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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by Revenue against the order dated 07.03.2023 by Ld. Commissioner of Income Tax (A)-27, New Delhi [“Ld.CIT(A)”] in Appeal No. CIT(A), Delhi-27/10378/2017-18 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 11.03.2021 passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act pertaining to Assessment Year 2018-19.
Brief facts of the case are that the assessee is a private limited company and declared income from business, capital gain and income from other sources. The return of income was e-filed on 30.11.2018, declaring total loss of INR 1,16,53,90,193/-. The case was selected for complete scrutiny under CASS and the AO observed that under the head “any other amount allowable as deduction” in the return of income filed, assessee has claimed deduction of INR 8,62,75,515/- and from the details of the same as called for, it is observed that this amount includes adjustment of income from Government grant of INR 6,04,72,932/-. The assessee claimed that accounting treatment was carried out in terms of Ind-AS adjustment and the income was already offered in this account. However, the AO has not accepted the contention of the assessee and made addition of the amount of Government grant of INR 6,04,72,932/- and total income was computed at a loss of INR 1,10,48,77,356/-.
Against the said order, the assessee filed an appeal before Ld. CIT(A) who deleted the addition made by the AO therefore, the revenue is in appeal before the Tribunal.
All the Grounds of appeal raised by the Revenue are with respect to the deletion of addition made towards the Government grant.
In one of the Grounds of appeal, the Revenue has challenged the action of AO/CIT(A) in admitting the additional evidences filed by the assessee without confronting the same to the AO.
In support of the Grounds of appeal taken, before us, Ld. Sr. DR for the Revenue submits that Ld.CIT(A) has violated the provision of Rule 46A of the Income Tax Rules, 1962 and admit the additional evidences without confronting them to the AO or without obtaining the remand report from the AO. In this regard, reliance is placed on the judgement of Hon’ble Delhi High Court in the case of CIT vs Manish Buildwell (P.) Ltd. reported in [2011] 16 taxmann.com 27 (Del.) and requested that the matter be set aside to the file of Ld. CIT(A) for fresh adjudication after providing the AO an opportunity to examine the additional evidences filed by the assessee at appellate stage. He prayed accordingly.
On the other hand, Ld.AR for the assessee submits that no fresh documents / evidence whatsoever, were filed during the course of appellate proceedings and all the submissions made are based on the facts arising from the documents already filed before the AO in the shape of computation of income as per ICDS adjustments and computation of taxable income u/s 115JB of the Act. Ld. AR submits that all these facts and figures were filled in either in the return of income filed or were during the course of hearing before the AO and no new document was filed before the ld. CIT(A). Ld. AR submits that during the year under consideration, assessee has received Government grants in the shape of EPCG license on the equipment imported from outside India. Ld.AR has filed detailed submission in this regard which read as under:-
For the year under consideration, the Assessee had filed its income-tax return ('ITR') on 30 November 2018. In the said ITR, the Assessee had disclosed a total loss amounting to INR 1,16,53,90,193 after set-off of income from other sources amounting to INR 3,79,257 and capital gains amounting to INR 5,23,789.
The return was selected for scrutiny assessment and a notice under section 143(2) of the Act was served on the Assessee. The scrutiny assessment proceedings were concluded by the National e-Assessment Centre ('NEAC') vide assessment order dated 11 March 2021 issued under section 143(3) of the Act (impugned assessment order) wherein the NEAC had made addition on account of Government grant amounting to INR 6,04,72,932. Pursuant to the same, the Ld. AO had passed the final assessment order dated 11 March 2021 wherein the total income of the Assessee has been assessed as under:
Particulars Amount (INR) Income/ (loss) assessed under section 143(1) (1,16,53,50,288) Add: Addition on account of Government Grant 6,04,72,932 Assessed Income/(Loss) (1,10,48,77,356) Aggrieved by the impugned assessment order, the Assessee filed the appeal before the CIT (A) disputing the erroneous additions made by the Ld. AO.
Our Submission
During the year under consideration, the Assessee had prepared its financial statements in accordance and compliance with the Indian Accounting Standards ('Ind-AS') as notified by Ministry of Corporate Affairs ('MCA'). The Assessee had prepared and filed its Income-tax return for AY 2018-19 as per the provisions of the Act read with applicable Income Computation and Disclosure Standard ('ICDS').
In earlier years, the Assessee had imported certain equipment required for its hotel project under the Export Promotion Capital Goods Scheme ('EPCG') license obtained from the Customs Department. Under the said EPCG License, the customs duty on all the imported equipment was leviable at a concessional rate and the Assessee in turn, had an obligation to earn export earnings equivalent to 8 times in 8 years/ 6 times in 6 years of the custom duty saved, as the case may be.
It is submitted that the Assessee had saved total amount of custom duty amounting to INR 44,82,08,431 up to 31 March 2018. Therefore to avail the benefit, the assessee had to make export sales of INR 322,01,85,104. However, the assessee had made export sales of INR 43,45,44,958 being 13.49% of total export obligations. Therefore, the Assessee had recorded only 13.49% of total custom duty saved (i.e., INR 44,82,08,431) amounting to INR 6,04,72,932 in its books of accounts.
In view of the aforesaid, the assessee made the below treatment of Government Grant in made is tabulated below:
Treatment in Statement of Profit & Loss Treatment in ITR A Government Grant of INR 60.47 million (INR 6,04,72,932) was credited in the statement of profit and loss (AY 2018-19) under the head Revenue from operations, sub head 'Other operating Revenue'. (Refer Note 21 of audited financials at Page No 34) The Assessee has claimed a deduction of INR 60.47 million (INR 6,04,72,932) as 'Any other amount allowable as deduction' in schedule BP of ITR for the AY 2018-19. (Please refer serial number 33 of schedule BP of ITR for AY 2018-19 at Page No 91). It is submitted that 'Loss before tax' figure as per Statement of Profit & Loss of INR 782.98 million (INR 78,29,74,040) is after considering a notional income of INR 60.47 million (INR 6,04,72,932) with respect to subject matter government grant. This Please note that the said amount of INR 6,04,72,932 is included in total amount of INR 8,62,75,515 mentioned in serial number 33 of schedule BP of ITR form. Refer page 233 of the paperbook. is in compliance with Indian Accounting Standards ('Ind-AS') (Refer Statement of profit and loss at Page No. 8).
In the backdrop of above factual information, the Assessee submits that as 'loss before tax' amount of INR 782.98 million (INR 78,29,74,040) as per statement of profit & loss is after considering a notional income of INR 6,04,72,932 in respect of government grant credited to statement of profit & loss. Hence, in order to arrive at income/loss amount as per Income tax Act, this notional income of INR 6,04,72,932 has been allowed from 'loss before tax' amount of INR 78,29,74,040 resulting in increase in Total loss amount considered as per Income tax Act.
Our submission
Re: Treatment of government grant in the books of accounts
(a) As Per I-GAAP
The Assessee had prepared its financial statements in accordance with Ind-AS (which follows real time/ fair value accounting basis), for the first time, in FY 2016-17. Till 31 March 2016, the Assessee had recorded the government grant as per the provisions of Indian GAAP (which follows historical cost convention).
Under the Indian GAAP, Property Plant and Equipment ('PPE') are recorded net of custom duty saved under the EPCG i.e., the customs duty or any part of the cost met by the government/ any other party (not borne by the Assessee) is not to be capitalized with the value of PPE.
(b) As per Ind-AS 20
Presentation of grant in Balance Sheet as per Ind AS-20
In the instant case, grant (i.e., the custom duty savings) relates to the fixed assets imported by the Assessee and hence it is pertinent to note the relevant paras (i.e., Para 24 to 27) of Ind AS-20 dealing with presentation of government grant, reproduced as under:
“24.Government grants related to assets, including non-monetary grants at fair value, shall be presented in the balance sheet either by setting up the grant as deferred income or by deducting the grant in arriving at the carrying amount of the asset.
25.Two methods of presentation in financial statements of grants or the appropriate portions of grants related to assets are regarded as acceptable alternatives.
26.One method recognises the grant as deferred income that is recognised in profit or loss on a systematic basis over the useful life of the asset.
27.The other method deducts the grant in calculating the carrying amount of the asset. The grant is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense.”
Thus, in line with the provisions of Ind AS-20, the Assessee had made the custom duty saved on capital goods imported was recorded as a part of cost of fixed assets by debiting the same with a corresponding credit to Government Grant Liabilities account (equivalent to custom duty saved).
Accordingly, the Assessee had recorded the amount equivalent to custom duty saved as part of cost of fixed assets by debiting the aforesaid amount to respective fixed asset. Correspondingly, equivalent amount has been recorded in government grant liabilities account.
Recognition of grant in the statement of profit and loss as per Ind AS-20
Further, kind attention of your goodself is invited to Para 12 of Ind AS-20 which requires that government grants shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.
Thus, income in the nature of government grant (being the duty saved upon fulfilment of related export obligation in the ratio of obligation fulfilled) was recorded by the Assessee, by way of unwinding of the liability recorded.
In the instant case, during the AY 2018-19 concession on custom duty of INR 6,04,72,932 was recorded by the Assessee as an income in the statement of profit and loss upon fulfilment of related export obligation in the ratio of obligation fulfilled.
To give the effect of the provisions of the Ind AS-20 (related to statement of profit and loss), following entry was passed by the Assessee in its books:
| Particulars | Amount (INR) | |
|---|---|---|
| Government Grant (liabilities) A/c | Dr. | 6,04,72,932 |
| To Government grant (Statement of Profit and loss) | Cr. | 6,04,72,932 |
Please refer page 233 of the paperbook, wherein the Assessee has furnished detail of EPCG licence wise custom duty saved till 31 March 2018 along with the related export obligations to be fulfilled. From the working, your goodself would note that for complete waiver of custom duty amounting to INR 44,82,08,431, the Assessee has to make export sales of INR 322,01,85,104. During the year under consideration, the Assessee had made export sales of INR 43,45,44,958 being 13.49% of total export obligations. Therefore, the Assessee had recorded only 13.49% of total custom duty saved (i.e., INR 44,82,08,431) amounting to INR 6,04,72,932 in its books of accounts.
The details of export sales made (i.e., the export obligation met) during the year, based on Foreign Inward Remittance Certificate ('FIRC') are placed on sample basis at pages 234 of paper book. Further, the copies of EPCG licences on sample basis are placed at page 240 of the paper book.
The Assessee on year-on-year basis recorded expense in statement of profit and loss being in the nature of depreciation on fixed assets as per the provisions of Companies Act, 2013. It is pertinent to mention here that the said depreciation, under the provision of Companies Act, 2013 was added back in the computation of income, hence, did not have any tax impact on taxable income of the Assessee.
Re: Treatment of government grant for tax purposes/ in income tax return
Explanation 10 to Section 43 of the Act deals with the treatment of grant while computing the actual cost of the assets for the purpose of depreciation under section 32 of the Act. The same is reproduced below:
Explanation 10 —Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :
Further, Para 5 of ICDS-VII deals with treatment of Government Grants relating to depreciable assets, which provides as under:
"5.Where the Government grant relates to a depreciable fixed asset or assets of a person, the grant shall be deducted from the actual cost of the asset or assets concerned or from the written down value of block of assets to which concerned asset or assets belonged to."
From the combined reading of the above provisions, it may be noted that:
That part of the cost of depreciable asset as met by government grant is 'not to be included' in the cost of fixed asset (per explanation 10 to section 43 of the Act);
The amount of grant meeting the part of the cost of depreciable asset of the Assessee 'shall be deducted from the actual cost of the asset' (per ICDS VII).
Any of the above treatment would have the same effect on the cost of the fixed assets viz. reduced cost/ lower depreciable value of the fixed asset. In the instant case, the Assessee did not include the amount of custom duty saved as a part of the cost of the fixed assets, while arriving at the depreciable value of the fixed assets. Thus, depreciation was claimed by the Assessee on already reduced value of the fixed assets and no separate reduction of custom duty from gross value of fixed assets was required.
In this regard, the working/reconciliation of the value of fixed assets capitalised in the financial statements drawn in compliance of Ind AS provisions and as capitalised in the tax audit report in compliance of the provisions of the Act is placed at pages 323 of Paper Book. From the perusal of reconciliation, it may clearly be noted that while the custom duty saved (government grant) capitalised in the books of accounts, the same was not included in the cost of fixed assets as reflected in the tax audit report. Thus, it is evident that the Assessee adopted the lower value of fixed assets for tax purposes and claimed depreciation on the lower value of fixed assets.
Further, during the AY 2018-19, while computing the taxable income under the head ‘profits from business or profession’, concession on custom duty amounting to INR 6,04,72,932 recorded as income in compliance of the provisions of Ind-AS (which is merely presentational requirement for fair value disclosure) has been reduced in the computation of income as per the income tax provisions.
Custom duty saved on import of goods has been recorded in books of account in line with the provisions of Ind AS-20 and the aforesaid amount credited to statement of profit and loss represents notional income on account of Ind AS adjustment/ compliance
As submitted supra, the Assessee had recorded the custom duty saved on capital goods imported, as a part of cost of such assets by debiting the same with a corresponding credit to Government Grant Liabilities account (equivalent to custom duty saved).
Further, government grant, as prescribed to be treated as income (duty saved upon fulfilment of related export obligation in the ratio of obligation fulfilled) in the statement of profit and loss by Ind-AS 20, was recorded by the Assessee by way of unwinding of the liability recorded in the balance sheet.
The above stated accounting treatment was given only for the purpose of complying with the provisions of Ind-AS 20. Had it been the case of IGAAP, capitalization of custom duty as a part of the cost of fixed assets and corresponding credit to the statement of profit and loss would not have been done by the Assessee. It is solely for the purpose of fair value accounting requirement of Ind-AS provisions that the Assessee has grossed up the custom duty saved and recorded it as part of cost of assets in books.
Thus, the aforesaid income credited to the statement of profit and loss, to extent of custom duty saved represents the notional income and not a real income taxable under the provisions of the Act. It is well settled law that only real income is taxable under the Act and not hypothetical income.
Respectfully submitted that any amount, which is not in the nature of income, can be deemed as income for taxation purposes under the Act only when there is express provision in the Act providing as such. The courts have uniformly supported the stance that taxation of notional income is impermissible. Tax on "income" – real and not hypothetical/ notional amount
Independent of the above, it is further submitted, that it is trite law that tax can be charged only on real income and not on any notional/hypothetical income which does not materialize.
The aforesaid proposition of law has been laid down by the Supreme Court in the case of Shoorji Vallabhdas & Co: 46 ITR 144 and in the case of Godhra Electricity Co. Ltd. v. CIT: 225 ITR 746.
In the case of Shoorji Vallabhdas & Co. (supra), the assessee was entitled to commission at a certain rate under a managing agency agreement. An entry for the amount of commission was made in the books of account. However, subsequently, the rate of commission was reduced but by that time the accounting year had come to an end. The Hon’ble Supreme Court held on a consideration of relevant facts that the commission at the reduced rate could only be treated as real income accrued to the assessee and liable to income-tax. In the opinion of Hon’ble Supreme Court the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of accounts.
In the case of Godhra Electricity (supra), the assessee, an electricity supply company unilaterally enhanced the rates of electricity from a certain date which was challenged by the consumers before trial court. Though Trial Court decided in favour of the consumers, the High Court reversed the decision in favour of the assessee company and held that the assessee company was entitled to enhance the charges unilaterally, which was later affirmed by the Supreme Court. During the pendency of litigation, the assessee company was not able to realize the enhanced charges from the consumers. The State Government directed the assessee not to recover the enhanced rates for six months. Before the expiry of six months, the consumers challenged the enhancement by filing suit. Before the suit was decided, the business was taken over by the Government and as a result the assessee could not take steps to recover the additional amount.
Emphasizing the concept of taxation of “real income”, irrespective of the method of accounting following, the Court observed as under:
"This principle is applicable whether the accounts are maintained on cash system or under the mercantile system. If the accounts are maintained under the mercantile system what has to be seen is whether income can be said to have really accrued to the assessee-company. In H. M. Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706, the Bombay High Court had said:
" Even so, (the failure to produce account books), we shall proceed on the footing that the assessee-company having followed the mercantile system of accounting, there must have been entries made in its books in the accounting year in respect of the amount of the commission. In our judgment, we would not be justified in attaching any particular importance in this case to the fact that the company followed the mercantile system of accounting. That would not have any particular bearing in applying the principle of real income to the facts of this case. "
The said view was approved by this court in CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 where the assessee maintained its accounts on the mercantile system. In that case this court, after referring to the decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC), which was also a case where the accounts were maintained on the mercantile system, has said :
"Hence, it is clear that this court in Morvi Industries' case [1971] 82 ITR 835 did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income. "
In Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521, this court has said
"Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act."
In that case the court has approved the following principle laid down by the Bombay High Court in H. M. Kashiparekh and Co. Ltd. v. CIT [1960] 39 ITR 706, 707 :
"The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language."(emphasis supplied)
Ultimately, on the aforesaid facts, the question regarding accrual of income qua the enhanced charges was decided by the Supreme Court in favour of the assessee as under:
"The question whether there was accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the Income-tax Officer while passing the assessment orders in respect of the assessment years under consideration. The Appellate Assistant Commissioner was right in deleting the said addition made by the Income-tax Officer and the Tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Income-tax Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal."(emphasis supplied)
The Supreme Court in the case of CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) reiterated the proposition laid down in the earlier decisions. It may thus be appreciated that the Supreme Court held that where no real income but only hypothetical income had accrued to the assessee, no tax can be levied on such income.
To the same effect are the following decisions:
UCO Bank vs. CIT: 237 ITR 889 (SC)
- CIT v. Motor Credit Co. P. Ltd.: 127 ITR 572 (Mad HC)- SLP dismissed in SLP (Civil) No. 2806 of 1981 CIT v. Ferozepur Finance (P) Ltd.: 124 ITR 619 (P&H)
The aforesaid decisions clarify the settled position that the Income Tax Act seeks to bring to tax only the real income earned by the assessee and it does not seek to bring to tax a notional or hypothetical income. In other words, where no amount is actually received by an assessee, any attempt to bring to tax any amount on notional basis, would amount to taxing hypothetical income, which would be contrary to the provisions of the Act.
It is a settled position of law that entries in the books of account are not determinative for computing tax liability under the provisions of the Act. If an item of income/expenditure is taxable/deductible, the same must be taken into account as per the provisions of the Act and not as per the book entries.
Reliance in this regard shall be placed on the judgement of Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT: 116 ITR 1 wherein the court held that it is now well settled that the way in which entries are made by an assessee in his books of accounts is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper principles of accountancy, conceal profit or show loss and entries made by him cannot, therefore, be regarded as conclusive one way or the other.
In the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT: 82 ITR 363, the Supreme Court held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his right, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter.
Following the above judgements, the Calcutta High Court in the case of CIT vs Berger Paints (India) Ltd. [2002] 254 ITR 503, held that it is settled law that if according to the revenue laws the assessee is entitled to treat a sum as revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account.
In the case of Vijay Flexible Containers Private Limited vs DCIT: ITA No 632/ Mum/2023 (Mum Trib.), the assessee considered the advertisement expense as deferred expenditure in the books of accounts. The court held that the action of the assessee in treating expenditure as deferred revenue expenditure in the books of accounts will not bar the assessee from claiming it as revenue expenditure for the income tax purposes.
Moreover, it is also settled law that there is not concept of deferred revenue expenditure for allowability under the provisions of the Act [refer Taparia Tools Ltd. v. JCIT: [2015] 372 ITR 605 (SC)]
In view of the aforesaid, treating the pot relining expenditure as deferred revenue expenditure in the books of accounts, shall not, in my opinion, be determinative for deciding the allowability of the said expenditure as per the provisions of the Act; it would be proper to claim the expenditure as deduction in the year of incurrence.
Thus, in view of the above, amount of custom duty saved credited to statement of profit and loss represents notional income and shall not be taxed under the provisions of the Act.
**Assessee has claimed the depreciation on account reduced value of assets (to the extent of custom duty saved) in line with the provisions of Explanation 10 of section 43(1) of the Act**
As discussed above, explanation 10 of section 43(1) of the Act essentially requires that the part of the cost of depreciable asset as met by government grant is ‘not to be included’ in the cost of fixed asset
Rebuttal to the findings of the Id. Ao
Value of fixed assets in schedule of depreciation in Tax Audit Report doesn’t include amount of custom duty saved [Page 12 of the assessment order]
According to the Ld. AO, tax auditor is required to specifically report the amount of concessional duty as a reduction in value of block of assets in the schedule of depreciation of tax audit report.
In this regard, it is respectfully submitted that the Ld. AO has grossly failed to appreciate the correct facts in respect of transaction under consideration. The Ld. AO has failed to understand how the value of concession is derived and how the same is being accounted for in books of account in compliance of Ind-AS 20 provisions.
The custom duty saved amounting to INR 6,04,72,932 recorded in statement of profit and loss is not the value of concessional custom duty on the assets imported during the year under consideration. Instead, the aforesaid figure is the proportional income derived based on ratio of export obligations fulfilled/ met by the Assessee during the year under consideration, as credited to the statement of profit and loss in compliance of the provisions of Ind-AS 20.
The Assessee had never added (or not included, as also provided by explanation 10 to section 43(1) of the Act) the amount of custom duty saved as a part of cost of depreciable assets for the purpose of computing the depreciation under the provisions of section 32 of the Act. In other words, the depreciable value of fixed assets was already undercapitalized to the extent of aforesaid customs duty saved. Thus, the Assessee had claimed the depreciation under section 32 of the Act at lower cost of concerned depreciable assets.
Since the block of depreciable assets is already under capitalized to the extent of aforesaid customs duty saved, question of separate reduction of custom duty saved in the schedule of depreciation in tax audit report doesn't arises. Hence, no specific disclosure with respect to such reduction was made by the tax auditor in the year under consideration in tax audit report.
Before adoption of Ind-AS 20 for the purposes of preparation of books of accounts, the Assessee was not capitalising the value of custom duty saved as a part of cost of respective assets. Further, same treatment was being followed for the purposes of income-tax Act. On adoption of the Ind-AS during the FY 2016-17, the Assessee had to gross up the custom duty saved and record it as a part of the cost of assets. However, there has not been any change in the tax law and the cost of assets adopted for the purpose of block of assets still remains same (i.e., amount exclusive of custom duty saved).
The Assessee has not claimed custom duty expenses and depreciation on custom duty saved in its income-tax return [page 12 of the assessment order]
At the outset, the Ld. AO has grossly failed to appreciate that the notes given by the statutory auditor in audited financial statements explains the treatment of various items coved by the financial statements from the perspective of Ind-AS in compliance of which the financial statements have been drawn. The tax provisions are to be analysed separately under the provisions of the Act, independent of the treatment of any particular item of income or expense provided by the Ind-AS provisions.
Here the Ld. AO has misinterpreted the note given by the statutory auditor in the financial statements of the Assessee in respect of government grant. The statutory auditor has mentioned that “Under the EPCG Scheme, the customs duty on all the imported equipment was levied at concessional rate and the Company in turn, has an obligation towards export earnings once the hotels commence their operations. The concession on custom duty has been recorded as income on fulfilment of export obligation”
In the above para, the statutory auditor has explained that in case of the assets imported under EPCG scheme, concessional custom duty is levied subject to fulfilment of prescribed export obligations. Further, in line with the provisions of Para 12 of Ind AS-20, the aforesaid government grants (custom duty saved) shall be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate.
However, the Ld. AO misinterpreted the note given by statutory auditor and alleged the grant as revenue in nature (which essentially is the Ind-AS 20 treatment of government grant). The Ld. AO failed to appreciate that custom duty, that has been saved by the Assessee, was leviable on the import of capital assets. However, the customs duty was not paid merely because on such imports benefit was available to the Assessee under the EPCG scheme. Thus, the savings in custom duty cost on imports of fixed assets by the Assessee cannot be said to be in the nature of revenue grant by any stretch of imagination. The Assessee only had to record the income in the statement of profit and loss in compliance of the treatment prescribed by Ind-AS 20 (and not due to any tax provisions).
Further, the Ld. AO has alleged that the concession recorded is not equivalent to the duty saved but it is 8 times or 6 times the duty saved as the case may be. In this regard, it is submitted that such observation of Ld. AO is also completely without any basis/ based on conjectures and surmises. The Ld. AO, without having any data/ documents on record which substantiates this claim, held that the Assessee has recorded the concession at 8 times, or 6 times of the duty saved.
While doing so, he failed to appreciate that INR 6,04,72,932 represents the proportionate customs duty saved, as credit to statement of profit and loss in compliance of Ind-AS 20, and does not represent the amount of export obligation of 8 times or 6 times, which is fulfilled by the Assessee and offered to tax as normal business income separately in the tax return of respective year in which it is fulfilled. To reiterate, the Assessee had made export sales of INR 43,45,44,958 during the previous year 2017-18 (being 13.49% of total export obligations of INR 322,01,85,104). Therefore, the Assessee had recorded only 13.49% of total custom duty saved (i.e., INR 44,82,08,431) amounting to INR 6,04,72,932 in its books of accounts as income in statement of profit and loss.
Furthermore, the Ld. AO held that cost related to grants viz. custom duty expense and depreciation expense have been claimed as an expense by the Assessee.
In the last, Ld.AR for the assessee submits that Ld.CIT(A) after appreciating the facts and by following the judgments of Hon’ble Supreme Court and Hon’ble High Court deleted the additions and requested for the confirmation of the order of ld. CIT(A)s.
Heard the contentions of both the parties at length and perused the material available on record. From the perusal of order of Ld. CIT(A), it is observed that assessee has filed the documents with respect to EPCG License granted and the copies of the computation etc., all the documents were forming part of the submissions made before the lower authorities. This fact is verifiable from the assessment order wherein assessee has clarified these facts which are discussed in para 5.3 of the order. Once the assessee has not filed any additional evidences before Ld.CIT(A) who had decided the issue by duly considering the evidences and submission already available on record, it cannot be said that decision was taken on the basis of the additional evidences filed by the assessee. Now coming to the merits of the issue, we find that Ld.CIT(A) in para 5 of the order made detailed observations, and after considering the issue in hand in detail, has deleted the addition by making following observations:-
5. Observations and Findings:
i.“The Appellant is primarily engaged in the business of running, owning, establishing, taking over, run on lease all kinds of hotels, resorts, holiday camps and restaurants and to provide hospitality services in this regard. During the year under consideration, the Appellant was engaged in operation of hotels under the brand name of 'Novotel' and 'Pullman' in New Delhi.
ii.The appellant is importing the capital goods under EPCG scheme of the Government of India where it is eligible for concessional custom duty on these imported capital goods on fulfilment of defined export obligations. In case, export obligations are not fulfilled, the appellant would be liable to pay custom duty at full rate.
iii.In its books of account, the appellant is claiming depreciation on the actual cost (concessional price) of these capital goods as per the requirement of the IT Act.
iv.The Appellant has furnished details of EPCG license wise custom duty saved till 31 March 2018 along with the related export obligations to be fulfilled. From the working, it is observed that for complete waiver of custom duty amounting to Rs.44,82,08,431/-, the appellant has to make export sales of Rs. 322,01,85,104/-. However, during the year under consideration, the appellant had made export sales of Rs.43,45,44,958/- being 13.49% of total export obligations. Therefore, the appellant had recorded only 13.49% of total custom duty saved amounting to Rs.6,04,72,932/-in its books of accounts.
v.In order to comply with Ind AS Accounting Standards, this amount of Rs.6,04,72,932/- was credited in the statement of profit and loss (AY 2018-19) under the head Revenue from operations, sub head 'Other operating Revenue as Government Grant.
vi.Now, in the Statement of Profit & Loss, the loss of Rs.78,29,74,040 is after considering a notional income of Rs.6,04,72,932 with respect to subject matter of Government grant.
vii.Further, to address the issue of this notional income, the appellant has claimed a deduction of same amount of Rs.6,04,72,932/- as 'Any other amount allowable as deduction' in schedule BP of ITR for the AY 2018-19.
viii.In view of the above discussion, it is held that the accounting adopted by the appellant is to comply with the Ind AS guidelines and for Income Tax purposes, it is tax neutral. Therefore, the contention of the appellant is found to be sustainable. The addition of Rs. 6,04,72,932/- is deleted and these grounds of appeal are hereby allowed.”
Before us, claim of the revenue is that ld. CIT(A) has deleted the addition based on additional evidences filed however, has failed to controvert the findings given by Ld.CIT(A) on merits of the issue which in our considered opinion, are based on the correct appreciation of the facts. The assessee has accounted for the amount of Government grant under the head “other operating revenue” and paid the taxes thereon. Once the assessee has already included the total income declared in the return of income filed, making further addition of the same is double addition and therefore, the Ld.CIT(A) has rightly deleted the same which order is hereby, upheld. All the grounds of appeal taken by revenue are thus, dismissed.
In the result, appeal of the Revenue is dismissed.