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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
Since all these appeals pertain to the same assessee involving common issues arising out of identical set of facts and circumstances, therefore, as a matter of convenience, these appeals were heard together and are being disposed off by way of this consolidated order. ./2013 – A.Y. 1995–96
The only effective ground raised by the assessee reads as under:– “On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in treating the sales tax exemption availed of ` 1,14,51,012, from the State Government for setting up industry in the notified area as operational subsidy instead of capital receipt and the learned Commissioner (Appeals) has erred in confirming the order of the Assessing Officer. The Assessing Officer be directed to treat the sales tax subsidy of ` 1,14,51,012 as capital and to reduce the total income of the appellant accordingly?
Brief facts relating to this issue are, the assessee had set–up an unit viz. Hightech Carbon at Nurdava Industrial Area, Renukoot, District Sonbhadra, U.P. The Government of U.P. vide notification
4 Grasim Industries Limited dated 27th July 1991, promised sales tax incentives / exemption to new units and as well as to units which have undertaken expansion, diversification or modernization by making fresh investment in fixed capital in certain areas of U.P. as notified in the notification. Since, the assessee made additional investment in fixed capital for expansion, diversification or modernization of the existing unit, the State Government in terms of the promise made in the notification referred to above, allowed sales tax exemption to the assessee to the extent provided in the said notification. In the return of income filed for the impugned assessment year, the assessee had treated the sales tax incentive as revenue receipt and offered it to tax. The assessment in case of the assessee was completed vide order dated 27th March 1998, after making various additions / disallowance. The assessee challenged the assessment order so passed before the learned Commissioner (Appeals) and thereafter before the Tribunal. Before the Tribunal, the assessee for the first time through an additional ground raised the issue of sales tax exemption / incentive received to be a capital receipt, hence, not taxable. The Tribunal while disposing off the appeal vide order dated 28th February 2011, a copy of which is at Page–105 of the paper book, restored the issue to the Assessing Officer for fresh adjudication after going into the incentive scheme framed by the U.P. Government. In order dated 8th November 2011, while giving effect to the directions of the Tribunal, the Assessing Officer on examining
5 Grasim Industries Limited assessee’s claim of exemption of the sales tax incentive received compared the incentive scheme of U.P. Government with that of the Maharashtra Government and observed that in the scheme of Maharashtra Government the purpose was to provide incentives to industries making large scale investment in fixed capital in the backward areas of the State, whereas, in U.P. Government scheme the main focus is on promotion of certain industries in the State by making the business of production and sale of goods in the state more profitable. The Assessing Officer observed, while the Maharashtra Government scheme is having direct nexus with the investment in fixed capital assets in the specified district of the State, in the U.P. Government scheme incentive was allowed only on the additional production on the quantity or on goods which are of a nature different from those manufactured earlier by such unit. The Assessing Officer observed, while in the case of Maharashtra Government scheme the investor did not have to set–up the industry first and wait for the production for claiming incentive, however, under the U.P. Government scheme, the incentive is allowed only on the additional production of the quantity or goods manufactured in excess of the production. On comparison of the U.P. Government scheme and Maharashtra Government scheme the Assessing Officer found that incentive declared under the U.P. Government scheme are production incentives and is an assistance to the assessee to enable it to run the 6 Grasim Industries Limited business more profitable. Thus, he concluded that the sales tax incentive granted under the U.P. Government scheme being operational subsidy has to be treated as revenue receipt. Accordingly, he distinguished the Special Bench decision of the Tribunal rendered in DCIT v/s Reliance Industries Ltd., (88 ITD 273), which was relied upon by the assessee. Being aggrieved of the aforesaid decision of the Assessing Officer assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee, however, upheld the view of the Assessing Officer.
Shri J.D. Mistry, learned Sr. Counsel, appearing for the assessee submitted that the Departmental Authorities have completely misconceived the facts and misinterpreted the U.P. Government sales tax incentive scheme while coming to the conclusion that the subsidy / incentive granted under the said scheme is for enabling the assessee to make its business more profitable. The learned Sr. Counsel taking us through the sales tax incentive scheme of the U.P. Government under which the assessee received sales tax incentive / subsidy submitted that the incentive scheme is not applicable generally to the industries set–up in the state but is applicable to industries set–up in certain backward areas of the State. He submitted, the conditions
7 Grasim Industries Limited imposed under the U.P. incentive scheme required the industries to either set–up a new unit or infuse fresh capital investment exceeding a particular amount. He submitted, as per the conditions of the said sales tax incentive scheme the assessee has made fixed capital investment exceeding ` 50 crore which is the threshold limit for making an industry eligible. He submitted, under the U.P. Government scheme, the quantum of incentive is also linked to fixed capital investment and not to the profitability. Learned Sr. Counsel submitted, though, the first appellate authority accepts that the incentive was to encourage setting up of industry in certain areas of the state but he has wrongly concluded that the incentive was giving for enabling the assessee to earn more profit. Learned Sr. Counsel submitted, whether the sales tax exemption / subsidy granted is capital or revenue has to be examined by applying the purposive test i.e., the purpose for which the incentive was given. If the purpose of granting the incentive is for industrialization or development of a backward area of the State Government, the subsidy granted is to be treated as capital subsidy. The learned Sr. Counsel heavily relying upon the decision of the Hon'ble Supreme Court in CIT v/s Ponni Sugars and Chemicals Ltd., [2008] 306 ITR 392 submitted, to find out the nature of subsidy whether revenue or capital the purposive test has to be applied. 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.
8 Grasim Industries Limited He submitted, a per the U.P. Government subsidy scheme, the subsidy was to enable the assessee to expand the existing unit. He submitted, as per the terms and condition of the subsidy scheme, assessee had made additional fixed capital investment of ` 51 crore, therefore, the reading of the scheme would suggest that the subsidy was not only for encouraging industrialization in the backward areas of the State but also enabling the industries to expand, modernize and diversify the existing unit with the receipt of subsidy. Further, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Chaphalkar Brothers, [2018] 400 ITR 279, wherein the Hon'ble Supreme Court has held that if the object of granting subsidy was for attracting setting–up of industry then it is to be treated as capital in nature. In support of his contention, the learned Sr. Counsel also relied upon a number of other decisions as well.
The learned Departmental Representative submitted, the assessee while claiming the sales tax subsidy received as capital in nature has relied upon the decision of the Tribunal, Mumbai Special Bench, in Reliance Industries Ltd. (supra). It is submitted, the Special Bench decision in case of CIT v/s Reliance Industries Ltd., wherein, the sales tax subsidy was held as capital in nature was contested by the Department before the Hon’ble High Court and the Hon’ble High Court held that as the object of the subsidy was to set–up a new unit in a 9 Grasim Industries Limited backward area it is capital in nature. It is submitted, the decision of the Hon'ble Jurisdictional High Court was challenged before the Hon'ble Supreme Court by the Department and the Hon'ble Supreme Court has set aside the decision of the Hon'ble Jurisdictional High Court with a direction to re–adjudicate the issue regarding the nature of subsidy. The learned Departmental Representative submitted, as per the decision of the Hon'ble Supreme Court in U.P. Rashtriya Chini Mill Sahakari Parishad, AIR 1995 SC 2148, if any judgment is set aside or its correctness is doubted by the High Court, the judgment no longer remains a law of the land and is treated as nonest. It was submitted, as per the doctrine of merger, the judgment of an inferior Court if subjected to an examination by the superior Court, it ceases to have existence in the eyes of law and is being treated as being superceded by the judgment of the superior Court. Learned Departmental Representative submitted, since, the decision of the Tribunal, Special Bench in case of Reliance Industries Ltd. (supra) and that of the Hon'ble Jurisdictional High Court are no more binding in view of the order passed by the Hon'ble Supreme Court setting aside the decision of the Hon'ble Jurisdictional High Court, assessee’s reliance on the decision of the Tribunal, Special Bench, in Reliance Industries Ltd. (supra) is no more relevant. Extensively referring to the observations of the learned Commissioner (Appeals) while deciding assessee’s appeal for assessment year 1998–99, which is also under 10 Grasim Industries Limited consideration before us, the Departmental Authorities submitted that the learned Commissioner (Appeals) after examining the incentive scheme of the U.P. Government has given a finding that the purpose of sales tax incentive was for enhancing production which will result in more product purchase from the towns / districts of U.P. which in turn would generate more revenue and employment for the people located in those towns and district. Learned Departmental Representative submitted, the facts on record indicate that sales tax exemption benefit were directly linked to the purchase and sale of goods located in certain areas mentioned in the notification. Therefore, irrespective of the fact that the sales tax incentive was linked to investment in fixed asset, it is of revenue nature. Thus, it was submitted by the learned Departmental Representative, assessee’s claim that the sales tax incentive is capital in nature cannot be allowed.
We have heard rival submissions and perused material on record. We have also applied our mind carefully to the decisions placed before us. It is evident, assessee’s claim that the sales tax subsidy received by it is a capital receipt has been rejected by the Departmental Authorities on the ground that sales tax subsidy granted by the U.P. government being intended for assessee’s business and its profitability is an operational subsidy, hence, is a revenue receipt. The elaborate reasoning on which the learned Commissioner (Appeals) has held the 11 Grasim Industries Limited sales tax subsidy received by assessee to be of revenue nature is contained in his order passed in assessment year 1998–99 which is also under appeal before us. As could be seen from the reading of the said order of the learned Commissioner (Appeals), after examining the sales tax subsidy scheme of the U.P. government, the learned Commissioner (Appeals) was of the view that the primary purpose of the scheme was to give incentive to industrial units to increase production of goods in the existing unit in notified Districts. He further observed that the quantification of incentive is linked to production of goods, turnover of sale of goods and the maximum exemption was limited to certain percentage of fixed capital investment. He observed, as per the U.P. Government scheme the benefit of sales tax exemption was availed by the assessee at source of purchase and sale under the notification issued by the U.P. Government Central Sales Tax Act. The learned Commissioner (Appeals) comparing the incentive scheme of U.P. Government with that of Maharashtra Government observed that while the benefit under the Maharashtra Government scheme was linked to the purchases effected from Industrial unit located in certain area of Maharashtra, the sales tax incentive provided under U.P. Government scheme is basically for the purpose of enhancing the production which would result in more product purchase from towns / district of U.P. which in turn would generate revenue and employment for people located in those towns and district. The learned
12 Grasim Industries Limited Commissioner (Appeals) observed, the assessee availed the sales tax benefit at source by paying less sales tax at the time of purchase and sale of goods thereby indicating that the sales tax incentive was not granted for fixed capital asset and not related to acquiring capital asset. Thus, it was held that the incentive / subsidy received cannot be treated as capital receipt. Therefore, the learned Commissioner (Appeals) distinguished the Special Bench decision of the Tribunal, Mumbai, to the facts of the assessee’s case. The argument of learned Departmental Representative in sum and substance is, the assessee relied upon the Special Bench decision of the Tribunal, Mumbai, in Reliance Petroproducts Pvt. Ltd. (supra) which though was upheld by the Hon'ble Jurisdictional High Court Hon'ble Jurisdictional High Court but the Hon'ble Supreme Court reversed the decision of the Hon'ble Jurisdictional High Court. Therefore, the decision of the Special Bench in Reliance Industries Pvt. Ltd. (supra) is not binding. In our view, assessee’s case can be decided independently without depending upon the decision in case of Reliance Industries Ltd. (supra) being adjudicated before the High Court. This is in view of the fact that the nature of subsidy received by the assessee is to be determined keeping in view the relevant subsidy scheme of the U.P. Government and the purpose for which such subsidy was granted. Perusal of the scheme of U.P. Government issued vide notification dated 27th July 1991, a copy of which is at Page–217 of the paper book, it is seen that 13 Grasim Industries Limited for promoting development of certain areas of the State as specified in the said notification the Government thought it appropriate to grant exemption from payment of sales tax to new units as well as existing units which have undertaken expansion, diversification or modernization by making investment in fixed capital exceeding ` 50 crore. The said notification further provided that the sales tax exemption / incentive will be allowed to a small scale unit at 150% of the fixed capital investment and in case of other unit @ 125% of the fixed capital investment. However, in case of certain areas including the area where the assessee’s unit is located, the sales tax incentive allowable for the total period of exemption will not exceed 125% of the fixed capital investment in the case of small scale industries and 100% of the fixed capital investment in case of other units. Thus, on a careful reading of the subsidy scheme the following facts emerge:– i) The subsidy scheme is not applicable to the entire State but is applicable to certain areas as notified in the said notification; ii) The incentive is allowable to a new unit or an existing unit which has made additional fixed capital investment exceeding ` 50 crore; and iii) The exemption allowable is related to the fixed capital investment.
14 Grasim Industries Limited 9. Undisputedly, the high-tech carbon unit of the assessee is situated in the District of Sonbhadra which is a notified area under the subsidy scheme. Further, as per the eligibility certificate issued by the director of Industries, the assessee in compliance of the conditions of the subsidy scheme has made investment of ` 51,18,69,511, in additional fixed capital for undertaking, expansion, modernization, diversification of the unit. Thus, from the aforesaid facts, it is clear that the assessee has complied to all the conditions of the subsidy scheme. Now, the issue before us is, the nature and character of the subsidy received by the assessee whether is revenue or capital. The learned Commissioner (Appeals) has held that the subsidy received as capital basically on the reasoning that the subsidy is intended for the purpose of enhancing the production which would result in more product purchase from the towns and districts of U.P. However, a perusal of the subsidy scheme does not bring out any such purport as the learned Commissioner (Appeals) tried to project. The Hon'ble Supreme Court in Ponni Sugars (supra) after analyzing various other decisions held that while determining the nature and character of subsidy the purposive test has to be applied. The Hon’ble Court held, if the object of the subsidy was to enable the assessee to make the business more profitable, then the receipt is on revenue account. Whereas, 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
15 Grasim Industries Limited unit, then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy / assistance is given determines the nature of incentive / subsidy. The form or the mechanism through which a subsidy is given is irrelevant. The Hon'ble Supreme Court again in case of Chaphalkar Brothers (supra) held that entertainment tax subsidy granted to industries setting up multiplex theater complex is capital in nature, since, the object of granting such subsidy was in order to attract persons to come forward and construct multiplex theaters which are highly capital intensive industries. It is relevant to note, while coming to such conclusion, the Hon’ble Court relied upon its own decision in case of Ponni Sugars (supra). Keeping in perspective the principle laid down by the Hon'ble Supreme Court in case referred to above, if we examine the U.P. Government subsidy scheme under which the assessee has received the sales tax incentive it is to be noted that the purpose of the subsidy scheme is to attract people to invest and take part in industrialization of certain areas in the State. The subsidy scheme nowhere states that it is for the benefit of generating product purchase from the town / district of U.P. As held by the Hon'ble Supreme Court in case of Ponni Sugars (supra), if the object scheme was to enable the assessee to set–up a new unit or to expand the unit then the receipt of subsidy was on capital account. The same is the case with the assessee as the U.P. Government subsidy scheme was for enabling the assessee to expand / modernize
16 Grasim Industries Limited its existing unit. Therefore, the ratio laid down by the Hon'ble Supreme Court in Ponni Sugars (supra) will squarely apply to assessee’s case. In view of the aforesaid, we hold that the sales tax subsidy received by the assessee being a capital receipt is not taxable. This ground is allowed.
In the result, assessee’s appeal is allowed.
ITA no.2197/Mum./2014
Ground no.1 relates to assessee’s claim of sales tax subsidy as capital receipt.
This ground is identical to ground raised in ITA no.3938/Mum./ 2013. In view of our decision in Para–8 and 9 of this order, we allow assessee’s claim. This ground is allowed.
In ground no.2, the assessee has challenged the disallowance of depreciation on payment made to MSEB for allowing 132KV electric transmission line.
Brief facts are, during the previous year relevant to assessment year under dispute, the assessee paid an amount of ` 11,88,730 to MSEB for laying 132 KV electrical transmission lines. In the return of income filed for the relevant assessment year, the assessee claimed it as revenue expenditure. However, the Assessing Officer disallowed the 17 Grasim Industries Limited claim of the assessee. While entertaining assessee’s appeal on the said issue, the learned Commissioner (Appeals) allowed assessee’s claim challenging the decision of the learned Commissioner (Appeals) Revenue filed appeal before the Tribunal. The Tribunal, while disposing off the appeal of the Revenue vide order dated 22nd June 2012, upheld the view of the Assessing Officer that the expenditure is capital in nature. In pursuance to the decision of the Tribunal, the Assessing Officer passed an order on 19th November 2012 giving effect to Tribunal’s order. While challenging the aforesaid order of the Assessing Officer before the learned Commissioner (Appeals) on the issue of payment made of ` 11,88,730 to MSEB, the assessee contended that the Tribunal has restored the issue relating to allowability of depreciation to the Assessing Officer. The learned Commissioner (Appeals) after perusing the order of the Tribunal found that the Tribunal has never directed the Assessing Officer to consider allowability of depreciation on the payment made to MSEB. Accordingly, he rejected assessee’s claim.
The learned Sr. Counsel submitted, in case the payment made to MSEB is held as capital expenditure depreciation should be allowed.
Learned Departmental Representative supported the order of the learned Commissioner (Appeals).
18 Grasim Industries Limited 17. We have heard the rival submissions and perused material on record. As could be seen, initially assessee had claimed expenditure incurred towards payment made to MSEB as revenue expenditure which was disallowed by the Assessing Officer holding it as capital expenditure. However, the learned Commissioner (Appeals) allowed the claim of the assessee. While deciding Revenue’s appeal against the order of the learned Commissioner (Appeals), the Tribunal restored the order of the Assessing Officer on the issue. The learned Commissioner (Appeals) has rejected assessee’s claim of depreciation simply on the reasoning that Tribunal has not issued any such direction. In our view, there is no necessity of Tribunal in directing the Assessing Officer to allow depreciation. Once a particular expenditure is held as capital, consequential benefits attached to such expenditure should automatically follow. That being the case, we direct the Assessing Officer to consider assessee’s claim of depreciation on the payments made to MSEB.
In the result, assessee’s appeal is partly allowed. ./2014 Assessee’s Appeal
Ground no.1 is identical to ground no.1 of ITA no.3938/Mum./ 2013. Following our decision in Para–8 and 9 of this order, we allow the ground raised.
19 Grasim Industries Limited
Ground no.2 is identical to ground no.2 of ITA no.2197/Mum./ 2014. In view of our decision in Para–17 of this order, we direct the Assessing Officer to consider assessee’s claim of depreciation.
In ground no.3, the assessee has raised the issue of grant of interest under section 244A of the Act.
The learned Sr. Counsel submitted, on the original assessment, the Assessing Officer had granted interest of ` 18,13,439 under section 244A of the Act, while computing book profit he submitted, while giving effect to the order of the Tribunal, the Assessing Officer withdrew the interest granted under section 244A, though the income under the MAT provisions remained unchanged. He submitted, after giving effect to the order of the Tribunal the income under the normal provisions, though, changed to ` 58,80,70,430, however, the income computed under MAT remained unchanged at ` 65,42,73,649, which is higher than the income computed under normal provisions. The learned Sr. Counsel submitted, a direction may be issued to the Assessing Officer to examine assessee’s claim as he has not provided any reason for withdrawal of interest under section 244A of the Act.
Learned Departmental Representative supported the order of the learned Commissioner (Appeals).
20 Grasim Industries Limited 24. Having considered the rival submissions, we find that the learned Commissioner (Appeals), in fact, has directed the Assessing Officer to calculate interest allowable to the assessee under the provisions of the Act. Be that as it may, considering the submissions made before us, we direct the Assessing Officer to verify assessee’s claim and decide the issue in accordance with the relevant statutory provisions. Ground is allowed for statistical purposes.
In the result, assessee’s appeal is partly allowed.
ITA no.7062/Mum./2014
Ground no.1 is identical to ground no.1 of ITA no.3938/Mum./ 2013. In terms of our decision in Para–8 and 9 of this order, we decide the issue in favour of the assessee. Ground raised is allowed.
In ground no.2, the assessee has challenged the disallowance of depreciation on payment made to MSEB for laying 132KV transmission line.
This ground is identical to ground no.2 of ITA no.2197/Mum./ 2014, following our decision In Para–17 of this order, we direct the Assessing Officer to consider assessee’s claim of depreciation.
21 Grasim Industries Limited 29. In ground no.3, the assessee has challenged the disallowance of expenditure incurred of ` 1,08,06,154, for allowing transmission line and construction of access road in factory premises at Vizag.
Brief facts are, in the appeal for the impugned assessment year arising out of original assessment order, the assessee raised an additional ground on the issue of allowability of expenditure incurred on laying of transmission line and construction of access road at Vizag factory and an alternative claim was also made by the assessee that in the event the expenditure is held as capital in nature, depreciation should be allowed. The Tribunal having found that while deciding similar issue in assessment year 1995–96, the Tribunal has held the expenditure incurred as capital in nature, restore the issue of allowability of depreciation to the Assessing Officer. Following the same Tribunal restored the issue to the Assessing Officer. While giving effect to the direction of the Tribunal, the Assessing Officer allowed depreciation of ` 59,24,250. Being aggrieved of the computation of depreciation made by the Assessing Officer, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after examining the facts on record found that the assessee while giving effect to the direction of the Tribunal has not examined the admissibility of deprecation in respect of capital expenditure of ` 1,19,94,984 as directed by the 22 Grasim Industries Limited Tribunal. Therefore, the learned Commissioner (Appeals) directed the Assessing Officer to examine the issue in terms of Tribunal’s direction and decide the matter afresh.
Having considered the rival submissions, we do not find any reason to interfere with the decision of the learned Commissioner (Appeals) on the issue, since, the nature of expenditure incurred by the assessee has attained finality in view of the decision of the Tribunal holding expenditure as capital in nature. So far as allowability of assessee’s claim of depreciation, the Assessing Officer is directed to comply to the directions of the Tribunal as contained in order dated 12th August 2011 in and 6669/Mum./2003. This ground is allowed for statistical purposes.
In the result, assessee’s appeal is partly allowed.
To sum up, ITA no.3938/Mum./2013 is allowed; Mum./2014 is partly allowed; ITA no.2198/Mum./2014 is partly allowed; and ITA no.7062/Mum./2014 is partly allowed. Order pronounced in the open Court on 18.04.2018