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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri P.M. Jagtap(KZ) &Shri A. T. Varkey, JM]
Per A. T. Varkey, JM:
The appeal and cross objections are preferred by the Revenue and the assessee ( as captioned in the cause list above ) against the order of the Ld. CIT(Appeals) - 23, Kolkata [ in short, hereinafter ‘ld. CIT(A)’] dated 08-07-2019 for the Assessment Year 2014-15.
Ground Nos. 1 to 4 of the Revenue’s appeal are directed against the disallowance of Rs.34,29,000/- made by the AO u/s 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income Tax Rules, 19621 (hereinafter
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referred to as the “Rules”). Briefly stated, in the facts of present case, the assessee is a company engaged in the business of manufacturing and trading 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 appeal preferred by the Revenue on this issue are as under:
“(1) The Ld. CIT(A)-23, Kolkata has erred in law and facts by deleting the addition of Rs.31,29,000/- made by the Assessing Officer u/s. 14A read with Rule 8D of Income Tax Act Rules 1962.
(2) The Ld. CIT(A)-23,Kolkata has erred in law by holding that adjustment u/s. 14A cannot be made while computing book profit u/s. 115JB by misinterpreting clause (f) to Explanation 1 of sub- section 115JB.
(3) The Ld. CIT (A)-23, Kolkata has erred in law and facts by observing in the order that the Assessing Officer has failed to record his satisfaction without referring to the Books of account for disallowing u/s. 14A, while the Assessing Officer has recorded his dissatisfaction while disallowing an amount of Rs. 34, 29,000/-u/s. 14A read with Rule 8D in the assessment order.
(4) The Ld. CIT(A)-23, Kolkata has erred in law and facts by not taking any cognizance to Circular No. 5 of CBDT of 2014 and also by not following the principle laid down the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Relating to disallowance u/s 14A read with Rule 8D.”
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At the time of hearing, the ld. CIT, DR primarily relied upon the order of the AO. The ld. AR for the assessee, on the other hand, strongly supported the impugned order of the ld. CIT(A) giving relief to the assessee on the issue of disallowance made by the AO under section 14A read with Rule 8D. He contended that the 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. In support of this contention, the Ld. AR of the assessee relied on the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Limited reported in 313 ITR 340 as well as in the case of CIT Vs HDFC Bank Limited reported in 383 ITR 529.
As regards the relief allowed by the ld. CIT(A) under Rule 8D(2)(iii) to the extent of restricting the disallowance to the amount of exempt dividend income actually earned by the assessee during the year, the ld. AR for the assessee contended that this issue is squarely covered by the decision of the Hon’ble Delhi High Court in the case of Joint Investment Limited Vs CIT, ITA 117/2015 dated 25.02.2015, wherein it was held that the 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.
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 disallowance of Rs.29.31 lacs made by the AO u/s 14A by applying Rule 8D(2)(ii) was deleted by the ld. CIT(A) on the premise that the actual investment capable of yielding exempt income made by the assessee was sufficiently
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covered by the own funds of the assessee in the form of share capital and free reserves. In such a scenario, we note that the Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Limited (supra) has held that, what would be relevant to see in this context is the financial position of the assessee during the year under consideration as reflected in the relevant balance-sheet and if it is found that the assessee had sufficient interest-free funds of its own to meet its investment, then it could be presumed that the investments were made from the interest-free funds available with the assessee and not from the interest bearing borrowed funds so as to warrant disallowance under section 14A of the Act. This decision rendered in the case of Reliance Utilities & Power Limited (supra) was subsequently followed with approval by the Hon’ble Bombay High Court in the case of HDFC Bank Limited (supra) where it was held that, where both interest-free funds and interest bearing funds (mixed funds) are available to an assessee and the interest-free funds are more than the investments made by the assessee, then the presumption that can be drawn is that the investment in the tax-free securities would have been made out of the interest-free funds available with the assessee. In the facts of the present case, we note that the interest- free funds of its own available with the assessee in the form of share capital and free reserves were substantially more than the corresponding investments made to earn the interest free income and therefore we are of the view that the interest disallowance made by the AO u/s 14A read with Rule 8D(2)(ii), was rightly deleted by the ld. CIT(A).
It is further noted that this issue relating to disallowance u/s 14A read with Rule 8D(2)(ii) on account of interest was involved in assessee’s own case for A.Y. 2010-11.This Tribunal in their order dated 31.07.2017 in ITA No.1873/Kol/2014 noted that there was sufficient own funds available with the assessee to make the investments and, therefore upheld the ld. CIT(A)’s deleting the said interest disallowance. Identical view was expressed by this Tribunal to delete similar 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).
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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. CIT(A) restricting the disallowance made on account of the common administrative expenses to the amount of exempt dividend income actually earned by the assessee during the year under consideration.
With regard to disallowance u/s 14A of the Act read with Rule 8D while computing the book profits u/s 115JB of the Act, we note that there is no enabling provision in clause (f) of Explanation 1 to Section 115JB for making any adjustment in respect of expenditure disallowed as per Rule 8D. It is noted that clause (f) of the said Explanation 1 requires adjustment of ‘the amount of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) section 11 or section 12 apply’. The aforesaid expression is similar to the expression used in Section 14A(1) of the Act. Section 115JB however being a deeming provision, the clauses contained therein has to be strictly construed. Accordingly, it is only the provisions of Section 14A(1) that can be imported into clause (f) of Section 115JB of the Act. The scope of clause (f) cannot be enlarged in order to bring within its ambit the provisions of Sub-Section (2) & (3) of Section 14A of the Act and therefore the disallowance made by applying Rule 8D cannot also be imported. The Special Bench of this Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. (165 ITD 27) has held that the computation mechanism provided under Rule 8D of the Rules cannot be applied for computing addition in terms of clause (f) of Explanation 1,for arriving at the book profit u/s 115JB of the Act. Identical view has also been expressed by the coordinate Benches of this Tribunal in the following cases:
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− Britannia Industries Ltd Vs DCIT (107 taxmann.com 138) − Bata India Ltd Vs DCIT (180 ITD 464)
Respectfully following the same, we are of the view that the ld. CIT(A) has rightly deleted the addition of Rs.34,29,000/- by the AO u/s 14A read with Rule 8D, while computing book profit u/s 115JB of the Act, therefore, for the reasons as aforesaid, we therefore do not find any reason to interfere with the order of the ld. CIT(A) and, we confirm the same and dismiss Ground Nos. 1 to 4 raised by the Revenue.
Ground Nos. 5 to 7 of the Revenue’s appeal are directed against the ld. CIT(A)’s action of deleting the addition of Rs.22,47,63,955/- made by the 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 sheet entry; the AO directed the A/R of the assessee to explain the reasons for higher profitability of the eligible unit in comparison to the overall profitability of the company. According to AO the submission made by the assessee on 30.12.2016 was not acceptable and he also refused to grant further time to the assessee to explain the same as the proceedings were getting time barred on the same date. The AO accordingly proceeded to complete the assessment on the said date i.e., 30-12-2016. According to AO, the profit of the eligible unit was 33.50% which was substantially higher than the profits of other businesses at 4.84%. In his opinion the assessee had manipulated its accounts and shifted the profits of non-eligible
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businesses to the eligible business. He accordingly proceeded to estimate the reasonable profitability of eligible Centply Unit at 19.17% by taking the average of the profits of the eligible units and other businesses. He accordingly determined the eligible deduction u/s 80IE at Rs.30,05,49,368/- as opposed to the assessee’s claim of Rs.52,53,13,324/- and disallowed the balance sum of Rs.22,47,63,955/- claimed as deduction u/s 80IE of the Act. Aggrieved by the said order of the AO, the assessee preferred an appeal before the ld. CIT(A). In his impugned order the ld. CIT(A) after calling for all the details, did not find merit in the disallowance made u/s 80-IE of the Act and deleted the same. Aggrieved by the same, the Revenue is in appeal before us. The grounds of appeal preferred by the Revenue are as under:
“(5) The Ld. CIT (A)-23, Kolkata has erred in law and facts by deleting the addition of Rs. 22,47,63,955/- made by the A.O. u/s.80IE of the I.T. Act 1961.
(6) The Ld. CIT (A)-23, Kolkata has erred in law and facts by not taking cognizance to the fact that the assesse has not replied to the questions asked by the Assessing Officer regarding high percentage profit in ineligible business units and in the absence of reasons and time shortage the Assessing officer recorded his reasons and dissatisfaction on such high profit margin in the exempted unit.
(7) The Ld. CIT(A)-23, Kolkata has erred in law and facts by not giving an adequate opportunity to the Assessing officer regarding the reasons submitted by assessee for high profits by the exempted unit u/s. 80IE (33.50%) as compared to profit of non- exempted unit (4.84%).”
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.
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
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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 2012-13 placed at Pages 193 to 241 of the paper book, he pointed out that in all the earlier years the Revenue had allowed the deduction, as claimed by the assessee u/s 80IE of the Act in the respective returns of income. Thereafter he invited our attention to a statement at Page 192 of paper book giving the comparative details of turnover and profits of the Centply Unit from AY 2010-11 to 2014-15, to show that the profitability of the eligible Unit had remained similar and that there was no substantial increase as alleged by the AO in the impugned assessment order.
The Ld. AR further pointed out that the assessment u/s 143(3) for AY 2013-14 was completed on the same date as that of AY 2014-15 viz., 30-12-2016, copy of which was placed at Page 268 to 283 of paper book. He drew our attention to an important fact that unlike the relevant AY 2014-15, the AO had referred the case of the assessee for AY 2013- 14 for transfer pricing scrutiny u/s 92CA to the TPO- I Kolkata. He then took us through the relevant enquiries made by the TPO in the course of proceedings u/s 92CA(2) wherein the TPO had inter alia examined the profitability of the Centply Unit. Upon verification of the inter-unit transactions conducted by the assessee, covered by Section 80IA(8) & (10) of the Act, the TPO did not find the profitability of the Unit to be excessive and accordingly no adjustment was proposed in the transfer pricing order passed u/s 92CA(3) of the Act dated 27.10.2016, copy of which is found placed at Pages 266 to 267 of the paper book. However, according to Ld. AR, while completing the assessments u/s 143(3) on 30.12.2016 for AYs 2013-14 & 2014-15, the AO arbitrarily held in both the assessments that the profits reported by the Centply Unit were excessive, and on identical reasoning he estimated and disallowed partial claim u/s 80IE in both the assessment years. The Ld. AR pointed out that the ld. CIT(A) deleted the disallowance made by the AO u/s 80IE of the Act in AY 2013-14 vide his order dated 08.07.2019, against which no further appeal was preferred by the Revenue, and the matter had since attained finality. Thereafter, the ld. AR drew our attention to the income-tax assessment framed by the AO u/s 143(3) dated 30.12.2017 for the subsequent AY 2015-16. Referring to the order sheet entries dated 26.12.2017 & 28.12.2017 [Page 315
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of paper book], he pointed out that 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.
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 the premise that it was higher in comparison to other units. According to the ld. AR, before doing so, neither did the AO point out as to which transaction reported under Section 92BA of the Act was not at arm’s length, nor for that matter he brought on record any defect in the books of accounts maintained by the assessee or the audited stand-alone accounts of the eligible unit or the report furnished in Form 10CCB by the auditor. He contended that it was also not a case where the AO had invoked Section 145(3) of the Act so as to resort to estimation of profits. He thus contended that the ld. CIT(A) had rightly held that without rejecting the book results in terms of the mandate set out in Section 145(3) of the Act, the AO could not have legally estimated the income of the eligible unit.
Further according to ld. AR, the AO was legally obliged to first point out as to whether he was of the view that the transactions conducted by the eligible unit with other non-eligible units in terms of Section 80IA(8) of the Act, were not at fair market value, or that there was any arrangement with AEs in terms of Section 80IA(10) of the Act which led to higher profits. Without pointing out any such arrangement, according to him the AO could not arbitrarily contend that the profits had been shifted out of non-eligible unit to the
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eligible unit. In this regard, the ld. AR relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs Schmetz India (P) Ltd. (26 taxmann.com 336).
The ld. AR further invited our attention to the enhancement notice given by the ld. CIT(A) u/s 251 on 15.05.2017 and the enquiries made by the ld. CIT(A) consequent thereto, in exercise of his powers u/s 250(4) of the Act. He submitted that even on the merits, the ld. CIT(A) had enquired into the various factors involved in the higher profitability of the eligible unit. After taking us through the explanation & details furnished in response to the enquiries made by the ld. CIT(A) in terms of Section 251 of the Act, the ld. AR submitted that, it was also upon being satisfied with the reasons for higher profitability of the eligible unit in comparison to other units that the ld. CIT(A) deleted the impugned addition. He thus urged that the impugned order of the ld. CIT(A) be upheld.
We have carefully considered the rival submissions and perused the material placed on our 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 19.17% and thereby disallowing sum of Rs.22,47,63,955/- out of the total claim of Rs.52,53,13,324/- made u/s 80IE of the Act.
On a perusal of the material on record we find that the primary facts noted by the AO in the impugned order were factually erroneous. Admittedly the assessee is engaged in
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the business of manufacture and marketing of plywood & block boards. However on perusal of the annual report, it is noted that the assessee also manufactures other allied products such as laminates, veneers & pre-laminated particle boards. Besides the manufacturing, the assessee also undertakes trading of numerous products, such as plywood, block boards, MDF, phenols, furniture, agri-products and others on substantial scale. The assessee also operates two Container Freight Stations at Sonai & JJP in the State of West Bengal. It is therefore observed that the assessee is engaged in diverse business activities involving manufacturing, trading and also rendering of services. As a consequence, the profitability of different product& service segments would be different & distinct. Similarly, the margins in the trading operations would not be comparable with the profits in manufacturing operations. We thus find merit in the ld. AR’s contention that AO had prima facie erred in considering all other units and business segments to be engaged in the same business as that of the eligible Assam Unit for comparing the profits. Hence, we find the action of the AO in comparing the profits of the eligible unit with rest of the business of the assessee to be fundamentally flawed.
We note that the case of the AO is that the profits derived by the assessee from the eligible business are more than the ordinary profits of other business and therefore he estimated at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 80-IE of the Act. We find that in the entire assessment order, there is no material or any evidence which has been brought out to say that the course of business of the eligible unit has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. Instead the AO proceeded only on surmises. In our opinion, when the assessee has placed the audited stand alone accounts 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.
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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 sub- section (7) to (12) of section 80IA has been incorporated in to section 80IE of the Act. The relevant extracts of the provision of section 80IA(10) of the Act is as follows:
“(10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:”(emphasis given by us)
In terms of the above provision, it is only where it appears to the AO that owing to the close connection between the assessee carrying on eligible business and any other closely connected person, the course of business is so arranged that the business transacted between them produces to the assessee more than the ordinary profits, which might be expected to arise in such eligible business; that he shall compute the amount of profits as may be reasonably deemed to have been derived therefrom. A bare reading of the relevant provision indicates that in order to invoke the same, it is of utmost importance on the part of the AO 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. The noteworthy point is that we are dealing with a deeming provision and a deeming provision or a legal fiction is one whose mandate does not exist but for such provision. Because of such deeming provision alone, the given imaginary state of affairs is taken as reality notwithstanding the fact that it is at variance with the reality and the other relevant provision of the enactment. It has been settled that the scope of a deeming provision should be restricted to what is expressly stated in such a provision. With this
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background that sub-section (10) is a deeming provision and it must be strictly construed. So, we revert to the point under consideration that in such a scenario, the burden lays on AO to show that in the course of business between these closely connected persons was arranged 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 with its related persons so as to produce more profits to it. To put it simply, if such an 'arrangement' is a ‘cause’, the higher profit is its 'effect'. Hence, what is relevant for invoking sub-section (10) of section 80 IE read with section 80IE(6) of the Act is the prevalence of a situation where the higher profit has resulted due to 'arrangement' between the assessee and its closely connected person and not where the higher profit resulted due to the assessee's effectively managing the business. In this regard, we find merit in the ld. AR’s reliance on the judgment of the Hon'ble Bombay High Court in CIT v. Schmetz India (P.) Ltd. (supra) in which it has been held that merely because an assessee makes extra ordinary profit, it would not lead to the conclusion that the same was organized/arranged for the purpose of claiming higher deduction u/s 10A of the Act. The case of the assessee is further supported by the decisions of the coordinate Benches of this Tribunal in AT Kearney India (P.) Ltd. v. Addl. CIT (66 SOT 140) [ITAT Delhi] and Zavata India (P.) Ltd. v. ITO (141 ITD 456) (ITAT Hyd]
Now adverting to the facts of the present case, we find that the AO failed to show that there existed any arrangement between the assessee and its connected persons or other
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ineligible units, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee. Since the AO was unable to show that there was any ‘arrangement’ in terms of Section 80IA(10) of the Act, the AO could not have invoked the deeming provision and then estimated and scaled down the profits of the eligible unit of the assessee. Thus, the AO erred in estimating the profit of the eligible unit without satisfying the condition precedent as prescribed in section 80IE(6) read with section 80IA(10) of the Act.
Be that as it may be, it is well known that higher or lower profit of a business in comparison to other units can be as a result of the cumulative effect of several factors. For instance, from the facts of the present case, it is noted that apart from the eligible unit at Assam, the assessee had manufacturing units at manufacturing at Karnal, Joka & Chennai. Unlike the other non-eligible units, the assessee was entitled for excise duty exemption in respect of the goods cleared by its eligible unit located 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 unit located in backward area was around Rs.3500/- per month whereas in the unit at Karnal and Joka it averaged around Rs.5500/- and Rs.8000/- approx. [Page 174 of paper-book] respectively. Having regard to these factors, we thus agree with the findings of the ld. CIT(A) that the assessee had substantiated on facts that the eligible unit enjoyed benefit of subsidies and substantial savings in costs in comparison to Other Units which contributed to its higher
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profitability. The aforesaid facts therefore further support our conclusion that the mere higher profit earned by eligible unit cannot be the reason to conclude that the assessee transacted in such an 'arranged' manner so as to produce more profits to it.
At this juncture it would also be relevant to note the text of proviso to sub-sec. (10) of Sec. 80IAwhich provides for computing ordinary profits from transactions/arrangements with related persons, having regard to the arm's length price. This proviso reads as under:—
“Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F.”
In the facts of the present case, we find that the out of the turnover of Rs.15,314.87 lacs, sales worth Rs.14,024.34 lacs was made by the eligible unit to its depots across India. These inter-unit transactions were reported in Form 3CEB filed along with the return of income wherein the auditor had certified the same to be at arm’s length. We note that the AO did not dispute the arm’s length value of these goods transacted by the eligible unit with it depots. We also note that the AO also did not deem it fit to refer these specified domestic transactions for transfer pricing scrutiny. Hence, when the AO had not disputed the arm’s length value of the transactions covered u/s 80IA(8),then his action of disputing the profitability of such eligible unit and holding it to be excessive, was clearly unsustainable in law as well as on facts.
Moreover, we note that during the appellate proceedings the ld. CIT(A) in exercise of his co-terminus powers had initiated suo-moto enquiry in terms of Section 250(4) into the arm’s length value of the prices at which the goods were transferred by the eligible Assam Unit to the depots. Before the ld. CIT(A), the appellant had furnished invoice-wise and date- wise 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 paper- book]. 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
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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 Department did not dispute the invoice rates at which the goods were transferred by the eligible Assam Unit to its depots, which also showed that the goods were cleared by the eligible Assam Unit at ‘market value’. We therefore note that, even on merits, the inter-unit transactions conducted by the eligible unit covered u/s 80IA(8) & (10), were at arm’s length and did not yield any more than ordinary profits to attract the rigors of Section 80IA(10) of the Act and enable the AO to estimate the profits of the eligible unit.
Coming to the argument of the ld. CIT, DR that, the AO was legally empowered to estimate the profits, we find the same to be fundamentally flawed. It is indeed true that, the AO could have estimated the eligible profits qua the specified domestic transactions conducted by the eligible Assam Unit, but only if it had it been done in terms of the mandate set out in Chapter X of the Act. Section 92 of the Act provides that, any income from specified domestic transactions, as defined in Section 92BA of the Act, have to be computed at arm’s length price. Further, Section 92C of the Act read with Rule 10B of the Rules sets out the specified methods in terms of which such arm’s length value is to be computed. We thus note that the condition precedent for estimating the arm’s length eligible profits is that, the AO has to first point out the relevant specified domestic transactions u/s 80IA(8) or (10) of the Act, which according to him was not at arm’s length and it is only qua such specified domestic transactions that the estimation exercise can be carried out and that too in accordance with one of the methods as specified in Rule 10B of the Rules. The mere fact that the profitability of the eligible unit is higher, does not qualify as a specified domestic transaction u/s Section 92BA of the Act so as to empower the AO to estimate the profits under Section 92C of the Act. The ld. AR has rightly pointed out that AO neither pointed out the specified domestic transactions reported u/s 92BA of the Act, which according to him were not at arm’ length nor his manner of estimating the profits was in
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terms of any of the five methods specified in Rule 10B of the Rules. Instead he had simply estimated the eligible profits of the unit as a whole which action was fundamentally wrong as discussed supra. Further, as already noted in the preceding paragraphs, the 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.
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 the deductions as claimed u/s 80IE in the return of income was allowed to the assessee. From the comparative chart furnished at Page 192 of paper book, it is noted that the profit margins in the AYs 2011-12 & 2012-13 was 38.31% and 33.91% which was comparable with the relevant AY 2014-15 viz., 33.50%. Moreover, we find that the profitability of the eligible Assam Unit for the subsequent AY 2015-16 was 38% and the same was not doubted or held to be excessive by the AO’s successor in the order passed u/s 143(3) of the Act dated 30.12.2017. As regards AY 2013-14, it is noted that the profitability for this year was 28.30%. In that year the AO had referred the inter-unit transactions of the eligible unit u/s 80IA(8) & (10) of the Act for transfer pricing scrutiny. In the transfer pricing assessment, the TPO had made enquiries into the higher profitability of the eligible Assam Unit and upon examining the submissions made by the assessee, no transfer pricing adjustment in terms of Section 80IA(8) & (10) of the Act was proposed by the TPO in his order dated 27.10.2016. It is noted that the transfer pricing order u/s 92CA(3) for the AY 2013-14 was available before the AO at the time of framing of assessment u/s 143(3) for AY 2014-15. Moreover, it is noted that similar
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estimated disallowance u/s 80IE which was made by the AO in AY 2013-14 was deleted by ld. CIT(A) against which no further appeal was preferred by the Revenue. Having regard to the foregoing facts, we fully agree with the ld. CIT(A) that profitability of the eligible Assam Unit for the relevant year commensurate with the earlier years and that the AO failed to bring on record any material to distinguish the assessee’s case for AY 2014-15 from the earlier years. Hence, when on same set of facts and circumstances, the Revenue, in the earlier AYs 2010-11 to 2012-13 and also the subsequent AY 2015-16, did not allege any ‘arrangement’ resulting in higher profits in terms of Section 80IA(10) of the Act and accepted similar profitability of the eligible Assam unit, then without pointing out the change in facts or the position of law, we hold that the AO could not have disputed the profitability of the said unit in the relevant year in question. Useful reference in this regard may be made to the following observations made by the Hon’ble Supreme Court in the case of Radhasoami Satsang vs. CIT (193 ITR 321).
“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.”
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 not the other way round. It was on this principle reason that the ld. CIT(A) allowed the appeal of the assessee. The ld. CIT(A) further took note of the fact that the profitability of the eligible Assam Unit was comparable with earlier years and therefore the AO could not have resorted to estimation of profits without first rejecting the books of accounts u/s 145(3) of the Act. We note that it was with
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a view to further verify the averments of the assessee and in exercise of his co-terminus powers that the ld. CIT(A)had issued enhancement notice u/s 251 of the Act and, thereafter made suo moto enquiries in exercise of the powers vested in him u/s 250(4) of the Act. Hence, it was a clear case of exercise of overriding power by ld. CIT(A) in terms of Rule 46A(4) and it was not a case where the assessee on his own volition had furnished additional evidence or fresh document, which would have been subjected to sub-rule (1) to (3) of Rule 46A of the Rules. In the instant case, the explanations regarding the factors influencing the higher profitability of the eligible Assam Unit had come on the record of the ld. CIT(A), because he had decided to examine the facts of the case in depth and then adjudicate upon the matter on the basis of evidence and material, thus, gathered. We note that the ld. CIT(A) was empowered to do so under the provisions of section 250(4) of the Act. The result of such enquiry conducted by him could have either gone to further cement or enhance the case made out by the AO or help out the assessee against the findings of the AO. In the instant case, the results of the enquiries thus conducted supported the case of the assessee and not that of the Revenue. However, the fact remains that such material was gathered by the ld. CIT(A) on his own motion, and therefore there was no requirement, in law for him, to consult the AO on the same. Our foregoing proposition is supported by the following judicial precedents:
− CIT vs Sagar Construction (P) Ltd. (56 taxmann.com 434) [Patna HC] − PCIT vs KM Sugar Mills Ltd. [ITA No. 187 of 2016] [Allahabad HC] − ITO vs Industrial Roadways (112 ITD 293)[ITAT, Mumbai] − DCIT vs NE Technologies India (P) Ltd. (47 taxmann.com 405) [ITAT Hyderabad]
Hence, we do not find any merit in the ld. CIT. DR’s plea for sending the issue back to the file of the 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.
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.
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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.
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 and in that view of the matter, the AO may be directed to allow deduction thereof.”
At the outset, the ld. AR mentioned that this issue now stands covered by the judgement of the Hon'ble Bombay High Court in the case of Sesa Goa Ltd. v. Jt. CIT (117 taxmann.com 96) & Hon’ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. v. JCIT (IT Appeal No.52/2018). The ld. AR submitted that this judgment has also been followed by the coordinate benches of this Tribunal in the cases of DCIT Vs Tega Industries Ltd (112 taxmann.com 259), Dy. CIT Vs ITC Infotech India Ltd (114 taxman.com 181) & Reckitt Benckiser (I) Pvt Ltd Vs DCIT (117 taxmann.com 519), where similar issue is adjudicated in favour of the assessee. He therefore urged that the education cess of Rs.39,47,371/- incurred during the year should be allowed as deduction while computing total income of the assessee. Per contra, the Ld. CIT, DR urged that this claim was not admissible in terms of the provisions of Section 40(a)(ii) of the Act.
We have heard both the parties and perused the facts which are available on record. We find that this issue is no longer res integra. We note that Coordinate Benches of this Tribunal in the following cases have held that education cess should be allowed as an expense deductible while computing total income of the assessee. The relevant extracts of the decisions are as follows:
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(i) Dy. CIT Vs ITC Infotech India Ltd (114 taxman.com 181)
Next comes assessee's cross-appeal ITA No.485/Kol/2019. It emerges at the outset the same suffers 1535 days' delay in filing. The assessee's detailed condonation petition reads that it has sought to delete section 40(a)(ii) education cess disallowance of Rs. 8,60,379/- as a business expenditure allowable u/s 37(1) of the Act since incurred only and exclusively for the purpose of the business. Learned CIT-DR vehemently contended that the impugned 1535 days' delay in filing of the instant appeal has not been properly explained as attributable to circumstances beyond assessee's control. The taxpayer's case on the other hand is that hon'ble Rajasthan high court's judgment in Chambal Fertilizers & Chemicals Ltd. v. Jt. CIT D.B. IT Appeal No.52/2018 dated 31.07.2018 considered in the tribunal's order in ITC Ltd. v. ACIT IT Appeal No.685-1267 (Kol.) of 2014 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.
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 refer to the tribunal's latter decision in ACIT v. Srei Infrastructure Finance Ltd. [IT Appeal No.1302-1318 (Delhi) of 2012 Dated 27.02.2019] that the issue stands adjudicated in the Revenue's favour. We are informed that the hon'ble jurisdictional high court has restored the very issue back to the tribunal for fresh adjudication. We therefore follow hon'ble Rajasthan high court's decision (supra) to conclude that the both lower authorities have erred in disallowing educational cess amounting to Rs. 8,60,379/- u/s 40(a)(ii) of the Act. The assessee's sole substantive grievance as well main appeal ITA No.485/Kol/2019 are accepted therefore.
(ii) DCIT Vs Tega Industries Ltd (112 taxmann.com 259)
“23. Now we shall take Cross-objections filed by the assessee in C.O No.31 to 33/Kol/2019. The solitary grievance of the assessee in these Cross Objections are that the ld. Assessing Officer as well as ld. CIT(A) has erred in not allowing deduction of the amount of education cess debited in the books of accounts of the company.
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These cross objections filed by the assessee is barred by limitation by 598 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, we condone the delay and admit these cross objections filed by assessee.
After giving our thoughtful consideration to the submissions of the parties and perusing the judicial decisions relied upon by the ld. Counsel for the assessee. We note that the education cess is allowable for deduction u/s 37(1) of the Act. For this, we rely on the judgment of the Coordinate Bench of ITAT Kolkata in the case of ITC Ltd. v. ACIT [IT Appeal No.685 (Kol) of 2014, for A.Y.2009-10, order dated 27.11.2018 wherein it was held as follows:
"12. The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317.0 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. v. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 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.”
Respectfully following the judgments rendered by the Hon’ble Bombay High Court & Rajasthan High Court and the binding decisions of this Tribunal, we thus direct the AO to allow the deduction of the education cess in computing total income of the assessee company. Ground No. 1 of the cross objection therefore stands allowed.
Ground Nos. 2 & 3 of the Cross objections are as follows:
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“(2) For that on the facts and in the circumstances of the case and in law, the incentive of Rs. 2,36,75,501 received by the company from the West Bengal State Government for setting-up a new industrial undertaking in the State of West Bengal by way of reimbursement of sales tax, was in the nature of pure capital receipt and therefore the amount of Rs. 2,36,75,501 credited in the Profit & Loss Account deserves to be excluded and/or reduced while computing tax on book profit u/s 115JB of the Act.
(3) For that on the facts and in the circumstances of the case and in law, the incentive of Rs. 13,82,79,547/- received by the company from the Central Government for setting-up a new industrial undertaking in the State of Assam by way of refund of Excise Duty, was in the nature of pure capital receipt and therefore the amount of Rs. 13,82,79,547 credited in the Profit & Loss Account deserves to be excluded and/or reduced while computing tax on book profit u/s 115JB of the Act.”
During the relevant AY 2014-15, the assessee was in receipt of subsidies from the Central Statement & State Government to the tune of Rs.13,82,79,547/- & Rs. 2,36,75,501/- in respect of their new units set-up in the States of Assam and West Bengal respectively. It is noted that in the audited accounts the said incentives were shown under the head “Other Operating Revenue” and Note (b) there under; in Schedule-19 of the financial statements, which is available at Page 28 of the paper book. The refund of excise duty was also reflected in the Notes forming part of the stand-alone audited accounts of the Assam Unit, which is available at Page 56 of paper book.
The assessee submitted that it had set-up a new manufacturing unit in the State of Assam. In terms of Notification No. 20/2007 issued by Government of India, Ministry of Finance dated 25.04.2007, the assessee was entitled to excise duty exemption on the goods cleared from the said Unit. The ld. AR invited our attention to the Eligibility Certificate 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:—
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“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 on or after the 1st day of April, 2007 but not later than 31st day of March, 2017.”
During the relevant year the assessee was also in receipt of subsidy in form of refund of sales tax/VAT from the State of West Bengal under the West Bengal Incentive Scheme, 2000 which was formulated expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas which are industrially backward. To promote industrialization, the Government offered various incentives/ subsidies including 'Industrial Promotion Assistance' (‘IPA’) in form of refund of 50% of sales tax paid for a period of fifteen years. The subsidy was therefore directed towards industrial development in the State. The assessee received an eligibility Certificate dated 07.07.2004 from the Government of West Bengal for setting up a new unit for manufacturing high pressure decorative laminates having capacity of 24 lacs sheets. The object and applicability of the West Bengal Incentive Scheme, 2000 is as follows:—
" NOTIFICATION No. 91-CH/H/4F-54/200
Whereas in pursuance of a National Policy the sales tax related incentives have been withdrawn from the 1st January 2000.
And whereas the State Government have considered it necessary and expedient to extend new types of incentives for promotion of industries in the State from the same date. Now, therefore, the Government is pleased hereby, in supersession of the West Bengal Incentive Scheme 1999 sanctioned under Commerce & Industries Department’s Notification No.580CI/H dated 22.06.1999 and amended from time to time, to approve and sanction a New Incentive Scheme for large, medium and small-scale industrial units as under:
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APPLICABILITY OF THE 2000 – SCHEME:
The 2000 Scheme shall generally be applicable to all large, medium, cottage and small- scale projects and to large/medium sector tourism units to be set up and also to expansion projects of existing units on or after the 1st January, 2000. The units may be in the private sector, co-operative sector, joint sector as also companies/undertakings owned or managed by the State Government.”
The object of the West Bengal Incentive Scheme, 2000 is therefore noted to be for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of sales tax subsidy was granted to the assessee.
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 this proposition, he relied on the judgment of the Hon’ble jurisdictional High Court in the case of Pr. CIT vs Ankit Metal & Power Ltd (416 ITR 591) and the decisions rendered by this Tribunal in the cases of DCIT vs Emami Biotech Ltd. in ITA No. 1915/KOL/2017 and SICPA India (P) Ltd. vs DCIT (80 taxmann.com 87). Per contra, the Ld. CIT, DR argued that since this claim was not made before the AO by filing revised return of income, it should not be admitted at this stage.
We have considered the rival submissions of both the parties. From the facts as already discussed in the foregoing, it can be safely inferred that the subsidies were granted
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to the assessee for setting up new units in the States of West Bengal and State of Assam. The Hon’ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) has held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment is capital in nature. The relevant extracts of the judgment are as follows:
“21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the "purpose test". It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.
Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear 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.
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 capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest
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subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.
After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.
We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.” (emphasis supplied)
The above decision of the Hon’ble Supreme Court has been followed by the Hon’ble Calcutta High Court in the case of Pr. CIT Vs Shyam Steel Industries Limited (303 CTR 628) wherein the Court held that, where the incentive under the Industrial Schemes are given only to new units and units which have undergone an expansion, then the real purpose of such incentive has to be seen as a capital subsidy and therefore should be regarded as a capital receipt and not a revenue receipt. Following the ratio laid down in these judgements, we find merit in the claim of the ld. AR that the excise & sales tax subsidies received by the assessee are in the nature of capital receipt not liable to tax since the object of granting subsidy is to encourage setting up new industries for industrial growth of industrially non- developed area.
Now coming to the issue relating to treatment of these subsidies while computing book 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
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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.
It is noted that in the context of similar State Industrial Scheme, the jurisdictional Hon’ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (416 ITR 591) held that subsidies received for setting up new industry is not in the nature of income and therefore cannot be deemed as income for the purposes of computing book profit u/s 115JB of the Act. In the decided case the assessee had received interest subsidy under the WB Incentive Scheme, 2000 and power subsidy under the Power Intensive Industries Scheme, 2005 for setting up Sponge Iron Plant in Bankura. Before this Tribunal, the assessee claimed that receipt of such subsidies in form of remission of interest and power / electricity duty payments etc. was capital receipt not liable to tax both under the normal computational provisions as well as book profit u/s 115JB of the Act. The Tribunal answered the issue in favour of the assessee. On appeal by the Revenue, the Hon’ble High Court upheld the order of this Tribunal by observing as under:
“26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of Appollo Tyres Ltd. (supra).
In this case since we have already held that in relevant assessment year 2010-11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question
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would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.”
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 account and treated as income and exclusion of these incomes (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.
We have heard the submission of the learned counsel for the Assessee. As far as the excluding the subsidies in question from computation of book profit u/s 115JB of the Act is concerned, the provisions of Sec.115JB of the Act have to be looked at. Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an Assessee, being a company, the income- tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2001, is less than seven and one half percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one half ten per cent. The Assessee being a company the provisions of Sec.115JB of the Act were applicable. Every assessee, being a company, shall, for the purposes of section 115JB of the Act, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, "book profit" means the net profit as shown in the
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profit and loss account for the relevant previous year prepared under sub- section (2), as increased by certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act.
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 taxation u/s 115JB. The tribunal after referring to several decisions on the issue viz., the Hon'ble Apex Court in case of Indo Rama Synthetics (I) Ltd. v. CIT [2011] 330 ITR 336/9 taxmann.com 25, Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC), Special Bench ITAT in the case of Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) (SB), ITAT Luknow Bench in the case of ACIT v. L.H. Sugar Factory Ltd. and vice versa in ITA Nos. 417 , 418 & 339/LKW/2013 dated 9.2.2016 and decision of Mumbai ITAT in the case of Shivalik Venture (P.) Ltd. v. Dy. CIT [2015] 70 SOT 92/60 taxmann.com 314, came to the conclusions
(i) the object of Minimum Alternate Tax (MAT) provisions incorporated in Sec.115JB of the Act was to bring out real profit of companies and the thrust was to find out real working results of company.
(ii) Inclusion of receipt which are not in the nature of income in computation of book profits for MAT would defeat two fundamental principles, it would levy tax on receipt which was not in nature of income at all and secondly it would not result in arriving at real working results of company. Real working result could be arrived at only after excluding this receipt which had been credited to P&L a/c and not otherwise.
(iii) There was a disclosure of the factum of forfeiture of share warrants amounting to Rs. 12,65,75,000/- by the Assessee in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for year ended 31.3.2009. Profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, included notes on accounts thereon and accordingly in order to determine real profit of Assessee, adjustment need to be made to disclosures made in notes on accounts forming part of profit and loss account of Assessee. Profits arrived after such adjustment, should be
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considered for purpose of computation of book profits u/s 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to section 115JB of the Act.
The Tribunal in the aforesaid decision made a reference to the decision of the Special Bench of the ITAT in the case of Rain Commodities (supra) which in turn was based on the ratio laid down in the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the 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 computing book profit u/s 115JB of the Act. The Mumbai Bench held as follows:
'26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in "book profit" u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.'
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The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s.115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue.
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.
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 case of CIT vs. Mitesh Impex (270 CTR 66) after considering the decisions rendered by the Hon’ble Apex Court in the case of NTPC Vs CIT (229 ITR 383) and Goetze (India) Ltd. vs. CIT (284 ITR 323) has held that that, if a claim which is available in law is not raised either inadvertently or an account of erroneous plea of complex legal position, such a relief cannot be shut up for all the times to come merely because it is raised for the first time in appellate proceedings in absence of a revised return filed before the Assessing Officer.
We further note that, on similar set of facts & circumstances, identical contention was also raised by the Revenue before the Hon’ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (supra). In the decided case also, the assessee had
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raised this plea for the first time before the Tribunal viz., the subsidy received under the State Industrial Scheme is capital in nature and therefore should be excluded from the book profit u/s 115JB of the Act. The Tribunal admitted this legal issue raised by the assessee and answered it in their favour. Before the Hon’ble High Court, the Revenue raised the following question for their consideration.
“(ii) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in accepting the claim of deduction by the assessee towards 'Interest subsidy' and 'Power subsidy' under the aforesaid schemes by filing revised computation instead of revised return before the assessing officer for exclusion of the aforesaid receipts from the book profit under Section 115 JB on the ground that the said subsidies do not constitute income under Section 2(24) of the Income Tax Act, 1961?.”
The Hon’ble jurisdictional High Court answered the question in negative and in favour of the assessee by observing as under:
“28. The third issue involve in the instant appeal which requires adjudication is whether the action of Tribunal entertaining / allowing the claim which was made by the assessee before the Assessing Officer by filing a revised computation instead of filing a revised return since the time to file the revised return was lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead of revenue receipts as claimed in original return. The Assessing Officer had denied this claim. Revenue has attacked the order of the tribunal by relying on the decision in the case of Goetze (India) Ltd. (supra).
This case does not help the revenue/appellant. In this case Supreme Court has made it clear that its decision was restricted to the power of the Assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under Section 254 of the Income Tax Act, 1961. The Hon'ble Supreme Court in the said decision held as follows: "……….In the circumstances of the case, we dismiss the Civil Appeal. However, we make it clear that the issue in this case is limited to the power of the Assessing Authority and does not impinge on the power of the Income Tax Appellate Tribunal under Section 254 of the Income Tax Act, 1961."
29.1 This judgment was followed by our Court in the case of Britannia Industries Ltd. (supra) holding that Tribunal has the power to entertain the claim of deduction not claimed before the Assessing Officer by filing revised return. Respectfully following the aforesaid decision as well as the view already taken by us in this case that the aforesaid subsidies are capital receipt and not an 'income' and not liable to Tax Tribunal in exercise of its power under Section 254 of the Income Tax Act justified this claim though no revised return under Section 139 (5) of the Act was filed before the Assessing
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Officer. We answer both the question Nos. 1 and 2 in negative and in favour of assessee.”
For the reasons set out above therefore, we do not find any merit in the contention put forth by the ld. CIT, DR. We accordingly accept the plea raised by the assessee and direct the AO to exclude the subsidies received in form of refund of VAT and excise duty exemption while computing book profit u/s 115JB of the Act. Ground Nos. 2 & 3 of the Cross Objections therefore stands allowed.
In the result, the appeal of the revenue is dismissed and cross objections of assessee are allowed.
Order is pronounced in the open court on 04.11.2020.
Sd/- Sd/- (J(((P. M. Jagtap) (A. T. Varkey) Vice President Judicial Member Dated: 04.11.2020 SB, Sr. PS Copy of the order forwarded to:
Appellant- DCIT, Circle-2, LTU, Kolkata 2. Respondent- M/s Century Plyboards (I) Ltd., P-15/1, Taratala Road, Kolkata-700088 3. The CIT(A)- 23, Kolkata (sent through e-mail) 4. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail)