Greenply Industries Limited Vs ACIT (ITAT Kolkata)
ITAT find that the excise duty exemption has been admittedly the capital receipt and the finding of the ld. CIT(Appeals) that the excise duty exemption is not liable to be taxed under the normal provisions of the Income Tax Act being not in dispute for us, the alleged capital receipt cannot be categorised as part of the book profit. In the case of assessee being covered by the excise duty notification, such sum collected on the goods manufactured and sold is in the nature of incentive subsidy given for establishing the units in backward areas and to generate employment opportunities. The said fact is evident from the office memorandum dated 07.01.2003 of Ministry of Commerce and Industry, which reads as under:-
3.4 On perusal of the above, it can be seen that incentive in the form of Excise Duty Exemption has been given with an objective to achieve industrialization in the backward areas of Himachal Pradesh and Uttaranchal and to generate employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence, the incentives granted by the Government of India vide Office Memorandum No. 1(10)/2001-NER issued by DIPP, Ministry of Commerce and Industry, GOI dated 07-01-2003 read with Notification No. No.50/2003- CE dated 10-06-2003, will be treated as capital receipt and not liable to tax. In this regard, statement showing computation of excise duty exemption received during the year aggregating to Rs. 87,98,09,432/- alongwith copy of Excise Returns (in case of Rudrapur Unit 1) and copy of Form A (in case of Rudrapur Unit 2) has been enclosed (Refer Page No. 599-683 of Paper Book).
In the light of above decision as well as the Memorandum issued by the Ministry of Commerce & Industry, we find that the excise duty exemption is purely capital receipt and is neither chargeable to tax under the normal provisions of the Income Tax Act nor is to be included as part of the book profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The above captioned cross appeals are directed against the order of Id. Commissioner of Income Tax (Appeals), Dibrugarh both dated 25.03.2019, which are arising ITA No. 232/GAU/2019 and ITA No. 359/GAU/2019.
2. First we will take up the assessee’s appeal in ITA No. 232/GAU/2019, wherein the assessee has raised the following grounds of appeal:-
“(1) That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing claim of education cess on Income Tax and Dividend Distribution Tax amounting to Rs.66,87,361/-, in computing total income under the normal provisions of the Act.
(2) That on the facts and in the circumstances of the case, the ld. CIT(A) was not justified and grossly erred in not allowing exclusion of Excise Duty Exemption as capital receipt amounting to Rs.87,98,09,432/- availed during the year under consideration in computing book profit as per section 115JB of the Act”.
2(i). The assessee has also raised an additional ground of appeal on 29th September, 2021, which reads as follows:-
“Claim for deduction of Amortization of Leasehold Land expenses Rs.18,73,242/-
In the computation of total income for the instant assessment year, the assessee has debited Amortization of Leasehold land expenses amounting to Rs.18,73,242/-. The Assessing Officer in the assessment order has disallowed the above expenditure. The disallowance made by the ld. Assessing Officer was upheld by the ld. CIT(Appeals). However, ld. CIT(Appeals) gave relief to the appellant by correspondingly increasing the deduction under section 80IC/80IE of the Act for the lease rentals attributable to the units eligible for deduction under section 80IC/80IE of the Act The assessee pleads that the expenditure shall be allowed as a deduction in view of the following decisions:-
DCIT –vs.- M/s. Adani Gas Ltd. (2018) ITA No. 775/AHD/2014 (Ahmedabad Tribunal);
DCIT –vs. – Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.);
ACIT –vs.- Balmer Lawrie & Co. Ltd. (2019) ITA No. 2264/KOL/2017 (Kolkata Trib.);
Balmer Lawrie & Co. Ltd. –vs.- SIT (2019) 111 taxmann.com 316 (Calcutta)”.
3. Brief facts of the case are that the assessee is a Limited Company engaged in the business of manufacturing and trading of plywood, laminate and allied products. The assessee filed e-return of income of Rs.49,12,19,250/-on 29.11.2015. The case was selected for scrutiny through CASS under complete scrutiny category followed by serving of notices under section 143(2) and 142(1) of the Act. Various details as called for by the ld. Assessing Officer were filed by the assessee. During the course of assessment proceedings, ld. Assessing Officer observed that the assessee has entered into an international transaction of Rs.195.93 crores (approx.) and also specified domestic transaction at Rs.149.48 crores (Approx.). The case was referred to the Transfer Pricing Officer (in short ‘TPO’) within the meaning of section 92CA of the Income Tax Act after necessary approval. Subsequently ld. TPO passed the order under section 92CA of the Act on 27.10.2017 suggesting the upward adjustment of Rs.43,67,295/- for Corporate Guarantee given by the assessee to its Associated Enterprises (AE) and downward adjustment in respect of purchase of eligible unit from non-eligible unit at Rs.4,67,33,912/-. Apart from the adjustment suggested by the TPO, ld. Assessing Officer also disallowed the amortization of leasehold land at Rs.18,73,242/- and made disallowance under section 14A of the Act at Rs.31,038/-. Ld. Assessing Officer assessed the income of the assessee at Rs.54,42,24,737/- and income computed under section 115JB of the Act at Rs.3,23,17,984/-(after giving set off of the MAT credit of Rs.18,49,81,989/-). Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) and partly succeeded. Now both the assessee and Revenue are in appeal before the Tribunal.
4. ITA No. 232/GAU/2019: Ground No. 1 relates to allowing claim of education cess. At the outset, ld. counsel for the assessee requested for not pressing this ground. We, therefore, dismiss Ground No. 1 as not pressed.
5. Ground No. 2: Through this ground, it is claimed that the ld. CIT(Appeals) grossly erred in not allowing exclusion of Excise Duty Exemption as capital receipt amounting to Rs.87,98,09,432/- availed during the year under consideration in computing book profit as per section 115JB of the Act.
6. Brief facts relating to the issue are that the assessee claimed excise duty exemption in terms of Excise Notification No. 50/2003 dated 10.06.2003, as for the Manufacturing units of the appellant namely Rudrapur Plywood Unit and Rudrapur MDF Unit located at Plot No. 2, Sector 9, IIE, Pantnagar, Rudrapur, Uttrakhand, which commenced commercial production on 02.05.2006 and 31.03.2010 respectively, and are thus eligible for 100% excise duty exemption in respect of goods manufactured and cleared from such units for a period of 10 years from the date of commencement of commercial production. In the impugned order, ld. CIT(Appeals) has allowed the deduction under the normal provisions of the Act but the order is silent on the exclusion of the said incentive while computing book profit under section 115JB of the Act.
7. counsel for the assessee stated that the two units owned by the assessee namely Rudrapur Plywood Unit and Rudrapur MDF Unit are covered by the Excise Notification No. No.50/2003- CE dated 10-06-2003 and the said excise duty exemption are given as the units owned by the assessee are located in the backward areas in the State of Himachal Pradesh and Uttranchal in terms of the observation of the then Hon’ble Prime Minister for generation of employment opportunities and local resources.
Reference was also made to the Office Memorandum of Ministry of Commerce & Industry dated 07.01.2003. Referring to the decision of the Hon’ble Mumbai Tribunal in the case of DCIT –vs.-(ITA No. 5725/MUM/2015), it was claimed that the excise duty and sales tax exemption are capital receipt and to be excluded in computation of income. Reliance was further placed on the judgment of the Hon’ble Apex Court in the case of CIT –vs.- Ponni Sugars & Chemicals Limited (2008) 306 ITR 392 (SC), Sahney Steel & Press Works Ltd. –vs.- CIT (1997) 228 ITR 253 (SC), judgment of the Hon’ble Jammu & Kashmir High Court in the case of Shree Balaji Alloys & ors –vs.- CIT (2011) 51 DTR 217 (J&K), judgment of the Hon’ble Jurisdictional High Court in the case of PCIT –vs.-Ankit Metals & Power Ltd. (2019) ITA 155 of 2018 (Cal.) and in the case of CIT –vs.- Rasoi Limited (335 ITR 438 (Cal.). Further reliance was placed on the judgment of the Hon’ble Special Bench decision of Mumbai Tribunal in the case of DCIT –vs.- Reliance Industries Limited (2004) 88 ITD 273 (MUM)(SB), wherein it was held that where the object of the subsidy was to encourage the settling up of industries in the backward area and the incentive was not given to the assessee for assisting it in carrying out its business operations, the same is capital in nature. This decision of Special Bench was affirmed by the Hon’ble Bombay High Court in the case of CIT –vs.- Reliance Industries Limited (2010) 339 ITR 632.
8. Ld. counsel for the assessee further submitted that appellant has availed the incentive being capital receipt for setting up a new unit or carry out expansion of existing unit and not for running the business more profitably. Such receipt does not have any income or profit element. Referring to the judgment of the Hon’ble Supreme Court in the case of Indo Rama Synthetics (I) Limited –vs.- CIT (2011) 330 ITR 363 (SC), it was submitted that the object of MAT provisions is to bring out the real profit of the companies and inclusion of capital receipt in the form of excise duty exemption in the computation of MAT would defeat the very objective of introduction of section 115JA and 115JB of the Act. Further Coordinate Bench of this Tribunal in the case of Sunrise Biscuit Co. Pvt. Limited –vs.-ITO (ITA No. 92/GAU/2019) held that source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. Reliance was also placed on the decision of the Coordinate Bench of Kolkata in the case of DCIT –vs.- M/s. Century Plyboards (I) Limited (ITA No. 2149/KOL/2019), wherein it was held that subsidies 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 under section 115JB of the Act. Reliance was further placed on the following decisions:-
(i) Uflex Limited –vs. ACIT (2022) (1) TMI 731- ITAT, Delhi,
(ii) M/s. BR Agrotech Limited –vs.- ACIT (2021 (9) TMI 233- ITAT, Delhi;
(iii) ACIT –vs.- Shree Cement Limited (ITA No. 614/JP/2010) order dated 09.09.2011;
(iv) CIT –vs.- Harinagar Sugar Mills Limited (ITA No. 1132 of 2014) order dated 04.01.2017 (Bombay High Court);
(v) ACIT –vs.- the Nilgiri Tea Estate Limited (2014) 65 SOT 14 (Cochin) (URO); &
In the following cases, the Hon’ble Kolkata Tribunal held that sales tax incentives/excise subsidy to be capital in nature and needs to be excluded in computing book profit under section 115JB of the Act:
(vi) Tata Metaliks Ltd. –vs.- ITO (2018) ITA No. 439 & 478/KOL/2016);
(vi) DCIT –vs.- M/s. Emami Biotech Limited (2019) ITA No. 1915/KOL/2017);
(vii) DCIT –vs.- Sanghi Industries Limited (2018) ITA No. 999/HYD/2017;
(viii) ACIT –vs.- JSW Steel Limited 112 com 55 92019) (Mumbai-Trib.);
(ix) Krishi Rasayan Exports Pvt. Ltd. –vs.- PCIT (2020) (ITA No. 742 & 743/KOL/2019).
To conclude it was stated that the excise duty being capital receipt and given with the object to achieve industrialization in the backward areas of Uttaranchal and to generate employment opportunities, the same is not liable to be taxed under the normal tax Rules and under section 115JB of the Act.
9. Per contra, ld. D.R. vehemently argued supporting the order of lower authorities but could not controvert the fact that the issue in hand is settled in favour of the assessee by various Hon’ble Courts and the decision of the Tribunal.
10. We have heard the rival contentions and perused the relevant material available on record. We note that the assessee runs two manufacturing units in the name of Rudrapur Plywood Unit and Rudrapur MDF Unit and both are covered by the Excise Notification No.50/2003 dated 10.06.2003. Both the units are located in backward areas and are eligible for 100% excise duty exemption in respect of goods manufactured and cleared from such units for a period of 10 years from the date of commencement of commercial production. The assessee has claimed the excise duty exemption from these two units at Rs.87,98,09,432/- which is in the nature of capital receipt not liable to be taxed. We also find that though the said amount is reflected in the Profit & Loss Account of the assessee and the amount being capital receipt has not been objected by the ld. CIT(Appeals) also, who has allowed deduction of the said amount vide his order dated 25.03.2019 under normal provisions of the Act, however, the order is silent on the exclusion of the said amount while computing the book profit under section 115JB of the Act, therefore, the issue is for our examination that “whether the excise duty exemption which is a capital receipt and not chargeable to tax under the normal provisions of the Act, is to be considered as a part of book profit for computing the book profit under section 115JB of the Act”.
11. We will like to first go through the judicial jurisprudence available for the issue in hand. We find that in the case of Sunrise Biscuit Co. Pvt. Limited –vs.- ITO, ward -1(5), Guwahati ITA No. 92/Gau/2019 (page 87102 of the case law paper book), the Hon’ble Guwahati Tribunal was dealing with the issue whether subsidy received by the assessee was capital in nature and, therefore, not exigible to income-tax, both under normal computational provisions as well as book profit u/s 115JB. The Hon’ble ITAT relied upon of the judgement of the Hon’ble Supreme Court in the cases of Sahney Steel & Press Works (supra) & Ponni Sugar & Chemicals Ltd. (supra) and had held that the object or purpose for which the subsidy was given was relevant. It was held that the source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. It was held that the purpose of the scheme which enabled the grant of subsidy to the assessee was the only material factor in determining the taxability of such receipts. Further, placing reliance on the decision of the Hon’ble Kolkata Tribunal in case of DCIT vs. M/s. Century Plyboards (I) Ltd, in ITA No. 2149/Kol/2019 (Refer Page 103-122 of the Case Law Paperbook), it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. Relevant extract of the order of the Hon’ble Tribunal is reproduced below:
“24. As regards the issue relating to treatment of this VAT subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (!) Ltd. in ITA No. 2149/Kol/2019 (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. The relevant findings are as follows:
45. Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB, we note that the Hon’ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) held that the AO has the power to rework the book profit if the profits are computed not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Hon’ble Supreme Court in their subsequent decision rendered in the case of Indo Rama Synthetics (!) Ltd vs. CIT (330 ITR 363) further held that, the object of MAT provisions is to bring out the true working result of the companies. As held in the preceding paras, the subsidies received by the assessee were capital in nature and therefore not liable to tax. In the circumstances therefore, inclusion of such capital receipt in the computation of book profit u/s 115JB would defeat two fundamental principles. Firstly, it would levy tax on receipt which is not in the nature of income at all and secondly it would not result in arriving at real working results of the company. We thus find merit in the assessee’s claim that the said subsidies being capital in nature, deserves to be excluded from the computation of book profit u/s 115JB of the Act.
46. It is noted that in the context of similar State Industrial Scheme, the Jurisdictional Hon’ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (416 ITR 591) held that subsidies received for setting up new industry is not in the nature of income and therefore cannot be deemed as income for the purposes of computing book profit u/s 115JB of the Act. In the decided case the assessee had received interest subsidy under the WB Incentive Scheme, 2000 and power subsidy under the Power Intensive Industries Scheme, 2005 for setting up Sponge Iron Plant in Bankura. Before this Tribunal, the assessee claimed that receipt of such subsidies in form of remission of interest and power/electricity duty payments etc. was capital receipt not liable to tax both under the normal computational provisions as well as book profit u/s 115JB of the Act. The Tribunal answered the issue in favour of the assessee. On appeal by the Revenue, the Hon’ble High Court upheld the order of this Tribunal by observing as under:
“26. Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115JB of the Income Tax Act, 1961 as contended by the revenue by reiving on the decision in the case of Apollo 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 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 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.”
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.
……………….
25. For the reasons set out above therefore, we allow the grounds taken by the assessee and direct the AO to deduct the VAT subsidy of Rs.8,78,84,902/- both while computing income under normal computational provisions and book profit u/s 115JB of the Act for the relevant AY 2014-15.”
12. The Hon’ble Kolkata ITAT in case of DCIT -vs.- M/S Century Plyboards (I) Ltd. (ITA No. 2149/Kol/2019 And C.O. No. 22/Kol/2020 In ITA No.2149/Kol/2019) relied upon finding of its coordinate bench in the case of Sicpa India (P) Ltd. – vs.- DCIT T20171 186 TTJ 289 (Kol.) (Refer Page 123-150 of the Case Law Paper book) wherein it has been held that subsidies 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.
13. Coordinate Bench Delhi in case of Uflex Limited -vs.- ACIT 2022 (1) TMI 731 – ITAT Delhi held that CENVAT credit, as received by the Assessee, in accordance with the incentive scheme for J & K as formulated by the Central Government is a capital receipt not liable to tax, accordingly the same cannot be part of book profit under Section 115JB also. Relevant extract of the order of the Hon’ble ITAT is reproduced below:
“14. Regarding issue raised vide Ground No. 7, that the aforesaid subsidy being capital in nature it will also not form part of the book profit u/s 115JB. Before us the Ld. Counsel for the assessee submitted that the CENVA T credit as received by the appellant under the incentive scheme for J&K as formulated by the Central Government and treated the same as a capital receipt not liable to tax by the J&K High Court in the case of Shree Balaji Alloys (supra) and also affirmed by the Hon’ble Supreme Court, that it will not form part of the income chargeable to tax u/s 4 of the Act and once the same is treated as capital receipt not chargeable to tax under the Income-tax Act, then same has to be excluded while computing the income under the MAT provisions in terms of Section 115-JB of the Act. Because Section 115-JB is also meant for the purpose of levy of tax on income and the basic things will have to be kept in mind that receipts which have to be included in the profit should be having the characteristic of income. There is a fundamental difference between the income and capital that the income is liable to tax, whereas capital is not liable to tax. In the case of Padmaraje R. Kadambande vs. CIT in 195 ITR 877, the Hon’ble Supreme Court held that the capital receipts are not income within the definition of Section 2(24) of the Act and hence are not chargeable under the Income Tax Act. The learned counsel further stated that the provision of Section 115-JB of the Act is alternative mechanism for computation of income based on book profit without claiming any deduction or incentive allowable under the Act, but the fact remains that taxability has to be restricted to the income and once a receipt is considered as capital, it should be excluded even while computing book profit u/s. 115-JB of the Act. He relied upon the following judgments:
(i) ITA No. 923/Bang/2009 dated 13th January 2017 JSW Steels Ltd. -vs. ACIT
(ii) ITA No. 5124/Del/2011 dated 29th June 2018 Montage Enterprises Pvt. Ltd. vs. DCIT
(iii) ITA No. 2199/Del/2009 dated 20th March 2019 Ultimate Flexipack Ltd. vs. DCIT
(iv) 416 ITR 591 (Cal) Pr. CIT vs. Ankit Metal and Power Ltd.
(v) Appeal No. 1132 of 2014 dated 4th January 2017 CIT vs. Harinagar Sugar Mills Ltd. (Bombay)
(vi) ITA Nos. 614, 615 & 635/JP/2010 dated 9th September 2011 – Shree Cement – Appeal by Revenue, the Hon’ble Rajasthan High Court in Appeal Nos. 204 of 2010 and 85 of 2014 vide order dated 22nd August 2017 has not admitted any question of law in appeal filed by Revenue.
15. Since we have already held that the CENVAT credit, as received by the appellant, in accordance with the incentive scheme for J & K as formulated by the Central Government is a capital receipt not liable to tax, accordingly the same cannot be part of book profit under Section 115JB also. Consequently, ground No. 7 is also allowed. ”
14. Coordinate Delhi ITAT in case of M/S BR Agrotech Ltd, -vs.- ACIT (2021 (9) TMI 233 – ITAT DELHI) decided in favour of the Assessee holding that only that receipt which forms part of the “income” are to be taxed. The capital receipts which are otherwise not subject to tax under the normal provisions of the Act are not envisaged to be taxed under the provisions of “Minimum Alternate Tax”. Once a receipt is not considered as income, the same cannot be subjected to tax under this Act as such receipt naturally classified under capital receipt, which was never meant to be taxed cannot be taxed even u/ s 115 JB. Relevant extract of the order of the ITAT is reproduced below:
“23. The similar view has been taken by various Co- ordinate Benches of IT AT, to mention a few, IT AT Delhi in the case of Montage Enterprises Pvt. Ltd. vs. DCIT in IT A No 5124/Del/2011, in the case of Malana Power Co. Ltd. in ITA No. 3957 & 1550/Del/2015 and ITAT Mumbai in the case of Shivalik Venture Pvt. Ltd. vs. DCIT in ITA No. 2008/ Mum/2012 wherein it was held that capital subsidy shall be excluded in computing book profit u/ s 115JB of the Act.
24. To conclude,
(a) Not considering the subsequent interpretation of law through the judgment of the Hon’ ble Supreme Court or the Hon’ ble jurisdictional High court would constitute a mistake apparent from record.
(b) The Excise subsidy refund is to be treated as capital receipt.
(c) Capital receipts are liable to be excluded for the purpose of computation of book profit u/s 115”
15. In case of ACIT -vs.- Shree Cement Ltd (ITA No. 614/JP/2010) order dated 0909-2011. (Refer Page No. 716-751 of Paper Book), the Coordinate Jaipur Bench of ITAT was dealing with the issue as to whether subsidy received which was admittedly capital in nature can be subject to MAT. The ITAT held that there was never any intention behind introduction of section 115JB to tax something which is not taxable at all. It was held that tax incentives needs to be excluded in computing Book Profits u/s 115JB being capital receipt not having any element of income embedded therein and not representing the real working results of the company. The Tribunal further held that:-
With the above discussions, the only issue left to be considered is whether exclusion of the above capital receipt is in line with the principles as laid down by Hon’ble Apex Court in the case of Apollo Tyres (supra). In the case of Apollo Tyres (supra), the question before the Apex Court was whether an AO can, while assessing a company for income tax u/s 115J of the IT Act, question the correctness of the P&L a/c prepared in accordance with requirements of Parts II and III ofSch. VI to the Companies Act. From the question as framed before the Apex Court it is clear that the issue before the Hon’ble Court was with regard to power of the AO to recast audited accounts prepared in accordance with Part II and Part III of the Sch. VI to the Companies Act. Therefore, for applicability of the decision of the Apex Court the prerequisite is that the accounts are prepared in accordance with Part II arid Part III to Sch. VI of the Companies Act. If however the P&L accounts are not in accordance with Part II and III of Sch. VI to the Companies Act, the said decision cannot be applied and in that situation it does not prohibit the needful adjustment.
16. By placing reliance on the above decision in the case of Shree Cement Limited (Supra), carbon credit being a capital receipt was held to be excludible while computing Book Profit in the following cases-
ACIT -vs.- Shree Cement Ltd. NTA No. 504/JP/2012, order dtd. 27-01- 2014
ACIT -vs.-M/s L.H. Sugar Factory Limited NTA No. 417 & 418/LKW/2013, order dtd. 09-02-2016.
17. Hon’ble Bombay High Court in the case of CIT -vs.- Harinagar Sugar Mills Ltd. (ITA No. 1132 of 2014), order dtd. 04-01-2017 (Refer Page No. 752-755 of Paper Book) has held that the object or purpose of the subsidy decides its character – whether on revenue or capital account. The point of time at which subsidy is paid and the source of subsidy are immaterial. Where the receipt was on capital account, the same needs to be excluded in computing Book Profit u/s 115JB.
18. In the case of DCIT -vs.- Binani Industries Ltd. (ITA No. 144/Kol/2013, order dtd 02-03-20161. (Refer Page No. 772-789 of Paper Book), it was held that receipt from forfeiture of share warrants credited to the P & L A/c and disclosed in the notes to accounts being a capital receipt shall be excluded in computing Book Profit. It held that in order to determine the real profit of the assessee as laid down by the Hon’ble Apex Court in the case of Indo Rama Synthetics (supra) adjustment need to be made to the disclosures made in the notes on accounts forming part of the profit and loss account of the assessee and the profits arrived after such adjustment should be considered for the purpose of computation of book profits u/s 115JB of the Act.
19. In the case of ACIT -vs.- The Nilgiri Tea Estate Ltd. (2014) 65 SOT 14 (Cochin) (URO) (Refer Page 151 -156 of the Case Law Paperbook) wherein it was held that any income, which does not fall within the purview of Total Income u/s 5 of the IT Act, cannot be taxed under any other provisions of the Act. Further, the Hon’ble Tribunal held that the provisions of Chapter Xll-B of the Act do not operate to extend the scope of Total Income but provides an alternative basis for computing the income and hence income which is not chargeable to tax cannot be included in the computation of Book Profit u/s 115JB.
20. In the case of Sutlej Cotton Mills Ltd -vs.- ACIT (1993) 45 ITD 22 (Cal) (SB) (Refer Page 157-201 of the Case Law Paperbook), it was held that according to standard accounting practice, capital receipt cannot be part of the profit. Therefore, capital receipts which do not have the character of income cannot be liable to income-tax by adding it to the book profit. When an amount which forms part of the book profit itself cannot be taxed under s. 115J, when it does not have the income character it has to be accepted that when what is routed through the P&L account and carried to reserve is of a capital receipt and does not have an income character. It cannot be added back to the book profits merely because of the enabling provision in the Expln. to s. 115J for the purpose of imposing a tax thereon.
21. After going through the above referred judgments and decisions and on examining the facts of the instant case, we find that the excise duty exemption has been admittedly the capital receipt and the finding of the ld. CIT(Appeals) that the excise duty exemption is not liable to be taxed under the normal provisions of the Income Tax Act being not in dispute for us, the alleged capital receipt cannot be categorised as part of the book profit. In the case of assessee being covered by the excise duty notification, such sum collected on the goods manufactured and sold is in the nature of incentive subsidy given for establishing the units in backward areas and to generate employment opportunities. The said fact is evident from the office memorandum dated 07.01.2003 of Ministry of Commerce and Industry, which reads as under:-
3.4 On perusal of the above, it can be seen that incentive in the form of Excise Duty Exemption has been given with an objective to achieve industrialization in the backward areas of Himachal Pradesh and Uttaranchal and to generate employment opportunities. The object of the assistance was not to enable the businessman to run the business more profitably but encourage a businessman to set up a new unit or expand the existing unit for overall economic development of the state. Hence, the incentives granted by the Government of India vide Office Memorandum No. 1(10)/2001-NER issued by DIPP, Ministry of Commerce and Industry, GOI dated 07-01-2003 read with Notification No. No.50/2003- CE dated 10-06-2003, will be treated as capital receipt and not liable to tax. In this regard, statement showing computation of excise duty exemption received during the year aggregating to Rs. 87,98,09,432/- alongwith copy of Excise Returns (in case of Rudrapur Unit 1) and copy of Form A (in case of Rudrapur Unit 2) has been enclosed (Refer Page No. 599-683 of Paper Book).
22. In the light of above decision as well as the Memorandum issued by the Ministry of Commerce & Industry, we find that the excise duty exemption is purely capital receipt and is neither chargeable to tax under the normal provisions of the Income Tax Act nor is to be included as part of the book profit for computing the minimum alternative tax as per the provisions of section 115JB of the Act. Thus Ground No. 2 raised by the assessee is allowed.
23. Apropos to the additional ground raised by the assessee for claim of deduction of amortisation of leasehold land expenses at Rs.18,73,242/-the assessee claimed the same as per the Accounting Standard 19 as deduction for amortisation of leasehold land and land development charges for various lands taken on lease by the assessee for the periods upto 99 years for carrying on the business. The ld. Assessing Officer rejected the assessee’s claim on the ground that the amortisation of leasehold land does not specify the conditions laid down in section 35D(2) of the Act and is also not liable to deduction under section 37 of the Income Tax Act. This view of the ld. Assessing Officer was confirmed by the ld. CIT(Appeals). However, ld. CIT(Appeals) gave a relief to the assessee by increasing the quantum of deduction under section 80IC/80IE of the Act for the lease rental attributable to the units eligible for deduction under section 80IC and 80IE of the Act. Aggrieved, the assessee is in appeal before the Tribunal.
24. The ld. counsel for the assessee referring to the decision of the Hon’ble Supreme Court in the case of Empire Jute Co. Limited –vs.- CIT (1980) 124 ITR 1 (SC), the decision of the Coordinate Bench of Delhi in the case of ACIT –vs.- NIIT Technologies Limited (2021) 123 com 135 (Delhi), decision of Coordinate Bench Ahmedabad in the case of DCIT –vs.- M/s. Adani Gas Limited (2018) ITA No. 775/Ahd./2014 (Ahmedabad-Tribunal); judgment of the Hon’ble Gujarat High Court in the case of DCIT-vs.- Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.), submitted that the assessee deserves to be allowed the claim of amortisation of leasehold claimed as it is consistently claimed proportionately on the lease rents paid for various lands and other immovable properties taken on lease for a long period.
25. Per contra, ld. D.R. vehemently argued supporting the order of the lower authorities.
26. We have heard the rival contentions and perused the relevant material available on record. The issue raised in the additional ground by the assessee is that the ld. CIT(Appeals) erred in not allowing the claim of expenses of RS.18,73,242/- for amortisation of leasehold land. We notice that the appellant has taken various lands on lease for a long period ranging upto 99 years, which are used to carry out on business. Upfront lease premium is paid in the first year and, therefore, normal lease rentals are paid every year. The assessee follows Accounting Standard 19 issued by the Institute of Chartered Accountants of India which provides for mechanism of amortising such lease premium. A detailed calculation of amortisation of lease premium paid during the year along with the yearly rental is placed before us in paper book at pages 30 and 31.
27. The ld. Assessing Officer has denied the claim stating that the assessee’s such claim cannot be made under section 35D of the Act and the said expense is also not allowable under section 37 of the Act. Section 35D of the Act deals with the amortisation of certain preliminary expenses. Before us, the issue is amortisation of lease amount and the lease premium paid by the assessee. It cannot be equated to preliminary expenses. Therefore, the said expense is not allowable under section 35D of the Act. The question is whether such expenses in the nature of amortisation of lease rental is allowable as revenue expenditure under section 37(1) of the Act? Section 37(1) of the Act provides that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”.
28. What needs to be examined whether the alleged expense has been expended wholly and exclusively for the purposes of business. In the instant case, it is not in dispute that the leasehold lands taken by the assessee on lease are used for carrying out business operation and the lumpsum lease money was paid as per the agreement and was required to be paid at the beginning of the lease term but the said sum is spread over the entire lease term. Now what is the mechanism to quantify the amount and how to spread the amount across the lease period. For this purpose, the assessee has taken guidance from the Accounting Standard 19 issued by the Institute of Chartered Accountants of India and in accordance with the procedure laid down therein and principal of accounting has debited the annual amount of lease in the profit & loss account and balance prepaid lease money is shown on the assets side in each year. The amount of amortisation debited to profit & loss account is reduced from the advance lease money paid. We find no error in this way of accounting treatment of the amortisation of the leasehold expenses and thus the same being spent exclusively for the business purposes has been rightly claimed as expenditure by the assessee under Section 37 of the Act. Our view is supported by the decision of the Coordinate Bench of Delhi in the case of NIIT Technologies Ltd.(supra), wherein it was held that the assessee would be entitled to claim 1/90th of amount of total lease rent every year till period of lease of 90 years as revenue expenditure and entire lease rent amount would not be allowed during the relevant year.
29. Similarly Coordinate Bench Ahmedabad in the case of Adani Gas Limited (supra) confirmed the decision of ld. CIT(Appeals) relying on the judgment of the Hon’ble Gujarat High Court in the case of DCIT –vs- Sun Pharmaceuticals Industries Limited (2009) 227 CTR 206 (Guj.) holding that – “Amortization is an accounting term that refers to the process of allocating the cost of an asset over a period of time and hence it is nothing else than depreciation. The allowability of costs towards amortization of leasehold land is in question. Having heard the rival submissions on the issue, we find that the CIT(A) has rightly appreciated the facts lin perspective and concluding the issue in favour of assessee in the light of decision of Hon’ble Gujarat High Court in the case of DCIT –vs.- Sun Pharmaceuticals Industries Ltd. (2009) 227 CTR 206 (Guj.). We do not see any infirmity in the reasoning given by the CIT(A) while deleting the aforesaid disallowance of amortization leasehold lands. We thus decline to interfere”.
30. We, therefore under the given facts and circumstances of the case and respectfully following the decisions referred hereinabove, are of the view that the amortization of leasehold land and land development charges of Rs.18,73,242/- deserves to be allowed as an expenditure under section 37 of the Act. Thus the finding of the ld. CIT(Appeals) is reversed and the additional ground raised by the assessee is allowed.
31. In the result, the appeal of the assessee is partly allowed.
32. Now we take up the Revenue’s appeal, wherein the Revenue has raised the following grounds:-
Corporate Guarantee
(i) The Ld. CIT(A) has erred on the facts and in law by restricting the guarantee fee rate to 0.5% which is much lower than the CG rate of 1.22%, 1.69% & 1.27% respectively as determined by the TPO, for a non-refund based financial assistance.
(ii) The Ld. CIT(A) has erred on the facts and in law in stating that the CG fee should be benchmarked by the TPO at 0.5% without giving any scientific or logical reason for the same while the TPO had determined the rate based on the information available on record.
(iii) The Ld. CIT(A) has erred on the facts and in law by restricting the CG rate 0.5% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution, and accordingly, the effective rate of interest was calculated and CG rate was determined accurately.
(iv) The Ld. CIT(A) has erred on the facts and in low in determining the arm’s length rate of interest on adhoc basis and not in accordance with 92C of the Income-tax Act, 1961 (the Act) read with Rule 10B & Rule 10C of the Income- tax Rules, 1962 (the Rules).
Inter-unit transaction
(v) The Ld. CIT(A) has erred on facts and low in the circumstances of the case in deleting the arm’s length price adjustment of Rs. 2,48,39,215/- made by the TPO as per section 92CA(3) of the Income Tax Act, 1961 on account of purchase transaction between the assessee and its AE i.e. purchase by the eligible units from the non-eligible units of the same assessee.
(vi) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by not appreciating the fact apparent from record that, in reply of the assessee dated 13.10.2017 in response to the show cause notice, no mention was made anywhere regarding higher profitability of the eligible unit on account of Excise duty exemption, VAT and lower cost of production.
(vii) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by admitting new facts based on new evidence/document which has not passed the test of Rule 46A of the Income Tax Rules, 1962.
(viii)The Ld. CIT(A) has erred on facts and law in the circumstances of the case without showing the sufficient cause which prevented the assessee from production such facts and evidences during the Transfer Pricing Audit proceeding before the TPO and thereby violates Rule 46A of the Income Tax Rules, 1962.
(ix) The Ld. CIT(A) has erred on facts and low in the circumstances of the case by accepting PLI (Profit Level Indicator) of 17.64% and 19.35% of the eligible units and not considering that it is diversion of profit from non-eligible to eligible unit.
(x) The Ld. CIT(A) has erred on facts and law in the circumstances of the case by accepting higher profit margin of the eligible units by only examining some limited factors namely Excise Duty, VAT & Lower cost of production without giving an opportunity of examining assessee’s claim by the TPO.
33. First we will take up the issue of addition made by the ld. Assessing Officer towards Corporate Guarantee given by the assessee to its Associated Enterprises.
34. Brief facts relating to this issue are that during the year under appeal, the assessee-company had following inter-company guarantee arrangements for its Associated Enterprises:-
(i) Providing a Corporate Guarantee to Standard Chartered Bank (SCB) for a term loan/letter of credit facility on behalf of Greenlam Asia Pacific Pte. Ltd. (“Greenlam Asia”) (referred to pages 446 to 461 of the paper book);
(ii) Providing a Corporate Guarantee to United Overseas Bank (UOB) for a commercial property loan on behalf of Greenlam Asia (referred to pages 462 to 471 of the paper book); and
(iii) Providing a standby Letter of Credit (SBLC) to City Bank N.A. for on behalf of Greenlam America Inc. (“Greenlam USA”) and Greenlam Asia (referred to pages 478 to 485 of the paper book).
Ld. Assessing Officer during the course of assessment proceedings observed that international transaction has taken place and referred the matter to Transfer Pricing Officer, who after considering the submission of the assessee, held that Corporate Guarantee fees @ 1.22%, 1.69% and 1.27% of the respective loan amounts should be treated as income of the assessee. Ld. Assessing Officer accordingly made the addition of Rs.43,67,295/-. Aggrieved, the assessee preferred appeal before the ld. CIT(Appeals) firstly claiming that the said Corporate Guarantee given to the Associated Enterprises do not come under the purview of international transactions and also raising an alternative plea that in view of the settled judicial precedence and looking to the facts of the case, the estimated Corporate Guarantee fees can be charged within the range of 0.3% to 0.5% and the same would meet the arm’s length criteria based on various Tribunal Rulings. However, ld. CIT(Appeals) brushed aside the assessee’s contention that the said transaction does not fall under the purview of international transaction. As regards the quantum of Corporate Guarantee fee is concerned, ld. CIT(Appeals) confirmed the same @ 0.5% taking support from the decision of various Tribunals. Aggrieved, Revenue is in appeal before the Tribunal.
35. D.R. vehemently argued supporting the orders of ld. Transfer Pricing Officer and the ld. Assessing Officer.
36. Per contra, ld. counsel for the assessee reiterated the submissions made before the ld. CIT(Appeals), the finding of the ld. CIT(Appeals) are also referred to the following decisions of Coordinate Benches determining the arm’s length guarantee fees within the range of 0.3% to 0.5% of the amount:-
