2016 (5) TMI 929 - AT - Income Tax

Tax Tribunal: Excise Duty Refund as Capital Receipt; Wages Deduction Allowed under Section 80IC

The D.C.I.T., Circle 5 (1), Chandigarh, M/s Green Field Enterprises Versus M/s Green Field Enterprises, The Addl. CIT, Chandigarh

The D.C.I.T., Circle 5 (1), Chandigarh, M/s Green Field Enterprises Versus M/s Green Field Enterprises, The Addl. CIT, Chandigarh - TMI Issues Involved:1. Allowability of excise duty refund as a capital receipt not liable to tax under the Income Tax Act, 1961.2. Addition on account of assumptions of less wages shown in the Profit & Loss account.3. Disallowance of deduction under section 80IC on account of notional wages.Issue-wise Detailed Analysis:1. Allowability of Excise Duty Refund as a Capital Receipt:The Department challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] that excise duty refund of Rs. 1,54,36,258 received by the assessee constituted a capital receipt not liable to tax under the Income Tax Act, 1961. The Assessing Officer (AO) had disallowed the deduction claimed by the assessee under section 80IB of the Act, referencing the decision in Liberty Shoes Ltd. vs. CIT. The CIT(A), however, allowed the appeal of the assessee, relying on the ITAT Chandigarh Bench decision in the case of M/s Shivalik Agro Chemicals.The Tribunal observed that the issue was whether the excise duty refund could be treated as income derived from industrial activity for the purposes of allowing deduction under section 80IB. The Tribunal referred to the Gauhati High Court judgment in CIT vs. Meghalaya Steels Ltd., which held that the central excise duty refund, being designed to give effect to exemption notifications, does not bear the character of income. Even if considered income, it is directly derived from industrial activity due to the inextricable link between manufacturing activity, payment of excise duty, and its refund. Consequently, the Tribunal dismissed the Department's appeal, affirming the CIT(A)'s decision.2. Addition on Account of Assumptions of Less Wages:The AO noted that the assessee showed either very little or no expenditure under various heads, estimating wages at Rs. 31,49,900 and reducing business profits accordingly, which impacted the deduction under section 80IC. The CIT(A) upheld the addition but reduced the estimated difference in wages to Rs. 25,00,000.The assessee contended that the AO's comparison with its sister concern, M/s Industrial Equipment Company, was flawed due to differences in business activities, mechanization levels, and machinery value. The Tribunal found the AO and CIT(A) erred by not considering the assessee's plausible explanation and failing to verify the compliance with ESI and PF provisions. The Tribunal directed the AO to delete the disallowance, allowing the assessee's grounds of appeal.3. Disallowance of Deduction Under Section 80IC on Account of Notional Wages:The disallowance of deduction under section 80IC was directly related to the addition on account of assumed less wages. Since the Tribunal directed the deletion of the disallowance related to wages, the deduction under section 80IC was also allowed accordingly.Conclusion:The appeal of the Department was dismissed, and the appeal of the assessee was partly allowed. The Tribunal upheld the CIT(A)'s decision on excise duty refund being a capital receipt and directed the deletion of the disallowance related to wages, thereby allowing the deduction under section 80IC. The order was pronounced in the open court on April 6, 2016.