2022 (12) TMI 740 - AT - Income Tax

Computation of income - Denying the claim of exclusion of Sales Tax Incentive availed in respect of units situated in the state of Himachal Pradesh and Rajasthan being capital in nature - HELD THAT - In the Special Bench decision in the case of Reliance Industries Ltd 2003 (10) TMI 255 - ITAT BOMBAY-J what came up for consideration was specifically the sales tax subsidy, and that decision, as we seen in the elaborate analysis of the coordinate bench- as extracted above still holds good in law. In the case of CIT Vs Chaphalkar Brothers 2017 (12) TMI 816 - SUPREME COURT Hon ble Supreme Court has held that where the object of respective subsidy schemes of State Governments was to encourage the development of Multiple Theatre Complexes, incentives would be held to be capital in nature and not revenue receipts, and, following the same logic, the sales tax subsidy schemes, which are admittedly to encourage industrial growth in the specific areas and the overall scheme in all the sales tax subsidy and exemption schemes unambiguously indicate so, are capital receipts in nature. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee that the amount added to the income of the assessee must stand deleted, and reject the grievance of the Assessing Officer against the grant of relief by the CIT(A). Disallowance of prior period expenditure debited to Profit and Loss Account of the instant year - HELD THAT - We are of the considered view that the assessee deserves to succeed as for the three immediately preceding assessment years, i.e. the assessment years 2002-03,2003-04 and 2004-05, the coordinate benches, in assessee s own case, have decided the same issue in favour of the assessee. In any case, there is no dispute that the expenses are otherwise admissible in nature and have not been claimed or allowed as deduction in any other assessment year. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance. Exclude gain on account of foreign exchange rate fluctuation from the computation of total income - HELD THAT - Respectfully following the views of the coordinate benches in assessee s own cases for the two immediately preceding assessment years. we reject the plea of the assessee. Disallowanceu/s 14A - Addition made u/s 14A, @ 2% in respect of expenses incurred on earning of the tax-exempt dividend by the assessee - HELD THAT - We are of the considered view that disallowance @ 1% of tax-exempt income will meet the ends of justice for the reason that the period pertains to the pre-amendment law and rule 8D does not, therefore, has any application in the matter, and that, in accordance with a series of coordinate bench decisions, it has been consistently held so far as the pre-amendment period is concerned, a disallowance of 1% is reasonable- particularly when the assessee has made investments entirety out of his own funds and when there are no borrowings costs involved. It is an undisputed position, on the facts of this case, that the assessee has made the investments entirely out of his own funds. The disallowance is thus restricted to 1% of the tax-exempt income. Unutilized MODVAT credit (net of unadjusted MODVAT credit on the first day of the year) deleted. Rejecting the value of export of cement to its Associated Enterprise (AE) - whether CIT (Appeals) was not justified and grossly erred in not directing the A0/TPO to make appropriate adjustments under Rule 10B to account, inter-alia, for difference in quality, quantity, make, grade and other relevant factors in order to make the data of other companies comparable to that of the appellant? - HELD THAT - As the entire volume of exports is around 3% of the tested party transaction in one case and around 13% in another. Once it is an accepted position that the relationship between the price and volume, when variations in the volume are significant- around 30 times in one case and around 8 times in another, a significant variation in price is inevitable, and, for this reason, alone, the independent transactions cease to be comparable. That leaves us with only one case, and that is the export of 2,79,100 MTs of cement by Ultratech Cements Ltd, and the FOB rate, going by the TPO, in this case, is US 30.45. That is well within the permissible 5% range of the transaction value at US 28.98, as 95% of the comparable transaction price in that case, which can be taken as a valid CUP, is US 28.92 per MT - as against the transaction price of US 28.98 per MT. Therefore, even going by the data gathered by the TPO, to the extent such data can meet our approval in the light of the observations above, the transaction entered into by the assessee for exports of cement to its AE in Sri Lanka was at an arm s length price. We, therefore, uphold the plea of the assessee for this short reason alone and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 4,73,21,572. The assessee gets the relief accordingly. As we have upheld the assessee's plea for the short reason as elaborated upon, we see no need to deal with other contentions raised before us. Interest paid by the appellant under Bare Boat Charter cum Demise Arrangement entered with its Associated Enterprise as not at arm's length - HELD THAT - As noted that the payments under the BBCD arrangements were made with specific regulatory approval prescribed by the RBI, and there are coordinate bench decisions, such as in the case of ACIT Vs Dow Agrosciences India (P.) Ltd. 2016 (12) TMI 936 - ITAT MUMBAI holding that when such regulatory approvals are duly obtained, that approval can also be viewed in support of the transaction price as an arm s length price. In any event, the total ALP adjustment is less than Rs 20 lakhs, and the relevant financial period is almost 20 years ago, it may not even be appropriate to even remit the matter for fresh consideration at the TPO stage. Keeping in all these factors, as also the entirety of the case, in mind, we deem it fit and proper to delete the impugned ALP adjustment - The assessee gets the relief accordingly. MAT computation u/s 115JB - We direct the Assessing Officer to exclude the sales tax incentive subsidy for computing book profit under section 115 JB of the Act. Allowability of expenditure grouped under the nomenclature Community Welfare Expenses as a business expenditure. - HELD THAT - Right from the assessment years 1988-89 to 1994-95, the coordinate benches have allowed appeal of the assessee on this point, and from the assessment years 1995-96 to 2004-05, in which the first appellate authority has deleted similar disallowance, the coordinate benches have rejected the grievances of the AO, against the reliefs so granted by the CIT(A). Learned Departmental Representative does not dispute this position but relies upon the stand of the AO nevertheless. We see no reasons to take any other view of the matter than the view so taken by the coordinate benches all along. Respectfully following the same, we uphold the relief granted by the learned CIT(A) and decline to interfere in the matter. Ground no. 2 is thus dismissed. Allowability temple expenses, Pooja/Function expenses, consultancy charges as a business expenditure confirmed. Allowing service charges, expenditure incurred on roads, entrance fees paid to club and mines prospecting expenses as revenue expenditure. Allowing deduction u/s. 35 D being 1/5th of the expenditure incurred in A.Y. 2001-02 and 2002-03 on issue of FCCB. Allowing expenses incurred towards earning dividend income U/s. 14A and reduced from the amount of income exempt U/s.14A and reduced from the amount of income exempt u/s. 10(34)/10 (35) of Income tax Act in computing book profit U/s. 115JB.

Summary

Issues Involved:
1. Exclusion of Sales Tax Incentive from taxable income.
2. Disallowance of prior period expenditure.
3. Exclusion of gain on account of foreign exchange rate fluctuation.
4. Enhancement of assessment and disallowance under section 14A.
5. Classification of interest income and truck hire charges.
6. Disallowance of premium on leasehold land.
7. Adjustment of unutilized MODVAT credit.
8. Arm's length price determination for export transactions.
9. Arm's length price determination for interest under Bare Boat Charter cum Demise Arrangement.
10. Set off of business loss from amalgamating company.
11. Exclusion of Sales Tax Incentive in computing Book Profit under section 115JB.
12. Allowance of various expenditures as business expenses.

Detailed Analysis:

1. Exclusion of Sales Tax Incentive from taxable income:
The assessee claimed exclusion of sales tax incentives amounting to Rs. 169,93,34,752 as capital receipts, hence not taxable. The CIT(A) allowed Rs. 130,57,12,796 as capital receipts but added Rs. 39,36,21,956 to taxable income. The Tribunal held that the subsidies received were capital in nature, following the principle that the purpose of the subsidy is crucial, not its form or timing. Hence, the entire amount was directed to be excluded from taxable income.

2. Disallowance of prior period expenditure:
The assessee contested the disallowance of Rs. 5,12,019 as prior period expenses. The Tribunal noted that similar expenses were allowed in previous years and directed the deletion of the disallowance.

3. Exclusion of gain on account of foreign exchange rate fluctuation:
The assessee's claim for exclusion of foreign exchange gain was dismissed, following the decisions in the assessee's own cases for preceding years.

4. Enhancement of assessment and disallowance under section 14A:
The CIT(A) enhanced the disallowance under section 14A to Rs. 7,49,68,089 by applying Rule 8D. The Tribunal restricted the disallowance to 1% of the tax-exempt income, as Rule 8D was not applicable for the assessment year in question.

5. Classification of interest income and truck hire charges:
The assessee did not press this issue, and it was dismissed as not pressed.

6. Disallowance of premium on leasehold land:
The Tribunal followed the coordinate benches' decisions in the assessee's own cases and dismissed the assessee's plea to allow the premium on leasehold land as revenue expenditure.

7. Adjustment of unutilized MODVAT credit:
The Tribunal upheld the assessee's plea, directing the deletion of the addition of Rs. 6,17,08,694 on account of unutilized MODVAT credit, following the decisions in the assessee's own cases.

8. Arm's length price determination for export transactions:
The Tribunal found that the TPO's comparison with low-volume transactions was inappropriate. It upheld the assessee's pricing as within the permissible range and directed the deletion of the ALP adjustment of Rs. 4,73,21,572.

9. Arm's length price determination for interest under Bare Boat Charter cum Demise Arrangement:
The Tribunal held that the interest rate implicit in the BBCD arrangement should not be compared with standalone borrowing rates. It deleted the ALP adjustment of Rs. 18,93,544, noting the regulatory approval and the nature of the transaction.

10. Set off of business loss from amalgamating company:
The assessee did not press this issue, and it was dismissed as not pressed.

11. Exclusion of Sales Tax Incentive in computing Book Profit under section 115JB:
The Tribunal directed the exclusion of sales tax incentive from book profit computation under section 115JB, following the decisions of higher courts and coordinate benches.

12. Allowance of various expenditures as business expenses:
The Tribunal upheld the CIT(A)'s allowance of various expenses such as community welfare, temple expenses, pooja/function expenses, consultancy charges, service charges, mines prospecting expenses, road expenses, deduction under section 35D, club entrance fees, and expenses related to earning dividend income, following the decisions in the assessee's own cases for preceding years.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal's decisions were based on consistent precedents and legal principles, ensuring fair adjudication of the issues involved.