DCIT CIRCLE 1, TIRUPUR vs. M/S EASTERN EXPORTS GLOBAL CLOTHING (P) LIMITED, TIRUPUR

सुनवाईकीतारीख/ : 12-12-2022 Date of Hearing घोषणाकीतारीख / : 10-02-2023 Date of Pronouncement आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member):

2. The appeal for AY 2014-15 arises out of the order passed by Learned Commissioner of Income Tax (Appeals)-3, Coimbatore [CIT(A)] on 12-12-2017 in the matter of an assessment framed by Learned Assessing Officer (AO) u/s 143(3) on 30-12-2016. The grounds raised

by the revenue read as under: - i) Whether on the facts and circumstances of the case and in law the Ld.CIT is justified in holding that incentive given by the Govt to the assessee for exploring new market is a capital receipt, whereas the object of the incentive was to enable the assessee to carry on the business more profitably and hence it is revenue receipt? ii) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) ii justified in holding that the incentive given by the Govt to the assessee for exploring new market for exports is a capital receipt and hence cannot be treated as income u/s.28 of the Act, whereas sec.28(iiib) states that "cash assistance (by whatever name called) received or receivable by any person against exports under any scheme under the Government of India shall be chargeable to income tax under the head 'Profits and Gains of Business or Profession " ? iii) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is justified in holding that the amount of Rs.1,54,10,800/- spent on construction of building is revenue in nature whereas the lease agreement recognizes both land and building and hence it clearly falls within the ambit of sec.32(1) and is capital expenditure? As is evident, two issues fall for our consideration – (i) Nature of Incentive received by the assessee during the year; (ii) Nature of expenditure incurred on construction of building.

3. The Ld. CIT-DR advanced arguments and relied on the decision of this Tribunal in M/s Hyundai Motor India Ltd. vs. ACIT (ITA No.3192/Chny/2017 dated 01.09.2021). The Ld. AR, on the other hands, averred that the issue stood covered in assessee’s favor by the decision of this Tribunal in earlier years. The copies of the orders have been placed on record. The Ld. AR also advanced argument supporting the case of the assessee. The written submissions have been filed by both sides in due course which have duly been considered while passing the order. Having heard rival submissions and after going through case records including judicial pronouncements as cited before us during the course of hearing, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing and export of hosiery garments and generation / sale of power through windmill.

the assessee to set up a new unit or expand the existing unit, then the receipt is on the capital account. In the case before us, the Government of India provided the incentive for exploring the new markets across the globe. Exploring a new market for a specified area would naturally expand the market area of the assessee. The incentive given to the assessee is not for running the business profitably but for expanding the market area. Therefore, this Tribunal is of the considered opinion that the incentive given by the Government to the assessee for exploring the new market is a capital receipt, hence it cannot be treated as income either u/s 2(24) or 28 of the Act. In view of the above, we are unable to uphold the order of the lower authority. Accordingly, the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted.

It could be observed that the bench, relying upon the decision of Hon’ble Apex Court M/s Ponni Sugars & Chemicals Ltd. (supra) held that if the object of the subsidy was to enable the assessee to carry on the business more profitably then the receipt would be on revenue side. On the other hand, if the object of assistance was to enable the assessee to set up a new unit or expand the existing unit, then the receipt would be on capital account. In the case of the assessee, it was found that the scheme provided for an incentive for exploring the new markets across the globe. Exploring a new market for a specified area would naturally expand the market area of the assessee. The incentive given to the assessee was not for running the business profitably but for expanding the market area. Therefore, the receipts were held to be capital receipt which could not be treated as income either u/s 2(24) or 28 of the Act. Following this decision, similar view has been taken by another bench of this Tribunal in assessee’s own case for AY 2013-14, & 291/Mds/2017 dated 09.11.2017 as well as in AY 2016-17, ITA Nos.1676 & 1677/Chny/2019 common order dated 12.09.2019. The copies of these orders are on record. Therefore, the undisputed position is that this issue stand covered in assessee’s favor by the earlier decisions of this Tribunal and facts are pari-materia the same in this year. There is nothing on record which would show that the aforesaid decisions have been reversed, in any manner, by higher judicial authorities. Also, there is nothing is record which would suggest any difference in facts in this year. This being so, we find no reason to deviate from the same.

6. The Ld. CIT-DR has impressed upon the fact that aforesaid decision has been distinguished by the bench in the case of M/s Hyundai Motor India Ltd. vs. ACIT (ITA No.3192/Chny/2017 dated 01.09.2021). The Ld. CIT-DR also submitted that the expenditure could not be treated as capital expenditure due to the fact that it is routine marketing expenditure incurred in order to sustain the market share and the assessee has to incur such expenses in regular course of business. The Ld. CIT-DR further argued that the assessee could not prove or match the actual expenses incurred for this scheme vis-à-vis the subsidy received from the Government of India. Further, in the present case, the assessee was not required to give compliance certificate for actual incurring of the expenditure unlike it was mandatory in the case of M/s Ponni Sugar & Chemicals Ltd. (supra) and therefore, this case law would not apply. The Ld. CIT-DR also submitted that if the receipts are treated as capital receipts, the corresponding expenditure incurred by the assessee for the purpose of marketing should also be considered as capital expenditure and the same deserve to be disallowed. The Ld. CIT- DR relied on the decision of Hon’ble Apex Court in the case of M/s Sahney Steel and Press Works Ltd. (228 ITR 253) wherein it was held that subsidy received subsequent to the commencement of production would be revenue in nature. The Ld. CIT-DR drew support from CBDT Circular No.564 dated 05.07.1990 which provide that the export incentives shall have to be considered as profits of the business for computing deduction u/s 80HHC which corroborates that the receipts of export incentives are revenue in nature. It was thus submitted that the receipts would be taxable u/s 28(iiib).

7. We find that the Market Linked Focus Product Scheme (MLFPS) as promoted under Foreign Trade Policy (FTP) has the main objective to incentivize export of such products which have high export intensity / employment potential. The object of the scheme is to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. The scheme would ultimately enable the assessee to expand market area. Under the scheme, the assessee is entitled to duty credit scrips equivalent to 2% of FOB value of exports which could be utilized to save customs duty on imports. The entitlement could also be sold in the market. The assessee has sold these scrips during the year and claimed the receipts to be capital receipts. It could be seen that the scheme does not provide for any matching expenses to be incurred by the assessee. Further, the objective of the scheme was to incentivize exploring new markets across the globe which would ultimately lead to expansion in market area for the assessee. It could thus be concluded that the incentive was given not to run the business profitably but to enable the assessee to expand the market area as held by the Tribunal in earlier orders.

8. The Hon’ble Supreme Court in the case of M/s Ponni Sugars & Chemicals Ltd. (306 ITR 392) held as under: - "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. 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 is irrelevant." It was thus held by Hon’ble Court that purpose test would be of paramount importance to determine the nature of subsidy. This decision has subsequently been followed by Hon'ble Jammu & Kashmir High Court in Shree Balaji Alloys & Ors. vs CIT [2011] 333 ITR 335 (J&K) which held that the incentives provided to the industrial unit with the object of creating avenues for perpetual employment, to eradicate the social problem of unemployment in the State by accelerated industrial development would be capital in nature. This decision has been affirmed by Hon'ble Supreme Court which is reported as 138 DTR 36 (SC).

by the revenue stand dismissed. This issue arises in AYs 2015-16 also and the same stand disposed-off accordingly in assessee’s favor.

14. Expenditure on construction of building on leasehold land 14.1 The assessee claimed sum of Rs.291.94 Lacs in the computation of income. The same represent amount spent on construction of building on leasehold land. The expenditure was capitalized in the books of accounts but claimed as revenue expenditure in the computation of income on the ground that the assessee did not have the ownership of building and it had to leave it as vacant when the lease of the land would be terminated. The amount so expanded would not be eligible for depreciation u/s 32 since the building is not owned by the assessee. 14.2 However, after perusal of terms of lease deed, Ld. AO held that Explanation-1 to Sec.32 would apply and the expenditure would be capital expenditure which would be eligible for depreciation. Accordingly necessary adjustments were made in the computation of income.

14.3 The Ld. CIT(A) allowed the claim of the assessee by relying upon the decision of this Tribunal for AY 2012-13, to 103/Mds/2016 dated 21.09.2016 as well as the decision of Hon’ble High Court of Madras in TVS Lean Logistics Ltd. (293 ITR 432) wherein it was held that such an expenditure would be revenue expenditure. Further, Explanation-1 to Sec.32 applies only when the building is taken on lease and not in situations wherein the building is constructed on leasehold land. The final adjudication of Ld. CIT(A) was as under: - 7.7 Therefore, in the instant case, the appellant has taken only the land on lease and not the building. Though the appellant has spent on construction of the super structure on the vacant land taken on lease, the appellant does not own the super structure since on termination of the lease agreement the appellant has to handover the land to the lessor either with or without the super structure. The appellant has spent the money on the super structure only to obtain a business advantage. The construction of the building on the leased land is not for expansion of capital base or for any enduring addition to the capital assets and does not partake the character of capital expenditure. Alternatively, there has been saving of revenue expenditure on an ongoing basis and the necessity for construction of the new building has arisen out of the retaining the business turnover with foreign buyers. Hence, I hold that the expenditure claimed of Rs.2,91,94,968/- is allowable as revenue expenditure.

Aggrieved as aforesaid, the revenue is in further appeal before us. 14.4 The Ld. CIT-DR relied on the decision of Hon’ble Supreme Court in Mother Hospital Pvt. Ltd. vs CIT (79 Taxmann.com 375) wherein it was held that the depreciation claimed on the expenditure incurred on construction of building on leasehold land would not be allowable to the assessee. The Ld. CIT-DR drew attention to the fact that the assessee incurred expenditure of more than Rs.20.23 Crores for the purpose of construction of building over a period of 5 years from AYs 2011-12 to 2015-16 which far exceed the savings in quantum of expenditure as observed by Ld. CIT(A). Since there is no actual revenue benefit, the expenditure would be capital in nature due to the fact that the assessee was contemplating to utilize the said building perpetually by way of frequent extension of the lease agreement from time to time. 14.5 The Ld. AR, on the other hand, submitted that the building was constructed on a land taken on lease and therefore, the expenditure would be revenue expenditure. It has been submitted that this issue stood covered in assessee’s favor by the earlier decision of this Tribunal for AYs 2012-13, 2013-14 and 2016-17 and the facts are pari-materia the same in this year. The Ld. AR submitted that the issue has been decided in assessee’s favor earlier by considering the decision of Hon’ble Apex Court in CIT vs. Madras Auto Service (P) Ltd [1998] 233 ITR 468 (SC) and the decision of the Hon'ble Jurisdictional High Court in CIT vs. TVS Lean Logistics Ltd (293 ITR 432). In the case of Madras Auto Service (P.) Ltd (supra), it was held by Hon’ble Court that since the asset created by the assessee did not belong to the assessee and the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. Similarly, in the decision of TVS Lean Logistics Ltd. (supra), it was held that what constitutes a capital expenditure and what does not, to attract Explanation 1 to section 32(1) of the Act, depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by him for carrying on his business and profession of the assessee, but not in a case of construction of any structure or doing any work or relation to where such building is put up / constructed for the purpose of business or the profession of the assessee in a land taken on lease by the assessee since the assessee did not acquire a capital asset, viz., the land in the instant case but merely put up a construction of the building only for the business advantage, with the result the entire construction cost is admissible as the revenue expenditure. The Ld. AR submitted that the assessee put up the construction to gain business advantage i.e., to attract foreign customers and therefore, the same would-be revenue in nature. Our findings and Adjudication 15. At the outset, we find that this issue has been decided by Tribunal in for AY 2016-17 as under: - 5. We have considered the rival submissions on either side and perused the relevant material available on record. In the earlier round of litigation, this Tribunal in I.T.A. No.291/Mds/2017, examined this issue and remitted back the matter to the file of the Assessing Officer with a direction to re-examine the matter in the light of the judgment of Apex Court in Madras Auto Service (P.) Ltd. (supra) and the judgment of Madras High Court in TVS Lean Logistics Ltd. (supra). Now, the Assessing Officer has made a distinction between the cases before the Apex Court and Madras High Court on the one hand and the case of the assessee on the other hand. This distinction made by the Assessing Officer, according to the Ld. representative, is not correct. We have gone through the orders of the Assessing Officer and both the cases before the Apex Court and the High Court. In the case of the assessee before the High Court and Apex Court, the vacant property was taken on lease and the cost of construction was claimed by incurring heavy expenditure. In both the cases, the assessee was paying a nominal rate of rent when compared to the market rate of lease. We may say that the rent paid by the assessee may pertain to the land since the superstructure belongs to the assessee. After expiry of lease, the assessee has to demolish or may leave the construction as such and vacate the premises. In both the cases, the assessee has to lose the investment made for construction. Therefore, as rightly submitted by the Ld. representative for the assessee, the distinction made by the Assessing Officer between the case of the assessee and the cases before the Apex Court and the Madras High Court is not correct. This Tribunal is of the considered opinion that the facts of the case are identical to that of the Madras High Court and Apex Court.

9. The apex court in L. H. Sugar Factory and Oil Mills P. Ltd. v. CIT [1980] 125 ITR 293 held that the construction of roads in the case of sugar mill is revenue expenditure. Similarly, contribution to the State Housing Board for construction of tenements for the workers was also held to be revenue expenditure by the apex court in the case of CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521.”

8. In view of the above judgment of Apex Court and the judgment of Madras High Court, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Thus, this issue has already been settled by Tribunal in assessee’s favor in earlier years and the facts are pari-materia the same. Since similar facts exist during this year and Ld. CIT(A) has merely followed the earlier order of the Tribunal, we see no reason to take a different view in the matter.

by the revenue stand dismissed. The appeal of the revenue stand dismissed. This issue arises in AY 2015-16 also and the grounds raised therein stand disposed-off accordingly. Conclusion

18. Both the appeals stand dismissed. Order pronounced on 10th February, 2023.