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Income Tax Appellate Tribunal, “ A” BENCH : KOLKATA
Before: Hon’ble Shri S.S. Godara, JM & Shri M. Balaganesh, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL , “ A” BENCH : KOLKATA [Before Hon’ble Shri S.S. Godara, JM & Shri M. Balaganesh, AM] I.T.A No.1774/Kol/2016 A.Y 2006-07 D.C.I.T, Cir-3(1), Kolkata Vs. M/s. Nilachal Iron & Power Ltd PAN: AABCN 5428K (Appellant/department) (Respondent/Assessee) I.T.A No.1718/Kol/2016 A.Y 2007-08 A.C.I.T, C.C 4(1), Kolkata Vs. M/s. Nilachal Iron & Power Ltd PAN: AABCN 5428K (Appellant/department) (Respondent/Assessee) For the Appellant : Smt. Ranu Biswas, Addl. CIT, ld. Sr.DR For the Respondent : Smt. Shikha Agarwal, ACA, ld.AR
Date of Hearing : 27-12-2018 Date of Pronouncement: 19 -03-2019
ORDER Shri S.S. Godara, JM 1. These two Revenue’s appeals for A.Ys 2006-07 and 2007-08 arise against the CIT(A)- 5 & CIT(A)-1, Kolkata’s orders, dated 09-05-2016 and 10-03-2016 passed in case nos. 209/CIT(A)-5/C-3/08-09/14-15 & 615/CIT(A)-1/Cir-3(1)/2009-10; respectively involving proceedings u/s 143(3) of the Income Tax Act, 1961 ( in short ‘Act’).
Heard both the parties. Case files perused.
The Revenue’s first identical substantive ground in these two instant appeals is that the CIT(A) has erred in law and on facts in reversing the Assessing Officer’s action
2 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd adding subsidy amount(s) of Rs.2,85,42,000/- each as taxable income/revenue receipts of the impugned assessment years. It is pointed out by the assessee in the meanwhile that Revenue’s appeal-ITA No. 1774/Kol/2016 for A.Y 2006-07 suffers from 19 days’ delay in filing on account of various procedural aspects at departmental level. The assessee is fair enough in not disputing correctness thereof. We, thus, condone the impugned delay of 19 days in above referred Revenue’s appeal.
2.1 We now revert back to above referred common issue of the subsidy receipt of Rs. 2,85,42,000/- each deleted in the CIT(A)’s orders is both the assessment years under consideration before us.
Both the parties take us to the CIT(A)‘s detailed discussion in assessment A/Y 2007-08 followed mutatis mutandis on this issue as in A.Y 2006-07 as under:- Decision:
I have carefully considered the findings of the A.O, the appellant's written submission and materials on record. The appellant is found to have received subsidy of Rs.2,85,42,000/ from the Govt. of Jharkhand for setting up of industry in backward area in the state which was held to be revenue receipt by the A.O. The A.O observed that the factory of the appellant coy is an existing unit and the subsidy of Rs2,85,42,000/ where not at all utilized for purchasing new plant and machinery or expansion rather it was deposited in back account of the coy. It was observed by the A.O that the Coy did not utilize the subsidy for purchase of fixed assets. The A.O was relied on the decision of Apex Court in case of PJ Chemicals Ltd 210 ITR. It was also observed that scheme of the arrangement by the Govt. of Jharkhand, is 'capital subsidy' The A.O also relied upon the finding in the assessment order in AY 200607 wherein it. was mentioned that the subsidy was 'untied'. In addition, based upon the, submission of the appellant, the scheme didn't lay down the manner in, which the subsidy granted was to be utilized and the agreement envisaged use of subsidy for 'smooth running of the unit'.
The A.O also observed that the subsidy was not used for purchase of fixed assets and the elements envisaged for use of subsidy for 'smooth running of the unit'. The A.O thus computed that the purpose of subsidy was not for setting up factory and the subsidy was only for running and maintenance 2
3 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd which was not of capital nature. In this regard the A.O, placed reliance upon the case of Sahney Steel And Press Works Limited And Others, 228 ITR 253 (SC) ,wherein it was held that in the case of subsidy whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies."
The appellant's A/R in his contention placed emphasis on Government of Jharkhand, Industrial Policy, 2001, wherein its object was to invite capital investment for the rapid industrial growth" of the state, which is rich in minerals. The industrial policy, so framed in 2001, was initially for small and medium size industries. Moreover, in Article 29.1 of the said policy, it was stated that there was a dire need for new born state of Jharkhand to accelerate industrialization in the background of lost opportunities and non realization of its industrial potential. It was also stated that special packages shall be formulated for the new projects with an investment of more than Rs.50 Crores on case to case basis through direct negotiation with respective investors. It was further stated that the appellant coy received enhanced subsidy i.e. 20% of capital investment. That the subsidy given to the appellant is 'untied' and for smooth running of the unit, reference was made to the para no IADA that "subsidy amount to be utilized to fixed assets and further development" It was thus the A.O has ignored the sum towards fixed assets and further development which implies that subsidy is one time grant and not a regular feature for smooth running of business.
Moreover, the appellant has placed reliance upon the CIT Vs. Balarampur Chini Mills Ltd. (1999) 238 ITR 445 (Cal.) and CIT vs Panni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC) has held 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, the AO 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. 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
4 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd up a 'new unit or to expand the existing unit then the receipt of the subsidy was on capital account.
The appellant has' also relied on ratio of various case laws for the proposition that any subsidy granted to encourage entrepreneurs to move to backward areas and establish industries' or to set up its business or complete a project the 'subsidy must' be treated as having 'been received for capital purpose. In addition reliance was' also place on decision of M/s Shyam Sel Ltd. for the Asst.Year 200001 & 200102 (ITA No.937 & 938 (Kol) of 2007.
After careful consideration of the facts of the case and cited case laws, it is found that from the perusal of the purpose and objects of the draft industrial policy 2001 was to accelerate the industrialization of Jharkhand through special packages for new projects in case of through ' capital incentive subsidy, (Punji Niwesh Protsahan): for "already existing industry intending to expand under this policy."
The A.O's finding that the subsidy was "untie" to the purchase of assets and for the smooth running of the unit for holding the subsidy is revenue receipt is found to be erroneous. It is found that there is substance in the appellant's contention that the object of the subsidy is to encourage industrialization through onetime payment of 5% of capital outlay later on extended to 10% of capital outlay, which was incentive for object of setting of new units or extension of existing units in Jharkhand state. In view of the above discussion and the ratio of decision of the jurisdictional High Court in the case of CIT Vs. Balarampur Chini Mills Ltd. (supra), the character of the subsidy is held to be capital receipt in the hands of the appellant coy. The A.O is directed to delete addition of Rs2,85,42,000/. This ground is allowed.”
Ms. Ranu Biswas vehemently contends during the course of hearing that the CIT(A) has erred in law and on facts in treating assessee’s impugned subsidy receipts to be capital than revenue in nature. She, therefore, she seeks to restore the impugned identical addition in both the assessment years under consideration. The assessee’s case on the other hand is that the CIT(A) has rightly applied the ‘purpose test’ in the given facts and circumstances of the case for deleting the impugned addition(s).
5 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd 5. We have heard rival contentions. The assessee company admittedly manufactures sponge iron. There is no dispute about the impugned subsidy receipts coming from Jharkhand state government for setting up new factory/industrial units in backward areas. The above said subsidy scheme came as per the Jharkhand Industrial Policy 2001. This industrial policy in forms part of detailed paper book filed before us. The impugned scheme came into effect from 15-11-2000 onwards. The assessee entered into the relevant agreement with the state government for “Capital” subsidy through authorized agency on 10-02-2006. Various other documents stood finalised thereafter. All these documents along with the State Government’s subsidy acknowledgement letter sufficiently indicate that the impugned sum(s) have come by way of capital investment scheme for setting up industries rather than having regard to day-to-day carrying out of industrial operations. Hon’ble jurisdictional high court’s decision in CIT Vs. Rasoi Ltd (2011) 335 ITR 438 (Cal) propounds the following test to determine nature of a subsidy scheme as follows:- “If the object of a subsidy scheme is to enable the assesse 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 is to enable the assesse to set up a new unit or to expand the existing unit, the receipt of the subsidy is on capital account. 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.
Held, dismissing the appeal, that the object of the subsidy was the expansion of business capacities, modernization, and improving marketing capabilities and thus, those were for assistance on capital account. Merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary that did not imply that it was in the form of refund of sales tax paid. The subsidy was a capital receipt.”
We therefore decline the Revenue’s contention that the assessee’s subsidy sums are revenue receipts as the said scheme is for setting up of industrial units, wherein
6 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd impugned subsidies have been computed @ flat rate of 5% of the specified items of the fixed investments only.
Coming to Revenue’s further stand that the assessee’s impugned subsidy is for already existing unit/ plant & machinery, we make it clear that it had made fixed investment of Rs.5708 (lacs). We, therefore, go by “ purpose test “ as per decision of the hon’ble jurisdictional high court & hon’ble Supreme Court in Balarampur Sugar Mills Ltd (1999) 238 ITR 445 (Cal) & Ponni Sugars & Chemicals Ltd (2008) 306 ITR 392(SC) to conclude that the CIT(A) has rightly reversed the impugned identical addition treating the tax payer‘s subsidy receipts in issue as revenue in nature. The Revenue fails in its instant identical ground in these two appeals. Its appeal No. 1718/Kol/2016 for the A.Y 2007-08 raising this sole issue is declined.
Coming to Revenue’s latter substantive ground in ITA No. 1774/Kol/2016 for the AY 2006-07 seeking to revive section 2(24)(e) deemed dividend addition of Rs.49,94,870/- ., the CIT(A)’s detailed discussion deleting the impugned addition reads as follows:-
“2. Ground No.5 [Deemed dividend u/s.2(22)(e) Rs.19,94,870/ & Rs.30,00,0000/]
Page Nos. 4, 5 & 6 of the assess ent order deals with application of Section 2(22)(e) of the LT. Act by t e A.O. in respect of amount of Rs.19,94,870/ and Rs.30,00,000/. The observation of the A.O. on facts around the two transactions are reproduced as under :
"Perusal of the accounts of the assesse further revealed that during the year it had received Rs.20, 00, 000/ and Rs.30, 00, (JOO/ from M/ s. Jayashree Motors Pvt. Ltd. and M/ s. Hitech Chemicals (P) Ltd. Respectively as loan. In order to verify the composition of these companies, the A/ R wa!s asked to file details of share holding ratios of both. Perusal of details revealed that major shareholdings of the assessee and M/ s. Jayashree Motors Pvt. Ltd. were as follows: M/s. NilachaZ Iron & Power Ltd.
7 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd Name Holding ratio 1) Sri Raj Kumar Agarwal (Director) 57.50% 2) M/ s. Raj Kumar Aqaruial (HUF) 15.41% 3) Smt.Prabha Agarwal (Director) 17.12%
M/s. Jayashree Motors Pvt. Ltd.
Name Holding ratio 1) Sri Raj Kumar Agarwal (Director) 14.35% 2) Smt.Prabha Agarwal (Director) 10.68% 3) M/ s. Kilbum Management 74.97%
The above observation of the A.O. Points to the fact that the appellant company received loans from Jayashrbe Motors Pvt. Ltd. and Hitech Chemicals (P) Ltd. As regards Jayashree Motors Pvt. Ltd. as noted above, the appellant is not shown as the shareholder. Similarly, there is no clear finding that the appellant company is a share holder in Hitech Chemicals (P) Ltd.
2.1 The appellant's submission on the point is that the appellant company is not share holder of Jayashree Motors Pvl Ltd. or Hitech Chemicals (P) Ltd. The relevant portion of the submission is r produced as under :
"In this regard, it is submitted that's the ssessee received loans amounting to Rs.20 laes & Rs.30 laes from M/s. Jayashr e Motors (P) Ltd. and M/s. Hitech. Chemicals (P) Ltd. respectively. Both the Corp rate Bodies are being controlled and managed by the Directors of the assessee com any. Accordingly, it was concluded by the AO that the loans received by the asses ee company from these two corporate Bodies should be treated as deemed dividend a per the provisions of Sewc.2(22)( e) of the Act.
In the assessment order the A. O. has given the name of shareholders. As per the AO, there are common shareholders of M/ s. Jayashree Motors Pvt. Ltd. and the assessee company. This means he confirms that assessee is not the shareholder of M/ s. Jayshree Motors Pvt. Ltd. I
It is further submitted that the assessee comAany is not the shareholder of M/ s. Jayshree Motors (P) Ltd. or M/ s. Hitech. Chemicals (P) Ltd. As such section 2(22)( e) is not applicable in its
8 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd case. This section is applicable only in the case where loan is given to a registered and beneficial share holder. The word 'shareholder' in sec. 2(22)(e} includes only those registered shareholders who are also beneficial owners. In this context, reliance is placed on the judgement of Hon'ble Supreme Court in the case of Rameshwarlal Sanwarmal vs. CIT (198 J 122 ITR I(SC), which dealt with s. 2(6A)( e ) (deemed dividend under Income Tax A~t, 1922), wherein it was held that's the amount of the loan would not fall within the mischief of this section if it is granted to a beneficial owner of the shares who is not the registered shareholder. In nutshell, for invoking the provision of sec. 2 (22}(e), the foll9wing are two conditions precedent:
(i) The shareholder should be a registered shareholder; and (ii) The shareholder should also be a beneficial of owner of the shares.
In the case of the assessee & M/s. Jayshree Motors (P) Ltd., the common shareholders are Mr. Raj Kumar Agarwal & Mrs. Prabha Agarwal. Shares certificates are in the name of both these persons. Thus, the registered holders of the share are Mr. Raj Kumar Agarwal & Mrs. Prabha Agarwal and not the assessee. This fact is confirmed by the AO in the assessment order itself.
Similarly, in the case of assessee is not the shareholder of M/ s. Hitech Chemicals (P) Ltd. as apparent from the audited balance sheet of the assessee. Hence, the primary condition for invoking s. 2(22}(e} is not fulfilled a~d consequently sec. 2(22)( e ) does not apply to the case of the assessee. Reliance its further placed on the order of the Hon'ble Special Bench of the ITAT, Mumbai in the case of ACIT Vs Bhaumik Colour (P) Ltd. (2009) 118 [STD 1 (Mum.) (SB)."
2.2 The appellant has relied on various judicial decisions to claim that the recipient of loan must be a shareholder in the company having advanced the an. The appellant has relied on the following decisions: i) ACIT Vs Bhaumik Colour (P) Ltd. (2 09) 118 ITD 1 (Mum.)(SB) ii) CIT Vs Ankitech (P) Ltd. & Ors. (201 ) 340 ITR 14 iii)CIT Vs. R Magnetics Pvt. Ltd (ITA 2 1/2012) (2014) 220 Taxman 209
2.3 As the A.O. has not given any finding that the appellant company is a shareholder in the companies having advanced loan,
9 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd the decisions listed above indicate that the A.O. 's action is wrong. The addition, therefore, has to be deleted and the ground is allowed.”
We have given our thoughtful consideration to both the parties’ respective stands in support and against the impugned addition. Suffice to say, it has come on record that this assessee is not a shareholder in M/s. Jayashree Motors P.Ltd and M/s. Hitech Chemicals P.Ltd, as evident from the CIT(A)’s findings. This tribunal’s recent decision in DCIT Vs. Gilbarco Veeder Root (I) P.Ltd, ITA No. 1003/Mum/2017 A.Y 2010-11 decided on 20.06.2018 has declined application of the impugned deeming fiction as follows: “10. We have considered this aspect of the matter as also the provisions of Sec. 2(22)(e) of the Act. Shorn of other details, Sec. 2(22)(e) of the Act covers within its sweep three categories of payments. Firstly, the payment by way of loan or advance to a shareholder; secondly, payment to any concern in which such shareholder is a member or a partner; and, thirdly, any payment made on behalf of or for the individual benefit of any such shareholder. Ostensibly, assessee recipient is not a shareholder in the payer company, i.e. Portescap and, therefore, it is not covered by the first category of payment. In fact, it is the second category which is sought to be invoked by the Assessing Officer. No doubt, there is a common shareholder, both in the assesseecompany and Portescap, and even if we were to assume that the amount received by the assesseecompany is for the benefit of the stated aforesaid common shareholder, yet, it could only be assessed in the hands of such registered shareholder and not in the hands of the assessee company. This proposition has been relied upon by CIT(A) to delete the addition, and which is well supported by the judgments of the Hon'ble Bombay High Court in the case of Universal Medicare (P.) Ltd. (supra), Impact Containers (supra) and NSN Jewellers (P) Ltd. (supra). Thus, we find no justifiable ground to interfere in the conclusion drawn by the CIT(A).
So far as the reliance placed by the Revenue on the judgment of the Hon'ble Supreme Court in the case of Gopal and Sons (HUF) (supra) is concerned, the same, in our view, is quite inapplicable to the facts of the present case. Firstly, the assessee before the Hon'ble Supreme Court was a HUF and the issue was as to whether the loans and advances received by the HUF could be treated as ‘deemed dividend’ within the meaning of Sec. 2(22)(e) of the Act. Notably, in the case before the Hon'ble Supreme Court, the payment was made by the company to the HUF and the shares in the company were held by the karta of the HUF. It is in this context that the Hon'ble Supreme Court upheld the addition in the 9
10 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd hands of the HUF as factually the HUF was the beneficial shareholder. The factsituation in the case before us stands on an entirely different footing inasmuch as the assesseerecipient of money is neither the registered nor the beneficial shareholder of the payer company, i.e. Portescap. Ostensibly, the common registered as well as beneficial shareholder of assesseecompany and Portescap is Kollmorgen and not the assesseecompany. Therefore, the decision of the Hon'ble Supreme Court in the case of Gopal and Sons (HUF) (supra) is inapplicable to the facts of the present case. In fact, the learned representative for the respondentassessee has correctly placed reliance on the judgment of the Hon'ble Madras High Court in the case of M/s. Ennore Cargo Container Terminal P. Ltd. (supra), which has been rendered in a somewhat identical situation. In order to elaborate the point, the following discussion in the judgment of the Hon'ble Madras High Court, which is reproduced hereinafter, would show that in the present circumstances before us, the ratio of the decision of the Hon'ble Supreme Court in the case of Gopal and Sons (HUF) (supra) is not attracted : “4.2 The Revenue seeks to assess as income the capital advance received by the assesseecompany from Indev Logistics Pvt. Ltd. on the ground that it is deemed dividend received by the assesseecompany for the benefit of the registered shareholder. For this purpose, the provisions of Section 2(22)(e) of the Incometax Act, 1961 (in short ‘the Act’) is sought to be relied upon. The Tribunal has rejected the said contention of the Revenue, principally, on the ground that deemed dividend can only be assessed in the hands of the registered shareholder for whose benefit the money was advanced. 4.3 As indicated above, there is no dispute that the assessee did receive capital advance from Indev Logistics Pvt. Ltd. There is also no dispute that there are common shareholders both in the assesseecompany and Indev Logistics Pvt. Ltd. Therefore, quite correctly, as noted by the Tribunal, though, the advance received by the assessee company may have been for the benefit of the aforementioned registered shareholders, it could only be assessed in the hands of those registered shareholders and not in the hands of the assesseecompany. 4.4 In our view, on a plain reading of the provisions of Section 2 (22)(e) of the Act, no other conclusion can be reached. As a matter of fact, a Division Bench of this Court, in the case of Commissioner of Income Tax vs. Printwave Services P. Ltd., (2015) 373 ITR 665 (Mad.), has reached a somewhat similar conclusion.
Mr. Senthil Kumar, however, contends to the contrary and relies upon the judgment of the Supreme Court in Gopal and Sons (HUF) vs. Commissioner of Incometax, KolkataXI, (2017) 77 taxmann.com 71 (SC).
5.1 In our view, the question of law considered by the Supreme Court in the case of Gopal and Sons (supra) was different from the issue which arises in the 10
11 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd present matter. The question of law which the Supreme Court was called upon to consider was whether loans and advances received by a HUF could be deemed as a dividend within the meaning of Section 2(22)(e) of the Act. The assessee in that case was the HUF and the payment in question was made to the HUF. The shares were held by the Karta of the HUF. It is in this context that the Supreme Court came to the conclusion that HUF was the beneficial shareholder.
5.2 In the instant case, however, both the registered and beneficial shareholders are two individuals and not the assesseecompany. Therefore, in our view, the judgment of the Supreme Court does not rule on the issue which has come up for consideration in the instant matter.”
Thus, in view of the aforesaid discussion, we hereby affirm the decision of CIT(A) and Revenue fails in its appeal.”
We adopt the above detailed reasoning mutatis mutandis to hold that section 2(22)(e) deeming fictitious of dividend cannot be applied in the facts of the instant case since the sassessee is not a registered shareholder in the said two entities (supra). The Revenue’s second substantive ground in ITA No. 1774/Kol/2016 also fails.
These two Revenue’s appeal are dismissed Order pronounced in the Court on 19-03-2019
Sd/- Sd/- [ M.Balaganesh ] [ S.S.Godara ] Accountant Member Judicial Member
Dated : 19 -03-.2019 PP, Sr. PS
Copy of the order forwarded to: 1.Appellant/Department: The DCIT, Cir-3(1), Kolkata, Aaykar Bhawan, 4th Floor, Room No. 19,P-7 Chowringhee Square, Kolkata-69./The ACIT, CC-4(1), Aaykar Bhavan Poorva, 110 Shanti Palli, EM Bye Pass, 4th Floor, Kolkata-107 2.Respondent/Assessee: M/s. Nilachal Iron & Power Ltd (PAN AABCN5428K). 5 Bentinck Street, Kolkata-1. 11
12 ITA Nos. 1774/Kol/16 & 1718/K/16 A.Ys 2006-07 & 2007-08 M/s. Nilachal Iron & Power Ltd 3..C.I.T(A).- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.