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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: Ms. MADHUMITA ROY & SHRI BHAGIRATH MAL BIYANI
PER Ms. MADHUMITA ROY - JM:
The instant appeal filed by the Revenue is directed against the order dated 27.08.2020 passed by the Commissioner of Income Tax (Appeals)-II, Indore (in short ‘CIT(A)’), arising out of the order dated 31.12.2019 passed by the DCIT/ACIT-5(1), Indore under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) for Assessment Year 2017-18.
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The Revenue has come up in appeal mainly on deletion of addition of Rs.3,50,67,221/- observing that the Clause (xviii) has been inserted in Section 2(24) of the Act is not applicable to the case of the assessee.
The assessee company filed its return of income on 19.03.2018 declaring total income of Rs.20,76,52,060/-. Upon selection of the case for scrutiny, a notice under Section 143(2) of the Act dated 24.08.2018 followed by notice under Section 142(1) of the Act dated 16.10.2019 were served upon the assessee. The short fact involved in this matter is this that the assessee during the year under consideration received VAT subsidy. In fact, the assessee has availed the scheme of Government of MP known as ‘Industrial Investment Promotion Assistance Scheme, 2010’, wherein the State Government has provided financial assistance to the companies and / or industrial units having fixed capital investment of Rs.1Crore or more. The object of the Scheme was evidently increasing the employment, establishment of new industrial undertakings and increase in new capital investment in the State of M.P. The amount of financial assistance sanctioned under the Scheme was restricted to the extent of fixed capital investment in the new facility set up by the appellant, which was to be paid by the Government by way of refund of VAT taxes up to 75% of the taxes so paid for a period of 10 years subject to the cap of fixed capital investment made by the appellant. It is relevant to mention that the assessee company commenced commercial production w.e.f. 08.02.2011 and therefore the eligible period for assistance was commencing from 08.02.2011 to 07.02.2021 and thus became eligible for the Scheme during F.Y. 2010-11 relevant to A.Y. 2011-12. Further that the payment of the financial assistance was computed as a percentage for VAT
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tax deposited by it but the assistance was in the nature of capital receipt for this particular reason that only upon fulfilling the objectives of the Scheme i.e. increasing the employment, establishment of the new industrial undertakings and increase in new capital investment in the State and also the overall limit of subsidy/financial assistance was linked to the fixed capital investment and therefore, was in the nature of capital subsidy for setting up a new unit / expansion of existing unit. It is not linked with the particular assets but it is given for over all setting up and installation of the new unit or expansion of existing unit. In that view of the matter, the case of the applicant is this that newly inserted Clause (xviii) in Section 2(24) of the Act w.e.f. 01.04.2016 is not applicable in the case of the assessee as the subsidy was sanctioned much prior to that from F.Y. 2010-11. However, the Ld.AO was of the opinion that only capital subsidy linked to reimbursement of capital investment towards closing of plant, machinery etc. and being liable to be reduced from the cost of fixed asset is not taxable as per amended provision. Further that the VAT subsidy received by the appellant cannot be reduced from the cost of fixed assets since the same is linked to the sales made and has not direct nexus on cost of fixed assets. In that view of the matter, the Ld.AO added the VAT subsidy of Rs.3,50,67,221/- to the total income of the assessee, which was, in turn, deleted by the Ld. CIT(A). Hence, the instant appeal before us.
We have heard the rival submissions made by the respective parties and also perused the materials available on record.
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Before the First Appellate Authority, the assessee reiterated the stand taken before the Ld. AO. It was contended that the subsidy was granted with the specific objects as already defined in the Scheme and is linked with the amount of capital investment newly installed facility and thus, the same is capital in nature. We have carefully considered the document relating to the scheme annexed to the Paper Book filed before us wherein the objectives were mentioned in para 2 of Page 111. The details of scheme are also available at page 126, para 16.3 therein. The only test to be applied to determine the nature of the financial assistance would be the purposive test i.e. the purpose for which the subsidy is given. The point of time at which the subsidy is paid is not relevant. The assessee has relied upon certain judgments where the financial assistance received under the identical circumstances even by way of reimbursement of Sales Tax/ VAT held to be capital receipt.
(a) CIT V/s Ponni Sugars and Chemicals Ltd. (2008) 219 CTR Supreme Court 105. (b) Special Bench decision of Honourable Mumbai ITAT in Reliance Industries 88 ITD 0273. (In respect of sales tax subsidy). (c) CIT V/s Shree Balaji Alloys 138 DTR 0036 (SC). (In respect of excise duty refund and interest subsidy). (d) DCIT V/s Harinagar Sugar Mills Ltd. ITA 5675/Mum/2014. (In respect of reimbursement of VAT on molasses). (e) CIT V/s Rasoi Ltd. 335 ITR 438 Kolkatta. (In respect of refund / reimbursement of sales tax / VAT). (f) Decision of Honourable ITAT Kolkatta Bench in the case of Budge Budge Refineries Ltd. V/s DCIT dated 14.10.2016 I (Reimbursement of 75% sales tax / VAT paid).
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The Ld. CIT(A) considering this aspect granted relief with the following observations:
“4.7 Thus when the scheme document is read in the light of the various judicial precedents on this issue, evidently the subsidy sanctioned to the appellant is with the aim and objectives of promoting industrial development in the state, maximizing employment opportunities and fresh investment in the state and is therefore capital in nature. It is immaterial that the said subsidy is given by way of refund of VAT taxes, as this is only a mode of conferring the benefit onto the eligible units, which by itself alone, is not sufficient to hold the same as revenue in^ nature. When the 'purpose test' as propounded by the Honorable Apex Court is applied in the instant case, it follows, beyond doubt that the subsidy falls with the four corners of 'capital receipt' and cannot be fastened in the category of 'revenue receipts' as attempted to be done by the AO. This position of law was categorical till before the introduction of the newly inserted clause (xviii) to section 2(24). 4.8 The moot point to be considered and decided now is whether the newly inserted clause (xviii) to section 2(24) can be applied retrospectively even in respect of the Financial Assistances sanctioned and guaranteed to the appellant much before the insertion of this new-clause. The facts relevant to this particular issue are that the appellant was sanctioned the financial assistance under the Industrial Investment Promotion Assistance" Scheme, 2010 in the FY 2010-11. Such assistance was to be provided by the Government for a period of 10 years after the date of commencement of commercial production by way of refund to the extent of 75% of VAT paid by the appellant subject to maximum cap to the extent of amount invested by the appellant in the new unit. Therefore, the payment of the sanctioned subsidy is deferred and staggered to subsequent years. Therefore, the amount credited by the appellant during the year under consideration which is 75% of the VAT paid during the year, finds its genesis in the registration of the appellant and sanction of the financial assistance in FY 2010-11 under Industrial Investment Promotion Assistance Scheme, 2010. For all practical purposes, the subsidy had accrued to the appellant in FY 2010-11 itself and only due to the typical mechanism of determining the eligible amount to be paid every year, based on the VAT payments made by the appellant, the said subsidy is being accounted for by the appellant on year to year basis. The appellant has rightly contended that had the entire subsidy would have been paid by the Government in FY 2010-11 itself, the present issue would not have arose. It is only because the Government, considering its own financial constrains preferred to launch a scheme under which the subsidy amount once determined arid sanctioned, was to be paid subsequently in installments based on the VAT payments made by the appellant. This mechanism served both the purposes for the State exchequer i.e. on one hand the desired objectives of promoting industrialization was achieved and on the other hand there was no immediate financial burden on the Government.
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Therefore, it is only due to this inherent technical issue in the financial assistance scheme itself, the subsidy amount is being credited in piecemeal by the appellant. Therefore, in my considered view, the provisions of newly inserted clause (xviii) of section 2(24) will not be applicable in respect of the impugned subsidy credited by the appellant, I find support in holding so also from the decision of the Honourable Rajasthan High Court, the relevant abstract of which has already been made above wherein it is held that there is distinction between the entitlement towards the said subsidy and its subsequent disbursement. The court has also held that the assessee became entitled to such subsidy once it has set up the new unit in the State of Bihar and the disbursement happens when the assessee company actually starts production. The Honourable Court also held that the quantum of subsidy is linked to the capital invested and also the disbursement thereof is linked to VAT which is collected and deposited on goods actually produced and sold and that by its very nature, the subsidy would thus be payable after the commencement of production but that would not make it a revenue subsidy as it was only a mode of disbursement and nothing to do with the object for which the subsidy was given. 'These propositions held by the Honourable Court sufficiently address the issue raised by the AO that since the VAT subsidy is linked to the sales made, after the insertion of new clause the said subsidy becomes taxable. Since in the present case before me, the appellant became entitled to the subsidy in the pre-amended era and only part of the subsidy is accounted in the post amendment period, only due to the disbursement mechanism devised by the Government, it has to be necessarily held that the treatment of the said subsidy shall be governed by the settled legal position existing at the time the said subsidy was sanctioned to the appellant. Therefore, in my considered view the newly inserted clause (xviii) to section 2(24) w.e.f. 01.04.2016 cannot be applied in respect of the subsidy granted to the appellant in FY 2010-11 under the Industrial Investment Promotion Assistance Scheme, 2010 as the amendment made by the Finance Act 2015 is prospective in its application and would apply only to the subsidies sanctioned and Authorized after 01.04.2016. 4.9 Therefore in the light of the various judicial pronouncements as discussed above, applicable provisions of the Act and facts and circumstances of the case the AO is directed to delete the addition made by treating the amount of capital subsidy as revenue receipt.”
It was further contended by the Ld. AR before us that the assessee has received an amount of Rs.747.67 Lakhs under the said Scheme prior to the year under consideration, out of which, an amount of Rs.239.71 Lakhs was received in the immediately preceding year i.e. A.Y. 2016-17, which was duly
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accepted as a capital receipt in the regular assessment proceeding concluded under Section 143(3) of the Act.
It is an admitted position that the financial assistance under the ‘Industrial Investment Promotion Assistance Scheme, 2010’ was sanctioned in F.Y. 2010-11 and only the payment is deferred and staggered to subsequent years. In fact, the subsidy has already accrued to the appellant in A.Y. 2011- 12 itself and therefore, the treatment shall be governed by the law existing at that material point of time. Needless to mention that the amended provision to be applied only to the subsidies sanctioned and authorized after 01.04.2016. Having regard to this particular facts and circumstances of the matter, the newly inserted Clause (xviii) to Section 2(24) of the Act w.e.f. 01.04.2016 cannot be said to be applied to the case of the assessee which has been duly considered by the Ld. CIT(A) while deleting the addition made by the Ld. AO, which according to us is without any ambiguity so as to warrant interference. Thus, the ground filed by the Revenue is found to be devoid of any merit and, therefore, dismissed.
The issue related to the addition of interest charged from Manjit Cotton Pvt. Ltd. To the tune of Rs.3,77,105/- is under challenge before us.
It appears that the order passed in the preceding years making addition of Rs.3,35,583/- on account of charging of interest @12% from M/s. Manjit Cotton Pvt. Ltd. as against interest paid 14% on amounts borrowed, the Ld. AO made addition. In appeal, relying upon the judgment passed by the Co-
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ordinate Bench in the case of Shri John Jacob vs. Jt. CIT in ITA No.1328/Ind/2016, the Ld. CIT(A) deleted the addition made by the Ld. AO.
We have heard the rival submissions and perused the materials available on record.
The Ld. CIT(A) while deleting the addition observed as follows:
“5.1 I find that the AO has merely stated that in the preceding year addition of Rs.3,35,583/- was made on account of charging of interest @ 12% from M/s Manjeet Cotton Pvt Ltd as against interest paid 14% on amounts borrowed and as the issue is identical in this year also addition on account of difference in the rate of Rs.3,77,105/- has been made to the total income of the appellant. On the other hand, the appellant contended that the AO has made the addition on the basis of wrong appreciation of the facts, incorrect interpretation of law and without considering the commercial acumen of a businessman. The appellant has also demonstrated the fact that it had huge own interest free funds along with the interest bearing borrowings which were specific in nature with the help of its balance sheet, which was also on the records of the AO. The appellant claimed that the own interest free funds were sufficient to make the advances on which substantial interest, had been received by the appellant. The appellant also contended that there was no provision under the Income Tax Act to make an addition on account of notional income, which has neither accrued nor received by the appellant. 5.2 1 find that the AO has riot negated the contentions raised by the appellant in his submissions made during the course of assessment proceedings. No nexus has been established that the loans taken at high rate of interest has been advanced at a lower rate of interest. Further, the submission of the appellant that the said party was an independent party and was not any way related to the appellant has also not been controverted by the AO. It is also seen that the AO has not made the disallowance of interest but has made an addition of notional income of charging lesser interest from a third party. This approach is not correct as the party is not a related party and the transaction was undertaken in during the normal course of business. The AO has not brought any evidence on record to establish that higher rate of interest bearing funds were utilized for the purpose of extending inter corporate deposits and not for the purpose of acquisition of the plant and machinery as submitted by the appellant. 5.3 In my opinion, the appellant also gets support from the decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Limited [2009] 313 ITR 340 wherein it was held that "If there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments." In the given case the appellant has not given any
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interest free funds, rather the appellant has charged the interest @12%. It is a settled position of law that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. 5.4 The appellant placed reliance on the decision of the. Hon'ble Jurisdictional Bench of IT AT Indore in the case of Shri John Jacob vs. Jt. CIT in ITA No. 1328/Ind/2016 wherein addition was made on account of notional interest to be charged on certain advances extended by the assessee, whereas the assessee had sufficient capital. It was held by the Hon'ble Jurisdictional Bench that "6. The Ld. Counsel for the assessee during the course of hearing relied upon the judgement of Hon'ble Supreme Court as rendered in the case of Hero Cycles (P) Limited vs. CIT (Central), Ludhiana in Civil Appeal No. 514 of 2008, wherein the Hon’ble Supreme Court has held as under :- "In so far as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT(A) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its Directors." 7. The assessee has stated that it was having sufficient amount to give advance free loans to Mrs. Preeti Shairna and Mr. Rijwan Khan. In support of this, the assessee has drawn our attention to the paper book page no. 11, where the balance sheet as on 31.3.2009 is enclosed. On the said balance sheet, it is evident that the assessee was having sufficient balances to make such advances. Therefore, we direct the AO to delete these disallowances. Grounds raised in this appeal are allowed. 5.5 In view of the ruling of the Honourable High Court, Honourable Jurisdictional ITAT and in view of the facts of the case and submissions placed on records, it is held that when the appellant has sufficient interest free funds to make the advances and also in respect of the business advances and business debtors there may not be accrual of interest income in the hands of the assessee, no addition on account of notional income is called for. In the present case, the appellant has in fact received the substantial amount of interest at the rate of 12%. Also, there is no direct nexus between the amount borrowed by the appellant from the bank for specific purpose and the loans advanced by the appellant on which interest income has been earned. The addition made by the Learned AO also lack cogent reasoning and specific findings, therefore the same is deleted. In the result ground no 2 of the appeal is allowed.”
After careful reading of the order and the records made available before us, it appears that the appellant has received substantial amount of interest @12% and we do not find any direct nexus between the amount borrowed by
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the appellant from the Bank for specific purpose and the loan advanced by the appellant on which interest has been earned. Thus, the impugned order of deletion of addition made by the Ld. CIT(A) is found to be justified and hence, upheld.
In the result, Revenue’s appeal is dismissed.
This Order pronounced on 24/11/2022
Sd/- Sd/- (BHAGIRATH MAL BIYANI) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Indore; Dated 24 /11/2022 TRUE COPY S. K. Sinha, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- 5. �वभागीय ��त�न�ध, आयकर अपील!य अ�धकरण, अहमदाबाद / DR, ITAT, Indore 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,
(Dy./Asstt.Registrar) ITAT, Indore
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1.Date of dictation on 22.11.2022 2.Date on which the typed draft is placed before the Dictating Member 23.11.2022 3.Date on which the approved draft comes to the Sr.P.S./P.S. 4.Date on which the fair order is placed before the Dictating Member for pronouncement 5.Date on which the fair order comes back to the Sr.P.S./P.S 6.Date on which the file goes to the Bench Clerk 7.Date on which the file goes to the Head Clerk…………. 8.The date on which the file goes to the Asstt. Registrar for signature on the order…………………… 9.Date of Despatch of the Order………Date on which the typed draft is placed before the Dictating Member 19.12.2019 1. Other Member………………Date on which the approved draft comes to