2022 (1) TMI 922 - AT - Income Tax

Taxability of the receipt given by way of subsidy - Exemption on account of sales-tax, entry tax and electricity duty in respect of industrial unit at Raigarh, Madhya Pradesh - As submitted that it is a capital receipt not liable to tax - HELD THAT -Here in this case, the incentives were given in order to encourage the establishment of new industrial units in the private sector to result in development of rural economy and backward areas of the State and creation of employment opportunities. All the Notifications issued by the State Government for different reimbursements/ remissions, are pursuant to the Policy and are in furtherance of the avowed objectives of the State Government in issuing the Policy. Appreciating the objectives of the Policy discussed above, the subsidy being made available to the new units, are clearly in the nature of capital receipt not liable to tax under the Act. The manner in which the concession is given is not material. Even if any concession/ rebate is given in respect of revenue items, the intent of the concession/rebate being the development of the rural economy and upliftment of backward areas, the same would, in our view, be in the nature of capital receipt not liable to tax. Since all the Notifications issued by the State Government for different reimbursements/ remissions, pursuant to the Scheme and in furtherance of the avowed objectives of the State Government in issuing the Scheme, the incentive/ benefit/ subsidy being made available, it has been stated that, it is clearly in the nature of capital receipt not liable to tax under the Act. Even if any concession/rebate is given in respect of revenue items, the intent of the concession/rebate being the development of the rural economy and upliftment of backward areas, the same would still be in the nature of capital receipt not liable to tax. Accordingly, we hold that the subsidy received by the assessee is a capital receipt not allowable for taxable. Accordingly, the ground raised by the assessee is allowed. Disallowing expenditure incurred on aircraft - same was expended for non-business purposes - HELD THAT - After considering the relevant findings of the impugned orders and perusal of the details of expenditure incurred on air journeys, we find that that all the journeys were related to the business of the assessee and the assessing officer disallowed the expenditure incurred on an ad-hoc basis, by randomly picking some of the journeys made and holding that they were not made for business purposes without bringing on record any iota of evidence to substantiate that the journeys were for non-business purposes. As pointed out before us that this issue stands decided in own case 2007 (6) TMI 308 - ITAT DELHI wherein the Tribunal has held that expenditure relatable to trips to meet the customers and/or prospective customers are directed to be allowed. Since it is purely an ad hoc addition, therefore, we direct to disallow the addition and the ground is accordingly allowed. - Decided in favour of assessee. Addition of commission paid - AO disallowed the aforesaid claim of the assessee on the ground that the assessee was unable to adduce evidence of services having been rendered by the said party - HELD THAT - In view of relief being allowed to the assessee in the second round, it is respectfully submitted that the present grounds of appeal challenging the disallowance of commission is rendered infructuous, hence dismissed. Addition u/s 80HHC while computing book profits in terms of clause (iv) of Explanation to section 115JB - HELD THAT - We find that now in the light of the decision of Hon ble Supreme Court in the case of Ajanta Pharma Ltd. 2010 (9) TMI 8 - SUPREME COURT the assessee is eligible for deduction of 100% export profits as computed under section 80HHC while computing book profits in terms of clause (iv) of Explanation to section 115JB of the Act. Further, the aforesaid issue is squarely covered in favour of the assessee 2013 (2) TMI 748 - ITAT DELHI . Additional coal levy - Allowable business deduction - HELD THAT - We find that additional coal levy relating to assessment year is clearly allowable as business deduction and it is not the case of the assessee that deduction of the same amount should be allowed in two different assessment years. However, we direct the AO to verify that, in case, the assessee has taken the deduction and the amount claimed in the return of income for AY 2015-16 of a sum of ₹ 62,42,42,420/-, the said claim should be withdrawn and the same is allowable deduction in the year under consideration. The assessee is also directed to file an application before the AO to claim the same. Deduction u/s 80IA in respect of profits of the power generating units located at Raigarh - HELD THAT - We agree with the submissions of the assessee and hold that inter-division of transfer of power from the captive power plants be made at ₹ 3.29/3.72 per unit being the price at which power is sold by the State Electricity Boards to the assessee since the said price was the fair market value of power and hence, in conformity with the provisions of sub-section (8) of section 80-IA of the Act. Accordingly, the order of the ld. CIT (A) is confirmed and the ground raised by the Revenue is dismissed. Depreciation of on the assets of the power generating undertaking viz. Turbine and 220KV transmission lines, at the rates specified in Appendix 1 read with Rule 5(1) of the Income Tax Rules, 1962 - depreciation was claimed on the written down value of the assets - HELD THAT - In the present case the assessee is bound by the option exercised in the initial assessment year and has, in any case, to claim depreciation only as per sub-rule (1) of Rule 5 of the Rules and there is no choice/ discretion or option left to the assessee to have claimed depreciation on any basis, other than on which depreciation was claimed in the initial year. Thus, the assessee is legally eligible/ entitled to claim depreciation under Rule 5(1) of the Rules since the option of claiming the depreciation under the said sub-rule was availed in the first year of the power generating undertaking. We hold that the assessee is eligible to claim depreciation as per Rule 5(1) and not Rule 5(1A) of the Income-tax Rules, 1962, therefore, the AO is directed to allow the depreciation as per WDV of impugned assets as opposed to straight line method adopted in the assessment order. Accordingly, grounds no.2 3 taken by the Revenue are dismissed. Receipt of preference share application money - assessee credited the said receipt in the capital reserve account as per the provisions of the Companies Act, 1956 - AO treating the said receipt as revenue in nature, taxed the same under the head Income from other sources - HELD THAT - Hon ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. v. ACIT 2014 (10) TMI 278 - BOMBAY HIGH COURT has also held that money received on account of share capital is capital in nature not chargeable to tax - we do not find any infirmity in the order passed by the ld. CIT (A) in deleting the said addition holding that money received on account of shares is capital in nature and accordingly, the same is confirmed. Consequently, ground no.4 is determined against the Revenue. Disallowance of proportionate interest expenditure - assessee had diverted interest bearing funds as interest free advances to its connected concern - HELD THAT - The disallowance of interest was clearly not justified. Further, Accounting Standard AS-9 on Effect of Uncertainties on Revenue Recognition, wherein it has been stated that where there is uncertainty regarding ultimate collection of, inter alia, interest, it may be appropriate to recognize revenue only when it is reasonably certain that ultimately collection will be made - The recovery of principal itself was doubtful, the assessee had not accrued any interest on illusionary basis. We find that no interest was accrued by the appellant on the aforesaid loans for immediately two preceding years and the said stand was accepted by the Department.Since there being no change either in facts or in law in this regard, as compared to the earlier years, the position accepted by the Department has to be followed even as per the principle of consistency. There could be no accrual of notional / imputed interest on the given facts and circumstances of the case, and, therefore, disallowance of interest paid to the extent of such notional / imputed interest was rightly been deleted by the CIT(A). Consequently, ground no.5 is determined against the Revenue. Deduction as ESOP expenditure amortized equally over the vesting period - whether expenditure incurred in order to compensate employees in lieu of services rendered in the form of ESOP? - HELD THAT - This issue now stands covered by the decision of Hon ble Delhi High Court in the case of CIT vs. Lemon Tree Hotels Limited 2015 (11) TMI 404 - DELHI HIGH COURT and the decision of Biocon Limited 2013 (8) TMI 629 - ITAT BANGALORE - This decision of the Tribunal has been affirmed by the Hon ble Karnataka High Court 2020 (11) TMI 779 - KARNATAKA HIGH COURT holding that employees discount represents consideration of services rendered by the employees and hence it is a deductible business expenditure. There is no dispute that here in this case, it is an ascertainable liability since employees incurred obligation over the distinct period, notwithstanding the fact that exact amount as quantified at the time of exercising the options. Thus, following the aforesaid judgments, ESOP expenses are allowed and consequently, ground no.6 is determined in favour of the assessee. Allowable revenue expenditure u/s 37(1) - expenditure relating to construction of Hospital and School Auditorium respectively in the district of Raigarh, in terms of understanding entered into with the Society owning the same, for the benefits of its employees and their children and also as part of its corporate social responsibility initiatives - HELD THAT - We find that the expenses incurred are related to employees welfare and for the purpose of employees and hence to be reckoned as expenditure incurred for the purpose of business. The assessee is carrying on the business/manufacturing activities in the backward and small city of Raigarh in the State of Chhattisgarh which does not have the requisite facilities and infrastructure to meet the regular/basic needs of the residents of that city including employees of the assessee company. The city of Raigarh also did not have any good school or hospital. Therefore, in order to attract qualified employees/technicians to work in such situation, the assessee is providing these facilities and created this infrastructure. Thus, it is for the benefit of the employees as well as part of corporate social responsibility, therefore, the same is to be reckoned as wholly and exclusively for the purpose of business and an allowable deduction. Accordingly, the order of the ld. CIT(A) is confirmed and the ground is dismissed. While holding the subsidy as revenue receipt, simultaneously reduced the same from cost of fixed assets - Subsidy was granted to the assessee to incentivize the industries in the backward areas to provide employment and such subsidy was not granted directly or indirectly for compensating the fixed assets, therefore, the same cannot be adjusted against the cost of assets. Disallowance of Expenditure of lease rent towards cost of the aircraft - HELD THAT - In the present case, the agreement entered into between the appellant and GE, the lessor and owner of the aircraft, is, undoubtedly a lease agreement. During the lease period, the ownership in the aircraft vests with lessor. The assessee only has an option to purchase the aircraft after the expiry of the lease period from lessor. Further, the said option is conditional upon the lessee/ assessee not defaulting in any of the lease payments. In case there is a default in making any of the lease payments the clause granting purchase option cannot be exercised and ownership in the asset shall remain with the lessor. In fact the lessee/ assessee would be required to return back the equipments to the lessor, in case the lessee defaults in making any of the lease rent payment.- Thus, in the present case also if the claim of lease rent has been allowed in the earlier and the subsequent year, but the same has been disallowed in the year under consideration, will lead to an absurd and anomalous situation, hence same is allowed.

Summary

Issues Involved:
1. Exemption of sales tax, entry tax, and electricity duty subsidy.
2. Disallowance of expenditure on aircraft.
3. Disallowance of commission paid to Ganesh Rolling Mills Ltd.
4. Charging of interest under section 234B.
5. Deduction under section 80HHC.
6. Deduction of additional coal levy.
7. Deduction under section 80IA.
8. Depreciation under section 32.
9. Forfeited share application money.
10. Disallowance of interest expenditure.
11. Employee Stock Option Scheme (ESOS) expenditure.
12. Construction of hospital and school auditorium expenditure.
13. Market price of power for captive consumption.
14. Treatment of capital subsidy as revenue receipt.

Issue-wise Detailed Analysis:

1. Exemption of Sales Tax, Entry Tax, and Electricity Duty Subsidy:
The Tribunal admitted the claim as a legal issue affecting the taxability of the subsidy receipt. The assessee argued that the subsidies were capital receipts not liable to tax, as they were granted to promote industrialization and employment in backward areas. The Tribunal agreed, referencing various judgments, including the Supreme Court's decision in Sahney Steel and Ponni Sugars, which emphasized the purpose test to determine the nature of subsidies. The Tribunal concluded that the subsidies were capital receipts and not taxable.

2. Disallowance of Expenditure on Aircraft:
The Tribunal found that the journeys undertaken by the aircraft were for business purposes. The disallowance made by the assessing officer was on an ad-hoc basis without evidence of non-business use. The Tribunal allowed the expenditure, referencing the assessee's own case for AY 2001-02, where similar expenses were allowed.

3. Disallowance of Commission Paid to Ganesh Rolling Mills Ltd.:
The Tribunal noted that the assessing officer made the disallowance without confronting the assessee with the results of ex-parte inquiries. The CIT(A) had directed further inquiries, which were not conducted properly by the assessing officer. The Tribunal upheld the CIT(A)'s deletion of the disallowance.

4. Charging of Interest under Section 234B:
The Tribunal noted that the issue of interest under section 234B is consequential and does not require a specific finding.

5. Deduction under Section 80HHC:
The Tribunal allowed the assessee's claim for a higher deduction under section 80HHC while computing book profits under section 115JB, following the Supreme Court's decision in Ajanta Pharma Ltd., which held that the entire export profits are allowable as deduction while computing book profits.

6. Deduction of Additional Coal Levy:
The Tribunal allowed the deduction of additional coal levy paid pursuant to the Supreme Court's order, relating to the coal extracted during the relevant assessment years. The Tribunal directed the assessing officer to verify that the deduction was not claimed in two different assessment years.

7. Deduction under Section 80IA:
The Tribunal upheld the CIT(A)'s decision to allow the deduction under section 80IA based on the market rate of power supplied by the State Electricity Boards to the assessee, rejecting the assessing officer's lower rate. The Tribunal referenced its own decisions in the assessee's earlier years, which were upheld by the jurisdictional High Court.

8. Depreciation under Section 32:
The Tribunal allowed the depreciation claimed by the assessee under the Written Down Value (WDV) method, rejecting the assessing officer's use of the Straight Line Method (SLM). The Tribunal referenced its own decisions in the assessee's earlier years, which were upheld by the jurisdictional High Court.

9. Forfeited Share Application Money:
The Tribunal upheld the CIT(A)'s decision that the forfeited share application money is a capital receipt not liable to tax, referencing various judicial decisions supporting this view.

10. Disallowance of Interest Expenditure:
The Tribunal upheld the CIT(A)'s deletion of the disallowance of interest expenditure, noting that the assessee had not diverted interest-bearing funds as interest-free advances and that the debtor company had substantial accumulated losses, making the accrual of interest income doubtful.

11. Employee Stock Option Scheme (ESOS) Expenditure:
The Tribunal allowed the deduction for ESOS expenditure, referencing the Delhi High Court's decision in Lemon Tree Hotels Limited and the Special Bench decision in Biocon Limited, which held that ESOS expenditure is a deductible business expense.

12. Construction of Hospital and School Auditorium Expenditure:
The Tribunal upheld the CIT(A)'s decision to allow the expenditure as revenue expenditure, noting that the construction was for employee welfare and part of the assessee's corporate social responsibility initiatives.

13. Market Price of Power for Captive Consumption:
The Tribunal upheld the CIT(A)'s decision to use the market rate charged by the State Electricity Boards to the assessee for captive consumption, rejecting the assessing officer's lower rate.

14. Treatment of Capital Subsidy as Revenue Receipt:
The Tribunal consistently held that the subsidies received by the assessee were capital receipts not liable to tax, based on the purpose test and various judicial precedents. The Tribunal rejected the assessing officer's treatment of the subsidies as revenue receipts.

Conclusion:
The appeals filed by the assessee for AYs 2003-04 and 2006-07 were partly allowed, and the appeals for AYs 2007-08 and 2008-09 were allowed. The appeals filed by the Revenue for AYs 2003-04, 2006-07, 2007-08, and 2008-09 were dismissed.