Delhi High Court: Sales Tax Incentive Received by Companies is Capital Receipt

Delhi High Court: Sales Tax Incentive Received by Companies is Capital Receipt

The Delhi High Court recently delivered a verdict in a tax case, clarifying the nature of a sales tax subsidy received by an assessee under the "Dispersal of Industries Package of Incentives, 1993." The Court ruled that the subsidy received by the assesse constituted a capital receipt, impacting the tax implications for the company.

Justices Rajiv Shakdher and Girish Kathpalia observed that all incentives offered under the Dispersal of Industries Package of Incentives, 1993, shared a common goal: encouraging the establishment of new industrial units or significant investments in fixed capital.

Notably, the scheme stipulated that an eligibility certificate, necessary to claim the incentives, would only be issued after the eligible unit commences commercial production. This specific requirement, the judges observed, was likely incorporated to ensure that the 1993 Scheme effectively achieved its core objective of boosting industrialisation in underdeveloped and developing areas.

In accordance with the Dispersal of Industries Package of Incentives, 1993, the respondent/assessee benefited from a sales tax subsidy granted by the Government of Maharashtra.

The crux of the case hinged on the classification of the sales tax subsidy received by the assessee. The court needed to decide whether it should be considered a capital receipt or a revenue receipt for tax purposes.

In 1964, aiming to promote industrial development outside the concentrated areas of Bombay, Thane, and Pune, the Government of Maharashtra launched the "Package Scheme of Incentives." This initiative incentivised the establishment and expansion of industrial units in underdeveloped and developing regions across the state.

The Package Scheme of Incentives, introduced in 1964, underwent various modifications over time. The 1993 Scheme, building upon the initial framework, was implemented by the Government of Maharashtra in 1993.

To take advantage of the 1993 scheme, the assessee established industrial units in Butibori and Takhalghat, Nagpur. Production at the Butibori unit commenced on May 1, 1994, while the expanded Takhalghat unit began production on September 1, 1996.

The assessee received two eligibility certificates from the State Industrial and Investment Corporation of Maharashtra Limited (SICOM) upon application.

During the assessment year 1997-98, the respondent/assessee filed their income tax return declaring a loss of ₹205,02,97,503. Subsequently, the respondent/assessee was selected for scrutiny assessment. After examination, the assessing officer issued an order revising the declared loss downwards.

The assessee appealed the assessing officer's (AO) order to the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) overturned the AO's decision, effectively upholding the loss declared by the assessee in their return of income.

Aggrieved by the (CIT(A)) order, the revenue department (appellant) appealed to the Income Tax Appellate Tribunal (ITAT). The assessee filed cross-objections before the ITAT regarding the sales tax subsidy issue.

The 1993 scheme, according to the department, was a production-linked incentive programme that was activated only after an eligible unit began production. While the primary goal was spreading industries beyond the Bombay-Thane-Pune belt, eligibility certificates were issued after commercial production commenced. Notably, the scheme offered no land grants or interest-free capital.

Eligible units under the 1993 scheme needed to demonstrate, among other things, land ownership, relevant government registrations, and industrial licenses confirming commercial production launch. These requirements were outlined under the "Initial Effective Steps" and "Final Effective Steps" sections.

The 1993 scheme improved liquidity through sales tax incentives, not via direct or indirect payments for setting up units. Its sole purpose was to alleviate hardship and support these industrial ventures.

The assessee insisted that the post-production issuance of the eligibility certificate for the 1993 Scheme's sales tax subsidy does not transform it into a capital receipt.

To determine the nature of the sales tax subsidy, the assessee applied the "purpose test." Under the 1993 Scheme, the aim was to disperse and attract industries to underdeveloped areas. Therefore, neither the timing nor the manner of receiving the subsidy was relevant. Receiving the subsidy after production, based on the eligibility certificate, did not automatically classify it as a capital receipt.

The Delhi High Court dismissed the department's appeal and sided with the assessee in the case concerning the sales tax subsidy.