TMI Blog2019 (12) TMI 1299X X X X Extracts X X X X X X X X Extracts X X X X ..... ated and the Ld. AO shall have the power to assess or re-assess total income, including undisclosed, if any found as a result of search. Disallowances of additional depreciation claimed on fixed assets - assessee has claimed additional depreciation u/s 32(1)(iia) @ 20% of the cost of plant and machinery which were purchased, installed and put to use in the proceeding previous year - AO has disallowed the claim of additional depreciation in the second year, on the ground that said claim is allowable in the year in which said plant and machinery was purchased/installed and put to use and also, it is one time claim - whether, an assessee can claim additional in the subsequent years in absence of any reference to a specific previous year after amendment by the Finance Act, 2005 in section 32(1)(iia) ? - HELD THAT:- On a literal reading of section 32(1)(iia), the additional depreciation is restricted to one time deduction and there is no explicit provision entitling the assesee to claim additional depreciation in subsequent year or years, when the additional depreciation was allowed in the year, when plant and machinery has been put to use. It is illogical and irrational to presume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and excise duty benefit received by the assessee is in the nature of capital receipts not liable to tax. Disallowance of depreciation on fixed assets u/s 40(a)(ia) r.w.s 37(1) under different categories on the plea that the deprecation was disallowed in the AY 2005-06 - whether the claim of the assessee with regard to depreciation on fixed assets, in respect of that expenditure for non deduction of tax at source is in accordance with law - HELD THAT:- The provisions of section 40(a)(ia) of the Act, is applicable, where any expenditure is debited into profit and loss account without deduction of tax at source, then to that extent, the expenditure on which TDS was not deducted is not allowable as deduction. Similarly, if any amount as capitalized to fixed assets and depreciation was claimed thereon, if no TDS is deducted, in respect of those capitalized fixed assets, then depreciation to that extent is not allowable. Assessee has failed to bring on record any evidence to prove that whether, the claim made, in respect of depreciation on fixed assets, in respect of those expenditure is in accordance with provision of section 40(a)(ia) of the Act. Therefore, we are of the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A} erred in holding mat backward area Incentive consisting of Sales Tax Incentive and excise duty benefits as Capital Receipt. 2. Alternatively and without prejudice the CIT(A) should have applied Explanation 10 to Sec.43(1) and should have directed that the backward area incentive should' have been reduced from the actual cost. 3. On the facts and in the circumstances of the cases and in law, the Ld.CIT(A) erred in deleting the disallowance made u/s.14A without appreciating that Rule 8D is squarely applicable' 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition on account pF depreciation on fixed assets u/s.40a(ia) read with section 37 in respect of capitalization of professional fees capitalized of certain expenses, FCCB Premium and FCCB Issue Expenses, 5. On the facts and in the circumstances of the case and in law, the Ld.ClT(A) erred in deleting the addition by way of disallowing FCCB Premium. 6. On the facts and in the circumstances of the case and in law, the Ld.ClT(A) erred in deleting the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A. b) The Id. CIT(A) failed to appreciate that:- (i) having regard to the accounts there is no reason and basis in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure was incurred in relation to dividend income which does not form part of the total income and (ii) the investment in shares was made out of business strategy and there was no major change in such investment. c) In reaching to the conclusion and confirming such addition the Id. CIT(A) omitted to consider relevant ' factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors. 4. On the facts arid in the circumstances of the case and in law, the Id. CIT(A) erred in confirming the addition to the extent of ₹ 1,00,000/- made by the AO to the book profit of the Appellant by way of adding back disallowance made u/s.14A and thereby erred in enhancing the book profit artificially. 5. The Id. CIT(A) erred in holding that levy of interest u/s, 234B, 234C, 234D and 220(2) of the Income Tax Act, 1961 is consequential. The Appellant denies its liability for such interest. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hava Sheva) Ltd. 58 Taxmann.com 78(Bom.) 5. Jai Steel (India) Vs. ACIT 36 taxmann.com 523 (Raj) 6. Gurinder Singh Bawa Vs. DCI 28 taxmann.com 328 (Mumbai-Trib.) 6. The Ld. DR, on the other hand, strongly supporting order of the Ld.CIT(A) submitted that, the assessment for the impugned assessment year is abated as on the date of search because, the Ld. AO has reopened the assessment u/s 147 of the I.T.Act 1961, by issuing notice u/s 148 on 26/02/2010. The time limit for completion of re-assessment u/s 143(3) r.w.s. 147 ends on 31/03/2011. Further, search and seizure action was carried out in this case on 13/10/2010. Since, the date of search is well within date of completion of assessment u/s 143(3) r.w.s. 147of the Act, the assessment for the impugned year is abated and consequently, the Ld. AO is entitled to assess or re-assess total income, including undisclosed, if any found as a result of search. Therefore, there is no merit in the contention of the assessee and hence, the same needs to be rejected. 7. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. It is a settled position of law that in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are not applicable and hence are not considered. 9. In this view of the matter and considering facts and circumstances of this case, we are of the considered view that there is no merit in the ground taken by the assessee challenging validity of assessment proceedings passed u/s 143(3) r.w.s. 153A of the Act, and consequently, ground taken by the assessee is rejected. 10. The next issue that came up for our consideration from ground No.2 of assessee s appeal is disallowances of additional depreciation claimed on fixed assets of ₹ 32,84,67,070/-. The assessee has claimed additional depreciation of ₹ 32,84,67,070/- u/s 32(1)(iia) @ 20% of the cost of plant and machinery of ₹ 164,23,35,348/-, which were purchased, installed and put to use in the proceeding previous year. The Ld. AO has disallowed the claim of additional depreciation in the second year, on the ground that said claim is allowable in the year in which said plant and machinery was purchased/installed and put to use and also, it is one time claim. 11. The Ld. AR for the assessee submitted that the Ld.CIT(A) was erred in confirming the additions made by the Ld. AO towards disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (iia) of section 32(1) are indicative of this propositions. The word further means something in addition to. Therefore, the additional depreciation as provided under section 32(1)(iia) is a onetime deduction provided to an assesee engaged in the business of manufacturing or production of any article or thing on any news plant and machinery, which has been acquired and installed in its business. In this legal background, the question that needs to be answered is whether, an assessee can claim additional in the subsequent years in absence of any reference to a specific previous year after amendment by the Finance Act, 2005 in section 32(1)(iia) of the Act. We noted that on a literal reading of section 32(1)(iia), the additional depreciation is restricted to one time deduction and there is no explicit provision entitling the assesee to claim additional depreciation in subsequent year or years, when the additional depreciation was allowed in the year, when plant and machinery has been put to use. Therefore, we are of the considered view that it is illogical and irrational to presume so, when the legislation intention is to allow one time additional depreciation u/s 32(1)(iia) in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A). The Ld.CIT(A) for the detailed reasons recorded in his appellate order and also, considering the decision of Hon ble Bombay High Court, in the case of Godrej Boyce Manufacturing Co.Ltd vs DCIT(supra) noted that the provision of Rule 8D does not apply prior to assessment year 2008-09 and accordingly, by considering the nature of investments and amount of dividend income earned for the year directed the Ld.AO to make an adhoc disallowances of ₹ 1 Lack to meet the expenditure incurred in relation to exempt income. Aggrieved by the Ld.CIT(A) order, the assessee, as well as the revenue are in appeal before us. 15. The Ld. DR submitted that the Ld.CIT(A) was erred in restricting disallowances of expenditure u/s 14A to an adhoc amount of ₹ 1 Lac without appreciating the fact that provisions of section 14A and Rule 8D are interconnected and hence, said disallowances needs to be worked out, as per the prescribed method provided under Rule 8D of Income Tax Rules 1962. 16. The Ld. AR for the assessee, on the other hand, submitted that this issue is squarely covered in favor of the assesse by the decision of Hon ble Bombay High Court in assessee own case for AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mum/2015 for AY 2008-09, where under identical set of facts the Tribunal held that sales tax incentives and excise duty benefits received by the assesee are in the nature of capital receipts not liable to tax. 19. The Ld. DR, on the other hand, fairly accepted that the issue is squarely covered in favour of the assesee by the decision of ITAT, Mumbai Bench in assessee group company cases. However, he strongly supported order of the Ld. AO and also, referred AS-2 and AS-10 issued by the ICAI for valuation of inventory and accounting of fixed assets and submitted that as per the provision of section 43(1) and Explanation (10), the same needs to be reduced from actual cost of assets. 20. We have heard both the parties, perused the material available on record and gone though orders of the authorities below. We find that an identical issue has been considered by the co-ordinate bench of ITAT, in the case of Welspun India Ltd. Vs DCIT in ITA No. 5376/Mum/2015, where under identical set of facts, the Tribunal held that sales tax incentives and excise duty benefit received by the assessee is in the nature of capital receipts not liable to tax. The relevant findings of the Tribunal a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , by holding as under:- ― 5. The brief facts qua the issue involved is that, assessee is engaged in the business of manufacturing of sponge Iron, Steel Ingots and rolled product. In the wake of devastating earthquake in Kutch District, Gujarat, the Central Government, vide notification No. 39/2001 dated 7th August, 2001 issued an excise benefit incentive scheme and State Government of Gujarat also vide its Notification dated 9th November, 2001 announced an incentive scheme for Sales-tax exemption known as ―Incentive Scheme, 2001 for Economic Development for Kutch District . Both these schemes were for setting-up of a new industrial unit/s in Kutch District after complying with the terms and conditions as set out in the notifications and schemes of the Central and State Government respectively. The object of both the schemes was economic development of Kutch District after the earthquake and creation of new employment opportunities and attraction of large scale investments. During the previous year, the assessee had received following incentives by the State government and Central government:- (i) Sales-tax incentive - ₹ 12,95, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that it can be seen that they were purely for assisting the entrepreneur for setting-up new industrial units and not for running of any industry for profit. He refer to preamble as given in the ―Incentive Scheme of 2001 for Economic Development of Kutch District issued by Government of Gujarat dated 09.11.2001. Even in the Central Excise Notification, the same was issued in a public interest for setting up of a new industrial plant and the incentive of Excise Duty benefit was given for a period of five years. He further submitted that the nature of incentive under both the notifications and the accounting treatment by the assessee as stated by the assessee before the authorities below was as under:- (a) The nature of incentives under the Notification and the Scheme and the present accounting treatment are summarized as under:- (a) Excise Duty (in view of the Notification) - Refund of the excise duty paid through PLA on finished goods cleared from the unit after taking Cenvat credit on the inputs. This amount is credited to the profit and loss account as 'Excise Benefit Received and inadvertently offered to tax. Presently, there is no limit for the quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case, the said receipts are treated as capital receipts, then same shall be reduced from the costs of assets and depreciation claimed on the net cost of the assets will be allowed after reducing the amount of incentives in terms of Explanation 10 to section 43(1). He submitted that such a contention of the AO cannot be upheld, because the same is not applicable in the present case at all, because there is no direct acquisition of asset from the Government subsidy. The subsidy is received in the form of excise tax benefit and sales-tax incentive only when the assessee had set up the whole industrial unit and starts manufacturing and commenced its business of sale. Thus, the said provision is not applicable and in support of his contention, he relied upon the following Tribunal decisions:- Sr.No. Case Name Citation 1 Sasisri Extraction s Limited 122 ITD 428 (Visakhapatnam) 2 M/s Harinagar Sugar Mills Ltd ITA No. 772/Mum/2012 3 Rasoi Ltd. 46 taxman.com 214 (Kolkata-Trib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of. refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis Of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment, opportunities could be created if new Investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption for new industries to promote large scale investment in the district, along with which the State Government has also decided to announce the scheme of sales tax incentives. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district. 13. From the perusal of the above, it is amply clear that the schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more profitably. As laid down by the Hon ble Supreme Court, the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or running it for profitability. Similarly, the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of refund and exemption of Sales Tax Incentive as are extracted by learned CIT(A) in his appellate order which are reproduced above in the preceding para s of this order We have observed that the assessee is engaged in the business of manufacturing of Terry Towels. We have observed that there was a devastating earthquake in District Kutch in Gujarat on 26.01.2001. In order to redevelop and rehabilitate the said Kutch District of Gujarat , the Central and State Government formulated policy with a view to encourage setting up of new industry in said Kutch District wherein certain incentives by way of refund of excise duty as well exemption of Sales Tax incentives were given by Central and State Government to the entrepreneurs for setting up new industry in Kutch District ,as detailed below:- NOTIFICATION NO 39 /2001 -CENTRAL EXCISE. In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), read with subsection (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) and subsection (3) of section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption were available; or (b) is found to be less than the declared value and was declared to be below rupees twenty crore, the manufacture shall be liable to pay duty on the goods cleared ,if any, in excess of twice the actual value of original investment in each of the years during which exemption has been claimed under this notification alongwith interest at the rate of twenty four per cent per annum , as if no exemption were available to those clearances under this notification. (vi) The exemption shall apply for a period not exceeding five years from the date of commencement of commercial production by the unit. The sales tax incentive scheme formulated by State Government of Gujarat is detailed hereunder: SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT The economic activities in the district of Kutch came to a standstill on account of devastating earthquake in the State on 26th January, 2001. New employment opportunities could be created if new investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption to new ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 10 years from the date of commencement of commercial production. (g) Unit opting for sales tax deferment scheme for the purpose of deferred amount shall have to give a personal undertaking in the form of security bond as prescribed vide Resolution No.INC-1087-2138-I dated the 1st August, 1990 or equitable charge, second charge. h) The unit availing of incentives under any other scheme of the State Government will not be eligible to receive benefits under this scheme. i) Expansion, diversification or modernization of the existing industries will not be considered eligible for the benefits under this scheme We have also observed that the Mumbai-tribunal has dealt with this incentive schemes of Central and State Government for giving incentives by Central Excise Benefits by way of refund and exemption of Sales Tax Incentives for setting up industrial units in District Kutch,Gujarat to redevelop the said Kutch District in the wake of devastating earth quakes on 26.01.2011 in the cases of group concern of the assessee in Welspun Steel Ltd. v. DCIT/ACIT, vide appellate order dated 18.12.2015 , in appeals in ITA no. 7630/Mum/2011 and 8294/M/2011 for AY 2007-08, ITA no. 6371 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rejected by the AO on the ground that the decision of Special Bench in the case of Reliance Industries is pending for disposal before the Hon ble Bombay High Court. 6. The Ld. CIT(A) too following the decision of Bombay High Court in the case of Reliance Industries, allowed the assessee s appeal. However, later on, this decision of the Hon ble Bombay High Court has been set aside to the Tribunal for fresh adjudication. 7. Before us, it has been stated that this issue of subsidy / incentive in the case of the assessee had reached to the stage of ITAT, whereby the Tribunal, vide I.T.A. No.5373 to 5376/Mum/2015 I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015 28 order dated 28.12.2011 had set aside this issue to the file of the AO on the ground that authorities below have not analysed the scheme of subsidy / incentive granted by the respective governments. It has been informed that, till date no assessment order has been passed in pursuance of Tribunal order. Instead a fresh assessment order has been passed under section 143(3) r.w.s. 153A wherein this issue has been confirmed by the AO again without proper analyzing the ‗purpose test of the scheme. 8. The Ld. Counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of this incentive linked to investment that is eligible under the Scheme. (c) The incentive can be availed of only after commencement of production. Further, in so far as it relates to the incentives under the Scheme, the unit has to invest at least 50% of the incentives in the State of Gujrat within a period of 10 years from the date of commercial production. Thus, he submitted that, looking to the objects and the purpose for which subsidy was given, the incentive receipts has to be treated as capital. In support of his contention, besides several decisions, he placed reliance on the following decisions:- S.No Case Law Citation 1 Sahney Steel Press Works Ltd 228 ITR 253 (SC)2 2 Ponni Sugars Chemicals Ltd. 306 ITR 392 (SC) 3 Bougainvillea Multiplex Ent. Centre (P) Ltd 373 ITR 14 (Trib 4 Chaphalkar Brothers 351 ITR 309 (Bom) 5 Birla VXL Ltd. 32 taxmann.com 330(Guj) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... augmentation of profit of the assessee and hence, it is nothing but revenue receipts. 11. We have carefully considered the rival contentions and also perused the relevant material placed on record. The main issue involved is, whether the incentive / subsidy provided by the State Government in the form of sales-tax incentive and in the form of Central Excise benefit by the Central Government for sums aggregating to ₹ 35,33,23,171/- is to be treated as capital receipts or revenue receipts. The Hon ble Supreme Court in the case of Ponni Sugars Chemicals Ltd vs CIT, reported in [2008] 306 ITR 392 after referring to the earlier decisions of the Supreme Court in the case of Sahney Steel Works Ltd v CIT, reported in [1999] 228 ITR 253, held that the ―purpose for which subsidy is given is the crucial factor . The purpose is to be judged from the character of the receipts in the hands of the assessee which has to be determined with respect to the purpose for which the subsidy is given. The point of time is not relevant and also the source and the form of subsidy is immaterial. If the subsidy has been given to setup new units or for substantial explanation of existing units, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has laid down the basic test to be applied in judging the character of a subsidy. 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 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 we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to setup 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, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e industry for augmenting the profit on day-today business. This proposition of law has been reiterated by the Hon ble Bombay High Court in the case of CIT vs Chaphalkar Brothers, reported in 351 ITR 309, wherein the Hon ble High Court relying upon the principles laid down by the Supreme Court in the case of Ponni Sugars Chemicals Ltd has held that if the object of the subsidy was to promote construction of multiplexes, theater complexes then, it would be on capital account. Similarly, views have been taken by the various other High Courts and Tribunal in the decision as referred and relied upon by the Ld. Counsel as above. Thus, We hold that the amount of incentive received by the assessee cannot be taxed as revenue receipt as it is purely on capital account. 14. As regards the other plea raised by the AO in the order passed u/s 143(3) r.w.s. 153A, we agree with the contention of the Ld. Counsel that, none of the plant and machinery installed by the assessee for setting up of a new industrial unit has been funded by the Government subsidy. The subsidy here in this case is not specifically intended to subsidies the cost of capital or plant machinery. The incentive in the form o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of co-ordinate Benches of the tribunal in the case of Welspun Steel Ltd(supra) , we hold that Central Excise benefit and Sales Tax incentive received by the assessee during the impugned assessment year under consideration, are capital receipts not exigible to income-tax and further we hold that the same shall not be deducted from cost of assets for computing depreciation. The ground number 1 and 2 raised by the Revenue in its memo of appeal filed with the tribunal are dismissed. We order accordingly. 21. In this view of the matter and consistent with view taken by the co-ordinate bench and also, considering the facts that the jurisdiction High Court of Bombay has upheld the findings of the Tribunal, in the case of M/s.Welspun Steel Ltd. vs CIT in ITA NO. 1743/2016, vide order dated 26/02/2019, we are of the considered view that there is no error in the findings recorded by the Ld.CIT(A), while deleting additions made by us Ld. AO towards sales tax incentives and excise duty benefits received by the assesee. Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the revenue. 22. The next issue that came up for our consideration from ground No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation on fixed assets, in respect of those expenditure is in accordance with provision of section 40(a)(ia) of the Act. Therefore, we are of the considered view that the issue needs to go back to the file of Ld.AO for verification of facts with regard to applicability of provision of section 40(a)(ia) of the Income Tax Act,1961. Hence, we set aside the issue to file of the Ld. AO and direct him to reconsider the issue in accordance with law. 25. The next issue that came up for our consideration from ground No.6 and 7 of revenue appeal is disallowances of FCCB premium and depreciation on FCCB premium debited to pre-operative expenses. The Ld. AO has disallowed said expenditure, on the ground that the assessee has created only a provision, even though the bond holders have not exercised their option during the year under consideration. The Ld.CIT(A) has deleted additions by following his predecessor appellate order for AY 2005-06. Further, although the appeals for AY 2005-06 has been decided by the Tribunal in ITA No.5371/um/2015, but the issue has not been discussed on merits, because the Tribunal has quashed assessment order on technical grounds. Therefore, it is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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