By TIOL News Service

AHMEDABAD, JUNE 22, 2016: THE issue is - Whether the subsidy in the form of exemption from the liability to pay sales tax, is on capital account and not on revenue account. YES is the answer.

Facts of the case

A) The assessee company engaged in the business of manufacturing of CTVs, PCBs, Washing Machines etc. During the course of the scrutiny assessment proceedings, the AO noticed that the assessee has claimed an amount as capital subsidy received by way of sales tax benefit under the scheme of the Gujarat Government, and an amount as excise duty benefit under the scheme of the Government of India. The assessee had claimed that the assessee was granted sales tax benefit for setting up the unit in the district of Kutch , and this benefit was in the sense that nether the assessee has paid any sales tax on purchases nor charged any sales tax to its customers. The claim of the assessee was that there is a notional subsidy element inbuilt in the revenue received and that is really the subsidy received by it in respect of sales tax. The AO had made the additions of Rs 4 ,36,57,867 in respect of sales tax subsidy and Rs 3,21,35,417 for excise duty subsidy were made to the income returned by the assessee .

B) During the course of the scrutiny assessment proceedings, the adjustment for debt redemption fund, at Rs 2.50 crores , was declined with a short observation that 'debt redemption fund of Rs 2.50 crores is an appropriation for purpose of creating a reserve and is a below the line adjustment, it does not fall in any category of the adjustments provided u/s 115JB. The CIT( A) confirmed the same on the same basis and rejected assessee's stand that it is covered by Bombay High Court's judgment in the case of CIT vs Raymonds Ltd. It was held that the purpose of debt redemption reserve is creation of a reserve and is not a permissible adjustment. The AO had made non exclusion of debt redemption fund of Rs 2.50 crores from the book profit for the purpose of computing book profits u/s 115JB.

Having heard the parties, the Tribunal held that,

Notional subsidy

++ the decision of the Special Bench still holds good as the same has not, and at least not yet, even been examined by Bombay High Court. Mere admission of appeal against a decision, as is elementary, does not affect the biding nature of a judicial precedent. The Special Bench decision, in the case of Reliance Industries Ltd was not reversed by Supreme Court, but was directed to be examined, on merits, by Bombay High Court. That is quite different from disapproving the special bench decision, but it appears that the coordinate bench was led to believe, and there could not have been any other reason for ignoring the special bench decision, that this Special Bench decision is reversed. That is patently incorrect, and when we pointed it out to the Commissioner (DR), he did not have much to say except to rely upon the coordinate bench decision which seems to have followed that approach. The wisdom of a division bench, even if superior- has to make way for the higher wisdom of a larger bench. It is this faith of judicial hierarchical system that is the strength of our functioning, and we must follow the same. Tribunal, therefore, regret their inability to follow the division bench in the case of Jindal Power, no matter how deeply we respect and admire the work of all our colleagues, and we would rather be guided by the special bench decision – which is exactly what another division bench, on the same set of facts as before us, did in the case of Ajanta Manufacturing Ltd. The fact that appeal is admitted does not affect the binding nature of the judicial precedents. There is no dispute before us that the scheme under which the sales tax and excise duty subsidy are given to this assesse are the same as in the case of Ajanta Manufacturing Ltd. All the material facts being the same, there is no reason to take any other view of the matter than the view so taken by the coordinate bench. Tribunal must, therefore, uphold the conclusions arrived at by the Commissioner (A), which are in consonance with the Special Bench decision in the case of Reliance Industries and coordinate bench decision in the case of Ajanta Manufacturing Ltd and decline to interfere in the matter;

Debt redemption reserve

++ it is found that the issue is indeed covered by the decision of Bombay High Court, in the case of CIT Vs Raymonds , wherein Their Lordships have inter alia observed that the mere fact that a Debenture Redemption Reserve is labeled as a reserve will not render it as a reserve in the true sense or meaning of that concept. An amount which is retained by way of providing for a known liability is not a reserve. Consequently, the Tribunal was correct in holding that the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA.The Tribunal therefore, uphold the plea of the assessee , and direct the AO to grant the relief accordingly.

(See 2016-TIOL-1112-ITAT-AHM)