Income Tax | Sales Tax Incentive Under Govt Scheme For Industrial Promotion Is Capital Receipt, Not Taxable: Bombay High Court
The Bombay High Court has stated that sales tax incentive under a government scheme for industrial promotion is a capital receipt, not taxable.Chief Justice Alok Aradhe and Justice Sandeep V. Marne were addressing the issue of whether an incentive received in sales tax liability under a Scheme formulated by the State Government would be on the capital account, exempt from taxation, or on...
The Bombay High Court has stated that sales tax incentive under a government scheme for industrial promotion is a capital receipt, not taxable.
Chief Justice Alok Aradhe and Justice Sandeep V. Marne were addressing the issue of whether an incentive received in sales tax liability under a Scheme formulated by the State Government would be on the capital account, exempt from taxation, or on the revenue account, liable for taxation.
“If the incentive is offered for the purpose of setting up of new industrial unit or for expansion of existing unit, the receipt of incentive would be on account of capital. On the other hand, if the incentive is given for enabling the Assessee to run business more profitably, then the receipt would be on revenue account,” stated the bench.
The Assessee-Bajaj Auto/appellant is engaged in the manufacture and sale of two-wheelers, three-wheelers and also in the manufacture and sale of spare parts of vehicles sold by it.
The Government of Maharashtra introduced the scheme on 4 May 1983, under which an option for sales tax exemption or deferral of sales tax for a period of five years was available. The Assessee obtained an eligibility certificate for sales-tax exemption for a period of three years commencing from 1 February 1986.
During the process of assessment proceedings, Assessee claimed that the amount of sales tax incentives should be regarded as capital receipt not liable to tax since the said incentive was received for the promotion of industries in backwards areas.
Since the Assessing Officer rejected the said claim of the Assessee and treated the same as a revenue receipt liable to tax, it preferred an appeal before the CIT(A) challenging the order of assessment. CIT(A) partly allowed the appeal but did not grant any relief to the Assessee in respect of its claim towards sales-tax incentive.
The Assessee accordingly filed an appeal before the ITAT challenging the order of CIT(A), which was partly allowed. However, so far as the claim of the Assessee towards sales-tax incentive is concerned, the ITAT directed the same to be treated as revenue receipt liable to payment of income tax and not capital receipt exempt from payment of income tax.
The revenue submitted that the incentive paid under the scheme formulated by the State Government in the form of exemption in payment of sales tax needs to be treated as revenue receipt by the Assessee, liable to payment of income tax.
The assessee submitted that the incentive under the sales tax scheme introduced by the State Government has been received by the Assessee for setting up of industry in the backwards area. The incentive is not towards production activity undertaken by the Assessee.
Instead of paying a cash amount towards the subsidy, the scheme envisaged adjustment of the incentive amount in the sales tax payable on the commencement of production.
The bench further stated that even if actual payment/grant of the incentive is linked to production or sale activity after completion of construction of the industrial unit, the receipt of the incentive would still be on the capital account so long as the purpose of the grant of the incentive is to promote industrialisation.
The bench opined that “the incentives/subsidy granted by the State Government under both the 1979 as well as 1983 Schemes were for the purpose of setting up of new industrial units. The incentive/subsidy was not granted for the purpose of enabling the Assessees to run the business more profitably. After applying the “purpose test” it is clear that the incentive provided to the Assessee under both the Schemes was for promoting setting up of new industrial units in developing areas of the State. The incentive was aimed at promoting industrialization in the State.”
In view of the above, the bench dismissed the appeal filed by the revenue and allowed the appeal filed by the assessee.
Case Title: Bajaj Auto Limited v. Dy. Commissioner of Income Tax
Case Number: INCOME TAX APPEAL NO.505 OF 2003
Counsel for Appellant/ Assessee: P.J. Pardiwalla
Counsel for Respondent/ Department: J.D. Mistri