9911796707
TMI Blog2017 (4) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing three grounds: - "1. The Ld. CIT(A) erred in confirming the disallowance of depreciation of Rs. 1,60,30,125/- by reducing the incentive received from Maharashtra State Government from the cost of building and plant and machinery. 2. The Ld. CIT(A) further erred in enhancing the income of the appellant by Rs. 9,91,44,875/- under the provisions of Section 251(i)(a) of the Income Tax Act. 3. The Ld. CIT(A)further erred in holding that the subsidy received from the Maharashtra Government for putting the Mega project in backward area amounting to Rs. 11,51,75,000/- is revenue receipt and full amount of the subsidy is taxable in this year." 3. Briefly stated facts are that the assessee a Private Limited Company is engaged in the business of manufacturing of steel. During the assessment proceedings, the AO noticed from the accounts of the assessee that the assessee has claimed depreciation on assets consequent upon receipt of incentives from State Government. The assessee company has received subsidy from State Government as an industrial promotional subsidy in order to encourage the dispersal of industries to the less developed areas. State Government has been given packa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sale tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area." It is seen that the case of Reliance Industries is not applicable to the appellant's case on two accounts Firstly, the Hon'ble ITAT in Reliance Industries Ltd (in view of the IPS policy at that time) observed that assessee would become entitled for sales tax incentive even before the commencement of the production. Accordingly, the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to supplement the effort in expanding capacity of present Sugar Mills, and in order to solve the problem of additional financial load faced by the investor and in order to minimize the burden on them the surplus funds so generated by the state incentive policy could be used for repayment of term loan taken from central financial institution and banks so that these project could become viable. Para 2 of the said resolution further states that under the new industrial Policy of the state, under the provision of attracting capital investment for technical development and expansion capacity of the sugar factory as well as for the establishment of new sugar mills approval of planned "Sugar Industry Incentive Packages' was discussed. So that the Entrepreneurs of the private sector could be attracted for the establishment of sugar industries and other industries based on sugarcane or sugarcane juice could be attracted and working/installed sugar mills also may expand their capacity and may establish other industries based on co-product of the sugarcane in the state. It is clearly seen from the above para that the scheme framed by the Bihar Government and as that of IPS scheme of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch goods in the State-in Ira-State or in the course of inter15tate trade or commerce within the meaning of section 3 of the Central Sales Tax Act, 1956 (Act No. 74 of 1956), from any place in the State, such dealer shall be entitled to a payment of a sum equal to ninety per centum of the amount of sales tax paid by him, for any quarter under the Sales Tax Act in respect of sales of such goods, as industrial promotion assistance." [Emphasis supplied]. It may be mentioned here that under the said scheme as would appear from sub-section (2) of section 1 that the same was given effect to from 1-4-1994 and initially, was in force only one year from that date and thus, the benefit was then available to the assessee only for that year which is the assessment year we are concerned with. 14A. From the objects and the reasons of the aforesaid scheme as well as the entitlement as indicated in section 3 mentioned above, it is clear That the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble five decisions referred by the appellant is applicable in its case. The appellant was given opportunity to explain why the subsidy received should not be treated as revenue receipt in view of Hon'ble Supreme Court decision in the case of Ponni Sugars & Chemicals Ltd. (174 taxman 87 (SC). The appellant only argued that the purpose/object of the IPS scheme is for development of backward area by generating employment therein through encouraging setting up industries in such area. I do not find merit in such argument. Hon'ble Supreme Court in the case of Ponni Sugars & Chemical ( Supra) held that determination of character of receipt in the hand of assessee has to be determined with respect to the purpose for which the subsidy is given, in such case purpose test has to be applied. The subsidy granted to the appellant is clearly mentioned in the show cause notice. Every person who wishes to take exemption from the Maharashtra Government has signed MOU. Such letter of intent of both the parties clearly indicates that the thrust of the Maharashtra State Government for granting subsidy is for generation of employment. The specific eligibility condition has been prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the sense that the company would be entitled to these incentives only after it went into production. The scheme was not to make any payment directly or indirectly for setting up of the industries. It was only after the industries had been set up and production had been commenced flint the incentives were to be given. The second important thing to note was that the manner in which the incentives were given was of no consequence for determination of the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production. In other words, if power was consumed for any other purpose like getting up the plant and machineries, the incentives would not be given. Refund of sales tax would also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. Hence, it was difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n whether the subsidy payments are of revenue or capital nature. The first proposition stated by Viscount Simon in Ostime's case (supra) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of the State. If any subsidy is given, the character of the subsidy in the hands of the recipient- whether revenue or capital- will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. For example, if the scheme is that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the revenue to contend that the refund of sales tax paid on raw, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strialization throughout the State, the Government of Andhra Pradesh had offered facilities and incentives for new industrial unit to be set up in Andhra Pradesh in the form of subsidies and refunds. It had been provided that subsidies, refunds and other financial concessions granted would he deemed to be a development grant for each unit which would be used wholly and solely for the development of the Unit. The subsidy, in the instant case, was not intended to be a contribution towards capital outlay of the industrial unit. The subsidy was received by the assessee from the Government regularly. It was given with the object of enabling the assessee to carry on its business, although the purpose behind it was to encourage industrialization. Further, the sales-tax liability was a trading liability and to the extent the assessee obtained refund of sales tax, it received a benefit in the course of its business. This benefit was incidental to its business. Thus, in view of the decision of the Andhra Pradesh High Court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, the amount of subsidy received by the assessee was assessable as a revenue receipt. This view of Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een giving a Package of Incentive to New/Expansion Units set up in the developing region of the State since 1964 under a Scheme popularly known as the Package Scheme of incentives. The Package Scheme of Incentives, introduced in 1964, was amended from time to time. The last amended Scheme, commonly known as the 2001 Scheme is operative from 1st April, 2001 to 31st March, 2007. The state has declared the new industrial, investment, infrastructure policy 2006 to ensure sustained industrial growth through innovative initiatives for development of key potential sectors and further improving the conductive industrial climate in the State, for providing the global competitive edge to the State's industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced regional development and employment generation through Greater Private and Public Investment in industrial development. The Package Scheme of Incentives 2007 outlines the eligibility criteria quantum of incentives and monitoring mechanism for administering the incentives.". Further, the assessee has installed a mega project and mega project has been defined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fixed Capital Investments w.e.f. Land & Site Development 0.00 Building 666.67 Plant & Machinery (Including Electricals,) 1719.52 Others 2.81 Total 2389.00 (Rupees twenty three cores eighty nine lacs only) As per Government offer letter dated 29.05.2008 2. Date of start of Commercial Production 01.01.2008 3. Validity period of EC & Period for ED Exemption 7 years: from 01.02.2008 to 31.01.2015 4. Date of effect of the EC 01.02.2008 5. Period of Investment From 30.07.2007 to 29.07.2012 7. As per eligible certificate clause 12 (which is given at page 85 of assessee's paper book) the above investment should be incurred within a period from 30-07-2007 to 29-07-2012 and the holder of the certificate i.e. eligibility certificate was to communicate to the director of industries, the value of fixed asset acquired to the aforesaid date within one month from such date. The assessee accordingly complied with the above condition. The learned Counsel for the assessee has given detail of land, building, plant and machinery acquired from BSAPL, the following are the details: - Sr. No. Particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mum limit of subsidy is fixed at a certain percentage of fixed assets invested by assessee. Therefore, according to the learned Counsel for the assessee this is capital receipt of subsidy and not Revenue in nature. As regards to the disallowance of depreciation by the AO by invoking explanation 10 to section 43(1) of the Act and reduced amount of subsidy from fixed assets and consequently disallowed depreciation. It was argued by the learned Counsel for the assessee that the wordings of explanation 10 are unambiguous. In the present case, the cost of the asset is incurred and paid by the assessee and not met by the Government in form of subsidy. The method of quantification i.e. the maximum subsidy limit is the only linked with cost of fixed assets. This quantification is for putting cap on maximum amount of subsidy eligibility. This method of quantification does not mean, in any way, that subsidy is given to offset cost of asset. It is very clear from PSI scheme as well as Eligibility certificate that subsidy is given to generate local employment in low human index district and receipt is in not for meeting or subsidizing cost of asset by Govt. The learned Counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with investment of more than of Rs. 100 crore or generating employment for more than 250 persons coming up in low human development district as mentioned in Annexure-II of scheme qualified as mega project. Further, the mega project claiming the benefit based on employment criteria will have to employ 75% of such employees from local persons throughout the year. In view of these facts, it is evident that a purpose of the subsidy of IPS 2007 of Maharashtra Govt. is to dispersal of industries to less developed areas of State and to ensure sustained industrial growth. According to us, the subsidy received by the assessee under IPS-2007, in view of the above scheme and given facts of the case, is for industrial development in States backward area, which is capital in nature. 10. For this we are relying on the decision of Hon'ble Bombay High Court in the case of CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom) wherein the same IPS-2007 was under consideration and Hon'ble Bombay High Court has held subsidy to be capital in nature by observing as under: - " 4. So far as question (D) is concerned, the Tribunal relied upon the Tribunal Mumbai Bench "J" (Special Bench) decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se for which the subsidy is granted. The Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Court then proceeded to observe as under: "The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account." 6. Therefore, let us apply the purpose test based on the findings recorded by the Special Bench. The object of the subsidy was to set up a new unit in a backward area to generate employment. In our opinion, the subsidy is clearly on capital account. In that view of the matter, q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Govt. 13. As regards to the issue of actual cost of the assets minus subsidy in view of explanation 10 to section 43(1) of the Act, this issue was not taken by Revenue to Hon'ble Calcutta High Court in the case of CIT v. Rasoi Ltd. (2011) 335 ITR 438 (Cal), wherein Hon'ble High Court has confirmed the Tribunal's order qua the issue of subsidy whether capital or revenue. It means the Tribunal's finding in respect to explanation 10 to section 43(1) of the Act has become final, wherein Tribunal following the decision of Hon'ble Supreme Court in the case of CIT v. PJ Chemicals Ltd. (1994) 210 ITR 830 (SC) has considered the aspect of actual cost by observing as under: - "6. From the above facts and circumstances, admitted facts are that during the year under consideration assessee company received incentive subsidy from Govt. of West Bengal under West Bengal Incentive Scheme, 1999 (WBIS) as encouragement for setting up of industrial project. It is also a fact that maximum limit of the subsidy was restricted with reference to the value of fixed capital investments in land, building, plant and machinery but no part of the subsidy was specifically intended to subsidize the cost of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. It is further, provided thereunder, that where such subsidy or grant or reimbursement 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. In order to invoke Explanation 10, it is necessary to show that the subsidy was directly or indirectly used for acquiring an asset. This is again a question of fact. The relatable subsidy to such asset can be reduced from the cost only if it is found that the cost for acquiring that asset was directly or indirectly met out of the subsidy. Likewise in the proviso, it is necessary to show that the subsidy has been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble income. In such circumstances, I feel it appropriate to disallow 20% of the expenditure, worked out at Rs. 97,11,120 820% =19,42,224/-, which is added back to the total income of the assessee." Aggrieved assessee preferred appeal before CIT(A), who sent back the matter back to the file of the AO for verification of facts. Aggrieved assessee is in second appeal before Tribunal. 17. We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee stated that most of the amounts are paid by cheque and only partly small amounts were through cash. It was argued that the total turnover is Rs. 284/- crore and expenses are to the tune of Rs. 97,11,120/-. The assessee gave details of expenses vis-à-vis turnover and also the details of payment in cash and cheque. It was claimed that the TDS is also deducted wherever applicable. The learned Counsel for the assessee stated that the AO as well as CIT(A) both made addition merely on surmises and without any reason. The assessee has given the following details: - Head of expenses Expenses amount Percentage to total turnover remarks Advertisement Expens ..... X X X X Extracts X X X X X X X X Extracts X X X X
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