2025 (8) TMI 1176 - AT - Income Tax

Appellate body affirms MEIS/MLFPS scrip sale proceeds are capital receipts under section 2(24)(xviii); departmental appeal dismissed

The Deputy Commissioner of Income Tax, Circle -1 Versus Armstrong Knitting Mills, Tirupur

The Deputy Commissioner of Income Tax, Circle -1 Versus Armstrong Knitting Mills, Tirupur - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from sale of Market Linked Focus Product Scheme (MLFPS/MEIS) scrips are revenue receipts taxable as income or capital receipts not includible in income under the Income Tax Act. 2. Whether the amended definition of 'income' in section 2(24)(xviii) (post-Finance Act amendment) and related provisions (including ICDS guidance) bring MLFPS/MEIS scrip proceeds within taxable government incentives, grants, subsidies or similar receipts. 3. Whether an adjustment increasing income in an intimation issued under section 143(1) can properly include such receipts for the assessment year in question, having regard to the temporal scope of statutory amendments permitting adjustments. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of receipts from sale of MLFPS/MEIS scrips: capital or revenue Legal framework: The Court examined the characterization of receipts as either revenue (taxable) or capital (non-taxable) receipts under the Income Tax Act, having regard to sections that define income and to section 28 limbs regarding business receipts. Treatment of incentives, rewards or market-development payments by Government schemes was central to classification. Precedent treatment: The Tribunal relied on its own coordinate bench decision holding MEIS/MLFPS proceeds to be capital receipts. It also considered authorities addressing government incentives for market expansion (including Supreme Court authority finding such incentives to be capital in nature when directed to expansion of market area), and other High Court/Tribunal decisions which had reached differing conclusions or considered constitutional/validity issues of statutory amendments. Interpretation and reasoning: The Tribunal analyzed the Foreign Trade Policy and the scheme under which the scrips arise, treating the scrips as 'rewards' for exploring new markets rather than as assistance, subsidy, grant, cash incentive, duty drawback or similar governmental monetary assistance contemplated within the amended definition of income. It considered whether the proceeds fell within section 28(iiia/iiib/iiic) or within section 2(24)(xviii) and concluded they do not. The Tribunal further reasoned that book-keeping treatment (crediting proceeds to profit and loss account) is not determinative of taxability. The Tribunal also considered applicability of ICDS (accounting standards) and concluded ICDS-VII (on government grants) is directed to government grants and not to duty credit scrips characterized as rewards; accordingly ICDS does not render the scrip proceeds taxable. Ratio vs. Obiter: Ratio - The holding that MLFPS/MEIS scrip sale proceeds are capital receipts, not income, is treated as the operative ratio for similar factual and legal contexts and was applied to resolve the appeal. Obiter - Remarks distinguishing certain High Court constitutional rulings as addressing validity rather than applicability were explanatory but not the core ratio. Conclusion: The Tribunal held the proceeds from sale of MLFPS/MEIS scrips to be capital in nature and therefore not taxable as income under the Act; accordingly, the addition made by the Revenue was disallowed. Issue 2 - Effect of amendment to section 2(24)(xviii) and applicability of ICDS on characterization Legal framework: The Court considered the statutory language of the amended definition of 'income' under section 2(24)(xviii) (as amended by Finance Act) and the scope of ICDS-VII (accounting standards notified) which deals with government grants. Precedent treatment: The Tribunal distinguished prior High Court decisions that addressed constitutional validity of the amendment from decisions addressing applicability. It relied on coordinate bench decisions which had interpreted the amended provisions in context and concluded that the scheme's 'rewards' do not fall within the ambit of the statutory terms used (subsidy, grant, cash incentive, duty drawback, waiver, concession, reimbursement). Interpretation and reasoning: The Tribunal parsed the terminology - 'rewards' under the Foreign Trade Policy versus 'assistance' or 'grant' within the statutory text - and concluded conceptual and functional differences exclude MLFPS/MEIS scrips from the words in section 2(24)(xviii). The Tribunal further held that ICDS-VII's focus on government grants does not extend to duty credit scrips characterized as rewards; therefore the accounting standard does not alter tax characterisation to revenue income. The Tribunal treated prior decisions on government subsidies (cited Supreme Court authority on subsidies being capital) as persuasive support for treating market-development incentives as capital receipts when they are aimed at expanding market area rather than running business operations. Ratio vs. Obiter: Ratio - The conclusion that the Finance Act amendment and ICDS do not automatically capture MEIS/MLFPS scrips within taxable income is part of the operative ratio. Obiter - Categorical comparisons with some earlier High Court holdings regarding constitutional validity are explanatory; they clarify limits of those rulings rather than supplant the Tribunal's analysis. Conclusion: The amendment to section 2(24)(xviii) and ICDS-VII do not, on the facts and scheme structure considered, bring proceeds from sale of MLFPS/MEIS scrips within taxable income; such proceeds remain capital receipts. Issue 3 - Validity of adjustment under section 143(1) intimation for including such receipts Legal framework: The Tribunal considered statutory timelines and the scope of section 143(1) intimations, and the effect of subsequent statutory amendments (specifically an amendment permitting certain adjustments from Finance Act, 2020 w.e.f. 01.04.2021) on the Revenue's ability to increase income in the relevant assessment year. Precedent treatment: The Tribunal noted the FAA's finding - unchallenged by Revenue on appeal - that the 143(1) adjustment basis was not available for the relevant assessment year because the statutory empowerment to make such adjustments by increasing income was introduced only w.e.f. 01.04.2021 and thus not applicable to the year under consideration. Interpretation and reasoning: The Tribunal accepted the FAA's temporal analysis: the statutory provision enabling adjustments to increase income in 143(1) intimations post-enactment could not be used retrospectively for the assessment year at issue. Because Revenue did not contest that specific finding on appeal, the Tribunal treated it as binding for the present disposition. Ratio vs. Obiter: Ratio - The conclusion that the Revenue could not validly rely on the later amendment to sustain the 143(1) addition for the year in question is treated as an operative ruling (at least on the facts before the Tribunal). Obiter - Broader remarks about retrospective application are explanatory. Conclusion: The adjustment in the section 143(1) intimation increasing income by the amount of MLFPS/MEIS proceeds could not be sustained for the relevant assessment year because the statutory provision permitting such an increase became effective only later; Revenue did not contest that finding on appeal. Overall Disposition Interconnection of issues: The Tribunal treated the three issues as interrelated - classification of the receipts dictated taxability, the amended definition and ICDS were considered in that classification, and the procedural availability of a 143(1) adjustment was a separate, dispositive temporal issue. The Tribunal relied on coordinate decisions addressing identical factual and legal questions and held the FAA's dismissal of the Revenue's addition was correct and in accordance with law. Final conclusion: The Tribunal dismissed the Revenue's appeal, holding that proceeds from sale of MLFPS/MEIS scrips are capital receipts not taxable as income, that the statutory amendment and ICDS do not alter that characterization for the facts considered, and that the Revenue could not rely on a later amendment to validate a 143(1) addition for the assessment year in question.