2014 (12) TMI 933 - HC - Income Tax

Incentives/subsidies amounted to capital receipt or not - Whether the Tribunal erred in not holding that incentives/subsidies in the form of exemption from sales tax received by the assessee constituted capital receipt not liable to tax Held that - The assessee is in receipt of a sales tax subsidy Tribunal was of the view that sales tax subsidy received by the assessee is a revenue receipt - a perusal of the judgment in Commissioner of Income Tax, Madras Versus Ponni Sugars & Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT reveals that it has been already held that whether a subsidy is a revenue or a capital receipt would depend upon the nature and purpose of a subsidy thus, the order passed by the Tribunal is set aside and the matter is restored to the Tribunal for re-determining the question whether sales tax subsidy is a revenue or a capital receipt by reference to the nature and purpose of the subsidy Decided in favour of assessee.

Summary

Issues:
1. Whether sales tax incentives/subsidies received by the appellant constitute capital receipt not liable to tax under the provisions of the Act?

Analysis:
The judgment pertains to Income Tax Appeals where the assessee challenged orders passed by the Income Tax Appellate Tribunal, CIT (Appeals), and the Assessing Officer. The main issue revolves around determining whether the sales tax incentives/subsidies received should be considered as capital receipts not liable to tax. The assessee argued that the nature and purpose of the subsidy should determine its classification as a capital or revenue receipt, citing relevant case laws. The Tribunal had initially held the sales tax subsidy as a revenue receipt based on a previous judgment. However, the Supreme Court clarified in a different case that the nature and purpose of the subsidy are crucial in making this determination.

The counsel for the assessee referred to a similar case where the matter was remitted to the Tribunal to decide whether the sales tax subsidy is a revenue or capital receipt based on its nature and purpose. The revenue's counsel relied on a different judgment but failed to distinguish the Supreme Court's clarification or the fact that a similar controversy had been referred back to the Tribunal in another case. The High Court analyzed the arguments, case laws, and the nature of the subsidy received by the assessee. It highlighted the importance of the purpose test in determining the character of the incentive and referred to previous judgments emphasizing the significance of the purpose for which the subsidy was granted.

Considering the conflicting judgments and the importance of determining the nature and purpose of the sales tax subsidy, the High Court allowed the appeal, set aside the Tribunal's order, and remitted the matter back to the Tribunal for reevaluation. The Tribunal was directed to consider the nature and purpose of the sales tax subsidy in light of the Supreme Court's judgment and then decide whether it should be treated as a capital or revenue expenditure. The parties were instructed to appear before the Income Tax Appellate Tribunal for further proceedings on the specified date.