DCIT 4(1)(2), MUMBAI vs. DEGEE COTSYN PVT. LTD., MUMBAI

This is an appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-09, Mumbai dated 04.10.2019 for assessment year 2014-15.

None appeared for the assessee. The sole issue is regarding the action of the Ld. CIT(A) deleting the addition made by the AO to the tune of Rs.5,58,52,480/- which assessee claimed to be incentive in nature of capital [Mega Project Incentive in the form of Sales tax Incentive etc.)] whereas according to the AO it was revenue in nature. Therefore, deduction claimed by assessee was not allowed by the AO. And thereafter he also made adjustment of book profit made by the AO u/s 115JB of the Income Tax Act, 1961 (hereinafter “the Act”) and disallowed the same and thus assessed the book profit at A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. Rs.2,06,95,298/-. Against the action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to delete the same. Aggrieved, by the aforesaid action of the Ld. CIT(A), the revenue is before us.

We have heard the Ld. CIT-DR and perused the records. We note that before the Ld. CIT(A), the assessee has submitted that the AO has erred in treating the Mega Project Incentive (Sales Tax Incentive) of Rs.5,98,52,480/- as revenue receipt, as against the treatment given by assessee as Capital receipt under the normal provisions of the Act as well as while computing book profit u/s 115JB of the Act. We note that the assessee is a Private Limited Company, engaged in the business of manufacturing of yarn, ginning of cotton spinning, weaving of cotton and refining of oils. According to the assessee, it has set up an industrial unit at Survey No.51/1, Village - Dhabha, Taluka Nandgaon Khandeshwar, District - Amravati, Maharashtra. And since the unit of the assessee being in a less developed area of the State of Maharashtra it claimed that it was eligible for the ‘Package Scheme of Incentives - 2007’ introduced by the Government of Maharashtra as notified under Govt. of Maharashtra’s Resolution No.PSI-1707/(CR-50)/Ind-8, dated 30 March,2007. The Government of Maharashtra, Directorate of Industries issued an Eligibility Certificate for Mega Project dt.31.12.2011 to the assessee under the Package Scheme of Incentives - 2007. Accordingly, the assessee claimed that it was eligible for sales A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. tax incentives (i.e. refund of sales tax) from the Government of Maharashtra for a period of 7 years (from 2009 to 2016) and claimed the same upto extent of eligible investment limit of Rs.103.9 crores.

During the year under consideration, it is noted that the assessee received Sales Tax Incentive of Rs.5,98,52,480/- from Government of Maharashtra and same was credited by it in its Profit & Loss A/c [in Note - 17 Other Income]. Since the Sale Tax Incentives of Rs.5,98,52,480/- which was received from Government of Maharashtra was treated by assessee as a Capital Receipt, the assesse duly reduced the same from its total income under the normal provisions as well as from book profit u/s 115/B of the Act. During the assessment proceedings the assessee brought to the notice of AO that the Sales Tax Incentive was a Capital Receipt and therefore not exigible to tax under the normal provisions of the Act as well as u/s 115JB of the Act. The assessee further pointed out that the issue was already decided in favour of assessee by this Tribunal (Nagpur) in the case of assessee’s Group Concern’s case M/s Narendra Vegetable Products Pvt. Ltd Vs, ACIT. The assessee therefore submitted that the Sales Tax Incentive received from Government of Maharashtra ought to be treated as Capital Receipt not chargeable to tax both under normal provisions and u/s 115JB of the Act. However, the AO did not accept the contention of the assessee and treated the “Sales Tax Incentive” of Rs.5,98,52,480/- as revenue Receipt as against Capital Receipt claimed by the assessee and added the same to the total A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. income of the assessee. The AO further added Rs.2,06,95,298/- while computing book profit u/s 115JB of the Act.

On appeal, before the Ld. CIT(A), the assessee submitted that, in order to encourage the development of industries in less developed areas of the State, the Government of Maharashtra has been giving package of incentives to industrial units set up in the notified less developed region of the State. And that the Package Scheme of Incentive was first introduced in the year 1964 and was subsequently been extended from time to time. It was pointed out by the assessee that although, the scheme was extended from time to time since 1964, however, the basic objective of the scheme remained the same i.e. the development of industries in the less developed areas of the State. The assessee submitted that, in continuation of its earlier schemes (Refer Page No.61 & 62 of Paper Book), the Government of Maharashtra had announced ‘Package Scheme of Incentives - 2007’ for promoting industries in backward areas of Maharashtra. And since the industrial unit of assessee was situated at backward area in the District of Amravati Maharashtra was eligible for the Package Scheme of Incentives - 2007 and on fulfillment of various conditions and necessary documents, the Government of Maharashtra issued Eligibility Certificate dated 31.12.2011 to the assessee. Accordingly, the assessee being eligible for refund of sales tax for a period of 7 years i.e. from 2009 to 2016. And during the year under consideration, the assessee having received Sales Tax Incentive of Rs.5,98,52,480/- from the Government of Maharashtra, same was credited to its Profit A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. & Loss A/c. Although, the impugned Sales Tax Incentives of Rs.5,98,52,480/- was credited to its Profit & Loss A/c, however, since the assessee treated the same as Capital Receipt in its return of income same was accordingly reduced from the taxable income under the normal provisions of the Act and book profit u/s 115JB of the Act.

The assessee brought to the notice of Ld. CIT(A) that the facts in the case of the assessee are identical to the facts in the case of its Group Company M/s Narendra Vegetable Products Pvt. Ltd Vs. ACIT, Central Circle-1(4), Nagpur [ITA No.118 to 124/Nag/2013]. The assessee submitted that its Group Company M/s Narendra Vegetable Products Pvt. Ltd has also set up an industrial unit in the same District of Amravati, Maharashtra under the (Same scheme of Government of Maharashtra. M/s Narendra Vegetable Products (supra) had also received Sales Tax Incentive under the ‘Package Scheme of Incentives – 1993 from Government of Maharashtra during the A.Y.2003-04 to 2009-10 which M/s Narendra Vegitable Products (supra) has treated as Capital Receipt not chargeable to tax. And even though, the AO treated the same i.e. Sales Tax Incentive as Revenue Receipt, however, on appeal, the same was held to be Capital Receipt not chargeable to tax. The assessee therefore submitted that, the issue was squarely covered in favour of the assessee by the decision of ITAT, Nagpur in the case of assessee’s Group Company M/s Narendra Vegetable Products Pvt. Ltd Vs. ACIT, Central Circle-1(4), Nagpur [ITA No.118 to 124/Nag/2013] wherein the ITAT held the Sales Tax Incentive A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. received from Government of Maharashtra as Capital Receipt not chargeable to tax by observing as under: “12.3 Finally it was held that the assessee was justified in its claim that the sales tax incentives received in terms of the Government scheme constituted the “capital receipt” and therefore not to be taken into account in computation of total income, since a view has been taken in respect of this very scheme by the respected Special Bench then we have no reason to take any other view but to follow the view already expressed in this precedent.

Further we have been informed that almost in identical situation, the ITAT, Delhi Bench in the case of Indo Rama Synthetics 33 CCH 526 wherein one of us ie. learned Accountant Member is the party, has given a verdict that the incentive given for development of backward area by establishing new industries would be in the nature of capital receipt not liable to tax. The notional amount of sales tax subsidy was held as capital receipt not chargeable to tax.

In respect of subsidy in the shape of entertainment duty the Hon'ble Bombay High Court in the case of Chaphalkar Brothers, order dated 8th June, 2011 has opined that the object of the subsidy was to promote construction of multiplex theatre complexes. Such receipt of subsidy was held on “capital account”. In this decision, the decision of Ponni Sugars & Chemicals 306 ITR 392 (SC) and the decision of Sahney Steel and Press Works Ltd. 228 ITR 253 (SC) has been discussed. It was opined that the test is that the character of the receipt in the A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. hands of the assessee has to be determined with respect to the purpose for which the subsidy was granted. Likewise, in the case of CIT v/s. Kirloskar Oil Engines 364 ITR 88 (Bom.) the said two decisions, namely, M/s. Sahney Steel and M/s. Press Works (supra) and M/s. Ponni Sugara and Chemicals (supra) have been discussed and commented that the Supreme Court had emphasized that the character of receipt in the hands of the assessee had to be determined with respect to purpose for which subsidy was given. If object of subsidy scheme was to enable the assessee to run business more profitability, then receipt was to be considered as on “revenue account”. But if object of assistance under subsidy scheme was to enable the assessee to set up new unit, then receipt of subsidy is to be considered on “capital account”. In the said case it was found by the Hon'ble Bombay High Court that under the incentive package offered by the State Government was for the purpose of setting up a new industry in the State. The assessee had applied for such special capital incentive from SICOM. An observation as well as the final conclusion of the Hon'ble Court is worth to mention as under: ‘‘We are afraid that if the Revenue persists with such stand and as has been turned down repeatedly, that would defeat the very object and purpose of the "schemes and packages devised by the States. That would also result in frustrating - the entrepreneurs and defeating the purpose of setting up new industries and particularly in backward areas. The Revenue, therefore, should bear in mind that in every such case and whenever the funds or receipts are from the schemes and packages devised by the State, it should note the object and purpose of the same. If that is of the nature specified in the judgments of this Court and equally that of the Honourable Supreme Court, then, the Revenue must act accordingly. We hope that this A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. much is enough so as to dissuade the Revenue from b ringing such matters repeatedly to this Court. Ordinarily and for wasting judicial time and which is precious, we would have imposed heavy costs on the Revenue while dismissing this Appeal, but we refrain from doing so by giving last opportunity to the Revenue. This Appeal does not raise any substantial question of law. It is dismissed. No order as to cost.”

Thus under the totality of the facts and circumstances of the case, we are of the view that considering the scheme of the State Government, the assessee is entitled for the exemption of the sales-tax incentive being a capital receipt in the hands of the assessee and that the claim being lawful in nature ought to have been entertained by the Assessing Officer while completing the assessment under section 153A of I.T. Act. Therefore, ground Nos. 2 and 3 are hereby decided in favour of the assessee.”

And thereafter the Ld. CIT(A) was of the opinion that the entire reimbursement of incentive/subsidy was for setting up industries in the backward area and for expansion of manufacturing activity in the backward area of the state of Maharashtra, the subsidy has to be treated as a capital receipt and therefore he directed the deletion of Rs.5,98,52,480/-. Aggrieved by the aforesaid impugned action of Ld. CIT(A), the revenue is before us.

Having heard the Ld. Sr. DR and having perused the records, we note that the Ld. CIT(A) while granting the relief to the assessee has not considered the scheme (incentive package) offered by the State Government (Maharashtra) to the entrepreneurs i.e. Package Scheme A.Y. 2014-15 Degee Cotsyn Pvt. Ltd. of 2007 for promoting industries in backward areas. The Ld. CIT(A) has not looked into the purpose and object of the scheme by virtue of which assessee is claiming the amount of Rs.5,98 crores as capital receipt. The Ld. CIT(A) has not discussed the facts of the present case vis a vis the scheme offered by the Government of Maharashtra to allow the claim of assessee. And the assessee has not filed Paper-Book before us. So in the absence of the same, we are not able to return a finding of fact as to the character of Sales Tax incentive as to whether it is capital or working-capital in nature. So we set aside the impugned order of the Ld. CIT(A) and restore the issue back to the file of the Ld. CIT(A) and direct him to examine the purpose/object of Mega Project (Package Scheme of incentive of 2007) on the basis of which the assessee has claimed the deduction. And if it is found by the Ld. CIT(A) that the incentive has been given by Government of Maharashtra for the purpose of investment for setting up of manufacture then it is to be treated as capital in nature, whereas if the Sales Tax Incentive is to augment working capital, then the same is to be treated as revenue in nature. Since the Ld. CIT(A) has not gone through the scheme [Mega Project notification issued by Government] by virtue of which assessee has claimed deduction, we set aside the order of the Ld. CIT(A) and direct him to analyse viz whether Sales Tax Incentive was given to assessee for investment/ setting up of manufacture or for the purpose of recouping work capital. And the Ld. CIT(A) to decide the issue in accordance to law after hearing the assessee. A.Y. 2014-15 Degee Cotsyn Pvt. Ltd.

In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on this 06/12/2022.