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Facts
The Revenue appealed against orders that allowed the assessee's claim that incentives received under the West Bengal Incentive Scheme were capital in nature and non-taxable, and that the cost of railway sidings should be treated as revenue expenditure. The assessee also claimed that interest and other expenses related to investments yielding exempt income should be disallowed only to the extent of exempt income.
Held
The Tribunal held that the incentives received under the West Bengal Incentive Scheme were capital in nature and not taxable. It also held that the cost of railway sidings was allowable as revenue expenditure. Furthermore, the Tribunal directed that disallowances for interest and indirect expenses related to investments should be restricted to the extent of exempt income earned.
Key Issues
Whether incentives received under a state scheme and cost of railway sidings are capital or revenue expenditure, and the correct method for calculating disallowance of expenses related to exempt income.
Sections Cited
14A, 115JB, Rule 8D(2)(ii), Rule 8D(2)(iii)
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Before: Shri S.S. Viswanethra Ravi & Shri Jagadish
O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
Both the appeals filed by the Revenue are directed against separate orders dated 17.10.2024 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2011-12 and order dated 27.09.2024 passed by the ld. CIT(A) – 16, Chennai for the assessment year 2015-16.
Since issues raised in both the appeals are similar based on the same identical facts, with the consent of both the parties, we proceed to hear the appeals together and pass consolidated order for the sake of convenience.
3. First, we shall take appeal in for AY 2011-12 for adjudication.
Ground No. 1 raised by the Appellant-Revenue is general in nature and requires no adjudication.
Grounds No. 2 to 5 raised by the Appellant-Revenue in challenging the action of the ld. CIT(A) in holding that the Industrial Promotion Assistance received by the assessee under the West Bengal Incentive Scheme is capital receipt and non-taxable.
Brief facts of the case are that the assessee company had credited in its books of account, an amount of ₹.11,33,14,261/- receivable from the West Bengal Government Incentive Scheme 2004. The assessee claimed that the said Govt. Subsidy received/receivable for setting up of industry is not a taxable income. However, the Assessing Officer rejected the claim and added to the income of the assessee. In appeal, by following the decision of the Tribunal in assessee’s own case for AY 2014-15 in dated 03.07.2024, the ld. CIT(A) deleted the addition made by the Assessing Officer.
The ld. DR. Shri Shivanand K Kalakeri, CIT relied on the order of the Assessing Officer.
The ld. AR Shri S. Muralidhar, F.C.A., relied on the order of the ld. CIT(A).
We have heard both the parties and perused the material available on record. The ld. CIT(A) discussed the issue in para 4.1 of the impugned order, wherein, by placing reliance on the order of the Tribunal in assessee’s own case for AY 2014-15 in held that the subsidy received by the assessee under the West Bengal Incentive Scheme is capital in nature. The relevant portion in para 4.1 is reproduced herein below: 4.1 The Appellant has, in the course of Faceless Appellant proceedings filed order of Hon'ble ITAT dated 03.07.2024 in the appellants own case wherein both the issues have been decided in favour of the appellate. In the order in in respect of AY 2014-15 the Hon'ble 'D' Bench of ITAT Chennai has allowed the appeal of the appellant. On the issue of West Bengal Incentive scheme the Hon'ble ITAT has held the following in the Para-3.5and 3.6 of their order: "3.5 The Ld. AR has further submitted that reliance on the decision of Sahney Steel & Press Works Ltd. (supra) is incorrect since the applicability of said decision to IPA subsidy received under WB incentive Scheme was specifically examined by Calcutta High Court in the case of Rasoi Limited (supra). This decision has become final since Special Leave Petition (SLP) of the department has been dismissed by Hon'ble Supreme Court Following the decision on Rasoi Limited (supra), similar view has been taken by Hon'ble Calcutta High Court in subsequent decisions. The Ld. AR further submitted that Hon'ble Supreme Court has laid down purpose fest. In the present case, the purpose of the subsidy was to promote industries in the state and therefore, the incentive was capital in nature. The Ld. AR also submitted that the decision in Rasoi Limited (supra) has considered the decision in Sawhney Steel & Press Works (supra). Another argument raised by Ld. AR is that all sales tax related incentives have been withdrawn in the State of West Bengal with effect from 01-01-2000 pursuant to National Policy Decision. Therefore, the understanding of the department that the IPA subsidy is refund of sales tax is incorrect. The subsidy was quantified at 90% of sales tax paid but it does not represent refund of sales tax as held in the decision of Rasoi Limited (supra)." 3.6 We find that the impugned issue of taxability of IPA incentive has been adjudicated in assessee's favor by Hon'ble Calcutta High Court in the cited case of M/s Rasol Ltd. (supra). This decision has considered the decision of Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) as well as the decision rendered in Ponni Sugars & Chemicals Ltd. (supra). In Ponni Sugars case, it was held by Hon'ble Court that if the object of the Subsidy Scheme was to enable the assessee to run the business more profitably, 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, the receipt of the subsidy was on capital account. Therefore, the Court held that 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. Considering the same, Hon'ble Calcutta High Court held that in the instant case, the object of the subsidy was for expansion of capacities, modernization and improving marketing capabilities and therefore, those were for the assistance on capital account. Merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary, it did not imply that the same was in the form of refund of sale tax paid. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure that makes it fall within capital or revenue. Thus, in the instant case, the amount paid as subsidy was really capital in nature. This decision has been rendered after considering the decision of Sahney Steel & Press Works Ltd. (supra). In the absence of any contrary decision shown to us, we would hold that the impugned incentive as received by the assessee was capital in nature. We order so. The corresponding grounds stands allowed."
On examination of the above, we note that the subsidy as received from the Government of West Bengal under the Scheme of Industrial Promotion Assistance held to be capital receipt, not chargeable to tax. The ld. DR could not bring any contrary view. Thus, the ground raised by the Appellant-Revenue is dismissed.
Ground No. 6 raised by the Appellant-Revenue in challenging the action of the ld. CIT(A) in treating the railway siding expenses as revenue expenditure.
The assessee company claimed ₹.24,57,02,256/- towards cost of railway sidings as revenue expenditure in the profit and loss account. However, by granting depreciation @ 10%, the Assessing Officer rejected the claim of the assessee and disallowed the same to be written off as revenue expenditure and added to the total income of the assessee. In appeal, by following the decision of the ITAT in assessee’s own case for AY 2014-15 (supra), the ld. CIT(A) deleted the addition made by the Assessing Officer. Aggrieved by the impugned order, the Revenue is in appeal before the Tribunal.
Having heard both the parties, we note that the ld. CIT(A) discussed the issue in para 4.2 of the impugned order, wherein, by placing reliance on the order of the ITAT in assessee’s own case (supra)
held that the cost of railway sidings is allowed as revenue expenditure. The relevant portion in para 4.2 & 4.3 are reproduced herein below: 4.2 On the issue of railway siding expenses the operative part of the decision of Hon'ble ITAT referred supra in Para-4.2 and 4.3 is reproduce hereunder: "4.2 The Ld. AR has submitted that this issue has been decided by Tribunal in assessee's favor for AYs 1994-95, 1996-97 and 2003-04. However, the issue has been restored back by Tribunal for AY 2011- 12. In AY 2003-04, Tribunal approved reliance placed by Ld. CIT(A) on the decision of Hon'ble Supreme Court in the case of Madras Auto Service (233 ITR 468). The Ld. AR also submitted that though expenditure was capitalized in the books of account and depreciation was charged in the books, however, for Income Tax purpose, no depreciation was claimed on the same. The Ld. AR also placed on record relevant railway siding agreements and submitted that the terms of the agreements remain the same as they were in AY 2003-04. As per relevant clauses, the assessee is not the owner of railway siding. There being no change in the same, Tribunal order for AY 2003-04 would apply. The Ld. AR also submitted that the matter in AY 2011-12 was restored back only for the reason that railway siding agreement was not available before Tribunal while deciding the appeal for AY 2011-12. The Ld. AR also submitted that similar treatment was given to such expenditure during AYs 1994-95, 1996- 97 and 2003-04. 4.3 After considering the submissions of the assessee as well as upon perusal of relevant documents, in this regard, we concur with the aforesaid plea raised by the assessee. The issue in earlier years stand covered in assessee's favor The issue in AY 2011-12 was restored back since relevant agreements were not available on record. Therefore, concurring with aforesaid submissions, we direct Ld. AO to allow the expenditure as revenue expenditure after verifying the fact that the assessee has not claimed depreciation on the same in Income Tax Computations in any of the years. The assessee is directed to demonstrate the same. The corresponding ground stand allowed accordingly 4.3 Respectfully following the binding decision of the Hon'ble ITAT the appellants own case it is held that the incentives received under the West Bengal incentive scheme under consideration is capital in nature and the addition of Rs. 11,33,14,261/-is hereby deleted. The cost of railway sidings amounting to Rs.22,11,32,031/- is allowed as revenue expenditure. The AO is directed to allow the same after verifying the fact that assessee has not claimed depreciation on the same. The assessee is directed to demonstrate the same as direct by Hon'ble ITAT in the relied upon decision (supra).
On perusal of the above, we note that the Tribunal held the expenditure incurred for railway sidings as revenue expenditure and deleted the addition made by the Assessing Officer. Therefore, we find no infirmity in the order of the ld. CIT(A). Thus, the ground raised by the Appellant-Revenue is dismissed.
Ground No. 1 raised by the Appellant – Revenue is general in nature and requires no adjudication.
Grounds No. 2 to 5 raised by the Appellant – Revenue with regard to west Bengal Incentive Scheme under IPA, similar issue is adjudicated in for AY 2011-12 in the aforementioned paras and the same view is applicable for AY 2015-16. Accordingly, the grounds raised by the Appellant-Revenue are dismissed.
Ground No. 6 raised by the Appellant – Revenue with regard to the addition of cost of railway sidings, similar issue is adjudicated in for AY 2011-12 in the aforementioned paras and the same view is applicable for AY 2015-16. Accordingly, the grounds raised by the Appellant-Revenue are dismissed.
Grounds No. 7 to 10 raised by the Appellant – Revenue in challenging the action of the ld. CIT(A) in directing the Assessing Officer to delete the addition made towards interest expenditure under Rule 8D(2)(ii) as well as restricting the disallowance under Rule 8D(2)(iii) for those investments which yielded exempt income. The ld. CIT(A) discussed the issue in para 4.4 [(iii), (iv) & (v)] and the relevant portions at page 18 to 20 are reproduced herein below: iii) On a perusal of the financials of the appellant, it is seen that the appellant's own funds in the shape of share capital and reserves and surplus are sufficient to cover the investments as per the balance sheet. This shows that the investments are out of its own funds and therefore no disallowance can be resorted to on account of interest under the second limb of Rule 8D(2). The Honourable Chennai ITAT in the appellant's own case in IT(TP)A No.46/CHNY/2021 dated 12.09.2024 deleted the disallowances on account of interest. iv) Respectfully following the above decision, the AO is directed to delete the addition of Rs.67,09,046/- made on account of interest disallowance under the second limb of Rule 8D(2). v) Regarding the disallowance made under the third limb of Rule 8D(2), the Honourable Chennai ITAT in its own case for AYs 2010-11, 2012-13, 2013-14 and 2014-15 in ITA No.2196/Chny/ 2019, ITA No.1274/Chny/2016, ITA No.1363/Chny/2016 and ITA No.1897/Chny/2017 dated 03.07.2024, held as under: "6.3 So far as disallowance of indirect expenditure is concerned, it is the plea of Ld. AR that only those investments are to be considered which have yielded exempt income during the year as held in various judicial decisions. We concur with the same and direct Ld. AO to re- compute the disallowance only by considering those investments which have yielded any exempt income during the year. This disallowance could not be made u/s 115JB as per the decision of Special bench of Tribunal in the case of Vireet Investments Pvt. Ltd (165 ITD 27) which held that disallowance u/s 14A r.w.r. 8D has no application while computing the book profit u/s 115JB. Respectfully following the same, we direct Ld. AO not to make this adjustment u/s 115JB. The corresponding grounds raised by the assessee stand partly allowed.
vi) The appellant, during the course of appellate proceedings submitted that the total dividend received during the year is Rs.56,10,121/- as per the following particulars:
Sl.No. Particulars Value of Value of Average Dividend investment investment value of received (in (Opening) (Closing investment FY 14-15) A) SUBSIDIARIES & ASSOCIATES 1. Ramco Industries Ltd. 20,53,67,162 20,53,67,162 20,53,67,162 33,43,124 B) OTHER EQUITY SECURITIES 2. Tamil Nadu News Prints 24,97,000 24,97,000 24,97,000 1,36,200 and Paper Ltd.
Rajapalayam Mills Ltd. 8,11,96,000 8,11,96,000 8,11,96,000 18,14,000 4. Vishnu Shankar Mill 78,750 78,750 78,750 6,300 5. HDFC Ltd. 46,950 46,950 46,950 2,78,400 6. HDFC Bank 5,000 5,000 5,000 17,125 7. ACCL 2,065 2,065 2,065 5,459 8. Indian Bank 2,54,072 2,54,072 2,54,072 4,746 9. IDBI 11,57,000 11,57,000 11,57,000 3,916 10. Chettinad Cements 500 500 500 500
C) OTHERS 11 MCL Employees Co- 2,500 2,500 2,500 350 operative Society TOTAL 29,06,06,999 29,06,06,999 29,06,06,999 56,10,121 As seen above, the average value of investment that yielded the dividend income of Rs. 56,10,121/- during the year is Rs.29,06,06,999/- It is also to be noted that the Honourable Madras High Court in the case of Redington India Limited [2017] 77 taxmann.com (Madras) held that where there is no exempt income in a year, there cannot be a disallowance of expenditure in relation to an assumed income. It has been judicially held in a number of decisions that for the purpose of working out disallowance u/s. 14 A, only investments which have yielded exempt income should alone be considered. Hence, the disallowance under the third limb of Rule 8D is calculated as 0.5% of the average investments of Rs. 29,06,06,999/- amounting to Rs.14,53,035/- in tune with the decision of the Special Bench of the Honourable Chennai Tribunal in the case of M/s Vireet Investments (supra). The AO is directed to restrict the disallowance of indirect expenses under the third limb of Rule 8D(2) to Rs. 14,53,035/- vii) To sum up, the AO is directed to delete the addition of Rs.67,09,046/- made on account of interest disallowance under the second limb of Rule 80(2) and to restrict the disallowance of indirect expenses under the third limb of Rule BD(2) to Rs. 14,53,035/- The demat expenses of Rs.1,500/- voluntarily disallowed by the appellant constitutes direct expense under the first limb of Rule 8D(2). Accordingly, grounds nos.9 to 13 are Partly Allowed.
We find that the assessee earned exempt income of ₹.56,10,121/- and the Assessing Officer made addition of ₹.1,12,96,796/-, which includes disallowance of interest expenditure of ₹.67,09,046/- under Rule 8D(2)(ii) and ½ percent of average value of investments as on first day and last day of the balance sheet under Rule 8D(2)(iii). The ld. CIT(A) deleted the disallowance relating Rule 8D(2)(ii). With regard to the disallowance under Rule 8D(2)(iii), the ld. CIT(A) observed that the disallowance should be with reference to those investments which yield exempt income by following this Tribunal order in assessee’s own case for AYs 2010-11, 2012-13, 2013-14 & 2014-15 and held that the above addition made by the Assessing Officer is not maintainable and directed to restrict the addition to the extent of investments yielded exempt income. Thus, we find no infirmity in the order of the ld. CIT(A) and is justified. Accordingly, the grounds Nos. 7 to 10 raised by the Appellant- Revenue are dismissed.
In the result, both the appeals filed by the Revenue are dismissed. Order pronounced on 17th April, 2025 at Chennai.