2018 (4) TMI 1200 - AT - Income Tax

Tribunal rules on sales tax subsidy and excise duty valuation in appeal decisions

Sanghi Industries Ltd. Versus The Asst. /Deputy Commissioner of Income Tax And The Deputy Commissioner of Income Tax, Hyderabad

Sanghi Industries Ltd. Versus The Asst. /Deputy Commissioner of Income Tax And The Deputy Commissioner of Income Tax, Hyderabad - TMI Issues Involved:1. Sales tax subsidy as capital receipt.2. Adjustment of sales tax subsidy in the cost of depreciable assets.3. Valuation of closing stock with respect to Excise Duty.Issue-wise Detailed Analysis:1. Sales Tax Subsidy as Capital Receipt:The primary issue was whether the sales tax exemption/remission granted by the Government of Gujarat should be treated as a capital receipt or a revenue receipt. The assessee claimed that the sales tax incentive was a capital receipt, not includable in total income, as it was granted under the Government of Gujarat's incentive policy for setting up industries and generating employment. The CIT(A) agreed with the assessee, treating the subsidy as a capital receipt based on the purpose of the scheme, which was to accelerate development in backward areas and create employment. This decision was supported by several judicial precedents, including the Hon'ble Gujarat High Court's ruling in CIT Vs. M/s. Lincon Polymers Pvt. Ltd., and the Hon'ble Supreme Court's decisions in Ponni Sugars and Sahney Steel cases, which emphasized the purpose of the subsidy over the timing or source of the grant. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's contention that the subsidy should be treated as a revenue receipt.2. Adjustment of Sales Tax Subsidy in the Cost of Depreciable Assets:The second issue was whether the sales tax subsidy, treated as a capital receipt, should be proportionately reduced from the cost of depreciable assets for the purpose of calculating depreciation. The CIT(A) directed that the subsidy should be adjusted against the cost of assets, citing Explanation 10 to Section 43(1) of the Income Tax Act, which mandates that any subsidy directly or indirectly related to the cost of an asset should not be included in the actual cost of the asset. However, the Tribunal disagreed with this adjustment, citing the Co-ordinate Bench's decision in ACIT Vs. Shree Cement Ltd., which held that subsidies intended for setting up or expanding units should not be reduced from the cost of assets merely because they are quantified based on fixed capital investment. The Tribunal directed the AO not to adjust the subsidy from the cost of depreciable assets.3. Valuation of Closing Stock with Respect to Excise Duty:The third issue involved the addition of Excise Duty to the valuation of closing stock. The AO had included Excise Duty in the closing stock of finished goods, relying on the decision in CIT Vs. British Paints Ltd. The assessee contended that Excise Duty should not be included for goods still lying in the factory premises. The CIT(A) accepted the assessee's argument, distinguishing the British Paints case and relying on other judgments, including the ITAT's decision in Sponge Iron India Ltd., which held that Excise Duty is not includible in the closing stock of goods not cleared from the factory premises. The Tribunal upheld the CIT(A)'s decision, supported by the Hon'ble Supreme Court's ruling in CIT Vs. Dynavision Ltd., which confirmed that Excise Duty liability crystallizes only upon the clearance of goods from the factory.Conclusion:The Tribunal dismissed the Revenue's appeals and allowed the assessee's appeals, affirming that the sales tax subsidy is a capital receipt, not to be adjusted against the cost of depreciable assets, and that Excise Duty should not be included in the valuation of closing stock for goods not cleared from the factory premises. The judgments were pronounced on 20th April 2018.