2015 (11) TMI 1882 - AT - Income Tax

Nature of receipt - Addition towards Sales Tax Incentive Scheme - Whether as per the Scheme, the assessee need not collect and pay any Sales Tax during the specified period, and allowing deduction towards notional tax liability tantamount to wrong deduction? - HELD THAT - An investment in the initial fixed capital was made at Rs.283.01 lacs. An application was made to the District Industries Centre for issue of eligibility certificate for exemption from payment of sales tax under 1990 Scheme. The appellant was granted the eligibility certificate on 09-06-2000. As per the said eligibility certificate; the assessee was entitled for exemption from payment of sales tax up to Rs.254.70 lacs for a period of ten years from 15th July, 2000 to 14th July, 2010. Later on, further investment was enhanced and accordingly renewed eligibility certificate was granted. We have also considered the object of 1993 Scheme and the main feature was to grant incentive to the industries established in the backward areas for development of under-developed region of Maharastra State. We have also examined the legal aspect whether the subsidy in question is capital in nature or revenue in nature. After going through the decisions cited before us and few of them already discussed by the learned CIT (A), we are of the considered opinion that the issue is squarely covered by those decisions especially by the decision of Reliance Industries Ltd. 2003 (10) TMI 255 - ITAT BOMBAY-J - We are not discussing all the decision delivered on this issue although discussed during the course of hearing. Assessee company was justified in claiming the sales tax incentives as exempt and not to be taken into account in computing the taxable income. The view taken by the CIT (A) is accordingly confirmed. The ground of appeal raised by the Revenue is dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in directing the deletion of the addition of Rs.97,47,804/- towards the Sales Tax Incentive Scheme.
2. Whether the sales tax incentives should be treated as capital receipts or revenue income.

Issue-wise Detailed Analysis:

1. Deletion of Addition towards Sales Tax Incentive Scheme:
The Revenue's primary contention was that the CIT(A) erred in deleting the addition of Rs.97,47,804/- towards the Sales Tax Incentive Scheme. The Revenue argued that as per the scheme, the assessee need not collect and pay any sales tax during the specified period, and allowing a deduction towards notional tax liability amounted to a wrong deduction.

The facts revealed that the assessee, a domestic company engaged in manufacturing detonators and related products, claimed an exemption of Rs.97,47,804/- under the PSI 1993 Scheme of the Government of Maharashtra. The assessee argued that these sales tax incentives, which were not repayable, represented incentives related to the cost of the project and should be treated as capital receipts. The AO, however, rejected this claim, stating that the sales tax component should not be deducted from the profit as it would amount to double deduction, i.e., no sales tax payment to the state and a reduction of an equivalent amount from the profit offered for income tax.

The CIT(A) granted relief to the assessee by referencing the decision of the ITAT Mumbai Special Bench in the case of Reliance Industries Ltd., which held that sales tax incentives constituted capital receipts and should not be included in the computation of total income. The CIT(A) emphasized that the AO should have considered the decision of the Special Bench, Mumbai, in the case of Reliance Industries Ltd. on identical facts.

2. Nature of Sales Tax Incentives:
The core issue was whether sales tax incentives should be treated as capital receipts or revenue income. The assessee argued that the sales tax incentives were capital receipts, citing the decision in Reliance Industries Ltd., where the subsidy received on account of exemption from sales tax was treated as capital in nature. The CIT(A) agreed with this view, noting that the object of the subsidy was to set up a new unit in a backward area to generate employment, thus qualifying it as a capital receipt.

The Revenue, represented by the learned DR, argued that since the assessee was not required to pay any sales tax although calculated as per the sales tax bills, it was in the nature of sales collection and should not be claimed as exempted. The DR also pointed out that the assessee did not maintain a separate invoice or account for the sales tax incentives, making it difficult to ascertain the incentive.

The Tribunal, after comparing the facts of the present case with those of Reliance Industries Ltd., concluded that the issue was squarely covered by the decision of Reliance Industries Ltd., which treated the sales tax incentives as capital receipts. The Tribunal confirmed the view taken by the CIT(A) and dismissed the Revenue's appeal, thereby upholding the assessee's claim that the sales tax incentives were exempt and should not be included in the computation of taxable income.

Conclusion:
The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld, confirming that the sales tax incentives received by the assessee under the PSI 1993 Scheme were capital receipts and not to be included in the computation of taxable income. The Tribunal relied heavily on the precedent set by the ITAT Mumbai Special Bench in the case of Reliance Industries Ltd. and other judicial decisions to reach this conclusion.