TMI Blog2018 (5) TMI 1967X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 - SUPREME COURT] bad debts need not be proven to be irrecoverable. It is sufficient if the same are written off. Since the issue is squarely covered by the provisions under section 36(1)(vii) and section 36(2) of the Income Tax Act,1961, and since it is written off as irrecoverable, we decline to interfere in the order of the Ld. CIT(A). - Decided against revenue Disallowance under section 36(1)(iii) on purchase of Land - HELD THAT:- Assessee has got sufficient funds as per the balance sheet as on year ending 2010. The share capital is of ₹ 2.57 Crores and the reserves and surplus are to the tune of ₹ 115.35 Crores. Hence, placing reliance on the decision of the Hon ble jurisdictional High Court in the case of Bright Enterprises Private Ltd. [ 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT] and judgment in the case of a CIT Vs. Omax bikes limited [ 2015 (8) TMI 1290 - ITAT CHANDIGARH] , Hero Cycles Vs. CIT [ 2016 (2) TMI 1081 - ITAT CHANDIGARH] wherein it has been held that if sufficient interest free funds are available the presumption is that the advances have been made out of such funds and no disallowance of interest under section 36(1)(iii) is called f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ldman Sachs (Mauritius) to whom 360000 shares have been allotted. Keeping in view the peculiar facts and circumstances of the case a reasonable estimate of the expenses needs to be determined as Rule 8D cannot be invoked. We find that Ld. CIT(A) has reasonably estimated the disallowance keeping in view the entire facts and circumstances of the case. Addition u/s 8D(2)(i) (ii) - In the decision in the case of Dhampur Sugar Mills Vs. CIT (Alld) [ 2014 (9) TMI 791 - ALLAHABAD HIGH COURT] wherein it was held that half percent of average investment is justified on account of disallowance under Rule 8D(2)(iii) on account of other expenses. Since the decision of the Ld. CIT(A) is based on the orders of the ITAT and the Hon ble High Court, we decline to interfere in the order of the Ld. CIT(A). Disallowance u/s14A cannot be considered in determination of tax under section 115JB - HELD THAT:- Disallowance under section 14A read with Rule 8D cannot be added while computing book profits as per section 115JB as Explanation to that section does not specifically mentions section 14A of the Income Tax Act, 1961. See ACIT VS. Vireet Investments Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case, the Ld. CIT(A) was justified in allowing deduction of ₹ 17,32,506/- u/s 80IS by holding the assessee's NOIDA Unit to be Small Industrial Unit by simply relying solely on the submissions of the assessee and not by giving any independent findings? Grounds of C.O. No. 27/Chd/2017 for A.Y. 2007-08 is as follows: 1. That the learned CIT(A)-1, Ludhiana, has erred in confirming the disallowance of ₹ 5,31,145/- u/s 14A being 10% of the dividend income of ₹ 53,11,447/-. 2. That it has been ignored that no expenditure was incurred by the appellant in earning the exempt income and even otherwise the disallowance of 10% of the exempt income is far too excessive. 3. That the confirmation is disallowance is against the law and facts of the case. Grounds of ITA No. 405/Chd/2017 for A.Y. 2008-09 is as follows: 1. Whether upon facts and circumstances of the case in law, the Ld. CIT(A) is justified in deleting the disallowance made on account of Foreign Travel Expenses when the onus of the assessee to prove the business purpose has not been discharged? 2. Whether upon facts and circumstances of the case in law, the Ld. CIT(A) is justified i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the learned CIT(A)-1, Ludhiana, has erred in confirming the order of the AO in respect of sale tax subsidy by wrongly treating the same as part of income of the appellant ignoring the facts that the said amount of ₹ 61,59,656/- was in nature of capital receipt not liable to tax. 2. That the Ld. CIT(A) has erred in not following the judgment of the Hon'ble jurisdictional Tribunal which was binding on him. 3. That the Ld. CIT(A) has erred in confirming the order of the AO in upholding the disallowance made u/s 14A amounting to ₹ 1,51,728/- in assessment made u/s 115JB of the Income Tax Act. Grounds of ITA No. 557/Chd/2017 for A.Y. 2011-12 is as follows: 1. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 14,76,483/- u/s 80IC of Income Tax Act, 1961 on job work charges by simply relying solely on the submissions of the assessee and not by giving any independent findings.? 2. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 17,10,872/- u/s 80IC of the Income-tax Act, 1961 in lieu of indirect benefits received b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ignoring the facts that the said amount of ₹ 57,17,950/- was in nature of capital receipt not liable to tax. 2. That the Ld. CIT(A) has erred in not following the judgment of the Hon'ble jurisdictional Tribunal which was binding on him. Grounds of ITA No. 559/Chd/2017 for A.Y. 2013-14 is as follows: 1. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 42,16,898/- u/s 80IC of Income Tax Act, 1961 on job work charges by simply relying solely on the submissions of the assessee and not by giving any independent findings.? 2. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of ₹ 43,44,775/- u/s 80IC of the Income-tax Act, 1961 in lieu of indirect benefits received by assessee from the parent company M/s. Cremica Agro Foods Ltd., by simply relying solely on the submissions of the assessee and not by giving any independent findings? 3. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of ₹ 99,032/- on account of bad debts without appreciating the facts that no effor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.5 Appeal of the Revenue on this ground is dismissed. 4. Issue of Disallowance of Bad Debts: A.Y. 2012-13: Ground No. 3 of Revenue s appeal A.Y. 2013-14: Ground No. 3 of Revenue s appeal 4.1 The Assessing Officer has disallowed bad debts of ₹ 4.78 Lacs( for the A.Y. 2012-13) claimed by the assessee on account of transactions with the distributors who in turn supply products of the assessee to the retailers. The retailers made claim against the distributors pertaining to the damaged stock. On settlement of the suits filed by the distributor, the amount was ultimately settled at ₹ 4.78 Lacs which the assessee written off permanently as bad debts. Ld. CIT(A) considered the facts of the case and allowed the claim made by the Assessing Officer as the assessee company has permanently written off the amount. 4.2 Since the action of the Ld. CIT(A) is in consonance with the provisions under section 36(1)(vii) and section 36(2) of the Income Tax Act,1961, and since it is written off as irrecoverable in the taxpayer's books of accounts, we decline to interfere in the order of the Ld. CIT(A). For the A.Y. 2013-14, the bad debts claimed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground of appeal of the Revenue is dismissed. 6. Issue of disallowance of Section 80IC on indirect benefits A.Y. 2007-08: Ground No. 3 of the Revenue s appeal (Cremica) A.Y. 2010-11: Ground No. 3 of the Revenue s appeal (Cremica) A.Y. 2011-12: Ground No. 2 of the Revenue s appeal (Cremica) A.Y. 2012-13: Ground No. 2 of the Revenue s appeal (Cremica) A.Y. 2013-14: Ground No. 2 of the Revenue s appeal (Cremica) 6.1 The relevant portion of the Assessment Order pertaining to disallowance is as under: The assessee is running a unit at Tahliwal claiming exemption u/s 80IC of the Income Tax Act, 1961 established by M/s Cremica Agro Foods Limited in a industrial growth centre in the state of Himachal Pradesh as per section 80IC(2)(ii). M/s. Cremica Agro Foods Ltd. had taken the land on lease from Himachal Pradesh Government for establishing its unit in Himachal Pradesh. The funds and technical know how has been provided by the management since it was already running the similar business at Phillaur. The brand names, products, quantities, packing, sizes/ quantities of the saleable units of the products are the same, as per the discussions with the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of M/s. Cremica Agro Foods Ltd. , which is relevant this year also as follows:- 8. The assessee is running a unit at Tahliwal claiming exemption u/s 80IC of the Income Tax Act, 1961 being established in a industrial growth centre in the state of Himachal Pradesh as per section 80IC(2)(ii). The assessee has taken the land on lease from Himachal Pradesh Government for establishing its unit in Himachal Pradesh. The funds and technical know how has been provided by the management since it was already running the similar business at Phillaur. The brand names, products, quantities, packing, sizes/quantities of the saleable units of the products are the same, as per the discussions with the assessee during the assessment proceedings. The Tahliwal Unit has not paid any expenses for know how, goodwill, trade name, establishing expenses in the market for its products as it got a readymade market generated by Phillaur Units in the last 12 to 15 years, no patent rights expenses given to Phillaur Unit etc. All the Profits of Tahliwal Unit could not have been earned by a newly established independent group without having experience, expertise, market share, goodwill, trade name, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ab and Haryana High Court in the case of CIT vs Impel Forge and Allied industries Ltd 326ITR 27 has held that the assessee is at liberty to manufacture for itself or others which makes no difference for the purpose of deduction under section 80IB of the act. Similar view was taken by the Hon'ble Delhi High Court in the case of CIT vs Northern Aromatics Ltd (2005) 196 CTR (Delhi) 479. In view of the same, the reduction in the claim made by the appellant under section 80IC on this account deserves to be deleted. These grounds of appeal are allowed . 6.3 The matter has further travelled to the Tribunal in the A.Y. 2006-07 which stands adjudicated in the favour of the assessee. For the sake of brevity the relevant portion of the order of the ITAT in the case of the assessee in ITA No. 39 40/CHD/2017 dt. 08/12/2017 in the case of M/s. Cremica Agro Foods Pvt. Ltd. for the A.Y. 2006-07. 28. Ground No.4 raised by the Revenue reads as under: 4.Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance ₹ 12,16,332/- made by the A.O. on deduction u/s 80IC claimed by the assessee on Tahliwal Unit without giving any r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer was done on estimate basis without bringing any evidence on record to show whether there was any transact ion between the two units. The Ld.CIT(Appeals) held that the assessee having al located al l common expenses on turnover basis and the Assessing Officer have not pointed out as to which expenses had not been considered, this al location of notional expenses by the Assessing Officer was unjustified and unwarranted. Relevant findings of the Ld.CIT(Appeals) at para 3.2 are as under: 3.2 I have considered the facts of the case, the basis of the additions made by the Assessing Officer and the arguments of the AR. The AO has reworked the claim under section 80IC between the Tahliwal unit and the Phillaur unit on estimated basis without bringing any evidence on record to show whether there has been any transaction between the two units. The appellant has made the allocation of all common expenses on turnover basis and the AO has failed to mention any expense which has not been considered in the said exercise. Thus, the reducing of the eligible profits to the extent of 10% by the AO without any sound basis is unwarranted and is hereby ordered to be deleted. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to our reply dated 11th December, 2008 and 17th December, 2008 filed during the assessment proceedings of Cremica Agro Foods Ltd. (AY 2006-07). Further the assessee vide letter dated 18.12.2009 submitted as under:- Regarding disallowance of deduction u/s 80IC on Tahliwal unit on income earned from job charges of ITC Limited in the assessment year 2006-07, we submit that we have correctly claimed the deduction U/S 80IC of the Income Tax Act, 1961 on income earned from job charges. Reliance is placed on the following case laws: ACIT Vs. Biotech Medicals P Ltd. (2009) 170 Taxman 3 (2009) 310 ITR 47 (AT) Hyd) (2009) 121 TTJ 858 Sec SOIB - Job Work/Conversion charges received by an industrial undertaking -entitled to 80IB. Profit on sale of scrap and interest on delayed payment have direct nexus with manufacturing activity. CIT Vs. Northern Arometics Ltd. (2005) 196 CTR 479 (Del) Warren Laboratories VS. DCIT (2005) 3 SOT 638 (Mum - Trib) Sec-80IA - Assessee engaged in job work - eligible for deduction u/s 801 A. ITO, Ludhiana V/s Impel Forge P Ltd. (2008) 36 ITRep 454 (Chd) Affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2006- 07 has observed on this issue in the case of M/s. Cremica Agro Foods Ltd. , which is relevant this year also as follows:- 9. The assessee is doing job work for M/s ITC at Tahliwal. The assessee has provided the copy of agreement between M/s ITC Ltd., Kolkatta and M/s Cremica Agro Foods Ltd. dated 14th June, 2004. The know-how has been provided by M/s ITC to the assessee and it further provides that the machinery provided by it will be used only for the manufacturing and packing the products of M/s ITC Ltd. The details of the machinery have also been provided in the agreement as Schedule 2 and Annexure F. On the perusal of the agreement it is cleared that the assessee is providing labour, electricity etc. while the quality supervision during the manufacturing and packing process is done by the employees of M/s ITC Ltd. M/s ITC is providing raw material and itself incurring the expenditure for the transportation of raw material and finished products. No separate record as per assessee is being maintained for labour or electricity expenses. The assessee has received ₹ 6,21,91,396/- as job charges. 10. The income u/s 80IC is exempted only which is derived by an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in CIT vs. Sterling Foods (237 ITR 579) that the expression 'profits and gains derived from' have been used deliberately by the legislature as the intention was to cover only those receipts which accrued due to actual conduct of the business. Had the intention of legislature been to cover receipts from other sources as well, then instead of using the words,' profits and gains derived from', the expression attributable to which has wider import, would have been used. Further, to avail of the benefit of deduction provisions, the assessee has to establish that the profits and gains are derived from its industrial undertaking and it is not sufficient that a commercial connection was established between profits earned and the industrial undertaking. The industrial undertaking itself has to be the source of the profit. When the industrial undertaking is engaged in manufacturing then the profit earned from the manufacturing alone qualify for the deduction 80IB. The nature of income of job charges cannot be treated to have en derived by the undertaking by manufacturing or producing any article or thing by providing only the labour and electricity. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t entitled to deduct ion u/s 80IC of the Act on the profits derived from the same which was computed on proportionate basis at ₹ 16,36,199/- . 36. Before the Ld.CIT(Appeals) , the assessee relied upon on a number of case laws in support of its content ion that even vis- -vis prof i ts derived from job work charges the assessee is entitled u/s 80IC of the Act . The Ld.CIT(Appeals) relying upon the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Impel Forge Allied Industries Ltd. , 326 ITR 27 and the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Northern Aromatics Ltd. (2005) 196 CTR 479 held that the assessee was entitled to claim deduct ion on profits earned on account of job work undertaken by i t holding as under: Further, the basic process is carried out by the appellant is the same whether the production is done for itself or job work. The Hon'ble Punjab and Haryana High Court in the case of CIT vs Impel Forge and Allied industries Ltd 326 ITR 27 has held that the assessee is at liberty to manufacture for itself or others which makes no difference for the purpose of deduction under section 80IB of the act. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Buns as Negative item under schedule eleventh of the Act. 2. Inclusion of certain assets as a part of Plant Machinery while computing the total eligible value of Plant Machinery for SSI Limit. 3. By Wrongly referring circular no S. O 2(E) dated 1st January 1993. Reply to Para-1 The Item no.6 of Eleventh Schedule of The Income Tax Act, 1961 makes mention of Confectionery and Chocolates . The Word Confectionery as per Webster's Dictionary means a candy _ sweets and other confections collectively while the Word Bun which is purely a bakery item is defined as a small, soft, slightly sweetened roll, often with raisins, a soft bread roll . As such A.O's interpretation was misconceived. Then again as per proviso to section 80 IB (2) (iii), Schedule XI is not applicable to the SSI units. Reply to Para-2. It is submitted that Central Government introduced MICRO, Small and Medium Enterprises Development Act in 2006, according to which the investment criteria for small scale industrial undertaking stands increased to ₹ 500 lacs. The amount of total investment in plant and machinery in Noida Unit during the year under reference is far below the prescribed limit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akings are set up as partnership firms under the Indian Partnership Act, 1932 (1 of 1932) and one or more partners are common partner or partners in such firms, each such undertakings shall be considered to be controlled by the other undertaking or undertakings, The S.O. 2(E) dated 1st January, 1993 has also defined the expression controlled by any other industrial undertaking means as under: - i. where two or more industrial undertakings are set up by the same person as a proprietor, each of such industrial undertaking shall be considered to be controlled by other industrial undertaking or undertakings, ii. where two or more industrial undertakings are set up as partnership firms under the Indian Partnership Act, 1932 (1 of 1932) and one or more partners are common partner or partners in such firms, each such undertakings shall be considered to be controlled by the other undertaking or undertakings; iii. where industrial undertakings are set up by companies under the Companies Act, 1956(1 of 1956), an industrial undertaking shall be considered to be controlled by other industrial undertaking if,- (a) the equity holding by other industrial undertaking in it e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant, transformer, misc. fixed assets, misc. equipments, cooling conveyor, electric control panel, electric equipment, totalling to ₹ 7,44,92,704/- which is much higher than the limits prescribed by the Notification issued by the Competent Authority for granting approval to an Industrial undertaking as Small Scale Industries. Therefore, as per the Provisions of Industries (Development and Regulation) Act, 1951 and the notifications discussed above. The assessee does not fall under the category of a small scale industry to get the benefits u/s 801B of Income Tax Act, 1961. The definition of Small Scale industry undertaking as also been given u/s 80IB(14)(g) which states that an industrial undertaking on the last day of the previous year must be regarded as Small Scale Industry undertaking u/s 11(b) of the industries (Development and Regulations) Act, 1951. The assessee has not provided this certificate during the current assessment year. 6.1 The depreciation chart prepared by the assessee for Noida Unit shows the following plant and machinery under the head fixed assets : - Sr. No. Particulars of assets Balance as on 31st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of valuing to come under small scale industry has been deliberately ignored. The assessee has also taken plant and machinery on lease from M/s Cremica Industries Pvt. Ltd. (Bread Manufacturer) and a sister concern of the assessee. It is paying 7.5 paisa per bun for providing necessary machinery and know how during the year. The assessee has not given the details of the total plant and machinery given by M/s Cremica Industries Pvt. Ltd. and the cost of the same to it since the value of lease machinery has also to be accounted in the total cost for the limit of ₹ 1 Crore. The Total value of fixed assets has been worked out amounting to ₹ 4,69,92,552/- of the group. 7. The small scale industries as per section 80IB(2)(iii) should not produce any article or thing specified in the list in the Eleventh Schedule of the Act. As per list, six of the Eleventh Schedule it prohibits manufacturing of confectionary and chocolates. The manufacturing of buns is part of confectionary items. Therefore, the assessee cannot be given the benefit u/s 80IB. Since it is manufacturing an item listed in the Eleventh Schedule of the Income Tax Act, 1961. Therefore, in the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Noida undertaking is well within the specified limit of ₹ 1 crore to qualify as an SSI undertaking. Further, the Ld. counsel for assessee has also demonstrated that as per the applicable circular of the Ministry of Commerce clubbing of investments of undertakings of the assessee is not required. This fact has also not been controverted by the Revenue. Therefore, we find no merit in the content ion of the Revenue that for the purpose of determining quantum of investments in plant and machinery by the assessee undertaking, investments by all undertakings owned by the assessee are to be considered. For the aforesaid reasons, we hold that the Ld.CIT(Appeals) has rightly held the assessee to qualify as an SSI undertaking as per sect ion 11B of the IDR Act , 1951. 23. The next content ion of the Revenue for denying deduct ion u/s 80IB of the Act is that manufacturing of buns undertaken by the Noida uni t is part of confectionery item which is a prohibited i tem for manufacture by SSI units claiming deduct ion u/s 80IB, as per Schedule XI of Income Tax Act , 1961. 24. On this issue, the Ld. counsel for assessee reiterated the content ion made before the Ld.CIT(Appeals) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted order in ITA No. 1063/Chd/2011 (Departments appeal) ITA No. 297/Chd/2014(assessee's appeal) dated 14.10.2015 restored back all the issues in both of the appeals to the file of learned CIT(A) for afresh adjudication after allowing reasonable opportunity of being heard to the appellant. 4. In view of the order of the Honorable ITAT, Division Bench, Chandigarh in ITA No. 1063/Chd/2011 (Departments appeal) ITA No. 297/Chd/2014(assessee's appeal) dated 14.10.2015, the issues with regard to additions of ₹ 36,02,230/- made by the Assessing Officer on account of disallowance of expenses by invoking provisions of section 14A of the Act as the assessee company has earned exempt dividend income, to be decided afresh. In view of the directions of the Honorable, IT AT, Division Bench, Chandigarh dated 14.10.2015, the issues restored back to the file of learned CIT(A) decided afresh. The assessee company had challenged the action of the Assessing Officer in making an addition of ₹ 36,02,230/- on account of disallowance of expenses by invoking provisions of section 14A of the Act as the assessee company has earned exempt dividend income not forming part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutual funds from which he has earned dividend income which will not form part of the taxable income of the assessee company. The Ld. CIT(A) held that Rule 8D cannot be applied to the instant case, for this year as Rule 8D cannot be applied retrospectively. 9.4 Since it cannot be said that the assessee has not incurred any expenses for earning dividend income which is exempt from tax, the Ld. CIT(A) held that the Assessing Officer is satisfied in disallowing the expenses. However since Rule 8D cannot be applied in the case of the company the Ld. CIT(A) has restricted the disallowance to 10% of the dividend income earned of ₹ 53,11,447/-. 9.5 Before us the Ld. AR in addition to the argument taken before the Ld. CIT(A), argued that the Hon ble High Court has held a sum of ₹ 1,00,000/- as reasonable expenditure for earning dividend income of ₹ 31.21 Lacs. 9.6 The Ld. DR relied on the assessment order 9.7 We have gone through the facts of the case and agree with the decision of the Ld. CIT(A) that Rule 8D cannot be applied for the year 2007-08. However it cannot be said that the assessee has not incurred any expenditure in respect of any exempt income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 03/02/2017 for A.Y. 2008-09. The relevant extract of the decision is as under: 2. The appeal is admitted on the following substantial questions of law framed by us:- i) Whether the Assessing Officer had recorded satisfaction that the appellant-assessee's claim was incorrect? ii) Whether the Income Tax Appellate Tribunal had erred in upholding the application of Rule 8D of the income Tax Rules, 1962? iii) Whether the Tribunal erred in applying the provisions of Rule 8D(2)(ii) to the interest paid as opposed to the net interest earned by the appellant? Regarding Questions (i) and (ii) the decision of Hon'ble court is as under: 40. The Assessing Officer on not being satisfied with the correctness of the claim by the assessee in respect of the expenditure incurred to earn exempt income ought to have applied Rule 8D which he did not. Instead he made an estimate on the basis that he considered to be reasonable. This he was not entitled to do. Where an Assessing Officer is not satisfied with correctness of the claim of the assessee, in this regard, he is bound by the provisions of sub section (2) of Section 14A to follow the prescribed method wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 313 ITR 340 as well as a Division Bench judgement of this Court in Commissioner of Income Tax Vs. Hero Cycles Ltd. (2010) 323 ITR 518, to contend that in view of the balance-sheet produced by the assessee, shall be presumed that the funds available with the assessee were sufficient to meet the investments out of its own funds and that borrowed funds were not utilized for investment. Therefore, interest, if any, paid on borrowed funds cannot be disallowed in terms of Section 14A . In Reliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an orders passed by the Income Tax Appellate Tribunal, where negating the argument of the Revenue that share holders funds to the tune of over ₹ 172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question , which has been invested for earning exempt income. Similarly, in Hero cycles Ltd. Case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05 and further there were certain findings of facts which may not be applicable in every situation. Secondly, to solve problem of quantum of interest to be disallowed and expenditure from common pool of interest and expenditure, Rule 8D has been introduced so that reasonable disallowance is made. In the above findings, the theory of proportionate disallowance as confirmed by Hon'ble Punjab Haryana High Court in the case of CIT-1 vs Punjab Station Industrial Development Corporation Ltd in Income Tax Appeal No. 565 of 2006 vide order dated 18.7.2011 has been discussed in above noted pasras. Justification of Rule 8D as given by Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd Vs. DCIT 328 ITR 81 (Bom.) has also been discussed. In conclusion it can be said that Rule 8D is applicable from assessment year 2008-9 and, therefore, issue arising in this appeal have to be discussed on the premise that Rule 8D was applicable. 13. From the above it becomes clear that Hon'ble Court has confirmed that once there are mixed funds, Rule 8D has to be resorted. The same principle would apply in the case of expenditure incurred in earning exempt income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 8D(2), disallowance of interest on mixed funds, retrospectivity or prospectivity of Rule 8D. Similarly the ld. AR arguments in Cheminvest(supra) and the other case laws quoted during arguments also do not deal with Rule8D (2)(iii){which stands omitted w.e.f 02/06/2016. The Ld. CIT(A) relied on M/s GlaxoSmithKline Consumer healthcare Ltd., Vs. DCIT in ITA No. 290/CHD/2014 for A.Y. 2008-09 wherein it is held as under: The second aspect of the issue is disallowance under Rule 8D(iii) of Income Tax Rules on account of administrative expenses. Admittedly, the assessee is not maintaining separate accounts in respect of its investment activity and in view thereof the provisions of Rule 8D of Income Tax Rules are squarely applicable and disallowance is to be computed in accordance with the said provisions of Rule 8D of Income Tax Rules for working out disallowance under section 14A of the Act. Accordingly, we uphold the order of the Assessing Officer in this regard. However, the assessee is entitled to the set off of the amount surrendered at ₹ 6,06,977/-. In view thereof, ground Nos.8 to 8.4 raised by the assessee are partly allowed. And also the decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id incentive was received as per Himachal Government's notification of Excise and Taxation Department dated 24.08.2005. As per the notification the appellant was to pay 65% of the Sale Tax collected and the balance of 35% was to be treated as the subsidy. The assessee has also received transport subsidy for the year 2008-09 from Government of Himachal Pradesh. 10.4 The Ld. AR relied on various case laws and argued that the transport subsidy should be treated as capital subsidy. 10.5 Ld. DR argued that since the matter has not been adjudicated by the Revenue earlier and being a new ground admitted by the Tribunal for the first time the issue should be remanded back to the file of the Ld. CIT(A). Further, we find that regarding the treatment of transport subsidy Hon ble Supreme Court in the case of CIT Vs. Meghalaya Steels Ltd. (itatonline.org) held that it is not correct that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head income from other sources , which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of M/s Abhishek Industries Limited and confirmed the action of Assessing Officer treating sales tax subsidy received by the assessee company as revenue receipt as against the capital receipt considered by the assessee company. 10.9 Before us, the Ld. AR submitted various judgments which have been dealt hereunder. In the case of Vardhman Acrylic Ltd. in ITA No. 911/CHD/2013 wherein the Tribunal held that the sales tax subsidy received by the assessee is capital in nature on comparison of scheme of Government of Gujarat and West Bengal Incentive Scheme 1999. The analysis of the Tribunal is as under: Now, the only issue to be decided by us is whether the amount of ₹ 5,47,60,997/- received by the assessee from the Government of Gujarat as sales tax Subsidy is capital or revenue in nature. The learned counsel for the assessee at the very outset mentioned that these were a bunch of appeals before the Hon'ble Punjab Haryana High Court together with the appeal of the assessee, out of which there was a case of Bhushan Limited, which was also similarly restored to the file of the Tribunal to decide the same afresh. The order of the Chandigarh Bench of the I.T.A.T. i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment are given. We have also gone through the scheme of the Bengal Government which was in question before the Chandigarh Bench of the I.T.A.T. in the case of Bhushan Limited (supra). Though both the schemes of Gujarat Government and West Bengal Government are not verbatim, the sum and substance of both the schemes are same. As directed by the Hon'ble High Court on the basis of judgment in the case of Ponny Sugars Chemicals Ltd. (supra), the nature of the sales tax subsidy is to be decided on the basis of character of the receipt in the hands of the assessee. We see that the sales tax subsidy received by the assessee is capital in nature and is not subjected to tax. In arriving at this conclusion, we are guided by the order of the I.T.A.T. in the case of Bhushan Limited (supra), in which the Coordinate Bench of the I.T.A.T. in the same set of facts and circumstances has held as under: 24. The Hon'ble Supreme Court in the case of Ponni Sugars Chemicals Ltd. (supra) considering its earlier decision in the case of Sahney Steels Press Works Ltd.(supra) directed that the test is that the character of the receipt in the hands of assessee has to be determined with respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject matter of consideration before ITAT Kolkatta Bench in the case of Keventer Agro Ltd. (supra) and the Tribunal also decided the issue in favour of the assessee holding that the West Bengal Incentive Scheme, 1999 categorically encourage the promotion of industries in the State of West Bengal. 26. Considering the facts and circumstances of the case in the light of decision of the Hon'ble Supreme Court in the case of Ponni Sugars Chemicals Ltd. (supra) and considering the above discussion, we are of the view that sales tax subsidy received by the assessee is capital receipt in nature and are not subjected to tax. The additions made by the Assessing Officer on account of receipt of sales tax subsidy are accordingly deleted in all the assessment years in appeals. The issue remanded to the Tribunal is thus, decided in favour of the assessee and against the revenue in all the appeals under reference. 8. Respectfully following the order of the Coordinate Bench of the Tribunal, we hereby hold that the sales tax subsidy received by the assessee is capital in nature and, therefore, not taxable. 9. The appeal of the assessee is allowed. Further in the case of Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present assessee has been granted for setting up of agro based industrial unit in a backward area in the State of Haryana. This fact situation is squarely covered by Ponni Sugars Chemicals {supra). 9. Apropos Sahney Steel Press Works Ltd. v. CIT (supra) and CIT v. Rajaram Maize Products (supra), these decisions also do not take anything away from the case of the assessee, as has been observed by the learned CIT(A) in as much as therein, the issue was as to what is a revenue subsidy which is taxable. It was held, inter alia, that subsidy granted for setting up of industry is not of revenue nature. That being so, there is no force in the allegation of the Department that the learned CIT(A) ignored Sahney Steel Press Works Ltd. v. CIT (supra ) and CIT v. Rajaram Maize Products (supra). 3. We have heard learned counsel for the appellant. it is clear from the findings recorded by the CIT(A), as affirmed by the Tribunal that the subsidy as given for setting up of industrial unit in backward area of Haryana and was to be determined with reference to capital investment. In such a situation, the plea of the assessee was supported by the view taken by the Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom. State Government in respect of setting up a new unit in the State of Himachal Pradesh at Tahliwal, District Una. As per Industrial policy of Himachal Pradesh there was deferment of general Sales Tax for the period of eight years. In August 2005, a notification was released by Government of Himachal Pradesh, Excise Taxation Department that units availing deferment can avail option, according to which person on depositing 65% of tax liability, would have been deemed to be paid off entire tax liability. So Company in 2005 opted for this option under said notification, the copy of this notification is enclosed. iii) The assessee was again issued show cause vide Note Sheet Entry dated 15.03.2013 wherein the assessee was given an opportunity to substantiate its claim of Sales Tax Incentive as a Capital Receipt. The assessee has submitted its reply to the same vide submission dated 18.03.2013. wherein the assessee has repeated the reply as submitted by it on 27.02.2013 and quoted at Para i) above. 3.2 The above replies of the assessee have been duly considered. Also Rules Regarding Grant of Incentives, Concessions and Facilities to Industrial Units in Himachal Pradesh, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessions/facilities which will be over and above the concessions and facilities admissible elsewhere in these Rules, unless otherwise specified: a) For such entrepreneurs 90% subsidy shall be given on the preparation of feasibility reports subject to a maximum of ₹ 25,000/- in each case. b) 100% subsidy shall be provided to such entrepreneurs for the carriage and installation costs of the machinery. c) 10% special investment subsidy on fixed assets subject to a ceiling of₹ 1,00,000/- per unit shall be allowed to such entrepreneurs out of State funds for establishment of Tiny units. d) SSSBES, Tiny units and units with fixed Capital investment limit of ₹ 25 Lakhs falling under the category of specified category of activity set up by such category of entrepreneurs availing term loans from Financial Institutions as defined will be entitled to 5% interest subsidy on the term loan subject to a ceiling of ₹ 50,000/-per year for 3 years only. The interest subsidy will not be admissible on defaulted instalment due to the financial institution and the period of default will be counted for determining the ceiling of 3 years. Interest subsidy will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime Grant/Subsidy but spread over a long time of 10 years. b) The Rules no where specify that the said Sales Tax ^Incentive is for the purpose of Establishment of any Capital Ass# like Building, Plant or Machinery. The Sales Tax Incentive is not a fixed amount of Grant or Subsidy given by the Government of Himachal Pradesh but is in direct proportion to the volume of Sales made in the said year. c) Further to substantiate the point that the Sales Tax Incentive is not in the nature of Subsidy or Grant, again reference is made to the Rules Regarding Grant of Incentives, Concessions and Facilities to Industrial Units in Himachal Pradesh, 2004 , as quoted above. Para 11 of the said Rules as quoted above clearly specified the Subsidies which are provided by the Government of Himachal Pradesh. The said subsidies are - 90% subsidy shall be given on the preparation of feasibility reports subject to a maximum of ₹ 25,000/- in each case, 100% subsidy shall be provided to such entrepreneurs for the carriage and installation costs of the machinery, 10% special investment subsidy on fixed assets subject to a ceiling of ₹ 1,00,000/- per unit shall be allowed to such entrepre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Hon ble Court also held that test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which one should be concerned is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units or running of the business profitably. On this aspect there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otton Mills Ltd. v. Commissioner of Income Tax, 191 ITR 518 which examined a scheme of refund of sales tax framed by Andhra Pradesh Government to assist newly set up industries. There the assessee had set up a cement plant. The Calcutta High Court held that receipt of the incentives from the State Government was incidental to carrying on the business of the assessee . Such subsidies were received year after year by refund of sales tax. The benefit was received in course of carrying on the assessee's business. It was a benefit incidental to its business. The subsidy was not intended to be contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt. In the case of Sadichha Chitra . V. Commissioner of Income Tax, 189 ITR 774. In that case, was noted that in a given case subsidy may be granted with the object of supplementing trade receipts and profits of the recipient. In another case, the scheme of subsidy may have been formulated by the authority to assist the assessee in acquiring a capital asset or for the growth of the industry generally in public ..... X X X X Extracts X X X X X X X X Extracts X X X X
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