Only if subsidy or other grant was given to offset the cost of an asset, such payment would be covered by Explanation 10 to section 143(1). In the instant case where subsidy was received as an incentive for setting up industries to generate employment, the mere fact that specified percentage of fixed capital cost was taken as basis for determining the subsidy, it should not be mistaken as a payment intended to subsidise the cost of fixed assets. Therefore, AO was directed to not to adjust the subsidy so received out of the cost of depreciable assets.
FULL TEXT OF THE ITAT JUDGMENT
These are cross-appeals by Assessee and Revenue against the orders of the Commissioner of Income Tax (Appeals)-3, Hyderabad, dated 24-03-2017 & 27-03-2017 for the AY. 2006-07, AY.2008-09, AYs.2011-12 to 2013-14.
2. Briefly stated facts are that assessee-company is engaged in the business of manufacture of cement and chemicals and has filed returns of income, offering incomes under normal computation as well as u/s. 115JB of the Income Tax Act [Act]. In the order u/s. 143(3) dt. 24-12-2008 for AY. 2006-07, the Assessing Officer (AO) determined the income under normal provisions at NIL and accepted the income u/s. 115JB at Rs. 80,59,75,288/-. In that assessment year, AO inter-alia disallowed the claim of increased interest element on account of foreign exchange fluctuations at Rs. 37,65,807/- and also disallowed an amount of Rs. 8,12,27,057/- u/s. 40(a)(ia) of the Act. In addition to the above amount, the AO also added an amount of Rs. 3,01,76,155/-representing the element of Excise Duty on Closing Stock. AO has not allowed a deduction u/s. 40(a)(ia) disallowed in earlier year but allowable in this year. Aggrieved on the above order, assessee preferred an appeal before the Ld.CIT(A).
3. In the course of appeal proceedings, assessee has raised an additional ground that sales tax exemption/remission of Rs. 35,91,26,456/-, shown in the P&L A/c as a receipt is in fact a capital receipt and is not includable in the total income, though admitted and assessed. Elaborately discussing the issues, Ld.CIT(A) in the impugned assessment year has allowed the contentions of assessee partly on the increased interest element on foreign exchange and completely on the disallowance u/s. 40(a)(ia), addition of Excise Duty on closing stock and claim of amount disallowed in earlier year u/s. 40(a)(ia).
4. With regard to the additional ground raised for the first time before the CIT(A), Ld.CIT(A) asked the comments of the AO and then, went on adjudicating the issue elaborately and gave relief, directing the AO to exclude the above amount as a capital receipt. However, while directing the above amount to be excluded as capital receipt, Ld.CIT(A) also directed the AO to proportionately exclude the same amount from the cost of the depreciable assets. Revenue is aggrieved mainly on the issue of excluding the sales tax exemption and other issues which CIT(A) gave relief, whereas the assessee is aggrieved on the direction of the Ld.CIT(A) to exclude the same amount proportionately from the cost of the depreciable assets. Further, Revenue is aggrieved on the amount of Excise Duty added to the closing stock contesting that Ld.CIT(A) has not followed the prescribed procedure under Rule 46A of the Income Tax Rules.
5. In the AY. 2008-09, AO completed the assessment making the addition of Rs. 4,55,52,000/- as valuation of closing stock and amount of Rs. 26,91,787/- claimed u/s. 80G of the Act. Assessee preferred an appeal originally on the addition of Excise Duty in the closing stock valuation, but raised the additional ground for exclusion of sales tax exemption/remission of Rs. 81,48,52,889/-. Ld.CIT(A) following the orders in AY. 2006-07, gave relief on both the grounds. However, the Ld.CIT(A) directed that the reduced sales tax subsidy to be adjusted proportionately from the cost of assets for the purpose of depreciation. In this year, Revenue is aggrieved on the direction of the CIT(A) on both the issues, whereas assessee is aggrieved on the direction of CIT(A) for reducing the proportionate cost of the depreciable assets.
6. In the AY. 2011-12, assessee admitted a loss of Rs. 1,85,23,20,898/- and in the course of assessment proceedings made claim of exclusion of sales tax subsidy/exemption which the AO has not considered. Therefore, assessee preferred an appeal before the CIT(A) raising the only ground for exclusion of sales tax incentive.
7. In the AY. 2012-13, assessee has raised the issue of exclusion of sales tax subsidy before the AO himself by filing revised return. However, AO did not agree with assessee’s claim and rejected the same. Thus, while completing the assessment, out of the loss returned in the revised return, AO added the sales tax exemption amount while completing the assessment.
7.1. In the appeal before the Ld.CIT(A), Ld.CIT(A) partly allowed the contentions. While allowing assessee’s claim of exclusion of sales tax subsidy, AO was directed to adjust the said amount proportionately from the cost of assets for the purpose of depreciation. Revenue is aggrieved on the direction of the CIT(A) to exclude the sales tax subsidy, whereas assessee is aggrieved on the direction of the CIT(A) to adjust in the cost of depreciable assets.
8. In the AY. 2013-14, as in the previous assessment year, assessee has raised the issue of exclusion of sales tax subsidy before the AO himself. However, AO did not agree with assessee’s claim and rejected the same. Thus, while completing the assessment, out of the loss returned in the revised return, AO added the sales tax exemption amount while completing the assessment.
8.1. In the appeal before the Ld.CIT(A), Ld.CIT(A) partly allowed the contentions. While allowing assessee’s claim of exclusion of sales tax subsidy, AO was directed to adjust the said amount proportionately from the cost of assets for the purpose of depreciation. Revenue is aggrieved on the direction of the CIT(A) to exclude the sales tax subsidy, whereas assessee is aggrieved with the direction of the CIT(A) to adjust in the cost of depreciable assets.
9. Thus, as can be seen, the main grievance of the Revenue is the direction of the CIT(A) to exclude sales tax subsidy and assessee’s objection in all the years is with reference to direction of reducing the amount proportionately from the cost of depreciable assets. These issues are considered issue-wise in all the appeals.
10. We have heard the Ld. Counsel and Ld.DR in detail and perused the paper book placed on record.
Issue of sales tax subsidy as capital receipt:
11. This issue arises in all the impugned Revenue appeals. As briefly stated earlier, assessee has made the claim for the first time as an additional ground before the Ld.CIT(A) in AYs. 2006-07 and 2008-09. In the AY. 2011-12, the claim was made before the AO but the AO has not allowed the same. In AYs. 2012-13 & 2013-14, assessee made the claims before the AO by filing the revised returns which the AO has not allowed by elaborately discussing the issue. It was the contention of assessee in the submissions filed along with the revised return (in two of the impugned years) that sales tax incentive was given by the Government of Gujarat under the new incentive policy – Capital Investment Incentive (General Scheme) 1995-2000 for setting up the industries to generate employment. It was further submitted that assessee started clinker and cement unit at Motibar, Kutch District of Gujarat State and the Government of Gujarat has issued eligibility certificate for sales tax incentives on 17-05-2002 provisionally @ 25% of tentative eligibility (limited to Rs. 151.50 Crores). There was an amendment on 21-04-2003, clarification on 05-06-2003 and finally amendment on 27-06-2007, recording the total investment of assets at Rs. 623.91 Crores and on fixing the eligibility period from 13-04-2002 to 12-04-2018. Thus, assessee got entitled to exemption/remission of sales tax @ 100% of its fixed capital investment of Rs. 623.91 Crores. It was submitted that dealing with the incentive/exemption granted under the same resolution, the Hon’ble Gujarat High Court in the case of CIT Vs. M/s. Lincon Polymers Pvt. Ltd., in Tax Appeal No. 972 of 2006, dt. 28-12-2006 held that the subsidy was not given to run the business and not to give any benefit on day to day functioning of the business and was aimed to cover capital outlay of assessee. It was held that amount was capital receipt not chargeable to tax. Relying on the principles laid down by the Hon’ble Gujarat High Court, assessee submitted to the AO that the sales tax incentive/remission received by the company is capital in nature.
11.1. AO, however, did not agree with the above contentions and elaborately discussed about assessee’s books of account, accounting standards, principles of taxation and provisions of Section 2 etc., and also various other decisions to come to a conclusion that the amount received is accruing in the course of a trading transaction of a business and therefore, revenue receipt and it is taxable. He also distinguished the judgment relied upon to state that the decision relied upon by the assessee was rendered on the issue of taxability of capital investment subsidy and not sales tax incentive. Holding the above view, AO rejected the claim in the assessment orders for AYs. 2012-13 and 2013-14.
11.2. When the matter was agitated before the Ld.CIT(A) in the form of additional ground for AY. 2006-07 and 2008-09 and as a regular ground from AYs. 2011-12 onwards, Ld.CIT(A) analysed the issue under various heads. Ld.CIT(A) has formulated five questions for consideration, which are as under:
a) Whether the assessee can rectify his own mistakes by way of filing an Appeal?
b) Whether the assessee can raise fresh claim/relief/raise an issue which was not raised before the Assessing Authority ?
c) Whether the sales tax exemptions/remissions granted by government is capital receipt or revenue receipt?
d) Whether the assessee is entitled to relief both under normal provisions and u/s. 115JB?
e) What would be the cost of asset and depreciation allowable if such sales tax receipt is treated as capital in nature?
11.3. Even though the first two questions does not arisei n three assessment years of AYs. 2011-12 to 2013-14, Ld.CIT(A) elaborately discussed the issues in AY. 2006-07 and followed the same decision in other years.
11.4. Ld.CIT(A)’s findings on issue-wise on sales tax- subsidy are as under:
“9.3 Regarding the first issue whether the assessee can file the appeal against his own mistake, the judicial precedents on this issue are as under:
Article 265 of the Constitution of India reads that “No tax shall be levied or collected except by the authority of law.” In terms of the Article 265 of the Constitution, tax can be levied only if it is authorized by law. The taxing authority cannot collect or retain tax that is not authorized. Any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional.
The Supreme Court of India in CIT Vs. Shelly Products and another [261 ITR 367] held that if the assessee has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of income-tax or is not income within the contemplation of law, the assessee may bring the same to the notice of the assessing officer, which if satisfied, may grant the assessee necessary relief and refund the tax paid in excess, if any.
In CIT Vs. Bharat General Reinsurance Co. Ltd. 81 ITR 303 (Del), this court held that merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year.
The Bombay High Court in Balmukund Acharya Vs. DCIT, CIT and UOI 310 ITR 310 held that Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.
The Bombay High Court in Nirmala L. Mehta V. A.Balasubramaniam, C.I.T. (2004) 269 ITR 1 held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected Circular No. 14(XL-35) of 1955, dated 11-04-1955, issued by the Central Board of Direct Taxes reads as under:
“Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a tax payer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assesses on whom it is imposed by law, officers should –
a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs”.
A reading of the circular Shows that a duty is cast upon the assessing officer to assist and aid the assessee in the matter of taxation. They are obliged to advise the assessee and guide them and not to take advantage of any error or mistake committed by the assessee or of their ignorance. The function of the Assessing Officer is to administer the statute with solicitude for public exchequer with an inbuilt idea of fairness to taxpayers.
Therefore it is abundantly clear from the above judicial precedents that an amount is taxable only in accordance with the law, not because the assessee himself offered it to tax either by mistake or by inadvertence.
9.4 The second issue is, whether the assessee can make claim/ raise the issue before the appellate authority for the first time?
In this regard when the matter was remanded to the Assessing officer in his report dated 29-07-2016 the AO opposed the admission of additional ground on the ground that :-
a) Any such claim can be made only by way of filing revised return as held by the Apex Court in case of Goetze India Limited. In the instant case the assessee did not file the revised return of income making such claim.
b) On the date of filing of return, the assessee was not entitled to capitalize the sales tax.
c) The appellate forum cannot be used to legitimize assessee’s own mistakes.
d) The assessed income cannot go below the returned income.
e) That with effect from 1-4-2016 section 2(24) is amended, sub clause XVIII is inserted treating any subsidy or grant as income.
The issue of making fresh claim before the appellate authorities is fairly settled legal issue. Wherein several courts held that the assessee can raise the issue for the first time before the appellate authorities, before CIT(A), before the Hon’ble ITAT. The judicial precedents are :-
JUTE CORPORATION OF INDIA 187 ITR 688 (SC). In this case the assessee had claimed reduction of purchase tax for the first time before the appellate authority. The hon’ble court held that an appellate authority has all the powers which the assessing officer has in deciding the question before it. It was further held that there is always a case for raising additional ground, if such ground could not be raised before the Assessing authority or such ground became available on account of change of circumstances or law. It was further held that there may be several factors justifying the raising of such new ground in appeal, and each case has to be considered on its own facts.
NTPC LIMITED Vs. CIT 229 ITR 383 (SC) wherein it was held that the purpose of assessment was to assess correctly the tax liability of the assessee in accordance with the law. If for example, “as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed, or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the tribunal u/s. 254 only to reduce the grounds which arise from the order of the Commissioner of Income Tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.”
Goetze India Limited 284 ITR 323 (SC) (2006), in this case the Hon’ble Supreme Court held that no fresh claim can be made before the AO except by way of filing revised return, however in the same case the Hon’ble court held that there is no restriction in making such claims before the appellate authorities.
GRASIM INDUSTRIES Vs Dept. of Income-Tax the Hon’ble Mumbai Bench in MA. No.247/MUM/2010 arising out of ITA No. 6253/Mum/1999, in an identical case involving sales-tax subsidy where the assessee himself had offered such sales-tax as revenue receipt, even after considering the new scheme of assessment (where 98% of the returns are not scrutinised, once the returns are processed no further action is taken by the department, where there is no scope for assessee to rectify his own mistakes), the Hon’ble Mumbai Bench held that even in the new scheme of assessment, the department cannot fasten tax to income which is not liable to tax.
Similar view was held in case of
Prithvi Share Brokers 349 ITR 336 (MUM)
GVK Industries Ltd Vs. ACIT (2012) 24 Taxmann.com 107 (Hyd)
c. Parikh & Co. 122 ITR 610 (Guj)
In view of the above judicial precedents it is a fairly settled issue that the assessee can raise the additional grounds for the first time before the appellate authority. The spirit behind all these decisions is, only the legitimate taxes due are collected and not otherwise.
9.5 The third issue is whether the sales tax exemption/remission granted by the Government of Gujarat vide its resolution dtd 11-9-1995 is a capital receipt or revenue receipt? In order to decide this issue it is essential to know the purpose of Gujarat government’s resolution which is evident from the first page of such resolution repeated as under
“The new industrial policy announced by the Government of Gujarat has emphasized the need to accelerate developments of the backward areas of the State and to create large-scale employment opportunities. It has also stressed the need to increase the total flow of investment to the industrial sector with the proper development of infrastructure and human resources to sustain long-term growth and achieve sustainable development.
2. The Government of Gujarat is committed to create large-scale employment opportunities to absorb the swelling ranks of the unemployed. State Government has announced the new employment policy in order to ensure that priority is given to local persons for employment in Industrial sector.
3. A scheme to provide Capital Investment Subsidy and Sales Tax Incentives is necessary to attract investments to generate greater employment in less industrially developed areas. With a view to secure balanced development of industries in Gujarat through dispersal of industries in the most backward areas and backward areas the Government of Gujarat has approved a package of incentives. As a part of this package, Government of Gujarat is pleased to introduce the following scheme.”
Therefore the primary purpose of this industrial policy is :-
A) To accelerate development of back ward areas in the state.
B) To create large scale employment.
C) The scheme was aimed at providing capital investment subsidy and sales tax incentives.
D) To secure the balanced development of industries in Gujarat through dispersal of industries in most back award areas.
The quantum of subsidy provided as per the scheme is
RATE OF SUBSIDY
|Type of Industries
|1.||Tiny units set up by SC/ST/other backward
|40% of the eligible fixed capital investment or Rs. 2.00 lacs whichever is Less.||40% of the eligible fixed capital investment or Rs.2.00 lacs which ever is less|
|2.||Small Scale Units||20% of the eligible fixed
capital investment or Rs. 15 lacs whichever is Less.
|20% of the eligible fixed
capital investment or Rs. 15 lacs whichever is Less.
RATE OF SALES TAX INCENTIVES
|Category||Sales Tax Exemption Rate
|Sales Tax Deferment Rate||Period
|I.||100% of the eligible fixed capital investment||7 years||125% of eligible fixed capital investment||9 years|
|II.||80% of the eligible fixed capital investment||5 years||100% of the eligible fixed capital investment||7 years|
The judicial precedents on the issue whether the sales tax subsidy is capital receipt or revenue receipt are :-
SAHNEY STEELS 228 ITR 253 (SC) 1997 the question in this case was whether the subsidy received from government of Andhra Pradesh was taxable or not? The Govt. of AP had allowed sales-tax subsidy on raw materials, on machinery and on finished goods to all the units which commenced production on or after 1-1-1969. In this case the Hon’ble Supreme Court held that such subsidy is taxable as it was given after commencement of production and not for setting up of industry. However, the Hon’ble Supreme Court in the subsequent decision in the case of PONNI SUGARS AND CHEMICALS LIMITED 306 ITR 392 (SC) after considering sahney steels case held that it is the purpose that decides the nature of subsidy and not the time of granting subsidy (before commencement or after commencement of unit) nor the source of subsidy. the facts in this case were, certain co-operative societies running sugar mills were in losses, No financial institutions were coming forward to give loans, In such circumstances the government had given subsidy to the sugar mills with the condition that the profits from such mills were to be used only for re-paying term loans, With this govt condition financial institutions came forward and provided funds. The court held that the subsidy in this case was given for setting up of new units/for substantial expansion of existing units. Therefore such subsidy was capital in nature.
CIT VS BOUGAINVILLEA MULTIPLEX ENTERTAINMENT CENTRE PVT. LTD. (2015 55 Taxmann.com 26 (Delhi HC). In this case entertainment tax exemption subsidy granted to an assessee engaged in the business of running of multiplex cinema and shopping malls was held as capital in nature.
CIT Vs SHREE BALAJI ALLOYS the Hon’ble Supreme Court in its recent judgment dated 19-04-2016 held that subsidy by way of excise duty and interest received from Government of Jammu & Kashmir for setting up of a new industrial undertaking is a capital receipt and not taxable as income. The court further held that the fact that the incentives were available only after commencement of production cannot be viewed in isolation and such incentives cannot be construed as mere production or trade incentives.
In case of ACIT Vs Shree Cement Ltd, ITA No.614, 615, 635/JP/2010, A.Y.2004-05 to 2006-07 the Hon’ble ITAT, Jaipur dealing with the identical issue of sales tax incentive held that
a) The sales tax subsidy granted for setting up of new unit is capital receipt, therefore not liable to tax.
b) such receipt is not includable for the purpose of 115JB.
In case of CIT Vs Harinagar Sugar Mills in ITA No.1132 of 2014 the Hon’ble Mumbai Bench held that subsidy granted by government for the purpose of setting up/expansion of sugar mills is a capital receipt and such receipt is not to be added to book profit u/s 115JB.
In view of the above discussion after carefully considering the Gujarat government scheme dated 11-09-1995, the object of the scheme was to set up industries in the backward areas of Gujarat and to provide employment opportunities to the unemployed youth. It is a trite law now that the determination of a subsidy as capital receipt or revenue receipt is dependent upon the objective of the scheme. As held in the case of Ponny Sugars Ltd 306 ITR 392 the subsidy given to set up industries was a capital receipt. The court further observed that in determination of character of the subsidy, the source, the form and the time of the grant of the subsidy would be immaterial. Therefore the sales-tax subsidy granted is capital receipt and therefore not liable to tax. However the A.O is directed to ascertain the quantum of sales tax subsidy ( that is included in sales ) from books of account or from the information submitted by appellant to sales tax dept. of Gujarat govt.
9.6 The next issue is regarding whether the sales tax subsidy should be assessed u/s 115JB or not? In this regard the judicial precedents are as under:
-In case of CIT Vs Balrampur Chini Mills Ltd (1999) 154 CTR ( CAL ) 323 the Hon’ble Calcutta High Court held that
a) The additional sugar quota granted to sugar mills for the purpose of setting up / expansion of sugar mills was capital receipt, therefore not taxable.
b) That the careful scrutiny of 115J and 115J14 clearly indicate that what is not taxable as per normal provisions is also not taxable u/s 115J14. Therefore the capital receipts which are not income at all needs to be excluded from the profit.
Apollo Tyres Vs. CIT (2002) 255 ITR 273 the Hon’ble Supreme Court held that the Assessing Officer has to accept the net profit computed in accordance with Part-II & III of Schedule-VI to Companies Act certified by the competent authorities and further held that Assessing Officer does not have the jurisdiction to go beyond and re-scrutinize the accounts, meaning thereby the net profit arrived at in P&L account as per the annual report shall be the opening figure to be adopted for the purpose of 115JB.
In case of ACIT Vs Shree Cement Ltd, ITA No.614, 615, 635/JP/2010, A.Y.2004-05 to 2006-07 the Hon’ble ITAT, Jaipur dealing with the identical issue of sales tax incentive held that:
c) The sales tax subsidy granted for setting up of new unit is capital receipt, therefore not liable to tax.
d) Such receipt is not includable for the purpose of 115J6. The Court further held that
“Our view as above is supported by the decision of the Special Bench in the case of Rain Commodities (supra), which incidentally has been relied upon by DR. On examination of the said order we find that at Para 17 (last sub-para) & Para 18, after considering the decision of Supreme Court in Apollo Tyres Ltd (supra), Special Bench have held that if Profit & Loss account is not in accordance with Part II & Part III of Schedule VI to the Companies Act, it is permissible to alter the net profit so as to make it in accordance with Part II & III of Schedule VI, which is the starting point for computation of ‘Book profit’ in terms of section 115JB. We have concluded in Para 13.4 above that inclusion of sales tax Subsidy in the Profit and loss is not in accordance with Schedule VI, Part II & III. Hence it implies that needful adjustment to exclude the same is not only permissible, but is mandatory so as to make the Profit & Loss Account compliant with the basic requirement of Section 115JB.”
It is pertinent to mention that the decision in case of Rain Commodities Vs. DCIT (2010) 131 TTJ 514 was rendered by Hon’ble Special Bench Hyderabad. Though this case was in favour of Revenue, the principle was, it is permissible to alter the net profit so as to make it in accordance with Part II & III of Schedule VI, which is the starting point for computation of ‘Book profit’ in terms of section 115JB.
In case of CIT Vs Harinagar Sugar Mills in ITA No.1132 of 2014 the Hon’ble Mumbai Bench held that subsidy granted by government for the purpose of setting up/expansion of sugar mills is a capital receipt and such receipt is not to be added to book profit u/s 115JB.
Therefore in view of the above judicial precedents the sales tax subsidy being capital in nature is not taxable, accordingly the net profit would be reduced to that extent and such reduced net profit forms basis for computing the book profit u/s 115JB.
9.7 The next issue is whether such sales tax subsidy is taxable under the new clause xviii of Sec.2(24)?
the Income Tax Act was amended by Finance Act, 2015 w.e.f. 1.4.2016. As this amendment the income includes
“assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement ( by whatever name called ) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee [other than the subsidy or grant or reimbursement which is taken into ‘ account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of Section 43].”
The explanatory notes in CBDT Circular No.19/2015 dated 27.11.2015 regarding the applicability of Sec.2(24)( xviii) clearly states that the amendment is applicable w.e.f. A.Y.2016-17. The relevant part of the circular is repeated as under:
” ……….in-order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section 2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement \(by whatever name called ) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause 1(2) of section 43 of the Income Tax Act.
5.2 As mentioned in Press Release dated 5th May, 2015, the amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him.
5.3 Applicability:- This amendment take effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years.”
Therefore the amended provisions treating subsidy or grant as Income, are prospective in nature and not applicable to assessment year prior to A.Y.2016-17”.
11.5. Revenue has raised that CIT(A) has erred in allowing the additional ground of appeal in AYs. 2006-07 and 2008-09 in addition to contesting the issue in all the impugned assessment years.
11.6. After considering the rival contentions of the parties and perusing the detailed order of the Ld.CIT(A), we do not find any reason to interfere with the above order. It is trite law that no tax shall be levied or collected, except by the authority of law as provided in terms of Article 265 of the Constitution. It is also admitted that if the assessee has by mistake or inadvertence or on account of ignorance, included any amount which is exempted from payment of tax, assessee may bring the same to the notice of the AO, who can grant the necessary relief [CIT Vs. Shelly Products & Anr] [261 ITR 367] (SC). There are various other case law as relied on by the Ld.CIT(A) and the judicial precedents clearly establishes that assessee can make the claim at any point of time when the appeals are pending even before the higher forum of ITAT, provided the facts are available on record. Since the Ld.CIT(A) examined this issue elaborately, we approve the same and reject the grounds raised in this regard by Revenue in AYs. 2006-07 and 2008-09.
12. Coming to the issue of exemption of the sales tax incentive granted by the Government of Gujarat, this issue is also discussed elaborately by the Ld.CIT(A), after analyzing the scheme and the case law. It was brought to our notice that the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. M/s. Lincon Polymers Pvt. Ltd., (supra) has become final, consequent to rejection of the Special Leave Petition by the Hon’ble Supreme Court vide order dt. 28-12-2006. We have also examined the scheme and relevant case law. Not only the Hon’ble Gujarat High Court judgment, which is binding on the authorities below, there are host of other judgments also on the issue of incentive, particularly from Hon’ble Supreme Court. In the case of Sahney Steel & Press Works Ltd. Vs. CIT  94 Taxman 368/228 ITR 253 (SC), Hon’ble Supreme Court held that subsidy received by assessee is capital in nature. The Hon’ble Supreme Court in the case of Ponny Sugars Ltd., [306 ITR 392] has held that it is the purpose that decides the nature of subside and not the time of granting subsidy nor the source of subsidy. The Hon’ble Supreme Court in the case of CIT-1, Kolhapur Vs. Chaphalkar Brothers, Pune [400 ITR 279] (SC) has again reiterated the same principles while analyzing the various incentive schemes and held as under:
12.1. In view of the scheme of Government of Gujarat which set up to provide employment opportunities to the unemployed youth, the subsidy is to be considered as capital receipt only. Respectfully following the decision of the Hon’ble Gujarat High Court, which directly applies to the scheme, we hereby affirm the order of CIT(A) and reject the grounds of Revenue. Even though Ld.CIT(A) also considered the issue in the light of the provisions of Section 115J, Revenue has not contested the issue. Accordingly, there is no need to consider the issue now.
12.2. In case assessee has claimed the deduction of sales tax u/s. 43B to that extent, the same need not be allowed. AO is free to make necessary adjustments, if the same amount was claimed as deduction in the IT computation.
12.3. In the result, Revenue’s grounds on this in all the impugned assessment years are accordingly dismissed.
The issue whether the subsidy amount can be adjusted in the cost of depreciable assets:
13. This issue arises in assessee’s appeals in all the impugned assessment years. When assessee has raised the issue that the sales tax exemption/remission is a capital receipt and is not to be included in the total income, Ld.CIT(A) while adjudicating the issue also considered whether the same is to be adjusted out of the cost of depreciable assets. Ld.CIT(A)’s order on this issue is as under:
“ 9.7………On the other hand having treated the sales tax subsidy as capital in nature, the same should go towards reducing the cost of assets. In the instant case the sales tax subsidy was quantified as a percentage of the capital investment made by the appellant. The appellant claimed full depreciation on the plant & machinery without reducing the sales tax subsidy thereby the appellant was granted double benefit (a) by not paying tax on sales tax subsidy, (b) by not reducing such capital subsidy from the W.D.V. of the machinery.
As per the provisions of the Section 43(1) of Income Tax Act, any subsidy granted by government shall not be included in the actual cost of a asset. The relevant provisions are as under:
Explanation 10.–Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee:
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.
Therefore the Assessing Officer is directed to reduce the sales tax subsidy from the depreciable assets in the same proportion as such asset bears to the total assets. For example;
The W.D.V. of plant & machinery – Rs.10,00,000
The W.D.V. of furniture & fixtures – Rs. 2,00,000
The sales tax subsidy – Rs. 1,00,000
The amount to be reduced from
the cost of plant & machinery = Rs.10 Lakhs/12 Lakhs x 1 lakh = Rs.75,000
The W.D.V. of Plant & machinery
for allowing depreciation would be – Rs. 9,25,000
Accordingly the Assessing Officer is directed to re-compute the depreciation”.
Assessee is aggrieved on this.
13.1. It was submitted that similar issue was considered by the Co-ordinate Bench at Jaipur in the case of ACIT, Circle-2, Ajmer Vs. Shree Cement Ltd., in ITA Nos. 614, 615 & 635/JP/2010, which order was confirmed by the Hon’ble High Court of Rajasthan in the case of CIT-1, Ajmer Vs. M/s. Shree Cement Limited, in D.B. Income Tax Appeal No. 27/2012, dt. 22-08-2017. It was further submitted that the amendment to the Act has come subsequently and so the same cannot be adjusted out of the cost in the impugned assessment years.
13.2. We have considered the rival contentions. It is true that this issue was elaborately discussed by the Co-ordinate Bench in the case of ACIT, Circle-2, Ajmer Vs. Shree Cement Ltd., (supra) wherein it was held as under:
“10.4 Before moving to the next ground, let us deal With a new contention raised by the Ld D/R that the above incentive, if treated as capital receipt, has to be reduced from cost of assets in terms of Explanation 10 to Sec 43(1). We find that the said issue is neither arising from the original ground nor from the additional ground filed by the Revenue. No leave has also been taken from the Tribunal for the same. Hence this new contention cannot be admitted at this stage.
10.5 Even on merits the above issue is covered in favour of the Assessee vide the decision of the Hon’ble Visakhapatnam Tribunal in the case of Sasisri Extractions Ltd. – vs. – ACIT (2008) 307 ITR (AT) 127 (Vizag) as well as by the decision of Hon’ble Mumbai Tribunal in the case of Godrej Agrovet Ltd. -vs.-ACIT (2009) in ITA No. 6807/Mum./06. In both the decisions, it has been held that only if the subsidy or other grant was given to offset the cost of an asset, such payment would be covered by Explanation 10 to Sec. 43(1). In a case where subsidy is received as an incentive for setting up or expansion of new unit, the mere fact that specified percentage of fixed capital cost was taken as the basis for determining the subsidy, it should not be mistaken as a payment intended to subsidize the cost of fixed assets. In the present case, the objective is industrialization & employment generation and only for the purpose of quantification of subsidy, it is linked with eligible fixed capital investment. Such case is not covered by Explanation 10 to Sec. 43 (1) as held by Hon’ble Mumbai and Visakhapatnam Tribunal. Incidentally similar view has also been taken by Hon’ble Hyderabad ITAT in a recent case in Bajaj Consumer Care Ltd –Vs.- ACIT (2011) [ITA No. 365/Hyd/09]. In the light of the facts of the present case and respectfully following the above mentioned decisions, we reject this contention of Ld DR on merit as well.
13.3. This order of the Hon’ble ITAT stands confirmed by the judgment of the Hon’ble High Court of Rajasthan in the above mentioned cases vide its judgment dt. 22-08-2017. Respectfully following the principles laid down by the above and since this issue is also discussed by the Co-ordinate Bench at Hyderabad in the case of Bajaj Consumer Care Ltd., Vs. ACIT in ITA No. 365/Hyd/2009, we hold that the order of CIT(A) to that extent is not correct and the amount of subsidy cannot be adjusted to the cost of a depreciable assets. Accordingly, we set aside the last portion of the CIT(A)’s order and direct the AO not to adjust the subsidy so received out of the cost of depreciable assets [WDV] in each of the impugned assessment years. The grounds are considered accordingly allowed.
Issue of valuation of closing stock:
14. This issue arises in the Revenue appeals for the AYs. 2006-07 and 2008-09. While completing the assessment, AO has considered that Excise Duty paid on finished goods has not been included in the value of closing stock and invoking the provisions of Section 145A, he made addition of Excise Duty @16% which works out to an addition of Rs. 3,01,76,155/- in AY. 2006-07 and Rs. 4,55,52,000/- in AY. 2008-09.
14.1. AO relied on the decision of the Hon’ble Supreme Court in the case of CIT Vs. British Paints Ltd., [188 ITR 144] wherein it was held that Excise Duty has to be included in the closing stock of finished goods. Assessee contested before the Ld.CIT(A) and explained that there is no Excise Duty on materials to be exported, there is no Excise Duty on work-in-progress and only when the goods have left factory premises Excise Duty was added to the finished goods and where the goods were lying in factory premises, no Excise Duty was considered.
14.2. Ld.CIT(A) after considering the explanation and facts of the assessee and distinguishing the judgment of Hon’ble Supreme Court in the case of CIT Vs. British Paints Ltd., (supra) relied on other judgments to hold that Excise Duty is not leviable in the finished goods and accordingly, question of making addition of the same amount to the closing stock does not arise. The order of CIT(A) on this issue in the final para is as under:
The Hon’ble ITAT, Hyderabad in case of Sponge Iron India Ltd in ITA No.1834/Hyd/2012 dated 3.5.2013 following the decision of Hon’ble Gujarat High Court in case of Narmada Chamatur Petrochemicals Ltd 233 CTR 265, and the decision of Hon’ble Mumbai High Court in case of Lokneta Balasaheb Desai SSK Ltd 339 ITR 288, clearly held that the excise duty is not includible in closing stock of finished goods which are not cleared from the factory premises.
Therefore it is evident from the above table that wherever the finished goods were cleared for sale from the factory premises the excise duty was already included by the assessee. Wherever the goods are still lying in the factory premises no excise duty is includable. Therefore there is no merit in the addition made by the Assessing Officer and the same is deleted”.
14.3. After considering the rival contentions, we do not find any reason to interfere with the order of the Ld.CIT(A). The Co-ordinate Bench in the case of Dy. CIT Vs. M/s. Sponge Iron India Ltd., in ITA No. 1834/Hyd/2012, dt. 03-05-2013 has held as under on the similar issue:
“6. We have heard both the parties and perused the record as well as gone through the orders of the authorities below. The CIT(A) gave a categorical finding that the “undisputed fact in this regard is that the finished goods have not been moved out of factory premises and hence the liability of payment of excise duty did not arise.” The CIT(A) relied upon the decision of the Bombay High Court in the case of Loknete Balasaheb Desai SSK Ltd., 339 ITR 288 (Bom.) wherein it was clearly held that the word incurred used in 145A(b) must be construed to mean the liability actually incurred by the assessee. The CIT(A) observed that though the date of manufacture is the relevant date for dutiability, the relevant date for the duty liability, is the date on which the goods are cleared. In other words, in respect of excisable goods manufacture and lying in stock, the excise duty liability will get crystallized on the date of clearance of goods and not on the date of manufacture. We find that, in the case under consideration, the liability for excise duty did not crystallize, the provisions of section 145A are not applicable to assessee’s case. Therefore, we find no infirmity in the order of the CIT(A) in directing the AO to delete the addition made towards variation in the valuation of closing stock. Accordingly, the grounds raised by the revenue are dismissed”.
14.4. This view of the Co-ordinate Bench of the ITAT was in way was upheld by the Hon’ble Supreme Court in the case of CIT Vs. Dynavision Ltd., [348 ITR 380] (SC), wherein it was held :
“2. At the outset, it may be stated, that, it is not in dispute that the assessee has been following consistently the method of valuation of closing stock which is “cost or market price whichever is lower.” Moreover, the AO conceded before the CIT(A) that he revalued the closing stock without making any adjustment to the opening stock (see: page 50 of the Paper Book). Lastly, though under section 3 of the Central Excise Act, 1944, the levy of excise duty is on the manufacture of the finished product the same is quantified and collected on the value (i.e. selling price). Before concluding, we may rely on judgment of this Court in the case of Chainrup Sampatram v. CIT  24 ITR 481 in which it has been held that, “valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. That, the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realized on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the goods”. (see also : para 8 of the judgment of this Court in the case of CIT v. Hindustan Zinc Ltd.  291 ITR 391 / 161 Taxman 162”.
14.5. Respectfully following the above judgment of the Hon’ble Supreme Court, we uphold the order of the CIT(A) and dismiss the grounds of Revenue on the above issue.
15. In the result, all the appeals of Revenue are dismissed and all the appeals of assessee are allowed.
Source- Sanghi Industries Ltd. Vs ACIT (ITAT Hyderabad); ITA No. 979/Hyd/17; 20/04/2018; 2006-07, 2008-09,2011-12, 2012-13, 2013-14