IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH ` G', NEW DELHI)
BEFORE SHRI D. MANMOHAN, HON'BLE VICE PRESIDENT
AND SHRI N.K.SAINI, ACCOUNTANT MEMBER
I.T.A. No. 5142/Del/2013
Assessment year : 2009-10
DCIT, Circle 9(1), Vs. M/s. Sutlej Textiles and Industries Ltd.,
New Delhi Pachpahar Road,
Bhawnimandi (Rajasthan)
GIR / PAN:AAJCS1850N
(Appellant) (Respondent)
Appellant by : Shri J. S. Minhas, ACIT DR
Respondent by : Shri Rohit Jain, Adv.
Shri Samhbav Jain, CA
Date of hearing : 03.07.2015
Date of pronouncement : 03.07.2015
ORDER
PER D.MANMOHAN, VP:
This appeal is filed at the instance of Revenue and it pertains to
Assessment Year 2009-10. The only ground urged before us reads as under:
"The Ld. CIT(A) erred in law and on the facts in deleting the
additions made by the A.O. on account of recruitment and training
expense amounting to Rs.15,84,215/-."
2. Facts necessary for the disposal of this appeal are stated in brief. The
assessee company is engaged in the business of manufacture and trading in
yarn and fabrics. On 29.09.2009, the assessee declared a loss of Rs.49.81
crores for the year under consideration. Thereafter, i.e. on 30.03.2011, the
assessee filed revised return declaring loss of Rs.79.56 crores. The revised
2 ITA No.5142/Del/2013
return was admittedly filed u/s 139(5) of the Act. Following subsidies were
received by the assessee under various schemes of Central and State
Governments:
i) 3% Central Interest Subsidy under the Central Interest Subsidy
Scheme, 2002 of Government of India in favour of Kathua unit;
-Rs.3,36,53,526/-.
ii) 2.5% interest subsidy under Rajasthan Investment Promotion
Scheme, 2003 by Rajasthan Government in favour of Bhawanimandi
unit; - Rs.44,64,000/-.
iii) Interest subsidy under Technology Up-gradation Fund Scheme
by Ministry of Textiles, Government of India in favour of all the units
of the company; - Rs.25,90,32,252/-.
3. As noticed from the paper book filed by the assessee, copy of Central
Interest Subsidy Scheme 2002, Rajasthan Government Promotion Scheme
2003, and Technology Upgradation Scheme of Ministry of Textiles were
placed before the A.O., before the completion of assessment proceedings
pursuant to revised return filed on 30.03.2011. Pages 6-10 of the paper book
contain the revised return and annexures. Pages 236-238 of the paper book
refer to detailed written submissions filed before the A.O. (vide letters dated
10.05.2011 and 16.11.2011) wherein the assessee clarified that it had
received interest subsidy under the above schemes which deserve to be
capitalised, by applying the "purpose test" laid down recently by Hon'ble
Supreme Court in the case of Ponni Sugars and Chemicals Ltd. Vs CIT 306
ITR 392 wherein, the Hon'ble Supreme Court observed that the test to
determine the character of receipt has to be with respect to the purpose for
which the subsidy is given; the point of time at which the subsidy is paid,
source thereof and the form of subsidy is not material. The Hon'ble Court
further observed that if the incentive is utilised for repayment of loan taken
3 ITA No.5142/Del/2013
by the assessee to set up new unit or for substantial expansion of the existing
unit, it has to be treated as capital in nature. It was further clarified that only
in cases where the object of subsidy scheme was to enable the assessee to
make the business more profitable the receipt, under those circumstances,
can be treated as revenue in character. On the other hand if the object was to
enable the assessee to set up the unit or for expansion of the unit, any
amount given to such assessee by way of assistance, in this regard, should be
treated as capital in nature without looking into the form and mechanism
through which subsidy is given.
4. It was also submitted before the AO that on 31.01.2011 the Hon'ble
Jammu and Kashmir High Court, in the case of Balaji Alloys Vs CIT 198
Taxman 122, observed that interest subsidy received under the Central
Interest Subsidy Scheme 2002 deserve to be treated as capital in nature in
the hands of recipient.
5. The assessee company furnished details of subsidies received under
various schemes to highlight that the purpose of subsidies was to assist in
setting up of industry / expansion of industrial units and hence it has to be
treated as capital subsidy.
6. The A.O. omitted to consider revised return thus the claim of assessee,
in the revised return, was not considered.
7. Aggrieved, the assessee contended before Ld. CIT(A) that the A.O.
erred in not considering the claim of assessee that the subsidies received are
of capital in nature and further contended that all the details were furnished
before the A.O. and hence he ought to have considered the same on merits.
4 ITA No.5142/Del/2013
8. Ld. CIT(A) observed that the assessee has filed valid revised return
and the A.O. was not justified in ignoring the revised return while
completing the assessment without assigning any valid reasons.
9. On merits, Ld. CIT(A) examined each scheme and the mode of receipt
of amount by the assessee, in the light of ratio laid down in the following
cases:
(a) Sahney Steel and Press Works Ltd. and Others Vs CIT 228
ITR 253 (S.C.)
(b) Ponni Sugars & Chemicals Ltd. Vs CIT 306 ITR 392 (S.C.)
(c) M/s. Shree Balaji Alloys Vs CIT 198 Taxman 122 (J&K H.C.)
(d) CITVs Sham Lal Bansal 200 Taxman 14 (P&H H.C.)
9.1 With regard to interest subsidy, under the Interest Subsidy Scheme
2002, Ld. CIT(A) noticed that the assessee company had received interest
subsidy to the extent of 3% of the working capital advanced by the banks /
financial institutions. The amount of subsidy so received was shown as part
of "miscellaneous income" in Schedule XV. The subsidy was granted for
industrial development in the State of Jammu & Kashmir for creating
employment opportunities. By applying the "purpose test", laid down by
Hon'ble Apex Court in the case of Ponni Sugars & Chemicals Ltd. (supra)
and also in the light of other judgements, which have considered the
schemes, Ld . Commissioner observed that primary consideration of Central
Government in granting incentives was to generate employment through
acceleration of industrial development and thus each incentive can be said to
have been designed to achieve public purpose and therefore, it is not by any
stretch of imagination constitute as production incentive for the benefit of
assessee alone. Therefore, the interest subsidy is in the nature of capital
receipt.
5 ITA No.5142/Del/2013
10. With regard to 2.5% capital investment subsidy, under Rajasthan
Investment Promotion Scheme, 2003, Ld. CIT(A) observed that subsidy was
provided for promoting investment in the State of Rajasthan and was linked
to capital investment/ and hence the scheme was in the larger public interest,
therefore, it constitutes capital receipt and not liable to tax.
11. Similarly, with regard to 5% interest subsidy granted by Ministry of
Textiles, Ld. CIT(A) perused the objects of the scheme while coming to the
conclusion that it was introduced to promote technological upgradation in
the Indian Textile Industry and also noted that the issue is squarely covered
by Punjab & Haryana High Court decision in the case of Shyam Lal (supra)
wherein it was held that such subsidy received under the said scheme is
capital in nature.
12. Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before us.
At the outset, it may be noted that though the Commissioner has
categorically mentioned that the AO was not correct in ignoring the revised
return and could not have proceeded to complete assessment without
adjudicating upon the claim made by the assessee in its revised return, the
Revenue did not challenge this finding.
13. Ld. D.R. merely submitted that the A.O. has not looked into the
schemes. Hence, in the interest of substantial justice, the matter deserves to
be restored to the file of AO for de novo consideration. He further submitted
that the scheme for technological upgradation and other schemes were not
merely meant for the purpose of business and setting up of new business but
also aimed at increasing of employment opportunities etc. which fall under
the capital field.
6 ITA No.5142/Del/2013
14. On the other hand, Ld. Counsel for the assessee invited our attention
to pages 61, 62, 70, 302, 316 and 317 of the paper book to submit that on
identical facts and circumstances, the Hon'ble Courts have taken a view that
"purpose test" is the only relevant test and by applying the same to the facts
and circumstances of this case, Ld. CIT(A) had come to the conclusion that
the subsidy received by the assessee is not assessable to tax since it falls in
the capital field. He thus strongly relied upon the order passed by Ld.
CIT(A).
15. We have carefully gone through the rival submissions and perused the
material placed on record. We have also gone through the claim made by
assessee and the schemes, under which the assessee was enjoying the benefit
of subsidies, to appreciate the purpose for which subsidies were granted. In
our considered opinion, the subsidies received by the assessee fall in the
capital field and Ld. CIT(A) has given exhaustive reasons in coming to the
conclusion that the subsidies are in the capital field and it is not necessary
for us to reiterate the facts in great detail. However, for the sake of
completeness, we extract the relevant observations of Ld. CIT(A) as under:
i) Regarding 3% Central Interest Subsidy:-
"· Interest Subsidy under the Central Interest Subsidy Scheme, 2002:-
The aforesaid subsidy was introduced by the Government of India
vide notification dated 22.10.2002, a copy whereof is placed at pages
55 to 57 of the appellant's paper book. On perusal of the said
notification, it is noticed that the very first para of the said
notification provides that-
"The Government of India is pleased to make the following scheme of
Interest Subsidy on Working Capital Loans for industrial units in the
state of Jammu & Kashmir with a view to accelerating the industrial
development in the state".
7 ITA No.5142/Del/2013
It is also noticed that subsequently another notification dated 28th
November, 2003 was issued, a copy whereof is placed at page 59 of
the appellant's paper book. The said notification makes it very clear
that the purpose of the subsidy being granted was creation
of employment opportunities in the State of Jammu & Kashmir. The
relevant extracts of the said notification are as under:
"No.1 (111)/20 I2-NER -In pursuance of the announcement by the
Prime Minister on 19th April, 2003 at Srinagar for creation of one
lakh employment and self employment opportunities in Jammu &
Kashmir, the Government of India had set up a Task Force under
Cabinet Secretary. The recommendations of Task Force were
submitted to the Cabinet. To achieve this object of employment
generation, the Cabinet has, inter alia, approved following definition
of the term 'substantial expansion' for the purpose of incentives/
subsidies notified as per OM No.1 (13)/2000-NER dated 14.06.2002.
2. The Central Government, therefore, hereby makes amendment in
the Central Interest Subsidy Scheme, 2002 notified in the notification
of the Government of India in the Ministry of Commerce & Industry,
Department of Industrial Policy & Promotion No.1 (11)/2002-NR
dated 22nd October, 2002. The definition of the term 'Substantial
Expansion' appearing under para 5(d) of the Scheme may be
substituted by the following:
"Concessions for substantial expansion should extend to include all
new investments by entrepreneurs, which leads to substantial
additional employment creation by an existing entrepreneur without
insisting on major expansion. 1-However, credit under the Industrial
Policy Package should not be merely for paying off old debts or for
equipment already in place. "
It is pursuant to the aforesaid notifications, that the appellant had
received interest subsidy to the extent of 3% on the working capital
advanced by the banks/financial institutions. The amount of subsidy so
received is also noticed to have been shown as part of "miscellaneous
income" in schedule 15 "other income" of the audited accounts. These
facts, in my considered view, clearly lead to the conclusion that the
subsidy was granted for industrial development in the State of Jammu
8 ITA No.5142/Del/2013
& Kashmir and for creating employment opportunities. Thus,
applying the purpose test laid down by the Supreme Court in the case
of Ponni Sugar, as elaborately discussed in detail in earlier paras, the
subsidy received by the appellant is in the nature of capital receipt
and not revenue receipt.
The aforesaid view is also supported by the decision of the Jammu &
Kashmir High Court in the case of Shree Balaji Alloys (referred
above) which has been relied upon by the AIR of the appellant. In that
case, too, the High Court considered the taxability of subsidy amount
for setting up units in the State of Jammu & Kashmir. The assessee in
that case relied upon Office Memorandum dated 14th June, 2002,
Notification dated 28th November, 2003 (as referred in the present
case) and the two other notifications referred for exemption from
payment of excise duty. Based on these notifications, the assessee
claimed that excise refund and interest subsidy was in the nature of
capital receipt not liable to tax. The Tribunal however, did not agree
with the claim of the assessee and held that excise refund and interest
subsidy were in the nature of revenue receipts. While, setting aside the
decision of the Tribunal and upholding the claim of the assessee, the
High Court held that excise refund and interest subsidy were capital
receipt not liable to tax. Some of the relevant observations of the High
Court are reproduced as under:
"..........
22. Perusal of the Office Memorandum dated 14-6-2002 indicating
New Industrial Policy and other concessions for the State of Jammu
and Kashmir, makes it explicit that the concessions were issued to
achieve twin objects viz., (i) Acceleration of industrial development in
the State of Jammu and Kashmir, which had been found lagging
behind in such development and (ii) Generation of employment in the
State of Jammu and Kashmir.
Amendment introduced to the Office Memorandum vide
Notification of 28- 11-2003 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 Hon'ble the Prime Minister at Srinagar on 19-4-
2003, was, for creation of one lakh employment and self-
employment opportunities in Jammu and Kashmir State.
9 ITA No.5142/Del/2013
23. To achieve the purpose and objective referred to herein above, 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 Jurisdictional Deputy Commissioner of
the Central Excise or the Assistant Commissioner of Central Excise,
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.
24. A close reading the Office Memorandum and the amendment
introduced thereto with para No.3 appearing in the Central Excise
Notification Nos. 56 and 57 of 11-11-2002, thus, 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 and Kashmir and the generation of employment, so
contemplated, was not only casual or temporary; but was on the other
hand, of permanent nature.
25. 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.
26. 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 and 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
10 ITA No.5142/Del/2013
construed as production or operational incentives for the benefit of
asses sees alone.
27. 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 appellants-
assessees, cannot be construed as mere Production and Trade
Incentives, as held by the Tribunal.
28. 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.
29. The other factors, which had weighed with the Tribunal-in
determining the incentives as Production Incentives may not be
decisive to determine the character of the incentive subsidies, when it
is found, as demonstrated in the
Office Memorandum, amendment introduced thereto and the statutory
notification too that the incentives were provided with the object of
creating avenues for Perpetual Employment, to eradicate the social
problem of unemployment in the State by accelerated industrial
development.
30. For all what has been said above, the finding of the Tribunal on
the first issue that the Excise Duty Refund, Interest Subsidy and
Insurance Subsidy were Production Incentives, hence revenue
Receipt, cannot be sustained, being against the law laid down by
Hon'ble Supreme Court of India in Sahney Steel & Press Works Ltd.'s
case (supra) and Ponni Sugars & Chemicals Ltd. 's case (supra).
11 ITA No.5142/Del/2013
31. 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.
The claim of the appellant in the present case that interest subsidy is
in the nature of capital receipt by applying purpose test is thus fully
supported and covered by the aforesaid decision of the Jammu &
Kashmir High Court. Therefore, interest subsidy (of Rs.3,36,53,526)
is held to be in the nature of capital receipt."
(ii) Regarding 2.5% Interest subsidy under Rajasthan Investment
Promotion Scheme, 2003:
"On perusal of the records, it is further noticed that interest subsidy
under the aforesaid Rajasthan Investment Promotion Scheme was also
shown as part of other income in the Schedule 15 of the audited
accounts. These facts, in my view, leads to the conclusion that since
the subsidy was provided for promoting investment in the state of
Rajasthan and was linked to capital investment/additional wages
being provided, the same was granted in larger public interests and
hence constitute capital receipt not liable to tax. Accordingly, it is
held that subsidy of Rs.44,64,000/- received under the above unit was
not liable to tax.
(iii) Regarding 5% interest subsidy (TUFS) by Government of India :-
"On perusal of the aforesaid, it is clear that the TUF scheme
was introduced by the Government recognizing the potential of the
textile industry and the larger benefits of technological upgradation in
the textile industry, which was necessary to provide a fresh lease of
life to the said industry. The Government recognized that
technological upgradation in textile industry would result in capacity
expansion and modernization, which would have direct impact on
employment generation, exports and globalization of textile trade. In
order achieve such objective, TUF scheme was introduced by the
Government to provide interest subsidy on loan taken for
technological upgradation by the units in the textile industry.
12 ITA No.5142/Del/2013
In terms of the said scheme, the appellant received interest
subsidy of Rs.25,90,32,252 in respect of various units as per details
placed at page 200 of the paper book. The interest subsidy so received
was shown as net of interest on term loans paid by the appellant as is
evident from Note No.18 given in schedule 22 of the Notes on
Accounts forming part of the balance sheet of the appellant for the
relevant assessment year.
The aforesaid facts, in my view, make it clear that subsidy
under the TUF scheme was given for technological upgradation, in
order to incentive-wise the textile industry and for promoting capacity
expansion, globalization of textile trade and employment generation.
Thus, applying the purpose test laid down in Ponni Sugar, such
subsidy is held to be in the nature of capital receipt.
It is noticed that the aforesaid issue is also clearly covered by
the Punjab & Haryana High Court in the case of Shamlal Bansal
relied upon by the AIR of the appellant, a copy whereof has been
placed at pages 222 -223 of the paper book. On perusal of the said
decision, it is noticed that the Punjab & Haryana High Court held
that subsidy received under the TUF scheme is in the nature of capital
receipt."
16. We are in agreement with the findings and conclusion reached by Ld.
CIT(A) . We therefore, affirm the order of Ld. CIT(A) and dismiss the
appeal filed by Revenue.
17. Order pronounced in the open court on 03rd July 2015.
Sd./- Sd./-
(N. K. SAINI) (D. MANMOHAN)
ACCOUNTANT MEMBER VICE PRESIDENT
Date: 03rd July, 2015
Sp
13 ITA No.5142/Del/2013
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi.
True copy.
By Order
(ITAT, New Delhi).
S.No. Details Date Initials Designation
1 Draft dictated on 3/7 Sr. PS/PS
2 Draft placed before author 3/7 Sr. PS/PS
Draft proposed & placed before the
3 JM/AM
Second Member
Draft discussed/approved by Second
4 AM/AM
Member
5 Approved Draft comes to the Sr. PS/PS 3/7/15 Sr. PS/PS
6 Kept for pronouncement 3/7 Sr. PS/PS
7 File sent to Bench Clerk 3/7 Sr. PS/PS
Date on which the file goes to Head
8
Clerk
9 Date on which file goes to A.R.
10 Date of Dispatch of order
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