2019 (7) TMI 1939 - AT - Income Tax

Tribunal: Sales tax subsidy capital, CSR expenses deductible. Revenue appeals dismissed, assessee appeal allowed.

Jt. Commissioner of Income Tax (OSD), Circle 7 (2) (1), Mumbai Versus M/s Mahindra Vehicles Manufacturers Pvt. Ltd. And Vice-Versa

The Tribunal upheld that the sales tax subsidy received was of a capital nature, linked to fixed capital investment for industrial development in ... Sales tax subsidy - Nature of receipt - revenue or capital receipt - CIT-A held scheme of sales tax subsidy granted to the assessee to be for setting up of or for expanding existing industries in the developing region of Maharashtra - HELD THAT:- The main objective of the scheme was to intensify and accelerate the process of dispersal of industries from developed areas and for development of under-developed regions of Maharashtra. It is clear from the scheme that IPS incentive was granted not for carrying on day-to-day business of the unit more profitably but to provide impetus to the process of dispersal of industries to backward areas. The plant of the assessee falls in Group C, which also includes Khed, which is outside the Pune Metropolitan Region. In the present case the sales tax payment is only an yardstick to determine the quantum of incentive and cannot be construed as to mitigate the operational cost of the business. In view of the above factual scenario we uphold the order of the Ld. CIT(A). Facts being identical and the grounds of appeal being same, our decision for AY 2011-12 applies mutatis mutandis to AY 2012-13. Corporate social responsibility expenses - allowable business expenses u/s 37(1) - expenses as explained by the assessee before the AO were mainly related to expenses incurred on construction of school building, devasthan/temple, drainage, barbed wire fencing, education schemes and distribution of clothes etc. voluntarily - HELD THAT:- We are of the considered view that the Ld. CIT(A) has rightly allowed u/s 37(1) the expenses claimed by the assessee. Moreover, the decision in Jindal Power Ltd. [2016 (7) TMI 203 - ITAT RAIPUR] is applicable to the instant case. Accordingly, we dismiss the above grounds of appeal. Issues Involved:1. Nature of sales tax subsidy (capital vs. revenue receipt).2. Allowability of Corporate Social Responsibility (CSR) expenditure under Section 37(1) of the Income Tax Act.Issue-wise Detailed Analysis:1. Nature of Sales Tax Subsidy:Revenue’s Argument:The Revenue contended that the sales tax subsidy received by the assessee should be treated as a revenue receipt. They argued that the subsidy was essentially a refund of VAT collected by the assessee and did not contribute to the setting up of a new unit. The Revenue relied on the Supreme Court’s decision in Sahney Steel and Press Works Ltd. v. CIT, which held that subsidies received after the commencement of business without specific instructions for their use towards capital purposes are revenue receipts.Assessee’s Argument:The assessee argued that the subsidy was capital in nature, as it was intended for setting up or expanding industries in developing regions of Maharashtra. The assessee relied on the jurisdictional High Court’s decision in CIT vs. Reliance Industries Ltd., which had not attained finality.Tribunal’s Decision:The Tribunal upheld the CIT(A)’s decision that the subsidy was capital in nature. They distinguished the present case from Sahney Steel and Press Works Ltd., noting that the subsidy in question was not a refund of sales tax on raw materials, machinery, or finished goods. Instead, it was linked to the fixed capital investment made by the assessee and was provided to promote industrial development in under-developed regions. The Tribunal also referred to the Supreme Court’s decision in Ponni Sugars & Chemicals Ltd., which emphasized the purpose of the subsidy in determining its nature. Since the subsidy was aimed at setting up or expanding the unit, it was considered a capital receipt.2. Allowability of CSR Expenditure:Revenue’s Argument:The Revenue argued that the CSR expenses were not incurred wholly and exclusively for the purpose of the business. They highlighted that the assessee did not provide sufficient documentation to establish that the expenses directly benefited the employees of the company. The Revenue also referred to Section 37 of the Income Tax Act, which disallows CSR expenditure as a business expense.Assessee’s Argument:The assessee argued that the CSR expenses were incurred to foster goodwill and create a congenial working environment around its premises. They cited various judicial precedents, including the ITAT Raipur Bench’s decision in Jindal Power Ltd., which allowed CSR expenses as business expenses under Section 37(1) of the Act.Tribunal’s Decision:The Tribunal upheld the CIT(A)’s decision to allow the CSR expenses as business expenses under Section 37(1). They noted that the expenses were incurred voluntarily and were aimed at promoting safety, advertising, and creating goodwill among the local community. The Tribunal distinguished between statutory CSR obligations and voluntary CSR activities, emphasizing that the latter could be allowed as business expenses if they were incurred wholly and exclusively for business purposes. They also referred to the ITAT Raipur Bench’s decision in Jindal Power Ltd., which supported the allowability of voluntary CSR expenses.Conclusion:The Tribunal dismissed the Revenue’s appeals for AY 2013-14 and AY 2014-15, while allowing the assessee’s appeal for AY 2014-15. The sales tax subsidy was held to be a capital receipt, and the CSR expenses were allowed as business expenses under Section 37(1) of the Income Tax Act.