DEEPAK VEGPRO (P) LTD.,ALWAR vs. ACIT, ALWAR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 110/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2009-10 cuke M/s Deepak Vegpro Pvt. ACIT, Cirle -1, Alwar. Vs. Ltd. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 116/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2009-10 cuke ACIT, Cirle -1, Alwar. M/s Deepak Vegpro Pvt. Ltd. Vs. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent

vk;dj vihy la-@ITA No. 704/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2010-11 cuke M/s Deepak Vegpro Pvt. DCIT, Cirle -1, Alwar. Vs. Ltd. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 705/JP/2014

2 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar fu/kZkj.k o"kZ@Assessment Year : 2010-11 cuke ACIT, Cirle -1, Alwar. M/s Deepak Vegpro Pvt. Ltd. Vs. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 275/JP/2015 fu/kZkj.k o"kZ@Assessment Year : 2011-12 cuke M/s Deepak Vegpro Pvt. ACIT, Cirle -1, Alwar. Vs. Ltd. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent

vk;dj vihy la-@ITA No. 173/JP/2016 fu/kZkj.k o"kZ@Assessment Year : 2012-13 cuke M/s Deepak Vegpro Pvt. ACIT, Cirle -1, Alwar. Vs. Ltd. Old Industrial Area, Itarana, Road, Alwar (Raj.). LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAACD 6118 P vihykFkhZ@Appellant izR;FkhZ@Respondent jktLo dh vksj ls@ Revenue by : Shri R.A.Verma (Addl. CIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.) lquokbZ dh rkjh[k@ Date of Hearing : 10/03/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement: 24/04/2017 vkns'k@ ORDER

PER: VIKRAM SINGH YADAV, A.M.

3 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar

These are cross appeals filed by the assessee and Revenue against the orders of ld. CIT(A), Alwar dated 26.12.2013 for A.Ys. 2009- 2010, dated 26.12.2013 for A.Y. 2010-2011, dated 20.01.2015 for A.Y. 2011-2012 and dated 30.12.2015 for A.Y. 2012-2013 respectively. Since the common grounds are involved, all these appeals were heard together and are being disposed off by this consolidated order.

ITA No. 110/JP/2014 (assessee’s grounds of appeal):

“1.0 Deemed Dividend of Rs. 70,00,000:-

1.1 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the amount of Rupees 70,00,000 as deemed dividend, whereas the fact remains that the assessee company has not accepted any payment within the meaning of section 2(22)(e) of the Income-Tax Act, 1961. The said credit is on account of purchase of shares from Saurabh Agrotech (P) Ltd, which does not fall within the definition of “receipt of payment” and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same.

4 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 1.2 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the assessee company as having voting power in the company Saurabh Agrotech (P) Limited, whereas the fact remains that the assessee company does not have any voting power in the Saurabh Agrotech (P) Ltd, in as much as its entire shareholding got transferred by Saurabh Agrotech (P) Ltd in favour of Sh. Babu Lal Data, on 10.04.2008, which is evidenced from the assessment records, therefore the provision of section 2(22)(e) of the Income-Tax Act’ 1961 has no applicability over the case and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same by not considering the same.

1.3. That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in not giving any finding that the amount taxed as deemed dividend of Rupees 70,00,000 is “by way of” loans or advances, whereas the statute requires only such amount of loans or advances, which have been given “by way of” advances or loan to be taxed as deemed dividend and learned Commission of Income-Tax (Appeals), Alwar has erred in sustaining the same by not giving any finding thereto.

1.4 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in treating a sum of Rs. 70,00,000 as advances and loan in the hands of the assessee company in the account of Saurabh Agrotech (P) Limited., whereas the said account is for the sale of shares and entered into for transferring the controlling interest in the company Saurabh Agrotech

5 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (P) Ltd in favour of Sh. Babu Lal Data for the business expediency, thus the said amount is outside the purview of advances or loan, thus not covered by the definition of “Deemed Dividend” and learned Commissioner of Income- Tax (Appeals), Alwar has erred in sustaining the same by not giving any finding thereto.

1.5 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the accumulated profit upto 03.01.2009, whereas the fact remain that as on 03.01.2009, the assessee company was not even the shareholder as on that date, therefore, no question arises for considering the amount of Rupees 7000000.00 as deemed dividend and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same by not giving any finding thereto.

1.6 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the accumulated profit of Rupees 81,27,348.00 as on 03.01.2009, whereas the assessee company did not possess accumulated profit as on 03.01.2009, which it could give as advances or loan and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustain the same by not giving any finding thereto.

1.7 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in considering the accumulated profit as per Balance Sheet, whereas the relevant piece of statute does not requires to consider the accumulated profit as per Balance Sheet, the profit has to be taken as defined under the provision of the Income-Tax Act, 1961 or in other words, for the

6 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar purpose of working out the profit, depreciation allowed under the provision of Income-Tax Act, 1961 should be taken into consideration and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustain the same by not giving any finding thereto.

1.8 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in not deducting the all liabilities due including the income tax liability while working out the accumulated profit for the purpose of deemed dividend within the meaning of Section 2(22)(e) of the Income-Tax Act, 1961 and learned Commissioner of Income-Tax (Appeals, Alwar has erred in sustaining the same by not giving any finding thereto.

1.9 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in taxing a sum of Rupees 70,00,000.00 within the meaning of section 2(22)(e) of the Income- Tax Act, 1961 on account of receiving the payment from the company where the assessee is holding more than 10% share capital and learned commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same.

2.0 Disallowance of interest of Rupees 33,90,121:-

2.1 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in giving a finding that the assessee company has invested its interest bearing funds in the investment in shares, whereas facts remains the assessee company has not invested the interest bearing funds on the contrary non- interest bearing funds representing the share capital and reserve and

7 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar surplus have been invested in the shares and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same.

2.2 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in applying the provision of section 14A of the Income-Tax Act’ 1961, in as much as the said provision has no applicability upon the facts of the case since the assessee company does not have any exempt income in the form of dividend during the year and learned Commissioner of Income-Tax (Appeals, Alwar has erred in sustaining the same.

2.3 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in applying the provision of rule 8D of the Income-Tax rules, which in the instant case has no applicability and learned commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same.

3.0 That the learned assessing officer has erred in law as well as on the facts and circumstances of the case in not allowing the claim of the assessee company of Rupees 3,24,17,009 being VAT reimbursement and in the nature of capital receipt in view of the Bombay High Court decision in the case of Commissioner of Income- Tax-3, Mumbai v/s Reliance Industries Limited 2010-TIOL-22B-HC- MUIM-IT dated 15.04.2009 and learned Commissioner of Income-Tax (Appeals), Alwar has erred in sustaining the same.”

ITA No. 116/JP/2014 (Revenue’s ground of appeal)

“ That the Commissioner of Income Tax ( Appeals), Alwar has erred in law as well as on the facts and circumstances of the case in

8 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar deleting the addition of Rs. 27,77,310/- made by AO on account of disallowance of deduction under section 80IA claimed on the profits of the Wind Mills.”

ITA No. 110/JP/14

3.1 Briefly the facts of the case are that the assessee was holding 24.70% of the shares of M/s Saurabh Agrotech Pvt. Ltd. (SAPL) which in turn holds 21% shares of Vijay Agro Mills Pvt. Ltd. (VAMPL). On 10.04.2008, assessee purchased 10,000 shares of VAMPL from SAPL for a consideration of Rs.70 lacs. In support of this, assessee in course of assessment proceedings filed copy of account of SAPL in its books of accounts, copy of share transfer form, copy of resolution of Board of Directors of SAPL, copy of the minutes of the board meeting of VAMPL and annual return of VAMPL filed to the ROC evidencing purchase of 10000 shares of VAMPL by the assessee from SAPL. The AO, in course of assessment proceedings, observed that the auditor in Note No. 11 of the accounts have stated that according to the legal opinion, assessee continues to be the owner of the shares of SAPL since the consideration for transfer of shares has not been determined, therefore the company

9 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar has rescinded the contract for sale of shares. He, therefore, held that assessee hold more than 10% of the shares of SAPL, SAPL has accumulated profit as on 03.01.09, computed on pro rata basis of Rs. 81,27,348/- (1,08,36,465*9/12) whereas assessee was having credit balance of Rs. 70 lacs as on 03.01.09 in the account of SAPL. He, therefore, concluded that provisions of section 2(22)(e) is attracted and accordingly made addition of Rs. 70 lacs.

3.2 Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) who confirmed the addition made by the AO u/s 2(22)(e). The relevant findings of the ld. CIT(A) are reproduced as under:-

“4.3 I have perused the assessment order as well as detailed submissions made by the AR along-with the judicial citations given therein and find that AO had made the disallowance of Rs. 70 lacs by invoking the provisions of section 2(22)(e) of the IT Act. The order of the AO (relevant text) has been reproduced above for the sake of convenience. The addition of Rs. 70 lacs on account of deemed dividend has been made by the AO as it was found that the appellant company is having substantial interest of more than 10% in the company M/s Saurabh Agrotech Pvt. Ltd. in the books of the appellant company revealed that on 03.01.2009, the assessee was having credit balance of Rs. 70 lacs which was to be paid to M/s Saurabh Agrotech Pvt. Ltd. Based on the accumulated profits available in the books of M/s Saurabh Agrotech Pvt. Ltd., the addition to be made on account of deemed dividend was restricted by the AO to Rs. 70 lacs.

10 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 4.4 The working of the quantum of addition to be made on account of deemed dividend has not been disputed in appeal by the appellant. However, the appellant has stated that the provisions of this section are not attracted as the said credit in the books of the assessee company is on account of purchase of shares from M/s Saurabh Agrotech Pvt. Ltd., which does not fall within the definition of receipt of payment. It is further stated that the assessee company does not have any voting power in M/s Saurabh Agrotech Pvt. Ltd., as its entire share holding was transferred by M/s Saurabh Agrotech Pvt. Ltd. in favour of Shri Babu Lal Data on 10-04-2008. It is also stated that the working of accumulated profits and computation of deemed dividend on 03-01-2009 would have no relevance as the assessee company no longer was a share holder on that date. Accordingly, it is stated that the provisions of deemed dividend are not applicable in this case.

4.5 Further, copies of annual return filed with the Ministry of Corporate Affairs (which were filed in the course of appellate proceedings) reveal that Form No. 20B has been filed only on 27-01- 2009 by M/s Saurabh Agrotech Pvt. Ltd. The form relates to financial year ending on 31-03-2008 but was filed much after the due date along-with the late fee on 27-01-2009. The date of transfer of shares though has been stated to be 10-04-2008. However the appellant failed to justify or explain any reasons for the delay in filing of such documents.

4.6 Further, it is seen from the written submission filed ( Para 4.2 above), that it is further stated by the appellant that- “we beg to

11 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar submit that the said amount of Rupees 7000000.00 is in relation to the purchase of shares by Deepak Vegpro (P) Ltd from Saurabh Agrotech (P) Ltd. of Vijay Agro Mills (P) Limited and the said shares purchase and sale transaction took place on 10.04.2008 as per the following documents:-

Copy of account of Saurabh Agrotech (P) Ltd (shares account) in the books of account of Deepak Vegpro (P) Ltd. for purchase of shares, wherein the entry for the purchase of shares were passed on 10.04.2008

Share transfer deed dated 10.04.2008 whereby the shares of Vijay Agro Mills (P) Limited, were transferred by Saurabh Agrotech (P) Ltd to Deepak Vegpro (P) Ltd.

Copy of the resolution passed in the meeting dated 10.04.2008 of the Board of Directors of Saurabh Agrotech (P) Ltd authorizing Sh. Babu Lal Data for the sale of shares of Vijay Agro Mills (P) Limited.

Minutes of the Board Meeting dated 10.04.2008 of Vijay Agro Mills (P) Limited approving the transfer of shares from Saurabh Agrotech (P) Ltd to Deepak Vegpro (P) Ltd.

Record of attendance in the Board’s meeting held on 10.04.2008 of Vijay Agro Mills (P) Limited.”

4.7 During the course of appellate proceedings the AR has stated that the addition on this ground was also made by the AO in the case of the appellant in last year also and the same has been deleted by my

12 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar ld. Predecessor. But he fairly agreed that the facts are different in this year as regards this issue is concerned as compared to last year.

4.8 It is seen from the Annual return filed with the ROC office that Form No. 20B (which is an evidence of change in the ownership) has been filed by M/s Vijay Agro Mills Pvt. Ltd. on 17.03.2009. The AO has not accepted the stand taken by the appellant due to the fact that the auditors of the company had qualified the audit report by stating vide note No. 11, which is as under: “According to legal opinion, the company continues to be the owner of the shares of Saurabh Agrotech (P) Ltd, Alwar since the consideration for the transfer of shares has not been determined, therefore, the company has rescinded the contract for sale of shares.”

This fact has been examined by the AO and has also been reproduced in his order, which is as under: “Since the assessee has rescinded the contract of sale hence, the shares holding remains the same as that of last year. Therefore, the share holding is more than 10% during the A.Y. 2009-10, as such provision of section 2(22)e) are applicable.”

4.9 The AO made the addition based on the available facts that the ownership of shares which was stated to have been transferred in favour of Sh. Babu Lal Date, which ultimately could not materialize. Therefore, the stand later taken by the appellant in the course of assessment proceedings that this amount is on account of transfer of shares of Vijay Solvex Pvt. Ltd. (another concern of the same group_ cannot be accepted in the absence of specific plea raised by the appellant.

13 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 4.10 During the course of appellate proceedings no material has been brought on record to contradict the findings of the AO on this issue. Further appellant has failed to explain the reasons to counter the qualification of the auditor given in the Audit Report. The issue for consideration is only the change of ownership and if that continues to be with the company than the amount cannot be considered on account of sale of shares. Further how the sale consideration of the shares has been arrived at has not been explained. What has been the valuation per share of the private company, whose shares are proposed to be transferred. All these factors do not support the stand taken by the appellant.

4.11 In view of the above discussion, I hold that AO has rightly invoked the provisions of section 2(22)(e) of the IT Act and accordingly confirm the addition of Rs.70 lacs made by the AO under this head.”

3.3. During the course of hearing, the ld AR submitted that Sec. 2(22)(e) of the Act is attracted where a company makes any payment by way of loan or advance to a shareholder holding more than 10% of the voting power in that company. The crucial word in the section is that the payment is made by way of loan or advance. If payment is not on account of loan or advance, section 2(22)(e) is not applicable. In the present case, the credit of Rs. 70 lacs in the account of SAPL is not on account of any loan or advance received from the said company but it is on account of purchase of shares of VAMPL from that company as evident from the copy of ledger account. This fact is not in dispute. Thus, it is not a transaction of loan or advance by SAPL to the

14 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar assessee. The assessee before the AO has specifically stated that it has no voting power in SAPL as per the copy of ROC return and also that there is no transaction of the assessee (by way of loan or advance) with the said company. However, neither the AO nor the CIT(A) considered the contention of the assessee that credit of Rs.70 lacs in the account of SAPL is not a transaction of loan or advance but only the amount payable against the purchase of shares. The CIT(A), inspite of specific contention of the assessee that the credit in the account of SAPL is not on account of any receipt of payment by way of loan or advance has not given any finding and has raised certain issues which are not relevant to decide on the applicability of section 2(22)(e). Hence, the addition made by the AO and confirmed by CIT(A) by invoking section 2(22)(e) is not as per law and the same be deleted.

3.4 It was further submitted that as on 10.04.2008 when assessee credited the account of SAPL on account of purchase of share of VAMPL, assessee was not holding any shares of SAPL in as much as that SAPL got transferred the entire shareholding held by the assessee in SAPL in favour of Sh. Babul Lal Data. This fact is verified by the CIT(A) as per Para 4.5, Page 12 of his order where he has given a finding that as per the annual return filed by SAPL, the entire shareholding of the assessee in SAPL stood transferred in favour of Sh. Babu Lal Data on 10.04.2008. Only for the reason that SAPL filed its annual return with ROC with some delay cannot be viewed adversely nor the notes to the account would change the position of law. Thus, when on 10.04.2008, the assessee was not holding any voting power in SAPL, the question of application of section 2(22)(e) does not arise for consideration.

15 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 3.5 It was further submitted that SAPL has a debit balance of Rs.28,30,446/- as on 31.03.2009 i.e. assessee has advanced this amount to SAPL. Copy of the account is enclosed. Thus, it is a case where the said amount is due from SAPL against the supply of goods and on the other hand Rs.70 lacs is payable to SAPL against the purchase of shares of VAMPL. Both these transactions are not loan or advance as envisaged u/s 2(22)(e). Infact in respect of transaction of purchase of shares, assessee has not received any sum of money but it is only a journal entry where investment in share account is debited and SAPL (share account) is credited. Thus, this transaction cannot be said to be a receipt of loan or advance so as to attract section 2(22)(e).

3.6 It was further submitted that it is a settled law that sec. 2(22)(e) is attracted only when payment is made by the company to its shareholder by way of loan or advance. If payment is not on account of loan or advance, the section is not applicable. The word “advance” has not been defined. However, in case of CIT Vs. Raj Kumar 318 ITR 462 (Del.) (HC), it was held that applying the Rule of “Noscitur a Sociis” which means that the words in an Act of Parliament is to be constructed with reference to the words found in immediate connection with them, the word “advance” has to be read in conjunction with the word “loan”. Usually attributes of a loan are that (i) it involves a positive act of lending coupled with acceptance by the other side of the money as loan (ii) generally carries an interest (iii) obligation of repayment. Therefore, the word “advance” which appears in the company of the word “loan” could only be such advance which carries with it an obligation of repayment. Thus, trade advances which is in the nature of money

16 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar transacted to give effect to a commercial transaction would not fall within the ambit of section 2(22)(e). The transaction of loan involves lending delivery by one party & receipt by another party of sum of money upon express or implied agreement to repay it with or without interest. In case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, 57 (SC), it was held that a loan of money results in debt but every debt does not involve a loan. Liability to pay a debt may arise from diverse sources & loan is only one of such source. Every creditor who is entitled to receive a debt cannot be regarded as a lender. In case of Ardee Finvset (P.) Ltd. Vs. DCIT 79 ITD 547 (Trib.) (Del.) it was held that loan means “a lending; delivery by one party to and receipt by another party of sum of moneys upon agreement, express or implied, to repay with or without interest. For a loan there must be a lender, a borrower, a thing loaned for use, as well as a contract between the parties for the return of the thing loaned. A loan contracted no doubt creates a debt, but there may be a debt without contracting a loan. In a loan the mind and intention of the two parties, the lender and the borrower must be ad idem.” The expression “advance” means something which is due to a person, but which is paid to him ahead of time when it is due to be paid. In the Dictionary of Accounts by Eric L. Kohler (5th Edn.), the expression “advance” was defined as payment of cash or the transfer of goods for which accounting must be rendered by the recipient at some later date. Loan and advances could only be considered “deemed dividend” for the purpose of section 2(22)(e). It is, therefore, sine qua non, to ascertain the correct nature of the payments. In the present case the assessee company received application money for the allotment of shares. There is nothing on record to indicate that application money was received or

17 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar allotment of shares was made contrary to the provisions of Companies Act, 1956. The amount was reflected as such in the Balance Sheet. Accounts were prepared perfectly in accordance with the norms set out under the Companies Act, 1956. These were filed with the Registrar of Companies. The chief ingredient of s. 2(22)(e) is that one should be shareholder on the date the loan was advanced to him. Where such ingredient is not established, the advance could not be taken as deemed dividend under s. 2(22)(e). It is settled rule of interpretation of a fiction that the court should ascertain for what purpose the fiction is created and after ascertaining the purpose, the court has to assume all facts which are incidental to give effect to that fiction. It will not be given a wider meaning than what it purports to do. Law dealing with fiction relates to that breach of jurisprudence which should be narrowly watched, zealously regarded and never to be pressed beyond its true limits. Taking into consideration the entire conspectus of the case, the receipt from H Ltd. was in the nature of share application money. It cannot be construed loan or advance. As such, the case of the assessee falls beyond the ken of s. 2(22)(e). In view of the cases referred above particularly the case of Ardee Finvset (P.) Ltd. (supra) the credit on account of amount payable to SAPL against purchase of shares of VAMPL is not loan or advance and therefore section 2(22)(e) is not applicable. Hence, the addition confirmed by CIT(A) be directed to be deleted.

3.7. The ld DR is heard who has vehemently argued the matter and relied on the order of the lower authorities.

18 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 3.8 We have heard the rival contentions and pursued the material available on record. The Assessing Officer during the course of assessment proceedings noticed that the assessee was having credit balance of Rs. 70 lacs which was to be paid to M/s Saurabh Agrotech Pvt. Ltd. wherein the assessee holds 24.7% shareholding. On perusal of records, it is noted that the credit of Rs. 70 lacs is towards the value of purchase consideration which is payable towards purchase of 10,000 shares of Vijay Agro Mills Pvt. Ltd. by the assessee from M/s Saurabh Agrotech Pvt. Ltd. The said shares were purchased on 10.04.2008 by the assessee and in support, a copy of the share transfer form, a copy of resolution passed by the Board of Directors of both the companies as well as annual return of Vijay Agro Mills Pvt. Ltd. filed with the ROC have been placed on record. Further, on the same date i.e, 10.04.2008, another transaction has taken place wherein the entire share holding of 24.7% held by the assessee in M/s Saurabh Agrotech Pvt. Ltd. were transferred by the assessee in favour of Shri Babu Lal Duta. Therefore, there are two transactions which has happened. The first transaction is where the assessee acquired shares of Vijay Agro Mills Pvt. Ltd. worth Rs 70 lacs from M/s Saurabh Agrotech Pvt Ltd and the second transaction where the assessee’s shareholding in M/s Saurabh Agrotech Pvt Ltd was transferred in favour of Shri Babu Lal Duta. It is the first transaction which has been made the subject matter of deemed dividend u/s 2(22)(e) of the Act by the AO and confirmed by the ld CIT(A) and under consideration before us.

3.9 In the above factual matrix, we now refer to the provisions of section 2(22)(e) of the Act which reads as under:-

19 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar “any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares ( not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern, in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits”.

3.10 On perusal of the above provisions, it provides that any payment by a company (not being a company in which public is substantially interested) of any sum by way of advance or loan to a shareholder, being a person who is the beneficial owner of share holding not less than 10% of voting power to the extent to which the company possesses accumulated profits. The conditions which need to be satisfied to invoke the said deeming provisions are that there has to be a payment by way of advance or loan. Secondly, such payment has to be made to a shareholder of the company and thirdly, the amount of deemed dividend is restricted to the extent of accumulated profits of the company.

20 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 3.11 For payment by way of an advance or loan as employed in section 2(22)(e) of the Act, there should be a outgoing or actual flow of money from the company to its shareholder. In the instant case, there is no outgoing or actual flow of money from M/s Saurabh Agrotech Pvt. Ltd. to the assessee, therefore, it cannot be said that there is any payment by way of advance or loan to the assessee by M/s Saurabh Agrotech Pvt. Ltd. Further, the transaction of loan involves lending, delivery by one party and receipt by another party of sum of money upon agreement express or implied to be repaid with or without interest. A loan of money results in debt but every debt doesn’t involve a loan. Liability to pay a debt may arise from diverse sources and loan is only one of such source. Every creditor who is entitled to receive a debt cannot be regarded as a lender. In the instant case where the assessee has purchased shares of Vijay Agro Mills Pvt. Ltd. from M/s Saurabh Agrotech Pvt. Ltd. and there is an amount payable to M/s Saurabh Agrotech Pvt. Ltd., it is a transaction of purchase and sale of shares and the same cannot fall within the ambit of payment by way of loan or advance. Secondly, on 10.04.2008, the day when assessee acquired shares of vijay Agro Mills Pvt. Ltd. from M/s Saurabh Agrotech Pvt. Ltd, the Assessee was not holding any shares in M/s Saurabh Agrotech Pvt. Ltd. as per annual return filed with the ROC and which is also verified by the Ld. CIT (A), therefore the second condition for invoking the provisions of deemed dividend doesn't get satisfied. In view of the fact that all the three conditions are to be satisfied cumulatively and the two conditions not being satisfied in the instant case, there is no necessity to examine the third condition in terms of extent of accumulated profits which can attract deemed dividend.

21 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 3.12 In light of above, we agree with the contention of the ld AR that provisions of section 2(22)(e) of the Act are not attracted in the instant case. The addition made by the Assessing Officer under section 2(22)(e) are hereby deleted. In the result ground no. 1 of the assessee’s appeal is allowed.

4.1. Briefly the facts of the case are that the assessee has shown investment of Rs. 8,74,13,129/- in shares in its Balance Sheet for the year ended 31.03.2009. All the investments were made in earlier years except for investment of Rs.70,00,000/- in Vijay Agro Mills Pvt. Ltd. and investment of Rs.15,68,000/- on account of share application money given to Vijay International Ltd. during the year. No dividend is received during the year. The AO observed that assessee has interest bearing funds in the form of secured and term loan of Rs.21,46,11,813/- taken from various banks and unsecured loan of Rs.5,86,70,159/- taken from private parties on which interest has been paid regularly. The assessee submitted that there is no nexus between the interest bearing funds and investment thereof in the shares and also that there is no exempt income from investment and thus no question of disallowance arises. The AO, however, held that assessee has failed to prove that the investments were made from non-interest bearing funds and thus it is considered that interest bearing funds to the tune of Rs.27,32,81,972/- have been diverted for extra commercial consideration on which the

22 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar company has incurred interest expenses without any corresponding return. Accordingly, the AO made disallowance of Rs. 33,90,121/- u/s 14A of the I.T. Act,1961 as per Rule 8D of the I. T. Rules, 1962 as calculated at Page 3-4 of the assessment order.

4.2 Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the disallowance and his findings are as under: “6.3 I have considered the assessment order as well as elaborate submissions made by the AR along-with the judicial citations given therein and find that the factual matrix of the case has been discussed above and is not repeated again for the sake of brevity. The AR of the assessee has fairly admitted that this issue is covered against the assessee by the orders of the ld. CIT(A) for preceding year in the case of the appellant. A copy of the order has also been filed on record in the course of present proceedings. The case laws cited by the appellant for allowing the expenditure u/s 36(1)(iii) of the IT Act are not applicable to the facts of this case and most of them pertain to the period before the insertion of the provisions of Rule of IT Rules.

6.4 The appellant has not disputed the quantum of disallowance made under section 14A of the IT Act read with Rule 8D of the IT rules but has contested the application of the said provisions. It is further stated that the investments have been made in the shares of other companies for business reasons as some transactions were stated to have been made with such companies. It is also stated that the investments were made out of the interest free

23 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar funds available with the company and hence no disallowance is called for. It is also submitted that no dividend has been received against such investments and therefore no disallowance could be made.

6.5 All these arguments taken by the appellant were also raised before the AO and have been duly considered in the assessment order. I have gone through the same and do find any force in them. Further, It is seen from the Balance Sheet of the appellant that under the head investments an amount of Rs.8,74,13,129 has been shown for this year as compared to the amount of Rs. 7,88,45,129 in the preceding year. On the other hand secured loans have increased from Rs. 16,26,61,143 (in the last year) to Rs. 21,46,11,813 (in the current year). The un-secured loans are Rs. 5,86,70,159 ( Current year and current liabilities are Rs. 9,12,38,848 as against current assets of Rs. 23,61,91,443. Besides this the loan and advances given by the company stand at Rs. 15,62,61,067.

6.6 During the year share capital and reserves and surpluses stand at Rs. 22,91,26,464 and against this fixed assets are at Rs. 13,64,56,572. This share capital and reserves and surpluses have increased only in this year as in the last year the comparative figure was Rs. 17,61,78,263. The increase of about 5 Crores in the owned funds in on account of issue of shares at a substantial premium during the year. Further, the investments have shown only marginal increase and were of Rs. 7.88 crores in the preceding year. Thus, these investments were financed out of the

24 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar loaned funds as no linkage could be established between the investments made and sources of fund. Moreover, it is clear from the above picture, that there were no funds available (other than the borrowed funds) with the company out of which investments could be made.

6.7 Further, it may be relevant to mention that recently Hon’ble Mumbai bench of ITAT has in the case of DCIT vs. Damani Estate & Finance (P) Ltd. (2013) 025 ITR ( Trib.) 0683 (Mum.) held that the purpose for which shares are held by the investor company is not material and would not impact the applicability of the provisions of section 14A of the IT Act. The provisions of section 14A were not required on the statue, if only direct expenses for earning of tax free incomes were to be charged. All expenses are required to be apportioned between taxable and non-taxable incomes. The apportionment of expenses comes into play only as regards in-direct expenses are concerned. The provisions of Rule 8D deal with this aspect. Further, Hon’ble ITAT Mumbai bench has in the case of Stream International Service (P) Ltd. (2013) 023 ITR (Trib.) 0070 (Mum.), held that the application of section 14A is justified, even if no income has been realized on such investments. The disallowance of expenses incurred in relation to such sources of income are justified u/s 14A of the IT Act.

6.8 In the case of Prakash Narottam Das Gupta vs. ITO (2013) 021 ITR (Trib.) 0255 ( Mum.), it has been held that disallowance of expenses i.e. interest paid u/s 14A of the IT Act is valid and justified. Also Hon’ble Kerala High Court has upheld the

25 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar disallowance of expenses u/s 14A of the IT Act in the case of Catholic Syrian Bank vs. Addl. CIT 349 ITR 0569 (Ker.).

6.9 In view of the overwhelming judicial opinion in favour of the application of the provisions of section 14A of the IT Act read with Rule 8D of Income Tax Rule and the factual matrix of the appellant, I hold that the provisions of section 14A of the IT Act have been rightly invoked by the AO. Accordingly, I confirm the disallowance of Rs. 3,90,121 determined under the provisions of Rule 8D of the IT Rules read with section 14A of the IT Act.”

4.3. During the course of hearing, the first contention raised by the ld. AR is that no disallowance u/s 14A can be made where no dividend is received. The Ld. CIT(A) in this connection has relied on the decision dt. 11.01.2013 of Hon’ble Mumbai Bench in case of Stream International Service (P.) Ltd. (2013) 23 ITR (Trib.) 0070 wherein by relying on the decision dt. 05.08.2009 of Special Bench of the Delhi Tribunal in case of Cheminvest Ltd. Vs. ITO (2009) 124 TTJ 577, it was held that disallowance u/s 14A can be made even if no dividend income is received. It was submitted that this decision of Special Bench has been overruled by the Hon’ble Delhi High Court vide order dt. 02.09.2015 reported at 378 ITR 0033 where it was held that the expression ‘does not form part of total income’ in sec. 14A envisages that there should be an actual receipt of income, which was not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, sec. 14A will not apply if no exempt income is received or receivable during the relevant previous year. Further, the Hon’ble ITAT, Jaipur Bench in

26 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar case of M/s Vijay Industries Vs. DCIT in ITA No. 673/JP/2015 for A.Y. 06-07 order dated 17.06.2016 wherein also no dividend income was received during the year, deleted the disallowance made by the AO u/s 14A by relying on the Delhi High Court decision in case of Cheminvest Ltd. (supra). Reliance was also placed on the following judgments of the Hon’ble High Court:- - CIT Vs. Holcim India (P.) Ltd. (2014) 111 DTR 158 (Del) order dt. 05.09.2014 - CIT Vs. Shivam Motors (P.) Ltd. Appeal No. 88 of 2014 (All.) order dt. 05.05.2014 - CIT Vs. Corrtech Energy (P.) Ltd. (2014) 372 ITR 0097 (Guj.) order dt. 24.03.2014 - CIT Vs. Lakhani Marketing Incl. (2014) 111 DTR 149 (P&H) order dt. 02.04.2014 - CIT Vs. Winsome Textile Industries Ltd. (2009) 319 ITR 0204 (P&H) order dt. 25.08.09

4.4 It was further submitted that from the plain reading of Rule 8D, it is evident that recourse to Rule 8D is not automatic. Assessee can claim that having regard to the books of accounts, it has not incurred any expenditure in relation to income not forming part of his total income. If the AO having regard to such accounts is not satisfied with the correctness of the assessee’s claim, then only he can invoke sub clause (2) of Rule 8D. Hon’ble Supreme Court in case of CIT Vs. Walfort Share & Stock Brokers Pvt. Ltd. 326 ITR 001 in Para 17 has observed that for attraction of section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income.

27 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar

In the present case, assessee has claimed that it has not incurred any expenditure by way of payment of interest for making investment in the shares. The source of investment in shares is out of the non-interest bearing funds of Rs. 2291.26 lacs in the form of share capital and reserves and surplus. An analysis of the sources of funds and its utilization in investment was furnished. The year-wise position of reserves and surplus vis-à-vis investment in shares was also furnished. Out of investment of Rs.85.68 lacs made during the year, investment of Rs.15.68 lacs is on account of share application money given to Vijay International Ltd. which otherwise is required to be excluded while working out the average value of investment under Rule 8D(2)(iii) as held by the Hon’ble Kolkata Tribunal in case of ITO Vs. LGW Ltd. (2016) 130 DTR 201. In this case, it was held that share application money is only in the nature of an offer to buy the shares made by the assessee. It is only after the offer is accepted by the company resulting in a concluded contract, the assessee becomes the shareholder in a company. Till the time the assessee becomes a shareholder, the assessee cannot have any rights to claim any dividend that may be declared by the company. Therefore, while working out the average value of the investment under rule 8D(2)(iii) the share application money should not be included. Further, the lower authorities have not established that any borrowed funds have been used for making investment in the shares. In various cases, it has been held that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the

28 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar interest free funds were sufficient to meet the investments. For this, reliance is placed on the following judicial precedents:- - CIT Vs. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. (2016) 237 Taxman 240 (Kar.) (HC) - HDFC Bank Ltd. Vs. DCIT & Ors. (2016) 132 DTR 89 (Bom.) (HC) - CIT Vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) (HC) - CIT Vs. HDFC Bank Ltd. (2014) 107 DTR 140 (Bom.) (HC) - CIT Vs. UTI Bank Ltd. (2013) 215 Taxman 8 (Guj.) (HC) (Magz.) - CIT Vs. Suzlon Energy Ltd. (2013) 354 ITR 630 (Guj.) (HC) - CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom.)(HC)

4.5 It was further submitted that similar issue came up before the Hon’ble Bench in assessee’s own case in A.Y. 06-07 in ITA No. 361/JP/11 dt. 21.10.2011 wherein the Hon’ble ITAT after considering the fact that the borrowed funds have been utilized in the assets for which borrowing is made & the share capital & reserves i.e. interest free funds available with the assessee are much more than the investment in shares, in Para 13.3 of the order held that “Therefore in our considered view, no disallowance u/s 14A is possible. However, the AO is free to examine this issue afresh, if in his mind the investment made in shares was not out of interest free funds/reserves available with the assessee”.

Thereafter, in A.Y. 07-08 and A.Y. 08-09, the matter was again set aside to the file of the AO to decide as per law. However, in view of the subsequent development as per the various case laws stated above, the disallowance made u/s 14A instead of being set aside to the AO should be decided on the facts and the case laws relied above considering the

29 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar decision of Hon’ble Third Member in case of Zuari Leasing & Finance Ltd. Vs. ITO 112 ITD 0205 (Del.) (Trib.) (TM) wherein in Para 10 of the order, it was held as under:- “It is clear from above that primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it is not possible to dispose of the appeal for want of relevant evidence, lack of finding or investigation warranted by the circumstances of the case. Remand in a casual manner and for the sake of remand only or as a short cut, is totally prohibited. It has to be borne in mind that litigants in our country have to wait for long to have fruit of legal action and expect the Tribunal to decide on merit. It is, therefore, all the more necessary that matter should be decided on merit without allowing one of the parties before the Tribunal to have another inning, particularly when such party had full opportunity to establish its case. Unnecessary remands, when relevant evidence is on record, belies litigant’s legitimate expectations and is to be deprecated. Having regard to aforesaid principle, it is necessary to look into records to see whether there is sufficient material on record to dispose of the issue on merit and there is no need to remand the issue to provide a fresh inning to the Revenue.”

4.6 It was further submitted that similar issue came before Hon’ble ITAT in case of Vijay Industries for A.Y. 06-07 in ITA No. 673/JP/15 order dt. 17.06.2016 where also the disallowance of interest made by AO was set aside by the Hon’ble ITAT but again AO made the disallowance which is confirmed by CIT(A) but considering the fact that assessee has sufficient

30 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar reserve and surplus to make investment in shares and in the absence of direct nexus between interest bearing funds and investment in shares, the disallowance made by the lower authorities was deleted. In deleting the disallowance, Hon’ble ITAT placed reliance on the decision of Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 and also on various other decisions cited by the assessee.

4.7 It was further submitted that the Hon’ble Supreme Court in case of Hero Cycles Pvt. Ltd. Vs. CIT 379 ITR 347 (PB 112-115) which is in context of allowance of interest u/s 36(1)(iii) in has held that “in so far as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors.” Thus, Hon’ble Supreme Court has also recognized that if interest free funds are more than interest free advances, it is to be presumed that interest free funds are utilized in providing interest free advances.

4.8 The ld DR is heard who has relied on the order of the lower authorities.

4.9. We have heard the rival contentions and pursued the material available on record. The first contention raised by the ld. AR is that no disallowance u/s 14A of the Act can be made in the year under

31 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar consideration as no dividend income has been received in respect of investment made by the assessee and in support, the ld. AR has relied on the decision of the Hon’ble Delhi High Court in case of Chem Invest Limited (supra).

4.10 The substantial question of law under consideration before the Hon’ble Delhi High Court was “whether disallowance under section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee.”

Briefly the facts of the case before the Hon’ble Delhi High Court were that in the year in question, the appellant borrowed funds on which interest expenditure of Rs. 1,21,03,367/- was incurred. In the said year, no dividend income was earned by the appellant from the amount invested in various shares. The Assessing Officer completed the assessment under section 143(3) of the Act disallowing Rs. 97,87,570/- out of the total expenditure incurred during the year under section 14A of the Act. The reason recorded by the AO for this disallowance was that the borrowed funds were utilized for the purpose of purchase of shares for the purpose to earn dividend income which is exempted under section 10(33) of the Act and thus, not forming a part of the total income, and therefore the interest paid thereon had to be disallowed under section 14A.

In the above factual matrix, the Hon’ble Delhi High Court has held that section 14A of the Act will not apply if no exempt income is received or receivable during the relevant previous year and observed that the complete answer is provided by the decision of this very Court in CIT v.

32 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar Holcim India (P.) Ltd. (2015) 57 taxmann.com 28 and in Para 15 of its order, it observed as under:

“15. …In that case, a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under section 14A of the Act when no dividend income had been earned by the assessee in the relevant AY. The Court referred to the decision of this Court in Maxopp Investment Ltd.’s case (supra) and to the decision of the Special bench of the ITAT in this very case i.e. Cheminvest Ltd. v. ITO (2009) 121 ITD 318. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Inc. (2014) 226 Taxmann 45/49 taxmann.com 257 of the High Court of Punjab and Haryana which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Ltd. (2010) 323 ITR 518/189 Taxman 50 and CIT v. Winsome Textile Industries Ltd. (2009) 319 ITR 204. The second was of the Gujarat High Court in CIT v. Corrtech Energy (P.) Ltd. ( 2014) 223 Taxman 130/45 taxmann.com 116 and the third of the Allahabad High Court in CIT v. Shivam Motors (P.) Ltd.(2015) 230 Taxman.com 262. These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question “corresponding expenditure could not be worked out for disallowance.”

Thereafter, at Para 19, the Hon’ble High Court has held as under:

“19. In light of the clear exposition of the law in Holcim India (P.) Ltd.’s case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY

33 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.”

And at Para 23, the Hon’ble High Court has laid down the ratio decidendi as under:

“23. In the context of the facts enumerated hereinbefore, the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing an expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

4.11 In the instant case, the facts of the assessee company are identical in the sense that there is no dividend income which is received or receivable for the year under consideration in respect of its investments in shares. It is noted that said fact is on record and remain undisputed before us. No contrary authority has been brought to our notice. In light of above discussions, respectfully following the decision of the Hon’ble Delhi High Court in case of Cheminvest Limited (supra), no disallowance under section 14A can be made in the instant case.

4.12 Now coming to the orders passed by the Coordinate Benches in earlier years where the matters have been set-aside to the file of the AO, it is noted that neither such contention (in terms of non-applicability of section 14A in absence of dividend income) has been raised by the

34 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar appellant nor the decision of the Hon’ble Delhi High Court in case of Cheminvest Ltd. has been brought to the notice of the Coordinate Bench. In fact, the decision in case of Cheminvest Ltd. has been pronounced by Hon’ble Delhi High Court on 2nd of September, 2015 which is subsequent to the latest decision of the Coordinate Bench for AY 2008-09 which was passed on 2nd of December, 2014. Given that such contention was not raised earlier, the undisputed fact that no dividend income was received during the year and in light of decision of the Hon’ble Delhi High Court in case of Cheminvest Ltd which squarely applies in the instant case, no useful purpose would be served in setting aside the matter to the file of the AO as has been done by the Coordinate Benches earlier and in this regard, we are also guided by the decision of Coordinate Bench in case of Zuari Leasing (supra) where the power to remand has to be stated to be used sparily and in only exceptional cases.

4.13 In the light of above discussions and in the entirety of facts and circumstances of the case, disallowance u/s 14A is hereby deleted and the ground no. 2 of the assessee’s appeal is allowed.

5.1. Brief facts of the case are that the assessee, under an Industrial Incentive Policy – 2006 of state of Bihar, established a Vanaspati Ghee

35 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar plant at Durgawati, Bihar with a capital investment of 744.76 lacs which started commercial production on 06.08.2007. The maximum admissible amount of subsidy as per this scheme by way of VAT reimbursement was Rs.22.34 crores (744.76 lacs*300%). Thereafter, the assessee under the expansion program installed an edible refined palm oil plant with capital investment of Rs.747.53 lacs which was commissioned on 23.03.2011. The admissible amount of subsidy on such expansion was Rs.22.43 crores (747.53 lacs*300%). Accordingly, the VAT collected on sale of goods was deposited with the sales tax department, the details of which are entered in the pass book issued by the State Government and verified by the Commercial Taxes Department. 80% of such amount was thereafter reimbursed to the assessee by the Industries Department.

5.2 During the year under consideration, assessee received the subsidy by way of VAT reimbursement of Rs.3,24,17,009/-. In the revised return, the assessee claimed the VAT reimbursement of Rs.3,24,17,009/- non taxable being in the nature of capital receipt in view of the decision dated 15.04.2009 of the Bombay High Court in case of CIT Vs. Reliance Industries Ltd. 339 ITR 0632 wherein by relying on the decision dt. 23.10.2003 of Special Bench of Mumbai Tribunal in Reliance Industries 88 ITD 0273 and decision dt. 16.09.2008 of Supreme Court in case of CIT Vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392, it was held that where the object of subsidy is to set up new units in the backward area to generate employment, the same is clearly on capital account. The AO, however, rejected the assessee’s claim by holding that the department has not accepted the decision of Bombay High

36 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar Court in the case of Reliance Industries (supra) and has filed SLP before the Hon’ble Supreme Court who has stayed the operation of the order. Accordingly, the AO disallowed the claim of Rs.3,24,17,009/-.

5.3 Being aggreived, the assessee carried the matter in appeal before the ld CIT(A) who has confirmed the addition and his findings are as under: “8.3 I have considered the assessment order as well as submissions made by the AR along-with judicial citations given therein. The Income Tax Return was filed by the appellant on 27- 09-2009 for A.Y. 2009-10 i.e. the period under consideration. Subsequently, a revised return was filed on 21-03-2011 (after the time permissible under the law) showing the VAT reimbursement of Rs. 3,24,17,009 as capital receipt and hence not taxable. The claim made in the revised return is not valid as it has been filed after the time limit permissible under the provisions of the IT Act.

8.4 The claim was made by the appellant in view of the judgment of the Hon’ble Bombay High Court in the case of Reliance Industries Ltd. this judgment has been discussed and reproduced above. The Hon’ble Supreme court has vide its order dated 09-09- 2012 stayed the operation of said judgment to the Bombay High Court and has remitted the matter back to the High Court for consideration.

8.5 I have gone through the judgment stated above in detail and find that the facts in the case of the appellant are on a different footing. The

37 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar sudden u-turn taken by the appellant is not acceptable and is not based on acts. The appellant has himself treated the receipt as a revenue in nature and also the books of accounts were duly audited and return of income has been filed. In-fact in the tax audit report filed along-with the return of income in Form-3CD, in column No. 13 of the report under the heading- Amounts not credited to the profit and loss account, being- against item (e) Capital receipt, if any- it is specified that sale of plant and machinery of Rs. 1,92,197 (oil division). Thus, the appellant himself has been showing such receipt consistently in its books of accounts as revenue in nature. Further, in column No. 21 of the above said form, it is stated that VAT and CST have not been passed through P& L account (in response to any sum refer to in section 43B).

8.6 A copy of the Industrial Incentive Policy 2006 issued by Department of industries, Govt. of Bihar was filed in the course of appellate proceedings to substantiate its claim. A perusal of the subsidy scheme of the State Govt. reveals that the amount of subsidy is revenue in nature and is linked to the taxes paid in the form of VAT to the account of the Govt. This amount is linked to the production and sales made by the unit. The purpose is to encourage all around the development of state. This, VAT reimbursement received by the appellant cannot be treated as a capital receipt and was rightly treated by the AO as revenue receipt. Hence, the addition of Rs. 3,24,17,009 made by the AO under this head is confirmed.”

5.4 The ld. AR of the assessee has submitted that the issue in this ground is whether the subsidy received from the State Government of

38 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar Bihar under the Industrial Incentive Policy 2006 for growth in the per capita income in the State, industrial growth as well as accelerated employment opportunities would constitute revenue receipt or capital receipt. The Special Bench of ITAT, Mumbai in case of DCIT Vs. Reliance Industries Ltd. 88 ITD 0273 held that the incentive received by the assessee under the Scheme framed by Government of Maharashtra to encourage the setting up of industries in the backward area and generating employment therein is a capital receipt. Following this order, the Hon’ble ITAT in a subsequent appeal held that sales tax subsidy is a capital receipt. Against this order, department filed an appeal before the Bombay High Court where Question No. D framed was “whether in the facts and circumstances of the case and in law, the Hon’ble Tribunal was right in holding that sales tax incentive is a capital receipt”. The Hon’ble High Court of Bombay in case of CIT Vs. Reliance Industries Ltd. 339 ITR 0632 order dated 15.04.2009 decline to admit the above question. The relevant Para 4 to 6 of this order is reproduced as under:-

“4. So far as question (D) is concerned, the Tribunal relied upon the Tribunal Mumbai Bench "J" (Special Bench) decision in the case of assessee itself in Dy. CIT vs. Reliance Industries Ltd. (2004) 82 TTJ (Mumbai)(SB)765 : (2005) 273 ITR 16 (Mumbai)(SB)(AT). We may gainfully reproduce the following portion:

"The scheme framed by the Government of Maharashtra in 1979 and formulated by its resolution dt. 5th Jan., 1980, has been analysed in detail by the Tribunal in its order in RIL for the asst. yr. 1985-86 which we have already referred to in extenso. On an

39 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar analysis of the scheme, the Tribunal has come to the conclusion that the thrust of the scheme is that the assessee would become entitled for the sales-tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has, at more than one place, stated that the thrust of the Maharashtra scheme was the industrial development of the backward districts as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the scheme was oriented towards and was subservient to the investment in fixed capital assets. The sales-tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales-tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area."

Thus, it can clearly be seen that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 219 CTR (SC) 105 :

40 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (2008) 13 DTR (SC) 1 : (2008) 306 ITR 392 (SC) will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. The Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Court then proceeded to observe as under: "The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account."

Therefore, let us apply the purpose test based on the findings recorded by the Special Bench. The object of the subsidy was to set up a new unit in a backward area to generate employment. In our opinion, the subsidy is clearly on capital account. In that view of the matter, question (D) as framed, would also not arise.”

Against this order of Bombay High Court, Department filed a civil appeal and SLP to the Supreme Court. The Hon’ble Supreme Court vide its

41 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar order dated 09.09.2011 by allowing the civil appeal, set aside the order of the Hon’ble High Court and remitted it to the High Court to decide the question in accordance with law. Thus, as on date, the decision of Hon’ble Special Bench holds the field. The AO has not allowed the claim of the assessee by wrongly stating that Hon’ble Supreme Court has stayed the operation of the order passed by the High Court whereas the fact is that after the order of the Hon’ble Supreme Court, this issue is pending for decision as per law before the High Court. Therefore, once there is a decision of Special Bench, the same would prevail. 5.5 It is submitted that Hon’ble Supreme Court in case of CIT Vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 decision dt. 16.09.2008 has held that if the object of assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of the subsidy is on capital account. Form or mechanism through which the subsidy is given is irrelevant. Thus, the test to be applied for determining the nature of subsidy is purpose test. In this case also, the purpose of subsidy is for growth in the per capita income of the state and industrial growth as well as accelerated employment opportunities. The subsidy is given to the new units. Thus, according to the purpose test, it is clearly a capital subsidy.

5.6 It was further submitted that the Hon’ble Supreme Court in case of CIT Vs. Shree Balaji Alloys & Ors. 138 DTR 0036 decision dated 19.04.2016 by relying on the decision in case of Ponni Sugars (SC) (supra) dismissed the revenue’s appeal and upheld the order of Hon’ble High Court of J&K in case of Shree Balaji Alloys Vs. CIT 333 ITR 0335

42 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar wherein it was held that the incentives received by way of excise duty refund and interest subsidy are capital receipts. In that case, the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), issued its Office Memorandum dt. 14th June, 2002 whereby it was provided that keeping in view the fact that the State of Jammu & Kashmir had lagged behind in industrial development; there was need for structured interventionist strategies to accelerate the industrial development of the State boosting investors’ confidence. The new initiatives, in terms of the memorandum were aimed at providing requisite incentives as well as enabling environment for industrial development, improving availability of capital and increase in market access so as to give a fillip to private investment in the State. These fiscal incentives were to be provided to the new industrial units and substantial expansion of existing units. The new industrial units and existing industrial units on their substantial expansion, set up in growth center, industrial infrastructure development centers and other locations like industrial estates, parks, export processing zones, commercial estates, etc., as notified by the Central Government, were entitled to 100 per cent excise duty exemption for a period of 10 years from the date of commencement of commercial production. All new industries in the notified locations were eligible for capital investment subsidy @ 15 per cent of their investment in plant and machinery, subject to a ceiling of Rs. 30 lacs whereas the existing units were entitled to subsidy on substantial expansion. Besides these and other concessions, interest subsidy of 3 per cent on the working capital and insurance premium to the extent of 100 per cent on capital investment too was permissible to the new and existing units on their

43 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar substantial expansion for a period of 10 years. The Office Memorandum dt. 14.06.2002 was later amended to achieve the government’s object, as conveyed by the Hon’ble Prime Minister at Srinagar, for creation of one lacs employment and self employment opportunities in Jammu & Kashmir.

On these facts, the Hon’ble High Court held that perusal of the Office Memorandum indicating New Industrial Policy and other concessions for the State of Jammu & Kashmir, makes it explicit that the concessions were issued to achieve twin objects viz. (i) Acceleration of industrial development in the State of Jammu & Kashmir, which had been found lagging behind in such development and (ii) Generation of employment in the State of Jammu & Kashmir. The paramount consideration of the Central Government in providing the incentives to the new industrial units and substantial expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the State, additionally creating opportunities for self-employment, hence a purpose in public interest. The incentives provided to the industrial units, in terms of the New Industrial Policy, for accelerated industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional permanent source of employment to the unemployed in the State of Jammu & Kashmir were in fact, in the nature of creation of new assets of industrial atmosphere and environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve public purpose, cannot, by any stretch of reasoning, be construed as production or operational

44 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar incentives for the benefit of assessees alone. Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in industrial development, which is certainly a purpose in the public interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the appellant-assessees cannot be construed as mere production and trade incentives. Making of additional provision in the scheme that incentives would become available to the industrial units, entitled thereto, from the date of commencement of the commercial production, and that these were not required for creation of new assets cannot be viewed in isolation to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide industrial units so that larger public interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum was achieved. Thus, the finding of the Tribunal that the excise duty refund, interest subsidy and insurance subsidy were production incentives, hence revenue receipt cannot be sustained, being against the law laid down by Hon’ble Supreme Court of India in Sahney Steel and Ponni Sugars case. The finding of the Tribunal that the incentives were revenue receipt was accordingly set aside holding the incentives to be capital receipt in the hands of the assessees.

5.7 It was further submitted that the Hon’ble Mumbai Tribunal vide its order dt. 22.06.2016 in ITA No. 5675/Mum/2014 in case of DCIT Vs. M/s Harinagar Sugar Mills Ltd. wherein also the assessee received

45 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar reimbursement of VAT on molasses under the Bihar Incentive Package 2006 for setting up distillery unit in Para 6 held as under:- “In the instant assessment year, the assessee company has received subsidy by way of reimbursement of commercial taxes (VAT) paid under Bihar Incentive Scheme 2006 of Rs.43,89,465/- on purchase of molasses. It is not disputed that the subsidy scheme formulated by the Government of Bihar is for the purpose of attracting capital investment and to encourage setting up the industry/expand the existing unit. It is pertinent to mention that the character of a subsidy in the hands of the tax-payer has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is paid and the source or the forms of subsidy are immaterial. If the object of the subsidy scheme is to enable the tax- payer in setting up the new unit or to expand the existing unit, then the receipt of the subsidy is to be treated on capital account. We have observed that the learned CIT(A) has also allowed the claim of the assessee company in treating reimbursement of commercial taxes (VAT) based upon the decision of the Tribunal for earlier years with respect to the reimbursement of excise duty holding that the subsidy received by the assessee by way of reimbursement of commercial taxes (VAT) is for setting up of a new unit/expansion of existing unit and is a capital receipt not exigible to tax. We have observed that the reimbursement of commercial taxes (VAT) on purchase of Molasses under Bihar Incentive Package 2006 is given to promote establishment of new units and for expansion of capacity of existing units. As per this scheme, the distillery is entitled for reimbursement of commercial taxes (VAT) paid on purchase of molasses for

46 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar production of alcohol and the said benefit will be available for five years from the date of establishment of distillery unit. We do not find any reason to interfere with the order of the learned CIT(A) with respect to this issue also as this scheme of reimbursement of commercial taxes (VAT) on purchase of Molasses under Bihar Incentive Package 2006 is similar to scheme of reimbursement of excise duty under Bihar Incentive Package 2006 and we hold that this is a capital receipt which is not chargeable to tax. We order accordingly.”

5.8 It was further submitted that the Hon’ble ITAT Kolkata Bench in case of Budge Budge Refineries Ltd. Vs. DCIT order dated 14.10.2016 where the assessee received incentive subsidy in form of reimbursement of 75% of sales tax/VAT paid on the sale of finished products under the ‘West Bengal Incentive Scheme 2000’ issued by the Commerce and Industries Department, Government of West Bengal by relying on the decision of Supreme Court in case of CIT Vs. Ponni Sugars and Chemicals Ltd., Calcutta High Court in case of CIT Vs. Rasoi Ltd. 335 ITR 438 and various other decisions held that the incentive subsidy in form of refund/reimbursement of sales tax/VAT is a capital receipt not chargeable to tax.

5.9 It was further submitted that the Ld. CIT(A) has incorrectly held that the revised return filed by the assessee on 21.03.2011 is not valid as it is filed after the time limit permissible under the IT Act. It is submitted that the time limit available for filing the revised return u/s 139(5) is one year for the end of the relevant assessment year i.e.

47 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 31.03.2011 and therefore the revised return filed by the assessee is as per law. Further, non-mentioning of the subsidy amount as capital receipt in Form No. 3CD by the auditor is not relevant to decide the nature of receipt of subsidy. The Ld. CIT(A) has admitted that the purpose of subsidy is to encourage all round development of state but still he treated it as a revenue subsidy for the reason that it is linked to the production and sales made by the unit. In holding so, he ignored the decision of purpose test laid down by the Supreme Court in case of Ponni Sugars and Chemicals Ltd. (supra) where it is categorically held that form or the mechanism through which the subsidy is given is irrelevant. Once, it is accepted, that the purpose of subsidy is all round development of the state, the nature of the subsidy clearly is a capital receipt. In view of above, the AO be directed to allow the claim of the assessee to consider the subsidy received by it as capital receipt.

5.10 Before we advert to contentions raised by both the parties, it would be relevant to refer to the industrial investment policy 2006 of Government of State of Bihar under which VAT reimbursement has been received by the assessee. The salient features of the said policy are reproduced as under:

“Industrial Incentive Policy Bihar - 2006

Subject: Incentive Policy 2006 for accelerated industrial growth of the state

Today there is a requirement to provide a new industrialized shape full of industries to Bihar State. There is a need to establish new industries

48 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar and to revive the sick and closed units of the state. For this purpose favorable environment should be created to attract the investors of state and from abroad. In this connection the Industrial Policy-2003 has been reviewed. After reviewing the policy, a decision has been taken to prepare a new industrial policy in the present circumstances so that there may be a balanced industries growth in the State.

In the light of the aforesaid facts a new Industrial Incentive Policy- 2006 has been prepared in consultation with Bihar Industries Association, Bihar Chamber of Commerce, Confederation of Indian Industry and all concerned Government Departments. In the preparation of this policy the industrial policies of different states have been kept in view.

Under this Industrial Incentive Policies-2006 there are provisions for granting preproduction incentive of subsidy/exemption from stamp duty and registration fee and post production incentive of grant/exemption for preparation of project reports, purchase of land/shed, technical know-how, captive power generation/diesel generating set, quality certificate Vat, luxury tax, electricity duty, conversion fee, market fee etc.

With the implementation of this Industrial Incentive Policy- 2006, it is expected that there will be growth in the per capita income of the state and industrial growth as well as accelerated employment opportunities.

1.2 STRATEGY

49 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (I) To create favorable circumstances in order to establish industries in the State so that among the investors, there may be positive communication.

(ii) Bihar Single Window Clearance Act- 2006- To promote all round development of the state and industrial growth rapid clearance procedures for establishing industries, to issue license and certificates, to provide a congenial atmosphere to the investors of Bihar State and in this regard and for other concerned subjects Bihar Single window Clearance Act-2006 has been enacted.

(iii) Bihar Infrastructure Development Enabling Act-2006- To provide for rapid development of physical and social infrastructure in the State and to attract private sector participation and to provide for a comprehensive legislation for designing, financing, construction, operation, maintenance of infrastructure projects, so that administrative and procedural delays are reduced, for identifying generic project risks, Bihar Infrastructure Development enabling Act, 2006 has been enacted.

(iv) In order to simplify the inspection of factories, provision of self- certification will be made.

(v) Industrial growth is adversely affected due to the complicated labour laws. Such labour laws will be made simple and development oriented.

(vi) Human resources will be developed in such a way, which can promote and create industrialization of high degree. Besides existing different institutions will be strengthened to improve skill.

50 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (vii) Land Bank- To meet the requirement of land for industries and development schemes, Land Bank will be established in the state. By this Bank, Land will be made available according to the requirements to different industries and for development schemes.

(viii) Marketing arrangements will be made for small, tiny, cottage industries, handloom and handicraft.

(ix) For the creation of the basic facilities of international level, to enhance capital investment in the industrial areas and invite the private sector for investment and to encourage public private partnership for this purpose.

(x) Development of Infrastructure.

(xi) In order to revive sick units, to identify such units and to suggest necessary remedial measures and to prevent sickness by developing a district level monitoring system.

(xii) To develop handicraft, handloom, khadi, silk and village industries.

Incentives/exemption facilities for Industries in Bihar to accelerate Industrial development and to attract investments

Stamp duty and Registration fee: Tiny, small, medium and large scale industries which are to be established in the industrial area/shed and outside the area of the Authority will enjoy the full (100%) exemption in stamp duty and registration fee in lease/sale/transfer. This

51 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar facility will be granted only for the first time and thereafter will not be granted.

(i) Project-Report Incentive: Reimbursement of the cost incurred in the project report preparation by the industrial units at the rate of 50% subject to a maximum of Rs. 75,000/- will be made available provided, the project report is prepared by any of the firms recognized by the Industrial Department. The reimbursement will be made to the unit after commencement of the production.

(ii) Incentive Granted on Land/Shed: The Industrial Units Located in Bihar Industrial Area Development Authority/ Export Promotion Industrial Park/Food Park/ Agri Export Zone would be eligible for the following incentive/ subsidy. These facilities/concession to the industrial units will be made available only after the commencement of production.

Sl. Industrial Grant No.

(Maximum)

(iii) Financial assistance for Technical-know-how: If an entrepreneur obtains Technical Know-how from any recognized National research center/ laboratory or institution to establish or to expand his industry, he will be reimbursed 30% (maximum) Rs. 15.00 lacks) of the fee paid

52 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar to the institution/organization for the technical know-how. This facility will be provided to the unit after commencement of production.

(iv) Incentive Grant for capital investment on Captive Power Generation/ Diesel Generating Set.: 50% (fifty percent) of the amount spent on plant and machinery in the establishment of Captive Power Generation/Diesel Generating set will be granted to the industry. No upper limit for this amount has been fixed. This facility will be made available after the unit comes into production.

(v) New industrial units will be granted relief from payment of electricity duty under the Bihar Electricity Duty Act, 1948 for the generation and for own consumption of electricity from D.G. Set and Captive Power Units.

(vi) Subsidy/Incentive on VAT: This facility will be available to Small/large/medium industries. The industrial unit will get a passbook from the State Government in which the details of the tax paid under Bihar VAT would be entered and verified by the commercial Taxes Department in the form prescribed in Appendix-iii. The Director, Industries will be authorized to pay the incentive amount on the basis of the verification.

The new Units will avail 80% reimbursement against the admitted VAT amount deposited in the account of the Government, for a period to ten years. The maximum Subsidy amount is payable 300% of the capital invested.

Clarification: The incentive would not be payable on the amounts imposed as penalty and the difference of amount between tax assessed

53 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar and accepted under the Central Sales Tax/Bihar Value Added Tax Act, 2005 and Bihar entry Tax Act.

(vii) Zero VAT: Zero VAT means the production of items, which do not attract VAT. Such units which produce items attracting zero Vat and pay income tax would be eligible for incentive upto a maximum utilization of 70% of the installed capacity (maximum limit) as per para (vi) above. Incentive will be payable after the inspection/recommendation by a committee constituted under the chairmanship of the Director Industries on the basis of inspection and recommendation by technical officer of the Department.

(viii) Besides aforesaid subsidy/concessions, the following exemptions will be provided:

a. 100% exemption for seven years in luxury tax for seven years.

b. 100% exemption in electricity duty for seven years.

c. 100% exemption in conversion charge.

d. 100% exemption in market fee for seven years.

(ix) Facilities granted for the units working under adverse situation: Such working units which have been working under adverse situation for years will be reimbursed 25 percent of the deposited VAT amount in the account of State Government against admitted VAT amount. This reimbursement will be admissible for five years continuously.

(x) Industrial Rehabilitation Fund: In order to revive the sick and closed industry, with the co-operation of the Commercial Banks, the

54 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar State Government and Bihar Industry Association, a corpus fund will be created.

(xi) S.C/S.T./Women/Handicapped:

a. Under this category, entrepreneurs will avail 5% additional grant/exemption/subsidy than the limit fixed under this policy.

b. UP to a turnover limit of Rs. 30 lakhs per annum S.C/S.T./Women/Handicapped category entrepreneurs who run small and tiny industries will avail 100% subsidy of the deposited amount in the account of Government in the form of VAT for a period of ten years.

(xii) Exemption from AMG/MMG: working units at present and new units will avail exemption from AMG/MMG from the date of declaration of the new Industrial Policy. This facility will be granted for five years.

(xiii) Central sales Tax (CST): only 1% CST will be payable on the items produced by the registered small and medium units in Bihar.”

5.11 We now refer to decision of Special Bench of the tribunal in case of Reliance Industries Ltd. (supra) wherein sales tax incentive was held in the nature of capital receipt and not liable to tax. The said decision was subsequently relied upon by another Coordinate Bench in case of Reliance Industries for a subsequent year and the said latter decision has been challenged by the Revenue before the Mumbai High Court wherein it has declined to admit the substantial question of law. The said decision has since been the subject matter of SLP before the Hon’ble Supreme Court wherein it was held that Hon’ble High Court out not to have dismissed the appeal without considering the following

55 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar questions which did arise for consideration. The matter was accordingly remitted back to the Hon’ble High Court to decide the following question “whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that sales tax incentive is a capital receipt?

5.12 During the course of hearing, it was informed by the ld AR that Hon’ble Bombay High Court has not decided the matter a fresh and therefore as on date, the decision of the Special bench of the Tribunal continue to hold good and relied upon by the assessee company. Further, the ld AR also drawn our reference to the submissions made before the ld CIT(A) wherein the assessee has discussed the comparative features of the Maharashtra Sales tax incentive scheme 1979 and 2006 scheme of Bihar Govt as under:

“6 while deciding the above appeal by special bench of Income Tax Appellate Tribunal, Bench Mumbai, the bench has laid emphasis upon the object and purpose of the incentive scheme, where-under the assessee company has received the incentive. The Income Tax appellate Tribunal Bench-Mumbai, had occasion to consider the Maharashtra Sales tax incentive scheme 1979 and comparative salient features of the said scheme and the scheme of Bihar Govt., whereunder the assessee company has received the incentive are as under:-

Salient 1979 Scheme of 2006 Scheme of Bihar features Maharashtra Govt. Govt.

Object of subsidy Promotion of 1. For balanced industrial

56 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (see preamble) industrialization in growth as well as accelerated backward areas of employment opportunity of the the State of Bihar State. Maharashtra 2. To promote all round through scheme of development of the state and incentives. industrial growth and rapid clearance procedures for establishing industries.

Granting of Effective from date Effective from date of Eligibility of commencement commencement of commercial Certificate from of commercial production/. SICOM production/. (Implementing

57 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar authority)

Mode of 1. By way of 1. By way of reimbursement of disbursement of exemption of VAT amount deposited in the sales tax purchase tax, sales account of the Govt. as % of incentive tax on purchase of fixed capital investment. raw materials, sales tax payable on sale of finished goods, CST on sale of finished goods as a % of fixed capital investment.

Your Honour will observe while going through the above comparative table, that both the scheme viz. 1979 scheme and 2006 scheme are materially stands on the same footing and the decision given with reference to the 1979 scheme finds its applicability to the cases covered by the 2006 scheme of the Bihar Govt.”

“7 The State of Maharashtra has also formed packaged scheme of incentive from time to time to grant sales tax exemption and other fiscal benefits to new and existing industries for setting up units in

58 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar undeveloped and under-developed regions. In the preamble to the sales tax incentive scheme there is a sufficient pointer that the incentive under the 1979 scheme is given to encourage the setting-up of new industrial units during a particular period in certain backward areas of Maharashtra as well as for dispersal of the industries. The object of the 2006 scheme of Bihar Govt. also stands in agreement with the object of the 1979 Maharashtra Govt. scheme as is evident from the copy of the scheme enclosed wherein the maximum quantum of incentive is restricted to 300% of the capital invested. This linkage of incentive with the capital investment is a pointer to the intention of the Bihar Govt., that they intend to refund back the capital investment made by the entrepreneur over a period of time. On the nature of subsidy granted under the 1979 scheme proper the Special bench of the Mumbai Income-tax Appellate Tribunal has held in Deputy CIT v. Reliance Industries Ltd. (2005) 273 ITR (AI) 16 that the sales tax incentive allowed in terms of the relevant scheme i.e. 1979 constitutes capital receipt and is not to be taken into account in computation of total income.”

5.13 In light of above, we now refer to the findings of the Special Bench of the Tribunal in Reliance Industries as under:

“28. The question for consideration is whether the Tribunal in the case of Reliance Industries Ltd. (supra) had correctly appreciated and interpreted the ratio of the decision of the Supreme Court in Sahney Steel & Press Works Ltd.'s case (supra). On a careful reading of the order of the Tribunal in the case of Reliance Industries Ltd. (supra), it appears to us that the ratio of the judgment in Sahney Steel & Press

59 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar Works Ltd.’s case (supra) has been correctly interpreted and appreciated by the Bench. It may be recalled that the assessee before the Supreme Court received the amount as subsidy under the Andhra Pradesh Scheme, one of the salient features of which, as noted by the Supreme Court at page 257 of the report, was that "the scheme was not to make any payment directly or indirectly for the setting up of the industries". Under the Andhra Scheme, it was only after the industries had been set up and production had been commenced that the incentives were to be given by way of refund of sales tax and by way of subsidy on power consumed for production. At page 261, the Supreme Court noticed that in the case before them, "payments were made only after the industries have been set up" and in the very next sentence observed that "payments are not being made for the purpose of setting up of the industries". The contrast between the two has been brought out in this paragraph. The Supreme Court also noted that the power subsidy under the Andhra Scheme was confined to the power that was consumed for production and if any power is consumed for setting up the plant and machinery, the incentive was not to be given. The Supreme Court held that such subsidies were operational subsidies and were given "to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable". It is in this background that we will have to consider the further observations of the Supreme Court at pages 262-263 of the report, which we have extracted in the preceding paragraph. These observations, in our humble understanding of the judgment, constitute the ratio of the judgment. It is here that the Supreme Court has laid down the following principles :—

60 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (1) The character of the subsidy (whether revenue or capital) in the hands of the recipient will have to be determined by having regard to the purpose for which the subsidy is given. (2) If the subsidy is given as assistance to the assessee in the carrying on of his trade or business, it is a trading receipt. (3) In determining the character of the subsidy, the source of the fund is immaterial. The Supreme Court itself gave an example to demonstrate how the ratio is to be applied. The Supreme Court supposed that if under the scheme, the assessee obtained a refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy would be capital receipt. This example demonstrates the applicability of the first principle viz., that it is the object or purpose for which the subsidy is given that is determinative of its character in the assessee’s hands. The object of the subsidy, in the example given, being for a capital purpose, the subsidy also fell to be considered as capital receipt. The first principle was emphasized again by the Supreme Court by referring to the judgment of the House of Lords in Seaham Harbour Dock Co.’s case (supra) and by giving that case as example, where the subsidy was given with the object of helping the assessee to set up its business or complete a project. Since this is a capital purpose, the subsidy was held to be capital. The third principle that the source of the fund was not determinative of the question was demonstrated by the Supreme Court in the same example. It noted that both in the case of refund of sales

61 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar tax paid on raw materials and finished products, the Government was paying out of public funds to the assessee for a definite purpose, viz., the expansion of its capacity. Thus, the Supreme Court demonstrated the principle that it is the object of the subsidy that must be given primacy over the source of the fund. The second-principle was demonstrated by observing that if any monies are given to the assessee for assisting him in carrying out the business operations and where the money is given only after and conditional upon commencement of production, it should be treated as revenue receipt. The Scheme framed by the Government of Maharashtra in 1979 and formulated by its Resolution dated 5-1-1980 has been analysed in detail by the Tribunal in its order in RIL for the assessment year 1985-86 which we have already referred to in extenso. On an analysis of the Scheme, the Tribunal has come to the conclusion that the thrust of the Scheme is that the assessee would become entitled for the sales tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has, at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sales tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be

62 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area.” “29. Thus, the interpretation of the Tribunal, of the ratio laid down in the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) cannot be stated to be erroneous. The Tribunal did recognise, as the Supreme Court itself recognised, that the object with which the subsidy was given is decisive. It did recognise, following the distinction pointed out by the Supreme Court that if the subsidy is given for setting up or expansion of the industry in a backward area, it will be capital, irrespective of the modality or the source of funds through or from which it is given and that if monies are given for assisting the assessee in carrying out the business operations only after, and conditional upon, the commencement of production, it would be revenue. It was only for the purpose of bringing out this distinction that the Tribunal had analysed the features of the Maharashtra Scheme of 1979 and had come to the conclusion that the subsidy given under the Scheme had a direct nexus with the fixed capital investment and that it could not be said that the subsidy was given with the object of assisting or lending a helping hand to the assessee in its business operations. The Tribunal also took the view that since the Madhya Pradesh Scheme was found by the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) to be more or less in the same genre as the Andhra Pradesh Scheme, it observed at page 267 of the report Sahney Steel & Press Works Ltd.’s case (supra), vis-a-vis the Madhya Pradesh Scheme and

63 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar while overruling the judgment of the M.P. High Court in Dusad Industries’s case (supra), that mere setting up of the industry did not qualify an industrialist for getting any subsidy and that the subsidy was given as help not for setting up of the industry which was already there, but as an assistance after the industry commenced production. This aspect of the matter has been noted by the Tribunal in case of Reliance Industries Ltd. ( supra) in para 112 of its order. In the same paragraph, it has also been noted by the Tribunal that Dusad Industries’ case (supra) (assessee before the Madhya Pradesh High Court) had commenced production on 5-1-1973, much before the Government Memorandum sanctioning the Scheme had been issued on 30-8-1973. The Tribunal has further noted that under the M.P. Scheme, an assessee could seek eligibility only after having commenced production, whereas under the Maharashtra Scheme, an assessee could seek eligibility immediately upon having taken some initial steps towards setting up of the industrial unit. “30. The Tribunal was thus aware of the distinction between the subsidy given with the object of setting up the industry and the subsidy given after the industry commences production and conditional upon the commencement of production. Factually, the Tribunal found that the assessee’s case which fell under the Maharashtra Scheme, was a case where the subsidy was given for the purpose of facilitating the assessee to set up an industry in Patalganga, Raigad District, which is a notified area. The actual disbursement took place after the assessee commenced production, but, according to the Tribunal, it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. In paragraph 115 at the bottom of page 121 of its

64 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar order (page 336 of the paperbook No. 1), the Tribunal observed as follows :— "On a detailed consideration of various schemes of Government of Maharashtra and 1979 Scheme in particular, we find that the investment in fixed capital assets is not merely a measure of the amount of incentive. The entire Scheme of incentive has been oriented and is subservient to investment in fixed capital assets in the specified districts of the State. The importance of this aspect has been emphasised in the judgment of Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. itself at page 263 in the following words..............." Thus, we find that the Tribunal did notice the crucial observations of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) which gave primacy to the object of the subsidy over the fact that it was given after the commencement of production. “31. In the same paragraph, in page 123 of the order (page 338 of the paperbook No.1), the Tribunal noted as under :— "In our view, the mere fact that the amount of incentive was allowed to the assessee after the purchase and installation of plant and not before hand cannot deflect from the essential position of the Maharashtra Scheme, that the payment is by virtue of and to the extent of investment made in the fixed assets. It is a fact of life of the setting up of industries in the modern era that the cost of machinery and plant, etc., are generally defrayed by way of repayment of borrowings from out of the internal accruals of the industry during the course of its business operations. Even the assessee before us in

65 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar its application dated 16-12-1980 submitted to SICOM that the aggregate cost of project estimated at Rs. 66.21 crores was proposed to be met by the following means of finance :— Share Capital and Internal Cash Accruals 1,350 Rupee loans/Debentures 2,576 Foreign Currency Loan 2,695 Total 6,621 Sales Tax incentive which has been envisaged in the Maharashtra Scheme as an alternative to cash disbursement, by its very nature could be available to the assessee only after the production had commenced. Secondly, it obviously made great sense from the point of view of the State to ensure that the incentive was given to a genuine project and not merely to the projects on paper only." “32. In the very next paragraph, i.e., in paragraph 116, the Tribunal again referred to the observations in Sahney Steel & Press Works Ltd.’s case (supra) at pages 260-261 of the report and held as follows :— "116. We are of the view that the fact that the assessee before us applied for incentive at the stage of blue print of the project and obtained from the State Government a Letter of Intent indicating implementing agency’s willingness to grant incentive to the assessee goes a long way to establish that the assessee applied for and obtained the incentive on account of its fixed capital investment. We find strong support to this finding from the following observations of Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. at pages 260-261 : Mr. Ganesh strongly relied on Seaham Harbour Dock Co.’s case [1931] 16 TC 333 (HL) which does not come to the assistance of his

66 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given for the express purpose which was named. It was found by the House of Lords that it had nothing to do with the trading of the company." “33. The above observations of the Tribunal made on the basis of the observations of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) also show that the Tribunal was alive to the distinction between the character of the subsidy given with the object of promoting industrial growth in a particular area and the subsidy given conditional upon the commencement of production and after actual commencement of production. In our opinion also, it is not correct to understand the judgment as laying down the broad proposition that wherever the subsidy is given after the commencement of production and conditional upon the same, it should be treated as a revenue receipt in the hands of the assessee, irrespective of the object for which the subsidy was granted. The object for which the subsidy is granted, in our opinion also, takes primacy over the fact that it was given after the commencement of production and conditional upon the same. That the Supreme Court itself recognised this position has been amply made clear in its observations made at pages 262-263 of the report. “34. With great respect, we are therefore unable to share the opinion expressed in Bajaj Auto Ltd.’s case (supra) that the Tribunal in its order in the case of Reliance Industries Ltd. (supra) for the assessment year

67 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 1985‑86 did not correctly interpret the ratio laid down by the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra).” “37. In the paperbook filed by the department containing the above judgments, we noticed a judgment of the Madras High Court in CIT v. Ponni Sugars & Chemicals Ltd. [2003] 260 ITR 605. In this case, the assessee received two types of subsidies. One was under a scheme of the Government framed with the object of augmenting indigenous sugar production and to provide incentives to new sugar factories and expansion products. The scheme enabled the entrepreneur to initially fund the capital cost by obtaining loans from public financial institutions and discharging them with the help of the incentives after the commencement of production. The incentives were provided exclusively for the purpose of repayment of loans for meeting the capital costs. These incentives were held by the High Court to be capital in nature. The other type of incentives was the subsidy which was linked to the purchase tax and was in no way linked to the expenditure incurred in setting up the sugar industry. The object of the subsidy was to give a concession to the assessee for meeting the cost of running the business after production. There was also no condition to the effect that the subsidy shall be used for a particular purpose only. In these circumstances, the High Court held that this subsidy was a trading receipt in the hands of the assessee. This case emphasises that the object with which the subsidy is given is the prime or foremost consideration while determining the nature of the receipt. The High Court held as under :—

68 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar "The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the desired development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P. Ltd. v. CIT [2000] 245 ITR 421 , it is not the name given by the assessee or even the Revenue or anyone else that matters, but is the true character of the receipt that determines its taxability and being regarded as falling with the capital field or out of it. If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating "capital" from "revenue" is a line which is not fixed and unalterable, but one which shifts from time to

69 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital or in the revenue field. The purpose and object of the scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts." The Madras High Court also referred to the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) and held that the Supreme Court "clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries" and that since in the case before the Supreme Court the payments "had been made post production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced". These observations of the Madras High Court (at page 612 of the report) recognise the possibility, depending upon the nature and object of the scheme, of even post-production payments being linked, albeit indirectly, to the steps taken by the assessee to set up the industry. The High Court also observed earlier at page 611 of the report, which we have extracted above, that what is of vital significance is the purpose and object of the scheme and that the decided cases which turn upon the special facts cannot predetermine the outcome of another case

70 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar merely on the ground that post-production receipts are normally regarded as trading receipts. In other words, the High Court has held that merely because the monies are received after production commences, it cannot be said, irrespective of the purpose and object of the scheme, that the receipt is of revenue nature. This observation of the Madras High Court and the manner in which the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra) has been explained at page 612 of the report also show that the Tribunal in the case of Reliance Industries Ltd. (supra) for the assessment year 1985-86 correctly interpreted the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra). The observations of the Madras High Court lend support to the view that the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy was received after the commencement of production or conditional upon it. Therefore, in our view and with respect, the Tribunal in the case of Reliance Industries Ltd. ( supra) had correctly interpreted and understood the ratio of the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.’s case (supra). “38. In this view of the matter, we answer the question referred to us in the affirmative. Since there are other grounds in the appeal of the assessee and since there is also an appeal by the department, they will go back to the Division Bench for being disposed of in accordance with law. “ 5.14 We now refer to the decision of the Hon’ble Supreme Court in case of Ponni Sugars and Chemicals Ltd (supra) which has affirmed

71 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar the decision of the Hon’ble Madras High Court in case of Ponni Sugars and Chemicals Ltd which has been referred and relied upon by the Special Bench in case of Reliance Industries (supra). The Hon’ble Supreme Court has held as under: “13. The main controversy arises in these cases because of the reason that the incentives were given through the mechanism of price differential and the duty differential. According to the Department, price and costs are essential items that are basic to the profit-making process and that any price-related mechanism would normally be presumed to be revenue in nature. In other words, according to the Department, since incentives were given through price and duty differentials, the character of the impugned incentive in this case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. 14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel & Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case

72 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel & Press Work's Ltd.'s case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the

73 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”

5.15 In light of above discussion, the legal proposition which has been laid down by the Special Bench in case of Reliance Industries after taking into consideration the decision of the Honb’le Supreme Court in case of Sahney Steel & Press Works Ltd and by the subsequent decision of the Hon’ble Supreme Court in case of Ponni Sugar and Chemical Ltd, the character of the subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is not relevant. The source is immaterial. The form or the mechanism through which the subsidy is given is immaterial. If the object of the subsidy scheme was to enable the assessee to run business more profitably, then the receipt is on revenue account. On the other hand, if the object of the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of subsidy was on capital account.

74 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 5.16 In the instant case, the subsidy in the form of VAT reimbursement is provided to the assessee company in terms of the Industrial Incentive Policy of state of Bihar formulated in the year 2006. The objective of the policy was to establish new industries and to revive the sick and closed units in the state of Bihar and to create favorable environment to attract the investors of state and from abroad. The thrust of the policy was growth in the per capita income of the state and industrial growth as well as accelerated employment opportunities. Under this Industrial Incentive Policies-2006, there are provisions for granting pre-production incentive of subsidy/exemption from stamp duty and registration fee and post production incentive of grant/exemption for preparation of project reports, purchase of land/shed, technical know-how, captive power generation/diesel generating set, subsidy/incentive on Vat, exemption in luxury tax, electricity duty, conversion fee, market fee etc.

5.17 Under the said policy, one of subsidy/incentive available to the new units, which is under consideration before us, is the reimbursement to the extent of 80% against the admitted VAT amount deposited in the account of the Government for a period of 10 years. The maximum subsidy/incentive amount was restricted to 300% of the capital employed. Applying the purpose test, the objective and the purpose of providing the VAT subsidy (to the extent of 300% of capital employed) is clearly related to encouraging setting up of the new units which commences production within five years from 1.4.2006 and to generate fresh employment opportunities in the state. It is noted that even the ld CIT(A) has given a similar finding where he states that the purpose of the industrial incentive scheme is to encourage all round development of

75 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar the state of Bihar. Further, the subsidy is calculated on the amount of VAT collected and deposited with the Government which would subsequently be entered in the passbook and verified by the Commercial taxes department. There is a distinction between the entitlement towards the said subsidy and its subsequent disbursement. The assessee becomes entitled to such subsidy once it has set up the new unit in the state of Bihar and the disbursement happens when the assessee company actually starts production. From a monitoring and implementation stand point, it is essential that subsidy is provided to genuine industries setting up new units, making capital investment, building infrastructure, actually commences production and generate employment opportunities in the state of Bihar. To this effect, the quantum of subsidy is linked to capital invested and also the disbursement thereof is linked to VAT which is collected and deposited on goods actually produced and sold. By its very nature, the subsidy would thus be payable after the commencement of production but that would not make it a revenue receipt as it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. The object for which the subsidy is granted, would takes primacy over the fact that it was given after the commencement of production and conditional upon the same. The subsidy is thus on capital account.

5.18 It is noted that a similar view has been taken by the Coordinate Bench in case of Harinagar Sugar Mills (supra) while examining the reimbursement of VAT on molasses under the Bihar Incentive Package 2006.

76 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 5.19 Further, we have noticed that the Finance Act, 2015 w.e.f. 1-4- 2016, has enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:-

“(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43.”

5.20 In light of above amendment in the definition of income, any subsidy given by the Central Government or a State Government or any authority etc. for any purpose, except where it is taken into account for determination of the actual cost of the asset under Explanation 10 section 43(1), has become chargeable to tax. Even if a subsidy is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre-amended era, shall henceforth be treated as income chargeable to tax, except where it has been taken into account for determining the actual cost of assets in terms of Explanation 10 to section 43(1). This amendment is with effect from 1-4-2016 and is prospective in its application. In the instant case, as the assessment year under consideration is 2009-10, Section 2(24)(xviii) shall have no operation.

5.21 In light of above discussions and in the entirety of the facts and circumstances of the case, VAT subsidy received by the assessee from the Government of Bihar is a capital receipt and accordingly not

77 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar chargeable to tax. In the result, ground no. 3 of the assessee’s appeal is allowed.

ITA No. 116/JP/14 6. In its solitary ground of appeal, the Revenue has challenged the order of the ld CIT(A) in deleting the addition of Rs. 27,77,310/- made by AO on account of disallowance of deduction under section 80IA claimed on the profits of the Wind Mills.

6.1 At the outset, the ld AR submitted that the issue is covered in favour of assessee by order dt. 02.12.2014 of Hon’ble ITAT, Jaipur in assessee’s own case in ITA No. 934/JP/11 for A.Y. 07-08 and in ITA No. 15/JP/12 for A.Y. 08-09.

6.2 The ld AR further placed on following cases:- - CIT Vs. Sri Ranganathar Industries Pvt. Ltd. (2015) 118 DTR 285 (Mad.) - CIT Vs. R. Yuvaraj (2015) 231 Taxman 609 (Mad.) - Jivraj Tea & Industries Ltd. Vs. ACIT (2014) 101 DTR 217 (Ahd.)

6.3 The ld AR further submitted that the Hon’ble Supreme Court has dismissed the SLP of the department reported in 389 ITR 5 (Statute.) filed against the order of Madras High Court in case of ACIT Vs. Velayudhaswamy Spinning Mills (P) Ltd in T.C.A. No. 909 of 2009 reported in 340 ITR 477 whereby the High court held that in the computation of special deduction under section 80 IA loss in the year earlier to initial assessment year already absorbed cannot be notionally

78 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar brought forward and set off against profits of eligible business and where the Department did not dispute finding of the Commissioner (Appeals) as to the initial assessment year it was not entitled in the assessee’s appeal to dispute it.

6.4 The ld AR further brought to the notice of the Bench that the Hon’ble Supreme Court has dismissed the SLP of the Department reported in (SC ) 2016 ITL 4951 filed against the order of Madras High Court in case of Commissioner of Income-tax Vs. Best Corporation Ltd. (2016) 76 taxmann.com 286 which has followed the earlier decision in case of Velayudhaswamy Spinning Mills (P) Ltd and the head notes read as under:

“Deductions- profits and gains from infrastructure undertakings (computation of deduction) assessee claimed deduction under section 80-IA-Tribunal following decision of Madras High Court in case of Velayudhaswamy Spinning Mills (P.) Ltd. v. Asstt. CIT, which was pending appeal before Supreme Court, held that assessee was entitled to deduction under section 80-IA without setting off losses/unabsorbed depreciation pertaining to windmill, which were set off in earlier year against other business income. It also held that initial assessment year in section 80-IA(5) would only mean year of claim of deduction under section 80-IA and not year of commencement of eligible business. It further held that assessee had option to choose first/initial assessment year of claim for deduction under section 80-IA- Revenue filed appeal before High Court – High Court held that since it has consistently followed decision in case of Velayudhaswamy Spinning Mills (P.) Ltd.

79 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (supra) and on basis of said decision CBDT had issued Circular No. 1 of 2016, dated 15.02.2016 clarifying term ‘initial assessment year’ in section 80-IA(5), order of Tribunal deserved to be upheld and SLP filed against order of High Court was to be dismissed.”

6.5 The findings of the ld CIT(A) are reproduced as under:- “I have considered the assessment order as well as submissions made by the AR along-with judicial citation given therein. It is submitted that this issue has been decided in favour of the assessee by the Ld. CIT(A) in the case of the appellant in A.Y. 2007-08 and A.Y. 2008-09. A copy of the orders has been placed on record. I have gone through the same and find that this issue has been elaborately discussed by my ld. Predecessor in the case of the appellant for A.Y. 2008-09 vide Appeal No. 325/2010-11 dated 24-10-2011. Since disallowance of Rs. 27,77,310 made by the AO u/s 80IA of the IT Act is deleted.”

6.6 The facts as noted by the Coordinate Bench in assessee’s own case in ITA 934/JP/2011 for A.Y. 2007-08 and its relevant findings are noted and reproduced as under:

“15. The assessee installed windmills and started producing electricity in the assessment year 2003-04. The depreciation and business losses of the windmills upto assessment year 2006-07 were adjusted against other business income of the assessee. Assessment year 2007-08, the year under consideration, is the initial year in which the assessee has claimed deduction u/s 80IA

80 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar (4)(iv)(a) of the Act @ 100% of the profit and gains of eligible business i.e. windmill.

The main issue is as to when the provision of section 80IA will become applicable upon the appellant. The appellant has opted to claim the deduction u/s 80IA w.e.f. assessment year 2007-08, though the production commenced from the assessment year 2003-04, therefore provision is made applicable from the assessment year 2007-08. The option to claim the deduction u/s 80IA rests with the appellant to claim it in 10 years out of 15 years. The initial assessment year for the appellant is assessment year 2007-8 and from such assessment year, the eligible industrial undertaking will be considered as independent source of income of the appellant and not prior to that.

The Assessing Officer has made applicable the provisions of section 80IA from the assessment year 2003-04, when the appellant has not even claimed the deduction under the said provision. The assessing Officer has misunderstood the first year of commencement of production and initial assessment year as

81 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar synonymous. The year of commencement of production and initial assessment year bears the different connotation. For this proposition, strength is drawn from the statutory audit report format in form number 10CCB as relied upon by learned counsel. I have no hesitation in giving a finding that the initial assessment year for the appellant is assessment year 2007-08 and from such assessment year, it will be considered as independent source of income.

While giving this finding I also draw strength from Taxmann’s ready recknor by Dr. Vinod K. Singhania 33rd edition from page number A-241 to A-244. Further, Hon’ble Rajasthan High Court in case of Mewar Sugar Mills 271 ITR 311 have decided that it is not at all required that losses or other deduction which have already been set off against the income of the previous year should be reopened again for the purpose of computing admissible deduction u/s 80IA of the Income Tax Act, 1961.

There is no provision under the Income Tax Act, 1961 or any iota of reference supporting the stand of the Assessing Officer for reviving the earlier year’s already adjusted business losses and unabsorbed depreciation in the subsequent year.

Decision of Velayudhaswamy Spinning Mills (P) limited (supra), is latest on the subject, wherein the decision of Hon’ble Rajasthan High Court in case of Mewar Sugar Mills have also been followed. Similar issue came up before me in the appeal number 192/2009- 10 of Saurabh Agrotech (P) Ltd. and in appeal number 191/2009- 10 of Vijay Industries, Khairtal & vide order dt. 12.07.2011 &

82 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 11.07.2011 respectively, I have taken a view that the appellant is entitled for deduction u/s 80IA of the I.T. Act, 1961 as claimed by it in its return of income. Therefore, considering all these issues & on the principle of consistency, it is held that the action of AO is not justified in denying deduction of Rs. 24,62,950/- within the meaning of section 80IA of the I.T. Act, 1961.

6.7 Undisputedly, there is no change in the facts and circumstances of the case or in the legal position. The Coordinate Bench in assessee’s own case for A.Y. 2007-08 has already taken a view in favour of the assessee following the decision of Hon’ble Madras High Court in case of CIT Vs. Velayudhaswamy Spinning Mills (P) limited and an SLP filed against the said decision has been dismissed by the Hon’ble Supreme Court. In a similar case of Best Corporation Limited (supra) wherein the decision of Hon’ble Madras High Court in case of Velayudhaswamy Spinning Mills (P) limited was followed, an SLP has again been dismissed by the Hon’ble Supreme Court. In light of above, we do not see any infirmity in the order of the Ld. CIT(A). In the result, the deduction of Rs. 27,77,310 as claimed by the assessee company u/s 80IAis hereby allowed. In the result, the ground taken by the revenue is dismissed.

ITA No. 704/JP/2014 & 705/JP/2014

83 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 7. In ITA No. 704/JP/2014 and in ITA No. 705/JP/2014 pertaining to AY 2010-11, admittedly, the ground of appeal no. 2 taken by the Revenue and all the grounds of appeal taken by the assessee are similar to grounds of appeal under identical facts and circumstances of the case as taken in ITA No. 110/JP/14 & 116/JP/14. Our findings and directions contained in ITA No. 110/JP/14 & 116/JP/14 shall therefore apply mutatis mutandis to all these grounds of appeal.

8.1 In this regard, the brief facts of the case are that the assessee is engaged in the business of trading and manufacturing of edible oil, oil cake and vanaspati ghee. It is also engaged in the business of power generation from windmills. During the year, it declared gross profit of Rs.2499.58 lacs on turnover of Rs.30026.09 lacs giving a G.P. rate of 8.32% as against gross profit of Rs.2308.05 lacs on turnover of Rs.32232.71 lacs giving a G.P. rate of 7.16% in the immediately preceding year. The N.P. rate declared during the year is 0.99% as against N.P. rate of 0.31% declared in the last year.

8.2 The AO observed that assessee has claimed shortage of mustard seed of 1.610 MT in the month of April, 2009 and 34.536 MT in the month of March, 2010 whereas no shortage has been claimed in the months of May, 2009 to February, 2010. Accordingly, he required the

84 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar assessee to explain the reasons for alarming shortage of mustard seed and for not declaring any shortage in the months of May 2009 to Feb, 2010. The assessee submitted that the shortage claimed by it is verifiable from the day to day stock records. Further, as the new crop of mustard starts arriving in the market in the month of March and the same contains moisture, it has to be dried before putting the seed in the expeller and it is on account of drying the moisture of seeds which arrives in March, the shortage has been shown in the months of April 09 and March 10. The AO after considering the aforesaid submission made the following observations:-

(i) The assessee has not maintained the details of day to day shortage in its stock register. (ii) The shortage in the mustard seeds claimed by the assessee is on estimate basis without any justification. It may be possible that the quantity of moisture in the mustard seeds is little more than what is shown in the month of April 2009 due to arrival of mustard crop. (iii) No explanation has been furnished by the assessee regarding not showing any shortage in the month of May 2009 to Feb 2010. (iv) No laboratory reports have been produced.

Accordingly, the AO by holding that assessee has sold the mustard oil out of the books and the same has been shown in the garb of excess claim of shortage, made lump-sum trading addition of Rs. 5 lacs by applying provisions of section 145(3) of the Act.

85 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar 8.3 The Ld. CIT(A) after considering the submission of the assessee deleted the same by holding that AO has failed to bring on record any adverse material before rejecting the book results declared by the assessee and also considering the fact that the G.P. rate declared by the assessee at 8.32% for the year under consideration is better than 7.16% declared for the preceding year.

8.4 During the course of hearing, the ld. AR submitted that the assessee maintains day to day books of accounts, which is subject to audit. These books are duly supported with bills and vouchers. The AO has not pointed out any sales or purchase which is out of the books or not vouched. Day to day stock records is also maintained. The shortage of mustard seeds claimed by the assessee in the month of April 09 and March 10 is verifiable from the day to day stock register of the said months wherein the shortage is shown on day to day basis whenever the same has occurred. The reason as to why the shortage has been claimed in the month of April 09 and March 10 and not in the months of May 2009 to Feb 2010 has been duly explained before the AO. So far as non-production of laboratory test reports are concerned, it is submitted that every lot of seeds contain different quality of oil and considering the content of oil in the seed, payment is made to the supplier. The maintenance of laboratory test report has thus no relevance for application of section 145(3). The Ld. CIT(A) after considering all these facts held that AO has no material for rejecting the book results declared by the assessee. The department has not challenged this finding of the CIT(A) where it is held that section 145(3) is not applicable. Hence, on

86 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar this account itself, the ground of the department be liable to be dismissed.

8.5 It was further submitted that in A.Y. 03-04 to 07-08 also, the AO rejected the books of accounts by making various observations including the non maintenance of laboratory test report and shortage of mustard seed claimed by the assessee and made trading addition. However, the Hon’ble ITAT accepted the books of accounts and deleted the trading addition in A.Y. 03-04 vide ITA No.415/JP/07 order dt. 27.06.08, in A.Y. 04-05 vide ITA No. 359/JP/09 order dt. 11.02.10, in A.Y. 05-06 vide ITA No. 910/JP/2009 order dt. 07.05.2010, in A.Y. 06-07 vide ITA No. 387/JP/11 order dt. 21.10.2011, in A.Y. 07-08 vide ITA No. 934/JP/11 order dt. 02.12.2014.

8.6 The ld AR further placed reliance on Hon’ble Rajasthan High Court decision in case of Pr. CIT Vs. Bhawani Silicate Industries (2016) 236 Taxman 0596. In this case, assessee firm was carrying on the business of manufacturing of edible oil and oil cake from mustard seeds and sale thereof. The AO rejected the books of account on the ground that stock register/production register were not maintained quality wise and in the absence of quality of seeds, proper/actual analysis of yield of edible oil and oil cake from mustard oil could not be ascertained. He also made certain trading addition by applying GP rate. Tribunal found that except quality, quantity wise stock details had been maintained and no other defect was noticed by the AO in quantitative details. Once stock register had been held to be properly maintained and had been held to be proper, no trading addition could have been made and rightly so,

87 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar even otherwise, minor discrepancies could result into rejection of books of accounts. Merely because there was some deficiency of quality wise record in books of accounts or merely because of rejection of books of accounts, it did not mean that it must necessarily lead to addition in return of income of assessee. Even AO estimated the income by making estimated addition by applying particular GP Rate also CIT(A) reduced it , therefore, those two authorities even while resorting to best judgment had no basis for coming to conclusion reached and even in case of estimated/adhoc addition, prima-facie, some material was required to be brought on record. Thus, order of Tribunal was just and proper and no substantial question of law arose out of order of Tribunal.

8.7 The ld AR further submitted that the G.P. rate of the assessee is better as compared to the last year. The Hon’ble Rajasthan High Court in case of CIT Vs. Inani Marbles Pvt. Ltd. 316 ITR 125 has observed that in the absence of any change in the factual position, normally the profit rate declared & accepted in the preceding year, constitutes a good basis for working out the gross profit. In the present case, the result declared by the assessee in the preceding year has been accepted. The G.P. rate declared during the year is better as compared to the preceding year. Not only the G.P. rate but the N.P. rate is also better as compared to earlier years. It is a settled law that, no trading addition is called for if the result declared is better as compared to the result declared in earlier year.

8.8 We have heard the rival contentions and pursued the material available on record. It is noted that on similar ground of shortage of

88 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar mustard seeds and the reasoning adopted by the AO, the additions have been made in the earlier years and the matter after been examined has been decided in favour of the assessee company by the Coordinate Benches. Further, we donot see any infirmity in the order passed by the Ld. CIT(A) and his following findings remain uncontroverted before us and which are hereby confirmed:

“4.3 I have perused the Assessment order as well as submissions made by the appellant and find that a lump sum trading addition of Rs. 5,00,000/- was made by the AO on the ground that claim of shortage by the assessee is quite excessive. AO has also noted that shortage has been claimed in the month of April, 2009 to the tune of 1.610 MT, and then again in the month March, 2010 of 34.536 MT, whereas no shortage was claimed in the intervening months.

4.4. The appellant has stated that company is engaged in the manufacturing of oil and ghee by means of crushing of oil seeds. New crop of mustard seeds comes in the market in the month of March and it contains moisture and therefore the claim of shortage was made in those two months, as stated by the AO. Complete day to day records, stock register etc. have been maintained and therefore the adhoc addition made by the AO is unjustified. No specific discrepancy has been pointed out by the AO. Further, reliance has been placed on certain judicial decisions, as stated above. The gross profit declared is better as compare to the earlier period and there is no justification for making the trading addition.

89 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar I have carefully considered the detailed submissions made by the appellant and find force in the arguments taken by the appellant. It is seen that the GP rate declared by the appellant at 8.32% for the year under consideration is better than 7.16% declared for the preceding year. AO has failed to bring on record any adverse material before rejecting the book result declared by the appellant. Thus, considering all these factors, I delete the trading addition of Rs. 5,00,000/- made by the AO on estimate basis under this head.”

8.9 In light of above discussions and respectfully following the decisions passed by the Coordinate Benches earlier, the adhoc trading addition of Rs. 5,00,000/- is hereby deleted. In the result ground No. 1 of the Revenue is dismissed.

ITA No. 275/JP/2015 & 173/JP/2016

In the result, the appeals filed by the assessee are allowed and the appeals filed by the Revenue are dismissed.

Order pronounced in the open court on 24/04/2017.

90 ITA No.110,116,704&705/JP/2014 and 275/JP/2015 & 173/JP/2016 Deepak Vegpro (P) Ltd.,Alwar Vs. ACIT, Cirle -1, Alwar Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 24/04/2017. *Santosh*. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Deepak Vegpro Pvt. Ltd. Old Industrial Area, Itarana, Road, Alwar (Raj.). 2. izR;FkhZ@ The ACIT, Circle-1, Alwar. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File {ITA No. 110,116,704 &705/JP/2014 and 275/JP/2015 & 173/JP/2016}.

vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत