BAJAJ HINDUSTAN LTD,MUMBAI vs. DCIT 3(1), MUMBAI

During the year under consideration the assessee has shown dividend income and income from units amounting to Rs. 19,29,752/- and Rs. 5,25,587/- respectively aggregating to Rs. 24,85,339/-. The AO called on the assessee to explain why the expenditure relatable to exempt income should not be disallowed as per the provisions of section 14A r.w.r. 8D. The assessee submitted before the AO that it had not incurred any specific expenditure to earn the exempt income and that the investments are not made out of borrowed funds. The assessee further submitted that the investments were made a decade ago and not during the year under consideration. The assessee also submitted that the suo-moto disallowance of Rs. 10,00,000/- is relatable to the exempt income earned and therefore, no further disallowance is warranted. The AO did not accept the submissions of the assessee and held that the assessee ought to have incurred certain indirect expenses for the purpose of managing investments which needs to be disallowed. The AO by relying on various judicial pronouncements invoked section 14A r.w.r. 8D to arrive at a disallowance of Rs. 8,97,38,865/-.

Before the CIT(A) the assessee submitted that the investments from which the exempt income is earned is made in the group companies and therefore, no expenditure is incurred towards managing such investments. The CIT(A) called for various details pertaining to the investments made by the assessee to rework the disallowance as under:

The ld. AR submitted that the AO has not recorded any satisfaction before invoking the provisions of section 14A. The ld. AR further submitted that the workings with regard to the suo-moto disallowance (page no. 8 of PB) have not been considered by the AO and he has not recorded any specific finding with regard to workings submitted. On the disallowance made under Rule 8D(2)(ii) the ld. AR submitted that the own funds of the assessee are much higher than the investments made and therefore, no disallowance is warranted. In this regard our attention is drawn to the financial statements of the assessee in page 219 of PB.

The ld. DR on the other hand vehemently argued that the AO has given a detailed finding with regard to why the disallowance under section 14A r.w.r. 8D is to be made in assessee's case. The ld. DR drew our attention to the findings given by the AO in para 7.3 to 7.7 in the assessment order to submit that the AO has recorded a detailed finding as to why he is not satisfied and therefore correctly invoked the provisions of section 14A r.w.r. 8D. The ld. DR further submitted that the investments made by the assessee is huge and therefore the CIT(A) is not correct in considering only the movement during the year for the purpose of reducing the disallowance. Therefore, the ld. DR supported the order of the AO to submit that the disallowance made by the AO should be upheld.

We have heard the parties and perused the material on record. The breakup of the exempt income earned by the assessee during the year under consideration is as under:

We further noticed that the assessee has made a suo-moto disallowance of Rs. 10,00,000/- while filing a revised return of income and before the AO the assessee made the following submission in this regard.

Rule 8D for computing the disallowance under section 14A came in effect from 24.03.2008 whereby the disallowance towards expenditure incurred for earning exempt income is to be computed as per Rule 8D. The Rule warrants disallowance towards (i) direct expenses incurred towards earning exempt income (ii) interest on borrowed cost for investment earning tax free income (iii) indirect expenses incurred towards earning exempt income. In assessee's case it is an undisputed fact that the assessee has not incurred any direct expenses towards earning exempt income and therefore there is no disallowance under rule 8D(2)(i). Coming to the disallowance under rule 8D(2)(ii), it is argued that it is a well-settled position that where the own funds of the assessee are more than the investments which are earning exempt income then no disallowance under section 8D(2)(ii) is warranted. In assessee's case from the perusal of the financial statements for the year ended 31.03.2008 we noticed that the shareholders funds of the assessee is at Rs. 1260,04,51,173/- whereas the total investments of the assessee is at Rs. 451,71,71,819/-. Therefore, there is merit in the contention of the assessee that since the own funds are more than the investments earning exempt income no disallowance towards interest under Rule 8D(2)(ii) is to be made in assessee's case.

With regard to disallowance under Rule 8D(2)(iii) we noticed that the assessee has made a suo-moto disallowance of Rs. 10,00,000/-. The AO has rejected the suo-moto disallowance while invoking section 14A r.w.r.8D. The relevant paras which the ld. AR argued that the AO ahs recorded the satisfaction is extracted as below:

Before proceeding further, we will look at the provisions of section 14Aand Rule 8D which are reproduced as follows:-

From the combined reading of the above provisions, it is clear that for the purpose of application of section 14 r.w.r 8D(2)(iii) the AO has to record reasons as to why he is not satisfied with the correctness of the claim of expenditure by the assessee. We notice that the Hon'ble Bombay High Court in the case of Principal Commissioner of Income Tax v. Godrej & Boyce Mfg. Co. Ltd. [2023] 149 taxmann.com 222/292 Taxman 497 (Bombay) has considered a similar issue where it has been held that –

In assessee's case from the perusal of the findings as extracted earlier it is clear that the AO before rejecting the suo-moto disallowance has not given any specific error in the computation of suo-moto disallowance but has made a general observation that certain indirect expenses ought to have been incurred by the assessee. We further notice that the AO has not brought anything on record to factually state that the computation of disallowance made by the assessee is not correct. Therefore the enhanced disallowance made without recording satisfaction cannot be sustained Therefore considering the facts and circumstances of the case and the decision of the jurisdictional High Court, we hold that the disallowance made u/s.14A should be restricted to the suo-moto disallowance of Rs.10 lakhs as claimed by the assessee and the enhanced disallowance by the CIT(A) is hereby deleted. This ground of the assessee is allowed. Subsidy under New Sugar Promotion Policy to be treated as Capital in nature – Ground No.2(a) & (b)

The assessee in the revised return of income claimed the subsidies and reimbursements totaling to Rs.84,16,46,954/- given under New Sugar Industry Promotion Policy, 2004 announced by State Government of Uttar Pradesh as not taxable for the reason that the same are capital receipts. The AO called on the assessee to submit that details pertaining to such claim including the relevant documents, terms and condition of the Scheme etc. The assessee submitted a detailed note on the terms and condition of the scheme to submit that the subsidy received is in the nature of capital receipt for the reason that the object behind giving such subsidy is setting up of new unit / expansion of existing business. However, the AO did not accept the submissions of the assessee and relied on the decision of the Hon'ble Supreme Court in the case of Sahaney Steel and Press works Ltd. & Ors. Vs. CIT (228 ITR 253) to make a disallowance towards subsidy received as reimbursement of Society Commission and Freight and VAT/CST charges. The CIT(A) confirmed the disallowance.

The ld. AR submitted that as per the terms of the scheme the subsidy is received as an incentive towards setting up of new sugar factories in private sector to speed up the industrialization of the State of Uttar Pradesh. The ld. AR drew our attention to the detailed submission made before the AO explaining the incentives scheme as per the policy. The ld. AR submitted that the assessee has adjusted the incentives in the revised return of income as capital receipt and has submitted a detailed note which has not been properly appreciated by the AO while denying the claim of the assessee. The ld. AR also submitted that the Co-ordinate Bench of the Tribunal in assessee's own case for AY 2007-08 (ITA No. 5058 & 5208/Mum/2012 dated 12.01.2023) has considered the same issue of treatment of subsidy received in the form of reimbursement and VAT/CST and held that the same are capital receipts. The ld. AR further submitted that the issue for the year under consideration is identical which is substantiated by the fact that the CIT(A) while confirming the disallowance has followed the order of his predecessor for AY 2007-08. Therefore, the ld. AR submitted that the issue is covered by the above decision of the Co-ordinate Bench and accordingly prayed that the disallowance be deleted.

We have heard the parties and perused the material on record. We noticed that the Co-ordinate Bench while considering the same for AY 2007-08 has observed that –

The receipt of the 10% capital subsidy and exemption of registration charges and stamp duty as mentioned in A' above ought not to be reduced from the cost of assets under section 43(1) of the Act.

The following notional amount of incentives referred in 'B' above are in the nature of capital receipts and ought to be reduced while computing the total income. Incentives Rs. Exemption from payment of UP7T9nowvvat) 1,901,637 and CST on sale of molasses Zero rate of Administrative Charges on 30,215,867 molasses produced by such units Exemption from payment of entry tax on sale 36,852,585 of non leg sugar produced by such Total 68,970,08 4. The incentives in the form of exemptions and reimbursements referred to in 'C' above amounting to Rs.560,779,698 are in the nature of capital receipts not eligible to tax and accordingly, ought to be excluded from the total In this connection on behalf of BHL, we wish to make the following submissions:- The Government of UP introduced the now Sugar Industry Promotion Policy, 2004, inter alia, with the avowed objective of promotion of establishment of new sugar factories in the private sector to speed up industrialkation of the State. The preamble to the Policy states the proposed objectives as follows. "to attract private investment in the field of the Cane Development and sugar industry by establishing sugar mills in private sector to augment the industrial Development in the State. Under the Policy, now sugar factories are given incentives. The period/ quantum of various concessions/ incentives have been linked to the amount of fresh investment made for the establishment of the new sugar mill, although the incentives are to be disbursed after the establishment of the unit. The salient fatures of the background note to the polig are reproduced hereunder- "Why new Sugar Industrial Promotion Polity needed? The total number of sugar factories working in the State is 101 having a total cane crushing capacity of 3 96 lacs TCD out of which 22 sugar mills are under State Sugar Corporation, 27 in Co-operative Sector and 52 sugarmills are established in private sector. It is clear from the basis of the average of the last 5 years that all these sugar factories are able to crush only 41.04% of the total cane produced in the state and the rest is consumed in Gur khandsari. Seed Juice, fodder and chewing. Percentage of Consumption of Cane in UP Sugar Other Mills consumption Average of 1999- 58/96% 00to 2003-04 Consumption of 48.85% 51.15% Cane % It is this clear that in UP there I savallabilio of sugarcane which can be used as raw material by the sugar mills, however, due to the sickness of the sugar mills belonging to the State Sugar Corporation mid stagnation in the expansion of the production capacity of the sugar mills belonging to the Co- operative sector and due to the lack of availability of the requisite capacity in the sugar mills belonging to the private sector, gradually the State's sugar industry is lagging behind. The sugarcane farmers have to sell their produce to the Handsari/Gur Industry at quite low prices, as a result of which, on the one hand farmers are not able to get adequate price for their produce, on the other hand, contribution to the programmes for the development of the rural areas and welfare of the common people is mostly negligible. Demand and supply of sugar in the country by 2010-11 It is estimate that in the year 2010-11 the country's total population would be approximately 120.75 crores Due to the increase in the country's per capital average consumption of sugar, till 2010-11, 276.02 lakh tonnes of sugar would be needed for internal consumption. For the target of taking the State's contribution in the country's sugar production from 28.06% in the year 2002-03 to 30% in the year 2010-11, in the State approximately 75 lakh tonne sugar would have to be produced. It is estimated that there would be substantial increase in the country's average per capita consumption of sugar and in order to satisfy this increase demand the country's two big sugar producing States up and Maharashtra would have to come forward Since in Maharashtra the percentage utilization of sugarcane for producing sugar is at the maximum possible, therefore, UP is the only State when' by increasing the drawal percentage of sugarcane, the increased demand for sugar in the country can be met. Keeping in view the State's limited financial resources, the sick condition of the mills belonging to the Corporation, stagnation in the mills of the Co-operative sector and the inability of the mills in the private sector to completely utilize the sugarcane produced, the need is being felt for encouraging the private sector to invest funds for setting up sugar mills which are of global standards, having sugarcane crushing capacity of 5000 TCD or more. In order to meet the domestic consumption of sugar at 6% GDP growth rate, it would be required to set up mills having approximately one lakh tonne per day capacity and thus create additional capacity. The requirement of sugarcane for this increased capacity can be met by increasing the current drawal percentage of sugarcane from 5 to 7% It must also be clarified that at which ever place a new sugar mill is set up the sugarcane area of that place increases as a result of which there is no possibility of difficulty in sugarcane supply for the increased capacity. In view of the above, in order to establish new sugar mills in the State the only option is to attract industrialists in the private sector, since in view of the lack of lands the possibility of setting up mills in the Government or the Co-operative sector is negligible in order to set up new sugar mills in the private sector having capacity of one lakh tonnes per day, investment of approximately Rs 2000 crores would be needed. For creating that additional capacity, in the initial years the State Government would be required to provide special economic promotion to the industrialists in the form or special packages.” On the perusal of the aforesaid policy the purpose/ rational behind disbursement of subsidy/ incentive under the Polig and the primary considerations, intention and the objective sought to be achieved by the Polig are summarized as under-

Increase in sugar production to utilizes the vast cane area in the State.

Protection of financial interests of cane farmers. 5. Rapid rural development and increase in revenues of the Government. 6. Generation of employment opportunities.” 19. In terms of the New Promotion Policy of Sugar Industry of Uttar Pradesh Government the assesse company was granted eligibility certificate for 5 years vide letter dated 31.10.2005 on investing in excess of Rs.350 crores under first stage. The eligibility was extended up to 10 years of investing in excess of Rs. 500 crores under 2nd stage. Therefore various benefit under the policy were availed by the assesse as discussed supra in this order. After referring the various clause of the new industry policy the assesse submitted that the various incentives given under the policy were in the nature of capital receipts. The assesse submitted that incentives granted under the policy were in the nature of the capital receipts. In this regard, we have perused the various judicial pronouncements referred by the counsel in the case of CIT Vs. Ponni Sugar & Chemical Ltd. (2008) 174 taxman 87 (SC) it is held that the test is that the character of receipt in the hands of the assesse 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 purpose test. The point of time at which the subsidy is paid is not relevant. The form of subsidy is immaterial. In the case of Everest Industries Ltd. Vs. Joint CIT (2018)19 taxman.com 330 (Mumbai Tribunal) held that sale tax incentive received by the assesse was considered as capital receipt by the A.O same was not required to be reduced from cost of assets for purpose of computing depreciation. In the case of CIT Vs. Shri Balaji Alloys & Other (2016) 181 CTR (SC) 459 held that excise refund and interest subsidy received by the assesse in pursuance of incentive announced and sanctioned by the Government of India is capital receipt. In the case of Shri Balaji Alloys Vs. CIT (2011) 198 taxman.com 122 (Jammu & Kashmir), it is held that amount of excise refund and interest subsidy received by industrial unit in pursuance of incentives announced in terms of new industrial policy for accelerated industrial development in the State of J & K would be capital receipt in the hands of such Industrial Unit. In the case of CIT Kolhapur Vs.Chaphlekar Brothers Pvt. Ltd. (2017) 88 taxman.com 178 (SC) held that where object of respective subsidy schemes of state of Maharashtra provided for exemption to multiplexes from entertainment duty for a period of 3 years remission for further period of 2 years was to encourage development of Multiple Theatre Complexes, incentive would be held to be capital in nature and not revenue receipts. In the case of ACIT Vs. Gems Electrotech Ltd. (2016) 71 taxman.com 101 (Ahd Tribunal) wherein held that sale tax and excise duty subsidy received by the assesse for purpose of industrialization was capital receipt. In the case of PCIT Vs. Capgemini India (P) Ltd. (2018) 90 taxmann.com 409 (Bombay) held that grant received by assessee from state govt. in shape of allotment of land for purpose of granting employment for over 3000 people, was to regarded as capital receipts. The ld. Counsel has also furnished similar judicial pronouncements of ITAT Benches. The assessee has also demonstrated that subsidy was granted for setting up sugar industry in general and not for acquisition of any asset, therefore, same also not to be reduced from the cost of asset. The assessee has demonstrated from the material as referred above and furnished before the lower authorities that various incentives were granted under the New Sugar Industry Promotion Policy 2004 for the purpose of development and growth of sugar industry in the state and same has to be considered as capital in nature. Therefore, after considering the facts and judicial findings on the issue as discussed supra, we find the decision of ld. CIT(A) is not justified therefore the ground of appeal

Ground No.1 of the revenue appeal pertains to the partial relief given by the CIT(A) towards disallowance under section 14A r.w.r. 8D. We while adjudicating Ground No.1 in assessee's appeal have already given a detailed finding in this regard in the earlier part of this order deleting the enhanced disallowance made by the CIT(A) and restricting disallowance to the suo-moto disallowance of Rs.10 lakhs made by the assessee. Therefore this ground raised by the revenue does not warrant a separate adjudication. Accordingly, this ground of the revenue is dismissed.

Ground No. 2 & 3 of the Revenue pertains to Foreign Exchange Fluctuation adjusted by the assessee in the revised return to the tune of Rs. 7,64,80,000/-. The ld. AR in this regard submitted that the assessee in AY 2007-08 had claimed that the gain from foreign exchange fluctuation arising on account reinstatement of ECB and FCCB have to be treated as capital in nature since the borrowing were utilized for the purpose of acquiring fixed assets. The ld. AR further submitted that the said claim was not allowed by the revenue and on further appeal the co- ordinate bench set-aside the matter back to the AO with a direction to examine the relevant materials after considering the decision of the Hon'ble Supreme Court in the case of Sutlaj Cotton Company Ltd. Vs. CIT (1979) 116 ITR 1 (SC). For the year under consideration i.e. AY 2008-09 it is submitted that the notional gain on foreign exchange fluctuation pertaining to AY 2007-08 is reversed but the same has been inadvertently added by the assessee while filing the return of income. The ld. AR submitted that the above decision of the coordinate bench for AY 2007-08 has a consequential effect in this year since the impugned amount is the reversal of earlier years notional income. Therefore the ld AR prayed that the issue may be remitted back to the AO for verification in accordance with the directions of the co-ordinate bench for AY 2007-08.

The ld. DR on the other hand vehemently argued that the foreign exchange fluctuation have been offered as income by the assessee in the AY 2007-08 and later revised its stand stating that it is capital in nature since the loans were borrowed for the purpose of acquiring fixed assets. The ld. DR accordingly argued that the addition made in the year under consideration should be upheld.

We have heard the parties and perused the material available on record. We noticed that the Co-ordinate Bench of the Tribunal while considering the issue of gain on foreign exchange fluctuation has held that “25. In this regard, the ld. Counsel submitted that during F.Y. relevant to the year under consideration gain on foreign exchange fluctuation amounting to Rs.7,64,80,000/- arose on account of restatement of ECB and FCCB which had been credited to the profit and loss account. He submitted that the borrowing in the nature of ECB & FCCB were utilized for the purpose of acquiring fixed assets, therefore, the notional gain on foreign exchange fluctuation on restatement of aforesaid loans ought to be excluded while computing the total income. The ld. D.R has contended that no such issue has been brought before the A.O and ld.CIT(A) during the course of assessment and appellate proceedings and the claim required verification. In the light of the above facts and circumstances we restore this issue to the file of the assessing officer for deciding the same after verification/examination of relevant material after considering the decision of Hon’ble Supreme Court in the case of Sutlaj Cotton Company Ltd. Vs. CIT (1979) 116 ITR 1 (SC). Therefore, this additional ground of appeal

In the result, the appeal of the assessee in Revenue in is partly allowed.