2016 (7) TMI 951 - AT - Income Tax

Nature of receipt of Premium on transfer of Market Linked Focus Product Scheme scrips - revenue or capital receipt - Held that - The Apex Court in the case of Ponni Sugars & Chemicals Ltd (2008 (9) TMI 14 - SUPREME COURT) had an occasion to examine an identical situation and observed that if the object of the subsidy was to enable the assessee to carry on the business more profitably, then the receipt is on the revenue account. On the other hand, if the object of assistance was to enable the assessee to set up a new unit or expand the existing unit, then the receipt is on the capital account. In the case before us, the Government of India provided the incentive for exploring the new markets across the globe. Exploring a new market for a specified area would naturally expand the market area of the assessee. The incentive given to the assessee is not for running the business profitably but for expanding the market area. Therefore, this Tribunal is of the considered opinion that the incentive given by the Government to the assessee for exploring the new market is a capital receipt, hence it cannot be treated as income either u/s 2(24) or 28 of the Act. In view of the above, we are unable to uphold the order of the lower authority. Accordingly, the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted. - Decided in favour of assessee.

Summary

Issues:
- Whether premium on sale of Market Linked Focus Product Scheme scrips is a capital receipt or a revenue receipt?

Analysis:
The judgment by the Appellate Tribunal ITAT Chennai involved appeals against orders of the Commissioner of Income-tax for assessment years 2011-12 and 2012-13. The key issue was the nature of the premium received on the sale of Market Linked Focus Product Scheme scrips by the assessee. The appellant argued that the scheme was an incentive for exploring new markets, not directly connected to the business, and hence the premium was a capital receipt. Citing the Madras High Court judgment and the absence of specific provisions in the Income-tax Act, the appellant contended that the premium was not covered under income tax provisions.

The appellant further relied on the Apex Court's judgment in Vodafone International Holdings B.V case, highlighting the distinction between the treatment of items in the Income-tax Act and the Direct Tax Code. The appellant argued that since the premium was not specifically included in income tax provisions, it should be treated as a capital receipt. Additionally, referencing the Kolkata Bench's decisions, the appellant emphasized that subsidies aimed at sustaining competitiveness were considered capital in nature.

On the contrary, the Departmental Representative argued that the Market Linked Focus Product Scheme was akin to trade promotion schemes mentioned in section 28 of the Act. The Department contended that the incentive provided by the Government for exports should be treated as revenue in nature and included as income under section 2(24) of the Act. Referring to a CBDT circular, the Department argued that export incentives were revenue receipts and thus taxable.

After considering the submissions and examining the scheme, the Tribunal concluded that the incentive was for exploring new markets, expanding the market area, and not for running the business profitably. Therefore, the Tribunal held that the premium received on the sale of Market Linked Focus Product Scheme scrips was a capital receipt, not taxable under sections 2(24) or 28 of the Act. Consequently, the Tribunal allowed both appeals of the assessee, setting aside the lower authorities' orders and deleting the additions made by the Assessing Officer.