Serum Institute of India Private Limited Vs Union of India (Bombay High Court)
Issue under consideration
Whether sub-clause (xviii) to section 2(24) can be held as unconstitutional as it covers within its ambit capital subsidies. The said issue was analysed in the case of Serum Institute of India Private Limited vs. Union of India [W.P. No. 3735 of 2021]
Facts of the case
Petitioner is a biotechnology company manufacturing drugs and vaccines. Petitioner’s project qualified as ultra mega project under ‘Package Scheme of Incentives 2013’ introduced by Government of Maharashtra to promote industries in less developed areas of State of Maharashtra. Petitioner was entitled to receive benefits of Electricity Duty, Stamp Duty, VAT/CST, SGST and PF & ESIC under the said scheme.
Constitutional validity of sub-clause (xviii) to section 2(24)
The present petition is filed assailing the constitutional validity of sub-clause (xviii) to section 2(24). Clause (24) of section 2 which defines the term “income”.
The sub-clause (xviii) of section 2(24) is as follows:
2(24) – Income includes:
(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, –
the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 or
the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be.
The effect of the impugned sub-clause (xviii) is that subsidies, grants, cash incentives, duty drawback, waivers, concessions or reimbursements provided by the Central or State Governments either in cash or kind will be included within the meaning of the term “income” and consequently will be taxable under the Act. The impugned sub-clause however excludes subsidies, grants or reimbursements which are taken into account to determine the actual cost of an asset in terms of Explanation 10 to clause (1) to section 43.
Contentions of the Petitioner
Capital receipts
According to the Petitioner, prior to insertion of the impugned sub-clause (xviii), subsidies, grants or incentives received by any person which were in nature of “capital receipts” were excluded from the definition of “income” and consequently not taxable under the Act and that position has been also accepted by the Supreme Court in a catena of decisions.
By insertion of the said sub-clause, all sorts of subsidies whether capital or revenue in nature have been brought within the ambit of term income and made taxable even though capital subsidy has been held to be non-taxable by various Courts and Hon’ble Supreme Court.
The impugned sub-clause seeks to tax a capital receipt as “income” which obliterates the clear, well-established and fundamental distinction between “income” and “capital receipts” disregarding the constitutional scheme that tax can be imposed only on “income”.
Purpose test
Whether the receipt is capital or revenue in nature, has to be determined on the basis of a purpose test. The impugned sub-clause seeks to do away with the classification and the purpose test. The Hon’ble Supreme Court has laid down the “purpose test” to determine whether a subsidy is capital or revenue in nature, irrespective of;
when it is received;
source of subsidy; or
form of subsidy.
The test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given.
If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy.
In the case at hand, the subsidy scheme was to enable petitioner to set up a new unit or expand the existing unit and therefore, the receipt of the subsidy was on capital account. If the object of the scheme is only one i.e. to promote industrial development and generation of employment which is the case under the said scheme then the same can be only on capital account. Any benefit provided by the Governments to augment capital investment cannot by any means be treated as income.
Real Income Theory
The insertion of sub-clause (xviii) in section 2(24) removes the distinction between capital subsidy and revenue subsidy which is contrary to the principles of “real income” theory which is one of the foundations for levy of income tax. Accordingly the impugned sub-clause is liable to be struck down as being unconstitutional and violative of fundamental rights.
The expression “income” defined under clause (24) of section 2 read with section 4 denotes that income is any monetary return coming in. In case of capital subsidy, there is no monetary return coming in because the assessee who invests capital does not invest the same in return of subsidy but invests to earn profit from running its business activity. Only real income is taxable i.e. profits arrived at on commercial principles. Accordingly, the capital subsidy covered in the given case is not real income and cannot be sought to be taxed.
The State Government provides incentives from its own coffers in order to promote industries and employment and the disbursal of the incentives and benefits are from funds of the State. For the Central Government to tax these incentives and benefits as income of recipient will be an indirect mechanism to tax the revenue of the State which is impermissible under the Constitution and violative of Article 12, 14, 19, 246, 265 and 289 of the Constitution of India and is contrary to the provisions of Section 4 and 5 of the Income-tax Act, 1961. The impugned sub-clause is violative of Article 19(1)(g) of the Constitution. The State Government on one hand is encouraging petitioner to invest in its State by providing subsidies and incentives and on other hand the Central Government seeks to tax the very same subsidy thereby affecting the right to carry on business.
The Central Government has the power to impose taxes on income under Entry 82 of List I to Schedule VII. The impugned sub-clause seeks to expand the scope of “income” beyond the meaning which could be capable of being ascribed under Entry 82 of List 1 to Schedule VII. The definition of income under section 2(24) is an inclusive one and its ambit should be the same as that of the word income occurring under Entry 82 of List 1 to Schedule VII.
Legislative overruling of Supreme Court decisions
It is open to the Legislature within certain limits to amend the provisions of the Act retrospectively and to declare what the law shall deemed to have been but it is not open to the legislature to say that a judgment of the Court, which is properly constituted and rendered in exercise of its powers in a matter brought before it, shall be deemed to be ineffective and the interpretation of law shall be otherwise than as declared by the Court. The inclusion of capital subsidies in the impugned clause (xviii) in section 2(24) amounts to legislative overruling of Supreme Court decisions which is impermissible as held in Madras Bar Association vs. Union of India and Anr. (2022) 12 SCC 455.
Struck down of impugned sub-clause (xviii)
Thus, the impugned sub-clause should be held unconstitutional and contrary to provisions of the Act and is liable to be struck down. In the event if the Court is not inclined to strike down the impugned clause then the same should be read down in such a way that it would apply only to receipts on revenue account.
Examination of constitutional validity of sub-clause (xviii) to section 2(24)
Parameters to be followed by Writ Courts for examining the constitutional validity of a provision
Following parameters have to be followed by Writ Courts for examining the constitutional validity of any provision namely:
Whether the law under challenge lacks legislative competence?
Whether it violates any Article of Part III of the Constitution, particularly Article 147?
Whether the prescribed criteria and classification resulting there from is discriminatory, arbitrary and has no nexus with the object of the Act?
Whether it is legislative exercise of power which is not in consonance with constitutional guarantees and does not provide adequate guidance to make the law just, fair and reasonable?
Provisions of sub-clause (xviii) to section 2(24) have to be tested on the anvil of the above set parameters.
No tax shall be levied or collected except by authority of law
Article 265 of the Constitution of India states that “No tax shall be levied or collected except by authority of law”. Sub-clause (xviii) to section 2(24) was introduced by Finance Act, 2015 duly passed by the Parliament and is therefore not violative of Article 265.
Article 14 lists Right to Equality and bars the State from creating unintelligible and irrational classifications. The impugned sub-clause only expanded the scope of income and all are treated on equal footing and unequals are not being treated as equals. Accordingly, the provisions of sub-clause (xviii) are not violative of Article 14 the Constitution.
The Court had also held that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot struck down as invalid.
Taxation of concession/subsidies is nuanced and specific
The Revenue Department’s approach towards taxation of concessions or subsidies is nuanced and specific. The tax is levied on the concession amount or the subsidy received and not on the transaction value. This ensures that the taxation is limited to the extra benefit accrued due to the state’s incentive schemes thereby upholding the principles of fairness and equity in taxation. This methodology aligns with the canons of taxation which advocates for fairness, equity and simplicity ensuring that the tax burden is proportionate and not unduly onerous. Petitioner’s claim of an indirect rollback of incentives is unfounded as the incentives remain intact. The only aspect subjected to taxation is the monetary benefit derived from the subsidy or concession which is a fair and justifiable tax base.
No violation of Article 19(1)(g)
The Constitution safeguards the right to trade under Article 19(1)(g) but does not extend this protection to the right to profit. Petitioner’s assertion that taxation of subsidies and concessions under the impugned sub-clause effectively nullifies the distinction between capital and revenue subsidies leading to erosion of what they perceive as a benefit or savings cannot be entertained.
The imposition of tax on these subsidies under the amended provision does not constitute an “taking away” of a benefit but rather represents a recalibration of fiscal advantages in line with broader economic and policy considerations.
Accordingly, there is no tenable basis to impugn the constitutional validity of the sub-clause (xviii).
No infringement of fundamental rights
As held in Nazeria Motor Service vs. State of Andhra Pradesh (1969) 2 SCC 576, assumptions that profits would be diminished or greatly reduced does not mean that there is infringement of the fundamental rights under Part III of the Constitution of India. As held in Malva Bus Services vs. State of Punjab and Ors. (1983) 3 SCC 237, the mere fact that a tax falls more heavily on certain goods or persons may not result in its validity.
Mere excessiveness of a tax or even the circumstances that its imposition might tend towards diminution of the earnings or profits of the persons does not per se constitute violation of rights under Part III of Constitution.
Legislative overruling of Supreme Court decision permissible
It is settled law as held in Hindustan Gum Chemicals Ltd. Vs. State of Haryana and Ors. [(1985) 4 SCC 124] that it is permissible for a competent Legislature to overcome the effect of a decision of a Court, setting aside imposition of tax, by passing a suitable legislation and by amending the relevant provisions of the statute, thus taking away the basis on which the decision of the court had been rendered.
Findings
Capital subsidy vs. revenue subsidy
Before the insertion of sub-clause (xviii) to section 2(24) through Finance Act, 2015, the Supreme Court applied the “purpose test” to determine whether a subsidy was a capital or revenue receipt. In the landmark cases of Sahney Steel & Press Works Ltd. Vs. CIT [228 ITR 253 (SC) and CIT vs. Ponni Sugars and Chemicals Ltd. [306 ITR 392 (SC)], the court held that if the subsidy’s purpose was to help the assessee to run the business more profitably or meet daily business expenses then it was considered as revenue receipt and thus taxable. Conversely, if the subsidy aimed at setting up a new unit or expanding an existing unit then it was deemed to be capital receipt and thus not taxable.
The Finance Act, 2015 significantly altered the landscape by introducing sub-clause (xviii) to section 2(24). This amendment defined any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement provided by the Central or State Government as income and hence taxable unless used to determine the actual cost of an asset. This amendment sought to end disputes by making all subsidies taxable unless they fell under an exclusion category. There is very limited scope for challenging constitutional validity.
Challenging constitutional validity
The fulcrum of the constitutional challenge is the question of legislative competence. Every legislation is an experiment in achieving certain desired ends and trial and error method is inherent in every such experiment. Every legislation particularly in economic matters cannot provide for all possible situations or anticipate all possible abuses. The Court while examining the constitutional validity of a legislation in economic matters be resilient, not rigid, forward looking, not static, liberal, not verbal.
No arbitrariness in introduction of impugned sub-clause (xviii)
According to petitioner, the impugned sub-clause is liable to be struck down as manifestly arbitrary. There is nothing to indicate that there was anything arbitrary in introduction of the impugned sub-clause. The said sub-clause does not suffer from the vice of discrimination.
Decision
Matters of economic policy should be best left to the wisdom of the legislature. In the context of a changed economic scenario, the expertise of the people dealing with the subject should not be lightly interfered with. While dealing with economic legislation, this court would interfere only in those few cases where the view reflected in the legislation is not possible to be taken at all. The case of the petitioner certainly does not fall within this exception. The Hon’ble Court does not find that by inserting the impugned sub-clause there is any perversity or gross disparity resulting in clear or hostile discrimination.
The mere fact that the institution of tax by virtue of the impugned sub-clause falls more heavily on petitioner cannot result in its in validity.
In light of the above, the amendment to Section 2(24) by the insertion of sub-clause (xviii) of the Finance Act, 2015 is a perfect example of a legislative endeavour to align the definition of “income” with the evolving economic landscapes.
The submission of the petitioner though appear to be of fiscal concern were more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded.
The amendment to section 2(24) by insertion of the impugned sub-clause, that includes various subsidies and concessions, only indicates the well-established jurisdictional path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital log in the nation’s fiscal machinery.
Since there is no merit in the petition, it is dismissed.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Considering the reliefs sought in the petition, it was decided to hear the petition finally at the admission stage itself.
2. Therefore, rule. Rule made returnable forthwith.
3. Petitioner is a biotechnology company manufacturing drugs and vaccines. Petitioner has a manufacturing plant at Hadapsar, Pune. Petitioner’s units at Hadapsar area are eligible for deduction under Section 10AA of the Income Tax Act, 1961 (the Act). Petitioner also has commissioned another manufacturing facility in the Special Economic Zone (SEZ) located at Manjari, Pune, which commenced production during the Financial Year 2019-2020.
4. The Government of Maharashtra had, from time to time, issued several Industrial Policies and Schemes to promote industries in less developed areas of the State of Maharashtra. The present writ petition is concerned with one such scheme being, ‘Package Scheme of Incentives, 2013’, which came into effect from 1st April 2013 for a period of five years (hereinafter referred to as the said Scheme). The said Scheme provides for various incentives to major industries depending on the type of project and amount of investments they make. The benefits include stamp duty concessions, exemption from electricity duty and VAT/CST/SGST subsidy.
5. The said Scheme covered various eligible industrial units as specified from time to time which included biotechnology manufacturing units. Petitioner would fall in this category. The said Scheme covered various projects as defined in the Scheme including mega projects/ultra mega projects. These are industrial units satisfying the minimum threshold limits of fixed capital investments or direct employment prescribed in the said Scheme. Petitioner’s project qualified as ultra mega project under the said Scheme. The qualifying criteria for ultra mega project states was either investment in eligible fixed assets of Rs.1500 Crores or direct employment of 3000 employees. The admissible period for investment under the said Scheme was from 1st April 2013 to 21st March 2020 and the operative period for the said Scheme is 30 years from the date of effect of the Entitlement Certificate. Petitioner’s operative period is 1st January 2015 to 31st March 2045.
6. Petitioner states it being an eligible unit under the ultra mega project, made capital investment of more than Rs.1500 Crores. Petitioner made its application for being eligible under the said Scheme on 27th March 2018, i.e., after making an investment amounting to more than Rs.1500 Crores which has been approved by the State of Maharashtra on 12th October 2018 and further amended on 25th March 2019. In view of the approval, the State of Maharashtra has issued to petitioner eligibility certificate dated 25th January 2019 read with letter dated 17th December 2019. According to petitioner, in view of the above, petitioner is entitled to receive the following benefits under the said Scheme :
