2021 (3) TMI 1373 - AT - Income Tax

Disallowance of ISO Expenses - CIT-A deleted the addition - as per AO allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year since the claim of assessee is in violation of doctrine of matching principles particularly when ISO certifications is valid for various years. - HELD THAT - We note that these expenses are generally incurred for getting a certification from the International Standardization Organization on a periodical basis for systems and procedures of operations implemented in the organization which are in accordance with the standards laid down by these international bodies. This certificate is basically issued and renewed from time to time to bring forth the fact that the systems and procedures of operations implemented in the organization are in accordance with the standards laid down, therefore it is revenue in nature. We note that by making payments for obtaining ISO 9002 certification, the fixed capital of the company has not enhanced in any manner. It rather created a positive image of the products of the assessee for the smooth conduct of the business. Therefore, the Ld. CIT (A) was justified in treating the entire amount as Revenue in nature. That being so, we decline to interfere in the order passed by Ld. CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue is dismissed. Receipt of subsidy under the 50% subsidy ASIDE scheme - Revenue or capital receipt - treated as income of the assessee or not? - subsidy was given towards the administrative expenses incurred during the execution of project for upgradation of infrastructure facilities - as per CIT-A subsidy is capital in nature - HELD THAT - As clearly mentioned in the sanction letter that the subsidy has been sanctioned for the Treatment Facility of Effluent Treatment Project for Ankleshwar, Jhagadia and Panoli Industrial Estate.The above components are covered under capital nature and thus, the same has been considered as capital subsidy by ld CIT(A). That being so, we decline to interfere in the order passed by Ld. CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue is dismissed.

Summary

Issues:
1. Disallowance of ISO expenses
2. Treatment of subsidy received under ASIDE scheme

Issue 1: Disallowance of ISO expenses

The appeal filed by the Revenue pertained to the Assessment Year 2010-11, challenging the order of the Learned Commissioner of Income Tax (Appeals) regarding the disallowance of ISO expenses. The Assessing Officer disallowed Rs. 27,39,668 out of ISO expenses incurred by the assessee company, stating that the payment made for ISO Certificates is of enduring benefit. However, the ld. CIT(A) deleted the addition, considering ISO certification expenses as revenue in nature. The Tribunal agreed with the ld. CIT(A), emphasizing that ISO certification expenses are incurred periodically to maintain standards and do not enhance the company's fixed capital. Therefore, the entire amount was treated as revenue in nature, leading to the dismissal of the Revenue's appeal.

Issue 2: Treatment of subsidy received under ASIDE scheme

The second issue revolved around the treatment of a subsidy of Rs. 3,87,00,000 received by the assessee under the ASIDE scheme. The Assessing Officer added this amount to the total income of the assessee, considering it as a revenue receipt for administrative expenses. However, the ld. CIT(A) overturned this decision, stating that the subsidy was given for the expansion of infrastructure facilities, making it capital in nature. The Tribunal upheld the ld. CIT(A)'s decision, noting that the subsidy was granted for specific capital components as per the sanction letter. Therefore, the subsidy was considered as capital in nature, leading to the dismissal of the Revenue's appeal.

In both issues, the Tribunal carefully analyzed the nature of expenses and subsidies in question, emphasizing the distinction between revenue and capital aspects. The decisions of the ld. CIT(A) were supported based on the specific purposes for which the expenses were incurred and the subsidies were granted. Ultimately, the Tribunal dismissed the Revenue's appeal in both matters, affirming the orders passed by the ld. CIT(A) in favor of the assessee.