Interest subsidy under TUF scheme excluded from book profit computation under Section 115JB as capital receipt

ITAT Mumbai upheld CIT(A)'s deletion of addition regarding interest subsidy received under TUF scheme while computing book profit under Section 115JB. The Tribunal held that capital receipts and exempt income must be excluded from book profit computation, following consistent precedents from assessee's earlier years and similar cases. The revenue's appeal was dismissed as the Tribunal found no infirmity in excluding the interest subsidy from MAT computation, distinguishing earlier contrary decisions as pertaining to Section 115J rather than 115JB.

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The core legal issue considered in these appeals is whether the interest subsidy received under the Technology Upgradation Fund (TUF) scheme qualifies as a capital receipt or revenue receipt, and more specifically, whether such interest subsidy should be included in the computation of book profit under section 115JB of the Income Tax Act, 1961.

Regarding this issue, the relevant legal framework includes section 115JB of the Income Tax Act, which prescribes the computation of book profit for the purpose of Minimum Alternate Tax (MAT). The section requires adjustments to the net profit as per the profit and loss account, but the treatment of capital receipts versus revenue receipts in this computation has been subject to judicial scrutiny. Precedents from various High Courts and Tribunals have addressed the inclusion or exclusion of capital receipts and exempt income in book profit calculations.

The Court examined the nature of the interest subsidy under the TUF scheme, which is granted by the Ministry of Textiles to encourage modernization and capacity expansion in the textile industry. The assessee contended that the subsidy is a capital receipt meant for industry-wide development and not a revenue receipt. This contention aligns with prior decisions in the assessee's own case for earlier years, where the subsidy was held to be a capital receipt.

In the present appeals, the Commissioner of Income Tax (Appeals) ('CIT(A)') had deleted the addition made by the Assessing Officer (AO) that included the interest subsidy in book profit computation under section 115JB. The CIT(A) relied on decisions of the Calcutta High Court in PCIT vs. Ankit Metal and Power Ltd. and the Madras High Court in CIT vs. Best Corporation Ltd., which held that since the interest subsidy is a capital receipt and not income under section 2(24), it should not be included in book profit under section 115JB.

The revenue challenged this view, urging adherence to the jurisdictional Bombay High Court decisions, particularly CIT vs. Veekaylal Investment Co., which held that book profits cannot be tinkered with and that certain receipts, including exempt capital gains, must be included in book profits. The revenue also relied on the Supreme Court decision in ACIT vs. Saurashtra Kutch Stock Exchange Ltd., emphasizing the binding nature of jurisdictional High Court decisions and the consequences of non-consideration as a mistake apparent on record.

The Tribunal analyzed these competing contentions in depth. It noted that the Bombay High Court's Veekaylal decision pertained to section 115J, which lacks provisions analogous to sub-section (5) of section 115JB, the section presently under consideration. The Madras High Court in CIT vs. Metal and Chromium Plater Pvt Ltd. distinguished Veekaylal's applicability to section 115JB, clarifying that adjusted book profits under section 115JB are subjected to further statutory provisions, unlike section 115J assessments.

The Tribunal further examined a series of decisions, including its own coordinate bench rulings in the assessee's case for subsequent years and in Reliance Industries Limited vs. DCIT, which consistently excluded capital receipts and exempt income from the book profit computation under section 115JB. The Tribunal emphasized the principle that receipts not in the nature of income cannot be included in book profit.

On the question of judicial precedents, the Tribunal reiterated the hierarchical judicial system principles. It acknowledged that jurisdictional High Court decisions are binding, whereas non-jurisdictional High Court decisions carry persuasive value and are followed based on judicial propriety. The Tribunal cited authoritative Supreme Court and coordinate bench rulings underscoring the necessity of following jurisdictional High Court decisions unless strong reasons justify deviation, and that non-jurisdictional High Court decisions should not be lightly disregarded.

In the present case, the Tribunal found no compelling reasons to depart from the decisions of the Calcutta and Madras High Courts, which are non-jurisdictional but authoritative on the issue of excluding capital receipts like interest subsidy from book profit under section 115JB. The Tribunal noted the absence of conflicting jurisdictional High Court rulings directly on point and upheld the CIT(A)'s order deleting the addition.

Applying the law to the facts, the Tribunal held that the interest subsidy under the TUF scheme is a capital receipt and not income under section 2(24). Consequently, it cannot form part of the book profit under section 115JB. The Tribunal rejected the revenue's contention that the subsidy should be included in book profit, finding that the revenue's reliance on Veekaylal Investment Co. was misplaced given the distinction between sections 115J and 115JB.

The Tribunal also addressed the revenue's argument regarding the binding nature of jurisdictional High Court precedents and the Supreme Court's stance on mistake apparent on record. It held that since the decisions relied upon by the CIT(A) emanated from non-jurisdictional High Courts but were well-reasoned and consistent with the facts, there was no error apparent on the record warranting interference.

In conclusion, the Tribunal dismissed the revenue's appeals for the assessment years 2006-07, 2007-08, and 2008-09, affirming that the interest subsidy received under the TUF scheme should not be included in the computation of book profit under section 115JB of the Income Tax Act.

Significant holdings from the judgment include the following verbatim excerpts:

"In this case since we have already held that in relevant assessment year 2010-11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961."

"The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system."

"Following a jurisdictional High Court decision is a compulsion of law and absolutely sacrosanct that way, but following a non-jurisdictional High Court is a call of judicial propriety which is never absolute, as it is inherently required to be blended with many other important considerations within the framework of law."

Core principles established include:

• The interest subsidy received under the TUF scheme is a capital receipt and not income under section 2(24) of the Income Tax Act.
• Capital receipts that do not constitute income cannot be included in the computation of book profit under section 115JB.
• Decisions of jurisdictional High Courts are binding on Tribunals; decisions of non-jurisdictional High Courts are persuasive and should be followed unless strong reasons exist to deviate.
• The distinction between sections 115J and 115JB is crucial in determining the inclusion or exclusion of certain receipts in book profit computations.
• Judicial discipline requires adherence to hierarchical precedent, with lower courts yielding to higher courts' decisions.

Final determinations on the issue are that the interest subsidy under the TUF scheme is not includible in book profit under section 115JB, and the revenue's appeals challenging the exclusion of such subsidy from book profit computation are dismissed.

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