2011 (1) TMI 1441 - AT - Income Tax

Income Tax Tribunal classifies West Bengal Industrial Promotion Assistance as capital receipt over revenue, rejects Rule 8D(2)(iii) application.

Deputy Commissioner of Income-tax Circle-10, Kolkata. Versus M/s. Strassenburg Pharmaceuticals Ltd

The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to classify West Bengal Industrial Promotion Assistance (WBIPA) as a capital ... Appeal for revenue for Assessment - Nature of receipts Capital or Revenue - the AO treated the amount received by the assessee as west Bengal Industrial Promotion Assistance(WBIPA) as 'revenue receipt' and on appeal, the Ld. CIT(A) treated the WBIPA as a capital receipt and directed the AO to delete the additions for all the years under appeal. Aggrieved by the said order, now the revenue is in appeals before us. HELD THAT:- the sole purpose behind the grant of assistance is to tide over the financial crisis and promotion of industries and that both these activities are related to capital field and cannot be linked up with day to day operations of the appellant in any manner. Respectfully following the jurisdictional Kolkata ITAT and High Court decisions, I treat WBIPA as a capital receipt and direct the A.O to delete the addition. This ground of appeal of the revenue for all the three assessment years are dismissed. Rule 8D(2)(iii) for disallowance - HELD THAT:- Since Rule 8D was inserted by the IT 5th Amendment Rules 2008 w.e.f. 24.3.2008 and Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] has held that it is not retrospective in nature this rule is not applicable for the year under appeal. Therefore, the Ld. CIT(A) was not justified in directing the AO to apply Rule 8D(2)(iii) for disallowance. In the result, the appeals of the revenue for Assessment Years 2000-01 and 2006- 07 are dismissed and the appeal for Assessment Year 2005-06 of the revenue is partly allowed. Issues Involved:1. Classification of West Bengal Industrial Promotion Assistance (WBIPA) as capital or revenue receipt.2. Applicability of Rule 8D(2)(iii) for determining disallowance related to exempt dividend and tax-free interest income.Detailed Analysis:1. Classification of WBIPA as Capital or Revenue Receipt:The primary issue in the appeals was whether the West Bengal Industrial Promotion Assistance (WBIPA) received by the assessee should be classified as a capital receipt or a revenue receipt. The Assessing Officer (A.O.) treated the WBIPA as a revenue receipt based on the Supreme Court's decision in the case of Sahney Steel & Press Works Ltd. vs. CIT (228 ITR 253). However, the Commissioner of Income Tax (Appeals) [CIT(A)] treated the WBIPA as a capital receipt, relying on jurisdictional Kolkata ITAT's order in Rasoi Ltd. vs. DCIT and the Calcutta High Court's decision in Klar Sehen P. Ltd. vs. ITO.The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by the decisions of the jurisdictional ITAT and High Court. The Tribunal observed that the assistance provided under WBIPA was intended to help industries tide over financial crises and promote industrial growth, which are activities related to the capital field. The Tribunal distinguished the facts of the present case from those in the Sahney Steel case, emphasizing that the WBIPA did not relate to day-to-day operations or specific revenue expenses but was more akin to fresh capital infusion.The Tribunal cited the detailed analysis by CIT(A), which compared the facts of the Sahney Steel case with the present case and found significant differences. The CIT(A) highlighted that the WBIPA was not conditional upon the commencement of production nor limited to specific revenue expenses like sales tax refunds or electricity charges, unlike the subsidies in the Sahney Steel case. The Tribunal agreed with CIT(A) that the WBIPA was a capital receipt and directed the A.O. to delete the additions for the assessment years under appeal.2. Applicability of Rule 8D(2)(iii) for Disallowance Related to Exempt Income:For the assessment year 2005-06, the second issue was the method for determining the disallowance related to exempt dividend income and tax-free interest income. The A.O. had made a proportionate disallowance of Rs. 8,79,844/- as expenses incurred for earning these incomes. The CIT(A) directed the A.O. to follow the method provided in Rule 8D(2)(iii) of the Income Tax Rules.The Tribunal found that Rule 8D was inserted by the IT 5th Amendment Rules 2008, effective from 24.03.2008, and the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (328 ITR 81) held that Rule 8D was not retrospective. Therefore, Rule 8D was not applicable for the year under appeal. The Tribunal noted that in similar cases, it had consistently restricted the disallowance to 1% of the exempted income and ordered accordingly.Conclusion:The appeals for assessment years 2000-01 and 2006-07 were dismissed, upholding the CIT(A)'s classification of WBIPA as a capital receipt. For the assessment year 2005-06, the appeal was partly allowed, modifying the disallowance related to exempt income to 1% of the exempted income instead of applying Rule 8D(2)(iii).