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TMI Blog2025 (4) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... 05.04.2023 Circle LTU-2, Delhi, date: 30.12.2019 143(3) 1372/Del/2023 2017-18 - Do - Do - - Do - - Do - 1373/Del/2023 2018-19 - Do NFAC/2017-18/10088931, dated 15.03.2023 National Faceless Asstt. Centre, Delhi, dated 30.09.2021 143(3) r.w.s. 144B 1706/Del/2023 2019-20 - Do- NFAC/2018- 19/10133148, Dated, 05.04.2023 National Faceless Asstt. Centre, Delhi, dated 31.03.2022 - Do - 1374/Del/2023 2019-20 - Do- - Do - - Do - - Do - 2. As the grounds in these appeals arise out of similar disallowances the appeals were heard together and are decided together. The assessee is a company engaged in the business of manufacturing of polyester chips, Biaxially Oriented Polyester Film, Biaxially Oriented Poly Propylene Film, Metalised Film and PVDC Film. In the respective years covered by the appeals, certain disallowances were made by the ld. AO in regard to which the assessee had succeeded in some of the issues before the ld.CIT(A). Accordingly, the appeals from both the sides are before this Tribunal. Ld. Counsel of assessee has stated at bar that juridicication and legal grounds are not pressed. On the basis of the rival submissions, we find that the grounds in these a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red shall be picked up from assessment year 2017-18. In the impugned assessment, the ld. AO has mentioned that the assessee did not establish the nature of services obtained by way of relevant evidences. It was also concluded that the payments for services should have been booked on the basis of actual services received and backed by the invoices. The allegation of the AO is that Soyuz is a Calcutta based company and has received major fees from the assessee and there is absence of nexus of the expenditure made by the assessee against the so-called services received from Soyuz. 5.1 The case of the assessee is that in order to strengthen its business capabilities the assessee is availing management/consultancy services from Soyuz covering wide spectrum of operational/administrative areas including production, planning, procurement, project/capital-cum-expansion, quality improvement, marketing research, marketing and sales promotion(domestic and export), financing, auditing, recruitments and training, legal services and information technology services. It is claimed that these services are being availed since financial year 2002-03. It is also the case of the assessee that on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciple of consistency alone the disallowance made by the AO is unwarranted and was liable to be quashed by the Ld. CIT(A). The nature of services and the terms of agreement and the nature of trade of the assessee have not changed over the years. It appears that agreements are entered for short period, but, otherwise there is no change in the terms and conditions for provision of services except the compensation part. 11. Further, after going through the impugned orders, it is apparent that the ld. tax authorities have not examined the services rendered by the Soyuz individually and on a very wholesome manner have concluded that the assessee did not require these services. We are of the considered view that when expenditure is being examined on the basis of the business expediency, then, without pointing out specific instances of deficiency or discrepancy in the working, operations and financials of the company, such a disallowance is not sustainable. More importantly when otherwise the expenditure has been accepted in previous years and even subsequently. 12. In this context, we also find force in the contention of the ld. counsel that elaborate factual details as called by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious supplies 24.18 Crore Negotiated contract with the (potential) suppliers Negotiated additional discount vis-à-vis discount availed in previous year Discount @ 20% + 10% quantity discount + 750/MT Services in relation to Sales and marketing Introduction of new customers 7.9 Crore The service provider identified new customer for export of films (quantity 3147 MT) Services in relation to purchase of capital equipment/ project implementation Benefit due to reduction in cost of capital goods 18.98 Crore Service provide negotiated with various suppliers by procurement of capital goods at cheapest rates Services in relation to purchase of capital equipment/ project implementation Benefit due to set up of demetalizing plant 6.7 Crore Service provide was involved in implantation of the dematalizing project Services in relation to purchase of capital equipment/project implementation Benefits due to reduction in production of nonreusable waste 5.4 Crore The service provide advised the service recipient for implementation of grinder cutterd 15. Further, it may be appreciated that the turnover of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956 subject to certain adjustments. For the relevant previous year, the audited financial statements were prepared in accordance with Indian Accounting Standards (in short Ind-AS) as notified by the Ministry of Corporate Affairs pursuant to section 133 of the Companies Act, 2013. The appellant, in its books of accounts, recognized subsidy aggregating to Rs. 55.77 crores as 'Deferred Government Grants' in 'Non-current Liabilities' and amortized/ recognized the same in the statement of profit and loss on straight line method. Accordingly, out of the total amount of Rs. 55.77 crores, an amount of Rs. 2.78 crores (Rs.2,78,04,611) was amortized and recognized as income in the financial statements. For tax purposes, the appellant followed a consistent practice of offering for tax the amount as recognized as income in the financial statements and/ or actual receipt of subsidy, whichever is earlier, in accordance with the amended provisions of 2(24) of the Act read with Income Computation and Disclosure Standard- VII (ICDS-VII) issued by the CBDT. 19. In this context the ld. Counsel in written submission has stated the provision of law and we consider it necessary to reproduce the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate." (emphasis supplied) The provisions of the Act recognize government grant (and its variants) as income under section 2(24)(xviii) except for grants in relation to depreciable assets (which are reduced from actual cost). There are no explicit provisions in the Act which pinpoint the year in which such treatment should be given. Although, section 43(1) mandates reduction of grant from cost of asset in the year of acquisition, there is no guidance available in the Act as to when government grants are to be recognized as income. Having regard to above, since the provisions relating to taxation of government grants were not aligned with the provisions of the Act, amendment to section 2(24)(xviii) of the Act was made in order to align the provisions of ICDS-VII with the provisions of the Act vide Circular No. 19/2015 dated 27.11.2015 through Explanatory Notes to provisions of Finance Act, 2015. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 5th May, 2015, the amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him. 5.3 Applicability:- This amendment takes effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years." (emphasis supplied)" In line with the aforesaid amendment, the legislature also inserted section 145B of the Act vide Finance Act, 2018 (w.r.e.f. 01.04.2017) which provided that income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. The said section reads as under: "Definitions. 2. In this Act, unless the context otherwise requires,- ........... (24) "income" includes - ........... (xviii) assistance in the form of a subsidy or the grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the investment made does not result in crystallization of the same as an accrued amount to be taxed as income. Moreover, mere recognition of the amount in the financial statements also does not result in crystallization of claim/ amount as 'income'. 23. Now what is material is that PSI was linked to fixed capital investment and the payment of the relevant taxes for a tenure of 7 years. Moreover, receipt of any amount as subsidy from the government was subject to and hedged by various conditions, including but not limited to continued compliance of all terms and conditions stipulated in the Scheme/Eligibility Certificate, furnishing of required documents, payment of relevant taxes, filing of application for making a claim, processing of the claim of the appellant, verification of claim followed by its acceptance, either wholly or in part, by the government, which was then followed by the receipt of the amount. Ld. Counsel has established that in terms of the aforesaid PSI read with the eligibility certificate, the appellant is entitled to industrial promotion subsidy to the extent of lower of either: (i) fixed capital investment made; or (ii) relevant taxes (i.e., VAT/CST) pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities post issuance of provisional sanction, which is followed by its disbursement. Therefore, the subsidy amount crystallizes and actually accrues as 'income' in favour of the appellant only on the happening of the said events and not prior thereto. Thus, it is not a situation where the appellant is guaranteed or even for that matter assured that subsidy applied for, will in effect be automatically sanctioned/received by the appellant despite having an operational Eligibility Certificate since the monitoring agency is empowered to cancel the Eligibility Certificate, or direct recovery of the incentives drawn / availed in the instance any of the stipulated conditions of the Eligibility Certificate issued under the Scheme stands violated by the appellant. 26. As a matter of fact, provisional sanction letter in respect of subsidy receivable during the relevant assessment year 2017-18 was received by the assessee only in AY 2018-19 vide sanction letter dated 23.10.2017 that too only for part of the amount claimed and which too was subject to submission of further documentation by the assessee which was to be verified by the concerned authorities. On verification of the documents sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come can be said to accrue when the assessee acquires vested right to receive the amount, on fulfilment of condition of scheme to the satisfaction of competent government. 29. Even otherwise, it is undisputed that the appellant has ultimately offered the entire amount of subsidy to tax in the subsequent assessment year(s) 2019- 20 and 2020-21. Thus, the only academic issue which remains is with respect to the year of taxability of such income, which, it is submitted, is merely a timing difference. Since the appellant is a company, assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of taxability of such income is, in any case, revenue neutral. Accordingly, even on this ground, the assessing officer has erred in bringing to tax the aforesaid amount of subsidy, disregarding the regular and consistent method of accounting followed thereafter. 30. Lastly the aforesaid method of recognition of subsidy in accordance with the provisions of the Act and ICDS has been duly accepted by the assessing officer in the succeeding assessment year(s) 2020-21. Copy of the assessment order passed under section 143(3) for AY 2020-21 dated 29.09.2022 is placed at pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had failed to furnish details of loan taken, purchase agreement, etc., and no corresponding adjustment was made to the value of fixed assets on account of change in rate of exchange. In appeal, the ld.CIT(A) has directed the AO to verify necessary documentary evidence in support of loans availed for purchase of fixed assets and necessary adjustments to block and thereafter, allow reduction of such foreign exchange fluctuation gains. The case of the assessee is that as the foreign currency fluctuation gain was purely on capital account being related to fixed assets, the said gains were reduced from the income of the assessee for the purpose of computing taxable income. The ld. AR has pointed out that the AO has in appeal giving effect order dated 21.02.2024, deleted the addition after due verification. Thus, this ground becomes superfluous and, accordingly, determined against the Department. 35. Issue No.5: The issue arises out of ground raised by the Department in AY 2017-18 and we find that in the impugned assessment order, the AO disallowed 10% of the following expenses:- S.No. Expenditure Amount claimed as expenditure (Rs. in lacs) 10% Amount disallowed by assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X
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