Addition towards disallowance u/s 14A to book profit computed u/s 115JB is unsustainable

Manali Petrochemical Ltd. Vs DCIT (ITAT Chennai)

ITAT Chennai held that additions made towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 to book profit computed u/s. 115JB(2) of the Income Tax Act is unsustainable.

Facts- The case was selected for scrutiny and draft assessment has been completed u/s. 143(3) r.w.s. 144C of the Act, on 05.10.2017 and determined total income of Rs. 19,72,45,117/-, by making additions towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 for Rs. 4,07,267/- and disallowance of capital subsidy received from Government of India for Rs. 84 lakhs. The assessee has filed objection against draft assessment order passed by the AO before the DRP and the DRP vide their directions dated 22.09.2017 issued u/s. 144C(5) of the Act, upheld additions made by the AO towards disallowance of capital subsidy received from Government of India through Tamilnadu Energy Development Agency. Thereafter, the AO passed final assessment order and made additions towards capital subsidy received from Government of India and also disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962. Aggrieved by the assessment order, the assessee is in appeal before us.

Conclusion- Held that subsidy received by the assessee from Government of India through Tamilnadu Energy Development Agency, is capital subsidy given by the Government to enable the assessee to set up new power plant in line with program on biomass co-generation system in industry and thus, the assessee ought to have reduced amount of subsidy received from actual cost of plant and machinery installed in the plant for claiming depreciation. Therefore, we direct the Assessing Officer to treat subsidy received from Government of India as capital receipts and also reduce from cost of asset acquired out of said subsidy and allow depreciation as per law.

Also, held that the issue of addition towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962, to book profit computed u/s. 115JB(2) of the Act, is covered in favour of the assessee by the decision of the ITAT Special Bench in the case of ACIT vs Vireet Investments Pvt Ltd (supra), where it has been clearly held that the computation of clause (f) to Explanation (1) of section 115JB(2) of the Act, is to be made without resorting to the computation as contemplated u/s. 14A r.w.r. 8D of the I.T. Rules, 1962. Thus, by following the decision of ITAT Special Bench, we direct the Assessing Officer to delete additions made towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 to book profit computed u/s. 115JB(2) of the Act.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer, u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) dated 05.10.2017, in pursuant to directions of the Dispute Resolution Panel-2, Bengaluru, dated 22.09.2017 and pertains to assessment year 2013-14.

2. The assessee has raised the following grounds of appeal:

“1. The order of the AO / DRP is contrary to law, facts and circumstances of the case.

2. Disallowance of subsidy receipt of Rs.84,00,000/-

2.1 The AO/DRP erred in confirming the action of the assessing officer in adding back to the total income the subsidy receipt of Rs.84,00,000/treating the same as a revenue receipt.

2.2 The AO / DRP ought to have appreciated the fact that the appellant had installed a 4.2 MW Biomass co-generation captive power plant(capitalized during the financial year 2008­09) for captive use and the above capital subsidy has been sanctioned by Govt of India for attracting investment in non-conventional renewable energy devices and hence the same is a capital receipt, and not taxable.

2.3 The AO /DRP ought to have appreciated that this was for promotion of biomass co-generation and not a subsidy for helping running of industries and therefore it is a capital receipt.

3. Disallowance u/s 14A – 4,07,267 under normal provisions and Rs.5,62, 106/- under Section 115.JB

3.1 The AO / DRP erred in confirming the disallowance of Rs. 4,07,267/under normal computation as expenditure incurred in relation to the income which does not form part of the total income under Section 14A of the Income Tax Act, 1961 by applying Rule 8D.

3.1 The AO / DRP ought to have appreciated that the Appellant has made the current investment in Mutual funds from out of its surplus funds available with the appellant from time to time and therefore disallowance of expenditure u/s.14A read with Rule 8D both under normal provisions and Section 115JB does not arise .

3.2 The AO / DRP ought to have appreciated that there was no fresh investment during the year and the profit for the year after tax was Rs.27.31 crores and with depreciation of Rs.6.36 crores resulted in cash profit of Rs.33.67 crores. Hence there can be no disallowance of interest in making the said investments. (HDFC Bank Ltd 383 ITR 529 Bom).

3.3 The AO /DRP ought to have appreciated that no expenditure was incurred by the Appellant Company for earning the exempt income, as they are deposited to the bank account. (Canara Bank v CIT 265 CTR 385 Kar)

3.4 Without prejudice, the disallowance under this section should be restricted to 0.5% of the investment from which dividend has been earned and not on the entire investment as per Rule 8D(2)(iii).

3.5 The DRP / AO erred in confirming the disallowance of Rs. Rs.5,62, 106/under sec 14A read with Rule 8D while computing Book Profits under Section 115JB

4. Deduction u/s.80-IA may be granted in accordance with the provisions of the Act and the decision of the Jurisdictional High Court taking into account the initiate assessment year as 2011-12.

5.  The appellant craves leave to file additional grounds at the time of hearing.”

3. The brief facts of the case are that, the assessee company is engaged in the business of manufacturing and trading of Petrochemical products. It had filed its return of income for the assessment year 2013-14 on 28.11.2013, by declaring a total income of Rs. 18,84,37,850/-. The case was selected for scrutiny and draft assessment has been completed u/s. 143(3) r.w.s. 144C of the Act, on 05.10.2017 and determined total income of Rs. 19,72,45,117/-, by making additions towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 for Rs. 4,07,267/- and disallowance of capital subsidy received from Government of India for Rs. 84 lakhs. The assessee has filed objection against draft assessment order passed by the AO before the DRP and the DRP vide their directions dated 22.09.2017 issued u/s. 144C(5) of the Act, upheld additions made by the AO towards disallowance of capital subsidy received from Government of India through Tamilnadu Energy Development Agency. Thereafter, the AO passed final assessment order and made additions towards capital subsidy received from Government of India and also disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962. Aggrieved by the assessment order, the assessee is in appeal before us.

4. The first issue that came up for our consideration from ground no. 2.1 to 2.3 of assessee’s appeal is assessment of subsidy received from Government of India amounting to Rs. 84 lakhs. During the financial year relevant to assessment year 2013-14, the assessee company has received a capital subsidy of Rs. 84 lakhs from the Government of India through Tamilnadu Energy Development Agency and such subsidy has been given for the purpose of implementation of program on ‘Biomass Co-generation in Industries’. As per objectives of the scheme, the main objects of the program on Biomass Co­generation (non-bagasse) in Industry are given, as per which the subsidy can be utilized for three purposes, including deployment of biomass co-generation systems, promote decentralized/distributed power generation through supply of surplus power to the grid and to create awareness of the potential and benefits of alternative modes of energy generation in industry. The assessee has received a sum of Rs. 84 lakhs subsidy from Tamilnadu Energy Development Agency towards setting up of 4.2 megavolt captive power plant. As per details filed by the assessee, such subsidy has been given @ 20 lakhs per megavolt. The assessee has treated subsidy received from Government of India as capital receipt which is not taxable under the Income Tax Act. The Assessing Officer, has assessed capital subsidy received from Government of India as income assessable u/s. 2(24)(xviii) of the Act, on the ground that subsidy received by the assessee is in the nature of revenue receipts, because it has been given for promotion of co-generation plants.

5. The ld. Counsel for the assessee, referring to the documents which facilitates receipts of subsidy from Government of India submitted that subsidy received by the assessee is neither directly used for acquisition of any asset and thus, the same has not been reduced from the cost of asset as required under provisions of section 43 of the Act. The counsel further submitted that subsidy received by the assessee is capital in nature, but not in the nature of revenue receipts because said subsidy has not been given for the purpose of promotion of co-generation system alone.

Therefore, he submitted that the AO and DRP erred in assessing subsidy received from the Government as revenue in nature and in this regard he relied upon the following judicial precedents:

1. CIT vs Ponni Sugars & Chemicals Ltd & Others – 306 ITR 392 (SC)

2. CIT vs Chaphalkar Brokers Pune – 300 CTR 113 (SC)

3. PCIT vs Chemplast Sanmar – TCA No 525 of 2021 dated 25.11.2021

4. DCIT vs Haldex India Pvt Ltd – ITA No. 852/Pune/2019 dated 19.05.2022

5. CIT vs GLoster Jute Mills Ltd 0 416 ITR 458 (Cal)

6. Deepak Spinners Ltd vs DCIT – ITA No. 2055/Kol/2018 dated 12.06.2018.

6. The ld. Senior AR, P. Sajit Kumar, JCIT, supporting the order of the DRP submitted that, in order to decide the nature of subsidy, whether it is capital or revenue the object of the subsidy scheme is to be seen. Further, if subsidy is given to the tax payer to run the business more profitably or reimburse the costs incurred in running the business, then subsidy shall qualify as taxable revenue receipt. On the other hand, if the object of the subsidy is to enable the tax payer to set up a new unit, then as per provisions of section 43 of the Act, said portion of the subsidy which is directly attributable to cost of new asset should be reduced from such asset. In this case, as per details filed by the assessee, the assessee has been given subsidy for the purpose of set up of biomass co-generation system and such subsidy has been given @ 20 lakhs per megavolt. The assessee has also spent a sum of Rs. 18.90 crores on the project and hence, subsidy received from the Government should be reduced from the cost of project.

7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. In order to decide the nature of subsidy, the objective of scheme promoting such subsidy needs to be examined. In case subsidy is given to the tax payers to run the business more profitably or reimburse cost incurred in running of business, then the subsidy would qualify as taxable revenue receipts as per provisions of section 2(24)(xviii) of the Act. In case, the subsidy is provided to enable the tax payers to set up a new unit or to expand the existing unit, then the subsidy would qualify as capital receipt and such subsidy needs to be reduced from the actual cost of such asset in terms of provisions of section 43 and Explanation (10). In this case, if you go through the objectives of subsidy scheme promoted by the Ministry of New and Renewable Energy, Government of India, the scheme is promoted to encourage the deployment of biomass co-generation system in industries for meeting their captive thermal and electrical energy requirement with supply of surplus power to the grid. Further, as per objectives of the scheme, the subsidy can be utilized for the purpose of deployment of biomass co-generation system in industry, promote decentralized/distributed power generation, conserve the use of fossil fuels for captive requirements and to create awareness about the potential and benefits of alternative modes of energy generation in industry. As per the scheme, subsidy can be utilized either for setting up of new biomass co­generation system or to promote the existing system and its benefits. In the present case, the assessee has set up 4.2 megavolts captive power plant with a cost of project of Rs. 18.90 crores. The assessee has claimed subsidy of Rs. 84 lakhs @ 20 lakhs per megavolt on total amount invested for setting up 4.2 megavolt power plant. From the above, it is very clear that subsidy received from Government of India is directly linked to investment made in setting up of new power plant. Therefore, we are of the considered view that the assessee needs to reduce the amount of subsidy received from Government of India from actual cost of asset installed in power plant, because said subsidy is directly linked to setting up of new power plant, as per the scheme promoted by the Government. Therefore, we are of the considered view that the Assessing Officer is completely erred in treating subsidy received from Government of India as revenue receipts taxable u/s. 2(24)(xviii) of the Act.

8. In so far as, the case laws relied upon by the assessee, including decision of Hon’ble Supreme Court in the case of CIT vs Ponni Sugars & Chemicals Ltd & Others 306 ITR 392 SC, we find that those cases are not applicable to facts of the present case and thus, are not considered to be relevant to decide the issue on hand. To sum up, subsidy received by the assessee from Government of India through Tamilnadu Energy Development Agency, is capital subsidy given by the Government to enable the assessee to set up new power plant in line with program on biomass co-generation system in industry and thus, the assessee ought to have reduced amount of subsidy received from actual cost of plant and machinery installed in the plant for claiming depreciation. Therefore, we direct the Assessing Officer to treat subsidy received from Government of India as capital receipts and also reduce from cost of asset acquired out of said subsidy and allow depreciation as per law.

9. The next issue that came up for our consideration from ground no. 3 of assessee’s appeal is additions towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 to book profit computed u/s. 115JB of the Act. The ld. Counsel for the assessee, submitted that this issue is covered in favour of the assessee by the decision of the ITAT Special Bench in the case of ACIT vs Vireet Investments Pvt Ltd [2017] 82 com 415, where it has been held that computation under clause (f) of Explanation (1) to section 115JB(2) of the Act, is to be made without resorting to the computation as contemplated u/s. 14A r.w.r. 8D of the I.T. Rules, 1962. The ld. DR, fairly agreed that this issue is covered in favour of the assessee.

10. We have heard rival contentions and gone through relevant material available on record and we find that the issue of addition towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962, to book profit computed u/s. 115JB(2) of the Act, is covered in favour of the assessee by the decision of the ITAT Special Bench in the case of ACIT vs Vireet Investments Pvt Ltd (supra), where it has been clearly held that the computation of clause (f) to Explanation (1) of section 1153B(2) of the Act, is to be made without resorting to the computation as contemplated u/s. 14A r.w.r. 8D of the I.T. Rules, 1962. Thus, by following the decision of ITAT Special Bench, we direct the Assessing Officer to delete additions made towards disallowance u/s. 14A r.w.r. 8D of the I.T. Rules, 1962 to book profit computed u/s. 1153B(2) of the Act.

11. In the result, appeal filed by the assessee is partly allowed.

Order pronounced in the court on 10^th May, 2023 at Chennai.