Education cess paid by assessee is not allowable as expense u/s. 37

DCIT Vs Aarti Drugs Ltd (ITAT Mumbai)

Held that education cess paid by the respondent-assessee is not allowable as an expenditure under Section 37 read with 40(a)(ii) of the Income Tax Act.

Facts- The assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-. CIT(A) after considering the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding assessment years deleted the disallowance towards interest expenditure u/s 14A r.w.r. 8D(2)(ii) on the basis that assessee’s own funds are adequate to cover the investments. As regard the disallowance made u/s 14A r.w.r. 8D(2)(iii), the learned CIT(A) restricted the disallowance to the dividend income earned by the assessee. Being aggrieved, the Revenue is in appeal before us.
Another issue raised by revenue is with regard to claim of education cess as allowable expenditure.

Conclusion- Held that we find that the Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. We further find that the Co-ordinate Bench of the Tribunal in assesee’s own case in Aarti Drugs Limited Vs. Addl. CIT, in ITA No. 6783-84/MUM/2014, vide order dated 10/02/2017, for the assessment years 2010-11 and 2011-12, following the principle laid down by the Hon’ble Jurisdictional High Court in aforesaid decision directed the deletion of addition made u/s 14A r.w.r. 8D(2)(ii). We find that the Hon’ble Jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue.

Held that education cess paid by the respondent-assessee would not be allowed as an expenditure under Section 37 read with 40(a)(ii) of the Act.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present appeal has been filed by the Revenue challenging the impugned order dated 31/08/2020, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–12, Mumbai, [“learned CIT(A)”], for the assessment year 2012–13.

2. In its appeal, the Revenue has raised the following grounds:–

“1. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in restricting the disallowance u/s 14A of the Income Tax Act r.w.r. 8D(2)(iii), to the extent of exempt Income received by the assesseeduring the year under consideration without appreciating the Circular No.5 of 2014 dated 11.02.2014 of CBDT.

2. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in holding that the assessee is entitled to claim 10% additional depreciation in the year under consideration ignoring the second proviso to section 32(1) of the Act, which clearly suggests the intention of legislature to give such additional depreciation for the yearin which the assets were put to use, but not in any succeeding year.

3. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in holding that the expenditure incurred by the assessee was a normal business expenditure towards sale of products and hence it is allowable as revenue expenditure ignoring the fact that the expenditure incurred towards obtaining “Certificate of Suitability (COS)” and filing of “Drug Master File (DMF)” are capital in nature as these expenses give enduring benefit to the business of the assessee spread over several years and therefore the Ld CIT(A) ought tohave held it as capital in nature.

4. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in ignoring the ratio laid down by the Hon’ble Supreme Court in the case of BallimalNavi Kishore Vs CIT reported in 224 ITR 414 (SC); in allowing the expenditure incurred towards obtaining COS and DMS as revenue expenditure.

5. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in allowing the prior period expenses of Rs. 78,572/-without appreciating the fact that such expenditure was not incurred oraccrued during the year under consideration.

6. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in allowing deduction u/s 80IA of the Act, which has been claimed by the assessee in appellate stage by way of filing a letter for the first time, ignoring the fact that the assessee has never made the claim of deduction u/s 801A in the return of income filed u/s 139 for the year under consideration.

7. On the facts and circumstances of the case and in low, whether theLd CIT(A) is justified in allowing deduction u/s 801A of the Act ignoringthe findings of the Assessing Officer in the remand report, wherein theAO has strongly objected the admission of fresh claims.

8. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing deduction u/s 801A of the Act ignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.

9. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in treating the “Status Holder Incentive Scripts (SHIS). “Focus Market Scheme (FMS)” and “Focus Product Scheme (FPS)”as capital receipts, claims of which have been made in appellate stage by way of filing a letter, ignoring the fact that the assessee has never made the claim in the return of income filed u/s 139 for the year under consideration.

10. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in treating the SHIS. FMS and FPS as capital receipts ignoring the findings of the Assessing Officer in the remand report. wherein the AO has strongly objected the admission of fresh claims.

11. On the facts and circumstances of the case and in law, whether theLd CIT(A) is justified in treating the SHIS, FMS and FPS as capital receiptsignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.

12. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in ignoring the amendment in Finance Act. 2015 w.e.f. 01.04.2016 which ultimately culminated into the taxing belt with the due insertion of sub-clause (xviii) in Section 2(24) of the IT Act, 1961 providing an inclusive definition of the expression ‘income’ under the tax law, which includes assistance in the form of a subsidy by the Central Government.

13. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in ignoring the fact that the consequential amendment in the statutory provisions calls for enforcing the very taxability of the subsidy or concessional grants received from the Government or any other constituted body.

14. On the facts and circumstances of the case and in law, whether
theLdCIT(A) is justified in allowing the expenditure of education cess, whichhas been made in appellate stage by way of filing a letter, ignoring thefact that the assessee has never made the claim of deduction in the return of Income filed u/s 139 for the year under consideration.

15. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of education cess paid as revenue expenditure ignoring the findings of the Assessing Officer in the remand report, wherein the AO has strongly objected the admission of fresh claims.

16. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of education cess paid as revenue expenditure ignoring the ratio laid down in the decision of the Hon’ble Supreme Court in the case of M/s Goetze India Ltd.

17. On the facts and circumstances of the case and in law, whether the Ld CIT(A) is justified in allowing the expenditure of Education Cess of Rs.23.30.097/-, which has been made in the first appellate stage for the first time by the assessee in view of the judgment of Hon’ble Rajasthan High court in the case of Chambal Fertilizers and Chemicals Ltd ignoring the fact that the department has challenged the decision of the Hon’ble High Court and the SLP No. 6655 of 2019 is pending before the Hon’ble Supreme Court.

18. On the facts and circumstances of the case and in law, whether the LdCIT(A) is justified in ignoring the fact that education cess ultimately form a part of the income tax and cannot be allowed as Revenue expenditure in the view of the Judgment of Hon’ble Supreme Court in the case of Shri K Srinivasan reported at 83 ITR 346 and Memorandum of Finance Bill of 2004.

19. The appellant craves to leave, to add, to amend and / or to alter of the ground of appeal. if need be.”

3. The brief facts of the case are: The assessee is a company and is engaged in the business of manufacture of chemicals and bulk drugs. For the year under consideration, the assessee filed its return of income on 29/11/2012 declaring a total income of Rs.18,50,97,133/-. The return of income filed by the assessee was selected for scrutiny and statutory notices u/ss 143(2) and 142(1) of the Act were issued. The Assessing Officer (the “AO”) vide order dated 05/03/2015 passed u/s 143(3) assessed the total income of the assessee at Rs.22,00,50,904/- after making various disallowance/addition. In further appeal, the learned CIT(A) vide impugned order partially allowed the appeal filed by the assessee. Being aggrieved, the Revenue is an appeal before us.

4. The issue arising in ground no.1, raised in Revenue’s appeal, is pertaining to disallowance u/s 14A of the Act.

5. The brief facts of the case pertaining to this issue are: During the assessment proceedings, it was observed that the assessee has made investments on which it has earned exempt income. Accordingly, the assessee was asked to show cause as to why disallowance u/s14A r.w.r.8D should not be made. After considering the submission of the assessee, the AO computed the disallowance of Rs.31,65,557/- u/s 14A r.w.r. 8D(2)(ii) and disallowance of Rs.6,69,375/- u/s 14A r.w.r. 8D(2)(iii), aggregating to total disallowance of Rs.37,91,582/-.

6. In its appeal before the learned CIT(A), the assessee submitted that it has earned a dividend income of Rs.99,483/ during the year, which is exempt from tax. Further, the assessee submitted that it has suo moto made a disallowance of Rs.43,350/-, being the expenditure incurred in relation to earning such exempt income as required u/s 14A of the Act. The assessee also submitted that it has a total share capital of Rs.12.10 crore and general reserves of Rs.15.10 crore, which is much more than the average value of investment of Rs.13.38 crore as appearing in the balance sheet. The learned CIT(A) after considering the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in preceding assessment years deleted the disallowance towards interest expenditure u/s 14A r.w.r. 8D(2)(ii) on the basis that assessee’s own funds are adequate to cover the investments. As regard the disallowance made u/s 14A r.w.r. 8D(2)(iii), the learned CIT(A) restricted the disallowance to the dividend income earned by the assessee. Being aggrieved, the Revenue is in appeal before us.

7. During the hearing, the learned Departmental Representative (the “learned DR”) vehemently relied upon the order passed by the AO. On the contrary, the learned Authorised Representative (the “learned AR”) placed reliance upon the judicial precedent in assessee’s own case.

8. We have considered the rival submissions and perused the material available on record. In the present case, it is an admitted position that the interest-free funds available with the assessee in the form of share capital and reserves are more than the investments from which the assessee earned exempt income. We find that the Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.), held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. We further find that the Co-ordinate Bench of the Tribunal in assesee’s own case in Aarti Drugs Limited Vs. Addl. CIT, in ITA No. 6783-84/MUM/2014, vide order dated 10/02/2017, for the assessment years 2010-11 and 2011-12, following the principle laid down by the Hon’ble Jurisdictional High Court in aforesaid decision directed the deletion of addition made u/s 14A r.w.r. 8D(2)(ii). We find that the Hon’ble Jurisdictional High Court in Nirved Traders (P.) Ltd. Vs. Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income. Thus, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground no.1, raised in Revenue’s appeal is dismissed.

9. The issue arising in ground no.2, raised in Revenue’s appeal, is pertaining to the allowance of additional depreciation.

10. The brief facts of the case pertaining to this issue are: During the assessment proceedings, the assessee was asked to explain the additional depreciation claimed by the assessee during the year in respect of assets purchased after 01/10/2010, which was not claimed in the assessment year 2011-12. In response thereto, the assessee submitted that it had purchased machinery during the assessment year 2011-12. Since, the assessee has purchased new machinery, which was eligible for additional depreciation at 20% u/s 32(1)(iia) of the Act, after 01/10/2010, the assessee only claimed 10% of the additional depreciation in the assessment year 2011-12. The balance 10% of additional depreciation was claimed in the year under consideration. The AO vide order passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that section 32(1)(iia) of the Act does not allow any carry forward of additional depreciation. Accordingly, additional depreciation to the extent of Rs.3,04,34,108/- was disallowed u/s 37(1) of the Act.

11. The learned CIT(A) vide impugned order allowed the appeal filed by the assessee on this issue by following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case of preceding assessment years. Being aggrieved, the Revenue is in appeal before us.

12. During the hearing, the learned DR vehemently relied upon the order passed by the AO. On the contrary, the learned AR placed reliance upon the judicial precedent in assessee’s own case.

13. We have considered the rival submissions and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case cited supra, for the assessment years 2010-11 and 201112 decided a similar issue in favour of the assessee, by observing as under:

“3.4 We have heard the rival submissions and perused the material before us. We find that the FAA had disallowed the claim made by the assessee u/s.32(1)(iia),that she was of the opinion that it was available for one year only i.e.in initial year, that the assessee had claimed 50% of the deduction as the machinery was used for a period less than 180 days in the last AY., that it had claimed the balance deduction in the year under appeal. We find that in the case of Rittal India Pvt. Ltd. -No. 1(supra) the Hon’ble Karnataka High Court has dealt the identical issue.

Facts of the case were that the assessee was an existing industrial undertaking, when it had acquired and installed new plant and machinery in the FY.2006-07,that it had claimed 50% of additional 20% depreciation (i.e.,10% additional depreciation) u/s.32(1)(iia) of the Act in the corresponding AY.2007-08,that the new machinery was acquired after 01/10/ 2006,that the machinery was put to use for the purpose of business for a period of less than 180 days, that u/s. 32(1)(iia), read with the second proviso to section 32(1)(ii) of the Act, for the AY. 2007-08, the assessee was granted benefit of 50% of the 20% of the amount of depreciation allowable. Dispute 6783-83/M/14910-11(11-12- Aarti Drug Limited 5 arose with regard to the allowance of the balance 10 % depreciation in the next AY. i.e. for the AY.2008-09.The AO, as well as the FAA disallowed the claim of the assessee, whereas the Tribunal, allowed the appeal of the assessee. Challenging the same, the Revenue filed appeal before the Hon’ble Court raising the following two substantial questions of law:

“(i) Whether the Tribunal is correct in extending the benefit of section 32(1)(iia) of the Act to the next AY. When the Income tax Act does not provide for such carryover, thereby violating the legal principles of ‘casus omissus’ which states that the courts cannot compensate for what the Legislature has omitted to enact?

(ii) Whether the Tribunal was correct in holding that additional depreciation allowed u/s.32(1)(iia) is a one-time benefit to encourage industrialisation and the relevant provisions has been construed reasonably and purposive without appreciating that the additional depreciation is allowed in the year of purchase and if in the year of purchase the assessee is eligible only for 50 per cent depreciation the balance 50 per cent cannot be carried forward for the subsequent year on the claim cannot be allowed in any other year ?”

The Hon’ble Court after referring to the provisions of section 32(1) dealt with the Clause (iia) of the section and held as under:

7. Clause (iia) of section 32(1) of the Act, as it now stands, was substituted by the Finance Act, 2005, applicable with effect from April 1, 2006. Prior to that, a proviso to the said clause was there, which provided for the benefit to be given only to a new industrial undertaking, or only where a new industrial undertaking begins to manufacture or produce during any year previous to the relevant AY.

8. The aforesaid two conditions, i.e., the undertaking acquiring new plant and machinery should be a new industrial undertaking, or that it should be claimed in one year, have been done away by substituting clause (iia) with effect from April 1, 2006. The grant of additional depreciation, under the aforesaid provision, is for the benefit of the assessee and with the purpose of encouraging industrialization, by either setting up a new industrial unit or by expanding the existing unit by purchase of new plant and machinery, and putting it to use for the purpose of business. The proviso to clause (ii) of the said section makes it clear that only 50 per cent of the 20 per cent would be allowable, if the new plant and machinery so acquired is put to use for less than 180 days in a financial year. However, it nowhere restricts that the balance per cent would not be allowed to be claimed by the assessee in the next AY.

9. The language used in clause (iia) of the said section clearly provides that “a further sum equal to 20 per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)”. The word “shall” used in the said clause is very significant. The benefit which is to be granted is per cent additional depreciation. By virtue of the proviso referred to above, only per cent can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent additional deduction can be availed of in the subsequent AY., otherwise the very purpose of insertion of clause (iia) would be defeated because it provides for per cent deduction which shall be allowed.

10. It has been consistently held by this court, as well as the apex court, that the beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the 6783-83/M/14910-11(11-12- Aarti Drug Limited 6 assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one AY., if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent AY. The Tribunal, in our view, has rightly held, that additional depreciation allowed u/s.32(1)(iia) of the Act is a one-time benefit to encourage industrialisation, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. We are in full agreement with such observations made by the Tribunal.”

3.4.1 Respectfully, following the above judgment, we hold that the assessee was entitled to claim 10% additional depreciation during the year under appeal. Reversing the order of the FAA, we decide the second ground of appeal in favor of the assessee.”

14. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the order passed by the Coordinate Bench of the Tribunal in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue, which has followed the judicial precedent in assessee’s own case. As a result, ground no.2 raised in Revenue’s appeal is dismissed.

15. The issue arising in grounds no.3 and 4, raised in Revenue’s appeal, is pertaining to the allowance of expenditure incurred towards obtaining ‘Certificate of Suitability’ and filing of ‘Drug Master File’ (‘DMF’).

16. The brief facts of the case pertaining to this issue are: During the assessment proceedings, it was observed that the assessee has debited a sum of Rs.6,49,509/- under the head ‘Sales Promotion’ and ‘Other Export Expenses’, the details of which are as under:

17. The assessee submitted that these payments were made towards application fees for obtaining ‘Certificate of Suitability’ and filing of DMF for various finished products. As per the assessee, these are the registration charges, which the assessee pays to the authorities to market and distribute the products in their countries i.e. Europe and US and without these certificates, the products cannot be sold in the regulated market. Accordingly, the assessee submitted that these expenses cannot be treated as capital in nature. The AO vide order passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that these expenditures are one-time expenditures towards approval under US FDA regulations and the same is not related to the renewal of the existing certificate of approval. The AO further held that the benefit from the expenditure spread over several years and has enduring benefit to the assessee and therefore, is in the nature of capital expenditure. Accordingly, the AO disallowed Rs.6,49,509/- claimed by the assessee as Revenue expenditure.

18. The learned CIT(A) vide impugned order allowed the appeal filed by the assessee on this issue by following the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case of the preceding assessment year. Being aggrieved, the Revenue is in appeal before us.

19. During the hearing, the learned DR by vehemently relying upon the order passed by the AO submitted that the certificate obtained by the assessee has enduring benefit and therefore expenditure incurred by the assessee is capital in nature. On the contrary, the learned AR placed reliance upon the judicial precedent in assessee’s own case and submitted that the assessee has to incur this expenditure every year and thus is revenue in nature.

20. We have considered rival submission and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in assessee’s own case in ACIT Vs. Aarti Drugs Limited, in ITA No. 5526/MUM/2013, vide order dated 14/01/2015, for the assessment year 2009-10 decided a similar issue in favour of the assessee by observing as under:

“7. We have carefully considered the rival submissions and perused the record. Admittedly the expenditure incurred is not preproduction expenditure. The assessee has been marketing products elsewhere and thus it can be said that the assessee is already in the business of manufacture and sale of drugs. To expand the business in certain countries it has to obtain certificate of suitability as per the FDA Regulations, which is a part of the process of sale of its products. Similar expenditure was considered by Hon’ble Gujarat High Court, wherein it was held that such payments should be considered in the revenue field. No decision of any other High Court, wherein contrary view taken, was placed before us by the Revenue. Having regard to the circumstances of the case, we respectfully follow the decision of Hon’ble Gujarat High Court and hold that the view taken by Hon’ble Gujarat High Court is in accordance with law. In the result, ground No.1 of the Revenue is dismissed.”

21. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the order passed by the Coordinate Bench of the Tribunal in assessee’s own case cited supra, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue, which has followed the judicial precedent in assessee’s own case. As a result, grounds no.3 and 4 raised in Revenue’s appeal are dismissed.

22. The issue arising in ground no.5, raised in revenue’s appeal is pertaining to the allowance of prior period expenses.

23. The brief facts of the case pertaining to this issue are: During the assessment proceedings it was observed that the assessee has claimed prior period expenditure amounting to Rs.78,572/- and has debited the same to profit and loss account towards foreign bank charges. However, the same was not disallowed while computing the income in its return. In this regard, the assessee submitted that the period of payment comes within the accounting period and therefore the claim was made in the year under consideration. The AO vide order passed u/s 143(3) of the Act did not agree with the submission of the assessee and held that the assessee is maintaining its account on the mercantile basis and therefore, liability if incurred in the earlier year cannot be claimed as deduction during the year under consideration. Accordingly, the AO disallowed the prior period expenses of Rs.78,572/- claimed by the assessee towards foreign bank charges.

24. The learned CIT(A) allowed the appeal filed by the assessee on this issue by following its predecessor’s order in assessee’s own case in the preceding assessment years. The relevant findings of the learned CIT(A) are as under:

“7.3 I have carefully considered the relevant and material facts on record, in respect of this ground of appeal, as brought out in the assessment order and submissions made during appeal proceedings. The appellant has made a submission on facts that it had debited bank charges in profit and loss account, as and when the debit advice from bank has been received. The bank advices were received after finalization of the accounts for the year ended 31st March 2011. Therefore the appellant could not record the exact bank charges in A.Y. 11-12 and created a provision for Bank charges. Subsequently the appellant recorded the bank charges in A.Y. 12-13 as and when it received the bank advices. The appellant has further stated that this was consistent with the accounting treatment followed regularly. The appellant has taken the plea that since bank charges have crystallized in the year under consideration, same ought to be allowed in this year. The appellant has relied on the case of Saurashtra Cement (1995) (213 ITR 523)(Gujrat) in support of the proposition that even though theexpenditure relates to prior period, if the liability has accrued during the year, then the expenditure has to be allowed as deduction. On similar facts, I find that the then CIT (Appeal) has adjudicated the issue in appellant’s own case for AY 2009-10 (in appeal no CIT (A)-14/IT 98/Rg.6(1)/11-12 dated 28 05 2013). The operating part of the order is reproduced as under:

“7.4 After taking into consideration, the reasons given by the Assessing Officer and submissions made by the Appellant, I am of the view that the liability for the aforesaid expenditure got crystallized during the current year, as the bank advices were received in the current year. Thus following the decision of the Hon’ble Gujarat High Court in the case of Saurashtra Cements, 1 hold that the disallowance of these expenses is not justified. The disallowance of Rs.26934/-is deleted.”

The same decision has been followed by the CIT (Appeals) in appellant’s own case for AY 2011-12 (in appeal No. CIT(A)-14/IT-165/Rg. 6(1)/13-14 dated 12.08.2014).

7.4 In view of the facts and circumstances of the case, and respectfully following the precedence of my learned predecessors in appellant’s own case for earlier years, I find that the liability for the bank charges got crystallized during the current year, and therefore the expenditure was allowable as deduction in the current year. Accordingly, the disallowance of prior period expenses of Rs.78,572/- is deleted. This ground of appeal is allowed in favour of the Appellant.”

Being aggrieved, the Revenue is in appeal before us.

25. During the hearings, the learned DR by vehemently relying upon the order passed by the AO submitted that the bank had levied charges during the preceding financial year and therefore, the liability accrued in the preceding assessment year, which cannot be allowed in the year under consideration, being a prior period expenditure.

26. On the contrary, the learned AR submitted that bank advices were received by the assessee after the finalisation of the account for year-end, and therefore as and when the bank advices were received the same were appropriately debited to bank charges. The learned AR further submitted that in the assessment years 2009-10 and 2011-12, the learned CIT(A) allowed a similar claim of prior period expenses, and the Revenue did not file an appeal on this issue before the Tribunal.

27. We have considered the rival submissions and perused the material available on record. In the present case, bank charges levied by the bank in the preceding financial year were debited by the assessee in the year under consideration and the same was not added back in the computation of income filed with the return of income. As per the revenue, since the assessee maintains its account on the mercantile basis, therefore any liability which was incurred in the preceding year cannot be allowed in the year under consideration. It is the plea of the assessee that the bank had levied bank charges during the preceding financial year, however, the assessee had not received the debit advice from the bank. As and when the bank advices were received, the same was appropriately debited to the bank charges. The bank charges were received after the finalisation of the account for the year ending 31/03/2011. Therefore, as per the assessee, it could not record the exact bank charges in the assessment year 2011-12 and created a provision for bank charges. Further, the assessee recorded the bank charges in the assessment year under consideration when it receives the bank advices. Thus, as per the assessee, the liability was crystallised in the current year and therefore, should be allowed in the current year only.

28. We find that in Saurashtra Cement & Chemical Industries Ltd. Vs. CIT, [1995] 213 ITR 523 (Guj.), inter alia, the following issue came up for consideration before the Hon’ble Gujrat High Court:

“5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs. 39,823 was not allowable in the year in question on the ground that the liability has arisen in the years 1968-69 to 1973-74 ?“

29. While adjudicating the aforesaid issue, the Hon’ble Gujarat High Court held that merely because an expense is related to a transaction of an earlier year it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. The relevant findings of the Hon’ble Gujarat High Court in aforesaid decision are as under:

“ Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years, it cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profi and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallising the expenditure is not in existence in respect of which such income or expenses relates, the mercantile system does not call for an adjustment in the books of account on estimate basis. It is actually known income or expenses, right to receive or liability to pay which has come to be crystallised, is to be taken into account under mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallised, can only be adjusted as contingency item but not as an accrued income or liability of that year. ..”

30. In the present case, the claim made by the assessee was denied merely on the basis that the liability pertains to the preceding year and since the assessee maintains its account on the mercantile basis, therefore such liability can be claimed in the preceding year only. No material has been brought on record by the Revenue to prove that the liability has also been crystallized in the preceding year. From the perusal of the order passed by the Co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2009-10 cited supra, we find that the Revenue though has raised other issues but did not challenge the order passed by the learned CIT(A) granting relief to the assessee on the similar issue. The Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT,[1992] 193 ITR 321(SC) held that while strictly speaking res judicata does not apply to Income-tax proceedings but where the fundamental aspect permeating through the different assessment years has been followed as the fact one way or the other and parties have allowed that position to be sustained by not challenging the order it would not at all be appropriate to allow the position to the change in the subsequent year. Thus, in view of the aforesaid findings, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, ground no.5 raised in Revenue’s appeal is dismissed.

31. The issue arising in grounds no.6-8, raised in Revenue’s appeal, is pertaining to the claim of deduction u/s 80 IA of the Act in respect of profit and gains from the generation of steam.

32. The brief facts of the case pertaining to this issue are: The assessee, during the course of appellate proceedings before the learned CIT(A), raised additional ground claiming the deduction of Rs.3,81,99,425/- u/s 80IA in respect of profit and gains derived by the undertaking engaged in generation of steam. In support of the admission of additional ground raised before the learned CIT(A), the assessee placed reliance upon the decision of the Hon’ble Jurisdictional High Court in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. (349 ITR 336) (Bombay). As regards the merit of the claim u/s 80IA of the Act, the assessee submitted that it has various power-generating units which produce ‘Power’ in the form of ‘Steam’. The said steam is captively consumed by other manufacturing units of the assessee. It was further submitted that the deduction u/s 80IA of the Act is available in respect of profit or gains derived by an undertaking from the business of generation of power. The assessee also furnished audit report in Form no.10CCB in respect of profit and gains derived by its undertaking engaged in the generation of steam. For the purpose of computation of deduction u/s 80IA(4) of the Act, the assessee considered the price at which it has purchased steam for its other units from the third party at Rs.1.67 per kg.

33. The additional ground raised by the assessee was remanded to AO for the report by the learned CIT(A). In the remand proceedings before the AO, the assessee explained the usage of steam by its other manufacturing units. It was submitted that the steam was being used for heating the chemical reaction mass, heating the mixture of solvent and recovery of solvent, drying of wet powder of intermediate products, drying of final wet powder product, and pre-heating of furnace oil before firing in the thermo pack. In its remand report, the AO agreed with the assesses’s contention that the generation of steam amounts to the generation of power for the purpose of claiming deduction u/s 80IA of the Act. Further, the AO also did not draw any adverse inference as to the method of computation of deduction or the market value at which steam is stated to be transferred by the assessee from the power-generating units to its manufacturing units.

34. The learned CIT(A) vide impugned order admitted the additional ground raised by the assessee following the decisions of the Hon’ble Jurisdictional High Court, wherein it has been held that CIT(A) being appellate authority can admit an additional ground, even though the same was not raised before the AO during the assessment proceedings. Insofar as the merit is concerned, the learned CIT(A) after considering the remand report of the AO, wherein no adverse inference was drawn as to the claim of the assessee u/s 80IA of the Act and following the decision of the Co-ordinate Bench of Tribunal in DCIT Vs. Deepak Fertilizers and Petrochemicals Corporation Ltd (ITA No.2116/MUM/2013 dated 30.01.2015) decided the issue in favour of the assessee and allowed the claim of deduction of Rs.3,81,99,425/0 u/s 80IA of the Act in respect of profits and gains derived from the generation of steam. Being aggrieved, the Revenue is in appeal before us.

35. During the hearing, the learned DR submitted that the assessee raised the fresh claim before the learned CIT(A) for the first time without making the claim in its return of income. The learned DR further submitted that the assessee also did not make any submission in this regard during the scrutiny assessment proceedings. Thus, by placing reliance upon the decision of the Hon’ble Supreme Court in Goetze (India) Limited Vs. CIT, (2006) (157 Taxman 1) (SC), the learned DR submitted that such a claim cannot be made before the learned CIT(A) for the first time. On the other hand, the learned AR placed reliance upon the impugned order.

36. We have considered the rival submissions and perused the material available on record. It is evident that the claim of deduction u/s 80IA of the Act in respect of profits and gains derived by the undertaking engaged in the generation of steam was made for the first time before the learned CIT(A) by way of additional ground. We find that Hon’ble Supreme Court in Goetz India Ltd. Vs. CIT, [2006] 284 ITR 323 and Hon’ble Jurisdictional High Court in CIT Vs. Pruthvi Brokers and Shareholders Pvt. Ltd., [2012] 349 ITR 336 (Bom.) has held that the appellate authority can entertain a fresh claim made by the assessee, even if such a claim was not made in return of income or by way of revised return of income. Thus, we find no infirmity in the impugned order admitting the additional ground filed by the assessee.

37. It is further evident from the record that the learned CIT(A) sought a remand report from the AO in respect of additional ground raised by the assessee. From the perusal of AO’s remand report dated 14/09/2017, forming part of the paper book from pages no. 40-43, we find that the AO accepted the contention of the assessee that the generation of steam amounts to the generation of power for the purpose of claiming deduction u/s 80IA of the Act, and thus the claim of the assessee is reasonable. Further, the AO also noted that the assessee has duly submitted the account of the undertaking and audit report in Form no.10CCB in support of its claim of deduction u/s 80IA of the Act. We further observed that the AO, however, objected to the claim on the basis that the said claim was neither made in the original return of income nor in the revised return of income and the same cannot be entertained now. Therefore, from the above, it is evident that the AO has not drawn any adverse inference as to the claim of deduction u/s 80IA of the Act on the generation of steam and the method of computation adopted by the assessee. Thus, once the deduction u/s 80IA of the Act has been accepted on merits in remand proceedings, the Revenue cannot raise any grievance now in the present appeal before us. Insofar as the admissibility of the claim at the appellate state for the first time is concerned, we have already found the same to be in conformity with the judicial pronouncements as noted above. Therefore, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, grounds no. 6-8 raised in Revenue’s appeal are dismissed.

38. The issue arising grounds no. 9-13, raised in Revenue’s appeal, in pertaining to the taxability of incentives received in terms of Foreign Trade Policy towards Focus Market Scheme (‘FMS’), Focus Products Scheme (‘FPS’), and Status Holder Incentives Scrip (‘SHIS’).

39. The brief facts of the case pertaining to this issue are: The assessee in its original return of income treated the incentives received under the foreign trade policy as revenue receipt and accordingly included the same in the computation of total income. In the appellate proceedings before the learned CIT(A), the assessee by way of additional ground raised a claim that incentives received under the Foreign Trade Policy, towards FMS, FTS, and SHIS should be treated as capital receipt. The assessee by placing reliance upon the decision of the Hon’ble Supreme Court in CIT Vs. Ponni Sugar & Chemicals ltd. (2008) (306 ITR 392) submitted that considering the objective for which the subsidy has been granted, the same should be considered as capital receipt. The assessee further submitted that the overall objective of the FMS and FPS schemes under the Foreign Trade Policy is to increase the percentage share of global trade by increasing competitiveness in selected markets, technological upgradation, and expanding employment opportunities. Similarly, the object of subsidy under the SHIS scheme is to promote investment in the upgradation of technology.

40. The additional ground raised by the assessee was remanded to the AO for a report. Vide its remand report dated 11/04/2019, the AO noted the salient objectives of the FPS/FMS/SHIS subsidy received under the Foreign Trade Policy. The AO, however, objected to the admission of additional ground filed by the assessee claiming non-taxability of receipt under the aforesaid subsidies. The assessee filed detailed submissions in response to the remand report filed by the AO.

41. The learned CIT(A) vide its impugned order admitted the additional ground of appeal filed by the assessee in view of decisions of the Hon’ble Jurisdictional High Court. On merits, the learned CIT(A), in view of the decision of the Hon’ble Supreme Court in Ponni Sugars and Chemicals Ltd (supra) after analysing the objectives of the subsidies granted under FPS, FMS, and SHIS came to the conclusion that the subsidies under the aforesaid screams are in nature of capital receipt, not includable in the total income of the assessee. In support of its conclusion, the learned CIT(A) placed reliance upon various other judicial pronouncements in respect of subsidies received under the similar scheme. Being aggrieved, the Revenue is in appeal before us.

42. During the hearing, the learned DR vehemently relied upon the remand report filed by the AO. On the other hand, the learned AR by placing reliance upon the impugned order on this issue submitted that the salient objective of the aforesaid subsidies under the Foreign Trade Policy is to increase the percentage share of global trade by increasing competitiveness in select markets, technological upgradation and expanding employment opportunities.

43. We have considered the rival submissions and perused the material available on record. The assessee is a manufacturer of bulk drugs and also exports some of the products to various countries for which the government is providing certain subsidies under the Foreign Trade Policy. As noted above, the assessee initially, in its return of income, treated the subsidies received as Revenue receipts and offered the same to tax. However, before the learned CIT(A), the assessee filed additional grounds claiming that the subsidy received under the FPS, FMS, SHIS schemes are capital in nature and therefore cannot be included in the total income of the assessee. As noted elsewhere, the appellate authority can entertain a fresh claim made by the assessee, even if such a claim was not made in return of income or by way of a revised return of income. Thus, we find no infirmity in the impugned order admitting the additional ground filed by the assessee.

44. Further, we find that the learned CIT(A) analysed the objectives of subsidies received under the aforesaid schemes in para 14.10 of its order, as under:

“14.10 The Government of India notified the Foreign Trade Policy, 2009-14 under Section 5 of the Foreign Trade (Development and Regulation) Act, 1992 vide notification No 1 (RE-2012)/2009-14 dated 05.06.2012. The Policy contains a Chapter on Special Focus Initiatives, wherein the objective of special focus incentives given for various sectors (FMS and FPS) is specified as under:

“(a) with a view to continuously increasing our percentage share of global trade and expanding employment opportunities, certain special focus initiatives have been identified/continued for Market Diversification, Technological Upgradation, Support to status holders, Agriculture, Handlooms, Handicraft, Gems & Jewellery, Leather, Marine, Electronics and IT Hardware manufacturing Industries, Green products, Exports of products from North- East, Sports Goods and Toys sectors Government of India shall make concerted efforts to promote exports in these sectors by specific sectoral strategies that shall be notified from time to time”

Further, the objective of subsidy under Status Holder Incentive Scrip (SHIS) is laid down in the policy as under:

“With an objective to promote investment in upgradation of technology of some specified sectors as listed in Para 3.16.4 below, Status Holders shall be entitled to incentive scrip @ 1% the FOB Value of exports made during 2009-10 and during 2010-11 of these specified sectors in the form of duty credit. This shall be over and above the duty credit scrip claimed/availed under this chapter.”

45. In this regard, it is also relevant to note that the AO in its remand report dated 11/04/2019, forming part of the paper book from pages No. 117-120 after examining the submissions of the assessee and schemes and various facts placed on record noted that the salient objectives of the FPS/FMS/SHIS subsidy received under the Foreign Trade Policy is to increase percentage share of global trade by increasing the competitiveness in selected markets, technological upgradation and expanding employment opportunity. In para 7.2 of its remand report, the AO further stated that the purpose of introduction of the schemes was to encourage industries, which require industrial growth, technological upgradation, and development.

46. Accordingly, the learned CIT(A) came to the conclusion that the subsidy is a capital receipt in the hands of the assessee and therefore not includable in the total income. The relevant findings of the learned CIT(A) in this regard are as under:

“14.11 Thus, on a plain reading of the relevant policy document of the Government of India, it is clear that the objective of the subsidy granted under FPS, FMS and SHIS is to increase the global market share, technology up gradation and employment generation in certain sectors. The object of the subsidy under these schemes was not to enable the assessee to run the business more profitably. The object was primarily to provide encouragement and support, which would create benefits of enduring nature, for the Industry as a whole in certain sectors of economy. It is pertinent to recall here that in the remand report, after examining the facts brought on record by the appellant, AO has also concluded that the salient objective of the FPS, FMS and SHIS subsidy under the Foreign Trade Policy is to increase percentage share of global trade by increasing competitiveness in select markets, technological upgradation andexpanding employment opportunity. In that view, I am of the considered opinion that, having regard to the ‘purpose test’ laid down by the Supreme Court in the aforementioned cases, the amounts received by the appellant during the year, under those Schemes as subsidy should be treated as capital receipt in its hands, not includible in the total income.”

47. We find that the subsidy granted under the FMS scheme came up for consideration before the Hon’ble Rajasthan High Court in PCIT Vs. Nitin Spinners Ltd. (2020) 116 com26 (Raj.), wherein the Hon’ble High Court observed as under:

“8. As far as the question with regard to Focus Marketing Scheme was concerned, apparently the Central Government gave the subsidy to enhance indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. The ITAT took note of judgment in Ponni Sugars & Chemicals Ltd. (supra) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. This Court is of the opinion that there is no infirmity with the reason.”

48. We further find that the Hon’ble Supreme Court dismissed the Revenue’s
Special Leave Petition in PCIT Vs. Nitin Spinners Ltd., [2021] 283 Taxman 2(SC), against the aforesaid decision of the Hon’ble Rajasthan High Court. Thus, when the objective of the aforesaid subsidies has been admitted to be to encourage industries by providing industrial growth, technological upgradation, and development, we find no infirmity in the impugned order passed by the learned CIT(A) on this issue in treating the amount received by the assessee under the aforesaid schemes as capital receipt. As a result, grounds no. 9-13 raised in Revenue’s appeal are dismissed.

49. The issue arising in grounds no. 14-18, raised in Revenue’s appeal, is pertaining to the claim of education cess as an allowable expenditure.

50. We find that Finance Act, 2022 with retrospective effect from 01/04/2005 inserted Explanation 3 to section 40(a)(ii), whereby it has been provided that the term ‘tax’ shall include and shall be deemed to have always included any surcharge of cess, by whatever name called, on such tax. We further find that the Hon’ble Supreme Court in JCIT Vs. Chambal Fertilisers & Chemicals Ltd., [2022] 145 com420 (SC) allowed the Revenue’s appeal against the Hon’ble Rajasthan High Court’s decision in Chambal Fertilisers & Chemicals Ltd. Vs. JCIT, [2019] 107 taxmann.com 484 (Raj.) and held that education cess paid by the respondent-assessee would not be allowed as an expenditure under Section 37 read with 40(a)(ii) of the Act. Thus, respectfully following the decision of the Hon’ble Supreme Court cited supra, grounds no. 14-18 raised in Revenue’s appeal are allowed.

51. In the result, the appeal by the Revenue is partly allowed.

Order pronounced in the open Court on 20/01/2023