2016 (5) TMI 716 - AT - Income Tax

Reduction of written down value of plant and machinery by reduction of subsidy amount - Held that - The hon ble apex court in the case of CIT v. P. J. Chemicals Ltd. 1994 (9) TMI 1 - SUPREME Court have stated that the 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 . After careful consideration, we find that the case of the assessee is squarely covered by the decision of the hon ble Supreme Court in the case of CIT v. P. J. Chemicals Ltd. supra . We, therefore, reverse the order of the learned Commissioner of Income-tax (Appeals) for all the assessment years. - Decided in favour of assessee Disallowance of expenses - Held that - The Assessing Officer and the learned Commissioner of Income-tax (Appeals) in their orders have disallowed 20 per cent. with regard to advertisement, sales promotion and product development expenses under section 37(1) for the assessment year 2004-05 for the inability of the assessee to provide direct evidence to establish that these expenses wholly and exclusively incurred for the purpose of business. We find that the disallowance has been restricted to 20 per cent. without any rhyme and reason. Therefore, the disallowance of expenses is not apparently clear. Under these circumstances, in the interest of justice and fairness, we feel it deem and proper to restrict the disallowance to 5 per cent. of the above disallowances made by the authorities below. We, accordingly, set aside the order of the learned Commissioner of Income-tax (Appeals) and direct the Assessing Officer to restrict the disallowance to 5 per cent. only - Decided in favour of assessee partly Denial of benefit of MAT under clause (vii) of section 115JB on the ground that the assessee has himself paid MAT - Held that - This issue squarely covered by the decision of the Income-tax Appellate Tribunal Cuttack Bench in the assessee s own case for the assessment year 2005-06 wherein, it has been held that the assessee is not liable to be taxed under section 115JB. We further appreciate the judicial pronouncements put forth by the assessee which suggest that the assessee is not liable to pay tax even if the tax is paid wrongly or under any mistake of law, then such tax may be refunded. In view of this, we allow this ground in favour of assessee.

Summary

Issues Involved:
1. Reduction of written down value of plant and machinery by reduction of subsidy amount.
2. Disallowance of various expenses.
3. Denial of benefit of MAT under clause (vii) of section 115JB.

Issue-wise Detailed Analysis:

1. Reduction of Written Down Value of Plant and Machinery by Reduction of Subsidy Amount:
The primary contention was whether the investment subsidy of Rs. 15,00,000 received by the assessee should be deducted from the written down value of the plant and machinery for the purpose of calculating depreciation. The Assessing Officer applied Explanation 10 to section 43(1) of the Income-tax Act, which mandates that any subsidy received should be reduced from the cost of the asset. This was contested by the assessee, who argued that the subsidy was an incentive and not meant to meet the cost of the assets. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, referencing the amendment by Explanation 10 to section 43(1). However, the Tribunal reversed this decision, citing the Supreme Court ruling in CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830 (SC), which held that such subsidies do not reduce the actual cost for depreciation purposes. Hence, the Tribunal allowed the assessee's appeal on this ground for all assessment years.

2. Disallowance of Various Expenses:
The assessee contested the disallowance of expenses related to advertisement, sales promotion, product development, share maintenance, and miscellaneous expenses. The Assessing Officer had disallowed a portion of these expenses due to insufficient evidence to prove they were incurred wholly and exclusively for business purposes. The Commissioner of Income-tax (Appeals) upheld these disallowances. The Tribunal, however, found the disallowances to be arbitrary and without clear justification. It directed the Assessing Officer to restrict the disallowance to 5% instead of 20%, thus partly allowing the assessee's appeal on this ground for the assessment years 2004-05 and 2005-06.

3. Denial of Benefit of MAT under Clause (vii) of Section 115JB:
The assessee argued that they should not be liable to pay Minimum Alternate Tax (MAT) under section 115JB as they were a "sick company." The Commissioner of Income-tax (Appeals) had upheld the Assessing Officer's decision to tax under MAT, noting that the assessee had themselves paid tax under this section. However, the Tribunal found that the issue was already settled in favor of the assessee in a previous decision (ITA No. 277/CTK/2010 for the assessment year 2005-06). It was held that the assessee was not liable to be taxed under section 115JB due to their status as a sick company. The Tribunal also referenced several judicial pronouncements supporting the notion that tax paid under a mistake of law should be refunded. Consequently, the Tribunal allowed the assessee's appeal on this ground.

Conclusion:
The Tribunal's judgment resulted in a partial allowance of the assessee's appeals, providing relief on the reduction of written down value and disallowance of expenses while fully allowing the appeal regarding the MAT liability. The judgment emphasized the importance of adhering to established legal principles and judicial precedents.