Sales Tax Subsidy Linked to Capital Investment is Capital Receipt: ITAT Mumbai

JCIT (OSD) Vs Grasim Industries Limited (ITAT Mumbai)

Summary: The Income Tax Appellate Tribunal (ITAT), Mumbai, dismissed the Revenue’s appeals for Assessment Years 1996-97 to 2000-01 and upheld the order of the Commissioner of Income Tax (Appeals) holding that sales tax, entry tax, purchase tax, VAT exemptions and similar incentives received by the assessee under various State Government schemes constituted capital receipts not chargeable to tax. The common issue in all appeals was whether the incentives received from the Governments of Maharashtra, Madhya Pradesh, Rajasthan and Haryana for establishing industrial units in notified or backward areas were taxable as revenue receipts or exempt as capital receipts.

The assessee had received incentives under various State Government schemes after setting up industrial units in notified areas. For Assessment Year 1996-97, it received sales tax exemption incentives of ₹17.50 crore. In its original return, the assessee had offered the subsidy as a trading receipt, and the original assessments also treated the subsidy as a revenue receipt. During the first round of appellate proceedings before the Tribunal, the assessee raised an additional ground claiming that the sales tax incentives should be treated as capital receipts, relying on the Special Bench decision of the Mumbai Tribunal in DCIT v. Reliance Industries Ltd. (88 ITD 273). The Tribunal admitted the additional ground and remitted the matter to the Assessing Officer (AO) for examination of the nature of the incentives and the relevant State Government schemes after granting an opportunity of hearing. The Revenue did not challenge this remand order before the High Court, and the Tribunal observed that the directions issued in the first round had therefore attained finality.

The Tribunal noted that the incentives were granted under schemes of Maharashtra, Madhya Pradesh, Rajasthan and Haryana to promote industrialisation, development of backward areas and employment generation. These schemes were administered by the respective State authorities through eligibility certificates containing prescribed conditions, including maintenance of accounts and compliance with scheme requirements. The Tribunal observed that under these schemes the incentives were linked to capital investment and subject to an overall ceiling based on a specified percentage of fixed capital investment. For example, under the Maharashtra Package Scheme of Incentives, a pioneer unit could claim sales tax exemption up to 95% of its fixed capital investment over a specified period. The amount of subsidy was determined on the basis of sales tax returns or sales tax, entry tax or purchase tax assessment orders and was treated as notional sales tax subsidy by the competent authorities, subject to the prescribed ceiling under the respective schemes.

During the second round of assessment proceedings under Section 143(3) read with Section 254 of the Income-tax Act, the AO called upon the assessee to produce documentary evidence in support of the claim. The assessee furnished scheme-wise details, salient features, objectives, notifications, eligibility certificates and other relevant documents relating to each incentive scheme. The CIT(A) also examined the documentary evidence and rejected the AO’s reliance on the Supreme Court decision in Goetze (India) Ltd., holding that the Tribunal had already admitted the additional ground in the earlier round and remitted the issue for adjudication. After examining the schemes, the CIT(A) relied upon the Supreme Court decision in CIT v. Ponni Sugars & Chemicals Ltd. (306 ITR 392) and the Special Bench decision in Reliance Industries Ltd., concluding that the incentives constituted capital receipts.

Before the Tribunal, the Revenue argued that the assessee had originally treated the subsidies as revenue receipts and had raised the capital receipt claim only after about ten years through an additional ground before the Tribunal. The Revenue contended that the Tribunal had erred in admitting the additional ground and argued that the Special Bench decision in Reliance Industries Ltd. had been reversed by the Supreme Court. It further submitted that the Special Bench decision dealt only with the Maharashtra subsidy scheme, whereas the present case involved schemes of four States. According to the Revenue, the AO and the CIT(A) had failed to conduct the detailed examination directed by the Tribunal in the first round, had merely relied on the assessee’s submissions, and had not independently analysed the individual schemes. The Revenue also contended that the assessee had received only notional sales tax subsidy, which could not be equated with actual subsidy, and argued that since the incentives were received after commencement of business and supported working capital requirements, they should be treated as revenue receipts. It also pointed to alleged discrepancies between the subsidy figures stated in the additional grounds and the actual amounts claimed.

The Tribunal rejected these contentions. It observed that the Revenue had not challenged the earlier Tribunal order admitting the additional ground and remanding the matter to the AO. Consequently, the issue relating to admission of the additional ground had attained finality and could not be reopened. The Tribunal also found that both the AO and the CIT(A) had examined the documentary evidence relating to the various State Government schemes during the second round of proceedings. It held that the CIT(A) had correctly rejected the AO’s reliance on Goetze (India) Ltd., as the proceedings arose pursuant to the Tribunal’s remand after admission of the additional ground.

Applying the purpose test laid down by the Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd., the Tribunal held that the decisive factor in determining the nature of the subsidy was the object of the scheme rather than the timing or manner of its receipt. It found that the incentives were granted to encourage industrialisation, promote development of backward areas and generate employment by linking the benefit to capital investment. The Tribunal therefore concluded that the incentives retained the character of capital receipts notwithstanding that they were quantified with reference to sales tax liability or received after commencement of business.

The Tribunal also rejected the Revenue’s alternative contention based on Explanation 10 to Section 43(1) of the Income-tax Act, holding that the provision was not applicable in the facts of the present case. Consequently, it held that the sales tax, entry tax, purchase tax, VAT exemptions and similar incentives received under the State Government schemes were capital receipts not chargeable to tax. The Tribunal upheld the order of the CIT(A), dismissed both the original and additional grounds raised by the Revenue, and dismissed all five appeals.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These appeals in ITA Nos.2155/Mum/2016, 2154/Mum/2016, 2165/Mum/2016, 2157/Mum/2016, & 2156/Mum/2016 for A.Yrs.1996-97-2000-01 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-13, Mumbai in appeal No.CIT(A)-13/ACIT-7(1)(1)/258/2015-16, CIT(A)-13/ACIT-7(1)(1)/329/2015-16, CIT(A)-13/ACIT-7(1)(1)/233/2015-16, CIT(A)-13/ACIT-7(1)(1)/328/2015-16 & CIT(A)-13/ACIT-7(1)(1)/933/2015-16 respectively dated 25/01/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 254 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/10/2013, 12/03/2014, 23/10/2013,14/03/2014 & 29/10/2013 respectively by the ld. Dy. Commissioner of Income Tax, Circle-6(3), Mumbai (hereinafter referred to as ld. AO).

1.1. As identical issue is involved in all these appeals, they are taken up together and disposed of by this common order for the sake of convenience. With the consent of both the parties, the appeal for the Asst Year 1996-97 is taken as the lead case considering the figures of sales tax subsidy thereon and the decision rendered thereon would apply with equal force for other assessment years also, except with variance in figures.

2. The only effective to be decided in all these appeals is as to whether the sales tax/entry tax exemption i.e subsidy, incentive, etc, by whatever name called, received by the assessee could be construed as capital receipt not chargeable to tax in the facts and circumstances of the case.

3. The brief facts of this issue are that the assessee has received sales tax/entry tax/purchase tax/VAT, etc exemptions/incentives under respective schemes from the State Governments of Maharashtra, Madhya Pradesh, Rajasthan and Haryana as the Assessee had set up units in notified areas of those State. During the Asst Year 1996-97, the assessee had availed sales tax exemption incentive of Rs 17,50,22,940/- for setting up new industry in backward areas under the scheme of various state governments. The assessee filed its original return and offered the subsidy as trading receipt. The assessments were completed treating the subsidy as a revenue receipt , but the ld. AO resorted to make certain additions / disallowances on certain other issues. This was agitated by the assessee upto Tribunal. Subsequently, the assessee filed an additional ground before the Tribunal claiming the sales tax exemption as a capital receipt, relying on the decision of Special Bench of Mumbai Tribunal in the case of DCIT v. Reliance Industries Ltd reported in 88 ITD 273. The Tribunal decided the appeals filed by the assessee admitting the additional ground filed by the assessee and directed the ld. AO as under:

”31.1 This ground has also been raised for the first time before us by the assessee; therefore, it requires proper examination and verification of the nature of the benefit and scheme of government under which the benefit has been availed by the assessee. Accordingly, we remit this issue to the record of the Assessing Officer to consider and decide the same as per law and after giving reasonable opportunity of being heard to the assessee.‖

3.1. It is pertinent to note that against this order of the Tribunal in the first round of proceedings, no appeals were preferred by the revenue before the Hon‟ble High Court. Accordingly, the said finding of Tribunal and directions have become final.

3.2. The scheme-wise state-wise details of the various sales tax/entry tax exemption received by the assessee for various assessment years are tabulated below:

Sr No.	Particulars	Year-wise amount of Incentives (Rs. in Lakhs)
		AY 1996-97	AY 1997-98	AY 1998- 99	AY 1999-00	AY 2000- 01
1	Maharashtra State – Package Scheme of Incentive, 1988 dated 01.10.1988
1.1	Vikram Ispat Unit	994.23	1,908.86	1,348.58	1,265.73	2,118.17
2	Haryana State – Sales Tax Exemption Scheme (Haryana General Sales Tax Rules 1975)
2.1	Elegant Spinners	–	–	84.61	84.93	192.63
3	Rajasthan State – Sales Tax New Incentive Scheme for Industries 1989, Rajasthan (S.No.764 : F-4(35)FD Gr.IV/87-39 dated 6.7.1989)
3.1	Aditya Cement – Sales Tax	41.86	169.39	898.15	842.08	698.54
4	Madhya Pradesh State
4A	Sales Tax Incentives
4.1	1991 Scheme for units with Capital Investment in fixed assets of Rs.100 Crores or more
4.1.1	Grasim Cement	683.27	1,045.09	1,187.93	1,022.03	1,346.04
4.2	New Industries Notification No.A-3-11-86 (74)-ST-V dated 16.10.1986 under Madhya Pradesh General Sales Tax Act,1958
4.2.1	Poly Aluminium Chloride	15.66	–	–	–	–
4.3	Sales Tax Exemption Scheme (M.P. Vanijyikar Adhiniyam, 1994)
4.3.1	Vikram Woollens	5.08	37.28	44.06	57.18	61.89
4B	Entry Tax Incentives
4.4	Entry Tax Notification No.422-6596 dated 09.02.1977 under Madhya Pradesh Sthaniya Kshetra Me Mal ke Pravesh Par Kar Adhiniyam, 1976
4.4.1	Poly Aluminium Chloride	1.21	–	–	–	–
4.4.2	Chloro Sulphuric Acid Division	1.60	1.07	0.65	–	–
4.5	New Industry Notification No.A-3-24-94-ST-V(112) dated 06.10.1994 under Madhya Pradesh Sthaniya Khstra Me Mal ke Pravesh Pare Kar Adhiniya, 1976
4.5.1	Caustic Soda Memrance Cell	7.32	23.43	41.99	42.42	4.54
	Total	1,750.23	3,185.12	3,605.97	3,314.36	4,421.81

3.3. The said exemption schemes are implemented by the respective sales tax authorities. For example, State Industrial and Investment corporation of Maharashtra (“SICOM”) is the implementing agency in Maharashtra. Exemption is granted to the assessee by way of eligibility certificate where various conditions are stipulated, including requirement of maintaining proper accounts, utilization etc. Generally, the purpose behind the grant of such schemes is for development of backward areas as well as industrial development and generating employment. For example, the preamble of the Package Scheme of Incentive (“PSI”), 1988 dated 01.10.1988 by State of Maharashtra is as under:-

”In order to achieve dispersal of industries outside the Bombay- Thane- Pune Belt and to attract them to the underdeveloped and developing areas of the State, Government has been giving a Package of Incentives to New Units / Expansion set­up in developing region of the State since 1964 under a Scheme popularly known as the Package Scheme of Incentive.‖

3.4. Further, the said Scheme itself defines what is a “notional” sales tax liability (“NSTL”). This is enclosed in Page 375 of the Paper Book 2 filed before us. It is pertinent to note that the Notional Sales Tax Liability (NSTL) is quantified by the Sales Tax Officer. Evidences in this regard are enclosed in Page 553 of the Paper Book 2 filed before us.

3.5. The assessee is eligible for sales tax exemption upto a fixed percentage of capital investment which could be availed over a period of several years. For example – In the Maharashtra Scheme, the assessee falls under the category of ^„Pioneer unit‟, it is eligible for sales tax exemption upto 95% of fixed capital investment and can avail the same for a period of 10 years. The total amount of subsidy/incentive is thus capped at a particular % of total capital invested and thus over the specified period, the assessee subject to fulfilment of respective conditions under relevant schemes, gets this benefit. The subsidy figure is either determined based on the sales tax returns filed by the assessee or based on the sales tax/entry tax / purchase tax assessment orders passed in respect of various schemes of various state governments, as the case may be. The total subsidy received for each year is summarised in page 1167 of the Paper Book 4 filed before us. As and when the final sales tax liability is determined in the sales tax assessment order, the same amount is treated as notional sales tax subsidy and granted by the competent authority to the assessee. However, in all these cases, the total subsidy figure have been capped / outer limit is prescribed in the subsidy / incentive scheme itself.

3.6. Proceedings before the ld. AO in the second round of proceedings:

During the course of proceedings u/s 143(3) r.w.s. 254 of the Act, the ld. AO had called for documentary evidences to substantiate the claim of sales tax/entry tax exemption. The evidence in this regard is enclosed in Page 786 of the Paper Book 3 filed for the Asst Year 1996-97. The assessee provided scheme-wise salient features along with its objects and benefit. The assessee filed all the relevant documents of each scheme before the ld. AO which are tabulated in the index pages 1-6 of Paper Book running from Page Nos. 368 to 748. In particular, the assessee filed the following documents for each of the subsidy / incentive scheme:-

a. Sales tax/entry tax scheme or State Government notification;

b. Eligibility certificate, wherever applicable;

c. Entitlement certificate, wherever applicable;

d. Sales tax assessment order/ Sales Tax Return/Entry tax returns/etc;

The assessee further mapped all the documents with the scheme-wise amount of exemption claimed. The evidence in this regard is enclosed in Page 1167 of the Paper Book 4 filed. The index of the factual submissions made before the ld. AO has also been filed by the assessee vide Paper Book 1, the relevant page numbers of which are as follows:

A.Y.	Scheme-wise documents filed before the AO (Paper Book 1, Pg. No.)
1996-97	31-33
1997-98	37-40
1998-99	47-49
1999-00	51-54
2000-01	55-58

3.6.1. The ld. AO passed order u/s 143(3) r.w.s. 254 of the Act after considering the details in the form of various subsidy schemes of the various state governments and submissions filed by the assessee. The ld. AO rejected the claim of the assessee by treating the receipt of subsidy as a revenue receipt, effectively on the following grounds:-

a. Hon’ble Bombay High Court order in case of Reliance Industries Ltd. has been set aside by the Hon’ble Apex Court. Hence the issue has not been settled by the Hon’ble Apex court till date.

b. Sales tax incentive is determined based on the sales tax assessment order or the sales tax returns, as the case may be, which happens after the commencement of business.

c. Alternatively, the incentives/ subsidies are to be reduced from the cost of assets as per Explanation 10 to section 43(1) of the Act.

d. Claim of exemption from tax was not made in the return of income and cannot be allowed following the decision of Hon’ble Supreme Court in the case of Goetze India Ltd reported in 284 ITR 323 (SC).

3.7. Proceedings before the ld. CIT(A) in the second round of proceedings:

The ld. CIT(A) also again verified all the documentary evidences filed by the assessee regarding various incentive /subsidy schemes as detailed supra. The ld. CIT(A) at Para 3.3 of his order, negated the observation of the ld. AO that claim cannot be made raised following the decision of Hon’ble Apex Court in the case of Goetze India Ltd on the ground that the proceedings are in course of second round, post tribunal admitting the additional ground and thus, reliance placed by the ld. AO on Goetze India Ltd in these proceedings is misplaced. The ld. CIT(A) after acknowledging that the assessee has filed all the incentive schemes including notifications of the state governments, relied upon the decision of Hon’ble Supreme Court in the case of CIT v. Ponni Sugars & Chemicals Ltd reported in 306 ITR 392 (SC) as well as the decision of Special Bench of Mumbai Tribunal in the case of Reliance Industries Ltd reported in 88 ITD 273 held that sales tax incentive/subsidy is a capital receipt. Aggrieved by this, the revenue is in appeals before us.

4. The ld. Special Counsel for the Revenue drew our attention to the eight additional grounds raised by the Revenue for the above mentioned assessment years. We find that all those additional grounds are merely argumentative in nature and are supportive of the main grounds raised already by the Revenue. Hence, the additional grounds and original grounds raised by the Revenue are taken up together for the purpose of adjudication of the issue in dispute before us.

4.1. The ld. Special Counsel for the Revenue argued that assessee had filed its original return for the above years by including sales tax subsidy as revenue receipt. The assessments were completed after making certain additions / disallowances. Those disputed issues were carried in appeal up to the level of the Tribunal by the assessee. When the appeal was pending before this Tribunal for the first time, almost after a gap of 10 years, the assessee chose to file an additional ground before this Tribunal to claim that subsidy / incentive / grants received under various schemes / notifications of various state Governments are capital receipts not chargeable to tax.

4.2. The ld. Special Counsel for the Revenue submitted that this Tribunal erred in admitting the additional grounds raised by the assessee in the first round of proceedings, as the decision of Special Bench of this Tribunal in the case of Reliance Industries Ltd., has been reversed by the Hon‟ble Supreme Court. The ld. Special Counsel for the Revenue also criticized the Special Bench decision of this Tribunal in the case of Reliance Industries ltd., to be fallacious, wrong and perverse. He submitted that this Tribunal in the first round of proceedings had admitted the additional ground raised by the assessee on the issue of taxability of subsidy as capital receipt and had remitted the same to the file of the ld. AO to decide the issue in the light of Special Bench decision of this Tribunal in the case of Reliance Industries Ltd., The ld. Special Counsel for the Revenue also submitted that this Tribunal in the first round of proceedings had directed the ld. AO to make thorough examination of the entire subsidy schemes of various State Governments. The ld. Special Counsel for the Revenue took us to the Special Bench decision of Reliance Industries Ltd., reported in 88 ITD 273 and stated that the said decision dealt only with the Maharashtra Subsidy Scheme, whereas in the case of assessee before us, the subsidy schemes notified by four different states are involved including Maharashtra Subsidy Scheme. Hence, he stated that the ld. CIT(A) grossly erred in merely following the Special Bench decision of Tribunal in the case of Reliance Industries Ltd., which dealt only with Maharashtra Subsidy Scheme, while granting relief to the assessee. He also stated that the ld. CIT(A) had merely relied on the statements made by the assessee that all the incentive schemes were submitted before the ld. AO. In the opinion of the ld. Special Counsel for the Revenue, the lower authorities had not examined the subsidy scheme at all as directed by this Tribunal in the first round of proceedings. He relied on the order of the ld. CIT(A) wherein no detailed discussions were made with regard to each of the subsidy schemes in the appellate order. The ld. Special Counsel for the Revenue stated that what is received by the assessee is whether the subsidy or incentive itself was not proved by the assessee in the instant case. He drew our attention to the submissions made before the lower authorities that assessee was entitled for notional sales tax subsidy and accordingly, he concluded that notional sales tax subsidy would not fall within the ambit of actual subsidy and hence, the same would have to be treated as a revenue receipt. He vehemently argued that since this subsidy was granted to the assessee after the commencement of business of the assessee, the same would constitute revenue receipt as it was meant for the purpose of supporting working capital requirements of the assessee. The ld. Special Counsel for the Revenue argued that there was some factual discrepancies between the figures of notional subsidy mentioned in the additional grounds furnished  by the assessee before this Tribunal in the first round of proceedings with the actual amount of subsidies received by the assessee. The same are tabulated hereunder:-

A.Y.	Amount (Rs.) (As per asst. order)	Amount (Rs.) (As per addl. Ground of appeal)
1996-97	17,50,22,940/-	18 Cr.
1997-98	31,85,11,619/-	30 Cr.
1998-99	36,05,96,547/-	34 Cr.
1999-00	33,14,35,985/-	33 Cr.
2000-01	44,21,80,515/-	42 Cr.
Total	162,77,47,606/-	157 Cr.

4.3. The ld. Special Counsel for the Revenue vehemently argued that assessee never reconciled these factual discrepancies with supporting documents. He also tried to drive home the point that subsidy figure has to be taken from the final sales tax assessment order as per the various subsidiaries schemes of various State Governments. He stated that the sales tax assessment order would be received by the assessee after the due date of filing the return of the income by the assessee. Hence, there cannot be a proper quantification of the subsidy by the assessee at the time of filing of return of income. This itself clearly goes to prove that the entire concept of notional sales tax subsidy as enumerated in the schemes of various State Governments becomes unworkable. He also vehemently argued that the Income Tax department need not wait for the final quantification of the subsidies in the sales tax assessment orders. Moreover, the sales tax assessment orders would not be final and would be subjected to regular appeal and thereafter, the Income Tax Officer had to correspondingly change the subsidy figures in the Income Tax assessment of the assessee company, which makes the entire gamut of quantification of subsidy unworkable. This itself goes to prove that assessee is not entitled for treating the said subsidy as capital in nature. Moreover, the basis of determination of sales tax subsidy is depending on sales tax assessment order. Hence, the ld. AO has to wait till the sales tax assessment order is finally passed in the hands of the assessee. This could be possible if the return of the assessee is selected for scrutiny. What if the income tax return is not at all selected for scrutiny? In such cases how the final quantification of sales tax subsidy could be determined by the Income Tax Officer? This makes the entire scheme of subsidy completely unworkable.

Hence, he vehemently denied the basic concept of notional subsidy which has been ultimately received by the assessee in the instant case. He also relied on the decision of the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty reported in 128 ITR 294 wherein it was held that when the computation provision fails, the charging section also correspondingly fails.

4.4. The ld. Special Counsel for the Revenue vehemently submitted that the Special Bench decision of this Tribunal in the case of Reliance Industries Ltd., reported in 88 ITD 273 was ultimately reversed by the Hon’ble Supreme Court vide its order dated 09/09/2011. He stated that the order in the first round of appellate proceedings was passed by this Tribunal on 16/05/2012 on which date the order of the Hon’ble Supreme Court was in force. Hence, the direction of this Tribunal in admitting the additional ground of the assessee and remitting the matter back to the ld. AO to decide the taxability of subsidy in the light of the Special Bench decision in the case of Reliance Industries Ltd., and ignoring the Hon’ble Supreme Court decision thereon, makes the order of this Tribunal per incuriam. Accordingly, he prayed for restoration of the original assessment framed in the hands of the assessee for all these years. The ld. Special Counsel for the Revenue also submitted that Reliance Industries Ltd., deals with Maharashtra Subsidy Scheme of 1983 whereas, the assessee case deals with different schemes of different years of different states. He argued that the decision of the Hon’ble Supreme Court in the case of U.P. Rashtriya Chinni vs. State of UP and others dated 02/07/1995 reported in 1995 SCC(4) 738 was not cited anywhere by this Tribunal and accordingly, the decision of Special Bench in the case of Reliance Industries Ltd., becomes non-est and loses its binding precedent. He accordingly argued that the entire gamut of taxability of subsidy should be viewed completely ignoring the decision of Special Bench in the case of Reliance Industries referred to supra.

4.5. He also pointed out that assessee had not maintained separate records for sales tax account and the subsidy to be received thereon. Accordingly, he argued that assessee had not maintained even the primary records that are required to prove that subsidy has been received by it for a specific purpose and quantification has been made in a particular manner as contemplated in the scheme. He also placed reliance on the decision of this Tribunal in the case of Bajaj Auto Ltd., reported in 90 ITD 153 which held that the liability for sales tax was not reflected in the accounts and no such claim was made by the assessee in the return of income, and in the return of income there was no mention regarding notional sales tax liability, the assessee would not be entitled for treating the said sales tax subsidy as a revenue receipt. He also relied on the same judgement for driving home the point that the eligibility certificate for granting the subsidy was issued by the implementing agency after the commencement of commercial production and accordingly, it cannot be said that the subsidy so received would be in the capital field. He vehemently relied on the decision of the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd., reported in 228 ITR 253 wherein it was held that subsidy received after the commencement of business would be revenue receipt chargeable to tax.

4.6. The ld. Special Counsel for the Revenue submitted that the cut-off date should be reckoned as the date of commencement of business and any subsidy or incentive received after that date shall be considered as a revenue receipt in the light of the decision of the Hon’ble Supreme Court in the case of Sahney Steel referred to supra. He submitted that there is no concept of notional subsidy that could be acceptable and if it is so, it is only revenue receipt. The ld. Special Counsel for the Revenue gave a brief description of each of the scheme in its written submissions enclosed in pages 52-56 thereon and finally drew our attention to the summary of the schemes furnished by the assessee and the common features enumerated thereon as under:-

a. The objects are general like dispersal of industries from Bombay-Thane- Pune belt to outside, boost up of new industrial development in the state, accelerating the pace of development. They are common objectives of any incentive system. It does not follow that all incentives would be capital in nature.

b. The incentives are given after the commencement of business. The presumption is that the incentive is of revenue nature [Vide the decision of the Hon‟ble Supreme Court in the case of Sahney Steel and Press Works Ltd. v. CIT, 1997,228 ITR 253( SC) ]. It is for the assessee to establish with documents how it is capital receipt. [Vide Supreme Court decision in the case of Novopan India Ltd. (supra) laying down the doctrine of strict construction of exemption provisions against the assessee].

c. The incentive continues for years – here 10 years, 5 years, 9 years and 11 years. As discussed in paragraph 20 above, the incentive is continuously received for years and the assessee received incremental indirect benefits, not any direct lump sum receipt. Then the strong presumption according to the normal conduct of business, is that the incentive supplemented the profit of the business and was of revenue nature. The most important point is that assessee in its original return of income treated the transaction, and rightly so, as revenue in character and paid the taxes. But, as narrated earlier, after more than a decade the assessee has raked up the issue of capital receipt. If the assessee claims it to be capital receipt, the burden is for the assessee to establish with evidence that it is a capital receipt.[ Vide Supreme Court decision in the case of Novopan India Ltd. (supra) laying down the doctrine of strict interpretation of exemption provisions against the assessee].

4.7. The ld. Special Counsel for the Revenue relied on para 23 of his written submissions dated 03/09/2020 from pages 57-61 wherein he had sought comments from the ld. AO regarding each of the schemes. For the sake of convenience the comments given by the ld. AO are reproduced hereunder:-

“1)Vikram Ispat, Division of Grasim Industries Limited – Sales Tax Exemption

In case of this Unit, the Assessee has shown and claimed Sales Tax subsidy of Rs.9,94,22,648/- by way of Purchase Tax, Sales Tax, Central Sales Tax and Turnover Tax. The said scheme availed by the Assessee is covered under the Package Scheme of Incentive 1988 dated 01.10.1988 by the State of Maharashtra.

The noteworthy and salient features of this Scheme outlined in the Notification is summarised as under –

Page No.	Remarks
3	As per Preamble, the New Scheme is launched to intensify and accelerate the process of dispersal of industries outside the Bombay-Thane-Pune Belt and to attract them to the underdeveloped and developing areas of the State.

From the above summarised features, it can be seen that the primary and cardinal motive of the Package Scheme of Incentive 1988, is to disperse the industrial units located in Mumbai-Thane-Pune belt. The sole purpose of this Notification that can be deduced from the Notification is de-congestion of this belt being Mumbai-Thane-Pune belt by dispersing such industries located in this area to other areascategorised as B, C and D of the under developed and developing areas.

In this case, the converse inference cannot be true, as the Notification does not speak of Industrial Units to be re-located from any other areas of Maharashtra to the backward areas. To put it simply, the industrial units put up in the backward area would not enjoy the same incentives, if they are relocated to backward area, from those areas not covered by the Mumbai-Thane-Pune belt.

For the purpose of grant of such subsidies, the methodology of working was based on the value of investments made in these backward/notified areas, which may also include the value of plant & machinery dismantled and relocated to these notified areas from the Mumbai-Thane-Pune belt. The Scheme is silent about relocation of Industrial Units from other areas than the specified Mumbai-Thane-Pune belt.

Therefore, it cannot be said that the Package Scheme of Incentive 1988, of State Government Maharashtra was meant at large for all the units setup in the notified areas, and hence the purpose of Scheme was not for the setting up of new units, but was primarily for the purpose of decongestion and dispersal of the units located in the Mumbai-Thane-Pune belt/corridor.

The subsidy therefore cannot be said to linked to the capital investments for setting of new units or relocation of units but was for the sufferance or disadvantage on setting up or relocating the units from Mumbai-Thane-Pune belt to the backward/ notified areas.

Hence, the facts of this case and the intention of the Notification when subjected to the purpose test envisaged in the Hon‘ble Apex Court‘s decision in the case of Sahney Steel and Press Ltd. vs. CIT [(1997) 142 CTR (SC) 261] and CIT v/s Ponni Sugars & Chemicals Limited [(2003) 260 ITR 0605], and the derived benefits fails to qualify as Capital Receipts.

Therefore, the receipts by way of subsidies of Purchase Tax, Sales Tax, Central Sales Tax and Turnover Tax amounting to Rs.9,94,22,648/- by the State Government of Maharashtra under the Package Scheme of Incentive 1988 dated 01.10.1988, are revenue in character and not ‗Capital‘ as claimed by the Assessee and accepted by the Ld.CIT(A), Mumbai.

(2) Chloro Sulphuric Acid Division and Caustic Soda Membrance Cell Division of Grasim Industries Limited – Entry Tax exemption

A. As per Assessee‘s submission for Assessment Year 1996-97, vide page nos.87, the Designated Authority has issued Exemption letter dated 24.9.1996 under the Entry Tax Notification No.422-6596 dated 09.02.1977 of the Madhya Pradesh SthaniyaKshetra Me Mal K Pravesh Par Kar Adhiniyam, 1976.

The certificates and other documents filed during the course of set-aside proceedings speak of the capital investmentonly for the purpose of computation/working of subsidy and not indicate the same as the sole criteria for eligibility for the benefit of scheme.

B. As per Assessee‘s submission for Assessment Year 1996-97, vide page nos.101, the Designated Authority has issued Certificate of Eligibility for Exemption of Entry Tax dated 23.02.1998 under the New Industry Notification No.A-3-24-94-ST-V(112) dated 06.10.1994 Madhya Pradesh SthaniyaKshetra Me Mal K Pravesh Par Kar Adhiniyam, 1976. The certificates and other documents filed during the course of set-aside proceedings speak of the capital investmentonly for the purpose of computation/working of subsidy and not indicate the same as the sole criteria for eligibility for the benefit of scheme.

3. Aditya Cement, Unit of Grasim Industries Limited, Sales Tax Exemption

As per the Assessee‘s submission for Assessment Year 1996-97, vide page No.119-120, the Assessee has been issued Eligibility Certificate dated 31.10.1995 for exemption of sales tax of cement clinkers of new unit, citing the eligible fixed capital investment (8a), under the Sales Tax New Incentive Scheme for Industries 1989, Rajasthan [Sr.No.764 : F-4(35)FD Gr.IV/87-39 dated 06.07.1989].

The certificates and other documents filed during the course of set-aside proceedings speak of the capital investment only for the purpose of computation/working of subsidy and not indicate the same as the sole criteria for eligibility for the benefit of scheme.

4. Vikram Woollens, Unit of Grasim Industries Limited, Sales Tax Exemption

As per Assessee‘s submission for Assessment Year 1996-97, vide page nos.140, the Designated Authority has issued Certificate of Eligibility for Exemption of Sales Tax under Sales Tax Exemption Scheme (M.P. VinijyikarAdhiniyam, 1994). As per the Assessee‘s submission, the scheme of sales tax exemption is applicable to new industrial undertakings. However, neither the Scheme nor the Eligibility Certificate vide page No.140, clearly establishes any nexus of the exemption granted with the capital investments,

The certificates and other documents filed during the course of set-aside proceedings speak of the capital investment only for the purpose of computation/working of subsidy and not indicate the same as the sole criteria for eligibility for the benefit of scheme.

5. Grasim Cement, Unit of Grasim Industries Limited, Sales Tax Exemption

On perusal of the Notification No.A-3-27-89-ST-V-(15) dated 15.02.1991, issued by the State Government of Madhya Pradesh, it is observed that the Sales Incentive Scheme is for exempting New Units with Capital Investments of Rs.100 crores or more. As per Assessee‘s submission, vide page nos.163-168, the Designated Authority has issued Certificate of Eligibility for Exemption of Sales Tax under Sales Tax Exemption Scheme (Madhya Pradesh Industrial Policy & Action Plan, 1994) citing investment of Rs.280,33,11,056/.

The certificates and other documents filed during the course of set-aside proceedings speak of the capital investment only for the purpose of computation/working of subsidy and not indicate the same as the sole criteria for eligibility for the benefit of scheme.

(6) Elegant Spinners, Unit of Grasim Industries Limited, Sales Tax Exemption (AY 1997-98)

As per Assessee‘s submission for Assessment Year 1996-97, vide page nos.193-194, the Designated Authority has issued Certificate of Eligibility for Exemption of Sales Tax under Sales Tax Exemption Scheme (Haryana General Sales Tax Rules, 1975).

As per the Assessee‘s submission for Assessment Year 1996-97, on perusal of the Scheme (Page nos.178-179) of the Assessee, it is seen that the exemption is provided in respect of newly established industrial undertakings or expansion of existing industrial undertakings subject to fulfilment of capital investment and increase in annual production criteria mentioned therein. However, neither the scheme, nor the Eligibility Certificate provide the methodology for quantification of sales tax exemption vis-à-vis capital investment. Hence no exemption available, not being capital subsidy.

4.8. The ld. Special Counsel for the Revenue submitted that the reliance placed by the assessee on the decision of the Hon’ble Madhya Pradesh High Court in the case of CIT vs. Dusad Industries Ltd., reported in 162 ITR 734 (MP) was overruled by the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd supra. Hence, Madhya Pradesh Scheme pursuant to which assessee has received subsidy has to be construed as a revenue receipt.

4.9. The ld. Special Counsel for the Revenue stated that the decision relied by the ld. CIT(A) on Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., reported in 306 ITR 392 (SC) was not at all applicable in view of the fact that the questions raised in the case of Ponni Sugars and Chemicals Ltd., had two limbs:-

“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the incentive given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipt and hence no tax was excisable thereon.‖

4.10. The ld. Special Counsel for the Revenue submitted that the incentive on purchase tax was held as ^„revenue receipt‟ by the Hon‟ble Madras High Court in the same case of Ponni sugars reported in 260 ITR 605 which was accepted by the assessee and that limb of the issue was never challenged before the Hon‟ble Supreme Court by the assessee. He submitted that in the case of Ponni Sugars and Chemicals Ltd., there was a categorical finding by the Hon‟ble Madras High Court in page 611 of the judgement that assessee had produced ample materials to show that monies accrued to it by way of incentives are infact properly applied for the purpose of discharging the term loans obtained by it in accordance with terms of the loan agreement. Whereas in the instant case before us, the assessee had not submitted any material regarding the subsidy scheme of various State Governments and had not established the purpose of receipt of such subsidy and the manner in which the same had been quantified and utilised. Accordingly, he argued that the decision of the Hon‟ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., cannot advance the case of the assessee. The ld. Special Counsel for the Revenue relied on various other decisions of the Hon‟ble High Courts in support of the aforesaid contentions.

4.11. The ld. Special Counsel for the Revenue on yet another occasion devoted maximum time in criticising the Special Bench decision of Reliance Industries Ltd., reported in 88 ITD 273 by observing as under:-

a. Special Bench decision is perverse.

b. Special Bench did not follow the mandate given to them by the Hon’ble President of Tribunal.

c. Special Bench did not go into facts as to what is notional subsidy, utilisation of subsidy etc.,

d. Special Bench decision has been very poorly drafted.

e. Though Bajaj Auto Ltd., decision of Mumbai Tribunal was distinguished by the Special Bench, the Special Bench did not overrule Bajaj Auto Ltd.,

f. Special Bench heavily relied on the Sales tax assessment for the purpose of quantification of notional subsidy and reliance placed on the said sales tax assessment is irrelevant.

g. Directions of Special Bench would be unimplementable.

h. Special Bench twisted the interpretation of the decisions of the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd and Ponni Sugars and Chemicals ltd., referred to supra.

i. Special Bench decision does not lay down any ratio decidendi.

j. Special Bench decision has been set aside by the Hon’ble Supreme Court on the grounds of perversity.

k. Special Bench decision has no precedence value.

4.12. The ld. Special Counsel for the Revenue again reiterated that quantification of sales tax subsidy in the instant case becomes totally unworkable as the same is dependent on sales tax assessment order which happens after the income tax return is filed. He argued that there cannot be any concept of notional sales tax subsidy. He submitted that notional subsidy is a “Monster”. He argued that Sales Tax and Income Tax department roles are totally different as Sales Tax department in the instant case is concerned with sales tax subsidy subject to maximum cap of Rs.5000 Crores whereas Income Tax department collects tax from assessee. The assessee had not maintained any accounts or details as to how the quantification of sales tax subsidy had been made in the instant case.

4.13 Finally, on without prejudice basis, the ld. Special Counsel for the Revenue argued that even if the aforesaid subsidy is treated as capital receipt, then the same should be reduced from the cost of the asset in terms of Explanation 10 to Section 43 (1) of the Act for A.Yrs. 1999-2000 and 2000­2001 as the said amendment was applicable only from Asst Year 1999-2000 and onwards.

5. We have heard the rival submissions and perused the materials available on record. The short point that arises for our consideration in these appeals is that whether the incentive /subsidy received by the assessee under various schemes of state governments after the commencement of business, could be construed as capital receipts not chargeable to tax. At the outset, in the original return of income, the assessee had not claimed exemption of any sales tax/purchase tax/entry tax incentive/subsidy. However, the assessee raised claim of exemption before the Tribunal for the first time by way of additional ground, which was admitted and restored to file of the ld AO to consider and decide the same as per law after giving opportunity of being heard to the assessee. This tribunal order in the first round of proceedings was not challenged by the revenue before the Hon’ble High Court for the Asst Years 1996-97 and 1997-98. For the Asst Year 1998-99, the revenue filed an appeal to the Hon’ble High Court against various other issues but did not raise the issue of admission of additional ground on the aspect of taxability of subsidy. For the Asst Years 1999-00 and 2000-01, the revenue challenged the tribunal order on the admission of additional ground on the aspect of taxability of subsidy and the same was dismissed by the Hon’ble High Court. The Revenue did not further challenge this before the Hon’ble Supreme Court. These facts are evident from Page 1168 of the Paper Book 5 filed by the assessee. The ld. AR before us met all the arguments of the ld. Special Counsel for the Revenue. The ld. AR even filed para wise rebuttal for each of the arguments of the ld. Special Counsel for the Revenue , which are reproduced herein for the sake of convenience:-

5.2. From the aforesaid table, it is very clear that the assessee had furnished all the requisite documents to justify its claim of exemption that the subsidy received by it are capital receipts not chargeable to tax, before the ld. AO as well as before the ld. CIT(A) and that both the lower authorities had examined the very same documents and had arrived at their respective conscious conclusions. Hence the argument advanced by the ld. Special Counsel for the Revenue that both the lower authorities had not followed the directions of this Tribunal in the first round of proceedings wherein this Tribunal had directed the ld. AO to make thorough examination of the various subsidy / incentive schemes and decide its taxability. is completely devoid of merits. Since the matter has been already examined by both the lower authorities and respective conclusions drawn thereon by them , though contrary to each other, we hold that there is no need for these appeals to be remitted back to the file of ld. AO for denovo adjudication, as prayed by the ld. Special Counsel for the Revenue.

5.3. We deem it fit and appropriate to refer to the various subsidy / incentive schemes of various state governments to understand its objects and purpose, which would ultimately decide its taxability.

Vikram Ispat, Division of Grasim Industries Limited – Sales Tax Exemption :

Package Scheme of Incentive(“PSI”), 1988 dated 01.10.1988 by State of Maharashtra

In order to achieve dispersal of industries outside the Bombay- Thane- Pune Belt and to attract them to the underdeveloped and developing areas of the State, Government has been giving a Package of Incentives to New Units / Expansion set-up in developing region of the State since 1964 under a Scheme popularly known as PSI.

This is evident from page 369 of the Paper Book filed by the assessee, which are forming part of judicial records. We find that the ld. Special Counsel for the Revenue submitted that only existing units when relocated to backward area would be eligible for the subsidy / incentive. This in our considered opinion is incorrect. We find from Pages 369 and 370 of the Paper Book 2 filed , which are part of judicial records, it lists down Group A,B,C & D specifying developed, under developed areas of the State. Page 373 of the Paper Book 2 further states that an existing or a new unit would also be eligible for the benefit. New Unit has been defined at Page 376 of the Paper Book. Pioneer Unit has been defined at Pg. 378 as a large scale New unit set up after October 1, 1988. We find that all these facts are mentioned in the Subsidy Schemes itself. We find that the assessee before us falls in the category of ^„Pioneer Unit‟ which is also evident from the eligibility certificate issued by SICOM enclosed in Page 399 of the Paper Book 2, which recognises Vikram Ispat unit as a Pioneer Unit. Thus, under the Maharashtra 1988 Scheme, even new units as well as existing units are entitled to notional sales tax subsidy.

We find that the assessee furnished the Package Scheme of Incentive, 1988 dated 01/10/1988 by State of Maharashtra before the lower authorities. These documents are enclosed in pages 368 to 398 of the factual paper book which are part of judicial records. We find that the assessee furnished the eligibility certificate for Sales Tax Incentive issued by SICOM in favour of Vikram Ispat before the lower authorities. These documents are enclosed in pages 399 to 422 of the factual paper book which are part of judicial records. We find that the assessee furnished the Certificate of Entitlement No.N29M/136/LM/660 issued by Dy. Commissioner of Sales Tax (Incentive and Enforcement), Sales Tax department, Maharashtra in favour of Vikram Ispat before lower authorities. These documents are enclosed in pages 423 to 436 of the factual paper book which are part of judicial records.

Chloro Sulphuric Acid Division and Caustic Soda Membrance Cell Division of Grasim Industries Limited – Entry Tax exemption

Entry Tax Notification No.422-6596 dated 09.02.1977 under Madhya Pradesh Sthaniya Kshetra Me Mal ke Pravesh Par Kar Adhiniyam, 1976

Exemption granted to new industry including any such substantial expansion of an existing industry as may be approved by the Government with the object of promoting industrial development in the State by setting up of new industrial units within the State of Madhya Pradesh. This fact is evident from Page 460 of the Paper Book.

New Industry Notification No.A-3-24-94-ST-V(112) dated 06.10.1994 under Madhya Pradesh Sthaniya Khstra Me Mal ke Pravesh Pare Kar Adhiniya, 1976

Exemption granted to new industry including any such substantial expansion of an existing industry as may be approved by the Government with the object of promoting industrial development in the State by setting up of new industrial units within the State of Madhya Pradesh. This fact is evident from Page 472 of the Paper Book.

We find that assessee furnished the Entry Tax Notification No.422-6596 dated 09/2/1977 under Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 before the lower authorities. These documents are enclosed in pages 460 to 466 of the factual paper book which are part of judicial records. We find that assessee furnished the provisions of Section 10 of Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 before lower authorities as referred to in above notification vide page 467 of the paper book which is part of judicial record. We find that assessee furnished the Certificate of Eligibility for exemption of Entry Tax in favour of Chloro Sulphuric Acid Division before lower authorities. These documents are enclosed in pages 470 to 471 of the factual paper book which are part of judicial records.

We find that assessee furnished the New Industry Notification No.A-3-24-94-ST-V(112) dated 06/10/1994 under Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976 before the lower authorities. These documents are enclosed in pages 472 to 478 of the factual paper book which are part of judicial records. We find that assessee furnished the Certificate of Eligibility for exemption of Entry Tax in favour of Caustic Soda Membrance Cell Division before the lower authorities. These documents are enclosed in pages 479 to 480 of the factual paper book which are part of judicial records.

We find that assessee furnished the Eligibility Certificate of Entry Tax in favour of Poly Aluminium Chloride Division before the lower authorities. These documents are enclosed in pages 468 to 469 of the factual paper book which are part of judicial records.

We find that assessee furnished the New Industries Notification No. A-3-11 86(74)-ST-V dated 16/10/1986 under Madhya Pradesh General Sales Tax Act, 1958 before the lower authorities in respect of Poly Aluminium Chloride Division. These documents are enclosed in pages 437 to 455 of the factual paper book which are part of judicial records. We find that assessee furnished the provisions of Section 12 of the Madhya Pradesh General Sales Tax, 1958 as referred in the above notification before the lower authorities. These documents are enclosed in pages 456 to 457 of the factual paper book which are part of judicial records. We find that assessee furnished the Certificate of Eligibility for Exemption from payment of Sales Tax under the Madhya Pradesh General Sales Tax Act, 1958 and Central Sales Tax Act, 1956 before the lower authorities in respect of Poly Aluminium Chloride Division. These documents are enclosed in pages 458 to 459 of the factual paper book which are part of judicial records.

Aditya Cement, Unit of Grasim Industries Limited, Sales Tax Exemption

Sales Tax New Incentive Scheme for Industries 1989, Rajasthan (S.No.764 : F-4(35)FD Gr.IV/87-39 dated 6.7.1989)

To boost up industrial development in the State, the Government have enacted provisions for giving relief to the industries in some form or the other so as to assist them in their development, particularly during the initial period required by the industries to come to full maturity. (para 1.1 refers to industrial policy 1990, whereas, above scheme is of 1989)

This Scheme exempts the industrial unit from payment of tax on the sales made in the course of inter-state trade or commerce of the goods including bye-products and waste items manufactured by them within the State and in case of packing material used therewith, the benefit is available only if it is linked with fixed capital investment with the object of promoting industrial development in the State of Rajasthan. This fact is evident from Page 481 of the Paper Book.

We find that the assessee furnished Sales Tax New Incentive Scheme for Industries, 1989, Rajasthan (S.No.764:F-4(35)FD Gr.IV/87-39 dated 06/07/1989) before lower authorities. These documents are enclosed in pages 481 to 489 of the factual paper book which are part of judicial records. We find that assessee furnished the Eligibility Certificate in favour of Aditya Cement before lower authorities. These documents are enclosed in pages 490 to 491 of the factual paper book which are part of judicial records.

Vikram Woollens, Unit of Grasim Industries Limited, Sales Tax Exemption

Notification no. A-3-24-94-ST-V(108) dated 6.10.1994 (Madhya Pradesh)

Exemption granted to new industrial unit with a capital investment in fixed assets above specified limit with the object of promoting industrial development in the State by setting up of new industrial units within the State of Madhya Pradesh. This fact is evident from Pages 492 to 494 of the Paper Book filed which are part of judicial records.

We find that assessee furnished Sales Tax Exemption Scheme (M.P.Vanijyikar Adhiniyam, 1994) before lower authorities. These documents are enclosed in pages 492 to 501 of the factual paper book which are part of judicial records. We find that the assessee furnished Exemption Certificate in favour of Vikram Woollens before lower authorities vide page no. 502 of the paper book which is part of judicial record.

Grasim Cement, Unit of Grasim Industries Limited, Sales Tax Exemption

1991 Scheme for units with Capital Investment in fixed assets of Rs. 100 crore or more [Notification no. A-3-27-89-ST-V-(15) dated 19.02.1991 (Madhya Pradesh)]

Exemption granted to eligible industrial unit established in any district in Madhya Pradesh with a capital investment in fixed assets of Rs. 100 crore or more (Pg. 517 to 518 of PB) with the object of accelerating pace of industrialisation in the State of Madhya Pradesh. This fact is evident from Pages 517 to 518 of the Paper Book filed which are part of judicial records.

We find that assessee furnished Sales Tax Exemption Scheme (Madhya Pradesh Industrial Policy & Action Plan, 1994) before lower authorities. These documents are enclosed in pages 503 to 516 of the factual paper book which are part of judicial records. We find that assessee furnished the 1991 scheme for units with capital investment in fixed assets of Rs.100 Crores or more before the lower authorities. These documents are enclosed in pages 517 to 522 of the factual paper book which are part of judicial records. We find that assessee furnished Certificate of Eligibility for exemption of tax in favour of Grasim Cement before the lower authorities. These documents are enclosed in pages 523 to 528 of the factual paper book which are part of judicial records.

Elegant Spinners, Unit of Grasim Industries Limited, Sales Tax Exemption (AY 1997-98)

Sales Tax Exemption Scheme (Haryana General Sales Tax Rules 1975)

Exemption granted to eligible industrial unit being a new industrial unit or a unit undertaking expansion or diversification with the object of promoting investment in backward area. This fact is evident from Page 536 of the Paper Book filed which are part of judicial records.

We find that assessee furnished Sales Tax Exemption Scheme (Haryana General Sales Tax Rules, 1975) before the lower authorities. These documents are enclosed in pages 529 to 543 of the factual paper book which are part of judicial records. We find that assessee furnished Exemption Certificate in Form VAT G1 in favour of Grasim Industries Ltd., (Unit Elegant Spinners) before the lower authorities. These documents are enclosed in pages 544 to 545 of the factual paper book which are part of judicial records.

5.3.1. We further find that the assessee had furnished all the Sales Tax assessment orders and the /Entry Tax assessment orders together with respective Sales Tax returns, as the case may be, of various States for various assessment years for quantification of Notional Sales Tax / Entry Tax subsidy figure, before the lower authorities, which are tabulated hereunder:-

	Sales tax Orders / Entry Tax Orders – AY 1996-97	AY 1996-97
I	Sales Tax Assessment Order for F.Y. 1995-96 of Vikram Ispat.		546 – 559
ii	Sales Tax Assessment Order for FY 1995 -96 of Poly Aluminium Chloride – State Sales Tax		560 – 562
iii	Central Sales Tax Assessment Order for FY 1995 -96 of Poly Aluminium Chloride – Central Sales Tax		563-564
iv	Entry Tax Assessment Order for FY 1995 -96 of Poly Aluminium Chloride		565-567
v	Entry Tax Assessment Order for FY 1995 -96 of Chloro Sulphuric Acid Division		568-571
Vi	Entry Tax Assessment Order for FY 1995 -96 of Caustic Soda Memrance Cell		572-573
Vii	RST Return Form for FY 1995-96 of Aditya Cement		574 – 592
viii	Sales Tax Assessment Order for FY 1995-96 of Vikram Woollens		593 – 595
ix	Sales Tax Assessment Order for FY 1995 -96 of Grasim Cement		596 – 597

–

	Sales tax Orders / Entry Tax Orders – AY 1997-98	AY 1997-98
I	Sales Tax Assessment Order for F.Y. 1996-97 of Vikram Ispat.		598 – 604
ii	Entry Tax Assessment Order for FY 1996 -97 of Chloro Sulphuric Acid Division		605 – 607
iii	Entry Tax Assessment Order for FY 1996 -97 of Caustic Soda Memrance Cell		608 – 610
iv	Sales Tax Assessment Order for FY 1996-97 of Aditya Cement		611 – 614
V	Sales Tax Assessment Order for FY 1996-97 of Vikram Woollens		615 – 620
vi	Sales Tax Assessment Order for FY 1996 -97 of Grasim Cement		621 – 625

–

	Sales tax Orders / Entry Tax Orders – AY 1998-99	AY 1998-99
I	Sales Tax Return for FY 1997 -98 of Vikram Ispat		626 – 634
ii	Entry Tax Assessment Order for FY 1997 -98 of Chloro Sulphuric Acid Division		635 – 637
iii	Entry Tax Assessment Order for FY 1997 -98 of Caustic Soda Memrance Cell		638 – 642
iv	Sales Tax Assessment Order for A.Y. 1997-98 of Aditya Cement		643 – 649
v	Sales Tax Assessment Order for FY 1997-98 of Vikram Woollens		650 – 651
vi	Sales Tax Assessment Order for FY 1997 -98 of Grasim Cement		652 – 659
vii	Sales Tax Assessment Order for FY 1997-98 of Elegant Spinners, Bhiwani		660 – 662

–

	Sales tax Orders / Entry Tax Orders – AY 1999-00	AY- 1999-00
i	Sales Tax Assessment Order for F.Y. 1998-99 of Vikram Ispat.		663 – 680
ii	Entry Tax Assessment Order for FY 1998 -99 of Caustic Soda Memrance Cell		681 – 687
iii	Sales Tax Assessment Order for FY 1998-99 of Aditya Cement		688 – 697
iv	Sales Tax Assessment Order for FY 1998-99 of Vikram Woollens		698 – 703
v	Sales Tax Assessment Order for FY 1998 -99 of Grasim Cement		704 – 710
vi	Sales Tax Assessment Order for FY 1998-99 of Elegant Spinners, Bhiwani		711 – 713

–

	Sales tax Orders / Entry Tax Orders – AY 2000-01	AY 2000-01
i	Sales Tax Return for FY 1999 -00 of Vikram Ispat		714 – 720
ii	Entry Tax Assessment Order for FY 1999 -00 of Caustic Soda Memrance Cell		721 – 727
iii	Sales Tax Assessment Order for FY 1999-00 of Aditya Cement		728 – 730
iv	Sales Tax Assessment Order for FY 1999-00 of Vikram Woollens		731 – 736
v	Sales Tax Assessment Order for FY 1999 -00 of Grasim Cement		737 – 744
vi	Sales Tax Assessment Order for FY 1999-00 of Elegant Spinners, Bhiwani		745 – 748

5.3.2. We find from the perusal of the Maharashtra Scheme as detailed hereinabove, the said scheme itself defines and explains what is “Notional Sales Tax Liability”. The said scheme also contemplates that the “Notional Sales Tax Liability” is required to be quantified by the Sales Tax Officer while framing the Sales Tax assessment for each of the years. Hence, the concept of “Notional Sales Tax Liability” is part and parcel of the Subsidy / Incentive Scheme brought out by the Maharashtra State Government. While this is so, we are unable to comprehend ourselves to accede to the arguments of Ld. Special Counsel for the Revenue that there cannot be any concept of “Notional Sales Tax Liability” and the quantification thereon becomes unworkable. We further strongly condemn the expressions used by the Ld. Special Counsel for the Revenue with regard to the said “Notional Sales Tax Liability” as a “Monster”. The aforesaid entire scheme papers were indeed fully furnished by the assessee before the lower authorities, which were categorised by the ld. Special Counsel for the Revenue as “Junk”, “Trash” and “Rubbish”. We strongly condemn this expression made by ld. Special Counsel for the Revenue for giving scant respect for the extensive documentation furnished by the assessee, which in any case, were not even disputed / doubted by the lower authorities. Even the Special Bench decision rendered by this Tribunal in the case of Reliance Industries Ltd., reported in 88 ITD 273 was erratically criticised by the ld. Special Counsel for the Revenue which have already been detailed hereinabove. In fact, the ld. Special Counsel for the Revenue proceeded on the premise that the Special Bench decision of this Tribunal has been reversed by the Hon’ble Supreme Court and sent back to the Hon’ble Bombay High Court. This aspect as to whether at all the decision of Special Bench in the case of Reliance Industries Ltd., referred to supra would still hold the field or not, is dealt separately hereinbelow. In these circumstances, we deem it fit and appropriate to direct the ld. Special Counsel for the Revenue to kindly be careful while arguing the cases in future before any judicial forum by not using such crude expressions.

5.3.3. We find that the ld. Special Counsel for the Revenue vehemently submitted that since the subsidy / incentive would be determined subsequently based on Sales Tax assessment order, which happens after the date of filing of return, the quantification of subsidy becomes unworkable and that the Income Tax department is not required to follow-up with the Sales Tax authorities regarding the final determination of Sales Tax liability. In our considered opinion, this objection is of no relevance at all in view of the fact that the respective schemes had indeed clearly specified the manner in which quantification of subsidies based on sales tax assessment orders which has to be done in future. Moreover, the competent authority which is incharge of actually granting the subsidy to the assessee had not objected to these points. In respect of Maharashtra Scheme, SICOM, being the implementing agency, had listed various conditions to be complied with including accounting, utilisation etc., and SICOM had duly examined the requisite conditions to be complied with. No adverse observations were indeed made by the competent authority. The competent authority had indeed granted subsidy to the assessee as finally determined by the respective sales tax officers which is in consonance with the subsidy schemes of various State Governments. The role of Income Tax department is only to examine whether the said receipt of subsidy would constitute capital or revenue receipt in the hands of assessee – nothing more nothing less. In any case, the lower authorities below had not even disputed this fact, which is vehemently argued by the ld. Special Counsel for the Revenue. This tantamounts to ld. Special Counsel for the Revenue making out a new case before the Tribunal and trying to travel beyond the brief, which is not permissible as per Law. Hence, we have no hesitation in summarily dismissing these arguments of ld. Special Counsel for the Revenue, as devoid of merits.

5.3.4. We further find that all the aforesaid schemes were subject matter of adjudication and consideration by various Tribunals across the country wherein, it was held that the subsidy / incentive received pursuant to the aforesaid schemes were capital receipts. The details of the various cases are tabulated hereunder:-

Sr. No.	Judgement	Paper Book Pg. No.	Objective of Subsidy Scheme in the case law relied upon
A	Maharashtra Scheme
1	DCIT v. Reliance Industries Ltd. (88 ITD 273) (Mum T SB) Reliance Industries Ltd v. ACIT (I.T.A. No. 7299/Mum/ 2017)	217- 232 (PB 1) 879- 991 (PB 4)	Sales Tax exemption Scheme of Government of Maharashtra, 1979 for disperse the industries outside the Bombay-Thane-Pune belt and to hasten the pace of industrialization in the developing regions of the State.
2	ACIT v. Economic Explosive Limited (ITA 202 to 206/Nag/20 15)	351- 354 (PB1)	Package scheme of Incentive 1993 of Government of Maharashtra which is an extension of Schemes introduced in 1964, 1979 and 1988 with the object being industrial development of backward district as well as generation of employment
3	DCIT v. Indo Rama Textiles Ltd. (25 taxmann.co m 161) (Del. T)	1116- 1120 (PB 4)	Sales Tax exemption Scheme of Government of Maharashtra, 1993 for promotion of industrialization in backward areas of the State of Maharashtra through Scheme of incentives.
4	ACIT v. Sanvijay Rolling and Engineering Ltd. (224/Nag/20 15) (Nag. T)	1121- 1127 (PB 4)	Package Scheme of Incentive, 2001 of the Government of Maharashtra granting subsidy for setting up project in view for employment generation and for dispersal of industry
5	LG Electronics India (P.) Ltd. v. ACIT (83 taxmann.co m 179) (Del. T)	992- 996 (PB 4)	Package Scheme of Incentive, 2001 of Government of Maharashtra providing refund of VAT with the objective of promotion of industry and balanced regional growth, diversion of industry to less developed areas of the State and increase in employment.
6	Mahindra & Mahindra Ltd. v. DCIT (7382/Mum/ 2017)	1021- 1079(PB 4)	Package Scheme of Incentive, 2001 of Government of Maharashtra (an extension of 1993 scheme) granting to intensify and accelerate the process of dispersal of industries to the less developed regions and promoting high tech industry in developed areas of the State of Maharashtra
7	Bombay Dyeing &Mfg Co Ltd v. DCIT (87 taxmann.co m 213) (Mum. T)	290- 321 (PB 1)	Package scheme of Incentive 2007 of Government of Maharashtra granting subsidy with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra
8	Innoventive Industries Ltd v. DCIT (ITA No. 601/PN/201 3)(Pune Trib.)	1222- 1246 (PB 6)	Package Scheme ofIncentive, 2007 ofGovernment of Maharashtragranting subsidy with a view to encourage the dispersal of industries to the less developed areas of the State of Maharashtra
B	Rajasthan Scheme
9	CIT v. Shri Cement (ITA No. 204 / 2010) (Raj HC)	248- 275 (PB 1)	Rajasthan Sales Tax/Central Sales Tax Exemption Scheme for Industries, 1998 for promoting industrial development of the State and encourage new capital investment in industry and thereby promote employment
10	Birla Corporation Ltd. v. DCIT (55 taxmann.co m 33) (Kol.)	1128- 1145 (PB 4)	Sales Tax Incentive under Rajasthan Sales Tax Exemption Scheme of 1998 for encouragement of setting up of industrial project or expansion of existing industrial projects
C	Haryana Scheme
11	DCIT v. Munjal Auto Industries Ltd and others, SLP dismissed in Civil Appeal No. 6226/2013 against Gujarat HC order in Tax Appeal No. 450 with 451 to 453 of 2012 (Munjal Auto) &Nirma Ltd in Appeal No. 226 of 2010 which is also covered by this SC order	822- 824 (PB 4)	Scheme framed by the Government of Haryana Haryana General Sales Tax Rules, 1975 for capital outlay expended by the Assessee for setting up of the unit in case of a new industrial unit and diversification of existing unit.
D	Madhya Pradesh Scheme
12	Universal Cables Ltd Vs. DCIT [2015] 57 taxmann.co m 95 (Kolkata – Trib.)	1146- 1163 (PB 4)	Subsidy received under Madhya Pradesh Industrial Investment Promotion Assistance Scheme, 2004with an objective to increase employment and establishing new industrial unit by enhancing new capital investment in the state of Madhya Pradesh.
13	ITO vs. M/s. Agya Auto Ltd (ITA No. 540/Ind/2018) (Indore T)	1191- 1200 (PB 6)	Subsidy received under Madhya Pradesh Industrial Policy, 2004 with an objective to increase capital investment in backward areas in the state of Madhya Pradesh.
14	Udai Plastic (P.) Ltd. v. ITO (98 ITD 231)	1247- 1249 (PB 7)	State Investment Subsidy and Sanction Rules, 1989 of MP state with an objective of setting up industries in backward area
15	ParleAgro P Ltd. v. ACIT (ITA No. 6209/Mum/ 2013)	1250- 1263 (PB 7)	Industrial Promotion Policy, named as “Madhya Pradesh Udyog NiveshSamvardhanYogna 2004″ with an objective to accelerate the pace of industrialization, maximize employment prospects and develop the infrastructure in the backward areas
16	Prism Cement Ltd. v. DCIT(I.T.A . No. 804 & 805/Mum/2 018)	1264- 1341 (PB 7)	Sales tax exemption under Madhya Pradesh Industrial Investment Promotion Assistance Scheme-2004 with an objective to accelerate the pace of industrialization, to maximize the employment prospects and balanced regional development
17	M/s Vardhman Textiles Limited (ITA No. 787/Chd/20 15)	1342- 1366 (PB 7)
18	M/s. Jinal Steel & Power Ltd. v. ACIT (ITA 167/Del/200 9)	–	Notification No. 40 for exemption from sales tax dated 24.04.2000 issued u/s 8(5) of the Central Sales Tax Act, 1956 to encourage new industrial units, development of backward areas and create employment opportunities in public interest
E	Entry Tax Scheme-Madhya Pradesh
19	M/s. Jindal Steel & Power Ltd. v. ACIT (ITA 167/Del/2009)	–	Notification No. 41 and 42 for exemption from entry tax 24.04.2000 issued u/s 8(5) of the Central Sales Tax Act, 1956 to encourage new industrial units, envelopment of backward areas and create employment opportunities in public interest

5.3.5. From the perusal of the aforesaid schemes together with its objects and preamble, we find that the dominant purpose for which the incentive scheme per se introduced by the respective State Governments was only for the purpose of setting up of industries in the respective areas for industrial development in State and also to accelerate development and absolutely not for augmenting the profits of the assessee. Effectively, the schemes of various State Governments envisaged the rapid industrialisation, growth and new employment generation in the respective areas which would in turn promote the growth of the State. Hence, it could be safely concluded that subsidy / incentive granted is only for setting up of the units based on the fixed percentage of the capital cost and not for running the business of the assessee. Moreover, even this subsidy which is determined based on sales tax assessment orders for 9 years, 6 years etc., are subject to maximum outer limit already fixed under the respective schemes. Though the quantification of the subsidy has been made post commencement of business, the measurement of subsidy is immaterial. In our considered opinion, none of the schemes contemplated to finance the assessee in the form of subsidy / incentive for meeting the working capital requirements of the assessee company post commencement of business. Hence, by applying the purpose test, apparently, the subsidy / incentive received in the instant case would only have to be construed as capital receipts not chargeable to income tax. In this regard, we find that ld. AR placed reliance on the decision of Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., reported in 306 ITR 392, wherein the incentive conferred under that scheme were two fold. First, in the nature of higher free sale sugar quota and second, in allowing the manufacturer to collect Excise duty on sale price on the free sale sugar in excess of the normal quota, but to pay to the Government only the Excise duty payable on the price of levy sugar. The Hon’ble Supreme Court in para 14 of its decision had held that “character of receipt of subsidy has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial.” In fact, the Hon’ble Supreme Court while rendering this decision had duly considered its earlier decision in the case of Sahney Steel and Press Works Ltd., reported in 228 ITR 253 and had absolutely no quarrel with that judgement. Rather, it concurred with the decision rendered in Sahney Steel and Press Works Ltd., case. In this regard, it would be relevant to reproduce the operative portion of the decision of Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., as under:-

14. The second case is Lincolnshire Sugar Co. Ltd. v. Smart 20 TC 643. In that case it was found that Lincolnshire Sugar Co. Ltd carried on the business of manufacturing sugar from home grown beet. The company was paid various sums under British Sugar Industry (Assistance) Act, 1931, out of monies provided by the Parliament. The question was whether these monies were to be taken into account as trade receipts or not. The object of the grant was that in the year 1981, in view of heavy fall in prices of sugar, sugar industries were in difficulty. The Government decided to give financial assistance to certain industries in respect of sugar manufactured by them from home-grown beet during the relevant period. Lord Macmillan held that—

“What to my mind is decisive is that these payments were made to the company in order that the money might be used in their business.”

He further observed that:

“I think that they were supplementary trade receipts bestowed upon the company by the Government and proper to be taken into computation in arriving at the balance of the company’s profits and gains for the year in which they were received.”

15. In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock Co. 5 case (supra).

16. There is a Canadian case St. John Dry Dock & Ship Building Co. Ltd. v. Minister of National Revenue 4 DLR 1, which has close similarity to the case of Seaham Harbour Dock Co. ‘s case (supra). In that case it was held that where subsidies were given under statutory authority, the statutory purpose for which they are authorised is relevant and may even be decisive in determining whether it is taxable income in the hands of the recipient. In that case, it was pointed out after discussing the Seaham Harbour Dock Co. ‘s case (supra)as well as that of Lincolnshire Sugar Co. Ltd. 5 case (supra)that subsidy given by the Canadian Government to encourage construction of dry docks was ‘an aid to the construction of dry dock and not an operational subsidy’.

17. This precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were trade for a period of five years calculated from the date of commencement of production in the assessee’s factory. The subsidies are operational subsidies and not capital subsidies.

5.3.6. Yet another decision was rendered by Hon‟ble Supreme Court in the case of CIT vs. Chapalkar Brothers reported in 400 ITR 279 which held that where the object of respective subsidy schemes of State Government was to encourage development of multiple theatre complexes, incentives would be held to be capital in nature and not revenue receipts. The relevant operative portion of the judgment is reproduced hereunder:-

18. After discussing the judgment in Sahney Steel & Press Works Ltd.’s case (supra) this Court then held:

“The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to the applied in judging the character of a 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. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the Scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. 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. The form of the mechanism through which the subsidy is given is irrelevant.”

19. Sahney Steel was distinguished, in para 16 by then stating that this Court found that the assessee was free to use the money in its business entirely as it liked.

20. Finally, it was found that, applying the test of purpose, the Court was satisfied that the payment received by the assessee under the scheme was not in the nature of a helping hand to the trade but was capital in nature.

21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the “purpose test”. It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial.

22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha’s argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.

23. Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT [2011] 9 taxmann.com255/198 Taxman 122/ 333 ITR 335. While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.

24. After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.

25. We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.

5.3.7. We further find that the Hon’ble Gujarat High Court in CIT vs. Munjal Auto Industries Ltd., in Tax Appeal No.450 with 451-453 of 2012 dated 28/01/2013 also had an occasion to consider the very same issue in dispute before us. In this case also, the Revenue had taken a specific argument that since subsidy would be received only once unit goes for production, subsidy would be revenue nature. The Hon’ble Gujarat High Court referred to the relevant subsidy scheme noted that concession was capped @125% of fixed capital investment and could be availed within 9 years. The Hon’ble Gujarat High Court after considering the decision of Hon’ble Supreme Court both in the case of Sahney Steel and Press Works Ltd., and Ponni Sugars and Chemicals referred to supra had held as under:-

“7. From the provisions of the said scheme, it clearly emerges that the subsidy though computed in terms of sales tax deferment or waiver, in essence it was meant for capital outlay expended by the assessee for set up of the unit in case of a new industrial unit and for expansion and diversification of an existing unit. As noted, such subsidy was available only to a new industrial unit or a unit undertaking expansion or diversification. Fixed capital investment has been defined as to include various investments in land under use, new construction, plant and machinery etc. The entitlement was related to percentage of fixed capital investment.

8. It is undoubtedly true that such subsidy was computed in terms of sales tax deferment and necessarily therefore, would accrue to an industry only once the commercial production commences. However, this by itself would not be either a sole or concluding factor. In case of Sahney Steel and Press Works Ltd. and others v. Commissioner of Income-tax reported in 228 ITR 253, the Apex Court held and observed that the character of the subsidy in the hands of the recipient whether revenue or capital will have to be determined, having regard to the purpose for which the subsidy is given. The source of find is quite immaterial. If the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. Such But if monies are given to the assessee for assisting him in carrying out the business operations and given after the satisfaction of the conditions of commencement of production, such subsidy must be treated as assistance for the purpose of the trade.

9. Such decision was considered in case of Ponni Sugars and Chemicals Ltd.(supra) and the Apex Court held and observed as under :

“13. The main controversy arises in these cases because of the reason that the incentives were given through the mechanism of price differential and the duty differential. According to the Department, price and costs are essential items that are basic to the profit making process and that any price related mechanism would normally be presumed to be revenue in nature. In other words, according to the Department, since incentives were given through price and duty differentials, the character of the impugned incentive in this case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment.

14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistancein carry ing on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That 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. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. 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. The form of the mechanism through which the subsidy is given is irrelevant.“

10. In a recent judgement dated 8.1.2013 in case of DCIT-Circle1(2)-Baroda v. Inox Leisure Ltd.,we had an occasion to consider somewhat similar question in the backdrop of entertainment tax waiver scheme of State of Gujarat as well as State of Maharashtra. Even in such a case, the entertainment tax waiver which was granted in terms of sale of tickets was treated as capital in nature when it was found that same was relatable to the capital investment made by the assessee. It was held as under :

“10. From the above noted provisions of thescheme it can be clearly seen that the entire purpose of granting tax exemption was for giving the boost to the terrorism sector. This was to be achieved by attracting higher investment in areas with tourism potential. In order to achieve such purpose, exemption from various taxes as may be applicable was granted. It is true that the exemption was to be computed in terms of tax otherwise payable by the industry. However, the purpose of such exemption was to meet with the capital outlay already undertaken by the assessee. This clearly comes out from various provisions of the scheme. For example, the scheme was applicable only to the new project or to a existing project provided investment in fixed capital or capacity was increased atleast by 50%.Thus, the very eligibility for seeking exemption was linked with new investment being made in fixed capital. Further though the scheme envisaged a certain period spanning for 5 to 10 years during which such exemption could be availed depending on the category of the unit, such exemption would cease the moment the total incentives touched 100% of the eligible capital investments. In other words, the upper limit of total incentive which the unit could receive from the State Government in the form of tax waiver would not exist 100% of the eligible capital investment regardless of the residue of the period of its exemption eligibility as per the scheme. From the combined reading of salient features of the scheme, we have no doubt in our mind that the incentive was being offered for recouping or covering a capital investment or outlay already made by the assessee.“

11. In the result we find no error in view of the Tribunal. Tax Appeals are dismissed.

5.3.7.1. It is pertinent to note that against this judgement, civil appeals were dismissed by the Hon‟ble Supreme Court vide its order dated 08/05/2018 on the ground that the issue is already covered in the decision of Chapalkar Brothers referred to supra.

5.3.8. Before us, the ld. Special Counsel for the Revenue referred to various decisions of Hon’ble High Courts. But, all those decisions were rendered prior to the decision of Hon’ble Supreme Court referred to above. Hence, the decisions relied upon by the ld. Special Counsel for the Revenue would not advance the case of the Revenue.

5.3.9. It is pertinent to note that in each of the aforesaid decisions of Hon’ble Supreme Court, the Courts have been mindful of the fact that the subsidy has to be received after commencement of business and to be availed within 9,10 & 12 years, as the case may be, and yet by applying purpose test, it was held that subsidy was on capital account.

5.4. Applicability of Special Bench decision of Mumbai Tribunal in the case of Reliance Industries reported in 88 ITD 273.

The ld. Special Counsel for the Revenue vehemently submitted that the decision of the Hon’ble Special Bench has been reversed by the Hon’ble Supreme Court by remitting the matter back to the Hon’ble Bombay High Court. First of all, it would be relevant to bring on record the crux of the decision of the Special Bench in the case of Reliance Industries Ltd. In case of Special Bench decision of Reliance Industries Ltd, the scheme dealt with sales tax exemption under the scheme of Government of Maharashtra, 1979. Further the said scheme was implemented by SICOM. The following question was referred by the Hon’ble President, Tribunal to the Special Bench:

“Whether, on the facts and in the circumstances of the case and in law the assessee company is justified in its claim that the sales-tax incentive allowed to it during the previous year in terms of the relevant Government order constitutes capital receipt and is not to be taken into account in the computation of total income?”

The Hon’ble Tribunal for Asst Years 1984-85 and 1985-86 had held the sales tax exemption to be capital in nature as the same was given for industrial development of the backward districts as well as generation of employment. However, the matter was referred to the Special Bench as it was alleged that the decision for AY 1985-86 was virtually overruled by subsequent decision of the Mumbai Tribunal in the case of Bajaj Auto Ltd (ITA No. 49 and 1101 of 1991).

The Special Bench held that the decision of Bajaj Auto has not overruled the decision of Hon’ble Mumbai Tribunal for AY 1985-86 on the following basis:

i) There cannot be any question of overruling the decision of one Bench by another bench of equal strength as it would be contrary to the established norms of judicial system in the country.

ii) Even on merits it cannot be said that the Tribunal has laid out more stress on the form of the scheme and not their substance as held in Bajaj Auto as the Tribunal in the order for AY 1985-86 has explained the difference between exemption schemes of Maharashtra and Andhra Pradesh in detail.

iii) Reliance placed by Tribunal in Asst Year 1985-86 on the decision of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. v. CIT (228 ITR 253) cannot be said to be erroneous. The Tribunal did recognise that the object with which subsidy is given is decisive as laid down by Hon’ble Supreme Court. If the scheme is for setting up or expansion of industry in a backward area, it will be capital, irrespective of the modality or source of fund. If the scheme is for assisting of carrying out of business operations, it is revenue. Hon’ble Supreme Court demonstrated the principle that the object of the subsidy must be given primary importance over the source of fund.

5.4.1. Ultimately the Special Bench after placing reliance on the decision of Hon’ble Supreme Court in Sahney Steel and Hon’ble Madras High Court in the case of CIT v. Ponni Sugars & Chemicals Ltd. Reported in 260 ITR 605 held that the decision of the Tribunal in Asst Year 1985-86 is correct and observed the following:

37….The observations of the Madras High Court lend support to the view that the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy was received after the commencement of production or conditional upon it. Therefore, in our view and with respect, the Tribunal in the case of Reliance Industries Ltd. ( supra) had correctly interpreted and understood the ratio of the judgment of the Supreme Court in Sahney Steel & Press Works Ltd.‘s case (supra).

38. In this view of the matter, we answer the question referred to us in the affirmative.

5.4.2. The ld. AR vehemently submitted that the department did not challenge the decision of the Special Bench before the Hon’ble Bombay High Court. However, he fairly stated that there was a subsequent decision of the Division Bench of this Tribunal which followed the Special Bench and that Division Bench order was challenged by the Revenue before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court while disposing of the said appeal did not reverse the decision of the Special Bench and accepted the same. When that appeal was further challenged by the Revenue before the Hon’ble Supreme Court, the Hon’ble Supreme Court remitted the matter back to the Hon’ble Bombay High Court. Accordingly, he argued that the decision of Special Bench was never reversed by the Hon’ble Supreme Court as stated by the ld. Special Counsel for the Revenue and accordingly still is a good law and therefore a binding precedent on this Division Bench. In fact, in assessee’s own case for A.Y.2001-02 in ITA No.778 of 2015 dated 18/12/2018 before the Hon’ble Jurisdictional High Court, wherein the question Nos. c & d was exactly on this point. For the sake of convenience, the question Nos. c & d raised by the Revenue before the Hon’ble Jurisdictional High Court is reproduced hereunder:-

“(c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in restoring the issue of taxability of the sale tax exemption benefit of Rs.58 crores availed by the assessee to the file of the Assessing Officer for deciding afresh after considering the decision of the Special Bench of the ITAT in the case of DCIT V. Reliance Industries Ltd., 88 ITD 273, which has not been accepted by the Revenue?

(d) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in entertaining the additional ground without appreciating that the assessee had treated the amount of sales tax exemption benefit of Rs.58 crores as revenue receipt and had included this amount in the returned income and it had been taxed accordingly and the assessee did not raise this issue before the CIT(A) and the issue had attained finality?”

5.4.3. While disposing of the questions Nos. c & d, the Hon’ble Jurisdictional High Court categorically held that the decision of the Special Bench of Tribunal had not been reversed or stayed by any higher judicial forum and it holds good as on date. The relevant operative portion of the judgement of Hon’ble Jurisdictional High Court in this regard is reproduced as under:-

“3. We will first address the questions no. (c) and (d), which are different elements of the same issue. The respondent assessee had received a subsidy. It is undisputed that up to the level of Income Tax Appellate Tribunal, the assessee did not raise a contention that such subsidy was towards capital account and, therefore, not taxable. However, before the Tribunal such a contention was raised. The Tribunal by the impugned judgment relied upon its earlier judgment for the Assessment Year 1999-2000 in case of this very assessee and restored the issue back to the Assessing Officer. In the earlier order, the Tribunal had remanded the issue to the file of the Assessing Officer “to decide the issue afresh after considering the decision of Special Bench of the Tribunal in the case of Reliance Industries Ltd. (supra)”. Thus, the Tribunal remanded the issue back to the Assessing Officer to be decided in the light of the Special Bench judgment in the case of Reliance Industries Ltd. The Revenue’s grievance in this respect is two fold. It was contended that the issue was raised for the first time before the Tribunal and the same should not have been permitted. Secondly, the view of the Tribunal in case of Reliance Industries Ltd. was challenged before the High Court. The High Court in a judgment dated 15.04.2009 in Income Tax Appeal No. 1299 of 2008 had held that no question of law in this respect arises and thereby confirmed the judgment of the Tribunal. It was pointed out that against this judgment of the High Court, the Department had approached the Supreme Court and the Supreme Court had held that a question of law did arise. The Supreme Court framed a question and placed the matter back before the High Court. We are informed that this appeal is still pending.

4. On the other hand, learned Counsel for the assessee firstly contended that the Tribunal had merely remanded the issue back to the Assessing Officer. In earlier orders, the Revenue had approached the Court against the similar orders of the Tribunal. The High Court on two occasions, in the order dated 27.09.2016 and 22.11.2016 passed in Income Tax Appeal Nos. 475 of 2014 and 102 of 2014 respectively had not entertained the challenge of the Revenue. In any case, it was contended that the facts on record are available and the Tribunal has merely asked the Assessing Officer to take a decision on the assessee’s contention.

5. As long as the material exists on record, a contention raised by the assessee for the first time before the Tribunal, cannot be barred. So much is clear from series of judgments of various Courts including of this Court in case of CIT Vs. Pruthvi Brokers and Shareholders P. Ltd. (2012) 349 ITR 336. It is not the case of the Revenue that the assessee in the context of its contention on the nature of the subsidy, desired to produce additional evidence. It is true that the judgment of this Court confirming the order of the Tribunal in case of Reliance Industries Ltd. has been partially reversed by the Supreme Court. A question of law has been framed and placed for consideration of the 4 of High Court. However, this does not mean that the judgment of the Tribunal as on today stands reversed or stayed. In any case, quite apart from the judgment in the case of Reliance Industries Ltd. of the Special Bench of the Tribunal, it is always been for the assessee to contend before the Assessing Officer by pointing out the relevant clauses of the subsidy that in law the subsidy cannot be treated to be towards revenue account. It would be equally open for the Revenue to oppose such a contention if so advised. The Assessing Officer and the Revenue authorities would have to take a decision in accordance with law. These questions, therefore, are not considered.”

(emphasis applied by us while placing reliance on the decision of
Hon’ble Jurisdictional High Court)

5.4.4. Against this judgement on other issues, the Revenue preferred an SLP before the Hon’ble Supreme Court and the same was dismissed vide order dated 23/08/2019 in SLP (Civil) Diary No.22929/2019. In other words, the Revenue while preferring SLP before the Hon’ble Supreme Court did not even challenge this ground of subsidy and the decision of Special Bench of Tribunal in the case of Reliance Industries Ltd., Hence, the order of the Hon’ble Jurisdictional High Court in assessee’s own case for A.Y.2001-02 had become final on the very same issue. Though the said decision has been rendered for subsequent assessment year as compared to the years under consideration before us, in view of identical facts and the same legal issue, and more especially, in order to address the fact of binding precedent of Special Bench decision in the case of Reliance Industries Ltd., this Bench deems it fit to place reliance on the said decision also of the Hon’ble Jurisdictional High Court. Accordingly, we categorically hold that the decision of the Special Bench still holds the field and is a good law. The entire contentions raised by the ld. Special Counsel for the Revenue in this regard are hereby dismissed.

5.4.5. Further, we find that the Co-ordinate Bench of Ahmedabad Tribunal in the case of ACIT vs. Genus Electrotech Ltd., reported in 72 taxmann.com 101 had an occasion to consider the fact of Special Bench decision in a more elaborate manner. The relevant operative portion is reproduced hereunder:-

“11. We find that so far as the Special Bench decision of this Tribunal in the case of Reliance Industries Ltd. (supra) is concerned, it still holds the field. All that has happened, as a result of Hon’ble Supreme Court’s decision dated 9th September 2011, is that Hon’ble Bombay High Court has now admitted the question “whether, on the facts and circumstances of the case, the Hon’ble Tribunal was right in holding that sales tax exemption was a capital receipt” and will, in due course though, adjudicate on this legal issue. To that extent, Hon’ble Bombay High Court’s order dated 15th April 2009, to the extent of declining to admit this question, stands reversed. However, the decision of the Special Bench still holds good as the same has not, and at least not yet, even been examined by Hon’ble Bombay High Court. Mere admission of appeal against a decision, as is elementary, does not affect the biding nature of a judicial precedent. The Special Bench decision, in the case of Reliance Industries Ltd. (supra), was not reversed by Hon’ble Supreme Court, but was directed to be examined, on merits, by Hon’ble Bombay High Court. That is quite different from disapproving the special bench decision, but it appears that the coordinate bench was led to believe, and there could not have been any other reason for ignoring the special bench decision, that this Special Bench decision is reversed. That is patently incorrect, and when we pointed it out to the learned Commissioner (DR), he did not have much to say except to rely upon the coordinate bench decision which seems to have followed that approach. The coordinate bench, in the case of Jindal Steel & Power Ltd. (supra), did indeed travel much beyond its limited mandate in ignoring a binding judicial precedent simply because appeal against that special bench decision is now pending before Hon’ble Bombay High Court. When posed with a special bench decision and a division bench directly on the issue, though touching different chords, we have no difficulty in recognizing our limitations. The wisdom of a division bench, even if superior- as strenuously argued by the learned Commissioner, has to make way for the higher wisdom of a larger bench. It is this faith of judicial hierarchical system that is the strength of our functioning, and we must follow the same. We, therefore, regret our inability to follow the division bench in the case of Jindal Power, no matter how deeply we respect and admire the work of all our colleagues, and we would rather be guided by the special bench decision – which is exactly what another division bench, on the same set of facts as before us, did in the case of Ajanta Manufacturing Ltd. (supra). As for learned Commissioner (DR)’s suggestion that we should follow the jurisdictional High Court decision in the case off Colourman Dyechem Ltd. (supra), we find that Their Lordships, in this case, were dealing with an entirely different type of subsidy which was clearly dealing with an expansion situation. However, we would rather refrain from making any further detailed observations on this issue, as we are alive to the fact that Hon’ble jurisdictional High Court, in Tax Appeal No 358 of 2012, has admitted appeal against the decision of this Tribunal in Ajanta’s Manufacturing Ltd. case (supra) and all these issues will now come up for consideration of Their Lordships. The fact that appeal is admitted does not, as we have stated earlier as well, does not affect the binding nature of the judicial precedents. There is no dispute before us that the scheme under which the sales tax and excise duty subsidy are given to this assessee are the same as in the case of Ajanta Manufacturing Ltd. (supra). All the material facts being the same, there is no reason to take any other view of the matter than the view so taken by the coordinate bench. We must, therefore, uphold the conclusions arrived at by the Commissioner (Appeals), which are in consonance with the Special Bench decision in the case of Reliance Industries Ltd. (supra) and coordinate bench decision in the case of Ajanta Manufacturing Ltd. (supra), and decline to interfere in the matter.”

(emphasis supplied by us)

5.4.6. In view of the above, no fault could be attributed on the ld. CIT(A) placing reliance on the decision of the Special Bench of the Tribunal and granting relief to the assessee in the instant case.

5.4.7. We find that the ld. Special Counsel for the Revenue placed heavy reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of Grasim Industries Ltd., (successor to the business of Aditya Birla Nuvo Ltd., formerly known as Indian Rayon and Industries Ltd.,) for A.Yrs. 1995-96 to 1998-99 in ITA Nos. 3938/Mum/2013, 2197/Mum/2014, 2198/Mum/2014 & 7062/Mum/2014 respectively dated 18/04/2018 wherein this Tribunal had held that the issue in dispute with regard to taxability of subsidy could be decided independently without depending upon the decision of the Special Bench in the case of Reliance Industries Ltd. We find that in the said decision, the Tribunal never said that Special Bench decision has been reversed by any higher forum or it is no longer good law. The Bench had simply stated that the issue in dispute would be adjudicated on merits with regard to taxability of subsidy and the Tribunal ultimately gave relief to the assessee on merits independently by applying purpose test and the decision of the Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd., referred to supra. Hence, the reliance placed on this observation of the Tribunal by the ld. Special Counsel for the Revenue is misplaced and does not come to the rescue of the revenue.

5.4.8. We further find that the ld. Special Counsel for the Revenue repeatedly reiterated that the decision of the Hon’ble Supreme Court in the case of U.P. Rashtriya Chinni vs. State of Uttar Pradesh and Others dated 02/07/1995 reported in 1995 SCC(4) 738 was not cited before the Special Bench of Mumbai Tribunal while rendering the decision in the case of Reliance Industries Ltd., and therefore, the Special Bench decision is non-est and loses its binding precedent. At the outset, we would like to state that UP Rashtraiya Chinni decision was not rendered in the context of Income Tax Act and the taxability of subsidy was not an issue there before the Hon’ble Supreme Court. We have already stated hereinabove that the decision of the Special Bench of Reliance Industries was never stayed or reversed by any higher judicial forum. Infact even the decision of Hon’ble Supreme Court in the case of U.P.Rashtriya Chinni supra states that the judgement holds good till it is set aside or its correctness is doubted by the Higher Court. Once the correctness of a judgement is doubted by the Higher Court, the judgement no longer remains the law of the land and is treated as non-est. As stated earlier, nowhere the decision of Special Bench of Mumbai Tribunal in the case of Reliance Industries Ltd had been set aside or its correctness is doubted by the Higher Forum, though it is being reiterated so by the ld. Special Counsel for the Revenue before us. Hence we hold that the ratio laid down in UP Rashtriya Chinni would rather advance the case of the assessee before us. Hence, we categorically hold that the decision of Special Bench of the Tribunal in the case of Reliance Industries Ltd., referred to supra still holds the field and still has binding precedent.

5.5. With regard to yet another argument advanced by the ld. Special Counsel for the Revenue, on without prejudice basis, that even if the subsidy is treated as capital receipt then the same would have to be reduced from the cost of assets in terms of Explanation 10 to Section 43(1) of the Act. We find that the provisions of Explanation 10 to Section 43(1) of the Act has been introduced in the statute only from A.Y.1999-2000 onwards. Eventhough we find that the subsidy in the instant case is given to meet the fixed capital investment but the said subsidy is not identifiable with any particular asset as such. When the subsidy or grant received is not identifiable to any particular asset, then the provisions of Explanation 10 to Section 43(1) of the Act would not be applicable. Reliance in this regard is placed on the decision of the Hon’ble Jurisdictional High Court in the case of PCIT vs. Welspun Steel Ltd., reported in 264 Taxman 252. The relevant question raised before the Hon’ble Jurisdictional High Court is as under:-

“(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that subsidy cannot be considered as payment directly or indirectly to meet any portion of the actual cost ignoring the fact that if the assessee claims the same as capital receipt, the same shall be reduced from the cost of asset and depreciation claim should be on the net value/cost of the asset after reducing the amount of incentives in terms of Explanation 10 to Section 43(1) of the Act?”

5.5.1. This question has been answered by the Hon’ble Jursidictional High Court in the following manner:-

9. The second question raised by the Revenue is consequent of the first question, in which, the Revenue argues that, if the subsidy is treated as a capital in nature, the same must bring down assessee’s costs of acquisition of plant and machinery. The assessee’s claim of depreciation to that extent must shrink. Assessee argues that, the Tribunal correctly held that, the subsidy had not been given in relation to acquisition of plant or machinery and that, therefore, same cannot be adjusted towards cost of acquisition.

10. It is undoubted that, the subsidy had no relation to the assessee’s acquisition of plant or machinery. It was to be granted to an industry which had set up the new industrial unit in the District of Kutch. In such back-ground, question – arises whether such subsidy would be adjustable towards assessee’s costs of acquisition of capital assets. We may notice that, a similar question was considered by Division Bench of Gujarat High Court in case of CIT v. Grace Paper Industries (P.) Ltd.[1990] 183 ITR 591/52 Taxman 18.The Court noted that, the subsidy was granted by the Government for development of industries in back-ward areas. It was not part of the actual cost of plant or machinery. The Court, therefore, held that it could not have been deducted towards costs of acquisition. The Court held as under:—

“We have carefully considered the provisions relating to the grant of cash subsidy under the schemes framed by the Central Government and the State Government. The Central Government as well as the State Government noticed that areas specified as backward areas and tribal areas were undeveloped or under-developed. Entrepreneurs were not willing to set up industries in such undeveloped or under-developed areas. The industries were concentrating only in urban areas. In other words, rapid urbanization was taking place. So far as the State of Gujarat is concerned, there was rapid industrial growth in cities like Baroda, Ahmedabad and Surat resulting in strain on municipal services. Urbanization created several problems such as pollution, growth of slums etc . It was also necessary to have balanced growth of industry in different regions. However, as pointed out above, entrepreneurs were reluctant to set up industries in backward areas. These areas were identified as backward because there was un-development or underdevelopment of industries in these areas. It was, therefore, that the Government decided to give financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region. One of the incentives which the Government decided to grant was cash subsidy so that entrepreneurs could utilize such cash subsidy for any purpose connected with the establishment of industries in the backward areas. Once the decision to give cash subsidy was taken, the Government had to work out some method to determine the quantum of such subsidy. In other words, the question as to how the amount of cash subsidy should be determined had to be considered by the Government. The Government, in order to determine the amount of cash subsidy, decided to follow one of the recognized methods of working it out on the basis of the amount invested by an entrepreneurs in acquiring capital assets as cash subsidy. The scheme does not say as to in what manner the subsidy was granted is to be utilized. In other words, the entrepreneur to whom the subsidy was granted was free to utilize it in any manner he liked. It would, therefore, appear that quantification of subsidy on the basis of investment was a measure adopted by the Government for convenience to work out the subsidy. If subsidy could be utilized by the entrepreneur in any manner he liked, could it be said that it was granted for meeting the cost of the capital assets? In our opinion, taking an overall view of the various provisions of the scheme, it is difficult to hold that cash subsidy was granted to entrepreneur to meet the cost of the fixed assets or part thereof The cost of the fixed assets was merely adopted as a measure for working out subsidy. In fact, a careful examination of the scheme reveals that it is the value of the fixed assets and not its cost which is adopted as the basis for computing the amount of the subsidy. Emphasis on value and not the cost is evident from the fact that land and building already owned by an industrial unit, cost of tools, jigs, dies and moulds, transport charges, insurance premium, erection cost, value of second-hand machinery purchased by an industrial unit etc. were to be taken into account while computing the value of fixed assets for the purposes of subsidy. In other words, it was the value of the fixed assets which formed the basis for computation of subsidy to be granted under the scheme. Subsidy, in our opinion, did not meet the cost of the fixed assets directly or indirectly. Under the scheme of the Central Government or the scheme of the State Government, cash subsidy was quantified by determining the same at a specified percentage of the value/ cost of the fixed assets. Therefore, as observed above, the basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and it could not be said that the subsidy was given for the specific purpose of meeting any portion of the cost of the fixed assets. The subsidy was granted to compensate the entrepreneur for the hardship and inconvenience which he might encounter while setting up industries in backward areas.”

11. Similar issue came up for consideration again before the Gujarat High Court in CIT v. Swastik Sanitary Works Ltd.[2006] 286 ITR 544.It was a case in which, the Government subsidy was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries. In such a case, specified percentage of the fixed capital cost, which was the basis for determining the subsidy, would be granted. The Court held that, such basis for determining the subsidy was only a measure adopted under the scheme to quantify the financial aid and it was not a payment, directly or indirectly to meet any portion of the actual cost of acquisition of capital asset. It was held and observed as under:—

‘In so far as question No.2 is concerned, this court finds that the same is squarely covered by the decision of the Supreme Court in CIT v. P. J. Chemicals Ltd., [1994] 210 ITR 830. In the said case, after review of the law on the point, the Supreme Court has held as under (head note):

“Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the ‘actual cost The expression ‘actual cost’ in section 43(1) of the Income Tax Act,1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from ‘actual cost’. The amount of subsidy is not to be deducted from the ‘actual cost’ under section 43(1) for the purpose of calculation of depreciation etc.”‘

No question of law, therefore, arises in this respect.

5.5.2. Respectfully following the same, we hold that the provisions of Explanation 10 to Section 43(1) of the Act would not be applicable in the facts and circumstances of the case and accordingly, the alternative ground raised by the Revenue is hereby dismissed.

5.6. In view of the aforesaid detailed observations, we hold that subsidy / incentive received in the instant case by the assessee for all the years under consideration would have to be construed only as a capital receipt not chargeable to tax and the ld. CIT(A) had rightly granted relief to the assessee in this regard by applying the purpose test. Hence, we do not find any infirmity in the order of the ld. CIT(A) for all the years under consideration. Accordingly, the original grounds as well as the additional grounds raised by the Revenue are dismissed.

6. In the result, all the appeals of the Revenue are dismissed.

Order pronounced on 29/04 /2022 by way of proper mentioning in the notice board.