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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM] I.T.A No. 885/Kol/2012 Assessment Year : 2007-08 Sicpa India Private Limited -vs.- D.C.I.T., Circle-8, (Formerly known as Kolkata Sicpa India Ltd. ), Kolkata [PAN : AADCS 6121 L] (Respondent) (Appellant) I.T.A No. 933/Kol/2012 Assessment Year : 2007-08 D.C.I.T., Circle-8, Sicpa India Private Limited Kolkata (Formerly known as Sicpa India Ltd. ), Kolkata [PAN : AADCS 6121 L] (Respondent) (Appellant) For the Assessee : Shri Prashant Jaiswal, AR For the Department : Shri Rajat Kumar Kureel, JCIT.Sr.DR Date of Hearing : 07.03.2017. Date of Pronouncement : 22.03.2017. ORDER Per N.V.Vasudevan, JM ITA No.933/Kol/2012 is an appeal filed by the Revenue while ITA No.885/Kol/12 is an appeal filed by the Assessee. Both these appeals are directed against the order dated 29.3.2012 of CIT(A)-VIII, Kolkata relating to A.Y 2007-08. ITA No.885/Kol/12 (Assessee’s appeal) 2. Ground No.1 raised by the Assessee reads as follows: “1. That on the facts and circumstances of the case, the Ld. CIT (Appeals) was not justified and grossly erred in not allowing deduction of leave encashment claimed on provision basis amounting to Rs. 18,97,435/-.”
2 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 3. The Assessee is a company. It is engaged in the business of manufacture and trading of printing inks having its manufacturing unit at Sikkim The assessee had debited a sum of Rs.31,45,986/- in the profit and loss account on account of leave encashment which was outstanding on 31.03.2007. Under the provision of section 43B(f) of the Income Tax Act, 1961 (Act) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee shall be allowed as deduction in computing the total income only in the year in which the sum is actually paid by him. In other words, the deduction on account of expenditure in the form of leave encashment paid by an employer to the employee cannot be allowed on the basis of the provision or on the basis of accrual under the mercantile system of accounting, made in the books of account and will be allowed only to the extent the leave encashment is actually paid to the employee by the employer. The plea of the assessee before the AO was that since section 43B(f) of the Act was declared unconstitutional by the Hon’ble Calcutta High Court in the case of Exide Industries Limited vs UOI 292 ITR 470 (Cal) provision for leave encashment which is based on proper estimate is a certain liability and should be allowed as deduction. The AO however after making a reference to the fact that an appeal against the decision of the Hon’ble Calcutta High Court in the case of Exide Industries Ltd. (supra) has been preferred before the Hon’ble Supreme Court by the Revenue which has been admitted for adjudication, and the fact that in such appeal, the operation of the Hon’ble High Court of Calcutta has been stayed, was of the view that deduction on account of provision for leave encashment cannot be allowed as deduction. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A), the Assessee has raised Gr.No.1 before us.
We have heard the rival submissions. The parties before us agreed that in view of the pendency of the constitutional validity of section 43B(f) of the Act before the Hon’ble Supreme Court, it would be just and proper to direct the AO to follow the ultimate decision that might be taken in the said proceedings and decide the grievance 2
3 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 projected by the assessee in Gr.No.1. Thus Gr.No.1 is treated as allowed for statistical purposes.
Gr.No.2 raised by the Assessee and Gr.No.1 raised by the Revenue in its appeal can be conveniently decided together. These grounds read as follows: “Assesee’s ground 2. That on the facts and in the circumstances of the case the Ld. CIT(Appeals) was not justified and grossly erred in computing disallowance u/s 14A at 1 % of exempt income.”
Revenue’s Ground “1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in allowing relief to the assessee U/S 14A of I TAct, whether A. O. was correct in computing disallowance U/S 14A of I TAct, 1961. “
During the previous year relevant for Assessment Year under consideration, the assessee has earned dividend income of Rs.2,05,47,158/-. In view of the provisions of section 10(35), in the return of income, entire amount of dividend income was claimed as exempt. During the course of assessment proceedings, the Assessee was asked by the AO to submit details of expenses disallowable u/s 14A of the Act, in respect of exempt income as per the provisions contained in Rule 8D of I.T.Rules, 1962. In response to the same, the Assessee vide letter dated 02-12-2010 submitted that Rule 8D introduced vide Notification No.45/2008 dated 24-03-2008 was applicable from A.Y.2008-09 onwards and hence the question of computing disallowance as per Rule 8D does not arise in the instant assessment year. Disregarding the submissions made by the assessee in the order u/s 143(3) of the Act, the AO computed disallowance u/s 14A at Rs.12,05,250/- by applying Rule 8D (i.e. 0.5% of average investments).
On appeal by the Assessee the CIT(A) firstly held that Rule 8D is applicable only from AY 2008-09 and in this regard referred to the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg.Co. Ltd. (2010) 43 DTR 177 (Bom) wherein 3
4 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 it was held that Rule 8D was applicable only from AY 2008-09. The CIT(A) thereafter held that disallowance of 1% of the exempt income prior to AY 2008-09 was reasonable and in this regard relied on the decision of the Hon’ble Kolkata Tribunal in the case of M/s.Civil Engineers Enterprises (P) Ltd. ITA 859/Kol/2010 and ITO Vs. M/S.BPS Securities (P) Ltd. ITA No.123/Kol/2010, wherein it was so held. Aggrieved by the order of the CIT(A) both the Assessee and revenue have raised the aforesaid grounds of appeal before the Tribunal.
We have considered the rival submissions and find that in the following orders ITAT Kolkata Bench has taken the view that 1% of the dividend income can be disallowed as other expenses disallowable u/s.14-A of the Act for AY prior to AY 2008-09 i.e., prior to introduction of Rule 8D of the Rules:
Himtaj Consultants Pvt. Ltd. vs. I.T.O. (ITA No. 721/Ko1l2007- AY. 2004-05) Order dated 27.04.2007. 2. CHNHS Association vs. ACIT(ITA No.74/Kol/2008-AY.2004-05) Order Dated 19.02.2008. 3. I.T.O. vs. M/s S.P.S. Securities (P) Ltd. (ITA NO.123/Kol/2010- AY.2000-01 Order dated 19.08.2010
The Hon’ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. in GA No.3019 of 2012 in ITA No.243 of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper. In view of the aforesaid decisions, we are of the view that the order of CIT(A) does not call for any interference. The ground of appeal of the Revenue and the Assessee are therefore dismissed.
In the result, appeal by the Assessee is treated as partly allowed for statistical purpose.
5 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 ITA No.933/Kol/2012: (Revenue’s appeal) 10. Gr.No.1 raised by the Revenue has already been decided while deciding Gr.No.2 in Assessee’s appeal. Gr.No.2 raised by the Revenue reads as follows: 2 That on the facts and in the circumstances of the case and in law, the CIT( Appeals) erred in giving relief to the assessee by holding that excise duty exemption received by the assessee was in the nature of capital receipt, and therefore, not includible in the taxable book profit under the provisions of section 115JB of the Act, whereas, there is no such provision stipulated in the Explanation 1 to section 115JB of the Act, 1961.”
During the previous year relevant to the assessment year under consideration, the assessee availed Excise Duty Exemption of Rs.2,14,60,052/- in respect of its new unit situated in the notified area of Sikkim. In the audited accounts the said incentive was shown under the head Revenue Grant from Government which was clubbed and included under the head ‘Other Income’ in Schedule-14. Detailed breakup of Revenue Grant from Government amounting to Rs.2,18,99,594/- was as follows :-
Particulars Amount (Rs.) Excise Exemption 2,14,60,052/- Transport Subsidy 4,39,542/- Total 2,18,99,594/-
In the revised return of income filed on 31.03.2009 the assessee excluded excise duty exemption of Rs.2,14,60,052/- in the computation of book profit u/s 115JB of the Act by placing reliance on the decision in the case of CIT –vs- Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC). The AO in the order u/s 143(3) held that as per the explanation and provisions contained in 115JB refund of excise duty should not be excluded in the computation of book profit u/s 115JB.
Before the CIT(A) the assessee submitted that in F.Y.2005-06 the assessee set up a new unit in the State of Sikkim. In terms of Office Memorandum No.14(2)/2002 issued
6 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 by Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion dated 31-12-2002, goods manufactured in the notified areas of Sikkim are exempt from payment of excise duty. The Government of Sikkim vide Notification No.G.O./2/DI/2002-2003/901 dated 17-02-2003 has also reproduced office Memorandum No.14(2)/2002 issued by Government of India for the general information of the public. The factory of the assessee was located in Mamring district in the State of Sikkim which is one of the notified areas as per Annexure-II of Office Memorandum No.,14(2)/2002 and thus the assessee was entitled for excise duty exemption. The said exemption was given to the unit for development of Industries and generation of employment in the State of Sikkim. In this regard relevant extracts of Office Memorandum No. 14(2)/2002 is reproduced below:- "Keeping in view the fact that the State of Sikkim lags behind in industrial development. a need has been felt for structured interventionist strategies to accelerate industrial development of the state and boost investor confidence. The new initiatives would provide the required incentives and enabling environment for industrial development. improve availability of capital and increase market access to provide a fillip to the private investment in the state. "
It was the plea of the assessee that incentive in the form of Excise Duty Exemption and various other incentives have been granted to the State of Sikkim which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence the incentives granted by the Government of India vide Office Memorandum No. 14(2)/2002 dated 23-12-2002 will be treated as capital receipt.
The assessee pointed out that it received excise exemption as per Notification No. 71/2003 -CENTRAL EXCISE dated 9'h Sept, 2003. As per para 4(a) of this notification the assessee received credit in the account current (PLA) by 7th day of the month 6
7 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 following the month under consideration of the amount of duty paid other than by way of utilization of Cenvat credit. Such amount credited in the PLA was used by the assessee for paying duty under Rule 8 of the Central Excise Rule, 2002 in subsequent months and the payment was deemed to be made in cash.
It was argued by the Assessee that the subsidy in question was a capital receipt not chargeable to tax as the subsidy was given for the purpose of enabling coming into existence new industries and not to enable carrying on of existing industries. It was further argued that while computing book profits u/s.115JB of the Act, the excise subsidy should be excluded though it is credited in the profit and loss account.
The CIT(A) agreed with the submissions of the Assessee and he held that central excise exemption received by the Assessee was not in the nature of income and therefore ought to be excluded from book profits for the purpose of Sec.115JB of the Act. The following were the relevant observations of the CIT(A): “1.0. I have perused the submission made by the appellant. In its submission, the appellant pleaded that the excise duty exemption being in the nature of capital receipt should not form part of the profit & loss account. Hence, it should be excluded in the computation of book profit U/S 11SJB. However, in the order U/S 143(3), AO has held that as per the explanation and provisions contained in 11SJB, refund of excise duty should not be excluded in the computation of book profit U/S 115JB.
1.1 I have carefully considered the assessment order and submission of the appellant. The objective behind granting of excise duty exemption in the present case is to give incentive for industrialization and employment generation in the State of Sikkim which lagged behind in industrial development. The same is evident from the various clauses of Memorandum No. 14(2)/2002 issued by Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion dated 23-12-2002. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence excise duty exemption granted to the appellant is a capital receipt. The issue is covered favourably by the principles laid down by the 7
8 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 Hon 'ble Apex Court in the case of Ponni Sugar & Chemicals Ltd (Supra) wherein it has been held that the character of subsidy is to be determined with respect to the purpose for which it is granted. The point of time at which the subsidy is paid and its source or mode is immaterial. The issue is also covered favourably by the decision of Hon'ble Jammu & Kashmir High Court in the case of Shree Balaji Alloys & Ors. (Supra) wherein it has been held that Excise Duty Refund and Interest Subsidy received for the purpose of eradication of unemployment in the state by acceleration of industrial development and removing backwardness of the area that lagged behind in industrial development is to be treated as capital receipt. Similarly the Jurisdictional High Court in the case of Rasoi Ltd (Supra) has held that sales tax incentive received under West Bengal Incentive Scheme for expansion of capacities, modernization and improving the marketing capabilities to tide over the crises- of promotion of industry in the state was capital in nature. Thus, in the light of the above observation, I am of the considered view that the excise duty exemption received by the appellant is capital in nature.
2.0 Once it has been decided that the aforesaid excised duty exemption is capital receipt, now the next question to be dealt with is the issue whether the said capital receipt shall be excluded in the computation of book profit u/s 11SJB.· In this regard, the appellant has placed reliance on the decision of Hon 'ble Apex Court in the case of Padmaraje R. Kadambande -vs.- CII (1992) 195 ITR 877 (SC) wherein it has been held that capital receipt are not income within the meaning of section 2(24) of the Act and hence not at all chargeable under the Income Tax Act. A receipt which is neither 'Profit' nor 'Income' and which does not have any element there-of embedded there in, cannot be part of 'Profit' as per Profit & Loss account prepared in terms of Part II of Schedule VI to Companies Act.
2.1 In the present case, the excise duty exemption granted to the appellant is pure and simple capital receipt. Thus, it doesn't have any income or profit element embedded in it, since the incentive has been granted to the appellant to accelerate industrial development and generate employment opportunities in the backward region. Hence, it is held that the excise duty exemption granted is not chargeable to tax under the Income Tax Act as held by the Apex Court in the case of Padmaraje (supra) and in the light of the factual finding as above. Therefore, the same is clearly not includible in P&L account prepared under Part II & Part III of Schedule VI to the Companies Act.
2.2 The genesis of Sec 115J, thereafter section 115JA and now section 115JB was to ensure that the assessee, while making profit from operations, should not enjoy tax free status due to various deductions available under the Income Tax Act. There was never any intention of the legislature to tax what is not income at all. In a recent decision, the Hon'ble Apex Court in the case of Indo Rama Synthetics 0) 8
9 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 Ltd -vs- CIT (2011) 330 ITR 363 (SC) has held that the object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, inclusion of capital receipt in the computation of MAT would defeat two fundamental principles. Firstly it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. The real working result can be arrived at only after excluding this receipt which has been credited to P&L a/c and not otherwise.
2.3 The above exclusion or adjustment in computing Book Profit is permissible in terms of decision of Hon'ble Apex Court in the case of Apollo Tyres (2002) 255 ITR 273 (SC) wherein it has been held that the AO has no power to rework the book profit if the profits are computed in accordance with Part II and Part III of Schedule VI to the Co. Act, 1956. Further, the Hon'ble Apex Court in the case of Indo Rama Synthetics (l) Ltd (Supra) has also held that the object of MAT provisions is to bring out the true working result of the companies. The thrust is to find out the real working results of the company.
2.4 Further, in the case of CIT -vs.- Veekaylal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Born) it has been held that if the profit is not computed in accordance with Part II and Part III of Sch. V1 to the Companies Act, 1956, the A.O. has the power to re-compute such book profits. Thus, it can be held that if the AO can amend the book profit it is not in accordance with Part II & Part III of Sch. VI, likewise the assessee also can re-compute the book profit for the purpose of Sec IISJB of the Act. This view is also supported by the decision of Mumbai Tribunal in the case of DCIT -vs.- Bombay Diamond Co. Ltd. (Supra) and Bangalore ITAT in the case of Syndicate Bank -vs.- ACIT (Supra).
2.5 Thus, in view of the above discussion and by placing reliance on the decision of Hon'ble Jaipur Tribunal in the case of ACIT -vs.- Shree Cement Ltd. C2012- TIOL-02-ITAT-Jaipur),· I am of the view that excise duty exemption, being a capital receipt not chargeable to income tax, is to be excluded to compute the book profit U/S 115JB as the profits are not computed in accordance with Part II and Part III of Schedule VI to the Co. Act, 19S6. Hence, Ground No. 10 taken by the appellant is allowed.”
Aggrieved by the order of the CIT(A) the Revenue has raised Gr.No.2 before the Tribunal.
10 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 17. We have considered the rival submissions in the light of the decision of the Hon’ble Jammu & Kashmir High Court in the case of M/S.Shree Balaji Alloys 333 ITR 335 (J & K) ITA No.2 of 2010 Judgment dated 31.01.2010, rendered in the context of identical scheme under which the excise duty exemption subsidy was received by the Assessee in the present case. In the case of Balaji Alloys (supra), the Hon’ble Jammu & Kashmir High Court has set out of the objects of the scheme under which the excise duty exemption subsidy and interest subsidy were received by the Assessee in the present case in the following words:
“Before coming to the issues, which need determination, regard needs to be had to the salient features of the New Industrial Policy, amendment introduced thereto and the statutory Central excise notifications issued in this respect governing the refund of excise duty and interest subsidy, as incentives to the industrial units, pursuant to the New Industrial Policy. The statement and objects, which had lead to the New Industrial Policy and other concessions for the State of Jammu & Kashmir floated vide Office Memorandum of 14th June, 2002 and the salient features thereof, may, in a nutshell, be stated thus : Considering the request of the Government of Jammu & Kashmir for a special package for development of the industries in the State on the lines for the North East Industrial Policy notified by the Central Government vide Ministry of Industry’s OM No. EA/1/2/96-IPD dt. 24th Dec., 1997, discussions were held by the Central Government on strategy and action plan for development of industries and generation of employment in the State of Jammu & Kashmir with various related Ministries on the issues, inter alia of infrastructure development, financial concessions and easy market access, pursuant whereto, the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion), issued its Office Memorandum dt. 14th June, 2002 whereby it was provided that keeping in view the fact that the State of Jammu & Kashmir had lagged behind in industrial development, there was need for structured interventionist strategies to accelerate the industrial development of the State boosting investors’ confidence. The new initiatives, in terms of the memorandum were aimed at providing requisite incentives as well as enabling environment for industrial development,
11 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 improving availability of capital and increase in market access so as to give a fillip to private investment in the State. These fiscal incentives were to be provided to the new industrial units and substantial expansion of existing units. The new industrial units and existing industrial units on their substantial expansion, as defined, set up in growth center, industrial infrastructure development centers and other locations like industrial estates, parks, export processing zones, commercial estates, etc., as notified by the Central Government, were entitled to 100 per cent excise duty exemption for a period of 10 years from the date of commencement of commercial production. All new industries in the notified locations were eligible for capital investment subsidy @ 15 per cent of their investment in plant and machinery, subject to a ceiling of Rs. 30 lakhs whereas the existing units were entitled to subsidy on substantial expansion, as defined. Besides these and other concessions, interest subsidy of 3 per cent on the working capital and insurance premium to the extent of 100 per cent on capital investment too was permissible to the new and existing units on their substantial expansion for a period of 10 years. 6. Office Memorandum dt. 14th June, 2002 referred to hereinabove was later amended vide notification of 28th Nov., 2003 issued by the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion. It reads thus : "No. 1(11)/2002-NER—In pursuance of the announcement by the Prime Minister on 19th April, 2003 at Srinagar for creation of one lakh employment and self-employment opportunities in Jammu & Kashmir, the Government of India had set up a Task Force under Cabinet Secretary. The recommendations of Task Force were submitted to the Cabinet. To achieve this object of employment generation, the Cabinet has inter alia, approved following definition of the term 'substantial expansion’ for the purpose of incentives/subsidies notified as per OM No. 1(13)/2000-NER dt. 14th June, 2002. 2. The Central Government, therefore, hereby makes amendment in the Central Interest Subsidy Scheme, 2002 notified in the notification of the Government of India in the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion No. 1(11)/2002-NER dt. 22nd Oct., 2002. The definition of the term 'substantial expansion’
12 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 appearing under para 5(d) of the scheme may be substituted by the following : 'Concessions for substantial expansion should extend to include all new investments by entrepreneurs, which leads to substantial additional employment creation by an existing entrepreneur without insisting on major expansion. However, credit under the industrial policy package should not be merely for paying off old debts or for equipment already in place’." 7. To implement the New Industrial Policy referred to hereinabove, requisite notifications for exemption on excise duty were issued under s. 5A of the Central Excise Act, 1944 prescribing therein the procedure required to be followed by the industrial units before claiming incentives. 8. Para No. 3, appearing in the two notifications i.e. Central Excise Notification Nos. 56 of 2002 and 57 of 2002 dt. 14th Nov., 2002, which may be relevant to understand the issue raised in the case, needs to be noticed. It reads thus : ".......... 3. The exemption contained in this notification shall apply only to the following kind of units namely : (a) New industrial units which have commenced their commercial production on or after the 14th day of June, 2002. (b) Industrial units existing before the 14th day of June, 2002, but which have : (i) undertaken substantial expansion by way of increase in installed capacity by not less than twenty-five per cent on or after the 14th day of June, 2002; or (ii) made new investments on or after the 14th day of June, 2002, and such new investment is directly attributable to the generation of additional regular employment of not less than twenty-five per cent over and above the base employment limit, subject to the conditions that : (1) the unit shall not reduce regular employment after claiming exemption, and once such employment is reduced below one hundred and twenty-five per cent of the base employment limit, such industrial unit shall be debarred from claiming the exemption contained in this notification 12
13 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 in future. However, the exemption availed by such industrial unit, prior to such reduction, shall not be recoverable from such industrial unit. (2) The manufacturer shall produce a certificate, from general manager of the concerned District Industries Centre to the jurisdictional Dy. CCE or the Asstt. CCE, as the case may be, to the effect that the unit has created such additional regular employment. Explanation—For the purposes of this notification : (a) 'base employment limit’ means maximum number of regular employees employed at any point of time by the concerned industrial unit, during last five years; (b) 'regular employment’ shall not include employment provided by the industrial unit to daily wagers or casual employees; (c) 'new investment’ shall not include investments which are used for paying off old debts or making payments for the plant or machinery installed prior to the 14th day of June, 2002, or paying salaries to the employees. [Above cl. (b) has been substituted vide NTF No. 11/2004- CE, dt. 29th Jan., 2004]. Old : (b) Industrial units existing before the 14th day of June, 2002, but which have undertaken substantial expansion by way of increase in installed capacity by not less than twenty five per cent on or after 14th day of June, 2002.] 4. The exemption contained in this notification shall apply to any of the said units for a period not exceeding ten years from the date of publication of this notification in the Official Gazette or from the date of commencement of commercial production whichever is later." 18. The Hon’ble Jammu & Kashmir High Court had to deal with the issue whether excise refund and interest subsidy availed of by an assessees under the very same scheme under which the Assessee in the present appeal received excise duty refund and
14 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 interest subsidy, as to whether the same was capital receipt not chargeable to tax and not revenue receipt which is chargeable to tax. The Hon’ble High Court after referring to the decisions of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. Etc. vs. CIT (1997) 142 CTR (SC) 261 : (1997) 228 ITR 253 (SC) and CIT vs. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 219 CTR (SC) 105 : (2008) 13 DTR (SC) 1 : (2008) 306 ITR 392 (SC), held as follows:
“15. After going through the two judgments, we find the ratio in Sahney Steel case (supra) and approval thereof in Ponni Sugars & Chemicals Ltd. (supra), to have been spelt out, in the following para of the judgment delivered by the Hon’ble Supreme Court of India in Ponni Sugars & Chemicals Ltd. case (supra). It reads thus : "The importance of the judgment of this Court in Sahney Steel case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that 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. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. 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 are irrelevant." 16. Perusal of the judgments in Sahney Steel (supra) and Ponni Sugars (supra), therefore, reveals that the apex Court had applied the above quoted dictum to determine the purpose, which the two schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases.
15 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel (supra) was held to be revenue receipt whereas the subsidy in Ponni Sugars & Chemicals Ltd. (supra) was held as capital receipt. 17. We are supported in taking this view by the observations made by the Hon’ble Supreme Court of India in a later decision reported as Mepco Industries Ltd. vs. CIT & Anr. (2009) 227 CTR (SC) 313 : (2009) 31 DTR (SC) 305 : 2009 (7) SCC 564, where the above dictum was reiterated as follows : ".......Sahney Steel & Press Works Ltd. Etc. (supra) was a case which dealt with production subsidy, Ponni Sugars & Chemicals Ltd. (supra) dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel & Press Works Ltd. Etc. (supra) was on its own facts; so also, the judgment of this Court in Ponni Sugars & Chemicals Ltd. (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straightjacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel & Press Works Ltd. Etc. (supra), this Court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas." 18. Now coming to the findings of the Tribunal on the issue, we find that the Tribunal has referred to various paras appearing in the two judgments to support its view that the receipts in the hands of the assessees were production incentives and thus revenue receipt and not capital receipt. This, however, appears to have been done without appreciating that the observations made in those paras were in the context of the schemes as such, which the apex Court was considering to find the intent and purpose of the incentives under those schemes, and not the law laid down as such. 19. The Tribunal has relied upon five factors to hold the incentives in question as production incentives but without dealing with that part of the scheme, whereby unemployment in the State had been intended to be eradicated creating atmosphere for accelerated industrial development to provide employment opportunities to deal with the social problem of unemployment.
16 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 This in our view was a lopsided interpretation of the New Industrial Policy and concessions formulated by the Central Government for the State of Jammu & Kashmir vide Office Memorandum of 14th June, 2002. 20. Therefore, in view of the clear legal position adumbrated by the Hon’ble Supreme Court of India on the issue in question, that to determine the nature and intent of the incentives as to whether those were revenue receipts or capital receipts, the purpose underlying the incentives was the determinative test, there may not be any necessity of referring to the judgments of other High Courts of the country referred to by the appellants’ learned counsel, some of which had been considered by Hon’ble Supreme Court of India in the above-referred cases. 21. Thus, finding that the New Industrial Policy and other concessions for the State of Jammu & Kashmir have not been correctly appreciated by the Tribunal, we proceed to examine the true intent and purpose underlying the Policy and concessions contemplated by the Office Memorandum of 14th June, 2002 and the statutory notifications issued in this behalf. 22. Perusal of the Office Memorandum dt. 14th June, 2002 indicating New Industrial Policy and other concessions for the State of Jammu & Kashmir, makes it explicit that the concessions were issued to achieve twin objects viz. (i) Acceleration of industrial development in the State of Jammu & Kashmir, which had been found lagging behind in such development and (ii) Generation of employment in the State of Jammu & Kashmir. Amendment introduced to the Office Memorandum vide notification of 28th Nov., 2003 of the Government of India, Ministry of Commerce and Industry (Department of Industrial Policy and Promotion) eloquently demonstrates the Central Government’s intention in extending the incentives. The Government’s objective, as conveyed by Hon’ble the Prime Minister at Srinagar on 19th April, 2003, was, for creation of one lac employment and self-employment opportunities in Jammu & Kashmir State. 23. To achieve the purpose and objective referred to hereinabove, it was, inter alia, provided in the Central excise notifications that the exemptions contained in the notifications would be available only on production of certificate from general manager of the concerned District Industry Centre to the jurisdictional Dy. CCE or the Asstt. CCE, as the case may be, to the effect that the unit had created required additional regular employment, which would not, however, include employment provided by the industrial units to daily wagers or casual employees engaged in the units.
17 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 24. A close reading of the Office Memorandum and the amendment introduced thereto with para No. 3 appearing in the Central Excise Notification Nos. 56 and 57 of 11th Nov., 2002, thus, makes it amply clear that the acceleration of development of industries in the State was contemplated with the object of generation of employment in the State of Jammu & Kashmir and the generation of employment, so contemplated, was not only casual or temporary, but was on the other hand, of permanent nature. 25. Considered thus, the paramount consideration of the Central Government in providing the incentives to the new industrial units and substantial expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the State, additionally creating opportunities for self-employment, hence a purpose in public interest. 26. In this view of the matter, the incentives provided to the industrial units, in terms of the New Industrial Policy, for accelerated industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional permanent source of employment to the unemployed in the State of Jammu & Kashmir were in fact, in the nature of creation of new assets of industrial atmosphere and environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve public purpose, cannot, by any stretch of reasoning, be construed as production or operational incentives for the benefit of assessees alone. 27. Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in industrial development, which is certainly a purpose in the public interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the appellant-assessees cannot be construed as mere production and trade incentives, as held by the Tribunal. 28. Making of additional provision in the scheme that incentives would become available to the industrial units, entitled thereto, from the date of commencement of the commercial production, and that these were not required for creation of new assets cannot be viewed in isolation to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide industrial units so that larger public interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum was achieved.
18 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 29. The other factors, which had weighed with the Tribunal in determining the incentives as production incentives may not be decisive to determine the character of the incentive subsidies, when it is found, as demonstrated in the Office Memorandum, amendment introduced thereto and the statutory notification too that the incentives were provided with the object of creating avenues for perpetual employment, to eradicate the social problem of unemployment in the State by accelerated industrial development. 30. For all what has been said above, the finding of the Tribunal on the first issue that the excise duty refund, interest subsidy and insurance subsidy were production incentives, hence revenue receipt cannot be sustained, being against the law laid down by Hon’ble Supreme Court of India in Sahney Steel (supra) and Ponni Sugars case (supra). 31. The finding of the Tribunal that the incentives were revenue receipt is, accordingly, set aside holding the incentives to be capital receipt in the hands of the assessees.” 19. The conclusion of the Hon’ble High Court is that the Excise refund and interest subsidy received in pursuance of New Industrial Policy of the Government have to be considered in the light of the Office Memorandum dt. 14th June, 2002, and the said Office Memorandum makes it explicit that the concessions were given to achieve twin objects viz., acceleration of industrial development in the State of Jammu & Kashmir and generation of employment in that State. The Hon’ble High Court further held that a close reading of the Office Memorandum and the amendments introduced thereto with para 3 of Central Excise Notification Nos. 56 and 57, dt. 11th Nov., 2002, makes it amply clear that the generation of employment so contemplated was not casual or temporary but of permanent nature and the paramount consideration of the Central Government in providing the incentives to new industrial units and substantial expansion of the existing units was generation of employment through acceleration of industrial development in public interest. Such incentives, designed to achieve a public purpose, cannot be construed as production or operational incentives for the benefit of assessees alone. It was further held that making of additional provision in the scheme that the incentives would be available to the eligible industrial units from the date of
19 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 commencement of commercial production and that these are not to be allowed for creation of new assets cannot be viewed in isolation to treat the incentives as production incentives. Such provisions are intended to ensure that the incentives are made available only to the bona fide industrial units so that the larger public interest of eradicating unemployment is achieved. The Court finally concluded that the incentives received by way of excise duty refund and interest subsidy are capital receipts in the hands of the assessee and therefore not chargeable to tax.
The ratio laid down in the aforesaid decision is squarely applicable to identical subsidy received under identical scheme of the State of Sikkim as the objective of both the schemes are identical. We therefore find no grounds to interfere with the conclusions of the CIT(A) that the subsidy in question is a capital receipt not chargeable to tax.
The main issue that arises for consideration on the basis of the grievance projected by the Revenue in the aforesaid ground No.2 is as to whether the excise duty refund which were held by the CIT(A) to be capital receipts not chargeable to tax can still be considered as part of the book profits u/s.115JB of the Act, even though these sums have been credited in the profit and loss account and treated as income and even though the exclusion of these sums for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act. In rejecting the claim of the Assessee in this regard, the AO held that these sums have been credited in the profit and loss account and treated as income and exclusion of these incomes (sums) for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act.
We have heard the submission of the learned counsel for the Assessee. As far as the excluding the subsidies in question from computation of book profit u/s 115JB of the Act is concerned, the provisions of Sec.115JB of the Act have to be looked at.
20 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an Assessee, being a company, the income- tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2001, is less than seven and one half percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one half ten per cent. The Assessee being a company the provisions of Sec.115JB of the Act were applicable. Every assessee, being a company, shall, for the purposes of section 115JB of the Act, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by— certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act.
We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon’ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision 20
21 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 the Hon’ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid decision of the Hon’ble High Court rendered on identical facts as that of the Assessee’s case, there can be no doubt that subsidies in question does not have any character of income.
When a receipt is not in the character of income, can it form part of the book profits for the purpose of Sec.115JB of the Act, is the question that arises for consideration. The ITAT Kolkata Bench in the case of Binani Industries Ltd. ITA No.144/Kol/2013 order dated 2.3.2016 reported in (2016) 178 TTJ 0658 (Kol) : (2016) 137 DTR 0185 (Kol)(Trib) had to deal with a case where the question was as to whether receipts on account of forfeiture of share warrants amounting to Rs. 12,65,75,000/-, being a capital receipt, would be liable for taxation u/s 115JB. The tribunal after referring to several decisions on the issue viz., the Hon’ble Apex Court in case of Indo Rama Synthetics (I) Ltd vs CIT 330 ITR 336 (SC), Apollo Tyres Ltd. 255 ITR 273 (SC), Special Bench ITAT in the case of Rain Commodities Ltd. Vs. DCIT (2010) 131 TTJ (Hyd)(SB) 514, ITAT Luknow Bench in the case of ACIT vs. L.H.Sugar Factory Ltd and vice versa in ITA Nos. 417 , 418 & 339/LKW/2013 dated 9.2.2016 and decision of Mumbai ITAT in the case of Shivalik Venture (P) Ltd. Vs. DCIT (2015) 173 TTJ (Mumbai) 238 dated 19.8.2015, came to the conclusions
(i) the object of Minimum Alternate Tax (MAT) provisions incorporated in Sec.115JB of the Act was to bring out real profit of companies and the thrust was to find out real working results of company. (ii) Inclusion of receipt which are not in the nature of income in computation of book profits for MAT would defeat two fundamental principles, it would levy tax on receipt which was not in nature of income at all and secondly it would not result in arriving at real working results of company. Real working result
22 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 could be arrived at only after excluding this receipt which had been credited to P&L a/c and not otherwise. (iii) There was a disclosure of the factum of forfeiture of share warrants amounting to Rs. 12,65,75,000/- by the Assessee in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for year ended 31.3.2009. Profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, included notes on accounts thereon and accordingly in order to determine real profit of Assessee, adjustment need to be made to disclosures made in notes on accounts forming part of profit and loss account of Assessee. Profits arrived after such adjustment, should be considered for purpose of computation of book profits u/s 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to section 115JB of the Act.
The Tribunal in the aforesaid decision made a reference to the decision of the Special Bench of the ITAT in the case of Rain Commodities (supra) which in turn was based on the ratio laid down in the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H.Sugar Factory Ltd.(supra), where receipts on account of carbon credits which were capital receipts not chargeable to tax and hence not in the nature of income were held not included in the book profits. The Bench also referred to the decision of the Mumbai Bench of the ITAT in the case of Shivalik Venture Pvt. Ltd. (supra) which was a case where the question was whether profits arising on transfer of a capital asset by a company to its wholly owned subsidiary company 22
23 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 which is not treated as income" u/s 2(24) of the Act and since it does not form part of the total income u/s.10 of the Act and therefore does not enter into computation provision at all under the normal provisions of the Act, the same should be considered for the purpose of computing book profit u/s 115JB of the Act. The Mumbai Bench held as follows:
“26.We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in "book profit" u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.” 26. The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should
24 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 be excluded for the purpose of determination of book profits u/s.115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue.
Gr.No.3 raised by the revenue reads as follows:
“3 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A} erred in granting depreciation @ 10% on landscaping & development charges which is capitalized in nature of land thereby allowing depreciation on land which is not permitted as per I TAct.” 28. The assessee has claimed the landscape expenses of Rs.35,23,301/- incurred on the leasehold land situated at Sikkim Unit to level the uneven land for construction of factory building as revenue expenditure. The AO held that landscaping and development charges are not related to regular repair & maintenance but for better utility of land and its development and therefore the said expenditure was capital expenditure. The CIT(A) upheld the view of the AO that landscaping and development charges are capital in nature. He however held the same shall be included in the block of building and entitled for depreciation @ 10%.
Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal.
We have considered the rival submissions. The assessee has incurred the landscape expenses on the leasehold land situated at Sikkim Unit to level the uneven land for construction of factory building. Since the same has been disallowed as capital in nature, the same should be included in the block of building and the assessee would be entitled for depreciation @10%. The said expenditure has been incurred to level the land and make it suitable of construction of factory. Expenditure incurred on land development is a separate thing as compared to the cost of the land. Reliance is placed in the decision of the Hon'ble High Court in the case of CIT -vs.- Herdilia Chemicals Ltd. (1995) 216 ITR 742 (Born) wherein the Hon'ble High Court held that expenditure
25 ITA No.885&933/Kol/2012 Sicpa India Private Limited A.Yr.2007-08 incurred on levelling and development of land for erection of machinery and building formed part of cost of machinery and building and is therefore entitled for depreciation.
In view of the above we do not find any merit in ground no.3 raised by the revenue. Accordingly we dismiss ground No.3.
In the result appeal by the Assessee is partly allowed for statistical purpose while appeal by the revenue is dismissed.
Order pronounced in the Court on 22.03.2017.
Sd/- Sd/- [Dr.Arjun Lal Saini] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 22.03.2017. [RG PS] Copy of the order forwarded to:
Sicpa India Private Limited (Formerly known as Sicpa India Ltd.), C/o Newby Tea Overseas (P)Ltd., 9A, 2nd Floor, 23A N.S.Road, Kolkata-700016. 2. D.C.I.T.,Circle-8 Kolkata. 3. CIT(A)-VIII, Kolkata 4. C.I.T.-III, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.