Excise duty exemption under Notification 50/2003 ruled capital receipt, excluded from MAT computation under Section 115JB
The ITAT Delhi allowed the assessee's appeal regarding IPO expenditure under Section 35D, holding that 92% of share issue expenditure utilized for working capital constituted revenue expenditure, while 8% used for capital expenditure was allowable under Section 35D. The tribunal ruled that excise duty exemption under Notification No. 50/2003 for Uttarakhand constituted capital receipt, not revenue receipt, as the exemption aimed at capital asset acquisition for industrialization. The amendment to Section 2(24)(xviii) was held inapplicable since it specifically excluded "exemption" from its scope. Consequently, the excise duty exemption was excluded from book profit computation under Section 115JB for MAT purposes.
Issues Presented and Considered1. Whether the learned Commissioner of Income Tax (Appeals) (CIT(A)) was justified in allowing the claim of the assessee treating share issue expenses related to Initial Public Offer (IPO) as revenue expenditure under Section 35D of the Income Tax Act, 1961 ("the Act"), contrary to the provisions of the Act and despite the issue being sub-judice before the High Court.
2. Whether the excise duty exemption availed by the assessee under Central Excise Notification No. 50/2003-CE should be treated as capital receipt or revenue receipt for the purposes of taxation under the Act.
3. Whether the CIT(A) was correct in admitting and allowing additional grounds raised by the assessee regarding the treatment of excise duty exemption as capital receipt despite the claim not being made in the original or revised return of income.
4. Whether the delay in filing appeals by the assessee before the CIT(A) for Assessment Years (AY) 2015-16 and 2016-17, which were barred by limitation (1537 days and 635 days respectively), was rightly condoned by the CIT(A) without reasonable cause.
5. Whether the excise duty exemption, being capital receipt, should be excluded from book profits for the computation of Minimum Alternate Tax (MAT) under Section 115JB of the Act.
Issue-wise Detailed Analysis
1. Treatment of Share Issue Expenses under Section 35D of the Act
Legal Framework and Precedents: Section 35D allows deduction of expenditure incurred in connection with the issue of shares or debentures in five equal installments. The issue involved whether share issue expenses should be treated as revenue expenditure or capital expenditure.
Court's Interpretation and Reasoning: The CIT(A) allowed the claim treating 92% of the share issue expenses as revenue expenditure since that portion of the IPO proceeds was utilized for working capital, and the remaining 8% related to capital expenditure was allowed under Section 35D. The CIT(A) relied on the decision of the Income Tax Appellate Tribunal (ITAT) in the assessee's own case for AYs 2013-14 and 2014-15, which had considered Apex Court judgments and held similarly.
Evidence and Findings: The assessee had raised Rs. 601.28 crores via IPO, incurring Rs. 38 crores as share issue expenses. 92% of the proceeds were used for working capital and 8% for capital expenditure. The ITAT had allowed the claim in earlier years.
Application of Law to Facts: The Tribunal accepted that since the majority of the IPO proceeds were used for working capital, the corresponding share issue expenses should be treated as revenue expenditure and allowed under Section 37(1), while the balance was allowed under Section 35D.
Competing Arguments: The Revenue contended that the CIT(A) erred by allowing the claim contrary to Section 35D and despite the issue being sub-judice. The assessee relied on prior ITAT rulings.
Conclusion: The Court found the CIT(A)'s order just and proper and declined to interfere, applying the same reasoning mutatis mutandis for AY 2016-17.
2. Treatment of Excise Duty Exemption as Capital Receipt
Legal Framework and Precedents: The issue involved whether excise duty exemption under Notification No. 50/2003-CE, granted to industrial units in backward areas for 10 years, is a capital receipt or revenue receipt. The Revenue contended it was a revenue receipt since it was not for acquisition of capital assets. The assessee relied on judgments including Shree Balaji Alloys vs. CIT (333 ITR 335), upheld by the Supreme Court, which held similar incentives as capital receipts. Other supporting decisions from ITAT and High Courts were cited.
Court's Interpretation and Reasoning: The CIT(A) admitted the additional ground raised by the assessee during appellate proceedings and allowed the claim treating the excise duty exemption as capital receipt. The CIT(A) considered the remand report from the Assessing Officer (AO), which acknowledged the exemption was granted to promote industrialization and employment generation in backward areas. The CIT(A) relied on the purpose test established by the Jammu & Kashmir High Court and Supreme Court that the nature of the receipt depends on the underlying purpose of the incentive.
Evidence and Findings: The assessee's undertaking commenced production in 2010 in a backward area of Uttarakhand and availed excise duty exemption of Rs. 87.49 crores in the 6th year. The exemption was included in total income and taxed, but the assessee raised the claim for capital receipt treatment during appeal. The AO's remand report accepted the objective of the scheme. Various judgments and notifications were placed on record.
Application of Law to Facts: The Court applied the purpose test, finding the exemption was granted to accelerate industrial development and generate employment, thus constituting a capital receipt. The absence of a revised return was held not to bar the claim, as appellate authorities have jurisdiction to admit additional grounds if bona fide and for good reasons.
Competing Arguments: The Revenue argued the claim was a change of opinion and barred since not made in the original or revised return, relying on Goetze (India) Ltd. vs. CIT. The assessee countered with judgments allowing additional grounds before appellate authorities and the distinction between exemption and subsidy.
Conclusion: The Court concurred with the CIT(A), admitted the additional ground, and held the excise duty exemption as capital receipt, not taxable under normal provisions, rejecting Revenue's appeal.
3. Admission of Additional Grounds and Delay in Filing Appeals
Legal Framework and Precedents: The issue was whether the CIT(A) could admit additional grounds not raised before the AO and whether delay in filing appeals barred the same. The Court relied on Supreme Court decisions including Goetze (India) Ltd. vs. CIT, Jute Corporation of India Ltd. vs. CIT, and principles laid down in B. Madhuri Goud vs. B. Damodar Reddy regarding condonation of delay.
Court's Interpretation and Reasoning: The CIT(A) admitted additional grounds relying on judgments from Bombay High Court and Supreme Court that appellate authorities have plenary powers to entertain additional claims if bona fide and for good reasons. The CIT(A) also condoned delays of 1537 days (AY 2015-16) and 635 days (AY 2016-17), considering explanations including change of tax consultants, Covid-19 pandemic (period excluded as per Supreme Court orders), and absence of mala fide or dilatory intent. The Court emphasized the liberal, pragmatic, and justice-oriented approach to condonation of delay, as per Supreme Court precedents.
Evidence and Findings: The assessee explained delay due to financial disputes with earlier tax consultants, late realization of demand, and reliance on prior ITAT decisions. The Supreme Court's extension of limitation period during Covid-19 was applied. No malafide conduct was found.
Application of Law to Facts: The Court applied the principles that delay length is not determinative; acceptability of explanation is key. The Court found the CIT(A)'s exercise of discretion proper and not arbitrary or perverse.
Competing Arguments: The Revenue challenged the condonation of delay as without reasonable cause. The assessee relied on case law and pandemic-related extensions.
Conclusion: The Court upheld the CIT(A)'s condonation of delay and admission of additional grounds, dismissing Revenue's appeals on these grounds.
4. Inclusion of Excise Duty Exemption in Book Profits for MAT under Section 115JB
Legal Framework and Precedents: The assessee contended that excise duty exemption being capital receipt should be excluded from book profits for MAT computation. Reliance was placed on the judgment of the Guwahati High Court in CIT vs. Greenply Industries Ltd. and Bombay High Court decisions.
Court's Interpretation and Reasoning: The Court noted that the Guwahati High Court held that capital receipts are not includible in book profits under Section 115JB. The Court accepted that the excise duty exemption is a capital receipt and thus cannot be added to book profits for MAT.
Evidence and Findings: The issue was consequential to the capital receipt nature of the exemption. The Revenue failed to cite any contrary binding authority.
Application of Law to Facts: The Court applied settled law that book profits are based on audited accounts and only limited adjustments under Explanation to Section 115JB are permissible. Since the exemption is capital receipt, it is excluded.
Competing Arguments: The Revenue argued for inclusion; the assessee relied on binding High Court precedents.
Conclusion: The Court allowed the assessee's cross-objection and held excise duty exemption not includible in book profits for MAT.
Significant Holdings
"The order of the Hon'ble ITAT in the appellant's own case filed by the appellant has been perused... The Hon'ble ITAT gave following decision on the issue:
'Hence, the claim of the assessee that the expenditure is in the nature of revenue expenses and hence allowable u/s 37(1) of the Act for the years in appeal in computing the total income under the normal provisions of the act as the fund raised is used as working capital by the company except an amount of Rs. 41.02 crores. As the assessee has utilised 92% of receipts on account of public issue on working capital and hence 92% of Rs. 38 crores of share issue expenditure would be revenue expenditure and balance 8% of share issue expenditure which was spent on capital expenditure would not be treated as revenue expenditure. The proceeds utilized for capital expenditure, is allowable u/s 35D of the Act. Appeal of the assessee on this ground is allowed.'"
"The additional ground pertaining to the claim of excise duty exemption as capital receipt has been supported by the appellant with various judgments... The admission of additional ground of appeal has been opposed by the AO relying on the decisions of M Goetze (India) Limited vs. CIT, (157 Taxman 1) only.
I have gone through the claims of appellant regarding admission of additional grounds and judgements in favor and the remand report of AO along with Hon'ble SC's judgment in M/s Goetze (India) case. The major legal issue to be decide is that whether 'additional ground taken by appellant for the first time before the appellate authority can be accepted or not' and 'whether the decision of Hon'ble SC is a bar on the power of the appellate authority too accepting additional ground raised first time before him by appellant which he did not ITR'.
In M/s Pruthvi Brokers and Shareholders Private Limited (349 ITR 0336)(2012), the Hon'ble HC of Bombay while deciding on the similar issue of claim of additional deduction under section 43B considering SC's decision in M/s Goetze provided held that
'......It is clear to us that the Supreme Court did not hold anything contrary to what was held in previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal u/s 254..........'
Therefore, in view of above judgement of SC and Bombay HC, the answer to both the legal queries comes out in favor of the appellant."
"In the case of Improvement Trust, Ludhiana vs. Ujagar Singh &Ors., it was averred/held by the Hon'ble Supreme Court:
'..... After all, justice can be done only when the matter is fought on merits and in accordance with law rather than to dispose it of on such technicalities and that too at the threshold.
...
Apart from the above, appellant would not have gained in any manner whatsoever, by not filing the appeal within the period of limitation. It is also worth noticing that delay was also not that huge, which could not have been condoned, without putting the respondents to harm or prejudice. It is the duty of the Court to see to it that justice should be done between the parties'
"
"The issue raised in these appeals is covered against the Revenue by the decision of this Court in 'Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd.' or in the alternate, in 'Commissioner of Income Tax Vs. M/s Meghalaya Steels Ltd.' The appeals are, therefore, dismissed."
"Exemption and subsidy are two separate and independent words and which are not defined. As per Black's Law Dictionary, exemption means freedom from a general duty or service; immunity from a general burden, tax, or charge, whereas subsidy means a grant of money made by government in aid of the promoters of any enterprise considered a proper subject for government aid because such purpose is likely to be of benefit to the public.
... The assessee is exempted from making payment of excise duty to the extent of 36% of the total excise duty collected. It is not subsidy given to meet cost of project. Therefore, exemption from excise duty does not fall in the definition of income as envisaged u/s 2(24)(xviii) of the Act. Meaning thereby, the amount is not income but a capital receipt not taxable under the provisions of the Act."
"The issue of inclusion of excise duty exemption in book profits for computation of MAT under Section 115JB is consequential to the substantial question of law that the exemption is capital receipt and hence not includible. The Hon'ble Guwahati High Court held that capital receipt cannot be added to book profits and the Assessing Officer's power is limited to verifying whether books are maintained as per Companies Act and audited. The Court respectfully agrees and holds accordingly."
Core Principles Established
- Share issue expenses related to IPO can be apportioned between capital and revenue expenditure based on utilization of proceeds, with revenue portion allowable under Section 37(1) and capital portion under Section 35D.
- Excise duty exemption granted to industrial units in backward areas under statutory notification aimed at industrialization and employment generation is a capital receipt, not taxable under normal provisions of the Act.
- Appellate authorities have plenary powers to admit additional grounds not raised before the AO, provided bona fide reasons exist and no mala fide intent is found.
- Delay in filing appeals can be condoned liberally and pragmatically, especially in absence of mala fide and where substantial justice requires adjudication on merits.
- Exemption from excise duty is distinct from subsidy and does not fall within the ambit of income under Section 2(24)(xviii) of the Act.
- Capital receipts are not includible in book profits for the purpose of MAT computation under Section 115JB.
Final Determinations on Each Issue
1. The CIT(A) was correct in allowing the claim of share issue expenses as revenue expenditure under Section 35D, following ITAT precedents and Apex Court rulings; Revenue's appeal on this ground is dismissed.
2. The excise duty exemption under Notification No. 50/2003-CE is a capital receipt, not taxable under the Act; the CIT(A)'s acceptance of this claim and admission of additional grounds is upheld; Revenue's appeal is dismissed.
3. The CIT(A) rightly admitted additional grounds despite no claim in original or revised return, in view of Supreme Court and High Court precedents; Revenue's objection is rejected.
4. The delay in filing appeals by the assessee was properly condoned by CIT(A) on sufficient grounds including pandemic-related extensions and absence of mala fide; Revenue's challenge is dismissed.
5. The excise duty exemption being capital receipt is not includible in book profits for MAT under Section 115JB; assessee's cross objections are allowed.
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