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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM]
ORDER Per Shri M. Balaganesh, AM:
Both these appeals by revenue are arising out of separate orders of CIT(A), Central- II, Kolkata vide appeal Nos. 97/CC-XXVII/CIT(A)C-II/Kol/09-10 and 86/CC- XXVII/CIT(A)C-II/10-11 dated 26.04.2010 and 31.01.2011 respectively. Assessments were framed by DCIT, Central Circle-XXVII, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AYs 2007-08 and 2008-09 vide his separate orders dated 31.07.2009 and 11.10.2010 respectively. Since grounds of appeal are common, we dispose of both these appeals by this consolidated order.
2. The only issue to be decided in both the appeals is as to whether the ld CITA is justified in deleting the addition made u/s 41(1) of the Act towards subsidy in the facts and circumstances of the case.
577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 3. The brief facts of this issue is that the ld AO in the course of assessment proceedings observed that the assessee had shown a sum of Rs. 3,72,95,124/- being 75% of sales Tax / VAT as Sales Tax Incentive Receivable under the scheme of State Government. This sum was correspondingly credited to General Reserve of the assessee. The ld AO show caused the assessee as to why the same should not be taxed by invoking the provisions of section 41(1) of the Act. In response to the said notice, the assessee replied that the company was entitled to receive incentives @ 75% of Sales Tax /VAT paid by the assessee company on sale of its finished products under West Bengal Incentive Scheme, 2000. The assessee submitted that the subsidy of Rs. 3,72,95,124/- represented “Industrial Promotion Assistance” allowable to the assessee company in pursuance of “The West Bengal Incentive Scheme 2000” announced by the West Bengal Government vide Notification No. 91- CI/H/4F-54/2000 dated 13.2.2001 with effect from 1.1.2000. The said scheme was announced for allowing several incentives to new units and / or existing units in the large / medium/ small scale sector having registration certificate by the Directorate of Industries and Eligibility Certificate by the West Bengal Industrial Development Corporation Ltd (WBIDCL) or registration certificate issued by the District Industries Centre. It was submitted that on reading of the Preamble and Short Title at Page 1 of the said Scheme , it would be found that the State Government announced the said scheme with the object of ‘Promotion of Industries in West Bengal”. The assessee also drew the attention of the communication issued by Government of West Bengal vide letter dated 22.3.2004 wherein it was mentioned that the “State Government has approved the following package for Budge Budge Refineries Ltd (assessee herein) to be located at Budge Budge , South Parganas with an investment of Rs 65 crores for setting up an Edible Oil Refinery Plant and Captive Power Generation Unit”. Furtehr the Government of West Bengal, Commerce & Industries Department vide its letter addressed to the Managing Director, WBIDC, approved the financial package for the company for the said project. WBIDC issued the eligibility certificate vide its letter No. INC-2000 (511)/I/GENCS/792 dated 7/8th June 2006 declaring the unit to be eligible for incentives. The assessee filed the copies of incentive scheme , eligibility certificate , registration certificate and other correspondences evidencing the eligibility for financial package from the Government of West Bengal. The assessee stated that on a combined reading of all these aforesaid documents and more particularly the incentive scheme of the West Bengal Government and its letter dated 22.3.2004 , it would
577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 be noticed that the object behind the grant of incentive subsidy was to promote industrial growth in the State of West Bengal. It was also submitted that the said incentive was not granted in the course of trade but for setting up of the Edible Oil Refinery Plant and Captive Power Generation Unit at Budge Budge, 24 Parganas, in the State of West Bengal and accordingly would take the character of Capital Receipt not chargeable to tax.
3.1. The quantification of subsidy was in the form of reimbursement of sales tax / VAT paid by the assessee on sale of its finished products to the extent of 75 % of the same after the commencement of production. Hence the assessee after commencement of the production and after payment of sales tax / VAT on sale of its finished products, made a claim to the Government of West Bengal and passed a book entry for the same by crediting the General Reserve and by debiting the Incentive Receivable to the tune of Rs. 3,72,95,124/- and Rs. 8,05,58,316/- during the Asst Years 2007-08 and 2008-09 respectively. This was recognized in the books based on the claim for sales tax subsidy made by the assessee. WBIDCL after ensuring the compliance made by the assessee for making payment of sales tax / VAT on sale of finished products of the assessee company, wherever applicable, in respect of the eligible unit, released/sanctioned the subsidy to the assessee vide letter No. INC-2000/(511)/I/GENCS/1616 dated 18.8.2008 for a sum of Rs. 395.85 lakhs and letter No. INC-2000/(511)/I/GENCS/3759 dated 20.2.2009 for a sum of Rs. 805.58 lakhs.
The ld AO observed that the assessee had collected sales tax but 75% of the same were not paid to the Government. The ld AO placed reliance on the decision of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd reported in 228 ITR 253 (SC) and held that the sales tax incentive / subsidy eligible to be received is a revenue receipt and would be treated as income u/s 41(1) of the Act on the ground that remission of liability which was allowed as a deduction in the earlier years and added the sums of Rs. 3,72,95,124/- and Rs. 8,05,58,316/- for the Asst Years 2007-08 and 2008-09 respectively.
The ld CITA deleted the additions on the ground that the subsidy was actually released / sanctioned to the assessee vide letters of WBIDCL dated 18.8.2008 and 20.2.2009 only which falls in the financial year 2008-09 relevant to Asst Year 2009-10 and hence the 577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 accrual of subsidy / receipt of subsidy had to be seen only in that year and not in the years under appeal. He did not give any finding as to whether the said subsidy is to be treated as a capital receipt or revenue receipt. Aggrieved, the revenue is in appeal before us for both the years.
The ld DR vehemently relied on the order of the ld AO. The ld AR stated that the ld AO had made a factual error by stating that the assessee had not paid the Sales tax / VAT for which purpose, he drew reference to the various tax paid challans enclosed in the paper book. He also stated that but for the payment of sale tax / VAT, WBIDCL would not have disbursed the incentive / subsidy to the assessee. The ld AR reiterated the submissions made before the lower authorities and placed reliance on various judgements of the Hon’ble Supreme Court / Hon’ble Calcutta High Court and various judicial decisions on the said subject and prayed that the sales tax subsidy eligible to the assessee is only a capital receipt keeping in view the object of the West Bengal Incentive Scheme 2000 of the Government of West Bengal.
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 Sales 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 ld 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 part 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 577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 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 1s 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.
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 shows 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 (2008) 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
577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 factories and, due to high financial costs, financial institutions did not come forward to advance loans to the entrepreneurs of new sugar factories. The tempo of establishing new sugar factories received a serious setback. A committee appointed by the Government recommended that five possible incentives for making a sugar plant economically viable could be provided for, viz., capital subsidy, larger percentage of free sale of sugar, higher levy 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 : 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 Indsutrial 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.
577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 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 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 hR 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) ACITVs. 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. Vs. 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 orders 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 incentives:
- 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) 191 ITR 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 577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 mainly based on two factors : First, 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 relied 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 Works 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. DCIT in dt. 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 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 capitol to tide over the financial crisis’, ‘enduring effect’, ‘promotion of industries’ etc. has also been followed in the 577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 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, materials 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 he 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. I 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 WBIPA 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 said 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 years 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.
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 ld 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 577/Kol/2011 Budge Budge Refineries Ltd., AYs 2007-08 & 2008-09 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.
In the result, the appeals of the revenue are dismissed.
Order pronounced in the open court on 14.10.2016