2017 (5) TMI 1591 - AT - Income Tax

Subsidy received - capital receipt OR revenue receipt - Held that - In the case of DCIT vs Teesta Agro Industries Ltd. 2011 (1) TMI 1501 - ITAT KOLKATA has observed that the subsidy given in the form of the remission of sales-tax under the West Bengal State Incentive Scheme 1999 is in the nature of capital receipt and therefore not assessable to income tax. In view of above, we are of the opinion that the impugned subsidy is capital in nature and therefore not liable to tax. Simply the assessee has inadvertently offered the same to tax does not mean the capital receipt has become taxable. Receipt of subsidy will not be taxable being capital in nature under the provisions of MAT - Held that - Hon ble Supreme Court in the case of Padmaraje R Kadambande Vs CIT 1992 (4) TMI 215 - SUPREME COURT has held that capital receipts are not income within the meaning of section 2(24) of the Act and hence not chargeable to tax. When a receipt cannot be brought to tax under the computation of income under the normal provisions as well as under the deeming provisions of the Act, then such receipt is out of the purview of the provisions of section 115JB. We find the decisions in support of this proposition that a capital receipt which is not chargeable to tax under any provisions of the Act would not be liable for book profits tax u/s 115JB Addition on account of unexpired foreign currency forward contract on Marked to Market (MTM for short) basis - Held that - Instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the DR. However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. We reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction - Decided against revenue

Summary

Issues Involved:
1. Taxability of sales tax remission as capital receipt.
2. Deletion of notional "Market to Market" foreign exchange loss.

Issue 1: Taxability of Sales Tax Remission as Capital Receipt

The Revenue appealed against the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] treating the sales tax remission received by the assessee as a capital receipt. The Revenue contended that the incentive should be considered revenue in nature, citing the Supreme Court decision in Sahney Steel & Press Works Ltd vs. CIT (1997).

The assessee, engaged in manufacturing PET resins, received an incentive of ?15,13,56,924 from the Government of West Bengal under the West Bengal Incentive Scheme 1999. The assessee initially reported this incentive as income but later claimed it as a capital receipt before the CIT(A), arguing that the incentive was for setting up new industrial projects or expanding existing ones, not for operational expenses.

The CIT(A) agreed with the assessee, stating that the subsidy was linked to capital investment and was meant to promote new industries in West Bengal. The CIT(A) relied on the Supreme Court decision in CIT vs. Ponni Sugars and Chemicals Limited, which distinguished between subsidies for operational costs (revenue in nature) and those for capital investments (capital in nature). The CIT(A) directed the Assessing Officer (AO) to delete the addition of the subsidy amount, both under normal income computation and Minimum Alternate Tax (MAT) provisions.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the subsidy was intended for capital investment and not operational costs. The Tribunal also noted that the form or mechanism of the subsidy is irrelevant; it is the purpose that determines its nature. The Tribunal cited several judgments, including the Calcutta High Court's decision in CIT vs. Rasoi Limited, which supported the view that such incentives are capital receipts.

Issue 2: Deletion of Notional "Market to Market" Foreign Exchange Loss

The Revenue also appealed against the CIT(A)'s decision to delete the addition made by the AO for ?84.51 lakh on account of unexpired foreign currency forward contracts on a Marked to Market (MTM) basis. The AO had disallowed this loss, considering it notional since the contracts had not expired by the balance sheet date.

The assessee argued that the loss was recorded following Accounting Standard-11 (AS-11) issued by the Institute of Chartered Accountants of India (ICAI), which mandates recognizing such losses on the balance sheet date. The CIT(A) accepted this argument, noting that the assessee consistently followed the mercantile system of accounting and AS-11. The CIT(A) emphasized that the AO could not take a divergent view in different assessment years, especially when the gain from similar transactions was taxed in subsequent years.

The Tribunal supported the CIT(A)'s decision, referencing the Supreme Court judgment in CIT vs. Woodward Governor India Ltd., which held that such losses are not notional but real and should be recognized as per the mercantile system of accounting. The Tribunal also dismissed the Revenue's reliance on CBDT Instruction No. 3/2010, stating that instructions from the CBDT are not binding on the courts.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on both issues. The sales tax remission was rightly treated as a capital receipt, and the notional "Market to Market" foreign exchange loss was correctly allowed as a deduction.