Whether the interest subsidy and excise refund would be treated as capital receipt or revenue receipt for the 115JB

PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA VS.M/S. KRISHI RASAYAN EXPORTS PVT. LTD.

ITA/18/2021-IA No.GA/2/2018 (Old No.GA/515/2018)

QUESTION

Whether the interest subsidy and excise refund would be treated as capital receipt or revenue receipt for the purpose of computation of book profit under the provision of Section 115JB of the Income-Tax Act, 1961 ?" BRIEF FACTS: 1. This appeal filed by the revenue under Section 260A of theIncome Tax Act, 1961 (the 'Act’) is directed against the order dated 12h May,2017 passed by the Income Tax Appellate Tribunal "A" Bench, Kolkata (Tribunal).

2. The appeal was admitted to decide the following substantial question oflaw:-"Whether the interest subsidy and excise refund would be treated ascapital receipt or revenue receipt for the purpose of computation of bookprofit under the provision of Section 115JB of the Income-Tax Act, 1961 ?"

JUDGEMENT OF THE HIGH COURT

I) The substantial question of law involved in this appeal is squarely covered in favour of the assessee and against the revenue in the light of the decision ofthe Hon’ble Supreme Court in Commissioner of Income-Tax-I, Kolhapur vs. M/s.Chaphalkar Brothers Pune, (2018) 400 ITR 279 (SC). The operative portion of the judgment reads as follows :-

"After setting out both the Supreme court judgements referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference."

II) Identical issue was also considered by this Court in the case of PrincipalCommissioner of Income-Tax vs. Ankit Metal And Power Ltd., (2019) 416 ITR 591(Cal) wherein apart from considering the effect of the subsidy the Court also considered as to whether when a receipt is not in the character of income as defined under Section 2(24) of the Act, whether it can be said to form part of the book profit under Section 115 JB. The said question was answered in favour of the revenue in the following terms :-

"31. In this case since we have already held that in the 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 the Income-tax Act, 1961 and when areceipt is not on in the character of income it cannot form part of the book profit under section 115JB of the Act, 1961.

III) In the case of Apollo TyresLtd. (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 itcannot be included in the book profit for the purpose of computation undersection 115JB of the Income-tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in questionwould have to be excluded while computing book profit under section 115JB of the Income-tax Act, 1961.

IV) The third issue involved in the instant appeal which requires adjudication is whether the action of the Tribunalentertaining/allowing the claim which was made by the assessee before theAssessing Officer by filing a revised computation instead of filing a revisedreturn since the time to file the revised return had lapsed, for claiming totreat the incentive subsidies in question as capital receipts instead ofrevenue receipts as claimed in original return. The Assessing Officer haddenied this claim. The Revenue has attacked the order of the Tribunal byrelying on the decision in the case of Goetze (India) Ltd. v. CIT reported in[2006] 284 ITR 323 (SC).This case does not help the Revenue/appellant. In this case theSupreme Court has made it clear that its decision was restricted to thepower of the assessing authority to entertain a claim for deduction otherwise than by a revised return, and did not impinge on the power ofthe Appellate Tribunal under section 254 of the Income-tax Act, 1961.

V) TheHon’ble Supreme Court in the said decision held as follows (page 324 of284 ITR):"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 thepower of the assessing authority and does not impinge on the powerof the Income-tax Appellate Tribunal under section 254 of theIncome-tax Act, 1961."

VI) This judgment was followed by our court in the case of CIT v.Britannia Industries Ltd. reported in [2017] 396 ITR 677 (Cal) holding thatthe Tribunal has the power to entertain the claim of deduction not claimedbefore the Assessing Officer by filing a revised return.

VII) Respectfullyfollowing the aforesaid decision as well as the view already taken by us inthis case that the aforesaid subsidies are capital receipt and not an"income" and not liable to tax, the Tribunal in exercise of its power undersection 254 of the Income-tax Act justified this claim though no revisedreturn under section 39(5) of the Act was filed before the Assessing Officer.

VIII) We answer both the question Nos. 1 and 2 in the negative and in favour ofthe assessee.

CONCLUSION: since interest subsidies and power subsidies are provided by the government to the entities establishing units in specified areas are of Capital nature. The subsidies are given to develop the specified areas and generate employment. Since these subsidies are of capital nature and hence cannot be included to compute Book Profit under provisions of Section 115JB of the Income tax Act, 1961.

DISCLAIMER: the case law presented here is only for sharing knowledge and information with the readers. The views are personal, shall not be considered as professionals advice. In case of necessity do consult with tax consultants. PRINCIPAL COMMISSIONER OF INCOME TAX-4, KOLKATA VS.M/S. KRISHI RASAYAN EXPORTS PVT. LTD. ITA/18/2021-IA No.GA/2/2018 (Old No.GA/515/2018) KOLKATA HIGH COURT

QUESTION:Whether the interest subsidy and excise refund would be treated as capital receipt or revenue receipt for the purpose of computation of book profit under the provision of Section 115JB of the Income-Tax Act, 1961 ?" BRIEF FACTS: 1. This appeal filed by the revenue under Section 260A of theIncome Tax Act, 1961 (the `Act') is directed against the order dated 12h May,2017 passed by the Income Tax Appellate Tribunal "A" Bench, Kolkata (Tribunal).

2. The appeal was admitted to decide the following substantial question oflaw:-"Whether the interest subsidy and excise refund would be treated ascapital receipt or revenue receipt for the purpose of computation of bookprofit under the provision of Section 115JB of the Income-Tax Act, 1961 ?"

JUDGEMENT OF THE HIGH COURT

I) The substantial question of law involved in this appeal is squarely coveredin favour of the assessee and against the revenue in the light of the decision ofthe Hon'ble Supreme Court in Commissioner of Income-Tax-I, Kolhapur vs. M/s.Chaphalkar Brothers Pune, (2018) 400 ITR 279 (SC). The operative portion of the judgment reads as follows :-

"After setting out both the Supreme court judgements referred to hereinabove, the High Court found that the concessions were issued inorder to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would haveto be held capital and not revenue. We have no hesitation in holding that the finding of the Jammu andKashmir High Court on the facts of the incentive subsidy contained in thatcase is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the factthat the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference."

II) Identical issue was also considered by this Court in the case of PrincipalCommissioner of Income-Tax vs. Ankit Metal And Power Ltd., (2019) 416 ITR 591(Cal) wherein apart from considering the effect of the subsidy the Court alsoconsidered as to whether when a receipt is not in the character of income asdefined under Section 2(24) of the Act, whether it can be said to form part of thebook profit under Section 115 JB. The said question was answered in favour ofthe revenue in the following terms :-

"31. In this case since we have already held that in the relevant assessment year 2010-11 the incentives "interest subsidy" and "powersubsidy" is a "capital receipt" and does not fall within the definition of"income" under section 2(24) of the Income-tax Act, 1961 and when areceipt is not on in the character of income it cannot form part of the bookprofit under section 115JB of the Act, 1961.

III) In the case of Apollo Tyres Ltd. (supra) the income in question was taxable but was exempt under aspecific Provision of the Act as such it was to be included as a part of thebook profit. But where a receipt is not in the nature of income at all itcannot be included in the book profit for the purpose of computation under Section 115JB of the Income-tax Act, 1961. For the aforesaid reason, wehold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115JB of the Income-tax Act, 1961.

IV) The third issue involved in the instant appeal which requires adjudication is whether the action of the Tribunalentertaining/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 had lapsed, for claiming to treat the incentive subsidies in question as capital receipts instead ofrevenue receipts as claimed in original return. The Assessing Officer had denied this claim. The 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).This case does not help the Revenue/appellant. In this case theSupreme 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 ofthe Appellate Tribunal under section 254 of the Income-tax Act, 1961.

V) The Hon'ble Supreme Court in the said decision held as follows (page 324 of284 ITR):"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 thepower 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."

VI) This judgment was followed by our court in the case of CIT v.Britannia Industries Ltd. reported in [2017] 396 ITR 677 (Cal) holding thatthe Tribunal has the power to entertain the claim of deduction not claimedbefore the Assessing Officer by filing a revised return.

VII) Respectfully following the aforesaid decision as well as the view already taken by us inthis case that the aforesaid subsidies are capital receipt and not an"income" and not liable to tax, the Tribunal in exercise of its power undersection 254 of the Income-tax Act justified this claim though no revised return under section 39(5) of the Act was filed before the Assessing Officer.

VIII) We answer both the question Nos. 1 and 2 in the negative and in favour of the assessee.

CONCLUSION

Since interest subsidies and power subsidies are provided by the government to the entities establishing units in specified areas are of Capital nature. The subsidies are given to develop the specified areas and generate employment. Since these subsidies are of capital nature and hence cannot be included to compute Book Profit under provisions of Section 115JB of the Income tax Act, 1961.

DISCLAIMER: The case law presented here is only for sharing knowledge and information with the readers. The views are personal, shall not be considered as professionals advice. In case of necessity do consult with tax consultants.