2022 (9) TMI 247 - AT - Income Tax

Nature of Sales tax incentive received - Revenue receipt OR capital receipt - HELD THAT - As subsidy was principally aimed to cover the capital outlay of the assessee for undertaking modernization industries in Rajasthan and thus subsidy in the form of sales tax waiver deferment was not meant to give any benefit on day to day functioning of the business or to make it more profitable per se. Hence, such sales tax incentive is clearly capital in nature as claimed by the assessee. CIT(A) has followed the judgment rendered by the Hon ble Delhi High Court in the case of CIT vs. Bhushan Steels and Strips Ltd. 2017 (7) TMI 501 - DELHI HIGH COURT against the assessee, the operation of the aforesaid judgment rendered by the Hon ble Delhi High Court has been found to be stayed by the Hon ble Supreme Court 2017 (12) TMI 477 - SC ORDER The subsidy in the instant case though computed in terms of sales tax deferment/waiver, it was essentially meant for capital outlay expanded by the assessee for set up of unit in case of new industrial unit and for expansion and diversification of existing unit. The entitlement was also stated to be related to percentage of fixed capital investment. No hesitation to accept the plea of the assessee. While doing so, we do not see any merit in the plea of the Revenue that necessary facts are not placed on record. It is nowhere spelt out what additional facts were exactly required to appreciate the factual matrix. We also observe that notwithstanding that the assessee has treated such incentive as revenue receipt in past, the same cannot be deterrent for making a correct claim in the subsequent assessment year. No merit in the adverse observation made by the CIT(A) with reference to the amendment brought out by Finance Act, 2015 by insertion of clause (xviii) to Section 24 whereby such subsidy has been included in the definition of income. Such inclusion is to be regarded as prospective in operation in the light of the judgment in CIT vs. Vatika Township Pvt. Ltd. 2014 (9) TMI 576 - SUPREME COURT - Appeal of the assessee is allowed.

Summary

Issues: Determination of the nature and character of sales tax incentive received by the assessee - whether revenue or capital receipt.

Analysis:

Issue 1: Nature of Sales Tax Incentive
The appeal was filed against the order of the Commissioner of Income Tax concerning the addition of a sales tax incentive received by the assessee. The assessee claimed the incentive as a capital receipt, while the Assessing Officer treated it as a revenue receipt due to past treatment by the assessee. The dispute revolved around whether the incentive was revenue or capital in nature.

Issue 2: Legal Precedents
The assessee cited various judgments to support their claim that similar subsidies were considered capital receipts. These judgments highlighted that the purpose of the subsidy is crucial in determining its character, regardless of the source of funds or mechanism of giving the subsidy. The subsidies were intended to promote capital investment and industrial development, making them capital in nature.

Issue 3: Tribunal's Decision
After reviewing the incentive scheme and legal precedents, the Tribunal accepted the assessee's claim that the sales tax incentive was a capital receipt. The Tribunal emphasized that the subsidy was meant to cover capital outlay for industrial modernization and expansion, not to enhance day-to-day profitability. The Tribunal disagreed with the Revenue's argument that necessary facts were not provided, noting that the assessee's past treatment of the incentive as revenue did not preclude a correct claim in the current assessment year.

Issue 4: Conclusion
The Tribunal allowed the appeal, ruling in favor of the assessee and considering the sales tax incentive as a capital receipt. The Tribunal rejected the adverse observations made by the CIT(A) and disregarded the Finance Act, 2015 amendment as prospective in operation. The decision was based on the purpose of the subsidy and its direct nexus with capital investment, leading to the conclusion that the incentive was indeed capital in nature.

Overall, the Tribunal's detailed analysis, consideration of legal precedents, and interpretation of the incentive scheme led to the decision in favor of the assessee, highlighting the importance of the purpose of subsidies in determining their character as revenue or capital receipts.