Gujarat High Court
Commissioner Of Income Tax ... vs Narmada Clean Tech Ltd on 24 January, 2022
Author: J.B.Pardiwala
Bench: J.B.Pardiwala
C/TAXAP/130/2022 ORDER DATED: 24/01/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 130 of 2022
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COMMISSIONER OF INCOME TAX (EXEMPTIONS)
Versus
NARMADA CLEAN TECH LTD
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Appearance:
M R BHATT & CO.(5953) for the Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE NISHA M. THAKORE
Date : 24/01/2022
ORAL ORDER
(PER : HONOURABLE MS. JUSTICE NISHA M. THAKORE)
1. This is an appeal filed by the Revenue Department under Section 260A of the Income Tax Act, 1961 (for short, 'the Act') challenging the order dated 16.03.2021 passed by the Income Tax Appellate Tribunal, Surat Bench, Surat in ITA No.1555/Ahd/ 2015 for the A.Y. 2010-11.
2. The brief facts which emerges from the record of the appeal are as under:
2.1 The respondent-assessee had filed revised return of income on 26.05.2011, declaring total loss of Rs.8,75,54,294/-
and has shown the same in book profit under Section 115JB of the Act thereby declaring the Income at Rs. Nil. The assessee company is engaged in the business of undertaking project of laying pipelines for the purpose of treatment of effluent of different industries as well as also extends services to monitor Page 1 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 and treatment of such effluent of industries.
2.2 The assessee had shown net loss of Rs.4,68,49,043/- for the year under consideration as against the net loss shown at Rs,2,86,36,855/- in the immediate preceding year. The Assessing Officer while processing the assessment for the year under consideration, made disallowance of Rs.5,95,758/- on account of rain shed protection, Rs.27,39,668/- as an expenditure towards the ISO certification of members industries and Audit, also Rs.3,87,00,000/- being subsidy received, Rs.4,13,381/- being laboratory expenses and Rs.2,69,257/- being monthly car hire charges. Thus, the total income determined by the Assessing Officer was of Rs.4,48,36,230/- and accordingly, the assessment order dated 11.03.2013 came to be passed under Section 143(3) of the Act.
2.3 Being aggrieved and dissatisfied with the aforesaid order of assessment passed by the Assessing Officer, the assessee company preferred an appeal before the CIT(A) which was registered as Appeal No.CAB(A)-3/1044/14-15. The assessee - original appellant has raised six grounds for consideration. The CIT(A) after hearing the respective parties and considering the submissions put forth along with the documents furnished and upon examination of the case laws relied upon, allowed the appeal of the assessee company vide order dated 24.02.2015. The CIT(A) was pleased to allowed the deduction of Rs.5,95,758/- as expense incurred for raising shed thereby treating the said amount as revenue expenditure. The CIT(A) also deleted the addition of an amount of Rs.27,39,668/- towards ISO Certification expense by referring to the decision Page 2 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 in case of assessee company for assessment year 2008-09 and further deleted addition of Rs.4,13,381/- towards laboratory expense by treating such amount as revenue expenditure more particularly, by following the decision of the Supreme Court in case of NTCP Vs. CIT, reported in 229 ITR 383 (SC). So far as ground of addition of Rs.3,87,00,000/- in respect of subsidy received by assessee company from the Government of India is concerned, the Tribunal after appreciation of documentary evidence, more particularly, sanctioned letter dated 03.07.2008 recorded a finding that the said subsidy has been given towards administrative expenses and therefore directed deletion of addition by treating it as capital in nature. Further, the Tribunal has disallowed the expenses towards monthly car hire charges thereby adding back to the total income of the assessee company. So far as depreciation of assets was found infructuous and not dealt with.
2.4 Being aggrieved and dissatisfied by the aforesaid order of the Commissioner of Income Tax, (Appeals) -3, Vadodara,(for short 'CIT(A)') in Appeal No.CAB(A)-3/1044/14-15, the Revenue Department preferred an appeal before the Income Tax Department Appellate Tribunal, Surat Bench, Surat, which was registered as ITA No.1555/Ahd/2015. The ITAT, Surat Bench, Surat upon hearing the respective parties and having carefully gone through the submissions putforth by the assessee along with the documents furnished and upon due consideration of the principles of law relied upon, was pleased to dismissed the aforesaid appeal preferred by the Revenue. Hence, being aggrieved and dissatisfied with the same, the Revenue has approached this Court.
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3. Mr. M.R. Bhatt, the learned Senior Counsel assisted by Mr. Munjaal Bhatt, the learned counsel appearing on behalf of the Revenue Department has drawn attention of this Court to the substantial questions of law, which arises for determination of this Court. The same reproduced as under:
"[A] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is justified in confirming the view of the CIT(A) of allowing the entire expenditure in one year without appreciating that the same might give a very distorted picture of the profits of a particular year since the claim of assessee is in violation of doctrine of matching principles particularly when ISO certification is valid for various years?
[B] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is justified in confirming the view of CIT(A) of deleting the addition of Rs.3,87,00,000/- made on account of subsidy received by the assessee?
[C] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in confirming the view of CIT(A) without appreciating that the assessee itself claimed that the subsidy was towards administrative expenses, which warranted the addition since the expenses claimed to this extent have been recovered from the Government?
[D] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in confirming the view of CIT(A) of treating the subsidy of Rs.3,87,00,000/- as capital in nature without appreciating that the same is in total contravention to Explanation - 10 below section 43(1) of the Act and without compelling the assessee to reduce the cost of the asset to the extent of the subsidy received, particularly when CIT(A) held that the subsidy was for expansion of the capacity infrastructure facility which was a capital asset subject to depreciation?"
4. Mr. M.R. Bhatt, the learned Senior Counsel has submitted that the order passed by the Tribunal is erroneous as the same is passed without appreciating the materials on record in light of the facts of the present matter. It is submitted that the Tribunal has erred in making payment for obtaining the ISO 9002 certification under the head of revenue expenditure as ultimately the issuance of such certificate may at the most create a positive image of the product for smooth running of Page 4 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 the business. But, at the same time, it has to be treated as fixed capital. It is submitted that the payment made for getting ISO Certificates are to be treated as giving rise to benefit of enduring nature and hence, the same cannot be disallowed by treating it as revenue expenditure. It is further submitted that such reasons assigned by the Tribunal of treating the same as not enhancing the fixed capital of the company in any manner is in violation of Doctrine of matching principles more particularly, when ISO certification is valid for various years. The learned Senior Counsel has further submitted that so far as the deletion of addition towards subsidy is concerned, the total subsidy which is granted is of an amount of Rs.12.41 crore to the assessee company and the Assessing Officer while processing the assessment for the year under consideration, has categorically recorded that an amount of Rs.2.93 crore has been received as subsidy from GIDC and so far as an amount of Rs.0.94 crore is concerned, the same is received under the scheme and has rightly treated such amount as revenue in nature.
4.1 Mr. M.R. Bhatt, the learned Senior Counsel has relied upon the sanction letter dated 03.07.2008 wherein it is clearly mentioned that the amount of subsidy has been sanctioned for "Treatment Facility of Effluent Treatment Project for Ankleshwar, Jhagadia and Panoli Inudstrial Estate". The reference is also made to the sanctioned subsidy for the civil work done for the Plant & Machinery as well as Mechanical & Electrical Equipments and contingencies totalling to an amount of Rs.3314.00 which is covered under the head of capital of the assessee company and accordingly, the same has been considered as capital subsidy by CIT(A). By drawing attention Page 5 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 to the assessment order, it is submitted that the decision of Tribunal is erroneous and perverse in so far as it allows the subsidy of Rs.3.87 crore in favour of assessee company. The attention of this Court was drawn to the submissions dated 08.02.2013 made by the Assessing Officer whereby it was clearly stated that the subsidy was towards administrative expenses having been recovered from the Government. Thus, it was submitted that in-fact that subsidy of an amount of Rs.3.87 crore was given towards administrative expenses incurred during the execution of project for the upgradation of infrastructure facility which ultimately enables the assessee company to run business smoothly and more profitability. Thus, considering the nature of such expenses incurred, the same is required to be classified under the head of revenue expenditure. But at the same time, if such subsidy was not granted to set up a new unit or to expand the existing unit then in that case, the same was required to be considered as capital in nature.
4.2 The learned Senior Counsel has further relied upon the decision of the Supreme Court in the case of CIT(Madras) Vs. M/s. Ponni Sugars Chemicals Ltd. wherein the Supreme Court has laid down guidelines in the nature of basic test to be applied in judging the character of subsidy. By referring to said decision, the emphasis has been laid to the legal principle 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. Thus, reliance was made upon the 'Purpose Test' to identify the character of the expenditure in order to determine the head i.e. the revenue/capital expenditure. Much emphasis has been laid by the learned counsel by drawing Page 6 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 attention of this Court to the object of the subsidy scheme in order to determine the nature of incentive subsidy in the hands of the assessee company for the purpose of determination of assessment of income. Alternatively, it was submitted that the source of such subsidy is immaterial. The mechanism through which the subsidy is given is also irrelevant. Ultimately, if the object of the extension of subsidy was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of such subsidy has to be treated as 'capital' in nature.
4.3 The learned Senior Counsel has further referred to Explanation - 10 below Section 43(1) of the Act. The same is reproduced as under:
"Explanation 10. -- Where a portion of the cost of an assest acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the assest to the assessee:
Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the assest acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee."
4.4 By referring to the aforesaid provision of law, the learned Senior Counsel has submitted that the Appellate Tribunal was not justified in confirming the view of CIT(A) of treating the subsidy of an amount of Rs.3.87 crore as capital in nature. It was further submitted that the Appellate Tribunal failed to appreciate that even the CIT(A) in contravention to Explanation 10 to Section 41(1) of the Act had held that the said subsidy Page 7 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 was for expansion of the capacity, infrastructure facility and therefore, was required to be treated as capital asset subject to depreciation.
5. We have extensively heard Mr. M.R. Bhatt, the learned Senior Counsel appearing for the Revenue Department and have carefully gone through the order passed by the Assessing Officer as well as the CIT(A) and the Income Tax Appellate Tribunal. We have also perused the relevant provisions of law and have also taken into consideration the decisions relied upon by the learned Senior Counsel appearing for the Revenue.
6. This Court finds that the Revenue Department has principally raised two issues during the course of hearing of appeal, which falls for our consideration. The first issue which arises for our consideration is the aspect of entire expenditure of assessee company more particularly, with regard to the ISO Certification expenditure being treated as under the head of Revenue expenditure thereby deleting the disallowance of Rs.27,39,668/- for the assessment purpose. Upon appreciation of material brought on record vis-a-vis the findings of the CIT(A) as regards treating the ISO Certification expenditure as 'Revenue expenditure' is concerned, we are in complete agreement with the said findings of the CIT(A). The Supreme Court in catena of decisions has laid down the guidelines in the nature of test for determination of the actual nature of the expenditure wherein it is observed that the test for determination of nature of expenditure has to be considered in light of the fact that if the advantage received on incurring expense facilities relates to the carrying on of the business Page 8 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 more efficiently and more profitably leaving the fixed capital untouch, then such expenditure has to be treated as 'revenue' in nature.
7. In the matter on hand, we agree with the view of ITAT that the CIT(A) was justified in treating the entire amount as revenue in nature. We find that making of payments towards obtaining ISO Certificate in no manner touches the fixed capital of the company though it may create a positive image for particular product of the assessee company which may ultimately smooth the conduct of the business of the assessee company. However, the same in no manner actually adds to any gain in the fixed capital of the company.
8. So far as the second issue of treating subsidy of amount of Rs.3.87 crore as capital in nature is concerned, the records and findings reveals that 50% of the subsidy was received by the assessee company under capital ASIDE Scheme. During the course of scrutiny assessment proceedings, the assessee company seems to have produced relevant documentary evidences to justify the purpose for which the subsidy was given. This includes a letter dated 22.02.2010 written by the Under Secretary, (Government of India) to the Accountant Officer (Ministry of Commerce and Industries). On bare perusal of the content of the aforesaid letter, it reflects that such subsidy was given towards administrative expenses incurred by the assessee company during the execution of project for upgradation of infrastructure facilities. The CIT(A) has rightly arrived at finding that the administrative expense being incurred for expansion of the infrastructure facility falls in the category of 'capital' in nature and has therefore, rightly Page 9 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022 C/TAXAP/130/2022 ORDER DATED: 24/01/2022 deleted the addition of an amount of Rs.3.87 crore made by the Assessing Officer.
9. We could note that the ITAT has examined the components of sanctioned subsidy and has thereafter arrived at a finding that the same has been rightly treated as capital subsidy by CIT(A). Thus, the findings recorded by the ITAT cannot be termed as perverse or dehors the record, which calls for our interference. So far as reference to Explanation - 1 of Section 43 of the Act is concerned, we find no error of law is committed by the ITAT as well as the CIT(A), while deleting the addition of an amount of Rs.3.87 crore by treating the same under the capital subsidy.
10. In view of the above, concurrent findings recorded by the CIT(Appeals) and by the ITAT, the question of law raised by the department does not deserve any further consideration. The said question also being no more res-integra, it could not be said that the present appeal involves any question much less substantial question of law. It may be noted that the Appeal under section 260A of the Act, could be admitted only on the High Court being satisfied that the case involves a substantial question of law.
11. In view of the aforesaid, this appeal fails and is hereby dismissed. No order as to costs.
(J. B. PARDIWALA, J) (NISHA M. THAKORE,J) NEHA Page 10 of 10 Downloaded on : Sun Apr 24 10:39:44 IST 2022