The income tax department has sought the Supreme Court’s direction to decide if Reliance Industries Ltd  should pay tax on sales tax incentives given to them by the governments of Maharashtra and Gujarat. A bench headed by Justice S H Kapadia has sought reply from the company headed by Mukesh Ambani. The tax of Rs 368 crore is for the company’s two units at Hazira and Patalganga for the assessment year 1998-99.

The revenue department has challenged a Bombay High Court order which admitted its appeal but did not decide if the company was entitled to claim tax relief.

Solicitor general Gopal Subramanian and counsel Balaji Subramanian, appearing for the department said the high court had erred in declining to frame the questions.

The department has contested that merely setting up of a new unit would not qualify RIL to avail of the tax benefit until production actually commenced at the two units for which the benefits were given.

This is because, the counsel argued that the incentive schemes were not part of any central subsidy scheme where typically the centre allocates funds to state governments to deploy.

But RIL has claimed it had opted for sales tax exemption scheme introduced by both the state governments and had therefore claimed deduction as ‘notional sales tax’ of Rs 368 crore.

The assessing officer had disallowed the claims on the ground that the amount being the sales tax collected as part of trading/revenue receipt of RIL was not a capital receipt.

It said after pursuing the scheme as amended by the different resolutions it had been found that sales tax subsidy was not being granted for setting up new unit, but was granted to support the new unit during initial period of production by giving sales tax subsidy either in the form of exemption or by deferral of sales tax liability.

The assessing officer had noted that the sales tax subsidy was given if production was carried out and sales tax effected. “If there are no sales, there will be no incentive, which makes it abundantly clear that the incentive is in the field of revenue and not capital in nature”.

While the Commissioner allowed the claim for deduction of sales tax incentive holding it to be in the nature of ‘capital receipt’ and deleted the additions made by the assessing officer, it refused to interfere with the interest and otrher expenses estimated to the extent of Rs 20 lakh being incurred towards earning dividend income on estimated basis thereby reducing exemption available to RIL.

Subsequently, the income tax tribunal had, by a common final order in April 2008, disposed of the RIL appeals relating to six assessment years including 1998-99.

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