2025 (6) TMI 214 - AT - Income Tax

Focus Product Scheme receipts are capital receipts excludable from income computation under section 115JB

ITAT DELHI held that Focus Product Scheme/Focus Market Scheme receipts constitute capital receipts excludable from total income computation under normal ... Characterization of receipt - Focus Product Scheme /Focus Market Scheme - whether treated as capital receipt in computing the total income under the normal provision of the Act as well as in computing the book profit u/s 115JB - AR has submitted that government gave the subsidy to enhance Indian export potential in the international market and the subsidy has to be treated as capital in nature and it was excludable from book profit u/s 115JB - HELD THAT:- It is found that the issue of claim of FPS/FMS as capital receipt received foreign trade policy in computing total income has been dealt by the co-ordinate bench of the tribunal in the case of RSWM ltd. [2024 (2) TMI 278 - ITAT DELHI] wherein as held CIT(A) while deleting the addition relied on the Judgment of Nitin Spinners Ltd. [2019 (9) TMI 1154 - RAJASTHAN HIGH COURT] wherein it was held that the subsidy has to be treated as capital in nature and is excludable from book profit u/s 115JB. Thus, we held that the assessee is entitled for claim of Focus Product Scheme /Focus Market Scheme as the capital receipt in computing the total income. Ground No 1 is decided in favour of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:- Whether the claim of Focus Product Scheme (FPS) and Focus Market Scheme (FMS) subsidies granted under the Foreign Trade Policy should be treated as capital receipts and excluded from total income computation under the normal provisions of the Income Tax Act, 1961, as well as from the book profit computation under section 115JB of the Act.- Whether the Education Cess claimed by the assessee should be allowed or disallowed in computing tax liability under the normal provisions of the Act.- A general ground allowing for amendment or modification of grounds during hearing, which was not substantively adjudicated.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Treatment of Focus Product Scheme/Focus Market Scheme Subsidies as Capital ReceiptRelevant Legal Framework and Precedents:The Income Tax Act, 1961 governs the computation of total income and book profits for tax purposes. Section 115JB deals with Minimum Alternate Tax (MAT) and prescribes computation of book profits. The key legal question is whether export incentives/subsidies under FPS/FMS constitute capital receipts or revenue receipts. Capital receipts are generally excluded from total income and book profit computations, whereas revenue receipts are included.Judicial precedents relied upon include the decision of the Hon'ble Rajasthan High Court in the case of Principal Commissioner of Income Tax, Ajmer v. Nitin Spinners Ltd., where it was held that FPS/FMS subsidies granted by the Central Government to enhance Indian export potential are capital receipts and not taxable income. The Calcutta High Court's decision in CIT v. Gloster Jute Mills Ltd. also supports this view. Furthermore, the Supreme Court dismissed the Special Leave Petition filed by the Department against the Rajasthan High Court decision, thereby affirming the capital receipt nature of such subsidies.Additionally, the Tribunal's coordinate bench ruling in ITA No. 145 & 146/Del/2021 in the assessee's own case for A.Y. 2013-14, relying on the above precedents, held FPS/FMS subsidies as capital receipts excludable from total income and book profit.Court's Interpretation and Reasoning:The Tribunal noted that the FPS/FMS subsidies are granted by the Central Government to enhance export potential in international markets, not to meet routine business expenditure or competition costs. Such subsidies are not export incentives in the conventional sense but are capital in nature. The Tribunal relied on the reasoning of the Hon'ble Rajasthan High Court, which found no infirmity in treating these subsidies as capital receipts. The Tribunal also observed that the Department did not controvert this proposition during the hearing.Key Evidence and Findings:The Tribunal examined the assessment order, CIT(A) order, and relevant judicial pronouncements. It found that the CIT(A) had partly allowed the appeal by deleting the Central Excise Subsidy amounting to Rs. 9,11,27,438/-. The Tribunal also found that the issue had been consistently decided in favor of the assessee in its own case for the subsequent assessment year and in various judicial decisions.Application of Law to Facts:The Tribunal applied the established legal principles and precedents to the facts of the case, concluding that the FPS/FMS subsidies received by the assessee for the relevant assessment year are capital receipts. Therefore, these subsidies should be excluded from the computation of total income under the normal provisions of the Act and from the book profit under section 115JB.Treatment of Competing Arguments:The Revenue did not contest the legal position during the hearing. The Tribunal dismissed the Revenue's ground challenging the capital receipt nature of the subsidies as devoid of merit.Conclusions:The Tribunal held that the claim of FPS/FMS subsidies as capital receipts is valid and allowed the appeal on this ground.Issue 2: Disallowance of Education CessRelevant Legal Framework and Precedents:Education Cess is a tax levied on income tax liability. The question is whether the Education Cess paid by the assessee can be claimed as a deduction in computing taxable income under the normal provisions of the Income Tax Act.Court's Interpretation and Reasoning:The assessee did not press this ground during the hearing. Consequently, the Tribunal decided this issue against the assessee without detailed examination.Conclusions:Ground No. 2 was decided against the assessee due to non-pursuance.Issue 3: General Ground for AmendmentThis ground was general in nature and was not adjudicated upon by the Tribunal.3. SIGNIFICANT HOLDINGS- The Tribunal held: 'As far as the question with regard to Focus Marketing Scheme was concerned, apparently the Central Government gave the subsidy to enhance Indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. The ITAT took note of judgment in Ponni Sugars & Chemicals Ltd. (supra) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. This Court is of the opinion that there is no infirmity with the reason.'- The Tribunal affirmed the ratio laid down by the Hon'ble Rajasthan High Court and the Supreme Court's dismissal of the Department's SLP, thereby establishing the principle that FPS/FMS subsidies under the Foreign Trade Policy are capital receipts and excludable from total income and book profit computation under section 115JB.- The Tribunal concluded that the assessee is entitled to treat the Focus Product Scheme / Focus Market Scheme subsidies as capital receipts in computing total income.- The disallowance of Education Cess was upheld due to non-pursuance by the assessee.- The appeal was partly allowed accordingly.