TMI Blog2017 (4) TMI 1526X X X X Extracts X X X X X X X X Extracts X X X X ..... rified by the Ld. CIT (A), therefore the second condition for invoking the provisions of deemed dividend doesn't get satisfied. In view of the fact that all the three conditions are to be satisfied cumulatively and the two conditions not being satisfied in the instant case, there is no necessity to examine the third condition in terms of extent of accumulated profits which can attract deemed dividend. We agree with the contention of the ld AR that provisions of section 2(22)(e) of the Act are not attracted in the instant case. Disallowance u/s 14A r.w.r. 8D - contention raised by the ld. AR is that no disallowance u/s 14A of the Act can be made in the year under consideration as no dividend income has been received in respect of investment made by the assessee - HELD THAT:- There is no dividend income which is received or receivable for the year under consideration in respect of its investments in shares. It is noted that said fact is on record and remain undisputed before us. No contrary authority has been brought to our notice. In light of above discussions, respectfully following the decision of the Hon ble Delhi High Court in case of Cheminvest Limited[ 2015 (9) TMI 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre-amended era, shall henceforth be treated as income chargeable to tax, except where it has been taken into account for determining the actual cost of assets in terms of Explanation 10 to section 43(1). This amendment is with effect from 1-4-2016 and is prospective in its application. In the instant case, as the assessment year under consideration is 2009-10, Section 2(24)(xviii) shall have no operation. Thus VAT subsidy received by the assessee from the Government of Bihar is a capital receipt and accordingly not chargeable to tax. Disallowance of deduction under section 80IA claimed on the profits of the Wind Mills - HELD THAT:- The Coordinate Bench in assessee s own case for A.Y. 2007-08 has already taken a view in favour of the assessee following the decision of Hon ble Madras High Court in case of CIT Vs. Velayudhaswamy Spinning Mills (P) limited [ 2010 (3) TMI 860 - MADRAS HIGH COURT] . Addition invoking the provisions of section 145(3) - Trading addition - GP rate determination - shortage of mustard seeds - HELD THAT:- AO has not pointed out any sales or pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.0 Deemed Dividend of ₹ 70,00,000:- 1.1 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the amount of ₹ 70,00,000 as deemed dividend, whereas the fact remains that the assessee company has not accepted any payment within the meaning of section 2(22)(e) of the Income-Tax Act, 1961. The said credit is on account of purchase of shares from Saurabh Agrotech (P) Ltd, which does not fall within the definition of receipt of payment and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same. 1.2 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the assessee company as having voting power in the company Saurabh Agrotech (P) Limited, whereas the fact remains that the assessee company does not have any voting power in the Saurabh Agrotech (P) Ltd, in as much as its entire shareholding got transferred by Saurabh Agrotech (P) Ltd in favour of Sh. Babu Lal Data, on 10.04.2008, which is evidenced from the assessment records, therefore the provision of section 2(22)(e) of the Income-Tax Act 1961 has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case in considering the accumulated profit as per Balance Sheet, whereas the relevant piece of statute does not requires to consider the accumulated profit as per Balance Sheet, the profit has to be taken as defined under the provision of the Income-Tax Act, 1961 or in other words, for the purpose of working out the profit, depreciation allowed under the provision of Income-Tax Act, 1961 should be taken into consideration and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustain the same by not giving any finding thereto. 1.8 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in not deducting the all liabilities due including the income tax liability while working out the accumulated profit for the purpose of deemed dividend within the meaning of Section 2(22)(e) of the Income-Tax Act, 1961 and learned Commissioner of Income-Tax (Appeals, Alwar has erred in sustaining the same by not giving any finding thereto. 1.9 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in taxing a sum of ₹ 70,00,000.00 within the meaning of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed on the profits of the Wind Mills. ITA No. 110/JP/14 3. In ground No.1 of assessee s appeal, the assessee has challenged the action of ld CIT(A) in confirming the addition of ₹ 70 lacs under section 2(22)(e) of the Act. 3.1 Briefly the facts of the case are that the assessee was holding 24.70% of the shares of M/s Saurabh Agrotech Pvt. Ltd. (SAPL) which in turn holds 21% shares of Vijay Agro Mills Pvt. Ltd. (VAMPL). On 10.04.2008, assessee purchased 10,000 shares of VAMPL from SAPL for a consideration of ₹ 70 lacs. In support of this, assessee in course of assessment proceedings filed copy of account of SAPL in its books of accounts, copy of share transfer form, copy of resolution of Board of Directors of SAPL, copy of the minutes of the board meeting of VAMPL and annual return of VAMPL filed to the ROC evidencing purchase of 10000 shares of VAMPL by the assessee from SAPL. The AO, in course of assessment proceedings, observed that the auditor in Note No. 11 of the accounts have stated that according to the legal opinion, assessee continues to be the owner of the shares of SAPL since the consideration for transfer of shares has not been determined, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have no relevance as the assessee company no longer was a share holder on that date. Accordingly, it is stated that the provisions of deemed dividend are not applicable in this case. 4.5 Further, copies of annual return filed with the Ministry of Corporate Affairs (which were filed in the course of appellate proceedings) reveal that Form No. 20B has been filed only on 27-012009 by M/s Saurabh Agrotech Pvt. Ltd. The form relates to financial year ending on 31-03-2008 but was filed much after the due date along-with the late fee on 27-01-2009. The date of transfer of shares though has been stated to be 10-04-2008. However the appellant failed to justify or explain any reasons for the delay in filing of such documents. 4.6 Further, it is seen from the written submission filed ( Para 4.2 above), that it is further stated by the appellant that- we beg to submit that the said amount of ₹ 7000000.00 is in relation to the purchase of shares by Deepak Vegpro (P) Ltd from Saurabh Agrotech (P) Ltd. of Vijay Agro Mills (P) Limited and the said shares purchase and sale transaction took place on 10.04.2008 as per the following documents:- Copy of account of Saurabh Agrotec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant in the course of assessment proceedings that this amount is on account of transfer of shares of Vijay Solvex Pvt. Ltd. (another concern of the same group_ cannot be accepted in the absence of specific plea raised by the appellant. 4.10 During the course of appellate proceedings no material has been brought on record to contradict the findings of the AO on this issue. Further appellant has failed to explain the reasons to counter the qualification of the auditor given in the Audit Report. The issue for consideration is only the change of ownership and if that continues to be with the company than the amount cannot be considered on account of sale of shares. Further how the sale consideration of the shares has been arrived at has not been explained. What has been the valuation per share of the private company, whose shares are proposed to be transferred. All these factors do not support the stand taken by the appellant. 4.11 In view of the above discussion, I hold that AO has rightly invoked the provisions of section 2(22)(e) of the IT Act and accordingly confirm the addition of ₹ 70 lacs made by the AO under this head. 3.3. During the course of hearing, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not holding any voting power in SAPL, the question of application of section 2(22)(e) does not arise for consideration. 3.5 It was further submitted that SAPL has a debit balance of ₹ 28,30,446/- as on 31.03.2009 i.e. assessee has advanced this amount to SAPL. Copy of the account is enclosed. Thus, it is a case where the said amount is due from SAPL against the supply of goods and on the other hand ₹ 70 lacs is payable to SAPL against the purchase of shares of VAMPL. Both these transactions are not loan or advance as envisaged u/s 2(22)(e). Infact in respect of transaction of purchase of shares, assessee has not received any sum of money but it is only a journal entry where investment in share account is debited and SAPL (share account) is credited. Thus, this transaction cannot be said to be a receipt of loan or advance so as to attract section 2(22)(e). 3.6 It was further submitted that it is a settled law that sec. 2(22)(e) is attracted only when payment is made by the company to its shareholder by way of loan or advance. If payment is not on account of loan or advance, the section is not applicable. The word advance has not been defined. However, in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, sine qua non, to ascertain the correct nature of the payments. In the present case the assessee company received application money for the allotment of shares. There is nothing on record to indicate that application money was received or allotment of shares was made contrary to the provisions of Companies Act, 1956. The amount was reflected as such in the Balance Sheet. Accounts were prepared perfectly in accordance with the norms set out under the Companies Act, 1956. These were filed with the Registrar of Companies. The chief ingredient of s. 2(22)(e) is that one should be shareholder on the date the loan was advanced to him. Where such ingredient is not established, the advance could not be taken as deemed dividend under s. 2(22)(e). It is settled rule of interpretation of a fiction that the court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the court has to assume all facts which are incidental to give effect to that fiction. It will not be given a wider meaning than what it purports to do. Law dealing with fiction relates to that breach of jurisprudence which should be narrowly watched, zealously regarded and never to be pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 2(22)(e) of the Act which reads as under:- any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares ( not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits . 3.10 On perusal of the above provisions, it provides that any payment by a company (not being a company in which public is substantially interested) of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of share holding not less than 10% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the instant case. The addition made by the Assessing Officer under section 2(22)(e) are hereby deleted. In the result ground no. 1 of the assessee s appeal is allowed. 4. In ground No. 2 of assessee s appeal, the assessee has challenged the action of ld CIT(A) in sustaining the disallowance of ₹ 33,90,121 under section 14A read with Rule 8D. 4.1. Briefly the facts of the case are that the assessee has shown investment of ₹ 8,74,13,129/- in shares in its Balance Sheet for the year ended 31.03.2009. All the investments were made in earlier years except for investment of ₹ 70,00,000/- in Vijay Agro Mills Pvt. Ltd. and investment of ₹ 15,68,000/- on account of share application money given to Vijay International Ltd. during the year. No dividend is received during the year. The AO observed that assessee has interest bearing funds in the form of secured and term loan of ₹ 21,46,11,813/- taken from various banks and unsecured loan of ₹ 5,86,70,159/- taken from private parties on which interest has been paid regularly. The assessee submitted that there is no nexus between the interest bearing funds and investment thereof in the shares and also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is seen from the Balance Sheet of the appellant that under the head investments an amount of ₹ 8,74,13,129 has been shown for this year as compared to the amount of ₹ 7,88,45,129 in the preceding year. On the other hand secured loans have increased from ₹ 16,26,61,143 (in the last year) to ₹ 21,46,11,813 (in the current year). The un-secured loans are ₹ 5,86,70,159 ( Current year and current liabilities are ₹ 9,12,38,848 as against current assets of ₹ 23,61,91,443. Besides this the loan and advances given by the company stand at ₹ 15,62,61,067. 6.6 During the year share capital and reserves and surpluses stand at ₹ 22,91,26,464 and against this fixed assets are at ₹ 13,64,56,572. This share capital and reserves and surpluses have increased only in this year as in the last year the comparative figure was ₹ 17,61,78,263. The increase of about 5 Crores in the owned funds in on account of issue of shares at a substantial premium during the year. Further, the investments have shown only marginal increase and were of ₹ 7.88 crores in the preceding year. Thus, these investments were financed out of the loaned fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Mumbai Bench in case of Stream International Service (P.) Ltd. (2013) 23 ITR (Trib.) 0070 wherein by relying on the decision dt. 05.08.2009 of Special Bench of the Delhi Tribunal in case of Cheminvest Ltd. Vs. ITO (2009) 124 TTJ 577, it was held that disallowance u/s 14A can be made even if no dividend income is received. It was submitted that this decision of Special Bench has been overruled by the Hon ble Delhi High Court vide order dt. 02.09.2015 reported at 378 ITR 0033 where it was held that the expression does not form part of total income in sec. 14A envisages that there should be an actual receipt of income, which was not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, sec. 14A will not apply if no exempt income is received or receivable during the relevant previous year. Further, the Hon ble ITAT, Jaipur Bench in case of M/s Vijay Industries Vs. DCIT in ITA No. 673/JP/2015 for A.Y. 06-07 order dated 17.06.2016 wherein also no dividend income was received during the year, deleted the disallowance made by the AO u/s 14A by relying on the Delhi H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Till the time the assessee becomes a shareholder, the assessee cannot have any rights to claim any dividend that may be declared by the company. Therefore, while working out the average value of the investment under rule 8D(2)(iii) the share application money should not be included. Further, the lower authorities have not established that any borrowed funds have been used for making investment in the shares. In various cases, it has been held that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. For this, reliance is placed on the following judicial precedents:- - CIT Vs. Karnataka State Industrial Infrastructure Development Corpn. Ltd. (2016) 237 Taxman 240 (Kar.) (HC) - HDFC Bank Ltd. Vs. DCIT Ors. (2016) 132 DTR 89 (Bom.) (HC) - CIT Vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) (HC) - CIT Vs. HDFC Bank Ltd. (2014) 107 DTR 140 (Bom.) (HC) - CIT Vs. UTI Bank Ltd. (2013) 215 Taxman 8 (Guj.) (HC) (Magz.) - CIT Vs. Suzlo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the Revenue. 4.6 It was further submitted that similar issue came before Hon ble ITAT in case of Vijay Industries for A.Y. 06-07 in ITA No. 673/JP/15 order dt. 17.06.2016 where also the disallowance of interest made by AO was set aside by the Hon ble ITAT but again AO made the disallowance which is confirmed by CIT(A) but considering the fact that assessee has sufficient reserve and surplus to make investment in shares and in the absence of direct nexus between interest bearing funds and investment in shares, the disallowance made by the lower authorities was deleted. In deleting the disallowance, Hon ble ITAT placed reliance on the decision of Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 and also on various other decisions cited by the assessee. 4.7 It was further submitted that the Hon ble Supreme Court in case of Hero Cycles Pvt. Ltd. Vs. CIT 379 ITR 347 (PB 112-115) which is in context of allowance of interest u/s 36(1)(iii) in has held that in so far as the loans to Directors are concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us year and observed that the complete answer is provided by the decision of this very Court in CIT v. Holcim India (P.) Ltd. (2015) 57 taxmann.com 28 and in Para 15 of its order, it observed as under: 15. In that case, a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under section 14A of the Act when no dividend income had been earned by the assessee in the relevant AY. The Court referred to the decision of this Court in Maxopp Investment Ltd. s case (supra) and to the decision of the Special bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO (2009) 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc. (2014) 226 Taxmann 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. (2010) 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd. (2009) 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. ( 2014) 223 Taxman 130/45 taxmann.com 116 and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eminvest Ltd. has been brought to the notice of the Coordinate Bench. In fact, the decision in case of Cheminvest Ltd. has been pronounced by Hon ble Delhi High Court on 2nd of September, 2015 which is subsequent to the latest decision of the Coordinate Bench for AY 2008-09 which was passed on 2nd of December, 2014. Given that such contention was not raised earlier, the undisputed fact that no dividend income was received during the year and in light of decision of the Hon ble Delhi High Court in case of Cheminvest Ltd which squarely applies in the instant case, no useful purpose would be served in setting aside the matter to the file of the AO as has been done by the Coordinate Benches earlier and in this regard, we are also guided by the decision of Coordinate Bench in case of Zuari Leasing (supra) where the power to remand has to be stated to be used sparily and in only exceptional cases. 4.13 In the light of above discussions and in the entirety of facts and circumstances of the case, disallowance u/s 14A is hereby deleted and the ground no. 2 of the assessee s appeal is allowed. 5. Now, coming to ground no. 3 of the assessee s appeal wherein the assessee company has chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Being aggreived, the assessee carried the matter in appeal before the ld CIT(A) who has confirmed the addition and his findings are as under: 8.3 I have considered the assessment order as well as submissions made by the AR along-with judicial citations given therein. The Income Tax Return was filed by the appellant on 2709-2009 for A.Y. 2009-10 i.e. the period under consideration. Subsequently, a revised return was filed on 21-03-2011 (after the time permissible under the law) showing the VAT reimbursement of ₹ 3,24,17,009 as capital receipt and hence not taxable. The claim made in the revised return is not valid as it has been filed after the time limit permissible under the provisions of the IT Act. 8.4 The claim was made by the appellant in view of the judgment of the Hon ble Bombay High Court in the case of Reliance Industries Ltd. this judgment has been discussed and reproduced above. The Hon ble Supreme court has vide its order dated 09-092012 stayed the operation of said judgment to the Bombay High Court and has remitted the matter back to the High Court for consideration. 8.5 I have gone through the judgment stated above in detail and find that the facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital receipt. Against this order, department filed an appeal before the Bombay High Court where Question No. D framed was whether in the facts and circumstances of the case and in law, the Hon ble Tribunal was right in holding that sales tax incentive is a capital receipt . The Hon ble High Court of Bombay in case of CIT Vs. Reliance Industries Ltd. 339 ITR 0632 order dated 15.04.2009 decline to admit the above question. The relevant Para 4 to 6 of this order is reproduced as under:- 4. So far as question (D) is concerned, the Tribunal relied upon the Tribunal Mumbai Bench J (Special Bench) decision in the case of assessee itself in Dy. CIT vs. Reliance Industries Ltd. (2004) 82 TTJ (Mumbai)(SB)765 : (2005) 273 ITR 16 (Mumbai)(SB)(AT). We may gainfully reproduce the following portion: The scheme framed by the Government of Maharashtra in 1979 and formulated by its resolution dt. 5th Jan., 1980, has been analysed in detail by the Tribunal in its order in RIL for the asst. yr. 1985-86 which we have already referred to in extenso. On an analysis of the scheme, the Tribunal has come to the conclusion that the thrust of the scheme is that the assessee would become en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, let us apply the purpose test based on the findings recorded by the Special Bench. The object of the subsidy was to set up a new unit in a backward area to generate employment. In our opinion, the subsidy is clearly on capital account. In that view of the matter, question (D) as framed, would also not arise. Against this order of Bombay High Court, Department filed a civil appeal and SLP to the Supreme Court. The Hon ble Supreme Court vide its order dated 09.09.2011 by allowing the civil appeal, set aside the order of the Hon ble High Court and remitted it to the High Court to decide the question in accordance with law. Thus, as on date, the decision of Hon ble Special Bench holds the field. The AO has not allowed the claim of the assessee by wrongly stating that Hon ble Supreme Court has stayed the operation of the order pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set up in growth center, industrial infrastructure development centers and other locations like industrial estates, parks, export processing zones, commercial estates, etc., as notified by the Central Government, were entitled to 100 per cent excise duty exemption for a period of 10 years from the date of commencement of commercial production. All new industries in the notified locations were eligible for capital investment subsidy @ 15 per cent of their investment in plant and machinery, subject to a ceiling of ₹ 30 lacs whereas the existing units were entitled to subsidy on substantial expansion. Besides these and other concessions, interest subsidy of 3 per cent on the working capital and insurance premium to the extent of 100 per cent on capital investment too was permissible to the new and existing units on their substantial expansion for a period of 10 years. The Office Memorandum dt. 14.06.2002 was later amended to achieve the government s object, as conveyed by the Hon ble Prime Minister at Srinagar, for creation of one lacs employment and self employment opportunities in Jammu Kashmir. On these facts, the Hon ble High Court held that perusal of the Office Memor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t larger public interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum was achieved. Thus, the finding of the Tribunal that the excise duty refund, interest subsidy and insurance subsidy were production incentives, hence revenue receipt cannot be sustained, being against the law laid down by Hon ble Supreme Court of India in Sahney Steel and Ponni Sugars case. The finding of the Tribunal that the incentives were revenue receipt was accordingly set aside holding the incentives to be capital receipt in the hands of the assessees. 5.7 It was further submitted that the Hon ble Mumbai Tribunal vide its order dt. 22.06.2016 in ITA No. 5675/Mum/2014 in case of DCIT Vs. M/s Harinagar Sugar Mills Ltd. wherein also the assessee received reimbursement of VAT on molasses under the Bihar Incentive Package 2006 for setting up distillery unit in Para 6 held as under:- In the instant assessment year, the assessee company has received subsidy by way of reimbursement of commercial taxes (VAT) paid under Bihar Incentive Scheme 2006 of ₹ 43,89,465/- on purchase of molasses. It is not disputed that the subsidy scheme formulated by the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Chemicals Ltd., Calcutta High Court in case of CIT Vs. Rasoi Ltd. 335 ITR 438 and various other decisions held that the incentive subsidy in form of refund/reimbursement of sales tax/VAT is a capital receipt not chargeable to tax. 5.9 It was further submitted that the Ld. CIT(A) has incorrectly held that the revised return filed by the assessee on 21.03.2011 is not valid as it is filed after the time limit permissible under the IT Act. It is submitted that the time limit available for filing the revised return u/s 139(5) is one year for the end of the relevant assessment year i.e. 31.03.2011 and therefore the revised return filed by the assessee is as per law. Further, non-mentioning of the subsidy amount as capital receipt in Form No. 3CD by the auditor is not relevant to decide the nature of receipt of subsidy. The Ld. CIT(A) has admitted that the purpose of subsidy is to encourage all round development of state but still he treated it as a revenue subsidy for the reason that it is linked to the production and sales made by the unit. In holding so, he ignored the decision of purpose test laid down by the Supreme Court in case of Ponni Sugars and Chemicals Ltd. (supra) where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orable circumstances in order to establish industries in the State so that among the investors, there may be positive communication. (ii) Bihar Single Window Clearance Act- 2006- To promote all round development of the state and industrial growth rapid clearance procedures for establishing industries, to issue license and certificates, to provide a congenial atmosphere to the investors of Bihar State and in this regard and for other concerned subjects Bihar Single window Clearance Act-2006 has been enacted. (iii) Bihar Infrastructure Development Enabling Act-2006- To provide for rapid development of physical and social infrastructure in the State and to attract private sector participation and to provide for a comprehensive legislation for designing, financing, construction, operation, maintenance of infrastructure projects, so that administrative and procedural delays are reduced, for identifying generic project risks, Bihar Infrastructure Development enabling Act, 2006 has been enacted. (iv) In order to simplify the inspection of factories, provision of selfcertification will be made. (v) Industrial growth is adversely affected due to the complicated labour laws. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available only after the commencement of production. Sl. No. Industrial Grant 1. Small/Tiny units/Financial Limit. 50% or 7.50 lacs (Maximum) 2. All large/medium/mega units/Financial Units 25% or 15 lacs (Maximum) (iii) Financial assistance for Technical-know-how: If an entrepreneur obtains Technical Know-how from any recognized National research center/ laboratory or institution to establish or to expand his industry, he will be reimbursed 30% (maximum) ₹ 15.00 lacks) of the fee paid to the institution/organization for the technical know-how. This facility will be provided to the unit after commencement of production. (iv) Incentive Grant for capital investment on Captive Power Generation/ Diesel Generating Set.: 50% (fifty percent) of the amount spent on plant and machinery in the establishment of Captive Power Generation/Diesel Generating set will be granted to the industry. No upper limit for this amount has been fixed. This facility will be made available after the unit comes into production. (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the State Government and Bihar Industry Association, a corpus fund will be created. (xi) S.C/S.T./Women/Handicapped: a. Under this category, entrepreneurs will avail 5% additional grant/exemption/subsidy than the limit fixed under this policy. b. UP to a turnover limit of ₹ 30 lakhs per annum S.C/S.T./Women/Handicapped category entrepreneurs who run small and tiny industries will avail 100% subsidy of the deposited amount in the account of Government in the form of VAT for a period of ten years. (xii) Exemption from AMG/MMG: working units at present and new units will avail exemption from AMG/MMG from the date of declaration of the new Industrial Policy. This facility will be granted for five years. (xiii) Central sales Tax (CST): only 1% CST will be payable on the items produced by the registered small and medium units in Bihar. 5.11 We now refer to decision of Special Bench of the tribunal in case of Reliance Industries Ltd. (supra) wherein sales tax incentive was held in the nature of capital receipt and not liable to tax. The said decision was subsequently relied upon by another Coordinate Bench in case of Reliance Industries for a subsequent year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, setting up of new food processing units and also add in expansion and up gradation of existing industries. Granting of Eligibility Certificate from SICOM (Implementing authority) Effective from date of commencement of commercial production/. Effective from date of commencement of commercial production/. Mode of disbursement of sales tax incentive 1. By way of exemption of purchase tax, sales tax on purchase of raw materials, sales tax payable on sale of finished goods, CST on sale of finished goods as a % of fixed capital investment. 2. By way of interest free unsecured loans or refunds. 1. By way of reimbursement of VAT amount deposited in the account of the Govt. as % of fixed capital investment. Your Honour will observe while going through the above comparative table, that both the scheme viz. 1979 scheme and 2006 scheme are materially stands on the same footing and the decision given with reference to the 1979 scheme finds its applicability to the cases covered by the 2006 scheme of the Bihar Govt. 7 The State of Maharashtra has also formed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en commenced that the incentives were to be given by way of refund of sales tax and by way of subsidy on power consumed for production. At page 261, the Supreme Court noticed that in the case before them, payments were made only after the industries have been set up and in the very next sentence observed that payments are not being made for the purpose of setting up of the industries . The contrast between the two has been brought out in this paragraph. The Supreme Court also noted that the power subsidy under the Andhra Scheme was confined to the power that was consumed for production and if any power is consumed for setting up the plant and machinery, the incentive was not to be given. The Supreme Court held that such subsidies were operational subsidies and were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable . It is in this background that we will have to consider the further observations of the Supreme Court at pages 262-263 of the report, which we have extracted in the preceding paragraph. These observations, in our humble understanding of the judgment, constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be treated as revenue receipt. The Scheme framed by the Government of Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the assessment year 1985-86 which we have already referred to in extenso. On an analysis of the Scheme, the Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has, at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Industries Ltd. ( supra) in para 112 of its order. In the same paragraph, it has also been noted by the Tribunal that Dusad Industries case (supra) (assessee before the Madhya Pradesh High Court) had commenced production on 5-1-1973, much before the Government Memorandum sanctioning the Scheme had been issued on 30-8-1973. The Tribunal has further noted that under the M.P. Scheme, an assessee could seek eligibility only after having commenced production, whereas under the Maharashtra Scheme, an assessee could seek eligibility immediately upon having taken some initial steps towards setting up of the industrial unit. 30. The Tribunal was thus aware of the distinction between the subsidy given with the object of setting up the industry and the subsidy given after the industry commences production and conditional upon the commencement of production. Factually, the Tribunal found that the assessee s case which fell under the Maharashtra Scheme, was a case where the subsidy was given for the purpose of facilitating the assessee to set up an industry in Patalganga, Raigad District, which is a notified area. The actual disbursement took place after the assessee commenced productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts very nature could be available to the assessee only after the production had commenced. Secondly, it obviously made great sense from the point of view of the State to ensure that the incentive was given to a genuine project and not merely to the projects on paper only. 32. In the very next paragraph, i.e., in paragraph 116, the Tribunal again referred to the observations in Sahney Steel Press Works Ltd. s case (supra) at pages 260-261 of the report and held as follows :- 116. We are of the view that the fact that the assessee before us applied for incentive at the stage of blue print of the project and obtained from the State Government a Letter of Intent indicating implementing agency s willingness to grant incentive to the assessee goes a long way to establish that the assessee applied for and obtained the incentive on account of its fixed capital investment. We find strong support to this finding from the following observations of Hon ble Supreme Court in the case of Sahney Steel and Press Works Ltd. at pages 260-261 : Mr. Ganesh strongly relied on Seaham Harbour Dock Co. s case [1931] 16 TC 333 (HL) which does not come to the assistance of his contention in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom public financial institutions and discharging them with the help of the incentives after the commencement of production. The incentives were provided exclusively for the purpose of repayment of loans for meeting the capital costs. These incentives were held by the High Court to be capital in nature. The other type of incentives was the subsidy which was linked to the purchase tax and was in no way linked to the expenditure incurred in setting up the sugar industry. The object of the subsidy was to give a concession to the assessee for meeting the cost of running the business after production. There was also no condition to the effect that the subsidy shall be used for a particular purpose only. In these circumstances, the High Court held that this subsidy was a trading receipt in the hands of the assessee. This case emphasises that the object with which the subsidy is given is the prime or foremost consideration while determining the nature of the receipt. The High Court held as under :- The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made not directly but indirectly for the setting up of the industries and that since in the case before the Supreme Court the payments had been made post production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced . These observations of the Madras High Court (at page 612 of the report) recognise the possibility, depending upon the nature and object of the scheme, of even post-production payments being linked, albeit indirectly, to the steps taken by the assessee to set up the industry. The High Court also observed earlier at page 611 of the report, which we have extracted above, that what is of vital significance is the purpose and object of the scheme and that the decided cases which turn upon the special facts cannot predetermine the outcome of another case merely on the ground that post-production receipts are normally regarded as trading receipts. In other words, the High Court has held that merely because the monies are received after production commences, it cannot be said, irrespective of the purpose and object of the scheme, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Works Ltd and by the subsequent decision of the Hon ble Supreme Court in case of Ponni Sugar and Chemical Ltd, the character of the subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is not relevant. The source is immaterial. The form or the mechanism through which the subsidy is given is immaterial. If the object of the subsidy scheme was to enable the assessee to run business more profitably, then the receipt is on revenue account. On the other hand, if the object of the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of subsidy was on capital account. 5.16 In the instant case, the subsidy in the form of VAT reimbursement is provided to the assessee company in terms of the Industrial Incentive Policy of state of Bihar formulated in the year 2006. The objective of the policy was to establish new industries and to revive the sick and closed units in the state of Bihar and to create favorable environment to attract the investors of state and from abroad. The thrust of the policy was growth in the per capita in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the commencement of production but that would not make it a revenue receipt as it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. The object for which the subsidy is granted, would takes primacy over the fact that it was given after the commencement of production and conditional upon the same. The subsidy is thus on capital account. 5.18 It is noted that a similar view has been taken by the Coordinate Bench in case of Harinagar Sugar Mills (supra) while examining the reimbursement of VAT on molasses under the Bihar Incentive Package 2006. 5.19 Further, we have noticed that the Finance Act, 2015 w.e.f. 1-42016, has enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:- (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o initial assessment year already absorbed cannot be notionally brought forward and set off against profits of eligible business and where the Department did not dispute finding of the Commissioner (Appeals) as to the initial assessment year it was not entitled in the assessee s appeal to dispute it. 6.4 The ld AR further brought to the notice of the Bench that the Hon ble Supreme Court has dismissed the SLP of the Department reported in (SC ) 2016 ITL 4951 filed against the order of Madras High Court in case of Commissioner of Income-tax Vs. Best Corporation Ltd. (2016) 76 taxmann.com 286 which has followed the earlier decision in case of Velayudhaswamy Spinning Mills (P) Ltd and the head notes read as under: Deductions- profits and gains from infrastructure undertakings (computation of deduction) assessee claimed deduction under section 80-IA-Tribunal following decision of Madras High Court in case of Velayudhaswamy Spinning Mills (P.) Ltd. v. Asstt. CIT, which was pending appeal before Supreme Court, held that assessee was entitled to deduction under section 80-IA without setting off losses/unabsorbed depreciation pertaining to windmill, which were set off in earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as rightly relied upon by the counsel, the issue is decided in favour of the assessee after considering the decision of Goldmine s case. The main issue is as to when the provision of section 80IA will become applicable upon the appellant. The appellant has opted to claim the deduction u/s 80IA w.e.f. assessment year 2007-08, though the production commenced from the assessment year 2003-04, therefore provision is made applicable from the assessment year 2007-08. The option to claim the deduction u/s 80IA rests with the appellant to claim it in 10 years out of 15 years. The initial assessment year for the appellant is assessment year 2007-8 and from such assessment year, the eligible industrial undertaking will be considered as independent source of income of the appellant and not prior to that. The Assessing Officer has made applicable the provisions of section 80IA from the assessment year 2003-04, when the appellant has not even claimed the deduction under the said provision. The assessing Officer has misunderstood the first year of commencement of production and initial assessment year as synonymous. The year of commencement of production and initial assessment year bears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision has been dismissed by the Hon ble Supreme Court. In a similar case of Best Corporation Limited (supra) wherein the decision of Hon ble Madras High Court in case of Velayudhaswamy Spinning Mills (P) limited was followed, an SLP has again been dismissed by the Hon ble Supreme Court. In light of above, we do not see any infirmity in the order of the Ld. CIT(A). In the result, the deduction of ₹ 27,77,310 as claimed by the assessee company u/s 80IAis hereby allowed. In the result, the ground taken by the revenue is dismissed. ITA No. 704/JP/2014 705/JP/2014 7. In ITA No. 704/JP/2014 and in ITA No. 705/JP/2014 pertaining to AY 2010-11, admittedly, the ground of appeal no. 2 taken by the Revenue and all the grounds of appeal taken by the assessee are similar to grounds of appeal under identical facts and circumstances of the case as taken in ITA No. 110/JP/14 116/JP/14. Our findings and directions contained in ITA No. 110/JP/14 116/JP/14 shall therefore apply mutatis mutandis to all these grounds of appeal. 8. We now come to Revenue s ground of appeal no. 1 in ITA No. 705/JP/2014 wherein the Revenue has challenged the action of the ld CIT(A) in deleting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of ₹ 5 lacs by applying provisions of section 145(3) of the Act. 8.3 The Ld. CIT(A) after considering the submission of the assessee deleted the same by holding that AO has failed to bring on record any adverse material before rejecting the book results declared by the assessee and also considering the fact that the G.P. rate declared by the assessee at 8.32% for the year under consideration is better than 7.16% declared for the preceding year. 8.4 During the course of hearing, the ld. AR submitted that the assessee maintains day to day books of accounts, which is subject to audit. These books are duly supported with bills and vouchers. The AO has not pointed out any sales or purchase which is out of the books or not vouched. Day to day stock records is also maintained. The shortage of mustard seeds claimed by the assessee in the month of April 09 and March 10 is verifiable from the day to day stock register of the said months wherein the shortage is shown on day to day basis whenever the same has occurred. The reason as to why the shortage has been claimed in the month of April 09 and March 10 and not in the months of May 2009 to Feb 2010 has been duly explained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of accounts or merely because of rejection of books of accounts, it did not mean that it must necessarily lead to addition in return of income of assessee. Even AO estimated the income by making estimated addition by applying particular GP Rate also CIT(A) reduced it , therefore, those two authorities even while resorting to best judgment had no basis for coming to conclusion reached and even in case of estimated/adhoc addition, prima-facie, some material was required to be brought on record. Thus, order of Tribunal was just and proper and no substantial question of law arose out of order of Tribunal. 8.7 The ld AR further submitted that the G.P. rate of the assessee is better as compared to the last year. The Hon ble Rajasthan High Court in case of CIT Vs. Inani Marbles Pvt. Ltd. 316 ITR 125 has observed that in the absence of any change in the factual position, normally the profit rate declared accepted in the preceding year, constitutes a good basis for working out the gross profit. In the present case, the result declared by the assessee in the preceding year has been accepted. The G.P. rate declared during the year is better as compared to the preceding year. Not onl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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