2016 (5) TMI 1136 - AT - Income Tax

Tribunal decision: Sales tax as capital receipts, exclusion of debt redemption fund from book profit

Assistant Commissioner of Income Tax Versus Genus Electrotech Limited and Genus Electrotech Limited Versus Income Tax Officer

The Tribunal dismissed the Assessing Officer's appeal and partly allowed the assessee's appeal, directing the AO to treat sales tax and excise incentives ... Sales tax incentive and excise incentive treated as revenue receipt - Held that:- CIT(A) did not has erred in law and on facts in deleting the addition treating sales tax incentive as revenue receipt by the Assessing Officer. Non exclusion of debt redemption fund from the book profit for the purpose of computing book profits under section 115JB - Held 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 of the Income Tax Act, 1961. Issues Involved:1. Treatment of Sales Tax Incentive as Revenue Receipt.2. Treatment of Excise Incentive as Revenue Receipt.3. Non-exclusion of Debt Redemption Fund from Book Profit under Section 115JB.4. New Issue on Treating Sales Tax and Excise Subsidy as Capital in Nature for Book Profits under Section 115JB.Issue-wise Detailed Analysis:1. Treatment of Sales Tax Incentive as Revenue Receipt:The Assessing Officer (AO) treated the sales tax incentive of Rs. 4,36,57,867 as a revenue receipt, arguing that incentives granted after the commencement of production should be considered revenue in nature. The AO relied on the Supreme Court's decision in Sahney Steel and Press Works Ltd Vs CIT, concluding that if there is no stipulation on how to use the incentive, it should be treated as revenue. However, the CIT(A) overturned this, stating that the sales tax incentive was aimed at attracting investment to the Kutch district post-earthquake and was thus a capital receipt. The CIT(A) referenced the Special Bench decision in DCIT Vs Reliance Industries Ltd and CIT Vs Ponni Sugars & Chemicals Ltd, applying the 'purpose test' to determine the nature of the subsidy.2. Treatment of Excise Incentive as Revenue Receipt:The AO also treated the excise incentive of Rs. 3,21,35,417 as a revenue receipt, reasoning that the refund was available post-commencement of production without any stipulation on its use. The CIT(A) disagreed, noting that the excise duty incentive was similarly aimed at promoting industrial investment in Kutch and was therefore a capital receipt. The CIT(A) again applied the 'purpose test' and cited relevant judicial precedents to support this conclusion.3. Non-exclusion of Debt Redemption Fund from Book Profit under Section 115JB:The AO and CIT(A) both declined to exclude the debt redemption fund of Rs. 2.50 crores from the book profit, considering it an appropriation for creating a reserve, not falling under permissible adjustments in Section 115JB. The assessee argued this was covered by the Bombay High Court's judgment in CIT vs Raymonds Ltd, which held that amounts set apart for known liabilities (like debenture redemption) should not be considered reserves. The Tribunal upheld the assessee's plea, directing the AO to grant the relief accordingly.4. New Issue on Treating Sales Tax and Excise Subsidy as Capital in Nature for Book Profits under Section 115JB:The Tribunal admitted a new issue raised by the assessee regarding the treatment of sales tax and excise subsidies as capital receipts, thus not liable for inclusion in book profits under Section 115JB. The Tribunal found this issue covered by the coordinate bench decision in ACIT Vs Shree Cements Ltd, and no contrary judicial precedent was presented. Consequently, the Tribunal upheld the assessee's plea and directed the AO to grant the relief.Conclusion:The Tribunal dismissed the appeal of the Assessing Officer and partly allowed the appeal of the assessee, directing the AO to treat the sales tax and excise incentives as capital receipts and to exclude the debt redemption fund from the book profit calculation under Section 115JB. The judgment emphasized the application of the 'purpose test' in determining the nature of subsidies and upheld the binding nature of higher judicial precedents.