2022 (7) TMI 334 - HC - Income Tax

High Court: ISO Certification costs are revenue, subsidy is capital. Appeal dismissed.

COMMISSIONER OF INCOME TAX (EXEMPTIONS) Versus NARMADA CLEAN TECH LTD

The High Court upheld the decision that ISO Certification expenditure should be treated as revenue expenditure and the subsidy received by the assessee as ... Nature of expenditure - ISO Certification expenditure - revenue or capital expenditure - HELD THAT:- Upon appreciation of material brought on record vis-a-vis the findings of the CIT(A) as regards treating the ISO Certification expenditure as ‘Revenue expenditure’ is concerned, we are in complete agreement with the said findings of the CIT(A). The Supreme Court in catena of decisions has laid down the guidelines in the nature of test for determination of the actual nature of the expenditure wherein it is observed that the test for determination of nature of expenditure has to be considered in light of the fact that if the advantage received on incurring expense facilities relates to the carrying on of the business more efficiently and more profitably leaving the fixed capital untouch, then such expenditure has to be treated as ‘revenue’ in nature. We agree with the view of ITAT that the CIT(A) was justified in treating the entire amount as revenue in nature. We find that making of payments towards obtaining ISO Certificate in no manner touches the fixed capital of the company though it may create a positive image for particular product of the assessee company which may ultimately smooth the conduct of the business of the assessee company. However, the same in no manner actually adds to any gain in the fixed capital of the company. Subsidy receipt - Nature of receipts - subsidy was received by the assessee company under capital ASIDE Scheme - HELD THAT:- On bare perusal of the content of the aforesaid letter, it reflects that such subsidy was given towards administrative expenses incurred by the assessee company during the execution of project for upgradation of infrastructure facilities. The CIT(A) has rightly arrived at finding that the administrative expense being incurred for expansion of the infrastructure facility falls in the category of ‘capital’ in nature and has therefore, rightly deleted the addition of an amount of Rs.3.87 crore made by the Assessing Officer. We could note that the ITAT has examined the components of sanctioned subsidy and has thereafter arrived at a finding that the same has been rightly treated as capital subsidy by CIT(A). Thus, the findings recorded by the ITAT cannot be termed as perverse or dehors the record, which calls for our interference. So far as reference to Explanation – 1 of Section 43 of the Act is concerned, we find no error of law is committed by the ITAT as well as the CIT(A), while deleting the addition of an amount of Rs.3.87 crore by treating the same under the capital subsidy. In view of the above, concurrent findings recorded by the CIT(Appeals) and by the ITAT, the question of law raised by the department does not deserve any further consideration. The said question also being no more res-integra, it could not be said that the present appeal involves any question much less substantial question of law. It may be noted that the Appeal under section 260A of the Act, could be admitted only on the High Court being satisfied that the case involves a substantial question of law. - Appeal of revenue dismissed. Issues Involved:1. Treatment of ISO Certification expenditure as revenue expenditure.2. Treatment of subsidy received by the assessee as capital in nature.Detailed Analysis:1. Treatment of ISO Certification Expenditure as Revenue Expenditure:The first issue concerns whether the expenditure incurred for obtaining ISO Certification should be treated as revenue expenditure. The Assessing Officer disallowed Rs. 27,39,668/- spent on ISO certification, treating it as capital expenditure. However, the CIT(A) allowed this expenditure, treating it as revenue in nature, referencing the assessee's previous assessment year and the Supreme Court's decision in NTCP Vs. CIT, which established that if the expenditure facilitates the business without affecting the fixed capital, it should be considered revenue expenditure. The ITAT upheld the CIT(A)'s decision, agreeing that obtaining an ISO certificate aids in smoother business operations without adding to the fixed capital. The High Court affirmed this view, stating that the expenditure did not enhance the fixed capital but merely facilitated business efficiency.2. Treatment of Subsidy Received by the Assessee as Capital in Nature:The second issue pertains to the treatment of a subsidy amounting to Rs. 3.87 crore received by the assessee. The Assessing Officer treated this subsidy as revenue in nature, arguing it was for administrative expenses. However, the CIT(A) and ITAT treated it as capital in nature, referencing documentary evidence, including a letter from the Under Secretary, Government of India, indicating the subsidy was for infrastructure upgradation. The High Court agreed with the CIT(A) and ITAT, finding that the subsidy was for capital expenses related to infrastructure expansion, thereby justifying its treatment as capital in nature. The Court also noted that Explanation 10 to Section 43(1) of the Act was correctly applied, as the subsidy was not directly relatable to any specific asset, hence it should be treated as capital subsidy.Conclusion:The High Court dismissed the appeal, upholding the concurrent findings of the CIT(A) and ITAT. It concluded that the ISO Certification expenditure was rightly treated as revenue expenditure and the subsidy as capital in nature. The Court found no substantial question of law warranting further consideration, affirming that the appeal did not involve any significant legal question under Section 260A of the Act.