2017 (12) TMI 1758 - AT - Income Tax

Sales tax subsidy for power generation deemed revenue, not deductible under Section 80IA(4)

Dy. Commissioner of Income Tax, Assistant Commissioner of Income Tax, Circle – 3, Nanded Versus Indo Enterprises Pvt. Ltd. And M/s. Patankar Wind Farm Pvt. Ltd. Versus Assistant Commissioner of Income Tax, Dy. Commissioner of Income Tax, Satara

The sales tax subsidy received by the assessee for power generation was deemed revenue in nature. Consequently, the subsidy was not eligible for deduction ... Disallowance u/s 80I/A - sales tax incentive received by the assessee - assessee treated the subsidy as revenue receipt and claimed deduction u/s. 80IA - first degree nexus between the sale of power and sales tax incentive - Whether sales tax subsidy is inextricable linked to the activity of generation of power ? - HELD THAT:- As relying on M/S. PATANKAR WIND FARM PVT. LTD. VERSUS THE DY. COMMISSIONER OF INCOME TAX [2015 (5) TMI 147 - ITAT PUNE] no infirmity in the order of Commissioner of Income Tax (Appeals) in disallowing assessee‟s claim of deduction u/s. 80IA on the sales tax subsidy. Accordingly, the impugned orders are upheld and both the appeals of assessee are dismissed. Issues Involved:1. Whether the sales tax subsidy received by the assessee on generation of power is capital or revenue in nature.2. If the sales tax subsidy is held to be revenue receipt, whether it is eligible for deduction under Section 80IA(4) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Nature of Sales Tax Subsidy- The assessee received sales tax subsidy from the Maharashtra State Electricity Board as an incentive for establishing/running windmill power generation units.- The Hon’ble Supreme Court in Commissioner of Income Tax Vs. Ponni Sugars & Chemicals Ltd. held that the 'purpose test' must be applied to determine the nature of subsidy. If the subsidy is to enable the assessee to run the business more profitably, it is revenue in nature. If it is to set up a new unit or expand an existing unit, it is capital in nature.- The Co-ordinate Bench of the Tribunal in Rasiklal M. Dhariwal (HUF) Vs. Dy. Commissioner of Income Tax analyzed the scheme and concluded that the subsidy received under it is revenue receipt. The Tribunal noted that the sales tax benefit is linked to achieving operational efficiencies and is not intended for the creation of new assets or expansion, thus making it revenue in nature.- The Tribunal rejected the alternate plea of the assessee to treat the sales tax subsidy as a capital receipt, as the subsidy was not restricted to any particular use and was aimed at supporting units to perform more efficiently and profitably.- The Tribunal also distinguished the facts of the present case from other cases cited by the assessee, such as Garden Silk Mills Vs. Commissioner of Income Tax and Chaphalkar Brothers Vs. Commissioner of Income Tax, where subsidies were held to be capital in nature due to their specific purposes.Issue 2: Eligibility for Deduction Under Section 80IA(4)- The Tribunal in M/s. Patankar Wind Farm Pvt. Ltd. Vs. Dy. Commissioner of Income Tax held that sales tax subsidy is not an operational subsidy and does not reduce the cost of production. Therefore, it is not eligible for deduction under Section 80IA of the Act.- The Tribunal considered the decision of the Hon’ble Gauhati High Court in Commissioner of Income Tax Vs. Meghalaya Steels Ltd., which dealt with transport, power, interest, and insurance subsidies, and concluded that these subsidies reduced the cost of production and had a direct nexus with the profits of the industrial undertaking. However, the sales tax subsidy in question did not have such a nexus.- The Tribunal further clarified that the Hon’ble Supreme Court's decision in Commissioner of Income Tax Vs. Meghalaya Steels Ltd. did not specifically address sales tax subsidies, and thus, the principle laid down in that case could not be applied to sales tax subsidies.- The Tribunal also dismissed the reliance on CBDT Circular No. 39/2016, which specifically dealt with transport, power, and interest subsidies, and did not include sales tax subsidies.- The Tribunal upheld the findings of the Commissioner of Income Tax (Appeals) in disallowing the assessee’s claim of deduction under Section 80IA on the sales tax subsidy.Conclusion:- The sales tax subsidy received by the assessee on generation of power is revenue in nature.- The sales tax subsidy is not eligible for deduction under Section 80IA(4) of the Income Tax Act, 1961.- The appeals by the Department were allowed, and the appeals by the assessee were dismissed.