2010 (2) TMI 916 - AT - Income Tax

Capital or revenue receipt - Subsidy towards sales tax exemption - Notification No.1179 dated 31.03.1995 issued by the State Government of Uttar Pradesh - The exemption of sales tax was available from the date of first sale or the date within the period of six months from the date of production, whichever is earlier - assessee has been exempted from collecting the sales tax from customers on the sales made with effect from 27th March, 1998 - Held that - It is a undisputed fact that none of the clause of the Notification issued under section 4-A of Trade Tax Act, 1948 had authorised the assessee to collect sales tax/trade tax - Nowhere in the Notification has it been stated that exemption from sales tax/trade tax was provided for the setting up of the eligible unit - Since the assessee has collected the sales tax as part of dealer s price, the sales tax element will be trading receipt in the hands of the assessee Regarding loss on account of exchange fluctuation - Revenue or capital expenditure - Held that - Delhi High Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 2007 (4) TMI 118 - HIGH COURT , DELHI has held that the liability arising out of contracts had already stood accrued the minute the contract was entered into and the mere postponement of the payment of such liability to a future date would not extinguish the same so as to render it notional or contingent - It was also held that any increase in such liability as a result of fluctuation in the value of foreign currency in relation to Indian currency thus was a fate-accompli and such increase in liability as per the exchange rate prevailing on the last date of the financial year was allowable as deduction being not notional or contingent. Addition to total turnover of excise duty and sales tax for the purposes of computation of deduction under section 80-HHC - Held that - Respectfully following the case of CIT vs. Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME Court it is held that the excise duty and sales tax will not form part of total turnover for the purpose of deduction under section 880-HHC of the Act - accordingly set aside the order of the CIT (Appeals) and direct the assessing officer not to include excise duty and sales tax in total turnover - appeal filed by the assessee is partly allowed.

Issues Involved:
1. Non-acceptance of the amount of Rs.28,28,53,871/- as capital subsidy received towards Sales-tax exemption.
2. Disallowance of Rs.24,82,307/- being the loss on account of exchange fluctuation on revenue items.
3. Addition of excise duty and sales tax to total turnover for the purposes of computation of deduction under section 80-HHC of the Act.

Detailed Analysis:

Issue 1: Non-acceptance of the amount of Rs.28,28,53,871/- as capital subsidy received towards Sales-tax exemption
The assessee, engaged in manufacturing and sales of consumer goods, claimed a sales tax component as a capital receipt based on the ITAT, Mumbai Special Bench judgment. The assessing officer treated it as a revenue receipt, relying on decisions from the Bombay High Court, Calcutta High Court, and the Supreme Court. The officer concluded that the sales tax subsidy was for business operations, not for setting up the industry, and thus it was part of trading receipts. The CIT (Appeals) upheld this view, noting the subsidy was provided after the commencement of business and was linked to production and sales, not capital investment.

Before the Tribunal, the assessee argued the subsidy was for promoting industrial development and should be considered a capital receipt, citing the Supreme Court decision in Ponny Sugars. However, the Tribunal found that the sales tax collected as part of the dealer's price constituted trading receipts. The Tribunal referenced the Supreme Court's decision in Sinclair Murray and Co. P. Ltd. and the Allahabad High Court's decision in K. M. Sugar Mills Ltd., concluding the sales tax collected was a trading receipt.

Issue 2: Disallowance of Rs.24,82,307/- being the loss on account of exchange fluctuation on revenue items
The assessee claimed a loss on foreign exchange fluctuation on trading bills, which the assessing officer treated as contingent and notional. The CIT (Appeals) upheld this view based on a previous year's decision. However, the Tribunal found the issue covered by the Delhi High Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., which held that liability arising from contracts accrues when the contract is entered into. The Tribunal allowed the foreign exchange fluctuation loss as a revenue expenditure, following precedents from earlier assessment years and the Supreme Court's affirmation in Woodward Governor.

Issue 3: Addition of excise duty and sales tax to total turnover for the purposes of computation of deduction under section 80-HHC of the Act
The assessing officer included excise duty and sales tax in the total turnover, reducing the deduction under section 80-HHC. The CIT (Appeals) upheld this inclusion. The Tribunal, however, referred to the Supreme Court's decision in CIT vs. Lakshmi Machine Works, which held that excise duty and sales tax do not form part of turnover for section 80-HHC purposes. The Tribunal directed the assessing officer to exclude excise duty and sales tax from the total turnover for the deduction calculation.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the treatment of sales tax subsidy as revenue receipt, allowed the foreign exchange fluctuation loss as a revenue expenditure, and excluded excise duty and sales tax from the total turnover for section 80-HHC deduction purposes.

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