Dcit Cen Cir 3(3) Cen Rg 3, Mumbai vs Welspun India Ltd, Mumbai on 11 January, 2019

[Cites 37, Cited by 9]

Income Tax Appellate Tribunal - Mumbai

Dcit Cen Cir 3(3) Cen Rg 3, Mumbai vs Welspun India Ltd, Mumbai on 11 January, 2019

आयकर अपीऱीय अधिकरण "G" न्यायपीठ मुंबई में ।

IN THE INCOME TAX APPELLATE TRIBUNAL "G" BENCH, MUMBAI

BEFORE SHRI JOGINDER SINGH, VICE PRESIDENT
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER

आयकर अपीऱ सं./I.T.A. No.5376, 5375,5374 and 5373 /Mum/2015
(नििाारण वर्ा / Assessment Year : 2008-09,2009-10, 2010-11 and 2011-12)

Welspun India Ltd., बिाम/ Deputy Commissioner of
9 t h Floor Income Tax
B Wing, Trade World, v. Central Circle-22
Kamala Mills Compound, R.No. 465, 4 t h Floor,
Senapati Bapat Marg, Aayakar Bhawan,
Lower Parel, Mumbai 400020
Mumbai-400013
स्थायी ऱेखा सं ./ PAN:AAACW1259N

आयकर अपीऱ सं./I.T.A. No.5725 , 5723, 5718 and 5721/Mum/2015
(नििाारण वर्ा / Assessment Year : 2008 -09,2009-10, 2010-11 and 2011-12)

Deputy Commissioner of बिाम/ Welspun India Ltd.,
Income Tax 9 t h Floor
Central Circle 3(3) v. B Wing, Trade World,
Central Range 3, Kamala Mills
R.No. 401, 4 t h floor, Compound, Senapati
Aayakar Bhavan, Bapat Marg, Lower
M.K. Road, Parel,
Mumbai- 400020 Mumbai-400013
स्थायी ऱेखा सं ./ PAN:AAACW1259N

(अपीऱाथी /Appellant) .. (प्रत्यथी / Respondent)

Assessee by: Shri. Mitesh Shah
Revenue by : Shri. Parag Vyas, Special
Counsel for Department

सन
ु वाई की तारीख /Date of Hearing : 18.10.2018
घोषणा की तारीख /Date of Pronouncement : 11.01.2019
I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

आदे श / O R D E R

PER BENCH:-

These eight appeals are cross appeals filed by the Assessee and
the Revenue for assessment year's(AY's) 2008-09 to 2011-12. Since
common issues are involved in all these appeals for AY 2008-09 to
2011-12 , they were heard together and disposed of by this common
order for the sake of convenience. First, we shall take up cross
appeals for AY 2008-09 , the assessee's appeal being ITA no.
5376/Mum/2015 and the Revenues appeal being 5725/Mum/2015
respectively, have arisen from the appellate order dated 10.09.2015
passed by Ld. Commissioner of Income-tax(Appeals)-51,Mumbai and
the appeal before Ld. CIT(A) had arisen from the assessment order
dated 26.03.2013 passed by the learned Assessing Officer u/s. 143(3)
r.w.s. 153A r.w.s. 144C(1) of the Income-tax Act,1961 (hereinafter
called " the Act").

2. The grounds of appeal raised by the Revenue in the memo of
appeal filed with the Income-Tax Appellate Tribunal, Mumbai
(hereinafter called "the tribunal") in ITA no. 5725/Mum/2015 for AY
2008-09, read as under:-

1) "On the facts and in the circumstances of the case and
in law, the Ld.CIT(A) erred in holding that backward area
incentive consisting of Sales Tax Incentive and excise duty
benefits as Capital Receipt."

2) "Alternatively and without prejudice, the CIT(A)
should have applied Explanation 10 to Sec.43(1) and
should have directed that the backward area incentive
should have been reduced from the actual cost."

3) "On the facts and in the circumstances of the case and
in law, the Ld.CIT(A) erred in deleting the disallowance of
Rs.3,59,88,823/- made u/s.14A read with Rule 8D
without appreciating that Rule 8D is squarely applicable.‖

4) ― On the facts and in the circumstances of the case and
in law, the Ld. CIT(A) erred in deleting the addition made
on account of premature redemption without appreciating

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that the transaction is in the nature of sale, exchange or
relinquishment of assets as was held by the Supreme
Court in Anarkali Sarabhai vs. CIT (224 ITR 422).‖

4) "On the facts and in the circumstances of the case and
in law, the Ld.CIT(A) erred in deleting the addition made
on account of book profit without appreciating that there is
no brought forward book loss available to the assessee."

5) ―On the facts and in the circumstances of the case and
in law, the Ld.CIT(A) erred in deleting the addition made to
book profit on account of disallowance u/s.14A of the IT
Act."

6) The appellant craves leave to amend or alter any ground
or add a new ground which may be necessary.‖

3. The grounds of appeal raised by the assessee in the memo of
appeal filed with the Income-Tax Appellate Tribunal, Mumbai
(hereinafter called "the tribunal") in ITA no. 5376/Mum/2015 for AY
2008-09, read as under:-

"The ground or grounds of appeal are without prejudice to one
another.

1 .a) On the facts and in the circumstances of the case and
in law, the ld. CIT(A) erred in confirming the addition to the
extent of Rs. 32,94,347/- made by the AO to the income of
the Appellant, by way of disallowing certain expenditure
claimed to have been incurred relating to exempt income
invoking the provisions of section 14A.

b) The ld. CIT(A) failed to appreciate that:-

(i) having regard to the accounts there is no reason and
basis in reaching to dis-satisfaction with the correctness of
the claim of the Appellant that no expenditure was
incurred in relation to dividend income which does not
form part of the total income; and

(ii) The investment in shares was made out of business
strategy and there was no major change in such
investment.

c} In reaching to the conclusion and confirming such
addition the ld. C1T(A) omitted to consider relevant
factors, considerations, principles and evidences while

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

he was overwhelmed, influenced and prejudiced by
irrelevant considerations and factors.

2. On the facts and in the circumstances of the case
and in law, the ld. CIT(A) erred in confirming the addition
to the extent of Rs. 1,14,25,322/- (i.e. Rs 81,30,975/- +
Rs. 32,94,347/-) made by the AO to the book profit of the
Appellant by way of adding back disallowance made u/s.
14A by the Appellant and further disallowance made by
the AO and thereby erred in enhancing the book profit
artificially.

3. The ld. CIT(A) erred in holding that levy of interest
u/s. 234D of the Income Tax Act, 1961 is consequential.
The Appellant denies its liability for such interest.

4. The ld. CIT(A) erred in holding that ground raised
disputing initiation of the penalty proceedings
u/s.271(1)(c) of the Income Tax Act, 1961 is premature.
The Appellant denies its liability for such penalty.

The Appellant craves leave to add, alter, amend or delete
any or all of the above grounds of appeal.‖

4. The brief facts of the case are that the assessee is engaged in
the manufacturing of terry towels . The search operations were carried
out by Revenue in the case of Welspun group of entities u/s. 132 of
the 1961 Act on 13th October, 2010 . The assessee was also covered
by Revenue in the aforesaid searches conducted by Revenue u/s 132
of the 1961 Act.

5. The first issue which arose before us comprises of chargeability
to income-tax of incentives by way of refund of Excise Duty of Rs.
3,65,47,921/- and Exemption of Sales Tax to the tune of Rs.
5,75,56,878/- as revenue receipt or the same are capital receipts not
exigible to income-tax. It so happened that Kutch District in Gujarat
was hit by devastating earthquake on 26th January, 2001 and in order
to redevelop and rehabilitate Kutch District of Gujarat , the Central
and State Government formulated policy/schemes to encourage
setting up of new industry in said Kutch District wherein certain
incentives by way of refund of excise duty as well Sales Tax incentives

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

were given by Central and State Government to the entrepreneurs for
setting up new industry in Kutch District , as detailed below:-

"NOTIFICATION NO 39 /2001 -CENTRAL EXCISE.
In exercise of the powers conferred by sub-section (1) of section
5A of the Central Excise Act, 1944 (1 of 1944), read with sub-
section (3) of section 3 of the Additional Duties of Excise (Goods
of Special Importance) Act, 1957 (58 of 1957) and sub-section
(3) of section 3 of the Additional Duties of Excise (Textiles and
Textile Articles) Act, 1978 ( 40 of 1978), the Central Government
being satisfied that it is necessary the public interest so to do,
hereby exempts the goods specified in the First Schedule to the
Central Excise Tariff Act,1985 (5 of 1986) other than goods
specified in the Annexure appended to this notification and
cleared from a unit located in Kutch district of Gujarat from
so much of the duty of excise or the additional duty of
excise, as the case may be, leviable. The exemption
contained in this notification shall be subject to the
following conditions, namely;-

(i) It shall apply only to new industrial units, that is to
say, units which are set up on or after the date of
publication of this notification in the Official Gazette but
not later than the 31st day of December, 2004;

(ii) In order to avail of this exemption, the manufacturer
shall produce a certificate from a Committee consisting of
the Chief Commissioner of Central Excise, Ahmedabad
and the Principal Secretary to the Government of Gujarat,
Department of Industry, to the jurisdictional Assistant
Commissioner or the Deputy Commissioner of Central
Excise, as the case may be, that the unit in respect of
which exemption is claimed is a new unit and has been set
up during the time period specified in condition (i) above.

(iii) Before effecting clearances under this notification, the
manufacturer shall also furnish a declaration regarding
the original value of investment in plant and machinery
installed in the factory as on the date of commencement of
commercial production, to the Assistant Commissioner or
the Deputy Commissioner of Central Excise, as the case
may be.

(iv) The manufacturer shall also produce a certificate from
the said Committee confirming the original value of
investment and such a certificate shall be produced within
a period of one month from the date of commencement of
commercial production, or such extended period as the

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said Assistant Commissioner or Deputy Commissioner
may allow.

v) In case on the basis of such certification, or otherwise,
the original value of investment in plant and machinery,

(a) is found to be less than rupees twenty crore but was
declared to be rupees twenty crore or more, the
manufacturer shall be liable to pay back the entire amount
of duty exemption availed under the notification alongwith
interest at the rate of twenty four per cent per annum as if
no exemption were available; or

(b) is found to be less than the declared value and was
declared to be below rupees twenty crore, the
manufacture shall be liable to pay duty on the goods
cleared ,if any, in excess of twice the actual value of
original investment in each of the years during which
exemption has been claimed under this notification
alongwith interest at the rate of twenty four per cent per
annum , as if no exemption were available to those
clearances under this notification.

(vi) The exemption shall apply for a period not exceeding
five years from the date of commencement of commercial
production by the unit.‖ WITHOUT ANY CAP.

The sales tax incentive scheme formulated by State
Government of Gujarat is detailed hereunder:

―SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH
DISTRICT

The economic activities in the district of Kutch came to a
standstill on account of devastating earthquake in the
State on 26th January, 2001. New employment
opportunities could be created if new investment takes
place. The Government is committed to attracting
industries in the district to make the industrial and
economic environment live. Government of India have
announced excise duty exemption to new industries to
promote large scale investment in the district, along with
which the State Government has also decided to announce
the scheme of sales tax incentive. Since the scheme is
aimed at making the economic environment of Kutch
district live, it has been decided to confine the same only to
Kutch district.

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Conditions

Under this scheme, following conditions shall be applicable
to sales tax incentives. In the case of violation of one or
more conditions, the amount of sales tax incentives availed
of shall be recovered as arrears of land revenue.

(a) The industrial unit shall have to give a clear
undertaking that it shall not transfer or dispose of the
assets in any manner, till the expiry of the eligibility period
of incentives.

(b) The industrial unit availing of the incentives under the
scheme, shall have to install, effectively use and maintain
the pollution control equipments as per the standards
prescribed and approved by the competent authority.

(c) The industrial unit shall have to continue production
up to the period of eligibility. However, if the unit does not
remain in continuous production on account of the reasons
beyond the control of the management, the unit shall
present its case before the State Level Committee as an
individual case on which the committee can take decision
to waive the period of discontinuation of production based
on the representation made.

(d) The industrial unit shall have to furnish the details of
production, employment and other information every year
before 30th June or from time to time as sought by the
State Government.

(e) As per the employment policy of the Government of
Gujarat, the unit availing of the incentives, will have to
recruit local persons for a minimum of 85% of the total
posts and for a minimum of 60% of the managerial and
supervisory posts. The unit shall have to submit the details
of fulfilling the conditions of local employment to the
concerned authority granting the incentives to his
satisfaction. The percentage of the above mentioned
employment will have to be maintained by the industrial
unit during the eligibility period of the incentives.
Otherwise, the amount of incentives availed by the unit
can be recovered as arrears of land revenue.

(f) Unit will have to invest the amount equivalent to 50%
of the sales tax incentives availed in the new projects in
the state within a period of 10 years from the date of
commencement of commercial production.

(g) Unit opting for sales tax deferment scheme for the
purpose of deferred amount shall have to give a personal

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undertaking in the form of security bond as prescribed
vide Resolution No.INC-1087-2138-I dated the 1st August,
1990 or equitable charge, second charge.

(h) The unit availing of incentives under any other
scheme of the State Government will not be eligible to
receive benefits under this scheme.

(i) Expansion, diversification or modernization of the
existing industries will not be considered eligible for the
benefits under this scheme.‖

The assessee has undisputedly fulfilled the conditions of these
schemes formulated by Central and State Government to avail the
aforesaid incentives in the form of refund of Central Excise and Sales
Tax incentives, which aggregated to Rs.9,41,04,799/- during the year
under consideration . The only question before us is whether the
aforesaid incentives received by the assessee during the impugned
assessment year under consideration were capital receipts not
exigible to income-tax or were these revenue receipts chargeable to
tax. The AO had brought the said incentives to tax by treating the
same as revenue receipts , while in the opinion of Ld. CIT(A) , these
receipts were in the nature of capital receipts not exigible to income-
tax, wherein Ld. CIT(A) vide appellate order dated 10.09.2015 has
held as under:-

― 7.6 I have considered the facts of the case, reasons
assigned by the AO and various submissions made on behalf
of the appellant. The 'subsidy' is 'a grant of money from a
Government to a private enterprise considered as beneficial to
the public' for bringing overall development in various parts
of the country in the field of agriculture, industry, trade,
generation of employment, etc. The Central Government
granted 10 per cent Central Outright Grant of subsidy under
Scheme of 1971 for industrial units to be set up in certain
selected backward districts/areas. Payment of subsidy under
the scheme is primarily given for helping the growth of
industries and not for supplementing their profits. The
Supreme Court in the case of V.S. S.V. Meenakshi Achi v. CIT
[1966] 60 ITR 253 held that the character of the subsidy in the
hands of the recipient is to be determined having regard to the
purpose for which it is given. This principle is reiterated by

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the Supreme Court in the case of Sahney Steel & Press Works
Ltd. v. CIT [1997] 228 ITR 253. It is further held that if the
purpose of the subsidy is to help the assessee to set up its
business or complete a project, the subsidy is to be treated as
having been received for capital purposes, whereas, if the
subsidy is given to the assessee for assisting him in carrying
out the business operations and is given only after
commencement of production, such subsidy is to be treated as
assistance for the purpose of the trade and would constitute
revenue receipt. Though the Supreme Court held that the
subsidy received was revenue in nature, it laid down the
guiding principles to determine the nature, whether capital
receipt or a revenue receipt. The observations made by the
Supreme Court in this regard are :-- .
"It is not the source from which the amount is paid to
the assessee, which is determinative of the question
whether the subsidy payments are of revenue or
capital nature. The first proposition stated by
Viscount Simon in Ostime's case [1946] 14 ITR
(Suppl.) 45 (HL) is that if payments in the nature of
subsidy from public funds are made to the assessee to
assist him in carrying his trade or business, they are
trade receipts. The sales tax upon collection forms part
of the public funds of the State. If any subsidy is given,
the character of the subsidy in the hands of the
recipient - whether revenue or capital - will have
to be determined by having regard to the purpose for
which the subsidy is given. If it is given by way of
assistance to the assessee in carrying on of his trade or
business, it has to be treated as trading receipt. The
source of the fund is quite immaterial." (p. 262)
It further observed that:--
"For example, if the scheme was that the assessee will be
given refund of sales tax on purchase of machinery as
well as on raw materials to enable the assessee to
acquire new plant and machinery for further
expansion of its manufacturing capacity in a backward
area, the entire subsidy must be held to be a capital in the
hands of the assessee. It will not be open to the revenue
to contend that the refund of sales tax paid on raw
materials or finished products must be treated as revenue
receipt in the hands of the assessee. In both the cases, the
Government is paying out of public funds to the assessee

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for a definite purpose. If the purpose is to help the
assessee to set up its business or complete a project as in
Seaham Harbour Dock Co.'s case [1931] 16 TC 333
(HL); the monies must be treated as having been received
for a capital purpose. But if monies are given to the
assessee for assisting him in carrying out the business
operation and the money is given only after and
conditional upon commencement of production, such
subsidies must be treated as assistance for the purpose of
the trade." (p. 262)
It is, therefore, clear that where the incentive is for the purpose
for setting up a business or complete a project, such incentive
necessarily has to be held in the nature of a capital receipt. But
if the assistance has been given for carrying out the day-to-day
operations and it is given after commencement of production,
such incentive has to be treated as revenue in nature, liable to
tax.
The Special Bench of the Tribunal in the case of Dy. CIT
v. Reliance Industries Ltd. [2004] 88 ITD 273 (Mum.) dealt with
a case of sales tax subsidy. In this case, the assessee's
Patalganga unit was eligible for the incentives announced by the
Government of Maharashtra under its Scheme of year 1979,
wherein the assessee was exempt from liability for payment of
sales tax for a period of 5 years. The assessee claimed the sales
tax exemption amount as capital receipt not liable to tax. The
aforesaid claim was rejected both by the AO and the
Commissioner (Appeals) because (i) under the scheme
announced by the State Government, the assessee was not
required to charge any sales tax from its customers and to pay
any purchase tax on its purchases; (ii) because no amount of
subsidy either in cash or in kind had been given by the
Government; (iii) because in the invoices, the assessee did not
charge any amount separately under the head 'Sales'; (iv)
because under the scheme, at no point of time, was the assessee
required to pay any sales tax to the Government, and (v)
because the assessee did not maintain any separate sales tax
account, any separate incentive account nor had shown any
amount as outstanding liability under the head. The Special
Bench of the Tribunal, relying on the principles laid down by the
Supreme Court in the case of Sahney Steel & Press Works Ltd.
(supra) came to the conclusion that since the incentives were given
for bringing about addition to necessary infrastructure in
processing/developing the backward area, the same would be in
the nature of capital receipt not liable to tax.

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The Special Bench, accepting the contention of the assessee,
thus, held that the collections made by the assessee would be
deemed to include the sales tax amount and since the assessee was
exempted from the payment of sales tax, the notional amount of
such sales tax should be reduced from the revenues for the purpose
of computing the total income of the assessee. The Bombay High
Court has approved the decision of Special Bench in the case of
CIT V/s. Reliance Industries Ltd. 339 ITR 632 (Bom). However the
Supreme Court in SLP(C) No.23433/2011 set aside the matter to
the High Court consider the questions formulated by the Supreme
Court.
In the case of the appellant the CIT(A)-13, Mumbai vide
order dated 13-5-2010 for the A.Y.2006-07 has held these
incentives to be capital receipts and the Department has not filed
any second appeal against the order of the CIT(A)-13, Mumbai.
The appellant has pointed out that the issue of Backward
Incentives has recently came before the ITAT, Mumbai in the case
of M/s. Welspun Gujarat Stahl Rohren Ltd. (now M/s. Welspun
Corp Ltd.), a group company of the appellant for the A.Y.2006-07
where the ITAT, Mumbai has allowed the appeal in favour of the
assessee on the same facts of the case vide order ITA
No.5608/M/2010 dated 6-11-2013. The relevant portion of the
order reads as under:-
"8. The second issue relates to the capital nature of the
incentives received by the assessee. In this regard, it is the
case of the Revenue that the said incentive of Rs.77.51 Crs
(round off to nearest lakhs) constitutes a 'revenue receipt'.
On the other hand, the case of the assessee is that the same
is treated as 'capital receipt'. During the proceedings before
the first appellate authority, CIT(A) relied on the decision of
the Special Bench, ITAT in the case of DCIT vs. Reliance
Industries Ltd (88 ITD 273) (SB) (Mum.) and allowed the
appeal of the assessee on this issue. Revenue carried the
matter in appeal before the Tribunal by raising the above
mentioned ground no.2, 2a and 2b.
9. During the proceedings before us, Ld Counsel for
the assessee demonstrated that the said Special
Bench decision of the Tribunal travelled to the
Hon'ble Bombay High Court, wherein the question
no.(D) relates to the present issue i.e., "[D] Whether
on the facts and in the circumstances of the case
and in law, the Hon'ble Tribunal was right in
holding that sale-tax incentive is a capital receipt?"
would not arise. In that sense, the Special Bench
decision on this issue of capital nature of the

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incentive remained unaltered. Further, in response
to the query from the Bench on the subsequent
development, if any, on the said question "D", Ld
Counsel fairly mentioned that the said question was
remanded by the Hon'ble Supreme Court, vide Civil
Appeal No.7769/ of 2011 (Arising out of S.L.P. (c)
No.9860 of 2010), to the Hon'ble High Court of
Bombay to decide the question in accordance with
the law. Thus, the said conclusion of the Special
Bench, which is followed by the CIT(A), while
granting relief to the assessee, remains unaltered.
Therefore, the present impugned order of the CIT(A)
does not call for any interference.

10. On the other hand, Ld DR relied heavily on the
order of the AO.

11. We have heard both the parties and perused the
orders of the Revenue Authorities as well as the
material placed before us on this issue. On perusal
of the order cited before us, we find that the
argument made by the Ld Counsel is an order, and
therefore, the cited decision of the Special Bench in
the assessee's own case is upheld. Therefore, in our
opinion, the order of the CIT(A) is fair and
reasonable and it does not call for any interference.
Accordingly, grounds no.2, 2a and 2b raised by the
Revenue are dismissed."

I have given anxious thought on alternate plea of the AO. It
is well established that depreciation is allowed on the
actual cost incurred by an assessee for acquiring the
asset. Under section 43(1), 'actual cost' means "the 'actual
cost' of the assets to the assessee, reduced by that portion
of the cost thereof, if any, as has been met directly or
indirectly by any other person or authority". Thus, if a
portion of the cost is met directly or indirectly by any
person or authority, the 'actual cost' would, for the
purposes of the aforesaid sections, be cost minus that cost
met by others, that is, subsidies. Explanation 10 to section
43(1) was introduced with effect from April 1, 1999 to
provide for reduction of amount which is met in the form of
subsidy where cost of any asset is met directly or
indirectly by the Government or any authority in the form
of subsidy or grant or reimbursement, then cost to that
extent is not liable to be included in the actual cost of the
asset to the assessee. Where the subsidy or grant or
reimbursement cannot be related directly to the asset
acquired, a proportionate amount is to be excluded from
computing the actual cost of the asset to the assessee. I

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have considered Explanation 10 to section 43(1). However,
in the case of the appellant subsidy is given in the form of
reimbursement of tax for promotion of industrial
development in the State, economic development of certain
industries in the State and generation of employment and
not to reimburse the cost of any fixed asset, the amount so
received cannot be reduced from the actual cost.

The Vishakapatnam Bench of Tribunal in the case of
Sasisri Extractions Ltd. v. Asstt, CIT [2008] 307 ITR (AT)
127, held that where subsidy is received for encouraging
investment in backward area, even though such subsidy is
computed with reference to cost of investment in fixed assets,
the same will not be reduced from the cost of assets by
applying the provisions of the Explanation since the subsidy
was not given to acquire any asset either directly or indirectly
and, thus, it need not be considered for calculation of
depreciation. Similar decisions are also given in the following
cases:-
ACIT v. Harinagar Sugar Mills Ltd. (ITA No.772/Mum/2012)
DCIT v. Rosoi Ltd. 46 taxmann.com 214 (Kolkata - Trib)
Capital Foods Exports (P.) Ltd. v. ACIT 28 taxmann.com 15
(Mum),
Inventa Chemicals Ltd. V/s. Asst. CIT 42 SOT 249(Hyd.)
Soham Electroplast Pvt. Ltd. V/s. ITO (ITA No.l578/PN/2008
dated. 28.10.2010)
Thus even after insertion of Explanation 10 to section 43(1)
the basic principle underlying in the decision of the Supreme
Court in the case of P. J. Chemicals 210 ITR 830 still holds
the field. It is cash subsidy without reference to any
expenditure incurred, it has to be taken as derived from
scheme of the Government but if it is given as a refund of
excise/ sales tax arithmetically of the same amount, it would
be either reimbursement of expenditure not amounting to
income at all or it would increase the profits of the
undertaking by offsetting it against expense and removing it
from debit to profit of the undertaking, i.e., both credit and debit
do not enter the profit coffers of the undertaking.
Following the order of CIT(A)-13, Mumbai in the case of
the appellant for the A.Y.2006-07 which has not been disputed in
second appeal by the Department and as such reached to the

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

finality and the decision of the ITAT, Mumbai in the case of
Welspun Gujarat Stahl Rohren Ltd. (Now Welspun Corp Ltd.)
where the ITAT, Mumbai has allowed the appeal for the
A.Y.2006-07 in favour of the assessee on the same facts vide
order ITA No.5608/M/2010 dated 6-11-2013, I allow this ground
of appeal in favour of the appellant. I direct the AO to accept
the Backward Incentives as capital receipts without applying the
Explanation 10 to section 43(1). It means Backward incentives
cannot be reduced from the actual cost. This ground of appeal
is allowed in favour of the appellant."
5.2. This issue of chargeability to income-tax of incentives by way of
refund of excise duty and exemption of sales tax incentive which were
given post commencement of production after the new industrial unit
was set up by entrepreneurs in Kutch District has now reached before
the tribunal at the behest of the Revenue and both the parties have
advanced detailed arguments including written submissions filed by
Revenue. The contentions were raised by Revenue's Special Counsel
to explain that there is a difference between subsidy and incentive.
The learned Special Counsel for Revenue explained that subsidy
involves cash flow while there is no cash flow in the case of incentives.
The Special Counsel for Revenue relied upon the Accounting Standard
AS-2 issued by ICAI , para 7 to contend that cost of purchases of the
inventories will include purchase price including duties and taxes
other than those duties and taxes subsequently recoverable by
enterprise from the taxing authorities. Thus, it was submitted in
alternative that even if the said incentives are treated as capital
receipt by tribunal, the taxes recoverable from Government are not
part of the cost of the asset and the refund of Excise duty and
exemption of Sales tax incentives should be reduced from cost of the
assets before allowing depreciation, while on the other hand Ld.
Counsel for the assessee has submitted that the issue of said Kutch
investment subsidy incentive by way of refund of Central Excise and
Exemption of Sales Tax incentives have been gone through by the
ITAT,Mumbai Benches in the case of group concern of the assessee in
Welspun Steel Ltd., v. DCIT/ACIT, vide appellate order dated

14
I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

18.12.2015 , in appeals in ITA no. 7630/Mum/2011 and
8294/M/2011 for AY 2007-08, ITA no. 6371/Mum/2014 for AY 2006-
07, ITA no. 6372/Mum/2014, 6304/Mum/2014 for AY 2007-08, ITA
no. 6373/Mum/2014, 6305/Mum/2014 for AY 2008-09, ITA no.
6374/Mum/2014, 6306/Mum/2014 for AY 2009-10, ITA no.
6375/Mum/2014, 6307/Mum/2014 for AY 2010-11, ITA no.
6376/Mum/2014, 6308/Mum/2014 for AY 2011-12, vide common
order dated 18.12.2015 , wherein the tribunal has held that the said
incentives are capital receipt and further it has been held that the said
amount of incentives received by the asseseee shall not be reduced
from the cost of the asset of the assessee despite provisions of Section
43(1), Explanation 10 , by holding as under:-

― 5. The brief facts qua the issue involved is that,
assessee is engaged in the business of manufacturing of
sponge Iron, Steel Ingots and rolled product. In the wake of
devastating earthquake in Kutch District, Gujarat, the
Central Government, vide notification No. 39/2001 dated
7th August, 2001 issued an excise benefit incentive
scheme and State Government of Gujarat also vide its
Notification dated 9th November, 2001 announced an
incentive scheme for Sales-tax exemption known as
―Incentive Scheme, 2001 for Economic Development for
Kutch District‖. Both these schemes were for setting-up of
a new industrial unit/s in Kutch District after complying
with the terms and conditions as set out in the
notifications and schemes of the Central and State
Government respectively. The object of both the schemes
was economic development of Kutch District after the
earthquake and creation of new employment opportunities
and attraction of large scale investments. During the
previous year, the assessee had received following
incentives by the State government and Central
government:-

(i) Sales-tax incentive -Rs. 12,95,99,499

(ii) Central Excise benefit -Rs. 22,37,23,672

------------------------------

Total -Rs.35,33,23,171
----------------------------

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

The amount of incentive received was credited to the profit
and loss account, however, the assessee claimed that the
said receipts are not taxable as they are capital receipts.
The AO while making the assessment has rejected the
claim of the assessee on the ground that in the
assessment year 2006-07, the assessee's claim was
rejected by the AO on the ground that the decision of
Special Bench in the case of Reliance Industries is pending
for disposal before the Hon'ble Bombay High Court.

6. The Ld. CIT(A) too following the decision of Bombay
High Court in the case of Reliance Industries, allowed the
assessee's appeal. However, later on, this decision of the
Hon'ble Bombay High Court has been set aside to the
Tribunal for fresh adjudication.

7. Before us, it has been stated that this issue of
subsidy / incentive in the case of the assessee had
reached to the stage of ITAT, whereby the Tribunal, vide
order dated 28.12.2011 had set aside this issue to the file
of the AO on the ground that authorities below have not
analysed the scheme of subsidy / incentive granted by the
respective governments. It has been informed that, till date
no assessment order has been passed in pursuance of
Tribunal order. Instead a fresh assessment order has been
passed under section 143(3) r.w.s. 153A wherein this
issue has been confirmed by the AO again without proper
analyzing the ‗purpose test' of the scheme.

8. The Ld. Counsel for the assessee submitted that,
now there is catena of decisions not only of the Tribunal
but also of the various High Courts including that of the
jurisdictional High Court, in favour of the assessee that if
the subsidy is given for setting up for a new industrial unit
or plant then it is on capital account. In support of this
contention a separate compilation of case laws have been
filed before us. Explaining the nature of scheme, he
submitted that the fundamental object for both the
schemes was to set up an industrial plant for economic
development and creation of new employment
opportunities. From the perusal of these schemes which
have been placed in the paper book from pages 35 to 47,
he submitted that it can be seen that they were purely for
assisting the entrepreneur for setting-up new industrial
units and not for running of any industry for profit. He
refer to preamble as given in the ―Incentive Scheme of
2001 for Economic Development of Kutch District‖ issued
by Government of Gujarat dated 09.11.2001. Even in the
Central Excise Notification, the same was issued in a
public interest for setting up of a new industrial plant and

16
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

the incentive of Excise Duty benefit was given for a period
of five years. He further submitted that the nature of
incentive under both the notifications and the accounting
treatment by the assessee as stated by the assessee
before the authorities below was as under:-

(a) The nature of incentives under the Notification
and the Scheme and the present accounting
treatment are summarized as under:-

(a) Excise Duty (in view of the Notification) -
Refund of the excise duty paid through PLA on
finished goods cleared from the unit after
taking Cenvat credit on the inputs. This
amount is credited to the profit and loss
account as 'Excise Benefit Received and
inadvertently offered to tax. Presently, there is
no limit for the quantum of such incentive.

(b) Sales Tax/Value Added Tax (in view of the
Scheme) - Purchase of inputs without sales
tax and sales without charging of sales tax
thus, claiming exemption. However, after the
introduction of VAT, refund of VAT paid on
inputs and remission of VAT collected on
sales is available. Both these components are
credited to the profit and loss account as
'Sales Tax Incentives Received' and
inadvertently offered to tax. There is a
monetary limit specified for the quantum of
this incentive linked to investment that is
eligible under the Scheme.

(c) The incentive can be availed of only after
commencement of production. Further, in so
far as it relates to the incentives under the
Scheme, the unit has to invest at least 50% of
the incentives in the State of Gujrat within a
period of 10 years from the date of
commercial production‖.

Thus, he submitted that, looking to the objects and the
purpose for which subsidy was given, the incentive
receipts has to be treated as capital. In support of his
contention, besides several decisions, he placed reliance
on the following decisions:-

Sr.. Case Law Citation
No.

17
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

1 Sahney Steel & Press Works Ltd 228 ITR 253
(SC)
2 Ponni Sugars & Chemicals Ltd. 306 ITR 392
(SC)
3 Bougainvillea Multiplex Ent. Centre 373 ITR 14
(P) Ltd (Trib)
4 Chaphalkar Brothers 351 ITR 309
(Bom)

5 Birla VXL Ltd. 32
taxmann.com
330(Guj)
6 M/s Ajanta Manufacturing Ltd. ITA No.
793/Rjt/2010
7 M/s Mihir Packaging ITA No.
5629/M/2011
8 M/s Nikomom Finance Pvt Ltd. ITA No.
3580/M/2012

9. Ld. Counsel further pointed out that in the case of
the assessee, a search and seizure action had taken place
on 30.10.2010 in Welspun Group of cases and in
pursuance of that notice u/s 153A was issued for the
impugned assessment years. The Ld. AO besides treating
the said incentives as revenue receipts had taken an
additional point by way of an alternative observation that
in case, the said receipts are treated as capital receipts,
then same shall be reduced from the costs of assets and
depreciation claimed on the net cost of the assets will be
allowed after reducing the amount of incentives in terms of
Explanation 10 to section 43(1). He submitted that such a
contention of the AO cannot be upheld, because the same
is not applicable in the present case at all, because there is
no direct acquisition of asset from the Government
subsidy. The subsidy is received in the form of excise tax
benefit and sales-tax incentive only when the assessee
had set up the whole industrial unit and starts
manufacturing and commenced its business of sale. Thus,
the said provision is not applicable and in support of his
contention, he relied upon the following Tribunal
decisions:-
Sr. Case Name Citation

No.

1 Sasisri Extractions Limited 122 ITD 428 (Visakhapatnam)

2 M/s Harinagar Sugar Mills Ltd ITA No. 772/Mum/2012

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

3 Rasoi Ltd. 46 taxman.com214(Kolkata-Trib)

4 Universal Cables Ltd 57 taxman.com95(Kolkata -Trib)

5 Soham Electroplast Pvt Ltd ITA No. 1578/PN/2008

10. On the other hand Ld. DR strongly relied upon the
assessment order especially passed by the AO under
section 143(3) r.w.s. 153A dated 25.03.2013 and
submitted that, if the incentive/ subsidy has been given in
the form of sales-tax or exemption of excise duty then it
directly leads to augmentation of profit of the assessee
and hence, it is nothing but revenue receipts.

11. We have carefully considered the rival contentions
and also perused the relevant material placed on record.
The main issue involved is, whether the incentive /
subsidy provided by the State Government in the form of
sales-tax incentive and in the form of Central Excise
benefit by the Central Government for sums aggregating to
Rs. 35,33,23,171/- is to be treated as capital receipts or
revenue receipts. The Hon'ble Supreme Court in the case of
Ponni Sugars & Chemicals Ltd vs CIT, reported in [2008]
306 ITR 392 after referring to the earlier decisions of the
Supreme Court in the case of Sahney Steel Works Ltd v
CIT, reported in [1999] 228 ITR 253, held that the ―purpose
for which subsidy is given is the crucial factor‖. The
purpose is to be judged from the character of the receipts
in the hands of the assessee which has to be determined
with respect to the purpose for which the subsidy is given.
The point of time is not relevant and also the source and
the form of subsidy is immaterial. If the subsidy has been
given to set-up new units or for substantial explanation of
existing units, then it is a capital receipt. If the object of the
subsidy scheme was to enable the assessee to run the
business more profitably then, the receipt is on revenue
account. The relevant observation of the Hon'ble apex
Court in this regard given in para 14 reads as under:-

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

subsidy granted on the basis of. refund of sales tax
on raw materials, machinery and finished goods
were also of capital nature as the object of granting
refund of sales tax was that the assessee could set
up new business or expand his existing business.
The contention of the assessee in that case was
dismissed by the Tribunal and, therefore, the
assessee had come to this Court by way of a special
leave petition. It was held by this Court on the facts
of that case and on the basis Of the analyses of the
Scheme therein that the subsidy given was on
revenue account because it was given by way of
assistance in carrying on of trade or business. On
the facts of that case, it was held that the subsidy
given was to meet recurring expenses. It was not for
acquiring the capital asset. It was not to meet part of
the cost. It was not granted for production of or
bringing into existence any new asset. The
subsidies in that case were granted year after year
only after setting up of the new industry and only
after commencement of production and, therefore,
such a subsidy could only be treated as assistance
given for the purpose of carrying on the business of
the assessee. Consequently, the contentions raised
on behalf of the assessee on the facts of that case
stood rejected and it was held that the subsidy
received by Sahney Steel could not be regarded as
anything but a revenue receipt. Accordingly, the
matter was decided against the assessee. The
importance of the judgment of this Court in Sahney
Steel & Press Works Ltd. 'S case (supra) lies in the
fact that it has discussed and analysed the entire
case law and. it has laid down the basic test to be
applied in judging the character of a subsidy. That
test is that the character of the receipt in the hands
of the assessee has to be determined with respect to
the purpose for which the subsidy is given. In other
words, in such cases, one has to apply the purpose
test. The point of time which the subsidy is paid is
not relevant. The source is immaterial. The form of
subsidy is immaterial. The main eligibility condition
in the scheme with which we are concerned in this
case is that the incentive must be utilized for
repayment of loans taken by the assessee to setup
new units or for substantial expansion of existing
units; On this aspect there is no dispute. If the object
of the subsidy scheme was to enable the assessee
to run the business more profitably then the receipt
is on revenue account. On the other hand, if the

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

object of the assistance under the subsidy scheme
was to enable the assessee to set up a new unit or
to expand the existing unit then the receipt of the
subsidy was on capital account. Therefore, it is the
object for which the subsidy/assistance is given
which determines the nature of the incentive
subsidy. The form of the mechanism through which
the subsidy is given is irrelevant‖.

12. Now, in the wake of the principle laid down by the
Hon'ble Supreme Court, we shall examine the nature of
subsidy provided to the assessee. The ―Incentive Scheme
2001 for Economic Development of Kutch District of the
Gujarat Government‖ gives the fundamental preamble
which highlights the basic objective and the purpose for
which the incentive by the State Government as well as
Central Government is being given has been highlighted in
the following manner:-

―The economic activities in the district of Kutch came
to a standstill on account of the devastating
earthquake in the State on 26th January, 2001.
New employment, opportunities could be created if
new Investment takes place. The Government is
committed to attracting industries in the district to
make the industrial and economic environment live.
Government of India have announced excise duty
exemption for new industries to promote large scale
investment in the district, along with which the State
Government has also decided to announce the
scheme of sales tax incentives. Since the scheme is
aimed at making the economic environment of Kutch
district live, it has been decided to confine the same
only to Kutch district‖.

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Government is nothing but capital receipts, because
applying the ―purpose test‖ the incentive / subsidy was
given only for setting up of new industrial unit and
economic development and generation of new employment
opportunities in the Kutch District and not for running the
industry for augmenting the profit on day-to-day business.
This proposition of law has been reiterated by the Hon'ble
Bombay High Court in the case of CIT vs Chaphalkar
Brothers, reported in 351 ITR 309, wherein the Hon'ble
High Court relying upon the principles laid down by the
Supreme Court in the case of Ponni Sugars & Chemicals
Ltd has held that if the object of the subsidy was to
promote construction of multiplexes, theater complexes
then, it would be on capital account. Similarly, views have
been taken by the various other High Courts and Tribunal
in the decision as referred and relied upon by the Ld.
Counsel as above. Thus, We hold that the amount of
incentive received by the assessee cannot be taxed as
revenue receipt as it is purely on capital account.

14. As regards the other plea raised by the AO in the
order passed u/s 143(3) r.w.s. 153A, we agree with the
contention of the Ld. Counsel that, none of the plant and
machinery installed by the assessee for setting up of a
new industrial unit has been funded by the Government
subsidy. The subsidy here in this case is not specifically
intended to subsidies the cost of capital or plant &
machinery. The incentive in the form of subsidy by the
government here in this case cannot be considered as
payment directly or indirectly to meet any portion of the
actual cost and hence it does not fall within the purview of
Explanation 10 to section 43(1). Thus, this alternative plea
as raised by Ld. AO is rejected. Accordingly, the ground
raised by the revenue on this score stands dismissed.‖

5.3. We have heard rival contentions and perused the material on
record including cited case laws, orders of the authorities below and
factual matrix of the case. We have also gone through the terms &
condition of the said incentive scheme formulated by Central and
State Government to grant Central Excise benefits by way of refund
and exemption of Sales Tax Incentive as are extracted by learned
CIT(A) in his appellate order which are reproduced above in the
preceding para's of this order We have observed that the assessee is
engaged in the business of manufacturing of Terry Towels. We have
observed that there was a devastating earthquake in District Kutch in

22
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Gujarat on 26.01.2001. In order to redevelop and rehabilitate the said
Kutch District of Gujarat , the Central and State Government
formulated policy with a view to encourage setting up of new industry
in said Kutch District wherein certain incentives by way of refund of
excise duty as well exemption of Sales Tax incentives were given by
Central and State Government to the entrepreneurs for setting up new
industry in Kutch District ,as detailed below:-

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

the Deputy Commissioner of Central Excise, as the case
may be.

v) In case on the basis of such certification, or otherwise,
the original value of investment in plant and machinery,

(vi) The exemption shall apply for a period not exceeding
five years from the date of commencement of commercial
production by the unit.‖

The sales tax incentive scheme formulated by State
Government of Gujarat is detailed hereunder:

―SALES TAX INCENTIVE SCHEME 2001 FOR KUTCH
DISTRICT

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

which the State Government has also decided to announce
the scheme of sales tax incentive. Since the scheme is
aimed at making the economic environment of Kutch
district live, it has been decided to confine the same only to
Kutch district.

Conditions

(a) The industrial unit shall have to give a clear
undertaking that it shall not transfer or dispose of the
assets in any manner, till the expiry of the eligibility period
of incentives.

(d) The industrial unit shall have to furnish the details of
production, employment and other information every year
before 30th June or from time to time as sought by the
State Government.

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

(g) Unit opting for sales tax deferment scheme for the
purpose of deferred amount shall have to give a personal
undertaking in the form of security bond as prescribed
vide Resolution No.INC-1087-2138-I dated the 1st August,
1990 or equitable charge, second charge.

(h) The unit availing of incentives under any other
scheme of the State Government will not be eligible to
receive benefits under this scheme.

(i) Expansion, diversification or modernization of the
existing industries will not be considered eligible for the
benefits under this scheme.‖

We have also observed that the Mumbai-tribunal has dealt with this
incentive schemes of Central and State Government for giving
incentives by Central Excise Benefits by way of refund and exemption
of Sales Tax Incentives for setting up industrial units in District
Kutch,Gujarat to redevelop the said Kutch District in the wake of
devastating earth quakes on 26.01.2011 in the cases of group
concern of the assessee in Welspun Steel Ltd. v. DCIT/ACIT, vide
appellate order dated 18.12.2015 , in appeals in ITA no.
7630/Mum/2011 and 8294/M/2011 for AY 2007-08, ITA no.
6371/Mum/2014 for AY 2006-07, ITA no. 6372/Mum/2014,
6304/Mum/2014 for AY 2007-08, ITA no. 6373/Mum/2014,
6305/Mum/2014 for AY 2008-09, ITA no. 6374/Mum/2014,
6306/Mum/2014 for AY 2009-10, ITA no. 6375/Mum/2014,
6307/Mum/2014 for AY 2010-11, ITA no. 6376/Mum/2014,
6308/Mum/2014 for AY 2011-12, vide common order dated
18.12.2015 , wherein the Mumbai tribunal has held that the said
incentives are capital receipt not exigible to income-tax and further it
has been held that the said amount of incentives received by the
asseseee shall not be reduced from the cost of the asset of the
assessee despite explanation 10 to Section 43(1) , by holding as
under:-

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

(i) Sales-tax incentive -Rs. 12,95,99,499

(ii) Central Excise benefit -Rs. 22,37,23,672

------------------------------

Total -Rs.35,33,23,171

----------------------------

7. Before us, it has been stated that this issue of
subsidy / incentive in the case of the assessee had
reached to the stage of ITAT, whereby the Tribunal, vide

27
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

order dated 28.12.2011 had set aside this issue to the file
of the AO on the ground that authorities below have not
analysed the scheme of subsidy / incentive granted by the
respective governments. It has been informed that, till date
no assessment order has been passed in pursuance of
Tribunal order. Instead a fresh assessment order has been
passed under section 143(3) r.w.s. 153A wherein this
issue has been confirmed by the AO again without proper
analyzing the ‗purpose test' of the scheme.

(a) The nature of incentives under the Notification
and the Scheme and the present accounting
treatment are summarized as under:-

28
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Sr.. Case Law Citation
No.
1 Sahney Steel & Press Works Ltd 228 ITR 253
(SC)
2 Ponni Sugars & Chemicals Ltd. 306 ITR 392
(SC)
3 Bougainvillea Multiplex Ent. Centre 373 ITR 14
(P) Ltd (Trib)
4 Chaphalkar Brothers 351 ITR 309
(Bom)

5 Birla VXL Ltd. 32
taxmann.com
330(Guj)
6 M/s Ajanta Manufacturing Ltd. ITA No.
793/Rjt/2010
7 M/s Mihir Packaging ITA No.
5629/M/2011
8 M/s Nikomom Finance Pvt Ltd. ITA No.
3580/M/2012

29
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

No.

1 Sasisri Extractions Limited 122 ITD 428 (Visakhapatnam)

2 M/s Harinagar Sugar Mills Ltd ITA No. 772/Mum/2012

3 Rasoi Ltd. 46 taxman.com214(Kolkata-Trib)

4 Universal Cables Ltd 57 taxman.com95(Kolkata -Trib)

5 Soham Electroplast Pvt Ltd ITA No. 1578/PN/2008

30
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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

benefit by the Central Government for sums aggregating to
Rs. 35,33,23,171/- is to be treated as capital receipts or
revenue receipts. The Hon'ble Supreme Court in the case of
Ponni Sugars & Chemicals Ltd vs CIT, reported in [2008]
306 ITR 392 after referring to the earlier decisions of the
Supreme Court in the case of Sahney Steel Works Ltd v
CIT, reported in [1999] 228 ITR 253, held that the ―purpose
for which subsidy is given is the crucial factor‖. The
purpose is to be judged from the character of the receipts
in the hands of the assessee which has to be determined
with respect to the purpose for which the subsidy is given.
The point of time is not relevant and also the source and
the form of subsidy is immaterial. If the subsidy has been
given to set-up new units or for substantial explanation of
existing units, then it is a capital receipt. If the object of the
subsidy scheme was to enable the assessee to run the
business more profitably then, the receipt is on revenue
account. The relevant observation of the Hon'ble apex
Court in this regard given in para 14 reads as under:-

―14. In our view, the controversy in hand can be
resolved if we apply the test laid down in the
judgment of this Court in the case of Sahney Steel &
Press Works Ltd. (supra). In that case, on behalf of
the assessee, it was contended that the subsidy
given was up to 10 per cent of the. capital
investment calculated on the basis of the quantum
of investment in capital and, therefore, receipt of
such subsidy was on capital account and not on
revenue account. It was also urged in that case that
subsidy granted on the basis of. refund of sales tax
on raw materials, machinery and finished goods
were also of capital nature as the object of granting
refund of sales tax was that the assessee could set
up new business or expand his existing business.
The contention of the assessee in that case was
dismissed by the Tribunal and, therefore, the
assessee had come to this Court by way of a special
leave petition. It was held by this Court on the facts
of that case and on the basis Of the analyses of the
Scheme therein that the subsidy given was on
revenue account because it was given by way of
assistance in carrying on of trade or business. On
the facts of that case, it was held that the subsidy
given was to meet recurring expenses. It was not for
acquiring the capital asset. It was not to meet part of
the cost. It was not granted for production of or
bringing into existence any new asset. The
subsidies in that case were granted year after year

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

only after setting up of the new industry and only
after commencement of production and, therefore,
such a subsidy could only be treated as assistance
given for the purpose of carrying on the business of
the assessee. Consequently, the contentions raised
on behalf of the assessee on the facts of that case
stood rejected and it was held that the subsidy
received by Sahney Steel could not be regarded as
anything but a revenue receipt. Accordingly, the
matter was decided against the assessee. The
importance of the judgment of this Court in Sahney
Steel & Press Works Ltd. 'S case (supra) lies in the
fact that it has discussed and analysed the entire
case law and. it has laid down the basic test to be
applied in judging the character of a subsidy. That
test is that the character of the receipt in the hands
of the assessee has to be determined with respect to
the purpose for which the subsidy is given. In other
words, in such cases, one has to apply the purpose
test. The point of time which the subsidy is paid is
not relevant. The source is immaterial. The form of
subsidy is immaterial. The main eligibility condition
in the scheme with which we are concerned in this
case is that the incentive must be utilized for
repayment of loans taken by the assessee to setup
new units or for substantial expansion of existing
units; On this aspect there is no dispute. If the object
of the subsidy scheme was to enable the assessee
to run the business more profitably then the receipt
is on revenue account. On the other hand, if the
object of the assistance under the subsidy scheme
was to enable the assessee to set up a new unit or
to expand the existing unit then the receipt of the
subsidy was on capital account. Therefore, it is the
object for which the subsidy/assistance is given
which determines the nature of the incentive
subsidy. The form of the mechanism through which
the subsidy is given is irrelevant‖.

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

13. From the perusal of the above, it is amply clear that
the schemes launched was for setting up of new industries
in the district of Kutch for the purpose of new employment
opportunities and to make industrial and economic
environment live. Thus, the scheme of incentives provided
by the respective Governments was setting-up of a new
unit and not for running of the business more profitably.
As laid down by the Hon'ble Supreme Court, the form and
the source of subsidy are immaterial and what is material
is whether the subsidy is for setting up for a industrial unit
or running it for profitability. Similarly, the Central Excise
exemption was given in the public interest for setting up of
a new industrial unit in the Kutch District. Accordingly on
the facts of the present case, we conclude that the
incentive given by the State Government and the Central
Government is nothing but capital receipts, because
applying the ―purpose test‖ the incentive / subsidy was
given only for setting up of new industrial unit and
economic development and generation of new employment
opportunities in the Kutch District and not for running the
industry for augmenting the profit on day-to-day business.
This proposition of law has been reiterated by the Hon'ble
Bombay High Court in the case of CIT vs Chaphalkar
Brothers, reported in 351 ITR 309, wherein the Hon'ble
High Court relying upon the principles laid down by the
Supreme Court in the case of Ponni Sugars & Chemicals
Ltd has held that if the object of the subsidy was to
promote construction of multiplexes, theater complexes
then, it would be on capital account. Similarly, views have
been taken by the various other High Courts and Tribunal
in the decision as referred and relied upon by the Ld.
Counsel as above. Thus, We hold that the amount of

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

incentive received by the assessee cannot be taxed as
revenue receipt as it is purely on capital account.

We are in agreement with the aforesaid decision of the tribunal dated
18.12.2015 in the case of Welspun Steel Ltd(supra) as the said
incentives by way of excise duty refund and sales tax incentives were
given to encourage setting up of new industrial unit in Kutch District
to redevelop the Kutch District in the wake of devastating earthquake
on 26.01.2001 albeit the said incentives are given post
commencement of manufacturing and the said subsidy shall be
capital in nature as it is for promoting setting up of new industry in
Kutch District which was devastated by earthquake even if the
subsidy is given post commencement of commercial production by
way of refund of Central Excise and Exemption of Sales Tax which is
not material keeping in view purposive test and the fact that the said
incentives were given to encourage making capital investments in
Kutch District in setting up new industry to redevelop the Kutch
District post devastating earthquakes on 26.01.2001. We also note
that Special Bench decision of the Mumbai-tribunal in the case of
Reliance Industries Limited(supra) was upheld by Hon'ble Bombay
High Court in CIT v. Reliance Industries Limited (2011) 339 ITR
632(Bom.) by holding that no substantial question of law would arises
as the object of the subsidy was to set up a new unit in a backward
area to generate employment but aforesaid decision of Hon'ble

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Bombay High court has been set aside by Hon'ble Supreme Court in
Civil Appeal Number 7769 of 2011 ( arising out of SLP (C) No. 9860 of
2010) dated 09.09.2011 and the matter is remitted back to Hon'ble
Bombay High court to decide the question of law framed thereon in
accordance with law. This revives the Special Bench decision of the
tribunal in the case of Reliance Industries Limited(supra) , which has
already held that subsidy which is given for setting up or expansion of
industry in a backward area , will be capital in nature, irrespective of
modality or source of funds through or from which it is given. Thus,
following the ratio of decision of co-ordinate Benches of the tribunal in
the case of Welspun Steel Ltd(supra) , we hold that Central Excise
benefit and Sales Tax incentive received by the assessee during the
impugned assessment year under consideration, are capital receipts
not exigible to income-tax and further we hold that the same shall not
be deducted from cost of assets for computing depreciation. The
ground number 1 and 2 raised by the Revenue in its memo of appeal
filed with the tribunal are dismissed. We order accordingly.

6. This takes us to the next issue which concerns itself with
disallowance made u/s. 14A of the 1961 Act. Both the rival parties are
aggrieved by the appellate decision of learned CIT(A) on this issue .

6.2. The assessee has received dividend income of Rs. 2,58,31,086/-
during the impugned assessment year which was claimed as an
exempt income . The assessee has made investments in shares to the
tune of Rs. 90.48 crores as on 31.03.2008. The said investment in
shares , inter-alia, included strategic investments in group/associated
companies apart from investments in shares, mutual funds and
government securities. The assessee voluntarily disallowed Rs.
81,30,975/- as an expenditure incurred in relation to earning of an
exempt income within the provisions of Section 14A of the 1961 Act.
The assessee had incurred an amount of Rs. 67.68 crores during the
impugned assessment year towards interest expenditure on
loans/debentures, working capital and other interest expenditure. The

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

AO held that the assessee could not prove that the assessee made
investments totally out of surplus money and contentions of the
assessee to that effect were rejected by the AO. The learned AO also
held that the assessee could not establish and provide any basis
/method to compute disallowance of expenditure incurred in relation
to earning of an exempt income u/s 14A of the 1961 Act. The AO
worked out disallowance of expenditure incurred in relation to earning
of an exempt income u/s 14A of the 1961 Act by invoking Rule 8D of
the Income-tax Rules, 1962 r.w.s. 14A of the 1961 Act, wherein
disallowance was worked out by the AO as under:-

Since, the assessee company had already disallowed an amount of

Rs.81,30,975/- under Section 14A of the Act, the remaining amount of

Rs. 3,92,83,170/- was disallowed by the AO u/s. 14A of the 1961 Act

and added back to the total income of the assessee, vide assessment

order dated 26.03.2013 passed u/s 143(3) read with Section 153A rws

144C(1) of the 1961 Act.

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

6.3 The assessee carried the matter further in appeal before learned
CIT(A), wherein Ld. CIT(A) was pleased to grant partial relief by
holding as under , vide appellant order dated 10.09.2015:-

― 8.4 I have considered the facts of the case together
with reasons assigned by the AO and contention of the
appellant. It is seen that the AO has disallowed
proportionate interest and an amount equal to 0.5% of
average investment in shares on account of administrative
expenses relating to exempt income and in doing so he
relied upon Godrej & Boyce Mfg. Co, Ltd. V/s. Dy. CIT 328
ITR 81 (Bom). It is now admitted position that,.the
disallowance U/S.14A has to be determined keeping in
view the direct nexus between exempt income and
expenditure incurred on a reasonable basis. In view of
specific language of sub-sections (2) and (3) of section 14A,
the prescribed method of rule 8D has to be applied by the
AO only if he, having regard to the accounts of the
assessee, is not satisfied with the correctness of the claim
of the assessee in respect of no or an expenditure has
been incurred in relation to exempt income.

The relevant facts of the case reveals that the appellant
received dividend income of Rs.2,58,31,086/- which was
claimed exempt. The nature of investment shows:-

31.03.2008 31.03.2007
(a) Government Securities (NSC) 12,000 12,000

(b) Shares in subsidiary and

Group companies 68,95,45,956/- 56,29,00,456/-

Shares of other companies 21,52,05,969/- 1,10,25,32,893/-

Total 90,47,63,925/- 1,66,54,45,350/-

The Government Securities are in the nature of NSC and
generate taxable income. The investment in shares of
Subsidiary and Group companies are around 76% of the
total investment. It is seen that there was Shareholders'
funds as on 31-3-2008 to the extent of Rs 5588.19 million.
It means investment in shares other than subsidiary and
group companies are around 4% only of the Shareholders'
funds. It is further seen that major investment in shares
are carried forward from the preceding previous year.
Coming to another aspect of loans taken by the appellant it
is seen that secured loans of Rs 15,235.71 million as on
31-3-2008 were taken from banks and financial

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

institutions in the nature of term loans, foreign currency
loans, working capital loans. Further unsecured loans of
RS 182.32 million were short term loans from banks. It is
seen that the appellant added back a sum of Rs
81,30,975/-being proportionate part of interest under s.
14A worked out in respect of investment in mutual funds
and shares of companies other than Group companies.
The AO has not contravened the proportionate part of
interest as worked out and added back to income. It is
observed that investment in subsidiary and Group
companies to the extent of Rs 68,95,45,956/- are long
term investment and no decision is required in making
these investment or disinvestment on regular basis
because these investments are strategic in nature and
therefore no direct or indirect expenditure is required. It is
pointed out by the appellant that in Garware Wall Ropes
Ltd. V/s. ACIT (ITA No.5408/Mum/2012) dated 15-1-2014
it is held that a disallowance under S.14A cannot be made
if primary object of investment is holding controlling stake
in group concerns. The appellant also pointed out the
similar decisions of Oriental Structural Engineers Pvt. Ltd.
35 taxmann.com 210 (Del.) and J. M. Financial Ltd. V/s.
ACIT (ITA No,4521/Mum/2012) dated 26-3-2014 for the
A.Y.2009-10. Considering the fact that the appellant
added back a sum of Rs 81,30,975/- being proportionate
interest under s. 14A in respect of investment in mutual
funds and shares of companies other than Group
companies . I do not find any reason for disallowing
further interest under S.14A since the primary object of
investment in Subsidiary and Group companies is holding
controlling stake in group concerns.

It is seen that the AO has disallowed expenses
under S.14A as per rule 8D relying on the decision of
Godrei & Boyce Mfg. Co. Ltd. In this case it is held that
provisions of section 14A cannot be applied unless there is
proximate cause for disallowance and therefore
application of section 14A and rule 8D is not automatic in
each and every case. The exemption from the tax if
granted by the statute should be given full scope and
amplitude and should not be whittled down by imposing
limitations. However in this case there are huge
investment in units of mutual funds and shares of the
other companies, and as such certain disallowance on
account of administrative expenses is required to be made.
Though the objective of section 14A is not allowing to
reduce tax payable on the normal exempt income by
debiting the expenditure incurred to earn the exempt
income. Thus, the expenses incurred to earn exempt

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

income cannot be allowed and the expenses shall be
allowed only to the extent they are related to the earning
of taxable income. If there is expenditure directly or
indirectly incurred in relation to exempt income, the same
cannot be claimed against the income, which is taxable as
it is held by the SC in case of CIT V/s. Walfort Share and
Stock Brokers P. Ltd. (326 ITR 1) (SC) that for attracting
the provisions of section 14A, there should be proximate
cause for disallowance which has relationship with the tax
exempt income. The expenditure incurred in relation to the
income which does not form part of total income has to be
disallowed. However, it should be proximate relationship
between the expenditure and the income, which does not
form part of total income. Once such proximity
relationships exist, .the disallowance is to be effected. In
case the assessee had claimed that no expenditure has
been incurred for earning the exempt income, it was for the
AO to determine as to whether the assessee had incurred
any expenditure in relation to income which did not form
part of total income and if so to quantify the extent of
disallowance.

However, certain part of administrative expenses should
be disallowed in accordance with rule 8D i.e. @ 0.5% of
average investment in units of mutual funds and shares
other than shares of Group companies. The average of
such investment comes to Rs. 65,88,69,431/-(i.e.
21,52,05,969/- + 1,10,25,32,893/- / 2). Hence I
confirm the addition to the extent of Rs 32,94,347/- being
0.5% of Rs 65,88,69,431/-(i.e. average investment in
mutual funds and shares of the companies other than
Group companies). The appellant gets relief of Rs
3,59,88,823/- . This ground of appeal is partly allowed.

6.4. The learned CIT(A) granted relief of Rs. 3,59,88,823/- while
disallowance to the tune of Rs. 32,94,347/- were confirmed by learned
CIT(A) by invoking provisions of Section 14A of the 1961 Act r.wr.
8D2(iii) of the 1962 Rules . The learned CIT(A) also excluded
investments made by the assessee in group companies while
confirming aforesaid disallowance of Rs. 32,94,347/- . It is pertinent
to mention here that the said proposition of exclusion of investments
in subsidiary/ associated companies while computing disallowance
u/s 14A r.w.r. 8D has already been rejected by Hon'ble Supreme
Court in a recent decision in the case of Maxopp Investment Limited v.

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

CIT reported in (2018) 402 ITR 640(SC) . Before us , Ld. Special
Counsel had pleaded that the matter can be restored and set aside to
the file of the AO for re-computation of disallowance u/s 14A of the
1961 Act. The learned counsel for the assessee on the other hand has
drawn our attention to the availability of own funds with the assessee
which it is claimed is much higher than investments made in the
shares and mutual funds, including investments made in
subsidiary/associated companies. It is shown that total investments
made by the assessee were to the tune of Rs. 90.48 crores as on
31.03.2008 and Rs. 166.54 crores as on 31.03.2007 , while own funds
were to the tune of Rs. 558.81 crores as on 31.03.2008 and Rs.
542.78 crores as on 31.03.2007. Our attention was drawn to page
28/paper book filed by the assessee which is audited balance sheet of
the assessee company. The assessee also submitted that the assessee
voluntarily disallowed an expenditure of Rs. 81,30,975/- incurred in
relation to earning of an exempt income , u/s 14A of the 1961 Act.

6.5 We have considered rival contentions and perused the material on
record including orders of authorities below and cited case law. We
have observed that the assessee has made an investment of Rs. 90.48
crores as on 31.03.2008 and Rs. 166.54 crores as on 31.03.2007, as
per audited financial statements produced before us. We have
observed that the assessee has its own interest free funds by way of
share capital and reserves and surpluses to the tune of Rs. 558.82
crores as on 31.03.2008 and Rs. 542.78 crores as on 31.03.2007. The
investments made by the assessee included investment in government
securities, mutual funds and shares. The investments in shares
included investment in group /subsidiary/associated companies. The
theory of dominant object of holding shares is already rejected by
Hon'ble Supreme Court in the case of Maxopp Investment
Limited(supra) and hence even if shares are held by the assessee as
strategic investment in group /associated companies etc. , it will
warrant disallowance u/s 14A. We have also noted that the assessee

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

has claimed that its interest bearing borrowings were for the specific
purposes and no part of it was invested in securities capable of
yielding an exempt income. There is no adverse finding of the lower
authorities to rebut such claim and it is on the theory of mixed fund
use, the disallowance was made of interest expenditure u/s 14A of the
1961 Act read with Rule 8D(2)(ii) of the 1962 Rules. As we have seen
earlier, the assessee's own funds are more than the investments made
by the assessee and hence no disallowances are warranted u/s 14A
read with Rule 8D(2)(ii) of the 1962 Rules., keeping in view that there
is no incriminating finding recorded by Revenue that any specific
interest bearing borrowings were used by the assessee for making
investments in shares while the assessee has claimed that interest
bearing borrowings were used for specific purposes for which they
were granted and no part of the said interest bearing borrowings were
used for making investments in securities which are capable of
yielding interest free income and the AO concluded that it is infact
mixed funds which were available with the assessee and on that basis
disallowance of expenditure was made u/s 14A of the 1961 Act read
with Rule 8D(2)(ii) of the 1962 Rules . The presumption in such cases
will be that the assessee used its own interest free funds available
with it for making investments in shares and securities capable of
yielding exempt income. We are guided by the decision of Hon'ble
Bombay High Court in the case of CIT v. Reliance Utilities and Power
Limited (2009) 313 ITR 340(Bom.) and HDFC Bank Limited v. DCIT
(2016) 383 ITR 529(Bom.) to hold that there will be presumption in
favour of the assessee. The Revenue is not able to rebut the aforesaid
presumption in favour of the assessee even before us. Thus this
disallowance as was made by the AO by invoking Section 14A of the
1961 Act read with Rule 8D(2)(ii) of the 1962 Rule is directed to be
deleted. We order accordingly.

So, far as disallowance u/s 14A read with Rule 8D(2)(iii) of the 1962
Rules is concerned, we are of the considered view that this issue with

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

respect to disallowance of expenditure is required to be set aside and
restored to the file of the AO for fresh/de-novo adjudication by the AO
on merits in accordance with law after considering the decision of
Hon'ble Supreme Court in the case of Maxopp Investments
Limited(supra) , decision of Hon'ble Bombay High Court , Nagpur
Bench in the case of The Pr. CIT v. Ballarpur Industries Ltd. in ITA
no. 51 of 2016 vide orders dated 13.10.2016, decision of Hon'ble Delhi
High Court in the case of Cheminvest Limited v. CIT (2015) 378 ITR
33(Delhi), decision of Hon'ble Delhi High Court in the case of Joint
Investments Private Limited v. CIT reported in (2015) 372 ITR
694(Delhi) and decision of ITAT-Special Bench Delhi in the case of
ACIT v. Vireet Investment Private Limited (2017) 165 ITD 27(Delhi-
trib.SB). The crux of these decisions is that strategic investments
made with group/associated companies etc cannot be excluded while
computing disallowance u/s 14A , Secondly that the disallowance
cannot exceed exempt income and thirdly that only those investments
which actually yielded an exempt income be only considered while
computing disallowance u/s 14A of the 1961 Act read with Rule
8D(2)(iii) of the 1962 Rule. With these directions, we are restoring this
issue back to the file of the AO for fresh/denovo adjudication of the
issue on merits in accordance with law keeping in view our above
directions. Needless to say that the AO shall provide necessary
opportunity of being heard to the assessee in denovo proceedings in
accordance with principles of natural justice in accordance with law.
The evidences/explanations produced by the assessee in its support
shall be admitted by the AO in the interest of justice in accordance
with law. This disposes of ground no. 3 of the Revenue appeal and
also ground no. 1(a),(b) and (c) of the assessee's appeal . We order
accordingly.

7. This takes us to the next ground raised by assessee vide ground
number 2 which concerns itself with additions made by the AO to the
tune of Rs. 4,74,14,145/- u/s 14A which was added while computing

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

book profits u/s 115JB , which additions were later confirmed by
learned CIT(A) to the tune Rs. 1,14,25,322/- , including voluntary
disallowance of Rs. 81,30,975/- made by the assessee u/s 14A , while
computing book profits of the assessee u/s 115JB. On the other hand
Revenue is aggrieved by the relief granted by learned CIT(A) which is
agitated by Revenue in its appeal vide ground number 6. We have
heard rival parties . The issue is consequential to our decision in the
case of disallowance of expenditure incurred in relation to earning of
an exempt income u/s 14 A in the preceding para's of this order. We
are of the view that this issue is required to be set aside and restored
to the file of the AO to be adjudicated afresh/denovo on merits in
accordance with law in the light of Special Bench decision of ITAT,
Delhi in the case of Vireet Investment Private Limited(supra).
Needless to say that the AO shall provide proper and necessary
opportunity of being heard in accordance with principles of natural
justice in accordance with law. Needless to say that the AO shall
provide proper and necessary opportunity of being heard in
accordance with principles of natural justice in accordance with law.
This disposes of ground no. 2 of the assessee's appeal and ground
number 6 raised by the Revenue in its appeal . We order accordingly.

8. This takes us to the ground no. 4 raised by Revenue with respect to
deletion of additions made by learned CIT(A) on account of gains on
premature redemption of debentures without appreciating that the
transaction is in the nature of sale, exchange or relinquishment of
assets as was held by Hon'ble Supreme Court in the case of Anarkali
Sarabhai v. CIT reported in 224 ITR 422(SC) . The AO made additions
to the income of the assessee by way of gain on premature redemption
of debentures while learned CIT(A) deleted the said additions relying
on judgment of Hon'ble Karnataka High Court in the case of CIT v.
Industrial Credit and Development Syndicate Limited 285 ITR 310. We
have heard rival parties and it is concurred by the rival parties, that
this issue needs to be restored to the file of the AO to decide the issue

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

afresh after considering the factual matrix of the case in the light of
judicial decisions and applicable law. After hearing both the parties ,
we are also of the considered view that this issue need to be restored
to the file of the AO for fresh/denovo adjudication of the issue on
merits in accordance with law after considering the entire factual
matrix of the case surrounding issue of debenture by the assessee,
purpose/object for which said debenture were raised by the assessee
and then applying ratio of the judicial precedents and applicable laws
to those identified factual matrix of the case. Needless to say that the
AO provide proper and necessary opportunity of being heard to the
assessee in accordance with principles of natural justice in
accordance with law. The evidences/explanation produced by the
assessee in its support shall be admitted by the AO in the interest of
justice in accordance with law. This disposes ground no. 4 raised by
Revenue in its appeal filed with the tribunal . We order accordingly.

9. The next issue agitated by Revenue in its appeal filed with the
tribunal is with respect to challenge to the decision of learned CIT(A)
in deleting additions made to the book profit without appreciating that
there is no brought forward book loss available to the assessee. The
assessee had claimed set off of unabsorbed carry forward of
depreciation and business loss of Rs. 152.49 crores. The AO referred
to the provisions of Section 115JB explanation (iii) to disallow
aforesaid set off. The AO observed that the assessee incurred losses
only in three years namely AY 1999-00, 2000-01 an 2001-02 and
such losses were already set off against the income of AY 2002-03,
2003-04 and 2004-05. Since, these losses were already set off in
earlier years , no brought forward loss was available to the assessee
for reducing from the profits for computing the book profit u/s 115JB
of the 1961 Act during the current year. The learned CIT(A) restored
the matter to the file of the AO for re-adjudicating the issue after
considering the claim of the assessee after noting that there were
unabsorbed loss of the merged entity. No doubt it is true that learned

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

CIT(A) has no power to set aside and remand the matter to the AO
keeping in view provisions of Section 251(1)(a) of the 1961 Act and
learned CIT(A) ought to have adjudicated the issue on merits in
accordance with law. The power of learned CIT(A) are co-terminus
with powers of learned AO. Be as it may be, this issue requires
investigation of facts as to scheme of merger and accumulated losses
of the said merged entity and application of law to those facts for
which we at this stage are of the considered view that the matter need
to be restored to the file of AO for verification of facts surrounding
brought forward losses/unabsorbed depreciation and their set off to
compute book profits u/s 115JB, on merits in accordance with law.
Needless to say that the AO shall provide proper and necessary
opportunity of being heard to the assessee in accordance with
principles of natural justice in accordance with law. The
evidences/explanations produced by the assessee in its support shall
be admitted by the AO in the interest of justice in accordance with
law. This disposes of ground no. 5 of the Revenue's appeal . We order
accordingly.

12. The other grounds raised by Revenue and assessee in their
respective appeals are consequential and does not require separate
adjudication. This disposes of ground number 7 raised in Revenue's
appeal and ground number 3 and 4 of the assessee's appeal. Thus,
cross appeals of both the Revenue and assessee for AY 2008-09 stood
disposed off.

13. In the result both the assessee's as well revenue's appeal in ITA
no. 5376/Mum/2015 and ITA no. 5725/Mum/2015 respectively for
AY 2008-09 are partly allowed as indicated above.

Assessment Year 2009-10 - ITA no. 5723/Mum/2015 &
5375/Mum/2015

14. All the issues raised in cross appeals filed by the assessee as well
revenue for AY 2009-10 are similar as were dealt with by us with

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

respect to cross appeals filed by the assessee and revenue for AY
2008-09 in preceding para's of this order and our decision for AY
2008-09 shall apply mutatis mutandis to the issues arising in cross
appeals filed by the assessee and revenue for AY 2009-10. We order
accordingly.

15. In the result both the assessee's as well revenue's appeal in ITA
no. 5375/Mum/2015 and ITA no. 5723/Mum/2015 respectively for
AY 2009-10 are partly allowed as indicated above.

Assessment Year 2010-11- ITA no. 5718/Mum/2015 &
5374/Mum/2015

16. We have observed that all the issue raised in cross appeals filed
by Revenue and the assessee are similar to the issues raised in the
cross appeals for AY 2008-09, except one issue raised by the assessee
vide ground number 3(a) and (b) in its appeal is concerning confirming
of the addition to the income of the assessee of Rs. 35,51,835/- by
learned CIT(A) , arising out of the additions made by the AO to the
income of the assessee by disallowance of the penalty of Rs.
35,51,835/- levied during the previous year relevant to the impugned
assessment year on the assessee under Sales Tax and FEMA laws.
The AO observed from the tax-audit report that the auditors have
specified that expenses on account of Sales Tax Penalty amounting to
Rs. 26,51,835/- and FEMA penalty amounting to Rs. 9,00,000/- were
debited to Profit and Loss Account . The AO observed that the
assessee did not suo motu disallowed the said penalty while filing
return of income with Revenue. The assessee on being asked by the
AO submitted that the appeal against sales tax penalty is preferred
and the appeal is subjudice while it is submitted that no appeal is
filed against penalty levied under FEMA. The AO observed that the
penalty was levied for contravention of Section 18(2) of the FERA
Act,1973 read with Section 39(3) and (4) of the FEMA,1999 while
Sales Tax penalty was levied u/s 45(6) and 46(1) of Gujarat Sales Tax

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Act,1969 . Thus, by invoking provisions of explanation 1 to Section
37(1) of the 1961 Act, the AO disallowed the said penalty of
Rs.35,51,835/- by making additions to the income of the assessee.

16.2 The matter reached learned CIT(A) at the behest of the assessee,
who was pleased to dismiss the appeal of the assessee , by holding as
under:-

― 9.1 Ground no. 5 is raised disputing the addition
of Rs. 35,51,835/- to the income of the appellant by way
of disallowing penalty under the Sales Tax and FEMA.

9.2 The Assessing Officer has made addition of
Rs.35,51,835/~ by way of disallowing penalty under
Sales Tax and FEMA recording the following reasons:-

"9.3. The above explanation of the assessee is
considered. It is agreed by the assessee that the
above penalties were levied by the Sales Tax and
FEMA authorities on the assessee during the year
and since the said penalties have been debited in
the Profit & Loss A/c., the same needs to be added
back to arrive at the taxable income, which the
assessee failed to do. The auditors have specified
that the amounts were penal in nature for
contravention of Section 18(2) of the FEMA, 1973
read with Sec.39(3) and (4) of FEMA, 1999 and the
Sales Tax penalty was levied u/s.45(6) and 46(1) of
Gujarat Sales Tax Act, 1969. Accordingly, the penal
amounts debited to the Profit & Loss A/c., totalling
to Rs.35,51,835 [Rs.26,51,835 + Rs.9,00,000] is
hereby disallowed as per explanation to Sec.37(1) of
the Income Tax Act, 1961 and added back to the
total income of the assessee."

9.3 The appellant submitted that the addition made to the
income is incorrect for the following reasons:-

"a) The penalty is paid for certain technical non-
compliance of regulation of the Sales Tax and FEMA
which amounts to infraction of contractual obligation
in the ordinary course of business and there was no
malafide intention in such technical non-
compliances. There is difference between the
penalty for infraction of law and for infraction of
contractual obligations. Only the penalty for
infraction of law is not allowable and the penalty
which is for infraction of contractual obligation is

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

allowable. The payment of penalty was not one for
breach of law and therefore the same is allowable
u/s.37(l).

b) The Explanation to section 37(1) reads as
under:-

"For the removal of doubts, it is hereby
declared that any expenditure incurred by an
assessee for any purpose which is an offence
or which is prohibited by law shall not be
deemed to have been incurred for the purpose
of business or profession and no deduction or
allowance shall be made in respect of such
explanation."

The plain reading of the Explanation shows that the
expenditure incurred by an assessee for any
purpose which is an offence or which is prohibited
by law shall not be deemed to have been incurred
for the purpose of business or profession. It is
submitted that the penalty paid towards certain
technical non-compliances will not amount to an
offence or prohibited by law. Hence, the penalty
paid by your Appellant is not hit by .the Explanation
of section 37(1). The penalty paid by the Appellant
does not involve any moral obliquity. Even otherwise
also the need for making payment of penalty arose
out of trading operation for the purpose of the
business carried on by the Appellant. It is normal
incident of the business and as such the same
cannot be disallowed merely because the name of
the payment is assigned as penalty by the Sales
Tax and FEMA."

9.4 I have considered the facts of the case together with
reasons assigned by the Assessing Officer and
submissions of the appellant. Normally, penalty for
infraction of law is not allowable, if penal in nature.
However compensatory penalty may be allowable. In this
case the auditor has reported these penalties under Tax
audit report. At the same time the appellant could not
produce any document in support of penalties being in the
nature of compensatory. I, therefore, confirm the addition
of Rs. 35,51,835/- on account of penalties. This ground of
appeal is dismissed.‖

16.3 The matter has now reached tribunal at the behest of the
assessee. We have observed both revenue as well as assessee has

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

advanced argument and its fairly agreed by both the parties that the
issue need to be restored to the file of AO for detailed analyses of the
penalties levied on the assessee under Gujarat Sales Tax Act as well
FERA/FEMA authorities and is allowability as an business
expenditure keeping in view bar created by explanation 1 to Section
37(1) of the 1961 Act after coming to conclusion whether the said
penalties are compensatory in nature or penal in nature. The assessee
is directed to produce all relevant details/material before the AO as to
circumstances under which penalty was levied , copies of penalty
orders and reasons for levying of the aforesaid penalties and whether
the same are compensatory or penal in nature. The decision of
tribunal in the case of ACIT v. Gini & Jony Limited (2018) 172 ITD
472(Mum-trib.) , to which one of us (Accountant Member) was part of
the Division Bench passing the said order is relevant. The relevant
conclusion arrived at by the tribunal in the said order of Gini & Jony
Limited (supra) is reproduced hereunder:

"8. We have considered rival contentions and perused the
material on record including case laws relied upon. We have
observed that the assessee is engaged in the business of
manufacturing and marketing of textiles, garments and fashion
accessories. There was a search and survey operations
conducted by the Enforcement Branch of the Maharashtra VAT
Authorities against the assessee in the last week of September
2011. During the course of search and survey operations
conducted by the Enforcement Branch of Maharashtra VAT
Authorities, it transpired that the assessee indulged in alleged
bogus purchases by way of accommodation entries wherein the
assessee had wrongly claimed input tax credits on these alleged
bogus purchases and these inadmissible input tax-credits was
set off by the assessee against its output VAT liabilities which led
to short payment of output tax by the assessee to MVAT
authorities in the return of VAT originally filed by the assessee.
The MVAT authorities during the course of search and survey
operations while it was underway directed assessee to file
revised return of VAT after removing alleged bogus inadmissible
input-tax credit set off towards output tax liabilities towards VAT
as originally claimed by the assessee and to pay additional tax
arising from such withdrawal along with interest as stipulated
u/s. 30(2) and 30(4) of the MVAT Act, 2002. At this stage, the
assessee had two choices either to contest these allegations of

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

availment of wrong input tax credit by entering into litigation with
MVAT department and the other option was to file revised return
under MVAT Act, 2002 while search and survey operations were
still underway after paying additional tax as well paying interest
as stipulated u/s. 30(2) and 30(4) of the 1961 Act. The assessee
chose not to enter litigation with MVAT department as it wanted
to buy peace and end litigation under the MVAT Act, 2002 and
chose second option of paying additional tax which was earlier
underpaid due to alleged wrong claim of input tax credit availed
on alleged bogus purchase bills, which additional tax is now paid
along with payment of interest u/s. 30(2) and 30(4) of the MVAT
Act, 2002. This interest liability u/s. 30(4) was computed @ of
25% on additional tax payable by the assessee due to
withdrawal of wrong inadmissible claim of input tax credit of VAT
on alleged bogus purchases. The interest was also paid u/s.
30(2) of the MVAT Act, 2002 by the assessee while filing revised
return when search and survey operations were underway,
which was by way of simple interest on the amount of VAT which
the assessee failed to deposit in time within prescribed due date
under MVAT Act, 2002 while filing return of VAT originally as it
claimed inadmissible and wrong credit and set off of input tax
credit on alleged bogus purchases against output VAT tax which
led to underpayment of VAT. It is profitable at this stage to
reproduce extract of relevant provisions of the statute as are
contained in Section 30(2) and 30(4) of the MVAT Act, 2002, as
under:
'Chapter VI
PENALTY AND INTEREST
"29 ***"
30. Interest payable by a dealer or person:--
(1) A dealer who is liable to pay tax in respect of any
year, and who has failed to apply for registration or
has failed to apply for registration within the time as
required by or under this Act, shall be liable to pay by
way of simple interest, in respect of each of such years,
in addition to the amount of tax payable in respect of
such year, a sum calculated at the prescribed rate on
the amount of such tax for each month or part thereof
for the period commencing on the 1st April of the
respective year to the date of the payment of tax. The
amount of such interest shall be calculated by taking
into consideration the amount of, and the date of, such
payment, when the payment is made on different dates
or in parts or is not made. When, as a result of any
order passed under this Act, the said amount of tax is
reduced, the interest shall be reduced accordingly and

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

where the said amount is enhanced, 1[the interest on
the enhanced amount shall be calculated mutatis
mutandis upto the date of such order]:
Provided that, in respect of any of such years, 2[the
amount of interest payable] under this sub-section shall
not exceed the amount of tax found payable for the
respective year.
(2) A registered dealer who has failed to pay the tax
within the time specified by or under this Act, shall be
liable to pay by way of simple interest, in addition to
the amount of such tax, a sum calculated at the
prescribed rate on the amount of such tax for each
month or paid thereof after the last date by which he
should have paid such tax:
Provided that, in relation to the tax payable
according to 3[the return, fresh return or as the case
may be], 4[fresh return or revised return], the said
dealer shall, notwithstanding anything contained in
any other provision of this Act, be deemed not to have
paid the amount of such tax within the time he is
required by or under the provisions of this Act to pay it
if he has not paid the full amount of such tax on or
before the last date prescribed for furnishing of such
return and accordingly, if he has not paid the full
amount of such tax or has paid only the part of the
amount of such tax by such date, he shall be liable
under this clause for payment of interest after such
date on the full or part, as the case may be, of the
amount of tax which has not been paid by such date
and where a dealer has furnished a 4[fresh return or
revised return] and the amount of tax payable as per
the 4[fresh return or revised return] exceeds the amount
of tax payable as per the original return, then for the
purposes of this sub-section, the dealer shall be
deemed to have been required to pay the excess
amount of tax at the time he was required to pay the
tax as per the original return and accordingly he shall
be liable to pay interest under this sub-section on the
said excess amount of tax.
4a[Provided further that, in case a dealer files an
annual revised return, as provided under clause (b)
or, as the case may be, clause (c) of sub-section (4) of
section 20, then the interest shall be payable on the
excess amount of tax, as per such annual revised
return, from the dates mentioned in column (2) of the
Table, till the date of payment of such excess amount
of tax.

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

TABLE
Registration status in the year for which annual revised
return is filed
(1)Interest to be computed from
(2)(a)Dealer, holding certificate of registration for whole year.
1s t October of the year, to which the annual revised
return relates.
(b)Certificate of registration granted, effective from any date
up to the 30th September of the year to which revised return
relates.
1st October of the year, to which the annual revised return
relates.
(c)Certificate of registration cancelled, effective on any date after
the 30th September of the year to which revised return relates.
1st October of the year, to which annual revised return relates.
(d)Certificate of registration granted, effective from any date after
the 30th September of the year to which revised return relates.
effective date of registration.
(e)Certificate of registration cancelled, effective on any date prior
to the 30th September of the year to which revised return relates.
effective date of cancellation of registration.]
(3) In the case of a registered dealer, in whose case, any tax
other than the tax on which interest is leviable under sub-
section (2) has remained unpaid upto one month after the end
of the period of assessment, such dealer shall be liable to pay
by way of simple interest, 5[a sum calculated at the prescribed
rate on the amount of such tax] for each month or part thereof
from the date next following the last date of the period covered
by an order of assessment till the date of the order of
assessment and where any payment of such unpaid tax
whether in full or part is made on or before the date of the
order of assessment, the amount of such interest shall be
calculated by taking into consideration the amount and the
date of such payment. If, as a result of any order passed under
this Act, the said amount of tax is reduced, then the interest
shall be reduced accordingly and where the said amount is
enhanced, then interest on the enhanced amount shall be
calculated mutatis mutandis up to the date of such order from
the said date next.
6[(4) If,--

(a) after the commencement of,--

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

(i) audit of the business of the dealer in respect of any period, or
(ii) inspection of the accounts, registers and documents pertaining
to any period, kept at any place of business of the dealer, or
(iii) entry and search of any place of business or any other place
where the dealer has kept his accounts, registers, documents
pertaining to any period or stock of goods,

(b) in consequence of any intimation issued under sub- section (7) of
section 63, the dealer files one or more returns or, as the case may
be, revised returns in respect of the said period, then he shall be
liable to pay by way of interest, in addition to the amount of tax, if
any, payable as per the return or, as the case may be, revised return,
a sum equal to 25 per cent. of the additional tax payable as per the
return or, as the case may be, revised return.]
7[Provided that, interest under this sub-section shall not be payable on
account of the additional tax liability arising due to non-production of
declarations or, as the case may be, certificates:
Provided further that, if the amount of tax paid as per revised return is
less than ten per cent. of the aggregate amount of tax paid as per the
original returns, in respect of the corresponding period, then no interest
under this sub-section shall be payable.
Explanation.- For the purpose of this sub-section the expressions,-
"tax paid as per original returns" shall be deemed to include the amount of
tax paid, as per the revised returns, filed before the commencement of
proceedings specified in clause (a) or before the receipt of intimation
specified in clause (b) of sub-section (4);
"tax paid" shall mean the amount of tax paid by such person or dealer,
after the adjustment of set-off.]'
We have also at the same time observed that under MVAT Act,
2002 there is a separate provision for imposition and levying of
Penalties u/s. 29 of the MVAT Act, 2002 for various
infraction/defaults in complying with various provision(s) of
MVAT Act, 2002 which is a Section immediately preceding to
Section 30 of MVAT Act, 2002 levying interest under the MVAT
Act, 2002. The said Section 29 of MVAT Act, 2002 is also
reproduced hereunder in its entirety:--
"29. Imposition of penalty in certain instances:--
1[(1) ***]
1[(2) ***]
1a[ (2A) While or after passing any order in respect of any dealer under
any provisions of this Act, it appears to the Commissioner that, the dealer
has failed to apply for registration as required under this Act or has

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

carried on business as a dealer without being registered in contravention
of the provisions of this Act, then the Commissioner may, after giving the
dealer a reasonable opportunity of being heard, impose upon him, by way
of penalty, a sum equal to the amount of tax payable by the dealer for the
period during which he has carried on business as a dealer without being
registered in contravention of the provisions of this Act.]
(3) 2[While or after passing any order] under this Act, in respect of any
person or dealer, the Commissioner, on noticing or being brought to his
notice, that such person or dealer has concealed the particulars or has
knowingly furnished inaccurate particulars of any transaction liable to tax
or has concealed or has knowingly misclassified any transaction liable to
tax or has knowingly claimed set-off in excess of what is due to him, the
Commissioner may, after giving the person or dealer a reasonable
opportunity of being heard, by order in writing, impose upon him, in
addition to any tax due from him, a penalty 2a[not exceeding the amount
of tax due but not less than twenty five per cent. of] the amount of tax
found due as a result of any of the aforesaid acts of commission or
omission.
(4) Where any person or dealer has knowingly issued or produced any
document including a false bill, cash memorandum, voucher, declaration
or certificate by reason of which any transaction of sale or purchase
effected by him or any other person or dealer is not liable to be taxed or is
liable to be taxed at a reduced rate or incorrect setoff is liable to be
claimed on such transaction, the Commissioner may, after giving, the
person or dealer a reasonable opportunity of being heard, by order in
writing, impose on him in addition to any tax payable by him, a penalty
equal to the amount of tax found due as a result of any of the aforesaid
acts of commission or omission.
3[(5) Where a dealer has sold any goods and the sale is exempt, fully or
partly, from payment of tax by virtue of any provision contained in sub-
section (3), (3A), (3B) or (5) of section 8, and the purchaser fails to comply
with the conditions or restrictions subject to which the exemption is
granted, then the Commissioner may, after giving the said purchaser a
reasonable opportunity of being heard, impose penalty on him equal to
one and a half times the tax which would have become payable on the
sale if the said exemption was not available on the said sale.]
(6) Where, any person or dealer contravenes the provision of section 86, so
as to have the quantum of tax payable by him to be under-assessed, the
Commissioner may, after giving the person or dealer a reasonable
opportunity of being heard, by order in writing, impose on him, in addition
to any tax payable by him a penalty equal to half the amount of tax which
would have been under-assessed or 4[one thousand rupees], whichever is
more.
(7) Where, any person or dealer has failed without reasonable cause to
comply with any notice in respect of any proceedings, the Commissioner
may, after giving the person or dealer a reasonable opportunity of being

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heard, by order in writing, impose on him, in addition to any tax payable
by him, a penalty equal to 5[five thousand rupees].
5a[(7A) In case of a dealer, who has filed late return on or after the 1st
August 2012, and has also paid the late fee, under sub-section (6) of
section 20, the penalty in respect of such return, if any, imposed under
sub-section (8) of this section, as it existed, shall not be recovered.]

6(8), (9)7(a) & 7(b)** ** **
(c) Where a dealer has filed a return 8[***] and such return is found to be
not 9[complete and self consistent], then the Commissioner may, after
giving the dealer a reasonable opportunity of being heard, impose on him,
by order in writing, a penalty of rupees one thousand. The levy of penalty
shall be without prejudice to any other penalty which may be imposed
under this Act. 10[(10) Where a person or dealer has collected any sum by
way of tax in contravention of the provisions of section 60,--

1. he shall be liable to pay a penalty not exceeding two thousand
rupees, and
2. in addition, any sum collected by the person or dealer in
contravention of section 60 shall be forfeited to the State Government.
If the Commissioner, in the course of any proceeding under this Act or
otherwise, has reasons to believe that any person has become liable to a
penalty or forfeiture or both penalty and forfeiture of any sum under this
sub-section, he may serve on such person a notice in the prescribed form
requiring him on a date and at a place specified in the notice to attend
and show cause why a penalty or forfeiture or both penalty and forfeiture
of any sum as provided in this sub-section should not be imposed on him.
The Commissioner shall thereupon hold an inquiry and shall make such
order as he thinks fit. When any order of forfeiture is made, the
Commissioner shall publish or cause to be published a notice thereof for
the information of the persons concerned giving such details and in such
manner as may be prescribed.]
11[(11) No order levying penalty under the foregoing provisions of this
section shall be passed in respect of any period after 12[eight years] from
the end of the year containing the said period.]
13[(11A) Notwithstanding anything contained in sub-section (11), penalty
under this section may be imposed while passing an order under this Act.]

14(12)** ** **
(13) For the purposes of this section, Commissioner includes any appellate
authority appointed or constituted under this Act."
Now the moot question before us is whether this interest payable u/s.
30(2) and 30(4) of MVAT Act, 2002 is compensatory or penal in nature.
If it is held to be compensatory in nature, then interest payable on these
statutory dues by way of VAT shall be allowable as deduction while

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computing income chargeable to income-tax under the head of income
'Profits and Gains of Business or Profession', while if on the other hand
the same is held to be penal in nature then the same cannot be allowed
as deduction while computing income from business keeping in view
provisions of Explanation 1 to Section 37(1) of the 1961 Act. It is also
profitable at this stage to reproduce the provisions of Section 37(1) of
the 1961 Act read with Explanation 1, which reads as under:--
" General.
37. (1) Any expenditure (not being expenditure of the nature described in
sections 30 to 36 [***] and not being in the nature of capital expenditure or
personal expenses of the assessee, laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed
in computing the income chargeable under the head "Profits and gains of
business or profession".
[ [Explanation 1.]-For the removal of doubts, it is hereby declared that any
expenditure incurred by an assessee for any purpose which is an offence
or which is prohibited by law shall not be deemed to have been incurred
for the purpose of business or profession and no deduction or allowance
shall be made in respect of such expenditure.]

** ** **"
The assessee is claiming that the interest paid u/s. 30(2) and 30(4) of
MVAT Act, 2002 to be compensatory in nature and claiming that the
same be allowed as business deduction while computing income from
business but the Revenue is claiming the same to be penal in nature
being hit by explanation 1 to Section 37(1) of the 1961 Act and not
allowable as business deduction. We are also conscious of the fact that
nomenclature or description used by law makers in the statute is not
decisive of its true nature and character and the fact whether the said
levy is compensatory or penal in nature is to be decided after going
through various provisions of the statute and to see the intentions of
law makers behind placing of such provisions in the statute. This
interpretation of the statute is well settled legal proposition which has
been so held by catena of judgments of Hon'ble Superior Courts which
case laws are also cited in preceding para's of this order and are not
repeated here. We have also carefully gone through the provision of
sections 29 and 30 of the MVAT Act 2002. We have observed that
Section 29 of the MVAT Act, 2002 prescribes penalties for various
offences/defaults under MVAT Act, 2002, while sections 30 of MVAT
Act, 2002 which is immediately succeeding Section to Section 29 of
MVAT Act, 2002 deals with the interest for various delays in making
payment of VAT. We have observed that Section 30(2) of the MVAT Act,
2002 stipulates payment of simple interest in case VAT is not paid
within due date as prescribed under MVAT Act, 2002. However, Section
30(4) of MVAT Act, 2002 prescribes interest which is in addition to
interest payable u/s. 30(2) of MVAT Act, 2002 and is to be paid after
commencement of some special event such as audits, inspection,

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survey, search etc under MVAT Act, 2002 by MVAT authorities and the
statute has given dealer an opportunity to come clean and end litigation
with MVAT department by coming forward by filing return or revised
returns by paying not only additional tax which the dealer earlier did
not pay in original return but also the dealer is burdened with the by
additional liability of paying simple interest u/s. 30(2) of MVAT Act,
2002 for delay in payment of VAT beyond due date as prescribed under
MVAT Act, 2002 and also further payment by way of interest @25% of
such additional tax which is termed by legislature as 'interest' within
provisions of Section 30(4) of the MVAT Act, 2002. It is also provided in
Section 30(4) of the MVAT Act, 2002 that if the additional tax paid in
return or revised return filed after commencement of such stipulated
special event is less than 10% of the tax paid as per original return,
then the dealer will not be burdened with this interest @25% of
additional tax which also indicates that this interest u/s. 30(4) of MVAT
Act, 2002 is penal in nature as the right to recover this penal interest is
waived by MVAT Act,2002 for minor infraction of law. It is pertinent to
mention that this interest provided u/s. 30(4) of the MVAT Act, 2002 is
in addition to the interest payable u/s. 30(2) of the MVAT Act, 2002. It
is also pertinent to mention that if the assessee would have chosen to
litigate under these circumstances then in the adverse situation and
eventuality of the assessee losing out the legal battle with MVAT
authorities, not only the assessee would have been burdened with the
additional tax owing to underpayment of VAT while filing VAT return
originally and with interest u/s. 30(2) of MVAT Act, 2002 for
withholding/ delay in payment of VAT beyond prescribed due date
under MVAT Act, 2002 but the assessee in such adverse eventuality of
losing out the legal battle with MVAT authorities would have also been
additionally visited and burdened with Penalty as is stipulated u/s.
29(3) of the MVAT Act, 2003 which shall not be less than 25% but which
may extend to 100% of the additional tax sought to be concealed or
evaded by the assessee. Thus, it is very clear that the lawmakers have
provided for a mandatory penal interest by virtue of provisions of
Section 30(4) of the MVAT Act, 2002 to the tune of 25% of the tax sought
to be evaded although nomenclature 'interest' is used in MVAT Act,
2002 which is in-fact penal in nature having germane to infraction of
law while filing of original return of VAT which led to under payment of
VAT originally. The reason is not far to seek as the liberty of paying 25%
of additional tax u/s. 30(4) of the MVAT Act, 2002 of its own even after
commencement of special event such as audit, inspection, survey and
search etc is given by way of one more opportunity to the dealer to come
clean voluntarily after the commencement of audit, inspection, survey,
search etc. as stipulated u/s. 30(4) of the MVAT Act, 2002 by paying
this penal interest computed @25% of tax sought to be evaded in
addition to paying up the tax sought to be evaded and interest u/s.
30(2) of MVAT Act, 2002 towards delayed payment of VAT which
interest u/s. 30(2) is compensatory in nature. It is also pertinent to
mention that before special event commences as is stipulated u/s. 30(4)
by way of audit, inspection, survey and seizure etc. and the dealer

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

observes that there is some omission or incorrect statement in original
return of VAT filed with MVAT authorities, the dealer can always come
forward and file revised returns after complying with stipulated
conditions u/s. 20(4) of the MVAT Act, 2002, for which there is only
stipulation to pay interest u/s. 30(2) of the MVAT Act,2002 for delayed
payment of VAT apart from paying additional tax liability u/s. 20(5) of
MVAT Act, 2002 which was originally short paid due to such omission
or incorrect statement in the original return filed with the MVAT
authorities and no further interest such as stipulated u/s. 30(4) of the
1961 Act is stipulated under the aforesaid circumstances of filing
revised return voluntarily by the dealer. Thus, since this interest u/s.
30(4) of MVAT Act, 2002(which is in addition to interest payable u/s.
30(2)) had genesis to correcting earlier infraction of law by giving of an
opportunity to the dealer to come clean after commencement of certain
special events such as audit, inspection, search, survey etc. by allowing
filing of revised return to cover up the tax earlier evaded/short paid
which was earlier not paid/ withheld from department due to infraction
of law by way of filing incorrect return of VAT originally, the
nomenclature used by lawmakers in MVAT, 2002 is 'interest' instead of
'penalty' to keep up with the spirit of an opportunity granted by statute
itself to the dealers by way of fresh opportunity to come clean and to
end litigation but the fact remains that it has its germane to the
infraction of law committed by dealer whether knowingly or not earlier
while the original return of VAT was filed with MVAT authorities as the
said return was filed with incorrect tax liability determined, wherein the
MVAT authorities were deprived of their legitimate dues of VAT due to
such wrong claim in the original return filed with MVAT authorities. It is
also pertinent to mention that this interest u/s. 30(4) of MVAT Act, 2002
@25% of additional is penal in nature because once the audit,
inspection, survey, search etc. starts, then it is very difficult for the
dealer to get away with any concealment or incorrect filing of
particulars in the return of VAT originally filed and hence being cornered
with the commencement of special event, an opportunity is provided in
the statute itself to come clean otherwise the dealer will be burdened
later with penalty as provided u/s. 29(3) of the MVAT Act which can
extend to 100% of the tax evaded. So, the fact remains that this is penal
interest to come clean from the infraction of law earlier committed
whether knowingly or not while filing original return of VAT under MVAT
Act, 2002. The assessee in the instant case came after the
commencement of search and survey operation being conducted against
assessee in the last week of September 2011 by MVAT authority came
forward to file revised return by withdrawing inadmissible and wrong
credit of input tax credit set off against output VAT payable in order to
come clean and buy peace with MVAT department with a view to end
litigation and the assessee also paid compensatory interest u/s. 30(2)
to MVAT department for delay in payment of this additional tax under
MVAT computed from the original due date of payment of this MVAT
liability due to availment of wrong input tax credit on alleged bogus
purchases till the said additional tax liability of VAT was paid to MVAT

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

department and the assessee also paid penal interest u/s. 30(4) of the
MVAT Act,2002 in terms of the scheme of the Act to buy peace and to
end litigation as also to safeguard against possible levy of penalty u/s.
29(3) of the MVAT Act, 2002 which would in any case be minimum 25%
but which could extend to 100% of the tax so evaded in the event of
having adverse outcome of litigation with MVAT department. This levy
of interest u/s. 30(4) of the MVAT Act, 2002 has germane to detection of
short payment of VAT by way of concealment or furnishing of inaccurate
particulars of income in the original return of VAT filed with MVAT
department due to infraction of law, which is detected after
commencement of such special events such as audit, inspection, survey,
search under MVAT Act, 2002 either at behest of dealer or by the team
of MVAT authorities conducting such special event. The fact remains
that one more opportunity is provided to the dealer to come clean and
buy peace with MVAT department by filing revised return by paying
additional tax, interest u/s. 30(2) and also u/s. 30(4) of MVAT Act,
2002. This levy of interest u/s. 30(4) being in addition to interest u/s.
30(2) of MVAT Act, 2002, penalises the dealer for filing wrong returns
earlier in violation of MVAT Act, 2002 leading to short payment of taxes
to MVAT department depriving them of their legitimate dues of statutory
impost, which interest in our considered view as is provided u/s. 30(4)
of MVAT Act, 2002 is in the form of penalising the dealer for such
infraction/violation of law while filing original return of VAT with MVAT
authorities which earlier led to short collection of taxes due to these
wrong claims filed in the VAT returns. While on the other hand the levy
of interest u/s. 30(2) of MVAT Act, 2002 is simple interest for delaying
or withholding the payment of VAT beyond the prescribed due date from
MVAT authorities and has germane to compensate MVAT department
for withholding of their dues of tax being unpaid within stipulated time
as prescribed in the statute and this levy of interest u/s. 30(2) is
compensatory in nature. Thus, we hold that the ld. CIT (A) has rightly
concluded that the interest payable u/s. 30(2) of MVAT Act, 2002 is not
penal in nature but rather it's compensatory in nature for delaying /
withholding payment of VAT beyond the time prescribed under MVAT
Act, 2002 and is an allowable deduction as business deduction for
withholding statutory dues from the MVAT department. But so far as
interest u/s. 30(4) of the MVAT Act, 2002 is concerned, in our
considered view, the learned CIT(A) erred in holding the same to be
compensatory in nature while in our considered view, interest paid by
the assessee u/s. 30(4) of MVAT Act, 2002 which is in addition to
interest payable u/s. 30(2) of MVAT Act, 2002 is penal in nature and
cannot be allowed as business deduction keeping in view provisions of
Explanation 1 to Section 37(1) of the 1961 Act, vide our detailed
discussions and reasoning as set out above. Our view is strengthened
by the fact that interest u/s. 30(4) of MVAT Act, 2002 is in addition to
interest payable u/s. 30(2) of MVAT Act, 2002 which is held by us to be
compensatory in nature and secondly in case the assessee choses path
of litigation with MVAT authorities wherein additional tax liability had
arisen after commencement of audit, inspection, survey, search instead

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

of filing revised return along with payment of this interest u/s. 30(4) in
addition to additional tax and interest u/s. 30(2) of MVAT Act, 2002,
then in the eventuality of the assessee losing out in the legal battle with
MVAT Authorities, the assessee will, inter-alia, be visited with penalty
u/s. 29(3) of MVAT Act, 2002 which shall be not less than 25% of the
amount of tax found to be evaded and which may extend to 100% of the
said tax so sought to be evaded apart from interest u/s. 30(2) and
additional tax so sought to be evaded. Thus, by asking assessee to pay
this interest @25% of additional tax u/s. 30(4) of MVAT Act,2002
voluntarily while filing revised return along with additional tax and
compensatory interest u/s. 30(2) of MVAT Act, 2002, after
commencement of special stipulated event such as audit, inspection,
survey and search etc, the lawmakers have chosen to end the path of
litigation despite the fact there was infraction of law earlier in filing
original VAT return and this interest is nothing but penal in nature
although nomenclature used is 'interest'. This is the reflection of State
Litigation Policy to allow dealers to come clean by paying voluntarily
this penal interest u/s. 30(4) of MVAT Act, 2002 under specified
circumstances and not to litigate matter further for such infraction of
law provided compliance as stipulated u/s. 30(4) of MVAT Act, 2002 are
undertaken. This is undertaken as part of State Litigation Policy to
preserve resources by reducing litigation with the dealers who want to
come clean and settle with State by fulfilling the stipulated conditions
but the fact remains that this interest u/s. 30(4) is penal in nature being
levied for infraction of law earlier by evading taxes earlier. The
lawmakers in our considered view have not used nomenclature of
'penalty' and instead used the word 'interest' in Section 30(4) because
an opportunity is given by the statute itself to the dealers to come clean
voluntarily once events like audit, inspection, search, survey etc as
stipulated u/s. 30(4) of MVAT Act, 2002 commences and thereafter
liability for additional tax arose. This reflected that the lawmakers did
not intended to use harsh word 'penalty' in the statute itself against
such dealers who wanted to come clean with a view to buy peace even
post commencement of special events such as audit, inspection, survey,
search etc by paying up additional tax, interest u/s. 30(2) and 30(4), as
the word used in Section 30(4) is instead 'interest'. The Penalty is
defined as punishment imposed for violation of law, rule or contract
while interest is to compensate for use of money. The State of
Maharashtra is considered to be business friendly state and this
gesture of using word 'interest' as against 'penalty' is reflection of the
trust reposed by State in business community as every error or wrong
claim in the original return may not be intentional and knowingly made
to evade taxes and it could be due to an unintentional error while
interpreting law or due to ignorance of law etc.. It is also well settled
proposition of law that ignorance of law is not an excuse and dealer has
to be cautious and well versed with law before filing its VAT returns. It
is also pertinent to mention that before special event commences as is
stipulated u/s. 30(4) by way of audit, inspection, survey and seizure
etc., and the dealer observes that there is some omission or incorrect

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

statement in original return of VAT filed with MVAT authorities, the
dealer can always come forward and file revised returns after
complying with stipulated conditions u/s. 20(4) of the MVAT Act, 2002,
for which there is only stipulation to pay interest u/s. 30(2) of the MVAT
Act,2002 for delayed payment of VAT apart from paying additional tax
liability u/s. 20(5) of MVAT Act, 2002 which was originally short paid
due to such omission or incorrect statement in the original return filed
with the MVAT authorities and no further interest such as stipulated
u/s. 30(4) of the 1961 Act is stipulated under the aforesaid
circumstances of filing revised return voluntarily by the dealer before
the commencement of audit, inspection, search, survey etc.. This also
clearly indicates that no penal interest as is provided u/s. 30(4) of
MVAT Act, 2002 is levied in every filing of revised return due to
omission or commission in the original return of VAT and it is only
whence the special events such as audit, inspection, survey, search etc
commences and the dealer is or is likely to be cornered and then at that
stage the dealer comes forwards and files revised return, it is burdened
with further penal interest as is contained in Section 30(4) of the MVAT
Act, 2002. The lawmakers in Section 30(4) of MVAT Act, 2002 has also
stated that if the additional tax is less than 10% of the tax paid
originally vide filing original VAT return, the dealer will not be visited
with this interest u/s. 30(4) of the MVAT Act, 2002 meaning thereby
that the State is willing not to penalise the dealers due to minor
infraction of law. Thus, after going through the relevant provisions of the
MVAT Act, 2002 and other material on record, we have no hesitation to
hold that interest paid by the assessee u/s. 30(4) of the MVAT Act,
2002 is penal in nature as it has its germane to infraction of law by the
dealer while filing original return of VAT and the interest paid u/s. 30(4)
of MVAT Act, 2002 cannot be allowed as deduction while computing
income under the head 'Profits and Gains of Business or Profession'
keeping in view Explanation 1 to Section 37(1) of the 1961 Act. This
ground filed by the Revenue is partly allowed. The AO is directed to
bifurcate the payments as between interest paid by the assessee u/s.
30(2) and 30(4) of the MVAT Act, 2002 respectively and allow interest
paid u/s. 30(2) of MVAT Act, 2002 as deduction from income computed
under the head 'Profits and Gains of Business or Profession', while
interest paid by the assessee u/s. 30(4) of MVAT Act, 2002 shall be
disallowed while computing income chargeable to tax under the head
'Profits and Gains of Business or Profession'. We order accordingly.‖

Thus, we are of the considered view that this issue is to be restored to
the file of the AO for fresh/denovo adjudication of the issue afresh on

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

merits in accordance with law. The assessee is directed to produce all
the surrounding facts concerning levy of penalty under FERA/FEMA
and Gujarat Sales Tax Act including orders of the authorities levying
the said penalty before the AO. The AO to analyse all the relevant facts
to ascertain whether such penalties are penal or compensatory in
nature to arrive at the decision whether these penalties are hit by
explanation 1 to Section 37(1) of the 1961 Act and thereafter to pass
well reasoned order in accordance with law on merits. Needless to say
that the AO shall provide proper and necessary opportunity of being
heard to the assessee in accordance with principles of natural justice
in accordance with law. The evidences/explanations produced by the
assessee in its support shall be admitted by the AO in the interest of
justice in accordance with law. This ground of appeal bearing number
3(a) and (b) raised by the assessee in its memo of appeal filed with the
tribunal is allowed for statistical purposes. We order accordingly.

17. The other grounds except ground number 3(a) and (b) raised by
the assessee in the memo of appeal filed with the tribunal and all the
grounds raised by revenue in memo of appeal filed with the tribunal
are similar to the issues raised in cross appeals filed by the assessee
and revenue for AY 2008-09 and our decision for AY 2008-09 shall
apply mutatis mutandis to the issues raised by the assessee and
revenue in their respective grounds except ground number 3(a) and (b)
raised by the assessee in its appeal which is separately adjudicated by
us in preceding para's. We order accordingly.

18. In the result appeal of the assessee and revenue filed with the
tribunal in ITA no.5374/Mum/2015 and 5718/Mum/2015 for AY
2010-11 are both partly allowed as indicated above.

Assessment Year - 2011-12 (ITA 5373/Mum/2015 and ITA
5721/Mum/2015)

19. The only additional issue which arose in this year is in
Revenue's appeal wherein Revenue is aggrieved by the decision of

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

learned CIT(A) deleting the additions with respect to alleged bogus
purchases of mobile handsets to the tune of Rs. 97,016/- made by
the assessee from Shivamani Traders Pvt. Ltd., wherein the AO got the
information from Maharashtra VAT authorities that the said concern
is engaged in providing hawala entries by issuing bogus
accommodation bills with out supplying any material which led to the
additions being made to the income of the assessee by the AO,
however the Ld. CIT(A) deleted the additions by holding as under:-

―8.4 I have considered the facts of the case reasons
assigned by the Assessing Officer and submissions of the
appellant. It is observed that foundation of the addition is
based on the evidence in the possession of Income Tax
Department that Shivamani Traders Pvt. Ltd. was engaged
in issuing bogus bills and included in the Hawala list of
Sales Tax Department. Just on the Information from the
Sales Tax Department and on the statement of any party
and without actually verification and putting on record and
without giving an opportunity of cross examination, the
Purchases from such suspected parties cannot be
disallowed. The third party information or evidence should
not be the sole basis for conclusion of a matter. It is an
accepted principle of law that if an AO is relying on a
statement and/or books of account of a third party, the
assessee is entitled to receive copy of all material which
have been collected at the back of an assessee alongwith
statement which is being referred, relied upon and
considered and to allow an opportunity to cross-examine
such third parties. In the case of the appellant no such
materials were provided nor any opportunity was allowed
to cross-examine Shivamani Traders Pvt. Ltd. Principles of
natural justice require that before charging a person with
financial liability, he should be informed of the material on
which the charge was going to be imposed and the
assessee must be given an opportunity to rebut the effect
of the material, if he can. The Supreme Court in the case of
State of Kerala V/s. K.T. Shaduli Yusuff 39 Sales Tax
Cases 478 observed that one of the rules which constitutes
a part of the principles of natural justice is the rule of audi
alteram partem which requires that no man should be
condemned unheard.

In this case the Assessing Officer has not assigned any
other reason but relied on the information in the
possession of Income Tax Department without any
independent investigation in this regard. In the case of

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

Jagdamba Trading Co. V/s. ITO 16 SOT 66 (URO) it is held
that the statements made before the Sales tax authorities
which do not have concern with the income tax
proceedings of the assessee hardly have any evidentiary
value against the assessee. It is seen that the purchases
are supported by proper bills and payment by account
payee's cheque. On the facts of the case a reasonable and
convincing inference which could be drawn is that the
appellant had purchased mobile handsets from the party
when nothing could be brought on record by the Assessing
Officer. In DCIT V/s. Shri Rajeev G. Kalathil 51
Taxmann.com 514 (Mum) it is held merely the supplier has
been declared a Hawala Dealer by Sales Tax Department
no addition can be made unless further investigation is
made bringing sufficient evidences to support the view and
that there was no evidence regarding cash received back
from the supplier. Further in the cases of Rameshkumar &
Co. V/s. ACIT (ITA No.2959/Mum/2014) dated 28-11-
2014 and Shri Deepak Popatlal Gala V/s. ITO (ITA
No.6203/Mum/2013) dated 27-32015 and Ganpatraj A.
Sanghavi V/s. ACIT (ITA No.2826/Mum/2013) dated 5-11-
2014 similar decision is taken.

In view of the above I delete the addition of Rs. 97,016/-
made by the Assessing Officer. This ground of appeal is
allowed.

19.2. The Ld. CIT(A) had deleted the additions on the grounds that no
cross examination was allowed by the AO to the assessee of the
persons whose statements were recorded by Maharashtra VAT
Department. We are of the considered view that powers of Ld. CIT(A)
are co-terminus with the powers of the AO and the learned CIT(A)
ought to have allowed the cross examination of the said parties to the
assessee . The decision of Hon'ble Delhi High Court in the case of CIT
v. Jansampark Advertising & Marketing Private Limited (2015) 375
ITR 373(Delhi) is relevant. The primary onus is on the assessee to
prove that the purchases are genuine. Keeping in view interest of
justice and factual matrix of the case , we are setting aside and
restoring the matter to the file of AO for denovo determination of the
issue on merits in accordance with law. Needless to say that the AO
shall provide proper and necessary opportunity of being heard to the
assessee in accordance with principles of natural justice in

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I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

accordance with law. The evidences/explanations produced by the
assessee in its support shall be admitted by the AO in the interest of
justice in accordance with law. This ground of appeal bearing number
6 raised by the Revenue in its memo of appeal filed with the tribunal
is allowed for statistical purposes. We order accordingly.

20. The other grounds except ground number 6 raised by the Revenue
in its appeal and all the grounds raised by assessee in memo of appeal
filed with the tribunal are similar to the issues raised in cross appeals
filed by the assessee and revenue for AY 2008-09 and our decision for
AY 2008-09 shall apply mutatis mutandis to the issues raised by the
assessee and revenue in their respective grounds for AY 2011-12
except ground number 6 raised by the Revenue in its appeal filed with
the tribunal which is separately adjudicated by us in preceding para's
of this order. We order accordingly.

21. In the result appeal of the assessee and revenue filed with the
tribunal in ITA no.5373/Mum/2015 and 5721/Mum/2015 for AY
2011-12 are both partly allowed as indicated above.

22. In the result all the cross appeals filed by the Assessee and
Revenue for AY 2008-09 to 2011-12 are partly allowed as indicated
above.

Order pronounced in the open court on 11.01.2019.

आदे श की घोषणा खऱ
ु े न्यायाऱय में ददनांकः 11.01.2019 को की गई

Sd/- Sd/-

(JOGINDER SINGH) (RAMIT KOCHAR)

VICE PRESIDENT ACCOUNTANT MEMBER

Mumbai, dated: 11.01.2019

Nishant Verma
Sr. Private Secretary

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I.T.A. No.5373 to 5376/Mum/2015
I.T.A. No.5718, 5721, 5723 and 5725/Mum/2015

copy to...

1. The appellant
2. The Respondent
3. The CIT(A) - Concerned, Mumbai
4. The CIT- Concerned, Mumbai
5. The DR Bench,
6. Master File
// Tue copy//

BY ORDER

DY/ASSTT. REGISTRAR ITAT, MUMBAI 66

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Dcit Cen Cir 3(3) Cen Rg 3, Mumbai vs Welspun India Ltd, Mumbai on 11 January, 2019