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TMI Blog2009 (12) TMI 945X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and paid, it is not correct to say they were not in the revenue field and are not reckoned while computing profit loss of the concern. A disclosure by the auditor that separate account has been maintained for sales-tax recovered and paid does not mean that the effect of the sales-tax has not been considered in the accounts of the assessee. It is well settled that the entries in the books of account are not determinative of the fact whether a deduction is allowable or not. Thus, this objection of the revenue is rejected. Disallowance of depreciation by reduction of notional tax on capital gain on an exemption allowed u/s 54G from the actual cost of the plant and machinery capitalized in the said assessment orders by invoking Explanation 10 to section 43(1) and thereafter computing the written down value - assessee alternatively, aggrieved at the non reduction of the same from the cost of land and building instead of plant and machinery - HELD THAT:- Section 54G exempts from capital gain on transfer of assets, in cases where an industrial undertaking is shifted from an urban area to a non urban area subject to fulfillment of certain conditions specified in that section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate authority has no power to set aside the matter, we reverse his order to that extent and remit the matter back to his file for fresh adjudication in accordance with law. The assessee is at liberty to furnish any additional material in support of his claims and the first appellate authority is directed to admit such material and if necessary obtain a remand report from the assessing officer and dispose of these grounds on merits. The first appellate authority shall not be influenced by the fact that in the set aside proceedings the assessee has not been able to present himself before the AO. With these observations we dispose of grounds 5, 6 9 10 of the assessee. Ad-hoc disallowance of sale promotion expenses - Addition made there would be a possibility that some of the expenses would have not been incurred - HELD THAT:- 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 regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2003-04. 2. The facts of the case are brought out at pages 4 5 of the CIT(A)'s order, which are as follows: the appellant is a company engaged, inter alia, in the business of manufacture and sale of asbestos cement sheets and accessories. It provides a range of product including roofing products, paneling and partitioning. The appellant has its works at Kymore, Kolkata, Lakhmapur and Podanur. In the assessment order, the A.O. states that in this case, the original return of income was filed on 29.11.2003 declaring total income of ₹ 2,89,90,340. The return was accompanied with Tax Audit Report in Form No.3CB and 3CD alongwith its annexures, schedules etc. alongwith audited balance sheet, P L account. The return was processed u/s 143(1) of the I.T. Act on 22.03.2004 determining a refund of ₹ 46,84,429 which was issued to the assessee. Subsequently, the return was revised by the assessee on 31.03.2005 declaring total income at Nil after adjustment of carried forward unabsorbed depreciation, and computation of Minimum Alternate Tax (MAT) as per sec. 115JB of the I.T. Act. In the revised return the assessee claimed deduction for notional sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals) erred in setting aside the matter with regard to factory power expenses amounting to ₹ 7,20,000/- to the file of the A.O. instead of outright deciding the issue in favour of the appellant. 6.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in setting aside the matter with regard to power house expenses amounting to ₹ 13,64,100/- to the file of the A.O. instead of outright deciding the issue in favour of the appellant. 7.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was grossly unjustified and erred in confirming the ad-hoc disallowance of ₹ 3,00,000/- on account of sales promotion expenses on the contention that the amount disallowed is too meager and 100% of the expenses could not have been incurred solely for the business purpose. 8.0 That on the facts and in the circumstances of the case, Ld. CIT(Appeals) was grossly unjustified in upholding the disallowance on account of expenditure incurred on repairs and maintenance of building to the tune of ₹ 15,25,297/- as capital in nature despite the fact that the appellant itself had capitalized part of the total expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its claim, the assessee relied on the judgment of CIT V/s Balrampur Cini Mills Ltd (1999) 238 ITR 445 (Cal) and jurisdictional Mumbai Special Bench of ITAT in the case of DCIT /s Reliance Industries Ltd (2004) 88 ITD 273 (Mum SB). The assessee contended that the notional sales tax liability for setting up the unit at Lakmapur, Dist:Nasik was in the nature of capital receipt as it was granted to encourage investment in the backward areas of the state of Maharashtra. From the verification of the case records of the assessee, it is noticed that the sales tax exemption were applicable right from A.Y 1995-96 when the assessee shited its factory to Lakhmapur in Nashik Distict of Maharashtra. Even the assessee had got eligibility certificate as also certificate of entitlement way back in 1996 itself. However, the assessee had not claimed any deductions on notional sales tax exemption as capital receipts for the A.Yrs 95-96 to 2003-04. Filing of revised return on the last day of financial year 31.03.2005 is only an indication of afterthought on the part of the assessee to claim Sales-tax exemption as capital subsidy. It is to be noted that any capital subsidy granted by the government will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not include any sales tax. As per accounting policy regularly employed by that assessee company, the notional sales tax collectible are not part of the profit and loss account and therefore, ₹ 4,69,70,108 pertaining to notional sales tax cannot be reduced from the sales figure in the P L account. 3.4 Notwithstanding the discussion regarding the allowability of claim of the assessee as per provisions of sec. 139(5), and accounting method regularly employed, the question of allowability of sales-tax exemption granted under 1993 scheme of Maharashtra government is analysed in detail hereunder - 3.5 In support of claim for sales-tax incentive s capital receipts to be deducted from the sales figure in the P L account, the assessee has relied on the judgment of ITAT, Mumbai, Special Bench in the case of CIT V/s Reliance Industries Ltd 88 ITD 273 (2004)(Mum SB). This judgment was with respect to allowability of Sales-tax incentive granted under 1979 Scheme of Government of Maharashtra. The Hon.ITAT allowed the assessee's (reliance Industries Ltd) plea that notional sales tax liability for the A.Y. 1986-87 is capital receipt in the hands of the assessee. While d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area. The various judgments referred to by the Tribunal in the detailed anlaysis are - 1. Sahndey Steel's case The Supreme Court in Sahney steel and Press works Ltd. V/s CIT (1997) 228 ITR 253 (SC) has decided that Sales-tax subsidy will be taxable primarily because it was treated as a supplementary trade receipt which could be freely used for business and it can, therefore, be treated only as helping the industry to run more profitably and enabling it to compete with other established industries. The fact that it was available after the business had been set up also influenced the judgment, which had, therefore, considered that the package of incentives by way of refund of sales tax or rebate on electricity or water charges has to be treated only as revenue receipt liable to tax. The Tribunal took the views that since the assessee was eligible for the incentive sat the stage of setting up of industries, it cannot be said that the scheme of Maharashtra govt. was for assisting the assessee to carry out the business operations profitably and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it was revenue receipt in the assessee's hands. In both the cases, the object of the subsidy was not to encourage the setting up of factories or for industrialization of any particular area of the State. The object was to assist or lend a helping hand to the concerned assessee after they commenced production so that they tide over the initial difficulties in running the factories. The subsidy in both the cases was an operational subsidy. The facts in these two cases being different from the facts of the present case, they are not applicable. 3.6 With due respects to the findings given by the tribunal in the case of Reliance Industries Ltd. It is stated as under - a) Even though the assessee is granted the Certificate of Entitlement and Eligibility Certificate for Sales tax exemption at the stage of setting up of the industries, the assessee's actual claim is based on purchases of goods for manufacture and sales of the goods manufactured as laid out in the terms and conditions of Certificate of Entitlement which is as under - i) Sales of goods manufactured at the said eligible Unit by the holder of this Certificate shall be free from whole of tax if it inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to assessee's case with respect to the scheme itself. 3.9 After discussing the judicial pronouncements, it would not be out of place to analyse the actual provisions of the Special Package Incenive Scheme, 1993 of Government of Maharashtra Special Package Scheme of 1993 of Government of Maharashtra clearly lays down the nature of incentive sunder the Scheme. Para 5 of the 1993 Scheme states the nature of incentives as - i) Sales tax incentives by way of Exemption / Deferral / Interest free unsecured loan. ii) Special capital incentive for SSI units. iii) Refund of Octroi / entry tax (in lieu of Octroi) iv) Refund of electricity duty. v) Concession in the capital cost of power supply; and vi) Contribution towards cost of feasibility study Para 5.1 (I)(A) of the scheme gives the details of sales tax incentive by way of exemption. Para 5.1(I)(B) of the Scheme gives the details of sales tax incentive by deferral Para 5.1(I)(C) of the Scheme gives the details of sales tax incentive by way of interest free unsecured loans. Para 5.1(II) of the scheme refers to quantum of sales tax incentives. On going through the details of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, the revised return is not legally tenable; (b) That in the tax audit report attached with the return of income, the tax auditor observed that sales-tax collection and payment on products sold has not been passed on the profit loss account and that at serial No.21, the following observation is made : In accordance with the method of accounting regularly followed by the company sales tax recovered from customers for the payment to the government is not routed through the profit and loss account but debited / credited directly to sales tax payment account. And that these observations clearly show that the sales figures shown in the P L account do not include any sales; and (c) That the decision of the Special Bench of the Tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB) is distinguishable and is not applicable to the facts o the case and also that the ratio laid down by the Special Bench in this case is against the law laid down by the Hon'ble High Court. Accordingly the first appellate authority rejected the claim of the assessee. Aggrieved, the assessee is in appeal. 7. Shri SE Dastur, the learned senior advocate su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has got the incentive and tried to demonstrate that they are pari materia and that the same propositions laid down by the Special Bench have to be applicable in this case. He specifically pointed out that the G Bench of the Tribunal in the case of Zenith Fibres Ltd (supra) has taken the same view. The learned counsel prayed for relief. 8. The learned departmental representative, Shri Hemant J Lal, on the other hand, strongly opposed the contentions of Shri SE Dastur and submitted that the facts of this case are different and it cannot be said that the same is covered by the decision of the Special Bench of the Tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB). He submitted that in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB) the bench was considering the 1979 incentive scheme and whereas the present incentive scheme under consideration is that of 1993, the ld DR submitted arguments which in effect disputes all the propositions and conclusions drawn by the Special Bench of the Tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB). Suffice to say that these arguments need not be repeated nor be answered s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nience and it is wrong to state that the receipt and payment of sales-tax do not form part of the profit determination mechanism of the assessee company. The learned counsel specifically referred to paragraph 7 on page 282 on the judgment of the special bench in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB). 10. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record and the orders of authorities below as well as the case law cited we hold as follows: 10.1 The Special Bench of the Tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB) was concerned with the sales-tax incentive scheme of 1979. The present scheme is the New Package Scheme of Incentives 1993 of Government of Maharashtra. The assessee furnished the following comparative chart of both the schemes which is extracted for ready reference: DCIT vs Reliance Industries Ltd Everest Industries Ltd s DCIT Salient Features of the 1979 Scheme as discussed in the order Salient Features of the 1993 Scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pletion of the setting up of the unit and could issue a letter of intent / provisional eligibility certificate on completion of the final effective steps. Page 298 An Eligible unit can apply for incentive after it has taken all the Initial Effective Steps (Pg 5, para 3.3) Pg 61 para 4.1 10.2 The learned departmental representative was not able to point out any defect in the analysis provided by Shri Dastur. A perusal of this comparative analysis leads us to a conclusion that both the schemes are similar and identical. The first appellate authority has clearly misdirected himself on the facts and has come to a factually incorrect conclusion that the assessee has brought sales-tax incentive by way of interest free unsecured loan and it had to repay the sales-tax liability after 10 years as per the repayment schedule. 10.3 Coming to the contention of the revenue that the assessee could not make the claim in the revised return, we are of the considered opinion that such argument is devoid of merit. The revised return was admittedly filed within the time available under the statute and a legal claim has been made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of entitlement of benefit could be curtailed if the gross fixed investment fell short of sales tax liability. For earning eligibility for the incentive benefit the Industrial Unit was supposed to take some initial and final steps and entrepreneur could apply for incentive benefit after having taken possession of the land and having made an application of DGTD for registration. Such application was to be processed by the implementing agency without waiting for the completion of the setting up of the Industrial unit and the provisional eligibility certificate should be issued to the appellant on acquisition of all cast 10% of the total fixed assets envisaged in the project and incurrence of expenditure to the extent of 25% of the capital cost of project. Though the entrepreneur could have entered into negotiation with the government even before setting up of the industry the level of entitlement of the benefit would gradually increase as and when further investment in the fixed capital asset was made. The very object of the incentive scheme was to promote industrial development in the backward regions of the state and to generate employment opportunity in such regions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. For example, if the scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw material to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward are, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the revenue to contend that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up it business or complete a project as in Seaham Harbour Dock Go's case (1932) 16 TC 333 (HL), the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken similar view. In the case of Govind Poy Oxygen Ltd., 239 ITR 543 (Bom) the Bombay High Court has held that benefit availed by the Industry on account of promotion of Industrial unit in the backward region of the state were directly linked to the cost of fixed capital investments and were variable in accordance with the ratio of fixed asset investment of an eligible unit. It was accordingly held that the sales tax collections retained by the industrial unit for the purpose of defraying cost of fixed assets or on account of capital receipt not chargeable to tax. These facts have been considered by the learned CIT(A) in detail in his order and the findings of learned CIT(A) remain un-controverted. Therefore, we see no reason to interfere with the findings of learned CIT(A), who held that the benefit availed by the assessee were on account of capital receipts not chargeable to tax and out of scope of section 41(1). Accordingly, we confirm the order of learned CIT(A) in this regard. 10.6. In the light of the decisions of the Tribunal referred to above, we are of the view that the order of learned CIT(A) on this issue has to be set aside. 10.7 Coming to the argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er:- The dealer has not maintained tax collection accounting ledger as tax is not separately charged in sales bills. The sales bills are inclusive of taxes, except sales of Methanol and scrap. After referring to the above facts, the relevant provisions of the Bombay Sales Tax Act and the other documentation, the Tribunal concluded as follows:- So what the assessee has obtained from the State government is exemption from the payment of tax under the Bombay Sales tax Act and Central Sales Tax Act and other rules thereunder. Now what is the amount for which the exemption from payment to the State Government is granted? The amount additionally payable on assessment, but for notification under section 41 as long as it is in force. This amount otherwise payable under the Sales Tax Act is not recovered from the assessee by virtue of exemption under section 41 of the Act. Why it is not recovered, the answer is simple. Because the assessee is to be ranted / disbursed incentive in the form of subsidy under scheme framed by the government. Therefore, this amount determined and referred to as notional sales-tax liability should have been reduced from the revenue receipts as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o since it leads to the same result on the same facts though on different reasoning . 10.8 We respectfully follow the conclusions drawn therein. Even otherwise when a consolidated amount is charged in an invoice it cannot be said that it does not contain sales-tax component. Even if a separate account has been maintained for the sales-tax collected and paid, it is not correct to say they were not in the revenue field and are not reckoned while computing profit loss of the concern. A disclosure by the auditor that separate account has been maintained for sales-tax recovered and paid does not mean that the effect of the sales-tax has not been considered in the accounts of the assessee. It is well settled that the entries in the books of account are not determinative of the fact whether a deduction is allowable or not. Thus, this objection of the revenue is rejected. 10.9 In view of the above discussion we hold that the issue is squarely covered by the Special Bench of the Tribunal in the case of CIT vs Reliance Industries Ltd 88 ITD 273 (Mum)(SB) as followed by the division bench of the Tribunal in the case of Zenith Fibres Ltd (supra) and in the case of M/s Sterlite Optica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set in terms of Explanation 10 to section 43(1) as it does not make the cost of the asset. 13. The learned counsel further submits that Explanation 10 to section 43(1) was brought into effect from 01-04-1999 and whereas the assessment years during which the assessee had received the benefit u/s 54G is 1995-96 and 1996-97 and thus the Explanation 10 does not apply to his case. He referred to section 54G and submitted that sub clause (1) provides that if the plant was shifted within 3 years, the benefit granted u/s 54G will be revoked and in such a situation the assessee would be put to double disadvantage of the tax benefit being withdrawn on the one hand and the cost of asset being reduced on the other hand which definitely is not what is intended in the Act. The assessee, as per Shri Dastur, cannot be put to double disadvantage by wrongly interpreting the section. 14. Without prejudice it is submitted that if notional capital gains tax on the amount of exemption u/s 54G has to be reduced, then the same should be reduced from the cost of the land as the same is related to capital gain on sale of land. Without prejudice it was submitted that even it is held that if it is not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted by the State or Central Government to meet directly or indirectly a portion of the cost or the asset. For this sole reason, the entire theory made out by the assessing officer has to be quashed as devoid of merit. We are unable to comprehend how such strange, thoughts and propositions crept into the mind of the assessing officer. The benefit u/s 54G was admittedly given to the assessee during the assessment years 1995-96 and 1996-97. Explanation 10 to sub section 43(1) was brought into the statute only wef 01-04-1999 and even in this Explanation, in our considered opinion, there is no possibility of anybody coming to a conclusion that actual cost of the asset as accepted by the revenue in the assessment years 1995-96 and 1996-97 have to be disturbed while doing the assessment for the assessment year 2003-04. The proposition suffice to say, is devoid of any logic. If such propositions are accepted, it will lead to a situation where any exemption granted under various provisions of the Income-tax Act for the payment of tax including depreciation, investment allowance etc. would be taken as a subsidy, grant or reimbursement and can be considered for the reduction of cost of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 'Other Sales Promotion Expenses'. During the course of assessment proceedings details in respect of the said expenditure along with ledger copies were duly furnished by the appellant vide its letter dated 28-09-2005. Copy of the said letter alongwith relevant details is enclosed as Annexure-16. B. Contention of the A.O 1.0 In the order u/s 143(3), the AICT disallowed an amount of ₹ 3,00,000/- on adhoc basis on the following contentions: a) Bills for certain items could not be produced and in other cases it could not exactly be pinpointed alongwith the proof as to the persons to whom the gifts have been made. b) The assessee failed to establish exclusive business connection in many cases which render these expenses liable to be disallowed considering the probable revenue leakages. The first appellate authority after considering the contentions of the assessee had observed that the assessing officer had disallowed only a meager sum of ₹ 3 lakhs out of a total sales promotion expenses of ₹ 2,30,95,852 claimed by the assessee on the ground that it is not possible to establish that the same has been incurred wholly and exclusively fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Repair expenses on head office ₹ 15,25,297 Depot maintenance expenses ₹ 19,25,297 The CIT(A) confirmed the disallowance of repair expenses of head office and as far as depot maintenance expenses are concerned, they are set aside to the file of the assessing officer. Before us, in ground No.8, the disallowance of repair and expenses at head office is agitated. The details of the repairs are given at pages 256 and 257 of the assessee's paper book. 26. After hearing rival contentions and on perusal of the details we find that out of an amount of ₹ 23,02,636 the assessee capitalized ₹ 7,77,339 suo motu. The expenditure of ₹ 15,25,297 have largely been incurred for replacement of tiles, replacement of glass windows, doors panels etc. The nature of these expenses clearly suggest that they are in the revenue field as no asset of enduring nature can be said to have come into existence by incurring of this expenditure. Thus, we find that the assessee has rightly relied upon the judgment of the jurisdictional High Court in the case of New Shorrock Spinning Mfg Co Ld vs IT (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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