Case Law Details
Economic Explosives Ltd. Vs ACIT (ITAT Nagpur)
ITAT Nagpur held that sales tax subsidy is capital subsidy and accordingly it should be reduced for computation of book profit under section 115JB of the Income Tax Act. Accordingly, appeal allowed.
Facts- The case of the assessee was selected for complete scrutiny under CASS. Notably, the assessee was entitled to the Sales Tax Subsidy viz., Value Added Tax and Sales Tax collected by the assessee on sales made during the year under consideration. The Sales Tax Subsidy was linked to the investment made by the assessee, however, it was payable in the form of the VAT and/or sales tax collected by the assessee.
In the return of income, the assessee claimed the Sales Tax Subsidy as capital receipt and deducted the same while computing the income under the head ‘Profit and Gains of Business or Profession’ under the normal provisions of the Act. However, while computing the book profit under the MAT provisions of the Act, the assessee did not correspondingly reduce the book profit.
The Assessing Officer while computing the book profit has not made any downward adjustments to the book profit on account of sales tax subsidy. CIT(A) confirmed the order. Being aggrieved, the present appeal is filed.
Conclusion- Co–ordinate Bench of the Tribunal, Mumbai Bench, in IPCA Laboratories Ltd. v/s DCIT, has held that the subsidy received under the State Industrial Scheme is capital in nature and therefore should be excluded from the book profit u’s 115JB of the Act. The Tribunal admitted this legal issue raised by the assessee and answered it in their favour.
Held that the capital subsidy should be reduced for computation of book profit. Particularly in view of the excruciating fact that reduction of subsidy from written down value was accepted by the Assessing Officer and he did not tinker with the amount of depreciation claimed.
FULL TEXT OF THE ORDER OF ITAT NAGPUR
Both the captioned appeals have been filed by the assessee. Appeal for the assessment year 2017–18 is against the impugned order dated 08/03/2022, passed by the learned CIT(A)–3, Nagpur, and the appeal for the assessment year 2018–19 is against the impugned order dated 31/05/2023, passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi.
ITA no.177/Nag./2022
Assessee’s Appeal – A.Y. 2017–18
2. The assessee has raised following grounds:–
“The following grounds of appeal are without prejudice to one another.
1. Assessee is in receipt of Sales Tax Subsidy of Rs.11,99,56,135. The Assessing officer erred in not reducing the same in computation of income under the MAT provisions considering it is a capital receipt.
2. On facts and circumstances of the appellants case and in Law the learned Assessing Officer erred in not allowing the cess paid of Rs.35,02,834 as deduction in the assessment order.
3. The Appellant craves leaves to alter, amend, withdraw or substitute any ground or grounds or to add any new ground or grounds of appeal on or before the hearing. Any other grounds which shall be prayed at the time of hearing.”
3. The issue arising out of Ground no.1, relates to receipt of Sales Tax Subsidy of ` 11,99,56,135 by the assessee which was not reduced by the Assessing Officer and the same was computed as book profit under the MAT provisions since the same was credited in Profit & Loss Account considering it as revenue grant as per its accounting policy.
4. Facts in Brief:– The assessee company is in the business of manufacture of Detonators/Filled shells, Aluminium & Copper Tubes, Fuse Head. The industry is set up at Sawange Village in Nagpur, which is a notified by Government of Maharashtra under Mega Project 2007. The assessee electronically filed its return of income under section 139 of the Income Tax Act, 1961 (“the Act”) on 29/11/2017, declaring gross total income at ` 20,85,63,863, under normal provisions and ` 56,35,18,915, under the normal provisions of Minimum Alternate Tax.
5. The case was selected for complete scrutiny under CASS. Notice under section 143(2) of the Act was issued and served on ITBA. Notice under section 142(1) of the Act was issued on 06/06/2019. In response to notice issued, the details called for were uploaded. The assessee filed Income Tax Return, Computation of Income, Balance Sheet, Tax Audit Report, etc. Various details were called for electronically vide notices under section 142(1) dated 06/06/2019, 20/08/2019 and 17/10/2019. The assessee uploaded the details.
6. The assessee Company was granted Eligibility Certificate for setting up the manufacturing unit under the Mega Project in one of the backward areas qualified under the Package Scheme of Incentive, 2007, announced by the State Government of Maharashtra (“the Scheme”). A copy of the said Scheme is placed on record at Page–129 to 165 of the Paper Book. Under the said Scheme, the assessee qualified for the Mega Project and has been issued the Eligibility Certificate dated 29/05/2014, a copy of which is also placed on record at Page–166 of the Paper Book. As per the Eligibility Certificate, the assessee had invested ` 5,700.41 lakh during the period from 27/10/2009 to 21/03/2013, in the various assets for setting up the manufacturing unit and production of the various products in which the assessee was engaged. The said unit was set up by the assessee in the backward area as notified under the Scheme i.e., at Village Sawanga, Post Shiva, Taluka Nagpur (Brahmin), District Nagpur in the State of Maharashtra (“the Unit”). Pursuant to the aforesaid investment, the assessee was entitled to the Sales Tax Subsidy viz., Value Added Tax and Sales Tax collected by the assessee on sales made during the year under consideration. The Sales Tax Subsidy was linked to the investment made by the assessee, however, it was payable in the form of the VAT and/or sales tax collected by the assessee.
7. In the books of accounts, the assessee has treated the Sales Tax Subsidy as the Government grant and was disclosed separately in the Profit & Loss Account which formed part of the Annual Report for the year under consideration and the same is placed on record at Page–41 to 62 of the Paper Book. As is evident, the said Government grant is forming part of revenue from operations and the said grant is recognized as revenue. In this regard, the learned A.R. invited the attention of the Bench to Note 2.2.j. of the “Significant Accounting Policies” which is placed on record at Page–26 of the Paper Book.
8. In the return of income, the assessee claimed the Sales Tax Subsidy as capital receipt and deducted the same while computing the income under the head ‘Profit and Gains of Business or Profession‘ under the normal provisions of the Act. However, while computing the book profit under the MAT provisions of the Act, the assessee did not correspondingly reduce the book profit.
9. The Assessing Officer while computing the book profit has not made any downward adjustments to the book profit on account of sales tax subsidy relying upon the decision of the Hon’ble Supreme Court in Apollo Tyres Ltd. v/s CIT, [2002] 255 ITR 273 (SC), whereby the Assessing Officer concluded that the adjustment, as claimed by the assessee is outside the scope of the Items (i) to (viii) specified under Explanation 1 to sub-section (2) of section 115JB of the Act. Since the assessee has not made the claim by filing the revised return of income, the Assessing Officer did not entertain the claim of the assessee by relying upon the judgment of the Hon’ble Supreme Court in Goetze (India) Ltd. v/s CIT, [2006] 284 ITR 323 (SC). The assessee, being aggrieved, filed appeal before the first appellate authority.
10. The learned CIT(A) confirmed the order passed by the Assessing Officer for the reason that (i) the downward adjustment on account of sales tax subsidy is not specified under item (i) to (viii) of the Explanation 1 to sub-section (2) of section 115JB of the Act and held that the Assessing Officer has no jurisdiction to make any adjustments other than those specified under Explanation 1 to sub-section (2) of the section 115JB of the Act. For this proposition, the learned CIT(A) relied upon the judgment of the Hon’ble Supreme Court in Apollo Tyres Ltd. (supra); and (ii) reduction of the capital sales tax subsidy from the book profit is not acceptable as it is contrary to the provisions of the Companies Act and therefore, it violates the provisions of section 115JB of the Act. The assessee being not satisfied with the order so passed by the learned CIT(A), is again in appeal before the Tribunal.
11. During the course of hearing, the assessee has filed detailed written submissions, which were also reiterated in course of hearing. Relevant extracts of his submissions are extracted below to analyse the gamut of the dispute.
“Submissions as to what is taxable under the Act:
Under the Act the tax is levied on the “income” of the previous year. As per section 4 of the Act, the subject of the charge is the income of the previous year and not the income of the assessment year. Therefore, a question arises as to what is „income‟.
Clause (24) of section 2 of the Act defines the term „Income‟. The said definition of “income” is inclusive and not exhaustive. It provides that „Income‟ includes not only those items of income which this clause declares that it shall include, but such things as the word signifies according to its natural import. This clause merely adds artificial categories to the natural connotation of “income”. In other words, what is not included in the definition of the term „income‟ may also be included, provided it should be “income” in nature.
Sir George Lowndes in CIT V/s. Shaw Wallace (6 ITC 178), gave the definition of „Income‟ as under:
“Income…. in this Act connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something which is often loosely spoken of as ‘capital’. But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production.”
(underlined and bold for emphasis)
Similar view is taken by the courts in the following decisions:
Sassoon v CIT (26 ITR 27 at 49) (SC);
CIT v Chunilal (6 ITR 521 at 529) (PC); and
CIT v Jaora Oil (129 ITR 423 at 425) (MP).
This above definition was followed in Gopal Saran Narain Singh v CIT (3 ITR 237 at 242) by Lord Russell of Killowen, the Privy Council in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT (11 ITR 513).
The Allahabad High Court in Rani Amrit Kunwar v. CIT (14 ITR 561 at 570) held that:
“Anything which can properly be described as income, is taxable under the Act unless expressly exempted.”
Now, a question arises as to whether capital receipt can be regarded as income. The compensation for repudiation of service agreement or for loss of office or employment or cessation of business is a capital receipt though payment may be entirely, voluntary and the recipient may have no any repeat payment has no legal right to any compensation at all. The proposition is supported by the following decisions:
CIT v E. D. Sheppard (48 ITR 237) (SC);
CIT v Vazir Sultan & Sons (36 ITR 175, 185) (SC);
P. H. Divecha v CIT (48 ITR 222) (SC);
W.A. Guff v CIT (31 ITR 826) (Bom.);
Helen Rubber Industries Ltd. v CIT (36 ITR 544) (Ker.), reversed on
another point CIT v Helen Rubber Industries Ltd. (44 ITR 714) (SC);
CIT v Shaw Wallace (6 ITC 178) (PC);
CIT v P. K. Das (34 ITR 729) (Cal.);
CIT v Pran Jiban Jaitha (52 ITR 108) (Cal.); and
Chibbett v Joseph (9 TC 48).
Taxability of income and capital receipt:
The income of a previous year is always subject to tax in the assessment year. Thus, income is always taxable unless exempted. However, the capital receipt shall not be subject to tax unless expressly taxed. A question arises as to whether the sales tax subsidy received from the State Government under the Scheme is a capital receipt or revenue receipt.
3.7.1. Capital receipt not subject to tax:
The Bombay High Court, being Jurisdictional High Court, in Sadichha Chitra V/s. CIT (189 ITR 774) while dealing with the question as to whether the receipt is revenue receipt or capital receipt held as under:
“If an amount received by an assessee could not be characterised as a trade receipt and was in the nature of a grant made by the Government not amounting to a trade receipt, receipt of such grant by the assessee-firm could not constitute a revenue receipt.”
(underlined and bold for emphasis)
The Hon‟ble Supreme Court in Padmaraje R. Kadambande vs. CIT (195 ITR 877), while dealing with the question as to whether the allowance received by the assessee under the Huzur order dated April 8, 1947 which was ratified subsequently post-merger of the territories vide Bombay Merged Territories Miscellaneous Alienations Abolition Act, 1955 held that the capital receipt is not income within the meaning of section 4 of the Act and hence not at all chargeable under the Act. The receipt which is neither “Profit” nor “Income” and which does not have any element thereof embedded therein, cannot be the part of the profit as per the profit and loss account prepared in terms of Part II of Schedule VI to the Companies Act.
In the present case, the Appellant has received the sales tax subsidy which is a pure and simple capital receipt since the incentives has been granted to the Appellant to accelerate industrial development and generate employment opportunities in the specified backward area as held by the Apex Court in various decisions, thus, it does not have any “income” or
“profit” element embedded in it. Therefore, it is humbly submitted that the impugned subsidy is not income and as such is outside the scope of the charging section, both, under the normal provisions of the Act, as also under the MAT provisions of the Act.
Subsidy when capital receipt not subject to tax:
The Supreme Court in CIT Vs. P. J. Chemicals Ltd (210 ITR 830) while considering the question as to whether the character and nature of a subsidy was really intended to subsidies the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and established industries held as under:
“Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a major adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to make any portion of the “actual cost”. The expression “actual cost” in section 43 (1) of the Income-tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from “actual cost”. The amount of subsidy is not to be deducted from the “actual cost” under section 43 (1) for the purpose of acquisition of depreciation, etc.”
(underlined and bold for emphasis)
In the above decision, the Apex Court held that the subsidy received by the assessee is capital in nature and need not be deducted from the actual cost of asset, post consideration of the object with which the subsidy was granted to the assesse.
In the present case, the subsidy is received by the Appellant Company for Mega expansion of the existing company which has set up eligible Unit in notified backward area under the Scheme. However, the subsidy is received subsequent to expansion i.e. after the commercial production by linking the quantification of payment to admissible fixed capital investment made by the Appellant Company and is paid based on actual amount of tax (sales tax and, now GST) collected by the Appellant Company. Therefore, merely because the payment of subsidy is postponed after the setup of Unit under Mega Project under the Scheme and commencement of commercial production would not make the subsidy as revenue in nature but, may be treated as capital in nature.
The Supreme Court in its latter decision in Sahney Steele and Press Works Ltd versus CIT (228 ITR 253) while considering the question as to whether refund of sales tax on raw materials, machinery and finished goods, levied by the State Government be treated as capital or revenue in nature held as under:
“Held, dismissing the appeal, that under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to shareholders. But the assessee was free to use the money in its business entirely as it like and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, bringing into existence and the new asset. The subsidies were granted year after year, only after the 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 the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly.” (Underlined and bold for emphasis)
Very recently, the Hon‟ble Supreme Court in CIT Vs. Ponni Sugars and Chemicals Ltd (306 ITR 392) has once again considered the question about the nature of subsidy received by the assesse and held as under:
“The character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidies granted. In other words, one is to apply the purpose test. The point of time at which the subsidies paid is not relevant. The source is immaterial. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue on account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit than the receipt of the subsidy would be on capital account.”
(Underlined bold and italics for emphasis)
The Supreme Court in its recent decision in CIT v. Chaphalkar Brothers (400 ITR 279) has once again considered the question as to whether subsidy received would be treated as capital or revenue nature and held as under:
“The fact that the subsidy kicks in only after the multiplexes start functioning and issue tickets on which entertainment duty is then waived, would not mean that the object of the subsidy is really in the nature of a helping hand for running of the day-to- day business of the multiplexes. That the object is carried out in a particular manner is irrelevant. The subsidy is capital in nature and not taxable.
Since the subsidy scheme in the West Bengal case is similar to the scheme in the Maharashtra case, being to encourage development of multiplex theatre complexes which are capital intensive in nature, and the entertainment tax collected is to be retained by new multiplex theatre complexes for a period not exceeding four years, the subsidy in those cases also would be capital in nature.”
(Underlined and bold for emphasis)
The Bombay High Court in CIT v. Reliance Industries Ltd (339 ITR 632) held as under:
“The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account.” (Underlined and bold for emphasis)
The Calcutta High Court in CIT v. Shyam Century Ferrous Ltd. (386 ITR 477) while dealing with the question as to whether sales tax subsidy shall be treated as part of book profit or not held that since the reserve was not created by debiting the profit and loss account, the assessing officer had no power to go behind the accounts and, therefore, the assessing officer erred in adding amount of excise duty refund subsidy while computing book profit under section 115JB.
The Gujarat High Court in CIT v. Narmada Clean Tech Ltd. (446 ITR 366) while dealing with a question as to whether sales tax subsidy shall be treated as part of book profit or not held that no error of law is committed by the ITAT as well as the CIT(A), while deleting the addition of an amount of Rs. 3.87 crore by treating the same under the capital subsidy.
Moreover, it is submitted that the issue of subsidy received is capital in nature is not under dispute as both the lower authorities have accepted the same. The only dispute raised by lower authorities is whether the capital subsidy can be reduced from book profit u/s 115JB when the same has been credited to P & L account.
Submissions as to treatment of subsidy while computing book profit under section 115JB of the Act irrespective of exclusion provision under Explanation 1 to sub-section (2) of section 115JB of the Act:
The Kolkata High Court in its recent decision in PCIT V/s. Ankit Metal & Power Ltd. (416 ITR 591) while dealing with the question as to whether the incentive received by the assesse on account of “interest subsidy” under the West Bengal Incentive Scheme, 2000 and “power subsidy” under the West Bengal Incentive to Power Intensive Industries Scheme, 2005 as capital receipt and not revenue receipt and whether the same shall be excluded in computation of the book profit under section 115JB of the Act, held that the impugned incentives are “capital receipts” and not income and same shall be excluded while computing the book profit under section 115JB of the Act specifically when such receipts are capital receipts and did not fall within the definition of “income” under section 2(24) of the Act.
The specific finding of the High Court reads as under:
“Held, dismissing the appeal, (i) that according to the West Bengal Incentive Scheme, 2000 and the West Bengal Incentive to Power Intensive Industries Scheme, 2005 the subsidies were granted with the sole intention of setting up new industry and attracting private investment in the State of West Bengal in the specified areas which were industrially backward and hence the subsidies were of the nature of non-taxable capital receipts. Thus according to the “purpose test” laid out by the Supreme Court and the High Courts the subsidy should be treated as a capital receipt in spite of the fact that the computation of “power subsidy” was based on the power consumed by the assessee. Once the purpose of a subsidy was established, the mode of computation was not relevant. The mode of computation of form of subsidy was irrelevant. The mode of giving incentive was reimbursement of energy charges. The nature of subsidy depended on the purpose for which it was given. The entire reason behind receiving the subsidies was for setting up of a plant in the backward region. Therefore, the incentive subsidies of interest subsidy and power subsidy received by the assessee were “capital receipts” and not “income” liable to be taxed in the assessment year 2010-11. The amendment to the definition of income under section 2(24) wherein sub-clause (xviii) has been inserted including “subsidy” for the first time by the Finance Act, 2015 with effect from April, 2016, i.e., assessment year 2016-17 has prospective effect and has no effect on the law on the subject applicable to the assessment years in question.”
(underlined, bold and italics for emphasis)
The Mumbai Tribunal, being jurisdictional Tribunal in ACIT Vs. JSW Steel Ltd. (180 ITD 505), while dealing with the question as to whether when a particular receipt is exempt from tax under the Act then the same cannot be considered for the purposes of computation of book profit under section 115JB of the Act held that such receipt shall be excluded while computing the book profit. The facts of this case were as under:
The brief facts of the issue in question in cross objection filed by the assessee were that the assessee had received a sales tax subsidy of Rs. 36,15,49,828/- from the Government of Karnataka for setting up a new industrial unit in the backward area of the State. The refund of sales tax subsidy was routed through the profit and loss account and hence, the same was considered as part of the book profits u/s 115JB of the Act. Subsequently, the assessee realized that sales tax subsidy being capital receipt as held by the Ld. CIT(A), the same is not taxable under the MAT provisions and accordingly, the issue was raised before the Tribunal. Based on the aforesaid facts, the Tribunal decided the issue in favour of the assessee. The specific finding of the Tribunal reads as under:
“A receipt exempt from tax under Income tax law, cannot be considered for purpose of computation of book profit under section 115JB, hence sales tax subsidy received by assessee being capital in nature was to be reduced from book profit computed under section 115JB.” (Bold for emphasis)
The Kolkata Tribunal in SICPA India (P) Ltd. Vs. DCIT and vice versa (186 TTJ (Kol.) 289), while dealing with the question as to whether the excise duty exemption received by the assessee was in the nature of capital receipt and, therefore, not includable in taxable book profit under section 115JB of the Act specifically when there is no such provisions stipulated in the Explanation 1 to section 115JB of the Act held that such subsidy shall be treated as capital receipt and shall be excluded while computing the book profit under section 115JB of the Act even though there is no specific exclusion in the Explanation 1 to the said section. The facts of this case were as under:
The assessee availed the excise duty exemption in respect of a new unit situated in the notified area of Sikkim. In the audited account, the said incentive was shown under the head revenue grant from Government which was clubbed and included under the head other income in Schedule 14 forming part of the financial statement. In the revised return, the assessee excluded excise duty exempt in the computation of book profit under section 115JB of the Act by relying on the decision of the Supreme Court in Ponni Sugars and Chemicals Ltd.‟s case (supra). The first Appellate Authority treated the said Central Excise exemption as capital receipt in nature and excluded the same from the book profit. On appeal by the Revenue in ITA No. 933/Kol/2012, the Tribunal held as under:
“26. The admitted factual and legal position in the present case is that subsidies in question are not in the nature of income. Therefore, they cannot be regarded as income even for the purpose of book profit under s. 115JB of the Act though credited in the P&L a/c and have to be excluded for arriving at the book profit under 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 under s. 115JB of the Act. We hold accordingly and dismiss ground No. 2 raised by the Revenue.”
Finally the Tribunal concluded as under:
“Conclusion: Incentive received by the assessee-company by way of excise duty exemption on setting up a new unit in the notified area of Sikkim is a capital receipt not chargeable to tax and therefore, it cannot be regarded as income even for the purpose of book profit under s. 115JB though credited in the P & L a/c and has to be excluded for arriving at the book profits.” (underlined, bold and italics for emphasis)
The Gauhati Tribunal in Sunrise Biscuit Co. (P.) Ltd. v. ITO (92 ITR
(T) 599) while dealing with a question as to whether sales tax subsidy shall be treated as part of book profit or not held that the subsidies in question should be excluded for the purpose of computing book profits u/s. 115JB of the Act.
Similar view is taken by the Courts in the following decisions:
Shivalik Venture (P) Ltd. v. Dy. CIT (70 SOT 92) (Mum – Trib);
Duke Offshore Ltd. v. Dy. CIT (45 SOT 399) (9 taxmann.com 214) (Mum.);
Dy. CIT v. Garware Polyester Ltd. (IT Appeal No. 5996/Mum/2013) (Mum. ITAT);
Kopran Pharmaceuticals Ltd. v. Dy. CIT (119 ITD 355) (Mum.);
ACTT v. Shree Cement Ltd. (IT Appeal Nos. 614, 615 & 635 (JP) of 2010);
Shree Cement Ltd. v. Addl. CIT (160 TTJ (Jp.) 529);
ACIT v. L. H., Sugar Factory Ltd. (ITA Nos. 417, 418, & 339/ LKW/2013) (Lucknow ITAT);
Dy. CIT v. Binani Industries Ltd. (82 taxmann.com 320) (Kol. – Trib.)
Hindustan Shipyard Ltd. v. DY. CIT (130 TTJ 213) (Vizag); and
B & B Infotech Ltd. v. ITO (IT Appeal No. 726 (Bang.) of 2014).
Based on the facts and the circumstances of the Appellant’s case, the settled legal position referred to above, the objects and intent of the statutory provisions of the Act, it is humbly submitted that the subsidies in question should be treated as capital subsidy and be excluded for the purpose of determination of book profits u/s 115JB of the Act.
Similarly, in the following decisions, the Court have held that the subsidy received not for running of the business but for setting up of the unit in the backward area or the subsidy received for setting up a multiplexes or theatres then, in that case, such subsidy can be treated as capital in nature and not revenue in nature:
DCIT vs. Inox Leisure Ltd. (351 ITR 314) (Guj.);
Shree Balaji Alloys vs. CIT (198 Taxmann 122) (J&K);
CIT vs. Tiruttani Co-op Sugar Mills Ltd. (322 ITR 59) (Mad.); and
CIT vs. Rasoi Ltd. (335 ITR 438) (Cal.).
Now, a question arises as to whether the impugned subsidy be reduced while computing the book profit under the MAT provisions of the Act:
The Mumbai Tribunal in the case of M/s. Bombay Dyeing & Manufacturing Co. ltd. Bearing ITA No. 4484/Mum/2019 wherein dealing with the identical scheme, it has been held that the same is capital in nature and needs to be reduced from book profits. Relevant decision para at 22 of the said decision.
The Kolkata Tribunal in DCIT Vs. Century Plyboards (India) Ltd. (187 ITD 35), while dealing with the question as to whether incentives/subsidies received by the assessee from the West Bengal State Government for setting up a new industrial undertaking in the said State by way of reimbursement of sales tax was in the nature of capital receipt and as such though credited in the profit and loss account shall be excluded and/or reduced while computing tax on the book profit under section 115JB of the Act held that the subsidy received by the assessee by way of refund of VAT and Excise duty for setting up new industries in States of Assam and West Bengal for development of industries and generation of employment opportunities in these States could not be regarded as income for the purpose of book profit even though the same was credited to the books of account.
The Calcutta Special Bench of the Tribunal in Sutlej Cotton Mills Ltd. v/s. ACIT (199 ITR 164), while dealing with the computation of book profit under section 115J of the Act held that a particular receipt, which is admittedly not an income, cannot be brought to tax under the deeming provisions of section 115J of the Act, as it defines the basic intention behind introduction of the provisions of section 115J of the Act. The specific finding of the Tribunal reads as under:
“In the case of capital gains, it is a receipt which is not taxable at all but for a deeming provision. Even the deeming provision is subject to exclusion in respect of certain receipts which fulfil certain conditions such as reinvestment. Section 115J has recognised this and has provided in Explanation, clause (f), item (ii), that the amounts falling under Chapter III are to be excluded. When an amount which forms part of the book profit itself cannot be taxed under section 115J when it does not have the income character, it has to be accepted that, when what is routed through the profit and loss account and carried to reserve is of a capital nature and does not have an income character, it cannot be added back to the book profits merely because of the enabling provision in the Explanation to section 115J for the purpose of imposing a tax thereon.” (underlined and bold for emphasis)
The Special Bench further considered the history of the MAT provisions and held as under:
“The legislative history shows that the tax under section 115J was with reference to the business profit as it was in replacement of section 80VVA which sought to reduce the deductions available in computing the income from business. When section 80VVA was introduced in 1983-84, the intention was to restrict the various tax incentives and concessions available in computing the income from business to 70 per cent. thereof. Significantly, the deduction under section 80T in respect of capital gains was not one of the items of concession or tax rebate which was to be restricted under that section. This shows that exemption of capital gains was not intended to be restricted. Subsequently also when that section was replaced by section 115J, the object was to introduce the provision whereby every company will have to pay a minimum corporate tax on the profits declared by it in its own accounts. These profits can only be those which are assessable as income under the Act. It is now well-settled that, in the interpretation of statutes, one has to adopt such a construction as will promote the general legislative purpose underlying the provision.” (underlined and bold for emphasis)
Submissions as to object of section 115JB of the Act:
The Hon’ble Supreme Court in its subsequent decision rendered in Indo Rama Synthetics (1) Ltd. v. CIT (330 ITR 363) held that, the object of MAT provisions is to bring out the true working result of the companies. Based on the various decisions quoted in the preceding paragraphs it can be seen that the courts, including the Apex Court, have held that, the subsidies received by the assessees 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. The Supreme Court further find merit in the assessee’s claim that the subsidies being capital in nature, deserves to be excluded from the computation of book profit u/s 115JB of the Act. The specific finding of the Apex Court reads as under:
“Clauses (i) to (vii) of the Explanation to section 115JB(2) of the Income-tax Act, 1961 represent items of reduction from the net profits. Clause (1) mandates reduction for the amounts withdrawn from the reserves earlier-created, provided such amounts are credited to the profit and loss account. Clause (1) contemplates only those reserves which actually affect the net profits as shown in the profit and loss account. The object of clauses (i) to (vii) is to find out the true working result of the assesse company. Only if the reserves created have gone to increase the book profits in any year when the provisions of section 115JB are applicable, would the assessee be entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to the profit and loss account.” (underlined and bold for emphasis)
The Supreme Court in Indo Rama Synthetics (India) Ltd. Vs. CIT (supra), further while dealing the question as to whether the amount transferred from revaluation reserve and the set off against the amount of depreciation debited to the profit and loss account can be excluded in terms of clause (i) of the Explanation to sub-section (2) of section 115JB of the Act read with proviso considered the object of inserting clauses (i) to (vii) of the Explanation to the said section.
The Supreme Court held that the object of clause (i) to (vii) is to find out the true working result of the assessee company. Only if the reserves created have gone to increase the book profit in any year when the MAT provisions are applicable, the assessee would be entitled to reduce the amount withdrawn from such reserve if such withdrawal is credited to the profit and loss account.
Thus, the Supreme Court held that MAT provision is to bring out the true working result of the assessee company. As a consequence, the subsidies which are capital in nature are not income and, therefore, not subject to tax under the Act. Hence, such receipts should be excluded while computation of the book profit.
The Kolkata Tribunal in DCIT v. Century Plyboards India Ltd. (supra) wherein after considering the above decisions of Supreme Court, the Tribunal held that though the subsidy has been credited to the profit and loss account the same shall be excluded while computing the book profit under section 115JB of the Act. The specific finding of the Tribunal reads as under:
“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. v. CIT. [2002] 122 Taxman 562/255 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 (1) Ltd. v. CIT [2011] 9 taxmann.com 25/196 Taxman 539/330 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.”
(underlined and bold for emphasis)
The Kolkata Tribunal in DCIT v/s. Century Plyboards (India) Ltd. (187 ITD 35), while dealing with the question as to whether the capital subsidies can be excluded from the computation of the book profit and following the decision of the Supreme Court in Indo Rama Synthetics (India) Ltd. (supra) held as under:
“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.” (bold for emphasis)
The Mumbai Bench of the Tribunal in Shivalik Venture (P) Ltd. v. Dy. CIT (70 SOT 92), 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 under s. 2(24) of the Act and since it does not form part of the total income under 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 under s. 115JB of the Act, held as under:
“26. We shall now examine the scheme of the provisions of s. 115JB of the Act. It is pertinent to note that the provisions of s.10 list 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 s. 2(24) of the Act, but they are not included in total income in view of the provisions of s. 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 under s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Expln. 1 to s. 115JB specifically provides that the amount of income to which any of the provisions of s. 10 (other than the provisions contained in cl. (38) thereof) is to be reduced from the net profit, if they are credited to the P&L a/c. 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 under 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 IT Act, cannot also be included in book profit under s. 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.”
Similar view is taken by Kolkata Tribunal in DCIT v. Emami Biotech Ltd. (ITA No. 1915/KOL/2017 dated 29-3-2019).
The Kolkata Tribunal in DCIT v/s. Binani Industries Ltd. (178 TTJ (Kol.) 658), dealt with a question as to whether receipt on account of forfeiture of share warrants, being a capital receipt, would be liable for taxation under section 115JB of the Act, the Tribunal after referring to the following decisions held that:
“(i) the object of Minimum Alternate Tax (MAT) provisions incorporated in 115JB of the Act was to bring out real profit of companies and the thrust was to find out real working results of company.
Inclusion of receipts 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.
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 31st March, 2009. P & L a/c prepared in accordance with Parts 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 P & L a/c of assessee. Profits arrived after such adjustment, should be considered for purpose of computation of book profits under s. 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to s 115JB of the Act.”
(underlined, bold and italics for emphasis)
Similar view is taken by the Courts in the following decisions:
Indo Rama Synthetics (I) Ltd vs. CIT (supra);
Apollo Tyres Ltd. vs. CIT (supra);
Rain Commodities Ltd. v/s. Dy. CIT (131 TTJ (Hyd.) (SB) 514);
ACIT v/s. L.H. Sugar Factory Ltd. and vice versa (in ITA Nos. 417. 418 and 339/Lkw/2013); and
Shivalik Venture (P) Ltd v/s. Dy. CIT (supra).
The Lucknow Bench of the Tribunal in ACIT v/s. L.H. Sugar Factory Ltd. and vice versa (in ITA Nos. 417. 418 and 339/Lkw/2013), 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.
A question arises as to what is the nature of “sales tax subsidy” in the present case:
The Appellant invites Your Honour‟s kind attention to the Preamble of the Scheme which is enclosed at page no. 129 of the PB (Please see internal page no. 2 of the Scheme). It can be seen from fifth line in the third paragraph under the heading Preamble that the object of the Scheme is the regional development i.e., development of the backward area and generation of employment. The said objective is reproduced hereunder:
“The State has declared the new Industrial, Investment, Infrastructure Policy 2006 to ensure sustained industrial growth through innovative initiatives for development of key potential sectors and further improving the conducive industrial climate in the State, for providing the global competitive edge to the State’s industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced Regional Development and Employment Generation through Greater Private and Public Investment in industrial development. The Package Scheme of Incentives 2007 outlines the eligibility criteria, quantum of incentives and monitoring mechanism for administering the incentives.”
(underlined and bold for emphasis)
Based on the aforesaid object it can be seen that, if the subsidy is granted under the Scheme for setting up the unit in the specified backward area then, in that case, such subsidy would be treated as capital in nature.
It is to be noted that both the AO and CIT(A) in the present case has accepted the fact that the impugned subsidy is “capital in nature”. This fact can be evident from the para 5.2 of the assessment order and para 4.1.2 of the CIT(A) order. From this paragraph, it can be seen that the AO has not made any disallowance with respect to the sales tax subsidy though claimed as “capital receipt” and deducted from the “total income” offered to tax in the return of income by the Appellant. Needless to add, the AO has dealt with the issue of sales tax subsidy vide paragraph 5 to 5.8. given at page no. 8 to 13 of the assessment order.
Similarly, the CIT(A)-3 vide second last line of the paragraph 4.1.2. given at page no. 7 of the order held that the impugned subsidy received by the Appellant is capital in nature. Thus, it can be seen that there is not dispute with respect to the fact that both the lower authorities have accepted that the impugned subsidy received by the Appellant for setting up of unit in the specified backward area under the Package Scheme of Incentive and is capital in nature. Therefore, the sales tax subsidy is to be reduced from book profit.
Meaning of Non-Obstante clause in section 115JB of the Act:
The Calcutta Special Bench of the Tribunal in Sutlej Cotton Mills Ltd. V/s. ACIT (199 ITR 164), while dealing with the non-obstante clause contained in the MAT provisions held as under:
“The non obstante clause with which this section begins could only mean that the other sections which impose tax on book profit alone are to be ignored and not that the section which deems a capital receipt as income should be taken as part of the book profit for the purpose of the section, more so when section 45 declares that it cannot be taken as income if section 54E is attracted. Hence capital gains which is not chargeable even as deemed income because of section 54E, cannot be brought to tax as part of the book profit under the Explanation to section 115J.”
(underlined, bold and italics for emphasis)
From the above finding of the Special Bench, it can be seen that the non-obstante will have overriding effect over the other section which imposes tax on the book profit alone hence, are to be ignored and not that the capital receipt which is not income at all shall be considered as income for the purposes of the book profit.
It is the real profit which is subject to tax for the purposes of MAT provisions:
The Mumbai Tribunal, being the Jurisdictional Tribunal, in Hitkari Fibres Pvt. Ltd v/s. DCIT (90 ITD 654) while dealing with the question as to whether the amount written back (ie. Credited to profit and loss account) can be reduced from the book profit, held that MAT is levied on the real book profit which have been earned by the assessee and not on artificial income, which have not accrued to the assessee but has been credited to profit and loss account as per the accounting principles. The specific finding of the High Court reads as under:
“The intention of the legislature is to charge minimum alternate tax on the real profits and not on artificial profits.”
Submission as to Amendment to clause (24) of section 2 of the Act:
The Finance Act 2015 has amended clause (24) of section 2 of the Income- tax Act, 1961. By virtue of this amendment sub-clause (xviii) has been inserted to clause (24) of section 2 of the Act so as to provide that income shall include assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concessions or reimbursements (by whatever name called) by the Central Government or State Government. However, while inserting the said sub-clause the subsidy or grant or reimbursements which are taken into account for determining the actual cost of the asset in accordance with the provisions of the Explanation 10 of section 43(1) of the Act shall be excluded. Subsequent to aforesaid amendment, the Central Board of Direct Taxes (“CBDT”) had issued a Circular No. 19 of 2015 dated November 27, 2015. Vide paragraph 5.1 running through paragraph 5.3 whereby it is clarified by the CBDT that sub-clause (xviii) to clause (24) of section 2 has been amended to cover subsidies or grants or reimbursements other than such subsidies etc., covered by Explanation 10 to section 43(1) of the Act. The relevant extracts of the aforesaid circular is given hereunder:
“5.1 Alignment of provisions relating to taxation of Government grants with the provisions of Income Computation and Disclosure Standards (ICDS).
Sub-section (2) of section 145 of the Income-tax Act provides the Central Government may notify Income Computation and Disclosure standards (ICDS) for any class of assesses or for any class of income. The Central Board of Direct Taxes (CBDT) notified ICDS-I to ICDS-X vide Notification No.S.O.892(E),dated March 31, 2015 after vide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to depreciable asset shall be recognized as income in accordance with the provisions of the said ICDS. The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidance for treatment of Government grants relating to acquisition of an asset. However, there was no specific guidance available under the provisions of the Income-tax Act for treatment of other Government grants. In order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section 2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive on duty drawback or waiver or concessions or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assesse other than the subsidy or grant or reimbursement which is taken into account of determination of the actual cost of the asset in accordance with the provisions of explanation 10 to clause (1) of section 43 of the Income -tax Act.
Applicability: – This amendment takes effect from April 1, 2016 and would accordingly apply to assessment year 201617 and subsequent assessment years.”
(underlined, bold and italics for emphasis)
From the aforesaid Circular of the CBDT has very clarified that the subsidy, etc., covered by the Explanation 10 of sub-section (1) of section 43 of the Act is outside the scope of sub-clause (xviii) of clause (24) of section 2 of the Act. In other words, subsidies which are subject to adjustments against the cost of assets, then, such subsidies cannot be treated as income but, capital receipt. Therefore, impugned subsidy which is adjusted against the cost of assets can be treated as capital in nature.
The appellant has duly reduced the subsidy from the cost of the assets. The above reduction has been accepted by the AO as well as CIT(A) in their respective orders and accordingly, the same is not under dispute. Further, it is pertinent to mention here that AO himself has reduced the subsidy from the cost of the assets u/s 43(1) while passing the order for AY 2013-14 u/s 154 dated 23.11.2016 and for AY 2014-15 u/s 143(3) dated 24.11.2016 since the assessee had not suo-moto reduced the same in those years.
It is the settled legal position that the orders, instructions, circulars, directions, etc., issued by the Board are binding on the Officers of the Tax Department. The proposition is supported by the following decisions:
In the following decisions courts have held that the orders instruction, etc., issued by the Board are binding on the officer of the department and not on assessees or appellate authorities:
(148 ITR 149) (Cal);
(205 ITR 589) (AP);
(147 ITR 332) (Mad);
(12 ITR 385) (La);
(16 ITR 325) (P);
(16 ITR 433 ) (Mag);
(17 ITR 426) (Cal);
(23 ITR 87) ( SC);
(45 ITR 107);
(95 ITR 151) (Del);
(102 ITR 622) (Mad);
(136 ITR 645) (Del);
(143 ITR 29) (Ker);
(163 ITR 659) (Karn.);
(179 ITR 283) (P&H); and
(230 ITR 622) (Karn.).
In the following decisions courts have held that circulars are binding on the Revenue:
Uco Bank Ltd. Vs CIT (237 ITR 889)(SC);
Anjum M.H. Ghaswala (252 ITR 1) (SC);
K.P. Varghese (131 ITR 597); and
Dhiren Chemicals (254 ITR 554).
In the following decisions courts have held that even if it is a benevolent circular it is binding on the authorities of the tax department:
Navnitlal C. Jhaveri (56 ITR 198 at 203) (SC);
Ellerman Lines Ltd versus CIT (82 ITR 913 at 920-1) (SC);
K.P. Varghese (131 ITR 597); and
UCO Bank versus CIT (237 ITR 89) (SC).
The aforesaid amendment carried out by the Finance Act, 2015 to section 2(24) of the Act is applicable prospectively from Assessment Year 2016-17 and onwards.
Based on the facts and circumstances of our case, the objects or intent of the statutory provisions of the Act and settled legal position referred to above and the preceding paragraphs, the impugned sales tax subsidy is capital in nature and this fact has been accepted by both the lower authorities, and, therefore, the Appellant humbly submits that the lower authorities be directed to follow the above Circular of the CBDT and apply the same to the Appellant‘s case and drop the proposal of treating the subsidy as the Appellant‘s income for the purposes of computing “book profit” under section 115JB of the Act.
Submissions as to entries in the books of accounts are not relevant for determining the tax consequences:
The Supreme Court in the case Kedarnath Jute Mfg. Ltd v. CIT (82 ITR 363) held that entries in the books of accounts are cannot determine the tax consequences. The facts of this case were as under:
The assessee-company, which followed the mercantile system of accounting incurred a liability of Rs. 1,49,776 on account of sales tax determined to be payable by the sales tax authorities on the sales made by it during the calendar year 1954, the previous year relevant to the assessment year 1955-
56. The sales tax demand was raised pending the income- tax assessment for that year. The Income-tax Officer rejected the assessee’s claim for deduction of that amount on the ground, (1) that the assessee had contested the sales tax liability in appeals, and (ii) that it had made no provision in its books with regard to the payment of that amount. The appeals to higher authorities or courts taken by the assessee contesting its liability to pay the sales tax ultimately failed. On appeal, the Supreme Court held as under:
“Held, that the moment a dealer made either purchases or sales which were subject to sales tax, the obligation to pay the tax arose. Although that liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The assessee, which followed the mercantile system of accounting, was entitled to deduct from the profits and gains of its business liability to sales tax which arose on sales made by it during the relevant previous year.
The assessee was entitled to the deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. That liability did not cease to be a liability because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail. Further, the fact that the assessee had failed to debit the liability in its books of account did not debar it from claiming the sum as a deduction either under section 10(1) or under section 10(2)(xv).
Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.”
(underlined and bold for emphasis)
The Bombay High Court, being jurisdictional High Court, in CIT vs Bhor Industries Ltd. (264 ITR 180) on a question whether expenditure which has been deferred in the books of accounts can be allowed as revenue expenditure, held that such expenditure to be treated as revenue expenditure in the year in which it is incurred irrespective treatment in the books of account. The facts of this case were as under:
During the accounting year ending March 31, 1996, the company claimed the voluntary retirement scheme expenses amounting to Rs. 10,02,23,735 incurred at Borvile plant. As per the annual report, the voluntary retirement scheme expenses were to be written off within a period of 60 months. In the past, the company had incurred the voluntary retirement scheme expenses for other plants and under the books of the company, such expenses were written off over a period of 36 months. Therefore, when for the accounting year ending March 31, 1996, the voluntary retirement scheme expenses amounting to Rs. 10,02,23,735 incurred for Borvile plant came to be written off within 60 months, the officer disallowed the said expenses to the tune of Rs. 9,68,82,917. In other words, the Assessing Officer amortised the said expenses over a period of five years and allowed deduction only to the tune of Rs. 33,40,818 for the accounting year ending March 31, 1996, and the Assessing Officer disallowed the claim for the balance amount. Consequently, the Assessing. Officer came to the conclusion that the balance amount of Rs. 9,68,82,917 constituted excess claim, which was disallowed. Being aggrieved, the assessee preferred an appeal before the Com- missioner of Income-tax (Appeals), who agreed with the Assessing Officer and, accordingly, took the view that once the management in its books spread over the amount of Rs. 10,02,23,735 over a period of 60 months then, the Department was right in not giving the full deduction of Rs. 10,02,23,735 during the assessment year in question. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. The Tribunal took the view that the voluntary retirement scheme expenses were not incurred for acquiring any asset. That, it was incurred in order to reduce the cost. That, under the VRS the liability stood ascertained, quantified and paid. That the liability was discharged during the accounting year ending March 31, 1996. The Tribunal also found that the VRS had been approved by the Commissioner of Income- tax. In the circumstances, the appeal was. allowed. Being aggrieved by the decision of the Tribunal, the matter has come before us in appeal under section 260A of the Income-tax Act.
On appeal by the Revenue, the High Court held as under:
“(i) That the said expenses were incurred by the assessee to save expense. This was not refereable to any income-yielding asset. It must be allowed in its entirety in the year in which it was incuned and it could not be spread over a number of years even though the assessee had written it off in its books over a period of years. Further, the assessee had incurred the said expenses not to the tune of Rs. 10,02,23,735 but only Rs. 6,79,06,431. The remaining expenses were on account of gratuity, bonus, leave travel allowance, etc., which could not be spread over by the Assessing Officer over a period of sixty months. Therefore, the expenses relating to voluntary retirement scheme were a revenue expenditure and were an allowable deduction.”
Similar view is taken in courts in following decisions:
UCO Bank v CIT (237 ITR 889) (SC);
Kedamath Jute Mfg. Co. Ltd. v CIT (R 1) (SC);
CIT v Tata Chemicals Ltd. (256 ITR 395) (Bom);
CIT v Berger Paints (India) Ltd (254 ITR 503) (Cal);
CIT v Bhor Industries Ltd. (264 ITR 180) (Bom);
CIT v Fenner (India) Ltd. (292 ITR 605);
CIT v Saravana Spinning Mills (P) Ltd. (292 ITR 655)(Mad); and
CIT v Darius Pandole (330 ITR 485) (Bom).82 ITR 363) (SC)
Sutlej Cotton Mills Ltd. v CIT (116 IT
From the ratio laid down by the courts in the aforesaid decisions it is very clear that entries in the books of account would not be a decisive factor for determining the tax implications under the Act.
Based on the above submissions, the facts and the circumstances of the Appellant’s case, the settled legal position referred to above, the objects and intent of the statutory provisions of the Act, merely because the sales tax subsidy is credited to in the books of accounts based on the Ind AS 20 as also based on the opinion of EAC of the ICAI the same under no circumstances be treated as revenue in nature for the purposes of the Income-tax Act and the character of the subsidy shall continue to be regarded as capital in nature and, therefore, the action of the lower authorities of treating the impugned subsidy as part of the book profit is not justified and such an action ought to be deleted.
Submissions based on Income Computation and Disclosure Standards (“ICDS”):
Section 145 of the Act provides for the method of accounting to be followed by an assessee.
Sub-section (1) of section 145 of the Act provides that income chargeable under the head “Profits and Gains from Business and Profession” shall be computed in accordance with either cash system of accounting or mercantile system of accounting. As per sub section (1) of section 128 of the 2013 Act a company is compulsorily required to follow mercantile system of accounting. The Appellant being a company is compulsory required to follow mercantile system of accounting with respect to its income and expenses, etc. Sub- section (2) of Section 145 of the Act provides that Central Govemment may notify in the Official Gazette from time to time, ICDS to be followed by any class of assessee. The Central Government pursuant to power given under sub-section (2) of section 145 of the Act has notified ICS which are required to be followed by assessees’, other than individual/HUF, who is not required to get accounts of the previous year audited in accordance with provisions of section 44AB of the Act. The Central Government has notified ICDS VII relating to “government grants”. Now, the Appellant invites Your Honours kind attention to paragraph 6 of the ICDS VII, which is as under:
“1. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfilment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income.”
It can be seen from the preceding paragraph of ICDS which provides that when the government grant has been received with respect to non-depreciable asset then, in that case, it should be reduced from cost of non- depreciable assets.
It can be seen that the government grant related to depreciable and non-depreciable assets shall be required to be deducted from the actual cost of the assets. In the present case the sales tax subsidy has been received by the Appellant is not related to any depreciable assets but is received for the purpose of setting up industry in backward area. Therefore, aforesaid paragraph of ICDS is not applicable to the Appellant.
The Appellant invites Your Honours kind attention to paragraph 7 of ICDS VII, which reads as under:
“7. Where the Government grant is of such a nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total Government grant, the same proportion as such asset bears to all the assets in respect of or with reference to which the Government grant is so received, shall be deducted from the actual cost of the asset or shall be reduced from the written down value of block of assets to which the asset or assets belonged to.”
The said paragraph specifically provides that when the grant is not related to any particular assets then, in that case, the proportionate amount of grant shall be reduced from the value of the respective asset.
This itself justifies that grants which are capital in nature are not required to be routed through profit and loss account but by virtue of specific provisions under Ind AS vis-a-vis opinion of the EAC of the ICAI, the same were credited to profit and loss account.
In the present case, the Appellant has followed paragraph 7 as the sales tax subsidy received by it does not related to any of the asset, depreciable / non depreciable but is granted for the purpose of setting up industries in backward area. However, based on the treatment given in the paragraph 7 of ICDS VII, the Appellant has reduced the proportionate amount of the subsidy from the cost/WDV of the asset whether depreciable /non depreciable. The above reduction has been accepted by the AO as well as CIT(A) in their respective orders and accordingly, the same is not under dispute. Further, it is pertinent to mention here that AO himself has reduced the subsidy from the cost of the assets u/s 43(1) while passing the order for AY 2013-14 u/s 154 dated 23.11.2016 and for AY 2014-15 u/s 143(3) dated 24.11.2016 since the assessee had not suo-moto reduced the same in those years.
From the aforesaid facts, it can be seen that the impugned subsidy is capital in nature. Since the sales tax subsidy is capital in nature and not income even as per provision of ICDS, the action of the lower authorities of treating the same as part of the book profit for the purpose of MAT provisions of the Act is not justified and ought to be deleted.
Based on the facts and circumstances of Appellant’s case, submissions given in the preceding part of this submission, the objects and intent of the statutory provision of the Act and settled legal position referred to above, the impugned subsidy be treated as capital in nature and, ought to be reduced from the computation of the book profit.
Now coming to the issue related to treatment of these subsidies while computing book profit u/s 115JB, it is to be noted that the Hon’ble Apex Court in Apollo Tyres Ltd. v. CIT (255 ITR 273) held that the assessing officer 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.
Distinguishing of Apollo Tyres Ltd. (supra):
The Calcutta High Court in Ankit Metal & Power Ltd. (supra) has distinguished the decision of the Supreme Court in Apollo Tyres Ltd. V/s. CIT (255 ITR 273) while holding as under:
“31. In this case since we have already held that in the 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 the 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 Apollo Tyres 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 the 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 115JB of the Income-tax Act, 1961.”
Thus, the Calcutta High Court in Ankit Metal and Power Ltd. (supra) has categorically distinguished the decision of the Supreme Court in Apollo Tyres’ Case (supra) and held that when subsidy is not income within the meaning of section 2(24) of the Act, the question of treating the same as income either under the normal provisions of the Act or under MAT provisions of the Act would be contrary to the objects and intent of the statutory provisions of the Act. The position would be the same even after insertion of sub-clause (xviii) to clause (24) of section 2 of the Act as the said amended definition of income still excludes the capital subsidy from the definition of income.
Claim before the Appellate Authority:
The Calcutta High Court in Ankit Metal & Power Ltd. (supra) has distinguished the decision of the Supreme Court in Goetze India Ltd (Supra) by holding as under:–
“The third issue involved in the instant appeal which requires adjudication is whether the action of the Tribunal entertaining/ allowing the claim which was made by the assessee before the Assessing Officer by filing a revised computation instead of filing a revised return since the time to file the revised return had lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead of revenue receipts as claimed in original return. The Assessing Officer had denied this claim. The Revenue has attacked the order of the Tribunal by relying on the decision in the case of Goetze (India) Ltd. v. CIT reported in [2006] (284 ITR 323)(SC).”
In this regard the High Court held as under:
“(iii) That since the time to file the revised return had lapsed, for claiming that the incentive subsidies in question be treated as capital receipts instead of revenue receipts as claimed in the original return, following the decision in CIT v. BRITANNIA INDUSTRIES LTD. [2017] 396 ITR 677 (Cal) as well as the view taken that the subsidies were capital receipts and not income liable to tax, the Tribunal in exercise of its power under section 254 was justified in allowing this claim though no revised return under section 139(5) was filed before the Assessing Officer.”
This, it can be seen that the High Court while dealing with the question as to whether the action of the Tribunal in entertaining/allowing the claim which was made by the assessee before the assessing officer by filing a revised computation instead of filing a revised return, since the time to file the revised return has lapsed for claiming to treat the incentive/subsidy under the scheme of State of West Bengal held that, the decision of the Supreme Court in Goetze (India) Ltd. v/s. CIT (supra) does not help the revenue as the Supreme Court in this case has made it clear that its decision was restricted to the power of the assessing authority to entertain a claim of reduction otherwise than by a revised return and did not impinge on the power of the Appellate Tribunal under section 254 of the Act.
Further, the Calcutta High Court in CIT v/s. Britannia Industries Ltd. (396 ITR 677), wherein it was held that the Tribunal has power to entertain the claim for deduction not claimed before the assessing officer by filing a revised return of income.
Decisions relied on by the CIT(A):
The CIT(A) vide its order relied on the decision of the Bombay High Court in CIT Vs. Veekaylal Investment Co. Pvt. Ltd. (249 ITR 597), wherein the Bombay High Court held that if the profit is not computed in accordance with Part II and Part III of the Schedule VI of the Companies Act, 1956, the assessing officer has power to re-compute such book profit. Thus, it can be said that if the assessing officer can amend the book profit, if it is not in accordance with Part II and Part III of Schedule VI, likewise even the assessee can re-compute the book profit for the purposes of section 115JB of the Act. The aforesaid proposition is supported by the following decisions:
DCIT Vs. Bombay Diamond Co. Ltd.;
Syndicate Bank Vs. ACIT (179 ITD 178) (Bang. Trib.); and
SICPA India (P) Ltd. vs. DCIT (supra).
In view of the above, it is submitted that the subsidy amount being capital in
nature, AO may be kindly be directed to be reduced from the income
computed u/s 115JB of the Act.
General submission as regard all grounds of Appeal:
The appellant submits that it doesn‟t wishes to press ground no. 2 for AY
2017-18 and ground no. 2 of AY 2018-19.”
12. On the other hand, the learned Departmental Representative vehemently submitted that provisions of section 115JB of the Act are self– contained code and no adjustments are possible which is not specified in the said section. He particularly averted that from the assessment year 2016–17, subsidies are considered part of the total income and the concept of capital receipt has been given a go bye. He drew our attention to provisions of Explanation–1 to section 115JB of the Act and the items to be reduced from book profit specified in clauses (i) to (viii) and submitted that reduction of subsidy is not envisaged in the provisions. Accordingly, the learned Departmental Representative vehemently stated that there is no scope to interfere in the order passed by the learned CIT(A) wherein the order of the A.O. has been upheld.
13. We have given a thoughtful consideration to the arguments made by the rival parties and perused the material available on record. We have also analysed the issues raised in a punctilious manner. After thread bare analysis, we find that the A.O. did not disturb the adjustment of sales tax subsidy of ` 11,99,56,136, against the cost of fixed assets, a copy of which is placed on record at Page–8 of the Paper Book and the same is reproduced below:–
Details of reduction of subsidy from cost of assets in AY 2017–18
| Sr. no. | Particular | Investment amount as per EC (in lacs) from 27.10.2009 to 31.03.2016 |
Addition investment post 31.03.2016 as per CA certificate |
Total investment | Ratio | Total deduction in IT depreciation schedule |
| 1. | Land | 4,272.31 | 256.71 | 4,529.02 | 18.83 | 2,25,88,896 |
| 2. | Civil Construction & Site Development | 9,850.45 | 1,388.10 | 11,238.55 | 46.73 | 5,60,53,283 |
| 3. | Plant & Machinery, Electricals, Technical know–how | 7,805.37 | 477.98 | 8,283.35 | 34.44 | 4,13,13,965 |
| Grand Total:– | 21,928.13 | 2,122.79 | 24,050.92 | 100.00 | 11,99,56,135 |
14. So, when such subsidy has been reduced from the written down value, it is no longer an income under section 2(24)(xviii) of the Act in the lines as enunciated supra and is a capital receipt. At this juncture, we deem it expedient to reproduce Para–45 to 51 of the Co–ordinate Bench decision of the Tribunal rendered in the matter of DCIT v/s Century Plyboards Pvt. Ltd., [2021] 187 ITD 35 (Kol. Trib.) decided on 04/11/2020.
“45 Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB. website that the Hon’ble Apex Court in the case of Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 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 (1) Ltd. v. CIT [20111 9 taxmann.com 25/196 Taxman 539-330 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 Ankit Metal and Power Ltd. (supra) 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 Appollo Tyres Ltd. (supra).
27. In this case since we have already held that in “Interest subsidy and Power subsidy is a relevant assessment year 2010-11 the ‘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 Appollo Tyres 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. (supra) wherein it has been held that the subsidy received by the assessee in form of excise duty exemption me for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not eliable 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 us.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 Ist 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/-, 260 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 (1) Ltd. v. CIT [2011] 330 ITB 336/9 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 [20101 40 SOT 265 (Hyd.) (SB). ITAT Luknow Bench in the case of ACIT v. L.H. Sugar Factory Ltd. and vice versa [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
(1) 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 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.
27. 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 us.1151B 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 as 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.18.82,79.547/- respectively are liable to be excluded from the computation of book profit u/s 115JB of the Act.
We also deem it fit to reproduce below Para–14.7 to 19.13 of the order dated 08/04/2024, passed by the Co–ordinate Bench of the Tribunal, Mumbai Bench, in IPCA Laboratories Ltd. v/s DCIT, [2024] 161 taxmann.com 511 (Mum.).
“14.7 We now come to the issue relating to treatment of these subsidies while computing book profit u/s 115JB. It is noted that, in the context of similar State Industrial Scheme, the Hon’ble Calcutta High Court in the case of Ankit Metal and Power Ltd. 416 ITR 591 has held that, the 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 Appollo Tyres 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 Appollo Tyres 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.”
14.8 We also rely on the decision of the coordinate bench of this Tribunal in the case of Sicpa India (P.) Ltd. v. DCIT 80 taxmann.com 87 involving identical facts and circumstances as found in the present case before us. In the decided case, 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 w/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. 11518(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. 1151B 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] 174 CTR 521/255 ITR 273/122 Taxman 562 (SC), Special Bench ITAT in the case of Rain Commodities Ltd. v. Dy. CIT [2010] 4 ITR(T) 551/40 SOT 265/131 TTJ 514 (Hyderabad) (SB), ITAT Luknow Bench in the case of ACIT v. L.H. Sugar Factory Ltd, and vice versa [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.
(ii) 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.
14.9 For the reasons set out above and respectfully following the decisions (supra), we uphold the order of Ld. CIT(A) excluding the subsidy received by the assessee for setting up new industry, by way of refund of excise duty from the computation of book profit u/s 115JB of the Act.
14.10 As far as the ld. CIT DR‟s contention regarding admission of fresh claim is concerned, we note that the had raised the claim in the abated AYs 2012-13 & 2014-15. It is noted that the Hon’ble Bombay High Losevin the decisions rendered in the cases of Pr. CIT v. JSW Steel Limited 270 Taxman 201 and CIT V. B. G. Shirke Construction Technology (P.) Ltd. 395 ITR 371 has held that, it is open for an assessee to lodge a new claim in a proceeding under section 153A which was not claimed in his regular return of income, provided the assessment stood abated as a consequence of the search. Also, the Hon’ble Bombay High Court in the case of CIT. Pruthvi Brokers & Shareholders (supro) after considering the decisions of the Hon’ble Supreme Court in the cases of Addl. CIT v. Gurjargravures (P.) Ltd., 111 ITR 1, Jute Corpn. of India Ltd. v. CIT 187 ITR 688, National Thermal Power Co. Ltd. v. CIT 229 ITR 383 and Goetze (India) Ltd. v. CIT (supra) has upheld the powers of the appellate authorities including Ld. CIT(A) to entertain and adjudicate additional claims which was not made by an assessee in the return of income.
14.11 We further note that, on similar set of facts & circumstances, identical contention was also raised by the Revenue before the Hon’ble Calcutta High Court in the case of Ankit Metal and Power Ltd. (supra). In the decided case also, the assessee had raised this plea for the first time before the Tribunal viz., the subsidy received under the State Industrial Scheme is capital in nature and therefore should be excluded from the book profit u’s 115JB of the Act. The Tribunal admitted this legal issue raised by the assessee and answered it in their favour. Before the Hon’ble High Court, the Revenue raised the following question for their consideration.
“(ii) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in accepting the claim of deduction by the assessee towards Interest subsidy’ and ‘Power subsidy under the aforesaid schemes by filing revised computation instead of revised return before the assessing officer for exclusion of the aforesaid receipts from the book profit under section 115 JB on the ground that the said subsidies do not constitute income under section 2(24) of the Income-tax Act, 19617.
14.12 The Hon’ble High Court answered the question in negative and in favour of the assessee by observing as under:–
“28. The third issue involve in the instant appeal which requires adjudication is whether the action of Tribunal entertaining/allowing the claim which was made by the assessee before the Assessing Officer by filing a revised computation instead of filing a revised return since the time to file the revised return was lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead of revenue receipts as claimed in original return. The Assessing Officer had denied this claim. Revenue has attacked the order of the tribunal by relying on the decision in the case of Goetze (India) Ltd. (supra).
29. This case does not help the revenue/appellant. In this case Supreme Court has made it clear that its decision was restricted to the power of the Assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under section 254 of the Income-tax Act, 1961. The Hon’ble Supreme Court in the said decision held as follows:
“ . . . . . . . . . In the circumstances of the case, we dismiss the Civil Appeal. However, we make it clear that the issue in this case is limited to the power of the Assessing Authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961.”
29.1 This judgment was followed by our Court in the case of Britannia Industries Ltd. (supra) holding that Tribunal has the power to entertain the claim of deduction not claimed before the Assessing Officer by filing revised return. Respectfully following the aforesaid decision as well as the view already taken by us in this case that the aforesaid subsidies are capital receipt and not an “income’ and not liable to Tax Tribunal in exercise of its power under section 254 of the Income-tax Act justified this claim though no revised return under section 139 (5) of the Act was filed before the Assessing Officer. We answer both the question Nos. 1 and 2 in negative and in favour of assessee.”
14.13 For the reasons set out above therefore, we do not find any merit in the legal plea raised by the Ld. CIT. DR contesting validity of admission of additional claim by the Ld. CIT(A). Overall thus, we see no reason to interfere with the order of Ld. CIT(A) on this issue and uphold his action of directing the AO to delete / reduce the excise duty subsidy both while computing income under normal provisions as well as book profit u’s 115JB of the Act. These grounds of the Revenue are therefore dismissed.”
16. Placing full reliance on the settled jurisprudence, we direct that the capital subsidy should be reduced for computation of book profit. Particularly in view of the excruciating fact that reduction of subsidy from written down value was accepted by the Assessing Officer and he did not tinker with the amount of depreciation claimed.
17. The key takeaways in holding the rationale is summarised below:–
i) The company is justified in raising additional claim of reduction of subsidy from computation of book profit though not claimed at the time of filing return of income;
ii) Upon verification of income tax return, it is clear that the amount of subsidy has been reduced from WDV for the purpose of computation of depreciation and as per Income Tax Act;
iii) Once the subsidy has been reduced to compute the actual cost of machineries & building, it can no longer be considered as income, even under section 2(24)(xviii) w.e.f. A.Y. 2016–17;
iv) Once it is not income, the same cannot be part of book profit, though it is shown in Profit & Loss Account, because capital receipt cannot be brought Page | 39 under the ambit of taxation even under the provisions of Minimum Alternate Tax. Entries in the books of account are not relevant;
v) The Department is not permitted to take diametric opposite stand once while computing depreciation and again while computing book profit on the same issue;
vi) Reduction from written down value leads to abatement of depreciation which in turn leads to higher taxable income. Again taxing the subsidy will lead to indirect double taxation which cannot be countenanced;
vii) Distinct lines of re asoning should be eschewed while computing total income under normal provisions and book profit under section 115JB.
18. Accordingly, ground no.1, is allowed.
19. Insofar as Ground no.2, is concerned, the assessee’s authorised representative did not wish to press this ground, hence, the same is dismissed as “not pressed”.
20. Ground no.3, being general in nature, hence, no separate adjudication is required.
21. In the result, appeal for the assessment year 2017–18 filed by the assessee is partly allowed.
ITA no.242/Nag./2023
Assessee’s Appeal – A.Y. 2018–19
22. The assessee has raised following grounds:–
“1. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in rejecting the additional legal claim of reduction of capital subsidy while computing the income u/s 115JB of the Act, for the reasons mentioned in the impugned order or otherwise.
2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in not allowing the deduction of sales tax subsidy of Rs. 10,34,44,301/- in computing the income u/s 115JB of the Act, for the reasons mentioned in the impugned order or otherwise.
3. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of ld. AO in making disallowance of depreciation aggregating to Rs.51,73,962/-, for the reasons mentioned in the impugned order or otherwise.
4. The appellant craves leaves to alter, amend, withdraw or substitute any ground or grounds or to add any new ground or grounds of appeal on or before the hearing.
23. The facts are similar with only variation in numerical figures, we hold that the decision in assessment year 2017–18 shall apply mutatis mutandis in this year also and hence grounds no.1 & 2, are allowed in favour of the assessee.
24. .For ground no.3, the learned A.R. did not press, hence, these grounds are dismissed as “not pressed”.
25. Ground no.4, is dismissed being general in nature.
26. In the result, appeal for the assessment year 2018–19 filed by the assessee is partly allowed.
27. To sum up, both the appeals for A.Y. 2017–18 and 2018–19 are partly allowed.
Order pronounced in the open Court on 09/09/2024
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