DCIT, CC-XVI, KOLKATA, KOLKATA vs. SOUTH ASIAN PETROCHEM LTD, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

3. The Revenue has raised per its grounds as under :- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in treating the sales tax remission received as capital receipt.

2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in treating the incentive received as capital receipt when the same was not used for acquiring any capital asset.

3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in treating the incentive received as capital receipt by not appreciating that the decision of the Apex court in the case of Sahney Steel & Press Works Ltd –v-CIT [1997] 228 ITR 253 on the same issue.

4. That the Department craves leave to add, modify or alter any of the grounds of appeal

and/or adduce additional evidence at the time of hearing of the case.”

4. The solitary issue raised by the Revenue in all the grounds of this appeal is whether the ld. CIT(A) was justified in holding that the subsidy received is a capital receipt after ignoring the fact that no capital asset was acquired and the principles laid down by the Hon'ble Apex Court in the case of Sahney Steel and Press Works Ltd vs. CIT (1997) reported in 228 ITR 253 on the same issue. -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 3

5. The facts in brief are that the assessee, a limited company, is engaged in the business of manufacturing of PET resins. The assessee in the year under consideration has received incentive of Rs. 15,13,56,924/- from the Government of West Bengal in the form of remission of sales tax under the West Bengal Incentive Schemes 1999. The assessee has shown the incentive as income in its profit and loss account. The assessment was framed u/s 143(3) of the Act at the returned income of the assessee.

However, the assessee before the ld CIT(A) has challenged the taxability of incentive income on the ground that the aforesaid incentive is not taxable being capital in nature. The assessee by mistake has offered the same to the tax but the AO should have excluded the same from the taxable income. Thus, the issue of taxability of impugned incentive income was first time raised before the ld CIT(A).

7.1 The ld. CIT(A) during the appellate proceedings after considering the submissions of the assessee observed that the main object of the scheme was setting up of new industrial units or expansion of existing units. The character of the subsidy whether it is on revenue account or capital in nature needs to be decided on the basis of the objects for which it was given. Thus the impugned capital receipt is neither taxable under the normal provisions of the Act nor under the MAT provisions of the Act. The ld. CIT(A) for holding so has relied on various judgments of Hon’ble Courts. Accordingly, the ld CIT(A) directed the AO to delete the addition of subsidy amount under the normal computation of income and MAT provisions of the Act by holding it as capital in nature which is not chargeable to tax.

The Revenue, being aggrieved, is in appeal before us.

Clause 4 of the said Scheme further lays down the applicability of the Scheme which read as follows:- “The 1999 Scheme shall generally be applicable to all large, medium, cottage and small-scale projects and tourism units in large/medium sector to be set up and also expansion projects of existing units on or after 1st April 1999 in the private sector, co-operative sector, joint sector as also companies / undertakings owned and managed by Statement Government.”

A plain look at the above scheme makes it clear that the incentive was being provided by the Government of West Bengal to promote the industries. The impugned incentive has nothing to do with the operational cost of the company. Similarly the manner in which the subsidy was computed has no role in deciding the nature of the subsidy. The assessee in the instant case has established a new industrial undertaking for the manufacture of “Bottle Grade Polyester Chips with a capacity of 140000 tonnes”. Therefore the subsidy was given to assessee for the establishment of new industrial unit. The Hon'ble jurisdictional High Court in the case of CIT Vs. Rasoi Limited reported in 335 ITR 438 (Cal) has held that the Sales Tax Incentive granted by the West Bengal Government to the assessee with the object to a provide incentive to set up new industrial undertaking or substantial expansion of the existing undertakings was capital receipt and not revenue in nature. The relevant extract of the judgment is extracted below:- -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 6 “From the objects and the reasons of the scheme of industrial promotion as well as the entitlement as indicated in s. 3 thereof it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales-tax paid by the industry concerned, for any quarter under the Sales-tax Act in respect of sales of such goods. The object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and thus, those are for the assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent of the sales-tax paid by the beneficiary does not imply that the same was in the form of refund of sales-tax paid. 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, and makes it fall within capital or revenue. Thus, the amount paid as subsidy was really capital in nature.—CIT vs. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 219 CTR (SC) 105 : (2008) 13 DTR (SC) 1 : (2008) 306 ITR 392 (SC) relied on; Senairam Doongarmall vs. CIT AIR 1961 SC 1579 applied; CIT vs. Abhishek Industries Ltd. (2006) 205 CTR (P&H) 304 : (2006) 156 Taxman 257 (P&H) distinguished.

Subsidy received by assessee from the State Government under a scheme of industrial promotion which was meant to provide financial assistance to specified industries for expansion of capacities, modernization and improving their marketing capabilities is capital receipt though the amount of subsidy is equivalent to 90 per cent of the sales-tax paid by the beneficiary.”

9.1 The above judgement was delivered by the Hon’ble High Court of Calcutta after having reliance in the judgement of Hon’ble Supreme Court in the case of CIT vs Ponni Sugars and Chemicals Limited reported in 306 ITR 392 (SC) wherein it was held as under:- “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, one has to apply the purpose test. 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 up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given is irrelevant. In the present case, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business. Keeping in mind the object behind the payment of the incentive subsidy such payment received by the assessee under the Scheme A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 7 was not in the course of a trade but was of capital nature.—Sahney Steel & Press Works Ltd. & Ors. vs. CIT (1997) 142 CTR (SC) 261 : (1997) 228 ITR 253 (SC) and Seaham Harbour Dock Co. vs. Crook (1931) 16 Tax Cases 333 (HL) applied.”

The case law i.e. Sahney Steel & Press works Ltd vs. CIT reported in 228 ITR 253 relied by the ld CIT(A) is distinguishable from the instant facts of the case. In that case the subsidy was provided to assist/ enable the assessee in carrying on its trade or business in more profitable manner. The subsidy was provided only after the set up of industry. Payments were not being made in the form of subsidy for the purpose of setting up of the industries. Similarly the Kolkata Tribunal in the case of DCIT vs Teesta Agro Industries Ltd. in 1053, 1753/Kol/2010 vide order dated 07.01.2011 has observed that the subsidy given in the form of the remission of sales-tax under the West Bengal State Incentive Scheme 1999 is in the nature of capital receipt and therefore not assessable to income tax. In view of above, we are of the opinion that the impugned subsidy is capital in nature and therefore not liable to tax. Simply the assessee has inadvertently offered the same to tax does not mean the capital receipt has become taxable. 9.2 Similarly the impugned receipt of subsidy will not be taxable being capital in nature under the provisions of MAT. Under the Act, income is chargeable to tax when it comes within the definition of income as specified u/s 2(24) of the Act. The Hon’ble Supreme Court in the case of Padmaraje R Kadambande Vs CIT reported in 195 ITR 877 (SC) has held that capital receipts are not income within the meaning of section 2(24) of the Act and hence not chargeable to tax. When a receipt cannot be brought to tax under the computation of income under the normal provisions as well as under the deeming provisions of the Act, then such receipt is out of the purview of the provisions of section 115JB of the Act. We find the decisions in support of this proposition that a capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB of the Act which was rendered after considering the decisions of Hyderabad Special Bench in Rain Commodities Rain Commodities Ltd vs DCIT, 41 DTR 449, and the decision of Hon'ble Apex Court in Apollo Tyres Ltd. vs. CIT (2002) reported in 255 ITR 273 (SC). The Hon’ble Kolkata Tribunal also in the case of Binani Industries Ltd., vs DCIT in ITA No.1222-1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 8 ITA No.144/Kol/2013 A.Y 2009-10 vide order dated 02-03-2016 has allowed the issue in favour of assessee as detailed under : The issue in the above case was raised as under : “The last issue to be decided in this appeal is as to whether, the forfeiture of share warrants amounting to Rs. 12,65,75,000/-, being a capital receipt, would be liable for taxation u/s 115JB of the Act just because it has been credited in the profit and loss account as an extraordinary item, in the facts and circumstances of the case.

The relevant operative portion of the order reads as under :

“28. In view of the foregoing discussions, we find merit in the contentions of the assessee that the profit arising on transfer of capital asset to its wholly owned Indian subsidiary company is liable to be excluded from the Net profit., i.e., the Net profit disclosed in the Profit and Loss account should be reduced by the amount of profit arising on transfer of capital asset and the amount so arrived at shall be taken as "Net profit as shown in the profit and loss account" for the purpose of computation of book profit under Explanation 1 to sec. 115JB of the Act. Alternatively, since the said profit does not fall under the definition of "income" at all and since it does not enter into the computation provisions at all, there is no question of including the same in the Book Profit as per the scheme of the provisions of sec. 115JB of the Act. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to exclude the above said profit from the computation of "Book Profit" for the reasons discussed above.

In the instant case, the assessee also has duly disclosed the fact of forfeiture of share warrants amounting to Rs. 12,65,75,000/- in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for the year ended 31.3.2009. Hence respectfully following the aforesaid decision of the Mumbai Tribunal, the profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, includes notes on accounts thereon and accordingly in order to determine the real profit of the assessee as laid down by the Hon'ble Apex Court in the case of Indo Rama Synthetics (I) Ltd vs CIT reported in (2011) 330 ITR 363 (SC), adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment , should be considered for the purpose of computation of book profits u/s 115JB of the Act and thereafter, the Learned AO has to make adjustments for additions / deletions contemplated in Explanation to section 115JB of the Act.”

In view of the aforesaid facts and respectfully following the various judicial precedents relied upon hereinabove, we find no infirmity in the order passed by the Ld CIT(A) in this regard and accordingly we uphold the same. The ground raised by the Revenue is dismissed. -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 9

10. In the result, Revenue’s appeal is dismissed.

Coming to Revenue’s appeal in for A.Y 07-08.

Coming to Revenue’s appeal in ITA 1224/Kol/2014 for A.Y. 09-10.

13. The Revenue has raised per its grounds as under:- “1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the notional “Market to Market” foreign exchange loss.

2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the “Market to market” foreign exchange loss, when the same was not crystalised during the year under consideration.

14. Only issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹84.51 lakh on account of unexpired foreign currency forward contract on Marked to Market (MTM for short) basis.

15. The assessee in the year under consideration has debited its profit and loss a/c by ₹ 4909.67 lakh which was inclusive of loss on account of MTM to the extent of ₹ 84.51 lakh. The aforesaid loss was claimed by assessee in respect to those contracts which were not expired on the balance-sheet date. Thus, the AO was of the view that the loss claimed by assessee is a notional loss and has no bearing in the amount of profit shown by the assessee. Accordingly, the AO called upon the assessee to explain the aforesaid loss of -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 10 ₹84.51 lakh on account of MTM basis. In compliance thereto, the assessee submitted that certain contracts were entered in connection with Foreign Currency Forward Contracts for the business purposes and on the date of balance-sheet these were valued where loss of ₹85.51 lakhs was identified, though these contracts were not matured on the balance-sheet date. However, the AO disregarded the contention of the assessee by holding that the liability in respect of unexpired contracts has not been crystallized on the balance-sheet date and therefore the aforesaid loss is notional loss in nature. Thus, the AO disallowed the loss of ₹ 84.51 lakh and added to the total income of assessee.

16. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that the loss was claimed in pursuance to the provision of Accounting Standard-11 issued by the ICAI. The Accounting Standard issued by the ICAI mandates to record the loss arising out of unexpired FOREX contracts on the balance-sheet date. Further, assessee relied on several judicial pronouncements in support of its claim. Ld. CIT(A) after considering the submission of the assessee has deleted the addition made by the AO by observing as under:- “7. I have considered the submission of the appellant and perused the assessment order. I have also gone through the judicial decisions relied upon by the AO as well as the remand report, rejoinder thereof and Instruction No. 3/2010 dated 23.03.2010. The facts of the case have already been discussed as above and it is observed that there is no dispute on the facts that the appellant company had entered into the foreign currency forward contracts for the purpose of hedging being an exporter of finished goods. The underlying assets were the trade receivables. Thus, the transactions in foreign currency were carried out by the company for the purpose of its business. Further, there is no dispute on the fact that the appellant company regularly followed the mercantile system of accounting and for the purpose of recording transactions in foreign currency it has followed Accounting Standard-11. The same system of accounting had been followed by the appellant company consistently year after year and accepted by the AO. Nowhere, the AO has doubted the correctness of the accounting system and accounting standard followed by the company. In the year under consideration the appellant has claimed loss of Rs.84.51 lacs being ‘Marked to Market’ loss. The unexpired forward contracts at the year end were re-alingned by the appellant on the basis of currency rate as on the last day of the financial year/. This was done by the appellant as per AS-11 which is a recognized and judicially accepted Accounting Standard. As per the accounting system the gain in the expired -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 11 contract is credited to the profit and loss account as income and similarly the loss is debited to the profit and loss account. It is true that the loss/gain is on the unexpired contracts which are to be matured/settled in the next financial year. But, in view of the mercantile system of accounting and the accounting Standard, AS-11, such gain or loss has to be recognized in the profit and loss account a on the last day of the financial year. Thus, such loss or gain cannot be treated as notional/. Accordingly, the appellant claimed MTM loss of Rs.84.51 lacs in the year under consideration and debited to the profit and loss account. On same un-expired forward contracts on which loss of Rs.84.51 lacs claimed in the year under appeal were matured/settled in FY 2009-10 relevant to AY 2010-11 wherein the appellant company declared the gain and credited to the profit and loss account. Such gain was assessed to tax by the AO in AY 2010-11. The Contention o the AO in the remand report that if at all, the appellant may have grievance in AY 2010-11 as the gain was brought to tax and not in the year under appeal for disallowance of loss; is not acceptable. The appellant had given the reference of AY 2010-11 to prove its point that same system of accounting is followed by the company regularly and if there is gain on MTM transactions, that is credited to the profit and loss account and if there is loss, it was debited. Thus, the AO cannot take divergent view in two different assessment years assessing the gain and disallowing the loss treating the same as notional. In any case, I am of the opinion that the claim of the appellant company of MTM loss is fully covered in its favour by the decision of the Hon'ble Supreme Court in the case of Woodward Governor India Ltd. (supra) which the AO unsuccessfully tried to distinguished in the assessment order. The same decision was relied upon by the appellant in the course of appellate proceedings with detailed submission but in the remand report the AO did not mention that as how the said decision is not applicable to the facts of the appellant’s case. The ape’s claim is also supported by another decision of the Apex Court on the similar issue in the case of Oil & Natural Gas Corporation Ltd. (supra) and the decision of Karnataka High Curt in the case of Motorla India (P) Ltd. (supra). The decision of the Special Bench of ITAT, Mumbai in the case of Bank of Baharain & Kuwait (supra) also supports the action and claim of the appellant company with reference to MTM loss of Rs.84.51 lacs. The AO has relied on the Instruction No.3/2010 dated 23.03.2010. The said circular has been considered by the ITAT, Delhi, in a recent decision in the case of Bechtal India (P) Ltd [2013] 33 taxmann.com 213 wherein claim of MTM loss was allowed as deduction. In view of above facts and respectfully following the decisions of the Hon'ble Supreme Court, High Court and ITAT as discussed above it is held that the AO was not justified in disallowing the MTM loss of Rs.84.51 lacs. He is directed to allow the claim of the appellant company. The ground no. 1 to 3 are allowed.”

The Revenue, being aggrieved, is in appeal before us. -1224/Kol/2014 A.Y. 06-07 to 07-08 & 09-10 DCIT,CC-XVI Kol. Vs. SAP Ltd. Page 12 17. Before us Ld. DR vehemently supported the order of AO whereas the ld AR relied on the order of Ld CIT(A) and filed a paper book which running from pages 1 to 97.