TMI Blog2017 (8) TMI 1336X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in Pony Sugar ( 2008 (9) TMI 14 - SUPREME COURT). Tribunal has not committed any error and view taken by the Tribunal is just and proper. It is nothing but capital investment by investing huge amount of 1.57 crores. - Decided in favour of assessee. - D.B. Income Tax Appeal No. 204 / 2010 - - - Dated:- 22-8-2017 - MR. K.S. JHAVERI AND MR. INDERJEET SINGH, JJ. For The Appellant : Ms. Parinitoo Jain with Ms. Shiva Goyal For The Respondent : Mr. S. Ganesh, Sr. Adv. appearing with Mr. Anant Kasliwal, Mr. Neeraj Seth, Ms. Charu Pareek and Mr. Nitin Jain Judgment 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby Tribunal has partly allowed the appeal of the department as well as aseessee. 2. This court while admitting the appeal on 1.10.2010 framed following substantial question of law:- Whether on the facts and circumstances of the case, the tribunal was justified in holding that the sales tax subsidy received by the assessee of ₹ 18,48,85,506/- in the form of Sales Tax Exemption was a capital receipt and not a revenue receipt ignoring the basic purpose for which the same was given which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dlaw AP 82(AP). In this case, it was held that any subsidy given for the purpose of bringing about rapid industrial growth in the State with particular attention to the backward taluks and blocks would be capital in nature. The observations of Hon'ble justice Jeevan Reddy in this case were specifically relied upon to contend that the fact that the subsidy was granted after the industry was set up and went into regular production was not the operative or decisive factor in coming to the conclusion as to whether the receipt was revenue or capital and that the most decisive factor was the object with which the incentive was given. The further submission was that Hon'ble justice Jeevan Reddy who wrote the judgment of the Andhra Pradesh High Court in Sahney Steel which was upheld by the Supreme Court in appeal, himself viewed the Scheme in Godavari Plywoods(supra) differently in view of the material distinctions between the two schemes. 3.3 Taking into consideration, she contended that even CIT(A) while considering the matter observed as under:- 9.18 The contention of both sides has taken into consideration and found that some portion of sales declared by the assessee Raj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other restrictive clauses, employment situation and production level is a post operational scenario and the above thrust of the incentive scheme is good indication that purpose of incentive of exemption of sales tax is meant for carrying on business for increasing employment opportunity and increase the level of production for the people the state to make the availability of commodity easier to achieve the goal of social justice which one of the main objects of democratic welfare state and incidentally it is achieved through expansion of the industrial unit Equal importance is given to increase the level of production of commodity and ban on out of state sale which clearly shows that in a democratic society, state is not interested in investment for expansion but is interested in the final result like employment of people, increase in production to make the goods available to the people. The perusal of indicates that this orientation has been kept as a parameter while incentive scheme was granted to the assessee and it clearly shows that it pertains to the operational part of the unit for day to day running of the industry. If the scheme is viewed in light of the various conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... located in a city or town or panchayat area other than that in which the existing unit is located. The incentives were : (a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10% of the equity capital paid up in the case of public limited companies and the actual capital in the case of others; (b) Subsidy on power consumed for production to the extent of 10% in the case of medium and large scale industries and 12 1/2% in the case of small scale industries. This concession will not apply to cases where concessional tariffs are allowed by the Electricity Board; (c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body; (d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it; (e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used. (f) The following additional incentives will be allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipt, 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., 20 T.C. 643; 156 L.T. 215, 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 a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising-see, for example, Lord Buckmaster's explanation in Forth Conservancy Board v. Commissioner of Inland Revenue (1931) A.C. 540, at page 546 (16 T.C. 103, at page 117) and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills 16 T.C. 430, at page 448. 14. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. 33. In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after seeing 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 assessee. Applying the test of Viscount Simon in the case of Ostime, it must be held that these subsidies are of revenue character and will have to be taxed accordingly. 35. The Madhya Pradesh High Court in the case of Commissioner of Income Tax. v. Dusad Industries [1986]162ITR784(MP) , dealt with a case where Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorting to adjustment from the free sale releases of future years. 10. At the outset, it may be stated that during the relevant year in question, on account of economic factors, namely, high cost, the new sugar factories could not come up as it was not economically viable. Due to high cost, the financial institutions did not come forward to advance loans to the entrepreneurs of new sugar factories. Secondly, the tempo of establishing new sugar factories received a serious set back, therefore, the Government appointed a Committee known as Sampat Committee to examine the question relating to economic viability of new sugar factories. One of the terms of reference suggested was to work out various incentives for making new sugar factories economically viable units. The increase of the cost of the project during the relevant years was on account of the increase in the cost of Plant and Machinery. The said Committee gave its Report in which the Committee recommended that the economic viability of a factory would mean that the unit should not break even after meeting the working expenses, interest on borrowings, depreciation on Plant and Machinery, but it should also be able to declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); (iv) the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); (v) the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); (vi) the Education Cess on excisable goods leviable under section 91 read with section 93 of the Finance (No.2) Act, 2004 (23 of 2004); (via) the Secondary and Higher Education Cess on excisable goods leviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007); (vii) the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv), (v) (vi) and (via); (viia) the additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, Provided that a provider of taxable service shall not be eligible to take credit of such additional duty; (viii) the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003); (ix) the service tax leviable under section 66 of the Finance Act; (x) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods become excisable. (3) Notwithstanding anything contained in sub-rule (1), in relation to a service which ceases to be an exempted service, the provider of the output service shall be allowed to take CENVAT credit of the duty paid on the inputs received on and after the 10th day of September, 2004 and lying in stock on the date on which any service ceases to be an exempted service and used for providing such service. (4) The CENVAT credit may be utilized for payment of - a) any duty of excise on any final product; or b) an amount equal to CENVAT credit taken on inputs if such inputs are removed as such or after being partially processed; or c) an amount equal to the CENVAT credit taken on capital goods if such capital goods are removed as such; or d) an amount under sub rule (2) of rule 16 of Central Excise Rules, 2002; or e) service tax on any output service: Provided that while paying duty of excise or service tax, as the case may be, the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made under the cover of an invoice referred to in rule 9: Provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service : Provided further that if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:- (a) for computers and computer peripherals: for each quarter in the first year @ 10% for each quarter in the second year @ 8% for each quarter in the third year @5% for each quarter in the fourth and fifth year @1% (b) for capital goods, other than computers and computer peripherals @ 2.5% for each quarter. (5A) If the capital goods are cleared as waste and scrap, the manufacturer shall pay an amount equal to the duty leviable on transaction value. (5B) If the value of any, (i) input, or (ii) capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue: Provided that the CENVAT credit in respect of inputs and capital goods cleared on or after 1st March, 2006 from an export oriented undertaking or by a unit in Electronic Hardware Technology Park or in a Software Technology Park, as the case may be, on which such unit pays excise duty under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-Central Excise dated 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003] shall be equal to {X multiplied by [(1+BCD/200) multiplied by (CVD/100)]}. Provided further that the CENVAT credit in respect of inputs and capital goods cleared on or after the 7th September, 2009 from an export-oriented undertaking or by a unit in Electronic Hardware Technology Park or in a Software Technology Park, as the case may be, on which such undertaking or unit has paid - (A) excise duty leviable under section 3 of the Excise Act read with serial number 2 of the notification no. 23/2003-Central Excise, dated 31st March, 2003 [G.S.R. 266(E), dated the 31st March, 2003]; and (B) the Education Cess leviable under section 91 read with section 93 of the Finance (No. 2) Act, 2004 and the Secondary and High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eviable under section 136 read with section 138 of the Finance Act, 2007 (22 of 2007) or the additional duty of excise leviable under section 157 of the Finance Act, 2003 (32 of 2003), or the education cess on taxable services leviable under section 91 read with section 95 of the said Finance (No.2) Act, 2004 (23 of 2004), or the Secondary and Higher Education Cess on taxable services leviable under section 136 read with section 140 of the Finance Act, 2007 (22 of 2007), or the additional duty of excise leviable under section 85 of the Finance Act, 2005 (18 of 2005) respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves, if such inputs are removed as such or after being partially processed or on any output service: Provided that the credit of the education cess on excisable goods and the education cess on taxable services can be utilized, either for payment of the education cess on excisable goods or for the payment of the education cess on taxable services: Provided further that the credit of the Secondary and Higher Education Cess on excisable goods and the Secondary and Higher Education Cess on taxable serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... New Units other than the units mentioned at items 2 and 3 and units going in for expansion or diversification. 1st yeat 100% 2nd year 90% 3rd year 80% 4th year 70% 5th year 60% 6th year 50% 7th year 50% 8th year 40% 9th year 40% 10th year 30% 11th year 30% 100% of eligible fixed capital investment in cases where such investment exceeds ₹ 150.00 lacs, and 125% of eligible FCI in cases where such investment does not exceed ₹ 150.00 lacs. Eleven Years 2. (a) New Units of Knit wears, gems and jewellery, textile, electronics and telecommunicatio ns, computer software, footwears and leather goods, glass and ceramic (b) Very Prestigious Units 1st year 100% 2nd year 100% 3rd year 90% 4th year 80% 5th year 70% 6th year 60% 7th year 50% 8th year 50% 9th year 40% 10th year 40% 11th year 30% 12th year 30% 13th year 30% 125% of eligible fixed capital investment. Thirteen years 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... े उद्देश्य से इस वर्ष नई औद्योगिक निति जारी की गई है। नई औद्योगिक निति के माध्यम से हमारा प्रयास है कि लघु उद्यमियों एवं दस्तकारों को बढावा मिले तथा ग्रामीण क्षेत्र में भी नये उद्योगों के माध्यम से रोजगार è ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s:- (1) The question of law arising in the present case is whether the sales-tax subsidy of ₹ 18,48,85,506 received by the Respondent assessee is a capital receipt which is not exigible to tax under the Incometax Act, 1961 ( the Act ). (2) The Supreme Court, in the case of C.I.T vs Ponni Sugars and Chemicals Ltd (2008) 306 ITR 392 (S.C), has laid down the test for determining whether the subsidy received by an assesse is a capital receipt or a revenue receipt. The test is the purpose that is, what is the object or purpose of the grant of subsidy. If the object or purpose of the grant of subsidy is to enable the assessee to set up a new unit or to expand an existing unit, then the subsidy received by the assesse would be a capital receipt in his hands. If, on the other hand, the object or purpose of grant of subsidy is to enable the assessee to continue to run or operate an existing unit, then such a receipt is a revenue receipt. (3) In the Ponni Sugars case, the subsidy in question provided that the amount of subsidy should be utilized only to pay off the loans taken by the assessee for establishing the unit. The Supreme Court did refer to and rely on this clause o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (Guj). The sales-tax incentive subsidy Scheme in this Gujarat case was also substantially the same as the one in the present case. There also, the subsidy commenced only after the new unit started commercial production and, further, there also, there was no requirement that the subsidy amount should be utilized in a particular manner. Nevertheless, the Gujarat High Court held that the amount was a capital receipt and that Judgment was upheld and affirmed by the Supreme Court in the consolidated Judgment passed in the Balaji Alloys case. This also squarely covers the present case. (6) The Respondent assessee in the present case has received subsidy in the form of Sales Tax Exemption under the Rajasthan Sales Tax/Central Sales Tax Exemption Scheme for Industries, 1998 of the Rajasthan State Government for substantial expansion of the undertaking. Only a new or substantially expanded industrial undertaking was eligible for grant of subsidy, and the amount of subsidy was based on the eligible fixed capital investment made by the assessee. The relevant Government documents clearly established that the object of the grant of subsidy was to promote the industrial development of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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