Sales Tax Subsidy/Incentive Is Capital Receipt: Delhi HC [Read Order]

The Delhi High Court has held that sales tax subsidy/incentive is a capital receipt and upheld the order of the Income Tax Appellate Tribunal ( ITAT ). The argument advanced on behalf of the appellant/revenue that a perusal of the 1993 Scheme would show that the incentives were tied in with production is untenable.

The central issue that arose was the nature of the benefit received by M/s Indo Rama Textiles Ltd, the respondent/assessee. The benefit which the respondent/assessee has obtained from the Government of Maharashtra, in the AYs in issue, is a sales tax subsidy in the manner and form prescribed under the scheme titled “Dispersal of Industries Package of Incentives, 1993” [ 1993 Scheme ]. 

The moot point that arises for consideration is whether the sales tax subsidy received by the respondent/assessee is a capital receipt or, as contended by the appellant/revenue, a revenue receipt.

The Government of Maharashtra notified the 1993 Scheme referred to Resolution dated 07.05.1993. It appeared that the Government of Maharashtra, to achieve the dispersal of industries outside the Bombay [ now Mumbai ]-Thane-Pune belt and to incentivise the setting up of new and expanded units in underdeveloped and developing areas had in 1964, forged a scheme titled “Package Scheme of Incentives”. 

The Package Scheme of Incentives introduced in 1964 changed from time to time. The 1993 Scheme we are concerned with is rooted in the Package Scheme of Incentives put in place by the Government of Maharashtra, as indicated above, in 1964.

The respondent/assessee was issued two eligibility certificates dated 13.12.1994 and 15.10.1996 by the designated authority, i.e., the State Industrial and Investment Corporation of Maharashtra Limited [ SICOM ].

The respondent/assessee filed its Return of Income [ ROI ] for AY 1997-98, wherein it declared a loss amounting to Rs.205,02,97,503/-. The respondent/assessee was subjected to scrutiny 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/-. The Commissioner of Income Tax ( Appeals ) [ CIT(A) ] accepted the loss, as declared by the respondent/assessee in its ROI.

The appellant/revenue approaching the Income Tax Appellate Tribunal [ ITAT ] against the order passed by the CIT(A). The respondent/assessee lodged cross-objections with the Tribunal regarding the issue concerning sales tax subsidy. 

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.

The argument advanced on behalf of the appellant/revenue that a perusal of the 1993 Scheme would show that the incentives were tied in with production is untenable. The complete focus of the 1993 scheme was to achieve the object, as noticed above, engrafted in its preamble.

A division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the respondent/assessee was entitled to avail of sales tax subsidy/incentive under two eligibility certificates [ as amended ] for 14 years and 13 years & 11 months, respectively, subject to a maximum entitlement of 110% of capital investment made in setting up of the industrial units. 

A perusal of the eligibility certificate dated 13.12.1994 showed that it was issued for setting up a “new unit”, while the eligibility certificate dated 15.10.1996 was given to a "pioneer unit" that had undertaken expansion.

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 in fact and in law is untenable.

The court noted that there was no provision in the scheme that financial assistance would be given to invest in a fixed asset or establish a new unit. Given these peculiarities, the court concluded that the financial assistance obtained by an assessee would have to be treated as a revenue receipt.

The Court held that the sales tax subsidy/incentive received by the respondent/assessee under the 1993 Scheme was a capital receipt and upheld the order of ITAT. 

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