2019 (6) TMI 655 - AT - Income Tax

ITAT Decision: Capital vs. Revenue Treatment Upheld

The ITAT upheld the treatment of sales tax subsidy and technical know-how fees as capital in nature, dismissing the Revenue's appeal. It also upheld the ... Sales tax subsidy received - whether capital or revenue receipt - HELD THAT:- Since the issue of sales tax subsidy received by the assessee by virtue of scheme of Punjab Government has already been decided by the I.T.A.T. in the case of the assessee itself in the preceding years [2011 (11) TMI 743 - ITAT CHANDIGARH] , holding the same to be capital in nature and with no distinguishing facts having been brought to our notice by the Ld. DR, we see no reason to interfere in the order of the CIT(A) allowing the assessee’s appeal following with order of the I.T.A.T. - Decided in favour of assessee Addition made on account of technical knowhow fees - revenue or capital expenditure - HELD THAT:- Identical issue stands decided in favour of the assessee in assessment year 2009-10 by the I.T.A.T., which has been admitted to by the Revenue also and no distinguishing facts having been brought to our notice by the Ld. DR, the Ld.CIT(A), we hold, has rightly allowed the assessee’s appeal following the order of the I.T.A.T. in assessee’s own case for assessment year 2009-10. We therefore find no reason to interfere in the order of the Ld.CIT(A) holding the technical knowhow expenses as revenue in nature. Disallowance of prior period expenses - assessee was following the mercantile system of accounting - HELD THAT:- No reason to interfere in the order of the CIT(A), deleting the disallowance made of prior period expenses, since we find that the said expenses had been booked as per the established and consistent policy followed by the assessee .Further considering the fact that even prior period incomes have been booked, no purpose would be served, we find, by disallowing only prior period expenses since in that case, even prior period income would have to be reduced from the taxable profits of the assessee. MAT computation - deduction from the Book Profits u/s 115JB on account of sales tax subsidy being in the nature of capital receipt - HELD THAT:- As in the case of H.M Steels [2018 (11) TMI 1628 - ITAT CHANDIGARH] wherein identical issue has been dealt holding the VAT subsidy, being capital in nature, as not includible in the Book Profits u/s 115JB as taken note of the decision of Apollo Tyres [2002 (5) TMI 5 - SUPREME COURT] as per which any adjustment to the Profit and Loss account prepared by the assessee was ruled out for the purposes of calculating the Book Profit amenable to tax. ITAT held as per section 115JB the profit and loss account prepared should be in accordance with Part II & III of Schedule VI to the Companies Act,1956 and therefore adjustments to the same can be made to make it compliant with the Schedule. ITAT accordingly held that Sales tax/VAT subsidy being capital in nature would have to be reduced from the profits. We find is identical to that in H.M Steels ,with the Sales tax subsidy having been held to be capital in nature. In view of the same ,the issue we hold is squarely covered by the decision of the ITAT in the case of H.M Steels, following which we hold that the sales tax subsidy is to be reduced from the Book Profits for the purposes of paying tax u/s 115JB. Disallowance of bad debts written off being in the nature of irrecoverable advance as business loss u/s 37(1) r.w.s. 28 - HELD THAT:- It is not disputed that the amount claimed as bad debts related to advances given, as admitted by assessee also. There is, therefore, no question of the same having been debited or considered while computing the income of the assessee. Further the assessee has been unable to demonstrate the same even before the lower authorities or even before us. Also undoubtedly, for claiming the write off of any amount as bad debts, the necessary pre-requisite is that the said amount should have been earlier taken into account while computing the income of the assessee. We have no hesitation in upholding the order of the Ld.CIT(A) in disallowing the claim of the assessee of bad debts. Disallowance of deduction being in the nature of fine and penalties as business loss u/s 37(1) - A.O. disallowed deduction claimed by the assessee in its Profit & Loss Account under the head “Penalty” on the ground that it was in the nature of fine/penalty and further sum claimed did not pertain to the year under consideration but to assessment year 2013-14 - HELD THAT:- No reason to interfere in the order of the CIT(A) in disallowing the penalty. The fact relating to the nature of the penalty, as pointed out by the Ld. DR before us, is not disputed. Thus ₹ 2000/- being penalty levied for sleeping driver, is clearly no allowable being in the nature of penalty for infringement of law. Similarly, also, the amount levied by the Arbitral Tribunal on the assessee to compensate the respondent in a case filed by it to the Tribunal is, we hold, rightly held by the CIT(A) to be in the nature of penalty and thus disallowed u/s 37(1) - it is an undisputed fact that the order levying penalty/cost by the Tribunal was dated 17.2.2013. Therefore, we agree with the authorities below that the liability to pay the fine accrued in assessment year 2013-14 and, therefore, did not pertain to the impugned year at all. We agree with the Ld.CIT(A) that the amount of ₹ 77,000/- was in the nature of penalty paid by the assessee and further out of the above ₹ 75,000/- pertained to the earlier year and, therefore, for the aforesaid reasons, the said amount was not allowable to. Ground of appeal No.3 raised by the assessee is, therefore, dismissed. Disallowance of deduction of provision of warranty rejections - HELD THAT:- The factual findings of the lower authorities that the impugned provision of ₹ 56,162/- had not been reversed in the subsequent year by way of debt note received from a party on account of rejected material, has not been controverted by the assessee before us. Therefore, as per the explanation of the assessee, also the said provisions did not relate to any rejected material received back by the assessee from any party because as per the explanation given by the assessee, such provisions were created on receipt of rejected material as at the end of the year pending the debit notes to be issue by the concerned parties. In the impugned case, the fact that no debit note was issued in the subsequent year shows that there was no receipt of rejected material to that extent as at the end of the year and the amount did not represent any liability but was only a provision for the same. The disallowance of the same is, therefore, rightly upheld by the CIT(A) - Decided against assessee. Issues Involved:1. Treatment of sales tax subsidy (capital vs. revenue nature).2. Treatment of technical know-how fees (capital vs. revenue nature).3. Disallowance of prior period expenses.4. Deduction of sales tax subsidy from book profits u/s 115JB.5. Deduction of bad debts written off.6. Deduction of fines and penalties as business loss.7. Deduction of provision for warranty rejections.Issue-wise Detailed Analysis:1. Treatment of Sales Tax Subsidy:The primary issue was whether the sales tax subsidy received by the assessee should be treated as capital or revenue in nature. The Assessing Officer (AO) treated the subsidy as revenue, referencing the jurisdictional High Court decision in CIT Vs. Abhishek Industries Ltd. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) reversed this, holding the subsidy as capital in nature. This decision was based on previous ITAT orders for the assessee's earlier assessment years, which found the subsidy under the Punjab Industrial Policies to be capital in nature. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.2. Treatment of Technical Know-How Fees:The AO classified the technical know-how fees paid to M/s Ring Tech. Co., Japan as capital expenditure, arguing that it provided enduring benefits. The CIT(A) and ITAT disagreed, treating it as revenue expenditure. The ITAT referenced its previous decision for the assessee's earlier years, where similar expenses were treated as revenue in nature. Consequently, the Revenue's appeal on this ground was dismissed.3. Disallowance of Prior Period Expenses:The AO disallowed prior period expenses claimed by the assessee, arguing that under the mercantile system of accounting, such expenses should have been recorded in the year they were incurred. The CIT(A) and ITAT found that the assessee consistently booked prior period expenses and incomes due to late receipt of bills from its units located at distant places. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal.4. Deduction of Sales Tax Subsidy from Book Profits u/s 115JB:The assessee argued that the sales tax subsidy, being a capital receipt, should be excluded from book profits for Minimum Alternate Tax (MAT) purposes. The CIT(A) rejected this, citing that the net profits as per the books should be considered for section 115JB. However, the ITAT accepted the assessee's contention, referencing its decision in H.M. Steels Ltd. vs. Addl. CIT, which allowed the exclusion of capital receipts from book profits. Thus, the ITAT allowed the assessee's appeal on this ground.5. Deduction of Bad Debts Written Off:The AO disallowed the bad debts claimed by the assessee, stating that the debts were not taken into account while computing the income. The CIT(A) upheld this disallowance. The ITAT agreed, noting that the amounts were advances and not considered in the income computation, thus not meeting the conditions of section 36(2)(i). The assessee's appeal on this ground was dismissed.6. Deduction of Fines and Penalties as Business Loss:The AO disallowed the deduction of fines and penalties, including a penalty levied by an Arbitral Tribunal. The CIT(A) upheld this, and the ITAT agreed, noting that the penalties were not incurred in the normal course of business and that the liability for the penalty accrued in an earlier year. The assessee's appeal on this ground was dismissed.7. Deduction of Provision for Warranty Rejections:The AO disallowed a provision for warranty rejections, finding that part of the provision was not reversed in subsequent years, indicating no actual liability. The CIT(A) upheld this disallowance. The ITAT agreed, noting that the provision did not represent an actual liability and was rightly disallowed. The assessee's appeal on this ground was dismissed.Conclusion:The ITAT dismissed the Revenue's appeals on all grounds and allowed the assessee's appeal regarding the exclusion of sales tax subsidy from book profits u/s 115JB. The assessee's appeals on bad debts, fines and penalties, and warranty rejections were dismissed.