SOLARIS CHEMTECH LTD.,NEW DELHI vs. ACIT, NEW DELHI

Besides above, the assessee has also moved application for permission to raise the following additional ground for the adjudication of the Bench: “That it is contended that sales-tax incentive Rs.1,49,70,016 allowed for setting up of an undertaking in Kutch District by the Government of Gujarat by way of adjustment of pre-determined amount of incentive against liability towards sales-tax being in the nature of capital receipts should be excluded from book profit for determination of income under sec. 115JB of the Act.”

In support of the application, the Learned AR submitted that the issue raised in the above additional ground is legal in nature and adjudication of which does not require consideration of fresh material outside the record. He submitted that the issue raised also goes to the root of the matter. In this 4 regard, he placed reliance on the decisions of Hon'ble Supreme Court in the cases of CIT vs. Varas International – 284 ITR 80 (SC); NTPC LTd. vs. CIT – 229 ITR 383 (SC).

Considering the above submissions, we concur with the Learned AR that a legal issue adjudication of which does not require consideration of any fresh material outside the record and which goes to the root of the matter can be raised even for the first time before the appellate forum. Besides, the issue raised in the additional ground is connected to the issue already raised in ground Nos. 2.1 to 2.3 of the appeal. We thus allow the above requested additional ground for our consideration and adjudication. Since it is connection to the issue raised in ground Nos. 2.1 to 2.3 of the appeal, we will hear this additional ground along with the said grounds in the succeeding paragraph.

Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.

In support of the above grounds, on the issue of disallowance under sec. 14A of the Act, the Learned AR has made following submissions: “ A. Investments were made from the own funds of the assessee, it is submitted that the position of interest free funds of the assessee is as under:-(see page no. 50 of the Paper Book) Nature of Funds Quantum Page No of PB Share capital 92,19,24,760/- 50- Schedule -1 Reserve and Surplus 57,68,91,863/- 50 Depreciation 69,69,14,545/- 50 Total 2,19,57,31,168

The Learned Senior DR on the other hand tried to justify the assessment order and the disallowance sustained by the Learned CIT(Appeals). She submitted further that the disallowance was made by the Assessing Officer on reasonable basis and there was no error in the figures taken by the Assessing Officer. She submitted that no suo moto disallowance under sec. 14A was made by the assessee despite having exempt income during the year. The Learned CIT(Appeals) thus was not justified in interfering with the disallowance made by the Assessing Officer.

Considering the above submissions, we find substance in the contention of the Learned AR that Rule 8D of the I.T. Rules was not applicable during the year under consideration and hold so. We find that against query raised by the Assessing Officer as to why expenses should not be allocated to the earned exempt income at Rs.42,69,842, the assessee

In support of the grounds, the Learned AR made following submissions: 1. “Assessee company has deployed capital investment of Rs. 23.87 Crore in Kutch District of Gujarat (see page no. 23 of the paper book). The investment made has been duly acknowledged by the State Govt. 2. It is submitted that the aforesaid investments were made by the assessee in pursuance to a scheme namely “Incentive Scheme 2001 for Economic Development of Kutch District”. Copy of scheme is annexed at page no. 1-12 of the paper book and the typed copy of scheme is annexed of 13-23 of paper book. 3. It is submitted that the preamble of the scheme would make it clear that this scheme was introduced by the Government of Gujrat for development of Kutch area which was destroyed in earthquake on 26.01.2001. (See the page no. 13 of the paper book). The last Para of the preamble is as under:- “Since the scheme is aimed at making the economic environment of Kutch district live, it has been decided to confine the same only to Kutch District”

It is next submitted that by virtue of this scheme the State Government of Gujrat has basically allowed the setoff of sales tax liability for the period of five years to those industries who have made capital investment in the area of Kutch for the development of Kutch. The features of the scheme are mentioned in clause 4.1 of the scheme at page no. 16 of the paper book. “4.1 Eligible units will be able to avail of the benefits of sales tax exemption or sales tax deferment on their eligible fixed capital investment. Under the sales tax incentives, the tax to be recovered against the sales proceeds under the Gujrat Sales Tax Act or Central Sales Tax Act shall be considered. The units shall have to opt for one of the following incentives. a) Sales Tax Exemption b) Sales Tax Deferment c) Composite scheme for units having capital exceeding Rs. 100 crore.” 8. It is next submitted that quantum of incentives, for which an industrial undertaking was entitled are mentioned in clause 4.6 of scheme. A perusal of this clause would show that 100% incentives equivalent to capital investment was available to an assessee. Here it is made clear that it is not a case of subsidies or the state Government has not provided any subsidy vis-à-vis capital deployed by an industrial undertaking. Rather, it is a case where State Government has announced 100% equivalent amount of incentives in the shape of exemption

It is next submitted that incentive granted to assessee was not for assisting assessee in carrying out its business operation but incurred the promotion of industries in the State of Gujarat in that Area which was devastated in 2001 due to earth quake.

It is further made clear the incentives allowed by Government were directly linked or proportionate to the capital investment made by an industrial undertaking and not with the sales turnover of an industrial undertaking. Therefore, It can be said that the incentives were capital receipt not revenue receipt. It is worthy to mention here that incentives granted to assessee were having a ceiling limit i.e up to the capital invested. 11. It is next submitted that the assessee has commenced its commercial production on 7.04.2005 and has opted for sales tax Exemption Scheme in the aforesaid scheme. (See the page no. 24 of paper book) 12. Initially, assessee has deployed capital investment of Rs. 21.01 crore and later the assessee has enhanced the investments to the tune of Rs. 23.87 crore and this investment was certified/ recognized by the State Government vide eligibility certificates dated 07.10.2007 ( See the page no. 23 of the paper book) 13. It is submitted that total incentive which were available with the assessee are 23,87,45,00/- ( equivalent to capital deployed) See Page No-31 of the PB. It is submitted that in impugned year, assessee has earned an amount of Rs. 1, 26, 61,483/- attributable to Sales Tax made an amount of Rs. 23, 08,533/- towards purchase of goods and Rs1,26,61,483/- towards the sales made. Both these amounts were emanating from sales tax return filed by the assessee with Gujrat state Government. (See the page no. 34of the paper book) 14. It is next submitted that there is difference between expression subsidy and incentive. It is submitted that Incentives are defined in the online Merriam- Webster dictionary as “something that has a tendency to incite to determination or action; something that encourages a person to do something or work harder.” Synonyms include “boost,” “spur” and “stimulant” among others. “Subsidies” are described by this same source as: “a grant or gift of money” and—here is what is interesting—“a sum of money formerly granted by the British Parliament to the Crown and raised by special taxation.”

It is next submitted that assessee seeks to rely on the judgment of Special Bench in the case of Reliance Industries reported in 88 ITD 273(SB), wherein it has been held that subsidy given for setting up or expansion of industries will be capital in nature irrespective of source of fund or the manner of disbursement. This decision has now been affirmed by the Hon’ble High Court of Bombay in CIT Vs Reliance Industries reported in 339 ITR 0632(Bom). In this case the Hon’ble Special Bench has referred to the decision of Shaney steel reported in 228 ITR 253(SC) and two decisions of House of Lords namely The Seaham Harbopur Dock Co Ltd Vs Crook reported in 16 Tax Cases 333 (HL) and Ostime Vs Pontipridd reported in 28 Tax Cases 261, Hon’ble Special Bench has held that it is the purpose, for which the scheme is launched, would decide the character of incentive and if the purpose is for development of Back word area then incentive would be capital. And if the subsidies went to fill the hole in the profits then such a subsidy would be revenue.

Further the assessee seeks to rely on the decision of Hon’ble Apex Court in the case of CIT Vs Ponni Sugar and Chemicals Ltd 306 ITR 392(SC), in this case Hon’ble Supreme Court has held that if the incentives are given only to new units and not to supplement the trade receipts then such incentives are capital receipts. The Hon’ble Apex court in referring to the old decisions of House of Lords in Seaham Harbour Dock Vs Crook 16 Tax Cases 333(HL), has held that form and mechanism of the subsidy is irrelevant The observations of the Hon’ble Apex Court in Ponni Sugar in Para-14 are as under:- “The importance of the judgment of this Court in Sahney Steel case (supra) lies in the fact that it has discussed and analyzed 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

The Learned Senior DR on the other hand placed reliance on the orders of the authorities below on the issues with the submission that the sales-tax benefit was given to the assessee to run its factory in initial years and not to set up the industry. She submitted that sales-tax benefit was granted on purchases to help the running factory/industry. The decisions relied upon by the Learned AR having distinguishable facts are not helpful to the assessee.

Having gone through the decisions relied upon by the Learned AR and the “Incentive Schemes 2001 for Economic Development of Kutch District”, made available at page Nos. 13 to 22 of the paper book, we find substance in the contention of the AR, which is also supported by the decision of Hon'ble Bombay High Court in the case of CIT vs. Reliance Ind. Ltd. (supra) that the very object of the subsidy was to be seen to arrive at 18 the conclusion as to whether it is Revenue or capital in nature. The Hon'ble Bombay High Court in the case of Reliance Ind. Ltd. (supra) while upholding the decision of the Bombay Bench of the ITAT in this regard has been pleased to hold that the object of the subsidy was to encourage the setting of the industries in the backward area by generating employment therein. The Hon'ble High Court was pleased to observe that as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd. (supra), the test of the character of the receipts of the subsidy in the hands of the assessee under a scheme as to be determined with respect to the purpose for which the subsidy is granted. The subsidy in the present case under the incentive scheme 2001 for economic development of Kutch District was aimed at making the economic environment of Kutch District live as the economic activity in the District of Kutch came to a stand still on account of the devastating earth quack in the state on 26th January 2001 and the aim was to create new employment opportunities if new investment takes place. The scheme was confined only to Kutch District. Again, the Hon'ble Gujarat High Court in the case of CIT vs. Birla VXL Ltd. (supra) where the issue was to determine the character of subsidy in hands of recipient, whether Revenue or capital. It was held by the Hon'ble High Court that the purpose of subsidy is to be considered and source of fund and 19 mechanism of giving subsidy are immaterial. The Hon'ble High Court pleased to hold that incentive being in the form of sales tax waiver/deferment was not meant to give any benefit or day to day functioning of business or to make it more profitable but was principally aimed to cover capital outlay of assessee for undertaking modernization of existing industries, hence, it was capital in nature and thus not taxable. In that case before the Hon'ble Gujarat High Court, the learned counsel for the Revenue had pointed out the decision of the ITAT in the case of Ajanta Manufacturing Ltd. vs. CIT (IT Appeal No. 793(RJT) of 2010 wherein same scheme as in reference in the present case was considered by the ITAT and it was decided that the incentive given was in the nature of capital. The said decision of the ITAT was questioned by the Revenue before the Hon'ble High Court and Hon'ble High Court had admitted the same without staying the operation of the order of the ITAT. The learned counsel of the Revenue tried to take advantage of the admission of that appeal but the Hon’ble Court denied his submission. We thus respectfully following the ratios laid down in the above cited decisions of the Hon’ble Courts relied upon by the Learned AR as well as having gone through the preamble of the “Incentive Scheme 2001 for Economic Development of Kutch District” come to the conclusion that the incentive given in the present case to the assessee was 20 capital in nature. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to allow the claim. Ground Nos. 2,1 to 2.3 are accordingly allowed. In view of this finding, the issue raised in the additional ground that once it is held that the sales-tax incentive are capital receipts then the same should be excluded from the ambit of book profit also i.e. section 115JB of the Act is allowed as it is also supported with the view taken by the Lucknow Bench of the ITAT in the case of L.H. Sugar Factory Ltd. Vs. JCIT – and 53/Lkw/2015 (A.Y. 2010- 11) order dated 9.12.2016. The additional ground is accordingly allowed.

Ground No. 3: The Assessing Officer disallowed Rs.85,255 claimed by the assessee on account of foreign travel expenses. In support of this ground, the Learned AR made following submissions: “ 1. It is submitted that assessee has incurred Rs. 85,259 on FTE of its employees namely Koshik Mitra & Mr. R. Raj Gopal both have gone to London for attending a conference. However, the AO has disallowed these expenses on the ground that the same were not incurred for the purpose of business.

The Learned Senior DR on the other hand placed reliance on the orders of the authorities below.

Considering the above submissions in view of orders of the authorities below, we find substance in the above contention of the Learned AR that even without going into the merits of disallowance once the assessee has paid fringe benefit tax on the expenses in question, details whereof have been made available at page No. 87 of the paper book, the element of personal use cannot be applied for making the disallowance in question. We concur with this submission of the assessee and direct the Assessing Officer to delete the disallowance of Rs.85,259. The ground No. 3 is thus allowed. 23. In result, the appeal preferred by the assessee is allowed and that of the Revenue is dismissed. Order pronounced in the open court on 18 .07.2016 Sd/- Sd/- ( O.P. KANT ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 18 /07/2016 Mohan Lal