MEIS scrips are rewards under section 2(24)(xviii) and capital receipts, not taxable; leasehold construction costs allowed as revenue deduction

ITAT CHENNAI - AT held that export incentive MEIS scrips are rewards, not subsidies or assistance under section 2(24)(xviii), and thus constitute capital receipts not chargeable as income; ICDS-VII and section 28(iiib) do not apply, and book treatment alone cannot determine taxability. The Revenue's appeals on this issue were dismissed. The tribunal also upheld the appellate authority in allowing deduction of construction cost on leasehold land as revenue expenditure for the year under consideration.

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Issues Involved:
1. Classification of Government incentives as capital or revenue receipts.
2. Treatment of construction expenses on leasehold land as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Classification of Government Incentives:
The primary issue was whether the incentives received under the Market Linked Focus Products Scheme (MLFPS) should be treated as capital receipts or revenue receipts. The Revenue argued that these incentives are revenue in nature and chargeable to tax under section 28(iiib) of the Income Tax Act, as they are akin to cash assistance for exports. The assessee contended that these incentives are capital receipts, intended to expand market areas and not for running the business profitably.

The tribunal examined the purpose of the incentives, citing the Supreme Court's decision in CIT v. Ponni Sugars & Chemicals Ltd., which emphasizes the "purpose test" to determine the nature of a subsidy. The tribunal concluded that the incentives were for expanding market areas, thus constituting capital receipts, not chargeable to tax under section 2(24) or section 28 of the Act. The tribunal also discussed the amendment to section 2(24) by the Finance Act, 2015, which includes various subsidies and incentives as income but found that the incentives in question did not fall under the definitions provided in section 2(24)(xviii).

2. Treatment of Construction Expenses on Leasehold Land:
The second issue was whether the expenses incurred on constructing a building on leasehold land should be treated as capital or revenue expenditure. The assessee claimed these expenses as revenue expenditure, arguing that the construction did not result in acquiring a capital asset since the land was not owned by them.

The tribunal referred to previous decisions, including the Madras High Court's ruling in TVS Lean Logistics Ltd., which held that construction on leased land for business purposes constitutes revenue expenditure. The tribunal noted that the assessee's situation was similar, as the building was constructed on leased land, and upon lease termination, the land would be returned to the lessor. Therefore, the tribunal upheld the CIT(A)'s decision to treat the construction expenses as revenue expenditure, allowing the assessee's claim.

Conclusion:
The tribunal dismissed the Revenue's appeals, affirming that the incentives under MLFPS are capital receipts and the construction expenses on leasehold land are revenue expenditures. The tribunal's decision was consistent with previous rulings and legal principles regarding the classification of government incentives and treatment of construction expenses.

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