2015 (6) TMI 1195 - AT - Income Tax

Characterization of income - Sales Tax subsidy receipt - revenue receipt or capital receipt - HELD THAT - Unit of assessee was set up as per scheme formulated by Government of West Bengal and assessee has been allowed remission of sales tax for 12 years upto 100% of gross fixed capital investment/asset of the approved project. The incentive scheme was available for location of the unit. No incentive is available to units located in group A . The unit of assessee is located in group B (Hooghly). The subsidy would help the growth of industry and not to supplement profit. Subsidy is determined with reference to the fixed capital investment/asset and not profit. No working capital is considered in the scheme. The ld. DR says that the subsidy is given for 12 years after production and as such it is revenue in nature. The arguments of ld. DR cannot be accepted in view of the above facts because the scheme is made to encourage the promotion of industries/setting up in the State of West Bengal. The incentives are provided to approved projects only. The purpose of giving subsidy is thus, to promote and set up industries in State of West Bengal. The object/purpose of assistance under the subsidy scheme was to enable the assessee to set up new unit in State of West Bengal. Therefore, the receipt of the sales tax subsidy in the hands of assessee was capital in nature. The decisions relied on by ld. DR would not support the case of the revenue. Considering case of Ponni Sugars Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT and sales tax subsidy received by the assessee is capital receipt in nature and are not subjected to tax. The additions made by the AO on account of receipt of sales tax subsidy are accordingly deleted in all the assessment years in appeals. - Decided in favour of the assessee

Summary

Issues Involved:
1. Whether Sales Tax subsidy is a revenue receipt or capital receipt.

Issue-wise Detailed Analysis:

1. Whether Sales Tax subsidy is a revenue receipt or capital receipt:

The core issue in the appeals was to determine the nature of the Sales Tax subsidy received by the assessee-whether it should be classified as a revenue receipt or a capital receipt. The Tribunal had previously ruled that the Sales Tax subsidy was a revenue receipt, setting aside the orders of the CIT(A) for the assessment years 2003-04 and 2004-05 and restoring the Assessing Officer's order.

The assessees appealed to the Punjab & Haryana High Court, which remanded the matter back to the Tribunal to adjudicate the nature and purpose of the Sales Tax subsidy, referencing the Supreme Court's judgment in CIT Vs Ponni Sugars & Chemicals Ltd. The High Court directed the Tribunal to determine whether the subsidy was a capital or revenue receipt based on its nature and purpose.

The Tribunal reviewed the West Bengal Incentive Scheme, 1999, applicable to the assessees, which linked the subsidy to the setting up of industrial units in West Bengal. The scheme's objective was to promote industrial growth, and the subsidy was calculated based on fixed capital investment, not to supplement profits. The Tribunal noted that the eligibility certificate issued to the assessee confirmed the subsidy was for remission of Sales Tax on finished goods and exemption on raw materials for 12 years, linked to 100% of the fixed capital investment.

The Tribunal referred to the Supreme Court's judgment in Ponni Sugars & Chemicals Ltd., which emphasized the "purpose test" to determine the nature of the subsidy. If the subsidy aimed to enable the assessee to set up a new unit or expand an existing one, it would be considered a capital receipt. The Tribunal also considered other judicial precedents, including decisions by the Punjab & Haryana High Court and the Calcutta High Court, which supported the view that subsidies linked to capital investments for setting up or expanding units are capital receipts.

The Tribunal concluded that the Sales Tax subsidy received by the assessees under the West Bengal Incentive Scheme, 1999, was a capital receipt. The subsidy was intended to promote industrial growth in West Bengal, linked to fixed capital investments, and not to supplement the assessees' profits. The Tribunal ruled in favor of the assessees, deleting the additions made by the Assessing Officer on account of the Sales Tax subsidy and holding that the subsidy was not subject to tax.

In summary, the Tribunal determined that the Sales Tax subsidy received by the assessees was a capital receipt, based on the nature and purpose of the subsidy as outlined in the West Bengal Incentive Scheme, 1999, and supported by judicial precedents. The departmental appeals were dismissed, and the appeals of the assessees were allowed.

Order pronounced in the Open Court on 16th June, 2015.