ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 1(4) MUMBAI, PRATISHTHA BHAVAN MUMBAI vs. GRASIM INDUSTRIES LIMITED , WORLI MUMBAI

O R D E R PER NARENDRA KUMAR BILLAIYA (AM)

(A.Y: 2002-03) Grasim Industries Limited 2. The solitary grievance of the revenue relates to the treatment of subsidy as capital receipt and not revenue receipt and exclusion of sales tax subsidy while computing book profits under section 115JB of Income-tax Act, 1961 (in short “Act”).

Page No. 2

(A.Y: 2002-03) Grasim Industries Limited Salav, Maharashtra and also for its unit at Grasim Cement, Raipur. The assessee also claimed exemption for its unit at Haryana, Tamilnadu, Gujarat and Bathinda.

Page No. 3 (A.Y: 2002-03) Grasim Industries Limited “5.5 …… Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Welspun Steel Ltd., reported in 264 Taxman 252. The relevant question raised before the Hon’ble Jurisdictional High Court is as under:- ― “(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that subsidy cannot be considered as payment directly or indirectly to meet any portion of the actual cost ignoring the fact that if the assessee claims the same as capital receipt, the same shall be reduced from the cost of asset and depreciation claim should be on the net value/cost of the asset after reducing the amount of incentives in terms of Explanation 10 to Section 43(1) of the Act?” 5.5.1. This question has been answered by the Hon’ble Jurisdictional High Court in the following manner:- 9. The second question raised by the Revenue is consequent of the first question, in which, the Revenue argues that, if the subsidy is treated as a capital in nature, the same must bring down assessee's costs of acquisition of plant and machinery. The assessee's claim of depreciation to that extent must shrink. Assessee argues that, the Tribunal correctly held that, the subsidy had not been given in relation to acquisition of plant or machinery and that, therefore, same cannot be adjusted towards cost of acquisition.

(A.Y: 2002-03) Grasim Industries Limited schemes framed by the Central Government and the State Government. The Central Government as well as the State Government noticed that areas specified as backward areas and tribal areas were undeveloped or underdeveloped. Entrepreneurs were not willing to set up industries in such undeveloped or under-developed areas. The industries were concentrating only in urban areas. In other words, rapid urbanization was taking place. So far as the State of Gujarat is concerned, there was rapid industrial growth in cities like Baroda, Ahmedabad and Surat resulting in strain on municipal services. Urbanization created several problems such as pollution, growth of slums etc . It was also necessary to have balanced growth of industry in different regions. However, as pointed out above, entrepreneurs were reluctant to set up industries in backward areas. These areas were identified as backward because there was un- development or underdevelopment of industries in these areas. It was, therefore, that the Government decided to give financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region. One of the incentives which the Government decided to grant was cash subsidy so that entrepreneurs could utilize such cash subsidy for any purpose connected with the establishment of industries in the backward areas. Once the decision to give cash subsidy was taken, the Government had to work out some method to determine the quantum of such subsidy. In other words, the question as to how the amount of cash subsidy should be determined had to be considered by the Government. The Government, in order to determine the amount of cash subsidy, decided to follow one of the recognized methods of working it out on the basis of the amount invested by an entrepreneurs in acquiring capital assets as cash subsidy. The scheme does not say as to in what manner the subsidy was granted is to be utilized. In other words, the entrepreneur to whom the subsidy was granted was free to utilize it in any manner he liked. It would, therefore, appear that quantification of subsidy on the basis of investment was a measure adopted by the Page No. 5 (A.Y: 2002-03) Grasim Industries Limited Government for convenience to work out the subsidy. If subsidy could be utilized by the entrepreneur in any manner he liked, could it be said that it was granted for meeting the cost of the capital assets? In our opinion, taking an overall view of the various provisions of the scheme, it is difficult to hold that cash subsidy was granted to entrepreneur to meet the cost of the fixed assets or part thereof The cost of the fixed assets was merely adopted as a measure for working out subsidy. In fact, a careful examination of the scheme reveals that it is the value of the fixed assets and not its cost which is adopted as the basis for computing the amount of the subsidy. Emphasis on value and not the cost is evident from the fact that land and building already owned by an industrial unit, cost of tools, jigs, dies and moulds, transport charges, insurance premium, erection cost, value of second-hand machinery purchased by an industrial unit etc. were to be taken into account while computing the value of fixed assets for the purposes of subsidy. In other words, it was the value of the fixed assets which formed the basis for computation of subsidy to be granted under the scheme. Subsidy, in our opinion, did not meet the cost of the fixed assets directly or indirectly. Under the scheme of the Central Government or the scheme of the State Government, cash subsidy was quantified by determining the same at a specified percentage of the value/ cost of the fixed assets. Therefore, as observed above, the basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and it could not be said that the subsidy was given for the specific purpose of meeting any portion of the cost of the fixed assets. The subsidy was granted to compensate the entrepreneur for the hardship and inconvenience which he might encounter while setting up industries in backward areas."

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(A.Y: 2002-03) Grasim Industries Limited of the fixed capital cost, which was the basis for determining the subsidy, would be granted. The Court held that, such basis for determining the subsidy was only a measure adopted under the scheme to quantify the financial aid and it was not a payment, directly or indirectly to meet any portion of the actual cost of acquisition of capital asset. It was held and observed as under:— 'In so far as question No.2 is concerned, this court finds that the same is squarely covered by the decision of the Supreme Court in CIT v. P. J. Chemicals Ltd., [1994] 210 ITR 830. In the said case, after review of the law on the point, the Supreme Court has held as under (head note): "Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the 'actual cost The expression 'actual cost' in section 43(1) of the Income Tax Act,1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from 'actual cost'. The amount of subsidy is not to be deducted from the 'actual cost' under section 43(1) for the purpose of calculation of depreciation etc."' No question of law, therefore, arises in this respect 5.5.2. Respectfully following the same, we hold that the provisions of Explanation 10 to Section 43(1) of the Act would not be applicable in the facts and circumstances of the case and accordingly, the alternative ground raised by the Revenue is hereby dismissed. 5.6. In view of the aforesaid detailed observations, we hold that subsidy / incentive received in the instant case by the assessee for all the years under consideration would have to be construed only as a capital receipt not chargeable to tax and the ld. CIT(A) had rightly granted relief to the assessee in this regard by applying the purpose test. Hence, we do not find any infirmity in the order of the ld. CIT(A) for all the years under consideration. Accordingly, the original grounds as well as the additional grounds raised by the Revenue are dismissed.”

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(A.Y: 2002-03) Grasim Industries Limited 7. As no distinguishing decision has been brought to our notice, respectfully following the findings of the Coordinate Bench (supra), Ground No. 1 is dismissed.

14. The assessee company by filing cross appeal sought to set aside the impugned findings returned by the Ld. PCIT(A) in not directing the AO to exclude sales tax subsidy being a capital receipt from the profit shown in the statement of profit & loss account while computing the book profit under section 115JB of the Act. This issue has already been decided by the Hon’ble Bombay High Court in case of M/s. Harinagar Sugar Mills Ltd., of 2014 dated 3rd April, 2017 (Bombay-HC) and ITA No.1132 of 2014 order dated 4th January, 2016 available at page Nos.191 to 196 of case law paper book wherein following question of law was framed. “(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal is correct in upholding the order of Commissioner of Income Tax (Appeals) in directing the Assessing Officer to delete the addition made to book profits on account of subsidy received by way of excise duty?

Page No. 8 (A.Y: 2002-03) Grasim Industries Limited 16. So in view of the matter, we direct the AO not to add sales tax subsidy received by the assessee, which is in the nature of capital receipt while computing the book profit under section 115JB of the Act.

10. In the result, appeal filed by the revenue is dismissed.