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Facts
The assessee claimed deduction for cost of moulds and dies as revenue expenditure. The AO disallowed most of it, allowing only depreciation. The assessee also received a capital investment subsidy and an excise duty refund, with differing treatments by the AO and CIT(A). The appeals also involve disallowances under Section 14A and issues related to Section 80-IB deduction.
Held
The Tribunal held that the expenditure on moulds and dies is revenue in nature due to their short life and frequent replacement. The capital investment subsidy was not to be reduced from the cost of assets. The excise duty refund was treated as a capital receipt. Disallowances under Section 14A were to be re-examined by the AO, and the deduction under Section 80-IB for the Jammu unit was allowed based on consistent past practice.
Key Issues
Whether the cost of moulds and dies is a revenue expenditure? Whether capital investment subsidy reduces the cost of assets for depreciation? Is excise duty refund a capital or revenue receipt? Whether disallowance under Section 14A is applicable if no exempt income is earned? Applicability of Section 80-IB deduction for the Jammu unit.
Sections Cited
32, 32(1)(iia), 14A, 80-IB, 43(1), 115JB, 154, 250, 263, 115-O, 31, 2(24)(xviii)
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Before: SHRI SANDEEP GOSAIN & SMT. RENU JAUHRI
PER RENU JAUHRI [A.M.] :- The assessee has filed this appeal against the order of the Learned Commissioner of Income-tax (Appeals)-12, Mumbai [hereinafter referred to as “CIT(A)”] dated 17.11.2015 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] and revenue has filed the appeal against the rectification order dated 09.03.2016 of Ld. CIT(A) u/s 154 of the Act for Assessment Year [A.Y.] 2011-12.
The assessee has raised the following grounds of appeal:
1. “1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in rejecting the appellant's claim for deduction of Rs. 61,86,000 as revenue in nature in respect of cost of moulds and dies put to use during the year.
2. Without prejudice to above, the learned CIT(A) erred in not allowing the additional depreciation @ 20% u/s 32(1)(iia) of the Act on moulds and dies if treated as capital expenditure 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in affirming the action of Assessing Officer ('AO') by reducing the capital investment subsidy from the cost of the asset purchased for the purpose of computing depreciation under section 32 of the Act.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in affirming the action of AO of treating the excise duty refund of Rs 4,96,06,000 as revenue receipt instead of capital receipt.
5. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in affirming the action of AO of disallowing an amount of Rs 4,10,154 under section 14A of the Act read with Rule 8D in respect of expenses incurred for earning exempt income.
6. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO in disallowing the administrative expenses under section 14A of the Act read with Rule BD(iii) without establishing any nexus between the administrative expenditure and earning of tax free income.
7. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not appreciating the fact that dividend from domestic & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. companies is not exempt from tax in view of section 115-0 and therefore investments in domestic companies ought not to be included for the purpose of computing disallowance under section 14A.
8. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the action of the AO that the disallowance under section 14A made by applying Rule BD should be added while computing the total income as per book profits under section 115JB of the Act 9. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in affirming the action of AO of not allowing deduction under section 80-IB of the Act in respect of Jammu unit 10. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in affirming the action of AO of allocating the indirect expenses on arbitrary and unreasonable basis without appreciating the fact the CIT 6 has accepted the method of expense allocation in its order dated 29 March 2014 passed under section 263 of the Act for AY 2010-11 11 Without prejudice to ground 1 and 2, the learned CIT(A) erred in not re- computing profits eligible for deduction under section 80-IB to the extent of treating the expenditure for moulds and dies as capital in nature. 12 Without prejudice to ground 4, the learned CIT(A) erred in not granting deduction under section 80-IB of the Act on the excise duty refund.”
The grounds of appeal raised by the revenue are as under:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing assessee's appeal by passing rectification order as in the original order dtd:-17/11/2015, CIT(A) had already dismissed grounds of appeal in respect of (1) taxability of excise duty refund Rs.4,96,06,000/- and (ii) deduction allowable under section 801B, on merits and, therefore there is no mistake apparent from records.
2. On the facts and in the circumstances of the case and in law, the Id CIT(A) has grossly erred in allowing the appeal of the assessee in ground of appeal no. 3 8.6 in the rectification application filed by the assessee when in the appellate order dtd. 17/11/2015 CIT(A) has confirmed the addition /disallowance and dismissed the above grounds of appeal on merits, thus, transgressing the jurisdiction of the CIT(A) and stepping into the jurisdiction of the ITAT.”
4. As common issues are involved in both the appeals, and these related to the same assessment order, but different orders of Ld. CIT(A), both are being decided by a common order. & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd.
Brief facts of the case are that the assessee filed its return declaring nil income on 21.11.2011, which was processed u/s 143(3) of the Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued along with a questionnaire. After considering the submissions of the assessee, the assessment was completed at an income of Rs. 12,95,96,080/- after making various additions/disallowances.
Aggrieved with the order of Ld. AO, the assessee preferred an appeal before Ld. CIT(A). The assessee’s appeal was partly allowed by the Ld. CIT(A) vide order dated 17.11.2015. Subsequently, the assessee filed a rectification application before the Ld. CIT(A), in response to which, another order was passed by Ld. CIT(A) on 09.03.2016 giving further relief to the assessee.
Ground No. 1: Claim for deduction in respect of the cost of moulds and dyes. 7.1 Brief facts relate to the issue are that the assessee is engaged in the business of manufacturing and trading of pesticides, biological and agri products. During the year under consideration, the company changed its accounting policy for recognition of the expenditure relating to moulds and dyes. In previous years, such expenditure was treated as capital in nature and depreciation was claimed. In the current year, the company has treated it as revenue expenditure, for which the following reasons have been given in Note- 5 to the Accounts:
& 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. “In the current year the Company has treated such expenditure as revenue expenditure. This change was necessitated based on operational facts and manner of usage of moulds and dyes in the Company's business. There is a high degree of turnover in such items as every small change in packing or labeling necessitates a change in the moulds/ dyes, accordingly the Company has decided to charge such expenditure to the profit and loss account instead of capitalizing such cost as it would result in more appropriate and reliable information been disclosed in the financial statements. As a result, in the Financial Statements, the net carrying amount of such items amounting to Rs. 42.07 Lakhs as at 31 March 2010 has been charged to the Profit and Loss account in addition to Rs. 54.41 Lakhs expenses in the current year. The total expenditure of Rs. 103.93 Lakhs as a result of change in the accounting policy has been included in 'Other Expenses' in Schedule "P" of these financial statements." This change was questioned by the Ld. AO, and thereafter, with regard to the moulds and dyes of Rs. 54,41,000/-, he allowed only depreciation @15%, i.e. Rs. 8,16,150/- and the difference of Rs. 46,24,850/- was disallowed. 7.2 Ld. CIT(A) upheld the decision of the Ld. AO and dismissed the assessee’s appeal. 7.3 Before us, Ld. AR has submitted that since the life of the moulds is short, and there is a high degree of turnover, as every change in packing or labelling necessitates a change in dies and moulds, the assessee has made the change in the system of accounting. The cost of new dyes and moulds represents only replacement, and hence, should be allowed as a deduction. Reliance has been placed on the following decisions in favour of the assessee: i. CIT v/s Malerkotla Steels & Alloys (2011) 336 ITR 49 (P&H) ii. CIT v/s TVS Motors Ltd. (2014) 364 ITR 1 (Madras) iii. CIT v/s Sunbeam Auto Ltd. (ITA No. 351/2012) (Delhi HC)
In the case of CIT v/s Malerkotla Steels & Alloys (supra), it has been held that the cost of moulds used in the manufacturing process should be treated as & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. a revenue expenditure since the life of moulds was short, requiring frequent replacement, and such an expenditure was incurred to facilitate main production process carried out by the assessee, and in no way could be construed as creating a new asset. Similarly, in the case of CIT v/s TVS Motors Ltd. (supra), it has been held that the dyes and moulds were not plant and machinery but were attachments made to plant and machinery to make it function as per the requirements of the business, and therefore, the deduction was allowable u/s 31 of the Act. Further, in the case of CIT v/s Sunbeam Auto Ltd. (supra), revenue’s appeal was dismissed upholding the Tribunal’s decision that dyes and moulds does not bring into existence any enduring and permanent advantage in the capital field and is allowable as a revenue expenditure. In view of the above judicial pronouncement, Ld. AR has strongly argued for deletion of the disallowance and has pointed out that the assessee was itself treating expenditure on dyes and moulds as capital expenditure all these years and there was no justification to change it in the current year. Ld. DR, on the other hand, has strongly relied on the order of Ld. AO. 7.4 We have heard the rival submissions and perused the material on record, along with the judicial pronouncements on the issue. We are of the considered opinion that the assessee is entitled to claim the expenditure incurred on dyes and moulds as a revenue expenditure as these have to be replaced frequently, & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. and accordingly, the disallowance made by the Ld. AO is not justified. Moreover, as pointed out by the Ld. AR, the department has itself accepted the changed method and allowed deduction for the moulds and dyes as a revenue expenditure in all the subsequent years. Accordingly, this ground is allowed and the disallowance of Rs. 46,24,850/- is directed to be deleted.
Ground No. 2: Claim of additional depreciation @20% on dyes and moulds, without prejudice to ground No.
Since ground No. 1 has been allowed in favour of the assessee, this ground becomes infructuous and hence dismissed.
Ground No. 3: Reduction of capital investment subsidy from the cost of the assets purchased- Rs. 4,50,000/- 9.1 Brief facts of the issue are that the assessee received capital investment subsidy of Rs. 30,00,000/- from the Jammu & Kashmir Government during the year. This amount was directly credited to the capital reserve instead of reducing the same from wdv or cost of the assets for the purpose of calculating depreciation under the Act. Ld. AO invoked the provisions of Explanation 10 to Section 43(1) and reduced the amount of subsidy from the cost of the assets for the purpose of calculating depreciation, resulting in the disallowance of Rs. 4,50,000/-. Ld. CIT(A) upheld the order of the Ld. AO. and the assessee is in appeal before the Tribunal.
& 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. 9.2 Before us, Ld. AR has submitted a copy of the scheme of the Government of India issued vide order dated 14.06.2002 vide which introduced subsidy to accelerate industrial development in the state of Jammu & Kashmir. It has been submitted by the Ld. AR that incentive in the form of a subsidy cannot be considered as the payment directly or indirectly made to meet any portion of the actual cost as envisaged under Explanation 10 to section 43(1). He has placed reliance on the following decisions of the Hon’ble jurisdictional and other High Courts and of the coordinate benches: i. PCIT vs. Welspun Steel Ltd. [2019] 103 taxmann.com 436 (Bombay High Court) ii. Universal Cables Ltd. vs. DCIT [2015] 57 taxmann.com 95 (Kolkata Tribunal) iii. Alkoplus Producers Pvt. Ltd. vs. DCIT (ITA No. 1129/Pune/2016) (Pune Tribunal) iv. Sasisri Extractions Ltd. vs. ACIT [2010] 122 ITD 428 (Vishakhapatnam Tribunal) v. Capital Foods Exports P. Ltd. vs. ACIT [2012] 139 ITD 584 (Mumbai Tribunal) vi. ACIT vs. Godrej Agrovet (ITA No. 1629/Mum/09) (Mumbai Tribunal)
9.3 Ld. DR, on the other hand, has relied on the order of Ld. AO, and pointed out that after insertion of Explanation 10 to Section 43(1), the capital investment subsidy ought to be reduced from the cost of the assets (plant and machinery), and the judicial pronouncements prior to this insertion are no longer applicable.
& 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. 9.4 We have heard the rival submissions and perused the material on record, along with judicial pronouncements. We have also perused the provisions of the scheme dated 14.06.2002. It is seen that the subsidy is introduced to accelerate industrial development in the state and the computation of capital investment subsidy @15% of investment subject to ceiling of Rs. 50,00,000/- is a method of calculation of incentive to be provided rather than a subsidy for acquisition of the capital assets, and therefore, provisions of Explanation 10 to Section 43(1) would not be applicable. In the case of DCIT Latur v/s M/s. Alco Plus Producer Pvt. Ltd. in relied upon by the Ld. AR, Hon’ble coordinate bench has dealt with a similar situation and held that the Explanation 10 to Section 43(1) is attracted only when the object of the scheme is to subsidise the cost of an asset and not otherwise. If the object of the scheme is to accelerate industrial development of the state, then the case is not caught with in the mandate of Explanation 10. In fact, to deal with such a situation, the Finance Act 2015 has enlarged the definition of income given u/s 2(24)(xviii) w.e.f. 01.04.2016. However, the same being prospective in nature is not applicable for the year under consideration, i.e. AY 2011-12. The same view has been taken by the coordinate bench Sasi Shri Extraction Ltd. v/s ACIT 2(1)(2) ITA No. 10/viz/, wherein it has been held that investment subsidy granted at a percentage of fixed capital investment could not be reduced from the cost of a capital asset, if the scheme & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. in question was intended to accelerate industrial development of the state and was not specifically intended to subsidise cost of the capital asset. Thus, in view of the judicial pronouncements of the issue and considering the provisions of the scheme in question, we are of the opinion that the amount of capital investment is not subsidy for purchase of any asset, and therefore, could not be reduced from the cost of plant and machinery for the purpose of calculating the claim of depreciation. This ground of appeal of the assessee is, accordingly, allowed.
10. Ground No. 4: Taxability of excise duty refund: Rs. 4,96,06,000/- 10.1 At the outset, Ld. AR pointed out that this ground stands allowed in favour of the assessee vide rectification order dated 09.03.2016 passed by the Ld. CIT(A) u/s 154. However, in the appeal filed by the department against the rectification order of Ld. CIT(A), this issue has been taken up as ground No. 1. 10.2 Brief facts are that in its computation of income, the assessee had claimed deduction of Rs. 4,96,06,000/- on account of refund of excise duty. After examining the requisite details, Ld. AO held that the assessee was not obliged to utilise the amount for a particular purpose. The assessee’s production facilities had already been set up. He, therefore, held that the amount received is covered under the profits and gains of business and professions under the normal provisions of the law, and therefore, the same is taxable as business & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. profits. Accordingly, the deduction claimed by the assessee in respect of excise duty refund was disallowed and added to its total income. 10.3 In the appellate order dated 17.11.2015, Ld. CIT(A) dismissed the assessee’s appeal. Subsequently, vide rectification order dated 09.03.2016, Ld. CIT(A), after considering the submissions of the assessee in the light of the decision of the Hon’ble J&K High Court in the case Shri Balaji Alloys v/s CIT 33 ITR 335, wherein it has been held that the refund of excise duty is capital receipt, and therefore, not taxable, allowed the appeal of the assessee. He accordingly directed the Ld. AO to treat the refund of excise duty as a capital receipt. 10.4 Aggrieved with this rectification order, the department is in appeal before us. Ld. AR has submitted that this ground was subsequently allowed in favour of the assessee by Ld. CIT(A) through rectification order dated 09.03.2016 after duly considering the decision of the Hon’ble J&K High Court in the case of Balaji Alloys v/s CIT (supra). He has further pointed out that this decision has been affirmed by the Hon’ble Supreme Court [(2017) 80 taxmann.com 239] 10.5 On the other hand, Ld. DR has relied on the decision of the Hon’ble Supreme Court in the case of CIT v/s Ponni Sugar Mills (2008) 306 ITR 392 in which purpose test was laid down for deciding the character of subsidy received. He has strongly argued that the decision of the Ld. CIT(A) in rectification order dated 09.03.2016 deserves to be reversed. Moreso, there was no apparent & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. mistake and the action of Ld. CIT(A) transgressed the jurisdiction of the Tribunal. 10.6 We have heard the rival submissions as well as considered the judicial pronouncements cited by both the parties. We are of the view that in light of the decision in the case of Shri Balaji Alloys v/s (supra), which has been upheld by the Hon’ble Apex Court, the excise duty refund has to be treated as a capital receipt. This ground of appeal is, therefore, allowed in favour of the assessee. Hence, the revenue’s appeal on this issue is dismissed.
11. Ground No. 5, 6 & 7: Disallowance u/s 14A in respect of expenditure attributable to earning exempt income: Rs. 4,10,154/-. 11.1 Brief facts of the issue are that the assessee had incurred interest expenditure of Rs. 276.88 lakhs during the year under consideration. The assessee has made substantial investments amounting to Rs. 623.55 lakhs in equity shares of a subsidiary company/joint venture. Ld. AO computed the disallowance u/s 14A r.w. Rule 8D at Rs. 4,10,154/- as the assessee had not made any suo moto disallowance on the ground that no direct expenditure was incurred in relation to exempt income. 11.2 Before us, Ld. AR submitted that no exempt income had been earned by the assessee from its investments, accordingly, no disallowance could be made u/s 14A in view of the various judicial pronouncements. Ld. AR, further, stated & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. that disallowance u/s 14A could not be made since the dividend income is subject to dividend distribution tax u/s 115O. Ld. DR, on the other hand, has relied on the orders of lower authorities. 11.3 We have considered the rival submissions. We find that on the issue of disallowance u/s 14A in respect of dividend income, the assessee’s claim that the same is subject to dividend distribution tax, and hence, no disallowance ought to be made is not tenable as the issue is covered by the decision of the Hon’ble Apex Court against the assessee in the case of Godrej and Boyce Manufacturing Company Ltd. v/s DCIT (2017) 394 ITR 449 (SC). 11.4 With regard to the assessee’s contention that where no exempt income had been earned from the investments, no disallowance ought to have been made u/s 14A of the Act by the Ld. AO, we note that the issue is decided in favour of the assessee in numerous decisions of the coordinate benches. In case no exempt income has been earned during the year under consideration by the assessee, no disallowance could be made u/s 14A of the Act in the light of the judicial pronouncements on the issue. In view of the above, we deem it appropriate to restore the issue to the Ld. AO for the limited purpose of verification to ascertain whether any exempt income, including dividend income, has been earned by the assessee during the year and recompute the disallowance accordingly.
& 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd.
Ground No. 8: disallowance u/s 14A for the purpose of computing book profit u/s 115JB: Rs. 4,10,154/-. 12.1 The assessee has submitted that the disallowance u/s 14A should not be taken into account while computing the book profit u/s 115JB of the Act and has relied upon the decision of the Special Bench in the case of Vireet Investment (P.) Ltd. (2017) 165 ITD 27 (Delhi Trib.). Ld. DR has not controverted the above submissions made by Ld. AR. 12.2 After considering rival submissions, we hold that this issue is squarely covered by the decision of the Special Bench, and hence, provisions of Section 14A r.w. Rule 8D are not applicable while computing book profit u/s 115JB of the Act.
Ground No. 9 & 10: Disallowance of deduction u/s 80-IB in respect of the profit earned by the Jammu Unit. 13.1 Brief facts of the issue are that the assessee has claimed deduction u/s 80-IB at Rs. 14,93,24,525/-, which was restricted to the gross total income of Rs. 7,35,12,861/-. The assessee submitted Form 10CCB in respect of Jammu and Silvassa units showing deduction claimed u/s 80-IB for the Jammu Unit @100% amounting to Rs. 14,88,18,879/- and for Silvassa unit @30% amounting to Rs. 5,05,646/-. Ld. AO, during the course of assessment proceedings, reallocated head office expenses to different units and reworked the profit of the Jammu unit, which came to a negative figure. Accordingly, no & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. deduction u/s 80IB was allowed in respect of Jammu Unit, and only Rs. 5,05,464/- claimed in respect of Silvassa unit was allowed u/s 80-IB of the Act. 13.2 Ld. CIT(A) upheld the disallowance made by the Ld. AO in his original appellate order dated 17.11.2015. The assessee sought rectification of the order on the ground that the method of allocation of expenses followed by the assessee has been accepted by the Ld. PCIT in the proceedings u/s 263 of the Act for the immediately preceding year, i.e. AY 2010-11. Since the assessee has been following the same method of allocation of expenses on a regular basis, Ld. AO was not justified in disturbing the same, and therefore, sought relief from the Ld. CIT(A) by filing a rectification application. Subsequently, Ld. CIT(A) passed the rectification order dated 09.03.2016, allowing the assessee’s claim with the following observations: “The submission of the Appellant is considered. After perusing the submissions of the Appellant and the order of CIT under section 263 of the Act for AY 2010-11 in Appellant's own case, it is observed that the system of allocation of expenses has been regularly followed by the Appellant. Further, it cannot be concluded based on this analysis of details that deduction has been allowed of an amount to the Appellant, to which it is not entitled - i.e. no excess deduction in respect of unit at Jammu (eligible @ 100% of profits) and with regard to Silvassa Unit which is entitled to deduction @ 30% of the profits has been allowed. The undersigned, therefore, accepts the contention of the Appellant that the scientific method of allocation of expenses has been adopted by the Appellant in allocating various, indirect head office expenses and further the same is being followed consistently on a year-on-year basis. Accordingly, the AO is directed to re-compute the eligible deduction available under section 80-IB from Jammu unit to the Appellant.” 13.3 Aggrieved with the original order of Ld. CIT(A), the assessee had preferred an appeal on this ground, which is not being pressed in view of the & 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. rectification order passed by the Ld. CIT(A). However, in its appeal against the rectification order, the revenue has objected to the relief granted by Ld. CIT(A) on the ground that once the disallowance had been confirmed on merits vide appellate order dated 17.11.2015, it could not be allowed in the rectification order as it was transgression into the jurisdiction of ITAT . 13.4 We have heard the rival submissions and considered the material placed before us. We find that in the order u/s 263 for AY 2010-11, Ld. PCIT has, after detailed examination, upheld the allocations of expenses and computation of profits of Jammu units and has observed as under: “3.2.4 As per the details available and backed by relevant evidence I find that system of allocation of expenses has been regularly followed by the assessee in the past as well as in the following years. I do not find anything amiss in this allocation. It cannot be concluded based on this analysis of details that deduction has been allowed of an amount to assessee, to which it is not entitled - i.e. no excess deduction in respect of unit at Jammu (eligible for deduction @ 100% of profits) and with regard to Silvassa unit which is entitled to deduction @ 30% of the profits has been allowed. I, therefore, accept the contention of the assessee that assessment order on this issue is not "erroneous" and "prejudicial to the interest of the revenue". 13.5 Accordingly, we hold that Ld. AO is not justified in disturbing the method of allocation of expenses adopted by the assessee, especially in the immediately preceding year, the method of computation has been examined and upheld by the Ld. PCIT vide order u/s 263 of the Act. Accordingly, this ground of appeal
is allowed in favour of the assessee.
14. Ground No. 11 is rendered infructuous as the assessee’s appeal on ground No. 1 has been allowed.
& 3559/Mum/2016 A.Y. 2011-12 Biostodt India Ltd. Similarly, ground No. 12 needs no adjudication as ground No. 4 stands allowed in favour of the assessee. 15. In the result, the appeal of the assessee is partly allowed and the revenue’s appeal is dismissed. Order pronounced in the open court on 30.05.2025.