Commissioner of Income Tax vs Standard Fireworks (P) Ltd.

K. Raviraja Pandian, J.—These appeals are filed by the revenue against the order of the Income Tax Appellate Tribunal, Madras "C" Bench dated 10-2-2006 in I. T. A. Nos. 2032 to 2034/Mds/2004. The relevant assessment years are 1996-97,1997-98 and 1998-99. The substantial questions of law formulated in these appeals are as follows:

Whether in the facts and the circumstances of the case, the Tribunal was right in holding that the excise duty and sales tax collection does not form part of the turnover, for the purpose of calculation of deduction u/s 80HHC ?

Whether in the facts and the circumstances of the case, the Tribunal was right in deleting the addition of Rs. 15,00,000 representing windmill subsidy on the ground that it is a capital receipt ?

Whether the Tribunal was right in treating the subsidy as a capital receipt but not reducing it from the cost of the windmills to work out the value for calculation of depreciation ?

The facts of the case are as follows:

The Assessee is a closely held industrial company engaged in the business of manufacture and sale of fireworks. For the assessment years 1996-97, 1997-98 and 1998-99, the Assessee, while filing the return of income, has excluded the sales tax and excise duty from the total turnover and claimed exemption u/s 80HHC For the assessment year 1996-97, in addition to the above claim, the Assessee also claimed exemption in respect of the subsidy received in a sum of Rs. 15 lakhs on windmill. The assessing officer for the abovesaid three assessment years rejected the claim of the Assessee and added the sales tax and excise duty to the turnover for the purpose of computing deduction u/s 80HHC and brought the same to tax. With regard to the subsidy received on the windmill in the assessment year 1996-97, the assessing officer was of the view that the subsidy received was in respect of a specific asset and the same went to reduce the cost of the asset as 100 per cent, depreciation was granted on the windmill and on that reasoning he brought the said amount for the purpose of taxation. Aggrieved against the order of assessment in respect of the above three years, the Assessee filed appeals to the Commissioner (Appeals), who allowed the appeals in favour of the Assessee and directed the assessing officer to delete the addition on account of sales tax and excise duty components added to the total turnover and further directed the assessing officer to delete the addition of subsidy as well. Not satisfied with the order of the Commissioner (Appeals), the revenue filed appeals to the Tribunal. The Tribunal dismissed the appeals by upholding the order passed by the Commissioner (Appeals). As against the said order, the present tax case appeals are filed.

We heard the argument of the learned Counsel appearing for the revenue.

The first question of law is no more res integra and it has been finally decided by the Supreme Court against the revenue in the case of Commissioner of Income Tax, Coimbatore Vs. Lakshmi Machine Works, , wherein the Supreme Court has held that (headnote) "Section 80HHC of the Income Tax Act, 1961, is a beneficial section. It was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. Just as commission received by the Assessee is relatable to exports and yet it cannot form part of turnover for the purposes of Section 80HHC, excise duty and sales tax also cannot form part of turnover. Just as interest, commission, etc., do not emanate from the turnover so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of turnover and, therefore, they are not includible in the total turnover. If so, excise duty and sales tax also cannot form part of the total turnover u/s 80HHC(3)." Hence the first question of law formulated has to be held against the revenue.

In respect of the second and third questions of law relating to windmill subsidy in respect of the assessment year 1996-97, they are also covered by the decision of the Supreme Court against the revenue in the case of Commissioner of Income Tax, Hyderabad Vs. M/s. P.J. Chemicals Ltd., , wherein the Supreme Court has held that (headnote) "Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the "actual cost". The expression "actual cost" in Section 43(1) of the Income Tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from "actual cost". The amount of subsidy is not to be deducted from the "actual cost" u/s 43(1) for the purpose of calculation of depreciation, etc." Hence, the second and third questions of law pertaining to the assessment year 1996-97 are also to be decided against the revenue.

Therefore, all the three appeals at the instance of the revenue are dismissed.