TMI Blog2017 (4) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Government in form of subsidy. The method of quantification i.e. the maximum subsidy limit is the only linked with cost of fixed assets. This quantification is for putting cap on maximum amount of subsidy eligibility. This method of quantification does not mean, in any way, that subsidy is given to offset cost of asset. It is very clear from PSI scheme as well as Eligibility certificate that subsidy is given to generate local employment in low human index district and receipt is in not for meeting or subsidizing cost of asset by Govt. It is only where subsidy is given specifically to offset the cost of an asset, such payment would fall within the expression ‘met’, whereas the subsidy received merely to accelerate the industrial development of the state cannot be considered as payments made specifically to meet a portion of the cost of the asset. Therefore, incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and thus it falls outside the ambit of Explanation 10 to Section 43(1) of the Act. In the light of the above discussion, for the purpose of computing depreciation allowable to the assessee, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,75,000/- is revenue receipt and full amount of the subsidy is taxable in this year. 3. Briefly stated facts are that the assessee a Private Limited Company is engaged in the business of manufacturing of steel. During the assessment proceedings, the AO noticed from the accounts of the assessee that the assessee has claimed depreciation on assets consequent upon receipt of incentives from State Government. The assessee company has received subsidy from State Government as an industrial promotional subsidy in order to encourage the dispersal of industries to the less developed areas. State Government has been given package of incentives to new/expansion units set up in developing regions of the Sate since 1964 under a scheme popularly known as Package Scheme of Incentives. This Package Scheme of Incentives of 2007 outlines liability criteria, quantum of incentives and long term mechanism for administering the incentives. The AO noticed that the receipt of subsidy from the Government is because of the assessee s initiative of setting up an industry in a low HDI district along with regular employment opportunities and not for specific assets. The AO held that subsidy is deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area. It is seen that the case of Reliance Industries is not applicable to the appellant's case on two accounts Firstly, the Hon'ble ITAT in Reliance Industries Ltd (in view of the IPS policy at that time) observed that assessee would become entitled for sales tax incentive even before the commencement of the production. Accordingly, the Hon'ble ITAT held that the object of the incentive is to fund a part if the cost of the setting up of the factory in notified backward area but in the case before me here, there is no such condition. The IFS policy, for the year under consideration only sets up the limit which is 100% of the eligible investment, ie, only the criterion that how much the assessee will get incentive from the IPS polices. There is no direct nexus between the funding of investment and setting up of the factory. Secondly, In the case of Reliance Industries Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment for technical development and expansion capacity of the sugar factory as well as for the establishment of new sugar mills approval of planned Sugar Industry Incentive Packages' was discussed. So that the Entrepreneurs of the private sector could be attracted for the establishment of sugar industries and other industries based on sugarcane or sugarcane juice could be attracted and working/installed sugar mills also may expand their capacity and may establish other industries based on co-product of the sugarcane in the state. It is clearly seen from the above para that the scheme framed by the Bihar Government and as that of IPS scheme of Maharashtra Government is totally different and the decision rendered is not on the argument of capital receipt or revenue receipt and as the facts of the case are different, the decision relied on by the appellant is not applicable in the present case. Third decision referred by the appellant is that of Rasoi Ltd. On careful perusal of the decision of Hon'ble High Court of Calcutta in the case of Rasoi Ltd it is seen that the subsidy granted for is as under: In order to appreciate the aforesaid question, it will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial promotion assistance. [Emphasis supplied]. It may be mentioned here that under the said scheme as would appear from sub-section (2) of section 1 that the same was given effect to from 1-4-1994 and initially, was in force only one year from that date and thus, the benefit was then available to the assessee only for that year which is the assessment year we are concerned with. 14A. From the objects and the reasons of the aforesaid scheme as well as the entitlement as indicated in section 3 mentioned above, it is clear That the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the Industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods. The facts and circumstance of the scheme fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of backward area by generating employment therein through encouraging setting up industries in such area. I do not find merit in such argument. Hon'ble Supreme Court in the case of Ponni Sugars Chemical ( Supra) held that determination of character of receipt in the hand of assessee has to be determined with respect to the purpose for which the subsidy is given, in such case purpose test has to be applied. The subsidy granted to the appellant is clearly mentioned in the show cause notice. Every person who wishes to take exemption from the Maharashtra Government has signed MOU. Such letter of intent of both the parties clearly indicates that the thrust of the Maharashtra State Government for granting subsidy is for generation of employment. The specific eligibility condition has been prescribed for that purpose. In this case, the appellant is eligible for subsidy only when the commercial production is started. Giving the employment more than specific numbers for local and other persons is the main condition for receiving the subsidy. This was the main object/purpose of the state government for granting subsidy. If the conditions were not fulfilled the appellant is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manner in which the incentives were given was of no consequence for determination of the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production. In other words, if power was consumed for any other purpose like getting up the plant and machineries, the incentives would not be given. Refund of sales tax would also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. Hence, it was difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or the revenue has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda Joint Water Board 28 TC 262. The amount paid to the assessee in the instant case was in the nature of subsidy from publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds of the State. If any subsidy is given, the character of the subsidy in the hands of the recipient- whether revenue or capital- will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial. For example, if the scheme is that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the revenue to contend that the refund of sales tax paid on raw, materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose was to help the assessee to set up its business or complete a project the monies must be treated as to have been received for capital purpose. Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used wholly and solely for the development of the Unit. The subsidy, in the instant case, was not intended to be a contribution towards capital outlay of the industrial unit. The subsidy was received by the assessee from the Government regularly. It was given with the object of enabling the assessee to carry on its business, although the purpose behind it was to encourage industrialization. Further, the sales-tax liability was a trading liability and to the extent the assessee obtained refund of sales tax, it received a benefit in the course of its business. This benefit was incidental to its business. Thus, in view of the decision of the Andhra Pradesh High Court in CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39, the amount of subsidy received by the assessee was assessable as a revenue receipt. This view of Hon'ble High Court of Calcutta quoted above is also applicable to the appellant's case here. Further, while confirming the revenue stand the Hon'ble High Court of Calcutta noted that as observed by the Andhra Pradesh High Court Vs Sahney Steel press Works Ltd (1985) 152 LTR 39, the amount in question was refunded to the assessee bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme is operative from 1st April, 2001 to 31st March, 2007. The state has declared the new industrial, investment, infrastructure policy 2006 to ensure sustained industrial growth through innovative initiatives for development of key potential sectors and further improving the conductive industrial climate in the State, for providing the global competitive edge to the State s industry. The policy envisages grant of fiscal incentives to achieve higher and sustainable economic growth with emphasis on balanced regional development and employment generation through Greater Private and Public Investment in industrial development. The Package Scheme of Incentives 2007 outlines the eligibility criteria quantum of incentives and monitoring mechanism for administering the incentives. . Further, the assessee has installed a mega project and mega project has been defined in this scheme at 3.2(iii) which reads as under: - (iii) Mega projects: Industrial Projects with investment more than ₹ 500 crores or generating employment for more than 1000 persons in A B area or investment more than 250 crores or generating employment for more than 500 persons in rest of Maharashtra. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .67 Plant Machinery (Including Electricals,) 1719.52 Others 2.81 Total 2389.00 (Rupees twenty three cores eighty nine lacs only) As per Government offer letter dated 29.05.2008 2. Date of start of Commercial Production 01.01.2008 3. Validity period of EC Period for ED Exemption 7 years: from 01.02.2008 to 31.01.2015 4. Date of effect of the EC 01.02.2008 5. Period of Investment From 30.07.2007 to 29.07.2012 7. As per eligible certificate clause 12 (which is given at page 85 of assessee s paper book) the above investment should be incurred within a period from 30-07-2007 to 29-07-2012 and the holder of the certificate i.e. eligibility certificate was to communicate to the director of industries, the value of fixed asset acquired to the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of' local employment falls below 75%, the Entrepreneur shall loose its Mega unit status and excess incentives drawn will be repaid forthwith together with penalty to be calculated at 15%. From the above, it is clear that the assessee has to employ more than 250 persons throughout the year in low human development district i.e. Jalna which is treated as low human development district in PSI 2007. Amongst the aforesaid employees a condition was prescribed to have minimum 75% of employees to be local persons. Thus, according to the learned Counsel the only purpose of subsidy is for the dispersal of industries in low human index developed district and it has nothing to do with subsidizing cost of fixed assets/meeting cost of fixed assets. In order to fixed cost of subsidy, the minimum limit of subsidy is fixed at a certain percentage of fixed assets invested by assessee. Therefore, according to the learned Counsel for the assessee this is capital receipt of subsidy and not Revenue in nature. As regards to the disallowance of depreciation by the AO by invoking explanation 10 to section 43(1) of the Act and reduced amount of subsidy from fixed assets and consequently d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is granted and conditions based on which the subsidy is granted mainly being generation of employment of local persons. We find that this incentive was granted to the assessee under the Package Scheme of Incentive 2007 as notified by Govt. of Maharashtra. The object of this scheme was to encourage the dispersal of industries to the less developed areas of the States and further improving conducive industrial climate in the State for providing global competitive edge to the states Industry. The policy envisage grant of fiscal incentive to achieve higher and sustainable economic growth with emphasis on balance regional development and employment generation through greater private and public investment in industrial development. As per this scheme of industrial projects, mega project has been defined, which is with investment of more than of ₹ 100 crore or generating employment for more than 250 persons coming up in low human development district as mentioned in Annexure-II of scheme qualified as mega project. Further, the mega project claiming the benefit based on employment criteria will have to employ 75% of such employees from local persons throughout the year. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the form of sales-tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area. 5. Thus, it can clearly be seen that a finding has been recorded that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein. In our opinion, in answering the issue, the test as laid down by the Supreme Court in CIT vs. Ponni Sugars Chemicals Ltd. Ors. (2008) 219 CTR (SC) 105 : (2008) 13 DTR (SC) 1 : (2008) 306 ITR 392 (SC) will have to be considered. The Supreme Court has held that the test of the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. The Court further observed that in such cases, what has to be applied is the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. Form of subsidy is material. The Court then proceeded to observe as under: The main eligibility condition in the scheme with which we are concerned in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial promotion Subsidy (Capital Incentive) from Govt. of Maharashtra under PSI-2007 Scheme. The same was claimed to be capital receipt and credited to capital reserve account by the assessee. We find that in the present case, the cost of the asset is incurred and paid by the assessee and not met by the Government in form of subsidy. The method of quantification i.e. the maximum subsidy limit is the only linked with cost of fixed assets. This quantification is for putting cap on maximum amount of subsidy eligibility. This method of quantification does not mean, in any way, that subsidy is given to offset cost of asset. It is very clear from PSI scheme as well as Eligibility certificate that subsidy is given to generate local employment in low human index district and receipt is in not for meeting or subsidizing cost of asset by Govt. 13. As regards to the issue of actual cost of the assets minus subsidy in view of explanation 10 to section 43(1) of the Act, this issue was not taken by Revenue to Hon ble Calcutta High Court in the case of CIT v. Rasoi Ltd. (2011) 335 ITR 438 (Cal), wherein Hon ble High Court has confirmed the Tribunal s order qua the issue of subsidy whether capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that if the subsidy is intended for meeting a portion of the cost of the assets, then such subsidy should be deducted from the actual cost, for the purpose of computing depreciation. As per Hon'ble Supreme Court, law is that if the subsidy is asset-specific, such subsidy goes to reduce the actual cost. If the subsidy is to encourage setting up of the industry, it does not go to reduce the actual cost, even though the amount of subsidy was quantified on the basis of the percentage of the total investment made by the assessee. 7. The law is already settled on the subject. Now, the only wavering is with reference to Explanation 10 provided under sec.43(1). The said Explanation provides that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. It is further, provided thereunder, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and it cannot be reduced from the cost of the fixed assets for computing depreciation. Accordingly, this inter-connected issue of assessee s appeal is allowed. 15. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing advertising and sales promotion expenses on adhoc basis amounting to ₹ 19,42,224. 16. At the outset, the learned Counsel for the assessee drew our attention to the relevant findings of the AO while making disallowance, which reads as under: - 6.4 Since the said Selling Distribution Expenses are not verifiable as to have been incurred for the purpose of business, and also since most of the expenses are made in cash, there is a high probability that the assessee might have debited excessive expenditure in Profit Los account to show lower taxable income. In such circumstances, I feel it appropriate to disallow 20% of the expenditure, worked out at ₹ 97,11,120 820% =19,42,224/-, which is added back to the total income of the assessee. Aggrieved assessee preferred appeal before CIT(A), who sent back the matter back to the file of the AO for verification of facts. Aggrieve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 34,70,647 0.12% Ledger Attached. All supported by bills. Copies of major bills attached. Includes ₹ 7,90,000/- for purchase of Polaad bags for Marketing, ₹ 2,25,750/- for 500 sweet box at Diwali for marketing staff, ₹ 2,26,042/- for staff at nasik (TDS deducted) Other Expenses 2,55,322 0.009% Small expenses, Ledger attached, all supported by vouchers. Printing Exp 2,53,085/- 0.009% Ledger attached, paid by Cheque Travelling Exp (Mkt) 5,60,530/- 0.018% It is only 0.018% of sales, supported by vouchers. Total marketing staff is more than 100. 18. In view of the above details given by the assessee and the fact that the AO has estimated the disallowance on adhoc basis, we are of the view that a reasonable disallowance of ₹ 5 lakhs will meet the end of justice, to which the learned Counsel for the assessee is also agreed. Accordingly, we allow this issue of assessee partly. 19. In the result, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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