2025 (6) TMI 390 - AT - Income Tax

Making fresh claim u/s 153A - sales tax subsidy/incentive received by the assessee from the Union Territory of Dadra Nagar Haveli - Fresh claim of execution during search assessment proceedings - HELD THAT - The gist of the decision in the case of Sew Infrastructure Limited Hyderabad 2024 (10) TMI 1144 - ITAT HYDERABAD is that the assessment/reassessment u/s 153A is not a de-novo assessment and as the assessment emanates from the provisions relating to search u/s 132 it essentially has be related to disclosed and undisclosed income and should have nexus or relevance with seized material as held in the case of Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT Provisions of section 153A is for the benefit of Revenue and it does not envisage a de-novo assessment. Though the assessee may claim any deduction u/s 153A in abated/incomplete assessment it has to make the claim in the return filed u/s 153A. To reiterate there is no provision in the Act where the assessee can claim expenses/deduction outside the Return filed u/s 153A as the provisions for exemption/deduction has to strictly construed in the light of the Supreme Court decision Commissioner of Customs (Imports) Mumbai Vs. Dilip Kumar and Company 2018 (7) TMI 1826 - SUPREME COURT (LB) Claim of exemption of sales tax subsidy being in the nature of capital/revenue receipt - We are conscious of the fact that the nature of a subsidy has to be decided on the basis of purpose for which it is granted as held in the case of Sahney Steel and Press Works 1997 (9) TMI 3 - SUPREME COURT and Ponni Sugar and Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT The purpose of the scheme for which the subsidy was given in the instant case was not to enable the assessee to set up a new unit or to expand existing unit. In our considered view the purpose of the Scheme was to assist the assessee in carrying out its business. The sales tax subsidy was not for the purpose of repayment of loan taken by the assessee or to set up units or for substantial expansion of existing units. The Scheme nowhere indicates that it is to meet a part of the cost or it was granted for production of or bringing into existence any assets. The facts of the case shows that the subsidy was given to meet recurring expenses and not for acquiring capital asset. The subsidy in this case were granted year after year from 2002 to 2016 only after setting up the new industry and only after commencement of production and therefore such a subsidy could only be treated as assistance given for the purpose of carrying on business of assessee. Further we find that the assessee was free to use the money in its business entirely as it liked. The Scheme does not obligate the assessee to use the incentive for a particular purpose. The decision in the Sahney Steel therefore squarely applies on the facts of the instant case and therefore we hold that the sales tax subsidy received by the assessee can only be treated as revenue receipt and be included as taxable income. The decision in the case of Ponni Sugar where the incentive/subsidy was held as capital receipt as the assessee was obliged to utilize the incentive for the purpose of repayment of loan for setting up new units also supports the same view. In the case of Maruti Suzuki India Ltd 2017 (11) TMI 1632 - ITAT DELHI it was held that where any subsidy given to the assessee post accomplishment of the project or expansion there without any obligation to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business or to liquidate the cost incurred in creating the capital asset or its expansion is only in the nature of the revenue receipt and is liable to be brought to tax. We are of the considered view that the sales tax subsidy received by the assessee is in the nature of revenue receipt and the AO has correctly considered the same as revenue receipt. Considering the same the ground of appeal of the assessee number 1 and 2 in the 2nd category of cases is dismissed. There is no change in facts and the scheme of the sales tax subsidy of the Dadra and Nagar Haweli of 1984 and 1999 in the 3rd category of cases for AYs 2012-13 to 2014-15. The grounds of appeal of the assessee no. 1 and 1.1 are dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these grouped appeals concerning assessment years 2006-07 to 2014-15 are:

• Whether the sales tax subsidy/incentive received by the assessee from the Union Territory of Dadra & Nagar Haveli qualifies as a capital receipt exempt from taxable income or is a revenue receipt taxable under the Income Tax Act, 1961.
• Whether the claims for exclusion of sales tax subsidy from taxable income made by the assessee during proceedings under section 153A (search assessments) without filing revised returns under section 139(5) are legally admissible.
• Whether fresh claims or additional deductions/exemptions not made in original or revised returns filed under section 139(1) or 139(5) can be entertained during assessments or reassessments under section 153A, especially in cases of completed/unabated assessments versus abated assessments.
• Whether the provisions of section 153A, which relate to search assessments, are for the benefit of the Revenue only and restrict the assessee's ability to make fresh claims.
• Whether the nature of the sales tax subsidy should be determined by the "purpose test" as laid down in precedents, and if so, what is the correct application of this test to the facts of the present case.
• Whether internal correspondence and state industrial profiles can be considered as part of the subsidy scheme to determine the purpose and nature of the subsidy.
• Whether the assessee's claim of sales tax subsidy being capital in nature is supported by the facts and law, including comparison with similar decisions in other jurisdictions or under different subsidy schemes.
• Whether the assessment officer's and CIT(A)'s rejection of the claim on grounds of non-filing of revised returns or classification of subsidy as revenue receipt is sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility of Fresh Claims for Exclusion of Sales Tax Subsidy in Section 153A Proceedings Without Revised Return

Legal Framework and Precedents: The Tribunal examined the Supreme Court decisions in Goetze (India) Ltd. vs. CIT, National Thermal Power Corporation Ltd. (NTPC) vs. CIT, and Wipro Finance Ltd. vs. CIT, among others. The Goetze ruling restricts the Assessing Officer's power to entertain fresh claims not made by way of valid returns or revised returns. NTPC and Wipro Finance cases clarify the powers of the Tribunal under section 254 to admit fresh claims for the first time before it, subject to conditions such as bona fide reasons and claims being questions of law based on existing facts.

Court's Interpretation and Reasoning: The Tribunal distinguished the present case facts from NTPC and Wipro Finance, noting that here the fresh claim was made before the AO during assessment proceedings under section 153A and not first before the Tribunal. The Tribunal held that the Goetze principle squarely applies, disallowing fresh claims made before the AO without filing revised returns under section 139(5). The Tribunal also relied on the Special Bench decision in DCIT vs. Sew Infrastructure Ltd., which emphasized that assessment under section 153A is not a de novo assessment but a continuation or merger of pending assessments, and fresh claims must be made in the return filed under section 153A to be admissible.

Evidence and Findings: The assessee had not claimed exclusion of sales tax subsidy in original or revised returns under section 139(5) for the relevant years, except in some later years. The claims were made by way of revised computation during section 153A proceedings. The Tribunal found that for completed/unabated assessments (AYs 2006-07 to 2008-09), no fresh claims can be entertained absent incriminating material found during search, per the Supreme Court decision in PCIT vs. Abhisar Buildwell (P.) Ltd.

Application of Law to Facts: For completed/unabated years, the Tribunal dismissed the fresh claims as inadmissible. For abated years (AYs 2009-10 to 2011-12), the Tribunal held that fresh claims must be made in the return filed under section 153A; since the assessee did not do so, claims made only by revised computation were inadmissible. For later years where claims were made in original or revised returns timely, admissibility was not disputed.

Treatment of Competing Arguments: The assessee argued that the AO is duty-bound to consider correct taxable income and allow claims even if not made in original returns, relying on Circular No. 14 (1955) and various Supreme Court decisions. The Revenue countered that section 153A assessments are for Revenue's benefit and do not permit fresh claims outside prescribed timelines, relying on Goetze and subsequent Supreme Court rulings.

Conclusion: The Tribunal upheld the Revenue's position that fresh claims not made by way of valid returns or revised returns are inadmissible in section 153A proceedings, especially for completed/unabated assessments. For abated assessments, fresh claims must be made in the return filed under section 153A; mere revised computation is insufficient.

Issue 2: Nature of Sales Tax Subsidy - Capital Receipt or Revenue Receipt

Legal Framework and Precedents: The determination of the nature of subsidy receipt is governed by the "purpose test" established by the Supreme Court in Sahney Steel & Press Works Ltd. vs. CIT and CIT vs. Ponni Sugar and Chemicals Ltd. The test focuses on the purpose for which the subsidy is granted rather than its form, timing, or source. Subsidies aimed at capital expenditure or setting up/expansion of units are capital receipts; those assisting in carrying on business or meeting recurring expenses are revenue receipts.

Court's Interpretation and Reasoning: The Tribunal analyzed the notifications granting sales tax exemption in Dadra & Nagar Haveli (1984 and 1999), the conditions attached, and the nature of the subsidy scheme. It rejected the assessee's reliance on internal correspondence and state industrial profiles as constituting the "purpose" of the subsidy scheme, holding these to be merely descriptive or administrative documents rather than part of the official scheme.

The Tribunal found that the exemption applied from the date of first sale, after the unit was set up and production commenced. The scheme did not mandate use of subsidy for capital purposes such as loan repayment or asset creation. The subsidy was given annually and was not linked to capital expenditure or expansion obligations. The conditions required maintenance of sales and stock records, indicating the subsidy related to trading activity.

Evidence and Findings: The assessee's units were manufacturing and trading photo sensitized goods in Dadra & Nagar Haveli. The subsidy was granted under notifications exempting sales tax on goods manufactured in the UT for a fixed period. The assessee did not have any obligation to utilize the subsidy for capital purposes. The subsidy was received post commencement of production and was recurring.

Application of Law to Facts: Applying the purpose test, the Tribunal held that the subsidy was assistance in carrying on the business and meeting recurring expenses, thus constituting revenue receipts. It distinguished cases where subsidies were capital in nature due to specific conditions or timing (e.g., Maharashtra 1993 scheme, or subsidies for expansion/modernization). The Tribunal relied on decisions such as CIT vs. Meghalaya Steels Ltd. and CIT vs. Bhushan Steel & Strips Ltd. supporting the revenue nature of similar subsidies.

Treatment of Competing Arguments: The assessee argued the subsidy was capital in nature based on the public interest purpose of industrialization and employment generation. The Revenue contended the subsidy was revenue receipt as it was linked to sales and business operations, not capital expenditure. The Tribunal sided with the Revenue, emphasizing the absence of any capital utilization condition and the timing of subsidy receipt.

Conclusion: The Tribunal concluded that the sales tax subsidy/incentive received by the assessee is a revenue receipt and taxable under the Income Tax Act.

Issue 3: Effect of Search and Section 153A Proceedings on Assessment and Claims

Legal Framework and Precedents: Section 153A provides for assessment or reassessment consequent to search under section 132. The Supreme Court in PCIT vs. Abhisar Buildwell (P.) Ltd. clarified that for completed/unabated assessments, no additions can be made in absence of incriminating material found during search. For abated assessments, the original and reassessment proceedings merge under section 153A, allowing fresh claims to be made in the return filed under section 153A.

Court's Interpretation and Reasoning: The Tribunal applied the above principles, categorizing the appeals into three groups: completed/unabated assessments (AY 2006-07 to 2008-09), abated assessments (AY 2009-10 to 2011-12), and cases where claims were made in original or revised returns (AY 2012-13 to 2014-15). It held that in the first group, no fresh claims could be entertained without incriminating material. In the second group, fresh claims must be made in returns filed under section 153A. In the third group, claims made in original or revised returns were admissible but failed on merits.

Evidence and Findings: The search was conducted on 14.11.2011. For completed years, assessments were final and no incriminating material was found. For abated years, assessments were pending and merged with section 153A proceedings. The assessee's claims were not made in original or revised returns for the first two groups but only by revised computation during assessment proceedings.

Application of Law to Facts: The Tribunal dismissed claims for completed years due to absence of incriminating material, disallowed fresh claims not made in returns for abated years, and rejected claims on merits for later years.

Treatment of Competing Arguments: The assessee argued for admission of fresh claims and substantive merits. The Revenue emphasized strict adherence to statutory timelines and the limited scope of section 153A assessments. The Tribunal aligned with the Revenue's view based on authoritative precedents.

Conclusion: The Tribunal upheld the legal framework limiting assessments and claims in search proceedings, dismissing the assessee's claims accordingly.

Issue 4: Treatment of Sales Tax Subsidy in Profit & Loss Accounts and Verification of Notional Claims

The Tribunal noted discrepancies in the assessee's accounting treatment of sales tax subsidy in AYs 2013-14 and 2014-15. It observed that in one year, subsidy was included in total sales but deducted in computation, and in another year, routed through P&L and directly reduced from sales. The Tribunal remanded the matter to the AO to verify whether the subsidy claim is notional or real, holding that a notional claim cannot be allowed. Where routed through P&L, it will be considered revenue receipt.

3. SIGNIFICANT HOLDINGS

"In case no incriminating material is unearthed during the search, the Assessing Officer cannot assess or reassess taking into consideration the other material in respect of completed assessments/unabated assessments. Meaning thereby, in respect of completed/unabated assessments, no addition can be made by the Assessing Officer in absence of any incriminating material found during the course of search under section 132 or requisition under section 132A."

"The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account."

"The purpose of assessment in relation to search cases is to assess undisclosed income, if any, on the basis of incriminating material found as a result of the search, but not to disturb the completed/unabated assessment."

"Assessment or reassessment made in pursuance to section 153A of the Act, is not a de novo assessment and, therefore, it was not open to the assessee to claim and be allowed such deduction or allowance of expenditure which it had not claimed in the original assessment proceedings which in the case of assessee stood completed."

"Beneficial provisions like, deductions/exemptions provisions are required to be strictly interpreted and any perceived ambiguity would necessarily ensure to the benefit of the revenue."

The Tribunal's final determinations on each issue are:

• Claims for exclusion of sales tax subsidy made during section 153A proceedings without filing revised returns under section 139(5) are inadmissible for completed/unabated assessments and abated assessments where claims were not made in returns filed under section 153A.
• The sales tax subsidy/incentive received under the Dadra & Nagar Haveli scheme is a revenue receipt and taxable under the Income Tax Act, based on the purpose test and scheme conditions.
• Section 153A assessments are not de novo assessments but are limited to detection of undisclosed income based on incriminating material found during search; thus, fresh claims outside prescribed returns are not permitted.
• The assessee's accounting treatment and genuineness of subsidy claims for AYs 2013-14 and 2014-15 require further verification by the AO to determine notional or real nature.
• All appeals filed by the assessee for AYs 2006-07 to 2014-15 are dismissed accordingly.