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Case Number

Tax Appeal Nos. 316 to 318 of 2012 , 316 of 2012, 318 of 2012

Attorney(S)

Pranav G. Desai

Judges

AKIL KURESHISONIA GOKANI

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Smart Summary

Concise Analytical Summary of the Opinion (Order by Akil Kureshi, J.)

Factual and Procedural Background

These Tax Appeals were filed by the Revenue and arise from a common factual matrix; the court refers to facts as set out in Tax Appeal No. 316 of 2012. For Assessment Year 1991–92 the Revenue challenged the Income Tax Appellate Tribunal's (ITAT) judgment dated 4 November 2011.

The central factual datum is that the respondent-assessee received incentives under a Gujarat State Government scheme framed by a resolution dated 2 January 1991 (named "Incentive for modernization by Existing Industrial Units : 1990-95") in the form of Sales Tax waiver/deferment. For AY 1991–92 the assessee received Sales Tax exemption amounting to Rs. 3,09,40,235. The Assessing Officer treated the amount as revenue in nature; the assessee contended it was a capital receipt.

The CIT(A), by order dated 28 March 2011, reversed the Assessing Officer and held the incentive to be a capital receipt, relying on the Apex Court decision in CIT v. Ponni Sugars & Chemicals Ltd. The ITAT dismissed Revenue's appeal on 4 November 2011, relying on Ajanta Mfg. Ltd. v. CIT. The Revenue then brought the present appeals to this Court.

Legal Issues Presented

Whether, in the circumstances and facts of the case and in law, the Sales Tax exemption of Rs. 3,09,40,235 granted to the assessee by the State Government was in the nature of a "capital receipt" and therefore not chargeable to tax?

Arguments of the Parties

Appellant (Revenue) — Principal Contentions

The Assessing Officer's position (as representing Revenue at assessment stage) was that the sales tax exemption amounted to revenue in nature.
Before this Court, Revenue's counsel pointed out that the Tribunal's reliance on Ajanta Mfg. Ltd. (supra) was problematic because that decision was under challenge before this Court (Tax Appeal No. 358 of 2012) and was rendered in the background of a materially different incentive scheme (Kutch earthquake relief scheme of 2001).

Respondent (Assessee) — Principal Contentions

The assessee contended that the sales tax incentive it received under the State's 1991 modernization scheme was in the nature of a capital receipt (i.e., related to capital outlay for modernization) and not a revenue receipt.
The CIT(A) accepted the assessee's position, concluding the incentive's purpose was to promote capital investment (modernization) and therefore the receipt was capital in nature, relying on the Supreme Court authority in CIT v. Ponni Sugars & Chemicals Ltd.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 / 174 Taxman 87	Reaffirmed and applied the "purpose test" (derived from Sahney Steel): whether a subsidy/incentive is capital or revenue depends on the purpose for which it is given; timing or source of payment is immaterial. If the subsidy enables setting up or expanding a unit it is capital; if it merely assists in carrying on trade (recurring expenses) it is revenue.	The CIT(A) relied on this decision to treat the incentive as capital. The court invoked the reasoning in Ponni Sugars (which itself applied Sahney Steel) in determining that the 1990–95 modernization scheme's object was capital in nature and therefore the incentive should be treated as a capital receipt.
Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253 / 94 Taxman 368	Laid down the fundamental "purpose test" for characterizing subsidies: determine character having regard to the purpose for which subsidy is given; source/time immaterial.	The court explicitly adopted the Sahney Steel purpose test as the governing analytical tool to decide whether the sales tax waiver under the 1991 scheme was capital or revenue in nature.
Ajanta Mfg. Ltd. v. CIT (ITA No. 793/RJT/2010) — Tribunal decision	Applied to determine character of certain sales tax incentives under a different State scheme (Kutch region, post-earthquake measures).	The ITAT in the present matter relied on Ajanta Mfg. Ltd. in dismissing Revenue's appeal. This Court noted Ajanta was produced by the ITAT below but observed that Ajanta dealt with a different incentive scheme (post-earthquake measures for Kutch), and therefore its applicability here is limited because the characterisation depends on the specific terms and purposes of the relevant scheme.
Tax Appeal No. 450 of 2012 and connected appeals (decision dated 28 January 2013)	Applied the principle that a subsidy computed as sales tax waiver/deferment may nevertheless be capital in nature if its object is capital outlay for setting up or expanding units; timing of accrual on commencement of production is not conclusive.	The Court cited this recent decision by the same bench where a sales tax waiver for setting up multiplexes was held to be meant for capital outlay. The present Court found the reasoning analogous and applied the same approach to conclude the incentive under the 1990–95 modernization scheme was capital in nature.

Court's Reasoning and Analysis

The Court's analysis proceeds from established precedents to a detailed examination of the specific incentive scheme and its terms, applying the "purpose test" as articulated in Sahney Steel and applied in Ponni Sugars.

Identification of governing legal test: The Court reiterated that the character of a subsidy/incentive (capital vs. revenue) must be determined with regard to the purpose for which the subsidy is given; time and source are immaterial. This is the principle set out in Sahney Steel and reiterated in Ponni Sugars.
Close textual analysis of the scheme: The Court examined the Government of Gujarat's resolution dated 2 January 1991 — the "Incentive for modernization by Existing Industrial Units: 1990–95" — including (a) the preamble (to accelerate industrial development, disperse industries to under-developed areas, and provide employment), (b) the defined meaning of "modernisation" (adoption of new/upgraded processes leading to energy savings, pollution reduction, improved production capacity by installation of new machinery, etc., excluding mere replacement), (c) the eligibility criteria (new investment thresholds, minimum amounts, requirement of capacity increase, restriction of eligible investments to items capitalized under "Plant & Machinery" and related capital expenditures), and (d) the schedule of Sales Tax exemption/deferment rates calculated as percentages of fixed capital investment for specified periods.
Purpose-driven conclusion: From the scheme's preamble, definitions and eligibility conditions, the Court concluded that the scheme was expressly framed to encourage modernization of existing industrial units, primarily to cover capital outlay on new plant and machinery and related installation and technical costs. The scheme was not framed simply to make day-to-day operations more profitable nor was it a scheme for setting up new industries or mere expansion in general terms.
Synthesis with precedent: Applying the purpose test, and having found that the scheme's objective was to underwrite capital expenditure for modernization, the Court held that the sales tax incentive was in substance a capital receipt despite being computed in terms of sales tax liability and accruing after commencement of production.
Reliance and distinction of other authorities: The Court accepted prior decisions (including its own recent 28 January 2013 decision on multiplex incentives) that subsidies framed as sales tax waivers/deferments may nonetheless be capital where the scheme's object is capital outlay. The Court also noted that the Ajanta Mfg. Ltd. decision relied upon by the ITAT was concerned with a different scheme (post-earthquake relief in Kutch) and therefore its direct applicability here was limited; however the ITAT's conclusion (dismissing Revenue's appeal) was nonetheless upheld on the basis of the present scheme's terms and purpose.

Holding and Implications

DISMISSED. The Tax Appeals filed by the Revenue are dismissed.

Direct consequences: The Court upheld the ITAT's decision that the Sales Tax exemption of Rs. 3,09,40,235 (for AY 1991–92) granted to the assessee under the Gujarat "modernization" scheme is in the nature of a capital receipt. The Assessing Officer's view that the incentive was revenue in nature was reversed by the CIT(A) and the ITAT's dismissal of Revenue's appeal was affirmed by this Court.

Broader implications: The opinion applies and reiterates the established "purpose test" (Sahney/Ponni) to the specific terms of an incentive scheme: where the scheme's object is to meet capital outlay for modernization, the related incentives — even if computed as sales tax waivers/deferments and payable after commencement of production — are capital receipts. The Court did not state that it was laying down a new principle of law; it applied existing precedents to the facts and concluded no substantial question of law arises.

Order delivered by Akil Kureshi, J.; final notation in the text: "PSEN".

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Commissioner of Income-tax v. Birla VXL Ltd.

ORDER

Akil Kureshi, J. - These Tax Appeals filed by the Revenue arise out of the common background. We may notice facts as arising in Tax Appeal No. 316 of 2012.

2. For the Assessment Year 1991-92, Revenue challenged the judgment and order of the Income Tax Appellate Tribunal dated 4th November 2011. Following question has been presented for our consideration :-

"Whether in the circumstances and the facts of the case and in law, the Appellate Tribunal has erred in holding that the Sales Tax exemption of Rs. 30940235/= granted to the assessee company by the State Government was in the nature of 'Capital Receipt' not chargeable to tax ?"

3. The respondent-assessee had received incentives under the scheme framed by the Government of Gujarat under resolution dated 2nd January 1991 in the form of Sales Tax Waiver/Deferment scheme. For the A.Y 1991-92, the assessee had received sales tax exemption of Rs. 3,09,40,235/=. Similar sales tax exemptions of varying amounts were received for the subsequent assessment years i.e., AY 1992-93 and 1993-94 also. Such incentives, according to the assessee, were in the nature of capital receipts. The Assessing Officer, however, did not accept such contention and held that the same was revenue in nature. The assessee carried the matter in appeal. CIT[A] by his order dated 28th March 2011, reversed the view of the Assessing Officer. He held that the purpose of incentives was clearly for promoting capital investment and thereby to achieve industrial development and therefore, incentive was in the nature of capital receipt. He relied on the decision of the Apex Court in case of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87 .

4. Revenue carried the matter in appeal before the Tribunal. The Tribunal, dismissed the Revenue's appeal by judgment dated 4th November 2011. The Tribunal relied on the decision in case of Ajanta Mfg. Ltd. v. CIT [ITA No. 793/RJT/2010]. The Revenue is thereupon before us in the present Tax Appeals.

5. Learned counsel for the Revenue pointed out that the decision of the Tribunal in case of Ajanta Mfg. Ltd. (supra) is under challenge before this Court in Tax Appeal No. 358 of 2012 which has been admitted. However, from the impugned judgment of the Tribunal, in the present cases, we noticed that the decision in case of Ajanta Mfg. Ltd. (supra) was rendered in the background of a different incentive scheme altogether. It emerges that in Ajanta Mfg. Ltd.'s case (supra) the Tribunal was concerned with the Sales Tax Incentive Scheme of the State Government made available to the Kutch region industries in wake of devasting earthquake hitting that region in the year 2001. Since in every case, decision whether incentive is in the nature of capital or revenue receipt must depend on the terms of the scheme involved. Mere fact that the High Court has admitted Revenue's appeal in case of Ajanta Mfg. Ltd. (supra) need not detain us in deciding these appeals.

6. In case of Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/94 Taxman 368 , the Apex Court observed that to determine the character of subsidy in the hands of the recipient, whether revenue or capital, it would have to be determined having regard to the purpose for which the subsidy is given. The source of fund is quite immaterial. If the payment is in the nature of subsidy to assist the assessee in carrying on its trade or business, it a trade receipt. However, if the purpose is to help assessee to set-up its business or complete the project, the monies must be treated as having been received for capital purposes.

7. Such decision in case of Sahney Steel & Press Works Ltd. (supra) came up for consideration before the Supreme Court in case of Ponni Sugars & Chemicals Ltd. (supra) wherein, the Apex Court observed as under :-

"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 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 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."

8. We may apply the above ratio to the cases on hand. We may take note of the incentive scheme in question. The same was named, "Incentive for modernization by Existing Industrial Units : 1990-95". It was announced by the Government as a part of new industrial policy, to accelerate the industrial development, to disperse industries to under-developed areas as well as to provide additional employment. Preamble to the resolution dated 2nd January 1991 under which the scheme was framed records that it was represented to the State Government that on account of rapid changes in technology and need to upgrade technology in industries, it is necessary to encourage modernization and evolve a scheme for incentives towards modernization. With these purposes in mind, the said scheme was framed. Term, "modernisation" was defined in clause 2(i) as under :-

"Modernisation" means adoption of a new and upgraded process by an existing industrial unit under the same management which leads to savings in energy or reduction in pollution and improvement in production capacity by installation of new machinery, balancing equipment etc; as may be required. If the existing industrial unit merely replaces plant and machinery it will not be considered modernization, eligible for incentives under this scheme."

Conditions for seeking benefit of the scheme were as under :-

"New Investment in Modernization which fulfils the following criteria will be treated as modernization eligible for incentives under this scheme :-

[a] The existing industrial unit would make new investment towards modernization to the extent of not less than 25% of the original book value of the plant and machinery for which incentives are claimed.

[b] Such new investment should not be less than Rs. 5 Crores.

[c] Such new investment towards modernization must be accompanied by and result into 25% or more increase in the licenced capacity as it existed prior to modernization.

[d] The benefit of incentives towards modernization will be restricted to the new investment towards additional 50% increase in the licenced capacity thereby aggregating the licenced capacity upto 150%.

[e] Modernization in respect of new plant and machinery which is not a replacement and modernization in respect of plant and machinery which is depreciated upto 80% or more of the original book (gross) value will be eligible for incentive under this scheme."

9. Eligibility criteria for investment provided inter alia that the new plant and machinery and imported second hand machinery and installation expenditure capitalized under the head of "Plant & Machinery" would qualify for the incentive alongwith technical knowhow, fees or drawing fees, diesel generating sets, equipments for non-conventional sources of energy, as installed in the process of modernization and equipments required for purification or desalination of water or for pollution control measures for the existing industrial units.

10. Ineligible investment included land, building, civil construction/ working capital, good-will fees, etc. Annexure-A to the Scheme specified the category-wise eligible talukas for the incentives under the scheme. Annexure-B to the scheme provided the rate of incentives in the following manner :-

Rate of incentives of Sales Tax Exemption/Deferment for Modernization Annexure to GRIMED No. INC/1090/1023(9)-I dated 2 January 1991

Category of Area	Quantum S.T. Exemption/Deferment	Time Limit
I.	75% of the fixed capital investment	For a period of 8 years from the date of commencement of commercial production.
II.	60% of the fixed capital investment	For a period of 6 years from the date of commencement of commercial production.
III.	50% of the fixed capital investment	For a period of 5 year from the date of commencement of commercial production

Note :

1. If a unit reaches admissible amount stated in the col.2 above before the expiry of the time limit mentioned in col.3 above, it will not be eligible for incentives thereafter.

2. In respect of Sales Tax Deferment, the amount so deferred will be recovered in six annual installments beginning from the next financial year to the year in which unit reaches the maximum limit of incentive granted to the unit under the Scheme of after the inquiry.

3. Units claiming the incentive under this Scheme will not be eligible for sales tax incentives under any other Scheme.

11. From the above provisions contained in the said Scheme, it can be immediately noticed that the scheme was framed as a part of Government's initiative to encourage modernization of existing industries in under-developed areas. The main purpose of the scheme was to accelerate the industrial development and to disperse industries to under-developed areas as well as to provide additional employment. The Government responded positively to the representations that on account of rapid changes in technology, there was constant need for upgradation of technology in industries. It was, therefore, necessary to encourage modernization. As part of such a scheme, incentives were given to industries existing in under-developed areas to undertake modernization. The scheme thus was primarily concerned with the modernization of the existing industries. It was not a scheme either for development of new industries in specified areas, or for mere expansion of the existing production capacities of the industries. Thus, the main purpose of the resolution was to modernize industries, which ordinarily would come at a considerable cost, particularly when such industries were located in under-developed areas. It can be imagined that the industries will find it difficult without Government's incentive to undertake large-scale modernization with the use of modern technology. It was for this purpose that the said scheme was framed giving benefit of the Sales Tax Waiver/Deferment, at the option of the industry concerned. Such benefit had to be computed in terms of the percentage of the fixed capital investment. Benefits were to last for specified periods and upto exhausting maximum limit computed in terms of the percentage of the fixed capital investment.

12. It can thus be straightaway seen that the benefit, though computed in terms of the Sales Tax liability in the hands of the recipient, the same was not mean to give any benefit on day-to-day functioning of the business, or for making the industry more profitable. The principle aim of the scheme was to cover the capital outlay already made by the assessee in undertaking special modernization of its existing industry.

13. In a recent decision dated 28th January 2013 in Tax Appeal No. 450 of 2012 and connected appeals, we had an occasion to examine the nature of incentives received by the assessee from the State Government in the form of entertaining tax waiver for setting up multiplexes. In such context, we had in wake of the revenue's contention that the receipt was revenue in nature, held and observed as under :

"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 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 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."

14. In the result, we do not find that the Tribunal has committed any error. No question of law, therefore, arises. Tax Appeals are therefore dismissed.

PSEN

Commissioner of Income-tax v. Birla VXL Ltd.

Concise Analytical Summary of the Opinion (Order by Akil Kureshi, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — Principal Contentions

Respondent (Assessee) — Principal Contentions

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner of Income-tax v. Birla VXL Ltd.

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