2003 (10) TMI 255 - AT - Income Tax

Payment to the Government of Maharashtra as part of subsidy - setting up a new Industrial Unit in the Specified Backward Area - Capital Or Revenue Receipt - Whether, the assessee-company is justified in its claim that the sales-tax incentive allowed to it during the previous year in terms of the relevant Government order constitutes capital receipt and is not to be taken into account in computation of total income? - Whether the Tribunal in the case of RIL had correctly appreciated and interpreted the ratio of the decision of the Supreme Court in Sahney Steel - HELD THAT - It refer to the Tribunal's order for the asst. yr. 1985-86 passed on 25th July, 2002. In this order, the Tribunal has elaborately dealt with the same question, as to whether the amount representing the amount exempted from payment of sales-tax to the Government of Maharashtra for setting up a new industrial unit in the specified backward area, of Patalganga in Raigad District, should be treated as capital receipt in the hands of the assessee and accordingly excluded from the assessee's total income chargeable to tax, from paras 48 to 118 of the order. A copy of this order has been filed at the paper book No. 1. We have carefully gone through these paragraphs. In that year, the basic facts were the same as those in the asst. yr. 1984-85. The assessee was exempt from payment of sales-tax to the Government of Maharashtra under the 1979 Scheme. In that year also, the assessee claimed that the incentive given in the form of non-payment of the sales-tax amount should be excluded from the total income either on the basis that the same was a capital receipt or, alternatively, that it should be treated as liability under the sales-tax law and deemed to have been paid by the assessee within the meaning of s. 43B of the Act. The reasons given by the AO for rejecting the assessee's claim were the same as the reasons given in the assessment order for the asst. yr. 1984-85. The CIT(A), following the view taken by him in the appeal for the asst. yr. 1984-85, rejected the assessee's claim agreeing with the AO. The CIT(A) also entertained a view that sales-tax exemption was placed in a category separate from the capital subsidy which an eligible unit was entitled to, that the AO was right in saying that there was no actual payment-of sales-tax to the Government, that the sales-tax collected on sales made was a part of the turnover, and deduction was available to the assessee only if the same was actually paid to the Government and that the turnover was merely exempt from the levy of sales-tax for specified period and therefore, the assessee's contention that it was entitled to the exemption of the income cannot be accepted. Thus, after going through the relevant portions of the Tribunal's order in the case of RIL for the asst. yr. 1985-86, we are inclined to hold that the Tribunal did not rest its decision on the Circular No. 142. If anything, this circular was considered to indirectly support the assessee's case, which stood accepted on the basis of various other grounds, both of facts and of law. On an analysis of the Scheme, the Tribunal has come to the conclusion that the thrust; of the Scheme, is that the assessee would become entitled for the sales-tax incentive even before the commencement of the production, which implies that the object of the incentive is to fund a part of the cost of the setting up of the factory in the notified backward area. The Tribunal has, at more than one place, stated that the thrust of the Maharashtra Scheme was the industrial development of the backward districts as well as generation of employment thus establishing a direct nexus with the investment in fixed capital assets. It has been found that the entitlement of the industrial unit to claim eligibility for the incentive arose even while the industry was in the process of being set up. According to the Tribunal, the Scheme was oriented towards and was subservient to the investment in fixed capital assets. The sales-tax incentive was envisaged only as an alternative to the cash disbursement and by its very nature was to be available only after production commenced. Thus, in effect, it was held by the Tribunal that the subsidy in the form of sales-tax incentive was not given to the assessee for assisting it in carrying out the business operations. The object of the subsidy was to encourage the setting up of industries in the backward area. Thus, the interpretation of the Tribunal, of the ratio laid down in the judgment of the Supreme Court in Sahney Steel 1983 (11) TMI 30 - ANDHRA PRADESH HIGH COURT cannot be stated to be erroneous. The Tribunal did recognise, as the Supreme Court itself recognised, that the object with which the subsidy was given is decisive. It did recognise, following the distinction pointed out by the Supreme Court that if the subsidy is given for setting up or expansion of the industry in a backward area, it will be capital, irrespective of the modality or the source of funds through or from which it is given and that if monies are given for assisting the assessee in carrying out the business operations only after, and conditional upon, the commencement of production, it would be revenue. It was only for the purpose of bringing out this distinction that the Tribunal had analysed the features of the Maharashtra Scheme of 1979 and had come to the conclusion that the subsidy given under the Scheme had a direct nexus with the fixed capital investment and that it could not be said that the subsidy was given with the object of assisting or lending a helping hand to the assessee in its business operations. The Tribunal also took the view that since the Madhya Pradesh Scheme was found by the Supreme Court in Sahney Steel to be more or less in the same genre as the Andhra Pradesh Scheme, it observed at the report, vis-a-vis the Madhya Pradesh Scheme and while overruling the judgment of the M.P. High Court in CIT vs. Dusad Industries 1985 (11) TMI 43 - MADHYA PRADESH HIGH COURT , that mere setting up of the industry did not qualify an industrialist for getting any subsidy and that the subsidy was given as help not for setting up of the industry which was already there, but as an assistance after the industry commenced production. This aspect of the matter has been noted by the Tribunal in RIL's case in its order In the same paragraph, it has also been noted by the Tribunal that Dusad Industries (assessee before the Madhya Pradesh High Court) had commenced production on 5th Jan., 1973, much before the Government memorandum sanctioning the Scheme had been issued on 30th Aug., 1973. The Tribunal has further noted that under the M.P. Scheme, an assessee could seek eligibility only after having commenced production, whereas under the Maharashtra Scheme, an assessee could seek eligibility immediately upon having taken some initial steps towards setting up of the industrial unit. The Tribunal was thus aware of the distinction between the subsidy given with the object of setting up the industry and the subsidy given after the industry commences production and conditional upon the commencement of production. Factually, the Tribunal found that the assessee's case which fell under the Maharashtra Scheme, was a case where the subsidy was given for the purpose of facilitating the assessee to set up an industry in Patalganga, Raigad District, which is a notified area. The actual disbursement took place after the assessee commenced production, but, according to the Tribunal, it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. Since the unit had undergone huge expansion, another eligibility certificate was issued on 22nd Oct., 1983, which was valid upto 30th Sept., 1993, by way of deferral and from 1st, Oct., 1993 to 30th June, 1997, by way of exemption. It has been found by the Tribunal that the incentive was thus given in several instalments depending on the setting up and expansion of the industrial unit. It was also one of the conditions of the eligibility certificate originally issued that, in the matter of employment of personnel for the unit, candidates from Scheduled Castes and Scheduled Tribes and local people should be given preference. All these facts have not been disputed before us. Thus, we answer the question referred to us in the affirmative. Since there are other grounds in the appeal of the assessee and since there is also an appeal by the Department, they will go back to the Division Bench for being disposed of in accordance with law.

Summary

Issues Involved:
1. Whether the sales-tax incentive constitutes a capital receipt.
2. Whether the Tribunal's previous decisions in the assessee's case were correctly interpreted.
3. The relevance of the Supreme Court's judgment in Sahney Steel.
4. The impact of the Tribunal's decision in Bajaj Auto Ltd. on the present case.

Summary:

Issue 1: Whether the sales-tax incentive constitutes a capital receipt.
The Tribunal examined whether the sales-tax incentive allowed to the assessee during the previous year under the Government order constitutes a capital receipt and should not be included in the computation of total income. The assessee claimed that the sales-tax incentive was a capital receipt, arguing that it was given to encourage the setting up of new industrial units in backward areas, and thus should not be taxed. The AO and CIT(A) had previously rejected this claim, treating the incentive as a revenue receipt.

Issue 2: Whether the Tribunal's previous decisions in the assessee's case were correctly interpreted.
The Tribunal reviewed its previous decisions for the assessment years 1984-85 and 1985-86, where it had ruled in favor of the assessee, holding that the sales-tax incentive was a capital receipt. The Tribunal found that the incentive was given for the purpose of setting up the industry and was directly linked to the investment in fixed capital assets, thus qualifying as a capital receipt.

Issue 3: The relevance of the Supreme Court's judgment in Sahney Steel.
The Tribunal analyzed the Supreme Court's judgment in Sahney Steel, which held that the character of the subsidy (whether revenue or capital) depends on the purpose for which it is given. If the subsidy is given to assist in carrying out business operations, it is a revenue receipt. However, if it is given to set up or expand an industry, it is a capital receipt. The Tribunal concluded that the Maharashtra Scheme under which the assessee received the incentive was aimed at encouraging industrialization in backward areas and was linked to fixed capital investment, thus making it a capital receipt.

Issue 4: The impact of the Tribunal's decision in Bajaj Auto Ltd. on the present case.
The Tribunal examined whether the decision in Bajaj Auto Ltd., which seemingly contradicted the earlier decisions in the assessee's case, "virtually overruled" the previous rulings. The Tribunal noted that a Bench of equal strength cannot overrule another Bench's decision. It found that the Bajaj Auto Ltd. decision did not correctly interpret the earlier rulings and the Supreme Court's judgment in Sahney Steel. The Tribunal reaffirmed its earlier decisions, holding that the sales-tax incentive was a capital receipt.

Conclusion:
The Tribunal concluded that the sales-tax incentive allowed to the assessee constitutes a capital receipt and should not be included in the computation of total income. The Tribunal's previous decisions in the assessee's case were correctly interpreted, and the Supreme Court's judgment in Sahney Steel supports this conclusion. The decision in Bajaj Auto Ltd. does not overrule the earlier rulings in the assessee's case. The question referred to the Special Bench was answered in the affirmative.