JINDAL POLY FILMS LTD.,NEW DELHI vs. ACIT, NEW DELHI

Consequently, appeal filed by the assessee against the revisionary order passed by the CIT under section 263 of the Act was dismissed by the Tribunal as infructuous vide order dated 30.06.2015 in ITA No.2519/Del/2012.

The assessment framed u/s 153A of the Act was challenged before the CIT(A) and an additional claim was made which read as under :-

One of the grounds urged by the Assessee before the CIT(A) - which was not raised before the Assessing Officer [AO]-regarding the subsidy on account of the sales tax was not entertained by the CIT(A) on the ground that the same was not reflected in the final accounts of Tax Audit Report and the Assessee had not been able to substantiate its claim.

Aggrieved by the same, the Assessee had filed an appeal before the learned ITAT, which was partly allowed by the impugned order. A plain reading of the impugned order indicates that the learned ITAT had held that the assessment was pursuant to the search that was conducted on 14.11.2011 and was in respect of unabated assessment and, therefore, the said assessment could be reopened for reassessment only on the basis of the incriminating material found during the search. Since, in the present case, incriminating material had not been found, learned ITAT proceeded on the basis that assessment order was required to be quashed. The learned ITAT has referred to the decision of the Supreme Court in Principal Commissioner of Income-tax, Central-3 v. Abhisar Buildwell (P.) Ltd.: (2024) 2 SCC 433. The facts as obtaining in the present case clearly indicate that the assessment in respect of AY 2006-07 had abated and therefore, learned ITAT had proceeded on an ex-facie erroneous premise that the assessment for the AY 2006-07 has not abated and had been reopened.

In view of the above, the learned ITAT's conclusion that no assessment could be made other than on the basis of incriminating material in respect of AY 2006-07 is, prima facie, erroneous. In cases of assessments which are pending and abated on account of issuance of notice under Section 153A of the Act, the AO has power to complete the assessment in accordance with law. The power of the AO to frame the assessment is not conditional on incriminating material being found during the search proceedings. This is obvious because in case of abated assessment, the initial assessment does not exist and a fresh assessment is required to be made. However, in case of concluded assessments, the proceedings initiated under Section 153A may be called in question on account of absence of any incriminating material found during the search.

However, in view of the facts as noted above, the said question does not arise for consideration of this Court as the impugned order is based on erroneous premise that the assessment for AY 2006-07 was not abated as it was a concluded assessment. Since, this assumption is erroneous it is not necessary for this Court to examine any other aspect in this case.

Ld. counsel appearing on behalf of the assessee at the very outset submitted that the very issue came up for consideration before the Tribunal in assessee’s own case for subsequent assessment years A.Y. 2008-09 & 2009-10 [ITA Nos. 3360 & 3361/Del/2016], wherein the Tribunal vide its common order dated 04.06.2024 has decided the issue of exemption of sales-tax subsidy as capital receipt. On the other hand, Ld. DR relied on the orders of authorities below. record. The Tribunal vide order dated 04.06.2024 in assessee’s own case for A.Y. 2008-09 and 2009-10 has adjudicated this issue, inter alia, by observing as under:

We are of the considered view that the CUT(A) grossly erred in not appreciating the decision of the Hon'ble Supreme Court in its true perspective. In the judgment itself the Hon'ble Supreme Court has categorically laid down that there is no fetter on the appellate authority to entertain such claim."

The Co-ordinate Bench has not only admitted the claim of the assessee but also allowed the claim of the assessee. However, that case related to the subsidy in respect of West Bengal Incentive Scheme, 1999 and the present case is related to the Incentive Scheme of Maharashtra, 1993 for which Learned counsel appearing for the assessee pointed out that Hon'ble Delhi High Court in the case of CIT V. Indo Rama Synthetics Ltd. [2024] 337 CTR Jindal Poly Films Ltd. v. ACIT (Del) 159 has considered the Incentive Scheme of Maharashtra, 1993 and held the receipts were capital in nature. This judgment of Hon'ble Jurisdictional High Court, has discussed all the aspects, which CIT(A) has gone into and asserted by Ld. SR. DR. As no contrary view is cited by the Id. Sr. DR, we consider the issue to be covered in favour of the assessee on the basis of following findings of Hon'ble Delhi High Court in case of Indo Ram (supra); "12. We have heard the learned counsel for the parties and perused the record.

As would be evident from the narration of facts and the submissions recorded hereinabove, the nature of subsidy in the hands of an assessee is fact-centric. 13.1 What has uniformly emerged upon perusal of the case law cited by both sides is that the courts have applied the "purpose test" for concluding one way or the other as to whether the subsidy received should be treated one on capital or revenue account. The principles enunciated by the Supreme Court in Sahney Steel's case have been uniformly applied in all cases which followed decision 14. In the Sahney Steel case, the Supreme Court dealt with an incentive scheme forged by the Government of Andhra Pradesh. The incentives were given in the form of refund of sales tax on raw materials, machinery and finished goods, subsidy on power consumed for production exemption from payment of water rate on water drawn from sources which were not maintained at the cost of the government or any local body, refund of water rate in respect of water drawn from a government source or source maintained by any local body but returned after purification, limitation qua liability on account of assessment of land revenue or taxes on land use for the establishment of any industry and additional incentives to new industrial units set up in designated areas 14.1 Although the aforesaid incentives were provided, their disbursement was linked to the commencement of production. Thus, an assessee became entitled to incentives only after the industrial unit began production Jindal Poly Films Ltd. v. ACIT 14.2. The scheme framed by the Government of Andhra Pradesh did not envisage a direct or indirect disbursal of incentives for setting up the industry. 14.3 The Supreme Court, thus, based on its examination of the scheme, concluded that the incentives received by the assessee in that case were akin to an operational subsidy. In other words, the court concluded that the incentives/subsidies had to be treated as trade or supplementary trade receipts. Notably, a specific observation was made by the court concerning the refund of sales tax on the purchase of machinery while repelling the argument made on behalf of the assessee that since a part of the refund was linked to a capital asset, it had to be necessarily treated as a capital receipt. 14.4 The observations made by the court in this context being significant and perhaps apposite in unravelling the predicament in which one can get caught while deciphering as to how the incentives received by the assessee in a given case should be treated, for convenience, are extracted hereafter: "18. Mr. Ganesh's further argument was that the three types of refunds contemplated in the scheme, the refund of sales tax on purchase of machinery must be treated as capital. The payment for the purchase of machineries must be of capital nature and the entire payment of sales tax must have been treated as capital expenditure of the Company. If any refund of sales tax paid on purchase of capital goods is made the refund will partake of the character which it had originally horne. Such refunds cannot in any circumstances be treated as trade receipts or s or supplementary trade receipts. This argument overlooks the basic principle laid down in the cases discussed above. It is not the source from which the amount is paid to the assesses which is determinative of the question whether the subsidy payments are of revenue or capital nature. The first proposition stated by Viscount Simon in Ostime's Case (supra) is that if payment in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of the State. If any subsidy is given the character of the subsidy in the hands of the recipient- Jindal Poly Films Ltd. v. ACIT whether revenue or capital-will have to be determined by having regard to the purpose for which the subsidy is given If it is given by way of assistance to the assessee in carrying on of his trade of business, it has to be treated as trading receipt. The source of the fund is quite immaterial. For example, if the scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipts in the hands of the assessee. It will not be open to the revenue to contended that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipts in the hand of the assessee. In both the cases, the Government is paying out of public funds to the assessee for definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Company's Case(supra), the monies must be treated as to have been received for capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade." [Emphasis is ours] 15. As noted hereinabove, this principle, ie., the purpose test, has been applied in subsequent judgments rendered both by the Supreme Court as well as by various High Courts (See Ponni Sugars and Chemicals Ltd., Chaphalkar Brothers and Nestle India Ltd] 16. Therefore, what the court requires to examine while applying the purpose test to the incentive/subsidy received by an assessee are the following aspects: (1) First, does it assist in setting up an industry, as opposed to carrying out trade or business operations? (ii) Second, is the incentive/subsidy given to operate the industrial unit profitably and not for setting it up? (iii) Third, while employing the purpose test, the court is not concerned with the source, the timing or the mode and manner in which the subsidy is measured and paid. In other words, the quantification of the subsidy/incentive (whether it is linked to Jindal Poly Films Ltd. v. ACIT turnover or the cost of a capital asset) would not be a determinative factor in concluding the nature of the receipt. The purpose and the object with which the benefit/incentive/subsidy is extended would determine its character in the hands of the recipient, Le., the assessee.

Against the backdrop of the aforesaid principles, it will be helpful to advert to the purpose and object of the 1993 Scheme. The purpose and object of the 1993 Scheme is best illustrated by referring to the preamble of the 1993 Scheme "In order to achieve dispersal of industries outside the Bombay-Thane- Pune belt and to attract them to the underdeveloped and developing areas of the State, Government has been giving a Package of Incentives to New/Expansion Units set up in the developing region of the State since 1964 under a Scheme popularly known as the Package Scheme of Incentives, The Package Scheme of Incentives, introduced in 1964, was amended from time to time. The last amended Scheme, commonly known as the 1988 Scheme was operative from 1st October, 1988 to 30th September, 1993. The question of rexiting the 1988 Scheme to rationalise the scope of incentives, various scales and mode of release of incentives to intensify and accelerate the process of dispersal of industries from the developed areas and for development of the underdeveloped regions of the State, particularly those farther away from the Bombay-Thane- Pune helt, had ben under consideration of the Government. In the light of the experience gained implementation of the earlier Schemes, particularly the 1988 Scheme, and in the changed circumstances of the liberalised industrial policy of the Government of Indi and with a view to achieving the objectives outlined above, the Government has decided to revise the 1988 Scheme and bring into force a New Scheme, viz, the Package Scheme of Incentives, 1993 (hereinafter referred to as "the 1993 Scheme") [Emphasis is ours] 17.1 A careful perusal of the preamble would show that the 1993 Scheme was forged to achieve three broad objectives. (1) First, to disperse industries outside the Bombay now Mumbai]-Thane- Pune belt and to attract new and expanded units to developing and underdeveloped areas of the State. (ii) Second, to rationalise incentives accorded by intensifying and accelerating the dispersal of units from developed to underdeveloped/developing areas. (iii) Third, the development of underdeveloped regions of the State, particularly those which were at some distance from the Bombay [now Mumbai]-Thane-Pune belt. 17.2 Jindal Poly Films Ltd. v. ACIT Thus, the central theme. object and purpose of the 1993 Scheme was to industrialise underdeveloped and developing areas which fell outside the Bombay now Mumbai)-Thane-Pune belt by incentivising the setting up of new and expanded units 18. A closer look at the 1993 Scheme would show that the folloveing incentives were envisaged as captured in paragraph 5 of the said scheme "S, INCENTIVES The incentives under the 1993 Scheme will be admissible to a Now Unit/Pioneer Unit/Prestigious Unit, and will be in the nature (i) Sales Tax Incentive by way of Exemption/Deferral/Interest-Free Unsecured Loan, (i) Special Capital Incentive SSI Units, (ii) Refund of Octroi/Entry Tax (in lieu of Octroi), (iv) Refund of Electricity Duty, (v) Concession in the Capital Cost of Power Supply, and (vi) Contribution towards the Cost of Feasibility Study."

Each of the incentives referred to above was made admissible to either one or more of the following units categorised ax new/pioneer or prestigious. 19.1 A perusal of the definition of new unit/pioneer unit/prestigious unit would show that there is a common denominator a brand-new unit had to be set up. The only difference was that insofar as the pioneer unit was concerned, it included a large-scale new unit or a large-scale fixed capital investment made by an existing unit. In other words, there was an expansion of an existing unit. 19.2 Insofar as the prestigious unit was concerned, its definition is almost similar to a pioneer unit, the only difference being that it had to be set up in a specific district, Le.. Gadchiroli District. It is common knowledge that Gadchiroli is a problematic area for more than one reason, therefore, setting up an industry in that area is challenging.

Besides this, the scheme also refers to a sick unit, which, as per the definition provided in paragraph 3.17 of the scheme, includes a small-scale industrial unit.

Therefore, the common thread running through various incentives provided under the scheme (to which we have referred above) was the setting up a new unit or large-scale investment in fixed capital. The Jindal Poly Films Ltd. v. ACIT fact that the eligibility certificate was to be issued by the agency implementing the scheme after the commencement of commercial production by the eligible unit appears to have been incorporated in the 1993 Scheme to ensure that the object and the purpose of the 1993 Scheme, which was to industrialise underdeveloped and developing areas was fulfilled.

Thus, in our opinion, the argument advanced on behalf of the appellant/revenue that a perusal of paragraphs 3.1 and 3.3 of the 1993 Scheme would show that the Incentives were tied in with production is untenable. The complete focus of the 1993 scheme was to achieve the object, as noticed above, engrafted in its preamble. 23 As noticed hereinabove, the respondent/assessee was entitled to avail of sales tax subsidy/incentive under two eligibility certificates dated 13.12.1994 and 15.10.1996 [as amended] for 14 years and 13 years & 11 months, respectively, subject to a maximum entitlement of 110% of capital investment made in setting up of the industrial units. 23.1 Investment in capital assets such as land, buildings, plant and machinery was only a measure adopted for calculating the sales tax subsidy/incentive [which in this case was availed by the respondent/assessee by retaining the sales tax it had levied on its goods]. 23.2 A perusal of the eligibility certificate dated 13.12.1994 would show that it was issued for setting up a "new unit", while the eligibility certificate dated 15.10.1996 was given to a "pioneer unit" which had undertaken expansion.

Therefore, the argument that the sales tax subsidy/incentive was granted to assist in carrying on business operations and thereby help make the industries more profitable, both on facts and in law is untenable.

At the risk of repetition, it must be stated that the sole purpose of the 1993 Scheme was to set up new units and/or expand existing units in underdeveloped and developing areas; an aspect which also emerges on perusal of classification of areas given in paragraph 1.3 of the 1993 Scheme. 25.1 In the categorisation, a clear distinction has been drawn between developed areas (Group A) and those where Jindal Poly Films Ltd. v. ACIT some development has taken place [Group B) or are less developed than those falling under Group B [Group C), those which are the least developed areas of the State not covered under Group A/Group B/Group C [Group D] and areas which are least developed lacking basic infrastructure and not covered under Group A, Group B. Group C and Group D [Group D+].

The fact that the 1993 Scheme is different from the scheme which the Andhra Pradesh Government framed which was considered in Sahney Steel] is evident upon perusal of the order passed by the CIT(A) The finding of fact returned by the CIT(A) is that the 1993 Scheme is akin to the 1979 Scheme considered in DCIT v. Reliance Industries id tod Even though the appellant/revenue did not inform us as to whether the decision of the special bench of the Tribunal rendered in DCIT v. Reliance Industries Ltd was carried further in appeal, we are of the opinion that the frame of the 1993 Scheme clearly indicates that it was mainly envisaged to industrialise underdeveloped and developing areas and not to improve the production capability or profitability of industrial units, which may have been incidental benefits of the said scheme.

Apart from the Sahney Steel judgement, Mr Shlok Chandra, on behalf of the appellant/revenue, has also cited the decisions rendered in Commissioner of Income Tax v Rassi Cements Ltd by the Andhra Pradesh High Court, Wardex Pharmaceuticals (P.) Ltd v ACIT by the Madras High Court and lastly, a judgement of this court in Commissioner of Income Tax v Steel Authority of India Ltd. A close perusal of these judgements would show that they are distinguishable on facts. 27.1. In Rassi Steel, the court was called upon to decide whether the power subsidy received by the assessee under an incentive scheme framed by the State of Andhra Pradesh was a reveme receipt. The court concluded that the power subsidy received hy the assessee falbeit after the commencement of production) was based on actual power consumption and hence, had nothing to do with investment subsidy for establishing industries in backward areas. It is in this context that the court ruled that the power subsidy received was a trading receipt and, hence, taxable Jindal Poly Films Ltd. v. ACIT 27.2. The Wardex case concerned financial assistance received by an assessee from the Government of West Bengal under a scheme titled "West Bengal Industrial Promotion (Assistance to Industrial Units) Scheme, 1994" The scheme brought registered dealers within its sway who manufactured specified goods in West Bengal via SSI units. The scheme also provided that for obtaining assistance, one of the parameters which was operable was that the registered dealer should not have discontinued manufacturing activities for fifteen (15) days. It was only when these requirements stood fulfillell that the assessee was extended financial assistance equivalent to 90% of the sales tax paid by him for a quarter. 27.3 The court noted that there was no provision in the scheme that financial assistance would be given to invest in a fixed asset or establish a new unit. Given these peculiarities, the court concluded that the financial assistance obtained by an assessee would have to be treated as a revenue receipt. Clearly, the facts obtaining in the said case are distinguishable from those that arise for consideration in the aforementioned appeals. 27.4 Insofar as Steel Authority of India Ltd is concerned, it must be noted that it is a cryptic order in which the court notes that the assessee had received a grant-in-aid from the Central Government for operations and not to bring into existence a new asset. Based on the purpose test evolved in Sahney Steels Ltd, the court answered the question of law as framed in favour of the revenue. In other words, the court held that the grant-in-aid was a revenue receipt. Once again, we must emphasise that the facts mentioned in the judgement suggest that the aid received was on the revenue account. Conclusion: 28. Given the foregoing discussion, we are not inclined to interfere with the impugned order dated 22.06.2012 passed by the Tribunal concerning AY 1997-98 The question of law, as framed in ITA 393/2014, is answered in favour of the respondent/assessee and against the appellant/revenue. The sales tax subsidy/ incentive received by the respondent/assessee under the 1993 Scheme was a capital receipt."

However, the assessee has not provided the working of the quantum of the subsidy arrived in its books of account so we restore the matter back to the Jindal Poly Films Ltd. v. ACIT file of the Assessing Officer for quantifying the exact amount of the subsidy after calling replies from the assessee and supportive documents in this regard. In other words, the issue of exemption of sales-tax subsidy has been principally accepted to be termed as capital receipts but for the limited purposes for the quantification of the figures, the matter is restored to the Assessing Officer.” 12.1. No change in facts has been pointed out by either of the parties. Therefore, following Tribunal’s order in assessee’s own case for A.Y. 2008-09 & 2009-10 (supra) we direct the Assessing Officer to treat the sales tax subsidy received by the assessee as capital receipt and restore the matter to file of Assessing Officer for limited purpose of quantification of figures in very terms.

Ld. counsel appearing on behalf of the assessee at the very outset submitted that the very issue in assessee’s own case for A.Y. 2008-09 & 2009-10 [ITA Nos.

We have heard rival submissions and perused the material available on record. The Tribunal vide order dated 04.06.2024 in assessee’s own case for A.Y. 2008-09 and 2009-10 (supra) has adjudicated this issue, inter alia, by observing as under:

Charging of interest u/s 234A, 234B and 234D, raised in ground No. 3, is consequential.