Sanghi Industries Ltd. Vs ACIT (ITAT Hyderabad)
Only if subsidy or other grant was given to offset the cost of an asset, such payment would be covered by Explanation 10 to section 143(1). In the instant case where subsidy was received as an incentive for setting up industries to generate employment, the mere fact that specified percentage of fixed capital cost was taken as basis for determining the subsidy, it should not be mistaken as a payment intended to subsidise the cost of fixed assets. Therefore, AO was directed to not to adjust the subsidy so received out of the cost of depreciable assets.
FULL TEXT OF THE ITAT JUDGMENT
These are cross-appeals by Assessee and Revenue against the orders of the Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 24-03-2017 & 27-03-2017 for the AY. 2006-07, AY.2008-09, AYs.2011-12 to 2013-14.
2. Briefly stated facts are that assessee-company is engaged in the business of manufacture of cement and chemicals and has filed returns of income, offering incomes under normal computation as well as u/s. 115JB of the Income Tax Act [Act]. In the order u/s. 143(3) dt. 24-12-2008 for AY. 2006-07, the Assessing Officer (AO) determined the income under normal provisions at NIL and accepted the income u/s. 115JB at Rs. 80,59,75,288/-. In that assessment year, AO inter-alia disallowed the claim of increased interest element on account of foreign exchange fluctuations at Rs. 37,65,807/- and also disallowed an amount of Rs. 8,12,27,057/- u/s. 40(a)(ia) of the Act. In addition to the above amount, the AO also added an amount of Rs. 3,01,76,155/-representing the element of Excise Duty on Closing Stock. AO has not allowed a deduction u/s. 40(a)(ia) disallowed in earlier year but allowable in this year. Aggrieved on the above order, assessee preferred an appeal before the Ld.CIT(A).
3. In the course of appeal proceedings, assessee has raised an additional ground that sales tax exemption/remission of Rs. 35,91,26,456/-, shown in the P&L A/c as a receipt is in fact a capital receipt and is not includable in the total income, though admitted and assessed. Elaborately discussing the issues, Ld.CIT(A) in the impugned assessment year has allowed the contentions of assessee partly on the increased interest element on foreign exchange and completely on the disallowance u/s. 40(a)(ia), addition of Excise Duty on closing stock and claim of amount disallowed in earlier year u/s. 40(a)(ia).
4. With regard to the additional ground raised for the first time before the CIT(A), Ld.CIT(A) asked the comments of the AO and then, went on adjudicating the issue elaborately and gave relief, directing the AO to exclude the above amount as a capital receipt. However, while directing the above amount to be excluded as capital receipt, Ld.CIT(A) also directed the AO to proportionately exclude the same amount from the cost of the depreciable assets. Revenue is aggrieved mainly on the issue of excluding the sales tax exemption and other issues which CIT(A) gave relief, whereas the assessee is aggrieved on the direction of the Ld.CIT(A) to exclude the same amount proportionately from the cost of the depreciable assets. Further, Revenue is aggrieved on the amount of Excise Duty added to the closing stock contesting that Ld.CIT(A) has not followed the prescribed procedure under Rule 46A of the Income Tax Rules.
5. In the AY. 2008-09, AO completed the assessment making the addition of Rs. 4,55,52,000/- as valuation of closing stock and amount of Rs. 26,91,787/- claimed u/s. 80G of the Act. Assessee preferred an appeal originally on the addition of Excise Duty in the closing stock valuation, but raised the additional ground for exclusion of sales tax exemption/remission of Rs. 81,48,52,889/-. Ld.CIT(A) following the orders in AY. 2006-07, gave relief on both the grounds. However, the Ld.CIT(A) directed that the reduced sales tax subsidy to be adjusted proportionately from the cost of assets for the purpose of depreciation. In this year, Revenue is aggrieved on the direction of the CIT(A) on both the issues, whereas assessee is aggrieved on the direction of CIT(A) for reducing the proportionate cost of the depreciable assets.
6. In the AY. 2011-12, assessee admitted a loss of Rs. 1,85,23,20,898/- and in the course of assessment proceedings made claim of exclusion of sales tax subsidy/exemption which the AO has not considered. Therefore, assessee preferred an appeal before the CIT(A) raising the only ground for exclusion of sales tax incentive.
7. In the AY. 2012-13, assessee has raised the issue of exclusion of sales tax subsidy before the AO himself by filing revised return. However, AO did not agree with assessee’s claim and rejected the same. Thus, while completing the assessment, out of the loss returned in the revised return, AO added the sales tax exemption amount while completing the assessment.
7.1. In the appeal before the Ld.CIT(A), Ld.CIT(A) partly allowed the contentions. While allowing assessee’s claim of exclusion of sales tax subsidy, AO was directed to adjust the said amount proportionately from the cost of assets for the purpose of depreciation. Revenue is aggrieved on the direction of the CIT(A) to exclude the sales tax subsidy, whereas assessee is aggrieved on the direction of the CIT(A) to adjust in the cost of depreciable assets.
8. In the AY. 2013-14, as in the previous assessment year, assessee has raised the issue of exclusion of sales tax subsidy before the AO himself. However, AO did not agree with assessee’s claim and rejected the same. Thus, while completing the assessment, out of the loss returned in the revised return, AO added the sales tax exemption amount while completing the assessment.
8.1. In the appeal before the Ld.CIT(A), Ld.CIT(A) partly allowed the contentions. While allowing assessee’s claim of exclusion of sales tax subsidy, AO was directed to adjust the said amount proportionately from the cost of assets for the purpose of depreciation. Revenue is aggrieved on the direction of the CIT(A) to exclude the sales tax subsidy, whereas assessee is aggrieved with the direction of the CIT(A) to adjust in the cost of depreciable assets.
9. Thus, as can be seen, the main grievance of the Revenue is the direction of the CIT(A) to exclude sales tax subsidy and assessee’s objection in all the years is with reference to direction of reducing the amount proportionately from the cost of depreciable assets. These issues are considered issue-wise in all the appeals.
10. We have heard the Ld. Counsel and Ld.DR in detail and perused the paper book placed on record.
Issue of sales tax subsidy as capital receipt:
11. This issue arises in all the impugned Revenue appeals. As briefly stated earlier, assessee has made the claim for the first time as an additional ground before the Ld.CIT(A) in AYs. 2006-07 and 2008-09. In the AY. 2011-12, the claim was made before the AO but the AO has not allowed the same. In AYs. 2012-13 & 2013-14, assessee made the claims before the AO by filing the revised returns which the AO has not allowed by elaborately discussing the issue. It was the contention of assessee in the submissions filed along with the revised return (in two of the impugned years) that sales tax incentive was given by the Government of Gujarat under the new incentive policy – Capital Investment Incentive (General Scheme) 1995-2000 for setting up the industries to generate employment. It was further submitted that assessee started clinker and cement unit at Motibar, Kutch District of Gujarat State and the Government of Gujarat has issued eligibility certificate for sales tax incentives on 17-05-2002 provisionally @ 25% of tentative eligibility (limited to Rs. 151.50 Crores). There was an amendment on 21-04-2003, clarification on 05-06-2003 and finally amendment on 27-06-2007, recording the total investment of assets at Rs. 623.91 Crores and on fixing the eligibility period from 13-04-2002 to 12-04-2018. Thus, assessee got entitled to exemption/remission of sales tax @ 100% of its fixed capital investment of Rs. 623.91 Crores. It was submitted that dealing with the incentive/exemption granted under the same resolution, the Hon’ble Gujarat High Court in the case of CIT Vs. M/s. Lincon Polymers Pvt. Ltd., in Tax Appeal No. 972 of 2006, dt. 28-12-2006 held that the subsidy was not given to run the business and not to give any benefit on day to day functioning of the business and was aimed to cover capital outlay of assessee. It was held that amount was capital receipt not chargeable to tax. Relying on the principles laid down by the Hon’ble Gujarat High Court, assessee submitted to the AO that the sales tax incentive/remission received by the company is capital in nature.
11.1. AO, however, did not agree with the above contentions and elaborately discussed about assessee’s books of account, accounting standards, principles of taxation and provisions of Section 2 etc., and also various other decisions to come to a conclusion that the amount received is accruing in the course of a trading transaction of a business and therefore, revenue receipt and it is taxable. He also distinguished the judgment relied upon to state that the decision relied upon by the assessee was rendered on the issue of taxability of capital investment subsidy and not sales tax incentive. Holding the above view, AO rejected the claim in the assessment orders for AYs. 2012-13 and 2013-14.
11.2. When the matter was agitated before the Ld.CIT(A) in the form of additional ground for AY. 2006-07 and 2008-09 and as a regular ground from AYs. 2011-12 onwards, Ld.CIT(A) analysed the issue under various heads. Ld.CIT(A) has formulated five questions for consideration, which are as under:
a) Whether the assessee can rectify his own mistakes by way of filing an Appeal?
b) Whether the assessee can raise fresh claim/relief/raise an issue which was not raised before the Assessing Authority ?
c) Whether the sales tax exemptions/remissions granted by government is capital receipt or revenue receipt?
d) Whether the assessee is entitled to relief both under normal provisions and u/s. 115JB?
e) What would be the cost of asset and depreciation allowable if such sales tax receipt is treated as capital in nature?
11.3. Even though the first two questions does not arisei n three assessment years of AYs. 2011-12 to 2013-14, Ld.CIT(A) elaborately discussed the issues in AY. 2006-07 and followed the same decision in other years.
11.4. Ld.CIT(A)’s findings on issue-wise on sales tax- subsidy are as under:
“9.3 Regarding the first issue whether the assessee can file the appeal against his own mistake, the judicial precedents on this issue are as under:
Article 265 of the Constitution of India reads that “No tax shall be levied or collected except by the authority of law.” In terms of the Article 265 of the Constitution, tax can be levied only if it is authorized by law. The taxing authority cannot collect or retain tax that is not authorized. Any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional.
The Supreme Court of India in CIT Vs. Shelly Products and another [261 ITR 367] held that if the assessee has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of income-tax or is not income within the contemplation of law, the assessee may bring the same to the notice of the assessing officer, which if satisfied, may grant the assessee necessary relief and refund the tax paid in excess, if any.
In CIT Vs. Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Del), this court held that merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year.
The Bombay High Court in Balmukund Acharya Vs. DCIT, CIT and UOI 310 ITR 310 held that Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.
The Bombay High Court in Nirmala L. Mehta V. A.Balasubramaniam, C.I.T. (2004) 269 ITR 1 held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected Circular No. 14(XL-35) of 1955, dated 11-04-1955, issued by the Central Board of Direct Taxes reads as under:
“Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a tax payer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assesses on whom it is imposed by law, officers should –
a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs”.
A reading of the circular Shows that a duty is cast upon the assessing officer to assist and aid the assessee in the matter of taxation. They are obliged to advise the assessee and guide them and not to take advantage of any error or mistake committed by the assessee or of their ignorance. The function of the Assessing Officer is to administer the statute with solicitude for public exchequer with an inbuilt idea of fairness to taxpayers.
Therefore it is abundantly clear from the above judicial precedents that an amount is taxable only in accordance with the law, not because the assessee himself offered it to tax either by mistake or by inadvertence.
9.4 The second issue is, whether the assessee can make claim/ raise the issue before the appellate authority for the first time?
In this regard when the matter was remanded to the Assessing officer in his report dated 29-07-2016 the AO opposed the admission of additional ground on the ground that :-
a) Any such claim can be made only by way of filing revised return as held by the Apex Court in case of Goetze India Limited. In the instant case the assessee did not file the revised return of income making such claim.
b) On the date of filing of return, the assessee was not entitled to capitalize the sales tax.
c) The appellate forum cannot be used to legitimize assessee’s own mistakes.
d) The assessed income cannot go below the returned income.
e) That with effect from 1-4-2016 section 2(24) is amended, sub clause XVIII is inserted treating any subsidy or grant as income.
The issue of making fresh claim before the appellate authorities is fairly settled legal issue. Wherein several courts held that the assessee can raise the issue for the first time before the appellate authorities, before CIT(A), before the Hon’ble ITAT. The judicial precedents are :-
JUTE CORPORATION OF INDIA 187 ITR 688 (SC). In this case the assessee had claimed reduction of purchase tax for the first time before the appellate authority. The hon’ble court held that an appellate authority has all the powers which the assessing officer has in deciding the question before it. It was further held that there is always a case for raising additional ground, if such ground could not be raised before the Assessing authority or such ground became available on account of change of circumstances or law. It was further held that there may be several factors justifying the raising of such new ground in appeal, and each case has to be considered on its own facts.
NTPC LIMITED Vs. CIT 229 ITR 383 (SC) wherein it was held that the purpose of assessment was to assess correctly the tax liability of the assessee in accordance with the law. If for example, “as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed, or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the tribunal u/s. 254 only to reduce the grounds which arise from the order of the Commissioner of Income Tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.”
Goetze India Limited 284 ITR 323 (SC) (2006), in this case the Hon’ble Supreme Court held that no fresh claim can be made before the AO except by way of filing revised return, however in the same case the Hon’ble court held that there is no restriction in making such claims before the appellate authorities.
GRASIM INDUSTRIES Vs Dept. of Income-Tax the Hon’ble Mumbai Bench in MA. No.247/MUM/2010 arising out of ITA No. 6253/Mum/1999, in an identical case involving sales-tax subsidy where the assessee himself had offered such sales-tax as revenue receipt, even after considering the new scheme of assessment (where 98% of the returns are not scrutinised, once the returns are processed no further action is taken by the department, where there is no scope for assessee to rectify his own mistakes), the Hon’ble Mumbai Bench held that even in the new scheme of assessment, the department cannot fasten tax to income which is not liable to tax.
Similar view was held in case of
Prithvi Share Brokers 349 ITR 336 (MUM)
GVK Industries Ltd Vs. ACIT (2012) 24 Taxmann.com 107 (Hyd)
B-bench
c. Parikh & Co. 122 ITR 610 (Guj)
In view of the above judicial precedents it is a fairly settled issue that the assessee can raise the additional grounds for the first time before the appellate authority. The spirit behind all these decisions is, only the legitimate taxes due are collected and not otherwise.
9.5 The third issue is whether the sales tax exemption/remission granted by the Government of Gujarat vide its resolution dtd 11-9-1995 is a capital receipt or revenue receipt? In order to decide this issue it is essential to know the purpose of Gujarat government’s resolution which is evident from the first page of such resolution repeated as under
“The new industrial policy announced by the Government of Gujarat has emphasized the need to accelerate developments of the backward areas of the State and to create large-scale employment opportunities. It has also stressed the need to increase the total flow of investment to the industrial sector with the proper development of infrastructure and human resources to sustain long-term growth and achieve sustainable development.
2. The Government of Gujarat is committed to create large-scale employment opportunities to absorb the swelling ranks of the unemployed. State Government has announced the new employment policy in order to ensure that priority is given to local persons for employment in Industrial sector.
3. A scheme to provide Capital Investment Subsidy and Sales Tax Incentives is necessary to attract investments to generate greater employment in less industrially developed areas. With a view to secure balanced development of industries in Gujarat through dispersal of industries in the most backward areas and backward areas the Government of Gujarat has approved a package of incentives. As a part of this package, Government of Gujarat is pleased to introduce the following scheme.”
Therefore the primary purpose of this industrial policy is :-
A) To accelerate development of back ward areas in the state.
B) To create large scale employment.
C) The scheme was aimed at providing capital investment subsidy and sales tax incentives.
D) To secure the balanced development of industries in Gujarat through dispersal of industries in most back award areas.
The quantum of subsidy provided as per the scheme is
RATE OF SUBSIDY
