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Commissioner Of Income Tax, Delhi Vs. Bhushan Steels And Strips Ltd.
July, 14th 2017
*       IN THE HIGH COURT OF DELHI AT NEW DELHI

                                                        Reserved on: 14.03.2017
                                                      Pronounced on: 13.07.2017

+       ITA 315/2003
+       ITA 316/2003
+       ITA 317/2003
+       ITA 349/2003
+       ITA 434/2005

        COMMISSIONER OF INCOME TAX, DELHI                      ..... Appellant

                                 Versus

        M/S. BHUSHAN STEELS AND STRIPS LTD........ Respondent

                                 Through: Sh. Rahul Chaudhary and Ms. Lakshmi
                                 Gurung, Advocates, for CIT, ITA Nos.315/2003,
                                 316/2003, 317/2003 & 349/2003.
                                 Sh. Zoheb Hossain, Advocate, for CIT in ITA
                                 434/2005.
                                 Sh. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha,
                                 Sh. Bhuwan Dhoopar and Ms. Roopali Gupta,
                                 Advocates, for respondent.

+       ITA 681/2004
+       ITA 708/2004
+       ITA 755/2004
+       ITA 725/2004

        COMMISSIONER OF INCOME TAX, DELHI                      ..... Appellant

                                 Versus

        M/S. VARDHMAN INDUSTRIES LTD.                          ........ Respondent

                                 Through: Sh. Zoheb Hossain, Advocate, for CIT.




ITA 315/2003 & connected cases                                            Page 1 of 27
                                 Sh. Ajay Vohra, Sr. Advocate with Ms. Kavita Jha,
                                 Sh. Bhuwan Dhoopar and Ms. Roopali Gupta,
                                 Advocates, for respondent.

        CORAM:
        HON'BLE MR. JUSTICE S. RAVINDRA BHAT
        HON'BLE MR. JUSTICE NAJMI WAZIRI

MR. JUSTICE S. RAVINDRA BHAT

%

1.      The following common question arises in these batch of nine appeals
arising from orders of the Income Tax Appellate Tribunal ("ITAT")
hereafter:

        "Whether the ITAT was correct in law in holding that the
        amount received by the assessee by way of exemption of sales
        tax payments was not a trading receipt but was a capital
        receipt, hence not liable to tax?"
2.      The main order- in the case of the assessee/respondent, Bhushan Steel,
was made for AY 1995-96 and was followed in all succeeding assessment
years; the same is the case with the appeals relating to the other assessee,
M/s. Vardhman Industries Ltd. [hereafter "Vardhman"] ­ where the ITAT
followed its decision in M/s. Bhushan Steels and Strips Ltd. [hereafter
"Bhushan"] appeals. For the purpose of easy reference and convenience, the
facts which are stated comprehensively in Bhushan's case (and which
includes the relevant parts of the same industrial policy of the State of UP for
1990 as amended in 1991) are discussed from appeals arising out of the first
order for AY 1995-96 (in Bhushan's case).




ITA 315/2003 & connected cases                                           Page 2 of 27
3.      Bhushan was running the business of manufacture of cold
rolled/galvanized steel strips and sheets etc. Its two units, namely, cold
rolling, coal units and galvanized unit was located at Sahibabad (Distt.
Ghaziabad ­ UP).           The area was noticed as a "backward" area.      The
assessees Bhushan and Vardhman, claimed that in terms of Notification
No.ST-2-7558/X- 1981-UP Act-XV/48-Order 85 dated 26.12.1983, the UP
Government, in exercise of powers under Section 4-A of the UP Sales Tax
Act, 1948 read with Section 221 of UP General Clauses Act, 1904 granted
exemption from payment of the sales tax in respect of any goods
manufactured in an industrial unit which is a new unit located in a specified
backward area, and that such exemption was allowed for a period of six
years. It was stated, by both assessees, that new units went into production
on and w.e.f. 01.04.1990; the eligibility certificate in respect of these units
effective from 07.03.1990 was issued by the Industries Department on
03.07.1992. In the batch of cases relating to the assessee Vardhman, the
existing unit was expanded through a ghee manufacturing unit at
Chhutmalpur, District Saharanpur, which commenced production on
20.09.1994. The assessees claimed that in terms of Notification No.STs.T.2-
1093/11-7(42)/86-UP-Act-XV-48 Order-91 dated 27.07.1991 issued by the
Government in exercise of powers under Section 4-A of UP Sales Tax Act
read with Rule 25 of the UP Sales Tax Rules, certain exemption of sales-tax
was granted to the industries set up in the specified backward area.
Bhushan's galvanizing unit started production in January 1994, the eligibility
certificate in respect of this unit was issued by the Industries Department
effective from 19.01.1994. The exemption in terms of the notification dated




ITA 315/2003 & connected cases                                       Page 3 of 27
27.07.1991, in respect of the galvanizing unit was available up to a period of
8 years based in fixed capital investment.

4.      As the units were located at Sahibabad (Dist. Ghaziabad and
Saharanpur,) which was such a specified area, while filing the return of
income, the grant of exemption given by the State Government through the
said notifications with the object of promotion and development of industries
was claimed by Vardhman. In Bhushan's case, it was not taken into
consideration at the time of filing the original return, notwithstanding the
fact that the subsidy allowed in the form of exemption was in the nature of a
capital grant according to it. However, subsequently, Bhushan revised its
return of income claiming that such amount of sales tax was in the nature of
capital subsidy. Such amount was `7,27,71,570/-. During the course of
assessment proceedings, the assessee also relied on decisions of the Andhra
Pradesh High Court (in Commissioner of Income Tax v Godavari Plywoods
168 ITR 632); Bombay High Court (in Commissioner of Income Tax v Elys
Plastics (1991)188 ITR 11) and the decision reported as Commissioner of
Income Tax v P.J. Chemicals 210 ITR 830 (SC). However, the assessee's
claim was not found accepted by the AO. In the order, the Assessing Officer
(AO) made these observations:-

        "(a) There is no doubt, that the amount of Rs.7,27,71,570/-
        represents the income of the assessee company. This issue had
        already been settled finally by several judgements of the
        Honble Supreme Court of India (e.g. Chowringee Sales
        Bureau Pvt. Ltd. vs. CIT (SC) 87 ITR 542 and Sinclair Murray
        & Co. Pvt. Ltd. vs. CIT (SC) 97 ITR 615). The assessees claim
        for deduction of this amount from its taxable income on the
        ground that Sales tax has been exempted by the State Govt. in
        the form of subsidy for installing industrial units in backward




ITA 315/2003 & connected cases                                      Page 4 of 27
        areas does not help if at all. Section 43-B opens with an
        overriding clause making it obligatory that any deduction of a
        sum "payable by the assessee by way of tax, duty, cess or fee,
        by whatever name called, under any law for the time being in
        force", can be allowed such sum is actually paid by the
        assessee. The assessee has admittedly not paid the amount of
        sales tax collection to the State Govt.
        (c) The assessees assertion that it is entitled to claim
        deduction in view of subsidy by virtue of notifications issued by
        the State a Govt. does not help its case as, provisions of Sec.43-
        B are clear and non ambiguous as well as overriding in nature.
        (d) The assessees reference to several judgements of the
        High Courts and judgment of Supreme Court in the case of PJ
        Chemicals is not relevant as the issue before the courts was
        determination of "Actual Cost" of capital assets for the
        purpose of grant of depreciation and not the grant of deduction
        in respect of Sales-tax collections which had not been paid in
        accordance with the provisions of sec.43-B of the IT Act.
        (e) No objection on the issue whether the assessees
        industrial undertaking was set up in a backward area, notified
        by the Central Govt. for the purpose of benefit under provisions
        of Chapter VI-A of Income-tax is necessary at this state as the
        issue concerning assessees claim is clearly covered by section
        43-B of the Act."
5.      On appeal, the CIT(A) allowed the assessee's claim. The CIT(A) held
that the amount of sales tax collected as incentive for setting up industries in
backward areas was not subject to tax as a trading receipt; but rather was to
be towards establishment of the new unit and to buy machinery.                He,
consequently, deleted `7,27,71,570/- added by the AO.            The revenue's
appeal before the ITAT was dismissed.

6.      The core of ITAT's reasoning is extracted below:




ITA 315/2003 & connected cases                                         Page 5 of 27
        "We have, therefore, examined the notification of the Govt. in
        this regard. The notification dated 26.12.1985 starts that the
        word "whereas the State Govt. is of the opinion that it is
        necessary so to do so for promoting the development of
        industries in the state generally and in certain districts and
        parts of the districts in particular". The purpose behind such
        notification was the development of industries in the state.
        Notification dated 27.7.1951 also specified the same purpose.
        The exemption/reduction of sales tax was to be computed on the
        basis of capital investment of the assessees. In other words, the
        incentive was given to the assessees to establish industrial unit
        in the specified areas. The State Govts. come out with similar
        schemes for promoting the industries, the Government grants
        certain subsidies for the same. Instead of granting subsidies
        which was also relatable to the capital invested by the
        assessees or the investment in the fixed assets, the UP Govt.
        thought it fit not to give any amount by way of subsidy and then
        collect the same by way of sales-tax. The Government,
        therefore, quantifies the subsidies payable by it to various;
        industries in the specified areas and instead of giving such
        subsidy to them, the Govt. exempted the industries from paying
        the sales collected to the extent of qualified amount. It will not
        be out of place to mention that the amount of sales tax collected
        exceeding the computed amount, the assessee was liable to pay
        such excess sales tax so collected. In this connection, we feel it
        expedient to consider the decision of the Honble Supreme
        Court in the case of Sawhney Steels & Press Works Ltd.
        reported in 228 ITR 253. The Honble Supreme Court in this
        case decided that if the moneys are given to the assessees for
        assisting them in carrying out their business operations and the
        money was given only after and conditional upon
        commencement of the production, such subsidy must be treated
        as assistance for the purpose of trade. But in so far as the case
        before us is concerned, the subsidy is granted to appellant
        company by the State Govt. not for the purposes of carrying out
        its business in a more profitable manner but merely in
        consideration of setting up the production units in backward
        areas. The purpose of the Govt in granting subsidy is clear




ITA 315/2003 & connected cases                                         Page 6 of 27
        from the preamble portion of the two notifications under which
        the appellant company became entitled to exemption in respect
        of sales tax amount.
        22. Though the subsidy/grant allowed by the Govt. appears
        to be in the nature of exemption/reduction in the amount of
        sales tax payable by the appellant company, actually, however,
        the sales tax amount is simply a measurement of the subsidy to
        be allowed by the State Govt. The subsidies are purely
        gratuitous in nature and cannot be considered to be an
        assistance provided to the appellant company for carrying on
        its business operation in a day to day manner. On the other
        hand as discussed earlier, the subsidy has been granted
        specially for the purpose of promotion and development of the
        industries in the backward areas of the state. In the case of
        Senai Ram Dungermal reported in 42 ITR 392 at 397, the
        Honble Supreme Court held that it is the quality of the
        payment that is decessive of the character (if the payment and
        not the method of the payment or its measure that makes it fall
        within capital or revenue. Honble Supreme Court in the case
        of PJ Chemicals Ltd. (supra) held that where the government
        subsidy is intended as an incentive to encourage entrepreneurs
        to move to backward areas and establish industries, the
        specified percentage of the fixed capital cost which is the basis
        for determining the sales being only a measure adopted under
        the scheme to quantity the financial aid was not a payment
        directly or indirectly to meet any operation of actual cost of
        such fixed assets. Honble Calcutta High Court in the case of
        Balrampur Chini Mills Ltd. reported in 238 ITR 448, has
        considered similar issue.       In this particular case, the
        government introduced an incentive scheme 1975 for the
        purpose of overcoming the problem of shortage of sugar. One
        of the incentive envisaged was increase in the free sale sugar
        quota. To avail the benefit of the Scheme that assessee took
        certain loans from the government financial institution for
        expansion of factory considerably by way of increasing per day
        crushing capacity. The Honble Court held that though the
        subsidy was in the form of realization of certain additional sale
        proceeds and in that way looked like trading receipts actually,




ITA 315/2003 & connected cases                                        Page 7 of 27
        however, it was of the nature of an incentive allowed by the
        state government for the purpose of expansion of capacity of
        the mill of the assessee and in that way the incentive expressed
        in terms of additional sale of sugar was of the nature of capital
        receipt. The ITAT Calcutta Bench in the case of Rasoi Limited
        (ITA No. 1080/Cal/98) and in the case of Pharma Impex
        Laboratory Pvt. Ltd. (ITA No.476/Cal/2000) and ITAT
        Bangalore Bench in the case of Hindustan Aeronautical Ltd.,
        Bangalore (ITA No.763/Bang/98) have taken the same view
        even after considering the decision of Honble Supreme Court
        in the case of Sawhney Steels & Press Works Ltd. (supra). In
        view of these facts, we have no hesitation in holding that the
        amount received by the assessee by way of exemption of sales
        tax payment, was not a trading receipt and, therefore, the
        CIT(A) has rightly held that the amount received by the
        assessee was capital receipt and not liable to tax up to the
        limits computed in accordance with the notification of the state
        government. While upholding the finding of the CIT(A), we
        dismiss the ground of appeal raised by the revenue.
        23. In the result, the appeal directed by the revenue is
        dismissed."
Parties contentions

7.      The revenue in its appeal argues that the source of the funds and the
manner it is collected from the public and also permitted to be retained by
the assessee is immaterial for determination as to whether in the hands of the
tax payer, it is a capital or revenue receipt. Acknowledging that this position
is recognized and well established in law, learned counsel relied upon the
decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income
Tax: 1997 (228) ITR 253(SC)

8.   The counsel analyzed various provisions of the Uttar Pradesh (UP)
subsidy scheme to say that the earlier scheme of 1982 was expanded in 1985









ITA 315/2003 & connected cases                                        Page 8 of 27
to promote industrial development in the State. Thereafter, in the year 1990,
various elements of the existing scheme were subsumed and a new subsidy
regime for industrial promotion was evolved.         This envisioned various
incentives to new units that were to be encouraged in certain parts of the
State. It was pointed out by the revenue that the assessee's unit (in Bhushan
Steel), came up in the Taj Trapezium zone which was entitled to be treated
as a backward area and thus the enterprise setting up a new unit, could claim
sales tax exemption for a certain number of years. Learned counsel pointed
out that the scheme was further expanded in 1991 whereby existing units
could take advantage by setting up of a new unit or expanding their
operations by increasing capacity. The assessee in this case had sought
advantage in terms of the expanded or enlarged provisions of the existing
1990 scheme. It is pointed out that as a consequence, both the provisions of
the old scheme as amended in 1991 were to be looked into.

9.      Learned counsel for the revenue highlighted that the provisions of the
scheme, especially the ones that confer advantages upon the assessee did not
require it to utilize the funds collected and retained, which made the products
economically viable during the formative years of the period that the subsidy
was granted, compared to products that had suffered tax, and were not
granted any benefit, through permitting the retention of amounts. Stressing
on the fact that the absence of any such condition with respect to capital use
meant that the scheme clearly granted flexibility to the unit that sought the
benefit, it was stated that the purpose of the scheme in the present case was
to promote industrialization and industrial production generally which
included economic viability and profitability of the unit. In other words, by




ITA 315/2003 & connected cases                                       Page 9 of 27
allowing the unit to collect sales tax, but not have the corresponding
obligation of passing it over to the revenue, the State permitted augmentation
of the assessee's income.        No strings were attached to the effect that
equipment or any other capital expenditure had to be incurred.

10.     Learned counsel relied upon the observations of the Supreme Court in
Sahney Steel (supra) to state that payments in the nature of subsidy from
public funds are made to the assessee to assist it in carrying on the business
through the trade receipts. The counsel highlighted that the Supreme Court
had ruled that the character of the subsidy in the hands of the recipient,
whether capital or revenue, has to be determined having regard to the
purpose for which the subsidy was given. Although the source is immaterial,
the purpose should be examined; if the purpose was to help the assessee to
set up its business or to complete the business, the moneys had to be treated
as having received for capital purposes. Conversely, if moneys were given
to the assessee for assisting it in carrying on business operations and if the
money was given only after and conditional upon production, subsidies had
to be treated as assistance for the purpose of the trade.

11.     It was stated that there are two strong reasons for this Court to follow
the rule in Sahney Steel (supra). One is that, like the enunciation of the
principle, the purpose for the grant of tax exemption was industrial
production and industrial development generally; no strings were attached
with respect to the expenditure and secondly, there were specific parts to the
scheme that dealt with capital subsidy. It was submitted that the presence of
specific provisions for capital subsidy which in turn contained conditions
that were to be complied with and had a cap as to the capital subsidy limit




ITA 315/2003 & connected cases                                       Page 10 of 27
meant that the other parts which conferred advantages by way of retention of
moneys collected, were by way of revenue receipts.

12.     It was submitted that the judgment of the Supreme Court in
Commissioner of Income Tax v. Ponni Sugars & Chemicals [2008] 306 ITR
392 (SC) in no way detracts from the rule recognized in Sahney Steel
(supra). Learned counsel points out that Ponni Sugars (supra) held that the
test applicable is the character of the receipt in the hands of the assessee,
which is determinable with respect to the purpose for which the subsidy is
given. The point at which the subsidy is paid is not relevant. The source and
the form of the subsidy are also immaterial. On the other hand, Ponni
Sugars (supra) emphasized that the main eligibility condition and the
scheme in that case was that the incentive had to be utilized for repayment of
loans taken by the assessee to set up new units or for substantial expansion
of existing units. The object of the subsidy, therefore, was to enable the
assessee to recoup its capital expenditure. The Court clearly observed that if,
on the other hand, the object of the subsidy scheme was to enable the
assessee to run the business more profitably, then the receipts were on the
revenue account.

13.     It was submitted that in the present case the encouragement to
enterprises through the incentive granted by the scheme was to set up a new
business or expanding it in the backward area concerned.           It no way
conditioned the enterprise, to recoup the capital. The expansion of the unit
meant that the expenditure had to be incurred by the assessee in this case. It
was only thereafter that upon production and sale of goods that sales tax
liability arose, which was suspended by the scheme (which permitted the




ITA 315/2003 & connected cases                                      Page 11 of 27
assessee to collect the amounts though not pass it on to the revenue). The
form of the subsidy was collection as tax with permission of the State to
retain the amount. The purpose of the subsidy, therefore, clearly was revenue
augmentation to ensure greater profitability and economic viability in the
particular backward area of Uttar Pradesh aimed at greater growth and higher
levels of employment. Therefore, the impugned decision is clearly contrary
to law.

14.     It was argued on the assessee's behalf that its cold rolled unit went
into production on 03.01.1990 and commenced sales from 07.03.1990. This
unit was eligible for incentive in the form of sales tax exemption under the
earlier notification of 29.01.1985 which had extended the existing
Government Order of 30.09.1982. The incentive available to the newly
established coal mill which was considered and classified as "Prestige" unit,
involving fresh investment of over ` 2 crores under the Government Orders
was in the form of sales tax exemption from the period of this exemption
from the date of sale. The State of U.P. formulated the industrial policy of
1990.      Reliance was placed upon the preamble to the policy which
envisioned large scale industrialization of the State with special facilities and
incentives for setting up industrial and manufacturing units in the State. It
was submitted that the 1990 scheme was amended so as to expand its ambit
to existing units if they expanded their capacity. The assessee then set up a
new galvanizing unit by way of expansion of its existing business that went
into production from January, 1994 and was eligible for incentive in the form
of sales tax exemption. The incentive for this diversification or expansion




ITA 315/2003 & connected cases                                        Page 12 of 27
was in the form of sales tax exemption for 8 years limited to 100% of the
fixed capital investment in the graded manner set out in the notification.

15.     Learned counsel took the Court through the decisions in Sahney Steel
(supra) and Ponni Sugars (supra), to say that neither is the point of time
when the subsidy was paid relevant nor is the source or the form of the
subsidy relevant but what is relevant is the assistance and its purpose. It is
stated that the Finance Act of 2015 which came into force on 01.04.2016
amended Section 2(24) of the Income Tax Act and inserted Clause (xvi). It
is stated that assistance in the form of subsidy or grant or cash incentive or
duty drawback or waiver by Central or State Governments or any authority
in cash or kind to the assessee other than subsidy or grant or reimbursement
which is taken into account determining the actual cost of the asset, is
deemed to be income. It was submitted that this amendment clarifies the
intent of Parliament which is that the assistance received otherwise than
towards capital augmentation or creation is deemed to be income. This
amendment is prospective which means that the law is to be interpreted in
the light of the judgments applicable, notably Ponni Sugars (supra) in the
present case.

16.     It is stated that in Sahney Steel (supra) and Ponni Sugars (supra) the
issue decided was, what was the true purpose of the incentive or the subsidy.
The end use of the funds was considered as an additional argument to decide
the matter either way. In Ponni Sugars (supra), the eligible unit which was
the new sugar factory expanded its operations and the expanded unit was
entitled to incentive irrespective of whether the setting up of the unit or
expansion of the unit was financed out of borrowed funds. It was held by the




ITA 315/2003 & connected cases                                       Page 13 of 27
Court that the amounts received were not by way of revenue subsidy but for
augmenting the capital expenditure incurred. Learned counsel also relies
upon subsequent judgment of the Supreme Court in Commissioner of Income
Tax v. Shree Balaji Alloys 2016 (287) CTR 459 (SC) which affirmed the
decision of the Jammu & Kashmir High Court in Shri Balaji Alloys vs.
Commissioner, Income Tax (2011) 333 ITR 335. It was stated that the Ponni
Sugars (supra) principle was applied and the Court held that the excise duty
refund received by the eligible unit, was not liable to tax as it was a capital
receipt despite absence of any provision in the scheme with regard to the use
of funds.

17.     Learned counsel also relied upon the decision of a Division Bench of
this Court in Commissioner of Income Tax vs. Bougainvilla Multiplex
Entertainment Centre Pvt. Ltd. (2015) 373 ITR 14. There too, the Court held
that subsidy given at the point of time after the commencement of production
did not mean that the State ruled out capital utilization of the funds received.
On the other hand, the very concept of grant of subsidy meant that the
assessee was free to use it either to augment its profit or to recoup its capital.
Therefore, the purpose test in this case had to be interpreted in the manner it
was done in Ponni Sugars (supra) and it leaves no room for doubt that
assistance in the form of tax rebate, which permitted amounts to be collected
by the assessee was to assist it to set up the new unit and recoup the capital
expenditure. The periodicity of the subsidy or its source and the form, i.e.
collection and retention were immaterial as in the case of Ponni Sugars
(supra) or even the other decisions cited in it.

Analysis and reasoning




ITA 315/2003 & connected cases                                         Page 14 of 27
18.     Before considering the submissions of the parties, it would be
necessary to extract the relevant parts of the supplementary notification
dated 27.07.1991 issued by the State of UP, in the present case. The subsidy
indicated, together with the preamble to the scheme, reads inter alia as
follows:

              "ST-II-1093/XI-7(42)-86-UP Act-XV/48-Order-91, dt.
                                  27.07.1991
                            (Gazette dt. 27.7.1991)

        WHEREAS the State Government is of the opinion that for
        promoting the development certain industries in the State, it is
        necessary to grant exemption from or reduction in rate of tax to
        new units and also to units which have undertaken expansion,
        diversification or modernization.
        NOW, THEREFORE, in exercise of the powers under section 4
        ­ A of the Uttar Pradesh Sales Tax Act, 1948 (UP Act No. XV
        of 1948), hereinafter referred to as the Act the Governor is
        pleased to declare that
        1(A) In respect of any goods manufactured in a ,,new unit,
        other than the units of the type mentioned in Annexure II
        established in the areas mentioned in Column 2 of Annexure I,
        the ,,date of starting production whereof falls or after first day
        of April, 1990 but not later than 31st day of March, 1995, no tax
        shall be payable, or, as the case may be, the tax shall be
        payable at the reduced rates, as specified in column 4 of
        Annexure I, by the manufacture thereof on the turnover of sales
        of such goods, for the period specified in column 3 of the said
        Annexure I, or till the maximum amount of tax relief by such
        exemption from or reduction in the rate of tax as specified in
        Column 5 of Annexure I is achieved, whichever is earlier. The
        period specified in Column 3 of the said Annexure shall be
        reckoned from the date of first sale, or the date following the
        expiration of six months from the date of starting production,
        whichever is earlier.




ITA 315/2003 & connected cases                                        Page 15 of 27
          (B) (1)      In respect of any good manufactured in a unit
          other than the units of the type mentioned in Annexure II, which
          has undertaken expansion, diversification or modernization on
          or after April 1, 1990 but not later than March 31, 1995, in the
          areas mentioned in Column 2 of Annexure I, not tax shall be
          payable or, as the case may be, the tax shall be payable at the
          reduced rates specified in Column 4 of Annexure I, by the
          manufacturer thereof for the period in Column 3 of the said
          Annexure I, or till the maximum amount of tax relief by such
          exemption from or reduction in rate of tax as specified in
          Column 5 of Annexure I is achieved, whichever is earlier, on
          the turnover of sales."
                                    ANNEXURE ­ I

      S.       Location of Unit     Total period of Rate of tax         Monitory
      No.                           exemption          applicable       limit upto
                                                       (denoted as      which
                                    Reduction       in percentage       exemption
                                    the rate of tax    of the rate of   from     or
                                                       tax normally     reduction
                                                       applicable       in the rate
                                                       under the Act    of tax is
                                                       to the goods     admissible
                                                       concerned)
                                                      Year in Case
                                                      of ib case of
                                                      Units    with
                                                      other a fixed
                                                      units
                                                      Capital
                                                      investment
                                                      Exceeding
                                                      50 Crores
      1        2                    3                 4                 5




ITA 315/2003 & connected cases                                              Page 16 of 27
                                       A        B      C
      (iii)   The Taj Trapezium
              Area
      1.      The district of Eight 1st year    NIL   NIL   125% of
              Agra  (excluding       nd                     the fixed
              Taj   Trapezium years 2 year      NIL   NIL   capital
              Area)                 3rd year    NIL   10%   investment
                                                            in the case
              Aligarh (excluding     4th year   NIL   30%   of small
              Taj     Trapezium                             scale unit
              area)                  5th year   NIL   40%
                                                            and 100%
              Allahabad              6th year   NIL   60%   of      the
              (excluding the area                           fixed
                                     7th year   NIL   70%   capital
              in south of Rivers
              Jamuna           &     8th year   NIL   90%   investment
              Confluent Ganga                               in case of
              but including the                             other unit
              area      included
              under        Nagar
              Mahapalika,
              Allahabad)
              Bareilly,  Bijore,
              Firozabad     (Taj
              Trapezium Area)
              Ghaziabad,
              Gorakhpur,
              Haridwar, Kanpur
              (Nagar),
              Lakhmpur-Kheri,
              Lucknow,
              Maharajganj,
              Meerut, Mirzapur,
              Muzzaffarnagar,
              Saharanpur,
              Sonbhadra     and




ITA 315/2003 & connected cases                               Page 17 of 27
              Varanasi



19.     In the arguments on behalf of the revenue, it was acknowledged that
the assessee was entitled to retain the amounts collected from customers
towards sales tax, to the extent that 100% of the outlay of capital expenditure
was attained, for a given number of years. At the same time, the scheme is
supplemental to the existing scheme framed in 1990; the revenue relied on
the following parts of that scheme, which too applied, according to its
submission:

        "STATE CAPITAL SUBSIDY SCHEME
        A.    No capital subsidy shall be due to the unit having fixed
        capital investment of more than Rs.5 crore.
        B.    The aforeasaid units shall also be eligible for facilities
        under the scheme on 25% or more expansion/modernization
        with this restriction that the amount of entire grant received
        under the scheme shall not be more than the maximum
        admissible amount mentioned in para No. 5."
      [Page 61 - 6(A) & 6(B)]

        "6 (A) :Special capital subsidy for the prestige units:-
               Any district, where any industry of fixed capital
        investment of 25 crore is not already established, the first
        industrial unit to be established from the capital investment of
        Rs.25 crore or more, within the period of 1.4.90 to 31.3.95,
        shall be treated as "Prestige" Unit and the special state capital
        subsidy worth Rs.15 lakh shall be granted to this unit. If
        prestige unit incentive to the ancillary units for the supply of
        requirement of more than 30% of its own purchased parts and
        components, then the further additional special capital subsidy
        of Rs.15 lakh shall be available to it. This scheme shall be




ITA 315/2003 & connected cases                                       Page 18 of 27
        applied with effect from 1.4.90 and the facility of subsidy shall
        not be admissible in the district under the scheme, where any
        unit of the capital investment of Rs.25 crore has already been
        established prior to 1.4.90.
        6 (B) :Special State Capital Subsidy to the Tehsil Level
               Pioneer Units.
               In any Tehsil, within the period of 1.4.90 to 31.3.95, the
        first industrial unit to be established from the fixed capital
        investment of Rs.5 crore or more, shall be treated as Tehsil
        Level Pioneer Unit. The special state capital subsidy of Rs.10
        lakh shall be granted to the Pioneer Unit.
        If pioneer unit encourage to the ancillary units for the supply of
        requirement of 30% of its own purchased parts and components,
        then the further additional special capital subsidy of Rs.10 lakh
        shall be available to it. This scheme shall be applied with effect
        from 1.4.90 and the facility of raw material shall not be
        admissible in the district under the scheme, where any unit of
        the capital investment of Rs.5 crore has already been
        established prior to 1.4.90."
20.     Predictably, the rival positions of parties are that according to the
revenue, the amounts retained were not towards capital subsidy, but were
revenue or trade subsidies, to ensure greater profitability. The assessee
naturally, takes the opposite position: it succeeded before the tribunal, which
ruled that the amount was towards capital subsidy. The question is which of
these two positions is correct in law, according to the authorities? Like other
issues, whether a particular item of expenditure or receipt falls within the
capital or revenue stream, determines its treatment for tax liability. Sahney
Steel (supra) discussed this rather extensively. The Supreme Court held:

               "The contention of Mr. Ganesh that the subsidies were of
        capital nature and were given for the purpose of stimulating the
        setting up and expansion of industries in the State cannot be




ITA 315/2003 & connected cases                                        Page 19 of 27
        upheld, because of the subsidy scheme itself. No financial
        assistance was granted to the assessee for setting up of the
        industry. It is only when the assessee had set up its industry
        and commenced production that various incentives were given
        for the limited period of five years. It appears that the
        endeavour of the State was to provide the newly set up
        industries a helping hand for five years to enable them to be
        viable and competitive. Sales tax refund and the relief on
        account of water rate, land revenue as well as electricity
        charges were all intended to enable the assessee to run the
        business more profitably. The basic principle to be applied for
        determination as to whether a subsidy payment is in the nature
        of capital or revenue, has been stated by Viscount Simon in
        Ostime v. Pontypridd and Rhondda Joint Water Board [1946]
        14 ITR (Suppl.) 45, 47; [1946] 28 TC 261 (HL) in the following
        words (page 278):
               "The first proposition is that, subject to the exception
        hereafter mentioned, payments in the nature of a subsidy from
        public funds made to an undertaker to assist in carrying on the
        undertakers trade or business are trading receipts, that is, are
        to be brought into account in arriving at the balance of profits
        or gains under Case I of Schedule D. It is sufficient to cite the
        decision of this House in the sugar beet case (Smart v.
        Lincolnshire Sugar Co. Ltd. [1937] 20 TC 643; 156 LT 25] as
        an illustration.
               The second proposition constitutes an exception. If the
        undertaker is a rating authority and the subsidy is the proceeds
        of rates imposed by it or comes from the fund belonging to the
        authority, the identity of the source with the recipient prevents
        any question of profits arising-see, for example, Lord
        Buckmasters explanation in Forth Conservancy Board v. IRC
        [1931] AC 540, at page 546 (16 TC 103, at page 117) and
        compare what Lord Macmillan said in Municipal Mutual
        Insurance Ltd. v. Hills [1932] 16 TC 430, at page 448."
              In the instant case, the first proposition of Viscount
        Simon clearly applies. The amount paid to the assessee in the
        instant case is in the nature of subsidy from public funds. The









ITA 315/2003 & connected cases                                       Page 20 of 27
        funds were made available to the assessee to assist it in
        carrying on its trade or business. In our view, having regard to
        the scheme of the notification, there can be little doubt that the
        object of various assistances under the subsidy scheme was to
        enable the assessee to run the business more profitably.
               Mr. Ganesh strongly relied on Seaham Harbour Dock
        Co.s case [1931] 16 TC 333 (HL) which does not come to the
        assistance of his contention in any way. In that case
        application for assistance was made even before the work of
        expansion of dock commenced. The money was for extension of
        the docks of the company. The extension would have enabled
        some persons to be kept in employment who would otherwise
        have lost their jobs. Money was given in several instalments as
        the work of extension of the dock continued. Money was given
        for the express purpose which was named. It was found by the
        House of Lords that it had nothing to do with the trading of the
        company.
               In the case before us, payments were made only after the
        industries have been set up. Payments are not being made for
        the purpose of setting up of the industries. But the package of
        incentives were given to the industries to run more profitably
        for a period of five years from the date of the commencement of
        production. In other words, a helping hand was being provided
        to the industries during the early days to enable them to come
        to a competitive level with other established industries.
        *************                          **********
               In the case before us, the payments were made to assist
        the new industries at the commencement of business to carry on
        their business. The payments were nothing but supplementary
        trade receipts. It is true that the assessee could not use this
        money for distribution as dividend to its shareholders. But the
        assessee was free to use the money in its business entirely as it
        liked and was not obliged to spend the money for a particular
        purpose like extension of docks as in the Seaham Harbour Dock
        Co.s case [1931] 16 TC 333 (HL).




ITA 315/2003 & connected cases                                        Page 21 of 27
                *************                  **************
               That precisely is the question raised in this case. By no
        stretch of imagination can the subsidies whether by way of
        refund of sales tax or relief of electricity charges or water
        charges be treated as an aid to the setting up of the industry of
        the assessee. As we have seen earlier, the payments were to be
        made only if and when the assessee commenced its production.
        The said payments were made for a period of five years
        calculated from the date of commencement of production in the
        assessees factory. The subsidies are operational subsidies and
        not capital subsidies.
        ***********                     ****************
              In the case before us, the subsidies have not been granted
        for production of or bringing into existence any new asset. The
        subsidies were granted year after year only after setting up of
        the new industry and commencement of production. Such a
        subsidy could only be treated as assistance given for the
        purpose of carrying on of the business of the assessee.
        Applying the test of Viscount Simon in the case of Ostime
        [1946] 14 ITR (Suppl) 45 (HL), it must be held that these
        subsidies are of revenue character and will have to be taxed
        accordingly."
21.     Ponni Sugars (supra) was the authority relied on by the assessee. In
Ponni Sugars (supra), the court observed about the decision in Sahney Steel
(supra) as follows:

               "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




ITA 315/2003 & connected cases                                        Page 22 of 27
        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 or the mechanism through which the subsidy is given are
        irrelevant.
              One more aspect needs to be mentioned. In Sahney Steel
        and Press Works Ltd. this court found that the assessee was free
        to use the money in its business entirely as it liked. It was not
        obliged to spend the money for a particular purpose. In the
        case of Seaham Harbour Dock Co. the assessee was obliged to
        spend the money for extension of its docks. This aspect is very
        important. In the present case also, receipt of the subsidy was
        capital in nature as the assessee was obliged to utilize the
        subsidy only for repayment of term loans undertaken by the
        assessee for setting up new units/expansion of existing business.
              Applying the above tests to the facts of the present case
        and keeping in mind the object behind the payment of the
        incentive subsidy, we are satisfied that such payment received
        by the assessee under the scheme was not in the course of a
        trade but was of capital nature."
22.     The object of providing subsidy by way of permission to not deposit
amounts collected (as sales tax liability)- which meant that the customer or
servicer user concerned had to pay sales tax, but at the same time, the
collector (i.e. the assessee) could retain the amount so collected, undoubtedly
was to achieve the larger goal of industrialization. The achievement of a




ITA 315/2003 & connected cases                                       Page 23 of 27
quantitative limit (of 125% of capital expenditure in the case of small scale
units and 100% in the case of other units) meant that the subsidy could no
longer be claimed.

23.     The revenue in this case stresses upon the lack of any conditionality
that the amounts were to be spent towards capital expenditure and that the
assessee had the flexibility of just increasing profitability, to say that the
subsidy here was revenue, and not capital. It also harps on the fact that the
quantitative limit indicated, i.e. amount (to be retained could be equal to
100% of capital expenditure) was only a reference point; the policy makers
did not, therefore, have to actually deal with figures or create a slab or
graded subsidy. This, according to the revenue, meant that the amounts
retained could be spent for any purpose, not necessarily capital. It was lastly
submitted that the subsidy operated only after expansion, i.e. after the capital
expenditure was incurred and capacity expanded.

24.     Both parties have used different passages from Sahnay Steel (supra)
and Ponni Sugars (supra). In the former, the court was persuaded to hold
that the amounts were revenue subsidies and "operational", not capital,
because "the payments were to be made only if and when the assessee
commenced its production. The said payments were made for a period of
five years calculated from the date of commencement of production in the
assessees factory." The added feature was that the assessee was free to use
the amounts for any purpose. In Ponni Sugars (supra), the following was
highlighted specifically:

        "In Sahney Steel and Press Works Ltd. this court found that the
        assessee was free to use the money in its business entirely as it




ITA 315/2003 & connected cases                                       Page 24 of 27
        liked. It was not obliged to spend the money for a particular
        purpose. In the case of Seaham Harbour Dock Co. the assessee
        was obliged to spend the money for extension of its docks. This
        aspect is very important. In the present case also, receipt of the
        subsidy was capital in nature as the assessee was obliged to
        utilize the subsidy only for repayment of term loans undertaken
        by the assessee for setting up new units/expansion of existing
        business."
25.     In the present case, the provisions of the original scheme (i.e. the
original policy of 1990) and its subsidy scheme are relevant; they have quite
correctly been relied upon by the revenue. Paras 6 (A) and 6(B) of that
scheme specifically provided for capital subsidy to set up prestige units; the
amounts indicated (Rupees fifteen lakhs) were to be towards capital
expenditure. Now, if that was the scheme under which the assessees set-up
their units, undoubtedly it contained specific provisions that enabled capital
subsidies. Whether the assessees were entitled to it, or not, is not relevant.
The assessees are now concerned with the sales tax amounts they were
permitted to retain, under the amended scheme (dated 27.07.1991) which
allowed the facility of such retention, after the unit (established and which
could possibly claim benefit under the first scheme) was already set up. This
subsidy scheme had no strings attached. It merely stated that the collection
could be retained to the extent of 100% of capital expenditure. Whilst it
might be tempting to read the linkage with capital expenditure as not only
applying to the limit, but also implying an underlying intention that the
capital expenditure would thereby be recouped, the absence of any such
condition should restrain the court from so concluding.

26.     How a state frames its policy to achieve its objectives and attain larger
developmental goals depends upon the experience, vision and genius of its




ITA 315/2003 & connected cases                                        Page 25 of 27
representatives. Therefore, to say that the indication of the limit of subsidy as
the capital expended, means that it replenished the capital expenditure and
therefore, the subsidy is capital, would not be justified. The specific
provision for capital subsidy in the main scheme and the lack of such a
subsidy in the supplementary scheme (of 1991) meant that the recipient, i.e.
the assessee had the flexibility of using it for any purpose. Unlike in Ponni
Sugars (supra), the absence of any condition towards capital utilization
meant that the policy makers envisioned greater profitability as an incentive
for investors to expand units, for rapid industrialization of the state, ensuring
greater employment. Clearly, the subsidy was revenue in nature.

27.     In view of the above discussion, the common question of law, is
answered in favour of the revenue and against the assessees, in both cases.

28.     In the Bhushan Steel batch of appeals, another question of law, i.e.
whether the assessee was entitled to claim depreciation under Section 32 of
the Income Tax Act, despite not owning the property or not being the owner
and being a lessee during the years under consideration, arises for
consideration.

29.     During the course of hearing, this court was informed that this
question is now covered against the revenue/appellant, in the assessee's
favour, in this court's order for AY 1994 -95 in ITA 314/2003
(Commissioner of Income Tax v Bhushan Steels and Strips, decided on 1st
December, 2016). In that decision, this court held that the judgments of the
Supreme Court in Mysore Minerals Ltd v Commissioner Income Tax 1999
(239) ITR 75 (SC) and Commissioner Income Tax v Poddar Cement Ltd
1997 (226) ITR 625 (SC) are conclusive that a lessee can claim depreciation.




ITA 315/2003 & connected cases                                        Page 26 of 27
Therefore, the second question of law, arising in the Bhushan Steel batch of
appeals, is decided in the assessee's favour and against the revenue.

30.     As a result, the revenue's appeals are partly allowed, in view of the
findings about taxability of the subsidy amounts as revenue receipts. There
shall be no order as to costs.



                                                      S. RAVINDRA BHAT
                                                                (JUDGE)



                                                           NAJMI WAZIRI
                                                                (JUDGE)

JULY 13, 2017




ITA 315/2003 & connected cases                                      Page 27 of 27

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