M/S THE STATE FISHERIES DEVELOPMENT CORPORATION LTD.,KOLKATA vs. D.C.I.T CIR - 2,KOLKATA., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

1. For that on the facts and in the circumstances of the case the Ld. Commissioner of Income tax (Appeals) erred in confirming the action of the Ld AO in adding a sum of rs.4,60,00,000/- as Grants-in-aid for salary P.F. & Flood relief to the total income of the appellant, without appreciating the fact that the Grant-in-aid is a capital receipt not liable to be included in the total income of the appellant and such action of the CIT(A) is arbitrary, unjustified, unwarranted and illegal.

M/s. The State Fisheries Dev.Corpn.Ltd. A.Y.2006-07 1 M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 2

2. For that on the facts and in the circumstances of the case the Ld. Commissioner of Income tax (Appeals) erred in applying the decision of the Apex Court in the case of Sahney Steel & Press Works Ltd. vs CIT (SC) reported under 228 ITR 253 as the facts of the appellant’s case are totally different and such action of the CIT(A) is arbitrary, unjustified, unwarranted and illegal.

3. For that on the facts and in the circumstances of the case the Ld. Commissioner of Income tax (Appeals) erred in confirming the action of the Ld AO in disallowing interest paid of rs.2,62,816 for delayed deposit of P.F without appreciating the fact that such interest is compensatory in nature and such action of the CIT(A) is arbitrary, unjustified, unwarranted and illegal. 4. For that on the facts and in the circumstances of the case interest of Rs.2,62,816/- for delay in deposit of P.F is allowable under section 37(1) of the Income tax Act, 1961. 5. For that the appellant craves indulgence to add, amend, alter and/or modify the grounds on or before the hearing of the appeal.”

2. The first issue raised by the assessee in ground nos. 1 & 2 of this appeal is that Ld. CIT(A) erred in upholding the order of the AO by treating the grant-in- aid of ₹4,60,00,000/- towards salary, PF and flood relief as revenue receipt and therefore taxable.

3. The facts in brief as culled out from the orders of lower authorities and documents are that the assessee in the present case is a Public Sector Undertaking and engaged in the business of pisci-culture activities. The assessee for the year under consideration filed its return of income dated 25.11.2006 declaring a total income at NIL. Thereafter the case was selected for scrutiny assessment and accordingly the notices under section 143(2)/142(1) were issue upon the assessee. The assessment was framed under section 143(3) of the Act at total income of Rs. 6,59,39,460.00 after making certain additions/disallowances to the total income of the assessee. The assessee for the year under consideration has received the grant-in-aid from Govt. of West Bengal for the following purposes as detailed hereunder:- a) The grant-in-aid for ₹3,00,00,000.00 was received for the payment of Salary of the employees, b) The grant-in-aid for ₹60,00,000/- for the payment of PF and M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 3

c) The grant-in-aid for ₹1,00,00,000/- for the payment flood relief The assessee treated the above said receipts from the Government of West Bengal as capital in nature and therefore these are not taxable. However, AO during the assessment proceedings has disregarded with the claim of the assessee and treated the same as revenue receipt which is liable to tax.

4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) where it was submitted that assessee is a sick public sector undertaking and the grant was received from the Government for the payment of salary, PF dues and flood relief with the purpose to keep workmen in employment. Therefore it is a capital grant-in-aid and not liable to tax. The assessee is a government company under the administrative control of Fisheries Department of West Bengal. It was not the general subsidy but it was given to keep the company viable. The assessee is owned by the State Government of the West Bengal and subsidy was given as owner. Therefore in the instant case the subsidy cannot be read in any way as it is understood in its normal parlance. However, Ld.CIT(A) disregarded the submission of the assessee by observing in para- 4.2 of his order, which is reproduced below:- “4.2. I have perused the assessment order and considered the submission of the appellant. This issue has also arisen for the A.Y.2005- 06 in which it has been decided against the appellant by the then CIT(A). The matter is now pending before the ITAT, Kolkata. Being identical issue which has been discussed in detail by the CIT(A) in his order for A.Y. 2005-06. Following the view taken by the CIT(A) for the A.Y. 2005-06, this ground of appeal is dismissed.”

Being aggrieved by this order of Ld. CIT(A) the assessee came in second appeal before. The ld. AR before us reiterated the submission made before the lower authorities. On the other hand the ld. DR vehemently supported the order of the lower authorities.

6.1 From the aforesaid discussion we find that the assessee has received a grant from the Government of West Bengal which is hundred percent sole shareholder of the assessee company. The purpose of the grant was to utilize towards the payment for salary and PF of the employees. The AO during assessment proceedings observed that the grant was given to meet the revenue expenses therefore it is fully liable to tax. However, the assessee treated the same as capital grant in aid and therefore not liable to tax. From the facts we find that the lower authorities have made the addition on account of the following:

1) The lower authorities relied in the decision of Hon’ble Supreme Court in the case of the Sahney Steel & Press Works (supra) for treating the grant in aid as the revenue in nature and therefore liable to tax. 2) Similar addition for grant-in-aid was made by the AO in the own case of the assessee for the assessment year the 2003-04. Now let us see the facts of the aforesaid judgment. The Hon’ble Supreme Court has referred to salient features of various schemes formulated by the Central / State Governments and the subsidy received there-under, the purpose of the said subsidy and then determined whether or not it was taxable as revenue receipt. It has been held that the payment made as incentives or subsidies by way of refund of sales tax, power and electricity consumed on production, water rate etc. should be treated as revenue receipts. Incentives and subsidy received in the nature of production expenses after the production has started were not directly or indirectly for setting up of industries and, hence, revenue in character. Operational subsidies would be revenue in nature and they amount to trading receipts. From M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 5 the aforesaid decision we observe that that the subsidies were given to the class of industries as per the schemes designed by the respective Governments. The purpose of the aforesaid subsidies was to promote the certain class of industries provided, they meet the eligibility criteria laid down in those schemes. However, in the instant case we find that the grant in aid was given to the assessee exclusively and there was no scheme as such. Therefore in our considered view the case law cited by AO in the case of Sahney Steel & Press Works Ltd. (supra) are different from the instant case of assessee, as it was given for the specific payment of salary and PF. The relevant portion of the sanctioned letter of Government of West Bengal is reproduced below:- “ GOVERNMENT OF WEST BENGAL FISHERIES DEPARTMENT Writers’ Buildings, Kolkata-1 No.155-Fish(FS)/C-VI/2C-5/00-Pt/1 Dated Kolkata the 30th March 2005 From: The Joint Secretary to the Govt. of West Bengal To: The Treasury Officer, Bidhan Nagar Treasury, Accounts Deptt. Jalsmpad Bhavan, Salt lake, Kolkata-91.

Sub: Sanction of a fund worth Rs.76.77 lakh (Rupees Seventy six lakh and seventy seven thousand only) as Grant-in-aid for the purpose of payment of arrear Provident Fund of the employees of the State Fisheries Development Corporation Ltd.

MEMORANDUM In continuation of this Deptt’s Memo No.87-Fish(FS)/C-VI dated 16.2.2005, the undersigned is directed by order of the Governor to say that the Governor has been pleased to accord sanction to a further sum of Rs.76.77 lakh (Rupees Seventy six lakh seventy seven thousand) only as Grant-in-aid to the State Fisheries Development Corporation Ltd., a Govt. company under the administrative control of the Fisheries Deptt., for the purpose of Provident Fund arrear dues in respect of the employees of SEDC Ltd., to the Regional provident Fund Commissioner.

deposit account has been communicated in terms of Finance Deptt. Memo No.8798-F, dated 23.12.98 wef 1.4.99.

5. This order issues with the concurrence of the Finance Deptt., of this Govt. vide their U.O.No.1141 Group A dt. 30.3.05.

Handlooms Export Corporation of India Limited (supra) wherein the relevant portion is reproduced below. “We have heard learned counsel on both sides in regard to this matter and we agree with the conclusion of the Tribunal that the sum of Rs.11,70,000 stands on no different footing from the amounts received from the STC in earlier years. We have pointed out that what happened in earlier years was that the assessee, having incurred certain losses in its export business, approached the STC for assistance to enable it to meet its liabilities consequent on such losses and the STC agreed to do so by reimbursing the losses incurred by the assessee. There was, therefore, even in those years an agreement on the part of the STC to recoup the losses made by the assessee. The circumstance, therefore, that in the present year, there was an agreement during the previous year by which the STC agreed to give financial assistance to the assessee will not, therefore, make any difference in principle. We are also of opinion that the other distinguishing feature pointed out by the Department does not also make a difference. As pointed out by the Tribunal the nature and purpose of the payments by the STC to the assessee is the same in earlier years as well as this years. In all the years the STC has only provided monies to the assessee-corporation with the object of enabling it to offset the losses which it had incurred in the curse of its business. The fact that the contribution which the STC was prepared to make to enable the assessee to do this was measured in terms of a percentage of its export earnings and was not a flat or round sum of money as in the prior years does not, it seems to us, make any difference. In all the years it is only a case of a cent per cent, holding company coming to the rescue of its subsidiary which has incurred losses and enabling it to recoup those losses and continue to carry on the business in spite of such losses. In the circumstances, what we have said in our earlier judgment in ITR Nos 17 and 84/74 (Addl. CIT v. Handicrafts and handloom Export Corporation [1982] 133 ITR 590 (Delhi) will equally apply in regard to the assistance received by the assessee from the STC during the current years.”

The aforesaid findings recorded by the Hon'ble High Court in the earlier decision i.e., Handicrafts and handloom Export Corporation of India v. CIT [1983] 140 ITR 532 (Del) merit acceptance, even when we apply the purpose test applied in the case of Sahney Steel and press Works Ltd. (supra) as explained in Ponni Sugar and Chemicals Ltd. (supra). It cannot be said that the earlier decision of the Delhi High Court has been overturned or overrule by the Hon'ble Supreme Court in the two decisions mentioned above. Accordingly, we answer the question of law M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 8 against the Revenue and in favour of the assessee. The lower authorities have also made the addition on the ground that similar disallowance was made in the earlier assessment year 2003-04. In this connection, we find that the AO made the addition of grant in aid for Rs. 48,22,698/- in the assessment year 2003-04 but the AO in the assessment year 2004-05 has allowed the relief of grant-in-aid for Rs. 44 Lacs. From the facts of the case we find that grant in aid for Rs.48,22,698/- pertaining to the assessment year 2003-04 was allowed in the immediate subsequent assessment year 2004-05 for Rs. 44 Lacs. The learned AR has produced the copies of the assessment orders for the AYs 2003- 04 and 2004-05 in support of its claim and the same are placed on the record. Similarly, we also find that the grant-in-aid received by the assessee in the assessment year 2004-05 was not disallowed by the AO. The ld. DR failed to bring anything on record contrary to the argument of the ld. AR and he left the issue to the discretion of the Bench. In view of above and in the interest of justice, we are inclined to treat the grant-in-aid as capital in nature therefore it is not liable to tax. Accordingly we reverse the order of the lower authorities and ground raised by the assessee is allowed.”

Respectfully following the order of the Hon’ble Tribunal in its own case, we reverse the order of the authorities below. Hence this ground of appeal of the assessee is allowed.

6. The next and last issue raised by assessee in this appeal is that the learned CIT(A) erred in confirming the order of AO by disallowing the interest paid for delayed deposit of PF for an amount of Rs. 2,62,816/- The AO during the assessment proceedings found that the assessee has paid interest of Rs. 5,51,228/- on delayed payment of PF amount. The AO disallowed the same on the ground that this interest being panel in nature and added it to the total income of the assessee. Aggrieved, assessee preferred an appeal to ld. CIT(A) who has upheld the action of the AO by observing as under:- “6.2. I have perused the assessment order and considered the submission of the appellant. The facts of the case is that the AO disallowed interest of Rs.2,62,816/- paid by the appellant on account of delayed deposit of provident fund. After going through the facts of the case and submission of the appellant, I am of the view that the payment M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 9

of interest on delayed deposit of P.F. is penal in nature, this view has been upheld by the Hon’ble High Court, Allahabad in the case of CIT Vs. Kamalapat Mothilal 172 ITR 438 in which a reference was made by the ITAT, Allahabad Bench at the instance of Commissioner of Income-tax, Kanpur in which a question was referred i.e. “Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs.31,572/- by way of damages for late payment of provident fund deductions was made by the assessee in the course of its business and was deductible in computing the assessee’s total income? “The Hon’ble Court has held that “Following Organo Chemical Industries case, Air 1979 Sc 1803, it must be held that the Appellate Tribunal was in error in holding that the payment of damages cannot be equated with the payment of penalty and that damages paid under section 14B are allowable as business expenditure. Question No.(1) is, therefore, decided in favour of the revenue and against the assessee. “ In view of the above discussion, the appeal on this ground is dismissed.”

Aggrieved, by the order of ld. CIT(A), assessee is in second appeal before us.

of sales tax, and for damages for delayed payment of contribution under Employees State Insurance Act, 1947. The assessee-appellant in the return of income, claimed the amount as allowance under section 37(1) of I.T. Act. The appellant, also claimed the entire entertainment expenses, amounting to Rs.3865 as allowance under section 37(2) of the I.T. Act The Income-tax Officer treated the payment of Rs.19635 as penal interest and disallowed it as allowance under section 37(1) of I.T. Act. Out of the entertainment, expenses, amounting to Rs.3865 incurred by the Directors of the assessee company, for entertainment at the Diners club and C.C.1, the I.T.O. regarded Rs.1365 only as permissible deduction under section 37(2) of I.T. Act, taking the view that the remaining sum of Rs.2500 was attributable to personal expenses of the Directors of the assessee company and therefore impermissible deduction under section 37(2) of the I.T. Act. The Assessee appellant did not succeed in appeals before the A.A.C. and in the Income Tax Tribunal. Applications under section 256 (1) of the I.T. Act before the Tribunal and under section 256 (2) in Bombay High Court were rejected. The assessee filed appeal by special leave in Supreme Court. This Court allowed the appeal partly and, HELD: 'Mat the authority concerned has to allow deduction under section 37(1) of the I.T. Act, wherever the concerned impost is purely 983 984 compensatory in nature. Wherever such impost is found to be of a composite nature, that is partly compensatory and partly penal, the authorities are obligated to bifurcate the two components of the impost and given deduction to the component, which is compensatory in nature and refuse the deduction for the component which is penal in nature. Therefore, whenever any statutory impost paid by assessee by way of damages or penalty or interest is aimed, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost, notwithstanding the nomenclature of the impost as given by the statute to find, whether it is compensatory or penal in nature. Ibis Court agreed with the view taken in earlier decisions by this Court and by the Andhra Pradesh High Court, which settle the law as to when any amount paid as interest damages or penalty could be regarded as compensatory (reparatory) as would entitle the assessee to claim allowance under section 37 (1) of I.T. Act This Court concluded that the question whether the impost is in essence compensatory or is by way of penalty, has to be decided having regard to the relevant provisions of the law under which it is imposed, the reasons given in the order imposing and quantifying the damages or penalty. The imposition though called a penalty may be composite in nature comprising penalty as well as compensation for delayed payment. The nomenclature of the levy as interest, damages or penalty is not conclusive.”

From the aforesaid judgment of Hon’ble Supreme Court, we find that the interest paid for late deposit of PF with the authorities is compensatory in nature therefore it is entitled for deduction while computing the profit under the business head. However it is also pertinent to note that the ld. CIT(A)

M/s. The State Fisheries Dev.Corpn. Ltd. A.Y.2006-07 11 disallowed the interest amount relying in the judgment of Hon’ble Allahabad High Court in the case of CIT Vs. Kamalapat Mothilal 172 ITR 438 and Allahabad High Court in turn relied in the judgment of Organic Chemical Industries case, AIR 1979 SC 1803. However we find that as per the judgment of Hon’ble Supreme Court SC in the case of CIT Vs. Vegetable product Ltd. (1973) 88 ITR 192 (SC) where it was held that in case of conflicting view, the view beneficial to the assessee should be adopted. The relevant extract of the order is reproduced below.

“Interpretation of statutes—Taxing provision—Two reasonable constructions— Construction which favors the assessee must be adopted—If the language is plain, absurd consequence is not a factor to be taken into account in interpreting a provision.

If the language is plain, the fact that the consequence of giving effect to it may lead to some absurd result is not a factor to be taken into account in interpreting a provision. It is for the legislature to step in and remove the absurdity. On the other hand, if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of construction.

If in case of a taxing provision two reasonable constructions are possible, construction which favors the assessee must be adopted”.

We also find that the issue is already covered in the own case of the assessee in ITA 1281/Kol/2009 vide order dated 19.4.2016. In this view of the matter, we reverse the action of Authorities below and ground raised by assessee in appeal is allowed.