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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘G’, NEW DELHI Before Sh. H.S. Sidhu, JM and Sh. Prashant Maharishi, AM Asstt. Year : 2010-11 Dy. Commissioner of Income Vs M/s Sutlej Textiles and Industries Tax, Circle-9(1), Ltd., Pachpahar Road, New Delhi Bhawanimandi, Rajasthan (APPELLANT) (RESPONDENT) PAN/GIR No. AAJCS1850N Revenue by : Sh. S. S. Rana, CIT (DR) Assessee by : Sh. Rohit Jain, Adv. ORDER Per H.S. Sidhu, JM:
This is an appeal by the department against the order dated 12.11.2014 of the ld. CIT(A)-XII, New Delhi.
2. Following grounds have been raised in this appeal: “1. The Ld. CIT(A) erred in law and on the facts in treating the subsidies received from the Government under different schemes as capital receipt.
2. The appellant craves to amend modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal.”
3. Facts of the case in brief are that the assessee filed the return of income on 25.09.2010 declaring a loss of Rs. 19,01,34,891/- after claiming of deduction u/s. 80IB (Income u/s. 115JB of Rs. 33,87,77,070) on 25.9.2010. Subsqeuently, assessee has filed a revised return declaring loss of Rs. 55,05,94,075/- on 22.9.2011. Again assessee has filed a revised return declaring a loss of Rs.
2 Sutlej Textiles and Industries Ltd. 55,05,94,075/- on 22.9.2011. Again assessee filed a revised return declaring a loss of Rs. 46,92,49,650/- (Income u/s. 115JB of Rs. 35,16,72,852/-) on 30.3.2012. The same was processed u/s. 143(1) of the Income Tax Act, 1961 (hereinafter referred as the Act). The case of the assessee was selected for scrutiny under CASS and notice u/s. 143(2) of the Act was sent on 29.8.2011. Again notice under section 143(2) of the Act alongwith questionnaire under section 142(1) of the Act was sent on 23.4.2012. In response to the same, the A.R. of the assessee appeared from time to time and submitted the requisite details which were verified. The Assessee during the relevant year derived income from manufacturing of Synthetic Staole Fibre Yarn, Man made fibres blended yarn and cotton yarn and fabrics and its trading. The AO did not allow the subsidies claimed by the assessee by observing in para 4 of the assessment order dated 18.3.2013 which reads as under: “The assessee has claimed following subsidies: i) Interest subsidy under Rajasthan Rs.75,75,000/- Investment Promotion scheme of ii) 3% Central Interest subsidy received on Rs.3,55,19,235/- working Capital loans iii) 4%/5% Interest subsidy on Term Loans Rs.27,95,18,563/- sanctioned Under Technology upgradation Fund (TUF) Scheme iv) Insurance subsidy received under Rs.3,78,46,386/- Central Government Scheme shown under the head of insurance premium Rs.36,04,59,184/- The subsidies are not allowable as per the Income-tax Act and in the case of assessee it was brought to tax even in earlier assessment orders. The assessee has vide a letter dated 6.8.2012 submitted that subsidies are capital in nature and not liable to tax. However, in view of the fact
3 Sutlej Textiles and Industries Ltd. that subsidies have been brought to even in earlier assessment years the same is also brought to tax in this assessment years. Hence, an amount of Rs.36,04,59,184/- is disallowed and added back to the total income of the assessee.”
4. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the addition made by the AO and held that the subsidy received by the assessee were capital in nature. The relevant findings have been given at page nos. 51 to 63 of the impugned order which read as under: “I have carefully considered the submissions of the A/R for the appellant and have carefully gone through the relevant schemes/notifications issued by the Central/State Governments in the context of three subsidies referred above, which are being claimed as capital receipt by the appellant It may, at the outset, be noted that the law with regard to the taxability of any amount received as incentive/subsidy is now fairly well settled by the two decisions of the Supreme Court in the case of Sahney Steel (referred above) and Ponni Sugar (referred above), relied upon by the AR. In fact, in the later decision in the case of Ponni Sugar, the Hon'ble Apex Court reiterated the fundamental principles laid down in its earlier decision in the case of Sahney Steel and emphasized on the application of "purpose test" to determine the nature and taxability of any amount received as subsidy/ incentive. It would be apposite to refer to the following observations of the Supreme Court: “......The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one
4 Sutlej Textiles and Industries Ltd. has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be 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. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”
The legal principle that emerges from the aforesaid decision of the Supreme Court is that the test to determine the character of any amount in the hands of the assessee is to determine the "purpose" for which the subsidy is given. The Court held that one has to apply the ''purpose test". The Court further held that the point of time at which the subsidy is paid is not relevant, the source is immaterial and the form of subsidy is also immaterial The Court further held that if the object of the subsidy was to enable the assessee to run the business more profitably, then the receipt would be on the revenue account. However, if the object of the assistance was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was of capital account. Thus, the underlying emphasis of the Hon'ble Apex Court was on the purpose for which the subsidy was granted and not to be form and mechanism of its computation. The legal position that therefore emerges from the aforesaid decision is 5 Sutlej Textiles and Industries Ltd. that if the purpose of granting subsidy/incentive is to promote industrialization in any particular area, promote employment generation, encourage capital expansion, etc., then notwithstanding the mode, manner and timing of such subsidy, the same would constitute capital receipt. It is now a question of application of the said settled principles to the facts of the appellant's case, after taking into consideration relevant schemes/ notifications issued by the Governments in order to cull out the purpose for which the subsidy was granted. In the light of the aforesaid legal background, the relevant schemes/ notifications of the Government in relation to the three subsidies referred earlier and its taxability is being considered, enumerated in the succeeding paras.
Interest Subsidy under the Central Interest Subsidy Scheme, 2002 The aforesaid subsidy was introduced by the Government of India vide notification dated 22.10.2002, a copy whereof is placed at pages 55 to 57 of the appellant's paper book. On perusal of the said notification, it is noticed that the very first para of the said notification provides that- "The Government of India is pleased to make the following scheme of Interest Subsidy on Working Capital Loans for industrial units in the state of Jammu & Kashmir with a view to accelerating the industrial development in the state". It is also noticed that subsequently another notification dated 28th November, 2003 was issued, a copy whereof is placed at page 59 of the appellant's paper book. The said notification makes it very clear that the purpose of the subsidy being granted was creation of employment opportunities in the State of Jammu & Kashmir. The relevant extracts of the said notification are as under:
6 Sutlej Textiles and Industries Ltd. "No.1(111)/2012-NER - In pursuance of the announcement by the Prime Minister on 19th April, 2003 at Srinagar for creation of one lakh employment and self employment opportunities in Jammu & Kashmir, the Government of India had set up a Task Force under Cabinet Secretary. The recommendations of Task Force were submitted to the Cabinet. To achieve this object of employment generation, the Cabinet has, inter alia, approved following definition of the term ‘substantial expansion' for the purpose of incentives/ subsidies notified as per O.M. No.1(13)/2000-NER dated 14.06.2002.
2. The Central Government, therefore, hereby makes amendment in the Central Interest Subsidy Scheme, 2002 notified in the notification of the Government of India in the Ministry of Commerce & Industry, Department of Industrial Policy & Promotion No.1(11)/2002-NR dated 22nd October, 2002. The definition of the term 'Substantial Expansion' appearing under para 5(d) of the Scheme may be substituted by the following:
Concessions for substantial expansion should extend to include all new investments by entrepreneurs, which leads to substantial additional employment creation by an existing entrepreneur without insisting on major expansion. However, credit under the Industrial Policy Package should not be merely for paying off old debts or for equipment already in place.
It is pursuant to the aforesaid notifications, that the appellant had received interest subsidy to the extent of 3% on the working capital advanced by the banks/financial institutions. The amount of subsidy so received is also noticed to have been shown as part of "miscellaneous income" in schedule 15 "other income" of the audited accounts. These facts, in my considered view, clearly lead to the conclusion that the subsidy was granted for industrial development in the State of 7 Sutlej Textiles and Industries Ltd. Jammu & Kashmir and for creating employment opportunities. Thus, applying the purpose test laid down by the Supreme Court in the case of Ponni Sugar, as elaborately discussed in detail in earlier paras, the subsidy received by the appellant is in the nature of capital receipt and not revenue receipt.
The aforesaid view is also supported by the decision of the Jammu & Kashmir High Court in the case of Shree Balaji Alloys (referred above) which has been relied upon by the A/R of the appellant. In that case, too, the High Court considered the taxability of subsidy amount for setting up units in the State of Jammu & Kashmir. The assessee in that case relied upon Office Memorandum dated 14th June, 2002, Notification dated 28th November, 2003 (as referred in the present case) and the two other notifications referred for exemption from payment of excise duty. Based on these notifications, the assessee claimed that excise refund and interest subsidy was in the nature of capital receipt not liable to tax. The Tribunal however, did not agree with the claim of the assessee and held that excise refund and interest subsidy were in the nature of revenue receipts. While, setting aside the decision of the Tribunal and upholding the claim of the assessee, the High Court held that excise refund and interest subsidy were capital receipt not liable to tax. Some of the relevant observations of the High Court are reproduced as under: “………… 22. Perusal of the Office Memorandum dated 14-6-2002 indicating New Industrial Policy and other concessions for the State of Jammu and Kashmir, makes it explicit that the concessions were issued to achieve twin objects viz., (i) Acceleration of industrial development in the State of Jammu and Kashmir, which had been found lagging behind in such development and (ii) Generation of employment in the State of Jammu and Kashmir.
8 Sutlej Textiles and Industries Ltd. Amendment introduced to the Office Memorandum vide Notification of 28-11-2003 of the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) eloquently demonstrates the Central Government's intention in extending the incentives. The Government's objective, as conveyed by Hon'ble the Prime Minister at Srinagar on 19-4-2003, was, for creation of one lakh employment and self-employment opportunities in Jammu and Kashmir State.
23. To achieve the purpose and objective referred to herein above, it was, inter alia, provided in the Central Excise Notifications that the exemptions contained in the Notifications would be available only on production of Certificate from General Manager of the concerned District Industry Centre to the Jurisdictional Deputy Commissioner of the Central Excise or the Assistant Commissioner of Central Excise, as the case may be, to the effect that the unit had created Required Additional Regular Employment, which would not, however, include employment provided by the industrial units to Daily wagers or Casual employees engaged in the Units.
24. A close reading the Office Memorandum and the amendment introduced thereto with para No. 3 appearing in the Central Excise Notification Nos. 56 and 57 of 11-11-2002, thus, makes it amply clear that the acceleration of development of industries in the State was contemplated with the object of generation of employment in the State of Jammu and Kashmir and the generation of employment, so contemplated, was not only casual or temporary; but was on the other hand, of permanent nature.
25. Considered thus, the paramount consideration, of the Central Government in providing the incentives to the New Industrial Units and Substantial Expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the State,
9 Sutlej Textiles and Industries Ltd. additionally creating opportunities for self-employment, hence a purpose in Public Interest.
26. In this view of the matter, the incentives provided to the Industrial units, in terms of the New Industrial Policy, for accelerated Industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional Permanent source of Employment to the unemployed in the State of Jammu and Kashmir, were in fact, in the nature of creation of New Assets of Industrial Atmosphere and Environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve Public Purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assessees alone.
27. Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in Industrial development, which is certainly a purpose in the Public Interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the appellants-assessees, cannot be construed as mere Production and Trade Incentives, as held by the Tribunal.
Making of additional provision in the Scheme that incentives would become available to the industrial units, entitled thereto, from the date of commencement of the commercial production, and that these were not required for creation of New Assets cannot be viewed in isolation, to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide Industrial Units so that larger Public Interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum, was achieved.
10 Sutlej Textiles and Industries Ltd.
29, The other factors, which had weighed with the Tribunal in determining the incentives as Production Incentives may not be decisive to determine the character of the incentive subsidies, when it is found, as demonstrated in the Office Memorandum, amendment introduced thereto and the statutory notification too that the incentives were provided with the object of creating avenues for Perpetual Employment, to eradicate the social problem of unemployment in the State by accelerated industrial development.
30. For all what has been said above, the finding of the Tribunal on the first issue that the Excise Duty Refund, Interest Subsidy and Insurance Subsidy were Production Incentives, hence revenue Receipt, cannot be sustained, being against the law laid down by Hon'ble Supreme Court of India in Sahney Steel & Press Works Ltd.'s case (supra) and Ponni Sugars & Chemicals Ltd.'s case (supra).
31. The finding of the Tribunal that the incentives were Revenue Receipt is, accordingly, set aside holding the incentives to be Capital Receipt in the hands of the assessees.
The claim of the appellant in the present case that interest subsidy is in the nature of capital receipt by applying purpose test is thus fully supported and covered by the aforesaid decision ' of the Jammu & Kashmir High Court. Therefore, interest subsidy of Rs.3,36,53,526 is held to be in the nature of capital receipt.
* 2.5% Capital Investment Subsidy (interest component) under Rajasthan Investment Promotion Scheme, 2003 The aforesaid scheme of subsidy was, it is noticed, introduced by the Government of Rajasthan vide Notification No. F.4(18)FD/ Tax Div./2001 dated
11 Sutlej Textiles and Industries Ltd. 28.07.2003. A bare look at the preamble to the said notification provides that the scheme of subsidy is being introduced to provide an attractive incentive to the state of Jammu & Kashmir. On perusal of the scheme placed at pages 62 to 75 of the paper book, it is noticed that under the said scheme two types of capital investment subsidies were granted, one being in respect of the interest component and the other being in respect of wage component. Insofar as Capital Investment Subsidy (Interest Component) was concerned, the same was granted with reference to the prescribed percentage of interest paid on borrowings taken by the eligible unit in order to undertake investment in the State of Rajasthan. The second form of Capital Investment Subsidy (Wage Component), was linked to the wages being paid. These facts show that the intent/purpose of grant of the subsidy to promote investment in the State of Rajasthan and also for employment generation.
FINDING On perusal of the records, it is further noticed that interest subsidy under the aforesaid Rajasthan Investment Promotion Scheme was also shown as part of other income in the Schedule 15 of the audited accounts. These facts, in my view, leads to the conclusion that since the subsidy was provided for promoting investment in the state of Rajasthan and was linked to capital investment/additional wages being provided, the same was granted in larger public interests and hence constitute capital receipt not liable to tax. Accordingly, it is held that subsidy of Rs.44,64,000 received under the above unit was not liable to tax.
* 5% interest subsidy TUFS by Government of India TUF Scheme was introduced by the Government of India, Ministry of Textiles for Textile Industries. On perusal of the objective of the TUF scheme placed at pages 88 to 199 of the appellant's paper book, it is noticed that the said scheme was introduced to promote technological upgradation in the Indian Textile
12 Sutlej Textiles and Industries Ltd. Industry. This fact is clear on perusal of the objective as stated in the "Government Resolution on TUFS on Techno-Operational Parameters" bearing No. 6/4/2007- CTI dated May, 20-08. The relevant extracts of the said resolution are reproduced hereunder:
"1. In spite of a strong and diversified fibre and production base, for various historical reasons, the Indian textiles industry has suffered from severe technological obsolescence and lack of economies of scale. The Technology Upgradation Fund Scheme (TUFS), which was introduced on 01.04.1999, has provided a 'fresh lease of life to the textile industry'. It has helped overcome technological obsolescence and create economies of scale. It has also helped in transition from quantitatively restricted textiles trade to market driven global merchandise. It has infused huge investment climate in the textiles sector and in its operational life span of eight years since 01.04.1999 till 31st March, 2007, has propelled investment of more than Rs. 1,16,981 crore.
2. The momentum thus achieved as a result of tremendous efforts on the part of both Government and industry needs to be further strengthened. Compared to the size and technology level of textiles units in the competing countries, India needs to increase the capacities and go in for modernization on continuous basis. The globalization of textiles trade mandates for financial assistance of domestic industry to abridge prime lending rate in the country to that of the LIBOR.
The Scheme off sets the global disadvantages faced by the Indian textiles industry in the field of power, transactional cost and additional cost borne by the industry due to poor infrastructure. The Scheme is equally crucial to attain higher level of infrastructure creation for modernization of textiles sector. 71% of the beneficiaries under TUFS are from small scale industry sector. It is necessary to continue the process
13 Sutlej Textiles and Industries Ltd. of strengthening this sector through this Scheme. The manufacturing chain in the textiles industry starts right from ginning of cotton till the clothing stage. Thus, TUFS is crucial for all the inter-connecting sector such as spinning, weaving, knitting, processing and garmenting.
However, the Scheme has witnessed un-uniform benefits to the various segments of the textiles sector. The spinning and composite segments of the textiles sector have driven maximum benefits whereas the segments like processing, garmenting, powerlooms etc. are still the weak links in the textiles value chain and have, not realized the potential for modernization.
5. The Government recognizes the potential of garmenting, technical textiles and processing segments for high value addition and employment generation and accords high priority to decentralized powerlooms segment in Small and Medium Enterprises dominated textiles economy for employment generation and capacity building. The Working Group on Textiles and Jute Industry for XI Five Year Plan constituted by Planning Commission has set a growth rate of 16% for the sector, projecting an investment of Rs.1,50,600 crores in the plan period."
FINDING On perusal of the aforesaid, it is clear that the TUF scheme was introduced by the Government recognizing the potential of the textile industry and the larger benefits of technological upgradation in the textile industry, which was necessary to provide afresh lease of life to the said industry. The Government recognized that technological upgradation in textile industry would result in capacity expansion and modernization, which would have direct impact on employment generation, exports and globalization of textile trade. In order achieve such objective, TUF scheme was introduced by 14 Sutlej Textiles and Industries Ltd. the Government to provide interest subsidy on loan taken for technological upgradation by the units in the textile industry.
In terms of the said scheme, the appellant received interest subsidy of Rs.25,90,32,252 in respect of various units as per details placed at page 200 of the paper book. The interest subsidy so received was shown as net of interest on term loans paid by the appellant as is evident from Note No. 18 given in schedule 22 of the Notes on Accounts forming part of the balance sheet of the appellant for the relevant assessment year.
The aforesaid facts, in my view, make it clear that subsidy under the TUF scheme was given for technological upgradation, in order to incentiwise the textile industry and for promoting capacity expansion, globalization of textile trade and employment generation. Thus, applying the purpose test laid down in Ponni Sugar, such subsidy is held to be in the nature of capital receipt. It is noticed that the aforesaid issue is also clearly covered by the Punjab & Haryana High Court in the case of Shamlal Bansal relied upon by the A/R of the appellant, a copy whereof has been placed at pages 222 -223 of the paper book. On perusal of the said decision, it is noticed that the Punjab & Haryana High Court held that subsidy received under the TUF scheme is in the nature of capital receipt. The relevant observations of the Court are reproduced as under:
"The purpose of scheme under which the subsidy is given, has been discussed by the Tribunal. To sustain and prove the competitiveness and overall long term viability of the textile industry, the concerned Ministry of Textile adopted the TUFS scheme, envisaging technology upgradation of the industry. Under the scheme, there were two options, either to reimburse the interest charged on the lending agency on purchase of technology upgradation or to give
15 Sutlej Textiles and Industries Ltd. capital subsidy on the investment in compatible machinery. In the present case, the assessee has taken term loans for technology upgradation and subsidy was released under agreement dated 12-7-2005 with Small Industry Development Bank of India. The relevant clause of the agreement under which the subsidy was given is as under:-
"Para 8. to prevent mis-utilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non-interest bearing term loan by the Bank/Fis. The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock-in-period of three years on a pro-rata basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount."
In view of above, the view taken in Sahney Steel and Press Works Ltd.'s case (supra) could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was 'revenue receipt' or 'capital receipt', character of receipt in the hands of the assesses had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel and Press Works Ltd.'s case (supra) itself and reiterated in later judgment in CIT v. Ponni Sugars and - Chemicals Ltd. [2008] 306 ITR 392 / 174 Taxman 87 (SC), referred to in the impugned order of the Tribunal."
The aforesaid decision squarely applies to the facts of the appellant's case since the subsidy was received by the appellant under the very same TUF scheme. Being so, the subsidy received is held to be in the nature of 16 Sutlej Textiles and Industries Ltd. capital receipt and accordingly, the same is directed to be excluded from the taxable income.
In the result ground of appeal No. 3 is allowed in favour of the appellant."
2.3 The facts and legal position in the case of the appellant during the year being the same, the disallowance of Rs.36,04,59,184/- made on account of subsidies calls for deletion. Further, the subsidies schemes in preceding and current year assessment being the same, and the issue already decided in favour of the appellant, the disallowance of Rs.36,04,59,184/- on the same account during the year deserves deletion. Ground raised in appeal is allowed.”
Now the department is in appeal. The ld. Counsel for the assessee at the very outset sated that this issue is covered in favour of the assessee and against the revenue vide order dated 03.07.2015 & 12.4.2018 of the ITAT Delhi Bench “G”, New Delhi in & 337/Del/2015 for the assessment years 2009-10 & 2011-12 respectively.
In his rival submissions, the ld. CIT DR supported the order of the AO and filed the written submission and submitted therein that the ITAT decision in the case of assessee for AY 2009-10 is not applicable to the present case since it has not considered following judgments in favour of the Department which are on identical facts. i) CIT vs. Bhushan Steels & Strips Ltd. (2017) 83 taxmann.com 204 (Delhi.) (Hon’ble Delhi High Court)
17 Sutlej Textiles and Industries Ltd. ii) Sahney Steel & Press Works Ltd. vs. CIT (1997) 94 taxman 368 (SC) iii) Shri Balaji Alloys vs. ITO 2010-TIOL-291-ITAT- Amritsar.
Ld. Counsel of the assessee further relied upon the order of the Ld. CIT(A) for the assessment years 2009-10 & 2011-12 and also relied upon the following case laws wherein it has been held that payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. i) Decision of Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. and others vs. CIT 228 ITR 253. ii) Decision of Hon’ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. vs. CIT 306 ITR 392. iii) Decision of Hon’ble J&K High Court in the case of Shree Balaji Alloys vs. CIT 198 Taxman 122. iv) Decision of Punjab & Haryana High Court in the case of Sham Lal Bansal in ITA 472/2010. v) Decision of Hon’ble Supreme Court in the case of CIT vs. Chaphalkar Brothers Pune : 88 taxmann.com 178. vi) Decision of Hon’ble Delhi High Court in the case of CIT vs. Boungianvillea Multiplex Entertainment Centre (P) Ltd. 373 ITR 14.
18 Sutlej Textiles and Industries Ltd.
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that a similar issue has been adjudicated by this Bench of the ITAT in for the assessment year 2009-10 vide order dated 03.07.2015 in assessee’s own case and the relevant findings have been given in paras 15 & 16 which read as under: “15. We have carefully gone through the rival submissions and perused the material placed on record. We have also gone through the claim made by assessee and the schemes, under which the assessee was enjoying the benefit of subsidies, to appreciate the purpose for which subsidies were granted. In our considered opinion, the subsidies received by the assessee fall in the capital field and Ld. CIT(A) has given exhaustive reasons in coming to the conclusion that the subsidies are in the capital field and it is not necessary for us to reiterate the facts in great detail. However, for the sake of completeness, we extract the relevant observations of Ld. CIT(A) as under: i) Regarding 3% Central Interest Subsidy:- “Interest Subsidy under the Central Interest Subsidy Scheme, 2002:- The aforesaid subsidy was introduced by the Government of India vide notification dated 22.10.2002, a copy whereof is placed at pages 55 to 57 of the appellant's paper book. On perusal of the said notification, it is noticed that the very first para of the said notification provides that The Government of India is pleased to make the following scheme of Interest Subsidy on Working Capital Loans for industrial units in the state of Jammu & Kashmir with a view to accelerating the industrial development in the state It is also noticed that subsequently another notification dated 28th November, 2003 was issued, a copy whereof
19 Sutlej Textiles and Industries Ltd. is placed at page 59 of the appellant's paper book. The said notification makes it very clear that the purpose of the subsidy being granted was creation of employment opportunities in the State of Jammu & Kashmir. The relevant extracts of the said notification are as under:
"No.1 (111)/20 I2-NER -In pursuance of the announcement by the Prime Minister on 19th April, 2003 at Srinagar for creation of one lakh employment and self employment opportunities in Jammu & Kashmir, the Government of India had set up a Task Force under Cabinet Secretary. The recommendations of Task Force were submitted to the Cabinet. To achieve this object of employment generation, the Cabinet has, inter alia, approved following definition of the term 'substantial expansion' for the purpose of incentives/ subsidies notified as per OM No.1 (13)/2000-NER dated 14.06.2002.
The Central Government, therefore, hereby makes amendment in the Central Interest Subsidy Scheme, 2002 notified in the notification of the Government of India in the Ministry of Commerce & Industry, Department of Industrial Policy & Promotion No.1 (11)/2002-NR dated 22nd October, 2002. The definition of the term 'Substantial Expansion' appearing under para 5(d) of the Scheme may be substituted by the following:
Concessions for substantial expansion should extend to include all new investments by entrepreneurs, which leads to substantial additional employment creation by an existing entrepreneur without insisting on major expansion. 1-However, credit under the Industrial Policy Package should not be merely for paying off old debts or for equipment already in place.
It is pursuant to the aforesaid notifications, that the appellant had received interest subsidy to the extent of 3% on the working capital advanced by the 20 Sutlej Textiles and Industries Ltd. banks/financial institutions. The amount of subsidy so received is also noticed to have been shown as part of "miscellaneous income" in schedule 15 "other income" of the audited accounts. These facts, in my considered view, clearly lead to the conclusion that the subsidy was granted for industrial development in the State of Jammu & Kashmir and for creating employment opportunities. Thus, applying the purpose test laid down by the Supreme Court in the case of Ponni Sugar, as elaborately discussed in detail in earlier paras, the subsidy received by the appellant is in the nature of capital receipt and not revenue receipt.
The aforesaid view is also supported by the decision of the Jammu & Kashmir High Court in the case of Shree Balaji Alloys (referred above) which has been relied upon by the AIR of the appellant. In that case, too, the High Court considered the taxability of subsidy amount for setting up units in the State of Jammu & Kashmir. The assessee in that case relied upon Office Memorandum dated 14th June, 2002, Notification dated 28th November, 2003 (as referred in the present case) and the two other notifications referred for exemption from payment of excise duty. Based on these notifications, the assessee claimed that excise refund and interest subsidy was in the nature of capital receipt not liable to tax. The Tribunal however, did not agree with the claim of the assessee and held that excise refund and interest subsidy were in the nature of revenue receipts. While, setting aside the decision of the Tribunal and upholding the claim of the assessee, the High Court held that excise refund and interest subsidy were capital receipt not liable to tax. Some of the relevant observations of the High Court are reproduced as under:
“………. 22. Perusal of the Office Memorandum dated 14-6-2002 indicating New Industrial Policy and other concessions for the State of Jammu and Kashmir, makes it explicit
21 Sutlej Textiles and Industries Ltd. that the concessions were issued to achieve twin objects viz., (i) Acceleration of industrial development in the State of Jammu and Kashmir, which had been found lagging behind in such development and (ii) Generation of employment in the State of Jammu and Kashmir.
Amendment introduced to the Office Memorandum vide Notification of 28- 11-2003 of the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) eloquently demonstrates the Central Government's intention in extending the incentives. The Government's objective, as conveyed by Hon'ble the Prime Minister at Srinagar on 19-4-2003, was, for creation of one lakh employment and self-employment opportunities in Jammu and Kashmir State.
To achieve the purpose and objective referred to herein above, it was, inter alia, provided in the Central Excise Notifications that the exemptions contained in the Notifications would be available only on production of Certificate from General Manager of the concerned District Industry Centre to the Jurisdictional Deputy Commissioner of the Central Excise or the Assistant Commissioner of Central Excise, as the case may be, to the effect that the unit had created Required Additional Regular Employment, which would not, however, include employment provided by the industrial units to Daily wagers or Casual employees engaged in the Units.
A close reading the Office Memorandum and the amendment introduced thereto with para No.3 appearing in the Central Excise Notification Nos. 56 and 57 of 11-11-2002, thus, makes it amply clear that the acceleration of development of industries in the State was contemplated with the object of generation of employment in the State of Jammu and Kashmir and the generation of employment, so contemplated, was not 22 Sutlej Textiles and Industries Ltd. only casual or temporary; but was on the other hand, of permanent nature.
Considered thus, the paramount consideration of the Central Government in providing the incentives to the New Industrial Units and Substantial Expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the "- State, additionally creating opportunities for self- employment, hence a purpose in Public Interest.
In this view of the matter, the incentives provided to the Industrial units, in terms of the New Industrial Policy, for accelerated Industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional Permanent source of Employment to the unemployed in the State of Jammu and Kashmir, were in fact, in the nature of creation of New Assets of Industrial Atmosphere and Environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve Public Purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of asses sees alone.
Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in Industrial development, which is certainly a purpose in the Public Interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the appellants-assessees, cannot be construed as mere Production and Trade Incentives, as held by the Tribunal.
28. Making of additional provision in the Scheme that incentives would become available to the industrial
23 Sutlej Textiles and Industries Ltd. units, entitled thereto, from the date of commencement of the commercial production, and that these were not required for creation of New Assets cannot be viewed in isolation, to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide Industrial Units so that larger Public Interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum, was achieved.
The other factors, which had weighed with the Tribunal-in determining the incentives as Production Incentives may not be decisive to determine the character of the incentive subsidies, when it is found, as demonstrated in the Office Memorandum, amendment introduced thereto and the statutory notification too that the incentives were provided with the object of creating avenues for Perpetual Employment, to eradicate the social problem of unemployment in the State by accelerated industrial development.
For all what has been said above, the finding of the Tribunal on the first issue that the Excise Duty Refund, Interest Subsidy and Insurance Subsidy were Production Incentives, hence revenue Receipt, cannot be sustained, being against the law laid down by Hon'ble Supreme Court of India in Sahney Steel & Press Works Ltd.'s case (supra) and Ponni Sugars & Chemicals Ltd. 's case (supra).
The finding of the Tribunal that the incentives were Revenue Receipt is, accordingly, set aside holding the incentives to be Capital Receipt in the hands of the assessees.
The claim of the appellant in the present case that interest subsidy is in the nature of capital receipt by applying purpose test is thus fully supported and covered by the aforesaid decision of the Jammu &
24 Sutlej Textiles and Industries Ltd. Kashmir High Court. Therefore, interest subsidy (of Rs.3,36,53,526) is held to be in the nature of capital receipt."
(ii) Regarding 2.5% Interest subsidy under Rajasthan Investment Promotion Scheme, 2003:
“On perusal of the records, it is further noticed that interest subsidy under the aforesaid Rajasthan Investment Promotion Scheme was also shown as part of other income in the Schedule 15 of the audited accounts. These facts, in my view, leads to the conclusion that since the subsidy was provided for promoting investment in the state of Rajasthan and was linked to capital investment/additional wages being provided, the same was granted in larger public interests and hence constitute capital receipt not liable to tax. Accordingly, it is held that subsidy of Rs.44,64,000/- received under the above unit was not liable to tax.
(iii) Regarding 5% interest subsidy (TUFS) by Government of India :-
25 Sutlej Textiles and Industries Ltd. “On perusal of the aforesaid, it is clear that the TUF scheme was introduced by the Government recognizing the potential of the textile industry and the larger benefits of technological upgradation in the textile industry, which was necessary to provide a fresh lease of life to the said industry. The Government recognized that technological upgradation in textile industry would result in capacity expansion and modernization, which would have direct impact on employment generation, exports and globalization of textile trade.
In order achieve such objective, TUF scheme was introduced by the Government to provide interest subsidy on loan taken for technological upgradation by the units in the textile industry.
In terms of the said scheme, the appellant received interest subsidy of Rs.25,90,32,252 in respect of various units as per details placed at page 200 of the paper book. The interest subsidy so received was shown as net of interest on term loans paid by the appellant as is evident from Note No.18 given in schedule 22 of the Notes on Accounts forming part of the balance sheet of the appellant for the relevant assessment year.
26 Sutlej Textiles and Industries Ltd.
The aforesaid facts, in my view, make it clear that subsidy under the TUF scheme was given for technological upgradation, in order to incentive-wise the textile industry and for promoting capacity expansion, globalization of textile trade and employment generation. Thus, applying the purpose test laid down in Ponni Sugar, such subsidy is held to be in the nature of capital receipt.
It is noticed that the aforesaid issue is also clearly covered by the Punjab & Haryana High Court in the case of Shamlal Bansal relied upon by the AIR of the appellant, a copy whereof has been placed at pages 222 - 223 of the paper book. On perusal of the said decision, it is noticed that the Punjab & Haryana High Court held that subsidy received under the TUF scheme is in the nature of capital receipt.”
We are in agreement with the findings and conclusion reached by Ld. CIT(A) . We therefore, affirm the order of Ld. CIT(A) and dismiss the appeal filed by Revenue.”
8.1 Similarly, in the assessment year 2011-12 also the Tribunal vide its order dated 12.4.2018 in in assessee’s own case by following the aforesaid decision dated 03.7.2015 of the Tribunal has dismissed the appeal of the Revenue. In view of above decisions, we find that case laws cited by the Ld.
27 Sutlej Textiles and Industries Ltd. CIT(DR) are not directly applicable to the case of the assessee. However, the case laws cited by the Ld. Counsel of the assessee are directly applicable because in most of the cases it has been held that payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature and some of these cases were discussed by the Ld. CIT(A) in his order for assessment year 2009-10 in assessee’s own case and the same was upheld by the Tribunal in its order dated 03.07.2015. As we are bound by the judicial precedent and therefore, respectfully following the aforesaid referred to order dated 03.07.2015 in assessee’s own case of the Tribunal, we do not see any merit in this appeal of the Department, hence, the same is dismissed.