2014 (1) TMI 1029 - AT - Income Tax

Taxability of sales tax benefit/subsidy received - Capital or revenue in nature - Held that - the assessee has sold its benefits/entitlements to the third parties - What the assessee has received is consideration in respect of sale of the entitlement/benefits - This is nothing but consideration for the transfer of the entitlement and clearly taxable as revenue receipt in the nature of benefit convertible into money arising from business - On perusal of the agreement to transfer sales tax incentive - Sale consideration on transfer of entitlement is nothing but is a benefit directly arising from business and, is therefore, a revenue receipt - Decided against the assessee.

Summary

Issues:
Taxability of sales tax benefit/subsidy received by the assessee under Power Policy of the State Government as incentive for setting up windmills in Maharashtra State.

Issue Analysis:

1. Taxability of Sales Tax Benefit/Subsidy:
The main issue in this case revolves around whether the sales tax benefit/subsidy received by the assessee is a capital or revenue receipt. The assessee argued that the subsidy received is a capital receipt not liable to tax, while the revenue authorities considered it as a revenue receipt and taxed it accordingly. The State Government's policy outlined that investment in wind power projects would qualify for sales tax benefits, with the benefit being 1/6th of the investment every year for six years under specific conditions. The assessee invested in wind power generation projects and sold the power generated to different entities, availing sales tax exemptions amounting to Rs. 1.66 crores. The assessee then sold this sales tax entitlement to a third party for Rs. 1.25 crores. The contention was whether this consideration for the transfer of entitlement should be considered as a sales tax benefit/subsidy or a revenue receipt.

2. Nature of Consideration Received:
The tribunal analyzed the agreement for the transfer of sales tax incentives, which clarified that the assessee sold its entitlements to third parties for consideration. The agreement explicitly stated the terms of transferring sales tax benefits and the payment structure involved. The tribunal concluded that what the assessee received was consideration for the transfer of entitlement, which is a benefit directly arising from business and, therefore, a revenue receipt. The tribunal emphasized that the consideration received cannot be classified as a capital subsidy and should be taxed as a revenue receipt. The tribunal cited various legal precedents to support its decision, highlighting that the assessee's case of selling sales tax benefits was distinct from the cases referred to by the assessee's counsel.

3. Judgment and Dismissal of Appeals:
After thorough analysis, the tribunal dismissed all appeals related to the taxability of sales tax benefits/subsidies received by the assessee. The tribunal held that the consideration received by the assessee for the transfer of entitlement was taxable as a revenue receipt. Additionally, in a separate issue raised in one of the appeals regarding the disallowance of expenses under section 14A read with Rule 8D, the tribunal clarified the prospective application of Rule 8D and directed the Assessing Officer to decide the issue afresh without applying Rule 8D for that particular appeal.

4. Conclusion:
The judgment by the Appellate Tribunal ITAT Mumbai clarified the taxability of sales tax benefits/subsidies received by the assessee for setting up windmills in Maharashtra State. The tribunal determined that the consideration received for the transfer of entitlement was a revenue receipt and not a capital subsidy, thus subject to taxation. The detailed analysis of the agreement and legal precedents supported the tribunal's decision to dismiss all appeals related to this issue and provide specific directions for the separate issue of disallowance of expenses under section 14A read with Rule 8D in one of the appeals.