2017 (1) TMI 1198 - AT - Income Tax

Subsidy receipt on account of industrial promotion assistance - capital or revenue receipt - nature of income - Held that - Assessee company got the subsidy from the West Bengal Government in the form of Industrial Promotion Assistance under the West Bengal Incentive Scheme-2000. The said scheme clearly says that it is for the company to establish its unit in the backward area to promote the employment and other facilities in the backward areas and the said incentive was towards capital receipt in nature. The said scheme is not for the assessee company to reimburse the day to day operational expenses, therefore, it cannot be in the nature of revenue. Considering the factual position we are of the view that the Ld. CIT(A) has passed a reasoned order and it does not require any modification stating that the receipt receivable by the appellant company on account of industrial promotion assistance under West Bengal Incentive Scheme, 2000 is capital in nature. Hence, the said receipt is not includible in the taxable income of the appellant company. There is no application of provisions of section 41(1) as held by the AO as there was no cessation of liability on account of payment of sales tax. - Decided against revenue

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Nature of sales tax incentive (capital vs. revenue receipt).
3. Application of Section 41(1) of the Income-tax Act, 1961.
4. Disallowance of preliminary expenses under Section 35D of the Act.

Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The appeals filed by the Revenue were delayed by two days. The Tribunal condoned the delay after reviewing the condonation petition and considering the concession given by the Assessee's Authorized Representative (AR).

2. Nature of Sales Tax Incentive (Capital vs. Revenue Receipt):
The primary issue was whether the sales tax incentive received under the West Bengal Incentive Scheme, 2000, amounting to ?6,19,47,252/-, should be treated as a capital receipt or revenue receipt. The Assessee argued that the incentive was a capital receipt aimed at promoting industrial development by setting up new units or expanding existing ones. The Assessing Officer (AO) treated the incentive as a revenue receipt and invoked Section 41(1) of the Act, arguing that 75% of the sales tax collected was not paid to the government and should be taxable.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the incentive was a capital receipt, emphasizing the purpose of the scheme, which was industrial promotion rather than facilitating trade or business. The CIT(A) relied on judicial precedents, including the Supreme Court's decisions in Sahney Steel & Press Works Ltd. and Ponni Sugars & Chemicals Ltd., which focused on the purpose of the subsidy. The Tribunal upheld the CIT(A)’s decision, confirming that the incentive was a capital receipt not includible in taxable income.

3. Application of Section 41(1) of the Income-tax Act, 1961:
The AO added ?3,72,95,124/- to the Assessee's income under Section 41(1), arguing it was a remission of liability previously allowed as a deduction. The Assessee contended that the amount was an industrial promotion assistance and not a waiver of sales tax liability, as the sales tax for the relevant years was duly paid. The CIT(A) agreed with the Assessee, stating that the incentive was capital in nature and there was no cessation of liability under Section 41(1). The Tribunal upheld this view, confirming the CIT(A)’s decision to delete the addition.

4. Disallowance of Preliminary Expenses under Section 35D of the Act:
For the assessment years 2010-11 and 2011-12, the AO disallowed the Assessee’s claim of preliminary expenses amounting to ?21,74,874/- under Section 35D, despite it being allowed in previous years. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, noting that there was no reason to disallow the claim when it had been consistently allowed in earlier years.

Conclusion:
The Tribunal dismissed all three appeals filed by the Revenue, confirming the CIT(A)’s orders. The sales tax incentive was held to be a capital receipt, not taxable under Section 41(1). Additionally, the preliminary expenses claim under Section 35D was upheld as valid.