2025 (1) TMI 89 - AT - Income Tax

Rectification of mistake - treatment of fertilizer subsidy as capital receipts - The assessee filed rectification application after relying on the decision of Hon ble Supreme Court regarding allowability of subsidy as capital receipt - AO has rejected the application filed by the assessee u/s 154 - CIT(A) held that the fertilizer subsidy received by the assessee in terms of the NBS policy during the year under consideration is not an income and same was treated as capital receipt not chargeable to tax. HELD THAT - Identical issue on similar fact in the case of the assessee for A.Y. 2015-16 has been adjudicated by the 2021 (8) TMI 982 - ITAT MUMBAI in favour of the assessee as held that the scheme was mainly to attract the investment in the industry and the purpose test is that the attraction of new players in the industry and also attracts the existing players to bring new investment. How the benefit of scheme is passed on to the industry matters. Sometime, Govt. introduces direct concession in the investments or introduces mechanism in relation to the ultimate achievement of the objects of the scheme. In this scheme, the ultimate object is to make available the required fertilizers and at appropriate price to the farmers, this can be achieved only by bringing new investments in the industry. This is a recurring issue in the case of the assessee which has already been adjudicated by the ITAT in favour of the assessee as discussed supra in this order therefore following the decision of the ITAT and other judicial findings as elaborated in the findings of ld. CIT(A) we do not find any merit in this appeal of the revenue therefore the same stand dismissed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core legal questions:

Whether the CIT(A) was justified in allowing the additional claim of the assessee, which was not claimed in the original or revised return of income, contrary to the decision of the Supreme Court in the case of Goetze (India) Ltd. vs CIT.
Whether the CIT(A) was justified in treating the fertilizer subsidy as a capital receipt when it was claimed by the assessee as a revenue receipt in the return of income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Additional Claim Not in Original or Revised Return

Relevant Legal Framework and Precedents: The legal framework involves the Income Tax Act, specifically the provisions concerning claims in returns and the rectification of mistakes under Section 154. The precedent case is Goetze (India) Ltd. vs CIT, which restricts claims not made in the original or revised return.
Court's Interpretation and Reasoning: The court considered whether the additional claim could be entertained despite not being included in the original or revised return. The CIT(A) allowed the claim, suggesting that the rectification was permissible due to a mistake apparent from the record.
Key Evidence and Findings: The court noted the rectification application filed by the assessee and the CIT(A)'s acceptance of the claim based on judicial precedents and the purpose test.
Application of Law to Facts: The court applied the principles of rectification and the purpose test to determine the nature of the subsidy as a capital receipt, allowing the claim despite procedural issues.
Treatment of Competing Arguments: The revenue argued against the allowance of the claim due to procedural non-compliance. However, the court found merit in the CIT(A)'s reasoning and judicial precedents supporting the substantive nature of the claim.
Conclusions: The court upheld the CIT(A)'s decision, allowing the additional claim as a rectifiable mistake.

Issue 2: Nature of Fertilizer Subsidy

Relevant Legal Framework and Precedents: The legal framework involves the classification of receipts under the Income Tax Act, with reference to the purpose test established by the Supreme Court in cases like Ponni Sugars & Chemicals Ltd. and Shree Balaji Alloys.
Court's Interpretation and Reasoning: The court analyzed the NBS policy's objectives, determining that the subsidy aimed at industrial growth and modernization, fulfilling the purpose test for a capital receipt.
Key Evidence and Findings: The court examined the NBS policy, judicial precedents, and the CIT(A)'s findings, which highlighted the subsidy's role in promoting industry growth and investment.
Application of Law to Facts: The court applied the purpose test, concluding that the subsidy was a capital receipt, not taxable under normal provisions or included in book profit calculations under Section 115JB.
Treatment of Competing Arguments: The revenue contended that the subsidy was a revenue receipt, linked to reducing manufacturing costs. The court, however, emphasized the subsidy's broader industrial objectives, aligning with the purpose test.
Conclusions: The court ruled that the subsidy should be treated as a capital receipt, excluding it from taxable income and book profit calculations.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The object of the subsidy under these schemes was not to enable the assessee to run the business more profitably. The object was primarily to provide encouragement and support, which would create benefits of enduring nature, for the Industry as a whole in certain sectors of economy and ultimately benefit the fertilizer users i.e the farmers."
Core Principles Established: The judgment reinforces the principle that the nature of a subsidy is determined by its purpose, aligning with the purpose test established by the Supreme Court. It also highlights the flexibility in rectifying procedural omissions when substantive justice demands it.
Final Determinations on Each Issue: The court upheld the CIT(A)'s decision on both issues, allowing the additional claim and classifying the fertilizer subsidy as a capital receipt, thus dismissing the revenue's appeal.

The judgment emphasizes the importance of the purpose test in determining the nature of subsidies and the potential for rectification of procedural omissions to achieve substantive justice. It also highlights the court's reliance on established judicial precedents to guide its decisions.

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