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TMI Blog2019 (2) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee even before us. Thus this disallowance as was made by the AO by invoking Section 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rule is directed to be deleted. Strategic investments made with group/associated companies etc cannot be excluded while computing disallowance u/s 14A - Secondly that the disallowance cannot exceed exempt income and thirdly that only those investments which actually yielded an exempt income be only considered while computing disallowance u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rule. With these directions, we are restoring this issue back to the file of the AO for fresh/denovo adjudication of the issue on merits in accordance with law keeping in view our above directions. Needless to say that the AO shall provide necessary opportunity of being heard to the assessee in denovo proceedings in accordance with principles of natural justice in accordance with law. Additions u/s 14A which was added while computing book profits u/s 115JB - Held that:- The issue is consequential to our decision in the case of disallowance of expenditure incurred in relation to earning of an exempt income u/s 14 A in the preceding para’s of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with principles of natural justice Penalties levied on the assessee under Gujarat Sales Tax Act as well FERA/FEMA authorities - allowable bussiness expenditure - Held that:- This issue is to be restored to the file of the AO for fresh/denovo adjudication of the issue afresh on merits in accordance with law. The assessee is directed to produce all the surrounding facts concerning levy of penalty under FERA/FEMA and Gujarat Sales Tax Act including orders of the authorities levying the said penalty before the AO. The AO to analyse all the relevant facts to ascertain whether such penalties are penal or compensatory in nature to arrive at the decision whether these penalties are hit by explanation 1 to Section 37(1) of the 1961 Act and thereafter to pass well reasoned order in accordance with law on merits. Bogus purchases of mobile handsets - addition made by the assessee from Shivamani Traders Pvt. Ltd., wherein the AO got the information from Maharashtra VAT authorities that the said concern is engaged in providing hawala entries by issuing bogus accommodation bills with out supplying any material which led to the additions being made to the income of the assessee by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) should have applied Explanation 10 to Sec.43(1) and should have directed that the backward area incentive should have been reduced from the actual cost. 3) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of ₹ 3,59,88,823/- made u/s.14A read with Rule 8D without appreciating that Rule 8D is squarely applicable. 4) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made on account of premature redemption without appreciating that the transaction is in the nature of sale, exchange or relinquishment of assets as was held by the Supreme Court in Anarkali Sarabhai vs. CIT (224 ITR 422). 4) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition made on account of book profit without appreciating that there is no brought forward book loss available to the assessee. 5) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition made to book profit on account of disallowance u/s.14A of the IT Act. 6) The appellant craves leave to ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of terry towels . The search operations were carried out by Revenue in the case of Welspun group of entities u/s. 132 of the 1961 Act on 13th October, 2010 . The assessee was also covered by Revenue in the aforesaid searches conducted by Revenue u/s 132 of the 1961 Act. 5. The first issue which arose before us comprises of chargeability to income-tax of incentives by way of refund of Excise Duty of ₹ 3,65,47,921/- and Exemption of Sales Tax to the tune of ₹ 5,75,56,878/- as revenue receipt or the same are capital receipts not exigible to income-tax. It so happened that Kutch District in Gujarat was hit by devastating earthquake on 26th January, 2001 and in order to redevelop and rehabilitate Kutch District of Gujarat , the Central and State Government formulated policy/schemes to encourage setting up of new industry in said Kutch District wherein certain incentives by way of refund of excise duty as well Sales Tax incentives were given by Central and State Government to the entrepreneurs for setting up new industry in Kutch District , as detailed below:- NOTIFICATION NO 39 /2001 -CENTRAL EXCISE. In exercise of the powers conferred by sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery, (a) is found to be less than rupees twenty crore but was declared to be rupees twenty crore or more, the manufacturer shall be liable to pay back the entire amount of duty exemption availed under the notification alongwith interest at the rate of twenty four per cent per annum as if no exemption were available; or (b) is found to be less than the declared value and was declared to be below rupees twenty crore, the manufacture shall be liable to pay duty on the goods cleared ,if any, in excess of twice the actual value of original investment in each of the years during which exemption has been claimed under this notification alongwith interest at the rate of twenty four per cent per annum , as if no exemption were available to those clearances under this notification. (vi) The exemption shall apply for a period not exceeding five years from the date of commencement of commercial production by the unit. WITHOUT ANY CAP. The sales tax incentive scheme formulated by State Government of Gujarat is detailed hereunder: SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT The economic activities in the district of Kutch came to a standstill on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent will have to be maintained by the industrial unit during the eligibility period of the incentives. Otherwise, the amount of incentives availed by the unit can be recovered as arrears of land revenue. (f) Unit will have to invest the amount equivalent to 50% of the sales tax incentives availed in the new projects in the state within a period of 10 years from the date of commencement of commercial production. (g) Unit opting for sales tax deferment scheme for the purpose of deferred amount shall have to give a personal undertaking in the form of security bond as prescribed vide Resolution No.INC-1087-2138-I dated the 1st August, 1990 or equitable charge, second charge. (h) The unit availing of incentives under any other scheme of the State Government will not be eligible to receive benefits under this scheme. (i) Expansion, diversification or modernization of the existing industries will not be considered eligible for the benefits under this scheme. The assessee has undisputedly fulfilled the conditions of these schemes formulated by Central and State Government to avail the aforesaid incentives in the form of refund of Central Excise and Sales Tax incent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is not the source from which the amount is paid to the assessee, which is determinative of the question whether the subsidy payments are of revenue or capital nature. The first proposition stated by Viscount Simon in Ostime's case [1946] 14 ITR (Suppl.) 45 (HL) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of the State. If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. (p. 262) It further observed that:- 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 materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parate sales tax account, any separate incentive account nor had shown any amount as outstanding liability under the head. The Special Bench of the Tribunal, relying on the principles laid down by the Supreme Court in the case of Sahney Steel Press Works Ltd. (supra) came to the conclusion that since the incentives were given for bringing about addition to necessary infrastructure in processing/developing the backward area, the same would be in the nature of capital receipt not liable to tax. The Special Bench, accepting the contention of the assessee, thus, held that the collections made by the assessee would be deemed to include the sales tax amount and since the assessee was exempted from the payment of sales tax, the notional amount of such sales tax should be reduced from the revenues for the purpose of computing the total income of the assessee. The Bombay High Court has approved the decision of Special Bench in the case of CIT V/s. Reliance Industries Ltd. 339 ITR 632 (Bom). However the Supreme Court in SLP(C) No.23433/2011 set aside the matter to the High Court consider the questions formulated by the Supreme Court. In the case of the appellant the CIT(A)-13, Mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, remains unaltered. Therefore, the present impugned order of the CIT(A) does not call for any interference. 10. On the other hand, Ld DR relied heavily on the order of the AO. 11. We have heard both the parties and perused the orders of the Revenue Authorities as well as the material placed before us on this issue. On perusal of the order cited before us, we find that the argument made by the Ld Counsel is an order, and therefore, the cited decision of the Special Bench in the assessee's own case is upheld. Therefore, in our opinion, the order of the CIT(A) is fair and reasonable and it does not call for any interference. Accordingly, grounds no.2, 2a and 2b raised by the Revenue are dismissed. I have given anxious thought on alternate plea of the AO. It is well established that depreciation is allowed on the actual cost incurred by an assessee for acquiring the asset. Under section 43(1), 'actual cost' means the 'actual cost' of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority . Thus, if a portion of the cost is met directly or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Government but if it is given as a refund of excise/ sales tax arithmetically of the same amount, it would be either reimbursement of expenditure not amounting to income at all or it would increase the profits of the undertaking by offsetting it against expense and removing it from debit to profit of the undertaking, i.e., both credit and debit do not enter the profit coffers of the undertaking. Following the order of CIT(A)-13, Mumbai in the case of the appellant for the A.Y.2006-07 which has not been disputed in second appeal by the Department and as such reached to the finality and the decision of the ITAT, Mumbai in the case of Welspun Gujarat Stahl Rohren Ltd. (Now Welspun Corp Ltd.) where the ITAT, Mumbai has allowed the appeal for the A.Y.2006-07 in favour of the assessee on the same facts vide order ITA No.5608/M/2010 dated 6-11-2013, I allow this ground of appeal in favour of the appellant. I direct the AO to accept the Backward Incentives as capital receipts without applying the Explanation 10 to section 43(1). It means Backward incentives cannot be reduced from the actual cost. This ground of appeal is allowed in favour of the appellant. 5.2. This issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e brief facts qua the issue involved is that, assessee is engaged in the business of manufacturing of sponge Iron, Steel Ingots and rolled product. In the wake of devastating earthquake in Kutch District, Gujarat, the Central Government, vide notification No. 39/2001 dated 7th August, 2001 issued an excise benefit incentive scheme and State Government of Gujarat also vide its Notification dated 9th November, 2001 announced an incentive scheme for Sales-tax exemption known as Incentive Scheme, 2001 for Economic Development for Kutch District . Both these schemes were for setting-up of a new industrial unit/s in Kutch District after complying with the terms and conditions as set out in the notifications and schemes of the Central and State Government respectively. The object of both the schemes was economic development of Kutch District after the earthquake and creation of new employment opportunities and attraction of large scale investments. During the previous year, the assessee had received following incentives by the State government and Central government:- (i) Sales-tax incentive -Rs. 12,95,99,499 (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting-up new industrial units and not for running of any industry for profit. He refer to preamble as given in the Incentive Scheme of 2001 for Economic Development of Kutch District issued by Government of Gujarat dated 09.11.2001. Even in the Central Excise Notification, the same was issued in a public interest for setting up of a new industrial plant and the incentive of Excise Duty benefit was given for a period of five years. He further submitted that the nature of incentive under both the notifications and the accounting treatment by the assessee as stated by the assessee before the authorities below was as under:- (a) The nature of incentives under the Notification and the Scheme and the present accounting treatment are summarized as under:- (a) Excise Duty (in view of the Notification) - Refund of the excise duty paid through PLA on finished goods cleared from the unit after taking Cenvat credit on the inputs. This amount is credited to the profit and loss account as 'Excise Benefit Received and inadvertently offered to tax. Presently, there is no limit for the quantum of such incentive. (b) Sales Tax/Value Added Tax (in view of the Scheme) - Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case, the said receipts are treated as capital receipts, then same shall be reduced from the costs of assets and depreciation claimed on the net cost of the assets will be allowed after reducing the amount of incentives in terms of Explanation 10 to section 43(1). He submitted that such a contention of the AO cannot be upheld, because the same is not applicable in the present case at all, because there is no direct acquisition of asset from the Government subsidy. The subsidy is received in the form of excise tax benefit and sales-tax incentive only when the assessee had set up the whole industrial unit and starts manufacturing and commenced its business of sale. Thus, the said provision is not applicable and in support of his contention, he relied upon the following Tribunal decisions:- Sr. No. Case Name Citation 1 Sasisri Extractions Limited 122 ITD 428 (Visakhapatnam) 2 M/s Harinagar Sugar Mills Ltd ITA No. 772/Mum/2012 3 Rasoi Ltd. 46 taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of. refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis Of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State on 26th January, 2001. New employment, opportunities could be created if new Investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India have announced excise duty exemption for new industries to promote large scale investment in the district, along with which the State Government has also decided to announce the scheme of sales tax incentives. Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch district . 13. From the perusal of the above, it is amply clear that the schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more profitably. As laid down by the Hon ble Supreme Court, the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or runni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government to grant Central Excise benefits by way of refund and exemption of Sales Tax Incentive as are extracted by learned CIT(A) in his appellate order which are reproduced above in the preceding para s of this order We have observed that the assessee is engaged in the business of manufacturing of Terry Towels. We have observed that there was a devastating earthquake in District Kutch in Gujarat on 26.01.2001. In order to redevelop and rehabilitate the said Kutch District of Gujarat , the Central and State Government formulated policy with a view to encourage setting up of new industry in said Kutch District wherein certain incentives by way of refund of excise duty as well exemption of Sales Tax incentives were given by Central and State Government to the entrepreneurs for setting up new industry in Kutch District ,as detailed below:- NOTIFICATION NO 39 /2001 -CENTRAL EXCISE. In exercise of the powers conferred by sub-section (1) of section 5A of the Central Excise Act, 1944 (1 of 1944), read with sub-section (3) of section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 (58 of 1957) and sub-section (3) of section 3 of the Additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest at the rate of twenty four per cent per annum as if no exemption were available; or (b) is found to be less than the declared value and was declared to be below rupees twenty crore, the manufacture shall be liable to pay duty on the goods cleared ,if any, in excess of twice the actual value of original investment in each of the years during which exemption has been claimed under this notification alongwith interest at the rate of twenty four per cent per annum , as if no exemption were available to those clearances under this notification. (vi) The exemption shall apply for a period not exceeding five years from the date of commencement of commercial production by the unit. The sales tax incentive scheme formulated by State Government of Gujarat is detailed hereunder: SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT The economic activities in the district of Kutch came to a standstill on account of devastating earthquake in the State on 26th January, 2001. New employment opportunities could be created if new investment takes place. The Government is committed to attracting industries in the district to make the industrial and economic environ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t equivalent to 50% of the sales tax incentives availed in the new projects in the state within a period of 10 years from the date of commencement of commercial production. (g) Unit opting for sales tax deferment scheme for the purpose of deferred amount shall have to give a personal undertaking in the form of security bond as prescribed vide Resolution No.INC-1087-2138-I dated the 1st August, 1990 or equitable charge, second charge. (h) The unit availing of incentives under any other scheme of the State Government will not be eligible to receive benefits under this scheme. (i) Expansion, diversification or modernization of the existing industries will not be considered eligible for the benefits under this scheme. We have also observed that the Mumbai-tribunal has dealt with this incentive schemes of Central and State Government for giving incentives by Central Excise Benefits by way of refund and exemption of Sales Tax Incentives for setting up industrial units in District Kutch,Gujarat to redevelop the said Kutch District in the wake of devastating earth quakes on 26.01.2011 in the cases of group concern of the assessee in Welspun Steel Ltd. v. DCIT/ACIT, vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that in the assessment year 2006-07, the assessee s claim was rejected by the AO on the ground that the decision of Special Bench in the case of Reliance Industries is pending for disposal before the Hon ble Bombay High Court. 6. The Ld. CIT(A) too following the decision of Bombay High Court in the case of Reliance Industries, allowed the assessee s appeal. However, later on, this decision of the Hon ble Bombay High Court has been set aside to the Tribunal for fresh adjudication. 7. Before us, it has been stated that this issue of subsidy / incentive in the case of the assessee had reached to the stage of ITAT, whereby the Tribunal, vide order dated 28.12.2011 had set aside this issue to the file of the AO on the ground that authorities below have not analysed the scheme of subsidy / incentive granted by the respective governments. It has been informed that, till date no assessment order has been passed in pursuance of Tribunal order. Instead a fresh assessment order has been passed under section 143(3) r.w.s. 153A wherein this issue has been confirmed by the AO again without proper analyzing the purpose test of the scheme. 8. The Ld. Counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incentive linked to investment that is eligible under the Scheme. (c) The incentive can be availed of only after commencement of production. Further, in so far as it relates to the incentives under the Scheme, the unit has to invest at least 50% of the incentives in the State of Gujrat within a period of 10 years from the date of commercial production . Thus, he submitted that, looking to the objects and the purpose for which subsidy was given, the incentive receipts has to be treated as capital. In support of his contention, besides several decisions, he placed reliance on the following decisions:- Sr.. No. Case Law Citation 1 Sahney Steel Press Works Ltd 228 ITR 253 (SC) 2 Ponni Sugars Chemicals Ltd. 306 ITR 392 (SC) 3 Bougainvillea Multiplex Ent. Centre (P) Ltd 373 ITR 14 (Trib) 4 Chaphalkar Brothers 351 ITR 309 (Bom) 5 Birl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd submitted that, if the incentive/ subsidy has been given in the form of sales-tax or exemption of excise duty then it directly leads to augmentation of profit of the assessee and hence, it is nothing but revenue receipts. 11. We have carefully considered the rival contentions and also perused the relevant material placed on record. The main issue involved is, whether the incentive / subsidy provided by the State Government in the form of sales-tax incentive and in the form of Central Excise benefit by the Central Government for sums aggregating to ₹ 35,33,23,171/- is to be treated as capital receipts or revenue receipts. The Hon ble Supreme Court in the case of Ponni Sugars Chemicals Ltd vs CIT, reported in [2008] 306 ITR 392 after referring to the earlier decisions of the Supreme Court in the case of Sahney Steel Works Ltd v CIT, reported in [1999] 228 ITR 253, held that the purpose for which subsidy is given is the crucial factor . The purpose is to be judged from the character of the receipts in the hands of the assessee which has to be determined with respect to the purpose for which the subsidy is given. The point of time is not relevant and also the source an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court in Sahney Steel Press Works Ltd. 'S case (supra) lies in the fact that it has discussed and analysed 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 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 with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to setup new units or for substantial expansion of existing units; On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of new industrial unit and economic development and generation of new employment opportunities in the Kutch District and not for running the industry for augmenting the profit on day-to-day business. This proposition of law has been reiterated by the Hon ble Bombay High Court in the case of CIT vs Chaphalkar Brothers, reported in 351 ITR 309, wherein the Hon ble High Court relying upon the principles laid down by the Supreme Court in the case of Ponni Sugars Chemicals Ltd has held that if the object of the subsidy was to promote construction of multiplexes, theater complexes then, it would be on capital account. Similarly, views have been taken by the various other High Courts and Tribunal in the decision as referred and relied upon by the Ld. Counsel as above. Thus, We hold that the amount of incentive received by the assessee cannot be taxed as revenue receipt as it is purely on capital account. 14. As regards the other plea raised by the AO in the order passed u/s 143(3) r.w.s. 153A, we agree with the contention of the Ld. Counsel that, none of the plant and machinery installed by the assessee for setting up of a new industrial unit has been funded by the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kward area , will be capital in nature, irrespective of modality or source of funds through or from which it is given. Thus, following the ratio of decision of co-ordinate Benches of the tribunal in the case of Welspun Steel Ltd(supra) , we hold that Central Excise benefit and Sales Tax incentive received by the assessee during the impugned assessment year under consideration, are capital receipts not exigible to income-tax and further we hold that the same shall not be deducted from cost of assets for computing depreciation. The ground number 1 and 2 raised by the Revenue in its memo of appeal filed with the tribunal are dismissed. We order accordingly. 6. This takes us to the next issue which concerns itself with disallowance made u/s. 14A of the 1961 Act. Both the rival parties are aggrieved by the appellate decision of learned CIT(A) on this issue . 6.2. The assessee has received dividend income of ₹ 2,58,31,086/- during the impugned assessment year which was claimed as an exempt income . The assessee has made investments in shares to the tune of ₹ 90.48 crores as on 31.03.2008. The said investment in shares , inter-alia, included strategic investments in grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied by the AO only if he, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of no or an expenditure has been incurred in relation to exempt income. The relevant facts of the case reveals that the appellant received dividend income of ₹ 2,58,31,086/- which was claimed exempt. The nature of investment shows:- 31.03.2008 31.03.2007 (a) Government Securities (NSC) 12,000 12,000 (b) Shares in subsidiary and Group companies 68,95,45,956/- 56,29,00,456/- (c) Units of mutual funds and Shares of other companies 21,52,05,969/- 1,10,25,32,893/- Total 90,47,63,925/- 1,66,54,45,350/- The Government Securities are in the nature of NSC and generate taxable income. The investment in shares of Subsidiary and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Co. Ltd. In this case it is held that provisions of section 14A cannot be applied unless there is proximate cause for disallowance and therefore application of section 14A and rule 8D is not automatic in each and every case. The exemption from the tax if granted by the statute should be given full scope and amplitude and should not be whittled down by imposing limitations. However in this case there are huge investment in units of mutual funds and shares of the other companies, and as such certain disallowance on account of administrative expenses is required to be made. Though the objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the SC in case of CIT V/s. Walfort Share and Stock Brokers P. Ltd. (326 ITR 1) (SC) that for attracting the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s much higher than investments made in the shares and mutual funds, including investments made in subsidiary/associated companies. It is shown that total investments made by the assessee were to the tune of ₹ 90.48 crores as on 31.03.2008 and ₹ 166.54 crores as on 31.03.2007 , while own funds were to the tune of ₹ 558.81 crores as on 31.03.2008 and ₹ 542.78 crores as on 31.03.2007. Our attention was drawn to page 28/paper book filed by the assessee which is audited balance sheet of the assessee company. The assessee also submitted that the assessee voluntarily disallowed an expenditure of ₹ 81,30,975/- incurred in relation to earning of an exempt income , u/s 14A of the 1961 Act. 6.5 We have considered rival contentions and perused the material on record including orders of authorities below and cited case law. We have observed that the assessee has made an investment of ₹ 90.48 crores as on 31.03.2008 and ₹ 166.54 crores as on 31.03.2007, as per audited financial statements produced before us. We have observed that the assessee has its own interest free funds by way of share capital and reserves and surpluses to the tune of ₹ 558. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. Thus this disallowance as was made by the AO by invoking Section 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rule is directed to be deleted. We order accordingly. So, far as disallowance u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules is concerned, we are of the considered view that this issue with respect to disallowance of expenditure is required to be set aside and restored to the file of the AO for fresh/de-novo adjudication by the AO on merits in accordance with law after considering the decision of Hon ble Supreme Court in the case of Maxopp Investments Limited(supra) , decision of Hon ble Bombay High Court , Nagpur Bench in the case of The Pr. CIT v. Ballarpur Industries Ltd. in ITA no. 51 of 2016 vide orders dated 13.10.2016, decision of Hon ble Delhi High Court in the case of Cheminvest Limited v. CIT (2015) 378 ITR 33(Delhi), decision of Hon ble Delhi High Court in the case of Joint Investments Private Limited v. CIT reported in (2015) 372 ITR 694(Delhi) and decision of ITAT-Special Bench Delhi in the case of ACIT v. Vireet Investment Private Limited (2017) 165 ITD 27(Delhi-trib.SB). The crux of these decisions is that strategic investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciples of natural justice in accordance with law. This disposes of ground no. 2 of the assessee s appeal and ground number 6 raised by the Revenue in its appeal . We order accordingly. 8. This takes us to the ground no. 4 raised by Revenue with respect to deletion of additions made by learned CIT(A) on account of gains on premature redemption of debentures without appreciating that the transaction is in the nature of sale, exchange or relinquishment of assets as was held by Hon ble Supreme Court in the case of Anarkali Sarabhai v. CIT reported in 224 ITR 422(SC) . The AO made additions to the income of the assessee by way of gain on premature redemption of debentures while learned CIT(A) deleted the said additions relying on judgment of Hon ble Karnataka High Court in the case of CIT v. Industrial Credit and Development Syndicate Limited 285 ITR 310. We have heard rival parties and it is concurred by the rival parties, that this issue needs to be restored to the file of the AO to decide the issue afresh after considering the factual matrix of the case in the light of judicial decisions and applicable law. After hearing both the parties , we are also of the considered view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sses of the said merged entity and application of law to those facts for which we at this stage are of the considered view that the matter need to be restored to the file of AO for verification of facts surrounding brought forward losses/unabsorbed depreciation and their set off to compute book profits u/s 115JB, on merits in accordance with law. Needless to say that the AO shall provide proper and necessary opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences/explanations produced by the assessee in its support shall be admitted by the AO in the interest of justice in accordance with law. This disposes of ground no. 5 of the Revenue s appeal . We order accordingly. 12. The other grounds raised by Revenue and assessee in their respective appeals are consequential and does not require separate adjudication. This disposes of ground number 7 raised in Revenue s appeal and ground number 3 and 4 of the assessee s appeal. Thus, cross appeals of both the Revenue and assessee for AY 2008-09 stood disposed off. 13. In the result both the assessee s as well revenue s appeal in ITA no. 5376/Mum/2015 and ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,835/- by making additions to the income of the assessee. 16.2 The matter reached learned CIT(A) at the behest of the assessee, who was pleased to dismiss the appeal of the assessee , by holding as under:- 9.1 Ground no. 5 is raised disputing the addition of ₹ 35,51,835/- to the income of the appellant by way of disallowing penalty under the Sales Tax and FEMA. 9.2 The Assessing Officer has made addition of ₹ 35,51,835/~ by way of disallowing penalty under Sales Tax and FEMA recording the following reasons:- 9.3. The above explanation of the assessee is considered. It is agreed by the assessee that the above penalties were levied by the Sales Tax and FEMA authorities on the assessee during the year and since the said penalties have been debited in the Profit Loss A/c., the same needs to be added back to arrive at the taxable income, which the assessee failed to do. The auditors have specified that the amounts were penal in nature for contravention of Section 18(2) of the FEMA, 1973 read with Sec.39(3) and (4) of FEMA, 1999 and the Sales Tax penalty was levied u/s.45(6) and 46(1) of Gujarat Sales Tax Act, 1969. Accordingly, the penal amounts debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature. However compensatory penalty may be allowable. In this case the auditor has reported these penalties under Tax audit report. At the same time the appellant could not produce any document in support of penalties being in the nature of compensatory. I, therefore, confirm the addition of ₹ 35,51,835/- on account of penalties. This ground of appeal is dismissed. 16.3 The matter has now reached tribunal at the behest of the assessee. We have observed both revenue as well as assessee has advanced argument and its fairly agreed by both the parties that the issue need to be restored to the file of AO for detailed analyses of the penalties levied on the assessee under Gujarat Sales Tax Act as well FERA/FEMA authorities and is allowability as an business expenditure keeping in view bar created by explanation 1 to Section 37(1) of the 1961 Act after coming to conclusion whether the said penalties are compensatory in nature or penal in nature. The assessee is directed to produce all relevant details/material before the AO as to circumstances under which penalty was levied , copies of penalty orders and reasons for levying of the aforesaid penalties and whether the same ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put tax credit availed on alleged bogus purchase bills, which additional tax is now paid along with payment of interest u/s. 30(2) and 30(4) of the MVAT Act, 2002. This interest liability u/s. 30(4) was computed @ of 25% on additional tax payable by the assessee due to withdrawal of wrong inadmissible claim of input tax credit of VAT on alleged bogus purchases. The interest was also paid u/s. 30(2) of the MVAT Act, 2002 by the assessee while filing revised return when search and survey operations were underway, which was by way of simple interest on the amount of VAT which the assessee failed to deposit in time within prescribed due date under MVAT Act, 2002 while filing return of VAT originally as it claimed inadmissible and wrong credit and set off of input tax credit on alleged bogus purchases against output VAT tax which led to underpayment of VAT. It is profitable at this stage to reproduce extract of relevant provisions of the statute as are contained in Section 30(2) and 30(4) of the MVAT Act, 2002, as under: 'Chapter VI PENALTY AND INTEREST 29 ** * 30. Interest payable by a dealer or person:- (1) A dealer who is liable to pay tax in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 4[fresh return or revised return] exceeds the amount of tax payable as per the original return, then for the purposes of this sub-section, the dealer shall be deemed to have been required to pay the excess amount of tax at the time he was required to pay the tax as per the original return and accordingly he shall be liable to pay interest under this sub-section on the said excess amount of tax. 4a[Provided further that, in case a dealer files an annual revised return, as provided under clause (b) or, as the case may be, clause (c) of sub-section (4) of section 20, then the interest shall be payable on the excess amount of tax, as per such annual revised return, from the dates mentioned in column (2) of the Table, till the date of payment of such excess amount of tax. TABLE Registration status in the year for which annual revised return is filed (1)Interest to be computed from (2)(a)Dealer, holding certificate of registration for whole year. 1st October of the year, to which the annual revised return relates. (b)Certificate of registration granted, effective from any date up to the 30th September of the year to which revised return relates. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of tax, if any, payable as per the return or, as the case may be, revised return, a sum equal to 25 per cent. of the additional tax payable as per the return or, as the case may be, revised return.] 7[Provided that, interest under this sub-section shall not be payable on account of the additional tax liability arising due to non-production of declarations or, as the case may be, certificates: Provided further that, if the amount of tax paid as per revised return is less than ten per cent. of the aggregate amount of tax paid as per the original returns, in respect of the corresponding period, then no interest under this sub-section shall be payable. Explanation.- For the purpose of this sub-section the expressions,- tax paid as per original returns shall be deemed to include the amount of tax paid, as per the revised returns, filed before the commencement of proceedings specified in clause (a) or before the receipt of intimation specified in clause (b) of sub-section (4); tax paid shall mean the amount of tax paid by such person or dealer, after the adjustment of set-off.]' We have also at the same time observed that under MVAT Act, 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pportunity of being heard, by order in writing, impose on him in addition to any tax payable by him, a penalty equal to the amount of tax found due as a result of any of the aforesaid acts of commission or omission. 3[(5) Where a dealer has sold any goods and the sale is exempt, fully or partly, from payment of tax by virtue of any provision contained in sub-section (3), (3A), (3B) or (5) of section 8, and the purchaser fails to comply with the conditions or restrictions subject to which the exemption is granted, then the Commissioner may, after giving the said purchaser a reasonable opportunity of being heard, impose penalty on him equal to one and a half times the tax which would have become payable on the sale if the said exemption was not available on the said sale.] (6) Where, any person or dealer contravenes the provision of section 86, so as to have the quantum of tax payable by him to be under-assessed, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him a penalty equal to half the amount of tax which would have been under-assessed or 4[one thousa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years] from the end of the year containing the said period.] 13[(11A) Notwithstanding anything contained in sub-section (11), penalty under this section may be imposed while passing an order under this Act.] 14(12)** ** ** (13) For the purposes of this section, Commissioner includes any appellate authority appointed or constituted under this Act. Now the moot question before us is whether this interest payable u/s. 30(2) and 30(4) of MVAT Act, 2002 is compensatory or penal in nature. If it is held to be compensatory in nature, then interest payable on these statutory dues by way of VAT shall be allowable as deduction while computing income chargeable to income-tax under the head of income 'Profits and Gains of Business or Profession', while if on the other hand the same is held to be penal in nature then the same cannot be allowed as deduction while computing income from business keeping in view provisions of Explanation 1 to Section 37(1) of the 1961 Act. It is also profitable at this stage to reproduce the provisions of Section 37(1) of the 1961 Act read with Explanation 1, which reads as under:- General. 37. (1) Any expenditure (not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n addition to interest payable u/s. 30(2) of MVAT Act, 2002 and is to be paid after commencement of some special event such as audits, inspection, survey, search etc under MVAT Act, 2002 by MVAT authorities and the statute has given dealer an opportunity to come clean and end litigation with MVAT department by coming forward by filing return or revised returns by paying not only additional tax which the dealer earlier did not pay in original return but also the dealer is burdened with the by additional liability of paying simple interest u/s. 30(2) of MVAT Act, 2002 for delay in payment of VAT beyond due date as prescribed under MVAT Act, 2002 and also further payment by way of interest @25% of such additional tax which is termed by legislature as 'interest' within provisions of Section 30(4) of the MVAT Act, 2002. It is also provided in Section 30(4) of the MVAT Act, 2002 that if the additional tax paid in return or revised return filed after commencement of such stipulated special event is less than 10% of the tax paid as per original return, then the dealer will not be burdened with this interest @25% of additional tax which also indicates that this interest u/s. 30(4) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some omission or incorrect statement in original return of VAT filed with MVAT authorities, the dealer can always come forward and file revised returns after complying with stipulated conditions u/s. 20(4) of the MVAT Act, 2002, for which there is only stipulation to pay interest u/s. 30(2) of the MVAT Act,2002 for delayed payment of VAT apart from paying additional tax liability u/s. 20(5) of MVAT Act, 2002 which was originally short paid due to such omission or incorrect statement in the original return filed with the MVAT authorities and no further interest such as stipulated u/s. 30(4) of the 1961 Act is stipulated under the aforesaid circumstances of filing revised return voluntarily by the dealer. Thus, since this interest u/s. 30(4) of MVAT Act, 2002(which is in addition to interest payable u/s. 30(2)) had genesis to correcting earlier infraction of law by giving of an opportunity to the dealer to come clean after commencement of certain special events such as audit, inspection, search, survey etc. by allowing filing of revised return to cover up the tax earlier evaded/short paid which was earlier not paid/ withheld from department due to infraction of law by way of filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst possible levy of penalty u/s. 29(3) of the MVAT Act, 2002 which would in any case be minimum 25% but which could extend to 100% of the tax so evaded in the event of having adverse outcome of litigation with MVAT department. This levy of interest u/s. 30(4) of the MVAT Act, 2002 has germane to detection of short payment of VAT by way of concealment or furnishing of inaccurate particulars of income in the original return of VAT filed with MVAT department due to infraction of law, which is detected after commencement of such special events such as audit, inspection, survey, search under MVAT Act, 2002 either at behest of dealer or by the team of MVAT authorities conducting such special event. The fact remains that one more opportunity is provided to the dealer to come clean and buy peace with MVAT department by filing revised return by paying additional tax, interest u/s. 30(2) and also u/s. 30(4) of MVAT Act, 2002. This levy of interest u/s. 30(4) being in addition to interest u/s. 30(2) of MVAT Act, 2002, penalises the dealer for filing wrong returns earlier in violation of MVAT Act, 2002 leading to short payment of taxes to MVAT department depriving them of their legitimate du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of tax found to be evaded and which may extend to 100% of the said tax so sought to be evaded apart from interest u/s. 30(2) and additional tax so sought to be evaded. Thus, by asking assessee to pay this interest @25% of additional tax u/s. 30(4) of MVAT Act,2002 voluntarily while filing revised return along with additional tax and compensatory interest u/s. 30(2) of MVAT Act, 2002, after commencement of special stipulated event such as audit, inspection, survey and search etc, the lawmakers have chosen to end the path of litigation despite the fact there was infraction of law earlier in filing original VAT return and this interest is nothing but penal in nature although nomenclature used is 'interest'. This is the reflection of State Litigation Policy to allow dealers to come clean by paying voluntarily this penal interest u/s. 30(4) of MVAT Act, 2002 under specified circumstances and not to litigate matter further for such infraction of law provided compliance as stipulated u/s. 30(4) of MVAT Act, 2002 are undertaken. This is undertaken as part of State Litigation Policy to preserve resources by reducing litigation with the dealers who want to come clean and settle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al return filed with the MVAT authorities and no further interest such as stipulated u/s. 30(4) of the 1961 Act is stipulated under the aforesaid circumstances of filing revised return voluntarily by the dealer before the commencement of audit, inspection, search, survey etc.. This also clearly indicates that no penal interest as is provided u/s. 30(4) of MVAT Act, 2002 is levied in every filing of revised return due to omission or commission in the original return of VAT and it is only whence the special events such as audit, inspection, survey, search etc commences and the dealer is or is likely to be cornered and then at that stage the dealer comes forwards and files revised return, it is burdened with further penal interest as is contained in Section 30(4) of the MVAT Act, 2002. The lawmakers in Section 30(4) of MVAT Act, 2002 has also stated that if the additional tax is less than 10% of the tax paid originally vide filing original VAT return, the dealer will not be visited with this interest u/s. 30(4) of the MVAT Act, 2002 meaning thereby that the State is willing not to penalise the dealers due to minor infraction of law. Thus, after going through the relevant provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds raised by revenue in memo of appeal filed with the tribunal are similar to the issues raised in cross appeals filed by the assessee and revenue for AY 2008-09 and our decision for AY 2008-09 shall apply mutatis mutandis to the issues raised by the assessee and revenue in their respective grounds except ground number 3(a) and (b) raised by the assessee in its appeal which is separately adjudicated by us in preceding para s. We order accordingly. 18. In the result appeal of the assessee and revenue filed with the tribunal in ITA no.5374/Mum/2015 and 5718/Mum/2015 for AY 2010-11 are both partly allowed as indicated above. Assessment Year - 2011-12 (ITA 5373/Mum/2015 and ITA 5721/Mum/2015) 19. The only additional issue which arose in this year is in Revenue s appeal wherein Revenue is aggrieved by the decision of learned CIT(A) deleting the additions with respect to alleged bogus purchases of mobile handsets to the tune of ₹ 97,016/- made by the assessee from Shivamani Traders Pvt. Ltd., wherein the AO got the information from Maharashtra VAT authorities that the said concern is engaged in providing hawala entries by issuing bogus accommodation bills with out sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. It is seen that the purchases are supported by proper bills and payment by account payee's cheque. On the facts of the case a reasonable and convincing inference which could be drawn is that the appellant had purchased mobile handsets from the party when nothing could be brought on record by the Assessing Officer. In DCIT V/s. Shri Rajeev G. Kalathil 51 Taxmann.com 514 (Mum) it is held merely the supplier has been declared a Hawala Dealer by Sales Tax Department no addition can be made unless further investigation is made bringing sufficient evidences to support the view and that there was no evidence regarding cash received back from the supplier. Further in the cases of Rameshkumar Co. V/s. ACIT (ITA No.2959/Mum/2014) dated 28-11-2014 and Shri Deepak Popatlal Gala V/s. ITO (ITA No.6203/Mum/2013) dated 27-32015 and Ganpatraj A. Sanghavi V/s. ACIT (ITA No.2826/Mum/2013) dated 5-11-2014 similar decision is taken. In view of the above I delete the addition of ₹ 97,016/- made by the Assessing Officer. This ground of appeal is allowed. 19.2. The Ld. CIT(A) had deleted the additions on the grounds that no cross examination was allowed by the AO to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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