2013 (10) TMI 600 - AT - Income Tax

Business income or capital gain - Sale of Sales Tax Exemption Entitlement - Incentive granted by Government for setting up a Wind-Mill Power Generation Unit - Whether the subsidy received by the assessee-company from the Government is taxable as revenue receipt or not - Held that - Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but as assistance after the industry commenced production - there is no dispute that the subsidies granted are revenue receipts and have been granted after setting up of the new industries and after commencement of production. Deduction u/s 80IA - The expression derived from occurring in section 80-IB of the Act in relation to the business of an industrial undertaking is narrower in connotation than the expression attributable to the business of an industrial activity - subsidy cannot be said to be derived from the industrial undertaking of the assessee - it can only be ancillary to the profits and gains relatable to or attributable to the business of the industrial undertaking and not in the category of profits and gains derived from its industrial activity - Following decision of Commissioner of Income-tax Versus Meghalaya Steels Ltd. 2010 (9) TMI 679 - GAUHATI HIGH COURT and Sahney Steel And Press Works Limited And Others Versus Commissioner of Income-Tax 1997 (9) TMI 3 - SUPREME Court - Decided against the assessee.

Summary

Issues Involved:
1. Taxability of the amount received on the sale of Sales Tax Exemption Entitlement.
2. Classification of the entitlement of sales tax exemption as a capital asset.
3. Eligibility for deduction under Section 80-IA of the Income Tax Act for the amount received from the sale of Sales Tax Exemption Entitlement.
4. Compliance with procedural requirements for claiming deduction under Section 80-IA(4) of the Income Tax Act.

Detailed Analysis:

1. Taxability of the amount received on the sale of Sales Tax Exemption Entitlement:
The primary issue is whether the amount of Rs. 46,66,665 received from the sale of Sales Tax Exemption Entitlement is chargeable to tax under Section 28(iv) of the Income Tax Act as a revenue receipt, or whether it should be considered a capital receipt and thus exempt from tax. The Tribunal referred to its earlier decision in the case of Rasiklal M. Dhariwal (HUF), where it was held that such receipts are of a revenue nature. The Tribunal emphasized the purpose of the sales tax benefit, which was to assist in the carrying on of business operations rather than to set up or expand the business. This aligns with the principles laid down by the Supreme Court in the cases of Sahney Steels and Ponni Sugars & Chemicals Ltd., where the character of the subsidy was determined based on the purpose for which it was granted. Consequently, the Tribunal upheld the lower authorities' decision to treat the amount as taxable revenue.

2. Classification of the entitlement of sales tax exemption as a capital asset:
The appellant argued that the sales tax exemption entitlement should be considered a capital asset, and any income from its sale should be taxed under the head 'capital gains'. However, the Tribunal dismissed this argument by relying on its earlier findings that the sales tax benefit was a revenue receipt. The Tribunal noted that the entitlement was granted to assist in the business operations rather than for acquiring a new asset or expanding the business. Therefore, the claim that the entitlement was a capital asset was not upheld.

3. Eligibility for deduction under Section 80-IA of the Income Tax Act:
The appellant contended that the receipt of Rs. 46,66,665 from the sale of sales tax exemption entitlement should be eligible for deduction under Section 80-IA of the Income Tax Act. The Tribunal referred to its previous decision in the appellant's case for A.Y. 2006-07, where it was held that such income could not be considered as "derived from" the business of power generation. The Tribunal cited the Supreme Court's judgment in Liberty India, which clarified that incentives like DEPB/duty drawback are not profits derived from the eligible business but are ancillary profits. As the immediate source of the sales tax benefit was the government scheme and not the business of power generation, the Tribunal concluded that the income was not eligible for deduction under Section 80-IA.

4. Compliance with procedural requirements for claiming deduction under Section 80-IA(4):
The appellant also argued that the deduction under Section 80-IA(4) was disallowed merely because the audit report in form 10CCB was not furnished. The Tribunal, however, did not find merit in this argument as it had already concluded that the income from the sale of sales tax exemption entitlement was not eligible for deduction under Section 80-IA. Therefore, the procedural compliance issue became redundant.

Conclusion:
The appeal was dismissed, and the Tribunal upheld the lower authorities' decisions on all grounds. The amount received from the sale of Sales Tax Exemption Entitlement was held to be taxable as revenue receipt, not a capital receipt. The entitlement was not considered a capital asset, and the income from its sale was not eligible for deduction under Section 80-IA of the Income Tax Act. Additionally, the procedural compliance issue regarding the audit report was deemed irrelevant in light of the substantive findings.