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2016 (7) TMI 1329 - HC - Income TaxSales tax collected but not paid to the State Government - taxable revenue receipt OR capital receipt - Held that - The Scheme is oriented towards and was subservient to the investment in fixed capital assets. The sales tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature, was to be available only after production had commenced. Thus, in effect, the subsidy in the form of sales tax incentive was not given to the assessee for assisting it in carrying out the business operations but, to encourage the setting up of industries in the backward area. In our opinion, the judgment rendered by the Bombay High Court in CIT v. Reliance Industries Ltd. (2009 (4) TMI 516 - Bombay High Court ) would govern the issue on hand. Since the object of the subsidy in the form of sales tax incentive was to set up a new unit in a backward area so that employment could be generated, it is a capital receipt and not revenue receipt. Hence, the Revenue authorities committed serious error in holding it as revenue receipt. - Decided in favour of assessee.
Issues:
Challenge to the order treating sales tax collected but not paid to the State Government as a taxable revenue receipt instead of a capital receipt. Detailed Analysis: 1. Background and Petitioner's Claim: The petitioner, a public limited company, invested in a new industrial unit under a State Government scheme and was entitled to recover a subsidy by retaining sales tax. The Assessing Officer treated this receipt as a revenue receipt, leading to the petitioner's grievance and subsequent petition under Article 226 of the Constitution. 2. Petitioner's Arguments: The petitioner argued that the sales tax receipt was a subsidy from the State Government to encourage industrial development in backward areas, making it a capital receipt. Citing relevant case law, including decisions from the Bombay High Court and previous judgments by the Gujarat High Court, the petitioner contended that the purpose of the subsidy determines its nature as revenue or capital. 3. Revenue's Counter-Arguments: The Revenue contended that the petitioner's non-compliance with statutory requirements indicated a revenue, not a capital, nature of the receipt. They highlighted the timing of incentives being available post-production and inconsistencies in the petitioner's claims before tax authorities to support their stance. 4. Court's Analysis and Decision: The Court examined the scheme under which the petitioner operated, emphasizing that the subsidy was linked to fixed capital investments and aimed at promoting industrial setup in backward areas. Relying on the Bombay High Court's precedent, the Court concluded that since the subsidy was intended to facilitate the establishment of new units for employment generation, it qualified as a capital receipt, contrary to the Revenue's classification as a revenue receipt. Consequently, the impugned order was set aside, and the subsidy was recognized as a non-taxable capital receipt. 5. Final Judgment: The Court allowed the petition, quashed the order treating the subsidy as a taxable revenue receipt, and affirmed that the sales tax incentive constituted a capital receipt. The petition was disposed of accordingly, with the rule being made absolute in favor of the petitioner.
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