2018 (7) TMI 209 - AT - Income Tax

Deduction under section 80IB in respect of the Jammu unit - Held that - Since, the entire basis for adverse inference by the Assessing Officer as well as of ld. CIT (A) is upon the assessment order and first appellate order given in the Assessment Year 2006-07, which the Tribunal has reversed by holding that assessee has rightly shown the payment of licence fee/royalty under the corporate unit; therefore, respectfully, following the precedence of the earlier year (2016 (5) TMI 1443 - ITAT DELHI) we also give the same direction that the licence fee, royalty payment of ₹ 6 crore has rightly been shown under the Corporate Division and accordingly, the finding of the ld. CIT(A) is reversed. Disallowance of claim for deduction on account of Self Cenvat Credit Availment u/s.80IB - challenging the finding that Excise refund is a capital receipt in nature and not liable to tax - Held that - Assessee besides relying upon the decision of Hon ble Delhi High Court in the case of Dharampal Prem Chand 2008 (11) TMI 231 - DELHI HIGH COURT wherein distinction has been made between the treatment given to the excise duty and the duty draw back in the DEPB in the context of which various judgments have been rendered which has been cited by the Assessing Officer. The Hon ble Delhi High Court has held that Excise duty refund is a profit derived from the industrial undertaking while computing the eligible deduction u/s.80IB. We find that in the case of Balaji Alloys as confirmed by SC 2016 (4) TMI 1161 - SUPREME COURT that Excise duty refund as granted by the State of Jammu and Kashmir is a capital subsidy. When the excise duty refund has been treated as capital subsidy not part of taxable receipts, then entire controversy sets at rest and accordingly, the finding of the ld. CIT (A) that excise refund is a capital in nature stands confirmed MAT computation - whether such capital receipt in the form of excise duty refund should be treated as part income while computing book profit u/s.115JB - Held that - The amount being capital in nature, cannot be part of book profit. Disallowance u/s 14A - Held that - Once assessee has produced all the relevant books of account, explained the nature of expenses debited and has explained that none of the expenditure can be said to be attributable to earning of exempt income, then onus shifts upon the Assessing Officer to examine the books of account and nature of expenditure debited and after recording his satisfaction as per the mandatory requirement given in Section 14A(2) and (3) r.w.s. Rule 8D(1), then only he can proceed to make disallowance under Rule 8D - Thus, in the absence of any recording of mandatory satisfaction as per Section 14A (2) r.w.s. Rule 8D (1) Assessing Officer cannot mechanically apply Rule 8D for the purpose of disallowance. Accordingly, disallowance made u/s.14 by Assessing Officer is hereby deleted.

Issues Involved:
1. Royalty Payment Allocation
2. Exclusion of Refund of Excise Duty (Self Cenvat Credit) in Determination of Total Income under Section 115JB
3. Disallowance of Claim for Deduction under Section 80-IB on Account of Self Cenvat Credit Availment
4. Nature of Excise Duty Refund as Capital Receipt
5. Disallowance under Section 14A Read with Rule 8D

Detailed Analysis:

1. Royalty Payment Allocation:
The main issue was whether the Royalty Payment of ?6,00,00,000 pertains exclusively to the Jammu Unit or should be allocated to the entire company. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] initially held that the royalty payment was exclusively for the Jammu Unit based on prior assessments. However, the Tribunal reversed this decision, citing the assessee's argument that the technical know-how for manufacturing improved sachet pouches was for the company as a whole and not confined to the Jammu Unit. The Tribunal referenced its earlier decision for the Assessment Year 2006-07, which supported the assessee's claim that the royalty payment should be allocated to the Corporate Division.

2. Exclusion of Refund of Excise Duty (Self Cenvat Credit) in Determination of Total Income under Section 115JB:
The Tribunal examined whether the refund of Excise Duty amounting to ?1,31,01,284 should be excluded from the book profit under Section 115JB. The CIT(A) had followed the decision of the ITAT Hyderabad in Rain Commodities Ltd. vs. DCIT, which held that such refunds should not be excluded. However, the Tribunal referenced the ITAT Mumbai Bench's decision in JSW Steel vs. ACIT, which concluded that capital receipts, including excise duty refunds, should not be included in the book profit. Hence, the Tribunal ruled in favor of the assessee, allowing the exclusion of the refund from the book profit.

3. Disallowance of Claim for Deduction under Section 80-IB on Account of Self Cenvat Credit Availment:
The AO had disallowed the deduction claimed under Section 80-IB, arguing that the excise refund was not a business receipt derived from the eligible undertaking. The CIT(A), however, relied on the Delhi High Court's decision in CIT vs. Dharam Pal Pream Prakash Ltd., which distinguished between excise duty refunds and duty drawbacks, and allowed the deduction. The Tribunal upheld the CIT(A)'s decision, noting that the excise duty refund was a profit derived from the industrial undertaking and thus eligible for deduction under Section 80-IB.

4. Nature of Excise Duty Refund as Capital Receipt:
The Tribunal considered whether the excise duty refund should be treated as a capital receipt. The CIT(A) had followed the Jammu & Kashmir High Court's decision in Shree Balaji Alloys v. CIT, which held that excise duty refunds are capital subsidies. This decision was affirmed by the Supreme Court. Consequently, the Tribunal upheld the CIT(A)'s finding that the excise duty refund is a capital receipt and not liable to tax.

5. Disallowance under Section 14A Read with Rule 8D:
For the Assessment Year 2009-10, the AO disallowed ?35,78,530 under Section 14A read with Rule 8D, attributing it to the earning of exempt dividend income. The CIT(A) found that the investments were made from the assessee's own funds and not borrowed funds, thus deleting the interest disallowance. However, the CIT(A) upheld the administrative cost disallowance under Rule 8D(2)(iii). The Tribunal noted that the AO had not recorded the mandatory satisfaction required under Section 14A(2) before applying Rule 8D, and hence, the disallowance was deleted.

Conclusion:
The Tribunal allowed the appeals of the assessee, reversing the findings of the AO and CIT(A) on the royalty payment allocation and the exclusion of excise duty refunds from book profits. It upheld the CIT(A)'s decision on the nature of excise duty refunds as capital receipts and the deletion of interest disallowance under Section 14A. The Tribunal dismissed the appeals of the Revenue.

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