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TMI Blog2011 (9) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... r nor can be apportioned over 11 year - amount credited to P&L A/C - Held That:- - Hon’ble Apex Court in the case of Padmaraje R. Kadambande vs. CIT (1992 -TMI - 5368 - SUPREME Court), has held that Capital Receipts are not income within the definition of Sec 2(24) of the Act and hence are not at all chargeable under the I.T. Act. - A receipt which is neither ‘Profit’ nor ‘Income’ and which does not have any element there-of embedded there in, cannot be part of ‘Profit’ as per Profit & Loss account prepared in terms of Part II of Schedule VI to Companies Act. There was never any intention of the legislature to tax what is not income at all. - Apex Court in Indo Rama Synthetics (I) Ltd -vs- CIT (2011 - TMI - 201411 - Supreme Court of India), has held that inclusion of capital receipt in the computation of MAT would defeat two fundamental principles. In view of Apollo Tyres (2002 - TMI - 6081 - Supreme Court), to fulfill requirement of Schedule VI it needs to be excluded while computing Book Profit u/s 115JB. Capital receipt in the form of Sales Tax incentive needs to be excluded from profit as per P&L Account for the year in computing Book profit u/s 115JB of the Act.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus on 12-09-2002, the Assessee became entitled to the Sales Tax Incentive to the tune of 157.28 Crs. to be availed over next 11 years. A.Y. 2003-04 was the first year of exemption under this Scheme and the year in appeal, that is, AY 2004-05, is the 2nd year for the same unit under the same scheme. The facts in the two years are thus identical. For A.Y. 2004-05, the assessee has availed Rs. 21,92,36,206/- as sales tax exemption, which has been claimed as Capital Receipt in computing total income under regular provisions of the Act and on the same ground, excluded in computing book profit u/s 115JB. In the order u/s 143(3), both the claims were disallowed by the A.O. However, CIT(A) has allowed both the claims of the assessee and deleted the disallowance relying upon the decision of Hon ble Tribunal in assessee s own case for A.Y. 2003-04 which is the first year of this claim. 7. We shall take up Ground No.1 first. 8. The Ld DR in its written submission filed on 21-06-2011 has submitted as under: This Ld CIT(A) while deciding the issue has relied upon the decision of the Hon ble Tribunal in Assessee s case for A.Y. 2003-04. Most respectfully it is submitted that the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. A notification was issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings , with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 per cent. And above of existing capacities, .. The incentives would be limited to a period of five years from the date of commencement of production; the incentives were to be given by way of refund of sales tax .. The assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of incentive/subsidy allowed to the assessee. Whereas in the case of assessee such conditions are not applicable. Secondly, the Hon ble Supreme Court has decided this issues for A.Y 89-90 i.e. prior to introduction of provision of explanation 10 of section 43(1) of I.T. Act 1961. Likewise the decision of Hon ble Special Bench, ITAT, Mumbai in the case of Reliance Industries (A.Y 85- 86) which is also not applicable in the case under question for the facts discuss above and also in the light of decision of Hon ble ITAT, Bench D Delhi in the case of M/s L.G Electronics India Ltd. Addl. CIT, Range-4 Delhi. Now, the questioned arise that if the assessee company has treated the S.T subsidy as capital receipt, on the ground that the same has been received against investment made in the eligible fixed assets for expanding of its existing business, then how come the assessee company has not reduced such subsidy (claimed to have been received against eligible assets as per certificate issued by sales tax officer) from the actual cost of the assets, as the cost of the assets to that extend has not been met by the assessee. These facts have been made abundantly clear, in the explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included the actual cost of the assets to the assessee. Cost incurred/payable by the assessee alone could be the basis for any tax allowance. This explanation further provides 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. Explanation 10 to section 43(1) was introduced to nullify the judgment of the Hon ble Supreme Court in the case of CIT vs. P. J. Chemicals Ltd.(1994) 210 ITR 830 where it was held that subsidy granted by the Govt. as an incentive for setting up industries in backward area at an percentage of cost of capital assets in not a payment for meeting any portion of the cost of the capital assets within the contemplation of section 43(1) of the I.T. Act 1961 and the same is not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs:- (i) The purpose of granting incentive was to accelerate the industrial growth and increase employment. (ii) Hon ble Tribunal has relied upon CIT vs.- Ponni Sugars Chemicals Ltd. (2008) 306 ITR 392 (SC) and held that whether any incentive is capital or revenue would depend upon the purpose for which subsidy is granted. If the purpose of the subsidy is to enable the assessee to run the business more profitably then the incentive is on revenue account and if the object of the subsidy is to enable the assessee to set up a new unit or expand the existing unit then the incentive is on capital account. (iii) Based on the purpose test as to why the incentive has been granted, the Hon ble Tribunal have held that incentive by way of sales tax exemption is provided to the appellant to set up a new unit or carry out expansion and not for running the business more profitably. In deciding, the Hon ble Tribunal also relied upon decision of Special Bench of Mumbai ITAT in the case of DCIT vs.- Reliance Industries Ltd. (2004) 88 ITD 273 (Mum) (SB). It has further held that the facts before the Special Bench are identical with those of the respondent. Hence, following the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidy is primarily given for helping the growth of industries and not for supplementing their profits, such subsidy shall be regarded as capital receipt in the hands of the recipient. 9.2 As far as issue for non-exclusion of above subsidy from the block of assets for claiming depreciation is concerned, the Ld Counsel submitted that the Ld DR has raised an additional issue which is neither arising from the Grounds of appeal nor from additional ground filed before the Hon ble Bench. Hence, the above issue cannot be raised now. Without prejudice, even on merit the contention of the department is not tenable as the above issue is squarely covered in favour of the assessee by the decision of Mumbai Tribunal in the case of Godrej Agrovet Care Ltd vs- ACIT (2009) in ITA No. 6807/Mum/06 as well as that of Visakhapatnam Tribunal in the case of Sasisri Extractions Ltd vs- ACIT (2010) 122 ITD 428 (Vizag). Hence, the contentions raised by the Ld DR are not tenable. 10. We have heard the rival submissions and the decisions relied upon by both sides. We have also examined the orders of authorities below as well as other materials on record. The omission of reference to some of the cases in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Apex Court in the case of Ponni Sugars (Supra) as well as Sahney Steel (Supra) supports the case of the Assessee and not that of the Revenue. (d) Based on the purpose test as to why the incentive has been granted, the Tribunal have held that incentive by way of sales tax exemption in the present case is provided to the assessee to set up a new unit or carry out expansion and not for running the business more profitably. (e) In deciding, the Tribunal also relied upon decision of Special Bench of Mumbai ITAT in the case of DCIT vs.- Reliance Industries Ltd. (2004) 88 ITD 273 (Mum) (SB). It has further held that the facts before the Special Bench are identical with those of the assessee. Hence, following the decision in the case of Ponni Sugars (supra) Reliance Industries (Supra), the incentive in the present case has been held as capital receipt. 10.2 For fear of repetition, we are not reciting down the in-depth findings of the Tribunal for A.Y. 2003-04. On the strength of clear finding of facts, the Tribunal has come to the conclusion that the subsidy in question is to be treated as capital receipt relying upon the principles laid down by the Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore profitably. Hence, we find no reason for departing from the decision taken by Hon ble Tribunal in immediately preceding assessment year. Incidentally, as recorded in Para 9 here in above, Hon ble Bombay, P H, J K Calcutta High Courts have also taken similar view and the same fully supports the case of the Assessee. Further as rightly pointed out by Ld. Counsel for the Assessee, CBDT vide Circular No. 142 dated 01-08-1974 has also clarified that subsidy given for helping the growth of industries and not for supplementing their profits would constitute capital receipt. It has been time and again held by Apex Court, including in the case of CIT vs- Indian Oil Corporation Ltd (2004) 267 ITR 272 (SC) that Circulars issued by CBDT are binding on Revenue and it is not open to the Revenue even to raise a contention contrary to the binding circular. 10.3 In the light of the aforesaid, we have no hesitation in holding that sales tax incentive availed by the Assessee is capital receipt and CIT(Appeals) was correct in deleting the addition made by the AO on this account. This ground of the department is thus dismissed. 10.4 Before moving to the next ground, let us deal with a ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be taken at the time of filing of original appeal since otherwise it tantamount to filing of fresh appeal. On examination, we find that the additional ground filed by the department is purely on legal issue and does not require investigation of new facts. Hence, the objection raised by Ld Counsel for the assessee is thus rejected and the additional ground is admitted for the sake of justice. 12. On merit, Ld D/R in its written submission filed on 21-06-2011 has submitted as follows : Brief facts with respect to the subject Ground of appeal are submitted as below: In the accounts prepared by the Assessee in accordance with the provisions of Part II Part III of Schedule VI of the companies Act and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, the sales tax subsidy has been credited by the Assessee to the Profit Loss account. The sales tax subsidy has been included in the total turnover of the Assessee. Thus the sales tax subsidy is included in the Book Profits as are reflected in the accounts maintained in accordance with the above mentioned provisions of companies Act. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits presented before the shareholders and the same should be also be included in computing Book profits u/s 115JB- If Long term capital gains is part of profits included in the P L account prepared as per Parts II III of Schedule VI of the Companies Act, it cannot be excluded from net profit for the purpose of computing book profit- Method of computation of Book Profit provided in Explanation to section 115JB should be followed while computing the book profit and the normal provisions of computation of profit under any head of the Act will not be applicable- Capital Gains in question is exempt u/s 47(iv) but the same is not covered by any of the clauses (i) to (vii) of expl to section 115JB. Merely because the long term capital gains is exempt u/s 47(iv) under the normal provisions of the Act, it is not correct to say that it is also to be reduced from the net profit for the purpose of computing book profit under section 115JB when the Explanation to section 115JB does not provide for any deduction in terms of section 47(iv) Thus it could be seen that the decision of the Hon ble Special Bench squarely applies to the present case. When none of the clauses of explanation 1 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l.No Rain Commodities (supra) Assessee s Case 1 Brief Facts Above decision is in relation to taxability of Capital Gains in computing Book Profit u/s 115JB of the Act and not taxability of Capital Receipt, which does not have any element of income embedded in it. Assessee s case is on incentive granted for expansion of its unit, which is pure simplicitor, capital receipt not chargeable to tax which factually does not have any element of income or profit embedded in it. Such receipts do not have any income or profit element, since granted to encourage industrial growth of industrially nondeveloped area. 2 Capital receipt Capital Gains are not identical Capital Gain is considered as income u/s 2(24)(vi) and hence chargeable to tax. Pure Capital receipts are not income within the meaning of section 2(24) of the Act [Padmaraje R Kadambande vs CIT (1992) 195 ITR 877 (SC)] hence are not at all chargeable under the I. T. Act. A receipt which is neither profit nor income cannot be part of profit as per P L A/c prepared in terms of Part II Part III of Schedule VI to Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modities Growth Avenue (supra) as relied upon by department are clearly distinguishable on facts and hence cannot be applied in the present case. On the contrary, the impugned matter is squarely covered by the facts of the case in decision of this Hon ble Tribunal in ITA No. 942/Jp/08 in assessee s own case for A.Y. 2003-04 and hence the decision in the said case, which is in favour of the assessee, fully applies. c. Exclusion of capital receipt credited to P L account is in accordance with Part II Part III of Schedule VI to the Companies Act, 1956 Hon ble Apex Court in the case of Apollo Tyres Ltd. vs.- CIT (2002) 255 ITR 273 (SC)have held that the AO has no power to rework the book profit if the profits are computed in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. Further, the Hon ble Apex Court in the case of Indo Rama Synthetics (I) Ltd -vs.- CIT (2011) 330 ITR 363 (SC) have also held that the object of MAT provisions is to bring out the true working result of the companies. The thrust is to find out the real working results of the company. Hon ble Special Bench in the case of Rain commodities (supra) in Para 17 (last sub-para) P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot in accordance with Part II Part III of Schedule VI as the said receipt was in the nature of income from investment and was required to be credited to P L a/c to show the correct result of the company. Decision After considering the decision of Apollo Tyres (supra), it was held that if assessee has earned profit on sale of rights in an immovable property and the same has not been routed through P L account and has been directly credited to capital reserve, then the accounts are not prepared in accordance with Part II of Schedule VI and A.O. has power to go beyond the book profit as per audited accounts. Applicability in present case - Above decision is squarely applicable as it is exactly the reverse situation. The capital incentive credited to P L account is not in accordance with Part II of Schedule VI as the same does not arise out of the working of the company during the period covered by the account and hence in order to compute the correct Book Profit u/s 115JB, the same needs to be excluded and while doing so the assessee is justified to go beyond the book profit as per audited accounts and make necessary adjustment for the same. In doing so, it does not contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss tax although they have huge profits in books. Incentive for expansion of industrial unit being capital receipt in nature, is not in the nature of Tax concessions or Tax incentives under the IT Act. It is an incentive for industrialization. Therefore, levying book profit on same will be against the legislative intention. Notably, in the case of Growth Avenue (supra) as relied upon by Ld. DR, the issue was with regard to exemption u/s 54EC of the Act. It needs to be noted that above exemption is a specific tax incentive or tax concession granted by the I. T. Act for investment in specified assets, for exemption of the capital gains that are chargeable to tax otherwise. Hence, such income is held to be subject to MAT u/s 115JB. Similarly, in the case of Rain Commodities (supra) the issue was with regard to chargeability of capital gain on assets transferred to subsidiary company and corresponding exemption u/s 47(iv). Since in the present case, the issue is with regard to taxability of capital receipt and not taxability of tax exempt income or profits (because of various tax incentives available in the I. T. Act), the above decisions are not applicable in the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with Schedule VI Parts II III of the Companies Act, it is permissible to make adjustments so as to get Profit as per P L Account in accordance with Schedule VI Parts II III, in terms of the decisions of Special Bench Mumbai Bangalore Tribunal relied upon by him, which have so held after duly considering explaining the decision of the Apex Court in the case of Apollo Tyres (supra). His elaborate submissions on both this accounts are aptly summarized in his Key Submissions, which have been reproduced in Para 12.1 here in above and hence not repeated here again. Ld. Counsel also countered each and every other point raised by Ld. D/R, which have been dealt with here in after. 13. We have heard the rival submissions and considered them carefully. We have also perused the orders of authorities below as well as other material on which our attention has been drawn. We have taken into consideration the ratio decidendi of all the decisions relied upon by the rival parties. 13.1 At the outset, the issue in hand is covered in favour of the assessee in its own case for A.Y. 2003-04 vide order dated 23-12-2009 in ITA No. 942/Jp/08. The above decision of Tribunal has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts should not place reliance on the decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. 13.4 From perusal of the decisions of Rain Commodities (supra) and Growth Avenues (supra), we notice that both the decisions dealt with the issue of taxability of capital gains in computing Book profit u/s 115JB of the Act. These capital gains were otherwise income u/s 2(24) of the Act and exclusion was claimed in computing Book Profit u/s 115JB on the ground that the said capital gains was exempt either u/s 47(iv) or u/s 54EC of the Act, which the Tribunal did not agree. In the present case, however, we are dealing not with capital gains but with pure capital receipt, which does not even have any income , profits or gains embedded there in. The impugned incentive granted to the Assessee is pure and simple capital receipt, in terms of our decision on ground no. 1 at Para 10 here-in-above, which in turn is supported by the principles laid down by the Apex Court, various high courts Special Bench of the Tribunal. That being the case, it does not have any income or profit element embedded in it, since th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it cannot be said to be as per Schedule VI, Part II III of the Companies Act and it would necessitate corrective adjustment in that situation so as to comply with Schedule VI, Part II III. 13.8 With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is in line with the principles as laid down by Hon ble Apex Court in the case of Apollo Tyres (supra). In the case of Apollo Tyres (supra), the question before the Apex Court was whether an AO can, while assessing a company for income tax u/s 115J of the IT Act, question the correctness of the P L a/c prepared in accordance with requirements of Parts II and III of Sch. VI to the Companies Act. From the question as framed before the Apex Court it is clear that the issue before the Hon ble Court was with regard to power of the AO to recast audited accounts prepared in accordance with Part II and Part III of the Sch. VI to the Companies Act. Therefore, for applicability of the decision of the Apex Court the prerequisite is that the accounts are prepared in accordance with Part II and Part III to Sch. VI of the Companies Act. If however the P L accounts are not in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce decided in favour of the Assessee. For the reasons stated therein, the appeal filed by the Revenue is dismissed. 16. Next we will take up the appeal filed by the department in ITA No. 635/Jp/201 for the A.Y. 2006-07 and the same is disposed off in the following manner. 17. Ground No. 1 and Additional Ground raised by the Revenue are identical to Ground No. 1 and Additional Ground for A.Y. 2004-05 in ITA No. 614/Jp/2010. Ld. Counsel for the assessee fairly submitted in his key submissions filed before us, that besides the subsidy as dealt with in earlier years, the assessee also received further subsidy under Rajasthan Investment Promotion Policy 2003 for expansion of its undertaking at Ras in the state of Rajasthan, the purpose of incentive where-under is also to encourage setting up of new unit or expansion of existing units. Copy of the Scheme as well as Eligibility certificate dated 08-09-2006 granted pursuant to the said scheme has been filed at Pg 26-40 and Pg. 41 of Paper Book respectively. We further find that object of above scheme are identical with the purpose of the other scheme examined by the Tribunal and us in AYs 2003-04 2004-05. On examination of the sche ..... X X X X Extracts X X X X X X X X Extracts X X X X
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