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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
Per N.V.Vasudevan, JM
ITA No.883/Kol/14 is an appeal by the Assessee while ITA No.1018/Kol/2014 is an appeal by the Revenue. Both these appeals are directed against the order dated 18.2.2014 of CIT(A)-XII, Kolkata, relating to AY 2010-11.
ITA No.1018/Kol/2014: (Revenue’s appeal) 2. The grounds of appeal raised by the Revenue reads as follows: “1. On the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in deleting the addition on account on account of interest subsidy and excise refund of Rs. 3,00,15,964/ - treating the both of as capital receipt."
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"On the facts and in the circumstances of the case and as per law Ld. CIT(A) erred in allowing the claim of revised return which is against the interest of revenue."
The Assessee is a company. It is engaged in the business of manufacture, sale and export of Insecticides and Agro Chemicals. For AY 2010-11, the Assessee filed a return of income declaring total income of Rs.28,91,20,688/- on 16.9.2010. The Assessee thereafter filed a revised return of income on 22.2.2012 declaring total income of Rs.25,28,24,247/-. The reasons for filing the revised return of income was explained by the Assessee as follows:
“A sum of Rs. 1,88,90,893/- was received by our Company as Interest Subsidy from J & K Development Finance Corporation during the financial year 2009- 2010 ------------------.
A sum of Rs.3,00,15,964/- was received by our Company as Excise Duty Refund from Asst Commissioner Division Central Excise & Customs, IN & K during the financial year 2009-2010 .
Both the above amounts aggregating to Rs.4, 89, 06, 857/- are in the nature of Capital Receipts received from Government of Jammu & Kashmir as incentive for setting up Industrial Unit in Jammu----------.
Since our Company's Unit is situated in the State of Jammu & Kashmir the Honorable Jammu & Kashmir High Court in the case of Shree Balaji Alloys Vs. Commissioner of Income Tax in Appeal Case N02 of 2010 vide their order dated 31/01/2011 has held that the above amounts are in the nature of Capital Receipts and not subjected to Income Tax ----------.”
The AO acted on the basis of the revised return of income filed by the Assessee. The question before the AO was whether the claim of the Assessee that the aforesaid subsidy received by the Assessee was capital receipt not chargeable to tax or was it in the nature of revenue receipt and hence income chargeable to tax. The AO was of the view that the subsidy/incentive in question was given to units which already exists and the subsidy was not utilized for acquisition of capital assets and therefore the subsidy/incentive cannot be regarded as capital receipt not chargeable to tax.
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On appeal by the Assessee, the CIT(A) held that (i) The claim that the subsidies in question were not taxable was made by the Assessee by filing a valid revised return of income u/s.139(5) of the Income Tax Act, 1961 (Act) and therefore such claim was valid and since the AO had not treated the revised return as invalid, the claim of the Assessee that these subsidies were capital receipt not chargeable to tax had to be examined. (ii) The subsidies in question were capital receipt not chargeable to tax as these subsidies were given with the object of acceleration of industrial development in the State of Jammu & Kashmir and generation of employment in the said State. He also held that 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 Judgement dated 31.01.2010, has in respect of the very same scheme under which the subsidies in question were received by the Assessee has held that the subsidies were capital receipt not chargeable to tax. 6. The following were the relevant observations of the CIT(A) in this regard: “I have carefully considered the detailed submission put forth on behalf of the appellant along with the case laws relied upon, perused the facts of the case including the findings of the AO& the judgements relied upon by him in the assessment order and other materials brought on record. After considering the entire facts of the case, I am of the view that though there is substantial force in the reasons given by the AO, but as ·there is a direct decision of the Hon'ble J&K High Court on this issue and the unit. of the appellant's industrial undertaking is situated in Jammu & Kashmir and has received the subsidy under the same scheme under which Shree Balaji Alloys (Supra) has received the subsidy, hence the decision of the Hon'ble J&K High Court will be applicable in the case of the appellant. Moreover, it is seen that the judgements of the Hon' ble Apex Court in both the cases relied upon by the AO have been duly considered by the Hon'ble J & K High Court in the case of Shree Balaji Alloys (supra) relied upon by the appellant. The Hon' ble Court has held that - "... Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the 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 assessee cannot be construed as mere production and trade incentives, as held by the Tribunal. 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
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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. 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." The conclusion of the Hon'ble Court is that: "Excise refund and interest subsidy received by the assessees in pursuance of the incentives announced and sanctioned vide Government of India, Ministry of Commerce and Industry's Office memorandum dt. 14th June, 2002 and Centre! Excise Notification Nos. 56 and 57 dt. 14th Nov., 2002 and other notifications issued on the subject, pertaining to the industrial Policy for the state of Jammu & Kashmir, is capital receipt"
Accordingly, keeping in view the principle of law laid down by the Hon'ble J & K High Court, the ground nos. 2, 3 & 6 of the appeal so far as they relate to computation of income under normal provisions of Income Tax Act are allowed.
However, so far as computation of book profit under section 115JB of the Act since these receipts are credited in profit & loss account prepared in accordance with the part II of Schedule IV of Companies Act 1956, and no deduction is allowed under section 115JB in respect of these subsidies hence, I am of the view that these receipts are to be considered for computation of book profit under section 115JB of the Act. Accordingly, this part of ground of the appeal is dismissed.”
Aggrieved by the order of the CIT(A) holding that the receipt in question was capital receipt not chargeable to tax, the revenue has raised the aforesaid grounds of appeal before the Tribunal.
At the time hearing of these appeals, the learned DR sought adjournment. Out of the 17 cases listed for hearing, the learned DR has sought adjournment in 11 cases. Since the issues raised in these appeals have already been decided in the cases of Assessee’s who have received similar subsidy under the very same subsidy scheme, the request for adjournment was refused. We proceed to decide the appeals after hearing the learned counsel for the Assessee.
We have considered the issue carefully and in the light of the decision of the Hon’ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the
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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, 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
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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’ 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.
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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 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;
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(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." 10. 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 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
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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. 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.
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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. 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.
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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. 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
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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. 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.” 11. 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
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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 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 the very same subsidy received under the very same scheme of State of Jammu & Kashmir by the Assessee in the present case. We therefore find no grounds to interfere with the conclusions of the CIT(A). The grievance of the revenue in ground No.2 regarding the revised return of income is not valid and has rightly held by the CIT(A) the said revised return of income was valid u/s.139(5) of the Act and was acted upon by the AO. In these circumstances, we find no merit in Ground No.2 raised by the revenue.
In the result, the appeal by the revenue is dismissed.
ITA No. 883/Kol/2014 (Assessee’s appeal)
Ground No.1 raised by the Assessee reads as follows:
“1. That the Learned Commissioner of Income Tax (Appeals) -XII, Kolkata was not justified in upholding the action of the Learned Additional CIT Range-12, in denying deduction while computation of Books Profits under section 115JB for Interest Subsidy of Rs.1,88,90,893/- & Customs Duty Refund Rs.3,00,15,964/- [Which were claimed by the Appellant Company & upheld by CIT(A)-XII, as
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Capital Receipts not chargeable to Income Tax under Normal Provisions of the Act] just because these receipts were credited to the Profit & Loss Account by the Appellant Company.” 15. The issue that arises for consideration on the basis of the grievance projected by the Assessee in the aforesaid ground of appeal is as to whether the interest subsidy and 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 CIT(A) 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. 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
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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 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
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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 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.
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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 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
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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.” 21. 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 be excluded for the purpose of determination of book profits u/s.115JB of the Act. We hold accordingly and allow Gr.No.1 raised by the Assessee.
Gr.No.2 raised by the Assessee reads as follows:
“02.Commissioner of Income Tax (Appeals) -XII, Kolkata was not justified in not deleting the addition of Lab Subsidy of Rs.l,50,036/- made by Additional CIT Range-12, since the same was already reduced by the Appellant Company while claiming deduction under section 80IB.” 23. The facts with regard to the aforesaid ground of appeal are that the Assessee is a Company and as per the provisions of the Companies Act, 1956 it is mandatorily required to follow the Accounting Standards referred to in Section 211 of the Companies Act, 1956. Accordingly the Assessee followed Accounting Standard -12 being Accounting for Government Grants. As per express provisions of this Standard the Assessee was required to follow the following:
“Grants related to specific fixed assets are government grants whose primary condition is that en enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Other conditions may also be attached restricting the type or location. of the assets or the periods during which they are to be acquired or held.
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Two methods of presentation in financial statements (or the grants appropriate portions of grants) related to specific fixed assets are regarded as acceptable alternatives. Under one method, the grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value.. The grant is thus recognized in the profit and loss statement over the useful life of a depreciable asset by way of a .reduced depreciation charge. Where the grant equals the whole, or virtually the whole of the cost of the asset, the asset is shown in the balance sheet at a nominal value. Under the other method, grants related to depreciable assets are treated as deferred income which is recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged.” The assessee applied the second alternative by crediting to the profit and loss account the Proportionate Amount of Lab Subsidy in proportion to depreciation charged on lab Equipment. Since the Lab subsidy was granted for acquisition of Lab Equipment the unamortized amount of Government Grant being Lab Subsidy was shown as Liability. Since the Lab Equipment are used in the Eligible Unit the Assessee claimed that proportionate amount of Lab Subsidy credited to the Profit & Loss Account forms a part of the profit of the eligible undertaking and is to be included while allowing deduction under section 80IB.
The CIT(A) dismissed the claim of the Assessee for the following reason:
“In this ground of the appeal., the appellant has contested the AO’s action of not treating lab subsidy of Rs.1,50,036/- for computing deduction under section 80IB of the Act. I have considered the submission of the AR and perused the facts of the case. However, in view of Hon’ble J&K High Court in the case of Shree Balaji Alloys (Supra), I am of the view that appellant is not entitled for deduction under section 80IB on this subsidy of Rs.1,50,036/-. Accordingly, the action of the AO is upheld and this ground of the appeal is dismissed.” 25. Aggrieved by the order of the CIT(A), the Assessee has raised the aforesaid ground of appeal before the Tribunal. As can be seen from the grounds of appeal of the Assessee, the only grievance projected by the Assessee is that there should not be double exclusion of the sum of Rs.1,50,036/- as the Assessee while computing eligible
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deduction u/s.80IB of the Act has already reduced this sum. We are of the view that it would be just and appropriate to direct the AO to consider the claim of the Assessee in this regard and if the contention of the Assessee is found correct, the AO shall give the required relief.
Gr.No.3 raised by the Assessee reads as follows:
“03.That the Learned Commissioner of Income Tax (Appeals) -XII, Kolkata was not justified in upholding the action of the Learned Additional CIT Range-12 by adding a sum of Rs.3,48,230/- under section 14A read with Rule 8D.” 27. The facts with regard to the aforesaid ground of appeal are that the assessee company has shown the dividend income of Rs.8,440/- which has been claimed exempt u/s 10(34). The AO noticed that the investments during the year have increased by an amount of Rs.3,30,60,000/-. He noticed that the assessee has claimed interest expenses of Rs.2,88,33,391/- in the profit and Loss A/C. The assessee was asked to explain the source of the said investments and also to furnish the details of expenses incurred to earn exempt income. It was submitted by the assessee that no expenses were incurred to earn dividend income. It was also available with the assessee. The AO held that the assessee failed to furnish fund flow statement or supporting document to substantiate its claim. Further, there was a common office set- up and establishment for all the business activities as well as investment. Hence, the explanation of the assessee was not acceptable. The AO therefore held that the claim of the assessee that no expenditure has been incurred by him in relation to dividend income was not correct and therefore the provisions of Sec 14A(2) read with Rule-8D are invoked in this case. Accordingly disallowance of expenses was worked out as under :
Rule 8D(ii)
A Interest 2,88,33,391/- B Average Investments 22768700/- (39298700 + 6238700)/2
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C Average Assets 1948962505/- (2205984982 + 169194027)/2 Disallowance = AXB/C 3,36,845/-
Rule 8D(iii)
Average Investments 22768700/- (39298700 + 6238700)/2 Disallowance @1/2% of Average Investments 11,384/- (2205984982 + 169194027)/2
Total Disallowance under section 14Awas thus determined at (3,36,845 + 11,384) Rs.3,48,230/-.
The CIT(A) confirmed the order of the AO. Hence Gr.No.3 by the Assessee before the Tribunal.
We have heard the submission of the learned counsel for the Assessee. It was brought to our notice that the Hon’ble ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). In the light of the admitted factual position that the assessee had earned dividend income of only Rs.8,440/- during the previous year, we are of the view that there can be no disallowance u/s 14A of the Act of any sum beyond Rs.8,440/-. Accordingly the addition made u/s 14A of the Act is directed to be restricted to the extent of dividend income of Rs.8,440/-. Gr.No.3 is partly allowed.
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In the result, appeal by the Assessee is partly allowed and appeal by the revenue is dismissed.
Order pronounced in the open Court on 08.03.2017.
Sd/- Sd/- [Dr.A.L.Saini] [ N.V.Vasudevan ] Accountant Member Judicial Member Dated : 08.03.2017. [RG PS] Copy of the order forwarded to: 1.Krishi Rasayan Exports Pvt. Ltd., 234/3A, A.J.C.Bose Road, Kolkata-700020. 2.Addl. .C.I.T., Range-12, Kolkata.. 3. CIT(A)-XII, Kolkata. 4. CIT-IV, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata. True Copy By order,
Asst. Registrar, ITAT, Kolkata Benches