2014 (3) TMI 888 - AT - Income Tax

Claim for exemption on account of Subsidies - Sales tax, entry tax and electricity duty subsidy Held that - The decision in Sahney Steel And Press Works Limited And Others Versus Commissioner of Income-Tax 1997 (9) TMI 3 - SUPREME Court and assessee s own case for the previous assessment year has been followed - If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts - The character of the subsidy in the hands of the recipient-whether revenue or capital-will have to be determined, having regard to the purpose for which the subsidy is given - The source of the fund is quite immaterial - if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes - But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. As per the scheme of the incentive of Madhya Pradesh Government, sales tax subsidy is taxable - The view taken by the ITAT in assessee s own case for AY 2004-05 is similar thus, the sales tax and other subsidies provided by Madhya Pradesh Government were revenue receipt - the amount of sales tax and other subsidies received by the assessee were revenue in nature Decided against Assessee. Confirmation of adhoc disallowance Expenses incurred for non-business purposes Held that - As decided in assessee s own case for the previous assessment year, the expenditure relatable to trips made for non-business purposes could only be disallowed by the Department - the entire disallowance for the trips undertaken by the assessee was for non-business purposes and the whole disallowance was sustained the AO has mentioned that the Managing Director of the company has been using the said plane for purposes other than the business of the company - instead of working the disallowance on the basis of such trips which were for non-business purposes, he made an adhoc disallowance - Complete details of aero plane expenses with the purpose of each visit have not been furnished thus, the matter is remitted back to the AO for working of disallowance Decided in favour of Assessee. Deletion made on account of front end fee Nature of expenses capital or revenue Held that - CIT(A) deleted the disallowance made by the AO being satisfied with the submission made in this regard by the assessee - The decision in India Cements Limited Versus Commissioner Of Income-Tax, Madras 1965 (12) TMI 22 - SUPREME Court followed - front end fees was like processing fees for signing loan agreement and was a revenue expenditure thus, there is no reason to interfere in the findings of the CIT(A) decided against Revenue. Deletion made on account of interest Held that - The decision in DEPUTY COMMISSIONER OF INCOME-TAX Versus CORE HEALTH CARE LTD. 2008 (2) TMI 8 - SUPREME COURT OF INDIA followed - CIT(A) has rightly allowed deduction for interest paid to UTI Bank for non-convertible debentures utilized for the purposes of business - the setting up of 55 MW power project at Raigarh was part of expansion of the existing business of the assessee has not been satisfactorily rebutted by the Revenue thus, the order of the CIT(A) upheld Decided against Revenue. Deletion made of consultancy charges paid to price water house Held that - The decision in HPCL Vs. DCIT 2004 (8) TMI 321 - ITAT BOMBAY-F followed - just because an expenditure was voluntary in nature and was not forced on the assessee by a statutory obligation, it could not cease to be a business expenditure - It is evolved over a period of time to include in its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular thus, the findings of the CIT(A) upheld Decided against Revenue. Deletion made of acquisition of capital assets Held that - CIT(A) was of the view that the expenditure was attributable to current repairs and there had been no increase in capacity of the asset and hence, the expenditure is revenue in nature the decision in Empire Jute Co. Ltd. Vs. CIT 1980 (5) TMI 1 - SUPREME Court followed - there is no increase in the production capacity the CIT(A) has rightly come to the conclusion that the claimed expenditure was revenue in nature Decided against Revenue.

Issues Involved:

1. Exemption of sales tax, entry tax, and electricity duty subsidy.
2. Adhoc disallowance of expenditure incurred on aircraft for alleged non-business purposes.
3. Charging of interest under Section 234B of the Income Tax Act.
4. Allowing depreciation under Section 32 of the Income Tax Act.
5. Deduction under Section 80-IA of the Income Tax Act.
6. Disallowance of front-end fees as capital expenditure.
7. Disallowance of interest as capital expenditure.
8. Disallowance of consultancy charges paid to Price Water House.
9. Disallowance of expenses related to acquisition of capital assets.

Issue-wise Detailed Analysis:

1. Exemption of Sales Tax, Entry Tax, and Electricity Duty Subsidy:
The assessee claimed exemption on sales tax, entry tax, and electricity duty subsidy, which was not initially claimed before the Assessing Officer (AO). The CIT(A) dismissed the additional ground based on the Supreme Court's decision in Goetze (India) Ltd., which mandates that such claims must be made in the return of income or a revised return. The ITAT upheld the CIT(A)'s decision, noting that judicial propriety demands adherence to previous ITAT decisions unless referred to a larger bench. The ITAT followed its prior ruling for AY 2004-05, determining the subsidies as revenue receipts based on the incentive scheme of the Madhya Pradesh Government and the Supreme Court's ruling in Sahney Steel and Press Works Ltd.

2. Adhoc Disallowance of Expenditure on Aircraft:
The AO made an adhoc disallowance of Rs. 2,00,000 for non-business use of the aircraft. The ITAT found that the AO did not provide specific details of non-business trips and thus set aside the matter to the AO to determine disallowance based on actual non-business trips.

3. Charging of Interest under Section 234B:
The ITAT directed the AO to rework the interest under Section 234B after determining the income as per the ITAT's order, acknowledging that this issue is consequential.

4. Allowing Depreciation under Section 32:
The AO had adopted the straight-line method for depreciation, disallowing Rs. 54,93,178. The CIT(A) allowed the depreciation based on the written down value method as claimed by the assessee. The ITAT upheld the CIT(A)'s decision, citing previous ITAT decisions and the Punjab & Haryana High Court's rulings in the assessee's favor.

5. Deduction under Section 80-IA:
The AO reduced the deduction under Section 80-IA by treating the inter-unit transfer of power at Rs. 2.32 per unit instead of Rs. 3.72/3.29 per unit. The CIT(A) allowed the higher rate, and the ITAT upheld this decision, following the Punjab & Haryana High Court's rulings in the assessee's favor for previous years.

6. Disallowance of Front-End Fees as Capital Expenditure:
The AO treated Rs. 50 lakhs of front-end fees as capital expenditure. The CIT(A) allowed it as a revenue deduction, supported by various judicial precedents, including the Supreme Court's decision in India Cements Ltd. The ITAT upheld the CIT(A)'s decision.

7. Disallowance of Interest as Capital Expenditure:
The AO disallowed Rs. 62,50,000 of interest on non-convertible debentures as capital expenditure. The CIT(A) allowed it as revenue expenditure under Section 36(1)(iii). The ITAT upheld the CIT(A)'s decision, supported by judicial precedents, including the Supreme Court's decision in Core Health Care Ltd.

8. Disallowance of Consultancy Charges Paid to Price Water House:
The AO disallowed Rs. 4,75,724 paid to PricewaterhouseCoopers for consultancy, deeming it unrelated to business. The CIT(A) allowed the expenditure, supported by judicial precedents. The ITAT upheld the CIT(A)'s decision.

9. Disallowance of Expenses Related to Acquisition of Capital Assets:
The AO disallowed Rs. 1,38,600 paid for design and drawings for slab caster modification as capital expenditure. The CIT(A) allowed it as revenue expenditure, considering it as current repairs. The ITAT upheld the CIT(A)'s decision, supported by judicial precedents.

Summary:
(i) The appeal filed by the assessee for AY 2002-03 is partly allowed for statistical purposes.
(ii) The appeal of the Revenue for AY 2002-03 is dismissed.
(iii) The appeal preferred by the Revenue for AY 2005-06 is dismissed.
(iv) The appeal of the assessee for AY 2005-06 is partly allowed for statistical purposes.

Decision pronounced in the open Court on 6th March, 2014.

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