80-IA by the Finance Act, 1999. Before the amendment, the initial assessment year was defined in the Act but after the amendment there is no definition for initial assessment year in the Act and there is option to the assessee in selecting the year of claiming relief under section 80-IA. In view of this, we are of the opinion that there is no question of setting off notionally carried forward unabsorbed depreciation or loss against the profits of the units and the assessee is entitled to claim deduction under section 80-IA on the current assessment year on the current year profit. Accordingly, we allow the claim of the assessee.”

27. From a reading of the above order, it is clear that all the authorities below had given a categorical finding that the first year is 2004-05. The issue also reached finality. The Revenue has accepted the finding given by the Commissioner of Incometax (Appeals) and, therefore, the same cannot be raised in the assessee’s appeal before the Tribunal. It is a question of fact. It is not a perverse order. We do not find any error or illegality in the order of the Tribunal warranting interference. The order of the Tribunal is in conformity with law. Under these circumstances, we also answer questions Nos. 1 and 3 in favour of the assessee and against the Revenue. The tax case filed by the Revenue is dismissed.

28. In fine, Tax Case (Appeal) Nos. 909 and 940 of 2009, all the questions answered in favour of the assessee and against the Revenue and, hence, these appeals are allowed.

29. Under these circumstances, we confirm the order of the Tribunal and answer all the questions in favour of the assessee and against the Revenue in Tax Case (Appeal) No. 918 of 2008 and dismiss the appeal.”

Thus keeping in view judgment of the Hon’ble Madras Court in the case of Velayudhaswamy Spinning Mills Private Limited v. ACIT(2012) 340 ITR 477(Mad.) = 2011-TIOL-979-HC-MAD-IT, judgment of Hon’ble Madras High Court in the case of CIT v. GRT Jewellers(India) (supra), CBDT Circular No. 01/2016 dated 15-02-2016, provisions of Section 80IA of the Act and as per discussions and reasoning as set out above, we have no hesitation in holding that the assessment year 2002-03 chosen by the assessee company shall be the ‘initial Assessment year’ for the purposes of claiming deduction u/s 80IA of the Act, although the Jojobera 67.5MW unit started generating power w.e.f. assessment year 1997-98. Thus, Jojobera 67.5 MW power undertaking shall be deemed to be the only source of the income as provided u/s 80IA(5) of the Act only from the assessment year succeeding the assessment year 2002-03 being the initial assessment year and subsequent assessment year up-to and including the assessment year for which the determination is to be made which in any case shall not transgress beyond fifteen years from the year when Jojobera 67.5 MW power generating unit started generating power. We also hold that the notionally brought forward losses/depreciation of the Jojobera 67.5 MW power generating unit for the period from the assessment year 1997-98 to 2001-02 which are already set off against the other business income in earlier years and set-off being allowed by the Revenue shall not be adjusted from the profit so computed by the assessee company with respect to Jojobera 67.5MW power generating unit for the assessment year 2002-03 for the purposes of computing deduction u/s.80IA of the Act.

Since, we have adjudicated this issue on merit in favour of the assessee company based on detailed discussions and reasoning as set out above, the grounds raised by the assessee company challenging the reopening of the assessment u/s 147/148 of the Act has become academic and infructuous and hence we refrain from deciding the same and the questions raised by the assessee company in the grounds of appeal are kept open. We order accordingly.”

The SLP filed by Revenue against the decision of Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills Private Limited v. ACIT (supra) before Hon’ble Supreme Court was dismissed by Hon’ble Supreme Court in the case of ACIT v. Velayudhaswamy Mills Private Limited (2016) 76 taxmann.com 176 (SC) =2016-TIOL-185-SC-IT. Respectfully following the aforesaid order of the tribunal in assessee’s own case for AY 2002-03, we are deciding both this issue covered by ground number 1(b) and1(c) in favour of the assessee. The ground number 1(b) and 1(c) of the assessee are allowed in favour of the assessee. We order accordingly.

29. The next ground of appeal being ground number 2 filed by the assessee in its appeal challenges the decision of learned CIT(A) in treating income of Rs. 9,81,38,257/- earned from broadband project during trial runs and income of Rs. 1,27,67,139/- on scrap sale before capital projects were installed, as revenue income instead of setting off such income against capital work-in-progress. The assessee had earned income during the previous year on its broadband project to the tune of Rs. 9,81,38,257/- as well income on the sale of scrap of the capital projects amounting to Rs. 1,27,67,139/-. The assessee did not offer the said income to tax. The assessee submitted before the AO that the said income on broadband project of Rs. 9,81,38,257/- represents income from providing broadband connectivity during trial runs wherein the said income was credited to capital work in progress. The assessee relied upon decision of Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Limited (236 ITR 315) = 2002-TIOL-161-SC-IT. The assessee had during the year ended 31st March 2003 had capitalized work in progress and claimed depreciation. Thus, the assessee reduced aforesaid incomes from the capital work in progress. The AO treated the said income from broadband project and also from sale of scrap of this project as revenue in nature and the same were added to the income of the assessee by the AO vide assessment order dated 23.02.2006 passed u/s 143(3) of the 1961 Act.

30. The matter reached learned Ld. CIT(A) at the behest of the assessee who was also pleased to dismiss the contentions of the assessee vide appellate order dated 27.02.2009 passed by learned CIT(A), wherein learned CIT(A) held as under:-

“13. I have gone through the above submissions very carefully and perused the reasoning given by the Assessing Officer as well as the facts of the case cited by the appellant. I agree with the assessing officer that the income earned by the appellant is clearly revenue in nature. Hence the same is required to be considered as income of the appellant. The case law relied by the: appellant is with regard to the capitalization of interest and not on the capitalization of income received by the appellant. The very purpose of setting up the plant is to earn income and this is also applicable to the Broadband project as far as the capital work in progress is concerned assessee has already capitalized the same and due depreciation on the same is being allowed.

13.1 In view of the above discussion, the income of the broadband project along with income on account of sale of scrap of this project is rightly been treated as income of the appellant by the assessing officer. Therefore, I uphold the action of the assessing officer. This ground of appeal is dismissed.”

31. The assessee being aggrieved by the decision of learned CIT(A) has filed an appeal before the tribunal. The Ld. Counsel for the assessee submitted that these income are inextricably connected with the broadband project and were earned during trial run phase before installation of the project, thus the said income were rightly reduced from capital work in progress as the trial runs of broadband projects were underway. The assessee relied on the decision of Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Limited, (1999) 236 ITR 315(SC) = 2002-TIOL-161-SC-IT and it was submitted that the trial runs were underway and the assessee has rightly reduced the said income from broadband projects and also income earned from scrap from capital work in progress as these incomes were earned before installation of the project. The assessee also relied on the decision of Ahmedabad tribunal in the case of Gujarat State Fertilizers and Chemicals Ltd. v. ACIT(OSD), Baroda in ITA no. 3228 and 3358/Ahd./2003 for AY 1999-00, order dated 28.08.2009. The assessee also relied upon decision of Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited reported in (2009) 315 ITR 255(Delhi) = 2009-TIOL-108-HC-DEL-IT. The assessee also relied upon decision of Ahmedabad tribunal in the case of Adani Power Limited v. ACIT reported in (2015) 155 ITD 239 (Ahmedabad-tribunal) = 2015-TIOL-1327-ITAT-AHM.

32. We have considered rival contentions and perused the material on record including cited case laws. We have observed from the material on record that the assessee broadband unit was under trial run and the same was not installed, when income from said project under installation to the tune of Rs. 9,81,38,257/- arose to the assessee. Similarly, there were scrap generated prior to installation of the broadband project which generated income to the tune of Rs. 1,27,67,139/-. The assessee was setting up broadband project and the cost incurred towards the said project was capitalised. The assessee reduced both the aforesaid income from capital work in progress of the broadband project as these income arose prior to installation of the said broadband project. During the year under consideration itself the broadband project became operational and the net capitalized cost (after excluding aforesaid income) was capitalised by the assessee and depreciation was also claimed on the net amount viz. capital cost less aforesaid two income’s. The authorities below has held that both these income’s were to be brought to tax as revenue income because broadband project was meant to generate revenue and was installed during the year itself on which depreciation was also allowed. We are of the considered view that both these income were inextricably linked with broadband project which was under installation and these income were earned during trial run phase/pre-installation phase and the assessee rightly reduced both the aforesaid income’s from the capital work in progress and the same cannot be brought to tax as revenue income as were sought to be done by lower authorities. The assessee has rightly relied upon the decision of Hon’ble Supreme Court in the case of Bokaro Steel Limited(supra). Thus, we have no hesitation in holding that income from broadband project to the tune of Rs. 9,81,38,257/- during trial run phase as well income from sale of scrap during pre-installation of the project was rightly reduced by the assessee from capital work in progress and cannot be brought to tax as revenue receipts chargeable to tax. The ground number 2 filed by the assessee in its memo of appeal is allowed. We order accordingly.

33. Ground no. 3 raised by the assessee relates to disallowance upheld by learned CIT(A) u/s. 40A(9) for payments aggregating to Rs. 29,36,361/- made by assessee to local schools. The assessee has suo motu voluntarily disallowed these expenses while filing return of income. The assessee vide letter dated 21.11.2005 submitted before learned AO raised this claim for deduction of aforesaid expenses for the first time, which was not allowed by the AO. It was claimed that the assessee has made payments to the local schools at Khopoli, Tata Vidalaya at Bhivpuri Camp and Tata Vidyalaya at Bhira. It was claimed that children of employees are also studying in the local schools. The assessee also relied upon case laws to contend that these expenses are allowable expenses u/s 37(1) of the 1961 Act. The learned CIT(A) also rejected claim of the assessee on the ground that no discussion to this effect has taken place in the assessment order passed by the AO, vide appellate order dated 27.02.2009 by holding as under:

“15 I have considered the above submissions very carefully and also gone through the case laws cited by the appellant. I find that the case laws cited by the appellant are distinguishable to the facts of the case of the appellant as the appellant has not claimed this amount in the return of income and no discussion to this effect has taken place in the assessment order. In view of the decision in Goetze India, I hold that such payment cannot be allowed as the same is not claimed in the return. Accordingly this ground of appeal is dismissed.”

34. Now aggrieved by the appellate decision of learned CIT(A), the assessee has filed an appeal with tribunal. It was submitted by learned counse for the assessee that the payment were made to local schools schools at Khopoli, Tata Vidalaya at Bhivpuri Camp and Tata Vidyalaya at Bhira where the power units of the assessee are located in close vicinity. It is also claimed that children of the employees were also studying in these schools. It was submitted by learned counsel for the assessee that said claim was raised before the AO for the first time by filing letter dated 21.11.2005 but the AO did not admit this claim. The learned CIT(A) also rejected claim of the assessee on the ground that no such claim was made by the assessee while filing return of income with Revenue. Before us the learned counsel for the assessee submitted that there may be bar on the AO in admitting additional claim for the first time during assessment proceedings as the same was not raised in return of income filed by assessee with the Revenue but there is no bar for Ld. CIT(A) who is an appellate authority in admitting this claim. The assessee relied on the decision of CIT v. Pruthvi Brokers & Shareholders (2012)23 taxmann. com 23 (Bom.) = 2012-TIOL-489-HC-MUM-IT and decision of Hon’ble Supreme Court in the case of Jute Corporation of India Limited v. CIT 1991 AIR 241 (SC) = 2002-TIOL-1027-SC-IT-LB The Ld. DR on the other hand relied upon the order of Ld. CIT(A).

35. We have considered rival contentions and have perused the material on record including cited case laws. We have observed that the assessee has made payment of Rs. 29,36,361/- to local schools and claim is made that the said local schools are situated in vicinity where the power units of the assessee are located and children of the employees of the assessee were also studying in the said schools during the previous year relevant to the impugned assessment year. The assessee did not raise this claim of deduction for making payments to local schools in the return of income filed with the AO but later during assessment proceedings, the said claim was raised by the assessee for the first time before the AO through a letter dated 21.11.2005 but since the said claim was not raised while filing return of income, the AO did not admit this claim and consequently no deduction was allowed by the AO for making payments to local schools while framing assessment u/s 143(3) of the 1961 Act. The learned CIT(A) also did not admit this claim of deduction for payments made to local schools by the assessee. In our considered view, the learned CIT(A) being appellate authority ought to have admitted this ground and then should have proceeded to decide this claim of deduction of the assessee for making payments to local schools on merits in accordance with law. It is well settled that the powers of learned CIT(A) are co-terminus with the powers of the AO. The decision of Hon’ble Bombay High court in the case of Pruthvi Brokers and Shareholders(supra) is relevant, wherein it is held by Hon’ble Bombay High Court as under:

“23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254.”

Thus, We are inclined to hereby admit this additional claim of the assessee towards deductions for making payment to local schools and then to restore this issue to the file of the AO for fresh adjudication on merits in accordance with law. The AO shall admit all additional evidences/explanations submitted by the assessee during denovo proceedings in connection therewith the aforesaid claim of deduction and adjudicate the same on merits in accordance with law. The assessee is also directed to file all relevant details before the AO during denovo proceedings as to the payments made to local schools as well details of children of the employees who were studying in the said local school during the year under consideration to prove that these expenses were inextricably linked with the business of assessee and is wholly and exclusively incurred for the purposes of the business of the assessee and comply with the mandate of provision of Sec. 40A(9) of the 1961 Act and/or Section 37(1) of the Act. This ground of appeal bearing number 3 filed by the assessee is allowed for statistical purposes. We order accordingly.

36. Ground No. 4 is general in nature and does not require separate adjudication.

37. In the result, appeal of the assessee is partly allowed as indicated above.

38. In the result, both the appeal filed by the assessee and revenue are party allowed as indicated above.

(Order pronounced in the open court on 21.05.2019)

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