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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM ]
Date of Hearing : 17.01.2017. Date of Pronouncement : 03.02.2017. ORDER Per N.V.Vasudevan, JM
This is an appeal by the Revenue against the order dated 31.01.2014 of CIT(A)-Central-I, Kolkata relating to A.Y.2010-11.
Grounds of appeal raised by the revenue read as follows :-
“1. That on the facts and in the circumstances of the case, the Ld.CIT(A), Central-I, Kolkata has erred in deleting the addition of Rs.7,48,27,500/- received as Industrial Promotion Assistance(IPA) by the assessee.
2. That on the facts and in the circumstances of the case, the Ld. CIT Appeal Central-I, Kolkata has erred in holding that the aim and object of the scheme was in the capital field and therefore the incentive in the form of the IPA was a capital receipt.
3. That on the facts and in the circumstances of the case, the Ld. CIT Appeal Central-I, Kolkata has erred in not appreciating the facts that the subsidy was paid to assist the assessee in carrying on its trade or business and hence is in the nature of a revenue receipt.
That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in accepting the wrong interpretation of the incentives/subsidies given by the assessee.
5. That on the facts and in the circumstances of the case, the order passed by the Ld. CIT(A), Central-I, Kolkata is not only erroneous but prejudicial to law.
-M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 2
The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearings.”
As can be seen from the grounds of appeal the only question that arises for consideration in this appeal is as to whether a sum of Rs.7,48,27,500/- received by the assessee as Industrial Promotion Assistance under the West Bengal Incentive Scheme 2000 for establishing the industry in the state of West Bengal which is disbursable by way of sales tax paid is a capital receipt not chargeable to tax. The AO was of the view that the aforesaid receipt was revenue in nature and chargeable to tax for the following reasons :-
“The submission of the assessee was perused and discussed. Further on perusal of the letter no.MD/WBIDC/172/2003-04/1206 dt. 23rd June, 2003 issued by Managing Director, WBIDC approving the package of incentive to the assessee M/s. Shyam Steel Industries Ltd, it can be seen that the assessee is eligible for the following incentives (a) Industrial Promotion Assistant @75% of the sale tax paid in the previous year, (b) Capital investment subsidy @15% of the fixed capital asset & (c) all other incentives under WBIS 2000 except interest subsidy in lieu of which IPA is being given. Now it can be seen that the Government under the WBIS 2000 is giving a separate capital investment subsidy to the assessee @15% of the fixed assets. Hence, it is absolutely illogical on the part of the assessee to treat the industrial Promotion Assistance i.e. IPA as capital investment subsidy which is given to the assessee as assistance for the promotion of industry. Further, had it been the intention of the Government to subsidies the capital investment? Then the IPA would have been included in the capital investment subsidy as mentioned in sub-clause (b) of package in approval letter. There would have been no need to mention it separately. Further, the facts that the government is granting the subsidy in the form of reimbursement of sales tax up to 75% of payment clearly suggests that the intention of the scheme is to subsidies the cost of production and not to give any incentive of capital nature. Furthermore, the accounting treatment of the IPA by the assessee in its books of accounts also justifies the case of the revenue because the IPA subsidies of Rs.7,48,27,500/- have been credited against the sale in the Profit & Loss account. And it is only at the time of computation of total income it has been reduced from the Net profit. Moreover, none of the cases cited by the assessee in its submission fits into the facts & circumstances of the case of the assessee because in most of the cases the business of the assessee are different than manufacturing of iron & steel. Therefore, the amount of Rs.7,48,27,500/ - received as Industrial Promotion Assistance(IPA) by the assessee is treated in the nature of revenue incentive/ subsidy and it is added to the total income for the A.Y. 20l0-11.”
4. On appeal by the assessee the CIT(A) held that the receipt in question was a capital receipt not chargeable to tax. In Coming to the aforesaid conclusion the CIT(A) apart from relying on several judicial pronouncements placed reliance on the ITA No.602/Kol/2014-M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 3 decision of Hon’ble Calcutta High Court in the case of CIT vs Rasoi Ltd. 335 ITR 438 (Cal). In the aforesaid decision the Hon’ble Calcutta High Court held that the sales tax subsidy received by the assessee from the Government of West Bengal was a capital receipt not chargeable to tax. The Hon’ble Calcutta High Court held that the subsidy was a capital receipt not chargeable to tax. The CIT(A) following the aforesaid decision was of the view that the subsidy in question was capital subsidy not chargeable to tax. Aggrieved by the order of CIT(A) the revenue has preferred the present appeal before the Tribunal.
We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. It was not disputed before us that identical subsidy received by an assessee was a subject matter of consideration by the Hon’ble ITAT ‘C ‘Bench in the case of DCIT vs M/s. Budge Budge Refineries Ltd in ITA No.1552/Kol/2010. This Tribunal in its order dated 14.10.2016 analysed the scheme and came to the following conclusion:
“7. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find that the assessee in the instant case is eligible for State Capital Incentive Subsidy in the form of reimbursement of 75% of Sale Tax/VAT paid on sale of finished products. In other words, the assessee had to first set up its project in the State of West Bengal and start manufacturing operations. The finished goods manufactured should be sold after payment of sales tax/VAT. The assessee has to produce the evidence for payment of sales tax/VAT. Thereafter, WBIDCL on satisfactory compliance made by the assessee in this regard, would release the subsidy by reimbursing 75% of the sales tax/VAT paid by the assessee. We have gone through the relevant pages of the paper book of the assessee containing the evidence in the form of tax paid challans for sales tax /VAT. Hence we hold that the Id AO had factually erred in stating that the sales tax /VAT were not paid by the assessee. Now the question is whether the said reimbursement of sales tax/ VAT would form pan of taxable receipt in the hands of the assessee in the form of a trading receipt. For this purpose, it would be relevant to go into the object of the Incentive Scheme. We find that the Objects of the scheme could be understood from the foreword of West Bengal Incentive Scheme, 2000 issued by the Commerce & Industries Department, Government of West Bengal. For the sake of convenience, the same is reproduced hereunder:- WHEREAS in pursuance of a National Policy the sales tax related incentives have been withdrawn from 1st January 2000. And WHEREAS the State Government have considered it necessary and expedient to extend new types of incentives for promotion of industries in the state from the same date.
-M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 4
Now, therefore, the Governor is pleased hereby, in supersession of the West Bengal Incentive Scheme 1999 sanctioned under Commerce & Industries Department's Notification No. 580-CI/H/ dated 22.06.1999 and amended from time to time, to approve and sanction a New Incentive Scheme for large, medium and small scale Industrial units as under :- ......... 7.1. A careful perusal of the West Bengal Incentive Scheme 2000 show that the scheme was intended to accelerate industrial development of the state and the incentive was given for setting up of industries in West Bengal and for the purpose of determining the amount of subsidy to be given, sales tax / VAT paid by the assessee on its finished products after setting up of the unit was taken as the basis. We find that the 'Purpose Test' is to be seen while ascertaining the taxability of subsidy in the facts and circumstances of the case. The Purpose Test clearly proves that the subsidy herein is contemplated for setting up of the industry / eligible unit for promotion of industries in the State of West Bengal. The quantification of subsidy alone is based on reimbursement of 75% of sales tax / VAT actually paid by the said eligible unit after commencement of the project. We hold that the quantification thereon would be irrelevant for taxability of the same going by the objects of the incentive scheme 2000 of West Bengal Government. We also find that the Hon'ble Apex Court in the case of CIT vs Ponni Sugars & Chemicals Ltd & Ors reported in (200 306 ITR 392 (SC) had held as under:-
"The character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is 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 is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account.
The assessee was a co-operative society running a sugar mill. During the relevant year in question, on account of economic factors. it was not economically viable to run new sugar factories and, due to high financial costs, financial institutions did not come for advance loans to the entrepreneurs of new sugar factories. The tempo of establishing sugar factories received a serious setback. A committee appointed by the Government recommended that five possible incentives jar making a sugar plant economically viable be provided for, viz., capital subsidy, larger percentage of free sale of sugar, higher sugar price, allowing rebate on excise duty and remission of purchase tax. Following that report, schemes were formulated giving the following benefits. (i) incentive subsidy available only in new units and to substantially expanded units; (ii) minimum investment for new units and expansion of existing units; (iii) increase in free sugar sale quota. The benefit of the schemes had to be utilised only for repayment of Loans. The Department and the High Court had held that the receipts from the Government under the incentive schemes were in the nature of revenue. On appeal to the Supreme Court :
-M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 5
Held accordingly, reversing the decision of the High Court, on this point, that the main eligibility condition in the schemes was that the incentive had to be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of an existing unit. The subsidy received by the assessee was not in the course of a trade but was of a capital nature ."
7.2. We also find that the Hon'ble Calcutta High Court in the case of CIT vs Rasoi Ltd reported in (2011) 335 ITR 438 (Cal) had held as under:-
"If the object of a subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit, the receipt of the subsidy is on capital account. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure.
Held, dismissing the appeal, that the object of the subsidy was the expansion of business capacities, modernization, and improving marketing capabilities and thus, those were for assistance on capital account. Merely because the amount of subsidy was equivalent to 90 per cent. of the sales tax paid by the beneficiary that did not imply that it was in the form of refund of sales tax paid. The subsidy was a capital receipt. “
7.3. It is not in dispute that the West Bengal Industrial Development Corporation Ltd had acknowledged the fact of assessee setting up a new unit for the production of Edible Oil Refinery Plant and Captive Power Generation Unit at Budge Budge, 24 Parganas, Burdwan District covered under Eligibility Certificate stated supra (enclosed in paper book of the assessee) and accordingly had sanctioned the State Capital Investment Subsidy under West Bengal Incentive Scheme 2000.
7.4. We find that the issue with regard to taxability of subsidy is also adjudicated in detail by the decision of the Co-ordinate Bench of this tribunal in the case of DCIT vs M/s Strassenburg Pharmaceuticals Ltd in - 1133 /Kol/2009 dated 27.1.2011 wherein it was held that :- "6. We have heard both the parties, perused the material placed before us and the decision of the ITAT and also the decision of the Hon' ble jurisdictional High Court cited supra. We find that the issue is covered by the aforesaid decisions cited supra and the Ld. CIT(A) following the said decisions treated the WBIPA receipt as a capital receipt and directed the Assessing Officer to delete the additions for all the three assessment years under appeal. Since the Ld. CIT(A) by following the decision of Hon 'ble jurisdictional High Court’s order and also the decision of the jurisdictional ITAT, treated the WBIPA receipt as a capital receipt and directed the Assessing Officer to delete the additions for all the three assessment years under appeal. we find no infirmity in his order and the same is hereby upheld. For the sake of brevity, we reproduce the relevant portion of his order as under: "6.3 I have duly considered the A.O's reliance placed on the judicial decisions and reasons for treating the WBIPA as a revenue receipt. The counter -M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 6 submissions made by the appellant have also been carefully examined and considered. The issue that is to be decided is whether the WBIPA receipt is a revenue or a capital receipt. The A.O placed reliance on the following case laws: Sahney Steel & Press Works Ltd. (1997) 228 ITR 253 (SC) CIT Vs. Chindwara Fuels 245 ITR 9 (Cal) East India Pharmaceutical Works Ltd. Vs. DCIT (ITA No.587 (Kol) 2006 The appellant placed reliance on the following case laws: CIT Vs. Ponni Sugars & Chemicals Ltd. (SC) ACIT Vs. Rasoi Ltd. (ITA No. 1467 to 1469 (Cal) 2001 CIT Vs. KlarSehen P. Ltd. (G.A.N. 145106 dt. 12.5.08 (Calcutta High Court) Klar Sahen P. Ltd. Vs. ITO (ITA No. 2069 to 2071 (Kol) of 2004) EMCEE Pharmaceuticals (P) Ltd. V5. Dy. CIT (ITA No. 1941 (Kol)/2004) Mendine Pharmaceuticals (P) Ltd. (ITA No. 2403/Koh/2003) The department has been relying on the Hon 'ble Supreme Court decision in the case of Sahney Steel and Press Works Ltd.(supra). The Calcutta High Court in the case of CIT vs. Chindwara Fuels (supra) has followed the Apex Court decision. This decision has also been followed by Hon'ble ITAT, Kolkata in the case of East India Pharmaceuticals Works Ltd. (supra). The A.O in his assessment order simply quoted the case laws and held that WBIPA receipt is a capital receipt. The A.O has not analysed the facts nor compared the facts with the facts of the Supreme Court case (Sahney Steel & Press Works Ltd. (supra). On the other hand the Hon'ble ITAT, Kolkata has dealt this issue in a number of cases and held that the subsidy/assistance received from West Bengal Government is a capital receipt. Before I proceed to discuss the ITAT order which are in favour of the appellant, I would first prefer to examine the facts of Sahney Steel & Press Work Ltd. (supra) wherein the Apex Court treated the subsidy as 'revenue' in nature. The Apex Court deeply examined the salient features of the scheme formulated by the Andhra Pradesh Government. It noticed the following conditions to be fulfilled for getting incentive : · Incentive is conditional upon commencement of production · Incentive is limited to 5 years from the date of commencement of production · Incentives are to be given by way of refund of Sales Tax and also subsidy as power consumed and other exemptions. After analyzing the above features, the Apex Court at page 262 observed as under: "That precisely is the question raised in this case. By no stretch of imagination can be subsidies whether by way of refund of Sales Tax or relief of electricity charges or water charges to be treated as an aid to setting up of the industry' of the assessee.............. The subsidies are operational subsidies and not capital subsidies".
The above facts of the case are similar to the case of Kesoram Industries & Cotton Mills Ltd. (1991) 1911TR 518 (Cal) wherein the subsidy received by way of refund of Sales Tax levied on raw materials, machinery, finished goods etc. Thus these two judicial decisions are mainly based on two factors: First, -M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 7 subsidy for carrying on business (conditional), secondly the incentive by way of refund of Sales Tax etc. The facts of the present case are different and are very similar to the case laws re on by the appellant especially cases decided by ITAT, Kolkata. In the present case the subsidy called as 'Assistance' is given equivalent to 90% of Sales Tax paid and not to equated with Sales Tax refund and other exemptions provided as in the case of Sahney Steel & Press Work Ltd. (supra). The TAT decisions relied on by the appellant clearly distinguished this point and also other conditions and held the 'assistance' receipt is a capital receipt. The notable case among others is the case of 'Rasoi Ltd. '(supra) wherein the Hon'ble jurisdictional ITAT (Kolkata) has discussed the similar issue thread bear distinguishing the Sahney Steel & Press works Ltd. case and held as a capital receipt. This decision has been followed in other cases dealt by Kolkata ITAT bench including the case of KIar Sehen P. Ltd. (supra) which was later upheld by the Kolkata High Court. It is very much relevant to reproduce the relevant extract from the ITAT ( - r in the case of Rasoi Ltd. Vs. DClTinITANo.1080/Cal/98dt.18.5.01: "7. So far as the present case before us is concerned, the notification No. 1460 - F.Y. dated 27th May 1994 recites the Resolution of the Govt. of West Bengal, Starting as follows: "Whereas certain industries in the State have been passing through an acute financial crisis and it has been considered necessary to extend financial assistance to tide over such crisis for promotion of such industries, it has been decided in the public interest to formulate a scheme to allow financial assistance to the manufacturing units in West Bengal of such. " It is clear from the above preamble to the Resolution that the scheme for allowing assistance to industries is to help them to tide over the financial crisis faced by the industries and for promotion of the industries themselves. The Scheme of the Govt. of West Bengal does not relate to new industries alone and rather allows benefit under the scheme to new as well as existing units pertaining to certain "industries ". The purpose of the Scheme is definitely to remote the specified industries and to help the units under such industries to tide over the financial crisis being faced by the industries as such. There is nothing in the scheme which could be considered to help the industries in carrying on their operations on day to day basis. When financial crisis is faced by some business, pumping of fresh capital is required to! help the business to tide over such financial crisis. The financial help, in this regard, has, therefore, got to be considered as having an enduring effect of dragging the business out of the poor financial conditions being faced by the industries, The scheme of the Govt. of West Bengal does not at all envisage giving any subsidy in respect of specific items of expenses like sales-tax, power, water etc. Hence, we are of the opinion that the facts of the present case not only differ greatly from those in the cases of either Kesoram Industries & Cotton Mills Ltd. or Sahney Steel & Press Works Ltd. As decided earlier, but the assistance, in the instant case, being unrelated to the day-to- day operations of the assessee-company or even meeting of any specific items of revenue expenses, has got to be considered as capital receipt. There is no doubt about the fact that the units receiving the assistance from the Govt. of West Bengal will be required to undergo certain regulatory measures and -M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 8 fulfill certain existence to be allowable to the assessee in carrying for the business itself in a regular manner or even for the purpose of augmenting its pro fits On the other hand, the sole purpose behind the grant of the assistance seems to be "to tide over the financial crises" and 'promotion of industries." Both these activities relate to capital field and cannot be considered to be linked up with the day to day operations of the assessee in any manner. Hence, we are of too view that the incentive received by the assessee, although dependent upon certain conditionalities, is actually gratuitous in nature and forms capital receipt in its hands. The incentive cannot again be considered as provided by the Govt. to the assessee to meet some of its revenue expenses." The above ratio laid down in terms of 'assistance in the form of fresh capital to tide over the financial crisis', 'enduring effect', 'promotion of industries' etc. has also been followed in the case of Klar Sehen P. Ltd. (supra) for treating the 'assistance' as a capital receipt. Subsequently the Kolkata High Court has also confirmed the decision in the case of Klar Sehen P. Ltd. as under: "Further we have perused the order passed by the Tribunal. We have found that the Tribunal has extensively dealt with the matter including the facts, material and evidence placed before the Tribunal or adjudication. We do not find any reason to interfere with the order so passed by the learned Tribunal nor the order so passed by the learned Tribunal suffers from any legal infirmity nor we find any substantial question of law is involved in the appeal .” 6.4 Decision: The facts of the case and the issue involved in the present case is similar to facts of the cases decided by the jurisdictional Kolkata Tribunal and High Court. l find in the later years (A. Y. 2001-02) in the appellant's own case my predecessor following the jurisdictional ITAT decisions [Rasoi Ltd., Mendine Pharm. Ltd. (supra)} held the WB1PA as capital receipt. I am also of the view that the sole purpose behind the grant of assistance is to tide over the financial crisis and promotion of industries and that both these activities are related to capital field and cannot be linked up with day to day operations of the appellant in any manner. Respectfully following the jurisdictional Kolkata ITAT and High Court decisions discussed earlier I treat WBIPA as a capital receipt and direct the A.O to delete the addition of Rs.23,12,430/-. This ground of appeal of the revenue for all the three assessment years are dismissed ." We also find that this decision of the tribunal has been duly approved by the Hon'ble Calcutta High Court in G.A. No. 2042 of 2011 ITAT No. 201 of 2011 dated 21.7.2011 in the very same case.
7.5. We hold that the ld AO had erred in invoking the provisions of section 41(1) of the Act. It is well settled that the said provision could be invoked only when the assessee had claimed deduction in earlier years at the time of creation of liability and if the aid liability ceases to exist, then the provisions of section 41(1) of the Act could be invoked. In the instant case, admittedly, the assessee had not claimed any deduction in the earlier. r towards the sales tax portion of the subsidy. Hence, the provisions of section 41(1) of the Act could be invoked in the facts of the instant case.
-M/s. Shyam Steel Inds. Ltd. A.Y.2010-11 9
7.5.1. Keeping in view the objects of the West Bengal Incentive Scheme 2000 and various judicial precedents relied upon hereinabove, we hold that the subsidy of Rs.3,72,95,124/- and Rs. 8,05,58,316/- is to be .treated as capital receipt not chargeable to tax in the hands of the assessee. The Id AR had placed reliance on series of decisions on the impugned issue including the various decisions of Hon'ble Supreme Court and Hon'ble Calcutta High Court which are not dealt with herein for the sake of brevity. We hold that in any case, the subsidy cannot be the subject matter of taxation in the years under appeal as the same got released/sanctioned only in the financial year 2008-09 relevant to Asst Year 2009-10. Accordingly, the grounds raised by the revenue for both the years are dismissed.”
6. In view of the aforesaid decision of the Tribunal dealing with identical subsidy we are of the view that there is no merit in this appeal by the revenue. Respectfully following the decision of the Tribunal referred to above we upheld the order of CIT(A) and dismiss the appeal of the revenue.
In the result the appeal of the revenue is dismissed.
Order pronounced in the Court on 03.02.2017.