DCIT, NEW DELHI vs. M/S. INDO RAMA SYNTHETICS LTD., GURGAON

Ld DR relied on the order of the ld Assessing Officer and also relied on the decision of Mumbai Tribunal in case of Sun and Sand Hotels Pvt. Vs. DCIT, whereas the ld AR submitted a paper book showing the scheme under which subsidy was granted also Circular No. 142 dated 01.08.1974. He further submitted that copy of the decision of ITAT in assessee’s own case in earlier year.

We have carefully considered the issue and revenue has not brought any difference in the characteristic subsidy decided by the coordinate benches in assessee’s own case. Recently, ITAT in dated 17.04.2014, for AY 2007-08 in the case of the assessee has decided the same subsidy as capital receipt as under:- “4. Brief facts apropos ground no. 1 are that AO noticed from the computation of the income that the assessee company had claimed sales tax subsidy amounting to Rs.85,19,51,413/- as capital receipt not liable to tax. He noted that assessee had treated the sale tax subsidy as a part of its turnover in audited profit & loss account but did not treat the same as revenue receipt for income tax purpose. The assessee explained that the sales tax subsidy had been received as per State Government‟s scheme for establishing of new units and, thus, being related to the setting up of the industry, was a capital receipt. He noted that in assessment year 2006-07, the assessee‟s claim was denied for the following reasons: - “The subsidy was not intended to be a contribution towards capital outlay of the industrial unit - It was given with the object of enabling the assessee to carry on the business, although the purpose behind it might have been to encourage industrialization. - The incentives are available only after the industry has started functioning. - Sales tax is a part of sales and in turn is a revenue receipt - It is well settled that subsidies given by the governments to assist a person in his business are generally speaking, payments of revenue nature.” He, accordingly, made an addition of Rs.85,19,51,413/-. pg. 2 DCIT V Indo Rama Synthetics Limited 4.1 Before ld. CIT(A), the assessee had submitted that the benefit of sales tax subsidy was granted to the assessee under the provisions of the scheme notified by Industries, Energy, and Labour Department, Govt. of 4 Maharashtra. The State Industrial and Investment Corporation of Maharashtra Ltd. (SICOM), the implementing agency for and on behalf of Government of Maharashtra, granted the eligibility certificate to the assessee for the aforesaid subsidy. The quantum of the sales tax subsidy incentive under the aforesaid scheme was subject to monetary ceilings, which are specified as a percentage of fixed capital investment. The scheme was introduced by Government of Maharashtra with a view to achieve faster dispersal of industries outside Bombay-Thane- Pune, belt and to attract industries to the under developed and developing areas of the state. It was further explained that the modus operandi of the scheme was that the assessee collected sales tax (which was in built in sales price of the products manufactured by it), which was not required to be paid to the State Government and was retained by the assessee. The Sales Tax Department, thereafter, calculated the exemption availed by the assessee every year and reduced the same from the opening balance given by the Government of Maharashtra to control that the subsidy in the form of sales tax collected and retained over years did not exceed the approved quantum. 4.2 It was further submitted that the scheme postulated the following important conditions, among others, for eligibility under the scheme: (i) Effective possession of land by an eligible Unit, 5 (ii) Tying up of the means of finance for the project the satisfaction of the concerned implementing agency (iii) Acquisition of fixed assets at site to an extent of at least 10% of the total fixed assets as envisaged for the project, and (iv) Evidence regarding expenditure on the project, including advances and pre- operative expenses paid, aggregating to at least 25% of the capital cost envisaged for the project.” 4.3 Thus, it was submitted that the purpose of the subsidy was to help the assessee to set up its business or complete a project. The assessee relied on the decision of Hon‟ble Supreme Court in the case of CIT , Madras Vs. Ponni Sugars & Chemicals Ltd, 306 ITR 392 wherein it was held that the character of the receipt in the hands of the recipient has to be determined with respect to the purpose for which the subsidy was given. 4.4 It was further submitted that the packages scheme of incentives (PSI) (1993), as applicable for assessee‟s case, was similar to the PSI- 1979, as applicable to Reliance Industries Ltd., wherein Special Bench, ITAT, Mumbai in the case of DCIT Vs. Reliance Industries Ltd., 88 ITD 273 has held that Sales Tax subsidy received under PSI- (1979) is capital receipt. It was contended that in Reliance Industries case (Supra), the Special Bench was considering the Package Scheme of Incentive, 1979 notified by the Government of Maharashtra vide Government Resolution, Industries, Energy and Labour Department, No.IDL-7079(2043)/IND-8 dated 5th January 1980. It was pointed out that as per clause (vi) to Para 3.2 of the 6 1993, scheme as applicable in the assessee‟s case, the 1979 Scheme (considered by the Special pg. 3 DCIT V Indo Rama Synthetics Limited Bench) was the predecessor scheme as applied in the case of the assessee. It was further pointed out that the Tribunal in assessee‟s own case for AY 1997- 98 and AY 2000-01 to 2002-03 had set aside the matter to the file of the AO with the direction to examine whether the Sales Tax Incentive Scheme in question was identical to the scheme as referred to in Reliance Industries Ltd., case (Supra) and if so, to allow the assessee‟s claim. It was further submitted that for AY 2004-05, the issue was decided in favour of the assessee by ld. CIT (A) vide order dated 21.10.2009. The ld. CIT (A) following the order for AY 2004-05 deleted the addition. 4.5 At the time of hearing, ld. counsel for the assessee pointed out that this issue is covered by the decision of Tribunal for AY 2006-07 vide consolidated order dated 26th March 2013 passed for AYs 2005-06, 2006-07 and 2008-09 vide & 281/Del/2012 and 5831/Del/2011 respectively. 4.6 We find that Tribunal has observed for AY 2005-06 in Para 5 to 5.2 as under: “5. Ground no.1 is on the issue of sales tax subsidy. Similar disallowances were made in the Assessment Year 1997-98, 7 2003-04 and 2004-05. The assessee had set up a new unit in Butibori, Nagpur during the Assessment Year 1996-97for the manufacture of polyester fibre. The new unit was entitled to the benefit of sales tax subsidy under the provisions of Dispersal of Industries-New Packages Scheme of Incentives, 1993 notified by the Government of Maharashtra. During the current Assessment Year the assessee received sales tax subsidy of Rs.87,85,15,268/-. This was claimed as a capital receipt. The AO brought the same to tax on the ground that the receipt in question is a revenue receipt. On appeal the Commissioner of Income Tax (Appeals) followed the orders of his predecessor on the issue and allowed the claim of the assessee. Aggrieved the Revenue is in appeal before us. 5.1. The „C‟ Bench of the Tribunal in assessee‟s own case for the Assessment Years 1997-98, 2000-2001, 2002-03, 2003-04, 2004-05 upheld the orders of the First Appellate Authority. The First Appellate Authority at page 7 of his order has given a comparison of the 1979 scheme with the 1993 scheme. The Tribunal in its order held as follows:- “5. The ground raised

Upon assessee‟s appeal, Ld.CIT(A) observed that the sales tax subsidy pertains to assessee‟s unit at Butibori. Butibori is an industrial area developed by Maharashtra Industrial Development corporation in1994. The assessee in 1995 set up its integrated polyester complex at Butibori for production of POLY and PSF. The assessee was eligible to sales tax incentive by way of exemption under the 1993 New Package Scheme of Incentives of Govt. of Maharashtra. Ld.CIT(A) also noted that Tribunal in the assessee‟s own case for Assessment Year 1997-98, Assessment Year 2000-01 to 2002-03 while concurring with the ruling of the case pf DCIT vs. Reliance Industries Ltd. 88 ITD 273 (Mumbai) (SB) to the case of the assessee, had set aside the subject matter for comparison of the two scheme (one applied by assessee before the Ld.CIT(A) and second availed and applied in case of Reliance (supra). 8.1. A comparative chart on the salient features of the PSI 1979 with 10 PSI 1993 was furnished by assessee before the Ld. CIT(A). Ld. ClT(A) gave a finding that it is observed that object of the subsidy of both the scheme is for promotion of Industrialization in backward area of the State of Maharashtra. Further, eligibility criteria and steps for processing of scheme (e.g. approval from government authorities, financing of project, expenditure on project, approval from SICOM, mode of disbursement of sales tax incentive etc.) are similar in both the schemes. Ld.CIT(A) found that according to the PSI 1993 purpose of the scheme is for encouraging setting up of manufacturing unit in backward area in the state. While granting subsidies for capital investment, the Maharashtra government does not disburse any amount by way of subsidy but allows industrial undertaking to collect usual charge on account of sales tax and retain it as capital subsidy instead of depositing the sales tax collected. From this Ld.CIT(A) observed that the purpose of the scheme is not to support carrying on business in a more profitable manner but is for promotion /setting up the production unit in backward area. Collection of sales tax amount is simply a measurement of the subsidy to be allowed. Ld. CIT(A) held that one cannot say that subsidy was granted for carrying on its business operation in day to day manner. Before the Ld. Commissioner of Income Tax (Appeals) assessee also cited the case law of C.I.T. vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC). In this case the Hon‟ble Apex pg. 5 DCIT V Indo Rama Synthetics Limited Court held that the character of the receipt in the hands 11 of the assessee company 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 when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. 8.2. Ld.CIT9A) observed that the special Bench of the Tribunal (Reliance Industries Ltd. (supra) relying on the principles laid down by the case of Sahney Steel & Press Works Ltd. (supra) came to the conclusion that since the incentives were given for bringing about addition to necessary infrastructure in processing/developing the backward area. It would be in the nature of capital receipt not liable to tax. Ld. Commissioner of Income Tax (Appeals) further gave a finding that the aforesaid decision of the special Bench has been rendered on identical facts and is on all fours with the facts of the assessee's case. Ld.CIT(A) further noted that the Scheme under consideration of the Tribunal in the above case is the predecessor of the Scheme applicable to the appellant and had identical objectives. 8.3. Ld.CIT(A) further held that in the present case, the purpose of Granting sales tax incentive is clearly only to provide an incentive for Establishment of new industries in the underdeveloped regions or to Expand its existing units of the State of Maharashtra. That the intention is not to increase the viability of the eligible units but to promote development of further industry and infrastructure in the region. That In the aforesaid circumstances, the exemption availed of by the 12 assessee‟s eligible units under the said notification would, in view of the decisions cited above, be a capital receipt not liable to tax. Therefore, Ld.CIT(A) held that this ground is to be held in favour of the assessee and notional amount of sales tax subsidy is held as capital receipt not chargeable to tax.

Against the above order, the Revenue is in appeal before us.

We have heard the rival contentions in light of the material produced and precedents relied upon. We find that Ld. ClT(A) has given a finding that issue in dispute was covered by the special Bench decision of the Tribunal in the case of Reliance Industries Ltd. (supra). Though the scheme applicable in the case of Reliance Industries Ltd. was 1979 scheme, however, in the 1993 scheme terms and conditions were of the same nature and intent. For this purpose, a comparative chart was referred by the Ld. CIT (A). As per the comparative chart the terms and conditions applicable in 1979 scheme were of the same nature and intent of the 1993 scheme. We further note that Mumbai Tribunal in the case of Everest Industries Ltd. in has held that salient features of the 1993 scheme are identical to that of 1979 scheme. We further note that the Tribunal in ITA no.678 and 679/Del/2012 in the case of M/s Indo Rama Textiles Ltd. on identical facts has held that the decision of the Mumbai Tribunal, special Bench In the case of Reliance Industries 88 ITD 273 is applicable. Accordingly, in the background of the aforesaid discussion and precedents, we hold that the Ld. CIT(A) has passed a 13 reasonable order which does not need any interference on our part. Accordingly, we uphold the same. 5.2. Respectfully following the same we uphold the order of the First Appellate Authority and dismiss this ground.” 4.7. For AY 2006-07 Tribunal has observed in Para 15 & 16 as under: “15. Ground no.2 is on the issue as to whether the sales tax subsidy received from pg. 6 DCIT V Indo Rama Synthetics Limited Butibori, Nagpur, State of Maharashtra, is a capital receipt or Revenue receipt.

Consistent with the view taken by us while disposing of ground no.1 during the Assessment Year 2005-06, we uphold the order of the Commissioner of Income Tax (Appeals) and dismiss this ground of the Revenue.” As the Department has not brought on record any distinguishing features from the earlier years, respectfully following the earlier orders of Tribunal including the decision for AY 2006-07, this ground is dismissed.”

As the issue is squarely covered in favor of the assessee by virtue of decision of the coordinate bench in previous year we respectfully following them hold that the sales tax subsidy received by the assessee is not a revenue receipt but capital receipt. The decision cited by the ld DR of Mumbai ITAT in case of Sun and Sands Hotels Vs. DCIT (supra) does not apply to the facts of the case as in that case the assessee has sold the sales tax incentive and received the sale consideration on transfer of its entitlement and therefore, it was held that it is a benefit arising from the business and therefore receipt. In the present case assessee has received this subsidy from the Govt. of Maharashtra and there is no sale of such entitlements. Therefore reliance on the decision by revenue is misplaced. In the result ground NO. 1 of the appeal of the assessee is dismissed confirming the finding of the ld CIT(A).