ACIT, CIRCLE 10(1), NEW DELHI V. JINDAL POLY FILMS LTD, BULANDSHAHR

ITA 1706/DEL/2023

AI Insights

The case involves multiple appeals by both the Revenue and the assessee, Jindal Poly Films Ltd., concerning disallowances and tax adjustments made by the AO for the assessment years 2017-18, 2018-19, and 2019-20. The primary issues revolved around the disallowance of management consultancy charges paid to M/s Soyuz Trading Company, the taxability of sales-tax subsidies under the Package Scheme of Incentives (PSI), and various disallowances under section 14A read with rule 8D of the Income Tax Act. The Tribunal examined the nature of services provided by Soyuz, the economic benefits derived from them, and the compliance with the terms of the PSI. The Tribunal also considered the procedural aspects of how disallowances were made and the substantive evidence provided by the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 41769 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2019-2020
• Other Referred Cases: CIT v. Malayalam Plantations Limited, CIT v. Walchand & Co., J.K. Woollen Manufacturers v. CIT, CIT v. Birla Cotton Spg. and Wvg. Mills Ltd., Madhav Prasad Jatia v. CIT U.P., S.A. Builders Ltd. v. CIT, CIT v. Bharti Televentures Ltd, CIT v. Padmani Packaging (P) Ltd., CIT v. Rockman Cycle Industries Ltd., CIT v. EKL Appliances Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DEL
• Assessee Lawyers: SOYUZ
• Keywords: Additional evidence; Transfer pricing; Depreciation; Rule of consistency; Commercial expediency; Earning of tax free income; Rule 8D; Revision of order; Related party transaction
• Section: 143(3); 142(1); 263; 153A; 43; 22; 13; 145; 14A; 115JB; 72; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : C : NEW DELHI BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. & Assessment Year Appellant Respondent Assessee by Revenue by 1705/Del/2023 2017-18 ACIT, Circle-10(1), New Delhi. Jindal Poly Films Ltd., 19th K M Hapur, Bulandshahr Road, PO Gulaothi, Bulandshahr, Uttar Pradesh – 203 408. PAN: AAACJ7650E Shri Rohit Jain, Advocate & Shri Shivam Gupta, CA Shri Dayainder Singh Sidhu, CIT- DR 1372/Del/2023 2017-18 Jindal Poly Films Ltd., Plot No.12, Sector-B-1, Local Shopping Complex, Vasant Kunj, New Delhi – 110 070. PAN: AAACJ7650E ACIT, Circle-10(1), New Delhi - Do - - Do - 1373/Del/2023 2018-19 - Do - - Do - - Do - - Do - 1706/Del/2023 2019-20 ACIT, Circle-10(1), New Delhi Jindal Poly Films Ltd., 19th K M Hapur, Bulandshahr Road, PO Gulaothi, Bulandshahr, Uttar Pradesh – 203 408. PAN: AAACJ7650E - Do - - do – 1374/Del/2023 2019-20 Jindal Poly Films Ltd., Plot No.12, Sector- ACIT, Circle-10(1), New Delhi - do - - do - ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 2 B-1, Local Shopping Complex, Vasant Kunj, New Delhi – 110 070. PAN: AAACJ7650E Date of Hearing : 11.03.2025 Date of Pronouncement : 26.03.2025 ORDER PER ANUBHAV SHARMA, JM: These are appeals preferred by both the Revenue as well as the Assessee against the orders of the Ld. First Appellate Authority in appeals filed before him against the orders of the ld. Assessing Officer (hereinafter referred to as the Ld. AO, for short). Further details of the orders of the lower authorities are as under:- ITA No. & Assessment Year CIT(A) who passed the order Appeal No. & Date of order of the CIT(A) AO who passed the assessment order & Date of order Section of the IT Act under which the AO passed the order 1705/Del/2023 2017-18 CIT(A), NFAC, Delhi. CIT(A), Delhi - 22/10491/2019-20, Dated 05.04.2023 Circle LTU-2, Delhi, date: 30.12.2019 143(3) 1372/Del/2023 2017-18 - Do - Do - - Do - - Do - 1373/Del/2023 2018-19 - Do NFAC/2017- 18/10088931, dated 15.03.2023 National Faceless Asstt. Centre, Delhi, dated 30.09.2021 143(3) r.w.s. 144B 1706/Del/2023 2019-20 - Do- NFAC/2018- 19/10133148, Dated, 05.04.2023 National Faceless Asstt. Centre, Delhi, - Do - ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 3 dated 31.03.2022 1374/Del/2023 2019-20 - Do- - Do - - Do - - Do - 2. As the grounds in these appeals arise out of similar disallowances the appeals were heard together and are decided together. The assessee is a company engaged in the business of manufacturing of polyester chips, Biaxially Oriented Polyester Film, Biaxially Oriented Poly Propylene Film, Metalised Film and PVDC Film. In the respective years covered by the appeals, certain disallowances were made by the ld. AO in regard to which the assessee had succeeded in some of the issues before the ld.CIT(A). Accordingly, the appeals from both the sides are before this Tribunal. Ld. Counsel of assessee has stated at bar that juridicication and legal grounds are not pressed. On the basis of the rival submissions, we find that the grounds in these appeals can be conveniently disposed of in the form of the following issues, and other grounds are only consequential.:- Issue No.1: Whether the ld. tax authorities below were justified in making a disallowance of management consultancy charges paid to M/s Soyuz Trading Company (hereinafter referred to as ‘Soyuz’ for short) [Assessment years 2017- 18, 2018-19 & 2019-20]. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 4 Issue No.2: Whether the ld. tax authorities have failed to appreciate that sales- tax subsidy/incentive availed under the Package Scheme of Incentives (Maharashtra) 2001/2007 (‘PSI’ for short) ought not to be taxed in the current year [Assessment years 2017-18, 2018-19 & 2019-20]. Issue No.3: Whether the disallowances u/s 14A r.w.r 8D in respective year 2017-18 and 2019-20 have been erroneously deleted by the ld.CIT(A). Issue No.4: Whether the ld.CIT(A) has erroneously deleted an addition made by the AO on account of foreign exchange fluctuation gain in AY 2017-18. Issue No.5: Whether the ld.CIT(A) has erred in deleting the addition made by the AO by way of ad hoc disallowances of certain expenditure in AY 2017-18. Issue No.6: Whether the ld.CIT(A) has erred in deleting an upward adjustment impugned u/s 14A of the Act to book profits u/s 115JB of the Act [AY 2019-20]. Issue No.7: Whether the ld.CIT(A) has erred in deleting upward adjustment of subsidy to book profits u/s 115JB of the Act [2019-20]. 3. On bearing both the sides, we find that the ld. counsel for the assessee has re-asserted the case of the assessee as was put up by way of submissions before the ld. tax authorities below and, on the contrary, the ld. DR has relied the orders ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 5 of the ld. AO. Wherever relevant, the rival contentions will be dealt specifically while determination of the aforesaid issues. 4. At the outset, we will like to observe that grounds No.1 and 2 in the appeals of the assessee challenging the impugned orders of the ld. tax authorities on the basis of non-providing opportunity of personal hearing have not been pressed and are accordingly dismissed. 5. As with regard to grounds covered by Issue No.1 as mentioned above, we find that the ld. AO has alleged that the assessee has failed to establish the correctness of the payments and the nexus of expenditure with business operations. As for convenient reference, for disposal of the appeals, the facts and impugned orders wherever relevant to be referred shall be picked up from assessment year 2017-18. In the impugned assessment, the ld. AO has mentioned that the assessee did not establish the nature of services obtained by way of relevant evidences. It was also concluded that the payments for services should have been booked on the basis of actual services received and backed by the invoices. The allegation of the AO is that Soyuz is a Calcutta based company and has received major fees from the assessee and there is absence of nexus of the expenditure made by the assessee against the so-called services received from Soyuz. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 6 5.1 The case of the assessee is that in order to strengthen its business capabilities the assessee is availing management/consultancy services from Soyuz covering wide spectrum of operational/administrative areas including production, planning, procurement, project/capital-cum-expansion, quality improvement, marketing research, marketing and sales promotion(domestic and export), financing, auditing, recruitments and training, legal services and information technology services. It is claimed that these services are being availed since financial year 2002-03. It is also the case of the assessee that on the basis of Management Service Agreement (hereinafter referred to as ‘the Agreement’) covering respective years the services were being availed and in the AY 2017-18 agreement dated 30.03.2015, the copy of which is available at pages 102 to 110 of the paper book was the foundation. 5.2 During the course of argument, the ld. counsel for the assessee has taken us across the paper book and referring to transfer pricing documentation wherein detailed benchmarking analysis has been done in regard to the transaction with Soyuz and has referred to the copy of transfer pricing report being made available at pages 183 to 272 of the paper book. The ld. counsel has submitted that these services availed are very critical for the business activity of the assessee on day-to-day basis. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 7 6. The ld. counsel has submitted that it was due to these services being availed since 2002, the turnover of the assessee has increased from 395.98 crores in 2002-03 to Rs.3516.78 in 2019-20. It was also submitted that no addition of consultancy fee paid to Soyuz from 2002-03 to 2014-15 was made. 7. In this context, we find that assessments were completed u/s 143(3) and also u/s 153A and in AY 2012-13 assessment was completed u/s 147/143(3) of the Act. We also find that in AY 2016-17 the AO had issued notice on the issue, but, the same was dropped and, thereafter, the ld.PCIT has examined the issue u/s 263 of the Act and, on the basis of the explanation given by the assessee, the proceedings u/s 263 were dropped. 8. The ld. counsel has also established before us that the transactions stand accepted by the Revenue in subsequent year 2020-21 and, in that context, our attention was drawn to notice u/s 142(1) of the Act where the AO had sought justification of the expenditure and based upon the response, no addition was made in the assessment concluded u/s 143(3) of the Act. The ld. counsel has also submitted that the transactions have been duly accepted by the GST authorities as genuine services provided by Soyuz. 9. Then, the ld. counsel submitted that even otherwise as tax has been offered by Soyuz and the assessment of Soyuz has been completed u/s 143(3) of the Act, then the whole exercise of disallowance is tax neutral. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 8 10. On the basis of the aforesaid averments duly established by the relevant pieces of evidence available on the paper book, we are of the considered view that on the principle of consistency alone the disallowance made by the AO is unwarranted and was liable to be quashed by the Ld. CIT(A). The nature of services and the terms of agreement and the nature of trade of the assessee have not changed over the years. It appears that agreements are entered for short period, but, otherwise there is no change in the terms and conditions for provision of services except the compensation part. 11. Further, after going through the impugned orders, it is apparent that the ld. tax authorities have not examined the services rendered by the Soyuz individually and on a very wholesome manner have concluded that the assessee did not require these services. We are of the considered view that when expenditure is being examined on the basis of the business expediency, then, without pointing out specific instances of deficiency or discrepancy in the working, operations and financials of the company, such a disallowance is not sustainable. More importantly when otherwise the expenditure has been accepted in previous years and even subsequently. 12. In this context, we also find force in the contention of the ld. counsel that elaborate factual details as called by the AO were filed and without controverting the same and determining as to how the varied services availed have no nexus with the business of the assessee, the AO has made the disallowance. The ld. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 9 AR has drawn our attention to the notes to accounts of audited financials of the assessee wherein under the various heads, the expenditures have been made and the assessee had clearly disclosed in related party transaction as what professional service were availed. The transfer pricing report available at pages 183 to 272 of the paper book has been referred extensively and the same establishes that a detailed benchmarking analysis has been undertaken with regard to the transactions concluding that the same were at arm’s length. On behalf of the assessee, the detailed break-up of income offered to tax by Soyuz and quarterly reports submitted to management of the assessee by Soyuz detailing the key services rendered by them in each of the quarters of respective financial years were provided. 13. We are of the considered view that the detailed economic analysis of the nature of benefits derived by the assessee from profession of each of the services rendered by Soyuz have not been disturbed on the basis of any factual determination of the issue, but, in a very arbitrary manner the services have been found to be not justified. 14. The ld. counsel has also mentioned of the fact that certain additional evidences have been filed before this Tribunal inter alia including e-mail correspondences exchanged between the assessee company and Soyuz to further corroborate services rendered during the year. However, without these evidences otherwise also the material on record is sufficient to conclude that without ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 10 sufficiently countering the evidences, the expenses have been alleged to be not incurred wholly and exclusively for the purpose of business. On the contrary, establishing the commercial expediency for availing services from Soyuz we find that the nature of services is such that they have held the assessee to cost savings increase revenue/profits and in the TP report the same have been quantified to a lot of extent. As for completeness we would like to reproduce the relevant part:- Service availed Benefit derived Benefits derived Examples of suggestion/advises given Services in relation to procurement of law material Reduction in cost of raw materials procured from various supplies 24.18 Crore  Negotiated contract with the (potential) suppliers  Negotiated additional discount vis-à-vis discount availed in previous year  Discount @ 20% + 10% quantity discount + 750/MT Services in relation to Sales and marketing Introduction of new customers 7.9 Crore  The service provider identified new customer for export of films (quantity 3147 MT) Services in relation to purchase of capital equipment/ project implementation Benefit due to reduction in cost of capital goods 18.98 Crore  Service provide negotiated with various suppliers by procurement of capital goods at cheapest rates Services in relation to purchase of capital equipment/ project implementation Benefit due to set up of demetalizing plant 6.7 Crore  Service provide was involved in implantation of the dematalizing project ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 11 Services in relation to purchase of capital equipment / project implementation Benefits due to reduction in production of non- reusable waste 5.4 Crore  The service provide advised the service recipient for implementation of grinder cutterd 15. Further, it may be appreciated that the turnover of the assessee company increased from Rs.479.73 crores in 2002 i.e., the year in which services of Soyuz was first availed to Rs.2,871.10 crores in 2017, owing to the continuous professional advise and services provided by Soyuz. 16. The settled position of law is that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue, as laid down by the Supreme Court repeatedly in the following cases: - CIT v. Malayalam Plantations Limited: 53 ITR 140 (SC) - CIT v. Walchand& Co.: 65 ITR 381 - J.K. Woollen Manufacturers v. CIT: 72 ITR 612 (SC) - CIT v. Birla Cotton Spg. and Wvg. Mills Ltd.: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC) - S.A. Builders Ltd. v. CIT : 288 ITR 1 (SC) - CIT v. Bharti Televentures Ltd: 331 ITR 502 (Del) - CIT v. Padmani Packaging (P) Ltd. : 155 Taxmann 268 (Del) - CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) - CIT v. EKL Appliances Ltd. : 345 ITR 241 (Del HC) ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 12 17. Thus we are satisfied that ld. CIT(A) has erred in not examining the issue in correct perspective and accordingly the respective grounds in the appeals covering the ground are determined in favour of the assessee. 18. In regard to the second issue the relevant facts are that during the previous year relevant to assessment year 2017-18, the appellant was entitled to Industrial Promotion Subsidy (IPS) under the Package Scheme of Incentive 2001/2007 (in short ‘PSI’) by the Government of Maharashtra relating to packaging films business of the company for making substantial investment by way of setting up its manufacturing unit for production of Polyester Film/ Polypropylene Film in Mundegaon, District Nashik, Maharashtra. The case of assessee is that in terms of the aforesaid, the maximum quantum of subsidy was linked to the fixed capital investment and payment of IPS every year was linked and subjected to the quantum of payment of “relevant taxes” by the eligible unit to the State or to any of its departments or agencies over a period of 7 years. The eligible unit is thus eligible to lower of the amount determined as per the fixed capital investment and the payment of relevant taxes over the period of 7 years. The relevant taxes, for the purpose, was defined to mean the amount of tax payable under Maharashtra Value Added Tax Act (MVAT) 2002 and Central Sales Tax (CST) Act, 1956 subject to certain adjustments. For the relevant previous year, the audited financial statements were prepared in accordance with Indian Accounting Standards (in short Ind-AS) as notified by the Ministry of ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 13 Corporate Affairs pursuant to section 133 of the Companies Act, 2013. The appellant, in its books of accounts, recognized subsidy aggregating to Rs.55.77 crores as ‘Deferred Government Grants’ in ‘Non-current Liabilities’ and amortized/ recognized the same in the statement of profit and loss on straight line method. Accordingly, out of the total amount of Rs.55.77 crores, an amount of Rs.2.78 crores (Rs.2,78,04,611) was amortized and recognized as income in the financial statements. For tax purposes, the appellant followed a consistent practice of offering for tax the amount as recognized as income in the financial statements and/ or actual receipt of subsidy, whichever is earlier, in accordance with the amended provisions of 2(24) of the Act read with Income Computation and Disclosure Standard- VII (ICDS-VII) issued by the CBDT. 19. In this context the ld. Counsel in written submission has stated the provision of law and we consider it necessary to reproduce the same here below:- “ICDS-VII specifically deals with Governmental Grants and inter alia, provides that government grant shall not be recognized until there is reasonable assurance that: (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be received (refer para 4). The ICDS further states that recognition of Government grant shall not be postponed beyond the date of actual receipt. The relevant extracts of the said ICDS are reproduced as under: “Scope ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 14 1. This Income Computation and Disclosure Standard deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc. 2. This Income Computation and Disclosure Standard does not deal with:— (a) Government assistance other than in the form of Government grants; and (b) Government participation in the ownership of the enterprise. ……………… 4. Recognition of Government Grants 4(1) Government grants should not be recognised until there is reasonable assurance that the person shall comply with the conditions attached to them, and the grants shall be received. 4(2) Recognition of Government grant shall not be postponed beyond the date of actual receipt. ……………. 5. Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to.” Refund of Government Grants. 6. Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognised as income over the same period over which the cost of meeting such obligations is charged to income. ……………….. 11. The amount refundable in respect of a Government grant referred to in paragraphs 6, 8 and 9 shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit and loss statement. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 15 12. The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate.” (emphasis supplied) The provisions of the Act recognize government grant (and its variants) as income under section 2(24)(xviii) except for grants in relation to depreciable assets (which are reduced from actual cost). There are no explicit provisions in the Act which pinpoint the year in which such treatment should be given. Although, section 43(1) mandates reduction of grant from cost of asset in the year of acquisition, there is no guidance available in the Act as to when government grants are to be recognized as income. Having regard to above, since the provisions relating to taxation of government grants were not aligned with the provisions of the Act, amendment to section 2(24)(xviii) of the Act was made in order to align the provisions of ICDS-VII with the provisions of the Act vide Circular No. 19/2015 dated 27.11.2015 through Explanatory Notes to provisions of Finance Act, 2015. The relevant extract of the Circular is reproduced as under: “Explanatory Notes to Provisions of Finance Act, 2015 …………. 5. Alignment of provisions relating to taxation of Government Grants with the provisions of Income Computation and Disclosure Standards (ICDS). 5.1 Sub-section (2) of section 145 of the Income-tax Act provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. The Central Board of Direct Taxes (CBDT) notified ICDS-I to ICDS-X vide Notification No.S.O. 892(E) dated 31st March, 2015 after wide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 16 depreciable asset shall be recognised as income in accordance with the provisions of the said ICDS. The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidance for treatment of Government grants relating to acquisition of an asset. However, there was no specific guidance available under the provisions of the Income-tax Act for treatment of other Government grants. During the public consultations for ICDS, the stakeholders suggested that in order to avoid any future controversy in this matter, there should be specific provision in the Income-tax Act for treating these Government grants as income. The Accounting Standard Committee, which drafted the ICDS, has also examined the suggestions/comments received during public consultations and suggested that the issue of legislative amendment for bringing certainty in this matter may be examined. In order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act. 5.2 As mentioned in Press Release dated 5th May, 2015, the amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him. 5.3 Applicability:- This amendment takes effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years.\" (emphasis supplied)” In line with the aforesaid amendment, the legislature also inserted section 145B of the Act vide Finance Act, 2018 (w.r.e.f. 01.04.2017) ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 17 which provided that income referred to in sub-clause (xviii) of clause (24) of section 2 shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year. The said section reads as under: “Definitions. 2. In this Act, unless the context otherwise requires,- ……….. (24) “income” includes - ……….. (xviii) assistance in the form of a subsidy or the grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provision of Explanation 10 to clause (1) of section 43;” 20. In the impugned assessment order, the assessing officer qua the PSI has alleged, that there was reasonable assurance that the conditions attached to the grant of subsidy stood fulfilled and hence proceeded to tax the entire amount of subsidy receivable in the relevant assessment year [after allowing reduction of amount already offered to tax by the appellant i.e., Rs.52,99,30,389 [55,77,35,000 – 2,78,04,611], without appreciating that the aforesaid subsidy, not having accrued nor being due to the appellant in the year under consideration was not taxable as income in terms of Section 2(24)(xviii) of the Act read with ICDS-VII. ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 18 21. On appeal, the CIT(A) directed deletion of addition to the extent of Rs.3.60 crores, being subsidy relatable to assessment year 2015-16, after necessary verification. The CIT(A), however, proceeded to confirm addition of Rs.52.99 crores on account of capital subsidy receivable by the appellant on the ground that though IND AS-20 permits postponement of recognition of subsidy till the point of actual receipt, the same does not hold good for ICDS-VII. 22. In regard to the addition of Rs.52.99 crores ld. Counsel has submitted that the assessing officer failed to appreciate that the entire amount of subsidy was not taxable in the relevant year and further failed to appreciate that the entire amount was, in any case, duly offered to tax by the appellant in the subsequent assessment year(s) and addition in the current year shall result in double taxation of the very same amount. It was submitted that AO has not appreciated that the aforesaid subsidy, not having accrued nor being due to the appellant in the year under consideration was not taxable as income in terms of Section 2(24)(xviii) of the Act read with ICDS-VII. Further, in the impugned assessment order, the assessing officer also made addition of Rs.3.60 crores (Rs.3,60,70,000), being subsidy relatable to assessment year 2015-16, which was already offered to tax in the said year, resulting in double taxation of the very same amount. It was submitted that merely determination of the entitlement of the appellant to receive subsidy on the basis of the investment made does not result in crystallization of the same as an accrued amount to be ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 19 taxed as income. Moreover, mere recognition of the amount in the financial statements also does not result in crystallization of claim/ amount as ‘income’. 23. Now what is material is that PSI was linked to fixed capital investment and the payment of the relevant taxes for a tenure of 7 years. Moreover, receipt of any amount as subsidy from the government was subject to and hedged by various conditions, including but not limited to continued compliance of all terms and conditions stipulated in the Scheme/Eligibility Certificate, furnishing of required documents, payment of relevant taxes, filing of application for making a claim, processing of the claim of the appellant, verification of claim followed by its acceptance, either wholly or in part, by the government, which was then followed by the receipt of the amount. Ld. Counsel has established that in terms of the aforesaid PSI read with the eligibility certificate, the appellant is entitled to industrial promotion subsidy to the extent of lower of either: (i) fixed capital investment made; or (ii) relevant taxes (i.e., VAT/CST) paid to the State Government during the specified period of 7 years, subject to certain adjustments. That apart, the eligibility criteria to claim subsidy under PSI is multi-pronged and is dependent on multiple factors/parameters/stipulations, like employment of Scheduled Castes/ Scheduled Tribes and local candidates, Technology up gradation, Quality certification, cleaner protection measures, Patent Registration, Inspection of assets, records, documents, registers, Non- closure of unit, Furnishing of periodical statements as prescribed by the ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 20 Directorate of Industries. 24. Further, as per the terms of the PSI, the amount of disbursement is determined every year by the authorized agency, after due verification and ascertaining that the unit/assessee continues to fulfill the stipulated conditions of the Scheme. Thus we are of considered view that the amount of subsidy is not clearly ascertainable/determinable in advance but is subject to independent determination every year on the basis of taxes payable and paid on the sales made, which is a variable component and is further subject matter of verification followed by acceptance, fully or partly, by the concerned authorities. The assessee was required to furnish periodical statements and on the basis the submission, sanction letter is issued by the concerned authorities. At the same time it is also established that mere issuance of sanction letter is not an absolute assurance of receipt of the subsidy amount in so far as the sanction letter is merely a provisional sanction which is subject to fulfillment of further conditions viz., furnishing of production records and returns, audited statement accounts confirming maintenance of normal production etc., and on submission of such documents, the same is verified by the concerned authorities and only thereafter the verification is done and the amount of disbursement is finally made. Further, in a situation where the documentation furnished by the assessee is not to the satisfaction of the concerned authorities, further documentation may be called for and/or the provisional sanction can be ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 21 withdrawn and no disbursement would be made till the filing of the documents to the satisfaction of the authorities. 25. In view of the above, it is established that there is uncertainty of receipt of subsidy until the stage of complete verification of documents by concerned authorities post issuance of provisional sanction, which is followed by its disbursement. Therefore, the subsidy amount crystallizes and actually accrues as ‘income’ in favour of the appellant only on the happening of the said events and not prior thereto. Thus, it is not a situation where the appellant is guaranteed or even for that matter assured that subsidy applied for, will in effect be automatically sanctioned/received by the appellant despite having an operational Eligibility Certificate since the monitoring agency is empowered to cancel the Eligibility Certificate, or direct recovery of the incentives drawn / availed in the instance any of the stipulated conditions of the Eligibility Certificate issued under the Scheme stands violated by the appellant. 26. As a matter of fact, provisional sanction letter in respect of subsidy receivable during the relevant assessment year 2017-18 was received by the assessee only in AY 2018-19 vide sanction letter dated 23.10.2017 that too only for part of the amount claimed and which too was subject to submission of further documentation by the assessee which was to be verified by the concerned authorities. On verification of the documents submitted by the assessee, the subsidy amount was disbursed only in AY 2019-20 and the ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 22 balance amount was thereafter sanctioned and disbursed in AY 2020-21. Accordingly, as and when the amount was received after approval by the authorities, the same was offered for taxation. 27. Ld. Counsel has established that during the relevant previous year, the assessee recognized subsidy as ‘Deferred Government Grants’ in ‘Non-current Liabilities’ in accordance with applicable Ind-AS. In books, the appellant, based on the sales made during the period and the formula prescribed in the Scheme, estimated the amount of subsidy at Rs.55.77 crores for the packing division and Rs.2.22 crores for the Global Non-wovens Division aggregating to Rs.58 crores (approx.). Out of the same, the appellant amortized/ recognized an amount of Rs.2.78 crores (Rs.2,78,04,611) as income in the financial statements. Indeed the aforesaid amount was merely a self-determined estimate prepared by the assessee, which was neither verified nor sanctioned by the concerned authorities and was recognized for book purposes in terms of the applicable IndAS. Thus we are of considered view that as for tax purposes, the appellant, followed a consistent practice of offering for tax the amount as recognized as income in the financial statements and/ or actual receipt of subsidy, whichever is earlier, in accordance with the amended provisions of 2(24) of the Act read with ICDS-VII issued by the CBDT. Therefore the fact that in accordance with the aforesaid consistent practice, the amount of subsidy pertaining to the relevant assessment year 2017-18 was offered to tax in the ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 23 return of income filed for AY 2017-18 to 2020-21 in accordance with provisions of section 2(24) of the Act read with ICDS-VII was as under: (Rs.in crores) Subsidy offered to tax in AY Subsidy Offered to Tax Pertaining to AY Total Subsidy Offered to Tax 2017-18 2018-19 2019-20 2017-18 2.96 - - 2.96 2018-19 2.96 21.49# - 24.45 2019-20 42.41# 3.20 28.30# 73.91 2020-21 9.86# 33.91# 5.68 49.45 2021-22 - - 39.14# 39.14 2022-23 - - 27.83# 27.83 Total 58.19 58.60 100.95 217.74 # - Includes subsidy actually received 28. Thus we are inclined to accept the case of assessee that the aforesaid treatment being in accordance with the provisions of ICDS and the Act the alleged income can be said to accrue when the assessee acquires vested right to receive the amount, on fulfilment of condition of scheme to the satisfaction of competent government. 29. Even otherwise, it is undisputed that the appellant has ultimately offered the entire amount of subsidy to tax in the subsequent assessment year(s) 2019- 20 and 2020-21. Thus, the only academic issue which remains is with respect to the year of taxability of such income, which, it is submitted, is merely a timing difference. Since the appellant is a company, assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of taxability of such income is, in any case, revenue neutral. Accordingly, even on this ground, the assessing officer has erred in bringing to tax the aforesaid amount of subsidy, disregarding the regular and consistent method of accounting followed ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 24 thereafter. 30. Lastly the aforesaid method of recognition of subsidy in accordance with the provisions of the Act and ICDS has been duly accepted by the assessing officer in the succeeding assessment year(s) 2020-21. Copy of the assessment order passed under section 143(3) for AY 2020-21 dated 29.09.2022 is placed at pages 438 to 445 of the PB. We find that specific queries were raised by the assessing officer during the course of assessment and on appreciating that it is merely a timing issue and the entire exercise is revenue neutral, accepted the position adopted by the appellant, being in accordance with the provisions of the Act and ICDS. 31. Consequently we are inclined to hold that subsidy being correctly offered to tax by the appellant, the addition of made by the assessing officer and confirmed by the CIT(A) on this account is liable to be deleted in toto. Accordingly the issue with respective grounds as raised in respective appeals stands sustained. 32. Issue No.3: As with regard to this issue arising out of the appeal of the Department, we find that during the assessment year 2017-18 and 2019-20, the assessee held investments in equity shares of various companies and mutual funds. However, no exempt income was earned on such investments. The disallowance was made by the ld. AO by holding that a sum of Rs.8,30,77,170/- ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 25 in Ay 2017-18 and Rs.5,62,51,595/- was explained being incurred for earning exempt income. The ld. CIT(A) has deleted this allowance. 33. Now, we find no error in the findings of the ld.CIT(A) that as the assessee has not earned any exempt income from investments in the mutual funds held by it, thus, no question of expenses incurred could have been disallowed u/s 14A of the Act. Reliance can be placed on the judgement of the Hon’ble Supreme Court in Maxopp Investment’s case 203 Taxman 364 (Delhi) as affirmed by the Hon’ble Supreme Court in (2018) 402 ITR 640. Apart from that there is substance in the assertion of the assessee that without recording any satisfaction for applying Rule 8D, the disallowance was made in a mechanical manner. Thus, the issue deserves to be decided against the Department. 34. Issue No.4: The issue arises out of ground raised by the Department in AY 2017-18 as the assessee had credited an amount of Rs.16,53,23,037/- as exceptional item in its statement of Profit & Loss Account on account of gain arising due to exchange difference on transaction/settlement of long-term foreign currency loans for acquisition of fixed assets. Admittedly, the gain on account of foreign exchange fluctuation was deducted by the assessee while computing its taxable income. The ld. AO has made addition of this amount on the ground that the assessee had failed to furnish details of loan taken, purchase agreement, etc., and no corresponding adjustment was made to the value of fixed assets on account of change in rate of exchange. In appeal, the ld.CIT(A) has directed the ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 26 AO to verify necessary documentary evidence in support of loans availed for purchase of fixed assets and necessary adjustments to block and thereafter, allow reduction of such foreign exchange fluctuation gains. The case of the assessee is that as the foreign currency fluctuation gain was purely on capital account being related to fixed assets, the said gains were reduced from the income of the assessee for the purpose of computing taxable income. The ld. AR has pointed out that the AO has in appeal giving effect order dated 21.02.2024, deleted the addition after due verification. Thus, this ground becomes superfluous and, accordingly, determined against the Department. 35. Issue No.5: The issue arises out of ground raised by the Department in AY 2017-18 and we find that in the impugned assessment order, the AO disallowed 10% of the following expenses:- S.No. Expenditure Amount claimed as expenditure (Rs. in lacs) 10% Amount disallowed by assessing officer (in Rs.) 1. Legal & Retainership Charges 5,190.66 5,19,06,578 2. Miscellaneous Expenses 862.74 86,27,418 3. Commission & Other Selling Expenses 519.07 51,90,661 4. Repairs & Maintenance – Others 746.77 74,67,694 5. Travelling & Conveyance 798.01 79,80,144 Total 8117.25 8,11,72,495 36. The ld.CIT(A) has deleted the same and we find no error in the findings of the ld.CIT(A) that without putting forward any specific reason for making disallowance, such ad hoc disallowance is not in conformity with the principles of the Act. We find that the ld. AO has not examined any aspect of the business ITAs No.1705, 1372, 1373, 1706 & 1374/Del/2023 27 expediency and merely on ad hoc basis made the disallowance. The revenue from operations stands accepted as it is and that all the more did not justify ad- hoc deletion. Thus, this issue is decided against the Department. 37. Issue No.6 & 7: These issues are taken up together and we are of the considered view that as the issue of disallowance u/s 14A and the issue of subsidy have been decided against the Department, no adjustment u/s 115JB can be sustained. Accordingly, these issues are decided against the Department. 38. As a consequence to the aforesaid determination of the issues corresponding to the relevant grounds in the appeals, the appeals of the assessee are allowed and that of the Revenue are dismissed. Order pronounced in the open court on 26.03.2025. Sd/- Sd/- (M. BALAGANESH) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26th March, 2025. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "