2026 (2) TMI 1382 - HC - Income Tax

Capital receipt treatment for sales tax retained under a capital-investment incentive: retained tax is not taxable as revenue for assessment purposes.

Sales tax amounts retained by an industrial undertaking under a state capital investment incentive scheme, to the extent permitted as retention equal to ... Nature of receipt - assessee withheld recovered sales tax - whether amount recovered from buyers in the name of sales tax was utilized for day to day working of the assessee? - revenue receipt or capital receipt - HELD THAT:- From the perusal of record, it is evident that in Birla VXL Ltd [2013 (7) TMI 655 - GUJARAT HIGH COURT], Munjal Auto Industries Ltd [2013 (10) TMI 650 - GUJARAT HIGH COURT] and Nirma Ltd. [2016 (6) TMI 1023 - GUJARAT HIGH COURT] has considered the legal issue raised herein. The Gujarat High Court has opined that sales tax collected and retained by assessee is capital receipt. The exemption scheme which was before Gujarat High Court is involved in the present case. The opinion of Gujarat High Court is consistent and appeals filed by Revenue have already been dismissed by Supreme Court. It is apt to notice that Revenue had not filed SLP against judgment of Gujarat High Court whereas civil appeals were filed. There is not even iota of dichotomy between facts and issues involved in the present appeals and appeals which were adjudicated by Gujarat High Court. We find ourselves in agreement with opinion formed by Gujarat High Court. There seems no reason to form any opinion contrary of Gujarat High Court. Decided against revenue. Issues: Whether the sales tax collected and retained by an industrial undertaking under a state capital investment incentive policy (allowing retention of sales tax up to the amount of capital investment) constitutes a capital receipt or a revenue receipt for the purposes of income-tax assessment for the assessment year 2007-08.Analysis: Prior decisions of a High Court addressed an identical exemption scheme and concluded that sales tax collected and retained under the policy is a capital receipt. Those High Court decisions were not sustained by successful challenge in the Supreme Court, as the appeals filed by Revenue were dismissed. The scheme allowed retention of sales tax equal to capital investment for a fixed period and the facts and legal questions in the present appeals materially correspond to those earlier decisions. On that basis, the applicable legal framework and consistent precedent support classification of the retained sales tax as capital receipt rather than taxable revenue receipt.Conclusion: The issue is answered against Revenue and in favour of the assessee: the sales tax collected and retained under the capital investment incentive policy is a capital receipt and not includible as taxable revenue for the assessment year in question.Ratio Decidendi: Sales tax amounts retained under a state capital investment incentive policy, to the extent permitted as retention equal to capital investment, constitute capital receipts and are not taxable as revenue receipts where the scheme and facts are materially identical to earlier authoritative decisions which have withstood challenge.