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Facts
The revenue appealed an order that allowed the assessee's claim of fertilizer subsidy as a capital receipt. The assessee initially treated the subsidy as a revenue receipt in its return but later sought rectification, arguing it was a capital receipt. The Assessing Officer disallowed a deduction under section 80JJA, and the CIT(A) held the subsidy as a capital receipt, not chargeable to tax.
Held
The Tribunal upheld the decision of the CIT(A), agreeing that the fertilizer subsidy received under the NBS policy was a capital receipt. The purpose of the scheme, aimed at promoting the growth of the fertilizer industry, justified its classification as capital in nature. This capital receipt was therefore not chargeable to tax under the normal provisions of the Income-tax Act and was also excluded from computation of book profit under section 115JB.
Key Issues
Whether the fertilizer subsidy received by the assessee is a revenue or capital receipt and its taxability. Whether the subsidy should be excluded from book profit computation under Section 115JB.
Sections Cited
Sec 80JJA, Sec 143(3), Sec 148, Sec 133A, Sec 154, Sec 54, Sec 4, Sec 2(24), Sec 115JB
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Income Tax Appellate Tribunal, MUMBAI BENCH ‘C’, MUMBAI
Before: SHRI AMARJIT SINGH, HON’BLE & SHRI RAHUL CHAUDHARY, HON’BLE
O R D E R PER AMARJIT SINGH, AM:
The present appeal filed by the revenue is directed against the order dated 05.12.2023 for Assessment Year 2013-14. The revenue has raised the following grounds of appeal:
"1. Whether on the facts and circumstances of the case and in law, the Ld CITA) is justified by allowing the additional claim of the assessee which was not claimed in the return of income or revised return of income by not appreciating the decision of Hon’ble Supreme Court in the case of M/s. Goetze (India) Ltd. vs CIT.
Whether on the facts and in circumstances of the case and in law, the Ld CITA) is justified by treating the fertilizers subsidy as capital receipt which was claimed by the assessee in return of income as revenue receipt.”
2. Fact in brief is that assessee was engaged in the business of manufacturing fertilizers, dyes and chemicals. The assessee filed Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 return of income declaring total income of Rs. 8,69,61,460/- under normal provisions and book profit of Rs. 7,26,24,640/- u/s 115B of the Act. The case was subject to scrutiny assessment and assessment order u/s 143(3) of the Act was passed on 23.03.2016 without making any additions. Subsequently, the case was reopened by issuing of notice u/s 148 of the Act on 26.03.2018 on the basis of survey action carried out u/s 133A of the Act at the office premises of the assessee. During the course of reassessment, the assessing officer observed that assessee was not engaged in manufacturing of bio-fertilizers and despite the same assessee has claimed deduction of Rs. 1,96,87,351/- u/s 80JJA of the Act. Therefore, the AO disallowed the entire deduction claimed u/s 80JJA of the Act as referred above. The assessee filed rectification application vide letter dated 27.02.2019 after relying on the decision of Hon’ble Supreme Court regarding allowability of subsidy as capital receipt. The assessing officer has rejected the application filed by the assessee u/s 154 of the Act.
The assessee filed appeal before the ld. CIT(A). The ld. CIT(A) held that the fertilizer subsidy received by the assessee in terms of the NBS policy during the year under consideration is not an income and same was treated as capital receipt not chargeable to tax.
Heard both the sides and perused the material on record. During the year under consideration, the assessee has credited fertilizer subsidy to profit and loss account amounting to Rs. Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 12,46,72,639/- and while filing the return of income, the assessee has treated the same as revenue receipt. The said income has been included in the total income of the assessee and same has been charged to tax as per the assessment order passed u/s 143(3) of the Act on 23.03.2016. Subsequently, the assessee vide letter dated 27.02.2019 filed rectification application u/s 54 of the Act stating that the amount of subsidy was wrongly offered for taxation under a mistaken belief as revenue receipt however the same did not constitute taxable income of the assessee as per the ratio laid down by various Hon’ble High Courts as well as by the Hon’ble Supreme Court. Thereafter, the assessing officer has passed the rectification u/s 154 of the Act on 03.04.2019 wherein the assessing officer accepted the treatment of fertilizer subsidy as capital receipts relying on the ratios of Hon’ble Supreme Court as mistake apparent from the record for the purpose of section 154 of the Act. However, the assessing officer has dismissed the rectification application on the ground that the mistake was not rectifiable through filing of original return and also not filed any revised return of income. The relevant extract of the ld. CIT(A) is reproduced as under:
“11.14 I have carefully gone through the submissions made on behalf of the appellant and also perused the relevant schemes. From the perusal of the schemes and various facts and judicial precedents placed before me, I find that the salient features and the objective of NBS Policy under which the Appellant company is getting the fertilizer subsidy is overall growth of fertilizer industry by increasing the investment, modernization, balanced fertilization and growth of indigenous fertilizer industry, competitiveness amongst the fertilizer companies. The object of Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 the subsidy under these schemes was not to enable the assessee to run the business more profitably. The object was primarily to provide encouragement and support, which would create benefits of enduring nature, for the Industry as a whole in certain sectors of economy and ultimately benefit the fertilizer users i.e the farmers. Thus, it is seen that, the ‘purpose’ of the introduction of the scheme was to encourage and industrial growth of the fertilizer industry as a whole and thus it fulfils the purpose test as laid down by the Apex Court.
11.15 In view of the objectives of the scheme as above, I find that the appellant’s case is covered by the above judicial precedents and also by the principle laid down by the Apex Court in the case of Ponni Sugars & Chemicals Ltd, Shree Balaji Alloys and Chaphalkar Brothers (supra). In all the decisions it has been held that ‘purpose’ of the incentive will decide the nature of the incentive. The said criteria have been fulfilled in the case of the appellant. The AO has himself stated in his order that the ‘purpose test’ has been fulfilled and the subsidy received is in the nature of a capital receipt. Thus, respectfully following the principle laid down by the Apex Court, decision of Hon’ble High Courts and Mumbai ITAT, the said subsidy is to be treated as capital receipt and should be excluded in computing the total income as per normal provisions of the Income-tax.
11.16 Since the object of the NBS Policy under which fertilizer subsidy received fulfils the purpose test ratio as laid down by the aforesaid latest decisions of the Apex Court, on similar facts, in the appellant’s own case in subsequent AY 2015-16, my predecessor vide order dated 28.08.2019 [Appeal No. CIT(A)-18/IT-10256/DCIT 11(2)(1)/17-18] has also held that fertilizer subsidy is to be treated as capital receipt not chargeable to tax as the same fulfils the purpose test laid down by the Apex Court.
8.3.10 I have carefully gone through the submissions made on behalf of the appellant and also perused the relevant schemes filed alongwith the submissions. From the perusal of the schemes and various facts and judicial precedents placed before me, I found that the salient features and the objective of NBS Policy under which the Appellant company is getting the fertilizer subsidy is overall growth of fertilizer industry by increasing the investment, modernization, balanced fertilization and growth of indigenous fertilizer industry, competitiveness amongst the fertilizer companies, Thus, it is seen that, the ‘purpose’ of the Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 introduction of the scheme was to encourage and industrial growth of the fertilizer industry as a whole and thus it fulfils the purpose test as laid down by the Apex Court.
8.3.11 In view of the objectives of the scheme as above, I find that the appellant’s case is covered by the above judicial precedents and also by the principle laid down by the Apex Court in the case of Ponni Sugars & Chemicals, Shree Balaji Alloys and Chaphalkar Brothers (supra). In all the decision it has been held that ‘purpose’ of the incentive will decide the nature of the incentive. The said criteria have been fulfilled in the case of the appellant. Thus, respectfully following the principle laid down by the Apex Court, decision of High court and Mumbai ITAT, thus the said subsidy is to be treated as capital receipt and should be excluded in computing the total income as per normal provisions of the Income-tax.
…..once the subsidy are treated as capital receipt and not chargeable to tax has also to be excluded from computing the book profit u/s 115JB of the Income-tax. I respectfully follow the said decisions and held that, subsidy in nature of capital receipt should also be excluded from computing the Book Profit u/s 115JB of the Income-tax. This additional ground of appeal is thus allowed 11.17 Further, recently Hon’ble Mumbai Tribunal (ITA No. 7008/Mum/2019, dated 09.08.2021) in the appellant’s own case has also dismissed the departmental ground of appeal and upheld my predecessor’s order by stating that, the fertilizer subsidy received under NBS policy was to be treated as capital receipt and not chargeable to tax as the objectives laid down in the policy fulfil the purpose test principle laid by the Apex Court. The relevant part of the order is reproduced as under:
15. …. . However, we notice that the purpose of introduction of NBS scheme and modification of various Govt. schemes over the period is due to the fact that (refer impact of concession scheme) the growth of fertilizer industry was stagnated with virtually no investments over the years in urea sector, this industry had no incentive to invest on modernization and for increasing efficiency. The industry had no incentive to focus on farmers leading to poor farm extension services. The policy was introduced to reduce the burden on subsidy outgo in the hands of the Government which increased exponentially over the years. This policy is introduced considering all the issues relating to agriculture Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 productivity, balanced fertilization and growth of indigenous fertilizer industry, competitiveness among the fertilizer companies and to overcome the deficiency of concession scheme. Therefore, it is clear that this scheme is introduced with the object of passing the benefit to the farmers at the same time, there is no fresh investment and innovations were not coming to the industry due to low profitability in this industry. In order to attract the new investments, to increase the productivity and to reduce the manufacturing cost by bringing new innovation in the industry in order to achieve ultimate reduction in the price of the fertilizers. Therefore, the scheme was mainly to attract the investment in the industry and the purpose test is that the attraction of new players in the industry and also attracts the existing players to bring new investment. How the benefit of scheme is passed on to the industry matters. Sometime, Govt. introduces direct concession in the investments or introduces mechanism in relation to the ultimate achievement of the objects of the scheme. In this scheme, the ultimate object is to make available the required fertilizers and at appropriate price to the farmers, this can be achieved only by bringing new investments in the industry. It is only the mechanism to pass on the capital subsidy to the companies, who bring in new investments and innovation. The subsidy calculated and MRP are under constant monitoring of the Ministry. Therefore, we are inclined to accept the adoption of purpose test by the learned CIT(A) in this case and the subsidy can be classified as capital in nature. In our considered opinion, a receipt that is held to be a capital in nature and not chargeable to tax under the normal provisions of the Act.
11.18 Similarly, in the case of Hon’ble Rajasthan High Court in the case of PCIT Vs Nitin Spinners Ltd. (2020) (116 taxmann.com 26) wherein Hon’ble Court has held that the subsidy received under the Focus Market Scheme and other export incentives under FTP policy was capital receipt in nature. Subsequently, Hon’ble Supreme Court in PCIT v. Nitin Spinners Ltd [2021] 130 taxmann.com 402 (SC) has also dismissed the SLP filed by department and thus the matter is now settled. The relevant part of High Court order is reproduced as under, - “8. As far as the question with regard to Focus Marketing Scheme was concerned, apparently the Central Government gave the subsidy to enhance indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. The ITAT took note of judgment in Ponni Sugars & Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 Chemicals Ltd. (supra) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. This Court is of the opinion that there is no infirmity with the reason.”
11.19 Respectfully following the said decisions, it is held that fertilizer subsidy received by the appellant fulfils the purpose test ratio laid down by Apex Court and thus the same should be treated as capital receipt should also be excluded from computing the income.
11.20 The appellant has also contended that said subsidy being capital receipt is not chargeable to tax under Income-tax Act should also not to be included in computing the Book Profit u/s 115JB of the Income-tax. In this regard, the appellant submitted that, as per the Article 265 of the Constitution of India state that, taxes shall be levied or collect except without the authority of law. In this regard, the appellant has relied on the decision of Apex Court in case of Padmaraje R. Kadambande vs. CIT (1992) 195 ITR 877 (SC), Hon’ble Rajasthan High Court in the case of Shri Cement Ltd. (Appeal No. 85/2014 and 204/2010 dated 22.08.2017, Hon’ble Bombay High Court in the case of CIT v. Harinagar Sugar Mills Ltd (ITA No. 1132 of 2014, dated 04.01.2017), Hon’ble Calcutta High Court in case of PCIT v. Ankit Metal & Power Ltd [2019] 109 taxmann.com 93 (Cal) and Hon’ble Mumbai Tribunal in the case of Alok Industries Ltd v. DCIT (ITA No 1017/Mum/2017, dated 21.05.2018).
11.21 I have considered the submission and the contention of the appellant carefully, since the subsidy received is capital in nature and not chargeable to tax in computing the total income as per the normal provisions of the Act, the said subsidy cannot be termed as Income to be fall under the section 4 of the Income-tax Act being the charging section. As stated by the Apex Court Padmaraje R. Kadambande (supra) wherein it has been held that Capital Receipts are not income within the definition of section 2(24) of the Act and hence are not at all chargeable under the entire Income-tax Act.
11.22 Thus, it is well settled position in law that capital receipt is not to be included in computing Book Profit under section 115JB. Hon’ble Bombay High Court in the case of CIT Vs Harinagar Sugar Mills Ltd (supra) has held that once subsidy received by the assessee from Government is treated as capital receipt, not chargeable to tax in computing total income as per normal provisions, the same shall also be excluded in computing Book Profit under section 115JB. The Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 jurisdictional bench of ITAT in the case of Alok Industries Ltd Vs DCIT (ITA No. 1017/Mum/2017 dated 21.05.2018) has held that interest subsidy received under the Technology Upgradation Fund Scheme was capital receipt, not chargeable to tax in computing total income, and accordingly the same shall also be excluded in computing Book Profit under section 115JB. 11.23 In view of the facts and circumstances of the case and respectfully following the judicial precedents being decisions of various Courts & Tribunals and my predecessor’s order in appellant’s own case, as discussed above, I find that the fertilizer subsidy received by the appellant in terms of NBS Policy during the year under consideration is not an income and should be treated as capital receipt, and hence should not be included in computing total income chargeable to tax. Further, these receipts also shall be excluded in computing Book Profit under section 115JB. Accordingly, the grounds of appeal are allowed.”
During the course of appellate proceedings before us, the ld. Counsel also submitted that identical issue on similar fact in the case of the assessee for A.Y. 2015-16 has been adjudicated by the ITAT, Mumbai vide dated 09.08.2021 in favour of the assessee. The relevant extract of the decision is as under:
15. Considered the rival submissions and perused the material on record in the light of the decisions relied upon by the parties. We notice that the learned Departmental Representative tried to submit before us that the subsidy given to the manufacturers under NBS Scheme was to give concession to the farmers and reduce the MRP in order to bring down the manufacturing cost. Whole scheme was M/s. Shree Pushkar Chemicals and Fertilizers Ltd. designed to increase the fertilizer production and utilization among the farmers by making available at the affordable price to the farmers. Since it is linked to reduction of price in manufacturing, this subsidy can only be classified under revenue not capital. However, we notice that the purpose of introduction of NBS scheme and modification of various Govt. schemes over the period is due to the fact that (refer Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 impact of concession scheme) the growth of fertilizer industry was stagnated with virtually no investments over the years in urea sector, this industry had no incentive to invest on modernization and for increasing efficiency. The industry had no incentive to focus on farmers leading to poor farm extension services. The policy was introduced to reduce the burden on subsidy outgo in the hands of the Government which increased exponentially over the years. This policy is introduced considering all the issues relating to agriculture productivity, balanced fertilization and growth of indigenous fertilizer industry, competitiveness among the fertilizer companies and to overcome the deficiency of concession scheme. Therefore, it is clear that this scheme is introduced with the object of passing the benefit to the farmers at the same time, there is no fresh investment and innovations were not coming to the industry due to low profitability in this industry. In order to attract the new investments, to increase the productivity and to reduce the manufacturing cost by bringing new M/s. Shree Pushkar Chemicals and Fertilizers Ltd. innovation in the industry in order to achieve ultimate reduction in the price of the fertilizers. Therefore, the scheme was mainly to attract the investment in the industry and the purpose test is that the attraction of new players in the industry and also attracts the existing players to bring new investment. How the benefit of scheme is passed on to the industry matters. Sometime, Govt. introduces direct concession in the investments or introduces mechanism in relation to the ultimate achievement of the objects of the scheme. In this scheme, the ultimate object is to make available the required fertilizers and at appropriate price to the farmers, this can be achieved only by bringing new investments in the industry. It is only the mechanism to pass on the capital subsidy to the companies, who bring in new investments and innovation. The subsidy calculated and MRP are under constant monitoring of the Ministry. Therefore, we are inclined to accept the adoption of purpose test by the learned CIT(A) in this case and the subsidy can be classified as capital in nature. In our considered opinion, a receipt that is held to be a capital in nature and not chargeable to tax under the normal provisions of the Act. Hence the same lies outside the purview of Act. When a receipt is not in the nature of income, it cannot form part of taxable profit. Consequently, in view Shree Pushkar Chemicals and Fertilisers Ltd. A.Y. 2013-14 of the aforesaid discussion as enumerated by the learned CIT(A) in detail, in our opinion, the order of the learned CIT(A) on the M/s. Shree Pushkar Chemicals and Fertilizers Ltd. issue in dispute is well reasoned and we do not find any legal infirmity in the order passed by him which is hereby upheld. Thus, the ground of the appeal no.2, raised by the Revenue is also dismissed.
In the light of the above facts and findings it is clear that this is a recurring issue in the case of the assessee which has already been adjudicated by the ITAT in favour of the assessee as discussed supra in this order therefore following the decision of the ITAT and other judicial findings as elaborated in the findings of ld. CIT(A) we do not find any merit in this appeal of the revenue therefore the same stand dismissed.