Case Law Details
Graphite India Limited Vs CIT (Calcutta High Court)
The Calcutta High Court considered two substantial questions of law arising in connected appeals.
The first question was whether deduction allowed under Section 80IA of the Income-tax Act should be reduced while computing profits of the business eligible for deduction under Section 80HHC. The appellant submitted that the issue was already covered by the Supreme Court’s decision in Shital Fibers Ltd. v. Commissioner of Income Tax. The Revenue agreed with this submission. Relying on the Supreme Court judgment, the High Court answered the first substantial question of law in the negative and in favour of the assessee.
The second question concerned whether incentive/subsidy received by the assessee in the form of remission of sales tax under the West Bengal Incentive Scheme, 1993 was capital or revenue in nature. The Court noted that the scheme was intended to encourage expansion and modernization of industrial units located in backward areas and that the incentive was directly linked to investment in fixed capital.
The Court applied the “purpose test” laid down by the Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd. and reiterated in CIT v. Shree Balaji Alloys. It also referred to its own decision in PCIT v. Ankit Metal & Power Ltd., which held that subsidies linked to capital investment for industrial development are capital receipts.
After examining the West Bengal Incentive Scheme, 1993, the Court held that the remission was intended to induce fresh capital investment and expansion of industrial capacity, and not to assist the assessee in carrying on its business more profitably. Accordingly, the Tribunal had erred in treating the subsidy as revenue in nature.
The High Court answered the second substantial question of law in the negative, in favour of the assessee and against the Revenue, and disposed of both appeals along with the connected application.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
The Court: Learned counsel appearing for the appellant refers to the substantial questions of law that were admitted on 7th June, 2018 in respect of ITA/72/2018 as well as on 8th May, 2018 in respect of ITA/16/2021 by the orders passed by their Lordships Hon’ble Justice Aniruddha Bose and Hon’ble Justice Amitabha Chatterjee. The substantial questions of law are as follows: “(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that deduction allowed under Section 80IA of the Act needs to be reduced while computing profits of the business eligible for deduction under section 80HHC of the Act ?”
Learned counsel submits that the issue is already covered by the judgment of the Hon’ble Supreme Court of India in Shital Fibers Ltd. versus Commissioner of Income Tax, reported in [2025] 476 ITR 309 (SC).
Learned counsel appearing for the respondent/department on instruction agrees with the submission made by the appellant.
As such, in view of the judgment of the Supreme Court in Shital Fibers Ltd. (supra), this Court holds that the substantial question of law to be in negative and in favour of the assessee.
The next substantial question of law is-
“(b) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that incentive/subsidy received by the appellant in the form of remission of sales tax is not capital but revenue in nature ?” The assessee received sales-tax remission under the West Bengal Incentive Scheme, 1993, which was granted to encourage expansion and modernization of industrial units located in backward areas and was directly linked to investment fixed capital.
The nature of such subsidy must be determined by applying the well-settled “purpose test”. In CIT v. Ponni Sugars and Chemicals Ltd. (306 ITR 392), the Supreme Court held that where the object of the subsidy is to enable setting up or expansion of an industrial unit, the receipt is capital nature irrespective of the mechanism through which it is granted. The principle was reiterated in CIT v. Shree Balaji Alloys (333 ITR 335), where incentive aimed at promoting industrialization in backward regions were held to be capital receipts. This Court in PCIT v. Ankit Metal 85 Power Ltd. (416 ITR 591) applied the aforesaid test and held that subsidies linked to capital investment for industrial development cannot be treated as revenue receipts.
A perusal of the West Bengal Incentive Scheme, 1993 clearly demonstrates that the remission was intended to induce fresh capital investment and expansion of industrial capacity. It was not a subsidy to assist the assessee in carrying on its trade more profitably.
The Tribunal, therefore, erred in treating the said subsidy as revenue in nature. We accordingly answer substantial question of law (b) in the negative, i.e., in favour of the assessee and against the revenue.
The appeal, being ITA/72/2018 and the appeal, being ITA/16/2021 along with connected application [IA No.GA/ 1/2017 (Old No.GA/43/2017)] are disposed of.
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