WELSPUN INDIA LTD, MUMBAI V. DCIT CEN CIR 22, MUMBAI

ITA 5376/MUM/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7711 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2008-2009
• Appeal Filed On: 18-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PARAG VYAS SPECIAL
• Assessee Lawyers: MITESH SHAH
• Keywords: Bogus purchase; Capital asset; Depreciation; Business expenditure; Search and seizure; Opportunity of being heard; Principle of natural justice; Opportunity of cross examination; Earning of tax free income; Source of fund; Proportionate interest; Question of law; Reasonable cause; Wrong claim; Accommodation entries; Competent authority; Capital receipt; Cancellation of registration; Revised return; Unabsorbed depreciation; Capital expenditure; Ignorance of law
• Section: 143(3); 153A; 14A; 115JB; 37(1); 32; 132

Judgement Text

G IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI JOGINDER SINGH, VICE PRESIDENT AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.5376, 5375,5374 AND 5373 / MUM/2015 ( / ASSESSMENT YEAR : 2008 - 09,2009 - 10, 2010 - 11 AND 2011 - 12) WELSPUN INDIA LTD., 9 TH FLOOR B WING, TRADE WORLD, KAMALA MILLS COMPOUND, SEN A PATI BAPAT MARG, LOWER PA R EL, MUMBAI - 40001 3 / V. D EPUTY C OMMISSIONER OF I NCOME T AX CENTRAL CIRCLE - 22 R.N O. 465, 4 TH FLOOR, AAYAKAR BHAWAN, MUMBAI 400020 ./ PAN :AAACW1259N ./ I.T.A. NO.5725 , 572 3, 5718 AND 5721 / MUM/2015 ( / ASSESSMENT YEAR : 2008 - 09,2009 - 10 , 2010 - 11 AND 2011 - 12) DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 3(3) CENTRAL RANGE 3, R.NO. 401, 4 TH FLOOR, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI - 400020 / V. WELSPUN INDIA LTD., 9 TH FLOOR B WING, TRADE WORLD, KAMALA MILLS COMPOUND, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI - 400013 ./ PAN :AAACW1259N ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI. MITESH SHAH REVENUE BY : SHRI. PARAG VYAS , SPECIAL COUNSEL FOR DEPARTMENT / DATE OF HEARING : 18 .10.2018 / DATE OF PRONOUNCEMENT : 11 .01.2019 I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 2 / O R D E R PER BENCH: - THESE EIGHT APPEALS ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE R EVENUE FOR ASSESSMENT YEAR S (AY S ) 2008 - 09 TO 2011 - 12. SINCE COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS FOR AY 2008 - 09 TO 2011 - 12 , THEY WERE HEARD TOGETHER AND DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE . FIRST, WE SHALL TAKE UP CROSS APPEALS FOR AY 2008 - 09 , THE ASS ESSEES APPEAL BEING ITA NO. 5376/ MUM/2015 AND THE REVENUES APPEAL BEING 5725 /MUM/2015 RESPECTIVELY, HAVE A RISEN FROM THE APPELLATE ORDER DATED 10.09.2015 PASSED BY LD. COMMISSIONER OF INCOME - TAX(APPEALS) - 51,MUMBAI AND THE APPEAL BEFORE LD. CIT(A) HAD A RISEN FROM THE ASSESSMENT ORDER DATED 26.03.2013 PASSED BY THE LEARNED A SSESSING O FFICER U/S. 143(3) R.W.S . 153A R.W.S . 144C(1) OF THE INCOME - TAX ACT ,1961 (HEREINAFTER CALLED THE ACT) . 2. THE GROUNDS OF APPEAL RAISED BY THE R EVENUE IN THE MEMO OF APP EAL FILED WITH THE INCOME - TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) IN ITA NO. 5725/MUM/2015 FOR AY 2008 - 09, READ AS UNDER: - 1) 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN HOLDING THAT BACKWARD AREA INCENTIVE CONSISTING OF SALES TAX INCENTIVE AND EXCISE DUTY BENEFITS AS CAPITAL RECEIPT.' 2) 'ALTERNATIVELY AND WITHOUT PREJUDICE, THE CIT(A) SHOULD HAVE APPLIED EXPLANATION 10 TO SEC .43( 1 ) AND SHOULD HAVE DIRECTED THAT THE BAC KWARD AREA INCENTIVE SHOULD HAVE BEEN REDUCED FROM THE ACTUAL COST.' 3) 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS. 3,59,88,823/ - MADE U/S. 14A READ WITH RULE 8D WITHOUT APPRECIATING THAT RULE 8D IS SQUARELY APPLICABLE. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF PREMATURE REDEMPTION WITHOUT APPRECIATING I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 3 THAT THE TRANSACTION IS IN THE NATURE OF SALE, EXCHANGE OR RELINQUISHMENT OF ASSETS AS WAS HELD BY THE SUPREME COURT IN ANARKALI SARABHAI VS. CIT (224 ITR 422). 4) 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION M ADE ON ACCOUNT OF BOOK PROFIT WITHOUT APPRECIATING THAT THERE IS NO BROUGHT FORWARD BOOK LOSS AVAILABLE TO THE ASSESSEE.' 5) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION MADE TO BOOK PROFIT ON ACCOUNT OF DISALLOWANCE U/S.1 4A OF THE IT ACT.' 6) THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 3 . THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE INCOME - TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAFTER CALLED THE TRIBUNAL) IN ITA NO. 5376/MUM/2015 FOR AY 2008 - 09, READ AS UNDER: - THE GROUND OR GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1 .A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE L D. CIT(A) ERRED IN CONFIRMING THE ADDITION TO THE EXTENT OF RS. 32,94,347/ - MADE BY THE AO TO THE INCOME OF THE APPELLANT, BY WAY OF DISALLOWING CERTAIN EXPENDITURE CLAIMED TO HAVE BEEN INCURRED RELATING TO EXEMPT INCOME INVOKING THE PROVISIO NS OF SECTION 14A. B) THE L D. CIT(A) FAILED TO APPRECIATE THAT: - (I) HAVING REGARD TO THE ACCOUNTS THERE IS NO REASON AND BASIS IN REACHING TO DIS - SATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT THAT NO EXPENDITURE WAS INCURRED IN R ELATIO N TO DIVIDEND INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME; AND (II) THE INVESTMENT IN SHARES WAS MADE OUT OF BUSINESS STRATEGY AND THERE WAS NO MAJOR CHANGE IN SUCH INVESTMENT. C} IN REACHING TO THE CONCLUSION AND CONFIRMING SUCH ADDI TION THE L D. C1T(A) OMITTED TO CONSIDER RELEVANT FACTORS, CONSIDERATIONS, PRINCIPLES AND EVIDENCES WHILE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 4 HE WAS OVERWHELMED, INFLUENCED AND PREJUDICED BY IRRELEVANT CONSIDERATIONS AND FACTORS. 2. ON THE FACTS AND IN THE CI RCUMSTANCES OF THE CASE AND IN LAW, THE L D. CI T(A) ERRED IN CONFIRMING THE ADDITION TO THE EXTENT OF RS. 1 ,14,25,322/ - (I.E. RS 81,30,975/ - + RS. 32,94,347/ - ) MADE BY THE AO TO THE BOOK PROFIT OF THE APPELLANT BY WAY OF ADDING BACK DISALLOWANCE MADE U/S. 1 4A BY THE APPELLANT AND FURTHER DISALLOWANCE MADE BY THE AO AND THEREBY ERRED IN ENHANCING THE BOOK PROFIT ARTIFICIALLY. 3. THE LD. CI T(A) ERRED IN HOLDING THAT LEVY OF INTEREST U/S. 234D OF THE INCOME TAX ACT, 1961 IS CONSEQUENTIAL. THE APPELLANT D ENIES ITS LIABILITY FOR SUCH INTEREST. 4 . THE LD. CI T(A) ERRED IN HOLDING THAT GROUND RAISED DISPUTING INITIATION OF TH E PENALTY PROCEEDINGS U/S.271(1 )(C) OF THE INCOME TAX ACT, 1961 IS PREMATURE. THE APPELLANT DENIES ITS LIABILITY FOR SUCH PENALTY. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE ANY OR ALL OF THE ABOVE GROUNDS OF APPEAL. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING OF TERRY TOWELS . THE SEARCH OPERATION S WERE CARRIED OUT BY REVENUE IN THE CASE OF WELSPUN GROUP OF ENTITIES U/S. 1 32 OF THE 1961 ACT ON 13 TH OCTOBER, 2010 . THE ASSESSEE WAS ALSO COVERED BY REVENUE IN THE AFORESAID SEARCHES CONDUCTED BY REVENUE U/S 132 OF THE 1961 ACT. 5. THE FIR ST ISSUE WHICH A ROSE BEFORE US COMPRISES OF CHARGEABILITY TO INCOME - TAX OF INCENTIVES BY WAY OF REFUND OF EXCISE D UTY OF RS. 3,65,47,921/ - AND EX EMPTION OF SA LES TAX TO THE TUNE OF RS. 5,75,5 6,878/ - AS REVENUE RECEIPT OR THE SAME ARE CAPITAL RECEIPTS NOT EXIGIBLE TO INCOME - TAX . IT SO HAPPENED THAT KUTCH D ISTRICT IN GUJARAT WAS HIT BY DEVASTATING EARTHQUAKE ON 26 TH JAN UARY , 2001 AND I N OR DER TO REDEVELOP AND REHABILITATE KUTCH D ISTRICT OF GUJARAT , TH E CENTRAL AND STATE GOVERNMENT FORMULATED POLICY /SCHEMES TO ENCOURAGE SETTING UP OF NEW INDUSTRY IN SAID KUTCH D ISTRICT WHEREIN CERTAIN INCENTIVE S BY WAY OF REFUND OF EXCISE DUTY AS WELL SALES TAX INCENTIVES I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 5 WERE GIVEN BY CENTRAL AND STATE GOVERNMENT TO TH E ENTREPRENEURS FOR SETTING UP NEW INDUSTRY IN KUTCH DISTRICT , AS DETAILED BELOW: - NOTIFICATION NO 39 /2001 - CENTRAL EXCISE. IN EXERCISE OF THE POWERS CONFERRED BY SUB - SECTION (1) OF SECTION 5A OF THE CENTRAL EXCISE ACT, 1944 (1 OF 1944), READ WITH SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (GOODS OF SPECIAL IMPORTANCE) ACT, 1957 (58 OF 1957) AND SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (TEXTILES AND TEXTILE ARTICLES) ACT, 1978 ( 40 OF 1978), THE CENTRAL GO VERNMENT BEING SATISFIED THAT IT IS NECESSARY THE PUBLIC INTEREST SO TO DO, HEREBY EXEMPTS THE GOODS SPECIFIED IN THE FIRST SCHEDULE TO THE CENTRAL EXCISE TARIFF ACT,1985 (5 OF 1986) OTHER THAN GOODS SPECIFIED IN THE ANNEXURE APPENDED TO THIS NOTIFICATION AND CLEARED FROM A UNIT LOCATED IN KUTCH DISTRICT OF GUJARAT FROM SO MUCH OF THE DUTY OF EXCISE OR THE ADDITIONAL DUTY OF EXCISE, AS THE CASE MAY BE, LEVIABLE. THE EXEMPTION CONTAINED IN THIS NOTIFICATION SHALL BE SUBJECT TO THE FOLLOWING CONDITIONS, NAME LY; - (I) IT SHALL APPLY ONLY TO NEW INDUSTRIAL UNITS, THAT IS TO SAY, UNITS WHICH ARE SET UP ON OR AFTER THE DATE OF PUBLICATION OF THIS NOTIFICATION IN THE OFFICIAL GAZETTE BUT NOT LATER THAN THE 31ST DAY OF DECEMBER, 2004; (II) IN ORDER TO AVAIL OF THIS EXEMPTION, THE MANUFACTURER SHALL PRODUCE A CERTIFICATE FROM A COMMITTEE CONSISTING OF THE CHIEF COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD AND THE PRINCIPAL SECRETARY TO THE GOVERNMENT OF GUJARAT, DEPARTMENT OF INDUSTRY, TO THE JURISDICTIONAL ASSI STANT COMMISSIONER OR THE DEPUTY COMMISSIONER OF CENTRAL EXCISE, AS THE CASE MAY BE, THAT THE UNIT IN RESPECT OF WHICH EXEMPTION IS CLAIMED IS A NEW UNIT AND HAS BEEN SET UP DURING THE TIME PERIOD SPECIFIED IN CONDITION (I) ABOVE. (III) BEFORE EFFECTING CLEARANCES UNDER THIS NOTIFICATION, THE MANUFACTURER SHALL ALSO FURNISH A DECLARATION REGARDING THE ORIGINAL VALUE OF INVESTMENT IN PLANT AND MACHINERY INSTALLED IN THE FACTORY AS ON THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, TO THE ASSISTANT COMM ISSIONER OR THE DEPUTY COMMISSIONER OF CENTRAL EXCISE, AS THE CASE MAY BE. (IV) THE MANUFACTURER SHALL ALSO PRODUCE A CERTIFICATE FROM THE SAID COMMITTEE CONFIRMING THE ORIGINAL VALUE OF INVESTMENT AND SUCH A CERTIFICATE SHALL BE PRODUCED WITHIN A PERIOD OF ONE MONTH FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, OR SU CH EXTENDED PERIOD AS THE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 6 SAID ASSISTANT COMMISSIONER OR DEPUTY COMMISSIONER MAY ALLOW. V) IN CASE ON THE BASIS OF SUCH CERTIFICATION, OR OTHERWISE, THE ORIGINAL VALUE OF INVESTMENT IN PLANT AND MACHINERY, (A) IS FOUND TO BE LESS THAN RUPEES TWENTY C RORE BUT WAS DECLARED TO BE RUPEES TWENTY CRORE OR MORE, THE MANUFACTURER SHALL BE LIABLE TO PAY BACK THE ENTIRE AMOUNT OF DUTY EXEMPTION AVAILED UNDER THE NOTIFICATION ALONGWITH INTEREST AT TH E RATE OF TWENTY FOUR PER CENT PER ANNUM AS IF NO EXEMPTION WER E AVAILABLE; OR (B) IS FOUND TO BE LESS THAN THE DECLARED VALUE AND WAS DECLA RED TO BE BELOW RUPEES TWENTY CRORE, THE MANUFACTURE SHALL BE LIABLE TO PAY DUTY ON THE GOODS CLEARED ,IF ANY, IN EXCESS OF TWICE THE ACTUAL VALUE OF ORIGINAL INVES TMENT IN EACH OF THE YEARS DURING WHICH EXEMPTION HAS BEEN CLAIMED UNDER THIS NOTIFICATION ALONGWITH INTEREST AT THE RATE OF TWENTY FOUR PER CENT PER ANNUM , AS IF NO EXEMPTION WERE AVAILABLE TO THOSE CLEARANCES UNDER THIS NOTIFICATION. (VI) THE EXEMPTION SHALL APPLY FOR A PERIOD NOT EXCEEDING FIVE YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION BY T HE UNIT . WITHOUT ANY CAP. THE SALES TAX INCENTIVE SCHEME FORMULATED BY STATE GOVERNMENT OF GUJARAT IS DETAILED HEREUNDER: SALES T AX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT THE ECONOMIC ACTIVITIES IN THE DISTRICT OF KUTCH CAME TO A STANDSTILL ON ACCOUNT OF DEVASTATING EARTHQUAKE IN THE STATE ON 26TH JANUARY, 2001. NEW EMPLOYMENT OPPORTUNITIES COULD BE CREATED IF NEW INVESTMENT T AKE S PLACE. THE GOVERNMENT IS COMMITTED TO ATTRACTING INDUSTRIES IN THE DISTRICT TO MAKE THE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. GOVERNMENT OF INDIA HAVE ANNOUNCED EXCISE DUTY EXEMPTION TO NEW INDUSTRIES TO PROMOTE LARGE SCALE INVESTMENT IN THE DISTRICT , ALONG WITH WHICH THE STATE GOVERNMENT HAS ALSO DECIDED TO ANNOUNCE THE SCHEME OF SALES TAX INCENTIVE. SINCE THE SCHEME IS AIMED AT MAKING THE ECONOMIC ENVIRONMENT OF KUTCH DISTRICT LIVE, IT HAS BEEN DECIDED TO CONFINE THE SAME ONLY TO KUTCH DISTRICT. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 7 CONDITIONS UNDER THIS SCHEME, FOLLOWING CONDITIONS SHALL BE APPLICABLE TO SALES TAX INCENTIVES. IN THE CASE OF VIOLATION OF ONE OR MORE CONDITIONS, THE AMOUNT OF SALES TAX INCENTIVES AVAILED OF SHALL BE RECOVERED AS ARREARS OF LAND REVENUE. (A) THE IN DUSTRIAL UNIT SHALL HAVE TO GIVE A CLEAR UNDERTAKING THAT IT SHALL NOT TRANSFER OR DISPOSE OF THE ASSETS IN ANY MANNER, TILL THE EXPIRY OF THE ELIGIBILITY PERIOD OF INCENTIVES. (B) THE INDUSTRIAL UNIT AVAILING OF THE INCENTIVES UNDER THE SCHEME, SHALL HAVE TO INSTALL, EFFECTIVELY USE AND MAINTAIN THE POLLUTION CONTROL EQUIPMENTS AS PER THE STANDARDS PRESCRIBED AND APPROVED BY THE COMPETENT AUTHORITY. (C) THE INDUSTRIAL UNIT SHALL HAVE TO CONTINUE PRODUCTION UP TO THE PERIOD OF ELIGIBILITY. HOWEVER, IF THE UNIT DOES NOT REMAIN IN CONTINUOUS PRODUCTION ON ACCOUNT OF THE REASONS BEYOND THE CONTROL OF THE MANAGEMENT, THE UNIT SHALL PRESENT ITS CASE BEFORE THE STATE LEVEL COMMITTEE AS AN INDIVIDUAL CASE ON WHICH THE COMMITTEE CAN TAKE DECISION TO WAIVE THE PERIOD OF DISCONTINUATION OF PRODUCTION BASED ON THE REPRESENTATION MADE. (D) THE INDUSTRIAL UNIT SHALL HAVE TO FURNISH THE DETAILS OF PRODUCTION, EMPLOYMENT AND OTHER INFORMATION EVERY YEAR BEFORE 30TH JUNE OR FROM TIME TO TIME AS SOUGHT BY THE STATE GOVERNMENT. (E) AS PER THE EMPLOYMENT POLICY OF THE GOVERNMENT OF GUJARAT, THE UNIT AVAILING OF THE INCENTIVES, WILL HAVE TO RECRUIT LOCAL PERSONS FOR A MINIMUM OF 85% OF THE TOT AL POSTS AND FOR A MINIMUM OF 60 % OF THE MANAGERIAL AND SUPERVISORY POSTS. THE UNIT SHALL HAVE TO SUBMIT THE DETAILS OF FULFILLING THE CONDITIONS OF LOCAL EMPLOYMENT TO THE CONCERNED AUTHORITY GRANTING THE INCENTIVES TO HIS SATISFACTION. THE PERCENTAGE OF THE ABOVE MENTIONED EMPLOYMENT WILL HAVE TO BE MAINTAINED BY THE INDUSTRIA L UNIT DURING THE ELIGIBILITY PERIOD OF THE INCENTIVES. OTHERWISE, THE AMOUNT OF INCENTIVES AVAILED BY THE UNIT CAN BE RECOVERED AS ARREARS OF LAND REVENUE. (F) UNIT WILL HAVE TO INVEST THE AMOUNT EQUIVALENT TO 50% OF THE SALES TAX INCENTIVES AVAILED IN THE NEW PROJECTS IN THE STATE WITHIN A PERIOD OF 10 YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. (G) UNIT OPTING FOR SALES TAX DEFERMENT SCHEME FOR THE PURPOSE OF DEFERRED AMOUNT SHALL HAVE TO GIVE A PERSONAL I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 8 UNDERTAKING IN THE FOR M OF SECURITY BOND AS PRESCRIBED VIDE RESOLUTION NO.INC - 1087 - 2138 - I DATED THE 1ST AUGUST, 1990 OR EQUITABLE CHARGE, SECOND CHARGE. (H) THE UNIT AVAILING OF INCENTIVES UNDER ANY OTHER SCHEME OF THE STATE GOVERNMENT WILL NOT BE ELIGIBLE TO RECEIVE BENEFI TS UNDER THIS SCHEME. (I) EXPANSION, DIVERSIFICATION OR MODERNIZATION OF THE EXISTING INDUSTRIES WILL NOT BE CONSIDERED ELIGIBLE FOR THE BENEFITS UNDER THIS SCHEME. THE ASSESSEE HAS UNDISPUTEDLY FULFILLED THE CONDITIONS OF THE SE SCHEMES FORMULATED B Y CENTRAL AND STATE GOVERNMENT TO AVAIL THE AFORESAID INCENTIVES IN THE FORM OF REFUND OF CENTRAL EXCISE AND SALES TAX INCENTIVES , WHICH AGGREGATED TO RS.9,41,04,799/ - DURING THE YEAR UNDER CONSIDERATION . T HE ONLY QUESTION BEFORE US IS WHETHER THE AFORE SAID INCENTIVES RECEIVED BY THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR UNDER CONSIDERATION WERE CAPITAL RECEIPTS NOT EXIGIBLE TO INCOME - TAX OR WERE THESE REV ENUE RECEIPTS CHARGEABLE TO TAX . T HE AO HAD BROUGHT THE SAID INCENTIVES TO TAX BY TREATIN G THE SAME AS REVENUE RECEIPTS , WHILE IN THE OPINION OF LD. CIT(A) , THESE RECEIPTS WERE IN THE NATURE OF CAPITAL RECEIPTS NOT EXIGIBLE TO INCOME - TAX, WHEREIN LD. CIT(A) VIDE APPELLATE ORDER DATED 10.09.2015 HAS HELD AS UNDER: - 7.6 I HAVE CONSIDERED THE FACTS OF THE CASE, REASONS ASSIGNED BY THE AO AND VARIOUS SUBMISSIONS MADE ON BEHALF OF THE APPELLANT. THE 'SUBSIDY' IS A GRANT OF MONEY FROM A GOVERNMENT TO A PRIVATE ENTERPRISE CONSIDERED AS BENEFICIAL TO THE PUBLIC' FOR BRINGING OVERALL DEVELOPMENT IN VARIOUS PARTS OF THE COUNTRY IN THE FIELD OF AGRICULTURE, INDUSTRY, TRADE, GENERATION OF EMPLOYMENT, ETC. THE CENTRAL GOV ERNMENT GRANTED 10 PER CENT CENTRAL OUTRIGHT GRANT OF SUBSIDY UNDER SCHEME OF 1971 FOR INDUSTRIAL UNITS TO BE SET UP IN CERTAIN SELECTED BACKWARD DISTRICTS/AREAS. PAYMENT OF SUBSIDY UNDER THE SCHEME IS PRIMARILY GIVEN FOR HELPING THE GROWTH OF INDUSTRIES A ND NOT FOR SUPPLEMENTING THEIR PROFITS. THE SUPREME COURT IN THE CASE OF V.S. S.V. MEENAKSHI ACHI V. CIT [1966] 60 ITR 253 HELD THAT THE CHARACTER OF THE SUBSIDY IN THE HANDS OF THE RECIPIENT IS TO BE DETERMINED HAVING REGARD TO THE PURPOSE FOR WHICH IT IS GIVEN. THIS PRINCIPLE IS REITERATED BY I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 9 THE SUPREME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. V. CIT [1997] 228 ITR 253. IT IS FURTHER HELD THAT IF THE PURPOSE OF THE SUBSIDY IS TO HELP THE ASSESSEE TO SET UP ITS BUSINESS OR COMPLETE A PROJECT, THE SUBSIDY IS TO BE TREATED AS HAVING BEEN RECEIVED FOR CAPITAL PURPOSES, WHEREAS, IF THE SUBSIDY IS GIVEN TO THE ASSESSEE FOR ASSISTING HIM IN CARRYING OUT THE BUSINESS OPERATIONS AND IS GIVEN ONLY AFTER COMMENCEMENT OF PRODUCTION, SUCH SUBSIDY IS TO BE TREATED AS ASSISTANCE FOR THE PURPOSE OF THE TRADE AND WOULD CONSTITUTE REVENUE RECEIPT. THOUGH THE SUPREME COURT HELD THAT THE SUBSIDY RECEIVED WAS REVENUE IN NATURE, IT LAID DOWN THE GUIDING PRINCIPLES TO DETERMINE THE NATURE, WHETHER CAPITAL RECEIPT OR A REVENUE RECEIPT. THE OBSERVATIONS MADE BY THE SUPREME COURT IN THIS REGARD ARE : . IT IS NOT THE SOURCE FROM WHICH THE AMOUNT IS PAID TO THE ASSESSEE, WHICH IS DETERMINATIVE OF THE QUESTION WHETHER THE SUBSIDY PAYMENTS ARE OF REVENUE OR CA PITAL NATURE. THE FIRST PROPOSITION STATED BY VISCOUNT SIMON IN OSTIME'S CASE [1946] 14 ITR (SUPPL.) 45 (HL) IS THAT IF PAYMENTS IN THE NATURE OF SUBSIDY FROM PUBLIC FUNDS ARE MADE TO THE ASSESSEE TO ASSIST HIM IN CARRYING HIS TRADE OR BUSINESS, T HEY ARE TRADE RECEIPTS. THE SALES TAX UPON COLLECTION FORMS PART OF THE PUBLIC FUNDS OF THE STATE. IF ANY SUBSIDY IS GIVEN, THE CHARACTER OF THE SUBSIDY IN THE HANDS OF THE RECIPIENT - WHETHER REVENUE OR CAPITAL - WILL HAVE TO BE DETERMINED BY HAVING REGARD TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. IF IT IS GIVEN BY WAY OF ASSISTANCE TO THE ASSESSEE IN CARRYING ON OF HIS TRADE OR BUSINESS, IT HAS TO BE TREATED AS TRADING RECEIPT. THE SOURCE OF THE FUND IS QUITE IMMATERIAL.' (P. 262) I T FURTHER OBSERVED THAT: 'FOR EXAMPLE, IF THE SCHEME WAS THAT THE ASSESSEE WILL BE GIVEN REFUND OF SALES TAX ON PURCHASE OF MACHINERY AS WELL AS ON RAW MATERIALS TO ENABLE THE ASSESSEE TO ACQUIRE NEW PLANT AND MACHINERY FOR FURTHER EXPAN SION OF ITS MANUFACTURING CAPACITY IN A BACKWARD AREA, THE ENTIRE SUBSIDY MUST BE HELD TO BE A CAPITAL IN THE HANDS OF THE ASSESSEE. IT WILL NOT BE OPEN TO THE REVENUE TO CONTEND THAT THE REFUND OF SALES TAX PAID ON RAW MATERIALS OR FINISHED PRODUCTS MUST BE TREATED AS REVENUE RECEIPT I N THE HANDS OF THE ASSESSEE. IN BOTH THE CASES, THE GOVERNMENT IS PAYING OUT OF PUBLIC FUNDS TO THE ASSESSEE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 10 FOR A DEFINITE PURPOSE. IF THE PURPOSE IS TO HELP THE ASSESSEE TO SET UP ITS BUSINESS OR COMPLETE A PROJECT AS IN SEAHAM HARBOUR DOCK CO.'S CASE [1931] 16 TC 333 (HL); THE MONIES MUST BE TREATED AS HAVING BEEN RECEIVED FOR A CAPITAL PURPOSE. BUT IF MONIES ARE GIVEN TO THE ASSESSEE FOR ASSISTING HIM IN CARRYING OUT THE BUSINESS OPERATION AND THE MONEY IS GIVEN ONLY AFTER AND CONDITIONAL UPON COMMENCEMENT OF PRODUCTION, SUCH SUBSIDIES MUST BE TREATED AS ASSISTANCE FOR THE PURPOSE OF THE TRADE.' (P. 262) IT IS, THEREFORE, CLEAR THAT WHERE THE INCENTIVE IS FOR THE PURPOSE FOR SETTING UP A BUSINESS OR COMPLETE A PROJECT, SUCH INCENTIVE NECESSARILY HAS TO BE HELD IN THE NATURE OF A CAPITAL RECEIPT. BUT IF THE ASSISTANCE HAS BEEN GIVEN FOR CARRYING OUT THE DAY - TO - DAY OPERATIONS AND IT IS GIVEN AFTER COMMENCEMENT OF PRODUCTION, SUCH INCENTIVE HAS TO BE TREATED AS REVENUE IN NATURE, LIABLE TO TAX. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DY. CIT V. RELIANCE INDUSTRIES LTD. [2004] 88 ITD 273 (MUM.) DEALT WITH A CASE OF SALES TAX SUBSIDY. IN THIS CASE, THE ASSESSEE'S PATALGANGA UNIT WAS ELIGIBLE FOR THE INCENTIVES ANNOUN CED BY THE GOVERNMENT OF MAHARASHTRA UNDER ITS SCHEME OF YEAR 1979, WHEREIN THE ASSESSEE WAS EXEMPT FROM LIABILITY FOR PAYMENT OF SALES TAX FOR A PERIOD OF 5 YEARS. THE ASSESSEE CLAIMED THE SALES TAX EXEMPTION AMOUNT AS CAPITAL RECEIPT NOT LIABLE TO TAX. T HE AFORESAID CLAIM WAS REJECTED BOTH BY THE AO AND THE COMMISSIONER (APPEALS) BECAUSE (I) UNDER THE SCHEME ANNOUNCED BY THE STATE GOVERNMENT, THE ASSESSEE WAS NOT REQUIRED TO CHARGE ANY SALES TAX FROM ITS CUSTOMERS AND TO PAY ANY PURCHASE TAX ON ITS PURCHA SES; (II) BECAUSE NO AMOUNT OF SUBSIDY EITHER IN CASH OR IN KIND HAD BEEN GIVEN BY THE GOVERNMENT; (III) BECAUSE IN THE INVOICES, THE ASSESSEE DID NOT CHARGE ANY AMOUNT SEPARATELY UNDER THE HEAD 'SALES'; (IV) BECAUSE UNDER THE SCHEME, AT NO POINT OF TIME, WAS THE ASSESSEE REQUIRED TO PAY ANY SALES TAX TO THE GOVERNMENT, AND (V) BECAUSE THE ASSESSEE DID NOT MAINTAIN ANY SEPARATE SALES TAX ACCOUNT, ANY SEPARATE INCENTIVE ACCOUNT NOR HAD SHOWN ANY AMOUNT AS OUTSTANDING LIABILITY UNDER THE HEAD. THE SPECIAL BEN CH OF THE TRIBUNAL, RELYING ON THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. (SUPRA) CAME TO THE CONCLUSION THAT SINCE THE INCENTIVES WERE GIVEN FOR BRINGING ABOUT ADDITION TO NECESSARY INFRASTRUCTURE IN PRO CESSING/DEVELOPING THE BACKWARD AREA, THE SAME WOULD BE IN THE NATURE OF CAPITAL RECEIPT NOT LIABLE TO TAX. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 11 THE SPECIAL BENCH, ACCEPTING THE CONTENTION OF THE ASSESSEE, THUS, HELD THAT THE COLLECTIONS MADE BY THE ASSESSEE WOULD BE DEEMED TO INCLUDE THE SA LES TAX AMOUNT AND SINCE THE ASSESSEE WAS EXEMPTED FROM THE PAYMENT OF SALES TAX, THE NOTIONAL AMOUNT OF SUCH SALES TAX SHOULD BE REDUCED FROM THE REVENUES FOR THE PURPOSE OF COMPUTING THE TOTAL INCOME OF THE ASSESSEE. THE BOMBAY HIGH COURT HAS APPROVED TH E DECISION OF SPECIAL BENCH IN THE CASE OF CIT V/S. RELIANCE INDUSTRIES LTD. 339 ITR 632 (BOM). HOWEVER THE SUPREME COURT IN SLP(C) NO.23433/2011 SET ASIDE THE MATTER TO THE HIGH COURT CONSIDER THE QUESTIONS FORMULATED BY THE SUPREME COURT. I N THE CASE OF THE APPELLANT THE CIT(A) - 13, MUMBAI VIDE ORDER DATED 13 - 5 - 2010 FOR THE A.Y.2006 - 07 HAS HELD THESE INCENTIVES TO BE CAPITAL RECEIPTS AND THE DEPARTMENT HAS NOT FILED ANY SECOND APPEAL AGAINST THE ORDER OF THE CIT(A) - 13, MUMBAI. THE APPELLANT HAS POINTED OUT THAT THE ISSUE OF BACKWARD INCENTIVES HAS RECENTLY CAME BEFORE THE ITAT, MUMBAI IN THE CASE OF M/S. WELSPUN GUJARAT STAHL ROHREN LTD. (NOW M/S. WELSPUN CORP LTD.), A GROUP COMPANY OF THE APPELLANT FOR THE A.Y.2006 - 07 WHERE THE ITAT, MUMBAI HAS ALLOWED THE APPEAL IN FAVOUR OF THE ASSESSEE ON THE SAME FACTS O F THE CASE VIDE ORDER ITA NO.5608/M/2010 DATED 6 - 11 - 2013. THE RELEVANT PORTION OF THE ORDER READS AS UNDER: - '8. THE SECOND ISSUE RELATES TO THE CAPITAL NATURE OF THE INCENTIVES RECEIVED BY THE ASSESSEE . IN THIS REGARD, IT IS THE CASE OF THE REVENUE THAT THE SAID INCENTIVE OF RS.77.51 CRS (ROUND OFF TO NEAREST LAKHS) CONSTITUTES A 'REVENUE RECEIPT'. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS THAT THE SAME IS TREATED AS 'CAPITAL RECEIPT'. DURING THE P ROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, CIT(A) RELIED ON THE DECISION OF THE SPECIAL BENCH, ITAT IN THE CASE OF DCIT VS. RELIANCE INDUSTRIES LTD (88 ITD 273) (SB) (MUM.) AND ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE. REVENUE CARRIED THE MAT TER IN APPEAL BEFORE THE TRIBUNAL BY RAISING THE ABOVE MENTIONED GROUND NO.2, 2A AND 2B. 9. DURING THE PROCEEDINGS BEFORE US, LD COUNSEL FOR THE ASSESSEE DEMONSTRATED THAT THE SAID SPECIAL BENCH DECISION OF THE TRIBUNAL TRAVELLED TO THE HON'BLE BOMBAY HIGH COURT, WHEREIN THE QUESTION NO.(D) RELATES TO THE PRESENT ISSUE I.E., '[D] WHETHER ON TH E FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE TRIBUNAL WAS RIGHT IN HOLDING THAT SALE - TAX INCENTIVE IS A CAPITAL RECEIPT?' WOULD NOT ARISE. IN THAT SENSE, THE SPECIAL BENCH DECISION ON THIS ISSUE OF CAPITAL NATURE OF THE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 12 INCENTIVE RE MAINED UNALTERED. FURTHER, IN RESPONSE TO THE QUERY FROM THE BENCH ON THE SUBS EQUENT DEVELOPMENT, IF ANY, ON T HE SAID QUESTION 'D', LD COUNSEL FAIRLY MENTIONED THAT THE SAID QUESTION WAS REMANDED BY THE HON'BLE SUPREME COURT, VIDE CIVIL APPEAL NO.7769/ OF 2011 (ARISING OUT OF S.L.P. (C) NO.9860 OF 2010), TO THE HON'BLE HIGH COURT OF BOMBAY TO DECIDE THE QUESTION IN ACCORDANCE WITH THE LAW. THUS, THE SAID CONCLUSION OF THE SPECIAL BENCH, WHICH IS FOLLOWED BY THE CIT(A), WHILE GRANTING RELIEF TO THE ASSESSEE, REMAINS UNALTERED. THEREFORE, THE PRESENT IMPUGNED ORDER OF THE CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. 10. ON THE OTHER HAND, LD DR RELIED HEAVILY ON THE ORDER OF THE AO. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE MATERIAL PLACED BEFORE US ON THIS ISSUE. ON PERUSAL OF THE ORDER CITED BEFORE US, WE FIND THAT THE ARGUMENT MADE BY THE LD COUNSEL IS AN ORDER, AND THEREFORE, THE CITED DECISION OF THE SPECIAL BENCH IN THE ASSESSEE'S OWN CASE IS UPHELD. THEREFORE, IN OUR OPINION, THE ORDER OF THE CIT(A) IS FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUNDS NO.2, 2A AND 2B RAISED BY THE REVENUE ARE DISMISSED.' I HAVE GIVEN ANXIOUS THOUGHT ON ALTERNATE PLEA OF THE AO . IT IS WELL ESTABLISHED THAT DEPRECIATION IS ALLOWED ON THE ACTUAL COST INCURRED BY AN ASSESSEE FOR ACQUIRING THE ASSET. UNDER SECTION 43(1), 'ACTUAL COST' MEANS 'THE 'ACTUAL COST' OF THE ASSETS TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF , IF ANY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY'. THUS, IF A PORTION OF THE COST IS MET DIRECTLY OR INDIRECTLY BY ANY PERSON OR AUTHORITY, THE 'ACTUAL COST' WOULD, FOR THE PURPOSES OF THE AFORESAID SECTIONS, BE COST MINUS THAT COST MET BY OTHERS, THAT IS, SUBSIDIES. EXPLANATION 10 TO SECTION 43(1) WAS INTRODUCED WITH EFFECT FROM APRIL 1, 1999 TO PROVIDE FOR REDUCTION OF AMOUNT WHICH IS MET IN THE FORM OF SUBSIDY WHERE COST OF ANY ASSET IS MET DIRECTLY OR INDIRECTLY BY THE GOVERNMENT OR ANY AUTHORITY IN THE FORM OF SUBSIDY OR GRANT OR REIMBURSEMENT, THEN COST TO THAT EXTENT IS NOT LIABLE TO BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. WHERE THE SUBSIDY OR GRANT OR REIMBURSEMENT CANNOT BE RELATED DIRECTLY TO T HE ASSET ACQUIRED, A PROPORTIONATE AMOUNT IS TO BE EXCLUDED FROM COMPUTING THE ACTUAL COST OF THE ASSET TO THE ASSESSEE. I I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 13 HAVE CONSIDERED EXPLANATION 10 TO SECTION 43(1). HOWEVER, IN THE CASE OF THE APPELLANT SUBSIDY IS GIVEN IN THE FORM OF REIMBURSEMENT OF TAX FOR PROMOTION OF INDUSTRIAL DEVELOPMENT IN THE STATE, ECONOMIC DEVELOPMENT OF CERTAIN INDUSTRIES IN THE STATE AND GENERATION OF EMPLOYMENT AND NOT TO REIMBURSE THE COST OF ANY FIXED ASSET, THE AMOUNT SO RECEIVED CANNOT BE REDUCED FROM THE ACTUAL COS T. THE VISHAKAPATNAM BENCH OF TRIBUNAL IN THE CASE OF SASISRI EXTRACTIONS LTD. V. ASSTT, CIT [2008] 307 ITR (AT) 127, HELD THAT WHERE SUBSIDY IS RECEIVED FOR ENCOURAGING INVESTMENT IN BACKWARD AREA, EVEN THOUGH SUCH SUBSIDY IS COMPUTED WITH REFERENCE TO CO ST OF INVESTMENT IN FIXED ASSETS, THE SAME WILL NOT BE REDUCED FROM THE COST OF ASSETS BY APPLYING THE PROVISIONS OF THE EXPLANATION SINCE THE SUBSIDY WAS NOT GIVEN TO ACQUIRE ANY ASSET EITHER DIRECTLY OR INDIRECTLY AND, THUS, IT NEED NOT BE CONSIDERED FOR CALCULATION OF DEPRECIATION. SIMILAR DECISIONS ARE ALSO GIVEN IN THE FOLLOWING CASES: - ACIT V. HARINAGAR SUGAR MILLS LTD. (ITA NO.772/MUM/2012) DCIT V. ROSOI LTD. 46 TAXMANN.COM 214 (KOLKATA - TRIB) CAPITAL FOODS EXPORTS (P.) LTD. V. ACIT 28 TAXMANN.CO M 15 (MUM), INVENTA CHEMICALS LTD. V/S. ASST. CIT 42 SOT 249(HYD.) SOHAM ELECTROPLAST PVT. LTD. V/S. ITO (ITA NO.L578/PN/2008 DATED. 28.10.2010) THUS EVEN AFTER INSERTION OF EXPLANATION 10 TO SECTION 43(1) THE BASIC PRINCIPLE UNDERLYING IN THE DECISION OF THE SUPREME COURT IN THE CASE OF P. J. CHEMICALS 210 ITR 830 STILL HOLDS THE FIELD. IT IS CASH SUBSIDY WITHOUT REFERENCE TO ANY EXPENDITURE INCUR RED, IT HAS TO BE TAKEN AS DERIVED FROM SCHEME OF THE GOVERNMENT BUT IF IT IS GIVEN AS A REFUND OF EXCISE/ SALES TAX ARITHMETICALLY OF THE SAME AMOUNT, IT WOULD BE EITHER REIMBURSEMENT OF EXPENDITURE NOT AMOUNTING TO INCOME AT ALL OR IT WOULD INCREASE THE PROFITS OF THE UNDERTAKING BY OFFSETTING IT AGAINST EXPENSE AND REMOVING IT FROM DEBIT TO PROFIT OF THE UNDERTAKING, I.E., BOTH CREDIT AND DEBIT DO NOT ENTER THE PROFIT COFFERS OF THE UNDERTAKING. FOLLOWING THE ORDER OF CIT(A) - 13, MUMBAI IN THE CASE OF TH E APPELLANT FOR THE A.Y.2006 - 07 WHICH HAS NOT BEEN DISPUTED IN SECOND APPEAL BY THE DEPARTMENT AND AS SUCH REACHED TO THE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 14 FINALITY AND THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF WELSPUN GUJARAT STAHL ROHREN LTD. (NOW WELSPUN CORP LTD.) WHERE THE ITAT, MUMBAI HAS ALLOWED THE APPEAL FOR THE A.Y.2006 - 07 IN FAVOUR OF THE ASSESSEE ON THE SAME FACTS VIDE ORDER ITA NO.5608/M/2010 DATED 6 - 11 - 2013, I ALLOW THIS GROUND OF APPEAL IN FAVOUR OF THE APPELLANT. I DIRECT THE AO TO ACCEPT THE BACKWARD INCENTIVES AS CA PITAL RECEIPTS WITHOUT APPLYING THE EXPLANATION 10 TO SECTION 43(1). IT MEANS BACKWARD INCENTIVES CANNOT BE REDUCED FROM THE ACTUAL COST. THIS GROUND OF APPEAL IS ALLOWED IN FAVOUR OF THE APPELLANT. 5.2 . THIS ISSUE OF CHARGEABILITY TO INCOME - TAX OF INCENTIVES BY WAY OF REFUND OF EXCISE DUTY AND EXEMPTION OF SALES TAX INCENTIVE WHICH WERE GIVEN POST COMMENCEMENT OF PRODUCTION AFTER THE NEW INDUSTRIAL UNIT WAS SET UP BY ENTREPRENEURS IN KUTCH DISTRICT HAS NOW REACHED BEFORE THE TRIBUNAL AT THE B EHEST OF THE REVENUE AND BOTH THE PARTIES HAVE ADVANCED DETAILED ARGUMENTS INCLUDING WRITTEN SUBMISSIONS FILED BY REVENUE. THE CONTENTIONS WERE RAISED BY REVENUES SPECIAL COUNSEL TO EXPLAIN THAT THERE IS A DIFFERENCE BETWEEN SUBSIDY AND INCENTIVE . THE L EARNED SPECIAL COUNSEL FOR REVENUE EXPLAIN ED THAT SUBSIDY INVOLVES CASH FLOW WHILE THERE IS NO CASH FLOW IN THE CASE OF INCENTIVE S. THE SPECIAL COUNSEL FOR REVENUE RELIED UP ON THE A CCOUNTING S TANDARD AS - 2 ISSUED BY ICAI , PARA 7 TO CONTEND THAT COST OF PURCHASES OF THE INVENTORIES WILL INCLUDE PURCHASE PRICE INCLUDING DUTIES AND TAXES OTHER THAN THOSE DUTIES AND TAXES SUBSEQUENTLY RECOVERABLE BY ENTERPRISE FROM THE TAXING AUTHORITIES. THUS, IT WAS SUB MITTED IN ALTERNATIVE THAT EVEN IF THE SAID INCENTIVES ARE TREATED AS CAPITAL RECEIPT BY TRIBUNAL, THE TAXES RECOVERABLE FROM GOVERNMENT ARE NOT PART OF THE COST OF THE ASSET AND THE REFUND OF E XCISE DUTY AND EXEMPTION OF SALES TAX INCENTIVES SHOULD BE RED UCED FROM COST OF THE ASSETS BEFORE ALLOWING DEPRECIATION, WHILE ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ISSUE OF SAID KUTCH INVESTMENT SUBSIDY INCENTIVE BY WAY O F REFUND OF CENTRAL EXCISE AND E XEMPTION OF SALES TAX INCENTIVE S HAVE BEEN GONE THROUGH BY THE ITAT ,MUMBAI BENCHES IN THE CASE OF GROUP CONCERN OF THE ASSESSEE IN WELSPUN STEEL LTD., V . DCIT /ACIT, VIDE APPELLATE ORDER DATED I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 15 18.12.2015 , IN APPEALS IN ITA NO. 7630/MUM/2011 AND 8294/M/2011 FOR AY 2007 - 08, ITA NO. 6371/M UM/2014 FOR AY 2006 - 07, ITA NO. 6372/MUM/2014, 6304/MUM/2014 FOR AY 2007 - 08, ITA NO. 6373/MUM/2014, 6305/MUM/2014 FOR AY 2008 - 09, ITA NO. 6374/MUM/2014, 6306/MUM/2014 FOR AY 2009 - 10, ITA NO. 6375/MUM/2014, 6307/MUM/2014 FOR AY 2010 - 11, ITA NO. 6376/MUM/201 4, 6308/MUM/2014 FOR AY 2011 - 12, VIDE COMMON ORDER DATED 18.12.2015 , WHEREIN THE TRIBUNAL HAS HELD THAT THE SAID INCENTIVE S ARE CAPITAL RECEIPT AND FURTHER IT HAS BEEN HELD THAT THE SAID AMOUNT OF INCENTIVES RECEIVED BY THE ASSESEEE SHALL NOT BE REDUCED FROM THE COST OF THE ASSET OF THE ASSESSEE DESPITE PROVISION S OF S ECTION 43(1) , E XPLANATION 10 , BY HOLDING AS UNDER: - 5. THE BRIEF FACTS QUA THE ISSUE INVOLVED IS THAT, ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SPONGE IRON, STEEL INGOTS AND ROLLED PRODUCT. IN THE WAKE OF DEVASTATING EARTHQUAKE IN KUTCH DISTRICT, GUJARAT, THE CENTRAL GOVERNMENT, VIDE NOTIFICATION NO. 39/2001 DATED 7TH AUGUST, 2001 ISSUED AN EXCISE BENEFIT INCENTIVE SCHEME AND STATE GOVERNMENT OF GUJARA T ALSO VIDE ITS NOTIFICATION DATED 9TH NOVEMBER, 2001 ANNOUNCED AN INCENTIVE SCHEME FOR SALES - TAX EXEMPTION KNOWN AS INCENTIVE SCHEME, 2001 FOR ECONOMIC DEVELOPMENT FOR KUTCH DISTRICT. BOTH THESE SCHEMES WERE FOR SETTING - UP OF A NEW INDUSTRIAL UNIT/S IN KUTCH DISTRICT AFTER COMPLYING WITH THE TERMS AND CONDITIONS AS SET OUT IN THE NOTIFICATIONS AND SCHEMES OF THE CENTRAL AND STATE GOVERNMENT RESPECTIVELY. THE OBJECT OF BOTH THE SCHEMES WAS ECONOMIC DEVELOPMENT OF KUTCH DISTRICT AFTER THE EARTHQUAKE AND CR EATION OF NEW EMPLOYMENT OPPORTUNITIES AND ATTRACTION OF LARGE SCALE INVESTMENTS. DURING THE PREVIOUS YEAR, THE ASSESSEE HAD RECEIVED FOLLOWING INCENTIVES BY THE STATE GOVERNMENT AND CENTRAL GOVERNMENT: - (I) SALES - TAX INCENTIVE - RS. 12,95,99,499 (II) CEN TRAL EXCISE BENEFIT - RS. 22,37,23,672 ------------------------------ TOTAL - RS.35,33,23,171 ---------------------------- I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 16 THE AMOUNT OF INCENTIVE RECEIVED WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT, HOWEVER, THE ASS ESSEE CLAIMED THAT THE SAID RECEIPTS ARE NOT TAXABLE AS THEY ARE CAPITAL RECEIPTS. THE AO WHILE MAKING THE ASSESSMENT HAS REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT IN THE ASSESSMENT YEAR 2006 - 07, THE ASSESSEES CLAIM WAS REJECTED BY THE AO ON T HE GROUND THAT THE DECISION OF SPECIAL BENCH IN THE CASE OF RELIANCE INDUSTRIES IS PENDING FOR DISPOSAL BEFORE THE HONBLE BOMBAY HIGH COURT. 6. THE LD. CIT(A) TOO FOLLOWING THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF RELIANCE INDUSTRIES, ALLOWED THE ASSESSEES APPEAL. HOWEVER, LATER ON, THIS DECISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN SET ASIDE TO THE TRIBUNAL FOR FRESH ADJUDICATION. 7. BEFORE US, IT HAS BEEN STATED THAT THIS ISSUE OF SUBSIDY / INCENTIVE IN THE CASE OF THE ASSESSEE HAD REACHED TO THE STAGE OF ITAT, WHEREBY THE TRIBUNAL, VIDE ORDER DATED 28.12.2011 HAD SET ASIDE THIS ISSUE TO THE FILE OF THE AO ON THE GROUND THAT AUTHORITIES BELOW HAVE NOT ANALYSED THE SCHEME OF SUBSIDY / INCENTIVE GRANTED BY THE RESPECTIVE GOVERNMENTS. IT HAS BE EN INFORMED THAT, TILL DATE NO ASSESSMENT ORDER HAS BEEN PASSED IN PURSUANCE OF TRIBUNAL ORDER. INSTEAD A FRESH ASSESSMENT ORDER HAS BEEN PASSED UNDER SECTION 143(3) R.W.S. 153A WHEREIN THIS ISSUE HAS BEEN CONFIRMED BY THE AO AGAIN WITHOUT PROPER ANALYZING THE PURPOSE TEST OF THE SCHEME. 8. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, NOW THERE IS CATENA OF DECISIONS NOT ONLY OF THE TRIBUNAL BUT ALSO OF THE VARIOUS HIGH COURTS INCLUDING THAT OF THE JURISDICTIONAL HIGH COURT, IN FAVOUR OF THE ASSESSEE THAT IF THE SUBSIDY IS GIVEN FOR SETTING UP FOR A NEW INDUSTRIAL UNIT OR PLANT THEN IT IS ON CAPITAL ACCOUNT. IN SUPPORT OF THIS CONTENTION A SEPARATE COMPILATION OF CASE LAWS HAVE BEEN FILED BEFORE US. EXPLAINING THE NATURE OF SCHEME, HE SUBMITTED THAT TH E FUNDAMENTAL OBJECT FOR BOTH THE SCHEMES WAS TO SET UP AN INDUSTRIAL PLANT FOR ECONOMIC DEVELOPMENT AND CREATION OF NEW EMPLOYMENT OPPORTUNITIES. FROM THE PERUSAL OF THESE SCHEMES WHICH HAVE BEEN PLACED IN THE PAPER BOOK FROM PAGES 35 TO 47, HE SUBMITTED THAT IT CAN BE SEEN THAT THEY WERE PURELY FOR ASSISTING THE ENTREPRENEUR FOR SETTING - UP NEW INDUSTRIAL UNITS AND NOT FOR RUNNING OF ANY INDUSTRY FOR PROFIT. HE REFER TO PREAMBLE AS GIVEN IN THE INCENTIVE SCHEME OF 2001 FOR ECONOMIC DEVELOPMENT OF KUTCH DI STRICT ISSUED BY GOVERNMENT OF GUJARAT DATED 09.11.2001. EVEN IN THE CENTRAL EXCISE NOTIFICATION, THE SAME WAS ISSUED IN A PUBLIC INTEREST FOR SETTING UP OF A NEW INDUSTRIAL PLANT AND I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 17 THE INCENTIVE OF EXCISE DUTY BENEFIT WAS GIVEN FOR A PERIOD OF FIVE YEA RS. HE FURTHER SUBMITTED THAT THE NATURE OF INCENTIVE UNDER BOTH THE NOTIFICATIONS AND THE ACCOUNTING TREATMENT BY THE ASSESSEE AS STATED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW WAS AS UNDER: - (A) THE NATURE OF INCENTIVES UNDER THE NOTIFICATION AND T HE SCHEME AND THE PRESENT ACCOUNTING TREATMENT ARE SUMMARIZED AS UNDER: - (A) EXCISE DUTY (IN VIEW OF THE NOTIFICATION) - REFUND OF THE EXCISE DUTY PAID THROUGH PLA ON FINISHED GOODS CLEARED FROM THE UNIT AFTER TAKING CENVAT CREDIT ON THE INPUTS. THIS AMOU NT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT AS 'EXCISE BENEFIT RECEIVED AND INADVERTENTLY OFFERED TO TAX. PRESENTLY, THERE IS NO LIMIT FOR THE QUANTUM OF SUCH INCENTIVE. (B) SALES TAX/VALUE ADDED TAX (IN VIEW OF THE SCHEME) - PURCHASE OF INPUTS WITHOUT S ALES TAX AND SALES WITHOUT CHARGING OF SALES TAX THUS, CLAIMING EXEMPTION. HOWEVER, AFTER THE INTRODUCTION OF VAT, REFUND OF VAT PAID ON INPUTS AND REMISSION OF VAT COLLECTED ON SALES IS AVAILABLE. BOTH THESE COMPONENTS ARE CREDITED TO THE PROFIT AND LOSS ACCOUNT AS 'SALES TAX INCENTIVES RECEIVED' AND INADVERTENTLY OFFERED TO TAX. THERE IS A MONETARY LIMIT SPECIFIED FOR THE QUANTUM OF THIS INCENTIVE LINKED TO INVESTMENT THAT IS ELIGIBLE UNDER THE SCHEME. (C) THE INCENTIVE CAN BE AVAILED OF ONLY AFTER COMMEN CEMENT OF PRODUCTION. FURTHER, IN SO FAR AS IT RELATES TO THE INCENTIVES UNDER THE SCHEME, THE UNIT HAS TO INVEST AT LEAST 50% OF THE INCENTIVES IN THE STATE OF GUJRAT WITHIN A PERIOD OF 10 YEARS FROM THE DATE OF COMMERCIAL PRODUCTION. THUS, HE SUBMITTED THAT, LOOKING TO THE OBJECTS AND THE PURPOSE FOR WHICH SUBSIDY WAS GIVEN, THE INCENTIVE RECEIPTS HAS TO BE TREATED AS CAPITAL. IN SUPPORT OF HIS CONTENTION, BESIDES SEVERAL DECISIONS, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: - SR . . NO. CASE LAW CITATION I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 18 1 SAHNEY STEEL & PRESS WORKS LTD 228 ITR 253 (SC) 2 PONNI SUGARS & CHEMICALS LTD. 306 ITR 392 (SC) 3 BOUGAINVILLEA MULTIPLEX ENT. CENTRE (P) LTD 373 ITR 14 (TRIB) 4 CHAPHALKAR BROTHERS 351 ITR 309 (BOM) 5 BIRLA VXL LTD. 32 TAXMANN.COM 330(GUJ) 6 M/S AJANTA MANUFACTURING LTD. ITA NO. 793/RJT/2010 7 M/S MIHIR PACKAGING ITA NO. 5629/M/2011 8 M/S NIKOMOM FINANCE PVT LTD. ITA NO. 3580/M/2012 9. LD. COUNSEL FURTHER POINTED OUT THAT IN THE CASE OF THE ASSESSEE, A SEARCH AND SEIZURE ACTION HAD TAKEN PLACE ON 30.10.2010 IN WELSPUN GROUP OF CASES AND IN PURSUANCE OF THAT NOTICE U/S 153A WAS ISSUED FOR THE IMPUGNED ASSESSMENT YEARS. THE LD. AO BESIDES TREATING THE SAID INCENTIVES AS REVENUE RECEIPTS HAD TAKEN AN ADDITIONAL POINT BY WAY OF AN ALTERNATIVE OBSERVATION THAT IN CASE, THE SAID RECEIPTS ARE TREATED AS CAPITAL RECEIPTS, THEN SAME SHALL BE REDUCED FROM THE COSTS OF ASSETS AND DEPRECIATION CLAIMED ON THE NET COST OF THE ASSETS WILL BE ALLOWED AFTER REDUCING THE AMOUNT OF IN CENTIVES IN TERMS OF EXPLANATION 10 TO SECTION 43(1). HE SUBMITTED THAT SUCH A CONTENTION OF THE AO CANNOT BE UPHELD, BECAUSE THE SAME IS NOT APPLICABLE IN THE PRESENT CASE AT ALL, BECAUSE THERE IS NO DIRECT ACQUISITION OF ASSET FROM THE GOVERNMENT SUBSIDY . THE SUBSIDY IS RECEIVED IN THE FORM OF EXCISE TAX BENEFIT AND SALES - TAX INCENTIVE ONLY WHEN THE ASSESSEE HAD SET UP THE WHOLE INDUSTRIAL UNIT AND STARTS MANUFACTURING AND COMMENCED ITS BUSINESS OF SALE. THUS, THE SAID PROVISION IS NOT APPLICABLE AND IN S UPPORT OF HIS CONTENTION, HE RELIED UPON THE FOLLOWING TRIBUNAL DECISIONS: - SR. NO. CASE NAME CITATION 1 SASISRI EXTRACTIONS LIMITED 122 ITD 428 (VISAKHAPATNAM) 2 M/S HARINAGAR SUGAR MILLS LTD ITA NO. 772/MUM/2012 I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 19 3 RASOI LTD. 46 TAXMAN.COM214(KOLKATA - TRIB) 4 UNIVERSAL CABLES LTD 57 TAXMAN.COM95(KOLKATA TRIB) 5 SOHAM ELECTROPLAST PVT LTD ITA NO. 1578/PN/2008 10. ON THE OTHER HAND LD. DR STRONGLY RELIED UPON THE ASSESSMENT ORDER ESPECIALLY PASSED BY THE AO UNDER SECTION 143(3) R.W.S. 153A DATED 25.03.2013 AND SUBMITTED THAT, IF THE INCENTIVE/ SUBSIDY HAS BEEN GIVEN IN THE FORM OF SALES - TAX OR EXEMPTION OF EXCISE DUTY THEN IT DIRECTLY LEADS TO AUGMENTATION OF PROFIT OF THE ASSESSEE AND HENCE, IT IS NOTHING BUT REVENUE RECEIPTS. 1 1. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE RELEVANT MATERIAL PLACED ON RECORD. THE MAIN ISSUE INVOLVED IS, WHETHER THE INCENTIVE / SUBSIDY PROVIDED BY THE STATE GOVERNMENT IN THE FORM OF SALES - TAX INCENTIVE AND IN THE FORM O F CENTRAL EXCISE BENEFIT BY THE CENTRAL GOVERNMENT FOR SUMS AGGREGATING TO RS. 35,33,23,171/ - IS TO BE TREATED AS CAPITAL RECEIPTS OR REVENUE RECEIPTS. THE HONBLE SUPREME COURT IN THE CASE OF PONNI SUGARS & CHEMICALS LTD VS CIT, REPORTED IN [2008] 306 IT R 392 AFTER REFERRING TO THE EARLIER DECISIONS OF THE SUPREME COURT IN THE CASE OF SAHNEY STEEL WORKS LTD V CIT, REPORTED IN [1999] 228 ITR 253, HELD THAT THE PURPOSE FOR WHICH SUBSIDY IS GIVEN IS THE CRUCIAL FACTOR. THE PURPOSE IS TO BE JUDGED FROM THE CHARACTER OF THE RECEIPTS IN THE HANDS OF THE ASSESSEE WHICH HAS TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. THE POINT OF TIME IS NOT RELEVANT AND ALSO THE SOURCE AND THE FORM OF SUBSIDY IS IMMATERIAL. IF THE SUBSIDY HAS BE EN GIVEN TO SET - UP NEW UNITS OR FOR SUBSTANTIAL EXPLANATION OF EXISTING UNITS, THEN IT IS A CAPITAL RECEIPT. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY THEN, THE RECEIPT IS ON REVENUE ACCOUNT. THE REL EVANT OBSERVATION OF THE HONBLE APEX COURT IN THIS REGARD GIVEN IN PARA 14 READS AS UNDER: - 14. IN OUR VIEW, THE CONTROVERSY IN HAND CAN BE RESOLVED IF WE APPLY THE TEST LAID DOWN IN THE JUDGMENT OF THIS COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LT D. (SUPRA). IN THAT CASE, ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT THE SUBSIDY GIVEN WAS UP TO 10 PER CENT OF THE. CAPITAL INVESTMENT CALCULATED ON THE BASIS OF THE QUANTUM OF INVESTMENT IN CAPITAL AND, THEREFORE, RECEIPT OF SUCH SUBSIDY WAS ON CAP ITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. IT WAS ALSO URGED IN THAT CASE THAT I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 20 SUBSIDY GRANTED ON THE BASIS OF. REFUND OF SALES TAX ON RAW MATERIALS, MACHINERY AND FINISHED GOODS WERE ALSO OF CAPITAL NATURE AS THE OBJECT OF GRANTING REFUND OF SALES TAX WAS T HAT THE ASSESSEE COULD SET UP NEW BUSINESS OR EXPAND HIS EXISTING BUSINESS. THE CONTENTION OF THE ASSESSEE IN THAT CASE WAS DISMISSED BY THE TRIBUNAL AND, THEREFORE, THE ASSESSEE HAD COME TO THIS COURT BY WAY OF A SPECIAL LEAVE PETITION. IT WAS HELD BY THI S COURT ON THE FACTS OF THAT CASE AND ON THE BASIS OF THE ANALYSES OF THE SCHEME THEREIN THAT THE SUBSIDY GIVEN WAS ON REVENUE ACCOUNT BECAUSE IT WAS GIVEN BY WAY OF ASSISTANCE IN CARRYING ON OF TRADE OR BUSINESS. ON THE FACTS OF THAT CASE, IT WAS HELD THA T THE SUBSIDY GIVEN WAS TO MEET RECURRING EXPENSES. IT WAS NOT FOR ACQUIRING THE CAPITAL ASSET. IT WAS NOT TO MEET PART OF THE COST. IT WAS NOT GRANTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDIES IN THAT CASE WERE GRANTED YEAR AFTER YEAR ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND ONLY AFTER COMMENCEMENT OF PRODUCTION AND, THEREFORE, SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. CONSEQUENTLY, THE CONTENTI ONS RAISED ON BEHALF OF THE ASSESSEE ON THE FACTS OF THAT CASE STOOD REJECTED AND IT WAS HELD THAT THE SUBSIDY RECEIVED BY SAHNEY STEEL COULD NOT BE REGARDED AS ANYTHING BUT A REVENUE RECEIPT. ACCORDINGLY, THE MATTER WAS DECIDED AGAINST THE ASSESSEE. THE I MPORTANCE OF THE JUDGMENT OF THIS COU RT IN SAHNEY STEEL & PRESS WORK S LTD. 'S CASE (SUPRA) LIES IN THE FACT THAT IT HAS DISCUSSED AND ANALYSED THE ENTIRE CASE LAW AND. IT HAS LAID DOWN THE BASIC TEST TO BE APPLIED IN JUDGING THE CHARACTER OF A SUBSIDY. THA T TEST IS THAT THE CHARACTER OF THE RECEIPT IN THE HANDS OF THE ASSESSEE HAS TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. IN OTHER WORDS, IN SUCH CASES, ONE HAS TO APPLY THE PURPOSE TEST. THE POINT OF TIME WHICH THE SUBSIDY IS PAID IS NOT RELEVANT. THE SOURCE IS IMMATERIAL. THE FORM OF SUBSIDY IS IMMATERIAL. THE MAIN ELIGIBILITY CONDITION IN THE SCHEME WITH WHICH WE ARE CONCERNED IN THIS CASE IS THAT THE INCENTIVE MUST BE UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SETUP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF EXISTING UNITS; ON THIS ASPECT THERE IS NO DISPUTE. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY THEN THE RECEIPT IS ON REVENUE ACCOUNT. ON THE OTHER H AND, IF THE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 21 OBJECT OF THE ASSISTANCE UNDER THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THEN THE RECEIPT OF THE SUBSIDY WAS ON CAPITAL ACCOUNT. THEREFORE, IT IS THE OBJECT FOR WHICH THE SUBSIDY/ASSISTANC E IS GIVEN WHICH DETERMINES THE NATURE OF THE INCENTIVE SUBSIDY. THE FORM OF THE MECHANISM THROUGH WHICH THE SUBSIDY IS GIVEN IS IRRELEVANT. 12. NOW, IN THE WAKE OF THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT, WE SHALL EXAMINE THE NATURE OF SUBSI DY PROVIDED TO THE ASSESSEE. THE INCENTIVE SCHEME 2001 FOR ECONOMIC DEVELOPMENT OF KUTCH DISTRICT OF THE GUJARAT GOVERNMENT GIVES THE FUNDAMENTAL PREAMBLE WHICH HIGHLIGHTS THE BASIC OBJECTIVE AND THE PURPOSE FOR WHICH THE INCENTIVE BY THE STATE GOVERNMEN T AS WELL AS CENTRAL GOVERNMENT IS BEING GIVEN HAS BEEN HIGHLIGHTED IN THE FOLLOWING MANNER: - THE ECONOMIC ACTIVITIES IN THE DISTRICT OF KUTCH CAME TO A STANDSTILL ON ACCOUNT OF THE DEVASTATING EARTHQUAKE IN THE STATE ON 26TH JANUARY, 2001. NEW EMPLOYMENT, OPPORTUNITIES COULD BE CREATED IF NEW INVESTMENT TAKES PLACE. THE GOVERNMENT IS COMMITTED TO ATTRACTING INDUSTRIES IN THE DISTRICT TO MAKE THE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. GOVERNMENT OF INDIA HAVE ANNOUNCED EXCISE DUTY EXEMPTION FO R NEW INDUSTRIES TO PROMOTE LARGE SCALE INVESTMENT IN THE DISTRICT, ALONG WITH WHICH THE STATE GOVERNMENT HAS ALSO DECIDED TO ANNOUNCE THE SCHEME OF SALES TAX INCENTIVES. SINCE THE SCHEME IS AIMED AT MAKING THE ECONOMIC ENVIRONMENT OF KUTCH DISTRICT LIVE, IT HAS BEEN DECIDED TO CONFINE THE SAME ONLY TO KUTCH DISTRICT. 13. FROM THE PERUSAL OF THE ABOVE, IT IS AMPLY CLEAR THAT THE SCHEMES LAUNCHED WAS FOR SETTING UP OF NEW INDUSTRIES IN THE DISTRICT OF KUTCH FOR THE PURPOSE OF NEW EMPLOYMENT OPPORTUNITIES AN D TO MAKE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. THUS, THE SCHEME OF INCENTIVES PROVIDED BY THE RESPECTIVE GOVERNMENTS WAS SETTING - UP OF A NEW UNIT AND NOT FOR RUNNING OF THE BUSINESS MORE PROFITABLY. AS LAID DOWN BY THE HONBLE SUPREME COURT, THE FORM AND THE SOURCE OF SUBSIDY ARE IMMATERIAL AND WHAT IS MATERIAL IS WHETHER THE SUBSIDY IS FOR SETTING UP FOR A INDUSTRIAL UNIT OR RUNNING IT FOR PROFITABILITY. SIMILARLY, THE CENTRAL EXCISE EXEMPTION WAS GIVEN IN THE PUBLIC INTEREST FOR SETTING UP OF A NEW I NDUSTRIAL UNIT IN THE KUTCH DISTRICT. ACCORDINGLY ON THE FACTS OF THE PRESENT CASE, WE CONCLUDE THAT THE INCENTIVE GIVEN BY THE STATE GOVERNMENT AND THE CENTRAL I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 22 GOVERNMENT IS NOTHING BUT CAPITAL RECEIPTS, BECAUSE APPLYING THE PURPOSE TEST THE INCENTIVE / SUBSIDY WAS GIVEN ONLY FOR SETTING UP OF NEW INDUSTRIAL UNIT AND ECONOMIC DEVELOPMENT AND GENERATION OF NEW EMPLOYMENT OPPORTUNITIES IN THE KUTCH DISTRICT AND NOT FOR RUNNING THE INDUSTRY FOR AUGMENTING THE PROFIT ON DAY - TO - DAY BUSINESS. THIS PROPOSITION OF LAW HAS BEEN REITERATED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS CHAPHALKAR BROTHERS, REPORTED IN 351 ITR 309, WHEREIN THE HONBLE HIGH COURT RELYING UPON THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF PONNI SUGARS & CHEMICAL S LTD HAS HELD THAT IF THE OBJECT OF THE SUBSIDY WAS TO PROMOTE CONSTRUCTION OF MULTIPLEXES, THEATER COMPLEXES THEN, IT WOULD BE ON CAPITAL ACCOUNT. SIMILARLY, VIEWS HAVE BEEN TAKEN BY THE VARIOUS OTHER HIGH COURTS AND TRIBUNAL IN THE DECISION AS REFERRED AND RELIED UPON BY THE LD. COUNSEL AS ABOVE. THUS, WE HOLD THAT THE AMOUNT OF INCENTIVE RECEIVED BY THE ASSESSEE CANNOT BE TAXED AS REVENUE RECEIPT AS IT IS PURELY ON CAPITAL ACCOUNT. 14. AS REGARDS THE OTHER PLEA RAISED BY THE AO IN THE ORDER PASSED U/S 1 43(3) R.W.S. 153A, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT, NONE OF THE PLANT AND MACHINERY INSTALLED BY THE ASSESSEE FOR SETTING UP OF A NEW INDUSTRIAL UNIT HAS BEEN FUNDED BY THE GOVERNMENT SUBSIDY. THE SUBSIDY HERE IN THIS CASE IS NOT SPECI FICALLY INTENDED TO SUBSIDIES THE COST OF CAPITAL OR PLANT & MACHINERY. THE INCENTIVE IN THE FORM OF SUBSIDY BY THE GOVERNMENT HERE IN THIS CASE CANNOT BE CONSIDERED AS PAYMENT DIRECTLY OR INDIRECTLY TO MEET ANY PORTION OF THE ACTUAL COST AND HENCE IT DOES NOT FALL WITHIN THE PURVIEW OF EXPLANATION 10 TO SECTION 43(1). THUS, THIS ALTERNATIVE PLEA AS RAISED BY LD. AO IS REJECTED. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE ON THIS SCORE STANDS DISMISSED. 5.3 . WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED TH E MATERIAL ON RECORD INCLUDING CITED CASE LAWS , ORDERS OF THE AUTHORITIES BELOW AND FACTUAL MATRIX OF THE CASE . WE HAVE ALSO GONE THROUGH THE TERM S & CONDITION OF THE SAID INCENTIVE SCHEME FORMULATED BY CENTRAL AND STATE GOVERNMENT TO GRANT CENTRAL EXCISE BENEFIT S BY WAY OF REFUND AND EXEMPTION OF SALES TAX INCENTIVE AS ARE EXTRACTED BY LEARNED CIT(A) IN HIS APPELLATE ORDER WHICH ARE REPRODUCED ABOVE IN THE PRECEDING PARAS OF THIS ORDER WE HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING OF TERRY TOWELS. WE HAVE OBSERVED THAT THERE WAS A DEVASTATING EARTHQUAKE IN DISTRICT KUTCH IN I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 23 GUJARAT ON 26.01.2001. IN ORDER TO REDEVELOP AND REHABILITATE THE SAID KUTCH DISTRICT OF GUJARAT , THE CENTRAL AND STATE GOVERNMENT FORMULATED POLICY WI TH A VIEW TO ENCOURAGE SETTING UP OF NEW INDUSTRY IN SAID KUTCH DISTRICT WHEREIN CERTAIN INCENTIVES BY WAY OF REFUND OF EXCISE DUTY AS WELL EXEMPTION OF SALES TAX INCENTIVES WERE GIVEN BY CENTRAL AND STATE GOVERNMENT TO THE ENTREPRENEURS FOR SETTING UP NEW INDUSTRY IN KUTCH DISTRICT ,AS DETAILED BELOW: - NOTIFICATION NO 39 /2001 - CENTRAL EXCISE. IN EXERCISE OF THE POWERS CONFERRED BY SUB - SECTION (1) OF SECTION 5A OF THE CENTRAL EXCISE ACT, 1944 (1 OF 1944), READ WITH SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (GOODS OF SPECIAL IMPORTANCE) ACT, 1957 (58 OF 1957) AND SUB - SECTION (3) OF SECTION 3 OF THE ADDITIONAL DUTIES OF EXCISE (TEXTILES AND TEXTILE ARTICLES) ACT, 1978 ( 40 OF 1978), THE CENTRAL GOVERNMENT BEING SATISFIED THAT IT IS NECESSARY THE PUBLIC INTEREST SO TO DO, HEREBY EXEMPTS THE GOODS SPECIFIED IN THE FIRST SCHEDULE TO THE CENTRAL EXCISE TARIFF ACT,1985 (5 OF 1986) OTHER THAN GOODS SPECIFIED IN THE ANNEXURE APPENDED TO THIS NOTIFICATION AND CLEARED FROM A UNIT LOCATED IN KUTCH DISTRICT OF GUJARAT FROM SO MUCH OF THE DUTY OF EXCISE OR THE ADDITIONAL DUTY OF EXCISE, AS THE CASE MAY BE, LEVIABLE. THE EXEMPTION CONTAINED IN THIS NOTIFICATION SHALL BE SUBJECT TO THE FOLLOWING CONDITIONS, NAMELY; - (I) IT SHALL APPLY ONLY TO NEW INDUSTRIAL UNITS, THAT IS TO SAY, UNITS WHICH ARE SET UP ON OR AFTER THE DATE OF PUBLICATION OF THIS NOTIFICATION IN THE OFFICIAL GAZETTE BUT NOT LATER THAN THE 31ST DAY OF DECEMBER, 2004; (II) IN ORDER TO AVAIL OF THIS EXEMPTION, THE MANUFACTURER SHALL PRODUCE A CERTIFICATE FROM A COMMITTEE CONSISTING OF THE CHIEF COMMISSIONER OF CENTRAL EXCISE, AHMEDABAD AND THE PRINCIPAL SECRETARY TO THE GOVERNMENT OF GUJARAT, DEPARTMENT OF INDUSTRY, TO THE JURISDICTIONAL ASSISTANT COMMISSIONER OR THE DEPUTY COM MISSIONER OF CENTRAL EXCISE, AS THE CASE MAY BE, THAT THE UNIT IN RESPECT OF WHICH EXEMPTION IS CLAIMED IS A NEW UNIT AND HAS BEEN SET UP DURING THE TIME PERIOD SPECIFIED IN CONDITION (I) ABOVE. (III) BEFORE EFFECTING CLEARANCES UNDER THIS NOTIFICATION, THE MANUFACTURER SHALL ALSO FURNISH A DECLARATION REGARDING THE ORIGINAL VALUE OF INVESTMENT IN PLANT AND MACHINERY INSTALLED IN THE FACTORY AS ON THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION, TO THE ASSISTANT COMMISSIONER OR I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 24 THE DEPUTY COMMISSIONER OF CENTRAL EXCISE, AS THE CASE MAY BE. (IV) THE MANUFACTURER SHALL ALSO PRODUCE A CERTIFICATE FROM THE SAID COMMITTEE CONFIRMING THE ORIGINAL VALUE OF INVESTMENT AND SUCH A CERTIFICATE SHALL BE PRODUCED WITHIN A PERIOD OF ONE MONTH FROM THE DATE OF COM MENCEMENT OF COMMERCIAL PRODUCTION, OR SUCH EXTENDED PERIOD AS THE SAID ASSISTANT COMMISSIONER OR DEPUTY COMMISSIONER MAY ALLOW. V) IN CASE ON THE BASIS OF SUCH CERTIFICATION, OR OTHERWISE, THE ORIGINAL VALUE OF INVESTMENT IN PLANT AND MACHINERY, (A) IS FOUND TO BE LESS THAN RUPEES TWENTY CRORE BUT WAS DECLARED TO BE RUPEES TWENTY CRORE OR MORE, THE MANUFACTURER SHALL BE LIABLE TO PAY BACK THE ENTIRE AMOUNT OF DUTY EXEMPTION AVAILED UNDER THE NOTIFICATION ALONGWITH INTEREST AT TH E RATE OF TWENTY FOUR PER CENT PER ANNUM AS IF NO EXEMPTION WERE AVAILABLE; OR (B) IS FOUND TO BE LESS THAN THE DECLARED VALUE AND WAS DECLARED TO BE BELOW RUPEES TWENTY CRORE, THE MANUFACTURE SHALL BE LIABLE TO PAY DUTY ON THE GOODS CLEARED ,IF ANY, IN EXCESS OF TWICE THE ACTUAL VALUE OF ORIGINAL INVESTMENT IN EACH OF THE YEARS DURING WHICH EXEMPTION HAS BEEN CLAIMED UNDER THIS NOTIFICATION ALONGWITH INTEREST AT THE RATE OF TWEN TY FOUR PER CENT PER ANNUM , AS IF NO EXEMPTION WERE AVAILABLE TO THOSE CLEARANCES UNDER THIS NOTIFICATION. (VI) THE EXEMPTION SHALL APPLY FOR A PERIOD NOT EXCEEDING FIVE YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION BY T HE UNIT . THE S ALES TAX INCENTIVE SCHEME FORMULATED BY STATE GOVERNMENT OF GUJARAT IS DETAILED HEREUNDER: SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH DISTRICT THE ECONOMIC ACTIVITIES IN THE DISTRICT OF KUTCH CAME TO A STANDSTILL ON ACCOUNT OF DEVASTATING EARTHQUAKE IN THE STATE ON 26TH JANUARY, 2001. NEW EMPLOYMENT OPPORTUNITIES COULD BE CREATED IF NEW INVESTMENT T AKES PLACE. THE GOVERNMENT IS COMMITTED TO ATTRA CTING INDUSTRIES IN THE DISTRICT TO MAKE THE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. GOVERNMENT OF INDIA HAVE ANNOUNCED EXCISE DUTY EXEMPTION TO NEW INDUSTRIES TO PROMOTE LARGE SCALE INVESTMENT IN THE DISTRICT, ALONG WITH I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 25 WHICH THE STATE GOVERNMENT HAS A LSO DECIDED TO ANNOUNCE THE SCHEME OF SALES TAX INCENTIVE. SINCE THE SCHEME IS AIMED AT MAKING THE ECONOMIC ENVIRONMENT OF KUTCH DISTRICT LIVE, IT HAS BEEN DECIDED TO CONFINE THE SAME ONLY TO KUTCH DISTRICT. CONDITIONS UNDER THIS SCHEME, FOLLOWING CONDIT IONS SHALL BE APPLICABLE TO SALES TAX INCENTIVES. IN THE CASE OF VIOLATION OF ONE OR MORE CONDITIONS, THE AMOUNT OF SALES TAX INCENTIVES AVAILED OF SHALL BE RECOVERED AS ARREARS OF LAND REVENUE. (A) THE INDUSTRIAL UNIT SHALL HAVE TO GIVE A CLEAR UNDERT AKING THAT IT SHALL NOT TRANSFER OR DISPOSE OF THE ASSETS IN ANY MANNER, TILL THE EXPIRY OF THE ELIGIBILITY PERIOD OF INCENTIVES. (B) THE INDUSTRIAL UNIT AVAILING OF THE INCENTIVES UNDER THE SCHEME, SHALL HAVE TO INSTALL, EFFECTIVELY USE AND MAINTAIN T HE POLLUTION CONTROL EQUIPMENTS AS PER THE STANDARDS PRESCRIBED AND APPROVED BY THE COMPETENT AUTHORITY. (C) THE INDUSTRIAL UNIT SHALL HAVE TO CONTINUE PRODUCTION UP TO THE PERIOD OF ELIGIBILITY. HOWEVER, IF THE UNIT DOES NOT REMAIN IN CONTINUOUS PRODUCT ION ON ACCOUNT OF THE REASONS BEYOND THE CONTROL OF THE MANAGEMENT, THE UNIT SHALL PRESENT ITS CASE BEFORE THE STATE LEVEL COMMITTEE AS AN INDIVIDUAL CASE ON WHICH THE COMMITTEE CAN TAKE DECISION TO WAIVE THE PERIOD OF DISCONTINUATION OF PRODUCTION BASED O N THE REPRESENTATION MADE. (D) THE INDUSTRIAL UNIT SHALL HAVE TO FURNISH THE DETAILS OF PRODUCTION, EMPLOYMENT AND OTHER INFORMATION EVERY YEAR BEFORE 30TH JUNE OR FROM TIME TO TIME AS SOUGHT BY THE STATE GOVERNMENT. (E) AS PER THE EMPLOYMENT POLIC Y OF THE GOVERNMENT OF GUJARAT, THE UNIT AVAILING OF THE INCENTIVES, WILL HAVE TO RECRUIT LOCAL PERSONS FOR A MINIMUM OF 85% OF THE TOT AL POSTS AND FOR A MINIMUM OF 60 % OF THE MANAGERIAL AND SUPERVISORY POSTS. THE UNIT SHALL HAVE TO SUBMIT THE DETAILS OF FULFILLING THE CONDITIONS OF LOCAL EMPLOYMENT TO THE CONCERNED AUTHORITY GRANTING THE INCENTIVES TO HIS SATISFACTION. THE PERCENTAGE OF THE ABOVE MENTIONED EMPLOYMENT WILL HAVE TO BE MAINTAINED BY THE INDUSTRIAL UNIT DURING THE ELIGIBILITY PERIOD OF THE IN CENTIVES. OTHERWISE, THE AMOUNT OF INCENTIVES AVAILED BY THE UNIT CAN BE RECOVERED AS ARREARS OF LAND REVENUE. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 26 (F) UNIT WILL HAVE TO INVEST THE AMOUNT EQUIVALENT TO 50% OF THE SALES TAX INCENTIVES AVAILED IN THE NEW PROJECTS IN THE STATE WITHIN A PERI OD OF 10 YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION. (G) UNIT OPTING FOR SALES TAX DEFERMENT SCHEME FOR THE PURPOSE OF DEFERRED AMOUNT SHALL HAVE TO GIVE A PERSONAL UNDERTAKING IN THE FORM OF SECURITY BOND AS PRESCRIBED VIDE RESOLUTI ON NO.INC - 1087 - 2138 - I DATED THE 1ST AUGUST, 1990 OR EQUITABLE CHARGE, SECOND CHARGE. (H) THE UNIT AVAILING OF INCENTIVES UNDER ANY OTHER SCHEME OF THE STATE GOVERNMENT WILL NOT BE ELIGIBLE TO RECEIVE BENEFITS UNDER THIS SCHEME. (I) EXPANSION, DIV ERSIFICATION OR MODERNIZATION OF THE EXISTING INDUSTRIES WILL NOT BE CONSIDERED ELIGIBLE FOR THE BENEFITS UNDER THIS SCHEME. WE HAVE ALSO OBSERVED THAT THE MUMBAI - TRIBUNAL HAS DEALT WITH THIS INCENTIVE SCHEMES OF CENTRAL AND STATE GOVERNMENT FOR GIVING IN CENTIVES BY CENTRAL EXCISE BENEFITS BY WAY OF REFUND AND EXEMPTION OF SALES TAX INCENTIVES FOR SETTING UP INDUSTRIAL UNITS IN DISTRICT KUTCH,GUJARAT TO REDEVELOP THE SAID KUTCH DISTRICT IN THE WAKE OF DEVASTATING EARTH QUAKES ON 26.01.2011 IN THE CASES OF GROUP CONCERN OF THE ASSESSEE IN WELSPUN STEEL LTD. V. DCIT/ACIT, VIDE APPELLATE ORDER DATED 18.12.2015 , IN APPEALS IN ITA NO. 7630/MUM/2011 AND 8294/M/2011 FOR AY 2007 - 08, ITA NO. 6371/MUM/2014 FOR AY 2006 - 07, ITA NO. 6372/MUM/2014, 6304/MUM/2014 FOR AY 2007 - 08, ITA NO. 6373/MUM/2014, 6305/MUM/2014 FOR AY 2008 - 09, ITA NO. 6374/MUM/2014, 6306/MUM/2014 FOR AY 2009 - 10, ITA NO. 6375/MUM/2014, 6307/MUM/2014 FOR AY 2010 - 11, ITA NO. 6376/MUM/2014, 6308/MUM/2014 FOR AY 2011 - 12, VIDE COMMON ORDER DATED 18.12.2015 , WHEREIN THE MUMBAI TRIBUNAL HAS HELD THAT THE SAID INCENTIVES ARE CAPITAL RECEIPT NOT EXIGIBLE TO INCOME - TAX AND FURTHER IT HAS BEEN HELD THAT THE SAID AMOUNT OF INCENTIVES RECEIVED BY THE ASSESEEE SHALL NOT BE REDUCED FROM THE COST OF THE ASSET OF THE ASSESSEE DESPITE EXPLANATION 10 TO SECTION 43(1) , BY HOLDING AS UNDER: - I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 27 5. THE BRIEF FACTS QUA THE ISSUE INVOLVED IS THAT, ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SPONGE IRON, STEEL INGOTS AND ROLLED PRODUCT. IN THE WAKE OF DEVASTATING EARTHQUAKE IN KUTCH DISTRICT, GUJARAT, THE CENTRAL GOVERNMENT, VIDE NOTIFICATION NO. 39/2001 DATED 7TH AUGUST, 2001 ISSUED AN EXCISE BENEFIT INCENTIVE SCHEME AND STATE GOVERNMENT OF GUJARAT ALSO VIDE ITS NOTIFICATION DATED 9TH NOVEMBER, 2001 ANNOUNCED AN INCENTIVE SCHEME FOR SALES - TAX EXEMPTION KNOWN AS INCENTIVE SCHEME, 2001 FOR ECONOMIC DEVELOPMENT FOR KUTCH DISTRICT. BOTH THESE SCHEMES WERE FOR SETTING - UP OF A NEW INDUSTRIAL UNIT/S IN KUTCH DISTRICT AFTER COMPLYING WITH THE TERMS AND CONDITIONS AS SET OUT IN THE NOTIFICATIONS AND SCHEMES OF THE CENTRAL AND STATE GOVERNMENT RESPECTIVELY. THE OBJECT OF BOTH THE SCHEMES WAS ECONOMIC DEVELOPMENT OF KUTCH DISTRICT AFTER THE EARTHQUAKE AND CREATION OF NEW EMPLOYMENT OPPORTUNITIES AND ATTRACTION OF LARGE SCAL E INVESTMENTS. DURING THE PREVIOUS YEAR, THE ASSESSEE HAD RECEIVED FOLLOWING INCENTIVES BY THE STATE GOVERNMENT AND CENTRAL GOVERNMENT: - (I) SALES - TAX INCENTIVE - RS. 12,95,99,499 (II) CENTRAL EXCISE BENEFIT - RS. 22,37,23,672 ------------------------------ TOTAL - RS.35,33,23,171 ---------------------------- THE AMOUNT OF INCENTIVE RECEIVED WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT, HOWEVER, THE ASSESSEE CLAIMED THAT THE SAID RECEIPTS ARE NOT TAXABLE AS THEY ARE CAPITAL RECEIPTS. THE AO WHILE MAKING THE ASSESSMENT HAS REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT IN THE ASSESSMENT YEAR 2006 - 07, THE ASSESSEES CLAIM WAS REJECTED BY THE AO ON THE GROUND THAT THE DECISION OF SPECIAL BENCH IN THE CASE OF RELIANCE INDUSTRIES IS PENDING FOR DISPOSAL BEFORE THE HONBLE BOMBAY HIGH COURT. 6. THE LD. CIT(A) TOO FOLLOWING THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF RELIANCE INDUSTRIES, ALLOWED THE ASSESSEES APPEAL. HOWEVER, LATER ON, THIS DE CISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN SET ASIDE TO THE TRIBUNAL FOR FRESH ADJUDICATION. 7. BEFORE US, IT HAS BEEN STATED THAT THIS ISSUE OF SUBSIDY / INCENTIVE IN THE CASE OF THE ASSESSEE HAD REACHED TO THE STAGE OF ITAT, WHEREBY THE TRIBUNAL, V IDE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 28 ORDER DATED 28.12.2011 HAD SET ASIDE THIS ISSUE TO THE FILE OF THE AO ON THE GROUND THAT AUTHORITIES BELOW HAVE NOT ANALYSED THE SCHEME OF SUBSIDY / INCENTIVE GRANTED BY THE RESPECTIVE GOVERNMENTS. IT HAS BEEN INFORMED THAT, TILL DATE NO ASSESSMENT ORD ER HAS BEEN PASSED IN PURSUANCE OF TRIBUNAL ORDER. INSTEAD A FRESH ASSESSMENT ORDER HAS BEEN PASSED UNDER SECTION 143(3) R.W.S. 153A WHEREIN THIS ISSUE HAS BEEN CONFIRMED BY THE AO AGAIN WITHOUT PROPER ANALYZING THE PURPOSE TEST OF THE SCHEME. 8. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, NOW THERE IS CATENA OF DECISIONS NOT ONLY OF THE TRIBUNAL BUT ALSO OF THE VARIOUS HIGH COURTS INCLUDING THAT OF THE JURISDICTIONAL HIGH COURT, IN FAVOUR OF THE ASSESSEE THAT IF THE SUBSIDY IS GIVEN FOR SETTING UP F OR A NEW INDUSTRIAL UNIT OR PLANT THEN IT IS ON CAPITAL ACCOUNT. IN SUPPORT OF THIS CONTENTION A SEPARATE COMPILATION OF CASE LAWS HAVE BEEN FILED BEFORE US. EXPLAINING THE NATURE OF SCHEME, HE SUBMITTED THAT THE FUNDAMENTAL OBJECT FOR BOTH THE SCHEMES WAS TO SET UP AN INDUSTRIAL PLANT FOR ECONOMIC DEVELOPMENT AND CREATION OF NEW EMPLOYMENT OPPORTUNITIES. FROM THE PERUSAL OF THESE SCHEMES WHICH HAVE BEEN PLACED IN THE PAPER BOOK FROM PAGES 35 TO 47, HE SUBMITTED THAT IT CAN BE SEEN THAT THEY WERE PURELY FOR ASSISTING THE ENTREPRENEUR FOR SETTING - UP NEW INDUSTRIAL UNITS AND NOT FOR RUNNING OF ANY INDUSTRY FOR PROFIT. HE REFER TO PREAMBLE AS GIVEN IN THE INCENTIVE SCHEME OF 2001 FOR ECONOMIC DEVELOPMENT OF KUTCH DISTRICT ISSUED BY GOVERNMENT OF GUJARAT DATED 09.11.2001. EVEN IN THE CENTRAL EXCISE NOTIFICATION, THE SAME WAS ISSUED IN A PUBLIC INTEREST FOR SETTING UP OF A NEW INDUSTRIAL PLANT AND THE INCENTIVE OF EXCISE DUTY BENEFIT WAS GIVEN FOR A PERIOD OF FIVE YEARS. HE FURTHER SUBMITTED THAT THE NATURE OF I NCENTIVE UNDER BOTH THE NOTIFICATIONS AND THE ACCOUNTING TREATMENT BY THE ASSESSEE AS STATED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW WAS AS UNDER: - (A) THE NATURE OF INCENTIVES UNDER THE NOTIFICATION AND THE SCHEME AND THE PRESENT ACCOUNTING TREATMEN T ARE SUMMARIZED AS UNDER: - (A) EXCISE DUTY (IN VIEW OF THE NOTIFICATION) - REFUND OF THE EXCISE DUTY PAID THROUGH PLA ON FINISHED GOODS CLEARED FROM THE UNIT AFTER TAKING CENVAT CREDIT ON THE INPUTS. THIS AMOUNT IS CREDITED TO THE PROFIT AND LOSS ACCOUNT AS 'EXCISE BENEFIT RECEIVED AND INADVERTENTLY OFFERED TO TAX. PRESENTLY, THERE IS NO LIMIT FOR THE QUANTUM OF SUCH INCENTIVE. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 29 (B) SALES TAX/VALUE ADDED TAX (IN VIEW OF THE SCHEME) - PURCHASE OF INPUTS WITHOUT SALES TAX AND SALES WITHOUT CHARGING OF SALES TAX THUS, CLAIMING EXEMPTION. HOWEVER, AFTER THE INTRODUCTION OF VAT, REFUND OF VAT PAID ON INPUTS AND REMISSION OF VAT COLLECTED ON SALES IS AVAILABLE. BOTH THESE COMPONENTS ARE CREDITED TO THE PROFIT AND LOSS ACCOUNT AS 'SALES TAX INCENTIVES RECEIVED' AN D INADVERTENTLY OFFERED TO TAX. THERE IS A MONETARY LIMIT SPECIFIED FOR THE QUANTUM OF THIS INCENTIVE LINKED TO INVESTMENT THAT IS ELIGIBLE UNDER THE SCHEME. (C) THE INCENTIVE CAN BE AVAILED OF ONLY AFTER COMMENCEMENT OF PRODUCTION. FURTHER, IN SO FAR AS I T RELATES TO THE INCENTIVES UNDER THE SCHEME, THE UNIT HAS TO INVEST AT LEAST 50% OF THE INCENTIVES IN THE STATE OF GUJRAT WITHIN A PERIOD OF 10 YEARS FROM THE DATE OF COMMERCIAL PRODUCTION. THUS, HE SUBMITTED THAT, LOOKING TO THE OBJECTS AND THE PURPOSE FOR WHICH SUBSIDY WAS GIVEN, THE INCENTIVE RECEIPTS HAS TO BE TREATED AS CAPITAL. IN SUPPORT OF HIS CONTENTION, BESIDES SEVERAL DECISIONS, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS: - SR . . NO. CASE LAW CITATION 1 SAHNEY STEEL & PRESS WORKS LTD 228 ITR 253 (SC) 2 PONNI SUGARS & CHEMICALS LTD. 306 ITR 392 (SC) 3 BOUGAINVILLEA MULTIPLEX ENT. CENTRE (P) LTD 373 ITR 14 (TRIB) 4 CHAPHALKAR BROTHERS 351 ITR 309 (BOM) 5 BIRLA VXL LTD. 32 TAXMANN.COM 330(GUJ) 6 M/S AJANTA MANUFACTURING LTD. ITA NO. 793/RJT/2010 7 M/S MIHIR PACKAGING ITA NO. 5629/M/2011 8 M/S NIKOMOM FINANCE PVT LTD. ITA NO. 3580/M/2012 I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 30 9. LD. COUNSEL FURTHER POINTED OUT THAT IN THE CASE OF THE ASSESSEE, A SEARCH AND SEIZURE ACTION HAD TAKEN PLACE ON 30.10.2010 IN WELSPUN GROUP OF CASES AND IN PURSUANCE OF THAT NOTICE U/S 153A WAS ISSUED FOR THE IMPUGNED ASSESSMENT YEARS. THE LD. AO BESIDES TREATING THE SAID INCENTIVES AS REVENUE RECEIPTS HAD TAKEN AN ADDITIONAL POINT BY WAY OF AN ALTERNATIVE OBSERVATION THAT IN CASE, THE SAID RECEI PTS ARE TREATED AS CAPITAL RECEIPTS, THEN SAME SHALL BE REDUCED FROM THE COSTS OF ASSETS AND DEPRECIATION CLAIMED ON THE NET COST OF THE ASSETS WILL BE ALLOWED AFTER REDUCING THE AMOUNT OF INCENTIVES IN TERMS OF EXPLANATION 10 TO SECTION 43(1). HE SUBMITTE D THAT SUCH A CONTENTION OF THE AO CANNOT BE UPHELD, BECAUSE THE SAME IS NOT APPLICABLE IN THE PRESENT CASE AT ALL, BECAUSE THERE IS NO DIRECT ACQUISITION OF ASSET FROM THE GOVERNMENT SUBSIDY. THE SUBSIDY IS RECEIVED IN THE FORM OF EXCISE TAX BENEFIT AND S ALES - TAX INCENTIVE ONLY WHEN THE ASSESSEE HAD SET UP THE WHOLE INDUSTRIAL UNIT AND STARTS MANUFACTURING AND COMMENCED ITS BUSINESS OF SALE. THUS, THE SAID PROVISION IS NOT APPLICABLE AND IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE FOLLOWING TRIBUNAL D ECISIONS: - SR. NO. CASE NAME CITATION 1 SASISRI EXTRACTIONS LIMITED 122 ITD 428 (VISAKHAPATNAM) 2 M/S HARINAGAR SUGAR MILLS LTD ITA NO. 772/MUM/2012 3 RASOI LTD. 46 TAXMAN.COM214(KOLKATA - TRIB) 4 UNIVERSAL CABLES LTD 57 TAXMAN.COM95(KOLKATA TRIB) 5 SOHAM ELECTROPLAST PVT LTD ITA NO. 1578/PN/2008 10. ON THE OTHER HAND LD. DR STRONGLY RELIED UPON THE ASSESSMENT ORDER ESPECIALLY PASSED BY THE AO UNDER SECTION 143(3) R.W.S. 153A DATED 25.03.2013 AND SUBMITTED THAT, IF THE INCENTIVE/ SUBSIDY HAS BEEN GI VEN IN THE FORM OF SALES - TAX OR EXEMPTION OF EXCISE DUTY THEN IT DIRECTLY LEADS TO AUGMENTATION OF PROFIT OF THE ASSESSEE AND HENCE, IT IS NOTHING BUT REVENUE RECEIPTS. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE RELEVANT MA TERIAL PLACED ON RECORD. THE MAIN ISSUE INVOLVED IS, WHETHER THE INCENTIVE / SUBSIDY PROVIDED BY THE STATE GOVERNMENT IN THE FORM OF SALES - TAX INCENTIVE AND IN THE FORM OF CENTRAL EXCISE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 31 BENEFIT BY THE CENTRAL GOVERNMENT FOR SUMS AGGREGATING TO RS. 35,33,2 3,171/ - IS TO BE TREATED AS CAPITAL RECEIPTS OR REVENUE RECEIPTS. THE HONBLE SUPREME COURT IN THE CASE OF PONNI SUGARS & CHEMICALS LTD VS CIT, REPORTED IN [2008] 306 ITR 392 AFTER REFERRING TO THE EARLIER DECISIONS OF THE SUPREME COURT IN THE CASE OF SAH NEY STEEL WORKS LTD V CIT, REPORTED IN [1999] 228 ITR 253, HELD THAT THE PURPOSE FOR WHICH SUBSIDY IS GIVEN IS THE CRUCIAL FACTOR. THE PURPOSE IS TO BE JUDGED FROM THE CHARACTER OF THE RECEIPTS IN THE HANDS OF THE ASSESSEE WHICH HAS TO BE DETERMINED WITH RESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. THE POINT OF TIME IS NOT RELEVANT AND ALSO THE SOURCE AND THE FORM OF SUBSIDY IS IMMATERIAL. IF THE SUBSIDY HAS BEEN GIVEN TO SET - UP NEW UNITS OR FOR SUBSTANTIAL EXPLANATION OF EXISTING UNITS, THEN IT IS A CAPITAL RECEIPT. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY THEN, THE RECEIPT IS ON REVENUE ACCOUNT. THE RELEVANT OBSERVATION OF THE HONBLE APEX COURT IN THIS REGARD GIVEN IN PARA 14 READS AS U NDER: - 14. IN OUR VIEW, THE CONTROVERSY IN HAND CAN BE RESOLVED IF WE APPLY THE TEST LAID DOWN IN THE JUDGMENT OF THIS COURT IN THE CASE OF SAHNEY STEEL & PRESS WORKS LTD. (SUPRA). IN THAT CASE, ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT THE SUBSIDY GIVEN WAS UP TO 10 PER CENT OF THE. CAPITAL INVESTMENT CALCULATED ON THE BASIS OF THE QUANTUM OF INVESTMENT IN CAPITAL AND, THEREFORE, RECEIPT OF SUCH SUBSIDY WAS ON CAPITAL ACCOUNT AND NOT ON REVENUE ACCOUNT. IT WAS ALSO URGED IN THAT CASE THAT SUBSIDY G RANTED ON THE BASIS OF. REFUND OF SALES TAX ON RAW MATERIALS, MACHINERY AND FINISHED GOODS WERE ALSO OF CAPITAL NATURE AS THE OBJECT OF GRANTING REFUND OF SALES TAX WAS THAT THE ASSESSEE COULD SET UP NEW BUSINESS OR EXPAND HIS EXISTING BUSINESS. THE CONTEN TION OF THE ASSESSEE IN THAT CASE WAS DISMISSED BY THE TRIBUNAL AND, THEREFORE, THE ASSESSEE HAD COME TO THIS COURT BY WAY OF A SPECIAL LEAVE PETITION. IT WAS HELD BY THIS COURT ON THE FACTS OF THAT CASE AND ON THE BASIS OF THE ANALYSES OF THE SCHEME THERE IN THAT THE SUBSIDY GIVEN WAS ON REVENUE ACCOUNT BECAUSE IT WAS GIVEN BY WAY OF ASSISTANCE IN CARRYING ON OF TRADE OR BUSINESS. ON THE FACTS OF THAT CASE, IT WAS HELD THAT THE SUBSIDY GIVEN WAS TO MEET RECURRING EXPENSES. IT WAS NOT FOR ACQUIRING THE CAPIT AL ASSET. IT WAS NOT TO MEET PART OF THE COST. IT WAS NOT GRANTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDIES IN THAT CASE WERE GRANTED YEAR AFTER YEAR I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 32 ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND ONLY AFTER COMMENCEMENT OF P RODUCTION AND, THEREFORE, SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. CONSEQUENTLY, THE CONTENTIONS RAISED ON BEHALF OF THE ASSESSEE ON THE FACTS OF THAT CASE STOOD REJECTED AND IT W AS HELD THAT THE SUBSIDY RECEIVED BY SAHNEY STEEL COULD NOT BE REGARDED AS ANYTHING BUT A REVENUE RECEIPT. ACCORDINGLY, THE MATTER WAS DECIDED AGAINST THE ASSESSEE. THE IMPORTANCE OF THE JUDGMENT OF THIS COU RT IN SAHNEY STEEL & PRESS WORK S LTD. 'S CASE (SU PRA) LIES IN THE FACT THAT IT HAS DISCUSSED AND ANALYSED THE ENTIRE CASE LAW AND. IT HAS LAID DOWN THE BASIC TEST TO BE APPLIED IN JUDGING THE CHARACTER OF A SUBSIDY. THAT TEST IS THAT THE CHARACTER OF THE RECEIPT IN THE HANDS OF THE ASSESSEE HAS TO BE DET ERMINED WITH RESPECT TO THE PURPOSE FOR WHICH THE SUBSIDY IS GIVEN. IN OTHER WORDS, IN SUCH CASES, ONE HAS TO APPLY THE PURPOSE TEST. THE POINT OF TIME WHICH THE SUBSIDY IS PAID IS NOT RELEVANT. THE SOURCE IS IMMATERIAL. THE FORM OF SUBSIDY IS IMMATERIAL. THE MAIN ELIGIBILITY CONDITION IN THE SCHEME WITH WHICH WE ARE CONCERNED IN THIS CASE IS THAT THE INCENTIVE MUST BE UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SETUP NEW UNITS OR FOR SUBSTANTIAL EXPANSION OF EXISTING UNITS; ON THIS ASPECT THER E IS NO DISPUTE. IF THE OBJECT OF THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY THEN THE RECEIPT IS ON REVENUE ACCOUNT. ON THE OTHER HAND, IF THE OBJECT OF THE ASSISTANCE UNDER THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESS EE TO SET UP A NEW UNIT OR TO EXPAND THE EXISTING UNIT THEN THE RECEIPT OF THE SUBSIDY WAS ON CAPITAL ACCOUNT. THEREFORE, IT IS THE OBJECT FOR WHICH THE SUBSIDY/ASSISTANCE IS GIVEN WHICH DETERMINES THE NATURE OF THE INCENTIVE SUBSIDY. THE FORM OF THE MECHA NISM THROUGH WHICH THE SUBSIDY IS GIVEN IS IRRELEVANT. 12. NOW, IN THE WAKE OF THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT, WE SHALL EXAMINE THE NATURE OF SUBSIDY PROVIDED TO THE ASSESSEE. THE INCENTIVE SCHEME 2001 FOR ECONOMIC DEVELOPMENT OF KU TCH DISTRICT OF THE GUJARAT GOVERNMENT GIVES THE FUNDAMENTAL PREAMBLE WHICH HIGHLIGHTS THE BASIC OBJECTIVE AND THE PURPOSE FOR WHICH THE INCENTIVE BY THE STATE GOVERNMENT AS WELL AS CENTRAL GOVERNMENT IS BEING GIVEN HAS BEEN HIGHLIGHTED IN THE FOLLOWING M ANNER: - I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 33 THE ECONOMIC ACTIVITIES IN THE DISTRICT OF KUTCH CAME TO A STANDSTILL ON ACCOUNT OF THE DEVASTATING EARTHQUAKE IN THE STATE ON 26TH JANUARY, 2001. NEW EMPLOYMENT, OPPORTUNITIES COULD BE CREATED IF NEW INVESTMENT TAKES PLACE. THE GOVERNMENT IS COMMITTED TO ATTRACTING INDUSTRIES IN THE DISTRICT TO MAKE THE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. GOVERNMENT OF INDIA HAVE ANNOUNCED EXCISE DUTY EXEMPTION FOR NEW INDUSTRIES TO PROMOTE LARGE SCALE INVESTMENT IN THE DISTRICT, ALONG WITH WHICH THE STA TE GOVERNMENT HAS ALSO DECIDED TO ANNOUNCE THE SCHEME OF SALES TAX INCENTIVES. SINCE THE SCHEME IS AIMED AT MAKING THE ECONOMIC ENVIRONMENT OF KUTCH DISTRICT LIVE, IT HAS BEEN DECIDED TO CONFINE THE SAME ONLY TO KUTCH DISTRICT. 13. FROM THE PERUSAL OF THE ABOVE, IT IS AMPLY CLEAR THAT THE SCHEMES LAUNCHED WAS FOR SETTING UP OF NEW INDUSTRIES IN THE DISTRICT OF KUTCH FOR THE PURPOSE OF NEW EMPLOYMENT OPPORTUNITIES AND TO MAKE INDUSTRIAL AND ECONOMIC ENVIRONMENT LIVE. THUS, THE SCHEME OF INCENTIVES PROVIDED BY THE RESPECTIVE GOVERNMENTS WAS SETTING - UP OF A NEW UNIT AND NOT FOR RUNNING OF THE BUSINESS MORE PROFITABLY. AS LAID DOWN BY THE HONBLE SUPREME COURT, THE FORM AND THE SOURCE OF SUBSIDY ARE IMMATERIAL AND WHAT IS MATERIAL IS WHETHER THE SUBSIDY IS FOR SETTING UP FOR A INDUSTRIAL UNIT OR RUNNING IT FOR PROFITABILITY. SIMILARLY, THE CENTRAL EXCISE EXEMPTION WAS GIVEN IN THE PUBLIC INTEREST FOR SETTING UP OF A NEW INDUSTRIAL UNIT IN THE KUTCH DISTRICT. ACCORDINGLY ON THE FACTS OF THE PRESENT CASE, WE CONCL UDE THAT THE INCENTIVE GIVEN BY THE STATE GOVERNMENT AND THE CENTRAL GOVERNMENT IS NOTHING BUT CAPITAL RECEIPTS, BECAUSE APPLYING THE PURPOSE TEST THE INCENTIVE / SUBSIDY WAS GIVEN ONLY FOR SETTING UP OF NEW INDUSTRIAL UNIT AND ECONOMIC DEVELOPMENT AND G ENERATION OF NEW EMPLOYMENT OPPORTUNITIES IN THE KUTCH DISTRICT AND NOT FOR RUNNING THE INDUSTRY FOR AUGMENTING THE PROFIT ON DAY - TO - DAY BUSINESS. THIS PROPOSITION OF LAW HAS BEEN REITERATED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS CHAPHALKAR BROTHERS, REPORTED IN 351 ITR 309, WHEREIN THE HONBLE HIGH COURT RELYING UPON THE PRINCIPLES LAID DOWN BY THE SUPREME COURT IN THE CASE OF PONNI SUGARS & CHEMICALS LTD HAS HELD THAT IF THE OBJECT OF THE SUBSIDY WAS TO PROMOTE CONSTRUCTION OF MULTIPLEXES, THEATER COMPLEXES THEN, IT WOULD BE ON CAPITAL ACCOUNT. SIMILARLY, VIEWS HAVE BEEN TAKEN BY THE VARIOUS OTHER HIGH COURTS AND TRIBUNAL IN THE DECISION AS REFERRED AND RELIED UPON BY THE LD. COUNSEL AS ABOVE. THUS, WE HOLD THAT THE AMOUNT OF I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 34 INCENTIVE RECE IVED BY THE ASSESSEE CANNOT BE TAXED AS REVENUE RECEIPT AS IT IS PURELY ON CAPITAL ACCOUNT. 14. AS REGARDS THE OTHER PLEA RAISED BY THE AO IN THE ORDER PASSED U/S 143(3) R.W.S. 153A, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT, NONE OF THE PLANT A ND MACHINERY INSTALLED BY THE ASSESSEE FOR SETTING UP OF A NEW INDUSTRIAL UNIT HAS BEEN FUNDED BY THE GOVERNMENT SUBSIDY. THE SUBSIDY HERE IN THIS CASE IS NOT SPECIFICALLY INTENDED TO SUBSIDIES THE COST OF CAPITAL OR PLANT & MACHINERY. THE INCENTIVE IN THE FORM OF SUBSIDY BY THE GOVERNMENT HERE IN THIS CASE CANNOT BE CONSIDERED AS PAYMENT DIRECTLY OR INDIRECTLY TO MEET ANY PORTION OF THE ACTUAL COST AND HENCE IT DOES NOT FALL WITHIN THE PURVIEW OF EXPLANATION 10 TO SECTION 43(1). THUS, THIS ALTERNATIVE PLEA AS RAISED BY LD. AO IS REJECTED. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE ON THIS SCORE STANDS DISMISSED. WE ARE IN AGREEMENT WITH THE AFORESAID DECISION OF THE TRIBUNAL DATED 18.12.2015 IN THE CASE OF WELSPUN STEEL LTD(SUPRA) AS THE SAID INCENTIVES BY WAY OF EXCISE DUTY REFUND AND SALES TAX INCENTIVES WERE GIVEN TO ENCOURAGE SETTING UP OF NEW INDUSTRIAL UNIT IN KUTCH DISTRICT TO REDEVELOP THE KUTCH DISTRICT IN THE WAKE OF DEVASTATING EARTHQUAKE ON 26.01.2001 ALBEIT THE SAID INC ENTIVES ARE GIVEN POST COMMENCEMENT OF MANUFACTURING AND THE SAID SUBSIDY SHALL BE CAPITAL IN NATURE AS IT IS FOR PROMOTING SETTING UP OF NEW INDUSTRY IN KUTCH DISTRICT WHICH WAS DEVASTATED BY EARTHQUAKE EVEN IF THE SUBSIDY IS GIVEN POST COMMENCEMENT OF COMMERCIAL PRODUCTION BY WAY OF REFUND OF CENTRAL EXCISE AND EXEMPTION OF SALES TAX WHICH IS NOT MATERIAL KEEPING IN VIEW PURPOSIVE TEST AND THE FACT THAT THE SAID INCENTIVES WERE GIVEN TO ENCOURAGE MAKING CAPITAL INVESTMENTS IN KUTCH DISTRICT IN SETTING U P NEW INDUSTRY TO REDEVELOP THE KUTCH DISTRICT POST DEVASTATING EARTHQUAKE S ON 26.01.2001. WE ALSO NOTE THAT SPECIAL BENCH DECISION OF THE MUMBAI - TRIBUNAL IN THE CASE OF RELIANCE INDUSTRIES LIMITED(SUPRA) WAS UPHELD BY HONBLE BOMBAY HIGH COURT IN CIT V. R ELIANCE INDUSTRIES LIMITED ( 2011) 339 ITR 632(BOM.) BY HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW WOULD ARISES AS THE OBJECT OF THE SUBSIDY WAS TO SET UP A NEW UNIT IN A BACKWARD AREA TO GENERATE EMPLOYMENT BUT AFORESAID DECISION OF HONBLE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 35 BOMBAY HIGH C OURT HAS BEEN SET ASIDE BY HONBLE SUPREME COURT IN CIVIL APPEAL NUMBER 7769 OF 2011 ( ARISING OUT OF SLP (C) NO. 9860 OF 2010) DATED 09.09.2011 AND THE MATTER IS REMITTED BACK TO HONBLE BOMBAY HIGH COURT TO DECIDE THE QUESTION OF LAW FRAMED THEREON IN AC CORDANCE WITH LAW . THIS REVIVES THE SPECIAL BENCH DECISION OF THE TRIBUNAL IN THE CASE OF RELIANCE INDUSTRIES LIMITED(SUPRA) , WHICH HAS ALREADY HELD THAT SUBSIDY WHICH IS GIVEN FOR SETTING UP OR EXPANSION OF INDUSTRY IN A BACKWARD AREA , WILL BE CAPITAL I N NATURE , IRRESPECTIVE OF MODALITY OR SOURCE OF FUNDS THROUGH OR FROM WHICH IT IS GIVEN. THUS, FOLLOWING THE RATIO OF DECISION OF CO - ORDINATE BENCHES OF THE TRIBUNAL IN THE CASE OF WELSPUN STEEL LTD(SUPRA) , WE HOLD THAT CENTRAL EXCISE BENEFIT AND SALES T AX INCENTIVE RECEIVED BY THE ASSESSEE DURING THE IMPUGNED ASSESSMENT YEAR UNDER CONSIDERATION, ARE CAPITAL RECEIPTS NOT EXIGIBLE TO INCOME - TAX AND FURTHER WE HOLD THAT THE SAME SHALL NOT BE DEDUCTED FROM COST OF ASSETS FOR COMPUTING DEPRECIATION. THE GROU ND NUMBER 1 AND 2 RAISED BY THE REVENUE IN ITS MEMO OF APPEAL FILED WITH THE TRIBUNAL ARE DISMISSED. WE ORDER ACCORDINGLY. 6 . THIS TAKES US TO THE NEXT ISSUE WHICH CONCERNS ITSELF WITH DISALLO WANCE MADE U/S. 14A OF THE 1961 ACT. BOTH THE RIVAL PARTIES ARE AGGRIEVED BY THE APPELLATE DECISION OF LEARNED CIT(A) ON THIS ISSUE . 6 .2. THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS. 2,58,31,086/ - DURING THE IMPUGNED ASSESSMENT YEAR WHICH WAS CLAIMED AS AN EXEMPT INCOME . THE ASSES SEE HAS MADE INVESTMENTS IN SHARES TO THE TUNE OF RS. 90.48 CRORES AS ON 31.03.2008. THE SAID INVESTMENT IN SHARES , INTER - ALIA, INCLUDED STRATEGIC INVESTMENTS IN GROUP/ASSOCIATED COMPANIES APART FROM INVESTMENTS IN SHARES, MUTUAL FUNDS AND GOVERNMENT SECU RITIES . T HE ASSESSEE VOLUNTARILY DISALLOWED R S. 81,30,975/ - AS AN EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME WITHIN THE PROVISIONS OF SECTION 14A OF THE 1961 ACT . THE ASSESSEE HAD INCURRED AN AMOUNT OF RS. 67.68 CRORE S DURING THE IMPU GNED ASSESSMENT YEAR TOWARDS INTEREST EXPENDITURE ON LOANS/DEBENTURES, WORKING CAPITAL AND OTHER INTEREST EXPENDITURE. THE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 36 AO HELD THAT THE ASSESSEE COULD NOT PROVE THAT THE ASSESSEE MADE INVESTMENTS TOTALLY OUT OF SURPLUS MONEY AND CONTENTIONS OF THE ASSE SSEE TO THAT EFFECT WERE REJECTED BY THE AO. THE LEARNED AO ALSO HELD THAT THE ASSESSEE COULD NOT ESTABLISH AND PROVIDE ANY BASIS /METHOD TO COMPUTE DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A OF THE 1961 ACT. T H E AO WORKED OUT DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING OF AN EXEMPT INCOME U/S 14A OF THE 1961 ACT BY INVOKING RULE 8D OF THE INCOME - TAX RULES, 1962 R.W.S. 14A OF THE 1961 ACT , WHEREIN DISALLOWANCE WAS WORKED OUT BY THE AO AS UNDER: - SINCE, THE ASSESSEE COMPANY HAD ALREADY DISALLOWED AN A MOUNT OF RS. 81,30,975/ - UNDER SECTION 14A OF THE ACT, THE REMAINING AMOUNT OF RS. 3,92,83,170/ - WAS DISALLOWED BY THE AO U/S. 14A OF THE 1961 ACT AND ADDED BACK TO TH E TOTAL INCOME OF THE ASSESSEE, VIDE ASSESSMENT ORDER DATED 26.03.2013 PASSED U/S 143(3) READ WITH SECTION 153A RWS 144C(1) OF THE 1961 ACT. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 37 6 . 3 THE ASSESSEE CARRIED THE MATTER FURTHER IN APPEAL BEFORE LEARNED CIT(A), WHEREI N LD. CIT(A) WAS PLEASED TO G RANT PARTIAL RELIEF BY HOLD ING AS UNDER , VIDE APPELLANT ORDER DATED 10.09.2015 : - 8.4 I HAVE CONSIDERED THE FACTS OF THE CASE TOGETHER WITH REASONS ASSIGNED BY THE AO AND CONTENTION OF THE APPELLANT. IT IS SEEN THAT THE AO HAS DISALLOWED PROPORTIONATE INTEREST AND AN AMOUNT EQUAL TO 0.5% OF AVERAGE INVESTMENT IN SHARES ON ACCOUNT OF ADMINISTRATIVE EXPENSES RELATING TO EXEMPT INCOME AND IN DOING SO HE RELIED UPON GODREJ & BOYCE MFG. CO, LTD. V/S. DY. CIT 328 ITR 81 (BOM). IT IS NOW ADMITTED POSITION THAT ,.THE DISALLOWANCE U/S.14A HAS TO BE DETERMINED KEEPING IN VIEW THE DIRECT NEXUS BETWEEN EXEMPT INCOME AND EXPENDITURE INCURRED ON A REASONABLE BASIS. IN VIEW OF SPECIFIC LANGUAGE OF SUB - SECTIONS (2) AND (3) OF SECTION 14A, THE PRESCRIBED METHOD OF RULE 8D HAS TO BE APPLIED BY THE AO ONLY IF HE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF NO OR AN EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME. THE RELEVANT FACTS OF THE CASE REVEALS THAT THE APPELLANT RECEIVED DIVIDEND INCOME OF RS.2,58,31,086/ - WHICH WAS CLAIMED EXEMPT. THE NATURE OF INVESTMENT SHOWS: - 31.03.2008 31.03.2007 (A) GOVERNMENT SECURITIES (NSC) 12,000 12,000 (B) SHARES IN SUBSIDIARY AND GROUP C OMPANIES 68,95,45,956/ - 56,29,00,456/ - (C) UNITS OF MUTUAL FUNDS AND SHARES OF OTHER COMPANIES 21,52,05,969/ - 1,10,25,32,893/ - TOTAL 90,47,63,925/ - 1,66,54,45,350/ - THE GOVERNMENT SECURITIES ARE IN THE NATURE OF NSC AND GENERATE TAXABLE INCOME. THE INVESTMENT IN SHARES OF SUBSIDIARY AND GROUP COMPANIES ARE AROUND 76% OF THE TOTAL INVESTMENT. IT IS SEEN THAT THERE WAS SHAREHOLDERS' FUNDS AS ON 31 - 3 - 2008 TO THE EXTENT OF RS 5588.19 MILLION. IT MEANS INVESTMENT IN SHARES OTHER THAN SUBSIDIAR Y AND GROUP COMPANIES ARE AROUND 4% ONLY OF THE SHAREHOLDERS' FUNDS. IT IS FURTHER SEEN THAT MAJOR INVESTMENT IN SHARES ARE CARRIED FORWARD FROM THE PRECEDING PREVIOUS YEAR. COMING TO ANOTHER ASPECT OF LOANS TAKEN BY THE APPELLANT IT IS SEEN THAT SECURED L OANS OF RS 15,235.71 MILLION AS ON 31 - 3 - 2008 WERE TAKEN FROM BANKS AND FINANCIAL I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 38 INSTITUTIONS IN THE NATURE OF TERM LOANS, FOREIGN CURRENCY LOANS, WORKING CAPITAL LOA NS. FURTHER UNSECURED LOANS OF RS 182.32 MILLION WERE SHORT TERM LOANS FROM BANKS. IT IS S EEN THAT TH E APPELLANT ADDED BACK A SUM OF RS 81,30,975/ - BEING PROPORTIONATE PART OF INTEREST UNDER S. 14A WORKED OUT IN RESPECT OF INVESTMENT IN MUTUAL FUNDS AND SHARES OF COMPANIES OTHER THAN GROUP COMPANIES. THE AO HAS NOT CONTRAVENED THE PROPORTIONAT E PART OF INTEREST AS WORKED OUT AND ADDED BACK TO INCOME. IT IS OBSERVED THAT INVESTMENT IN SUBSIDIARY AND GROUP COMPANIES TO T HE EXTENT OF RS 68,95,45,956/ - ARE LONG TERM INVESTMENT AND NO DECISION IS REQUIRED IN MAKING THESE INVESTMENT OR DISINVESTME NT ON REGULAR BASIS BECAUSE THESE INVESTMENTS ARE STRATEGIC IN NATURE AND THEREFORE NO DIRECT OR INDIRECT EXPENDITURE IS REQUIRED. IT IS POINTED OUT BY THE APPELLANT THAT IN GARWARE WALL ROPES LTD. V/S. ACIT (ITA NO.5408/MUM/2012) DATED 15 - 1 - 2014 IT IS HEL D THAT A DISALLOWANCE UNDER S.14A CANNOT BE MADE IF PRIMARY OBJECT OF INVESTMENT IS HOLDING CONTROLLING STAKE IN GROUP CONCERNS. THE APPELLANT ALSO POINTED OUT THE SIMILAR DECISIONS OF ORIENTAL STRUCTURAL ENGINEERS PVT. LTD. 35 TAXMANN.COM 210 (DEL.) AND J . M. FINANCIAL LTD. V/S. ACIT (ITA NO,4521/MUM/2012) DATED 26 - 3 - 2014 FOR THE A.Y.2009 - 10. CONSIDERING THE FACT THAT THE APPELLANT A DDED BACK A SUM OF RS 81,30,975/ - BEING PROPORTIONATE INTEREST UNDER S. 14A IN RESPECT OF INVESTMENT IN MUTUAL FUNDS AND SHA RES OF COMPANIES OTHER THAN GROUP COMPANIES . I DO NOT FIND ANY REASON FOR DISALLOWING FURTHER INTEREST UNDER S.14A SINCE THE PRIMARY OBJECT OF INVESTMENT IN SUBSIDIARY AND GROUP COMPANIES IS HOLDING CONTROLLING STAKE IN GROUP CONCERNS. IT IS SEEN THAT TH E AO HAS DISALLOWED EXPENSES UNDER S.14A AS PER RULE 8D RELYING ON THE DECISION OF GODREI & BOYCE MFG. CO. LTD. IN THIS CASE IT IS HELD THAT PROVISIONS OF SECTION 14A CANNOT BE APPLIED UNLESS THERE IS PROXIMATE CAUSE FOR DISALLOWANCE AND THEREFORE APPLICAT ION OF SECTION 14A AND RULE 8D IS NOT AUTOMATIC IN EACH AND EVERY CASE. THE EXEMPTION FROM THE TAX IF GRANTED BY THE STATUTE SHOULD BE GIVEN FULL SCOPE AND AMPLITUDE AND SHOULD NOT BE WHITTLED DOWN BY IMPOSING LIMITATIONS. HOWEVER IN THIS CASE THERE ARE HU GE INVESTMENT IN UNITS OF MUTUAL FUNDS AND SHARES OF THE OTHER COMPANIES, AND AS SUCH CERTAIN DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES IS REQUIRED TO BE MADE. THOUGH THE OBJECTIVE OF SECTION 14A IS NOT ALLOWING TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME BY DEBITING THE EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 39 INCOME CANNOT BE ALLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO THE EARNING OF TAXABLE INCOME. IF TH ERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO EXEMPT INCOME, THE SAME CANNOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXABLE AS IT IS HELD BY THE SC IN CASE OF CIT V/S. WALFORT SHARE AND STOCK BROKERS P. LTD. (326 ITR 1) (SC) THAT FOR A TTRACTING THE PROVISIONS OF SECTION 14A, THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH HAS RELATIONSHIP WITH THE TAX EXEMPT INCOME. THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALLOWED. H OWEVER, IT SHOULD BE PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, .THE DISALLOWANCE IS TO BE EFFECTED. IN CASE THE ASSESSEE HAD CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING THE EXEMPT INCOME, IT WAS FOR THE AO TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME AND IF SO TO QUANTIFY THE EXTENT OF DISALLOWANCE. HOWEVER , CERTAIN PART OF ADMINISTRATIVE EXPENSES SHOULD BE DISALLOWED IN ACCORDANCE WITH RULE 8D I.E. @ 0.5% OF AVERAGE INVESTMENT IN UNITS OF MUTUAL FUNDS AND SHARES OTHER THAN SHARES OF GROUP COMPANIES. THE AVERAGE OF SUCH INVESTMENT COMES TO RS. 65,88,69,431/ - (I.E. 21,52,05,969/ - + 1,10,25,32,893/ - / 2). HENCE I CONFIRM THE ADDITION TO THE EXTENT OF RS 32,94,347/ - BEING 0.5% OF RS 65,88,69,431/ - (I.E. AVERAGE INVESTMENT IN MUTUAL FUNDS AND SHARES OF THE COMPANIES OTHER THAN GROUP COMPANIES). THE AP PELLANT GETS RELIEF OF RS 3,59,88,823/ - . THIS GROUND OF APPEAL IS PARTLY ALLOWED. 6 .4 . THE LEARNED CIT(A) G RANTED RELIEF OF RS. 3,59,88,82 3/ - WHILE DISALLOWANCE TO THE TUNE OF RS. 32,94,347/ - WERE CONFIRMED BY LEARNED CIT(A) BY INVOKING PROVISIONS OF SECTION 14A OF THE 1961 ACT R.WR. 8D2(III) OF THE 1962 RULES . THE LEARNED CIT(A) ALSO EXCLUDED INVESTMENT S MADE BY THE ASSESSEE IN GROUP COMPANIES WHILE CONFIRMING AFORESAID DISALLOWANCE OF RS. 32,94,347/ - . IT IS PERTINENT TO MENTION HERE T HAT THE SAID PROPOSITION OF EXCLUSION OF INVESTMENTS IN SUBSIDIARY / ASSOCIATED COMPANIES WHILE COMPUTING DISALLOWANCE U/S 14A R.W.R. 8D HAS ALREADY BEEN REJECTED BY HONBLE SUPREME COURT I N A RECENT DECISION IN T HE CASE OF MAXOPP INVESTMENT LIMITED V. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 40 CIT REPORTED IN (2018) 402 ITR 640(SC) . B EFORE US , LD. SPECIAL COUNSEL HAD PLEADED THAT THE MATTER CAN BE RESTORED AND SET ASIDE TO THE FILE OF THE AO FOR RE - COMPUTATION OF DISALLOWANCE U/S 14A OF THE 1961 ACT . THE LEARNED COUNSEL FOR THE ASSESSEE ON THE O THER HAND HAS DRAWN OUR ATTENTION TO THE AVAILABILITY OF OWN FUNDS WITH THE ASSESSEE WHICH IT IS CLAIMED IS MUCH HIGHER THAN INVESTMENTS MADE IN THE SHARES AND MUTUAL FUNDS, INCLUDING INVESTMENTS MADE IN SUBSIDIARY/ASSOCIATED COMPANIES. IT IS SHOWN THAT TO TAL INVE STMENTS MADE BY THE ASSESSEE WERE TO THE TUNE OF RS. 90.48 CRORES AS ON 31.03.2008 AND RS. 166.54 CRORES AS ON 31.03.2007 , WHILE OWN FUNDS WERE TO THE TUNE OF RS. 558.81 CRORES AS ON 31.03.2008 AND RS. 542.78 CRORES AS ON 31.03.2007 . OUR ATTENTIO N WAS DRAWN TO PAGE 28/PAPER BOOK FILED BY THE ASSESSEE WHICH IS AUDITED BALANCE SHEET OF THE ASSESSEE COMPANY . THE ASSESSEE ALSO SUBMITTED THAT THE ASSESSEE VOLUNTARILY DISALLOWED AN EXPENDITURE OF RS. 81,30,975/ - INCURRED IN RELATION TO EARNING OF AN E XEMPT INCOME , U/S 14A OF THE 1961 ACT. 6 .5 WE HAVE CONSIDERED RIVAL CONTENTION S AND PERUSED THE MATERIAL ON RECORD INCLUDING ORDERS OF AUTHORITIES BELOW AND CITED CASE LAW. WE HAVE OBSERVED THAT THE ASSESSEE HAS MADE AN INVESTMENT OF RS. 90.48 CRORES AS O N 31.03.2008 AND RS. 166.54 CRORES AS ON 31.03.2007, AS PER AUDITED FINANCIAL STATEMENTS PRODUCED BEFORE US. WE HAVE OBSERVED THAT THE ASSESSEE HAS ITS OWN INTEREST FREE FUNDS BY WAY OF SHARE CAPITAL AND RESERVES AND SURPLUSES TO THE TUNE OF RS. 558.82 CRO RES AS ON 31.03.2008 AND RS. 542.78 CRORES AS ON 31.03.2007. THE INVESTMENTS MADE BY THE ASSESSEE INCLUDED INVESTMENT IN GOVERNMENT SECURITIES, MUTUAL FUNDS AND SHARES. THE INVESTMENTS IN SHARES INCLUDED INVESTMENT IN GROUP /SUBSIDIARY/ASSOCIATED COMPANIES. THE THEORY OF DOMINANT OBJECT OF HOLDING SHARES IS ALREADY REJECTED BY HONBLE SUPREME COURT IN THE CASE OF MAXOPP I NVESTMENT LIMITED(SUPRA) AND HENCE EVEN IF SHARES ARE HELD BY THE ASSESSEE AS STRATEGIC INVESTMENT IN GROUP /ASSOCIATED COMPANIES ETC . , IT WILL WARRANT DISALLOWANCE U/S 14A. WE HAVE ALSO NOTED THAT THE ASSESSEE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 41 HAS CLAIMED THAT ITS INTEREST BEARING BORROWINGS WERE FOR THE SPECIFIC PURPOSES AND NO PART OF IT WAS INVESTED IN SECURITIES CAPABLE OF YIELDING AN EXEMPT INCOME . THERE IS N O ADVERSE FINDING OF THE LOWER AUTHORITIES TO REBUT SUCH CLAIM AND IT IS ON THE THEORY OF MIXED FUND USE, THE DISALLOWANCE WAS MADE OF INTEREST EXPENDITURE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES. AS WE HAVE SEEN EARLIER, THE ASS ESSEES OWN FUNDS ARE MORE THAN THE INVESTMENTS MADE BY THE ASSESSEE AND HENCE NO DISALLOWANCES ARE WARRANTED U/S 14A READ WITH RULE 8D(2)(II) OF THE 1962 RULES. , KEEPING IN VIEW THAT THERE IS NO INCRIMINATING FINDING RECORDED BY REVENUE THAT ANY SPECIFIC INTEREST BEARING BORROWINGS WERE USED BY THE ASSESSEE FOR MAKING INVESTMENTS IN SHARES WHILE THE ASSESSEE HAS CLAIMED THAT INTEREST BEARING BORROWINGS WERE USED FOR SPECIFIC PURPOSES FOR WHICH THEY WERE GRANTED AND NO PART OF THE SAID INTEREST BEARING BOR ROWINGS WERE USED FOR MAKING INVESTMENTS IN SECURITIES WHICH ARE CAPABLE OF YIELDING INTEREST FREE INCOME AND THE AO CONCLUDED THAT IT IS INFACT MIXED FUNDS WHICH WERE AVAILABLE WITH THE ASSESSEE AND ON THAT BASIS DISALLOWANCE OF EXPENDITURE WAS MADE U/S 1 4A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULES . THE PRESUMPTION IN SUCH CASES WILL BE THAT THE ASSESSEE USED ITS OWN INTEREST FREE FUNDS AVAILABLE WITH IT FOR MAKING INVESTMENTS IN SHARES AND SECURITIES CAPABLE OF YIELDING EXEMPT INCOME. WE ARE GUIDED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LIMITED (2009) 313 ITR 340(BOM.) A ND H D FC BANK LIMITED V. DCIT (2016) 383 ITR 529(BOM.) TO HOLD THAT THERE WILL BE PRESUMPTION IN FAVOUR OF THE ASS ESSEE . THE REVENUE IS NOT ABLE TO REBUT THE AFORESAID PRESUMPTION IN FAVOUR OF THE ASSESSEE EVEN BEFORE US. THUS THIS DISALLOWANCE AS WAS MADE BY THE AO BY INVOKING SECTION 14A OF THE 1961 ACT READ WITH RULE 8D(2)(II) OF THE 1962 RULE IS DIRECTED TO BE DEL ETED. WE ORDER ACCORDINGLY. SO, FAR AS DISALLOWANCE U/S 14A READ WITH RULE 8D(2)(III) OF THE 1962 RULES IS CONCERNED, WE ARE OF THE CONSIDER ED VIEW THAT THIS ISSUE WITH I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 42 RESPECT TO DISALLOWANCE OF EXPENDITURE IS REQUIRED TO BE SET ASIDE AND RESTORED TO THE FILE OF THE AO FOR FRESH /DE - NOVO ADJUDICATION BY THE AO ON MERITS IN ACCORDANCE WITH LAW AFTER CONSIDERING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENTS LIMITED(SUPRA) , DECISION OF HONBLE BOMBAY HIGH COURT , NAGPUR BENCH IN THE CASE OF THE PR. CIT V. BALLARPUR INDUSTRIES LTD. IN ITA NO. 51 OF 2016 VIDE ORDERS DATED 13.10.2016 , DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LIMITED V. CIT (2015) 378 ITR 33(DELHI) , DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF JOINT INVESTMENTS PRIVATE LIMITED V . CIT REPORTED IN (2015) 372 ITR 694(DELHI) AND DECISION OF ITAT - SPECIAL BENCH DELHI IN THE CASE OF ACIT V. VIREET INVESTMENT PRIVATE LIMITED (2017) 165 ITD 27(DELHI - TRIB.SB). THE CRUX OF THESE DECISIONS IS THAT STRATEGIC INVESTMENTS MADE WITH GROUP/ASSOCIATED COMPANIES ETC CANNOT BE EXCLUDED WHILE COMPUTING DISALLOWANCE U/S 14A , SECONDLY THAT THE DISALLOWANCE CANNOT EXCEED EXEMPT INCOME AND THIRDLY THAT ONLY THOSE INVESTMENTS WHICH ACTUALLY YIELDED AN EXEMPT I NCOME BE ONLY CONSIDERED WHILE COMPUTING DISALLOWANCE U/S 14A OF THE 1961 ACT READ WITH RULE 8D(2)(III) OF THE 1962 RULE . WITH THESE DIRECTIONS, WE ARE RESTORING TH IS ISSUE BACK TO THE FILE OF THE AO FOR FRESH /DENOVO ADJUDICATION OF THE ISSUE ON MERITS IN ACCORDANCE WITH LAW KEEPING IN VIEW OUR ABOVE DIRECTIONS. NEEDLESS TO SAY THAT THE AO SHALL PROVIDE NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN DENOVO PROCEEDINGS IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. THE EVI DENCES /EXPLANATIONS PRODUCED BY THE ASSESSEE IN ITS SUPPORT SHALL BE ADMITTED BY THE AO IN THE INTEREST OF JUSTICE IN ACCORDANCE WITH LAW. THIS DISPOSES OF GROUND NO. 3 OF THE R EVENUE AP PEAL AND ALSO GROUND NO. 1( A ) , ( B ) AND ( C ) OF THE ASSESSEE S APPEAL . WE ORDER ACCORDINGLY. 7 . THIS TAKES US TO THE NEXT GROUND RAISED BY ASSESSEE VIDE GROUND NUMBER 2 WHICH CONCERNS ITSELF WITH ADDITIONS MADE BY THE AO TO THE TUNE OF RS. 4,74,14,145/ - U/S 14A WHICH WAS ADDED WHILE COMPUTING I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 43 BOOK PROFITS U/S 115JB , WHICH A DDITIONS WERE LATER CONFIRMED BY LEARNED CIT(A) TO THE TUNE RS. 1,14,25,322/ - , INCLUDING VOLUNTARY DISALLOWANCE OF RS. 81,30,975/ - MADE BY THE ASSESSEE U/S 14A , WHILE COMPUTING BOOK PROFITS OF THE ASSESSEE U/S 115JB. ON THE OTHER HAND R EVENUE IS AGGRIEVE D BY THE RELIEF GRANTED BY LEARNED CIT(A) WHICH IS AGITATED BY REVENUE IN ITS APPEAL VIDE GROUND NUMBER 6. WE HAVE HEARD RIVAL PARTIES . THE ISSUE IS CONSEQUENTIAL TO OUR DECISION IN THE CASE OF DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EARNING O F AN EXEMPT INCOME U/S 14 A IN THE PRECEDING PARAS OF THIS ORDER. WE ARE OF THE VIEW THAT THIS ISSUE IS REQUIRED TO BE SET ASIDE AND RESTORED TO THE FILE OF THE AO TO BE ADJUDICATED AFRESH/ DENOVO ON MERITS IN ACCORDANCE WITH LAW IN THE LIGHT OF SPECIAL BE NCH DECISION OF ITAT, DELHI IN THE CASE OF VIREET INVESTMENT PRIVATE LIMITED(SUPRA). NEEDLESS TO SAY THAT THE AO SHALL PROVIDE PROPER AND NECESSARY OPPORTUNITY OF BEING HEARD IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. NEEDLE SS TO SAY THAT THE AO SHALL PROVIDE PROPER AND NECESSARY OPPORTUNITY OF BEING HEARD IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. THIS DISPOSES OF GROUND NO. 2 OF THE ASSESSEES APPEAL AND GROUND NUMBER 6 RAISED BY THE REVENUE I N ITS APPEAL . WE ORDER ACCORDINGLY. 8 . THIS TAKES US TO THE GROUND NO. 4 RAISED BY R EVENUE WITH RESPECT TO DELETION OF ADDITIONS MADE BY LEARNED CIT(A) ON ACCOUNT OF GAINS ON PREMATURE REDEMPTION OF DEBENTURES WITHOUT APPRECIATING THAT THE TRANSACTION IS IN THE NATURE OF SALE, EXCHANGE OR RELINQUISHMENT OF ASSETS AS WAS HELD BY HONBLE SUPREME COURT IN THE CASE OF ANARKALI SARABHAI V. CIT REPORTED IN 224 ITR 422(SC) . THE AO MADE ADDITIONS TO THE INCOME OF THE ASSESSEE BY WAY OF GAIN ON PREMATURE REDEMPTIO N OF DEBENTURES WHILE LEARNED CIT(A) DELETED THE SAID ADDITIONS RELYING ON JUDGMENT OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. INDUSTRIAL CREDIT AND DEVELOPMENT SYNDICATE LIMITED 285 ITR 310. WE HAVE HEARD RIVAL PARTIES AND IT IS CONCURRED BY TH E RIVAL PARTIES, THAT THIS ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE AO TO DECIDE THE ISSUE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 44 AFRESH AFTER CONSIDERING THE FACTUAL MATRIX OF THE CASE IN THE LIGHT OF JUDICIAL DECISIONS AND APPLICABLE LAW. AFTER HEARING BOTH THE PARTIES , WE ARE ALSO OF T HE CONSIDERED VIEW THAT THIS ISSUE NEED TO BE RESTORED TO TH E FILE OF THE AO FOR FRESH /DENOVO ADJUDICATION OF THE ISSUE ON MERITS IN ACCORDANCE WITH LAW AFTER CONSIDERING THE ENTIRE FACTUAL MATRIX OF THE CASE SURROUNDING ISSUE OF DEBENTURE BY THE ASSESSEE , PURPOSE /OBJECT FOR WHICH SAID DEBENTURE WERE RAISED BY THE ASSESSEE AND THEN APPLYING RATIO OF THE JUDICIAL PRECEDENTS AND APPLICABLE LAWS TO THOSE IDENTIFIED FACTUAL MATRIX OF THE CASE . NEEDLESS TO SAY THAT THE AO PROVIDE PROPER AND NECESSARY OPPORTUNI TY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. THE EVIDENCES /EXPLANATION PRODUCED BY THE ASSESSEE IN ITS SUPPORT SHALL BE ADMITTED BY THE AO IN THE INTEREST OF JUSTICE IN ACCORDANCE WITH LAW. THIS DISPOSES GROUND NO. 4 RAISED BY R EVENUE IN ITS APPEAL FILED WITH THE TRIBUNAL . WE ORDER ACCORDINGLY. 9 . THE NEXT ISSUE AGITATED BY REVENUE IN ITS APPEAL FILED WITH THE TRIBUNAL IS WITH RESPECT TO CHALLENGE TO THE DECISION OF LEARNED CIT(A) IN DELETING ADDITIONS MADE TO THE BOOK PROFIT WITHOUT APPRECIATING THAT THERE IS NO BROUGHT FORWARD BOOK LOSS AVAILABLE TO THE ASSESSEE. THE ASSESSEE HAD CLAIMED SET OFF OF UNABSORBED CARRY FORWARD OF DEPRECIATION AND BUSINESS LOSS OF RS. 152.49 CRORES. THE AO REFERR ED TO THE PROVISIONS OF SECTION 115JB EXPLANATION (III) TO DIS ALLOW AFORESAID SET OFF. THE AO OBSERVED THAT THE ASSESSEE INCURRED LOSSES ONLY IN THREE YEARS NAMELY AY 1999 - 00, 2000 - 01 AN 2001 - 02 AND SUCH LOSSES WERE ALREADY SET OFF AGAINST THE INCOME OF A Y 2002 - 03, 2003 - 04 AND 2004 - 05. SINCE, THESE LOSSES WERE ALREADY SET OFF IN EARLIER YEARS , NO BROUGHT FORWARD LOSS WAS AVAILABLE TO THE ASSESSEE FOR REDUCING FROM THE PROFITS FOR COMPUTING THE BOOK PROFIT U/S 115JB OF THE 1961 ACT DURING THE CURRENT YEAR. THE LEARNED CIT(A) RESTORED THE MATTER TO THE FILE OF THE AO FOR RE - ADJUDICATING THE ISSUE AFTER CONSIDERING THE CLAIM OF THE ASSESSEE AFTER NOTING THAT THERE WERE UNABSORBED LOSS OF THE MERGED ENTITY. NO DOUBT IT IS TRUE THAT LEARNED I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 45 CIT(A) HAS NO POWER TO SET ASIDE AND REMAND THE MATTER TO THE AO KEEPING IN VIEW PROVISIONS OF SECTION 251(1)(A) OF THE 1961 ACT AND LEARNED CIT(A) OUGHT TO HAVE ADJUDICATED THE ISSUE ON MERITS IN ACCORDANCE WITH LAW. THE POWER OF LEARNED CIT(A) ARE CO - TERMINUS WITH POWERS OF LEARNED AO. BE AS IT MAY BE, THIS ISSUE REQUIRES INVESTIGATION OF FACTS AS TO SCHEME OF MERGER AND ACCUMULATED LOSSES OF THE SAID MERGED ENTITY AND APPLICATION OF LAW TO THOSE FACTS FOR WHICH WE AT THIS STAGE ARE OF THE CONSIDERED VIEW THAT THE MATTER NEED TO BE RESTORED TO THE FILE OF AO FOR VERIFICATION OF FACTS SURROUNDING BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION AND THEIR SET OFF TO COMPUTE BOOK PROFITS U/S 115JB , ON MERITS IN ACCORDANCE WITH LAW . NEEDLESS TO SAY THAT THE AO SHALL PROVIDE P ROPER AND NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN ACCORDANCE WITH LAW. THE EVIDENCES /EXPLANATIONS PRODUCED BY THE ASSESSEE IN ITS SUPPORT SHALL BE ADMITTED BY THE AO IN THE INTEREST OF JUS TICE IN ACCORDANCE WITH LAW. THIS DISPOSES OF GROUND NO. 5 OF THE REVENUES APPEAL . WE ORDER ACCORDINGLY. 12. THE OTHER GROUNDS RAISED BY REVENUE AND ASSESSEE IN THEIR RESPECTIVE APPEALS ARE CONSEQUENTIAL AND DOES NOT REQUIRE SEPARATE ADJUDICATION. THIS D ISPOSES OF GROUND NUMBER 7 RAISED IN REVENUES APPEAL AND GROUND NUMBER 3 AND 4 OF THE ASSESSEES APPEAL. THUS, CROSS APPEALS OF BOTH THE REVENUE AND ASSESSEE FOR AY 2008 - 09 STOOD DISPOSED OFF. 13. IN THE RESULT BOTH THE ASSESSEES AS WELL REVENUES APPE AL IN ITA NO. 5376/MUM/2015 AND ITA NO. 5725/MUM/2015 RESPECTIVELY FOR AY 2008 - 09 ARE PARTLY ALLOWED AS INDICATED ABOVE. ASSESSMENT YEAR 2009 - 10 - ITA NO. 5723/MUM/2015 & 5375/MUM/2015 14. ALL THE ISSUES RAISED IN CROSS APPEALS FILED BY THE ASSESSEE AS WELL REVENUE FOR AY 2009 - 10 ARE SIMILAR AS WERE DEALT WITH BY US WITH I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 46 RESPECT TO CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE FOR AY 2008 - 09 IN PRECEDING PARAS OF THIS ORDER AND OUR DECISION FOR AY 2008 - 09 SHALL APPLY MUTATIS MUTANDIS TO THE ISSUES ARI SING IN CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE FOR AY 2009 - 10. WE ORDER ACCORDINGLY. 15. IN THE RESULT BOTH THE ASSESSEES AS WELL REVENUES APPEAL IN ITA NO. 5375/MUM/2015 AND ITA NO. 5723/MUM/2015 RESPECTIVELY FOR AY 2009 - 10 ARE PARTLY ALLOWED A S INDICATED ABOVE. ASSESSMENT YEAR 2010 - 11 - ITA NO. 5718/MUM/2015 & 5374/MUM/2015 1 6 . WE HAVE OBSERVED THAT ALL THE ISSUE RAISED IN CROSS APPEALS FILED BY REVENUE AND THE ASSESSEE ARE SIMILAR TO THE ISSUES RAISED IN THE CROSS APPEALS FOR AY 2008 - 09, EXCEPT ONE ISSUE RAISED BY THE ASSESSEE VIDE GROUND NUMBER 3(A) AND (B) IN ITS APPEAL IS CONCERNING CONFIRMING OF THE ADDITION TO THE INCOME OF THE ASSESSEE OF RS. 35,51,835/ - BY LEARNED CIT(A) , ARISING OUT OF THE ADDITIONS MADE BY THE AO TO THE INCOME O F THE ASSESSEE BY DISALLOWANCE OF THE PENALT Y OF RS. 35,51,835/ - LEVIED DURING THE PREVIOUS YEAR RELEVANT TO THE IMPUGNED ASSESSMENT YEAR ON THE ASSESSEE UNDER SALES TAX AND FEMA LAWS . THE AO OBSERVED FROM THE TAX - AUDIT REPORT THAT THE AUDITORS HAVE SPECIF IED THAT EXPENSES ON ACCOUNT OF SALES TAX PENALTY AMOUNTING TO RS. 26,51,835/ - AND FEMA PENALTY AMOUNTING TO RS. 9,00,000/ - WERE DEBITED TO PROFIT AND LOSS ACCOUNT . THE AO OBSERVED THAT THE ASSESSEE DID NOT SUO MOTU DISALLOWED THE SAID PENALTY WHILE FILIN G RETURN OF INCOME WITH REVENUE. THE ASSESSEE ON BEING ASKED BY THE AO SUBMITTED THAT THE APPEAL AGAINST SALES TAX PENALTY IS PREFERRED AND THE APPEAL IS SUBJUDICE WHILE IT IS SUBMITTED THAT NO APPEAL IS FILED AGAINST PENALTY LEVIED UNDER FEMA. THE AO OBSE RVED THAT THE PENALTY WAS LEVIED FOR CONTRAVEN TION OF SECTION 18(2) OF THE FER A ACT,1973 READ WITH SECTION 39(3) AND (4) OF THE FEMA,1999 WHILE SALES TAX PENALTY WAS LEVIED U/S 45(6) AND 46( 1 ) OF GUJARAT SALES TAX I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 47 ACT,1969 . THUS, BY INVOKING PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT, THE AO DISALLOWED THE SAID PENALTY OF RS.35,51,835/ - BY MAKING ADDITIONS TO THE INCOME OF THE ASSESSEE. 16.2 THE MATTER REACHED LEARNED CIT(A) AT THE BEHEST OF THE ASSESSEE, WHO WAS PLEASED TO DISMISS THE A PPEAL OF THE ASSESSEE , BY HOLDING AS UNDER: - 9.1 GROUND NO. 5 IS RAISED DISPUTING THE ADDITION OF RS. 35,51,835/ - TO THE INCOME OF THE APPELLANT BY WAY OF DISALLOWING PENALTY UNDER THE SALES TAX AND FEMA. 9.2 THE ASSESSING OFFICER HAS MADE ADDITION OF RS. 35,51,835/~ BY WAY OF DISALLOWING PENALTY UNDER SALES TAX AND FEMA RECORDING THE FOLLOWING REASONS: - '9.3. THE ABOVE EXPLANATION OF THE ASSESSEE IS CONSIDERED. IT IS AGREED BY THE ASSESSEE THAT THE ABOVE PENALTIES WERE LEVIED BY THE SALES TAX AND FEMA A UTHORITIES ON THE ASSESSEE DURING THE YEAR AND SINCE THE SAID PENALTIES HAVE BEEN DEBITED IN THE PROFIT & LOSS A/C., THE SAME NEEDS TO BE ADDED BACK TO ARRIVE AT THE TAXABLE INCOME, WHICH THE ASSESSEE FAILED TO DO. THE AUDITORS HAVE SPECIFIED THAT THE AMOU NTS WERE PENAL IN NATURE FOR CONTRAVENTION OF SECTION 18(2) OF THE FEMA, 1973 READ WITH SEC.39(3) AND (4) OF FEMA, 1999 AND THE SALES TAX PENALTY WAS LEVIED U/S.45(6) AND 46(1) OF GUJARAT SALES TAX ACT, 1969. ACCORDINGLY, THE PENAL AMOUNTS DEBITED TO THE P ROFIT & LOSS A/C., TOTALLING TO RS.35,51,835 [RS.26,51,835 + RS.9,00,000] IS HEREBY DISALLOWE D AS PER EXPLANATION TO SEC.37(1 ) OF THE INCOME TAX ACT, 1961 AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE.' 9.3 THE APPELLANT SUBMITTED THAT THE ADDITION MA DE TO THE INCOME IS INCORRECT FOR THE FOLLOWING REASONS: - 'A) THE PENALTY IS PAID FOR CERTAIN TECHNICAL NON - COMPLIANCE OF REGULATION OF THE SALES TAX AND FEMA WHICH AMOUNTS TO INFRACTION OF CONTRACTUAL OBLIGATION IN THE ORDINARY COURSE OF BUSINESS AND TH ERE WAS NO MALAFIDE INTENTION IN SUCH TECHNICAL NON - COMPLIANCES. THERE IS DIFFERENCE BETWEEN THE PENALTY FOR INFRACTION OF LAW AND FOR INFRACTION OF CONTRACTUAL OBLIGATIONS. ONLY THE PENALTY FOR INFRACTION OF LAW IS NOT ALLOWABLE AND THE PENALTY WHICH IS F OR INFRACTION OF CONTRACTUAL OBLIGATION IS I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 48 ALLOWABLE. THE PAYMENT OF PENALTY WAS NOT ONE FOR BREACH OF LAW AND THEREFORE THE SAME IS ALLOWABLE U/S.37(L). B) THE EXPLANATION TO SECTION 37(1) REA DS AS UNDER : - 'FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLA RED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPLANATION.' THE PLAIN READING OF THE EXPLANATION SHOWS THAT THE EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION. IT IS SUBMITTED THAT THE PENALTY PAID TOWARDS CERTAIN TECHNICAL NON - COMPLIANCES WILL NOT AMOUNT TO AN OFFENCE OR PROHIBITED BY LAW. HENCE, THE PENALTY PAID BY YOUR APPELLANT IS NOT HIT BY .THE EXPLANATION OF SECTION 37(1). THE PENALTY PAID BY T HE APPELLANT DOES NOT INVOLVE ANY MORAL OBLIQUITY. EVEN OTHERWISE ALSO THE NEED FOR MAKING PAYMENT OF PENALTY AROSE OUT OF TRADING OPERATION FOR THE PURPOSE OF THE BUSINESS CARRIED ON BY THE APPELLANT. IT IS NORMAL INCIDENT OF THE BUSINESS AND AS SUCH THE SAME CANNOT BE DISALLOWED MERELY BECAUSE THE NAME OF THE PAYMENT IS ASSIGNED AS PENALTY BY THE SALES TAX AND FEMA.' 9.4 I HAVE CONSIDERED THE FACTS OF THE CASE TOGETHER WITH REASONS ASSIGNED BY THE ASSESSING OFFICER AND SUBMISSIONS OF THE APPELLANT. N ORMALLY, PENALTY FOR INFRACTION OF LAW IS NOT ALLOWABLE, IF PENAL IN NATURE. HOWEVER COMPENSATORY PENALTY MAY BE ALLOWABLE. IN THIS CASE THE AUDITOR HAS REPORTED THESE PENALTIES UNDER TAX AUDIT REPORT. AT THE SAME TIME THE APPELLANT COULD NOT PRODUCE ANY D OCUMENT IN SUPPORT OF PENALTIES BEING IN THE NATURE OF COMPENSATORY. I, THEREFORE, CONFIRM THE ADDITION OF RS. 35,51,835/ - ON ACCOUNT OF PENALTIES. THIS GROUND OF APPEAL IS DISMISSED. 1 6.3 THE MATTER HAS NOW REACHED TRIBUNAL AT THE BEHEST OF THE ASSESSEE . WE HAVE OBSERVED BOTH REVENUE AS WELL AS ASSESSEE HAS I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 49 ADVANCED ARGUMENT AND ITS FAIRLY AGREED BY BOTH THE PARTIES THAT THE ISSUE NEED TO BE RESTOR ED TO THE FILE OF AO FOR DETAILED ANALYSES OF THE PENALTIES LEVIED ON THE ASSESSEE UNDER GUJARAT SALES TAX ACT AS WELL FERA/ FEMA AUTHORITIES AND IS ALLOWABILITY AS AN BUSINESS EXPENDITURE KEEPING IN VIEW BAR CREATED BY EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT AFTER COMING TO CONCLUSION WHETHER THE SAID PENALTIES ARE COMPENSATORY IN NATURE OR PENAL IN NAT URE. THE ASSESSEE IS DIRECTED TO PRODUCE ALL RELEVANT DETAILS /MATERIAL BEFORE THE AO AS TO CIRCUMSTANCES UNDER WHICH PENALTY WAS LEVIED , COPIES OF PENALTY ORDERS AND REASONS FOR LEVYING OF THE AFORESAID PENALTIES AND WHETHER THE SAME ARE COMPENSATORY OR P ENAL IN NATURE. THE DECISION OF TRIBUNAL IN THE CASE OF ACIT V. GINI & JONY LIMITED (2018) 172 ITD 472(MUM - TRIB.) , TO WHICH ONE OF US (ACCO UNTANT MEMBER) WAS PART OF THE DIVISION B ENCH PASSING THE SAID ORDER IS RELEVANT. THE RELEVANT CONCLUSION ARRIVED AT BY THE TRIBUNAL IN THE SAID ORDER OF GINI & JONY LIMITED (SUPRA) IS REPRODUCED HEREUNDER: 8. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD INCLUDING CASE LAWS RELIED UPON. WE HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF TEXTILES, GARMENTS AND FASHION ACCESSORIES. THERE WAS A SEARCH AND SURVEY OPERATIONS CONDUCTED BY THE ENFORCEMENT BRANCH OF THE MAHARASHTRA VAT AUTHORITIES AGAINST THE ASSESSEE IN THE LAST WEEK OF SEPTEMBER 2011. DURING THE COURSE OF SEARCH AND SURVEY OPERATIONS CONDUCTED BY THE ENFORCEMENT BRANCH OF MAHARASH TRA VAT AUTHORITIES, IT TRANSPIRED THAT THE ASSESSEE INDULGED IN ALLEGED BOGUS PURCHASES BY WAY OF ACCOMMODATION ENTRIES WHEREIN THE ASSESSEE HAD WRONGLY CLAIMED INPUT TAX CREDITS ON THESE ALLEGED BOGUS PURCHASES AND THESE INADMISSIBLE INPUT TAX - CREDITS WA S SET OFF BY THE ASSESSEE AGAINST ITS OUTPUT VAT LIABILITIES WHICH LED TO SHORT PAYMENT OF OUTPUT TAX BY THE ASSESSEE TO MVAT AUTHORITIES IN THE RETURN OF VAT ORIGINALLY FILED BY THE ASSESSEE. THE MVAT AUTHORITIES DURING THE COURSE OF SEARCH AND SURVEY OPE RATIONS WHILE IT WAS UNDERWAY DIRECTED ASSESSEE TO FILE REVISED RETURN OF VAT AFTER REMOVING ALLEGED BOGUS INADMISSIBLE INPUT - TAX CREDIT SET OFF TOWARDS OUTPUT TAX LIABILITIES TOWARDS VAT AS ORIGINALLY CLAIMED BY THE ASSESSEE AND TO PAY ADDITIONAL TAX ARIS ING FROM SUCH WITHDRAWAL ALONG WITH INTEREST AS STIPULATED U/S. 30(2) AND 30(4) OF THE MVAT ACT, 2002. AT THIS STAGE, THE ASSESSEE HAD TWO CHOICES EITHER TO CONTEST THESE ALLEGATIONS OF I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 50 AVAILMENT OF WRONG INPUT TAX CREDIT BY ENTERING INTO LITIGATION WITH M VAT DEPARTMENT AND THE OTHER OPTION WAS TO FILE REVISED RETURN UNDER MVAT ACT, 2002 WHILE SEARCH AND SURVEY OPERATIONS WERE STILL UNDERWAY AFTER PAYING ADDITIONAL TAX AS WELL PAYING INTEREST AS STIPULATED U/S. 30(2) AND 30(4) OF THE 1961 ACT. THE ASSESSEE CHOSE NOT TO ENTER LITIGATION WITH MVAT DEPARTMENT AS IT WANTED TO BUY PEACE AND END LITIGATION UNDER THE MVAT ACT, 2002 AND CHOSE SECOND OPTION OF PAYING ADDITIONAL TAX WHICH WAS EARLIER UNDERPAID DUE TO ALLEGED WRONG CLAIM OF INPUT TAX CREDIT AVAILED ON ALLEGED BOGUS PURCHASE BILLS, WHICH ADDITIONAL TAX IS NOW PAID ALONG WITH PAYMENT OF INTEREST U/S. 30(2) AND 30(4) OF THE MVAT ACT, 2002. THIS INTEREST LIABILITY U/S. 30(4) WAS COMPUTED @ OF 25% ON ADDITIONAL TAX PAYABLE BY THE ASSESSEE DUE TO WITHDRAWAL O F WRONG INADMISSIBLE CLAIM OF INPUT TAX CREDIT OF VAT ON ALLEGED BOGUS PURCHASES. THE INTEREST WAS ALSO PAID U/S. 30(2) OF THE MVAT ACT, 2002 BY THE ASSESSEE WHILE FILING REVISED RETURN WHEN SEARCH AND SURVEY OPERATIONS WERE UNDERWAY, WHICH WAS BY WAY OF S IMPLE INTEREST ON THE AMOUNT OF VAT WHICH THE ASSESSEE FAILED TO DEPOSIT IN TIME WITHIN PRESCRIBED DUE DATE UNDER MVAT ACT, 2002 WHILE FILING RETURN OF VAT ORIGINALLY AS IT CLAIMED INADMISSIBLE AND WRONG CREDIT AND SET OFF OF INPUT TAX CREDIT ON ALLEGED BO GUS PURCHASES AGAINST OUTPUT VAT TAX WHICH LED TO UNDERPAYMENT OF VAT. IT IS PROFITABLE AT THIS STAGE TO REPRODUCE EXTRACT OF RELEVANT PROVISIONS OF THE STATUTE AS ARE CONTAINED IN SECTION 30(2) AND 30(4) OF THE MVAT ACT, 2002, AS UNDER: 'CHAPTER VI PENALTY AND INTEREST '29 ***' 30. INTEREST PAYABLE BY A DEALER OR PERSON: (1) A DEALER WHO IS LIABLE TO PAY TAX IN RESPECT OF ANY YEAR, AND WHO HAS FAILED TO APPLY FOR REGISTRATION OR HAS FAILED TO APPLY FOR REGISTRATION WITHIN THE TIME AS REQUIRED BY OR UNDER THIS ACT, SHALL BE LIABLE TO PAY BY WAY OF SIMPLE INTEREST, IN RESPECT OF EACH OF SUCH YEARS, IN ADDITION TO THE AMOUNT OF TAX PAYABLE IN RESPECT OF SUCH YEAR, A SUM CALCULATED AT THE PRESCRIBED RATE ON THE AMOUNT OF SUCH TAX FOR EACH MONTH OR PART T HEREOF FOR THE PERIOD COMMENCING ON THE 1ST APRIL OF THE RESPECTIVE YEAR TO THE DATE OF THE PAYMENT OF TAX. THE AMOUNT OF SUCH INTEREST SHALL BE CALCULATED BY TAKING INTO CONSIDERATION THE AMOUNT OF, AND THE DATE OF, SUCH PAYMENT, WHEN THE PAYMENT IS MADE ON DIFFERENT DATES OR IN PARTS OR IS NOT MADE. WHEN, AS A RESULT OF ANY ORDER PASSED UNDER THIS ACT, THE SAID AMOUNT OF TAX IS REDUCED, THE INTEREST SHALL BE REDUCED ACCORDINGLY AND I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 51 WHERE THE SAID AMOUNT IS ENHANCED, 1[THE INTEREST ON THE ENHANCED AMOUNT S HALL BE CALCULATED MUTATIS MUTANDIS UPTO THE DATE OF SUCH ORDER]: PROVIDED THAT, IN RESPECT OF ANY OF SUCH YEARS, 2[THE AMOUNT OF INTEREST PAYABLE] UNDER THIS SUB - SECTION SHALL NOT EXCEED THE AMOUNT OF TAX FOUND PAYABLE FOR THE RESPECTIVE YEAR. (2) A REGIS TERED DEALER WHO HAS FAILED TO PAY THE TAX WITHIN THE TIME SPECIFIED BY OR UNDER THIS ACT, SHALL BE LIABLE TO PAY BY WAY OF SIMPLE INTEREST, IN ADDITION TO THE AMOUNT OF SUCH TAX, A SUM CALCULATED AT THE PRESCRIBED RATE ON THE AMOUNT OF SUCH TAX FOR EACH M ONTH OR PAID THEREOF AFTER THE LAST DATE BY WHICH HE SHOULD HAVE PAID SUCH TAX: PROVIDED THAT, IN RELATION TO THE TAX PAYABLE ACCORDING TO 3[THE RETURN, FRESH RETURN OR AS THE CASE MAY BE], 4[FRESH RETURN OR REVISED RETURN], THE SAID DEALER SHALL, NOTWITHS TANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF THIS ACT, BE DEEMED NOT TO HAVE PAID THE AMOUNT OF SUCH TAX WITHIN THE TIME HE IS REQUIRED BY OR UNDER THE PROVISIONS OF THIS ACT TO PAY IT IF HE HAS NOT PAID THE FULL AMOUNT OF SUCH TAX ON OR BEFORE THE LAST DATE PRESCRIBED FOR FURNISHING OF SUCH RETURN AND ACCORDINGLY, IF HE HAS NOT PAID THE FULL AMOUNT OF SUCH TAX OR HAS PAID ONLY THE PART OF THE AMOUNT OF SUCH TAX BY SUCH DATE, HE SHALL BE LIABLE UNDER THIS CLAUSE FOR PAYMENT OF INTEREST AFTER SUCH DA TE ON THE FULL OR PART, AS THE CASE MAY BE, OF THE AMOUNT OF TAX WHICH HAS NOT BEEN PAID BY SUCH DATE AND WHERE A DEALER HAS FURNISHED A 4[FRESH RETURN OR REVISED RETURN] AND THE AMOUNT OF TAX PAYABLE AS PER THE 4[FRESH RETURN OR REVISED RETURN] EXCEEDS TH E AMOUNT OF TAX PAYABLE AS PER THE ORIGINAL RETURN, THEN FOR THE PURPOSES OF THIS SUB - SECTION, THE DEALER SHALL BE DEEMED TO HAVE BEEN REQUIRED TO PAY THE EXCESS AMOUNT OF TAX AT THE TIME HE WAS REQUIRED TO PAY THE TAX AS PER THE ORIGINAL RETURN AND ACCORD INGLY HE SHALL BE LIABLE TO PAY INTEREST UNDER THIS SUB - SECTION ON THE SAID EXCESS AMOUNT OF TAX. 4A[PROVIDED FURTHER THAT, IN CASE A DEALER FILES AN ANNUAL REVISED RETURN, AS PROVIDED UNDER CLAUSE (B) OR, AS THE CASE MAY BE, CLAUSE (C) OF SUB - SECTION (4) OF SECTION 20, THEN THE INTEREST SHALL BE PAYABLE ON THE EXCESS AMOUNT OF TAX, AS PER SUCH ANNUAL REVISED RETURN, FROM THE DATES MENTIONED IN COLUMN (2) OF THE TABLE, TILL THE DATE OF PAYMENT OF SUCH EXCESS AMOUNT OF TAX. I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 52 TABLE REGISTRATION STATUS IN THE Y EAR FOR WHICH ANNUAL REVISED RETURN IS FILED (1)INTEREST TO BE COMPUTED FROM (2)( A )DEALER, HOLDING CERTIFICATE OF REGISTRATION FOR WHOLE YEAR. 1S T OCTOBER OF THE YEAR, TO WHICH THE ANNUAL REVISED RETURN RELATES. ( B )CERTIFICATE OF REGISTRATION GRANTED, EFFECTIVE FROM ANY DATE UP TO THE 30TH SEPTEMBER OF THE YEAR TO WHICH REVISED RETURN RELATES. 1ST OCTOBER OF THE YEAR, TO WHICH THE ANNUAL REVISED RETURN RELATES. ( C )CERTIFICATE OF REGISTRATION CANCELLED, EFFECTIVE ON ANY DATE AFTER THE 30TH SEPTEMBER OF T HE YEAR TO WHICH REVISED RETURN RELATES. 1ST OCTOBER OF THE YEAR, TO WHICH ANNUAL REVISED RETURN RELATES. ( D )CERTIFICATE OF REGISTRATION GRANTED, EFFECTIVE FROM ANY DATE AFTER THE 30TH SEPTEMBER OF THE YEAR TO WHICH REVISED RETURN RELATES. EFFECTIVE DATE O F REGISTRATION. ( E )CERTIFICATE OF REGISTRATION CANCELLED, EFFECTIVE ON ANY DATE PRIOR TO THE 30TH SEPTEMBER OF THE YEAR TO WHICH REVISED RETURN RELATES. EFFECTIVE DATE OF CANCELLATION OF REGISTRATION.] (3) IN THE CASE OF A REGISTERED DEALER, IN WHOSE CASE, ANY TAX OTHER THAN THE TAX ON WHICH INTEREST IS LEVIABLE UNDER SUB - SECTION (2) HAS REMAINED UNPAID UPTO ONE MONTH AFTER THE END OF THE PERIOD OF ASSESSMENT, SUCH DEALER SHALL BE LIABLE TO PAY BY WAY OF SIMPLE INTEREST, 5[A SUM CALCULATED AT THE PRESCRIBED RATE ON THE AMOUNT OF SUCH TAX] FOR EACH MONTH OR PART THEREOF FROM THE DATE NEXT FOLLOWING THE LAST DATE OF THE PERIOD COVERED BY AN ORDER OF ASSESSMENT TILL THE DATE OF THE ORDER OF ASSESSMENT AND WHERE ANY PAYMENT OF SUCH UNPAID TAX WHETHER IN FULL OR PART IS MADE ON OR BEFORE THE DATE OF THE ORDER OF ASSESSMENT, THE AMOUNT OF SUCH INTEREST SHALL BE CALCULATED BY TAKING INTO CONSIDERATION THE AMOUNT AND THE DATE OF SUCH PAYMENT. IF, AS A RESULT OF ANY ORDER PASSED UNDER THIS ACT, THE SAID AMOUNT OF TAX IS REDUCED, THEN THE INTEREST SHALL BE REDUCED ACCORDINGLY AND WHERE THE SAID AMOUNT IS ENHANCED, THEN INTEREST ON THE ENHANCED AMOUNT SHALL BE CALCULATED MUTATIS MUTANDIS UP TO THE DATE OF SUCH ORDER FROM THE SAID DATE NEXT. 6[(4) IF, ( A ) AFTER THE COMMENCEMENT OF, I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 53 ( I ) AUDIT OF THE BUSINESS OF THE DEALER IN RESPECT OF ANY PERIOD, OR ( II ) INSPECTION OF THE ACCOUNTS, REGISTERS AND DOCUMENTS PERTAINING TO ANY PERIOD, KEPT AT ANY PLACE OF BUSINESS OF THE DEALER, OR ( III ) ENTRY AND SEARCH OF ANY PLACE OF BUSINESS OR ANY OTHER PLACE WHERE THE DEALER HAS KEPT HIS ACCOUNTS, REGISTERS, DOCUMENTS PERTAINING TO ANY PERIOD OR STOCK OF GOODS, ( B ) IN CONSEQUENCE OF ANY INTIMATION ISSUED UNDER SUB - SECTION (7) OF SECTION 63, THE DEALER FILES ONE OR MORE RETURNS OR, AS THE CASE MAY BE, REVISED RETURNS IN RESPECT OF THE SAID PERIOD, THEN HE SHALL BE LIABLE TO PAY BY WAY OF INTEREST, IN ADDITION TO THE AMOUNT OF TAX, IF ANY, PAYABLE AS PER THE RETURN OR, AS THE CASE MAY BE, REVISED RETURN, A SUM EQUAL T O 25 PER CENT. OF THE ADDITIONAL TAX PAYABLE AS PER THE RETURN OR, AS THE CASE MAY BE, REVISED RETURN.] 7[ PROVIDED THAT, INTEREST UNDER THIS SUB - SECTION SHALL NOT BE PAYABLE ON ACCOUNT OF THE ADDITIONAL TAX LIABILITY ARISING DUE TO NON - PRODUCTION OF DECLARATIONS OR, AS THE CASE MAY BE, CERTIFICATES: PROVIDED FURTHER THAT, IF THE AMOUNT OF TAX PAID AS PER REVISED RETUR N IS LESS THAN TEN PER CENT. OF THE AGGREGATE AMOUNT OF TAX PAID AS PER THE ORIGINAL RETURNS, IN RESPECT OF THE CORRESPONDING PERIOD, THEN NO INTEREST UNDER THIS SUB - SECTION SHALL BE PAYABLE. EXPLANATION . - FOR THE PURPOSE OF THIS SUB - SECTION THE EXPRESSIONS, - 'TAX PAID AS PER ORIGINAL RETURNS' SHALL BE DEEMED TO INCLUDE THE AMOUNT OF TAX PAID, AS PER THE REVISED RETURNS, FILED BEFORE THE COMMENCEMENT OF PROCEEDINGS SPECIFIED IN CLAUSE (A) OR BEFORE THE RECEIPT OF INTIMATION SPECIFIED IN CLAUSE (B) OF SUB - SECTION (4); 'TAX PAID' SHALL MEAN THE AMOUNT OF TAX PAID BY SUCH PERSON OR DEALER, AFTER THE ADJUSTMENT OF SET - OFF.]' WE HAVE ALSO AT THE SAME TIME OBSERVED THAT UNDER MVAT ACT, 2002 THERE IS A SEPARATE PROVISION FOR IMPOSITION AND LEVYING OF PENA LTIES U/S. 29 OF THE MVAT ACT, 2002 FOR VARIOUS INFRACTION/DEFAULTS IN COMPLYING WITH VARIOUS PROVISION(S) OF MVAT ACT, 2002 WHICH IS A SECTION IMMEDIATELY PRECEDING TO SECTION 30 OF MVAT ACT, 2002 LEVYING INTEREST UNDER THE MVAT ACT, 2002. THE SAID SECTIO N 29 OF MVAT ACT, 2002 IS ALSO REPRODUCED HEREUNDER IN ITS ENTIRETY: '29. IMPOSITION OF PENALTY IN CERTAIN INSTANCES: 1[(1) ***] 1[(2) ***] 1A[ (2A) WHILE OR AFTER PASSING ANY ORDER IN RESPECT OF ANY DEALER UNDER ANY PROVISIONS OF THIS ACT, IT APPEARS TO THE COMMISSIONER THAT, THE DEALER HAS FAILED TO APPLY FOR REGISTRATION AS REQUIRED UNDER THIS ACT OR HAS I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 54 CARRIED ON BUSINESS AS A DEALER WITHOUT BEING REGISTERED IN CONTRAVENTION OF THE PROVISIONS OF THIS ACT, THEN THE COMMISSIONER MAY, AFTER GIVING THE D EALER A REASONABLE OPPORTUNITY OF BEING HEARD, IMPOSE UPON HIM, BY WAY OF PENALTY, A SUM EQUAL TO THE AMOUNT OF TAX PAYABLE BY THE DEALER FOR THE PERIOD DURING WHICH HE HAS CARRIED ON BUSINESS AS A DEALER WITHOUT BEING REGISTERED IN CONTRAVENTION OF THE PR OVISIONS OF THIS ACT.] (3) 2[WHILE OR AFTER PASSING ANY ORDER] UNDER THIS ACT, IN RESPECT OF ANY PERSON OR DEALER, THE COMMISSIONER, ON NOTICING OR BEING BROUGHT TO HIS NOTICE, THAT SUCH PERSON OR DEALER HAS CONCEALED THE PARTICULARS OR HAS KNOWINGLY FURNI SHED INACCURATE PARTICULARS OF ANY TRANSACTION LIABLE TO TAX OR HAS CONCEALED OR HAS KNOWINGLY MISCLASSIFIED ANY TRANSACTION LIABLE TO TAX OR HAS KNOWINGLY CLAIMED SET - OFF IN EXCESS OF WHAT IS DUE TO HIM, THE COMMISSIONER MAY, AFTER GIVING THE PERSON OR DE ALER A REASONABLE OPPORTUNITY OF BEING HEARD, BY ORDER IN WRITING, IMPOSE UPON HIM, IN ADDITION TO ANY TAX DUE FROM HIM, A PENALTY 2A[NOT EXCEEDING THE AMOUNT OF TAX DUE BUT NOT LESS THAN TWENTY FIVE PER CENT. OF] THE AMOUNT OF TAX FOUND DUE AS A RESULT OF ANY OF THE AFORESAID ACTS OF COMMISSION OR OMISSION. (4) WHERE ANY PERSON OR DEALER HAS KNOWINGLY ISSUED OR PRODUCED ANY DOCUMENT INCLUDING A FALSE BILL, CASH MEMORANDUM, VOUCHER, DECLARATION OR CERTIFICATE BY REASON OF WHICH ANY TRANSACTION OF SALE OR PU RCHASE EFFECTED BY HIM OR ANY OTHER PERSON OR DEALER IS NOT LIABLE TO BE TAXED OR IS LIABLE TO BE TAXED AT A REDUCED RATE OR INCORRECT SETOFF IS LIABLE TO BE CLAIMED ON SUCH TRANSACTION, THE COMMISSIONER MAY, AFTER GIVING, THE PERSON OR DEALER A REASONABLE OPPORTUNITY OF BEING HEARD, BY ORDER IN WRITING, IMPOSE ON HIM IN ADDITION TO ANY TAX PAYABLE BY HIM, A PENALTY EQUAL TO THE AMOUNT OF TAX FOUND DUE AS A RESULT OF ANY OF THE AFORESAID ACTS OF COMMISSION OR OMISSION. 3[(5) WHERE A DEALER HAS SOLD ANY GOOD S AND THE SALE IS EXEMPT, FULLY OR PARTLY, FROM PAYMENT OF TAX BY VIRTUE OF ANY PROVISION CONTAINED IN SUB - SECTION (3), (3A), (3B) OR (5) OF SECTION 8, AND THE PURCHASER FAILS TO COMPLY WITH THE CONDITIONS OR RESTRICTIONS SUBJECT TO WHICH THE EXEMPTION IS GRANTED, THEN THE COMMISSIONER MAY, AFTER GIVING THE SAID PURCHASER A REASONABLE OPPORTUNITY OF BEING HEARD, IMPOSE PENALTY ON HIM EQUAL TO ONE AND A HALF TIMES THE TAX WHICH WOULD HAVE BECOME PAYABLE ON THE SALE IF THE SAID EXEMPTION WAS NOT AVAILABLE ON THE SAID SALE.] (6) WHERE, ANY PERSON OR DEALER CONTRAVENES THE PROVISION OF SECTION 86, SO AS TO HAVE THE QUANTUM OF TAX PAYABLE BY HIM TO BE UNDER - ASSESSED, THE COMMISSIONER MAY, AFTER GIVING THE PERSON OR DEALER A REASONABLE OPPORTUNITY OF BEING HEARD, BY ORDER IN WRITING, IMPOSE ON HIM, IN ADDITION TO ANY TAX PAYABLE BY HIM A PENALTY EQUAL TO HALF THE AMOUNT OF TAX WHICH WOULD HAVE BEEN UNDER - ASSESSED OR 4[ONE THOUSAND RUPEES], WHICHEVER IS MORE. (7) WHERE, ANY PERSON OR DEALER HAS FAILED WITHOUT REASONABLE CAUSE TO COMPLY WITH ANY NOTICE IN RESPECT OF ANY PROCEEDINGS, THE COMMISSIONER MAY, AFTER GIVING THE PERSON OR DEALER A REASONABLE OPPORTUNITY OF BEING I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 55 HEARD, BY ORDER IN WRITING, IMPOSE ON HIM , IN ADDITION TO ANY TAX PAYABLE BY HIM, A PENALTY EQUAL TO 5[FIVE THOUSAND RUPEES]. 5A[(7A) IN CASE OF A DEALER, WHO HAS FILED LATE RETURN ON OR AFTER THE 1ST AUGUST 2012, AND HAS ALSO PAID THE LATE FEE, UNDER SUB - SECTION (6) OF SECTION 20, THE PENALTY IN RESPECT OF SUCH RETURN, IF ANY, IMPOSED UNDER SUB - SECTION (8) OF THIS SECTION, AS IT EXISTED, SHALL NOT BE RECOVERED.] 6(8), (9)7(A) & 7(B)** ** ** ( C ) WHERE A DEALER HAS FILED A RETURN 8[***] AND SUCH RETURN IS FOUND TO BE NOT 9[COMPLETE AND SELF CONSI STENT], THEN THE COMMISSIONER MAY, AFTER GIVING THE DEALER A REASONABLE OPPORTUNITY OF BEING HEARD, IMPOSE ON HIM, BY ORDER IN WRITING, A PENALTY OF RUPEES ONE THOUSAND. THE LEVY OF PENALTY SHALL BE WITHOUT PREJUDICE TO ANY OTHER PENALTY WHICH MAY BE IMPOS ED UNDER THIS ACT. 10[(10) WHERE A PERSON OR DEALER HAS COLLECTED ANY SUM BY WAY OF TAX IN CONTRAVENTION OF THE PROVISIONS OF SECTION 60, 1. HE SHALL BE LIABLE TO PAY A PENALTY NOT EXCEEDING TWO THOUSAND RUPEES, AND 2. IN ADDITION, ANY SUM COLLECTED BY THE PERSON OR DEALER IN CONTRAVENTION OF SECTION 60 SHALL BE FORFEITED TO THE STATE GOVERNMENT. IF THE COMMISSIONER, IN THE COURSE OF ANY PROCEEDING UNDER THIS ACT OR OTHERWISE, HAS REASONS TO BELIEVE THAT ANY PERSON HAS BECOME LIABLE TO A PENALTY OR F ORFEITURE OR BOTH PENALTY AND FORFEITURE OF ANY SUM UNDER THIS SUB - SECTION, HE MAY SERVE ON SUCH PERSON A NOTICE IN THE PRESCRIBED FORM REQUIRING HIM ON A DATE AND AT A PLACE SPECIFIED IN THE NOTICE TO ATTEND AND SHOW CAUSE WHY A PENALTY OR FORFEITURE OR B OTH PENALTY AND FORFEITURE OF ANY SUM AS PROVIDED IN THIS SUB - SECTION SHOULD NOT BE IMPOSED ON HIM. THE COMMISSIONER SHALL THEREUPON HOLD AN INQUIRY AND SHALL MAKE SUCH ORDER AS HE THINKS FIT. WHEN ANY ORDER OF FORFEITURE IS MADE, THE COMMISSIONER SHALL PU BLISH OR CAUSE TO BE PUBLISHED A NOTICE THEREOF FOR THE INFORMATION OF THE PERSONS CONCERNED GIVING SUCH DETAILS AND IN SUCH MANNER AS MAY BE PRESCRIBED.] 11[(11) NO ORDER LEVYING PENALTY UNDER THE FOREGOING PROVISIONS OF THIS SECTION SHALL BE PASSED IN RE SPECT OF ANY PERIOD AFTER 12[EIGHT YEARS] FROM THE END OF THE YEAR CONTAINING THE SAID PERIOD.] 13[(11A) NOTWITHSTANDING ANYTHING CONTAINED IN SUB - SECTION (11), PENALTY UNDER THIS SECTION MAY BE IMPOSED WHILE PASSING AN ORDER UNDER THIS ACT.] 14(12)** ** ** (13) FOR THE PURPOSES OF THIS SECTION, COMMISSIONER INCLUDES ANY APPELLATE AUTHORITY APPOINTED OR CONSTITUTED UNDER THIS ACT.' NOW THE MOOT QUESTION BEFORE US IS WHETHER THIS INTEREST PAYABLE U/S. 30(2) AND 30(4) OF MVAT ACT, 2002 IS COMPENSATORY OR PE NAL IN NATURE. IF IT IS HELD TO BE COMPENSATORY IN NATURE, THEN INTEREST PAYABLE ON THESE STATUTORY DUES BY WAY OF VAT SHALL BE ALLOWABLE AS DEDUCTION WHILE I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 56 COMPUTING INCOME CHARGEABLE TO INCOME - TAX UNDER THE HEAD OF INCOME 'PROFITS AND GAINS OF BUSINESS O R PROFESSION', WHILE IF ON THE OTHER HAND THE SAME IS HELD TO BE PENAL IN NATURE THEN THE SAME CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS KEEPING IN VIEW PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT. IT IS ALSO PROF ITABLE AT THIS STAGE TO REPRODUCE THE PROVISIONS OF SECTION 37(1) OF THE 1961 ACT READ WITH EXPLANATION 1, WHICH READS AS UNDER: ' GENERAL. 37. (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 [***] AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE, LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSI NESS OR PROFESSION'. [ [ EXPLANATION 1. ] - FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOS E OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.] ** ** **' THE ASSESSEE IS CLAIMING THAT THE INTEREST PAID U/S. 30(2) AND 30(4) OF MVAT ACT, 2002 TO BE COMPENSATORY IN NATURE AND CLAIMING THAT THE S AME BE ALLOWED AS BUSINESS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS BUT THE REVENUE IS CLAIMING THE SAME TO BE PENAL IN NATURE BEING HIT BY EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT AND NOT ALLOWABLE AS BUSINESS DEDUCTION. WE ARE ALSO CONSCIOUS OF THE FACT THAT NOMENCLATURE OR DESCRIPTION USED BY LAW MAKERS IN THE STATUTE IS NOT DECISIVE OF ITS TRUE NATURE AND CHARACTER AND THE FACT WHETHER THE SAID LEVY IS COMPENSATORY OR PENAL IN NATURE IS TO BE DECIDED AFTER GOING THROUGH VARIOUS PROVISIONS OF THE STATUTE AND TO SEE THE INTENTIONS OF LAW MAKERS BEHIND PLACING OF SUCH PROVISIONS IN THE STATUTE. THIS INTERPRETATION OF THE STATUTE IS WELL SETTLED LEGAL PROPOSITION WHICH HAS BEEN SO HELD BY CATENA OF JUDGMENTS OF HON'BLE SUPERIOR COURTS WHICH CASE LAWS ARE ALSO CITED IN PRECEDING PARA'S OF THIS ORDER AND ARE NOT REPEATED HERE. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISION OF SECTIONS 29 AND 30 OF THE MVAT ACT 2002. WE HAVE OBSERVED THAT SECTION 29 OF THE MVAT ACT, 2002 PRESCRIBES PENALTIES FOR V ARIOUS OFFENCES/DEFAULTS UNDER MVAT ACT, 2002, WHILE SECTIONS 30 OF MVAT ACT, 2002 WHICH IS IMMEDIATELY SUCCEEDING SECTION TO SECTION 29 OF MVAT ACT, 2002 DEALS WITH THE INTEREST FOR VARIOUS DELAYS IN MAKING PAYMENT OF VAT. WE HAVE OBSERVED THAT SECTION 30 (2) OF THE MVAT ACT, 2002 STIPULATES PAYMENT OF SIMPLE INTEREST IN CASE VAT IS NOT PAID WITHIN DUE DATE AS PRESCRIBED UNDER MVAT ACT, 2002. HOWEVER, SECTION 30(4) OF MVAT ACT, 2002 PRESCRIBES INTEREST WHICH IS IN ADDITION TO INTEREST PAYABLE U/S. 30(2) OF MVAT ACT, 2002 AND IS TO BE PAID AFTER COMMENCEMENT OF SOME SPECIAL EVENT SUCH AS AUDITS, INSPECTION, I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 57 SURVEY, SEARCH ETC UNDER MVAT ACT, 2002 BY MVAT AUTHORITIES AND THE STATUTE HAS GIVEN DEALER AN OPPORTUNITY TO COME CLEAN AND END LITIGATION WITH MVAT DEP ARTMENT BY COMING FORWARD BY FILING RETURN OR REVISED RETURNS BY PAYING NOT ONLY ADDITIONAL TAX WHICH THE DEALER EARLIER DID NOT PAY IN ORIGINAL RETURN BUT ALSO THE DEALER IS BURDENED WITH THE BY ADDITIONAL LIABILITY OF PAYING SIMPLE INTEREST U/S. 30(2) OF MVAT ACT, 2002 FOR DELAY IN PAYMENT OF VAT BEYOND DUE DATE AS PRESCRIBED UNDER MVAT ACT, 2002 AND ALSO FURTHER PAYMENT BY WAY OF INTEREST @25% OF SUCH ADDITIONAL TAX WHICH IS TERMED BY LEGISLATURE AS 'INTEREST' WITHIN PROVISIONS OF SECTION 30(4) OF THE MV AT ACT, 2002. IT IS ALSO PROVIDED IN SECTION 30(4) OF THE MVAT ACT, 2002 THAT IF THE ADDITIONAL TAX PAID IN RETURN OR REVISED RETURN FILED AFTER COMMENCEMENT OF SUCH STIPULATED SPECIAL EVENT IS LESS THAN 10% OF THE TAX PAID AS PER ORIGINAL RETURN, THEN THE DEALER WILL NOT BE BURDENED WITH THIS INTEREST @25% OF ADDITIONAL TAX WHICH ALSO INDICATES THAT THIS INTEREST U/S. 30(4) OF MVAT ACT, 2002 IS PENAL IN NATURE AS THE RIGHT TO RECOVER THIS PENAL INTEREST IS WAIVED BY MVAT ACT,2002 FOR MINOR INFRACTION OF LA W. IT IS PERTINENT TO MENTION THAT THIS INTEREST PROVIDED U/S. 30(4) OF THE MVAT ACT, 2002 IS IN ADDITION TO THE INTEREST PAYABLE U/S. 30(2) OF THE MVAT ACT, 2002. IT IS ALSO PERTINENT TO MENTION THAT IF THE ASSESSEE WOULD HAVE CHOSEN TO LITIGATE UNDER THE SE CIRCUMSTANCES THEN IN THE ADVERSE SITUATION AND EVENTUALITY OF THE ASSESSEE LOSING OUT THE LEGAL BATTLE WITH MVAT AUTHORITIES, NOT ONLY THE ASSESSEE WOULD HAVE BEEN BURDENED WITH THE ADDITIONAL TAX OWING TO UNDERPAYMENT OF VAT WHILE FILING VAT RETURN OR IGINALLY AND WITH INTEREST U/S. 30(2) OF MVAT ACT, 2002 FOR WITHHOLDING/ DELAY IN PAYMENT OF VAT BEYOND PRESCRIBED DUE DATE UNDER MVAT ACT, 2002 BUT THE ASSESSEE IN SUCH ADVERSE EVENTUALITY OF LOSING OUT THE LEGAL BATTLE WITH MVAT AUTHORITIES WOULD HAVE AL SO BEEN ADDITIONALLY VISITED AND BURDENED WITH PENALTY AS IS STIPULATED U/S. 29(3) OF THE MVAT ACT, 2003 WHICH SHALL NOT BE LESS THAN 25% BUT WHICH MAY EXTEND TO 100% OF THE ADDITIONAL TAX SOUGHT TO BE CONCEALED OR EVADED BY THE ASSESSEE. THUS, IT IS VERY CLEAR THAT THE LAWMAKERS HAVE PROVIDED FOR A MANDATORY PENAL INTEREST BY VIRTUE OF PROVISIONS OF SECTION 30(4) OF THE MVAT ACT, 2002 TO THE TUNE OF 25% OF THE TAX SOUGHT TO BE EVADED ALTHOUGH NOMENCLATURE 'INTEREST' IS USED IN MVAT ACT, 2002 WHICH IS IN - FA CT PENAL IN NATURE HAVING GERMANE TO INFRACTION OF LAW WHILE FILING OF ORIGINAL RETURN OF VAT WHICH LED TO UNDER PAYMENT OF VAT ORIGINALLY. THE REASON IS NOT FAR TO SEEK AS THE LIBERTY OF PAYING 25% OF ADDITIONAL TAX U/S. 30(4) OF THE MVAT ACT, 2002 OF ITS OWN EVEN AFTER COMMENCEMENT OF SPECIAL EVENT SUCH AS AUDIT, INSPECTION, SURVEY AND SEARCH ETC IS GIVEN BY WAY OF ONE MORE OPPORTUNITY TO THE DEALER TO COME CLEAN VOLUNTARILY AFTER THE COMMENCEMENT OF AUDIT, INSPECTION, SURVEY, SEARCH ETC. AS STIPULATED U/ S. 30(4) OF THE MVAT ACT, 2002 BY PAYING THIS PENAL INTEREST COMPUTED @25% OF TAX SOUGHT TO BE EVADED IN ADDITION TO PAYING UP THE TAX SOUGHT TO BE EVADED AND INTEREST U/S. 30(2) OF MVAT ACT, 2002 TOWARDS DELAYED PAYMENT OF VAT WHICH INTEREST U/S. 30(2) IS COMPENSATORY IN NATURE. IT IS ALSO PERTINENT TO MENTION THAT BEFORE SPECIAL EVENT COMMENCES AS IS STIPULATED U/S. 30(4) BY WAY OF AUDIT, INSPECTION, SURVEY AND SEIZURE ETC. AND THE DEALER I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 58 OBSERVES THAT THERE IS SOME OMISSION OR INCORRECT STATEMENT IN ORIG INAL RETURN OF VAT FILED WITH MVAT AUTHORITIES, THE DEALER CAN ALWAYS COME FORWARD AND FILE REVISED RETURNS AFTER COMPLYING WITH STIPULATED CONDITIONS U/S. 20(4) OF THE MVAT ACT, 2002, FOR WHICH THERE IS ONLY STIPULATION TO PAY INTEREST U/S. 30(2) OF THE M VAT ACT,2002 FOR DELAYED PAYMENT OF VAT APART FROM PAYING ADDITIONAL TAX LIABILITY U/S. 20(5) OF MVAT ACT, 2002 WHICH WAS ORIGINALLY SHORT PAID DUE TO SUCH OMISSION OR INCORRECT STATEMENT IN THE ORIGINAL RETURN FILED WITH THE MVAT AUTHORITIES AND NO FURTHE R INTEREST SUCH AS STIPULATED U/S. 30(4) OF THE 1961 ACT IS STIPULATED UNDER THE AFORESAID CIRCUMSTANCES OF FILING REVISED RETURN VOLUNTARILY BY THE DEALER. THUS, SINCE THIS INTEREST U/S. 30(4) OF MVAT ACT, 2002(WHICH IS IN ADDITION TO INTEREST PAYABLE U/S . 30(2)) HAD GENESIS TO CORRECTING EARLIER INFRACTION OF LAW BY GIVING OF AN OPPORTUNITY TO THE DEALER TO COME CLEAN AFTER COMMENCEMENT OF CERTAIN SPECIAL EVENTS SUCH AS AUDIT, INSPECTION, SEARCH, SURVEY ETC. BY ALLOWING FILING OF REVISED RETURN TO COVER U P THE TAX EARLIER EVADED/SHORT PAID WHICH WAS EARLIER NOT PAID/ WITHHELD FROM DEPARTMENT DUE TO INFRACTION OF LAW BY WAY OF FILING INCORRECT RETURN OF VAT ORIGINALLY, THE NOMENCLATURE USED BY LAWMAKERS IN MVAT, 2002 IS 'INTEREST' INSTEAD OF 'PENALTY' TO KE EP UP WITH THE SPIRIT OF AN OPPORTUNITY GRANTED BY STATUTE ITSELF TO THE DEALERS BY WAY OF FRESH OPPORTUNITY TO COME CLEAN AND TO END LITIGATION BUT THE FACT REMAINS THAT IT HAS ITS GERMANE TO THE INFRACTION OF LAW COMMITTED BY DEALER WHETHER KNOWINGLY OR NOT EARLIER WHILE THE ORIGINAL RETURN OF VAT WAS FILED WITH MVAT AUTHORITIES AS THE SAID RETURN WAS FILED WITH INCORRECT TAX LIABILITY DETERMINED, WHEREIN THE MVAT AUTHORITIES WERE DEPRIVED OF THEIR LEGITIMATE DUES OF VAT DUE TO SUCH WRONG CLAIM IN THE ORI GINAL RETURN FILED WITH MVAT AUTHORITIES. IT IS ALSO PERTINENT TO MENTION THAT THIS INTEREST U/S. 30(4) OF MVAT ACT, 2002 @25% OF ADDITIONAL IS PENAL IN NATURE BECAUSE ONCE THE AUDIT, INSPECTION, SURVEY, SEARCH ETC. STARTS, THEN IT IS VERY DIFFICULT FOR TH E DEALER TO GET AWAY WITH ANY CONCEALMENT OR INCORRECT FILING OF PARTICULARS IN THE RETURN OF VAT ORIGINALLY FILED AND HENCE BEING CORNERED WITH THE COMMENCEMENT OF SPECIAL EVENT, AN OPPORTUNITY IS PROVIDED IN THE STATUTE ITSELF TO COME CLEAN OTHERWISE THE DEALER WILL BE BURDENED LATER WITH PENALTY AS PROVIDED U/S. 29(3) OF THE MVAT ACT WHICH CAN EXTEND TO 100% OF THE TAX EVADED. SO, THE FACT REMAINS THAT THIS IS PENAL INTEREST TO COME CLEAN FROM THE INFRACTION OF LAW EARLIER COMMITTED WHETHER KNOWINGLY OR NOT WHILE FILING ORIGINAL RETURN OF VAT UNDER MVAT ACT, 2002. THE ASSESSEE IN THE INSTANT CASE CAME AFTER THE COMMENCEMENT OF SEARCH AND SURVEY OPERATION BEING CONDUCTED AGAINST ASSESSEE IN THE LAST WEEK OF SEPTEMBER 2011 BY MVAT AUTHORITY CAME FORWARD TO FILE REVISED RETURN BY WITHDRAWING INADMISSIBLE AND WRONG CREDIT OF INPUT TAX CREDIT SET OFF AGAINST OUTPUT VAT PAYABLE IN ORDER TO COME CLEAN AND BUY PEACE WITH MVAT DEPARTMENT WITH A VIEW TO END LITIGATION AND THE ASSESSEE ALSO PAID COMPENSATORY INTEREST U/S. 30(2) TO MVAT DEPARTMENT FOR DELAY IN PAYMENT OF THIS ADDITIONAL TAX UNDER MVAT COMPUTED FROM THE ORIGINAL DUE DATE OF PAYMENT OF THIS MVAT LIABILITY DUE TO AVAILMENT OF WRONG INPUT TAX CREDIT ON ALLEGED BOGUS PURCHASES TILL THE SAID ADDITIONAL TAX L IABILITY OF VAT WAS PAID TO MVAT I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 59 DEPARTMENT AND THE ASSESSEE ALSO PAID PENAL INTEREST U/S. 30(4) OF THE MVAT ACT,2002 IN TERMS OF THE SCHEME OF THE ACT TO BUY PEACE AND TO END LITIGATION AS ALSO TO SAFEGUARD AGAINST POSSIBLE LEVY OF PENALTY U/S. 29(3) OF T HE MVAT ACT, 2002 WHICH WOULD IN ANY CASE BE MINIMUM 25% BUT WHICH COULD EXTEND TO 100% OF THE TAX SO EVADED IN THE EVENT OF HAVING ADVERSE OUTCOME OF LITIGATION WITH MVAT DEPARTMENT. THIS LEVY OF INTEREST U/S. 30(4) OF THE MVAT ACT, 2002 HAS GERMANE TO DE TECTION OF SHORT PAYMENT OF VAT BY WAY OF CONCEALMENT OR FURNISHING OF INACCURATE PARTICULARS OF INCOME IN THE ORIGINAL RETURN OF VAT FILED WITH MVAT DEPARTMENT DUE TO INFRACTION OF LAW, WHICH IS DETECTED AFTER COMMENCEMENT OF SUCH SPECIAL EVENTS SUCH AS A UDIT, INSPECTION, SURVEY, SEARCH UNDER MVAT ACT, 2002 EITHER AT BEHEST OF DEALER OR BY THE TEAM OF MVAT AUTHORITIES CONDUCTING SUCH SPECIAL EVENT. THE FACT REMAINS THAT ONE MORE OPPORTUNITY IS PROVIDED TO THE DEALER TO COME CLEAN AND BUY PEACE WITH MVAT DE PARTMENT BY FILING REVISED RETURN BY PAYING ADDITIONAL TAX, INTEREST U/S. 30(2) AND ALSO U/S. 30(4) OF MVAT ACT, 2002. THIS LEVY OF INTEREST U/S. 30(4) BEING IN ADDITION TO INTEREST U/S. 30(2) OF MVAT ACT, 2002, PENALISES THE DEALER FOR FILING WRONG RETURN S EARLIER IN VIOLATION OF MVAT ACT, 2002 LEADING TO SHORT PAYMENT OF TAXES TO MVAT DEPARTMENT DEPRIVING THEM OF THEIR LEGITIMATE DUES OF STATUTORY IMPOST, WHICH INTEREST IN OUR CONSIDERED VIEW AS IS PROVIDED U/S. 30(4) OF MVAT ACT, 2002 IS IN THE FORM OF P ENALISING THE DEALER FOR SUCH INFRACTION/VIOLATION OF LAW WHILE FILING ORIGINAL RETURN OF VAT WITH MVAT AUTHORITIES WHICH EARLIER LED TO SHORT COLLECTION OF TAXES DUE TO THESE WRONG CLAIMS FILED IN THE VAT RETURNS. WHILE ON THE OTHER HAND THE LEVY OF INTER EST U/S. 30(2) OF MVAT ACT, 2002 IS SIMPLE INTEREST FOR DELAYING OR WITHHOLDING THE PAYMENT OF VAT BEYOND THE PRESCRIBED DUE DATE FROM MVAT AUTHORITIES AND HAS GERMANE TO COMPENSATE MVAT DEPARTMENT FOR WITHHOLDING OF THEIR DUES OF TAX BEING UNPAID WITHIN S TIPULATED TIME AS PRESCRIBED IN THE STATUTE AND THIS LEVY OF INTEREST U/S. 30(2) IS COMPENSATORY IN NATURE. THUS, WE HOLD THAT THE LD. CIT (A) HAS RIGHTLY CONCLUDED THAT THE INTEREST PAYABLE U/S. 30(2) OF MVAT ACT, 2002 IS NOT PENAL IN NATURE BUT RATHER IT 'S COMPENSATORY IN NATURE FOR DELAYING / WITHHOLDING PAYMENT OF VAT BEYOND THE TIME PRESCRIBED UNDER MVAT ACT, 2002 AND IS AN ALLOWABLE DEDUCTION AS BUSINESS DEDUCTION FOR WITHHOLDING STATUTORY DUES FROM THE MVAT DEPARTMENT. BUT SO FAR AS INTEREST U/S. 30( 4) OF THE MVAT ACT, 2002 IS CONCERNED, IN OUR CONSIDERED VIEW, THE LEARNED CIT(A) ERRED IN HOLDING THE SAME TO BE COMPENSATORY IN NATURE WHILE IN OUR CONSIDERED VIEW, INTEREST PAID BY THE ASSESSEE U/S. 30(4) OF MVAT ACT, 2002 WHICH IS IN ADDITION TO INTERE ST PAYABLE U/S. 30(2) OF MVAT ACT, 2002 IS PENAL IN NATURE AND CANNOT BE ALLOWED AS BUSINESS DEDUCTION KEEPING IN VIEW PROVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT, VIDE OUR DETAILED DISCUSSIONS AND REASONING AS SET OUT ABOVE. OUR VIEW IS S TRENGTHENED BY THE FACT THAT INTEREST U/S. 30(4) OF MVAT ACT, 2002 IS IN ADDITION TO INTEREST PAYABLE U/S. 30(2) OF MVAT ACT, 2002 WHICH IS HELD BY US TO BE COMPENSATORY IN NATURE AND SECONDLY IN CASE THE ASSESSEE CHOSES PATH OF LITIGATION WITH MVAT AUTHOR ITIES WHEREIN ADDITIONAL TAX LIABILITY HAD ARISEN AFTER COMMENCEMENT OF AUDIT, INSPECTION, SURVEY, SEARCH INSTEAD I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 60 OF FILING REVISED RETURN ALONG WITH PAYMENT OF THIS INTEREST U/S. 30(4) IN ADDITION TO ADDITIONAL TAX AND INTEREST U/S. 30(2) OF MVAT ACT, 200 2, THEN IN THE EVENTUALITY OF THE ASSESSEE LOSING OUT IN THE LEGAL BATTLE WITH MVAT AUTHORITIES, THE ASSESSEE WILL, INTER - ALIA, BE VISITED WITH PENALTY U/S. 29(3) OF MVAT ACT, 2002 WHICH SHALL BE NOT LESS THAN 25% OF THE AMOUNT OF TAX FOUND TO BE EVADED AN D WHICH MAY EXTEND TO 100% OF THE SAID TAX SO SOUGHT TO BE EVADED APART FROM INTEREST U/S. 30(2) AND ADDITIONAL TAX SO SOUGHT TO BE EVADED. THUS, BY ASKING ASSESSEE TO PAY THIS INTEREST @25% OF ADDITIONAL TAX U/S. 30(4) OF MVAT ACT,2002 VOLUNTARILY WHILE F ILING REVISED RETURN ALONG WITH ADDITIONAL TAX AND COMPENSATORY INTEREST U/S. 30(2) OF MVAT ACT, 2002, AFTER COMMENCEMENT OF SPECIAL STIPULATED EVENT SUCH AS AUDIT, INSPECTION, SURVEY AND SEARCH ETC, THE LAWMAKERS HAVE CHOSEN TO END THE PATH OF LITIGATION DESPITE THE FACT THERE WAS INFRACTION OF LAW EARLIER IN FILING ORIGINAL VAT RETURN AND THIS INTEREST IS NOTHING BUT PENAL IN NATURE ALTHOUGH NOMENCLATURE USED IS 'INTEREST'. THIS IS THE REFLECTION OF STATE LITIGATION POLICY TO ALLOW DEALERS TO COME CLEAN B Y PAYING VOLUNTARILY THIS PENAL INTEREST U/S. 30(4) OF MVAT ACT, 2002 UNDER SPECIFIED CIRCUMSTANCES AND NOT TO LITIGATE MATTER FURTHER FOR SUCH INFRACTION OF LAW PROVIDED COMPLIANCE AS STIPULATED U/S. 30(4) OF MVAT ACT, 2002 ARE UNDERTAKEN. THIS IS UNDERTA KEN AS PART OF STATE LITIGATION POLICY TO PRESERVE RESOURCES BY REDUCING LITIGATION WITH THE DEALERS WHO WANT TO COME CLEAN AND SETTLE WITH STATE BY FULFILLING THE STIPULATED CONDITIONS BUT THE FACT REMAINS THAT THIS INTEREST U/S. 30(4) IS PENAL IN NATURE BEING LEVIED FOR INFRACTION OF LAW EARLIER BY EVADING TAXES EARLIER. THE LAWMAKERS IN OUR CONSIDERED VIEW HAVE NOT USED NOMENCLATURE OF 'PENALTY' AND INSTEAD USED THE WORD 'INTEREST' IN SECTION 30(4) BECAUSE AN OPPORTUNITY IS GIVEN BY THE STATUTE ITSELF TO THE DEALERS TO COME CLEAN VOLUNTARILY ONCE EVENTS LIKE AUDIT, INSPECTION, SEARCH, SURVEY ETC AS STIPULATED U/S. 30(4) OF MVAT ACT, 2002 COMMENCES AND THEREAFTER LIABILITY FOR ADDITIONAL TAX AROSE. THIS REFLECTED THAT THE LAWMAKERS DID NOT INTENDED TO USE HARSH WORD 'PENALTY' IN THE STATUTE ITSELF AGAINST SUCH DEALERS WHO WANTED TO COME CLEAN WITH A VIEW TO BUY PEACE EVEN POST COMMENCEMENT OF SPECIAL EVENTS SUCH AS AUDIT, INSPECTION, SURVEY, SEARCH ETC BY PAYING UP ADDITIONAL TAX, INTEREST U/S. 30(2) AND 30 (4), AS THE WORD USED IN SECTION 30(4) IS INSTEAD 'INTEREST'. THE PENALTY IS DEFINED AS PUNISHMENT IMPOSED FOR VIOLATION OF LAW, RULE OR CONTRACT WHILE INTEREST IS TO COMPENSATE FOR USE OF MONEY. THE STATE OF MAHARASHTRA IS CONSIDERED TO BE BUSINESS FRIEND LY STATE AND THIS GESTURE OF USING WORD 'INTEREST' AS AGAINST 'PENALTY' IS REFLECTION OF THE TRUST REPOSED BY STATE IN BUSINESS COMMUNITY AS EVERY ERROR OR WRONG CLAIM IN THE ORIGINAL RETURN MAY NOT BE INTENTIONAL AND KNOWINGLY MADE TO EVADE TAXES AND IT C OULD BE DUE TO AN UNINTENTIONAL ERROR WHILE INTERPRETING LAW OR DUE TO IGNORANCE OF LAW ETC.. IT IS ALSO WELL SETTLED PROPOSITION OF LAW THAT IGNORANCE OF LAW IS NOT AN EXCUSE AND DEALER HAS TO BE CAUTIOUS AND WELL VERSED WITH LAW BEFORE FILING ITS VAT RET URNS. IT IS ALSO PERTINENT TO MENTION THAT BEFORE SPECIAL EVENT COMMENCES AS IS STIPULATED U/S. 30(4) BY WAY OF AUDIT, INSPECTION, SURVEY AND SEIZURE ETC., AND THE DEALER OBSERVES THAT THERE IS SOME OMISSION OR INCORRECT I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 61 STATEMENT IN ORIGINAL RETURN OF VAT FILED WITH MVAT AUTHORITIES, THE DEALER CAN ALWAYS COME FORWARD AND FILE REVISED RETURNS AFTER COMPLYING WITH STIPULATED CONDITIONS U/S. 20(4) OF THE MVAT ACT, 2002, FOR WHICH THERE IS ONLY STIPULATION TO PAY INTEREST U/S. 30(2) OF THE MVAT ACT,2002 FOR D ELAYED PAYMENT OF VAT APART FROM PAYING ADDITIONAL TAX LIABILITY U/S. 20(5) OF MVAT ACT, 2002 WHICH WAS ORIGINALLY SHORT PAID DUE TO SUCH OMISSION OR INCORRECT STATEMENT IN THE ORIGINAL RETURN FILED WITH THE MVAT AUTHORITIES AND NO FURTHER INTEREST SUCH AS STIPULATED U/S. 30(4) OF THE 1961 ACT IS STIPULATED UNDER THE AFORESAID CIRCUMSTANCES OF FILING REVISED RETURN VOLUNTARILY BY THE DEALER BEFORE THE COMMENCEMENT OF AUDIT, INSPECTION, SEARCH, SURVEY ETC.. THIS ALSO CLEARLY INDICATES THAT NO PENAL INTEREST AS IS PROVIDED U/S. 30(4) OF MVAT ACT, 2002 IS LEVIED IN EVERY FILING OF REVISED RETURN DUE TO OMISSION OR COMMISSION IN THE ORIGINAL RETURN OF VAT AND IT IS ONLY WHENCE THE SPECIAL EVENTS SUCH AS AUDIT, INSPECTION, SURVEY, SEARCH ETC COMMENCES AND THE DEA LER IS OR IS LIKELY TO BE CORNERED AND THEN AT THAT STAGE THE DEALER COMES FORWARDS AND FILES REVISED RETURN, IT IS BURDENED WITH FURTHER PENAL INTEREST AS IS CONTAINED IN SECTION 30(4) OF THE MVAT ACT, 2002. THE LAWMAKERS IN SECTION 30(4) OF MVAT ACT, 200 2 HAS ALSO STATED THAT IF THE ADDITIONAL TAX IS LESS THAN 10% OF THE TAX PAID ORIGINALLY VIDE FILING ORIGINAL VAT RETURN, THE DEALER WILL NOT BE VISITED WITH THIS INTEREST U/S. 30(4) OF THE MVAT ACT, 2002 MEANING THEREBY THAT THE STATE IS WILLING NOT TO PE NALISE THE DEALERS DUE TO MINOR INFRACTION OF LAW. THUS, AFTER GOING THROUGH THE RELEVANT PROVISIONS OF THE MVAT ACT, 2002 AND OTHER MATERIAL ON RECORD, WE HAVE NO HESITATION TO HOLD THAT INTEREST PAID BY THE ASSESSEE U/S. 30(4) OF THE MVAT ACT, 2002 IS PE NAL IN NATURE AS IT HAS ITS GERMANE TO INFRACTION OF LAW BY THE DEALER WHILE FILING ORIGINAL RETURN OF VAT AND THE INTEREST PAID U/S. 30(4) OF MVAT ACT, 2002 CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINES S OR PROFESSION' KEEPING IN VIEW EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT. THIS GROUND FILED BY THE REVENUE IS PARTLY ALLOWED. THE AO IS DIRECTED TO BIFURCATE THE PAYMENTS AS BETWEEN INTEREST PAID BY THE ASSESSEE U/S. 30(2) AND 30(4) OF THE MVAT ACT, 2002 RESPECTIVELY AND ALLOW INTEREST PAID U/S. 30(2) OF MVAT ACT, 2002 AS DEDUCTION FROM INCOME COMPUTED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', WHILE INTEREST PAID BY THE ASSESSEE U/S. 30(4) OF MVAT ACT, 2002 SHALL BE DISALLOWED WHI LE COMPUTING INCOME CHARGEABLE TO TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. WE ORDER ACCORDINGLY. THUS, WE ARE OF THE CONSIDERED VIEW THAT THIS ISSUE IS TO BE RESTORED TO THE FILE OF THE AO FOR FRESH/DENOVO ADJUDICATION OF THE ISSUE AFRESH ON I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 62 MERITS IN ACCORDANCE WITH LAW. THE ASSESSEE IS DIRECTED TO PRODUCE ALL THE SURROUNDING FACTS CONCERNING LEVY OF PENALTY UNDER FERA/FEMA AND GUJARAT SALES TAX ACT INCLUDI NG ORDERS OF THE AUTHORITIES LEVYING THE SAID PENALTY BEFORE THE AO. THE AO TO ANALYSE ALL THE RELEVANT FACTS TO ASCERTAIN WHETHER SUCH PENALTIES ARE PENAL OR COMPENSATORY IN NATURE TO ARRIVE AT THE DECISION WHETHER THESE PENALTIES ARE HIT BY EXPLANATION 1 TO SECTION 37(1) OF THE 1961 ACT AND THEREAFTER TO PASS WELL REASONED ORDER IN ACCORDANCE WITH LAW ON MERITS . NEEDLESS TO SAY THAT THE AO SHALL PROVIDE PROPER AND NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NA TURAL JUSTICE IN ACCORDANCE WITH LAW. THE EVIDENCES/EXPLANATIONS PRODUCED BY THE ASSESSEE IN ITS SUPPORT SHALL BE ADMITTED BY THE AO IN THE INTEREST OF JUSTICE IN ACCORDANCE WITH LAW. THIS GROUND OF APPEAL BEARING NUMBER 3(A) AND (B) RAISED BY THE ASSESSE E IN ITS MEMO OF APPEAL FILED WITH THE TRIBUNAL IS ALLOWED FOR STATISTICAL PURPOSES. WE ORDER ACCORDINGLY. 17. THE OTHER GROUNDS EXCEPT GROUND NUMBER 3(A) AND (B) RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE TRIBUNAL AND ALL THE GROUNDS RAISED BY REVENUE IN MEMO OF APPEAL FILED WITH THE TRIBUNAL ARE SIMILAR TO THE ISSUES RAISED IN CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE FOR AY 2008 - 09 AND OUR DECISION FOR AY 2008 - 09 SHALL APPLY MUTATIS MUTANDIS TO THE ISSUES R AISED BY THE ASSESSEE AND REVENUE IN THEIR RESPECTIVE GROUNDS EXCEPT GROUND NUMBER 3(A) AND (B) RAISED BY THE ASSESSEE IN ITS APPEAL WHICH IS SEPARATELY ADJUDICATED BY US IN PRECEDING PARAS . WE ORDER ACCORDINGLY. 18. IN THE RESULT APPEAL OF THE ASSESSEE A ND REVENUE FILED WITH THE TRIBUNAL IN ITA NO.5374/MUM/2015 AND 5718/MUM/2015 FOR AY 2010 - 11 ARE BOTH PARTLY ALLOWED AS INDICATED ABOVE. ASSESSMENT YEAR - 2011 - 12 (ITA 5373/MUM/2015 AND ITA 5721/MUM/2015) 1 9 . THE ONLY ADDITIONAL ISSUE WHICH AROSE IN THIS YEAR IS IN REVENUES APPEAL WHEREIN REVENUE IS AGGRIEVED BY THE DECISION OF I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 63 LEARNED CIT(A) DELETING THE ADDITIONS WITH RESPECT TO ALLEGED BOGUS PURCHASES OF MOBILE HANDSETS TO THE TUNE OF RS. 97, 016 / - MADE BY THE ASSESSEE FROM SHIVAMANI TRADERS PVT. LT D. , WHEREIN THE AO GOT THE INFORMATION FROM MAHARASHTRA VAT AUTHORITIES THAT THE SAID CONCERN IS ENGAGED IN PROVIDING HAWALA ENTRIES BY ISSUING BOGUS ACCOMMODATION BILLS WITH OUT SUPPLYING ANY MATERIAL WHICH LED TO THE ADDITIONS BEING MADE TO THE INCOME OF THE ASSESSEE BY THE AO , HOWEVER THE LD. CIT(A) DELETED THE ADDITIONS BY HOLDING AS UNDER: - 8.4 I HAVE CONSIDERED THE FACTS OF THE CASE REASONS ASSIGNED BY THE ASSESSING OFFICER AND SUBMISSIONS OF THE APPELLANT. IT IS OBSERVED THAT FOUNDATION OF THE ADDITION IS BASED ON THE EVIDENCE IN THE POSSESSION OF INCOME TAX DEPARTMENT THAT SHI VAMANI TRADERS PVT. LTD. WAS ENGAGED IN ISSUING BOGUS BILLS AND INCLUDED IN THE HAWALA LIST OF SALES TAX DEPARTMENT. JUST ON THE INFORMATION FROM THE SALES TAX DEPARTMENT AND ON THE STATEMENT OF ANY PARTY AND WITHOUT ACTUALLY VERIFICATION AND PUTTING ON RE CORD AND WITHOUT GIVING AN OPPORTUNITY OF CROSS EXAMINATION, THE PURCHASES FROM SUCH SUSPECTED PARTIES CANNOT BE DISALLOWED. THE THIRD PARTY INFORMATION OR EVIDENCE SHOULD NOT BE THE SOLE BASIS FOR CONCLUSION OF A MATTER. IT IS AN ACCEPTED PRINCIPLE OF LAW THAT IF AN AO IS RELYING ON A STATEMENT AND/OR BOOKS OF ACCOUNT OF A THIRD PARTY, THE ASSESSEE IS ENTITLED TO RECEIVE COPY OF ALL MATERIAL WHICH HAVE BEEN COLLECTED AT THE BACK OF AN ASSESSEE ALONGWITH STATEMENT WHICH IS BEING REFERRED, RELIED UPON AND CO NSIDERED AND TO ALLOW AN OPPORTUNITY TO CROSS - EXAMINE SUCH THIRD PARTIES. IN THE CASE OF THE APPELLANT NO SUCH MATERIALS WERE PROVIDED NOR ANY OPPORTUNITY WAS ALLOWED TO CROSS - EXAMINE SHIVAMANI TRADERS PVT. LTD. PRINCIPLES OF NATURAL JUSTICE REQUIRE THAT B EFORE CHARGING A PERSON WITH FINANCIAL LIABILITY, HE SHOULD BE INFORMED OF THE MATERIAL ON WHICH THE CHARGE WAS GOING TO BE IMPOSED AND THE ASSESSEE MUST BE GIVEN AN OPPORTUNITY TO REBUT THE EFFECT OF THE MATERIAL, IF HE CAN. THE SUPREME COURT IN THE CASE OF STATE OF KERALA V/S. K.T. SHADULI YUSUFF 39 SALES TAX CASES 478 OBSERVED THAT ONE OF THE RULES WHICH CONSTITUTES A PART OF THE PRINCIPLES OF NATURAL JUSTICE IS THE RULE OF AUDI ALTERAM PARTEM WHICH REQUIRES THAT NO MAN SHOULD BE CONDEMNED UNHEARD. IN TH IS CASE THE ASSESSING OFFICER HAS NOT ASSIGNED ANY OTHER REASON BUT RELIED ON THE INFORMATION IN THE POSSESSION OF INCOME TAX DEPARTMENT WITHOUT ANY INDEPENDENT INVESTIGATION IN THIS REGARD. IN THE CASE OF I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 64 JAGDAMBA TRADING CO. V/S. ITO 16 SOT 66 (URO) IT I S HELD THAT THE STATEMENTS MADE BEFORE THE SALES TAX AUTHORITIES WHICH DO NOT HAVE CONCERN WITH THE INCOME TAX PROCEEDINGS OF THE ASSESSEE HARDLY HAVE ANY EVIDENTIARY VALUE AGAINST THE ASSESSEE. IT IS SEEN THAT THE PURCHASES ARE SUPPORTED BY PROPER BILLS A ND PAYMENT BY ACCOUNT PAYEE'S CHEQUE. ON THE FACTS OF THE CASE A REASONABLE AND CONVINCING INFERENCE WHICH COULD BE DRAWN IS THAT THE APPELLANT HAD PURCHASED MOBILE HANDSETS FROM THE PARTY WHEN NOTHING COULD BE BROUGHT ON RECORD BY THE ASSESSING OFFICER. I N DCIT V/S. SHRI RAJEEV G. KALATHIL 51 TAXMANN.COM 514 (MUM) IT IS HELD MERELY THE SUPPLIER HAS BEEN DECLARED A HAWALA DEALER BY SALES TAX DEPARTMENT NO ADDITION CAN BE MADE UNLESS FURTHER INVESTIGATION IS MADE BRINGING SUFFICIENT EVIDENCES TO SUPPORT THE VIEW AND THAT THERE WAS NO EVIDENCE REGARDING CASH RECEIVED BACK FROM THE SUPPLIER. FURTHER IN THE CASES OF RAMESHKUMAR & CO. V/S. ACIT (ITA NO.2959/MUM/2014) DATED 28 - 11 - 2014 AND SHRI DEEPAK POPATLAL GALA V/S. ITO (ITA NO.6203/MUM/2013) DATED 27 - 32015 AND GANPATRAJ A. SANGHAVI V/S. ACIT (ITA NO.2826/MUM/2013) DATED 5 - 11 - 2014 SIMILAR DECISION IS TAKEN. IN VIEW OF THE A BOVE I DELETE THE ADDITION OF RS. 97,016/ - MADE BY THE ASSESSING OFFICER. THIS GROUND OF APPEAL IS ALLOWED. 1 9.2 . THE LD. CIT(A) HAD DELETED THE ADDITIONS ON THE GROUNDS THAT NO CROSS EXAMINATION WAS ALLOWED BY THE AO TO THE ASSESSEE OF THE PERSONS WHOSE STATEMENT S WERE RECORDED BY MAHARASHTRA VAT DEPARTMENT . W E ARE OF THE CONSIDER ED VIEW THAT POWER S OF LD. CIT(A) ARE CO - TERMINUS WITH THE POWERS OF THE AO AND THE LEARNED CIT(A) OUGHT TO HAVE ALLOWED THE CROSS EXAMINATION OF THE SAID PARTIES TO THE ASSESSEE . THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. JANSAMPARK ADVERTISING & MARKETING PRIVATE LIMITED (2015) 375 ITR 3 73(DELHI) IS RELEVANT. THE PRIMARY ONUS IS ON THE ASSESSEE TO PROVE THAT THE PURCHASES ARE GENUINE. KEEPING IN VIEW INTEREST OF JUSTICE AND FACTUAL MATRIX OF THE CASE , WE ARE SETTING ASIDE AND RESTORING THE MATTER TO THE FILE OF AO FOR DENOVO DETERMINATIO N OF THE ISSUE ON MERITS IN ACCORDANCE WITH LAW . NEEDLESS TO SAY THAT THE AO SHALL PROVIDE PROPER AND NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 65 ACCORDANCE WITH LAW. THE EVIDENCES/EXPLANATION S PRODUCED BY THE ASSESSEE IN ITS SUPPORT SHALL BE ADMITTED BY THE AO IN THE INTEREST OF JUSTICE IN ACCORDANCE WITH LAW. THIS GROUND OF APPEAL BEARING NUMBER 6 RAISED BY THE REVENUE IN ITS MEMO OF APPEAL FILED WITH THE TRIBUNAL IS ALLOWED FOR STATISTICAL P URPOSES. WE ORDER ACCORDINGLY. 20. THE OTHER GROUNDS EXCEPT GROUND NUMBER 6 RAISED BY THE REVENUE IN ITS APPEAL AND ALL THE GROUNDS RAISED BY ASSESSEE IN MEMO OF APPEAL FILED WITH THE TRIBUNAL ARE SIMILAR TO THE ISSUES RAISED IN CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE FOR AY 2008 - 09 AND OUR DECISION FOR AY 2008 - 09 SHALL APPLY MUTATIS MUTANDIS TO THE ISSUES RAISED BY THE ASSESSEE AND REVENUE IN THEIR RESPECTIVE GROUNDS FOR AY 2011 - 12 EXCEPT GROUND NUMBER 6 RAISED BY THE REVENUE IN ITS APPEAL FILED WI TH THE TRIBUNAL WHICH IS SEPARATELY ADJUDICATED BY US IN PRECEDING PARAS OF THIS ORDER . WE ORDER ACCORDINGLY. 21 . IN THE RESULT APPEAL OF THE ASSESSEE AND REVENUE FILED WITH THE TRIBUNAL IN ITA NO.5373/MUM/2015 AND 5721/MUM/2015 FOR AY 201 1 - 1 2 ARE BOTH PA RTLY ALLOWED AS INDICATED ABOVE. 22. IN THE RESULT ALL THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE FOR AY 2008 - 09 TO 2011 - 12 ARE PARTLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 1 1 .01.2019. 1 1 .01.2019 S D / - S D / - ( JOGINDER SINGH ) (RAMIT KOCHAR) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 1 1 .01.2019 NISHANT VERMA SR. PRIVATE SECRETARY I.T.A. NO.5373 TO 5376/MUM/2015 I.T.A. NO.5718, 5721, 5723 AND 5725/MUM/2015 66 COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI