2015 (12) TMI 1783 - AT - Income Tax

Nature of receipt - incentive/subsidy received from the Central & State government - to be treated as revenue receipt or capital receipt - Held that - The schemes launched was for setting up of new industries in the district of Kutch for the purpose of new employment opportunities and to make industrial and economic environment live. Thus, the scheme of incentives provided by the respective Governments was setting-up of a new unit and not for running of the business more profitably. As said in PONNI SUGARS & CHEMICALS LTD. 2008 (9) TMI 14 - SUPREME COURT the form and the source of subsidy are immaterial and what is material is whether the subsidy is for setting up for a industrial unit or running it for profitability. Similarly, the Central Excise exemption was given in the public interest for setting up of a new industrial unit in the Kutch District. Accordingly on the facts of the present case, we conclude that the incentive given by the State Government and the Central Government is nothing but capital receipts, because applying the purpose test the incentive / subsidy was given only for setting up of new industrial unit and economic development and generation of new employment opportunities in the Kutch District and not for running the industry for augmenting the profit on day-to-day business. Thus, We hold that the amount of incentive received by the assessee cannot be taxed as revenue receipt as it is purely on capital account. Other plea raised by the AO in the order passed u/s 143(3) r.w.s. 153A, we agree with the contention of the Ld. Counsel that, none of the plant and machinery installed by the assessee for setting up of a new industrial unit has been funded by the Government subsidy. The subsidy here in this case is not specifically intended to subsidies the cost of capital or plant & machinery. The incentive in the form of subsidy by the government here in this case cannot be considered as payment directly or indirectly to meet any portion of the actual cost and hence it does not fall within the purview of Explanation 10 to section 43(1). Thus, this alternative plea as raised by Ld. AO is rejected - Decided n favour of assessee Claim of prior period expenses - Held that - Whole issue relating to prior period expenses is set aside to the file of the AO to be decided afresh after giving due opportunity to represent its case. Disallowance u/s 14A - Held that - We agree in principle with the Ld. Counsel that in case, assessee has own surplus fund which are in far excess of investment made, then no disallowance of interest should be made and this view stands covered by the decision of Hon ble Bombay High Court in the case of HDFC bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT . Accordingly, the AO is directed to verify this contention and grant relief so far as interest disallowance is concerned. Further, the AO is also directed to apply the principles laid down by Delhi High Court in the case Chem Invest 2015 (9) TMI 238 - DELHI HIGH COURT inasmuch as if there is no exempt income then, no disallowance should be made. - Appeal allowed for statistical purposes.

Summary

Issues Involved:

1. Classification of government incentives/subsidies as revenue or capital receipts.
2. Allowance of prior period expenses.
3. Levy of interest under sections 234B and 234C.
4. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Classification of Government Incentives/Subsidies as Revenue or Capital Receipts:

The primary issue across all appeals was whether the incentives/subsidies received from the Central and State governments should be classified as revenue receipts or capital receipts. The assessee, engaged in manufacturing sponge iron, steel ingots, and rolled products, received incentives under schemes from both governments aimed at economic development and creating employment in the Kutch District post-earthquake.

The assessee argued that these incentives were capital receipts as they were intended for setting up new industrial units. The Assessing Officer (AO) initially rejected this claim, treating the incentives as revenue receipts. The CIT(A) followed the Bombay High Court decision in Reliance Industries, treating the incentives as capital receipts. However, the Tribunal had set aside this decision for fresh adjudication, emphasizing the need for a "purpose test" to determine the nature of the subsidy.

The Tribunal, upon reviewing various case laws and the purpose of the schemes, concluded that the incentives were indeed capital receipts. They noted that the incentives were for setting up new industrial units and not for running the business profitably. This conclusion was supported by the Supreme Court's decision in Ponni Sugars & Chemicals Ltd., which emphasized the purpose for which the subsidy is given as the crucial factor.

2. Allowance of Prior Period Expenses:

The second issue involved the allowance of prior period expenses amounting to Rs. 83,55,190/-. The Tribunal observed that the AO and CIT(A) did not discuss these expenses in detail. The Tribunal set aside this issue to the AO for fresh adjudication, allowing both the revenue and the assessee to present their cases with proper evidence.

3. Levy of Interest Under Sections 234B and 234C:

The issue of interest under sections 234B and 234C was deemed consequential. The Tribunal did not provide a specific adjudication on this matter, as it would follow the final determination of the tax liability based on the other issues.

4. Initiation of Penalty Proceedings Under Section 271(1)(c):

The initiation of penalty proceedings under section 271(1)(c) was considered premature by the Tribunal. They dismissed this issue without prejudice, allowing it to be revisited if necessary after the primary issues were resolved.

Separate Judgments Delivered:

The Tribunal delivered a consolidated order addressing the issues for multiple assessment years (2006-07 to 2011-12). They consistently applied their findings across these years, ensuring uniformity in the treatment of government incentives and other related matters. The detailed analysis and application of legal principles were consistent, providing clarity and direction for the AO to follow in reassessing the cases.