Sales Tax Subsidy under Backward Area Development Scheme Classified as Capital Receipt: ITAT Excludes Computation u/s. 115JB [Read Order]

The Appellant, Nirma Limited, engaged in the manufacture of consumer and industrial products, received a subsidy of ₹7,22,34,860 from the Gujarat Government for its Kala Talav Unit in Bhavnagar. The subsidy was granted under the Backward Area Development Scheme designed to promote industrialization in less-developed regions. While filing its return for Assessment Year 2015–16, the company claimed the subsidy as a capital receipt not chargeable to tax.

The Assessing Officer (AO) rejected the claim, treating it as revenue in nature on the ground that the incentive was linked to sales and purchases rather than investment. The AO further noted that the amount was not reflected in the books but only claimed in computation, which in his view reduced taxable income while escaping inclusion in profits.

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On appeal, the Commissioner of Income Tax (Appeals) [ CIT(A) ] disagreed with the AO’s view, observing that the purpose of the scheme was to encourage industrialisation in backward regions and that sales tax exemption was merely the modality of incentive.

The CIT(A) relied on the Gujarat High Court ruling in Nirma’s case (Tax Appeal No. 226 of 2010), and the Supreme Court judgment in CIT v. Chaphalkar Brothers (2017) to hold that the subsidy was capital in nature. The appellate authority accordingly directed deletion of the addition made by the AO.

Appearing for the Appellant, Bandish Soparkar and Hemanshu Shah argued that the incentive was linked to capital investment rather than operational revenue, and therefore should be treated as a capital receipt. It was reiterated that the issue stood covered by its own cases in earlier years and by binding judicial precedents, including the Supreme Court ruling in CIT v. Ponni Sugars & Chemicals Ltd. (2008), which laid down the “purpose test” for determining the nature of a subsidy.

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Appearing for the Revenue Authorities, Alpesh Parmar contended that the subsidy was linked to sales and purchases and therefore had the character of a revenue receipt. It was further argued that the amount should be included in the computation of book profits under Section 115JB.

The Bench, consisting of Judicial Member, Sanjay Garg and Accountant Member, Makarand V. Mahadeokar, ruled that the object of the subsidy scheme was to encourage capital investment and industrial growth in backward areas, making the receipt capital in nature. The Bench noted that this view had been consistently accepted in earlier assessments of the company and upheld by both the Gujarat High Court and the Supreme Court.

The Bench also directed exclusion of the subsidy from book profits under Section 115JB, observing that the adjustments prescribed under Explanation 1 to Section 115JB are exhaustive and do not permit inclusion of capital receipts. Since capital receipts not chargeable under the Act are not among the specified additions, they cannot be brought to tax in book profits through MAT provisions.

Accordingly, the order of the CIT(A) was upheld and deletion of the addition of ₹7.22 crore was confirmed.

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