TMI Blog2013 (2) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of finding by AO that the payee was not in existence HELD THAT:- Payments were made in view of agreement which was duly furnished before AO and the terms and conditions of agreement duly spelt out the services to be rendered by payee and commission to be paid to it. The concern was registered with the Sales Tax Department and was liable to pay local taxes. Assessee had discharged its onus of proving regarding genuineness of transaction, identity of payee and services rendered by the payee. Therefore, payment was for legitimate business purposes - Decision in favour of Assessee. Disallowance of Aircraft Expenditure/ Non business Purposes - Assessee had taken air craft on lease and used it for some purpose. He claimed that such expenditure was made for business purposes. Thus, should be disallowed - HELD THAT:- Expenditure relatable to trips made for non business purposes could only be disallowed by the Department. The AO had specifically pointed out journeys undertaken by the assessee which were not for business purposes and assessee neither before the AO nor before Ld CIT(A) was able to produce any evidence to claim that air journeys were undertaken for business purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are cross appeals filed by the revenue as well as by the assessee against the order of Ld CIT(A) dated 18.8.2008. The grounds taken by the revenue as well as by the assessee are as under:- I.T.A. No. 3319/Del/2008( Revenue s appeal): 1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in allowing depreciation of Rs. .29867285/- u/s 32 of the IT Act against the straight line method adopted by the Assessing Officer. 2. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in allowing deduction u/s 80IA at Rs. .141,11,51,172/- against at Rs. .94,84,41,458/- allowed by Assessing Officer. 3. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in directing the Assessing Officer to recompute deduction u/s 80HHC. 4. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in setting aside the issue regarding commission paid to M/s Ganesh Steel Rolling Mills Ltd Hissar. 5. The appellant craves leave to add or amend the grounds of appeal before the appeal is heard or disposed off. I.T.A. No. 3254/Del/2008: (Assessee s appeal): 1.That the Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the powers of the CIT(A) to entertain additional ground(s) of appeal in respect of claims not made by way of revised returns. 5. That the Commissioner of Income Tax (Appeals) erred on facts and in law in not holding that subsidy amounting to ₹ 25,17,91,463 [inadvertently ₹ 24,77,25,360 was adopted before CIT(A)] accruing to the appellant on account of exemption from sales tax, entry tax and electricity duty was capital receipt not exigible to tax. 6. That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding the action of the assessing officer in charging interest under section 234B of the Act. The appellant craves leave to add, alter, amend or vary from the above grounds of appeal before or at the time of hearing. , 2. The brief facts of the case are that assessee is engaged in the manufacturing of sponge iron, universal ream/railway mile with its own captive power plant. Besides captive consumption, the assessee is also engaged in supplying electricity to Chattisgarh State Electricity Board. The return of income declaring total income of Rs. .67,15,19,540/- was filed availing deduction u/s 80IA, 80IB 80HHC of the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n those units. The assessee, during assessment proceedings vide written submissions dated 26.12.2006 pleaded for considering its claim for deduction u/s 80IB of the Act in respect of mini blast furnace and ferro chrome unit as according to assessee the profits of these units will increase and will become positive in the event of deduction u/s 80IA was curtailed. The assessee further submitted that the claim is in accordance with Note No.5 given in the computation of income where this claim was not quantified in view of the negative incomes of these units and hence no statutory forms were enclosed with the return of income at that time. Fresh certificate u/s 80IB in respect of both the units with the positive incomes quantifying allowable deduction u/s 80IB were placed by the assessee during the course of assessment proceedings. Considering the reply of assessee, the Assessing Officer held that deduction u/s 80IB was allowable for blast furnace unit and ferro chrome unit and also enhanced deduction u/s 80IB on Kiln No.6. Therefore, in view of above, the Assessing Officer allowed deduction u/s 80IB totaling Rs. .20,92,17,564/-. 4. The Assessing Officer further observed that assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft for purposes other than business. Therefore, the expenses incurred by the assessee s business journeys by air craft was allowed and expenses attributable to non business purposes was not allowed. The plea of the assessee company of having fixed expenses in the shape of salary, maintenance, insurance, lease rentals though was accepted but variable expenses comprising of expenses like aviation fuel, spare parts, administrative expenses not linked with its business was not allowed. The Assessing Officer worked out variable cost of Rs. .29,083/- and made an addition of Rs. .5,47,530/- on account of 18 hours and 15 minutes of non business use of the air craft. 8. The Assessing Officer further noted that during assessment proceedings, the assessee has placed on record a letter dated 28.12.2006 wherein it had requested to adopt revised/reduce computation of income arrived at after deducting an amount of Rs. .24,,77,25,360/- representing subsidy received from Govt. The assessee had retained this amount by not paying sale tax collected and by not paying electricity duty and entry tax and had declared this as revenue receipt in the books of accounts and return of income. During asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he three conditions i.e. (i) identity of the recipients, (ii) services rendered and (iii) legitimate business needs of the appellant. Therefore, this ground of appeal was allowed for statistical purposes. 10. As regards disallowance of depreciation u/s 32 of the IT ACT, the Ld AR of the assessee submitted that the issue was covered in favour of appellant by the decision of Delhi Bench of Tribunal in the case of appellant for assessment year 2000-01 reported at 106 TTJ 943 (Del.). It was also submitted that the said decision has been followed by the Tribunal in appellant s own case for assessment year 2001-02. The Ld CIT(A) following the earlier year order of the Tribunal deleted the disallowance of depreciation. 11. In respect of disallowance on account of air craft expenses, the appellant submitted that traveling to places mentioned in the assessment order was only for purposes of businesses but Ld CIT(A) upheld the disallowance made by the Assessing Officer in view of the fact that the nature of business conducted at these places was not explained by the assessee. 12. As regards disallowance of subsidy amount of Rs. .24,77,25,360/- the Ld AR of the assessee explained t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (3) of section 80HHC of the Act is allowable and that is why by way of additional ground the assessee is seeking to raise claim of deduction of export profit allowable in terms of clause (4) of Explanation 1 to section 115JB of the Act while computing book profit taxable under that section. It was further submitted that above additional ground was purely a legal issue which has now been raised on the basis of aforesaid recent judgment of Hon'ble Supreme Court. In view of the above submissions, the following additional grounds were requested to be admitted:- i) That on the facts and circumstances of the case and in law, the Assessing Officer erred in restricting the deduction of export profit allowable in terms of clause (iv) of Explanation 1 to section 115JB of the Income Tax Act, 1961 to the extent specified in section 80HHC even while computing book profit. ii) That the Assessing Officer failed to appreciate that the entire export profits are allowable as deduction while computing book profit u/s 115JB and the same are not required to be restricted to the extent specified in sub section (Ib) of section 80HHC of the Act. Continuing his arguments with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal regarding subsidy the Ld AR submitted that the subsidy related to exemption from payment of sales tax, entry tax duty and electricity duty Ld CIT(A) did not go to adjudicate on the claim of subsidy because as per him this claim was not made in the original return and the claim was also not made through revised return. In this respect, he argued that Assessing Officer had indeed rejected the claim of assessee on merits and Ld CIT(A) was not justified in dismissing the ground of appeal on the basis that claim was made by appellant merely by filing a revised computation of income. He further submitted that Assessing Officer raised the applicability of decision of Supreme Court in the case of Goetze India (supra) for the first time in remand reported dated 13.2.2008 and therefore ld CIT(A) should have decided the issue on merits as the issue emanated from the order of Assessing Officer. It was further argued that in the case of Goetze India (supra) Supreme Court had held that Assessing Officer is not obliged to entertain claim not made through revised return but same does not impinge the powers of appellate authority. Reliance was placed on the judgments in the following ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial policy action plan 1994 as listed at page 11 of paper book and in view of the fact stressed that the receipt of amount was capital receipt and not revenue receipt. 21. The Ld AR further brought to our notice that earlier in the case of Sawhney Steel and Press Works Ltd. v. CIT 228 ITR 253 the Hon'ble Supreme court had dealt with similar kind of issue regarding subsidy on account of refund of sales tax on material, subsidy on power consumed and exemption from payment of water etc. wherein the Hon'ble Supreme court had held in favour of revenue holding the receipt of subsidy on revenue account. In this respect pages 317 to 325 of paper book dated 31.7.2009 was referred to wherein complete judgment of Hon'ble Court was placed. The Ld AR further took us to page 324 onwards of the same paper book wherein the Hon'ble Supreme Court in the case of CIT v. Ponny sugar Chemical Ltd, 306 ITR 392 (SC) has held in favour of assessee. In this respect para 5 of page 328 and paras 9,12,13,14 16 at page 329 were read by Ld AR and in view of the findings of Hon'ble Supreme Court, the Ld AR stressed that Hon'ble Court had over ruled its earlier judgment in Sawhn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honda Seil Car India Ltd. v. ACIT in I.T.A. No.5577 of Delhi. Relying upon the above noted cases, the Ld AR submitted that in assessee s case also the objection was that subsidy was received after the unit was set up and therefore it was revenue receipt. Continuing his stress on the purpose test, the Ld AR further submitted that industrial policy of Madhya Pradesh was framed in order to increase employment and for overall growth of State and subsidy in the form of Sales tax exemption etc. were designed to achieve this purpose and therefore applying the purpose test the amount of subsidy can only be said to be capital receipt. He further submitted that Assessing Officer has simply held the nature of subsidy as revenue on the basis that subsidy in the form of non payment of sales tax, entry tax and electricity duty were production related incentives and none of the above items tantamount to acquisition of capital assets. Our attention was also invited to CBDT Circular No.142 dated 1,8.1974 which explains the nature of subsidies and therefore it was pleaded that subsidy was capital in nature. 23. As regards additional ground taken by the assessee, the Ld AR submitted that in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f subsidy depending upon the facts and circumstances of each case. In respect of reliance put by Ld AR on different case laws, the Ld DR submitted that the judgment in those cases depended upon the facts and circumstances of those cases and cannot be compared with the present case and it was submitted that under the industrial policy subsidy was available to both existing and new units and therefore cannot be said to attract new units only. With respect to Special Bench case in the case of Reliance Industries Ltd. (2010) 228 taxindiaonline, the Ld DR submitted that Hon'ble High Court s decision has been set aside by Hon'ble Supreme Court. Continuing his arguments the Ld DR submitted that Govt. is making huge amounts for payment of subsidy from tax payers money and they cannot be allowed to go tax free. With respect to case laws of Sawhney Steel Pony Sugar (supra) of Hon'ble Supreme Court the ld DR submitted that Hon'ble Supreme Court had not over ruled the earlier case of Sawhney Steel rather in the latter case the Hon'ble Court had clarified the purpose test which was capital in nature in that case whereas it was revenue in nature in first case of Sawhney Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r complete a project, it is a capital receipt. v) If the moneys are given only after conditional upon the commencement or production, then subsidy must be treated as assistance for the purpose of trade or business. In view of the above principles he submitted that in the present case the subsidy was not given to assessee for purchase of capital asset or for setting up of an industrial unit as the same has already been set up. Therefore, the present case is squarely covered by the ratio of decision of Hon'ble Supreme Court in the case of Sawhney Steel Press Works Ltd. (supra). He further argued that assessee has failed to establish on record that in the present case the subsidy was to enable it to carry out capital investment and in the absence thereof it cannot be presumed that such subsidy would be in the nature of capital subsidy. Reliance in this context was placed on the case of law of LG Electronics India Pvt. Ltd. (2010) TIOL -222-ITAT-Del. Wherein the Hon'ble ITAT held that subsidy was linked with the production and sales after commencement of business and sales tax subsidy was treated as revenue receipt. Regarding contention of the Ld AR that the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of subsidy is of capital nature only because the subsidy was meant for repayment of term loans which were taken by the assessee for setting up of new unit and such repayment of term loans was on capital account whereas in the present case the subsidy is in the form of sales tax exemption, electricity duty exemption etc which were revenue in nature. He further argued that Hon'ble Supreme Court after noting similar scheme where the Hon'ble High Court of Madhya Pradesh had held that the subsidy to be of capital nature in the case of Dusad Industries reported at 162 ITR 734 had held as under:- The Madhya Pradesh High Court, however, failed to notice the significance fact that under the scheme framed by the Govt. No subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify for industrialization for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but is an assistance after the industry commenced its production. The view taken by the Hon'ble Madhya Pradesh High Court is erroneous. 29. Regarding reliance of Ld AR in the case of Maruti Ltd. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as. He stressed that purpose of giving subsidy was to overall attract big industrial houses for generating employment, development and for efficient use of human and industrial resources with a view to increase employment and strengthen State infrastructure facilities and therefore the nature of subsidy was of capital. Further reliance was placed on the judgments in the following cases wherein purpose test was applied:- 1. V.S.S.V. Menakshi Achi 60 ITR 253 (SC). 2. Sawhney Steel Press Works Ltd. v. CIT 228 ITR 253 (SC) 3. Ponni Sugar Chemicals Ltd. v. CIT 306 ITR 392 (SC). 4. Mepco Industries Ltd. v. CIT 319 ITR 208 (SC). 5. CIT v. Ruby Rubber WEorks Ltd. 178 ITR 181 (Kewr.). (affirmed by the Hon'ble SC in Kalpetta Estates Ltd. v. CIT 221 ITR 601. 6. CIT v. Sham Lal Bansal I.T.A. No.472 of 23010 (P H). 7. CIT v. Udapi Builders (P) Ltd. 229 CTR 452 (Karnataka). 8. CIT v. Balrampur Chinni Mills Ltd. 238 ITR 445 (Cal.). 9. CIT v. National Cooperative Consumer Federation Ltd. 254 ITR 599(Del.). 10. Sadichha Chitra v. CIT 189 ITR 774 (Bom.). In rebuttal of Ld DR s contention regarding first contention that the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her relying upon the case of CIT v. Sham Lal Bansal (supra) the Ld AR submitted that Hon'ble Court had observed that subsidy received by assessee was of capital receipt and not liable to tax. Similarly, the head notes of various case laws relied by the Ld AR were read and on the basis of the judgments it was argued that the subsidy received in the present case was of capital nature and not liable to tax. He further argued financial statements for the period from 31.3.1999 to 31.3.2004 shows secured borrowings had increased by Rs. .400 croes and though the subsidy scheme had no particular utilization scheme but as a mater of fact the appellant has to utilize the subsidy for repayment of above borrowings and therefore the amount of subsidy can be said to be used for repayment of loan and therefore was of capital receipt. Regarding Ld DR s reliance of Sawhney Steel Press Works and other decisions the Ld AR submitted that these cases are distinguishable and in those cases after analyzing the purpose of scheme it was held that subsidy granted was revenue receipt. 32. As regards the decision of Hon'ble Madhya Pradesh High Court in the case of Dussad Industries (supra), the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. As regards ground No.4. it was submitted that it is a common ground and has already been argued. In respect of ground No.2 he submitted that this ground is also covered against revenue in the earlier year but argued that facts are different in the present year. Continuing his arguments on this ground, he submitted that there are two agreements placed at paper book page 66 and page 92. He argued that agreement for sale of power to Gujrat, placed at paper book page 92 is relevant for the year. In view of this agreement, the Ld DR argued that excess power was sold to Gujarat Electricity Board and not to Chhatisgarh Electricity Board as in the earlier year. Therefore, the rate at which the power had been supplied was market rate and was rightly taken by Assessing Officer as market rate. He further argued that there is difference between the facts and circumstances of earlier year With respect to present appeal as in the present appeal the power was sold to Gujarat Electricity Board and not to Chattisgarh Electricity Board. 34. In his reply, the Ld AR argued that assessee was not permitted to sell power other than to Electricity Board of state and forced price can never be market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income was processed u/s 143(1) on 29.9.2008 no adjustment in this behalf was made by the Assessing Officer. Under sub rule (1) of Rule 5 read with appendix-I as noted earlier the provisions of Income Tax Rules, 1962 has not laid down any particular procedure for exercise of option by the assessee. That being so the assessee could find the occasion to exercise his option while filing the return of income for assessment year 1999-00. We, therefore, allow assessee s ground of appeal No.2 and direct the Assessing Officer to allow depreciation as admissible to the assessee. 36. We further find that the aforesaid decision has been followed by the Tribunal in appellant s own case for assessment year 2001-02 in I.T.A. No.3257/Del/2005 (relevant pages 307 308 of paper book). Further we notice that department s appeal against the said order of the Tribunal has been dismissed by Hon'ble Punjab Haryana High Court vide order dated 2.9.2008 for assessment year 2000-01 and for assessment year 2001-02(relevant orders are placed at paper book pages 43-46. Following the above, we find that facts and circumstances of the case remains same, therefore, we dismiss the first ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, services rendered by the recipient and the legitimate business needs of the appellant. 40. The Ld AR had submitted that the Assessing Officer again disallowed the same. However, Ld CIT(A) in second round of appeal has allowed the same. We find that Ld CIT(A) s finding prima facie establishes the existence of the payee and also the payments were made in view of agreement dated 25.3.2002 which was duly furnished before Assessing Officer and the terms and conditions of agreement duly spelt out the services to be rendered by payee and commission to be paid to it. The concern was registered with the Sales Tax Department and was liable to pay local taxes and we are of the considered opinion that the assessee had discharged its onus of proving regarding genuineness of transaction, identity of payee and services rendered by the payee and therefore, we are of the considered opinion that payment was for legitimate business purposes and therefore we dismiss ground No.4 of revenue s appeal and consequently allow ground No.3 of assessee s appeal. 41. In view of the above, the appeal filed by the revenue is dismissed. 42. Now we take up the appeal filed by the assessee in I.T.A. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had not explained the purpose of these visits whereas in assessment year 2001-02 the same were explained fully. Even before us, the Ld AR has submitted that purpose was for visit to customers but did not elaborate specifically as elaborated in the assessment year 2001-02. Therefore, we do not agree with Ld AR s contention that issue was covered by the earlier order of assessment year 2001-02. We dismiss ground No.2 of assessee s appeal. 45. Ground No.3 of assessee s appeal stands already adjudicated in revenue s appeal as ground No.4 and has been decided in favour of assessee. Therefore, ground No.3 is allowed. 46. Ground No.4 of assessee s appeal relates to taxability of subsidy received by the appellant on account of exemption from sales tax, entry tax and electricity duty. The appellant had set up during the period 2000 04 industrial unit which has enabled it to avail exemption in respect of payment of Central sales tax, entry tax and electricity duty. The assessee had earlier declared the receipt of subsidy as a revenue receipt but during assessment proceedings, the said amount was claimed as not taxable being in the nature of capital receipt and this was claimed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have held that the nature of subsidy to be of capital nature or revenue nature depending upon the facts and circumstances of each case. However, we find that the issue has been explained in detail in the Apex Court judgment of Sawhney Steel Press Works (supra) and Ponny Sugar Chemicals Ltd. (supra) wherein the Hon'ble Court had taken opposite views in view of different facts and circumstances of both cases. The case law of Sawhney Steel Press Works (supra) squarely covers the facts and circumstances of the present case. The facts of Sawhney Steel Press Works are that whether subsidy received by the assessee company was taxable as revenue receipt or not. As per notification issued by Andhra Pradesh Govt. certain facilities and incentives were to be given to all new industrial undertakings which commenced production on or after 1.1.1969 with capital investment not exceeding Rs. .5 crores and the incentives were to be allowed for a period of five years from the date of commencement of production and incentive was in the form of refund of sales tax on raw material, machinery and finished goods subject to maximum of 10% of equity capital paid up in the case of public limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of recipients whether revenue or capital will have to be determined by having regard to the purpose for which the subsidy was given and if it was given by way of assistance to the assessee in carrying on his trade or business it has to be treated as trading receipt and if the refund of sales tax on purchase of machinery as well as on raw material is given to enable the assessee to acquire new plant machinery for further expansion of its manufacturing capacity the entire subsidy must be held to be a capital receipt in the hands of the assessee. The Hon'ble Court further held that subsidies were not granted for production or bringing into in existence any new asset and the same were granted year after year only after setting up of new industry and commencement of production and such subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee and held that these subsidies were of revenue character and were liable to tax. 49. The facts and circumstances of the present case are similar to the facts and circumstances of Sawhney Steel Press Works (supra) wherein the Govt. of Madhya Pradesh with a view to industrialize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be on revenue account in the form of sales tax exemption, water tax exemption etc. whereas in the latter case the subsidy was paid for repayment of outstanding loans which were capital in nature Therefore, keeping in view the purpose test which was for repayment of loans a capital receipt the Hon'ble Court had held it to be capital receipt. The assessee had relied upon a number of judgments given by lower courts which has considered subsidy as capital receipt by applying purpose test but the facts and circumstances of each and every case are different from the facts and circumstances of the present case which are squarely covered by the judgment of Hon'ble Supreme Court in the case of Sawhney Steel Press Works (supra). The case laws relied upon by the assessee are discussed as under:- 50. CIT v. Rasoi Ltd. 335 ITR 438 (Cal.). The object of the subsidy in this case was expansion of business capacities, modernization and marketing and capability of these were assistance on capital amount whereas the facts and circumstances of the present case are totally different. 51. Sri Balaji v. CIT 333 ITR 335 (J K). The subsidy in the form of excise duty refund and interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of present appeal are similar to the facts and circumstances of Sawhney s Steel Press Works (supra) which has been adjudicated by the Apex Court. 57. Indo Rama Synthetic India Ltd. in I.T.A.No.2002 of 2008.. In this case the Hon'ble Tribunbal has held the subsidy on account of sales tax exemption to be of capital in nature relying upon the case law of Reliance Industries Ltd. (supra) 88 ITD 273 which itself has been remitted back by Hon'ble Supreme Court to Hon'ble High Court for reconsideration. 58. As regards reliance of Ld AR on Circular No.142 dated 1.8,1974, it is observed that the circular was in respect of 10% Central outright grant of subsidy for industrial units to be set up in certain selected backward areas and it was specifically intended to be contribution towards capital outlay of industrial unit which is not the case in the present appeal. 59. The Ld AR also argued that assessee had created fixed assets with the help of huge borrowings and these borrowings in any case will have to be repaid over a period of time and assessee will utilize amount of subsidies for repayment of loans and therefore same should be treated as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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