S.4 : Charge of income-tax – Derived – Subsidy by way of refund of excise duty and interest for setting up a new industrial undertaking is a capital receipt & not taxable as income. Alternatively, such receipts are “derived” from the industrial undertaking and are deductible u/s. 80-IB.

The assessee, pursuant to the New Industrial Policy announced for the State of J&K, received excise refund and interest subsidy, etc. which it claimed to be a capital receipt. In the alternative, it was claimed that the same was eligible for deduction u/s. 80-IB. The AO, CIT(A) and Tribunal rejected the claim and held the receipts to be revenue on the ground that the subsidy (i) was for an established industry and not to set up a new one, (ii) it was available after commercial production, (iii) it was recurring in nature, (iv) it was not for purchasing capital assets and (v) it was for running the business profitably. On appeal by the assessee, the High Court (333 ITR 335) reversed the decision of the lower authorities and held as follows:

(i) The ratio of Sahney Steel 228 ITR 253 (SC), Ponni Sugars 306 ITR 392 (SC) and Mepco Industries 319 ITR 208 (SC) is that the underlying purpose of the incentives is the test for determining whether incentives and subsidies are revenue or capital receipts. If the object of the subsidy scheme is 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 subsidy scheme is 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. It is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given is irrelevant;

(ii) On facts, the object of the subsidy scheme was (a) to accelerate industrial development in J&K and (b) generate employment in J&K. Such incentives, designed to achieve a public purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assessees alone. It cannot be construed as mere production and trade Incentives;

(iii) The fact that the incentives were available only after commencement of commercial production cannot be viewed in isolation. The other factors which weighed with the Tribunal are also not decisive to determine the character of the incentive subsidies in view of the stated objects of the subsidy scheme;

(iv) Question whether the subsidy receipts are eligible u/s. 80-IB not decided.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

The issue raised in these appeals is covered against the Revenue by the decision of this Court in
“CIT v. Ponni Sugars and Chemicals Ltd.”, reported in (2008) 9 SCC 337, or in the alternate, in
“CIT v. Meghalaya Steels Ltd.“, reported in (2016) 3 SCALE 192 (383 ITR 217 (SC)). The appeals are, therefore, dismissed. (CA No. 10061 of 2011, dt. 19-4-2016)

CIT v. Shree Balaji Alloys (SC); www.itatonline.org

S.37(1) : Business expenditure – Interest paid for broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities

Interest paid for broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities. (CA No. 1549 of 2006, dt. 12-8-2008)(AY.1978-79)

CIT v. Citi Bank N.A. (SC); www.itatonline.org

S.37(1) : Business expenditure – Accrued or contingent liability – Provision for interest for default in payment of instalments in terms of compromise agreement with bank – Ascertained liability hence deductible

The assessee obtained a loan from a bank which it was unable to repay. It entered into a compromise with the bank by which the total liability was reduced and the reduced sum was payable in a phased manner with interest on the reducing balance and in case of delay by a period of one year in payment of respective instalments, interest was to be charged. The assessee made a provision for interest at 10% for default of compromise. For the AY. 1995-96, the Assessing Officer disallowed the provision and the disallowance was confirmed by the Commissioner (Appeals). However, the Tribunal allowed the provision for interest and on appeal by the Department, the High Court held, dismissing it, that even if the amount of loan was not paid by the assessee as per the agreement, the liability could not cease to exist, that the bilateral consented action on behalf of the parties was binding in terms of the agreement, and that therefore, the interest liability was not a contingent liability, but an ascertained liability. On appeal to the Supreme Court: The Supreme Court dismissed the appeal holding that the matter was covered against the Department by the decision in
Taparia Tools Limited v. Joint CIT [2015] 372 ITR 605 (SC). (AY. 1995-96)

CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

S.80HHC : Export business –Commission – Deduction of 90% has to be on net commission not on gross commission

Following the ratio in
ACG Associated Capsules Pvt. Ltd. v. CIT (2012) 343 ITR 89 (SC), the Apex Court held that the deduction of 90% has to be on net commission not on gross commission. Order of High Court was set aside and remanded to the Assessing Officer for fresh consideration. (AYs. 1993-94, 1994-95)

Veejay Marketing v. CIT (2016) 382 ITR 395 (SC)

S.80HHC : Export business – Netting of interest for computing deduction was held to be justified

The issue in the appeal was whether the Tribunal was correct in law in directing the AO to allow netting of interest for computing deduction under section 80HHC of the Act. In this regard, the Supreme Court placed reliance on the case of
ACG Associated Capsules (P) Ltd. v. CIT [(2012) 343 ITR 89 (SC). However the Revenue had disputed the correctness of the order of the High Court and contended that the High Court had made an error in framing the question and answering the same. In this regard, the Supreme Court held that in the present appeal the issue was the correctness of the opinion of the High Court and if the Revenue had any grievance with regard to the question framed and the relevance thereof, the Revenue could take remedies available to it under law including moving the High Court by way of review. Thus the appeal of the Revenue was disposed of by the Supreme Court.

Liberty Footwear Co. v. CIT (2016) 383 ITR 195/238 Taxman 89/286 CTR 369 (SC)

S.115VB : Shipping business – “Tonnage Tax” Income earned on “slot charters” is also held to be eligible for tonnage on slot charter related income

It is only income from the business of operating the qualifying ship that has to be computed in accordance with the provisions of Chapter XIIG. As per Section 115VB of the Act, a company is regarded as operating a ship if it operates any ship which is owned by it or a ship which is chartered by it and it also includes a case where even a part of the ship has been chartered by it in an arrangement such as slot charter, space charter or joint charter etc. The question that has arisen for consideration pertains to ‘slot charter’ i.e., should the ‘slot charter’ operations of a ‘Tonnage Tax Company’ be carried on only in ‘qualifying ships’ to include the income from such operations to determine the ‘tonnage income’ under ‘TTS’ in terms of the provisions of Chapter XIIG of the Act? In other words, is the income derived from ‘slot charter’ operations of a ‘Tonnage Tax Company’ liable to be excluded while determining the ‘Tonnage Income’ under the ‘TTS’ if such operations are carried on in ships which are not ‘qualifying ships’ in terms of the provisions of that Chapter of the Act and the relevant provisions of the Income Tax Rules, 1962? HELD by the Supreme Court:

“(i) When the scheme of the aforesaid special provision for computation of income under TTS is exempted, we find the balance tilted in favour of the assessee as that was the precise purpose in introducing TTS in India. It may be stated in brief that in view of the stiff competition faced by the Indian shipping companies vis-a-vis foreign shipping lines, and in order to ensure an easily accessible, fixed rate, low tax regime for shipping companies, the Rakesh Mohan Committee in its report (of January, 2002) recommended the introduction of the TTS in India, which was similar to, and adopted some of the best global practices prevalent. The whole purpose of introduction of the Scheme was to make the Indian shipping industry more competitive in the global space by rationalising its tax cost. For the reason that it is impossible to cater to all shipping routes on owned ships, it is an accepted and widely prevalent practice globally and in India that shipping companies engage in slot charter operations. If such slot charter arrangements are not entered into, then Indian shipping companies will not be able to take up contract of affreightment and these contracts would have fallen to only foreign shipping lines thereby making Indian shipping industry uncompetitive. Such slot charter arrangements being with a shipping company but not in relation to or for a particular ship, it is impossible for the Indian shipping company to identify the cargo ship, which carried the goods.

(ii) We would also like to refer to Circular No. 05/2005 dated 15-7-2005 explaining the need and essence of the introduction of these provisions which was issued contemporaneously by the Central Board of Direct Taxes (CBDT). The Circular clarifies that the Scheme is a “preferential regime of taxation”. It also clarifies that “charging provision is under Section 115VA read with Section 115VF and Section 115VG.” Circulars of CBDT explaining the Scheme of the Act have been held to be binding on the Department repeatedly by this Court in a series of judgments including
Azadi Bachao Andolan v. Union of India 263 ITR 706, Navnit Lal Jhaveri v. K. K. Sen 56 ITR 198 SC, and UCO Bank v. CIT 237 ITR 889 (SC). (Civil Appeal No. 5869 of 2016, dt. 5-7-2016)

CIT v. Trans Asian Shipping service Pvt. Ltd. (SC); www.itatonline.org

S.244(1A) : Refunds – Interest on refund – Assessee becoming entitled to refund pursuant to assessment order – Refund adjusted against dues for succeeding AY after three years – Entitled to interest on sum for period of delay

For the AY. 1987-88, the assessee filed its return on the basis of self-assessment and paid tax in a sum of Rs. 3,23,68,834 on September 12, 1987. Assessment was made under Section 143(3) of the Act pursuant to which an amount of Rs. 2,03,29,841 was found refundable to the assessee. Instead of immediate refund of this amount, the Assessing Officer ordered that the sum be adjusted against the demand for the year 1986-87. It was ultimately adjusted on July 25, 1991. The assessee claimed interest for the period from March 28, 1988 to July 25, 1991 but the claim was rejected by the Assessing Officer. However, the Commissioner (Appeals) allowed the assessee’s appeal holding that interest was payable on the sum under Section 244(1A) of the Act. This was upheld by the Appellate Tribunal as well as by the High Court. Held, affirming the decision of the High Court, that the amount in question, though found refundable to the assessee, was utilised by the Department and, therefore, interest was payable under section 244(1A) of the Act. (AY. 1985-86 to 1987-88)

CIT v. Jyotsna Holdings P. Ltd. (2016) 382 ITR 451/ 238 Taxman 558 (SC)

S.263 : Commissioner – Revision of orders prejudicial to revenue – Even if AO applies mind and decides not to assess expenditure as unexplained u/s. 69C because the assessee withdrew the claim for deduction, the CIT is entitled to revise the assessment on the ground that the matter needed further investigation – Order is not erroneous merely because another view is possible – Revision on issue not mentioned in the notice is permissible, however he must be heard at each stage

(i) The CIT took the view that notwithstanding the withdrawal of the claim by the assessee, in view of the earlier stand taken that the said expenses were incurred for security purposes of the assessee, the Assessing Officer ought to have proceeded with the matter as the assessee was following the cash system of accounting and the filing of the re-revised return, prima facie, indicated that the additional expenses claimed had been incurred. Withdrawal of claim by assessee can be for variety of reasons and this does not mean that Assessing Officer should abandon enquiries regarding sources for incurring expenses. Assessee follows cash system of accounting and the claim regarding additional expenses was made through duly verified revised return. The claim was pressed during assessment proceedings before the A.O. after filing revised return and it was specifically stated in letter dated 13-2-2004 that expenses were for security purposes and that payments have been made out of cash balances available etc. Under the circumstances, the Assessing Officer was expected to examine the matter further to arrive at a definite finding whether assessee incurred expenses or not and in case, actually incurred, then what were sources for incurring these expenses. Assessing Officer was satisfied on withdrawal of the claim and in my view, his failure to decide the matter regarding actual incurring of additional expenses and sources thereof resulted into erroneous order which is prejudicial to the interest of revenue.”

(ii) There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, the above is not the situation in the present case in view of the reasons stated by the learned CIT. on the basis of which the said authority felt that the matter needed further investigation, a view with which we wholly agree. Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-C of the Act could not have been simply dropped on the ground that the claim has been withdrawn. We, therefore, are of the opinion that the learned CIT was perfectly justified in coming to his conclusions insofar as the issue No. (iii) is concerned and in passing the impugned order on that basis. The learned Tribunal as well as the High Court, therefore, ought not to have interfered with the said conclusion. (CA. No. 5009 of 2016, dt. 11-5-2016) (AY. 2001-02)

CIT v. Amitabh Bachchan (2016) 384 ITR 200/135 DTR 73/286 CTR 113 (SC).

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