I T C Limited, Kolkata V. DCIT, Circle - 8, Kolkata, Kolkata

ITA 253/KOL/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1941 (ITAT-KOLKATA)
• Duration Of Justice: 6 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 13-09-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 15-02-2011
• Court: TRIBUNAL
• Department Lawyers: J P KHAITAN SR FOR
• Keywords: Capital asset; Business income; Business expenditure; Salary income; Earning of tax free income; Cost of acquisition
• Section: 143(3); 2(14); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH, KOLKATA (BENCH - B) BEFORE M BALAGANESH, ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER I.T. A. NO. 253/KOL/2011 ASSESSMENT YEARS: 2006 - 07 & I.T. A. NO. 336/KOL/2011 ASSESSMENT YEARS: 2006 - 07 OR DER PER M. BALAGANESH , AM THESE ARE APPEALS ARISING OUT OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - VIII, KOLKATA, DT. 23.11.2010, PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT), FOR THE ASSESSMENT YEAR 2006 - 07. ITC LIMITED [PAN :AAACI5950L] - VS - DCIT, CIR - 8, KOLKATA (APPELLANT) (RESPONDENT) DCIT, CIR - 8, KOLKATA [PAN :AAACI5950L] - VS - ITC LIMITED (APPELLANT) (RESPONDENT) FOR THE A SSESSEE SHRI J. P. KHAITAN, SR. ADVOCATE. FOR THE REVENUE SHRI GOULEN HANGSHING, CIT, DR DATE OF HEARING 15.03.2017 DATE OF PRONOUNCEMENT 22.03 .2017 2 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED 2. DISALLOWANCE OF STAFF WELFARE EXPENSES U/S 40A(9) OF THE ACT GROUND NO. 1 IN ITA NO. 253/KOL/2011 ASSESSEE APPEAL THE BRIEF FACTS OF THIS ISSUE IS THAT THE LD AO OBSERVED THAT IN THE TAX AUDIT REPORT FILED ALONG WITH THE RETURN OF INCOME, THE AUDI TORS HAVE IDENTIFIED PAYMENTS AMOUNTING TO RS . 16,52,249/ - AS ITEMS OF EXPENSES COVERED BY SECTION 40A(9) OF THE ACT. THE AUDITORS HAD ALSO HOWEVER MENTIONED THAT THE SAME IS ALLOWABLE IN ACCORDANCE WITH THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUN AL IN THE CASE OF DCIT VS CHLORIDE INDUSTRIES LTD REPORTED IN 76 ITD 1 (KOL ) ITAT). THE ASSESSEE FILED DETAILS OF THESE PAYMENTS IN THE COURSE OF SCRUTINY PROCEEDINGS. THE LD AO ON PERUSAL OF THE SAME OBSERVED THAT THE PAYMENTS HAVE BEEN MADE TO EMPLOYEE S WELFARE FUNDS, STAFF CLUBS EMPLOYEES CO - OPERATIVES AND SPORTS COMMITTEES WHICH IS NOT ALLOWABLE U/S 40A(9) OF THE ACT. HE STATED THAT SECTION 36 OF THE ACT PROVIDES THAT ANY SUCH SUM PAID / CONTRIBUTED BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUT ION TOWARDS THE RECOGNIZED PROVIDENT FUND OR AN APPROVED SUPERANNUATION FUND AND TO AN APPROVED GRATUITY FUND IS ALLOWABLE. DETAILS SUBMITTED BY THE ASSESSEE DO NOT INDICATE THAT ANY OF THE PAYMENT, EXCEPT FOR CONTRIBUTION OF RS . 6,86,000/ - TOWARDS ITC WORK MEN WELFARE SCHEME IS COVERED U/S 36(1)(IV) AND (V) OF THE ACT. ACCORDINGLY, THE LD AO DISALLOWED THE REMAINING SUM OF RS.9,66,249/ - U/S 40A(9) OF THE ACT IN THE ASSESSMENT. THE LD CIT ( A ) BY PLACING RELIANCE ON THE ORDERS OF HIS PREDECESSOR IN ASSESSEE S OWN CASE FOR THE ASST . YEARS 2004 - 05 AND 2005 - 06 HELD THAT THE EXPENDITURE IN RESPECT OF EDUCATIONAL INSTITUTIONS I.E TRIBENI TISSUES VIDYAPITH OF RS . 4,20,000/ - IS ALLOWABLE AND CONFIRMED THE DISALLOWANCE IN RESPECT OF THE REMAINING SUM OF RS . 5,46,249/ - MADE BY THE LD AO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND: - 3 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED (1) EXPENDITURE ON STAFF WELFARE DISALLOWED UNDER SECTION 40A(9): RS.5,46,249/ - FOR THAT THE LEARNED CIT(A) ERRED IN DISALLOWING THE EXPENDITURE FOR STAFF WELFARE UNDER SECTION 40A(9) IN RESPECT OF EMPLOYEE CLUBS AND CO - OPERATIVES. FOR THAT THE LEARNED CIT(A) FAILED TO APPRECIATE THAT GENUINE EXPENDITURE FOR STAFF WELFARE IS FULLY AL LOWABLE UNDER THE INCOME TAX ACT. RELIEF PRAYED: THE DISALLOWANCE OF RS.5,46,249/ - SHOULD BE DELETED. 2.1. THE LD AR STATED THAT THE DETAILS OF EXPENSES INCURRED ON THIS ACCOUNT ARE ENCLOSED IN PAGE 3 OF THE PAPER BOOK AND THE ISSUE UNDER DISPUTE IS CO VERED BY THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASST . YEAR 2007 - 08 IN ITA NO. 919/KOL/2011 DATED 18.11.2011 WHEREIN THIS TRIBUNAL HAD GRANTED RELIEF FOR THE SUBSTANTIAL PORTION OF THE EXPENDITURE AND SUSTAINED DISALLOWANCE ONLY TO THE EXTENT OF RS . 25,800/ - BEING PAYMENT MADE DIRECTLY FOR REGISTRAR OF SOCIETIES. HE PRAYED FOR SIMILAR DIRECTION BE GIVEN TO THE LD AO TO DECIDE THE SAME IN THE LIGHT OF THE SAID TRIBUNAL ORDER. IN RESPONSE TO THIS, THE LD DR FAIRLY CONCEDED FOR THE SAME. 2.2. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE ISSUE UNDER DISPUTE IS COVERED BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASST . YEAR 2007 - 08 IN ITA NO. 919/KOL/2011 DATED 18.11.2011 WHEREIN IT WAS HELD AS BELOW: - 4. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE STATED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST REVENUE BY TRIBUNAL'S DECISION IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2005 - 06 IN ITA NO.475/K/2010 DATED 10.6.2011, WHEREIN TRIBUNAL EXACT LY ON SAME FACTS, VIDE PARA 8 OF ITS ORDER HAS HELD AS UNDER: '8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTIES AND THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE DETAILS OF THE EXPENDITURE AGG REGATING RS.9,00,111 CLAIMED BY THE ASSESSEE, THE BREAK - UP OF WHICH HAS ALREADY BEEN MENTIONED HEREINABOVE. WE OBSERVE THAT THE ASSESSEE HAS MADE THE CONTRIBUTION TO STAFF CLUB/ RECREATION CLUB OF ITS EMPLOYEES. ON PERUSAL OF THE DETAILS, IT IS OBSERVED TH AT THE SAID AMOUNTS WERE REIMBURSED BY THE ASSESSEE FOR 4 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED SALARY OF THE STAFFS EMPLOYED AT THE CLUB, MAINTENANCE OF LIBRARY AT THE CLUB, EXPENSES FOR MAINTENANCE OF INDOOR GAME SECTION EXPENSES FOR CONDUCT OF SPORTS COMPETITION AND THEIR FAMILIES, REIMBURSE MENT OF EXPENSES TOWARDS ELECTRICITY, EXPENSES INCURRED ON PROVIDING CULTURAL RECREATION TO THE MEMBERS/ CULTURAL EVENTS, EXPENSES FOR ORGANIZING FETE FOR THE MEMBERS/ FAMILIES OF ASSESSEE'S EMPLOYEES, EXPENSES INCURRED ON ORGANIZING CULTURAL EVENTS ON DIF FERENT OCCASIONS, ANNUAL SOCIAL MEETS OF THE EMPLOYEES/ THEIR FAMILIES, ETC., EXCEPT DIRECT SUBSCRIPTION MADE TO ONE COOPERATIVE SOCIETY OF RS.25,800/ - . CONSIDERING THE FACTS OF THE CASE, WE DO AGREE WITH THE ASSESSEE THAT IN THE ASSESSMENT YEAR UNDER CONS IDERATION, THE ASSESSEE HAS FILED THE DETAILS OF THE EXPENSES REIMBURSED TO THE RECREATION CLUBS/ ORGANIZATIONS/ SOCIETIES OF THE EMPLOYEES AND THEIR FAMILIES AND IT WAS NOT AN EXPENDITURE INCURRED BY THE ASSESSEE TOWARDS SETTING UP FORMATION OR GIVING DIR ECT CONTRIBUTION TO A FUND, TRUST, COMPANY, ASSOCIATION OF PERSONS, BODY OF INDIVIDUALS, SOCIETY REGISTERED UNDER SOCIETIES' REGISTRATION ACT , 1860 (EXCEPT TO ONE CONTRIBUTION OF RS.25,800/ - AS MENTIONED HEREINABOVE), BUT THE REIMBURSEMENT IS OF THE EXPENDITURE ACTUALLY INCURRED FOR THE WELFARE ACTIVITIES OF THE EMPLOYEES AND THEIR FAMILIES. HENCE, WE ARE OF THE CONSIDERED VIEW THAT THE STAFF R ECREATION CLUB AND STAFF CLUB FOR WHICH THE ASSESSEE HAS INCURRED THE EXPENSES ARE FOR THE WELFARE OF ITS EMPLOYEES DUE TO BUSINESS EXPEDIENCY. STAFF RECREATION CLUB AND STAFF CLUB ARE A PART AND PARCEL OF THE ORGANIZATION ITSELF. CONSIDERING THE EARLIER D ECISION OF ITAT, KOLKATA IN THE CASE OF CHLORIDE INDUSTRIES LTD. (SUPRA) AND ALSO THE FACT THAT THE ASSESSEE HAS GIVEN THE BREAK - UP OF THE EXPENSES 3 ITA 919/K/2011 ITC LIMITED . A.Y.07 - 08 INCURRED/ REIMBURSED, AS MENTIONED HEREINABOVE, WE ARE OF THE CONSI DERED VIEW THAT THE PROVISIONS OF SECTION 40A(9) OF THE ACT ARE NOT ATTRACTED FOR A SUM OF RS.8,74,311/ - AND THE SAID EXPENDITURE IS ALLOWABLE UNDER SECTION 37(1) OF THE ACT. THEREFORE, WE ALLOW GROUND OF APPEAL TAKEN BY THE ASSESSEE IN PART BY RESTRICTING THE DISALLOWANCE TO RS.25,800/ - AND BY DELETING THE SUM OF RS.8,74,311/ - OUT OF RS.9,00,111/ - .' LD. COUNSEL FOR THE ASSESSEE BEFORE US STATED THAT THE SIMILAR EXPENSES ARE IN THE PRESENT YEAR ALSO AND HE REFERRED TO ASSESSEE'S PAPER BOOK PAGES 5 AND 6, WHICH ARE EXACTLY IDENTICAL LIKE TRIBENI TISSUES RECREATION CLUB RS.1,43,000/ - , TRIBENI TISSUES SPO RTS CLUB RS.1,00,000/ - , ITC RECREATION CLUB STAFF WELFARE EXPENSES FOR ITC EMPLOYEES RS.3,00,000/ - , TRIBENI TISSUES MAHILA SAMITY RS.5,000/ - , TRIBENI TISSUES EMPLOYEES RECREATION CLUB RS.1,16,375/ - , TRIBENI TISSUES MANAGEMENT STAFF CLUB RS.1,75,000/ - , TRIB ENI TISSUES CO - OPERATIVE CREDIT SOCIETY RS.1,200/ - , TRIBENI TISSUES CO - OPERATIVE STORES LIMITED RS.25,800/ - , TRIVENI TISSUES VIDYAPITH RS.4,20,000/ - AND ITC WORKMEN WELFARE SCHEME - STAFF WELFARE EXPENSES AT CIGARETTE DIVISION RS.780,080/ - . AS FACTS ARE ID ENTICAL IN AY 2005 - 06 AND IN PRESENT AY, TAKING A CONSISTENT VIEW AND RESPECTFULLY FOLLOWING TRIBUNAL'S ORDER, WE DIRECT THE ASSESSING OFFICER TO DISALLOW ONLY PAYMENT MADE DIRECTLY FOR REGISTRAR OF SOCIETIES I.E. CONTRIBUTION OF RS.25,800/ - . ACCORDINGLY, THIS ISSUE OF ASSESSEE'S APPEAL IS PARTLY ALLOWED. 5 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED RESPECTFULLY FOLLOWING THE SAME WE SET ASIDE THE ISSUE TO THE FILE OF THE LD AO TO DECIDE THE ALLOWABILITY OF THE EXPENSES IN THE LIGHT OF THE DECISION OF THIS TRIBUNAL FOR THE EARLIER YEAR SUPRA. ACCO RDINGLY, THE GROUND NO. 1 IN ITA NO. 253/KOL/2011 IS ALLOWED FOR STATISTICAL PURPOSES. 3. DISALLOWANCE U/S 14A OF THE ACT GROUND NO. 2 IN ITA NO. 253/KOL/2011 FOR ASST YEAR 2006 - 07 ASSESSEE APPEAL GROUND NO.1 IN ITA NO. 336/KOL/2011 FOR ASST YEAR 2006 - 07 REVENUE APPEAL THE BRIEF FACTS OF THIS ISSUE IS THAT THE LD AO OBSERVED THAT THE ASSESSEE HAD SUBSTANTIAL AMOUNT OF EXEMPT INCOME INCLUDING DIVIDEND INCOME OF RS . 136,98,28,578/ - AND INCOME FROM TAX FREE BONDS OF RS . 21,52,88,990/ - . THE ASS ESSEE WAS ASKED TO EXPLAIN AS TO WHY A PART OF THE EXPENDITURE CLAIMED IN THE PROFIT AND LOSS ACCOUNT SHOULD NOT BE HELD TO BE DIRECTLY RELATED TO THE EARNING OF EXEMPTED INCOME AND ACCORDINGLY WHY SUCH EXPENDITURE SHOULD NOT BE DISALLOWED U/S 14A OF THE A CT READ WITH RULE 8D OF THE RULES. IN RESPONSE THE ASSESSEE REPLIED THAT ONLY A SUM OF RS.2,48,600/ - IS ATTRIBUTABLE TO THE EARNING OF EXEMPTED INCOME AND ACCORDINGLY THE SAME WAS OFFERED FOR DISALLOWANCE U/S 14A OF THE ACT I N THE ASSESSMENT PROCEEDINGS. THIS OFFER OF DISALLOWANCE WAS DULY SUPPORTED BY DETAILED WORKINGS. THE LD AO IGNORED THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT IT IS HIGHLY INCONCEIVABLE THAT A VERY PETTY SUM OF RS 2,48,600/ - WAS INCURRED FOR EARNING HUGE EXEMPT INCOME OF RS . 15 8 CRORES AND ACCORDINGLY RESORTED TO INVOKE RULE 8D(2)(III) OF THE RULES AND MADE DISALLOWANCE THEREON TO THE EXTENT OF RS . 17,84,00,000/ - IN THE ASSESSMENT. 3.1. BEFORE THE LD CIT(A) , THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO 6 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED LTD VS DCIT REPORTED IN 328 ITR 81 (BOM) FOR NON - APPLICABILITY OF RULE 8D OF THE RULES FOR THE YEAR UNDER APPEAL. HOWEVER, IT STATED THAT ALTHOUGH NO SPECIFIC /DIRECT EXPENSES WERE INCURRED , THE A SSESSEE ON FURTHER ANALYSIS OF THE TREASURY DEPARTMENTS EXPENSES OF RS. 2,58,87,620/ - WHOSE RESPONSIBILITY INCLUDES HANDLING ALL THE FINANCIAL / WORKING CAPITAL, INVESTMENTS AND BANKING FUNCTIONS AS WELL AS FOREIGN EXCHANGE. THE ASSESSEE SUBMITTED THE DE TAILED BREAK UP OF THE FUNCTIONS PERFORMED BY THE EMPLOYEES AND THE INDIRECT EXPENSES COMPRISED OF SALARIES AND OVERHEADS WHICH ARE INDIRECTLY LINKED TO THE DEPLOYMENT OF THE SURPLUS FUNDS RESULTING IN THE EXEMPT INCOME. THE SALARIES WERE APPORTIONED ON T HE BASIS OF THE INVESTMENTS TO THE TOTAL ASSETS IN THE BALANCE SHEET. THE OVERHEADS OF THE CORPORATE TREASURY DEPARTMENT WERE APPORTIONED ON THE BASIS OF THE SALARIES DETERMINED ABOVE (IN THE CONTEXT OF EXEMPT INCOME) TO THE TOTAL SALARIES OF THE ENTIRE D EPARTMENT. BASED ON THIS ANALYSIS, THE ASSESSEE SUBMITTED THAT THE TOTAL INDIRECT EXPENDITURE OF THE TREASURY DEPARTMENT THAT CAN BE CONSIDERED FOR DISALLOWANCE U/S 14A OF THE ACT WOULD AMOUNT TO RS . 60,39,896/ - AND REQUESTED THE LD CIT(A) TO ADOPT THE SAM E FOR DISALLOWANCE U/S 14A OF THE ACT. HOWEVER, THE LD CIT(A) BY PLACING RELIANCE ON CERTAIN TRIBUNAL DECISIONS DIRECTED THE LD AO TO ADOPT 1% OF EXEMPTED INCOME WHICH AMOUNTED TO RS . 1,58,51,175/ - FOR THE PURPOSE OF DISA LLOWANCE U/S 14A OF THE ACT. AGGRIE VED, BOTH THE ASSESSEE AS WELL AS THE REVENUE IS IN APPEALS BEF ORE US ON THE FOLLOWING GROUNDS : - (2) PROPORTIONATE MANAGEMENT EXPENSES (I N THE CONTEXT OF EXEMPT INCOME) : (RS.1 ,58,51,175 LESS RS. 60,39,896) RS.98, 11,279/ - FOR THAT THE LEARNED CIT(A) ERRED IN ARBITRARILY DETERMINING AND DISALLOWING PROPORTIONATE MANAGEMENT EXPENSES UNDER SECTION 14A IN RESPECT OF EXEMPT INCOME SINCE THE APPELLANT COMPANY WAS A PROFITABLE MANUFACTURING COMPANY AND THE SAID INVESTMENTS HAD ARI SEN OUT OF PROFITS/SURPLUSES. 7 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED FOR THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE @ 1 % OF EXEMPT INCOME IGNORING THE APPELLANT COMPANY'S COMPUTATION DETERMINING THE EXPENSES HAVING SOME CONNECTION TO THE SAID EXEMPT INCOME. RELIEF PRAYED: THE DISALLOWANCE OF RS.98,11,279/ - SHOULD BE DELETED. & 1. THAT THE LD. CLT(A) HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY ALLOWING JUST 1% OF EXEMPT INCOME AS DISALLOWANCE AND DELETING THE ADDITION MADE U/S 14A MADE BY THE ASSESSING OFFICER EVEN THOUGH HE HAS CORRECTLY APPLIED RULE 8D AS PER LAW IN RESPECT OF EXEMPT INCOME. 3.2. THE LD AR ARGUED THAT THE DISALLOWANCE U/S 14A OF THE ACT HAD TO BE WORKED OUT ON THE BASIS OF SOME RATIONAL WORKINGS PRIOR TO ASST . YEAR 20 08 - 09. HE ARGUED THAT EVEN THOUGH THE TRIBUNAL HAD HELD THAT 1% OF EXEMPTED INCOME WOULD BE FAIR AND REASONABLE FOR DISALLOWANCE U/S 14A OF THE ACT, IN ALL THOSE CASES, THERE WAS NO MECHANISM FOR MAKING DISALLOWANCE OF EXPENSES INCURRED FOR EARNING EXEMPT INCOME AND THE ASSESSEE HAD NOT COME FORWARD WITH ITS WORKINGS FOR DISALLOWANCE WITH SCIENTIFIC BASIS. IN THE INSTANT CASE, THE ASSESSEE HAD WORKED OUT THE DISALLOWANCE IN THE SUM OF RS . 60,39,896/ - SCIENTIFICALLY ON THE BASIS STATED HEREINABOVE WHICH HA S NOT BEEN CONSIDERED AT ALL BY THE LD CIT(A) . HE STATED THAT LET THE WORKINGS GIVEN BY THE LD AO BE EXAMINED AND THEN A RATIONAL DECISION BE TAKEN IN THIS REGARD AND ACCORDINGLY PRAYED FOR SETTING ASIDE OF THIS ISSUE TO THE FILE OF THE LD AO. IN RESPONS E TO THIS, THE LD DR VEHEMENTLY STATED THAT 1% OF EXEMPTED INCOME ALONE SHOULD BE RECKONED FOR DISALLOWANCE U/S 14A OF THE ACT IN RESPECT OF ASSESSMENT YEARS PRIOR TO ASST . YEAR 2008 - 09. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE FACTS STATED HEREIN ABOVE REMAIN UNDISPUTED AND HENCE THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY. IT IS NOT IN DISPUTE THAT RULE 8D OF T HE RULES CANNOT BE APPLIED FOR A SST . YEARS PRIOR TO ASST . YEAR 2008 - 09. WE FIND THAT THE LD CIT ( A ) HAD DIRECTED THE LD AO TO DISALLOW 1% 8 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED OF EXEMPTED INCOME U/S 14A OF THE ACT WHICH WAS AGREED UPON BY THE LD DR BEFORE US. HENCE THE GROUND TAKEN BY THE REVENUE BEFORE US DOES NOT SURVIVE. WE FIND THAT THE ASSESSEE THOUGH DID NOT OFFER ANY DISALLOWANCE SUO MOTO IN THE RETU RN OF INCOME U/S 14A OF THE ACT, CAME FORWARD WITH PETTY DISALLOWANCE OF RS . 2,48,600/ - DURING THE COURSE OF ASSESSMENT PROCEEDINGS WHICH WAS FURTHER IMPROVED TO RS . 60,39,896/ - BASED ON SOME RATIONAL WORKINGS. ADMITTEDLY THE SAID WORKINGS HAVE NOT BEEN EXA MINED BY THE LOWER AUTHORITIES. HENCE IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE DIRECT THE LD AO TO EXAMINE THE WORKINGS GIVEN BY THE ASSESSEE BEFORE THE LD CIT(A) AND DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW. ACCORDINGLY, THE GROUND NO. 2 RAIS ED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND GROUND NO. 1 RAISED BY THE REVENUE IS DISMISSED. 4. DISALLOWANCE OF COMMISISON TO NON - WHOLE TIME DIRECTORS U/S 40(A)(IA) OF THE ACT GROUND NO. 3 IN ITA NO. 253/KOL/2011 FOR ASST YEAR 2006 - 07 ASSESSEE APPEAL THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE CLAIMED EXPENDITURE OF RS . 24,00, 000/ - TOWARDS COMMISSION TO NON - WHOLE TIME DIRECTORS OF COMPANY AS BELOW: - NAME OF THE DIRECTOR COMMISSION AMOUNT (RS.) S.B. MATHUR 4,00,000 P.B. RAMANUJAM 4,00,000 Y.P. GUPTA/ T.S. VIJAYAN 4,00,000 B. VIJAYRAGHAVAN 4,00,000 B. SEN 4,00,000 DR. RAM S. TANEJA 4,00,000 TOTAL 24,00,000 9 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED THE ASSESSEE STATED THAT FIRST THREE PAYMENTS WERE MADE TO THREE PERSONS WHO ARE NOMINEES OF LIC, GIC AND SPECIFIC UNDERTAKING OF UNIT TRUST OF INDIA RESPECTIVELY AND THE LAST THREE PAYMENTS ARE MADE TO THREE INDIVIDUAL NON - EXECUTIVE DIRECTORS. THE ASSESS EE CLAIMED THAT THE ABOVE PAYMENTS OF COMMISSION TO SIX PERSONS DO NOT COME UNDER PROVISIONS OF SECTION 194H OR 194J OF THE ACT AND FOR THESE REASONS THERE WAS NO LIAB ILITY TO DEDUCT TAX AT SOURCE. THE LD AO OBSERVED THAT THE ASSESSEE WOULD INDULGE IN APPO INTING THESE DIRECTORS ONLY AFTER ASCERTAINING THE FACT THAT THEY ARE INDEPENDENTLY POSSESSING TH E REQUISITE PROFESSIONAL SKILLS , ABILITY AND QUALIFICATION AND ACCORDINGLY THE COMMISSION PAYMENTS MADE TO THEM WOULD FALL UNDER THE AMBIT OF PROVISIONS OF SEC TION 194J OF THE ACT. HE ALSO HELD THAT IN ANY CASE, THE SUBJECT MENTIONED PAYMENTS WOULD FALL UNDER THE AMBIT OF COMMISSION OR BROKERAGE IN TERMS OF SECTION 194H OF THE ACT WHICH WARRANTS DEDUCTION OF TAX AT SOURCE AT THE RATE OF 5% AND FAILURE TO DO SO W OULD INVITE DISALLOWANCE U/S 40(A)(IA) OF THE ACT. ACCORDINGLY, HE DISALLOWED THE COMMISSION IN THE SUM OF RS . 24,00,000/ - , U/S 40(A)(IA) OF THE ACT. 4.1. BEFORE THE LD CIT(A) , THE ASSESSEE STATED THAT SUCH EXPENDITURE HAS BEEN REPEATEDLY HELD FOR THE PURPOSE OF BUSINESS AND IS FULLY ALLOWABLE UNDER THE ACT AND IN SUPPORT OF THIS, IT PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF J K WOOLEN MANUFACTURERS VS CIT REPORTED IN 72 ITR 612 (SC) AND HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS K C THAPAR REPORTED IN 157 ITR 212 (CAL) . IT WAS STATED THAT NO SPECIAL PAYMENTS WERE MADE TO THE DIRECTORS OF THE COMPANY WARRANTING DEDUCTION OF TAX AT SOURCE IN TERMS OF SECTION 194J OF THE A CT. THE COMMISSION PAYMENTS WERE CLEARLY FOR DISCHARGE OF THE ROUTINE RESPONSIBILITIES OF THE BOARD AND DO NOT FALL WITHIN THE SCOPE OF MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. IT WAS PLEADED THAT PROVISIONS OF SECTION 194H OF THE ACT ARE CLEARLY NO T APPLICABLE IN THE CONTEXT OF THE EXPLANATION 10 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED TO THE SAID SECTION WHICH HAS DEFINED THE TERM AS PAYMENT RECEIVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACTING ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PROFESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYING OR SELLING OF GOODS . IN THIS CASE, NEITHER THE RS . 12 LACS PAID TO INSTITUTIONAL SHAREHOLDERS NOR THE OTHER PAYMENT OF RS . 12 LACS TO THE THREE INDIVIDUAL NON - EXECUTIVE DIRECTORS FALL WITHIN THE SCOPE OF THIS DEFINITION. THE ASSESSEE PLACED RELIANCE ON THE CO - ORDINATE BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF JAHANGIR BIRI FACTORY (P) LTD VS DCIT REPORTED IN 126 TTJ 567 (KOL) (2009 ) WHEREIN IT WAS CATEGORICALLY HELD THAT THE SUBJECT MENTIONED COMMISS ION PAYMENTS DO NOT FALL EITHER UNDER THE AMBIT OF SECTION 194H OR U/S 194J OF THE ACT AND CONSEQUENTIALLY NO DISALLOWANCE U/S 40(A)(IA) OF THE ACT WOULD OPERATE. IT WAS FURTHER PLEADED THAT THE NON - EXECUTIVE DIRECTORS ARE NOT EMPLOYEES OF THE COMPANY AND THEREFORE THE PROVISIONS OF SECTION 192 OF THE ACT ARE NOT APPLICABLE. IT WAS ALSO PLEADED THAT RS . 12 LACS WAS PAID TO THREE INDIVIDUAL DIRECTORS WHO HAVE SUBMITTED CONFIRMATIONS TO THE EFFECT THAT COMMISSION PAYMENTS HAVE BEEN FULLY OFFERED TO TAX IN THE IR PERSONAL INCOME TAX RETURNS. THIS IS IN LINE WITH SECTION 191 OF THE ACT WHICH PROVIDES FOR DIRECT TAX PAYMENT WHERE THERE ARE NO TDS PROVISIONS. IN RESPECT OF BALANCE SUM OF RS . 12 LACS PAID TO THE INSTITUTIONAL SHAREHOLDERS I.E LIC, GIC AND SPECIFIC UNDERTAKING OF UNIT TRUST OF INDIA, IN RESPECT OF THE NOMINEE DIRECTORS, THERE CANNOT BE ANY S COPE FOR TDS EVEN OTHERWISE, SINCE THE INDIVIDUAL DIRECTORS HAVE NOT RECEIVED ANY PAYMENTS. IN FACT, THE SAID INDIVIDUALS WERE REPRESENTING THEIR RESPECTIVE INST ITUTIONS AS NOMINEE DIRECTORS BY VIRTUE OF THE SHAREHOLDING OF THE SAID BODIES IN THE ASSESSEE COMPANY. ACCORDINGLY, IT WAS ARGUED THAT PAYMENTS MADE TO THE CONCERNED INSTITUTIONS BY NO STRETCH OF IMAGINATION WOULD FALL WITHIN THE SCOPE OF SECTION 194H O R SECTION 194J OF THE ACT. THE LD CIT(A) HOWEVER CONCLUDED THAT THE PROVISIONS OF EXPLANATION TO SECTION 194H DEFINING THE TERM COMMISSION OR BROKERAGE IS VERY WIDE AND BROADER INTERPRETATION IS TO BE GIVEN TO THE SAME AND HENCE THE SUBJECT MENTIONED 11 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED PAY MENTS WOULD FALL UNDER THE AMBIT OF SECTION 194H OF THE ACT. ACCORDINGLY, HE UPHELD THE ORDER OF THE LD AO IN THIS REGARD. AGGRIEVED, THE ASSESSEE IS IN APPEAL BE FORE US ON THE FOLLOWING GROUND : - (3) COMMISSION TO NON - WHOLE TIME DIRECTORS DISALLOWED UN DER SECTION 40(A)(IA): RS.24,00,000/ - FOR THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN DISALLOWING THE DOMESTIC PAYMENT OF COMMISSION TO THE NON - WHOLE TIME DIRECTORS UNDER SECTION 40(A)(IA) ALTHOUGH THERE ARE NO PROVISIONS FOR DEDUCTION OF TDS UNDER THE INCOME TAX ACT. FOR THAT THE LEARNED C IT(A) ERRED IN STATING THAT TDS PROVISIONS OF SECTION 194H FOR PAYMENT OF COMMISSION ARE APPLICABLE IGNORING THE PROVISIONS OF THE INCOME TAX LAW. FOR THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE IN RESPECT OF RS.12,00,000/ - (INCL UDED IN THE TOTAL PAYMENT OF RS.24,00,000/ - ) CREDITED/PAID TO INSTITUTIONAL SHAREHOLDERS IN RESPECT OF THREE(3) NOMINEE DIRECTORS ALTHOUGH THE PAYMENTS WERE NOT MADE TO THE INDIVIDUALS CONCERNED. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSE SSING OFFICER ERRED IN MAKING THE SAID DISALLOWANCE UNDER THE INCOME TAX LAW. RELIEF PRAYED : THE DISALLOWANCE OF RS.24,00,000/ - SHOULD BE DELETED. 4.2. THE LD AR ARGUED THAT THIS PAYMENT HAS BEEN BROUGHT WITHIN THE AMBIT OF SECTION 194J OF THE ACT ONLY WITH EFFECT FROM 1.7.2012 AND HENCE NOT APPLICABLE FOR THE EARLIER YEARS. HE STATED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE F OR THE ASST . YEAR 2007 - 08 IN ITA NO. 919/KOL/2011 DATED 18 .11.2011. IN RESPONSE TO THIS , THE LD DR VEHEMENTLY RELIED ON THE ORDER OF THE LD CIT(A) . 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE ISSUE UNDER DISPUTE IS COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE FOR THE ASST YEAR 2007 - 08 IN ITA NO. 919/KOL/2011 DATED 18.11.2011, WHEREIN IT WAS HELD AS BELOW: - 12 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED 10. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSEE CO MPANY HAS PAID A SUM OF RS.33,67,671/ - AS COMMISSION TO TEN NON - WHOLE TIME DIRECTORS I.E. NON - EXECUTIVE DIRECTORS OUT OF WHICH RS.8 LAC WAS PAID TO TWO FOREIGN DIRECTORS AND TAX WAS DEDUCTED U/S. 195 OF THE ACT. ON THE BALANCE RS.25,67,671/ - NO TDS WAS DE DUCTED AND AO DISALLOWED THIS EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT . ACCORDING TO ASSESSEE, THESE PAYMENTS COMPRISED TO INSTITUTIONAL SHAREHOLDERS I.E. LICI, GIC AND UT I FOR A SUM OF RS.12 LAC IN RESPECT OF THREE NOMINEE DIRECTORS AND BALANCE RS.13,67,671/ - WAS PAID TO REMAINING FOUR INDIVIDUAL DIRECTORS. IT WAS CLAIMED THAT NON - EXECUTIVE DIRECTORS ARE ONLY MEMBERS OF BOARD OF DIRECTORS AND HAVE NO POWER EXCEPT AS DELEG ATED TO THEM BY THE BOARD OR VESTED IN THEM BY THE ARTICLE OF ASSOCIATION OF THE COMPANY. ACCORDING TO ASSESSEE, SUCH GENERAL FUNCTION CANNOT CONSTITUTE ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICE WITHIN THE SCOPE OF SECTION 194J OF THE ACT. EVEN THESE FUNCTIONS DO NOT FALL UNDER THE PROVISIONS OF SECTION 194H OF THE ACT, REASON BEING THESE COMMISSION PAYMENTS DO NOT FALL WITHIN THE DEFINITION OF COMMISSION AS GIVEN IN THE EXPLANATION TO SECTION 194H OF THE ACT. AS LD. COUNSEL FOR THE ASSESSEE CITED BEFORE US THAT THIS ISSUE IS COVERED BY THE DECISION OF JURISDICTIONAL TRIBUNAL IN THE CASE OF JA HANGIR BIRI FACTORY PVT. LTD. VS. DCIT 7 ITA 919/K/2011 ITC LIMITED . A.Y.07 - 08 (2009) 126 TTJ 567 (KOL), WHEREIN THE ISSUE OF TDS ON DIRECTORS' COMMISSION WAS DECIDED VIDE PARA 8 TO 12 AS UNDER: 8. AS REGARDING THE SECOND ISSUE, I.E. COMMISSION PAYMENT TO DIRECTORS AMOUNTING TO RS.5,94,036, THE LEARNED CIT(A) HAS DELETED THE SAME BY OBSERVING AS UNDER: 'I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE AUTHORISED REPRESENTATIVE AND PERUSED THE A SSESSMENT ORDER. ON CAREFUL CONSIDERATION OF THE RELEVANT FACTS, I AM OF THE OPINION THAT THE 'COMMISSION' PAID TO THE DIRECTORS IS NOT THE NATURE OF 'COMMISSION OR BROKERAGE' AS IS ENVISAGED IN S. 194H , NOR AS 'FEES FOR PROFESSIONAL OR TECHNICAL SERVICES' CONSIDERED IN S. 194J OF THE ACT. THEREFORE, THERE WAS NO JUSTIFICATION FOR DISALLOWING THE CLAIM FOR COMMISSION PAYMENT TO DIRECTORS, UNDER S. 40(A)(IA) OF THE ACT, WHICH IS OTHERWISE AN ALLOWABLE BUSINESS EXPENDITURE. IT IS A DIFFERENT MATTER THAT ACTUALLY 'COMMISSION' SHOULD ALSO HAVE BEEN INCLUDED WITHIN 'SALARY' PAYABLE TO THE DIRECTORS AND TA XES SHOULD HAVE BEEN DEDUCTED AT SOURCE THEREFROM. BUT THAT ISSUE IS NOT RELEVANT TO DETERMINE THE PRESENT ISSUE OF DISALLOWABILITY OF THE PAYMENT UNDER CONSIDERATION IN TERMS OF THE PROVISIONS OF S. 40(A)(IA) OF THE ACT. ACCORDINGLY, THE DISALLOWANCE MADE BY THE AO IS DELETED. HOWEVER, THE AO MAY CONSIDER THE COMMISSION PAYMENT AS SALARY INCOME OF THE DIRECTORS AND TAKE SUITABLE ACTION FOR NON - DEDUCTION OF TAX THEREFROM IN CASE OF THE ASSESSEE.' 9. AGGRIEVED BY THIS, NOW THE REVENUE IS IN APPEAL BEFORE US. 10. AT THE TIME OF HEARING BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE, APPEARING ON BEHALF OF THE REVENUE, HAS HEAVILY RELIED ON THE ORDERS OF THE AO AND CONTENDED THAT ON THIS ISSUE THE LEARNED CIT(A) IS NOT JUSTIFIED IN DELETING THE SAME BY OBSERVING THAT THE COMMISSION PAID TO THE DIRECTORS IS NOT IN THE NATURE OF COMMISSION OR BROKERAGE AS ENVISAGED UNDER S. 194H NOR AS FEES FOR PROFESSIONAL OR TECHNICAL SERVICES CONSIDERED IN S. 194J OF THE ACT. THEREFORE, HE SUPPORTED THE ORDERS OF THE AO. 11. ON THE OTHER HAND, THE LEARNED COUNSEL, APPEARING ON BEHALF OF THE ASSESSEE, HAS SUPPORTED THE ORDERS OF THE LEARNED CIT(A) AND STATED THAT THE DIRECTORS HAVE BEEN PAID COMMISSION, IN ADDITION TO THE SALARIES AND OTHER PERQUISITES. HENCE, THE DIRECTION OF THE LEARNED CIT(A) ON THIS ISSUE IS IN ACCORDANCE WITH LAW. THEREFORE, HE REQUEST ED THAT THE SAME MAY BE UPHELD. 13 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED 12. AFTER HEARING THE RIVAL SUBMISSIONS AND ON CAREFUL PERUSAL OF THE MATERIALS AVAILABLE ON RECORD AND TAKING INTO CONSIDERATION THAT THE ASSESSEE COMPANY HAS PAID THIS COMMISSION TO THE DIRECTORS AS PER THEIR TERMS OF EM PLOYMENT FOR THE WORK DONE IN THEIR CAPACITY AS WHOLE - TIME DIRECTORS, THIS COMMISSION SHOULD HAVE BEEN TREATED AS AN INCENTIVE IN ADDITION TO SALARY, BONUS AND OTHER PERQUISITES. THEREFORE, IN OUR CONSIDERED OPINION, THE LEARNED CIT(A) IS JUSTIFIED IN RECO RDING THE SAME AS NOT COMING WITHIN THE PURVIEW OF COMMISSION OR BROKERAGE AS DEFINED IN S. 194H NOR A FEE FOR PROFESSIONAL OR TECHNICAL SERVICES AS DEFINED IN S. 194J OF THE IT ACT. THEREFORE, WE FIND NO INFIRMITY IN THE ORDERS OF THE LEARNED CIT(A) ON THIS ISSUE. THEREFORE, THIS GROUND OF THE REVENUE IS DISMISSED.' RESPECTFULLY FOLLOWING THE VIEW TAKEN BY JURISDICTIONAL TRIBUNAL IN THE CASE OF JAHA NGIR BIRI FACTORY PVT. LTD. (SUPRA), WE ALLOW THE CLAIM OF ASSESSEE. WE ALSO FIND THAT THE SUBJECT MENTIONED PAYMENTS HAVE BEEN BROUGHT WITHIN THE AMBIT OF SECTION 194J OF THE ACT ONLY WITH EFFECT FROM 1.7.2012 AND HENCE THE SAME CANNOT BE MADE APPLICABL E FOR EARLIER YEARS. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THIS TRIBUNAL, WE ALLOW THE GROU ND NO. 3 RAISED BY THE ASSESSEE . 5. ADDITION TOWARDS RECEIPT FROM ELEL HOTEL AND INVESTMENTS LTD GROUND NO. 2 IN ITA NO. 336/KOL/2011 IN REVENUE APPEAL THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE ACQUIRED THE RIGHT TO OPERATE THE HOTEL SEAROCK, LANDS END, BANDSTAND, BANDRA, MUMBAI 400050 BY VIRTUE OF AN OPERATING LICENSE AGREEMENT DATED 3.5.1986 WITH ELEL HOTELS AND INVESTMENTS LTD (HE REINAFTER REFERRED TO AS ELEL) WHO OWNED THE HOTEL. NO NON - REFUNDABLE PAYMENT WAS MADE BY THE ASSESSEE AT THE TIME OF ENTERING INTO AGREEMENT BUT ELEL WOULD RECEIVE 23% OF GROSS TURNOVER FROM THE HOTEL OPERATION AS ITS SHARE OF INCOME EVERY YEAR. TO RESO LVE VARIOUS DISPUTES ARISING OUT OF THE AFORESAID 14 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED OPERATING LICENSE ARRANGEMENTS DATED 3.5.1986, THE ASSESSEE ENTERED INTO A SETTLEMENT AGREEMENT DATED 11.5.2005 WITH ELEL. SIMULTANEOUSLY CONSENT TERMS WAS SIGNED BY BOTH ASSESSEE AND ELEL BEFORE THE ARB ITRATOR ON 11.5.2005 AND IN PURSUANCE OF THE SETTLEMENT AGREEMENT, ASSESSEE RECEIVED A SUM OF RS . 43.10 CRORES AND IT IN TURN HANDED OVER THE OPERATION OF HOTEL SEAROCK TO ELEL. THE ABOVE AMOUNT OF RS . 43.10 CRORES INCLUDED SUM OF RS.32,41,96,977/ - PAID T O THE ASSESSEE COMPANY BY ELEL WHICH THE ASSESSEE STATED THAT IT WAS RECEIVED FOR RELINQUISHMENT OF RIGHTS TO OPERATE THE HOTEL UNDER THE OPERATING LICENSE AGREEMENT. THE ASSESSEE TREATED THIS AMOUNT OF RS . 32,41,96,977/ - AS LONG TERM CAPITAL GAIN AND OF FERED THE SAME IN THE RETURN OF INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE RECEIPT OF RS.32,41,96,977/ - SHOULD NOT BE CONSIDERED AS BUSINESS INCOME. THE ASSESSEE FILED A DETAILED REPLY ON 18.11.2009 AND ON SUBSEQUENT DATES. THE ASSESSEE CL AIMED THAT THE RIGHT TO OPERATE HOTEL SEAROCK, THE SUBJECT MATTER OF REFERENCE FOR THIS PURPOSE, WHICH GOT VESTED IN ITC LTD B Y VIRTUE OF THE OPERATING LICENS E AGREEMENT DATED 3.5.1986 WAS A CAPITAL ASSET IN TERMS OF SECTION 2(14) OF THE ACT. IT FURTHER S TATED THAT SECTION 2(47)(I) OF THE ACT STATES THAT TRANSFER IN RELATION TO A CAPITAL ASSET INCLUDES THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASSET. THE ASSESSEE HAD HELD THE SAID RIGHT TO OPERATE THE HOTEL FOR A PERIOD OF 19 YEARS. ACCORDINGLY T HE SAID RIGHT / ASSET IS A LONG TERM CAPITAL ASSET IN THE HANDS OF THE ASSESSEE AS PER SECTION 2(29A) READ WITH SECTION 2(42A) OF THE ACT ON THE BASIS OF THE PERIOD OF HOLDING OF THE SAID RIGHT. FURTHER THE GAIN ARISING FROM THE TRANSFER OF A RIGHT / ASSE T IS A LONG TERM CAPITAL GAIN IN TERMS OF SECTION 2(29B) OF THE ACT. THE ASSESSEE ALSO STATED THAT SINCE NO CONSIDERATION WAS PAID BY IT TO ELEL FOR ACQUIRING THE RIGHT TO OPERATE THE HOTEL SEAROCK AT ITS INCEPTION, THE COST OF ACQUISITION OF THE SAID RIG HT HAD BEEN CONSIDERED AS NIL AND THE ENTIRE AMOUNT OF RS . 32,41,96,977/ - RECEIVED BY IT AGAINST THE RELINQUISHMENT OF THE SAID RIGHT WAS CORRECTLY OFFERED TO TAX AS LONG TERM CAPITAL GAIN. 15 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED 5.1. THE LD AO OBSERVED THAT THE PROPERTY UNDER CONSIDERATION AS CLAIMED BY THE ASSESSEE IS ITS RIGHT TO OPERATE HOTEL SEAROCK. THE ASSESSEE NEVER HAD ANY OWNERSHIP RIGHT IN HOTEL SEAROCK. NOR DID IT PAY ANY NON - REFUNDABLE AMOUNT AT THE TIME OF ENTERING INTO THE AGREEMENT DATED 3.5.1986. THE OWNERSHIP OF THE H OTEL ALWAYS REMAINED WITH ELEL THROUGHOUT THE PERIOD WHEN THE SAID HOTEL WAS BEING RUN BY THE ASSESSEE. THE ASSESSEE WAS ONLY ALLOWED TO OPERATE THE HOTEL SEAROCK AS PER THE TERMS OF AGREEMENT WHICH INCLUDED PAYMENT OF 23% OF GROSS TURNOVER OF THE SAID HOTEL TO ELEL EVERY YEAR. SO WHEN THE SAID HOTEL WAS CEASED TO BE OPERATED BY THE ASSESSEE, NO TRANSFER IN RELATION TO A CAPITAL ASSET TOOK PLACE AS NO RIGHT TO CARRY ON THE BUSINESS AS SUCH WAS CONFERRED ON THE ASSESSEE AT THE TIME OF ENTERING INTO THE AGREEMENT DATED 3.5.1986 SO AS TO BRING THE TRANSACTION WITHIN THE AMBIT OF CAPITAL GAIN. 5.2. THE LD AO FURTHER OBSERVED THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS EVEN NOT COVERED UNDER THE HEAD CAPITAL GAINS AS PER CLAUSE (I) OF FIRST PROVISO BELOW SECTI ON 28(VA) OF THE ACT. THE ASSESSEE HAS NOT TRANSFERRED ANY RIGHT TO CARRY ON ANY BUSINESS TO ELEL. THE WORD RIGHT INHERENTLY MEANS THAT A PERSON HAS ELEMENT OF DISCRETION ATTACHED WITH THE CONCERNED PROPERTY. THE ASSESSEE HAD NO OPTION TO TRANSFER T HE BUSINESS OF RUNNING OF HOTEL SEAROCK TO ANY OTHER PARTY EVEN IF IT WANTED. IT HAD NO OWNERSHIP OVER THE PROPERTY AND THE ASSESSEE HAD TO ACT AS PER THE STRICT TERMS OF THE AGREEMENT WHICH IS EVIDENT FROM SOME CLAUSES IN THE AGREEMENT. THE LD AO OBSERV ED THAT VARIOUS DISPUTES AROSE BETWEEN THE ASSESSEE AND ELEL IN RELATION TO / CONCERNING THE HOTEL AND / OR THE OPERATING LICENSE IN RESPECT OF WHICH SUIT NO. 3885 OF 1993, SUIT NO. 3886 OF 1993 , SUIT NO. 1877 OF 1995 AND SUIT NO. 3832 OF 1995 WERE FILED BEFORE THE HONBLE HIGH COURT OF BOMBAY. AS PER THE SETTLEMENT AGREEMENT, THE ASSESSEE WOULD PROMPTLY WITHDRAW UNCONDITIONALLY AND WITH NO ORDER AS TO COSTS SUIT NO. 3886 OF 1993 AND SUIT NO. 1877 OF 1995 AND ELEL WOULD PROMPTLY WITHDRAW UNCONDITIONALLY AND 16 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED WITH NO ORDER AS TO COSTS SUIT NO. 3885 OF 1993 AND SUIT NO. 3832 OF 1995 ON THE FILES OF HONBLE HIGH COURT OF BOMBAY. HE HELD THAT THE ABOVE COURT CASES AROSE IN RELATIO N TO/CONCERNING THE HOTEL AND/ OR THE OPERATING LICENSE WHICH MEANS THAT THE ABOV E COURT - CASES AROSE OUT OF THE BUSINESS ACTIVITY OF THE ASSESSEE IN RELATION TO HOTEL SEAROCK AND THE AMOUNT RECEIVED BY THE ASSESSEE COMPANY IS ALSO A RECEIPT ARISING FROM THE BUSINESS ACTIVITY. SO THE SUM OF RS . 32,41,96,977/ - IS CHARGEABLE TO TAX AS B US INESS INCOME. HE FURTHER OBSERVED THAT HOTEL SEAROCK WAS OPERATED BY THE ASSESSEE AS LICENSEE AND ALL RECEIPTS FROM THIS HOTEL WERE CREDITED TO THE PROFIT AND LOSS ACCOUNT. SO WHEN THE ASSESSEE RECEIVES SOME AMOUNT FOR HANDING OVER THE OPERATION OF TH E SAID HOTEL BACK TO ITS RIGHTFUL OWNER, THEN THE AMOUNT SO RECEIVED WILL DEFINITELY BE BUSINESS INCOME. 5.3. THE LD CIT(A) HELD THAT THE RIGHT TO OPERATE HOTEL SEAROCK WAS A LONG TERM CAPITAL ASSET IN TERMS OF THE PROVISIONS OF SECTION 55(2) AND ALSO SECTION 2(29A) READ WITH SECTION 2(42A) OF THE ACT. THE R ELINQUISHMENT OF THE SAID RIGHT , RESULTED IN TRANSFER OF A CAPITAL ASSET IN ACCORDANCE WITH SECTION 2(47)(I) OF THE ACT LIABLE TO TAX UNDER THE HEAD LONG TERM CAPITAL GAINS. THIS WAS, THEREFORE, CO RRECTLY OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS; BY THE ASSESSEE IN LINE WITH THE PROVISIONS OF THE ACT AND THE LD AO WAS NOT JUSTIFIED IN TREATING THE SAME AS BUSINESS INCOME. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND : - 2. THAT THE LD. CLT{A} HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY TREATING RECEIPT FROM ELEL HOTEL AND INVESTMENTS LTD. FOR RELINQUISHMENT OF THE RIGHT TO OPERATE THE HOTEL SEA ROCK AS LONG TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME. 5.4. THE LD DR VEHEMENTLY RELIED ON THE ORDER OF THE LD AO. IN RESPONSE TO THIS, THE LD AR REFERRED TO THE RELEVANT PAGES OF THE PAPER BOOK CONTAINING THE OPERATING LICENSE AGREEMENT DATED 3.5.1986 ENCLOSED IN PAGES 15 TO 36 OF THE 17 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED PAPER BOOK WHEREIN HE SPECIFICALLY REFERRED TO ARTICLE II IN PAGE 20 OF THE PAPER BOOK WHICH READS AS UNDER : - 2.2. IT IS HEREBY EXPRESSLY AGREED AND UNDERSTOOD BY THE PARTIES THAT THIS AGREEMENT SHALL AND IS MEANT TO CONFER FULL AND UNFETTERED RIGHT TO ITC TO OPERATE THE SA ID HOTEL SUBJECT TO NO BREACH OF ANY OF THE TERMS ON THE PART OF ITC UNDER THIS AGREEMENT. EHIL HEREBY IRREVOCABLY DURING THE SUBSISTENCE OF THIS AGREEMENT OR ANY RENEWAL THEREOF, AUTHORIZES ITC TO DO AND EXECUTE ALL SUCH ACTS, DEEDS, MATTERS, THINGS AND D OCUMENTS TO CONDUCT AND OPERATE THE SAID HOTEL, THE INTENTION BEING THAT ITC SHALL HAVE AN UNFETTERED RIGHT TO RUN THE SAID HOTEL, SO LONG AS ITC DOES NOT COMMIT ANY BREACH OR DEFAULT OF ANY TERMS AGREED UNDER THESE PRESENTS. 2.3. EHIL SHALL EXECUTE FROM TIME TO TIME OR AS MAY BE REQUIRED BY ITC ONE OR MORE SPECIFIC POWERS OF ATTORNEY OR SUCH OTHER DOCUMENTS OR INSTRUMENTS AS ITC MAY REQUIRE IN ORDER TO CONDUCT, OPERATE AND RUN THE SAID HOTEL. ITC HEREBY INDEMNIFIES AND KEEPS EHIL INDEMNIFIED AGAINST ANY LOSS OR DAMAGE EHIL MAY SUSTAIN OR ANY COSTS, CHARGES AND EXPENSES EHIL MAY SUFFER AS A RESULT OF ANY IRREGULAR OR ILLEGAL OR MALA FIDE EXERCISE OF THE POWERS IN THE POWER OF ATTORNEY TO BE EXECUTED BY EHIL IN FAVOUR OF ITC. 5.4.1. HE ALSO REFERRED TO SETTLEMENT AGREEMENT (ENCLOSED IN PAGES 37 TO 49 OF PAPER BOOK) DATED 11.5.2005 BETWEEN ASSESSEE AND ELEL BY REFERRING TO CLAUSE 4 CONSENT TERMS IN PAGE 41 OF THE PAPER BOOK AS BELOW: - CONSENT TERMS 4. THE PARTIES SHALL PROMPTLY SIGN THE TERMS SET OUT I N ANNEXURE A (THE CONSENT T ERMS) AND WITH DILIGENCE REQUEST AND OBTAIN THE AWARD FROM THE ARBITRATOR. THE TERMS OF ANNEXURE A SHALL FORM AN INTEGRAL PART OF THIS SETTLEMENT AGREEMENT. 5.4.2. HE THEN REFERRED TO CONSENT TERMS IN ANNEXURE A AT PAGE 54 OF THE PAPER BOOK TO CLAUSE N THEREON WHICH READS AS BELOW: - N. ON OR BEFORE THE EXECUTION HEREOF ELEL HAS PAID TO ITC AND ITC HAS RECEIVED FROM ELEL : 18 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED (I) THE SUM OF RS 7.75 CRORES AS AND BY WAY OF REFUND OF INTEREST FREE SECURITY DEPOSIT UNDER THE OP ERATING LICENCE ; (II) THE SUM OF RS. 2.29 CRORES AS AND BY WAY OF REIMBURSEMENT OF EXPENSES; (III) THE SUM OF RS 64 LAKHS BY WAY OF REIMBURSEMENT OF THE COST OF STORES AS SET OUT IN ANNEXURE C HELD BY ITC FOR THE PURPOSES OF THE HOTEL; (IV) THE SUM OF RS 32.42 CRORES AS AND BY WAY OF RELINQUISHMENT OF RIGHTS TO OPERATE THE HOTEL UNDER THE OPERATING LICENCE . 5.4.3. LATER HE PLACED RELIANCE ON THE DECISION OF THE HONBLE MADHYA PRADESH HIGH COURT , INDORE BENCH , IN THE CASE OF CIT VS SMT LAXMIDEVI RATANI REPORTED IN (2005) 296 ITR 363 (MP ) AND HONBLE SUPREME COURT IN THE CASE OF OBEROI HOTEL (P) LTD VS CIT REPORTED IN (1999) 236 ITR 903 (SC) IN SUPPORT OF HIS CONTENTIONS. 5.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABL E ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE IN THIS REGARD. THE FACTS STATED HEREINABOVE REMAIN UNDISPUTED AND HENCE THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY. THE ONLY DISPUTE IS WHETHER THE RELINQUISHMENT OF A RIGHT TO OPERATE TH E HOTEL SEAROCK COULD BE CONSTRUED AS RELINQUISHMENT OF A CAPITAL ASSET SO AS TO FALL WITHIN THE AMBIT OF CAPITAL GAIN. WE HOLD THAT RIGHT TO OPERATE THE HOTEL UNDER OPERATING LICENCE AGREEMENT DATED 3.5.1986 WHEREIN THE ASSESSEE HAS BEEN GIVEN UNFETT ERED POWERS TO OPERATE THE HOTEL IN ANY MANNER IN WHICH IT FINDS SUITABLE. THIS RIGHT , IN OUR CONSIDERED OPINION, IS A CAPITAL ASSET WITHIN THE MEANING OF SECTION 2(14) OF THE ACT. HENCE RELINQUISHMENT OF SUCH RIGHT WOULD ONLY RESULT IN TRANSFER U/S 2(4 7) OF THE ACT AND HENCE THE RESULTANT GAIN THEREON WOULD ONLY FALL UNDER THE AMBIT OF CAPITAL GAIN. SINCE THE ASSESSEE HAS BEEN USING THE SAID RIGHT FROM 1986 ONWARDS, THE RESULTANT GAIN WOULD ONLY BE LONG TERM CAPITAL GAIN. MOREOVER, THE ASSESSEE HAD ENTERED INTO A SETTLEMENT 19 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED AGREEMENT DATED 11.5.2005 IN ORDER TO GIVE QUIETUS TO VARIOUS DISPUTES AMONG THE ASSESSEE AND ELEL WITH THE ASSISTANCE OF AN ARBITRATOR AND THE SAID ARBITRATOR HAD DULY PASSED AN AWARD WHEREIN THE ASSESSEE WAS MADE TO RELINQUISH ITS RIGHT TO OPERATE THE HOTEL BY RECEIVING A CONSIDERATION OF RS. 32.42 CRORES AND BOTH THE PARTIES UNCONDITIONALLY WITHDRAWING THEIR RESPECTIVE CASES FILED BEFORE THE HONBLE BOMBAY HIGH COURT. HENCE WE HOLD THAT THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE PURSUANT TO THIS SETTLEMENT AGREEMENT IN THE SUM OF RS. 32.42 CRORES FOR RELINQUISHING ITS CAPITAL ASSET (I .E. RIGH T TO OPERATE THE HOTEL) IS TO BE TAXED ONLY AS LONG TERM CAPITAL GAIN. WE FIND THAT THE RELIANCE PLACED ON THE DECISION OF THE HON BLE MADHYA P RADESH HIGH COURT, INDORE BENCH SUPRA IS WELL FOUNDED WHEREIN IT WAS HELD THAT : - 14. THE EXPRESSION PROPERTY OF ANY KIND USED IN SECTION 2(14) IS OF WIDE IMPORT. WHEN WE READ THIS EXPRESSION ALONG WITH EXPRESSION DEFINED IN SECTION 2(47)( II ) I.E., EXTINGUISHMENT OF ANY RIGHTS THEREIN, WE HAVE NO HESITATION IN HOLDING THAT GIVING UP OF RIGHT TO CLAIM SPECIFIC PERFORMANCE BY AN ASSESSEE TO GET CONVEYANCE OF IMMOVABLE PROPERTY IN LIEU OF RECEIVING CONSIDERATION RESULTED IN EXTINGUISHMENT OF RI GHT IN PROPERTY THEREBY ATTRACTING THE RIGOUR OF SECTION 2(14) READ WITH SECTION 2(47) IBID . IN OTHER WORDS, THE ACTION ON THE PART OF AN ASSESSEE IN GIVING UP HER RIGHT TO CLAIM THE PROPERTY AND INSTEAD ACCEPTING THE MONEY COMPENSATION WAS A CLEAR CASE OF RELINQUISHMENT OF A RIGHT IN THE PROPERTY RESULTING IN TRANSFER AS DEFINED IN SECTION 2(47) IBID . WHEN THE LEGISLATURE IN ITS WISDOM DEFINES A PARTICULAR TYPE OF TRANSACTION TO BE IN THE NATURE OF TRANSFER FOR TAXING PURPOSE, THEN THE EFFECT HAS TO BE GIV EN TO SUCH TRANSACTION TO BE IN THE NATURE OF TRANSFER AS DEFINED. THE READING OF DEFINITION OF TRANSFER UNDER SECTION 2(47) IBID, CLEARLY INDICATE THAT THE INTENTION OF LEGISLATURE IS TO INCLUDE SEVERAL KINDS OF TRANSACTION TO BE FALLING IN THE CATEGORY O F TRANSFER FOR THE PURPOSE OF BRINGING THEM IN INCOME - TAX NET UNDER THE INCOME - TAX ACT. INDEED, WHILE INTERPRETING THE WORD TRANSFER AS DEFINED IN SECTION 2(47). THEIR LORDSHIPS OF SUPREME COURT IN THE CASE OF AHAMAD G.H. ARIFF V. CWT [1970] 76 ITR 471 HAS HELD: '... A TERM OF THE WIDEST IMPORT AND SIGNIFYING EVERY POSSIBLE INTEREST WHICH A PERSON CAN CLEARLY HOLD OR ENJOY.' IN VIEW OF THE AFORESAID FINDINGS AND RESPECTFUL LY FOLLOWING THE JUDICIAL PRECEDENT RELIED UPON HEREINABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE 20 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED LD CIT ( A ) IN THIS REGARD. ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE REVENUE IS DISMISSED. 6. DISALLOWANCE OF DEDCUTION U/S 80IA OF THE ACT IN RESPECT OF CAPTIVE POWER GROUND NO. 3 IN ITA NO. 336/KOL/2011 IN REVENUE APPEAL THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE COMPANY CLAIMED DEDUCTION U/S 80IA OF THE ACT IN RESPECT OF TWO CAPTIVE POWER UNDERTAKINGS AT BHADRACHALAM FACTORY, ANDHRA PRADESH FOR RS 2519.13 LACS AND RS 3081.05 LACS AND ONE AT TRIBENI, WEST BENGAL FOR RS 48.62 LACS RESPECTIVELY. THE ASSESSEE FILED THE FOLLOWING DOCUMENTS ALONG WITH THE RETURN : - A) AUDIT REPORT IN FORM 10CCB FOR THE SAID POWER UNDERTAKINGS ALONG WITH NECESSARY DETAILS IN THE STATUTORY FORMAT B) AUDITED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT C) AUDITED PARTICULARS OF COST AND REVENUE WITH FULL DETAILS D) AUDITED STATEMENT SHOWING MARKET VALUE OF POWER WHICH IS THE APSEB / WBSEB RATES RESPECTIVELY, BASED ON WHICH SECTION 80IA CLAIM WAS COMPUTED. 6.1. THE LD AO DISALLOWED THE ENTIRE DEDUCTION U/S 80IA OF HE ACT FOR THE FOLLOWING REASONS : - A) CAPTIVE POWER UNDERTAKING IS NOT ENTITLED TO THE SAID DEDUCTION SINCE IT HAS SUPPLIED POWER ONLY TO THE PAPER UNDERTAKING AND NOT TO OUTSIDERS. THE ASSESSEE STATED THAT THE CAPTIVE POWER UNDERTAKING (PU I) AT BHADRACHALAM WAS SET UP IN ASST . YEAR 1998 - 99 AND POWER UNDERTAKING II (PU II) WAS SET UP IN ASST . YEAR 2005 - 06. THE CAPTIVE PU II AT TRIBENI WAS SET UP IN ASST . YEAR 2002 - 03. THIS HELPED THE COMPANY IN MANAGING THE PROBLEM OF ACUTE POWER SHORTAGE WITH RESPECT TO SUPPLY OF POWER TO THE PAPER UNDERTAKINGS AND EVER INCREASING POWER COST BY REDUCING THE DRAWAL OF POWER FROM EXTERNAL GOVERNMENTAL SOURCES 21 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED I.E AN DHRA PRADESH STATE ELECTRICITY BOARD (APSEB) AN WEST BENGAL STATE ELECTRICITY BOARD (WBSEB). THE LD AO HELD THAT SINCE THE POWER GENERATED BY THE ASSESSEE IN ITS POWER PLANT HAS BEEN CAPTIVELY CONSUMED BY IT, THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 80IA OF THE ACT BY PLACING RELIANCE ON THE DECISION TAKEN BY HIM IN ASST YEAR 2002 - 03. THE ASSESSEE STATED THAT THIS ISSUE HAS BEEN SUCCEEDED BY THE ASSESSEE UP TO THE LEVEL OF TRIBUNAL. THE LD AO STATED THAT THIS ISSUE IS AGITATED FURTHER BY THE REVEN UE BEFORE THE HONBLE CALCUTTA HIGH COURT AND IT WAS PENDING. IT WAS ALSO STATED THAT THE IDENTICAL ISSUE HAS BEEN HELD IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL FOR ASST . YEARS 2003 - 04 AND 2004 - 05. B) MARKET VALUE ISSUE U/S 80IA(8) OF THE ACT AS STATED IN SECTION 80IA(8) OF THE ACT, THE VALUE TO BE CONSIDERED FOR THE PURPOSE OF DEDUCTION IN CASE OF TRANSFER FROM ONE BUSINESS TO ANOTHER HAS TO BE AT THE MARKET VALUE . IT WAS STATED THAT IN THE CASE OF THIS CAPTIVE POWER UNDERTAKING, ANY POWER WHICH IS TR ANSFERRED HAS TO BE VALUED AT MARKET VALUE. THE ASSESSEE APPLIED THE RATES CHARGED BY THE STATE ELECTRICITY BOARDS AS MARKET VALUE FOR POWER CAPTIVELY CONSUMED IN ITS UNITS FOR BOOKING THE INCOME IN POWER UNDERTAKING AND CONSEQUENTIALLY CLAIMED DEDUCT ION U/S 80IA OF THE ACT THEREON. THE ASSESSEE STATED THAT THIS ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE IN ASST . YEAR 2002 - 03 BY THE ORDER OF THIS TRIBUNAL WHICH BY PLACING RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF THIRU AROORAN SUGARS LTD VS CIT REPORTED IN (1997) 227 ITR 432 (SC) HAD HELD THAT THE MARKET PRICE IN CASE OF A CAPTIVE UNIT SHOULD BE THE PRICE THAT THE ASSESSEE WOULD HAVE PAID TO AN OUTSIDER IF THE SAME COMMODITY / SERVICES WERE TO BE PROCURED BY THE ASSESSEE I.E . THE LANDED COST. IT WAS ALSO STATED THAT THIS ISSUE WAS HELD IN FAVOUR OF THE ASSESSEE FOR ASST . YEAR 2004 - 05 BY THE TRIBUNAL. IT WAS ALSO SUBMITTED THAT PURSUANT TO THE AMENDMENT IN ELECTRICITY ACT 2003, THE ASSESSEE COMPANY HAS THE LIBERTY TO SE LL POWER TO VARIOUS THIRD PARTIES AND IN FACT THE COMPANY HAS STARTED SELLING TO VARIOUS THIRD PARTIES LIKE 22 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED RELIANCE ENERGY TRADING LTD IN SUBSEQUENT YEARS AT HIGHLY REMUNERATIVE PRICES. THE LD AO ACCEPTED ALL THESE FACTS IN HIS ASSESSMENT ORDER. HOWEVER , THE ONLY ISSUE RAISED IN THE ASSESSMENT ORDER RELATE TO THE ASPECT OF EXCLUDING THE COST OF TRANSMISSION AND DISTRIBUTION FR OM THE SAID VALUE FOR ENSURING THAT THE COMPUTATION IS CORRECTLY DONE. IN THIS RESPECT, IT WAS SUBMITTED THAT THE LD AO ERRED IN MAKING THIS ISSUE SINCE TRANSMISSION AND DISTRIBUTION COSTS ARE NOT PART OF THE TARIFF RATE FOR ELECTRICITY OF THE STATE ELECTRICITY BOARD AND THEY ARE BILLED FOR SEPARATELY. 6.2. THE LD CIT(A) BY PLACING RELIANCE ON THE DECISIONS OF THIS TRIBUNAL FOR THE EARLIER YEARS ALLOWED RELIEF BY ALLOWING DEDUCTION U/S 80IA OF THE ACT TO THE ASSESSEE. WITH REGARD TO THE MARKET VALUE ISSUE, HE HELD THAT THE LD AO HAD WRONGLY MADE THE SAID ADJUSTMENT IN THE COMPUTATION SINCE THE TRANSMISSION AND DISTRIBUTION COST S ARE BILLED FOR SEPARATELY BY THE STATE ELECTRICITY BOARDS. THE MARKET VALUE HAS BEEN CALCULATED BY THE ASSESSEE IN LINE WITH THE DECISIONS OF THE CIT(A) AND TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS AND THEREFORE THE ADDITION MADE BY THE LD AO C ANNOT BE SUSTAINED. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND: - 3. THAT THE LD. CIT{A} HAS ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY DELETING THE DISALLOWANCE U/S 80LA MADE BY THE AO WITHOUT CONSIDERING THE FAC T THAT THE ASSESSEE'S CAPTIVE POWER PLANT DOES NOT FULFILL CONDITIONS LAID DOWN IN SECTION 80IA{8} AND SECTION 80IA(1) OF THE ACT TO BE ELIGIBLE FOR DEDUCTION U/S 801A. 6.3. THE LD DR VEHEMENTLY REL IED ON THE ORDER OF THE LD AO. IN RESPONSE TO THIS, THE LD AR STATED THAT THE ISSUE UNDER DISPUTE IS ADDRESSED BY THE HONBLE CALCUTTA HIGH COURT IN ASSESSEES OWN CASE REPORTED IN (2015) 64 TAXMANN.COM 214 (CALCUTTA) VIDE ORDER DATED 1.6.2015 WHEREIN IT WAS HELD THAT SECTION 80IA BENE FIT IS FOR SETTING UP OF AN UNDERTAKING FOR GENERATION OF POWER DURING SPECIFIED PERIOD AND IF SUCH CONDITION IS SATISFIED, DEDUCTION U/S 80IA OF THE ACT CANNOT BE DENIED TO THE ASSESSEE MERELY BECAUSE POWER GENERATED BY THE ASSESSEE IS IN ITS ENTIRETY 23 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED CON SUMED BY OTHER BUSINESS OF THE ASSESSEE AND NOT SOLD TO OUTSIDERS. WITH REGARD TO THE MARKET VALUE ISSUE IN TERMS OF SECTION 80IA(8) OF THE ACT, HE FAIRLY STATED THAT THIS ASPECT OF THE ISSUE HAS BEEN SET ASIDE TO THE LD AO BY THE HONBLE HIGH COURT AND ACCORDINGLY PRAYED FOR SETTING ASIDE OF THE ISSUE BEFORE US TO THE FILE OF THE LD AO TO DECIDE THE MARKET RATES IN THE LIGHT OF DIRECTIONS OF THE HONBLE HIGH COURT. 6.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT WHETHER THE DEDUCTION U/S 80IA OF THE ACT IS ELIGIBLE TO AN ASSESSEE ENGAGED IN GENERATION OF POWER WHICH HAS BEEN CONSUMED IN ITS ENTIRETY BY THE OTHER BUSINESS UNITS OF THE ASSESSEE IS SETTLED BY THE DECISION OF THE HONBLE CALCUTTA HIGH COU RT IN FAVOUR OF THE ASSESSEE BY LAYING EMPHASIS ON THE WORD GENERATIO N OF POWER WHICH IS CONTEMPLATED IN PROVISIONS OF SECTION 80IA OF THE ACT. HENCE THIS ASPECT OF THE ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. WITH REGARD TO THE MARKET VALUE ISSUE, WE FIND THAT THE HONBLE HIGH COURT HAD SET ASIDE TO THE FILE OF THE LD AO BY OBSERVING AS UNDER : - 18. CLAUSE 2 TO THE EXPLANATION HAS BEEN ADDED TO CLARIFY WHAT WAS OBVIOUS ALREADY. THE ASSESSING OFFICER WAS CORRECT IN THE VIEW HE TOOK THAT THE ASSESSEE CAN COMPUTE THE PRICE OF THE ELECTRICITY SOLD TO THE PAPER UNIT AT THE MARKET RATE AND FOR THAT PURPOSE HE ALSO GAVE AN OPPORTUNITY TO ADDUCE EVIDENCE TO THE ASSESSEE. THE ASSESSEE DID NOT, HOWEVER, AVAIL THE SAME AND CONTENTED ITSELF BY DISCLOSING THE PR ICE AT WHICH POWER WAS PURCHASED BY THE PAPER UNIT OF THE ASSESSEE FROM THE ANDHRA PRADESH STATE ELECTRICITY BOARD. THE RATE AT WHICH ELECTRICITY WAS PURCHASED FROM ANDHRA PRADESH STATE ELECTRICITY BOARD BY THE PAPER UNIT OF THE ASSESSEE CAN BY NO MEANS BE THE MARKET RATE AT WHICH THE POWER PLANT OF THE ASSESSEE COULD HAVE SOLD ITS PRODUCTION IN THE OPEN MARKET. IN THE OPEN MARKET THE BUYER WOULD OBVIOUSLY BE A DISTRIBUTION COMPANY OR A COMPANY ENGAGED BOTH IN GENERATION AND DISTRIBUTION. THEREFORE, THE RAT E AT WHICH ELECTRICITY IS SOLD TO ANY SUCH COMPANY CAN ONLY BE THE MARKET RATE CONTEMPLATED BY THE SECTION. THE JUDGMENT IN THE CASE OF THIRU AROORAN SUGARS LTD. ( SUPRA ) HAS NO MANNER OF APPLICATION FOR THE SIMPLE REASON THAT THE COURT IN THAT CASE WAS CON CERNED WITH THE QUESTION AS TO THE MARKET VALUE OF SUGARCANE GROWN BY THE ASSESSEE AT HOME. THE SUPREME COURT WAS OF THE OPINION THAT THE SUGARCANE GROWN AT HOME WOULD BE DEEMED TO HAVE BEEN SOLD TO THE SUGAR MILL AT THE SAME RATE AT WHICH SUGAR CANE WAS P URCHASED BY THE SUGAR MILL. THAT OBVIOUSLY IS CORRECT BECAUSE IF THE SUGARCANE GROWN AT HOME HAD NOT BEEN SOLD TO THE SUGAR MILL OF THE ASSESSEE ITSELF, THE 24 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED SUGARCANE WOULD HAVE BEEN SOLD IN THE OPEN MARKET. THE RATE OF SALE IN THE OPEN MARKET WOULD BE THE SAME AT WHICH SUGARCANE WAS PURCHASED BY THE SUGAR MILL OF THE ASSESSEE. BUT IN THE CASE BEFORE US THE ELECTRICITY GENERATED BY THE ASSESSEE COULD NOT BE SOLD TO ANYONE OTHER THAN A DISTRIBUTION COMPANY OR A COMPANY WHICH IS ENGAGED BOTH IN GENERATION AND DISTRIBUTION. THE RATE AT WHICH ELECTRICITY COULD HAVE BEEN SOLD TO ANY SUCH COMPANY IS NOT THE SAME AT WHICH SUCH COMPANIES SALE ELECTRICITY TO THE CONSUMERS. THE RATE AT WHICH ELECTRICITY CAN BE SUPPLIED TO A CONSUMER BY THE DISTRIBUTION LICENSEE AND TH E RATE AT WHICH THE GENERATING COMPANIES CAN SELL ELECTRICITY TO THE DISTRIBUTION LICENSEE ARE GOVERNED RESPECTIVELY BY SECTIONS 61 AND 62 OF THE ELECTRICITY ACT 2003. THERE IS TARIFF REGULATORY COMMISSION WHICH FIXES BOTH THE RATES FOR SALE AND PURCHASE O F ELECTRICITY BY THE DISTRIBUTION LICENSEE. THERE ARE PROVISIONS IN SECTION 62 SO THAT THE GENERATING COMPANIES CAN RECOVER EXPECTED REVENUE ON THE BASIS OF THE TARIFF FIXED BY THE COMMISSION. THERE ARE SIMILARLY PROVISIONS IN SECTION 61 SO THAT THE DISTRI BUTION LICENSEE CAN DERIVE REASONABLE RETURN. THERE IS THUS AN IN - BUILT MECHANISM TO ENSURE PERMISSIBLE PROFIT BOTH TO THE GENERATING COMPANIES AND THE DISTRIBUTION LICENSEES. THE ASSESSEE'S GENERATING UNIT CANNOT AS SUCH CLAIM ANY BENEFIT UNDER SECTION 80 - IA OF THE I. T. ACT COMPUTED ON THE BASIS OF RATES CHARGEABLE BY THE DISTRIBUTION LICENSEE FROM THE CONSUMER. THE BENEFIT CAN ONLY BE CLAIMED ON THE BASIS OF THE RATES FIXED BY THE TARIFF REGULATION COMMISSION FOR SALE OF ELECTRICITY BY THE GENERATING COM PANIES. 19. THEREFORE, THE VIEW TAKEN BOTH BY THE TRIBUNAL AND THE C.I.T. (A) ON THE BASIS OF THE JUDGMENT OF THIRU AROORAN SUGARS LTD. ( SUPRA ) IS ALTOGETHER INCORRECT. 20. THE JUDGMENT OF THE CHHATTISGARH HIGH COURT IN THE CASE OF GODAWARI POWER & ISPAT LTD. ( SUPRA ) CANNOT BE FOLLOWED FOR THE SAME REASONS. THE JUDGMENT OF THE MADRAS HIGH COURT CITED BY MR. KHAITAN HAS NO MANNER OF APPLICATION BECAUSE THAT JUDGMENT IS BASED ON THE PRINCIPLE THAT MONEY SAVED IS MONEY EARNED. THE PRINCIPLE IS NO DOUBT TRUE BUT THE QUESTION IS, 'WHICH UNIT OF THE ASSESSEE HAS SAVED THE MONEY?' IS IT THE PAPER MANUFACTURING UNIT WHICH SAVED THE MONEY? OR IS IT THE POWER GENERATING UNIT WHICH SAVED THE MONEY? BY INSTALLING POWER GENERATING UNIT THE ASSESSEE HAS BENEFITED ITSELF BY GETTING UNINTERRUPTED SUPPLY OF POWER AND HAS ALSO BENEFITED ITSELF BY GETTING ELECTRICITY AT A LOWER COST WHICH OTHERWISE WAS NOT POSSIBLE. THEREFORE, THE MONEY WAS SAVED BY THE PAPER UNIT AND NOT BY THE ELECTRICITY UNIT. WE ARE AS SUCH UNABLE TO AGRE E WITH THE VIEWS RENDERED BY THE MADRAS HIGH COURT. 21. OUR ATTENTION WAS DRAWN BY MR. KHAITAN TO AN UNREPORTED JUDGMENT OF THIS COURT IN THE CASE OF CIT V. GRAPHITE INDIA LIMITED , WHEREIN THE ASSESSEE HAD COMPUTED THE RECEIPTS FOR CAPTIVELY CONSUMED POWER AT THE RATE AT WHICH IT HAD PURCHASED POWER FROM THE BOARD. THAT APPEAL PREFERRED BY THE REVENUE WAS NOT ADMITTED BY THIS COURT AND WAS DISMISSED AT THE ADMISSION STAGE WITHOUT EXAMINING OF THE MATTER. THEREFORE, THAT JUDGMENT DOES NOT CONSTITUTE A PRECED ENT. ANOTHER JUDGMENT WAS DRAWN TO OUR ATTENTION BY MR. KHAITAN WHICH IS IN THE CASE OF CIT V. KANORIA CHEMICALS & INDUSTRIES LTD. [2013] 2 19 TAXMAN 35( MAG.)/35 25 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED TAXMANN.COM 566 (CALCUTTA) TO WHICH ONE OF US WAS A PARTY (GIRISH CHANDRA GUPTA, J.). THAT JUDGMENT WAS RENDERED ON CONCESSION. THEREFORE, THAT JUDGMENT ALSO DOES NOT CONSTITUTE A PRECEDENT. 25. CONSIDERING THE VIEW WE HAVE TAKEN, FOR ENDS OF JUSTICE THE MATTER SHALL NOW GO BACK TO THE ASSESSING OFFICER. HE SHALL GIVE AN OPPORTUNITY TO THE ASSESSEE TO ADDUCE EVIDENCE AS REGARDS MARKET RATE AT WHICH ELECTRICITY COULD HAVE BEEN SOLD TO THE DISTRIBU TION LICENSEE BY A GENERATING COMPANY. BASED ON SUCH EVIDENCE THE QUANTUM OF BENEFIT UNDER SECTION 80IA SHALL BE WORKED IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE SAME , WE DEEM IT FIT AND PROPER TO SET ASIDE THIS ASPECT OF THE ISSUE (I.E . DETERMIN ATION OF MARKET VALUE ALONE) TO THE FILE OF THE LD AO TO DECIDE THE SAME IN THE LIGHT OF DIRECTIONS OF THE HONBLE CALCUTTA HIGH COURT IN ASSESSEES OWN CASE. ACCORDINGLY, THE GROUND NO. 3 RAISED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 253/KOL/2011 IS ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF THE REVENUE IN ITA NO. 336/KOL/2011 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 22.03. 2017. SD/ - SD/ - [SRI PARTHA SARATHI CHAUDHURY ] [SHRI M. BALAGANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 22.03. 2017 {SC SPS} 26 I.T. A. NO. 253 & 336 /KOL/2011 ASSESSMENT YEARS: 2006 - 07 ITC LIMITED COPY OF THE ORDER FORWARDED TO: 1. APPELLANT/ASSESSEE M/S ITC LIMITED, 37, NEHRU ROAD, KOLKATA - 700 071 2.RESPONDENT DCIT, CIR - 8 , KOLKATA 3. CIT(A) - KOLKATA. 4. CIT , KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR, ITAT, KOLKATA BENCHES