TaxTMI 
TaxTMI 
2025 (7) TMI 323
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....ion, or on revenue account, liable for taxation. The State Government had introduced schemes from time to time for encouraging setting up of industries in specified backward areas of the State, by providing sales tax incentives. In Income Tax Appeal No. 156 of 2003 filed by the Revenue, the Income Tax Appellate Tribunal (ITAT) has treated the amount received towards such incentive to be capital receipt, exempt from taxation, whereas in Income Tax Appeal No. 505 of 2003 filed by the Assessee, the amount forming part of similar incentive is treated as revenue receipt, liable for taxation. 2. Income Tax Appeal NO. 156 of 2003 is filed by the Revenue challenging judgment and order dated 25 July 2002 passed by the ITAT allowing the Appeal preferred by the Assessee-Reliance Industries Ltd. relating to Assessment Year 1985-86 and setting aside the assessment order by directing the Assessing Officer to treat the amount received under sales tax incentive scheme as capital receipt in the hands of the Assessee and to exclude the same from the title 'income chargeable to tax'. 3. Income Tax Appeal No. 505 of 2003 is filed by the Assessee-Bajaj Auto Ltd. challenging the judgment and order....
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.... (ii) Alternatively, whether on the facts and in the circumstances of the case and in law, the ITAT was justified in not treating the notional salestax liability, determined as per the Sales-tax Assessment Order dated 20-2-1988 as liability under the Sales-tax Act, which is deemed to have been paid by the Appellant within the meaning of Section 43B of the Income-tax Act? 6. For the reasons discussed in the latter part of the judgment, Question Nos 1,2 and 4 in Appeal No. 156 of 2003 need no determination and therefore the only issue that survives for determination in both the Appeals is about treatment of sales tax incentive as capital receipt exempt from taxation or revenue receipt liable for taxation. Since both the Appeals essentially involve same question of law, they are accordingly taken up for hearing and decision together. C. FACTS IN APPEAL NO. 156 OF 2003: 7. The Appeal arises out of Return of Income filed by the Assessee-Reliance Industries Ltd. for the assessment year 1985-86. The Assessee is engaged in the business of manufacturing synthetic fabrics from plain, crimped, twisted and worsted yarns. The Assessee used to operate manufacturing units at Sidhpur....
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....ssessee filed its Return of Income for the assessment year 1987-88 declaring total income as Rs. 45,26,94,700/-. The accounting year for the assessment year 1987-88 has ended on 30 June 1986. During the previous year, the Assessee had started a new unit at Waluj, Aurangabad, which was notified as backward area. The Government of Maharashtra introduced the scheme on 4 May 1983 under which an option for sales tax exemption or deferral of sales tax for a period of five years was available. The Assessee obtained eligibility certificate for sales-tax exemption for a period of three years commencing from 1 February 1986. The sales-tax incentive under the said scheme amounted to Rs. 3,56,43,643/- as determined by the assessment order dated 20 February 1988. During the process of assessment proceedings, Assessee claimed that the amount of sales tax incentives amounting to Rs. 3,56,43,643/- should be regarded as capital receipt not liable to tax since the said incentive was received for promotion of industries in backward area. Since the Assessing Officer rejected the said claim of Assessee by order dated 31 January 1990 and treated the same as revenue receipt liable to tax and since the As....
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.... any incentive provided for production by the Assessee would necessarily form part of the revenue receipt. (f) There is no material on record to infer that the incentive under the scheme was provided for incurring of capital expenditure for establishment of the manufacturing units. (g) Sales-tax became liable for payment only on production and sale of the products and since the sale of products is incentivized, the incentive was making the business profitable rather than aiding the Assessee in setting up any industrial unit. (h) Incentivisation of sales-tax has resulted in the Assessee earning higher amount of profits and the amount of sales-tax collected from the customers is retained by the Assessee. That therefore the amount received under the sales-tax incentive scheme needs to be treated as revenue receipt. (i) That the Tribunal has passed contradictory orders by holding in the case of Bajaj Auto Limited that the sales-tax incentive is revenue receipt while holding in the case of Reliance Industries Ltd. that the sales-tax incentive would form capital receipt. (j) Relying on judgment of Calcutta High Court in Commissioner of Income-....
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....Textiles Ltd. 158 taxmann.com 685 and has concluded that the amount of subsidy received by the Assessee under the scheme is for the purpose of setting up a new unit and therefore should be treated as capital receipt not chargeable to tax. 13. Mr. Pardiwalla, the learned senior advocate appearing for the Assessee-Bajaj Auto in support of Appeal No. 505 of 2003 has canvassed following broad submissions:- a) That the incentive under the sales tax scheme introduced by the State Government has been received by the Assessee for setting up of industry in the backward area; b) That the incentive is not towards production activity undertaken by the Assessee. c) That instead of paying cash amount towards the subsidy, the scheme envisaged adjustment of the incentive amount in the sales tax payable on commencement of production. d) That what needs to be applied is the 'purpose test' as held by the Apex Court in Sahney Steel & Press Works Ltd.(supra). e) That the purpose of grant of incentive was not to enable the Assessee to earn higher profits but the purpose was to incentivise the Assessee for setting up the industry in notified backward area. ....
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.... really arise in the present appeal. The ITAT has categorically held that Section 37(4) of the Act has been attracted and it is not held that maintenance and depreciation will not be covered within Section 37(4) of the Act. Therefore, Question No. 4 does not arise for consideration in the appeal and the same is erroneously framed. Question No. 4 therefore need not be answered. 21. This is how only Question No.3 relating to amount of sales tax incentive as capital receipt or revenue receipt remains to be answered in Income Tax Appeal No. 156 of 2003 filed by Revenue. The two questions of law framed while admitting the Assessee's Income Tax Appeal No. 505 of 2003 also relate to the same issue of treatment of sales tax incentive as capital or revenue receipt. 22. Therefore, the only common issue that needs to be decided in these two Appeals is about treatment of the sales tax incentive paid to the Assessees under the State Government Scheme either as capital receipt or revenue receipt. The issue is essentially linked to the exact character of the incentive subsidy offered by the State Government, decision of which would be the determinative factor for deciding whether the incent....
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....hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co. case [16 TC 333], the monies must be treated as to have been received for capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. (emphasis and underlining added) 24. The Apex Court thus held in Sahney Steel & Press Works Ltd. that if the Assessee was given refund of sales tax on purchase of machinery as well as raw material to enable it to acquire new plant and machinery for further expansion of its manufacturing capacity in the backward area, the entire subsidy must be held to be capital receipt. It further held that if monies are given to the Assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon the commencement of such production, such subsidy must be ....
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....ion is : what is the character of the incentive subsidy under the said Schemes? 28. The Apex Court thereafter referred to the judgment in Sahney Steel & Press Works Ltd. (supra) and held in paragraphs 13, 14, 15, 16 and 17 as under: 13. The main controversy arises in these cases because of the reason that the incentives were given through the mechanism of price differential and the duty differential. According to the Department, price and costs are essential items that are basic to the profit-making process and that any price-related mechanism would normally be presumed to be revenue in nature. In other words, according to the Department, since incentives were given through price and duty differentials, the character of the impugned incentive in this case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. 14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in Sahney Steel and Press Works Ltd. [(1997) 7 SCC 764 : (1997) 228 ITR 253] In that case, on beh....
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....d in this case is that the incentive must be utilised 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 revenue account. On the other hand, if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 15. In the decision of the House of Lords in Seaham Harbour Dock Co. v. Crook [(1931) 16 TC 333] Harbour Dock Co. had applied for grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed; the payments were made several times for some years. Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The ma....
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....ncentive subsidy we are satisfied that such payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. Accordingly, the first question is answered in favour of the assessee and against the Department. (emphasis and underlining added) 29. Thus in CIT vs. Ponni Sugars & Chemicals Ltd. (supra), the Apex Court has explained the ratio of the judgment in Sahney Steel & Press Works Ltd. (supra) by holding that the judgment lays down the basic test to be applied in judging the character of subsidy and holding that the real test is character of the receipt in the hands of the Assessee which has to be determined with respect to the 'purpose' for which the subsidy is given. The Apex Court thereafter held that one has to apply the "purpose test" and the point at which the subsidy is paid becomes irrelevant and the source is also immaterial. It is also held that the form of subsidy is also immaterial. It is held that if the object of the subsidy scheme was to enable the Assessee to run the business more profitably, then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was....
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.... concept of a complete family entertainment centre, more popularly known as multiplex theatre complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need government support in the form of incentives qua entertainment duty. It was also added that the Government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to multiplex theatre complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct multiplex theatre complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centres. This being the case, it is difficult to accept Mr Narasimha's argument that it is only the immediate object and not the larger objec....
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....r actual sale of cinema tickets, the said mechanism made no difference as the purpose still remained the same viz. promotion of construction of new multiplexes. The Apex Court thus held that mere form in which the incentive under the scheme is to be ultimately paid becomes irrelevant once the objective of the scheme is to industrialize the State. F.2 PRINCIPLES DEDUCIBLE 32. After considering the ratio of judgments in Sahney Steel & Press Works Ltd., CIT vs. Ponni Sugars & Chemicals Ltd. and CIT vs. Chaphalkar Brothers following principles are deducible: (i) While determining the nature of receipt under a particular incentive subsidy scheme, what needs to be applied is "purpose test" i.e. to determine the purpose for which the incentive is offered; (ii) If the incentive is offered for the purpose of setting up of new industrial unit or for expansion of existing unit, the receipt of incentive would be on account of capital. On the other hand, if the incentive is given for enabling the Assessee to run business more profitably, then the receipt would be on revenue account; (iii) Since purpose of incentive scheme is the determinative factor, the form or....
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.... by way of exemption from payment of sales tax, whereas incentive in Part II was in the form of interest free unsecured loan repayable after 12 years. The incentive in Part I was available only to a new area, which could include a new pioneer unit. The period of eligibility was differently fixed under Part I scheme for small, medium and large scale units. 35. Reliance Textiles Industries Ltd. made an application on 16 December 1980 stating that it did not have any industrial unit in Maharashtra and that it was proposing to set up a new unit at Patalganga Industrial Area for manufacture of polyester filament yarn. It represented that it had spent Rs.1.40 crores on acquisition of land and its total investment towards fixed assets for the project was in the range of Rs.1.50 crores. The expected date of commencement of production was indicated as 31 March 1983. The aggregate cost of the project was estimated at Rs. 66.21 crores. The implementing agency (SIICOM) issued Letter of Intent to the Assessee on 27 January 1981 showing willingness to issue eligibility certificate under Part I of the 1979 Scheme. SIICOM issued Eligibility Certificate dated 6 June 1983 to the Assessee under Pa....
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.... were introduced to promote industrialisation in backward areas in Maharashtra State with a view to decongest the industrial belt of Mumbai-Thane-Pune. The Schemes were aimed that promoting setting up of new industries in other areas of the State. An entity setting up a new industrial unit in developing areas were provided incentive in the form of sales tax subsidy under both the schemes. The eligibility of an industrial unit was determined based on the value of fixed capital investment made for setting up of the concerned unit. However instead of actual payment of incentive by the Government to the Assessees, the scheme provided for adjustment of amount of such incentive against the liability of the Assessee to pay the sales tax to the Government after commencement of the production. 39. In our view therefore, the incentives/subsidy granted by the State Government under both the 1979 as well as 1983 Schemes were for the purpose of setting up of new industrial units. The incentive/subsidy was not granted for the purpose of enabling the Assessees to run the business more profitably. After applying the "purpose test" it is clear that the incentive provided to the Assessee under bo....
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.... Court held that the purpose of grant of incentive under the scheme was to promote setting up of new units or expansion of existing units, as the amount of subsidy was compulsorily required to be utilised only for repayment of term loans availed for setting up of a new units. In the present cases as well, mere grant of incentive by adjusting the same against Assessee's sales tax liability upon commencement of production, did not alter the purpose of the Scheme. In our view, the issue involved in the present Appeals is squarely answered by the judgments of the Apex Court in CIT vs. Ponni Sugars & Chemicals Ltd. and CIT vs. Chaphalkar Brothers. 42. The Delhi High Court had the occasion of considering the issue of treatment of sales tax subsidy receipt under the 1993 Scheme introduced by the Government of Maharashtra in CIT IV vs. M/s. Indo Rama Textiles Ltd. (supra). The Division Bench of Delhi High Court rejected the contention of the Revenue that the sales tax subsidy/incentive was granted to assist the Assessee in carrying of the business/operations or to make the industry more profitable. The Division Bench held in paragraphs 24 and 25 as under:- 24. Therefore, the ar....
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....y as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area. 44. The Division Bench of this Court upheld the above findings in CIT-3 Mumbai vs. Reliance Industries Limited [2011] 339 ITR 632 (Bombay) holding that object of the subsidy was to set up new unit in backward areas to generate employment and that therefore the subsidy was clearly on capital account. Therefore, substantial question of law on this issue was not framed by the Division Bench while admitting the Appeal on other questions of law. It is contended by the Revenue that in Special Leave Petition filed by the Revenue challenging order of the Division Bench, the Appeal has been remanded for deciding framing of question of law on the above issue and the matter is pending. We need not delve deeper into this aspect as we are convinced after consideration of ratio of various ju....