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Income Tax Appellate Tribunal, “E”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM
O R D E R PER R.C.SHARMA (A.M): These are the appeals filed by the assessee against the order of CIT(A), Mumbai for the assessment years 2005-06 & 2007-08 to 2009- 2010, in the matter of order passed u/s.143(3) r.w.s.254(2) of the I.T Act.
Common grievance of the assessee in all the years pertains to interest subsidy granted under TUF scheme, whether revenue or capital in nature.
3. Rival contentions have been heard and record perused. Facts in brief are that during the years under consideration the assessee received subsidy from Central Government under the Technology Upgradation Fund Scheme (in short „TUF‟ Scheme). The contention of the assessee 2 ITA No.8565/M/10 & ITA Nos.296&4154/12 was that it is capital in nature. The A.O. upon consideration of the submissions made by the assessee and the decisions in the cases of Ponni Sugars and Chemicals Ltd.(Supra) & Sahnay Steel & Pressworks Ltd. (Supra) held that the contention of the assessee was not acceptable. The reasons stated by the A.O. are that the incentive under TUF Scheme was for payment of interest which the assessee would have paid in case the incentive had not been given and claimed as revenue expenditure as the incentive that was given was not for repayment of loan but for payment of interest. The A.O. drew support from the decision in the case of Sahnay Steel & Pressworks Ltd.(Supra) to conclude that the purpose of granting incentive was for interest payment which was revenue expenditure and not repayment of loan which would have been capital expenditure.
4. By the impugned order the CIT(A) confirmed the action of the AO after observing as under :- “On careful consideration of the relevant facts and the appellant‟s submissions, I find that it is significant to note that the appellant has itself pointed out that the interest subsidy was credited to its profit and loss account as income of the year. Subsequently however, the appellant during the appellate proceeding before the Hon'ble ITAT made a claim that the receipt was capital in nature. I find that the A.O. has stated in his order that had the incentive not been given to the assessee, t\1e assessee would have paid interest from its own account and claimed it has revenue expenditure. The A.O.'s finding that the amount of interest received by the assessee as subsidy would have been claimed as revenue expenditure by the assessee has not been denied or contradicted by the appellant in its submissions filed during the appellate proceeding. Admittedly therefore, the expenditure on interest against which the subsidy was received was revenue expenditure as has been held by the A.O. It is settled that an amount of subsidy received to augment profit of the assessee shall be on account of revenue receipt. Reduction of the assessee's liability of revenue expenditure 3 ITA No.8565/M/10 & ITA Nos.296&4154/12 amounts to augmentation of the assessee's profit and any receipt therefore which reduces the quantum of revenue expenditure is necessarily a revenue receipt as recuperation of expenditure. It has, therefore under these circumstances to be held that the subsidy received by the assessee was its revenue receipt and not capital receipt. The issue can be examined from another angle also. The assessee was, during the appellate proceeding required to furnish a copy of TUF Scheme under which the subsidy had been received. As per its letter dt. 31.5.2011, the assessee has furnished a copy of the Scheme No. 281l/99-CTI, dt. 31.3.1999. On going through the Scheme, I find that the objective of the Scheme has been stated as being improvement of competitiveness and overall long term viability. The improvement of competitiveness necessarily means that the object of the subsidy was to enable the assessee to run its business more profitably. If such was the object of subsidy then the receipt is on revenue account as has been observed in the case of Ponni Sugars and Chemicals Ltd. (306 ITR 392 SC). The appellant's contention that the subsidy was for the purpose of acquisition of new capital asset is therefore not correct as the stated purpose of the Scheme under which the subsidy was granted was improvement of competitiveness and over all long term liability which was to be achieved by acquisition of advanced technology. I therefore find that the appellant's contention that subsidy was not granted to supplement the profit of unit is not correct. The stated objective of the subsidy was improving the competitiveness of the assessee's unit which necessarily means enhancing the profit .of the assessee so as to make such units viable in the long run. It requires to be further clarified that the stated objective of the Subsidy Scheme was not modernization of the unit but to improve competitiveness and overall long term viability. Improvement in competitiveness necessarily means improved profitability. The subsidy received for improving profitability is revenue expenditure. In the case of Ludhiana Central Cooperative Consumers Stores Ltd. Vs.CIT (122 ITR 942 P & H ), where subsidy was received towards managerial and rental expenses, the subsidy was held to be revenue receipt meant for recoupment of revenue expenditure even though the subsidy was given as an incentive to the cooperative movement. In the instant case also, the subsidy has been given towards interest expenditure which has been found by the A.O. to be revenue expenditure and such finding of the A.O. has neither been contradicted nor denied by the appellant. The subsidy receipt therefore has rightly been held by the A.O. as revenue receipt as was also initially treated by the appellant who had credited the amount of subsidy to its profit and loss account as income as has been stated in its written submission ( Para (ii), Page No.5). The A.O's finding is therefore correct which The appeal is not allowed.”
4 ITA No.8565/M/10 & ITA Nos.296&4154/12 5. Against the above order of CIT(A) the assessee is in further appeal before us.
As per ld. AR the interest subsidy was capital receipt contending inter alia, that the TUF Scheme was introduced for the purpose of encouraging the acquisition of technologically advanced textile machinery which was in the interest of public at large and had nothing to do with supplementing the profit of the unit eligible under the Scheme. It has further been pointed out that the Scheme was for acquisition of new capital asset and the subsidy was not in any way given to the assessee for assisting it in carrying out its existing business operation. It has further been pointed out that the subsidy was not dependent on commencement of any business operation or to supplement the profit. The assessee has thus asserted that the subsidy which was not granted to supplement the profit of the unit should be treated as capital receipt and not liable to tax as revenue receipt.
7. Ld. AR placed reliance on the decision of Hon‟ble Supreme Court in the case of Sahney Steel, 228 ITR 253 in support of the proposition that if any subsidy is given, the character of the subsidy in the hands of the recipient-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 or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. Further reliance was placed on the decision of Hon‟ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., 306 ITR 5 ITA No.8565/M/10 & ITA Nos.296&4154/12 392. Our attention was also invited to the objective of the TUF Scheme which provides that in order to sustain and improve its competitiveness and overall long term viability, it is essential for the textile industry to have access to timely and adequate capital at internationally comparable rates of interest in order to upgrade its technology level. As per ld. AR a careful study of the objective of the Government in formulating the Scheme reveals that the main purpose in implementing the scheme was to promote Modernization of the Textile Industry through technology upgradation in the industry. The TUF Scheme was introduced for the purpose of encouraging the acquisition of technologically advanced textile machineries by way of extending loans for the specified purpose through Commercial Banks/ Financial Institutions on subsidized rates of interest, being the rate of 5% in the case of the assessee. Further, the Scheme was formulated in the interest of the overall health of the Indian economy and for increasing employment in the country. This inevitably confirms the fact that the Scheme was in the interest of the public at large and had nothing to do with supplementing the profits of the unit eligible under the said Scheme. As per ld. AR the subsidy was to be granted only in the case of acquisition of new machinery. Second hand machines were specifically kept out of the purview of the Scheme except for certain specified second hand imported machinery. Further the eligible machinery were to be state of the art machinery and it was specifically stated that machinery with technology levels lower than that specified will not be permitted for funding under the TUF Scheme. Reliance was also placed 6 ITA No.8565/M/10 & ITA Nos.296&4154/12 on P&H High Court in the case of Sham Lal Bansal, 200 Taxman 14, Jammu & Kashmir High Court in the case of Shree Balaji Alloys , 51 DTR 217. In view of the above, it was vehemently argued by ld. AR that TUF Scheme subsidy so received was capital in nature and the lower authorities have not properly appreciated the same and wrongly taxed it as revenue receipt.
8. On the other hand, it was contended by ld. DR that interest subsidy was received by the assessee which resulted into reduction in the interest expenditure which is revenue in nature, therefore, the AO was justified in treating the interest subsidy as revenue receipt rather than capital receipt.
We have considered rival contentions, carefully gone through the orders of the authorities below. We have also deliberated on the judicial pronouncements cited at bar by ld. AR and DR during the course of hearing before us as well as the decision referred by lower authorities in their respective orders in the context of factual matrix of the case.
10. The issue with regard to treatment of subsidy whether capital or revenue in nature has been restored by the Tribunal vide its order dated 21.10.2009 to examine in the light of the decision of Hon‟ble Supreme Court in the case of Sahney Steel and Press Works Ltd. Vs. CIT, 228 ITR 253 and Ponni Sugars and Chemicals Ltd.. The direction of the Tribunal was to consider the ratio of judgments as given in the cases of Sahney Steel and Press Works Ltd.(supra) and Ponni Sugars and Chemicals Ltd.(supra) and to analyze the facts of the assessee‟s case in light of the 7 ITA No.8565/M/10 & ITA Nos.296&4154/12 said cases and pass order accordingly. The Hon‟ble Supreme Court in the case of Sahney Steel and Press Works Ltd.(supra) held as under :- “if any subsidy is given, the character of the subsidy in the hands of the recipient-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 or business, it has to be treated as trading receipt. The source of the fund is quite immaterial.” In case of Ponni Sugars and Chemicals Ltd. (supra), the Hon‟ble Supreme Court observed as under :- " 14 The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to determined with respect to the purpose with which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is not relevant. The form of subsidy is immaterial. A close and detailed examination of the above decisions of the Supreme Court in the cases of Sahney Steel (supra) and Ponni Sugars and Chemicals Ltd.(supra) in which the decisions of the House of Lords in case of Sea ham Harbour Dock Co. v. Crook [1931] 16 TC 333 (HL) were referred to reveals that it lays down the basic test to be applied in judging the character of a subsidy. These observations in our humble understanding of the judgment, are reproduced as under:
• 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 at which the subsidy is paid is not relevant. • The source is immaterial.
8 ITA No.8565/M/10 & ITA Nos.296&4154/12 • The form or the mechanism through which the subsidy is given are irrelevant. • If the object of the subsidy scheme was 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 was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. • If the incentive/subsidy is 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 subsidy must be treated as assistance for the purpose of the trade. • One more aspect which needs to be examined is that whether the assessee was obliged to spend the money received by way of incentive/subsidy for a particular purpose or was free to use the money in its business entirely as it liked.” In order to arrive at the above determination, first of all we see the "objective" of the TUF Scheme as applicable in the present case of the assessee. A careful study of the objective of the Government in formulating the Scheme reveals that the main purpose in implementing the scheme was to promote Modernization of the Textile Industry through technology upgradation in the industry. The TUF Scheme was introduced for the purpose of encouraging the acquisition of technologically advanced textile machineries by way of extending loans for the specified purpose through Commercial Banks/ Financial Institutions on subsidized rates of interest, being the rate of 5% in the case of the assessee. Further, the Scheme was formulated in the interest of the overall health of the Indian economy and for increasing employment in the country. This inevitably confirms the fact that the Scheme was in the interest of the public at large and had nothing to do with supplementing the profits of the 9 ITA No.8565/M/10 & ITA Nos.296&4154/12 unit eligible under the said Scheme. It is evident from an analysis of the scheme that the TUF Scheme was introduced for the specific purpose of enabling the acquisition of new state of the art modern machinery by way of extending loans for the specified purpose. Installation of the specified machinery in a new unit or in an existing unit by way of replacement of existing machinery and/or expansion will be eligible for coverage under TUF scheme. Thus, it is clear that the subsidy was to be granted only in the case of acquisition of new machinery. Second hand machines were specifically kept out of the purview of the Scheme except for certain specified second hand imported machinery. Further the eligible machinery were to be state of the art machinery and it was specifically stated that machinery with technology levels lower than that specified will not be permitted for funding under the TUF Scheme. From perusal of the Scheme, it is evident that the eligibility for the receipt of the interest subsidy under the TUF Scheme was the date of sanction of the loan by the Bank/Financial Institution and that the subsidy was nowhere dependent on the commencement of any business operations of the assessee-company.
In view of the above and applying the proposition of law laid down by the Hon‟ble Supreme Court as discussed above, we can infer that the incentive given under the TUF Scheme was solely with the motive of helping the assessee-company in the purchase of the state of the art new machinery as exclusively specified in the scheme with the object of achieving modernization of the Textile Industry. However, both the AO 10 ITA No.8565/M/10 & ITA Nos.296&4154/12 and the Ld.CIT failed to appreciate the above fact and wrongly interpreted the motive of implementation of the said scheme as enhancement of profit of the units eligible under the scheme.
In the instant case before us, we found that pursuant to the TUF Scheme, the assessee-company proposed to import three embroidery machines from M/s. Saurar Hamel, Switzerland. With a view to import machinery, the assessee-company applied for a loan from the Bank of Baroda at a subsided rate of interest in view of the TUF Scheme applicable to the Indian Textile Industry. Accordingly, the assessee- company entered into a loan agreement with the concerned bank seeking an amount of Rs.5,19,75,000/- vide loan. Bank of Baroda sanctioned the loan of Rs.5,19,75,000/- for the specified purpose of buying the eligible machinery, as is evident from the sanction letter dated 24-3-2003, placed on record. It was only pursuant to the announcement of the TUF Scheme that the assessee-company proposed to buy new state of the art machinery as approved under the Scheme. Under the Scheme, the assessee-company acquired three multi-head computerized embroidery machines which were all imported from Switzerland. The interest subsidy was extended by the Govt. on the loan sanctioned for the specified purpose, being the acquisition of the state of the art new machines by the assessee company. It inevitably follows from above that the subsidy even though in the form of interest granted under the TUF Scheme for the named purpose i. e. acquisition of capital asset with a view to achieve modernization of the Textile Industry, in no way can be treated as a 11 ITA No.8565/M/10 & ITA Nos.296&4154/12 revenue receipt being relatable to the enhancement of profit of the assessee.
The contention of the Ld.CIT(A) that since the amount of interest received by the assessee as subsidy would have been claimed as revenue expenditure, the character of the receipt is of revenue nature, is devoid of any merit. This is because, it has already been decided in the case of Sahney Steel (supra) and Ponni Sugars and Chemicals Ltd.(supra) that it is not the mode of payment but it is the purpose for which the subsidy is granted which is decisive in determining the character of the incentive subsidy under a given scheme. Moreover, relying on the decision of the House of Lords in the case of Sea ham Harbour Dock Co. v. Crook [1931] 16 TC 333 (HL) as followed by the Supreme Court, wherein even though the payment was equivalent to half the interest amount payable on the loan (interest subsidy) still the House of Lords held that money received by the company was not in the course of trade but was of capital nature.
The issue of subsidiary receipt under TUF Scheme is squarely covered by the decision of coordinate bench in the case of Gloster Jute Mills Ltd. {2014) 33 ITR (Trib) 322 (Kol), wherein the assessee received subsidy from the Central Government under the “technology upgradation fund scheme” by way of interest refund. In computing the assessable income the assessee deducted the amount on the ground that the subsidy was capital in nature. The AO held that the subsidy was revenue in nature and had to be added in the total income of the assessee as a revenue 12 ITA No.8565/M/10 & ITA Nos.296&4154/12 receipt. The CIT(A) confirmed this. On further appeal, the Tribunal held that in order to sustain competitiveness in the domestic as well as international markets and overall long-term viability of the industry, the Ministry adopted the “technology upgradation fund scheme” envisaging technology upgradation of the industry. Therefore, the subsidy received in that regard was capital in nature. The precise observation of the bench was as under :- “7. We have heard the rival submissions and perused the material available on record. Ld. Counsel of the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon‟ble Punjab & Haryana High Court in the case of CIT – vs.- Sh. Sham Lal Bansal in ITA No. 472 of 2010, wherein it had been held that interest subsidy received under TUF Scheme is capital in nature. Ld. Counsel for the assessee has further submitted that this issue is covered in favour of the assessee by the decision of the Hon‟ble Apex Court in the case of CIT –vs.- Ponni Sugars & Chemicals Ltd. reported iln (2008) 306 ITR 392 (SC) wherein it has been held that it is the purpose of the incentive which decides its nature and not the modality or the source thereof. That thisissue is also favourably covered by the decision of Hon‟ble jurisdictional High Court in the case of CIT –vs.- Rasoi Ltd. (2011) 335 ITR 438 (Cal.), wherein it has held that subsidy received for expansion of capacities, modernization and improving the marketing capabilities to tide over the crises for promotion of industry in the state is to be treated as capital in nature. That similarly, the issue is covered in the case of Shree Balaji Alloys & Ors. –vs.- CIT (2011) 333 ITR 335 (J&K) wherein it has been held that excise duty refund and interest subsidy received for the purpose of eradication of unemployment in the state by acceleration of industrial development and removing backwardness of the area that lagged behind in industrial development is to be treated as capital receipt.
Ld. A.R. also submitted that similar view was given in following decisions:- DCIT –vs.- Reliance Industries (2004) 88 ITD 273 (Mum.)(SB); CIT –vs.- Chaphalkar Brothers (2013) 351 ITR 309 (Bom.); CIT –vs.- Birla VXL Ltd. (2013) 90 DTR 376 (Guj.)(HC); Hydro Carbons & Chemicals –vs.- ACIT (ITA No. 1982-86/Kol/09 dated 29.04.2011); Indo Rama Synthetics (I) Ltd. –vs.- ACIT (2012) 33 CCH 526 (Del.)(ITAT).
9. Ld. Departmental Representative, on the other hand, relied upon the orders of the authorities below.
We have carefully considered the submissions. We find considerable cogency in the submissions of the ld. Counsel of the assessee. We find that identical issue under the Technology Upgradation Fund Scheme (in short „TUFS‟) of Ministry of Textiles was considered by the Hon‟ble Punjab & Haryana High Court in of 2010 vide decision dated 17.01.2011. Hon‟ble High Court has considered and held the issue as under:- “2. The assessee is engaged in manufacture and sale of woolen garments. It received subsidy for repayment of loan taken for building, plant and machinery under the Credit Linked Capital Subsidy Scheme under Technology Upgradation Fund Scheme (TUFS) of Ministry of Textiles, Government of India. The assessee claimed the said subsidy to be capital receipt but the Assessing Officer did not accept the same and added back the same to the income of the assessee holding the same to be revenue receipt. On appeal, the CIT(A) upheld the plea of the assessee, which view has been affirmed by the Tribunal with the following observations:- “Having regard to the aforesaid, in our view, it is quite clear that the objective of the subsidy scheme was to enhance the technology apparatus of the assessee by assisting in acquiring machinery and further that the subsidy so received was utilized for repayment of loans taken by the assessee to set up the new unit, as was the intention of the subsidy. 10. Considered in the aforesaid light, in our view, the facts of the instant case are on all fours comparable to those considered by the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) and therefore, a natural corollary is that the nature of the subsidy in question is capital. Therefore, both on the issue of the objective of the scheme and on the utilization of the funds received as subsidy, the subsidy is to be viewed as capital in nature having regard to the judgment of the Hon‟ble Supreme Court in the case of Ponni Sugars & Chemical Ltd. (supra). 11. Reliance placed by the Revenue on the case of Sawhney Steels and Press Works Ltd. & others (supra), in our view, is not appropriate having regard to the aforesaid features of the scheme, which are not in dispute. Moreover, in the case of Sawhney Steels and Press Works Ltd. & others (supra), it was found as a fact that the subsidy was given to meet recurring expenditure and was not for acquiring a capital asset. Whereas in the instant case, admittedly, there is no provision in the scheme to grant subsidy to 14 ITA No.8565/M/10 & ITA Nos.296&4154/12 meet any recurring expenditure and neither such a case has been set up by the Department. The only objections of the Department are that the subsidy has been given after commencement of production and, secondly that it was for repayment of loans. Both these factors do not distract from the nature of the subsidy being treated as capital, as explained by the Hon‟ble Supreme Court in the case of CIT vs. Ponni Sugars Chemicals Ltd. [2008] 306 ITR 392 (SC).
We have heard learned counsel for the appellant.
Learned counsel for the revenue submitted that the subsidy was not given at hte time of setting up of the industry but after commencement of production for repayment of loan. In such situation, the amount should have been treated as revenue receipt as per judgment of the Hon‟ble Supreme Court in Sahney Steel & Press Works Ltd. & Ors. v. CIT (1997) 228 ITR 253.
We are unable to accept the submission.
6. The purpose of scheme under which the subsidy is given, has been discussed by the Tribunal. To sustain and prove the competitiveness and overall long term viability of the textile industry, the concerned Ministry of Textile adopted the TUFS scheme, envisaging technology upgradation of the industry. Under the scheme, there were two options, either to reimburse the interest charged on the lending agency on purchase of technology upgradation or to give capital subsidy on the investment in compatible machinery. In the present case, the assessee has taken term loans for technology upgradation and subsidy was released under agreement dated 12.7.2005 with Small Industry Development Bank of India. The relevant clause of the agreement under which the subsidy was given is as under:- “Para 8. - to prevent misutilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non interest bearing term loan by the Bank/Fis. The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock in period of three years on a pro-rate basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount.”
In view of above, the view taken in Sahney Steel & Press Works Ltd. & Ors., could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was „revenue receipt‟ or „capital receipt‟, character of receipt in the hands of the assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel & Press Works Ltd. & Ors. itself and reiterated in later judgment in