2019 (2) TMI 1061 - AT - Income Tax

Chargeability to income-tax of incentives by way of refund of Excise Duty and Exemption of Sales Tax - nature of receipt - revenue or capital receipt - Held that - Following the ratio of decision of co-ordinate Benches of the tribunal in the case of Welspun Steel Ltd 2015 (12) TMI 1783 - ITAT MUMBAI we hold that Central Excise benefit and Sales Tax incentive received by the assessee during the impugned assessment year under consideration, are capital receipts not exigible to income-tax and further we hold that the same shall not be deducted from cost of assets for computing depreciation. The ground number 1 and 2 raised by the Revenue in its memo of appeal filed with the tribunal are dismissed. Disallowance made u/s. 14A - Held that - We are guided by the decision of CIT v. Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Limited v. DCIT 2016 (3) TMI 755 - BOMBAY HIGH COURT to hold that there will be presumption in favour of the assessee. The Revenue is not able to rebut the aforesaid presumption in favour of the assessee even before us. Thus this disallowance as was made by the AO by invoking Section 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rule is directed to be deleted. Strategic investments made with group/associated companies etc cannot be excluded while computing disallowance u/s 14A - Secondly that the disallowance cannot exceed exempt income and thirdly that only those investments which actually yielded an exempt income be only considered while computing disallowance u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rule. With these directions, we are restoring this issue back to the file of the AO for fresh/denovo adjudication of the issue on merits in accordance with law keeping in view our above directions. Needless to say that the AO shall provide necessary opportunity of being heard to the assessee in denovo proceedings in accordance with principles of natural justice in accordance with law. Additions u/s 14A which was added while computing book profits u/s 115JB - Held that - The issue is consequential to our decision in the case of disallowance of expenditure incurred in relation to earning of an exempt income u/s 14 A in the preceding para s of this order. We are of the view that this issue is required to be set aside and restored to the file of the AO to be adjudicated afresh/denovo on merits in accordance with law in the light of Special Bench decision of ITAT, Delhi in the case of Vireet Investment Private Limited 2017 (6) TMI 1124 - ITAT DELHI . AO shall provide proper and necessary opportunity of being heard in accordance with principles of natural justice. Additions on account of gains on premature redemption of debentures - AO made additions to the income of the assessee by way of gain on premature redemption of debentures - CIT(A) deleted the said additions relying on judgment CIT v. Industrial Credit and Development Syndicate Limited 2006 (3) TMI 90 - KARNATAKA HIGH COURT - Held that - This issue needs to be restored to the file of the AO to decide the issue afresh after considering the factual matrix of the case in the light of judicial decisions and applicable law. After hearing both the parties , we are also of the considered view that this issue need to be restored to the file of the AO for fresh/denovo adjudication of the issue on merits in accordance with law after considering the entire factual matrix of the case surrounding issue of debenture by the assessee, purpose/object for which said debenture were raised by the assessee and then applying ratio of the judicial precedents and applicable laws to those identified factual matrix of the case. Additions made to the book profit - brought forward book loss available to the assessee - Held that - No doubt it is true that learned CIT(A) has no power to set aside and remand the matter to the AO keeping in view provisions of Section 251(1)(a) of the 1961 Act and learned CIT(A) ought to have adjudicated the issue on merits in accordance with law. The power of learned CIT(A) are co-terminus with powers of learned AO. This issue requires investigation of facts as to scheme of merger and accumulated losses of the said merged entity and application of law to those facts for which we at this stage are of the considered view that the matter need to be restored to the file of AO for verification of facts surrounding brought forward losses/unabsorbed depreciation and their set off to compute book profits u/s 115JB, on merits in accordance with law. AO shall provide proper and necessary opportunity of being heard to the assessee in accordance with principles of natural justice Penalties levied on the assessee under Gujarat Sales Tax Act as well FERA/FEMA authorities - allowable bussiness expenditure - Held that - This issue is to be restored to the file of the AO for fresh/denovo adjudication of the issue afresh on merits in accordance with law. The assessee is directed to produce all the surrounding facts concerning levy of penalty under FERA/FEMA and Gujarat Sales Tax Act including orders of the authorities levying the said penalty before the AO. The AO to analyse all the relevant facts to ascertain whether such penalties are penal or compensatory in nature to arrive at the decision whether these penalties are hit by explanation 1 to Section 37(1) of the 1961 Act and thereafter to pass well reasoned order in accordance with law on merits. Bogus purchases of mobile handsets - addition made by the assessee from Shivamani Traders Pvt. Ltd., wherein the AO got the information from Maharashtra VAT authorities that the said concern is engaged in providing hawala entries by issuing bogus accommodation bills with out supplying any material which led to the additions being made to the income of the assessee by the AO - Held that - The primary onus is on the assessee to prove that the purchases are genuine. Keeping in view interest of justice and factual matrix of the case , we are setting aside and restoring the matter to the file of AO for denovo determination of the issue on merits in accordance with law. Needless to say that the AO shall provide proper and necessary opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences/explanations produced by the assessee in its support shall be admitted by the AO in the interest of justice in accordance with law. This ground of appeal bearing number 6 raised by the Revenue in its memo of appeal filed with the tribunal is allowed for statistical purposes.

Summary

Issues Involved:
1. Chargeability to income-tax of backward area incentives (Sales Tax Incentive and excise duty benefits).
2. Disallowance under Section 14A of the Income Tax Act.
3. Addition to book profits under Section 115JB.
4. Addition on account of premature redemption of debentures.
5. Addition of penalties under Sales Tax and FEMA laws.
6. Alleged bogus purchases.

Detailed Analysis:

1. Chargeability to Income-Tax of Backward Area Incentives:
The Tribunal examined whether incentives received by the assessee in the form of refund of excise duty and exemption of sales tax were capital receipts or revenue receipts. The incentives were provided to encourage the setting up of new industries in the Kutch District post the 2001 earthquake. The Tribunal held that these incentives were capital receipts, not exigible to income-tax, as their purpose was to promote industrial development and not to supplement profits. The Tribunal relied on the Supreme Court's decision in Ponni Sugars & Chemicals Ltd., which emphasized the purpose test to determine the nature of the subsidy. The Tribunal also upheld that these incentives should not be reduced from the cost of the assets for depreciation purposes.

2. Disallowance under Section 14A of the Income Tax Act:
The Tribunal dealt with the disallowance of expenses incurred in relation to earning exempt income under Section 14A. The assessee had voluntarily disallowed a portion of the expenses, but the AO made further disallowances using Rule 8D. The Tribunal noted that the assessee had sufficient own funds to cover the investments and that there was no direct nexus between the borrowed funds and the investments. Consequently, the Tribunal directed the deletion of disallowance under Rule 8D(2)(ii) but remanded the issue of disallowance under Rule 8D(2)(iii) back to the AO for fresh adjudication, considering recent judicial precedents.

3. Addition to Book Profits under Section 115JB:
The Tribunal addressed the addition of disallowed expenses under Section 14A to the book profits under Section 115JB. The matter was remanded to the AO for fresh adjudication in light of the Special Bench decision in Vireet Investment Private Limited, which held that only those investments that actually yielded exempt income should be considered.

4. Addition on Account of Premature Redemption of Debentures:
The Tribunal considered the AO's addition of gains on premature redemption of debentures. The CIT(A) had deleted the addition, relying on a Karnataka High Court decision. The Tribunal remanded the issue to the AO for fresh adjudication, instructing the AO to consider the purpose of the debentures and apply relevant judicial precedents.

5. Addition of Penalties under Sales Tax and FEMA Laws:
The Tribunal examined the disallowance of penalties paid under Sales Tax and FEMA laws. The CIT(A) upheld the disallowance, noting that the penalties were reported by the auditors and the assessee failed to prove they were compensatory. The Tribunal remanded the issue to the AO to determine if the penalties were compensatory or penal, directing the AO to consider relevant facts and judicial precedents.

6. Alleged Bogus Purchases:
The Tribunal dealt with the addition made by the AO based on information from Maharashtra VAT authorities regarding alleged bogus purchases. The CIT(A) deleted the addition, citing lack of cross-examination and independent investigation by the AO. The Tribunal remanded the issue to the AO for fresh adjudication, emphasizing the need for cross-examination and proper verification of facts.

Conclusion:
The Tribunal's judgment involved a detailed examination of various issues related to taxability of incentives, disallowance of expenses, and additions to income. The Tribunal provided clear directions for fresh adjudication by the AO on several issues, ensuring that the principles of natural justice and relevant judicial precedents are applied. The appeals were partly allowed, with specific instructions for further proceedings.