2019 (4) TMI 558 - AT - Income Tax

Ad-hoc disallowance of 50% commission payment - allegation that some of the bills were handmade and self-made vouchers and having discrepancies - CIT-A deleted the addition - HELD THAT - It is observed that the assessee paid commission of ₹ 22.59 lakhs to Kasturchand Raghunath Sons, which fact was clearly stated before the AO as has also been recorded in the assessment order. Not only that, the assessee also furnished details of commission. AO proceeded to make an ad hoc disallowance at 50% of commission without even endeavoring to verify the genuineness of such payment from Kasturchand Raghunath Sons. He simply stated that vouchers were handmade and there were discrepancies in some vouchers and bills. He, however, failed to spell out any such discrepancy in any of the vouchers produced by the assessee. Under the given circumstances, we are satisfied that the CIT(A) was justified in deleting the addition. We, therefore, uphold the same. Addition on account of interest on interest-free loans - advance for allotment of shares - HELD THAT - CIT(A) has categorically recorded that the assessee did charge interest @9% on the advance given to Indo Sprint. Such an interest was shown as receivable in the books of account of the assessee. This finding has not been controverted on behalf of the Revenue. In our considered opinion, no exception can be taken to the view canvassed by the ld. CIT(A) on this issue in deleting the addition to this extent. As regards the second component of disallowance of interest being advance given to Vyanjan Hotels, it is seen that the assessee contended before the CIT(A) that this amount was given for purchase of shares of that company. The assessee furnished details of the shares which it was intending to purchase. CIT(A) restored the issue to the AO and directed him to find out if shares of the company were allotted to it. If it was found that the shares were not allotted to the assessee company after making the payment, then the interest cost would be taken to shares account and added to their cost of acquisition and in the otherwise scenario it should be taken as revenue expenditure. No grievance on the part of the Revenue in as much as the CIT(A) has adopted a legally valid view. AR submitted that the shares were in fact allotted and the assessee has no objection if the amount of interest was capitalized. Under the given circumstances, we countenance the impugned order to this extent. Taxability of subsidy - revenue of capital - financial assistance of Government of Maharashtra to eligible units under the Financial assistance to Grain Distillery Scheme, 2007 - as per CIT-A amount of subsidy should be reduced from the cost of assets in terms of Explanation 10 to section 43(1) - HELD THAT - we find that the subsidy was given to the assessee to establish the industrial unit in backward regions of the Maharashtra State. Even if such subsidy was quantifiable in the form of rebate of ₹ 10/- per litre on the Excise duty, but the purpose of its grant, which is to accelerate the industrial development in grain based distilleries in the backward regions of the Maharashtra State, does not alter the nature of subsidy from capital to a revenue receipt. Considering the mandate of the scheme issued by the Government of Maharashatra, it becomes clear that the subsidy is a capital receipt not a revenue receipt. The impugned order is upheld to this extent. The language of Explanation 10 clearly states that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee . Proviso to this Explanation states that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee . On going through the language of the Explanation 10, it is manifest that it is attracted only when the object of the Scheme is to subsidize the cost of an asset and not otherwise. Proviso also refers to such subsidy only. subsidy given by the Central Government or a State Government or any authority etc. for any purpose, except where it is taken into account for determination of the actual cost of the asset under Explanation 10 section 43(1), has become chargeable to tax. Even if a subsidy is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre-amendment era, shall be treated as income chargeable to tax, except where it has been taken into account for determining the actual cost of assets in terms of Explanation 10 to section 43(1). This amendment is patently prospective. As the assessment year under consideration is 2011-12 and the amendment is effective from assessment year 2016-17, new hold that section 2(24) (xviii) will have no application. In view of the foregoing discussion, we are satisfied that the subsidy received by the assessee from the Government of Maharashtra is a capital receipt and accordingly not chargeable to tax and at the same time, it is not liable to be reduced from the cost of assets for the purposes of depreciation in the year under consideration. - Decided in favour of assessee.

Summary

Issues:
1. Deletion of addition of commission payment
2. Deletion of addition on interest-free loans
3. Deletion of addition on account of subsidy and reduction from the cost of assets

Analysis:

Issue 1: Deletion of addition of commission payment
The Revenue appealed against the deletion of an addition of ?11,29,894 made by the Assessing Officer on account of disallowance of commission payment. The assessee paid a commission of ?22,59,788 to Kasturchand Raghunath & Sons for manufacturing extra neutral alcohol. The AO disallowed 50% of the commission without verifying its genuineness. The ld. CIT(A) deleted the addition, stating that the AO failed to provide evidence of discrepancies in the vouchers. The Tribunal upheld the deletion, as the commission payment was substantiated, and the AO's disallowance lacked verification.

Issue 2: Deletion of addition on interest-free loans
The Revenue challenged the deletion of an addition on interest-free loans. The AO disallowed 12% of the loan amount, resulting in an addition of ?31,88,480. The ld. CIT(A) allowed relief for interest charged on one advance but sent the other part back for verification. The Tribunal upheld the deletion of the addition related to the interest charged on the first advance. For the second component, the Tribunal accepted the ld. CIT(A)'s direction to verify if shares were allotted against the advance given to Vyanjan Hotels.

Issue 3: Deletion of addition on account of subsidy and reduction from the cost of assets
The Revenue appealed against the deletion of an addition of ?13,76,60,000 on account of subsidy. The assessee received financial assistance under the Financial assistance to Grain Distillery Scheme, 2007. The AO considered the subsidy as revenue, but the ld. CIT(A) held it to be a capital receipt. The Tribunal agreed with the ld. CIT(A), stating that the subsidy aimed to encourage investment in grain-based distilleries. The Tribunal referred to legal precedents to support the capital nature of the subsidy. The Tribunal also discussed Explanation 10 to section 43(1) and the Finance Act, 2015 amendment, concluding that the subsidy was a capital receipt not chargeable to tax and not to be reduced from the cost of assets for depreciation.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal regarding all issues raised in the judgment. The cross objection filed by the assessee was dismissed as it became academic in light of the decision on the Revenue's appeal.