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TMI Blog2012 (9) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... licable to the computers Ad hoc disallowance for interest and administrative expenses attributable to the earning of dividend income – Held that:- Tax-free investments had been made out of the assessee's own funds, this did not mean that there was no expenditure incurred to earn tax-free income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1) - principle of consistency would not apply as s. 14A had introduced a material change in the law - matter remanded to the file of Assessing Officer Deduction of additional depreciation- Assessee purchased new assets during preceding previous year which were put to use for less than 180 days - Since assets were put to use for less than 180 days, in preceding assessment year assessee claimed only 50 per cent of 15 per cent - Balance additional depreciation was claimed by assessee in instant assessment year – Held that:- Assessee deserves to get the benefit in full when there is no restriction in the statute to deny the benefit of balance of 50% when the new plant and machinery were acquired and use for less than 180 days - restrictions cannot divest the statutory right. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The grounds of appeal taken by the assessee ITA No. 2508/Del/2007 are as under :- "(1) That the Commissioner of Income tax (Appeals) -VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in confirming prorated adhoc disallowance of Rs. 5,59,000 for interest and administrative expenses which are alleged to have been attributable to the earning of dividend income. (2) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in confirming disallowance of arrears of additional depreciation of Rs. 3,31,78,825 as certified by the Chartered Accountant on qualifying assets put to use in the second half of the immediately preceding previous year. (3) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in negating an alternate claim for deduction of additional depreciation of Rs. 11,29,06,214 in AY 2004-05. (4) That the appellant reserves the right to add, alter or amend any other ground at the time of hearing." 4. First we take up revenue's appeal. In Ground Nos.1 to 3, the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.2009 in CIT v. Reliance Industries Ltd. [2010] taxmann.com 218 (Bom.). 6.2 We have heard both sides on this issue. The learned CIT (A) has granted the relief on the basis of decision of Special Bench of Mumbai ITAT in the case of Reliance Industries Ltd. ( supra ). This decision has been upheld by Hon'ble Bombay High Court and the Hon'ble High Court has held as under :- "4. Sofaras Question (B) is concerned, the Tribunal relied upon the ITAT Mumbai Bench 'J' (Special Bench) decision in the case of assessee itself in Dy. CIT v. Reliance Industries Ltd. [2004] 88 ITD 273 : We may gainfully reproduce the following portion: "The Scheme framed by the Government of Maharashtra in 1979 find formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the assessment year 1985-86 which we have already referred to in extenso. On an analysis of the Scheme, the Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account." Therefore, let us apply the purpose test based on the findings recorded by the Special Bench. The object of the subsidy was to set up anew unit in a backward area to generate employment. In our opinion, the subsidy is clearly on capital account. In that view of the matter, Question (D) as framed, would also not arise. 5. In the light of above, appeal is admitted only on the questions (B), (E) and (F)." The learned DR mainly concentrated his arguments on the difference between old Scheme and new Scheme of 1993. However, he is failed to distinguish and make out a markable difference in basic purpose of subsidy received by assessee and subsidy received by Reliance Industries Limited. His reliance on the decision of Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd. v. CIT [1997] 228 ITR 253/94 Taxman 368 and Hon'ble Madras High Court in the case of Tamilnadu Sugar Corpn. Ltd. v. CIT [2003] 130 Taxman 348 are of no help. The assessee received the subsidy from the Maharashtra Government under the Maharashtra Govt.'s Package Scheme of Incentives, 1993. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of total income." Thus, in the light of Special Bench of Mumbai IT AT decision in Reliance Industries Ltd. case, I find that the AO in appellant case was not justified to treat the sales-tax subsidy of Rs. 6,74,99,274/- as revenue receipt. Further, I find that appellant has charged the Sales Tax amount being part and parcel of sales and quantified this sales-tax subsidy of Rs. 6,74,99,274/- and deducted the same from the block of asset by virtue of Explanation 10 of Section 43(1) which was inserted by the Finance Act, 1998 w.e.f. 1.4.1999. Thus, the depreciation to that extent has been reduced in this year and further shall be reduced in due course. In other words, the disallowance of sales-tax subsidy would amount to double disallowance in case of appellant. In the light of facts and legal provision I hold that the AO was not justified to disallow the sales-tax subsidy amounting to Rs. 6,74,99,274 and the same is deleted. Relief Rs. 6,74,99,274/-" Since the relief is granted on the basis of Special Bench decision of ITAT, Mumbai, which has been affirmed by Hon'ble High Court, the purpose of subsidy remains the same. The facts remain the same, therefore, we find no fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny objection to this proposition. 12. We have heard both the sides. The Hon'ble Bombay High Court's decision in the case of Godrej Boyce Mfg. Co. Ltd. ( supra ), is the only High Court decision available on the applicability of the Rule 8D and disallowance under section 14A. The Hon'ble Mumbai High Court in the aforesaid case held as under : "Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can be applied only if assessee's method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on "reasonable basis" u/s 14A (1) In AY 2002-03, the assessee claimed that no disallowance u/s 14A in respect of the tax-free dividend earned by it could be made as it had not incurred any expenditure to earn the dividend. The AO rejected the claim and made a disallowance u/s 14A. This was deleted by the CIT(A). On appeal by the department, the Tribunal followed the judgement of the Special Bench in Daga Capital 117 ITD 169 (Mum) (where it had been held that s. 14A(2) (3) Rule 8D are procedural in nature and have retrospective effect) and remanded the matter to the AO for re-computing the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1). Also, the principle of consistency would not apply as s. 14A had introduced a material change in the law." As stated above, both sides are agreed to restore the matter to the file of Assessing Officer, therefore, we restore the issue to the file of Assessing Officer for working out the reasonable disallowances u/s 14A (1) in view of the aforesaid decision of Hon'ble Mumbai High Court. 13. In Ground Nos. 2 3, the issue involved is against the disallowance of arrears of additional depreciation of Rs. 3,34,78,825/- and negating an alternate claim for deduction of additional depreciation of Rs. 11,29,06,214/-. 14. The assessee has claimed additional depreciation during the year which was not pertaining to the addition to the fixed asset during the year. The claim of the assessee was that the additions made during the second half of the financial year 2002-03 relevant to Assessment Year 2003-04, the additional depreciation was claimed only on 50% on all the additions made after 30th September, 2002. The balance 50% could not be claimed in that Assessment Year on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict/prohibit that the balance of 50% so calculated shall not be allowed in the immediate succeeding year. The additional depreciation u/s 32(1)(iia) as provided by the Finance (No. 2) Act, 2002 w.e.f. 1.4.2003 is explained by Circular No. 8 of 2002 dated 27.08.2002 reported in 258 ITR (ST) 13 as being 'a deduction of a further sum' as depreciation, therefore what was proposed to be allowed is depreciation simplicitor though it was called as additional depreciation. Section 32(1)(iia) mandates the grant of additional sum of depreciation. Therefore, any balance of the amount of additional sum of depreciation would have to be considered to be carry forward and set off in terms of sub-section (2) of section 32 of the Act. This sub-section of section 32(2) provides that where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) of section 32 in any previous year, than the allowance shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, then it will be deemed to be the allowance for that previous year, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other hand, the learned DR submitted that the full additional depreciation can be allowed as per section 32(1)(iia) only when the assets are put to use for more than 180 days in the year of acquisition. The additional depreciation on the assets which are put to use by the assessee for less than 180 days is restricted to 50% of the amount by second proviso to section 32(1)(ii). There cannot be any carried forward additional depreciation to be allowed in subsequent year. The second proviso to section 32(1)(ii) restricts such allowances. The proviso laid down conditions for restricting the depreciation where the assets are used for less than 180 days. The condition to put to use is necessary the condition for allowing any type of depreciation, therefore, the CIT(A) has rightly confirmed the addition. 17. We have heard both the sides on this issue. Section 32(1)(iia) inserted by Finance (No. 2) Act, 2002 with effect from 1.4.2003. In speech of Finance Minister, this clause was inserted to provide incentives for fresh investment in industrial sector. This clause was intended to give impetus to new investment in setting up a new industrial unit or for expanding the installed ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the intention was not to deny the benefit to the assets who have acquired or installed new machinery or plant. The second proviso to section 32(1)(ii) restricts the allowances only to 50% where the assets have been acquired and put to use for a period less than 180 days in the year of acquisition. This restriction is only on the basis of period of use. There is no restriction that balance of one time incentive in the form of additional sum of depreciation shall not be available in the subsequent year. Section 32(2) provides for a carry forward set up of unabsorbed depreciation. This additional benefit in the form of additional allowance u/s 32(1)(iia) is one time benefit to encourage the industrialization and in view of the decision of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. ( supra ), the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This additional benefit is to give impetus to industrialization and the basic intention and purpose of these provisions can be reasonably and liberally held that the assessee deserves to get the benefit in full when there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 60% only on computer and computer software and not on computer accessories. 3. In the facts and circumstances of the case, the Ld. CIT(A) erred in treating the "Sale tax Subsidy" amounting to Rs. 9,48,11,588/- as capital receipt which was added by the AO as "Revenue Receipt". 4. The appellant craves leave for reserving the right to amend, modify; alter, add or forego any Grounds(s) of appeal at any time before or during the hearing of this appeal." 21. In ground no.1, the issue involved is foreign exchange fluctuation loss. The learned DR submitted that liability was unascertained; hence the fluctuation is not allowable. He submitted that the CIT(A) was not justified in allowing the appeal. 22. On the other hand, the learned AR submitted that the assessee company has debited a net loss on foreign exchange transactions of Rs. 96.87 lacs in the profit and loss account. In the immediate preceding previous year relevant to Assessment Year 2004-05, the assessee has credited a net gain of Rs. 374.95 lacs to the profit and loss account. The assessee is converting the foreign currency assets and liabilities into rupee term at the exchange rate prevalent at the last date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st date of the accounting year, not at any intermediate date. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profits" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset: it is a trading asset. Therefore, the concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account. Under the mercantile system of accounting, what is due is brought into credit before it is actually received : it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. United Commercial Bank v. CIT [1999] 240 ITR 355 (SC) followed. The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits." In view of this, we uphold the order of CIT(A) on this issue and accordingly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f additional depreciation of Rs. 2,22,91,570/-. 30. We have taken up this issue in ground nos. 1 2 in assessee's appeal in ITA No. 2508/Del/2007 for Assessment Year 2004-05 vide paragraphs 13 to 17 hereinbefore. Facts and circumstances in this assessment year are also similar to that assessment year. Therefore, following our own decision in the aforesaid appeal, we set aside the orders of the authorities below and direct to extend the benefit. Accordingly, we allow ground no. 1 taken by the assessee. Ground No. 2 is alternate claim, hence no need to adjudicate. 31. Ground No. 3 is general in nature and does not require any adjudication. ITA No. 4040/Del/2009 32. This appeal filed by the revenue arises out of the order of the CIT (Appeals)-VI, New Delhi dated 23.07.2009 for the Assessment Year 2006-07. 33. The grounds of appeal taken by the revenue are as under :- "1. The Ld. CIT(A) erred on facts and in law by treating the "Sales Tax Subsidy" of Rs. 266,05,910/- as Capital Receipt, which was added by the AO as "Revenue Receipt". 2. The Ld. CIT(A) erred on facts and in law by deleting the addition made by the AO on account of Sales Tax Subsidy, treating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2006-07 are as under :- "(1) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in confirming disallowance of arrears of additional depreciation of Rs. 58,30,495/- as certified by the Chartered Accountant on qualifying assets put to use in the second half of the immediately preceding previous year. (2) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in negating an alternate claim for deduction of additional depreciation of Rs. 2,46,25,759/- in AY 2005-06. (3) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in confirming disallowance of prior period expenses of Rs. 7,33,260/- (4) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the case and in law in confirming disallowance of Rs. 42,95,700/- out of claim for deduction u/s 10B. (5) That the Commissioner of Income tax (Appeals)-VI, New Delhi has grossly erred on facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at should require us to exercise our minds particularly since there is no doubt that the tax has been paid and the rate of tax remains the same for both the assessment years. He pleaded that the tax rates were the same in those years, therefore, in view of the aforesaid decision of Hon'ble Delhi High Court, no addition is called for. 41. On the other hand, the learned DR submitted that the assessee has failed to establish that these expenses pertaining to prior period expenses were actually quantified and crystallized during the relevant previous year and since the assessee is following the mercantile system of accounting, therefore, these cannot be allowed in this year. 42. We have heard both the sides. We have considered the case laws relied upon and after considering these facts, we find that the assessee has failed to establish that these expenses were actually crystallized during the year under consideration. Since the assessee was following the mercantile system of accounting the assessee has to establish that these liabilities pertaining to the previous year were actually crystallized during the year under consideration. Since the assessee has failed to do so we sust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, in the case of management salary, the allocation made by assessee is not justified, the allocation should be made in the ratio of sales turnover as adopted by assessee himself to allocate other expenses. This method of allocation is more accurate and correct way for allocation of management salary to the facts of assessee's case. The basis adopted by assessee of time estimated in proportion to the production capacity employed in EOU and non EOU plants is highly unreliable and unscientific. In view of these facts, we sustain the order of CIT(A) and dismiss this ground. 47. Ground No. 6 is against the confirmation of disallowance u/s 14A at Rs. 88,17,408/- being as high as 111% of the dividend income. We have taken up this issue in ground no. 1 in assessee's appeal in ITA No. 2508/Del/2007 for Assessment Year 2004-05 vide paragraphs 10 to 12 hereinbefore. Facts and circumstances in this assessment year are also similar to that assessment year. Therefore, following our decision in the said appeal as aforesaid, we restore the issue to the file of Assessing Officer for working out the reasonable disallowances u/s 14A (1). 48. Ground No. 7 is general in nature and does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sides, we hold that this is a legal ground raised first time before us. In view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. ( supra ), this ground is admitted. However, in the interest of justice and equity, we restore this issue to the file of CIT(A) to be decided on merits after providing an opportunity of being heard to the assessee. 54. In the result, the additional ground taken in all the three appeals of the assessee for assessment years 2004-05 to 2006-07 is allowed for statistical purposes. ITA Nos. 934 935/Del/2011 55. Both these appeals filed by the assessee are directed against the common order of CIT(A)-VI, New Delhi dated 15.10.2010 for Assessment Years 2004-05 2005-06. 56. In both the appeals, the issue involved is against the levy of penalty u/s 271(1)(c) of the Income-tax Act, 1961. The brief facts of the case are as under :- The assessee company claimed additional depreciation of Rs. 3,34,78,825/- and Rs. 1,96,57,902/- in the assessment years 2004-05 and 2005-06 respectively. The claim of the additional depreciation was pertaining to the assessee made during the second half of the immediate pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he jurisdiction and clearly defies the scheme of penalty enshrined in the Income-tax Act, 1961. (4) That the appellant reserves the right to add, alter or amend any other ground at the time of hearing." 58. In the quantum appeals, we have allowed the relief to the assessee on the issue of additional depreciation and these penalties have been levied only on the disallowances made of additional depreciation, since we have deleted the addition in quantum appeal, therefore, the penalty levied in both the appeals could not be sustained, hence deleted. Both the appeals are allowed. 59. In the result, the appeals in ITA Nos. 934 935/Del/2011 filed by the assessee are allowed 60. To sum up, appeals of the revenue and assessee are disposed off as under :- ( i ) ITA No. 2831/Del/2007 filed by the revenue for Assessment Year 2004-05 is dismissed; ( ii ) ITA No. 2508/Del/2007 filed by the assessee is partly allowed for statistical purposes; ( iii ) ITA No. 1449/Del/2008 filed by the revenue for Assessment Year 2005-06 is dismissed. ( iv ) ITA No. 1548/Del/2008 filed by the assessee for Assessment Year 2005-06 is allowed for statistical purposes. ( v ) ITA No. 404 ..... 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