2003 (4) TMI 496 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of sales-tax subsidy received by the assessee.
2. Applicability of the Supreme Court's ruling in Sahney Steel & Press Work Ltd. case.

Issue-wise Detailed Analysis:

1. Taxability of Sales-Tax Subsidy:
The primary issue in this appeal is whether the sales-tax subsidy received by the assessee is liable to tax. The assessee, a partnership firm operating a Rice Mill, received a special package of incentives from the State Government, which included investment subsidy, interest subsidy, and sales-tax subsidy. The Assessing Officer treated the reimbursement of sales tax of Rs. 50,000 as a revenue receipt and taxed it accordingly. However, the Commissioner of Income-tax (Appeals) [CIT(A)] held that the reimbursement of sales tax is a capital receipt and deleted the addition.

2. Applicability of Supreme Court's Ruling in Sahney Steel & Press Work Ltd. Case:
The Revenue argued that the issue is covered in its favor by the Supreme Court's judgment in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC). The Departmental Representative contended that the subsidy received should be treated as revenue in character since the assessee did not reduce the subsidy amount from the value of its capital assets and continued to claim depreciation on the cost before reducing the subsidy.

The assessee, on the other hand, argued that the CIT(A) was correct in treating the subsidy as a capital subsidy. The assessee also relied on the same Supreme Court judgment, emphasizing that the purpose of the subsidy was to encourage Scheduled Caste and Scheduled Tribe entrepreneurs to set up new industries, which should be considered a capital purpose.

Analysis and Findings:
Upon reviewing the facts, the Tribunal examined the Government Order (G.O.Ms. No. 194 dated 24-4-1989) and related proceedings, which outlined the special package of incentives for Scheduled Tribe Entrepreneurs. The Tribunal noted that the incentives were granted for "setting up of industries" by certain categories of entrepreneurs.

The Tribunal referred to the Supreme Court's judgment in Sahney Steel & Press Works Ltd., which established that the character of the subsidy in the hands of the recipient-whether revenue or capital-depends on the purpose for which it is given. If the purpose is to help the assessee set up its business or complete a project, the subsidy is considered capital. Conversely, if the subsidy is given to assist in carrying out business operations and is conditional upon the commencement of production, it is treated as revenue.

Applying this test, the Tribunal concluded that the special package of incentives provided by the State Government was intended to help set up industries and, therefore, should be treated as capital in nature. Consequently, the Tribunal upheld the CIT(A)'s order, confirming that the sales-tax subsidy received by the assessee is not liable to tax as a revenue receipt.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the sales-tax subsidy received by the assessee is a capital receipt and not taxable as revenue. The Tribunal's decision was based on the purpose of the subsidy as outlined in the Government Order and the principles established by the Supreme Court in Sahney Steel & Press Works Ltd.