THE ACIT, TRIVANDRUM vs. THE ACIT, TRIVANDRUM

Per GEORGE GEORGE K.,JUDICIAL MEMBER:

These appeals at the instance of the Revenue are directed against the orders

of the CIT(A), Trivandrum dated 14/07/2016 concerning assessment year 2012-

13 and the other order of the CIT(A) dated 22/08/2016 concerning assessment

years 2003-04 and 2007-08.

ITA Nos.474, 484 & 485/C/2016

and are being disposed of by this consolidated order. We shall first take up for

adjudication ITA No. 474/Coch/2016 concerning assessment year 2012-13.

ITA No. 474/Coch/2016 (AY 2012-13)

3.1 Briefly stated the facts of the case are as follows:

The assessee is a Government company. It is engaged in the activity of

production and distribution of frozen semen and also conducts research in cattle

breeding, fodder production etc.. The assessee is having units in various districts

all over the State of Kerala. For the assessment year 2012-13, the return of

income was filed on 30/09/2012, declaring total income at Rs.1,40,64,800/-.

The assessment was taken up for scrutiny by issuance of notice u/s. 143(2) of

ITA Nos.474, 484 & 485/C/2016

the I.T. Act. The scrutiny assessment u/s. 143(3) of the Act was completed vide

order dated 26/03/2015. The Assessing Officer made an addition of

Rs.41,61,30,489/-, being the unspent balance of grant received by the assessee

as on 31/03/2012. The Assessing Officer held that the grants received are not

capital receipts but for the business activities of the assessee company and

therefore it is a revenue receipt. The relevant observation of the Assessing

Officer in making the above addition reads as follows:

(Pg. 2 of AO) “It is noticed that the assessee has been receiving grants from the Govt. of Kerala and of India for its various business activities through different schemes/projects. During the previous year, relevant to AY 2012-13, the assessee has received such grants and the position of the unspent balance of grant so received, to the tune of Rs.41,61,30,489/- was not taken to the P&L a/c at the end of the year. As these grants received were not earmarked for any capital expenditure and these were received for the business activities of the assessee company, the unspent balance should be brought to tax. As per IT Act, receipts otherwise than of a capital nature is subject to tax.”

3.2 Aggrieved by the assessment order, the assessee preferred an appeal to

the first appellate authority. The CIT(A) after elaborately considering the

submissions made by the assessee, held that the amounts received from the

Central Government and the State Government are not subsidy but only a

grant-in-aid to do specific/designated work. It was further held by the CIT(A)

that there is no logic for the Assessing Officer to tax as revenue receipt only the

unspent portion of the grant-in-aid. It was concluded by the CIT(A) that if at all

the Assessing Officer’s contention that the amounts received by the assessee 3

ITA Nos.474, 484 & 485/C/2016

from the Central Government and the State Government are not capital

receipts, the entire amount ought to have been taxed and not merely the

unspent portion of the grant-in-aid. The CIT(A) allowed the appeal of the

assessee on this issue. The relevant finding of the CIT(A) reads as follows:

“6. Considering all the above, I am of the opinion that what was received by the appellant from the Government is only grant in aid and not subsidy. Once it is established that subsidy has not been received by the appellant then the question of bringing to tax the unspent fund received while treating the same as not capital in nature, doesn’t arise. This apart, if at all, the unspent balance amount has to be brought to tax then the entire grant received during the year should have been treated as revenue receipt and accordingly, assessed to tax. This was not done by. The Assessing Officer has added to the income returned only the unspent grant outstanding during the year. Partial disallowance of balance amount of grant received is very much illogical and cannot be within the permissible limit of the Act as well. It can further be seen that grant received for meeting certain administrative and day to day expenses are booked separately in the profit and loss account. In view of this, what was received by the appellant is nothing but grant and since it was received both for acquiring capital assets and implementing the schemes and projects, the grants are of capital in nature and cannot brought to tax.

ITA Nos.474, 484 & 485/C/2016

acquired out of the grants received has been written back and shown as income without which the returned income of Rs.1,40,64,800/- could not have been worked out. It is also further not the case of the Assessing Officer that grants received were not utilized for the purpose for which it was granted and utilization certificate for each project and scheme was not submitted to the respective Governments. In the circumstances, the grants received neither forming part of the revenue of the appellant nor credited to the profit and loss account as income. Since these grants are not forming part of the revenue, the unspent balance cannot be treated as revenue receipt and taxed. As ruled by the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd vs CIT (228 ITR 253), if the purpose is to help the assessee to set up its business or to complete a project then the money’s must be treated as having been received for capital purposes. But if money’s are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of trade.

3.3 Aggrieved by the order of the CIT(A), the Revenue has filed the present

appeal before the Tribunal. The Ld. DR submitted that these amounts received

from the Government of India and the Government of Kerala, are not

earmarked for any capital expenditure and they were received for the business

activities of the assessee-company. Therefore, it was contended that the

Assessing Officer has rightly brought to tax the unspent balance as revenue

receipt. The Ld. DR has also filed balance sheet and P&L account for the

relevant assessment year, 2012-13. 5

ITA Nos.474, 484 & 485/C/2016

3.3.1 The Ld. AR on the other hand filed a brief written submission along with

certain annexures and reiterated the submissions made before the income tax

authorities. The Ld. AR strongly supported the findings/conclusion of the CIT(A).

3.4 We have heard the rival submissions and perused the material on record.

It is the case of the assessee that grants received are for the specific purposes

envisaged by the Government of India and the same can be utilized only for

that purpose. It was submitted by the assessee that grants are released based

on budget estimates and unspent balance as on 31.03.2012 has to be utilized

only for the sanctioned purpose in the subsequent years. It was submitted that

the schemes would not end within a year and the unspent balance would be

carried over for many years, till the projects/schemes are completed. It was

stated that the schemes envisaged are for the enduring benefit of the whole

nation. It was submitted that the grants are released based on the utilization

certificate issued every year.

3.4.1 The projects/schemes are envisaged by Government of India, Ministry of

Agriculture, Department of Animal Husbandry whereby specific amounts are

disbursed for implementing the Centrally sponsored scheme like Conservation of

Malabari Goat, Piggery Development Programme, National Fodder Production

Programme, Cattle and Buffalo breeding etc. The assessee had produced 6

ITA Nos.474, 484 & 485/C/2016

letters of the Government of India, Ministry of Agriculture to explain how these

grants are disbursed to the assessee. The assessee has also produced a copy

of agreement entered into between the assessee and the President of India

acting through Director (AH), Department of Animal Husbandry, Dairying &

Fisheries, Ministry of Agriculture, Government of India, whereby the assessee is

to construct state of the art semen station for production of quality frozen

semen. On perusal of the letters of the Government of India, whereby the

assessee is advanced grants, the agreements entered between assessee and

the Government, it is clear that the assessee is acting as a nodal agency for the

implementationof the Government sponsored programmes/schemes. The

Government authorities are closely monitoring each scheme and its

implementation. The unspent amounts are either returned or appropriated to

new/revised schemes as per respective government orders. The detailed

breakup of the funds received and utilization of various schemes relating to the

assessment years under consideration is on record. It can be seen that only on

utilizing the released amount that the new funds are released by the

Government.

3.4.2 During the assessment year 2012-13, the assessee had unspent balance

of Rs.41,61,30,489/- which includes opening balance of Rs.20,35,12,103/-

brought forward from the immediately preceding year. The unspent balance of

grant of various government schemes as on 31/03/2012 are detailed below: 7

ITA Nos.474, 484 & 485/C/2016

UNSPEND BALANCE ON VARIOUS CENTRAL AND STATE GOVT SCHEMES AS ON 31-03-2012

No Schemes Amount 1. Conservation of Malabari Goat 33,02,101.00 2. Plan Funds – Govt. of Kerala 3,22,30,651.87 3. Other Scheme expenses 87,946.00 4. Piggery Development Programme (GOK) 2,09,523.00 5. National Fodder Production Programme 21,21,045.50 6. Piggery Development Programme (GOI) 10,86,247.00 7. Livestock Insurance Scheme 55,69,502.62 8. Strengthening Goat Breeding Centre Dhoni – GOK 11,57,783.00 9. RKVY Scheme 13,93,99,663.00 10. Sree Chithra Heart Valve Production 7,12,259.00 11. Goat Development Programme(DAH) 13,27,304.00 12. Attappadi Black Goat Scheme (GOI) 1.19,96,521.00 13. Establishment of Fodder Pelleting Units 1,94,354.00 14. Grass Land Development Kolahalamedu 1,77,202.00 15 State Livestock Insurance 6,12,71,381.00 16. Modern Bull Mother Farm – GOK 84,97,337.00 17. Al Network –IDRSS 46,77,055.00 18 Buffalo Breeding, Kuriottumal - GOK 5,00,000.00 19 DLF – Kudapanakunnu PIT SILO MAKING- GOK 4,82,509.00 20 State Horticulture Mission 88,750.00 21. Establishment of Silage Making Units-GOK 29,20,089.00 22. Hitech – Kolahalamedu – GOK 5,38,00,000.00 23. Introduction of Goat units – Kuttanad-GOI 2,68,18,795.00 24. Introducion of Hand Driven Chaff Cut – GOK 9,37,500.00 25. Skill Development –Self Employ-DAH-GOK 0,00,000.00 26. Special livestock & Fisheries – GOI 1,73,33,122.00 27. Kuttanad Eco System – GOI 19,10,021.00 28. Idukki Package – GOI 3,53,21,828.00 TOTAL (1 to 28) 41,61,30,489.99

3.4.3 The detailed position of the schemes from 01/04/2002 till 31/03/2015 is

also on record. It can be seen that there is ‘nil’ balance in certain schemes of

heads in which grants are received. This is because those schemes are

terminated or wound up or closed during that year. The scheme can be closed 8

ITA Nos.474, 484 & 485/C/2016

only after utilizing the funds allotted for the scheme or on the expiry of the

period for which the scheme is sanctioned. It can be seen that when certain

schemes are closed without utilizing the full grant that amounts are returned to

the respective sanctioning authority. In the financial year 2013-14, with regard

to Buffalo Breeding Scheme, Kuriyottumala, refund letter dated 22/08/2012

addressed to the Department of Animal Husbandry intimating the return of

grant is on record. Similarly, in the financial year 2016-17, Rs.191.60 lakhs and

Rs.74 lakhs were refunded from the fund allotted for RKVY Scheme. The

relevant letters addressed to the Director of Agriculture are also on record. In

some cases, the unspent balance in one scheme is carried over to new scheme

with the permission of the sanctioning authority. The relevant permission of the

sanctioning authority is also on record. The chartered accountant’s certificates

are also available on record stating that the grant received for specific purpose

have been utilized for that specific purpose itself. It is also noticed that the

grants are released based on the budget estimates. Moreover the grants were

given based on the utilization certificate issued by the authorities concerned.

3.4.4 The Assessing Officer had brought to tax the unspent portion of the

grant received by the assessee for the reason that the amounts that are

unspent are not earmarked for any capital expenditure and therefore, it is a

revenue receipt and ought to have been taxed. This reasoning of the Assessing

Officer, as rightly pointed out by the CIT(A) is illogical. If the Assessing Officer’s 9

ITA Nos.474, 484 & 485/C/2016

contention is correct that the grants received by the assessee are revenue

receipts, then not only the unspent portion of the same but the entire grant

received during the year ought to have been brought to tax. The grants that

are received for meeting certain administrative and day to day expenses are

booked separately in the P&L account and the same is evidenced on perusal of

the P&L account which is placed on record. The amounts that are subject of

adjudication before us are only those amounts that are received by the assessee

as grant-in-aid for acquiring capital assets and implementation of specific

schemes and projects as envisaged by the Central Government and the State

Government. These grants cannot be brought to tax as revenue receipts since

assessee is only a nodal/implementing agency for the schemes envisaged by the

respective governments.

3.4.5 In this context, let us examine some of the judicial pronouncements on

this issue.

(i) Hon’ble Punjab & Haryana High Court in the case of CIT vs. The Punjab State-E-Governance in ITA No. 75 of 2011 (judgment dated 21st April,

2011) was considering the following substantial question of law:

i) Whether in the facts and circumstances of the case and in law the ITAT was justified in upholding the decision of Id. CIT(A) and deleting

ITA Nos.474, 484 & 485/C/2016

the addition of j Rs.10,80,40,212/- made by the A.O. on account of unutilized portion of grant received from the State Government?

ii) Whether in the facts and circumstances of the case and in law the ITAT was justified in upholding the decision of Id. CIT(A) and deleting the addition of Rs.65,89,6787- made by the A.O. on account of interest earned on *** FDRs?"

In considering the above substantial question of law, the Hon’ble High

Court held that grant in aid received from the government for specific

purpose cannot be taxed in the hands of the assessee. It was further held

by the Hon’ble High Court that the interest received by the assessee on

the amount of grant deposited in the bank was also in the nature of grant

itself.

(ii) The Hon’ble High Court of Karnataka in the case of CIT vs. Karnataka

Urban Infrastructure Development and Finance Corporation reported in

284 ITR 582 held that the amounts received by the Centre for

implementing certain schemes envisaged by the Government is not

taxable in the hands of the assessee since the assessee is only an

implementing agency. It was further held by the Hon’ble High Court that

the interest from deposits made out of the grants received from the

Government is also not taxable.

ITA Nos.474, 484 & 485/C/2016

(iii) The Hon’ble High Court of Karnataka in the case of CIT vs. M/s. India

Telephone Industries Ltd. in ITA No. 73/2009 (judgment dated 18-03-

2013) was considering the following substantial question of law:

"Whether the Tribunal was correct in holding that the grant-in-aid of Rs.38,02,801/- received by the assessee from , the Government of India should be treated as 'capital receipt' and cannot be treated as 'revenue receipt'?"

In adjudicating the above substantial question of law, the Hon’ble High

Court held as follows:

“It is in the back ground of the aforementioned judgment when we look to the facts of this case, it is clear that the object of the grant-in- aid is for the specific purpose of conducting research in the field of telecommunications, so that the benefit thereof would endure to the Nation. May be on account of said research, the assessee is able to manufacture a better or more sophisticated product, they may be able to earn more. But the object with which this grant-in-aid is given to the assessee is for conducting research and improving existing telecommunication systems. In other words, the grant-in-aid is not given to the assessee for carrying on its day-to-day business. Infact, if after research if the assessee is able to acquire new ideas or new knowledge and use the same in its manufacturing activity, it would be a case of acquisition of such new idea which in itself would constitute an intellectual property. It is to acquire such capital asset, the grant- in-aid is given. It also helps in the growth of the assessee generally in public interest, so as to assist the assessee to acquire the new capital asset and the said benefit may be incidental to the business of the assessee. It is in the nature of capital asset. Once it is to be held as capital asset, even if the records maintained by the assessee, they show as revenue expenditure, it would not make any difference in law, as the liabililty to tax is depending on the object with which the grant-in-aid is given to the assessee. In that view of the matter, the facts of this case, when the grant-in-aid is given to the assessee for research in the field of telecommunications, which in-turn would benefit the Nation and public at large, the said income is only a 12

ITA Nos.474, 484 & 485/C/2016

'capital receipt' and not a 'revenue receipt' as contended by the revenue. In that view of the matter. we do not find any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the revenue. Accordingly, appeal is dismissed.”

(iv) The ITAT, Chandigarh in the case of The Chief Administrator, Haryana

Rural Development Authority vs. The DCIT in ITA No.742/Chd/2012 dated

22/01/2014 held that where the authority had been constituted by the

government for the specific purposes of carrying on the activities of the

government and where the grants and advances or loans are disbursed by

the government to the assessee, the said grants, advances cannot be held

to be the income of the assessee as the said grants/advances are released

to the assessee for the specific purposes for carrying on the development

work.

3.4.6 In the light of the aforesaid facts and judicial pronouncements mentioned

above, I hold that the unspent grant received by the assessee from the

Government as on 31/03/2012 amounting to Rs.41,61,30,489/- cannot be

brought to tax as revenue receipt.

3.5 In the result, the appeal of the Revenue in ITA No. 474/Coch/2016 is

dismissed.

ITA Nos.474, 484 & 485/C/2016

ITA No. 484/Coch/2016: (AY : 2003-04)

4.1 In the above grounds, the Revenue has raised two issues:

(i) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on the unspent balance of grant in aid received from the Government as on 31/03/2003.

(ii) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on account of sundry credits.

ITA Nos.474, 484 & 485/C/2016

(i) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer, being the unspent balance of grant in aid as on 31/03/2003 received by the assessee from the Government.

4.2 This issue has already been considered by us in ITA No. 474/Coch/2016.

For the reason mentioned in paras 3.4 to 3.4.6(supra), we hold that the unspent

balance of grant as on 31-03-2003 received by the assessee from the

Government cannot be brought to tax as revenue receipt. It is ordered

accordingly.

(ii) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on account of sundry credits.

4.3 The Assessing Officer had made an addition of Rs.12,35,813/-, being the

sundry creditors. According to the Assessing Officer these were old balance and

was outstanding for quite some time. According to the Assessing Officer, these

are not legally enforceable by the creditors and hence liable to be taxed.

4.4 Aggrieved by the addition of Rs.12,35,813/- made by the AO, the assessee,

among other issues, filed an appeal before the first appellate authority. The

contention raised by the assessee before the CIT(A) is reproduced below:

“The amount of Rs.12,35,813/- is the balance of sundry creditors during the Assessment Year 2003-04. The above amount is not fully unclaimed and old balances. This amount includes security deposit from the contractors, earnest money deposit, deposit for assuring performance of contracts, stale cheques return, purchases made from outside state etc. This will be adjusted/returned as and when the final settlements are made

ITA Nos.474, 484 & 485/C/2016

by the contractors/purchasers. The exact old balances will be traced out and reported.”

The CIT(A) deleted the addition of Rs.12,35,813 by observing as follows:

“6.2 Under the provisions of the Act, unexplained sundry creditors which are crystallized during the current year alone can be considered for making the addition. The brought forward old balances which could still be claimed by the parties concerned during the year under consideration cannot be considered for making the addition. The conditions precedent for making such addition can either be crystallized or disowned by the parties concerned during the year under consideration. In the absence of both the conditions been fulfilled in the instant case, the brought forward old sundry creditors because of the above mentioned reasons, cannot represent a benefit accrued to the appellant during the year under consideration. The argument of the appellant that these balances includes security deposits from the customers, earnest money deposits, deposits for assuring performance of contracts etc and will be adjusted/returned as and when the final settlement is made, would in no way authorize the Assessing Officer to treat the same as a benefit accrued to the appellant. Considering the assurance given by the appellant that they are making reconciliation and the amount which has no claim from the parties will be offered for tax during the relevant year once the reconciliation process is over, I have no other option but to delete the addition made since the same has not been justified by the Assessing Officer. However, the appellant is hereby directed to complete the reconciliation exercise at the earliest possible and report the outcome to the officer for further necessary action if need be, to be taken in this regard. Appeal on this ground is also allowed.”

4.5 Aggrieved by the order of the CIT(A), the Revenue had raised this issue in

the present appeal. The Ld. DR relied on the grounds raised in the

Memorandum of Appeal. The Ld. AR on the other hand relied on the

findings/conclusion of the CIT(A).

ITA Nos.474, 484 & 485/C/2016

4.6 We have heard the rival submissions and perused the material on record.

The CIT(A) has deleted the addition based on the assurance given by the

assessee that reconciliation of the outstanding sundry creditors would be

completed and unenforceable credits of sundry creditors would be offered to

tax. In the interest of justice and equity, we are of the view that the Assessing

Officer should be granted an opportunity to examine the reconciliation

statement of sundry creditors filed by the assessee. Therefore, this issue is

restored to the files of the Assessing Officer. The Assessing Officer shall

expeditiously dispose off the matter, after affording reasonable opportunity of

hearing to the assessee. It is ordered accordingly.

4.7 In the result, the appeal of the Revenue in I.T.A. No. 484/Coch/2016 is

partly allowed for statistical purposes.

ITA No. 485/Coch/2016 (AY 2003-04)

ITA Nos.474, 484 & 485/C/2016

the Assessing Officer that payment was not a subsidy for setting up the plant but a grant for the efficient and profitable running of the industry and its growth. The receipts were therefore revenue in nature.

5.1 In the above grounds, the Revenue has raised two issues:

(i) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer, being the unspent balance of grant in aid as on 31/03/2007 received by the assessee from the Government.

(ii) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on account of interest accrued on treasury savings deposits.

(i) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer, being the unspent balance of grant in aid as on 31/03/2007 received by the assessee from the Government

5.2 This issue has already been considered by us in ITA No. 474/Coch/2016.

For the reason mentioned in paras 3.4 to 3.4.6(supra), we hold that the unspent

balance of grant as on 31/03/2007 received by the assessee from the

Government cannot be brought to tax as revenue receipt. It is ordered

accordingly.

ITA Nos.474, 484 & 485/C/2016

(ii) Whether the CIT(A) is justified in deleting the addition made by the Assessing Officer on account of interest accrued on treasury savings deposits.

5.3 The Assessing Officer had made the addition of Rs.37,85,470/-. The

Assessing Officer held that interest had accrued, since the assessee was

following the mercantile system of accounting, and hence liable to be taxed. The

relevant observation of the Assessing Officer reads as follows:

“The assessee offered interest income towards deposits and loans as the interest received only (schedule-D). but as per schedule D-II forming part of balance sheet, an amount of Rs.40,13,677/- has been receivable on Treasury Savings Bank as interest accrued on deposits. As on 31/03/2006, the interest accrued on deposit is Rs.2,28,207/-. As the assessee follows mercantile system of accounts, the interest accrued in the current year should also be taken as income.”

5.4 Aggrieved by the order of the assessment, the assessee preferred an

appeal to the first appellate authority. The CIT(A) deleted the addition. The

relevant observation of the CIT(A) reads as follows:

“11.3 A copy of the interest account filed for verification has been gone through and found that the interest accrued during the year under consideration has rightly been taken into account and the addition made to the income returned has actually resulted in double addition. Hence, the addition made of Rs.37,85,470/- is hereby deleted. However, the appellant is hereby directed to furnish/produce copies of both interest receivable and interest account for the Assessing Officer to verify afresh the interest account and to satisfy himself that the addition made had resulted in double addition. In view of the above, the appeal on this ground is allowed for statistical purposes.”

5.5 Aggrieved by the order of the CIT(A), the Revenue had raised this issue in

the present appeal. The Ld. DR relied on the grounds raised in the 19

ITA Nos.474, 484 & 485/C/2016

Memorandum of Appeal. The Ld. AR on the other hand relied on the

findings/conclusion of the CIT(A).

5.6 We have heard the rival submissions and perused the material on record.

The CIT(A) had only directed the Assessing Officer to verify whether interest

accrued on treasury savings deposits amounting to Rs. 37,85,470/- is offered to

tax on the basis of mercantile system of accounting. We do not find any

infirmity in the finding of the CIT(A) and confirm the same. It is ordered

accordingly.

5.7. In the result, the appeal of the Revenue in I.T.A. No. 485/Coch/2016 is

dismissed.

i) ITA No. 474/Coch/2016 is dismissed.

ii) ITA No. 484/coch/2016 is partly allowed for statistical purposes.

iii) ITA No. 485/Coch/2016 is dismissed Pronounced in the open court on 1st February, 2018

sd/- sd/- (CHANDRA POOJARI) ( GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER

Place: Kochi Dated: 1st February, 2018 GJ 20

ITA Nos.474, 484 & 485/C/2016

Copy to: 1. M/s. Kerala Livestock Development Board Ltd., Gokulam, Pattom, Trivandrum. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Range-1, Trivandrum 3. The Commissioner of Income-tax(Appeals), Trivandrum. 4. The Pr. Commissioner of Income-tax,Trivandrum. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin