NAHAR POLY FILMS LIMITED,LUDHIANA vs. DCIT, CIRCLE-1, LUDHIANA

आयकर अपील�य अ�धकरण,च�डीगढ़ �यायपीठ, च�डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH, ‘B’, CHANDIGARH BEFORE SHRI A.D. JAIN, VICE PRESIDENT & DR KRINWANT SAHAY, ACCOUNTANT MEMBER आयकर अपील सं./ �नधा�रण वष� / Assessment Year: 2015-2016 Nahar Poly Films Limited, Vs. The DCIT, बनाम 375, Industrial Area-A, Circle-1, Ludhiana 141003 Aayakar Bhawan, Rishi Nagar, Ludhiana �थायी लेखा सं./PAN No: AAACN5708K अपीलाथ�/ APPELLANT ��यथ�/ REPSONDENT ( Physical Hearing ) �नधा�रती क� ओर से/Assessee by : Sh. Navdeep Sharma, Advocate राज�व क� ओर से/ Revenue by : Smt. Kusum Bansal, CIT DR सुनवाई क� तार�ख/Date of Hearing : 29.05.2024 उदघोषणा क� तार�ख/Date of Pronouncement : 19.08.2024 आदेश/Order Per Dr. Krinwant Sahay, A.M.:

The appeal in this case has been filed by the Assessee against the order dated 26.05.2023 of ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi.

Directions be given to delete the addition of Rs. 14,24,378/- made out of interest paid to bank on C.C. Account.

Directions be given not to apply Rule 8 D as the provisions of Section 14 A (2) are not applicable in the case here in.

Directions be given to compute the disallowance u/s 14A on proportion basis at Rs. 2,17,428/-, in view of the decision of Hon'ble ITAT Chandigarh Bench in the case of Appellant in & 1415/2019 & group company case in Oswal Woollen Mills Ltd in ITA No. 37/CHD/2015.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 3 Further directions may be given to compute disallowance u/s 14A by applying method of proportion.

Directions be given to compute disallowance only by taking the actual investment from where exempted dividend income was received.

Direction may be given to allow the said additional depreciation in the year under appeal on the cost of machinery put to use during the preceding year but was restricted because of its use for less than 180 days.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 4 Directions be given to treat Sales Tax subsidy as capital receipt and accordingly returned income be reduced by the said amount. ,

3. The appeal on Ground No.1 is against disallowance of Rs. 14,24,378/- out of interest paid on working capital.

Now, the appellant submits that the addition to fixed assets of Rs. 3.8 cr. including plant and machinery were made either from capital reserves or surplus funds of the appellant. The appellant further, submits that its total term loan which was Rs. 62.33 lakh in A.Y. 2014-15 had come down to Rs. 43.44 lakh in A.Y. 2015-16, denoting surplus of funds to the appellant. The appellant, further, submits that the AO was incorrect in applying debt equity ratio of 38:62 and calculating interest of Rs. 14,24,378/- on working capital loan. The appellant also submits that the AO further erred in not allowing depreciation on the said interest capitalized. The appellant, further, relied on the order of the Hon'ble Jurisdictional Tribunal in in appellant's case itself for A.Y. 2013-14, wherein the Hon'ble Tribunal has held that if the appellant had its own sufficient fund in the form of capital reserve ^and surplus than no disallowance can be made.”

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 6 “Facts on records and appellant's submission have been examined. The relevant question of fact here is whether the appellant has its own sufficient capital, reserves and surplus! If the funds are there, then no disallowance can be made. The AO has brought on record that the appellant has filed NIL ROI for A.Y.2014-15 & 2015-16. The AO has also brought on record that appellant's own capital and reserves were already invested in fixed assets of past years, investment in shares of group companies and IDFC Ltd. and there remained only the borrowed funds in the balance sheet. The Hon'ble Jurisdictional Tribunal has also ruled that if appellant had its own sufficient fund in the form of capital / reserve /surplus, then no disallowance can be made. The fact here is contrary. Therefore, I find no reasons to interfere with the order of the AO and as a result appellant's appeal is dismissed.”

Aggrieved with this order, the Assessee filed an appeal before the 6. Tribunal.

“19. We have heard the rival contentions and perused the order of the authorities below. We find merit in the contention of the Ld. Counsel for the assessee. Various courts, including the jurisdictional High Court cited by the Ld. Counsel for the assessee,

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 7 have held that no disallowance u/s 36(1)(iii) is warranted where availability of sufficient own interest free funds is demonstrated by the assessee. The Ld. DR has failed to point out any contrary decision either of the jurisdictional High Court or the Apex Court. Therefore there remains no dispute with regard to the said proposition of law. Further the audited financial statements of the assessee show sufficient own funds in the form of share capital and reserves to the tune of Rs. 144 Cr., while the amount invested in building in relation to which the impugned disallowance has been worked out is RS. 52,46,711/-The Ld. Dr has not controverted the said facts before us. Therefore, in the light of the fact that sufficient own funds were available with the assessee, following the proposition laid down by various courts, no disallowance u/s 36(1) (iii) was warranted in the present case. We therefore set aside the order of the Ld. CIT(A) in this regard.”

No term loan was taken by the appellant company during the year for purchase of fixed assets but 458-Chd-2023 Nahar Poly Films Limited, Ludhiana 8 rather reduced the earlier year term loan as apparent from the balance sheet”

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 9

There is clear cut opportunity cost of these invested funds measurable in proportionate interest payment. Opportunity cost of the invested funds is not myth /concept /fiction rather it is a real business cost. Assessing Officer's action is therefore upheld. Appellant's appeal is therefore dismissed.”

During the proceedings before us, the ld. Counsel for the Assessee 14. submitted that this issue is squarely covered in favour of the Assessee in the case of Assessee’s sister concern company ‘M/s Nahar Industrial Enterprises, Ludhiana vs The ACIT’, order dated 30.7.2021 decided by the ITAT Chandigarh in ITA No. 262/Chd/2020. The Chandigarh Bench of the Tribunal has given its findings on this issue as under: -

“11. We notice that in the aforesaid case the AO had made disallowance u/s 14A read with Rule 8D, rejecting the suo motu disallowance made by the assessee on proportionate basis. As pointed out by the Ld. counsel, the coordinate Bench of the Tribunal has allowed the identical ground of the appeal of the assessee and set aside the findings of the Ld. CIT(A) holding that there is no defect in the suo motu disallowance made by the assessee on proportionate basis. Since the coordinate Bench has allowed the identical ground of appeal in the group company case, we do not find any reason to take a different view. However, in our considered view, the computation submitted by the assessee in this case needs to be verified by the AO to ascertain whether the assessee has computed the same in accordance with the observations made by the coordinate Bench

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 10 in the said case and in case any defect is found to determine the same afresh after affording a reasonable opportunity of being heard to the assessee. Hence, we set aside this ground of appeal to the file of AO to verify as to whether the suo motu disallowance computed by the assessee is in accordance with the observations made by the coordinate Bench in the case of M/s Oswal Woolen Mills Ltd.(supra) and allow the same if the same is in order.”

- Nahar Industrial Enterprises Ltd. - Oswal Woolen Mills Ltd.” The ld. DR relied on the order of the CIT(A). 16.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 11 17. We have considered the facts and heard the parties. Following the ratio laid down by the Chandigarh Bench of the Tribunal in ‘M/s Nahar Industrial Enterprises Ludhiana vs The ACIT’, order dated 30.7.2021 (supra), we find no reason to disturb the ratio already decided on this issue in the case of Assessee’s sister concern. Accordingly, Assessee’s appeal on this issue, raised vide Ground Nos. 2, 3 and 4 is allowed.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 12

Now, the appellant submits that direction may be given to the AO to allow additional depreciation on balance 10%. The appellant says that additional depreciation must be allowed in full and since it was not given in full, the balance 10% of additional depreciation should be allowed in this assessment year i.e., A.Y. 2015-16.”

On this issue the finding of the ld. CIT(A) is as under:- 19. “Facts on record and appellant's submission have been considered. It is an undisputed fact that the machinery has been used for less than 180 days and therefore, only 50% of the depreciation was allowable and the AO was correct in doing so. As far as additional depreciation is concerned, it is directly related to and dependent upon use of the machinery. Since, the machinery is used for less than 180 days, the additional depreciation is also to be restricted to be 50%. The AO was therefore correct in his stand. Appellant's appeal is dismissed”.

The ld. Counsel of the Assessee submitted that this issue is 20. squarely covered by the order of the Chandigarh Bench in the case of sister concern ‘M/s Nahar Industrial Enterprises Ltd. vs. The Addl. CIT’ of the in order dated 22.07.2022. The findings arrived at by the Tribunal is as under:- “43. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that the Ld. CIT(A) rightly allowed the claim of the assessee by following the decision dt. 24/05/2013 of the ITAT Chandigarh Bench in the 458-Chd-2023 Nahar Poly Films Limited, Ludhiana 13 case of Budhewal Co-operative Society Ltd. in wherein it was held as under:

"We find that the Hon'ble Punjab & Haryana High Court in CIT vs. Ramco International (supra) allowed the claim of deduction under section 80IB of the Act as the form No. 10CCB in respect of the said claim was filed during the assessment proceedings and it was held that the assessee was not to make any fresh claim and had duly furnished and submitted the form for deduction, there was no requirement of filing any revised return. The plea of the Revenue before the Hon'ble High Court that the judgment of Hon'ble Supreme Court in Goetze (India) Ltd., vs. CIT (supra) was applicable and deduction was not allowable, was not accepted by the Hon'ble Court. In view of the above said ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT vs. Ramco International (supra), we are of the view that the claim of deduction made by the assessee u/s 80P(2)(a)(iii) of the Act is to be considered in the present facts and circumstances of the case, even though the assessee had raised said claim by way of letter dated 15.12.2004 and had not furnished any revised return of income."

We therefore by respectfully following the aforesaid order dated 24/05/2013 in the case of M/s Budhewal Co-operative Society Ltd. do not see any valid ground to interfere with the findings given by the Ld. CIT(A).” 21. During proceedings before us, the Counsel of the Assessee filed a written submission on this issue which is as under:-

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 14

“During assessment proceedings further additional depreciation of Rs. 20,48,585/- was also claimed on the machinery installed and put to use in the preceding year which was used for less than 180 days and accordingly additional depreciation for the said preceding year was restricted to 50% of the normal additional depreciation as per provision of section 32(1)(ii). The balance 50% of the additional depreciation which was short allowed because of restriction in the said year has been claimed during the year under appeal before the Assessing Officer. The copy of letter dt. 14.04.2017 filed with the Assessing Officer regarding this claim of additional depreciation has been reproduced by the AO at page 14 of the Assessment Order. The contention and claim of the assessee was not accepted by the AO. Similarly, the worthy CIT(A) has also rejected the claim of the appellant company for the additional depreciation of the preceding year by holding that this claim of additional depreciation was not made in the return of income and therefore the same was not allowed. Further it is submitted that it is an accepted and admitted fact that the appellant company acquired and installed new machinery in preceding year on which the additional depreciation was allowed but restricted to 50%. This issue has already been decided by the Hon'ble ITAT in favour of the assessee in in the case of Nahar Spinning Mills Limited.”

The appellant now submits that the said receipt was actually capital in nature but was inadvertently shown as revenue receipt and offered to tax.

Facts on record and appellant's submission have been examined. First of all, this claim had not been 458-Chd-2023 Nahar Poly Films Limited, Ludhiana 16 made by the appellant in its ROI and therefore, it cannot be allowed. Secondly, in the case law, relied upon by the appellant i.e., the Hon'ble Supreme Court in CIT Madras Vs. Ponni Sugars and Chemicals Ltd. has clarified that only when receipt of subsidy is capital in nature and the recipient is obliged under the law to utilise the subsidy for repayment of term loan under taken for setting up new unit / expansion (capital expenditure), such claim can be allowed. The appellant in this case has not explained that the receipt of the subsidy was capital in nature and it was obliged under the subsidy scheme to use it towards reduction of capital expense and therefore, the benefit as ruled by the Hon'ble Supreme Court cannot be given in this case. Therefore, appellant's appeal is dismissed.”

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 17 “7. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record.We have carefully perused the order of I.T.A.T. in the case of Bhushan Limited (supra) and come to a conclusion that this is one of the cases which was before the Hon'ble High Court on the same issue of sales tax subsidy. However, the only difference in the facts of the case of Bhushan Limited (supra) and the current assessee is that in the case of Bhushan Limited (supra), the sales tax subsidy was received from the Government of West Bengal under "Wes Bengal Incentive Scheme 1999", while in the case of the assessee in question, the subsidy has been received from the Government of Gujarat under the "New Incentive Policy-Capital investment Incentive to Premier/Prestigious Unit Scheme 1995-2000". Therefore, in order to compare the policies of two different States, we have very carefully gone through the schemes of both the Governments produced before us. Since as per the directions of the Hon'ble High Court, we have to judge the nature and purpose of the sales tax subsidy received by the assessee. We see that the scheme of the Gujarat Government has aimed to trigger off accelerated industrial development and economic growth. For this purpose, to provide special package to certain types of industries, the scheme was formulated. To be eligible to get the benefit of this scheme mainly the criteria has been laid down with regard to the fixed capital investment, project related infrastructural investment, social infrastructural investment and common and public purpose infrastructure. All these requirements are towards capital investments. Further a closer look at the clause relating to ineligible investment shows that short term investment or investment of revenue

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 18 nature are not eligible for this scheme. A certificate of being declared as Permanent Prestigious Unit has been given to the assessee dated 18.5.2002, whereby the details of investment of the project and employment are given. We have also gone through the scheme of the Bengal Government which was in question before the Chandigarh Bench of the I.T.A.T. in the case of Bhushan Limited (supra). Though both the schemes of Gujarat Government and West Bengal Government are not verbatim, the sun and substance of both the schemes are same. As directed by the Hon'ble High Court on the basis of judgment in the case of Ponny Sugars & Chemicals Ltd. (supra), the nature of the sales tax subsidy is to be decided on the basis of character of the receipt in the hands of the assessee. We see that the sales tax subsid}' received by the assessee is capital in nature and is not subjected to tax. In arriving at this conclusion, we are guided by the order of the I.T.A.T. in the case of Bhushan Limited (supra), in which the Coordinate Bench of the I.T.A.T. in the same set of facts- and circumstances has held as under:

"24. The Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) considering its earlier decision in the case of Sahney Steels & Press Works Ltd. (supra) directed that the test is that the character of the receipt in the hands of assessee has to be determined with respect to the purpose for which subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which subsidy is paid, is not relevant. The source is immaterial. The form of subsidy is immaterial.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 20 of assessee was capital in nature. he decisions relied on by Id. DR would not support the case of the revenue. The decision cited by Id. counsel for the assessee clearly support the submission of Id. counsel for the assessee that the sales tax subsidy received by the assessee are capital in nature. We may also note here that the same scheme under West Bengal Incentive Scheme, 1999 under reference was subject matter of consideration before ITAT Kolkatta Bench in the case of Keventer Agro Ltd. (supra) and the Tribunal also decided the issue in favour of the assessee holding that the West Bengal Incentive Scheme, 1999 categorically encourage the promotion of industries in the State of West Bengal.

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 21 28. During the proceedings before us, the Counsel of the Assessee filed a submission on the issue as under:-

“We may further submit that appellant company during the year received Rs. 4,06,91,354/- as sales tax subsidy from M.P. State Govt which was of capital nature. Any subsidy from govt, cannot be said to be of revenue nature during the said assessment year. This issue has already been decided by the following courts in favour of assessee.

Moreover an amendment was introduced in section 2(24)(xviii) by Finance Act 2015 w.e.f. 2016 which was effective from Asstt. Year 2016-17 onwards that assistance in the form of subsidy or grant by state/central govt, would be an income. This amendment was not retrospective but prospective in nature. This amendment clearly envisage that any subsidy received prior to the A.Y 2016-17 was not an income. Moreover in the following case laws, it was decided by Courts including jurisdictional ITAT, Chandigarh have held that industrial/sales tax is a capital receipt and not revenue in nature.

(i) CIT V/s. Chaphallar Brothers- 252 ITR -360 (SC) (ii) PCIT V/s. Nitin Spinners - 283 ITR-2 (SC) (iii) CIT V/s. Ponny Sugar & Chemicals - 306 ITR- 292 (SC) (iv) Sahney Steel & Press Works Ltd V/s. CIT - 228 ITR-253 (SC) (v) DCIT V/s. Steel Strip Wheels Ltd in (vi) Vardhman Textiles Ltd V/s. ACIT in ITA No.392/CHD/2007.”

458-Chd-2023 Nahar Poly Films Limited, Ludhiana 22

Sd/- Sd/- ( A.D. JAIN ) (DR KRINWANT SAHAY) Vice President Accountant Member “rkk.” 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/ CIT