THE SUPREME INDUSTRIAL LTD , MUMBAI V. ASST CIT LTU CIRCLE , MUMBAI

ITA 7598/MUM/2019

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6853 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 06-07-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 10-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Salary income; Source of fund; Capital receipt
• Section: 6; 143(3); 92D; 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, JM AND SHRI S. RIFAUR RAHMAN, AM आयकर अपील सं/ I.T.A. No. 7598/Mum/2019 (निर्धारण वर्ा / Assessment Year: 2015-16) The Supreme Industries Ltd. 612, Raheja Chambers, Free Press Journal Marg, Nariman Point, Mumbai- 400021. बिधम/ Vs. ACIT LTU, Circle, Mumbai Room No. X, 29 th Floor, World Trade Centre-1, Cuffee Parade, Mumbai- 400005. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AAACT1344F (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) सुनवाई की तारीख / Date of Hearing: 07/07/2023 घोषणा की तारीख /Date of Pronouncement: 03/10/2023 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee against the order of the Assistant Commissioner of Income-tax, LTU Circle 2, Mumbai [in short ‘AO’] dated 31.10.2019 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter “the Act”). 2. Ground No. 1 relates to the Ld. AO’s action of making transfer pricing adjustment of Rs.7,50,81,060/- u/s 92CA(3) of the Act. It is noted that the assessee has inter alia challenged the validity of the Ld. TPO’s action for making transfer pricing adjustment in relation to specified domestic transaction covered u/s 40A(2)(b) of the Act. The assessee has alternatively also opposed the impugned transfer pricing adjustment on merits. Assessee by: Shri Nitesh Joshi & Shri Harsh Shah Revenue by: Shri Manoj Kumar (CIT- DR) ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 2 3. Briefly stated, the facts of the case are that, the AO had noted that the assessee had entered into both International & Specific domestic transactions with Associated Enterprises (AE’s) and therefore made a reference u/s 92CA(1) of the Act to the TPO for determination of the Arm’s Length Price (ALP). It is noted that the TPO had proposed transfer pricing adjustment in relation to (i) international transaction with AEs of Rs.4,19,928/- (ii) specified domestic transaction involving payment of commission to directors u/s 40A(2)(b) of the Act of Rs.7,50,81,060/-. The assessee has challenged the legal validity as well as merits of the transfer pricing adjustment made in relation to specified domestic transaction. The Ld. AR for the assessee submitted that there is no provision which provides for determination of ALP covered u/s 40A(2) of the Act now as clause (i) of Section 92BA has since been omitted by the Finance Act 2017 without any savings clause. The crux of the argument was that the Finance Act 2012 with effect from 1/4/2013 had made the provisions of sections 92, 92C, 92D and 92E applicable to certain specified domestic transactions vide introduction of Section 92BA in the Act. One of the specified domestic transaction mentioned in section 92BA(i) was with respect to any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A. This clause i.e. 92BA (i) however was omitted by the Finance Act, 2017 with effect from 1-4- 2017. According to him, therefore the presumption ought to be that ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 3 expenditure covered u/s 40A(2)(b) was never a specified domestic transaction and therefore by virtue of this amendment, the impugned transfer pricing adjustment made u/s 92BA of the Act be deleted on this score alone. The Ld. AR placed before us copies of the decisions rendered by this Tribunal in the cases of Edelweiss Rural &Corporate Services Ltd in ITA No. 7475/Mum/2017 and Mutha Engineering Pvt Ltd in ITA No. 7226/Mum/2018. 4. On merits, the Ld. AR submitted that the TPO had erred in holding that the director’s commission paid by the company was excessive and thereby making transfer pricing adjustment by applying TNMM Method. The Ld. AR brought to our notice that the Nomination & Remuneration Committee comprising of independent directors had approved the terms of remuneration including commission payable to the Directors. He further explained that the shareholders at the annual general meeting had also approved the same and therefore according to him, the TPO had erred in holding that the transaction was not at arm’s length. The Ld. AR further submitted that the TPO had erred in benchmarking the salary paid to directors and the commission paid to them separately. He showed us that the total remuneration paid to directors comprised of both salary & commission. He took us through the provisions of Section 197 of Companies Act, 2013 and demonstrated that the limits prescribed therein was towards the gross remuneration inclusive of salary and commission. The Ld. AR further submitted that even Section 17(1) of ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 4 the Act which defined the term ‘salary’ included fees & commission and therefore according to him both salary & commission paid to directors were closely related and linked and thus ought to have been aggregated for benchmarking purposes. The Ld. AR submitted that, on aggregate comparison with the six comparables identified by the TPO, the transaction was at arm’s length. The Ld. AR further submitted that both the appellant and the directors were taxed at the same marginal rates and therefore there was no tax avoidance, which would suggest shifting of profits for avoidance of tax. The Ld. AR argued that the provisions of Section 40(A)(2) can be invoked only if a transaction with related party is used as a tax avoidance mechanism to siphon off profits to evade tax. Likewise, the provisions of Chapter X are also meant to check shifting of profits between entities to avoid payment of taxes or pay taxes at lesser rates. The Ld. AR submitted that, in the given facts of the present case, since both the appellant as well as the shareholders were taxed at normal rates, there was purported tax avoidance which would invite the rigors of Section 40A(2) read with 92BA of the Act. For this, he relied on the decision of the Hon’ble Bombay High Court in CIT v. V.S. Dempo & Co. (P.) Ltd. (336 ITR 209). The Ld. AR thus pleaded that, viewed from any angle, the impugned TP adjustment ought to be deleted. 5. Per contra, the Ld. DR also explained the background of the insertion and subsequent omission of section 92BA(i) of the Act. He submitted that, this omission has been made by the Finance Act 2017 ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 5 with effect 01.04.2017 and therefore it had prospective application. According to him, the plea of the assessee that the ‘omission’ of clause (i) to Section 92BA would render all previous acts undertaken by the TPO since the introduction of the provision a nullity, was unjustified. The Ld. DR supported the Revenue’s case by relying upon the provisions of Section 6A of the General Clauses Act. He submitted that Section 6A stated that, ‘where any Central Act or Regulation made after the commencement of this Act repeals any enactment by which the text of any Central Act or Regulation was amended by the express omission, insertion or substitution of any matter, then, unless a different intention appears, the repeal shall not affect the continuance of any such amendment made by the enactment so repealed and in operation at the time of such repeal’. According to him, the provisions of Section 6A of the General Clauses Act saved the TPO’s action and the impugned adjustment made in the relevant AY 2015-16. The Ld. DR further relied on the decision of the Hon’ble Supreme Court in the case of M/s Fibre Boards (62 taxmann.com 135; 376ITR596SC) wherein according to him, on similar facts and circumstances, the Court had held the ‘omission’ of a provision was applicable prospectively. The Ld. DR pointed out that this judgment of the Hon’ble Supreme Court in the case of Fibre Board (supra) was not considered by the Hon’ble Karnataka High Court in the case of Texport Overseas (P.) Ltd. (271 Taxman 170). Instead, he showed us that the Hon’ble Karnataka High Court had relied upon the earlier judgment of the Hon’ble Supreme Court Constitution Bench decision ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 6 in the case of Kolhapur Cane Sugar Ltd. reported in [2008] 2 SCC 536/ AIR [2000] SC 811 wherein the Hon’ble Supreme Court was concerned with applicability of sec.(6) of General Clauses Act, to the deletion of Rule 10 and 10A of the Central Excise Rules on 06.08.1977 and in that case, the Hon’ble Supreme Court followed another Constitution Bench decision in the case of Rayala Corporation Pvt. Ltd., reported in [1969] 2 SCC 412 which judgment as well as that of General Finance Company & anr. v. ACIT reported in [2002] 7 SCC 1 ( cited by Karnataka High Court in Texport Overseas supra) has been discussed by the Hon’ble Supreme Court in M/s.Fibre Boards Pvt. Ltd. (supra); and the Hon’ble Supreme Court in M/s.Fibre Boards (supra) observed at Para No.29 “a reading of this section (6A of General Clauses Act) would show that a repeal can be way of an express omission. This being the case, obviously the word ‘repeal’ in both section 6 and section 24 would, therefore, include repeals by express omission. The absence of any reference to section 6A, therefore, again undoes the binding effect of these two judgments on an application of the ‘per incuriam’ principle’’. The Ld. DR thus submitted that the ratio decidendi laid down in Texport Overseas (P.) Ltd.(supra) which has been followed by the coordinate Benches of this Tribunal was not the correct position of law. On merits, the Ld. DR supported the order of the lower authorities. 6. We have carefully considered the rival contention and perused the orders of the lower authorities. From the facts on record, it is noted that the appellant had paid director’s salary and commission to its two ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 7 directors, which was aggregated for benchmarking purposes under the TNMM Method. The appellant had identified six (6) comparables from the same industry. The ratio of aggregate remuneration (salary & commission) to the profit before tax of the appellant was 4.39% in comparison to 6.37% of the comparables which was well within the permitted range of +/- 3% as well as the 35th & 65th percentile to the set of six comparables. Accordingly, this specified domestic transaction was reported to be at arm’s length. It is noted that the (a) method of benchmarking – TNMM Method, (b) comparables – six (6) comparables identified by the appellant, (c) PLI – ratio of remuneration to profit before tax are not in dispute and has been accepted by the TPO as well. The TPO however sought to benchmark the salary & commission paid to the directors separately with the six (6) comparables. Upon conducting this exercise, the salary paid to directors was found to be at arm’s length, whereas the director’s commission was held to be excessive. The TPO noted that the ratio of director’s commission to profit before tax of the appellant was 3.13% in comparison to 1.50% of the six (6) comparables. Accordingly, the differential of 1.63% which worked out to Rs.7,50,81,060/- was adjusted by the TPO. 7. Having regard to the above noted facts, the limited issue in dispute before us is, whether the director’s remuneration was required to be benchmarked on aggregate basis or the salary & commission was to be benchmarked separately and independent of each other. It is ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 8 noted that the remuneration of directors is decided by the Remuneration Committee and approved by the shareholders as a single package, which comprises of both fixed (salary) and variable (commission) component. Hence, both these items of remuneration are noted to be closely related. The Ld. AR has rightly pointed out that the remuneration policies of companies in same industry may differ i.e. fixed & variable pay may vary depending on each case but the overall remuneration policy shall be in accordance with the provisions of Companies Act, 2013. It is noted that Section 197 of the Companies Act 2013 sets the limits for payment of overall director’s remuneration, by whatever name i.e. salary, fee or commission. Hence, we note that there is no distinction between salary or sitting fees or commission carved out in the Companies Act, 2013. This is indeed relevant in the present context as the said provision sets out the parameters for payment of overall remuneration to Directors in unison. We also note that Section 17(1) of the Act which defines ‘salary’, includes any ‘commission’ paid in addition to salary and therefore the commission is noted to form part of the salary income of the employee / director. For the aforesaid reasons, we find merit in the plea of the appellant that the salary & commission paid to the directors are closely related and forms part of the overall remuneration package and therefore it has to be aggregated and benchmarked as a single transaction. ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 9 8. In light of the above findings, it is noted that applying the aggregate approach, the ratio of aggregate salary & commission i.e. director’s remuneration to the profit before tax of the appellant works out to 4.36% which is well within the permitted range of the six (6) comparables. Hence, the transfer pricing adjustment made by the TPO in relation to director’s commission is held to be unjustified and the TPO is directed to delete the same. 9. Since we have deleted the impugned transfer pricing adjustment on its merits, the alternative legal plea raised by the assessee has become academic and is therefore not being adjudicated upon. Accordingly Ground No. 1 stands allowed. 10. Ground no. 2 is against the action of the AO in rejecting the claim of the assessee that Industrial Promotion Subsidy (IPS) received amounting to Rs.47,32,73,937/- is capital in nature on the ground that IPS is refund of VAT/CST, Octroi/LBT and waiver of electricity duty and hence is revenue in nature. 9. We have heard both the parties and perused the records. We note that the assessee company had filed revised return of income on 09.03.2017 and claimed the IPS subsidy of Rs.47,32,73,937/- credited in the Profit & Loss Account to be in the nature of capital receipt not liable to tax. The details are as under: - ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 10 Sr. No. Unit Location Type of package scheme Mode of receiving the subsidy Amount credited in books (Rs.) 1. Jalgoan/Gadegaon Package Scheme of Incentives- 2001 VAT/CST refund (sanction order dated Dec- 28-15) 35,49,26,450/- Octroi/LBT (sanction order dated Oct-26- 15) 1,46,97,318/- Exemption of Electricity Duty (sanction order dated Jun-11- 15) 3,36,43,711/- 2. Malanpur Industrial Promotion Policy 2010 VAT/CST refund (sanction order dated Mar-27-15) 6,55,72,724/- 3. Guwahati Policy for development of North Eastern regions Excise Refund 44,33,734/- Total 47,32,73,937/- 10. It is noted that, following the reasoning set out in the assessment order passed by his predecessor in assessee’s own case for AY 2010- 11, the AO rejected the claim of the assessee and assessed the aforesaid subsidy as revenue in nature disallowed the same by holding as under: - “(i) The amounts have been consistently credited to the Profit & Loss account since the FY 2009-2010 and had also paid dividend out of the same. (ii) There is no nexus between subsidy granted and the capital cost of the project. In other words, subsidy is not granted with reference to the assets acquired and, hence, the contention that it was a capital receipt, cannot be accepted. (iii) The IPS was in the nature of refund of VAT/CST/Octroi/LBT/Excise/Electricity Duty and were, therefore, in ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 11 the nature of revenue receipts liable to tax. On this reasoning, the claim of the assessee that the subsidy was a capital receipt was rejected and a sum of Rs. 47,32,73,937/- was added back to the total income.” 11. The Ld. AR brought to our notice that, the IPS subsidy was received in relation to setting up of their units in State of Maharashtra, Madhya Pradesh & Assam. The assessee has placed before us the copy of the respective IPS Schemes along with the details of the subsidy so received at Pages 94 to 316 of the Paper book. It was pointed out that, the impugned issue before us is no longer res-integra as the coordinate Bench of this Tribunal in assessee’s own case for AYs 2010-11 to 2012-13 in ITA Nos. 7261/Mum/2014, 5840/Mum/2019 and 2006/Mum/2017 dated 04.01.2022 has held the IPS subsidy received from the State of Maharashtra for setting up new unit to be in the nature of capital receipt not liable to tax, by holding as under: - “2.4 Ground of appeal No. 4 with respect to addition of the subsidy amount received amounting to Rs. 33,90,28,500/- treating the same as Revenue in nature:- During the course of assessment proceedings, the A.O noticed that the Govt of Maharashtra has granted subsidy to the assessee company in terms of Package Scheme of Investment 2001 to set up project in the notified industrially backward districts of the state. The A.O stated that there was no nexus between the subsidy granted and the capital cost of the project therefore the subsidy amount was added to the total income of the assessee by treating the same as of the nature of revenue receipt. 2.5 Aggrieved, assessee has filed appeal before the Ld. CIT(A). The CIT(A) has rejected the appeal of the assessee, holding that nowhere in the scheme, it was mentioned that subsidy was pertained to the capital cost of the project. ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 12 2.6 During the course of appellate proceedings before us the Ld. Counsel contended that assessee has set up the project in the backward district of Maharashtra, Gadegaon Vill, Jalgoan Dist in accordance with the package scheme of 2001 of Maharashtra. It is further contended that the scheme provides for substantial incentives to the industries for setting up projects in notified backward districts of Maharashtra. It was further submitted that in accordance with the scheme the assessee was entitled to subsidies incentives mainly annual refund comprising of VAT and Central Sales Tax (CST) and electricity duty exemption. The Ld. Counsel for the assessee has also placed reliance on the following decisions; “1. Kirloskar Oil Engines Ltd [2015], 55 Taxmann.com 96 (Bombay)” 2. Chaphalkar Brothers Pune, [2017], 88 taxmann.com 178(SC). 3. LG Electronics India (P) Ltd, [2017], Delhi Trib 2.7 On the other hand, the LD DR has relied on the order of the lower authorities. 2.8 We heard both the parties and perused the material available on record. During the year under consideration, the assessee received subsidy from Government of Maharashtra which was claimed exempt on the ground that the same was capital in nature. The A.O was of the view that amount of subsidy was not granted with reference to the assets acquired and treated the subsidy amount as revenue receipt. During the course of assessment and appellate proceedings before the A.O and Ld. CIT(A) the assessee has specifically submitted that it has set up project in the notified backward area of Maharashtra in accordance with the package scheme of Govt of Maharashtra. In accordance with the scheme, the assessee has received subsidy from Govt of Maharashtra which was claimed exempt on the ground that the same was capital in nature. In the light of the facts and material placed on the record it is observed that purpose of the subsidy was to provide incentives for setting up projects in backward areas of Maharashtra and for generation of employment and the benefit of the scheme was available to the new units. Therefore, we consider that the object of the subsidy scheme was to enable the assessee to set up a new unit which was clearly in the nature of capital receipt. Had it been object of the assessee to run the business more profitably then the receipt was to be revenue in nature. With the assistance of Ld. ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 13 Representatives, we gone through the decision of Hon’ble Bombay High Court in the case of Kirloskar Oil Engines Ltd, (supra), wherein it is held as under: “Section 4 of the IT Act, 1961 income Chargeable as assessment year 1997-98 special capital incentive given to assessee by state government to enable assessee to set up a new unit in state would be capital receipt.” In the case of Chapalkar Brothers, Pune (supra) the Hon’ble Supreme Court held that since the object of incentive scheme was to encourage and development of multiple theatre complexes incentives would be capital in nature and not revenue receipt. In the case of LG Electronics India (supra) the Special Bench of ITAT Delhi held that the assessee’s receipts from State Govt. to the extent of subsidy under package scheme of incentive, 2001 for accelerating flow of investments in industries in state, i.e for expansion of industries and also to create employment opportunities was not form of exemption from payment of taxes on increased turnover and from payment of electricity duty such subsidy receipts assumed character of capital receipt irrespective of forum in which it was disbursed. 2.9 In the light of the above facts and findings it is clear that in the case of the assessee the project for various plastic product with large capacities was set up in notified backward area of Maharashtra in accordance with the package Scheme of Incentives-2001 of Maharashtra Government. The main object of the scheme was to intensifying and accelerate the process of dispersal of industries in the less developed region, coupled with the object of generating employment opportunities in backward areas. Therefore, we consider that the decision of the Ld. CIT(A) is not justified. Accordingly, this ground of appeal is allowed.” 12. Per contra, the Ld. DR supported the order of the lower authorities. He also took us through Paras 6.5, 6.10 & 6.11 of the directions of Ld. DRP and brought to our notice the factual discrepancies found by the Panel in the computation of the quantum of subsidy regarding certain short provisions/adjustments. In his rebuttal, ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 14 the Ld. AR took us particularly through Pages 129-130, 240 & 316 of the Paper Book to show that the reconciliations had been submitted before the Ld. DRP and no specific defect therein had been pointed out by the Panel. The Ld. AR explained that there is always a time lag between the end of the year to which subsidy pertains and final approval of the same. He showed us that the subsidy is accounted for on mercantile basis of accounting based on the initial sanction as received by the company. Thereafter, when the final sum is approved/ disbursed, there may be excess/ shortfall, which is accordingly adjusted for. On the given facts, the Ld. AR showed us that the subsidy was short recognized in earlier years and therefore the excess amount i.e. difference between amount recognized and amount finally disbursed was credited in P&L A/c during the year. He contended that, irrespective of the year to which such short provision pertains to, the nature of receipt remains the same i.e. capital in nature and thus not liable to tax. 13. We have considered the submissions of both the parties and perused the material placed before us. It is noted that the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugar & Chemicals Ltd. (306 ITR 392) had held that whether the subsidy or grant given by the Government is in the nature of capital or revenue will have to be judged and decided with reference to the object and the purpose for which the subsidies are granted. If the principal object for grant of subsidy is to promote industry or to enable the assessee to set up or ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 15 expand the existing unit or capital base, then such subsidy is capital in nature. The view is noted to have endorsed by the Hon'ble Supreme Court in its latter decision in the case of CIT vs. Chapalkar Brothers (400 ITR 279). In the decided case, the Hon’ble Apex Court explained the principle that the subsidy granted by the Government to achieve the object of acceleration of industrial development shall be capital in nature. 14. Having regard to the above principle as laid down by Hon’ble Supreme Court (supra), it is noted that this Tribunal in assessee’s own case for AYs 2010-11 & 2012-13 (supra) had held the IPS subsidy received by the assessee from the Government of Maharashtra was towards setting up of the new unit at Jalgaon and therefore capital in nature. 15. With regard to the IPS subsidy received in relation to the Madhya Pradesh, it is noted that the Industrial Policy 2010 of Government of Madhya Pradesh (in terms of which the assessee also received the impugned IPS subsidy) was examined by the coordinate bench of this Tribunal at Indore in the case of Agya Auto Ltd in ITA No. 540/Ind/2018 and the IPS subsidy received pursuant to the said Incentive scheme for setting up new units was held to be capital in nature, by holding as under: “12. We observe that the assessee company started Unit-II in Pithampur, Dist.-Dhar, MP on 24.07.2011 with a capital investment of Rs.10,00,53,000/-. This unit is covered under second point of para 4.2.15 ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 16 of investment Promotion Scheme and Pithampur fell under 'C' category of backward area. This unit was thus eligible for subsidy of 75% of the Commercial Tax and Central Sales Tax deposited into Government account. In various decisions referred by Ld. CIT(A) in the impugned order the catch word is 'purpose of subsidy'. It is immaterial that at what point of time the subsidy is given. It can be before the start of production or after the commencement of production or after effecting the sales. What is important is that for what purpose the subsidy is given. Special Bench of the Tribunal in the case of DCIT v. Reliance Industries Limited (88 ITD 273) has held that 'after incentive is given for setting up or expansion of industry in a backward area, it will be capital, irrespective of modality or source of funds through or from which it is given. 13. In the case of assessee maximum amount of assistances permissible is the total eligible investment stated in the sanctioned letter which is Rs.1042.94 lakhs (10.43 cr.). Being attracted by the ITA No.540/Ind/2018 Agya Auto Ltd provision of this scheme of subsidy the assessee decided to take a tough path of setting up a unit in a backward area and for this made capital investment of Rs.10.43 cr. (approx.). The scheme of subsidy is devised to give the benefit to the assessee by way of refund of the sales tax/MPCT/VAT & CST deposited by the assessee on the sales effected by it in the Unit-II located in backward area. So the nexus of subsidy is linked to the capital investment made by the assessee for setting up a unit in backward area. In these given facts, the subsidy received during the year by the assessee, in our view is capital in nature. Our view is further supported by following various decisions: Name of Decision 1. CIT vs. Chaphalkar Brothers [2017] 88 taxmann.com 178 (SC) ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 17 2. PepsiCo India Holdings (P.) Ltd. vs. Addl CIT [2018] 100 taxmann.com 159 (Delhi - Trib.) 3. BhushaISteelvs.CIT(SC) 4. PCIT vs. Welspun Steel Ltd. [2019] 103 taxmann.com 436 (Bombay) 5. Johnson Matthey India (P.) Ltd. vs. DCIT [2018] 91 taxmann.com 200 (Delhi - Trib.) 6. Universal Cables Ltd. vs. DCIT [2015] 57 taxmann.com 95 (Kolkata - Trib.) .... 16. We, therefore, respectfully following the decisions of the coordinate Benches referred hereinabove and the settled judicial proposition and having examined the facts of the instant case, are of the considered view that the purpose of subsidy received by the assessee during the year is towards meeting out the capital investment made to set up the Unit-II project in a backward area and the subsidy so received at Rs.2,57,07,188/- during the year is capital subsidy. Thus, no interference is called for in the finding of the Ld. CIT(A).” 16. Similarly, it is noted that Industrial Policy of Assam in terms of which the assessee received IPS subsidy in relation to its Assam Unit, was examined by the coordinate bench of this Tribunal at Guwahati in the case of DCIT Vs Century Plyboards (I) Ltd in ITA No. 2149/Gau/2019 dated 04.11.2020 and the subsidies received under this Industrial Scheme for setting up unit in Assam was held to be capital in nature, by observing as under: ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 18 “39. The assessee submitted that it had set-up a new manufacturing unit in the State of Assam. In terms of Notification No. 20/2007 issued by Government of India, Ministry of Finance dated 25.04.2007, the assessee was entitled to excise duty exemption on the goods cleared from the said Unit. The ld. AR invited our attention to the Eligibility Certificate dated 14.05.2010 issued by Office of Superintendent, Central Excise Range- II Guwahati Division confirming that the unit set-up by the assessee is eligible for exemption from excise duty in terms of the said Notification as a new unit with effect from 04-02-2009 i.e. the date of commencement of commercial production. It is noted that the said exemption was given to the new units for development of Industries and generation of employment in the North Eastern States. In this regard relevant extracts of Notification No. 20/2007 is reproduced below:-- "5. The exemption, contained in this notification shall apply only to the following kind of units, namely; a) New Industrial units which commence commercial production on or after the 1st day of April, 2007 but not later than 31st day of March, 2017; b) Industrial Units existing before the 1st day of April, 2007 but which have undertaken substantial expansion by way of increase by not less than 25% in the value of fixed capital investment in plant and machinery for the purposes of expansion of capacity/modernization and diversification and have commenced commercial production from such expanded capacity on or after the 1st day of April, 2007 but not later than 31st day of March, 2017." .... 42. In view of the above facts, it was the plea of the ld. AR that the incentive in the form of excise duty exemption and sales tax subsidy, have been granted for setting up new units in the States of Assam & West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State. Referring to the decision of the Hon'ble Supreme Court in the batch of cases, with its lead order in the matter of CIT Vs Chaphalkar Brothers (400 ITR 279), the ld. AR contended that, it is now well settled that subsidies granted under the State Industrial Schemes formulated with the object to ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 19 accelerate industrial development and generate employment, is capital in nature and therefore not liable to income-tax. 43. We have considered the rival submissions of both the parties. From the facts as already discussed in the foregoing, it can be safely inferred that the subsidies were granted to the assessee for setting up new units in the States of West Bengal and State of Assam. The Hon'ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (supra) has held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment is capital in nature... 44. The above decision of the Hon'ble Supreme Court has been followed by the Hon'ble Calcutta High Court in the case of Pr. CIT Vs Shyam Steel Industries Limited (303 CTR 628) wherein the Court held that, where the incentive under the Industrial Schemes are given only to new units and units which have undergone an expansion, then the real purpose of such incentive has to be seen as a capital subsidy and therefore should be regarded as a capital receipt and not a revenue receipt. Following the ratio laid down in these judgements, we find merit in the claim of the ld. AR that the excise & sales tax subsidies received by the assessee are in the nature of capital receipt not liable to tax since the object of granting subsidy is to encourage setting up new industries for industrial growth of industrially non- developed area.” 17. Following the above decisions (supra), we hold that the lower authorities had erred in holding the IPS subsidy received by the assessee under the State Industrial Schemes of Maharashtra, Madhya Pradesh & Assam was revenue in nature. 18. Coming to the reconciliation deficiencies, it is noted that the same had been reconciled by the assessee and the relevant extracts of the reconciliation is found placed in the Paper Book at Pages 129-130, 240 & 316. Perusal of the same reveals that, the assessee recognizes subsidy on mercantile basis of accounting basis the terms of the initial sanction received from the State Government. The final approval or ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 20 disbursement comes at a later date and there are instances of excess/ shortfall, which is appropriately accounted for by the assessee. It is noted that that the subsidy was short recognized by the assessee in earlier years and therefore the excess amount i.e. difference between amount recognized and amount finally disbursed was credited in P&L A/c during the year. As rightly pointed out by the Ld. AR, the nature of the subsidy which was short recognized in earlier year/s remains the same i.e. capital in nature. Before us, the Ld. DR appearing for the Revenue was unable to point out any infirmity in the above reconciliation furnished by the assessee. 19. For the above reasons therefore, we hold that the IPS subsidies received by the assessee was capital in nature. Hence, Ground No. 2 stands allowed. 20. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on this 03/10/2023. Sd/- Sd/ Sd/- (RIFAUR RAHMAN) Sd/- (ABY T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 03/10/2023. Vijay Pal Singh, (Sr. PS) ITA No.7598/Mum/2019 A.Y. 2015-16 Supreme Industries Ltd. 21 आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनर्करण, मुंबई / ITAT, Mumbai