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TMI Blog2021 (9) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the nature of capital receipt and non taxable; ii) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is justified in deleting the addition made by the Assessing Officer received by the assessee as subsidy from the Government of Andhra Pradesh iii) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in not appreciating that the grant in this case is given to reduce the sales tax burden of the assessee and eventually to increase the profitability and the grant given was on revenue account because it was given by way of assistance in payment of taxes in carrying on trade or business and not for acquiring the capital asset. iii) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is justified in not appreciating the grant in this case was granted year after year only after expansion and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. iv) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is justified in relying upon the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the ld. CIT(A) erred in deleting the disallowance made u/s 14A rwr 8D without appreciating the fact that the Board vide circular No. Circular no.5/2014 has made it clear that the Rule 80 read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. ix) The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary. 3. The Revenue has raised the following grounds of appeal for the A.Y.: 2014-15:- "i) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in holding that the grant received by the assessee from the Government of Andhra Pradesh is of the nature of capital receipt and non taxable; ii) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the addition made by the Assessing Officer received by the assessee as subsidy from the Government of Andhra Pradesh iii) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in not appreciating that the grant in this case is given to reduce the sales tax burden of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und or add any other grounds which may be necessary. " 3.1 The assessee filed CO No. 23/Hyd/208 for the AY 2014-15 against the order of CIT(A) wherein it has raised the issue in regard to disallowance u/s section 14A to the tune of Rs. 9,61,911/- and the assessee also filed an additional ground on 29/07/2019 contesting that the assessee has not received any exempt income, therefore, the disallowance u/s 14A should not be made. 4. From the above, it is clear that the issues involved in both the appeals of the Revenue for the A.Y. 2013-14 and 2014-15 in respect of treatment of subsidy received is capital or revenue received from the Government of Andhra Pradesh are similar in nature and therefore, our decision in the appeal for the A.Y. 2013-14 shall apply mutadis mutandis for the A.Y. 2014-15. For the sake of convenience and brevity, we shall take up the Revenue's appeal for the A.Y. 2013-14. ITA No.654/Hyd/2018 5. Brief facts of the case are that the assessee-company is engaged in the business of Manufacturing & Selling of Electronic Equipment & its spare parts filed its return of income for the A.Y. 2013-14 on 28/11/2013 admitting total income of Rs. 95,60,11,428/-. The case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, the same is treated as Capital Reserve. However, the contentions of the assessee company is not acceptable since the said sales tax was paid in the earlier assessment years and already claimed as revenue expenditure of the company. Hence, the same is treated as income and added to the income returned." 7. Accordingly, the Ld. A.O. added the amount of Rs. 1,69,32,910/- received towards sales tax reimbursement to the income of the assessee and computed the total income. Ld. A.O. made certain other additions also. Aggrieved by the order of the Ld. A.O., the assessee filed an appeal before the Ld. CIT(A) and the Ld. CIT(A) deleted the additions and allowed the appeal of the assessee. 8. Feeling aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us. 9. At the outset, the Ld. DR relied on the order of the Assessing Officer and submitted that the assessee had incurred some expenditure towards the investments made but he has not disallowed any expenditure as per the provisions of section 14A of the Act which was ought to have been done by the assessee as per Rule 8D(2)(ii) and Rule 8D(2)(iii) of the IT Rules, 1962. He further submitted that the Ld. CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: a).reimbursement of sales tax Rs. 2,78,65,864 b).disallowance u/s.14A Rs. 9,61,911 Reimbursement of sales tax Rs. 1,69,32,910IA.Y 2013-14 and Rs. 2,78,65,864 (A.Y.: 2014-15},: . 3. The assessee received reimbursement of sales tax in an amount of Rs. 1,69,32,910 for Asst.Year 2013-14 and Rs. 2,78,65,864 for A.Y 2014-15 as state incentive. The assessee capitalised the same as capital reserve. During the course of assessment proceedings, the A.O called upon the assessee to show cause as to why the amount of sales tax reimbursement should not be treated as revenue receipt. The assessee submitted that the erstwhile Govt. of A.P framed a new industrial investment promotion policy 2005-2010 to encourage setting up of industries/expansion of industries in the state of Andhra Pradesh. According to the said policy new units of industries are to be given certain benefits, one of which is reimbursement of sales tax. Industrial units expanding their capacity at least by 25% are eligible for sales tax reimbursement, as per G.O MS No.178 dated 21-6-2005 of Industries and Commerce (IP) Department of Government. Paragraphs 1.0 and 4.4 of the operational guidelines for implementat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court in the case of Chaphalkar brothers (Supra) and also the decisions in the cases of CIT vs Ponni Sugars and chemicals ltd., 306 ITR 392 SC and Pr.CIT vs Talbros Engineering ltd., 386 ITR 154 P & H and held that since the assessee had received the sales tax reimbursement for expanding its manufacturing capacity, the said amount is a capital receipt and cannot be considered as income. The C.I.T (Appeals) allowed the appeals. 8. Aggrieved by the decision of the C.I.T(Appeals}, Department has filed appeals before the Hon'ble ITAT. The assessee submits that the Industrial Investment Promotion Policy 2005-2010, by its very name spells the intention of the Govt. of A.P. Various fiscal benefits listed in the policy include reimbursement of stamp duty paid on purchase of land, reimbursement of stamp duty paid for lease of land/building, reimbursement of stamp duty paid on financial deeds/mortgages, partial rebate on land cost in IEs and IDAs, partial subsidy on fixed capital investment, partial provision of seed capital assistance in certain cases, partial subsidy on capital equipment for technology upgradation, partial subsidy on expenses incurred for paten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent for subsequent two years. The issue that arose was whether since object of incentive schemes was to encourage development of Multiple Theatre Complexes, incentives would be held to be capital in nature and not revenue receipts. The same was answered in favour of assessee. 13. In the case of Sanghi Industries Ltd., vs ACIT (ITA no.979/Hyd/2017 and other appeals) Hon'ble ITAT, Hyderabad bench held that sales tax exemption/remission granted by Govt. of Gujarat is a capital receipt since the object of the scheme under which it was granted was to set up industries in the backward areas of Gujarat and to provide employment opportunities to the umemployed youth. Hon'ble ITAT held "it is a trite law now that the determination of a subsidy as capital receipt or revenue receipt is dependent on the objective of the scheme". Relying on the ratio of several decisions including the decision of the Hon'ble Supreme Court in the case of Panni Sugars Ltd., 306 ITR 392 SC (copy filed at pages 18 to 24 of paper book), Hon'ble ITAT held that the impugned amount of sales tax remission/exemption was a capital receipt. 14. The assessee prays that on the facts of the assessee&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee submits that disallowance made u/s.14A r.w.r 8D(2)(ii) is not correct. 18. As regards disallowance made u/s.14A r.w.rule 80(2)(iii) it has been held in the case of Priya Exhibitors pvt. Ltd., vs ACIT 27 Taxmann.com 88 DEL ITAT that disallowance u/s.14A requires a clear finding of incurring expenditure and in the absence of the same, no disallowance could be made. It has been held in the case of ACIT vs SIL Investment Ltd., 26 Taxmann.com 78 DEL ITAT that where the A.O did not bring any evidence on record to establish that any expenditure has been incurred by assessee for earning exempt income, it was wrong on part of the Assessing Officer to proceed to compute disallowance of expenses u/s.14A by merely applying rule 8D{2}(iii). It has been held in the case of Relaxo Footwear Ltd., vs AddI.C.I.T 18 Taxmann.com 333 DEL ITAT that there cannot be an assumption of some kind of built in expenditure and some facts must be there on record to show that expenditure was actually incurred in relation to earning exempt income. It has been held in the case of ACIT vs Iqbal M. Chagla [2014] 52 taxmann.com 94 (Mumbai - Trib) that where assessee had not claimed any expenditure in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance made U/s. 14A of the Act has rightly been allowed by the Ld. CIT(A). We find from the order of the Ld. CIT(A) that there is no exempt income earned by the assessee during the impugned assessment year and he has relied on certain judgments while deciding the issue in favour of the assessee. The Hon'ble Delhi High Court in the case of Cheminvest Ltd., reported in (2015) 378 ITR 33 (Del.) has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Therefore, as per our considered view, we do not find any infirmity in the order of the Ld. CIT(A) and therefore, this ground No. VI to VIII of appeal raised by the Revenue is dismissed. 14. Further, on the issue of reimbursement of sales tax received from the State Government by the assessee, we observe from the order of the Ld. CIT(A) that he has not considered / appreciated properly the facts of the case of the assessee and has simply relied on the judgements as quoted in his order and treated reimbursement of sales tax received from the State Government by the assessee as capital receipts. On perusal of the schemes, wherein, as per clause 3.1.8 cited supra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Policy Measures, Thrust Sectors, the Government approved a new "Industrial Investment Promotion Policy 20052010" as appended at Annexure-I. 3. Under the new "Industrial Investment Promotion Policv 2002- 2010", the Government approved the following fiscal benefits covering the _______ Incentives for New Industries categories of : (a) SSI / Tiny units (b) SC / 5T Entrepreneurs (c) Women Entrepreneurs (d) Units other than SSI / Tiney (Large and Medium Scale Industries) and (e) Mega Projects: 3.1.0. 5SI/Tiny units Small Scale Industry (S5I) means a Unit having the investment on plant and machinery (productive only) up to limit as defined by the Government of India from time to time. Tiny Industry means an industry in which Investment plant and machinery (Productive only) up to limit as defined by the Government of India from time to time. 3.1.1. 100% reimbursement of Stamp Duty and transfer duty paid by the industry on purchase of land meant for industrial use. 3.1.2. 100% reimbursement of Stamp Duty for Lease of Land / Shed / Buildings. 3.1.3. 100% reimbursement of Stamp Duty and transfer duty paid by the industry on financial deeds and mortgages etc. 3.1.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire sales tax paid to the Government was claimed as a revenue expenditure in the Profit & Loss Account in the previous year and subsequently in the following year 25% is returned which has not been offered as income during the impugned assessment year and directly credited to the capital reserve account, whereas, it is as revenue receipts received from the State Govt. The ld. AR of the assessee has relied on the judgments which are not applicable to the facts of the assessee's case. We find substance in the submissions made by the Ld. DR that once the expenditure has been allowed in any previous year and which has been received or reimbursed in subsequent year is to be treated as income for the year in which the amount is received. 14.4 Similar issue decided by the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. Vs. CIT, [1997] 94 Taxman 368 (Sc). For the sake of clarity, we reproduce the entire order of the above judgment as under: "Sen, J. - The question in this case is whether the subsidy received by the assessee-company from the Andhra Pradesh Government is taxable as the revenue receipt or not. It appears from the notification issued by the Andhra P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also provided for water rate in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in this case. 3. The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given. 4. The second important thing to note is that the manner in which the incentives were given is 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 is consumed for any other purpose like setting up the plant and machineries, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable income of the assessee which was confirmed on appeal by the Commissioner (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs. 14,665.70, refunded to the assessee in terms of the said G.O. 'did not represent refund of sales tax' but was a development subsidy in the nature of a capital receipt. The Tribunal also held that the said amount cannot be deemed to be the income of the assessee under section 41 (1) of the Income-tax Act, 1961 ('the Act') either. Thereupon the revenue asked for and obtained the reference of the following question : "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was not liable to be included in the total income assessable for the assessment year 1974-75 ?" 9. The contention of Mr. Ganesh that the subsidies were of capital nature and were given for the purpose of stimulating setting up and expansion of industries in the State cannot be upheld because of the subsidy sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment delivered by Viscount Simon with whom Lord Thankerton agreed two earlier decisions were relied on. The first of these two decisions was the case of Seaham Harbour Dock Co. v. Crook 16 TC 333. In this case, the Harbour Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropriated by the Parliament. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. The payments were made several times a year for same years. The Dock company had undertaken an extension of its docks. The extended dock was also for relieving unemployment problem. Because the work undertaken was extension of the dock and the main purpose was relief of unemployment, the House of Lords held that the financial assistance given to the company for extension of the dock cannot be regarded as receipt of the trade. Lord Atkin explained the position by saying that: "It is a receipt which is given for the express purpose which is named, and it has nothing to do with their trade in the sense in which you are considering the profits or gains of the trade." Lord Buckmaster observed as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the relevant period. Lord Macmillan held that- "What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business." He further observed that: "I think that they were supplementary trade receipts bestowed upon the company by the Government and proper to be taken into computation in arriving at the balance of the company's profits and gains for the year in which they were received." 15. In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee could not use this money for distribution as dividend to its shareholders. But 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 like extension of docks as in the Seaham Harbour Dock Co. 5 case (supra). 16. There is a Canadian case St. John Dry Dock & Ship Building Co. Ltd. v. Minister of National Revenue 4 DLR 1, which has close similarity to the case of Seaham Harbour Dock Co. 's case (supra) . In that cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidy 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. 19. For example, if the scheme was that the assessee will be given refund of: ales 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 a 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 the 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 is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co.'s case (supra) , the monies must be treated as to have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme of subsidy framed by the Rubber Board in 1967 for replanting rubber plants. The subsidy was not given for budding immature unselected plants but was restricted to replanting only of old and uneconomic trees. The subsidy was not for the purpose of unkeep or maintenance of mature or immature rubber trees. On these facts, the Full Bench came to the conclusion that the object of the Scheme was replanting and the subsidy was being paid for planting high yielding variety of rubber plants which the Rubber Board and the Government thought was necessary for the development of the rubber industry. What was sought to be achieved was public purpose of vital public interest. 24. The Full Bench pointed out that the economic assistance offered by the Board was under stringent conditions for implementing a scheme designed to achieve development of rubber plantation industry on efficient and economic lines. After an exhaustive review of the case law and the subsidy scheme, the Full Bench observed : "We are tempted to say that the subsidy received by the assessee is used to acquire an asset by replanting high-yield variety of rubber trees. The difference is, as said by Bowen, L.J., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate of eligibility for getting the grant. The Collector after holding necessary enquiry in respect of various matters referred in the scheme would recommend the release of the amount to the applicant. One of the pre-conditions of the grant was that the applicant must prepare adequate plants for production of new film and also fulfil financial and technical requirements for production of the film. Financial assistance was to be given in four equal instalments in the following manner. The first instalment was to be released after completion of one-third of the proposed footage of the film, the second instalment had to be released on completion of two-third of the proposed footage in a final shape and the third instalment on the completion of the entire film ready for censors and the final instalment had to be released immediately after the new film had crossed the hurdle of censorship and actual release. It was noted in the judgment: "The said subsidy was released to the assessee so as to assist the assessee to acquire a new capital asset so as to meet part of the cost of the new film in public interest." 29. On the basis of that vital distinction, the Court held that the rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved year after year by refund of sales tax. The benefit was received in course of carrying on the assessee's business. It was a benefit incidental to its business. The subsidy was not intended to be contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt. 34. The Madhya Pradesh High Court in the case of CIT v . Dusad Industries 162 ITR 734, dealt with a case where Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent of the sales tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otally depend upon the production, sales and sales tax collected and paid by the assessee. Thereafter, the Govt. of AP refunds to the assessee in the following year to the extent of 25% paid by it. In the impugned case, the subsidy amount depend upon the sales of the assessee, which is a performance based subsidy, namely, if the sales are increased, the amount of subsidy increases and if the sales are low, the subsidy amount will be low. Therefore, the impugned subsidy does not have direct relation to the investments made in the plant and machinery by the assessee. If the assessee is invested huge amount in the plant and machinery, which does not yield 100% production capacity due to various reasons, the sales will automatically go down and the subsidy of the assessee will also come down as per sales or vice-versa. 14.6 Further, we refer to the land mark judgment of the Hon'ble Supreme Court in the case of CIT Vs. Meghalaya Steels Ltd., [2016] 67 taxmann.com 158 (SC) wherein the Hon'ble Court has decided the issue in favour of the assessee by holding that the subsidy received by the assessee, namely, a) transport subsidy, b) interest subsidy, c) power subsidy and d) insurance subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidy in question was a capital receipt not taxable under the Act. After the judgment of this Court in Sahney Steel & Press Works Ltd.'s case (supra), the Commissioner of Income-tax has taken the view that the subsidy in question was a revenue receipt. Therefore, in our view, the present case is a classic illustration of change of opinion. 9.............................. Sahney Steel & Press Works Ltd.' case (supra) was a case which dealt with production subsidy, Ponni Sugars & Chemicals Ltd.'s case (supra) dealt with subsidy linked to loan re-payment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel & Press Works Ltd.'s case (supra) was on its own facts; so also, the judgment of this Court in Ponni Sugars & Chemicals Ltd.'s case (supra). The nature of the subsidies in each of the three cases is separate and distinct. There is no straight-jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel & Press ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee during the impugned AY. The CIT(A) has relied on the judgment of the Hon'ble Supreme Court in the case of Godrej Boyce and the same is not applicable to the case of the assessee in which there was exempt income received by the assessee, but, the case in hand there is no exempt income earned by the assessee in the impugned AY. Following the conclusions drawn in para 13 (supra), we direct the AO to delete the disallowance made u/s 14A r.w. rule 8D(2)(iii). In the result, the CO filed by the assessee is allowed. 16. In the result, revenue's appeal in ITA No. 654/Hyd/2018 is partly allowed, appeal in ITA No. 655/Hyd/2018 is allowed and the CO No. 23/Hyd/2019 is allowed. A copy of this common order be placed in the respective case files. 12. We lastly acknowledge that although the instant appeals are being decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court's recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 'In Re Cognizance for extension of limitation' making it clear that in such cases where the li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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