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2016 (5) TMI 1136 - ITAT AHMEDABAD

2016 (5) TMI 1136 - ITAT AHMEDABAD - TMI - Sales tax incentive and excise incentive treated as revenue receipt - Held that:- CIT(A) did not has erred in law and on facts in deleting the addition treating sales tax incentive as revenue receipt by the Assessing Officer. - Non exclusion of debt redemption fund from the book profit for the purpose of computing book profits under section 115JB - Held that:- The mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render .....

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Agarwal and Vimlendu Verma For the Assessee : Naresh Jain, along-with Sunil Agarwal ORDER Per Pramod Kumar, AM 1. These cross appeals are directed against the order dated 26th September 2012 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2006-07. 2. We will first take up the appeal filed by the Assessing Officer. 3. Grievances raised by the Assessing Officer are as follows: 1. The ld. CIT(A) has erred in law and .....

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t feels to do so and there is no stipulation of it being used. 4. The relevant material facts, as culled out from material on record, are like this. The assessee before us is a company engaged in the business of manufacturing of CTVs, PCBs, Washing Machines etc. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed an amount of ₹ 4,36,57,867 as capital subsidy received by way of sales tax benefit under the scheme of the Gujara .....

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at nether the assessee has paid any sales tax on purchases nor charged any sales tax to its customers. The claim of the assessee was that there is a notional subsidy element inbuilt in the revenue received and that is really the subsidy received by it in respect of sales tax. As for the Central Excise Subsidy granted by the Government of India, the assessee was to charge full excise duty on sales invoices, adjusted the CENVAT credit available to it on purchase, and was required to pay the balanc .....

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he name of Genus Overseas Limited, Jaipur, Ratna Sugar Mills Co Ltd Vs CIT (33 ITR 644), CIT Vs Chitra Kalp (277 ITR 540) and CIT Vs Ponni Sugar & Chemicals Ltd (306 ITR 392). He then noted that whether a subsidy is capital receipt or revenue receipt is a vexed question and it has no easy answer. He further expressed the view that whether a subsidy is to be treated as capital receipt or revenue receipt will depend upon the purpose, intent and nature of scheme and benefit received under it by .....

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o utilize it wither to expand its capital structure or towards acquisition of the same or repayment of its capital liability only . He inferred that if there is no such stipulation and the assessee is free to use the money in its business entirely as he likes it, it will be of revenue nature . The Assessing Offcer noted that the sales tax benefit is given to the assessee only after commencement of production, that the assessee is under no stipulation to apply the incentive amount towards repayme .....

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at there is no stipulation on how to use the refunds so received, and that, in view of this factual position and earlier discussions on legal position, this subsidy is also required to be treated as a revenue receipt. It was in this backdrop that the additions of ₹ 4,36,57,867 in respect of sales tax subsidy and ₹ 3,21,35,417 for excise duty subsidy were made to the income returned by the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) s l .....

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ated that The economic activities in the district of Kutch came to a standstill on account of the devastating earthquake in the state on 26th January 2001, New employment opportunities could be created. If new investment takes place, the Government is committed to attracting industries in the district to make the industrial and economic environment live. Government of India has announced excise duty exemption for new industries to promote large scale investment in the district along with which t .....

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vident from the preamble of the scheme that the incentives were given to entrepreneurs to attract the large scale investment to generate new employment and for making the economic environment of Kutch district live. Thus, neither the incentives were given for meeting the cost of the investment nor were given for assisting the appellant in carrying out the business operations. Thus, the subsidy in the form of exemption from the liability to pay sales tax is on capital account and not on revenue a .....

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anuary, 2001. The scheme was formulated and the incentives were given to entrepreneurs to attract the large scale investment to generate new employment and for making the economic environment of Kutch district of Gujarat before the specified date as per the scheme of incentive. The limit of the incentive was fixed. The appellant s case is covered by the decision of Hon ble Special Bench of Mumbai Tribunal in the case of DCIT vs. Reliance Industries Ltd. 88 ITD 273 (Mum. (SB) as relied on by the .....

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in such cases one has to apply purpose test . The point of time when the subsidy is paid is not relevant. The source is immaterial and the form of subsidy is also immaterial. It is evident from the incentive scheme itself that the purpose of the scheme was to attract the large scale investment to generate new employment and for taking the economic environment of Kutch district live. In view of the above judicial decisions and considering the facts of the case and also relying on the decision of .....

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was called out for hearing, Shri Sanjay Agarwal, learned Commissioner (DR), moved a petition seeking reference to a larger bench. This petition, inter alia, stated as follows: One of the issues involved in this appeal is receipt of sales tax and excise duty subsidy received by the assessee from the State for the purpose of industrialization. ITAT Rajkot, in ITA No. 793/RJT/2012 relying upon the decision of DCIT Vs Reliance Industries Ltd in 88 ITD 273, held that nature of subsidy was capital. 2. .....

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l & Press Works Ltd 228 ITR 253, and held them to be complimentary to each other. The amount of subsidy was held to be revenue in nature. 4. In the present case also, the subsidy has been granted for the conduct of business more efficiently after the industry commenced the production. 5. It is further seen that the decision of the ITAT Delhi is later in point of time and it analysed the issue after considering different decisions of Supreme Court and Tribunals, and so the same is required to .....

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er, in respect of the same subsidy scheme, and we must, therefore, follow the said decision. As for the decision of another coordinate bench, in the case of ACIT Vs Jindal Steel & Power Ltd [(2013) 38 taxmann.com 132 (Delhi)], learned counsel points out that this decision is clearly per incurium as the bench has ignored a binding special bench decision in the case of Reliance Industries Ltd (supra). A deviant and per-incurium decision, according to the learned counsel, should not be allowed .....

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of this Tribunal, for that purpose. He also invited our attention to a rather recent decision of Hon ble jurisdictional High Court in the case of JCIT Vs Colouman Dyechem Limited [(2015) 127 DTR 74 (Guj)] which, according to him, holds that if the purpose of subsidy is for not buying the capital assets, or for establishment of project, the same will be revenue in nature . He submits that as this is a judicial precedent from Hon ble jurisdictional High Court, we are required to follow the same. .....

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sis that Their Lordships came to a factual finding that subsidy be treated as assistance for carrying on of business of the assessee. Learned counsel then took us through certain observation which, quite to the contrary of what is submitted by the learned Commissioner (DR), follow the principle that if the purpose of the subsidy scheme was to help the industrialization of setting up of businesses, the subsidy will be on capital account. Learned counsel then invites our attention to the judgment .....

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cision in the case of Colourman Dyechem (supra), does not apply to the facts of this case inasmuch as that was a case in which the subsidy was dependent on increase in the capacity as against the present case in which the subsidy is for setting up the business. 10. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 11. We find that so far as the Special Bench decision of this Tribunal in the cas .....

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April 2009, to the extent of declining to admit this question, stands reversed. However, the decision of the Special Bench still holds good as the same has not, and at least not yet, even been examined by Hon ble Bombay High Court. Mere admission of appeal against a decision, as is elementary, does not affect the biding nature of a judicial precedent. The Special Bench decision, in the case of Reliance Industries Ltd (supra), was not reversed by Hon ble Supreme Court, but was directed to be exa .....

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followed that approach. The coordinate bench, in the case of Jindal Steel (supra), did indeed travel much beyond its limited mandate in ignoring a binding judicial precedent simply because appeal against that special bench decision is now pending before Hon ble Bombay High Court. When posed with a special bench decision and a division bench directly on the issue, though touching different chords, we have no difficulty in recognizing our limitations. The wisdom of a division bench, even if superi .....

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bench, on the same set of facts as before us, did in the case of Ajanta Manufacturing Ltd (supra). As for learned Commissioner (DR) s suggestion that we should follow the jurisdictional High Court decision in the case off Colourman Dyechem (supra), we find that Their Lordships, in this case, were dealing with an entirely different type of subsidy which was clearly dealing with an expansion situation. However, we would rather refrain from making any further detailed observations on this issue, a .....

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en to this assesse are the same as in the case of Ajanta Manufacturing Ltd (supra). All the material facts being the same, there is no reason to take any other view of the matter than the view so taken by the coordinate bench. We must, therefore, uphold the conclusions arrived at by the Commissioner (Appeals), which are in consonance with the Special Bench decision in the case of Reliance Industries (supra) and coordinate bench decision in the case of Ajanta Manufacturing Ltd (supra), and declin .....

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the adjustment for debt redemption fund, at ₹ 2.50 crores, was declined with a short observation that debt redemption fund of ₹ 2.50 crores is an appropriation for purpose of creating a reserve and is a below the line adjustment, it does not fall in any category of the adjustments provided under section 115JB . Learned CIT(A) confirmed the same on the same basis and rejected assessee s stand that it is covered by Hon ble Bombay High Court s judgment in the case of CIT vs Raymonds Ltd .....

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(a): Section 115JA of the Income Tax Act, 1961 provides in subsection (2) that every assessee, being a company shall for the purpose of the section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The explanation to the Section provides that for the purpose of the section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous .....

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Redemption Reserve (DRR) has been considered by the judgment of the Supreme Court in National Rayon Corporation Ltd. Vs. Commissioner of Income Tax [(1997) 227 ITR 764]. The Supreme Court after adverting to the provisions of Clause 7 of Part III to Schedule VI of the Companies Act, 1956 held that "the basic principle is that an amount set apart to meet a known liability cannot be regarded as reserve". Where a company issues debentures, the liability to repay arises the moment the money .....

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ture Redemption Reserve cannot be regarded as a reserve for the purpose of Schedule VI to the Companies Act, 1956. In National Rayon Corporation, the Supreme Court followed its earlier decision in Vazir Sultan Tobacco Co. Ltd. Vs. CIT [[1981] 132 ITR 559], in holding that since the concept of reserve and of a provision is well known in commercial accountancy and is used in the Companies Act, 1956, while dealing with the preparation of balance sheets and profit and loss accounts the meaning of th .....

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I, the secured loans have to be shown under the heading "liabilities". Secured loans include (1) debentures, (2) loans and advances from banks, (3) loans and advances from subsidiaries, and (4) other loans and advances. The secured loans might not be immediately repayable, but the liability to repay these loans is an existing liability and has to be shown in the company's balance-sheet for the relevant year of account as a liability. Amounts set apart to pay these loans cannot be & .....

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