Appeal Details
Counselvise Citation
[2021] 107 COUNSELVISE.COM (IT) 7072 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 4 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
24-08-2021
Appeal Filed By
Department
Order Result
Allowed
Bench Allotted
DB-A
Next Hearing Date
28-04-2021
Assessment Year
2013-2014
Appeal Filed On
09-04-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD (THROUGH VIRTUAL HEARING) BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA NOS.654 & 655/HYD/2018 AYS: 2013 - 14 AND 2014 - 15 JCIC (OSD), CENTRAL CIRCLE - 1(4), HYDERABAD. PAN: AABCM 3917 A VS. MEDHA SERVO DRIVES PRIVATE LIMITED, HYDERABAD. PAN: AABCM 3917 A (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI V. SHIVA KUMAR REVENUE BY: SHRI SUNIL KUMAR PANDEY, DR C.O. NO. 23/HYD/2018 (A.Y.: 2014 - 15) (IN ITA NO.655/HYD/2018) JCIC (OSD), CENTRAL CIRCLE - 1(4), HYDERABAD. PAN: AABCM 3917 A VS. MEDHA SERVO DRIVES PRIVATE LIMITED, HYDERABAD. PAN: AABCM 3917 A (APPELLANT IN APPEAL ) (RESPONDENT / CROSS OBJECTOR ) ASSESSEE BY: SHRI V. SHIVA KUMAR REVENUE BY: SHRI SUNIL KUMAR PANDEY, DR DATE OF HEARING: 28/04 /2021 DATE OF PRONOUNCEMENT: /05/2021 ORDER PER L.P. SAHU, A.M: THE CAPTIONED TWO APPEALS (ITA NO.654 & 655/HYD/2018) ARE FILED BY THE REVENUE AGAINST THE ORDERS OF THE LD. CIT(A) - 4, 2 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. HYDERABAD IN APPEAL NOS.0166 & 0336/16 - 17/ACIT/DCIT, CIR.16(2)/CIT(A) - 4/HYD/17 - 18, DATED 29/01/2018 PASSED U/S. 143(3) R.W.S 250(6) OF TH E ACT FORT THE AYS 2013 - 14 AND 2014 - 15 RESPECTIVELY. THE CROSS OBJECTION (C.O. NO. 23/HYD/2018) IS FILED BY THE ASSESSEE IN ITA NO. 655/HYD/2018 FOR THE A.Y. 2014 - 15. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL FOR THE A.Y.: 201 3 - 1 4: - I) WH ETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) IS JUSTIFIED IN HOLDING THAT THE GRANT RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT OF ANDHRA PRADESH IS OF THE NATURE OF CAPITAL RECEIPT AND NON TAXABLE; II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) IS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER RECEIVED BY THE ASSESSEE AS SUBSIDY FROM THE GOVERNMENT OF ANDHRA PRADESH III) WHETHER ON THE FACTS AND CIRC UMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN NOT APPRECIATING THAT THE GRANT IN THIS CASE IS GIVEN TO REDUCE THE SALES TAX BURDEN OF THE ASSESSEE AND EVENTUALLY TO INCREASE THE PROFITABILITY AND THE GRANT GIVEN WAS ON REVENUE ACCOUNT BE CAUSE IT WAS GIVEN BY WAY OF ASSISTANCE IN PAYMENT OF TAXES IN CARRYING ON TRADE OR BUSINESS AND NOT FOR ACQUIRING THE CAPITAL ASSET. III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) IS JUSTIFIED IN NOT APPRECIATING THE GRANT IN THIS CASE WAS GRANTED YEAR AFTER YEAR ONLY AFTER EXPANSION AND ONLY AFTER COMMENCEMENT OF PRODUCTION AND, THEREFORE, SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN 3 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. IV) WHETH ER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE ID. CIT(A) IS JUSTIFIED IN RELYING UPON THE DECISION IN THE CASE OF CIT VS. CHAPHALKAR BROTHERS (400 ITR 279), WHEREIN THE GRANT GIVEN BY WAY CONCESSION IN ENTERTAINMENT DUTY TO MULTIPLEX THEATRE COMPLEXES TO PROMOTE CONSTRUCTION OF NEW CINEMA HOUSES IN THE STATE ON THE CONSIDERATION THAT THE INDUSTRY IS VERY CAPITAL INCENTIVE AND THUS THE SAID CASE IS DISTINGUISHABLE ON FACTS. V) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THE SP IRIT OF THE DECISION OF SUPREME COURT IN THE CASE OF 'SAHNEY STEEL AND PRESS WORKS LIMITED V CIT' - 1997 - TMI - 5620 - (SUPREME COURT) WHEREIN THE APEX COURT HAS CATEGORICALLY STATED AS UNDER: THE MADHYA PRADESH HIGH COURT, HOWEVER, FAILED TO NOTICE THE SIGNIFICANT FACT THAT UNDER THE SCHEME FRAMED BY THE GOVERNMENT, NO SUBSIDY WAS GIVEN UNTIL THE TIME PRODUCTION WAS ACTUALLY COMMENCED. MERE SETTING UP OF THE INDUSTRY DID NOT QUALIFY AN INDUSTRIALIST FOR GETTING ANY SUBSIDY. THE SUBSIDY WAS GIVEN AS HELP NOT FOR THE SETTING UP OF THE INDUSTRY WHICH WAS ALREADY COMMENCED PRODUCTION. THE VIEW TAKEN BY THE MADHYA PRADESH HIGH COURT IS ERRONEOUS.' 'IN THE CASE BEFORE US, SUBSIDIES HAVE NOT BEEN GRANTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW AS SET. THE SUBSIDIES WERE GRANTED YEAR AFTER YEAR ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND COMMENCEMENT OF PRODUCTION. SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS OF THE ASSESSEE. APPLYING THE TEST OF VISCOUNT SIMON IN THE 4 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. CASE OF OSTIME. IT MUST BE HELD THAT THESE SUBSIDIES ARE OF REVENUE CHARACTER AND WILL HAVE TO BE TAXED ACCORDINGLY.' VI) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U 1 S 14A RWR 8 D WITHOUT APPRECIATING THE FACT THAT THE DISALLOWANCE U/S 14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME WAS EARNED OR RECEIVED BY THE ASSESSEE? VII) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN L AW, THE ID. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U 1 S 14A RWR 8 D WITHOUT APPRECIATING THE FACT THAT THE FORMULA FOR COMPUTATION OF DISALLOWANCE U/S 14A AS GIVEN IN RULE 80 NOT ONLY INCLUDES THE INVESTMENT, INCOME FROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME BUT ALSO THE INVESTMENT, INCOME FROM WHICH SHALL NOT FORM PART OF THE TOTAL INCOME? VIII) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U/S 14A RWR 8 D WITHOUT APP RECIATING THE FACT THAT THE BOARD VIDE CIRCULAR NO. CIRCULAR NO. 5/ 2014 HAS MADE IT CLEAR THAT THE RULE 80 READ WITH SECTION 14A OF THE ACT PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EXEMPT INCOM E. IX) THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD ANY OTHER GROUNDS WHICH MAY BE NECESSARY. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL FOR THE A.Y.: 2014 - 15: - I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN HOLDING THAT 5 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. THE GRANT RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT OF ANDHRA PRADESH IS OF THE NATURE OF CAPITAL RECEIPT AND NON TAXABLE; II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE L D. CIT(A) IS JUSTIFIED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER RECEIVED BY THE ASSESSEE AS SUBSIDY FROM THE GOVERNMENT OF ANDHRA PRADESH III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN NOT APPRECIATING THAT THE GRANT IN THIS CASE IS GIVEN TO REDUCE THE SALES TAX BURDEN OF THE ASSESSEE AND EVENTUALLY TO INCREASE THE PROFITABILITY AND THE GRANT GIVEN WAS ON REVENUE ACCOUNT BECAUSE IT WAS GIVEN BY WAY OF ASSISTANCE IN PAYMENT OF TAXES IN CARRY ING ON TRADE OR BUSINESS AND NOT FOR ACQUIRING THE CAPITAL ASSET. III) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) IS JUSTIFIED IN NOT APPRECIATING THE GRANT IN THIS CASE WAS GRANTED YEAR AFTER YEAR ONLY AFTER EXPANSION 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. IV) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CI T(A) IS JUSTIFIED IN RELYING UPON THE DECISION IN THE CASE OF CIT VS. CHAPHALKAR BROTHERS (400 ITR 279), WHEREIN THE GRANT GIVEN BY WAY CONCESSION IN ENTERTAINMENT DUTY TO MULTIPLEX THEATRE COMPLEXES TO PROMOTE CONSTRUCTION OF NEW CINEMA HOUSES IN THE STAT E ON THE CONSIDERATION THAT THE INDUSTRY IS VERY CAPITAL INCENTIVE AND THUS THE SAID CASE IS DISTINGUISHABLE ON FACTS. 6 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. V) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THE SPIRIT OF THE DECISION OF SU PREME COURT IN THE CASE OF 'SAHNEY STEEL AND PRESS WORKS LIMITED V CIT' - 1997 - TMI - 5620 - (SUPREME COURT) WHEREIN THE APEX COURT HAS CATEGORICALLY STATED AS UNDER : THE MADHYA PRADESH HIGH COURT, HOWEVER, FAILED TO NOTICE THE SIGNIFICANT FACT THAT UN DER THE SCHEME FRAMED BY THE GOVERNMENT , NO SUBSIDY WAS GIVEN UNTIL THE TIME PRODUCTION WAS ACTUALLY COMMENCED. MERE SETTING UP OF THE INDUSTRY DID NOT QUALIFY AN INDUSTRIALIST FOR GETTING ANY SUBSIDY. THE SUBSIDY WAS GIVEN AS HELP NOT FOR THE SETTING UP O F THE INDUSTRY WHICH WAS ALREADY COMMENCED PRODUCTION. THE VIEW TAKEN BY THE MADHYA PRADESH HIGH COURT IS ERRONEOUS.' 'IN THE CASE BEFORE US, SUBSIDIES HAVE NOT BEEN GRANTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDIES WERE G RANTED YEAR AFTER YEAR ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND COMMENCEMENT OF PRODUCTION. SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS OF THE ASSESSEE. APPLYING THE TEST OF VISCOUNT SIMON IN THE CASE OF OSTIME. IT MUST BE HELD THAT THESE SUBSIDIES ARE OF REVENUE CHARACTER AND WILL HAVE TO BE TAXED ACCORDINGLY.' VI) THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD ANY OTHER GROUNDS WHICH MAY BE NECESSARY. 3.1 THE ASSESSEE FILED CO NO. 23/HYD/208 FOR THE AY 2014 - 15 AGAINST THE ORDER OF CIT(A) WHEREIN IT HAS RAISED THE ISSUE IN REGARD TO DISALLOWANCE U/ S SECTION 14A TO THE TUNE OF RS. 7 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 9,61,911/ - AND THE ASSESSEE ALSO FILED AN ADDITIONAL GROUND ON 29/07/2019 CONTESTING THAT THE ASSESSEE HAS NOT RECEIVED ANY EXEMPT INCOME, THEREFORE, THE DISALLOWANCE U/S 14A SHOULD NOT BE MADE. 4. FROM THE ABOVE , IT IS CLEAR THAT THE ISSUES INVOLVED IN BOTH THE APPEALS OF THE REVENUE FOR THE A.Y. 2013 - 14 AND 2014 - 15 IN RESPECT OF TREATMENT OF SUBSIDY RECEIVED IS CAPITAL OR REVENUE RECEIVED FROM THE GOVERNMENT OF ANDHRA PRADESH ARE SIMILAR IN NATURE AND THEREFORE, OUR DECISION IN THE APPEAL FOR THE A.Y. 2013 - 1 4 SHALL APPLY MUTADIS MUTANDIS FOR THE A.Y. 2014 - 15. FOR THE SAKE OF CONVENIENCE AND BREVITY, WE SHALL TAKE UP THE REVENUES APPEAL FOR THE A.Y. 2013 - 14. ITA NO.654/HYD/2018 5. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE - COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING & SELLING OF ELECTRONIC EQUIPMENT & ITS SPARE PARTS FILED ITS RETURN OF INCOME FOR THE A.Y. 2013 - 14 ON 28/11/2013 ADMITTING TOTAL INCOME OF RS. 95,60,11,428/ - . THE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY THE STATUTORY NOTICES WERE ISSUED TO THE ASSESSEE. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEES - COMPANY HAS MADE INVESTMENTS TO THE TUNE OF RS. 23,40 ,18,258/ - AS ON 31/3/2013 AND NO ANY EXPENDITURE AGAINST THESE INVESTMENTS WAS DISALLOWED BY THE ASSESSEE ITSELF AND THEREFORE, THE ASSESSEE WAS ASKED AS TO WHY THE DISALLOWANCE U/S. 14A OF THE ACT SHOULD NOT BE MADE. IN 8 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE REQUESTED NOT TO DISALLOW ANY EXPENDITURE U/S. 14A SINCE TH ERE WERE NO ADDITIONS TO IT DURING THE PERIOD UNDER CONSIDERATION WHICH IS CLEAR FROM THE SCHEDULE NO.10 OF THE FINANCIAL STATEMENT. THE LD.AO ALSO OBSERVED THAT THE ASSESSEE HAD DEB ITED INTEREST EXPENDITURE TO THE TUNE OF RS. 53,24,336/ - . ACCORDINGLY, THE ASSESSING OFFICER CALCULATED THE DISALLOWANCE AS PER RULE RULE 8D (2) (II) & (III) AND MADE DISALLOWANCE OF RS. 8,45,648/ - . FURTHER, ON SCRUTINY OF ACCOUNTS IT WAS NOTICED BY THE A SSESSING OFFICER THAT THE ASSESSEE HAD RECEIVED REIMBURSEMENT OF SALES TAX FROM THE STATE GOVERNMENT TO THE TUNE OF RS. 1,69,32,910/ - WHICH WAS CREDITED INTO CAPITAL RESERVE ACCOUNT WITHOUT PASSING THROUGH PROFIT & LOSS ACCOUNT AND THE SAME WAS NOT OFFERE D AS REVENUE INCOME DURING THE YEAR. IN THIS REGARD, THE OBSERVATION OF THE ASSESSING OFFICER IS AS UNDER: - 8.1. ON VERIFICATION OF THE INFORMATION FURNISHED, IT IS NOTICED THAT THE ASSESSEE COMPANY HAS RECEIVED RS. 1,69,32,910/ - AS STATE INCENTIVE TOWAR DS REIMBURSEMENT OF SALES TAX VIDE ORDER BEARING NO. GO NO. 178, INDUSTRIES AND COMMERCE (IP) DEPARTMENT DATED 21/06/2015 AND THE SAME WAS CAPITALIZED AS CAPITAL RESERVE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEES AR WAS ASKED AS TO WHY THE S AID REIMBURSEMENT OF SALES TAX SHOULD NOT BE TREATED AS INCOME / REVENUE OF THE ASSESSEE - COMPANY FOR THE ASSESSMENT YEAR UNDER CONSIDERATION SINCE THE SAID SALES TAX WAS PAID BY THE ASSESSEE COMPANY IN THE EARLIER ASSESSMENT YEARS AND CLAIMED AS RE VENUE EX PENDI8TURE OF THE ASSESSEE COMPANY FOR THAT YEARS. 8.2 IN THIS REGARD, AR OF THE ASSESSEE COMPANY HAS REPLIED THAT THE SAID REIMBURSEMENT OF S ALES TAX PAID IS 9 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. RECEIVED FROM INDUSTRIES AND COMMERCE (IP) DEPARTMENT BY WAY OF INCENTIVES / CONCESSIONS TO ELIGIBLE INDUSTRIES SET UP IN ANDHRA PRADESH TO ENCOURAGE INDUSTRIES IN ANDHRA PRADESH, WHICH IS CAPITAL IN NATURE. HENCE, THE SAME IS TREATED AS CAPITAL RESERVE. HOWEVER, THE CONTENTIONS OF THE ASSESSEE COMPANY IS NOT ACCEPTABLE SINCE THE SAID SALES TAX WAS PAID IN THE EARLIER ASSESSMENT YEARS AND ALREADY CLAIMED AS REVENUE EXPENDITURE OF THE COMPANY. HENCE, THE SAME IS TREATED AS INCOME AND ADDE D TO THE INCOME RETURNED. 7. ACCORDINGLY, THE LD. A.O. ADDED THE AMOUNT OF RS. 1,69,32,910/ - RECEIVED TOWARDS SALES TAX REIMBURSEMENT TO THE INCOME OF THE ASSESSEE AND COMPUTED THE TOTAL INCOME. LD. A.O. MADE CERTAIN OTHER ADDITIONS ALSO. AGGRIEVED BY THE ORDER OF THE LD. A.O., THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A) AND THE LD. CIT(A) DELETED THE ADDITIONS AND ALLOWED THE APPEAL OF THE ASSESSEE. 8. FEELING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US . 9. AT TH E OUTSET, THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE ASSESSEE HAD INCURRED SOME EXPENDITURE TOWARDS THE INVESTMENTS MADE BUT HE HAS NOT DISALLOWED ANY EXPENDITURE AS PER THE PROVISIONS OF SECTION 14A OF THE ACT WHICH WAS OUGHT TO HAVE BEEN DONE BY THE ASSESSEE AS PER RULE 8D (2) (II) AND RULE 8D (2) (III) OF THE IT RULES, 1962. HE FURTHER SUBMITTED THAT THE LD. CIT(A) HAD IGNORED THE RULE IN THIS REGARD WHILE DELETING THE ADDITIONS MADE BY THE LD. AO AND THEREFORE, THE ORDER OF THE LD. A.O. SHOULD BE RESTORED ON THIS ISSUE. 10 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 10. THE LD. DR FURTHER SUBMITTED THAT WITH REGARD TO THE SALES TAX REIMBURSEMENTS RECEIVED BY THE ASSESSEE, IN THE PREVIOUS YEAR RELEVANT TO THE A.Y. UNDER CONSIDERATION, THE SALES TAX WAS DEBITED INTO THE REVENUE ACCOUNT AS REVENUE EXPENDITURE AND WHEN THE ASSESSEE - COMPANY RECEIVED THE REIMBURSEMENT FROM THE GOVERNMENT, THE ASSESSEE HAS DIRECTLY CREDITED TO THE CAPITAL RESERVE ACCOUNT WHICH IS NOT PROPER BECAUSE THE RECEIPTS FROM THE GOVERNMENT FOR SALES T AX IS A REVENUE RECEIPT. LD. DR ALSO SUBMITTED THAT ONCE THE CLAIM HAS BEEN ALLOWED IN ANY PREVIOUS YEAR AND IF THE SAME IS RECEIVED IN SUBSEQUENT YEAR IT SHOULD BE CONSIDERED AS THE CLAIM OF THE YEAR IN WHICH THE AMOUNT IS RECEIVED. HE FURTHER SUBMITTED THAT THE CASE - LAWS RELIED ON BY THE LD. AR ARE NOT APPLIABLE TO THE FACTS OF THE PRESENT CASE. 11. ON THE OTHER HAND, LD. AR RELIED ON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT THE LD. CIT(A) HAS RIGHTLY DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AFTER RELYING ON THE JUDGMENTS AS QUOTED BY THE LD. CIT(A) IN HIS ORDER. IN RESPECT OF DISALLOWANCE U /S. 14A, THE LD. AR SUBMITTED THAT THERE WAS NO EXEMPT INCOME RECEIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND THEREFORE, NO DISALLOWANCE CAN BE MADE AND THEREFORE, THE LD. CIT(A) HAS RIGHTLY DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 1 2 . THE WRITTEN SUBMISSIONS OF THE ASSESSEE ARE AS UNDER: WRITTEN SUBMISSIONS; 11 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 1. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING AND SALE OF ELECTRONIC EQUIPMENT AND ITS SPARES ETC. FOR THE ASST.YEAR 2013 - 14, THE ASSESSEE FILED RETURN OF INCOME ON 30 - 09 - 2013 DECLARING TOTAL INCOME OF RS.95,60, 11 ,428. REGULAR ASSESSMENT WAS COMPLETED U/S.143(3) ON 31 - 03 - 2016 ON TOT AL INCOME OF RS.97,94,52,347/ - THE ASSESSING OFFICER MADE, INTER ALIA, THE UNDERMENTIONED DISA LL OWANCES/ ADDITIONS. A). REIMBURSEMENT OF SALES TAX RS.1,69,32,910 B). DISALLOWANCE U/S.14A RS. 8,45,648 2. FOR THE ASSESSMENT YEAR 2014 - 15, IT FILED RETUR N OF INCOME ON 14 - 09 - 2014 DECLARING TOTAL INCOME OF RS.95,29,62,050. REGULAR ASSESSMENT WAS COMPETED U/S.143(3) ON 3011 - 2016 ON TOTAL INCOME OF RS.98,25,79,500. THE ASSESSING OFFICER MADE, INTER ALIA, DISALLOWANCES/ADDITIONS AS UNDER: A).REIMBURSEMENT OF SALES TAX RS.2,78,65,864 B).DISALLOWANCE U/S.14A RS. 9,61,911 REIMBURSEMENT OF SALES TAX RS. 1,69,32,910IA.Y 2013 - 14 AND RS.2,78,65,864 (A.Y.: 2014 - 15},: . 3. THE ASSESSEE RECEIVED REIMBURSEMENT OF SALES TAX IN AN AMOUNT OF RS.1,69,32,910 FOR ASST.Y EAR 2013 - 14 AND RS.2,78,65,864 FOR A.Y 2014 - 15 AS STATE INCENTIVE. THE ASSESSEE CAPITALISED THE SAME AS CAPITAL RESERVE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE AMOUNT OF SALES TAX REIMBURSE MENT SHOULD NOT BE TREATED AS REVENUE RECEIPT. THE ASSESSEE SUBMITTED THAT THE ERSTWHILE GOVT. OF A.P FRAMED A NEW INDUSTRIAL INVESTMENT PROMOTION POLICY 2005 - 2010 TO ENCOURAGE SETTING UP OF INDUSTRIES/EXPANSION OF INDUSTRIES IN THE STATE OF ANDHRA PRADESH . ACCORDING TO THE SAID POLICY 12 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. NEW UNITS OF INDUSTRIES ARE TO BE GIVEN CERTAIN BENEFITS, ONE OF WHICH IS REIMBURSEMENT OF SALES TAX. INDUSTRIAL UNITS EXPANDING THEIR CAPACITY AT LEAST BY 25% ARE ELIGIBLE FOR SALES TAX REIMBURSEMENT, AS PER G.O MS NO.178 DA TED 21 - 6 - 2005 OF INDUSTRIES AND COMMERCE (IP) DEPARTMENT OF GOVERNMENT. PARAGRAPHS 1.0 AND 4.4 OF THE OPERATIONAL GUIDELINES FOR IMPLEMENTATION OF INDUSTRIAL INVESTMENT PROMOTION POLICY (IIPP) - 2005 - 2010 ARE REPRODUCED HEREUNDER: #1.0 TO PROMOTE ANDHRA PRADESH AS ATTRACTIVE AND COMPETITIVE DESTINATION FOR INDUSTRIAL INVESTMENTS, THE STATE GOVERNMENT HAVE OFFERED VARIOUS INCENTIVES/BENEFITS TO ALL ELIGIBLE NEW INDUSTRIAL UNITS SET UP IN THE STATE. PROJECTS INVOLVING SUBSTANTIAL EXPANSION/DIVERSIFICATION O F EXISTING INDUSTRIES IN THE ELIGIBLE LINES OF ACTIVITIES ARE ALSO ENTITLED FOR BENEFITS OFFERED UNDER THE POLICY NOTIFIED VIDE GO MS NO.178 INDUSTRIES & COMMERCE (JP) DEPARTMENT DATED 21 - 06 - 2005 READ WITH GO MS NO.327~ IND & COM (JP) DEPT DATED 31 - 12 - 2005 .# #4.4 :EXPANSION PROJECTS: EXISTING INDUSTRIAL UNITS, IN ALL ELIGIBLE AREAS SETTING UP EXPANSION PROJECTS OTHER THAN THOSE LISTED IN THE INELIGIBLE LIST INVOLVING ENHANCEMENT OF FIXED CAPITAL INVESTMENT BY AT LEAST 25% AS WELL AS ENHANCEMENT OF CAPACIT Y BY 25% FOR THE SAME PRODUCT LINES WILL BE ELIGIBLE FOR INCENTIVES II 4. SINCE THE ASSESSEE HAD SET UP A NEW UNIT AT KORREMULA VILLAGE, GHATKESAR MANDAI, RR DISTRICT, ANDHRA PRADESH, IT BECAME ELIGIBLE FOR SUCH INCENTIVE. DURING THE ASST.YEAR 2013 - 14, T HE ASSESSEE RECEIVED RS.1,69,32,910 AND DURING ASST.YEAR 2014 - 15 IT RECEIVED RS.2,78,65,864_FROM INDUSTRIES DEPARTMENT AS INCENTIVE BY WAY OF SALES TAX REIMBURSEMENT. THE ASSESSEE SUBMITTED THAT AS THIS AMOUNT WAS RECEIVED IN CONNECTION WITH EXPANDING ITS MANUFACTURING CAPACITY, THIS AMOUNT IS TO BE CONSIDERED AS CAPITAL RECEIPT. 13 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND MADE ADDITION OF RS.1,69,32,910/ - FOR ASST.VEAR 2013 - 14 AND RS.2,78,65,864 FOR A.V 2014 - 15 BEING T HE SALES TAX REIMBURSED. 6. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). BEFORE THE C.I.T(A} , THE ASSESSEE REITERATED IT SUBMISSIONS. THE ASSESSEE SUBMITTED THAT IT COLLECTED VAT AND CST AND REMITTED THE SAME TO THE SALES TAX DEPARTMENT AND THE BALANCE IN THE SALES TAX ACCOUNTS IS NIL AT THE END OF THE YEAR. THE ASSESSEE SUBMITTED THAT THE SUBSID Y RECEIVED FROM THE INDUSTRIES DEPARTMENT OF THE GOVT. OF A.P WAS GIVEN FOR PROMOTING INDUSTRIAL DEVELOPMENT IN THE STATE OF ANDHRA PRADESH. THE ASSESSEE CITED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS CHAPHALKAR BROTHERS 400 ITR 279 SC IN SUPPORT OF ITS CONTENTION. 7. LEARNED C.I.T (APPEALS) REFERRED TO THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF CHAPHALKAR BROTHERS (SUPRA) AND ALSO THE DECISIONS IN THE CASES OF CIT VS PONNI SUGARS AND CHEMICALS LTD., 306 ITR 392 SC AN D PR.CIT VS TALBROS ENGINEERING LTD., 386 ITR 154 P & H AND HELD THAT SINCE THE ASSESSEE HAD RECEIVED THE SALES TAX REIMBURSEMENT FOR EXPANDING ITS MANUFACTURING CAPACITY, THE SAID AMOUNT IS A CAPITAL RECEIPT AND CANNOT BE CONSIDERED AS INCOME. THE C.I.T ( APPEALS) ALLOWED THE APPEALS. 8. AGGRIEVED BY THE DECISION OF THE C.I.T(APPEALS}, DEPARTMENT HAS FILED APPEALS BEFORE THE HON'BLE ITAT. THE ASSESSEE SUBMITS THAT THE INDUSTRIAL INVESTMENT PROMOTION POLICY 2005 - 2010, BY ITS VERY NAME SPELLS THE INTENTION OF THE GOVT. OF A.P. VARIOUS FISCAL BENEFITS LISTED IN THE POLICY INCLUDE REIMBURSEMENT OF STAMP DUTY PAID ON PURCHASE OF LAND, REIMBURSEMENT OF STAMP DUTY PAID FOR LEASE OF LAND/BUILDING, REIMBURSEMENT OF 14 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. STAMP DUTY PAID ON FINANCIAL DEEDS/MORTGAGES, PART IAL REBATE ON LAND COST IN IES AND IDAS, PARTIAL SUBSIDY ON FIXED CAPITAL INVESTMENT, PARTIAL PROVISION OF SEED CAPITAL ASSISTANCE IN CERTAIN CASES, PARTIAL SUBSIDY ON CAPITAL EQUIPMENT FOR TECHNOLOGY UPGRADATION, PARTIAL SUBSIDY ON EXPENSES INCURRED FOR P ATENT REGISTRATION ARE ALSO PART OF THE INCENTIVES FOR INDUSTRIAL INVESTMENT PROMOTION. (PLEASE SEE PAGES 2 AND 3 OF PAPER BOOK) 9. APART FROM THE CASES CITED BEFORE THE CIT(A), THE ASSESSEE ALSO RELIES ON THE DECISIONS IN THE CASES GARDEN SILK MILLS LTD ., VS CIT 88 TAXMANN.COM 724 (GUJ) (PLEASE SEE PAGES 11 TO 13 OF PAPER BOOK CONTAINING COPIES OF DECISIONS) AND ITO VS SANTOSH LAXMI BINNY MODERN RICE MILL (PLEASE SEE PAGES 14 TO 17 OF PAPER BOOK CONTAINING COPIES OF DECISIONS) 10. IN THE CASE OF GARDEN SILK MILLS LTD., (SUPRA) HON'BLE HIGH COURT OF GUJARAT HELD THAT SUBSIDY IN THE FORM OF SALES TAX INCENTIVE GIVEN TO ASSESSEE TO ENCOURAGE SETTING UP OF INDUSTRIES IN BACKWARD AREA CONSTITUTES CAPITAL RECEIPT. THE COURT (IN PARA 7 OF ITS ORDER) RECORDED T HAT THE SALES TAX INCENTIVE WAS ONLY AN ALTERNATIVE TO CASH DISBURSEMENT AND BY ITS VERY NATURE, WAS TO BE AVAILABLE ONLY AFTER PRODUCTION HAD COMMENCED. THUS IN EFFECT, THE SUBSIDY IN THE FORM OF SALES TAX INCENTIVE WAS NOT GIVEN TO THE ASSESSEE FOR ASSIS TING IT IN CARRYING OUT BUSINESS OPERATIONS BUT TO ENCOURAGE THE SETTING UP OF INDUSTRIES IN BACKWARD AREAS. THE COURT HELD THAT THE JUDGMENT OF THE BOMBAY HIGH COURT IN RELIANCE INDUSTRIES((2010)339 ITR 632 BOM WHEREIN IT HAS BEEN HELD THAT WHERE THE OBJE CT OF THE SUBSIDY IN THE FORM OF SALES TAX INCENTIVE WAS TO SET UP A NEW UNIT IN A BACKWARD AREA TO GENERATE EMPLOYMENT SUCH A RECEIPT WAS A CAPITAL RECEIPT. 11. HON'BLE ITAT, HYDERABAD 'A' BENCH IN THE CASE OF ITO VS SANTOSH LAXMI BINNY MODERN RICE MILL 1 SOT 15 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 137 HYD HELD THAT (PLEASE SEE HEAD NOTES) SINCE SPECIAL PACKAGE OF INCENTIVE WAS ONLY FOR SETTING UP OF INDUSTRIES, INCENTIVE RECEIVED BY ASSESSEE WAS CAPITAL IN NATURE. 12. IN THE CASE OF CIT VS CHAPHALKAR BROTHERS PUNE, 88 TAXMANN.COM 178 SC,(PL EASE SEE PAGES 1 TO 10 OF PAPER BOOK CONTAINING COPIES OF DECISIONS) HON'BLE SUPREME COURT HELD (PLEASE SEE CATCHWORDS ON TOP OF JUDGMENT:PAGE 1 OF PAPER BOOK CONTAINING COPIES OF DECISIONS): 'WHERE OBJECT OF RESPECTIVE SUBSIDY SCHEMES OF STATE GOVERNMENTS WAS TO ENCOURAGE DEVELOPMENT OF MULTIPLE THEATRE COMPLEXES, INCENTIVES WOULD BE HELD TO BE CAPITAL IN NATURE AND NOT REVENUE RECEIPTS'. IN THAT CASE, GOVT. OF MAHARASHTRA PROVIDED EXEMPTION OF ENTERTAINMENT DUTY IN MULTIPLEX THEATRE COMPLEXES NEWLY SETUP, FOR A PERIOD OF THREE YEARS AND THEREAFTER PAYMENT OF ENTERTAINMENT DUTY AT RATE OF 25 PER CENT FOR SUBSEQUENT TWO YEARS. THE ISSUE THAT AROSE WAS WHETHER SINCE OBJECT OF INCENTIVE SCHEMES WAS TO ENCOURAGE DEVELOPMENT OF MULTIPLE THEATRE COMPLEXES, INCENT IVES WOULD BE HELD TO BE CAPITAL IN NATURE AND NOT REVENUE RECEIPTS. THE SAME WAS ANSWERED IN FAVOUR OF ASSESSEE. 13. IN THE CASE OF SANGHI INDUSTRIES LTD., VS ACIT (ITA NO.979/HYD/2017 AND OTHER APPEALS) HON'BLE ITAT, HYDERABAD BENCH HELD THAT SALES TAX EXEMPTION/REMISSION GRANTED BY GOVT. OF GUJARAT IS A CAPITAL RECEIPT SINCE THE OBJECT OF THE SCHEME UNDER WHICH IT WAS GRANTED WAS TO SET UP INDUSTRIES IN THE BACKWARD AREAS OF GUJARAT AND TO PROVIDE EMPLOYMENT OPPORTUNITIES TO THE UMEMPLOYED YOUTH. HON'B LE ITAT HELD 'IT IS A TRITE LAW NOW THAT THE DETERMINATION OF A SUBSIDY AS CAPITAL RECEIPT OR REVENUE RECEIPT IS DEPENDENT ON THE OBJECTIVE OF THE SCHEME'. RELYING ON THE RATIO OF SEVERAL DECISIONS INCLUDING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF PANNI SUGARS LTD., 306 ITR 392 SC (COPY FILED AT PAGES 18 TO 24 OF 16 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. PAPER BOOK), HON'BLE ITAT HELD THAT THE IMPUGNED AMOUNT OF SALES TAX REMISSION/EXEMPTION WAS A CAPITAL RECEIPT. 14. THE ASSESSEE PRAYS THAT ON THE FACTS OF THE ASSESSEE'S CASE AN D IN THE LIGHT OF THE VARIOUS JUDICIAL PRONOUNCEMENTS, THE ORDERS OF THE LEARNED CIT(A) MAY KINDLY BE UPHELD AND THE IMPUGNED AMOUNTS MAY BE HELD AS CAPITAL RECEIPTS IN THE HANDS OF THE ASSESSEE. DISALLOWANCE U/S.14A. ASST.VEAR 2013 - 14: 15. ASSESSEE EARNED DIVIDEND INCOME OF RS.1,90,69,825/ - DURING THE PREVIOUS YEAR RELEVANT TO ASST.YEAR 2013 - 14. A.O MADE DISALLOWANCE OF RS.1,50,751/ - UNDER RULE 8D(2)(II) AND RS.6,94,897/ - UNDER RULE 8D(2)(III). HOWEVER, C.I.T(A), VIDE PARAGRAPH 4.2 OF HE R ORDER, STATED THAT SINCE THERE IS NO DIVIDEND INCOME DURING THE YEAR, DISALLOWANCE MADE BY THE ASSESSING OFFICER IS DELETED. 16. DEPARTMENT IS IN APPEAL AGAINST SUCH DELETION OF DISALLOWANCE. GROUND NOS (VI), (VII) AND (VIII) OF THE GROUNDS OF APPEAL T AKEN BY THE DEPARTMENT INDICATE THAT THE DEPARTMENT IS CLAIMING THAT DISALLOWANCE IS IN ORDER EVEN IF THERE IS NO EXEMPT INCOME. THIS PROPOSITION IS NOT TENABLE IN VIEW OF THE DECISION OF THIS HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD., VS CIT 69 TAXAMNN.COM 118 DEL HE. THERE IS NO GROUND TAKEN BY THE DEPARTMENT SEEKING RELIEF ON THE DECISION TAKEN BY THE C.I.T(A). 16. WITHOUT PREJUDICE TO THE SUBMISSIONS MADE IN THE PRECEDING PARAGRAPH, IT IS SUBMITTED THAT BEFORE THE C.I.T(A), THE ASSESSEE SUBMITTED THAT ITS CAPITAL AND RESERVES AS AT 31 - 03 - 2012 AND 31 - 03 - 2013, AS DETAILED HEREUNDER, FAR EXCEEDED ITS INVESTMENT IN ASSETS YIELDING EXEMPT IN COME AND HENCE DISALLOWANCE UNDER 17 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. RULE 8D(2)(II) IS NOT WARRANTED. (PLEASE SEE DETAILS AS PER BALANCE SHEET AND DETAILS OF DISALLOWANCE U/S.14A AS PER PAGES 9 AND 10 ANNEXED) DETAILS OF OWN FUNDS: 31 - 03 - 2013 31 - 03 - 2012 SHARE CAPITAL 20,87 ,71,900 20,87,71,900 RESERVES & SURPLUS 4,45,87,30,871 3,14,98,20,131 TOTAL: 4,66,75,02,771 3,35,85,92,031 17. THE INVESTMENTS MADE BY THE ASSESSEE COMPANY WHICH YIELD TAX - FREE INCOME ARE RS,4,39,40,540/ - AND RS.23,40,18,258/ - AS AT 31 - 03 - 2012 AND 31 - 03 - 2013 RESPECTIVELY WHICH ARE MUCH LESS THAN THE CAPITAL AND RESERVES PUT TOGETHER. ALSO, THE CASH PROFIT FOR THE YEAR AFTER TAX IS RS.136,52,53,635/ - . THE ASSESSEE RELIED ON THE DECISION OF HON'BLE ITAT, KOLKATA BENCH IN THE CASE OF SP JAI SWAL ESTATES PVT. LTD VS CIT 147 TIJ 649 (29 TAXMANN.COM 221) AND PLEADED BEFORE C.I.T (APPEALS) THAT NO DISALLOWANCE OF INTEREST IS WARRANTED. IN THE LIGHT OF THE FACTS SUBMITTED HEREINABOVE, THE ASSESSEE SUBMITS THAT DISALLOWANCE MADE U/S.14A R.W.R 8D(2) (II) IS NOT CORRECT. 18. AS REGARDS DISALLOWANCE MADE U/S.14A R.W.RULE 80(2)(III) IT HAS BEEN HELD IN THE CASE OF PRIYA EXHIBITORS PVT. LTD., VS ACIT 27 TAXMANN.COM 88 DEL ITAT THAT DISALLOWANCE U/S.14A REQUIRES A CLEAR FINDING OF INCURRING EXPENDITURE AND IN THE ABSENCE OF THE SAME, NO DISALLOWANCE COULD BE MADE. IT HAS BEEN HELD IN THE CASE OF ACIT VS SIL INVESTMENT LTD., 26 TAXMANN.COM 78 DEL ITAT THAT WHERE THE A.O DID NOT BRING ANY EVIDENCE ON RECORD TO ESTABLISH THAT ANY EXPENDITURE HAS BEEN INCUR RED BY ASSESSEE FOR EARNING EXEMPT INCOME, IT WAS WRONG ON PART OF THE ASSESSING OFFICER TO PROCEED TO COMPUTE DISALLOWANCE OF EXPENSES 18 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. U/S.14A BY MERELY APPLYING RULE 8D{2}(III). IT HAS BEEN HELD IN THE CASE OF RELAXO FOOTWEAR LTD., VS ADDI.C.I.T 18 TAXMA NN.COM 333 DEL ITAT THAT THERE CANNOT BE AN ASSUMPTION OF SOME KIND OF BUILT IN EXPENDITURE AND SOME FACTS MUST BE THERE ON RECORD TO SHOW THAT EXPENDITURE WAS ACTUALLY INCURRED IN RELATION TO EARNING EXEMPT INCOME. IT HAS BEEN HELD IN THE CASE OF ACIT VS IQBAL M. CHAGLA [2014] 52 TAXMANN.COM 94 (MUMBAI - TRIB) THAT WHERE ASSESSEE HAD NOT CLAIMED ANY EXPENDITURE IN RELATION TO EXEMPT INCOME, ONUS IS ON ASSESSING OFFICER TO PROVE THAT OUT OF EXPENDITURE INCURRED UNDER VARIOUS HEADS, SOME WERE RELATED TO EARN ING OF EXEMPT INCOME AND NOT ONLY THIS HE HAS ALSO TO GIVE BASIS OF SUCH CALCULATION. IN THE CASE OF THE ASSESSEE, THE A.O HAS PROCEEDED TO MAKE DISALLOWANCE RELYING ON CIRCULAR NO.5 OF 2014 DATED 11 - 02 - 2014 ISSUED BY CBDT AND HOLDING THAT THE QUESTION 0 E XAMINING ABOUT SATISFACTION OF ASSESSING OFFICER WITH REGARD TO THE CLAIM OF THE ASSESSEE DOES NOT ARISE DUE TO LEGAL FICTION EMBODIED IN SUB - SECTION (3). (PLEASE SEE PARAGRAPH 7.8 OF ASSESSMENT ORDER.) 19. IN THE LIGHT OF THE SUBMISSIONS MADE HEREINABOVE, THE RESPONDENT SUBMITS THAT THE DECISION OF THE C.I.T(A) NEED NOT BE DISTURBED AND THE DELETION OF THE DISALLOWANCE MADE U/S.14A MAY KINDLY BE UPHELD THOUGH FOR DIFFERENT REASONS. CROSS OBJECTION NO.2 3/HYD/2018 :DISALLOWANCE U/S.14A. ASST.YEAR 2014 - 15: 20. FOR ASST. YEAR 2014 - 15, THE ASSESSING OFFICER MADE DISALLOWANCE OF RS.9,61,911 U/S.14A R.W.RULE 8D(2}(III). IN FIRST APPEAL THE C.I.T(A) CONFIRMED THE DISALLOWANCE. THE ASSESSEE FILED A CROSS OBJEC TION CONTESTING THAT THE DISALLOWANCE IS NOT WARRANTED SINCE THE ASSESSEE DID NOT INCUR ANY EXPENDITURE AND HENCE DISALLOWANCE UNDER RULE 8D(2)(III) IS NOT WARRANTED. SUBSEQUENTLY, THE ASSESSEE FILED AN ADDITIONAL GROUND SEEKING 19 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. DELETION OF THE DISALLOWANC E ON THE GROUND THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME FOR ASST.YEAR 2014 - 15 AND ALSO DID NOT CLAIM ANY EXEMPTION WHILE COMPUTING ITS INCOME. 21. THE ASSESSEE PRAYS THE HON'BLE APPELLATE TRIBUNAL MAY KINDLY ADMIT THE ADDITIONAL GROUND AND ADJUD ICATE UPON THE SAME. IN SUPPORT OF THE ADDL, GROUND THE ASSESSEE SUBMITS THAT HON'BLE ITAT HAS HELD IN THE CASE OF PRATHISTA INDUSTRIES LTD., VS DCLT, CIR .16(3), HYDERABAD IN ITA NO.1302/HYD/2015 THAT WHEN THE ASSESSEE HAS NOT EARNED ANY EXEMPT INCOME, TH ERE CAN BE NO DISALLOWANCE U/S.14A OF THE ACT. (KINDLY SEE PAGE 15 OF PAPER BOOK SHOWING DETAILS OF OTHER INCOME). LEARNED C.I.T(A) TOOK SUPPORT OF THIS DECISION TO DELETE THE DISALLOWANCE MADE BY A. O FOR ASST.YEAR 2013 - 14 IN THE ASSESSEE'S OWN CASE. THE A SSESSEE PRAYS THAT THE DISALLOWANCE OF RS.9,61,911/ - MADE U/S.14A MAY KINDLY BE DIRECTED TO BE DELETED. 13. AFTER HEARING BOTH THE SIDED AND PERUSING THE ENTIRE MATERIAL AVAILABLE ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW, WE OBSERVE THAT THE DISA LLOWANCE MADE U/S. 14A OF THE ACT HAS RIGHTLY BEEN ALLOWED BY THE LD. CIT(A). WE FIND FROM THE ORDER OF THE LD. CIT(A) THAT THERE IS NO EXEMPT INCOME EARNED BY THE ASS ESSEE DURING THE IMPUGNED ASSESSMENT YEAR AND HE HAS RELIED ON CERTAIN JUDGMENTS WHILE DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE. THE HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD., REPORTED IN (2015) 378 ITR 33 (DEL.) HAS HELD THAT SECTION 14 A WILL NOT APPLY WHERE NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT ASSESSMENT YEAR. THEREFORE, AS PER OUR CONSIDERED VIEW, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND 20 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. THEREFORE, THIS GROUND NO. VI TO VIII OF APPEAL RA ISED BY THE REVENUE IS DISMISSED. 14. FURTHER, ON THE ISSUE OF REIMBURSEMENT OF SALES TAX RECEIVED FROM THE STATE GOVERNMENT BY THE ASSESSEE, WE OBSERVE FROM THE ORDER OF THE LD. CIT(A) THAT HE HAS NOT CONSIDERED / APPRECIATED PROPERLY THE FACTS OF THE CA SE OF THE ASSESSEE AND HAS SIMPLY RELIED ON THE JUDGEMENTS AS QUOTED IN HIS ORDER AND TREATED REIMBURSEMENT OF SALES TAX RECEIVED FROM THE STATE GOVERNMENT BY THE ASSESSEE AS CAPITAL RECEIPTS. ON PERUSAL OF THE SCHEMES, WHEREIN, A S PER CLAUSE 3.1.8 CITED SUPRA, T HE SALES TAX PLOUGHED BY THE ASSESSEE FOR SETTING UP OF NEW INDUSTRIES IN ANDHRA PRADESH UNDER THE INDUSTRIAL INVESTMENT PROMOTION POLICY FOR 2005 TO 2010 , RECEIVED BY THE ASSESSEE BACK WAS TO BE TREATED AS REVENUE RECEIPT S . 14.1 WHILE DECIDING THE ISSUE, WE HAVE GONE THROUGH THE ENTIRE SCHEMES OF GOVT. OF ANDHRA PRADESH PRODUCED BEFORE US AND THE RELEVANT PARTS OF THE SAME ARE REPRODUCED HEREUNDER FOR SAKE OF CLARITY AS WELL AS AMENDMENT ISSUED TO PARA 4 OF THE GO MS. NO . 178, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DATED 21/06/2005, WHICH HAS BEEN TABULATED, ACCORDING TO WHICH, ALL THE ENTREPRENEURS ARE E LIGIBLE FOR SUBSIDY/INCENTIVES FOR SETTING UP OF NEW INDUSTRIAL UNITS IN THE STATE OF AP AFTER COMMENCEMENT OF PRODUCTION BETWEEN 01/04/2005 TO 31/03/2010. INCENTIVES FOR NEW INDUSTRIES 21 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 1. INDUSTRIES AND COMMERCE DEPARTMENT - INCENTIVES FOR SETTING U P OF NEW INDUSTRIES IN ANDHRA PRADESH - INDUSTRIAL INVESTMENT PROMOTION POLICY FOR 2005 - 2010 - ORDERS - ISSUED. G.OMS.NO. 178, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DT, 21 - 06 - 2005. READ THE FOLLOWING: - 1. G.O.MS.NO. 108, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DT. 20 - 05 - 1996. 2. G.O.MS.NO. 241, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DT.15 - 07 - 1998. 3. G.O.MS.NO. 9, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DT. 05 - 01 - 2001. 4. G.O.MS.NO. 141, INDUSTRIES AND COMMERCE (IP) DEPARTMENT, DT. 03 - 07 - 2004. ORDER 1. GOVERNMENT IS EXTENDING VARIOUS INCENTIVES FOR ENCOURAGING ESTABLISHMENT OF NEW INDUSTRIAL UNIT S IN THE STATE SINCE 1961. IN THE REFERENCE 3'D READ ABOVE, GOVERNMENT HAVE ISSUED NEW INDUSTRIAL POLICY 2000 - 2005, WHICH WAS CONCLUDED BY 31 - 03 - 2005. 2. AFTER DETAILED EXAMINATION AND AFTER DISCUSSIONS WITH VARIOUS INDUSTRIAL ORGANISATIONS SUCH AS CLI, FAPSIA, FLCCI AND TAKING INTO CONSIDERATION OF RECOMMENDATIONS OF INDUSTRIAL ASSOCIATIONS, A POLICY OF VARIOUS STATES VIZ., KARNATAKA, MAHARASHTRA, GUJARAT, WEST BENGAL AND TO MAKE A POLICY WITH EMPHASIS ON CREATION OF QUALITY INFRASTRUCTURE, INCENTIVISING INVESTMENTS, BUILDING INDUSTRIAL COMPETENCY IN WOMEN, QUALITY 22 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. COMPETITIVENESS, EXPORT PROMOTION, ENVIRONMENTAL FRIENDLY CLIMATE, ATTRACTING MEGA INVESTMENTS, ATTRACTING FOREIGN DIRECT INVESTMENT, ACCESS TO MARKET, INTELLECTUAL PROPERTY RIGHTS, FOSTERING I NDUSTRIAL CLUSTERS, PREVENTION OF INDUSTRIAL SICKNESS, PREVENTING MIGRATION, PERMITTING INDUSTRIES TO EXIT, TOWARDS BETTER REGULATION, POLICY MEASURES, THRUST SECTORS, THE GOVERNMENT APPROVED A NEW 'INDUSTRIAL INVESTMENT PROMOTION POLICY 20052010' AS APPEN DED AT ANNEXURE - I. 3. UNDER THE NEW 'INDUSTRIAL INVESTMENT PROMOTION POLICV 2002 - 2010', THE GOVERNMENT APPROVED THE FOLLOWING FISCAL BENEFITS COVERING THE _______ INCENTIVES FOR NEW INDUSTRIES CATEGORIES OF : (A) SSI / TINY UNITS (B) SC / 5T ENTREPRENEURS (C) WOMEN ENTREPRENEURS (D) UNITS OTHER THAN SSI / TINEY (LARGE AND MEDIUM SCALE INDUSTRIES) AND (E) MEGA PROJECTS: 3.1.0. 5SI/TINY UNITS SMALL SCALE INDUSTRY (S5I) MEANS A UNIT HAVING THE INVESTMENT ON PLANT AND MACHINERY (PRODUCTIVE ONLY) UP TO LIMIT AS DEFINED BY THE GOVERNMENT OF INDIA FROM TIME TO TIME. TINY INDUSTRY MEANS AN INDUSTRY IN WHICH INVESTMENT PLANT AND MACHINERY (PRODUCTIVE ONLY) UP TO LIMIT AS DEFINED BY THE GOVERNMENT OF INDIA FROM T IME TO TIME. 3.1.1. 100% REIMBURSEMENT OF STAMP DUTY AND TRANSFER DUTY PAID BY THE INDUSTRY ON PURCHASE OF LAND MEANT FOR INDUSTRIAL USE. 23 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 3.1.2. 100% REIMBURSEMENT OF STAMP DUTY FOR LEASE OF LAND / SHED / BUILDINGS. 3.1.3. 100% REIMBURSEMENT OF STAMP DUTY AND TRANSFER DUTY PAID BY THE INDUSTRY ON FINANCIAL DEEDS AND MORTGAGES ETC. 3.1.4. 25% REBATE ON LAND COST IN IES/IDA'S LIMITED TO RS. 5.00 LAKHS. 3.1.6. 15% INVESTMENT SUBSIDY ON FIXED CAPITAL INVESTMENT WILL BE GIVEN SUBJECT TO A MAXIMUM OF RS . 15.00 LAKHS. 3.1.7. AN ADDITIONAL INVESTMENT SUBSIDY OF 5% ON FIXED CAPITAL INVESTMENT LIMITED TO RS. 5.00 LAKHS FOR SC/ST ENTERPRISES. 3.1.8. 25% OF THE TAX PAID DURING ONE FINANCIAL YEAR WILL BE PLOUGHED BACK AS A GRANT BY THE GOVERNMENT TOWARDS THE PAYMENT OF TAX DURING NEXT YEAR. BENEFIT WILL BE AVAILABLE FOR 5 YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION I.E. UPTO 6 TH YEAR. 3. 1.9. 3% INTEREST SUBSIDY ON PRIME LENDING RATE (PLR) WILL BE GIVEN ON THE TERM LOAN TAKEN BY NEW TINY / SS] INDUSTRIAL UNITS SUBJECT TO A MAXIMUM OF RS. 5.00 LAKH PER FOR A PERIOD OF 5 YEARS. 3.1.10.5% OF PROJECT COST WILL BE PROVIDED AS SEED CAPITAL ASS ISTANCE TO SSI / TINY UNITS STARTED BY SC/ST ENTREPRENEURS AS A GRANT FOR INDUSTRIES, WHICH WERE SANCTIONED SEED CAPITAL ASSISTANCE BY PRIME LENDING INSTITUTIONS UNDER NATIONAL EQUITY FUND SCHEME LIMITED TO RS. 5.00 LAKH. 24 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 3.1.11.8% SUBSIDY ON CAPITAL EQU IPMENT FOR TECHNOLOGY UP - GRADATION. 3.1.12.50% SUBSIDY ON THE EXPENSES INCURRED FOR QUALITY CERTIFICATION LIMITED TO RS. 1.00 LAKH. 3.1.13.25% SUBSIDY ON SPECIFIC CLEANER PRODUCTION MEASURES LIMITED TO RS. 5.00 LAKHS. 3.1.14. 50% SUBSIDY ON THE EXPENSE S INCURRED FOR PATENT REGISTRATION LIMITED TO RS. 5.00 LAKHS. 1 4 . 2 FROM THE ABOVE SCHEMES, IT IS CLEAR THAT ENTREPRENEURS ARE ELIGIBLE FOR VARIOUS INCENTIVES/SUBSIDIES AFTER COMMENCEMENT OF COMMERCIAL PRODUCTION , BUT, NOT BEFORE. THE ISSUE BEFORE US ARE COVERED AS PER PARA 3.1.8, THAT THE ASSESSEE HAS TO RECEIVE 25% OF THE SALES - TAX PAID DURING FINANCIAL YEAR WILL BE PLOUGHED BACK AS A GRANT BY THE GOVERNMENT TOWARDS THE PAYMENT OF SALES TAX DURING THE NEXT YEAR AND THE BENEFIT WILL BE AVAILABLE FOR 5 YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION I.E., UP TO 6 TH YEAR. IN THE PRESENT CASE, THE ASSESSEE HAS COMMENCED THE MANUFACTURING ON 6/4/200 7 AND T HE ASSESSEE IS SELLING THE PRODUCTS AND COLLECTING THE SALES TAX AND LATER ON IT IS PAID TO THE GOVT. OF AP AND IN THE NEXT YEAR, 25% OF THE TOTAL SALES TAX PAID IS RECEIVED AS A GRANT FROM THE STATE GOVT . THERE IS NO DOUBT THAT THE SALES TAX IS A LIABILITY ON SALES MADE BY THE ASSESSEE AN D COLLECTED FROM THE PURCHASER OF GOODS AND LATER ON PAID TO THE GOVERNMENT AS A SALES TAX LIABILITY. 14.3 THE ENTIRE SALES TAX PAID TO THE GOVERNMENT WAS CLAIMED AS A REVENUE EXPENDITURE IN THE PROFIT & LOSS ACCOUNT IN THE PREVIOUS 25 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. YEAR AND SUBSEQUENTLY I N THE FOLLOWING YEAR 25% IS RETURNED WHICH HAS NOT BEEN OFFERED AS INCOME DURING THE IMPUGNED ASSESSMENT YEAR AND DIRECTLY CREDITED TO THE CAPITAL RESERVE ACCOUNT, WHEREAS, IT IS AS REVENUE RECEIPTS RECEIVED FROM THE STATE GOVT. THE LD. AR OF THE ASSESSE E HAS RELIED ON THE JUDGMENTS WHICH ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE . WE FIND SUBSTANCE IN THE SUBMISSIONS MADE BY THE LD. DR THAT ONCE THE EXPENDITURE HAS BEEN ALLOWED IN ANY PREVIOUS YEAR AND WHICH HAS BEEN RECEIVED OR REIMBURSED IN SUBSEQUENT YEAR IS TO BE TREATED AS INCOME FOR THE YEAR IN WHICH THE AMOUNT IS RECEIVED. 14.4 SIMILAR ISSUE DECIDED BY THE HONBLE SUPREME COURT IN TH E CASE OF SAHNEY STEEL & PRESS WORKS LTD. VS. CIT, [1997] 94 TAXMAN 3 68 (SC). FOR THE SAKE OF CLARITY, WE REPRODUCE THE ENTIRE ORDER OF THE ABOVE JUDGMENT AS UNDER: SEN, J. - THE QUESTION IN THIS CASE IS WHETHER THE SUBSIDY RECEIVED BY THE ASSESSEE - COMPANY FROM THE ANDHRA PRADESH GOVERNMENT IS TAXABLE AS THE REVENUE RECEIPT OR NOT. IT APPEARS FROM THE NOTIFICATION ISSUED BY THE ANDHRA PRADESH GOVERNMENT THAT CERTAIN FACILI TIES AND INCENTIVES WERE TO BE GIVEN TO ALL THE NEW INDUSTRIAL UNDERTAKINGS WHICH COMMENCED PRODUCTION ON OR AFTER 1 - 1 - 1969 WITH INVESTMENT CAPITAL (EXCLUDING WORKING CAPITAL) NOT EXCEEDING RS. 5 CRORES. THE INCENTIVES WERE TO BE ALLOWED FOR A PERIOD OF FI VE YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. CONCESSION IS ALSO AVAILABLE FOR SUBSEQUENT EXPANSION OF 50 PER CENT AND ABOVE OF EXISTING CAPACITIES PROVIDED IN EACH CASE, THE EXPANSION WAS LOCATED IN A CITY OR TOWN OR PANCHAYAT AREA OTHER THAN THAT IN WHICH THE EXISTING UNIT IS LOCATED. THE INCENTIVES WERE : '(A )REFUND OF SALES TAX ON RAW MATERIALS, MACHINERY AND FINISHED GOODS, LEVIED BY THE STATE GOVERNMENT SUBJECT TO 26 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. A MAXIMUM OF 10 PER CENT OF THE EQUITY CAPITAL PAID - UP IN THE CASE OF PUBLIC LI MITED COMPANIES AND THE ACTUAL CAPITAL IN THE CASE OF OTHERS; (B)SUBSIDY ON POWER CONSUMED FOR PRODUCTION TO THE EXTENT OF 10 PER CENT IN THE CASE OF MEDIUM AND LARGE SCALE INDUSTRIES AND 12 & PER CENT IN THE CASE OF SMALL SCALE INDUSTRIES. THIS CONCESSION WILL NOT APPLY TO CASES WHERE CONCESSIONAL TARIFFS ARE ALLOWED BY THE ELECTRICITY BOARD; (C)EXEMPTION FROM PAYMENT OF WATER RATE ON WATER DRAWN FROM SOURCES NOT MAINTAINED AT THE COST OF THE GOVERNMENT OR ANY LOCAL BODY; (D)REFUND OF WATER RATE IN RESPECT OF WATER DRAWN FROM A GOVERNMENT SOURCE OR FROM A SOURCE MAINTAINED BY ANY LOCAL BODY BUT RETURNED PURIFIED TO IT; (E)LIABILITY ON ACCOUNT OF ASSESSMENT OF LAND REVENUE OR TAXES ON LAND USED FOR ESTABLISHMENT OF ANY INDUSTRY, SHALL BE LIMITED TO THE AMOUN T OF SUCH TAXES PAYABLE IMMEDIATELY BEFORE THE LAND IS SO USED; (F)TH E FOLLOWING ADDITIONAL INCENTIVES WILL BE ALLOWED TO NEW INDUSTRIAL UNITS SET UP IN THE AYACUT AREAS OF NAGARJUNASAGAR, POCHAMPAD AND K.C. CANAL IN THE RAMAGUNDAM - KOTHAGUDEM AREAS AND IN THE FOLLOWING EIGHT BACKWARD DISTRICTS.' 2. THE SALIENT FEATURES OF THE SCHEME FORMULATED BY THE ANDHRA PRADESH GOVERNMENT WAS THAT THE INCENTIVES WERE NOT AVAILABLE UNLESS AND UNTIL PRODUCTION HAD COMMENCED. THE AVAILABILITY OF THE INCENTIVES WOULD BE LIMITED TO A PERIOD OF FIVE YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. THE INCENTIVES WERE TO BE GIVEN BY WAY OF REFUND OF SALES TAX AND ALSO BY SUBSIDY ON POWER CONSUMED FOR PRODUCTION TO THE EXTENT STATED IN THE NOTIFICATION. EXEMPTIONS WERE GIVE N ALSO FROM PAYMENT OF WATER RATE. REFUND WAS ALSO PROVIDED FOR WATER RATE IN RESPECT OF WATER DRAWN FROM GOVERNMENT SOURCES. THERE WERE CERTAIN ADDITIONAL INCENTIVES WITH WHICH WE ARE NOT CONCERNED IN THIS CASE. 3. THE IMPORTANT POINT TO NOTE IS THAT ALL THE INCENTIVES ARE PRODUCTION INCENTIVES IN THE SENSE THAT THE COMPANY WILL BE 27 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. ENTITLED TO THESE INCENTIVES ONLY AFTER IT GOES INTO PRODUCTION. THE SCHEME WAS NOT TO MAKE ANY PAYMENT DIRECTLY OR INDIRECTLY FOR SETTING UP OF THE INDUSTRIES. IT IS ONLY AFTER THE INDUSTRIES HAD BEEN SET UP AND PRODUCTION HAD BEEN COMMENCED THAT THE INCENTIVES WERE TO BE GIVEN. 4. THE SECOND IMPORTANT THING TO NOTE IS THAT THE MANNER IN WHICH THE INCENTIVES WERE GIVEN IS OF NO CONSEQUENCE FOR DETERMINATION OF THE QUESTION RAISE D IN THIS CASE. INCENTIVES WERE GIVEN BY WAY OF REFUND OF SALES TAX ON RAW MATERIAL, MACHINERY AND FINISHED GOODS. SIMILARLY, SUBSIDY ON POWER WAS CONFINED TO 'POWER CONSUMED FOR PRODUCTION'. IN OTHER WORDS, IF POWER IS CONSUMED FOR ANY OTHER PURPOSE LIKE SETTING UP THE PLANT AND MACHINERIES, THE INCENTIVES WILL NOT BE GIVEN. REFUND OF SALES TAX WILL ALSO BE IN RESPECT OF TAXES LEVIED AFTER COMMENCEMENT OF PRODUCTION AND UP TO A PERIOD OF FIVE YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. IT IS DIFFICU LT TO HOLD THESE SUBSIDIES AS ANYTHING BUT OPERATIONAL SUBSIDIES. THESE SUBSIDIES WERE GIVEN TO ENCOURAGE SETTING UP OF INDUSTRIES IN THE STATE OF ANDHRA PRADESH BY MAKING THE BUSINESS OF PRODUCTION AND SALE OF GOODS IN THE STATE MORE PROFITABLE. 5. MR. GA NESH APPEARING ON BEHALF OF THE ASSESSEE HAS CONTENDED THAT THE INCENTIVE SCHEME WAS FOR SETTING UP NEW INDUSTRIAL UNDERTAKINGS IN THE STATE AND ALSO FOR THE PURPOSE OF STIMULATING SUBSTANTIAL EXPANSION OF THE INDUSTRIES. THE PRIMARY OBJECT WAS RAPID INDUS TRIALISATION OF THE STATE. THIS OBJECT WAS SOUGHT TO BE ACHIEVED BY THE VARIOUS INCENTIVES. IT WAS FURTHER CONTENDED THAT THE SUBSIDY GIVEN BY THE STATE WAS UP TO 10 PER CENT OF THE CAPITAL INVESTMENT IN THE UNDERTAKINGS. SINCE THE SUBSIDY WAS CALCULATED O N THE BASIS OF QUANTUM OF INVESTMENT IN CAPITAL SUCH SUBSIDY CANNOT BE CONSIDERED TO HAVE BEEN RECEIVED BY THE ASSESSEE ON REVENUE ACCOUNT. 6. IT WAS FURTHER CONTENDED BY MR. GANESH THAT GRANT OF SUBSIDY WAS ON THE BASIS OF REFUND OF SALES TAX ON RAW MATER IALS, MACHINERIES AND FINISHED GOODS ALREADY PAID FOR BY THE ASSESSEE. THESE SUBSIDIES WOULD BE ENJOYED BY THE ASSESSEE FOR A PERIOD OF FIVE YEARS AND WAS OF A CAPITAL NATURE. THE OBJECT FOR GRANTING REFUND OF SALES TAX WAS THAT THE ASSESSEE COULD SET UP N EW BUSINESS OR EXPAND SUBSTANTIALLY HIS EXISTING BUSINESS. 28 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 7. BEFORE WE EXAMINE THESE PROPOSITIONS ADVANCED BY MR. GANESH, WE WILL EXAMINE THE FACTS OF THE CASE A LITTLE MORE. THE ASSESSEE - COMPANY SAHNEY STEEL & PRESS WORKS LTD., SET UP A FACTORY AT PATANC HERU IN MEDAK DISTRICT, WHICH WENT INTO PRODUCTION IN THE YEAR 1973. THE ASSESSEE MAINTAINS ITS ACCOUNTS ACCORDING TO THE CALENDAR YEAR. IT WAS, THEREFORE, ENTITLED TO THE BENEFITS OF THE SAID G.O. IN THE CALENDAR YEAR 1973, WHICH MEANS THE ASSESSMENT YEAR 1974 - 75. IN THE SAID ACCOUNTING YEAR, THE ASSESSEE OBTAINED REFUND OF THE FOLLOWING THREE ITEMS TOTALLING RS. 14,665.70 IN TERMS OF G.O. MS. NO. 455. THE THREE ITEMS ARE : RS. (I) REFUND OF SALES TAX ON PURCHASE OF MACHINES DURING 1971 - 72 5,839.93 (II) REFUND OF SALES OF TAX ON PURCHASE OF RAW MATERIALS DURING THE YEAR 1971 - 72 390.79 (III) REFUND OF SALES TAX PAID ON SALE OF FINISHED GOODS DURING THE YEAR 1971 - 72 8,423.98 8. THE ITO, WHILE MAKING THE ASSESSMENT FOR THE YEAR 1974 - 75, INCLUDED THE SAID AMOUNT IN THE ASSESSABLE INCOME OF THE ASSESSEE WHICH WAS CONFIRMED ON APPEAL BY THE COMMISSIONER (APPEALS). ON FURTHER APPEAL, HOWEVER, THE TRIBUNAL UPHELD THE ASSESSEE'S CONTENTION AND HELD THAT THE AMOUNT OF RS. 14,665.70, REFUNDED TO THE ASSESSEE IN TERMS OF THE SAID G.O. 'DID NOT REPRESENT REFUND OF SALES TAX' BUT WAS A DEVELOPMENT SUBSIDY IN THE NATURE OF A CAPITAL RECEIPT. THE TRIBUNAL ALSO HELD THAT THE SAID AMOUNT CANNOT BE DE EMED TO BE THE INCOME OF THE ASSESSEE UNDER SECTION 41 (1) OF THE INCOME - TAX ACT, 1961 ('THE ACT') EITHER. THEREUPON THE REVENUE ASKED FOR AND OBTAINED THE REFERENCE OF THE FOLLOWING QUESTION : 29 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, T HE INCOME - TAX APPELLATE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE AMOUNT OF RS. 14,665 RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT OF ANDHRA PRADESH IN THE RELEVANT ACCOUNTING PERIOD WAS NOT LIABLE TO BE INCLUDED IN THE TOTAL INCOME ASSESSABLE FOR THE AS SESSMENT YEAR 1974 - 75 ?' 9. THE CONTENTION OF MR. GANESH THAT THE SUBSIDIES WERE OF CAPITAL NATURE AND WERE GIVEN FOR THE PURPOSE OF STIMULATING SETTING UP AND EXPANSION OF INDUSTRIES IN THE STATE CANNOT BE UPHELD BECAUSE OF THE SUBSIDY SCHEME ITSELF. NO FINANCIAL ASSISTANCE WAS GRANTED TO THE ASSESSEE FOR SETTING UP OF THE INDUSTRY. IT IS ONLY WHEN THE ASSESSEE HAD SET UP IT S INDUSTRY AND COMMENCED PRODUCTION THAT VARIOUS INCENTIVES WERE GIVEN FOR THE LIMITED PERIOD OF FIVE YEARS. IT APPEARS THAT THE ENDEAVOUR OF THE STATE WAS TO PROVIDE THE NEWLY SET UP INDUSTRIES A HELPING HAND FOR 5 YEARS TO ENABLE THEM TO BE VIABLE AND CO MPETITIVE. SALES TAX REFUND AND THE RELIEF ON ACCOUNT OF WATER RATE, LAND REVENUE AS WELL AS ELECTRICITY CHARGES WERE ALL INTENDED TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY. THE BASIC PRINCIPLE TO BE APPLIED FOR DETERMINATION AS TO WHETHER A SUBSIDY PAYMENT IS IN THE NATURE OF CAPITAL OR REVENUE HAS BEEN STATE BY VISCOUNT SIMON IN OSTIMEV. PONTYPRIDD & RHONDDA JOINT WATER BOARD 28.TC 262 IN THE FOLLOWING WORDS : 'THE FIRST PROPOSITION IS THAT, SUBJECT TO THE EXCEPTION HEREAFTER MENTIONED, P AYMENTS IN THE NATURE OF A SUBSIDY FROM PUBLIC FUNDS MADE TO AN UNDERTAKER TO ASSIST IN CARRYING ON THE UNDERTAKER'S TRADE OR BUSINESS ARE TRADING RECEIPTS, THAT IS, ARE TO BE BROUGHT INTO ACCOUNT IN ARRIVING AT THE BALANCE OF PROFITS OR GAINS UNDER CASE I OF SCHEDULE D. IT IS SUFFICIENT TO CITE THE DECISION OF THIS HOUSE IN THE SUGAR BEET CASE, (SMART V. LINCOLNSHIRE SUGAR CO. LTD. 20 TC 643; 156 LT 215) AS AN ILLUSTRATION. THE SECOND PROPOSITION CONSTITUTES AN EXCEPTION. IF THE UNDERTAKER IS A RATING AUTH ORITY AND THE SUBSIDY IS THE PROCEEDS OF RATES IMPOSED BY IT OR COMES FROM A FUND BELONGING TO THE AUTHORITY, THE IDENTITY OF THE SOURCE WITH THE RECIPIENT PREVENTS ANY QUESTION OF PROFITS ARISING - SEE, FOR 30 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. EXAMPLE, LORD BUCKMASTER'S EXPLANATION IN FORTH CONSERVANCY BOARD V. COMMISSIONERS OF INLAND REVENUE[L93 \ ] AC 540, AT PAGE 546 (16 TC 103 AT PAGE 117) AND COMPARE WHAT LORD MACMILLAN SAID IN MUNICIPAL MUTUAL INSURANCE LTD. V. HILLS 16 TC 430, AT PAGE 448.' 10. IN THE INSTANT CASE, THE FIRST PROPOSITION OF VISCOUNT SIMON CLEARLY APPLIES. THE AMOUNT PAID TO THE ASSESSEE IN THE INSTANT CASE IS IN THE NATURE OF SUBSIDY FROM PUBLIC FUNDS. THE FUNDS WERE MADE AVAILABLE TO THE ASSESSEE TO ASSIST IT IN CARRYING ON ITS TRADE OR BUSINESS. IN OUR VIEW, HAVING REGARD TO THE SCHEME OF THE NOTIFICATION, THERE CAN BE LITTLE DOUBT THAT THE OBJECT OF VARIOUS ASSISTANCES UNDER THE SUBSIDY SCHEME WAS TO ENABLE THE ASSESSEE TO RUN THE BUSINESS MORE PROFITABLY. 11. IN THE JUDGMENT D ELIVERED BY VISCOUNT SIMON WITH WHOM LORD THANKERTON AGREED TWO EARLIER DECISIONS WERE RELIED ON. THE FIRST OF THESE TWO DECISIONS WAS THE CASE OF SEAHAM HARBOUR DOCK CO. V. CROOK 16 TC 333. IN THIS CASE, THE HARBOUR DOCK COMPANY HAD APPLIED FOR AND OBTAIN ED GRANTS FROM THE UNEMPLOYMENT GRANTS COMMITTEE FROM FUNDS APPROPRIATED BY THE PARLIAMENT. THESE GRANTS WERE PAID AS THE WORK PROGRESSED AND WERE EQUIVALENT TO HALF THE INTEREST ON APPROVED EXPENDITURE MET OUT OF LOANS. THE PAYMENTS WERE MADE SEVERAL TIME S A YEAR FOR SAME YEARS. THE DOCK COMPANY HAD UNDERTAKEN AN EXTENSION OF ITS DOCKS. THE EXTENDED DOCK WAS ALSO FOR RELIEVING UNEMPLOYMENT PROBLEM. BECAUSE THE WORK UNDERTAKEN WAS EXTENSION OF THE DOCK AND THE MAIN PURPOSE WAS RELIEF OF UNEMPLOYMENT, THE HO USE OF LORDS HELD THAT THE FINANCIAL ASSISTANCE GIVEN TO THE COMPANY FOR EXTENSION OF THE DOCK CANNOT BE REGARDED AS RECEIPT OF THE TRADE. LORD ATKIN EXPLAINED THE POSITION BY SAYING THAT: 'IT IS A RECEIPT WHICH IS GIVEN FOR THE EXPRESS PURPOSE WHICH IS NA MED, AND IT HAS NOTHING TO DO WITH THEIR TRADE IN THE SENSE IN WHICH YOU ARE CONSIDERING THE PROFITS OR GAINS OF THE TRADE.' LORD BUCKMASTER OBSERVED AS UNDER : 'WAS THIS A TRADE RECEIPT ?, AND MY ANSWER IS MOST UNHESITATINGLY: NO. IT APPEARS TO ME THAT IT WAS NOTHING WHATEVER OF THE KIND. IT WAS A GRANT WHICH WAS MADE BY A GOVERNMENT DEPARTMENT WITH THE IDEA THAT BY ITS USE MEN 31 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. MIGHT BE KEPT IN EMPLOYMENT, AND IT WAS PAID TO AND, RECEIVED BY THE DOCK COMPANY WITHOUT ANY SPECIAL ALLOCATION TO ANY PARTICULAR PART OF THEIR PROPERTY, EITHER CAPITAL OR REVENUE, AND WAS SIMPLY TO ENABLE THEM TO CARRY OUT THE WORK UPON WHICH THEY WERE ENGAGED, WITH THE IDEA THAT BY SO DOING PEOPLE MIGHT BE EMPLOYED.' 12. MR. GANESH STRONGLY RELIED ON SEAHAM HARBOUR DOCK CO.'S CASE (SUPRA), WHICH DOES NOT COME TO THE ASSISTANCE OF THIS CONTENTION IN ANY WAY. IN THAT CASE, APPLICATION FOR ASSISTANCE WAS MADE EVEN BEFORE THE WORK OF EXPANSION OF DOCK COMMENCED. THE MONEY WAS FOR EXTENSION OF THE DOCKS OF THE COMPANY. THE EXTENSION WOU LD HAVE ENABLED SOME PERSONS TO BE KEPT IN EMPLOYMENT WHO WOULD OTHERWISE HAVE LOST THEIR JOBS. MONEY WAS GIVEN IN SEVERAL INSTALMENTS AS THE WORK OF EXTENSION OF THE DOCK CONTINUED. MONEY WAS GIVEN FOR THE EXPRESS PURPOSE WHICH WAS NAMED. IT WAS FOUND BY THE HOUSE OF LORDS THAT IT HAD NOTHING TO DO WITH THE TRADING OF THE COMPANY. 13. IN THE CASE BEFORE US, PAYMENTS WERE MADE ONLY AFTER THE INDUSTRIES HAVE BEEN SET UP. PAYMENTS ARE NOT BEING MADE FOR THE PURPOSE OF SETTING UP OF THE INDUSTRIES. BUT THE PAC KAGE OF INCENTIVES WERE GIVEN TO THE INDUSTRIES TO RUN MORE PROFITABLY FOR A PERIOD OF FIVE YEARS FROM THE DATE OF THE COMMENCEMENT OF PRODUCTION. IN OTHER WORDS, A HELPING HAND WAS BEING PROVIDED TO THE INDUSTRIES DURING THE EARLY DAYS TO ENABLE THEM TO C OME TO A COMPETITIVE LEVEL WITH OTHER ESTABLISHED INDUSTRIES. 14. THE SECOND CASE IS LINCOLNSHIRE SUGAR CO. LTD. V. SMART 20 TC 643. IN THAT CASE IT WAS FOUND THAT LINCOLNSHIRE SUGAR CO. LTD CARRIED ON THE BUSINESS OF MANUFACTURING SUGAR FROM HOME GROWN BE ET. THE COMPANY WAS PAID VARIOUS SUMS UNDER BRITISH SUGAR INDUSTRY (ASSISTANCE) ACT, 1931, OUT OF MONIES PROVIDED BY THE PARLIAMENT. THE QUESTION WAS WHETHER THESE MONIES WERE TO BE TAKEN INTO ACCOUNT AS TRADE RECEIPTS OR NOT. THE OBJECT OF THE GRANT WAS T HAT IN THE YEAR 1981, IN VIEW OF HEAVY FALL IN PRICES OF SUGAR, SUGAR INDUSTRIES WERE IN DIFFICULTY. THE GOVERNMENT DECIDED TO GIVE FINANCIAL ASSISTANCE TO CERTAIN INDUSTRIES IN RESPECT OF SUGAR MANUFACTURED BY THEM FROM HOME - GROWN BEET DURING THE RELEVANT PERIOD. LORD MACMILLAN HELD THAT 32 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 'WHAT TO MY MIND IS DECISIVE IS THAT THESE PAYMENTS WERE MADE TO THE COMPANY IN ORDER THAT THE MONEY MIGHT BE USED IN THEIR BUSINESS.' HE FURTHER OBSERVED THAT: 'I THINK THAT THEY WERE SUPPLEMENTARY TRADE RECEIPTS BESTOWE D UPON THE COMPANY BY THE GOVERNMENT AND PROPER TO BE TAKEN INTO COMPUTATION IN ARRIVING AT THE BALANCE OF THE COMPANY'S PROFITS AND GAINS FOR THE YEAR IN WHICH THEY WERE RECEIVED.' 15. IN THE CASE BEFORE US, THE PAYMENTS WERE MADE TO ASSIST THE NEW INDUST RIES AT THE COMMENCEMENT OF BUSINESS TO CARRY ON THEIR BUSINESS. THE PAYMENTS WERE NOTHING BUT SUPPLEMENTARY TRADE RECEIPTS. IT IS TRUE THAT THE ASSESSEE COULD NOT USE THIS MONEY FOR DISTRIBUTION AS DIVIDEND TO ITS SHAREHOLDERS. BUT THE ASSESSEE WAS FREE T O USE THE MONEY IN ITS BUSINESS ENTIRELY AS IT LIKED AND WAS NOT OBLIGED TO SPEND THE MONEY FOR A PARTICULAR PURPOSE LIKE EXTENSION OF DOCKS AS IN THE SEAHAM HARBOUR DOCK CO. 5 CASE (SUPRA). 16. THERE IS A CANADIAN CASE ST. JOHN DRY DOCK & SHIP BUILDING CO . LTD. V. MINISTER OF NATIONAL REVENUE 4 DLR 1, WHICH HAS CLOSE SIMILARITY TO THE CASE OF SEAHAM HARBOUR DOCK CO. 'S CASE (SUPRA) . IN THAT CASE IT WAS HELD THAT WHERE SUBSIDIES WERE GIVEN UNDER STATUTORY AUTHORITY, THE STATUTORY PURPOSE FOR WHICH THEY ARE AUTHORISED IS RELEVANT AND MAY EVEN BE DECISIVE IN DETERMINING WHETHER IT IS TAXABLE INCOME IN THE HANDS OF THE RECIPIENT. IN THAT CASE, IT WAS POINTED OUT AFTER DISCUSSING THE SEAHAM HARBOUR DOCK CO. 'S CASE (SUPRA) AS WELL AS THAT OF LINCOLNSHIRE SUGAR CO. LTD. 5 CASE (SUPRA) THAT SUBSIDY GIVEN BY THE CANADIAN GOVERNMENT TO ENCOURAGE CONSTRUCTION OF DRY DOCKS WAS 'AN AID TO THE CONSTRUCTION OF DRY DOCK AND NOT AN OPERATIONAL SUBSIDY'. 17. THIS PRECISELY IS THE QUESTION RAISED IN THIS CASE. BY NO STRETC H OF IMAGINATION CAN THE SUBSIDIES WHETHER BY WAY OF REFUND OF SALES TAX OR RELIEF OF ELECTRICITY CHARGES OR WATER CHARGES CAN BE TREATED AS AN AID TO SETTING UP OF THE INDUSTRY OF THE ASSESSEE. AS WE HAVE SEEN EARLIER, THE PAYMENTS WERE TO BE MADE ONLY IF AND WHEN THE ASSESSEE COMMENCED ITS PRODUCTION. THE SAID PAYMENTS WERE TRADE FOR A PERIOD OF FIVE YEARS 33 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. CALCULATED FROM THE DATE OF COMMENCEMENT OF PRODUCTION IN THE ASSESSEE'S FACTORY. THE SUBSIDIES ARE OPERATIONAL SUBSIDIES AND NOT CAPITAL SUBSIDIES. 18 . MR. GANESH'S FURTHER ARGUMENT WAS THAT OF THE THREE TYPES OF REFUNDS CONTEMPLATED IN THE SCHEME, THE REFUND OF SALES TAX ON PURCHASE OF MACHINERY MUST BE TREATED AS CAPITAL. THE PAYMENT FOR THE PURCHASE OF MACHINERIES MUST BE OF CAPITAL NATURE AND THE EN TIRE PAYMENT OF SALES TAX MUST HAVE BEEN TREATED AS CAPITAL EXPENDITURE OF THE COMPANY. IF ANY REFUND OF SALES TAX PAID ON PURCHASE OF CAPITAL GOODS IS MADE, THE REFUND WILL PARTAKE OF THE CHARACTER WHICH IT HAD ORIGINALLY BORNE. SUCH REFUNDS CANNOT IN ANY CIRCUMSTANCES BE TREATED AS TRADE RECEIPTS OR SUPPLEMENTARY TRADE RECEIPTS. THIS ARGUMENT, THOUGH ATTRACTIVE AT FIRST BLUSH, DOES NOT BEAR CLOSE SCRUTINY. THIS ARGUMENT OVERLOOKS THE BASIC PRINCIPLE LAID DOWN IN THE CASES DISCUSSED ABOVE. IT IS NOT THE SO URCE FROM WHICH THE AMOUNT IS PAID TO THE ASSESSEE WHICH IS DETERMINATIVE OF THE QUESTION WHETHER THE SUBSIDY PAYMENTS ARE OF REVENUE OR CAPITAL NATURE. THE FIRST PROPOSITION STATED BY VISCOUNT SIMON IN OSTIME'S CASE (SUPRA) IS THAT IF PAYMENTS IN THE NATU RE OF SUBSIDY FROM PUBLIC FUNDS ARE MADE TO THE ASSESSEE TO ASSIST HIM IN CARRYING ON HIS TRADE OR BUSINESS, THEY ARE TRADE RECEIPTS. THE SALES TAX UPON COLLECTION FORMS PART OF THE PUBLIC FUNDS OF STATE. IF ANY SUBSIDY IS GIVEN, THE CHARACTER OF THE SUBSI DY 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 T O BE TREATED AS TRADING RECEIPT. THE SOURCE OF THE FUND IS QUITE IMMATERIAL. 19. FOR EXAMPLE, IF THE SCHEME WAS THAT THE ASSESSEE WILL BE GIVEN REFUND OF: ALES TAX ON PURCHASE OF MACHINERY AS WELL AS ON RAW MATERIALS TO ENABLE THE ASSESSEE TO ACQUIRE NEW P LANTS AND MACHINERY FOR FURTHER EXPANSION OF ITS MANUFACTURING CAPACITY IN A BACKWARD AREA, THE ENTIRE SUBSIDY MUST BE HELD TO BE A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. IT WILL NOT BE OPEN TO THE REVENUE TO CONTEND THAT THE REFUND OF SALES TAX PAI D ON RAW MATERIALS OR FINISHED PRODUCTS MUST BE TREATED AS THE REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. IN BOTH THE CASES, THE GOVERNMENT IS PAYING OUT OF PUBLIC FUNDS TO THE ASSESSEE FOR A 34 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. DEFINITE PURPOSE. IF THE PURPOSE IS TO HELP THE ASSESSEE TO S ET UP ITS BUSINESS OR COMPLETE A PROJECT AS IN SEAHAM HARBOUR DOCK CO.'S CASE (SUPRA) , THE MONIES MUST BE TREATED AS TO HAVE BEEN RECEIVED FOR CAPITAL PURPOSE. BUT IF MONIES ARE GIVEN TO THE ASSESSEE FOR ASSISTING HIM IN CARRYING OUT THE BUSINESS OPERATIO N 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. 20. IN SEAHAM HARBOUR DOCK CO. 'S CASE (SUPRA) WHICH APPEARS TO BE THE SHEET - ANCHOR OF THE ARGUM ENT OF MR. GANESH, THE COMPANY IN CONTEMPLATION OF AN EXPANSION OF ITS DOCKS HAD APPLIED FOR FINANCIAL ASSISTANCE TO THE UNEMPLOYMENT GRANTS COMMITTEE. THE COMMITTEE GAVE FINANCIAL ASSISTANCE FROM TIME TO TIME AS THE WORK PROGRESSED AND THE PAYMENT WAS EQU IVALENT TO HALF THE INTEREST FOR TWO YEARS (NOT EXCEEDING AVERAGE RATE OF 5 PER CENT PER ANNUM) ON APPROVED EXPENDITURE MADE OUT OF LOANS. EVEN THOUGH THE PAYMENT WAS EQUIVALENT TO HALF THE INTEREST AMOUNT PAYABLE ON THE LOAN WHICH MIGHT HAVE BEEN A REVEN UE EXPENDITURE THE HOUSE OF LORDS HAD NO DIFFICULTY IN HOLDING THAT THE MONEY RECEIVED BY THE COMPANY WAS NOT IN COURSE OF TRADE BUT WAS OF CAPITAL NATURE. WE SHALL NOW SEE HOW OUR COURTS HAVE DEALT WITH THE PROBLEM. 21. THIS COURT IN V.S.S.V. MEENAKSHI AC HI V. CIT 60 ITR 253 FOLLOWED THE SAME PRINCIPLE AND RELIED UPON AND APPROVED OF AN ENGLISH DECISION IN THE CASE OF HIGGS V. WRIGHTSON [1944] 26 TC 73. THERE A DAIRY FARMER HAD RECEIVED GRANT IN RESPECT OF THE PLOUGHING AND BRINGING INTO A STATE OF CLEANLINESS AND FERTILITY L AND PREVIOUSLY UNDER GRASS FOR SEVEN YEARS MORE. MECNAGHTEN, J. HELD THAT SINCE THE AMOUNT OF THE GRANT DEPENDS ON THE AREA PLOUGHED, THE GRANT WAS TOWARDS THE EXPENDITURE OF PLOUGHING AND, THEREFORE, A REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. IT WAS OBSERVED IN V.S.S. V. MEENAKSHI ACHI'S CASE (SUPRA) BY SUBBA RAO, J. (AS HIS LORDSHIP THEN WAS): 'SO TOO, IN THE INSTANT CASE, THE PAYMENTS TO THE PLANTERS WERE MADE AGAINST THE EXPENDITURE INCURRED FOR MAINTAINING THE RUBBER PLANTATIONS. HAVING REGARD TO THE AFORESAID FACTS, WE MUST HOLD THAT THE AMOUNTS FROM THE FUND EARMARKED FOR THE APPELLANTS ON THE 35 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. BASIS OF THE RUBBER PRODUCED BY THEM WERE PAID AGAINST THE EXPENDITURE INCURRED BY THEM FOR MAINTAINING THE RUBBER PLANTATION AND PRODUCING THE RUBBER.' 2 3. A FULL BENCH OF THE KERALA HIGH COURT EXAMINED THE QUESTION OF SUBSIDY RECEIVED FOR REPLANTING RUBBER TREES IN THE CASE OF CIT V . RUBY RUBBER WORKS LTD. 178 ITR 181 . IT DEALT WITH A SCHEME OF SUBSIDY FRAMED BY THE RUBBER BOARD IN 1967 FOR REPLANTING RUBBER PLANTS. THE SUBSIDY WAS NOT GIVEN FOR BUDDING IMMATURE UNSELECTED PLANTS BUT WAS RESTRICTED TO REPLANTING ONLY OF OLD AND UNECONOM IC TREES. THE SUBSIDY WAS NOT FOR THE PURPOSE OF UNKEEP OR MAINTENANCE OF MATURE OR IMMATURE RUBBER TREES. ON THESE FACTS, THE FULL BENCH CAME TO THE CONCLUSION THAT THE OBJECT OF THE SCHEME WAS REPLANTING AND THE SUBSIDY WAS BEING PAID FOR PLANTING HIGH Y IELDING VARIETY OF RUBBER PLANTS WHICH THE RUBBER BOARD AND THE GOVERNMENT THOUGHT WAS NECESSARY FOR THE DEVELOPMENT OF THE RUBBER INDUSTRY. WHAT WAS SOUGHT TO BE ACHIEVED WAS PUBLIC PURPOSE OF VITAL PUBLIC INTEREST. 24. THE FULL BENCH POINTED OUT THAT THE ECONOMIC ASSISTANCE OFFERED BY THE BOARD WAS UNDER STRINGENT CONDITIONS FOR IMPLEMENTING A SCHEME DESIGNED TO ACHIEVE DEVELOPMENT OF RUBBER PLANTATION INDUSTRY ON EFFICIENT AND ECONOMIC LINES. AFTER AN EXHAUSTIVE REVIEW OF THE CASE LAW AND THE SUBSIDY SCH EME, THE FULL BENCH OBSERVED : 'WE ARE TEMPTED TO SAY THAT THE SUBSIDY RECEIVED BY THE ASSESSEE IS USED TO ACQUIRE AN ASSET BY REPLANTING HIGH - YIELD VARIETY OF RUBBER TREES. THE DIFFERENCE IS, AS SAID BY BOWEN, L.J., THE EXPENDITURE IN THE ACQUISITION OF T HE CONCERN WILL BE CAPITAL EXPENDITURE AND THE EXPENDITURE IN CARRYING ON THE CONCERN IS REVENUE EXPENDITURE. THIS MAKES THE VITAL DIFFERENCE BETWEEN THE CASES REPORTED IN KARIMTHARUVI TEA ESTATES LTD. V. STATE OF KERALA [1963] 48 ITR 83 (SC) AND TRAVANCOR E RUBBER & TEA CO. LTD. V. COMMR. OF AGRL. I.T. [1961] 41 ITR 751 (SC).' 25. SO FAR AS THE SCHEME IS CONCERNED, THE FULL BENCH FURTHER OBSERVED : 'THE SUBSIDY SCHEME MAKES IT VERY CLEAR THAT THE AMOUNT OF SUBSIDY HAS TO BE SPENT 'FOR THE ACQUISITION OF AN ASSET' BY REPLANTING RUBBER PLANTS OF HIGH - YIELDING VARIETIES.' 36 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 26. IT WILL BE SEEN FROM THIS DECISION THAT THE FULL BENCH RELIED UPON THE DECISIO N OF THE HOUSE OF LORDS IN SEAHAM HARBOUR DOCK CO. 'S CASE (SUPRA) AND POINTED OUT THAT A BENEFICIAL SCHEME HAD BEEN EVOLVED FOR REPLANTING OF THE TREES AND AS A RESULT OF REPLANTING, THE ASSESSEE ACQUIRED AN ASSET WHICH WAS OF CAPITAL NATURE. IT WAS FURTH ER POINTED OUT IN THAT JUDGMENT THAT THE SCHEME WAS DEFINITELY ONLY FOR ONE PURPOSE, VIZ,, REPLANTING. IT WAS NOT FOR THE PURPOSE OF UNKEEPING AND MAINTAINING NATURE OR IMMATURE RUBBER PLANTS. THIS WAS THE VITAL FACTOR ON THE BASIS OF WHICH THE FULL BENCH OF THE KERALA HIGH COURT CAME TO THE CONCLUSION THAT THE SUBSIDY GIVEN FOR REPLANTING OF OLD RUBBER TREES CANNOT BE INCLUDED AS A REVENUE RECEIPT OF THE RUBBER COMPANY. 27. OUR ATTENTION WAS DRAWN TO THE CASE OF SADICHHA CHITRAV. CIT 189 ITR 774 . IN THAT CASE, IT WAS NOTED THAT IN A GIVEN CASE SUBSIDY MAY BE GRANTED WITH THE OBJECT OF SUPPLEMENTING TRADE RECEIPTS AND PROFITS OF THE RECI PIENT. IN ANOTHER CASE, THE SCHEME OF SUBSIDY MAY HAVE BEEN FORMULATED BY THE AUTHORITY TO ASSIST THE ASSESSEE IN ACQUIRING A CAPITAL ASSET OR FOR THE GROWTH OF THE INDUSTRY GENERALLY IN PUBLIC INTEREST WITHOUT ANY OBJECTIVE OF SUPPLEMENTING TRADE RECEIPTS OR RECOUPMENT OF REVENUE EXPENDITURE ALREADY INCURRED BY THE ASSESSEE. 28. IN THAT CASE, THE GOVERNMENT OF MAHARASHTRA SANCTIONED A SUBSIDY SCHEME FOR GRANT OF FINANCIAL ASSISTANCE TO MARATHI FILM PRODUCERS TO PROMOTE PRODUCTION OF BETTER MARATHI FILMS AN D HELP MARATHI COLOUR FILMS IN PREFERENCE TO BLACK AND WHITE FILMS. IT WILL BE SEEN FROM THE FACTS NOTED IN THE JUDGMENT OF THE BOMBAY HIGH COURT THAT ANY PRODUCER OF MARATHI FILM COULD APPLY TO THE COLLECTOR OF BOMBAY (ENTERTAINMENT DUTY DEPARTMENT) FOR G RANT OF A CERTIFICATE OF ELIGIBILITY FOR GETTING THE GRANT. THE COLLECTOR AFTER HOLDING NECESSARY ENQUIRY IN RESPECT OF VARIOUS MATTERS REFERRED IN THE SCHEME WOULD RECOMMEND THE RELEASE OF THE AMOUNT TO THE APPLICANT. ONE OF THE PRE - CONDITIONS OF THE GRAN T WAS THAT THE APPLICANT MUST PREPARE ADEQUATE PLANTS FOR PRODUCTION OF NEW FILM AND ALSO FULFIL FINANCIAL AND TECHNICAL REQUIREMENTS FOR PRODUCTION OF THE FILM. FINANCIAL ASSISTANCE WAS TO BE GIVEN IN FOUR EQUAL INSTALMENTS IN THE FOLLOWING MANNER. THE FI RST INSTALMENT WAS TO 37 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. BE RELEASED AFTER COMPLETION OF ONE - THIRD OF THE PROPOSED FOOTAGE OF THE FILM, THE SECOND INSTALMENT HAD TO BE RELEASED ON COMPLETION OF TWO - THIRD OF THE PROPOSED FOOTAGE IN A FINAL SHAPE AND THE THIRD INSTALMENT ON THE COMPLETION OF THE ENTIRE FILM READY FOR CENSORS AND THE FINAL INSTALMENT HAD TO BE RELEASED IMMEDIATELY AFTER THE NEW FILM HAD CROSSED THE HURDLE OF CENSORSHIP AND ACTUAL RELEASE. IT WAS NOTED IN THE JUDGMENT: 'THE SAID SUBSIDY WAS RELEASED TO THE ASSESSEE SO AS TO ASSI ST THE ASSESSEE TO ACQUIRE A NEW CAPITAL ASSET SO AS TO MEET PART OF THE COST OF THE NEW FILM IN PUBLIC INTEREST.' 29. ON THE BASIS OF THAT VITAL DISTINCTION, THE COURT HELD THAT THE RATIO OF THE JUDGMENT OF THIS COURT IN V.S.S. V. MEENAKSHI ACHI'S CASE (S UPRA) WAS NOT APPLICABLE IN THE FACTS OF THE CASE BEFORE IT. 30. IN THE CASE OF CIT V. UDAYA PICTURES ( P.) LTD 225 ITR 394 , SUBSIDY WAS GRANTED BY THE STATE GOVERNMENT FOR PRODUCING NEW REGIONAL FILMS. IT WAS HELD THAT THE ENTITLEMENT TO THE SUBSIDY SPRANG FROM THE BUSINESS CARRIED ON BY THE ASSESSEE AND THE AMOUNT WAS RECEIVED DURING THE COURSE OF CONDUCT OF THE BUSINESS. WH AT WAS RECEIVED BY THE ASSESSEE WAS NOT CAPITAL RECEIPT BUT A SUBSIDY. 31. THE FACTS OF THIS CASE HAVE NOT BEEN CLEARLY STATED IN THE JUDGMENT. BUT IT APPEARS THAT SUBSIDY WAS GRANTED AFTER MAKING OF THE FILM. THE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF SADICHHA CHITRA ( SUPRA), PROCEEDED ON THE FOOTING THAT SUBSIDIES WERE GRANTED AS AND WHEN THE FILM WAS BEING COMPLETED WHICH RESULTED IN CREATION OF A CAPITAL ASSET. A SIMILAR VIEW WAS TAKEN BY THE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT V. CHITRA KA LPA 177 ITR 540 WHERE IT WAS HELD THAT SUBSIDY WAS FOR MAKING A FILM AND WAS TO BE TREATED AS A CAPITAL RECEIPT BECAUSE THE FILM WAS A CAPITAL ASSET IN THE HANDS OF THE PRODUCER. THE VIEW TAKEN BY THE BOMBAY AND THE KERALA HIGH COURTS APPEARS TO BE CORRECT AND ACCORDS WITH THE PRINCIPLE LAID DOWN IN SEAHAM HARBOUR DOCK CO. 'S CASE (SUPRA) THAT ASSISTANCE GIVEN BY THE GOVERNMENT FOR COM PLETION OF A PROJECT MUST BE OF CAPITAL NATURE. 38 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. 32. IN THE CASE BEFORE US, SUBSIDIES HAVE NOT BEEN GRANTED FOR PRODUCTION OF OR BRINGING INTO EXISTENCE ANY NEW ASSET. THE SUBSIDIES WERE GRANTED YEAR AFTER YEAR ONLY AFTER SETTING UP OF THE NEW INDUSTRY AND COMMENCEMENT OF PRODUCTION. SUCH A SUBSIDY COULD ONLY BE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS OF THE ASSESSEE. APPLYING THE TEST OF VISCOUNT SIMON IN THE CASE OF OSTIME (SUPRA) , IT MUST BE HELD THAT THESE SUBSIDIES AR E OF REVENUE CHARACTER AND WILL HAVE TO BE TAXED ACCORDINGLY. 33. A DIVISION BENCH OF THE CALCUTTA HIGH COURT IN THE CASE OF KESORAM INDUSTRIES & COTTON MILLS LTD. V. CIT 191 ITR 518 ALSO EXAMINED A SCHEME OF REFUND OF SALES TAX FRAMED BY THE ANDHRA PRADESH GOVERNMENT TO ASSIST NEWLY SET UP INDUSTRIES. THERE THE ASSESSEE HAD SET UP A CEMENT PLANT. THE CALCUTTA HIGH COURT HELD THAT RECEIPT OF THE INCENTIVES FROM THE STATE GOVERNMENT W AS INCIDENTAL TO CARRYING ON THE BUSINESS OF THE ASSESSEE. SUCH SUBSIDIES WERE RECEIVED YEAR AFTER YEAR BY REFUND OF SALES TAX. THE BENEFIT WAS RECEIVED IN COURSE OF CARRYING ON THE ASSESSEE'S BUSINESS. IT WAS A BENEFIT INCIDENTAL TO ITS BUSINESS. THE SUBS IDY WAS NOT INTENDED TO BE CONTRIBUTION TOWARDS CAPITAL OUTLAY OF THE INDUSTRY. THEREFORE, IT WAS HELD THAT THE SUBSIDY RECEIVED BY THE ASSESSEE IN THAT CASE COULD NOT BE REGARDED AS ANYTHING BUT A REVENUE RECEIPT. 34. THE MADHYA PRADESH HIGH COURT IN THE CASE OF CIT V . DUSAD INDUSTRIES 162 ITR 734, DEALT WITH A CASE WHERE GOVERNMENT HAD FRAMED A SCHEME FOR GRANTING SALES TAX SUBSIDIES TO INDUSTRIES SET UP IN BACKWARD AREAS. THE HIGH COURT WAS OF THE VIEW THAT THE OBJECT OF THE SCHEME WAS NOT TO SUPPLEMENT THE PROFITS MADE BY INDUSTRIES. IN THAT VIEW OF THE MATTER, THE HIGH COURT HELD THAT THE SUBSIDIES GIVEN UNDER THE SAID SCHEME BY THE GOVERNMENT TO NEWLY SET UP INDUSTRIES WERE CAPITAL RECEIPTS IN THE HANDS OF THE INDUSTRIES AND COULD NOT BE TAXED AS REVE NUE RECEIPTS. IN THAT CASE, 75 PER CENT OF THE SALES TAX PAID IN A YEAR FOR A PERIOD OF FIVE YEARS FROM THE DAY OF STARTING OF PRODUCTION WAS TO BE GIVEN BACK BY THE GOVERNMENT TO THE INDUSTRY CONCERNED. THE HIGH COURT WAS OF THE VIEW THAT OBVIOUSLY THE SU BSIDY WAS GIVEN BY WAY OF AN INCENTIVE FOR CAPITAL INVESTMENT AND NOT BY WAY OF 39 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. ADDITION TO THE PROFITS OF THE ASSESSEE AS WAS CLEAR FROM THE FACTS AND CIRCUMSTANCES OF THE CASE. THE MADHYA PRADESH HIGH COURT, HOWEVER, FAILED TO NOTICE THE SIGNIFICANT FACT THAT UNDER THE SCHEME FRAMED BY THE GOVERNMENT, NO SUBSIDY WAS GIVEN UNTIL THE TIME PRODUCTION WAS ACTUALLY COMMENCED. MERE SETTING UP OF THE INDUSTRY DID NOT QUALIFY AN INDUSTRIALIST FOR GETTING ANY SUBSIDY. THE SUBSIDY WAS GIVEN AS HELP NOT FOR THE SETT ING UP OF THE INDUSTRY WHICH WAS ALREADY THERE BUT AS AN ASSISTANCE AFTER THE INDUSTRY COMMENCED PRODUCTION. THE VIEW TAKEN BY THE MADHYA PRADESH HIGH COURT IS ERRONEOUS. 35. IN VIEW OF THE AFORESAID, IT IS NOT NECESSARY TO DISCUSS THE POINT RELATING TO AP PLICABILITY OF SECTION 41(1) IN THIS CASE. 36. THE APPEAL FAILS AND IS DISMISSED. THERE WILL BE NO ORDER AS TO COSTS. C.A. NOS. 10091 OF 1995, 5279 OF 1996, 2008 OF 1988, 425 OF 1985 37. IN VIEW OF OUR ABOVE DECISION, THESE APPEALS ALSO STAND DISMISSED WIT H NO ORDER AS TO COSTS. C.A. NOS. 1664 - 65/97 38. THESE APPEALS BY THE REVENUE ARE ALLOWED WITH NO ORDER AS TO COSTS. 14.5 ON GOING THROUGH THE ABOVE LAND MARK JUDGMENT, THE FACT S OF THE CASE ON HAND ARE SIMILAR, THE PERIOD IS CHANGED. THE ABOVE JUDGEMENT OF THE HONBLE SUPREME COURT IS ST ATED T HAT THE SUBSIDY GRANTED BY THE GOVT. OF ANDHRA PRADESH FOR SETTING UP OF A NEW INDUSTRY AS PER THE SCHEME WHICH WAS THE IMPUGNED ISSUE BEFORE THE HONBLE SUPREME COURT WAS TO BE CONSIDERED AS A REVENUE RECEIPT. WHILE GOING THROUGH THE SCHEME OF GOVT. OF A.P. FOR SETTING UP OF NEW INDUSTRY BY THE ASSESSEE IS SIMILAR TO THE ISSUE DECIDED HONBLE SUPREME COURT CITED SUPRA. THE HONBLE SUPREME COURT IN THE SAID CASE EXAMINED TH AT IT WAS A PRODUCTION BASED INCENTIVES . THE ASSESSEE, AS PER THE PRESENT SCHEME, WHICH HAS BEEN QUOTED 40 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. SUPRA, ACCORDING TO WHICH, THE ENTREPRENEURS HAVE BEEN OFFERED DIFFERENT KINDS OF SUBSIDIES , OUT OF WHICH, SOME OF THE M ARE DIRECTLY RELATED TO THE IN VESTMENTS IN THE PLANT AND MACHINERY I.E. BEFORE COMMENCEMENT OF COMMERCIAL PRODUCTI ON AND SOME OF THEM ARE DIRECTLY RELATED TO THE OPERATION OF THE ASSESSEE. WHEN THE ASSESSEE PRODUCES THE ARTICLES OR THINGS AND SALES OF THE FINISHED GOODS , THE SALES TAX IS LIABLE TO BE PAID TO THE GOVT. IT IS IMPORTANT TO NOTE THAT THE THERE IS NO DIRE CT NEXUS WITH THE QUANTUM OF SUB SIDY AS IT IS TOTALLY DEPEND UPON THE PRODUCTION, SALES AND SALES TAX COLLECTED AND PAID BY THE ASSESSEE. THEREAFTER, THE GOVT. OF AP REFUNDS TO THE ASSESSEE IN THE FOLLOWING YEAR TO THE EXTENT OF 25% PAID BY IT. IN THE IMPUGNED CASE, THE SUBSIDY AMOUNT DEPEND UPON THE SALES OF THE ASSESSEE, WHICH IS A PERFORMANCE BASED SUBSIDY, NAMELY, IF THE SALES ARE INCREASED, THE AMOUNT OF SUBSIDY INCREASES AND IF THE SAL ES ARE LOW, THE SUBSIDY AMOUNT WILL BE LOW. THEREFORE, THE IMPUGNED SUBSIDY DOES NOT HAVE DIRECT RELATION TO THE INVESTMENTS MADE IN THE PLANT AND MACHINERY BY THE ASSESSEE. IF THE ASSESSEE IS INVESTED HUGE AMOUNT IN THE PLANT AND MACHINERY, WHICH DOES NOT YIELD 100% PRODUCTION CAPACITY DUE TO VARIOUS REASONS, THE SALES WILL AUTOMATICALLY GO DOWN AND THE SUBSIDY OF THE ASSESSEE WILL ALSO COME DOWN AS PER SALES OR VICE - VERSA . 14.6 FURTHER, WE REFER TO THE LAND MARK JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MEGHALAYA STEELS LTD., [2016] 67 TAXMANN.COM 158 (SC) WHEREIN THE HONBLE COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING THAT THE SUBSIDY RECEIVED BY THE ASSESSEE, NAMELY, A) TRANSPORT SUBSIDY, B) INTEREST 41 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. SUBSIDY, C ) POWER SUBSIDY AND D) INSURANCE SUBSIDY ARE RELATED TO THE OPERATION OF THE BUSINESS OF THE ASSESSEE AND HAS BEEN ALLOWED FOR THE ELIGIBLE FOR DEDUCTION UNDER CHAPTER VI - A OF THE IT ACT. IT CLEARLY SHOWS THAT ABOVE RECEIPTS ARE IN THE NATURE OF REVENUE R ECEIPTS. THE HONBLE APEX COURT HAS CONSIDERED VARIOUS JUDGMENTS IN IT ORDER AND SPEECH OF THE FINANCE MINISTER ALSO. IN THIS JUDGMENT, THE HONBLE SUPREME COURT VIDE PARA NO. 25 OBSERVED AS UNDER: THE DECISION IN SAHNEY STEEL AND PRESS WORKS LTDS CASE (SUPRA) DEALT WITH SUBSIDY RECEIVED FROM THE STATE GOVERNMENT IN THE FORM OF REFUND OF SALES TAX PAID ON RAW MATERIALS, MACHINERY, AND FINISHED GOODS; SUBSIDY ON POWER CONSUMED BY THE INDUSTRY; AND EX EMPTION FROM WATER RATE. IT WAS HELD THAT SUCH SUBSIDIES WERE TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE. 14.7 FURTHER, IN THE CASE OF MEPCO INDUSTRIES LTD., VS. CIT [2009] 185 TAXMAN 409 (SC) , THE HONBLE S UPREME COURT HAS HELD AS UNDER: 7. ON THE FACTS OF THE PRESENT CASE, WE ARE OF T HE VIEW THAT THE PRESENT CASE INVOLVES CHANGE OF OPINION. IN THIS CONNECTION, IT MUST BE NOTED THAT GOVERNMENT GRANTS DIFFERENT TYPES OF SUBSIDIES TO THE ENTREPRENEURS. THE SUBSIDY IN SAHNEY STEEL & PRESS WORKS LTD.'S CASE (SUPRA) WAS AN INCENTIVE SUBSIDY LINKED TO PRODUCTION. IN FACT, IN SAHNEY STEEL & PRESS WORKS LTD.'S CASE (SUPRA) [AT PAGE 257], THIS COURT CATEGORICALLY STATED THAT THE SCHEME IN HAND WAS AN INCENTIVE SCHEME AND IT WAS NOT A SCHEME FOR SETTING UP THE INDUSTRIES. IN THE SAID CASE, THE SAL IENT FEATURES OF THE SCHEME WERE EXAMINED AND IT WAS NOTICED THAT THE SCHEME FORMULATED BY THE GOVERNMENT OF ANDHRA PRADESH WAS ADMISSIBLE ONLY AFTER THE COMMENCEMENT OF PRODUCTION. IN INCOME - TAX MATTERS, ONE HAS TO EXAMINE THE NATURE OF THE ITEM IN QUESTI ON, WHICH WOULD DEPEND ON THE FACTS OF EACH CASE. IN THE PRESENT CASE, WE ARE CONCERNED WITH POWER SUBSIDY WHEREAS IN THE CASE OF CIT V. PONNI SUGARS & CHEMICALS LTD. [2008] 306 ITR 392 , THE SUBSIDY GIVEN BY THE GOVERNMENT WAS FOR REPAYING LOANS. THEREFORE, IN EACH CASE, ONE HAS TO EXAMINE THE NATURE OF SUBSIDY. THIS EXERCISE CANNOT BE UNDERTAKEN U NDER SECTION 154 OF THE ACT. THERE IS ONE MORE REASON WHY SECTION 154 IN THE PRESENT CASE WAS NOT 42 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. INVOKABLE BY THE DEPARTMENT. ORIGINALLY, THE COMMISSIONER OF INCOME - TAX, WHILE PASSING ORDERS UNDER SECTION 264 OF THE ACT ON 30 - 4 - 1997, HAD TAKEN THE VIEW TH AT THE SUBSIDY IN QUESTION WAS A CAPITAL RECEIPT NOT TAXABLE UNDER THE ACT. AFTER THE JUDGMENT OF THIS COURT IN SAHNEY STEEL & PRESS WORKS LTD.'S CASE (SUPRA), THE COMMISSIONER OF INCOME - TAX HAS TAKEN THE VIEW THAT THE SUBSIDY IN QUESTION WAS A REVENUE REC EIPT. THEREFORE, IN OUR VIEW, THE PRESENT CASE IS A CLASSIC ILLUSTRATION OF CHANGE OF OPINION. 9.. . SAHNEY STEEL & PRESS WORKS LTD.' CASE (SUPRA) WAS A CASE WHICH DEALT WITH PRODUCTION SUBSIDY, PONNI SUGARS & CHEMICALS LTD.'S CASE (SUPRA) DEALT WI TH SUBSIDY LINKED TO LOAN RE - PAYMENT WHEREAS THE PRESENT CASE DEALS WITH A SUBSIDY FOR SETTING UP AN INDUSTRY IN THE BACKWARD AREA. THEREFORE, IN EACH CASE, ONE HAS TO EXAMINE THE NATURE OF THE SUBSIDY. THE JUDGMENT OF THIS COURT IN SAHNEY STEEL & PRESS WO RKS LTD.'S CASE (SUPRA) WAS ON ITS OWN FACTS; SO ALSO, THE JUDGMENT OF THIS COURT IN PONNI SUGARS & CHEMICALS LTD.'S CASE (SUPRA). THE NATURE OF THE SUBSIDIES IN EACH OF THE THREE CASES IS SEPARATE AND DISTINCT. THERE IS NO STRAIGHT - JACKET PRINCIPLE OF DIS TINGUISHING A CAPITAL RECEIPT FROM A REVENUE RECEIPT. IT DEPENDS UPON THE CIRCUMSTANCES OF EACH CASE. AS STATED ABOVE, IN SAHNEY STEEL & PRESS WORKS LTD.'S CASE (SUPRA), THIS COURT HAS OBSERVED THAT THE PRODUCTION INCENTIVE SCHEME IS DIFFERENT FROM THE SCH EME GIVING SUBSIDY FOR SETTING UP INDUSTRIES IN BACKWARD AREAS. IN THE CIRCUMSTANCES, THE PRESENT CASE IS AN EXAMPLE OF CHANGE OF OPINION. THEREFORE, THE DEPARTMENT HAS ERRED IN INVOKING SECTION 154 OF THE ACT . ALTHOUGH, THE ABOVE DECISION DEALS WITH THE RECTIFICATION U/S 154 OF THE ACT PASSED BY THE CIT , BUT, IN THIS CASE THE HONBLE APEX COURT HAS CONSIDERED THE RATIO LAID DOWN IN THE LAND MARK JUDGEMENT OF SAHNEY STEEL & PRESS WORKS LTD. , 14.7 FURTHER, IN THE CASE OF CIT VS. RAJARAM MAIZE PRODUCTS, [20 01] 119 TAXMAN 492 (SC), BEFORE THE HONBLE SUPREME COURT, THE FOLLOWING QUESTION OF LAW AROSE: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE POWER SUBSIDY RECEIVED BY THE ASSESSEE WAS A CAPITAL RECEIPT NOT LIABLE TO BE TAXED WITHIN THE MEANING OF SECTION 28(IV) OF THE INCOME - TAX ACT, 1961 ?' THE HONBLE SUPREME COURT HAS OBSERVED AS UNDER: 3. THIS COURT IN SAHNEY STEEL & PRESS WORKS LTD. V. CIT [1997] 228 ITR 253 1 (SC) HAS HELD THAT POWER SUBSIDIES ARE OF REVENUE NATURE AND HAVE TO BE TAXED ACCORDINGLY. WE ALSO FIND THAT THE TERMS UN DER WHICH THE SUBSIDY WAS GIVEN IN THE PRESENT CASES CLEARLY SUGGEST THAT THE SUBSIDY WAS OF A REVENUE NATURE INASMUCH AS IT WENT TOWARDS REDUCTION OF THE ELECTRICITY BILLS. 43 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. THE LD. AR HAS RELIED ON MANY JUDGMENTS QUOTED SUPRA IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE AND CONSIDERING THE RATIONS LAID DOWN BY THE HONBLE SUPREME COURT IN THE AFORESAID CASES CITED BY US, IN OUR CONSIDERED OPINION, THE SUBSIDY RECEIVED BY THE ASSESSEE I N THE FORM OF REFUND OF SALES TAX PAID FROM THE SATE GOVT OF AP IS TO BE TREATED AS REVENUE RECEIPTS. THEREFORE, ALL THE APPEALS FILED BY THE REVENUE ON TH E S E GROUND S ARE ALLOWED. 14.6 AS THE FACTS AND GROUNDS ARE SIMILAR IN AY 2014 - 15 TO THAT OF AY 2013 - 14 , FOLLOWING THE DECISION THEREIN WE ALLOW THE GROUNDS RAISED BY THE REVENUE. 15. AS REGARDS CO, IN WHICH THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE MADE BY THE AO UNDER RULE 8D(2)(III) AGAINST WHICH THE ASSESSEE SUBMITTED THAT DURING THE IMPUGNED AY TH ERE WAS NO EXEMPT INCOME RECEIVED BY THE ASSESSEE. ON GOING THROUGH THE ORDERS OF AUTHORITIES BELOW AS WELL AS ON PERUSAL OF RECORD, WE DO NOT FIND ANYWHERE THAT THERE WAS EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE IMPUGNED AY. THE CIT(A) HAS RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF GODREJ BOYCE AND THE SAME IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE IN WHICH THERE WAS EXEMPT INCOME RECEIVED BY THE ASSESSEE, BUT, THE CASE IN HAND THERE IS NO EXEMPT INCOME EARNED BY THE AS SESSEE IN THE IMPUGNED AY. FOLLOWING THE CONCLUSIONS DRAWN IN PARA 13 (SUPRA), 44 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. WE DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S 14A R.W. RULE 8D(2)(III). IN THE RESULT, THE CO FILED BY THE ASSESSEE IS ALLOWED. 16. IN THE RESULT, REVENUE S APPEAL IN ITA NO. 654/HYD/2018 IS PARTLY ALLOWED, APPEAL IN ITA NO. 655/HYD/2018 IS ALLOWED AND THE CO NO. 23/HYD/2019 IS ALLOWED. A COPY OF THIS COMMON ORDER BE PLACED IN THE RESPECTIVE CASE FILES. 12. WE LASTLY ACKNOWLEDGE THAT ALTHOUGH THE INSTANT APPEALS ARE BEING DECIDED AFTER A PERIOD OF 90 DAYS FROM THE DATE OF HEARING AS PER RULE 34(5) OF THE IT(AT) RULES 1963, THE SAME HOWEVER, DOES NOT APPLY IN THE COVID LOCKDOWN SITUATION AS PER HON'BLE APEX COURT'S RECENT DIRECTIONS DATED 27 - 04 - 2021 IN M.A.NO.665/2021 IN SM(W)C NO.3/2020 'IN RE COGNIZANCE FOR EXTENSION OF LIMITATION' MAKING IT CLEAR THAT IN SUCH CASES WHERE THE LIMITATION PERIOD (INCLUDING THAT PRESCRIBED FOR INSTITUTION AS WELL AS TERMINATION) SHALL STAND EXCLUDED FROM 14TH OF MARCH, 2021 TILL FURTHER ORDERS. PRONOUNCED IN THE OPEN COURT ON 24 TH AUGUST , 2021. SD/ - SD/ - (S.S. GODARA) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 24 TH AUGUST, 2021. OKK 45 ITA NO. 654 & 655/HYD/2018 & CO NO. 23/H/2018 MEDHA SERVO DRIVES PVT. LTD.,, HYD. COPY TO: - 1) M/S. MEDHA SERVO DRIVES PRIVATE LIMITED, NO. P4/5B, INDUSTRIAL PARK, NACHARAM, HYDERABAD 500 076. 2) JOINT COMMISSIONER OF INCOME TAX (OSD), CENTRAL CIRCLE - 1(4), 7 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3) THE CIT (A) - 4, HYDERABAD. 4) THE PRINCIPAL COMMISSIONER OF INCOME TAX - 4, HYDERABAD. 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE
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