2022 (1) TMI 731 - AT - Income Tax

Tribunal rules in favor of assessee, disallows admin expenses, exempts Excise duty refund & Sales Tax subsidy

The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The disallowance of administrative expenses under Section 14A was deemed ... Disallowance u/s 14A r.w.r. 8D - Mandation of recording of satisfaction - HELD THAT:- We find that the Assessing Officer has nowhere recorded his satisfaction as to why the assessee’s claim that no expenditure has been incurred for earning of exempt income especially when majority of dividend income has come from holding company and has mechanically proceeded to make the disallowance under Rule 8D(2)(iii). Now it is well settled proposition that recording of satisfaction as contemplated in Section 14A(2) of the Act is a condition precedent for determination of the amount of expenditure for earning the exempt income as formulated - See H.T. MEDIA LIMITED [2017 (8) TMI 962 - DELHI HIGH COURT] and MAXOPP INVESTMENT LTD. [2018 (3) TMI 805 - SUPREME COURT]. Since no satisfaction has been recorded by the Assessing Officer as per the mandate of section 14A (2), then no disallowance under Section 14A can be made and accordingly, disallowance worked out by the Assessing Officer under Rule 8D is deleted - Decided in favour of assessee Eligibility for deduction u/s 80-IB - nature of subsidy has treated the incentive by way of central excise refund (generally called CENVAT credits) in relation to the Jammu unit - HELD THAT:- The refund of CENVAT credit on the facts of the present case is capital subsidy in view of the principle laid down by the Hon’ble apex court in case of Shree Balaji Alloys [2016 (4) TMI 1161 - SC ORDER] and also the judgement of the Tribunal in the group concern of the assessee as cited Montage Enterprises Pvt. Ltd [2018 (7) TMI 209 - ITAT DELHI] and Ultimate Flexipack Ltd. [2019 (3) TMI 1298 - ITAT DELHI] MAT computation u/s 115JB - Since we have already held that the CENVAT credit, as received by the appellant, in accordance with the incentive scheme for J & K as formulated by the Central Government is a capital receipt not liable to tax, accordingly the same cannot be part of book profit under Section 115JB also Characterization of receipts - taxability of receipts - VAT subsidy being capital in nature - HELD THAT:- For the year under consideration the assessee has placed on record relevant assessment passed by the authorities under the Uttar Pradesh VAT Act, 2008 where the refund has been worked out at ₹ 19,12,31,759/- The nature of the incentive provided under the Uttar Pradesh Industrial Scheme by way of giving exemption was refund of VAT has to be seen with reference to the object and purposes for which Uttar Pradesh Industrial Scheme was framed. A perusal of the salient features as reproduced hereinabove it is quite evident that incentive under the Scheme has been provided for taxing capital investment and the State for the purpose of industrialization and setting up of new industries to generate more employment opportunities. The refund now VAT as given to the industrial undertakings only for the purpose of fulfilling the best industrialization of the State by establishment of new industries. Thus, incentive provided under the Uttar Pradesh Industrial Scheme is nothing, but capital subsidy not liable to be taxed - The VAT subsidy is a capital receipt and hence not liable for tax and it cannot be treated as revenue receipt liable for tax. Accordingly, the additional ground raised by the assessee is allowed. Issues Involved:1. Disallowance of administrative expenses under Section 14A of the Income Tax Act, 1961.2. Treatment of refund of Excise duty (Self Cenvat Credit) as a capital receipt.3. Inclusion of Excise duty refund in the determination of total income under Section 115JB.4. Treatment of Sales Tax subsidy as a capital receipt and its exclusion from the computation of book profit under Section 115JB.Issue-wise Detailed Analysis:1. Disallowance of Administrative Expenses under Section 14A:The assessee contested the disallowance of administrative expenses amounting to Rs. 29,26,185/- under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The assessee argued that the lower authorities erred in disallowing these expenses without recording satisfaction as required under Section 14A and Rule 8D(1)(a) & (b). The assessee also contended that no expenditure was incurred in relation to the exempt dividend income and that investments from which no exempt dividend was received should not be included under Rule 8D(2)(iii). The Revenue's appeal contested the relief given by the CIT(A) amounting to Rs. 1,56,07,634/-. The Tribunal found that the Assessing Officer (AO) did not record satisfaction as required under Section 14A(2). Citing the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, it was held that without such satisfaction, no disallowance under Section 14A can be made. Consequently, the disallowance was deleted, allowing the assessee's grounds and dismissing the Revenue's appeal.2. Treatment of Refund of Excise Duty (Self Cenvat Credit) as a Capital Receipt:The assessee claimed that the refund of Excise duty amounting to Rs. 3,29,12,376/- should be treated as a capital receipt, not liable to tax. The AO treated it as a revenue receipt, which was endorsed by the CIT(A). The Tribunal referred to the Jammu & Kashmir High Court's decision in Shree Balaji Alloys vs. CIT and the Supreme Court's decision in CIT vs. Chaphalkar Brothers, which held that subsidies aimed at industrial development and employment generation are capital receipts. Given that the scheme's purpose was to boost industrialization and employment in Jammu & Kashmir, the Tribunal concluded that the Excise duty refund is a capital receipt and not taxable. Thus, the Revenue's ground was dismissed.3. Inclusion of Excise Duty Refund in the Determination of Total Income under Section 115JB:The assessee argued that since the Excise duty refund is a capital receipt, it should not be included in the computation of book profit under Section 115JB. The Tribunal agreed, stating that capital receipts are not income within the definition of Section 2(24) of the Income Tax Act and hence are not chargeable to tax. Consequently, the refund of CENVAT credit was excluded from the book profit, allowing the assessee's ground.4. Treatment of Sales Tax Subsidy as a Capital Receipt and its Exclusion from the Computation of Book Profit under Section 115JB:The assessee raised additional grounds regarding the Sales Tax subsidy amounting to Rs. 19,22,32,000/- received under the Uttar Pradesh VAT Act, 2008. The Tribunal admitted the additional grounds, noting that the issue was purely legal and facts were already on record. The Tribunal examined the UP Industrial Policy and VAT Act, noting that the scheme aimed to boost industrialization and employment in the state. Referring to the Supreme Court's decisions in Sahney Steel & Press Works Ltd. vs. CIT and CIT vs. Ponni Sugars & Chemicals Ltd., it was held that subsidies linked to capital investment and industrial development are capital receipts. Therefore, the VAT refund was treated as a capital receipt, not liable to tax, and excluded from book profit computation under Section 115JB. The additional grounds raised by the assessee were allowed.Conclusion:The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, concluding that the disallowance under Section 14A was not justified without recording satisfaction, the Excise duty refund was a capital receipt not liable to tax, and the Sales Tax subsidy was also a capital receipt, thus not includible in the book profit under Section 115JB.