Delhi High Court Affirms Sales Tax Subsidy/Incentive as Capital Receipt

LI Network

Published on: February 1, 2024 at 11:20 IST

In a recent ruling, the Delhi High Court has declared that the sales tax subsidy or incentive received by the assessee under the Dispersal of Industries Package of Incentives, 1993, is classified as a capital receipt.

Justice Rajiv Shakdher and Justice Girish Kathpalia, comprising the bench, noted that the underlying theme connecting various incentives within the scheme was the establishment of new units or substantial investments in fixed capital.

The requirement for the eligibility certificate to be issued by the implementing agency after the commencement of commercial production was seen as a measure to ensure the fulfillment of the scheme’s objective – industrializing underdeveloped and developing areas.

The recipient, or assessee, in this case, had availed the sales tax subsidy from the Government of Maharashtra as per the provisions outlined in the Dispersal of Industries Package of Incentives, 1993.

The crucial question raised pertained to whether the sales tax subsidy received should be treated as a capital or revenue receipt.

To promote industrial dispersal outside the Bombay, Thane-Pune belt and encourage the establishment of new units in underdeveloped areas, the Government of Maharashtra introduced the “Package Scheme of Incentives” in 1964. The 1993 Scheme, rooted in the 1964 Package Scheme of Incentives, aimed to achieve similar goals.

Taking advantage of the 1993 scheme, the assessee established industrial units in Butibori, Nagpur, and Takhalghat, Nagpur. Commercial production commenced on May 1, 1994, in the Butibori unit and on September 1, 1996, in the expanded Takhalghat unit.

Following the application, the State Industrial and Investment Corporation of Maharashtra Limited (SICOM) issued two eligibility certificates to the assessee.

In the Return of Income for AY 1997–98, the assessee declared a loss of Rs. 205,02,97,503. After a scrutiny assessment, the assessing officer scaled down the declared loss. The Commissioner of Income Tax (Appeals) (CIT(A)) overturned the AO’s order in favor of the assessee. The department then appealed to the Income Tax Appellate Tribunal, challenging the CIT(A)’s decision.

The department argued that the 1993 scheme was production-linked and only applied after the eligible unit commenced production. Despite the scheme’s objective of dispersing industries, the eligibility certificate was issued post the commencement of commercial production. Importantly, the 1993 scheme did not entail land grants or interest-free capital.

It focused on eligible units with land ownership, registrations, and industrial licenses, as outlined in the “Initial Effective Steps” and “Final Effective Steps” under the 1993 Scheme.

The sales tax incentives in the 1993 Scheme aimed to enhance liquidity but did not involve direct or indirect payments for establishing the industrial unit. The sole purpose was to support such units.

The assessee countered that receiving the sales tax subsidy after the production commencement, as per the eligibility certificate, did not categorize it as a capital receipt.

The Court concluded the appeal in favor of the assessee, rejecting the department’s arguments.

Case Title: Commissioner Of Income Tax Versus M/S Indo Rama Textiles Ltd.

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