C/Taxap/130/2022 Order Dated: 24/01/2022 v. Narmada Clean Tech Ltd

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 130 of 2022 =============================================COMMISSIONER OF INCOME TAX (EXEMPTIONS) VersusNARMADA CLEAN TECH LTD ============================================= Appearance: M R BHATT & CO.(5953) for the Appellant(s) No. 1 for the Opponent(s) No. 1============================================= CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAand 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 underSection 260A of the Income Tax Act, 1961 (for short, ‘the Act’)challenging the order dated 16.03.2021 passed by the IncomeTax 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 theappeal are as under: 2.1The respondent-assessee had filed revised return ofincome on 26.05.2011, declaring total loss of Rs.8,75,54,294/-and has shown the same in book profit under Section 115JB ofthe Act thereby declaring the Income at Rs. Nil. The assesseecompany is engaged in the business of undertaking project oflaying pipelines for the purpose of treatment of effluent ofdifferent industries as well as also extends services to monitor and treatment of such effluent of industries. 2.2 The assessee had shown net loss of Rs.4,68,49,043/- forthe year under consideration as against the net loss shown atRs,2,86,36,855/- in the immediate preceding year. TheAssessing Officer while processing the assessment for the yearunder consideration, made disallowance of Rs.5,95,758/- onaccount of rain shed protection, Rs.27,39,668/- as anexpenditure towards the ISO certification of membersindustries and Audit, also Rs.3,87,00,000/- being subsidyreceived, Rs.4,13,381/- being laboratory expenses andRs.2,69,257/- being monthly car hire charges. Thus, the totalincome determined by the Assessing Officer was ofRs.4,48,36,230/- and accordingly, the assessment order dated11.03.2013 came to be passed under Section 143(3) of theAct. 2.3Being aggrieved and dissatisfied with the aforesaid orderof assessment passed by the Assessing Officer, the assesseecompany preferred an appeal before the CIT(A) which wasregistered as Appeal No.CAB(A)-3/1044/14-15. The assessee –original appellant has raised six grounds for consideration. TheCIT(A) after hearing the respective parties and considering thesubmissions put forth along with the documents furnished andupon examination of the case laws relied upon, allowed theappeal of the assessee company vide order dated 24.02.2015.The CIT(A) was pleased to allowed the deduction ofRs.5,95,758/- as expense incurred for raising shed therebytreating 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 in case of assessee company for assessment year 2008-09 andfurther deleted addition of Rs.4,13,381/- towards laboratoryexpense by treating such amount as revenue expendituremore particularly, by following the decision of the SupremeCourt in case of NTCP Vs. CIT, reported in 229 ITR 383 (SC). Sofar as ground of addition of Rs.3,87,00,000/- in respect ofsubsidy received by assessee company from the Governmentof India is concerned, the Tribunal after appreciation ofdocumentary evidence, more particularly, sanctioned letterdated 03.07.2008 recorded a finding that the said subsidy hasbeen given towards administrative expenses and thereforedirected deletion of addition by treating it as capital in nature.Further, the Tribunal has disallowed the expenses towardsmonthly car hire charges thereby adding back to the totalincome of the assessee company. So far as depreciation ofassets was found infructuous and not dealt with. 2.4Being aggrieved and dissatisfied by the aforesaid order ofthe Commissioner of Income Tax, (Appeals) -3, Vadodara,(forshort ‘CIT(A)’) in Appeal No.CAB(A)-3/1044/14-15, the RevenueDepartment preferred an appeal before the Income TaxDepartment Appellate Tribunal, Surat Bench, Surat, which wasregistered as ITA No.1555/Ahd/2015. The ITAT, Surat Bench,Surat upon hearing the respective parties and having carefullygone through the submissions putforth by the assessee alongwith the documents furnished and upon due consideration ofthe principles of law relied upon, was pleased to dismissed theaforesaid appeal preferred by the Revenue. Hence, beingaggrieved and dissatisfied with the same, the Revenue hasapproached this Court. 3.Mr. M.R. Bhatt, the learned Senior Counsel assisted byMr. Munjaal Bhatt, the learned counsel appearing on behalf ofthe Revenue Department has drawn attention of this Court tothe substantial questions of law, which arises for determinationof this Court. The same reproduced as under: “[A]Whether on the facts and circumstances of the case andin law, the Appellate Tribunal is justified in confirming the viewof the CIT(A) of allowing the entire expenditure in one yearwithout appreciating that the same might give a very distortedpicture of the profits of a particular year since the claim ofassessee is in violation of doctrine of matching principlesparticularly when ISO certification is valid for various years? [B]Whether on the facts and circumstances of the case andin law, the Appellate Tribunal is justified in confirming the viewof CIT(A) of deleting the addition of Rs.3,87,00,000/- made onaccount of subsidy received by the assessee? [C]Whether on the facts and circumstances of the case andin law, the Appellate Tribunal was justified in confirming theview of CIT(A) without appreciating that the assessee itselfclaimed that the subsidy was towards administrative expenses,which warranted the addition since the expenses claimed to thisextent have been recovered from the Government? [D]Whether on the facts and circumstances of the case andin law, the Appellate Tribunal was justified in confirming theview of CIT(A) of treating the subsidy of Rs.3,87,00,000/- ascapital in nature without appreciating that the same is in totalcontravention to Explanation – 10 below section 43(1) of the Actand without compelling the assessee to reduce the cost of theasset to the extent of the subsidy received, particularly whenCIT(A) held that the subsidy was for expansion of the capacityinfrastructure facility which was a capital asset subject todepreciation?” 4.Mr. M.R. Bhatt, the learned Senior Counsel has submittedthat the order passed by the Tribunal is erroneous as the sameis passed without appreciating the materials on record in lightof the facts of the present matter. It is submitted that theTribunal has erred in making payment for obtaining the ISO9002 certification under the head of revenue expenditure asultimately the issuance of such certificate may at the mostcreate a positive image of the product for smooth running of 4.Mr. M.R. Bhatt, the learned Senior Counsel has submittedthat the order passed by the Tribunal is erroneous as the sameis passed without appreciating the materials on record in lightof the facts of the present matter. It is submitted that theTribunal has erred in making payment for obtaining the ISO9002 certification under the head of revenue expenditure asultimately the issuance of such certificate may at the mostcreate a positive image of the product for smooth running of the business. But, at the same time, it has to be treated asfixed capital. It is submitted that the payment made for gettingISO Certificates are to be treated as giving rise to benefit ofenduring nature and hence, the same cannot be disallowed bytreating it as revenue expenditure. It is further submitted thatsuch reasons assigned by the Tribunal of treating the same asnot enhancing the fixed capital of the company in any manneris in violation of Doctrine of matching principles moreparticularly, when ISO certification is valid for various years.The learned Senior Counsel has further submitted that so faras the deletion of addition towards subsidy is concerned, thetotal subsidy which is granted is of an amount of Rs.12.41crore to the assessee company and the Assessing Officer whileprocessing the assessment for the year under consideration,has categorically recorded that an amount of Rs.2.93 crore hasbeen received as subsidy from GIDC and so far as an amountof Rs.0.94 crore is concerned, the same is received under thescheme and has rightly treated such amount as revenue innature. 4.1Mr. M.R. Bhatt, the learned Senior Counsel has reliedupon the sanction letter dated 03.07.2008 wherein it is clearlymentioned that the amount of subsidy has been sanctioned for“Treatment Facility of Effluent Treatment Project forAnkleshwar, Jhagadia and Panoli Inudstrial Estate”. Thereference is also made to the sanctioned subsidy for the civilwork done for the Plant & Machinery as well as Mechanical &Electrical Equipments and contingencies totalling to an amountof Rs.3314.00 which is covered under the head of capital of theassessee company and accordingly, the same has beenconsidered as capital subsidy by CIT(A). By drawing attention to the assessment order, it is submitted that the decision ofTribunal is erroneous and perverse in so far as it allows thesubsidy of Rs.3.87 crore in favour of assessee company. Theattention of this Court was drawn to the submissions dated08.02.2013 made by the Assessing Officer whereby it wasclearly stated that the subsidy was towards administrativeexpenses having been recovered from the Government. Thus,it was submitted that in-fact that subsidy of an amount ofRs.3.87 crore was given towards administrative expensesincurred during the execution of project for the upgradation ofinfrastructure facility which ultimately enables the assesseecompany to run business smoothly and more profitability.Thus, considering the nature of such expenses incurred, thesame is required to be classified under the head of revenueexpenditure. But at the same time, if such subsidy was notgranted to set up a new unit or to expand the existing unitthen in that case, the same was required to be considered ascapital in nature. 4.2The learned Senior Counsel has further relied upon thedecision of the Supreme Court in the case of CIT(Madras) Vs.M/s. Ponni Sugars Chemicals Ltd. wherein the Supreme Courthas laid down guidelines in the nature of basic test to beapplied in judging the character of subsidy. By referring to saiddecision, the emphasis has been laid to the legal principle thatthe character of the receipt in the hands of the assessee has tobe determined with respect to the purpose for which thesubsidy is given. Thus, reliance was made upon the ‘PurposeTest’ to identify the character of the expenditure in order todetermine the head i.e. the revenue/capital expenditure. Muchemphasis has been laid by the learned counsel by drawing 4.2The learned Senior Counsel has further relied upon thedecision of the Supreme Court in the case of CIT(Madras) Vs.M/s. Ponni Sugars Chemicals Ltd. wherein the Supreme Courthas laid down guidelines in the nature of basic test to beapplied in judging the character of subsidy. By referring to saiddecision, the emphasis has been laid to the legal principle thatthe character of the receipt in the hands of the assessee has tobe determined with respect to the purpose for which thesubsidy is given. Thus, reliance was made upon the ‘PurposeTest’ to identify the character of the expenditure in order todetermine the head i.e. the revenue/capital expenditure. Muchemphasis has been laid by the learned counsel by drawing attention of this Court to the object of the subsidy scheme inorder to determine the nature of incentive subsidy in the handsof the assessee company for the purpose of determination ofassessment of income. Alternatively, it was submitted that thesource of such subsidy is immaterial. The mechanism throughwhich the subsidy is given is also irrelevant. Ultimately, if theobject of the extension of subsidy was to enable the assesseeto set up a new unit or to expand the existing unit, then thereceipt of such subsidy has to be treated as ‘capital’ in nature. 4.3 The learned Senior Counsel has further referred toExplanation – 10 below Section 43(1) of the Act. The same isreproduced as under: “Explanation 10. -- Where a portion of the cost of an assestacquired by the assessee has been met directly or indirectly bythe Central Government or a State Government or any authorityestablished under any law or by any other person, in the form ofa subsidy or grant or reimbursement (by whatever name called),then, so much of the cost as is relatable to such subsidy or grantor reimbursement shall not be included in the actual cost of theassest to the assessee: Provided that where such subsidy or grant or reimbursement isof such nature that it cannot be directly relatable to the assestacquired, so much of the amount which bears to the totalsubsidy or reimbursement or grant the same proportion as suchasset bears to all the assets in respect of or with reference towhich the subsidy or grant or reimbursement is so received,shall not be included in the actual cost of the asset to theassessee.” 4.4By referring to the aforesaid provision of law, the learnedSenior Counsel has submitted that the Appellate Tribunal wasnot justified in confirming the view of CIT(A) of treating thesubsidy of an amount of Rs.3.87 crore as capital in nature. Itwas further submitted that the Appellate Tribunal failed toappreciate that even the CIT(A) in contravention to Explanation10 to Section 41(1) of the Act had held that the said subsidy was for expansion of the capacity, infrastructure facility andtherefore, was required to be treated as capital asset subjectto depreciation. 5.We have extensively heard Mr. M.R. Bhatt, the learnedSenior Counsel appearing for the Revenue Department andhave carefully gone through the order passed by the AssessingOfficer as well as the CIT(A) and the Income Tax AppellateTribunal. We have also perused the relevant provisions of lawand have also taken into consideration the decisions reliedupon by the learned Senior Counsel appearing for theRevenue. was for expansion of the capacity, infrastructure facility andtherefore, was required to be treated as capital asset subjectto depreciation. 5.We have extensively heard Mr. M.R. Bhatt, the learnedSenior Counsel appearing for the Revenue Department andhave carefully gone through the order passed by the AssessingOfficer as well as the CIT(A) and the Income Tax AppellateTribunal. We have also perused the relevant provisions of lawand have also taken into consideration the decisions reliedupon by the learned Senior Counsel appearing for theRevenue. 6.This Court finds that the Revenue Department hasprincipally raised two issues during the course of hearing ofappeal, which falls for our consideration. The first issue whicharises for our consideration is the aspect of entire expenditureof assessee company more particularly, with regard to the ISOCertification expenditure being treated as under the head ofRevenue expenditure thereby deleting the disallowance ofRs.27,39,668/- for the assessment purpose. Upon appreciationof material brought on record vis-a-vis the findings of theCIT(A) as regards treating the ISO Certification expenditure as‘Revenue expenditure’ is concerned, we are in completeagreement with the said findings of the CIT(A). The SupremeCourt in catena of decisions has laid down the guidelines in thenature of test for determination of the actual nature of theexpenditure wherein it is observed that the test fordetermination of nature of expenditure has to be considered inlight of the fact that if the advantage received on incurringexpense facilities relates to the carrying on of the business more efficiently and more profitably leaving the fixed capitaluntouch, then such expenditure has to be treated as ‘revenue’in nature. 7.In the matter on hand, we agree with the view of ITATthat the CIT(A) was justified in treating the entire amount asrevenue in nature. We find that making of payments towardsobtaining ISO Certificate in no manner touches the fixedcapital of the company though it may create a positive imagefor particular product of the assessee company which mayultimately smooth the conduct of the business of the assesseecompany. However, the same in no manner actually adds toany gain in the fixed capital of the company. 8.So far as the second issue of treating subsidy of amountof Rs.3.87 crore as capital in nature is concerned, the recordsand findings reveals that 50% of the subsidy was received bythe assessee company under capital ASIDE Scheme. Duringthe course of scrutiny assessment proceedings, the assesseecompany seems to have produced relevant documentaryevidences to justify the purpose for which the subsidy wasgiven. This includes a letter dated 22.02.2010 written by theUnder Secretary, (Government of India) to the AccountantOfficer (Ministry of Commerce and Industries). On bare perusalof the content of the aforesaid letter, it reflects that suchsubsidy was given towards administrative expenses incurredby the assessee company during the execution of project forupgradation of infrastructure facilities. The CIT(A) has rightlyarrived at finding that the administrative expense beingincurred for expansion of the infrastructure facility falls in thecategory of ‘capital’ in nature and has therefore, rightly deleted the addition of an amount of Rs.3.87 crore made bythe Assessing Officer. 9.We could note that the ITAT has examined thecomponents of sanctioned subsidy and has thereafter arrivedat a finding that the same has been rightly treated as capitalsubsidy by CIT(A). Thus, the findings recorded by the ITATcannot be termed as perverse or dehors the record, which callsfor our interference. So far as reference to Explanation – 1 ofSection 43 of the Act is concerned, we find no error of law iscommitted by the ITAT as well as the CIT(A), while deleting theaddition of an amount of Rs.3.87 crore by treating the sameunder the capital subsidy. deleted the addition of an amount of Rs.3.87 crore made bythe Assessing Officer. 9.We could note that the ITAT has examined thecomponents of sanctioned subsidy and has thereafter arrivedat a finding that the same has been rightly treated as capitalsubsidy by CIT(A). Thus, the findings recorded by the ITATcannot be termed as perverse or dehors the record, which callsfor our interference. So far as reference to Explanation – 1 ofSection 43 of the Act is concerned, we find no error of law iscommitted by the ITAT as well as the CIT(A), while deleting theaddition of an amount of Rs.3.87 crore by treating the sameunder the capital subsidy. 10.In view of the above, concurrent findings recorded by theCIT(Appeals) and by the ITAT, the question of law raised by thedepartment does not deserve any further consideration. Thesaid question also being no more res-integra, it could not besaid that the present appeal involves any question much lesssubstantial question of law. It may be noted that the Appealunder section 260A of the Act, could be admitted only on theHigh Court being satisfied that the case involves a substantialquestion of law. 11.In view of the aforesaid, this appeal fails and is herebydismissed. No order as to costs. (J. B. PARDIWALA, J) (NISHA M. THAKORE,J)