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TaxTMI 
TaxTMI 
TaxTMI 
2017 (7) TMI 501
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.... relating to the other assessee, M/s. Vardhman Industries Ltd. [hereafter "Vardhman"] - where the ITAT followed its decision in M/s. Bhushan Steels and Strips Ltd. [hereafter "Bhushan"] appeals. For the purpose of easy reference and convenience, the facts which are stated comprehensively in Bhushan's case (and which includes the relevant parts of the same industrial policy of the State of UP for 1990 as amended in 1991) are discussed from appeals arising out of the first order for AY 1995-96 (in Bhushan's case). 3. Bhushan was running the business of manufacture of cold rolled/galvanized steel strips and sheets etc. Its two units, namely, cold rolling, coal units and galvanized unit was located at Sahibabad (Distt. Ghaziabad - UP). The area was noticed as a "backward" area. The assessees Bhushan and Vardhman, claimed that in terms of Notification No.ST-2-7558/X- 1981-UP Act-XV/48-Order 85 dated 26.12.1983, the UP Government, in exercise of powers under Section 4-A of the UP Sales Tax Act, 1948 read with Section 221 of UP General Clauses Act, 1904 granted exemption from payment of the sales tax in respect of any goods manufactured in an industrial unit which is a new unit located i....
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....de these observations:- "(a) There is no doubt, that the amount of Rs. 7,27,71,570/- represents the income of the assessee company. This issue had already been settled finally by several judgements of the Hon‟ble Supreme Court of India (e.g. Chowringee Sales Bureau Pvt. Ltd. vs. CIT (SC) 87 ITR 542 and Sinclair Murray & Co. Pvt. Ltd. vs. CIT (SC) 97 ITR 615). The assessee‟s claim for deduction of this amount from its taxable income on the ground that Sales tax has been exempted by the State Govt. in the form of subsidy for installing industrial units in backward areas does not help if at all. Section 43-B opens with an overriding clause making it obligatory that any deduction of a sum "payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force", can be allowed such sum is actually paid by the assessee. The assessee has admittedly not paid the amount of sales tax collection to the State Govt. (c) The assessee‟s assertion that it is entitled to claim deduction in view of subsidy by virtue of notifications issued by the State a Govt. does not help its case as, provisions of Sec.43-B are clear and ....
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....uantifies the subsidies payable by it to various; industries in the specified areas and instead of giving such subsidy to them, the Govt. exempted the industries from paying the sales collected to the extent of qualified amount. It will not be out of place to mention that the amount of sales tax collected exceeding the computed amount, the assessee was liable to pay such excess sales tax so collected. In this connection, we feel it expedient to consider the decision of the Hon‟ble Supreme Court in the case of Sawhney Steels & Press Works Ltd. reported in 228 ITR 253. The Hon‟ble Supreme Court in this case decided that if the moneys are given to the assessees for assisting them in carrying out their business operations and the money was given only after and conditional upon commencement of the production, such subsidy must be treated as assistance for the purpose of trade. But in so far as the case before us is concerned, the subsidy is granted to appellant company by the State Govt. not for the purposes of carrying out its business in a more profitable manner but merely in consideration of setting up the production units in backward areas. The purpose of the Govt in gra....
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....xpansion of capacity of the mill of the assessee and in that way the incentive expressed in terms of additional sale of sugar was of the nature of capital receipt. The ITAT Calcutta Bench in the case of Rasoi Limited (ITA No. 1080/Cal/98) and in the case of Pharma Impex Laboratory Pvt. Ltd. (ITA No.476/Cal/2000) and ITAT Bangalore Bench in the case of Hindustan Aeronautical Ltd., Bangalore (ITA No.763/Bang/98) have taken the same view even after considering the decision of Hon‟ble Supreme Court in the case of Sawhney Steels & Press Works Ltd. (supra). In view of these facts, we have no hesitation in holding that the amount received by the assessee by way of exemption of sales tax payment, was not a trading receipt and, therefore, the CIT(A) has rightly held that the amount received by the assessee was capital receipt and not liable to tax up to the limits computed in accordance with the notification of the state government. While upholding the finding of the CIT(A), we dismiss the ground of appeal raised by the revenue. 23. In the result, the appeal directed by the revenue is dismissed." Parties‟ contentions 7. The revenue in its appeal argues that the source of....
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....ty of the unit. In other words, by allowing the unit to collect sales tax, but not have the corresponding obligation of passing it over to the revenue, the State permitted augmentation of the assessee's income. No strings were attached to the effect that equipment or any other capital expenditure had to be incurred. 10. Learned counsel relied upon the observations of the Supreme Court in Sahney Steel (supra) to state that payments in the nature of subsidy from public funds are made to the assessee to assist it in carrying on the business through the trade receipts. The counsel highlighted that the Supreme Court had ruled that the character of the subsidy in the hands of the recipient, whether capital or revenue, has to be determined having regard to the purpose for which the subsidy was given. Although the source is immaterial, the purpose should be examined; if the purpose was to help the assessee to set up its business or to complete the business, the moneys had to be treated as having received for capital purposes. Conversely, if moneys were given to the assessee for assisting it in carrying on business operations and if the money was given only after and conditional upon produ....
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....as suspended by the scheme (which permitted the assessee to collect the amounts though not pass it on to the revenue). The form of the subsidy was collection as tax with permission of the State to retain the amount. The purpose of the subsidy, therefore, clearly was revenue augmentation to ensure greater profitability and economic viability in the particular backward area of Uttar Pradesh aimed at greater growth and higher levels of employment. Therefore, the impugned decision is clearly contrary to law. 14. It was argued on the assessee's behalf that its cold rolled unit went into production on 03.01.1990 and commenced sales from 07.03.1990. This unit was eligible for incentive in the form of sales tax exemption under the earlier notification of 29.01.1985 which had extended the existing Government Order of 30.09.1982. The incentive available to the newly established coal mill which was considered and classified as "Prestige" unit, involving fresh investment of over Rs. 2 crores under the Government Orders was in the form of sales tax exemption from the period of this exemption from the date of sale. The State of U.P. formulated the industrial policy of 1990. Reliance was p....
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....at the amounts received were not by way of revenue subsidy but for augmenting the capital expenditure incurred. Learned counsel also relies upon subsequent judgment of the Supreme Court in Commissioner of Income Tax v. Shree Balaji Alloys 2016 (287) CTR 459 (SC) which affirmed the decision of the Jammu & Kashmir High Court in Shri Balaji Alloys vs. Commissioner, Income Tax (2011) 333 ITR 335. It was stated that the Ponni Sugars (supra) principle was applied and the Court held that the excise duty refund received by the eligible unit, was not liable to tax as it was a capital receipt despite absence of any provision in the scheme with regard to the use of funds. 17. Learned counsel also relied upon the decision of a Division Bench of this Court in Commissioner of Income Tax vs. Bougainvilla Multiplex Entertainment Centre Pvt. Ltd. (2015) 373 ITR 14. There too, the Court held that subsidy given at the point of time after the commencement of production did not mean that the State ruled out capital utilization of the funds received. On the other hand, the very concept of grant of subsidy meant that the assessee was free to use it either to augment its profit or to recoup its capital. ....
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....pect of any good manufactured in a unit other than the units of the type mentioned in Annexure II, which has undertaken expansion, diversification or modernization‟ on or after April 1, 1990 but not later than March 31, 1995, in the areas mentioned in Column 2 of Annexure I, not tax shall be payable or, as the case may be, the tax shall be payable at the reduced rates specified in Column 4 of Annexure I, by the manufacturer thereof for the period in Column 3 of the said Annexure I, or till the maximum amount of tax relief by such exemption from or reduction in rate of tax as specified in Column 5 of Annexure I is achieved, whichever is earlier, on the turnover of sales." ANNEXURE - I S. No. Location of Unit Total period of exemption Reduction in the rate of tax Rate of tax applicable (denoted as percentage of the rate of tax normally applicable under the Act to the goods concerned) Year in Case of ib case of Units with other a fixed units Capital investment Exceeding 50 Crores Monitory limit upto which exemption from or reduction in the rate of tax is admissible 1 2 3 4 5 A B C (iii) The Taj Trapezium Area ....
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.... the district under the scheme, where any unit of the capital investment of Rs. 25 crore has already been established prior to 1.4.90. 6 (B) :Special State Capital Subsidy to the Tehsil Level Pioneer Units. In any Tehsil, within the period of 1.4.90 to 31.3.95, the first industrial unit to be established from the fixed capital investment of Rs. 5 crore or more, shall be treated as Tehsil Level Pioneer Unit. The special state capital subsidy of Rs. 10 lakh shall be granted to the Pioneer Unit. If pioneer unit encourage to the ancillary units for the supply of requirement of 30% of its own purchased parts and components, then the further additional special capital subsidy of Rs. 10 lakh shall be available to it. This scheme shall be applied with effect from 1.4.90 and the facility of raw material shall not be admissible in the district under the scheme, where any unit of the capital investment of Rs. 5 crore has already been established prior to 1.4.90." 20. Predictably, the rival positions of parties are that according to the revenue, the amounts retained were not towards capital subsidy, but were revenue or trade subsidies, to ensure greater profitability. The assesse....
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....ord Buckmaster‟s explanation in Forth Conservancy Board v. IRC [1931] AC 540, at page 546 (16 TC 103, at page 117) and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills [1932] 16 TC 430, at page 448." In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably. Mr. Ganesh strongly relied on Seaham Harbour Dock Co.‟s case [1931] 16 TC 333 (HL) which does not come to the assistance of his contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given in several instalments as....
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.... character and will have to be taxed accordingly." 21. Ponni Sugars (supra) was the authority relied on by the assessee. In Ponni Sugars (supra), the court observed about the decision in Sahney Steel (supra) as follows: "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 main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on reve....
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....b or graded subsidy. This, according to the revenue, meant that the amounts retained could be spent for any purpose, not necessarily capital. It was lastly submitted that the subsidy operated only after expansion, i.e. after the capital expenditure was incurred and capacity expanded. 24. Both parties have used different passages from Sahnay Steel (supra) and Ponni Sugars (supra). In the former, the court was persuaded to hold that the amounts were revenue subsidies and "operational", not capital, because "the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee‟s factory." The added feature was that the assessee was free to use the amounts for any purpose. In Ponni Sugars (supra), the following was highlighted specifically: "In Sahney Steel and Press Works Ltd. this court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. the assessee was obliged to spend the money for extension of it....