DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1, NASHIK vs. MSS INDIA PRIVATE LIMITED, NASHIK

The Revenue has raised the following grounds of appeal:- i) Whether on the facts and in the circumstances of the case, the Ld. CIT(A)-1, Nashik was justified in treating the incentive received by the assessee from Govt. of Maharashtra in the form of Octroi Refund of Rs.1,14,42,680/- as capital subsidy?

In the appeal filed by Revenue, the only issue raised is whether incentive received by the assessee from Government of Maharashtra under the PSI Scheme, 2007 in the form of Octroi refund was capital subsidy or not.

Briefly, in the facts of the case, the assessee was engaged in manufacturing and supply of fabricated electrical components, connectors, bus- bars and assemblies, etc. The assessee during the year under consideration had made claim in respect of incentive subsidy by way of Octroi refund under Package Scheme of Incentive by Government of Maharashtra, 2007. The assessee had claimed that it had received the aforesaid incentive for expansion of facilities in the form of Octroi refund from the Government of Maharashtra. The refund benefit of ₹ 1.14 crores (approx.) was reduced by the assessee from the cost of material / purchases. The assessee claimed the Octroi refund to be capital receipt not includable in its hands. The Assessing Officer did not accept the plea of assessee and held it to be revenue receipt. On without prejudice basis, the Assessing Officer also held that it was a fresh claim made during assessment proceedings without filing any revised return of income and hence, the decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd.

The CIT(A) on the other hand, observed that in order to decide whether the subsidy was revenue receipt or capital in nature, the object of subsidy scheme was to be considered and the form of mechanism through which the subsidy given was held to be irrelevant. Vide para 4.14.1, it was held as under:- “4.14.1 To achieve the purpose and objective referred to herein above, it was, interalia, provided in the package scheme of incentive 2007 of Government of Maharashtra that the refund of octroi duty would be available only on production of Certificate from Director of Industries for expansion of unit. As per the sanction letter assessee has invested ₹ 485.96 lacs in land building plant, machinery and preoperative expenses.”

The CIT(A) in turn, relying on the decision of Hon’ble Bombay High Court in CIT Vs. Chaphalkar Brothers (2013) 351 ITR 309 (Bom) held that Octroi refund was to be treated as capital in nature. It was further observed that since the subsidy received helped in reducing the actual cost of the asset, hence the same is to be reduced from the cost of asset and the depreciation to be recomputed. In the final analysis, the CIT(A) directed the Assessing Officer to disallow depreciation of ₹ 37,03,619/- after due verification.

The Revenue is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that the issue stands covered by the order of Tribunal in assessee’s own case for assessment year 2011-12 in ITA No.1909/PUN/2016, order dated 02.01.2019.

The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer.

We have heard the rival contentions and perused the record. The limited issue which arises in the present appeal is whether Octroi refund received in the form of subsidy by the assessee is capital or revenue in nature. We find that similar issue arose in assessee’s own case in assessment year 2011-12 (supra) wherein the Tribunal in turn, relying on another decision of Pune Bench of Tribunal, held that subsidy received in the form of Octroi refund under the Government of Maharashtra PSI Scheme 2007 was capital subsidy. The relevant findings are in paras 7 to 8 of the said order dated 02.01.2019.

We further find that the CIT(A) in turn, relied on the decision of Hon’ble Bombay High Court in CIT Vs. Chaphalkar Brothers (supra). The Hon'ble Supreme Court has confirmed the decision of Hon’ble Bombay High Court in CIT Vs. Chaphalkar Brothers (2018) 252 TAXMAN 360 (SC), wherein it has been laid down that purpose test has to be applied to determine whether the subsidy received is on capital or revenue account.

Then, the Hon'ble Supreme Court in CIT Vs. Chaphalkar Brothers Pune (supra) has made reference to judgment in Ponni Sugars & Chemicals Ltd. 2008 (9) SCC 337 and it was observed as under:- “The next important judgment that was referred to is the judgment in Ponni Sugars & Chemicals Limited (supra). On the facts in that case, incentives given under a scheme relating to sugar production were in the nature of a higher free sale sugar quota, and also allowing the manufacturer to collect excise duty on the sale price of free sale sugar in excess of the normal quota but to pay to the government only the excise duty payable on the price of levy sugar. Clause 7 of the aforesaid scheme was set out in para 3 of the judgment as follows:- “The beneficiaries of the incentive scheme shall ensure that the surplus funds generated through sale of the incentive sugar are utilised for the repayment of term loans, if any, outstanding from the Central financial

The Apex Court in CIT Vs. Chaphalkar Brothers Pune (supra) thus, held as under:- “What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the “purpose test”. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.”

The Apex Court noting the facts before it observes, where the object of scheme was to encourage development of Multiplex Theatre Complexes, merely because the scheme kicks in only post construction, would not change the object of scheme to construct Multiplexes. The Apex Court also held that We have no hesitation in holding that the finding of the Jammu and Kashmir High Court in Shri Balaji Alloys vs. C.I.T. (2011) 333 I.T.R. 335 (J&K) on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.

Applying the principle laid down by the Hon’ble Apex Court in CIT Vs. Chaphalkar Brothers Pune (supra), we hold that where the purpose for which the subsidy was given for establishment of facility, then the subsidy received in this regard is capital subsidy in the hands of assessee. Accordingly, we hold so. In the present facts and circumstances, the assessee on its own motion had reduced the said subsidy from the cost of its assets. Accordingly, the

In the result, the appeal of Revenue is dismissed.