* 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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