2011 (3) TMI 716 - AT - Income Tax

Denial of claim of exclusion of road transport subsidy as capital receipt - In the course of assessment proceedings, the Assessing Officer noticed that the assessee had received a sum of Rs.18,94,31,601 towards transport subsidy and claimed the same as a capital receipt being exempt from tax - ITAT in assessee s own case, wherein, identical claim for the assessment years 1991-92 to 1996-97 has been decided in favour of the assessee - Decided in favor of the assessee Regarding payment to Rajasthan State Forest Department - Capital or revenue expenditure - It was submitted by the assessee that the assessee company had one factory in Lakheri, Rajasthan and as the mining for raw material was done on the forest land, as per the instruction of the Government of Rajasthan, the amount was paid for the Forest Department to compensate them for loss of forest and towards afforestation costs to make good the said loss - It is statutory obligation of the assessee to provide for compensatory afforestation of land, and unless he does so, the assessee is not allowed to carry out its business activity of extracting from the mines - The object and purpose of the said expenditure, therefore, seen from the businessman s point of view, must be held to be to obtain the approval of the Government to the continuance of the technical collaboration arrangement - Held that expenditure is to be revenue in nature - decided in favor of assessee. Allowance of profit from power generating unit u/s. 80 IA while computing book profit u/s.115JA. - Held that - the profit of the industrial undertaking eligible for exemption under section 80-IA must be computed as per the books of account and the provisions of the Act cannot be applied and no adjustment can be made which is not permissible under the section. - Decided in favor of assessee. Allowance of deduction under section 80 HHC while computing book profit under section 115JA. - held that - what is to be excluded must start with book profits of export business as base. One cannot have computation of book profit with tax profits as the base. In this view of the matter, and in view of the broad principles clearly discernable from Hon ble Supreme Court s judgment in Ajanta Pharma s case (2010 -TMI - 77381 - SUPREME COURT ), we uphold the grievance of the assessee and direct the Assessing Officer to giver resultant relief, if any. Admission of additional grounds - held that - As additional grounds of appeal are on legal issues and there is nothing on record to suggest any malafides in additional grounds being raised at this stage, we admit these additional grounds of appeal and proceed to take up the ground of appeal on merits. Book profit u/s 115JA - withdrawals from the share premium account to meet Prorata premium on redemption of debentures equity shares issue expenses and debenture issue expenses - Held that - The vertical profit and loss account is based on the entries made in the profit and loss account as traditionally prepared in the books of accounts and is not a copy of the same. Therefore, merely because separate credit entry, as an income, is not shown in the profit and loss account, it can not be said that there has been no credit to the profit and loss account. It is not shown separately as an income head on the credit side, bit that does not mean that the amount has not been credited to the profit and loss account. In substance, on the facts of this case, there was a credit to the profit and loss account on account of the transfer from reserves and this has been offset against the expenses incurred by the assessee. - Adjustment allowed - Decided in favor of assessee.

Issues Involved:
1. Exclusion of road transport subsidy as capital receipt.
2. Treatment of expenditure on compulsory afforestation.
3. Non-allowance of profit from the power generating unit under section 80IA while computing book profit under section 115JA.
4. Non-allowance of deduction under section 80HHC while computing book profit under section 115JA.
5. Deduction of provision for additional gratuity and gratuity for sold units.
6. Exclusion of excise duty and sale of flats from total turnover for computing deduction under section 80HHC.
7. Treatment of power tariff freeze and sales tax subsidy as capital receipts.
8. Exclusion of profit on sale of fixed assets and road transport subsidy in computing book profits under section 115JA.
9. Exclusion of dividend distribution tax and transfer to debenture redemption reserve in computing book profit under section 115JA.
10. Relief under section 91 for tax deducted on fees received from Yanbu Cement Company Ltd., Saudi Arabia.
11. Disallowance of provision for encashment of leave salary.
12. Disallowance of service connection charges paid to RESB and APSSB.
13. Disallowance of expenditure on improvement of internal roads.
14. Disallowance of expenditure on construction of HP Indoor Stadium and Namhole Stadium.
15. Disallowance of payment to employees under VRS scheme.
16. Deduction of withdrawals from the share premium account to meet prorata premium on redemption of debentures, equity shares issue expenses, and debenture issue expenses.

Detailed Analysis:

1. Exclusion of Road Transport Subsidy as Capital Receipt:
The assessee claimed a sum of Rs.18,94,31,601 as a capital receipt exempt from tax. The Assessing Officer (AO) treated it as a trading receipt based on several judgments, including Sahaney Steel and Press Works Ltd. The CIT(A) upheld the AO's view. However, the Tribunal found that the issue was covered by earlier decisions in the assessee's favor, including the ITAT Mumbai Special Bench decision in DCIT vs. Reliance Industries Ltd. and the Supreme Court judgment in CIT v. Ponni Sugars and Chemicals Ltd. The Tribunal directed the AO to delete the addition of Rs.18,94,31,601.

2. Treatment of Expenditure on Compulsory Afforestation:
The AO treated the expenditure of Rs.1,21,38,100 paid to Rajasthan State Forest Department as capital in nature. The Tribunal found that the expenditure was incurred wholly and exclusively for business purposes and did not result in the creation of any asset. Citing various judgments, including CIT vs. Kirkel Coal Co and CIT vs. Associated Cement Companies Ltd., the Tribunal directed the AO to allow the deduction as revenue expenditure.

3. Non-Allowance of Profit from Power Generating Unit under Section 80IA while Computing Book Profit under Section 115JA:
The AO and CIT(A) held that tax profit should be considered for exclusion from book profit. The Tribunal, following the decision in the assessee's own case for the assessment year 1997-98, directed the AO to exclude the book profits of the eligible unit from the overall book profits.

4. Non-Allowance of Deduction under Section 80HHC while Computing Book Profit under Section 115JA:
The AO and CIT(A) held that the profit to be excluded is the profit computed under the head 'profits and gains from business and profession.' The Tribunal, relying on the Supreme Court judgment in Ajanta Pharma Ltd vs. CIT, directed the AO to exclude the book profits of export business from the computation of book profits under section 115JA.

5. Deduction of Provision for Additional Gratuity and Gratuity for Sold Units:
The Tribunal admitted the additional ground of appeal raised by the assessee and directed the AO to allow the claim after verifying the related facts, consistent with the decisions in the assessee's own case for earlier years.

6. Exclusion of Excise Duty and Sale of Flats from Total Turnover for Computing Deduction under Section 80HHC:
The Tribunal upheld the exclusion of excise duty from total turnover based on the Supreme Court judgment in CIT vs. Laxmi Machine Works. It also directed the exclusion of sale of flats from total turnover, as it was not part of the assessee's business.

7. Treatment of Power Tariff Freeze and Sales Tax Subsidy as Capital Receipts:
The Tribunal upheld the treatment of power tariff freeze and sales tax subsidy as capital receipts based on earlier decisions in the assessee's own case and the Special Bench decision in DCIT vs. Reliance Industries Ltd. However, it rejected the exclusion of these items from book profits under section 115JA, following the Special Bench decision in Rain Commodities Ltd vs. DCIT.

8. Exclusion of Profit on Sale of Fixed Assets and Road Transport Subsidy in Computing Book Profits under Section 115JA:
The Tribunal rejected the exclusion of profit on sale of fixed assets and road transport subsidy from book profits under section 115JA, following the view taken on ground no. 7.

9. Exclusion of Dividend Distribution Tax and Transfer to Debenture Redemption Reserve in Computing Book Profit under Section 115JA:
The Tribunal upheld the exclusion of dividend distribution tax and transfer to debenture redemption reserve from book profit under section 115JA, based on the decision in the assessee's own case for the assessment year 1997-98.

10. Relief under Section 91 for Tax Deducted on Fees Received from Yanbu Cement Company Ltd., Saudi Arabia:
The Tribunal remitted the matter to the AO for verifying the quantum of deduction that the assessee is eligible for under section 91, consistent with the precedent set in earlier years.

11. Disallowance of Provision for Encashment of Leave Salary:
The Tribunal directed the AO to consider the claim of the assessee in accordance with the Supreme Court judgment in Bharat Earth Movers, which held that if the liability is certain, the deduction must be allowed even if it is to be discharged at a future date.

12. Disallowance of Service Connection Charges Paid to RESB and APSSB:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of service connection charges, following the decision in the assessee's own case and supported by the Supreme Court judgment in CIT vs. Associated Cement Companies and the Bombay High Court judgment in CIT vs. Excel Industries Ltd.

13. Disallowance of Expenditure on Improvement of Internal Roads:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of expenditure on improvement of internal roads, following the decision in the assessee's own case for the assessment year 1997-98 and the Supreme Court judgment in CIT vs. Associated Cement Companies Ltd.

14. Disallowance of Expenditure on Construction of HP Indoor Stadium and Namhole Stadium:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of expenditure on construction of HP Indoor Stadium and Namhole Stadium, following the decision in the assessee's own case for the assessment year 1997-98.

15. Disallowance of Payment to Employees under VRS Scheme:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of payment to employees under the VRS scheme, following the Bombay High Court judgment in CIT vs. Bhor Industries Ltd.

16. Deduction of Withdrawals from the Share Premium Account to Meet Prorata Premium on Redemption of Debentures, Equity Shares Issue Expenses, and Debenture Issue Expenses:
The Tribunal upheld the CIT(A)'s direction to allow the adjustment of withdrawals from the share premium account, rejecting the hyper-technical objection of the revenue. The Tribunal found that the substance and nature of the transaction should be considered, and the manner of disclosure was not decisive of the admissibility of adjustment.

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