2024 (9) TMI 735 - AT - Income Tax

Sales tax subsidy reducing asset value becomes capital receipt, excluded from MAT book profit under section 115JB

Economic Explosives Ltd. Versus Asstt. Commissioner of Income Tax Central Circle–1 (2), Nagpur

The ITAT Nagpur ruled in favor of the assessee regarding treatment of sales tax subsidy in MAT computation. The tribunal held that when subsidy is reduced ... Nature of receipt - receipt of Sales Tax Subsidy - MAT computation - AO not reducing the same in computation of income under the MAT provisions considering it is a capital receipt - HELD THAT:- When such subsidy has been reduced from the written down value, it is no longer an income u/s 2(24)(xviii) of the Act in the lines as enunciated and is a capital receipt. See Century Plyboards Pvt. Ltd [2020 (12) TMI 55 - ITAT KOLKATA] as held when subsidies received by the assessee for setting up new Industries, by way of refund of VAT and excise duty are liable to be excluded from the computation of book profit u/s 115JB We direct that the capital subsidy should be reduced for computation of book profit. Particularly in view of the excruciating fact that reduction of subsidy from written down value was accepted by the Assessing Officer and he did not tinker with the amount of depreciation claimed. Conclusion: i) The company is justified in raising additional claim of reduction of subsidy from computation of book profit though not claimed at the time of filing return of income; ii) Upon verification of income tax return, it is clear that the amount of subsidy has been reduced from WDV for the purpose of computation of depreciation and as per Income Tax Act; iii) Once the subsidy has been reduced to compute the actual cost of machineries & building, it can no longer be considered as income, even u/s 2(24)(xviii) w.e.f. A.Y. 2016–17; iv) Once it is not income, the same cannot be part of book profit, though it is shown in Profit & Loss Account, because capital receipt cannot be brought under the ambit of taxation even under the provisions of Minimum Alternate Tax. Entries in the books of account are not relevant; v) The Department is not permitted to take diametric opposite stand once while computing depreciation and again while computing book profit on the same issue; vi) Reduction from written down value leads to abatement of depreciation which in turn leads to higher taxable income. Again taxing the subsidy will lead to indirect double taxation which cannot be countenanced; vii) Distinct lines of reasoning should be eschewed while computing total income under normal provisions and book profit u/s 115JB. Issues Involved:1. Receipt of Sales Tax Subsidy as a capital receipt and its treatment under MAT provisions.2. Deduction of cess paid.3. Additional legal claims and general grounds of appeal.Detailed Analysis:Issue 1: Receipt of Sales Tax Subsidy as a Capital Receipt and its Treatment under MAT ProvisionsFacts in Brief:The assessee, engaged in manufacturing detonators and other products, received a Sales Tax Subsidy of Rs. 11,99,56,135 under the Mega Project 2007 scheme by the Maharashtra Government. The subsidy was treated as a capital receipt in the return of income but was not reduced while computing book profit under MAT provisions.Assessing Officer's Decision:The AO did not reduce the Sales Tax Subsidy from the book profit under MAT provisions, citing the Supreme Court decision in Apollo Tyres Ltd. v/s CIT, which limits adjustments to those specified under Explanation 1 to sub-section (2) of section 115JB. The AO also relied on Goetze (India) Ltd. v/s CIT, which mandates that claims must be made through a revised return.CIT(A)'s Decision:The CIT(A) upheld the AO's decision, stating that the downward adjustment on account of sales tax subsidy is not specified under the items listed in Explanation 1 to section 115JB. The CIT(A) also noted that reducing the capital sales tax subsidy from book profit would violate the provisions of the Companies Act and section 115JB.Tribunal's Decision:The Tribunal allowed the appeal, holding that the Sales Tax Subsidy is a capital receipt and should be excluded from the computation of book profit under section 115JB. The Tribunal relied on several judicial precedents, including decisions from the Supreme Court and various High Courts, which have consistently held that subsidies intended for setting up new industries or expanding existing ones are capital receipts.Key Takeaways:1. Nature of Subsidy: The subsidy was granted to promote industrial development in backward areas and was linked to the investment made by the assessee.2. Capital Receipt: The Tribunal reiterated that subsidies received for setting up new industries or expanding existing ones are capital receipts and not income.3. Book Profit Computation: The Tribunal held that such capital receipts should be excluded from the computation of book profit under section 115JB, even if credited to the Profit & Loss Account.4. Judicial Precedents: The Tribunal cited various decisions, including those from the Supreme Court and High Courts, which support the exclusion of such subsidies from book profit computation.Issue 2: Deduction of Cess PaidFacts in Brief:The assessee claimed a deduction for cess paid amounting to Rs. 35,02,834.Assessing Officer's Decision:The AO disallowed the deduction for cess paid.CIT(A)'s Decision:The CIT(A) upheld the AO's decision.Tribunal's Decision:The assessee did not press this ground during the hearing, and hence, the Tribunal dismissed this ground as 'not pressed.'Issue 3: Additional Legal Claims and General Grounds of AppealFacts in Brief:The assessee raised additional legal claims and general grounds of appeal, including the right to alter, amend, withdraw, or substitute grounds of appeal.Tribunal's Decision:The Tribunal allowed the additional legal claims related to the reduction of capital subsidy from book profit computation, citing various judicial precedents that permit such claims to be entertained even if not made through a revised return. The general grounds of appeal were dismissed as no separate adjudication was required.Summary of Tribunal's Rulings:1. Sales Tax Subsidy: The Sales Tax Subsidy is a capital receipt and should be excluded from the computation of book profit under section 115JB.2. Cess Paid: The ground related to the deduction of cess paid was dismissed as 'not pressed.'3. Additional Claims: The Tribunal upheld the assessee's right to raise additional legal claims related to the reduction of capital subsidy from book profit computation.Final Outcome:The appeals for both assessment years 2017-18 and 2018-19 were partly allowed, with the Tribunal directing that the capital subsidy should be reduced for the computation of book profit. The ground related to the deduction of cess paid was dismissed as 'not pressed.'