Vardhman Acrylics Ltd., Ludhiana V. DCIT, Ludhiana

ITA 482/CHANDI/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3596 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 03-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Earning of tax free income; Capital receipt
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO. 481/CHD/2016 ASSESSMENT YEAR : 2011-12 M/S VARDHMAN ACRYLICS LTD., VS. THE ACIT, CIRCLE-1, CHANDIGARH ROAD, LUDHIANA LUDHIANA PAN NO.AAACV7602E ITA NO. 517/CHD/2016 ASSESSMENT YEAR : 2011-12 THE DCIT, CIRCLE-1, VS. M/S VARDHMAN ACRYLICS LTD. , LUDHIANA CHANDIGARH ROAD, LUDHIANA PAN NO.AAACV7602E ITA NO. 482/CHD/2016 ASSESSMENT YEAR : 2012-13 M/S VARDHMAN ACRYLICS LTD., VS. THE DCIT, CIRCLE-1, CHANDIGARH ROAD, LUDHIANA LUDHIANA PAN NO.AAACV7602E & ITA NO. 743/CHD/2016 ASSESSMENT YEAR : 2012-13 THE DCIT, CIRCLE-1, VS. M/S VARDHMAN ACRYLICS LTD. , LUDHIANA CHANDIGARH ROAD, LUDHIANA PAN NO.AAACV7602E APPELLANT BY : SH. VINEET JAIN (ON 13.12.2017 ) & NONE ON 23.2.2018 SH. SUBHASH AGGARWAL, ADV. (20.6.2018) RESPONDENT BY : SH. ASHISH ABROL, CIT DR (ON 13. 12.2017) SH GULSHAN RAJ, CIT DR (ON 23.02.2018) SH. MANJIT SINGH,SR. DR (ON 20.06.2018) 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 2 DATE OF HEARING : 20.06.2018 DATE OF PRONOUNCEMENT : 20. 08.2018 ORDER PER SANJAY GARG, JUDICIAL MEMBER: THE CAPTIONED ARE CROSS APPEALS BY THE ASSESSEE AN D THE DEPARTMENT FOR ASSESSMENT YEAR 2011-12 AND ASSESSME NT YEAR 2012- 13 RESPECTIVELY AGAINST THE SEPARATE ORDERS DATED 2 9.02.2016 & 28.03.2016 RESPECTIVELY OF COMMISSIONER OF INCOME TAX (APPEALS)- 1, LUDHIANA [HEREINAFTER REFERRED TO AS CIT(A)]. 2. SINCE THE FACTS AND ISSUE INVOLVED IN ALL THESE APPEALS ARE IDENTICAL, HENCE, THESE WERE HEARD TOGETHER AND AR E BEING DISPOSED OF BY THIS COMMON ORDER. FIRST, WE TAKE UP ASSESSEES APPEAL FOR ASSESSMENT YEAR 2011-12. ITA NO. 481/CHD/2016 (A.Y. 2011-12) 3. THE SOLE ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL RE LATES TO DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE INCOM E TAX RULES, 1962. DURING ASSESSMENT PROCEEDINGS, THE ASSESSIN G OFFICER NOTICED THAT THE ASSESSEE HAD MADE HUGE INVESTMENT CAPABLE OF YIELDING TAX EXEMPT INCOME. THE ASSESSEE EXPLAINED BEFORE THE AS SESSING OFFICER THAT THE ASSESSEE DID NOT INCUR ANY EXPENDITURE FOR MAKING THE INVESTMENT IN QUESTION. HOWEVER, THE SUO-MOTO D ISALLOWANCE OF RS. 10,000/- IN THIS RESPECT WAS MADE BY THE ASSESS EE IN ITS COMPUTATION OF INCOME. THAT THE ASSESSEE HAS OWN SU FFICIENT FUNDS TO MEET THE INVESTMENTS. THE TOTAL OF THE SHARE CAPITA L AND RESERVE AND SURPLUS AS ON 31.3.2011 WAS RS. 22632.34 LACS AND A S ON 31.3.2010 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 3 WAS RS. 18868.02 LACS. SO THERE WAS AN INCREASE IN THE RESERVE AND SURPLUS OF THE ASSESSEE OF RS. 3764.14 LACS. THE TO TAL INVESTMENT WAS AT RS. 4743.49 LACS AS ON 31.03.2011 AND OF RS. 10 14.75 LACS AS ON 31.3.2010. THE TOTAL INCREASE IN INVESTMENT WAS RS. 3728.74 LACS. THE ASSESSEE HAS DEMONSTRATED THAT THE TOTAL INVEST MENT AS ON THE END OF THE YEAR I.E. 31.3.2011 WERE FAR LESS THAN THE F UNDS OF THE ASSESSEE AND EVEN THE INCREASE IN THE RESERVE AND SURPLUS WA S MORE THAN THE INCREASE IN THE INVESTMENT DURING THE YEAR. THE ASS ESSEE FURTHER EXPLAINED THAT THE LOAN FUNDS OF THE COMPANY AS ON 1.4.2010 WERE RS. 234.38 LACS WHICH HAD DECREASED TO 223.87 AS ON 31. 3.2011 AND FURTHER THAT CASH RESERVES INCLUDING CAPITAL AS ON 31.3.2010 WERE RS. 30900.15 LACS WHICH HAD INCREASED TO RS. 35781.91 L ACS AS ON 31.3.2011. THE NET CURRENT ASSETS OF THE ASSESSEE H AVE INCREASED BY RS. 696.95 LACS IN AGGREGATE. THE ASSESSEE, THERE FORE, HAD SUBMITTED THAT SINCE THE ASSESSEE HAD OWN SUFFICIENT FUNDS TO MAKE THE INVESTMENT, THERE WAS NO QUESTION OF DISALLOWANCE O F INTEREST EXPENDITURE U/S 14A READ WITH RULE 8D OF THE INC OME TAX RULES. IN RESPECT OF DISALLOWANCE UNDER RULE 8D(2)(III),, THE ASSESSEE EXPLAINED THAT ONLY ONE INVESTMENT DURING THE YEAR I.E IN IIFL BONDS OF RS. 1023.10 LACS WAS MADE WHICH YIELDED DIVIDEND EXEMPT INCOME OF RS. 59.11 LACS. THAT THE OTHER INVESTMENTS MADE BY THE ASSESSEE WERE NOT CAPABLE OF YIELDING TAXABLE INCOME. THE A SSESSEE IN THIS RESPECT HAS GIVEN A CHART, WHICH IS REPRODUCED AS U NDER:- PARTICULARS OF INVESTMENT AS ON 31.03.11 (RS. IN LACS) AS ON 31.03.2010 (RS. IN LACS) NATURE OF INCOME (EXCEPT OR TAXABLE) BHARUCH ECO-ACQA INFRASTRUCTURE LTD 164.75 164.75 NOT APPLICABLE 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 4 RELIANCE REGULAR SAVING FUND- GROWTH OPTION NIL 300.00 TAXABLE SBI MAGNUM CASH FUND 1023.10 NIL EXEMPT IIFL BONDS 1056.30 NIL TAXABLE SOLARIS HOLIDAYS LTD (DEBENTURES) 999.34 NIL TAXABLE REC BONDS 500.0 NIL TAXABLE RELIANCE FIXED HORIZON FUND- GROWTH OPTION 1000.00 NIL TAXABLE SBI DEBT SERIES GROWTH OPTION TAXABLE IT WAS ALSO EXPLAINED THAT EXCEPT THE INVESTMENT IN IIFL BONDS, THE INCOME FROM THE OTHER INVESTMENT I.E. IN BHARUCH EC O-ACQA INFRASTRUCTURE LTD, RELIANCE REGULAR SAVING FUND-GR OWTH OPTION, SBI MAGNUM CASH FUND, SOLARIS HOLDING LTD (DEBENTURES), REC BONDS, RELIANCE FIXED HORIZON FUND-GROWTH OPTION AND SBI D EBT SERIES GROWN OPTION) WAS TAXABLE INCOME OF THE ASSESSEE. S O FAR AS THE INVESTMENT IN BHARUCH ECO-ACQA INFRASTRUCTURE LTD, IT WAS EXPLAINED THAT IT WAS A SECTION 25 COMPANY AND AS PER COMPANI ES ACT, NO DIVIDEND CAN BE DECLARED BY THE SAID COMPANY. THAT THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 (FI RST ROUND OF APPEAL (IN ITA NO. 911/CHD/2013 DATED 20.1.2014 HAS HELD THAT INVESTMENT IN BHARUCH ECO-ACQA INFRASTRUCTURE LTD. WAS MADE AS PER THE DIRECTIONS OF THE HON'BLE GUJARAT HIGH COURT AN D SINCE NO DIVIDEND DECLARED BY THE SAID COMPANY BEING A SECT ION 25 COMPANY UNDER THE COMPANIES ACT, THEREFORE, SECTION 14 A COULD NOT BE 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 5 APPLIED. THE LD. ASSESSING OFFICER, HOWEVER, WAS N OT SATISFIED WITH THE ABOVE CONTENTION OF THE ASSESSEE. HE OBSERVED T HAT SINCE THE ASSESSEE HAD USED MIXED FUNDS FOR INVESTMENT, HENCE , THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WERE APPLICABLE, A ND HE THEREFORE, CALCULATED THE DISALLOWANCE APPLYING THE AFORESAID PROVISIONS. 4. IN APPEAL, THE LD. CIT(A) UPHELD THE FINDINGS OF THE ASSESSING OFFICER THAT SINCE THE COMMON FUNDS HAVE BEEN USED, THERE WAS NO SEPARATE ACCOUNT OF THE ASSESSEES OWN FUNDS AND, H ENCE, THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WOULD B E APPLICABLE. HE, HOWEVER, ACCEPTED THE CONTENTION OF THE ASSESSE E THAT ONLY THE INVESTMENT IN IIFL BONDS YIELDED TAX EXEMPT INCOME, THEREFORE, DIRECTED THE ASSESSING OFFICER TO REWORK THE DISAL LOWANCE U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES ONLY IN R ESPECT OF INVESTMENT MADE IN IIFL BONDS. BEING AGGRIEVED BY THE ABOVE ORDER OF THE CIT(A), T HE ASSESSEE HAD COME IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS OBS ERVED ABOVE, THE ASSESSEE HAS DEMONSTRATED BEFORE THE LOWER AUT HORITIES THAT IT HAS MUCH MORE RESERVE AND SURPLUS THAN THE TOTAL INVEST MENTS MADE DURING THE YEAR. THE ASSESSEE HAS ALSO DEMONSTRATED THAT EXCEPT INVESTMENT IN IIFL BONDS, ALL OTHER INVESTMENTS WE RE NOT CAPABLE OF YIELDING EXEMPT INCOME. IT WAS ALSO EXPLAINED THAT EXCEPT THE INVESTMENT IN BHARUCH ECO-ACQA INFRASTRUCTURE LTD, INCOME FROM OTHER INVESTMENTS MADE BY THE ASSESSEE WERE TAXABL E INCOME. IN CASE OF BHARUCH ECO-ACQA INFRASTRUCTURE LTD, THE SAID IN VESTMENT WAS NOT 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 6 CAPABLE OF YIELDING EXEMPT INCOME. IT HAS BEEN HELD TIME AND AGAIN BY VARIOUS HIGH COURTS INCLUDING THE JURISDICTIONA L HIGH COURT OF PUNJAB & HARYANA HIGH THAT IF THE ASSESSEE HAS ITS OWN FUNDS SUFFICIENT TO MAKE INVESTMENT, THEN THE PRESUMPTION WOULD BE THAT INVESTMENT HAS BEEN MADE FROM OWN FUNDS AND NO DISA LLOWANCE U/S 14A OF THE ACT WOULD BE ATTRACTED UNDER THOSE CIRCUMSTANCES. RELIANCE IN THIS RESPECT CAN BE PLA CED UPON THE DECISIONS OF CIT VS. MAX INDIA LTD (2016) 388 ITR 8 1(P&H) AND CIT VS. KAPSON ASSOCIATES (2016) 381 ITR 204 (P&H), WHEREIN, IT HAS BEEN HELD BY THE HIGHER COURTS THAT IF THE ASSESSEE HAS AVAILABILITY OF OWN SUFFICIENT FUNDS T O MAKE THE INVESTMENT, THEN THE PRESUMPTION WOULD BE THAT INVE STMENT HAS BEEN MADE FROM OWN FUNDS AND NO DISALLOWANCE U/S 14 A OF THE ACT WOULD BE ATTRACTED UNDER THOSE CIRCUMSTANCES. 6. THE LD. COUNSEL HAS INVITED OUR ATTENTION TO A CHART TO DEMONSTRATE THE FINANCIAL POSITION OF THE ASSESSEE, WHICH FOR THE SAKE OF CONVENIENCE IS AS UNDER:- PARTICULARS AS ON 31.03.11 AS ON 31.03.2010 INCREASE / DECREASE SHARE CAPITAL 10853.25 10853.25 - RESERVE & SURPLUS 11779.09 8014.95 3764.14 TOTAL 22632.34 18868.20 3764.14 ACCUMULATED BALANCE OF DEPRECIATION 13148.85 12031.95 1116.9 CASH RESERVES INCLUDING CAPITAL 35781.19 30900.15 4881.04 INVESTMENTS 4743.49 1014.75 3728.74 LOAN FUNDS 223.87 234.38 -10.51 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 7 FIXED ASSETS INCLUDING CAPITAL WORK IN PROGRESS 23728.90 23581.91 146.99 NET CURRENT ASSETS 9804.03 9107.08 696.95 7. THE LD. DR, ON THE OTHER HAND, HAS RELIED ON AN OTHER DECISION OF THE HIGH COURT IN THE CASE OF AVON CYCLES LTD VS . CIT [2015] 53 TAXMANN.COM 297 (P&H) WHEREIN THE HON'BLE HIGH COUR T HAS HELD THAT WHERE FUNDS UTILIZED BY ASSESSEE WAS MIXED FUN DS AND, HENCE, INTEREST PAID ON BORROWED FUND WAS ALSO RELATABLE T O INTEREST ON INVESTMENT MADE IN TAX FREE FUNDS, INTEREST EXPENDI TURE RELATABLE TO INVESTMENT IN TAX FREE FUNDS WAS TO BE COMPUTED UND ER PROVISIONS OF RULE 8D(2)(II). IT HAS BEEN FURTHER SUBMITTED THAT THE SAID DECISION OF THE HIGH COURT IN AVON CYCLES LTD VS. CIT HAS BEE N FURTHER UPHELD BY THE SUPREME COURT VIDE ORDER DATED 12.2.2018 IN GROUP OF APPEALS WITH THE LEAD CASE MAXOPP INVESTMENT LTD VS CIT REPORTED IN (2018) 91 TAXMAN.COM (154) SC. 8. IN OUR VIEW, THE SAID DECISION CITED BY THE DEPA RTMENT IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CA SE. THE COUNSEL FOR THE ASSESSEE HAS DEMONSTRATED THAT THE LOAN FUNDS OF THE COMPANY DURING THE YEAR HAVE DECREASED WHEREAS THE RESERVE AND SURPLUSES OF THE COMPANY DURING THE YEAR HAD INCREASED TO A LARG E EXTENT. THE INCREASED IN THE RESERVE AND SURPLUS WAS MORE THAN THE TOTAL INVESTMENT MADE BY THE ASSESSEE, HENCE, UNDER THE C IRCUMSTANCES, IT CANNOT BE SAID THAT THE ASSESSEE HAS USED INTEREST BEARING LOAN FUNDS TO MAKE INVESTMENTS IN QUESTION. 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 8 WE ARE GUIDED IN THIS RESPECT BY THE DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES P. LTD W HICH HAS BEEN FOLLOWED IN THE VARIOUS DECISIONS OF THE HON'BLE JURISDICTIONAL HIGH COURT OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT LTD VS. CIT, 381 ITR 107( P&H), CIT VS. MAX INDIA LTD (2016) 388 ITR 81(P&H) AND CIT VS. KAPSON ASSOCIATES (2016) 381 ITR 204 (P&H). FURTHER, THE HON'BLE SUPREME COURT IN THE CASE OF VEGETABLE PRODUCTS LTD [1973] 88 ITR 192 (SC) HAS HELD THAT WHERE TWO VIEWS ARE AV AILABLE ON A PROPOSITION, THE VIEW FAVORABLE OF THE ASSESSEE I S TO BE TAKEN. IN VIEW OF THIS, NO DISALLOWANCE ON INTEREST EXPEND ITURE IS ATTRACTED IN THIS CASE. SO FAR AS THE DISALLOWANCE ON ACCOUNT OF ADMINISTRA TIVE EXPENDITURE IS CONCERNED, THE ASSESSEE DURING THE Y EAR HAD MADE INVESTMENT ONLY IN ONE COMPANY WHICH WAS CAPABLE O F EARNING TAXABLE INCOME. MERELY BECAUSE THE VALUE OF THE INV ESTMENT WAS HIGH, CANNOT BE A SOLE FACT FOR DETERMINATION OF TH E ADMINISTRATIVE EXPENDITURE INCURRED / LIKELY TO BE INCURRED. THIS IS NOT THE CASE OF THE REVENUE THAT THE ASSESS EE HAD MADE SO MANY INVESTMENTS WHICH WERE CAPABLE OF YIELDING EXEMPT INCOME WHICH REQUIRE DAY TO DAY MONITORING. THE FAC T IS THAT THE ASSESSEE HAD MADE ONLY SOLE INVESTMENT WHICH WAS CAPABLE OF EARNING TAX EXEMPT INCOME AND THE ASSESSEE HAD SU O MOTO MADE A DISALLOWANCE OF RS. 10,000/-. IN OUR VIEW, N O FURTHER DISALLOWANCE U/S 14A OF THE ACT IS ATTRACTED. THE ASSESSING OFFICER RECORDED OBJECTIVE DIS-SATISFACTION TO THE CLAIM OF THE 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 9 ASSESSEE THAT IT HAS NOT INCURRED THE EXPENDITURE MORE THAN IT HAS SUO MOTO DECLARED IN THE COMPUTATION OF INCOME. 9. IN VIEW OF THIS, THE DISALLOWANCE MADE U/S 14A IS RESTRICTED WITH THAT HAS BEEN SUO MOTO MADE BY THE ASSESSEE. FURTHER, THE ADDITIONS MADE BY THE LOWER AUTHORITIE S ON THIS ISSUE ARE ORDERED TO BE DELETED. 10. NOW COMING TO THE DEPARTMENTAL APPEAL FOR ASSES SMENT YEAR 2010-11 ITA NO. 517/CHD/2016 (A.Y. 2011-12) IN ITS CROSS OBJECTION ABOVE, THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS:- 1. WHETHER UPON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) WAS JUSTIFIED IN DISREGARDING THE FINDINGS OF THE ASSESSING OFFICER AND TREATING THE SALES TAX SUBSIDY RECEIVED BY THE ASSESSEE AS CAPITAL IN NATURE? 2. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) WAS JUSTIFIED IN REDUCING THE QUANTUM OF DISALLOWANCE MADE U/S 14A OF THE ACT, BY DIRECTING THE ASSESSING OFFICER TO RECALCULATE THE DISALLOWANCE U /S 14A ON THE INVESTMENT IN IIFL BONDS ONLY. 3. THAT THE ORDER OF LD. CITABE SET ASIDE AND THAT OF AOBE RESTORED. WE FIND THAT THE REVENUE IN THIS APPEAL HAS TAKEN T WO EFFECTIVE GROUNDS OF APPEAL. 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 10 11. GROUND NO. 1 - VIDE THIS GROUND, THE REVENUE HAS AGITATED THE ACTION OF THE CIT(A) IN DELETING THE SALES TAX SUB SIDY RECEIVED BY THE ASSESSEE AS CAPITAL IN NATURE AS AGAINST THE T REATMENT OF THE SAME BY THE ASSESSING OFFICER AS REVENUE RECEIPTS. THE BRIEF FACTS RELATING TO THE ISSUE UNDER CONSIDE RATION ARE THAT THE ASSESSEE DURING THE YEAR RECEIVED SALES TAX SUB SIDY AMOUNTING TO RS. 9,09,47,621/- AND INCENTIVE FROM THE GOVERNMENT UNDER THE SCHEME OF STATE GOVERNMENT NAMELY CAPITAL INVESTME NT INCENTIVE TO PREMIER / PRESTIGIOUS UNIT SCHEME 1995-2000 FOR S ETTING UP A MANUFACTURING UNIT OF THE ASSESSEE AT JHAGADIA DIST RICT BAROCH IN GUJARAT. THE ASSESSING OFFICER AFTER EXAMINING THE SCHEME AND NATUE OF THE SUBSIDY RECEIVED BY THE ASSESSEE OBSERVED TH AT UNDER THE SCHEME THE INCENTIVE IS GIVEN BY THE GOVERNMENT AFT ER UNIT STARTS ITS COMMERCIAL PRODUCTION. THAT THE SCHEME PROVIDES FOR SUBSIDY IN THE FORM OF SALES TAX EXEMPTION OR DEFERMENT FOR A PERI OD OF FEW YEARS AFTER COMMENCEMENT OF THE COMMERCIAL PRODUCTION BY THE UNIT. THAT THE SAID SUBSIDY WAS GIVEN TO LEND A HELPING HAND T O NEW UNIT IN RUNNING ITS BUSINESS MORE PROFITABLY. THAT THE SCHE ME DID NOT FUND SPECIALLY PART OF CAPITAL INVESTMENT FOR SETTING UP THE INDUSTRY IN BACKWARD AREAS AND, HENCE, THE SAME ARE REVENUE IN NATURE. THE LD. COUNSEL FOR THE ASSESSEE IN THIS RESPECT HAS RELIED UPON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF .CIT VS. ABHISHEK INDUSTRIES LTD 284 ITR 1. 12. THE LD. CIT(A), HOWEVER, IN APPEAL, DELETED TH E ADDITION SO MADE BY THE ASSESSING OFFICER BY FOLLOWING THE DECI SION OF THE 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 11 TRIBUNAL IN THE CASE OF THE ASSESSEE IN ITA NO. 59 2/2007, 824/2007, 773/2012, 283/2014, 911/2013 VIDE ORDER DATED 21.10 .2015 HAS HELD THAT THE SALES TAX SUBSIDY RECEIVED BY THE ASSESSE E WAS A CAPITAL RECEIPT AND NOT CHARGEABLE TO TAX. NOW, THE REVENU E HAS COME IN APPEAL AGITATING THE ACTION OF THE CIT(A) IN DELETI NG THE ADDITION MADE ON THIS ISSUE. 13. WE HAVE HEARD THE RIVAL CONTENTIONS. ADMITTEDL Y, THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE WHILE FOLLOW ING THE DECISION OF THE TRIBUNAL IN EARLIER ASSESSMENT YEAR IN THE OWN CASE OF THE ASSESSEE WHEREIN THE SUBSIDY RECEIVED BY THE ASSE SSEE HAS BEEN HELD TO BE A CAPITAL RECEIPT. THE ASSESSEE HAS ALSO P LACED ON FILE A COPY OF THE SALES TAX SCHEME OF THE GOVERNMENT NAMELY N EW INCENTIVE POLICY CAPITAL INVESTMENT INCENTIVE TO PREMIER / PRESTIGIOUS UNIT SCHEME 1995-2000. THE PURPOSE OF THE SCHEME MENTIO NED IN THE OPENING PARAS OF THE SCHEME, WHICH READS AS UNDER:- THE NEW INDUSTRIAL POLICY, ANNOUNCED BY THE GOVERNMENT OF GUJARAT HAS EMPHASIZED THE NEED TO ACCELERATE DEVELOPMENT OF THE BACKWARD AREAS OF THE STATE AND TO CREATE LARGE SCALE EMPLOYMENT OPPORTUN ITIES. IT HAS ALSO STRESSED THE NEED TO INCREASE THE TOTAL FLOW OF INVESTMENT TO INDUSTRIAL SECTOR WITH THE PROPER DEVELOPMENT OF INFRASTRUCTURE AND HUMAN RESOURCES T O SUSTAIN THE LONG TERM GROWTH AND ACHIEVE SUSTAINABL E DEVELOPMENT. 2. THE GOVERNMENT OF GUJARAT IS COMMITTED TO CREATE LARGE-SCALE EMPLOYMENT OPPORTUNITIES TO ABSO RB THE SWELLING RANKS OF THE UNEMPLOYED. STATE GOVERNM ENT HAS ANNOUNCED THE NEW EMPLOYMENT POLICY IN ORDER TO 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 12 ENSURE THAT PRIORITY IS GIVEN TO LOCAL PERSONS FOR EMPLOYMENT IN INDUSTRIAL SECTORS. THERE ARE CERTAIN CORE SECTOR INDUSTRIES WHICH HAVE TREMENDOUS POTENTIAL TO SPUR INDUSTRIAL GROWTH IN ANCILLARY, SECONDARY; AND TERTIARY SECTORS OF THE E CONOMY. INVESTMENT IN SUCH CORE INDUSTRIES, ENTITLED AS PR EMIER / PRESTIGIOUS UNITS IS LIKELY TO TRIGGER OFF ACCELER ATE INDUSTRIAL DEVELOPMENT AND ECONOMIC GROWTH. IN VIEW OF THIS, GOVERNMENT AFTER CAREFUL CONSERVING HAS DECID ED TO GIVE CERTAIN HIGHER BENEFITS UNDER ITS INCENTIVE PO LICY TO PROVIDE SPECIAL PACKAGE TO SUCH TYPE OF INDUSTRIES . GOVERNMENT. IS PLEASED TO INTRODUCE THE FOLLOWING SCHEME. 14. A PERUSAL OF THE ABOVE OPENING PARAS OF THE SCHEME REVEAL THAT THE SCHEME HAS BEEN FLOATED BY THE GOVERNMENT OF GU JARAT FOR DEVELOPMENT OF THE BACKWARD AREA OF THE STATE AND T O CREATE LARGE SCALE EMPLOYMENT OPPORTUNITIES AND WITH A STRESS TO ENCOURAGE INVESTMENT FOR DEVELOPMENT OF INFRASTRUCTURE AND HU MAN RESOURCES TO SUSTAIN LONG TERM GROWTH AND ACHIEVE SUSTAINABLE DE VELOPMENT. THE OTHER PURPOSE OF THE SCHEME WAS TO ENCOURAGE INVEST MENT IN CERTAIN CORE SECTOR INDUSTRIES NAMES AS PREMIER / PRESTIGI OUS UNITS LIKELY TO TRIGGER OFF INDUSTRIAL DEVELOPMENT AND ECONOMIC GRO WTH. THOUGH THE INCENTIVES HAVE TO BE GIVEN, OVER A PERIOD OF TIME , IN THE FORM OF SALES TAX SUBSIDY ETC. AFTER THE COMMENCEMENT OF PR ODUCTION BUT PURPOSE OF THE SCHEME WAS TO ENCOURAGE NEW INVESTME NT IN CORE SECTOR OF THE INDUSTRY, TO ACCELERATE THE DEVELOPM ENT OF THE BACKWARD AREA OF THE STATE AND TO CREATE LARGE SCALE EMPLOYM ENT OPPORTUNITIES. 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 13 THE ISSUE UNDER CONSIDERATION IS NOW SETTLED BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT-I VS . M/S CHAPHALKAR BROTHERS, PUNE AND OTHERS IN CIVIL APP EAL NOS. 6513-6514 OF 2012 VIDE ORDER DATED 7.12.2017 [2017] 88 TAXMAN.COM 278 (SC). THE HON'BLE SUPREME COURT WH ILE DELIBERATING ON THE OTHER DECISIONS OF THE SUPREME COURT IN THE CASES OF SAHNEY STEEL & PRESS WORKS LTD. HYDERABAD VS. CIT, A.P.-1, HYDERABAD : 1997 (7) SCC 765, CIT, MADRAS VS. POONI SUGARS AND CHEMICALS LIMITED 2009 (9) SCC 337 AND FURTHER OF THE HON'BLE J&K HIGH COURT IN THE CASE OF SHRI BAL AJI ALLOYS VS. CIT (2011) 333 ITR 335, HAS HELD THAT TO HOLD WHET HER ANY OF SUCH RECEIPTS ARE CAPITAL OR REVENUE IN NATURE, PU RPOSE TEST IS TO BE APPLIED. IF THE PURPOSE IS FOR THE SETTING UP O F NEW INDUSTRY, THEN THE RECEIPTS ARE TO BE CONSIDERED AS CAPITAL I N NATURE. HOWEVER, IF THE RECEIPTS ARE IN THE NATURE OF FACIL ITATION / HELPING HAND TO THE TRADE, THE SAME ARE TO BE CONSTRUED AS REVENUE IN NATURE. WHAT IS IMPORTANT IS THE OBJECT FOR WHICH THE SUBSIDY / INCENTIVE IS GRANTED. THAT THE OBJECT IS CARRIED OU T IN A PARTICULAR MANNER IS IRRELEVANT. ONCE THE OBJECT OF THE SUBSI DY WAS TO INDUSTRIALIZE THE STATE AND TO GENERATE EMPLOYMENT IN THE STATE, THE FACT THAT A SUBSIDY TOOK A PARTICULAR FORM AND THAT IT WAS GRANTED ONLY AFTER COMMENCMENT OF PRODUCTION, WOULD NOT MAKE ANY DIFFERENCE. THE HON'BLE SUPREME COURT MADE REFE RENCE TO THE DECISION OF THE HON'BLE J&K HIGH COURT IN THE CAS E OF SHRI BALAJI ALLOYS V CIT (SUPRA), WHEREIN, THE HON'BLE HIGH COURT WHILE CONSIDERING THE SCHEME OF REFUND OF EXCISE DU TY AND INTEREST 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 14 SUBSIDY, HAS HELD THAT THE RECEIPTS WERE CAPITAL IN NATURE DESPITE THE FACT THAT THE INCENTIVES WERE NOT AVAILABLE UN TIL AND UNLESS THE COMMERCIAL PRODUCTION HAS STARTED AND DESPITE THE F ACT THAT THESE INCENTIVES WERE NOT GIVEN TO THE ASSESSEE EXPRESSL Y FOR THE PURPOSE OF CAPITAL ASSETS. THE RELEVANT PART OF THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. M/S C HAPHALKAR BAROATHERS, PUNE IS REPRODUCED AS UNDER:- FINALLY, IT WAS FOUND THAT, APPLYING THE TEST OF P URPOSE, THE COURT WAS SATISFIED THAT THE PAYMENT RECEIVED B Y THE ASSESSEE UNDER THE SCHEME WAS NOT IN THE NATURE OF A HELPING HAND TO THE TRADE BUT WAS CAPITAL IN NATURE . WHAT IS IMPORTANT FROM THE RATIO OF THIS JUDGMENT I S THE FACT THAT SAHNEY STEEL WAS FOLLOWED AND THE TEST LA ID DOWN WAS THE PURPOSE TEST. IT WAS SPECIFICALLY HELD TH AT THE POINT OF TIME AT WHICH THE SUBSIDY IS PAID IS NOT R ELEVANT; THE SOURCE OF THE SUBSIDY IS IMMATERIAL; THE FORM O F SUBSIDY IS EQUALLY IMMATERIAL. APPLYING THE AFORESAID TEST CONTAINED IN BOTH SAHNE Y STEEL AS WELL AS PONNI SUGAR, WE ARE OF THE VIEW THAT THE OBJECT, AS STATED IN THE STATEMENT OF OBJECTS AND REASONS, OF THE AMENDMENT ORDINANCE WAS THAT SINCE THE AVERAGE OCCUPANCY IN CINEMA THEATRES HAS FALLEN CONSIDERABL Y AND HARDLY ANY NEW THEATRES HAVE BEEN STARTED IN THE RE CENT PAST, THE CONCEPT OF A COMPLETE FAMILY ENTERTAINMEN T CENTRE, MORE POPULARLY KNOWN AS MULTIPLEX THEATRE COMPLEX, HAS EMERGED. THESE COMPLEXES OFFER VARIOUS ENTERTAINMENT FACILITIES FOR THE ENTIRE FAMILY AS A WHOLE. IT WAS NOTICED THAT THESE COMPLEXES ARE HIGHLY CAPITAL INTENSIVE AND THEIR GESTATION PERIOD IS QUITE LONG AND THEREFORE, THEY NEED GOVERNMENT SUPPORT IN THE FORM OF INCENTIVES QUA ENTERTAINMENT DUTY. IT WAS ALSO ADDE D THAT 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 15 GOVERNMENT WITH A VIEW TO COMMEMORATE THE BIRTH CENTENARY OF LATE SHRI V. SHANTARAM DECIDED TO GRAN T CONCESSION IN ENTERTAINMENT DUTY TO MULTIPLEX THEAT RE COMPLEXES TO PROMOTE CONSTRUCTION OF NEW CINEMA HOU SES IN THE STATE. THE AFORESAID OBJECT IS CLEAR AND UNEQUIVOCAL. THE OBJECT OF THE GRANT OF THE SUBSIDY WAS IN ORDER THAT PERSONS COME FORWARD TO CONSTRUCT MULTIP LEX THEATRE COMPLEXES, THE IDEA BEING THAT EXEMPTION FR OM ENTERTAINMENT DUTY FOR A PERIOD OF THREE YEARS AND PARTIAL REMISSION FOR A PERIOD OF TWO YEARS SHOULD GO TOWAR DS HELPING THE INDUSTRY TO SET UP SUCH HIGHLY CAPITAL INTENSIVE ENTERTAINMENT CENTERS. THIS BEING THE CASE, IT IS D IFFICULT TO ACCEPT MR. NARASIMHA'S ARGUMENT THAT IT IS ONLY THE IMMEDIATE OBJECT AND NOT THE LARGER OBJECT WHICH MU ST BE KEPT IN MIND IN THAT THE SUBSIDY SCHEME KICKS IN ON LY POST CONSTRUCTION, THAT IS WHEN CINEMA TICKETS ARE ACTUA LLY SOLD. WE HASTEN TO ADD THAT THE OBJECT OF THE SCHEM E IS ONLY ONE -THERE IS NO LARGER OR IMMEDIATE OBJECT. T HAT THE OBJECT IS CARRIED OUT IN A PARTICULAR MANNER IS IRR ELEVANT, AS HAS BEEN HELD IN BOTH PONNI SUGAR AND SAHNEY STE EL. MR. GANESH, LEARNED SENIOR COUNSEL, ALSO SOUGHT TO RELY UPON A JUDGMENT OF THE JAMMU AND KASHMIR HIGH COURT IN SHRI BALAJI ALLOYS VS. C.I.T. (2011) 333 I.T.R. 335 . WHILE CONSIDERING THE SCHEME OF REFUND OF EXCISE DUTY AND INTEREST SUBSIDY IN THAT CASE, IT WAS HELD THAT THE SCHEME WAS CAPITAL IN NATURE, DESPITE THE FACT THAT THE IN CENTIVES WERE NOT AVAILABLE UNLESS AND UNTIL COMMERCIAL PROD UCTION HAS STARTED, AND THAT THE INCENTIVES IN THE FORM OF EXCISE DUTY OR INTEREST SUBSIDY WERE NOT GIVEN TO THE ASSE SSEE EXPRESSLY FOR THE PURPOSE OF PURCHASING CAPITAL ASS ETS OR FOR THE PURPOSE OF PURCHASING MACHINERY. AFTER SETTING OUT BOTH THE SUPREME COURT JUDGMENTS REFERRED TO HEREINABOVE, THE HIGH COURT FOUND THAT THE CONCESSIONS WERE ISSUED IN ORDER TO ACHIEVE THE TWI N 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 16 OBJECTS OF ACCELERATION OF INDUSTRIAL DEVELOPMENT I N THE STATE OF JAMMU AND KASHMIR AND GENERATION OF EMPLOYMENT IN THE SAID STATE. THUS CONSIDERED, IT W AS OBVIOUS THAT THE INCENTIVES WOULD HAVE TO BE HELD C APITAL AND NOT REVENUE. MR. GANESH, LEARNED SENIOR COUNSEL , POINTED OUT THAT BY AN ORDER DATED 19.04.2016, THIS COURT STATED THAT THE ISSUE RAISED IN THOSE APPEALS WAS C OVERED, INTER ALIA, BY THE JUDGMENT IN PONNI SUGARS, AND TH E APPEALS WERE, THEREFORE, DISMISSED. WE HAVE NO HESITATION IN HOLDING THAT THE FINDING O F THE JAMMU AND KASHMIR HIGH COURT ON THE FACTS OF THE INCENTIVE SUBSIDY CONTAINED IN THAT CASE IS ABSOLUT ELY CORRECT. IN THAT ONCE THE OBJECT OF THE SUBSIDY WAS TO INDUSTRIALIZE THE STATE AND TO GENERATE EMPLOYMENT IN THE STATE, THE FACT THAT THE SUBSIDY TOOK A PARTICULAR FORM AND THE FACT THAT IT WAS GRANTED ONLY AFTER COMMENCEMEN T OF PRODUCTION WOULD MAKE NO DIFFERENCE . 15. WE MAY FURTHER ADD HERE THAT THE DECISION OF TH E HON'BLE JAMMU & KASHMIR HIGH COURT IN THE CASE OF CIT VS. SHRI BALAJI ALLOYS & ORS (SUPRA) HAS BEEN UPHELD BY THE HON'B LE SUPREME COURT VIDE ITS DECISION DATED 19.12.2016 REPORTED I N (2016) 95 CCH 0249 SCC / (2016) 138 DTR 0036 (SC). 16. IN VIEW OF THIS PROPOSITION OF LAW LAID DOWN BY THE HON'BLE SUPREME COURT, THE AFORESAID RECEIPTS OF THE ASSESS EE ON ACCOUNT OF SUBSIDY, EXCISE DUTY REFUND AND INTEREST REFUND ARE HELD TO BE CAPITAL IN NATURE AND NOT TAXABLE. SINCE THE RECEIP TS HAVE BEEN HELD TO BE CAPITAL IN NATURE, HENCE, NO ADDITION IS ATTRACTED ON ACCOUNT OF THESE RECEIPTS INTO THE INCOME OF THE AS SESSEE. 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 17 WE, THEREFORE, DO NOT FIND ANY INFIRMITY IT THE ORD ER OF THE CIT(A) AND, THEREFORE, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 17. GROUND NO.2 . - IN THIS GROUND THE REVENUE HAS AGITATED THE ACTION OF THE CIT(A) IN DIRECTING THE ASSESSING OF FICER TO RECALCULATE THE DISALLOWANCE U/S 14A TAKING INTO CONSIDERATIO N THE INVESTMENT IN IIFL BONDS ONLY. 18. WHILE ADJUDICATING THE APPEAL OF THE ASSESSEE WE HAVE ALREADY DELETED THE ADDITIONS MADE BY THE ASSESSING OFFICER AND ALSO EVEN CONFIRMED BY CIT(A) ON THIS ISSUE. IN VIEW OF OUR FINDINGS GIVEN ABOVE, THERE IS NO MERIT IN THE GROUND OF APPEAL AN D THE SAME IS ACCORDINGLY DISMISSED. ITA NOS.482/CHD/2016 & 743/CHD./2016 (A.Y.2012-13) - 19. NOW COMING TO THE SOLE ISSUE RAISED IN BOTH TH E CROSS APPEALS WHICH IS RELATING OF THE DISALLOWANCE U/S 14A RE AD WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE ASSESSEE HAS COME IN APPEAL AGAINST THE ACTION OF THE CIT(A) IN DIRECTING THE ASSESSING OFFICER TO CALCU LATE THE DISALLOWANCE U/S 14A READ WITH RULE 8D TAKING INT O CONSIDERATION THE INVESTMENT WHICH WAS CAPABLE OF YIELDING TAXABL E INCOME WHEREAS THE REVENUE HAS AGITATED THE ACTION OF THE CIT(A) IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE INVE STMENT NOT YIELDING EXEMPT INCOME. 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 18 20. THE FACTS FOR THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS OF THE CASE FOR ASSESSMENT YEAR 2011-12 (ITA NO. 481/CHD/2016) AS DISCUSSED ABOVE EXCEPT THAT DURING THE YEAR THE ASSESSEE HAD MADE ONE NEW INVESTMENT OF RS. 108.75 LACS IN IRFC NCB. INCOME FROM REST OF THE INTERMENTS MADE BY THE ASSESSEE WAS TAXABLE. THE INVESTMENT IN BHARUCH ECO-ACQA INFRAST RUCTURE LTD, RELIANCE REGULAR SAVING FUND-GROWTH OPTION AS DISCUSSED ABOVE WAS AN OLD INVESTMENT NOT CAPABLE OF YIELDING TAX EXEMP T INCOME AS DISCUSSED IN THE ASSESSEES CASE FOR ASSESSMENT YEA R 2011-12. IT IS ALSO TO BE NOTED THAT INVESTMENT IN IRFC NCB OF R S. 1023.10 LACS HAS BEEN WITHDRAWN WHEREAS AN INVESTMENT OF RS. 108 .75 LACS WAS MADE IN IFRC NCB. THE ASSESSEE DURING THE YEAR EAR NED EXEMPT INCOME OF RS. 84.08 LACS. THE ASSESSEE SUO MOTO DIS ALLOWED A SUM OF RS. 10,000/- ON ACCOUNT OF EXPENDITURE U/S 14A OF THE ACT. THE OTHER FACTS REGARDING THE OWN FUNDS OF THE ASSESSEE ARE IDENTICAL AS SHARE CAPITAL, RESERVE AND SURPLUSES OF THE ASSESSE E AT THE END OF THE YEAR HAD INCREASED I.E. ON 31.3.2012 AT RS. 25081 LACS AND THERE WAS AN INCREASE OF RS. 2449 LACS. THOUGH, THE LOAN FUND S DURING THE YEAR HAD INCREASED FROM 224 LACS AT THE END OF THE YEA R, HOWEVER, THE INVESTMENT OF THE ASSESSEE DURING THE YEAR HAVE DE CREASED. THE TOTAL RESERVE AND SURPLUS OF THE ASSESSEE WERE MUCH MORE THAT THE TOTAL INVESTMENTS, OUT OF WHICH, ONE INVESTMENT IN IRFC N CB OF RS. 108.75 LACS WAS CAPABLE OF YIELDING TAX EXEMPT IN COME. 21. IN VIEW OF THIS, OUR OBSERVATIONS MADE ABOVE WH ILE DECIDING THE APPEAL FOR ASSESSMENT YEAR 2011-2 ARE SQUARELY APPLICABLE FOR THE YEAR UNDER CONSIDERATION ALSO AND ACCORDINGLY THE D ISALLOWANCE U/S 481-482-517 & 743-CHD/-2016- VARDHMAN ACRYLICS LTD., LUDHIANA 19 14A ON THIS ISSUE IS RESTRICTED TO SUO MOTO DISALL OWANCE MADE BY THE ASSESSEE OF RS. 10,000/-. THE ADDITIONS MADE BY TH E LOWER AUTHORITIES ON THIS ISSUE ARE HEREBY ORDERED TO BE DELETED. IN VIEW OF THIS, THE APPEAL OF THE ASSESSEE IS HERE BY ALLOWED AND THAT OF THE REVENUE IS HEREBY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20.08.2018 SD/- SD/- (ANNAPURNA GUPTA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 20.08.2018 RKK COPY TO: THE APPELLANT THE RESPONDENT THE CIT THE CIT(A) THE DR