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Provision for leave encashment created under LIC group lease encashment scheme can be disallowed u/s 43B(f) as the same can only be claimed in year of payment: ITAT

2019-TIOL-1372-ITAT-MAD

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘B’ CHENNAI

ITA Nos.1859 /Chny/2011, 689/Chny/2012, 688/Chny/2013,
494 & 495/Chny/2014 & 2193/Chny/2016
Assessment Years: 2007-08, 2008-09, 2009-10 & 2010-11

M/s CHENNAI PETROLEUM CORPORATION LTD
REFINERY HOUSE, MANALI, CHENNAI-600068
PAN NO: AAACM4392C

Vs

1) ASSISTANT COMMISSIONER OF INCOME TAX
COMPANY CIRCLE-I(3), CHENNAI

2) JOINT COMMISSIONER OF INCOME TAX
LARGE TAXPAYER UNIT, CHENNAI

3) DEPUTY COMMISSIONER OF INCOME TAX
LARGE TAXPAYER UNIT-APPEALS, CHENNAI

4) ASSISTANT COMMISSIONER OF INCOME TAX
LARGE TAXPAYER UNIT-APPEALS, CHENNAI

ITA Nos.1982/Chny/2011, 854/Chny/2013,
884/Chny/2013, & 309/Chny/2014
Assessment Years: 2007-08, 2008-09, 2009-10

DEPUTY COMMISSIONER OF INCOME TAX
LARGE TAXPAYER UNIT, CHENNAI

ASSISTANT COMMISSIONER OF INCOME TAX
LARGE TAXPAYER UNIT-I, CHENNAI

Vs

M/s CHENNAI PETROLEUM CORPORATION LTD
536, ANNA SALAI, TEYNAMPET, CHENNAI-600018
PAN NO: AAACM4392C

N R S Ganesan, JM & Inturi Rama Rao, AM

Date of Hearing: January 09, 2019
Date of Decision: March 20, 2019

Appellant Rep: Shri R Vijayaraghavan, Adv.
Respondent Rep by: 
Shri C Vathsala, Addl. CIT

Income Tax – Section 43B.

Keywords – Provision for leave encashment – LIC group leave encashment scheme.

THE assessee company, engaged in the business of refinery of petroleum and petroleum chemical products, filed return for relevant AY. During assessment, the AO made disallowance of provision for leave encashment holding that the provision was hit by clause (f) of s. 43B of the Act. On appeal, CIT(A), confirmed the same. Aggrieved assessee filed appeal before Tribunal.

On appeal, Tribunal held that,

Whether provision for leave encashment created under LIC group leave encashment scheme can be disallowed under clause (f) of s. 43B of Act as same can be claimed in the year of payment only – YES : ITAT

++ arguments of the Counsel that the payment made towards the LIC group leave encashment scheme should be allowed as a deduction on the payment basis cannot be accepted for two reasons 1) No evidence was filed showing that during the year under consideration the assessee company made any payment towards LIC group leave encashment scheme 2) The decision of High Court of Kerala in the case of Hindustan Latex Ltd cannot come to the rescue of the assessee company, as in the said decision, the Kerala High Court had not laid down any law that the payment made towards the group leave encashment policy is allowable as a deduction. It merely held that the issue is a debatable and therefore, it cannot be subject matter of the revision u/s. 263 of the Act. In the result, ground of appeal of the assessee is dismissed.

Assessee’s appeal dismissed

ORDER

Per: Inturi Rama Rao:

ITA NOs.688/Chny/2013 & 884/Chny/2013 for assessment year 2007-
08 (Cross Appeals)

These are cross appeals filed by the Assessee as well as Revenue directed against the Order of the Learned Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai (hereinafter called as ‘CIT(A)’) dated 8.01.2013 for the Assessment Year (AY) 2007-08.

2. Since, the identical facts and issues are involved in these appeals, we proceed to dispose the same vide this common order.

3. For the sake of convenience and clarity the facts relevant for the AY 2007-08 in ITA No.688/Chny/2013 are stated herein.

4. The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of refinery of petroleum and petroleum chemical products and the sale of the same. The return of income for the AY 2007-08 was filed on 27.10.2007 declaring income of Rs.422,47,34,220/-. Against the said return of income, the assessment was completed by the Addl. CIT (LTU), Chennai vide order dated 16.12.2009 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) at a total income of Rs. 438,99,85,730/-. While doing so, the AO made the following disallowances:

1)Effect of change in Accounting Policy (para No.4.1.2)2365202
2)Disallowance u/s. 35DDA (para No.5)100291
3)Provision for Leave Encashment (para No.6)118584791
4)Payment to Indocoserve (para No.7)35251825
5)Bad Debts (para No.8)700416
6)Social & Community Welfare Expenses (para No.9)4838240
7)Under section 14A (para No.10)3410749165251514

5. Being aggrieved, an appeal was preferred before ld. CIT(A), who vide impugned order granted relief in respect of addition of Rs. 23,65,202/- on account of change in method of accounting on pre-paid expenses following his predecessor’s order in assessee’s own case in the AY 2006-07. The ld. CIT(A) confirmed the disallowance of provision for leave encashment by holding that the decision of Hon’ble High Court of Calcutta in the case of Exide Industries vs. UOI 292 ITR 470 (Cal.) = 2007-TIOL-429-HC-KOL-IT had been stayed by Hon’ble Supreme Court. The ld. CIT(A) had confirmed the disallowance of sum of Rs. 3,52,51,825/- u/s. 40(a)(ia) of the Act on the payments made to Indocoserve towards consideration for different works undertaken by it on the ground that the appellant had not produced the certificate obtained from the Income Tax Dept. for non deduction of tax. The ld. CIT(A) also confirmed the addition on account of bad debts claimed for Rs. 7,00,416/- on the ground that there was no material. However, he accepted the alternative argument of the appellant that the same should be allowed as trading loss u/s. 37(1) of the Act. The ld. CIT(A) directed the AO to delete the addition of Rs. 48,38,240/- on account of expenditure incurred on social & community welfare expenses placing reliance on the decision of Hon’ble High Court of Madras in the assessee’s own case in the case of CIT v. Madras Refineries Ltd. [2004] 266 ITR 170 (Mad.). As regards to the disallowance u/s. 14A of the Act, the ld. CIT(A) directed the AO to delete the addition of Rs. 28,18,999/- made under clause (ii) of the Rule 8D of the Income Tax Rules, 1962 (hereinafter ‘the Rules’). However, confirmed the addition under clause(iii) of Rs. 5,91,750/-.

6. Being aggrieved by that part of order of the ld. CIT(A), which is against the assessee, the assessee filed an appeal in ITA No.688/Chny/2013 and the Revenue is in appeal on the grounds which are allowed in favour of the assessee in ITA No.884/Chny/2013 for AY 2007-08.

7. Now we shall take up the assessee’s appeal in ITA No.688/Chny/2013 for AY 2007-08.

7.1. The Assessee raised the following grounds of appeal:

“1. The order of The Commissioner of Income Tax (Appeal) LTU is contrary to Law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals) LTU erred in confirming the disallowance of Rs.11,85,84,791/- Lakhs under sec 43B(f).

2.1 the Commissioner of Income tax (Appeals) LTU ought to have appreciated that the Appellant had provided the above amount towards provision for leave encashment on an actuarial basis.

2.2 The Appellant relied on the decision of Calcutta High Court in the case of Exide Industries reported in 292 ITR 479 (Cal) wherein the High Court has held that Liability of Leave encashment cannot be disallowed for non payment under Section 43B.

3. The Commissioner of Income tax (Appeals) LTU erred in confirming the disallowance of Rs.3,52,51,8251- u/s 40(a)(ia) paid to M/s. lndocoserve for non- deduction TDS.

3.1 The Commissioner of Income tax (Appeals) LTU ought to have appreciated that it is merely reimbursement of expenses and hence no tax need to be deducted on the same. –

3.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 31 March and not on the amounts which have been paid during the previous year. Appellant relies on the decision of Special bench in the case of Merilyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) 1 (Vis)(SB) = 2012-TIOL-184-ITAT-VIZAG-SB.

3.2 Without prejudice to the same, as M/s. Indocoserve has filed the return of income including the amount received and has been arranged for payment of tax there can be no disallowance in the hands of the Appellant. Appellant relies on the decision of Apex court in the case of Hindustan Coca Cola Beverages (P) Ltd Vs CIT reported in 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT.

4. The Commissioner of Income tax (Appeals), LTU erred in restricting the disallowance of expenses of Rs. 5,91,750/- alleged to be relatable to earning the dividend income, by applying Rule 8D(iii).

4.1 The Commissioner of Income tax (Appeals), L1U ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disalLowed. The appellant has not irred any expenditure for earning the dividend income.

4.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the Hon’ble Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited – reported in 323 ITR 518 = 2009-TIOL-604-HC-P&H-IT has held that “Disallowance u/s.14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.”

4.3 The Commissioner of Income tax (Appeals, LTU ought to appreciate that the notification No.5.0.547(E) containing disallowance sub-section of (2) of section 4A read with rule 8D has come in force from 24th March, 2008 i.e., from Assessment Year 2008-09 and therefore not applicable for the Assessment year 2007- 08.The appellant relies on the decision of the Mumbai High court in the case of Godrej a Boyce Mfg Co Ltd Vs CIT Reported in 234 CTR 1 = 2010-TIOL-564-HC-MUM-IT.”

7.2 The assessee raised five grounds of appeal. Grounds of appeal No.1 & 5 are general in nature and therefore, do not require any adjudication.

7.3 Ground of appeal No.2 challenges the disallowance of provision for leave encashment of Rs. 11,85,84,791/-. The AO disallowed the provision for leave encashment of Rs.11,85,84,791/- holding that the provision is hit by clause (f) of s. 43B of the Act. Even on appeal before the ld. CIT(A), the same came to be confirmed.

7.4 The ld. Counsel for the assessee Shri R.Vijayaraghavan, Advocate submitted that the provision for encashment is allowable as deduction as the Hon’ble High Court of Calcutta has held the provisions to be ultra virus in the case of Exide Industries reported in 292 ITR 470 (Cal) = 2007-TIOL-429-HC-KOL-IT. Without prejudice to the above, he submitted that the same should be allowed as deduction on payment basis and he further submitted that the payment made to LIC towards group leave encashment scheme should be treated as a payment to employees be allowed as deduction. Reliance in this regard was placed on the decision of Hon’ble High Court of Kerala in the case of CIT v. Hindustan Latex Ltd. 209 Taxman 42 (Ker.) = 2012-TIOL-484-HC-KERALA-IT. This issue was dealt with by us in the case of Karur Vysya Bank Ltd. in ITA No.1343/Chny/2013 dated 28.02.2019, wherein it was held as under:

“23.1 Ground No.2 & 3 challenges the addition of provision for leave encashment and medical leave. The addition was made by the Assessing Officer invoking the provision of s. 43B of the Act. The clause (f) to s. 43B of the Act enacts that no expenditure shall be allowed on account of any leave salary unless, the expenditure is actually paid. Thus, provision is intended to overcome 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-LB. Even, the decision of Hon’ble Madras High Court in the case of CIT v. Panasonic Home Appliances [2010] 323 ITR 344 (Mad.) = 2009-TIOL-194-HC-MAD-IT is also before enactment of clause (f) to s. 43B of the Act. Further, the appellant has placed reliance on the order of Coordinate Bench of Tribunal, Chennai in the case of Indian Overseas Bank [2013] (4) TMI 751 – ITAT, Chennai, we find that this decision was rendered in relation to AY 1994-95, which is prior to the enactment of the provision of s. 43B(f) of the Act. Therefore, the case laws relied upon by the ld. Counsel cannot come to the rescue of the assessee-bank. The decision Hon’ble High Court of Calcutta in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 470 (Cal.) = 2007-TIOL-429-HC-KOL-IT striking down the provisions of clause (f) of s. 43B of the Act on the grounds of arbitrariness is stayed by Hon’ble Supreme Court in SLP(Civil) No.CC.12060 dated 08.09.2008 therefore, the provisions of clause (f) to s. 43B of the Act are in force in the light of the stay order granted by the Hon’ble Apex Court. In this context, we can rely on the decision of Hon’ble High Court of Kerala in the case of South Indian Bank Ltd. v. CIT [2014] 45 taxmann.com 428 (Kerala) = 2014-TIOL-224-HC-KERALA-IT, wherein it was held as follows vide para 6 of the judgment:

“6. Then coming to the second issue, it pertains to the provision made for leave encashment and the disallowance claimed was under Section 43B(f). As already stated above, the opinion of the CIT(Appeals) was set aside by the Tribunal in the light of the stay order of the judgment of the High Court of Calcutta in Excide Industries case (supra) and the SLP stated above is still pending. Therefore, the opinion of the Tribunal so far as disallowance claimed in respect of leave encashment under Section 43B(f) of the Act, as on today, the provision seems to be in force in the light of the stay order granted by the Apex Court in the SLP. Therefore, as long as Section 43B(f) is on Statute, the said disallowance is justified.”

23.2 Thus, in the light of the above legal position, we do not find any merit in the grounds of appeal filed by the assessee-bank. Hence, we dismiss these grounds of appeal. “

7.5 In view of the above, we do not find any reason to differ with the view expressed by us in the above case. The arguments of the ld. Counsel that the payment made towards the LIC group leave encashment scheme should be allowed as a deduction on the payment basis cannot be accepted for two reasons 1) No evidence was filed before us showing that during the year under consideration the assessee company made any payment towards LIC group leave encashment scheme 2) The decision of Hon’ble High Court of Kerala in the case of Hindustan Latex Ltd. (supra) cannot come to the rescue of the assessee company, as in the said decision, the Hon’ble Kerala High Court had not laid down any law that the payment made towards the group leave encashment policy is allowable as a deduction. It merely held that the issue is a debatable and therefore, it cannot be subject matter of the revision u/s. 263 of the Act.

7.6 In the result, ground of appeal No.2 of the assessee is dismissed.

8. Ground of appeal No.3 challenges the disallowance of sum of Rs. 3,52,51,825/- on the payments made to M/s. Indocoserve for non deduction of tax at source. It is submitted that M/s. Indocoserve was formed by the MRL as registered co-operative society under Tamil Nadu Co-operative Society Act, 1951 and is formed by MRL for the benefit of contract workmen with the object of providing sustainable livelihood and at the same time avoid the exploitation by the contractor. The workmen were enrolled by these members. The object of the MRL Indocoserve is to undertake and execute various works entrusted by the assessee for the Refinery at Manali and their Corporate Office at Annasalai, Chennai. It provides the following services to the assessee company:

– Asphalt filling/was filling and Loading

– Grabber Maintenance

– Plumbing, Indcoserve canteen, Collection and Distribution of mail

– Indcoserve time office

– Assisting Company employees in various departments/sections like OM&S, Lab, Power Plant, Pumps, R&D, OIlS, etc.

8.1 The AO disallowed this sum invoking the provision of s. 40(a)(ia) of the Act on the ground that the assessee-company had failed to deduct tax at source on such payment. The ld. CIT(A) also confirmed the addition on the ground that the certificate of Nil TDS issued by the Income tax Department was not produced before him. Being aggrieved, the appellant is in appeal before us in the present appeal.

8.2 The ld. Counsel for the assessee submitted that the payment is in the nature of reimbursement of expenditure and therefore, the provisions of TDS are not applicable to the subject payments, without prejudice, it is contended that the recipient had filed return of income including this sum as income and payee made necessary arrangement for payment of tax. The assessee also filed copy of certificate issued by M/s. MJV & Associates, Chartered Accountants stating that the payee had offered this amount to tax, which is placed at page 16 of paper book. Hence, no disallowance in the hands of the assessee-company is required to be made. Reliance in this regard was placed in the cases of Hindustan Coco Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 (SC) = 2007-TIOL-144-SC-ITCIT v. Ansal Land Mark Township (P) Ltd. [2015] 377 ITR 635 (Del.) = 2015-TIOL-2026-HC-DEL-IT and Indus Projects Ltd. v. ACIT – 2016-TIOL-251-ITAT-MUM. On the other hand, the ld. Departmental Representative placed reliance on the orders of lower authorities.

8.3 We heard the rival submissions and perused the material on record. Considering the submissions made on behalf of the assessee company, we remit the issue back to the file of AO for the purpose of verification whether the recipient had offered this sum as income in its hands and made necessary arrangements for payment of tax. If so, to allow the same as deduction in terms of provisions of second proviso to s. 40(a)(ia) of the Act.

8.4 In the result, ground of appeal No.3 of the assessee is partly allowed for statistical purposes.

9. Ground of appeal No.4 challenges the disallowance of Rs. 5,92,750/- under the clause (iii) of Rule 8D of the Rules. It is contended before us that the resort to disallowance u/s. 14A of the Act cannot be made in the years prior to insertion of the provision of Rule 8D of the Rules and reliance in this regard placed on the decision of Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 81 (Bom.) = 2010-TIOL-564-HC-MUM-IT.

9.1 On the other hand, the ld. Departmental Representative placed reliance on the orders of lower authorities.

9.2 This issue was considered by us in the case of Karur Vysya Bank in ITA No. 1342/Chny/2013 dated 28.02.2019, wherein it is held that the disallowance u/s. 14A of the Act prior to insertion of Rule 8D of the Rules should be restricted @ 2% of the dividend income received following decision of Hon’ble Jurisdictional High Court in the case of Simpson & Co. Ltd. in T/C. No.2621 of 2006 dated 15.10.2012. Similarly, in this case also, we direct the AO to restrict the disallowance only to the extent @ 2% of the dividend income received.

9.3 In the result, ground of appeal No.4 of the assessee is partly allowed.

9.4. In the result, appeal of the assessee in ITA No.688/Chny/2013 for assessment year 2007-08 is partly allowed for statistical purpose.

10. Now we shall take up the Revenue’s appeal in ITA No.884/Chny/2013 for AY 2007-08.

10.1 The Revenue’s raised the following grounds of appeal:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2.1 The CIT(A) erred in deleting the disallowance of social and community welfare expenses made by the A.O.

2.2 The CIT(A) failed to appreciate the fact that the above expenses incurred by the assessee is not wholly and exclusively for the purpose of assessee’s business and hence not allowable u/s 37(1).

2.2 It is submitted that the decision of the ITAT on a similar issue in assessee’s own case for the A.Y. 2005-06 in ITA NO. 439 I Mds / 2009 dt 25.07.2012 haw not been accepted by the department and appeal to the High Court has been filed.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

10.2 The Revenue raised three grounds of appeal. Grounds of appeal No.1 & 3 are general in nature therefore, do not require any adjudication.

10.3 Ground of appeal No.2 challenges the direction of ld. CIT(A) to delete the addition on account of social community welfare expenses. The AO also disallowed the social community welfare expenses of Rs. 48,38,240/- incurred in Manali i.e., the town in neighborhood area, where the assessee’s refinery is situated. The AO stated that the disallowance was being made for several years. The Assessing Officer also noted that in the assessment year 1992-93, the Hon’ble Supreme Court had remitted the matter back to the file of ITAT for denovo examination of the issue and the decision of the ITAT is still awaited.

10.4 On appeal before the ld. CIT(A), he directed the AO to delete the same following the decision of Hon’ble High Court of Madras in the assessee’s own case CIT v. Madras Refineries Ltd. (supra) and the decision of Tribunal for the assessment year 1992-93 & 1993-94 in ITA No.578 and 22/Mds/1997 dated 19.03.2010. Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present grounds of appeal.

10.5 We heard the rival submissions and perused the material on record. The AO disallowed the expenditure placing reliance on the orders for the earlier years. The AO noted that the decision by the Tribunal in the assessment year 1992-93 had been restored to the Tribunal by the Hon’ble Supreme Court. It appears that these facts not taken note of by the ld. CIT(A). Even before us neither the assessee nor the Department had filed copies of the Hon’ble Supreme Court order. The assessee-company made the following submissions before ld. CIT(A) on this issue:

“8.1 The appellant contested the above addition. The ld.AR submitted as under:

“An appeal is preferred against the order of the Learned Assessing officer on the grounds that such expenses have been incurred with an intention of securing the support of the public near the area of operation to avoid potential losses due to any interruption to the organization. Such expenses have been incurred by the assessee to promote awareness among the public to conserve oil as per the various initiatives taken by the Ministiy of Petroleum and Natural Gas. Further, it is submitted that winning the goodwill of the people of the geographical locailty also helps boosting of business in many ways. Therefore, the appellant considers it righiful to claim deduction of the following expenses as deduction u/s 37 of the Income Tax Act.

Moreover, the appellant’s case on the same issue regarding allowability of Social and Community Welfare expenses before the Tribunal has been decided in favour of the appellant. Therefore, the appellant relies on the above order of the Tribunal in its own case and pleads allowabillty of the Social and Community Welfare expenses.”

10.6 However, we find that the above submissions are not supported by any material on record nor the ld. CIT(A) applied the test of commercial expediency. The decision of Hon’ble High Court of Madras in the case of CIT v. Madras Refinery (supra) and in the decision of CIT v. Chemicals and Plastics India Ltd. [2007] 292 ITR 115 (Mad.) = 2007-TIOL-243-HC-MAD-IT are on the touch stones of the commercial expediency. The issue of commercial expediency is a matter of fact, which requires to be proved by leading necessary evidence on record. In the present case, no material is placed on record demonstrating the commercial expediency. In the circumstances, we are of the considered opinion that the matter to the remission to the AO to adjudicate the issue of the allowability of the expenditure applying the test of the commercial expediency with reference to the evidence on record. Thus, this ground of appeal is partly allowed for statistical purpose.

10.7. In the result, appeal of the Revenue in ITA No.884/Chny/2013 is partly allowed for statistical purpose.

ITA NOs.494/Chny/2014 & 309/Chny/2014 for assessment year 2007- 08 (Cross Appeals [reassessment]):

11. These cross appeals are filed by the Assessee as well as Revenue directed against the Order of the Learned Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai (hereinafter called as ‘CIT(A)’) dated 25.12.2013 for the Assessment Year (AY) 2007-08.

11.1 The brief facts of the case are as under:

The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of crude into petroleum and petrochemical products. The return of income for the AY 2007-08 was filed on 27.10.2007 disclosing income of Rs. 422,47,34,220/-. Against the said return of income, the assessment was completed vide order dated 16.12.2009 passed u/s. 143(3) of the Act at a total income of Rs. 438,99,85,730/- after making certain disallowances. These disallowances were being contested by the assessee in separate proceedings.

11.2 Subsequently, the AO formed a belief that the income chargeable to tax had escaped the assessment on the following issues:

“a. Payment made to Chennai Metro Water & Sewerage Board of Rs.27.49 lakhs without deduction of tax at source is to be disallowed u/s 40(a)(ia).

b. Payment of Rs.50 lakhs by the assessee company as founder member of consortium of sponsors to conduct tennis tournament at Chennai, to be disallowed as the expenditure is not for business purpose.

c. Deduction allowed u/s 80-IS of Rs.448.95 crore to be withdrawn due to the reasons that the unit is not a separate unit and no separate final accounts were prepared.”

11.3 Therefore, a notice was issued u/s. 148 of the Act on 28.03.2012. On receipt of the said notice, the assessee-company vide letter dated 09.04.2012 submitted that the return of income filed on 27.10.2007 be treated as return of income in response to notice u/s. 148 of the Act. The AO completed the assessment vide order dated 06.11.2012 passed u/s. 143(3) r/w s. 147 of the Act at a total income of Rs. 439,77,34,730/-. While doing so, the AO had made disallowance of payment made to Chennai Metro Water & Sewerage Board (herein after “CMWSB”) under the provisions of s. 40(a)(ia) of the Act of Rs. 27,49,000/- and payment towards sponsorship of Tennis tournament of Rs. 50 lakhs.

11.4 Being aggrieved by the above decisions, an appeal was preferred before ld. CIT(A), who vide impugned order had confirmed the disallowance of payment made to CMWSB towards lease rent. However, he deleted the addition of sponsorship of tennis tournament of Rs. 50 lakhs placing reliance on the decision of his predecessor in assessee’s case for earlier years.

11.5 Being aggrieved by that part of order of the ld. CIT(A), which is against assessee, the assessee had come up in appeal vide ITA No.494/Chny./2014. Being dissatisfied by the decision of the ld. CIT(A), allowing the sponsorship fee Rs. 50 lakhs to conduct tennis tournament as a revenue expenditure, the Revenue is in appeal in ITA No.309/Chny/2014.

11.6 Now we shall take up the Assessee’s appeal in ITA No.494/Chny/2014 for AY 2007-08.

12. The Assessee raised the following grounds of appeal:

“1. The order of The Commissioner of Income Tax (Appeals), LTU is contrary facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals), LTU erred in reopening of the assessment u/s 147 as the appellant had furnished aLl the materials and particulars fully and truly while completing the assessment u/s 143(3).

2.1. The Commissioner of Income tax (Appeals), LTU ought to have appreciated that addition made in the reassessment has arisen only due to change of opinion or is a case of review on the same set of facts and not on account of concealment of any particulars by the Appellant; hence the order is to be quashed as being without jurisdiction.

2.2 The Appellant relies on the decision of the Supreme Court in the case of CIT V. Kelvinator of India Limited, reported in 320 ITR 561 (SC) = 2010-TIOL-06-SC-IT-LB.

3. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.27, 49,000/- u/s 40(a)(ia) on the ground that the appellant had not deducted TDS from the payments made to Chennai Metro Water Supply a Sewerage Board(CMWSSB).

3.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the recipient has offered this amount as their income, and arranged for payment of tax and hence there can be no disallowance in the hands of the Appellant .The Appellant relies on the decision in the case of Hindustan Coca Cola Beverage P Ltd Vs CIT – 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT.”

12.1 The assessee-company raised four grounds of appeal. Grounds of appeal No.1 & 4 are general in nature therefore, do not require any adjudication.

12.2 Ground of appeal No.2 challenges the validity of the reopening of the assessment u/s. 147 of the Act. This ground of appeal was not pressed during the course of hearing of appeal. Hence, dismissed the same as not pressed.

12.3 Grounds of appeal No.3 challenges the addition of disallowance of payment of Rs. 27,49,000/- made to CMWSB towards lease rent for non deduction of tax at source. The AO disallowed the lease rent payment made to CMWSB u/s. 40(a)(ia) of the Act for non deduction of tax at source on the said payment. The contention that the payee is a Government agency of Government of Tamil Nadu and therefore, no TDS was required to be made was not accepted by the AO, stating that it is a different entity. Even, on appeal before ld. CIT(A), the same came to be confirmed by the ld. CIT(A). Being aggrieved, the assessee-company is before us in the present grounds of appeal.

12.4 The ld. Counsel for the assessee submitted that the recipient i.e., CMWSB had already offered this income for tax and paid the tax thereon and therefore covered by the second proviso to s. 40(a)(ia) of the Act inserted by Finance Act, 2012 w.e.f 01.4.2013. He further submitted that the said provision should have retrospective effect from 01.4.2005 and reliance in this regard was placed on the decision of Hon’ble High Court of Delhi in the case of CIT v. Ansal Land Mark Township (P) Ltd. [2015] 377 ITR 635 (Del) = 2015-TIOL-2026-HC-DEL-IT and the decision of Co-ordinate Bench of Tribunal, Mumbai in the case of Indus Projects Ltd. v. Addl. CIT – 2016-TIOL-251-ITAT-MUM.

12.5 On the other hand, the ld. Departmental Representative opposed the above submissions and submitted that the second proviso to s. 40(a)(ia) of the Act inserted w.e.f. 01.4.2013 by Finance Act,2012 is only prospective in nature.

12.6 We heard the rival submissions and perused the material on record. The only issue in the present appeal is whether the disallowance of lease rent paid to CMWSB is justified u/s. 40(a)(ia) of the Act. Admittedly, the appellant had not deducted the tax at source on lease rent paid to CMWSB nor a certificate from the AO of the said CMWSB u/s. 197 of the Act authorizing the appellant not to deduct tax at source on the lease rent paid to it. The provision of s. 40(a)(ia) of the Act provides that any sum paid to recipient on which tax was not deducted at source, the source shall not be deducted in computing the income chargeable under head “profits and gains of business or profession”. However, the second proviso to s. 40(a)(ia) of the Act inserted w.e.f 01.4.2013 by Finance Act, 2012 carves out an exception to the said provision by providing that where the assessee is not deemed to be in assessee in default under the first proviso to sub s. (1) to s. 201 for non deduction tax at source on the said payment, then it shall be deemed that the assessee had deducted tax and paid tax on such sum on the date of furnishing the return of income by recipient payee. The second proviso has been held to be declarative and curative and it is retrospective from 01.4.2005 by Hon’ble High Court of Delhi in the case of Ansal Land Mark Township (P) Ltd. (supra). However, the Hon’ble Supreme Court granted SLP against the Hon’ble Jurisdictional High Court ruling in the case of CIT v. Ansal Landmark Township (P.) Ltd. [2016] 73 taxmann.com 68 (SC). Now, in the present case, no material was placed before us showing that the assessee has not been declared “assessee in default” under first proviso to s. 201 of the Act. However, keeping in view the legal position that the assessee cannot be expected to prove the negative, we remit the matter back to the file of AO with a direction to verify whether the assessee is declared as default under first proviso of s. 201 of the Act and adjudicate the matter keeping in view the outcome of the pending appeal before Hon’ble Supreme Court in the case of Ansal Land Mark Township (P) Ltd. (supra).

12.7 In the result, ground of appeal No.3 of the assessee is partly allowed.

12.8. In the result, appeal of the assessee in ITA No.494/Chny/2014 for assessment year 2007-08 is partly allowed for statistical purposes.

13. Now we shall take up the Revenue’s appeal in ITA No.309/Chny/2013 for AY 2007-08.

13.1. The Revenue raised the following grounds of appeal:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2.1 The CIT(A) erred in deleting the disallowance towards the payment of Rs.50 lakhs as founder member of Consortium of sponsors to conduct tennis tournament at Chennai.

2.2 The CIT(A) ought to have appreciated that there is no merit in the contention of the assessee that the expenditure is in the nature of advertisement expenses for promoting the cause of the company, since the assessee company’s products are exclusively marketed by public sector oil marketing companies.

2.3 The CIT(A) ought to have appreciated that in the case laws relied on by him, the assessee’s were carrying out their marketing by themselves and therefore the said case laws are distinguishable on facts and not applicable to the assessee’s case.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

13.2. The present appeal is filed by the Revenue, being aggrieved by the decision of the ld. CIT(A) to allow the deduction of the sponsorship fee Rs. 50 lakhs towards tennis tournament. This expenditure was disallowed by the AO holding that the expenditure was not incurred wholly and exclusively for the purpose of business. On appeal before ld. CIT(A), the ld. CIT(A) placing the reliance on the order of his predecessor in the assessee’s own case for the assessment year 2008- 09, wherein the ld. CIT(A) following the decision of Hon’ble High Court of Madras in the case of CIT v. Cheran Transport Corporation Ltd. [1996] 219 ITR 203 (Mad.)held that the contribution to the tennis tournament is held to be revenue expenditure. Being aggrieved, the Revenue is in appeal before us.

13.3 The ld. Departmental Representative submitted that the contribution to the tennis tournament is not an expenditure incurred wholly and exclusively for the purpose of business. It is nothing but an application income and cannot be allowed as a deduction.

13.4 On the other hand, the ld. Counsel submitted that the contribution was made only on the direction of the Government of Tamil Nadu and he also placed before us the copy of letter from Chief Secretary of Govt. of Tamil Nadu vide page 1 & 2 of paper book, therefore, the same should be allowed as a deduction placing reliance on the decision of Hon’ble Madras High Court in the case of Cheran Transport Corporation Ltd. (supra).

13.5 We heard the rival submissions and perused the material on record. The short issue involved in the present appeal is whether the sponsorship expenditure of Rs. 50 lakhs towards tennis tournament incurred by the assessee is allowable as a deduction. The AO had not assigned any reasons for disallowances except stating that in the earlier years similar disallowance was made. However, the ld. CIT(A) had allowed by placing reliance on the orders of his predecessor in the earlier years. The submission of the ld. Counsel that the expenditure was incurred only on the direction of the Government of Tamil Nadu cannot be accepted for the reasons that from the perusal of the letter of the Chief Secretary of Government of Tamil Nadu dated 27.01.2004 vide DO letter No.1044/Secy./2004-2, it is clear that the Government of Tamil Nadu had only extended an invitation to participate on the occasion of the sponsorship of the tennis tournament. This invitation cannot be construed as a mandatory direction of the Government of Tamil Nadu. The ratio of the decision of Hon’ble Jurisdictional High Court in the case of Cheran Transport Corporation Ltd. (supra) is not applicable to the facts of the present case. The facts of the case are that the assessee, a Govt. of Tamil Nadu undertaking made a contribution to Flag Day Fund and Chief Minister Rehabilitation Funds both under the direction of the Government and the assessee being a Government undertaking is obliged to obey the direction of the Government, whereas in the present case there is no mandatory direction from the Government to make a contribution towards the tennis tournament nor the assessee is a State Government undertaking. In the present case, there is nothing to show that the assessee established the nexus between the contribution to the tennis tournament and the benefit which the assessee’s business received by virtue of such contribution. In the absence of these nexus, the expenditure cannot be allowed as a deduction and is nothing but application of income and reliance in this regard can be placed on the decision of full bench of Hon’ble Madhya Pradesh High Court in the case of Addl. CIT vs. Kuber Singh Bhagwandas [1979] 118 ITR 379 (MP-FB). Therefore, we reverse the findings of the ld. CIT(A) on this issue. Thus, the grounds of appeal filed by the Revenue are allowed.

13.6 In the result, appeal filed by the Revenue in ITA No.309/Chny/2014 is allowed.

ITA NOs.1859/Chny/2011 & 1982/Chny/2011 for AY 2008-09 (Cross Appeals):

14. These are cross appeals filed by the Assessee as well as Revenue directed against the Order of the Learned Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai (hereinafter called as ‘CIT(A)’) dated 27.09.2011 for the Assessment Year (AY) 2008-09.

14.1 The brief facts of the case are as follows:

The appellant is a company engaged in the business of crude oil refining & manufacturing of petroleum products. The return of income for the AY 2008-09 was filed on 30.11.2008 disclosing total income of Rs. 858,63,69,000/-. Against said return of income, the assessment was completed by Addl. CIT, LTU, Chennai vide order dated 30.11.2010 passed u/s. 143(3) of the Act at a total income of Rs. 1704,34,58,200/- under normal provisions and book profit of Rs. 1721,62,93,440/- u/s. 115JB of the Act after making certain disallowances. The AO made the following disallowances while computing the income under normal provisions of the Act:

1)Effect of change in accounting policy Effect of change in accounting policy10608178 67634396 
2)Provision for leave encashment319926000
3)Payments of Indocoserve39252455
4)Social & Community welfare expenses3963298
5)Under sec.14A3238398
6)Lease rent paid to Chennai Metrowater Supply & Sewerage Board2052789
7)Expenses incurred for conducting Chennai Open Tennis Tournament5000000451675514

14.2 Being aggrieved by the above additions, an appeal was preferred before ld. CIT(A), who vide impugned order had directed the Assessing Officer to allow deduction u/s. 80-IB of the Act in respect of the profits derived from refinery-III projects. As regards to the disallowance of provision for service awards and gift cheques to the employees who have completed certain years of service or at the time of retirements, the ld. CIT(A) held that the same should be allowed as a deduction placing reliance on the decision of Hon’ble Supreme Court in the case of Bharat Earthmovers Ltd. 245 ITR 428 (SC) = 2002-TIOL-123-SC-IT-LB. Regarding the issue of disallowance of amount paid towards the pay revision of its employees of Rs. 676.34 lakhs, the ld. CIT(A) treating as a part of advance salary directed the Assessing Officer to allow the same as deduction. The disallowance of provision for leave encashment is partly allowed by discussing the issue as under:

“7.2 I have carefully considered the facts of the case and the submission made by the Id. AR. Clause (f) of sec 43B was inserted by the Finance Act,2001 with effect from 1t April, 2002. According to this clause, any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed in computing the income in the previous year in which such sum is actually paid. In the present case, though Rs.3199.26 lakhs was paid to LIC as manager of leave encashment scheme, only a sum of Rs.353.29 lakhs was actually paid to the employees towards leave encashment, leavng the balance as unpaid to the employees. The appellant has not proved that the balance amount was paid to the employees. The section speaks about actual payment of the sum payable at the credit of the employees. Hence, in my considered opinion, unless the payment is made to the employee, the provisions of sec 43B(f) could not be fulfilled. It is also clear from the scheme with LIC that the appellant will have option either to claim the money in one or two days’ in advance to release the same to the retiring employee or it can seek reimbursement on the strength of the settlement carried out by them. LIC would also pay interest on amount deposited. Hence, it is clear that money had not been paid to employees except to the extent of Rs.353.29 lakhs. The only argument put forth by the ld.AR is that the said amendment has been held to the unconstitutional by the Hon’ble Calcutta High Court in the case of Exide Industries Ltd v. UCI 292 ITR 470(Cal) = 2007-TIOL-429-HC-KOL-IT. However, the SLIP filed against the above order has been admitted by the Hon’ble Supreme Court (2009-TIOL-110-SC-IT) and the order has been stayed. The Hon’ble Court has held that clause (f) would remain in the statute till the final decision is given by it. Therefore, the action of the AC was in accordance with the provisions of sec 43B(f) of the Act and hence confirmed.

7.2.1 However, there is substance in the alternative submission of the Id.AR that only Rs.2429.76 lakhs can be disallowed. It is so because the total amount debited for the year was Rs.1538.58 Iakhs and the assessee had claimed further amount of Rs.1244.47 lakhs relating to the earlier years. Thus, the total comes to Rs.2783.06 lakhs, out of which a sum of Rs.353.29 Iakhs had been actually paid, leaving a balance of Rs.2429.76 lakhs which alone can be disallowed u/s43B(f).

In the result, the ground is, accordingly, partly allowed.”

14.3 The disallowance of payment of Rs.392.52 lakhs made to M/s. Indocoserve is confirmed by the ld. CIT(A). The ld. CIT(A) deleted the addition of community welfare expenses of Rs. 39,63,298/- following the decision of Hon’ble Madras High Court in assessee’s own case reported in 266 ITR 170 (Mad) regarding the disallowance u/s. 14A of the Act, the ld. CIT(A) directed the Assessing Officer to restrict the addition under clause (iii) of Rule 8 D of the Rules at ½ percentage average value of the investments. The ld. CIT(A) confirmed the addition of lease rent of Rs. 20,52,789/- paid to CMWSSB as no TDS was deducted at source. As regards to the disallowance of contribution of Rs. 50 lakhs towards conduct of tennis tournament, the ld. CIT(A) directed the Assessing Officer to allow deduction placing reliance on the decision of Hon’ble Madras High Court in the case of Cheran Transport Corporation (supra). Thus, the appeal filed by the assessee before ld. CIT(A) came to be partly allowed.

14.4 Being aggrieved by that part of the ld. CIT(A) order, which is against the assessee, the assessee filed an appeal bearing ITA No.1859/Chny/2011 and the Revenue is in appeal on the grounds which are allowed in favour of the assessee in ITA No.1982/Chny/2011 for AY 2008-09.

15. Now we shall take up the Assessee’s appeal in ITA No.1859/Chny/2011 for AY 2008-09.

15.1 The Assessee raised the following grounds of appeal:

“1. The order of The Commissioner of Income Tax (Appeals) LTU is contrary to Law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals) LTU erred in confirming the disallowance of 2429.76 Lakhs under sec 43B(f).

2.1 The Commissioner of Income tax (AppeaLs) LTU ought to have appreciated that the Appellant had provided for 1538.58 lakhs towards provision for leave encashment on an actuarial basis.

2.2 The Appellant relied on the decision of Jurisdictional High Court in the case of Exide Industries reported in 292 ITR 479 (CaL) wherein the High Court has held that liability of Leave encashment cannot be disallowed for non payment under Section 43B.

2.3 Without prejudice to the above, the Commissioner of Income tax (Appeals) LTU ought to have appreciated that the assessee has paid 3199.26 Lakhs to LIC for managing Leave encashment of the employees and as such the accrued liability towards leave encashment having been paid and settLed by the AppelLant, the sum of 2783.06 lakhs being the provision made for Leave encashment up to ÀY 2008-09 should be allowed on payment basis.

3. The Commissioner of Income tax (Appeals) LTU erred in confirming the disalLowance of 392.52 lakhs u/s 40(a)(ia) the amount paid to M/s.Indocoserve.

3.1 The Commissioner of Income tax (Appeals) LTU ought to have appreciated that it is merely reimbursement of expenses and hence no tax need to be deducted on the same.

3.2 Without prejudice to the same as M/s. Indocoserve has filed the return of income including the amount received and has been arranged for payment of tax there can be no disallowance in the hands of the Appellant. Appellant reLies on the decision of Apex court in the case of Hindustan Coca Cola Beverages (P) Ltd Vs CIT reported in 293 ITR 226(SC) = 2007-TIOL-144-SC-IT.

4. The Commissioner of Income tax (Appeals) erred in confirming the disaLlowance of expenses of 6,97,700/- alLeged to be relatabLe to earning the dividend income, by applying Rule 8D.

4.1 The Commissioner of Income tax (Appeals) ought to have appreciated that u/s.14A only the actuaL expenditure incurred for the purpose of earning exempt income shouLd be disaLlowed. The appellant has not incurred any expenditure for earning the dividend income.

4.2 The Commissioner of Income tax (AppeaLs) ought to have appreciated that the Hon’ble Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited – reported in 323 ITR 518 = 2009-TIOL-604-HC-P&H-IT has held that “Disallowance u/s.14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.”

5. The Commissioner of Income tax (Appeals) LTU erred in confirming the disalLowance of 20,52,789/- the lease rent paid to Chennai Metro Water SuppLy and Sewerage Board for non deduction of tax u/s 40(a(ia)

5.1 The Commissioner of Income tax (Appeals) LTU ought to have appreciated that the CMWSSB had written to the appellant that in respect of the above payment from 01.06.1994 up to the year 2010 tax need not be deducted at source because the recipient viz., CMWSSB has paid the tax for the above amount.

5.2 The appellant relies on the decision of the Apex court in the case of Hindustan Coca Cola Beverages (P) Ltd Vs CIT reported in 293 ITR 226(SC) = 2007-TIOL-144-SC-IT.

6. The appellant craves leave to file additional grounds at the time of hearing.”

15.2 Now we shall deal with the same. Grounds of appeal No.1 & 6 are general in nature and do not require any adjudication. Hence, we dismiss the same.

15.3 Grounds of appeal No.2 challenges the disallowance of provision for leave encashment invoking the provisions of s. 43B(f) of the Act. The assessee-company provided a sum of Rs. 1538.58 lakhs towards leave encashment expenses of the employees. During the year under consideration, the assessee-company paid a sum of Rs. 353.29 lakhs to the employees on account of leave encashment and also made a payment of a sum of Rs. 3199.25 lakhs to LIC towards contribution of LIC Group Leave Encashment Scheme out of this contribution Rs. 3191.36 lakhs a sum of Rs. 1538.58 lakhs is pertaining to the current financial year and a sum of Rs. 353.29 lakhs was actually paid to the employees on account of leave encashment and the balance amount of Rs. 1244.47 lakhs is pertaining to the provision made in the earlier years. The Assessing Officer has disallowed the entire sum of Rs. 31,99,26,000/-. On appeal before ld. CIT(A), the ld. CIT(A) held that what can be disallowed is the total contribution for the year to LIC towards the approved group leave encashment scheme net off of the payments made to the employees during the year under consideration. Being aggrieved by this direction, the appellant is in appeal before us.

15.4 The ld. Counsel vehemently contested that the provisions for leave encashment cannot be disallowed placing reliance on the decision of Hon’ble Calcutta High Court in the case of Exide Industries (Cal) and the order of co-ordinate Bench of Mumbai Tribunal in the case of Essar Exploration and Production India v. ACIT in ITA No.6189/Mum/2011 dated 08.08.2012.

15.5 This issue was dealt by us in the assessee’s own case for AY 2007-08 in ITA No. 688/Chny/2013 for the detailed reasons mentioned therein, we are unable to accept the contention of the assessee that the provision for leave salary encashment cannot be disallowed.

15.6 It is further contended that the amount of contribution to LIC Group Leave Encashment Scheme should be allowed as a deduction on payment basis placing reliance on the decision of Hon’ble Kerala High Court in the case of Hindustan Latex Ltd. 74 DTR 212 (Ker.) = 2012-TIOL-484-HC-KERALA-IT and the decision of Hon’ble Supreme Court in the case of Taxtool 263 CTR 257 (SC). We find that these decisions are in the context of provisions of s. 36(1)(v) of the Act. The purport and the phraseology of the provisions of s. 36(1)(v) of the Act and s. 43B(f) of the Act are totally different. The contribution made by an assessee towards approved scheme of employees group leave encashment cannot be construed as a payment to the employees. Therefore, the decisions relied upon by the ld. counsel for the assessee is not of any help. Therefore, we do not find any merit in the submission made on this behalf. Accordingly, ground of appeal No.2 filed by the assessee is dismissed.

15.7 In the result, ground of appeal No.2 of assessee is dismissed.

16. Ground of appeal No.3 challenges the disallowance of amount paid to M/s. Indocoserve invoking the provisions of s. 40(a)(ia) of the Act. This issue was elaborately dealt by us in the assessee’s own appeal for the AY 2007-08 in ITA No.688/Chny/2013, wherein for the reasons mentioned therein, the issue was remitted to the file of Assessing Officer for the purpose of carrying out the verification whether the benefit of second proviso to s. 40(a)(ia) of the Act can be granted to the assessee. Similarly, in the present AY also, we remit the issue to the file of Assessing Officer on similar directions.

16.1 In the result, ground of appeal No.3 of assessee is partly allowed for statistical purposes.

17. Ground of appeal No.4 challenges the disallowance of s. 14A of the Act under clause (iii) of Rule 8 D of the Rules. It is contended that the assessee had not incurred any expenditure for earning the exempt income. On perusal of the ld. CIT(A), it is clear that what is disallowed u/s. 14A of the Act is under clause (iii) of Rule 8D of the Rules. The decision of the ld. CIT(A) is in line with the settled preposition of the law that the provision of rule 8D of the Rules are mandatory is in nature. The assessee does not challenges the correctness of the calculation under clause (iii) of Rule 8D of the Rules. Therefore, ground of appeal No.4 filed by the assessee is dismissed.

17.1 In the result, ground of appeal No.4 of assessee is dismissed.

18. Ground of appeal No.5 challenges the disallowance of sum of Rs. 20,52,789/- on the payments made to CMWSSB for non deduction of tax at source. It is submitted that CMWSSB was formed by the MRL as registered co-operative society under Tamil Nadu Co-operative Society Act, 1951 and is formed by MRL for the benefit of contract workmen with the object of providing sustainable livelihood and at the same time avoid the exploitation by the contractor. The workmen were enrolled by these members. The object of the MRL Indocoserve is to undertake and execute various works entrusted by the assessee for the Refinery at Manali and their Corporate Office at Annasalai, Chennai. It provides the following services to the assessee company:

– Asphalt filling/was filling and Loading

– Grabber Maintenance

– Plumbing, Indcoserve canteen, Collection and Distribution of mail

– Indcoserve time office

– Assisting Company employees in various departments/sections like OM&S, Lab, Power Plant, Pumps, R&D, OIlS, etc.

18.1 The AO disallowed this sum invoking the provision of s. 40(a)(ia) of the Act on the ground that the assessee-company had failed to deduct tax at source on such payment. The ld. CIT(A) also confirmed the addition on the ground that the certificate of Nil TDS issued by the Income tax Department was not produced before him. Being aggrieved, the appellant is in appeal before us in the present appeal.

18.2 The ld. Counsel for the assessee submitted that the payment is in the nature of reimbursement of expenditure and therefore, the provisions of TDS are not applicable to the subject payments, without prejudice, it is contended that the recipient had filed return of income including this sum as income payee made necessary arrangement for payment of tax. The assessee also filed copy of certificate issued by M/s. MJV & Associates, Chartered Accountants stating that the payee had offered this amount to tax, which is placed at page 16 of paper book. Hence, no disallowance in the hands of the assessee-company is required to be made. Reliance in this regard was placed in the cases of Hindustan Coco Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 (SC) = 2007-TIOL-144-SC-ITCIT v. Ansal Land Mark Township (P) Ltd. [2015] 377 ITR 635 (Del.) = 2015-TIOL-2026-HC-DEL-IT and Indus Projects Ltd. v. ACIT – 2016-TIOL-251-ITAT-MUM. On the other hand, the ld. Departmental Representative placed reliance on the orders of lower authorities.

18.3 We heard the rival submissions and perused the material on record. Considering the submissions made on behalf of the assessee company, we remit the issue to the file of AO for the purpose of verification whether the recipient had offered this sum as income in the hands of payee and made necessary arrangements for payment of tax in order to extend the benefit of second proviso to s. 40(a)(ia) of the Act.

18.4 In the result, ground of appeal No.5 of the assessee is partly allowed for statistical purposes.

19. In the result, the appeal filed by the assessee in ITA No.1859/Chny/2011 for AY 2008-09 is partly allowed for statistical purpose.

20. Now we shall take up the Revenue’s appeal in ITA No.1982/Chny/2011 for AY 2008-09.

20.1 The Revenue raised the following grounds of appeal:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2.1. The CIT(A) erred in allowing deduction uls.801B in respect of its refinery III unit at Manali.

2.2. The CIT(A) ought to have appreciated that the said unit is nothing but a mere expansion of the existing unit, though it is independent in all respects.

2.3. The CIT(A) ought to have appreciated clause-(i) of sub-section 2 of 801B expressly provides that the business should not be formed by splitting up or the reconstruction of a business already in existence and in the light of the same ought to have held that the assessee’s case is one of expansion of the already existing business and not eligible for deduction uls.801B.

2.4. The CIT(A) ought to have appreciated that the case laws relied on by him are in the context of reduction u/s. 80J and are not applicable to the facts of this case.

3.1 The CIT(A) erred in deleting the disallowance of provision for service awards and gift cheques.

3.2 The CIT(A) ought to have appreciated that the provision for gifts and awards can be allowed only during the year when such expenses are actually incurred and ought to have upheld the action of the assessing officer who had correctly allowed the actual expenditure incurred during the year by way of payment made to employees retiring during the year and disallowed the balance.

4.1 The CIT(A) erred in holding that the amount paid in connection with pay revision for supervisory employees was nothing but advance of part of salary

4.2 The CIT(A) ought to have appreciated that pending government ratification for wage revision, any payment made under this head cannot be claimed as ascertained liability and ought to have upheld the disallowance as being in the nature of provision for unascertained liability.

5.1. The learned CIT(A) has erred in restricting the disallowance u/s.14A r.w.Rule 8D to Rs.6,97,700/- as against Rs.32 38,398!-.

5.2. The Ld.CIT(A) has erred in not considering the decision of the Hon’ble Supreme Court in CIT Vs. Rajendra Prasad Mody 115 ITR 519 = 2002-TIOL-751-SC-IT-LB wherein it was held that even if no dividend income is earned the provision of section 14A would still be applicable.

5.3. The CIT(A) erred in not following the decision of Kerala High Court in the case of Leena Ramachandran ITA No.1784 of 2009 dated 14.6.2010 = 2010-TIOL-541-HC-KERALA-IT wherein it was held that in respect of acquisition of shares in the form of investment, where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s.14A is squarely attracted.

5.4. The CIT(A) ought to have appreciated that Section 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax free income, the same could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income.

5.5 The CIT(A) ought to have upheld the disallowance made by the A.O since he was not satisfied with the correctness of the assessee’s claim in respect of expenditure in relation to exempt income, considering the voluminous transactions involved and the substantial amount of expenses debited to the P and L account under various heads.

6.1 The CIT(A) erred in deleting the disallowance of community welfare expenses made by the A.O.

6.2 The CIT(A) ought to have appreciated that the decisions of the ITAT relied on by the CIT(A) have not been accepted by the department and appeal to the High Court has been filed.

7.1 The CIT(A) erred in deleting the disallowances of expenses incurred towards conducting of Chennai Open Tennis Tournament.

7.2 The CIT(A) ought to have appreciated that there is no merit in the contention of the assessee that the expenditure is in the nature of advertisement expenses for promoting the cause of the company, since the assessee company’s products are exclusively marketed by public sector oil marketing companies.

7.3 The CIT(A) ought to have appreciated that in the case laws relied on by him, the assessee’s were carrying out their marketing by themselves and therefore the said case laws are distinguishable on facts and not applicable to the assessee’s case.

8 For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

20.2 Grounds of appeal No.1 & 8 are general in nature and do not require any adjudication.

20.3 Grounds of appeal No.2 challenges the decision of the ld. CIT(A) allowing the deduction of Rs. 800.54 crores under the provisions of s. 80- IB of the Act. The factual backgrounds of the issue are as under:

20.4 The assessee made a claim for deduction of the profits derived from Refinery-III under the provisions of s. 80-IB of the Act. the AO had disallowed the claim on the ground that it is only an expansion of the existing business and it does not amount to setting up of a new undertaking and the AO also relied on the approval granted by Ministry of Petroleum and Natural Gas, Government of India vide letter No.R- 31011/9-97-or-I dated 27.07.2000. On appeal before the ld. CIT(A), the ld. CIT(A) held that the deduction under the provisions of sub s. (9) of s. 80IB of the Act is allowable only in respect of undertaking. He further placing reliance on the decision of Hon’ble Supreme Court in the case of Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC) = 2002-TIOL-973-SC-IT-LB that the expansion of an existing business amounts to a new undertaking and directed the AO to allow the deduction.

20.5 Being aggrieved by the decision of ld. CIT(A), the Revenue is in appeal before us in the present grounds of appeal.

20.6 The ld. Departmental Representative placed reliance on the orders of lower authorities. On the other hand, the ld. Counsel for the assessee Mr. R Vijayaraghavan, Advocate reiterated the same submissions made before the ld. CIT(A).

20.7 We heard the rival submissions and perused the material on record. The only issue in the present ground of appeal is whether the assessee is entitled for deduction under the provisions of sub s. (9) of s. 80-IB of the Act, which provides for 100% deduction of profits from undertakings engaged in the refinery of oil and which begins such refining on or after first day of October, 1998 but before the 31st day of March, 2012 for a period of seven years. The AO is of the opinion that the assessee is already in the business of refining and the expansion of the existing business does not amount to setting up of a new business undertaking and denied the exemption.

20.8 From the mere bare reading of the provisions of sub s. (9) of s. 80IB of the Act, it is clear that the primary purpose of the provision is to grant a relief to a new industrial undertaking engaged in the business of refinery of crude oil established within the specified window period and therefore, when an assessee claims a relief under the provisions of s. 80IB(9) of the Act, the onus lies upon the assessee to prove and establish that a new undertaking has come into existence, which can independently function and refine the crude and that new undertaking is not depending upon the existing unit. This implies that expansion of the existing unit cannot be equated with a new undertaking. Then, the issue that arises for consideration is whether the assessee had established a new undertaking or not? From the perusal of the approval granted by Ministry of Petroleum and Natural Gas, Government of India, it is for the expansion of modernization the refinery capacity for 3 MMTPA from 6.4 MMTPA to 9.5 MMTPA. This evidence militates against the contentions of the assessee-company that it has set up a new undertaking. However, it is contended before the ld. CIT(A) that it has established a new unit, which can function independent of the old unit. But, there is nothing on record to show that the assessee has established a new unit. On the contrary, the approval granted by the Ministry of Petroleum and Natural Gas, Govt. of India would suggest only an expansion of the existing unit. The judicial precedents relied upon by the ld. Counsel in support of the proposition that the substantial expansion of the unit also amounts to a new undertaking is not relevant, inasmuch as, the said judicial precedents were rendered in the context of provisions of s. 80J of the Act. The purpose and purport and phraseology of the provisions of s. 80IB(10) of the Act & s. 80J of the Act are different.

20.9 However, we note that the Assessing Officer himself allowed the deduction in the subsequent year. But, from the perusal of the assessment order, there is nothing to show that the Assessing Officer examined the aspect of whether the assessee set up a new undertaking or not. The fact that the Assessing Officer allowed the deduction in the subsequent year cannot be bar to examine the eligibility/conditions in the every year of claim as held by Hon’ble Supreme Court in the case of DCIT v. Ace Multi Axes Systems Ltd. [2018] 400 ITR 141 (SC) = 2017-TIOL-452-SC-IT-LB. The decision of the ld. CIT(A) is based on the reasoning that expansion of the existing unit also amounts to new undertaking as observed by us supra this meaning cannot be adopted in the context of provisions of s. 80IB(9) of the Act. In the interest of justice, we are of the considered opinion that the matter should be remitted to the file of AO for fresh adjudication and verification whether the assessee had set up of a new undertaking altogether different from the existing unit or not and then, examine eligibility for deduction under the provisions of sub s. (9) of s. 80-IB of the Act.

30. In the result, ground of appeal No.2 of Revenue is partly allowed for statistical purposes.

31. Ground No.3 challenges the decision of ld. CIT(A) allowing the provision for service awards and gift cheques. It is stated that it is the policy of the assessee company to grant service awards and gift cheques to their employees on account of their association with the company. The provision for these expenses is made based on the actual valuation and for the year under consideration a sum of Rs. 1,11,73,000/- was provided. The AO had allowed only to the actual expenses of Rs. 5,64,822/- and the balance amount of Rs. 1,06,08,178/- was disallowed by the AO holding to the provision for unascertained liability.

31.1 On appeal before ld. CIT(A), the ld. CIT(A) placing reliance on the decision of Hon’ble Supreme Court In the case of Bharat Earthmovers Ltd. (supra) held that it is an accrued liability and the same should be allowed as a deduction. Being aggrieved, the Revenue is in appeal before us.

31.2 On perusal of the assessment order, it is clear that the AO had not disputed about the accrual of the liability on account of grant of service awards and gift cheques to the employees. However, it appears that the AO has allowed only to the extent of actual expenses incurred during the year under consideration. But, it is the settled proposition that when the assessee is following mercantile system of accounting, if the amount is set apart for discharging a liability on actuarial valuation has to be allowed as a deduction. Reliance in this regard can be placed on the decision of Hon’ble Calcutta High Court in the case of CIT v. Electric lamp Mfrs. (India) P. Ltd. 165 ITR 115 (Cal). The difficulty in estimation of value cannot convert the accrued liability into a contingent one. In this regard reference can be on the decision of Hon’ble Supreme court in the case of Calcutta Co. Ltd. v. CIT 37 ITR 1 (SC) = 2002-TIOL-819-SC-IT-LB. Further, in the mercantile system of accounting a liability already accrued though to be discharged at a future date would be allowed as a deduction while computing the profits and gains of business. In this regard reference can be on the decision of Hon’ble Supreme court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) = 2002-TIOL-941-SC-IT. In the present case, it is not the case of the Assessing Officer that the liability had not accrued therefore, having regard to the principles enunciated in the judicial precedents cited above, we do not see any difficulty to allow the same as a deduction. Hence, we do not find any fallacy in the reasoning of the ld. CIT(A), while allowing this item of provision and therefore, the ground of appeal No.2 of Revenue is dismissed.

31.3 In the result, ground of appeal No.3 of Revenue is dismissed.

32. Grounds of appeal No.4 challenges the decision of ld. CIT(A) allowing the advance salary of Rs. 676.34 lakhs paid to his employees on account of proposed pay revision. The factual background of this issue is that the pay revision was due for supervision employees from 01.01.2007 for want of necessary approvals and notification of revised pay scale from the Government. The assessee-company had decided to pay adhoc towards the additional salaries payable on account of pay revision which would be adjusted against the final amount payable to the employees and the assessee treated this as advance salary and deducted tax at source thereon. The AO had disallowed this sum holding to be an unascertained liability. On appeal before the ld. CIT(A), the ld. CIT(A) allowed the claim holding that the amount paid by the assessee company to its employees is a salary within the meaning of the provisions of s. 17 of the Act. Being aggrieved, the Revenue is in appeal before us in the present ground of appeal.

32.1 We heard the rival submissions and perused the material on record. There is no need of reiterating principle that the expenditure, which can allowed as deduction is one in respect of which liability has accrued under mercantile system of accounting. Therefore, the expenditure shall be allowed as a deduction only if the liability of the expenditure had crystallized during the year under consideration. Admittedly, in the present case, the liability for the increased salaries of its employees had not crystallized during the year under consideration as the necessary approvals from the Government are still awaited. The fact that the payment is treated as salary within the meaning of s. 17 of the Act in the hands of the employees does not amount to accrual of liability in the hands of the employee. It shall not be treated as accrued liability in the hands of the employer. The liability to the enhanced salaries and wages would arise when it was finally approved by the Government. The fact that a payment constitutes income in the hands of recipient is not material in determining wither the payment is allowable as a deduction. Reliance in this regard can be placed on the decision of Hon’ble Supreme Court in the case of Empire Jute co. Ltd. v. CIT [1980] 124 ITR 1 (SC)2002-TIOL-238-SC-IT-LB. Thus, the reasoning of the ld. CIT(A) does not stand the test of the law and hence, we reverse the findings of the ld. CIT(A) on this issue. Hence, this ground of appeal filed by the Revenue is allowed.

32.2 In the result, ground of appeal No.4 of Revenue is allowed.

33. Ground of appeal No.5 challenges the decision of ld. CIT(A) to restrict the disallowance u/s. 14A of the Act r/w clause (iii) of Rule 8D of the Rules of Rs. 6,97,700/-. The decision of ld. CIT(A) is based on the appreciation of facts and law governing the issue. The relevant paras of ld. CIT(A) is extracted below:

“10.2 I have carefully considered the facts of the case and the submission made by the id.AR. I have also gone through the decisions relied on by the Id.AR. The Id.AR has stated that the appellant has not incurred expenditure in earning the dividend indome including any interest expenditure. The Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited v. DCIT 328 ITR 81 (Born) = 2010-TIOL-564-HC-MUM-IT has held that provisions of rule 8D are applicable with effect from A.Y. 2008-09 and subsequent years. hence rule 80 is applicable to the appellant. The lci.AR has explained that the appellant is a government company and has not incurred any expenditure in earning dividend income. The impugned investment was out of own funds and was not out of any borrowed fund. The AO has not established any nexus between the exempt income and the expenditure incurred by the appellant. The ld.AR, therefore, claimed that own fund was used for investments and that too more than 15 years ago. I find substance in the argument of the Id. AR. The Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (221 CTR 435) = 2009-TIOL-27-HC-MUM-IT has held that if there are interest-free funds available to the assessee sufficient to meet its investments and at the same time the assessee had raised a loan, it can be presumed that investments were from interest-free funds available. It is based on the principle that if no nexus could be established between interest bearing funds and funds deployed to earn exempt income, then no disallowance can be made. Further, Hon’ble Punjab & Haryana High Court in the case of CIT v. Hero Cycles Ltd, 323 ITR 518 = 2009-TIOL-604-HC-P&H-IT held that “The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against business income which may nullify the mandate of section 14A, cannot be accepted”. Respectfully following the above decisions, it is held that no interest expenditure is attributable to the earning of exempt income in the form of dividend. However, the other components in the computation of disallowance for the purpose of s. 14A as specified in Rule 80 have to be disallowed. It may be stated that Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. v. DCIT, 328 ITR 81(Bom) = 2010-TIOL-564-HC-MUM-IT has held that rule 8D is applicable for A.Y.2008-09 onwards. As regards the first component i.e. the direct expenses attributable to the earning of exempt income, the appellant itself has taken it as Rs.1,05,950/-. The next component relates to disallowance of interest expenditure which, for the detailed reasons given earlier, would be Rs. Nil. As regards the next component of Rule 80, the same is to be considered at % % of investments yielding exempt income. This comes to Rs.5,91 ,750/- being % per cent of the average of the value of investment. Therefore, the disallowance is restricted to Rs.6,97,700/- being Rs.1,05,950/- + Rs. Nil + Rs.5,91,750/-. This ground is partly allowed.”

33.1 Thus, we do not find any reason to interfere with the order of ld. CIT(A). Hence, this ground of appeal filed by the Revenue is dismissed.

33.2 In the result, ground of appeal No.5 of Revenue is dismissed.

34. Ground of appeal No.6 challenges the order of ld. CIT(A) allowing the expenditure on community welfare expenses of Rs. 39,63,298/-. This issue was dealt by us in the Revenue’s appeal in ITA No. 884/Chny/2013 for AY 2007-08, wherein we remitted this issue to the file of AO for fresh adjudication on the touch stone of commercial expediency. Similarly, this issue for the year under consideration also, we remit this issue to the file of AO for fresh adjudication on the similar directions.

34.1 In the result, ground of appeal No.5 of Revenue is partly allowed for statistical purposes.

35. Ground of appeal No.7 challenges the order of ld. CIT(A) allowing the contribution made by the assessee towards conduct of tennis tournament. This issue was also dealt by us in the Revenue’s appeal in ITA No.309/Chny/2014 for AY 2007-08, wherein we decided this issue against the assessee-company for the detailed reasons mentioned therein. Hence, this ground of appeal filed by the Revenue is allowed.

35.1 In the result, ground of appeal No.7 of Revenue is allowed.

36. In the result, appeal filed by the Revenue in ITA No.1982/Chny/2011 for AY 2008-09 is partly allowed for statistical purposes.

ITA NOs.689/Chny/2013 & 854/Chny/2013 for assessment year 2009- 10 (Cross Appeals):

37. The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of refinery of petroleum and petroleum chemical products and the sale of the same. The return of income for the AY 2009-10 was filed on 29.09.2009 declaring a loss of Rs. 509,63,30,876/-. Against the said return of income, the assessment was completed by the Jt. CIT, LTU, Chennai vide order dated 22.10.2011 passed u/s. 143(3) of the Act at a total income of Rs. 438,05,27,258/-. While doing so, the AO made the following additions

1) Disallowances of Rs. 51,74,337/- u/s. 14A of the Act.

2) Payment made to foreign company i.e., M/s. Hardy Exploration & Production India Inc (HEPI) towards purchase of crude oil as the assessee had failed to deduct TDS of Rs. 61,23,06,054/-.

3) On account of payment made to MRL Ind. Co-op. Service Society of Rs. 4,59,59,000/- and Chennai Metro of Rs. 28,41,000/- on the ground that no tax was deducted at source.

4) The social community welfare expenses of Rs. 18,04,853/-.

5) Expenditure towards sponsorship of CMWSB of Rs. 50 lakhs.

37.1 Being aggrieved by the above additions, an appeal was preferred before the ld. CIT(A), who vide impugned order had partly allowed the appeal by directing the AO to delete the addition on account of contribution to Chennai Open Tennis Tournament of Rs. 50 lakhs and community welfare expenses of Rs. 18,04,853/- and the other additions were confirmed by the ld. CIT(A). Thus, the ld. CIT(A) partly allowed the appeal.

37.2 Being aggrieved by that part of order of the ld. CIT(A), which is against the assessee, the assessee is in appeal in ITA No.689/Chny/2013 and the Revenue is in appeal on the grounds which are partly allowed in favour of the assessee in ITA No.854/Chny/2013 for AY 2009-10.

37.3 Now we shall take up the assessee’s appeal in ITA No.689/Chny/2013 for AY 2009-10.

The assessee raised the following grounds of appeal:

“1. The order of The Commissioner of Income Tax (Appeals), LTU is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals), LTU erred in restricting the disallowance u/s 14A by applying Rule 8D (iii) Amounting to Rs.5,91,700/-.

2.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed. All the investments have been made by assesee’s own fund and the appellant has not incurred any expenditure for earning the dividend income.

2.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the Hon’ble Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited – reported in 323 ITR 518 = 2009-TIOL-604-HC-P&H-IT has held that “Disallowance u/s.14Arequires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.”

2.3 It is submitted that the Delhi Tribunal in the case of ACIT Vs Sun Investments reported in 8 ITR (Tn) 33 have held that unless the assessing officer established that specific expenditure has been incurred by the assessee for earning exempt income there can be no disallowance under Section 14A.

3. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.61,23,06,0541- u/s 40(a)(i) as the appellant had not deducted TDS from the payments made to Hardy Exploration and Production India Inc u/s 195.

3.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that payment made to HEPI was for the purchase of crude oil and hence payment is not subject to tax in India.

3.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax.

3.3 The Hon’ble Supreme Court in G.E. Technology Center vs. CIT (327 ITR 256) has held that that if there is no income chargeable to tax in India then there is no requirement for deducting tax at source under the Income Tax Act, 1961.

3.4 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3l march and not on amounts which have been paid during the previous year. Appellant relies on the decision of Special bench in the case of Merityn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) 1 (Vis)(SB) = 2012-TIOL-184-ITAT-VIZAG-SB.

3.5 Without prejudice, if any disallowance u/s 40(a)(ia) is warranted, should, at best be restricted to the profit accruing to M/s. HEPI on sale of crude to the Appellant, on which tax liability accrues to M/s HEPI and not the entire payment, i.e. the entire revenue to M/s HEPI.

4. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.4,59,59,000/- u/s 40(a)(ia) for non deduction of TDS from the payment made to MRL md. Co-op Service Society.

4.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that it is merely reimbursement of expenses and hence no tax need to be deducted on the same.

4.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3l march and not on the amounts which have been paid during the previous year. Appellant relies on the decision of Special bench in the case of Merilyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) 1 (Vis)(SB) = 2012-TIOL-184-ITAT-VIZAG-SB.

4.3 Without prejudice to the same, as MRL md. Co-op Service society has filed the return of income including the amount received and has been arranged for payment of tax there can be no disallowance in the hands of the Appellant. Appellant relies on the decision of Apex Court in the case of Hindustan Coca Cola Beverages (P) Ltd. vs. CIT reported in 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT.

5. The Commissioner of Income tax (Appeals), LTU erred in confirming without adjudicating the disallowance of Rs.28,41,000/- the (ease rent paid to Chennai Metro Water Supply and Sewerage Board for non-deduction of tax u/s 40 (a(ia).

5.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the recipient has offered this amount as their income, and arranged for payment of tax by which there can be no disallowance in the hands of the Appellant .The Appellant relies on the decision in the case of Hindustan Coca Cola Beverage P Ltd Vs CIT – 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT.

6. The Appellant craves leave to file additional grounds at the time of hearing.”

38. Grounds of appeal No.1 & 6 are general in natural and do not require any adjudication.

38.1 Ground of appeal No.2 challenges the decision of ld. CIT(A) confirming the addition of Rs. 5,91,700/- under clause (iii) of Rule 8D of the Rules. From the perusal of the ld. CIT(A) order, it is clear that the order of ld. CIT(A) is based on the appreciation of law and facts and we do not find any reason to interfere with the order of ld. CIT(A). Hence, this ground of appeal filed by the assessee is dismissed.

38.2 In the result, ground of appeal No.2 of assessee is dismissed.

39. Ground No.3 challenges the confirmation of the disallowance of payment made to HEPI for the purchase of crude oil for non-deduction of tax at source. Admittedly, the payee is a non-resident and payments are made towards purchase of crude oil. The AO was of the opinion that the purchases made by the assessee had embedded element of income for the payee and therefore, tax is required to be tax at source. Accordingly, the AO has disallowed this sum invoking the provision of s. 40(a)(ia) of the Act for non-deduction of tax at source. On appeal before ld. CIT(A) also confirmed the addition.

39.1 Being aggrieved, the assessee is in appeal before in the present grounds of appeal.

39.2 The ld. Counsel for the assessee vehemently argued that the payments of purchase of crude oil is not subject to deduction of tax at source u/s. 195 of the Act, it merely constitutes a purchases. In the case of transaction of mere purchase, there is no necessity of deducting TDS in the light of the decision of Hon’ble Supreme Court in the case of GE Technology Center v. CIT 327 ITR 256 (SC), wherein it was held that in the absence of taxable income in India, there is no obligation to deduct tax at source. It is further contended that in terms of provisions of Article 26 of Treaty between USA and India payments to non-resident should be considered as a payment to a resident for the purpose of deduction in the hands of the payer and reliance in this regard placed on the decision Hon’ble Jurisdictional High Court in the case of CIT v. Herbalife International India Pvt. Ltd. [2016] 384 ITR 276 (Del.).

39.3 On the other hand, the ld. DR placed reliance on the order of lower authorities.

39.4 We heard the rival submissions and perused the material on record. The only issue that arises for consideration in this ground of appeal is whether the payment made to HEPI for purchase of crude oil can be disallowed for non deduction of tax on such payment. In short the case of AO appears to be that in the case of payment made for the purchase of crude oil from HEPI is subject to deduction tax at source u/s. 195 of the Act as the payment has embedded element of income, whereas the assessee is of the opinion that such payments are not taxable in India and therefore, there was no necessity of complying the TDS provisions. The contention of the assessee-company that the sum paid is not chargeable to tax in India, therefore, there was no need to deduct tax in the light of the decision of Hon’ble Supreme Court in the case of GE Technology Center (supra) cannot be accepted as there is embedded element of income even in the case of transaction of purchase. The Hon’ble Supermen Court in the case of Transmission Corporation of Assessing Officer Ltd. v. CIT 105 Taxman 742 (SC) = 2002-TIOL-471-SC-IT clearly laid down that any sum paid to a non-resident may be income or income hidden or otherwise embedded therein. Therefore, the tax is required to be deducted on the said sum. What would be the income is to be computed on the basis various provisions of the Act including the provisions for computation of income if the payment is a trade receipt. However, we find merit in the submission of the assessee that in the light of second proviso to s. 40(a)(ia) of the Act, the matter requires remission to the AO to examine applicability of second proviso to s. 40(a)(ia) of the Act, which is inserted by the Finance Act, 2012 w.e.f. 01.04.2013 held to be retrospective by the Hon’ble High Court of Delhi. Accordingly, we remit this issue to the file of Assessing Officer to examine the allowability of the claim under the second proviso to s. 40(a)(ia) of the Act. Hence, this ground of appeal filed by the assessee is partly allowed for statistical purposes.

39.5 In the result, ground of appeal No.3 of assessee is partly allowed for statistical purposes.

40. Ground No.4 challenges the decision of ld. CIT(A) confirming the disallowance of payment made to MRL Industrial Co-operative Services Society u/s. 40(a)(ia) of the Act. This issue was dealt by us in the assessee’s own case for AY 2007-08 in ITA No. 688/Chny/2013, wherein the matter was remitted to the file of AO to examine the applicability of second proviso to s. 40(a)(ia) of the Act for the detailed reasons mentioned therein. Hence, this ground of appeal filed by the assessee is partly allowed for statistical purposes.

40.1 In the result, ground of appeal No.4 of assessee is partly allowed for statistical purposes.

41. Ground of appeal No.5 challenges the order of ld. CIT(A) confirmation the disallowance of lease rent paid to CMBWSSB for non deduction of tax at source. This issue was again dealt by us in the assessee’s own case for AY 2007-08 in ITA No. 688/Chny/2013 for the detailed reasons mentioned therein, the matter was remitted to the file of AO for verification of applicability of second proviso to s. 40(a)(ia) of the Act. Similarly this ground of appeal is restored to the file of Assessing Officer with similar directions. Hence, this ground of appeal filed by the assessee is partly allowed for statistical purposes.

41.1 In the result, ground of appeal No.5 of assessee is partly allowed for statistical purposes.

42. In the result, appeal filed by the assessee in ITA No.689/Chny/2013 for AY 2009-10 is partly allowed for statistical purpose.

43. Now we shall take up the Revenue’s appeal in ITA No.854/Chny/2013 for AY 2009-10.

43.1 The Revenue raised the following grounds of appeal:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2.1 The CIT(A) erred in deleting the disallowance of social and community welfare expenses made by the A.O.

2.2 The CIT(A) failed to appreciate the fact that the above expenses incurred by the assessee is not is not wholly and exclusively for the purpose of assessee’s business and hence not allowable u/s 37(1).

2.3 It is submitted that the decision of the ITAT on a similar issue in assessee’s own case for the A.Y. 2005-06 in ITA NO. 439 / Mds / 2009 dt 25.07.2012 haw not been accepted by the department and appeal to the High Court has been filed.

3.1 The CIT(A) erred in deleting the disallowance of expenditure incurred towards Chennai Open Tennis Tournament.

3.2 The C1T(A) failed to appreciated the fact that the assessee has made the contribution as the founder member of the consortium of sponsors for the conduct of the tournament

3.3 The CIT(A) ought not to have accepted the contention of the assessee that the expenditure is in the nature of advertisement expenses for promoting the cause of the company, since the assessee company’s products are exclusively marketed by public sector oil marketing companies.

3.4 The C1T(A) failed to appreciate that the case laws relied upon by the assessee are distinguishable from the facts of the current case since in the case of DCM Ltd. and Sarada Plywood Industries, the assessee’s were carrying out their marketing themselves.

4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

44. Grounds of appeal No.1 & 4 are general in nature and do not require any adjudication.

44.1 Ground of appeal No.2 challenges the confirmation by the ld. CIT(A), the disallowance of social community welfare expenses. This issue was dealt by us in the Revenue’s appeal for AY 2007-08 in ITA No.884/Chny/2013, wherein we remitted this issue to the file of AO for fresh adjudication on the touch stone of commercial expediency. Similarly, this issue for the year under consideration also, we remit this issue to the file of AO for fresh adjudication on the similar directions.

44.2 In the result, ground of appeal No.2 of Revenue is partly allowed for statistical purposes.

45. Ground of appeal No.3 challenges the deletion of addition by ld. CIT(A) on account of expenditure towards conduct of Chennai Open Tennis Tournament. This issue was also dealt by us in the Revenue’s appeal in ITA No.309/Chny/2014 for AY 2007-08, wherein we decided this issue against the assessee-company for the detailed reasons mentioned therein. Hence, this ground of appeal filed by the Revenue is allowed.

45.1 In the result, Ground of appeal No.3 of Revenue is allowed.

46. In the result, appeal filed by the Revenue in ITA No.854/Chny/2013 for AY 2009-10 is partly allowed.

Assessee’s appeal in ITA No.495/Chny/2014 for AY 2010-11:

47. The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of refinery of petroleum and petroleum chemical products and the sale of the same. The return of income for the AY 2010-11 was filed on 30.09.2010 declaring income as Nil. Against the said return of income, the assessment was completed by the Jt. CIT, LTU, Chennai vide order dated 25.02.2013 passed u/s. 143(3) of the Act at a total income of Rs. 129,63,69,813/-. While doing so, the AO made the following disallowances:

1.Disallowance u/s. 14A11,56,000
2.Payment to CMWSSB disallowed u/s. 40(a)(ia) [para 4.4]37,32,000
3.Payment to Indocoserve disallowed u/s. 40(a)(ia) [para 4.6]4,29,31,868
4.Payment to Hardy Exploration disallowed u/s. 40(a)(ia) [para 5.8]24,71,39,263
5.Payment to Niko Ltd. disallowed u/s. 40(a)(ia) [para 5.9]15,83,20,443
6.Provision for Retirement benefits as per DPE guidelines disallowed as being contingent (para 6)17,00,05,000

47.1 Being aggrieved, an appeal was preferred before ld. CIT(A), who vide impugned order partly allowed the appeal. Being aggrieved, the appellant is in appeal before us in the present appeal.

47.2 The assessee raised the following grounds of appeal:

“1. The order of the Commissioner of Income Tax (appeals), LTU is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.11,56,000/- under Section 14A by appLying Rule 8D.

2.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disaLlowed. All the investments have been made by assesee’s own fund and the appeLlant has not incurred any expenditure for earning the dividend income.

2.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the Hon’bLe Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited – reported in 323 ITR 518 = 2009-TIOL-604-HC-P&H-IT has heLd that “Disallowance u/s.14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.”

2.3 It is submitted that the Delhi Tribunal in the case of ACIT Vs Sun Investments reported in 8 ITR (Tn) 33 h.ave held that unless the assessing officer established that specific expenditure has been incurred by the assessee for earning exempt income there can be no disallowance under Section 14A.

2.4 Without prejudice to the same, the 0.5% has been calculated on the total investment made both on Indian Additives Limited (IAL) and Petroleum India International (PII).Only the Dividend earned from IAL is exempt income u/s 10 whereas the share of profit from P11 is a deduction u/s 86(1)(a) and hence rule 8D is not applicable on the investment made on P11.

3. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.37,32,000/- u/s 40(a)(ia) on the ground that the appellant had not deducted TDS from the payments made to Chennai Metro Water Supply & Sewerage Board(CMWSSB).

3.1 The Commissioner of Income tax (Appeal), LTU ought to have appreciated that the recipient has offered this amount as their income, and arranged for payment of tax and hence there can be no disallowance in the hands of the Appellant .The Appellant relies on the decision in the case of Hindustan Coca Cola Beverage P Ltd Vs CIT – 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT.

4. The Commissioner of Income tax (Appeal), LTU erred in restricting the disallowance u/s 40(a)(ia) amounting to Rs.3,24,10,0001- for non-deduction of TDS from the payments made to MRL Ind.Co-op Service society.

4.1 The commissioner of Income tax (Appeals), LTU ought to have appreciated that the appellant held a valid TDS exemption certificate u/s 197 for non deduction of TDS on payments made to MRL Ind.Co op Service society. Rule 28AA(3) of the Income tax Rule mentions that any certificate issued for lower or nil deduction of tax issued u/s197 shall be valid for such period of the previous year as specified in the certificate. Appellant relies on the decision in the case of ITO(TDS) Vs. Jet Airways (India) Ltd. (ITAT Mumbai -ITA No7441/Mum/2010) = 2013-TIOL-800-ITAT-MUM.

4.2 The commissioner of Income tax (Appeals), LTU ought to have appreciated that MRL md Co-op service society is a society providing service Like asphalt and wax filling and Loading, management of Labour, canteen, attending semi-skilled and unskilled jobs at various plants, plumbing and carpentry etc., the appellant has reimbursed the expenses of the Society. As it was only mere reimbursement of expenses and hence no tax need to be deducted on the same.

4.3 Without prejudice to the same, as the recipient. has filed the return of income including the amount received and has been arranged for payment of tax there can be no disallowance in the hands of the appellant. The Appellant relies on the decision in the case of Hindustan Coca Cola Beverage P Ltd Vs CIT – 293 ITR 226 (SC) = 2007-TIOL-144-SC-IT. Disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3l’ march and not the amounts which have been paid during the previous year. Merilyn Shipping and Transports V. ACIT, reported in 16 ITR Trib) 1 (Vis)(SB). Vector Shipping 85 CCH 201 (All. H.C) = 2012-TIOL-184-ITAT-VIZAG-SB.

5. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.24,71,39,263/- u/s 40(a)(i)for non-deduction TDS from the payments made to Hardy Exploration and Production India Inc u/s 195.

5.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that payment made to HEPI was for the purchase of crude oil and hence payment is not subject to tax in India.

5.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax.

5.3 The Hon’ble Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) has held that that only that portion of the payment to the non resident chargeable to tax in India tax has to be deducted at source under the Income Tax Act, 1961.

5.4 Without prejudice, only the profit accruing to M/s. Hardy Exploration and Production India Inc on production and sale of crude to the Appellant is taxable in India. Hence the entire payment cannot be disallowed u/s 40(a)(ia)

5.5 Without prejudice disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3l’ march and not the amounts which have been paid during the previous year. Merilyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) 1 (Vis)(SB). Vector Shipping 85 CCH 201 (All. H.C)2012-TIOL-184-ITAT-VIZAG-SB.

6. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of Rs.15,83,20,443/- u/s 40(a)(i) for non-deduction of TDS from the payment made to M/s NIKO (Neco) Ltd.

6.1 The Commissioner Of Income tax (Appeals), ought to have appreciated that payment made to M/s. NIKO (Neco) Ltd was for the purchase of crude oft and hence payment is not subject to tax in India.

6.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that Section 195 requires that tax is to be deducted at source from payment to a non-resident only if the amount is chargeable to tax.

6.3 The Hon’b(e Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) has held that that if there is no income chargeable to tax in India then there is no requirement for deducting tax at source under the Income Tax Act, 1961.

6.4 The commissioner of Income tax (Appeals), LTU ought to have appreciated that the appellant held a valid TDS exemption certificate u/s 197 for non deduction of TDS on payments made to NIKO (Neco) Ltd. Rule 28AA(3) of the Income tax Rule mentions that any certificate issued for Lower or nil deduction of tax issued u/s197 shall be valid for such period of the previous year as specified in the certificate. Appellant relies on the decision in the case of ITO(TDS) Vs.Jet Airways (India) Ltd.(ITAT Mumbai -ITA No7441/Mum/2010) = 2013-TIOL-800-ITAT-MUM.

6.4 Without prejudice, only the profit accruing to M/s. NIKO (Neco) Ltd on production and sale of crude to the Appellant is taxable in India. Hence the entire payment can not be disallowed u/s 40(a)(ia).

6.5 Without prejudice disallowance u/s 40(a)(ia) can be made only in respect of amounts outstanding and payable as on 3l march and not the amounts which have been paid during the previous year. Mentyn Shipping and Transports V. ACIT, reported in 16 ITR (Trib) 1 (Vis)(SB). Vector Shipping 85 CCH 201 (Alt. H.C) = 2012-TIOL-184-ITAT-VIZAG-SB.

7. The Commissioner of Income tax (Appeals), LTU erred in confirming the disallowance of the provision of Rs.17,00,05,0001/- made for Retirement benefits of supervisory and non-supervisory employees as per DPE guidelines as being contingent liability and added to the total income of the appellant.

7.1 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that As per the Department of Public Enterprises ( DPE) guideline dated 26th Nov 2008, all Central public sector enterprises are required to contribute 30% of Basic pay as superannuation benefit which may include contribution to provident fund (CPF),Gratuity , Pension and Post superannuation medical benefits.

7.2 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that In line with the above guideline, the appellant has made additional provision towards retirement benefit to the extent of 8.62% of the Basic pay as Superannuation benefit for the employees as the remaining 21 .38% has been met through contribution to provident fund (CPF), Gratuity and other retirement benefits.

7.3 The Commissioner of Income tax (Appeals), LTU ought to have appreciated that the above provisions are business Liability has arisen in the accounting year that are to be discharged at a future date. The appellant is certain of incurrence of the liability and the estimation made with reasonable certainty. Having met these requirements, the provision created by the appellant should be allowed as ascertained liability.

8. The Appellant craves leave to file additional grounds at the time of hearing.”

47.3 Ground of appeal No.1 challenges the confirmation of disallowance u/s. 14A of the Act. On perusal of the order of ld. CIT(A), we find that the order is well reasoned and based on the proper appreciation of facts, therefore, we do not intend to interfere with the order of ld. CIT(A).

47.4 In the result, Ground of appeal No.1 of assessee is dismissed.

48. Ground of appeal No.3 challenges the disallowance of payment made to HEPI for purchase of crude oil. This issue was dealt by us in Assessee’s appeal in ITA No.689/Chny/2013 for AY 2009-10, wherein the issue was remitted back to the file of AO for fresh adjudication for the detailed reasons mentioned therein. Similarly, this issue for the year under consideration also, we remit this issue to the file of AO for fresh adjudication on the similar directions. Hence, this ground of appeal filed by the Assessee is partly allowed for statistical purpose.

48.1 In the result, ground of appeal No.3 of assessee is partly allowed for statistical purpose.

49. Ground No.4 challenges the disallowance of payment made to MRL Ind. Co-op. Services Society for non deduction of tax at source. This identical issue was dealt by us in assessee’s own case in ITA No. 688/Chny/2013 for AY 2007-08, wherein the issue was remitted to the file of AO for limited purpose of verification of applicability of the second proviso to s. 40(a)(ia) of the Act for the detailed reasons mentioned therein. Hence, this ground of appeal filed by the Assessee is restored to the file of AO for denovo adjudication applicability of second proviso to s. 40(a)(ia) of the Act after due verification.

49.1 In the result, ground of appeal No.4 of assessee is partly allowed for statistical purpose.

50. Ground of appeal No.5 challenges the confirmation of disallowance on account of lease rent paid to CMWSSB. This identical issue was dealt by us in assessee’s own case in ITA No. 688/Chny/2013 for AY 2007-08, wherein the issue was remitted back to the file of AO for fresh adjudication for the detailed reasons mentioned therein. Similarly, this issue for the year under consideration also, we remit this issue to the file of AO for fresh adjudication on the similar directions. Hence, this ground of appeal filed by the Assessee is partly allowed for statistical purpose.

50.1 In the result, ground of appeal No.5 of assessee is partly allowed for statistical purpose.

51. In the result, appeal filed by the assessee in ITA No.495/Chny/2014 for AY 2010-11 is partly allowed for statistical purpose.

Assessee’s appeal in ITA No.2193/Chny/2016 for AY 2007-08:

52. This an appeal filed by the Assessee directed against the Order of the Learned Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai (hereinafter as ‘CIT(A)’) dated 30.03.2016 for the Assessment Year (AY) 2007-08.

52.1 The brief facts of the case are as under:

The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of refinery of petroleum and petroleum chemical products and the sale of the same. The return of income for the AY 2007-08 was filed on 27.10.2007 declaring income of Rs. 422,47,34,220/-. Against the said return of income, the assessment was completed by the Jt. CIT, LTU, Chennai vide order dated 16.12.2009 passed u/s. 143(3) of the Act at a total income of Rs. 438,99,85,730/-. Subsequently, the reassessment was completed u/s. 143(3) r/w s. 147 of the Act on 06.11.2012 at a total income of Rs. 439,77,34,730/-. It is stated that while computing the reassessment, the Assessing Officer determined the interest payable to the assessee u/s. 244A of the Act on the amount of Rs. 104,96,64,767/- did not grant interest on self assessment tax paid of Rs. 46,03,59,000/-.

52.2 Being aggrieved, an appeal was preferred before ld. CIT(A), who vide impugned order in ITA No.10/12-13 dt. 25.12.2013 to work out the interest u/s. 244A of the Act till the date of refund including the self assessment tax paid u/s. 140A of the Act. However, while giving effect of the Act he order of ld. CIT(Appeals), the Assessing Officer vide order dated 31.01.2014 had not adjusted the interest granted earlier u/s. 244A of the Act against the earlier demand/refunds. Being aggrieved, an appeal was preferred before ld. CIT(A), who vide impugned order confirmed the action of the Assessing Officer. Hence, the appellant is in appeal before us in the present appeal.

52.3 The assessee raised the following grounds of appeal:

“1. The order of the Commissioner of Income tax (Appeals) is contrary to Law, facts and in the circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming not granting interest u/s 244A on the principal portion of Rs.10,73,99,068/-.

2.1. The Commissioner of Income tax (Appeals) ought to have appreciated that Under explanation to Section 140A(1), it is stipulated where the amount paid by an assessee under self assessment falls short of the aggregate amount of tax and interest aforesaid, the amount paid shall first be adjusted towards the interest payable and the balance, if any, shall be adjusted towards the tax payable.

2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that on the above principle, when Revenue defaults and makes part payment of the amount refundable, there is no other provision under the Act under which an Assessing Officer/Revenue can be made Liable to pay interest when part payment is made and the entire amount, which is refundable is not paid to the assessee.

2.3 Interest under section 244A is payable on the amount of determined as refundable (inclusive of interest upto that date) for the period for which there was a delay in payment of the amount to be refunded.

2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that otherwise the Assessing Officer/Revenue can refund the principal amount and not pay the interest component under Section 244A for an unlimited period with impunity and without any sanction, which would amount to granting premium to a noncompliance of Law. In the present case, the interest component was withheld for the period of about 7 years and no interest was paid on the same.

2.5 The Appellant relies on the following decisions:

CIT Vs. Narender Doshi (2002) 245 ITR 606 (SC)

R.K. Jam and Sons Vs. CIT, 2006 (142) Taxman 445(Delhi)

CIT Vs HEG Ltd – 324 ITR 331 (SC) = 2009-TIOL-132-SC-IT-LB

3. The Appellant craves Leave to adduce additional grounds at the time of hearing.”

53. We heard the rival submissions and perused the material on record. The short issue involved in the present appeal is whether assessee is entitled to interest on the interest u/s. 244A of the Act. the Hon’ble Supreme Court in the case of Gujarat Fluoro Chemicals 43 taxmann.com 350 (SC) = 2014-TIOL-32-SC-ITcategorically held that the provisions of s. 244A of the Act provides for interest on refunds under various contingencies and it is only that interest provided for under the statute which may be claimed by the assessee from the Revenue. No other interest on such statutory interest. Following this decision the Hon’ble Delhi High Court in the case of CIT v. Indian Farmer Fertilizer Co-operative Ltd. 374 ITR 56 (Del.) = 2015-TIOL-572-HC-DEL-IT, held that the assessee is not entitled to interest on interest payable u/s. 244A of the Act. However, we must state here that a different law prevails in case of inordinate delay in grant of refunds. It is not the case of the assessee that there is inordinate delay in the grant of refunds. Hence, we do not find any merit in the appeal filed by the assessee is dismissed.

54. In the result, the appeal filed by the assessee in ITA No.2193/Chny/2016 for AY 2007-08 is dismissed.

(Order pronounced on the 20.03.2019)

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