Deputy Commissioner of Income Tax, Circle-2(1), Hyderabad V. M/s. K. Raheja IT Park (Hyderabad) Pvt. Ltd., Hyderabad

ITA 1324/HYD/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74741 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 21-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Capital receipt; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NOS. 1324 & 1325/HYD/2013 ASSESSMENT YEARS: 2006-07 & 2007-08 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 2(1), HYDERABAD. VS. M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD., HYDERABAD. PAN AACK1914G APPELLANT RESPONDENT REVENUE BY: SRI SOLGY JOSE T. KOTTARAM ASSESSEE BY: SRI K. GOPAL DATE OF HEARING: 07/02/2014 DATE OF PRONOUNCEMENT: 21/03/2014 O R D E R PER CHANDRA POOJARI, AM: BOTH THESE APPEALS PERTAINING TO ONE ASSESSEE FILED BY THE REVENUE ARE DIRECTED AGAINST THE SEPARATE ORDERS OF CIT(A)-III, HYDERABAD FOR THE ASSESSMENT YEARS 2006-07 AND 2007 -08. AS THE ISSUE INVOLVED IN BOTH THESE APPEALS ARE IDENTICAL, BOTH THE APPEALS WERE CLUBBED AND HEARD TOGETHER AND, THEREFORE, A C OMMON ORDER IS PASSED. 2. THE GROUNDS RAISED ARE COMMON IN BOTH THE APPEAL S, THE SAME ARE AS FOLLOWS: 1. THE CIT(A) ERRED ON FACT AND IN LAW IN GRANTING RELIEF TO THE ASSESSEE. 2. THE CIT(A) ERRED ON FACTS AND IN LAW IN TREATING PERFORMANCE RELATED INCENTIVE AS CAPITAL RECEIPT. 3. THE CIT(A) ERRED ON FACTS AND IN LAW IN TREATING SUBSIDY GRANTED FOR CREATION OF JOBS AS CAPITAL RECEIPTS. 2 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. 3. TO DISPOSE OF THESE APPEALS, WE REFER THE FACTS FROM AY 2006- 07 IN ITA NO. 1324/HYD/2013. 4. BRIEFLY THE FACTS OF THE CASE ARE THAT THE APPEL LANT IS A COMPANY ENGAGED IN THE BUSINESS OF REAL ESTATE DEVE LOPMENT. DURING THE COURSE OF THE CURRENT ASSESSMENT PROCEED INGS THE ASSESSING OFFICER FOUND THAT THE APPELLANT COMPANY HAD RECEIVED A SUBSIDY OF THE AFOREMENTIONED AMOUNT FROM THE GOV ERNMENT OF ANDHRA PRADESH. THE APPELLANT TREATED THE SUBSIDY A S A CAPITAL RECEIPT WHEREAS THE ASSESSING OFFICER TREATED THIS SUBSIDY AS REVENUE RECEIPT AND ADDED BACK THE SUBSIDY BEING IN COME IN NATURE. THE ASSESSING OFFICER MADE THE ADDITIONS BY GIVING THE FOLLOWING REASONS:- ' 3.2. THE ABOVE SUBMISSIONS OF THE ASSESSEE HAVE BEEN EXAMINED. HOWEVER THE SAME CANNOT BE ACCEPTABLE IN VIEW OF THE FOLLOWING REASONS: I. THE ASSESSEE COMPANY HAS RECEIVED LAND OF 109.36 ACRES FROM GOVERNMENT OF ANDHRA PRADESH, IF THE CONDITION S ENUMERATED IN THE SCHEME OF INDUSTRIAL PARK. IN THE ABOVE, THE LAND COST WAS AFTER ALLOWING SUBSIDIES ETC. WAS FIXED AT RS.54.57 CRORES. FOR THIS PURPOSE, INSTEAD OF MAKIN G THE PAYMENT THE ASSESSEE HAS PLACED BANK GUARANTEE EQUIVALENT TO COST OF LAND OF RS.54.57 CRORES WITH APIIC. THE AMOUNT OF COST OF LAND IS THE COST OF THE PROJE CT BUT FOR THE SUBSIDY OF CREATION OF JOBS WAS PLACED AS A BANK GUARANTEE. II. THE PURCHASE CONSIDERATION OF RS. 54.57 CRORES WAS THE CONCESSION RECEIVED TO THE ASSESSEE COMPANY BUT WIT HOUT THE AGREEMENT, IT IS A CAPITAL EXPENDITURE FOR ACQU ISITION OF THE SAID LAND. ONE WAY THE ASSESSEE COMPANY RECEIVE D CONCESSION IN FIXING THE COST OF LAND AT RS.54.57 C RORES IN ADDITION TO THE ABOVE, IT HAS OFFERED BANK GUARANTE E WHICH WILL BE RELEASED ON ACCOUNT OF CREATION OF JOBS. III. DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE COMPANY STATED TO BE CREATED 1536 JOBS AND THE EQUI VALENT AMOUNT OF RS.3,07,20,000/- WAS REMITTED TO THE ASSE SSEE'S ACCOUNT. THE REMISSION OF THE QUANTUM OF EXPENDITUR E WHICH OTHERWISE COULD HAVE BEEN MET IS THE BENEFIT DERIVED TO THE ASSESSEE COMPANY OVER AND ABOVE THE CONCESSI ON IN LAND COST. IN THE ABOVE LAND TRANSACTION, WITHOUT T HE ABOVE 3 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. ARRANGEMENT, THE ASSESSEE COULD HAVE PAID THE LAND COST TO THE GOVERNMENT OF ANDHRA PRADESH. THE ASSESSEE COMPANY AFTER HAVING INCURRED EXPENSES TOWARDS SALA RIES ETC., OF SUCH CREATED JOBS HAD BEEN REIMBURSED BY W AY OF SUBSIDY FROM GOVT. OF A.P. WHICH WA S PURELY OF A REVENUE NATURE. BUT INSTEAD OF PAYING SUCH SUBSIDY IN CASH, THE GOVT. OF AP HAD ADJUSTED THE SAME TOWARDS THE COST OF LAND, ALTOGETHER A DIFFERENT TRANSACTION INVOLVING THE ELEMENT OF REBATE ETC; WHICH HAD NOTHING TO DO WITH THE EARLIER TRANSACTION OF REVENUE SUBSIDY TOWARDS EXPE NSES OF CREATED JOBS. IV. NO DOUBT, FOR THE CONCESSION THE ASSESSEE HAS C OME ALL THE WAY FROM MUMBAI AND SET UP THE INDUSTRIAL PARK. BUT IT CANNOT BE DENIED THAT THE PROPORTIONATE BENEFIT ON ACCOUNT OF RELEASE OF BANK GUARANTEE IS ALSO AN INCENTIVE I N THE FORM OF SUBSIDY AND CAN BE TREATED AS THE REVENUE R ECEIPT IN THE YEAR OF RECEIPT. 4.1 IN VIEW OF THE ABOVE REASONS, THE ASSESSING OF FICER MADE THE ADDITION OF RS.3,07,20,000/- TOWARDS SUBSIDY R ECEIVED. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE C IT(A). 5. DURING THE COURSE OF APPEAL PROCEEDINGS THE APPE LLANT ARGUED THAT THE SUBSIDY WAS APPLICABLE ONLY IN RESPECT OF LAND ALLOTTED BY THE GOVERNMENT OF ANDHRA PRADESH AND WAS PROVIDE D AS AN INCENTIVE TO ENCOURAGE SETTING UP OF NEW PROJECTS. FURTHER, THE APPELLANT NEVER RECEIVED CASH SUBSIDY FROM THE GOVE RNMENT AS STATED BY THE ASSESSING OFFICER. BEFORE THE START O F THE PROJECT THE APPELLANT WAS TO PROVIDE A BANK GUARANTEE TO TH E GOVERNMENT EQUIVALENT TO THE AMOUNT OF SUBSIDY. ONC E CERTAIN CONDITIONS WERE FULFILLED IN A PARTICULAR YEAR, THE APPELLANT BECAME ELIGIBLE TO REDUCE THE LEVEL OF BANK GUARANT EE. IT WAS AT THIS STAGE THAT THE SUBSIDY GOT ACCRUED TO THE APPE LLANT. HOWEVER, THERE WAS NO CASH TRANSFER FROM THE GOVERN MENT TO THE APPELLANT COMPANY. THE APPELLANT ALSO RELIED ON VAR IOUS JUDGEMENTS AND STATED THAT IN ORDER TO DECIDE WHETH ER THE SUBSIDY WAS IN THE NATURE OF A CAPITAL OR REVENUE R ECEIPT THE TEST OF PURPOSE HAD TO BE APPLIED. AS PER THIS TEST THE ENTIRE OBJECTIVE WAS TO ENCOURAGE AN ASSESSEE TO SET UP A NEW UNIT TO 4 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. SUBSTANTIALLY EXPAND AN EXISTING UNIT AND THAT IS W HY THE SUBSIDY WAS MADE AVAILABLE AGAINST LAND AND NOTHING ELSE. 5.1 SOME OF THE IMPORTANT PORTIONS OF THE ARGUMENTS OF THE ASSESSEE WERE MENTIONED BY THE CIT(A) IN THE IMPUGN ED ORDER AT PAGES 5 TO 8. 6. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) REFERRING TO THE JUDGMENT OF THE HONBLE MUM BAI HIGH COURT IN THE CASE OF CIT VS. M//S XYLON HOLDINGS PV T LTD., VIDE ITA NO. 3704 OF 2010, DATED 13 TH SEPTEMBER, 2012, OBSERVED THAT IT IS CLEAR THAT THE LAW AS IT STANDS TODAY DI STINGUISHES BETWEEN A LOAN TAKEN FOR ACQUIRING A CAPITAL ASSET VIS-A-VIS ADVANCE RECEIVED FOR THE PURPOSE OF CARRYING ON DAY -TO-DAY BUSINESS. HE FURTHER OBSERVED THAT WHEN A PERSON O BTAINS AN ADVANCE FOR DAY-TO-DAY BUSINESS ACTIVITIES OR AS A CURRENT LIABILITY, THEN THE CESSATION OF THAT LIABILITY OR WAIVING OF THAT LOAN RESULTS IN THE PRINCIPLE AMOUNT ACQUIRING THE CHARA CTER OF A REVENUE RECEIPT. 6.1 REFERRING TO ANOTHER DECISION OF THE HONBLE DE LHI HIGH COURT IN THE CASE OF CIT VS. DEUTSCHE POST BANK HOM E FINANCE LTD., 209 TAXMAN 0313 AND THE DECISION OF THE CALCU TTA TRIBUNAL IN CASE OF ISPAT PROJECTS LTD. VS. ITO, [1988] 26 I TD 354, THE CIT(A) OBSERVED THAT IF THE SUBSIDY DIRECTLY OR IND IRECTLY SUPPLEMENTS THE REVENUE OF AN ASSESSEE IN A PARTICU LAR YEAR, THEN IT DEFINITELY OBTAINS THE CHARACTER OF REVENUE RECEIPT. FOR EXAMPLE SUBSIDY FOR EXPORT, SUBSIDY TOWARDS SALES A ND THE LIKE FALL IN THIS CATEGORY. HOWEVER, WHERE AN ASSISTANCE OR INCENTIVE OR SUBSIDY IS LINKED TO A CAPITAL ASSET AND TO THE CREATION OF A CAPITAL INFRASTRUCTURE, ITS CHARACTER OF A CAPITAL RECEIPT CANNOT BE DEBATED. FOR EXAMPLE IF SUBSIDY IS PROVIDED TO SET UP THE INFRASTRUCTURE OF A POWER PLANT, IT IS CAPITAL IN N ATURE AND IF IT IS GIVEN FOR THE ACHIEVEMENT OF CERTAIN PLANT LOAD FAC TOR AND A 5 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. CERTAIN LEVEL OF PRODUCTION, THEN OBVIOUSLY ITS CHA RACTER CHANGES TO THAT OF REVENUE. 6.2 THE CIT(A) NOTED THAT THE GOVERNMENT OF ANDHRA PRADESH CAME UP WITH A NEW 'INFORMATION, COMMUNICATION AND TECHNOLOGY POLICY' WHICH WAS A PART OF THE BROADER STRATEGY FO R A DETAILED ROADMAP PERTAINING TO ECONOMIC GROWTH OF ANDHRA PRA DESH. THE TWIN OBJECTIVES OF THE POLICY WERE TO CREATE EMPLOY MENT OPPORTUNITIES FOR PEOPLE OF ANDHRA PRADESH AS WELL AS TO GENERATE ADDITIONAL RESOURCES FOR THE GOVERNMENT. I NFORMATION TECHNOLOGY WAS IDENTIFIED AS ONE OF THE THRUST AREA S IN WHICH HIGH-GROWTH HAD BEEN PROJECTED AND THE GOVERNMENT W ANTED TO CREATE A WORLD-CLASS INFRASTRUCTURE OF IT IN THE ST ATE. ONE OF THE OBJECTIVES WAS TO PROVIDE COMPANIES AND PROFESSIONA LS WITH INFRASTRUCTURE COMPARABLE TO ANY OTHER LOCATION IN THE WORLD AND TO DEVELOP AND IMPLEMENT A COMPELLING PROMOTIONAL P ROGRAM WHICH WOULD MAKE HYDERABAD AS AN ATTRACTIVE DESTINA TION FOR IT COMPANIES. THE VISION OF E-GOVERNMENT OF ANDHRA PRA DESH AS PER GOM NUMBER 27, DEPARTMENT OF IT &C DATED 27/06/ 2002 IS AS BELOW: - THE VISION 'ANDHRA PRADESH WILL LEVERAGE INFORMATION TECHNOLOG Y TO ATTAIN A POSITION OF LEADERSHIP AND EXCELLENCE I N THE INFORMATION AGE AND TO TRANSFORM ITSELF INTO A KNOWLEDGE SOCIETY' VISION 2020 6.3 THE CIT(A) FURTHER NOTED THAT THEREAFTER, THE G OVERNMENT INTERACTED WITH THE APPELLANT AND SIGNED A MEMORAND UM OF UNDERSTANDING DIRECTING THE APPELLANTS TO ESTABLISH AN IT PARK IN MADHAPUR, 15 KM FROM HYDERABAD. THE APPELLANT FORME D A JOINT VENTURE WITH APIIC FOR DEVELOPING THE PROJECT TITLE D AS 'MINDSPACE CYBERABAD'. SALIENT FEATURES OF THIS AGR EEMENT WERE EXTRACTED BY THE CIT(A) IN THE IMPUGNED ORDER AT PA GES 15 TO 20. 6 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. 6.4 IN VIEW OF THE ABOVE OBSERVATIONS, THE CIT(A) H ELD THAT THE NATURE OF SUBSIDY IS CAPITAL AND CANNOT BE BROUGHT TO TAX AS A REVENUE RECEIPT AND DELETED THE ADDITION MADE BY THE ASSESS ING OFFICER BY OBSERVING AS UNDER: 6.10 FROM THE ABOVE, IT IS CLEAR THAT THE GOVERNMEN T OF ANDHRA PRADESH WANTED THE APPELLANT TO SET UP A WORLD-CLAS S INFRASTRUCTURE FOR IT COMPANIES IN HYDERABAD. THE I NFRASTRUCTURE WOULD PERTAIN TO LAND DEVELOPMENT, DEVELOPMENT OF B UILDINGS AND OFFICES ALONG WITH RELATED INFRASTRUCTURE FROM WHERE IT COMPANIES COULD COME AND OPERATE FROM ALL OVER THE WORLD. FOR THE AFOREMENTIONED PURPOSE `09 ACRES OF LAND WERE G IVEN TO THE APPELLANT AT RS. 50 LAKH PER ACRE. THEREFORE, THE T OTAL AMOUNT PERTAINING TO THE LAND WAS RS. 54.57 ACRE. HOWEVER, THE COST OF LAND DID NOT HAVE TO BE PAID IMMEDIATELY, RATHER A BANK GUARANTEE EQUIVALENT TO THE ABOVE AMOUNT HAD TO BE PROVIDED TO THE GOVERNMENT. THEREAFTER, IT WAS HOPED THAT THE I NFRASTRUCTURE SO CREATED WOULD ATTRACT IT COMPANIES AND WOULD GEN ERATE JOBS FOR PEOPLE. THE ANNUAL SUBSIDY WAS TO BE CALCULATED AT THE RATE OF RS. 20,000/- PER JOB CREATED. IN OTHER WORDS IF, IN THE CURRENT YEAR CERTAIN NUMBER OF JOBS WERE CREATED AS PER THE AGREEMENT, THEN SUBJECT TO CONDITIONS A SUBSIDY OF RS. 20,000/ - MULTIPLIED BY THE NUMBER OF JOBS CREATED WOULD BE PROVIDED TO THE APPELLANT. HOWEVER, NOTHING WAS TO BE PROVIDED IN C ASH. RATHER THE APPELLANT WAS ALLOWED TO SUBTRACT THAT AMOUNT F ROM THE BANK GUARANTEE. IN OTHER WORDS THE GOVERNMENT IN THE EVE NT OF NON- PERFORMANCE AS PER THE CONTRACT COULD NOW INVOKE ON LY THE REMAINING PORTION OF THE BANK GUARANTEE AND NOT THE ENTIRE AMOUNT OF RS. 54.57 CRORE. 6.11 FROM THE ABOVE, IT IS CLEAR THAT DURING THE YE AR THE APPELLANT CREATED 1536 JOBS AND FROM THE BANK GUARA NTEE AMOUNTING TO RS. 54.57 CRORE AN AMOUNT OF RS. 3,07, 20,000/- COULD NOW BE REDUCED, HOWEVER, THIS DOES NOT TANTAM OUNT TO CASH PAYMENT TO THE APPELLANT. IT IS ONLY A REDUCT ION IN THE AMOUNT WHICH THE GOVERNMENT CAN COLLECT FROM THE A PPELLANT IN CASE FURTHER TIME SCHEDULES AND CLAUSES OF THE CONT RACT ARE NOT FULFILLED BY THE APPELLANT. IT IS ALSO CLEAR THAT T HE SUBSIDY IS ON ACCOUNT OF LAND AND RELATED INFRASTRUCTURE WHICH IS CAPITAL IN NATURE. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US. 8. BEFORE US, THE LEARNED DR SUBMITTED THAT THE CIT (A) ERRED ON FACTS AND IN LAW IN TREATING PERFORMANCE RELATED IN CENTIVE AS CAPITAL 7 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. RECEIPT AND ALSO TREATING SUBSIDY GRANTED FOR CREAT ION OF JOBS AS CAPITAL RECEIPT. HE SUBMITTED THAT FOR THE CONCESS ION THE ASSESSEE HAS COME ALL THE WAY FROM MUMBAI AND SET UP THE IND USTRIAL PARK, BUT, IT CANNOT BE DENIED THAT THE PROPORTIONATE BENEFIT ON ACCOUNT OF RELEASE OF BANK GUARANTEE IS ALSO AN INCENTIVE IN T HE FORM OF SUBSIDY AND CAN BE TREATED AS THE REVENUE RECEIPT IN THE YE AR OF RECEIPT. 9. ON THE OTHER HAND, THE LEARNED AR OF THE ASSESSE E BESIDES RELYING UPON THE ORDER OF THE CIT(A), INVITED OUR A TTENTION TO THE ORDER OF THE GOVT. OF ANDHRA PRADESH VIDE GOMS. NO. 27, D ATED 27/06/2002. THE LEARNED AR REFERRED TO THE MEMORAND UM OF AGREEMENT BETWEEN THE GOVT. OF AP AND THE ASSESSEE ENTERED ON 19 TH MAY, 2003 AND INVITED OUR ATTENTION TO THE FOLLOWIN G CLAUSES MENTIONED IN THE SAID AGREEMENT: 6.3 THE CONSIDERATION FOR THE CHOSEN PART/S OF THE SCHEDULE I AND WOULD BE SET OFF AGAINST THE REBATE ON COST OF LAND PROVIDED/TO BE PROVIDED FOR THE CREATION OF JOBS FO R THE MAIN USER AND ANCILLARY USER ON THE SAID LAND AS HEREINA FTER PROVIDED IN ACCORDANCE WITH THE RELEVANT PROVISIONS OF G.O.MS. NO. 5 DATED 28/01/2002 AND G.O.MS. NO. 27 DATED 27/ 06/2002 OF THE GOVT. OF AP AND IN ACCORDANCE WITH THE OTHER PROVISIONS OF THIS AGREEMENT. 6.4 THE JOINT VENTURE COMPANY WOULD BE ENTITLED TO REBATE ON LAND COST FOR EVERY JOB CREATED ON THE SAID LAND IN RESPECT OF THE MAIN USER (WHETHER SUCH JOB IS CREATED BY THE JV CO MPANY OR BY A SUBSEQUENT ACQUIRER/LESSEE/LICENSEE OF THE SAI D LAND/PROPERTIES DEVELOPED ON THE SAID LAND). THIS J OB RELATED REBATE ON COST OF LAND WOULD BE PROVIDED AT THE RAT E OF RS. 20,000/- PER JOB CREATED IN RESPECT OF THE MAIN USE R AND ANCILLARY USER. THE GOVT. OF AP/APIIC WOULD SET OFF THE PAYMENTS DUE FOR THE SAID LAND (FOR ALL PHASES) AS AGAINST THE REBATE ON COST OF LAND AVAILED FROM TIME TO TIME. 6.6 FOR THE PURPOSE OF COMPUTATION OF THE REBATE ON COST OF LAND LINKED TO EMPLOYMENT WOULD BE AS PER THE ITES POLIC Y UNDER GO NO. 5 AND ICT POLICY AND UNDER GO NO. 27 AND THE SAME WILL BE VALID FOR THE ENTIRE DURATION OF THE MINDSP ACE CYBERABAD PROJECT. 6.8 IN THE EVENT OF THERE BEING A SHORTFALL IN THE GENERATION OF EMPLOYMENT FOR AVAILING THE REBATE ON COST OF LAND WITH RESPECT TO THE INDIVIDUAL PHASES, THE TOTAL EMPLOYMENT GENE RATED OVER 8 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. THE ENTIRE PROJECT WITH ALL THE PHASES MAY BE TAKEN INTO CONSIDERATION FOR DETERMINING THAT THE JV HAS FULFI LLED ITS EMPLOYMENT OBLIGATION. IN THIS REGARD THE GOVT. OF AP MAY ESTABLISH A MONITORING MECHANISM TO MONITOR THE GEN ERATION OF EMPLOYMENT IN THE PROJECT AND TO DETERMINE THE SHOR TFALL AND/OR EXCESS EMPLOYMENT GENERATED IN THE INDIVIDUAL PHASE S TO BE CONSIDERED IN THE AGGREGATE ON COMPLETION OF THE MI NDSPACE CYBERABAD PROJECT AT THE END OF THE YEARS. SHORTFAL L IN GENERATION OF EMPLOYMENT IN A PARTICULAR PHASE SHAL L NOT MAKE THE JV COMPANY LIABLE TO MAKE ANY PAYMENTS TOWARDS THE COST OF LAND SINCE THE AGGREGATE COUNTING SHALL BE DONE ON THE COMPLETION OF THE MINDSPACE CYBERABAD PROJECT AT TH E END OF TEN YEARS (AS HEREIN MENTIONED). THE JV COMPANY SHA LL NOT BE REQUIRED TO MAKE PAYMENTS FOR ANY LAND NOT OPTED FO R AND NOT VESTED IN THE JOINT VENTURE COMPANY. 9.1 THE LEARNED AR ALSO INVITED OUR ATTENTION TO SC HEDULE K PERTAINING EXPENDITURE INCURRED, SCHEDULE L PERTAIN ING TO EMPLOYEE COST AND SCHEDULE M PERTAINING SELLING AND MARKETIN G EXPENDITURE OF BALANCE SHEET AS AT 31 ST MARCH, 2006. 9.2 FINALLY, HE SUBMITTED THAT THE CIT(A) HAS RIGHT LY HELD THAT THE NATURE OF SUBSIDY IS CAPITAL AND CANNOT BE BROUGHT TO TAX AS A REVENUE RECEIPT. HE, THEREFORE, SUBMITTED THAT THE ORDER OF THE CIT(A) MAY BE UPHELD. 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW. AFTER GOING THROUGH THE GOVT. OF AP ORDER VIDE G.O. MS. NO. 27, DATED 27/06/2002, IT IS CLEAR THAT THE GOVT. OF AP ANNOUN CED AN INDUSTRY- FRIENDLY INCENTIVES POLICY FOR THE IT SECTOR TO PRO MOTE THE GROWTH OF IT INDUSTRY WITHIN THE STATE. ACCORDINGLY, THE ASSESSE E COMPANY HAD RECEIVED LAND FROM THE GOVT. OF AP ON A CONCESSIONA L RATE FIXED AT RS. 54.57 CRORES. IN THIS CASE REBATE IN THE COST OF LA ND HAS BEEN GIVEN TO THE ASSESSEE BY THE GOVT. OF ANDHRA PRADESH VIDE GO MS. NO. 27, DATED 27/06/2002, WHEREIN THE CONDITIONS FOR ALLOTM ENT OF LAND LAID DOWN BY THE GOVT. ARE AS FOLLOWS: A) THE REBATE SHALL BE APPLICABLE ONLY IN RESPECT O F LANDS ALLOTTED BY GOVT./APIIC WITH PROSPECTIVE EFFECT. 9 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. B) THE REBATE SHALL BE RESTRICTED TO RS. 20,000/- P ER JOB CREATED OR THE COST OF THE BARE LAND (EXCLUDING DEVELOPMENT CHARGES) WHICHEVER IS LESS SUBJECT TO A CEILING COMPUTED AT THE RATE 0.30 ACRES FOR EVERY 100 JOBS CREATED [ EG. IF 3250 JOBS ARE CREATED THE LIMIT FOR ALLOTMENT OF LAND AT A CONCESSIONAL P RICE WOULD BE 9.75 ACRES]. C) THE MINIMUM NUMBER OF EMPLOYEES TO BE HIRED BY A COMPANY IN ORDER TO AVAIL OF THE CONCESSION ON LAND COST SH ALL BE 100 [CORRESPONDING TO A CEILING OF 0.30 ACRES OF LAND]. D) ON AREAS ALLOTTED IN EXCESS OF THE LIMIT I.E. TH E CEILING OF 0.30 ACRES FOR EVERY 100 JOBS CREATED, NO CONCESSIONS WO ULD BE APPLICABLE. E) THE MINIMUM GROSS SALARY WAGE FOR AN EMPLOYMENT TO BE CONSIDERED TO HAVE BEEN CREATED WOULD BE RS. 5,000/ - PER MONTH. F) THE PERIOD FOR WHICH SUCH EMPLOYMENT WOULD HAVE TO BE SUSTAINED TO BE ELIGIBLE TO BE RECKONED FOR THIS IN CENTIVE SHALL BE TWO YEARS. G) THE NUMBER OF EMPLOYEES TO BE CONSIDERED FOR THE PURPOSE OF THIS PROVISION SHALL NOT EXCEED THE NUMBER ARRIV ED AT BY THE FORMULA: [NO COMPUTER WORK STATIONS AT A LOCATION; NUMBER OF SHIFTS [OF 8 HOURS EACH] OPERATED BY THE COMPANY AT THE LOCATION] H) GOVERNMENT SHALL SPECIFY SUITABLE GUIDELINES TO ENSURE THAT THE BENEFIT OF THIS PROVISION REACHES A COMPANY ONL Y AFTER IT MEETS THE STIPULATED CONDITIONS REGARDING JOB CREAT ION AND THAT THE EMPLOYMENT FIGURES REPORTED ARE CORROBORATED BY OTHER SUPPORTING DATA SUCH AS INVESTMENT, TURNOVER, RETUR NS FILED WITH RBI, RETURNS FILED WITH STPI, HYDERABAD, ETC. 10.1 THE CONTENTION OF THE AR IS THAT THE CONCESSIO N RECEIVED BY THE ASSESSEE BY WAIVER OF THE RECOVERY OF THE COST OF 1 09.36 ACRES OF LAND AT RS. 50 LAKHS PER ACRE COMES TO RS. 54.57 CRORES IS A CAPITAL RECEIPT AND THE SAME IS NOT TAXABLE AS IT IS RELATING TO CR EATION OF THE JOB IN ASSESSEES PROJECT. THE CIT(A) AGREED WITH THE CONT ENTION OF THE ASSESSEES ON THE REASON THAT THE SUBSIDY RECEIVED BY THE ASSESSEE ON THE LAND ALLOTTED TO IT RELATED TO LAND DEVELOPM ENT, DEVELOPMENT OF BUILDINGS AND OFFICES ALONG WITH RELATED INFRASTRUC TURE FROM WHERE IT COMPANIES COULD COME AND OPERATE FROM ALL OVER THE WORLD AND, THEREFORE, THE SAME IS IN CAPITAL NATURE. THE REAS ONING GIVEN BY THE CIT(A) HOLDING THAT THE CONCESSION RECEIVED BY THE ASSESSEE BY WAY OF WAIVER OF RECOVERY OF THE COST OF LAND AS A CAPI TAL RECEIPT DOES NOT TO BE ON SOUND REASON. IT IS WELL SETTLED BY VARIO US DECISIONS OF THE 10 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. COURTS INCLUDING THE DECISION OF THE HONBLE SUPREM E COURT WHERE SUBSIDIES ARE GIVEN UNDER STATUTORY AUTHORITY, STAT UTORY PURPOSE FOR WHICH THEY ARE AUTHORISED IS RELEVANT AND EVEN BE D ECISIVE IN DETERMINING WHETHER IT IS TAXABLE INCOME IN THE HAN DS OF THE RECIPIENT. THE PRINCIPLE OF LAW THAT EMERGES FROM THE DECIDED CASES IS THAT IT IS TO BE SEEN AS TO WHAT IS THE CHARACTER OF THE RECEI PT. IF A SUBSIDY OR GRANT IS GIVEN TO RECOUP THE REVENUE EXPENDITURE, I T WILL TAKE COLOUR OF THE REVENUE RECEIPT, IF NOT, THEN, IT WOULD BE A CA PITAL RECEIPT. IN THE CASES OF SAHNEY STEEL AND PRESS WORKS LTD., 142 CTR 261 (SC), VSSV MEENAKSHI ACHI & ANR. VS. CIT, 60 ITR 253 (SC) AND BENGAL TEXTILE ASSOCIATION VS. CIT, 39 ITR 723 (SC), THE H ONBLE SUPREME COURT HAS CLEARLY HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT TOWARDS SERVICES RENDERED FOR CARRYI NG ON ITS TRADE, WAS NOT SUBSIDY OR BOUNTY, BUT, A TRADE RECEIPT ASS ESSABLE AS BUSINESS INCOME. 10.2 IN THE PRESENT CASE, IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT AND LEASING OF LAND AND BUILDING ARE THE TRADING ASSETS OF THE ASS ESSEE. IT IS ALSO EVIDENT FROM THE COPY OF THE BALANCE SHEET FILED BY THE ASSESSEE FOR THE YEAR ENDED 31/03/2006 AS PER SCHEDULE VI-K, THE ASSESSEES TOTAL EXPENDITURE ON LAND IS RS. 1,610,805,902/-, WHICH I S AS FOLLOWS: LAND AND LAND RELATED EXPENSES RS. 7,336,547 MATERIAL CONSUMED RS.403,720,338 OTHER BUILDING ACCESSORIES RS.664,650,096 CONTRACTUAL PAYMENTS RS.411,541,202 OTHER EXPENSES RS.123,557,719 TOTAL RS.1,610,805,902 ============= THE SAID EXPENDITURE WAS CHARGED TO THE P&L A/C. FU RTHER, IT IS ALSO EVIDENT FROM THE NOTES TO ACCOUNTS, WHEREIN IT HAS BEEN MENTIONED AS UNDER: 2(A) THE COMPANY IS A JOINT OF VENTURE OF K. RAHEJA CORP PRIVATE LTD. (KRCPL) REPRESENTING AND BEING A PART OF THE C.L. RAHEJA GROUP AND ANDHRA PRADESH INDUSTRIAL INFRASTR UCTURE CORPORATION LTD (APIIC). PURSUANT TO JOINT VENTURE AGREEMENT 11 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. DATED AUGUST 23, 2003 EXECUTED BETWEEN KRCPL, APIIC AND THE COMPANY, THE COMPANY HAS ACQUIRED A PLOT OF LAN D OF ABOUT 109.36 ACRES FOR DEVELOPING, MARKETING AND SELLING. AS PER THE SAID JOINT VENTURE AGREEMENT AND IN ACCORDANCE WITH THE INFORMATION, COMMUNICATIONS AND TECHNOLOGY POLICY O F THE GOVERNMENT OF ANDHRA PRADESH, THE COMPANY IS ALSO E NTITLED TO SUBSIDY IN RESPECT OF JOBS CREATED ON THE SAID PLOT OF LAND. SUCH SUBSIDY IS TO BE ADJUSTED AGAINST THE PRICE PAYABLE FOR TRANSFER OF SAID PLOT OF LAND. INITIALLY THE COMPANY HAD ISS UED BANK GUARANTEE TO THE EXTENT OF THE PRICE OF THE SAID PL OT OF LAND. AT PRESENT THE MANAGEMENT IS OF THE OPINION THAT THE C OMPANY MAY NOT BE REQUIRE TO MAKE ANY PAYMENT IN RESPECT OF PR ICE OF THIS PLOT AS THE REBATE ON ACCOUNT OF JOB SUBSIDY TO BE AVAILED BY CREATION OF THE JOBS IS LIKELY TO EQUAL THE PRICE. THE PRICE PAYABLE WILL BECOME LIABILITY AT THE AGREED TIME AT WHICH TOTAL SUBSIDY AMOUNT IS FOUND TO BE INSUFFICIENT TO MEET THE OBLIGATION OF THE COMPANY. TILL THE DATE OF THE BALANCE SHEET, THE COMPANY HAS AVAILED REBATE OF RS. 30,720,000 BY CREATION OF JOBS AND ACCORDINGLY THE BANK GUARANTEE GIVEN FOR THE PRICE OF LAND WAS REDUCED TO RS. 514,980,000 FROM RS. 545,700,000 AN D THE SAME IS TREATED AS CONTINGENT LIABILITY. 10.3 IT IS CLEARLY MENTIONED IN THE NOTES TO THE AC COUNTS THAT THE ABOVE SUBSIDY TO BE ADJUSTED AGAINST THE PRICE PAYA BLE FOR THE TRANSFER OF THE SAID LAND. WHEN THE LAND IS TREATED BY THE ASSESSEE AS STOCK-IN-TRADE AND THE EXPENDITURE RELATING TO THE LAND IS TREATED AS REVENUE EXPENDITURE, THE CONCESSION RECEIVED BY THE ASSESSEE WITH REFERENCE TO THE LAND CANNOT BE TREATED AS CAPITAL RECEIPT, BUT, IT WOULD BE TREATED AS REVENUE RECEIPT. IN OTHER WORDS , WHEN THE LAND WAS ADMITTEDLY RELATING TO THE TRADING ACTIVITIES O F THE ASSESSEE, THE CONCESSION RECEIVED IN RELATION TO THE LAND, THE CO ST OF THE LAND TO BE TAKEN INTO ACCOUNT IN COMPUTING THE PROFIT AND GAIN S OF THE ASSESSEE. IN THIS CASE, ASSISTANCE WAS GIVEN TO THE ASSESSEE WITH REFERENCE TO THE LAND FOR THE PURPOSE OF BEING USED IN THE BUSIN ESS CARRIED ON BY THE ASSESSEE SO AS TO ENABLE THE ASSESSEE TO MEET T HE TRADING OBLIGATIONS, THE AMOUNT SO GIVEN IS A TRADING RECEI PT. PAYMENT IN THE NATURE OF SUBSIDY BY WAY OF WAIVER OF THE LAND COST TO AN ASSESSEE ASSISTING IN CARRYING ON THE ASSESSEES TRADE OR BU SINESS OR TRADING RECEIPT THAT HAS TO BE BROUGHT IN TO ACCOUNT IN AR RIVING PROFITS AND GAINS OF THE ASSESSEE. 12 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. 10.4 BEFORE US, THE LEARNED AR SUBMITTED THAT THE B ANK GUARANTEE GIVEN TO GOVT. OF A.P. TOWARDS COST OF THE LAND IS STILL IN OPERATION, BEING SO, IT CANNOT BE SAID THAT ANY INCOME ACCRUED TO THE ASSESSEE. TO THIS EXTENT, WE AGREE WITH THE ASSESSEES COUNSE L AND IF THE BANK GUARANTEE GIVEN BY THE ASSESSEE TOWARDS COST OF THE IMPUGNED LAND IS STILL IN OPERATION, IT IS NOT POSSIBLE TO ARRIVE AT A CONCLUSION THAT THE ASSESSEE DERIVED BENEFIT OUT OF THE LAND BY WAY OF REBATE OR SUBSIDY. BEING SO, WE DIRECT THE ASSESSING OFFICER TO EXAMIN E WHETHER THE BANK GUARANTEE GIVEN BY THE ASSESSEE IS IN OPERATIO N OR NOT. ONLY IN THE EVENT OF CESSATION OF THE BANK GUARANTEE GIVEN BY THE ASSESSEE, IT CAN BE PRESUMED THAT THE ASSESSEE RECEIVED THE SUBSIDY/REBATE/CONCESSION AND THE SAME IS TO BE BRO UGHT TO TAX. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. THE GROU NDS RAISED BY THE REVENUE IN BOTH THE APPEALS ARE PARTLY ALLOWED. 11. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 21/03/2014. SD/- (SAKTIJIT DEY) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 21/03/2014 KV COPY FORWARDED TO: 1. DCIT, CIRCLE 2(1), 8 TH FLOOR, B-BLOCK, IT TOWERS,HYDERABAD, 2. M/S K. RAHEJA IT PARK (HYD.) PVT. LTD., 64, (PAR T), MINDSPACE, CYBERABAD, APIIC SOFTWARE UNIT LAYOUT, MADHAPUR, HYDERABAD 500 081. 3. CIT(A)-III, HYDERABAD 4. CIT-II, HYDERABAD. 5. THE DR, ITAT, HYDERABAD 13 ITA NOS. 1324 & 1325/H/2013 M/S K. RAHEJA IT PARK (HYDERABAD) PVT. LTD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER