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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: SMT. BEENA PILLAI & MS. PADMAVATHY S
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by the assessee against the order dated 23.10.2019, passed by the Ld.CIT(A)-I, Kochi for Assessment Year 2016-17 on following grounds of appeal: “1. The Ld CIT(A) erred in not treating Tea Board Orthodox Subsidy amounting to Rs 1,55,10,867/- as income from Tea Operations. The CIT(A) ought to have held that such income from Subsidy pertaining to manufacturing of orthodox teas in the business of growing and manufacturing of tea is derived from operations of Page 2 of Rule 8 of the Income Tax Rules.
2. The Ld CIT(A) erred in not accepting the claim of deduction u/s 80IA of Rs 40,20,000/-. The CIT(A) ought to have held that the deduction u/s 80IA is allowable relying on the favourable order from the Kerala High Court for AY 2008-09 vide order of 2015 dt 16.11.2017 on eligibility of deduction u/s 801A.
3. The Ld CIT(A) erred in not allowing the claim of Educational Cess amounting to Rs 2,29,558/- as allowable expenditure. The CIT(A) ought to have followed the CBDT Circular No.19/58/66-ITJ(19) dt.18-5-1967 on the said matter.
4. For these and other grounds to be further adduced at the time hearing, the order of the learned CIT(A) requires to be modified to the extent appealed against.”
2. Brief facts of the case are as under: 2.1 The assessee is a company. It is engaged in the business of growing, manufacturing and sale of tea for the year under consideration the assessee filed return of income declaring total income of Rs.2,38,37,840/- on 15/10/2016. The case was selected for scrutiny and statutory notices were issued to the assessee. In response, the representatives of the assessee filed details before the L.dAO. The Ld.AO noted that the assessee claimed deduction of Rs. 1.34 crores for the year under consideration u/s. 10(30) of the I.T. Act in respect of subsidy received from Tea Board under Special Purpose Tea Fund Scheme. The Ld.AO held that the assessee is not eligible for exemption u/s. 10(30) of the I.T. Act as the subsidy was not notified by the government. 2.2 The Ld.AO observed as under: “2.4 The reply furnished by the assessee is perused and it's contention is considered carefully. The letter obtained by the assessee from Director of tea development dated 25th of March 2013 and filed in the course of hearing is considered. The Director of Tea Development has stated in the letter dated above that subsidy paid by the board is Page 3 of 30 of section 10 of the income tax act, 1961. Tea board has been operating replantation subsidy scheme since 1968 onwards. Over the years the nomenclature of the scheme has undergone changes namely plantation development scheme, special purpose tea fund scheme etc. However, the activity for which the subsidy is given remains unchanged namely replantations/replacernent and rejuvenation. Therefore, no separate Gazzette notification has been made in liew of the existing Gazzette notification. 2.5 While accepting the interpretations of Director of Tea Development that over the years the nomenclature of the scheme has undergone changes namely plantation, development scheme, special purpose tea fund scheme etc and that the activity for which the subsidy is given remains unchanged, I am constrained by the provisions of section 10(30) which unambiguously stipulates that the Central Government must expressly notify such schemes in the official Gazette. 2.6 The assessee company vide its reply dated above made an alternate claim stating that in any case if the claim under section 10(30) is not allowed to the assessee as made in the return of income, the assessee would wish to extend an alternate claim that the amount of subsidy for rejuvenation and replacement planting is not the revenue receipt and may be treated as a capital receipt and is not to be offered as taxable income in any case. The assessee had originally claimed subsidy received as exempt under section 10 (30) of the Act. Now it cannot make a fresh claim during the scrutiny proceedings. Further any claim by the assessee cannot be entertained except through an income tax return. Therefore, the alternate claim pleaded by the assessee cannot be accepted. Section 10(30) specifically exempts certain subsidies received from the government as not taxable. Therefore, the very fact that the Central Government had omitted to notify the new scheme implies that it is not the intention of the Central Government to treat such subsidies received under replanting, replacement planting and rejuvenation planting to be exempt. 2.7 It is also to be noted that similar issue was involved in the assessee's own case for the asst. years from 2010-11 to 2014-15, its claim for exemption u/s.10(30) was not accepted. Relying on the judgment of the Hon'ble High Court of Kerala in the case of Kilkotagiri Tea & Coffee Estates vs. CIT reported in 241 ITR 444, it has been held that the provisions of section 10(30) are very specific and Page 4 of clear on the nature of benefit to be granted to the assessee on subsidy receipts. It was also observed that there was no ambiguity in the intention of the Government in not notifying the subsidy in question that the same was not eligible for exemption u/s.10(30) of the Income Tax Act, 1961.” 2.3 The assessee brought to the notice of the Ld.AO, the orders passed by Hon’ble Cochin Tribunal for A.Ys. 2010-11 to 2012-13 on identical issue, wherein, the claim of assessee u/s. 10(30) was allowed. The Ld.AO rejected this submission by observing that, revenue has filed appeal before the Hon’ble Kerala High Court. The Ld.AO further observed that the subsidy cannot be held as income having directly derived out of sale of tea grown and manufactured by the assessee. He thus rejected the claim of assessee and denied the benefit under Rule 8 to the assessee by observing as under: “2.9 Therefore it becomes apparent that the assessee has claimed expenditure related to the subsidy as revenue expenditure while claiming that the subsidy receipts as capital in nature. Considering the facts and circumstances of the case as discussed above and also taking into account that similar claim was not accepted in earlier assessment years from A.Y. 2010-11 to 2014-15 for detailed reasons given in the assessment orders for that assessment years, the claim of the assessee u/s. 10(30) this year also is not accepted. Further, the decision of the Hon'ble Tribunal, Cochin allowing the assessee's appeal on the very same issue in the assessment years from 2010-11 to 2012-13 has not been accepted and further appeal to Hon'ble High Court, Kerala has been preferred by the department. The issue has not attained finality. Accordingly, exemption u/s.10(30) claimed by the assessee for replanting subsidy credited to P & L Account amounting to Rs. 1,34,75,103/- is disallowed. 2.10 While disallowing the claim for exemption u/s. 10(30) in respect of the above said subsidy, benefit of Rule 8 is also not allowed to the assessee as subsidy received cannot be directly linked to deriving of income from sale of tea grown and manufactured by the company. In asst years 2012-13, 2013-14 and 2014-15, on similar ground Page 5 of the disallowance of exemption u/s.10(30) has not been brought under Rule 8 for the detailed discussion made in the assessment for that assessment years. It has been clearly held that subsidy received as an assistance to support the expenditure for tea growing on specific purposes, cannot be given the benefit of Rule 8, since such subsidy cannot be held as income directly derived out of sale of tea grown and manufacture by the company. In view of this position, the exemption claimed u/s.10 (30) of the Act by the assessee in respect of subsidy received from Tea Board of India is disallowed fully. [Disallowance Rs. 1,34,75,103/-]” 2.4 The Ld.AO further observed that assessee claimed deduction u/s. 80IA being the expenditure incurred on substantial renovation of the undertaking engaged in the business of electricity distribution by treating it as separate industrial undertaking. This claim was made by the assessee during the assessment proceedings and had not claimed it in the return of income. The Ld.AO thus denied the submissions of the assessee as not acceptable. 2.5 Aggrieved by the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
The Ld.CIT(A) while considering both the issues directed the Ld.AO to grant the claim of the assessee to the extent of Rs.1,26,81,279/- u/s. 10(30) of the act by observing as under: “26.2. Tea Board subsidy was claimed as exempt u/s. 10(30) by the assessee. The AO treated the same as revenue receipt and taxed the same. However. this issue is covered in favour of the appellant in its own case by the order of Hon'ble ITAT, Cochin Bench in ACIT vs. KDHP in 163, 164/Coch/2017. Relying on the same, the disallowance is hereby deleted and this ground of appeal of the appellant is allowed.” 3.1 The assessee had raised additional claim of revising the error committed by offering the Tea Board Orthodox Subsidy entirely under central income instead of treating the same as Page 6 of Rule 8. The Ld.AO had rejected the subsidy by observing that it is not linked with the manufacturing of orthodox tea by assessee and therefore the benefit under Rule 8 to the assessee. Based on the submissions of the assessee, the Ld.CIT(A) dismissed this plea by observing as under: “27.4. I have gone through the assessment order and submission of the appellant. From the reading of assessment order, it is absolutely clear that the assessee has itself consistently, over a period of assessment years upto A.Y. 2017-18, has been offering the orthodox subsidy received as central income. Therefore, just because an order of the Hon'ble Guwahati High Court has been passed, the claim of the appellant does not become an error, which can be rectified. I do not find any infirmity in the decision of the AO and this ground of appeal of the appellant is dismissed.” 3.2 On the issue of the claim of deduction u/s. 80IA, the Ld.CIT(A) denied the claim by observing as under: “28.4. I have gone through the assessment order and submission of the appellant. It is not in dispute that no deduction u/s.80IAm was claimed in the Return of Income. No claim was made through filing a revised Return of Income. In the meanwhile, Hon'ble Kerala High Court passed an order allowing deduction u/s. 801A for A.Y. 2008-09. The deduction claimed by the appellant in A.Y. 201011 was denied by the AO. However, the CIT(A) and Hon'ble ITAT allowed the claim of the appellant. In spite of Hon'ble ITAT allowing the claim u/s. 801A, the appellant has not made any such claim in A.Y. 2016-17 in the Return of Income filed. No such claim has been made in A.Y. 2013-14, 2014-15 and 2015-16 as well. presumably. Under these circumstances, claim made during the course of assessment on the basis of an order passed for A.Y. 2008-09 has rightly been denied by the AO. I do not find any infirmity in the order of the AO and this ground of appeal of the appellant is dismissed.” Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal.
4. Ground no. 1 deals that the denial of Tea Board Orthodox Subsidy received by assessee as a part of Kerala Agricultural Income Tax Act as per Rule 8 of Income Tax Act, 1961. 4.1 The Ld.AR submitted that, the assessee received total subsidy from the Tea Board of India amounting to Rs.290.03 lakhs out of which Rs. 155.28 lakhs was the subsidy for orthodox tea production and the balance of Rs.134.75 lakhs was for replanting. The Ld.CIT(A) accepted the subsidy of Rs.134.75 lakhs as exempt u/s. 10(30) of the act however rejected the claim of Rs.155.28 lakhs being related to orthodox tea production. The Ld.AR submitted that assessee wrongly offered the said subsidy of Rs.155.28 lakhs to tax in the return of income. It is submitted that an effort was made by assessee to correct the mistake during the assessment proceedings which was denied. 4.2 The Ld.AR submitted that manufacture of orthodox tea is the business of growing and manufacturing of tea by the assessee and hence the computation has to be as per Rule 8. She placed reliance on the decision of Hon’ble Gauhati High Court in case of McLeod Russel India Ltd. vs. CIT reported in (2013) 38 taxmann.com 273 which states that, receipts that have direct nexus with the business of the assessee of growing, manufacturing and selling of tea is eligible for computation under Rule 8. The Ld.CIT(A) denied the claim of assessee on the ground that assessee for A.Y. 2017-18 has offered orthodox subsidy received as central income and therefore the decision of Hon’ble Gauhati High Court cannot be of any rescue. 4.3 She submitted that, orthodox subsidy is realized directly by the assessee based on manufacture of orthodox tea and has a direct nexus with the activity of growing and manufacturing orthodox tea. She submitted this subsidy is granted under the approved scheme Page 8 of Tea Board of India. She also placed reliance on sanctioned letter of subsidy that is placed in the paper book at page 20. For the sake of convenience, the same is scanned and reproduced as under:
4.4 It is thus prayed by the Ld.AR that the reasoning for denial of the claim by authorities below does not have any basis.
Page 9 of 4.5 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 4.6 On perusal of the sanctioned letter scanned and reproduced hereinabove wherein assessee has received a subsidy which is based on the quantity of production and the rate of subsidy per Kg. There can be no doubt that the subsidy received by assessee is with reference to the production of tea and therefore the nexus stands established. It is also noted that the subsidy is granted after a survey and actual production of the tea by assessee. 4.7 We therefore do not find any reason to deny the claim of assessee as the nexus is established. 4.8 In respect of the claim of assessee raised during the assessment proceedings to compute the benefit as per Rule 8, we rely on the decision of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. vs. CIT reported in (1998) 229 ITR 383 to contend that it was upon to the assessee to raise the points of law even before the Appellate Tribunal. Reliance is also placed on the decision of Goetz India Ltd. vs. CIT reported in (2006) 284 ITR 323 wherein Hon’ble Supreme Court observed as under: “4. The decision in question is that the power of the Tribunal under section 254 of the Income Tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income Tax Page 10 of Appellate Tribunal under section 254 of the Income Tax Act, 1961. There shall be no order as to costs.” 4.9 We therefore direct the Ld.AO to compute the benefit as per Rule 8 on the subsidy received towards manufacture of orthodox tea. Accordingly, Ground no. 1 raised by assessee stands allowed.
Ground no. 2 relates to the claim of deduction u/s. 80IA of the act. 5.1 The Ld.AR submitted that assessee had incurred expenditure towards renovation of the undertaking engaged in the business of electricity distribution and therefore is to be treated as a separate industrial undertaking. She submitted that for assessment year under consideration, assessee did not consider the deduction u/s. 80IA in the return of income as a matter of prudence since the same was disallowed by the Ld.AO for A.Y. 2008-09 against which an appeal was pending before the Hon’ble High Court. 5.2 She submitted that now this issue stands squarely covered by the decision of Hon’ble Kerala High Court in dated 16.11.2017 wherein Hon’ble Kerala High Court had granted the claim of assessee u/s. 80IA. She submitted that based on this decision that assessee had claimed deduction u/s. 80IA during the assessment proceedings, she also submitted that form 10CCB was filed by assessee during the assessment proceedings which was rejected by the Ld.AO. The Ld.CIT(A) also did not consider the claim by stating that assessee did not file a revised return of income. On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
Page 11 of We have perused the submissions advanced by both sides in the light of records placed before us. 5.3 We note that this issue is settled in favour of assessee by the decision of Hon’ble Kerala High Court in assessee’s own case for A.Y. 2008-09. It is based on this decision that assessee made a claim before the Ld.AO and the Ld.CIT(A) which was denied. The Ld.AR has relied on the decision of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. vs. CIT reported in (1998) 229 ITR 383 to contend that it was upon to the assessee to raise the points of law even before the Appellate Tribunal. Reliance is also placed on the decision of Goetz India Ltd. vs. CIT reported in (2006) 284 ITR 323 wherein Hon’ble Supreme Court observed as under: “4. The decision in question is that the power of the Tribunal under section 254 of the Income Tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income Tax Appellate Tribunal under section 254 of the Income Tax Act, 1961. There shall be no order as to costs.” 5.4 We are therefore of the opinion that this issue needs to be considered by the Ld.AO based on the observations of Hon’ble Kerala High Court in assessee’s own case wherein Hon’ble Court held as under: “Analysis: Are the Conditions Cumulative? 19. Section 80-IA of the Act, to begin with, is the beneficial provision, carving out an exception from the rigors of tax payment. An assessee can deduct his total profits for ten Page 12 of (4) of the provision. Indeed, the deduction is subject to certain limitations. Undoubtedly, the assessee's business is covered by sub-Section (4) of Section 80-IA. As seen from sub-Section (2) of Section 80-IA, the assessee can deduct the profits in any consecutive years out of the initial 15 years when he started his business or when he first met the conditions imposed in the provision.
We may first deal with a pertinent issue: An enterprise may (i) develop, or (ii) operate and maintain, or (iii) develop, operate, and maintain any infrastructural facility. It brooks no contradiction if we hold that all these three activities are disjoint. Now, we will see clause (iv) of sub-section (4). It mandates that an undertaking in India may (a) generate or generate and distribute power at any time between 1.4.1993 and 31.3.2010; (b) transmit and distribute by laying a network of new transmission or distribution lines between the above-mentioned period; or (c) substantially renovate or modernize the existing network of transmission or distribution lines between the same period.
The Revenue, indeed, has contended that these three contingencies are cumulative. We are afraid they are not. The clauses (a), (b), and (c) are disjointed and, in fact, unconnected. Clauses (b) and (c), especially, cannot go together. Under clause (b) a network of new transmission or distribution lines must be laid, whereas under clause (c), they must be renovated or modernized. Laying down a new network of transmission lines under clause (b) and simultaneously renovating them under clause (c) exposes a temporal impossibility and linguistic incongruity.
First, temporally, we can only renovate what has already been in use; second, linguistically, we cannot renovate what is new. So legislative intent is unmistakable, and the conditions are disjoint and independent. The assessee’s fulfilling any one of them will suffice. And the assessee here did fulfil clause (c).
Now, we may, as well examine whether the conditions under sub-Section (4)(i) are cumulative. Clause (a) mandates that the company must have been registered in India under any Central or State Act. It should contract with the Central Government, or State Government, or any other statutory authority to develop, or operate and maintain or, develop, operate and maintain a new Page 13 of infrastructure facility. Under clause (c), the operating and maintaining infrastructure facility must have commenced after the 1st April, 1995. It is not disputed that all these three activities are cumulative and the assessee fulfils them all. Has the Machinery Been Used? 24. Indeed, the learned Senior Counsel for the Revenue has emphasized that much of the machinery in the assessee's establishment has already been used by another establishment.
Section 80IA, evidently, applies to an “undertaking” referred to in clause (ii) or clause (iv) or clause (vi) of sub- section (4) if it fulfils the enumerated conditions. We have already held that the assessee’s undertaking falls in clause (iv) of sub-section (4).
As per the conditions stipulated, the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. Here there is neither splitting up nor reconstructing; nor is it the Revenue’s case, either. Equally mandatory is the other condition that the assessee has not formed the undertaking (ii) by transferring to a new business any machinery or plant used earlier for any purpose. The Revenue, true, latches on to it. We will see whether it can sustain this plea: the assessee formed the undertaking by transferring used machinery or plant to a new business.
Of course, the restriction under clause (ii) will not apply to the machinery or plant used abroad by any other person than the assessee, as stated in the Explanation I. But it does not apply to this case; nor does the Explanation 2, which permits an assessee’s new business to use less than 20% of the used machinery. The Statutory Purpose: 28. It is well to remember that deduction under Section 80- IA was introduced only through Finance (No.2) Act, 2004; the Act spells out that it is to encourage investment in existing undertakings. CBDT Circular No. 5 of 2005, dated 15th July, 2005, clarifies the legislative intention: "[R]ecognising the need to encourage investment in renovation and modernization of the transmission and distribution network, the benefit under the section has Page 14 of been extended to undertakings which undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the period beginning on 01-04-2004 and ending on 31-3-2006. 'Substantial renovation and modernisation' means 50 per cent increase in the book value of plant and machinery in the network of transmission or distribution lines, as on 01- 04-2004". (Italics supplied) 29. From the above extract, we can gather that Section 80- IA has a salutatory purpose of encouraging investment in renovation and modernization of the transmission and distribution network. Whose Benefit Does the Provision Exist For? 30. We must acknowledge that the deduction under section 80-IA is a profit-linked incentive, for the very Chapter VI-A provides for the incentives of tax deductions. The 1961 Act broadly provides for two types of tax incentives: (a) investment linked incentives; (b) profit linked incentives. So, according to the Supreme Court in Liberty India v. CIT,1 when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What merits the incentives under Section 80-IA/80-IB is the generation of profits (operational profits).
Further, if we look at the scheme of Section 80-IA(2), it does not speak about the business of assessee but of "undertaking" or "enterprise". Then, an undertaking or an enterprise alone matters for the Revenue to decide the eligibility. Significantly, section 80-IA (2), the charging provision, does not refer to “business” as such. Analogous Provision and Its Interpretation: 32. Section 84—since repealed—is in pari materia.2 Interpreting this provision, CBDT issued a clarificatory note, dt. 13/12/1963: The Board agree that the benefit of section 84 of the IT Act, 1961, attaches to the undertaking and not to the owner thereof. The successor may have the benefit for the unexpired period of five years provided the undertaking is taken over as a running concern. Has the Assessee’s Undertaking Fulfilled the Eligibility Criteria?
Page 15 of (1)[] Section 84. Income of newly established industrial undertakings or hotels. – (1) Save as otherwise hereinafter provided, income tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this section applies, as does not exceed six per cent. per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner. (2) This section applies to any industrial undertaking which fulfils all the following conditions namely: (i) it is not formed by the splitting up, or the reconstruction, of a business already in existence; (ii) it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose; ...
Repetitive it may be, the assessee acquired in March, 2005 certain tea estates at Munnar, as a going concern. This acquisition included the erstwhile “Devikulam Estate” from Tata Tea Limited. The plant and machinery thus acquired included the electric power distribution network— the transmission lines.
The assessee produced an audited certificate that the written down value of the plant and machinery as on 01/04/2004 was Rs. 88,39,340/-. It has claimed that it spent for the assessment year 2008-09 Rs.50.31 Lakh to renovate and modernize its transmission network. So, the amount spent is over 50% of the then existing establishment's book value. Indeed, the undertaking squarely falls under Section 80-1A(4)(iv) (c) of the Act. The renovation or modernization, admittedly, took place between 01.04.2004 and 31.03.2011.
To be specific, the assessee claims that the undertaking’s renovation or modernization has brought about “substantial improvement in the 'line loss.' Substantial renovation and modernization has been done by replacement of High Tension distribution lines and installation of new CT/PT units.” Conclusion: 36. In the above circumstances, the Assessing Officer’s disallowing Rs.58,91,000/- under section 80-IA of the Act, as affirmed by the Appellate Authority and the Tribunal, cannot be sustained.
So, we answer the question of law in the assessee’s favour. As a corollary, we set aside the Tribunal’s impugned order, dated 19.09.2014, and allow the Appeal. No order on costs.” 5.5 The Ld.AO is directed to call for the necessary documents to verify in terms of the decision by Hon’ble Kerala High Court extracted hereinabove and to consider the claim of assessee in accordance with law. Assessee is directed to file all relevant certificates and verification documents / evidences as observed by Hon’ble Kerala High Court for A.Y. 2008-09. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed.
6. Ground no. 3 is in respect of the claim of educational cess. 6.1 The Ld.AR submitted that this issue is no longer resintegra by view of the retrospective amendment by the Finance Act, 2022 w.e.f. 01.04.2005 to section 40(a)(ii) of the act. The Ld.AR accordingly prayed for withdrawal of this ground. Accordingly, this ground stands dismissed as withdrawn. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in open court on 30th March, 2023.