DCIT Vs Everest Industries Limited (ITAT Mumbai)
ITAT Mumbai held that under regular provisions of section 36(1)(vii) of the Act, the provision for doubtful debt being in the nature of diminution in value of asset, it also attracts explanation (i) of the section 115JB of the Act. Accordingly, addition of book profit sustained.
Facts- The assessee, a public limited company, was during the year under consideration engaged in the business of manufacturing of ‘asbestos cement sheets’ and ‘accessories and ‘pre-engineered’ building products. For the year under consideration, the assessee filed return of income on 27.02.2014 declaring total loss of Rs.58,70,89,863/- under the normal provisions of the Income-tax Act, 1961 whereas book loss of Rs.40,32,90,378/- was shown as per the provisions of section 115JB of the Act. The assessee further revised its return of income on 30.03.2016 declaring total loss of Rs.57,35,23,520/- under the normal provisions and book loss at Rs.40,71,78,204/-. The return of income filed by the assessee was selected for scrutiny and the statutory notices under the Income Tax Act were issued and complied with.
In the assessment order passed u/s. 143(3) of the Act dated 30.12.2016, AO made additions to the income under the normal provisions of the Act as well as book profit/loss u/s. 115JB of the Act. Aggrieved, the assessee filed appeal before the CIT(A) wherein got part relief in the impugned order dated 22.10.2019. Aggrieved by the relief allowed to the assessee, the Revenue appealed before the tribunal.
Conclusion- What is relevant for the purpose of section 115JB of the Act is book profit prepared in accordance with the provisions of the Company Act, 2013 as mentioned in section 115JB(2) as increased by the items mentioned in Explanation (a) to(k). How the entries have been made in Balance sheet, may be relevant for deciding the issue under section 36(1)(vii) of the Act and if there is finding on that issue that provision for bad and doubtful debt is no longer an unascertained liability, then no addition could be made under section 115JB of the Act. But unless there is such a finding under regular provisions of section 36(1)(vii) of the Act, the provision for doubtful debt being also in the nature of diminution in value of asset, it also attracts explanation (i) of the section 115JB of the Act.
In our opinion, for the purpose of section 115JB of the Act no amount can be reduced or added from the book profit otherwise under the items listed in Explanation -I to section 115JB(2) of the Act. Though, the assessee might be entitled for written back of the provisions for the purpose of computing income under regular provision s of the Act, but is not entitled for benefit u/s 115JB of the Act in view of express provisions of the Act. Accordingly, this ground of appeal of the assessee is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals by the Revenue and assessee are directed and against separate orders dated 22.10.2019 04.12.2019 passed by the Ld. Commissioner of Income- tax (Appeals), Income-tax (Appeals) Nashik/ Commissioner of , Thane [in short ‘the Ld. CIT(A)’] for assessment year 20 14-15 and 20 16-17 respectively.
2. First of all, we take up the appeal of the Revenue in ITA No. 652/Mum/2020 for assessment year 2014- 15 The grounds raised by the Revenue are reproduced as under:
1. (i) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in deleting an amount of – Rs. 4,63,30,950/being disallowance of claim of sales tax incentive.
(ii) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in holding that Sales Tax was embedded in the Sales prices charged by the assessee and the same was in the nature of capital receipt. The id. CIT(A) ignored the fact that the assessee was legally required to collect Sales Tax On the Sales made, yet it had worked out the notional Sales Tax so collected and had claimed the same as capital receipts.
(iii) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in relying on the decision of ITAT, Mumbai and the decision of Bombay High Court (ITA 1299 of 2008)in the case of Reliance Industries Limited, even though subsequent to the Departmental appeal against the Order of High Court, the issue has been remitted back to the Bombay High Court to decide afresh and the same is still pending for adiudication.
(iv) Without prejudice to the above grounds, whether the CIT (A) erred on facts and in law, directing the AO that the Sales Tax Incentive is not required to be deducted from the cost of assets, if the same is treated as capital receipts by the A.O. ignoring the provisions of explanation 10 to section 43(1) of the Act?
2. (i) Whether the CIT (A) erred on facts and in the circumstances of the case and in law in holding that the excise duty of Rs. 49,00,05,693/stated to be collected by the assessee was capital in nature without any evidence placed on record to establish that the said amount was actually collected on account of excise duty.
(ii) Without prejudice to the ground at (li) above, whether the CIT (A) erred on facts and in the circumstances of the case and in law in holding that the excise duty of Rs. 49,00,05,693/ collected by the assessee was not revenue in nature despite the fact that the same was collected by the assessee on goods which were exempted from levy of any duty as per the Central -CE dated Excise Department’s Notification No. 50/2002 10.06.2003
(iii) Whether the CIT (A) erred on facts and in the circumstances of the case and in law in holding that the excise duty of Rs. 49,00,05,693/- collected by the assessee was capital in nature by comparing the scheme of exemption under which the claim was made by the assessee by such other schemes wherein the mode of incentive was in the nature of refund/reimbursement or subsidy.
(iv) Without prejudice to the above, whether the CIT (A) erred on facts and in law, directing the AO that the Excise duty exemption is not required to be deducted from the cost of assets, if the same is treated as capital receipts by the A.O. ignoring the provisions of explanation 10 to section 43(1) of the Act?
(v) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in not appreciating the fact that the provision to explanation 10 section 43(1) of the IT .Act, was intended to cover any subsidy or grant or reimbursement directly or indirectly met by the Central or State Government or any authority established under any law and covered in the asesseee’s claim of excise duty exemption is indirect subsidy?
3. Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in directing the AO to allow the balance additional depreciation in A.Y. 2014-15 on account of asset put to use for less than 180 days in A. Y. 2013- 1 4, when no such provision was available in the I.T. Act, -1 5. 1961 for A.Y. 2014
4. Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in allowing the foreign exchange fluctuation loss on reinstatement of loan without verifying whether the underlying transaction was on capital or revenue account and without verifying whether the underlying transaction was in US dollar and Japanese Yen.
5. (i) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in directing the AO to exclude Sales Tax incentive and Excise Duty Exemption, while computing the book profits u/s 1 15JB of the Act, without appreciating that they have not been specifically excluded in Explanation 1 to section 11 5JB of the Act.
(ii) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in directing the AO to exclude Sales Tax incentive and Excise Duty Exemption, while computing the book profits us 11 5JB of the Act despite the fact that no adjustment other than the ones mentioned in Sec. 11 5JB is permissible as held by the Supreme Court in the case of Apollo Tyres Ltd.(255 IT 273)
6. (i) Whether the CIT (A) erred on the facts and in the circumstances of the case and in law, in not following precedent in the decision of hon’ble ITAT vide order dated 31.01.2018 in assessee’s own case for A.Y. 2009-10 wherein hon’ble ITAT rejected the grounds raised by the assessee in respect of Education Cess.
(ii) Whether the CIT (A) erred On the facts and in the circumstances of the case and in law, to appreciate that fact that the education cess has been levied under Finance Act as an item to increase income tax and it has been held to be part of “income tax” by Hon’ble Calcutta High Court in the case of Srei InfrastructureFinance Ltd.
(i) Whether the CIT(A)erred in his interpretation that Pre- operative expenditure of Rs. 4,33,50,999/- was revenue in nature?
(ii)Whether on the facts and in the circumstances of the case, the order of the Tribunal holding this to be revenue would not lead to a double deduction since the expenditure was shown as work in progress in theblock of assets that would subsequently be eligible for depreciation?
3. Briefly stated, facts of the case are that the assessee limited company, was during the year under consideration engaged ‘asbesto in the business of manufacturing of s cement sheets’ and ‘accessories and ‘pre-engineered’ building products. For the year under consideration, the assessee filed return of income on under the 27.02.2014 declaring total loss of Rs.58,70,89,863/ normal provisions of the Income tax Act, 1961 (in short ‘the Act’) whereas book loss of Rs.40,32,90,378/was shown as per the provisions of section 11 5JB of the Act. The assessee further revised its return of income on 30.03.2016 declaring total loss of Rs.57,35,23,520/- under the normal provisions and book loss at Rs.40,71,78,204/- . The return of income filed by the assessee was selected for scrutiny and the statutory notices under the Act were M/s Everest Industries Ltd. 6 ITA Nos.652, 1424,719 & 720/Mum/2020 issued and complied with. In the assessment order passed u/s 143(3) of the Act dated 30.12.2016, the Assessing Officer made additions to the income under the normal provisions of the Act as u/s 115JB of the Act. Aggrieved, the assessee filed appeal before the Ld. CIT(A) wherein got part relief in the impugned order dated 22.10.2019. Aggrieved with the relief allowed to the assessee, the Revenue is in appeal. The appeal of the assessee for the impugned assessment year has already been adjudicated by the Tribunal vide order dated 31.01.2023.
4. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record.
4.1 The ground No. 1 of the appeal of the Revenue relates to deletion of disallowance of the claim of exclusion of sales tax incentives being capital receipts amounting to Rs.4,63,30,950/This amount consists of sales tax incentives of Rs.2,66,04,629/- of deferred sales tax incentives of Rs.1,97,26,321/-.
4.2 The Ld. Assessing Officer noted that the sales tax incentives of Rs.2,66,04,629/- has been filed under “the Orissa Industrial Policy, 2007” . It was contended by the assessee that objective of the policy was to incur additional investment for setting up / expansion and modernization of industry in backward area and same was linked with the fixed capital investment. The assessee relied on the decision of the Hon’ble Supreme Court in the case of Sahney Steel & press Works Ltd.'(1997) 228 ITR 253 (SC) and submitted that subsidy or the incentives received in the hand of the recipient have to be determined having regard to the purpose for which the subsidy was given.
4.3 In respect of sales tax incentives of Rs.1,97,26,321/ – for ‘Lakhmapur’ Unit, the assessee submitted that same had been quantified on the basis of net present value (NPV) of deferred sales tax liability granted under the new package scheme incentives of 1993. It was submitted that payment of net present value (NPV) of the future liability cannot be classified as remission or cessation of the liability so as to attract the provisions of section 41(1) of the Act and same cannot be treated as income for the purpose of the computation of the total income.
4.4 The Assessing Officer noted that identical claim of the assessee has been rejected by the Assessing Officer in earlier years though the Tribunal has deleted the addition but to keep the matter alive before the Hon’ble High Court, the Assessing Officer made addition of sales tax incentives amount of Rs.4,63,30,950/ -. On further appeal, the Ld. CIT(A) in his detailed finding deleted the addition observing as under:
“5. I have duly considered the submissions of the appellant company. The brief facts of the case are that the appellant company is engaged in the business of manufacturing and sale of asbestos & cement roofing sheets, accessories and pre-engineered building products. It provides a range of products including roofing products, paneling and partitioning. The appellant company has its units at Kymore, Kolkata, Lakhmapur, Podanur, Bhagwanpur and Baleshwar. In respect of Lakhmapur unit, the Certificate of Entitlement dated 01.10.2013 provided that said unit was liable to pay the entire amount of sales tax liability in equal annual instalments not exceeding five such instalments on expiry of 10* year as computed from the date prescribed for furnishing the last return for the period covered in respect of each of the order of assessment passed. As against this, provisions of section 94(2) of the Maharashtra Value Added Tax Act, 2002 stated that the appellant company at its own option could prematurely pay in place of the amount of tax deferred by it, an amount equal to the net present value of the deferred tax. Considering the above facts, the Lakhmapur unit had the option to defer the payment of VAT & CST collected from customers during the relevant year aggregating to Rs.2,71,38,148/- to the Sales Tax Department after 10 years. However the unit opted to pre-pay the above tax at Net Present Value basis in terms of section 94(2) of the MVAT Act, 2002 read with rule 84D of MVAT Rules 2005 and paid an amount of Rs.74,11,826/ – against the aforesaid tax liability. Thus by opting for NPV basis, the Lakhmapur unit had realised a profit of Rs. 1,97,26,321/ – (i.e.Rs.2,71,38,148/- less Rs.74,11,826/ -) and the same had been credited to profit & loss account as ‘other receipts’. Further Sales Tax returns filed during the year along with the summary of returns evidencing deferment of VAT & CST of Rs.2,71,38,148/ – were also submitted. It was claimed that the difference of Rs.1,97,26,321/ – was a capital receipt not liable to tax. The issue under consideration is covered in the favour of the appellant company by the appellate order dated 16.10.2019 in appeal No.NSK/CIT(A) -3/139/2017-18 for AY 2010-11 wherein elaborate discussion was made by the undersigned in para-5 as to why the Sales Tax Incentive under 1993 Scheme was a capital receipt not liable to tax. There is no change in the facts & circumstances in the current year in respect of Lakhmapur unit as compared to those in AY 2010-1 1.The undersigned had also compared the terms and conditions of 1979 and 1993Scheme of the State Government and both the Schemes were found to be similar. While rendering the decision on this issue, the undersigned had also placed reliance on the decision of Supreme Court in the case of CIT Vs. Ponni Sugars & Chemicals Ltd. (306IT 392), Shree Cement Ltd. Vs. Addl. CIT (031 IT. Trib.513), CIT Vs. Rasoi Ltd.(335 IT 438), DCIT Vs. Reliance Industries Ltd. (88 ITD 273 (Mumbai SB), CIT Vs.Kirloskar Oil Engines Ltd. (364 IT 88). John Deere India (P.) Ltd. Vs. ITO (82 taxmann.com 201), CIT Vs. Birla VXL Ltd. (32 taxmann.com 330), CIT Vs. Udupi Builders Pvt. Ltd. (319 IT 440) and CIT Vs. Balarampur Chini Mills Ltd. (238 ITR445). The Package Scheme of Incentives, 1993 was introduced with a view to revise the1988 Scheme to rationalize the scope of incentives, various scales and mode of release of incentives to intensify and accelerate the process of dispersal of industries from the developed areas and for development of the underdeveloped regions of the State, particularly those farther away from the Bombay – Thane-Pune belt. The quantum of incentive benefit was to be determined with reference to the gross fixed capital investment of the eligible unit during the period of eligibility. The quantum of incentive benefit was variable and said quantum of deferral benefit was directly related to the cumulative gross fixed capital investment made by the eligible unit. As and when further fresh capital investment was made, the quantum of Sales Tax Incentive was further increased during the period of eligibility. The period of entitlement of benefit could be curtailed if the gross fixed investment fell short of sales tax liability. For earning eligibility for the incentive benefit, the Industrial unit was supposed to take some initial and final steps and it could apply for incentive benefit after having taken possession of the land and having made an application of DGTD for registration. Such application was to be processed by the implementing agency i.e. SICOM without wailing for the completion of the setting up of the Industrial unit and the provisional eligibility certificate was issued to the industrial unit on acquisition of at least 10% of the total fixed assets envisaged in the project and incurrence of expenditure to the extent of 2 5% of the capital cost of project. In the aforesaid facts, the exemption availed of by the appellant’s eligible units under the said notification, was a capital receipt not liable to tax. Though the sales tax incentive could have been realised only upon the commencement of production yet the fixed capital investments entitled the assessee company to the sales tax incentive. The Maharashtra Government instead of giving outright subsidy for setting up of industry in the backward regions had permitted the industrial unit to realize said subsidy by way of sales tax collection which were either exempted or deferred at the option of the industrial unit. The main purpose of the resolution was to modernize industries which ordinarily would come at a considerable cost, particularly when such industries were located in under-developed areas. It was for this purpose that the said scheme was framed giving benefit of the Sales Tax Waiver/Deferment, at the option of the industry concerned. The entitlement of industrial unit to claim eligibility for the Sales Tax incentive arose even while the industry was in the process of being set up. The scheme was oriented towards and subservient to investment in fixed capital assets. The object of the subsidy was to encourage the setting up of industries in the backward area. Para 5.1(Il) of said 1993 Scheme gave the details of quantum of sales tax incentive which was to be calculated as percentage of fixed capital investment depending on the category of area in which the eligible unit w as being set up. The Sales Tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus in effect, the subsidy in the form of Sales Tax incentive was not given to the appellant company for assisting it in carrying out the business operations. It was therefore held that Sales Tax Incentive availed by the appellant company under the Package Scheme of Incentives, 1993 was on capital account.
5.1 The appellant company had also set up a manufacturing facility at Somnathpur in Orissa in FY 2012 – 13 and this unit started commercial production w.e.f. 17.05.2013.This unit had applied to District Industries Centre (DIC) for grant of Thrust Sector Status under Orissa Industrial Policy Resolution 2007. As per Para 18.4 (ji) of the Policy, New Industrial units of Thrust sector were eligible for reimbursement of 75% of VAT paid for a period of 10 years from the date of starting commercial production limited to 200% of fixed capital investment provided that the VAT reimbursement shall be applicable only to the net tax paid after adjustment of input tax credit against the output tax liability. In view of the above facts, this unit was eligible for incentive for a period of 10 years from the date of commencement of commercial production i.e. 17.05.2013. Accordingly it had applied to DIC for grant of approval as Thrust Sector Unit. The General Manager, DIC had forwarded the copy of the said application Directorate mclustries, Orissa. The office of the Director of Industries, Odisha had issued the certificate of Thrust sector on 05.11.2015. On the basis of the aforesaid certificate, the appellant company had credited Sales Tax Incentive of Rs.2,66,04,629/ -to profit & loss account during the relevant year under the head ‘other receipts’. The objectives of the Scheme (para 2 of the Orissa Industrial Policy) provided, including inter alia, as under:
(a) To transform Orissa into a vibrant industrialized state,
(b) To promote Orissa as a major manufacturing hub,
(C) To maximize employment generation opportunities both direct and indirect,
(d)To make concerted efforts for balanced regional development.
Further the objective for thrust sector Unit (applicable to Somnathpur unit), as stated in para 4.4 of the Scheme, was to facilitate directed investment into sectors that offered huge employment opportunities, maximize value addition and had a multiplier effect in terms of ancillary and downstream linkages. Further as per para-19 of the Scheme, the Thrust Sector meant new industrial Units in the specified categories which commenced fixed capital investment on or after the effective date and fulfilled certain criteria as specified therein. As regards Ancillary & Down Stream sector, the minimum capital investment had been prescribed at Rs. 10 crores and direct employment generation of 100 persons. Further Down Stream industry, as per para-2, meant an industrial undertaking which was engaged or proposed to be engaged in value addition of the intermediate or final produce or waste product of one or more industrial undertakings. The Somnathpur unit of the appellant company was eligible for the incentive under the OIP as it had fulfilled the following conditions:
(a) It had invested amount of Rs.51.61 crores (As per application filed before DIC) as against minimum required capital investment of Rs. 10 crore.
(b) It had provided direct employment of 104 personnel (more than required minimum of 100).
(c) It was using fly ash as waste of industrial produce. The copy of report on process study & determination of percentage of fly ash, was also submitted.
The very object of the incentive scheme was to promote industrial development in the backward regions of the State of Orissa and to generate employment opportunity in that state. The entrepreneur setting up industries in the most backward areas of Orissa were entitled to the Sales Tax benefit. The terms and conditions of New Package Scheme of Incentives, 1993 for Maharashtra State and Industrial Policy Resolution, 2007 for Orissa State were also compared by the undersigned and both the Schemes were found to be similar as per following details:
