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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
M/s Mahindra Vehicles 2 2809 & 3334/Mum/2018 Revenue by : Mr. Manjunath Swami, CIT-DR Assessee by : Mr. Karthik Natrajan, AR Date of Hearing : 18/07/2019 Date of pronouncement: 24/07/2019 ORDER
PER N.K. PRADHAN, AM
The captioned appeal for the assessment year 2013-14 by the Revenue and cross appeals- one filed by the Revenue and the other by the assessee for AY 2014-15 are directed against the order of the Commissioner of Income Tax (Appeals)-13 (in short ‘CIT(A)’), Mumbai and arise out of the assessment order passed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by a consolidate order for the sake of convenience. ITA No. 2808/MUM/2018 Assessment Year: 2013-14 (The Revenue’s Appeal) 2. The 1st ground of appeal 1. On the facts and in the circumstances of the case and in taw, Ld. CIT(A) has erred in holding that the object of scheme of sales tax subsidy granted to the assessee to be for setting up of or for expanding existing industries in the developing region of Maharashtra without appreciating the fact the legal and factual matrix of the cases.
M/s Mahindra Vehicles 3 2809 & 3334/Mum/2018 The 2nd ground of appeal 2. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in holding the nature of sales tax subsidy received by the assessee is capital receipt relying upon decision of the jurisdictional High Court in the case of CIT vs. Reliance Industries Ltd. (CEA No. 1299/2008) dated 15.04.2008 which has not attained finality and not properly appreciating the ratio of decision in the case of Sahaney Steel and Press Works Ltd vs. CIT (1977) (228 ITR 253) (SC) which clearly laid down that the subsidy received after commencement of business without any specific instruction for its use towards the capital utilized for establishing the business constitutes revenue receipt. 2.1 During the year under consideration, the assessee had received industrial promotion subsidy of Rs.179,77,51,676/- from the Government of Maharashtra. The assessee claimed it as a deduction in the computation of income on the ground that it is capital in nature. However, the AO was not convinced with the above claim of the assessee for the reason that the IPS subsidy is actually refund of VAT collected by the assessee during the year, depending upon certain conditions. As per the AO, the refund of VAT in the form of IPS subsidy did not enable the assessee to set up a new unit and it only helps the assessee in minimizing the cost of production. Referring to the decision of the Hon’ble Supreme Court in Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC), the AO held that the IPS subsidy received by the assessee in the form of refund of VAT after the commencement of commercial production and on the basis of sales is nothing but revenue receipt which helps the assessee to reduce the cost of business and run the business profitably. Therefore, the AO treated the IPS subsidy of M/s Mahindra Vehicles 4 2809 & 3334/Mum/2018 Rs.179,77,51,676/- as revenue receipt and added it back to the total income of the assessee. 2.2 In appeal, the Ld. CIT(A) followed the order of his predecessor-in- office for AY 2011-12 and AY 2012-13 and held that subsidy received by the assessee was capital in nature because the same was received for setting up of or for expanding existing industries in the developing reasons of Maharashtra. Therefore, he directed the AO to delete the addition of Rs.179,77,51,676/-. 2.3 Before us, the Ld. counsel of the assessee submits that the above issue is decided in favour of the assessee by the order of the Tribunal dated 28.01.2018 in assessee’s own case for AY 2011-12 and AY 2012- 13. On the other hand, the Ld. DR supports the order passed by the AO. 2.4 We have heard the rival submissions and perused the relevant materials on record. The same issue arose before the Tribunal in assessee’s own case in ITA No. 6919/Mum/2016 for AY 2011-12 and in ITA No. 6920/Mum/2016 for AY 2012-13. The Tribunal vide order dated 28.11.2018 held as under: “7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decision are given below. At this moment, we discuss the case-laws relied on by the Ld. DR. In Sahney Steel & Press Works Ltd. (supra), the assessee-company set up a factory in the State of Andhra Pradesh, which went into production in the year 1973. For M/s Mahindra Vehicles 5 2809 & 3334/Mum/2018 the AY 1974-75, the assessee obtained refund of sales tax to the extent of Rs.14,565/- in terms of notification issued by the State Government. According to the said notification, certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 01.01.1969 with investment capital not exceeding Rs.5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. The incentives were not available unless and until production had commenced. The AO included the said amount in the assessable income of the assessee and that was affirmed by the CIT(A). On further appeal, the Tribunal deleted the additions holding that the refund was a development subsidy in the nature of a capital receipt. On reference, the Hon’ble High Court set aside the order of the Tribunal. On appeal to Supreme Court, it was held that the subsidies had been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee and, therefore, these were of revenue character and would have to be taxed accordingly. Here in the instant case, the issue is not subsidy in the nature of refund of sales tax on raw materials, machineries and finished goods. Thus the present case is distinguishable from the decision in Sahney Steel & Press Works Ltd. (supra), relied on by the Ld. DR. In Bhushan Steels & Strips Ltd. (supra), relied on by the Ld. DR, the U.P. Government in exercise of powers u/s 4A of the U.P. Sales Tax Act, 1948 r.w.s. 221 of the General Clauses Act, 1904 granted exemption from payment of the sales tax in respect of any goods manufactured in an industrial unit which is a new unit located in a specified backward area, and such exemption was allowed for a period of six years. In the year 1990, a new subsidy regime for industrial promotion was evolved. This envisioned various incentives to new M/s Mahindra Vehicles 6 2809 & 3334/Mum/2018 units that were to be encouraged in certain parts of the State. The assessee’s unit came up in a backward area and thus the enterprise setting up a new unit, could claim sales tax exemption for a certain number of years. The scheme did not place any condition but merely stated that the collection could be retained to the extent of 100 per cent. of capital expenditure. The Assessing Officer held that the amount received by way of sales tax exemption was taxable. On appeal the Commissioner (Appeals) allowed the assessee’s claim. The Commissioner (Appeals) held that the amount of sales tax collected as incentive for setting up industries in backward areas was not subject to tax as a trading receipt; but rather was to be towards establishment of the new unit and buy machinery. Consequently, the Commissioner (Appeals) deleted the amount added by the Assessing Officer. The Revenue’s appeal before the Appellate Tribunal was dismissed. On further appeal, the Hon’ble High Court held as under : “(i) that the specific provision for capital subsidy in the main scheme and the lack of such subsidy in the supplementary scheme (of 1991) meant that the recipient, i.e. the assessee had the flexibility of using it for any purpose. The absence of any condition towards capital utilization meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the State, ensuring greater employment. Clearly, the subsidy was revenue in nature.” Further, the Hon’ble High Court held that: “In Sahney Steels and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) the Supreme Court had ruled that the character of the subsidy in the hands of the recipient, whether capital or revenue, has to be determined having regard to the purpose of which the subsidy was given. Although the source is immaterial, the purpose should be examined; if the purpose was to help the assessee to set up its business or to complete the business, the moneys had to be treated as having received for capital purposes. Conversely, if moneys M/s Mahindra Vehicles 7 2809 & 3334/Mum/2018 were given to the assessee for assisting it in carrying on business operations and if the money was given only after and conditional upon production, subsidies had to be treated as assistance for the purpose of the trade.” In the instant case, as per the EC issued by the Directorate of Industries on 24.01.2011, the assessee was entitled to IPS equivalent to 100% of the eligible amount of fixed capital investment made by the assessee or the taxes paid by it to the GOM within a period of 20 years, whichever is lower. Between 2008 to 2010, the assessee had set up a plant for the manufacture of four wheelers, trucks and construction equipments. Commercial production from this new unit started on 13.01.2010. As per the scheme (para 3.1), it is provided that an EC will be issued by the implementing agency, after ascertaining that the eligible unit has complied with the provisions of the Scheme and has commenced commercial production. So, IPS is given only after the capital investment has been made and commercial production has started. Thus the instant case is distinguishable from the decision in Bhushan Steels & Strips Ltd. (supra), relied on by the Ld. DR. 7.1 Let us recapitulate the facts briefly. The assessee is a 100% subsidiary of Mahindra & Mahindra Ltd. Between 2008 and 2010, it set up a plant for the manufacture of four wheelers, trucks and construction equipment. Commercial production from this new unit started on 13.01.2010. As per page 40-68 of the P/B, the Government of Maharashtra, Industries, Energy and Labour Department, continuing with the practice followed by it since 1964, passed a resolution on 30.03.2007, enhancing what is popularly known as the Package Scheme of Incentives 2007. As per the EC issued by the Directorate of Industries on 24.01.2011, the assessee was entitled to IPS equivalent to 100% of the eligible amount of fixed capital investment made by it or the taxes paid by the assessee to the GOM within a period of 20 years, whichever is lower. As per item 12 of the EC, period for making admissible investment is from 16.01.2007 to 15.01.2015. It is found that 16.01.2007 is M/s Mahindra Vehicles 8 2809 & 3334/Mum/2018 the date of the MOU entered into with GOM as referred to in the EC itself. Therefore, the origin of the entire arrangement dates back to pre-setting up of the new unit and not to the commencement of commercial production. Upon receipt of the EC, the Directorate of industries disbursed subsidy nature of which is the subject matter of dispute. At this juncture, we may refer to the decision in Ponni Sugars & Chemicals Ltd. (supra), wherein the Hon’ble Supreme Court has held that the test is the character of receipt in the hands of the assessee, so that where the object of the subsidy is to enable the assessee to run the business more profitably, it could be taxable, but where it is to enable the assessee to set up a new unit or expand its existing unit, it should not taxable. We extract below the observations of the Hon’ble Supreme Court following: “…the main eligibility condition in the scheme with which we are concerned in this case in that the incentive must be utilized 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 …” We are of the considered view that the ratio laid down in the above decision squarely applies to the present case. In the instant case, the main objective of the scheme was to intensify and accelerate the process of dispersal of industries from developed areas and for development of under-developed regions of Maharashtra. It is clear from the scheme that IPS incentive was granted not for carrying on day-to-day business of the unit more profitably but to provide impetus to the process of M/s Mahindra Vehicles 9 ITA No. 2808, 2809 & 3334/Mum/2018 dispersal of industries to backward areas. The plant of the assessee falls in Group C, which also includes Khed, which is outside the Pune Metropolitan Region. In the present case the sales tax payment is only an yardstick to determine the quantum of incentive and cannot be construed as to mitigate the operational cost of the business. In view of the above factual scenario we uphold the order of the Ld. CIT(A). Facts being identical and the grounds of appeal being same, our decision for AY 2011-12 applies mutatis mutandis to AY 2012-13.”
2.5 Facts being identical, we follow the above order of the Tribunal in assessee’s own case and uphold the order of the Ld. CIT(A). Thus the 1st & 2nd grounds of appeal filed are dismissed.
The remaining grounds of appeal
relate to CSR expenditure and these are as under:
3. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the expenses incurred for medical camps, schools & provision of water supply after holding that these were incurred for the purpose of the business without appreciating that these expenses were social and medical in nature and were not incurred wholly and exclusively for the purpose of business of the assessee.
4. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the expenses incurred for medical camps, schools & provision of water supply after holding that these were incurred for the purpose of the business without appreciating that that the assessee has not provided the documents to establish that the end user of these expenses were the employees of the assessee company.
5. On the facts and in the circumstances of the case and in taut, Ld. CIT(A) has erred in allowing the expenses incurred for donating the bus & M/s Mahindra Vehicles 10 2809 & 3334/Mum/2018 electric vehicle after holding that these were incurred for the purpose of the business without appreciating that these expenses were social in nature and were not incurred wholly and exclusively for the purpose of business of the assessee.
6. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the expenses incurred for donating the helmets after holding that these were incurred for the purpose of the business without appreciating that the assessee company manufactures the four wheelers and not the two wheelers where the helmets are used.
7. On the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in allowing the expenses incurred for road safety programmes, custom driving simulator and press shop partners with PCMC Traffic Police after holding that these were incurred for the purpose of the business without appreciating that these expenses were social in nature and were not incurred wholly and exclusively for the purpose of business of the assessee. 3.1 During the year under consideration, the assessee had debited Rs.14,26,00,000/- on account of miscellaneous expenditure. During the course of assessment proceedings, the assessee submitted before the AO vide letter dated 14.12.2016 the bifurcation of miscellaneous expenses stating that it had incurred expenses of Rs.96,95,743/- on account of CSR activities. The AO has noted that the assessee failed to file documentary proof along with justification for allowing these expenses. Referring to section 37 of the Act that “any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the M/s Mahindra Vehicles 11 2809 & 3334/Mum/2018 purpose of the business or profession”, the AO disallowed the above sum of Rs.96,95,743/- incurred by the assessee towards CSR. 3.2 In appeal, the Ld. CIT(A) called for a remand report from the AO on the additional evidence filed by the assessee during the course of appellate proceedings. After receipt of the said remand report, the Ld. CIT(A) sent a copy of it to the assessee for its comments. The reply/comments received from the assessee has been reproduced by the Ld. CIT(A) at page 6-11 of his appellate order. Having examined the details, the Ld. CIT(A) held that (i) the expenditure of Rs.2,86,250/- incurred on distribution of free helmets to promote the safety while driving, expenditure of Rs.6,40,080/- incurred on custom driving simulator, expenditure of Rs.2,71,256/- incurred on electric vehicle given to Nehru Centre for advertisement purpose, expenditure of Rs.9,75,053/- on bus donation to Bandhavgarh National Park for advertisement and creating awareness about fuel efficiency can easily be held for the purpose of business and thus allowable u/s 37(1), (ii) so far as expenditure of Rs.20,09,308/- incurred on project Bandhan is concerned, since the camp was organized in the area around the factory, employees have also benefited from the same and expenditure creates goodwill for the assessee and accordingly the same is allowable as business expenses, (iii) the same is true for other expenditure of Rs.22,78,196/- incurred by the assessee mainly towards bore wells and pipeline to restore water supply to village Padali-Parner Taluka, where the employees of the company reside and activities with PCMC traffic police for road safety awareness programme, which is allowable u/s 37(1) and (iv) so far as expenditure of Rs.4,00,000/- towards “door step M/s Mahindra Vehicles 12 2809 & 3334/Mum/2018 school” is concerned, the same has been incurred for books distribution in the Municipal schools in the adjoining area of Pune, where the factor of the assessee is located and the children of the employees are also beneficiary of this activity and thus allowable as a deduction us/ 37(1) of the Act. Only in respect of donation of Rs.28,35,600/- in respect of Nanhi Kali Project, since it has no direct link to the business of the assessee, considering the alternate claim of the assessee to allow it as deduction u/s 80G, the AO directed the AO to verify the claim after satisfying that the trust receiving donation is duly registered. 3.3 Before us, the Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel for the assessee submits that Explanation 2 to section 37(1), which states that any CSR expenditure incurred as per the mandate provided under the Companies Act, 2013, is prospective in nature. However, prior to amendments in IT Act and Companies Act, there was no demarcation between voluntary and statutory CSR expenditure. Further, there was no express provision dealing with allowability of CSR expenditure. It is stated by him that in various cases for example in Orissa Forest Development Corporation Ltd. (2002) 80 ITD 300 (Cuttack) and Hindustan Petroleum Corporation Ltd. (2004) 92 TTJ 168 (Mum), it has been held that expenditure incurred on CSR was allowable as revenue expenditure even though there was no statutory liability to incur such expenditure. Referring to the order of the Tribunal, Raipur Bench in the case of Jindal Power Ltd. in ITA No. 99/BLPR/2012, the Ld. counsel submits that the expenditure incurred M/s Mahindra Vehicles 13 ITA No. 2808, 2809 & 3334/Mum/2018 on the activities mentioned above has been done by the assessee in its capacity as a good corporate citizen and as a measure of fostering congenial working relations and enhancing goodwill amongst the people living in an around its premises and thus allowable u/s 37(1) of the Act.
3.4 We have heard the rival submissions and perused the relevant materials on record. A similar issue arose before the ITAT, Raipur Bench, Raipur in ACIT v. Jindal Power Ltd. in for AY 2008-09. In that case the revenue is aggrieved by the order of the CIT(A) deleting the disallowance of Rs.24,45,434/- made by the AO on account of corporate social responsibility expenses. Those expenses as explained by the assessee before the AO were mainly related to expenses incurred on construction of school building, devasthan/temple, drainage, barbed wire fencing, education schemes and distribution of clothes etc. voluntarily. The Tribunal vide order dated 23.06.2016 held as under:
We have also noted that the amendment in the scheme of Section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1st April 2015. In this view of the matter also, there is no reason to hold this provision to be retrospective in application. As a matter of fact, the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed deduction in the computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of Companies Act 2013, and there is thus now a M/s Mahindra Vehicles 14 2809 & 3334/Mum/2018 line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to Section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business . There is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also for the basic reason that the Explanation 2 to Section 37(1) comes into play with effect from 1st April 2015, we hold that the disabling provision of Explanation 2 to Section 37(1) does not apply on the facts of this case.” 3.4.1 We are of the considered view that the Ld. CIT(A) has rightly allowed u/s 37(1) the expenses claimed by the assessee. Moreover, the decision in Jindal Power Ltd. (supra) is applicable to the instant case. Accordingly, we dismiss the above grounds of appeal.
In the result, the appeal filed by the revenue is dismissed.
The grounds of appeal filed by the revenue for AY 2014-15 in and the one filed by the assessee for the same assessment year in AY 2013-14. Facts being identical, our decision for AY 2013-14 applies mutatis mutandis to AY 2014-15. Accordingly, the appeal filed by the revenue for AY 2014-15 is dismissed, whereas the appeal filed by the assessee is allowed.