2025 (3) TMI 466 - HC - Income Tax

Nature of receipt - excise duty exemption - revenue or capital receipt - HELD THAT - The purpose test as formulated in the case of Sahney Steel Press Works Ltd. 1997 (9) TMI 3 - SUPREME COURT it is seen that the excise duty exemption was so granted for the purpose of industrializing the States of Uttaranchal and Himachal Pradesh and for generation of employment in the States. Therefore the said excise duty exemption granted to the assessee for its Rudrapur Plywood Unit and Rudrapur MDF Unit would necessarily be a capital receipt in the hands of the assessee. Decided in favour of the assessee herein. Excise duty exemption adjustment in computation of MAT u/s 115JB - In view of the conclusions reached by us with regard to the substantial question of law No. 1 we are of the considered view that the substantial question of law No. 2 being a consequential one; the excise duty exemption being purely a capital receipt not chargeable to tax under the normal provisions of the Income Tax Act 1961 it would also not be permissible to reckon the same for computation of book profit under the provisions of Section 115-JB of the Act of 1961.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal questions considered in this judgment were:

(1) Whether the Income Tax Appellate Tribunal (ITAT) was correct in law in upholding the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to treat the excise duty exemption as a capital receipt, despite the assessee having treated it as a revenue receipt in its financial records and tax returns.

(2) Whether the ITAT was correct in law in allowing the adjustment of the excise duty exemption in the computation of Minimum Alternative Tax (MAT) under Section 115-JB of the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of Excise Duty Exemption as Capital Receipt

- Relevant legal framework and precedents: The Court considered the purpose test established by the Supreme Court in Sahney Steel & Press Works Ltd. v. CIT and Ponni Sugars & Chemicals Ltd., which determines the nature of a subsidy based on the purpose for which it is granted. If the subsidy is intended to aid in setting up or expanding business operations, it is deemed a capital receipt.

- Court's interpretation and reasoning: The Court noted that the excise duty exemption was granted under a policy aimed at industrializing backward areas and generating employment. This aligns with the purpose test, indicating that the exemption serves as a capital receipt.

- Key evidence and findings: The policy memorandum from the Ministry of Commerce and Industry outlined the objectives of the exemption, supporting the classification as a capital receipt.

- Application of law to facts: The Court applied the purpose test, concluding that the excise duty exemption was intended to encourage industrial development and employment, thus qualifying as a capital receipt.

- Treatment of competing arguments: The Revenue argued that the exemption should be treated as a revenue receipt since it was initially recorded as such by the assessee. However, the Court emphasized the purpose of the exemption over its initial classification.

- Conclusions: The Court held that the excise duty exemption should be treated as a capital receipt, aligning with the purpose of the policy under which it was granted.

Issue 2: Adjustment of Excise Duty Exemption in MAT Computation

- Relevant legal framework and precedents: Section 115-JB of the Income Tax Act governs the computation of book profits for MAT purposes. The Court referenced the Bombay High Court decision in CIT v. Harinagar Sugar Mills Ltd., which held that capital receipts should not be included in book profit calculations.

- Court's interpretation and reasoning: The Court reasoned that since the excise duty exemption was a capital receipt, it should not be included in the book profits for MAT computation under Section 115-JB.

- Key evidence and findings: The ITAT had previously allowed the exclusion of the excise duty exemption from book profits, considering it a capital receipt.

- Application of law to facts: The Court applied the legal principles from relevant precedents, determining that the excise duty exemption, being a capital receipt, should not be factored into MAT calculations.

- Treatment of competing arguments: The Revenue's argument for including the exemption in book profits was countered by the Court's reliance on established legal principles that exclude capital receipts from such calculations.

- Conclusions: The Court upheld the ITAT's decision, confirming that the excise duty exemption should be excluded from book profit computations under Section 115-JB.

3. SIGNIFICANT HOLDINGS

- Core principles established: The judgment reaffirmed the application of the purpose test in determining the nature of subsidies and emphasized that capital receipts should not be included in MAT computations.

- Final determinations on each issue: The Court concluded that the excise duty exemption was a capital receipt and should not be included in book profits for MAT purposes, dismissing the Revenue's appeals.