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Facts
The assessee, a sugar company, availed a loan under a government scheme with interest subvention. The AO made additions/disallowances including interest subvention, subsidies/incentives, and disallowance under Section 14A. The CIT(A) confirmed most disallowances but granted partial relief on Section 14A and excess depreciation.
Held
The Tribunal held that the interest subvention did not accrue to the assessee in the year under appeal as the bank had not yet received it from the government and certain conditions were yet to be met. Regarding Section 14A, the Tribunal directed the AO to restrict the disallowance to the extent of the suo-motto disallowance made by the assessee, as the AO failed to record dissatisfaction with the assessee's claim.
Key Issues
Whether the interest subvention income accrued to the assessee in the relevant assessment year, and whether the disallowance under Section 14A was correctly made by the AO without recording dissatisfaction.
Sections Cited
115JB, 14A, 43B, 391, 394, 8D, 147, 154
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE KAND
आदेश /O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (in short ‘CIT(A)’), Delhi dated 28.11.2024, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2009-10.
The assessee is a company and filed its return of income for the assessment year 2009-10 on 28.09.2009 admitting ‘nil’ income under normal provisions and Rs.15,23,55,372/- u/s.115JB of the Act. The assessee subsequently filed its revised return on 06.12.2010 wherein the income declared u/s.115JB of the Act was revised to Rs.12,85,83,462/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The assessment was completed wherein the AO made the following additions / disallowances:- i. Addition towards interest subvention - Rs.73,49,868/- ii. Addition towards Subsidies and Incentives - Rs.78,71,825/- iii. Disallowance of Bonus - Rs. 7,70,100/- iv. Disallowance u/s.14A - Rs.14,17,103/- v. Disallowance of excess depreciation - Rs.47,57,007/-
Aggrieved, the assessee filed further appeal before the CIT(A). The CIT(A) confirmed the additions/disallowances made by the AO except the disallowance of excess depreciation. The CIT(A) also directed the AO to adjust the suo-motto disallowance made by the assessee while computing the disallowance u/s.14A of the Act. Aggrieved, the assessee is in appeal before the Tribunal against the order of the CIT(A).
4. Though the assessee has raised seven grounds, during the course of hearing, the Ld.AR presented arguments with regard to the following grounds and submitted that the rest of the grounds are not pressed:-
2. Whether the Commissioner of Income Tax (Appeals) was correct in coming to a conclusion that the Appellant had claimed Rs.73,49,868/- as interest expense and the same amount as deduction for unrealized subsidy impregnated with uncertainty in realization, ignoring the fact that the payment of interest and the grant of subsidy are independent of each other?
Whether the Commissioner of Income Tax (Appeals) was correct in not adjudicating the ground taken by the Appellant that the Assessing Officer has not recorded objective satisfaction for the applicability of Section 14A read with Rule 8D held in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR0081 (2010) (BOM) and as affirmed by the Hon'ble Supreme Courtin (2017) 81 taxmann.com 111 (SC)?
Whether the Commissioner of Income Tax (Appeals) was correct in coming toa conclusion that there is a necessity for the Appellant to make one to one mapping with respect to sources and investments when detailed evidences have been filed about the availability of interest free funds in excess of the investments made and the purpose of the borrowings have also been explained?
6. Whether the Commissioner of Income Tax (Appeals) is correct in not following the Hon'ble Supreme Court decisions? (1) CIT VS. Reliance Industries Ltd. (2012) 102 Taxmann.com 52 (2) Pr. CIT Vs Reliance Capital Assessment Management Ltd (2018) 98Taxmann.com 361 (3) South Indian Bank Ltd. Vs. Commissioner of Income Tax (2021) 130taxmann.com 178 SC (4) Commissioner of Income Tax-I Vs. UTI Bank Ltd. (2022) 142taxmann.com 136 SC
7. Whether the Commissioner of Income Tax (Appeals) was correct in applying the principles of res-judicata for confirming the disallowance Addition towards interest subvention 5. The Ld.AR submitted the following facts pertaining to the issue under consideration - a) The Assessee, Ponni Sugars (Erode) Limited (PEL) owns a Sugar Unit at Erode, Tamil Nadu
b) Sugar industry was passing through severe cash crunch consequent to the losses incurred, which resulted in huge arrears of Cane price payable to farmers by the Sugar Industry across the country. With a view to strengthen the sugar industry and help the cane growing agriculturists, the Central Government by Notification dated 7 December 2007 notified a scheme" Scheme for Extending Financial Assistance to Sugar Undertakings, 2007"(the Scheme). In that scheme, the Central Government directed the Commercial Banks to extend loans to all the sugar industries who are in arrears of cane payment on the following conditions:- i. Interest subvention shall be provided to all scheduled commercial banks for the total duration of the loan. ii.Interest subvention will be limited to 12% per annum of which 5% will be met out of the general budget provisions of the Central Government and the remaining 7% from the Sugar Development Fund constituted under the Sugar Development Fund Act. iii.Under the Scheme, the Banks will debit interest on the facility to the Sugar Mill's account and collect the interest from the Sugar Mills. In turn, the sugar mills will submit necessary claim form for subsidy with appropriate documents and certificates. After due processing the subsidy is sanctioned and the disbursement directly made to the Bank that originally extended the financial assistance. In turn, the Bank shall credit same to the Sugar Mill's account. c) The Assessee company availed such loan from Commercial Banks and the interest charged and collected by the Banks was Rs.73,49,868/- and this is accounted as "Interest Payment". The amount of Rs.73,49,868/- was debited to Interest Expense and as the same was paid, it was claimed u/s 43B.
As the Government was to release the subsidy to the Bank in the normal course, the amount was credited to interest expense in accordance with applicable accounting standards that in effect correspondingly increased the profit Pending realisation, the amount due was debited to claims receivable. The banks informed the company that the subsidy will be credited to our account only when they (Banks) receive the subsidy from the Government as per Clause 5 of the Scheme. Thus the subsidy credited to Profit and Loss becomes effectively realizable and legally enforceable only when the banks receive the subsidy from the Government. Therefore, this was claimed as not taxable, as the subsidy amount was credited to interest amount and the profit for the year was increased. e) Thus, the subsidies though recognized in the books, the determination of the subsidies and right to receive had not got established during relevant Assessment Year. In the absence of the right to receive the Assessee Company claimed this amount as not taxable in computation of income.
It is the argument of the Ld.AR that for the year under consideration the lender bank did not receive any interest subsidy from the Government and hence the assessee did not get any credit towards the same. The ld AR further argued that the interest subsidy does not automatically accrue to the assessee but is subject to certain conditions and submitting forms claiming the subsidy. The ld AR drew our attention to Para 5 of the Scheme where it is mentioned that if the assessee is not repaying the amount then it will not be entitled for the interest subsidy until the repayment is regularized. The Ld.AR also argued that that the subsidy accrues to the assessee only when the lender bank actually receives the subsidy since the same is subject to certain conditions and formalities. Therefore it is submitted that the subsidy income accrues to the assessee only when the subsidy is actually received by the bank since the receipt is contingent until then. The Ld.AR submitted that the assessee has accounted for the subsidy in the profit & loss account as per the Accounting Standard and since it is not received assessee reduced the same from the taxable income for the reason submitted herein above. Without prejudice to the above submissions, the Ld.AR submitted that the assessee has offered the interest subvention as income in the subsequent years and therefore if the income is held to be taxable in the year under consideration then the income offered in the subsequent years should be reversed. The ld AR in this regard drew our attention to the details of income offered in the subsequent years as tabulated below:- S.No. FY AY Amount (in Rs.) 01 2009-10 2010-11 51,90,454 02 2010-11 2011-12 11,56,706 03 2012-13 2013-14 7,53,649 04 2014-15 2015-16 2,36,000 Total 73,36,809
7. The Ld.DR on the other hand, supported the orders of the lower authorities.
We have heard rival submissions and perused the materials on record. During the year under consideration, the assessee has recognized the income towards subsidies and incentives in the profit Rs.73,49,868/- and reduced the same from the computation of income on the ground that the right to receive is under dispute. In this regard, we notice that the assessee has availed loan facility under “Scheme for Extending Financial Assets to Sugar Undertakings, 2007” as notified by the Government of India on 07.12.2007. As per the terms of the scheme, the Central Government would give full interest subvention to the Scheduled Commercial Banks, Regional Rural Banks and Cooperative Banks during the duration of loan i.e., 4 years including 2 years moratorium. However, the interest subvention will be limited to 12% per annum of which 5% will be met out of general budget provisions of the Central Government and the remaining 7% from the Sugar Development Fund. The payment of subsidy is subject to the condition that the borrower should make repayment of loan as per the schedule agreed in the beginning with the Bank. As per the scheme, the lender bank will debit the interest on the loan to the borrowers account and on receipt of subsidy, the same shall be credited to the borrower account. The scheme also specifies the modalities of reimbursement of interest to the lender banks. It is the contention of the assessee that though it has recognized the income to the extent of the interest subsidy due to the assessee, the same is reduced from the computation of income for the reason that the banks have not credited the account of the assessee with the subsidy. The assessee is further contenting that the receipt of subsidy is subject to certain conditions such as proper repayment by the borrower and also subject to submission of documents, etc., and hence has not accrued to the assessee. From the perusal of the following clauses of the scheme, we notice that the credit of subsidy to the assessee is not automatic but subject to certain procedural compliance. “5. Rate of interest: Full interest subvention shall be provided to all Scheduled Commercial Banks, Regional Rural Banks and Cooperative Banks for the total duration of the loan, i.e., 4 years including 2 years moratorium. The interest subvention will be limited to 12% per annum of which 5% will be met out of general budget provisions of the Central Government and the remaining 7% from the Sugar Development Fund The interest rate subsidy would be provided if this account is regular, i.e., the repayment of instalment of principal is made after the expiry of moratorium, In case the party is not able to make repayment as per the schedule approved in the beginning of the season, it will not be entitled for the interest subsidy till it regularises the account to the satisfaction of the bank. However, once the account is regulaised, it will be entitled to get the subsidy again from the date of regularisation till the end of four year period. It is clarified that borrower will be entitled for interest subsidy in the account as envisaged irrespective of any irregularity in any other account. Banks will debit interest on the facility to the Sugar Mill's account and on receipt of the subsidy, the same shall be credited to the Mills account.
In case there is any delay in receipt of claim from the Department of Food and Public Distribution, Government of India (DF&PD) (until and unless the claim is rejected), it will not affect the asset classification of the account. No penal interest will be charged on such amount. However, normal interest will be charged.
6. Disbursement: The disbursement shall be in a separate account and the amount in the account shall be utilised for payment of cane price arrears of
Repayment: The loan shall be repaid in 24 monthly instalments after amoratorium of 2 years. The instalments shall be recovered by way of suitable "tagging" to be fixed by the bank every year in advance based on projected monthly sales. In case there is any shortfall in repayment either because of fall in actual production as compared to the projected production decided initially or due to any other reason, it will be obligatory on the borrower to make the repayment as decided by the bank in the beginning by bringing in funds from its own sources.
8. Documentation: Term Loan Agreement and Extension of Personal Guarantee Agreement by the promoters, if applicable. The borrower shall also provide an undertaking that the amount of loan shall be exclusively utilised for payment of cane price arrears of 2006-07 sugar season and cane price/dues of 2007-08 sugar season.
9. Modalities for reimbursement of interest to lenders: The Government shall appoint the following major banks as Nodal Agencies for the purpose of payment of interest to commercial banks. State Bank of India Punjab National Bank Bank of Baroda Canara Bank Indian Bank NABARD shall be the Nodal Agency for cooperative banks and RRBs.
The DF&PD would be paying the interest subsidy amount of the current financial year to the Nodal banks before the end of March, 2008.
From the next financial year, i.e., 2008-09, the estimated amount of interest for each quarter shall be placed by the DF&PD with the Nodal Banks at the beginning of the quarter on the basis of the indents placed by the lending banks. Each lending bank will designate a Nodal Branch for the purpose. The lending branches will lodge their claim in respect of monthly interest with the Nodal Branch by the 5 of the succeeding month. The Nodal Branch will reimburse the interest to the lending branch and make a claim from the Nodal Bank by the 15thof the month. The claim will be reimbursed by the Nodal Bank through RTGS within a week's time. Other detailed procedures
Utilisation certificate: The lending branches shall obtain a certificate from the Chartered Accountant regarding the correctness of the claim made and submit the same to the Nodal Office of the bank for onward submission to the Nodal Bank. Each lending bank shall also submit a utilisation certificate certifying that the loan amount has been utilised for the purpose as specified in the scheme.”
From the combined perusal of the above clauses, we see merit in the claim of the assessee that the subsidy does not accrue automatically to the assessee and only when the procedural requirements are complied with, gets credited. The revenue's contention is that the assessee is following the mercantile system of accounting and the impugned subsidy which has accrued to the assessee should be offered to tax. In this regard it is relevant to note the following observations of the Hon'ble Supreme Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC) where it is observed that – "This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount."
10. Thus judicially the term 'accrual' has been defined to mean enforceable of right to receive (from recipient's standpoint) with a corresponding obligation to pay (from payer's perspective). In Government and according to the scheme the obligation to credit / pay the account of the assessee has not arisen to the lender bank. As per the scheme, the lender bank is required to credit the borrower's account when the subsidy is received and in the given case the assessee has received the credit towards the subsidy during the subsequent years and has offered the same to tax. This fact is substantiated by the computation of income for the subsequent years which is submitted during the course of hearing. It is now settled that the accounting entries are not determinative or conclusive of provisions and the characteristic of income is to be examined on the touchstone of provisions contained in the Act. In our view, the income cannot be held to be accrued and taxable in the hands of the assessee merely based on the fact the subsidy is accounted in the profit & loss account of the assessee. Accordingly considering the facts and circumstances of the case, we are of the view that the subsidy income which the assessee is entitled as per the scheme accrues to the assessee only when the Central Government actually credits the subsidy to the lender bank after compliance of stipulated processes. Therefore, we hold that the AO is not correct in making addition towards subsidy in the year Disallowance u/s.14A of the Act:- 11. The assessee acquired from erstwhile Ponni Sugars (Orissa) Limited, the Erode Sugar Mill through a scheme of arrangement u/s.391 to 394 of the Companies Act, which is approved by the shareholders and the Hon’ble Madras High Court. Under the scheme of arrangement, the assessee acquired the Erode Sugar Mill with all assets and liabilities and certain specified debts relating to Orissa unit. In the said scheme of arrangement, the company got transferred 1200000 equity shares of Seshasayee Paper & Boards at the transfer value of Rs.720 lakhs even though the cost in the books of Ponni Sugars (Orissa) Ltd., for Rs.120 lakhs. The AO invoked the provisions of section 14A r.w.rule 8D for the reason that the investments in the books of accounts are earning income not subject to tax. The AO made disallowance of Rs.14,17,103/- which includes disallowance towards interest under Rule 8D(2)(ii) amounting to Rs.10,52,703/- and under Rule 8D(2)(iii) amounting to Rs.3,64,400/- On further appeal, the CIT(A) upheld the disallowance made by the AO. However, the CIT(A) gave partial relief to the assessee by
The Ld.AR submitted that the assessee has not utilized any borrowed funds for making investment earning exempt income. The Ld.AR further submitted that the loans borrowed by the assessee are utilized for the regular course of business and therefore, no interest disallowance is warranted under Rule 8D(2)(ii). With regard to disallowance made under Rule 8D(2)(iii), the Ld.AR submitted that the AO failed to consider the suo-motto disallowance made by the assessee and also did not record any dissatisfaction with respect to accounts towards to the suo-motto disallowance made by the assessee. The Ld.AR in this regard relied on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd., vs. DCIT reported in 328 ITR 81 [2010] (Bombay). Accordingly, the Ld.AR prayed for deleting the disallowance made u/s.14A r.w.rule 8D.
The Ld.DR on the other hand relied on the orders of the lower authorities.
14. We have heard rival submissions and perused the materials on record. The AO while completing the assessment has invoked the provisions of section 14A r.w.rule 8D for the reason that the assessee has made investments which are earning exempt income. The AO has applied Rule 8D(2)(ii) & 8D(2)(iii) while making the disallowance. Before proceeding further, let us look at the relevant provisions of section 14A and Rule 8D, which is extracted below:-
“Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]
Rule 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to half per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.”
From the perusal of the above provisions and the rule, it is clear the Rule 8D(2)(ii) is applied towards the interest on borrowed funds which are utilized for making investments earning exempt income. During the course of hearing, the Ld.AR drew our attention to the following table to substantiate the claim that the assessee is having sufficient own funds to make the investments and therefore, the borrowed funds are not utilized for making investments warranting disallowance of interest:- Sl.No. Particulars 31.03.2009 31.03.2008 (Rs. in lakhs) (Rs. in lakhs) 01 Share capital 859.84 1019.84 02 Reserve and surplus 3819.65 2685.13 03 Total net worth 4679.49 3704.97 04 Investments 728.80 728.80 16. On perusal of the above table, we notice that the own fund of the assessee is far more than the investments made and therefore, we see merit in the claim of the assessee that no disallowance of interest is warranted under Rule 8D(2)(ii).
From the combined reading of the above provisions, it is clear that for the purpose of application of section 14 r.w.r 8D(2)(iii) the AO has to record reasons as to why he is not satisfied with the correctness of the claim of expenditure by the assessee. Accordingly, recording of dissatisfaction with regard to suo-motto disallowance made by the assessee is necessary before invoking the provisions of section 14A read with Rule 8D(2)(iii). On perusal of the assessment order, we notice that the AO has not considered the suo- motto disallowance made by the assessee and has not recorded any dissatisfaction with regard to the same. We further notice that the AO neither brought on record to factually state that the disallowance made by the assessee is not correct and the AO did not call for any details to examine the workings of the suo-moto disallowance. The AO has simply observed that provisions of section 14A is applicable in assessee's case due to the fact that assessee has made investments earning exempt income. In this regard we notice that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) has held as follows:-
41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.
In view of the above Hon'ble Apex Court judgment, it is clear that no disallowance can be made u/s 14A of the Act read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. In view of the above discussion, we direct the AO to restrict the disallowance made u/s.14A of the Act to the extent of suo-motto disallowance made by the assessee. The grounds raised by the assessee in this regard are allowed.
Ground No.1 and 3 are dismissed as not pressed.
In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 6th August, 2025 at Chennai.