2025 (7) TMI 297 - AT - Income Tax

Nature of expenditure - cost of moulds and dies put to use during the year - In previous years such expenditure was treated as capital in nature and depreciation was claimed and in the current year the company has treated it as revenue expenditure - HELD THAT - We are of the considered opinion that the assessee is entitled to claim the expenditure incurred on dyes and moulds as a revenue expenditure as these have to be replaced frequently and accordingly the disallowance made by the AO is not justified. Moreover as pointed out by the Ld. AR the department has itself accepted the changed method and allowed deduction for the moulds and dyes as a revenue expenditure in all the subsequent years. Accordingly this ground is allowed and the disallowance is directed to be deleted. Reduction of capital investment subsidy from the cost of the assets purchased - assessee received capital investment subsidy from the Jammu Kashmir Government during the year - amount was directly credited to the capital reserve instead of reducing the same from wdv or cost of the assets for the purpose of calculating depreciation under the Act - AO invoked the provisions of Explanation 10 to Section 43(1) and reduced the amount of subsidy from the cost of the assets for the purpose of calculating depreciation resulting in the disallowance - HELD THAT - Finance Act 2015 has enlarged the definition of income given u/s 2(24)(xviii) w.e.f. 01.04.2016. However the same being prospective in nature is not applicable for the year under consideration i.e. AY 2011-12. The same view has been taken by the coordinate bench Sasi Shri Extraction Ltd. 2008 (1) TMI 485 - ITAT VISAKHAPATNAM wherein it has been held that investment subsidy granted at a percentage of fixed capital investment could not be reduced from the cost of a capital asset if the scheme in question was intended to accelerate industrial development of the state and was not specifically intended to subsidise cost of the capital asset. Thus we are of the opinion that the amount of capital investment is not subsidy for purchase of any asset and therefore could not be reduced from the cost of plant and machinery for the purpose of calculating the claim of depreciation. This ground of appeal of the assessee is accordingly allowed. Taxability of excise duty refund - revenue or capital receipt - HELD THAT - We are of the view that in light of the decision in the case of Shri Balaji Alloys 2011 (1) TMI 394 - JAMMU AND KASHMIR HIGH COURT which has been upheld by the Hon ble Apex Court the excise duty refund has to be treated as a capital receipt. Disallowance u/s 14A in respect of expenditure attributable to earning exempt income - HELD THAT - We find that on the issue of disallowance u/s 14A in respect of dividend income the assessee s claim that the same is subject to dividend distribution tax and hence no disallowance ought to be made is not tenable as the issue is covered by the decision of the Hon ble Apex Court against the assessee in the case of Godrej and Boyce Manufacturing Company Ltd. 2010 (9) TMI 291 - ITAT MUMBAI Assessee s contention that where no exempt income had been earned from the investments no disallowance ought to have been made u/s 14A of the Act by the Ld. AO we note that the issue is decided in favour of the assessee in numerous decisions of the coordinate benches. In case no exempt income has been earned during the year under consideration by the assessee no disallowance could be made u/s 14A of the Act in the light of the judicial pronouncements on the issue. In view of the above we deem it appropriate to restore the issue to the Ld. AO for the limited purpose of verification to ascertain whether any exempt income including dividend income has been earned by the assessee during the year and recompute the disallowance accordingly. Disallowance u/s 14A for the purpose of computing book profit u/s 115JB - Disallowance u/s 14A should not be taken into account while computing the book profit u/s 115JB as held in Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI Disallowance of deduction u/s 80-IB in respect of the profit earned by the Jammu Unit - AO is not justified in disturbing the method of allocation of expenses adopted by the assessee especially in the immediately preceding year the method of computation has been examined and upheld by the Ld. PCIT vide order u/s 263 of the Act. Accordingly this ground of appeal is allowed in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

- Whether the expenditure on moulds and dies used in manufacturing can be treated as revenue expenditure or must be capitalized and depreciated.

- Whether additional depreciation under section 32(1)(iia) is allowable on moulds and dies if treated as capital assets.

- Whether capital investment subsidy received should be reduced from the cost of assets for depreciation calculation under Explanation 10 to section 43(1) of the Income-tax Act.

- The taxability of excise duty refund: whether it is a capital receipt or taxable as business income.

- Disallowance under section 14A read with Rule 8D regarding expenses incurred in relation to exempt income, including dividend income from domestic companies.

- Whether disallowance under section 14A should be added back while computing book profits under section 115JB.

- Allowability of deduction under section 80-IB for profits of the Jammu unit and the correctness of allocation of indirect expenses between units.

2. ISSUE-WISE DETAILED ANALYSIS

Expenditure on Moulds and Dies (Grounds 1 & 2)

The assessee changed its accounting policy treating expenditure on moulds and dies as revenue expenditure instead of capitalizing and claiming depreciation. The AO allowed only depreciation at 15% and disallowed the balance expenditure. CIT(A) upheld the AO's disallowance.

Relevant legal framework includes the principles distinguishing capital expenditure from revenue expenditure, and section 32 relating to depreciation. Precedents cited by the assessee include:

• CIT v. Malerkotla Steels & Alloys, where moulds with short life and frequent replacement were held to be revenue expenditure.
• CIT v. TVS Motors Ltd., where dyes and moulds were held not to be plant and machinery but attachments facilitating business operations, hence revenue in nature.
• CIT v. Sunbeam Auto Ltd., where dyes and moulds did not create enduring advantage and were allowable as revenue expenditure.

The Tribunal accepted the assessee's argument that moulds and dies have a short life with frequent replacements due to changes in packing or labeling, thus qualifying as revenue expenditure. It noted the department's acceptance of this treatment in subsequent years. The Tribunal directed deletion of the disallowance of Rs. 46,24,850/-.

Ground relating to additional depreciation under section 32(1)(iia) became infructuous following this conclusion.

Capital Investment Subsidy (Ground 3)

The assessee received capital investment subsidy from the Jammu & Kashmir government credited to capital reserve and did not reduce it from the asset cost. AO reduced the subsidy from asset cost under Explanation 10 to section 43(1), disallowing depreciation accordingly. CIT(A) upheld this.

The assessee argued that the subsidy was an incentive to accelerate industrial development and not a payment towards the cost of assets, relying on decisions such as:

• PCIT v. Welspun Steel Ltd. (Bombay HC)
• Universal Cables Ltd. (Kolkata Tribunal)
• Alkoplus Producers Pvt. Ltd. (Pune Tribunal)
• Sasisri Extractions Ltd. (Visakhapatnam Tribunal)
• Capital Foods Exports P. Ltd. (Mumbai Tribunal)
• ACIT v. Godrej Agrovet (Mumbai Tribunal)

The Department contended that Explanation 10 mandates reduction of subsidy from asset cost for depreciation.

The Tribunal analyzed the scheme's objective and judicial precedents, concluding that Explanation 10 applies only when subsidy is specifically for asset cost. Here, the subsidy aimed at industrial development acceleration and was not linked to asset cost. The Tribunal noted that the Finance Act 2015 expanded the definition of income to include such subsidies prospectively, not applicable for AY 2011-12. Accordingly, the Tribunal held the subsidy should not be reduced from asset cost and allowed the ground in favour of the assessee.

Taxability of Excise Duty Refund (Ground 4)

The assessee claimed deduction for excise duty refund of Rs. 4,96,06,000/-. AO treated it as taxable business income. CIT(A) initially dismissed the claim but subsequently, via rectification order, allowed it as a capital receipt relying on the J&K High Court decision in Shri Balaji Alloys v. CIT and the Supreme Court's affirmation.

The Revenue challenged this rectification. The Department relied on the Supreme Court decision in CIT v. Ponni Sugar Mills, which applied the "purpose test" for subsidy characterization.

The Tribunal upheld the rectification order, relying on the binding precedent of Shri Balaji Alloys, affirmed by the Supreme Court, holding the excise duty refund as a capital receipt and not taxable as business income. The revenue's appeal on this issue was dismissed.

Disallowance under Section 14A read with Rule 8D (Grounds 5, 6 & 7)

The AO disallowed Rs. 4,10,154/- under section 14A for expenses related to earning exempt income, including dividend income from investments in domestic companies.

The assessee argued no exempt income was earned and that dividend income is subject to dividend distribution tax under section 115O, hence no disallowance is warranted. The Department relied on lower authorities' orders.

The Tribunal referred to the Supreme Court decision in Godrej and Boyce Manufacturing Co. Ltd. v. DCIT, which held that disallowance under section 14A is applicable even if dividend distribution tax is paid. However, the Tribunal noted that if no exempt income was earned during the year, no disallowance under section 14A can be made, as supported by coordinate benches.

The Tribunal restored the matter to the AO for verification of whether any exempt income was earned and directed recomputation of disallowance accordingly.

Disallowance under Section 14A for Computing Book Profit under Section 115JB (Ground 8)

The assessee contended that disallowance under section 14A should not be added back while computing book profit under section 115JB, relying on the Special Bench decision in Vireet Investment (P.) Ltd.

The Department did not contest this submission. The Tribunal held that section 14A disallowance is not applicable for computing book profits under section 115JB, following the Special Bench ruling.

Deduction under Section 80-IB and Allocation of Expenses (Grounds 9 & 10)

The assessee claimed deduction under section 80-IB for profits of the Jammu unit. AO reallocated indirect expenses arbitrarily, resulting in negative profits for Jammu unit and disallowance of deduction. CIT(A) upheld AO's disallowance initially.

The assessee filed rectification application relying on the fact that the method of expense allocation had been accepted by the Principal Commissioner of Income Tax (PCIT) under section 263 for AY 2010-11.

The rectification order allowed the deduction, accepting the scientific and consistent method of expense allocation followed by the assessee.

The Revenue challenged the rectification order, arguing that once disallowance was confirmed on merits, it could not be reversed in a rectification order.

The Tribunal examined the PCIT's order under section 263, which upheld the allocation method as reasonable and not prejudicial to revenue. The Tribunal held that AO was not justified in disturbing the method of allocation, especially when it was accepted in preceding years. Accordingly, the Tribunal allowed the ground in favour of the assessee.

Grounds Rendered Infructuous

Ground No. 11 relating to recomputation of profits eligible for deduction under section 80-IB was rendered infructuous as ground No. 1 was allowed.

Ground No. 12 relating to deduction under section 80-IB on excise duty refund required no adjudication as ground No. 4 was allowed.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The assessee is entitled to claim the expenditure incurred on dyes and moulds as a revenue expenditure as these have to be replaced frequently, and accordingly, the disallowance made by the Ld. AO is not justified."

"The amount of capital investment subsidy is not subsidy for purchase of any asset, and therefore, could not be reduced from the cost of plant and machinery for the purpose of calculating the claim of depreciation."

"In light of the decision in the case of Shri Balaji Alloys v/s (supra), which has been upheld by the Hon'ble Apex Court, the excise duty refund has to be treated as a capital receipt."

"If no exempt income has been earned during the year under consideration by the assessee, no disallowance could be made u/s 14A of the Act in the light of the judicial pronouncements on the issue."

"The provisions of Section 14A read with Rule 8D are not applicable while computing book profit under section 115JB of the Act."

"The method of allocation of indirect expenses adopted by the assessee, which has been accepted by the Principal Commissioner of Income Tax under section 263 for the immediately preceding year, cannot be disturbed arbitrarily by the AO."

Final determinations were:

• Expenditure on moulds and dies is allowable as revenue expenditure.
• Additional depreciation on moulds and dies is not applicable as the expenditure is revenue in nature.
• Capital investment subsidy received for industrial development is not to be reduced from asset cost for depreciation.
• Excise duty refund is a capital receipt, not taxable as business income.
• Disallowance under section 14A to be recomputed after verifying exempt income earned.
• Section 14A disallowance is not to be added back in book profit computation under section 115JB.
• Deduction under section 80-IB for Jammu unit is allowable based on accepted expense allocation method.