2018 (12) TMI 629 - AT - Income Tax

Taxability of subsidy in the nature of refund of sales tax on raw materials, machineries and finished goods - Held that - In the instant case, the main objective of the scheme was to intensify and accelerate the process of dispersal of industries from developed areas and for development of under-developed regions of Maharashtra. It is clear from the scheme that IPS incentive was granted not for carrying on day-to-day business of the unit more profitably but to provide impetus to the process of dispersal of industries to backward areas. The plant of the assessee falls in Group C, which also includes Khed, which is outside the Pune Metropolitan Region. In the present case the sales tax payment is only an yardstick to determine the quantum of incentive and cannot be construed as to mitigate the operational cost of the business. In view of the above factual scenario we uphold the order of the CIT(A). Facts being identical and the grounds of appeal being same, our decision for AY 2011-12 applies mutatis mutandis to AY 2012-13.

Summary

Issues Involved:
1. Whether the sales tax subsidy received by the assessee is a capital receipt or revenue receipt.

Detailed Analysis:

Issue 1: Whether the sales tax subsidy received by the assessee is a capital receipt or revenue receipt.

Facts of the Case: The assessee-company filed its return of income for the assessment year (AY) 2011-12 declaring total income of Rs. Nil, claiming current year’s business loss of ?158,78,56,843/-. The nature of business of the assessee is designing, developing, manufacturing, marketing, and selling of automobile vehicles, construction equipment, machinery, and its parts. The assessee claimed an amount of ?71,83,20,499/- as capital receipt-industrial promotion subsidy in its computation of taxable total income. The Assessing Officer (AO) held the receipt of sales tax subsidy of ?71,83,20,499/- as revenue receipt and added back the same to the total income of the assessee.

CIT(A) Observations: The Ld. CIT(A) observed from the ‘Resolution of Government of Maharashtra’ dated 30.03.2007 that it had been issued in connection with ‘Package Scheme of Incentives’, which had been formulated for setting up of new units or for expanding existing units set up in underdeveloped regions of Maharashtra. The Finance Act, 2015 inserted clause (xviii) in section 2(24) of the Act w.e.f. 01.04.2016 to provide that any subsidy received shall be chargeable to tax as income, but this does not apply to the impugned assessment year. Referring to various judgments, the Ld. CIT(A) noted that the ‘purpose’ for which any subsidy had been granted would be important. If the purpose was for setting up a new industrial unit or expanding an existing industrial unit, the subsidy had to be taken to have been received on capital account. The Ld. CIT(A) held that the subsidy in question of ?71,83,20,499/- was received on the capital account and the same cannot be charged to tax.

Revenue’s Argument: The Ld. DR relied on the decision in Sahney Steel & Press Works Ltd. and CIT v. M/s Bhushan Steels & Strips Ltd. to argue that the subsidies were granted year after year only after setting up of the new industry and commencement of production, and thus, these were of revenue character and should be taxed accordingly. The Ld. DR also highlighted that the assessee had set up a mega project and the eligibility certificate was issued after the commencement of commercial production.

Assessee’s Argument: The Ld. counsel of the assessee argued that the purpose of the subsidy was for setting up a new unit or expanding an existing unit in underdeveloped regions, not for carrying on day-to-day business more profitably. The assessee’s plant falls in Group C, which includes less developed areas. The subsidy was availed in the form of VAT and GST payable on finished goods and spares sold by the assessee, not as a refund of sales tax from the Sales Tax Department.

Tribunal’s Decision: The Tribunal noted that the main objective of the scheme was to intensify and accelerate the process of dispersal of industries from developed areas and for the development of under-developed regions of Maharashtra. The sales tax payment was only a yardstick to determine the quantum of incentive and cannot be construed as to mitigate the operational cost of the business. The Tribunal upheld the order of the Ld. CIT(A) that the subsidy in question was received on the capital account and cannot be charged to tax. The decision for AY 2011-12 applies mutatis mutandis to AY 2012-13.

Conclusion: The appeals were dismissed, and the order pronounced in the open Court on 28/11/2018.