2025 (11) TMI 1489 - AT - Income Tax

Sales tax subsidy held capital receipt; s.14A disallowance deleted due to sufficient own funds and no nexus

ITAT Delhi held that sales tax subsidy/incentive received under the Maharashtra Package Scheme of Incentives, 1993 is a capital receipt not liable to tax, ... Nature of receipt - sales tax subsidy/ incentive availed under the Package Scheme of Incentives (Maharashtra), 1993 - treated as capital receipt not liable to tax under the provisions of Income Tax Act, 1961 or revenue receipt - HELD THAT:- As following Tribunal’s order in assessee’s own case for A.Y. 2008-09 & 2009-10 [2024 (6) TMI 330 - ITAT DELHI] we direct the Assessing Officer to treat the sales tax subsidy received by the assessee as capital receipt and restore the matter to file of Assessing Officer for limited purpose of quantification of figures in very terms. Disallowance u/s 14A - Expenditure incurred on earning exempt income - HELD THAT:- Tribunal vide order dated 04.06.2024 in assessee’s own case for A.Y. 2008-09 and 2009-10 [2024 (6) TMI 330 - ITAT DELHI] as held tax authorities, have taken into consideration the personnel expenditure to conclude that such a big investment could not have been managed without human intervention although the assessee has claimed that the investments were made out of own funds. It was a question of fact for which sufficient facts were brought on record by the assessee on the basis of fund flow and cash proposition, as cited above. The Revenue cannot dispute the availability of huge accumulated reserves and surpluses and cash from operating activities in the year under consideration. There is no evidence that interest paid on borrowed funds had any nexus with the investments made in shares/mutual funds. We are of the considered view that as there was sufficient funds available Revenue is not justified to make any addition u/s 14A. ISSUES PRESENTED AND CONSIDERED 1. Whether sales tax subsidy/incentive availed under the Package Scheme of Incentives, 1993 (Maharashtra) is a capital receipt not liable to tax under the Income Tax Act, 1961, where the subsidy was granted for setting up new/expanded industrial units in underdeveloped areas and linked to capital investment. 2. Whether an appellate authority may admit and decide an additional claim (tendered first before CIT(A)) regarding characterization of subsidy as capital receipt in proceedings abated by notice under Section 153A, where the assessment for the year was pending at the time of search. 3. Whether disallowance under Section 14A of the Income Tax Act, 1961 is justified where: (a) no incriminating material was found during search; (b) the AO applied a routine or broad-brush computation including investments that did not yield exempt income; and (c) the Assessing Officer/Commissioner directed computation based on a fixed percentage of average investments. 4. Whether interest under Sections 234A, 234B and 234D is correctly charged as consequential to substantive additions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of Sales Tax Subsidy under the 1993 Maharashtra Scheme (Capital v. Revenue) Legal framework: Characterisation of receipts as capital or revenue is governed by established principles applying the 'purpose test' (as expounded in Sahney Steel and subsequent authorities): the purpose for which the subsidy is granted determines its character, irrespective of the source, timing or mode of payment; receipts given to assist setting up an industry or completing a project are capital, whereas assistance to operate profitably after commencement of production tends to be revenue. Precedent treatment: The Court relied on the purposive test developed in Sahney Steel and applied by various High Courts and Tribunals. Distinguishing authorities (e.g., Rassi Cements, Wardex, SAIL) were considered on their facts and held distinguishable where the scheme targeted operational assistance or was based on actual consumption/turnover rather than to incentivise setting up/expansion. Interpretation and reasoning: The Tribunal and this Court examined the preamble, objects and operative provisions of the 1993 Scheme. Key findings: (a) the 1993 Scheme's central purpose was dispersal/industrialisation of underdeveloped and developing areas by incentivising new and expanded units; (b) incentives (including sales tax incentive) were admissible to 'new', 'pioneer' or 'prestigious' units and were tied to setting up/expansion; (c) eligibility certificates were issued after commencement of commercial production to ensure the object of setting up units was met; and (d) capital investment was used as a metric to measure entitlement, but quantification method does not dictate character. On those factual and legal foundations, the Court concluded the subsidy was granted for capital purpose (to set up/expand units in underdeveloped areas) and thus is capital in nature. Ratio vs. Obiter: Ratio - The subsidy under the 1993 Scheme is a capital receipt where the scheme's purpose is to encourage establishment/expansion of units in underdeveloped areas; the 'purpose test' governs characterization and the source/mode/quantification is not determinative. Obiter - Distinctions drawn with other state schemes and factual permutations (e.g., subsidies linked purely to consumption/turnover) are explanatory and not general propositions overriding the ratio. Conclusion: The Court holds the sales tax subsidy under the 1993 Scheme is a capital receipt. The matter is remitted to the AO for quantification of the exact quantum of subsidy, calling for supporting documents and computations from the assessee. Issue 2 - Admissibility of Additional Claim in Proceedings Abated by Notice under Section 153A Legal framework: Proceedings under Section 153A (search-triggered assessments) revive or abate earlier pending proceedings; the authority of AO to complete assessment in abated cases is not limited to additions based only on incriminating material seized during the search where assessment proceedings were live/pending at time of search. Distinction exists between abated pending assessments and concluded assessments reopened post-search. Precedent treatment: The Tribunal's earlier order had quashed the assessment on the premise that reassessment of an unabated year is permissible only on incriminating material (citing Supreme Court authority). The High Court found that premise erroneous where the original assessment had abated (pending proceedings under Section 263) and therefore remanded for fresh decision. This Court proceeded on the remitted record and followed Tribunal decisions in the assessee's own case for later years admitting and adjudicating identical additional claims. Interpretation and reasoning: The Court accepted the High Court's determination that the assessment for the year in question had abated and that the AO could complete assessment in accordance with law without being constrained to additions supported solely by incriminating material. Given that factual posture, the Tribunal (and this Court) was entitled to consider the admissibility and merits of additional claims raised before CIT(A). The Court therefore proceeded to address the substantive claim on merit rather than dismissing it as barred by the search-linked incriminating-material requirement. Ratio vs. Obiter: Ratio - Where assessment proceedings are pending and abated by notice under Section 153A, the AO's power to assess is not conditioned upon the existence of incriminating material found during search; accordingly appellate admission of additional claims may be considered on their merits. Obiter - Discussion of the specific Supreme Court authority's applicability where assessments were concluded was situational and not applied to abated-pending proceedings. Conclusion: The Court treated the additional claim as admissible for consideration on merits in the abated-pending assessment and therefore adjudicated the subsidy issue rather than rejecting the ground for want of prior presentation to the AO. Issue 3 - Disallowance under Section 14A Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; the assessment of such disallowance requires factual enquiry into nexus between expenditure and exempt income, availability of funds, and whether investment was made from borrowings or own funds. Tribunal practice allows deletion of Section 14A additions where assessee adduces credible fund-flow/cash flow evidence showing investments were made from own funds or surplus reserves without nexus to interest-bearing borrowings. Precedent treatment: The Tribunal's orders in the assessee's own case for AYs 2008-09 & 2009-10 were relied upon, wherein the Tribunal accepted fund-flow/cash position and found no nexus between interest-bearing borrowings and investments in exempt-income yielding assets; routine percentage-based disallowances and inclusion of investments not yielding exempt income were held inappropriate. Interpretation and reasoning: On facts no distinction was pointed out for the year under consideration; the Court followed the Tribunal's reasoning that revenue had not demonstrated nexus between interest-bearing borrowings and the investments that yielded exempt income. The AO's routine computation and inclusion of investments which did not generate exempt income were held improper. Given availability of substantial accumulated reserves and operating cash, the Section 14A addition was deleted. Ratio vs. Obiter: Ratio - Section 14A disallowance cannot be sustained on a routine percentage basis or by including investments that did not produce exempt income where the assessee demonstrates, on facts, availability of own funds and absence of nexus with borrowed funds. Obiter - Specific numerical approaches suggested by revenue are context-specific and not mandated universally. Conclusion: Disallowance under Section 14A is deleted for the assessment year in question for the same reasons accepted in the assessee's later-year Tribunal decisions; the AO is directed to give effect accordingly. Issue 4 - Interest under Sections 234A, 234B and 234D Legal framework: Interest under Sections 234A/234B/234D is consequential to the determination of taxable income and additions; where additions are deleted or reversed, corresponding interest charges are to be computed consistently with the revised tax liability. Interpretation and reasoning: The Court treated interest charges as consequential to the substantive deletions/allowances made on the subsidy characterization and Section 14A disallowance. Ratio vs. Obiter: Ratio - Interest levied under aforesaid provisions is consequential and must follow the outcome on substantive tax additions/deductions. Obiter - None. Conclusion: Interest charged under Sections 234A, 234B and 234D is to be adjusted consequentially in accordance with the Court's decisions on substantive issues.