2025 (5) TMI 704 - AT - Income Tax

Characterization of receipt - excise duty refund sales tax/ VAT input tax refund and sales tax remission as capital receipt not chargeable to tax for the reason that the said claim was not made in the return of income - assessee company is engaged in the business of manufacturing various types of pipes - HELD THAT - The same issue came up for adjudication in assessee s own case before this Tribunal for AY 2005-06 2024 (10) TMI 242 - ITAT DELHI There is absolutely no logical reason for the ld CIT(A) to take a divergent stand for the year under consideration. We find that the incentives claimed in 2001 for economic development of Kutch District of Gujarat. The copy of Notification No. 39/2001 dated 31.07.2001 issued by Central Excise Department. Further there is a clarification issued by Department of Revenue Ministry of Finance Govt. of India dated 29.07.2008 clearly stating that intention behind the exemption scheme was to attract immediate investment by incentivizing setting up of new industrial unit so as to generate employment. The assessee in the instant case was given incentives in the form of excise duty refund sales tax remission sales/ VAT input tax refund. We direct the AO to treat the receipt of aforesaid incentives under the Incentive Scheme as capital receipts not chargeable to tax. Accordingly the Ground raised by the assessee are allowed. Disallowance u/s 14A read with Rule 8D(2) of the Income Tax Rules 1962 - HELD THAT - Action of the ld CIT(A) in restricting the disallowance u/s 14A of the Act to 1% of dividend income was approved in the case of R.R. Sen Brothers P Ltd 2013 (7) TMI 260 - CALCUTTA HIGH COURT we direct the AO to make disallowance of Rs. 36, 541/- (288317 -246776) u/s 14A of the Act. Accordingly the grounds raised by the revenue are dismissed. Suo moto disallowance towards administrative expenses being the actual expenses incurred for the purpose of earning exempt income - AO without recording the objective satisfaction with cogent reasons as to why the aforesaid basis is incorrect directly proceeded to apply the computation mechanism provided in the Rule 8D(2)(iii) of the Rules and proceeded to work out the disallowance thereon. The recording of objective satisfaction with cogent reasons is mandated in terms of section 14A(2) of the Act read with Rule 8D(1) of the Rules. This issue is no longer res integra in view of the decision of Taikisha Engineering India Ltd 2014 (12) TMI 482 - DELHI HIGH COURT which has been relied upon by the ld CIT(A) in his order. Since the relief is granted by the ld CIT(A) by placing reliance on the decision of the Hon ble Jurisdictional High Court which is clearly applicable in the facts and circumstances of the instant case we direct the ld AO to restrict the total disallowance of expenses u/s 14A only to the expenditure of Rs. 1, 42, 936/- and delete the remaining sum. Accordingly Ground No. 1 raised by the revenue is dismissed. Short deduction of TDS - TDS U/S 194C OR 194I - Disallowance made u/s 40(a)(ia) - wharfage charges and hire charges - proceedings of the TDS officer u/s 201(1) - HELD THAT - We find that provisions of Section 40(a)(ia) of the Act cannot be made applicable for short deduction of tax at source as held in the case of CIT vs S.K Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT . Decded in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the excise duty refund, sales tax/VAT input tax refund, and sales tax remission received by the assessee under the Incentive Scheme 2001 for Economic Development of Kutch District constitute capital receipts not chargeable to income tax, despite being offered as revenue receipts in the return of income.

- Whether the Commissioner of Income Tax (Appeals) erred in dismissing the additional ground raised by the assessee seeking to treat the aforesaid receipts as capital receipts.

- Whether disallowance of expenses under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962, was correctly computed and restricted by the appellate authorities in respect of exempt dividend income.

- Whether the disallowance under section 40(a)(ia) of the Act for alleged short deduction of tax at source on wharfage and hire charges was justified.

- Miscellaneous grounds including general and unpressed grounds.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterization of Excise Duty Refund, Sales Tax/VAT Input Tax Refund, and Sales Tax Remission as Capital Receipt

Relevant Legal Framework and Precedents: The Income-tax Act, 1961 governs the taxation of receipts. The distinction between capital receipts and revenue receipts is fundamental in taxation. The Hon'ble Supreme Court's decision in Goetze (India) Ltd. vs CIT (284 ITR 323) was applied by the CIT(A) to dismiss the assessee's additional ground. However, the Tribunal noted that the restriction in Goetze applies only to the Assessing Officer and not to appellate authorities under section 254 of the Act, who can admit fresh claims if legally tenable. The Hon'ble Supreme Court in CIT vs Ponni Sugars and Chemicals Ltd (306 ITR 392) emphasized the 'purpose test' to determine the nature of receipts under incentive schemes.

Court's Interpretation and Reasoning: The Tribunal analyzed the Incentive Scheme 2001 and related Notifications issued by the Central and State Governments, which aimed to promote industrial development in the Kutch District after the earthquake devastation. The scheme provided excise duty exemption, sales tax exemption/deferment, and remission to new industrial units set up within specified periods, with the underlying purpose of incentivizing capital investment and employment generation. The assessee's units were certified as eligible under the scheme, and the receipts were received pursuant to these incentives.

The Tribunal observed that the assessee had included these receipts as income in the return but subsequently claimed before the CIT(A) that they were capital receipts. The CIT(A) dismissed this claim relying on Goetze. However, the Tribunal held that the CIT(A) ought to have admitted the additional ground, as the claim was legal in nature and did not require fresh facts. It was further noted that the CIT(A) had admitted and allowed similar claims in earlier years for the assessee, and no logical reason existed for divergent treatment.

Key Evidence and Findings: The scheme documents, Notifications Nos. 39/2001 (Central Excise) and subsequent extensions, the Incentive Scheme 2001 by the Government of Gujarat, certificates issued by Customs and Central Excise authorities, and clarifications by the Department of Revenue, Ministry of Finance, were examined. The Tribunal relied on a prior decision in the assessee's own case for AY 2005-06, where the same issue was adjudicated in favor of the assessee, treating the incentives as capital receipts not chargeable to tax.

Application of Law to Facts: The Tribunal applied the 'purpose test' to the Incentive Scheme and concluded that the receipts were granted to promote capital investment and industrial development, thus constituting capital receipts. The manner of receipt or inclusion in the return as income did not alter their nature.

Treatment of Competing Arguments: The revenue argued that the receipts were taxable as revenue income since offered in the return and relied on Goetze. The Tribunal distinguished Goetze's applicability and emphasized the appellate authority's power to admit fresh legal claims. The revenue's objection was dismissed, following judicial precedents including Taparia Tools Ltd vs JCIT (372 ITR 605).

Conclusions: The Tribunal directed the Assessing Officer to treat the excise duty refund, sales tax remission, and sales/VAT input tax refund as capital receipts not chargeable to tax for AYs 2007-08 and 2008-09, allowing the assessee's grounds on this issue.

Issue 2: Disallowance of Expenses under Section 14A read with Rule 8D

Relevant Legal Framework and Precedents: Section 14A of the Act disallows expenditure incurred to earn exempt income. Rule 8D prescribes the method for computing such disallowance. The Hon'ble Supreme Court in South Indian Bank Ltd vs CIT (283 Taxman 178) clarified that disallowance under Rule 8D(2)(ii) is not required if the assessee has sufficient interest-free funds to cover investments yielding exempt income. The Hon'ble Calcutta High Court in CIT vs R.R. Sen & Brothers P Ltd upheld the Tribunal's restriction of disallowance to 1% of exempt dividend income.

Court's Interpretation and Reasoning: The Assessing Officer disregarded the assessee's suo moto disallowance of actual expenses incurred (salary of investment handling staff) and applied Rule 8D mechanistically, resulting in a large disallowance. The CIT(A) restricted disallowance to 1% of exempt income and allowed deduction of the suo moto disallowance made by the assessee.

For AY 2008-09, the Tribunal noted that the assessee had sufficient interest-free funds, negating the need for disallowance under Rule 8D(2)(ii). The Tribunal also found that the Assessing Officer failed to record objective satisfaction with cogent reasons before applying Rule 8D(2)(iii), violating the mandate of section 14A(2) and Rule 8D(1). The CIT(A)'s reliance on the Delhi High Court's decision in CIT vs Taikisha Engineering India Ltd (2014-TIOL-2239-HC-DEL-IT) was upheld.

Key Evidence and Findings: The Tribunal examined the assessee's financial statements showing interest-free funds, details of expenses incurred for earning exempt income, and the Assessing Officer's lack of satisfaction recording. The suo moto disallowance computations were scrutinized and accepted.

Application of Law to Facts: The Tribunal applied the Supreme Court's ruling on interest-free funds and the requirement for AO's satisfaction to restrict disallowance to actual expenses incurred (suo moto disallowance), rejecting the Assessing Officer's higher disallowance.

Treatment of Competing Arguments: The revenue contended for full disallowance as per Rule 8D. The Tribunal rejected this, relying on binding precedents and the facts showing no need for higher disallowance.

Conclusions: The Tribunal directed the Assessing Officer to restrict disallowance under section 14A to the amount of actual expenses incurred by the assessee for earning exempt income, dismissing the revenue's grounds on this issue.

Issue 3: Disallowance under Section 40(a)(ia) for Alleged Short Deduction of Tax at Source

Relevant Legal Framework and Precedents: Section 40(a)(ia) disallows expenses if tax is not deducted or deducted at lower rates as per the provisions of the Act. The TDS provisions under sections 194C and 194I apply to different categories of payments. The Tribunal's earlier decision in the assessee's own case for AY 2009-10 and the Hon'ble Calcutta High Court's ruling in CIT vs S.K Tekriwal (361 ITR 432) held that section 40(a)(ia) cannot be invoked for short deduction of TDS where the deduction was made under a different but applicable section.

Court's Interpretation and Reasoning: The Assessing Officer made disallowance on the ground that TDS should have been deducted under section 194I instead of 194C on wharfage and hire charges. However, the TDS proceedings under section 201(1) were quashed by the Tribunal in the assessee's own case, confirming the correctness of deduction under section 194C.

Key Evidence and Findings: The Tribunal relied on the quashing of TDS demand and the factual position that tax was deducted under section 194C, which was held to be proper.

Application of Law to Facts: The Tribunal applied the legal principle that section 40(a)(ia) disallowance is not sustainable where tax has been deducted under a valid provision, even if the Assessing Officer believed another section was applicable.

Treatment of Competing Arguments: The revenue's contention was rejected based on the Tribunal's prior decision and judicial precedents.

Conclusions: The Tribunal dismissed the revenue's appeal on this issue, upholding the deletion of disallowance under section 40(a)(ia).

3. SIGNIFICANT HOLDINGS

"The taxation of excise duty refund pursuant to incentive scheme is to be determined by the purpose for which the same is granted and not the form / mode / manner in which it is determined or disbursed. 'Purpose Test' qua the incentive scheme is the relevant consideration and not the manner of determining the incentive."

"The intention behind the exemption scheme was to attract fresh investment so as to generate employment and for industrial development of the region. The excise duty refund received is clearly in the nature of capital receipt not chargeable to income tax."

"The appellate authorities are duly entitled to admit the additional ground if it is legal in nature and goes to the root of the matter and not requiring verification of fresh facts."

"No disallowance of interest need to be made under Rule 8D(2)(ii) of the Income Tax Rules if the assessee has sufficient interest-free funds to cover investments yielding exempt income."

"The Assessing Officer must record objective satisfaction with cogent reasons before applying Rule 8D(2)(iii) for disallowance under section 14A."

"Section 40(a)(ia) of the Act cannot be invoked for short deduction of tax at source where tax has been deducted under a valid provision of the Act."

Final determinations:

• The excise duty refund, sales tax remission, and sales/VAT input tax refund received under the Incentive Scheme 2001 are capital receipts not chargeable to tax.
• The CIT(A) erred in dismissing the additional ground; appellate authorities have power to admit such claims.
• The disallowance under section 14A is to be restricted to actual expenses incurred by the assessee for earning exempt income, subject to the assessee having sufficient interest-free funds.
• The disallowance under section 40(a)(ia) on account of alleged short deduction of TDS was not justified and rightly deleted.
• Other general and unpressed grounds were dismissed or not adjudicated.