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TMI Blog2016 (8) TMI 695X X X X Extracts X X X X X X X X Extracts X X X X ..... DER PER I.C. SUDHIR: JUDICIAL MEMBER ITA No. 5202/Del/2010: The assessee has questioned first appellate order on the following grounds: 1.1 That the Learned CIT(Appeals) has erred in confirming the application of Rule 8D in relation to exempt income ₹ 4,269,842 and he is wrong in ignoring the decision of Hon'ble Bombay High Court held in the case of Godrej Boycee Mfg. Co. Ltd. 1.2 Without prejudice to Ground No.1.1 above, the Learned CIT(Appeals) has erred in applying Rule 8D in respect of investment in shares ₹ 597,178,500 which has never fetched dividend in the hands of the appellant company. 1.3Without prejudice to ground Nos. 1.1 and 1.2 above, the Learned CIT(Appeals) has erred in holding that for the purpose of application of Rule 8D(2)(ii), gross interest ₹ 227,188,853 has to be considered in respect of Net interest ₹ 83,160,554 charged to the profit loss account. 2.1 That the Learned CIT(Appeals) was wrong in confirming disallowance of sales-tax incentive ₹ 14,970,116 for setting up of an undertaking in Kutch District by the Government of Gujarat by way of adjustment of pre-determined amount of incentive ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dication of which does not require consideration of any fresh material outside the record and which goes to the root of the matter can be raised even for the first time before the appellate forum. Besides, the issue raised in the additional ground is connected to the issue already raised in ground Nos. 2.1 to 2.3 of the appeal. We thus allow the above requested additional ground for our consideration and adjudication. Since it is connection to the issue raised in ground Nos. 2.1 to 2.3 of the appeal, we will hear this additional ground along with the said grounds in the succeeding paragraph. 7. The Revenue ( ITA No. 5701/Del/2010): on the other hand has questioned first appellate order directing the Assessing Officer to take average cost of assets at ₹ 4,40,08,12,471 as worked out by the assessee as against ₹ 2,32,28,77,170 as taken by the Assessing Officer while computing disallowance under sec. 14A read with Rule 8D. 8. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 9. In the above appeal preferred by the assessee, following additions were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,19,57,31,168 Interest bearing funds:- Nature of Funds Quantum Page No- PB Loan Funds 2,53,93,95,660 50- Schedule -1 Less:- Deployed in Fixed Assets 2,44,82,42,205 Capital Work in progress 37,75,74,884 282,58,17,089 Shortfall funded by Interest free fund 28,64,21,429 Even after the utilization of interest free funds to the extent of ₹ 28, 64, 21,429 in fixed assets and Capital work in progress. The appellant company was having interest free funds to tune of ₹ 1,90,93,09,739. B. It is submitted that the total investment made by the assessee in mutual funds is only 70,09,574/-9 (See Page no-56 of PB), which is very meager when compare to the presence of own funds with the assessee . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted further that the disallowance was made by the Assessing Officer on reasonable basis and there was no error in the figures taken by the Assessing Officer. She submitted that no suo moto disallowance under sec. 14A was made by the assessee despite having exempt income during the year. The Learned CIT(Appeals) thus was not justified in interfering with the disallowance made by the Assessing Officer. 14. Considering the above submissions, we find substance in the contention of the Learned AR that Rule 8D of the I.T. Rules was not applicable during the year under consideration and hold so. We find that against query raised by the Assessing Officer as to why expenses should not be allocated to the earned exempt income at ₹ 42,69,842, the assessee submitted that it had not incurred any expense in earning dividend from mutual funds as investment were made from surplus funds. The Assessing Officer did not agree and held that the assessee s balance sheet shows total fund of ₹ 427.81 crores out of which ₹ 253.94 crores were borrowed constituting about 61% of total funds. The Assessing Officer noted further that the fixed assets are to the tune of ₹ 212.89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration, hence, the ground raised in the appeal filed by the Revenue does not survive. The ground is accordingly rejected. 16. Ground Nos. 2.1 to 2.3 additional ground: The relevant facts are that Assessing Officer made disallowance of ₹ 1,49,70,016 on account of sales tax incentives which the assessee had treated as capital receipts. The Learned CIT(Appeals) has also upheld the same. 17. In support of the grounds, the Learned AR made following submissions: 1. Assessee company has deployed capital investment of ₹ 23.87 Crore in Kutch District of Gujarat (see page no. 23 of the paper book). The investment made has been duly acknowledged by the State Govt. 2. It is submitted that the aforesaid investments were made by the assessee in pursuance to a scheme namely Incentive Scheme 2001 for Economic Development of Kutch District . Copy of scheme is annexed at page no. 1-12 of the paper book and the typed copy of scheme is annexed of 13-23 of paper book. 3. It is submitted that the preamble of the scheme would make it clear that this scheme was introduced by the Government of Gujrat for development of Kutch area which was destroyed in earthqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shape of exemption from sales tax liability to those assesses who were developing the devastated area of Kutch. 9. It is next submitted that incentive granted to assessee was not for assisting assessee in carrying out its business operation but incurred the promotion of industries in the State of Gujarat in that Area which was devastated in 2001 due to earth quake. 10. It is further made clear the incentives allowed by Government were directly linked or proportionate to the capital investment made by an industrial undertaking and not with the sales turnover of an industrial undertaking. Therefore, It can be said that the incentives were capital receipt not revenue receipt. It is worthy to mention here that incentives granted to assessee were having a ceiling limit i.e up to the capital invested. 11. It is next submitted that the assessee has commenced its commercial production on 7.04.2005 and has opted for sales tax Exemption Scheme in the aforesaid scheme. (See the page no. 24 of paper book) 12. Initially, assessee has deployed capital investment of ₹ 21.01 crore and later the assessee has enhanced the investments to the tune of ₹ 23.87 crore an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the decision of Hon ble Apex Court in the case of CIT Vs Ponni Sugar and Chemicals Ltd 306 ITR 392(SC), in this case Hon ble Supreme Court has held that if the incentives are given only to new units and not to supplement the trade receipts then such incentives are capital receipts. The Hon ble Apex court in referring to the old decisions of House of Lords in Seaham Harbour Dock Vs Crook 16 Tax Cases 333(HL), has held that form and mechanism of the subsidy is irrelevant The observations of the Hon ble Apex Court in Ponni Sugar in Para-14 are as under:- The importance of the judgment of this Court in Sahney Steel case (supra) lies in the fact that it has discussed and analyzed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy . That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... running factory/industry. The decisions relied upon by the Learned AR having distinguishable facts are not helpful to the assessee. 19. Having gone through the decisions relied upon by the Learned AR and the Incentive Schemes 2001 for Economic Development of Kutch District , made available at page Nos. 13 to 22 of the paper book, we find substance in the contention of the AR, which is also supported by the decision of Hon'ble Bombay High Court in the case of CIT vs. Reliance Ind. Ltd. (supra) that the very object of the subsidy was to be seen to arrive at the conclusion as to whether it is Revenue or capital in nature. The Hon'ble Bombay High Court in the case of Reliance Ind. Ltd. (supra) while upholding the decision of the Bombay Bench of the ITAT in this regard has been pleased to hold that the object of the subsidy was to encourage the setting of the industries in the backward area by generating employment therein. The Hon'ble High Court was pleased to observe that as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Ponni Sugars Chemicals Ltd. (supra), the test of the character of the receipts of the subsidy in the hands of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities below in this regard direct the Assessing Officer to allow the claim. Ground Nos. 2,1 to 2.3 are accordingly allowed. In view of this finding, the issue raised in the additional ground that once it is held that the sales-tax incentive are capital receipts then the same should be excluded from the ambit of book profit also i.e. section 115JB of the Act is allowed as it is also supported with the view taken by the Lucknow Bench of the ITAT in the case of L.H. Sugar Factory Ltd. Vs. JCIT ITA No. 518 and 53/Lkw/2015 (A.Y. 2010- 11) order dated 9.12.2016. The additional ground is accordingly allowed. 20. Ground No. 3 : The Assessing Officer disallowed ₹ 85,255 claimed by the assessee on account of foreign travel expenses. In support of this ground, the Learned AR made following submissions: 1. It is submitted that assessee has incurred ₹ 85,259 on FTE of its employees namely Koshik Mitra Mr. R. Raj Gopal both have gone to London for attending a conference. However, the AO has disallowed these expenses on the ground that the same were not incurred for the purpose of business. 2. It is submitted that without going into the merits of disallowance. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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