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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by Revenue is against order of CIT(A)-1, Pune, dated 18.11.2016 relating to assessment year 2012-13 against order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
The Revenue has raised the following grounds of appeal:- 1. The order of Ld. CIT(A) is contrary to law and on facts and in the circumstances of the case.
ITA No.446/PUN/2017 2 M/s. Inox Air Products Ltd.
The Ld. CIT(A) has erred in law and on facts and in the circumstances of the case in directing the AO to delete the addition made by him by treating the subsidy as revenue receipt. 3. The Ld. CIT(A) has erred in law and on facts and in the circumstances of the case by treating the subsidy as capital receipt even though the assessee‟s case clearly falls within the ambit of principles laid down by Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. 4. For these and such other grounds as may be urged at the time of hearing, the order of the CIT(A) may be vacated and that of the AO be restored.
In the appeal filed by Revenue, the only issue raised is against treatment of subsidy received by assessee and whether the same is capital or revenue in nature.
Briefly, in the facts of the case, the assessee was engaged in the business of manufacturing and sale of industrial gases such as oxygen, Nitrogen, Liquid gases, specialty gases, air separation plants, etc. For the year under consideration, the assessee had filed return of income declaring total income of ₹ 212.34 crores. The case of assessee was picked up for scrutiny. The Assessing Officer show caused the assessee as to why capital subsidy of ₹ 10.19 crores should not be treated as revenue receipt. The assessee had credited the same to capital reserve in the Balance Sheet. However, on going through the scheme of subsidy, the Assessing Officer observed that in both the units, subsidies were received after commencement of commercial production and hence, was nothing but support given by the Government to augment the sources and profitability of assessee company. The Assessing Officer applying the ratio laid down by the Hon'ble Supreme Court in Sahney Steel & Press Works Ltd. Vs. CIT (1997) 228 ITR 253 (SC) held that the said receipt was revenue receipt. It was further held by Assessing Officer that in both the cases, the assessee was required to pay sales tax to the Government and thereafter, it was refunded in the form of subsidies and thus, it was nothing but refund of sales tax paid by assessee and these were revenue in nature.
ITA No.446/PUN/2017 3 M/s. Inox Air Products Ltd.
Before the CIT(A), the assessee explained the subsidy received under Jharkhand Industrial Policy, 2001. It was pointed out that the said policy was promulgated for mega projects issued by Jharkhand State. Comparison was made with the scheme of Maharashtra, 2006. The assessee placed reliance on several case laws and pointed out that the subsidy received by assessee was capital receipt. The CIT(A) held as under:- “6. I have carefully considered the facts of the case as well as reply of the appellant. The appellant claims that it has received capital subsidy of Rs.10,19,06,740/- which has been credited to capital Reserve in the Balance Sheet. As per the details furnished by the appellant Unit-wise / yearwise subsidy is as under: Unit Subsidy Nature Amount Rs. pertaining to (Financial Year) Bokaro Capital Investment Subsidy 4,00,00,000 Bokaro 2008-2009 Capital Investment Subsidy 1,16,49,000 (On payment of commercial taxes) Bokaro 2009-2010 Capital Investment Subsidy 4,57,33,000 (On payment of commercial taxes) Sub Total A 9,73,82,000 Jejuri 2009-2010 Industrial Promotion Subsidy 9,02,636 (IPC) Jejuri 2010-2011 Industrial Promotion Subsidy 36,22,104 (IPC) Sub Total B 45,24,740 Grand Total 10,19,06,740 The above subsidy has been given in respect of appellant‟s unit in Bokaro (Jharkhand) and Jejuri near Pune. Coming to the issue of subsidy of Bokaro unit, the appellant has submitted that the company has set up Air Separation Plant in the premises of Bokaro Steel Plant in A.Y. 2008-09 and the Commercial production commenced on 13/12/2008. The appellant claims that the said plant is eligible for Investment Promotion Incentive i.e. Capital Subsidy under Jharkhand Industrial Policy, 2001. As per the scheme the appellant has received capital investment subsidy of 4 crores (5% of fixed capital investment subject to maximum of 4 crores) and 75% of Commercial taxes (VAT and CST) paid. From the perusal of Jharkhand State Industrial Policy 2001, it is seen that the broad objectives of the policy is to promote economic activity and to ensure maximum capital investment. Accordingly, special package for Mega unit was formulated which is known as Jharkhand Mega Project Incentive Rules 2005. As per this Mega Project new industrial unit was defined to be such industrial unit where investment in fixed assets consisting of land, civil construction, plant and machinery and other capital equipment is more than Rs.50 crores and has gone into production on or after 15/11/2000. As per the above scheme capital investment subsidy was to be given in the following manner:
ITA No.446/PUN/2017 4 M/s. Inox Air Products Ltd.
i. Within three months of commencement of commercial production of the Industry, following Capital Investment Subsidy shall be given on the basis of geographical classification: Region % of Fixed Capital Investment Maximum amount Rs. A 5% 4 crores B 10% 7 crores 10 crores C 15% ii. After commencement of the Said Industry, state government shall receive commercial and other taxes on sales of goods produced from it. Amount equal to 75% of such taxes received in each financial year will be payable to such unit in the next year as capital investment subsidy. As far as subsidy in respect of Jejuri unit is concerned, the same has been granted for expansion of existing plant on account of being eligible for Industrial Promotion subsidy (IPS) under package scheme of incentives 2007 issued by Govt. of Maharashtra as per which quantum of subsidy is linked to Fixed capital Investment. 7. Thus, from the perusal of Scheme under which subsidy has been granted to appellant by both the states i.e. Jharkhand and Maharashtra, it is clear that the same was given for capital investment and the same is also linked to capital investment. The fact that part of subsidy was given by way of refund of Sales tax/VAT paid by the appellant is immaterial as the same will not change the character of payment which is for the purpose of infrastructure development in the field of industry. The AO has treated the receipt as revenue on the ground that payment was received after start of commercial production and since the same was granted by way of Sales tax refund, the same was of revenue nature This stand of the AO cannot be accepted for the simple reason that what is important is the purpose for which subsidy has been granted and not the manner in which the same was granted. From the Scheme of subsidy granted by both the governments, it is clear that purpose of subsidy was for growth of industrial development and therefore, the same is required to be treated as capital receipt, Accordingly, the AO is directed to delete the addition of Rs. 10,19,06,740/-. Accordingly the ground is allowed.”
The Revenue is in appeal against order of CIT(A).
The learned Authorized Representative for the assessee pointed out that the issue stands covered by the ratio laid down by Pune Bench of Tribunal in Innoventive Industrial Limited Vs. DCIT in ITA Nos.601/PN/2013 and 215/PN/2014, relating to assessment years 2009-10 and 2010-11, order dated 24.03.2017, wherein the scheme of Maharashtra i.e. Package Scheme of Incentive, 2007 (PSI, 2007) was elaborately considered and was for accelerating industrial growth in Maharashtra, which was held to be capital incentive. It was pointed out by the learned Authorized Representative for the
ITA No.446/PUN/2017 5 M/s. Inox Air Products Ltd.
assessee that in the hands of assessee, subsidy was received on account of two units; one in Jharkhand for which copy of scheme is placed at pages 61 to 77 of Paper Book, second unit was at Jejuri and the assessee received incentive under the Package Scheme of Incentive, 2007, copy of which is placed at pages 102 to 116 of Paper Book. It was also pointed out that in addition to capital incentive, rebate was allowed on account of 75% of taxes paid over a period of seven years. Reliance was also placed on ratio laid down by Hon'ble Supreme Court in CIT Vs. Chaphalkar Brothers (2018) 252 TAXMAN 360 (SC).
The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer and the ratio laid down by Hon'ble Supreme Court in Sahney Steel & Press Works Ltd. Vs. CIT (supra).
We have heard the rival contentions and perused the record. We find the issue of taxability or not of subsidies has been decided by Hon’ble Apex Court in several cases. The latest decision being in CIT Vs. Chaphalkar Brothers Pune (supra), 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. Referring to decision of Apex Court in Sahney Steel & Press Works Ltd. Vs. CIT (supra) it was noted that in the facts of that case incentives were to be given to all new industrial undertakings which commenced production on or after 01.01.1969 with investment capital not exceeding ₹ 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. The Hon'ble Supreme Court in Sahney Steel & Press Works Ltd. Vs. CIT (supra) further held, on the facts of that case, that as no financial assistance was granted to the assessee for setting up of the
ITA No.446/PUN/2017 6 M/s. Inox Air Products Ltd.
industry, the idea of the subsidy scheme was to provide a helping hand for five years in order to enable the industry to be viable and competent.
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 institutions. The sugar factories should submit utilisation certificates annually from Chartered/Cost Accountant, holding certificate of practice. Utilisation certificate in respect of each sugar season during the incentive period should be furnished on or before 31st December of the succeeding year. Failure to submit utilisation certificate within the stipulated time may result not only in the termination of release of incentive free sale quota, but also in the recovery of the incentive free sale releases already made, by resorting to adjustment from the free sale releases of future years.” The Court then referred to the background of the incentive scheme and to the fact that the Sampat Committee was set up to examine the question relating to the economic viability of new sugar factories. The Court then found in para 9 of the judgment that the Sampat Committee referred to the fact that the increase in the cost of new sugar factories was because of increase in the cost of plant and machinery. The Committee then stated that five possible incentives for making a sugar plant economically viable could be provided. It is two of such incentives referred to that was the subject-matter for decision before this Court. In Para 10 this Court found: “We have examined in this case the 1980 and 1987 Schemes. Essentially all the four Schemes are similar except in the matter of details. Four factors exist in the said Schemes, which are as follows: (i) Benefit of the incentive subsidy was available only to new units and to substantially expanded units, not to supplement the trade receipts. (ii) The minimum investment specified was Rs. 4 crores for new units and Rs. 2 crores for expansion units. (iii) Increase in the free sale sugar quota depended upon increase in the production capacity. In other words, the extent of the increase of free sale sugar quota depended upon the increase in the production capacity. (iv) The benefit of the Scheme had to be utilized only for repayment of term loans.”
ITA No.446/PUN/2017 7 M/s. Inox Air Products Ltd.
After discussing the judgment in Sahney Steel case, this Court then held: “The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to the applied in judging the character of a subsidy. The test is that 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. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. 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 of the mechanism through which the subsidy is given is irrelevant.” Sahney Steel was distinguished, in para 16 by then stating that this Court found that the assessee was free to use the money in its business entirely as it liked. Finally, it was found that, applying the test of purpose, the Court was satisfied that the payment received by the assessee under the scheme was not in the nature of a helping hand to the trade but was capital in nature.”
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
ITA No.446/PUN/2017 8 M/s. Inox Air Products Ltd.
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.
Now, coming to facts of the present case, the scheme of State of Jharkhand, wherein State Policy for Mega Projects was announced vide Notification No.2371 i.e. Jharkhand Mega Project Incentive Rules, 2005. The copy of same is placed at pages 78 to 82 of Paper Book. The said scheme was promulgated to boost industrial development in the State of Jharkhand for setting up new industrial units or industrial units undertaking expansion, diversification and modernization on or after 15.11.2000. In the note with regard to Bokaro subsidy, the assessee stated as under:- “Note on Bokaro Subsidy: The company has set up Air Separation Plant in the premises of Bokaro Steel Plant (Steel Authority of India) at Bokaro in the accounting year 2008-09. The commercial production commenced on 13th December 2008. The said plant is eligible for Investment Promotion Incentive i.e. Capital Subsidy under Jharkhand Industrial Policy 2001 and categorized as Mega Project. Accordingly it is entitled for Capital Investment Subsidy of 5% of fixed capital investment subject to maximum of Rs.4 crores and 75% of amounts received by Govt. towards Commercial taxes (VAT and CST) for the period of seven years from the date of commercial production i.e. 13th December 2008. The Capital Investment Subsidy (75% of commercial taxes paid) for the period 13th December 2008 to 31st March 2009 is received by us on 28th December 2011. The same is accounted in accounting year 2011-12 by crediting capital subsidy account under Reserves and Surplus. Also Capital Subsidy of Rs.4 crores and Capital Subsidy (75% of commercial taxes) for FY 2009-10 is accounted in accounting year 2011-12 by crediting capital subsidy account in the books of accounts on the basis of sanction letter dated 12.03.2012 for Rs.4 crores and 10.10.2011 for Rs.4.57 Crores.”
The sanction letter for capital subsidy of ₹ 400 lacs specifies as under:- “2. The discussion was held for Capital Subsidy payable (first part) for following Mega Industrial Units:- I…….. As the Capital Investment by the unit (Inox Air Products Limited), Bokaro Steel City, Bokaro) is Rs.214.24 crores, the unit falls under Category „A‟ and hence it is recommended to sanction capital investment subsidy of Rs.4.00 crores (Rs.400 lacs). The List for Mega project capital investment subsidy (for 1st part) also specifies such subsidy as Capital Investment Subsidy.”
ITA No.446/PUN/2017 9 M/s. Inox Air Products Ltd.
The sanction letter for payment of Capital Subsidy (Against payment of commercial taxes for FY 2008-09 & FY 2009-10 dated 10.10.2011 specifies as under:- “The sanction towards capital subsidy (Against payment of actual commercial taxes) of Rs.116.49 lacs for FY 2008-09 is granted vide letter No.2317 dated 10.10.2011. 2. The capital investment (commercial taxes) subsidy sanction is given by Screening Committee meetings held on 02.12.2010 & 22.03.2011 under chairmanship of Chief Secretary, Jharkhand to following mega industrial units as accepted by Ministry in its meeting dated 30.08.2011: …. Inox Air Products Limited FY 2008-09 Rs.116.49 lacs & FY 2009-10 Rs.457.33 lacs.”
The purpose of above scheme was to establish new units in Jharkhand and hence purpose of scheme was in capital field i.e. to establish manufacturing unit in Jharkhand. Merely because the incentives were received in the form of sales tax waiver, would not change the purpose of grant of subsidy.
The assessee has also received subsidy under the Maharashtra PSI 2007 Scheme for Jejuri plant. In respect of said scheme, the Pune Bench of Tribunal has already decided the issue of receipt of subsidy in the case of Innoventive Industrial Limited Vs. DCIT (supra). The said ratio has been applied in the case of Innoventive Industrial Limited itself in later year in ITA No.1360/PUN/2016, relating to assessment year 2011-12 vide order dated 12.12.2018. The relevant findings of Tribunal are as under:- “6. On perusal of record and after hearing the learned Departmental Representative for the Revenue, we find that the issue which is raised in the present appeal is in respect of claim of assessee that the subsidy received by it by way of refund of sales tax paid is capital in nature. The assessee had reduced the said amount from total income, but however the Assessing Officer held the said amount to be taxable in the hands of assessee treating the said receipts as revenue receipts. The CIT(A) upheld the order of Assessing Officer. 7. We find that similar issue arose before the Tribunal in assessee‟s own case in ITA No.601/PN/2013, relating to assessment year 2009-10 and ITA No.215/PN/2014, relating to assessment year 2010-11, wherein vide consolidated order dated 24.03.2017, the Tribunal has elaborately considered the scheme under which the assessee was given the said subsidy and has
ITA No.446/PUN/2017 10 M/s. Inox Air Products Ltd.
observed that the said incentive received by the assessee under PSI, 2007 Scheme in the form of refund of sales tax was capital receipt and not liable to tax. The said ratio laid down by the Tribunal is squarely applicable to the facts and issues raised in the present case also, since the subsidy by way of refund of sales tax has been received by the assessee under the said scheme itself. We are referring to the order of Tribunal in this regard but the same is not being reproduced for the sake of brevity. Following the same parity of reasoning, we hold that the subsidy received by assessee under the PSI, 2007 Scheme by way of refund of sales tax is not taxable being capital receipt, in the hands of assessee. The grounds of appeal raised by assessee are thus, allowed.”
In view thereof, where the purpose of subsidy was to establish units, was in capital field, hence the subsidy received is capital receipt. We accordingly, reject the grounds of appeal raised by Revenue.
In the result, the appeal of Revenue is dismissed.
Order pronounced on this 15th day of July, 2019.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 15th July, 2019. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : अऩीऱाथी / The Appellant; 1. 2. प्रत्यथी / The Respondent; आयकर आयुक्त(अऩीऱ) / The CIT(A)-1, Pune; 3. 4. The CIT-1, Pune; ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “ए” / DR 5. ‘A’, ITAT, Pune; 6. गार्ड पाईऱ / Guard file. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे/ ITAT, Pune