2022 (8) TMI 1485 - AT - Income Tax

Sales tax subsidy and excise duty incentive held as capital receipts under section 115JB using purpose test

ITAT Ahmedabad held that sales tax subsidy, excise duty incentive, and debenture redemption reserve were not taxable additions under section 115JB. ... Characterization of receipts - Additions on account of Sales Tax Subsidy, Excise Duty incentive and Debenture redemption Reserve of made for the purpose of income computation u/s 115JB - HELD THAT:- We note that Revenue does not dispute that the issue is covered in favour of the assessee in assessee’s own case for AY 2006-07 [2016 (5) TMI 1136 - ITAT AHMEDABAD] as held that as evident from the scheme itself that the sales tax subsidy/incentives were not given to the appellant for assisting it is carrying out the business operations. The objects of the subsidy were to encourage large scale investment by attracting entrepreneurs for setting up of industries in the notified area of Kutch district where the economic activities came to a standstill on account of the devastating earthquake in the state on 26th January, 2001. The scheme was formulated and the incentives were given to entrepreneurs to attract the large-scale investment to generate new employment and for making the economic environment of Kutch district of Gujarat before the specified date as per the scheme of incentive. The limit of the incentive was fixed. As decided in Ponni Sugars & Chemicals Ltd [2008 (9) TMI 14 - SUPREME COURT] character of the receipt in the hands of the appellant has to be determined with respect to the purpose for which the subsidy is given. In other works, in such cases one has to apply 'Purpose test'. The point of time when the subsidy is paid is not relevant. The source is immaterial and the form of subsidy is also immaterial. It is evident from the incentive scheme itself that the purpose of the scheme was to attract the large scheme investment to generate new employment and for talking the economic environment of Kutch district live. Thus relying on the decision of Birla VXL Ltd. [2011 (11) TMI 731 - ITAT RAJKOT] sales tax incentives and Excise duty incentive received by the appellant were in the nature of capital receipts and thus were not chargeable to tax. AO is directed to delete the above additions. Also as relying on Raymond's Ltd [2012 (4) TMI 128 - BOMBAY HIGH COURT] mere fact that a Debenture Redemption Reserve is labelled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently, the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA. Also addition of made by the AO on account of sales Tax incentive subsidy, Excise duty incentive and Debenture Redemption Reserve to the Book Profit under section 115JB of the Act is held to be unjustified. However it has been claimed that the decision of ITAT is under challenged before the Hon’ble High Court, in our considered opinion, this cannot be a reason to stood depart from the decision of coordinate Bench. Hence, following the aforesaid decision of ITAT in assessee’s own case, we uphold the order of ld. CIT(A). Revision u/s 263 - disallowance on account of depreciation on subsidy - sales-tax subsidy which has been treated as capital receipt on the direction of CIT u/s 263 has been attributable to be relatable to the assets acquired and accordingly, depreciation against the so-called capital subsidy purchased as such has been denied - HELD THAT:- CITA’s order in this regard is quite appropriate as he has held that subsidy is given with reference to sales made and sale-tax benefit is given. Subsidy nowhere linked to cost of acquisition of the assets, hence there is no reason to make any deduction from the depreciation claimed. We find that the above reasoning is quite in consonance with the order of ITAT in this regard on the basis of which we have disposed off as above. In the said decision, ITAT had categorically held that the same was a capital receipt and it had upheld the order of CIT (A) and no view was expressed that the same is linked to capital assets acquisition, hence question of deduction in depreciation does not arise. Issues Involved:1. Deletion of additions on account of Sales Tax Subsidy, Excise Duty incentive, and Debenture Redemption Reserve for income computation under Section 115JB.2. Treatment of Sales Tax Subsidy and Excise Duty incentive as capital or revenue receipts.3. Adjustment of Debenture Redemption Reserve in computing book profit under Section 115JB.4. Validity of the CIT's order under Section 263 regarding Sales Tax Incentive and depreciation.5. Allowance of Sales Tax Incentive and Excise Duty Refund from the computation of book profit under MAT (Section 115JB).Detailed Analysis:1. Deletion of Additions on Account of Sales Tax Subsidy, Excise Duty Incentive, and Debenture Redemption Reserve:The Revenue contested the deletion of additions by the CIT(A) regarding Sales Tax Subsidy of Rs.12,74,46,480/-, Excise Duty incentive of Rs.7,90,94,513/-, and Debenture Redemption Reserve of Rs.4,50,00,000/-. The CIT(A) had followed the decision of ITAT in the assessee's case for AY 2006-07, which was under consideration by the High Court. The ITAT upheld the CIT(A)'s order, emphasizing that the pending appeal before the High Court does not invalidate the ITAT's binding decision.2. Treatment of Sales Tax Subsidy and Excise Duty Incentive:The CIT(A) and ITAT consistently treated the Sales Tax Subsidy and Excise Duty incentive as capital receipts, not chargeable to tax. This decision was based on the purpose test, as outlined by the Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd., which determines the nature of the subsidy based on its intended purpose. The ITAT noted that these subsidies were granted to encourage investment in the Kutch district post-earthquake, thus qualifying as capital receipts.3. Adjustment of Debenture Redemption Reserve:The CIT(A) and ITAT found that the Debenture Redemption Reserve does not qualify as a reserve under Section 115JB, following the Supreme Court's decision in National Rayon Corporation Ltd. vs. CIT. It was concluded that the reserve is for meeting a known liability and should not be added back to the book profit for MAT purposes.4. Validity of CIT's Order under Section 263:The CIT had invoked Section 263 to direct the AO to examine whether the Sales Tax Incentive had been capitalized for depreciation purposes. The ITAT found the CIT's direction unjustified, as the Sales Tax Incentive was credited in the profit & loss account and was not capitalized. The ITAT upheld the CIT(A)'s decision, which aligned with the Supreme Court's judgment in P J Chemicals and other relevant precedents, confirming that the subsidy was not linked to the acquisition cost of assets.5. Allowance of Sales Tax Incentive and Excise Duty Refund from Computation of Book Profit under MAT:The ITAT reiterated that the Sales Tax Incentive and Excise Duty Refund should not be included in the computation of book profit under Section 115JB, as they are capital receipts. This was consistent with the earlier findings and decisions in the assessee's own case and other similar cases.Conclusion:The ITAT dismissed the Revenue's appeals and upheld the CIT(A)'s decisions across all issues, confirming the treatment of Sales Tax Subsidy and Excise Duty incentive as capital receipts and the non-inclusion of Debenture Redemption Reserve in the book profit computation under Section 115JB. The ITAT's adherence to precedent and judicial hierarchy was emphasized, ensuring consistency in the application of legal principles.