U.P.Power Corporation Ltd.,, Lucknow vs Assessee

DCIT - Range - 6, Vs. M/s U. P. Power Corporation Ltd., Lucknow 14, Ashok Marg, Lucknow - 226001 PAN:AAACU5088M (Appellant) (Respondent)

Assessee by Shri Rajesh Jain, C.A. Department by Dr. Anand Kumar Agarwal, CIT DR Date of hearing 29/04/2015 Date of pronouncement 16/06/2015

ORDER

PER A. K. GARODIA, A.M.

These are cross appeals filed by the assessee and the revenue directed against two separate orders of Learned CIT (A) - II Lucknow both dated 07.01.2013 for A.Y. 2008 - 09 and 2009 - 10. All these appeals were heard together and are being disposed by this common order for the sake of convenience.

2 2. First we take up the appeals of the assessee. In its appeals for both years, there is only one grievance of the assessee regarding disallowance u/s 14A sustained by CIT (A) for Rs. 431,73,167 in A.Y. 2008 - 09 and Rs. 311,81,24,742 in A.Y. 2009 - 10.

3. Learned AR of the assessee submitted that in these two years, no objective satisfaction was recorded by the A.O. as required for invoking Rule 8D and therefore, the disallowance u/s 14A read with Rule 8D is not proper and it should be deleted. He also submitted that this issue is covered in favour of the assessee by the tribunal order in the case of U.P. Electronics Corporation Ltd. vs. DCIT in ITA No. 538/LKW/2012 dated 23.01.2015, copy available on pages 246 to 266 of the paper book with relevant page being 266. Reliance was also placed on tribunal order in the case of EIH Associated Hotels Ltd. vs. DCIT in ITA No. 503/MDS/2012 dated 17.07.2013, copy available on pages 221 to 238 of the paper book with relevant pages being 2231 to 232. Reliance was also placed on tribunal order in the case of MSA Securities Services Pvt. Ltd. vs. ACIT reported in 58 SOT 44 (Chennai) (URO). Reliance was also placed on tribunal order in the case of Rainy Investments Pvt. Ltd. vs. ACIT reported in 56 SOT 61 (Mumbai) (URO).

4. Learned DR of the revenue supported the orders of the authorities below.

5. We have considered the rival submissions. We find that on page no. 4 of the assessment order for AY 2008 - 09, it is noted by the A.O. that the assessee has invested interest bearing borrowed funds in DISCOMS as Share Capital. He also noted that the learned AR of the assessee has submitted before him that all the interest paid by the assessee relates to and is directly attributable to the transmission and distribution of electricity business of the assessee. Thereafter, a categorical finding is given by the A.O. that from the submissions made and on the basis of material available, the assessee's contention is not found 3

acceptable and section 14A is applicable with Rule 8D. Thereafter, he worked out disallowance of Rs. 527,58,286/- out of interest expenditure and Rs. 431,73,167/- out of administrative expenditure Total Rs. 959,31,453/-. After making similar observations in the assessment order for A.Y. 2009 - 10, the A.O. worked out disallowance of Rs. 273,51,72,921/- out of interest expenditure and Rs. 38,29,51,821/- out of administrative expenditure Total Rs. 311,81,24,742/-. Now, we examine the balance sheets of the assessee company. The same as on 31.03.2008 is available on page 34 of the paper book. In the balance sheet, investment as on 31.03.2008 is at Rs. 6352.82 Crores and own fund as on this date is Rs. 18765.71 Crores. Hence, if the decision is taken on gross basis by presuming that the investment is out of own funds if the same is more than investment, it may be said that no disallowance is called for out of interest expenditure but after insertion of Rule 8D, it cannot be done. We feel it proper and relevant to reproduce Rule 8D as under:-

"Rule 8D (1)Where the Assessing Officer having regard to the accounts of the assessee of a previous year, is not satisfied with -

(a) The correctness of the claim of expenditure made by the assessee; or

(b) The claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-

(i) the amount of expenditure directly relating to income which does not form part of total income ;

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to 4

any particular income or receipt, an amount computed in accordance with the following formula, namely :-

B

A X---

C

Where A =amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;

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

C =the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ;

(iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.

3. For the purposes of this rule, the "total assets" shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets."

6. From these Rules, it comes out that in order to invoke Rule 8D, this is a pre requisite that the A.O. is not satisfied with the working of the assessee regarding the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act or with the claim of the assessee that no expenditure was incurred by the assessee in relation to income which does not form part of the total income under the Act. But in the present case, a clear and categorical finding is given by the A.O. in the assessment order for both years that that from the submissions made and on the basis of material available, the assessee's contention is not found acceptable and section 5

14A is applicable with Rule 8D. Hence, in our considered opinion, in the facts of the present case as discussed above, this pre requisite that the A.O. is not satisfied with the working of the assessee regarding the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act or with the claim of the assessee that no expenditure was incurred by the assessee in relation to income which does not form part of the total income under the Act is complied with and therefore, Rule 8D can be invoked in the present case.

7. Now for applying Sub - Rule (2), apportionment of interest expenditure is to be made in respect of that interest expenditure, which is not directly attributable to any particular income or receipt. In the present case, a claim is made that interest expenditure is incurred for taxable business but no evidence is brought on record to establish this contention and in the absence of evidence, it cannot be accepted.

8. Now we examine the applicability of various tribunal orders cited by the learned AR of the assessee. The first tribunal order is tribunal order in the case of U.P. Electronics Corporation Ltd. vs. DCIT (Supra). In this case in Para 15 page 266, it is held by the tribunal that invocation of Rule 8D without recording objective satisfaction by the A.O. is not proper. But in the present case, a categorical finding is given by the A.O. in the assessment order that from the submissions made and on the basis of material available, the assessee's contention is not found acceptable and section 14A is applicable with Rule 8D. In our considered opinion, this amounts to recording of objective satisfaction by the A.O. in the facts of the present case and hence, this tribunal order does not render any help to the assessee in the present case.

9. The second tribunal order is tribunal order in the case of EIH Associated Hotels Ltd. vs. DCIT (Supra). In this case, the investments were made in wholly owned subsidiary company and under this fact, it was held by the tribunal that 6

investment made in wholly owned subsidiary company is not to be reckoned for disallowance u/s 14A. In the present case, the investment is not made in wholly owned subsidiary company and therefore, this tribunal order also does not render any help to the assessee in the present case.

10. The third tribunal order is tribunal order in the case of MSA Securities Services Pvt. Ltd. vs. ACIT (Supra). As per the highlighted portion of this judgment on page 240 of the paper book, the amount of Rs. 47.51 Crores was lying as share application money on which, there cannot be any income whether exempt or otherwise and hence this investment cannot be considered to invoke section 14A. Our attention was drawn only to this highlighted portion of this tribunal order and hence, we confine ourselves to that extent only. Since, in the present case, the investments is in shares and not share application money, this tribunal order also does not render any help to the assessee in the present case.

11. The fourth tribunal order is tribunal order in the case of Rainy Investments Pvt. Ltd. vs. ACIT (Supra). Our attention was drawn only to highlighted portion of this tribunal order on page 242 of the paper book and hence, we confine ourselves to that extent only. As per the highlighted portion of this judgment on page 242 of the paper book, the dispute is regarding disallowance u/s 14A in respect of investment lying as share application money and hence for the same reasons as noted by us in Para 10 above, this tribunal order also does not render any help to the assessee in the present case.

12. As per above discussion, we find that none of the four tribunal orders cited by learned R of the assessee is rendering any help to the assessee in the present case. Moreover, in the tribunal order rendered in the case of U.P. Electronics Corporation Ltd. vs. DCIT (Supra), on which reliance was placed by the learned AR of the assessee, reference is made to a judgment of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT as reported in 328 ITR 81(Bombay). In this case, the A.Y. 7

involved was 2002 - 03 and the A.O. invoked Rule 8D. It was held by Hon'ble Bombay High Court that Rule 8D cannot be invoked up to A.Y. 2007 - 08 and it can be invoked only from AY 2008 - 09. In spite of this, it was held that the restoring of the matter back by the tribunal to the A.O. for fresh decision was justified. Hence, in our considered opinion after considering the mandate of this judgment of Hon'ble Bombay High Court that even in a situation where Rule 8D was invoked before the same was inserted in Income Tax Rules, restoring the matter to AO by the tribunal for reconsideration is justified, it cannot be said and held that merely because objective satisfaction was not recorded by the A.O., the disallowance should be deleted and the matter should not be restored to the A.O. In other words, it can be held that the invocation of Rule 8D is irregular but it cannot be said to be illegal. But since, in the facts of the present case where we found that objective satisfaction was recorded by the A.O., the provisions of Rule 8D were rightly invoked and therefore, we decline to interfere in the order of learned CIT (A) on this issue in both years.

13. In the result, both appeals of the assessee are dismissed.

14. Now, we take up the revenue's appeal for A.Y. 2008 - 09 in ITA No. 135/LKW/2013.

15. Ground No. 1 is as under:-

"The CIT (A) has erred in law and on facts in deleting the disallowances of depreciation of Rs. 117,45,63,244/- made by the A.O. The CIT (A) failed to appreciate that the A.O. has made this addition only after the assessee shows its inability to furnish the block wise details of transferred assets during the assessment proceedings."

16. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that the computation of income is available on page 18 of the paper book and therein, the deduction claimed for depreciation is Rs. 292,57,67,966/-. He also 8

submitted that the details of depreciation as per IT Act, Rs. 292,57,67,966/- is available on page 29 of the paper book and therein, the total amount of depreciation reduced is Rs. 270,28,21,123/- @ 15% of WDV of transferred assets of Rs. 1801,88,07,488/-. He also pointed out that on same page, it can be seen that depreciation claimed is 0% for Land, 10% for building etc. and 15% on plant & machinery, vehicle etc. and by excluding 15% depreciation on entire transferred assets in absence of its item wise details, the claim of depreciation has in fact gone down and not gone up.

17. We have considered the rival submissions. We find force in the submissions of the learned AR of the assessee because in the absence of item wise details of WDV of transferred assets, the assessee has reduced depreciation @15% of WDV of transferred assets as against claim of depreciation at various rates such as 0%, 10% and 15%. Therefore, the claim of depreciation has in fact gone down and not gone up because of the inability of the assessee to give wdv of each item of transferred assets and therefore, no further disallowance is justified because of this lapse on part of the assessee. Hence, we decline to interfere in the order of CIT (A) on this issue. Accordingly, Ground No. 1 of the revenue is rejected.

18. Ground No. 2 is as under:-

"The CIT (A) has erred in law and on facts in deleting the addition made by the A.O. of Rs. 119,84,57,257/- u/s 40a (ia) as he assessee failed to deduct tax at source u/s 194J of the I. T. Act. The Ld. CIT (A) failed to appreciate that transmission charges paid by the assessee were in the nature of fees for technical services and within meaning of section 194J of the I. T. Act and liable for TDS as per section 40a (ia) of the I. T. Act on the entire amount.

The CIT (A) has erred in law in failing to take into account the advance ruling made in by Hon'ble justice Mr. P.K. Balasubramanyan in his ruling AAR No. 1012 of 2010 in which he has held that similar charges received by Rajasthan Rajya Vidyut 9

Prasaran Nigam Ltd., were in the nature of fees for technical services and liable to TDS u/s 194J of the I. T. Act."

19. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that this issue is covered in favour of the assessee by the tribunal order in the case of ACIT vs. madhyanchal Vidyut Vitaran Nigam Ltd. in ITA No. 505/LKW/2012 & 01/LKW/2013 dated 27.02.2015, copy on pages 267 to 289 of the paper book. In particular, our attention was drawn to Para 17 on page 286.

20. We have considered the rival submissions. We find force in the submissions of the learned AR of the assessee because in the case cited by learned AR of the assessee also, the facts are similar and in that case also, the revenue had cited the same advance ruling and after considering the same, it was held by the tribunal in that case that the tribunal has taken a consistent view that payment of transmission charges is not payment for fees for technical services and therefore, the provisions of section 194J are not attracted and as a consequence, provisions of section 40a(ia) are not applicable. Respectfully following this tribunal order, we decline to interfere in the order of CIT (A) on this issue as learned DR of the revenue could not point out any difference in facts. Accordingly, Ground No. 2 of the revenue is also rejected.

21. Ground No. 3 is as under:-

"The CIT (A) has erred in law and on facts in restricting the disallowance to Rs. 431,73,167/- as against Rs. 959,31,453/- made by the A.O. u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. This action of the Ld. CIT (A) is in sharp contradiction of his own observation that he has made in his order at Para 5(3) that -

"There is no anomaly in computation of disallowable expenditure in accordance with prescribed formula under Ryle 8D."

10 22. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that this issue is covered in favour of the assessee by the tribunal order in the case of ACIT vs. madhyanchal Vidyut Vitaran Nigam Ltd. in ITA No. 505/LKW/2012 & 01/LKW/2013 dated 27.02.2015, copy on pages 267 to 289 of the paper book. In particular, our attention was drawn to Para 17 on page 286.

20. We have considered the rival submissions. We find that disallowance of Rs. 527,58,286/- has been made by the A.O. as per calculation on page 4 of the assessment order. For this, he has considered interest expenditure of Rs. 68,18,27,353/-, investment for exempt income at Rs. 369,31,83,936/- and average total assets at Rs. 4772,92,57,437/-. As per Balance Sheet and P & L account as appearing on pages 34 & 35 of the paper book, total interest & finance charges debited to P & L Account is Rs. 698,24,25,569/- ant it does not include interest expenditure in respect of DISCOM Loans because the same has been reduced as per Schedule 19 as noted by CIT (A) also. We also find that the assets as per balance sheet include investment in shares of DISCOMS as well as loans to DISCOMS. Interest is receivable on account of loans to DISCOMS and exempt dividend is receivable on account of investments in DISCOMS. Interest receipt is chargeable to tax and not exempt. But since the interest expenditure on account of loan to DISCOMS is not debited to P & L account, total interest debited to P & L Account is to be considered for disallowance under Rule 8D as has been done by the A.O. A specific finding is given by CIT (A) that "There is no anomaly in computation of disallowable expenditure in accordance with prescribed formula under Ryle 8D ", we fail to understand the basis of deleting the disallowance out of interest expenditure as per Rule 8D. Hence, on this issue, we reverse the order of CIT (A) and restore that of the A.O. Accordingly, Ground No. 3 of the revenue is allowed.

21. In the result, the appeal of the revenue is partly allowed.

11 22. Now, we take up the revenue's appeal for A.Y. 2009 - 10 in ITA No. 136/LKW/2013.

23. Ground No. 1 is as under:-

"The CIT (A) has erred in law and on facts in deleting the addition made by the A.O. of Rs. 555,54,30,890/- u/s 40a (ia) as he assessee failed to deduct tax at source u/s 194J of the I. T. Act. The Ld. CIT (A) failed to appreciate that transmission charges paid by the assessee were in the nature of fees for technical services in the hands of the recipients such payments were therefore, liable for TDS u/s 194J of the I. T. Act.

The CIT (A) has erred in law in failing to take into account the advance ruling made in by Hon'ble justice Mr. P.K. Balasubramanyan in his ruling AAR No. 1012 of 2010 in which he has held that similar charges received by Rajasthan Rajya Vidyut Prasaran Nigam Ltd., were in the nature of fees for technical services and liable to TDS u/s 194J of the I. T. Act."

24. Learned DR of the revenue supported the assessment order and learned AR of the assessee supported the order of CIT (A). He also submitted that this issue is covered in favour of the assessee by the tribunal order in the case of ACIT vs. madhyanchal Vidyut Vitaran Nigam Ltd. in ITA No. 505/LKW/2012 & 01/LKW/2013 dated 27.02.2015, copy on pages 267 to 289 of the paper book. In particular, our attention was drawn to Para 17 on page 286.

25. We have considered the rival submissions. We find force in the submissions of the learned AR of the assessee because in the case cited by learned AR of the assessee also, the facts are similar and in that case also, the revenue had cited the same advance ruling and after considering the same, it was held by the tribunal in that case that the tribunal has taken a consistent view that payment of transmission charges is not payment for fees for technical services and therefore, the provisions of section 194J are not attracted and as a consequence, provisions of section 40a(ia) are not applicable. Respectfully 12

following this tribunal order, we decline to interfere in the order of CIT (A) on this issue as learned DR of the revenue could not point out any difference in facts. Accordingly, Ground No. 1 of the revenue is rejected.

26. In the combined result, both appeals of the assessee and appeal of the revenue for A.Y. 2009 - 10 are dismissed and the remaining appeal of the revenue for A.Y. 2008 - 09 is partly allowed.

(Order was pronounced in the open court on the date mentioned on the caption page) Sd/. Sd/.

(SUNIL KUMAR YADAV) ( A. K. GARODIA ) Judicial Member Accountant Member

Dated:16/06/2015 *C.L.Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar