2017 (7) TMI 501 - HC - Income Tax

Nature of receipts - Amount received by way of exemption of sales tax payments - trading receipt OR capital receipt hence not liable to tax? - Held that - In the present case the provisions of the original scheme (i.e. the original policy of 1990) and its subsidy scheme are relevant; they have quite correctly been relied upon by the revenue. Paras 6 (A) and 6(B) of that scheme specifically provided for capital subsidy to set up prestige units; the amounts indicated (Rupees fifteen lakhs) were to be towards capital expenditure. Now if that was the scheme under which the assessee set-up their units undoubtedly it contained specific provisions that enabled capital subsidies. Whether the assessees were entitled to it or not is not relevant. Assessee s are now concerned with the sales tax amounts they were permitted to retain under the amended scheme (dated 27.07.1991) which allowed the facility of such retention after the unit (established and which could possibly claim benefit under the first scheme) was already set up. This subsidy scheme had no strings attached. It merely stated that the collection could be retained to the extent of 100% of capital expenditure. Whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit but also implying an underlying intention that the capital expenditure would thereby be recouped the absence of any such condition should restrain the court from so concluding. How a state frames its policy to achieve its objectives and attain larger developmental goals depends upon the experience vision and genius of its representatives. Therefore to say that the indication of the limit of subsidy as the capital expended means that it replenished the capital expenditure and therefore the subsidy is capital would not be justified. The specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) meant that the recipient i.e. the assessee had the flexibility of using it for any purpose. The absence of any condition towards capital utilization meant that the policy makers envisioned greater profitability as an incentive for investors to expand units for rapid industrialization of the state ensuring greater employment. Clearly the subsidy was revenue in nature. - Decided against the assessee. Depreciation claim by lessee - Whether the assessee was entitled to claim depreciation under Section 32 despite not owning the property or not being the owner and being a lessee during the years? - Held that - A lessee can claim depreciation. See Commissioner of Income Tax v Bhushan Steels and Strips 2016 (12) TMI 1085 - DELHI HIGH COURT . - Decided against revenue.

Summary

Issues Involved:
1. Whether the ITAT was correct in law in holding that the amount received by the assessee by way of exemption of sales tax payments was not a trading receipt but was a capital receipt, hence not liable to tax?
2. Whether the assessee was entitled to claim depreciation under Section 32 of the Income Tax Act, despite not owning the property or being a lessee during the years under consideration?

Issue-wise Analysis:

1. Nature of Sales Tax Exemption:
The primary issue was whether the sales tax exemption received by the assessee was a capital receipt or a revenue receipt. The assessee argued that the exemption was a capital receipt, intended to promote industrialization in backward areas, hence not liable to tax. The Assessing Officer (AO) rejected this claim, treating the exemption as a revenue receipt and taxable under Section 43-B of the Income Tax Act.

The CIT(A) and ITAT supported the assessee's view, stating that the exemption was a capital receipt aimed at establishing new units and purchasing machinery. The ITAT emphasized that the subsidy was not for the purpose of carrying on business operations but for setting up units in backward areas, thus qualifying as a capital receipt.

The revenue argued that the exemption was a revenue receipt, citing the Supreme Court's decision in *Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax* and pointing out that the subsidy was granted to assist in carrying on business operations, not specifically for capital expenditure.

The court examined the purpose of the subsidy, referencing the Supreme Court's rulings in *Sahney Steel* and *Ponni Sugars & Chemicals*. It concluded that the subsidy was intended to promote industrialization and economic viability in backward areas, allowing the assessee to retain sales tax amounts collected, which were not specifically earmarked for capital expenditure. Consequently, the court held that the subsidy was a revenue receipt, taxable as income.

2. Entitlement to Depreciation:
The second issue pertained to whether the assessee, being a lessee and not the owner of the property, could claim depreciation under Section 32 of the Income Tax Act. The court referred to its previous decision in *Commissioner of Income Tax v. Bhushan Steels and Strips* for AY 1994-95, which relied on the Supreme Court's judgments in *Mysore Minerals Ltd v. Commissioner Income Tax* and *Commissioner Income Tax v. Poddar Cement Ltd*. These judgments established that a lessee could claim depreciation.

Based on this precedent, the court ruled in favor of the assessee, allowing the claim for depreciation despite the assessee not owning the property.

Conclusion:
The court concluded that the sales tax exemption was a revenue receipt, taxable as income, thus answering the first issue in favor of the revenue. On the second issue, the court upheld the assessee's entitlement to claim depreciation, deciding in favor of the assessee. The revenue's appeals were partly allowed, with no order as to costs.