Export incentives under SHIS incremental scheme and MLEPS qualify as capital expenditure not revenue

ITAT Mumbai held that expert incentives under SHIS, incremental incentive scheme, and MLEPS were capital in nature. SHIS promoted technology upgradation investment, incremental incentive linked to new plant and machinery expenses, and MLEPS connected to employment generation for exports. CIT(A)'s decision allowing capital treatment was affirmed based on SC precedent in Ponni Sugars case. However, regarding education cess, ITAT reversed CIT(A)'s allowance, following Kanoria Chemicals precedent and Finance Bill 2022 clarification that education cess constitutes part of tax, making related expense claims inadmissible.

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Issues Involved:
1. Whether the CIT(A) was justified in allowing the claim of export incentive of Rs. 66,70,644/-.
2. Whether the CIT(A) was justified in allowing the claim of Education Cess of Rs. 1,42,88,177/- on income tax and Dividend Distribution Tax.

Issue-wise Detailed Analysis:

Issue No. 1: Export Incentive Claim

The revenue challenged the allowance of the export incentive claim of Rs. 1,10,01,193/-. The revenue's argument was that the export incentive was not initially claimed by the assessee in the return of income but was allowed by the CIT(A) during the appellate proceedings. The CIT(A) allowed the claim based on various judicial pronouncements, including the Hon'ble Supreme Court's decision in the case of Goetze India Ltd vs CIT, and the Hon'ble Mumbai High Court's decision in Pruthvi Brokers Pvt. Ltd 253 CTR 0515. The CIT(A) concluded that such claims could be made at any stage of appellate proceedings.

The CIT(A) examined the nature of the export incentives under various schemes such as MLFPS/SHIS/IEIS, concluding that these incentives were capital in nature. The CIT(A) relied on the Hon'ble Supreme Court's decision in CIT vs Ponni Sugars & Chemicals Ltd (2008) 306 ITR 392 (SC), which held that if the purpose of the incentive was to enable the assessee to set up a new unit or expand an existing unit, the receipt of the subsidy was of capital nature. The CIT(A) also cited decisions from various courts, including the Hon'ble ITAT Chennai in Eastman Exports Global Clothing Pvt. Ltd. and the Hon'ble ITAT Delhi in Sutlej Textiles & Industries Ltd, which supported the view that such incentives are capital receipts.

The CIT(A) found that the export incentives under schemes like SHIS, IEIS, and MLFPS were linked to capital expenditure, technology upgradation, and employment generation, making them capital receipts. The appellate authority's findings were based on detailed examination and judicial precedents, leading to the conclusion that the claim was rightly considered at the appellate stage. The tribunal affirmed the CIT(A)'s decision, finding no reason to interfere with the order, and decided the issue in favor of the assessee.

Additional Ground: Education Cess

The revenue challenged the allowance of the claim of Education Cess based on the Hon'ble Bombay High Court's decision in Sesa Goa Limited Vs. JCIT (2020) 117 taxmann.com 96. The revenue argued that recent judgments and the Finance Bill 2022 clarified that Education Cess is part of the tax and not an allowable deduction. The tribunal referred to the Hon'ble ITAT's decision in M/s. Kanoria Chemicals & Industries Ltd., which relied on the Hon'ble Supreme Court's decision in CIT Vs. K. Srinivasan (1972) 83 ITR 346, holding that surcharge and additional surcharge are part of the income tax.

The tribunal noted that the Finance Bill 2022 explicitly treated Education Cess as part of the tax, disallowing its deduction. Consequently, the tribunal set aside the CIT(A)'s finding and decided the issue in favor of the revenue, against the assessee.

Conclusion:

The tribunal dismissed the appeals filed by the revenue in ITA Nos. 1667, 1668, and 1669/Mum/2021, affirming the CIT(A)'s decision on the export incentive claim but reversing the CIT(A)'s decision on the Education Cess claim, thereby favoring the revenue on the latter issue. The order was pronounced in the open court on 28/04/2022.

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