2013 (7) TMI 655 - HC - Income Tax

Nature of Incentive from government scheme - Capital receipt or revenue receipt - Tribunal held incentive as capital receipt - Held that - said Scheme, it can be immediately noticed that the scheme was framed as a part of Governments initiative to encourage modernization of existing industries in under-developed areas. The main purpose of the scheme was to accelerate the industrial development and to disperse industries to under-developed areas as well as to provide additional employment - It can thus be straightaway seen that the benefit, though computed in terms of the Sales Tax liability in the hands of the recipient, the same was not mean to give any benefit on day-to-day functioning of the business, or for making the industry more profitable. The principle aim of the scheme was to cover the capital outlay already made by the assessee in undertaking special modernization of its existing industry - The source of fund is quite immaterial. If the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes - Following decision of Sahney Steel and Press Works Limited & Ors. vs. Commissioner of Income Tax 1997 (9) TMI 3 - SUPREME Court - Decided against Revenue.

Summary

Issues Involved:
1. Nature of Sales Tax Exemption: Capital Receipt vs. Revenue Receipt.

Detailed Analysis:

Nature of Sales Tax Exemption: Capital Receipt vs. Revenue Receipt

The primary issue in this case was whether the Sales Tax exemption of Rs. 3,09,40,235 granted to the assessee by the State Government was a capital receipt not chargeable to tax or a revenue receipt. The respondent-assessee received incentives under the Government of Gujarat's Sales Tax Waiver/Deferment scheme for the assessment year 1991-92. The assessee argued that these incentives were capital receipts, while the Assessing Officer considered them revenue in nature.

The CIT (A) reversed the Assessing Officer's decision, holding that the incentives were for promoting capital investment and industrial development, thus qualifying as capital receipts. This decision was based on the Supreme Court's ruling in CIT v. Ponni Sugars & Chemicals Limited, which emphasized the purpose of the subsidy in determining its nature.

The Tribunal upheld the CIT (A)'s decision, relying on the case of Ajanta Manufacturing Limited v. CIT, despite the Revenue's appeal against this decision being admitted by the High Court. The Tribunal noted that the incentive scheme in Ajanta Manufacturing Limited was different, as it was related to the Kutch region's post-earthquake rehabilitation.

The High Court applied the principles from the Supreme Court's decisions in Sahney Steel and Press Works Limited & Ors. vs. Commissioner of Income Tax and Ponni Sugars & Chemicals Limited. These rulings established that the nature of a subsidy (capital or revenue) depends on the purpose for which it is given. If the subsidy assists in setting up or expanding a business, it is a capital receipt; if it aids in running the business, it is a revenue receipt.

The incentive scheme in question aimed to encourage modernization of existing industries in under-developed areas, promoting industrial development and employment. The scheme required substantial new investments in modernization, defined as adopting new processes and machinery, leading to increased production capacity and reduced pollution. The incentives were linked to fixed capital investment and were not intended to support day-to-day business operations.

The High Court concluded that the incentives, though computed based on Sales Tax liability, were meant to cover the capital outlay for modernization. Therefore, the incentives were capital receipts, not revenue receipts. The Tribunal's decision was upheld, and the Revenue's appeals were dismissed, affirming that no question of law arose in this context.