M/S Shree Ganesh Industries , Ludhiana vs Assessee

M/s Shree Ganesh Industries, Vs. The A.C.I.T., E-411, Phase-VI, Focal Point, Circle I, Aayakar Bhawan, Ludhiana. Rishi Nagar, Ludhiana PAN: AAMFS1740F (Appellant) (Respondent)

Appellant by : None(Written Submissions) Respondent by : Shri Manjit Singh, DR

Date of hearing : 26.03.2015 Date of Pronouncement : 27.03.2015

PER BHAVNESH SAINI, J.M. :

This appeal filed by the assessee is directed

against the order of learned Commissioner of Income

Tax(Appeals)-II, Ludhiana dated 14.10.2013 for

assessment year 2007-08.

2. None appeared on the assessee. The assessee filed

written submissions and request is made to dispose off the

appeal on the basis of the written submissions.

3. The learned D.R for the Revenue was, therefore,

directed to produce the record as was produced at the time of

hearing of the appeal.

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4. We have heard the learned D.R for the Revenue and

perused the material available on record and taken into

consideration the written submissions filed by the assessee.

5. On ground No.1, the assessee challenged the order

of the learned CIT (Appeals) in confirming the action of the

Assessing Officer in making the assessment in the case of the

assessee that no notice under section 143(2) of the Act was

served upon the assessee as per the time limit fixed by law.

6. The brief facts of the case are that return of income

was filed by the assessee on 8.10.2007. Notice under section

143(2) of the Act was issued on 29.9.2008 and served upon

the assessee. The assessee contended before the learned CIT

(Appeals) that notice under section 143(2) of the Act was

served upon the assessee on 4.10.2008 by speed post.

Therefore, the assessment is bad in law, illegal and without

jurisdiction. The learned CIT (Appeals), however, following

the decision of the Jurisdictional Punjab & Haryana High

Court in the case of V.R.A. Cotton Mills (P) Ltd. Vs. Union of

India, 70 DTR 439 (359 ITR 495) rejected this appeal of the

assessee. The assessee in the written submissions stated that

the above decision of the Hon'ble High Court is against the

assessee, yet the assessee is pressing this ground for

adjudication to keep the matter alive. The assessee,

therefore, conceded the above judgment of the Hon'ble Punjab

& Haryana High Court in the case of V.R.A. Cotton Mills (P)

Ltd. (supra), in which it was held that since issue of notice

was within the prescribed period, therefore, notice was valid. 3

In view of the above, the issue is covered against the assessee

by the judgment of the Jurisdictional High Court. The ground

No.1 of the appeal of the assessee is dismissed.

7. On ground No.2(a), the assessee challenged the

addition of Rs.3,97,247/- on account of capital investment

incentive received from Government of Punjab claimed by the

assessee firm as capital receipt.

8. The brief facts are that the assessee firm has

received subsidy amounting to Rs.3,97,247/- under the

"Package of Incentive Scheme 1992" Scheme of Punjab

Government. The subsidy was received during the financial

year 2006-07. The Assessing Officer asked the assessee to

provide the details of subsidy scheme and its treatment in the

books of account. The assessee explained that this amount

has been treated as capital receipt in the hands of the

assessee and the assessee relied upon the decision of the

Hon'ble Supreme Court in the case of CIT Vs. Ponni Sugars &

Chemicals Ltd., 306 ITR 39. The Assessing Officer examined

the facts of the case and relied upon the decision of the

Hon'ble Supreme Court in the case of M/s Sahni Steels &

Press Works Ltd. & Others, 228 ITR 253 and the decision of

the Hon'ble Punjab & Haryana High Court in the case of CIT

Vs. Abhishek Industries Ltd., 286 ITR 1 and held that the

subsidy amount received by the assessee was revenue in

nature.

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9. The assessee challenged the addition before the

learned CIT (Appeals) and it was contended that the amount

received is capital receipt in respect of capital investment

made in the fixed assets. This amount was disbursed to the

assessee firm in June 2006 and in other cases also it was

stated as capital receipt. The learned CIT (Appeals), however,

dismissed this ground of appeal of the assessee. His findings

in paras 4.3 to 4.5 of the appellate order are reproduced as

under :

"4.3 I have carefully considered the appellant's submissions. As per the scheme, the new industrial units were eligible for investment incentive at 20% to 30% of their fixed capital investment to a maximum of Rs 30 to 50 lacs as well as sales tax exemption. Further, the investment incentives were to be disbursed only after the new industrial units went into commercial production.

4.4 In this backdrop it may be relevant to analyze the judicial pronouncements on the issue. Some of the leading case laws are discussed as under:-

4.4.1 Sahney Steel and Press Works Ltd. Vs CIT (SC) 228 ITR 253.

Refund of sales tax, subsidies on Power consumed and exemption from payment of water charges etc. - Amounts received were production incentives and operational subsidies and not capital subsidies -- What is material is the purpose for which subsidy was granted - If the purpose is 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 purposes but if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade and revenue in nature.

4.4.2 CITVs Rajaram Maize Products (SC) 251ITR 427

Following Sahney Steel's case [1997] 228 ITR 253 in CIT v. Rajaram Maize Products [2001] 251 ITR 427, the hon'ble Supreme Court held that power subsidy received by the new industry based on consumption per unit is a kind of revenue receipt as the benefit accrues after the commencement of the business.

5 4.4.3 CIT Vs Abhishek Industries Ltd. (P&H) 286 ITR 1 Sales tax subsidy quantified at percentage of fixed capital investment - Revenue receipt since it is provided for smooth running of business. In this case, the Hon'ble High Court observed as under:

"The contention of Mr. Ganesh that the subsidies -were of capital nature and were given for the purpose of stimulating the setting up and expansion of industries in the State cannot be upheld, because of the subsidy scheme itself. No financial assistance was granted to the assessee for' setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for five years to enable them to be viable and competitive. Sales tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably."

4.4.4 ITO Vs Shreejee Chitra Mandir (ITAT, Indore ) 97 ITD 66 After construction of cinema house, received subsidy from Government on the condition that cinema house would run for 3 years -- Revenue receipt. 4.4.5 CIT Vs Kisan Sahkari Chini Mills Ltd. (Uttarakhand) 318 ITR 218 Incentive received from Government - Capital receipt if granted for expansion of plant and machinery and revenue receipt if granted for use in business

4.4.6 DCIT Vs A.P. State Electricity Board (ITAT, Hyd-TM) 130 ITD 1 If purpose of giving subsidy is to help in setting up of business or completing project, it is capital receipt -- If subsidy is given to assist in carrying out business operations and for commencement of production, it is revenue receipt.

4.4.7 Wardex Pharmaceuticals P. Ltd. Vs ACIT (Mad) 307 ITR 387

4.4.8 In CIT v. Chhindwara Fuels [2000] 245 ITR 9, the Hon'ble Calcutta High Court held that the subsidy received in the form of sales tax refund after the commencement of the production in the industry cannot be treated as capital receipt and was not exempt from tax.

4.4.9 In Jagapathy Art Pictures v. CIT [1999] 240 ITR 625, the Hon'ble Madras High Court held that cash subsidy paid by the Government to the producer of a film after certification by the Central Board of Film Censors was not an amount paid to assist the assessee therein to make the film, the same having not been paid during the course of production and was not meant to assist the 6

producer in financing the movie which was filmed in the State. The payment being in the kind of a supplementary trade receipt was held to be revenue in nature.

4.4.10 In Sree Ayyanar Spinning and Weaving Mills Ltd. v. CIT [1999] 240 ITR 106, the Hon'ble Madras High Court held that the subsidy received by the assessee was not received as some ex gratia payment but was received exclusively received exclusively for carrying on the business after the commencement of the business by the assessee and was held to be a kind of revenue receipt. 4.4.11 In Tamil Nadu Sugar Corporation Ltd. v. CIT [2001] 251 ITR 843, the Hon'ble Madras High Court held that purchase tax subsidy received from the State Government for a period of 5 years from the date of the commencement of production was in the nature of revenue receipt as the object thereof was to tide over the difficulties that might be experienced by sugar factories after the commencement of production and not for setting up of factories. It was observed there as under:

"In other words, the subsidy was given by way of giving assistance to the sugar factories on the commencement of production and it is not given for the setting up of the factories, and the subsidy is given only to tide over the difficulties that may be experienced by the management in the actual running of the sugar factories. Though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running of the sugar factories in the initial years.

... the payments of subsidy were made not for the purchase of capital items, and it was not tied up with the purchase of machinery or for future expansion of the industry. In other words, it was given without any prior condition attached to it and it is open to the petitioner to utilise the same for any of its purposes including its business purposes. The fact that the payments made might have been utilised for the purchase of capital equipments is not relevant as there is no embargo imposed on the sugar factory not to utilise the subsidy received for business purposes. The subsidy, in other words, is granted to tide over the teething troubles that the sugar factory may face soon after the commencement of production and it is not for the setting up of the factory. I also hold that the fact that the sugar factory is eligible to get the subsidy for a period of five years from the date of the commencement of production clearly indicates that the payment of subsidy is linked to the production of sugar in the factory. It is further strengthened by the fact that the measure of payment of subsidy is also closely interlinked with the purchase of sugarcane by the sugar factory which shows that the subsidy was granted for the continuous running of its business and it is not granted for the setting up of the sugar factory."

7 4.4.12 In CIT v. Neo Sack Ltd. [2005] 148 Taxmann 603, the Hon'ble Madhya Pradesh Court held that power subsidy received by the assessee for consumption of power is a revenue receipt in the hands of the assessee. 4.4.13 In CIT v. Steel Authority of India Ltd. [2002] 257 ITR 241, the Hon'ble Delhi High Court held that grant received from the Government not for bringing into existence any new asset but for functioning of the company was revenue in nature.

4.4.14 In CIT v. Ponni Sugars and Chemicals Ltd. [2003] 260 ITR 605, the Hon'ble Madras High Court held as under:

'The question referred also refers to the purchase tax benefit enjoyed by the assessee. So far as this concession extended by the State Government is concerned, it was in no way linked to the expenditure incurred insetting up the industry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy equivalent to the quantum of the purchase tax for the period for which it was given for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government."

4.4.15 In CIT v. Premier Proteins Ltd. [2005] 277 ITR 406 the Hon'ble Madhya Pradesh High Court held that the power subsidy received after the unit started functioning was revenue in nature.

4..4.16 In Saroja Mills Ltd. v. CIT [1996] 220 ITR 626, the Hon'ble Madras High Court held that the subsidy received by the assessee in respect of revenue expenditure incurred in modernisation of its plant in its industrial unit, established in a backward area from SIPCOT, was a revenue receipt. In this case, an earlier judgment of the hon'ble Supreme Court in V.S.S.V. Meenakshi Achi v.

C IT [1966] 60 1TR 253 was relied upon.

4.5 From the aforesaid judicial pronouncements, the legal position which emerges is that whether subsidy received by any person is capital receipt or revenue receipt would depend upon the purpose for which the subsidy is given and the stage at which subsidy is given. In case the subsidy is given at the pre- production stage i.e before the commencement of production for the purpose of investment in machinery and other capital assets, the subsidy received would be capital subsidy. However, in case the subsidy received is at post production stage and the amount received is given for running of business without any specific obligation cast on a person to apply the subsidy towards purchase of 8

capital assets it would be revenue receipt. In the instant case, as discussed above, the subsidy was received at the post production stage. There was no obligation cast on the appellant to apply the subsidy towards any particular purposes. The amount was available to the appellant for being applied in such a manner as it desired without having to account for the same to any authority.

Keeping in view these facts and circumstances of the case and keeping in view the case laws as discussed above, the AO was fully justified in holding that the subsidy received by the appellant is revenue receipt. Merely because the subsidy was called capital subsidy or because the quantum of subsidy was computed on the basis of capital investment does not make it a capital receipt. This ground of appeal is accordingly dismissed."

10. The learned D.R for the Revenue relied upon the

order of the learned CIT (Appeals) and the assessee in the

written submissions reiterated the submissions already made

before the learned CIT (Appeals).

11. On consideration of the above facts, we do not find

any merit in this ground of appeal of the assessee. The

learned CIT (Appeals) specifically noted that the investment

incentives were to be disbursed only after the new industrial

units went into commercial production. The finding of fact

recorded by the learned CIT (Appeals) has not been rebutted

through any material on record. The issue is, therefore,

covered against the assessee by the judgment of the Hon'ble

Supreme Court in the case of M/s Sahni Steels & Press Works

Ltd. & Others (supra) and the decision of the Jurisdictional

Punjab & Haryana High Court in the case of Abhishek

Industries Ltd. (supra). This ground of appeal of the assessee

is accordingly dismissed.

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12. On ground No.2(b), the assessee challenged the

addition of Rs.35,796/- out of the interest paid to the

partners on their capital accounts.

13. The brief facts are that the subsidy received by the

assessee was credited to the partners' capital account instead

of crediting it to the firm's account. Further on this capital

credited to the partners" capital account, the assessee firm

also paid interest to the partners @ 11%. The Assessing

Officer asked the assessee to explain why the interest on this

inflated capital may not be disallowed. The Assessing Officer

considering assessee's submissions and referring to number of

decisions held that the interest paid on inflated capital

account by crediting subsidy, the interest is not allowable and

accordingly disallowed Rs.35,796/-.

14. The assessee reiterated the submissions made before

the learned CIT (Appeals). The learned CIT (Appeals) noted

that the subsidy received by the assessee firm did not belong

to the partners and was wrongly credited to the partners"

capital account. Therefore, there is no justification to pay

interest on the same.

15. After hearing the learned D.R for the Revenue and

perusing the written submission of the assessee, we do not

find any merit in this ground of appeal of the assessee. It is

admitted fact that the sales tax subsidy do not belong to the

partners. Therefore, it should not be credited directly to the

partners' account. No justification was giiven by the assessee 10

why the interest on inflated capital of the partners on

subsidy, which do not belong to the partners, was paid. In

the absence of any explanation, the learned CIT (Appeals) was

justified in dismissing this ground of appeal of the assessee.

This ground of appeal is accordingly dismissed.

16. No other point is pressed.

17. In the result, the appeal of the assessee is

dismissed.

Order pronounced in the open court on this 27th day of

March, 2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated : 27 t h March, 2015

*Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh