Interest and power subsidy to set up plant in backward region is Capital receipt or Revenue receipt?
IN THE CALCUTTA HIGH COURT
I. P. MUKERJI & MD. NIZAMUDDIN, JJ.
Pr. CIT v. Ankit Metal and Power Ltd.
ITA No. 155 of 2018
9 July, 2019
Appellant by: P.K. Bhowmick, Advocate & D. Ghorai, Advocate
Respondent by: J.P. Khaitan, Sr. Advocate, Saumya Kejriwal, Advocate and G.S. Gupta, Advocate
Md. Nizamuddin, J.
Heard both sides.
The aforesaid appeal of the revenue relating to assessment years 210-11 arises out of the impugned Order, dated 6-9-2017 passed by the learned Income Tax Tribunal. Substantial questions of law involve in the instant Appeal may be simply reformulated as follows :–
(i) Whether on the facts and in the circumstances of the case the learned Tribunal has erred in law in allowing the claim of the assessee to treat the incentives received by it on account of ‘Interest subsidy’ under West Bengal Incentive Schemes, 2000′ and ‘Powers subsidy’ under West Bengal Incentive to Power Intensive Industries Scheme, 2005 as capital receipt and not revenue receipt in relevant assessment year 2010-11 and not to include the aforesaid receipts in Book Profit under section 115 JB of the Income Tax Act, 1961 ?.
(ii) Whether on the facts and in the circumstances of the case the learned Tribunal erre0d in law in accepting the claim of deduction by the assessee towards ‘Interest subsidy’ and ‘Power subsidy’ under the aforesaid schemes by filing revised computation instead of revised return before the assessing officer for exclusion of the aforesaid receipts from the book profit under section 115 JB on the ground that the said subsidies do not constitute income under section 2(24) of the Income Tax Act, 1961 ?.
The relevant facts as emerge on perusal of record, in brief for, the purpose of adjudication on the issues involved in the instant appeal are hereunder.
The assessee company is a Public Limited Company registered under the Companies Act, 1956. It is engaged in the manufacturing of Sponge Iron; Ingots & Billets, Steel Items and Ferro Alloys. It also has a captive power generating plant. For the Asst Year 2010-11, the assessee company filed its Return of Income on 12-10-2010 disclosing “NIL” income as per the normal computation and Rs. 17,69,51,366 as Book Profit under MAT i.e. under section 115JB of the Act. Subsequently, during the course of assessment proceedings, the assessee company filed Revised Computation of its income under normal provisions as well as under section 115JB of the Act, on 22-11-2012. The same computation was filed again on 10-12-2012. The assessee company had revised the computation of income mainly, in order to claim deduction of Capital Receipts being ‘Interest Subsidy’ and ‘Power Subsidy’ amounting to Rs. 4,52,33,330 and Rs. 4,81,63,439.
The assessee had filed original return of income treating the interest subsidy as revenue receipt but during the assessment proceedings the assessee had rectified its mistake and claimed the aforesaid subsidies as capital receipt by filing a Revised Computation of Income since the time limit for filing Revised Return had lapsed. The assessing officer however treated the interest subsidy and power subsidy as a revenue receipt and brought the same to tax. The assessee treated the Interest Subsidy of Rs. 4,52,33,330 and Power Subsidy of Rs. 4,81,63,649 as Capital Receipt in the revised computation filed before the assessing officer during the course of assessment proceedings.
The assessee had made investment in Sponge Iron Plant and Mega Project (Induction manufacturing units Sponge Iron, Power, Billet) which made the assessee eligible for subsidy under the Scheme taken out by the Government of West Bengal, commerce & Industries Department for making capital investments in backward area, namely, ‘Bankura’.
The West Bengal Incentive Scheme, 2000 was expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas which are industrially backward. To promote industrialization, the Government offered various incentives/subsidies including ‘State Capital Subsidy’ and ‘Interest subsidy’ when a ‘unit’ was set up in any area specified in Group C i.e. backward area as defined under the Scheme. At page 9 Para No. 7 of the Scheme, the areas of West Bengal have been segregated into ‘Development Areas and Backward Areas’ by grouping them into three Groups A, B & C. Maximum Benefits in the form of Subsidy has been given to areas under ‘Group C’. The assessee had received both the subsidies for setting up industry in ‘Bankura’, which falls under ‘Group C’ i.e. backward area. The aforesaid subsidies were not in the nature of general assistance to the assessee to carry on his business or trade more profitable but were for industrial development which clearly falls under the category of fixed capital incentive. The assessee received an eligibility Certificate from the Government of West Bengal wherein it received approval for Interest Subsidy.
The object of the West Bengal Incentive Scheme, 2000 would be apparent from the following extracts :–
“West Bengal Incentive Scheme 1999 Scheme had an attractive provision of Sales Tax related by way of “remission” of “deferment”. But in pursuance of the National Policy, the State Govt. had to discontinue the Sales Tax related Incentives from 1-1-2000. However, as there is a strong need for fiscal support for the promotion of industry in the State, the State Government decided to introduce the West Bengal incentive Scheme, 2000, with different and new features, quite attractive for industries in large medium, small scale and tourism sectors.”
“4. Applicability of the 2000-Scheme :–
The 2000 Scheme shall generally be applicable to all large, medium, cottage and small scale projects and to large/medium sector tourism units to be set up and also to expansion projects of existing units on or after the 1-1-2000. The units may be in the private sector, co-operative sector, joint sector as also companies/undertakings owned or managed by the State Government.” It would thus be seen that the purpose/object of the West Bengal Incentive Scheme, 2000 was to encourage the setting up of new industrial units and expansion of existing industrial units. The receipt of interest subsidy was clearly on capital account.
Similar is the position with regard to the West Bengal Incentive to Power Intensive Industries Scheme, 2005 as would be apparent from the following extracts:-.
“And whereas, there has been robust growth and resurgence in the industrial scenario/investment in the State and the State Government is desirous of continuing all efforts to attract entrepreneurs for setting up industries in the State, especially in the backward areas,”
“And whereas the State Government has decided to provide incentives to power intensive industries to new and expanding industries in certain designated areas by way of reimbursement of part of the net energy charges for a certain period by the State government as per details formulated in Part B of the Scheme”.
The learned Tribunal on consideration of factual and legal position and scope of the schemes in question, has held the ‘interest subsidy’ and ‘power subsides’ as capital receipts and also held that the same would be excluded while computing ‘Book profit’ under section 115JB of the Income Tax Act, 1961.
Aggrieved by the aforesaid order of the Tribunal, revenue has preferred this appeal.
Mr. Bhowmick learned Advocate appearing for the revenue/appellant attacking the impugned order of the learned Tribunal on the issues of treating the aforesaid ‘interest subsidy’ and ‘power subsidy’ received by the assessee from the State Government under ‘West Bengal Subsidy Scheme, 2000 and West Bengal Incentive to power Intensive Scheme, 2005, has made mainly three fold submission. Firstly Mr. Bhowmick contended that the aforesaid State capital investment subsidy is for assisting the assessee in carrying out business and not to set up an industry and should be treated as revenue receipt and in support of his contention on this issue, has relied upon the decision in the case of Sahney Steel and Press Works Ltd. v. CIT, (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC). Secondly, Mr. Bhowmick contended that since the aforesaid subsidies received by the assessee from the West Bengal Government are revenue receipts these receipts should be included while computing ‘Book Profit’ under section 115JB of the Income Tax Act, 1961 and he supported the order and reasoning of the assessing officer and in support of his contention he relied upon the decision in the case of Appollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC).
Thirdly, Mr. Bhowmik contended that the learned Tribunal should not have allowed the aforesaid claim of deduction on account of incentive subsidies in question by way of revised computation instead of filing a revised return under section 139(5) of the Income Tax Act, 1961 and in support of his contention he has relied upon the decision in the case of Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC) : 2006 TaxPub(DT) 1528 (SC).
Mr. Khaitan learned Senior Advocate, appearing for the respondent assessee supported the order of the learned Tribunal on the aforesaid issues and in reply to the submission of Mr. Bhowmick contended as follows.
Mr. Khaitan submits that on perusal of the purpose/object of granting the aforesaid ‘interest subsidy’ and ‘power subsidy’ under the schemes in question of the Government of West Bengal, it would appear that these incentive subsidies were for encouraging setting up of new industrial units or expansion of existing industrial units and are capital receipts and in support of his contention he relied upon the following decisions :–
(i) CIT v. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC).
(ii) CIT v. Shree Balaji Alloys, (2017) 80 taxmann.com 239 (SC) : 2016 TaxPub(DT) 3528 (SC) affirming Shree Balaji Alloys v. CIT & Anr., (2011) 333 ITR 335 (J&H).
(iii) CIT v. Chaphalkar Brothers, (2018) 400 ITR 279 (SC) : 2017 TaxPub(DT) 5218 (SC).
(iv) CIT v. Rasoi Ltd., (2011) 335 ITR 438 (Cal.) : 2012 TaxPub(DT) 715 (Cal-HC).
(v) Pr. CIT v. Shyam Steel Industries Ltd., (2018) 93 taxmann.com 495 (Cal) : 2018 TaxPub(DT) 2552 (Cal-HC).
(vi) CIT v. Keventer Agro Ltd., (2019) 416 ITR 482 (Cal) : 2018 TaxPub(DT) 4049 (Cal-HC)
(vii) CIT v. Gloster Jute Mills Ltd., (2018) 96 taxmann.com 303 (Cal) : 2018 TaxPub(DT) 5370 (Cal-HC)..
Mr. Khaitan further contends that the aforesaid subsidies received by the assessee from the Government of West Bengal under the schemes in question are not an income and are capital receipts and should not be treated as revenue receipts and should not be included for computation under section 115 JB of the Income Tax Act, 1961 in relevant assessment year 2010-11.
He submits that the term ‘subsidy’ was included in the definition of ‘income’ under section 2(24) of the Income Tax Act, 1961 for the first time by insertion of sub-clause (xviii) by the Finance Act, 2015 with effect from 1-4-2016 i.e. Assessment year 2016-17 and is prospective in nature. In paragraph 5.3 of Circular No. 19, dated 27-11-2015 containing explanatory notes to the provisions of the Finance Act, 2015, it is stated that the said amendment takes effect from 1-4-2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years ((2015) 379 ITR (St.) 19 at 35, 36). The assessment year involved herein is 2010-11 which is before the amendment in question under section 2(24)of the Income Tax Act, 1961. Having regard to the decisions holding the field, subsidy received on capital account was not ‘income’ within the meaning of the Act at least till the assessment year 2015-16.
He submits that the revenue has not challenged before this Hon’ble Court the finding of the Tribunal that the interest and power subsidies are capital receipts and are not income liable for tax under the normal computation provisions. Once it is accepted that the said subsidies are not income within the meaning of section 2(24) of the Act, the same cannot also form part of the total income or be subjected to tax under section 115JB of the Act.
He submits that the subject matter of taxation under the Act is “income”. The charging section 4 of the Act provides for levy of tax in respect of “Total income”. “Total income” is defined in section 2(45) of the Act to mean “the total amount of income referred to in section 5, computed in the manner laid down in this Act”. The material portion of section 5 reads as under :–
“5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes, all income from whatever source derived which.”
Thus, the “total income” in the relevant assessment year 2010-11consists of all items of “income” as defined in clause (24) of section 2 of the Act, 1961.
He submits that what can be taxed under section 115JB of the Act is the “total income” which is income as defined in section 2(24) of the Act and subsidy is outside the purview of the Act in relevant assessment year and cannot form subject matter of the charge of tax under section 4; cannot form part of “total income” and cannot be subjected to tax either under the normal computation provisions or under section 115JB of the Act, in relevant assessment year. The absence of provision in section 115JB of the Act for exclusion of such capital receipt credited to the profit and loss account cannot result in its taxation. On the issue of entertaining of claim of deduction by the Tribunal without filing the revised return before the assessing officer under section 139(5) of the Act, he submitted that issue stands covered in favour of assessee by the judgment of this Court in case of CIT v. Britannia Industries Ltd. reported in (2017) 396 ITR 677 (Cal) : 2017 TaxPub(DT) 1900 (Cal-HC) We have heard both sides at length on the issues involved in the instant appeal, considered their submission and perused the relevant record. The first issue which requires adjudication is whether incentives ‘Interest subsidy’ and ‘Power subsidy’ received by the assessee under the schemes in question are capital receipt not liable to the taxed or ‘Revenue receipt’ and is liable to be taxed and the key question which arises for determination of this issue is what is the character of the incentive subsidies under the said schemes in question and in judging the character of incentives, the “purpose test” is a great factor. On this issue decision in the case of Sahney Steel and Press Works Ltd. v. CIT reported in (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC) relied upon by the revenue is a leading decision on the test or determining the nature and character of a subsidy under any scheme as to when it is to be treated as ‘capital receipt’ or ‘revenue receipt’ in the hands of the assessee and considering this decision of Sahney Steel (supra) another leading decision on this proposition of law is CIT v. Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC). Law laid down in these two decisions have been uniformly followed in series of decisions of the Hon’ble Supreme Court, our High Court and other High Courts which assessee has relied as referred above on this issue. The following paragraph of the judgment delivered by the Hon’ble Supreme Court in Ponni Sugars and Chemicals Limited case (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC) reads thus (page 400) :–
“The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that 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. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. It the object of the subsidy scheme was to enable the assessee to run the business more profitable 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.
Therefore, it is the object for which the subsidy assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant.”
A perusal of the judgments in Sahney Steel (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC) and Ponni Sugars (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC) therefore, reveals that the Apex Court had applied the above quoted dictum to determine the purpose, which the two schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases.
It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC) was held to be revenue receipt whereas the subsidy in Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC) was held as capital receipt.”
On a careful look into these decisions it appears that the law is settled that the nature of incentives/subsidies granted by the Government under any Scheme to any enterprise would totally depend upon the salient features of the said Scheme.
The purpose for which the incentive/subsidy is given under the Scheme is the determining factor to lay down the nature of the incentive/subsidy. If an incentive/subsidy is given as a general assistance to the assessee to carry on his business or trade, it would be an operational incentive and thus a trading receipt in the hands of the assessee. However if the object of the subsidy, irrespective of its source, is to enable the assessee to acquire new plant and machinery or for further expansion of its manufacturing capacity or for setting up a new unit, the entire subsidy must be held to be a capital receipt. The incentives/subsidies, depending upon the purpose for which they are granted, fall under two categories namely :–
(i) Operational incentives/subsidies which are given to the assessee to carry on his business or trade and;
(ii) Fixed capital incentives/subsidies which are given to the assessee to set up a new unit or to expand its existing unit.
On perusal of the contents of the relevant portion under the incentive subsidy schemes in question we found that in the case of the assessee, the State Government under the West Bengal Incentive Scheme, 2000, and ‘West Bengal Incentive to Power Intensive Industries Scheme, 2005’, had actually granted the subsidy with the sole intention of setting up new industry and attracting private investment in the state of West Bengal in the specified areas in the present case Bankura which is industrially backward hence the same was of the nature of non-taxable Capital receipt. Thus according to the ‘purpose test’ laid out by the Hon’ble Supreme Court, various and High Courts including our Court the aforesaid subsidy should be treated as capital receipt in spite of the fact that computation of ‘Power subsidy’ is based on the power consumed by the assessee. It is well established from submission of the assessee as enunciated above that once the purpose of a subsidy is established; the mode of computation is not relevant as held in the decisions of the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC); CIT v. Ponni sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC) and the decision of our High Court in case of CIT v. Rasoi Ltd. (2011) 335 ITR 438 (Cal.) : 2012 TaxPub(DT) 715 (Cal-HC) against which SLP has been dismissed. The mode of computation/form of subsidy is irrelevant. The mode of giving incentive is re-imbursement of energy charges. The nature of subsidy depends on the purpose for which it is given. Hence the assessee draws support from the decisions already discussed earlier as the same principle will apply here. Thus, the entire reason behind receiving the subsidy is setting up of plant in the backward region of West Bengal, namely, Bankura.
Accordingly we hold the aforesaid incentive subsidies are ‘capital receipts’ and is not an ‘income’ liable to be taxed in relevant assessment year 2010-11 on the basis of discussion made above and further taking into consideration the definition of Income under section 2(24) of the Income Tax Act, 1961, where sub-clause (xviii) has been inserted including ‘subsidy’ for the first time by Finance Act, 2015 with effect from April, 2016 i.e. assessment year 2016-17. The amendment has prospective effect and had no effect on the law on the subject discussed above applicable to the subject assessment years.
Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under section 115 JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of Appollo Tyres Ltd. v. CIT reported in (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC).
In this case since we have already held that in relevant assessment year 2010-11 the incentives ‘Interest subsidy’ and ‘Power subsidy’ is a ‘capital receipt’ and does not fall within the definition of ‘Income’ under section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under section 115JB of the Act, 1961. In the case of Appollo Tyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under section 115 JB of the Income Tax Act, 1961.
The third issue involve in the instant appeal which requires adjudication is whether the action of Tribunal entertaining/allowing the claim which was made by the assessee before the assessing officer by filing a revised computation instead of filing a revised return since the time to file the revised return was lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead of revenue receipts as claimed in original return. The assessing officer had denied this claim. Revenue has attacked the order of the tribunal by relying on the decision in the case of Goetze (India) Ltd. v. CIT reported in (2006) 284 ITR 323 (SC) : 2006 TaxPub(DT) 1528 (SC).
This case does not help the revenue/appellant. In this case Supreme Court has made it clear that its decision was restricted to the power of the Assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power of the Appellate Tribunal under section 254 of the Income Tax Act, 1961. The Hon’ble Supreme Court in the said decision held as follows :–
“……….In the circumstances of the case, we dismiss the Civil Appeal. However, we make it clear that the issue in this case is limited to the power of the Assessing Authority and does not impinge on the power of the Income Tax Appellate Tribunal under section 254 of the Income Tax Act, 1961.”
This judgment was followed by our Court in the case of CIT v. Britannia Industries Ltd. (2017) 396 ITR 677 (Cal) : 2017 TaxPub(DT) 1900 (Cal-HC) holding that Tribunal has the power to entertain the claim of deduction not claimed before the assessing officer by filing revised return. Respectfully following the aforesaid decision as well as the view already taken by us in this case that the aforesaid subsidies are capital receipt and not an ‘income’ and not liable to Tax Tribunal in exercise of its power under section 254 of the Income Tax Act justified this claim though no revised return under section 139 (5) of the Act was filed before the assessing officer. We answer both the question Nos. 1 and 2 in negative and in favour of assessee.
Accordingly Appeal of the revenue is dismissed with no order as to cost. Certified photocopy of this judgment and order, if applied for, be supplied to the parties upon compliance with all requisite formalities.