CIT Vs Indo Rama Textiles Ltd. (Delhi High Court)
Delhi High Court held that sales tax subsidy/incentive received by the respondent/assessee under the Dispersal of Industries Package of Incentives, 1993 Scheme is a capital receipt and not revenue in nature.
Facts-
The issue which arises for consideration in the appeals concerns the nature of the benefit received by the respondent/assessee. The benefit which the respondent/assessee has obtained from the Government of Maharashtra, in the AYs in issue, is a sales tax subsidy in the manner and form prescribed under the scheme titled “Dispersal of Industries Package of Incentives, 1993”.
The moot point which arises for consideration is whether the sales tax subsidy received by the respondent/assessee is a capital receipt or, as contended by the appellant/revenue, a revenue receipt.
Conclusion-
The argument that the sales tax subsidy/incentive was granted to assist in carrying on business operations and thereby help make the industries more profitable, both on facts and in law is untenable. The sole purpose of the 1993 Scheme was to set up new units and/or expand existing units in underdeveloped and developing areas; an aspect which also emerges on perusal of classification of areas given in paragraph 1.3 of the 1993 Scheme.
Held that sales tax subsidy/incentive received by the respondent/assessee under the 1993 Scheme was a capital receipt.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. These appeals concern Assessment Year (AY) 1997-98 [ITA No.393/2014], AY 2005-06 [ITA Nos.392/2014 & 395/2014], AY 2006-07 [ITA Nos.394/2014 & 397/2014], AY 2008-09 [ITA Nos.396/2014 & 398/2014], AY 2013-14 [ITA No.496/2022] and AY 2014-15 [ITA No.443/2022].
2. At the outset, we would note that the counsel for the parties agreed in the course of the hearing in the above-captioned appeals that the issue raised on behalf of the appellant/revenue is common, and therefore, the facts of one of the appeals could be taken up for discussion to arrive at the end result.
3. Bearing this in mind, we would be referring to the facts insofar as they are relevant to the issue at hand obtaining in ITA No.393/2014, which, as indicated above, concerns the earliest AY, i.e., AY 1997-98.
4. The common question of law, which was framed in the above captioned appeals, reads as follows:
“Whether the Income Tax Appellate Tribunal was right in holding that the subsidy received in the form of sales tax incentive under the Resolution dated 07th May, 1993 under the Package Scheme of Incentives Scheme, 1993 was [a] capital receipt and not revenue in nature?”
5. Thus, the central issue which arises for consideration in the appeals concerns the nature of the benefit received by the respondent/assessee. The benefit which the respondent/assessee has obtained from the Government of Maharashtra, in the AYs in issue, is a sales tax subsidy in the manner and form prescribed under the scheme titled “Dispersal of Industries Package of Incentives, 1993”[hereafter referred to as “1993 Scheme”].
6. The moot point which arises for consideration is whether the sales tax subsidy received by the respondent/assessee is a capital receipt or, as contended by the appellant/revenue, a revenue receipt.
Backdrop:
7. Thus, before we proceed further to conclude one way or the other concerning the aforementioned issue, the following broad facts are required to be noticed:
7.1 The 1993 Scheme referred to hereinabove was notified by the Government of Maharashtra via Resolution dated 07.05.1993.
7.2 It appears that the Government of Maharashtra, to achieve the dispersal of industries outside the Bombay [now Mumbai]-Thane-Pune belt and to incentivise the setting up of new and expanded units in underdeveloped and developing areas had in 1964, forged a scheme titled “Package Scheme of Incentives”.
7.3 The Package Scheme of Incentives introduced in 1964 underwent changes from time to time. The 1993 Scheme we are concerned with is rooted in the Package Scheme of Incentives put in place by the Government of Maharashtra, as indicated above, in 1964.
7.4 Seeking to take advantage of the 1993 Scheme, the respondent/assessee set up industrial units in Butibori, Nagpur and Takhalghat, Nagpur. The production in the Butibori unit commenced on 01 .05.1994, while in the expanded Takhalghat unit, it commenced on 01.09.1996.
7.5 Upon an application being made, the respondent/assessee was issued two eligibility certificates dated 13.12.1994 and 15.10.1996 by the designated authority, i.e., the State Industrial and Investment Corporation of Maharashtra Limited [hereafter referred to as “SICOM”].
7.6 On 29.11.1997, the respondent/assessee filed its Return of Income [hereafter referred to as “ROI”] for AY 1997-98, wherein it declared a loss amounting to Rs.205,02,97,503/-.
7.7 The respondent/assessee was subjected to scrutiny assessment. The Assessing Officer (AO) passed an order on 28.03.2000, whereby the loss declared by the respondent/assessee was scaled down to Rs. 180,95,99,757/-. 7.8 In the appeal preferred by the respondent/assessee with the Commissioner of Income Tax (Appeals) [hereafter referred to as “CIT(A)”], the order passed by the AO was reversed. Thus, CIT(A), via order dated 10.09.2002, in effect, accepted the loss, as declared by the respondent/assessee in its ROI.
7.9 This resulted in the appellant/revenue approaching the Income Tax Appellate Tribunal [hereafter referred to as “Tribunal”] against the order dated 10.09.2002 passed by the CIT(A). The respondent/assessee lodged cross-objections with the Tribunal regarding the issue concerning sales tax subsidy.
7.10 The Tribunal, insofar as the issue pertaining to sales tax subsidy was concerned, restored the matter to the AO to examine whether the 1993 Scheme (under which incentives had been granted to the respondent/assessee) was similar to an earlier avatar of the scheme, i.e., 1979 Scheme, which was considered by its special bench of the Tribunal in the matter of DCIT v. Reliance Industries Ltd (2004) 88 ITD 273 (Mum) (SB). This direction was issued by the Tribunal on 01.02.2006.
8. Upon remand by the Tribunal, submissions were advanced before the AO qua the matter concerning sales tax subsidy on 28.12.2007.
8.1. The AO, however, was not persuaded by the arguments advanced on behalf of the respondent/assessee and, accordingly, via order dated 31.12.2007, concluded that the sales tax subsidy had to be treated as a revenue receipt.
8.2. The respondent/assessee assailed the assessment order dated 31.12.2007 before the CIT(A). The CIT(A), via order dated 19.09.2011, overturned the conclusion arrived at by the AO that the sales tax subsidy had to be treated as revenue receipt. The CIT(A) observed that the 1993 Scheme was identical to the 1979 Scheme considered by the unique bench of the Tribunal in the matter of DCIT v. Reliance Industries Ltd.
8.3 In reaching this conclusion, the CIT(A), among other things, considered the order dated 26.03.1998 passed by his counterpart concerning the respondent/assessee qua AY 2003-04. Since, in the said order, there was an elaborate discussion about the similarities and differences that obtained between not only the 1979 Scheme but also the 1983 Scheme, when compared with the scheme forged by the Andhra Pradesh State Government [which was the subject matter of the decision rendered by the Supreme Court in Sahney Steels and Press Works Ltd. v. CIT, (1997) 228 ITR 253 SC], the order passed was extracted in extenso.
8.4. For convenience, the relevant part of the said order passed by the CIT(A) concerning AY 2003 -04 is set forth hereafter:
“(c) In the background of the facts above, and directions of the ITAT, the appellant’s case for AY 97-97 that the case of the appellant for claim of sales tax subsidy as exempt being a capital receipt be examined in the case of DCIT vs Reliance Inds. ltd 88 ITD 273 (Mumbai Special bench), the relevant grounds of appeal are required to be considered. My analysis and findings are as under
(i) The sales tax subsidy is said to pertain to the appellant’s unit at Butibori. Butibori is and [sic, an ] industrial area developed by [the] Maharashtra Industrial-Development Corporation in 1994. The appellant in 1995 set up its integrated polyester complex at Butibori for [the] production of POY and PSF.
(ii) In the scheme formulated by [the] Govt of Maharashtra (Industries, Energy and Labour Department) under resolution No. IDL1093/(8889)IND-8 under the nomenclature “Dispersal of Industries -New Package Scheme of Incentives. 19931″ Butibori falling in Nagpur Division is a group “D” area, where the quantum of sales tax incentives in accordance with para 5.1 (IS) would be 9 years or earlier, if the ceiling of 90% of fixed capital investment is reached in case of non-pioneer unit or 11 years or earlier if the ceiling of 110% of fixed capital investment is reached, in case the appellant is regarded as a pioneer Thus if the appellant is otherwise eligible to sales tax incentive by way of exemption under the 1993 New Package Scheme of Incentive of Govt. of Maharashtra, the fact that the unit is at Butibori, a category “D” area as per classification, and the unit being setup up in 1995, the percentage of fixed capital investment as per the stipulation for a period of 9 to 11 year. Since the appellant has setup up its unit in 1995, it is otherwise covered for the tax incentive for the year under appeal.
(iii) The Tribunal in the appellant’s case for AY 1997-98 has set aside for verification the issue as regards applicability of the DCIT” Vs Reliance Industries Ltd. 88 ITD 273 (Mumbai Special Bench)” to the case of appellant undertaking its business of production of PSF and POY at an area classified under the Maharashtra Incentive. Scheme 1993 for its coverage for grant of sales tax incentive. In the case before the Bombay Tribunal, the issue relate to classifying the character of the subsidy obtained under the 1979 package scheme of incentives of the Maharashtra Government, and whether subsidy could be treated as revenue receipt as per the decision of the Tribunal in the case of Bajaj Auto Ltd ( IT reference no. 49 and 110) (Bombay) of 1991 dated 31.12.2002). in the case of DCST vs Reliance Industries Ltd (supra) it was held at para 28 and 29 of the order that the thrust of the Maharashtra Scheme was industrial development of the backward districts as well as generation of employment, thus establishing, a direct-nexus with the investment in fixed capital assets. In the preamble to 1993 scheme, there is sufficient pointer that the incentive under the scheme is given encourage the setting up of industrial units during a particular period n certain backward areas of Maharashtra as well as for dispersal of the Industries. At para 17 of the order, the Tribunal referring to Sahney Steel & Press Works ltd 228 ITR 253 (SO holds that the nature of the receipt would depend upon the scheme under which a subsidy is given. The Special Bench gave a finding that in the earlier order of Reliance Industries ltd for 1985-86 (IT appeal no. 1418 (Bom) of 1988 and 75554 of 1989) the Tribunal examined the 1979 scheme of the Govt of Maharashtra tracing the background of the subsidy from 1965 when it was first given, and each and every scheme thereafter and proceeded to compare the 1979 scheme with the Andhra Pradesh Scheme. The Andhra Pradesh Scheme was the subject matter of judgment in Sahney Steel & Press Works Ltd (Supra). The Special Bench observed that the Tribunal after detailed analysis of the schemes came to the conclusion that the Maharashtra scheme Was materially different from the Andhra Pradesh and Madhya Pradesh scheme ( the latter was the subject in Ousad industries 162 STR 784 (M.P.) The Tribunal on and analysis of the 1979 package scheme came to the conclusion that the thrust of the scheme was that the assessee would become entitled that the object of the incentive even before the commencement of the business which implied that object of the incentive was to finance a part of the cost of setting up of the factory in the notified backward area. According to the Tribunal, the Scheme was for industrial development of the backward districts as well as generation of employment and hence there was direct nexus with investment in fixed capital assets. The sales tax incentive had been envisaged as an “alternative, to disbursement and by its very nature would be available to the assesses only after the production has commenced. The Special Bench, after appreciating the ratio of the previous decision in Reliance Industries case (IT Appeal No. 1418/1988 and 7544/89) held that the observation of the Tribunal in Bajaj Auto case (IT reference -No 49 and 11-01) (Born) of 1991) was not supported by any reason as to why it was felt that the earlier order of the Tribunal in Reliance Industries case referred only to the form of the Scheme and not their substance in para 108 of the order in Reliance Industries case, the Tribunal found that in Andhra Pradesh Scheme, the object was to stimulate rapid industrialization throughout the state, whereas under the Maharashtra Scheme, the aim was to disperse the industries outside the Bombay, Thana – Pune belt and to speed up the pace of industrialization in the developing regions of the state. Under the Maharashtra Scheme, no incentive was available to industries in the developed regions of the state. The second point of difference related to the quantum of the sales tax incentive which was uniform to “all eligible units under the Andhra Pradesh Scheme, but not so under the Maharashtra scheme, under which the quantum depended on the area in which the industry is located. The third point of distinction was that in the Andhra Pradesh scheme incentive, was in the form of refund of sales tax subject to maximum of equity capital, whereas under the Maharashtra scheme, it was either in form of sales tax exemption and interest free unsecured loans. Further the incentives in the Maharashtra Scheme were subject to monetary limits directly related to fixed-capital investment. Another distinction is the period f (sic: of) eligibility, which stood at 5 years for all units under Andhra Pradesh scheme, whereas, it varied depending upon whether the unit was new or existing or a pioneer unit or a resource based unit. The period of eligibility could also be curtailed if the investment was likely to fail short of sales tax liability. Another pint of distinction was that under the A. P. scheme, the units were required to apply every year for the subsidy after being II set up and going into production, whereas under the Maharashtra scheme, an intending entrepreneur after taking initial effective steps such as taking possession, of land, making application for registration, could also make an application without waiting for the completion of the setting up of the unit for the purposes of availing the incentives, although the final eligibility certificate from SICOM and the letter f (sic: of) entitlement from the Commissioner of sales tax could be granted only after the commencement of production, in that manner, the ratio of the decision in Bajaj Auto Ltd case has been overruled in 1988 ITO 273 (Mumbai).
In Bajaj Auto Ltd. case the assessee availed of the benefit of the 1983 package scheme of incentives. This is comparable to the 1993 scheme of incentives. The preamble and object of both 1983 and 1993 schemes are identical i.e. setting up or expansion of the units in the developing under developed regions of Maharashtra . The basis for classification of areas under the 1993 scheme, and the 1983 scheme are identical. The effective steps to be taken for claiming approval under the 1993 scheme are similar to the one used in the 1983 scheme. The quantum of sales tax incentives under para 5.1 (1( (I) of the scheme 193, is directly linked to the amount of capital investment in the unit. The exemption under the package scheme of 1993 as in the 1983 scheme are therefore in direct production to the investment in fixed assets.
I hold therefore that following the over ruling of the order in the case of Baja] Auto Ltd (IT reference No.49 and 1101 Bombay) of 1991 dated 31.12.2002) vide the special bench Bombay’s order vs DCIT vs Reliance Industries Ltd 88 LTD 273 (mum) and the fact that the 1983 scheme of Govt of Maharashtra is identical in its application to those contained in the 1993 package scheme of incentives, the appellant is entitled to claim as capital receipt of the notional sales tax liability. The AD is directed to allow upon verification the quantum of notional sales tax liability computed at Rs. 77,89,99,7437- as per the CAs certificate. Subject to the verification above, the ground is allowed.
(d) I also hold that pursuant to introduction of Explanation (10) in section 43(1) w.e.f 01.04.99, any subsidy intended to meet the cost of assets should go to the reduce the actual cost for the purposes of allowance of depreciation u/s 32 of the act. Hence, the amount of sales tax exemption is also to be proportionately reduced from the w.d.v. of the respective block of asset on the basis of cost of project indicators given in the eligibility certificate issued by SICOM. Thus I direct that the amount of sales tax incentives held a capital receipt in an earlier part of this order be considered as a reduction form the block of asset at the admissible amount of depreciation. The AD would give effect accordingly.”
[Emphasis is ours]
9. Being dissatisfied, the appellant/revenue preferred an appeal with the Via the impugned order dated 22.06.2012, the Tribunal sustained the order passed by the CIT(A).
10. Against this backdrop, the appellant/revenue has preferred an appeal to this court.
Submissions of counsel:
11. The submissions on behalf of the appellant/revenue were advanced by Mr Shlok Chandra, learned senior standing counsel, while Mr Ajay Vohra, learned senior counsel, advanced arguments on behalf of the respondent/assessee.
11.1 Mr Chandra’s arguments can broadly be paraphrased as follows:
(i) The 1993 Scheme was a production-linked incentive scheme that kicked in only after the eligible unit had commenced production. To buttress this submission, the following aspects of the scheme were emphasised:
(a) Firstly, although the main objective of the 1993 Scheme was to disperse industries outside the Bombay [now Mumbai]-Thane-Pune belt, the eligibility certificate was issued once commercial production had Significantly, the 1993 Scheme did not envisage land grants or interest-free capital.
(b) Secondly, under the 1993 Scheme, the eligible units were those that, among other things, possessed the land, registrations from different governmental bodies, and industrial licenses declaring the commencement of commercial production. The said requirements were captured in the 1993 Scheme under the sub-headings “Initial Effective Steps” and “Final Effective Steps”
(c) Thirdly, the 1993 Scheme provided various incentives, including sales tax incentives by way of exemption, deferral and interest-free unsecured loans.
(ii) The 1993 Scheme, thus, did not assist in setting up the industry but helped make the industrial units viable by increasing their working capital. [See paragraphs 3.1 and 3.3 of the 1993 Scheme].
(iii) The 1993 Scheme improved liquidity by providing sales tax incentives; it did not provide for any direct or indirect payment for setting up the industrial unit. The sole purpose of the 1993 Scheme was to alleviate hardship and handhold such industrial units. [See Sahney Steel & Press Works Ltd. v. Commissioner of Income Tax (1997)228 ITR 253 (SC)]
(iv) The 1993 Scheme was not intended to contribute towards the capital outlay of the industrial unit. The sales tax subsidy provided to the respondent/assessee only assisted in carrying on business operations and, thus, was in the nature of a revenue receipt. [See Commissioner of Income Tax v. Rassi Cements Ltd. (2013) 351 ITR 169 (Andhra Pradesh); Wardex Pharmaceuticals (P.) Ltd. v. Assistant Commissioner of Income Tax (2008) 307 ITR 387 (Madras) and Commissioner of Income Tax v. Steel Authority of India Ltd. (2002) 257 ITR 241 (Delhi)]
(v) Since the incentive concerned sales tax, the receipt inherently can only be construed as a revenue receipt.
(vi) The judgments rendered in PCIT-04 v. Nestle India Ltd., 2023:DHC:4438-DB; CIT v. Ponni Sugars and Chemicals Ltd., (2008) 306 ITR 392 (SC) and CIT v. Chaphalkar Brothers, [2018] 400 ITR 279 (SC), are distinguishable on facts. In paragraph 16 of the judgment rendered in Ponni 6XJar’s’case, the Supreme Court noted that the facts found in Sahney Steel were different. It was noticed that Ponni Sugar, i.e., the appellant, was free to use the money received in its business activity as per its requirements. Likewise, in Chaphalkar Brothers, the subsidy was given to offset the burden of the substantial capital expenditure required for setting up multiplex cinema theatres.
(vii) On the other hand, the 1993 Scheme does not impact the capital expenditure component, which would remain the same or even less if the eligible industrial unit moved to a less developed or underdeveloped area. What the 1993 Scheme does is improve the profitability and viability of the eligible industrial unit.
(viii) The mere factum of setting up a new unit in a particular geographical region would not be sufficient to treat the sales tax incentive as a capital Thus, the subsidy would have to be treated as a revenue receipt in the instant case.
11.2 Mr Vohra, on the other hand, apart from taking us through the contours of the 1993 Scheme, which, according to him, in sum, was put in place to disperse and attract industries to underdeveloped and developing areas in the State of Maharashtra, gave granular details about the investment made by the respondent/assessee in setting up the new units in Butibori area as reflected in the eligibility certificates dated 13.12.1994 and 15.10.1996:
