2017 (4) TMI 44 - AT - Income Tax

Sales tax refund under PSI 2007 not taxable; Disallowance of prior period expenditure upheld

The Tribunal found that the sales tax refund received under the Package Scheme of Incentives, 2007 was a capital receipt linked to investments in fixed ... Nature of sales tax incentive / Refund of sales tax - revenue receipt OR Capital subsidy - Held that:- In the present case, the incentive in the form of refund of sales tax is on account of setting up of new industrial unit with twin objective of balance development of regions and generation of employment. As per the scheme there are two modes of payment of Industrial Promotion Subsidy. The subsidy to the extent of 75% of the eligible investments as reduced by the benefit of electricity duty exemption and stamp duty exemption or to the extent of taxes paid to the State Government within a period of 7 years, whichever is lower. It is not the choice of the assessee to opt for either of the two modes. The beneficiary under the Scheme will receive the subsidy after comparative analysis of both the modes, whichever is lower. The assessee is eligible to claim the incentive subject to the compliance of certain conditions mentioned in the PSI 2007 scheme, subject to the maximum limit as specified in the scheme. Since the assessee is eligible to qualify in the latter part of the scheme, the assessee is receiving incentive/subsidy in the form of refund of sales tax from the State Government. As far as the purpose of subsidy is concerned, it is quite evident that it is for setting up of new Mega Project in the classified area. Hence, the decision of Coordinate Bench of the Tribunal in the case of Rasiklal M. Dhariwal (HUF) Vs. DCIT (2011 (3) TMI 1619 - ITAT PUNE ) would not apply in the facts and circumstances of the case. Thus, in the facts of the case and in the light of various decisions discussed above, we hold that the incentive received by the assessee under the PSI, 2007 scheme in the form of refund of sales tax is Capital receipt, not liable to tax. Issues Involved:1. Classification of subsidy received under the PSI, 2007 as capital or revenue receipt.2. Disallowance of prior period expenditure for A.Y. 2010-11.Detailed Analysis:1. Classification of Subsidy:The primary issue in these appeals was whether the refund of sales tax received by the assessee under the Package Scheme of Incentives, 2007 (PSI, 2007) should be treated as a capital receipt or a revenue receipt.Facts and Arguments:- The assessee, engaged in manufacturing precision steel tubes, received a sales tax refund as an Industrial Promotion Subsidy under PSI, 2007.- The Assessing Officer treated this refund as a revenue receipt, leading to additions of Rs. 44,70,347/- for A.Y. 2009-10 and Rs. 18,89,12,990/- for A.Y. 2010-11.- The CIT(A) upheld the Assessing Officer’s findings, rejecting the assessee's claim that the subsidy was a capital receipt.- The assessee contended that the subsidy was for setting up an industrial unit in a less developed area, thus qualifying as a capital receipt. The assessee relied on the Supreme Court’s decisions in Sahney Steel and Ponni Sugars and Chemicals Ltd., asserting that the purpose of the subsidy, not its form, determines its nature.Tribunal’s Findings:- The Tribunal examined the PSI, 2007 scheme, which aimed at balanced regional development and employment generation through industrial investment.- The scheme provided various incentives, including electricity duty exemption, stamp duty exemption, and an Industrial Promotion Subsidy equivalent to 75% of eligible investments.- The Tribunal noted that the subsidy was linked to the investment in fixed assets and employment generation, indicating a capital nature.- The Tribunal distinguished the case from Sahney Steel, where the subsidy was for operational purposes, and aligned it with Ponni Sugars, where the subsidy was for setting up a new unit.- The Tribunal also referenced the Special Bench decision in DCIT vs. Reliance Industries Ltd., which held that sales tax incentives for setting up industries in notified areas are capital receipts.- The Tribunal concluded that the refund of sales tax under PSI, 2007 was a capital receipt, not liable to tax.2. Disallowance of Prior Period Expenditure:In A.Y. 2010-11, the assessee also challenged the disallowance of prior period expenditure amounting to Rs. 29,84,611/-.Facts and Arguments:- The CIT(A) upheld the Assessing Officer’s disallowance, stating that the expenses should have been accounted for in the year they were incurred, as the assessee follows the mercantile system of accounting.- The CIT(A) noted that the assessee did not provide satisfactory reasons for not claiming these expenses in the relevant year and that the expenses were not related to any disputed liability crystallized during the year under consideration.Tribunal’s Findings:- The Tribunal found no reason to interfere with the CIT(A)’s order on this issue, as the assessee could not controvert the findings.- Consequently, the disallowance of prior period expenditure was upheld.Conclusion:- The appeal for A.Y. 2009-10 was allowed, treating the sales tax refund as a capital receipt.- The appeal for A.Y. 2010-11 was partly allowed, with the disallowance of prior period expenditure being upheld.