TaxTMI 
TaxTMI 
TaxTMI 
2016 (8) TMI 695
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of 'Net interest' Rs. 83,160,554 charged to the profit & loss account. 2.1 That the Learned CIT(Appeals) was wrong in confirming disallowance of sales-tax incentive Rs. 14,970,116 for setting up of an undertaking in Kutch District by the Government of Gujarat by way of adjustment of pre-determined amount of incentive against liability towards sales-tax. 2.2 That the Learned CIT(Appeals) was wrong in not appreciating the fact that the incentive Rs. 14,970,016 for the development of Kutch district was quantified much before the adjustment of such incentive against liability towards sales tax and accordingly the character of the incentive Rs. 14,970,016 is in nature of capital receipt. 2.3 That the Learned CIT(Appeals) was wrong in holding that incentive Rs. 14,970,016 as allowed to appellate company in terms of "Incentive Scheme 2001 for economic development of Kutch District" is in the nature of Revenue but not capital. He is also wrong in not taking note of decision of the ITAT, Special Bench as reported in 273 ITR (AT) 16 and the decision of Hon'ble Bombay High Court not admitting the appeal filed by the CIT-III, Mumbai in relation to above matter. 4. That the Learned CI....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 14A read with Rule 8D. 8. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 9. In the above appeal preferred by the assessee, following additions were made by the Assessing Officer: i) Disallowance under sec. 14A of the Income-tax Act, 1961 of Rs. 4,25,50,145; ii) Rs. 1,49,70,016 on account of sales tax incentives; iii) Foreign travel expenses of Rs. 85,259. 10. The Learned CIT(Appeals) has given part relief on the issue of disallowance under sec. 14A read with Rule 8D which has been questioned by the Revenue. 11. Ground Nos. 1.1, 1.2 and 1.3: The Assessing Officer observed that the assessee had claimed exempt income of Rs. 42,69,842, however, it had not allocated any expense for earning this income. The Assessing Officer did not accept contention of the assessee that investment in the shares had been made from the surplus funds with this observation that the borrowed funds constituted about 60% of the total funds. Thereafter, the Assessing Officer applied Rule 8D of the I.T. Rules and worked out the disallowance under sec. 14A at Rs. 4,25.50,145. The Learned CIT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Rohtagi Vs. JCIT - ITA No. 998/Del/2012 (A.Y. 2008-09) - order dated 14.10.2015. D. It is next submitted that it is now settled position of law that before resorting to the provisions of sec. 14A (2) & 14A (3), it is incumbent upon the AO to record his satisfaction vis-à-vis correctness of account of the assessee and if there is no satisfaction then no disallowance is permissible u/s 14A of the Act. E. Further assessee seeks to rely on following judgments. Wherein it has been held that satisfaction of the AO is a pre-condition before making any disallowance u/s 14A of the Act. a) Joint Stock Investment Delhi High Court- 92 CCH 088 (Del) b) Taikisha Engineering India Ltd (ITA 115/2014, decided on 25.11.2014). c) Minda Capital Ltd. vs. JCIT, ITA No. 1568/Del/2013 (A.Y. 20090-10) - order dated 25.3.2015. F. It is next submission that the AO has also invoked the provision of Rule 8D for the impugned assessment year. However, Rule 8D has been introduced in the statute w.e.f. 1.04.2008 and hence the same is not applicable to the present case. G. It is submitted that this view has now been affirmed by various High Courts including the Jurisdictional High court in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stance of the audited balance sheet which was filed before the Assessing Officer along with the return of income, the Learned AR has been able to support his submission that the assessee company was having interest free funds to the tune of Rs. 1,90,93,09,739. The Learned CIT(Appeals) at page No. 5 in para No. 4.4 of the first appellate order has also accepted the contention of the assessee that the average cost assets has been wrongly worked out by the Assessing Officer and the average cost of the assets as worked out by the assessee at Rs. 4,40,08,12,471 is correct figure. We also find substance in the contention of the Learned AR that when the assessee had earned exempt income of only Rs. 42,69,842 on the investment of Rs. 70,09,574 on mutual funds, how the action of the Assessing Officer in making disallowance of Rs. 4,25,50,145 can be justified especially when Rule 8D admittedly was not applicable during the year. The Learned CIT(Appeals) was however justified in directing the Assessing Officer to exclude the amount invested in the National Saving Certificates being taxable income from average value of investment related to tax free income. The disallowance made by the Assessi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tch 5. It is submitted that clause 4 at Page No 16 of the scheme describes as to which units are eligible units. As per this clause Eligible units will be able to avail benefits on their eligible fixed capital investment. Now what is eligible fixed capital investment is mentioned in clause 3.6 at Page No-14 of Paper Book. 6. It is next submitted that clause 3.6 of scheme is very crucial in the sense that it describe as to what is eligible fixed capital investment. 7. It is next submitted that by virtue of this scheme the State Government of Gujrat has basically allowed the setoff of sales tax liability for the period of five years to those industries who have made capital investment in the area of Kutch for the development of Kutch. The features of the scheme are mentioned in clause 4.1 of the scheme at page no. 16 of the paper book. "4.1 Eligible units will be able to avail of the benefits of sales tax exemption or sales tax deferment on their eligible fixed capital investment. Under the sales tax incentives, the tax to be recovered against the sales proceeds under the Gujrat Sales Tax Act or Central Sales Tax Act shall be considered. The units shall have to opt for one of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Both these amounts were emanating from sales tax return filed by the assessee with Gujrat state Government. (See the page no. 34of the paper book) 14. It is next submitted that there is difference between expression subsidy and incentive. It is submitted that Incentives are defined in the online Merriam- Webster dictionary as "something that has a tendency to incite to determination or action; something that encourages a person to do something or work harder." Synonyms include "boost," "spur" and "stimulant" among others. "Subsidies" are described by this same source as: "a grant or gift of money" and-here is what is interesting-"a sum of money formerly granted by the British Parliament to the Crown and raised by special taxation." 15. It is next submitted that assessee seeks to rely on the judgment of Special Bench in the case of Reliance Industries reported in 88 ITD 273(SB), wherein it has been held that subsidy given for setting up or expansion of industries will be capital in nature irrespective of source of fund or the manner of disbursement. This decision has now been affirmed by the Hon'ble High Court of Bombay in CIT Vs Reliance Industries reported in 339 ITR 0632(Bo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant." 17.Further assessee seeks to rely on the circular of board no 142 dated 1-08- 1974, in this circular it is conceded that such amounts were capital receipts. This circular has been considered by the Special Bench in Reliance Industries (supra) 18. Same Kutch Scheme case:- It is submitted that in the present case the assessee has been provoked by the state Govt. for deploying capital investment and it is not the case that State Govt. has granted any subsidy on the assets deployed by the assessee. Further assessee seeks to rely on the decision of ITAT Ahmadabad in the case of Ajanta Mfg Ltd -ITA No-793/RJT/2010) wherein the considering the same scheme the ITAT has held that the sales tax incentives are capital receipts. Copy of the decision at page No- 62 of PB 19.115JB ground :-It is next submitted that in additional ground the assessee has contended that once it is held that the sales tax incentives are capital receipts then the same should be excluded from the ambit o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;ble Gujarat High Court in the case of CIT vs. Birla VXL Ltd. (supra) where the issue was to determine the character of subsidy in hands of recipient, whether Revenue or capital. It was held by the Hon'ble High Court that the purpose of subsidy is to be considered and source of fund and mechanism of giving subsidy are immaterial. The Hon'ble High Court pleased to hold that incentive being in the form of sales tax waiver/deferment was not meant to give any benefit or day to day functioning of business or to make it more profitable but was principally aimed to cover capital outlay of assessee for undertaking modernization of existing industries, hence, it was capital in nature and thus not taxable. In that case before the Hon'ble Gujarat High Court, the learned counsel for the Revenue had pointed out the decision of the ITAT in the case of Ajanta Manufacturing Ltd. vs. CIT (IT Appeal No. 793(RJT) of 2010 wherein same scheme as in reference in the present case was considered by the ITAT and it was decided that the incentive given was in the nature of capital. The said decision of the ITAT was questioned by the Revenue before the Hon'ble High Court and Hon'ble High....