Case Law Details

Case Name : DCIT Vs. M/s. Orient Paper & Industries Ltd. (ITAT Kolkata)
Appeal Number : I.T.A Nos. 1936 & 1937/Kol/2014
Date of Judgement/Order : 09/06/2017
Related Assessment Year : 2006- 07 & 2007- 08
Courts : All ITAT (7438) ITAT Kolkata (595)
 1. In this appeal the only issue that is to be decided as to whether the CIT-A justified in holding that the purchase of sales tax exemption certificates is a revenue expenditure in the facts and circumstances of the case.

2. The brief facts of the case are that the assessee is a company and engaged in manufacturing of papers, cement, fans and other engineering products. Initially, the assessment was completed u/s. 143(3) of the Act on 23-12-2011. Thereafter, the CIT II Kolkata having exercising his jurisdiction u/s. 263 of the Act declared that the said assessment was erroneous and prejudicial to the interest of revenue and directed the AO to examine the issue regarding the allow ability of sum of Rs. 1,62,74,997/- claimed towards purchase of sales tax exemption certificates and to frame the assessment denovo vide his order date 14-03-2011.

3. During such proceedings the assessee produced necessary evidence in support of his contentions and contended that the sales tax exemption certificates were purchased from the three different Wind Power Projects for a consideration aggregating of Rs. 1,62,74,997/-. In pursuance of sales tax scheme 1998 introduced by the Govt. of  Maharashtra the assessee claimed credit of sales tax payments by way of purchase of sales tax exemption certificates. But, according to AO, the assessee collected total sales tax of Rs. 68,23,30,482/- and deposited only of  Rs. 60,94,00,944/-with the sales tax authorities. The said amount was not credited to P & L account and the assessee debited the amount incurred for purchase of the sales tax exemption certificates of Rs. 1,62,74,997/- to its P & L account as against sales tax exemption availed of Rs. 2,16,99,999/-. The AO has relied on the decision of the Hon’ble Special Bench, ITAT Mumbai in the case of Reliance Industries Ltd reported in 273 ITR 16(Trib) and treated such purchase of exemption certificates worth of Rs. 1,62,74, 997/-as capital expenditure and as such added the same to the total income of the assessee.

4. Aggrieved, the assessee preferred an appeal before the CIT-A and contended before him that the AO was wrong in placing reliance on the decision of the Hon’ble Special Bench, ITAT, Mumbai in the case of Reliance Industries Ltd (supra) and the facts and circumstances therein are entirely different from the facts of the present case. The assessee further contended that the Govt of Maharashtra under the Sales Tax Scheme 1998 provided that the wind mill owners could transfer such sales tax entitlement certificates to a third party. The assessee purchased such sales tax exemption certificates from three different wind mill project owners with the permission of Sales Tax Department of Maharashtra and in pursuance of which such sales tax entitlement certificates transferred to assessee. The assessee further submitted that the said certificates are not subsidy from sales tax department. The assessee by purchasing the said exemption certificates got benefit of Rs. 54,25,002 (Rs. 2,16,99,999 – Rs. 1,62,74,997). The assessee contended that the Hon’ble Special Bench in the case of Reliance Industries Ltd (supra) decided the issue whether the subsidy receipt is a revenue receipt or capital receipt. Therefore, the ratio of decision therein does not apply to the present case. The CIT-A considering the submissions of the assessee deleted the impugned addition by observing as under:-

3.2. I have considered the facts of the case. The appellant purchased sales tax entitlement certificates, which entitled it to claim sales tax exemption to the extent of Rs. 2,16,99,999/-. The assessing officer has disallowed the cost of purchase of the said certificates by treating the same as of capital nature. He has also stated that the benefit of sales tax was not included in sales tax collection/payment. In this regard, it is noted, that the appellant was following a system of accounting where sale was normally shown exclusive of sales tax. However, since sales tax collected from the customer to the extent of exemption available was not required to be paid to the sales tax department, the appellant has, as explained by it, shown such sales at a gross value i.e. inclusive of sales tax. The appellant has produced a certificate from its auditor in support of this claim and has informed that the said certificate was produced before the assessing officer as well. Thus, the sales, which were cleared against the exemption certificate were booked at the amount inclusive of the exemption of Rs. 2,16,99,999/-. As against this, it claimed the amount of Rs. 1,62,74,997/-, which was the purchase price of the sales tax entitlement certificate, as an expenditure. Thus, the appellant had shown receipt of Rs. 2,16,99,999/- and expenditure of Rs. 1,62,74,997/-. The assessing officer has not specifically refuted this claim. He is, however, of the view that the cost of sales tax exemption entitlement certificate was capital in nature. For this, he has drawn strength from the decision of Special bench of tribunal in the case of Reliance Industries Ltd. (supra). However, on going through the said decision, it is seen, that the same was delivered in respect of an assessee who had received subsidy from government for setting up new industrial unit in the specified backward area. The Hon’ble tribunal held that such sales tax exemption was in nature of subsidy for purpose of facilitating the assessee who set up industry in a notified area and thus constituted capital receipt. The material facts in the appellant’s case are quite different. Here, the appellant has not set up any industrial unit eligible for subsidy and hence did not receive any exemption as such. Instead, the unit was set up by some other companywhich became entitled for sales tax exemption, transferable as per the terms of the scheme. The appellant purchased sales tax exemption entitlement from the aforesaid company at a consideration. As a result of this, it became entitled for exemption from payment for sales tax to the extent of Rs. 2,16,99,999/-. The appellant offered the amount of Rs. 2,16,99,999/- as its income and claimed the corresponding expenses of Rs. 1,62,74,997/- towards purchase of exemption certificate against the same. Thus, the appellant did not get sales tax exemption due to setting up of any industrial unit or any investment etc. Rather, it was a purely commercial transaction in which the appellant purchased the entitlement from another party at a price and derived profit from the same. Neither the receipt, nor the expenditure involved in such transaction, which is simply commercial in nature, can, in my opinion, be called capital in nature. In fact, if the view of the assessing officer, that the purchase price of sales tax exemption was capital in nature, is accepted, by the same token even the receipt of Rs. 2,16,99,999/- will also have to be held as capital in nature. The appellant has rightly treated both items as revenue in nature and has offered the difference as income. Action of the assessing officer in accepting receipt as revenue and expenditure part as capital is not sustainable. The dis allowance of Rs. 1,62,74,997/- is accordingly deleted. ”

5. The ld.DR submits that the assessee purchased sales tax exemption certificates from other entities which expenditure is capital expenditure. He relied on the order of the AO.

6. On the other hand, the ld.AR of the assessee has relied on the order of the CIT-A.

7. Heard rival submissions and perused the material available on record. We find that the AO decided the issue by relying on the decision of the Special Bench, ITAT Mumbai in the case of Reliance Industries Ltd (supra). The CIT-A distinguished the order. We find from the impugned order of the CIT-A that, the Special Bench decision in the case of Reliance Industries Ltd (supra) as rightly pointed out by ld. AR, decided the issue as to whether the subsidy receipt in that case is a revenue or capital receipt. We find that in the present case the assessee claimed expenditure from purchasing Certificates from third party under the scheme introduced by the Govt. of Maharashtra and with the permission of the concerned department. In such circumstances, we are of the view that the CIT-A was justified in deleting same. We uphold the order of the CIT-A. Therefore, the ground raised by the revenue is dismissed.

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