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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
Per N.V.Vasudevan, JM
This is an appeal by the Revenue against the order dated 15.02.2013 of CIT(A)- XX, Kolkata, relating to AY 2006-07.
Ground Nos. 1 and 2 raised by the revenue reads as follows :-
“ 01.Whether on facts and circumstances of the case the Ld. CIT(A) is correct in treating the subsidy as capital receipt without taking into account the fact that once the subsidy was received and deposited in the cash credit account of the assessee, it became a part of general pool of fund available to it. There is no way to distinguished it and treated it as capital in nature. 02. The Ld. CIT(A) failed to take into account the fact that the assessee claimed depreciation not on the reduced W.O.V. after adjusting the impugned capital investment subsidy but on the full amount of b/f W.O.V. of Plant & Machinery which itself shows the intention of the assessee that the said amount of subsidy was revenue in nature and not of capital nature. This fact, brought on record by the AO was not disputed by the Ld. CIT(A).”
2 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07
The Assessee is a company. It is engaged in the business of manufacture of iron ingots. During the previous year the assessee had received subsidy of Rs.31,15,000/- from West Bengal Industrial Development Corporation. (WBIDC). This sum was not offered to tax by the assessee on the ground that it was a capital subsidy not chargeable to tax. The assessee however reduced from value of plant and machinery the subsidy received to arrive at the return of value on which depreciation was claimed by the assessee. However, in the Tax Audit Report it was mentioned that depreciation was claimed without reducing the value of the subsidy from WBIDC. In these circumstances AO came to the conclusion that the subsidy in question was neither offered to tax as revenue subsidy nor was it reduced from the WBIDC of plant and machinery for the purpose of claiming depreciation. AO further came to the conclusion that subsidy in question was a revenue subsidy and ultimately brought the subsidy to tax.
Before CIT(A) the Assessee submitted the sum of Rs 31.15 lakhs which was State Capital Investment subsidy under West Bengal Incentive Scheme 2000 notified vide Govt. of West Bengal Notification No 91/CI/H/4F-54/2000 dated 13.02.2001, was capital subsidy not chargeable to tax and not revenue receipt which is chargeable to tax. The Assessee pointed out that as per the said scheme the investment subsidy equal to 15% of the Fixed Capital Investment made for setting up "New Industrial Unit" at back ward area in the district of Burdwan, before commencement of production is allowed. The Assessee pointed out that the Assessee submitted the eligibility certificate dated 31.01.2003, final sanction letter copy of West Bengal Government Incentive Scheme 2000, certificate of Registration under the above scheme, and other allied documents to justify that subsidy in question was capital in nature. The Assessee pointed out that the basic scheme of Govt. of West Bengal, Commerce & Industries Department, Group H, Notification No. 91/CI/4F- 54/2000 dtd 13.02.2001 is as follows:
3 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 "Whereas in pursuance of a national policy the Sales Tax related incentive have been withdrawn from 1st January 2000, and whereas the State Government have considered it necessary and expedient to extend new type of incentives for promotion of' industries in the state from the same date.
The West Bengal Incentive Scheme 2000(hereinafter referred to as the 2000 Scheme) is for Industrial project of large medium and/ small scale units, to be set up in the state. The Scheme shall come into effect on and from 1st day of January, 2000 in the whole of West' Bengal and shall remain valid for a period of five years ending on 31st December, 2004. As per the scheme "New Unit" means an industrial unit in the large medium/small scale sector having investment in capital assets which is established and commissioned by the entrepreneur for the manufacture of goods in West Bengal, for the first time on or after the 1st January, 2000 and is registered with the Directorate of Industries/Directorate Cottage & Small Scale Industries/Directorate of Tourism.
"Approved Project" : Means the industrial project of a unit for which· registration certificate and eligibility certificate have been issued under the 2000 scheme.
"Fixed Capital Investment": Means investment made in land, building, plant & machinery and equipment installed for pollution control measures of the approved project of the eligible unit on or after the 1st April, 1999 subject to other conditions laid down in paragraph 6 of 2000 Scheme.
Eligibility Criteria for incentive under the 2000 Schemeis : Large, medium and small sector industrial projects are eligible for securing eligibility certificate after fulfilling certain conditions.
Classification of development areas and backward areas: For the purpose of determination of types and quantum of incentive available under the scheme for the approved projects, according to their location, the state shall be classified in the following groups:
Group A : Calcutta Municipality area, Developed area. Group B : District of Burdwan and other backward area & districts. Group C : Other backward districts.
4 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 State Capital Investment Subsidy: An eligible Industrial Unit located in Group 'B' area and set up in the state on or after the 1st January, 2000 will be entitled to State Capital Investment subsidy @ 15% of the Fixed Capital Investment subject to a limit of Rs 150 lakhs.
The above scheme is applicable to the Assessee and accordingly eligibility certificate was granted and state capital investment subsidy amounting to Rs 31.15 lakhs was disbursed.
The Assessee pointed out that the sole purpose behind the grant of the assistance to develop certain industries in backward areas of the state. Both these activities relates to capital field and cannot be considered to be linked up with the day-to-day operation of the assessee in any manner. Incentive/subsidy of the Government was sanctioned by the State Govt. before, commencement of commercial production and the quantum of subsidy was determined on investment made by the appellant on land, building, plant & machinery. Hence incentive received by the assessee though dependent upon certain conditionalities is actually gratuitous in nature and form capital receipt in the assessee's hands. The Assessee relied on the following two cases of the Apex Court, in support of its claims that the subsidy in question was capital receipt not chargeable to tax:- (a)PJ Chemicals Ltd (1994) 210 ITR 830 (SC) wherein the .Apex Court held that where the Govt subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries the specified percentage which is the percentage, of fixed capital cost which is the basis of determining the subsidy being only a measure adopted under the scheme to qualifying the financial aid is not payment directly or indirectly to' meet any of the actual cost, of such fixed capital assets! ' (b) Senairam, Durgamall 42 ITR 392 (SC) wherein at page 397 it was held: "It is the quality of the payment that is decisive of the character of the payment and not the method of the payment of its nature and ………… it fall within the capital or revenue."
5 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 (c) ITAT Kolkata Bench in the case of Rasoi Ltd Vs Dy Commissioner of Income Tax Spl. Range-12, Kolkata, LT. No. 1080/Cal/98 (copy of the order enclosed) wherein it was held that subsidy received on identical facts was held to be capital subsidy. (d) It was further submitted that the reliance placed by the Ld. A.O. on the decision of the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd and others 228 ITR 253 (SC), to come to a conclusion that the subsidy in question was revenue subsidy chargeable to tax is not correct. The following table was given by the Assessee before CIT(A) in this regard:- Sahney Steel & Press Works Ltd Appellant company's case case
i)Subsidy granted from Govt. after i) Subsidy granted from Govt. They started production. Before commencement of production.
ii)Subsidies were – ii) Subsidy was given @ 15% on Fixed (a) Reimbursement of Sales Tax Capital Investment i.e. on land, (b) Reimbursement Tax on power Building, Plant & machinery. Consumed & (c) Reimbursement of Water taxes Charges
iii) Amount received were production iii)Amount received was capital incentive and operational subsidies. Incentive towards setting up certain industry in backward areas.
The CIT(A) agreed with the contentions put forth by the Assessee and held that the subsidy in question was capital subsidy not chargeable to tax. The following were the relevant observations of the CIT(A) in this regard: “6.2. I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the appellant company received as sum of Rs.31.15 lacs from Govt. of West Bengal as State Capital Investment Subsidy being 15%, of the fixed capital investment made as 'new' industrial unit' newly established at backward areas in the District of Burdwan as per the Government Scheme. The subsidy was related to investment in new industrial unit before commencement 'of the production. However, the' A.O. treated the same as 5
6 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 revenue receipt as against claim of the appellant as capital receipt. After careful consideration of the facts and circumstances of the case, I find merit in the argument, by the appellant. The subsidy was granted by the Govt. of West Bengal before commencement of the production which was for the purpose of fixed capital investment. Therefore, the receipt are certainly in the nature of capital receipt. The facts of the judgment relied upon by the A.O. in the case of Sahney Steel & Press Works Ltd. and others 228 ITR 253 (SC) are different from the facts of the present case. Under these circumstances and also f9ollowing the ratio of the judgements of Hon’ble Supreme Court in the case of E.J.Chemicals Ltd. (1994) 210 ITR 830(SC) and Senairam, Durgamall 1961 42 ITR 392(SC) and also the judgement of Hon’ble ITAT Kolkata in the case of Rasoi Ltd. Vs DCIT SPL. Range-12, Kolkata I.T.No.1080/CAL/98 as cited by the appellant, the appeal on this ground is allowed.”
Aggrieved by the order of CIT(A) revenue has raised ground nos. 1 and 2 before the Tribunal.
We have heard the submissions of the learned DR, who relied on the order of AO and the learned counsel for the assessee relied on the order of CIT(A).
We have considered the rival submissions. The tests to be applied to decide the question whether a subsidy received by an Assessee has to be regarded as capital or revenue subsidy has been laid down in several decisions of Hon’ble Supreme Court and Hon’ble High Courts. The Hon’ble Supreme in CIT , Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) has held that, `It is the object for which subsidy/assistance is given, that truly determines nature of subsidy. The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the `Purpose Test’. The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt was on revenue account. On the other hand, if the
7 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand its existing units, then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 10. It would also be of immense merit to refer to another judgement of the Hon’ble Calcutta High Court in the case titled Commissioner of Income Tax vs. Rasoi Limited [2011] 335 ITR 438, wherein it has been held by the Hon’ble Court by making a due reference to the judgement of the Hon’ble Apex Court in the case titled Commissioner of Income Tax vs. Ponni Sugars & Chemicals Ltd [2008] 174 Taxman 87 (SC) that one time subsidy received as a percentage of sales tax paid for modernization and expansion purposes would constitute a capital receipt not subject to the rigours of tax under the Income Tax Act, 1961. The Hon’ble Calcutta High Court further held that merely because subsidy received was equivalent to a substantial percentage of the sales tax paid, it cannot be construed that the same was in form of refund of sales tax paid and exigible to tax. Hence one time subsidy received from the State Government under the scheme of industrial promotion for expansion of its facilities and for modernization purposes is capital receipt and cannot be brought into tax net.
Keeping in mind the principles laid down in the aforesaid decisions referred to by the learned counsel for the Assessee, we shall now see the objects of the Scheme under which the Assessee received subsidy in the present case. The object and purpose of the scheme has already been set out in the earlier paragraphs. It is clear from the reading of the objective of the scheme is to was to enable the assessee to set up a new unit. The object of the Scheme in the present case was to promotion of' industries in the state of West Bengal. It was available to a "New Unit" which has been defined under the scheme to mean an industrial unit in the large medium/small scale sector having investment in capital assets which is established and commissioned by the entrepreneur
8 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 for the manufacture of goods in West Bengal, for the first time on or after the 1st January, 2000 and is registered with the Directorate of Industries/Directorate Cottage & Small Scale Industries/Directorate of Tourism. Once the objective of the scheme is to enable setting up of a new unit, the manner and quantum in which the subsidy is disbursed is of no consequence. In the given facts and circumstances of the case, we find no grounds to interfere with the conclusions of the CIT(A). Consequently, Gr.No.1 & 2 raised by the Revenue are dismissed.
Ground No.3 raised by the revenue reads as follows :- “ 03. Whether on facts and circumstances of the case the Ld. CIT(A) is correct in allowing depreciation on moulds @ 30% when there is no such provision in the I.T. Rules I Act. Moreover, it is also not mentioned by Ld. CIT(A) whether Moulds and Rolling Mill Rolls (for which depreciation is available @ 80%) are technically same item.”
On perusal of the depreciation chart AO noticed that the assessee had claimed depreciation of 30% on account of moulds. According to the AO the moulds were to be treated as plant and machinery and 15% depreciation were allowed thereto. Consequently the depreciation of Rs.12,54,893/- was added back to the total income of the assessee.
On appeal by the assessee the CIT(A) deleted the addition made by the AO by observing as follows :- “ 9.1. During the course of appellate proceedings, the A.R. of the appellant submitted as under :
“ The addition of Rs.12,54,893/- on excess depreciation charges on moulds. As per I.T.Act u/s 32 & Rules 5 Appendix I in case of Iron & Steel Industry – rolling mills (moulds) depreciation is allowable at the rate of 80% p.a. However the appellant company had claimed depreciation on moulds (rolling mills – rolls) at the rate of 30% p.a. (instead of allowable depreciation of 80%).
9 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 The Ld. A/.O. without considering the above facts arbitraril7y and on estimated basis disallowed 15% of the depreciation on moulds, treating moulds as plant & machinery. Your goodself is requested to delete the addition made by Ld. A.O.
9.2. I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the appellant was having an Iron & Steel Industry – Rolling Mills (Mould). As per section 32 and Rule 5, depreciation is allowable @ 80% on such moulds. However, the appellant claimed only 30%. Therefore, the A.O. was not justified to restrict the claim at 15%. Appeal on this ground is, therefore, allowed.
Aggrieved by the order of CIT(A) the revenue has raised ground no.3 before the Tribunal.
We have heard the rival submissions. The learned DR brought to our notice that as per Appendix I to the Rules mould used in rubber and plastic manufacture alone are entitled to depreciation at 30% as per part-A –III (3)(vii) to Appendix-I. According to him the assessee is in the business of manufacturing of iron ingots and therefore the assessee cannot get 30% depreciation. The learned counsel for the assessee on the other hand submitted that in part A-III(8)(vii) rolling mills in iron and steel industry are entitled to depreciation at 80%. According to him rolling mills used in iron and steel industry are also in the nature of moulds but are in a rolling form and therefore the conclusion of the CIT(A) was correct. According to him therefore the conclusion of CIT(A) that the assessee was entitled to claim depreciation at 80% as against which it had claimed only 30% is correct and has to be upheld.
We have considered the rival submissions. We are of the view that the issue requires fresh consideration by the AO. There is no basis to come to a conclusion that rolling mills used in iron and steel industry are also in the nature of moulds but are in a rolling form. As to whether they are materially same or different cannot be decided without technical and expert evidence. It is also seen that moulds used in rubber and 9
10 ITA No.1517/Kol/2013 M/s. Barjora Steel & Rerolling Mills Pvt. Ltd. A.Yr.2006-07 plastic manufacture are entitled to higher depreciation of 30%. A different treatment for moulds used in iron ingot manufacture cannot be allowed on the basis of such general observations as done by the CIT(A). Therefore we set aside the order of the CIT(A) on this issue and direct the AO to examine the claim of the Assessee in the light of the observations made above. Gr.No.3 raised by the revenue is treated as allowed for statistical purpose.
In the result, appeal is treated as partly allowed for statistical purpose. Order pronounced in the Court on 6.4.2016.
Sd/- Sd/- [Waseem Ahmed] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 6.4.2016.
[RG PS] Copy of the order forwarded to: 1.M/s. Barjora Steel & Rerolling Mills Pvt. Ltd., 1st Floor, 135A, Biplabi Rashbehari Basu Road, Kolkata-700020. 2. D.C.I.T., Circle-3, Kolkata. 3. CIT(A)-XX, Kolkata 4. CIT-I, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.