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TMI Blog2021 (9) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... Govt of AP is to be treated as revenue receipts. Therefore, all the appeals filed by the revenue on these grounds are allowed. Disallowance u/s 14A - proof of exempt income earned by the assessee - HELD THAT:- As perusing the entire material available on record and the orders of the Authorities below, we observe that the disallowance made U/s. 14A of the Act has rightly been allowed by the Ld. CIT(A). We find from the order of the Ld. CIT(A) that there is no exempt income earned by the assessee during the impugned assessment year and he has relied on certain judgments while deciding the issue in favour of the assessee. The Hon ble Delhi High Court in the case of Cheminvest Ltd.[ 2015 (9) TMI 238 - DELHI HIGH COURT] has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Therefore, as per our considered view, we do not find any infirmity in the order of the Ld. CIT(A) - ITA Nos.654 & 655/Hyd/2018, C.O. No. 23/Hyd/2018 (A.Y.: 2014-15) (In ITA No.655/Hyd/2018) - - - Dated:- 24-8-2021 - Shri S.S. Godara, Judicial Member And Shri Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri V. Shiva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the ld. CIT(A) failed to appreciate the spirit of the decision of Supreme Court in the case of 'Sahney Steel and Press Works Limited V CIT' - 1997 -TMI - 5620 - (SUPREME Court) wherein the Apex Court has categorically stated as under: The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already commenced production. The view taken by the Madhya Pradesh High Court is erroneous. In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Applying the test of Viscount Simon in the case of Ostime. It must be held that these subsidies are of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is justified in not appreciating the grant in this case was granted year after year only after expansion and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. iv) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in relying upon the decision in the case of CIT vs. Chaphalkar Brothers (400 ITR 279), wherein the grant given by way concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State on the consideration that the Industry is very capital incentive and thus the said case is distinguishable on facts. v) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) failed to appreciate the spirit of the decision of Supreme Court in the case of 'Sahney Steel and Press Works Limited V CIT' - 1997 -TMI - 5620 - (SUPREME Court) wherein the Apex Court has categorically stated as under : The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on 31/3/2013 and no any expenditure against these investments was disallowed by the assessee itself and therefore, the assessee was asked as to why the disallowance U/s. 14A of the Act should not be made. In response to the show cause notice, the assessee requested not to disallow any expenditure U/s. 14A since there were no additions to it during the period under consideration which is clear from the Schedule No.10 of the Financial Statement. The Ld.AO also observed that the assessee had debited interest expenditure to the tune of ₹ 53,24,336/-. Accordingly, the Assessing Officer calculated the disallowance as per Rule Rule 8D(2) (ii) (iii) and made disallowance of ₹ 8,45,648/-. Further, on scrutiny of accounts it was noticed by the Assessing Officer that the assessee had received reimbursement of Sales Tax from the State Government to the tune of ₹ 1,69,32,910/- which was credited into capital reserve account without passing through profit loss account and the same was not offered as revenue income during the year. In this regard, the observation of the Assessing Officer is as under:- 8.1. On verification of the information furnished, it is notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the sales tax reimbursements received by the assessee, in the previous year relevant to the A.Y. under consideration, the sales tax was debited into the revenue account as revenue expenditure and when the assessee-company received the reimbursement from the Government, the assessee has directly credited to the capital reserve account which is not proper because the receipts from the Government for sales tax is a revenue receipt. Ld. DR also submitted that once the claim has been allowed in any previous year and if the same is received in subsequent year it should be considered as the claim of the year in which the amount is received. He further submitted that the case-laws relied on by the Ld. AR are not appliable to the facts of the present case. 11. On the other hand, Ld. AR relied on the order of the Ld. CIT(A) and submitted that the Ld. CIT(A) has rightly decided the issue in favour of the assessee after relying on the judgments as quoted by the Ld. CIT(A) in his order. In respect of disallowance U/s. 14A, the Ld. AR submitted that there was no exempt income received by the assessee during the previous year relevant to the assessment year under consideration and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promote Andhra Pradesh as attractive and competitive destination for industrial investments, the state Government have offered various incentives/benefits to all eligible new industrial units set up in the state. Projects involving substantial expansion/diversification of existing industries in the eligible lines of activities are also entitled for benefits offered under the policy notified vide GO MS No.178 Industries Commerce (JP) Department dated 21-06-2005 read with GO MS No.327~ Ind Com (JP) Dept dated 31-12-2005.# #4.4 :Expansion projects: Existing industrial units, in all eligible areas setting up expansion projects other than those listed in the ineligible list involving enhancement of fixed capital investment by at least 25% as well as enhancement of capacity by 25% for the same product lines will be eligible for incentives II 4. Since the assessee had set up a new unit at Korremula village, Ghatkesar Mandai, RR District, Andhra Pradesh, it became eligible for such incentive. During the Asst.Year 2013-14, the assessee received ₹ 1,69,32,910 and during Asst.Year 2014-15 it received ₹ 2,78,65,864_from Industries Department as incentive by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial investment promotion. (please see pages 2 and 3 of paper book) 9. Apart from the cases cited before the CIT(A), the assessee also relies on the decisions in the cases Garden Silk Mills Ltd., vs CIT 88 Taxmann.com 724 (Guj) (please see pages 11 to 13 of paper book containing copies of decisions) and ITO vs Santosh Laxmi Binny Modern Rice Mill (please see pages 14 to 17 of paper book containing copies of decisions) 10. In the case of Garden Silk Mills Ltd., (supra) Hon'ble High Court of Gujarat held that subsidy in the form of sales tax incentive given to assessee to encourage setting up of industries in backward area constitutes capital receipt. The court (in para 7 of its order) recorded that the sales tax incentive was only an alternative to cash disbursement and by its very nature, was to be available only after production had commenced. Thus In effect, the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out business operations but to encourage the setting up of industries in backward areas. The court held that the judgment of the Bombay High court in Reliance Industries((2010)339 ITR 632 BOM wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of the various judicial pronouncements, the orders of the learned CIT(A) may kindly be upheld and the impugned amounts may be held as capital receipts in the hands of the assessee. Disallowance u/s.14A. Asst.Vear 2013-14: 15. Assessee earned dividend income of ₹ 1,90,69,825/- during the previous year relevant to Asst.Year 2013-14. A.O made disallowance of ₹ 1,50,751/- under rule 8D(2)(ii) and ₹ 6,94,897/- under rule 8D(2)(iii). However, C.I.T(A), vide paragraph 4.2 of her order, stated that since there is no dividend income during the year, disallowance made by the Assessing Officer is deleted. 16. Department is in appeal against such deletion of disallowance. Ground Nos (vi), (vii) and (viii) of the grounds of appeal taken by the Department indicate that the Department is claiming that disallowance is in order even if there is no exempt income. This proposition is not tenable in view of the decision of this Hon'ble Delhi High Court in the case of Cheminvest Ltd., vs CIT 69 Taxamnn.com 118 DEL He. There is no ground taken by the Department seeking relief on the decision taken by the C.I.T(A). 16. Without prejudice to the subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and some facts must be there on record to show that expenditure was actually incurred in relation to earning exempt income. It has been held in the case of ACIT vs Iqbal M. Chagla [2014] 52 taxmann.com 94 (Mumbai - Trib) that where assessee had not claimed any expenditure in relation to exempt income, onus is on Assessing Officer to prove that out of expenditure incurred under various heads, some were related to earning of exempt income and not only this he has also to give basis of such calculation. In the case of the assessee, the A.O has proceeded to make disallowance relying on Circular No.5 of 2014 dated 11-02-2014 issued by CBDT and holding that the question 0 examining about satisfaction of Assessing Officer with regard to the claim of the assessee does not arise due to legal fiction embodied in sub- section (3). (please see paragraph 7.8 of assessment order.) 19. In the light of the submissions made hereinabove, the respondent submits that the decision of the C.I.T(A) need not be disturbed and the deletion of the disallowance made u/s.14A may kindly be upheld though for different reasons. Cross Objection No.23/Hyd/2018 :Disallowance u/s.14A. Asst.Year 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he has not considered / appreciated properly the facts of the case of the assessee and has simply relied on the judgements as quoted in his order and treated reimbursement of sales tax received from the State Government by the assessee as capital receipts. On perusal of the schemes, wherein, as per clause 3.1.8 cited supra, the sales tax ploughed by the assessee for setting up of new industries in Andhra Pradesh under the industrial investment promotion policy for 2005 to 2010, received by the assessee back was to be treated as revenue receipts. 14.1 While deciding the issue, we have gone through the entire schemes of Govt. of Andhra Pradesh produced before us and the relevant parts of the same are reproduced hereunder for sake of clarity as well as amendment issued to para 4 of the GO Ms. No. 178, Industries and Commerce (IP) Department, dated 21/06/2005, which has been tabulated, according to which, all the entrepreneurs are eligible for subsidy/incentives for setting up of new industrial units in the state of AP after commencement of production between 01/04/2005 to 31/03/2010. INCENTIVES FOR NEW INDUSTRIES 1. Industries and Commerce Department - Incentives f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd machinery (Productive only) up to limit as defined by the Government of India from time to time. 3.1.1. 100% reimbursement of Stamp Duty and transfer duty paid by the industry on purchase of land meant for industrial use. 3.1.2. 100% reimbursement of Stamp Duty for Lease of Land / Shed / Buildings. 3.1.3. 100% reimbursement of Stamp Duty and transfer duty paid by the industry on financial deeds and mortgages etc. 3.1.4. 25% rebate on land cost in IEs/IDA's limited to ₹ 5.00 lakhs. 3.1.6. 15% investment subsidy on fixed capital investment will be given subject to a maximum of ₹ 15.00 lakhs. 3.1.7. An additional investment subsidy of 5% on fixed capital investment limited to ₹ 5.00 lakhs for SC/ST enterprises. 3.1.8. 25% of the tax paid during one financial year will be ploughed back as a grant by the Government towards the payment of tax during next year. Benefit will be available for 5 years from the date of commencement of production i.e. upto 6th year. 3.1.9. 3% interest subsidy on Prime Lending Rate (PLR) will be given on the term loan taken by new Tiny / SS] industrial units subject to a maximum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year is to be treated as income for the year in which the amount is received. 14.4 Similar issue decided by the Hon ble Supreme Court in the case of Sahney Steel Press Works Ltd. Vs. CIT, [1997] 94 Taxman 368 (Sc). For the sake of clarity, we reproduce the entire order of the above judgment as under: Sen, J. - The question in this case is whether the subsidy received by the assessee-company from the Andhra Pradesh Government is taxable as the revenue receipt or not. It appears from the notification issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 1-1-1969 with investment capital (excluding working capital) not exceeding ₹ 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession is also available for subsequent expansion of 50 per cent and above of existing capacities provided in each case, the expansion was located in a city or town or panchayat area other than that in which the existing unit is located. The incentives were : (a )Refund of sales tax on raw mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote is that the manner in which the incentives were given is of no consequence for determination of the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machineries, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable. 5. Mr. Ganesh appearing on behalf of the assessee has contended that the incentive scheme was for setting up new industrial undertakings in the State and also for the purpose of stimulating substantial expansion of the industries. The primary object was rapid industrialisation of the State. This object was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidy in the nature of a capital receipt. The Tribunal also held that the said amount cannot be deemed to be the income of the assessee under section 41 (1) of the Income-tax Act, 1961 ('the Act') either. Thereupon the revenue asked for and obtained the reference of the following question : Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount of ₹ 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was not liable to be included in the total income assessable for the assessment year 1974-75 ? 9. The contention of Mr. Ganesh that the subsidies were of capital nature and were given for the purpose of stimulating setting up and expansion of industries in the State cannot be upheld because of the subsidy scheme itself. No financial assistance was granted to the assessee for setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rants Committee from funds appropriated by the Parliament. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. The payments were made several times a year for same years. The Dock company had undertaken an extension of its docks. The extended dock was also for relieving unemployment problem. Because the work undertaken was extension of the dock and the main purpose was relief of unemployment, the House of Lords held that the financial assistance given to the company for extension of the dock cannot be regarded as receipt of the trade. Lord Atkin explained the position by saying that: It is a receipt which is given for the express purpose which is named, and it has nothing to do with their trade in the sense in which you are considering the profits or gains of the trade. Lord Buckmaster observed as under : Was this a trade receipt ?, and my answer is most unhesitatingly: No. It appears to me that it was nothing whatever of the kind. It was a grant which was made by a Government department with the idea that by its use men might be kept in employment, and it was paid to and, received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipts bestowed upon the company by the Government and proper to be taken into computation in arriving at the balance of the company's profits and gains for the year in which they were received. 15. In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock Co. 5 case (supra). 16. There is a Canadian case St. John Dry Dock Ship Building Co. Ltd. v. Minister of National Revenue 4 DLR 1, which has close similarity to the case of Seaham Harbour Dock Co. 's case (supra) . In that case it was held that where subsidies were given under statutory authority, the statutory purpose for which they are authorised is relevant and may even be decisive in determining whether it is taxable income in the hands of the recipient. In that case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 19. For example, if the scheme was that the assessee will be given refund of: ales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in a backward area, 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 the 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 its business or complete a project as in Seaham Harbour Dock Co.'s case (supra) , the monies must be treated as to have been received for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic trees. The subsidy was not for the purpose of unkeep or maintenance of mature or immature rubber trees. On these facts, the Full Bench came to the conclusion that the object of the Scheme was replanting and the subsidy was being paid for planting high yielding variety of rubber plants which the Rubber Board and the Government thought was necessary for the development of the rubber industry. What was sought to be achieved was public purpose of vital public interest. 24. The Full Bench pointed out that the economic assistance offered by the Board was under stringent conditions for implementing a scheme designed to achieve development of rubber plantation industry on efficient and economic lines. After an exhaustive review of the case law and the subsidy scheme, the Full Bench observed : We are tempted to say that the subsidy received by the assessee is used to acquire an asset by replanting high-yield variety of rubber trees. The difference is, as said by Bowen, L.J., the expenditure in the acquisition of the concern will be capital expenditure and the expenditure in carrying on the concern is revenue expenditure. This makes the vital difference between the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the amount to the applicant. One of the pre-conditions of the grant was that the applicant must prepare adequate plants for production of new film and also fulfil financial and technical requirements for production of the film. Financial assistance was to be given in four equal instalments in the following manner. The first instalment was to be released after completion of one-third of the proposed footage of the film, the second instalment had to be released on completion of two-third of the proposed footage in a final shape and the third instalment on the completion of the entire film ready for censors and the final instalment had to be released immediately after the new film had crossed the hurdle of censorship and actual release. It was noted in the judgment: The said subsidy was released to the assessee so as to assist the assessee to acquire a new capital asset so as to meet part of the cost of the new film in public interest. 29. On the basis of that vital distinction, the Court held that the ratio of the judgment of this Court in V.S.S. V. Meenakshi Achi's case (supra) was not applicable in the facts of the case before it. 30. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit incidental to its business. The subsidy was not intended to be contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt. 34. The Madhya Pradesh High Court in the case of CIT v . Dusad Industries 162 ITR 734, dealt with a case where Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent of the sales tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee as was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the Govt. of AP refunds to the assessee in the following year to the extent of 25% paid by it. In the impugned case, the subsidy amount depend upon the sales of the assessee, which is a performance based subsidy, namely, if the sales are increased, the amount of subsidy increases and if the sales are low, the subsidy amount will be low. Therefore, the impugned subsidy does not have direct relation to the investments made in the plant and machinery by the assessee. If the assessee is invested huge amount in the plant and machinery, which does not yield 100% production capacity due to various reasons, the sales will automatically go down and the subsidy of the assessee will also come down as per sales or vice-versa. 14.6 Further, we refer to the land mark judgment of the Hon ble Supreme Court in the case of CIT Vs. Meghalaya Steels Ltd., [2016] 67 taxmann.com 158 (SC) wherein the Hon ble Court has decided the issue in favour of the assessee by holding that the subsidy received by the assessee, namely, a) transport subsidy, b) interest subsidy, c) power subsidy and d) insurance subsidy are related to the operation of the business of the assessee and has been allowed for the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of this Court in Sahney Steel Press Works Ltd.'s case (supra), the Commissioner of Income-tax has taken the view that the subsidy in question was a revenue receipt. Therefore, in our view, the present case is a classic illustration of change of opinion. 9 ... Sahney Steel Press Works Ltd.' case (supra) was a case which dealt with production subsidy, Ponni Sugars Chemicals Ltd.'s case (supra) dealt with subsidy linked to loan re-payment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel Press Works Ltd.'s case (supra) was on its own facts; so also, the judgment of this Court in Ponni Sugars Chemicals Ltd.'s case (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straight-jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel Press Works Ltd.'s case (supra), this Court has observed that the production incentive scheme is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon ble Supreme Court in the case of Godrej Boyce and the same is not applicable to the case of the assessee in which there was exempt income received by the assessee, but, the case in hand there is no exempt income earned by the assessee in the impugned AY. Following the conclusions drawn in para 13 (supra), we direct the AO to delete the disallowance made u/s 14A r.w. rule 8D(2)(iii). In the result, the CO filed by the assessee is allowed. 16. In the result, revenue s appeal in ITA No. 654/Hyd/2018 is partly allowed, appeal in ITA No. 655/Hyd/2018 is allowed and the CO No. 23/Hyd/2019 is allowed. A copy of this common order be placed in the respective case files. 12. We lastly acknowledge that although the instant appeals are being decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court's recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 'In Re Cognizance for extension of limitation' making it clear that in such cases where the limitation period (including that prescribed for insti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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