MEIS Is Called a “Reward.” Does That Make It a Capital Receipt? Mumbai ITAT Says No

ACIT Vs Sangam (India) Ltd. (ITAT Mumbai)

Summary: Sangam (India) Ltd. had included ₹5,95,46,449 received under the Merchandise Exports from India Scheme (MEIS) in its return of income. It later argued that the inclusion was a mistake: the incentive was, in its view, a capital receipt that should be excluded both from taxable income under the normal provisions and from book profit under section 115JB. The Commissioner (Appeals) accepted that claim.

On the Revenue’s appeal, the Mumbai Tribunal reversed the MEIS finding. Following the Mumbai Special Bench decision in Aarti Drugs Ltd. v. ACIT, it held that the incentive was a revenue receipt taxable under the normal provisions and includible in book profit under section 115JB. The word “reward” used in the scheme did not determine its tax character.

How the Claim Reached the Tribunal

Sangam (India) Ltd. was engaged in manufacturing textile products and generating power. For AY 2020–21, it filed a return declaring income of ₹16,73,69,620 under the normal provisions and book profit of ₹20,30,46,844 under section 115JB. The ₹5.95 crore MEIS incentive was included in its returned income.

The return was processed under section 143(1), followed by an order under section 154. That rectification order dealt with several matters, including deferred tax and credits for advance tax, TDS and TCS. The assessee also sought to remove the MEIS amount from income and book profit, saying it had been offered to tax inadvertently. That request was not accepted in the rectification order.

The Commissioner (Appeals) subsequently held the MEIS incentive to be a capital receipt and allowed its exclusion from both computations. Other relief concerning deferred tax and tax credits was also granted, subject to verification. The Revenue’s appeal before the Tribunal challenged the MEIS relief.

The Assessee’s Capital Receipt Argument

The assessee contended that MEIS was designed to promote manufacture and exports under the Foreign Trade Policy 2015–20. It emphasised that the scheme described the benefit as a “reward” to eligible exporters and argued that a reward should be distinguished from ordinary business assistance.

It relied on decisions concerning other incentive and subsidy schemes, as well as decisions addressing whether a capital receipt can enter the section 115JB computation. The assessee also referred to an earlier Tribunal order in its own case for AY 2015–16, in which the Assessing Officer had been directed to verify its claim.

The Revenue, however, relied on the later Aarti Drugs Special Bench ruling, constituted to address conflicting Tribunal views on the character of MEIS rewards. The present bench found that Sangam’s incentive arose under the same scheme and had the same relevant features. It therefore applied the Special Bench’s conclusion.

The Purpose of MEIS Was Decisive

The Tribunal explained why the scheme’s label did not settle the issue. MEIS granted duty credit scrips to eligible exporters of notified goods for notified markets. The incentive aimed to offset infrastructural inefficiencies and associated export costs and improve export competitiveness.

Its amount was calculated as a percentage of the FOB value of exports. It was not tied to setting up a new unit, substantially expanding an existing one or making a minimum capital investment. Nor did the scheme require recipients to use the benefit to repay a loan or acquire capital assets. The scrips were freely transferable and could be used for various duty, tax and fee payments.

Applying the purpose-based analysis discussed in Sahney Steel & Press Works Ltd. v. CIT and CIT v. Ponni Sugars & Chemicals Ltd., the Special Bench had treated these features as pointing to a benefit connected with the profitable conduct of existing export business. The Mumbai bench followed that reasoning. An incentive calculated by reference to exports and available without a capital-use condition did not acquire a capital character merely because the policy called it a reward.

Section 2(24)(xviii) and Book Profit

The Tribunal also adopted the Special Bench’s reading of section 2(24)(xviii). That provision includes specified forms of assistance in the definition of income, using broad language that covers benefits “by whatever name called.” The Special Bench had held that a MEIS reward fell within that provision, including the descriptions of a grant or cash incentive, and that the relevant statutory exclusions did not apply.

The result was the same under section 115JB. Since the MEIS amount was a revenue receipt under the scheme and the statutory provision, the assessee could not exclude it from book profit on the premise that it lay outside income altogether.

The Tribunal therefore set aside the Commissioner (Appeals)’ finding only to the extent that it treated the ₹5,95,46,449 MEIS incentive as a capital receipt excludible from total income and book profit. The Revenue’s appeal was allowed.

The Additional Grounds Remain Undecided

The Revenue had also raised questions about whether the Commissioner (Appeals) could entertain this claim when the incentive had been offered in the original return, whether the issue was within the scope of section 154 proceedings, and whether additional evidence had been considered contrary to Rule 46A.

Although the Tribunal admitted these legal grounds, it expressly left them undecided after ruling for the Revenue on the substantive tax character of MEIS. This order should therefore be cited for its MEIS holding, not as a decision resolving those procedural questions.

Author’s Comments

This decision shows why the design of an incentive matters more than its name. MEIS was described as a reward, but eligibility and quantum followed export activity, while use of the scrips was unrestricted by a capital investment condition. Following the Special Bench, the Tribunal treated that combination as characteristic of a revenue receipt.

For this assessee and year, the consequence is clear: ₹5.95 crore remains taxable under the normal provisions and in the section 115JB book-profit computation. The Tribunal reached that result on the merits of MEIS and deliberately did not decide the separate rectification, appellate-jurisdiction or Rule 46A objections.

Cases Discussed

• Liberty India v. CIT, 317 ITR 218 (Supreme Court) — Cited in the Revenue’s original ground challenging the CIT(A)’s treatment of the MEIS incentive as a capital receipt.
• NTPC Ltd., 226 ITR 383 (Supreme Court) — Applied for admitting the Revenue’s additional grounds as purely legal grounds not requiring investigation of fresh facts.
• Bharat Rasayan Ltd. v. ACIT, ITA No. 1231/Del/2019 (ITAT Delhi) — Relied upon by the assessee for the proposition that assistance under MLFPS was a capital receipt.
• Shree Cement Ltd., ITA No. 614/JP/2010 (ITAT Jaipur), affirmed by Rajasthan High Court in Appeal Nos. 85/2014 and 204/2010 dated 22/08/2017 — Relied upon by the assessee for exclusion of capital subsidy from book profit under Section 115JB.
• CIT v. Harinagar Sugar Mills Ltd., ITA No. 1132 of 2014, order dated 04/01/2017 (Bombay High Court) — Relied upon by the assessee in support of its Section 115JB claim.
• Alok Industries Ltd. v. DCIT, ITA No. 1017/Mum/2017, order dated 21/05/2018 (ITAT Mumbai) — Relied upon for the proposition that a subsidy not chargeable under Section 4 cannot become chargeable under Section 115JB.
• Shivalik Venture Pvt. Ltd. v. DCIT, ITA No. 2008/Mum/2012, order dated 19/08/2015 (ITAT Mumbai) — Relied upon for the proposition that a receipt outside the definition of income cannot be included in book profit.
• Malana Power Co. Ltd. v. JCIT, ITA No. 2281/Del/2013, order dated 27/04/2018 (ITAT Delhi) — Relied upon by the assessee in support of the capital-receipt/book-profit contention.
• PCIT v. Ankit Metal and Power Ltd., [2019] 416 ITR 591 (Calcutta High Court) — Relied upon by the assessee in support of exclusion of a capital receipt from book profit.
• Binani Industries Ltd., ITA No. 144/Kol/2013 (ITAT Kolkata) — One of the coordinate bench decisions relied upon by the assessee in support of its Section 115JB position.
• L.H. Sugar Factory Ltd., ITA No. 417/LKW/2013 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Nilgiri Tea Estate Ltd., ITA No. 377/Coch/2010 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Harrisons Malayalam Ltd., 32 SOT 497 (Cochin) — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Genus Electrotech Limited, ITA No. 2840/Ahd/12 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• KrishiRasayan Exports, ITA No. 883/Kol/14 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Mcnally Bharat, ITA No. 532/Kol/12 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Sicpa India, ITA No. 933/Kol/12 — Relied upon by the assessee as part of the coordinate-bench authorities supporting its claim.
• Suraj Jewellery (India) Ltd., [2008] 21 SOT 79 (Mumbai) — Followed in the assessee’s own earlier case while directing verification of its claim under the normal provisions and Section 115JB.
• Shivalik Venture, [2015] 60 taxmann.com 314 (Mumbai) — Followed in the assessee’s own earlier case concerning its claim under the normal provisions and Section 115JB.
• DCIT v. Degree Orchards Pvt. Ltd., order dated 08/08/2018 — Followed in the assessee’s own earlier case while directing verification of the claim.
• ITO v. Frigsales (India) Ltd., [2005] 4 SOT 376 — Followed in the assessee’s own earlier case while directing verification of the claim.
• DCIT v. Aarti Drugs Ltd., ITA No. 2873/Mum/2023 (AY 2017–18) and ITA Nos. 3069 & 3183/Mum/2023 (AYs 2016–17 and 2017–18) (ITAT Mumbai Special Bench) — Followed by the Tribunal. The Special Bench held MEIS rewards to be revenue receipts taxable under the normal provisions and Section 115JB.
• Sahney Steel & Press Works Ltd. v. CIT, 228 ITR 253 (Supreme Court) — Applied by the Special Bench for the purpose test governing the capital or revenue character of subsidies and incentives.
• CIT v. Ponni Sugars & Chemicals Ltd., [2008] 306 ITR 392 (Supreme Court) — Applied by the Special Bench for the purpose test and the factors indicative of a capital subsidy.
• D.N. Singh v. CIT, [2023] 454 ITR 595 (Supreme Court) — Applied by the Special Bench while construing the wide residuary expression “by whatever name called” in Section 2(24)(xviii).
• Hyundai Motor India Ltd. v. ACIT, IT(TP)A No. 39/Chny/2021, order dated 22/12/2021 (ITAT Chennai) — Its contrary revenue-receipt approach was expressly approved by the Aarti Drugs Special Bench.
• DCIT v. Eris Life Sciences Ltd., ITA Nos. 847–850/Ahd/2025, order dated 09/12/2025 (ITAT Ahmedabad) — Its interpretation that “by whatever name called” brings governmental assistance within the statutory income definition was expressly approved by the Special Bench.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the Revenue is directed against the order dated 03.04.2025 passed by the learned Addl. /Joint Commissioner of Income-tax (Appeals)-4, Bangalore (hereinafter shall be referred to as the ‘Ld. CIT(A)’) for the A.Y. 2020-21, raising following grounds:

1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that export incentives received under the MEIS Schemes are capital receipts not liable to tax under the normal provisions of the Act and also liable for exclusion while computing book profit under section 115JB of the Income Tax Act, 1961, contrary to the binding precedent of the Hon’ble Supreme Court in Liberty India v. CIT (317 ITR 218)?”

2. During course of the hearing, the learned Departmental Representative (DR) also raised additional grounds, which are reproduced as under:

“1. Whether, on the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in adjudicating the issue relating to MEIS subsidy amounting to ₹5,95,46,449/-, which had been offered by the assessee to tax in its return of income filed on 13.02.2021 as export incentive?

“2. Whether, on the facts and in the circumstances of the case and in law, the learned CIT( A) exceeded his jurisdiction in deciding that the MEIS subsidy is a capital receipt or a revenue receipt, when this issue was not adjudicated in order under section 143(1) dated 31.03.2021 & order under section 154 of the Income Tax Act 1961 dated 24.01.2023.

“3. Whether, on the facts and in the circumstances of the case and in law, the learned CIT(A) exceeded his jurisdiction in deciding that the MEIS subsidy is a capital receipt or a revenue receipt, when such an issue falls outside the scope and purview of section 154 of the Income-tax Act, 1961, being not a mistake apparent from the record?

“4. Whether, on the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax (Appeals) erred in admitting and relying upon additional evidence on the issue of MEIS/export incentive amounting to 25,95,46,449/-and treating the same as a capital receipt, in contravention of Rule 46A of the Income-tax Rules, 1962, without affording the Assessing Officer an opportunity to examine or rebut such additional evidence as mandated under Rule 46A(3), thereby rendering the appellate order bad in law?”

3. The additional ground raised by the Revenue being purely of legal in nature, and not requiring investigation of the fresh facts, therefore same are admitted for adjudication in view of settled principle in the case of NTPC Ltd reported in 226 ITR 383(SC).

4. Briefly stated, facts of the case are that the assessee is engaged in the business of manufacturing of textile and handloom & power-loom products, and power generation. For the year under consideration, the assessee filed return of income on 13/02/2021 declaring total income of Rs. at Rs.16,73,69,620/- under the normal provisions of the Income-tax Act, 1961, (in short ‘the Act’) and book profit of Rs.20,30,46,844/- under section 115JB of the Act. The return, as filed, included the Merchandise Exports from India Scheme (MEIS) incentive of Rs. 5,95,46,449/- within total income.

4.1 The return of income filed by the assessee was processed u/s 143(1) of the Act and thereafter further rectified vide order under section 154 dated 24th January 2023, determining total income at Rs.23,40,71,700/-.

4.2 In the aforesaid order under section 154, the ld Assessing officer added to total income deferred tax amounting to Rs.4,30,00,000/-. He also denied credit of the advance tax, tax deducted at source(TDS), and tax collected at source(TCS). Further, he also rejected the claim of assessee of excluding export incentives received in form of MEIS amounting to Rs.5,95,46,449/- under normal provisions as well as MAT provisions, on the ground of included inadvertently.

5. On further appeal regarding the claim of export incentive, it was submitted that the MEIS incentive had been added to total income by inadvertent error in the original return. It was submitted that as per the FIP policy (2015-2020), objective of the MEIS was to promote the manufacture and export of notified goods/product. Hence, the incentive was granted to reward the eligible exporters under the Foreign Trade Policy 2015-20 policy, MEIS is a reward granted to the eligible exporter as recognition for increase in export. There is a marked difference between the term assistance and reward. It was submitted that accordingly, it was a capital receipt outside the charge to tax, both under normal provisions and under Section 115JB, since a receipt outside the definition of “income” cannot enter the computation of book profit either.

5.1 In support of the capital-receipt characterisation, the assessee relied (i) decision of Delhi Bench of Tribunal in the case of Bharat Rasayan Ltd. v. ACIT in ITA No. 1231/Del/2019, holding assistance under MLFPS to be a capital receipt; (ii) Shree Cement Ltd., ITA No. 614/JP/2010 (Jaipur Trib., 09.09.2011), affirmed by the Hon’ble Rajasthan High Court, Appeal Nos. 85/2014 and 204/2010 (22.08.2017), for the exclusion of capital subsidy from book profit under Section 115JB; (iii) CIT v. Harinagar Sugar Mills Ltd., ITA No. 1132 of 2014 (Bom., 04.01.2017); (iv) Alok Industries Ltd. v. DCIT, ITA No. 1017/Mum/2017 (21.05.2018), holding that a subsidy which is not chargeable under Section 4 cannot become chargeable under Section 115JB, “an alternate mechanism for computation of income”; (v) Shivalik Venture Pvt. Ltd. v. DCIT, ITA No. 2008/Mum/2012 (19.08.2015), holding that a receipt falling outside the definition of “income” cannot be included in book profit; (vi) Malana Power Co. Ltd. v. JCIT, ITA No. 2281/Del/2013 (27.04.2018); and (vii) PCIT v. Ankit Metal and Power Ltd. [2019] 416 ITR 591 (Cal.). The assessee also placed reliance on a battery of coordinate decisions to similar effect Binani Industries Ltd. (ITA No. 144/Kol/2013); L.H. Sugar Factory Ltd. (ITA No. 417/LKW/2013); Nilgiri Tea Estate Ltd. (ITA No.377/Coch/2010); Harrisons Malayalam Ltd. 32 SOT 497 (Coch); Genus Electrotech Limited (ITA No. 2840/Ahd/12); KrishiRasayan Exports (ITA No. 883/Kol/14); Mcnally Bharat (ITA No. 532/Kol/12); Sicpa India (ITA No. 933/Kol/12) and, significantly, on the decision of this Tribunal in the assessee’s own case for AY 2015-16, where, following Suraj Jewellery (India) Ltd. [2008] 21 SOT 79 (Mum.), Shivalik Venture [2015] 60 taxmann.com 314 (Mum.), DCIT v. Degree Orchards Pvt. Ltd. (08.08.2018), and ITO v. Frigsales (India) Ltd. [2005] 4 SOT 376, the Tribunal directed the AO to verify and allow the assessee’s claim, both under normal provisions and under Section 115JB.

5.2 The learned CIT(A) allowed the assessee’s claim regarding double addition of deferred tax in the book-profit computation and the non-grant of credit for advance tax, TDS, and TCS, subject to verification, and allowed the claim that the MEIS incentive of Rs. 5,95,46,449/- be excluded from total income, as well as from book profit under Section 115JB, as a capital receipt, subject to consequential verification of interest and MAT credit.

6. Aggrieved with the finding of the learned CIT(A) on the issue of the allowability of the export incentive as Capital receipt, the Revenue is in appeal before us.

7. Before us, the learned Departmental Representative on the regular ground raised, submitted that the assessee’s claim cannot be sustained, since MEIS rewards are revenue receipts, chargeable to tax both under the normal provisions of the Act and under Section 115JB. In support, reliance was placed on the decision of the Special Bench of this Tribunal in Aarti Drugs Ltd. v. ACIT, ITA No. 2873/Mum/2023 (AY 2017-18) and ITA Nos. 3069 & 3183/2023 (AY 2016-17 and 2017-18) — constituted to resolve conflicting views taken by different Benches on the character of MEIS rewards — which examined the scheme in detail and reached this very conclusion.

7.1 The ld. Counsel relied on the order of ld. CIT(A).

8. We have heard both sides and examined the record. The MEIS incentive here in question, like that considered by the Special Bench in Aarti Drugs Ltd. (supra), arises under the very same scheme i.e. Chapter III of the Foreign Trade Policy 2015-20, carrying the same objective of offsetting infrastructural inefficiencies and enhancing export competitiveness, the same computation as a percentage of FOB export value, and the same absence of any capital-investment threshold or utilisation obligation. The issue is accordingly identical on merits to that decided by the Special Bench.

8.1 The Special Bench, noted the scheme as under MEIS is a part of the Foreign Trade Policy, 2015-20 notified under the Foreign Trade (Development and Regulation) Act, 1992. The FTP-2015-20 was launched on April 1, 2015 introducing a slew of measures by providing a framework for increasing exports of goods and services, generation of employment and increasing value addition, in keeping with the “Make in India” vision of the government. MEIS envisages providing “reward” to exporters of notified goods to notified markets in the form of “duty credit scrips” for offsetting infrastructural inefficiencies and associated costs, involved in export of goods/products which produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing the country’s export competitiveness. The duty credit scrips and the goods imported/domestically procured against them shall be freely transferable. The duty credit scrips can also be utilised for a wide range of duty/taxes/fee payments. It is further noted that all the erstwhile schemes, viz. Focus Product Scheme (FPS), Focus Market Scheme (FMS), Vishesh Krishi Gramin Udyog Yojana (VKGUY), Market Linked Focus Product Scheme (MLFPS), Agri Infrastructure Incentive Scheme, and Incremental Export Incentive Scheme (offering separate duty credit scrips with varying conditions) have been merged into a single scheme, i.e. MEIS with no conditions attached thereto (for getting the assistance) except realization of export proceeds/foreign exchange.

8.2 The Special Bench after examining the objective, structure, and eligibility conditions of the MEIS scheme under Chapter III of the Foreign Trade Policy 2015-20, applied the “purpose test” laid down by the Hon’ble Supreme Court in Sahney Steel & Press Works Ltd. v. CIT, 228 ITR 253 (SC) and CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 (SC), under which a subsidy or incentive is a revenue receipt where its object is to enable the assessee to run its business more profitably, and a capital receipt only where its object is to enable the setting up or expansion of a unit, coupled with an obligation to apply the receipt to that capital purpose. Comparing the MEIS scheme against the four factors identified by the Supreme Court in Ponni Sugars (supra) as indicative of capital character, confinement to new or substantially expanded units, a minimum investment threshold, quantum linked to increase in production capacity, and mandatory utilisation for loan repayment , the Special Bench found none present in MEIS. The Special Bench observed that the scheme is open to all qualifying exporters, including merchant exporters; carries no investment threshold; computes the reward as a percentage of FOB export value, not production capacity; and imposes no obligation as to utilisation, the duty credit scrips being freely transferable and usable for any purpose, including payment of duties and taxes. On this basis, the Special Bench held that MEIS rewards, aimed at offsetting infrastructural inefficiencies and improving export competitiveness on a recurring, shipment-by-shipment basis, align with the revenue side of the Ponni Sugars (supra) test.

8.3 The Special Bench further held that MEIS rewards fall within the inclusive definition of “income” under Section 2(24)(xviii) of the Act (inserted with effect from 01.04.2016), which brings to tax “assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called),” subject only to the two exclusions in sub-clauses (a) and (b), neither of which applies to MEIS. Rejecting the argument that the principle of ejusdem generis confines the phrase “by whatever name called” to the seven enumerated categories and excludes a “reward,” the Special Bench held, applying D.N. Singh v. CIT [2023] 454 ITR 595 (SC), that the residuary phrase was deliberately used to keep the definition wide and elastic, and that a MEIS “reward” in any event falls within the description of “grant” or “cash incentive,” both enumerated categories.

8.4 The Special Bench considered and distinguished the decisions relied upon by assessees favouring capital treatment and noted that several arose prior to the introduction of Section 2(24)(xviii), or under schemes tied to industrial development of a particular region, or turned on their own peculiar facts, and expressly approved the contrary view taken in Hyundai Motor India Ltd. v. ACIT IT(TP)A No.39/Chny/2021 dated 22nd December, 2021 and DCIT v. Eris Life Sciences Ltd. ITA No.847-850/AHD/2025 dated 09.12.2025, holding that the phrase “by whatever name called” captures the legislative intent to bring within the tax net all forms of governmental assistance, the label “reward” notwithstanding.

8.5 The Special Bench accordingly held that MEIS rewards are revenue receipts, chargeable to tax both under the normal provisions of the Act and under Section 115JB, on both the purpose test and the statutory language of Section 2(24)(xviii).

8.6 Respectfully following the ratio of the Special Bench in Aarti Drugs Ltd. v. ACIT (supra), we hold that the MEIS incentive of Rs. 5,95,46,449/- is a revenue receipt, chargeable to tax both under the normal provisions of the Act and under Section 115JB. The finding of the learned CIT(A) to the contrary is set aside, and the original ground of the Revenue’s appeal is allowed.

9. Having so held on the substantive character of the MEIS incentive, we do not consider it necessary to adjudicate the additional grounds raised by the Revenue concerning the scope of the AO’s order under Section 154, the jurisdiction of the learned CIT(A) to entertain the issue in that context, and the alleged violation of Rule 46A. These grounds are left open, to be decided at an appropriate stage, if and when necessary.

10. The order of the learned CIT(A) is set aside to the extent it holds the MEIS incentive of Rs. 5,95,46,449/- to be a capital receipt excludible from total income and from book profit under Section 115JB.

11. In the result appeal of the revenue is allowed.

Order pronounced in the open Court on 24/09/2026.