Facts of the Case

The respondent-assessee, M/s Indo Rama Textiles Ltd., established industrial units in Butibori and Takhalghat in Nagpur pursuant to the “Package Scheme of Incentives, 1993” announced by the Government of Maharashtra.

The scheme aimed to encourage industrial development in underdeveloped regions by granting incentives such as sales tax subsidy to new or expanded industrial units.

The assessee received sales tax subsidy under the 1993 Scheme and treated it as a capital receipt not chargeable to tax in its return of income.

During assessment proceedings, the Assessing Officer (AO) treated the subsidy as revenue receipt taxable as business income.

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals) who allowed the claim of the assessee and held the subsidy to be capital in nature. The order was upheld by the Income Tax Appellate Tribunal (ITAT).

Aggrieved, the Revenue filed appeal before the Delhi High Court under Section 260A. 

Issues Involved

  1. Whether the sales tax subsidy received by the assessee under the Maharashtra Package Scheme of Incentives, 1993 is a capital receipt or a revenue receipt?
  2. Whether such subsidy is liable to tax under the Income Tax Act as business income?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the sales tax subsidy was linked to business operations of the assessee.
  • Since the subsidy was received after commencement of production, it should be treated as revenue receipt taxable as income.
  • The Revenue argued that the incentive was not meant for acquiring capital assets but rather for supporting ongoing business activities.

Respondent’s Arguments (Assessee)

  • The assessee submitted that the subsidy was granted under the 1993 Incentive Scheme to promote industrialization in backward areas.
  • The purpose of the subsidy was to encourage setting up of industries in underdeveloped regions rather than to supplement profits.
  • The assessee relied upon judicial precedents including the Special Bench decision in DCIT v. Reliance Industries Ltd. (88 ITD 273).
  • It was argued that the purpose test must be applied to determine the character of subsidy, and since the objective was industrial development, the subsidy constituted a capital receipt. 

Court Findings / Court Order

  • The primary test to determine the nature of subsidy is the “purpose test.”
  • If the subsidy is granted to encourage setting up of industries or expansion in backward areas, it is capital in nature.
  • The Package Scheme of Incentives, 1993 was formulated to promote industrial dispersal and development in less developed regions.
  • Therefore, the sales tax subsidy received under the scheme constituted a capital receipt and could not be taxed as revenue income. 

Important Clarification

  • The purpose of the subsidy scheme is decisive, not the timing or form of the subsidy.
  • Even if subsidy is received after commencement of production, it can still be capital receipt if the objective of the scheme is industrial promotion or expansion.
  • The 1993 Incentive Scheme was substantially similar to earlier schemes examined in judicial precedents.   

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/RAS23012024ITA3922014_151522.pdf

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