2019 (5) TMI 1782 - AT - Income Tax

ITAT Upholds Capital Treatment of Interest Reimbursement Under TUFS, Revenue Appeals Dismissed

The ITAT upheld the CIT(A)'s decision that interest reimbursement under TUFS is capital in nature, dismissing Revenue's appeals. The ITAT allowed ... Treatment of interest reimbursement under TUFS (Technology Upgradation Fund Scheme) - whether capital or revenue in nature - CIT(A) treating it as capital in nature - HELD THAT:- Nature of the subsidy received under TUFS Scheme and after analyzing the terms of the scheme and finding that the purpose of the scheme was to induce modernization of plant and machniery used in textile industry ,held the same to be capital in nature following the proposition laid down by the apex court for determining the nature of subsidy in the case of Sawhney steels [1997 (9) TMI 3 - SUPREME COURT] and Ponni Sugars [2008 (9) TMI 14 - SUPREME COURT]. DR has been unable to bring to our notice any contrary decision either of the Hon'ble Jurisdictional High Court or the Hon'ble Apex Court on this issue nor was the decisions relied upon by the Ld.CIT(A) distinguished before us. No hesitation in upholding the order of the CIT(A) relying on SHAM LAL BANSAL [2011 (1) TMI 409 - PUNJAB AND HARYANA HIGH COURT] and M/S. GLOSTER JUTE MILLS LTD. [2018 (8) TMI 1474 - CALCUTTA HIGH COURT] that considering the objective of the TUF Scheme the interest received under TUF Scheme is capital in nature. Grounds of appeal raised by the Revenue are, therefore, dismissed. Interest u/s 244A - Claim shall not be granted on the amount of refund due to the assessee in relation to interest reimbursement under TUFS (Technology Upgradation Fund Scheme) - assessee has vehemently argued that it was entitled to interest on refund - HELD THAT:- In the present case, the Ld.CIT(A) has given the direction of no interest being granted on refund, without giving the assessee any opportunity of hearing and considering the forceful arguments of the assessee before us based on decisions of Courts as cited above, we hold ,that the issue needs reconsideration. Further noting the interpretation of the relevant section dealing with interest on refunds i.e. section 244A of the Act, as above, we are in agreement with the DR that the issue needs to be considered in the factual matrix of the case before us. We therefore consider it fit to restore the issue back to the CIT(A) to consider the same afresh. The Ld.CIT(A) is directed to give due opportunity of hearing to the assessee and thereafter decide the issue in accordance with law. Appeals of the assessee are allowed for statistical purposes. Issues Involved:1. Treatment of interest reimbursement under the Technology Upgradation Fund Scheme (TUFS) - whether it is capital or revenue in nature.2. Entitlement to interest on the refund of tax resulting from the reclassification of interest reimbursement under TUFS as non-taxable.Issue-wise Detailed Analysis:1. Treatment of Interest Reimbursement under TUFS:The primary issue in the appeals was whether the interest reimbursement received under the TUFS should be treated as capital or revenue in nature. This issue was previously remanded by the ITAT to the CIT(A) for a detailed examination. The CIT(A) ruled in favor of the assessee, treating the interest reimbursement as a capital receipt. This decision was based on the objectives of the TUFS, which aimed at modernizing plant and machinery to make the textile industry more competitive. The CIT(A) noted that the scheme's purpose was to meet part of the capital investment in modernizing plant and machinery, thus classifying the interest reimbursement as capital in nature.The CIT(A) relied on several judicial precedents, including:- CIT Vs. Sham Lal Bansal (P&H High Court)- CIT Vs. Gloster Jute Mills Ltd. (Calcutta High Court)Both judgments emphasized the 'purpose test,' determining the nature of the subsidy based on its intended use. The courts concluded that subsidies aimed at capital investments should be treated as capital receipts.The ITAT upheld the CIT(A)'s decision, noting that the Revenue could not provide any contrary judicial decisions or evidence to refute the CIT(A)'s findings. The ITAT agreed that the interest reimbursement under TUFS was capital in nature, following the established judicial principles and the specific objectives of the TUFS.2. Entitlement to Interest on Refund:The second issue concerned whether the assessee was entitled to interest on the tax refund resulting from the reclassification of the interest reimbursement as non-taxable. The CIT(A) had denied interest on the refund, reasoning that the assessee had initially offered the interest reimbursement for taxation and only raised the issue at the appellate level. The CIT(A) held that since the assessee was responsible for the excess tax payment, no interest should be granted on the refund.The assessee challenged this decision on three grounds:- The CIT(A) exceeded his jurisdiction as the ITAT had only remanded the issue of the nature of the interest reimbursement, not the interest on the refund.- The CIT(A) did not provide an opportunity for the assessee to be heard on this issue.- Judicial precedents establish that interest on refunds is automatic and not discretionary.The ITAT noted that the CIT(A) had indeed denied interest without giving the assessee a chance to be heard. The ITAT referenced several judicial decisions, including:- Union of India Vs. Tata Chemicals Ltd. (Supreme Court)- Ajanta Manufacturing Ltd. Vs. DCIT (Gujarat High Court)These judgments clarified that interest on refunds is a statutory right unless the delay in proceedings is attributable to the assessee. The ITAT found that the CIT(A) had not properly considered these principles and had not provided the assessee with an opportunity to present its case.Consequently, the ITAT remanded the issue back to the CIT(A) for reconsideration, directing the CIT(A) to provide the assessee with a fair hearing and to decide the matter in accordance with the law.Conclusion:The ITAT dismissed the appeals filed by the Revenue, upholding the CIT(A)'s decision that the interest reimbursement under TUFS is capital in nature. The ITAT allowed the appeals filed by the assessee for statistical purposes, remanding the issue of interest on the tax refund back to the CIT(A) for fresh consideration.