ORDER

N.V. Vasudevan, Judicial Member – ITA No.933/Kol/2012 is an appeal filed by the Revenue while ITA No.885/Kol/12 is an appeal filed by the Assessee. Both these appeals are directed against the order dated 29.3.2012 of CIT(A)-VIII, Kolkata relating to A.Y 2007-08.

ITA No.885/Kol/12 (Assessee’s appeal)

2. Ground No.1 raised by the Assessee reads as follows:

“1.

That on the facts and circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in not allowing deduction of leave encashment claimed on provision basis amounting to Rs. 18,97,435/-.”

3. The Assessee is a company. It is engaged in the business of manufacture and trading of printing inks having its manufacturing unit at Sikkim The assessee had debited a sum of Rs.31,45,986/- in the profit and loss account on account of leave encashment which was outstanding on 31.03.2007. Under the provision of section 43B(f) of the Income Tax Act, 1961 (Act) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as deduction in computing the total income only in the year in which the sum is actually paid by him. In other words, the deduction on account of expenditure in the form of leave encashment paid by an employer to the employee cannot be allowed on the basis of the provision or on the basis of accrual under the mercantile system of accounting, made in the books of account and will be allowed only to the extent the leave encashment is actually paid to the employee by the employer. The plea of the assessee before the AO was that since section 43B(f) of the Act was declared unconstitutional by the Hon’ble Calcutta High Court in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 470  provision for leave encashment which is based on proper estimate is a certain liability and should be allowed as deduction. The AO however after making a reference to the fact that an appeal against the decision of the Hon’ble Calcutta High Court in the case of Exide Industries Ltd. (supra) has been preferred before the Hon’ble Supreme Court by the Revenue which has been admitted for adjudication, and the fact that in such appeal, the operation of the Hon’ble High Court of Calcutta has been stayed, was of the view that deduction on account of provision for leave encashment cannot be allowed as deduction. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.1 before us.

4. We have heard the rival submissions. The parties before us agreed that in view of the pendency of the constitutional validity of section 43B(f) of the Act before the Hon’ble Supreme Court, it would be just and proper to direct the AO to follow the ultimate decision that might be taken in the said proceedings and decide the grievance projected by the assessee in Gr.No.1. Thus Gr.No.1 is treated as allowed for statistical purposes.

5. Gr.No.2 raised by the Assessee and Gr.No.1 raised by the Revenue in its appeal can be conveniently decided together. These grounds read as follows:

“Assesee’s ground

2. That on the facts and in the circumstances of the case the Ld. CIT(Appeals) was not justified and grossly erred in computing disallowance u/s 14A at 1 % of exempt income.”

Revenue’s Ground

“1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in allowing relief to the assessee U/S 14A of I TAct, whether A. O. was correct in computing disallowance U/S 14A of I TAct, 1961. ”

6. During the previous year relevant for Assessment Year under consideration, the assessee has earned dividend income of Rs.2,05,47,158/-. In view of the provisions of section 10(35), in the return of income, entire amount of dividend income was claimed as exempt. During the course of assessment proceedings, the Assessee was asked by the AO to submit details of expenses disallowable u/s 14A of the Act, in respect of exempt income as per the provisions contained in Rule 8D of I.T.Rules, 1962. In response to the same, the Assessee vide letter dated 02-12-2010 submitted that Rule 8D introduced vide Notification No.45/2008 dated 24-03-2008 was applicable from A.Y.2008-09 onwards and hence the question of computing disallowance as per Rule 8D does not arise in the instant assessment year. Disregarding the submissions made by the assessee in the order u/s 143(3) of the Act, the AO computed disallowance u/s 14A at Rs.12,05,250/- by applying Rule 8D (i.e. 0.5% of average investments).

7. On appeal by the Assessee the CIT(A) firstly held that Rule 8D is applicable only from AY 2008-09 and in this regard referred to the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010] 328 ITR 81 (Bom.) wherein it was held that Rule 8D was applicable only from AY 2008-09. The CIT(A) thereafter held that disallowance of 1% of the exempt income prior to AY 2008-09 was reasonable and in this regard relied on the decision of the Hon’ble Kolkata Tribunal in the case of Civil Engineers Enterprises (P.) Ltd. v. Dy. CIT [ITA 859/Kol/2010, dated 19-8-2010] and ITO v. SPS Securities (P.) Ltd. [ITA No.123/Kol/2010], wherein it was so held. Aggrieved by the order of the CIT(A) both the Assessee and revenue have raised the aforesaid grounds of appeal before the Tribunal.

8. We have considered the rival submissions and find that in the following orders ITAT Kolkata Bench has taken the view that 1% of the dividend income can be disallowed as other expenses disallowable u/s.14-A of the Act for AY prior to AY 2008-09 i.e., prior to introduction of Rule 8D of the Rules:

1.		Himtaj Consultants (P.) Ltd. v. ITO [ITA No. 721/Ko1l/2007- AY. 2004-05] Order dated 27.04.2007.
2.		CHNHS Association v. ACIT [ITA No.74/Kol/2008-AY.2004-05] Order Dated 19.02.2008.
3.		SPS Securities (P.) Ltd. (supra)

The Hon’ble Calcutta High Court in the case of CIT v. R.R. Sen & Brothers (P.) Ltd. in GA No.3019 of 2012 in ITA No.243 of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper. In view of the aforesaid decisions, we are of the view that the order of CIT(A) does not call for any interference. The ground of appeal of the Revenue and the Assessee are therefore dismissed.

9. In the result, appeal by the Assessee is treated as partly allowed for statistical purpose.

ITA No.933/Kol/2012: (Revenue’s appeal)

10. Gr.No.1 raised by the Revenue has already been decided while deciding Gr.No.2 in Assessee’s appeal. Gr.No.2 raised by the Revenue reads as follows:

“2 That on the facts and in the circumstances of the case and in law, the CIT( Appeals) erred in giving relief to the assessee by holding that excise duty exemption received by the assessee was in the nature of capital receipt, and therefore, not includible in the taxable book profit under the provisions of section 115JB of the Act, whereas, there is no such provision stipulated in the Explanation 1 to section 115JB of the Act, 1961.”

11. During the previous year relevant to the assessment year under consideration, the assessee availed Excise Duty Exemption of Rs.2,14,60,052/- in respect of its new unit situated in the notified area of Sikkim. In the audited accounts the said incentive was shown under the head Revenue Grant from Government which was clubbed and included under the head ‘Other Income’ in Schedule-14. Detailed breakup of Revenue Grant from Government amounting to Rs.2,18,99,594/- was as follows :—

Particulars	Amount (Rs.)
Excise Exemption	2,14,60,052/-
Transport Subsidy	4,39,542/-
Total	2,18,99,594/-

In the revised return of income filed on 31.03.2009 the assessee excluded excise duty exemption of Rs.2,14,60,052/- in the computation of book profit u/s 115JB of the Act by placing reliance on the decision in the case of CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392  (SC). The AO in the order u/s 143(3) held that as per the explanation and provisions contained in 115JB refund of excise duty should not be excluded in the computation of book profit u/s 115JB.

12. Before the CIT(A) the assessee submitted that in F.Y.2005-06 the assessee set up a new unit in the State of Sikkim. In terms of Office Memorandum No.14(2)/2002 issued by Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion dated 31-12-2002, goods manufactured in the notified areas of Sikkim are exempt from payment of excise duty. The Government of Sikkim vide Notification No.G.O./2/DI/2002-2003/901 dated 17-02-2003 has also reproduced office Memorandum No.14(2)/2002 issued by Government of India for the general information of the public. The factory of the assessee was located in Mamring district in the State of Sikkim which is one of the notified areas as per Annexure-II of Office Memorandum No.,14(2)/2002 and thus the assessee was entitled for excise duty exemption. The said exemption was given to the unit for development of Industries and generation of employment in the State of Sikkim. In this regard relevant extracts of Office Memorandum No. 14(2)/2002 is reproduced below:—

“Keeping in view the fact that the State of Sikkim lags behind in industrial development. a need has been felt for structured interventionist strategies to accelerate industrial development of the state and boost investor confidence. The new initiatives would provide the required incentives and enabling environment for industrial development. improve availability of capital and increase market access to provide a fillip to the private investment in the state. ”

It was the plea of the assessee that incentive in the form of Excise Duty Exemption and various other incentives have been granted to the State of Sikkim which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence the incentives granted by the Government of India vide Office Memorandum No. 14(2)/2002 dated 23-12-2002 will be treated as capital receipt.

13. The assessee pointed out that it received excise exemption as per Notification No. 71/2003 -CENTRAL EXCISE dated 9’h Sept, 2003. As per para 4(a) of this notification the assessee received credit in the account current (PLA) by 7th day of the month following the month under consideration of the amount of duty paid other than by way of utilization of Cenvat credit. Such amount credited in the PLA was used by the assessee for paying duty under Rule 8 of the Central Excise Rule, 2002 in subsequent months and the payment was deemed to be made in cash.

14. It was argued by the Assessee that the subsidy in question was a capital receipt not chargeable to tax as the subsidy was given for the purpose of enabling coming into existence new industries and not to enable carrying on of existing industries. It was further argued that while computing book profits u/s.115JB of the Act, the excise subsidy should be excluded though it is credited in the profit and loss account.

15. The CIT(A) agreed with the submissions of the Assessee and he held that central excise exemption received by the Assessee was not in the nature of income and therefore ought to be excluded from book profits for the purpose of Sec.115JB of the Act. The following were the relevant observations of the CIT(A):—

“1.0. I have perused the submission made by the appellant. In its submission, the appellant pleaded that the excise duty exemption being in the nature of capital receipt should not form part of the profit & loss account. Hence, it should be excluded in the computation of book profit U/S 11SJB. However, in the order U/S 143(3), AO has held that as per the explanation and provisions contained in 11SJB, refund of excise duty should not be excluded in the computation of book profit U/S 115JB.

1.1 I have carefully considered the assessment order and submission of the appellant. The objective behind granting of excise duty exemption in the present case is to give incentive for industrialization and employment generation in the State of Sikkim which lagged behind in industrial development. The same is evident from the various clauses of Memorandum No. 14(2)/2002 issued by Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion dated 23-12-2002. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence excise duty exemption granted to the appellant is a capital receipt. The issue is covered favourably by the principles laid down by the Hon ‘ble Apex Court in the case of Ponni Sugar & Chemicals Ltd (Supra) wherein it has been held that the character of subsidy is to be determined with respect to the purpose for which it is granted. The point of time at which the subsidy is paid and its source or mode is immaterial. The issue is also covered favourably by the decision of Hon’ble Jammu & Kashmir High Court in the case of Shree Balaji Alloys & Ors. (Supra) wherein it has been held that Excise Duty Refund and Interest Subsidy received for the purpose of eradication of unemployment in the state by acceleration of industrial development and removing backwardness of the area that lagged behind in industrial development is to be treated as capital receipt. Similarly the Jurisdictional High Court in the case of Rasoi Ltd (Supra) has held that sales tax incentive received under West Bengal Incentive Scheme for expansion of capacities, modernization and improving the marketing capabilities to tide over the crises- of promotion of industry in the state was capital in nature. Thus, in the light of the above observation, I am of the considered view that the excise duty exemption received by the appellant is capital in nature.

2. Once it has been decided that the aforesaid excised duty exemption is capital receipt, now the next question to be dealt with is the issue whether the said capital receipt shall be excluded in the computation of book profit u/s 11SJB.• In this regard, the appellant has placed reliance on the decision of Hon ‘ble Apex Court in the case of Padmaraje R. Kadambande -vs.- CII (1992) 195 ITR 877 (SC) wherein it has been held that capital receipt are not income within the meaning of section 2(24) of the Act and hence not at all chargeable under the Income Tax Act. A receipt which is neither ‘Profit’ nor ‘Income’ and which does not have any element there-of embedded there in, cannot be part of ‘Profit’ as per Profit & Loss account prepared in terms of Part II of Schedule VI to Companies Act.

2.1 In the present case, the excise duty exemption granted to the appellant is pure and simple capital receipt. Thus, it doesn’t have any income or profit element embedded in it, since the incentive has been granted to the appellant to accelerate industrial development and generate employment opportunities in the backward region. Hence, it is held that the excise duty exemption granted is not chargeable to tax under the Income Tax Act as held by the Apex Court in the case of Padmaraje (supra) and in the light of the factual finding as above. Therefore, the same is clearly not includible in P&L account prepared under Part II & Part III of Schedule VI to the Companies Act.

2.2 The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all. In a recent decision, the Hon’ble Apex Court in the case of Indo Rama Synthetics 0) Ltd -vs- CIT (2011) 330 ITR 363 (SC) has held that the object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, inclusion of capital receipt in the computation of MAT would defeat two fundamental principles. Firstly it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. The real working result can be arrived at only after excluding this receipt which has been credited to P&L a/c and not otherwise.

2.3 The above exclusion or adjustment in computing Book Profit is permissible in terms of decision of Hon’ble Apex Court in the case of Apollo Tyres (2002) 255 ITR 273 (SC) wherein it has been held that the AO has no power to rework the book profit if the profits are computed in accordance with Part II and Part III of Schedule VI to the Co. Act, 1956. Further, the Hon’ble Apex Court in the case of Indo Rama Synthetics (l) Ltd (Supra) has also held that the object of MAT provisions is to bring out the true working result of the companies. The thrust is to find out the real working results of the company.

2.4 Further, in the case of CIT -vs.- Veekaylal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom.) it has been held that if the profit is not computed in accordance with Part II and Part III of Sch. V1 to the Companies Act, 1956, the A.O. has the power to re-compute such book profits. Thus, it can be held that if the AO can amend the book profit it is not in accordance with Part II & Part III of Sch. VI, likewise the assessee also can re-compute the book profit for the purpose of Sec IISJB of the Act. This view is also supported by the decision of Mumbai Tribunal in the case of DCIT -vs.- Bombay Diamond Co. Ltd. (Supra) and Bangalore ITAT in the case of Syndicate Bank -vs.- ACIT (Supra).

2.5 Thus, in view of the above discussion and by placing reliance on the decision of Hon’ble Jaipur Tribunal in the case of ACIT -vs.- Shree Cement Ltd. C2012- TIOL-02-ITAT-Jaipur),• I am of the view that excise duty exemption, being a capital receipt not chargeable to income tax, is to be excluded to compute the book profit U/S 115JB as the profits are not computed in accordance with Part II and Part III of Schedule VI to the Co. Act, 19S6. Hence, Ground No. 10 taken by the appellant is allowed.”

16. Aggrieved by the order of the CIT(A) the Revenue has raised Gr.No.2 before the Tribunal.

17. We have considered the rival submissions in the light of the decision of the Hon’ble Jammu & Kashmir High Court in the case of Shree Balaji Alloys v. CIT [2011] 333 ITR 335 , rendered in the context of identical scheme under which the excise duty exemption subsidy was received by the Assessee in the present case. In the case of Balaji Alloys (supra), the Hon’ble Jammu & Kashmir High Court has set out of the objects of the scheme under which the excise duty exemption subsidy and interest subsidy were received by the Assessee in the present case in the following words:

“Before coming to the issues, which need determination, regard needs to be had to the salient features of the New Industrial Policy, amendment introduced thereto and the statutory Central excise notifications issued in this respect governing the refund of excise duty and interest subsidy, as incentives to the industrial units, pursuant to the New Industrial Policy.

The statement and objects, which had lead to the New Industrial Policy and other concessions for the State of Jammu & Kashmir floated vide Office Memorandum of 14th June, 2002 and the salient features thereof, may, in a nutshell, be stated thus :

Considering the request of the Government of Jammu & Kashmir for a special package for development of the industries in the State on the lines for the North East Industrial Policy notified by the Central Government vide Ministry of Industry’s OM No. EA/1/2/96-IPD dt. 24th Dec., 1997, discussions were held by the Central Government on strategy and action plan for development of industries and generation of employment in the State of Jammu & Kashmir with various related Ministries on the issues, inter alia of infrastructure development, financial concessions and easy market access, pursuant whereto, the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), issued its Office Memorandum dt. 14th June, 2002 whereby it was provided that keeping in view the fact that the State of Jammu & Kashmir had lagged behind in industrial development, there was need for structured interventionist strategies to accelerate the industrial development of the State boosting investors’ confidence.

The new initiatives, in terms of the memorandum were aimed at providing requisite incentives as well as enabling environment for industrial development, improving availability of capital and increase in market access so as to give a fillip to private investment in the State.

These fiscal incentives were to be provided to the new industrial units and substantial expansion of existing units.

The new industrial units and existing industrial units on their substantial expansion, as defined, set up in growth center, industrial infrastructure development centers and other locations like industrial estates, parks, export processing zones, commercial estates, etc., as notified by the Central Government, were entitled to 100 per cent excise duty exemption for a period of 10 years from the date of commencement of commercial production.

All new industries in the notified locations were eligible for capital investment subsidy @ 15 per cent of their investment in plant and machinery, subject to a ceiling of Rs. 30 lakhs whereas the existing units were entitled to subsidy on substantial expansion, as defined. Besides these and other concessions, interest subsidy of 3 per cent on the working capital and insurance premium to the extent of 100 per cent on capital investment too was permissible to the new and existing units on their substantial expansion for a period of 10 years.

6. Office Memorandum dt. 14th June, 2002 referred to hereinabove was later amended vide notification of 28th Nov., 2003 issued by the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion. It reads thus :

“No. 1(11)/2002-NER—In pursuance of the announcement by the Prime Minister on 19th April, 2003 at Srinagar for creation of one lakh employment and self-employment opportunities in Jammu & Kashmir, the Government of India had set up a Task Force under Cabinet Secretary. The recommendations of Task Force were submitted to the Cabinet. To achieve this object of employment generation, the Cabinet has inter alia, approved following definition of the term ‘substantial expansion’ for the purpose of incentives/subsidies notified as per OM No. 1(13)/2000-NER dt. 14th June, 2002.

2. The Central Government, therefore, hereby makes amendment in the Central Interest Subsidy Scheme, 2002 notified in the notification of the Government of India in the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion No. 1(11)/2002-NER dt. 22nd Oct., 2002. The definition of the term ‘substantial expansion’ appearing under para 5(d) of the scheme may be substituted by the following :

‘Concessions for substantial expansion should extend to include all new investments by entrepreneurs, which leads to substantial additional employment creation by an existing entrepreneur without insisting on major expansion. However, credit under the industrial policy package should not be merely for paying off old debts or for equipment already in place’.”

7. To implement the New Industrial Policy referred to hereinabove, requisite notifications for exemption on excise duty were issued under s. 5A of the Central Excise Act, 1944 prescribing therein the procedure required to be followed by the industrial units before claiming incentives.

8. Para No. 3, appearing in the two notifications i.e. Central Excise Notification Nos. 56 of 2002 and 57 of 2002 dt. 14th Nov., 2002, which may be relevant to understand the issue raised in the case, needs to be noticed. It reads thus :

” ……… 3. The exemption contained in this notification shall apply only to the following kind of units namely :

(a)		New industrial units which have commenced their commercial production on or after the 14th day of June, 2002.
(b)		Industrial units existing before the 14th day of June, 2002, but which have :

(i)		undertaken substantial expansion by way of increase in installed capacity by not less than twenty-five per cent on or after the 14th day of June, 2002; or
(ii)		made new investments on or after the 14th day of June, 2002, and such new investment is directly attributable to the generation of additional regular employment of not less than twenty-five per cent over and above the base employment limit, subject to the conditions that :

(1)		the unit shall not reduce regular employment after claiming exemption, and once such employment is reduced below one hundred and twenty-five per cent of the base employment limit, such industrial unit shall be debarred from claiming the exemption contained in this notification in future. However, the exemption availed by such industrial unit, prior to such reduction, shall not be recoverable from such industrial unit.
(2)		The manufacturer shall produce a certificate, from general manager of the concerned District Industries Centre to the jurisdictional Dy. CCE or the Asstt. CCE, as the case may be, to the effect that the unit has created such additional regular employment.

Explanation—For the purposes of this notification :

(a)		‘base employment limit’ means maximum number of regular employees employed at any point of time by the concerned industrial unit, during last five years;
(b)		‘regular employment’ shall not include employment provided by the industrial unit to daily wagers or casual employees;
(c)		‘new investment’ shall not include investments which are used for paying off old debts or making payments for the plant or machinery installed prior to the 14th day of June, 2002, or paying salaries to the employees.

[Above cl. (b) has been substituted vide NTF No. 11/2004- CE, dt. 29th Jan., 2004]. Old :

(b) Industrial units existing before the 14th day of June, 2002, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent on or after 14th day of June, 2002.]

4. The exemption contained in this notification shall apply to any of the said units for a period not exceeding ten years from the date of publication of this notification in the Official Gazette or from the date of commencement of commercial production whichever is later.”

18. The Hon’ble Jammu & Kashmir High Court had to deal with the issue whether excise refund and interest subsidy availed of by an assessees under the very same scheme under which the Assessee in the present appeal received excise duty refund and interest subsidy, as to whether the same was capital receipt not chargeable to tax and not revenue receipt which is chargeable to tax. The Hon’ble High Court after referring to the decisions of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253  and Ponni Sugars & Chemicals Ltd. (supra), held as follows:

’15. After going through the two judgments, we find the ratio in Sahney Steel case (supra) and approval thereof in Ponni Sugars & Chemicals Ltd. (supra), to have been spelt out, in the following para of the judgment delivered by the Hon’ble Supreme Court of India in Ponni Sugars & Chemicals Ltd. case (supra). It reads thus :

“The importance of the judgment of this Court in Sahney Steel 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 at 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 set up 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 or the mechanism through which the subsidy is given are irrelevant.”

16. Perusal of the judgments in Sahney Steel (supra) and Ponni Sugars (supra), therefore, reveals that the apex Court had applied the above quoted dictum to determine the purpose, which the two schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases.

It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel (supra) was held to be revenue receipt whereas the subsidy in Ponni Sugars & Chemicals Ltd. (supra) was held as capital receipt.

17. We are supported in taking this view by the observations made by the Hon’ble Supreme Court of India in a later decision reported as Mepco Industries Ltd. vs. CIT & Anr. (2009) 227 CTR (SC) 313 : (2009) 31 DTR (SC) 305 : 2009 (7) SCC 564, where the above dictum was reiterated as follows :

” ……. Sahney Steel & Press Works Ltd. Etc. (supra) was a case which dealt with production subsidy, Ponni Sugars & Chemicals Ltd. (supra) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel & Press Works Ltd. Etc. (supra) was on its own facts; so also, the judgment of this Court in Ponni Sugars & Chemicals Ltd. (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straightjacket principle of distinguishing a capital receipt from a revenue receipt.

It depends upon the circumstances of each case. As stated above, in Sahney Steel & Press Works Ltd. Etc. (supra), this Court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas.”

18. Now coming to the findings of the Tribunal on the issue, we find that the Tribunal has referred to various paras appearing in the two judgments to support its view that the receipts in the hands of the assessees were production incentives and thus revenue receipt and not capital receipt. This, however, appears to have been done without appreciating that the observations made in those paras were in the context of the schemes as such, which the apex Court was considering to find the intent and purpose of the incentives under those schemes, and not the law laid down as such.

19. The Tribunal has relied upon five factors to hold the incentives in question as production incentives but without dealing with that part of the scheme, whereby unemployment in the State had been intended to be eradicated creating atmosphere for accelerated industrial development to provide employment opportunities to deal with the social problem of unemployment.

This in our view was a lopsided interpretation of the New Industrial Policy and concessions formulated by the Central Government for the State of Jammu & Kashmir vide Office Memorandum of 14th June, 2002.

20. Therefore, in view of the clear legal position adumbrated by the Hon’ble Supreme Court of India on the issue in question, that to determine the nature and intent of the incentives as to whether those were revenue receipts or capital receipts, the purpose underlying the incentives was the determinative test, there may not be any necessity of referring to the judgments of other High Courts of the country referred to by the appellants’ learned counsel, some of which had been considered by Hon’ble Supreme Court of India in the above-referred cases.

21. Thus, finding that the New Industrial Policy and other concessions for the State of Jammu & Kashmir have not been correctly appreciated by the Tribunal, we proceed to examine the true intent and purpose underlying the Policy and concessions contemplated by the Office Memorandum of 14th June, 2002 and the statutory notifications issued in this behalf.

22. Perusal of the Office Memorandum dt. 14th June, 2002 indicating New Industrial Policy and other concessions for the State of Jammu & Kashmir, makes it explicit that the concessions were issued to achieve twin objects viz. (i) Acceleration of industrial development in the State of Jammu & Kashmir, which had been found lagging behind in such development and (ii) Generation of employment in the State of Jammu & Kashmir.

Amendment introduced to the Office Memorandum vide notification of 28th Nov., 2003 of the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) eloquently demonstrates the Central Government’s intention in extending the incentives. The Government’s objective, as conveyed by Hon’ble the Prime Minister at Srinagar on 19th April, 2003, was, for creation of one lac employment and self-employment opportunities in Jammu & Kashmir State.

23. To achieve the purpose and objective referred to hereinabove, it was, inter alia, provided in the Central excise notifications that the exemptions contained in the notifications would be available only on production of certificate from general manager of the concerned District Industry Centre to the jurisdictional Dy. CCE or the Asstt. CCE, as the case may be, to the effect that the unit had created required additional regular employment, which would not, however, include employment provided by the industrial units to daily wagers or casual employees engaged in the units.

24. A close reading of the Office Memorandum and the amendment introduced thereto with para No. 3 appearing in the Central Excise Notification Nos. 56 and 57 of 11th Nov., 2002, thus, makes it amply clear that the acceleration of development of industries in the State was contemplated with the object of generation of employment in the State of Jammu & Kashmir and the generation of employment, so contemplated, was not only casual or temporary, but was on the other hand, of permanent nature.

25. Considered thus, the paramount consideration of the Central Government in providing the incentives to the new industrial units and substantial expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the State, additionally creating opportunities for self-employment, hence a purpose in public interest.

26. In this view of the matter, the incentives provided to the industrial units, in terms of the New Industrial Policy, for accelerated industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional permanent source of employment to the unemployed in the State of Jammu & Kashmir were in fact, in the nature of creation of new assets of industrial atmosphere and environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve public purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assessees alone.

27. Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in industrial development, which is certainly a purpose in the public interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the appellant-assessees cannot be construed as mere production and trade incentives, as held by the Tribunal.

28. Making of additional provision in the scheme that incentives would become available to the industrial units, entitled thereto, from the date of commencement of the commercial production, and that these were not required for creation of new assets cannot be viewed in isolation to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide industrial units so that larger public interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum was achieved.

29. The other factors, which had weighed with the Tribunal in determining the incentives as production incentives may not be decisive to determine the character of the incentive subsidies, when it is found, as demonstrated in the Office Memorandum, amendment introduced thereto and the statutory notification too that the incentives were provided with the object of creating avenues for perpetual employment, to eradicate the social problem of unemployment in the State by accelerated industrial development.

30. For all what has been said above, the finding of the Tribunal on the first issue that the excise duty refund, interest subsidy and insurance subsidy were production incentives, hence revenue receipt cannot be sustained, being against the law laid down by Hon’ble Supreme Court of India in Sahney Steel (supra) and Ponni Sugars case (supra).

31. The finding of the Tribunal that the incentives were revenue receipt is, accordingly, set aside holding the incentives to be capital receipt in the hands of the assessees.’

19. The conclusion of the Hon’ble High Court is that the Excise refund and interest subsidy received in pursuance of New Industrial Policy of the Government have to be considered in the light of the Office Memorandum dt. 14th June, 2002, and the said Office Memorandum makes it explicit that the concessions were given to achieve twin objects viz., acceleration of industrial development in the State of Jammu & Kashmir and generation of employment in that State. The Hon’ble High Court further held that a close reading of the Office Memorandum and the amendments introduced thereto with para 3 of Central Excise Notification Nos. 56 and 57, dt. 11th Nov., 2002, makes it amply clear that the generation of employment so contemplated was not casual or temporary but of permanent nature and the paramount consideration of the Central Government in providing the incentives to new industrial units and substantial expansion of the existing units was generation of employment through acceleration of industrial development in public interest. Such incentives, designed to achieve a public purpose, cannot be construed as production or operational incentives for the benefit of assessees alone. It was further held that making of additional provision in the scheme that the incentives would be available to the eligible industrial units from the date of commencement of commercial production and that these are not to be allowed for creation of new assets cannot be viewed in isolation to treat the incentives as production incentives. Such provisions are intended to ensure that the incentives are made available only to the bona fide industrial units so that the larger public interest of eradicating unemployment is achieved. The Court finally concluded that the incentives received by way of excise duty refund and interest subsidy are capital receipts in the hands of the assessee and therefore not chargeable to tax.

20. The ratio laid down in the aforesaid decision is squarely applicable to identical subsidy received under identical scheme of the State of Sikkim as the objective of both the schemes are identical. We therefore find no grounds to interfere with the conclusions of the CIT(A) that the subsidy in question is a capital receipt not chargeable to tax.

21. The main issue that arises for consideration on the basis of the grievance projected by the Revenue in the aforesaid ground No.2 is as to whether the excise duty refund which were held by the CIT(A) to be capital receipts not chargeable to tax can still be considered as part of the book profits u/s.115JB of the Act, even though these sums have been credited in the profit and loss account and treated as income and even though the exclusion of these sums for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act. In rejecting the claim of the Assessee in this regard, the AO held that these sums have been credited in the profit and loss account and treated as income and exclusion of these incomes (sums) for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act.

22. We have heard the submission of the learned counsel for the Assessee. As far as the excluding the subsidies in question from computation of book profit u/s 115JB of the Act is concerned, the provisions of Sec.115JB of the Act have to be looked at. Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an Assessee, being a company, the income- tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2001, is less than seven and one half percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one half ten per cent. The Assessee being a company the provisions of Sec.115JB of the Act were applicable. Every assessee, being a company, shall, for the purposes of section 115JB of the Act, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by— certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act.

23. We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon’ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision the Hon’ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid decision of the Hon’ble High Court rendered on identical facts as that of the Assessee’s case, there can be no doubt that subsidies in question does not have any character of income.

24. When a receipt is not in the character of income, can it form part of the book profits for the purpose of Sec.115JB of the Act, is the question that arises for consideration. The ITAT Kolkata Bench in the case of Dy. CIT v. Binani Industries Ltd. [2016] 178 TTJ 658 : had to deal with a case where the question was as to whether receipts on account of forfeiture of share warrants amounting to Rs. 12,65,75,000/-, being a capital receipt, would be liable for taxation u/s 115JB. The tribunal after referring to several decisions on the issue viz., the Hon’ble Apex Court in case of Indo Rama Synthetics (I) Ltd. v. CIT [2011] 330 ITR 336 Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273  (SC), Special Bench ITAT in the case of Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) (SB), ITAT Luknow Bench in the case of ACIT v. L.H. Sugar Factory Ltd. and vice versa in ITA Nos. 417 , 418 & 339/LKW/2013 dated 9.2.2016 and decision of Mumbai ITAT in the case of Shivalik Venture (P.) Ltd. v. Dy. CIT [2015] 70 SOT 92 , came to the conclusions

(i)		the object of Minimum Alternate Tax (MAT) provisions incorporated in Sec.115JB of the Act was to bring out real profit of companies and the thrust was to find out real working results of company.
(ii)		Inclusion of receipt which are not in the nature of income in computation of book profits for MAT would defeat two fundamental principles, it would levy tax on receipt which was not in nature of income at all and secondly it would not result in arriving at real working results of company. Real working result could be arrived at only after excluding this receipt which had been credited to P&L a/c and not otherwise.
(iii)		There was a disclosure of the factum of forfeiture of share warrants amounting to Rs. 12,65,75,000/- by the Assessee in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for year ended 31.3.2009. Profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, included notes on accounts thereon and accordingly in order to determine real profit of Assessee, adjustment need to be made to disclosures made in notes on accounts forming part of profit and loss account of Assessee. Profits arrived after such adjustment, should be considered for purpose of computation of book profits u/s 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to section 115JB of the Act.

25. The Tribunal in the aforesaid decision made a reference to the decision of the Special Bench of the ITAT in the case of Rain Commodities (supra) which in turn was based on the ratio laid down in the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H. Sugar Factory Ltd. (supra), where receipts on account of carbon credits which were capital receipts not chargeable to tax and hence not in the nature of income were held not included in the book profits. The Bench also referred to the decision of the Mumbai Bench of the ITAT in the case of Shivalik Venture (P.) Ltd. (supra) which was a case where the question was whether profits arising on transfer of a capital asset by a company to its wholly owned subsidiary company which is not treated as income” u/s 2(24) of the Act and since it does not form part of the total income u/s.10 of the Act and therefore does not enter into computation provision at all under the normal provisions of the Act, the same should be considered for the purpose of computing book profit u/s 115JB of the Act. The Mumbai Bench held as follows:

’26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term “income” as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as “incomes not included in total income” for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of “income”, are excluded for the purpose of computing “Book Profit”, since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of “total income” and “book profit”, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in “book profit” u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.’

26. The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s.115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue.

27. Gr.No.3 raised by the revenue reads as follows:

“3 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A} erred in granting depreciation @ 10% on landscaping & development charges which is capitalized in nature of land thereby allowing depreciation on land which is not permitted as per I TAct.”

28. The assessee has claimed the landscape expenses of Rs.35,23,301/- incurred on the leasehold land situated at Sikkim Unit to level the uneven land for construction of factory building as revenue expenditure. The AO held that landscaping and development charges are not related to regular repair & maintenance but for better utility of land and its development and therefore the said expenditure was capital expenditure. The CIT(A) upheld the view of the AO that landscaping and development charges are capital in nature. He however held the same shall be included in the block of building and entitled for depreciation @ 10%.

29. Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal.

30. We have considered the rival submissions. The assessee has incurred the landscape expenses on the leasehold land situated at Sikkim Unit to level the uneven land for construction of factory building. Since the same has been disallowed as capital in nature, the same should be included in the block of building and the assessee would be entitled for depreciation @10%. The said expenditure has been incurred to level the land and make it suitable of construction of factory. Expenditure incurred on land development is a separate thing as compared to the cost of the land. Reliance is placed in the decision of the Hon’ble High Court in the case of CIT v. Herdillia Chemicals Ltd. [1995] 216 ITR 742 (Bom.) wherein the Hon’ble High Court held that expenditure incurred on levelling and development of land for erection of machinery and building formed part of cost of machinery and building and is therefore entitled for depreciation.

31. In view of the above we do not find any merit in ground no.3 raised by the revenue. Accordingly we dismiss ground No.3.

32. In the result appeal by the Assessee is partly allowed for statistical purpose while appeal by the revenue is dismissed.

ORDER

Sanjay Arora, Accountant Member – This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-22, Mumbai (‘CIT (A)’ for short) dated 17.3.2011, partly allowing the Assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2006-07 videorder dated 11.12.2008.

2.1 The issue in this appeal is the validity or otherwise in law of the assessee’s claim for depreciation on what it calls an Effluent Treatment Plant (ETP), costing Rs. 29,13,344/-. While the Revenue considers it as an item of plant and machinery, allowing depreciation thereon at the normal rate of 15%, plus additional depreciation @ 20% (i.e., at a total of 35%), the assessee agitates for allowance of depreciation at 100%, pressing its claim under clause III(ix)[(e) & (q)] of Part A of Appendix I prescribed under rule 5 of the Income Tax Rules, 1962 (‘the Rules’ hereinafter), raising the following Grounds:

‘1.		Re: Disallowance of depreciation in respect of Effluent Treatment Plant (E.T.P) of Rs. 18,93,674/-.
1.1		The CIT(A) is grossly erred in upholding the contention of the Assessing Officer by not allowing 100% depreciation on E.T.P. (Effluent Treatment Plant).
1.2		The CIT(A) is grossly erred in not considering the evidence filed before him and also erred in upholding the contention of the Assessing Officer that no evidence regarding expenditure incurred, equipment forming part of the ETP, cost incurred for assembling etc. were filed.’

2.2 At the first appellate stage, the assessee sought to refurbish its said claim by furnishing a certificate from a Chartered Engineer (dated 18.12.2009) as well as the Environmental Audit Report (EAR) dated 25.01.2008 qua an audit carried out by Ahmedabad Textile Industry’s Research Association (ATIRA) – an independent body appointed by Gujarat Pollution Control Board, Gandhi Nagar (GPCB) in compliance with the orders dated 20.12.1996 and 13.3.1997 of the Hon’ble High Court of Gujarat, as further modified vide its order dated 16.9.1999. The same, despite being objected to by the Assessing Officer (A.O.), were admitted as additional evidence by the ld. CIT(A) under r. 46A of the Rules. Copies of invoices of various bought out materials – ETP having been fabricated in-house, were also submitted, even as the assessee claimed of having submitted the same during the assessment proceedings itself. On merits, the A.O. vide his remand report dated 04.2.2011 to the ld. CIT(A), observed as follows:—

‘v. Without prejudice to the above, the submissions made by the assessee are examined. Even in the said additional evidences, the assessee has not furnished the evidences of the said ETP plant, the expenditure incurred, the components/apparatus/equipments forming part of the said ETP and the cost incurred on the assembly and putting to use of the same. The assessee has relied upon a certificate of a Chartered Engineer and some audit report without producing the actual invoices and evidences for the acquisition/construction of the said ETP, on which the assessee has claimed depreciation @ 100%. Hence, the claim is still unsubstantiated and, accordingly, disallowable.’

The ld. CIT(A), on a consideration of the materials before him, held as under:

‘From the above report of the A.O. it may be noted that the assessee failed to furnish the evidence regarding expenditure incurred, equipments forming part of ETP, cost incurred on assembling, etc. even during the opportunity given in remand proceedings before A.O. This ETP as claimed by appellant is an in-house developed ETP and not purchased from outside agency and hence assessee had to maintain all details of expenses incurred on its construction. Since the claim of 100% depreciation made by the appellant could not be verified by the A.O. for non-submission of details, the same is not allowable as deduction and accordingly the disallowance made by the A.O. is upheld.’

Aggrieved, the assessee is in second appeal.

3. We have heard the parties, and perused the material on record.

The Revenue’s case, as apparent from the foregoing, is that the assessee’s claim (for depreciation on ETP) is unsubstantiated inasmuch as it has not been able to conclusively show that what was fabricated was an ETP, i.e., the assessee had not been able to adduce sufficient evidence to establish that an ETP was installed by it during the relevant previous year. In our view, in view of the bills for material and labour submitted (PB pgs. 46-76); the assessee’s audited accounts, coupled with the certificate of the Chartered Engineer and the EAR (for the year 2007), there could reasonably be no doubt in the matter. On the Bench questioning the ld. Authorized Representative (AR), the assessee’s counsel, as to why the environmental audit was conducted, admittedly for the first time, only in the year 2007 and not in the year 2006, being mandatory, with the installation of the ETP having been completed and, rather, stated as having been put to use (for the first time) by 30.9.2005, he could furnish no satisfactory answer, stating that the issue of the date of installation and of being put to use for the first time by 30.9.2005 is not in dispute; the Revenue having itself allowed depreciation at the normal rate of depreciation, in full. We will visit this aspect of the matter later.

The question, however, is: Even granting that an ETP was set up and put to use during the relevant year, would it qualify to be a Water Pollution Control (WPC) Equipment, i.e., in terms of the relevant clauses of Appendix I, which read as under, so as to be eligible for depreciation @ 100%:

‘(ix) Water pollution control equipment, being –

(a) to (d)

(e) Mechanical flocculators and mechanical reactors

(f). . . . . . . . . . . . . . . . . . . . .

(q) Activated carbon column’

Clearly, it is not any WPC equipment, but one which is constituted or comprised of any of the specified systems, that would qualify for depreciation at the enhanced rate. In other words, an ETP is without doubt a WPC equipment, set up to treat the fluid effluent and waste prior to its discharge from an industrial unit. The very fact that an environment audit was carried out in the present case, which bears abundant reference to the ETP (including its flow chart at Ann. 8 thereto), along with an examination of its various aspects as Water (per a separate section (C)); Quality of Effluent; Energy consumption of ETP; Analysis Reports, etc., establishes so. Whether it, however, constitutes or is comprised of any of the systems stated in the relevant clauses has not been subject to examination by the Revenue at any stage. The ld. AR would toward this state that the certificate (supra) by the Chartered Engineer, clearly mentioning of the ETP as made up by, to quote ‘assembling the systems, namely, Mechanical Flocculators and Mechanical Reactors and Activated Carbon Column’, i.e., the systems as specified under the relevant clauses, has not been doubted by the Revenue. If that were the case, how we wonder could the Revenue disallow the assessee’s claim in the first place? At the same time though, we are inclined to agree with the assessee’s case. It has furnished all the materials it considered proper and relevant for the purpose. No further queries were raised, asking it to substantiate a particular aspect, by the Revenue. The assessee under the circumstances should not be put to the rigmarole of fresh proceedings before the A.O., who had another occasion during the remand proceedings to question and examine the assessee’s claims. This is more so as there is nothing on record to suggest otherwise, with the assessee having placed all the materials it is reasonably expected to before the Revenue authorities. We accordingly accept the assessee’s claim of the ETP installed and being used at its industrial unit as falling under the relevant sub-clauses of clause A (III)(ix) of Appendix-I and, thus, eligible for depreciation @ 100%.

Coming back to the aspect of the date of the ETP being put to use for the first time, we find that despite having been allowed depreciation in full (at the normal rate), the following bills/vouchers indicate otherwise:

(a)		Bill No. 17 of Civil Contractor (Diva Construction) dated 14.10.2005 after several work for boiler – ETP (PB pg. 46);
(b)		Bill No. 481 dated 20.10.2005 of Shital Poly Plast for HDPE Pipe (in coil form) (PB pg. 58);
(c)		Bill No. 495 dated 25.10.2005 of Shital Poly Plast for HDPE Pipe (in coil form) (PB pg. 59);
(d)		Bill No. 03 dated 05.11.2005 (of Mamta Engineering Works) towards labour charges for fabrication of pipe lines for, among others, ETP – boiler plant (PB pg. 53);
(e)		Bill No. 12 dated 18.12.2005 (of Ashokbhai Ninjar) for painting labour work (PB pg. 64);
(f)		Bill No. 07 dated 02.01.2006 (of Mamta Engineering Works) towards labour charges for fabrication of pipe lines for, among others, ETP – boiler plant (PB pg. 54); and
(g)		Bill No. 19 of Civil Contractor (Diva Construction) dated 04.3.2006 after several work for boiler – ETP (PB pgs. 49-50);

The ld. AR, on being confronted therewith, would submit that these bills are for labour, which are raised much after the actual conduct of the work and, accordingly, are not indicative of when the work was actually completed. We are unable to agree. The bills are, firstly, also for materials. Again, a delay in raising bills is understandable only for a few days, stretching up to a week to ten days, while in the instant case the bills continue to be raised even up to March, 2006. Then, again, as a matter of practice, it could be that the bills are raised for a month, at its end. There is in fact a labour bill for 30.9.2005 itself (PB pg. 52), by Mamta Engg. Works, suggesting raising of bills on a regular basis. In fact, even if not so, the bills, where the work is scheduled to be completed by a particular date, would normally be issued by that date or otherwise indicate to the work date. There is further nothing on record which could positively establish the use of the ETP from 01.10.2005, as in the form of commissioning report; ETP power consumption (which is separately metered); consumption of chemicals for use in ETP, et. as. The EAR contains specific reference to the ETP records. The EAR is also silent in this regard, being, as aforenoted, only for the period January 2007 onwards. We are, at the same time, conscious that there has been no verification qua this aspect of the matter by the Revenue, who has proceeded by accepting the assessee’s claim. The assessee, therefore, has not got an opportunity to properly represent its case in the matter. We, accordingly, restrain from issuing any final finding in the matter, and consider it only proper to restore this aspect of the matter back to the file of the A.O. The assessing authority, where not satisfied with the assessee’s explanation, or if the assessee itself concedes not to press this aspect, shall, in giving effect to this order, allow deprecation at 50% of the cost for the current and the following year inasmuch as we have confirmed it to be eligible for depreciation @ 100%. This, it would be appreciated, is even otherwise incumbent on him inasmuch as he has to, while allowing additional depreciation for the current and/or the following year, withdraw the depreciation for the subsequent years; the issue at hand concerning the rate of depreciation, so that the issue in essence involves timing difference. We decide accordingly.

As regards our competence to issue such a direction, i.e., qua the date of installation and put to use for the first time (of the ETP), we may clarify that as explained by the Hon’ble Courts, the tribunal is empowered to frame issues it considers as arising out of the impugned order. The matter under reference is a matter of fact, relevant to the issue, and on which we observe no finding by the Revenue. Reference for the purpose of law in the matter may be made to the decision by the Hon’ble Apex Court in Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and by the Hon’ble jurisdictional High Court in Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.) (FB), rendered relying on a series of decisions by the Apex Court.

4. In the result, the assessee’s appeal is partly allowed.

ORDER

Inturi Rama Rao, Accountant Member – This is an appeal filed by the assessee directed against the order of the CIT (A)-I, Bangalore, dated 31/08/2012 for the assessment year 2008-09.

2. The assessee raised the following grounds of appeal:

1.1 The order passed by the learned Commissioner of Income Tax (Appeals) I, Bangalore to the extent prejudicial to the appellant is bad in law and liable to be quashed.

2.1 The learned CIT (A)-I, Bangalore has erred in confirming the disallowance of depreciation amounting to Rs. 28,06,462/- claimed under section 32(1)(ii) in respect of business or commercial rights held by the appellant.

2.2 On facts and in the circumstances of the case and law applicable, depreciation in respect of business or commercial rights is to be allowed as claimed in the return of income.

2.3 Alternatively and without prejudice, the learned CIT (A)-I, Bangalore has erred in not allowing

(i)		the entire amount as revenue expenditure;
(ii)		at least, the proportionate amount based on the numbers of years of lease as revenue expenditure.

3.1 The learned CIT (A)-I, Bangalore has erred in directing the Assessing Officer to make disallowance under section 14A in accordance with rule 81)(2)(iii).

3.2 On facts and in the circumstances of the case and law applicable, disallowance under section 14A read with rule 81)(2)(iii) as confirmed by the learned CIT (A)-I, Bangalore is to be deleted in entirety.

4.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT (A)-I, Bangalore to the extent prejudicial to the appellant be quashed

Or in the alternative

(i)		Depreciation amounting to Rs. 28,06,462/- be allowed as claimed;
(ii)		Disallowance under section 14A as sustained by the learned CIT (A) be deleted.

3. Briefly, facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of development and maintenance of infrastructure facilities for software and related sectors. Return of income for the assessment year under consideration was filed on 30/09/2008 disclosing a total income of Rs. 9,51,25,818/-. The said return of income was taken up for scrutiny assessment and the assessment was completed u/s. 143(3) [hereinafter referred to as ‘the Act’ for short][hereinafter referred to as ‘the Act’ for short] vide order dated 30/09/2010 at a total income of Rs. 9,87,23,674/-. While doing so, the AO disallowed depreciation claim on leasehold property and also made disallowance of Rs. 7,91,394/- under the provisions of sec. 14A treating the expenses incurred towards earning of exempt income.

4. The factual matrix leading to the impugned additions is as under: As stated earlier, assessee-company is in the business of development, and maintenance of infrastructure facilities for software and related sectors. For this purpose, it had taken land on lease for a period of 66 years from Software Technological Park of India (STPI). In consideration of granting the leasehold rights, assessee-company had developed 42,665 sq.ft. of space for use by STPI in terms of agreement entered into by it with STPI. The cost of development of this space was treated as cost of leasehold rights treating as intangible asset, depreciation was claimed on this. It is the contention of the assessee-company that leasehold rights is nothing but a commercial right falling within the definition of intangible assets as defined u/s. 32(1)(ii) of the Act. In support of this, assessee-company has relied on the decision of the Tribunal in the case of Ashoka Info (P.) Ltd. v. Asstt. CIT [2010] 35 SOT 50 (URO) (Pune) and Skyline Caterers (P.) Ltd. v. ITO [2008] 20 SOT 266 (Mum.). An alternative claim was made before the AO that in case depreciation was disallowed for any reason, expenditure incurred towards development of commercial space given to STPI may be allowed as revenue expenditure and placing reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. H.M.T. Ltd. [1993] 203 ITR 820  and Hon’ble Supreme Court decision inCIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 . The above contentions of the assessee were rejected by the AO by holding that the rights acquired are in the nature of land which is of capital asset and does not qualify for allowance of depreciation and it is also capital expenditure and therefore, cannot be allowed as revenue expenditure.

As regards the disallowance of Rs. 7,91,394/-, the assessee-company made a deposit in HDFC Mutual Funds. During the course of assessment proceedings, the AO noticed that the assessee earned dividend from HDFC Mutual Funds. He further noticed that the assessee borrowed funds on interest which paid interest of Rs. 2,29,54,519/- and therefore, inferred that borrowed funds have been utilised for the purpose of making investment in HDFC mutual funds and by applying the formula of total expenditure multiplied by exempted income divided by total income arrived at a disallowance of Rs. 7,91,394/-. The assessee’s contention that no borrowed funds were utilised was rejected by the AO.

5. Being aggrieved, appeal was filed before the CIT (A) who vide impugned order, confirmed the disallowance of depreciation in the following words:

“. . . . . . . It is the contention of the appellant that the rights in the undivided portion of the land in terms of the agreement with STPI constitute intangible asset and is in the nature of a business or a commercial rights and eligible for depreciation. The appellant relied on various judicial decisions which are distinguished by the A,O in his report dated 27.07.2012 and I agreed with the same. The appellant would be eligible for depreciation if the asset is in the nature of intangible asset as provided in section 32(1)(ii) of the Act relevant IT Rules and the same is in the nature of know how copyrights, patents, licenses, franchises etc., it may be seen from the descriptions of the items they are all in the nature of movable assets. Whereas in the present case the rights obtained by the appellant relating to the immovable landed property, therefore, the appellant is not eligible for any depreciation. In view of this, the nature of the asset held by the appellant is akin to the nature of immovable property and does not qualify for any depreciation the detailed reasons given by the A.O in his assessment order and the Remand Report are justifiable. Hence the action of the AO is confirmed. The alternative claim of the appellant that the expenditure should be allowed as revenue expenditure is also rejected as the said expenditure was not incurred during the period under consideration.”

However, in respect of disallowance u/s. 14A, the CIT (A) directed the AO to consider disallowance under rule 8D(2)(iii) of the IT Rules, 1962.

6. Being aggrieved, assessee-company is before us in the present appeal.

6.1 Learned AR of the assessee-company contended that leasehold right on land constitutes an intangible asset as defined under the provisions of section 32(1)(ii) of the Act. Therefore, the claim of depreciation is allowable in light of the Hon’ble Supreme Court’s judgment in the case of CIT v. Smits Securities Ltd. [2012] 348 ITR 302 .As regards disallowance u/s. 14A, learned AR of the assessee contended that the AO is not justified in making disallowance without recording a finding as to how the claim of the assessee that no expenditure was incurred for earning exempt income is incorrect. He further contended that the provisions of rule 8D(2)(iii) are also not applicable to the facts of the present case as sec. 8(1) is not applicable. When there was no application of provisions of sec. 8(1), question of invoking rule 8DD(2)(iii) does not arise. He also relied on the decision of jurisdictional High Court in the case of CIT v. Canara Bank[ITRC No. 382 of 2010 C/W ITA No. 381/2010] and Canara Bank v. Asstt. CIT [2014] 99 DTR 36 (Kar.) in the context of provisions of 80M of the Act.

6.2 On the other hand, learned DR contended that on the plain meaning of the word intangible, nature of asset cannot be tangible whereas in the present case leasehold rights on land are nothing but interest in land which is nothing but land therefore is not eligible for depreciation. As regards the applicability of provisions of sec. 14A, he contended that no exempt income can be earned without incurring any expenditure and therefore applicability of rule 14A cannot be ruled out. He further argued that the case-laws relied upon by the learned AR of the assessee-company are in context of provisions of sec. 80M. Therefore, the ratio laid down in those cases is not applicable to the facts of the present case. He thus prayed for sustenance of the addition made by the AO.

7. We heard rival submissions and perused material on record. Ground Nos. 1.1 and 4.1 are general in nature and do not require adjudication.

7.1 Ground No. 2 relates to disallowance of depreciation claim on leasehold rights of Rs. 28,06, 462/-. In this ground of appeal, we are required to adjudicate whether the leasehold rights fall within the term and scope of expression ‘intangible asset’ as defined under the provisions of sec. 32(1)(ii) of the Act. There is no dispute about the cost of acquisition. The only dispute is with regard to nature of the asset acquired. Whether leasehold rights par take character of land or intangible asset. Intangible asset has been defined under section 32(1)(ii) of the Act as follows:

“Depreciation.

32. (1) In respect of depreciation of-

(i)		buildings, machinery, plant or furniture, being tangible assets;
(ii)		know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

Owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed –

**

**

**”

Thus, the term ‘intangible assets’ has been defined being know-how, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature. Obviously, leasehold rights on land do not fall in the category of above categories. It does not fall even in residuary category of any other business or commercial rights of similar nature. Because the term ‘rights of similar nature’ qualifies that even to fall under residuary clause, it should be in the nature of above know-how, patents, copy-rights, trade marks license or franchise. Applying the rule of ejusdem generis even to fall within the residuary category it should be in the nature of rights enumerated above. Further, definition of the term ‘immovable property’ is given in sec. 3(26) of the General Clauses Act and it is defined as follows:

“Immovable property shall include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to earth”

Right of enjoyment to immovable property under a lease is immovable property within the meaning given in sec. 103 of the Transfer of Property Act. Under sec. 105 of the Transfer of Property Act, a lease creates a right or an interest in the enjoyment of the land property. Jaswantsingh Mathurasinh v. Ahmedabad Municipal Corporation [1992] 5 SCC 12.

7.2 Having referred to the above legal position, we hold that by virtue of lease only an interest in land is created which does not qualify for allowance e of depreciation.

8. Now, we will deal with the alternative claim of the assessee-company that the cost incurred on development of commercial space given to STPI should be allowed as a revenue expenditure, as mentioned above, the expenditure is incurred for acquiring interest in the land which is capital in nature. Therefore, the question of allowing it as revenue expenditure does not arise at all. Hence, this ground of appeal filed by the assessee-company is dismissed.

9. Ground No. 3 of appeal relates to disallowance made under the provisions of sec. 14A of the Act. It is the claim of the assessee-company that no expenditure was incurred for the purpose of earning dividend income of HDFC Mutual Fund. It was contended that no interest bearing funds were utilised for the purpose of making investment in HDFC Mutual Funds. However, the AO, taking note of the negative balance in the bank, after making investment in mutual funds, inferred that borrowed funds were utilized. However, it is settled proposition of law that where common pool of funds were utilized for making investment should be inferred that investments are out of own funds. The AO has not rendered any finding whether the claim of the assessee is incorrect.

When the assessee-company had not incurred any expenditure, the question of disallowance u/s. 14A does not arise as per law laid down by the Hon’ble Karnataka High Court in the case of Canara Bank (supra). Therefore, this ground of appeal is remitted back to the file of the AO for fresh adjudication in accordance with law.

10. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.