Ved Jain, Adv. for the Assessee. Shefali Swroop, CIT DR for the Revenue.

This is an appeal by the department against the order dated 03.10.2008 of ld. CIT(A)-XVI, New Delhi.

2. Following grounds have been raised in this appeal:

“1. On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing deduction u/s 80IA (of Income Tax Act, 1961) on steam unit of CCGPS Plant by considering it as separate industrial undertaking or enterprise.

2. On the facts and circumstances of the case, the Ld. CIT(A) erred in allowing incentive of Rs, 2131.1 crores paid to various SEBs under the terms of One Time Settlement Scheme.

3. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs 171.2 crores being an expenditure disallowed by the Assessing Officer u/s 14A (of Income Tax Act, 1961) of the I. Tax Act, incurred to earn the exempt income.

4. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting an addition of Rs. 239.33 crores on account of income tax recoverable from SEBs.

5. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting an addition of Rs. 790.10 crores on account of provision of deffered tax.

6. The appellant craves to be allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal.”

3. As regards to the Ground No. 1 relating to the deduction u/s 80IA (of Income Tax Act, 1961) (hereinafter referred to as the Act), the ld. Counsel for the assessee at the very outset stated that this issue is covered in favour of the assessee vide order dated 26.05.2004 in ITA Nos. 1377 & 2188/Del/2002 for the assessment years 1998-99 and 1999-2000 respectively in assessee’s own case (copy of the said order was furnished which is placed on record).

4. The CIT DR although supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee.

5. After considering the submissions of both the parties and the material available on record, it is noticed that an identical issue having similar facts has already been adjudicated by the ITAT Delhi Bench ‘B’, New Delhi in assessee’s own case in ITA Nos. 1377 & 2188/Del/2002 for the assessment years 1998-99 and 1999- 2000 respectively. The relevant findings have been given in paras 8 to 11 of the said order which read as under:

“8. Rival submissions of the parties have been considered carefully in the light of the materials produced as well as case law referred to. The question for our consideration is how to compute the profits derived from an industrial undertaking eligible for deduction under the aforesaid sections. There are no provisions in these sections for computing such profits. In the absence of such provisions, the profits of an industrial undertaking must be determined in accordance with the settled legal principles. As per the commercial accounting practice, the businessman would debit the profit and loss account either on the basis of expenditure actually paid or on the basis of liability incurred/accrued as per the mercantile method of accounting. There is no scope of notional expenditure in computing such profits. If no expenditure is incurred for use of any material or services, where is the question of debiting any amount on account of such notional expenses? Admittedly, the hot gas was freely available to the steam unit. If the assessee had not set up the steam unit, such hot gas would have to be exposed to the open atmosphere. There is no evidence that such hot gas can be sold in the open market. It is only because of the advanced technology that such hot gas, which otherwise goes waste, can be utilized for generating electricity. But that requires massive investment. What would happen if the assessee, in the national interest, allows a third party to use such gas free of any charges? Would the department reduce the profits of steam unit by notional expenditure? In our opinion, the answer would be clearly in the negative as no deduction can be allowed unless any expenditure is incurred. Therefore, in our humble opinion, no portion of the expenditure incurred by the gas units can be allocated to the steam unit.

9. Heavy reliance has been placed by the lower authorities on the provisions of sub-section (6) of section 80 (of Income Tax Act, 1961)-1, which for the benefit of this order is being reproduced as under:

"Section 80 (of Income Tax Act, 1961)-1(6): Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to oceangoing vessels or other powered craft to which the provisions of subsection (a) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made."

We are afraid how the above provisions help the case of the revenue. On the contrary, it helps the case of the assessee. This provision has been relied upon by the Assessing Officer for the submission that profits of each unit has to be determined independently as if such unit were only source of income of the assessee. There is no dispute to such submission. According to such submission, profits of gas unit as well as steam unit must be determined independently as the sole source of income of the assessee and consequently, the expenditure incurred for the generation of electricity by gas unit cannot be shifted to any other unit even by the logic of the Assessing Officer. For the similar reasons, profit of the steam unit has to be determined independently on the basis of the expenditure incurred by such unit. Steam unit has not incurred by expenditure for acquiring hot gas.

Therefore, the question of reducing the profits of such unit by any notional figure does not arise. Therefore, we reject the stand of the revenue that sub-section (6) of section 80 (of Income Tax Act, 1961)-1 permits the revenue to shift the expenses of one unit to another unit.

10. Further, heavy reliance has been placed by the revenue on the provisions of sub-section (8) of section 80-I (of Income Tax Act, 1961) and sub-section (9) of section 80-IA (of Income Tax Act, 1961) which, for the benefit of this order, are reproduced as under:

"Section 80 (of Income Tax Act, 1961)-1(8): Where any goods held for the purposes of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft are transferred to any other business carried on by the assessee, or where any goods held for the purposes business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to oceangoing vessels or other powered craft does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship or the business of repairs to ocean- going vessels or other powered craft shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date: Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship or the business of repairs to ocean- going vessels or other powered craft in the manner here in before specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-In this sub-section, "market value", in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market." Section 80-IA(9) (of Income Tax Act, 1961): Where any goods held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date:

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.-In this sub-section, "market value", in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market." After going through the above provisions carefully, we are unable to uphold the stand of the revenue. Such provisions can be applied if it is established by the revenue that the gas unit transferred the steam unit and the consideration for the transfer of gas does not correspond to the market value as on the date of transfer. Market value has been defined as the price, which such goods would fetch on sale in the open market. No evidence, whatsoever, has been brought to our notice to show that there is any market for sale of such waste hot gas in India. There is also no evidence that such gas transported. Such gas, if not used, has to be exposed to the open atmosphere. Maybe such gas may find a market but as per the provisions of sub-section (8) of section 80 (of Income Tax Act, 1961)- 1 and sub-section (9) of section 80-IA (of Income Tax Act, 1961), the market value has to be seen as on the date of transfer. Since there is no evidence of any market for sale of such waste hot gas, we are unable to accept the stand of the revenue.

11. In view of the above discussion, it is held that the course adopted by the Assessing Officer for shifting a portion of expenses incurred by gas unit to the steam unit was not permissible in law and, therefore, cannot be approved. Consequently, the order of the CIT(A) confirming the above action of the Assessing Officer is set aside and the Assessing Officer is directed to allow deductions under sections 80 (of Income Tax Act, 1961)-I and 80-IA without allocating any expenditure of gas unit to steam unit.”

6. As regards to Ground Nos. 2, 4 & 5 relating to deletion of addition on account of incentives paid to various State Electricity Boards (SEBs) under the terms of one time settlement scheme amounting to Rs.2131.1 crores on account of income tax recoverable from SEBs amounting to Rs.239.33 crores and provision of deferred tax amounting to Rs.790.10 crores respectively. The ld. Counsel for the assessee submitted that clearance was not given by the COD to file the appeals on these issues and that as per the office memorandum dated 04.02.2013 issued by Government of India, Cabinet Secretariat, Rashtrpati Bhavan, the department or public sector undertakings may not reopen the cases wherein decision has been issued by the COD prior to 17.02.2011 (copy of the said office memorandum was furnished which is placed on record). The reliance was also placed on the judgment of the Hon’ble Delhi High Court in the case of CIT-V Vs Rural Electrification Corp. Ltd. 2014 (1) TMI 1238 (copy of the said order was furnished which is placed on record).

7. In her rival submissions, the ld. CIT DR supported the order of the AO.

8. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that the CBDT sought permission from the COD for filing the appeals for the assessment year 2004-05 on the issues relating to incentive paid to various SEBs, income tax recoverable from State Electricity Board (SEBs) and provisions of deferred tax, vide Reference No. 279/COD/110/2009-ITJ dated 08.06.2009 and the COD declined permission to CBDT to pursue these issues. It is also noticed that the Government of India, Cabinet Secretariat, Rashtrapati Bhavan issued an office memorandum dated 04.02.2013 directing therein as under:

“Sub: Settlement of disputes between one Central Government Department and another / one Central Govt. Department and a Central Govt. Public Enterprise / one Central Govt. Public Enterprise and another - Reg. The undersigned is directed to refer to Cabinet Secretariat's Office Memoranda of even number dated 1.9.2011 and 20.12.2011 on the above subject vide which all Ministries/Departments were intimated inter alia that the Committee on Disputes (COD) that had been functioning in Cabinet Secretariat for pursuing litigation by PSUs/Govt. Departments, stood wound up in accordance with the Order dated 17.2.2011 of the Hon'ble Supreme Court.

2. Instances have come to notice wherein a few PSUs/Departments have approached Tribunals/Courts to re- open the cases in which permission to litigate was denied by COD. In a few cases, Public Sector Undertakings /Departments have filed petitions in the High Courts. In an isolated case, a Special Leave Petition (SLP) has also been filed in the Hon'ble Supreme Court by an organisation against the High Court decision seeking clarification of the Order dated 17.2.2011 of the Hon'ble Supreme Court, although the High Court had declined to re-open the case.

3. Since the matter has been agitated before the Hon'ble Supreme Court in one case and decision on the same is pending, following interim directions are issued, with the approval of the competent authority, for strict compliance:

(i) No Ministry/Department or Public Sector Undertaking under them may re-open those cases in which clear decisions had been issued by the COD prior to 17.2.2011, AND

(ii) Ministries/Departments may circulate the instructions to all concerned offices/PSUs under their administrative control indicating that any violation may be viewed seriously and may invite administrative/disciplinary action.

4. This issues with the concurrence of Ministry of Law, Department of Legal Affairs vide Dy No. 246 Adv(B) dated 18.2.2013.”

Receipt of this O.M. may kindly be acknowledged.

(V. K. Gauba) Director

Tel: 23018467

9. In the present case, it is not indispute that the COD vide minutes dated 21.12.2009 has not permitted the CBDT to pursue the issues raised in Ground Nos. 2, 4 & 5, of the appeal before the ITAT. It is also clear from the office memorandum dated 04.02.2013 that no public sector undertakings may reopen those cases in which clear decisions have been issued by the COD prior to 17.02.2011. Therefore, the department ought not to have filed the appeal on these issues.

10. On a similar issue their Lordships of the Hon’ble Jurisdictional High Court in the case of CIT-V Vs Rural Electrification Corp. Ltd. (supra) observed as under:

“This is an application for revival of the appeal, which was dismissed/disposed of by order dated 6th May, 2009 for want of approval from the Committee on Disputes (COD). The applicant, Commissioner of Income Tax (LTU) has filed the application for revival in view of the order dated 17th February, 2011 passed by the Supreme Court in Civil Appeal No.1883/2011, Electronic Corporation India Ltd. Vs. Union of India and Others. By this order, it was held that mechanism of COD device has outlived its utility and the scenario has changed and, therefore, directions issued by the Supreme Court in earlier orders, stand recalled.

2. The respondent has contested the application on the ground that in the present case COD had refused permission to the Revenue to pursue or file the present appeals pursuant to meeting held on 16th October, 2008, the minutes of which were circulated on 4th November, 2008. This is factually correct.

3. In view of the aforesaid factual position, the present applications have to be dismissed in view of the order dated 13th February, 2012 passed in ITA 86/2009, Commissioner of Income Tax Vs. Gas Authority of India Ltd. Learned counsel for the applicant, however, has submitted that the Revenue has filed Special Leave to Appeal against the said decision, which is pending. Learned counsel for the respondent has drawn our attention to the office memorandum dated 4th February, 2013 issued by the Government of India, Cabinet Secretariat. The same is reproduced below:-

"The undersigned is directed to refer to Cabinet Secretariat’s Office Memoranda of even number dated 1.9.2011 and 20.12.2011 on the above subject vide which all Ministries/Departments were intimated inter alia that the Committee on Disputes (COD) that had been functioning in Cabinet Secretariat for pursuing litigation by PSUs/Govt. Departments, stood wound up in accordance with the Order dated 17.2.2011 of the Hon’ble Supreme Court.

2. Instances have come to notice wherein a few PSUs/Departments have approached Tribunals/Courts to re- open the cases in which permission to litigate was denied by COD. In a few cases, Public Sector Undertakings/Departments have filed petitions in the High Courts. In an isolated case, a Special Leave Petition (SLP) has also been filed in the Hon’ble Supreme Court by an organisation against the High Court decision seeking clarification of the Order dated 17.2.2011 of the Hon’ble Supreme Court, although the High Court had declined to re- open the case.

3. Since the matter has been agitated before the Hon’ble Supreme Court in one case and decision on the same is pending, following interim directions are issued, with the approval of the competent authority, for strict compliance:

(I) No Ministry/Department of Public Sector Undertaking under them may re-open those cases in which clear decision has been issued by the COD prior to 17.2.2011, AND

(II) Ministries/Departments may circulate the instructions to all concerned offices/PSUs under their administrative control indicating that any violation may be viewed seriously and may invite administrative/disciplinary action.

4. This issues with the concurrence of Ministry of Law, Department of Legal Affairs vide Dy No.246 Adv (B) dated 18.2.2013.

Receipt of this O.M. may kindly be acknowledged."

4. Learned counsel for the respondent states that the present application may be disposed of with the finding and direction that if the Revenue succeeds in the appeal before the Supreme Court, they will be entitled to ask for revival of the appeals. We take the statement made by the learned counsel for the respondent on record and dispose of the present application with the observation and direction that if the decision in the case of Gas Authority of India Ltd. is reversed, the Revenue will be entitled to ask for revival of the present appeal.”

11. We, therefore, by respectfully following the ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid referred to case, dismiss these grounds of the appeal of the department with the rider that the revenue will be entitled to ask for revival of the appeal on the happening of the events as directed by the Hon’ble Jurisdictional High Court in para 4 of the aforesaid referred to order.

12. As regards to Ground No. 3 relating to the disallowance of Rs.171.2 crores u/s 14A (of Income Tax Act, 1961) is concerned. The ld. Counsel for the assessee submitted that this issue is covered vide order dated 30.10.2011 of the ITAT Delhi Bench ‘F’, New Delhi in ITA No. 488/Del/2009 for the assessment year 2002-03 in the case of DCIT, Circle-14(1), New Delhi Vs Power Grid Corporation of India Ltd. (copy of the said order was furnished which is placed on record).

13. In her rival submissions, the ld. CIT DR supported the order of the AO.

14. After considering the submissions of both the parties and the material available on the record, it is noticed that an identical issue having similar facts has been adjudicated in the aforesaid referred to case of DCIT Vs Power Grid Corporation of India Ltd. wherein the relevant findings have been given in paras 10 to 11.5 which read as under:

“10. We have heard both the parties and gone through the facts of the case as also the aforecited decisions relied on by the ld. AR on behalf of the assessee. Indisputably, the assessee did not incur any expenditure by way of interest for investment in tax free bonds. In fact, the tax free bonds were acquired on the orders of the Government on conversion of sundry debtors of State Electricity Boards, facing financial crunch. The AO disallowed 2.5% of the administrative expenses for earning interest income from tax free bonds in the assessment years 2002-03 to 2004-05 while in assessment year 2007-08 disallowance has been made having recourse to provisions of rule 8D (of Income Tax Rules, 1962). There is no material before us, suggesting that the assessee incurred any expenditure by way of administrative expenses for earning interest income in these four assessment years nor the AO identified any item of such expenditure for earning the interest income. In these circumstances, the estimated disallowance made by the AO, without establishing the nexus between administrative expenses and interest income from tax free bonds, cannot be sustained.

11. We find that the Hon’ble Bombay High Court in their decision dated 12.8.2010 in case of Godrej & Boyce Mfg. Co. Ltd. Mumbai while holding that Rule 8D (of Income Tax Rules, 1962), inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income and is applicable only w.e.f AY 2008-09, concluded that for the assessment years where Rule 8D (of Income Tax Rules, 1962) does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all the facts and circumstances. Thus, the disallowance made by the AO ,invoking Rule 8D (of Income Tax Rules, 1962) in the AY 2007-08, is not justified.

11.1. Moreover, Hon’ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1, inter alia, observed that for attracting section 14A (of Income Tax Act, 1961) there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon’ble Apex Court observed in the context of provisions sec.14A (of Income Tax Act, 1961) in the following terms:

“17. The insertion of section 14A (of Income Tax Act, 1961) with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22- 11-2001). In other words, section 14A (of Income Tax Act, 1961) clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A (of Income Tax Act, 1961), the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A (of Income Tax Act, 1961) is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A (of Income Tax Act, 1961) is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A (of Income Tax Act, 1961). In section 14A (of Income Tax Act, 1961), the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A (of Income Tax Act, 1961). The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A (of Income Tax Act, 1961). Further, section 14 (of Income Tax Act, 1961) specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A (of Income Tax Act, 1961). Reading section 14 (of Income Tax Act, 1961) in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A (of Income Tax Act, 1961) refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37)..................”

11.2 Hon’ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd.,323 ITR 518 have observed that disallowance under section 14A (of Income Tax Act, 1961) requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A (of Income Tax Act, 1961) cannot stand.

11.3 Hon’ble Kerala High Court in their decision in Catholic Syrian Bank Ltd.(supra) held that there being no precise formula for proportionate disallowance, no disallowance is called for out of administrative expenses until Rule 8D (of Income Tax Rules, 1962) came in to force.

11.4 Hon’ble jurisdictional High Court in their decision in Printers House (P) Ltd. (supra) upheld the findings of the ITAT ,holding that expenditure cannot be disallowed on the basis of a mere estimate as to what possibly could have been incurred to earn income exempted from tax.

11.5 In the light of view taken in the aforesaid decisions, especially when the Revenue has not placed before us any material in order to controvert the aforesaid findings of the ld. CIT(A) so as to enable us to take a different view in the matter nor even referred to us any material that impugned expenditure was incurred to earn tax free interest income, we are not inclined to interfere with the findings of the ld. CIT(A). In view thereof, ground no.2 in the appeal for assessment year 2003-04, ground nos. i to iii in the appeal for the AY 2002-03, ground no.2 in the appeal for assessment year 2004-05 and ground no.1 in the appeal for the AY 2007- 08, are dismissed.”

15. Since, the facts of the assessee’s case are similar to the facts involved in the case of DCIT, Circle-14(1), New Delhi Vs Power Grid Corporation of India Ltd. (supra). So, respectfully following the aforesaid referred to order dated 31.10.2011, we do not see any merit in this ground of the departmental appeal.

16. In the result, the appeal of the department is dismissed. (Order Pronounced in the Court on 04/05/2018)

Sd/- Sd/-

(Suchitra Kamble) (N. K. Saini)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 04/05/2018