2021 (7) TMI 1476 - AT - Income Tax

Capital treatment for interest subsidies and TUFS upheld; Sec.115JB adjustments, education cess deductions, Sec.14A deletion considered

DCIT-11 (1) (2), Mumbai Versus M/s. Sangam India Ltd. And (Vice-Versa)

ITAT MUMBAI upheld CIT(A)'s treatment of interest subsidies under the Rajasthan scheme and TUFS as capital receipts not taxable. Additional grounds on ... Nature of subsidy received - capital receipt not chargeable to tax or revenue receipt - assessee had received two subsidies viz. (i) 2.5% interest subsidy under Rajasthan Government Promotion Scheme 2003 of Rajasthan with respect to Bhilwara Unit & interest subsidy under Technology Upgradation Fund Scheme (TUF) by Ministry of Textiles, Government of India HELD THAT:- We find that Ld. CIT(A) has followed appellate orders for AYs 2012-13 to 2014-15 while adjudicating the issues. The revenue challenged the appellate orders for AYs 2012-13 to 2014-15 before this Tribunal vide [2020 (10) TMI 131 - ITAT MUMBAI] wherein the appeals of the revenue were dismissed by the coordinate bench as held duly examined the entire scheme and brought out the final nuances of the schemes in his appellate order and examined all the contents of the scheme with the its purpose of granting. After due examination of the scheme in detail, we find that the CIT(A) had rightly treated the subsidy received by the assessee as capital receipt. Admission of additional grounds - Deduction of Education Cess on income tax and dividend distribution tax in computing tax liability under the normal provisions of the Act - HELD THAT:- No prohibition on raising of an additional ground before the appellate authority, when the ground so raised could not have been raised before the Assessing Officer and the ground now becomes available in view of changed circumstances such as a decision of a Court allowing a particular deduction. Respectfully following the same, the additional grounds are admitted and adjudicated on merits in succeeding paragraphs. Deduction of Education Cess on income tax and dividend distribution tax while computing tax liability under the normal provisions of the Act - AR submitted that the assessee has paid cess on Income Tax and dividend distribution tax on the dividend so distributed during the year which is an allowable deduction as per the decision of Sesa Goa Ltd. [2020 (3) TMI 347 - BOMBAY HIGH COURT] In this case, it has been held that held that while the income tax is not allowable as deduction in view of Sec. 40(a)(ii) of the Act, the expression ‘Cess’ cannot be read into the said provisions and hence the amount of education cess and higher and secondary education cess are allowable as deduction in computing the income of the assessee. We concur that this issue is covered by the cited decision of jurisdictional High Court. Therefore, Ld. AO is directed to verify the claim of the assessee and allow the deduction in terms of the cited decision. Exclusion of export-incentive received under FMS scheme not liable to tax in computing the tax liability under normal provision and u/s 115JB - We direct Ld. AO to verify the claim and allow deduction thereof while computing income under normal provisions as well as while computing book-profits u/s 115JB Adjustment of Interest Subsidy received under TUFS and Incentive received under RIPS u/s 115JB - We find that in department’s appeals, these receipts are held to be capital receipts not chargeable to tax under normal provisions. It is the submission of Ld. AO that the same would be excludible while computing Book Profits u/s 115JB also as per the various decisions of Tribunal. Accordingly, Ld. AO is directed to verify the claim and allow the same in terms of the cited decisions while adjudicating the claim of the assessee. Adjustment of depreciation due to change in the method of useful life under with General Reserve while computing tax liability under the provision of Section 115JB - As submitted by Ld. AR that depreciation allowable under the Act was adjusted against the general reserve as against charging the same against the profits of the company and therefore, book-profits u/s 115JB ought to have been computed after taking into the account the depreciation so adjusted against the general reserves in the Balance Sheet. For the same, Ld. AR referred to the decision of Sain Processing & Wvg. Mills (P) Ltd. [2008 (12) TMI 20 - DELHI HIGH COURT] wherein the Hon’ble Court has allowed current year’s depreciation, though not charged to profit and loss account but disclosed in the notes to accounts - We find strength in the aforesaid arguments of Ld. AR. Therefore, we direct Ld. AO to verify the facts and allow the claim as per law in terms of cited decisions. This ground stand allowed for statistical purposes. Disallowance u/s 14A - We find that now it is settled law that in case no exempt income is earned by the assessee during the year, then no disallowance u/s 14A could be made. Therefore, we direct Ld. AO to verify that the assessee has not earned any exempt dividend income during the year. If so, the disallowance shall stand deleted. This ground stand allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether interest-subsidies under a State promotion scheme and under the Technology Upgradation Fund Scheme (TUFS/TUF) are capital receipts or revenue receipts for income-tax purposes. 2. Whether the Finance Act 2015 amendment to the definition of 'income' in section 2(24) (inserting clause (xviii)) with effect from 01/04/2016 alters the characterisation of such subsidies for the assessment year in issue. 3. Whether the appellate authority may admit and decide additional grounds (raised by assessee in cross-objection) based on subsequent judicial decisions and whether delay in filing cross-objection should be condoned. 4. Whether (a) education cess and higher education cess paid on income-tax and dividend distribution tax are allowable deductions under normal provisions, (b) export incentives under the Focus Market Scheme (FMS) are non-taxable capital receipts and excludible from book profits under section 115JB, (c) interest subsidies/TUFS and RIPS incentives are excludible from book profits under section 115JB, (d) depreciation re-computed pursuant to Companies Act, 2013 and adjusted to general reserve must be taken into account in computing book profits under section 115JB, and (e) disallowance under section 14A is sustainable where no exempt income was earned. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Character of interest-subsidies (capital v. revenue) Legal framework: Characterisation of receipts as capital or revenue is determined by the purpose for which the subsidy is granted and the point of time/purpose test as applied by judicial precedents; accounting form or label is not decisive. Precedent treatment: The Tribunal applied the ratio of the authoritative decision that subsidy schemes granted for setting up/expansion of industry, promotion of capacity, globalization of trade and employment generation are capital in nature (purpose test). Earlier appellate orders in favour of the assessee, affirmed by a coordinate bench, applied that precedent to similar facts. Interpretation and reasoning: The Tribunal examined the terms and purpose of the State and Central subsidy schemes (Rajasthan Promotion Scheme 2003 and TUFS/TUF) and found they were granted to promote capacity expansion and set up industry; therefore the purpose test required treating the receipts as capital receipts. The Tribunal rejected the Assessing Officer's conclusion that the subsidies were revenue in nature, noting the appellate authority had independently examined the schemes and reached reasoned findings. Ratio vs. Obiter: Ratio - subsidies given for capital formation/setting up industry under the schemes are capital receipts and not taxable as income for the assessment year in question. Obiter - comments on Rule 46A and evidentiary aspects were ancillary observations supporting admission of material already in public domain. Conclusion: The Tribunal upheld the characterisation of the interest-subsidies as capital receipts and not chargeable to tax for the year under consideration. Issue 2 - Effect of Finance Act 2015 (s.2(24)(xviii)) Legal framework: Finance Act 2015 amended the definition of 'income' by inserting clause (xviii) to s.2(24) effective 01/04/2016 to include subsidies/grants/cash incentives received from government as income. Precedent treatment: The Tribunal treated the amendment as prospective - effective for assessment years commencing on or after 01/04/2016 - and therefore not operative for the assessment year under adjudication. Interpretation and reasoning: The Tribunal accepted that prior to the statutory amendment the classic purpose test governed characterisation. Since the amendment is prospective, it could not retroactively alter the taxability of subsidies for the subject year; thus the subsidies remained capital receipts for that year. Ratio vs. Obiter: Ratio - the 2015 amendment does not affect assessment years prior to its effective date; characterisation for those years continues to be governed by established tests and precedents. Obiter - none material beyond prospective operation point. Conclusion: The 2015 amendment did not enlarge the taxable income for the assessment year in issue; subsidies remained outside income for that year. Issue 3 - Admission of additional grounds and condonation of delay in filing cross-objection Legal framework: Appellate authorities may permit additional grounds where they arise from the subject-matter of proceedings, particularly when such grounds could not have been raised earlier because of subsequent judicial decisions; condonation of delay requires 'sufficient cause' and is to be liberally construed to advance substantial justice, applying Supreme Court guidance. Precedent treatment: The Tribunal applied guiding precedents permitting additional grounds when ensuing case law changes circumstances and considered authorities holding legal advice and subsequent favourable decisions can constitute sufficient cause for delay; it distinguished contrary precedents on the facts. Interpretation and reasoning: The Tribunal accepted the assessee's explanation supported by affidavit: (i) notice of appeal was received 06/11/2019; (ii) required filing date was 05/12/2019; (iii) cross-objection filed 05/01/2021; (iv) the period 15/03/2020-05/01/2021 is excluded by the Supreme Court's suo-moto order extending limitation during Covid-19 lockdown; and (v) favourable High Court/tribunal decisions rendered in Feb-Mar 2020 gave rise to new grounds which could not reasonably have been raised earlier. The Tribunal found the remaining pre-lockdown delay of about 100 days satisfactorily explained by reliance on counsel's advice and emergence of new favourable decisions and, following liberal principles, condoned the delay and admitted the cross-objection and additional grounds for adjudication. Ratio vs. Obiter: Ratio - where additional grounds arise from changed legal position (subsequent judicial decisions) and the delay is satisfactorily explained (including by operation of limitation suspension during Covid-19), appellate authorities may admit the grounds; delay may be condoned in the exercise of judicial discretion to advance substantial justice. Obiter - emphasis on need to verify facts where additional grounds depend on factual matrix. Conclusion: Delay in filing cross-objection was condoned; additional grounds were admitted for adjudication on merits. Issue 4(a) - Deductibility of education cess and higher education cess Legal framework: Allowability of cess as deduction under normal provisions; Sec.40(a)(ii) disallows certain taxes but expression 'cess' is to be construed on its terms. Precedent treatment: Tribunal followed binding jurisdictional High Court authority holding that education cess/higher education cess is allowable as deduction despite Sec.40(a)(ii) disallowance of income-tax. Interpretation and reasoning: The Tribunal concurred with the High Court decision and directed verification and allowance of the deduction. Ratio vs. Obiter: Ratio - education cess and higher education cess paid on income-tax and DDT are allowable deductions for computing income under normal provisions (subject to verification). Conclusion: Deduction allowed (statistical). Issue 4(b) - Export incentives under FMS and treatment under section 115JB Legal framework: Taxability of export incentives depends on characterisation; book-profits under s.115JB must exclude receipts of capital character as per judicial decisions. Precedent treatment: The Tribunal relied on favourable High Court and tribunal decisions holding FMS incentives to be capital receipts and excluded from book profits. Interpretation and reasoning: Given scheme object and precedents, the Tribunal directed verifying the claim and excluding FMS incentives from income under normal provisions and from book profits under s.115JB. Ratio vs. Obiter: Ratio - FMS export incentives held to be capital receipts and excludible from computation of income and book profits under s.115JB. Obiter - procedural direction to verifying authorities. Conclusion: Relief directed for verification and allowance (statistical). Issue 4(c) - Exclusion of interest subsidy (TUFS/RIPS) from book profits under s.115JB Legal framework: Same as Issue 1, with application to computation of book profits under s.115JB. Precedent treatment: Tribunal accepted earlier findings that such receipts are capital and followed tribunal decisions treating capital receipts as excludible from book profits. Interpretation and reasoning: Since these subsidies are capital receipts not taxable under normal provisions, they should likewise be excluded from book profits for s.115JB computation; Assessing Officer directed to verify and allow accordingly. Ratio vs. Obiter: Ratio - capital nature subsidies are excludible from book profits under s.115JB. Obiter - none material. Conclusion: Directed allowance upon verification (statistical). Issue 4(d) - Depreciation re-computation under Companies Act, 2013 adjusted against general reserve and effect on book profits under s.115JB Legal framework: Accounting adjustments required by Companies Act may affect taxable book profits; where depreciation not charged to P&L but disclosed/adjusted against reserves, courts have held current year's depreciation may nevertheless be considered for tax computations depending on disclosure and facts. Precedent treatment: Tribunal relied on High Court/tribunal authorities allowing depreciation where disclosed in notes and resulting adjustment to reserves. Interpretation and reasoning: Tribunal accepted that excess WDV due to revised useful life was adjusted against general reserves and that depreciation impact was disclosed in notes; therefore Assessing Officer to verify facts and allow appropriate adjustment in book profits in accordance with cited precedents. Ratio vs. Obiter: Ratio - where depreciation re-computation is correctly disclosed and adjusted to reserves pursuant to Companies Act, an appellate authority may direct taking such depreciation into account for computing book profits under s.115JB after verification. Obiter - factual verification required. Conclusion: Directed verification and allowance as per law (statistical). Issue 4(e) - Section 14A disallowance where no exempt income earned Legal framework: Section 14A read with Rule 8D provides for disallowance of expenditure in relation to exempt income; settled position that if no exempt income is earned in the year, no disallowance under s.14A is warranted. Precedent treatment: Tribunal applied settled law that absence of exempt dividend income negates s.14A disallowance. Interpretation and reasoning: Since the assessee did not earn exempt dividend income in the year, the Assessing Officer must verify that factual position and, if confirmed, delete the disallowance. Ratio vs. Obiter: Ratio - no s.14A disallowance where no exempt income earned; Obiter - verification directed. Conclusion: Disallowance to be deleted if no exempt income is found (statistical). OVERALL CONCLUSION The Tribunal dismissed the revenue's appeal regarding taxation of the interest-subsidies (upholding capital character) and condoned the delay/admitted cross-objection; several issues raised in the cross-objection were allowed in principle for verification and appropriate adjustment by the Assessing Officer (deduction of cess, treatment of FMS incentives, exclusion of TUFS/RIPS subsidies from book profits, depreciation adjustment, deletion of section 14A disallowance) - all directed to be verified and allowed as per cited legal principles and precedents.