ACIT, Shimla V. M/s Jaiprakash Hydro Power Ltd., Solan

ITA 595/CHANDI/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60857 (ITAT-CHANDIGARH)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-05-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 28-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Keywords: Business income; Depreciation; Business expenditure
• Section: 115JB; 32; 56; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, A.M AND MS. SUSHMA CHOWLA, J M ITAS NO. 594, 595 & 1206/CHD/2012 ASSESSMENT YEAR : 2007-08 TO 2009-10 A.C.I.T. CIRCLE, SHIMLA V M/S JAIPARKASH HYDRO POW ER LTD. JUIT COMPLEX WAKNAGHAT PO DUMERHAR BANI KANDAGHAT DISTT. SOLAN AAACJ 6297 K ITAS NO. 685, 686 & 1125/CHD/2012 ASSESSMENT YEAR : 2007-08 TO 2009 -10 M/S JAIPARKASH HYDRO POWER V A.C.I.T. CIRCLE, SHIM LA LTD. JUIT COMPLEX WAKNAGHAT PO DUMERHAR BANI KANDAGHAT DISTT. SOLAN CROSS-OBJECTIONS NO. 21 & 22/CHD/2012 ARISING OUT OF ITAS NO. 594 & 595/CHD/2012 ASSESSMENT YEAR : 2007-08 & 2008- 09 M/S JAIPARKASH HYDRO POWER V A.C.I.T. CIRCLE, SHIM LA LTD. JUIT COMPLEX WAKNAGHAT PO DUMERHAR BANI KANDAGHAT DISTT. SOLAN (APPELLANT) (RESPONDENT) DEPARTMENT BY SMT. JYOTI KUMARI, CIT RESPONDENT BY: SHRI ASHWANI KUMAR GARG DATE OF HEARING 22.5.2013 DATE OF PRONOUNCEMENT 24.5.2013 O R D E R PER T.R.SOOD, A.M THESE ARE CROSS APPEALS FILED THE REVENUE AND THE ASSESSEE. THESE ARE DIRECTED AGAINST THE ORDER PAS SED BY THE 2 LD. CIT(A), SHIMLA DATED 23.3.2012 AND THE ASSESSEE HAS FIELD CROSS-OBJECTIONS AGAINST THE ORDER OF THE LD. CIT(A ). REVENUES APPEALS 594,595 & 1206/CHD/2012 2. IN THESE APPEALS THE REVENUE HAS RAISED COMMON I SSUES. 3. FIRST COMMON ISSUE IS REGARDING ALLOWING OF DEDU CTION U/S 80IA OF THE ACT IN RESPECT OF INTEREST INCOME WHICH WAS RECEIVED AGAINST LATE PAYMENT FROM CUSTOMERS AND WA S HELD TO BE DERIVED FROM THE BUSINESS INCOME. 4 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSE SSEE HAD RECEIVED A SUM OF RS. 27,43, 88,709/- WHICH WAS REC EIVED AS INTEREST FROM FDRS, TARIFF FILING FEE FROM HPSEB, D AMAGE OF TRANSFER SALE OF SCRAP, INTEREST RECEIVED FROM STAF F AND INTEREST RECEIVED FROM HPSEB ETC. AND DEDUCTION U/S 80IA OF THE ACT WAS CLAIMED ON THESE AMOUNTS. IT WAS HELD THAT THE SE INCOME ITEMS ARE NOT DERIVED FROM ELIGIBLE UNDERTAKING AND ACCORDINGLY DEDUCTION U/S 80IA WAS DENIED. 5 ON APPEAL IT WAS SUBMITTED THAT AS FAR AS INTERES T AMOUNTING TO RS. 24,18,42,351/- WHICH WAS RECEIVED FROM HPSEB ON LATE PAYMENT OF POWER SALES DUES. IT WAS FURTHER POINTED OUT THAT THE SAID INTEREST ACCRUED FROM CON TRACT OF SALE OF POWER DUES AND NOT FROM OTHER SEPARATE CONTRACT AND THEREFORE, SUCH INTEREST SHOULD BE TREATED AS ADDI TION TO THE SALE REVENUE. SUCH INTEREST HAS A DIRECT NEXUS WIT H THE SALE OF POWER AND THEREFORE, HAS DIRECT NEXUS WITH THE REV ENUE DERIVED FROM ELIGIBLE BUSINESS OF POWER GENERATION. 3 6 THE LD. CIT(A) AFTER EXAMINING THE SUBMISSIONS OB SERVED THAT THE INTEREST WAS RECEIVED FROM HPSEB ON ACCOUN T OF DELAYED PAYMENTS OF THE POWER BILLS AND THEREFORE, SUCH INTEREST INCOME IS INEXTRICABLE LINKED TO THE SUPPL Y OF POWER TO HPSEB. THEREFORE, THIS RECEIPT IS DISTINCTLY PART OF SALE REVENUE AND IS DIRECTLY DERIVED FROM THE ELIGIBLE B USINESS OF GENERATION OF POWER. ACCORDINGLY THE RECEIPT OF INT EREST WAS HELD TO BE ELIGIBLE FOR DEDUCTION U/S 80IA OF THE A CT. 7 BEFORE US, THE CIT-D.R STRONGLY RELIED ON THE ORD ER OF ASSESSING OFFICER. SHE ALSO RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN CASE OF PANDIAN CHEMICALS LTD. V. CIT (2003) 262 ITR 278 (S.C) WHEREIN IT WAS HELD THAT T HE INTEREST EARNED CANNOT BE SAID TO HAVE BEEN DERIVED FROM ELI GIBLE BUSINESS. 8 ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE REITERATED THE SUBMISSIONS MADE BEFORE THE FIRST AP PELLATE AUTHORITY AND RELIED ON THE DECISION OF HON'BLE SUP REME COURT IN CASE OF CIT V. GOVINDA CHOUDHURY AND SONS (1993) 203 ITR 881 (S.C). HE ALSO RELIED ON THE DECISION OF HON'B LE GUJARAT HIGH COURT IN CASE OF 283 ITR 403 (GUJ) AND IN CASE OF PHATELA COTGIN INDUSTRIES P. LTD. V CIT (2008) 303 ITR 411( PH). 9 WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY AN D FIND THAT NO DOUBT IN CASE OF PANDIAN CHEMICALS LTD. V. CIT (SUPRA) HON'BLE SUPREME COURT WAS CONCERNED WITH THE ISSUE WHETHER INTEREST WAS RECEIVED ON DEPOSITS OF ELECTRICITY C AN BE SAID TO HAVE BEEN DERIVED FROM INDUSTRIAL UNDERTAKING AND I T WAS OBSERVED THAT SUCH INTEREST INCOME WAS A STEP REMOV ED FROM 4 THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND THER EFORE, DEDUCTION WAS DENIED. HOWEVER, THIS ISSUE CAME UP FOR CONSIDERATION BEFORE VARIOUS HIGH COURTS AND IT WAS POINTED OUT THAT WHEN THE INTEREST IS RECEIVED FROM DELAYED PAYMENT FROM CUSTOMERS THEN IT WOULD HAVE DIRECT NEXUS WITH SUCH SALE AND WOULD BE ELIGIBLE FOR DEDUCTION U/S CHAPTER VI. THIS VIEW WAS ACCEPTED BY HON'BLE GUJARAT HIGH COURT IN CASE OF NIRMA INDUSTRIES LTD. VS. CIT (SUPRA). IN THAT CASE IT WA S HELD AS UNDER. HELD, THAT WHEN ONE READS THE OPENING PORTION OF SE CTION 80-I OF THE ACT IT IS CLEAR THAT THE WORDS USED ARE GRO SS TOTAL INCOME OF AN ASSESSEE INCLUDES ANY PROFIT AND GAINS DERIVED FROM AN INDUSTRIAL UNDERTAKING. ONCE THIS IS THE P OSITION THEN, IN COMPUTING THE TOTAL INCOME OF THE ASSESSEE, A DE DUCTION FROM SUCH PROFITS AND GAINS OF AN AMOUNT EQUAL TO T HE PRESCRIBED PERCENTAGE IS TO BE ALLOWED. THE SAME IT EM OF RECEIPT COULD NOT BE TREATED DIFFERENTLY, ONCE WHIL E COMPUTING THE GROSS TOTAL INCOME AND SECONDLY, AT THE TIME OF COMPUTING DEDUCTION UNDER SECTION 80-I. WHEN THE ASSESSEE ENT ERS INTO A CONTRACT FOR SALE OF ITS PRODUCT IT COULD EITHER ST IPULATE (A) THAT INTEREST AT THE SPECIFIED RATE WOULD BE CHARGED ON THE UNPAID SALE PRICE AND ADDED TO THE OUTSTANDING TILL THE PO INT OF TIME OF REALIZATION, OR (B) THAT IN CASE OF DELAY THE PAYME NT FOR SALE OF PRODUCTS WORTH RS. 100 TO CARRY THE SALE PRICE OF R S. 102 FOR THE FIRST MONTHS DELAY, RS. 104 FOR THE SECOND MON THS DELAY, RS. 106 FOR THE THIRD MONTHS DELAY AND SO ON. IN S UM AND SUBSTANCE THESE ARE ONLY TWO MODES OF REALIZING SAL E CONSIDERATION, THE OBJECT BEING TO REALIZE THE SALE PROCEEDS AT THE EARLIEST AND WITHOUT DELAY. THE PURCHASER PAYS A HIGHER SALE PRICE IF IT DELAYS PAYMENT OF THE SALE PROCEED S. IN OTHER WORDS, THIS IS A CONVERSE SITUATION TO OFFERING A C ASH DISCOUNT. THUS, IN PRINCIPLE, IN REALITY, THE TRANSACTION REM AINS THE SAME AND THERE IS NO DISTINCTION AS TO THE SOURCE. WHILE COMPUTING THE SPECIAL DEDUCTION UNDER SECTION 80-I, INTEREST RECEIVED FROM TRADE DEBTORS TOWARDS LATE PAYMENT OF SALE CON SIDERATION IS TO BE INCLUDED IN THE PROFITS OF THE INDUSTRIAL UNDERTAKING. SIMILARLY HON'BLE PUNJAB & HARYANA HIGH COURT HAS O BSERVED IN CASE OF PHATELA COTGIN INDUSTRIES P. LTD. V CIT (SUPRA) HAS OBSERVED IN PARA 10 AS UNDER: 5 THE INTEREST WHICH IS RECEIVED ON DELAYED PAYMENTS ON ACCOUNT OF SALE TO CUSTOMERS OF MANUFACTURED GOODS CAN CLEARLY BE TERMED TO BE AN INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING AND DISTINCT FROM THE INCOME ON ACCOUNT OF THE INTEREST WHICH HAS BEEN RECEIVED FROM THE FIXED DEP OSIT. FROM THE ABOVE DECISIONS IT BECOMES CLEAR THAT WHEN INTEREST IS RECEIVED ON ACCOUNT OF DELAYED PAYMENTS FROM CUSTO MERS THEN IT WOULD DEFINITELY CONSTITUTE INCOME FROM ELIGIBLE BU SINESS BECAUSE SUCH INTEREST HAS DIRECT NEXUS WITH THE RECEIPT FRO M ELIGIBLE BUSINESS. ACCORDINGLY WE FIND NOTHING WRONG IN TH E ORDER OF THE LD. CIT(A) AND CONFIRM THE SAME. 10 SECOND COMMON ISSUE IS WHETHER THAT THE LD. CIT( A) ERRED IN HOLDING THAT PROVISION OF LEAVE ENCASHMENT IS AS CERTAINED LIABILITY AND THEREFORE, NEED NOT TO BE ADDED BACK TO THE BOOK PROFITS U/S 115 JB OF THE ACT. 11 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSE SSEE HAD MADE PROVISION FOR LEAVE ENCASHMENT AMOUNTING TO RS . 10,29,478/- (TO ASSESSMENT YEAR 2007-08) AND ACCORD INGLY THE ASSESSEE WAS ASKED TO EXPLAIN WHY THIS PROVISION SH OULD NOT BE TREATED AS UNASCERTAINED LIABILITY AND ADDED TO THE BOOK PROFITS U/S 115 JB OF THE ACT. IN RESPONSE IT WAS MAINLY S TATED THAT PROVISION WAS MADE AS PER ACTUARIAL VALUATION AND T HEREFORE, IT CANNOT BE TREATED AS UNASCERTAINED LIABILITY. RELI ANCE WAS PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN CASE OF BHARAT EARTH MOVERS V CIT, 245 ITR 428 (S.C) WHEREI N IT WAS OBSERVED THAT LIABILITY FOR LEAVE ENCASHMENT WAS CE RTAIN THOUGH PERIOD IN WHICH THE LIABILITY WOULD INCUR, IS NOT C ERTAIN BECAUSE LEAVE ENCASHMENT CAN BE SOUGHT FOR BY THE EMPLOYEE EITHER 6 DURING THE YEARS OF SERVICE OR AT THE END OF THE SE RVICE. THE ASSESSING OFFICER DID NOT ACCEPT THE SUBMISSIONS AN D ADDED THE AMOUNT TO THE BOOK PROFIT OF THE ASSESSEE U/S 1 15 JB OF THE ACT. 12 ON APPEAL, SIMILAR SUBMISSIONS WERE MADE BEFORE THE LD. CIT(A) WHO AFTER EXAMINING THE SAME HELD THAT THE P ROVISION FOR LEAVE ENCASHMENT CANNOT BE TREATED AS UNASCERTAINED LIABILITY IN ASSESSMENT YEAR 2004-05. IN THE CURRENT YEAR, T HE LD. CIT(A) FOLLOWING THE ORDER FOR ASSESSMENT YEAR 2004 -05 HAD HELD THAT PROVISION FOR LEAVE ENCASHMENT CANNOT BE HELD TO BE FOR UNASCERTAINED LIABILITY. 13 BEFORE US, THE CIT-D.R RELIED ON THE ORDER OF TH E ASSESSING OFFICER. 14 ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. CIT( A). 15 AFTER HEARING BOTH THE PARTIES WE FIND THAT THE HON'BLE SUPREME COURT IN CASE OF BHARAT EARTH MOVERS V CIT (SUPRA) WHEREIN THE COURT WAS CONSIDERING THE ISSUE WHERE P ROVISION FOR LEAVE ENCASHMENT WAS ALLOWABLE AS ADMISSIBLE DE DUCTION REFERRED TO THE ANOTHER DECISION OF HON'BLE APEX CO URT IN CASE OF METAL BOX COMPANY OF INDIA LTD. V THEIR WORKMEN (1969) 73 ITR 53 (S.C) AND EXTRACTED THE FOLLOWING PRINCIPLES : (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THO UGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDU CTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTI CE AND 7 ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERM ISSIBLY ONLY IN THE CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; (II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS B UT ACCRUED DUE ARE BROUGHT IN FOR INCOME-TAX ASSESSMENT, SO AL SO LIABILITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDITION SUBSEQUENT THE FULFILLMENT OF WHI CH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE L IABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY IN TO A CONTINGENT LIABILITY; (IV) A TRADED COMPUTING HIS TAXABLE PROFITS FOR A P ARTICULAR YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENTS ACTU ALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MAD E IN A SUBSEQUENT YEAR IF IT CAN BE SATISFACTORY ESTIMATED . NO DOUBT THE ABOVE DECISION WAS RENDERED IN THE CON TEXT WHETHER SUCH PROVISION WAS ALLOWABLE AS DEDUCTION U NDER NORMAL PROVISIONS, HOWEVER, THE PRINCIPLES LAID DOW N ABOVE ARE RELEVANT FOR OUR PURPOSE TO UNDERSTAND WHETHER SUCH PROVISION FOR LEAVE ENCASHMENT WOULD CONSTITUTE ASCERTAINED L IABILITY OR NOT. ABOVE PRINCIPLES CLEARLY SHOW THAT THE PROVIS ION FOR LEAVE ENCASHMENT WOULD CONSTITUTE A LIABILITY AND IF THE SAME HAS BEEN DETERMINED ON THE BASIS OF ACTUARIAL VALUATION THEN SAME CANNOT BE CONSIDERED AS UNASCERTAINED LIABILITY. A CCORDINGLY WE FIND NOTHING WRONG IN THE ORDER OF THE LD. CIT(A ) AND CONFIRM THE SAME. 16 THIRD COMMON ISSUE IS WHETHER PROVISION FOR STAF F INCENTIVE IS UNASCERTAINED LIABILITY OR NOT. 17 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASS ESSEE HAS MADE PROVISION FOR INCENTIVE TO STAFF AMOUNTING TO RS. 20,44,086/- (ASSESSMENT YEAR 2007-08) AND OUT OF TH E OPENING 8 BALANCE OF RS. 16,19,073/- A SUM OF RS. 13,18,356/- WAS INCURRED DURING THE YEAR. ACCORDING TO THE ASSESSI NG OFFICER THE LIABILITY WAS UNASCERTAINED AND THEREFORE, THE ASSESSEE WAS ASKED TO EXPLAIN WHY THE SAME SHOULD NOT BE ADD ED TO THE BOOK PROFIT U/S 115 JB OF THE ACT. IN RESPONSE IT WAS MAINLY SUBMITTED THAT THE LIABILITY IS ACCRUED LIABILITY B ECAUSE IT PERTAINED TO THE WORK DONE DURING THE YEAR IN RESPE CT OF WHICH THE COMPANY HAS DECLARED ITS INTENTION TO PAY BY MA KING THE PROVISION IN ACCORDANCE WITH EXISTING POLICY AND SC HEME. THE LIABILITY IS NOT CONTINGENT BECAUSE THE PAYMENT DID NOT DEPEND ON HAPPENING OF ANY FURTHER EVENT. HOWEVER, THE AS SESSING OFFICER DID NOT ACCEPT THE EXPLANATION AND HELD THA T THIS LIABILITY IS UNASCERTAINED LIABILITY AND ACCORDINGL Y THE SAME WAS ADDED TO THE BOOK PROFITS. 18 ON APPEAL BEFORE THE LD. CIT(A), IT WAS MAINLY S UBMITTED THAT STAFF INCENTIVE IS MAINLY GIVEN IN RESPECT OF THE SERVICES RENDERED BY THE EMPLOYEES AND FLOWS FROM THE CONTRA CT OF SERVICE BETWEEN THE EMPLOYEES AND EMPLOYERS. 19 THE LD. CIT(A) AFTER EXAMINING THE SUBMISSIONS O BSERVED THAT (IN ASSESSMENT YEAR 2004-05) THAT STAFF INCENT IVE IS DECLARED IN ACCORDANCE WITH EXISTING POLICIES AND D IRECTLY RELATES TO THE WORK DONE BY THE EMPLOYEES DURING TH E YEAR AND ACCORDINGLY THE SAME WAS HELD TO BE ASCERTAINED LI ABILITY DURING THE YEAR. THE LD. CIT(A) FOLLOWING THE ORDE R FOR ASSESSMENT YEAR 2004-05 HELD THAT THIS AMOUNT PERTA INS TO ASCERTAIN LIABILITY AND CANNOT BE ADDED TO THE BOOK PROFITS U/S 115 JB OF THE ACT. 9 20 BEFORE US, THE LD. DR FOR THE REVENUE SUBMITTED THAT THE FINDINGS HAVE BEEN GIVEN BY THE LD. CIT(A) WITHOUT EXAMINING AND SPECIFYING WHAT WAS THE POLICY IN RESPECT OF S TAFF INCENTIVES. 21 ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE SUBMITTED THAT INCENTIVE HAS BEEN PAID ON PRE-DETER MINED SCHEME FORMULATED BY THE GOVERNMENT. STAFF INCENTIV E IS PAID IN ADDITION TO NORMAL BONUS PAID BY THE COMPANY. T HIS AMOUNT IS PAID TO INCREASE THE EFFICIENCY OF EMPLOYEES. H OWEVER, IN RESPONSE TO QUESTION FROM THE BENCH HE ADMITTED TH AT COPY OF SCHEME WAS NOT ASKED BY THE ASSESSING OFFICER AND W AS NOT FILED BEFORE HIM OR THE LD. CIT(A). 22 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT NO EVIDENCE HAS BEEN FILED BEFORE ASSESSING OFFICER IN RESPECT OF PARTICULAR POLICY FOLLOWED BY THE ASSESSEE-COMPANY IN RESPECT OF STAFF INCENTIVE. THE COPY OF SCHEME HAS ALSO N OT BEEN FILED BEFORE US. HOWEVER, AT THE SAME TIME THE ASSESSING OFFICER ALSO REJECTED THE ISSUE SUMMARILY WITHOUT ASKING FO R THE SCHEME FOR INCENTIVE CLAIMED FROM THE ASSESSEE AND THE LD. CIT(A) HAS ALLOWED THE RELIEF WITHOUT EXAMINING THE SCHEME. THEREFORE, IN THE INTEREST OF JUSTICE, WE SET ASID E THE ORDER OF THE LD. CIT(A) AND REMAND THE MATTER BACK TO THE FI LE OF ASSESSING OFFICER WITH A DIRECTION TO RE-EXAMINE TH E ISSUE AFTER OBTAINING THE SCHEME OF STAFF INCENTIVE FROM THE AS SESSEE. 23 ONE MORE ISSUE HAS BEEN RAISED IN ASSESSMENT YEA R 2009-10 BY THE REVENUE. THE ISSUE PERTAINS TO THE ACTION OF THE LD. CIT(A) IN HOLDING THAT THE ASSESSING OFFICE R WAS NOT 10 RIGHT IN MAKING ADJUSTMENTS FOR WORKING THE BOOK PR OFIT U/S 115 JB OF THE ACT BY ADDING ADVANCE AGAINST DEPRECIATIO N (FOR SHORT AAD) TO THE BOOK PROFITS. 24 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE AO ASKED TO EXPLAIN THE TREATMENT OF ADD AND WHY THE SAME SHOULD NOT BE ADDED TO THE BOOK PROFIT. IN RESPONSE FOLLOWING REPLY WAS GIVEN BY T HE ASSESSEE- COMPANY: JAI PRAKASH HYDRO POWER REPLIED THAT IN TERMS OF S UB SECTION (2) OF SECTION 115JB READ WITH THE EXPLANAT ION TO THE SAID SECTION, THE BOOK PROFIT OF THE ASSESSEE MEANS THE NET PROFIT AS SHOWN IN THE ACCOUNTS PREPARED IN ACCORDA NCE WITH THE PROVISIONS OF PARTS II & III OF SCHEDULE VI OF THE COMPANIES ACT, 1956. THE NET PROFIT SHOWN IN THESE ACCOUNTS CANNOT BE DISTURBED EXCEPT TO THE EXTENT SPECIFIED IN THE EXPLANATION. THE ADVANCE AGAINST DEPRECATION NEITHE R REPRESENTS AN AMOUNT CARRIED TO A RESERVE, NOT A PR OVISION FOR MEETING AN UN-ASCERTAINED LIABILITY. IT REPRESENTS AS ASCERTAINED LIABILITY WHICH IS SHOWN AS DEFERRED R EVENUE FOR THE REASON THAT IT IS REQUIRED TO BE ADJUSTED IN FU TURE AGAINST THE CLAIM FOR DEPRECIATION IN THE YEARS AFTER THE R EPAYMENT PERIOD OF THE LOANS IS OVER. HENCE, THE ADVANCE-AGA INST- DEPRECIATION CAN NEITHER BE ADDED BACK IN COMPUTING THE BOOK PROFIT OF THE ASSESSEE NOR IN COMPUTING ITS TOTAL I NCOME. THE ISSUE HAS ALREADY BEEN DEALT WITH AND DETERMINE D BY THE HONBLE SUPREME COURT IN THE CASE OF NATIONAL HYDRO POWER CORPORATION LTD. VS. CIT 320 ITR 374 (S.C). THE APE X COURT HAS IN THE ABOVE CASE OBSERVED THAT IN ORDER TO MAK E AN ADDITION UNDER CLAUSE (B) OF EXPLANATION 1 TO SECTI ON 115JB, TWO CONDITIONS MUST BE JOINTLY SATISFIED: (A) THERE MUST BE A DEBIT OF THE AMOUNT TO THE PROFIT AND LOSS ACCOUNT; AND (B) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERVE. S INCE THE AMOUNT OF AAD IS REDUCED FROM SALES, THERE IS NOT D EBIT TO THE PROFIT AND LOSS ACCOUNT AND THE AMOUNT DID NOT ENTE R THE STREAM OF INCOME FOR THE PURPOSE OF DETERMINATION O F NET PROFIT AT ALL. HENCE, CLAUSE (B) OF THE EXPLANATION 1 IS N OT APPLICABLE TO AAD. HOWEVER, THE ASSESSING OFFICER DID NOT AGREE WITH T HE SAME AND HE REFERRED TO THE LATTER DECISION OF HON'BLE S UPREME COURT 11 IN CASE OF DYNAMIC ORTHOPEDIC S (P) LTD V CIT, 321 ITR 300 AND ALSO TO THE DECISION OF SPECIAL BENCH OF THE TR IBUNAL AT HYDERABAD IN RAIN COMMODITIES LTD. V DCIT, ITA NO. 673/HYD/2009 DATED 2.7.2010 WHEREIN IT WAS HELD TH AT IF THE ACCOUNTS WERE NOT PREPARED IN ACCORDANCE WITH PROVI SION OF PARTS II & III OF SCHEDULE VI OF COMPANIES ACT THEN SOME ADJUSTMENT CAN BE MADE AND ON THAT BASIS HE ADDED T HIS AMOUNT TO THE BOOK PROFITS. 25 ON APPEAL THE ISSUE WAS DECIDED IN FAVOUR OF TH E ASSESSEE BY FOLLOWING THE DECISION OF HON'BLE SUPRE ME COURT IN CASE OF NATIONAL HYDRO ELECTRIC POWER CORPORATION V CIT, 320 ITR 374. 26 BEFORE US, THE LD. DR FOR THE REVENUE RELIED ON THE ORDER OF ASSESSING OFFICER. 27 ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSES SEE NATIONAL HYDRO ELECTRIC POWER CORPORATION V CIT (SU PRA). 28 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THIS ISSUE WAS DECIDED BY THE LD. CIT(A) IN THE FOLLOWIN G PARAS: THE ISSUE REGARDING THE NATURE OF RECEIPT IN THE FO RM OF AAD HAS ALREADY BEEN DECIDED BY THE HONBLE SUPREME COU RT IN THE CASE OF NHPC VS. CIT 320 ITR 374, WHEREIN IT HAS BE EN HELD BY THE HONBLE COURT THAT AAD IS INCOME RECEIVED IN ADVANCE. IT IS A TIMING DIFFERENCE. IT HAS BEEN FU RTHER HELD BY THE HONBLE SUPREME COURT THAT IN ORDER TO MAKE AN ADDITION UNDER CLAUSE (B) OF EXPLANATION 1 TO SECTION 115 JB , TWO CONDITIONS MUST BE JOINTLY SATISFIED: (A) THERE MUS T BE A DEBIT OF THE AMOUNT TO THE PROFIT AND LOSS ACCOUNT, AND ( B) THE AMOUNT SO DEBITED MUST BE CARRIED TO THE RESERVE. S INCE THE AMOUNT OF AAD IS REDUCED FROM SALES, THERE IS NO DE BIT TO THE PROFIT AND LOSS ACCOUNT AND THE AMOUNT DID NOT ENTE R THE STREAM OF INCOME FOR THE PURPOSES OF DETERMINATION OF NET PROFIT AT ALL. HENCE CLAUSE (B) OF THE EXPLANATION 1 IS NOT 12 APPLICABLE TO AAD. THUS THE HONBLE COURT HAS CLEAR LY ENDORSED THE METHOD OF ACCOUNTING OF THE AAD BY WHI CH IT HAS BEEN REDUCED FROM SALES AND REPRESENTED AS DEFERRE D REVENUE. IT IS THUS ACCEPTED AS AN AMOUNT THAT IS UNDER OBLIGATION, RIGHT FROM INCEPTION, TO GET ADJUSTED I N FUTURE. THE HONBLE COURT HAS ALSO ACKNOWLEDGED THE FACT THAT T HE ASSESSEE CANNOT USE THE AAD FOR ANY OTHER PURPOSE E XCEPT BY WAY OF ITS ADJUSTMENT AGAINST FUTURE DEPRECIATION R ESULTING IN THE REDUCTION OF TARIFF IN FUTURE YEARS. WITH THE H ONBLE SUPREME COURT HAVING ACCEPTED THE POSITION IN PRINC IPLE REGARDING THE EXCLUSION OF THE AAD FROM THE SALES, THE A.O. DOES NOT APPEAR TO BE JUSTIFIED IN STILL INSISTING THAT THE NON- INCLUSION OF AAD IN THE SALE RECEIPTS VITIATES THE AUDITED ACCOUNTS OF HE ASSESSEE. THIS INSISTENCE OF THE A.O . IS IN CLEAR CONTRADICTION OF THE RULING OF THE SUPREME CO URT (SUPRA) AND HENCE HIS ACTION OF ALTERING THE NET PROFIT AS PER THE AUDITED ACCOUNTS OF THE ASSESSEE BY PLACING RELIANC E ON THE DECISION OF THE APEX COURT IN THE CASE OF DYNAMIC O RTHOPEDIC (P) LTD. VS. CIT 321 ITR 300 IS NOT FOUND TO BE IN ORDER. THE ABOVE CLEARLY SHOWS THAT THE ISSUE HAS BEEN DEC IDED ON THE BASIS OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF NATIONAL HYDRO ELECTRIC POWER CORPORATION V CIT (SU PRA). THE DECISION IS DIRECTLY ON THE ISSUE OF ADVANCE AGAINS T DEPRECIATION AND WHETHER THE SAME IS REQUIRED TO BE ADDED U/S 115 JB OF THE ACT TO THE BOOK PROFITS. SINCE THE D ECISION (OR THE LAW LAID DOWN) OF HON'BLE SUPREME COURT IS THE LAW OF LAND AND THEREFORE, WE ARE BOUND TO FOLLOW THE SAME. AC CORDINGLY WE FIND NOTHING WRONG WITH THE ORDER OF THE LD. CIT (A) WHICH HAS BEEN RENDERED ON THE BASIS OF ABOVE DECISION. 29 IN VIEW OF THE ABOVE DISCUSSION ON VARIOUS ISSUE S WHICH HAVE BEEN RAISED BY THE REVENUE IN ALL THE THREE AP PEALS BEFORE US, APPEALS OF THE REVENUE ARE PARTLY ALLOWE D. ITAS NO. 685 & 686/CHD/2012 ASSESSEES APPEALS 30 DURING THE COURSE OF HEARING THE ASSESSEE SOUGHT PERMISSION TO WITHDRAW THESE APPEALS FOR WHICH THE LD. DR FOR 13 THE REVENUE HAD NO OBJECTION. THEREFORE, THESE AP PEALS ARE DISMISSED AS WITHDRAWN. ITA NO. 1125/CHD/2012 ASSESSEES APPEAL CROSS-OBJECTIONS NO. 21 & 22/CHD/2012 31 IN THIS APPEAL AND THE CROSS-OBJECTIONS FIRST CO MMON ISSUE RAISED BY THE ASSESSEE IS REGARDING UPHOLDING OF THE DEDUCTION U/S 80IA OF THE ACT ON ACCOUNT OF INTERE ST INCOME. 32 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFF ICER HELD THAT THE ASSESSEE HAS SHOWN VARIOUS ITEMS INCLUDING INTEREST ON FDRS AS BUSINESS INCOME AND CLAIMED DEDUCTION U/ S 80IA OF THE ACT. IT WAS HELD THAT INTEREST ON FDRS COULD N OT BE SAID TO HAVE BEEN DERIVED FROM ELIGIBLE BUSINESS, THEREFORE , THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION U/S 80IA OF THE ACT. 33 ON APPEAL, IT WAS MAINLY SUBMITTED THAT THE ASSE SSEE WAS RUNNING A POWER PROJECT AND THEREFORE, UNDER THE CA TEGORY OF INDUSTRIAL UNDERTAKING ENGAGED IN THE INFRASTRUCTU RE DEVELOPMENT. THE PROJECT WAS FINANCED BY FINANCIAL INSTITUTION AND ASSESSEE WAS REQUIRED TO EXECUTE THE TRUST AND RETENTION AGREEMENT SO THAT FINANCIAL INSTITUTION CAN CONTROL AND KEEP LIEN OVER CASH FLOW OF THE ASSESSEE COMPANY. OUT OF VARIOUS REQUIREMENTS OF TRA AGREEMENT PERMITTED INVESTMENTS MADE IN FDRS ETC. IT IS PART OF THE FINANCING ARRANGEMENTS UNDER TRA AGREEMENT. THEREFORE, SAME SHOULD BE TREATED AS DI RECTLY LINKED TO THE REVENUE FROM THE ELIGIBLE UNDERTAKING . 14 34 THE LD. CIT(A) DID NOT ACCEPT THE SUBMISSIONS AN D UPHELD THE ACTION OF THE ASSESSING OFFICER IN DENYING DEDU CTION U/S 80IA OF THE ACT IN RESPECT OF INTEREST ON FDRS. 35 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE RELIE D ON THE SUBMISSIONS MADE BEFORE THE LD. CIT(A). 36 ON THE OTHER HAND, THE LD. CIT-D.R STRONGLY SUP PORTED THE ORDER OF LD. CIT(A) AND ALSO RELIED ON THE DECI SION OF HON'BLE SUPREME COURT IN CASE OF PANDIAN CHEMICALS LTD. V. CIT (SUPRA). 37 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THIS ISSUE HAS BEEN ADJUDICATED IN DETAIL BY THE LD. CIT (A) VIDE PARAS 15.10 TO 15.17 OF HIS ORDER AS UNDER: 15.10 THE APPELLANT'S SUBMISSIONS HAVE BEEN CAREFULLY CONSIDERED WITH REFERENCE TO THE FACTS OF THE CASE. THE MAIN THRUST OF THE APPELLANT'S ARGUMENT IS THAT IT HAS INVESTED ITS FUNDS ONLY IN 'PERMITTED INVESTMENTS' WHICH ARE AN INTEGRAL PART OF THE FINANCING ARRANGEMENT UNDER THE TRUST AND RETENTION AGREEMENT AND THE APPELLANT DOES NOT ENJOY ANY POWER OF DISPOSAL OVER THE INCOME ACCRUING FROM SUCH PERMITTED INVESTMENTS, IT HAS BEEN ARGUED THAT THE APPELLANT IS UNDER AN OBLIGATION TO SETTLE THE INTEREST OBLIGATIONS INCURRED BY IT TOWARDS THE SECURED LENDERS. THEREFORE THE INTEREST ON PERMITTED INVESTMENTS IS LIABLE TO BE SET OFF AGAINST THE INTEREST EXPENDITURE. ALTERNATIVELY, THE APPELLANT HAS ARGUED THAT PERMITTED INVESTMENTS ARE AN INTEGRAL PART OF THE WORKING CAPITAL OF ITS POWER GENERATION BUSINES S WHICH IS ONLY TEMPORARILY INVESTED FOR A SHORT PERI OD WITHIN THE TIGHT SCHEDULE OF PRIORITY CASH FLOW APPLICATION. THEREFO RE THEY BEAR A DIRECT AND FIRST DEGREE NEXUS WITH THE POWER GENERATION BU SINESS. THE SAID ARGUMENTS OF THE APPELLANT, HOWEVER, ARE NOT FOUND TO BE CARRYING ANY FORCE. A CLOSE PERUSAL OF THE TRA AGREEMENT MAKES I T AMPLY CLEAR THAT THE SAID AGREEMENT IS ENTERED INTO TO PROTECT THE R ESPECTIVE INTERESTS OF THE SECURED PARTIES( LENDERS) AS WELL AS THE BORROW ER (THE APPELLANT). UNDER THIS AGREEMENT, THE ACCOUNT BANK ESSENTIALLY ACTS AS A TRUSTEE FOR THE SECURED PARTIES AS WELL AS THE BORROWER. TH IS KIND OF AGREEMENT IS NECESSITATED IN VIEW OF THE HUGE FINAN CING OF THE PROJECT BY BANKS AND FINANCIAL INSTITUTIONS AND IN ORDER TO ENSURE A SAFE AND REGULATED SEIVICE OF THE SAID DEBT BY THE BORROWER. BUT THERE IS NOTHING IN THE TERMS AND CONDITIONS OF THE SAID TRA WHICH IS OPPRESSIVE FOR THE APPELLANT. THE TRA LAYS DOWN A B ROAD FRAME WORK OF THE MANAGEMENT OF THE APPELLANT'S FUNDS /CA SH FLOWS BY THE ACCOUNT BANK IN THE MUTUALLY AGREED UPON FASHION IN ORDER TO PROTECT 15 THE LENDERS AGAINST THE CREDIT RISK. BUT, AT THE SA ME TIME, THE BENEFIT OF THE 'SECURED LENDERS AND THE BORROWER' IS AN EXP LICITLY MENTIONED OBJECTIVE AS PER THE VARIOUS CLAUSES OF THE TRA. 15.11 THE TRA LAYS DOWN THAT THE INVESTMENTS CAN BE MADE BY THE BORROWER IN THE 'PERMITTED INVESTMENTS', BUT IT ALS O MENTIONS THAT SUCH INVESTMENTS SHALL BE MADE ON THE INSTRUCTIONS OF TH E BORROWER AND SHALL ALSO BE REALIZED BY THE ACCOUNT BANK IN ACCOR DANCE WITH THE BORROWER'S INSTRUCTIONS. IT IS ONLY IN THE EVENT OF A NOTIFIED DEFAULT OR NOTIFIED POTENTIAL EVENT OF DEFAULT BY THE LEAD INS TITUTION (THE LENDERS) THAT THE INVESTMENT OF SUCH FUNDS, SUCH IN VESTMENT AND RE- INVESTMENT SHALL BE MADE BY THE LEAD INSTITUTION, H OWEVER, THERE IS NOTHING IN THE TRA WHICH CASTS ANY OBLIGATION ON TH E APPELLANT TO MAKE INVESTMENT IN THE PERMITTED INVESTMENTS. IT IS PURE LY THE APPELLANT'S OWN CHOICE TO MAKE OR NOT TO MAKE ANY INVESTMENT. L IKEWISE, THERE IS NO COMPULSION ON THE APPELLANT TO MAKE INVESTMENT I N ANY PARTICULAR PERMITTED INVESTMENT IT IS AT A LIBERTY TO MAKE ITS OWN CHOICE OUT OF THE WHOLE RANGE OF PERMITTED INVESTMENTS RECOGNIZED UNDER THE TRA. FURTHER, THERE IS NO CEILING AS REGARDS THE AMOUNT OF INVESTMENT THAT CAN BE MADE BY THE APPELLANT IN THE PERMITTED INVESTMEN TS. IN FACT, THE APPELLANT IS FREE TO INVEST FROM SUCH PART OF THE A MOUNT STANDING TO THE CREDIT OF ANY OF THE TRUST AND RETENTION ACCOUN TS. THE ONLY SAFEGUARD PROVIDED IN THIS REGARD IS THAT THE INVES TMENTS ARE OF SUCH MATURITY THAT THEY MATCH WITH, AND DO NOT DISTURB, THE TRANSFER AND PAYMENT OBLIGATIONS UNDER THE AGREEMENT. THUS IT IS NOT THE APPELLANT'S CASE THAT IT WAS OBLIGED TO KEEP ITS SURPLUS MONEY IN PERMITTED INVESTMENTS UNDER SOME LEGAL BINDING. IF THE APPELL ANT HAS CHOSEN TO INVEST ITS SURPLUS FUNDS IN THE FORM OF FIXED DEPOS ITS, IT IS PURELY OF ITS OWN VOLITION. 15.12 AS PER THE TRA, THE APPELLANT COULD HAVE KE PT ITS FUNDS IN THE REVENUE ACCOUNT OR IN ANY ONE OF THE VARIOUS SUB-ACCOUNTS OF THE TRUST AND RETENTION ACCOUNT IN THE PRESCRIBED M ANNER. IN FACT, THE APPELLANT HAS ITSELF ADMITTED THAT IT HAS INVESTED ITS TEMPORARILY AVAILABLE SURPLUS FUNDS IN THE VARIOUS SUB-ACCOUNTS IN PERMITTED INVESTMENTS. BUT IT IS WRONG TO CLAIM THAT THE SURP LUS FUNDS ARE INVESTED BY THE ACCOUNT BANK, AS ALREADY MENTIONED, THE ACCO UNT BANK INVESTS THE FUNDS ONLY ON THE INSTRUCTIONS OF THE B ORROWER (THE APPELLANT) THE ACCOUNT BANK DOES NOT HAVE ANY DISCR ETION REGARDING THE FUND MANAGEMENT. IT PRIMARILY MANAGES THE FUNDS ON THE INSTRUCTIONS OF THE BORROWER, AND ONLY IN THE CASE OF A DEFAULT ON THE PART OF THE BORROWER, DOES IT MANAGE THE ACCOUNT ON THE INSTRUCTIONS OF THE LENDER. A READING OF THE TRA MAKES IT AMPLY CLEAR THAT THE ACCOUNT BANK IS LIKE ANY OTHER BANK, AND ACTS AS A TRUSTEE OF THE ACCOUNT HOLDER THEREFORE, IT CANNOT TAKE ANY DECISI ONS ON BEHALF OF THE 'APPELLANT REGARDING INVESTMENT(S) OR THE LIQUIDATI ON/DISPOSAL THEREOF. 15.13 UNDER EVERY FINANCING AGREEMENT, THE BO/ROW ER IS REQUIRED TO SAFEGUARD THE INTEREST OF THE LENDER BY WAY OF P RIOR PLEDGING /HYPOTHECATION OF VALUABLE ASSETS OR BY WAY OF CREA TING HIS LIEN ON THE FUTURE CASH FLOWS FROM THE PROJECT/ASSET FINANC ED AND THE FUTURE INVESTMENTS THERE FROM, OR BY WAY OF A COMBI NATION OF VARIOUS SUCH METHODS. BUT THIS REQUIREMENT DOES NOT HAVE THE EFF ECT OF NEGATING THE INCOME, IF ANY, EARNED BY THE BORROWER . IT SIMPLY PLACES CERTAIN FETTERS ON THE BORROWER'S SPENDING A ND DISPOSAL OF INCOME /ASSETS TEMPORARILY TILL THE TIME THE BORROWING LAS TS. THEREFORE THE 16 APPELLANT'S ARGUMENT THAT ALL DOCUMENTS OF TITLE RE LATING TO PERMITTED INVESTMENTS ARE HELD IN THE CUSTODY OF TH E ACCOUNT B.ANK DOES NOT HELP ITS CASE IN ANY MANNER. MERELY BECAUSE THERE EXISTS A LIEN OF THE SECURED LENDERS OVER THE CASH FLOW AN D OTHER INVESTMENTS INCLUDING THE PERMITTED INVESTMENTS AS A PART OF TH E CHECK - AND - BALANCE MECHANISM TO SAFE-GUARD THEIR INTEREST DOES NOT VALIDATE THE APPELLANT'S ARGUMENT THAT THERE WAS NO TAXABLE INCO ME EARNED FROM THE PERMITTED INVESTMENTS. 15.14 MERELY BECAUSE THE APPLICATION/LIQUIDATION OF ANY PERMITTED INVESTMENT CAN BE MADE BY THE LEAD INSTITUTION TO T HE EXTENT NECESSARY FOR THE PURPOSE OF RECOVERING ANY DEBT DU E, DOES NOT IN ANY MANNER AFFECT, THE CHARACTER OF THE INCOME THEREFRO M SO FAR AS ITS TAXABILITY UNDER THE INCOME-TAX ACT IS CONCERNED. AS A MATTER OF FACT, THE SECURED LENDERS ENJOY THIS KIND OF LIEN NOT ONLY IN RESPECT OF THE PERMITTED INVESTMENTS, BUT OVER THE COMPLETE CASH FLOW OF THE APPELLANT'S POWER GENERATION BUSINESS FINANCED BY THEM AND OVER ALT THE ACCOUNTS UNDER TRA AS IS EVIDENT FROM PARAS 19.1 AN D 19,2 OF THE TRA AS WELL AS FROM THE APPELLANT'S OWN ADMISSION A S PER THE WRITTEN SUBMISSIONS (REFER PARA 15.6 (6) SUPRA). BUT THIS D OES NOT MEAN THAT THE APPELLANT HAS EARNED NO INCOME FROM THE POWER G ENERATION BUSINESS, OR THAT THE INCOME EARNED FROM POWER GEN ERATION STANDS NEGATED. 15. 15 THE APPELLANT'S ARGUMENT THAT IT DOES NOT ENJOY ANY DISPOSABLE INCOME FROM THE INTEREST ON PERMITTED IN VESTMENTS BEFORE OFFSETTING THE INTEREST OBLIGATION ON THE SECURED D EBTS IS ALSO DEVOID OF ANY FORCE. IT IS NOTED THAT THE SECURED LOANS HAVE BEEN INVESTED BY THE APPELLANT IN ITS POWER GENERATION BUSINESS, AND NO PART OF THE SECURED LOANS HAS BEEN INVESTED IN THE PERMITTED INVESTMENT S. THEREFORE, THE APPELLANT IS ENTITLED TO DEBIT THE INTEREST PAI D ON THE SECURED LOANS TO THE P & L A/C IN * WHICH THE REVENUE ON ACCOUNT OF GENERATION AND SALE OF POWER IS CREDITED. BUT THE APPELLANT CANNOT JUSTIFIABLY DEBIT THE INTEREST PAID ON THE SAID SECURED LOAN AGAINST THE. INTEREST INCOME EARNED THROUGH INVESTMENT OF SURPLUS FUNDS IN FIXED DEPOSITS. IN THE CASE OF TUTICORM ALKALI CHEMICALS AND FERTILIZERS L TD. VS. CIT 227 ITR 172, THE HON'B/E SUPREME COURT HAS GONE TO THE EXTE NT OF HOLDING THAT INTEREST EARNED ON SHORT TERM INVESTMENT OF FUNDS H AS TO BE ASSESSED AS INCOME FROM OTHER SOURCES EVEN THOUGH THE INTEREST INCOME IS EARNED BY UTILIZING THE IDLE BORROWED CAPITAL. IN THE INSTANT CASE, AS ALREADY MENTIONED, THE SOURCE OF INVESTMENT IN THE FIXED DE POSITS FROM WHICH INTEREST HAS BEEN EARNED BY THE APPELLANT IS NOT TH E BORROWED CAPITAL BUT ITS OWN SURPLUS FUNDS. 15.16 THE APPELLANT'S ALTERNATIVE PLEA TH AT THE INTEREST ON THE PERMITTED INVESTMENTS BEARS A DIRECT AND FIRS T DEGREE NEXUS WITH THE POWER GENERATION BUSINESS HAS ALSO BEEN DULY CO NSIDERED. AS ALREADY MENTIONED, THE APPELLANT IS UNDER NO OBLIGA TION TO INVEST ITS SURPLUS FUNDS M FIXED DEPOSITS OR ANY OTHER INSTRUM ENT UNDER PERMITTED INVESTMENTS. IT IS AS A PART OF PRUDENT FINANCIAL M ANAGEMENT THAT THE APPELLANT TAKES STOCK OF ITS SURPLUS FUNDS AND OPTS TO MAKE INVESTMENTS WHICH COULD YIELD IT MAXIMUM RETURN THE INVESTMENT OF SURPLUS FUNDS WITH A VIEW TO MAXIMIZE RETURNS ACCOR DING TO PRUDENT NORMS CANNOT BE SAID TO BE HAVING AN IMMEDIATE AND FIRST DEGREE NEXUS WITH THE ELIGIBLE BUSINESS OF POWER GENERATION. THE SURPLUS EARNED BY THE APPELLANT AFTER ALL HAS TO BE INVESTED SOMEWHERE. I F A CERTAIN INCOME IS GIVEN EXEMPTION FROM TAXATION AT THE FIRST POINT OF ITS EARNING / ACCRUAL 17 AND THE SAID INCOME GIVES RISE TO FURTHER INCOME AF TER BEING INVESTED DOES NOT MEAN THAT THE BENEFIT OF TAX EXEMPTION WOU LD TRAVEL WITH IT TO THE NEXT POINT OF INCOME GENERATION. IT IS CERTAINL Y NOT THE INTENTION OF THE LAW MAKERS TO ALLOW SERIAL DEDUCTION TO THE ASSESSE E. THE IMMEDIATE AND PROXIMATE SOURCE OF INTEREST INCOME IN THE INST ANT CASE IS NOT THE ELIGIBLE BUSINESS. THE HON'BLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT (2003) 262 ITR 278, FOLLOWIN G THE DECISION IN THE CASE OF CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. VS. CIT (1978) 113 ITR 84 (SC) HAS DWELLED UPON THE MEANING OF WORDS ' DERIVED FROM' QUOTING FROM THE JUDGMENT OF THE PRIVY COUNCIL IN C IT V. RAJA BAHADUR KAMAKHAYA NARAYAN SINGH [1948]16 ITR 325, T HE HON'BLE COURT OBSERVED ' ..THE WORD 'DERIVED IS NOT A TERM OF ART. ITS USE IN THE DEFINITION INDEED DEMANDS AN ENQUIRY INTO TH E GENEALOGY OF THE PRODUCT. BUT THE ENQUIRY SHOULD STOP AS SOON AS THE EFFECTIVE SOURCE IS DISCOVERED....' IT WAS FINALLY LAID DOWN BY TH E HON'BLE COURT THAT THE WORD 'DERIVED FROM' MUST, BE UNDERSTOOD AS SOME THING WHICH HAS A DIRECT, OR IMMEDIATE NEXUS WITH THE APPELLANT'S I NDUSTRIAL UNDERTAKING. IT IS FURTHER PERTINENT TO NOTE THAT T HE SAID JUDGMENT OF THE HON'BLE SUPREME COURT WAS IN THE CONTEXT OF INTERES T INCOME EARNED ON SUCH FIXED DEPOSITS, THE INVESTMENT IN WHICH WA S MANDATORY BY THE ASSESSEE UNDER A LEGAL COMPULSION AND FOR THE OPERA TION OF ITS BUSINESS. IN THE INSTANT CASE, EVEN SUCH COMPULSION OR OBLIGA TION DOES NOT EXIST. 15.17 IN VIEW OF THE DISCUSSION ABOVE, THE ID. A. O IS FOUND FULLY JUSTIFIED IN EXCLUDING THE INTEREST INCOME FR OM THE ELIGIBLE PROFITS U/S 80IA. THE SAID GROUND OF APPEAL IS ACC ORDINGLY DISMISSED. WE ARE OF THE OPINION THAT THE LD. CIT(A) HAS CORRE CTLY ADJUDICATED THE ISSUE BY FOLLOWING THE DECISION OF HON'BLE APEX COURT IN CASE OF PANDIAN CHEMICALS LTD. V. CIT (SUP RA). WE FURTHER FIND THAT IF INTEREST FROM DEPOSIT FROM ELE CTRICITY SECURITY WHICH IS DIRECTLY RELATED WITH THE POWER CONNECTION WITHOUT WHICH AN INDUSTRIAL UNIT CANNOT BE OPERATED, WAS HE LD TO BE A STEP REMOVED FROM INDUSTRIAL UNDERTAKING IN CASE OF PANDIAN CHEMICALS LTD. V. CIT (SUPRA) THEN HOW INTEREST ON FDRS MADE FOR OBTAINING LOANS FROM THE BANK, CAN BE HELD TO H AVE DIRECT NEXUS WITH THE ELIGIBLE INDUSTRIAL UNDERTAKING. TH IS IS NOT POSSIBLE AND IN OUR OPINION THE LD. CIT(A) HAS CORR ECTLY ADJUDICATED THE ISSUE. NO DOUBT THAT THE DECISION I N CASE OF PANDIAN CHEMICALS LTD. V. CIT (SUPRA) HAS BEEN REND ERED U/S 80HH OF THE ACT, HOWEVER, THE JUDGMENT HAS BEEN REN DERED MAINLY BECAUSE OF THE EXPRESSION USED DERIVED FROM . PERUSAL 18 OF SECTION 80IA(1) OF THE ACT WOULD SHOW THAT IN TH IS PROVISION ALSO THE EXPRESSION HAS BEEN USED A S DERIVED BY A N UNDERTAKING, THEREFORE, THE SAME PRINCIPLE WOULD BE APPLICABLE IN CASE OF DEDUCTION U/S 80IA OF THE ACT . ACCORDINGLY WE CONFIRM THE ORDER OF LD. CIT(A). 38 THE ASSESSEE HAS ALSO RAISED ANOTHER OBJECTION O N OTHER ASPECT OF THIS ISSUE THROUGH CROSS-OBJECTIONS NO. 2 WHICH READS AS UNDER: THAT IN ANY CASE THE LD. CIT(A) HAS ALSO ERRED IN NOT ALLOWING DEDUCTION OF INTEREST PAID FROM THE AFORESAID INTER EST INCOME OF RS. 2,70,95,301/- WHILE REDUCING THE SAME FROM T HE PROFITS OF THE ELIGIBLE BUSINESS FOR COMPUTING DEDUCTION U/ S 8IA. ACCORDINGLY AS INTEREST PAID FAR EXCEEDS INTEREST INCOME, AS SUCH TOO, NO EXCLUSION OF INTEREST INCOME IS WARRAN TED FOR COMPUTING DEDUCTION U/S 80IA. 39 THIS ISSUE HAS BEEN ADJUDICATED BY THE LD. CIT(A ) VIDE PARA 15.15. 40 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE DID N OT MAKE ANY ARGUMENTS IN RESPECT OF THIS ISSUE AND SIMPLY STAT ED THAT THE ISSUE WAS RELATED TO THE ISSUE RAISED IN CROSS-OBJECTIONS NO. 1. 41 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE S TRONGLY SUPPORTED THE ORDER OF LD. CIT(A). 42 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THIS ISSUE WAS ADJUDICATED BY PARA 15.15 BY THE LD. CIT(A) WHICH W E HAVE ALREADY EXTRACTED IN THE ABOVE NOTED PARAS BUT AT THE COST OF REPETITION, WE WOULD LIKE TO REPRODUCE THE SAME AS UNDER: 15. 15 THE APPELLANT'S ARGUMENT THAT IT DOES NOT E NJOY ANY DISPOSABLE INCOME FROM THE INTEREST ON PERMITTED IN VESTMENTS BEFORE OFFSETTING THE INTEREST OBLIGATION ON THE SECURED D EBTS IS ALSO DEVOID OF ANY FORCE. IT IS NOTED THAT THE SECURED LOANS HAVE BEEN INVESTED BY THE APPELLANT IN ITS POWER GENERATION BUSINESS, AND NO PART OF THE SECURED LOANS HAS BEEN INVESTED IN THE PERMITTED INVESTMENT S. THEREFORE, THE APPELLANT IS ENTITLED TO DEBIT THE INTEREST PAI D ON THE SECURED LOANS TO THE P & L A/C IN * WHICH THE REVENUE ON ACCOUNT OF GENERATION AND SALE OF POWER IS CREDITED. BUT THE APPELLANT CANNOT JUSTIFIABLY DEBIT THE INTEREST PAID ON THE SAID SECURED LOAN AGAINST THE. INTEREST INCOME 19 EARNED THROUGH INVESTMENT OF SURPLUS FUNDS IN FIXED DEPOSITS. IN THE CASE OF TUTICORM ALKALI CHEMICALS AND FERTILIZERS L TD. VS. CIT 227 ITR 172, THE HON'B/E SUPREME COURT HAS GONE TO THE EXTE NT OF HOLDING THAT INTEREST EARNED ON SHORT TERM INVESTMENT OF FUNDS H AS TO BE ASSESSED AS INCOME FROM OTHER SOURCES EVEN THOUGH THE INTEREST INCOME IS EARNED BY UTILIZING THE IDLE BORROWED CAPITAL. IN THE INSTANT CASE, AS ALREADY MENTIONED, THE SOURCE OF INVESTMENT IN THE FIXED DE POSITS FROM WHICH INTEREST HAS BEEN EARNED BY THE APPELLANT IS NOT TH E BORROWED CAPITAL BUT ITS OWN SURPLUS FUNDS. WE ARE IN TOTAL AGREEMENT WITH THE LD. CIT(A) THAT WHATEVER INTEREST HAS BEEN INCURRED OR SPENT BY THE ASSESSEE, HAS ALR EADY BEEN ALLOWED AS BUSINESS EXPENDITURE BECAUSE SAME HAS BE EN DEBITED TO THE PROFIT AND LOSS ACCOUNT. INCOME ON ACCOUNT OF INTEREST FROM FDR IS TOTALLY A SEPARATE ITEM AND HAS TO BE TAXED ACCORDINGLY. IT CANNOT BE SAID THAT THE AMOUNT IN FDRS HAVE BEEN IN VESTED OUT OF BORROWED FUNDS BECAUSE BORROWED FUNDS HAVE BEEN UTI LIZED FOR PURCHASE OF ASSETS. THEREFORE, THERE IS NO QUESTI ON OF ALLOWING DEDUCTION U/S 80IA OF THE ACT SIMPLY BECAUSE INTERE ST PAID BY THE ASSESSEE, WAS MORE THAN THE INTEREST EARNED BY THE ASSESSEE. 43 ONE MORE ISSUE HAS BEEN RAISED IN CROSS-OBJECTIO NS THAT IS IN RESPECT OF SALE OF SCRAP FROM PROFITS FOR TH E PURPOSE OF DEDUCTION U/S 80IA OF THE ACT. 44 AFTER HEARING BOTH THE PARTIES WE FIND THAT AS O BSERVED EARLIER VARIOUS ITEMS OF INCOME WHICH WERE INCLUDED IN THE BUSINESS PROFIT TO THE TUNE OF RS. 27,43,88,709/- W ERE HELD TO BE NOT INCLUDIBLE IN THE BUSINESS PROFIT FOR THE PU RPOSE OF DEDUCTION U/S 80IA OF THE ACT BECAUSE THE SAME WAS NOT DERIVED FROM ELIGIBLE BUSINESS. ONE OF THE ITEM EXC LUDED IS SALE OF SCRAP. 20 45 ON APPEAL, IT WAS MAINLY SUBMITTED THAT SCRAP WA S GENERATED DURING THE COURSE OF MANUFACTURE AND THER EFORE, SAME SHOULD BE TREATED AS DERIVED FROM INDUSTRIAL U NDERTAKING. 46 THE LD. CIT(A) DID NOT FIND FORCE IN THE SUBMISS IONS AND REJECTED THE CLAIM VIDE PARA 16.4 WHICH IS AS UNDER : 16.4 AS REGARDS THE INCOME FROM SALE OF SCRAP AMOUNTING TO RS. 11,10,169/- IT IS NOTED THAT THE S CRAP SOLD WAS NOT GENERATED IN THE COURSE OF THE REGULAR BUSI NESS OF POWER GENERATION OF THE APPELLANT. THE SAME WAS ADM ITTEDLY GENERATED OUT OF STORES AND SPARES AND REPAIRS OF P LANT AND MACHINERY, THE EXACT BREAK-UP OF WHICH WAS NOT FURN ISHED BY THE APPELLANT. IT IS NOT THE APPELLANTS CASE THAT THE SCRAP IS GENERATED AS A REGULAR BY-PRODUCT OF ITS PRIMARY IN DUSTRIAL ACTIVITY OF POWER GENERATION. FOR THE PURPOSES OF D EDUCTION U/S 80IA, THE INCOME SHOULD HAVE AN IMMEDIATE AND FIRST DEGREE NEXUS WITH THE BUSINESS CARRIED ON BY THE ASSESSEE. THE INCOME FROM THE SALE OF SCRAP OF SPARES OR STORES O R OF PARTS OF CAPITAL / FIXED ASSETS LIKE PLANT AND MACHINERY IS CLEARLY IN THE NATURE OF ANCILLARY INCOME WHICH IS REQUIRED TO BE TAXED AS INCOME FROM OTHER SOURCES U/S 56 OF THE ACT. IT CON STITUTES AN INDEPENDENT SOURCE OF INCOME BEYOND THE FIRST DEGRE E NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UNDERTAKING. THE REFORE, THE ADDITION MADE BY THE LD. A.O. IS FOUND TO BE IN ORD ER AND IS UPHELD. 47 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMI TTED THAT SCRAP WAS GENERATED IN THE PROCESS OF MANUFACTURE A ND THEREFORE, SAME SHOULD BE ELIGIBLE FOR DEDUCTION. IN THIS REGARD HE RELIED ON THE DECISION OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF CIT V. BICYCLE WHEELS, 335 IT R 384. 48 ON THE OTHER HAND, THE LD. DR FOR THE REVENUE S TRONGLY SUPPORTED THE ORDER OF LD. CIT(A). 49 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE DO NO T FIND ANY FORCE IN THE SUBMISSIONS OF THE LD. COUNSEL OF THE ASSESSEE BECAUSE THE LD. CIT(A) HAS CLEARLY OBSERVED THAT A DMITTEDLY SCRAP WAS GENERATED OUT OF STORES AND FROM REPAIR O F PLANT AND 21 THEREFORE, SAME CANNOT BE SAID TO HAVE BEEN GENERA TED DURING THE PROCESS OF MANUFACTURE. FURTHER THE DECISION O F CIT V. BICYCLE WHEELS (SUPRA) INVOLVES ALL TOGETHER DIFFER ENT ISSUE I.E. WHETHER SALE OF SCRAP SHOULD BE INCLUDED IN THE TOT AL TURN OVER OR NOT? IN THE CASE BEFORE US THE LD. CIT(A) HAS OB SERVED THAT THE SCRAP WAS NOT OUT OF MANUFACTURE BUT ONLY FROM STORES AND REPAIRS OF PLANTS. IN VIEW OF THESE FACTS, WE DECI DE THIS ISSUE ALSO AGAINST THE ASSESSEE. 50 ONE MORE OBJECTION HAS BEEN RAISED IN ASSESSMENT YEAR 2007-08 REGARDING INTEREST RECEIVED ON LOANS FROM S TAFF WHICH WAS NOT PRESSED BEFORE US, THEREFORE, SAME IS DISM ISSED AS NOT PRESSED. 51 IN VIEW OF ABOVE DISCUSSION, ASSESSEES APPEALS AS WELL AS THE CROSS-OBJECTIONS ARE DISMISSED. 52 IN THE RESULT, APPEALS OF THE REVENUE ARE PARTLY ALLOWED AND APPEALS OF THE ASSESSEE AND THE CROSS-OBJECTION S ARE DISMISSED. ORDER PRONOUNCED ON 24.5.2013 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 24.5.2013 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR