THE SUPREME INDUSTRIES LTD,MUMBAI vs. ASST CIT CEN CIR 29, MUMBAI

आदेश / O R D E R

Per Ashwani Taneja (Accountant Member): These appeals involve identical issues, and therefore these were heard together and are disposed of by this common order.

3 Supreme Industries Ltd. 2. During the course of hearing, arguments were made by Shri Nitesh Joshi, Authorised Representatives (AR) on behalf of the Assessee and by Shri Anupama Singla, Departmental Representative (DR) on behalf of the Revenue.

First we shall take assessee’s appeal in ITA No.3138/Mum/2012 filed against the order of Ld. CIT(A) dated 14.03.2012 passed against the order of AO dated 24.12.2008 u/s 143(3) for A.Y. 2006-07 on the following grounds: “1. The learned Commissioner of Income-tax (Appeals) erred in law in rejecting the claim of the appellant of giving consequential effect of depreciation to the tune of Rs.2,63 ,78,903/- and set-off of unabsorbed depreciation allowance of earlier years of Rs.6,89,21,767/- while computing taxable total income under the normal provisions of the Act after considering the outcome of appeal for the earlier assessment years. 2. The learned Commissioner of Income-tax (Appeals) erred in law in disallowing a sum of Rs.20,27,786/- being 5% of dividend income under section 14A of the income Tax Act, 1961 (the Act) while computing taxable income under normal provision of the Act and under section 1 15JB of the Act. 3.Without prejudice to what is stated in Ground No. 2 above, the learned Commissioner of Income- tax (Appeals) erred in law in rejecting the scientific working of disallowance under section 14A of the Act submitted by the appellant. 4.Without prejudice to what is stated in 2 and 3 above, the learned Commissioner of Income-tax (Appeals) erred in not restricting the disallowance to Rs.4,05,557/- under section 14A of the Act being 1% of dividend income while computing taxable income under normal provision of the Act and under section 11 5JB of the Act.

4 Supreme Industries Ltd. The appellant submits that the learned Assessing Officer be directed: (i) to give consequential effect in respect of pending appeals of earlier years in respect of depreciation allowance of Rs.2,63,78903/- and set-off of brought forward unabsorbed depreciation allowance of Rs.6,89,21,767/while computing the taxable total income under the normal provisions of the Act. (ii) to delete the disallowance of Rs.20,27,786/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 11 5JB of the Act; (iii) Without prejudice to what is stated in (ii) above, to restrict the disallowance to Rs.6,066/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 115JB of the Act; (iv) Without prejudice to what is stated in (ii) and (iii) above, to restrict the disallowance to Rs.4,05,557/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 115JB of the Act, and to modify the assessment in accordance with the provisions of the Act.” 3. Ground No.1: In this ground, the assessee has requested for giving directions to give consequential effect of depreciation to the tune of Rs.2,63,78,903/- and set-off of unabsorbed depreciation allowance of earlier years of Rs.6,89,21,767/- while computing taxable total income under the normal provisions of the Act, after considering outcome of the appeal of earlier assessment years. 3.1. During the course of hearing it was submitted by the Ld. Counsel of the assessee that in this case the assessee did not claim depreciation in earlier years and therefore in the impugned year the depreciation was claimed on higher amount of reopening written down value (WDV). But, AO

5 Supreme Industries Ltd. rejected the claim and allowed the depreciation by taking opening WDV as if depreciation was allowable in earlier years. The stand of the AO has been confirmed up to the High Court. It was informed that assessee has filed appeal before the Supreme Court of India. Under these circumstances, it was requested that in case relief is granted by the Supreme Court, then, the assessee should get the benefit of depreciation in the year before us by taking opening WDV at higher amount, and for this purpose requisite direction should be given to the AO. 3.2. Per contra, Ld. DR submitted that no such direction can be given at this stage. 3.3. We have gone through the orders passed by the lower authorities as well as submissions made before us. During the course of hearing, Ld. Counsel had placed reliance upon the judgment of Mumbai Bench of Tribunal in the case of M/s. Castrol India Limited. V. ACIT (MA No.117/Mum/2014 (arising out of ITA No.3938/Mum/2010 wherein identical situation arose and the said assessee had requested for similar direction before that bench. It is noted that in this regard the bench had passed following order: “3. We have heard the arguments of both the sides and also perused the relevant material placed on record. By way of this Misc. Application, the assessee is seeking a direction from the Tribunal to the effect that the depreciation for the year under appeal be re-determined whenever written down value at the end of the preceding year i.e. 31st March 2001 undergoes a change if the assessee succeeds before the Supreme Court on the issue of depreciation in the earlier years. In our opinion, such a direction based on hypothetical situation was not necessary for disposal of the appeal of the

6 Supreme Industries Ltd. assessee on the issue of disallowance of depreciation involved in ground no.3 and it therefore cannot be said that there is any mistake in the order of the Tribunal in not giving such direction. Moreover the issue of re- determining the deprecation for the year under appeal as a result of any change in the closing written down value if the claim of the assessee is allowed by the Supreme Court in the earlier years is purely a consequential issue and the AO, in our opinion, is bound to consider the same while giving effect to the order of the Hon’ble Supreme Court in case the assessee succeeds on the relevant issue in the earlier years. We therefore, find no merit in Misc. Application filed by the assessee and dismiss the same.” 3.4. We have gone through aforesaid order, wherein similar facts were involved. We also feel that at this stage no specific direction can be given by presuming hypothetical situation. But, we also find that, as observed in the aforesaid order, the issue of re-determining the depreciation for the year under appeal as a result of any change in the closing written down value of the preceding years is a purely consequential issue and the AO is bound to consider the same as per law while giving effect to the order of the Hon’ble Supreme Court in case the assessee succeeds on the impugned issue for which appeal is pending before the Hon’ble Supreme Court. In case, the AO does not follow proper course as per law, then at appropriate stage and time, the assessee should seek appropriate remedial measures as prescribed under the law. We order accordingly. This ground may be treated as allowed for statistical purposes.

7 Supreme Industries Ltd. 4. Ground Nos. 2, 3 & 4: In these grounds the solitary issue raised by the assessee is that lower authorities erred in disallowing a sum of Rs.20,27,786/- being 5% of dividend income u/s 14A of the Act. 4.1. The brief facts are that the assessee did not make suo motto any disallowance u/s 14A in the computation of income filed along with return of income. In the assessment order, the AO made disallowance of interest as well as disallowance of administrative expenses. Before Ld. CIT(A), the assessee got relief on the disallowance on interest, against which Revenue has filed an appeal before the Tribunal. But, with respect to disallowance of administrative expenses, the disallowance was sustained at Rs.20,27,786/- being 5% of the dividend income of Rs.4,05,55,716/- 4.2. During the course of hearing, Ld. Counsel of the assessee submitted that perusal of schedule of investment enclosed in the Balance Sheet shows that there was no change in investment during the year and all the investments were brought forward from earlier years. Thus, no expenses were incurred and receipt of dividend was spontaneous exercise and therefore no disallowance should be made during the year on account of expenses. It was also submitted that since it is A.Y. 2006-07, therefore Rule 8D was not applicable in this year. 4.3. Per contra, Ld. DR submitted that it cannot be believed that no expenses have been incurred by the assessee. Thus,

8 Supreme Industries Ltd. some disallowance must be made and she requested for making disallowance @ 2% of dividend income. 4.4. We have gone through the facts of the case and orders passed by the lower authorities. Nothing was brought before us to indicate that whether any fresh investment was made by the assessee during the year or any other activity was done in this regard. Both the parties fairly submitted that some disallowance should be made. Ld. DR requested of disallowance @ of 2% whereas Ld. Counsel requested for disallowance @ 0.5 % of the total exempt income received during the year. After considering all the facts and circumstances of the case, we find it appropriate to sustain the disallowance @ 1% of dividend income received by the assessee during the year. The balance amount of disallowance is directed to be deleted. The AO is directed to sustain disallowance @ 1% of dividend income of Rs.4,05,55,716/- received by the assessee during the year and delete the balance disallowance. Thus, these grounds may be treated as partly allowed.

Now we shall take up appeal filed by the Revenue in ITA No.3808/Mum/2012 for Assessment Year, 2006-07 on the following grounds: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to reduce the amount of disallowance made by the A.O u/s 14A of the LT Act, 1961. 2.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing officer to restrict the addition to Rs.20,27,786/- as against the disallowance of Rs

9 Supreme Industries Ltd. 1,50,25,048/- made by the A.O. for the purpose of computing book profit as per the provisions of section 1 15JB of the Act. 3.The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the Assessing Officer restored. 4.The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

10 Supreme Industries Ltd. method prescribed in Rule 8D (2)(ii) while other expenditures have been disallowed by the method prescribed in Rule 8D(2)(iii). 5.1 In this manner, the Assessing Officer has disallowed interest expenditure of Rs.1,33,06,157/- and other expenditure of Rs.17,18,891/totally amounting to Rs. 1,50,25,048/-. 6. As per the provisions of sec.14A, only those expenditures can be disallowed which have been incurred in relation to income which does not form part of the total income of the assessee. In the present case, it is the claim of the assessee that no expenditure has been incurred by it in relation to income which does not form part of the total income of the assessee (exempt income), either on account of interest or on account of other expenditure. In Godrej & Boyce Mfg. Co. Ltd reported in 328 ITR 81, it has been held by the Hon'ble Jurisdictional High Court that the Assessing Officer can invoke Rule 8D only if he does not find the claim of the assessee regarding the expenditure in relation to income which does not form part of the total income acceptable. However, the Assessing Officer is to record his objective satisfaction as to why he does not find the claim of the assessee acceptable. In the case of Mxopp Investments Ltd, the Hon'ble Delhi High Court has held that the objective satisfaction of the Assessing Officer was required even before 01/04/2007 before he could reject the claim of the assessee regarding the expenditure in relation to the exempt income. The conclusion of the Assessing Officer that expenditure to be disallowed is to be worked out by the method prescribed in Rule 8D is correct cnly if the Assessing Officer shows that the claim of the assessee that no expenditure had been incurred in relation to the income which does not form part of the total income is not correct and records his objective satisfaction in this respect having regard to the accounts of the assessee as is provided in Sec.14A(2) and 14A(3) of the I.T. Act, 1961. 7. Adverting to the facts of the present case, I find that the Assessing Officer has given no objective

11 Supreme Industries Ltd. reason as to why he did not find the claim of the assessee acceptable. He has given a very general reason that since the assessee had substantial investments and also had huge borrowings, it was not acceptable that the investments in shares was out of the funds of the assessee. This at best, in my opinion, is a presumption on the part of the Assessing Officer and is not an objective finding of the Assessing Officer. 7.1 Merely because the assessee has made investments and at the same time has borrowings would not lead to an automatic conclusion that the borrowings have been utilized for making the investments. The assessee has made investments in the shares of Supreme Petrochemical Ltd. in the following periods as per the details submitted by the assessee.

Year A.Y. No. of Shares Cost(Rs) 1992-93 1993-94 95,00,000 9,50,00,000 1993-94 1994-95 85,00,000 8,50,00,000 1998-99 1999-00 75,00,000 7,50,00,000 2003-04 2004-05 34,36,400 3,34,64,000 33,37,49,544 Total

7.2 It is the submission of the assessee that it had enough internal accruals by way of cash profits to make strategic investment. It had sufficient internal resources at relevant times when investments were made by way of equity contribution and/or internal resources. It had own funds which far exceeded investments made in the shares, etc. Hence, no disallowance u/s. 14A was called for. This claim of the assessee has not been controverted by the Assessing Officer by way of any factual examination.

12 Supreme Industries Ltd.

7.3 As per the details submitted by the assessee, I find that the assessee had come out with a rights issue of shares and partly convertible debentures in July, 1993. As per the 'Terms of Offer', the company proposed to make investments in the shares of Group companies, including Supreme Industries Ltd. Aggregate investment of Rs.3 1.54 crores in the Group Companies was to be met out of the proceeds of the equity issue to the extent of Rs.17.72 crores and out of internal accruals to the extent of Rs.13.82 crores. The assessee made investments of Rs.8.50 crores in the F.Y.1993-94 relevant to the A.Y.1994-95 in the equity shares of Supreme Industries Ltd. Hence, the source of this investment is directly out of the rights issue of shares and cannot be linked with or attributed to any borrowings on which the assessee has paid interest during the A.Y.2006-07. Investments in the A.Y.1993-94 is claimed to have been made out of internal accruals. The Assessing Officer has not shown that the assessee had made these investments out of borrowings on which the assessee continued to pay interest in the A.Y.2006-07 also and, hence, such interest expenditure was needed to be disallowed. As regards the investments made in the A.Y.1999-2000 and 2004-05 as also in the earlier assessments years., the assessee has shown that it had sufficient internal accruals by way of cash profits year after year and it was these cash profits which were as1'pilable with it which were utilized for making the investments in the group company. The details of such cash profit as furnished by the assessee are as follows: From To A.Y. Cash Profit 01.07.86 30.06.87 88-89 456.33 01.07.87 30.03.89 89-90 899.23 01.04.89 31.03.90 90-91 828.89 01.04.90 31.03.91 91-92 1,076.85

13 Supreme Industries Ltd.

01.04.91 31.03.92 92-93 1,035.57

01.04.92 31.03.93 93-94 1,044.41

01.04.93 31.03.94 94-95 1,300.56

01.04.94 31.03.95 95-96 3,895.46

01.04.95 31.03.96 96-97 2,524.89

01.04.96 31.03.97 97-98 3,106.50

01.04.97 31.03.98 98-99 3,478.90

01.04.98 31.03.99 99-00 4,340.64

01.04.99 31.03.00 00-01 4,531.45

01.04.00 31.03.01 01-02 3,068.25

01.04.01 31.03.02 02-03 4,620.14

01.04.02 31.03.03 03-04 3,937.09

01.04.03 31.03.04 04-05 7,897.46

01.04.04 31.03.05 05-06 5,014.88

01.04.05 31.03.06 06-07 7,746.20 8. The Assessing Officer has not shown that the funds for the investments in the equity shares came out from the borrowings made by the assessee on which interest expenditure was claimed. In the absence of the same and in view of the details furnished by the assessee, the contention of the assessee that the investments in question were made out of the internal cash accruals and proceeds of issue of equity shares and out of the company own funds is required to be accepted. Disallowance of expenditure on account of interest u/s.14A cannot be made automatically on the ground that interest expenses have been claimed in the P & L Account when the assessee has furnished explanation claiming that no interest bearing funds have been utilized in making the investment in question and the Assessing

14 Supreme Industries Ltd. Officer has not found the said explanation as not acceptable. For making the disallowance of expenditure, the Assessing Officer is required to show as to why he is not satisfied with the assessee's explanation and he is also to show that interest- bearing funds were utilized for making the investments, income from which was being claimed as exempt. This is what the Hon'ble Jurisdictional High Court has held in the case of Godrej & Boyce Mfg Co. Ltd (Supra) and this is what has been held by the Hon'ble Delhi Court in the case of Maxopp Investments Ltd. (supra). 9. The assessee has also shown that the borrowed funds on which interest has been paid in the A.Y.2006-07 are earmarked either for working capital or for further expansion and the loans are monitored by the banks as to their utilization for the purpose for which they have been given. Hence, the decision of the Hon'ble Delhi Tribunal in the case of Maharashtra Seamless Ltd(ITA No.4063/DeI/2006) and decision of the Hon'ble Mumbai Tribunal in the case of Yatish Trading Co.(P) Ltd. (ITA No.456/Mum/2009) is directly applicable in favour of the assessee. Further, in the absence of the Assessing Officer showing that interest-bearing funds of the assessee were utilized for making the investments in question, and the assessee showing that it had sufficient internal accruals by way of cash profits at the relevant points of time when such investments were made, and that the investments were made out of interest-free funds, the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340(Bom) would be directly applicable in favour of the assessee. Also, in the case of CIT-II Vs. Hero Cycles Ltd. reported in 323 FIR 518( P & H), it has been held by the Hon'ble High Court as follows: "Merely because the assessee has incurred interest expenditure on funds borrowed would not ipso facto invite the disallowance under section 14,4, unless there is evidence to show that such interest

15 Supreme Industries Ltd. bearing funds have been invested in the investments which has generated the 'tax exempt dividend income There is no nexus established by the Assessing Officer in this regard and therefore on mere presumption provisions of sec. 14A cannot be applied." "Even under Rule 8D of section 14A, disallowance can be made only if there is actual nexus between tax- free income and expenditure. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s. 14A cannot be accepted. The contention of the revenue even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made is also not justified. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand" 10. In view of the aforesaid reason, in my opinion, the action of the Assessing Officer of disallowing interest expenditure u/s.14A is not justified and therefore, cannot be upheld. The same is accordingly directed to be deleted. 5.2. It is noted from the perusal of the order of the Ld. CIT(A) that elaborate analyses have been made by the Ld. CIT(A) before arriving at the conclusion that assessee had sufficient tax-free funds to make investment in the tax-free securities. Under these circumstances, no disallowance can be made in view of judgment of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340(Bom). Nothing wrong was pointed out by the Ld. DR in the factual findings of Ld. CIT(A). Under these circumstances, we do not find any need to make interference in the well reasoned findings of Ld. CIT(A) and

16 Supreme Industries Ltd. therefore, these are upheld. The grounds raised by the Revenue are dismissed. 6. As a result, the appeal filed by the Revenue is dismissed.

Now we shall take up appeal filed by the Assessee in ITA No.3139/Mum/2012 against the order of the Ld. CIT(A) passed against the assessment order dated 24.12.2009 u/s 143(3) of the Act, for Assessment Year 2007-08 on the following grounds: 1. The learned Commissioner of Income-tax (Appeals) erred in law in rejecting the claim of the appellant of giving consequential effect of depreciation to the tune of Rs.2,13,41,938/- while computing taxable total income under the normal provisions of the Act after considering the outcome of appeal for the earlier assessment years. 2. The learned Commissioner of Income-tax (Appeals) erred in law in disallowing a sum of Rs.15,12,134/- being 5% of dividend income under section 14A of the income Tax Act, 1961 (the Act) while computing taxable income under normal provision of the Act and under section 1 15JB of the Act. 3.Without prejudice to what is stated in Ground No. 2 above, the learned Commissioner of Income- tax (Appeals) erred in law in rejecting the scientific working of disallowance under section 14A of the Act submitted by the appellant. 4.Without prejudice to what is stated in 2 and 3 above, the learned Commissioner of Income-tax (Appeals) erred in not restricting the disallowance to Rs.4,05,557/- under section 14A of the Act being 1% of dividend income while computing taxable income under normal provision of the Act and under section 11 5JB of the Act. 5. The Learned Commissioner of Income tax(Appeals) erred in law in upholding the Action of the Additional commissoenr of Income Tax, LTU, Mumbai (hereinafter

17 Supreme Industries Ltd. referred to as “the Assessing Officer”) to reducing the claim of deduction under section 80IB of the Act to a sum of Rs.2,68,44,966/- as against the claim of Rs.2,75,51,761/- as per its return of income in respect of its unit at Silvassa. The appellant submits that the learned Assessing Officer be directed: (i) to give consequential effect in respect of pending appeals of earlier years in respect of depreciation allowance of Rs. 2,13 ,41,938/- while computing the taxable total income under the normal provisions of the Act. (ii) to delete the disallowance of Rs. 15,12,134/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 11 5JB of the Act; (iii) Without prejudice to what is stated in (ii) above, to restrict the disallowance to Rs.7,127/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 115JB of the Act; (iv) Without prejudice to what is stated in (ii) and (iii) above, to restrict the disallowance to Rs.3,02,426/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 1 15JB of the Act: (v) to delete the disallowance of Rs.7,06,795/- under section 80IB and to modify the assessment in accordance with the provisions of the Act. 7. Each of the above grounds of appeal are independent and without prejudice to each other. 8. The appellant craves liberty to add, to alter and /or amend the grounds of appeal as and when given.” 7. Ground No.1 is identical to ground no.1 of assessee’s appeal in A.Y. 2006-07; therefore AO is directed to follow our order for A.Y. 2006-07 on this ground. This ground may be treated as allowed for statistical purposes. 8. Ground Nos. 2, 3 & 4 are identical to ground Nos. 2,3 & 4 of A.Y. 2006-07. The AO is directed to sustain the

18 Supreme Industries Ltd. disallowance @ of 1% of dividend income; balance disallowance is directed to be deleted. These grounds are partly allowed. 9. Ground No.5: In this ground, the assessee has challenged the action of Ld. CIT(A) in reducing the claim of deduction u/s 80IB of the Act, to a sum of Rs.2,68,44,966/- as against the claim of Rs.2,75,51,761/- made as per its return of income in respect of its unit at Silvassa. 9.1. The brief facts noted form the orders of the lower authorities are that Silvassa unit of the assessee had received a sum of Rs.23.16 lakhs, being claim received from Windmuller & Holscher, Germany. It was explained by the assessee that the said amount was received from Windmuller & Holscher K G, Germany in pursuance of a claim made on account of inferior quality of production initially generated out of the machinery imported from the said party. If the machine would have delivered standard quality material from the beginning, the undertaking at Silvasa would have earned higher profits and would have been entitled for higher deduction u/s 80IB. It was further submitted that the claim amount received represented compensation for loss of profits. But, AO was not satisfied with the submissions of the assessee and it was held by him that the amount of claim received from Windmuller and Holscher cannot be said to be in the nature of income from undertaking involved in the manufacturing of eligible products. Thus, the AO denied the benefit of deduction u/s 80IB on the aforesaid amount.

19 Supreme Industries Ltd. 9.2. During the course of hearing before Ld. CIT(A), the assessee submitted that the aforesaid income was inextricably linked to the business of the assessee and was generated from the industrial undertaking. It was also contended that there need not necessarily we direct nexus between the activity of an industrial undertaking and profits and gains. But, Ld. CIT(A) did not agree with the submission of the assessee and he rejected the claim of the assessee with following observations: “14. I have considered the facts of the case and the submissions made by the assessee. I agree with the Assessing Officer that deduction u/s.801B is not allowable to the assessee in respect of the above items of income for the reason that both these items of income cannot be said to have been derived from the industrial undertaking. The unit is not engaged in the manufacture or production of packing materials. This income is only attributable to the industrial undertaking. Similarly, the claim of Rs.23,16,000/- is also only attributable to the industrial undertaking. There is no first degree nexus between the industrial undertaking and these two items of income. Hence, in view of the decision of Hon'ble Supreme Court in the case of Liberty India Ltd. reported in 317 ITR 218, deduction u/s 80IB cannot be allowed in respect of the income on account of claim and on account of packing materials. The action of the Assessing Officer is, therefore upheld. The assessee has made no submissions in respect of its without prejudice contention that in the event the aforesaid amounts are not considered for the purpose of computing the deduction u/s 801B, the expenditure incurred for the earning of the aforesaid income should also not be considered and the eligible profits be determined accordingly for working out the deduction u/s 80IB. It has also not shown as to the amount of direct expenditure, if any in relation to these items of

20 Supreme Industries Ltd. income. This without prejudice contention is, therefore dismissed. This ground of appeal is dismissed.” 9.3. During the course of hearing before us, Ld. Counsel vehemently contested the disallowance made by the lower authorities. It was submitted that the amount of compensation was received pursuant to the bad production due to defect in the machinery, in absence of which The assessee would have been able to produce good quality of product and entitled for a higher claim of deduction under section 80IB and hence the said receipt is derived from the eligible business Reliance is placed in the case of Pfizer Corporation 330 ITR 62 9.4. The Ld. counsel also drew our attention upon the credit note issued by the said party in which it was stated that the compensation was given as per discussions made with the concerned executives of the said party and assessee on account of bad production. 9.5. Per contra, Ld. DR submitted that disallowance has been rightly upheld by the Ld. CIT(A) since assessee was not able to establish first degree nexus between the aforesaid income and industrial undertaking of the assessee; it was also submitted that the judgment of Hon’ble Bombay High Court was with respect to insurance claim and therefore it was not applicable on the facts of the assessee, whereas judgment of Hon’ble Supreme Court in the case of Liberty India Ltd.(supra) was clearly applicable and therefore these deductions were not available to the assessee, in view of clear judgment of Hon’ble Supreme Court and she

21 Supreme Industries Ltd. requested for upholding the order of Ld. CIT(A) on this issue. 9.6. We have gone through the facts of the case as recorded by the lower authorities as well as the judgments placed before us for our consideration by both the sides. It is noted that Hon’ble Supreme Court has clearly laid down that for getting benefit of deduction u/s 80IB, there must be first degree nexus between the activity carried out by industrial undertaking and earning of the income. It is noted that aforesaid compensation was received by the assessee since assessee was not able to carry out the production. On the other hand, section 80IB envisages that income should be derived from carrying out of the industrial activity. Under these circumstances, it cannot be said that the aforesaid income is derived from carrying out industrial activity and thus, the first degree nexus as has been stipulated by the Hon’ble Supreme Court is found missing in this case. The judgment of Hon’ble Bombay High Court relied upon the Ld. Counsel cannot be applied upon the facts before us, as it was on account of insurance claim received on account of damages. Under these circumstances, we are unable to provide relief to the assessee with respect to claim of deduction u/s 80IB on the aforesaid income, in view of the judgment of Hon’ble Supreme Court in the case Liberty India Ltd. (supra). 9.7. The second part of this ground is with regard to allowing claim of deduction u/s 80IB of the Act, on the amount of receipt of sale proceeds of sale of packing

22 Supreme Industries Ltd. material amounting to Rs.3,85,621/-. The AO had disallowed the benefit on the aforesaid amount for the similar reasons as have been discussed above. 9.8. During the course of hearing before us, Ld. counsel submitted that in the case of CIT v. Meghalaya Steal Ltd. 383 ITR 217 (SC), it has been held by Hon’ble Supreme Court that if an item of receipt goes into the reimbursement of the cost of purchase/production of goods, then the net cost of purchase/production should be considered for computing profits and gains of business of profession of the undertaking, and thus, the benefit of deduction u/s 80IB on the said receipt should not be denied. In addition to that, he placed reliance on various decisions by way of note submitted during the course of hearing wherein it was held that ‘other receipts’ are to be considered for the purpose of computing deduction u/s 80IB of the Act. Gist of these judgments is reproduced herein below: 1. Commissioner of Income-tax v. Modi Xerox Ltd 365 ITR 200 (All.) The Court while allowing deduction under section 80HHC of the Act held that the word "derived from" under section 80-HH has to be understood as something which has immediate nexus with the industrial undertaking. In the instant case, the scrap generated from the concerned units has direct and immediate nexus with the industrial undertaking since the said scrap has been generated from the manufacturing process itself and any income from sale of such scrap has to be included for purpose of benefit of section 80HH of the Act. 2. Commissioner of Income-tax v. Sadhu Forging Ltd. 336 ITR 444 (Delhi)

23 Supreme Industries Ltd. The Court while allowing deduction under section 80-lB of the Act held that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under section 80-IB of the Act. 3. Commissioner of Income-tax v. Sportking India Ltd.324 ITR 283 (Delhi) The Court while allowing deduction under section 80-IA of the Act held that there is definitely a nexus to the business is in case the goods of a business are destroyed and for which an insurance amount is claimed and hence amount received from the insurance company should be taken into account in determining the profits and gains of an industrial undertaking under section 80-IA of the Act. 4. DCIT v. Harjivandas Juthabhai Zaveri 258 ITR 785 (Guj) The amount received by the assessee for job work, sale of empty soda ash, bardatui, empty barrels, plastic wastes etc. are eligible to be considered for deduction available under section 80-IA of the Act. 5. Arvind Fashions Ltd. v. ACIT ITA No. 1037/Ahd/2005 decided on Dec 18, 2009 (AHD) Sale of scrap integrally forms part of the manufacturing activity of an industrial unit and thus needs to be considered for calculation of deduction under section 80-lB of the Act. 6. G. S. C. Toughened Glass (P.) Ltd. v. ACIT (2007) 13 SOT 668 (DEL) Interest received from suppliers and interest received from customers on delayed payment of sale consideration are eligible for deduction und r section 80-lB of the Act, while interest received from bank is not so eligible.

24 Supreme Industries Ltd.

9.9. Ld. DR relied upon the order of the Ld. CIT(A) on this issue. 9.10. We have gone through the order of the lower authorities as well as judgment placed before us. It is noted that aforesaid amount has been received by the assessee on account of sale of packing material which has been credited in the cost of purchase of packing material. Thus, effectively it is net cost of purchase of packing material which has been claimed as item of expenses in computing profit derived from the industrial undertaking. On this issue, our attention has brought upon the recent judgment of Hon’ble Supreme Court in the case of CIT v. Meghalaya Steel Ltd. (supra) wherein it was inter alia observed as under: 28. It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head “income from other sources”, which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head “profits and gains of business or profession”. If cash assistance received or receivable against exports schemes are

25 Supreme Industries Ltd. included as being income under the head “profits and gains of business or profession”, it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head “profits and gains of business or profession”, and not under the head “income from other sources”. 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods and Liberty India to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove.” 9.11. From the perusal of the above, it may be noted that Hon’ble Supreme Court has clarified this issue after considering its earlier judgments in the case of Sterling Foods as well as Liberty India. Thus, from the judgment of Hon’ble Supreme Court it becomes clear that items of receipts which go to reduce the cost should not be dealt with separately. But, it should be credited to the respective head of cost, and profits of the industrial undertaking should be computed accordingly. Under these circumstances, it would not be legally permissible to deny the benefit of deduction u/s 80IB on such receipts. Thus, respectfully following the aforesaid judgment of Hon’ble Supreme Court, we direct the AO to grant the benefit of deduction u/s 80IB on the sale proceeds of packing material amounting to Rs.3,85,621/-. Thus, ground no.5 is partly allowed. 10. In the result the appeal filed by the assessee is partly allowed.

26 Supreme Industries Ltd. Now we shall take up appeal filed by the Revenue in ITA No.3807/Mum/2012 for Assessment Year, 2007-08 on the following grounds: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to reduce the amount of disallowance made by the A.O u/s 14A of the LT Act, 1961.” 11. The only ground raised by the Revenue is with regard to disallowance on account of interest made by the AO u/s 14A which was deleted by Ld. CIT(A). It is noted that this ground is identical to the ground raised by the Revenue for A.Y. 2006- 07. Thus, relying upon our order for A.Y. 2006-07, these ground raised by the Revenue is hereby dismissed.

Now we shall take up appeal filed by the Assessee in ITA No.3140/Mum/2012 for Assessment Year, 2008-09 against the order passed by the Ld. CIT(A) dated 14.03.2012 passed against the assessment order of the AO u/s 143(3) dated 23.12.2010 on the following grounds: 1.The learned Commissioner of Income-tax (Appeals) erred in law in rejecting the claim of the appellant of granting consequential effect of depreciation to the tune of Rs.1,77,68,229/- while computing taxable total income under the normal provisions of the Act after considering the outcome of appeal for the earlier assessment years. 2. The learned Commissioner of Income-tax (Appeals) erred in law upholding the action of the Deputy Commissioner of Income tax, LTU, Mumbai (hereinafter referred as "the Assessing Officer") in disallowing a sum of Rs.17,04,380/- under Rule 8D(2)(iii) of the Income Tax Rules, 1962 (the Rules) read with section under section 14A of the income Tax Act, 1961 (the Act) while computing taxable income under normal provision

27 Supreme Industries Ltd. of the Act and under section 11 5JB of the Act. 3.Without prejudice to what is stated in Ground No. 2 above, the learned Commissioner of Income-tax (Appeals) erred in law in rejecting the scientific working of disallowance under section 14A of the Act submitted by the appellant. 4. Without prejudice to what is stated in 2 and 3 above, the learned Commissioner of Income-tax (Appeals) erred in not restricting the disallowance to Rs.3,59,860/under section 14A of the Act being 1% of dividend income while computing taxable income under normal provision of the Act and under section 115JB of the Act. 5. The learned Commissioner of Income-tax (Appeals) erred in law in upholding the Action of the Additional Commissioner of Income tax, LTU, Mumbai (hereinafter referred to as "the Assessing Officer") of reducing the claim of deduction under section 801B of the Act to a sum of Rs.6,03,13,947/- as against the claim of Rs.6,04,73,590/- as per its return of income in respect of its unit at Silvassa. 6.The learned Commissioner of Income-tax (Appeals) erred in law upholding the action of the Assessing Officer in disallowing a sum of Rs.41,523/- based on the AIR information on the ground that the said receipts could not be reconciled and were not offered for income. 7. The appellant submits that the learned Assessing Officer be directed to grant consequential effect in respect of pending (i) appeals of earlier years in respect of depreciation allowance of Rs. 1,77,68,229/- while computing the taxable total income under the normal provisions of the Act. to delete the disallowance of Rs. 17,04,380/- under (ii) section 14A of the Act while computing taxable income under normal provision of the Act and under section 11 5JB of the Act; Without prejudice to what is stated in (ii) (iii) above, to restrict the disallowance to Rs.2,27,817/- under section 14A of the Act while computing taxable income under normal provision of the Act and under section 1 15JB of the Act; Without prejudice to what is stated in (ii) and (iii) (iv)

28 Supreme Industries Ltd. above, to restrict the disallowance to Rs.3,59,861/- under section 14A of the Act being 1% of dividend income while computing taxable income under normal provision of the Act and under section 11 5JB of the Act; to delete the disallowance of Rs. 1,59,643/- under (v) section 80-IB; to delete the disallowance of Rs.41,523/- being (vi) income not offered for tax; 6. Each of the above grounds of appeal are independent and without prejudice to each other. 7. The appellant craves liberty to add, to alter and /or amend the grounds of appeal as and when given.”

29 Supreme Industries Ltd. disallowance of administrative and other expenses, Ld. CIT(A) upheld the disallowance against which assessee is in appeal before us. 13.2. During the course of hearing before us, Ld. counsel submitted in appeal that provisions of Rule 8D(2)(iii) have not been applied correctly on the facts of this case. It was submitted that computation of income filed for A.Y.2008-09 along with return of income reveals that assessee had made suo motto disallowance of Rs.2,27,817/-, and the basis of disallowance was also furnished which is evident from the page no.28 of the paper book. But, in the assessment order the AO did not record any satisfaction or any finding to the effect that the disallowance made by the assessee was not appropriate having regard to the account of the assessee and facts of the case. Thus, under these circumstances, he did not assume jurisdiction to make further disallowance under the law as contained in section 14A read with rule 8D. It was further submitted by him that details of investments available at page 97 of the paper book shows that most of the investments remained same during the year as compared to earlier year. Thus, no further expenditure was incurred in absence of any fresh investments. It was also submitted that assessee had made substantial investment in M/s. Supreme Petrochem Ltd. as well as Supreme Industries Overseas (FZE) a wholly owned subsidiary incorporated in UAE. It was submitted that both companies were group companies of the assessee and the investment was made for strategic reasons. Thus, while applying Rule 8D(2)(iii), these investments should

30 Supreme Industries Ltd. be excluded for computing the average amount of investments. It was also argued that income in the form of dividend earned from the overseas subsidiary would be taxable in India in the hands of Assessee Company. Thus, these investments need to be excluded for the said reasons also. It was submitted that in case these investment are excluded, then the disallowance that can be made on the basis of 0.5% of the average value of remaining investment would works out to Rs.26,912/-. Copy of work sheet was submitted to demonstrate the said working. In support of his arguments, the Ld. Counsel relied upon the following Judgments: 1. CIT v. Oriental Structural Engineers P. Ltd. (ITA No.605 of 2012(Delhi HC) 2. Bhupinder Investment Co. P. Ltd. v. DCIT (ITA No.6326/Mum2011)(ITAT Mumbai) 3. Jigar P. Shah v. ACIT (ITA No.4366/Mum/2014) dated 24.02.2016 13.3. Per contra, Ld. DR supported the orders of the lower authorities and also submitted that there was no reason to exclude the investments claimed to be made for strategic reasons. 13.4. We have gone through the submissions made by both the sides, orders of lower authorities as well as judgments placed before us. It is noted that investment made in overseas subsidiary i.e. Supreme Industries (incorporated in UAE) for Rs.18,87,955/- shall earn taxable income. Thus, it should be straight away excluded for computing average value investments. With regard to the exclusion of investments

31 Supreme Industries Ltd. made for strategic reasons, it is noted that our attention has been drawn on various judgments (as mentioned above) wherein this issue has been decided in favour of the assessee. It is further noted by us that nothing has been brought before us by lower authorities or by the Ld. DR to oppose the argument of the assessee. On facts, the assessee submitted that the investments in Supreme Group companies were made for commercial expediency and for strategic reasons. These facts have not been disputed. We find that in the case of CIT v. Oriental Structural Engineers P. Ltd., Hon’ble Delhi High Court upheld the order of Delhi Bench of the Tribunal wherein it was observed as under: 6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs. 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPV) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A r.w. Rule 8D because it cannot be termed as expense interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs 40,556/- calculated @ 2% of the dividend earned is sufficient. Under the

32 Supreme Industries Ltd. circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals),hence we uphold the same.’

13.5. Further, in the case of Bhupinder Investment Co. P. Ltd.(supra), it was observed that strategic investment in the associated concerns is not intended for the purpose of earning tax free income but to acquire the control over these concerns and therefore these should be excluded for the purpose of computing average value investments. In another judgment relied by the Ld. Counsel in the case of Jigar P. Shah (supra), it was observed on this issue by the Bench as under: 4. The Ld. A.R. of the assessee has further brought our attention to the decision of the Hon’ble Bombay High Court in the case of “CIT, Panaji, Goa vs. Phil Corpn. Ltd.” (2011) 202 Taxman 368 wherein the Hon’ble Bombay High Court has held that where the investment in shares of sister/subsidiary company is made to have control over that company and further that such an investment was accordingly part of the business of the assessee, in that event the assessee is entitled to deduction of interest paid on the borrowed amount under section 6(1)(iii) of the Act. We, further find that recently the Hon’ble Delhi high Court in the case of “Eicher Goodearth Ltd. vs. CIT” (2015) 60 taxman.com 268 (Del.) has held that if the expenditure is incurred for the purpose of promotion of business-more specifically to retain control or as part of his strategic investment of the assessee company, such expenses by way of interest out go would have to be treated as allowable under section 36(1)(iii) of the Act. 5. In view of the above decisions and respectfully following the same, we direct the AO to verify the claim of the assessee regarding the strategic investments and exclude the strategic investments while calculating the disallowance under rule 8D for the purpose of section 14A of the Income Tax Act.”

33 Supreme Industries Ltd. 13.6. It is further noted by us no contrary view was made available before us by the Ld. DR, nor facts stated by Ld. Counsel were disputed. Under these circumstances, we direct the AO to exclude the aforesaid investment for computing average value of investments of which 0.5% needs to be disallowed under Rule 8D(2)(iii). In case, the disallowance so worked out comes below the amount of disallowance made by the assessee as Rs.2,27,817/-, then the disallowance would be sustained at Rs.2,27,817. Thus, this ground may be treated as partly allowed. 14. Ground No.5: In this ground the assessee has contested the action of lower authorities in denying the benefit of deduction u/s 80IB on account of receipt of sale proceeds of packing material only. This issue has been decided by us in favour of the assessee in assessee’s appeal for A.Y.2007-08. Thus, respectfully following our order we decide this ground in favour of the assessee. 15. Ground No.6 was not pressed, therefore, dismissed. 16. As a result, appeal filed by the assessee is partly allowed.

Now we shall take Revenue’s Appeal in ITA No.3809/Mum/2012 For A.Y. 2008-09 on the following grounds: “1.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to reduce the amount of disallowance made by the AO u/s 14A of the IT Act, 1961. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing officer to restrict the addition to Rs.17,04,380/- as against the disallowance of

34 Supreme Industries Ltd. Rs.1,53,33,948/- made by the AO for the purpose of computing book profit as per the provisions of section 115JB of the I.T. Act.” 17. The Revenue has challenged the action of Ld. CIT(A) in deleting the disallowance of interest made u/s 14A read with rule 8D(2)(ii). It is noted that the Ld. CIT(A) has relied upon his own order for A.Y. 2006-07 while giving relief to the assessee. We have already decided this issue against the Revenue and in favour of the assessee by dismissing the appeal for Revenue for A.Y. 2006-07. Both the parties jointly stated that the facts as well as legal position remain same in this year also. Thus, following our order for A.Y. 2006-07, these grounds raised by the Revenue in this appeal are also dismissed. 18. As a result, appeal filed by the Revenue is dismissed. 19. In the result, the appeals of the assessee are partly allowed and appeals of the Revenue are dismissed.

Order pronounced in the open court on 21st December, 2016.

Sd/- Sd/- (Mahavir Singh ) (Ashwani Taneja) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated : 21/12/2016 ctàxÄ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file.

35 Supreme Industries Ltd. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.) Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai