TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 98
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....he Act. 3. The brief facts of the case, as noted by the AO is that, the assessee company filed its return of income on 29.11.2014 showing total income at Rs.Nil. The case was selected for scrutiny through CASS inter alia on the issue of deduction claimed in respect of the VAT subsidy of Rs.8,78,84,902/- under the Industrial Promotion Policy of the State of Assam in category 'B' for substantial expansion. The assessee claimed that the VAT subsidy was in the nature of capital receipt and therefore not taxable. However, the AO show caused the assessee as to why the VAT Remission of Rs.8,78,84,902/- should not be treated as revenue receipt and be taxed rather than as capital receipt. In response, the assessee explained that it is in the business of manufacturing biscuits and the manufacturing unit is located in the industrially backward state of Assam. It was pointed out to the AO that the Industrial Policy of Assam 2003 was formulated by the State with an object to encourage private investment in industrial projects so as to accelerate industrial development and thereby generate more employment opportunities in the State of Assam. Accordingly, in consonance with the Industrial Policy....
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....bsidy was given by way of assistance to the assessee for carrying on its manufacturing business more profitably, and therefore the VAT remission was in the nature of revenue receipt liable to income-tax in the relevant AY 2014-15. In support of his findings, the AO relied on the decision of the Hon'ble Apex Court in the case of M/s. Sahney Steel & Press Works vs. CIT (228 ITR 253) wherein it was observed as under: "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, it must be held that these subsidies are of revenue character and will have to be taxed accordingly." 5. The AO accordingly held the assessee's claim that the VAT Remission of Rs.8,78,84,902/- was a capital receipt, is not tenable and treated it to be a Revenue Receipt and accordingly brought it to tax. 6. Aggrieved by the aforesaid action of the AO, the assessee....
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....subsidy is capital or revenue in nature. The Hon'ble Supreme Court has held that, in deciding the true nature and character of the subsidy, one has to examine the object of the subsidy for which it was sanctioned and not the form or manner in which it is granted and disbursed. So according to Ld. AR, by applying the ratio laid down in this decision of the Apex Court, the AO was unjustified in holding that the VAT remission of Rs.8,78,84,902/- was in the nature of revenue receipt includible in the total income. 9. The Ld. AR further submitted that since VAT remission was a capital receipt, it did not come within the charging provisions of Section 4 of the Act. As the subsidy did not partake the character of income, it could not be included in the scope of total income as defined u/s 5 of the Act and accordingly it was to be excluded from the computation of "book profit" u/s 115JB of the Act as well. In support of his contention, he relied on the decision of the Hon'ble Calcutta High Court in the case of Pr.CIT Vs Ankit Metal and Power Ltd (416 ITR 591). The Ld. AR therefore pleaded that the assessee's claim of treating the VAT Remission of Rs.8,78,84,902/- as Capital Receipt be uph....
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....ment are as follows: "20. Finally, it was found that, applying the test of purpose, the Court was satisfied that the payment received by the assessee under the scheme was not in the nature of a helping hand to the trade but was capital in nature. 21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the "purpose test". It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial. 22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and t....
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....his Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed. 25. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference." 12. In light of the above judgment, in order to adjudicate the issue before us, we need to apply the object/purpose test to the subsidy received by the assessee in the given facts of the present case and then examine whether the same isCapital or Revenue in nature. The Hon'ble Supreme Court in the cases of Sahaney Steel & Press Works(supra)and Ponni Sugar & Chemicals Ltd. (supra)had held that the object or purpose for which the subsidy was given is what matters, and the source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsid....
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....f Assam in the non-managerial cadre and that over a period of 5years from the commencement of commercial production, such unit would takeall effective steps to ensure 100% employment of people of Assam in nonmanagerialcadre and at least 90% in managerial post. d) A unit availing grants/incentives from a Department/ an agency under the State/Central Government/ foreign agencies shall not be eligible for similar type of incentives under this policy. e) Incentives/ subsidies/ concessions/ financial support under this policy shall beapplicable to units in the private sector, joint sector, co-operatives as well as unitsset up by State Government only. f) The non-eligible industries mentioned in annexure one will not be eligible for anyincentives under this Industrial Policy. g) In case a new unit is promoted in the premises of an existing unit; it should bedistinctly identifiable and be located in the open spaces available in the premises.The earlier unit in the premise should not be closed nor any plant & machinery bedislodged from the earlier unit. 14. It is thus noted that this Scheme was not made available to existing units to run their business more profitably but to attra....
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....re 100% employment from amongst people of Assam in non-managerial cadre and at least 90% in managerial cadre." 17. It is noted that the assessee fulfilled all the eligibility criteria set out in the State Industrial Policy Scheme viz., it understood substantial expansion and made capital investment in excess of Rs. 1300 lacs which resulted in expansion of production capacity from 14711 MT to 22487 MT and it also ensured generation of employment by recruiting total of 411 employees which comprised of 96.15% and 99.48% of local people of Assam in managerial and non-managerial posts respectively. Accordingly, the assessee was issued Eligibility Certificate no. AIDC/US/EC/623/21 dated 26.08.2013 by the Assam Industrial Development Corporation Ltd, in terms of which the assessee was entitled to incentive for undertaking such substantial expansion in the form of VAT exemption, with effect from 24.05.2012 to 23.05.2019, subject to a maximum of 90% of fixed capital investment i.e. Rs. 8,78,84,902/-. 18. Applying the purpose test as laid down by the Hon'ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) to the above facts of the case, it is noted that the subsidy in the f....
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....ya Steels Ltd. (supra) rendered on 16.09.2010, the Division Bench recalled the earlier order by observing that the substantial question of law was not framed in the earlier proceeding and thus through the judgment dated 08.04.2013 in the Review case filed by the assessee in Meghalaya Steels Ltd. (supra), a fresh determination with formulation of the substantial question of law, was ordered by the Court. The resultant challenge of the revenue in the Supreme Court, we may note here, was dismissed on 05.08.2015 and this decision of the Supreme Court is Meghalaya Steels Ltd. (supra). 18. In respect of the same assessee i.e. Meghalaya Steels Ltd., the nature of the receipt towards transport subsidy was reconsidered by the High Court in CIT v. Meghalaya Steels Ltd. [2013] 356 ITR 235/217 Taxman 184/34 taxmann.com 34 (Gau.). But in this case, the parties were in agreement that the subsidies are revenue receipt to help an industrial undertaking to earn profit and make gains and accordingly the Court declared that such undertaking is entitled to seek deduction of the sum received under subsidy head, under Section 80-IB or 80-IC of the I.T. Act." 21. The Hon'ble High Court, following the ....
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....hich the subsidy is given or in other words, one has to apply the purpose test. It was further declared by the Court that the point of time at which, the subsidy is paid is not relevant, the source also is immaterial and the form of subsidy has no relevance for determination of the issue. The Court declared that if the object of the subsidy scheme was to enable the assessee to have a more profitable business, then the receipt is on revenue account. But on the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new industrial unit or to expand the existing facilities, then the receipt of the subsidy was on capital account. It was thus held that the object for which the subsidy is given will determine the nature of the incentive and the form of mechanism through which the subsidy is received by the assessee, is wholly irrelevant for deciding the issue. 22. Endorsing the purpose test enunciated in Sahney Steel & Press Works Ltd. (supra), the Apex Court in Ponni Sugars & Chemicals Ltd. (supra) reiterated that it is the object for which subsidy is given, that will determine the nature of the incentive subsidy and bearing in mind ....
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.... para 39 onwards, reads as under: "39. The assessee submitted that it had set-up a new manufacturing unit in the State of Assam. In terms of Notification No. 20/2007 issued by Government of India, Ministry of Finance dated 25.04.2007, the assessee was entitled to excise duty exemption on the goods cleared from the said Unit. The ld. AR invited our attention to the Eligibility Certificate dated 14.05.2010 issued by Office of Superintendent, Central Excise Range-II Guwahati Division confirming that the unit set-up by the assessee is eligible for exemption from excise duty in terms of the said Notification as a new unit with effect from 04-02-2009 i.e. the date of commencement of commercial production. It is noted that the said exemption was given to the new units for development of Industries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification No. 20/2007 is reproduced below:- "5. The exemption, contained in this notification shall apply only to the following kind of units, namely; a) New Industrial units which commence commercial production on or after the 1st day of April, 2007 but not later than 31st day of March, 2017; ....
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....e sector, joint sector as also companies/undertakings owned or managed by the State Government." 41. The object of the West Bengal Incentive Scheme, 2000 is therefore noted to be for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of sales tax subsidy was granted to the assessee. 42. In view of the above facts, it was the plea of the ld. AR that the incentive in the form of excise duty exemption and sales tax subsidy, have been granted for setting up new units in the States of Assam & West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State. Referring to the decision of the Hon'ble Supreme Court in the batch of cases, with its lead order in the matter of CIT Vs Chaphalkar Brothers (400 ITR 279), the ld. AR contended that, it is now well settled that subsidies granted under the State Industrial Schemes formulated with the ob....
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....l receipt not liable to tax, since the object of granting of subsidies was to bring about industrial development, encourage fixed capital investment and generate employment in the State of Assam. 24. As regards the issue relating to treatment of this VAT subsidy while computing book profit u/s 115JB of the Act, we note that this exact issue was considered by us while deciding the case of DCIT vs. M/s. Century Plyboards (I) Ltd. in ITA No. 2149/Kol/2019 (supra) and it was held that such capital subsidy received by the assessee is also liable to be excluded from the computation of book profit. The relevant findings are as follows: 45. Now coming to the issue relating to treatment of these subsidies while computing book profit u/s 115JB, we note that the Hon'ble Apex Court in the case of Apollo Tyres Ltd. vs. CIT (255 ITR 273) held that the AO has the power to rework the book profit if the profits are computed not in accordance with Part II and Part III of Schedule VI to the Companies Act, 1956. The Hon'ble Supreme Court in their subsequent decision rendered in the case of Indo Rama Synthetics (I) Ltd vs. CIT (330 ITR 363) further held that, the object of MAT provisions is to bring....
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.... 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 AppolloTyres 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. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961." 47. We also rely on the decision of the coordinate bench of this Tribunal in the case of Sicpa India (P) Ltd Vs DCIT (80 taxmann.com 87) wherein it has been held that the subsidy received by the assessee in form of excise duty exemption for setting up new industry in the North Eastern State viz., Sikkim was in the capital field and therefore not liable to tax under the provisions of Section 115JB of the Act. The relevant findings of this Tribunal are as follows: "21. The main issue that a....
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....l general meeting in accordance with provisions of Sec.210 of the Companies Act. Explanation below Sec.115JB of the Act provides that for the purposes of section 115JB of the Act, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section (2), as increased by certain items debited in the profit and loss account in arriving at the net profit and as reduced by- certain items that are credited in the profit and loss account. In other words, all that one has to do, while computing book profits is to take the profit as per profit and loss account prepared in accordance with Companies Act, 1956 and make additions or subtraction as is given in the explanation to Sec.115JB(2) of the Act. 23. We have already seen that the issue whether subsidies in question can be regarded as income at all is no longer res integra and has been concluded by the Hon'ble Jammu & Kashmir High Court in the case of Balaji Alloys (supra). In the aforesaid decision the Hon'ble J & K High Court on identical facts held that excise duty subsidy and interest subsidy were capital receipts not chargeable to tax. In view of the aforesaid ....
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....de in notes on accounts forming part of profit and loss account of Assessee. Profits arrived after such adjustment, should be considered for purpose of computation of book profits u/s 115JB of the Act and thereafter, AO had to make adjustments for additions/deletions contemplated in Explanation to section 115JB of the Act. 25. The Tribunal in the aforesaid decision made a reference to the decision of the Special Bench of the ITAT in the case of Rain Commodities (supra) which in turn was based on the ratio laid down in the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. (supra) as a case in which the income in question was taxable but was exempt under a specific provision of the Act and but for the exemption, the income would be chargeable to tax and such items of income should also be included as part of the book profits. But where a receipt is not in the nature of income at all it cannot be included in book profits though it is credited in the profit and loss account. The Bench followed the decision of the Lucknow Bench in the case of L.H. Sugar Factory Ltd. (supra), where receipts on account of carbon credits which were capital receipts not chargeable....