ITAT Delivers Twin Blow to Revenue; Upholds 80-IA on Amalgamated Units, Caps 14A at Actual Exempt Income [Read Order]
The Tribunal noted that the AO had failed to disprove that the machinery was new when originally purchased by Shanti Processors or that the deduction had been routinely allowed in earlier years.
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has dismissed the Revenue’s appeal and allowed the Cross Objection providing a dual relief to the taxpayer. The Tribunal upheld the deletion of a disallowance of over ₹4.82 crore under Section 80-IA of the Income Tax Act, 1961, and also confirmed that disallowance under Section 14A cannot exceed the actual exempt income earned during the year.
Chiripal Industries Ltd., a company engaged in manufacturing and processing textile products. For the Assessment Year 2017-18, the Assessing Officer had disallowed a deduction of ₹4,82,07,712 under Section 80-IA, arguing that the power generation unit was set up using over 90% old machinery transferred from an amalgamating entity, M/s Shanti Processor Ltd., which merged with the assessee in 2005. The AO invoked Explanation 2 to Section 80-IA(3) to deny the deduction. Additionally, the AO made a disallowance of ₹60,46,187 under Section 14A read with Rule 8D, citing unallocated expenses against exempt income.
On appeal, the CIT(A) deleted both additions. Aggrieved, the Revenue approached the ITAT. The Tribunal, comprising Judicial Member T.R. Senthil Kumar and Accountant Member Annapurna Gupta, affirmed the CIT(A)’s decision. On the Section 80-IA issue, the Tribunal relied on its own earlier orders in the assessee’s own cases for AYs 2014-15 and 2016-17. It held that since the power plant was transferred as part of a court-approved amalgamation, the assessee was entitled to “step into the shoes” of the amalgamating company and claim the deduction. The Tribunal noted that the AO had failed to disprove that the machinery was new when originally purchased by Shanti Processors or that the deduction had been routinely allowed in earlier years.
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Regarding the Section 14A disallowance, the Tribunal concurred with the CIT(A)’s rationale that the disallowance cannot exceed the actual exempt income of ₹670 (dividend earned). It upheld the deletion of the balance disallowance of over ₹60 lakh, relying on the jurisdictional High Court’s judgment in Corrtech Energy Pvt. Ltd. (2014) which capped the disallowance at the amount of exempt income.
In the Cross Objection, the assessee argued that it had erroneously offered as income a capital subsidy received under the Technology Upgradation Fund Scheme (TUFS). The Tribunal, following its own order in the assessee’s case for AY 2014-15 and the precedent set in Jindal Worldwide Limited, admitted the additional ground and restored the issue to the AO for fresh verification. It directed the AO to examine whether the interest and power subsidies of ₹9.25 crore and ₹1.21 crore, respectively, were indeed capital receipts not chargeable to tax.
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