Deputy Commissioner of Income Tax vs Munjal Auto Industries Ltd.

Akil Abdul Hamid Kureshi, J.—Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 21.12.2011. Following question is presented for our consideration: Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sales tax incentive is a capital receipt without considering the fact that subsidy in the form of sales tax deferment was given by the Government of Haryana to the assessee company much after the commencement of business to augment the normal business running of Binola Unit and not for setting up of business and should, therefore, have been treated as a revenue receipt?

Issue is in narrow compass. Question is whether a certain subsidy received by the respondent assessee under the scheme framed by the Government of Haryana under Chapter IV-C of Haryana General Sales Tax Rules, 1975 should be treated as a capital receipt or a revenue receipt. The Tribunal in the impugned judgment relied on the decision of the Supreme Court in case of Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd., and ruled in favour of the assessee in the following manner: 11. We have considered rival submissions and have perused the material on record and gone through the orders of the authorities below. We find that in the course of the assessment proceedings, it was stated by the Assessing Officer in the show cause notice issued to the assessee on 17.11.2006 that the assessee was requested to show cause as to why the amount of capital subsidy should not be reduced from the cost of respective assets for the purpose of calculating depreciation. In reply dated 27.11.2006, it was submitted by the assessee before the AO that the amount of sales-tax incentives received by the assessee of Rs. 62,38,589/- was included in the schedule-2 of reserves and surplus and the amount was not subsidy for the fixed assets. It was submitted that the incentive is with reference to the sales made after the fixed assets were put to use and hence, this was not a case in which portion of cost of fixed assets was met by the Government and therefore, this amount was not required to be deducted from the cost of fixed assets. In view of this reply of the assessee, now it emerges that when the Assessing Officer considered this receipt of subsidy as capital receipt and asked for reduction of the same from the cost of fixed assets for the purpose of calculating depreciation allowable to the assessee, it was the submission of the assessee before the Assessing Officer that this incentive is with reference to sales made after the fixed assets were put to use and therefore, it was not a capital receipt meant for cost of fixed assets. When the Assessing Officer treated the amount of subsidy as revenue receipt, the case of the assessee is that it is a capital receipt. The decision of the Special Bench of the Tribunal rendered in the case of Reliance Industries (supra) has been relied upon by the learned CIT(A) to hold that this receipt as capital receipt, however, there is no finding given by the learned CIT(A) as to whether the subsidy is required to be reduced from the cost of fixed assets for the purpose of calculating depreciation allowable to the assessee. Once it is accepted that the subsidy receipt by the assessee is with reference to the fixed assets and therefore, capital receipts and not includible in the total income of the assessee as revenue receipt, the natural consequence is this that the same is required to be reduced from the cost of fixed assets for the purpose of calculating depreciation as per the provisions of section 43(1) of the Act, On this aspect, the decision of the Special Bench of the Tribunal is silent. Similarly, in the ease of Ponni Sugars & Chemicals (supra) also, this issue was not before the Hon''ble Apex Court as to whether the subsidy received by the assessee and treated as capital receipt is required to be reduced from the cost of fixed assets for the purpose of computation of depreciation allowed to the assessee. In the present case, this was the first proposition put forward by the Assessing Officer in the course of assessment proceedings and although in the ground the appeal before us by the Revenue, this contention is not put forward in so many words, but this is the ground of the Revenue that the learned CIT(A) is wrong in holding that the Assessing Officer was wrong in treating the subsidy as revenue receipt for the reason that subsidy was not for fixed assets. Hence, as per this ground of the revenue, it comes out that if it is held that the subsidy is for fixed assets, then the natural consequence as per the law should follow and if it is held that it is not for fixed assets, then the same should be required to be added to the income of the assessee is revenue receipt. On this aspect, as to whether the subsidy receipt by the assessee is revenue or capital receipt, we feel that this aspect is covered in favour of the assessee by the decision of the Special Bench rendered in the case of Reliance Industries (supra) and also by the judgment of the Hon''ble Apex Court in the case of Ponni Sugar & Chemicals Ltd. (supra) and hence, we decide this issue in favour of the assessee. But at the same time we direct the Assessing Officer to consider the receipt as subsidy received by the assessee for fixed assets and therefore the Assessing Officer should recalculate the depreciation as per the law after reducing the amount of subsidy from the cost of fixed assets as per the provisions of section 43(1) of the Act. Before doing so., the Assessing Officer should provide reasonable opportunity of being heard to the assessee and thereafter he should pass necessary order as per the law on these aspects. The ground No. 2 is partly allowed as indicated above.

Learned counsel for the Revenue drawing our attention to the various provisions of the said scheme vehemently contended that the subsidy was in the nature of sales tax deferment. An eligible unit would receive such subsidy only once when it goes for production. He therefore, submitted that subsidy was not for the purpose of covering capital outlay of an assessee. Revenue is therefore, justified in contending that subsidy is in nature of revenue receipt.

Learned counsel Shri Manish Shah appearing for the respondent assessee opposed the petition contending that provisions contained in the said scheme are sufficiently clear. Subsidy was though computed in terms of sales tax liability, same was for the purpose of covering capital outlay. He relied on decision of Ponni Sugars and Chemicals Ltd. (supra). He also placed reliance on decision of this Court dated 8.1.2013 in Tax Appeal No. 167/2012 and connected appeals.

To examine the contentions, we may notice the provisions of the said scheme. The scheme made provisions for concession of sales tax. Eligible industrial unit was defined as a new industrial unit or a unit undertaking expansion or diversification satisfying the conditions contained therein. We are not concerned with the conditions which are procedural in nature. The expansion of a unit was defined as increase in the installed capacity by more than 25% of the fixed capital investment. The term fixed capital investment was defined as under:

(g) "fixed capital investment" for purposes of the benefit under this rule, means investment in-

(i) land under use;

(ii) new construction;

(iii) plant, machinery (including generating set), tools and equipment which have not been used before in India.

(iv) capitalised installation expenditure for plant and machinery;

(v) capitalised interest during the period of construction of the unit not exceeding 5% of the total fixed capital investment in respect of items listed at serial Nos. (iii) and (iv) above; and

(vi) technical know how fees or drawing fees paid as lump sum to foreign or Indian collaborations or suppliers as approved by Government of India or paid to laboratories of the State Governments or the Central Government. This fee shall not exceed 5% of the fixed capital investment.

Explanation:- Fixed capital investment will cover all the assets of the unit as erected on the site on the date of commercial production and paid for as on any day falling within ninety days after the date of commencement of commercial production.

Clause 5(a) of the scheme specified the concession available to the eligible units and inter alia provided that an eligible industrial unit holding a valid entitlement certificate shall be entitled to the concession of deferment of payment of sales tax including central sales tax and conversion of the same to capital subsidy, computed on the sale of goods manufactured by such unit and declared in the sales tax returns as per the rules specified in Table-I and Table-II. Table-I pertains to concession being available to new industrial unit and Table-II pertains to expansion and diversification of units. Different rates of concession were specified in terms of fixed capital investment. For example, in relation to a industry placed in category-A, extent of concession available to a unit other than small scale unit was 125% of the fixed capital investment which could be availed within a period of nine years.

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.

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 M/s. Sahney Steel and Press Works Ltd., Hyderabad etc. etc. Vs. Commissioner of Income Tax, Andhra Pradesh-I, Hyderabad, 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 fund 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. 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.

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

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.

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 assistance in carrying 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.

In a recent judgment dated 8.1.2013 in case of Dy. D.C.I.T. - Circle 1(2) - Baroda Vs. 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 the scheme 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 lax 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 at least 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.

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