TaxTMI 
TaxTMI 
2011 (3) TMI 1619
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....or taxation, it being in the nature of capital receipt. Since the facts and rival arguments are similar for both the assessment years, we shall first take up the assessee's appeal for the assessment year 2003-04. The facts, in brief, are that the assessee, an HUF, is engaged in carrying out wide range of business activities as a manufacturer and trader. The assessee is a group concern under the umbrella of Dhariwal group of Industries. During the course of assessment proceedings for the assessment year 2003-04, the Assessing Officer noticed that the assessee had set up wind-mills in Maharashtra for generating wind power. The Government of Maharashtra has given subsidy by way of entitlement to Sales-tax exemption to the assessee as per a Scheme. During the assessment year 2003-04, assessee transferred its Sales-tax benefit entitlement for an amount of Rs. 63,74,291/-. The assessee claimed that the amount so received on transfer of Sales-tax Eligibility is a capital receipt and, therefore, not taxable. In support of the aforesaid claim, the assessee referred to the following Resolutions of the Government of Maharashtra, which incorporated the Government of Maharashtra's schem....
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....talled in Maharashtra is a capital receipt and is not given as a portion of the cost of assets acquired in the Wind Mills Project. 3. On a perusal of the Scheme, the Assessing Officer observed that the incentive received by the assessee could not be said to have been received on capital account. According to the Assessing Officer, under the Scheme, the Government of Maharashtra offered two sets of incentives for setting up Wind-mills in the State. As per Resolution NCP/1097/CR 57/ENERGY - 7 dated 13.3.1998, Clause 7, capital subsidy is being provided by the State Government @ 30% of the fixed capital investment subject to a maximum limit of Rs. 30 lakhs in the Wind power plant. According to the Assessing Officer, this incentive has been specifically provided for setting up of Wind- mills and the only other condition attached with this is that the plant must be successfully operated in the range of 17% Plan Load Factor (PLF). The other set of incentives comprised of subsidy on account of Sales-tax incentives. Such other kind of subsidy was not linked with any capital investment as such and such Sales-tax incentive was granted only when the Wind-mill has been successfully run in t....
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....e reduced from the actual cost of any capital asset. The Commissioner of Income-tax (Appeals) on a careful consideration of the various submissions made by the assessee, proceeded to examine relevant Government Resolutions dated 12.03.1998 (supra) and dated 01.10.1999 (supra) of the Government of Maharashtra and observed that salient feature of Scheme for providing subsidy were the same as those contained in Notification issued by Andhra Pradesh Government which was subject matter of appeal before the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd (supra). According to the Commissioner of Income-tax (Appeals), the facts of the case of the assessee being identical to those considered by the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), the ratio laid down by the Hon'ble Supreme Court in the aforesaid case would be directly applicable to the facts of the assessee's case. After thoroughly analyzing the decision of the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd (supra) wherein the Resolution of the Andhra Pradesh High Court was discussed and the Resolutions of the Government of Maharashtra....
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....& 1343/PN/06 for assessment year 2003-04 and 2004-05 dated 30.6.2009, iv. ITO v Santosh Laxmi Binny Modern Rice Mill 1 SOT 137 (Hyd) v. Sasisri Extractions Ltd v ACIT 119 TTJ 976 (Visakha) vi. CIT v Ponni Sugars & Chemicals Ltd. 306 ITR 392 (SC) vii. Sahney Steel & Press Works Ltd. v CIT 228 ITR 253 (SC) 6. Factually speaking, it has been argued with reference to the resolutions of the State Government that for the impugned receipt, the dominant purpose was not running/operation of the concerned wind mills as concluded by the lower authorities. According to the learned Counsel, the aforesaid perception of the Revenue is based on incorrect understanding of the nature and dominant purpose of the sales-tax subsidy. The learned Counsel submitted that the purpose of the Scheme was to promote generation of energy, the benefit being linked with the quantum of qualifying investment made in the wind power project thus bringing out the dominant object of the Scheme as being to promote the generation of energy through non-conventional sources. Contesting the argument of the lower authorities that requirement of achieving a minimum 12% plant load factor s....
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....e running of the project and not linked to merely setting up of the project. According to the learned Departmental Representative the lower authorities made no mistake in holding that the sales-tax incentive received by the assessee is of revenue nature following the ratio of the decision of the Hon'ble Supreme Court in the case of Sahney Steel (supra). Another argument of the Assessing officer which has been referred by the ld DR is that the liability towards statutory dues like sales-tax have a direct bearing on the profits of an entity for a particular year and if the assessee gets a benefit which reduces the charge of the sales-tax, such benefit is on revenue account since it has a direct impact in increasing the revenue earnings of the assessee for a particular year. For this reason also, it is contended that the impugned receipt is liable to be taxed as a revenue receipt and cannot be treated as capital in nature so as to be outside the ambit of taxation. 8. We have carefully considered the rival contentions. In terms of the policy on wind power generation formulated by the Government of Maharashtra, vide Resolutions dated 12.3.1998 (supra), and 1.10.1999 (supra), the ....
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....nes from Government of India, wind power generation policies of other State Governments and the problems being faced by promoters of wind energy generation were under active consideration of the State Government. RESOLUTION : In partial modification of its existing policy to promote wind energy generation, the State Government has taken following decisions to promote wind energy generation in the State:- (1) Tariff: Maharashtra State Electricity Board shall purchase energy generated from wind power plants at a rate of 225 paise per unit. The financial year 1994-95 will be taken as base year for this rate which will be increased at a rate of 5% per annum. This 5% escalation will be available to the developers for the first 10 years of the project life. The liability of the project reduces after repayment of debt. Due to this, for the next 3 years there will be no escalation and the rate will be kept constant. Thereafter, for the balance life of the project (7 years), an escalation of 5% per annum will be available to the developers. (2) Banking In line with the Central government policy, wind power developers would be given permission to bank the ....
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....any other company associated with the promoters. Detailed instructions about the modus operandi about Sales Tax benefits will be separately issued by the Finance Department. By order and in the name of the Governor of Maharashtra. Sd/-(L.V.Nilesh) Deputy Secretary to Government" 10. A perusal of the Preamble to such Resolution reveals that the State Government has a policy to promote generation of energy through non conventional sources to supplement the ever increasing demand of electricity in the State of Maharashtra. It was found that there is immense potential for generation of wind power in the State and different sites were selected by the Government for this purpose. It appears that the State Government had enunciated its policy of generation through non conventional sources in January 1996, which was not found attractive by the promoters. In terms of the said Resolution the Government modified its existing policy to promote wind energy generation by announcing certain concessions as incentives enumerated therein. Such incentives related to tariff structuring, banking of power generated by wind mills with MSEB, bearing of transmission losses by ....
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....ng the difficulties of the industrialists and with a view to make available sales tax benefit, Government has decided to simplify the procedure as follows: 1. The sales tax benefit will be available on electricity generating units in relation to achievement of plant load factor as follows: S.No. Plant Load Factor Sales tax benefit equivalent of 1//6 of qualifying investment Without Bank Guarantee With Bank Guarantee 1 12% 60% 50% 2 13% 70% 60% 3 14% 80% 70% 4 15% 90% 80% 5 16% 100% 90% 6 17% 100% 100% The sales tax benefit can be availed by all projects which are commissioned as well as connected to the transmission lines from two months after the date of publication of the Government resolution. Sales tax benefit will be available for continuous 6 years after obtaining the "entitlement Certificate" from the Sales Tax Department. 2. While determining the Plant Load Factor, the availability of the transmission lines during the months from May to September of that financial year average availability of transmission lines shall be taken into consideration and this percentage will be increased proportionately to 100%, and then the Plant Load Factor will be de....
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....nd plant load factor. The electricity sold to the unit/units of third party can avail sales tax benefit limited only to the qualifying investment and plant load factor. The electricity sold to the unit/units of third party can avail sales tax benefit limited only to the qualifying investment as mentioned in paragraph 1. 5. After satisfying the condition of average plant load factor, sales tax benefit can be availed by the eligible wind energy generation unit in the immediate following year. However, if some promoters desire to avail this benefit in the current financial year immediately on commissioning of wind energy project, they can avail the benefit on the following conditions: a) Bank guarantee equivalent to qualifying investment will have to be given every year for availing sales tax benefit of following financial year. b) If the condition of plant load factor is not fulfilled, the bank guarantee amount will be forfeited at the end of the year. The forfeited amount of bank guarantee will be transferred to sales tax department by Maharashtra Energy Development Agency. 6. Facility to Bulk Licensees If the bulk licensee has installed wind ener....
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....cted to the transmission lines from two months after the date of publication of the said Resolution. It is also provided that the Sales-tax benefit is available on electricity generating units in relation to achievement of plant load factor. The procedural requirement also entails that the sales- tax benefit will be available for the promoters from the date of obtaining of "Entitlement Certificate" for a period of continuous six years, and for every year such benefit will be limited to 1/6th of the qualifying investment. It is also provided that in any one year, if plant load factor of 12% is not achieved, then that year's sales-tax benefit will get cancelled and that such Unit would loose sales-tax benefit of that year for ever. Another pertinent procedure outlined in the Resolution permitted the facility of transferring the sales-tax benefit to third parties. In terms of such facility, the promoters of the project were permitted to transfer sales-tax benefit to third party, if it sold electricity to such third party. Such transfer was subject to issuance of the Entitlement Certificate to be issued by the Commissioner of Sales-tax. The said Resolution also provided that the sa....
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....ense that the company would be entitled to these incentives only after it goes into production and that the Scheme was not to make any payment directly or indirectly for the setting up of industries. On factual analysis of the Scheme, it was inferred that the subsidies were operational subsidies, inasmuch as they were "given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable." The Hon'ble Supreme Court observed that the character of subsidy whether revenue or capital will have to be determined, having regard to the purpose for which the subsidy is given. The following observations are relevant: "If any subsidy is given, the character of the subsidy in the hands of the recipient - whether revenue or capital - will have to be determined by having regard to the purpose for which the subsidy is given. If it is given y way of assistance to the assessee in carrying on of his trade or business, it has to e treated as trading receipt. The source of the fund is quite immaterial. For example, if the scheme was that the assessee will be given refund of sales tax on purch....
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.... granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only 6 after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The ....
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....ent of backward regions of the State of Maharashtra; dispersal of industries; promotion of industries for employment oriented units; and, providing local employment to SC/ST. The Tribunal observed that in order to decide the character of receipt the purpose of granting subsidy was relevant, while the mode of payment and the application of money for capital or revenue purposes was irrelevant. Therefore, as per the Special Bench the decisive factor was the objects with which the incentive was given and, therefore, such subsidy was held to be a capital receipt. The said decision has also been further approved by the Hon'ble High Court vide order dated 15.4.2009 (supra). The Hon'ble High Court applied the purpose test and found that the object of the subsidy being to set up units in backward areas for generation of employment, could construe the subsidy as a capital receipt. 15. On the basis of the aforesaid decisions an undisputed premise which can be deduced is that in order to determine the character of the impugned receipt - whether capital or revenue, the same has to be decided in the lights of the objects and purpose for which the scheme has been formulated by the Stat....
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....unning of the plant and that too under prescribed efficiency levels. In fact, in the Resolution dt 1.10.1999 staggered plant load factors achieved by the unit entitled the unit to varying levels of sales-tax benefit. Therefore, it could not be said that the sales-tax benefit is available merely on commencement of generation. We are conscious that mere timing of the grant of subsidy is not relevant. However, in the present case, it is not the timing of the subsidy alone but the grant is linked to achieving operational efficiencies and that too for only six continuous years. If a unit which is otherwise eligible for incentive, does not achieve the plant load factor of 12% or above, it would not be entitled to receive the sales tax benefit. Therefore, in our considered opinion, though the object of the Scheme is to promote generation of energy through non conventional sources but the same is sought to be achieved by the Government in the form of supporting the units to perform more efficiently and profitably. 17. In fact the Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) clearly noted that the subsidy received therein was to be utilized only for repa....