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2016 (8) TMI 695 - ITAT DELHI

2016 (8) TMI 695 - ITAT DELHI - TMI - Determine the character of subsidy in hands of recipient - whether Revenue or capital - Held that:- The subsidy in the present case under the incentive scheme 2001 for economic development of Kutch District was aimed at making the economic environment of Kutch District live as the economic activity in the District of Kutch came to a stand still on account of the devastating earth quack in the state on 26th January 2001 and the aim was to create new employmen .....

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RI O.P. KANT For The Assessee : Shri P.C. Yadav,Adv. For The Department : Smt. Rishpal Bedi, Sr. DR ORDER PER I.C. SUDHIR: JUDICIAL MEMBER ITA No. 5202/Del/2010: The assessee has questioned first appellate order on the following grounds: 1.1 That the Learned CIT(Appeals) has erred in confirming the application of Rule 8D in relation to exempt income ₹ 4,269,842 and he is wrong in ignoring the decision of Hon'ble Bombay High Court held in the case of Godrej & Boycee Mfg. Co. Ltd. 1. .....

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rofit & loss account. 2.1 That the Learned CIT(Appeals) was wrong in confirming disallowance of sales-tax incentive ₹ 14,970,116 for setting up of an undertaking in Kutch District by the Government of Gujarat by way of adjustment of pre-determined amount of incentive against liability towards sales-tax. 2.2 That the Learned CIT(Appeals) was wrong in not appreciating the fact that the incentive ₹ 14,970,016 for the development of Kutch district was quantified much before the adjus .....

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(AT) 16 and the decision of Hon'ble Bombay High Court not admitting the appeal filed by the CIT-III, Mumbai in relation to above matter. 4. That the Learned CIT(Appeals) has erred in disallowing foreign travel expenses ₹ 85,255 actually incurred for its employees. 2. Besides above, the assessee has also moved application for permission to raise the following additional ground for the adjudication of the Bench: That it is contended that sales-tax incentive ₹ 1,49,70,016 allowed fo .....

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sh material outside the record. He submitted that the issue raised also goes to the root of the matter. In this regard, he placed reliance on the decisions of Hon'ble Supreme Court in the cases of CIT vs. Varas International - 284 ITR 80 (SC); NTPC LTd. vs. CIT - 229 ITR 383 (SC). 4. The Learned Senior DR opposed the application with the submission that it has been raised for the first time before the ITAT. 5. In rejoinder, the Learned AR pointed out that the additional ground has been raise .....

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ve requested additional ground for our consideration and adjudication. Since it is connection to the issue raised in ground Nos. 2.1 to 2.3 of the appeal, we will hear this additional ground along with the said grounds in the succeeding paragraph. 7. The Revenue ( ITA No. 5701/Del/2010): on the other hand has questioned first appellate order directing the Assessing Officer to take average cost of assets at ₹ 4,40,08,12,471 as worked out by the assessee as against ₹ 2,32,28,77,170 as .....

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entives; iii) Foreign travel expenses of ₹ 85,259. 10. The Learned CIT(Appeals) has given part relief on the issue of disallowance under sec. 14A read with Rule 8D which has been questioned by the Revenue. 11. Ground Nos. 1.1, 1.2 and 1.3: The Assessing Officer observed that the assessee had claimed exempt income of ₹ 42,69,842, however, it had not allocated any expense for earning this income. The Assessing Officer did not accept contention of the assessee that investment in the sha .....

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investment related to tax free income. The Learned CIT(Appeals) also directed the Assessing Officer to take average cost of assets at ₹ 4,40,08,12,471 as worked out by the assessee against ₹ 2,32,28,77,170 as taken by the Assessing Officer while computing disallowance under sec. 14A read with Rule 8D. The relief given by the Learned CIT(Appeals) to the assessee has been questioned by the Revenue. The assessee has questioned the disallowance sustained by the Learned CIT(Appeals). 12. .....

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bearing funds:- Nature of Funds Quantum Page No- PB Loan Funds 2,53,93,95,660 50- Schedule -1 Less:- Deployed in Fixed Assets 2,44,82,42,205 Capital Work in progress 37,75,74,884 282,58,17,089 Shortfall funded by Interest free fund 28,64,21,429 Even after the utilization of interest free funds to the extent of ₹ 28, 64, 21,429 in fixed assets and Capital work in progress. The appellant company was having interest free funds to tune of ₹ 1,90,93,09,739. B. It is submitted that the to .....

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505(Bom) b. Hind Industries ITA No.4325/Del/2012(Del) c. Mukul Rohtagi Vs. JCIT - ITA No. 998/Del/2012 (A.Y. 2008-09) - order dated 14.10.2015. D. It is next submitted that it is now settled position of law that before resorting to the provisions of sec. 14A (2) & 14A (3), it is incumbent upon the AO to record his satisfaction vis-à-vis correctness of account of the assessee and if there is no satisfaction then no disallowance is permissible u/s 14A of the Act. E. Further assessee see .....

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However, Rule 8D has been introduced in the statute w.e.f. 1.04.2008 and hence the same is not applicable to the present case. G. It is submitted that this view has now been affirmed by various High Courts including the Jurisdictional High court in the case of Max Cop reported in 347 ITR 0272(Del). H. It is next submitted that it is also settled position of the law that even after the insertion of the Rule 8D, the burden is on revenue to establish proximity between the expenses incurred and inco .....

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ained by the Learned CIT(Appeals). She submitted further that the disallowance was made by the Assessing Officer on reasonable basis and there was no error in the figures taken by the Assessing Officer. She submitted that no suo moto disallowance under sec. 14A was made by the assessee despite having exempt income during the year. The Learned CIT(Appeals) thus was not justified in interfering with the disallowance made by the Assessing Officer. 14. Considering the above submissions, we find subs .....

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balance sheet shows total fund of ₹ 427.81 crores out of which ₹ 253.94 crores were borrowed constituting about 61% of total funds. The Assessing Officer noted further that the fixed assets are to the tune of ₹ 212.89 crores and, therefore, the share capital and reserves are not even sufficient to meet the investment made in fixed assets. We thus find that there is no dispute that the assessee had earned exempt income from mutual funds. The Learned AR, however, submitted that i .....

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st appellate order has also accepted the contention of the assessee that the average cost assets has been wrongly worked out by the Assessing Officer and the average cost of the assets as worked out by the assessee at ₹ 4,40,08,12,471 is correct figure. We also find substance in the contention of the Learned AR that when the assessee had earned exempt income of only ₹ 42,69,842 on the investment of ₹ 70,09,574 on mutual funds, how the action of the Assessing Officer in making d .....

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assessee is thus directed to be deleted. The ground Nos. 1.1 to 1.3 are thus allowed. 15. Sole ground of the Revenue: In this ground, the Revenue has questioned the action of the Learned CIT(Appeals) in directing the Assessing Officer to take average cost of assets at ₹ 4,40,08,12,471 as worked out by the assessee as against ₹ 2,32,28,77,170 as taken by the Assessing Officer while computing disallowance under sec. 14A read with Rule 8D. Since while discussing the issue raised in grou .....

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Learned CIT(Appeals) has also upheld the same. 17. In support of the grounds, the Learned AR made following submissions: 1. Assessee company has deployed capital investment of ₹ 23.87 Crore in Kutch District of Gujarat (see page no. 23 of the paper book). The investment made has been duly acknowledged by the State Govt. 2. It is submitted that the aforesaid investments were made by the assessee in pursuance to a scheme namely Incentive Scheme 2001 for Economic Development of Kutch Distric .....

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ct live, it has been decided to confine the same only to Kutch District 4. It is submitted that perusal and interpretation of the above clause would show that scheme was not aimed to enhance the profits of any industry( including that of assessee) rather it was launched for the development of Kutch 5. It is submitted that clause 4 at Page No 16 of the scheme describes as to which units are eligible units. As per this clause Eligible units will be able to avail benefits on their eligible fixed ca .....

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of Kutch for the development of Kutch. The features of the scheme are mentioned in clause 4.1 of the scheme at page no. 16 of the paper book. 4.1 Eligible units will be able to avail of the benefits of sales tax exemption or sales tax deferment on their eligible fixed capital investment. Under the sales tax incentives, the tax to be recovered against the sales proceeds under the Gujrat Sales Tax Act or Central Sales Tax Act shall be considered. The units shall have to opt for one of the followin .....

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idy vis-à-vis capital deployed by an industrial undertaking. Rather, it is a case where State Government has announced 100% equivalent amount of incentives in the shape of exemption from sales tax liability to those assesses who were developing the devastated area of Kutch. 9. It is next submitted that incentive granted to assessee was not for assisting assessee in carrying out its business operation but incurred the promotion of industries in the State of Gujarat in that Area which was d .....

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d that the assessee has commenced its commercial production on 7.04.2005 and has opted for sales tax Exemption Scheme in the aforesaid scheme. (See the page no. 24 of paper book) 12. Initially, assessee has deployed capital investment of ₹ 21.01 crore and later the assessee has enhanced the investments to the tune of ₹ 23.87 crore and this investment was certified/ recognized by the State Government vide eligibility certificates dated 07.10.2007 ( See the page no. 23 of the paper boo .....

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ment. (See the page no. 34of the paper book) 14. It is next submitted that there is difference between expression subsidy and incentive. It is submitted that Incentives are defined in the online Merriam- Webster dictionary as something that has a tendency to incite to determination or action; something that encourages a person to do something or work harder. Synonyms include boost, spur and stimulant among others. Subsidies are described by this same source as: a grant or gift of money and-here .....

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High Court of Bombay in CIT Vs Reliance Industries reported in 339 ITR 0632(Bom). In this case the Hon ble Special Bench has referred to the decision of Shaney steel reported in 228 ITR 253(SC) and two decisions of House of Lords namely The Seaham Harbopur Dock Co Ltd Vs Crook reported in 16 Tax Cases 333 (HL) and Ostime Vs Pontipridd reported in 28 Tax Cases 261, Hon ble Special Bench has held that it is the purpose, for which the scheme is launched, would decide the character of incentive and .....

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eipts. The Hon ble Apex court in referring to the old decisions of House of Lords in Seaham Harbour Dock Vs Crook 16 Tax Cases 333(HL), has held that form and mechanism of the subsidy is irrelevant The observations of the Hon ble Apex Court in Ponni Sugar in Para-14 are as under:- The importance of the judgment of this Court in Sahney Steel case (supra) lies in the fact that it has discussed and analyzed the entire case law and it has laid down the basic test to be applied in judging the charact .....

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ent of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, .....

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e the assessee has been provoked by the state Govt. for deploying capital investment and it is not the case that State Govt. has granted any subsidy on the assets deployed by the assessee. Further assessee seeks to rely on the decision of ITAT Ahmadabad in the case of Ajanta Mfg Ltd -ITA No-793/RJT/2010) wherein the considering the same scheme the ITAT has held that the sales tax incentives are capital receipts. Copy of the decision at page No- 62 of PB 19.115JB ground :-It is next submitted tha .....

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the other hand placed reliance on the orders of the authorities below on the issues with the submission that the sales-tax benefit was given to the assessee to run its factory in initial years and not to set up the industry. She submitted that sales-tax benefit was granted on purchases to help the running factory/industry. The decisions relied upon by the Learned AR having distinguishable facts are not helpful to the assessee. 19. Having gone through the decisions relied upon by the Learned AR a .....

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upra) while upholding the decision of the Bombay Bench of the ITAT in this regard has been pleased to hold that the object of the subsidy was to encourage the setting of the industries in the backward area by generating employment therein. The Hon'ble High Court was pleased to observe that as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd. (supra), the test of the character of the receipts of the subsidy in the hands of the assessee .....

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lace. The scheme was confined only to Kutch District. Again, the Hon'ble Gujarat High Court in the case of CIT vs. Birla VXL Ltd. (supra) where the issue was to determine the character of subsidy in hands of recipient, whether Revenue or capital. It was held by the Hon'ble High Court that the purpose of subsidy is to be considered and source of fund and mechanism of giving subsidy are immaterial. The Hon'ble High Court pleased to hold that incentive being in the form of sales tax wai .....

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wherein same scheme as in reference in the present case was considered by the ITAT and it was decided that the incentive given was in the nature of capital. The said decision of the ITAT was questioned by the Revenue before the Hon'ble High Court and Hon'ble High Court had admitted the same without staying the operation of the order of the ITAT. The learned counsel of the Revenue tried to take advantage of the admission of that appeal but the Hon ble Court denied his submission. We thus .....

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re accordingly allowed. In view of this finding, the issue raised in the additional ground that once it is held that the sales-tax incentive are capital receipts then the same should be excluded from the ambit of book profit also i.e. section 115JB of the Act is allowed as it is also supported with the view taken by the Lucknow Bench of the ITAT in the case of L.H. Sugar Factory Ltd. Vs. JCIT - ITA No. 518 and 53/Lkw/2015 (A.Y. 2010- 11) order dated 9.12.2016. The additional ground is accordingl .....

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