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TMI Blog2017 (4) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... d that 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. It is only where subsidy is given specifically to offset the cost of an asset, such payment would fall within the expression ‘met’, whereas the subsidy received merely to accelerate the industrial development of the state cannot be considered as payments made specifically to meet a portion of the cost of the asset. Therefore, incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ambit of Explanation 10 to Section 43(1) of the Act. In the light ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 package of incentives to new/expansion units set up in developing regions of the Sate since 1964 under a scheme popularly known as Package Scheme of Incentives. This Package Scheme of Incentives of 2007 outlines liability criteria, quantum of incentives and long term mechanism for administering the incentives. The AO noticed that the receipt of subsidy from the Government is because of the assessee's initiative of setting up an industry in a low HDI district along with regular employment opportunities and not for specific assets. The AO held that subsidy is deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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'ble ITAT held that the object of the incentive is to fund a part if the cost of the setting up of the factory in notified backward area but in the case before me here, there is no such condition. The IFS policy, for the year under consideration only sets up the limit which is 100% of the eligible investment, ie, only the criterion that how much the assessee will get incentive from the IPS polices. There is no direct nexus between the funding of investment and setting up of the factory. Secondly, In the case of Reliance Industries Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 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 Maharashtra Government is totally different and the decision rendered is not on the argument of capital receipt or revenue receipt and as the facts of the case are different, the decision relied on by the appellant is not applicable in the present case. Third decision referred by the appellant is that of Rasoi Ltd. On careful perusal of the decision of Hon'ble High Court of Calcutta in the case of Rasoi Ltd it is seen that the subsidy granted for is as under: In order to appreciate the aforesaid question, it will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the Industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods." The facts and circumstance of the scheme framed by the Government of West Bengal under scheme of industrial promotion for expansion of its capacities modernization and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prescribed for that purpose. In this case, the appellant is eligible for subsidy only when the commercial production is started. Giving the employment more than specific numbers for local and other persons is the main condition for receiving the subsidy. This was the main object/purpose of the state government for granting subsidy. If the conditions were not fulfilled the appellant is not eligible for the subsidy even if the industry is set up in the specific back-ward area. This clearly indicates that the main eligibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and sale of goods in the State more profitable. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or the revenue has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda Joint Water Board 28 TC 262. The amount paid to the assessee in the instant case was in the nature of subsidy from public funds. Therefore, the first proposition of Viscount Simon clearly applied. The funds were made available to the assessee to assist it in carrying on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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, materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose was to help the assessee to set up its business or complete a project the monies must be treated as to have been received for capital purpose. But if monies were given to the assessee for assisting him in carrying out the business operation and the money was given only after and conditional upon commencem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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'ble High Court of Calcutta quoted above is also applicable to the appellant's case here. Further, while confirming the revenue stand the Hon'ble High Court of Calcutta noted that as observed by the Andhra Pradesh High Court Vs Sahney Steel & press Works Ltd (1985) 152 LTR 39, the amount in question was refunded to the assessee because he had set up a new industrial undertaking and had commenced producing goods and continued in production it is not possible to divorce the said payment from the character of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... novative 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 this scheme at 3.2(iii) which reads as under: - "(iii) Mega projects: Industrial Projects with investment more than ₹ 500 crores or generating employment for more than 1000 persons in A & B area or investment more than 250 crores or generating employment for more than 500 persons in rest of Maharashtra. However, Industrial projects with investment of more than ₹ 100 crores or generating employment for more than 250 persons coming up in low human development district as mentioned in Annexure I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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. Particular of assests Purchase date Cost of acquisition (rs.) 1 M.D.C. PLOT NO. G-8 (LEASE HOLD LAND) 17.01.2011 36,50,000 2 FACTORY BUILDING & SHED 17.01.2011 3,42,83,879 3 OFFICE BUILDING 17.01.2011 7,16,121 4 P&M (AS SPECIFIED IN SCHEDULE IIOFMOM OF AGREEMENT DT 30.12.2010) 17.01.2011 5,00,00,000 5 REBAR BENDING & CUTTER MACHINE 17.01.2011 8,03,600 6 LAND AT GUT NO.30-80R (FREE HOLD LAND) INCLUSIVE OF REGISTRATION CHARGES- ₹ 30,500 & STAMP DUTY-RS. 2,46,000) 15.03.2011 43,76,500 Total amount 9,38,30,100 8. The learned Counsel for the assessee also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 relied on the various case laws, we will discuss latter on. On the other hand, the learned CIT DR relied on the assessment order and that of the CIT(A). 9. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that above facts are undisputed. The assessee received subsidy from Maharashtra Govt. for putting up mega project in backward area amounting to ₹ 11,51,75,000/- during the year under consideration. The assessee's project was eligible mega project as certified by directorate of industries. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained 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 in the case of assessee itself in Dy. CIT vs. Reliance Industries Ltd. (2004) 82 TTJ (Mumbai)(SB)765 : (2005) 273 ITR 16 (Mumbai)(SB)(AT). We may gainfully reproduce the following portion : "The scheme framed by the Government of Maharashtra in 1979 and formulated by its resolution dt. 5th Jan., 1980, has been analysed in detail by the Tribunal in its order in RIL for the asst. yr. 1985-86 which we have already referred to in extension. On an analysis of the scheme, the Tribunal has come to the conclusion that the thrust of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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, question (D) as framed, would also not arise." 11. Similarly, Hon'ble Supreme Court in the case of CIT(A) v. Ponni sugars & Chemicals Ltd. (2008) 306 ITR 392 (SC) considering whether under a subsidy scheme, assessee a sugar mill, was obliged to utilized subsidy only for repayment of term loans undertaken by it for setting up new unit/expansion of existing business, receipt of subsidy was held to be capital in nature. Hon'ble Supreme Court held that the character of the receipt in the hands of the assessee has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 any fixed asset, therefore, it cannot be said that the subsidy was to meet a portion of cost of the asset. According to us, the assessee has rightly not reduced the amount of subsidy received from the actual cost/WDV of the fixed assets while claiming depreciation. It is also a fact that revenue during scrutiny assessments of the assessee for AY 2003-04 and 2004-05, the above stated subsidy was considered as capital receipt accepting the contention of the assessee. For the sake of consistency also the AO should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears 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 directly or indirectly used to acquire an asset but it is not possible to exactly quantify the amount directly or indirectly used for acquiring the asset. Here also, a finding of fact is necessary that an asset was acquired by directly or indirectly using the subsidy. The above Explanation and the proviso thereto do not dilute the finding of the Hon'ble Supreme Court in the case of P. J. Chemicals Ltd. (supra) that asset-wise subsidy alone can be reduced from the actual cost. The above Explanation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 284/- crore and expenses are to the tune of ₹ 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 Expenses 42,51,534 0.14% Only ₹ 21,282 paid by cash, all other exps are incurred by cheque. TDS deducted wherever applicable. Each & every expense supported by Bail. We have attached ledger and copies of bills above ₹ 1 lacc. In most of bills vat or service tax charged Central Sales Tax 6,800 0.0002% It is Central Sales tax charged on bill Exhibition Exps. 2,36,562 0.008% Includes ₹ 71,475 for exhibition at ICEA surat, ₹ 56,000/- ACCE Solapur paid by cheque. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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