M/S. TESLA TRANSFORMERS LTD.,BHOPAL V. ACIT-3(1), BHOPAL

ITA 515/IND/2023

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Tesla Transformers Ltd. appealed against the order of the Commissioner of Income-Tax (Appeals)-NFAC, Delhi, which arose from the assessment order passed by the National e-Assessment Centre, Delhi. The primary contention was regarding the taxability year of duty drawback receipts. The Assessing Officer had taxed certain duty drawback receipts in AY 2018-19 based on the export being made in the previous year 2017-18, while the assessee argued that the receipts should be taxed in AY 2019-20 when they were actually received. The Tribunal examined the provisions of the Income Computation & Disclosure Standard-VII relating to government grants and the specifics of the duty drawback receipts to determine the correct assessment year and compliance with the conditions of recognition as income.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 470321 (ITAT-INDORE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2018-2019
• Other Referred Cases: Azadi Bachao Andolan v Union of India [2001] 252 ITR 471 (Delhi)
• Laws Referred To: Income-tax Act, 1961, Income Computation & Disclosure Standard-VII, Foreign Exchange Management Act, 1999, The Customs Act, 1962
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FORASSESSEESUBMITTEDTHATTHE; FORASSESSEEFIRSTLYPOINTEDOUTTHATTHEDUTYDRAWBACKWAS; FORREVENUEALSOMADEHISSUBMISSIONS.WEPRESENTBELOWTHE; FORREVENUERESISTEDTHE; SHRIASHISHPORWAL
• Assessee Lawyers: SHRIANILKHABYA
• Keywords: Capital asset converted into stock in trade
• Section: 143(3)

Judgement Text

"Page 1 of 10 आयकरअपीलीयअिधकरण, इंदौरɊायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI B.M. BIYANI, ACCOUNTANT MEMBER AND SHRI PARESH M. JOSHI, JUDICIAL MEMBER ITA No. 515/Ind/2023 Assessment Year: 2018-19 M/s. Tesla Transformers Ltd., 23-A, Industrial Area, Govindpura, Bhopal बनाम/ Vs. ACIT-3(1), Bhopal/NEAC (Assessee/Appellant) (Revenue/Respondent) PAN: AABCT1005C Assessee by Shri Anil Khabya, AR Revenue by Shri Ashish Porwal, Sr. DR Date of Hearing 11.03.2025 Date of Pronouncement 26.03.2025 आदेश/ O R D E R Per B.M. Biyani, A.M.: Feeling aggrieved by order of first appeal dated 29.11.2023 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 20.04.2021 passed by learned National e-Assessment Centre, Delhi [“AO”] u/s 143(3) r.w.s. 144B of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2018-19, the assessee has filed this appeal. 2. The background facts leading to present appeal are such that the assessee-company filed return of AY 2018-19 declaring a total income of Rs. Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 2 of 10 7,20,89,230/-. The case was selected for scrutiny assessment and the AO passed order u/s 143(3) after making two additions, namely (i) addition of Rs. 18,32,561/- on account of income from duty drawback, and (ii) disallowance of Rs. 25,40,234/- on account of personal expenses. Aggrieved, the assessee carried matter in first-appeal whereupon the CIT(A) upheld the addition of Rs. 18,32,561/- but deleted the disallowance of Rs. 25,40,234/- and this way partly allowed assessee’s first appeal. Still aggrieved, the assessee has come in next appeal before us. 3. The assessee has raised following grounds: “1. That the Ld. CIT(A) ought to have cancelled the order of assessment as no statutory compliance of issuing show cause notice was observed by AO. 2. That the Ld. CIT(A) ought to have deleted addition of Rs. 18,32,561/- made on account of duty drawback income which did not accrue in AY 2018-19.” 4. At the time of hearing, Ld. AR for assessee submitted that the assessee is not pressing Ground No. 1. Accordingly, this ground is dismissed as non-pressed. 5. In Ground No. 2, the assessee assails the addition of Rs. 18,32,561/- on account of income from duty drawback made by AO and upheld by CIT(A). 6. Ld. AR for assessee firstly pointed out that the duty drawback was received on 06.12.2018/10.04.2018 falling within the previous year 2018-19 and accordingly the assessee offered it for taxation in AY 2019-20 which is basically next year to the AY 2018-19 involved in present appeal. However, Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 3 of 10 the AO has taxed it in AY 2018-19 on the basis that the relevant export was made in previous year 2017-18 relevant to AY 2018-19 and the assessee follows mercantile method. Accordingly, the present controversy basically concerns with taxability year of duty drawback receipts. 7. Ld. AR next submitted that the duty drawback is a “Govt. Grant” and the “Income Computation & Disclosure Standard-VII” relating to “Govt. Grants” [“ICDS-VII”] notified by Central Govt. u/s 145(2) of the Act governs the taxability of duty drawback receipts. He submitted that Para 4 of ICDS- VII prescribes thus: “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.” 8. Ld. AR then referred a publication titled “Technical Guide on Income Computation and Disclosure Standards” issued by “The Institute of Chartered Accountants of India” wherein following guidance has been provided with regard to above Para 4 of ICDS-VII: “5.11 Para 4 of the ICDS has two limbs. The two limbs collectively provide the timing of recognizing government grants. The first limb provides the starting point of recognition, while the second limb draws the cut-off date. In the first limb, there are two conditions to recognize government grants. It stipulates that the government grant cannot be recognized until there is 'reasonable assurance' that: (a) the person shall comply with the conditions attached to the grant; and (b) the grants shall be received. Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 4 of 10 5.12 The use of the conjunction 'and' implies that both the conditions have to be cumulatively satisfied to recognise the government grant as income. Failure of either of the conditions would prevent recognition of government grants as income. Further, there has to be a 'reasonable assurance' that the two conditions would occur. The factum of reasonable assurance is attached to both 'compliance (of conditions)' and receipt (of grant)'. The term 'reasonable' has not been defined in the Act. The Delhi High Court in the case of Azadi Bachao Andolan v Union of India [2001] 252 ITR 471 (Delhi) has observed - \"The expression 'reasonable' is not susceptible of a clear and precise definition; for an attempt to give a specific meaning to the word 'reasonable' is trying to count what is not number and measure what is not space. It can be described as rational according to the dictates of reason and is not excessive or immoderate. The word 'reasonable' has in law the prima facie meaning of reasonable with regard those circumstances of which the actor, called on to act reasonably, knows or ought to know.\" 5.13 The phrase 'reasonable assurance' has also not been defined by the ICDS. It connotes something which has a sufficient degree of certainty. Often, one cannot obtain absolute assurance because of the following limitations: (a) Grant conditions which are contingent upon the performance of outsiders or third parties; (b) Change in Government policies; (c) Delay in communicating the precise quantum of grant; 5.14 Accordingly, absolute assurance in complying with conditions and receipt of grant may not be attainable. The ICDS does not visualize an absolute or virtual certainty in compliance with the conditions. The recognition of Government grant as income requires a reasonable vision of due compliance from both ends - Grantee (by complying with the conditions) and Government (by paying the grant). 5.15 Para 4(2) of the ICDS provides for the end-point of recognition of government grant. It states that the government grant recognition cannot be postponed beyond the date of actual receipt. The Government grant has to be recognised on or before the date of receipt.” 9. In nutshell, Ld. AR submitted, as per Para 4(1) of ICDS-VII the duty drawback (which is a type of Govt. grant) cannot be recognized as income until there is a ‘reasonable assurance’ that the person shall comply with the conditions attached to it and also that the grant shall be received. But at the Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 5 of 10 same time, as per next Para 4(2), the recognition cannot be postponed beyond the date of actual receipt of duty drawback. 10. Having explained the above law relating to recognition of duty drawback as income for income-tax purpose, Ld. AR referred the details of duty drawback receipts of Rs. 18,32,561/- compiled by him in the form of a Statement as under: Duty Drawback Statement S.No. Shipping Bill no. Shipping bill date Drawback amount Country of exports Draw back receipt date 25% advance receipt date Final payment receipt date from party 1 297309 20.02.2018 11,68,179 Kenya 06.12.2018 22.06.2017 15.10.2019 2 1971745 03.01.2018 3,29,980 Kenya 06.12.2018 22.06.2017 15.10.2019 3 8199446 24.08.2017 1,40,698 Kenya 06.12.2018 28.11.2016 01.08.2017 4 8277419 28.08.2017 1,49,519 Tanzania 06.12.2018 26.09.2017 5 3200990 28.08.2017 44,185 Bangladesh 10.04.2018 20.04.2018 Total 18,32,561 11. Ld. AR thereafter made a detailed submission for all line items of duty drawback receipts as mentioned at S.No. 1 to 5 in above Table. Replying to Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 6 of 10 same, Ld. DR for revenue also made his submissions. We present below the entire discussion alongwith our adjudication: (i) Ld. AR instantly agreed that the duty drawbacks of Rs. 1,40,698/- (+) Rs. 1,49,519/- appearing at S.No. 3 & 4 in the Table aggregating to Rs. 2,90,217/-, were rightly taxed by AO in AY 2018-19 since the relevant export proceeds were received on 01.08.2017/26.09.2017 falling within the previous year 2017-18 relevant to AY 2018-19 and hence there was a ‘reasonable assurance’ qua the receipt of duty drawback also, as contemplated in Para 4(1) of ICDS-VII. Ld. AR would, however, make a limited prayer that since the assessee has already offered and department has taxed these receipts in AY 2019- 20, the assessee cannot be made to suffer double taxation by taxing it again in AY 2018-19 as has been done by AO. We, however, find that every assessment-year is a distinct and separate assessment-year in the scheme of Income-tax Act, 1961 and the income has to be taxed in correct assessment-year only. Since the Ld. AR makes a clear assertion that the correct assessment-year for the receipts of Rs. 2,90,217/- was AY 2018-19, the AO has rightly made addition to that extent in AY 2018-19. Hence, we uphold the addition to the extent of Rs. 2,90,217/- in AY 2018-19. We, however, direct the AO to exclude it from AY 2019-20 to avoid wrong-cum-double taxation in that year. Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 7 of 10 (ii) Ld. AR next submitted that the duty drawback of Rs. 44,185/- appearing at S.No. 5 in the Table cannot be taxed in AY 2018-19 because although the relevant export proceed was received on 20.04.2018 within the period of 6 months after date of export as stipulated under Foreign Exchange Management Act, 1999 (“FEMA) but still the ‘reasonable assurance’ is very technical and it was difficult for anyone to account for duty drawback in the previous year 2017-18 relevant to AY 2018-19. This argument raised by Ld. AR is for the sake of argument only and we are not convinced. We have made this clear to Ld. AR during hearing itself. Accordingly, the pleading made by Ld. AR is rejected and it is held that the AO has rightly taxed the duty drawback of Rs. 44,185/- in AY 2018-19. However, since the assessee has already offered and department has taxed this very receipt in AY 2019-20, the assessee cannot be made to suffer double taxation. Therefore, we give similar direction as given in preceding para to the AO to exclude it from AY 2019-20 to avoid wrong-cum-double taxation in that year. (iii) Lastly, Ld. AR submitted that the duty drawback of Rs. 11,68,179/- (+) Rs. 3,29,980/- appearing at S.No. 1 & 2 in the Table aggregating to Rs. 14,98,159/-, cannot be taxed in AY 2018-19 because the buyer paid only 25% advance in the previous year 2017-18 relevant to AY 2018-19 and did not pay balance 75% within the period of 6 months Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 8 of 10 as per FEMA. He submitted that there was gross uncertainty regarding collection of underlying export proceeds till 15.10.2019 when the assessee could somehow recover full proceeds from buyer. Therefore, the condition of ‘reasonable assurance’ in terms of Para 4(1) of ICDS-VII was not satisfied in AY 2018-19. But since the assessee received duty drawback on 06.12.2018, the assessee could not postpone the recognition of duty drawback beyond 06.12.2018 in terms of Para 4(2) of ICDS-VII, the assessee offered the same for taxation in previous year 2018-19 relevant to AY 2019-20 even though the export proceed was not recovered. To support his stand, Ld. AR referred the law prescribed in 2nd Proviso to section 75 of The Customs Act, 1962 where it has been specifically provided that where any drawback has been allowed and the sale proceeds of goods are not received by exporter within the time allowed under FEMA, such drawback shall be deemed never to have been allowed and the Central Govt. may specify the procedure for the recovery or adjustment of the amount of such drawback. Per contra, Ld. DR for revenue resisted the argument of Ld. AR on the footing that the assessee received 25% advance in current year and therefore it cannot be said that there was no ‘reasonable assurance’. After a careful consideration, we find considerable merit in the submission of Ld. AR. We find that the assessee received only part advance from buyer and the substantial portion was not received within 6 months as prescribed in FEMA. The Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 9 of 10 assessee was ultimately able to realise much later on 15.10.2019. These facts are sufficient enough to show that there was no ‘reasonable assurance’ that the assessee shall comply with the condition of realization of export proceeds attached to the duty drawback. We find that the Para 4(1) of ICDS-VII uses negative language in a very stricter term. The language is “Government grants should not be recognized until there is reasonable assurance …..”. Therefore, having regard to facts of issue in the light of the language of Para 4(1) of ICDS-VII, it can be said that the duty drawback of Rs. 14,98,159/- was not taxable in AY 2018-19. The assessee is justified in offering the same in AY 2019-20 since the assessee received duty drawback on 06.12.2018 and recognition of duty drawback could not have been postponed beyond the date of receipt as per Para 4(2) of ICDS-VII. Therefore, we direct the AO to delete the addition to the extent of Rs. 14,98,159/- in AY 2018-19. The assessee succeeds to this extent. 12. Resultantly, this appeal is partly allowed. Order pronounced in open court on 26/03/2025 Sd/- Sd/- (PARESH M. JOSHI) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Tesla Transformers Ltd. ITA No. 515/Ind/2023 – AY 2018-19 Page 10 of 10 Indore िदनांक/Dated : 26/03/2025 Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order E COPYSr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore "