RAJ STATE MINES and MINERALS LTD vs. ASSTT COMMISSIONER OF IT-6 JAIPUR

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 146 / 2016 Rajasthan State Mines & Minerals Ltd. registered office at C-89, 90, Lal Kothi Scheme, Jaipur through its Senior Manager Finance & Accounts Sh. Rajendr Rao S/o Sh. Pratap Singh Rao R/o 273, Sector-9, Behind Crystal Plaza, Udaipur. ----Appellant Versus Assistant Commissioner of Income Tax, Circle-6, Statute Circle, NCR Building, Jaipur. ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay Jhanwar with Ms. Archana For Respondent(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 13/12/2017 1. By way of this appeal, the appellant has assailed the judgment and order of the tribunal whereby tribunal has partly allowed the appeal of the assessee dismissing the appeal of the department. 2. This court while admitting the appeal on 31.1.2017 framed following substantial question of law:- “(i) Whether under the facts and circumstances of the case, the learned Income Tax Appellate Tribunal has not legally erred in not allowing the claim of Rs.1,01,45,849/-

account

of amortization of cost paid towards the

(2 of 22) [ITA-146/2016] acquisition of wasting asset i.e. mining land/leasehold land u/s 37 of the Act? (ii) Whether on the facts and circumstances of the case the license to use the land for mining is not covered by the definition of intangible asset u/s 2(11) of the Act entitling depreciation allowance u/s 32(1)(ii) of the Act? (iii) Whether on the facts and circumstances of the case and in law the expenditure incurred on computerization of Mines Department of the Government of Rajasthan of Rs.50 lacs does not qualify to be an expenditure expended “wholly and exclusively for the purpose of business” allowable u/s 37 of the Act?” 3. Subsequently vide order dt. 31.10.2017 one additional substantial question of law was added which reads as under:- (iv) Whether under the facts and circumstances of the case the learned Income Tax Appellate Tribunal has not legally erred in not allowing the benefit of

deduction

u/s

80IA

on Rs.3,44,23,812/- received on account of minimum guarantee covenant under the agreement by holding the same to be not ”derived” from the business of power generation undertaking?” 4. The facts of the case are that the case of the assessee was selected for scrutiny assessment u/s 143(3) under CASS. Notice u/s 143(2) dt. 27.8.2011 sent through registered post and served upon the assessee. In response to notice, the A/R of the assessee filed application for adjournment and the case was adjourned sine die. Thereafter, issued notice u/s 142(2) alongwith query letter dt. 30.4.2012, served upon the assessee and the case was fixed for hearing on 17.5.2012.

(3 of 22) [ITA-146/2016] 4.1 Further in response to notice u/s 142(1) and query letter the A/R of the assessee submitted a copy of return of income, computation sheet, balance sheet and audit report etc. Subsequent to change incumbent , issued notice u/s 142(1) & 143(2) alongwith query letter dt. 25.9.2012, served through registered post and the case was fixed for hearing on 8.10.2012. Further, in response to notice u/s 142(1) and 143(2) and query letter. Assessee derives income from mining, processing and trading of minerals, consultancy services, power generation & allied products. There is no change in the nature of business as compared to preceding year/s. 5. Counsel for the appellant Mr. Jhanwar has taken us to the Accounting Standard (AS) 6 and how to get a depreciation, he has taken us to Introduction clause (1) (ii) which reads as under:- Introduction 1. This Statement deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply:— (ii) wasting assets including expenditure on the exploration for and extraction ofminerals, oils, natural gas and similar non-regenerative resources; 5.1 Then, he has taken us to definition of depreciable assets under Clause 3.2 (iii) which reads as under:- Definitions 3.2 Depreciable assets are assets which (iii) are held by an enterprise for use in the production or supply of goods and services, for rental to others, or for administrative purposes and not for the

(4 of 22) [ITA-146/2016] purpose of sale in the ordinary course of business.” 5.2 He contended that in view of the Accounting Standard the observations which are made by the tribunal that this is capital expenses, the depreciation refusal is contrary to law for which he has relied upon the decision of Supreme Court in M/s. Madras Industrial Investment Corporation Ltd. vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras reported in (1997) 255 ITR 802 (SC) wherein Supreme Court held as under:- 15. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years., Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirely in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. Commissioner of Income-Tax, Calcutta-I : [1983]144ITR474(Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and

(5 of 22) [ITA-146/2016] allowed a proportionate deduction in the accounting year in question. 16. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. 17. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M.P. Financial Corporation v. Commissioner of Income- tax (supra). The view that we have taken is also in conformity with accounting practice of showing the discount in "discount on debentures account" which is written off over the period of the debentures. 18. The appellant is, therefore, entitled to deduct a sum of Rs. 12,500 out of the discount of Rs. 3,00,000 in the relevant assessment

year.

The

balance expenditure of Rs. 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed) therefore, which is the subject matter of appeal before us, is answered in the negative in so far as it relates to the deduction of Rs. 2,87,500 in the assessment year in question though for reasons entirely different from those given by the High Court. The second part of the reframed question is answered in the affirmative But only a proportionate part of the discount can be deducted in the assessment year in question as set out earlier. The appeal is disposed of accordingly and the judgment of the High Court is set aside. There will be no order as to costs in the circumstances of the case.

(6 of 22) [ITA-146/2016] 5.3 Regarding question 3, Mr. Jhanwar has taken us to the provisions of Section 37 of the Income Tax Act which reads as under:- Section 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 6. He has relied upon the following decisions:- 6.1 In S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals), Chandigarh and Anr. [2007] 288 ITR 1 (SC) it has been held as under :- “22. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bhart) Ltd. : [2002]254ITR377(Delhi) that once it is established that there was nexus between the

(7 of 22) [ITA-146/2016] expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 6.2 In Commissioner of Income Tax vs. Rajasthan Spg. and Wvg. Mills Ltd. [2005] 272 ITR 487 (RAJHC), it has been held as under :-

(8 of 22) [ITA-146/2016] 22. The principle was considered by the Supreme Court in Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) . In the said case, the Court observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or in enabling the management in the conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The test of acquisition of capital asset was referable to acquisition of such asset to the trade and not de hors its ownership vesting in the trade of the assessee or in the assessee. In the present case, there is no dispute on the point that the assessee did not acquire any capital asset for his trade or himself. Even the test of acquiring enduring benefit was held to be not applicable where such acquisition does not result in expansion of profit-making apparatus of the assessee. The case of Empire Jute Co. Ltd (supra) was the case in which the assessee, by incurring the disputed expenses purchased the loom hours resulting in increased loom hours for the assessee during the currency of contract period, which was to augment production and productivity of assessee per loom. Even applying the test of enduring benefit, the Supreme Court held it to be a revenue expenditure. It was considered that by purchase of loom hours, no new asset was created. There was no expansion of the profit

(9 of 22) [ITA-146/2016] making apparatus of the assessee. The income earning machine remained the same as it was prior to the purchase of loom hours. 23. In the present case also, by incurring expenditure for construction of building for the institute, the profit-making apparatus of the assessee was not expanded. Its income earning machinery remained the same. Assessee has, by contributing to construction of building, only facilitated the training of his workers at hand without necessitating their training at distant place causing more expense of time and money. Therefore, it cannot be said that assessee acquired any enduring benefit in the capital field. Therefore, the test of enduring benefit also cannot help the Revenue in the case at hand. As it was a benefit which was only to run business of the assessee more efficiently by getting his workmen trained, the ratio in Empire Jute Co. Ltd.'s case (supra) clearly applies to it. 24. The decision of the Supreme Court in Royal Calcutta Turf Club (supra) is also pointer to this conclusion. In the Royal Calcutta Turf Club's case (supra) the Supreme Court has held that the expenditure incurred for training the Indian boys as jockeys was not expenditure in the nature of capital but was a revenue expenditure, therefore, the benefit which the assessee deriving dwells in future. The Court observed as under : "... the conclusion is that the amount in dispute was laid out wholly and exclusively for the purpose of the respondent's business because if the supply of jockeys of efficiency and skill failed, the business of the respondent would no longer be possible. Thus, the money was spent for the preservation of the respondent's business." By laying out the expenditure for bringing into existence a building to be owned by the State and to be run by the State for the benefit of the industry for the purpose of training its workmen was clearly related to the running of the business of the assessee more efficiently and smoothly by securing the assessee's workmen trained, skilled and efficient. 25. We have no hesitation in coming to the conclusion that, in the facts and circumstances which exist in the case, the expenses incurred by the assessee towards construction of the

(10 of 22) [ITA-146/2016] building for Manak Manikya Lal Verma Textile Institute, Bhilwara were expenses wholly and exclusively incurred for the purpose of business of the assessee and was not In the nature of capital expenditure, therefore, the same is allowable as revenue expenses under Section 37(1) of the IT Act, 1961. The Tribunal was justified in reaching this conclusion. No interference can be made on this count. 6.3 In Commissioner of Income Tax vs. Hindustan Zinc Ltd. [2010] 322 ITR 478 (RAJHC) it has been held as under :- 11. In Rajasthan Spg. & Wvg. Mills Ltd.'s case (supra), the Division Bench of this Court after due consideration of the various decisions of the Hon'ble Supreme Court and High Courts including the decision of the Supreme Court in Associated Cement Companies Ltd.'s case (supra), decision of the Bombay High Court in Bombay Dyeing & Manufacturing Co. Ltd.'s case (supra) and the decision of the Hon'ble Supreme Court in the matter of CIT v. Madras Auto Service (P) Ltd. : [1998]233ITR468(SC) , opined as under: From the aforesaid judgments of the Supreme Court, it is apparent that merely because the amount spent has been used for construction of a building or structure of permanent nature is not the decisive test for holding the expenses to be capital outlay or revenue outlay. The two tests emerging from the aforesaid decisions are that firstly where the building or construction of any permanent structure is brought into existence that is by itself not sufficient to hold the expenses to be capital nature invariably. Where such construction does not result in acquisition of any capital assets to the trade of the assessee or the property does not become the property of the assessee, it does not result in acquisition of capital assets of enduring nature by the assessee. Secondly, it is also clearly discernible that if such expenses are incurred for the purposes of business for deriving any benefit whether to preserve the business or to facilitate the running of the business more smoothly or to make the business more

(11 of 22) [ITA-146/2016] profitable or to secure any other advantage for the assessee's business or incurring expenditure by seeking exemption from or reduction in incurring of other expenses which would have been ordinarily allowable as revenue expenditure of the assessee's business, such expenses are to be treated as having been incurred wholly and exclusively for the business of the assessee and revenue expenditure. Such expenses cannot be construed as a capital expenses. 12. Adverting to the facts of the present case, admittedly, the assessee's super smelter plant requires adequate quantity of water for its operation and unless and until, water is available, the super smelter plant would not function and would not be able to produce any items. Admittedly, the Ghosunda Dam has been constructed by the State Government and the assessee has made expenditure for its alteration so as to ensure sharing of the water with the State Government without having any right or ownership in the dam or the water. Even, the assessee's share of water is also determined by the State Government. Thus, the expenditure incurred by the assessee for commercial expediency relates with carrying on of business and falls within such matter expenditure as prudent businessman may incur for the purpose of the business. The operational expenses incurred by the assessee solely intended for furtherance of the enterprise can be no means be treated as expenditure of capital nature. 13. Keeping in view the object and purpose of the expenditure and totality of the facts and circumstances of the case noticed above, in our considered opinion, the benefit received by the assessee company on account of the expenditure incurred cannot be said to be an advantage in the capital field. We are in agreement with the view taken by the CIT(A) and affirmed by the learned Tribunal that the object and effect of the expenditure made by the assessee is to facilitate its trade operation and enable the management to conduct business more efficiently or more profitably. Therefore, the question No. 1 (supra) deserves to be answered in affirmative i.e. in favour of the assessee and against the Revenue. 14. Regarding the guest house expenses, it is the common ground between the parties that

(12 of 22) [ITA-146/2016] the matter is squarely covered by the decisions of the Hon'ble Supreme Court in Britannia Industries Ltd.'s case (supra). In the said case, the Hon'ble Supreme Court while considering the question as to whether the expression "premises and buildings" referred to in Sections 30 and 32 and used for the purposes of business operation would include within its scope and ambit, the expression "residential accommodation in nature of guest house" used in Sub-sections (3), (4) and (5) of Section 37 of the Act of 1961, observed as under: While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of Section 37 by specifying the nature of building to be a guest house. In our view, the intention of the legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purposes of a guest house of the nature indicated in Sub-section (4) of Section 37. When the language of a statute is clear and unambiguous, the Courts are to interpret the same in its literal sense and not to give it a meaning which would cause violence to the provisions of the statute. If the legislature had Intended that deduction would be allowable in respect

all

types

of buildings/accommodations used for the purposes of business or profession, then it would not have felt the need to amend the provisions of Section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in Sub- section (5) of Section 37 and the provisions of Sections 31 and 32 would have been sufficient for the said purpose. 6.4 In The Commissioner of Income Tax vs. Chemicals and Plastics India Ltd. [2007] 292 ITR 115 (MADHC) it has been held as under: 8. The approach, hence, needs to be that of a practical and prudent businessman rather than from the Revenue's strict classification of a

(13 of 22) [ITA-146/2016] right. As the Supreme Court held in the decision reported in : [1997]223ITR101(SC) (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT), what is to be seen is not whether a payment was compulsory for the assessee to make or not. The correct test is that of a commercial expediency. The Apex Court held that considering the various decisions held that any contribution made by the assessee to a fund which is directly connected or related the carrying on of the assessee's business or which results in benefit to the assessee's business, has to be regarded as a deduction allowable under Section 37 of the Income Tax Act, 1961. Although the case related to a contribution to a public welfare fund, the ratio decidendi will guide the decision in this case too. 9. In may be noted that the decision reported in : [2004]266ITR170(Mad) (CIT v. Madras Refineries Ltd.), while considering a claim of the expenditure incurred by an assessee providing drinking water facility as well as establishing or improving the school meant for the residents in the locality, a Division Bench of this Court, held that the amount spent could not be regarded as being wholly outside the ambit of the business concerns of the assessee. The Division Bench held as follows: The concept of business was not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located, in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. 10. The facts in this case before us stand on a stronger footing, since the contribution made by the company is for the Chamber of Commerce whose activities are closely linked with the welfare of the Corporate entities who are members therein and whose interest are taken care of by the Chamber of Commerce, irrespective of whether the expense incurred is compulsory or otherwise. Hence, considering

(14 of 22) [ITA-146/2016] the fact that the payment is made for the purpose of the business, it satisfies the commercial expediency test to accept the case of the assessee. In the circumstances, we do not find any justification to accept the case of the Revenue that the Provisions of Section 37 have to be viewed in a very strict manner. It may be noted that Section 37 itself is concerned with 'an expenditure laid at or extended wholly or exclusively for the purpose of business or profession' to qualify for deduction. With the necessity no longer a valid test, we reject the Revenue's appeal. 6.5 Regarding question no.4, he also taken us to the provisions of Sub section (I) & (iv) of Section 80I(A) of the Income Tax Act which reads as under:- 80-IA.(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. Section (4) This section applies to— (i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or

(iii)

developing,

operating

and maintainingany infrastructure facility which fulfils all the following conditions, namely :— (a) it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i)developing or (ii)operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;

(15 of 22) [ITA-146/2016] (c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995: 6.6 In support of his contentions, he relied on the decision of the Supreme Court in Commissioner of Income Tax vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC) it has been held as under : 18. The judgment in Sterling Foods lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an Assessee was entitled to import entitlements which it could thereafter

sell.

Obviously,

the

sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the Assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the Assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the

(16 of 22) [ITA-146/2016] Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the Assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the Assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the Assessee by the Government concerned. 24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (non-remote) areas. The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other northeastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industrial unit in the remote area, so

(17 of 22) [ITA-146/2016] that the industry could become competitive and economically viable. (Paras 14 and 15) 25. The decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P.-I, Hyderabad : (1997) 7 SCC 764, dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the Assessee. 26. We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being CIT v. Dharampal Premchand Ltd. : 317 ITR 353 from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80- IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction Under Section 80-IB of the Act. 6.7 He also relied upon the judgment of Delhi High Court in Commissioner of Income Tax vs. Advance Detergents Ltd. (2011) 339 ITR 0081 (DELHC) it has been held as under : 14. Thus, according to the Gujarat High Court, when interest is paid on delayed payment, it can be treated as higher sale price which is converse situation to offering of cash discount because the transaction remains the same and there is no distinction as to the source. Looking from this angle, the interest becomes part of the higher sale price and is clearly derived from the sales made and is not divorced therefrom. It is, thus, the direct result of the sale of goods and the income is derived from the business of industrial undertaking.

(18 of 22) [ITA-146/2016] 15. Same view is expressed by various other High Courts in the following judgments: (i) Phatela Cotgin Industries (P) Ltd. v. CIT : (2008) 303 ITR 411 (P&H); (ii) CIT v. Flender Macneill Gears Ltd. : (1984) 41 CTR (Cal) 60 : (1984) 150 ITR 83 (Cal); (iii) Tata Sponge Iron Ltd. v. CIT : (2007) 292 ITR 175 (Ori); (iv) CIT v. Indo Matsushita Carbon Co. Ltd. : (2006) 205 CTR (Mad) 493 : (2006) 286 ITR 201 (Mad). 16. There is no reason to depart from the aforesaid view taken consistently by various High Courts, which is in tune with the principle laid down by the Supreme Court in Liberty India (supra). We answer this question in favour of the assessee and against the Revenue. 6.8 In Commissioner of Income Tax vs. Moonlight Builders and Developers reported in (2008) 307 ITR 197 (Delhi), similar view was taken. 6.9 He also relied on two decisions of Tribunal where no appeal was preferred. Therefore, they cannot discriminate between two different assessee. 10. Counsel for the respondent contended that on first issue regarding Section 37, the expenses which are made are of capital nature, therefore, it cannot be taken as revenue expenditure. In that view of the matter, the first issue may not be considered. However, regarding second issue, he contended that assessee is not entitled for depreciation since he has not made any capital investment and this is raw material.

(19 of 22) [ITA-146/2016] 10.1 Regarding issue no.3, he contended that there is concurrent finding of authorities and the issue is required to be answered in favour of the department. 10.2 Regarding fourth issue, he has relied upon the decision of Madhya Pradesh High Court, Indore Bench in CIT vs. Alpine Solvex Ltd. reported in (2005) 276 ITR 92 wherein it has been held as under:- 10. It is not in dispute that a sum of Rs. 57,83,675 claimed by the assessee to be in the nature of profit said to be derived from the industrial undertaking was not an amount earned directly by sale of their finished commodity

manufactured

their undertaking/plant. In other words, the amount claimed was alleged to be received by assessee from their supplier and purchaser not as a price/value of the goods but it was in the nature of compensation/damages on account of breach alleged to have been committed by them qua assessee in performance of contract. We cannot thus equate such sum at par with actual profit which the assessee earned by sale of the finished goods. 11. In our opinion, the assessee is entitled to claim deduction of that amount which they have derived as direct profit by sale of manufactured goods in their newly set up industrial undertaking. The object underlined in these sections is to give incentive to the assessee who earns/derive income from their actual manufacturing activity, i.e., by sale of their products. Any indirect or incidental profit cannot be regarded as profit earned out of main business activity. It has to be taxed as an income earned from other sources as defined under Section 56(1) r/w Section 14(f) ibid. 12. Submission of learned counsel for the assessee was that amount received by the assessee is nothing but profitable price of the

(20 of 22) [ITA-146/2016] goods and having direct nexus with the business activity of the assessee. In reply, learned counsel for the Revenue contended that assessee in order to create artificial profit has entered into such bogus contracts with their purchasers/suppliers with a view to show bogus profit so that they may earn more benefit under Section 80HH/80I. In our opinion, the submission of learned counsel for the assessee has no merit. As held supra, the words "derived from" has got to be given restricted meaning and hence, we cannot include such type of earning (even assuming it to be genuine) within the meaning of expression as profit/gains derived from industrial undertaking. [See Cochin Co. v. CIT : [1978]114ITR822(Ker), Hindustan Lever Ltd. v. CIT : [1980]121ITR951(Bom), North East Gases (P) Ltd. v. CIT Orissa Tyres Ltd. v. CIT : [1991]188ITR342(Orissa) ,CIT v. Bihar Alloy Steels Ltd. : [1994]206ITR350(Patna), Godavari Sugar Mills Ltd. v. CIT : [1991]191ITR359(Bom) and CIT v. Cochin Refineries Ltd. : [1985]154ITR345(Ker) ]. 10.3 He also relied upon the decision of Supreme Court in CIT vs. Alpine Solvex Ltd. reported in (2003) 259 ITR 719 wherein it has been held as under:- In our opinion, a substantial question of law did arise in this case, which is as follows: "Whether on the facts and in the circumstances of the case and in law the ITAT was justified in holding that the liquidated damages received by the assessee on account of breach of contract are nothing but a part of profit received from the industrial undertaking on which the assessee is entitled for deduction under sections 80HH and 80IA?" The High Court, in our opinion, was wrong in dismissing the appeal in limine. We, therefore, allow this appeal set aside the High Court's order and direct the High Court to hear the appeal on merits.”

(21 of 22) [ITA-146/2016] 11. We have heard counsel for the parties. 12. On the first issue, we are in complete agreement with the view taken by the tribunal, therefore, first issue is required to be answered in favour of the department and against the assessee. 13. However, on the second issue, on a close scrutiny of Sub section 32 (ii) of the Income Tax Act which reads as under:- Section 32. (1) In respect of depreciation of- (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, 13.1. In our considered opinion, the rights which are given to the assessee are of commercial rights which are akin to license for mining. 13.2.In that view of the matter, the contention of the assessee regarding depreciation u/s 32(ii) is required to be accepted, therefore, the second issue is answered in favour of the assessee and against the department. 14. Regarding issue no.3, taking into consideration the expenses which are done in view of decision in SA Builder’s case (supra) and other judgments relied on the assessee, the issue is answered in favour of the assessee. 15. On issue no.4 regarding liquidated damages which are given are business losses which the undertaking ought to have done, if the machines which were delivered to the assessee would have

(22 of 22) [ITA-146/2016] performed very well, therefore, damages which were given for loss of business which was guaranteed by the supplier, Madhya Pradesh High Court judgment will not apply in the present case. This is not damages for compensation for business loss. In that view of the matter, this issue is also answered in favour of the assessee and against the department. 16. The appeal is partly allowed. (VIJAY KUMAR VYAS), J. (K.S. JHAVERI), J. BMG 75.