Case Law Details
Sunrise Biscuit Co. Pvt. Ltd. Vs ITO (ITAT Gauhati)
VAT subsidy received by the Assessee – subsidy received for substantial expansion of the undertaking – subsidy is capital in nature – capital subsidy liable to be excluded from the computation of books profit
Facts- The assessee has received subsidy of INR 8,78,84,902/- from the Industrial Promotion Policy of Assam Government. Assessee contented that subsidy is capital in nature and therefore not exigible to income tax.
Conclusion- We find merit in the claim of the assessee that the VAT subsidy received by it for undertaking substantial expansion at their unit was in the nature of capital receipt not liable to tax, since the object of granting of subsidies was to bring about industrial development, encourage fixed capital investment and generate employment in the State of Assam.
As regards the issue relating to treatment of this VAT subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (I) Ltd. in ITA No. 2149/Kol/2019″ (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit.
FULL TEXT OF THE JUDGMENT/ORDER OF GAUHATI HIGH COURT
This is an appeal preferred by the assessee which is against the orderdated 07.01.2019 of the Commissioner of Income Tax (Appeals), Guwahati-1, Guwahati [hereinafter the ‘Ld. CIT(A)] for the Assessment Year 2014-15 [hereinafter the ‘AY’].
2. The main ground of the assessee is against the action of the Ld. CIT(A) in confirming the addition made by the Assessing Officer [hereinafter the ‘AO’] on account of the subsidy of ₹8,78,84,902/-received by it under the Industrial Promotion Policy of the Assam Government. It is the contention of the assessee that the impugned subsidy is capital in nature and therefore not exigible to income-tax, both under normal computational provisions as well as book profit u/s 115JB of the Act.
3. The brief facts of the case, as noted by the AO is that, the assessee company filed its return of income on 29.11.2014 showing total income at ₹ The case was selected for scrutiny through CASS inter alia on the issue of deduction claimed in respect of the VAT subsidy of ₹8,78,84,902/- under the Industrial Promotion Policy of the State of Assam in category ‘B’ for substantial expansion. The assessee claimed that the VAT subsidy was in the nature of capital receipt and therefore not taxable. However, the AO show caused the assessee as to why the VAT Remission of ₹8,78,84,902/- should not be treated as revenue receipt and be taxed rather than as capital receipt. In response, the assessee explained that it is in the business of manufacturing biscuits and the manufacturing unit is located in the industrially backward state of Assam. It was pointed out to the AO that the Industrial Policy of Assam 2003 was formulated by the State with an object to encourage private investment in industrial projects so as to accelerate industrial development and thereby generate more employment opportunities in the State of Assam. Accordingly, in consonance with the Industrial Policy, the assessee had undertaken substantial expansion in its unit which started from Financial Year 2008-09 and completed in Financial Year 2012-13.By virtue of such substantial expansion, the assessee was issued Eligibility Certificate bearing No. AIDC/US/EC/623/21 dated 26.08.2013 for claiming incentives under Industrial Policy of Assam, 2008. Consequently the assessee was entitled to claim exemption of VAT under the Assam Industries (Tax Exemption) Order, 2009. According to the assessee, the intent and purpose of the Industrial Policy of Assam, 2008 was for establishing/substantial expansion of manufacturing units located in backward areas of State of Assam and generate employment for the local people, and therefore the nature of subsidy received under the State Industrial Scheme was in the capital field not exigible to tax. In support of this proposition, the assessee had relied on the decision of the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugar and Chemicals Limited (306 ITR 392) wherein it was held by the Hon’ble Apex Court that, when the “object” of subsidy was to enable the assessee to run the business more profitably and/or to meet its recurring expenses, the receipt would be held to be on Revenue Account. On the other hand, if the “object” of subsidy scheme is to enable the assessee to set up new unit or expand the existing unit, then the subsidy received under such scheme is capital in nature. Therefore, according to the assessee, upon applying the purpose/object test to the Industrial Policy of Assam, 2008, and having regard to the substantial expansion undertaken by the assessee as envisaged in the Industrial Policy, the subsidy granted in the form of remission of VAT of ₹8,78,84,902/-should be treated as Capital Receipt not taxable in the hands of the assessee. The assessee further relied on the following decisions before the AO:
i) CIT vs. Rasoi Limited (335 ITR 438) (Cal HC)
ii) Balaji Alloys Limited vs. CIT (333 ITR 335) (J&K HC)
iii) CIT vs. Siya Ram Garg (HUF) (49 DTR 126) (P&H HC)
4. However, the AO was not impressed. According to him, the assessee received the subsidy after commencement of the manufacturing activities and therefore the VAT Remission in question was given by the Government not for setting up/expansion of unit but to industries which had already commenced production. According to the AO, the incentive/subsidy was given by way of assistance to the assessee for carrying on its manufacturing business more profitably, and therefore the VAT remission was in the nature of revenue receipt liable to income-tax in the relevant AY 2014-15. In support of his findings, the AO relied on the decision of the Hon’ble Apex Court in the case of M/s. Sahney Steel & Press Works vs. CIT (228 ITR 253) wherein it was observed as under:
“In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Applying the test of Viscount Simon in the case of Ostime, it must be held that these subsidies are of revenue character and will have to be taxed accordingly.”
5. The AO accordingly held the assessee’s claim that the VAT Remission of ₹8,78,84,902/- was a capital receipt, is not tenable and treated it to be a Revenue Receipt and accordingly brought it to tax.
6. Aggrieved by the aforesaid action of the AO, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the decision of the AO by relying on the decision of the Hon’ble Supreme Court in the case of CIT vs. Meghalaya Steels I.T.A. No. 92/Gau/2019 Assessment Year: 2014-15 Sunrise Biscuit Co. Pvt. Ltd. Limited (2016) 383 ITR 217 (SC) wherein it was held that the transport subsidy, interest subsidy, power subsidy and refund of excise duty are incomes derived from the Industrial Undertaking being revenue in nature, was eligible for deduction u/s 80-IC/80-IE of the Act.
7. Aggrieved by the aforesaid action of the Ld. CIT(A), the assessee is in appeal before us.
8. We have heard both the parties and perused papers on record. Before us, the Ld. AR of the assessee, Shri Akkal Dudhwewala submitted that the AO wrongly appreciated and applied the judgment of the Apex Court in the case of Sahaney Steel & Press Works vs. CIT (supra). According to him, the ratio laid down in that decision was explained by the Hon’ble Apex Court in its latter judgment in the case of CIT vs. Ponni Sugar & Chemicals Ltd. (supra) wherein the Hon’ble Supreme Court held that whether the subsidy or grant given by the Government is in the nature of capital or revenue will have to be judged and decided with reference to the object and the purpose for which the subsidies are granted. It was pointed out by the Ld. A/R that according to the Supreme Court, if the principal object for grant of subsidy is to promote industry or to enable the assessee to set up or expand the existing unit or capital base, then such subsidy is capital in nature and cannot be taxed as income. The mere fact that quantification of the subsidy is based on the events subsequent to setting up and commencement of the new unit or that the subsidy is granted in the form of refund of taxes collected by itself will not alter the character or quality of the receipt. The Ld. AR further submitted that the Hon’ble Supreme Court in its latter decision in the case of CIT vs. Chapalkar Brothers (400 ITR 279) dated 7th December 2017 explained the principle that the subsidy granted by the Government to achieve the object of acceleration of industrial development shall be capital in nature. According to him, it has been explained in these judgments that, the fact that incentives or subsidies are granted after the commencement of commercial production or that the subsidy is not given expressly for purchase of a capital asset, is immaterial in deciding whether the subsidy is capital or revenue in nature. The Hon’ble Supreme Court has held that, in deciding the true nature and character of the subsidy, one has to examine the object of the subsidy for which it was sanctioned and not the form or manner in which it is granted and disbursed. So according to Ld. AR, by applying the ratio laid down in this decision of the Apex Court, the AO was unjustified in holding that the VAT remission of ₹8,78,84,902/- was in the nature of revenue receipt includible in the total income.
9. The Ld. AR further submitted that since VAT remission was a capital receipt, it did not come within the charging provisions of Section 4 of the Act. As the subsidy did not partake the character of income, it could not be included in the scope of total income as defined u/s 5 of the Act and accordingly it was to be excluded from the computation of “book profit” u/s 115JB of the Act as well. In support of his contention, he relied on the decision of the Hon’ble Calcutta High Court in the case of Pr. CIT Vs Ankit Metal and Power Ltd (416 ITR 591). The Ld. AR therefore pleaded that the assessee’s claim of treating the VAT Remission of ₹8,78,84,902/- as Capital Receipt be upheld and thus the same be excluded from computation of total income both under normal computational provisions and book profit u/s 115JB of the Act.
10. Per contra, the Ld. DR opposed the contention of the Ld. AR and submitted that it was only after the commencement of production, that the assessee has claimed the deduction for subsidy which goes on to show that the subsidy received by it was as assistance for the carrying on the business and therefore it is not in the nature of Capital Receipt. The Ld. DR relied on the decision of the Hon’ble Supreme Court in the case of Meghalaya Steels Limited (supra), and thus he does not want us to interfere with the order of the Ld. CIT(A).
11. Having heard both the parties and after perusal of records, we note that the assessee became entitled to the VAT subsidy under the Assam Industrial Policy Scheme, 2008. The assessee has claimed it to be capital in nature but the lower authorities have held it to be in the nature of revenue receipt by relying on the decision of the Hon’ble Supreme Court in the case of M/s. Sahney Steel & Press Works(supra) and Meghalaya Steels Limited (supra). So the bone of contention is whether the VAT subsidy which the assessee received, is Capital or Revenue in nature. To adjudicate this issue, we first refer to the recent judgment rendered by the Hon’ble Supreme Court in a batch of appeals with the lead case of CIT vs. Chaphalkar Brothers Pune(supra).In the instant case, the question before the Hon’ble Supreme Court was whether the subsidy received by the assessees, under the respective Industrial Schemes of the State Governments, for setting up new unit or undertaking substantial expansion, in the form of remission of taxes, is capital or revenue in nature. The Hon’ble Supreme Court taking into account their earlier decisions rendered in the cases of Sahney Steel & Press Works Ltd. v. CIT (supra) and CIT v. Ponni Sugars & Chemicals Ltd. (supra), answered the question in favour of the assessees, by holding that the “object” of granting subsidy is of the prime importance and not the manner in which it is disbursed. The Hon’ble Apex Court thus noted that the subsidies which were granted under the State Industrial Scheme was with the “object” to accelerate industrial development and generate employment and therefore held the subsidy to be in the capital field. The relevant extracts of the judgment are as follows:
“20. Finally, it was found that, applying the test of purpose, the Court was satisfied that the payment received by the assessee under the scheme was not in the nature of a helping hand to the trade but was capital in nature.
21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the “purpose test”. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.
22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.
23. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT [2011] 9 taxmann.com 255/198 Taxman 122/ 333 ITR 335. While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.
24. After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.
25. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.”
12. In light of the above judgment, in order to adjudicate the issue before us, we need to apply the object/purpose test to the subsidy received by the assessee in the given facts of the present case and then examine whether the same isCapital or Revenue in nature. The Hon’ble Supreme Court in the cases of Sahaney Steel & Press Works(supra)and Ponni Sugar & Chemicals Ltd. (supra)had held that the object or purpose for which the subsidy was given is what matters, and the source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. Therefore, we need to examine as to what was the purpose of the scheme which enabled the grant of subsidy to the assessee. For that, the Ld. AR first drew our attention to the Industrial Policy of Assam, 2008 placed at Pages 26 to 39 of the paperbook, particularly the Aims & Objectives of the State Industrial Policy (Page 33 of paperbook) which read as under:
“4.1 AIMS AND OBJECTIVES
1) To generate economic development by accelerating the process of industrialization.
2) To generate employment and increase income by encouraging the establishment of micro enterprises.
3) To increase the share of the Industrial sector in the State Domestic Product (SDP).
4) To make Nature – Economics Centric Development.
5) To make Agro and rural area linked industrial investment as focused programme.”
13. He further pointed out that the said Industrial Policy clearly stated that the incentives under the Scheme were only available to new units or those existing units which undertook substantial expansion within the period prescribed in the policy i.e. 01/10/2008 to 30/09/2013. The relevant extracts thereof (Page 33 & 34 of paper book) is as follows:
4.3 PERIOD OF VALIDITY OF THE POLICY
The policy will be effective from 1/10/2008 and will be valid for a period of 5 years, i.e. up to 30/9/2013. All new units as well as existing units which go in for sub-stantial expansion and which commence commercial production within the period of validity will be eligible for the incentives from the date of commencement of commercial production for the period applicable for each incentive.
4.6 ELIGIBILITY CRITERIA
Unless otherwise specified, the eligibility criteria shall be as below:
a) A unit that is engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 is eligible.
b) New Units set up on or after 1/10/2008 as well as existing units undergoing substantial expansion at the same place in the State of Assam on or after 01-10-2008 shall be eligible for incentives under 2008 Industrial Policy provided that for the units undergoing substantial expansion, the fiscal incentives will be only against the additional investments made on plant & machineries.
c) A unit shall have employment of 80% people of Assam in the managerial cadreand 90% people of Assam in the non-managerial cadre and that over a period of 5years from the commencement of commercial production, such unit would take all effective steps to ensure 100% employment of people of Assam in non managerialcadre and at least 90% in managerial post.
d) A unit availing grants/incentives from a Department/ an agency under the State/Central Government/ foreign agencies shall not be eligible for similar type of incentives under this policy.
e) Incentives/ subsidies/ concessions/ financial support under this policy shall beapplicable to units in the private sector, joint sector, co-operatives as well as unitsset up by State Government only.
f) The non-eligible industries mentioned in annexure one will not be eligible for anyincentives under this Industrial Policy.
g) In case a new unit is promoted in the premises of an existing unit; it should bedistinctly identifiable and be located in the open spaces available in the premises.The earlier unit in the premise should not be closed nor any plant & machinery bedislodged from the earlier unit.
14. It is thus noted that this Scheme was not made available to existing units to run their business more profitably but to attract capital investment in the State and encourage the private industries to set up/substantially expand industrial units. Hence, the finding of the lower authorities that the subsidy was granted to the existing manufacturing units post commercial production with a view to given them financial assistance in running of their business is found to be factually incorrect.
15. The Ld. AR thereafter invited our attention to Chapter 7 – Tax Incentives of the Industrial Policy of Assam, 2008 (Page 39 of the paper book) which stated that, only those ‘eligible units’ which fulfilled the eligibility criteria, would be entitled to exemption of 99% of the tax payable under the Assam Value Added Tax Act. Para 7.1 of the Industrial Policy stated that the Finance Department of the Government of Assam shall implement an agency for tax incentives and shall accordingly bring out a separate notification in this regard.
16. It was pointed out that, the Finance Department of the Govt. of Assam thereafter notified the Assam Industries (Tax Exemption) Scheme, 2009 vide Gazette Notification dated 03.11.2009for granting exemption to such units which manufacture goods in Assam and are considered eligible in the manner prescribed therein the Scheme, which was placed at Pages 40 to 48 of the paper-book. The said Scheme was in force from 01.10.2008 up to 30.09.2013. It is noted that three different categories of eligible units were specified for the purposes of this Scheme viz., (a) setting up of new unit, (b) existing unit which undertakes substantial expansion and (c) an existing unit declared sick by BIFR or as Assam Government Relief Undertaking and has recommenced commercial production. The assessee fell in category ‘B’ which is quoted for existing unit which manufacture goods in Assam, and which undertook substantial expansion and such substantial expansion is completed and commercial production commences on or before 01.10.2008 up to 30.09.2013. Further, we note that all the eligible units also have to fulfill the following additional mandatory criteria given in the Scheme, which reads as under:
“A unit shall have employment of 80% from amongst people of Assam in the managerial cadre and 90% from amongst people of Assam in the non-managerial cadre and that over a period of five years from the commencement of commercial production, such unit would take all effective steps to ensure 100% employment from amongst people of Assam in non-managerial cadre and at least 90% in managerial cadre.”
17. It is noted that the assessee fulfilled all the eligibility criteria set out in the State Industrial Policy Scheme viz., it understood substantial expansion and made capital investment in excess of Rs.1300 lacs which resulted in expansion of production capacity from 14711 MT to 22487 MT and it also ensured generation of employment by recruiting total of 411 employees which comprised of 96.15% and 99.48% of local people of Assam in managerial and non-managerial posts respectively. Accordingly, the assessee was issued Eligibility Certificate no. AIDC/US/EC/623/21 dated 26.08.2013 by the Assam Industrial Development Corporation Ltd, in terms of which the assessee was entitled to incentive for undertaking such substantial expansion in the form of VAT exemption, with effect from 24.05.2012 to 23.05.2019, subject to a maximum of 90% of fixed capital investment i.e. Rs.8,78,84,902/-.
18. Applying the purpose test as laid down by the Hon’ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) to the above facts of the case, it is noted that the subsidy in the form of remission of VAT was granted for undertaking substantial expansion of the existing industrial unit. The intent of the subsidy was to attract fixed capital investment, accelerate industrial development and generate employment opportunities in the State of Assam. The mode of paying the subsidy was by way of remission of VAT collections, which was disbursed from the date of commercial production. We thus find merit in the contention of the Ld. AR of the assessee that, since the object of the subsidy was to accelerate industrial development and generation of employment in the State, the incentive received in the form of VAT exemption was capital in nature.
19. The reliance placed by the Ld. CIT(A) on the decision of the Hon’ble Supreme Court in the case of Meghalaya Steels Limited (supra) is foundto be misplaced. In this case, the grievance of theparties before the Court was, whether the subsidy received from the State had first degree nexus with the business of the assessee and therefore whether it is eligible for deduction u/s 80-IC and 80-IE of the Act. In the instant case, both the assessee and the Revenue had not disputed the nature of subsidies to be revenue in nature and therefore the Court was never called upon to adjudicate the nature/character of the subsidy and whether it is capital or revenue in nature.
19. The Ld. AR, in this regard, rightly invited our attention to the decision of the Hon’ble jurisdictional High Court of Gauhati in the case of Shiv Shakti Flour Mills (P) Ltd. vs. CIT reported in [2017] 77 com 115 (Gauhati).In the decided case, the question before the High Court was whether the transport subsidy received by the assessee under the State Industrial Policy, to stimulate industrial activity and bring about development in the backward region of the State, was in the nature of revenue receipt or capital receipt. While adjudicating this issue, the Court had taken note of the decision in the case of Meghalaya Steels Limited (supra) and observed that in that case the parties were in agreement that the subsidies are revenue receipt to help an industrial undertaking and accordingly the said judgment was not relevant in deciding the issue raised before them. The relevant observations of the jurisdictional High Court were as follows:
“17. However, as earlier noted when the assessee applied for review of the judgment in Meghalaya Steels Ltd. (supra) rendered on 16.09.2010, the Division Bench recalled the earlier order by observing that the substantial question of law was not framed in the earlier proceeding and thus through the judgment dated 08.04.2013 in the Review case filed by the assessee in Meghalaya Steels Ltd. (supra), a fresh determination with formulation of the substantial question of law, was ordered by the Court. The resultant challenge of the revenue in the Supreme Court, we may note here, was dismissed on 05.08.2015 and this decision of the Supreme Court is Meghalaya Steels Ltd. (supra).
18. In respect of the same assessee i.e. Meghalaya Steels Ltd., the nature of the receipt towards transport subsidy was reconsidered by the High Court in CIT v. Meghalaya Steels Ltd. [2013] 356 ITR 235/217 Taxman 184/34 taxmann.com 34 (Gau.). But in this case, the parties were in agreement that the subsidies are revenue receipt to help an industrial undertaking to earn profit and make gains and accordingly the Court declared that such undertaking is entitled to seek deduction of the sum received under subsidy head, under Section 80-IB or 80-IC of the I.T. Act.”
21. The Hon’ble High Court, following the judgments of the Apex Court in the cases of Sahney Steel and Pressworks Ltd. (supra), Ponni Sugars & Chemicals Ltd. (supra) andJai Bhagwan Oil and Flour Mills (supra)upheld the assessee’s plea that, the incentives received under the State Industrial Scheme, which was intended to stimulate industrial development and generate employment opportunities in the backward regions, was capital in nature and therefore not liable to tax. The relevant findings of the Court are as follows:-
“20. What follows from the above discussion is the relevance and applicability of the purpose test to determine the nature of the receipt towards transport subsidy in the hand of the assessee. But before we proceed further with the matter, the Court has to deal with the contention of the revenue lawyer that the assessee cannot apply certain accounting method, in order to treat the received sum as capital receipt by including the amount in the reserve and surplus head, in the balance sheet. On this point we may benefit by referring to the ratio in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC). Here the Supreme Court considered the accountancy practice and observed that when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with the accountancy practice. It was thus declared by the Supreme Court that accounting practice cannot overwrite the provision of the Income Tax law as the taxation law does not keep step in the footprints of the accountancy profession. If we apply the ratio of this verdict to the matter in hand, we can be assured that the question formulated for consideration need not be answered on the basis of the accounting procedure followed by the assessee but question has to be decided on the basis of the applicable principles of law.
21. To determine as to whether the transport subsidy received by the assessee from the Government is taxable as revenue receipt or not, the purpose of the incentive scheme will have to be considered. The Supreme Court in Sahney Steel & Press Works Ltd. (supra) after analyzing the relevant case laws declared that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given or in other words, one has to apply the purpose test. It was further declared by the Court that the point of time at which, the subsidy is paid is not relevant, the source also is immaterial and the form of subsidy has no relevance for determination of the issue. The Court declared that if the object of the subsidy scheme was to enable the assessee to have a more profitable business, then the receipt is on revenue account. But on the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new industrial unit or to expand the existing facilities, then the receipt of the subsidy was on capital account. It was thus held that the object for which the subsidy is given will determine the nature of the incentive and the form of mechanism through which the subsidy is received by the assessee, is wholly irrelevant for deciding the issue.
22. Endorsing the purpose test enunciated in Sahney Steel & Press Works Ltd. (supra), the Apex Court in Ponni Sugars & Chemicals Ltd. (supra) reiterated that it is the object for which subsidy is given, that will determine the nature of the incentive subsidy and bearing in mind the objective behind the payment of incentive subsidy, the payment received by the assessee under the concerned head was declared to be categorized as capital receipt rather than revenue receipt and thus not taxable, in the hands of the assessee.
23. The transport subsidy received by a mustered oil unit located in Assam was the subject matter of consideration of the Apex Court in Jai Bhagwan Oil and Flour Mills (supra). In this case, the Supreme Court declared that the object of the Transport Subsidy Scheme is not augmentation of revenue but to improve trade and commerce between the remote parts of the country with other parts to bring about economic development of the remote and backward regions. The ratio of this case makes it clear that the amount received towards transportation cost in the hand of the assessee is capital receipt and the same cannot be subject to taxation in the hand of assessee, under the I.T. Act.
25. Following the above discussion and analysis and also the ratio of the decisions in Sahney Steel & Press Works Ltd. (supra), Ponni Sugars & Chemicals Ltd. (supra), Jai Bhagwan Oil and Flour Mills (supra) and applying the purpose test, we are of the considered opinion that the transport subsidy received by the assessee during the assessment year 2001-02 is intended to stimulate industrial activity in the backward region, to generate employment opportunities and bring about developments in the N.E. States and it is not meant to provide higher profit for the entrepreneur. It is intended to encourage investment in difficult and far flung states and the sum received under subsidy head cannot be treated as revenue receipt. Instead such incentives should be treated as capital receipt and thus not taxable, in the hands of the assessee. Accordingly the substantial question of law in this appeal is answered against the revenue and in favour of the assessee.”
22. Gainful reference may also be made to the decision of this Tribunal in the case of DCIT vs. M/s. Century Plyboards (I) Ltd. in ITA No. 2149/Kol/2019 dated 04.11.2020 wherein the excise & VAT subsidies received by the assessee post commencement of commercial production, from the Central Government and State Government for setting up new units in the States of Assam and West Bengal respectively, was held to be capital in nature. The relevant operative portion of the order which starts from para 39 onwards, reads as under:
“39. The assessee submitted that it had set-up a new manufacturing unit in the State of Assam. In terms of Notification No. 20/2007 issued by Government of India, Ministry of Finance dated 25.04.2007, the assessee was entitled to excise duty exemption on the goods cleared from the said Unit. The ld. AR invited our attention to the Eligibility Certificate dated 14.05.2010 issued by Office of Superintendent, Central Excise Range-II Guwahati Division confirming that the unit set-up by the assessee is eligible for exemption from excise duty in terms of the said Notification as a new unit with effect from 04-02-2009 i.e. the date of commencement of commercial production. It is noted that the said exemption was given to the new units for development of Industries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification No. 20/2007 is reproduced below:—
“5. The exemption, contained in this notification shall apply only to the following kind of units, namely;
a) New Industrial units which commence commercial production on or after the 1st day of April, 2007 but not later than 31st day of March, 2017;
b) Industrial Units existing before the 1st day of April, 2007 but which have undertaken substantial expansion by way of increase by not less than 25% in the value of fixed capital investment in plant and machinery for the purposes of expansion of capacity/modernization and diversification and have commenced commercial production from such expanded capacity on or after the 1st day of April, 2007 but not later than 31st day of March, 2017.”
40. During the relevant year the assessee was also in receipt of subsidy in form of refund of sales tax/VAT from the State of West Bengal under the West Bengal Incentive Scheme, 2000 which was formulated expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas which are industrially backward. To promote industrialization, the Government offered various incentives/ subsidies including ‘Industrial Promotion Assistance’ (‘IPA’) in form of refund of 50% of sales tax paid for a period of fifteen years. The subsidy was therefore directed towards industrial development in the State. The assessee received an eligibility Certificate dated 07.07.2004 from the Government of West Bengal for setting up a new unit for manufacturing high pressure decorative laminates having capacity of 24 lacs sheets. The object and applicability of the West Bengal Incentive Scheme, 2000 is as follows:—
” NOTIFICATION
No. 91-CH/H/4F-54/200
Whereas in pursuance of a National Policy the sales tax related incentives have been withdrawn from the 1st January 2000.
And whereas the State Government have considered it necessary and expedient to extend new types of incentives for promotion of industries in the State from the same date. Now, therefore, the Government is pleased hereby, in supersession of the West Bengal Incentive Scheme 1999 sanctioned under Commerce & Industries Department’s Notification No.580CI/H dated 22.06.1999 and amended from time to time, to approve and sanction a New Incentive Scheme for large, medium and small-scale industrial units as under:
APPLICABILITY OF THE 2000 – SCHEME:
The 2000 Scheme shall generally be applicable to all large, medium, cottage and small-scale projects and to large/medium sector tourism units to be set up and also to expansion projects of existing units on or after the 1st January, 2000. The units may be in the private sector, co-operative sector, joint sector as also companies/undertakings owned or managed by the State Government.”
41. The object of the West Bengal Incentive Scheme, 2000 is therefore noted to be for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of sales tax subsidy was granted to the assessee.
42. In view of the above facts, it was the plea of the ld. AR that the incentive in the form of excise duty exemption and sales tax subsidy, have been granted for setting up new units in the States of Assam & West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State. Referring to the decision of the Hon’ble Supreme Court in the batch of cases, with its lead order in the matter of CIT Vs Chaphalkar Brothers (400 ITR 279), the ld. AR contended that, it is now well settled that subsidies granted under the State Industrial Schemes formulated with the object to accelerate industrial development and generate employment, is capital in nature and therefore not liable to income-tax. He accordingly contended that even while computing book profit u/s.115JB of the Act, these subsidies should be excluded though it is credited in the profit and loss account. In support of this proposition, he relied on the judgment of the Hon’ble jurisdictional High Court in the case of Pr. CIT vs Ankit Metal & Power Ltd (416 ITR 591) and the decisions rendered by this Tribunal in the cases of DCIT vs Emami Biotech Ltd. in ITA No. 1915/KOL/2017 and SICPA India (P) Ltd. vs DCIT (80 com 87). Per contra, the Ld. CIT, DR argued that since this claim was not made before the AO by filing revised return of income, it should not be admitted at this stage.
43. We have considered the rival submissions of both the parties. From the facts as already discussed in the foregoing, it can be safely inferred that the subsidies were granted to the assessee for setting up new units in the States of West Bengal and State of Assam. The Hon’ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) has held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment is capital in nature. The relevant extracts of the judgment are as follows:
…………..
44. The above decision of the Hon’ble Supreme Court has been followed by the Hon’ble Calcutta High Court in the case of Pr. CIT Vs Shyam Steel Industries Limited (303 CTR 628) wherein the Court held that, where the incentive under the Industrial Schemes are given only to new units and units which have undergone an expansion, then the real purpose of such incentive has to be seen as a capital subsidy and therefore should be regarded as a capital receipt and not a revenue receipt. Following the ratio laid down in these judgments, we find merit in the claim of the ld. AR that the excise & sales tax subsidies received by the assessee are in the nature of capital receipt not liable to tax since the object of granting subsidy is to encourage setting up new industries for industrial growth of industrially non-developed area.”
23. Following the ratio laid down in these judgments, we find merit in the claim of the assessee that the VAT subsidy received by it for undertaking substantial expansion at their unit was in the nature of capital receipt not liable to tax, since the object of granting of subsidies was to bring about industrial development, encourage fixed capital investment and generate employment in the State of Assam.
24. As regards the issue relating to treatment of this VAT subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (I) Ltd. in ITA No. 2149/Kol/2019 (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. The relevant findings are as follows:
45. Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB, we note that the Hon’ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) held that the AO has the power to rework the book profit if the profits are computed not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Hon’ble Supreme Court in their subsequent decision rendered in the case of Indo Rama Synthetics (I) Ltd vs. CIT (330 ITR 363) further held that, the object of MAT provisions is to bring out the true working result of the companies. As held in the preceding paras, the subsidies received by the assessee were capital in nature and therefore not liable to tax. In the circumstances therefore, inclusion of such capital receipt in the computation of book profit u/s 115JB would defeat two fundamental principles. Firstly, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. We thus find merit in the assessee’s claim that the said subsidies being capital in nature, deserves to be excluded from the computation of book profit u/s 115JB of the Act.
46. It is noted that in the context of similar State Industrial Scheme, the jurisdictional Hon’ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (416 ITR 591) held that subsidies received for setting up new industry is not in the nature of income and therefore cannot be deemed as income for the purposes of computing book profit u/s 115JB of the Act. In the decided case the assessee had received interest subsidy under the WB Incentive Scheme, 2000 and power subsidy under the Power Intensive Industries Scheme, 2005 for setting up Sponge Iron Plant in Bankura. Before this Tribunal, the assessee claimed that receipt of such subsidies in form of remission of interest and power / electricity duty payments etc. was capital receipt not liable to tax both under the normal computational provisions as well as book profit u/s 115JB of the Act. The Tribunal answered the issue in favour of the assessee. On appeal by the Revenue, the Hon’ble High Court upheld the order of this Tribunal by observing as under:
“26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of AppolloTyres Ltd. (supra).
27. In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘Income’ under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of AppolloTyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.”
47. We also rely on the decision of the coordinate bench of this Tribunal in the case of Sicpa India (P) Ltd Vs DCIT (80 taxmann.com 87) wherein it has been held that the subsidy received by the assessee in form of excise duty exemption for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not liable to tax under the provisions of Section 115JB of the Act. The relevant findings of this Tribunal are as follows:
“21. The main issue that arises for consideration on the basis of the grievance projected by the Revenue in the aforesaid ground No.2 is as to whether the excise duty refund which were held by the CIT(A) to be capital receipts not chargeable to tax can still be considered as part of the book profits u/s.115JB of the Act, even though these sums have been credited in the profit and loss account and treated as income and even though the exclusion of these sums for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act. In rejecting the claim of the Assessee in this regard, the AO held that these sums have been credited in the profit and loss account and treated as income and exclusion of these incomes (sums) for the purpose of computing book profit u/s.115JB has not been specifically provided under explanation below Sec.115JB (2) of the Act.
22. We have heard the submission of the learned counsel for the Assessee. As far as the excluding the subsidies in question from computation of book profit u/s 115JB of the Act is concerned, the provisions of Sec.115JB of the Act have to be looked at. Section 115JB of the Act provides that notwithstanding anything contained in any other provision of the Act, where in the case of an Assessee, being a company, the income- tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April,2001, is less than seven and one half percent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of seven and one half ten per cent. The Assessee being a company the provisions of Sec.115JB of the Act were applicable. Every assessee, being a company, shall, for the purposes of section 115JB of the Act, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956). In so preparing its book of accounts including profit and loss account, the company shall adopt the same accounting policies, accounting stand and method and rates for calculating depreciation as is adopted while preparing its accounts that are laid before the company at its annual general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act.
23. We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon’ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision the Hon’ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid decision of the Hon’ble High Court rendered on identical facts as that of the Assessee’s case, there can be no doubt that subsidies in question does not have any character of income.24. When a receipt is not in the character of income, can it form part of the book profits for the purpose of Sec.115JB of the Act, is the question that arises for consideration. The ITAT Kolkata Bench in the case of Dy. CIT v. Binani Industries Ltd. [2016] 178 TTJ 658 : had to deal with a case where the question was as to whether receipts on account of forfeiture of share warrants amounting to Rs. 12,65,75,000/-, being a capital receipt, would be liable for taxation u/s 115JB. The tribunal after referring to several decisions on the issue viz., the Hon’ble Apex Court in case of Indo Rama Synthetics (I) Ltd. v. CIT [2011] 330 ITR 336/9 taxmann.com 25, Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC), Special Bench ITAT in the case of Rain Commodities Ltd. v. Dy. CIT [2010] 40 SOT 265 (Hyd.) (SB), ITAT Luknow Bench in the case of ACIT v. L.H. Sugar Factory Ltd. and vice versa in ITA Nos. 417 , 418 & 339/LKW/2013 dated 9.2.2016 and decision of Mumbai ITAT in the case of Shivalik Venture (P.) Ltd. v. Dy. CIT [2015] 70 SOT 92/60 taxmann.com 314, came to the conclusions
(i) the object of Minimum Alternate Tax (MAT) provisions incorporated in Sec.115JB of the Act was to bring out real profit of companies and the thrust was to find out real working results of company.
(ii) Inclusion of receipt which are not in the nature of income in computation of book profits for MAT would defeat two fundamental principles, it would levy tax on receipt which was not in nature of income at all and secondly it would not result in arriving at real working results of company. Real working result could be arrived at only after excluding this receipt which had been credited to P&L a/c and not otherwise.
(iii) There was a disclosure of the factum of forfeiture of share warrants amounting to Rs. 12,65,75,000/- by the Assessee in its notes on accounts vide Note No. 6 to Schedule 11 of Financial Statements for year ended 31.3.2009. Profit and loss account prepared in accordance with Part II and III of Schedule VI of Companies Act 1956, included notes on accounts thereon and accordingly in order to determine real profit of Assessee, adjustment need to be made to disclosures made in notes on accounts forming part of profit and loss account of Assessee. Profits arrived after such adjustment, should be considered for purpose of computation of book profits u/s 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to section 115JB of the Act.
25. The Tribunal in the aforesaid decision made a reference to the decision of the Special Bench of the ITAT in the case of Rain Commodities (supra) which in turn was based on the ratio laid down in the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H. Sugar Factory Ltd. (supra), where receipts on account of carbon credits which were capital receipts not chargeable to tax and hence not in the nature of income were held not included in the book profits. The Bench also referred to the decision of the Mumbai Bench of the ITAT in the case of Shivalik Venture (P.) Ltd. (supra) which was a case where the question was whether profits arising on transfer of a capital asset by a company to its wholly owned subsidiary company which is not treated as income” u/s 2(24) of the Act and since it does not form part of the total income u/s.10 of the Act and therefore does not enter into computation provision at all under the normal provisions of the Act, the same should be considered for the purpose of computing book profit u/s 115JB of the Act. The Mumbai Bench held as follows:
’26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term “income” as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as “incomes not included in total income” for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of “income”, are excluded for the purpose of computing “Book Profit”, since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of “total income” and “book profit”, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in “book profit” u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.’
26. The admitted factual and legal position in the present case is that subsidies in question is not in the nature of income. Therefore they cannot be regarded as income even for the purpose of book profits u/s.115JB of the Act though credited in the profit and loss account and have to be excluded for arriving at the book profits u/s.115JB of the Act. We hold accordingly and confirm the order of the CIT(A) in this regard. In light of the aforesaid discussion, we are of the view that the subsidies in question should be excluded for the purpose of determination of book profits u/s.115JB of the Act. We hold accordingly and dismiss Gr.No.2 raised by the Revenue.
48. For the reasons set out above and respectfully following the binding decision of the Hon’ble Calcutta High Court as well as this Tribunal, we hold that the subsidies received by the assessee for setting up new industries, by way of refund of VAT and excise duty of Rs. 2,36,75,501/- and Rs.13,82,79,547/- respectively are liable to be excluded from the computation of book profit u/s 115JB of the Act.
25. For the reasons set out above therefore, we allow the grounds taken by the assessee and direct the AO to deduct the VAT subsidy of ₹8,78,84,902/- both while computing income under normal computational provisions and book profit u/s 115JB of the Act for the relevant AY 2014-15.
26. In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 28th October, 2021.
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