AI Drafter 
TaxTMI 
TaxTMI 
2024 (1) TMI 1228
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.... with Mr Rohit Jain, Adv., Mr Aniket D Agarwal, Adv and Mr Samarth Chaudhari, Adv. RAJIV SHAKDHER, J.: Prefatory Facts: 1. These appeals concern Assessment Year (AY) 1997-98 [ITA No.393/2014], AY 2005-06 [ITA Nos. 392/2014 & 395/2014], AY 2006-07 [ITA Nos. 394/2014 & 397/2014], AY 2008-09 [ITA Nos. 396/2014 & 398/2014], AY 2013-14 [ITA No. 496/2022] and AY 2014-15 [ITA No. 443/2022]. 2. At the outset, we would note that the counsel for the parties agreed in the course of the hearing in the above-captioned appeals that the issue raised on behalf of the appellant/revenue is common, and therefore, the facts of one of the appeals could be taken up for discussion to arrive at the end result. 3. Bearing this in mind, we would be referring to the facts insofar as they are relevant to the issue at hand obtaining in ITA No. 393/2014, which, as indicated above, concerns the earliest AY, i.e., AY 1997-98. 4. The common question of law, which was framed in the above- captioned appeals, reads as follows: "Whether the Income Tax Appellate Tribunal was right in holding that the subsidy received in the form of sales tax incentive under the Resolution dated 07th May, 1993....
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.... assessment. The Assessing Officer (AO) passed an order on 28.03.2000, whereby the loss declared by the respondent/assessee was scaled down to Rs. 180,95,99,757/-. 7.8 In the appeal preferred by the respondent/assessee with the Commissioner of Income Tax (Appeals) [hereafter referred to as "CIT(A)"], the order passed by the AO was reversed. Thus, CIT(A), via order dated 10.09.2002, in effect, accepted the loss, as declared by the respondent/assessee in its ROI. 7.9 This resulted in the appellant/revenue approaching the Income Tax Appellate Tribunal [hereafter referred to as "Tribunal"] against the order dated 10.09.2002 passed by the CIT(A). The respondent/assessee lodged cross-objections with the Tribunal regarding the issue concerning sales tax subsidy. 7.10 The Tribunal, insofar as the issue pertaining to sales tax subsidy was concerned, restored the matter to the AO to examine whether the 1993 Scheme (under which incentives had been granted to the respondent/assessee) was similar to an earlier avatar of the scheme, i.e., 1979 Scheme, which was considered by its special bench of the Tribunal in the matter of DCIT v. Reliance Industries Ltd (2004) 88 ITD 273 (Mum) (SB). ....
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....rgy and Labour Department) under resolution No. IDL1093/(8889)IND-8 under the nomenclature "Dispersal of Industries -New Package Scheme of Incentives. 19931" Butibori falling in Nagpur Division is a group "D" area, where the quantum of sales tax incentives in accordance with para 5.1 (IS) would be 9 years or earlier, if the ceiling of 90% of fixed capital investment is reached in case of non-pioneer unit or 11 years or earlier if the ceiling of 110% of fixed capital investment is reached, in case the appellant is regarded as a pioneer unit. Thus if the appellant is otherwise eligible to sales tax incentive by way of exemption under the 1993 New Package Scheme of Incentive of Govt. of Maharashtra, the fact that the unit is at Butibori, a category "D" area as per classification, and the unit being setup up in 1995, the percentage of fixed capital investment as per the stipulation for a period of 9 to 11 year. Since the appellant has setup up its unit in 1995, it is otherwise covered for the tax incentive for the year under appeal. (iii) The Tribunal in the appellant's case for AY 1997-98 has set aside for verification the issue as regards applicability of the DCIT" Vs Re....
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....ness which implied that object of the incentive was to finance a part of the cost of setting up of the factory in the notified backward area. According to the Tribunal, the Scheme was for industrial development of the backward districts as well as generation of employment and hence there was direct nexus with investment in fixed capital assets. The sales tax incentive had been envisaged as an "alternative, to disbursement and by its very nature would be available to the assesses only after the production has commenced. The Special Bench, after appreciating the ratio of the previous decision in Reliance Industries case (IT Appeal No. 1418/1988 and 7544/89) held that the observation of the Tribunal in Bajaj Auto case (IT reference -No 49 and 11-01) (Born) of 1991) was not supported by any reason as to why it was felt that the earlier order of the Tribunal in Reliance Industries case referred only to the form of the Scheme and not their substance in para 108 of the order in Reliance Industries case, the Tribunal found that in Andhra Pradesh Scheme, the object was to stimulate rapid industrialization throughout the state, whereas under the Maharashtra Scheme, the aim was to disperse th....
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....basis for classification of areas under the 1993 scheme, and the 1983 scheme are identical. The effective steps to be taken for claiming approval under the 1993 scheme are similar to the one used in the 1983 scheme. The quantum of sales tax incentives under para 5.1 (1( (I) of the scheme 193, is directly linked to the amount of capital investment in the unit. The exemption under the package scheme of 1993 as in the 1983 scheme are therefore in direct production to the investment in fixed assets. I hold therefore that following the over ruling of the order in the case of Baja] Auto Ltd (IT reference No.49 and 1101 Bombay) of 1991 dated 31.12.2002) vide the special bench Bombay's order vs DCIT vs Reliance Industries Ltd 88 lTD 273 (mum) and the fact that the 1983 scheme of Govt of Maharashtra is identical in its application to those contained in the 1993 package scheme of incentives, the appellant is entitled to claim as capital receipt of the notional sales tax liability. The AD is directed to allow upon verification the quantum of notional sales tax liability computed at Rs. 77,89,99,7437- as per the CAs certificate. Subject to the verification above, the ground is all....
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....ferral and interest-free unsecured loans. (ii) The 1993 Scheme, thus, did not assist in setting up the industry but helped make the industrial units viable by increasing their working capital. [See paragraphs 3.1 and 3.3 of the 1993 Scheme]. (iii) The 1993 Scheme improved liquidity by providing sales tax incentives; it did not provide for any direct or indirect payment for setting up the industrial unit. The sole purpose of the 1993 Scheme was to alleviate hardship and handhold such industrial units. [See Sahney Steel & Press Works Ltd. v. Commissioner of Income Tax (1997)228 ITR 253 (SC)] (iv) The 1993 Scheme was not intended to contribute towards the capital outlay of the industrial unit. The sales tax subsidy provided to the respondent/assessee only assisted in carrying on business operations and, thus, was in the nature of a revenue receipt. [See Commissioner of Income Tax v. Rassi Cements Ltd. (2013) 351 ITR 169 (Andhra Pradesh); Wardex Pharmaceuticals (P.) Ltd. v. Assistant Commissioner of Income Tax (2008) 307 ITR 387 (Madras) and Commissioner of Income Tax v. Steel Authority of India Ltd. (2002) 257 ITR 241 (Delhi)] (v) Since the incentiv....
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.... Vohra emphasised that the court while ascertaining the nature of the sales tax subsidy received by an assessee, had to employ the "purpose test". 11.4 According to Mr Vohra, if the purpose is ascertained, which, under the 1993 Scheme, was to both disperse and attract industries to underdeveloped and developing areas of the State, the manner and the point at which the assessee received the sales tax subsidy was of little relevance. 11.5 In sum, the submission was that merely the fact that the sales tax subsidy under the 1993 Scheme was received based on the eligibility certificate issued after the commencement of the production would not render the receipt as one on capital account. 11.6 In support of his submission, Mr Vohra relied upon the following judgments: (i) Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) (ii) CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) (iii) CIT v. Chaphalkar Brothers [2018] 400 ITR 279 (SC) (iv) Shree Balaji Alloys v. CIT [2011] 333 ITR 335 (J&K) [approved in [2016] 287 CTR 459 (SC)] (v) DCIT v. Munjal Auto Industries Ltd. [2013] 218 Taxman 135 (Guj) [approved by Hon....
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....mination of the scheme, concluded that the incentives received by the assessee in that case were akin to an operational subsidy. In other words, the court concluded that the incentives/subsidies had to be treated as trade or supplementary trade receipts. Notably, a specific observation was made by the court concerning the refund of sales tax on the purchase of machinery, while repelling the argument made on behalf of the assessee that since a part of the refund was linked to a capital asset, it had to be necessarily treated as a capital receipt. 14.4 The observations made by the court in this context being significant and perhaps apposite in unravelling the predicament in which one can get caught while deciphering as to how the incentives received by the assessee in a given case should be treated, for convenience, are extracted hereafter: "18. Mr. Ganesh's further argument was that the three types of refunds contemplated in the scheme, the refund of sales tax on purchase of machinery must be treated as capital. The payment for the purchase of machineries must be of capital nature and the entire payment of sales tax must have been treated as capital expenditure of th....
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....e purpose test, has been applied in subsequent judgments rendered both by the Supreme Court as well as by various High Courts [See Ponni Sugars and Chemicals Ltd.; Chaphalkar Brothers and Nestle India Ltd.] 16. Therefore, what the court requires to examine while applying the purpose test to the incentive/subsidy received by an assessee are the following aspects: (i) First, does it assist in setting up an industry, as opposed to carrying out trade or business operations? (ii) Second, is the incentive/subsidy given to operate the industrial unit profitably and not for setting it up? (iii) Third, while employing the purpose test, the court is not concerned with the source, the timing or the mode and manner in which the subsidy is measured and paid. In other words, the quantification of the subsidy/incentive (whether it is linked to turnover or the cost of a capital asset) would not be a determinative factor in concluding the nature of the receipt. The purpose and the object with which the benefit/incentive/subsidy is extended would determine its character in the hands of the recipient, i.e., the assessee. 17. Against the backdrop of the aforesaid princ....
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....developing areas which fell outside the Bombay [now Mumbai]-Thane-Pune belt by incentivising the setting up of new and expanded units. 18. A closer look at the 1993 Scheme would show that the following incentives were envisaged as captured in paragraph 5 of the said scheme: "5. INCENTIVES The incentives under the 1993 Scheme will be admissible to a New Unit/Pioneer Unit/Prestigious Unit, and will be in the nature of- (i) Sales Tax Incentive by way of Exemption/Deferral/Interest-Free Unsecured Loan, (ii) Special Capital Incentive for SSI Units, (iii) Refund of Octroi/Entry Tax (in lieu of Octroi), (iv) Refund of Electricity Duty, (v) Concession in the Capital Cost of Power Supply, and (vi) Contribution towards the Cost of Feasibility Study." 19. Each of the incentives referred to above was made admissible to either one or more of the following units categorised as new/pioneer or prestigious. 19.1 A perusal of the definition of new unit/pioneer unit/prestigious unit would show that there is a common denominator: a brand-new unit had to be set up. The only difference was that insofar as the pioneer unit w....
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.... given to a "pioneer unit" which had undertaken expansion. 24. Therefore, the argument that the sales tax subsidy/incentive was granted to assist in carrying on business operations and thereby help make the industries more profitable, both on facts and in law is untenable. 25. At the risk of repetition, it must be stated that the sole purpose of the 1993 Scheme was to set up new units and/or expand existing units in underdeveloped and developing areas; an aspect which also emerges on perusal of classification of areas given in paragraph 1.3 of the 1993 Scheme. 25.1 In the categorisation, a clear distinction has been drawn between developed areas [Group A] and those where some development has taken place [Group B] or are less developed than those falling under Group B [Group C], those which are the least developed areas of the State not covered under Group A/Group B/Group C [Group D] and areas which are least developed lacking basic infrastructure and not covered under Group A, Group B, Group C and Group D [Group D+]. 26. The fact that the 1993 Scheme is different from the scheme which the Andhra Pradesh Government framed [which was considered in Sahney Steel] is evident....