Capital is received as a result of the sales tax subsidy for industry development

Fact and issue of the case

Fact in brief is that return of income declaring total income of Rs.71,21,91,480/- was filed on 27.09.2012. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 06.08.0213. Further remaining facts of the case are discussed while adjudicating the ground of appeal filed by the revenue.

1st Ground: Claim of sale tax subsidy of Rs.1,49,39,458/-:

During the financial year relevant to the assessment year under consideration the assessee has raised additional ground of appeal before the ld. CIT(A) that assessing officer be directed to exclude the sale tax subsidy amounting to Rs. 1,49,39,458/- as capital receipt while computing the total income under the provisions of the Income Tax Act. In the additional ground of appeal filed before the ld. CIT(A) the assessee submitted that the said subsidy has been granted with an object to intensify and accelerate the process of dispersal of industries from the developed area and for development of underdeveloped region of the state. The object for granting incentive is for development of industries and generation of employment in specified area. In terms of the scheme assessee has set up manufacturing unit at lote and Mahad in the state of Maharashtra. The lote unit was eligible for sale tax subsidy as per Government resolution, industries energy and labour No. IDL – 1093/[8889]/IND-8 dated 07.05.1993. It was further submitted that as per the aforesaid policy incentive in the form of sale tax is granted for development of underdeveloped area. Therefore, it was claimed that sale tax subsidy was of the nature of capital receipt. The ld. CIT(A) after considering the remand report and terms and conditions of the scheme treated the subsidy received by the assessee and capital received. The relevant part of the decision of ld. CIT(A) is as under:

Observation by the tribunal

The tribunal has Heard both the sides and perused the material on record. During the year under consideration the assessee has received the sale tax subsidy and raised additional ground before the ld. CIT(A) for considering the sale tax subsidy as capital receipt. The ld. CIT(A) has elaborated in his finding as supra that assessee has set up a manufacturing unit at Lote and Mahad in the state of Maharashtra. The said unit was eligible for sale tax as per the Government Resolution, Industries, Energy and labour, No. IDL -1093/[8889]/IND-8 dated 07.05.1993. The ld. CIT(A) has also considered the decision of Hon’ble Supreme Court in the case of CIT Vs. Ponni Sugar & Chemicals Ltd. (2008) 1306 ITR 392 (SC) wherein held that if the purpose of incentive or subsidy was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of subsidy was of the capital in nature. The ld. CIT(A) has also discussed the other decision of ITAT, Chennai in the case of Eastman Export Global Clothing Pvt. Ltd. vide ITA No.47/Mad/2016 dated 17.05.2016 wherein it is held that if the object of assistance was to enable the assessee to set up a new unit or expand the existing unit then the receipt is of the capital account. The ld. CIT(A) has also discussed the decision of ITAT, Delhi in the case of Sutlej Textiles Industries Ltd. (ITA No. 5142/Del/2013) wherein held that TUF subsidies has been given for the purpose of technology upgradation and for providing capacity extension, globalisation of textiles trade and employment generation thus applying the propose test as laid down in Ponni Sugar the same is capital receipt not chargeable to tax. Similarly the ld. CIT(A) has also discussed the various other decision in his finding on identical issue that subsidies received pertaining to development of industries is of the nature of capital receipt.

During the course of appellate proceedings before us the ld. counsel also submitted that in subsequent year assessment year 2013-14 the ld. CIT(A) has allowed the appeal of the assessee treating sale tax subsidy as capital receipt and department has not raised any ground before the ITAT. It is also submitted that in assessment year 2015-16 the assessee has treated the sale tax subsidy received as capital receipt and same has been accepted by the A.O in the assessment order. In the light of the above facts and finding we don’t find any force in the ground of appeal of the revenue, therefore, this ground of appeal stand dismissed.

2nd Ground: Claim of education cess of Rs.67,83,793/- as deduction:

The assessee has also made additional claim of deduction in respect of education cess of Income Tax of Rs.67,83,793/- and education cess on dividend distribution tax of Rs.4,66,570/- before the ld. CIT(A). The CIT(A) has allowed the claim of the assessee.

Heard both the sides and perused the material on record. Since surcharge or cess is a part of Income Tax and not deductible u/s 40(a)(ii) w.e.f 01.04.2005 as per Finance Act 2022. Therefore, we consider that assessee is not eligible for claiming deduction of education cess while computing total income. Therefore, this ground of appeal of the revenue is allowed.

The appeal of the revenue is partly allowed.

1st Ground: Disallowance u/s 40(a)(i) of the Act:

During the course of assessment the A.O noticed that assessee has made payment to non-resident of Rs.55,160/- to ICIC prising U.K. and Rs.2,12,603/- to Platts USA. After considering the detailed submission filed by the assessee the A.O observed that the payment made were in the nature of royalty payment since the aforesaid payments were made for the right to use the process or information concerning industrial commercial or scientific experience which was liable to be taxed as royalty as per the provisions of Sec. 9(i)(vi) of the Act. The assessee company has not deduct tax as per the provision of Sec. 195 of the Act, therefore, the A.O disallowed the amount of Rs.2,67,763/- u/s 40(a)(i) of the Act.

Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

During the course of appellate proceedings before us the ld. Counsel could not controvert the fact that impugned payment made to the non-resident was not attracted by the provision of Sec. 195 of the Act, therefore, we don’t find any merit in this ground of appeal of the assessee, therefore, the same stand dismissed.

Additional Ground: Claim of deduction u/s 80IA on account of generation of power:

During the course of appellate proceedings vide letter dated 01.08.2022 the assessee filed the additional ground for claim of deduction u/s 80IA on account of generation of power.

Heard both the side and perused the material on record. The assessee claimed that it has coal based boiler which generate powers in the form of steam. It was also submitted for power in the form of steam was generated by the captive power plant and consumed in the manufacturing of chemicals. The assessee claimed that deduction u/s 80IA on the said unit was allowed by the A.O in the subsequent assessment year 2016-17. Since, this issue of claim of deduction u/s 80IA was not made before the lower authorities, therefore, we restore this issue to the file of the assessing officer for deciding de novo after verification of the relevant details and material to be submitted by the assessee during the course of set aside proceedings. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.

The appeal of assessee partly allowed for statistical purposes.

In the result, the appeal of the revenue vide ITA No.445/Mum/2022 is partly allowed. The appeal of the assessee vide ITA No.402/Mum/2022 is partly allowed for statistical purposes.

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