2025 (10) TMI 1227 - AT - Income Tax

Sales-tax/excise refunds and state TUF subsidies treated as non-taxable capital receipts; 14A/Rule 8D deletions; 115JB book profit excludes 14A adjustments

ITAT MUMBAI upheld the CIT(A) and dismissed Revenue's appeal. The tribunal held the sales-tax/excise refund and state subsidies (including TUF) were ... Nature of the sales tax incentive received by the assessee - Revenue or capital receipt - HELD THAT:- As from the perusal of the decision of Tribunal in the assessee’s own case [2019 (2) TMI 1061 - ITAT MUMBAI] it is evident that the Coordinate Bench, following its earlier decision in the case of M/s. Welspun Steel Ltd. [2015 (12) TMI 1783 - ITAT MUMBAI] held that the excise duty refund and sales tax incentive were given to encourage the setting up of a new industrial unit in Kutch District in the wake of the devastating earthquake, which is capital in nature as it promotes the setting up of new industry in Kutch District. We find that while deciding the Revenue’s appeal against the aforesaid decision of the Tribunal in M/s. Welspun Steel Ltd.(supra), the Hon’ble Jurisdictional High Court in PCIT vs. M/s. Welspun Steel Ltd. [2019 (3) TMI 397 - BOMBAY HIGH COURT] dismissed the grounds raised by the Revenue as held subsidy was granted under schemes framed by the State and the Central Government, to be given to the assesses who set up new industry in Kutch District. The scheme was envisaged to encourage investment which would in turn, provide fresh employment opportunity in the district which had suffered due to devastating earthquake. The computation of subsidy may be on the basis of sales tax or excise duty. Nevertheless, the purpose test would ensure that, the subsidy was capital in nature. No infirmity in the findings of the learned CIT(A) in treating the sales tax incentive received by the assessee as a capital receipt. Accordingly, ground no.1 raised in Revenue’s appeal is dismissed. Computation of disallowance u/s 14A r/w Rule 8D by only taking into account those investments which have resulted in exempt income - HELD THAT:- It is an undisputed fact that during the year under consideration, the assessee made an investment in shares amounting to Rs. 376.94 crore. Therefore, we do not find any infirmity in the findings of the learned CIT(A) in deleting the disallowance made under Rule 8D(2)(ii) of the Rules by placing reliance upon the decision of Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] Disallowance made under Rule 8D(2)(iii) of the Rules, we find that the Special Bench of the Tribunal in Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] held that only those investments are to be considered for computing average value of investment which yielded exempt income during year. Therefore, no infirmity in the findings of the learned CIT(A) on this issue, which has followed the said decision. Accordingly, the findings of the learned CIT(A) on this issue are upheld. As a result, ground no.2 raised in Revenue’s appeal is dismissed. Taxability of Technology Upgradation Fund (“TUF”) subsidy received by the assessee - HELD THAT:- We find that while examining the taxability of the amount received under the TUF Scheme, in PCIT vs Nitin Spinners Ltd. [2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] held that such subsidy was towards capital stream, and therefore, is not taxable. Computing the book profit u/s 115-JB by making an addition on account of disallowance made u/s 14A read with Rule 8D of the Rules - We find that this issue is no longer res integra and the Special Bench of the Tribunal in Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A read with Rule 8D of the Rules. Since the learned CIT(A), following the aforesaid decision, decided this issue in favour of the assessee, we do not find any infirmity in the same ISSUES PRESENTED AND CONSIDERED 1. Whether sales tax/excise incentives granted under schemes to promote setting up/rehabilitation of industry in a backward area (post-earthquake Kutch incentives) are capital receipts or revenue receipts. 2. Whether disallowance under section 14A read with Rule 8D of the Income Tax Rules is to be computed by reference to the aggregate investments held at year-end or only by reference to those investments which actually yielded exempt income during the relevant year; and relatedly, whether Rule 8D(2)(ii) disallowance is sustainable where investments were funded from own substantial funds. 3. Whether subsidy/interest-subsidy received under the Technology Upgradation Fund (TUF) Scheme is a capital receipt or a revenue receipt. 4. Whether disallowance under section 14A read with Rule 8D should be added back in computation of book profit under section 115JB(2) (cl. (f) of Explanation 1) for MAT purposes. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of sales tax/excise incentives (capital v. revenue) Legal framework: Character of subsidy/ incentive is determined by the purpose for which the subsidy is granted (purpose test); nomenclature or modality of benefit (e.g., exemption computed by reference to tax payable) is not conclusive. Precedent treatment: Earlier Supreme Court decisions (including principles in Sahney Steel and Ponni Sugars) establish the purpose test; Tribunal and High Court decisions in favour of capital character where subsidy aimed at promoting capital investment or setting up industry in backward area; Coordinate Bench and High Court decisions upholding capital nature of Kutch incentives were followed. Interpretation and reasoning: The Tribunal applied the purposive test - scheme objective was redevelopment and promotion of new industrial units in Kutch after earthquake, aimed at encouraging capital investment and employment. The fact that incentives were given post-commencement and administratively computed as tax refunds/exemptions does not alter the underlying capital objective. Distinction from Sahney Steel arises where subsidy was given to assist running of business (revenue stream) rather than to promote capital formation; here the scheme's unequivocal object is capital promotion. Ratio vs. Obiter: Ratio - where subsidy is granted with primary object of promoting setting up/expansion of industry in a backward area, it is a capital receipt irrespective of computation modality. Observations distinguishing Sahney Steel/Ponni Sugars are applied as ratio to facts; not obiter. Conclusion: Sales tax/excise incentives under the Kutch incentive schemes constitute capital receipts and are not exigible to income tax; they should not be deducted from asset cost for depreciation purposes. Issue 2 - Computation of disallowance under section 14A read with Rule 8D Legal framework: Section 14A prohibits claim of expenditure in relation to exempt income; Rule 8D prescribes methodology to compute disallowance, including formulae in sub-rules (2)(ii) and (2)(iii). Precedent treatment: The Tribunal (Special Bench in Vireet Investments) held that for computing average value under Rule 8D(2)(iii) only those investments which actually yielded exempt income during the year are to be considered. Jurisdictional High Court decisions (Reliance Utilities & Power; HDFC Bank) support deletion of Rule 8D(2)(ii) disallowance where assessee had sufficient own funds and investments were financed from own funds. Interpretation and reasoning: Applying Vireet SB, the Tribunal reasoned that including all investments (many of which did not produce exempt income) inflates the denominator and produces an arbitrary disallowance. For Rule 8D(2)(ii), examination of balance sheet showed substantial own funds (shareholder funds, reserves) in excess of investments, supporting the conclusion that the investment was from own funds and therefore no disallowance under that sub-rule. The Tribunal respected binding coordinate/Special Bench decisions and High Court authority on applicability. Ratio vs. Obiter: Ratio - for Rule 8D(2)(iii) computation, include only investments that yielded exempt income in the relevant year; for Rule 8D(2)(ii), where assessee can demonstrate sufficient own funds, disallowance under that sub-rule is not warranted. These are applied as binding or followed precedents, thus ratio. Conclusion: Disallowance under Rule 8D(2)(ii) deleted where own funds sufficed; disallowance under Rule 8D(2)(iii) to be computed considering only investments that produced exempt income, per Special Bench Vireet; orders of lower authorities on broader inclusion of investments are set aside. Issue 3 - Taxability of TUF subsidy (capital v. revenue) Legal framework: Characterisation of subsidy determined by the purpose for which it is granted; scheme terms and mechanisms (e.g., treatment as non-interest bearing term loan to be adjusted after lock-in) inform character. Precedent treatment: Decisions of various High Courts and Tribunals (including Rajasthan High Court in Nitin Spinners, Punjab & Haryana HC in Sham Lal Bansal, Calcutta HC in Gloster Jute Mills) treat TUF/subsidies aimed at technology upgradation as capital in nature where scheme contemplates capital subsidy or interest subvention adjusted against term loans. Interpretation and reasoning: The Tribunal examined scheme provisions (lock-in, adjustment against term loan, treatment as non-interest bearing term loan) and consistent judicial precedent concluding the subsidy forms part of capital stream aimed at facilitating capital investment/technology upgradation. Distinguishing cases where subsidy merely aids running of business, the factual matrix and scheme mechanics here indicate capital character. Ratio vs. Obiter: Ratio - where scheme grants subsidy/interest subsidy for technology upgradation with instrumentality resembling capital subsidy (lock-in, adjustment against loans), the receipt is a capital receipt; applied as binding ratio. Conclusion: TUF subsidy/interest subsidy received under the Scheme is a capital receipt and not taxable as revenue in the hands of the recipient. Issue 4 - Treatment of section 14A/Rule 8D disallowance in computation of book profit under section 115JB Legal framework: Clause (f) of Explanation 1 to section 115JB(2) prescribes items to be included/excluded in computing book profit for MAT; interplay with section 14A and Rule 8D has been subject to tribunal consideration. Precedent treatment: Special Bench in Vireet Investments held computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resort to computation under section 14A read with Rule 8D; coordinate decisions followed. Interpretation and reasoning: The Tribunal applied the Special Bench ruling that the methodology under section 115JB(2) (Explanations) is independent and does not incorporate Rule 8D disallowance additions; consequently, disallowance under section 14A/Rule 8D should not be mechanically added back while computing book profit for MAT under clause (f). Ratio vs. Obiter: Ratio - section 115JB(2) computation should not import Rule 8D disallowance; this is applied as binding precedent. Conclusion: Disallowance under section 14A read with Rule 8D is not to be included in book profit computation under section 115JB(2) clause (f); the CIT(A)'s direction deleting such addition is upheld. Overall Disposition The Tribunal dismissed Revenue's appeals on all grounds: (i) Kutch sales tax/excise incentives are capital receipts; (ii) Rule 8D disallowance must be computed only with reference to investments yielding exempt income and Rule 8D(2)(ii) disallowance deleted where own funds sufficed; (iii) TUF subsidy is a capital receipt; (iv) Rule 8D disallowance is not to be included in book profit under section 115JB(2). These conclusions follow applicable purpose-test jurisprudence and binding Special Bench/High Court precedents relied upon by the Tribunal.