► Head notes :

Income Tax Act – Assessee reduced the excise duty refund and interest subsidy received from book profits by treatingthe same as ‘capital in nature’ by relying on the decision of Hon’ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys  – AO rejected the claim and treated the receipts as revenue and added the same to book profits for the purpose of MAT u/s 115JB on the ground that the said order of high court was appealed before the Supreme court

Delhi ITAT – The Supreme court has decided the matter against revenue in the above case – Excise duty refund and interest subsidy held ‘capital receipts’ – Rightly excluded from book profits for the purpose of sec 115JB

► Name of Judge : Dr. B.R.R. Kumar AM & Shri N.K. Choudhary JM

► Order:

Shri N.K. Choudhary

These cross appeals have been preferred by the Assessee and the Revenue Department against the order dated 24.04.2017, impugned herein, passed by the learned Commissioner of Income- tax (Appeals)-4, New Delhi (in short “Ld. Commissioner”), u/s. 250 of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2013-14. We are deciding the appeal filed by the Revenue Department, first.

2. Brief facts, relevant for adjudication of the instant appeal are that the Assesseebeing engaged in the business of manufacturing and trading of pesticides, insecticides and agro chemicals etc., had filed its return of income on 27.11.2013 by declaring an income of Rs.4,92,27,220/- after claiming deduction under Chapter VIA at Rs.18,76,38,726/- and paid the taxes under MAT at book profit of Rs.46,40,00,764/-.

2.1. The case of the Assessee was selected for scrutiny under CASS and in pursuance to which notice dated 04.09.2014 u/s. 143(2) was served upon the Assessee, whosubsequently revised its return on dated 21.03.2015 and declared total income at ‘NIL’ after claiming deduction under Chapter VIA to the tune of Rs.8,84,45,531/- and paid taxes on the book profit of Rs.31,55,80,349/-. Under the revised return, the Assessee had also reduced the total income by an amount of Rs.14,84,20,415/- by showing the same as ‘capital receipts’, which was earlier shown as ‘revenue receipts’ in the original return of income. The Assessee also reduced the book profit at the same amount in its revised return and paid the taxes accordingly.

Therefore considering the said facts during the assessment proceedings, it was observed by the Assessing Officer that in the original return of income, the Assesseedeclared the income under the heads of business, income from other sources and income from capital gains. After claiming deduction of Rs.18,59,51,576/- u/s. 80IB of the Act for its units at Samba and Udhampur (Jammu) , the Assessee also filed Form No. 10CCB in support its claim and declared the net taxable income at Rs.4,92,27,220/- and paid taxes on book profit of Rs.46,40,00,764.It was further noticed by the Assessing Officer that in the revised return, the Assessee has reduced an amount of Rs.14,84,20,415/- out of total income under the head of business claiming to be ‘capital receipts’, which was actually shown as ‘revenue receipts’in the original return of income.

2.2  The Assessee was show caused by the AO and confronted on these aspects vide order sheet entry dated 22.02.2016 and was asked to file complete details, documentary evidence and prove as to how the amount in question was ‘capital receipts’ and was not ‘revenue receipt’.

2.3 The Assessee while relying upon the Excise Notifications No. 56/57 dated 14.11.2012 issued by the Central Excise Department and the judgments of the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugars & Chemical Ltd. (2008) 306 ITR 392(SC), wherein it was held “that the excise  duty  refund  are  purely  capital  receipts, hence, not chargeable to tax”and of the Hon’ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys vs. CIT (2011) 333 ITR 335(J&K) wherein it was held “that excise  duty  refund,  interest subsidy and  insurance  subsidy received  with  the  object  of  creating avenues for perpetual employment to eradicate the social problem of unemployment in the state  by accelerating  industrial  development  is capital receipt”, requested the Assessing Officer to consider the excise duty refund and interest subsidy to the tune of Rs.10,67,03,009/- and Rs.4,17,16,506/- respectively, as ‘capital in nature’.“

2.4 The Assessing Officer declined to accept the claim of the Assessee on the ground that with regard to the decision of Hon’ble High Court of Jammu & Kashmir in the case of Shree Balaji Alloys (supra), it may be mentioned that the facts of the instant case appear to be identical to the facts of the stated judgment, but it has come to the notice that the department has not accepted the said judgment of the Hon’ble High Court and has filed a SLP before the Apex Court which is pending. Ultimately, the Assessing Officer treated the aforesaid amount of Rs.14,84,20,415/- as ‘revenue receipts; and consequently added to the total income under the normal provisions and book profit under MAT as well.

2.5  The Assessing Officer also made other additions, which are not subject matter before us.

3. The Assessee, being aggrieved also challenged the said addition before the ld. Commissioner, who vide impugned order allowed the claim of the Assessee to the extent of treating excise duty and interest subsidy as ‘revenue receipts’ and deleted the addition on that account under the normal provisions of the Act by holding as under :

“4. The issue in this appeal is covered in favour of the appellant on merits by  the order of  Hon'ble  High Court of  Jammu & Kashmir reported in 333 ITR  335.  The  SLP  filed  against  the said case has been dismissed by the Hon'ble Apex Court. For reference the head note of the order of reported in 333 ITR 0335 in the case of Shree Balaji Alloys &Ors. is reproduced  nere  in under:-

"Tribunal has relied upon five factors to hold the incentives in question as production incentives but without dealing with that part of the scheme, whereby unemployment in the State had been intended to be eradicated creating atmosphere for accelerated industrial development to provide employment opportunities to deal with the social problem of unemployment. This was a lopsided interpretation of the New Industrial Policy and concessions formulated by the Central Government for the State of Jammu & Kashmir vide Office Memorandum of 14th June, 2002. Perusal of the Office Memorandum dt. 14th June, 2002 indicating New Industrial Policy and other concessions for the State of Jammu & Kashmir, makes it explicit that the concessions were issued to achieve twin objects viz. (i) acceleration of industrial development in the State of Jammu & Kashmir, which had been found lagging behind in such development, and (ii) generation of employment in the State of Jammu & Kashmir. Amendment introduced to the Office Memorandum vide notification of 28th Nov., 2003 of the Government of India, Ministry of Commerce and Industry (Department of  Industrial  Policy and Promotion) eloquently demonstrates the Central Government's intention in extending the incentives. The Government's objective, as conveyed by  the  Prime  Minister at Srinagar on 19th April, 2003, was, for creation of one la (employment  and self-employment opportunities  in Jammu & Kashmir State. To achieve this purpose and objective, it was, inter alia, provided in the Central excise notifications that the exemptions contained in the notifications would be available only on production of certificate from General Manager of the concerned District Industry Centre to the jurisdiction at Dy. CC/E or the  Asstt. CCE,  as the  case  may be, to the effect that the unit had created required additional regular employment, which would not, however, include employment provided by  the  industrial  units  to daily wagers or casual employees engaged in the units.  A close reading of the Office Memorandum and the amendment introduced thereto with para No. 3  appear  in the Central Excise Notification Nos. 56 and 57 of 11th Nov., 2002, makes it amply clear that the acceleration of development of industries in the State  was  contemplated with the object of generation of employment in the State of Jammu & Kashmir and the generation of employment, so contemplated, was not only casual  or  temporary;  but  was on the other hand, of  permanent nature.  Considered  thus, the paramount consideration of the Central Government in providing the incentives to the new industrial units and substantial expansion of the existing units, was the generation of employment through acceleration of industrial development, to deal with the social problem of unemployment in the State, additionally creating opportunities for self- employment, hence  a  purpose  in public interest. In this view of the matter, the incentives provided to the industrial units, in terms of the New Industrial Policy, for accelerated industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional permanent source of employment to the unemployed in the State of Jammu & Kashmir were in fact, in the nature of creation of new assets of industrial atmosphere and environment, having the potential of employment generation to achieve a social object. Such incentives, designed to achieve public purpose, cannot, by any stretch  of  reasoning, be  construed as production or operational incentives for the benefit of Assessees alone. Thus, looking to the purpose of eradication of the social problem of unemployment in the State by acceleration of the industrial development and removing backwardness of the area that lagged behind in industrial development, which is certainly a purpose in the public interest, the incentives provided by the Office Memorandum and statutory notifications issued in this behalf, to the Assessees cannot be construed as mere production and trade incentives, as held by the Tribunal, Making of additional provision in the scheme that incentives would become available to the industrial units, entitled thereto, from the date of commencement of the commercial production, and that these  were  not  required for creation of new assets cannot be viewed in isolation, to treat the incentives as production incentives, as held by the Tribunal, for the measure so taken, appears to have been intended to ensure that the incentives were made available only to the bona fide industrial units so that larger public interest of dealing with unemployment in the State, as intended, in terms of the Office Memorandum, was achieved. For all  what has been  said above,  the finding of the Tribunal that the excise duty refund,      interest subsidy and insurance subsidy were production incentives, hence revenue receipt cannot  be  sustained. The finding  of the Tribunal that the incentives were revenue receipt is, accordingly, set aside holding the incentives to be capital receipt in the hands of the Assessees."

5. The order dated  19/04/2016 of  the Hon'ble Apex Court in the Revenue's SLP/appeal against the above order is also reproduced here in under:-

"IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 10061 OF 2011 C.I.T., JAMMU &ANR.        

Appellant(s)

VERSUS

M/S SHREE BALAJI ALLOYS         

Respondent(s)

WITH

CIVIL APPEAL NO. 10666 OF 2013

CIVIL APPEAL NO. 8491 OF 2012

CIVIL APPEAL NO. 8495 OF 2012

CIVIL APPEAL NO. 8492 OF 2012

CIVIL APPEAL NO. 10396 OF 2013

CIVIL APPEAL NO. 8907 OF 2013

CIVIL APPEAL NO. 8490 OF 2012

CIVIL APPEAL NO. 8337 OF 2013

ORDER

Heard Mr. K. Radhakrishnan, learned senior counsel appearing for the Revenue as well as Mr. Ajay Vohra, learned senior counsel appearing for the respondents.

The issue raised in these appeals is  covered  against  the  Revenue by the decision of this Court in "Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd.", reported in (2008) 9 SCC 337,or  in        the alternate,         in Commissioner of Income Tax Vs.M/s Meghalaya Steels Ltd.",reported in

(2016)3SCALE 192.

The appeals are, therefore, dismissed. No Costs.

[KURIAN JOSEPH]

[R. BANUMATHI]

New Delhi April 19, 2016

6.  At the time the assessment order was passed the decision of Hon'ble Apex court was not available. Therefore, on merit, the issue is covered in favour of appellant by the decision of the Hon'ble Apex Court.

7. It was confirmed by the appellant that till AY 2013-14 refund of excise duty and interest subsidy were shown by the appellant on revenue receipts. In AY 2012-13, the receipts were claimed as capital receipts, during the course of assessment proceedings. The AO did not allow the same by relying on the decision of the Apex court in the case of Goetzeindia Ltd. reported in 284 ITD 323. However, the CIT(A) allowed the claim of the appellant and held the receipts to be of capital nature in order dated 30.12.2015. In AY 2012-13 i.e. the  year  under  appeal, valid revised return was filed on 21.03.2015 making the claim of receipts being of capital nature. Therefore, the addition made is deleted as far as computation/assessment of income under normal provisions of the Act is concerned.”

4.  The Revenue Department, being aggrieved, is in appeal against the said deletion of additions of Rs.10,67,03,009/- and Rs.4,17,16,506/- made on account of excise duty refund and interest subsidy, by treating the same as ‘capital in nature’ by the ld. Commissioner.

5.  The ld. CIT/DR, Ms.Sapna Bhatia, vehemently supported the decision of the Assessing Officer on the issue under consideration, whereas ld. AR, ShriVed Jain, Ld.Advocate supported the decision of the ld. Commissioneron the present issue.

6. Heard the parties and perused the material available on record. We have also given thoughtful consideration to the peculiar facts and circumstances of the case and are of the considered view that the decision of the ld. Commissioner on the issue in hand is not only based on thepeculiar facts and circumstances but also upon the judgment of the Hon’ble Jammu & Kashmir High court in the case of Shree Balaji Alloys&Ors. (supra), wherein the Hon’ble High Court while considering the Central Excise Notifications No. 56/57 of 11.11.2002 which arepari-materiato the notifications No. 56/57 dated 14.11.2012 issued by the Central Excise Department as involved in the instant case, on the basis of which the Assessee had claimed deduction u/s. 80IB for its unit at Samba and Udhampur ( Jammu & Kashmir), has clearly held “that excise duty refund and interest subsidy were production incentives and ‘capital receipts’ in the hands of the Assessee.”

6.1  The said judgement of the Hon’ble High Court has also been scrutinized and approved by theHon’ble Apex Court in the case of CIT, J&K and Anr. Vs. ShriBalaji Alloys, Civil Appeal No. 20666 of 2013 and others, order dated 19.04.2017, wherein the Hon’ble Apex Court dismissed the appeal filed by the Revenue by holding “that the issue raised in these appeals is covered against the Revenue.”

6.2  It is also a fact that the Assessing Officer in the subsequent cases for the A.Y. 2014-15 and 2015-16, has allowed the excise duty refund and interest subsidy as ‘capital receipts’.

6.3  On the analyzations made above and in cumulative effects , we are inclined not to interfere in the decision of the Ld. Commissioner on the issue in hand, consequently the grounds raised/appeal filed by the Revenue Department stands dismissed.

7.  ITA No. 3297/Del/2017

Coming to the appeal filed by the Assessee, the Assessee has challenged the affirmation of addition of Rs.14,84,20,415/- made by AO, on account of book profit under MAT provisions. The ld. Commissioner, while upholding the said addition under MAT provisions, held that the issue is covered against the appellant by the decision of Hon’ble ITAT, Bangalore in the case of B&B Infotech Ltd., 155 ITD 1040. The ld. Commissioner further held that the issue is also covered against the appellant by the decision of Hon’ble Apex Court in the case of Apollo Tyres Ltd., 255 ITR 273.

The Assessee before us submitted that for bringing to tax under MAT provisions, the first and foremost condition is that such a receipt should be first held as an income under the charging section and if it is not an income, then the same cannot be brought to tax under the MAT provisions also. Further what cannot be taxed directly, cannot be tax indirectly as well. The ld. AR also relied upon various judgments in support of its case.

7.3  On the contrary, the ld. DR heavily relied upon the orders passed by the authorities below specifically the impugned order.

7.4  Heard the parties and perused the material available on record. On the basis of the conclusion drawn by the authorities below and rival claims of the parties, question emerge, if the addition is deleted under the normal provisions of the Actthen what would be the fate of addition made under MAT provisions.

7.4.1 The Hon’ble Kolkata High in the case of PCIT, Central-2, Kolkata vs. Ankit Power Ltd., 2019 (7) TMI 878-Calcutta High Court dated 09.07.2019, dealt with identical issue and held as under:

“Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the Assessee from the Government of West Bengal under  the schemes in question are to be included for the purpose of computation of book profit under Section 115 JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of Appollo Tyres Ltd. Vs. CIT reported in 225 ITR 273 (SC).

In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘Income’ under Section 2(24) of Income Tax Act, 1961 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  Appollo Tyres 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.”

7.4.2    The Hon’ble Coordinate Bench of the Tribunal, in the case of SRF Limited vs. ACIT, Circle-1, LTU, New Delhi, 2022(2) TMI 758- ITAT Delhi, dated February 07, 2022, also dealt with the identical issue and held that ‘capital receipts’ cannot be brought to tax as book profits and are, thus, liable to be excluded from the computation of book profits u/s. 115JB. For ready reference the concluding part of the judgement is reproduced below:

6.4. It is a settled law that a capital receipt is not liable  to  tax under the Act unless it is specifically included in the definition of income u/s. 2(24) of the Act and chargeable under any of the charging provisions of the Act. Once a particular receipt is treated as capital receipt, the same cannot be brought to tax in garb of 'minimum alternative tax' applicable on book  profits  computed u/s. 115JB of the Act. The ratio of judgment delivered by  the Hon'ble High Court of Calcutta  in  case  of  Ankit Metal & Power Ltd. [2019] 109 taxmann 93 (Cal) is worth mentioning....

6.6. We, therefore, respectfully following the aforesaid ratio of Hon'ble High Court hold that Carbon credits being the capital receipts cannot be brought to tax as book profits and are, thus, liable to be excluded from the computation of book profits u/s. 115JB. The additional ground of  appeal  no. 4 of  the Assessee is thus allowed.”

7.4.3 We have given thoughtful consideration the peculiar facts and circumstances of the case, the issue involved and the decisions of the authorities below and of the Hon’ble Courts referred to above on the issue in hand. With regard to determination of the Ld. Commissioner that the issue is covered against the Appellant by the decision of the Hon’ble Apex Court in the case of Apollo Tyres Ltd. vs Commissioner Of Income Tax, Kochi {255 ITR 273 SC}, we observe that Hon’ble Calcutta High Court in PCIT, Central-2, Kolkata vs. Ankit Power Ltd., (supra) analysed the said judgment of the Hon’ble Apex Court and held that in the case of Appollo Tyres 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.

In the instant case facts are contrary and even otherwise the Ld. Commissioner deleted the addition made under normal provisions of the Act by considering the Excise duty refund and Interest subsidy as ‘capital in nature’ and not taxable under normal provisions of the Act, therefore the applicability of the Judgement in Apollo Tyres (supra) to the instant case does not arise at all.

7.4.4 In our considered view, once the foundation lost its existence,then the buildingwould automatically collapse. In simple meaning, once it is determined that receipt is not in the nature of income, then it cannot be considered in the book profit for the purpose of computation u/s. 115JB of the Act. As the addition in the instant case could not survive under normal provision of the Act, thus the addition under MAT provisions alsowillnot survive, hence stands deleted. Consequently, decision of the ld. Commissioner on this issue is set aside and the appeal of the Assessee is allowed.

8.  In the result, the appeal filed by the Revenue Department stands dismissed and that of the Assessee stands allowed.

► Summery :

Delhi ITAT:  Excise duty refund and interest subsidy received are ‘capital receipts’ and not to be included in book profits for the purpose of computing tax payable u/s 115JB