TaxTMI 
TaxTMI 
2020 (12) TMI 55
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.... of plywood, ply boards and allied products. The return of income for the year under consideration was filed by it on 28-11-2014 declaring total income of Rs. 7,06,37,830/- under the normal provisions of the Act and Book Profit of Rs. 64,65,80,087/- under section 115JB of the Act. In the said return, dividend income of Rs. 4,89,391/- was claimed to be exempt u/s 10(34) of the Act by the assessee. In relation thereto, the assessee disallowed, demat charges of Rs. 9,844/- and administrative expenses of Rs. 4,89,391/- being amount equivalent to the sum of dividend income earned during the year; u/s 14A of the Act. This disallowance of Rs. 4,99,235/- offered by the assessee was not acceptable to the AO. The AO instead applied Rule 8D and worked out the disallowance in terms of Rule 8D(2)(ii) & (iii) at Rs. 29.31 lacs and Rs. 4.98 lacs respectively. Accordingly the AO disallowed further sum of Rs. 34.29 lacs u/s 14A of the Act read with Rule 8D. Aggrieved by this disallowance, the assessee preferred an appeal before the ld. CIT(A). On appeal the ld. CIT(A) deleted the disallowance. Aggrieved by the impugned order of ld. CIT(A), the Revenue is now in appeal before us. The grounds of appe....
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....he disallowance under section 14A cannot exceed the actual amount of exempt income earned by the assessee. He further relied on the decision of the coordinate Bench of this Tribunal in the case of Patrex Vyapar Limited Vs ITO in ITA No. 1921/Kol./2017 dated 02.01.2019. 5. We have considered the rival submissions and also perused the relevant material available on record. First we will deal with the merit of the disallowance made by AO applying Rule 8D(2)(ii) on account of interest expenses. The Ld. AR of the assessee contended that own funds available with the assessee during the financial year 2013-14 were sufficient to make the corresponding investments, and hence no interest bearing borrowed funds were utilized for making such investment, so no disallowance was warranted on this issue. For appreciating this fact let us have a look at the balance sheet of the assessee as on 31.03.2014, which is placed at Page 19 & 20 of paper-book, it is noted that the assessee's own funds of the assessee in the form of share capital and free reserves stood at Rs. 29,140.79 lacs and the investments as on 31.03.2014 was Rs. 991.45 lacs. Taking note of the aforesaid fact, the interest disallowan....
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....ar interest disallowance made in assessee's own case for A.Ys. 2011-12 & 2012-13 in the order dated 25.01.2018 passed in ITA Nos. 1634 & 1635/Kol/2016. Therefore, we uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the Assessing Officer on account of interest under section 14A read with Rule 8D(2)(ii). 7. As regards the disallowance of Rs. 4.98 lacs made by the AO on account of common administrative expenses under section 14A read with Rule 8D(2)(iii), it is observed that the same was restricted by the ld. CIT(A) to the extent of exempt dividend income actually earned by the assessee during the year under consideration by following, the decision of the Hon'ble Delhi High Court in the case of Joint Investment Limited -vs.- CIT (372 ITR 694). It is noted that the aforementioned judgment of the Hon'ble Delhi High Court has been followed by this Tribunal in the case of Patrex Vyapar Limited Vs ITO (supra) wherein this Tribunal restricted the disallowance of Rs. 8,81,839/- made by AO u/s 14 read with Rule 8D to Rs. 72,000/- i.e., the dividend actually earned during the year. Hence, we do not see any reason to interfere with the impugned order of the ld....
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....e AO u/s 80-IE of the Act. Brief facts of the case as discerned from the orders of the authorities below are that, in the return of income filed u/s 139 of the Act, the assessee had claimed deduction u/s 80IE of Rs. 52,53,13,324/- in respect of the profits derived by its eligible 'Centply' Unit in the State of Assam. The case of the assessee was selected for regular scrutiny under CASS. In the notice issued u/s 142(1) dated 07-06-2016 the AO had called for the details of the deduction's claimed under Chapter VI-A inter alia including the details of the eligible undertaking/s along with relevant stand-alone accounts and audit report. In response thereto, the assessee had furnished its reply vide letter dated 02-12-2016 wherein it had inter alia set out a note on deduction claimed under Section 80IE of the Act in respect of the profits derived by the Centply Unit located in the State of Assam, which was in its 6th year of claim. Along with the said note, the appellant also enclosed the relevant audit report in Form 10CCB issued by the Chartered Accountant and the stand-alone audited accounts of the eligible Assam Unit. On the last date of hearing i.e. 30-12-2016, vide an order she....
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....t (4.84%)." 11. Assailing the action of the ld. CIT(A), Shri R.B. Meena, the ld. CIT, DR vehemently supported the order of the AO. He submitted that the assessee had failed to explain the reasons of high profitability of the Centply Unit before the AO and therefore the AO was well within his powers to work out the adjustment u/s 80IE so as to arrive at the arm's length profits of the eligible unit. According to him the arguments put forth by the assessee before the ld. CIT(A), were not available before the AO and therefore he urged that this issue be set aside to the file of the AO. 12. Per contra Shri Akkal Dudhwewala, Ld. AR of the assessee supported the order of the ld. CIT(A) and vehemently opposes the plea of the Ld. CIT, DR to remand the issue back to AO. First of all, he drew our attention to the entire chronology of events which led to the disallowance made by the AO u/s. 80IE of the Act. He submitted that the eligible Assam Unit was set up in the AY 2009-10and its first year of claim of deduction u/s 80IE was AY 2010-11. The relevant AY 2014-15 was therefore the 6th year of claim. Inviting our attention to the assessment orders passed u/s 143(3) for AYs 2010-11 to 20....
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....t the AO had raised the same issue viz., the higher profitability of Centply Unit [38% in AY 2015-16] in comparison to other businesses/units and, upon being satisfied with the explanation offered, no disallowance was made in relation to the claim made u/s 80IE of the Act in AY 2015-16. On these facts therefore, the ld. AR contended that when the audited stand-alone accounts of the eligible unit as well as its profitability has been accepted by the Revenue in the preceding years and in the subsequent year as well, then in absence of change in the factual matrix, there was no reason for the AO to hold the claim made u/s 80IE in the relevant year to be excessive. 14. The Ld. AR further submitted that the impugned disallowance was not made by the AO in terms of Section 92A of the Act. He submitted that it was not a case where the AO had pointed out any defect in the arm's length value of the specified domestic transactions undertaken by the eligible unit which could have enabled him to estimate the arm's length value of the said transactions resulting in downward adjustment of the eligible profits. He submitted that the AO proceeded to estimate the profits of the eligible unit on t....
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....r record. The AO in his order observed that the assessee is engaged in manufacture and trading of plywood and related products, having units at Chennai, Haryana & Kandla, all of which are ineligible units. He noted that the assessee also operates an eligible manufacturing undertaking by the name, 'Cent Ply', located in industrially backward State of Assam. The AO observed that the profitability of the eligible business was 33.50% in comparison to the profitability of other units at 4.84%, which according to him was excessive. According to AO, the units located in backward areas could not be more profitable than units located in developed areas and therefore in his view it was nothing but diversion of profits. He further noted that the profit of the eligible had increased from 28.34% to 33.50% in comparison to earlier year. Citing preponderance of probabilities, the AO held that the assessee had shifted profits from non-eligible business to eligible business and that, merely because the deduction claimed u/s 80IE was allowed in earlier years, he was not bound to allow the same in relevant year. For such reasons he estimated the reasonable profitability of eligible Centply Unit at 19....
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....nts of the "Cent Ply" unit at Assam before the AO and still if the AO was of the view that the profits of the units set up in backward areas should be lower than other units in developed areas, then the onus lay on the AO to establish the same with cogent material and corroborative evidence on at least find fault or infirmity in the books produced by the assessee. We however note that the AO clearly failed to do so. Nothing tangible was brought on record to support such reasoning. Instead the disallowance was made on the last ray of assessment purely on suspicion. 20. According to us, the fact that high profits were earned by the eligible unit in comparison to other businesses by itself cannot lead to conclusion that the deduction claimed u/s 80IE was excessive. In this regard, it would first be relevant to examine the provisions of sub-section (10) of Section 80-IA of the Act which empowers the AO of the assessee having eligible business to scale down the profits which provision has been incorporated by sub-section (6) of section 80IE by virtue of which sub-section (5) and subsection (7) to (12) of section 80IA has been incorporated in to section 80IE of the Act. The relevant e....
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.... in such a manner so as to produce more than ordinary profits in the hands of a person carrying on the eligible business. Such an arrangement between the related parties as contemplated section 80IA(10) of the Act has to be necessarily proved by the AO with tangible evidence. And unless such 'arrangement' or 'manipulation' is shown to exist by the AO, there can be no question of discarding the declared actual profit and substituting it with a reasonable profit. Thus, from the discussion, it is clear that there is a condition precedent before the AO invokes the deeming provision for estimating the reasonable amount of profit of the eligible unit. First the AO has to discharge the burden that assessee has made an 'arrangement' between it and the related parties and due to such an arrangement, it lead to higher profit of the eligible unit. Therefore, the high profit must necessarily be the consequence of such an arrangement between the assessee and the related parties, which has been exposed by the AO. So first of all, the mere higher profit earned by such eligible assessee can be no reason to conclude that the assessee transacted in such an 'arranged' manner w....
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....d in Assam. The incentive received in form of excise refund & working capital subsidy was almost Rs. 1382.80 lacs, which accounted for almost 26% of the profits of the Assam Unit. We further note that the product profile manufactured by the eligible unit was also different. It is noted that the eligible Assam unit manufactured both plywood and block boards, whereas the units at Joka & Chennai were only manufacturing plywood. Due to difference in nature of products manufactured, the margins varied. Moreover it is noted that the eligible unit was able to procure their primary raw material i.e. veneer in the range of Rs. 20 to Rs. 25, whereas the ineligible unit at Karnal was procuring them in the range of Rs. 25 to Rs. 35 [Pages 142 to 162 of paper book]. We further note that the Ld. CIT(A) had also called for the details of electricity expenses, from which it was gathered that the per unit cost of electricity at the eligible Assam Unit was in the range of Rs. 4.93 to Rs. 6.12, whereas, on the other hand, the per unit electricity cost at Karnal and Joka was in the range of Rs. 7.93 to Rs. 8.22 [Page 175 of paper-book]. We further note that the cost of wages per worker in the eligible....
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.... by the eligible Assam Unit to the depots. Before the ld. CIT(A), the appellant had furnished invoice-wise and datewise break-up of transfers made out of the eligible Unit to the depots along with comparative details of sales made to unrelated third parties [Pages 129 to 130 of paperbook]. It is noted that the rates at which the different products were supplied to depots was comparable with that the rates at which the same product was sold to third parties. We further note that the rates at which the eligible Assam Unit recognized the supplies in its books to Units/Depots was in conformity with the valuation Rules set out in Rule 7 of the Central Excise Valuation (determination of price of excisable goods) Rules, 2000. On perusal of the said Rule 7, we note that where the goods are supplied to related parties, then even in terms of the excise laws, irrespective of the transacted value, the excise duty is payable by the manufacturing unit at the "market value" of the product prevailing at the point of destination on the date of removal of the goods. From the audit report issued Central Excise Audit for the relevant financial year 2013-14, it is noted that the Central Excise Depar....
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....he inter-unit transactions of the eligible unit reported u/s 80IA(8) were at arm's length and no 'arrangement' within the meaning of Section 80-IA(10) of the Act has been brought on record by the AO. For the reasons as aforesaid, we thus find substance in the argument of the ld. AR that AO's action of estimating the profit of eligible unit was erroneous and therefore we reject this contention of the ld. CIT, DR. Moreover, we also note that, it is not a case where the AO had invoked Section 145(3) of the Act and rejected the book results and has passed the order u/s 144 of the Act. We thus find merit in the findings recorded by the ld. CIT(A) that the AO could not have legally ventured into estimation of profits without rejecting the books of accounts u/s 145(3) of the Act. 28. Coming to the AO's observation that the profits for AY 2014-15 had increased in comparison to earlier year and therefore the rule of consistency did not apply. We note that the relevant year in question is the 6th year of claim of deduction u/s 80IE of the Act. It is noted that in the income-tax assessments from the first year of claim i.e. AY 2010-11 and AYs 2011-12 & 2012-13 were completed u/s 143(3) and....
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.... "where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." 29. Now we proceed to deal with the ld. CIT, DR's contention that, the assessee did not furnish these explanations before the AO and therefore the matter should be set aside to him. In this regard, we note as a matter of fact that the AO never gave proper show cause to the assessee before making such estimated disallowance. It was vide an order sheet entry dated 30.12.2016 i.e. the same date on which he passed the assessment order, that the assessee was put to notice to explain the reasons for higher profitability. Such action of the AO done in haste amounted to violation of principles of natural justice. Further, as observed supra that, the burden lay on the Revenue, to first demonstrate that the transactions between the assessee and the other related person were 'arranged' with a view to produce more profit to the assessee carrying on eligible business, and no....
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....he AO. Moreover, we find that the ld. CIT, DR was also unable to point out any perversity in the factual findings recorded by Ld. CIT(A), therefore, sending this issue back to AO will be abuse of process of law. 31. For the reasons set out above therefore, we do not find any reason to interfere with the order of the ld. CIT(A) and accordingly uphold the same. Ground Nos. 5 to 7 of the Revenue's appeal therefore stands dismissed. 32. Now we shall take up the Cross-objections filed by the assessee in C.O No.22/Kol/2020. These cross objections filed by the assessee is barred by limitation by 341 days. The Assessee has moved a petition requesting the Bench to condone the delay. We have heard both the parties on this preliminary issue. Having regard to the reasons given in the petition and for rendering substantial justice, we condone the delay and admit these cross objections filed by assessee. 33. Ground No. 1 raised in this Cross Objection is as follows: "(1) For that on the facts and in the circumstances of the case and in law, the Education Cess and the Secondary and Higher Education Cess incurred by the assessee is deductible while computing profits from business....
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....4 dated 27.11.2018 held that the impugned disallowance of educational cess u/s 40(a)(ii) is not sustainable. Hon'ble apex court's landmark decision in Collector,Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) settled the law long back that the cause of substantial justice prevails over all technical aspects. Their lordships' latter decision in National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) also held that the tribunal can very well entertain an additional ground/issue in order to determine correct tax liability of an assessee provided all the relevant facts are already on record. We hold in view of the foregoing pleadings and settled legal proposition that the impugned delay of 1535 days in filing deserves to be condoned. We order accordingly. The assessee's cross-appeal ITA No.485/Kol/2019 is taken for adjudication. 9. Adverting to the assessee's sole substantive grievance seeking to delete its educational cess disallowance made in both the lower proceedings u/s 40(a)(ii) of the Act, hon'ble Rajasthan high court and as well this tribunal (supra) have already held the same to be not sustainable. Learned CIT-DR took pains to re....
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....ion 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue's contentions supporting the impugned disallowance . The assessee's instant substantive ground is accepted. The Assessing Officer is direction to verify all the relevant facts and allow the impugned cess (es) as deduction u/s 37 of the Act. The assessee's appeal I.T.A. No. 685/Ko/2014 is partly accepted in above terms." However, the ld. DR for the Revenue submitted before the Bench that the Income Tax Appellate Tribunal (ITAT), Kolkata in the case of Srei Infrastructure Ltd, in ITA No.1302/Del/2012 and ITA No.1318/Del/2012, for A.Y. 2008-09, order dated 27.02.2019 held that the education cess is not allowable expenditure under section 37(1) of the Act. On appeal by assessee, the Hon'ble High Court of Calcutta, vide ITAT No.121 of 2019, order dated 08.08.2019, has remanded the matter back to the ITAT Kolkata to reconsider the issue. Hence there is no contrary view on this issue which survive as on date. Therefore, respectfully following the judgment of this Coordinate Bench in the case of ITC Limited (supra), we allow the claim of the assessee." 36. Respectfully fol....
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....rtificate dated 14.05.2010 issued by Office of Superintendent, Central Excise Range-II Guwahati Division confirming that the unit set-up by the assessee is eligible for exemption from excise duty in terms of the said Notification as a new unit with effect from 04-02-2009 i.e. the date of commencement of commercial production. It is noted that the said exemption was given to the new units for development of Industries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification No. 20/2007 is reproduced below:- "5. The exemption, contained in this notification shall apply only to the following kind of units, namely; a) New Industrial units which commence commercial production on or after the 1st day of April, 2007 but not later than 31st day of March, 2017; b) Industrial Units existing before the 1st day of April, 2007 but which have undertaken substantial expansion by way of increase by not less than 25% in the value of fixed capital investment in plant and machinery for the purposes of expansion of capacity/modernization and diversification and have commenced commercial production from such expanded capacity ....
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....tax subsidy was granted to the assessee. 42. In view of the above facts, it was the plea of the ld. AR that the incentive in the form of excise duty exemption and sales tax subsidy, have been granted for setting up new units in the States of Assam & West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State. Referring to the decision of the Hon'ble Supreme Court in the batch of cases, with its lead order in the matter of CIT Vs Chaphalkar Brothers (400 ITR 279), the ld. AR contended that, it is now well settled that subsidies granted under the State Industrial Schemes formulated with the object to accelerate industrial development and generate employment, is capital in nature and therefore not liable to income-tax. He accordingly contended that even while computing book profit u/s.115JB of the Act, these subsidies should be excluded though it is credited in the profit and loss account. In support of t....
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....lear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha's argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel. 23. Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT [2011] 9 taxmann.com 255/198 Taxman 122/ 333 ITR 335. While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was cap....
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....ook profit u/s 115JB, we note that the Hon'ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) held that the AO has the power to rework the book profit if the profits are computed not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Hon'ble Supreme Court in their subsequent decision rendered in the case of Indo Rama Synthetics (I) Ltd vs. CIT (330 ITR 363) further held that, the object of MAT provisions is to bring out the true working result of the companies. As held in the preceding paras, the subsidies received by the assessee were capital in nature and therefore not liable to tax. In the circumstances therefore, inclusion of such capital receipt in the computation of book profit u/s 115JB would defeat two fundamental principles. Firstly, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. We thus find merit in the assessee's claim that the said subsidies being capital in nature, deserves to be excluded from the computation of book profit u/s 115JB of the Act. 46. It is noted that in the context of similar State Indu....
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.... We also rely on the decision of the coordinate bench of this Tribunal in the case of Sicpa India (P) Ltd Vs DCIT (80 taxmann.com 87) wherein it has been held that the subsidy received by the assessee in form of excise duty exemption for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not liable to tax under the provisions of Section 115JB of the Act. The relevant findings of this Tribunal are as follows: "21. The main issue that arises for consideration on the basis of the grievance projected by the Revenue in the aforesaid ground No.2 is as to whether the excise duty refund which were held by the CIT(A) to be capital receipts not chargeable to tax can still be considered as part of the book profits u/s.115JB of the Act, even though these sums have been credited in the profit and loss account and treated as income and even though the exclusion of these sums for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act. In rejecting the claim of the Assessee in this regard, the AO held that these sums have been credited in the profit and loss acco....
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....ions or subtraction as is given in the explanation to Sec.115JB(2) of the Act. 23. We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon'ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision the Hon'ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid decision of the Hon'ble High Court rendered on identical facts as that of the Assessee's case, there can be no doubt that subsidies in question does not have any character of income. 24. When a receipt is not in the character of income, can it form part of the book profits for the purpose of Sec.115JB of the Act, is the question that arises for consideration. The ITAT Kolkata Bench in the case of Dy. CIT v. Binani Industries Ltd. [2016] 178 TTJ 658 : had to deal with a case where the question was as to whether receipts on account of forfeiture of share warrants amounting to Rs. 12,65,75,000/-, being a capital receipt, would be liable for taxati....
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....e income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H. Sugar Factory Ltd. (supra), where receipts on account of carbon credits which were capital receipts not chargeable to tax and hence not in the nature of income were held not included in the book profits. The Bench also referred to the decision of the Mumbai Bench of the ITAT in the case of Shivalik Venture (P.) Ltd. (supra) which was a case where the question was whether profits arising on transfer of a capital asset by a company to its wholly owned subsidiary company which is not treated as income" u/s 2(24) of the Act and since it does not form part of the total income u/s.10 of the Act and therefore does not enter into computation provision at all under the normal provisions of the Act, the same should be considered for the purpose of ....
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....book profits u/s.115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue. 48. For the reasons set out above and respectfully following the binding decision of the Hon'ble Calcutta High Court as well as this Tribunal, we hold that the subsidies received by the assessee for setting up new industries, by way of refund of VAT and excise duty of Rs. 2,36,75,501/- and Rs. 13,82,79,547/- respectively are liable to be excluded from the computation of book profit u/s 115JB of the Act. 49. As far as the ld. CIT, DR's contention is concerned, we note that the claim raised by the assessee is legal in nature in as much as the primary details of the subsidies received during the year was available before the lower authorities. The paper book filed by the assessee in this regard comprised of the relevant Notifications and the judicial precedents on this subject. It is noted that the assessee had not raised this claim earlier due to the complex legal position on the issue which has now been adjudicated by the Hon'ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (supra) on 09.06.2019. We observe that the Hon'ble Gujrat High Court in the ca....