M/s. EVEREST INDUSTRIES LTD., NEW DELHI V. ACIT CIR. - 3, THANE

ITA 814/MUM/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 2751 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 09-10-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 24-01-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HEMANT J LAL
• Assessee Lawyers: S E DASTUR
• Keywords: Capital asset; Gift; Business income; Depreciation; Source of fund; Capital receipt; Revised return; Revenue expenditure; Set aside; Capital Gains
• Section: 143(3); 234B; 115JB; 37(1); 12A; 139(5); 143(1); 191; 264; 139(1); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI N.V. VASUDEVAN, JM & SHRI J. SUDHAKAR R EDDY, AM I.T.A. NO.814/MUM/2007 (ASSESSMENT YEAR 2003-04) EVEREST INDUSTRIES LTD VS ACIT, CIR.3 E-62, EVEREST HOUSE MUMBAI GREATER KAILASH NEW DELHI 110 048 PAN : AAACE7550N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SE DASTUR RESPONDENT BY: SHRI HEMANT J LAL O R D E R J. SUDHAKAR REDDY : THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-I, MUMBAI DATED 29-11-2006 FOR THE ASSESSMENT YEAR 2003-04. 2. THE FACTS OF THE CASE ARE BROUGHT OUT AT PAGES 4 & 5 OF THE CIT(A)S ORDER, WHICH ARE AS FOLLOWS: THE APPELLANT IS A COMPANY ENGAGED, INTER ALIA, IN THE BUSINESS OF MANUFACTURE AND SALE OF ASBESTOS CEMENT SHEETS A ND ACCESSORIES. IT PROVIDES A RANGE OF PRODUCT INCLUD ING ROOFING PRODUCTS, PANELING AND PARTITIONING. THE APPELLANT HAS ITS WORKS AT KYMORE, KOLKATA, LAKHMAPUR AND PODANUR. IN THE ASSESSMENT ORDER, THE A.O. STATES THAT IN THIS CASE , THE ORIGINAL RETURN OF INCOME WAS FILED ON 29.11.2003 DECLARING TOTAL INCOME OF RS.2,89,90,340. THE RETURN WAS ACCOMPANIED WITH TAX AUDIT REPORT IN FORM NO.3CB AND 3CD ALONGWITH ITS ANNEXUR ES, SCHEDULES ETC. ALONGWITH AUDITED BALANCE SHEET, P&L ACCOUNT. THE RETURN WAS PROCESSED U/S 143(1) OF THE I.T. ACT ON 22.03.2004 DETERMINING A REFUND OF RS.46,84,429 WHI CH WAS ISSUED TO THE ASSESSEE. SUBSEQUENTLY, THE RETURN W AS REVISED BY THE ASSESSEE ON 31.03.2005 DECLARING TOTAL INCOM E AT NIL AFTER ADJUSTMENT OF CARRIED FORWARD UNABSORBED DEPR ECIATION, AND COMPUTATIONOF MINIMUM ALTERNATE TAX (MAT) AS PE R SEC. 115JB OF THE I.T. ACT. IN THE REVISED RETURN THE A SSESSEE CLAIMED DEDUCTION FOR NOTIONAL SALES-TAX INCENTIVE AVAILED IN NEW PACKAGE SCHEME OF INCENTIVE, 1993 AS CAPITAL SUBSIDY. IT WAS CLAIMED BY THE ASSESSEE THAT THE NOTIONAL SALES TAX LIABILITY 2 OF RS.4,69,70,108/- IS INCLUDED IN THE SALES CREDIT ED TO P&L ACCOUNT IN THE ORIGINAL RETURN OF INCOME. THE ASSISTANT COMMISSIONER OF INCOME TAX (HERE-IN A FTER REFERRED TO AS ACIT) PASSED THE ORDER U/S 143(3) ON 30-01-2006 DETERMINING TOTAL INCOME UNDER THE PROVISIONS OF TH E ACT OTHER THAN SEC. 115JB, AT RS.4,84,87,581/-. IN THE SAID ORDER, THE ACIT MADE VARIOUS DISALLOWANCES AND / OR MODIFICATI ON IN THE COMPUTATION OF TOTAL INCOME UNDER THE PROVISIONS OF THE ACT OTHER THAN SEC. 115JB. 3. ON APPEAL, THE FIRST APPELLATE AUTHORITY GRANTED PART RELIEF. AGGRIEVED, THE ASSESSEE IS IN APPEAL ON THE FOLLOWING GROUNDS: 1.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, LD.CIT(APPEALS) WAS GROSSLY UNJUSTIFIED AND ERRED I N NOT CONSIDERING SALES TAX SUBSIDY RECEIVED BY THE APPEL LANT UNDER THE NEW PACKAGE SCHEME OF INCENTIVE, 1993 OF GOVERNMENT OF MAHARASHTRA AMOUNTING TO RS.4,69,70,108/- AS CAPITAL SUBSIDY. 2.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.CIT(APPEALS) WAS GROSSLY UNJUSTIFIED AND ERRED I N UPHOLDING THE REDUCTION OF NOTIONAL TAX ON CAPITAL GAIN ALLOWED AS EXEMPT U/S 54G IN A.Y. 1995-96 AND 1996- 97 FROM THE ACTUAL COST OF PLANT AND MACHINERY CAPITAL IZED IN THE SAID ASSESSMENT YEARS FOR THE PURPOSE OF COMPUT ING OPENING WRITTEN DOWN VALUE (WDV) AND DEPRECIATION ALLOWANCE FOR THE YEAR UNDER CONSIDERATION. 3.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND WITHOUT PREJUDICE TO GROUND NO.2.0 TAKEN HERE-I N- ABOVE, LD.CIT(APPEALS) WAS NOT JUSTIFIED IN UPHOLDI NG THE REDUCTION OF NOTIONAL TAX ON CAPITAL GAIN FROM THE BLOCK OF PLANT AND MACHINERY ONLY AND NOT FROM LAND / BUILDI NG FOR THE PURPOSE OF COMPUTING DEPRECIATION. 4.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND WITHOUT PREJUDICE TO GROUND NO.2.0 AND 3.0 TAKE N HERE-IN-ABOVE, LD.CIT(APPEALS) ERRED IN SUSTAINING THE DISALLOWANCE OF ENTIRE DEPRECIATION FROM A.Y. 1999- 2000 TO A.Y. 2003-04 AGGREGATING TO RS.1,10,65,058/- IN THE YEAR UNDER CONSIDERATION INSTEAD OF RS.11,47,592/- BEING DEPRECIATION PERTAINING TO A.Y. 2003-04, THUS RESUL TING IN EXCESS DISALLOWANCE OF RS.99,17,466/-. 5.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD.CIT(APPEALS) ERRED IN SETTING ASIDE THE MATTER W ITH 3 REGARD TO FACTORY POWER EXPENSES AMOUNTING TO RS.7,20,000/- TO THE FILE OF THE A.O. INSTEAD OF OU TRIGHT DECIDING THE ISSUE IN FAVOUR OF THE APPELLANT. 6.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(APPEALS) ERRED IN SETTING ASIDE THE MAT TER WITH REGARD TO POWER HOUSE EXPENSES AMOUNTING TO RS.13,64,100/- TO THE FILE OF THE A.O. INSTEAD OF O UTRIGHT DECIDING THE ISSUE IN FAVOUR OF THE APPELLANT. 7.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD. CIT(APPEALS) WAS GROSSLY UNJUSTIFIED AND ER RED IN CONFIRMING THE AD-HOC DISALLOWANCE OF RS.3,00,000/- ON ACCOUNT OF SALES PROMOTION EXPENSES ON THE CONTENTI ON THAT THE AMOUNT DISALLOWED IS TOO MEAGER AND 100% O F THE EXPENSES COULD NOT HAVE BEEN INCURRED SOLELY FO R THE BUSINESS PURPOSE. 8.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(APPEALS) WAS GROSSLY UNJUSTIFIED IN UPHOLDI NG THE DISALLOWANCE ON ACCOUNT OF EXPENDITURE INCURRED ON REPAIRS AND MAINTENANCE OF BUILDING TO THE TUNE OF RS.15,25,297/- AS CAPITAL IN NATURE DESPITE THE FAC T THAT THE APPELLANT ITSELF HAD CAPITALIZED PART OF THE TO TAL EXPENDITURE INCURRED AND CLAIMED ONLY THOSE EXPENSE S AS REVENUE FOR WHICH NEW ASSET CAME INTO EXISTENCE. 9.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(APPEALS) ERRED IN SETTING ASIDE THE MATT ER WITH REGARD TO EXPENSES INCURRED ON MAINTENANCE OF DEPOT SHED AMOUNTING TO RS.19,05,642/- TO THE FILE OF THE A.O. INSTEAD OF OUTRIGHT DECIDING THE ISSUE IN FAVOUR OF THE APPELLANT. 10.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.CIT(APPEALS) ERRED IN NOT DIRECTING THE A.O. TO GRANT MAT CREDIT OF RS.3,68,145/- BROUGHT FORWARD FROM EARLIE R YEARS. 11.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.CIT(APPEALS) ERRED IN CONFIRMING LEVY OF INTERES T U/S 234D OF THE INCOME TAX ACT ALTHOUGH THE SAID PROVISIONS WERE NOT IN THE STATUTE FOR THE ASSESSMENT YEAR UNDER CONSID ERATION. 12.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.CIT(APPEALS) ERRED IN NOT DELETING LEVY OF INTER EST U/S 234B & 234C OF THE INCOME TAX ACT AMOUNTING TO RS.8,89,239/- AND RS.68,909/- RESPECTIVELY. 4 12.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ON DISPOSAL OF THIS APPEAL, MATERIAL ADJUSTMENTS WO ULD BE REQUIRED IN COMPUTING TOTAL INCOME, INTEREST AND TA X FOR THE ASSESSMENT YEAR UNDER REFERENCE AND NECESSARY DIREC TION MAY BE GIVEN TO THE A.O. ON THIS FRONT. 4. SHRI SE DASTUR, THE LEARNED SR. ADVOCATE FOR THE ASSESSEE FILED TWO PAPER BOOKS, THE FIRST RUNNING INTO 284 PAGES AND T HE OTHER RUNNING INTO 55 PAGES. HE ALSO FURNISHED A TABULAR FORMAT GIVING T HE GROUNDS OF APPEAL AND THE CONTENTIONS OF THE ASSESSEE. WE HAVE ALSO HEAR D SHRI HEMANT J LAL, THE LEARNED DEPARTMENTAL REPRESENTATIVE. 5. THE FIRST ISSUE PERTAINS TO THE DENIAL OF CLAIM OF EXCLUSION OF SALES-TAX INCENTIVE ON THE GROUND THAT IT IS A CAPITAL RECEIP T. THE CIT(A) HAS BROUGHT OUT THE FACTS AND OBSERVATIONS OF THE ASSESSING OFFICER AT PAGE 6 OF HIS ORDER WHICH IS EXTRACTED BELOW FOR READY REFERENCE: IN THE ORIGINAL RETURN OF INCOME FILED BY THE ASSE SSEE ON 29.11.2003 THERE WAS NO CLAIM OF SALES TAX EXEMPTIO N IN THE COMPUTATION OF TOTAL INCOME ATTACHED WITH THE RETUR N OF INCOME. ON 31.03.2005, THE ASSESSEE FILED A REVISED RETURN OF INCOME CLAIMING NOTIONAL SALES TAX LIABILITY TO THE TUNE O F RS.4,69,70,108 AS INCENTIVE / SUBSIDY IN THE FORM OF SALES TAX EXE MPTION TO BE CONSIDERED AS CAPITAL RECEIPTS. IN SUPPORT OF ITS CLAIM, THE ASSESSEE RELIED ON THE JUDGMENT OF CIT V/S BALRAMPU R CINI MILLS LTD (1999) 238 ITR 445 (CAL) AND JURISDICTIONAL MUM BAI SPECIAL BENCH OF ITAT IN THE CASE OF DCIT /S RELIANCE INDUS TRIES LTD (2004) 88 ITD 273 (MUM SB). THE ASSESSEE CONTENDED THAT THE NOTIONAL SALES TAX LIABILITY FOR SETTING UP THE UNI T AT LAKMAPUR, DIST:NASIK WAS IN THE NATURE OF CAPITAL RECEIPT AS IT WAS GRANTED TO ENCOURAGE INVESTMENT IN THE BACKWARD AREAS OF TH E STATE OF MAHARASHTRA. FROM THE VERIFICATION OF THE CASE REC ORDS OF THE ASSESSEE, IT IS NOTICED THAT THE SALES TAX EXEMPTIO N WERE APPLICABLE RIGHT FROM A.Y 1995-96 WHEN THE ASSESSEE SHITED ITS FACTORY TO LAKHMAPUR IN NASHIK DISTICT OF MAHARASHT RA. EVEN THE ASSESSEE HAD GOT ELIGIBILITY CERTIFICATE AS ALSO CE RTIFICATE OF ENTITLEMENT WAY BACK IN 1996 ITSELF. HOWEVER, THE ASSESSEE HAD NOT CLAIMED ANY DEDUCTIONS ON NOTIONAL SALES TAX EX EMPTION AS CAPITAL RECEIPTS FOR THE A.YRS 95-96 TO 2003-04. F ILING OF REVISED RETURN ON THE LAST DAY OF FINANCIAL YEAR 31.03.2005 IS ONLY AN INDICATION OF AFTERTHOUGHT ON THE PART OF THE ASSES SEE TO CLAIM SALES-TAX EXEMPTION AS CAPITAL SUBSIDY. IT IS TO B E NOTED THAT ANY CAPITAL SUBSIDY GRANTED BY THE GOVERNMENT WILL BE GRANTED AS ONE TIME TRANSACTION AND IT CANNOT BE IN THE NAT URE OF RECURRING INCENTIVES. THE VERY NATURE OF SUBSIDY U NDER SPECIAL 5 SCHEME OF MAHARASHTRA GOVERNMENT FOR YEAR TO YEAR B ASIS UPTO 10-15 YEARS INDICATE THE NATURE OF EXEMPTION AS REV ENUE RATHER THAN CAPITAL AS CLAIMED BY THE ASSESSEE. 3.1 THE ASESSEES CLAIM OF EXEMPTION OF SALES TAX L IABILITY IS AS PER REVISED RETURN OF INCOME U/S 139(5) OF THE A CT. AS PER THE PROVISIONS OF SEC. 139(5) THE ASSESSEE, HAVING FILE D A RETURN U/S 139(1) CAN FILE REVISED RETURN IF IT DISCOVERS ANY OMISSION OR ANY WRONG STATEMENT IN THE ORIGINAL RETURN OF INCOME WI THIN A PERIOD OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION OF THE ASSESSMENT WHICHEVER I S EARLIER. THE ASSESSEE HAS RIGHTLY FILED REVISED RETURN U/S 1 39(5) BY 31.03.2005 WHICH IS WITHIN THE PERIOD OF 1 YEAR FRO M THE END OF THE RELEVANT ASSESSMENT YEAR. HOWEVER, THERE IS NO INDICATION OF ANY OMISSION OR ANY WRONG STATEMENT IN THE ORIGI NAL RETURN OF INCOME CITED BY THE ASSESSEE. AS REGARDS THE CLAIM OF NOTIONAL SALES TAX LIABILITY AT THE TIME OF REVISED RETURN I T IS STATED THAT THE ASSESSEE HAD SAME FACTS AND CIRCUMSTANCES AT THE TI ME OF FILING OF ORIGINAL RETURN OF INCOME. THUS, THERE IS NO CH ANGE IN POSITION OF THE ASSESSEE AS PERTAINING TO ANY OMISSION OR WR ONG STATEMENT TILL THE TIME OF FILING OF REVISED RETURN . THEREFORE, THE QUESTION OF CLAIM OF SALES TAX INCENTIVE OF RS.4,69 ,70,108 AS PER REVISED RETURN U/S 139(5) IS LEGALLY NOT TENABLE. 3.2 THE NOTES ON ACCOUNT VIDE S. NO.2(III) OF SCHED ULE 17 STATES THAT REVENUE FROM SALE OF PRODUCTS IS RECOGN IZED ON DISPATCH OF GOODS TO CUSTOMERS AND SALES ARE NET OF REBATES AND SALES TAXES, WHEREVER APPLICABLE. FURTHER, EXHIBIT VII RELATING TO TAX AUDIT REPORT ATTACHED WITH THE RETURN OF INCOME CARRY NOTE SALES TAX COLLECTION AND PAYMENT ON PRODUCTS SOLD HAS NOT BEEN PASSED THROUGH THE PROFIT AND LOSS ACCOUNT. VIDE S.NO.21 OF FORM NO.3CB (AUDIT REPORT), IT IS STATED AS IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULA RLY FOLLOWED BY THE COMPANY SALES TAX RECOVERED FROM CU STOMERS FOR THE PAYMENT TO THE GOVERNMENT IS NOT ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT BUT DEBITED / CREDITED DIRECTLY TO SALES TAX PAYMENT ACCOUNT. 3.3 THESE DISCLOSURES IN THE TAX AUDIT REPORT STREN GTHEN OUR VIEW THAT THE SALES FIGURE SHOWN IN THE PROFIT AND LOSS ACCOUNT DO NOT INCLUDE ANY SALES TAX. AS PER ACCOUNTING PO LICY REGULARLY EMPLOYED BY THAT ASSESSEE COMPANY, THE NOTIONAL SAL ES TAX COLLECTIBLE ARE NOT PART OF THE PROFIT AND LOSS ACC OUNT AND THEREFORE, RS.4,69,70,108 PERTAINING TO NOTIONAL SA LES TAX CANNOT BE REDUCED FROM THE SALES FIGURE IN THE P & L ACCOU NT. 3.4 NOTWITHSTANDING THE DISCUSSION REGARDING THE AL LOWABILITY OF CLAIM OF THE ASSESSEE AS PER PROVISIONS OF SEC. 139(5), AND ACCOUNTING METHOD REGULARLY EMPLOYED, THE QUESTION OF 6 ALLOWABILITY OF SALES-TAX EXEMPTION GRANTED UNDER 1 993 SCHEME OF MAHARASHTRA GOVERNMENT IS ANALYSED IN DETAIL HER EUNDER - 3.5 IN SUPPORT OF CLAIM FOR SALES-TAX INCENTIVE S C APITAL RECEIPTS TO BE DEDUCTED FROM THE SALES FIGURE IN TH E P & L ACCOUNT, THE ASSESSEE HAS RELIED ON THE JUDGMENT OF ITAT, MUMBAI, SPECIAL BENCH IN THE CASE OF CIT V/S RELIAN CE INDUSTRIES LTD 88 ITD 273 (2004)(MUM SB). THIS JUD GMENT WAS WITH RESPECT TO ALLOWABILITY OF SALES-TAX INCENTIVE GRANTED UNDER 1979 SCHEME OF GOVERNMENT OF MAHARASHTRA. THE HON. ITAT ALLOWED THE ASSESSEES (RELIANCE INDUSTRIES LTD) PL EA THAT NOTIONAL SALES TAX LIABILITY FOR THE A.Y. 1986-87 I S CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. WHILE DELIVERING THE JUDGMENT THE HON.ITAT BENCH DISCUSSED AT LENGTH THE VARIOUS JUDG MENTS OF HIGH COURTS AS WELL AS SUPREME COURT ON THE SIMILAR ISSUE. IT IS PERTINENT HERE TO NOTE THAT THE ISSUE IN QUESTION F OR A.Y. 1984-85 AND 1985-86 FOR THE SAME ASSESSEE RELIANCE INDUSTRI ES LTD. WAS ALSO DECIDED BY THE ITAT IN ASSESSEES FAVOUR A ND DEPARTMENTS REFERENCE TO BOMBAY HIGH COURT ON THAT ISSUE IS STILL PENDING. IN VIEW OF THE ISSUE UNDER DISPUTE BEFORE THE BOMBAY HIGH COURT AS ALSO VARYING JUDGMENTS OF VARI OUS HIGH COURTS, THE ASSESSEES CONTENTION FOR RELIANCE ON T HE ABOVE JUDGMENT OF ITAT, SPECIAL BENCH CANNOT BE ACCEPTED. FURTHER, IT IS TO BE NOTED THAT HE ALLOWABILITY OF SALES TAX IN CENTIVES AS PER SPECIAL SCHEME OF GOVERNMENT OF MAHARASHTRA WAS CON SIDERED BY THE HON.ITAT IN THE CASE OF RELIANCE INDUSTRIES LTD. FOR A.Y. 1984-85 AND 1985-86 AND DECIDED IN FAVOUR OF THE AS SESSEE. LATER ON, THE SAME ISSUE WAS DEALT WITH IN THE CASE OF BAJAJ AUTO LTD. WHEREIN THE HON.BENCH OF THE ITAT, MUMBAI TOOK EXACTLY OPPOSITE VIEW AS TAKEN IN THE CASE OF THE RELIANCE INDUSTRIES ORDER FOR A.Y. 1985-86. THE CURRENT JUDGMENT OF RE LIANCE INDUSTRIES LTD. FOR A.Y. 1986-87 CITED BY THE ASSES SEE WAS DEALT WITH BY A LARGER BENCH (SPECIAL BENCH) OF ITAT WHER EIN AGAIN DIAMETRICALLY OPPOSITE VIEW COMPARED TO THE BAJAJ A UTO LTD. CASE WAS TAKEN. THE SPECIAL BENCH OF THE TRIBUNAL DISCU SSED IN DETAIL THE VARIOUS PRONOUNCEMENTS OF HIGH COURTS AS WELL A S SUPREME COURT ON THE RELATED ISSUE. ON ANALYSIS OF THE JUD GMENTS IS-A-VIS SCHEME OF THE MAHARASHTRA GOVERNMENT, THE TRIBUNAL CAME TO THE CONCLUSION THAT THE THRUST OF THE MAHARASHTRA S CHEME WAS THE INDUSTRIAL DEVELOPMENT OF BACKWARD DISTRICT AS WELL AS GENERATION OF EMPLOYMENT, THUS ESTABLISHING A DIREC T NEXUS WITH INVESTMENT IN FIXED CAPITAL ASSETS. IT WAS STATED THAT THE ENTITLEMENT OF INDUSTRIAL UNIT TO CLAIM ELIGIBILITY FOR THE INCENTIVE AROSE EVEN WHILE THE INDUSTRY WAS IN THE PROCESS OF BEING SET UP. ACCORDING TO THE TRIBUNAL, THE SCHEME WAS ORIE NTED TOWARDS AND WAS SUBSERVIENT TO INVESTMENT IN FIXED CAPITAL ASSETS. THE SALES TAX INCENTIVE WAS ENVISAGED ONLY AS AN ALTERN ATIVE TO THE CASH DISBURSEMENT AND BY ITS VERY NATURE WAS TO BE AVAILABLE ONLY AFTER PRODUCTION COMMENCED. THUS, IN EFFECT, IT WAS HELD BY THE TRIBUNAL THAT THE SUBSIDY IN THE FORM OF SALES TAX INCENTIVE 7 WAS NOT GIVEN TO THE ASSESSEE FOR ASSISTING IT IN C ARRYING OUT THE BUSINESS OPERATIONS. THE OBJECT OF THE SUBSIDY WAS TO ENCOURAGE THE SETTING UP OF INDUSTRIES IN THE BACKW ARD AREA. THE VARIOUS JUDGMENTS REFERRED TO BY THE TRIBUNAL I N THE DETAILED ANLAYSIS ARE - 1. SAHNDEY STEELS CASE THE SUPREME COURT IN SAHNEY STEEL AND PRESS WORKS L TD. V/S CIT (1997) 228 ITR 253 (SC) HAS DECIDED THAT SA LES-TAX SUBSIDY WILL BE TAXABLE PRIMARILY BECAUSE IT WAS TR EATED AS A SUPPLEMENTARY TRADE RECEIPT WHICH COULD BE FREELY U SED FOR BUSINESS AND IT CAN, THEREFORE, BE TREATED ONLY AS HELPING THE INDUSTRY TO RUN MORE PROFITABLY AND ENABLING IT TO COMPETE WITH OTHER ESTABLISHED INDUSTRIES. THE FACT THAT IT WAS AVAILABLE AFTER THE BUSINESS HAD BEEN SET UP ALSO INFLUENCED THE JU DGMENT, WHICH HAD, THEREFORE, CONSIDERED THAT THE PACKAGE O F INCENTIVES BY WAY OF REFUND OF SALES TAX OR REBATE ON ELECTRIC ITY OR WATER CHARGES HAS TO BE TREATED ONLY AS REVENUE RECEIPT L IABLE TO TAX. THE TRIBUNAL TOOK THE VIEWS THAT SINCE THE ASSESSE E WAS ELIGIBLE FOR THE INCENTIVE SAT THE STAGE OF SETTING UP OF INDUSTRIES, IT CANNOT BE SAID THAT THE SCHEME OF MAHARASHTRA GO VT. WAS FOR ASSISTING THE ASSESSEE TO CARRY OUT THE BUSINESS OP ERATIONS PROFITABLY AND THEREFORE THERE WAS DIRECT NEXUS OF INCENTIVE LINKED TO CAPITAL INVESTMENT. 2. THE JUDGMENT OF THE MADRAS HIGH COURT IN TAMIL N ADU SUGAR CORPORATION LTD. V/S CIT (2001) 165 CTR (MAD) 276 THE ASSESSEE, A SUGAR FACTORY OWNER, RECEIVED PURCHASE TAX SUBSIDY EQUIVALENT TO THE QUANTUM OF PURCHASE TAX, FROM THE STATE GOVERNMENT FOR A PERIOD OF 5 YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. IT RETURNED THE SUBSID Y AS BUSINESS INCOME FOR THE A.Y. 1986-87 AND 1987-88 BU T LATER FILED REVISION APPLICATIONS BEFORE THE CIT U/S 264 OF THE I.T. ACT CONTENDING THAT THE SUBSIDY SHOULD BE TREATED AS CA PITAL RECEIPT. THE APPLICATIONS WERE REJECTED BY THE CIT, AGAINST WHICH THE ASSESSEE MOVED THE MADRAS HIGH COURT BY WAY OF WRIT PETITIONS. THE MADRAS HIGH COURT HELD THAT A FAIR READING OF T HE GOVERNMENT ORDER SHOWED THAT THE SUBSIDY WAS GIVEN BY WAY OF ASSISTANCE TO THE SUGAR FACTORIES ON THE COMMENCEME NT OF PRODUCTION AND NOT FOR THE SETTING UP OF THE FACTOR IES AND IT WAS GIVEN ONLY TO TIDE OVER THE DIFFICULTIES THAT MIGHT BE EXPERIENCED BY THE MANAGEMENT IN THE ACTUAL RUNNING OF THE SUGA R FACTORIES. IT WAS FURTHER HELD THAT THOUGH THE AMOUNT OF SUBSI DY IS EQUIVALENT TO THE QUANTUM OF PURCHASE TAX, THE OBJE CT BEHIND THE GRANT OF THE SUBSIDY IS NOT TO SET UP A NEW SUGAR F ACTORY, BUT TO RUN THE FACTORY EFFICIENTLY. IN OTHER WORDS, THE S UBSIDY IS GIVEN SO THAT THE MANAGEMENT MAY NOT BE IN TROUBLE IN RUN NING THE FACTORIES IN THE INITIAL YEAR. IN THIS BACKGROUND OF THE FACTS, THE 8 MADRAS HIGH COURT APPLIED THE DECISION OF THE SUPRE ME COURT IN SAHNEY STEEL. IN DOING SO, THE HIGH COURT NOTED TH AT IN SAHNEY STEELS CASE, THE PAYMENTS WERE MADE DIRECTLY OR IN DIRECTLY NOT FOR THE SETTING UP OF THE INDUSTRIES, BUT WERE MADE ONLY AFTER THE PRODUCTION WAS COMMENCED. IT WAS THEREFORE HELD, A PPLYING THE RULING OF THE SUPREME COURT, THAT THE SUBSIDY RECEI VED BY THE ASSESSEE, WHICH WAS NOT FOR THE SETTING UP OF THE S UGAR FACTORY, IS A REVENUE RECEIPT. IN THE OTHER JUDGMENT, WHICH IS OF THE MADHYA PRADESH HIGH COURT IN CIT V/S S. KUMAR TYRE MANUFACTURING CO. (2003) 183 CTR (MP) 590, THE SUBS IDY WAS EXPRESSLY GIVEN TO MEET EXPENDITURE ON POWER. THE MADHYA PRADESH HIGH COURT HELD, FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA) AND IN CIT V/S RAJARA M MAIZE PRODUCTS (SUPRA) THAT SINCE THE SUBSIDY IS GIVEN FO R THE PURPOSE OF MEETING A PART OF THE EXPENDITURE ON POWER, IT W AS REVENUE RECEIPT IN THE ASSESSEES HANDS. IN BOTH THE CASES , THE OBJECT OF THE SUBSIDY WAS NOT TO ENCOURAGE THE SETTING UP OF FACTORIES OR FOR INDUSTRIALIZATION OF ANY PARTICULAR AREA OF THE STATE. THE OBJECT WAS TO ASSIST OR LEND A HELPING HAND TO THE CONCERNED ASSESSEE AFTER THEY COMMENCED PRODUCTION SO THAT TH EY TIDE OVER THE INITIAL DIFFICULTIES IN RUNNING THE FACTOR IES. THE SUBSIDY IN BOTH THE CASES WAS AN OPERATIONAL SUBSIDY. THE FAC TS IN THESE TWO CASES BEING DIFFERENT FROM THE FACTS OF THE PRE SENT CASE, THEY ARE NOT APPLICABLE. 3.6 WITH DUE RESPECTS TO THE FINDINGS GIVEN BY THE TRIBUNAL IN THE CASE OF RELIANCE INDUSTRIES LTD. IT IS STATED A S UNDER - A) EVENTHOUGH THE ASSESSEE IS GRANTED THE CERTIFICA TE OF ENTITLEMENT AND ELIGIBILITY CERTIFICATE FOR SALES T AX EXEMPTION AT THE STAGE OF SETTING UP OF THE INDUSTRIES, THE ASSE SSEES ACTUAL CLAIM IS BASED ON PURCHASES OF GOODS FOR MANUFACTUR E AND SALES OF THE GOODS MANUFACTURED AS LAID OUT IN THE TERMS AND CONDITIONS OF CERTIFICATE OF ENTITLEMENT WHICH IS A S UNDER - I) SALES OF GOODS MANUFACTURED AT THE SAID ELIGIBL E UNIT BY THE HOLDER OF THIS CERTIFICATE SHALL BE FRE E FROM WHOLE OF TAX IF IT INCORPORATES THE FOLLOWING DECLARATION IN ADDITION TO CERTIFICATE UNDER SECTION 12A OF THE ACT IN THE SAL ES BILL OR EACH MEMORANDUM ISSUED BY HIM, IN RESPECT OF THE SALES, VIZ THIS SALES IS EXEMPT FROM PAYMENT OF SALES TAX UND ER THE PROVISIONS OF ENTRY NO.E-3 OF THE SCHEDULE APPENDED TO THE GOVERNMENT NOTIFICATION, FINANCE DEPARTMENT, NO.STA - 1095/37/TAXATION-2, DATED 22-09-1995, AND THE BUYER PURCHASING THESE GOODS AND ANY SUBSEQUENT BUYER PUR CHASING THESE GOODS 9 A) SHALL NOT BE ENTITLED TO CLAIM DRAWBACK, SET OFF OR REFUND UNDER ANY PROVISIONS OF THE ACT OR THE RULES FRAMED THEREUNDER, IN RESPECT OF THE PURCHASES OF THESE GOODS; B) SHALL NOT GIVE ANY CERTIFICATE IN FORM 31 OR 31A UNDER THE BST RULES, 1959 TO ANY SUBSEQUENT PURCHASER OF THES E GOODS. II) THE HOLDER OF THIS CERTIFICATE SHALL BE ENTITLE D TO PURCHASE GOODS FREE OF TAX ON HIS FURNISHING TO THE REGISTERED DEALER A DECLARATION IN FORM-BC, BEARING THE SEAL A ND SIGNATURE OF THE SALES TAX OFFICER, HAVING JURISDICTION OVER HIS ELIGIBLE UNITS DECLARING INTER ALIA THAT THE GOODS ARE REQUI RED FOR USE IN THE MANUFACTURE OF GOODS AT THE SAID ELIGIBLE UNIT FOR SALE WITHIN THE STATE OR IN THE COURSE OF INTER-STATE TRADE OR COMMERCE OR IN THE COURSE OF EXPORT OUT OF THE TERRITORY OF INDIA OR IN THE PACKING OF GOODS SO MANUFACTURED. 3.7 THE ABOVE CONDITIONS CLEARLY INDICATE THAT THE SALES TAX EXEMPTIONS UNDER THE SCHEME IS AVAILABLE TO THE ASS ESSEE ONLY ON THE SALES AND PURCHASES PERTAINING TO MANUFACTUR E OF GOODS OF THE ELIGIBLE UNIT. THUS, THE FACTS OF THIS CASE IS SQUARELY COVERED BY THE RATIO LAID DOWN IN THE CASE OF SAHNE Y STEELS BY THE SUPREME COURT. HENCE THE TRIBUNALS FINDINGS I N NOT IN ACCORDANCE WIT5H THE RATIO LAID DOWN BY THE SUPREME COURT. HENCE THE TRIBUNALS FINDINGS IN NOT IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE SUPREME COURT ON THE ISSUE. 3.8 THE ASSESSEE HAD ALSO CITED THE JUDGMENT OF CAL CUTTA HIGH COURT IN THE CASE OF CIT V/S BALRAMPUR CINNI M ILLS LTD 91999) 238 ITR 445. IN THIS CASE, THE HIGH COURT E NDORSED THE VIEW THAT THE ASSESSEE HAD TO PAY BACK THE LOAN TAK EN FOR THE PURPOSES OF EXPANSION UNDER THE SCHEME AND THAT THE SCHEME ITSELF WAS CLEARLY INTENDED TO COMPENSATE FOR THE S TEEP RISE IN THE COST OF PLANT AND MACHINERY FOR SUGAR PROJECTS AND TO REMOVE THE HARD SHIPS FOR ESTABLISHMENT OF NEW SUGAR FACTO RIES. THE FACTS IN THIS CASE ARE NOT APPLICABLE TO ASSESSEES CASE WITH RESPECT TO THE SCHEME ITSELF. 3.9 AFTER DISCUSSING THE JUDICIAL PRONOUNCEMENTS, I T WOULD NOT BE OUT OF PLACE TO ANALYSE THE ACTUAL PROVISIONS OF THE SPECIAL PACKAGE INCENIVE SCHEME, 1993 OF GOVERNMENT OF MAHA RASHTRA SPECIAL PACKAGE SCHEME OF 1993 OF GOVERNMENT OF MAHARASHTRA CLEARLY LAYS DOWN THE NATURE OF INCENTI VE SUNDER THE SCHEME. PARA 5 OF THE 1993 SCHEME STATES THE N ATURE OF INCENTIVES AS - I) SALES TAX INCENTIVES BY WAY OF EXEMPTION / DEFER RAL / INTEREST FREE UNSECURED LOAN. 10 II) SPECIAL CAPITAL INCENTIVE FOR SSI UNITS. III) REFUND OF OCTROI / ENTRY TAX (IN LIEU OF OCTRO I) IV) REFUND OF ELECTRICITY DUTY. V) CONCESSION IN THE CAPITAL COST OF POWER SUPPLY; AND VI) CONTRIBUTION TOWARDS COST OF FEASIBILITY STUDY PARA 5.1 (I)(A) OF THE SCHEME GIVES THE DETAILS OF SALES TAX INCENTIVE BY WAY OF EXEMPTION. PARA 51(I)(B) OF THE SCHEME GIVES THE DETAILS OF SA LES TAX INCENTIVE BY DEFERRAL PARA 5.1(I)(C) OF THE SCHEME GIVES THE DETAILS OF S ALES TAX INCENTIVE BY WAY OF INTEREST FREE UNSECURED LOANS. PARA 5.1(II) OF THE SCHEME REFERS TO QUANTUM OF SAL ES TAX INCENTIVES. ON GOING THROUGH THE DETAILS OF PARA 5 .1(I)(B) AND 5.1(I)(C) RELATING TO SALES TAX INCENTIVES BY WAY O F DEFERRAL AND BY WAY OF INTEREST FREE UNSECURED LOANS, THE ELIGIB LE UNIT SHALL HAVE TO REPAY THE SALES TAX LIABILITY AFTER 10 YEAR S IN ACCORDANCE WITH THE REPAYMENT SCHEDULE AS PER PARA 5.1(IV) OF THE SCHEME. THIS CLEARLY INDICATE THAT THE LEGISLATURE HAD NEVE R INTENDED THAT THE SALES TAX INCENTIVES BY WAY OF DEFERRAL AND BY WAY OF INTEREST FREE UNSECURED LOAN. UNDER SALES TAX INCENTIVE BY WAY OF DEFERRAL AND BY WAY OF INTEREST FREE UNSECURED LOAN S THE ASSESSEE HAS FUNDS AVAILABLE TO THE EXTENT OF SALES TAX LIABILITY WHICH WILL BE REPAID AT THE END OF 10 YEARS. SUCH REPAYMENT WILL ULTIMATELY BE CLAIMED FROM THE P & L ACCOUNT AT THE TIME OF PAYMENT AS PER SEC.43B OF THE I.T. ACT. THUS, MERE LY BECAUSE THE SALES TAX INCENTIVE BY WAY OF EXEMPTION WAS NOT PAYABLE AT ALL, CANNOT CHANGE ITS COLOUR FROM REVENUE RECEIPT TO CAPITAL RECEIPT. FURTHER, PARA 5.1(II) OF THE SCHEME GIVES THE DETAILS OF QUANTUM OF SALES TAX INCENTIVE WHICH IS TO BE CALCU LATED AS PERCENTAGE OF FIXED CAPITAL INVESTMENT DEPENDING ON THE CATEGORY OF AREA IN WHICH THE ELIGIBLE UNIT IS BEIN G SET UP. THE DETAILS OF WORKING OF QUANTUM FOR SALES TAX INCENTI VE CLEARLY INDICATE THAT THE PERCENTAGE TO FIXED CAPITAL INVES TMENT METHOD HAS BEEN TAKEN ONLY AS A MEASURE OF MAXIMUM SALES-T AX INCENTIVE AVAILABLE TO THE ELIGIBLE UNIT DURING THE PERIOD OF VALIDITY OF CERTIFICATE OF ENTITLEMENT. 3.10 THE ABOVE ANALYSIS OF THE DETAILS OF PACKAGE S CHEME OF INCENTIVE, 1993 CLEARLY INDICATE THAT THE SALES TAX INCENTIVE WERE NEVER INTENDED TO BE IN THE NATURE OF CAPITAL INCEN TIVE. THUS, THE ASSESSEES CLAIM OF EXEMPTION OF NOTIONAL SALES TAX LIABILITY TO 11 THE EXTENT OF RS.4,69,70,108 CANNOT BE ALLOWED AND IS ADDED BACK TO THE TOTAL INCOME. 6. THEREAFTER, THE FIRST APPELLATE AUTHORITY UPHELD THE REJECTION OF THE CLAIM OF THE ASSESSEE THAT SALES-TAX INCENTIVE SHOULD BE EXCLUDED FROM ITS INCOME AS THE SAME IS A CAPITAL RECEIPT. THE GROUND OF REJ ECTION FOR BREVITY CAN BE SUMMARIZED AS FOLLOWS : (A) NO REVISED RETURN CAN BE FILED BY THE ASSESSEE UNLESS THERE IS AN OMISSION OR A WRONG STATEMENT IN THE ORIGINAL RETURN OF INCO ME FILED BY THE ASSESSEE AND AS THERE IS NO OMISSION OR WRONG STATEMENT IN T HE ORIGINAL RETURN OF INCOME FILED, THOUGH THE REVISED RETURN OF INCOME W AS FILED WITHIN A PERIOD OF ONE YEAR AND WAS THUS WELL WITHIN TIME, THE REVISED RETURN IS NOT LEGALLY TENABLE; (B) THAT IN THE TAX AUDIT REPORT ATTACHED WITH THE RETURN OF INCOME, THE TAX AUDITOR OBSERVED THAT SALES-TAX COLLECTION AND PAYM ENT ON PRODUCTS SOLD HAS NOT BEEN PASSED ON THE PROFIT & LOSS ACCOUNT AND TH AT AT SERIAL NO.21, THE FOLLOWING OBSERVATION IS MADE : IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULA RLY FOLLOWED BY THE COMPANY SALES TAX RECOVERED FROM CU STOMERS FOR THE PAYMENT TO THE GOVERNMENT IS NOT ROUTED THROUGH THE PROFIT AND LOSS ACCOUNT BUT DEBITED / CREDITED DIRECTLY TO SALES TAX PAYMENT ACCOUNT. AND THAT THESE OBSERVATIONS CLEARLY SHOW THAT THE S ALES FIGURES SHOWN IN THE P & L ACCOUNT DO NOT INCLUDE ANY SALES; AND (C) THAT THE DECISION OF THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) IS DIS TINGUISHABLE AND IS NOT APPLICABLE TO THE FACTS O THE CASE AND ALSO THAT TH E RATIO LAID DOWN BY THE SPECIAL BENCH IN THIS CASE IS AGAINST THE LAW LAID DOWN BY THE HONBLE HIGH COURT. ACCORDINGLY THE FIRST APPELLATE AUTHORITY REJECTED THE CLAIM OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE IS IN APPEAL. 12 7. SHRI SE DASTUR, THE LEARNED SENIOR ADVOCATE SUBM ITTED THAT THE ASSESSEE HAD ORIGINALLY FILED ITS RETURN OF INCOME ON 29-11-2003 AND THE DECISION OF THE SPECIAL OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) THOUGH PRONOUNC ED ON 23-10-2003 WAS PUBLISHED AT A LATER DATE AND WAS AVAILABLE TO THE PUBLIC AFTER 29-11-2003. ON COMING TO KNOW OF THIS SPECIAL BENCH DECISION, THE ASSESSEE FILED A REVISED RETURN WELL WITHIN THE TIME PERMITTED BY THE LAW, W HEREIN A CLAIM HAS BEEN MADE THAT SALES-TAX INCENTIVE RECEIVED IS A CAPITAL RECEIPT AND HENCE NOT A REVENUE RECEIPT. HE FURTHER SUBMITTED THAT FOR ALL THE EARLIER YEARS, WHEREVER POSSIBLE, WHEREVER THE MATTER WAS AT DIFFERENT STAG ES OF APPELLATE PROCEEDINGS, THE ASSESSEE HAD RAISED ADDITIONAL GRO UNDS OF APPEAL AND THAT IN FACT THE TRIBUNAL FOR THE ASSESSMENT YEAR 2000-0 1 IN ITA NO.1968/MUM/2000 J BENCH ORDER DATED 27 TH OCTOBER, 2008 HAD ADMITTED THIS ADDITIONAL GROUND. REFERRING TO PAGE 40 OF TH E CIT(A)S ORDER, THE LEARNED COUNSEL SUBMITTED THAT FIRST APPELLATE AUTH ORITY HAS TOTALLY MISDIRECTED HIMSELF ON FACTS BY OBSERVING THAT THE ASSESSEE HAD BROUGHT SALES-TAX INCENTIVE BY WAY OF INTEREST FREE UNSECURED LOAN AN D IT HAD TO REPAY THE SALES- TAX LIABILITY AFTER 10 YEARS AS PER THE REPAYMENT S CHEDULE. HE POINTED OUT THAT NO SUCH INTEREST FREE UNSECURED LOAN WAS GIVEN IN T HE SALES-TAX INCENTIVE SCHEME OF THE GOVERNMENT. HE SUBMITTED THAT THE CL AIM WAS A PERFECT LEGAL CLAIM AND THAT THE ISSUE IS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB); BAJAJ AUTO LTD VS DCIT ITA NO.4660/MUM/1996 B BENCH ORDER DATED 12 TH MAY, 2006 AND THE DECISION IN THE CASE OF ZEENAT FIBRES VS ITO 2009 TIOL-468-MUM. THE LEARNED COUNSEL ALSO DREW REFERENCE TO THE DECISION OF THE APEX COU RT IN THE CASE OF PONNI SUGARS & CHEMICALS LTD 306 ITR 392 (SC) WHEREIN IT WAS HELD THAT THE MODALITIES OR THE SOURCE OF FUNDS THROUGH OR FROM WHICH SUBSIDY IS GIVEN SHALL NOT BE A DECISIVE FACTOR IN DETERMINING WHETHER THE SUBSIDY IS REVENUE OR CAPITAL IN NATURE. RATHER, THE PURPOSE OF THE INCE NTIVE HAS TO BE SEEN. HE FILED A COMPARATIVE CHART AND THE SALIENT FEATURES OF THE SALES-TAX INCENTIVE SCHEME OF 1979 WHICH WAS DISCUSSED IN THE CASE OF C IT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) AND THE SALIENT FEATURES OF THE 1993 13 SCHEME UNDER WHICH THE ASSESSEE HAS GOT THE INCENTI VE AND TRIED TO DEMONSTRATE THAT THEY ARE PARI MATERIA AND THAT THE SAME PROPOSITIONS LAID DOWN BY THE SPECIAL BENCH HAVE TO BE APPLICABLE IN THIS CASE. HE SPECIFICALLY POINTED OUT THAT THE G BENCH OF THE TRIBUNAL IN T HE CASE OF ZENITH FIBRES LTD (SUPRA) HAS TAKEN THE SAME VIEW. THE LEARNED COUNS EL PRAYED FOR RELIEF. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE, SHRI HE MANT J LAL, ON THE OTHER HAND, STRONGLY OPPOSED THE CONTENTIONS OF SHR I SE DASTUR AND SUBMITTED THAT THE FACTS OF THIS CASE ARE DIFFERENT AND IT CA NNOT BE SAID THAT THE SAME IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) . HE SUBMITTED THAT IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 2 73 (MUM)(SB) THE BENCH WAS CONSIDERING THE 1979 INCENTIVE SCHEME AND WHERE AS THE PRESENT INCENTIVE SCHEME UNDER CONSIDERATION IS THAT OF 199 3, THE LD DR SUBMITTED ARGUMENTS WHICH IN EFFECT DISPUTES ALL THE PROPOSIT IONS AND CONCLUSIONS DRAWN BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB). SUFFICE TO SAY THAT TH ESE ARGUMENTS NEED NOT BE REPEATED NOR BE ANSWERED SEPARATELY FOR THE REASON THAT THEY STAND ANSWERED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNA L IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) AND WE ARE BOUND TO FOLLOW THE DECISION AND CONCLUSIONS THEREIN. THE ARGUMENT THAT THE DECISION OF THE SPECIAL BENCH IS PER INCURIUM IS DEVOID OF MERIT SHRI LAL FURTHER ARGUED THAT THE ASSESSEE HAD NOT COLLECTED ANY SALES-TAX AND TH US THE QUESTION OF SALES- TAX INCENTIVE BEING IDENTIFIED AND TREATING THE SAM E AS A CAPITAL SUBSIDY DOES NOT ARISE. HE ALSO DREW THE ATTENTION OF THE BENCH TO PAGE 45 OF THE CIT(A) AND SUBMITTED THAT SALES-TAX COLLECTION AND PAYMENT OF PRODUCTS SOLD HAS NOT BEEN PASSED THROUGH THE P & L ACCOUNT AND IN SUCH A SITUATION THE ASSESSEE IS WRONGLY CLAIMING DEDUCTION OF SALES-TAX ON NOTIO NAL BASIS. HE DREW THE ATTENTION OF THE BENCH TO THE NOTES GIVEN BY THE AU DITORS IN THEIR TAX AUDIT REPORT AND SUBMITTED THAT THE ARGUMENT OF THE ASSES SEE THAT THE SALES-TAX IS EMBEDDED IN THE SALE PRICE RECOVERED FROM THE CUSTO MERS, IS DEVOID OF MERIT AND THAT THE FIRST APPELLATE AUTHORITY HAS RIGHTLY UPHELD THE ORDER OF THE ASSESSING OFFICER. 14 9. IN REPLY, SHRI SE DASTUR SUBMITTED THAT VERY SAM E ISSUE I.E. THE ASSESSEE NOT SEPARATELY CHARGING SALES-TAX IN ITS I NVOICE WAS CONSIDERED BY THE SPECIAL BENCH OF THE TRIBUNAL AND THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE. HE POINTED OUT THAT THE ASSESSEE HAD FIL ED ITS SALES-TAX RETURNS AND THE QUANTUM OF SALES-TAX LIABILITY HAS BEEN DET ERMINED BY THE SALES-TAX AUTHORITIES AND THE ASSESSMENT ORDER PASSED. CHARG ING OF AN ALL INCLUSIVE PRICE AND NOT SHOWING THE BREAK UP IN THE INVOICE D OES NOT MEAN THAT NO SALES-TAX HAS BEEN CHARGED OR COLLECTED FROM THE CU STOMERS. HE POINTED OUT THAT THE SALES-TAX ACT PROVIDES FOR SUCH A SITUATI ON AND EVEN GIVES A FORMULA BY WHICH THE SALES-TAX COMPONENT OF THE COMPOSITE S ALE BILL RAISED CAN BE QUANTIFIED. REFERRING TO THE NOTES GIVEN BY THE AU DITORS HE SUBMITTED THAT IT IS ONLY IN THE CASE OF SALES-TAX RECOVERED SEPARATELY THAT THE POLICY REQUIRES SEPARATE DISCLOSURE BY WAY OF SALES-TAX PAYABLE. HE MADE A FINE DISTINCTION THAT THIS NOTE DOES NOT APPLY TO COMPOSITE PRICE CH ARGED TO THE CUSTOMER. HE VEHEMENTLY CONTENDS THAT IT IS UNIMAGINABLE THAT SA LES-TAX COLLECTION AND SALES-TAX LIABILITY IS NOT PART OF THE P&L ACCOUNT. IT WAS ONLY A QUESTION OF SEPARATE DISCLOSURE BEING MADE FOR THE PURPOSE OF C ONVENIENCE AND IT IS WRONG TO STATE THAT THE RECEIPT AND PAYMENT OF SALE S-TAX DO NOT FORM PART OF THE PROFIT DETERMINATION MECHANISM OF THE ASSESSEE COMPANY. THE LEARNED COUNSEL SPECIFICALLY REFERRED TO PARAGRAPH 7 ON PAG E 282 ON THE JUDGMENT OF THE SPECIAL BENCH IN THE CASE OF CIT VS RELIANCE IN DUSTRIES LTD 88 ITD 273 (MUM)(SB). 10. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDER ATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD AND THE ORDERS OF AUTHORITIES BELOW AS WELL AS THE CASE LAW CITED WE HOLD AS FOLLOWS: 10.1 THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) WAS CONCERNED W ITH THE SALES-TAX INCENTIVE SCHEME OF 1979. THE PRESENT SCHEME IS TH E NEW PACKAGE SCHEME OF INCENTIVES 1993 OF GOVERNMENT OF MAHARASHTRA. T HE ASSESSEE FURNISHED THE FOLLOWING COMPARATIVE CHART OF BOTH THE SCHEMES WHICH IS EXTRACTED FOR READY REFERENCE: 15 DCIT VS RELIANCE INDUSTRIES LTD EVEREST INDUSTRIES LTD S DCIT SALIENT FEATURES OF THE 1979 SCHEME AS DISCUSSED IN THE ORDER SALIENT FEATURES OF THE 1993 SCHEME THE SALIENT FEATURES OF THE MAHARASHTRA SCHEME ARE: I) THE AIM WAS TO DISPERSE THE INDUSTRIES OUTSIDE THE BOMBAY-THANE-PUNE BELT AND TO HASTEN THE PACE OF INDUSTRIALIZATION IN THE DEVELOPING REGIONS OF THE STATE. PAGE 298 THE AIM WAS TO INTENSIFY AND ACCELERATE THE PROCESS OF DISPERSAL OF INDUSTRIES FROM THE DEVELOPED AREAS AND FOR DEVELOPMENT OF THE UNDERDEVELOPED REGIONS OF THE STATE PARTICULARLY THOSE FARTHER AWAY FROM THE BOMBAY-THANE- PUNE BELT. PG 52 OPENI NG PARA II) THE INCENTIVE IS BASED ON THE AMOUNT OF INVESTMENT IN FIXED ASSETS PAGE 298 THE INCENTIVE IS BASED ON THE BASED ON PERCENTAGE OF FIXED CAPITAL INVESTMENT PAGE 63 PARA 5.1 (II) III) THE QUANTUM OF INCENTIVE DEPENDED ON THE AREA IN WHICH THE INDUSTRY WAS LOCATED PAGE 298 THE QUANTUM DEPENDS ON THE AREA IN WHICH UNIT IS LOCATED PAGE 62 PARA 5.1 IV) THE INCENTIVE IS IN THE FORM OF SALES TAX EXEMPTION OR INTEREST FREE UNSECURED LOAN PAGE 298 THE INCENTIVE UNDER THE 1993 SCHEME WILL BE ADMISSIBLE TO A NEW UNIT / PIONEER UNIT / PRESTIGIOUS UNIT AND WILL BE IN THE NATURE OF SALES TAX INCENTIVE BY WAY OF EXEMPTION / DEFERRAL / INTEREST FREE UNSECURED LOAN. PAGE 62 PARA 5 V) THE PERIOD OF ELIGIBILITY VARIED DEPENDING ON WHETHER THE UNIT WAS NEW OR EXISTING OR A PIONEER UNIT OR A RESOURCE BASED UNIT. THE PERIOD OF ENTITLEMENT WAS ALSO DIRECTLY CONNECTED TO THE GROSS FIXED CAPITAL INVESTMENT. PAGE 298 THE PERIOD OF ELIGIBILITY SHALL BE COMPUTED FROM THE DATE SPECIFIED IN THE ELIGIBILITY CERTIFICATE IN RESPECT OF ELIGIBLE UNIT WILL BE DETERMINED WHETHER THE UNIT IS PIONEER OR NON- PIONEER. THE PERIOD OF ENTITLEMENT WAS ALSO DIRECTLY CONNECTED TO THE % OF FIXED CAPITAL INVESTMENT PG 59 PARA 3.11 16 VI) AN INTENDING ENTERPRENUER COULD APPLY FOR INCENTIVE IMMEDIATELY AFTER TAKING THE INITIAL EFFECTIVE STEPS. THE SICOM COULD PROCESS THE APPLICATION WITHOUT WAITING FOR THE COMPLETION OF THE SETTING UP OF THE UNIT AND COULD ISSUE A LETTER OF INTENT / PROVISIONAL ELIGIBILITY CERTIFICATE ON COMPLETION OF THE FINAL EFFECTIVE STEPS. PAGE 298 AN ELIGIBLE UNIT CAN APPLY FOR INCENTIVE AFTER IT HAS TAKEN ALL THE INITIAL EFFECTIVE STEPS (PG 5, PARA 3.3) PG 61 PARA 4.1 10.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS NO T ABLE TO POINT OUT ANY DEFECT IN THE ANALYSIS PROVIDED BY SHRI DASTUR. A PERUSAL OF THIS COMPARATIVE ANALYSIS LEADS US TO A CONCLUSION THAT BOTH THE SCH EMES ARE SIMILAR AND IDENTICAL. THE FIRST APPELLATE AUTHORITY HAS CLEARL Y MISDIRECTED HIMSELF ON THE FACTS AND HAS COME TO A FACTUALLY INCORRECT CONCLUS ION THAT THE ASSESSEE HAS BROUGHT SALES-TAX INCENTIVE BY WAY OF INTEREST FREE UNSECURED LOAN AND IT HAD TO REPAY THE SALES-TAX LIABILITY AFTER 10 YEARS AS PER THE REPAYMENT SCHEDULE. 10.3 COMING TO THE CONTENTION OF THE REVENUE THAT T HE ASSESSEE COULD NOT MAKE THE CLAIM IN THE REVISED RETURN, WE ARE OF THE CONSIDERED OPINION THAT SUCH ARGUMENT IS DEVOID OF MERIT. THE REVISED RETU RN WAS ADMITTEDLY FILED WITHIN THE TIME AVAILABLE UNDER THE STATUTE AND A L EGAL CLAIM HAS BEEN MADE BY THE ASSESSEE IN THIS REVISED RETURN OF INCOME. IN FACT, THIS BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2001-02 HAD ADMITTED A SIMILAR LEGAL GROUND AT THE APPELLATE ST AGE AND REMITTED THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJU DICATION. 10.4 COMING TO THE MERITS OF THE CASE, THE G BENC H OF THE TRIBUNAL IN THE CASE OF M/S ZENITH FIBRES LTD (SUPRA) HAD CONSIDERE D THE INCENTIVE SCHEME OF THE MAHARASHTRA GOVERNMENT OF 1993 AND CAME TO A CO NCLUSION THAT THIS SCHEME IS IDENTICAL TO THE INCENTIVE SCHEME OF 1979 CONSIDERED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANC E INDUSTRIES LTD 88 ITD 273 (MUM)(SB) AND CONCLUDED THAT THE RECEIPT IN QUESTIO N IS CAPITAL RECEIPT. 17 10.5 AT THE TIME OF HEARING, IT WAS BROUGHT TO OUR NOTIC E THAT THIS TRIBUNAL IN THE CASE OF M/S. STERLITE OPTICAL TECHNOLOGIES LTD. IN ITA NO. 7136/MUM/04 HAD CONSIDERED THE BENEFIT OF A RISING OUT OF EARLIER REPAYMENT OF LOAN DEFERRED UNDER THE VERY S AME SCHEME, WHICH WAS REPAID AND THE TRIBUNAL HAS HELD AS FOLLOWS :- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CONSI DERED THEM CAREFULLY. WE HAVE ALSO PERUSED THE ORDERS OF AUTHO RITIES BELOW. AFTER CONSIDERING THE SUBMISSIONS AND CASE LAWS RELIED UP ON BY BOTH THE PARTIES, WE FIND THAT THE LEARNED CIT(A) HAS DISCUS SED THE ISSUE AT A GREAT LENGTH AND THEN CAME TO THE CONCLUSION THAT P ROVISIONS OF SECTION 41(1) ARE NOT APPLICABLE ON THE FACTS OF THE PRESEN T CASE AS THE BENEFIT RECEIVED BY THE ASSESSEE IS ON ACCOUNT OF CAPITAL R ECEIPT. THE FINDINGS OF LEARNED CIT(A) ARE GIVEN IN PAGE NO. 8 TO 10 OF HIS ORDER. WE NOTED THAT THE SALES TAX BENEFIT AS PER MAHARASH TRA SCHEME WERE ORIENTED TOWARDS THE FIXED CAPITAL INVESTMENT. THE QUANTUM OF INCENTIVE BENEFIT WAS TO BE DETERMINED WITH REFEREN CE TO THE GROSS FIXED CAPITAL INVESTMENT OF THE ELIGIBLE UNIT DURING THE PERIOD OF ELIGIBILITY. THE SAID QUANTUM OF INCENTIVE BENEFIT WAS VARIABLE AND THE QUANTUM OF DEFERRAL BENEFIT WAS DIRECTLY RELATED TO CUMULATIVE GROSS FIXED CAPITAL INVESTMENTS MADE BY THE ELIGIBLE UNIT. AS AND WHEN FURTHER FRESH CAPITAL INVESTMENT WAS MADE THE QUANTUM OF SALES TAX INCENT IVE WAS FURTHER INCREASED DURING THE PERIOD OF ELIGIBILITY. THE ELI GIBLE INDUSTRIAL UNITS WERE DIVIDED INTO B, C & D CATEGORY AND THE ENTITLE MENT OF EVERY UNIT FOR INCENTIVE WAS DIRECTLY CONNECTED TO THE GROSS F IXED CAPITAL INVESTMENT. THE PERIOD OF ENTITLEMENT OF BENEFIT CO ULD BE CURTAILED IF THE GROSS FIXED INVESTMENT FELL SHORT OF SALES TAX LIAB ILITY. FOR EARNING ELIGIBILITY FOR THE INCENTIVE BENEFIT THE INDUSTRIA L UNIT WAS SUPPOSED TO TAKE SOME INITIAL AND FINAL STEPS AND ENTREPRENEUR COULD APPLY FOR INCENTIVE BENEFIT AFTER HAVING TAKEN POSSESSION OF THE LAND AND HAVING MADE AN APPLICATION OF DGTD FOR REGISTRATION. SUCH APPLICATION WAS TO BE PROCESSED BY THE IMPLEMENTING AGENCY WITHOUT WAI TING FOR THE COMPLETION OF THE SETTING UP OF THE INDUSTRIAL UNIT AND THE PROVISIONAL ELIGIBILITY CERTIFICATE SHOULD BE ISSUED TO THE APP ELLANT ON ACQUISITION OF ALL CAST 10% OF THE TOTAL FIXED ASSETS ENVISAGED IN THE PROJECT AND INCURRENCE OF EXPENDITURE TO THE EXTENT OF 25% OF T HE CAPITAL COST OF PROJECT. THOUGH THE ENTREPRENEUR COULD HAVE ENTERED INTO NEGOTIATION WITH THE GOVERNMENT EVEN BEFORE SETTING UP OF THE I NDUSTRY THE LEVEL OF ENTITLEMENT OF THE BENEFIT WOULD GRADUALLY INCREASE AS AND WHEN FURTHER INVESTMENT IN THE FIXED CAPITAL ASSET WAS MADE. THE VERY OBJECT OF THE INCENTIVE SCHEME WAS TO PROM OTE INDUSTRIAL DEVELOPMENT IN THE BACKWARD REGIONS OF T HE STATE AND TO GENERATE EMPLOYMENT OPPORTUNITY IN SUCH REGIONS. TH E ENTREPRENEUR 18 SETTING UP INDUSTRIES IN THE MOST BACKWARD AREAS WE RE ENTITLED TO MORE SALES TAX BENEFIT AS COMPARED TO THE ENTREPRENEUR W HO HAVE SET UP AN INDUSTRY IN THE DEVELOPED OR SEMI-DEVELOPED REGIONS OF THE STATE. THUS, THE SCHEME WAS PRIMARILY GEARED TO ALLURE AND ATTRA CT THE PERSPECTIVE INVESTOR FOR MAKING CAPITAL INVESTMENT IN THE BACKW ARD REGIONS OF MAHARASHTRA STATE AND WAS INTENDED FOR HELPING THE ENTREPRENEUR IN SETTING UP THE ELIGIBLE UNIT. THOUGH THE SALES TAX INCENTIVE COULD HAVE BEEN REALIZED ONLY UPON THE COMMENCEMENT OF THE PRO DUCTION, BUT THE FIXED CAPITAL INVESTMENTS ENTITLED THE APPELLANT TO THE SALES TAX INCENTIVE. THUS, THE MAHARASHTRA GOVERNMENT INSTEAD OF GIVING OUT RIGHTS SUBSIDY FOR SETTING UP THE INDUSTRY IN THE B ACKWARD REGION HAD PERMITTED THE INDUSTRIAL UNIT TO REALIZE THE SAID S UBSIDY BY WAY OF SALES TAX COLLECTION WHICH WERE EITHER EXEMPTED OR DEFERR ED AT THE OPTION OF THE INDUSTRIAL UNIT. THE ASSESSING OFFICER WHILE DISALLOWING THE CLAIM O F THE ASSESSEE BY HOLDING THAT THE BENEFITS RECEIVED BY T HE ASSESSEE WERE ON ACCOUNT OF REVENUE. IN SUPPORT OF HIS CONTENTION , RELIANCE HAS BEEN PLACED BY THE ASSESSING OFFICER ON THE DECISION OF THE APEX COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS (SUPRA). W E NOTED THAT THE DECISION OF THE APEX COURT IS IN FAVOUR OF THE ASSE SSEE BUT NOT IN FAVOUR OF THE DEPARTMENT. THE APEX COURT IN THE CASE OF SA HNEY STEEL AND PRESS WORKS (SUPRA) HAS OBSERVED THAT THE OBJECT WI TH WHICH THE SUBSIDY WAS GRANTED WOULD DETERMINE ITS NATURE A CA PITAL OR REVENUE RECEIPT. THE OBSERVATIONS OF THE HON'BLE SUPREME CO URT ARE AS UNDER :- IT IS NOT THE SOURCE FROM WHICH THE AMOUNT IS PAID TO THE ASSESSEE, WHICH IS DETERMINATIVE OF THE QUESTION WH ETHER THE SUBSIDIARY PAYMENTS ARE OF THE REVENUE OR CAPITAL N ATURE. THE FIRST PROPOSITION STATED BY VISCOUNT SIMON IN OSTIM ES CASE (1946) 14 ITR (SUPPL) 45 (HL) IS THAT IF PAYMENTS I N THE NATURE 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 SALE TAX UPON COLLECTION FORMS PART OF THE PUBL IC FUNDS OF THE STATE. IF ANY SUBSIDY IS GIVEN, THE CHARACTER OF TH E SUBSIDY IN THE HANDS OF THE RECIPIENT WHETHER REVENUE OR CAPITAL W ILL HAVE TO BE DETERMINED BY HAVING REGARD TO THE PURPOSE FOR WHIC H THE SUBSIDY IS GIVEN. IF IT IS GIVEN BY WAY OF ASSISTAN CE TO THE ASSESSEE IN CARRYING ON OF HIS TRADE OR BUSINESS, I T HAS TO BE TREATED AS TRADING RECEIPT. THE SOURCE OF THE FUND IS QUITE IMMATERIAL. FOR EXAMPLE, IF THE SCHEME WAS THAT THE ASSESSEE WI LL BE GIVEN REFUND OF SALES TAX ON PURCHASE OF MACHINERY AS WEL L AS ON RAW MATERIAL TO ENABLE THE ASSESSEE TO ACQUIRE NEW PLAN T AND MACHINERY FOR FURTHER EXPANSION OF ITS MANUFACTURIN G CAPACITY IN A BACKWARD ARE, THE ENTIRE SUBSIDY MUST BE HELD TO BE A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. IT WILL NOT B E OPEN TO THE REVENUE TO CONTEND THAT THE REFUND OF SALES TAX PAI D ON RAW MATERIALS OR FINISHED PRODUCTS MUST BE TREATED AS R EVENUE 19 RECEIPT IN THE HANDS OF THE ASSESSEE. IN BOTH THE C ASES, THE GOVERNMENT IS PAYING OUT OF PUBLIC FUNDS TO THE ASS ESSEE FOR A DEFINITE PURPOSE. IF THE PURPOSE IS TO HELP THE ASS ESSEE TO SET UP IT BUSINESS OR COMPLETE A PROJECT AS IN SEAHAM HARB OUR DOCK GOS CASE (1932) 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 AFTE R AND CONDITIONAL UPON COMMENCEMENT OF PRODUCTION, SUCH S UBSIDIES MUST BE TREATED AS ASSISTANCE FOR THE PURPOSE OF TH E TRADE. FROM THE ABOVE OBSERVATIONS OF HON'BLE SUPREME COUR T, IT IS VERY CLEAR THAT EVEN THE SALES TAX REFUND CAN BE TR EATED AS A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE PROVIDED THE S AME IS GRANTED TO MEET DIRECTLY OR INDIRECTLY THE CAPITAL COST ON THE FIXED ASSETS AND TO HELP THE ENTREPRENEUR IN THE ESTABLISHMENT AND EXPA NSION OF THE INDUSTRIAL UNIT. THUS, WHERE THE SUBSIDY OR INCENTI VE GIVEN BY THE GOVERNMENT FOR ACQUISITION OF AN ASSET OR FOR BUYIN G ANY NEW ASSETS FOR COMPLETION OF THE PROJECT, SUCH SUBSIDY WOULD BE OF CAPITAL NATURE. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF RELIAN CE INDUSTRIES (SUPRA) HAS CONSIDERED SIMILAR VIEWS OF MAHARASHTRA SCHEME AND HAD ALSO MADE A COMPARATIVE ANALYSIS OF ANDHRA PRADESH SCHEM E AND MAHARASHTRA SCHEME. THE JUDGEMENT OF APEX COURT IN SAHNEY STEEL AND PRESS WORKS WAS ALSO TAKEN INTO CONSIDERATION A ND THEN AFTER ANALYZING ALL THE MATERIAL, IT WAS FOUND THAT THE B ENEFIT AVAILED BY THE ASSESSEE WAS ON ACCOUNT OF CAPITAL RECEIPT. IT HAS BEEN CATEGORICALLY HELD THAT SALES TAX INCENTIVE GIVEN IN MAHARASHTRA GOVERNMENT FOR SETTING UP INDUSTRIAL UNIT IN THE NOTIFIED AREAS WI TH A VIEW TO BRING ABOUT THE NECESSARY INFRASTRUCTURE IN THE BACKWARD AREAS, IS A CAPITAL RECEIPT NOT CHARGEABLE TO TAX. THE DEFERRAL BENEFIT RECEIVE D BY THE ASSESSEE HAS ALSO RESULTED ULTIMATELY IN THE FORM OF PARTIAL EXEMPTION FOR SALES TAX LIABILITY AND THE SAID EXEMPTION WAS PROVIDED U NDER AN IDENTICAL INCENTIVE SCHEME OF MAHARASHTRA GOVERNMENT. THEREFO RE, THE BENEFIT AVAILED BY THE ASSESSEE HAS TO BE HELD AS CAPITAL R ECEIPT NOT CHARGEABLE TO TAX. THE LEARNED DR HAS STATED THAT THE FACTS BEFORE LEA RNED CIT(A) IN THE CASE OF RELIANCE INDUSTRIES WERE DIFFERENT T O THE FACTS OF THE PRESENT CASE, HOWEVER, NOTHING HAS BEEN BROUGHT ON RECORD THAT HOW THE FACTS ARE DIFFERENT. IN OUR CONSIDERED VIEW THE FACTS INVOLVED IN THE CASE OF RELIANCE INDUSTRIES AND THE FACTS INVOLVED IN THE PRESENT CASE ARE SIMILAR. THE CASE LAWS RELIED UPON BY THE ASSESSEE IN THE CA SE OF BALARAMPUR CHINI MILLS LTD. IN 238 ITR 441 (CAL) IS ALSO IN FAVOUR OF THE ASSESSEE. IN THIS CASE, IT WAS HELD THAT EVEN THE S ALES PROCEEDS REALIZED BY THE ASSESSEE ON FREE SALE OF SUGAR IN T HE OPEN MARKET WAS HELD TO BE A CAPITAL RECEIPT. IN THE CASE OF KESORA M INDUSTRIES & COTTON MILLS IN 191 ITR 158 AGAIN THE CALCUTTA HIGH COURT HAS TAKEN SIMILAR VIEW. 20 IN THE CASE OF GOVIND POY OXYGEN LTD., 239 ITR 543 (BOM) THE BOMBAY HIGH COURT HAS HELD THAT BENEFIT AVAILED BY THE INDUSTRY ON ACCOUNT OF PROMOTION OF INDUSTRIAL UNIT IN THE BACK WARD REGION OF THE STATE WERE DIRECTLY LINKED TO THE COST OF FIXED CAP ITAL INVESTMENTS AND WERE VARIABLE IN ACCORDANCE WITH THE RATIO OF FIXED ASSET INVESTMENT OF AN ELIGIBLE UNIT. IT WAS ACCORDINGLY HELD THAT THE SALES TAX COLLECTIONS RETAINED BY THE INDUSTRIAL UNIT FOR THE PURPOSE OF DEFRAYING COST OF FIXED ASSETS OR ON ACCOUNT OF CAPITAL RECEIPT NOT CHARGEA BLE TO TAX. THESE FACTS HAVE BEEN CONSIDERED BY THE LEARNED CIT(A) IN DETAIL IN HIS ORDER AND THE FINDINGS OF LEARNED CIT(A) REMAIN UN-CONTRO VERTED. THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE FINDINGS OF LEARNED CIT(A), WHO HELD THAT THE BENEFIT AVAILED BY THE ASSESSEE WERE ON ACCOUNT OF CAPITAL RECEIPTS NOT CHARGEABLE TO TAX AND OUT OF S COPE OF SECTION 41(1). ACCORDINGLY, WE CONFIRM THE ORDER OF LEARNED CIT(A) IN THIS REGARD.' 10.6. IN THE LIGHT OF THE DECISIONS OF THE TRIBUNA L REFERRED TO ABOVE, WE ARE OF THE VIEW THAT THE ORDER OF LEARNED CIT(A) ON THIS ISSUE HAS TO BE SET ASIDE. 10.7 COMING TO THE ARGUMENT OF THE REVENUE THAT SA LES-TAX IS NOT SEPARATELY CHARGED IN THE INVOICES, WE FIND THAT TH E SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) HAD CONSIDERED THE ISSUE AND DECIDED THE ISSUE IN F AVOUR OF THE ASSESSEE. AT PAGE 282 AND 283 AT PARAGRAPH 7 & 8 IT IS HELD AS F OLLOWS: 7. AFTER COMING TO THE ABOVE CONCLUSIONS, THE TRIB UNAL PROCEEDED TO CONSIDER THE QUESTION WHETHER ANY AMOU NT WAS RECEIVED BY THE ASSESSEE SO AS TO BRAND THE RECEIP T AS EITHER CAPITAL OR REVENUE IN NATURE AND THE FURTHER QUEST ION AS TO WHETHER IF THE AMOUNT IS RECEIVED WHERE DOES IT AP PEAR IN THE BOOKS OF ACCOUNT. THIS QUESTION WAS CONSIDERED IN PARAGRAPH 27 OF THE TRIBUNALS ORDER. ONE OF THE OBJECTIONS RAISED BY THE TAX AUTHORITIES WAS THAT THE ASSESSEE DID NOT SEPAR ATELY CHARGE SALES TAX IN THE INVOICES, BUT THE TRIBUNAL HELD TH AT THIS ASPECT WAS NOT RELEVANT BECAUSE IT IS NOT NECESSARY TO SHO W IN THE SALES INVOICES A SEPARATE CHARGE FOR SALES TAX. TH E TRIBUNAL PROCEEDED TO RECORD A FINDING THAT EVEN BEFORE THE EXEMPTION WAS GRANTED TO THE ASSESSEE AND THE ASSESSEE WAS LI ABLE TO PAY SALES TAX, IT WAS NOT SHOWING SALES TAX AS A SEPARA TE3 CHARGE IN THE INVOICES. THE SAME POSITION WAS NOTICED TO HAVE BEEN CONTINUED SUBSEQUENT TO THE EXEMPTION. IN THIS CON NECTION, THE TRIBUNAL REFERRED TO RULE 46A OF THE BOMBAY SALES T AX RU;LES WHICH PROVIDED FOR BIFURCATION OF THE GROSS INVOICE FIGURE INTO SALES AND THE SALES TAX CHARGEABLE THEREON. THIS R ULE HAS BEEN APPLIED IN ORDER TO GET OVER THE SITUATION CAUSED B Y THE ASSESSEE 21 NOR SEPARATELY CHARGING SALES TAX IN THE INVOICE. THE SALES TAX IS STATUTORILY DETERMINED AND CHARGED. THE TRIBUNAL R EFERRED TO THE LETTER DATED 18-12-1986 ISSUED BY THE STATE INDUSTR IAL AND INVESTMENT CORPORATION OF MAHARASHTRA (SICOM), WHIC H IS THE IMPLEMENTING AGENCY, PERMITTING THE ASSESSEE TO ADJ UST ITS PRICE SO AS TO INCLUDE THEREIN THE SALES TAX ELEMENT WHIC H OTHERWISE COULD BE FASTENED OR THE ASSESSEE AND RECOVERED, IN THE ABSENCE OF ANY EXEMPTION FROM THE PAYMENT OF TAX. THE TRIBUNAL ALSO AVERTED TO SECTION 41 OF THE BOMBAY S ALES TAX ACT, WHICH EMPOWERED THE COMMISSIONER OF SALES TAX TO EX EMPT ANY DEALER FROM PAYMENT OF SALES TAX EITHER WHOLLY OR P ARTIALLY. THE TRIBUNAL ALSO REFERRED TO THE SALES TAX ASSESSMENT ORDER FOR THE CALENDAR YEAR 19083, WHEREIN AT PAGE 3, THE ASSESSI NG AUTHORITY (SALES TAX) STATED AS UNDER:- THE DEALER HAS NOT MAINTAINED TAX COLLECTION ACCOU NTING LEDGER AS TAX IS NOT SEPARATELY CHARGED IN SALES BILLS. T HE SALES BILLS ARE INCLUSIVE OF TAXES, EXCEPT SALES OF METHANOL AN D SCRAP. AFTER REFERRING TO THE ABOVE FACTS, THE RELEVANT PR OVISIONS OF THE BOMBAY SALES TAX ACT AND THE OTHER DOCUMENTATION, T HE TRIBUNAL CONCLUDED AS FOLLOWS:- SO WHAT THE ASSESSEE HAS OBTAINED FROM THE STATE G OVERNMENT IS EXEMPTION FROM THE PAYMENT OF TAX UNDER THE BOMB AY SALES TAX ACT AND CENTRAL SALES TAX ACT AND OTHER RULES T HEREUNDER. NOW WHAT IS THE AMOUNT FOR WHICH THE EXEMPTION FROM PAYMENT TO THE STATE GOVERNMENT IS GRANTED? THE AMOUNT ADD ITIONALLY PAYABLE ON ASSESSMENT, BUT FOR NOTIFICATION UNDER S ECTION 41 AS LONG AS IT IS IN FORCE. THIS AMOUNT OTHERWISE PAYA BLE UNDER THE SALES TAX ACT IS NOT RECOVERED FROM THE ASSESSEE BY VIRTUE OF EXEMPTION UNDER SECTION 41 OF THE ACT. WHY IT IS N OT RECOVERED, THE ANSWER IS SIMPLE. BECAUSE THE ASSESSEE IS TO B E RANTED / DISBURSED INCENTIVE IN THE FORM OF SUBSIDY UNDER SC HEME FRAMED BY THE GOVERNMENT. THEREFORE, THIS AMOUNT DETERMIN ED AND REFERRED TO AS NOTIONAL SALES-TAX LIABILITY SHOULD HAVE BEEN REDUCED FROM THE REVENUE RECEIPTS AS IT IS EMBEDDED IN SUCH RECEIPTS, THOUGH HAVING CHARACTER OF SUBSIDY. SECT ION 41(1) OF BOMBAY SALES TAX ACT STATES THAT SUBJECT TO SUCH CO NDITION AS IT MAY IMPOSE, THE STATE GOVERNMENT MAY, IF IT IS NECE SSARY IN PUBLIC INTEREST, BY NOTIFICATION EXEMPT ANY PART OF ANY TAX PAYABLE UNDER THE PROVISIONS OF THE ACT. THIS AMOU NT AS CLAIMED SHOULD HAVE BEEN TRANSFERRED TO THE SEPARAT E ACCOUNT OF SUBSIDY. BUT AS STATED EARLIER THE ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT SACROSANCT AND IF THE TRUE NATURE O F THE RECEIPT OR PAYMENT IS DIFFERENT THEN THE SAME HAS TO BE EVA LUATED ON THE BASIS OF SUBSTANCE OF THE TRANSACTION AND IN ACCORD ANCE WITH THE LAW APPLICABLE TO SUCH TRANSACTION. THIS IS WHAT T HE COMMISSIONER (APPEALS) HAS DONE IN ASSESSMENT YEAR 1989-90 AFTER REVIEWING EARLIER APPELLATE ORDERS (PAGE 479 OF PAPERBOOK). 22 FROM THIS DISCUSSION IT WILL BE AMPLY CLEAR THAT TH E AMOUNT OF NOTIONAL LIABILITY DETERMINED BEARS THE CHARACTER O F SUBSIDY, THE AMOUNT WHICH OTHERWISE WOULD HAVE BEEN PAID TO THE SALES TAX DEPARTMENT. 8. BEFORE THE TRIBUNAL, THE ASSESSEE HAD ALSO RAISE D AN ALTERNATIVE CONTENTION TO THE EFFECT THAT THE SALES -TAX LIABILITY, ASCERTAINED AND DETERMINED TO BE PAYABLE BUT NOT PA ID BECAUSE OF THE EXEMPTION UNDER SECTION 41 OF THE BOMBAY SAL ES TAX ACT, SHOULD BE TREATED AS HAVING BEEN PAID AND ADJUSTED AGAINST THE AMOUNT OF SUBSIDY RECEIVABLE FROM THE STATE GOVERNM ENT. THIS ALTERNATIVE CONTENTION WAS RAISED PRESUMABLY TO OVE RCOME THE VIEW IF ONE IS TAKEN, THAT THE AMOUNT DETERMINED AS SALES TAX COLLECTED BY THE ASSESSEE AND PAYABLE TO THE GOVERN MENT, WOULD BE A REVENUE RECEIPT OR A TRADING RECEIPT ON THE BASIS OF THE JUDGMENT OF THE SUPREME COURT IN CHOWRINGHEE SA LES BUREAU (P) LTD V. CIT [1973] 87 ITR 542. THIS ALT ERNATIVE CONTENTION TOOK CARE OF THE SITUATION WHICH WOULD R ESULT IF SUCH A VIEW IS TAKEN. IF THE ALTERNATIVE CONTENTION IS AC CEPTED, IT WOULD REDUCE THE INCOME BY AN IDENTICAL AMOUNT TO BE DEDU CTED AS LIABILITY TOWARDS SALES TAX, THUS NEUTRALIZING THE EFFECT OF THE ADDITION. IN PARAGRAPH 28, THE TRIBUNAL DEALT WITH THIS ARGUMENT AND HELD AS FOLLOWS:- THE CONSEQUENCE IS SAME BECAUSE WHAT THE ASSESSEE WANTS REALLY IS THAT THE AMOUNT OF LIABILITY UNDER THE SALES TAX AT AS DETERMINED BY THE SALES TAX AUTHORITY SHO ULD BE TREATED AS AN AMOUNT RECEIVED BY WAY OF SUBSIDY FROM THE STATE GOVERNMENT. WE ACCEPT THIS ALTERNATIVE CONTENTION ALSO SINCE IT LEADS TO THE SAME RESULT O N THE SAME FACTS THOUGH ON DIFFERENT REASONING. 10.8 WE RESPECTFULLY FOLLOW THE CONCLUSIONS DRAWN THEREIN. EVEN OTHERWISE WHEN A CONSOLIDATED AMOUNT IS CHARGED IN AN INVOICE IT CANNOT BE SAID THAT IT DOES NOT CONTAIN SALES-TAX COMPONENT. EVEN IF A SEPARATE ACCOUNT HAS BEEN MAINTAINED FOR THE SALES-TAX COLLECTED AND PAID, IT IS NOT CORRECT TO SAY THEY WERE NOT IN THE REVENUE FIELD AND ARE NOT RECKONED WHILE COMPUTING PROFIT & LOSS OF THE CONCERN. A DISCLOSURE BY THE AUDITOR THAT SEPARATE ACCOUNT HAS BEEN MAINTAINED FOR SALES-TAX RECOVERED AND PAI D DOES NOT MEAN THAT THE EFFECT OF THE SALES-TAX HAS NOT BEEN CONSIDERED IN THE ACCOUNTS OF THE ASSESSEE. IT IS WELL SETTLED THAT THE ENTRIES IN T HE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE FACT WHETHER A DEDUCTION IS AL LOWABLE OR NOT. THUS, THIS OBJECTION OF THE REVENUE IS REJECTED. 23 10.9 IN VIEW OF THE ABOVE DISCUSSION WE HOLD THAT THE ISSUE IS SQUARELY COVERED BY THE SPECIAL BENCH OF THE TRIBUN AL IN THE CASE OF CIT VS RELIANCE INDUSTRIES LTD 88 ITD 273 (MUM)(SB) AS FOL LOWED BY THE DIVISION BENCH OF THE TRIBUNAL IN THE CASE OF ZENITH FIBRES LTD (SUPRA) AND IN THE CASE OF M/S STERLITE OPTICAL TECHNOLOGIES LTD. (SUPRA). IN THE RESULT, THIS GROUND OF THE ASSESSEE IS ALLOWED. 11. THE SECOND ISSUE THAT ARISES IN THIS APPEAL IS THE DISALLOWANCE OF DEPRECIATION BY REDUCTION OF NOTIONAL TAX ON CAPITA L GAIN ON AN EXEMPTION ALLOWED U/S 54G OF THE ACT DURING THE AY 1995-96 AN D 1996-97, FROM THE ACTUAL COST OF THE PLANT AND MACHINERY CAPITALIZED IN THE SAID ASSESSMENT ORDERS BY INVOKING EXPLANATION 10 TO SECTION 43(1) AND THEREAFTER COMPUTING THE WRITTEN DOWN VALUE. THE ASSESSEE ALTERNATIVELY , AGGRIEVED AT THE NON REDUCTION OF THE SAME FROM THE COST OF LAND AND BUI LDING INSTEAD OF PLANT AND MACHINERY. THE FACTS OF THE ISSUE ARE THAT THE ASS ESSEE HAD SHIFTED ITS FACTORY FROM MULUND, MUMBAI TO LAKHMAPUR, NASHIK DURING THE ASSESSMENT YEAR 1995-96 AND 1996-97. AS THE ASSESSEE HAD SHIFTED T HE UNIT FROM AN URBAN AREA, TO A NON URBAN AREA IT WAS ENTITLED FOR CLAIM OF DEDUCTION U/S 54G OF THE ACT. THERE IS NO DISPUTE ON THE FACT THAT THE ASSE SSEE WAS ENTITLED TO A DEDUCTION U/S 54G. THE ASSESSING OFFICER DURING TH E CURRENT YEAR INVOKED EXPLANATION 10 TO SECTION 43(1) AND CAME TO A CONCL USION THAT THE BENEFIT DERIVED BY THE ASSESSEE BY VIRTUE OF SECTION 54G, G OES TO REDUCE THE ACTUAL COST OF THE ASSET AND CONSEQUENTLY THE DEPRECIATION SHOULD BE ALLOWED ONLY ON SUCH REDUCED COST. THE ASSESSING OFFICER DEDUCTED THE BENEFIT DERIVED BY THE ASSESSEE BY VIRTUE OF THIS SECTION 54G FROM THE COS T OF THE ASSET AS DISCLOSED IN THE ASSESSMENT YEARS 1995-96 AND 1996-97 AND THE REAFTER RECALCULATED THE DEPRECIATION AND THE CONSEQUENT WRITTEN DOWN VALUE OF ASSETS AND ULTIMATELY DISALLOWED PART OF THE CLAIM OF DEPRECIATION MADE B Y THE ASSESSEE. 12. SHRI SE DASTUR SUBMITTED THAT EXPLANATION 10 T O SECTION 43(1) DEALS WITH A SITUATION WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN MADE DIRECTLY OR INDIRECTLY BY TH E CENTRAL GOVERNMENT OR A STATE GOVERNMENT, ETC. IN THE FORM OF A SUBSIDY, GR ANT OR REIMBURSEMENT AND IN SUCH A SITUATION SUCH SUBSIDY GRANT OR REIMBURSEMEN T REDUCES THE ACTUAL COST 24 OF THE ASSET. THE TAX BENEFIT GRANTED TO THE ASSES SEE U/S 54G, CANNOT BE TERMED AS A FORM OF SUBSIDY OR GRANT OR REIMBURSEME NT. HE SUBMITS THAT THE SUBSIDY, GRANT OR REIMBURSEMENT SHOULD BE ONE WHICH IS NOT ARISING OUT OF THE INCOME-TAX ACT. HE VEHEMENTLY CONTENDS THAT THE TA X BENEFIT DERIVED BY VIRTUE OF SECTION 54G DOES NOT GO TO REDUCE THE ACT UAL COST OF THE ASSET IN TERMS OF EXPLANATION 10 TO SECTION 43(1) AS IT DOES NOT MAKE THE COST OF THE ASSET. 13. THE LEARNED COUNSEL FURTHER SUBMITS THAT EXPLAN ATION 10 TO SECTION 43(1) WAS BROUGHT INTO EFFECT FROM 01-04-1999 AND W HEREAS THE ASSESSMENT YEARS DURING WHICH THE ASSESSEE HAD RECEIVED THE BE NEFIT U/S 54G IS 1995-96 AND 1996-97 AND THUS THE EXPLANATION 10 DOES NOT AP PLY TO HIS CASE. HE REFERRED TO SECTION 54G AND SUBMITTED THAT SUB CLAU SE (1) PROVIDES THAT IF THE PLANT WAS SHIFTED WITHIN 3 YEARS, THE BENEFIT GRANT ED U/S 54G WILL BE REVOKED AND IN SUCH A SITUATION THE ASSESSEE WOULD BE PUT T O DOUBLE DISADVANTAGE OF THE TAX BENEFIT BEING WITHDRAWN ON THE ONE HAND AND THE COST OF ASSET BEING REDUCED ON THE OTHER HAND WHICH DEFINITELY IS NOT W HAT IS INTENDED IN THE ACT. THE ASSESSEE, AS PER SHRI DASTUR, CANNOT BE PUT TO DOUBLE DISADVANTAGE BY WRONGLY INTERPRETING THE SECTION. 14. WITHOUT PREJUDICE IT IS SUBMITTED THAT IF NOTIO NAL CAPITAL GAINS TAX ON THE AMOUNT OF EXEMPTION U/S 54G HAS TO BE REDUCED, THEN THE SAME SHOULD BE REDUCED FROM THE COST OF THE LAND AS THE SAME IS RE LATED TO CAPITAL GAIN ON SALE OF LAND. WITHOUT PREJUDICE IT WAS SUBMITTED T HAT EVEN IT IS HELD THAT IF IT IS NOT DEDUCTED FROM LAND, THEN, AS PER THE PROVISO TO EXPLANATION 10 TO SECTION 43(1) IT IS TO BE DEDUCTION ON PRO-RATA BASIS AMONG DEPRECIABLE AND NON DEPRECIABLE ASSETS. 15. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUBMITTED THAT THE ASSESSING OFFICER, AS WELL AS THE FIRST AP PELLATE AUTHORITY HAD CONSIDERED ALL THESE ARGUMENTS OF THE ASSESSEE AND HAS COME TO A PROPER CONCLUSION THAT EXPLANATION 10 TO SECTION 43(1) IS APPLICABLE FOR THE BENEFIT 25 DERIVED BY THE ASSESSEE U/S 54G DURING THE ASSESSME NT YEARS 1995-96 AND 1996-97. HE RELIED ON THE ORDERS OF THE AUTHORITIE S BELOW. 16. RIVAL CONTENTIONS HEARD. SECTION 54G EXEMPTS F ROM CAPITAL GAIN ON TRANSFER OF ASSETS, IN CASES WHERE AN INDUSTRIAL UN DERTAKING IS SHIFTED FROM AN URBAN AREA TO A NON URBAN AREA SUBJECT TO FULFILLME NT OF CERTAIN CONDITIONS SPECIFIED IN THAT SECTION. EXPLANATION 10 TO SECTI ON 43(1) READS AS FOLLOWS: EXPLANATION 10.- WHERE A PORTION OF THE COST OF AN ASSET ACQUIRED BY THE ASSESSEE HAS BEEN MET DIRECTLY OR I NDIRECTLY BY THE CENTRAL GOVERNMENT OR A STATE GOVERNMENT OR ANY AUTHORITY ESTABLISHED UNDER ANY LAW OR BY ANY OTHER PERSON, I N THE FORM OF A SUBSIDY OR A GRANT OR REIMBURSEMENT (BY WHATEVER NAME CALLED), THEN, SO MUCH OF THE COST AS IS RELATABLE TO SUCH SUBSIDY OR GRANT OR REIMBURSEMENT SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASSET TO THE ASSESSEE: PROVIDED THAT WHERE SUCH SUBSIDY OR GRANT OR REIMBURSEMENT IS OF SUCH NATURE THAT IT CANNOT BE DIRECTLY RELATABLE TO THE ASSET ACQUIRED, SO MUCH OF THE AMOUNT WHICH BEARS TO THE TOTAL SUBSIDY OR REIMBURSEMENT OR GRANT THE SAME PROPORTI ON AS SUCH ASSET BEARS TO ALL THE ASSETS IN RESPECT OF OR WITH REFERENCE TO WHICH THE SUBSIDY OR GRANT OR REIMBURSEMENT IS SO R ECEIVED, SHALL NOT BE INCLUDED IN THE ACTUAL COST OF THE ASS ET TO THE ASSESSEE. 17. A PLAIN READING OF THIS EXPLANATION CLEARLY SHO WS THAT ONLY IN CASES WHERE THE ASSESSEE RECEIVES A PORTION OF THE COST O F THE ASSET DIRECTLY OR INDIRECTLY FROM THE CENTRAL OR STATE GOVERNMENT OR ANY OTHER PERSON AND THAT TOO IN THE FORM OF A SUBSIDY OR GRANT OR REIMBURSEM ENT, THEN SO MUCH OF THE COST AS IS RELATABLE TO SUCH SUBSIDY, GRANT OR REIM BURSEMENT SHALL NOT BE INCLUDED. AN EXEMPTION FROM PAYMENT OF CAPITAL GAI NS TAX GRANTED U/ 54G CANNOT BY ANY STRETCH OF IMAGINATION BE CALLED A SU BSIDY OR GRANT OR REIMBURSEMENT. SUCH EXEMPTION CANNOT BE SAID TO HA VE BEEN GRANTED BY THE STATE OR CENTRAL GOVERNMENT TO MEET DIRECTLY OR IND IRECTLY A PORTION OF THE COST OR THE ASSET. FOR THIS SOLE REASON, THE ENTIRE THE ORY MADE OUT BY THE ASSESSING OFFICER HAS TO BE QUASHED AS DEVOID OF ME RIT. WE ARE UNABLE TO COMPREHEND HOW SUCH STRANGE, THOUGHTS AND PROPOSITI ONS CREPT INTO THE MIND OF THE ASSESSING OFFICER. THE BENEFIT U/S 54G WAS ADMITTEDLY GIVEN TO THE ASSESSEE DURING THE ASSESSMENT YEARS 1995-96 AND 1 996-97. EXPLANATION 26 10 TO SUB SECTION 43(1) WAS BROUGHT INTO THE STATUT E ONLY WEF 01-04-1999 AND EVEN IN THIS EXPLANATION, IN OUR CONSIDERED OPINION , THERE IS NO POSSIBILITY OF ANYBODY COMING TO A CONCLUSION THAT ACTUAL COST OF THE ASSET AS ACCEPTED BY THE REVENUE IN THE ASSESSMENT YEARS 1995-96 AND 199 6-97 HAVE TO BE DISTURBED WHILE DOING THE ASSESSMENT FOR THE ASSESS MENT YEAR 2003-04. THE PROPOSITION SUFFICE TO SAY, IS DEVOID OF ANY LOGI C. IF SUCH PROPOSITIONS ARE ACCEPTED, IT WILL LEAD TO A SITUATION WHERE ANY EXE MPTION GRANTED UNDER VARIOUS PROVISIONS OF THE INCOME-TAX ACT FOR THE P AYMENT OF TAX INCLUDING DEPRECIATION, INVESTMENT ALLOWANCE ETC. WOULD BE TA KEN AS A SUBSIDY, GRANT OR REIMBURSEMENT AND CAN BE CONSIDERED FOR THE REDUCTI ON OF COST OF ASSET. 18. IN VIEW OF THE ABOVE DISCUSSION WE FULLY AGREE WITH THE SUBMISSIONS OF THE LEARNED SENIOR ADVOCATE, SHRI SE DASTUR AND ALLOW THIS GROUND OF THE ASSESSEE. 19. GROUND 3 & 4 ARE ON THE SAME ISSUE OF DISALLOW ANCE OF DEPRECIATION AND IN LINE WITH OUR DECISION ON GROUN D 2 WE ALLOW THESE GROUNDS OF THE ASSESSEE. 20. COMING TO GROUNDS 5, 6 9 & 10 AFTER HEARING RI VAL CONTENTIONS WE FIND THAT THE CIT(A) HAS IN ERRONEOUS EXERCISE OF H IS POWERS AND WRONGLY SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFIC ER FOR FRESH ADJUDICATION THOUGH HE HAD NO POWER TO DO SO CONSEQUENT TO THE A MENDMENT BROUGHT INTO THE ACT WITH EFFECT FROM 01-06-2001 BY FINANCE ACT, 2001 WHEREBY SECTION 251(1)(A) HAS BEEN AMENDED AND THE WORDS OR HE MAY SET ASIDE HAVE BEEN DELETED. WE ALSO FIND THAT WHILE THE CIT(A) AGREES WITH THE SUBMISSIONS OF THE ASSESSEE, HE SET ASIDE THE MATTER TO THE FILE O F THE ASSESSING OFFICER FOR FRESH ADJUDICATION WHICH IS, IN OUR CONSIDERED OPIN ION, NOT PROPER. IN ANY EVENT, AS THE FIRST APPELLATE AUTHORITY HAS NO POWE R TO SET ASIDE THE MATTER, WE REVERSE HIS ORDER TO THAT EXTENT AND REMIT THE MATT ER BACK TO HIS FILE FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. THE ASSESSEE IS AT LIBERTY TO FURNISH ANY ADDITIONAL MATERIAL IN SUPPORT OF HIS CLAIMS AND TH E FIRST APPELLATE AUTHORITY IS DIRECTED TO ADMIT SUCH MATERIAL AND IF NECESSARY OB TAIN A REMAND REPORT FROM THE ASSESSING OFFICER AND DISPOSE OF THESE GROUNDS ON MERITS. THE FIRST 27 APPELLATE AUTHORITY SHALL NOT BE INFLUENCED BY THE FACT THAT IN THE SET ASIDE PROCEEDINGS THE ASSESSEE HAS NOT BEEN ABLE TO PRESE NT HIMSELF BEFORE THE ASSESSING OFFICER. IN OTHER WORDS, AS THE SET-ASID E PROCEEDINGS BEFORE THE ASSESSING OFFICER ARE NON EST IN LAW IN VIEW OF OUR ABOVE DECISION, THIS GROUND MAY BE ADJUDICATED AFRESH BY THE FIRST APPELLATE AU THORITY. WITH THESE OBSERVATIONS WE DISPOSE OF GROUNDS 5, 6 9 & 10 OF T HE ASSESSEE. 21. WE NOW DISPOSE OF GROUND 7 WHICH PERTAINS TO A DHOC DISALLOWANCE OF SALE PROMOTION EXPENSES. THE FACTS ARE GIVEN AT PAGE 84 PARAGRAPHS A & B OF THE CIT(A)S ORDER, WHICH ARE E XTRACTED BELOW FOR READY REFERENCE: A. BRIEF FACTS OF THE CASE 1.0 DURING THE YEAR UNDER CONSIDERATION THE APPELLA NT HAD INCURRED EXPENDITURE AMOUNTING TO RS.2,30,95,883/- ON ACCOUNT OF SALES PROMOTION. OUT OF THE SAME, EXPENDITURE A MOUNTING TO RS.1,44,54,650/- WERE SHOWN UNDER THE HEAD OTHER S ALES PROMOTION EXPENSES. DURING THE COURSE OF ASSESSME NT PROCEEDINGS DETAILS IN RESPECT OF THE SAID EXPENDIT URE ALONG WITH LEDGER COPIES WERE DULY FURNISHED BY THE APPELLANT VIDE ITS LETTER DATED 28-09-2005. COPY OF THE SAID LETTER ALONGWIT H RELEVANT DETAILS IS ENCLOSED AS ANNEXURE-16 . B. CONTENTION OF THE A.O 1.0 IN THE ORDER U/S 143(3), THE AICT DISALLOWED AN AMOUNT OF RS.3,00,000/- ON ADHOC BASIS ON THE FOLLOWING CONTE NTIONS: A) BILLS FOR CERTAIN ITEMS COULD NOT BE PRODUCED AN D IN OTHER CASES IT COULD NOT EXACTLY BE PINPOINTED ALONGWITH THE PROOF AS TO THE PERSONS TO WHOM THE GIFTS HAVE BEEN MADE. B) THE ASSESSEE FAILED TO ESTABLISH EXCLUSIVE BUSIN ESS CONNECTION IN MANY CASES WHICH RENDER THESE EXPENSE S LIABLE TO BE DISALLOWED CONSIDERING THE PROBABLE REVENUE LEAK AGES. THE FIRST APPELLATE AUTHORITY AFTER CONSIDERING THE CONTENTIONS OF THE ASSESSEE HAD OBSERVED THAT THE ASSESSING OFFICER HAD DISALLO WED ONLY A MEAGER SUM OF RS.3 LAKHS OUT OF A TOTAL SALES PROMOTION EXPENSES OF RS.2,30,95,852 CLAIMED BY THE ASSESSEE ON THE GROUND THAT IT IS NOT POSSIB LE TO ESTABLISH THAT THE SAME HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS. 28 HE MADE AN OBSERVATION THAT SOME OF THE EXPENSES WE RE ON ACCOUNT OF GIFTS MADE BY THE ASSESSEE. HE CONFIRMED THE ADHOC ADDIT ION. FURTHER AGGRIEVED, THE ASSESSEE IS BEFORE US. 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT A DISALLOWANCE CANNOT BE MADE MERELY ON CONJECTURES A ND SURMISES. HE VEHEMENTLY CONTENDED THAT IN THE ABSENCE OF ANY MAT ERIAL ON RECORD TO SHOW THAT ANY PART OF THE SALE PROMOTION EXPENSES HAVING BEEN INCURRED FOR BUSINESS PURPOSES, THE ENTIRE EXPENDITURE HAS TO BE ALLOWED U/S 37(1) AS HELD IN NATIONAL INDUSTRIAL CORPORATION VS CIT 258 ITR 5 75 (DEL). HE ALSO RELIED ON THE FOLLOWING CASE LAWS: LALCHAND BHAGAT AMBICA RAM VS CIT (1959) 37 ITR 28 8 (SC) CIT VS DAULAT RAM RAWATMULL (1973) 87 ITR 349/360 (SC) SUKHDAYAL RAMBILAS VS CIT (1982) 136 ITR 414 / 418 (BOM) HE ALSO POINTED OUT THAT THE DETAILS OF THE SALE PR OMOTION EXPENDITURE ARE GIVEN AT PAGE 237 OF THE PAPER BOOK AS WELL AS ON P AGES 19 AND 36 OF THE SUPPLEMENTARY PAPER BOOK. 23. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE FIRST APPELLATE AUTHORITY. 24. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON A PERUSAL OF THE O RDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED WE FIND THAT T HE DISALLOWANCES IN QUESTION IS MADE ON AN ADHOC BASIS MERELY ON THE GR OUND THAT THERE WOULD BE A POSSIBILITY THAT SOME OF THE EXPENSES WOULD HAVE NOT BEEN INCURRED. THE ASSESSEE PROVIDED COMPLETE BREAK UP OF ALL THE DET AILS IN THE COURSE OF ASSESSMENT PROCEEDINGS AND ALSO AN EXTRACT OF THE L EDGER ACCOUNT IN RESPECT OF THE DETAILS PROVIDED. THE ASSESSING OFFICER HAS NOT ASKED FOR ANY SPECIFIC DETAIL OR PROOF IN THE NATURE OF ANY PARTICULAR BIL L FROM THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. NO EXPLANATION REGARDING A LLOWABILITY OR REASONABLENESS OF THE EXPENSES WAS ASKED FOR DURING THE COURSE OF 29 ASSESSMENT PROCEEDINGS. ON THIS FACTUAL MATRIX, WE HOLD THAT THE ADHOC DISALLOWANCE IS NOTHING BUT A SHEER SURMISE AND SUC H DISALLOWANCE CANNOT BE SUSTAINED. IN THE RESULT, THIS ADDITION IS DELETED . 25. GROUND 8 IS AGAINST THE DISALLOWANCE OF EXPEND ITURE ON REPAIRS AND MAINTENANCE OF BUILDINGS. THE FACTS ARE GIVEN ON PAGE 91 O THE CIT(A)S ORDER. THE EXPENDITURE ON REPAIRS HAS BEEN CLASSIF IED UNDER THE FOLLOWING TWO CATEGORIES: REPAIR EXPENSES ON HEAD OFFICE RS. 15,25,297 DEPOT MAINTENANCE EXPENSES RS. 19,25,297 THE CIT(A) CONFIRMED THE DISALLOWANCE OF REPAIR EXP ENSES OF HEAD OFFICE AND AS FAR AS DEPOT MAINTENANCE EXPENSES ARE CONCERNED, THEY ARE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER. BEFORE US, IN GROUND NO.8, THE DISALLOWANCE OF REPAIR AND EXPENSES AT HEAD OFFICE IS AGITATED. THE DETAILS OF THE REPAIRS ARE GIVEN AT PAGES 256 AND 257 OF THE ASSESSEES PA PER BOOK. 26. AFTER HEARING RIVAL CONTENTIONS AND ON PERUSAL OF THE DETAILS WE FIND THAT OUT OF AN AMOUNT OF RS. 23,02,636 THE ASS ESSEE CAPITALIZED RS. 7,77,339 SUO MOTU. THE EXPENDITURE OF RS.15,25,297 HAVE LARGELY BEEN INCURRED FOR REPLACEMENT OF TILES, REPLACEMENT OF G LASS WINDOWS, DOORS PANELS ETC. THE NATURE OF THESE EXPENSES CLEARLY SUGGEST THAT THEY ARE IN THE REVENUE FIELD AS NO ASSET OF ENDURING NATURE CAN BE SAID TO HAVE COME INTO EXISTENCE BY INCURRING OF THIS EXPENDITURE. THUS, WE FIND THAT THE ASSESSEE HAS RIGHTLY RELIED UPON THE JUDGMENT OF THE JURISDI CTIONAL HIGH COURT IN THE CASE OF NEW SHORROCK SPINNING & MFG CO LD VS IT (1956) 3 0 ITR 338 (BOM); CULTURAL ENTERPRISES CORPORATION VS CIT (1992) 196 ITR 488 (CAL) AND CLAIMED THAT THIS EXPENDITURE HAS BEEN WRONGLY DISALLOWED. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF NEW SHORROCK SPINNING & MFG CO LTD VS IT (1956) 30 ITR 338 (BOM) HELD THAT THE TEST THAT MUST BE APPLIED I S THAT AS A RESULT OF THE EXPENDITURE WHICH IS CLAIMED AS AN EXPENDITURE FOR REPAIRS, WHAT IS REALLY BEING DONE IS TO PRESERVE AND MANAGE AN ALREADY EXI STING ASSET. THE OBJECT OF THE EXPENDITURE IS NOT TO BRING A NEW ASSET INTO EXISTENCE NOR IS ITS OBJECT 30 THE OBTAINING OF A NEW OR FRESH ADVANTAGE. SIMILAR LY, THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CULTURAL ENTERPRISES (SUP RA) HELD THAT WHEN MONEY IS SPENT FOR REPAIRS IN A PARTICULAR YEAR, THE EXPENSE S ON EVEN ARREAR REPAIRS ARE TO BE CONSIDERED AS REVENUE EXPENDITURE. RESPECTFU LLY APPLYING THESE DECISIONS TO THE FACTS OF THIS CASE, WE ALLOW THE G ROUND OF THE ASSESSEE. 27. GROUND NO.11 IS AGAINST THE LEVY OF INTEREST U/ S 234D. SECTION 234D WAS INTRODUCED WITH EFFECT FROM 01-06-2003 AND HENC E APPLICABLE FOR THE ASSESSMENT YEAR 2004-05 AS HELD BY THE HONBLE SPEC IAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS EKTA PROMOTERS PVT L TD 113 ITD 719 (SB)(DEL). RESPECTFULLY FOLLOWING THE SAME WE ALLOW THIS GROUN D OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER NOT TO LEVY INTEREST U /S 234D. 28. GROUND 12 IS AGAINST THE LEVY OF INTEREST U/S 2 34B AND 234C. THE CASE OF THE ASSESSEE IS THAT INTEREST U/S 234C IS TO BE CALCULATED AS PER THE INCOME DISCLOSED IN THE REVISED RETURN AS THE PHRASE USED IN THE SAID SECTION IS TAX DUE ON RETURNED INCOME. RELIANCE WAS PLACED ON TH E DECISION IN THE CASE OF SOUTH EASTERN COAL FIELDS LTD S JCIT 85 ITD 608 (NA G). ON INTEREST U/S 234B, THE LEARNED COUNSEL FAIRLY CONCEDED THAT THE SAME IS CONSEQUENTIAL IN NATURE. THE LEARNED DEPARTMENTAL REPRESENTATIVE SU BMITS THAT LEVY OF INTEREST UNDER BOTH THE SECTIONS ARE CONSEQUENTIAL AND THE G ROUND HAS TO BE DISMISSED. 29. AFTER HEARING RIVAL CONTENTIONS, WE RESPECTFULL Y APPLY THE DECISION ON THE NAGPUR BENCH OF THE TRIBUNAL IN THE CASE OF SOU TH EASTERN COAL FIELDS LTD (SUPRA) AND DIRECT THE ASSESSING OFFICER TO COMPUTE INTEREST U/S 234C AS PER THE INCOME DISCLOSED IN THE REVISED RETURN. COMING TO LEVY OF INTEREST U/S 31 234B WE HOLD THAT IT IS CONSEQUENTIAL IN NATURE. I N THE RESULT, GROUND 12 IS ALLOWED IN PART. 30. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART. 31. ORDER PRONOUNCED ON THIS 04 TH DAY OF DECEMBER, 2009. SD/- SD/- (N.V. VASUDEVAN) (J. SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT: 04 TH DECEMBER, 2009 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT BY ORDER 4. THE CIT(A) 5. THE DR, E-BENCH (TRUE COPY) ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES DATE INITIAL 1. DRAFT DICTATED ON 12-10 2. DRAFT PLACED BEFORE AUTHOR 15-10 4. DRAFT DISCUSSED / APPROVED BY THE SECOND MEMBER ___________ 5. APPROVED DRAFT CAME TO PS ___________ 6. KEPT FOR PRONOUNCEMENT ON ___________ 7. FILE SENT TO THE BENCH CLERK ___________ 8. FILE SENT TO THE HEAD CLERK ___________ 9. DATE OF DESPATCH OF ORDER ___________