TaxTMI 
TaxTMI 
2016 (8) TMI 695
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....st Rs. 227,188,853 has to be considered in respect 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, Mumb....
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.... taken by the Assessing Officer while computing disallowance under sec. 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. Rul....
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....lable with assessee then no disallowance under section 14A is permissible. a. CIT Vs HDFC Bank (Bom)- 366 ITR 0505(Bom) b. Hind Industries ITA No.4325/Del/2012(Del) c. Mukul 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 intr....
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....arned exempt income from mutual funds. The Learned AR, however, submitted that investment made by the assessee in mutual funds was only Rs. 70,09,574 which was very meager when compare to the presence of own funds with the assessee. With the assistance 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(Appea....
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....nfine the same only to Kutch District" 4. It is submitted that perusal and interpretation of the above clause would show that scheme was not aimed to enhance the profits of any industry( including that of assessee) rather it was launched for the development of Kutch 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....
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....essee are 23,87,45,00/- ( equivalent to capital deployed) See Page No-31 of the PB. It is submitted that in impugned year, assessee has earned an amount of Rs. 1, 26, 61,483/- attributable to Sales Tax made an amount of Rs. 23, 08,533/- towards purchase of goods and Rs. 1,26,61,483/- towards the sales made. 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 8....
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....ject of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital 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 sc....
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....ic environment of Kutch District live as the economic activity in the District of Kutch came to a stand still on account of the devastating earth quack in the state on 26th January 2001 and the aim was to create new employment opportunities if new investment takes place. The scheme was confined only to Kutch District. Again, the Hon'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 ....