2024 (1) TMI 915 - HC - Income Tax

Nature of receipt - sales tax subsidy - revenue or capital receipt - ITAT treated it as capital receipt though the subsidy has been granted to the assessee only after commencement of production - whether amount exemption from trade tax on turnover of sales of the UP Trade Tax Act, 1948, availed by the assessee, is a capital receipt as subsidy or a revenue receipt? - HELD THAT - Exemption from tax is freedom of liability from tax on turnover of sales under Section 4A of the U.P. Act, 1948. Hence in the absence of liability to pay trade tax on turnover of sales to the extent provided in the eligibility certificate issued to the assessee under Section 4A of the U.P. Act, 1948, neither trade tax on turnover of sales to the extent of exemption from liability to tax could be collected by the assessee from the purchasers either directly or indirectly nor it could be claimed as capital receipt or subsidy and instead the entire sale price received by the assessee from the purchasers towards sale of goods is revenue receipt. Hence no deduction from revenue receipts in the name of subsidy was permissible. Allowing such claim of the assessee would result in unauthorised collection and retention of trade tax and also unauthorised deduction from taxable income which is statutorily and constitutionally not permissible. As per the own case of respondent/assessee, the amount of tax component in respect to the assessment years as mentioned in the substantial questions of law afore-quoted, is the tax component which was included by him in the sales turnover of the goods as a sale price of the goods. Once it is admitted case of the respondent/assessee that the amount realized by him from purchaser was the sale price of the goods, there does not arise any question of tax component included in the sale price to be of a capital nature, irrespective of the issue as to whether the respondent/assessee could have recovered it from purchasers or not. Exemption pre-supposes liability to tax. It is not a right but it is granted subject to statutory provision. The Legislature in it wisdom by enacting Section 4A of the U.P. Act, 1948 has exempted turnover of sales of goods subject to certain conditions. Having obtained eligibility certificate under Section 4A of the U.P. Act, 1948, the respondent/assessee became entitled for exemption from tax on sales subject to certain conditions and limit. Bare perusal of Section 4A of the U.P. Act, 1948 clearly indicates that the exemption from tax on turnover of sales is not a subsidy granted by the State Government. In the present set of facts, Section 4A of the U.P. Act, 1948 has not authorised the respondent/assessee either to collect the tax component on exempted sales or to retain it and to grant it as state subsidy. Once admittedly the amount as shown in the invoices is the sale price of the goods sold by the respondent/assessee to purchasers, it is revenue receipt. Such a receipt is not of capital nature but being part of sale price of the goods, is certainly revenue receipt. The Income Tax Appellate Tribunal has committed a manifest error law in passing the impugned order to hold the aforesaid part of the sale price to be subsidy or capital receipt. In fact, the ITAT has totally misdirected it and passed the impugned orders without even having reference to the relevant provision of the U.P. Act, 1948, the nature of exemption granted to the respondent/assessee under the notification dated 780 dated 31.3.1995 and the nature of receipts of the assessee which, according to own case of the assessee, was the part of the sale price. Once turnover of sales has been exempted, trade tax as per scheme of the Act, 1948, could neither be realized by the sellers not it could be retained. No provision under the U.P. Act, 1948 has been shown to us by the learned counsel for the respondent/assessee which empowers the assessee to withhold the amount of tax recovered or which empowers the respondent/assessee to collect tax on exempted sales and to retain it as subsidy. The receipts have been shown by the respondent/assessee as sale price received by him from the purchasers. Once the amount has been received as sale price, no part of it could be termed as capital receipts. - Decided against assessee.

Summary

Issues Involved:
1. Classification of sales tax subsidy as capital receipt or revenue receipt.
2. Applicability of the Supreme Court's decision in Sahney Steel Works Ltd. v. CIT to the case.

Summary:

Issue 1: Classification of Sales Tax Subsidy
The central issue in these appeals was whether the sales tax subsidy availed by the assessee under the UP Trade Tax Act, 1948, should be treated as a capital receipt or a revenue receipt. The assessee claimed the subsidy as a capital receipt, which was initially rejected by the Assessing Officer but later allowed by the CIT (Appeals) and upheld by the Income Tax Appellate Tribunal (ITAT).

The High Court examined the provisions of the UP Trade Tax Act, 1948, specifically Section 4A, which provides for exemption from trade tax to promote industrial development. The Court noted that there is no statutory provision authorizing the assessee to collect and retain trade tax as a subsidy. The exemption merely frees the assessee from the liability to pay trade tax on turnover of sales, but does not convert the tax component into a capital receipt.

The Court held that the entire sale price, including the tax component, is a revenue receipt. Allowing the assessee to claim the tax component as a capital receipt would result in unauthorized collection and retention of trade tax, which is not permissible under the law.

Issue 2: Applicability of Sahney Steel Works Ltd. v. CIT
The revenue argued that the ITAT's decision was contrary to the Supreme Court's ruling in Sahney Steel Works Ltd. v. CIT, where it was held that subsidies after the commencement of production are revenue receipts. The Court distinguished the present case from Sahney Steel, noting that the UP Trade Tax Act does not authorize the collection and retention of trade tax as a subsidy.

The Court also referred to other Supreme Court judgments, including Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd., and Commissioner of Income Tax v. Chaphalkar Brothers, which were cited by the respondent/assessee. The Court found these cases inapplicable as they involved statutory provisions that explicitly granted subsidies, unlike the UP Trade Tax Act.

Conclusion:
The High Court concluded that the sales tax subsidy claimed by the assessee is not a capital receipt but a revenue receipt. The ITAT's orders were set aside, and the appeals were allowed in favor of the revenue. The Court emphasized that any collection of trade tax on exempted sales must be deposited with the government and cannot be retained as a subsidy.

Decision:
The appeals (ITA/158/2010 and ITA/233/2007) were allowed, and the ITAT's orders treating the sales tax subsidy as a capital receipt were set aside. The substantial questions of law were answered in favor of the revenue and against the assessee.