TaxTMI 
TaxTMI 
2021 (9) TMI 124
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....y the assessee from the Government of Andhra Pradesh is of the nature of capital receipt and non taxable; ii) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is justified in deleting the addition made by the Assessing Officer received by the assessee as subsidy from the Government of Andhra Pradesh iii) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in not appreciating that the grant in this case is given to reduce the sales tax burden of the assessee and eventually to increase the profitability and the grant given was on revenue account because it was given by way of assistance in payment of taxes in carrying on trade or business and not for acquiring the capital asset. iii) Whether on the facts and circumstances of the case and in law, the Id. CIT(A) is justified in not appreciating the grant in this case was granted year after year only after expansion and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. iv) Whether on the facts and circumstances of ....
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....om which SHALL NOT form part of the total income? viii) Whether on the facts and circumstances of the case, and in law, the ld. CIT(A) erred in deleting the disallowance made u/s 14A rwr 8D without appreciating the fact that the Board vide circular No. Circular no.5/2014 has made it clear that the Rule 80 read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. ix) The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary. 3. The Revenue has raised the following grounds of appeal for the A.Y.: 2014-15:- "i) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in holding that the grant received by the assessee from the Government of Andhra Pradesh is of the nature of capital receipt and non taxable; ii) Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the addition made by the Assessing Officer received by the assessee as subsidy from the Government of Andhra Pradesh iii) Whether on the facts and circumstan....
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....mon in the case of Ostime. It must be held that these subsidies are of revenue character and will have to be taxed accordingly." vi) The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary. " 3.1 The assessee filed CO No. 23/Hyd/208 for the AY 2014-15 against the order of CIT(A) wherein it has raised the issue in regard to disallowance u/s section 14A to the tune of Rs. 9,61,911/- and the assessee also filed an additional ground on 29/07/2019 contesting that the assessee has not received any exempt income, therefore, the disallowance u/s 14A should not be made. 4. From the above, it is clear that the issues involved in both the appeals of the Revenue for the A.Y. 2013-14 and 2014-15 in respect of treatment of subsidy received is capital or revenue received from the Government of Andhra Pradesh are similar in nature and therefore, our decision in the appeal for the A.Y. 2013-14 shall apply mutadis mutandis for the A.Y. 2014-15. For the sake of convenience and brevity, we shall take up the Revenue's appeal for the A.Y. 2013-14. ITA No.654/Hyd/2018 5. Brief facts of the case are that the assessee-company is engaged i....
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....x paid is received from industries and commerce (IP) Department by way of incentives / concessions to eligible industries set up in Andhra Pradesh to encourage Industries in Andhra Pradesh, which is capital in nature. Hence, the same is treated as Capital Reserve. However, the contentions of the assessee company is not acceptable since the said sales tax was paid in the earlier assessment years and already claimed as revenue expenditure of the company. Hence, the same is treated as income and added to the income returned." 7. Accordingly, the Ld. A.O. added the amount of Rs. 1,69,32,910/- received towards sales tax reimbursement to the income of the assessee and computed the total income. Ld. A.O. made certain other additions also. Aggrieved by the order of the Ld. A.O., the assessee filed an appeal before the Ld. CIT(A) and the Ld. CIT(A) deleted the additions and allowed the appeal of the assessee. 8. Feeling aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before us. 9. At the outset, the Ld. DR relied on the order of the Assessing Officer and submitted that the assessee had incurred some expenditure towards the investments made but he has not disallow....
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....Assessment Year 2014-15, it filed return of income on 14-09-2014 declaring total income of Rs. 95,29,62,050. Regular assessment was competed u/s.143(3) on 3011-2016 on total income of Rs. 98,25,79,500. The Assessing Officer made, inter alia, disallowances/additions as under: a).reimbursement of sales tax Rs. 2,78,65,864 b).disallowance u/s.14A Rs. 9,61,911 Reimbursement of sales tax Rs. 1,69,32,910IA.Y 2013-14 and Rs. 2,78,65,864 (A.Y.: 2014-15},: . 3. The assessee received reimbursement of sales tax in an amount of Rs. 1,69,32,910 for Asst.Year 2013-14 and Rs. 2,78,65,864 for A.Y 2014-15 as state incentive. The assessee capitalised the same as capital reserve. During the course of assessment proceedings, the A.O called upon the assessee to show cause as to why the amount of sales tax reimbursement should not be treated as revenue receipt. The assessee submitted that the erstwhile Govt. of A.P framed a new industrial investment promotion policy 2005-2010 to encourage setting up of industries/expansion of industries in the state of Andhra Pradesh. According to the said policy new units of industries are to be given certain benefits, one of which i....
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....stries Department of the Govt. of A.P was given for promoting industrial development in the state of Andhra Pradesh. The assessee cited the decision of the Hon'ble Supreme court in the case of CIT vs Chaphalkar brothers 400 ITR 279 SC in support of its contention. 7. Learned C.I.T (Appeals) referred to the decisions of the Hon'ble Supreme Court in the case of Chaphalkar brothers (Supra) and also the decisions in the cases of CIT vs Ponni Sugars and chemicals ltd., 306 ITR 392 SC and Pr.CIT vs Talbros Engineering ltd., 386 ITR 154 P & H and held that since the assessee had received the sales tax reimbursement for expanding its manufacturing capacity, the said amount is a capital receipt and cannot be considered as income. The C.I.T (Appeals) allowed the appeals. 8. Aggrieved by the decision of the C.I.T(Appeals}, Department has filed appeals before the Hon'ble ITAT. The assessee submits that the Industrial Investment Promotion Policy 2005-2010, by its very name spells the intention of the Govt. of A.P. Various fiscal benefits listed in the policy include reimbursement of stamp duty paid on purchase of land, reimbursement of stamp duty paid for lease of ....
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....hemes of State Governments was to encourage development of Multiple Theatre Complexes, incentives would be held to be capital in nature and not revenue receipts". In that case, Govt. of Maharashtra provided exemption of entertainment duty in multiplex theatre complexes newly setup, for a period of three years and thereafter payment of entertainment duty at rate of 25 per cent for subsequent two years. The issue that arose was whether since object of incentive schemes was to encourage development of Multiple Theatre Complexes, incentives would be held to be capital in nature and not revenue receipts. The same was answered in favour of assessee. 13. In the case of Sanghi Industries Ltd., vs ACIT (ITA no.979/Hyd/2017 and other appeals) Hon'ble ITAT, Hyderabad bench held that sales tax exemption/remission granted by Govt. of Gujarat is a capital receipt since the object of the scheme under which it was granted was to set up industries in the backward areas of Gujarat and to provide employment opportunities to the umemployed youth. Hon'ble ITAT held "it is a trite law now that the determination of a subsidy as capital receipt or revenue receipt is dependent on the objec....
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....3-2013 respectively which are much less than the capital and reserves put together. Also, the cash profit for the year after tax is Rs. 136,52,53,635/-. The assessee relied on the decision of Hon'ble ITAT, Kolkata Bench in the case of SP Jaiswal Estates Pvt. Ltd vs CIT 147 TIJ 649 (29 Taxmann.com 221) and pleaded before C.I.T (Appeals) that no disallowance of interest is warranted. In the light of the facts submitted hereinabove, the assessee submits that disallowance made u/s.14A r.w.r 8D(2)(ii) is not correct. 18. As regards disallowance made u/s.14A r.w.rule 80(2)(iii) it has been held in the case of Priya Exhibitors pvt. Ltd., vs ACIT 27 Taxmann.com 88 DEL ITAT that disallowance u/s.14A requires a clear finding of incurring expenditure and in the absence of the same, no disallowance could be made. It has been held in the case of ACIT vs SIL Investment Ltd., 26 Taxmann.com 78 DEL ITAT that where the A.O did not bring any evidence on record to establish that any expenditure has been incurred by assessee for earning exempt income, it was wrong on part of the Assessing Officer to proceed to compute disallowance of expenses u/s.14A by merely applying rule 8D{2}(iii). It....
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....of the Act. (kindly see page 15 of paper book showing details of other income). Learned C.I.T(A) took support of this decision to delete the disallowance made by A.O for Asst.Year 2013-14 in the assessee's own case. The assessee prays that the disallowance of Rs. 9,61,911/-made u/s.14A may kindly be directed to be deleted." 13. After hearing both the sided and perusing the entire material available on record and the orders of the Authorities below, we observe that the disallowance made U/s. 14A of the Act has rightly been allowed by the Ld. CIT(A). We find from the order of the Ld. CIT(A) that there is no exempt income earned by the assessee during the impugned assessment year and he has relied on certain judgments while deciding the issue in favour of the assessee. The Hon'ble Delhi High Court in the case of Cheminvest Ltd., reported in (2015) 378 ITR 33 (Del.) has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Therefore, as per our considered view, we do not find any infirmity in the order of the Ld. CIT(A) and therefore, this ground No. VI to VIII of appeal raised by the Revenue is dismissed. 1....
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....olicy of various States viz., Karnataka, Maharashtra, Gujarat, West Bengal and to make a policy with emphasis on Creation of Quality Infrastructure, Incentivising Investments, Building Industrial Competency in Women, Quality Competitiveness, Export Promotion, Environmental Friendly Climate, Attracting Mega Investments, Attracting Foreign Direct Investment, Access to Market, Intellectual Property Rights, Fostering Industrial Clusters, Prevention of Industrial Sickness, Preventing Migration, Permitting Industries to Exit, towards better Regulation, Policy Measures, Thrust Sectors, the Government approved a new "Industrial Investment Promotion Policy 20052010" as appended at Annexure-I. 3. Under the new "Industrial Investment Promotion Policv 2002- 2010", the Government approved the following fiscal benefits covering the _______ Incentives for New Industries categories of : (a) SSI / Tiny units (b) SC / 5T Entrepreneurs (c) Women Entrepreneurs (d) Units other than SSI / Tiney (Large and Medium Scale Industries) and (e) Mega Projects: 3.1.0. 5SI/Tiny units Small Scale Industry (S5I) means a Unit having the investme....
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....ill be ploughed back as a grant by the Government towards the payment of sales tax during the next year and the benefit will be available for 5 years from the date of commencement of production i.e., up to 6th year. In the present case, the assessee has commenced the manufacturing on 6/4/2007 and the assessee is selling the products and collecting the sales tax and later on it is paid to the Govt. of AP and in the next year, 25% of the total sales tax paid is received as a grant from the State Govt. There is no doubt that the sales tax is a liability on sales made by the assessee and collected from the purchaser of goods and later on paid to the Government as a sales tax liability. 14.3 The entire sales tax paid to the Government was claimed as a revenue expenditure in the Profit & Loss Account in the previous year and subsequently in the following year 25% is returned which has not been offered as income during the impugned assessment year and directly credited to the capital reserve account, whereas, it is as revenue receipts received from the State Govt. The ld. AR of the assessee has relied on the judgments which are not applicable to the facts of the assessee's case. We fin....
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.... (f)Th e following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochampad and K.C. Canal in the Ramagundam - Kothagudem areas and in the following eight backward districts." 2. The salient features of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available unless and until production had commenced. The availability of the incentives would be limited to a period of five years from the date of commencement of production. The incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemptions were given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in this case. 3. The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for setting up....
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....strict, which went into production in the year 1973. The assessee maintains its accounts according to the calendar year. It was, therefore, entitled to the benefits of the said G.O. in the calendar year 1973, which means the assessment year 1974-75. In the said accounting year, the assessee obtained refund of the following three items totalling Rs. 14,665.70 in terms of G.O. Ms. No. 455. The three items are : Rs. (i) Refund of sales tax on purchase of machines during 1971-72 5,839.93 (ii) Refund of sales of tax on purchase of raw materials during the year 1971-72 390.79 (iii) Refund of sales tax paid on sale of finished goods during the year 1971-72 8,423.98 8. The ITO, while making the assessment for the year 1974-75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the Commissioner (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs. 14,665.70, refunded to the assessee in terms of the said G.O. 'did not represent refund of sales tax' but was a development subsidy in the nature of a capital receipt.....
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.... the source with the recipient prevents any question of profits arising - see, for example, Lord Buckmaster's explanation in Forth Conservancy Board v. Commissioners of Inland Revenue[l93\] AC 540, at page 546 (16 TC 103 at page 117) and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills 16 TC 430, at page 448." 10. In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the Notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably. 11. In the judgment delivered by Viscount Simon with whom Lord Thankerton agreed two earlier decisions were relied on. The first of these two decisions was the case of Seaham Harbour Dock Co. v. Crook 16 TC 333. In this case, the Harbour Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropr....
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.... the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries. 14. The second case is Lincolnshire Sugar Co. Ltd. v. Smart 20 TC 643. In that case it was found that Lincolnshire Sugar Co. Ltd carried on the business of manufacturing sugar from home grown beet. The company was paid various sums under British Sugar Industry (Assistance) Act, 1931, out of monies provided by the Parliament. The question was whether these monies were to be taken into account as trade receipts or not. The object of the grant was that in the year 1981, in view of heavy fall in prices of sugar, sugar industries were in difficulty. The Government decided to give financial assistance to certain industries in respect of sugar manufactured by them from home-grown beet during the relevant period. Lord Macmillan held that- "What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business." He further observed that: "I think that they were supplementary trade receipts besto....
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....ave been treated as capital expenditure of the company. If any refund of sales tax paid on purchase of capital goods is made, the refund will partake of the character which it had originally borne. Such refunds cannot in any circumstances be treated as trade receipts or supplementary trade receipts. This argument, though attractive at first blush, does not bear close scrutiny. This argument overlooks the basic principle laid down in the cases discussed above. It is not the source from which the amount is paid to the assessee which is determinative of the question whether the subsidy payments are of revenue or capital nature. The first proposition stated by Viscount Simon in Ostime's case (supra) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of State. If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assess....
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....iness and fertility land previously under grass for seven years more. Mecnaghten, J. held that since the amount of the grant depends on the area ploughed, the grant was towards the expenditure of ploughing and, therefore, a revenue receipt in the hands of the assessee. It was observed in V.S.S. V. Meenakshi Achi's case (supra) by Subba Rao, J. (as His Lordship then was): "So too, in the instant case, the payments to the planters were made against the expenditure incurred for maintaining the rubber plantations. Having regard to the aforesaid facts, we must hold that the amounts from the fund earmarked for the appellants on the basis of the rubber produced by them were paid against the expenditure incurred by them for maintaining the rubber plantation and producing the rubber." 23. A Full Bench of the Kerala High Court examined the question of subsidy received for replanting rubber trees in the case of CIT v . Ruby Rubber Works Ltd. 178 ITR 181. It dealt with a scheme of subsidy framed by the Rubber Board in 1967 for replanting rubber plants. The subsidy was not given for budding immature unselected plants but was restricted to replanting only of old an....
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....eceipt of the rubber company. 27. Our attention was drawn to the case of Sadichha Chitrav. CIT 189 ITR 774 . In that case, it was noted that in a given case subsidy may be granted with the object of supplementing trade receipts and profits of the recipient. In another case, the scheme of subsidy may have been formulated by the authority to assist the assessee in acquiring a capital asset or for the growth of the industry generally in public interest without any objective of supplementing trade receipts or recoupment of revenue expenditure already incurred by the assessee. 28. In that case, the Government of Maharashtra sanctioned a subsidy scheme for grant of financial assistance to Marathi film producers to promote production of better Marathi films and help Marathi colour films in preference to black and white films. It will be seen from the facts noted in the judgment of the Bombay High Court that any producer of Marathi film could apply to the Collector of Bombay (Entertainment Duty Department) for grant of a certificate of eligibility for getting the grant. The Collector after holding necessary enquiry in respect of various matters referred in the scheme woul....
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....sistance given by the Government for completion of a project must be of capital nature. 32. In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Applying the test of Viscount Simon in the case of Ostime (supra) , it must be held that these subsidies are of revenue character and will have to be taxed accordingly. 33. A Division Bench of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT 191 ITR 518 also examined a scheme of refund of sales tax framed by the Andhra Pradesh Government to assist newly set up industries. There the assessee had set up a cement plant. The Calcutta High Court held that receipt of the incentives from the State Government was incidental to carrying on the business of the assessee. Such subsidies were received year after year by refund of sales tax. The benefit was received in course of carrying on the as....
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....riod is changed. The above judgement of the Hon'ble Supreme Court is stated that the subsidy granted by the Govt. of Andhra Pradesh for setting up of a new industry as per the scheme which was the impugned issue before the Hon'ble Supreme Court was to be considered as a revenue receipt. While going through the scheme of Govt. of A.P. for setting up of new industry by the assessee is similar to the issue decided Hon'ble Supreme Court cited supra. The Hon'ble Supreme Court in the said case examined that it was a production based incentives. The assessee, as per the present scheme, which has been quoted supra, according to which, the entrepreneurs have been offered different kinds of subsidies, out of which, some of them are directly related to the investments in the plant and machinery i.e. before commencement of commercial production and some of them are directly related to the operation of the assessee. When the assessee produces the articles or things and sales of the finished goods, the sales tax is liable to be paid to the Govt. It is important to note that the there is no direct nexus with the quantum of subsidy as it is totally depend upon the production, sales and sales tax c....
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.... (supra) was an incentive subsidy linked to production. In fact, in Sahney Steel & Press Works Ltd.'s case (supra) [at page 257], this Court categorically stated that the Scheme in hand was an incentive Scheme and it was not a Scheme for setting up the industries. In the said case, the salient features of the Scheme were examined and it was noticed that the Scheme formulated by the Government of Andhra Pradesh was admissible only after the commencement of production. In income-tax matters, one has to examine the nature of the item in question, which would depend on the facts of each case. In the present case, we are concerned with power subsidy whereas in the case of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392, the subsidy given by the Government was for repaying loans. Therefore, in each case, one has to examine the nature of subsidy. This exercise cannot be undertaken under section 154 of the Act. There is one more reason why section 154 in the present case was not invokable by the Department. Originally, the Commissioner of Income-tax, while passing orders under section 264 of the Act on 30-4-1997, had taken the view that the subsidy in question was a capital rec....
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....e also find that the terms under which the subsidy was given in the present cases clearly suggest that the subsidy was of a revenue nature inasmuch as it went towards reduction of the electricity bills." The ld. AR has relied on many judgments quoted supra is not applicable to the case of the assessee and considering the rations laid down by the Hon'ble Supreme Court in the aforesaid cases cited by us, in our considered opinion, the subsidy received by the assessee in the form of refund of sales tax paid from the Sate Govt of AP is to be treated as revenue receipts. Therefore, all the appeals filed by the revenue on these grounds are allowed. 14.6 As the facts and grounds are similar in AY 2014-15 to that of AY 2013-14, following the decision therein we allow the grounds raised by the revenue. 15. As regards CO, in which the assessee has challenged the disallowance made by the AO under rule 8D(2)(iii) against which the assessee submitted that during the impugned AY there was no exempt income received by the assessee. On going through the orders of authorities below as well as on perusal of record, we do not find anywhere that there was exempt income earned by the assessee ....