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TMI Blog2018 (7) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital in nature, in the determination of total income u/s 115JB of the Income Tax Act, 1961. Whereas in the Revenue s appeal, following grounds have been raised:- 1. On the faces and in the circumstances of the case, the C1T(A) has erred in law and on facts in deleting the disallowance of claim for deduction of ₹ 1,31,01,284/- u/s 80-IB on account of Self Cenvat Credit availment. 2. On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in holding the Excise duty refund is a capital receipt in nature and not liable to tax. 3. The order of the learned CIT(A) is erroneous and is not tenable on facts and in law. 4. The order of the Ld. CIT (A) is erroneous and is not tenable on facts and in law. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal. 3. Facts in brief are that assessee-company is engaged in the business of manufacturing and trading of flexible packaging material in roll and pouch form. During the year under consideration, the total sales and job work receipts were at ₹ 247.02 crore. The assessee was havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason taken in the Asst. Year 2006-07 stating that the expenditure relates to Jammu Unit. It was further submitted that in the Assessment Year 2005- 06, the appellant entered into an agreement with Mr. Ashok Chaturvedi (hereinafter referred to as AC) for acquiring technical know-how for the manufacture of improved Sachet Pouches with additional gusset either on one or both the sides of the Sachet Pouch with a scoring line in the form of a laser cut . A copy of such agreement is placed at Page No. 44 to 48 of the Paper Book. That, under the terms of the agreement, such technical know- how can be used for the manufacture of improved Sachet Pouches in all parts of India including the plant located at Jammu. This is clear from paragraph 2.1 of the said agreement. Under paragraph 2.2 of the said agreement, the appellant is also entitled to sub- license such know-how and technology to other parties in India or abroad. As per appellant the licence is not exclusively for Jammu Unit. The agreement between the licensor and the Assessee is dated 14.07.2004 and in the first page of the agreement, the Regd. Office of Montage Enterprises Pvt. Ltd. is mentioned. Hence it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... netting of the amount to be considered while determining the deduction under section 80 IB in respect of the Jammu unit. The Ld.AR placed is reliance on the decision of Hon'ble Bombay High Court in the case of Zandu Pharmaceuticals Works Ltd. Vs. CIT reported in 259 CTR 253. 5. The revenue in its appeal has raised that the netting of royalty income as directed by the Ld. CIT (A) is not proper. As both these grounds of assessee as well as revenue are interlinked with each other, they are disposed of together for the sake of convenience. 5.1. There is no dispute that the assessee is entitled to the benefit of the provisions of section 80 IB of the act which provides that, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains, an amount specified therein. Further while computing the profits and gains of the concerned undertaking, only expenses relating thereto can be deducted. In other words the expenses must be incurred, for and on behalf of the concerned undertaking. The expenses attributable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly be said to be the export promotion scheme of the Central government parent that the export entitlements become available. There must be, for the application of the words derived from, a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed seafood. By reason of such export, the export promotion scheme applies. Thereunder, the assessee is entitled to import entitlements, which it can sell. This sale consideration therefrom can not in our view be held it to constitute a profit and gains derived from the assessee s industrial undertaking. 5.3.1 The Hon ble Bombay High Court in view of the ratio laid down by the Hon ble Supreme Court in the case of Sterling foods (supra), observed as under: The Supreme Court held that there must be for the application of the words *derived from a direct nexus between the profits and gains and an industrial undertaking. Sections 80 I and 80-IB also use the expression derived from . If there must be a direct nexus between the profits and gains and an industrial undertaking, it must follow equally that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 115JB. First of all, we find that the Revenue has also raised the similar issue in ground no.1 and 2, that is, firstly, disallowance of claim for deduction at ₹ 1,31,01,284/- on account of Self Cenvat Credit Availment u/s.80IB; and secondly, challenging the finding that Excise refund is a capital receipt in nature and not liable to tax. 10. The facts in brief qua this issue are that Assessing Officer noted that in the P L account of the Jammu Unit, assessee has credited an amount of ₹ 1,31,01,284 on account of Self Cenvat Credit to Jammu unit. The assessee has received refund of Excise duty by the Excise Department. The Government of India, Ministry of Commerce Industry, and Department of Industrial Policy Promotion vide its Office Memo dated 14th June 2002 has formulated a special package of incentives for the development of industries in the State of J K. Such Office Memorandum states that the special package for the State of J K is on the same lines which were earlier formulated by the Government of India for the North Eastern States, notified vide OM No. EA/1/2/96- IPD dated 24th December 1997. With a view to accelerate industrial development in the Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en treated as capital receipt, then the same has to be followed as such. He further pointed out that this decision of Hon'ble Jammu Kashmir High Court has been affirmed by the Hon'ble Supreme Court vide order dated 19th April, 2016, wherein Hon'ble Apex Court following the ratio of CIT vs. Ponni Sugars Chemicals Ltd., reported in (2008) 9 SCC 337 has confirmed the order of the High Court and dismissed the Revenue s appeal. Thus, in view of such binding precedence the refund amount has to be treated as capital receipt. 13. On the other hand, learned DR relied upon the order of the Assessing Officer. 14. After considering the relevant finding given in the impugned orders as well as the judgment relied upon before us, we find that Assessing Officer has held that the excise refund on account of Self Cenvat Credit Availment is not eligible for deduction u/s.80IB and for this he has relied upon the various decisions of Hon'ble Supreme Court on the point that such excise refund cannot be held as business receipt derived from the eligible undertaking. Hence he denied the assessee s claim for deduction u/s.80IB. Before the ld. CIT (A), assessee besides relying upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue has been discussed and analysed and on similar capital receipt, ITAT Mumbai Bench in the case has held that such capital receipt cannot be part of book profit. Thus, he submitted that once a receipt itself is not taxable within the provision of the Act, then same cannot be held to be includable while computing the book profit u/s.115JB. 19. On the other hand, learned Department Representative submitted that once the assessee has itself credited to the P L account then it cannot be claimed that it should be removed while computing the book profit u/s. 115JB. He thus strongly relied upon the order of the ld. CIT (A). 20. After considering the rival submissions and perusal of the judgment relied upon by the learned counsel, we find that from the stage of the ld. CIT(A) it has been held that excise duty refund of ₹ 1,31,01,284/- is a capital receipt not chargeable to tax under the provision of the Act. Such a receipt being a capital in nature stands upheld from the stage of the Hon'ble Supreme Court also. Once receipt itself has been treated as capital in nature it cannot be brought to tax, then same cannot be held to be includable in the book profit. This issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpulsions and second are disclosure compulsions. The accounting compulsion comes into play since there is a double entry system of accounting, for instance, when a loan amount is waived, a debit goes to the liability account and a credit has to go to any of the liability/ reserve account, which in the present case has been taken to the Profit and Loss account. The disclosure compulsions merely require the assessee to disclose the material items in the Profit Loss account. A mere disclosure of an extraordinary item in the profit loss account statement does not mean that the said item represents the 'working result' of the company, when the accounting standard, especially AS-9 clearly provides that remission of a liability is not to be recognized as revenue, then it has to be reckoned that it cannot be treated as revenue for the purpose of either net profit or consequently book profit. The primary purpose of preparing the Profit Loss account in Part II of the Companies Act is to find out the result of the company, during the period covered by the profit loss account and the exceptional nature items are required to be disclosed separately so as to assess the correct imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be accounted directly to the credit of the capital reserve account instead of being credited to the profit loss account so as to ensure that it is not left for being distributed through the profit loss account. 16. From our above analysis and discussion of the various provisions of the Companies Act as well as Accounting Standards it can be ostensibly deduced that an item of 'capital surplus' can ever be a part of profit loss account albeit it is a part of a capital reserve as the waiver of a loan taken for acquisition of a capital asset is a capital receipt falling within the category of cap :a surplus which is non- recurring and exceptional item which to be disclosed as per the requirement of the Companies Act. Further it is quite pertinent to note that, clause (ii) of Explanation -1 of section 115JB is also an indicator of the intention of the legislature and also the scheme of the section that the incomes which are treated as exempt under the Income Tax Act are to be excluded from the profit loss account. The said clause excludes; Xxxxxxxx 17. From the above discussion we are of the opinion that surplus resulting in the books of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been allowed as a deduction in earlier years due to the provisions of Section 43B of the Act and consequently, the write- back of this amount is not considered as a taxable income in this year Accordingly, the loss computed has been increased to the extent of the provision written-back. In connection with the above contentions, the Company relies on the following decisions:- Tirunelveli Motor Bus Service Co. P Ltd. v. CIT 78 ITR 55(SC) CIT V. Chetan Chemicals (P) Ltd. 188 CTR572(Guj Mahindra Mahindra Ltd v CIT 261 ITR 501 (Bom) CIT v. Usha Ranjan Bhadra 126 ITR 44 (Gauhati) Then again in note no.10.1 (the relevant portion of which has already been incorporated above) the assessee specifically gave a caveat that this amount on account of waiver of loan is not includable in the 'book profit' and same has been included only out of abundant precaution as the assessee company reserves the right to exclude such sum and contest during the course of assessment proceedings. Thus, at the very initial stage itself the assessee had disclosed all the particulars and had also given a detailed note as to why the said amount will not form part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd., (2012) 349 ITR 336 (Bom.). It is also equally a salutary principle of tax laws that entries in the books of account or in the profit loss account is not a determinative factor for taxing the income because income can be taxed only by the express provisions of law. We have already discussed in detail in our earlier part of the order that waiver of a loan is a capital receipt which is part of the capital reserve and cannot be reckoned as working result of the company and therefore, it does not form part of the net profit as per the profit loss account. Thus, such a capital receipt cannot be taxed as 'book profit' as envisaged in terms of section 115JB. 19. As regard the decision of the Hon'ble Apex Court in the case of Apollo Tyres (supra), as relied upon the Ld. CIT D.R., we do not find that this judgment in any way envisages that a receipt which is not taxable as book profit nor reckoned as part of net profit as per profit loss account should be taxed under u/s 115JB, just because it has been credited to profit loss account which too has been qualified by a note giving a caveat for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earn income from dividend and a Business Investment made with a commercial motive of acquiring controlling interest. 4. On the facts and in the circumstances of the case, the lower authority has erred in applying Section 14A read with Rule 8D, without establishing the requisite nexus between the expenses incurred and dividend income earned. 5. On the facts and in the circumstances of the case, the lower authority has erred in holding the refund of Excise duty (Self Cenvat Credit) amounting to ₹ 2,46,79,790/-, is not a capital receipt. 6. On the facts and in the circumstances of the case, the lower authority has erred in holding that the assessee is not entitled to the exclusion of refund of Excise duty (Self Cenvat Credit) amounting to ₹ 2,46,79,790/-, being Capital in nature, in the determination of total income u/s 115JB of the Income Tax Act, 1961. 22. Since, the issue involved in grounds no.1, 5 and 6 in assessee s appeal and grounds no.1 and 2 in the Revenue s appeal were exactly the same as were involved in Assessment Year 2008-09, therefore, finding given therein will apply mutatis mutandis in this year also. Accordingly, grounds no.1, 5 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds have been diverted for the purpose of investment and hence no disallowance can be made on account of interest. 26. On the other hand, learned DR strongly relied upon the order of the Assessing Officer and ld. CIT (A) and submitted that, once the assessee has a dividend income which is claimed as exempt then expenditure needs to be attributable. 27. After considering the aforesaid submissions and on perusal of the relevant finding given in the impugned orders as well as material referred to before us, we find that in so far as disallowance of interest expenditure is concern, the same has rightly been deleted by the ld. CIT (A) after due verification of the records that none of the investments have been made out of borrowed funds and has been made by assessee s own fund. In view of such a clear cut finding, no disallowance of interest can be made. With regard to other disallowance on account of administrative cost, we find that assessee has given a categorical explanation that no expenditure can be said to be attributable especially when all the investments were made in much earlier years and there is only one dividend cheque received during the year. Once assessee has produ ..... 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