2022 (11) TMI 1420 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - MAT computation - HELD THAT - So far as this assessment year is concerned, it is the first assessment year post insertion of rule 8D and as is the settled legal position in this regard, rule 8 D is to be applied for computing the disallowance. To that extent, our decisions for the preceding assessment years will not hold good. However, since the assessee has not used any borrowed funds, no amount shall be disallowed under rule 8 D in respect of the interest. Accordingly, while disallowance of the assessee is upheld in principle, the quantum shall stand reduced, upon verification of necessary facts, in the light of the above legal position. To this extent, this ground of appeal is allowed for statistical purposes. Adjustment of book profits u/s 15JB for the 14A disallowance - We find that this aspect of the matter stands concluded, in favour of the assessee, by a special bench decision in the case of ACIT Vs Vireet Investments Pvt Ltd 2017 (6) TMI 1124 - ITAT DELHI The assessee gets relief on this point as well. Allowance of leave encashment claimed on provision - HELD THAT - Deduction can only be allowed when it is otherwise admissible, and that aspect of the matter will have to be examined by the Assessing Officer. That is indeed the correct approach. While we dismiss the grievance of the asseseee, we make it clear that the Assessing Officer will take a call, as and when the payment is actually made, on the admissibility of deduction in accordance with the law. Computation of total income - Excluding sales tax incentive availed under various schemes of different states in computing its total income holding the incentives to be capital in nature - HELD THAT - Approach of discerning the purpose of the subsidy, solely from the specific words used in the preamble of the scheme and without examining the overall scheme of the Act- which is admittedly to promote the growth of industry, is incorrect and superficial. The subsidies so received can be said to be revenue in nature unless these subsidies are for augmenting the profits of the assessee, and that is not even the case of the revenue. CIT(A) is simply swayed by the wording of the preamble of the scheme- something clearly impermissible. These subsidy schemes are materially similar in nature, and there are, by now, a number of decisions of the coordinate benches, as also Hon‟ble Courts above, dealing with these schemes. It is also important to bear in mind the fact that the subsidies received by the assessee are in the nature of sales tax subsidies, and dealing with sales tax subsidies, Hon‟ble Gujarat High Court, in the case of CIT Vs Nirma Ltd 2016 (6) TMI 1023 - GUJARAT HIGH COURT that where the object of respective subsidy schemes of State Governments was to encourage the development of Multiple Theatre Complexes, incentives would be held to be capital in nature and not revenue receipts, and, following the same logic, the sales tax subsidy schemes, which are admittedly to encourage industrial growth in the specific areas and the overall scheme in all the sales tax subsidy and exemption schemes unambiguously indicate so, are capital receipts in nature. Addition u/s 41(1) - Difference of the N. P. V. of the sales tax liability and the liability as not assessable to tax - HELD THAT - As even going by the stand of the Assessing Officer, the issue is covered in favour of the assessee, by case of CIT Vs Sulzer India Ltd 2014 (12) TMI 267 - BOMBAY HIGH COURT but yet the appeal has been filed because the revenue has challenged the correctness of the said judgment. That very approach is simply erroneous because it is only elementary in law that the mere pendency of the appeal, against a binding judicial precedent, in a higher judicial forum does not dilute, curtail or otherwise narrow down its binding nature. As long as the binding judicial precedent holds good in law, as it does unless it is upturned or reversed by a higher judicial forum, it binds the lower judicial forums. That apart, even otherwise, the view taken by the Hon ble Bombay High Court in Sulzer s case 2014 (12) TMI 267 - BOMBAY HIGH COURT now stands approved and confirmed by the Hon ble Supreme Court in the case of CIT Vs Balakrishna Industries Limited 2017 (11) TMI 1626 - SUPREME COURT wherein held what the Assessee was required to pay after 12 years in 6 equal installments was paid by the Assessee prematurely in terms of the NPV of the same. That the State may have received a higher sum after the period of 12 years and in installments. However, the statutory arrangement and vide section 38, 4th proviso does not amount to remission or cessation of the Assessee's liability assuming the same to be a trading one. Rather that obtains a payment to the State prematurely and in terms of the correct value of the debt due to it. There is no evidence to show that there has been any remission or cessation of the liability by the State Government. We agree with the Tribunal that one of the requirement of section 41(1)(a) has not been fulfilled in the facts of the present case Nature of receipt - exclusion of excise duty incentive availed by the assessee, aggregatingin computing its total income by treating it as capital - HELD THAT - The subsidy was granted under schemes framed by the State and the Central Government, to be given to the assesses who set up new industry in Kutch District. The scheme was envisaged to encourage investment which would in turn, provide fresh employment opportunity in the district which had suffered due to devastating earthquake. The computation of subsidy may be on the basis of sales tax or excise duty. Nevertheless, the purpose test would ensure that, the subsidy was capital in nature. As decided in P. J. Chemicals Ltd ., 1994 (9) TMI 1 - SUPREME COURT Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the 'actual cost The expression 'actual cost' in section 43(1) needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from 'actual cost'. The amount of subsidy is not to be deducted from the 'actual cost' under section 43(1) for the purpose of calculation of depreciation etc. Pooja expenses, Temple expenses, Community Welfare Expenses need to be allowed as expenditure is incurred for the smooth functioning of the business Mines Prospecting Expenses - HELD THAT - As expenditure in question is incurred on identifying the nature of deposits of limestone at various sites to plan mining operations, that the AO has made the addition even as he took note of the Tribunal decisions on the said issue, in favour of the assessee in its own cases, but added that the views of the Tribunal has not attained finality, and that the CIT(A) gave relief on the ground that as the Assessing Officer has not challenged the relief granted by the Tribunal, the matter has attained finality. No material has been brought before us to dislodge the findings of the learned CIT(A). In any event, even going by the observations of the Assessing Officer, the matter is squarely covered, in favour of the assessee Disallowance u/s 14A r.w.r. 8D - HELD THAT - So far as this assessment year is concerned, it is an assessment year post insertion of rule 8D and as is the settled legal position in this regard, rule 8 D is to be applied for computing the disallowance. To that extent, our decisions for the preceding assessment years will not hold good. However, since the assessee has not used any borrowed funds, no amount shall be disallowed under rule 8 D in respect of the interest. Accordingly, while disallowance of the assessee is upheld in principle, the quantum shall stand reduced, upon verification of necessary facts, in the light of the above legal position. To this extent, this ground of appeal is allowed for statistical purposes. Nature of expenses - Expenditure incurred on capital jobs abandoned written off - HELD THAT - The views expressed by the tax auditor on what constitutes capital expenditure cannot dilute, curtail or override the views expressed by the Hon ble Courts above. What an auditor holds is his accounting perspective, and it has no effect on the legal position. Similarly, just because a claim is made in the revised return, the admissibility of the claim cannot be declined for that reason alone. Nothing turns on these factors, and the Assessing Officer was thus clearly in error, as was the CIT(A) -we uphold the plea of the assessee and direct the Assessing Officer to delete the expenses incurred on these abandoned projects Excise duty exemption availed by the assessee as capital receipt allowed. Disallowance of Community Welfare Expenses - principle of consistency - HELD THAT - This is a legacy issue and pertains to the expenditure incurred for community welfare as the factories of the assessee are concerned in backward areas and the expenditure is incurred for the smooth functioning of the business. Right from the assessment years 1988-89 to 1994-95, the coordinate benches have allowed the appeal of the assessee on this point, and from the assessment years 1995-96 to 2004-05, in which the first appellate authority has deleted similar disallowance, the coordinate benches have rejected the grievances of the Assessing Officer, against the reliefs so granted by the CIT(A). Learned Departmental Representative does not dispute this position but relies upon the stand of the Assessing Officer nevertheless. Additional depreciation on all the eligible assets acquired before 01.04.2008 - only objection of the AO is that the provisions refer to new machinery or plant and therefore the machinery will cease to be a new machinery after the end of the first year in which it is installed or put to use - HELD THAT - In our view this stand taken by the revenue is not supported by the language of statutory provision. The condition imposed by the relevant provisions is that Plant and Machinery must be new at the time of installation to be eligible for additional depreciation u/ s 32(1)(iia) and not new in subsequent years. The expression new machinery is therefore to be construed as referring to the condition that at the time of acquisition or installation the machinery or plant should be new. Going by the legislative history of the relevant provision, we are of the view that the condition for allowing additional depreciation only in the initial assessment year ceased to exist as and from 01-04-2006. The plain language of the section warrants such an interpretation. Unutilized CENVAT credit - CIT(A) correctly deleted the addition. Nature of expenses - pre-operative expenses - assessee itself claimed these expenses as capital expenses in the books of accounts adding it to capital work in progress/fixed assets - HELD THAT - CIT(A) correctly after taking note of the detailed submissions, held that the expenses, being in the nature of expenses incurred for the expansion of existing business, cannot be disallowed. Short grievance raised before us by the Assessing Officer is whether, even when the expenditure is shown in the books of accounts, it can be treated as revenue in nature, in our considered view, stands concluded in favour of the assessee MAT computation u/s 115JB - Exclude the sales tax incentive subsidy for computing book profit under section 115 JB

Summary

Issues Involved:

1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Exclusion of Education Cess, Dividend Distribution Tax, and Fringe Benefit Tax.
3. Deduction of leave encashment on a provision basis.
4. Treatment of sales tax incentives as capital receipts.
5. Treatment of excise duty incentives as capital receipts.
6. Allowability of community welfare and temple expenses.
7. Allowability of pooja expenses.
8. Allowability of mines prospecting expenses.
9. Additional depreciation on eligible assets.
10. Treatment of unutilized CENVAT credit.
11. Treatment of capital jobs abandoned and written off.
12. Tax rate on dividend declared under the India-Mauritius treaty.
13. Inclusion of sales tax and excise duty incentives in book profits under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee's grievance regarding the disallowance under Section 14A was partly upheld. The Tribunal noted that Rule 8D applies post its insertion and disallowed any amount related to interest as the assessee did not use any borrowed funds. The decision was guided by the jurisdictional High Court's ruling in PCIT Vs Shapoorji Pallonji & Co Ltd.

2. Exclusion of Education Cess, Dividend Distribution Tax, and Fringe Benefit Tax:
The assessee withdrew the grievance regarding the exclusion of these taxes, and the ground was dismissed as not pressed.

3. Deduction of Leave Encashment:
The Tribunal acknowledged that the issue of leave encashment on a provision basis is covered against the assessee, referencing the Supreme Court's stay on the judgment in Bharat Earth Movers Vs CIT. The Tribunal directed that the deduction be allowed on a payment basis when actually made.

4. Treatment of Sales Tax Incentives as Capital Receipts:
The Tribunal upheld the CIT(A)'s decision treating sales tax incentives as capital receipts, referencing previous decisions and the purpose of the incentives to promote industrial growth.

5. Treatment of Excise Duty Incentives as Capital Receipts:
The Tribunal agreed with the CIT(A) that excise duty incentives are capital receipts, noting that the incentives were for promoting industrial growth in backward areas, similar to sales tax incentives.

6. Allowability of Community Welfare and Temple Expenses:
The Tribunal upheld the CIT(A)'s decision allowing community welfare and temple expenses, consistent with the decisions in the assessee's own cases for previous years.

7. Allowability of Pooja Expenses:
The Tribunal upheld the CIT(A)'s decision allowing pooja expenses, following the precedent set in the assessee's own cases for previous years.

8. Allowability of Mines Prospecting Expenses:
The Tribunal upheld the CIT(A)'s decision allowing mines prospecting expenses, noting that the expenditure was for identifying limestone deposits for mining operations, consistent with previous Tribunal decisions in the assessee's own cases.

9. Additional Depreciation on Eligible Assets:
The Tribunal upheld the CIT(A)'s decision allowing additional depreciation on eligible assets acquired after 01.04.2005, referencing the legislative history and judicial precedents that support the allowance of additional depreciation in subsequent years.

10. Treatment of Unutilized CENVAT Credit:
The Tribunal upheld the CIT(A)'s decision allowing the addition of unutilized CENVAT credit to the closing stock, consistent with the decisions in the assessee's own cases for previous years.

11. Treatment of Capital Jobs Abandoned and Written Off:
The Tribunal upheld the assessee's claim that expenses on abandoned projects are allowable as a deduction, referencing several judicial precedents that support the deduction of such expenses as incidental business losses.

12. Tax Rate on Dividend Declared under the India-Mauritius Treaty:
The Tribunal remitted the matter back to the Assessing Officer for consideration, as the issue was raised for the first time before the Tribunal.

13. Inclusion of Sales Tax and Excise Duty Incentives in Book Profits under Section 115JB:
The Tribunal upheld the CIT(A)'s decision excluding sales tax and excise duty incentives from book profits under Section 115JB, referencing judicial precedents that support the exclusion of such capital receipts from book profits.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal's decisions were guided by judicial precedents and the legislative intent behind the provisions of the Income Tax Act, 1961.