2012 (8) TMI 1175 - AT - Income Tax

Deductions - Interest paid on borrowings - MAT - Peak load infringement charges - Sales tax incentive. Interest paid on borrowings - HELD THAT - Respectfully following the principles laid down in the Setabganj Sugar Mills Ltd vs. CIT 1960 (11) TMI 10 - SUPREME COURT and by the Coordinate bench in assessee s own case, we modify the order of the CIT (A) and allow the expenditure as revenue expenditure u/s 36(1)(iii). The amendment to the section wherein the borrowed funds are to be capitalized till the date on which such asset was put to use has come up with effect from 1.4.2004. As seen from the facts of the claim from the order of the CIT (A) all the borrowings are for the existing business, even though new advantages have been created. Therefore, the interest expenditure is allowable as revenue expenditure. Accordingly this ground is allowed. Peak load infringement charges - HELD THAT - What assessee has paid is additional charges for overdrawing the power sanctioned to it which the HPSEB has levied as peak load infringement charges. These are nothing but electricity charges but paid for additional drawal of power than the sanctioned load at that particular point of time. The amounts are compensatory in nature and not penalty for surcharge violation. The same cannot be disallowed by invoking Explanation to section 37(1). In view of this, we direct AO to allow the amount. Ground is allowed. Sales tax incentive - power tariff freeze - Electricity duty - Road Transport subsidy as capital receipt - MAT - HELD THAT - We are of the view that so far as the exclusion of these items from book profits under section 115JB is concerned, we find that even though there are Coordinate Bench decision in favour of assessee, this precedence no longer hold good law in view of the Special Bench decision of this Tribunal in the case of Rain Commodities 2010 (7) TMI 794 - ITAT HYDERABAD . Respectfully following the Coordinate Bench decision in assessment year 1998- 99 which in turn followed the above Special Bench decision, we reject the grievance of assessee and uphold the stand of the authorities on this issue. The grounds are rejected. Disallowance of interest on funds borrowed in connection with earning incomes exempt u/s 10(33) - HELD THAT - Since the CIT (A) has considered the issue on facts wherein a finding has given that assessee has own funds to make investments, no disallowance is required on facts. Not only that the Hon'ble Supreme Court in the case of Munjal Sales Corporation vs. CIT Another 2008 (2) TMI 19 - SUPREME COURT held that when assessee had sufficient own funds and profits to provide interest free loans, the submission that loans to sister concerns were out of those funds has to be accepted. Similar view is also taken by the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT . Thus, we do not see any reason to interfere with the order of the CIT (A). Accordingly Revenue ground is rejected. In the result, Revenue appeal is dismissed. In the result assessee s appeal is partly allowed and Revenue appeal is rejected.

Issues Involved:
1. Transport Subsidy as Capital Receipt
2. Power Tariff Incentive and Electricity Duty as Capital Receipts
3. Expenditure for Compulsory Afforestation
4. Interest on Borrowings
5. Peak Load Infringement Charges
6. Provident Fund Contribution Delay
7. MODVAT on Closing Stock
8. Expenditure on Dismantling Assets
9. Relief under Section 91 for Tax Deducted in Saudi Arabia
10. Voluntary Retirement Scheme (VRS) Expenditure
11. Service Connection Charges to UPSEB
12. Interest on Borrowings for Exempt Income
13. Sales Tax Incentive as Capital Receipt
14. Book Profit Computation under Section 115JA

Detailed Analysis:

1. Transport Subsidy as Capital Receipt:
The assessee received Rs. 22,93,57,398 as transport subsidy under the Transport Subsidy Scheme 1971 for setting up a new industrial unit. The AO treated it as revenue receipt based on the Supreme Court's decision in the case of Sahney Steel & Press Works Ltd. However, the ITAT ruled in favor of the assessee, citing previous judgments and the "Purpose Test," confirming that the subsidy is a capital receipt not taxable as revenue.

2. Power Tariff Incentive and Electricity Duty as Capital Receipts:
The ITAT upheld that power tariff incentives and electricity duty exemptions received under the Himachal Pradesh Incentives Scheme 1991 are capital receipts. This decision was consistent with previous years' rulings and supported by the Special Bench decision in DCIT vs. Reliance Industries Ltd.

3. Expenditure for Compulsory Afforestation:
The assessee's expenditure of Rs. 7,72,750 for compulsory afforestation was deemed revenue expenditure by the ITAT. The expenditure was necessary for the business activity of extracting limestone and did not result in the creation of any asset. This decision was consistent with previous rulings in the assessee's favor.

4. Interest on Borrowings:
The assessee's claim of Rs. 39,09,39,000 as interest on borrowings was allowed as revenue expenditure under Section 36(1)(iii). The ITAT followed the precedent set by previous years and various Supreme Court rulings, confirming that the interest expenditure is allowable as revenue expenditure.

5. Peak Load Infringement Charges:
The ITAT ruled that Rs. 1,78,00,000 paid as peak load infringement charges to HPSEB is compensatory in nature and not penal, thus allowable as deduction. This decision was supported by similar rulings in other cases.

6. Provident Fund Contribution Delay:
The ITAT allowed the assessee's claim for provident fund contributions amounting to Rs. 2,04,297 and Rs. 2,06,182, which were delayed but paid within the due date for filing returns. This decision was based on the Supreme Court's ruling in CIT vs. Alom Extrusions Ltd.

7. MODVAT on Closing Stock:
The issue of adding MODVAT to the closing stock was restored to the AO for verification, following the principles laid down by the Bombay High Court in CIT vs. Mahalaxmi Glass Works Pvt Ltd.

8. Expenditure on Dismantling Assets:
The ITAT allowed the assessee's claim of Rs. 7,95,594 for dismantling old and unserviceable assets as revenue expenditure. This decision was consistent with previous rulings in the assessee's favor.

9. Relief under Section 91 for Tax Deducted in Saudi Arabia:
The ITAT directed the AO to allow relief under Section 91 for tax deducted in Saudi Arabia on fees received from Yanbu Cement Corporation, following the precedent set in previous years.

10. Voluntary Retirement Scheme (VRS) Expenditure:
The ITAT upheld that VRS expenditure is revenue in nature and allowable as deduction. This decision was consistent with previous rulings and supported by the Bombay High Court's decision in CIT vs. Bhor Industries Ltd.

11. Service Connection Charges to UPSEB:
The ITAT upheld that service connection charges paid to UPSEB are revenue expenditure, consistent with previous rulings in the assessee's favor.

12. Interest on Borrowings for Exempt Income:
The ITAT upheld the CIT(A)'s decision to delete the disallowance of Rs. 150,68,960 as interest on borrowings for earning exempt income, based on the finding that the assessee had sufficient own funds.

13. Sales Tax Incentive as Capital Receipt:
The ITAT ruled that sales tax incentives availed under various state schemes are capital receipts. This decision was consistent with previous rulings and supported by the Special Bench decision in DCIT vs. Reliance Industries Ltd.

14. Book Profit Computation under Section 115JA:
The ITAT rejected the assessee's claim to exclude sales tax incentive, power tariff freeze, electricity duty, and road transport subsidy from book profits under Section 115JA, following the Special Bench decision in Rain Commodities Ltd vs. DCIT.

Conclusion:
The ITAT's judgment comprehensively addressed multiple issues, largely ruling in favor of the assessee based on precedents and established legal principles. The appeals were partly allowed for the assessee and dismissed for the Revenue.

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