Sales tax incentives granted for industrial development and setting up units are capital receipts under the 'purpose test'. Furthermore, Section 14A disallowance is impermissible when the assessee demonstrates sufficient own funds and the absence of a nexus between borrowed capital and tax-exempt investments.

O R D E R

PER Ms. MADHUMITA ROY, JM:

The instant appeal filed by the assessee is directed against the order passed by the Ld. CIT(A)-30, New Delhi dated 20.05.2016 arising out of the Assessment Order dated 13.03.2015 passed by the ACIT, Central Circle-30, New Delhi under Section 153A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for Assessment Year 2006-07.

2. Grounds of appeal raised by the assessee in the instant appeal read as under:

“1. That the Commissioner of Income Tax (Appeals) [CIT(A)'] erred on facts and in law in rejecting grounds of appeal no. 1.1 (infra), raised by the appellant as additional ground, regarding claim of sales tax subsidy/ incentive as capital receipt, holding that there is no merit in the said claim made by the appellant which is made for the very first time during the appellate proceedings.

1.1 That the CIT(A) erred on facts and in law in not appreciating that the sales tax subsidy/incentive amounting to Rs.22.63 crores availed under the Package Scheme of Incentives (Maharashtra), 1993, ought to be treated as capital receipt not liable to tax under the provisions of the Income Tax Act, 1961 ('the Act').

1.2 That the CIT(A) erred on facts and in law in not discussing the merits of the above claim and rejecting the same alleging that:

a) the appellant had, in earlier years, shown the amount of subsidy/ incentive aş revenue receipt which was duly offered to tax;

b) the amount/nature of subsidy/ incentive was nowhere accounted/shown by the appellant in the books of account of the appellant or the tax audit report;

c) the appellant could have made the above claim by filing revised return of income under section 139(5) or return of income in response to notice issued under section 153A of the Act.

2. That the CIT(A) erred on facts and in law in confirming disallowance made by the assessing officer under section 14A of the Act without appreciating that the same was made de-hors any incriminating material/ document found/ seized during the course of search conducted in the case of appellant and therefore, bad in law.

Without prejudice

2.1 That the CIT(A) erred on facts and in law in not appreciating that above disallowance was computed in a routine manner, without recording any finding/ satisfaction as to why the claim made by the appellant, that no expenditure was incurred to earn exempt income, was incorrect.

2.2 That the CIT(A) erred on facts and in law in not appreciating that disallowance computed under section 14A of the Act was incorrect inasmuch as the entire amount of investments was considered by the assessing officer including those investments on which no exempt income was earned by the appellant during the year under consideration.

2.3 That the CIT(A) further erred on facts and in law in directing the assessing officer to compute disallowance under section 14A on the basis of 0.5% of average value of investments excluding only the amount of investments made in growth-oriented mutual funds.

3. That the CIT(A) erred on facts and in law in confirming action of the assessing officer in charging interest under section 234A. 234B and 234D of the Act.

The appellant craves leave to add, amend, alter or vary from the above grounds of appeal at or before the time of hearing.”

3. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing of Polyester chips, Biaxially Oriented Polyester Film, Biaxially Oriented Poly Propylene Film, Metalised Film and PVDC Film. For A.Y. 2006-07 the return of income was filed on 24.11.2006 declaring total income at Rs.47698324/- which was assessed at Rs.47898324/- u/s.