2021 (9) TMI 124 - AT - Income Tax

Nature of receipt - grant received by the assessee from the Government of Andhra Pradesh - revenue or capital receipt - sales tax paid is received as a grant from the State Govt - HELD THAT - Assessee has to receive 25% of the sales-tax paid during financial year will be ploughed back as a grant by the Government towards the payment of sales tax during the next year and the benefit will be available for 5 years from the date of commencement of production i.e., up to 6th year. In the present case, the assessee has commenced the manufacturing on 6/4/2007 and the assessee is selling the products and collecting the sales tax and later on it is paid to the Govt. of AP and in the next year, 25% of the total sales tax paid is received as a grant from the State Govt. There is no doubt that the sales tax is a liability on sales made by the assessee and collected from the purchaser of goods and later on paid to the Government as a sales tax liability. As the subsidy received by the assessee in the form of refund of sales tax paid from the Sate Govt of AP is to be treated as revenue receipts. Therefore, all the appeals filed by the revenue on these grounds are allowed. Disallowance u/s 14A - proof of exempt income earned by the assessee - HELD THAT - As perusing the entire material available on record and the orders of the Authorities below, we observe that the disallowance made U/s. 14A of the Act has rightly been allowed by the Ld. CIT(A). We find from the order of the Ld. CIT(A) that there is no exempt income earned by the assessee during the impugned assessment year and he has relied on certain judgments while deciding the issue in favour of the assessee. The Hon ble Delhi High Court in the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Therefore, as per our considered view, we do not find any infirmity in the order of the Ld. CIT(A)

Summary

Issues Involved:
1. Nature of the grant received from the Government of Andhra Pradesh: Capital or Revenue.
2. Disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Nature of the Grant Received from the Government of Andhra Pradesh: Capital or Revenue

The primary contention revolved around whether the grant received by the assessee from the Government of Andhra Pradesh should be treated as a capital receipt or a revenue receipt. The Revenue argued that the grant was given to reduce the sales tax burden and thus should be treated as a revenue receipt, citing the Supreme Court's decision in 'Sahney Steel and Press Works Limited V CIT'. The assessee, however, contended that the grant was for expanding its manufacturing capacity and should be treated as a capital receipt, relying on the Supreme Court decision in 'CIT vs. Chaphalkar Brothers'.

The Tribunal examined the scheme under which the grant was provided and noted that the grant was received only after the commencement of production and was linked to the sales tax paid, which aligns with the characteristics of a revenue receipt as per the 'Sahney Steel' case. Therefore, the Tribunal concluded that the subsidy received by the assessee was in the nature of revenue receipts and should be taxed accordingly.

2. Disallowance under Section 14A read with Rule 8D

The second issue was regarding the disallowance made under Section 14A read with Rule 8D. The Revenue argued that disallowance under Section 14A can be made even in a year where no exempt income was earned or received by the assessee, citing Board Circular No. 5/2014. The assessee contended that since no exempt income was received during the relevant assessment year, no disallowance should be made.

The Tribunal referred to the Delhi High Court's decision in 'Cheminvest Ltd. vs. CIT', which held that Section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the disallowance made under Section 14A, as there was no exempt income earned by the assessee during the impugned assessment year.

Conclusion:

The Tribunal allowed the Revenue's appeal regarding the nature of the grant, treating it as a revenue receipt. However, it dismissed the Revenue's appeal concerning the disallowance under Section 14A, upholding the CIT(A)'s decision to delete the disallowance due to the absence of exempt income during the relevant assessment year. The Tribunal also allowed the assessee's Cross Objection, directing the AO to delete the disallowance made under Section 14A read with Rule 8D(2)(iii).