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2016 (1) TMI 1461 - AT - Income TaxReopening of assessment u/s 147 - Characterization of income - treating the sale of additional quota of sugar in free market as revenue receipt against the assessee s claim of capital receipt - HELD THAT - The Hon ble Supreme Court in CIT vs. Ponni Sugar and Chemicals Ltd. and Ors. 2008 (9) TMI 14 - SUPREME COURT has held that the subsidy for setting up sugar mills, to be utilized for repayment of term loans undertaken for setting up new units/expansion of existing business, is a capital receipt and not chargeable to tax. Adverting to the facts of the instant case, we find that the assessee is covered under the Incentive scheme dated 10.3.1993 as it was set up in 7.3.1994. It is so borne out from the letter dated 10.7.2000 issued to the assessee by the Government of India, Ministry of Food, Directorate of Sugar, a copy of which is placed at page 175 of the paper book, giving licence and covering it under the Incentive scheme dated 10.3.1993. Pursuant to the requirement of submission of Utilization certificate from a Chartered Accountant, the assessee submitted such certificate, a copy of which is available at pages 38 and 39 of the paper book. Such certificate indicates repayment of interest on loan to the financial institutions to the tune of ₹ 2.65 crore against which the amount of subsidy is only a sum of ₹ 35.11 lac. This exhibits that the object of subsidy given to the assessee is setting up of sugar mill and the mode of discharge of subsidy is free sale of additional quota, which is meant to be utilized for the repayment of term loans taken from the financial institutions etc. In the instant case, the assessee has simply realized excess price in terms of Incentive scheme dated 10.3.1992 and there is no excess realization over and above the sanctioned realizable amount. Thus, it is manifest that the facts of the instant case are strictly governed by the judgment in the case of Ponni Sugar rather than KCP Ltd. We, therefore, overturn the impugned order on this issue. Disallowance of reserve fund for construction of Molasses Storage Tank which was credited to Reserve account after debiting the same to the Profit Loss Account - HELD THAT - The undisputed facts are that the assessee created Molasses reserve fund for construction of molasses storage tank by crediting a sum to this account in accordance with UP Sheera Niyantran Niyamavali. The Hon ble Calcutta High Court in CIT vs. Upper Ganges Sugar Mills Ltd 1993 (2) TMI 22 - CALCUTTA HIGH COURT has held that contribution towards Molasses Storage Fund is eligible for deduction as business expenditure. Similar view has been taken by the Hon ble Madras High Court in certain decisions including CIT vs. Salem Cooperative Sugar Mills Ltd 1996 (9) TMI 40 - MADRAS HIGH COURT - In view of several decisions taken note of by the ld. CIT(A) in the impugned order supporting the assessee s contention, which have not been controverted by the ld. DR with any contrary decision, we are of the considered opinion that the ld. first appellate authority has taken an unimpeachable view on this issue. We, therefore, uphold the impugned order on this score. Disallowance of pre-operative expenses which were capitalized by the assessee - HELD THAT - On a specific query, the ld. DR could not point out any direct addition made by the AO on account of the third reason and submitted that the disallowance was in support of such third reason. We are unable to find any rationale in making any disallowance for an expenditure which was admittedly capitalized by the assessee and no deduction was claimed by way of a debit to its Profit Loss Account - AO himself has categorically noted in the assessment order that the pre-operative expenses were capitalized. Once the assessee has not claimed any deduction for a particular amount and capitalized the same, there can be no reason for making any disallowance of the such amount. In our considered opinion, the ld. CIT(A) was justified in deleting this addition. Excise duty (sugar), Cess duty (sugar) and Purchase tax unpaid - HELD THAT - . AR has pointed out that the assessee had itself made disallowance of these three amounts in the computation of income, which was the reason for the AO in not making such addition. Thus all the four reasons taken note of by the AO before issuing notice u/s 148 are non-existent and, resultantly, there is no question of making any other addition. We, therefore, set aside the assessment order passed by the AO u/s 147 read with section 143(3) of the Act. As such, there is no need to discuss other additions made by the AO which have been upheld or deleted in the first appeal. As the AO is not competent to make any other addition in the instant case, all the additions so made are liable to be deleted. - Decided in favour of assessee.
Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income-tax Act, 1961. 2. Treatment of sale proceeds from additional sugar quota as capital or revenue receipt. 3. Deductibility of reserve fund for Molasses Storage Tank. 4. Capitalization of pre-operative expenses. 5. Unpaid statutory liabilities and their treatment in the reassessment. Issue-wise Detailed Analysis: 1. Validity of Reassessment Proceedings under Section 147: The first ground of the assessee's appeal was against the upholding of the action taken by the Assessing Officer (AO) under Section 147 of the Income-tax Act, 1961. The AO initiated reassessment proceedings based on several reasons, including the treatment of sale proceeds from additional sugar quota, reserve fund for Molasses Storage Tank, pre-operative expenses, and unpaid statutory liabilities. The Tribunal noted that the AO recorded reasons on 07.12.2001 before issuing notice under Section 148, which included the non-inclusion of certain amounts in the income and incorrect capitalization of expenses. 2. Treatment of Sale Proceeds from Additional Sugar Quota as Capital or Revenue Receipt: The AO treated the sale proceeds of Rs. 35,11,976 from the additional sugar quota as a revenue receipt, contrary to the assessee's claim of it being a capital receipt. The AO relied on the Supreme Court judgment in KCP Ltd. However, the Tribunal found that the incentive scheme aimed to encourage setting up new sugar factories by providing higher free sale quota for repayment of term loans. Citing the Supreme Court judgment in CIT vs. Ponni Sugar and Chemicals Ltd., the Tribunal held that the subsidy for setting up sugar mills is a capital receipt. Therefore, the Tribunal overturned the AO's decision, treating the amount as a capital receipt. 3. Deductibility of Reserve Fund for Molasses Storage Tank: The AO disallowed the deduction of Rs. 1,30,625 created as a reserve fund for Molasses Storage Tank, considering it not an allowable expenditure. The CIT(A) allowed the deduction, and the Tribunal upheld this decision. The Tribunal referred to judgments from the Calcutta and Madras High Courts, which supported the deduction of contributions towards Molasses Storage Fund as business expenditure. 4. Capitalization of Pre-operative Expenses: The AO disallowed Rs. 4,98,17,057 of pre-operative expenses, arguing they should have been capitalized in the assessment year 2000-01. The CIT(A) deleted this addition, noting that these expenses were capitalized and not claimed as a deduction in the Profit & Loss Account. The Tribunal found no reason for disallowance since the assessee had capitalized the expenses and upheld the CIT(A)'s decision. 5. Unpaid Statutory Liabilities and Their Treatment in the Reassessment: The AO initiated reassessment proceedings noting unpaid statutory liabilities, including excise duty, cess duty, and purchase tax, which were marked as "Adjusted" in the tax audit report. However, the Tribunal observed that no such addition was made in the final computation of income. The assessee had already disallowed these amounts in the computation of income, leading the AO not to make any further addition. Conclusion: The Tribunal concluded that all four reasons cited by the AO for initiating reassessment were non-existent. According to Section 147, the AO must have valid grounds for reassessment, and if these grounds are invalid, no other income can be added. Citing jurisdictional High Court decisions, the Tribunal set aside the reassessment order, rendering all additions made by the AO invalid. Consequently, the assessee's appeal was allowed, and the Revenue's appeal was dismissed. Order Pronouncement: The order was pronounced in the open court on 21.01.2016.
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