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Facts
The Revenue appealed against an order that deleted an addition for MEIS subsidy. The AO had treated the MEIS subsidy as a revenue receipt and added it back to income, using a Section 154 rectification based on an order from a different assessment year. The CIT(A) deleted this addition, holding the issue to be debatable and thus not rectifiable under Section 154.
Held
The Tribunal held that the issue of whether MEIS subsidy is a capital or revenue receipt is debatable and involves significant interpretational issues. Therefore, it does not fall under the scope of a 'mistake apparent from the record' for rectification under Section 154. The CIT(A)'s deletion of the addition was upheld.
Key Issues
Whether the classification of MEIS subsidy as revenue vs. capital receipt is a 'mistake apparent from the record' suitable for rectification under Section 154 of the Income Tax Act.
Sections Cited
250, 154, 139(1), 132, 153A, 115JB, 143(3), 2(24)(xxviii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: MS. PADMAVATHY SSHRI SANDEEP SINGH KARHAIL
Date of Hearing – 12/06/2025 Date of Order – 18/06/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The Revenue has filed the present appeal against the impugned order dated 20.02.2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”), by the learned Commissioner of Income Tax Appeals – 51, Mumbai, [“learned CIT(A)”], which in turn arose from the order passed under section 154 of the Act, for the assessment year 2018-19.
In this appeal, the Revenue has raised the following grounds:
– “1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition for the MEIS subsidy without appreciating that the subsidy is a revenue receipt and should be treated as income under the Income Tax Act, 1961.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law and on facts in holding that the rectification carried out under Section 154 of the Income Tax Act, 1961 was beyond the permissible scope, ignoring the assessee's prior acceptance of the rectification.
3. On the facts and in the circumstances, the Ld. CIT(A) failed to appreciate that the reclassification of MEIS subsidy as a revenue receipt was an apparent mistake, evident from the records and consistently followed in group cases.
4. On the facts and in the circumstances, the Ld. CIT(A) wrongly treated the issue as debatable despite the amendment of Finance Act, 2015, MEIS was introduced under the Foreign Trade Policy 2015-20 with the objective of incentivizing exports, and the benefits received there under are revenue in nature being directly linked to business operations and not resulting in creation of any capital asset.
5. On the facts and in the circumstances, the Ld. CIT(A) erred in holding that rectification under Section 154 of the Income Tax Act, 1961 amounted to reassessment, whereas it merely corrected an evident mistake without conducting any fresh verification or inquiry."
6. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing fresh claim in return filed u/s 153A of the Income Tax Act, 1961 stating that the same is a abated assessment year.”
The only dispute raised by the Revenue is against the treatment of Merchandise Exports from India Scheme (“MEIS”) subsidy received by the assessee as capital receipt as against revenue receipt considered vide order passed under section 154 of the Act.
The brief facts of the case are that the assessee is engaged in the manufacturing of complex polymer intermediates widely used in aerospace, aircraft, and hybrid car industries. For the year under consideration, the assessee filed its return of income under section 139(1) of the Act on 30.10.2018, declaring a total income of ₹ 5,69,06,230/-. Subsequently, on 10.01.2020, search action under section 132 of the Act was conducted in the case of Aarti Group of cases, which included the assessee. In pursuance of the notice issued under section 153A of the Act, the assessee filed its return of income on 08.12.2020, declaring a total income of ₹ 5,64,50,140/- under the normal provisions of the Act and declared a book profit of ₹ 23,31,80,439/- under section 115JB of the Act. While filing the original return of income, as well as while filing the return of income under section 153A of the Act, the assessee claimed the MEIS subsidy amounting to ₹ 1,84,52,744/- as capital receipt. Vide order dated 19.05.2021 passed under section 153A of the Act, the total income of the assessee was assessed at ₹ 6,36,82,970/- after making certain additions and disallowances. Subsequently, the Assessing Officer (“AO”) issued notice under section 154 r.w.s. 153A of the Act, observing as follows: - “1. It is seen from the records that you have claimed deduction on account of MEIS subsidy to the tune of Rs. 1,84,52,744/- in the original return of income. However, this claim of deduction of MEIS subsidy has been disallowed in the assessment order passed u/s 143(3) for A.Y. 2020-21 in your own case. Similarly, the claims made on this account in returns filed in response to notice u/s 153A of the Act for the earlier years and subsequent years have also been rejected by holding that the fresh claims are not allowable. Thus, in principle, a uniform stand has been taken by the undersigned in the search assessments on this issue. However, this issue has been inadvertently omitted to be addressed in this year. Since this being a mistake apparent from record, it is proposed that MEIS subsidy received of Rs. 1,84,52,744/- would be treated as revenue receipt and brought to tax accordingly in view of the findings drawn in the assessment order for A.Y. 2020-21, thus it is proposed to enhance the total income by Rs. 1,84,52,7441- 2. The above mistakes apparent from record are proposed to be rectified and you are provided an opportunity to file your reply whether you are in agreement with the view that the above rectification is covered within in the purview of provisions of sec. 154 and also whether you have any objections to the proposed rectifications on the merits of the above issues.”
In response to the notice issued under section 154 of the Act, the assessee accepted the rectification as a matter of consistency, however, reserved its right to contest the addition before the Appellate Authorities on the basis that the assessee did not accept the aforesaid addition made in the assessment orders of the group and appeals have been preferred on merits. Rejecting the submissions of the assessee, the AO passed the order under section 154 of the Act on 10.08.2021, treating the MEIS subsidy received by the assessee amounting to ₹ 1,84,52,744/- as a revenue receipt.
The learned CIT(A), vide impugned order, after noting the fact that the issue of MEIS subsidy being capital or revenue in nature has been a recurring issue in the case of assessee and also other taxpayers, wherein while the AO has been taxing it to be a revenue receipt, the Appellate Authorities have taken the same as capital in nature, held that this issue is debatable in nature as it involves significant interpretational issues, making it unsuitable rectification under section 154 of the Act. Accordingly, learned CIT(A) held that the action of the AO in treating the MEIS subsidy as a revenue receipt constitutes a mistake apparent from the record is not correct. Consequently, the addition of ₹ 1,84,52,744/-made by the AO was deleted. Being aggrieved, the Revenue is in appeal before us.
During the hearing, the learned Departmental Representative (“learned DR”), vehemently relying upon the rectification order passed under section 154 of the Act, submitted that the MEIS subsidy has been treated as a revenue receipt by the Department in other years. Further, by placing reliance upon the provisions of section 2(24)(xxviii) of the Act, the learned DR submitted that after the amendment by the Finance Act, 2015, w.e.f. 1st April, 2016, the MEIS subsidy received by the assessee is a revenue receipt taxable under the Act.
On the other hand, the learned Authorised Representative, vehemently relying upon the order passed by the learned CIT(A), submitted that the issue whether MEIS subsidy is a revenue receipt or capital receipt is a debatable issue, and therefore, falls beyond the scope of the term “mistake apparent from the record” under section 154 of the Act. In support of this submission, learned AR placed reliance upon the decision of the Hon’ble Supreme Court in T.S. Balaram, ITO vs. Volkart Brothers & Ors., reported in (1971) 982 ITR 50 (SC).
We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that the rectification order under section 154 of the Act was passed only on the basis that the claim of deduction on account of MEIS subsidy to the tune of ₹ 1,84,52,744/- in the original return of income as well as in the return of income filed pursuant to notice issued under section 153A of the Act was accepted while completing the assessment under section 153A of the Act on 19.05.2021. As per the AO, the claim of deduction of MEIS subsidy has been disallowed in the assessee’s own case vide assessment order passed under section 143(3) for the assessment year 2020-21. Thus, on the basis of the assessment order passed for the assessment year 2020-21, the AO passed an order under section 154 of the Act and held that the MEIS subsidy received by the assessee is taxable as a revenue receipt. From the perusal of the assessment order dated 14.07.2021 passed under section 143(3) of the Act for the assessment year 2020-21, we find that the AO passed a detailed order after considering various judicial pronouncements and held that the MEIS subsidy is a revenue receipt.
We find that in Volkart Brothers (supra), the Hon’ble Supreme Court held that for initiating proceedings under section 154 of the Act, the mistake apparent from record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. The very fact that in the present case, the proceedings under section 154 of the Act were initiated on the issue of MEIS subsidy being a capital or revenue receipt requires examination of the objective of the scheme, the nature of reward received under the scheme, as well as the purpose for which it was granted. Therefore, we do not find any infirmity in the findings of the learned CIT(A) that the determination of the nature of MEIS subsidy involves significant interpretational issues, making it unsuitable for rectification under section 154 of the Act. The very controversy of capital receipt vs. revenue receipt brings this issue outside the ambit of the expression “mistake apparent from the record” under section 154 of the Act, as this issue is the most contentious in the history of tax litigation. Accordingly, we do not find any infirmity in the order of the learned CIT(A) that the AO erred in invoking the provisions of section 154 of the Act on a debatable issue. As a result, the findings of the learned CIT(A) are upheld, and the grounds raised by the Revenue are dismissed.
In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 18/06/2025