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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SH. S.K. YADAV & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These cross appeals by the assessee and the Revenue are directed against order dated 25/02/2014 of learned Commissioner of 2980/Del/2014 AY: 2010-11 Income-tax(Appeals)-XVIII, New Delhi, for assessment year 2010-11. Both the appeals being connected with the same assessee, same are heard together and disposed of by this consolidated order for convenience. 2. The grounds of appeal
raised by the assessee in ITA number 1904/Del/2014 are as under: “1.That the Learned CIT(A), has erred both on facts and in law in holding that the amount of Rs.1,45,985/-, contributed under 'U.P. Sheera Niyantran Adhiniyam’ is required to be added for the purposes of computing 'Book Profit’ under section 115JB of the Act as the same is in the nature of reserve not specified under section 33AC of the Act.
2. (a) That the learned CIT(A), has erred in sustaining the addition made by the learned Assessing Officer in respect of the amount of capital subsidy to the book profits while computing income under the section 115JB of the Act, on the alleged contention that the appellant has transferred Rs.17,84,404/- to a reserve which has not been specified under section 33AC of the Act and therefore the same has to be added back for computing Book Profits under section 115JB of the Act. (b) That, in this connection, the learned CIT(A) has erred in interpreting the provisions of section 115JB of the Act stating that the appellant had transferred the amount of Rs.17,84,404/- to a reserve which has not been specified under section 33AC, without giving credence to the fact that the amount of Rs.17,84,404/- is not an appropriation of profits and there is no such debit to profit & loss account for the alleged appropriation.
3. That the learned CIT(A) has erred in sustaining the addition of Rs. 1 Lakh on account of forfeiture of security deposit by characterizing the receipt under section 28(iv) of the Act as it results in ‘value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession’.
4. That the appellant craves leave to add, amend and/ or alter the grounds at a later stage.”
2980/Del/2014 AY: 2010-11 3. The grounds of appeal raised by the Revenue in are as under:
1. Whether on the facts 8s circumstances of the case, Ld. CIT(A) has erred in allowing the appeal of the appellant against disallowance on account of Molasses Reserve Fund by ignoring the fact that Molasses Reserve Fund is provision in nature & it is not an actual liability and provision of contingent liability is not allowable as deduction.
2. Whether on the facts 8s circumstances of the case, Ld. CIT(A) has erred in allowing the appeal of the appellant against treating the capital subsidy received from Central Government as revenue receipt by ignoring the fact that interest was neither actually incurred nor was there any liability on the assessee to incur the same.
3. That on facts 8s circumstances of the case, Ld. CIT(A) has erred in deleting the addition made by the AO on account on repair to plant & machinery by ignoring the fact that if machinery cost would have been capitalized, the associated consultancy fee should also be capitalized. 4.That the appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.
The facts in brief of the case are that the assessee company was engaged in the business of manufacturing of crystal sugar, a part of which was sold as levy sugar at the rate(s) specified by the government and balance was sold in the open market and free sale sugar. For the year under consideration, the assessee filed return of income on 29/09/2010, declaring total income of Rs.1,80,39,918/-. The case of the assessee was selected for scrutiny and complied with. In the scrutiny assessment completed under section 143(3) of the income tax Act, 1961 (in short “the Act”) on 18.12.2012 the Assessing Officer made various additions and income under normal provisions of the Act was assessed at Rs.1,12,03,992/-, whereas income under section 115JB of the Act was assessed at Rs.16,27,65,595/-. Aggrieved, the assessee filed appeal 2980/Del/2014 AY: 2010-11 before the learned Commissioner of Income-tax (Appeals), who allowed part relief to the assessee. Aggrieved, both the assessee and the Revenue are in appeal before the Tribunal.
Before us, the learned counsel of the assessee submitted that ground No. 1 of the appeal of the assessee was covered against the assessee by the order of the Tribunal in the case of the assessee for assessment year 2009-10. 5.1 Learned CIT(DR), on the other hand, relied on the order of the lower authorities. 5.2 We have heard the rival submission of the parties and perused the relevant material on record. We find that in para-5 of the order of the Tribunal in the issue in dispute has been decided by the Tribunal as under: “5. In view of above, at the very outset, we note that the assessee company has transferred impugned amount to a reserve which has not been specified u/s 33AC of the Act, therefore, as per Explanation 1 attached to provisions of section 115JB of the Act, the book profit is required to be increased by the amount carried to any reserve account. We also note that the AO has rightly relied on the decision of Hon’ble Apex Court in the case of State Bank of Patiala reported as 219 ITR 706(SC) wherein it was clearly held that the issue of what construes “reserve” and “provision” and the ratio laid down in these decisions clearly enlighten us that to constitute a reserve, a particular amount set aside out of the profit and other surpluses, should be such as not designated to meet a liability, contingency, commitment or diminution in the value of assets known to at the date of balance sheet. Hence, the reserve can be set aside out of the profits and surpluses and the same cannot be claimed as deduction because it is not an expense laid out for the purpose of business. Coming to the facts of the present case, the contribution to the Molasses reserve fund can be viewed as a provision in nature and it is not an actual liability and the provision created for additional storage facility is obviously in the nature of provision for contingent liability, therefore, the impugned amount being contingent in nature deserves to be added back while computing income u/s 115JB of the Act. Finally, we reach to a conclusion that the action of the AO as well as order of the CIT(A) is well founded and justified and we 2980/Del/2014 AY: 2010-11 are unable to see any perversity, infirmity or any other valid reason to interfere with the same on this issue. Accordingly, ground no. 2 of the assessee being devoid of merits is dismissed.”
5.3 Since the identical issue in dispute has been decided by the Tribunal (supra), thus, respectfully following the above finding of the Tribunal, we reject the ground No. 1 of the appeal.
In respect of the ground No. 2 of the appeal of the assessee, the learned counsel of the assessee submitted that issue in dispute was covered in favour of the assessee by the order of the Tribunal in assessment year 2009-10. 6.1 The Ld. CIT(DR), on the other hand, relied on the findings of the lower authorities. 6.2 We have heard the rival submission and perused the relevant material on record. We find that issue in dispute has been decided by the Tribunal in para-8 to para-10 in as under: “8. On careful consideration of above rival submissions, at the very outset, it is pertinent to note that as per facts noted by the AO, the assessee received an amount of Rs.27,55,420 capital subsidy against the interest paid on Central Government loan and capital subsidy which was debited to the profit and loss account of the assessee company. As per final statement of account, a similar corresponding amount was shown as capital subsidy in the balance sheet in Schedule II under the head of reserves and surpluses. At this juncture, we also take cognizance of Note No. 14 Schedule 12 to balance sheet (as on 31.3.2008) which reads as under:- “5.0.1 This is as per Note No. 14 (schedule 12 to balance sheet as at 31.03.08), which reads as under: "Under the agreement dated 31.01.1986, as amended thereafter, the interest liability aggregating to Rs.27,55,420/- on loan from the Central Govt. is treated as having been discharged in view of the fact that an equivalent amount is received as cash subsidy for the specific purpose to the company's undertaking by the Govt. The Hon'ble ITAT, New Delhi, for the A.Y. 1990-91 in the company's own case, has held that the subsidy received from 2980/Del/2014 AY: 2010-11 the Central Govt. is capital in nature. Accordingly, the interest amounting to Rs.27,55,420/- has been debited to the statement of profit and loss under the head 'Financial Expenses' and the corresponding amount has been credited to capital subsidy under the head' Reserves and Surplus'."
It is also undisputed that the amount of interest paid by the assessee to the Central Government on loan for 1990-91 has been allowed as revenue expenditure by the ITAT, New Delhi, wherein it was held that the corresponding subsidy is a capital subsidy. We also note that the appeal of the revenue against the order of the Tribunal has been dismissed by Hon’ble High Court on the contention that no substantial question of law arises out of the order of the Tribunal. From bare reading of the impugned order, we observe that the ld. AR, during first appellate proceedings placed this fact before the CIT(A) which was also noted at page 2 and 3 and page 18 of the impugned order and the CIT(A) granted relief for the assessee on ground no. 4A and 4B by holding that the issue has been decided in favour of the assessee in the earlier years by the CIT(A), ITAT Delhi and Hon’ble Jurisdictional High Court of Delhi and, therefore, respectfully following the same, the first appellate authority granted relief for the assessee with a final conclusion that the interest on loan advanced by the central government is allowable and the capital subsidy received by the assessee company in this regard is not taxable.
10. Coming back to the issue involved in ground no. 3(a) and (b) of the extant appeal, at the very outset, we note that as per ratio of the decision of Hon’ble Apex Court in the case of CIT vs HCL Comnet Systems & Services Ltd. (supra) and Apollo Tyres Ltd. vs CIT (supra), the AO has to accept the authenticity of the accounts maintained in accordance with the provisions of the Companies Act which are also certified by the auditors and passed by the company in its Annual General Meeting. In this connection, we may also point out that the ld. DR has not disputed the fact that the subsidy against the interest paid by the assessee company on central government loan is granted with the object of incentive for the entrepreneur to establish sugar industry or to expand the capacity of the existing sugar industry in the state of UP and thus, the said subsidy is given for setting up of an industry or expansion of existing industry. We further find it appropriate to note that SASISRI EXTRACTIONS LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX 122 ITD 428, Coordinate Bench of this Tribunal has held that where subsidy is 2980/Del/2014 AY: 2010-11 granted as percentage of fixed capital cost taken as the basis for determining the subsidy that would only be a measure adopted under the scheme to quantify the financial aid. The contention is that it is not a payment, directly or indirectly, to meet any portion of the ‘actual cost’ but intended as an incentive to entrepreneurs, its quantification determined at a percentage of the fixed capital cost." We further note that the Hon’ble Apex Court in the case of P.J. Chemicals (supra) has held that the expression “actual cost”” in section 131(1) of the Act needs to be interpreted liberally and subsidy does not partake of the character of a payment intended either directly or indirectly to meet the ‘actual cost’." As we have noted above that it has already been accepted by the Hon’ble High Court in assessee’s own case for AY 1990-91 that the subsidy received by the assessee is in the nature of capital subsidy, hence, the same cannot be treated as revenue and thus, the income approach of accounting for capital subsidy received as government grant is not applicable in this case as per AS-12 where in para 5.2 it has been made clear that the capital approach is to be followed in respect of government grants and it is inappropriate to recognize government grants in profit and loss statements because they are not earned to represent an incentive provided by the government. Accordingly, conclusion of the CIT(A) on this issue is not found to be sustainable and we demolish the same by directing the AO that the amount of capital subsidy to the book profits while computing the income u/s 115JB of the Act is not an appropriation of profits and there is no such debit to the profit and loss account for the alleged appropriation and, therefore, the same cannot be added while computing the income u/s 115JB of the Act. Accordingly, ground no. 3(a) and (b) of the assessee are allowed.” 6.3 Since the identical issue in dispute has been decided by the Tribunal (supra), thus, respectfully following the above finding of the Tribunal, we allow the ground No. 2 of the appeal.
The ground No. 3 was not pressed by the learned counsel of the assessee and, therefore, the same is dismissed as infructuous. .
Now, we take up the appeal of the Revenue having ITA No. 2980/Del/2014.
2980/Del/2014 AY: 2010-11 9. In respect of grounds No. 1, the learned CIT(DR) reiterated the grounds and relied on the order of the Assessing Officer. 9.1 On the other hand, the learned counsel of the assessee submitted that the ground No. 1 is covered in favour of the assessee by the order of the Tribunal in the case of the assessee for assessment year 2011-12 and ground No. 2 was covered in favour of the assessee by the order of the Tribunal in the case of the assessee for assessment year 2008-09. 9.2 We have heard the rival submission of the parties and perused the relevant material on record. As regard to ground No. 1, the Tribunal in para-4 of the order in held as under: “4. Ground no. 1 is on the deletion of disallowance of Rs.1,45,985/- on account of Molasses Reserve Fund. At page 19 page 8, the first appellant authority followed the order of the coordinate bench of the Tribunal in the assessee’s own case for the astt. Year 1995-96 and allowed the claim of the assessee. We find no infirmity in the same. Thus, this ground of the revenue is dismissed.”
9.3 Since the identical issue in dispute has already been decided in favour of the assessee by the Tribunal (supra), respectfully following the above decision we reject the ground of the appeal.
In respect of ground No. 2, the Tribunal in para-7 of the order in held as under: “7. Considering all the materials aspects of the issue, the Tribunal in the Assessment Year 1990-91, had allowed the amount of interest paid by the assessee to the Central Government as revenue expenditure with further findings that the corresponding subsidy is a capital subsidy. The Revenue had preferred appeal against the said order of the Tribunal before the Hon’ble High Court of Delhi but it could not succeed as the Hon’ble High Court dismissed the appeal of the Revenue on the basis that no substantial question of law arises out of the order of the Tribunal The Tribunal has also decided the issue in favour of the assessee in the appeals for the Assessment Years 1993-94, 1944-95 and 1998-99. In the appeals for the Assessment Years 1995-96, 1996-97, 1998-99, 2001-02, 2002-03, 2003-04, 2004-05 and 2005-06, the Tribunal has held that' 2980/Del/2014 AY: 2010-11 in the appeals preferred by the assessee, the amount of interest on the Central Government loan cannot be disallowed. In view of this finding of the Tribunal on the issue we are of the view that Ld. CIT(A) was right in deciding the issue in favour of the assessee following the above decisions and was thus justified in deleting the addition in question. The same is upheld. The ground No.1 is accordingly rejected.
10.1 The identical issue in question has already been decided in favour of the assessee by the Tribunal (supra), thus, respectfully following the above decision, we reject the ground of the appeal.
In ground No. 3, the Revenue has challenged the finding of the learned Commissioner of Income-tax (Appeals) on the issue of consultancy fee incurred in relation to plant and machinery. 11.1 The facts in respect of the issue in dispute are that the assessee debited a sum of Rs.4,53,450/- under the head ‘repairs to plant and machinery’, which was explained by the assessee as consultancy payment towards an old 10 MW turbine which was damaged in a break down. The assessee further contended that consultancy payment was for ascertaining whether the existing turbine could be repaid by incurring reasonable cost. Whereas on the basis of correspondence between the assessee and the consultant, the Assessing Officer was of the view that the expenditure of consultancy payment was associated with the Turbine, i.e., capital asset and not in the nature of repairs and, therefore, he held the same as capital expenditure. The learned Commissioner of Income-tax (Appeals), on the other hand, observed that the consultancy fee was a part of repair and maintenance expenses and accordingly, he allowed the same as revenue expenditure. 11.2 Before us, the learned CIT(DR) referred to correspondence between the assessee and the consultant, which is available on pages 28 and 29 of the assessee’s paper book and submitted that part of 2980/Del/2014 AY: 2010-11 consultation was towards finding of a suitable substitute of turbine and finalization of the deal and thus the consultancy being connected with the substitution by a new plant and machinery, it was partly capital in nature. 11.3 The learned counsel of the assessee, on the other hand, submitted that consultancy payment was towards repairs and maintenance of an existing turbine and thus it was in the nature of revenue expenditure. In support of the contention, the learned counsel relied on the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income tax Vs. Abbott Laboratories Private Limited, (1993) 69 taxmann 214 (Bom). 11.4 We have considered the rival submission and perused the relevant material on record. In the case of Commissioner of Income Tax Vs. Abbott Laboratories India Private Limited (supra) , the assessee claimed deduction of Rs.3,24,178/-related to consultation fee paid for engineering services rendered by a consultancy firm. The Assessing Officer found that the services of the said firms were engaged for making proposals related to relocation of the plant and machinery and utility services at the existing facilities with a view to increase efficiency and output of the plant. He also observed that recommendation of the said firm ultimately did not metalize. He, therefore, held that the expenditure was of a capital nature. The Hon’ble Bombay High Court held as under: “8. We have carefully considered the facts of the case. It appears that the object of the exercise for which the services of Messrs. Ralph M. Parsons Co., of Asia were availed of by the assessee was for rationalisation of its administration and modernisation of its machinery with a view to derive maximum benefit out of the existing resources. The object seems to be to improve the productive efficiency. It was not in connection with a new plant or a new project or a new product. It was to improve the production of the existing project with a view to increase its profitability. There is no element of enduring benefit in it. From an overall view of the entire facts and 2980/Del/2014 AY: 2010-11 circumstances of the case, we are of the clear opinion that this is not a case where the expenditure incurred by the assessee can be termed to be capital expenditure or an expenditure which has resulted in any enduring benefit to the assessee.”
11.5 When we advert to the fact of the instant case, we find that facts of the instant case are different from the facts of the case cited by the learned counsel of the assessee. In the present case, on perusal of the correspondence between the consultant and the assessee which is available on pages 28 and 29 of the assessee’s paper book, we find that the consultant has observed the repair as uneconomic and he recommended for a replacement of the turbine. Further, he has set out in terms of conditions of the payment for the consultancy as under: “1. 30% Advance, 2. 30% on selection after inspection,. 3. 30% after finalization of deal, 4. 10% on the receipt of complete STG at your site.” 11.6 From above the terms and condition of payment, it is clear that 70% of the payment was towards purchase of a new plant and machinery, which forms part of block of plant and machinery for the purpose of depreciation. It is evident from the above that payment for consultancy was not only for examining the old turbine, but it was consultancy for purchase of a substitute turbine, which forms part of block of the plant and machinery. In such facts and circumstances, we are of the opinion, that at least 70% of the payment of consultancy fee paid by the assessee is expenditure in the nature of capital expenditure and the balance expenditure falls in the nature of revenue expenditure. However, we agreed with the contention of the learned counsel that if this expenditure is held as capital in nature, then depreciation should be allowed to the assessee. We, therefore, direct the Assessing Officer to 2980/Del/2014 AY: 2010-11 consider the 70% of the payment on consultancy fee as capital expenditure for inclusion under the block of asset of plant and machinery and allow the depreciation accordingly. This ground of the appeal is partly allowed.
In the result, both the appeals of the assessee and the Revenue are partly allowed. The decision is pronounced in the open court on 20th January, 2017.