| SooperKanoon Citation | sooperkanoon.com/74614 |
| Court | Income Tax Appellate Tribunal ITAT Jodhpur |
| Decided On | Jan-06-2006 |
| Judge | H O Maratha, R Sayal |
| Reported in | (2006)101ITD66(Jodh.) |
| Appellant | Harshavardhan Chemicals and |
| Respondent | Asstt. Commissioner of |
i. Under the facts and in the circumstances of the case, the ld. CIT(A) Udaipur has erred in upholding the addition in respect of subsidy amount received from the government. The addition so made in set aside proceedings was without following the direction given by the ITAT while setting aside the issue.
ii. Under the facts and in the circumstances of the case, the ld. CIT(A) Udaipur has erred in confirming the addition of Rs. 4,27,68,409/- by treating the subside received from the government as income from business of assessee.
3. Briefly stated, the facts of the case are that the assessee furnished its return declaring loss of Rs. 47,39,648/-. Pursuant to the order passed Under Section 143(3) and its subsequent rectification Under Section 154, the income of the year was determined at Rs. 2,78,03,100/-. In this assessment the Assessing Officer rejected the books of accounts on the premise that the assessee had shown bogus production and sale of fertilizers in order to avail the benefit of subsidy, being a grant allowed by the Government of India for this purpose. The Assessing Officer recasted the manufacturing, trading and P & L loss in which the entire subsidy of Rs. 4,27,68,409/- Rs. 3,82,53,695/- received during the year under consideration and Rs. 45,14,715/- pertaining to the previous year] was considered as income of the assessee. The assessment order was upheld in the first appeal.
However, the Tribunal vide its order dated 7.5.1999 restored the question of subsidy to the file of the Assessing Officer with the direction to examine the fact that if the production was not genuine arid the assessee had to remit the subsidy amount to the Government, could it be subjected to tax. The Tribunal further directed that if the production was held to be bogus it should also be ascertained whether the assessee had remitted the subsidy pertaining to bogus production to the Government or not.
In the fresh proceedings, the assessee made the following submissions in support of its claim, the sum and substance of which is as follows: (1) The Assessing Officer had treated the production and sale of 30170 MT of SSP as bogus and disallowed the relevant cost and excluded the corresponding sales. But he had not reduced the amount of subsidy referable to the above-mentioned quantity. Therefore, there was an inherent anomaly/contradiction in the assessment order keeping in view the accrual system of accounting.
(2) The subsidy was conditional to the production of the fertilizers and if production was disallowed then the subsidy referable to the said quantity of production would become refundable to the Government and could not be taken to have accrued to or vested with the appellant.
(3) As per the Accounting Standards of ICAI the receipt of grant was not necessarily a conclusive evidence that conditions attached to the grant have been or will be fulfilled. Reliance was placed on the order of the Hon'ble Supreme Court in the case of CIT v. UPSIDC 225 ITR 703 wherein it was accepted that while determining profits and gains, the ordinary principles of commercial accounting would be applied so long as they do not conflict with the express provisions of the relevant statutes. Reliance was also placed upon the decision Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. v. CIT 82 ITR 363.
(4) The subsidy did not have the character of income at the time of its accrual and the appellant did not acquire enforceable right to such income. The income assessed was not real and if in reality there was no production then taking the subsidy referable to that production would not be correct. The subsidy amount did not bear the character of the appellant's income at the time it reached him and therefore, it was not eligible for taxation.
(5) The question whether real income had materialized to the appellant had to be considered with reference to the commercial and business realities. When an amount received by the assessee stood as a liability and when a receipt was accounted for in the mercantile system, which in turn created an obligation and liability to repay as and when it was refunded, the said amount could not be included in the income of the appellant.
The Assessing Officer did not accept the assessee's contentions mainly for the following reasons: (i) The question, whether a receipt of money is taxable or not or whether deduction from that receipt is permissible or not, has to be decided according to the principles of law and not in accordance with the accountancy practice BCS Footline Ltd. v. CIT 77 ITR 857 [Cal.] and Tuticorn Alkali Chemicals and Fertilizers v. CIT 227 ITR 172 [SC]. Further the decision at 225 ITR 703 was found to be inapplicable to the appellant's case.
(ii) The decision of the Hon'ble Supreme Court given in the case of Kedarnath Jute Manufacturing Co. v. CIT 87 ITR 363 would also not apply as the facts of the case were different from that of the appellant. Even otherwise, once a receipt had been declared as income it could not be held that it did not accrue if in a subsequent year a dispute arose regarding the production.
(iii) The subsidy given to recoup the cost of production was a revenue receipt in the hands of the appellant Sahney Steel and Press Works Lt v. CIT 228 ITR 253 and other cases. As per the facts the subsidy amount was claimed by the appellant and the same was received and accounted for in the books of accounts against production. The chargeability of the income arose at this point as held by the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. v. CIT 82 ITR 363. Further the decision of the Hon'ble Supreme Court given in the case of Godhara Electricity Co.
v. CIT 225 ITR 746 would not apply because in that case the question was whether the receipt realized due to the litigation should be taxed or not whereas in the appellant's case the amounts had been received and were in possession of the appellant and the Government has filed a suit in court to withdraw the subsidy claim which was allowed on a bogus claim of the appellant.
(iv) The chargeability of income Under Section 5 was on the basis of accrual and receipt and an income could not be exempted from taxation on the basis of contingency, which may arise in future. The amount of subsidy was received and accounted for by the appellant in the books during the present assessment year and therefore, the basis of charge arose at that point itself.
In the final analysis the Assessing Officer noted that the assessee was indulging in the malpractice of inflating the production and sales figures of SSP fertilizers in order to take advantage of the subsidy scheme of the Government. It was noticed that when it was discovered, a CBI enquiry was conducted against the company as a result of which a charge sheet was filed in the Court of District h. Sessions Judge, Indore. It was further noticed that the assessee had actually received the amount of subsidy and till the date of assessment order, no refund was made to the Government, By considering these facts, it was opined that the amount of Rs. 4.27 crores and odd was taxable. The arguments made on behalf of the assessee before the ld. CIT(A) did not find favour with the latter, who echoed the assessment order on this count.
4. Before us, the ld. counsel for the assessee contended that the assessee had availed subsidy from the Government, which was relatable to production and sales. Since the part of production was held to be bogus, it was contended that the amount of subsidy relatable to such bogus production, already received and accounted for by the assessee in its books of accounts became liable to be refunded. It was stated that the amount though received as subsidy was, in fact, not in the nature of income because the liability to repay crystallized when CBI enquiry was conducted. On a specific question raised from the Bench, it was stated that the proceedings before the CBI started in 1994 have not yet been decided and further the amount of subsidy has still not been refunded. However, it was emphasized that the accrual of income of subsidy got deferred and the very liability to repay the amount, wrongly collected earlier from the Government, had arisen by virtue of the CBI enquiry. He relied on certain decisions and Accounting standards of Institute of Chartered Accountants of India to contend that the amount of subsidy cannot be put to tax. On a further query from the Bench, it was conceded by the ld. A.R. that in the immediately preceding A.Y., namely, 1990-91 for which such production was also held to be bogus, the taxability of the amount of subsidy having been offered for taxation, was not assailed before the appellate forums for not taxing it. However, it was maintained that the assessee's right to claim deduction for this amount should not be adversely viewed simply on this ground, more specifically when it is duly in accordance with the correct legal position. In the opposition, the ld. D.R. strongly relied on the impugned order. Her further submissions were the reiteration of reasoning recorded by the ld. CIT(A) in upholding the assessment order on this count.
5. We have heard the rival submissions in the light of material placed before us and precedents relied upon by both the sides. The short controversy, which falls for our consideration is to; decide, as to whether or not the subsidy relatable to bogus production is liable to be taxed? On going through the factual matrix of this case, it is clear that the assessee company had declared bogus production and sales of fertilizers of 30170 MT of SSP and also claimed subsidy under the Scheme of Central Government under which the manufacturers of fertilizers were compensated at the relevant time so that fertilizers could be sold at the subsidised rates. The assesse Company received the subsidy amount, also comprising of the subsidy in relation to the bogus production and sales. The disputed amount of subsidy has not been refunded to the Government even till date. There is no dispute about the fact that the assessee company was following the mercantile system of accounting. There is further no quarrel about the proposition that the subsidy is Revenue in nature and rightly so, because it is connected with the sale price of the fertilizers to ensure that the sale is made at the controlled rates. It is further evident that the Assessing Officer held that the part of production/sales was bogus and resultantly reconstructed the trading account by ignoring the cost of bogus production and sales but retained the amount of subsidy received by the company and as such, the part of the subsidy referable to the bogus production/sales remained included in the total income of the assessee, which is the subject matter of the instant controversy. The finding of the Assessing Officer with regard to bogus production of fertilizers was upheld by the ld. CIT(A) as well as the Tribunal in the, first round. However, a new issue was raised for the first time before the Tribunal in the earlier proceedings to the effect that if the finding of bogus production was upheld, then the subsidy referable to such bogus sales should also be ignored as the assessee was liable to refund this amount to the Government. The Tribunal in the appeal against the first round of assessment discussed this aspect and eventually restored the matter to the file of the Assessing Officer with the following directions: There are so many conditions for granting subsidy and if the conditions are not fulfilled, then the subsidy has to be refunded back to the Government. There is a specific condition that if it is found that the production is not genuine then in that case the assessee has to remit back the subsidy amount to the Government.
Therefore, we are of the considered opinion that the matter should be restored to the file of the Assessing Officer to examine the case from this angle. There is no doubt that the production was held to be ingenuine and bogus. In these circumstances, whether the assessee has remitted subsidy back to the Government or not or whether it is taxable in the hand of the assessee or not. For this purpose the matter is restored to the file of the Assessing Officer. The Assessing Officer is further directed to give opportunity to the assessee to explain his side.
The assessee in the first ground is questioning the jurisdiction of the Assessing Officer in considering the matter afresh by overlooking the directions given by the Tribunal while restoring the issue. From the relevant portion of the order of the Tribunal, extracted above, it is crystal clear that the Assessing Officer was directed to examine two things - viz., first, whether the assessee has remitted the subsidy back to the Government or not or, and second, whether it is taxable in the hands of the assessee or not? On examination it was found by the Assessing Officer that the assessee had not remitted the subsidy back to the Government. The question of taxability of the subsidy was also considered by the Assessing Officer. As after appreciating the factual scenario in detail and submissions made on behalf of the assessee he held it to be taxable, we are convinced that he has not overlooked the observations of the Tribunal. To this extent the claim of the assessee is not accepted.
6. Now we come to the main argument of the ld. A.R. that since the cost/sales had been excluded by the Assessing Officer from the recasted trading account, the subsidy amount referable to such production and sales shold also have been excluded. It has been asserted that the entire amount of subsidy was duly reflected in the books of accounts and also offered for taxation since at that stage there was no question of the assessee becoming disentitled to any part of the subsidy. The detection of bogus production/sales was an incident taking place at a subsequent point of time. Though the Assessing Officer was justified in making necessary adjustment in the cost/sales, it was stated on behalf of the assessee that he failed in duty by not allowing deduction far the proportionate amount of subsidy relatable to such bogus sales. We have already noted in the foregoing para that the assessee was maintaining its accounts on mercantile basis. In such a system of accounting the income is recognized on accrual basis i.e. it is subjected to tax when the right to receive income is acquired. Such a right of income accrues when the final claim in this regard is filed after fulfilling the necessary conditions. The Hon'ble Supreme Court in the case of CIT v. Punjab Bone Mills considered a case of cash incentive for exports. It was held that such incentive accrued immediately on the date of application filed by the assessee claiming cash incentive from the Government. Adverting to the facts of the instant case, it is manifest that the assessee not only lodged its claim in respect of bogus production/sales, but also received the amount after due acceptance by the Government and was also reflected in its books of accounts. Hence income for subsidy accrued when it filed its claim and on its subsequent receipt the transaction came to an end i.e, the income was realized after having accrued. At the time when the claim of subsidy was made by the assessee, there was no dispute regarding the assessee's right to receive it. The same was eventually passed and the assessee recognized the income in its books of accounts.
However, the subsequent development, being the detection of bogus production jeopardized the assessee's right to such subsidy. Whereas the assessee is claiming before us that the finality to the original subsidy claim has been unsettled with the further developments and hence it cannot be recognized as income, the stand point of the department is that the income has, in fact, been accrued and realized.
We observe that once an amount in the nature of income [not advance] is received after accrual, it would remain income even if the dispute for its repayment arises subsequently. The rationale behind this proposition is that at the time of receipt, the accrual of income got concluded and also stood received by the assessee The subsequent dispute cannot affect the earlier accrual of income because there was no doubt as to the right to receive the amount at that time. The dispute is only for the further liability to repay. The situation would have been different if there had been some controversy at the time of receipt itself. In such a situation, it would not have assumed the character of income till the dispute on its right to receive had been finally settled. As in the instant case the amount did accrue as income initially and was also received as such, its taxability got finalized.
We do not find any embargo on the character of the receipt at the material time shedding its character of income. It is only a subsequent development that the assessee's mischievous practice was discovered and a CBI enquiry was conducted against the assessee's company and a charge sheet was filed in the Court of District and Sessions Judge, Indore, under the Essential Commodities Act and another charge sheet in the Court of Special Judicial Magistrate Indore under IPC. The Assessing Officer has mentioned that this information was received from the Under Secretary to the Government of India, Ministry of Chemicals and Fertilizers by letter dated 26.2.2002. By means of these subsequent proceedings unearthing the assessee's malpractice, the amount of subsidy received and finally accrued earlier came under the cloud of litigation. In bur considered opinion, the I Assessing Officer was fully justified in excluding costs and sale price of bogus production from the recasted trading account and retaining the amount of subsidy as it is because neither the sale price was earned nor the expenses were actually spent but the amount of subsidy was real and actual receipt distinct from mere fake entries of production and sales.
7. The ld. A.R. has strongly relied on the case of Godhra Electricity Co Ltd. v. CIT to bring home the point that only the real income can be subjected to tax. It was contended that the Income-tax is levied on income and if the income does not result at all, there cannot be any tax even though in book-keeping an entry is made about a hypothetical income, which does not materialize. In this case, the then Government of Bombay had granted a licence to the LSC company authorizing it to generate and supply electricity to the Godhra area. The assessee company was the successor of the LSC company and the State Government fixed the charges for supply of electricity w.e.f.
1.2.1952. After the amendment of the Electricity [Supply] Act, 1948 in 1956 the assessee company increased the charges. This unilateral increase in the rates led to the institution of suits by consumers, which were decided in favour of the consumers by the trial court, but the High Court held that the assessee company was entitled to enhance the charges unilaterally subject to the specified conditions. As the subject mater was in dispute, the assessee company was not able to realize the enhanced charges from the consumers. The suit was decreed in favour of the consumers by the Civil Judge. While the said suit was pending before the trial court, the Gujarat Electricity Board purchased the undertaking of the assessee company. For the prior period the assessee company was assessed on the basis of accounts maintained according to the Mercantile System and the Income-tax Officer included this amount in the total income of the assessee on the ground that the suit filed against the assessee company by the consumers was decided in favour of the assessee company by the court and the assessee had legal right to recover the said amount on the basis of the system of accounting followed by it. Eventually when the matter travelled to the Hon'ble Apex Court, it was held that the assessee company, a licencee, could not ignore the direction of the State Government under which it was asked to maintain the status quo and not to take steps to recover dues towards enhanced charges. Thereafter, the assessee company was taken over by the Government of Gujarat. It was, therefore, held that the necessary entries passed by the assessee in its books of accounts represented only hypothetical income and hence no tax could be levied thereon. We find that the facts of the instant case are nowhere near to the facts considered by the Hon'ble Supreme Court in this case. In our case the question is not whether the receipts had been realized due to litigation or not and further whether there was any embargo on the accrual of income. Rather, the amount rightly accrued on filing claims and was in fact received and is in the possession of the assessee as on date and the Government in fighting in court to withdraw the subsidy claim. Neither at the time of making claim for subsidy nor at the time of its receipt there was any dispute with regard to the assessee's entitlement on the said amount. It is in glaring contrast to the facts of the case in Godhra Electricity Co Ltd. [supra] where the claim for higher electricity charges was under the shadow of litigation ab initio and never came to be realized on accrual. We find that in the instant case the amount has not only been received by the assessee by rightful accrual but has not been refunded till date though the matter is subjudice for around one and a half decade.
8. Even though the assessee has received the amount in an illegal manner, the same has to be treated as income because an illegal income, like legal income is also subject matter of taxation. If the assessee indulges in an illegal activity, the benefits arising from such activity would obviously be in the nature of income Under Section 28.
We are not persuaded to accept the assessee's contention on this score for the obvious reason that the subsidy has direct connection with the assessee's trading operations. It was not alien to the regular business dealings of the assessee, being production and sales. Even though a part of the sales and production was held to be bogus but the claim of subsidy in connection with such production/sales cannot be construed as non-germane to the business operations. It is palpable that the receipts, which are referable to the business operations of the assessee, cannot be regarded as non trading receipts. The subsequent development of detection of bogus production/sales cannot mar the character of receipt in the hands of the assessee. The Hon'ble Kerala High Court in the case of Father Epharam v. CIT considered the case of a priest monastery receiving remittances from abroad. It was held that such receipts were traceable to vocation of assessee as priest and the amount remaining with him was assessable as income. It is austere that the assessee cannot be allowed to make conflicting claims before different authorities, viz, he cannot claim before the I.T. department that the subsidy may not be taxed because the related referable production was not made and at the same time submit before the District and Sessions Court and Court of Judicial Magistrate that it had a right of subsidy and it should not be withdrawn. Be that as it may, the amount of trading subsidy, whether obtained legally or illegally is taxable.
9. It has further been claimed by the ld. A.R. that the grant of subsidy cannot be considered as income till the conditions attached to it have been complied with and the purpose for which it has been given is fulfilled. He has relied on the Accounting Standard No. 12 issued by the Institute of Chartered Accountants of India in this regard. It was further asserted, while referring to certain paras of this Accounting Standard, that the mere receipt of a grant or subsidy was not a conclusive evidence of complying with all the conditions and hence the receipt of grant cannot be the basis of recognition of Revenue. On the basis of these paras, it was contended that if the Assessing Officer alleged that there was no production, the subsidy referable to the same quantity deserved to be excluded from the P & L account. We note that the ld. A.R. has referred to the paras, which deal with the normal course of business. He has not referred to a contingency of the event happening in the assessee's case. It has been mentioned in para 6.3 of this Accounting Standard that a contingency related to a Government grant arising after the grant has been recognized is to be treated in accordance with the Accounting Standard [AS 4] - Contingencies and Events occurring after the balance sheet date. Para 11 deals with "Refund of Government Grants". Para 11.1 states that "Government grant that becomes refundable is treated as an extra ordinary item" and the amount refundable in respect of a Government grant related to revenue is applied first against any unamortised deferred credit remaining in respect of the grant to the extent that the amount refundable exceeds any such deferred credit or where no deferred credit exists, the amount is charged immediately to P & L account. From the above, it is clear that the case of the assessee cannot be considered under normal prescription of Accounting Standard. Nevertheless, we find that the taxability of income has to be considered as per the provisions of I.T.Act and accounting practice cannot govern the chargeability or otherwise of the income. It has been laid down by the Hon'ble. Supreme Court in the case of Tuticorn Alkali Chemicals and Fertilizers Ltd v.CIT footsteps of the accounting practice and the taxability is to be examined on the basis of the provisions of the Act. It has been further held in this case that "it has to be seen whether at the point of accrual the amount is of a Revenue nature, if so, the amount will have to be taxed." We further find that the Amritsar Bench of the Tribunal in the case of DCIT v. Sterling Steels a Wire Ltd. [2004] 91 ITD 564 [Asr] has held to the same effect that the accountancy practice would not necessarily be relevant in so far as taxability is concerned. This order of the Amntsar Bench has been affirmed by the Hon'ble High Court in the case of Sterling Steels and Wires Ltd. v. DCIT . The case relied upon by the ld. A.R. in CIT v. U.P.State Industrial Development [1997] 225 ITR 730 [SC] in support of the proposition that the principles of commercial accounting should be applied in ascertaining the profits and gains, is distinguishable for more than one reasons. Primarily that was a case in which the question of deducting underwriting commission from the cost of unsubscribed shares was involved wherein it was held that the underwriting commission in respect of shares held by the assesses would reduce the cost of shares. No such facts are prevailing in the instant case.
Second and the other important ratio decidendi, on which the ld. A.R.is placing reliance to bring home the point is that the principles of accounting be applied in ascertaining the profits and gains. We observe that this in not an unqualified observation of the apex court. It held that 'for the purposes of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute'. So the condition precedent for applying rules of commercial accounting is that these should be in conformity with the provisions of law. If there comes out any conflict between the two, it is only the statutory provision that would have an overriding effect and would hold the field. The relevant portion of Section 5 read with Section 9 of the I.T. Act stipulates that the total income of any previous year includes all incomes from whatever source which accrues or arises or is deemed to accrue or arise to him in India during such year. Hence if the income has accrued as per the I.T. Act, 1961 no accounting practice can justify its exclusion. In the same realm operates the other decision of the summit court relied upon by the ld. A.R. in the case of Kedarnath Jute Manufacturing Co. v. CIT , in which it was held that the entries in the books of accounts are not determinative of the character of income. On this reasoning, it was argued that even though the assessee had reflected the amount of subsidy in its accounts, the same should not be taxed as the liability to repay arose on the detection of fraud by the CBI. We fully concur with the contention that deducibility or inclusion of an amount depends on the provisions of law relating thereto and not on the existence or absence of entries in the books of accounts. In our considered opinion, it is the nature of income, which has direct bearing on the question of taxability. We have upheld the taxability of income not on the strength of assessee's reflection of subsidy amount in its I account books, but on the ground that it had accrued to it and as would be further seen infra, the question of its deductibility. is pre mature for consideration.
10. The next claim made by the ld. A.R. is that the assessee's case be considered from the point of view of the deductibility of such subsidy as will. It was contended that the assessee was maintaining its books of accounts on Mercantile System and therefore, liability to pay such amount be recognized and the deduction be allowed. It is self evident that in such a system of accounting, the amount becomes deductible when liability to pay arises. The actual payment is not a relevant consideration to decide the fact as to whether the liability to pay has arisen or not. If the liability arises in the year then the deduction is to be allowed even if such liability has to be quantified and discharged at a later date, but where the liability is dependent upon a contingency, it cannot be ranked as a debt till such contingency happens. Only when such contingency happens and the amount becomes the ascertained debt, that it qualifies for deduction. Where the incurring of liability is not certain, it is said to be contingent liability and hence cannot be allowed as deduction the instant case, we find that the claim of the assessee is dependent upon the contingency, which may or may not happen in the future as the assessee is disputing the matter in the civil court that it had right over subsidy and it should not be withdrawn. This shows that no liability can be said to have arisen either at the end of the relevant year or as on date. In such circumstances, we are not inclined to accept this contention of the ld.A.R. The assessee has not suffered any loss so far. If in a subsequent year, the matter is eventually decided against the assessee and notice of demand is served to refund, it is at that juncture that the liability to pay will spring up and he can claim deduction for it. But in so far the instant year is concerned, no liability to repay the amount has crystallized. Their Lordships of the Hon'ble Supreme Court in the case of K.C.P. Ltd. v. CIT considered a case in which the assessee was manufacturing and selling sugar at a very high price higher than the price fixed by the Government. The amount in excess of levy price was retained in separate account in the accounting year relevant to A.Y. 1972-73. Such amount was transferred to Sugar Equalization Fund in 1997. It was held by the Hon'ble Supreme Court that the retention in the separate account and subsequent transfer to Sugar Equalization Fund did not change the character of receipt in A.Y.1972-73 and the amount was a trading receipt in the assessee's hands in A.Y. 1972-73. It was further held that finally if the amount so collected is passed on to the State Government or refunded to the purchasers, the assessee would be entitled to claim deduction of the sum when it is so paid or refunded.
11. In view of the foregoing reasons, we are satisfied that the ld.CIT(A) was justified in not accepting the assessee's claim and hence was right in confirming the addition of Rs. 4.27 crores by treating it as income from business. Before parting with this appeal, we make it clear that all the decisions relied upon by both the sides have duly been considered by us. Only representative cases have been specifically referred to by us in this order, though the ratio decidendi of each case is carefully examined before reaching this conclusion. It is further observed that the judicial precedents cited by the ld. A.R. are applicable in the normal course of business. None of the authorities have accepted the claim analogous to the assessee's case, which is an extra ordinary fraudulent situation.