Facts of the Case

The appeal was filed by M/s. The India Cements Limited against the order of the Commissioner of Income Tax (Appeals), NFAC, Delhi, for Assessment Year 2017-18. The assessment involved multiple additions and disallowances relating to Section 14A read with Rule 8D, interest on interest-free advances to subsidiaries, depreciation on consultancy payments, taxability of government subsidies, disallowance under Section 43B, adjustments under Section 115JB, and denial of deduction under Section 80-IA in respect of captive power generating units.

The Assessing Officer made various additions including disallowance of expenditure under Section 14A, proportionate interest on advances, depreciation on payments made to a vastu consultant, taxation of subsidies received from State Governments, royalty payable under mining laws, leave encashment provision under MAT, interest on belated TDS payment under MAT, and denial of deduction under Section 80-IA based on transfer pricing adjustments.

Issues Involved

Whether disallowance under Section 14A could be made in respect of investments not yielding exempt income, whether interest on advances to subsidiaries was disallowable despite availability of sufficient own funds, whether depreciation on payments to a vastu consultant was allowable, whether government subsidies were taxable post insertion of Section 2(24)(xviii), whether royalty was disallowable under Section 43B, whether provisions like leave encashment and interest on TDS could be added back under Section 115JB, and whether deduction under Section 80-IA for captive power generation was to be computed using market rates charged to consumers or regulatory tariffs.

Petitioner’s (Assessee’s) Arguments

The assessee contended that disallowance under Section 14A should be restricted only to investments that actually yielded exempt income. It was argued that interest-free advances to subsidiaries were made out of substantial own funds and were driven by commercial expediency, hence no interest disallowance was warranted.

Regarding depreciation on consultancy payments, the assessee relied on earlier favourable orders. On subsidies, it was argued that the incentives were capital in nature as they were linked to setting up of units in backward areas. Under Section 115JB, it was submitted that provisions like leave encashment and interest on TDS could not be added back unless specifically covered by Explanation 1. For Section 80-IA, the assessee argued that transfer of power to its own manufacturing units should be benchmarked at the rate charged by electricity boards to consumers, not at regulatory purchase tariffs.

Respondent’s (Revenue’s) Arguments

The Revenue argued that Section 14A disallowance was mandatory where investments capable of yielding exempt income existed. It supported interest disallowance on advances and contended that payments to the vastu consultant lacked business nexus. The Revenue relied on Supreme Court and High Court rulings to treat subsidies as revenue receipts and emphasized the amendment brought by Finance Act 2015.

It was further argued that royalty payable to the Government attracted Section 43B, that leave encashment and interest on TDS were liable for MAT adjustment, and that Section 80-IA deduction had been correctly denied by applying regulatory tariffs for captive power transfer.

Court / Tribunal Order and Findings

The ITAT held that disallowance under Section 14A read with Rule 8D must be computed only with reference to investments that actually yielded exempt income during the year, and directed recomputation accordingly. It further held that no disallowance of interest on advances was justified since the assessee had sufficient own funds far exceeding the advances made.

On depreciation relating to payments made to the vastu consultant, the Tribunal followed its later coordinate bench decisions in the assessee’s own case and upheld the disallowance. With respect to subsidies, the Tribunal held that after insertion of Section 2(24)(xviii) by the Finance Act 2015, all subsidies received from Government, irrespective of capital or revenue nature, are taxable unless adjusted against actual cost of assets, and therefore upheld taxation of the subsidies.

The Tribunal confirmed disallowance of royalty under Section 43B to the extent unpaid. Regarding MAT computation, it held that interest on belated TDS payment could not be added back while computing book profit, and remanded the issue of leave encashment provision to the Assessing Officer for fresh examination under Explanation 1 to Section 115JB.

On the issue of deduction under Section 80-IA, the Tribunal followed its earlier decisions and held that for captive consumption of power, the market rate charged by electricity boards to consumers should be adopted, and accordingly allowed the deduction by deleting the transfer pricing adjustment.

Important Clarification

The Tribunal clarified that post Finance Act 2015, the earlier judicial distinction between capital and revenue subsidies based on “purpose test” no longer applies, and that Section 115JB is a self-contained code where only specified adjustments under Explanation 1 are permissible.

Final Outcome

The appeal of the assessee was partly allowed, with relief granted on Section 14A disallowance, interest on advances, MAT adjustment for interest on TDS, and Section 80-IA deduction, while disallowances relating to consultancy payments, subsidy taxation, royalty under Section 43B were upheld, and the issue of leave encashment under MAT was restored to the Assessing Officer for fresh adjudication.

Link to Download order
https://www.mytaxexpert.co.in/uploads/1768995074_THEINDIACEMENTSLIMITEDCHENNAIVS.DCITCORPORATECIRCLE21CHENNAICHENNAI1.pdf 

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