2017 (9) TMI 1872 - AT - Income Tax

Nature of receipt - sales tax subsidy - revenue or capital receipt - HELD THAT - There is no doubt about the principles governing the subsidies-if the subsidy is in the field of setting up of a business or for capital goods it has to be considered a capital receipt or same has to be taxed as revenue receipt. The said broad categorisation is applicable to all kind of subsidies. As the various schemes announced by the state government from time to time lay down different conditions for availing the incentive schemes, so, without analysing the scheme, as a whole, no final conclusion can be drawn. Considering the peculiar facts and circumstances of the case, we are of the opinion, that in the interest of justice matter should be restored back to the file of the AO for fresh adjudication. He is directed to compare the scheme deliberated upon by the Tribunal in the case of RIL and the scheme of 1993 applicable for the year under appeal. He would afford a reasonable opportunity of hearing to the assessee. First Ground of appeal is decided in favour of the assessee, in part. Income under the head capital gains from sale of plot of land at Mulund - applicability of provisions of section 50 - HELD THAT - Following the judgment of the Hon'ble Bombay High Court in the case of Heatex Products 2016 (7) TMI 1393 - BOMBAY HIGH COURT the Tribunal decided the issue in favour of the assessee held provisions of Section 50C would apply only to capital assets being land or building or both and it could not be applied to transfer of lease hold rights in land. Not referring the matter to the DVO for determining the market value of the assets - we hold that the FAA had not interpreted the provisions of section 50(2) of the Act correctly, that the AO should have referred that matter to the DVO. FMV of the land as on 01.04.1982 - A perusal of the Indian Valuers Directory and Reference Book (Pg. 340 of the PB) reveal that the market value of land located in the adjoining areas of Mulund on 01.04.1981 was ₹ 400-480/- per Sq. feet. Tribunal, in the case of Kumar K Chabaria 2010 (2) TMI 1252 - ITAT, MUMBAI has considered the said Reference Book as a reliable source for valuation of capital assets. So, in our opinion, FMV adopted by the assessee as on 01.04.1981 cannot be brushed aside-rather it is quite reasonable. Reference to the DVO u/s. 55A of the Act is concerned, we would like to say that after the judgments of the Hon'ble Bombay High Court in the cases of Daulal Mohta (360 ITR 680) and Pooja Prints (360 ITR 697) there is no doubt that the AO cannot make a reference to the DVO for purpose of valuation, where the value of the property, declared by the assessee, is not less than FMV. In other words reference u/s. 55A of the Act can only be made in cases where the value of capital asset shown by an assessee is less than the FMV of the land. In the case under consideration, the value shown the assessee is more than the FMV and therefore there was no justification for making a reference to the Valuation Cell. Besides, the AO had made the reference after the assessment was over. In short, in our opinion the FAA was not justified in endorsing the views of the AO. Considering the above, grounds No. 2-5 are decided in favour of the assessee. Entitlement of deduction u/s. 54G - Assessee, in the case under consideration, had entered in to an agreement with a developer for selling rights in the plots of land. But, the agreement was cancelled later on due to differences between the assessee and the developer. It found a new developer and sold the specified assets resulting in accruing of capital gains. There is no doubt that after receiving the sale proceeds from the developer, the assessee had invested the money in purchasing P M and part of it was deposited in a designated bank account. P M purchased by it at the time of shifting the premises had nothing to do with the new P M acquired after sale of capital assets. There is no precondition in the section that new machinery should be purchased at the time of shifting of industrial undertaking. No undertaking can function without P M. But, the assessee can purchase machinery even after shifting and commissioning of business from the new premises. Expansion of business can take place any time. Generally, shifting of industrial unit from urban to rural areas take place simultaneously. But, in a few cases, there can be time lag between shifting of unit and receipt of capital gains. In such cases what is be considered is sale of assets and receipt of capital gains - we are of the opinion that the AO and the FAA had wrongly denied the benefit of the section 54 G of the Act to the assessee. Sale of right of the plot of land - As per the assessee the AO had erroneously reduced the area of assets sold by it. It was also argued that there was a mistake in determining the proportionate cost of improvement calculation - HELD THAT - AR argued that the AO and FAA erroneously reduced the area of assets sold, that there was error in calculation of proportionate cost of improvement, that it had sold development rights in land and not the land itself, that the area to be considered had to be measured in terms of FSI and not area of land, that the AO should have considered FSI potential of 7.08 lakhs sq. ft. for computing the cost in the hands of the assessee, that in the development agreement it had mentioned that saleable land was 6.38 lakhs sq.ft., that the FAA had reduced the cost of acquisition and cost of improvement - both these facts needs further verification on part of the AO. So, in the interest of justice we direct the AO to decide both the issue afresh. He is directed to consider all the facts and figures produced by it, before us, during the appellate proceedings. Both the grounds stand partly allowed. Ad hoc disallowance of various expenses - HELD THAT - Disallowances in question is made on an ad hoc basis merely on the ground that there would be a possibility that some of the expenses would have not been incurred. The Assessee provided complete break up of all the details in the course of assessment proceedings and also an extract of the ledger account in respect of the details provided. The assessing officer has not asked for any specific detail or proof in the nature of any particular bill from the assessee during the assessment proceedings. No explanation regarding allowability or reasonableness of the expenses was asked for during the course of assessment proceedings. On this factual matrix, we hold that the ad hoc disallowance is nothing but a sheer surmise and such disallowance cannot be sustained. Disallowance of provision for leave encashment - HELD THAT - We find that the FAA has not adjudicated the issue, though a specific ground was raised before him with regard to provision for leave encashment. As per the Hon'ble Bombay High Court additional claim can be raised before the appellate authorities Pruthvi Brokers and Shareholders Private Ltd. 2012 (7) TMI 158 - BOMBAY HIGH COURT . Therefore, we are of the opinion matter should be restored back to the file of the FAA for fresh adjudication, who would decide the issue after affording a reasonable opportunity of hearing to the assessee and after considering the cases relied upon before us. Fifth ground of appeal is allowed in favour of the assessee, in part. Deduction in respect of provision for leave encashment - HELD THAT - We find that the assessee had made the claim as per the judgment of the Calcutta High Court that was late on stayed by the Hon'ble Apex Court. As far as the matters of Bharat Earth Movers 2000 (8) TMI 4 - SUPREME COURT and Aditya Birla Nuvo Ltd. , 2014 (8) TMI 1032 - ITAT MUMBAI are concerned, we will like to mention that both did not have benefit of the judgment of the Hon'ble Supreme Court in the case of Exide Industries Ltd. 2007 (6) TMI 175 - CALCUTTA HIGH COURT - Therefore, in our opinion, the order of the FAA does not suffer from any legal or factual infirmity. Confirming the same, we decide first ground of appeal, against the assessee Additional depreciation u/s. 32(1)(iia) in respect of eligible plant and machinery required and store during the F.Y. 2005-06 - HELD THAT - 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. 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. - Decided against revenue Not allowing foreign exchange fluctuation loss incurred by assessee in respect of currency swap and derivative transactions - HELD THAT - During the year under consideration the assessee had accounted for foreign exchange loss of ₹ 350.18 lakhs, that it was net of foreign exchange gain, that the loss mainly comprised of swap loss of ₹ 493.50 lakhs, that the assessee was consistently booking loss or gain on Foreign exchange on the basis of the foreign exchange rate as on the last date of particular year. In the subsequent year i.e. AY 2011-12 when the assessee had shown surplus the AO had taxed the same. In our opinion the AO should follow uniform policy for taxing or not taxing the foreign exchange loss/gains. If gains are to be taxed of a particular transaction the losses arising out of same cannot be denied to the assessee. The AO/FAA has not commented upon the fact that assessee was following AS-11. Considering the above, we are of the opinion that FAA was not justified in confirming the order of the AO. Ground decided in favour of the assessee.

Summary

Issues Involved:
1. Sales tax subsidy
2. Capital gains from the sale of land
3. Admissibility of deduction under section 54G
4. Ad-hoc disallowance of various expenses
5. Provision for leave encashment
6. Additional depreciation under section 32(1)(iia)
7. Foreign exchange fluctuation loss
8. Exclusion of sales tax incentive in computing book profit under section 115JB

Detailed Analysis:

1. Sales Tax Subsidy:
The assessee claimed a sales tax subsidy of ?6.57 crores as a capital receipt, arguing it was an incentive for setting up a unit in a backward area. The AO rejected this, deeming it a revenue receipt, as the subsidy was recurring and not a one-time capital receipt. The FAA upheld the AO's decision, noting the subsidy was linked to sales rather than capital investment. The Tribunal restored the matter to the AO for fresh adjudication, directing a comparison with the scheme in the Reliance Industries case.

2. Capital Gains from Sale of Land:
The AO adjusted the sale consideration of a plot of land at Mulund from ?64.92 crores to ?80.78 crores based on stamp duty valuation and reduced the FMV as on 01/04/1981 from ?200 per sq. ft. to ?54.83 per sq. ft. The FAA upheld these adjustments. The Tribunal noted the necessity of referring the valuation to the DVO when disputed by the assessee and found the FMV of ?200 per sq. ft. reasonable based on the Indian Valuers Directory. The Tribunal decided the issue in favor of the assessee, directing the AO to reassess.

3. Admissibility of Deduction under Section 54G:
The AO and FAA denied the assessee's claim for deduction under section 54G, arguing the industrial undertaking had already shifted in FY 1994-95, and the sale of land in 2004 did not fit within the stipulated period. The Tribunal, considering the legislative intent to decongest urban areas, found that the assessee had complied with the conditions of section 54G by investing the sale proceeds in new plant and machinery and depositing funds in a designated account. The Tribunal allowed the deduction.

4. Ad-hoc Disallowance of Various Expenses:
The AO made ad-hoc disallowances under various heads, which the FAA confirmed. The Tribunal, referring to its decision for AY 2003-04, found such disallowances unsustainable without specific evidence and deleted them.

5. Provision for Leave Encashment:
The AO disallowed the provision for leave encashment based on section 43B(f) and the stay on the Exide Industries judgment by the Supreme Court. The FAA upheld this. The Tribunal restored the issue to the FAA for fresh adjudication, considering the assessee's reliance on various case laws.

6. Additional Depreciation under Section 32(1)(iia):
The AO and FAA denied additional depreciation on plant and machinery acquired in earlier years, arguing it was only allowable in the year of acquisition. The Tribunal, referring to the Gloster Jute Mills case, found that the amended section 32(1)(iia) did not restrict additional depreciation to the year of acquisition and allowed the claim for subsequent years.

7. Foreign Exchange Fluctuation Loss:
The AO disallowed the notional loss from foreign exchange transactions, considering it speculative. The FAA upheld this. The Tribunal found the loss was consistently accounted for as per AS-11 and allowed it, noting the AO had taxed similar gains in subsequent years.

8. Exclusion of Sales Tax Incentive in Computing Book Profit under Section 115JB:
The Tribunal restored the issue to the FAA for fresh adjudication, following the decision on the sales tax subsidy for earlier years.

Conclusion:
The Tribunal provided detailed directions for fresh adjudication on several issues, emphasizing the necessity of proper valuation references, legislative intent, and consistent accounting practices. The appeals by both the assessee and the AO were partly allowed.