2014 (1) TMI 234 - AT - Income Tax

Appeals allowed on Section 80IA deduction, sales tax treatment, Revenue's appeal dismissed on disallowance, notice validity issue dismissed.

M/s. Jivraj Tea & Industries Ltd. Versus The ACIT, Central Circle-2, Surat.

The Tribunal allowed the assessee's appeals regarding the Section 80IA deduction and treatment of sales tax entitlement, remitting the latter for ... Deduction u/s 80IA - Held that:- As per Section 80IA(5) - The quantum of deduction under section 80IA, for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year to be computed as if the eligible business is the only source of income - The eligible business is the only source of income and the deduction would be allowed from the initial assessment year or any subsequent assessment year - In view of the amendemnt to section 80IA w.e.f. 01.04.2004 - The assessee exercises the option of choosing the initial assessment year from which it chooses its 10 years of deduction out of 15 years, then only the losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in section 80IA(5) - It is only when the loss have been incurred from the initial assessment year, then the assessee has to adjust loss in the subsequent assessment years and it has to be computed as if eligible business is the only source of income and then only deduction under section 80IA can be determined. Following CIT v/s Emerald Jewel Industry (P) Ltd. [2010 (8) TMI 648 - Madras High Court] - Sub-section (5) of section 8oIA will come into operation only from the initial assessment year or any subsequent assessment year. The option of choosing the initial assessment year is wholly upon the assessee in the post amendment period i.e., after 1st April 2000 by virtue of section 80IA(2) - The initial Assessment Year in the case of Jivraj Tea & Industries Ltd. is the Assessment Year 2004-05 and in the case of Jivraj Tea Ltd. is Assessment Year 2007-08 - The assessee has not suffered any loss in the said year, no brought forward loss or depreciation could be reduced for determining the amount in which the deduction is to be allowed u/s. 80IA of the Act - Decided in favour of assessee. Whether deduction u/s. 80IA will be allowable on the sale proceeds of sales tax entitlement received - Held that:- Following CIT Vs. Birla VXL Ltd [2013 (7) TMI 655 - GUJARAT HIGH COURT] - The scheme was framed as a part of Government's initiative to encourage modernization of existing industries in underdeveloped areas - The main purpose of the scheme was to accelerate the industrial development and to disperse industries to under-developed areas as well as to provide additional employment - The scheme was primarily concerned with the modernization of the existing industries - It was not a scheme either for development of new industries in specified areas, or for mere expansion of the existing production capacities of the industries - The main purpose of the resolution was to modernize industries, which ordinarily would come at a considerable cost, particularly when such industries were located in under-developed areas - The industries will find it difficult without Government's incentive to undertake large-scale modernization with the use of modern technology.the benefit, though computed in terms of the Sales Tax liability in the hands of the recipient, the same was not mean to give any benefit on day-to-day functioning of the business, or for making the industry more profitable - The principle aim of the scheme was to cover the capital outlay already made by the assessee in undertaking special modernization of its existing industry - The issue was restored for fresh adjudication. Disallowance u/s 40A(2)(b) - Held that:- Following assessee's own case for A.Y. 2006-07 - The yard stick adopted by the Assessing Officer was average purchase price of Tea without ascertaining the price prevailing in the market on the date when purchase was made from sister concerns with that from outside party and without comparing the exact quality and the transactions of purchases from the sister concerns were not the sham transactions - Decided in favour of assessee. Disproportionate increase in sales promotion expenses - Held that:- Following assessee's own case for A.Y. 2006-07 - the payments were made through account payee cheques and bank draft and none of the parties were related to the assessee company or its director and details and vouchers were maintained verifiably and genuineness of the expenditure was not in doubt - Decided in favour of assessee. Issues Involved:1. Disallowance of deduction under Section 80IA for profits from electricity generation through windmill.2. Treatment of sales tax entitlement as capital receipt instead of revenue receipt.3. Validity of notice under Section 148 for reopening assessment.4. Disallowance under Section 40A(2)(b) for purchases from sister concerns.5. Disallowance of advertisement expenses due to disproportionate increase.Detailed Analysis:1. Disallowance of Deduction under Section 80IA:The primary issue was the disallowance of deduction under Section 80IA for profits derived from electricity generation through windmills. The Assessing Officer (AO) disallowed the deduction, citing that unabsorbed business losses and depreciation from earlier years should be set off against the current year's profits, leaving no profit for deduction. The AO relied on the Special Bench decision in ACIT vs. Goldmine Shares & Finance Pvt Ltd. The assessee argued that the initial assessment year should be the year when the deduction was first claimed, not the year of installation, citing the Madras High Court decision in Velayudhaswamy Spinning Mills (P) Ltd. The Tribunal agreed with the assessee, stating that losses prior to the initial assessment year, which were already set off, should not be brought forward. The Tribunal followed the Madras High Court's interpretation, allowing the deduction under Section 80IA without adjusting prior losses.2. Treatment of Sales Tax Entitlement:The assessee argued that the amount received from the sale of sales tax entitlement should be treated as a capital receipt, not liable to tax, based on the Gujarat High Court decision in CIT vs. Birla VXL Ltd. The AO and CIT(A) treated it as a revenue receipt, citing the Supreme Court decision in Liberty India Ltd. The Tribunal remitted the matter back to the AO to reconsider the nature of the sales tax entitlement scheme of the Maharashtra Government and to determine if it qualifies as a capital receipt based on the Gujarat High Court's decision.3. Validity of Notice under Section 148:The assessee did not press this ground of appeal, and it was dismissed for want of prosecution.4. Disallowance under Section 40A(2)(b):The AO made an addition under Section 40A(2)(a) for purchases made from sister concerns at higher rates than from outside parties. The CIT(A) deleted the addition, following the Tribunal's decision in the assessee's case for the previous year. The Tribunal confirmed the CIT(A)'s deletion, noting that the AO did not compare the exact quality and market prices on the purchase dates and that the transactions were genuine.5. Disallowance of Advertisement Expenses:The AO disallowed a portion of advertisement expenses due to a disproportionate increase compared to the sales increase. The CIT(A) deleted the disallowance, following the Tribunal's decision in the previous year, which found that the expenses were genuine, paid through account payee cheques, and verifiable. The Tribunal upheld the CIT(A)'s deletion, noting no specific error pointed out by the Departmental Representative.Conclusion:The Tribunal allowed the assessee's appeals on the issues of Section 80IA deduction and treatment of sales tax entitlement, remitting the latter for reconsideration. The Tribunal dismissed the Revenue's appeal on the issues of disallowance under Section 40A(2)(b) and advertisement expenses, confirming the CIT(A)'s deletions. The issue of the validity of notice under Section 148 was dismissed for want of prosecution.