2016 (8) TMI 695 - AT - Income Tax

Determine the character of subsidy in hands of recipient - whether Revenue or capital - Held that - The subsidy in the present case under the incentive scheme 2001 for economic development of Kutch District was aimed at making the economic environment of Kutch District live as the economic activity in the District of Kutch came to a stand still on account of the devastating earth quack in the state on 26th January 2001 and the aim was to create new employment opportunities if new investment takes place. Having gone through the preamble of the Incentive Scheme 2001 for Economic Development of Kutch District come to the conclusion that the incentive given in the present case to the assessee was capital in nature. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to allow the claim of assessee.

Summary

Issues Involved:
1. Application of Rule 8D in relation to exempt income.
2. Disallowance of sales-tax incentive.
3. Disallowance of foreign travel expenses.
4. Additional ground regarding exclusion of sales-tax incentive from book profit under sec. 115JB.

Issue-Wise Detailed Analysis:

1. Application of Rule 8D in Relation to Exempt Income:
The assessee contested the application of Rule 8D concerning exempt income of ?4,269,842. The Assessing Officer (AO) observed that the assessee had not allocated any expense for earning this income and applied Rule 8D, resulting in a disallowance of ?4,25,50,145. The CIT(A) partially accepted the assessee's contention, excluding investment in national saving certificates from the average value of investment related to tax-free income. The Tribunal found that Rule 8D was not applicable during the year under consideration and that the AO had not justified the disallowance, given the assessee's substantial interest-free funds. Consequently, the disallowance was deleted, and the assessee's grounds were allowed.

2. Disallowance of Sales-Tax Incentive:
The AO disallowed ?1,49,70,016 on account of sales-tax incentives, treating it as a revenue receipt. The CIT(A) upheld this disallowance. The Tribunal, however, examined the "Incentive Scheme 2001 for Economic Development of Kutch District" and concluded that the incentive was capital in nature, aimed at economic development and not at enhancing the assessee's profits. The Tribunal relied on the decisions of the Hon'ble Bombay High Court in CIT vs. Reliance Industries Ltd. and the Hon'ble Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd., which emphasized the purpose of the subsidy. The Tribunal directed the AO to allow the claim, treating the sales-tax incentive as a capital receipt.

3. Disallowance of Foreign Travel Expenses:
The AO disallowed ?85,255 claimed by the assessee for foreign travel expenses, stating they were not incurred for business purposes. The Tribunal found that the assessee had paid Fringe Benefit Tax (FBT) on these expenses, which negated the element of personal use. Consequently, the disallowance was deleted, and the assessee's ground was allowed.

4. Additional Ground Regarding Exclusion of Sales-Tax Incentive from Book Profit under Sec. 115JB:
The assessee raised an additional ground contending that the sales-tax incentive, being a capital receipt, should be excluded from book profit for determining income under sec. 115JB. The Tribunal allowed this additional ground, noting that it was legal in nature and did not require fresh material. The Tribunal's decision was supported by the view taken by the Lucknow Bench of the ITAT in the case of L.H. Sugar Factory Ltd. vs. JCIT.

Conclusion:
The appeal preferred by the assessee was allowed, and the appeal by the Revenue was dismissed. The Tribunal pronounced the order in the open court on 18.07.2016.