Bombay High Court
Bajaj Auto Limited vs Dy Commissioner Of Income … on 3 July, 2025
2025:BHC-OS:9937-DB
Megha 401_itxa_505_2023_fc.docx
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION.
INCOME TAX APPEAL NO.505 OF 2003
Bajaj Auto Limited ...Appellant
V/s.
Dy. Commissioner of Income Tax ...Respondent
WITH
INCOME TAX APPEAL NO.156 OF 2003
The Commissioner of Income Tax-3 ...Appellant
V/s.
M/s. Reliance Industries Limited ...Respondent
______________
Mr. P.J. Pardiwalla, Senior Advocate with Ms. Vasanti Patel for
the Appellant in ITXA/505/2003.
Mr. Suresh Kumar for the Appellant in ITXA/156/2003 and for
Respondent in ITXA/505/2003.
Mr. J.D. Mistri, Senior Advocate with Mr. Madhur Agarwal, Mr.
Fenil Bhatt, Mr. P.C. Tripathi, Mr. Punit J. Shah, Mr. Ketan Dave
and Mr. Pratik Shah i/b. M/s. A.S. Dayal and Associates for the
Respondent in ITXA/156/2003.
______________
CORAM: ALOK ARADHE, CJ. &
SANDEEP V. MARNE, J.
Judgment reserved on: 26 JUNE 2025.
Judgment pronounced on: 03 JULY 2025.
Page No. 1 of 36
Megha 401_itxa_505_2023_fc.docx
JUDGMENT (PER: SANDEEP V. MARNE, J.)
A. THE CHALLENGE
1. These Appeals, filed under Section 260A of the
Income Tax Act,1961, (the Act) raise a common question of law
as to whether an incentive received in sales tax liability under a
Scheme formulated by the State Government would be on capital
account, exempt to taxation, or on revenue account, liable for
taxation. The State Government had introduced schemes from
time to time for encouraging setting up of industries in specified
backward areas of the State, by providing sales tax incentives. In
Income Tax Appeal No.156 of 2003 filed by the Revenue, the
Income Tax Appellate Tribunal (ITAT) has treated the amount
received towards such incentive to be capital receipt, exempt
from taxation, whereas in Income Tax Appeal No.505 of 2003
filed by the Assessee, the amount forming part of similar
incentive is treated as revenue receipt, liable for taxation.
2. Income Tax Appeal No.156 of 2003 is filed by the
Revenue challenging judgment and order dated 25 July 2002
passed by the ITAT allowing the Appeal preferred by the
Assessee-Reliance Industries Ltd. relating to Assessment Year
1985-86 and setting aside the assessment order by directing the
Assessing Officer to treat the amount received under sales tax
incentive scheme as capital receipt in the hands of the Assessee
and to exclude the same from the title ‘income chargeable to tax’.
Page No. 2 of 36
Megha 401_itxa_505_2023_fc.docx
3. Income Tax Appeal No.505 of 2003 is filed by the
Assessee-Bajaj Auto Ltd. challenging the judgment and order
dated 31 December 2002 passed by the ITAT partly dismissing
its Appeal in respect of assessment year 1987-88 and upholding
the order of Commissioner of Income Tax-Appeals (CIT(A)) to
the extent of treatment of sales tax incentives as revenue receipt
and not as capital receipt.
B. SUBSTANTIAL QUESTIONS OF LAW FORMULATED
4. Appeal No.156 of 2003 filed by the Revenue has been
admitted by order dated 11 October 2004 on following
substantial questions of law:
(i) Whether on the facts and in the circumstances of
the case the Tribunal was right in law in directing
to capitalize the expenses incurred on account of
foreign exchange fluctuation and interest thereon
in respect of foreign currency loans availed by the
assessee, although out of the total amount directed
to be capitalized an amount of Rs.82,77,221/-
represented interest accrued but no payment was
made during the year?
(ii) Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding
and allowing assessee’s claim for deduction of
entire amount of ‘Traveling Expenses’ on account
of foreign travel by company executives
accompanied by spouses, although there was no
material on record to show that visit of the spouses
was necessary in order to facilitated negotiation at
top level with foreign corporation?
(iii) Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding
allowing assessee’s claim for deduction as in
Page No. 3 of 36
Megha 401_itxa_505_2023_fc.docx
respect of notional sales tax liability holding it as
capital subsidy?
(iv) Whether on the facts and in the circumstances of
the case, the Tribunal was right in law in holding
that the expenses incurred on the maintenance of
guest house and depreciation will not be covered
within the mischief of section 37(4) of the I.T. Act.
5. Income Tax Appeal No.505 of 2003 has been admitted
on 19 October 2004 on following substantial questions of law:-
(i) Whether on the facts and in the circumstances of
the case and in law, the ITAT was justified in
treating an amount of Rs.31,56,48,643/-, being
the amount of sales-tax exempted from payment
under the Scheme of incentives to the
Government of Maharashtra for setting up a new
industrial unit in the specified backward area at
Waluj, Aurangabad as trading receipt,
chargeable to tax under the provisions of the
Income-tax Act?
(ii) Alternatively, whether on the facts and in the
circumstances of the case and in law, the ITAT
was justified in not treating the notional sales-
tax liability, determined as per the Sales-tax
Assessment Order dated 20-2-1988 as liability
under the Sales-tax Act, which is deemed to
have been paid by the Appellant within the
meaning of Section 43B of the Income-tax Act?
6. For the reasons discussed in the latter part of the
judgment, Question Nos 1,2 and 4 in Appeal No. 156 of 2003
need no determination and therefore the only issue that survives
for determination in both the Appeals is about treatment of sales
tax incentive as capital receipt exempt from taxation or revenue
receipt liable for taxation. Since both the Appeals essentially
Page No. 4 of 36
Megha 401_itxa_505_2023_fc.docx
involve same question of law, they are accordingly taken up for
hearing and decision together.
C. FACTS IN APPEAL NO.156 OF 2003:
7. The Appeal arises out of Return of Income filed by the
Assessee-Reliance Industries Ltd. for the assessment year 1985-
86. The Assessee is engaged in the business of manufacturing
synthetic fabrics from plain, crimped, twisted and worsted yarns.
The Assessee used to operate manufacturing units at Sidhpur in
Gujarat and set up a new manufacturing unit at Patalganga in
Maharashtra in pursuance of the Scheme for encouraging
industries in backward parts of the State. The Assessee received
incentive in the form of sales tax waiver and was issued with the
eligibility certificate under the Scheme. On 28 June 1985, Return
of Income was filed by the Assessee for the assessment year
1985-86 treating the sales tax incentive as capital receipt.
Notices under Sections 143(2) and 142 (1) of the Act were issued
and served on the Assessee on 5 June 1987 alongwith
questionnaire vide letter dated 27 May 1987. Thereafter
additional questionnaires were also issued and served on the
Assessee. While making the assessment order, the Assessing
Officer disallowed certain claims of the Assessee relating to
suppression of production, difference in exchange rate, notional
sales-tax, foreign travelling expenses with spouses and guest
house accommodation expenses. Being aggrieved by the
Assessment Order dated 30 March 1988, the Assessee filed
appeal before the CIT(A). The CIT(A) partly allowed the appeal
Page No. 5 of 36
Megha 401_itxa_505_2023_fc.docx
preferred by the Assessee by deleting the additions made under
the head of ‘suppression of production’. The claim towards
difference in exchange rate was only partly allowed. The claim
towards notional sales tax liability was rejected holding that the
incentive should be treated as revenue receipt liable to income
tax. The claim towards expenditure on foreign travel with spouse
was partly allowed. The claim towards expenditure on guest
house was also partly allowed.
8. Aggrieved by order dated 10 July 1989 passed by the
CIT(A), cross appeals came to be filed before the ITAT by the
Revenue and the Assessee. Both the appeals have been decided
by the ITAT by common judgment and order dated 25 July 2002.
The ITAT dismissed the appeal preferred by the Revenue and
allowed the appeal filed by the Assessee by directing treatment of
incentives received under sales tax scheme as capital receipt not
liable to payment of income tax. The Revenue is aggrieved by
judgment and order dated 25 July 2002 passed by the ITAT and
has accordingly filed Income Tax Appeal No.156 of 2003.
D. FACTS IN INCOME TAX APPEAL NO. 505 OF 2003
9. The Assessee-Bajaj Auto is engaged in manufacture
and sale of two wheelers, three wheelers and also in manufacture
and sale of spare parts of vehicles sold by it. The Assessee filed
its Return of Income for the assessment year 1987-88 declaring
total income as Rs.45,26,94,700/-. The accounting year for the
assessment year 1987-88 has ended on 30 June 1986. During the
Page No. 6 of 36
Megha 401_itxa_505_2023_fc.docx
previous year, the Assessee had started a new unit at Waluj,
Aurangabad, which was notified as backward area. The
Government of Maharashtra introduced the scheme on 4 May
1983 under which an option for sales tax exemption or deferral of
sales tax for a period of five years was available. The Assessee
obtained eligibility certificate for sales-tax exemption for a period
of three years commencing from 1 February 1986. The sales-tax
incentive under the said scheme amounted to Rs.3,56,43,643/- as
determined by the assessment order dated 20 February 1988.
During the process of assessment proceedings, Assessee claimed
that the amount of sales tax incentives amounting to
Rs.3,56,43,643/- should be regarded as capital receipt not liable
to tax since the said incentive was received for promotion of
industries in backward area. Since the Assessing Officer rejected
the said claim of Assessee by order dated 31 January 1990 and
treated the same as revenue receipt liable to tax and since the
Assessing Officer also made certain additions in the income of
the Assessee, it preferred appeal before the CIT(A) challenging
the order of assessment.
10. CIT(A) partly allowed the appeal but did not grant
any relief to the Assessee in respect of its claim towards sales-tax
incentive. The Assessee accordingly filed appeal before the ITAT
challenging the order of CIT(A). The Revenue also filed cross
appeal challenging the order of CIT(A) to the extent of deletion of
some of the disallowances. By judgment and order dated 31
December 2002, the ITAT has partly allowed both the appeals.
However, so far as the claim of the Assessee towards sales-tax
Page No. 7 of 36
Megha 401_itxa_505_2023_fc.docx
incentive is concerned, the ITAT directed the same to be treated
as revenue receipt liable to payment of income tax and not
capital receipt exempt from payment of income tax. Aggrieved by
the order passed by the ITAT, the Assessee has filed Income Tax
Appeal No.505 of 2003.
E. Submissions
11. Mr. Suresh Kumar, the learned counsel appearing for
the Revenue, in support of Appeal No.156 of 2003 filed by the
Revenue and for opposing Appeal No.505 of 2003 filed by the
Assessee, has made following broad submissions:-
(a) That the incentive paid under scheme formulated by the
State Government in the form of exemption in payment
of sales-tax needs to be treated as revenue receipt by the
Assessee, liable to payment of income tax.
(b) That the schemes introduced by the State Government
envisaged grant of sales-tax incentive only on actual
commencement of production.
(c) That since provision for sales-tax incentive was
conditional upon commencement of production, the
incentive was necessarily for the activity of production
taken up by the Assessee and the same cannot be
treated as a capital receipt.
(d) Any amount received by the Assessee for incentivising
production would necessarily form part of revenue
receipt and not a part of capital receipt. If the AssesseePage No. 8 of 36
Megha 401_itxa_505_2023_fc.docxwas not to commence production, no incentive under the
sales-tax scheme was payable making it abundantly
clear that there was direct linkage between
commencement of production and grant of incentive.
(e) That the issue involved in the present Appeals is
squarely covered by the judgment of the Apex Court in
Sahney Steel & Press Works Ltd. Vs. Commissioner
of Income-tax1, in which it is held that any incentive
provided for production by the Assessee would
necessarily form part of the revenue receipt.
(f) There is no material on record to infer that the incentive
under the scheme was provided for incurring of capital
expenditure for establishment of the manufacturing
units.
(g) Sales-tax became liable for payment only on production
and sale of the products and since the sale of products is
incentivized, the incentive was making the business
profitable rather than aiding the Assessee in setting up
any industrial unit.
(h) Incentivisation of sales-tax has resulted in the Assessee
earning higher amount of profits and the amount of
sales-tax collected from the customers is retained by the
Assessee. That therefore the amount received under the
sales-tax incentive scheme needs to be treated as
revenue receipt.
(i) That the Tribunal has passed contradictory orders by
holding in the case of Bajaj Auto Limited that the sales-
1
[1997] 228 ITR 253(SC)
Page No. 9 of 36
Megha 401_itxa_505_2023_fc.docx
tax incentive is revenue receipt while holding in the case
of Reliance Industries Ltd. that the sales-tax incentive
would form capital receipt.
(j) Relying on judgment of Calcutta High Court in
Commissioner of Income-tax Vs. Chhindwara
Fuels2 it is contended that subsidy received in the form
of refund of sales tax after commencement of production
is liable to taxation by treating it as revenue receipt.
(k) That the issue is also covered by judgment of the Apex
Court in Commissioner of Income-tax Vs. P.J.
Chemicals Ltd.3 and Commissioner of Income-tax
vs. Rajaram Maize Products4
On above broad submissions, Mr. Suresh Kumar, would pray for
allowing Income Tax Appeal No.156 of 2003 filed by Revenue and
for dismissal of Income Tax Appeal No.505 of 2003 preferred by
the Assessee.
12. Mr. Mistri, the learned senior advocate appearing for
the Assessee-Reliance Industries for opposing Appeal No.156 of
2003 filed by the Revenue, would submit as under:-
(a) The ITAT has rightly directed treatment of
incentives received under the sales-tax scheme as
capital receipt not liable to tax.
2
[2001] 114 Taxman 707 (Calcutta)
3
[1994] 76 Taxman 611(SC)
4
[2001] 119 Taxman 492 (SC)
Page No. 10 of 36
Megha 401_itxa_505_2023_fc.docx
(b) That the incentive in payment of sales-tax was
provided in order to decongest industries in Mumbai,
Thane and Pune belt and to encourage the
industrialist to set up new industrial units in
specified backward areas and that the incentive in
payment of sales-tax was provided to the Assessee for
having set up industry in specified area of
Patalganga.
(c) That the ITAT has rightly treated the incentive as a
part of capital receipt not chargeable to tax by taking
into consideration the purpose for which the
incentive is granted.
(d) That the decision of the Apex Court in Sahney Steel
& Press Works Ltd. (supra) has been subsequently
considered and explained in Commissioner of
Income-tax, Madras Vs. Ponni Sugars &
Chemicals Ltd.5 which in turn had been followed
and applied in Commissioner of Income Tax Vs.
Shree Balaji Alloys6, Commissioner of Income
Tax-I, Kolhapur Vs. Chaphalkar Brothers Pune7
and Dy. Commissioner of Income Tax Vs. M/s.
Munjal Auto Industries Ltd.8
5
[2008] 174 Taxman 87(SC)
6
[2017] 80 taxmann.com 239(SC)
7
[2018] 400 ITR 279 (SC)
8
Civil Appeal No.6226 of 2013, decided on 8 May 2018.
Page No. 11 of 36
Megha 401_itxa_505_2023_fc.docx
(e) That purpose for which the incentive is granted is
the key and the form in which the incentive is
released is irrelevant.
(f) That the Delhi High Court has considered the very
same scheme in the case of Commissioner of
Income Tax-IV V/s. M/s. Indo Rama Textiles
Ltd.9 and has concluded that the amount of subsidy
received by the Assessee under the scheme is for the
purpose of setting up a new unit and therefore should
be treated as capital receipt not chargeable to tax.
13. Mr. Pardiwalla, the learned senior advocate
appearing for the Assessee-Bajaj Auto in support of Appeal
No.505 of 2003 has canvassed following broad submissions:-
a) That the incentive under the sales tax scheme
introduced by the State Government has been
received by the Assessee for setting up of industry in
the backward area;
b) That the incentive is not towards production activity
undertaken by the Assessee.
c) That instead of paying cash amount towards the
subsidy, the scheme envisaged adjustment of the
incentive amount in the sales tax payable on
commencement of production.
9
158 taxmann.com 685
Page No. 12 of 36
Megha 401_itxa_505_2023_fc.docx
d) That what needs to be applied is the ‘purpose test’ as
held by the Apex Court in Sahney Steel & Press
Works Ltd.(supra).
e) That the purpose of grant of incentive was not to
enable the Assessee to earn higher profits but the
purpose was to incentivise the Assessee for setting
up the industry in notified backward area.
f) That the Tribunal has failed to appreciate the real
nature and purpose of incentive scheme and has
erroneously mixed up the concept of adjustment of
incentive after commencement of production with the
purpose for which the incentive is granted.
g) That the scheme itself made it abundantly clear that
the incentive was towards the expenditure incurred
in setting up of the industry. He would also rely upon
judgment of the Apex Court in Chaphalkar
Brothers (supra) in support of his contention that
once the subsidy is granted to industrialize the State,
the form in which the subsidy is paid becomes
irrelevant and therefore the grant of subsidy after
commencement of production would make no
difference.
On above broad submissions Mr. Pardiwalla would pray for
allowing the appeal No.505 of 2003.
Page No. 13 of 36
Megha 401_itxa_505_2023_fc.docx F. REASONS AND ANALYSIS
18. Before proceeding further with the main and the only
issue involved in these appeals, it would be necessary to quickly
deal with the three other questions of law formulated in Appeal
No.156 of 2003 filed by the Revenue in the case of Reliance
Industries Ltd. As observed above, total four questions of law are
framed while admitting the appeal. It is common ground that
Question No.1 is squarely covered by the Apex Court judgment in
Commissioner of Income-tax Delhi vs. Woodward Governor
India (P) Ltd.10, in which it is held that loss suffered by an
Assessee on account of foreign exchange difference as on the date
of balance sheet would constitute an item of expenditure under
Section 37 (1) of the Income Tax Act, 1961. Since the question of
law No. 1 is already covered by the Hon’ble Apex Court
judgment, it is not necessary to deliberate on the said issue.
Question No.1 therefore needs to be answered against the
Revenue.
19. So far as Question No.2 is concerned, the same involves
minuscule amount of Rs.48,288/- incurred towards foreign tour
expenses of executives accompanied by their spouses. It appears
that out of claimed expenditure of Rs.48,288/-, CIT(A) has
already allowed amount of Rs.32,192/-. Considering the amount
involved in respect of Question No.2 we are not inclined to
10
[2009] 312 ITR 254 (SC)
Page No. 14 of 36
Megha 401_itxa_505_2023_fc.docx
interfere in the order passed by the ITAT. Question No.2 is also
answered against the Revenue.
20. So far as Question No.4 in Appeal No.156 of 2003 is
concerned, both parties are ad idem that same does not really
arise in the present appeal. The ITAT has categorically held that
Section 37(4) of the Act has been attracted and it is not held that
maintenance and depreciation will not be covered within Section
37(4) of the Act. Therefore, Question No.4 does not arise for
consideration in the appeal and the same is erroneously framed.
Question No. 4 therefore need not be answered.
21. This is how only Question No.3 relating to amount of
sales tax incentive as capital receipt or revenue receipt remains
to be answered in Income Tax Appeal No.156 of 2003 filed by
Revenue. The two questions of law framed while admitting the
Assessee’s Income Tax Appeal No. 505 of 2003 also relate to the
same issue of treatment of sales tax incentive as capital or
revenue receipt.
22. Therefore, the only common issue that needs to be
decided in these two Appeals is about treatment of the sales tax
incentive paid to the Assessees under the State Government
Scheme either as capital receipt or revenue receipt. The issue is
essentially linked to the exact character of the incentive subsidy
offered by the State Government, decision of which would be the
determinative factor for deciding whether the incentive subsidy
is provided to enable the Assessee to set up a new unit or to run
Page No. 15 of 36
Megha 401_itxa_505_2023_fc.docx
the business more profitable. In the former case, the receipt of
the subsidy would be on capital account whereas in the latter
case, receipt of such subsidy would be on revenue account. Thus,
the object or purpose for which the subsidy incentive is given
would determine the nature of receipt in the hand of the
Assessees.
F. 1 PRECEDENTS GOVERNING THE ISSUE
23. Before proceeding ahead with examination of the
schemes under which the subsidy is provided to the Assessees, it
would be necessary to take a stock of few judgments dealing with
the issue of treatment of the subsidy as capital receipt or revenue
receipt. The leading judgment on the issue is in the case of
Sahney Steel & Press Works Ltd. (supra), in which the issue
before the Apex Court was whether the subsidy received by the
Assessee-Company from Andhra Pradesh Government was
taxable as a revenue receipt. Under the Notification issued by
the Andhra Pradesh Government, certain facilities and
incentives were to be given to all industrial undertakings, which
commenced production on or after 1 January 1969 with
investment capital not exceeding Rs.5 crores. The incentives were
to be allowed for a period of five years from the date of
commencement of production. The concession was also available
for subsequent expansion of 50% and above of existing capacities
provided in each case, provided that the expansion was located in
the city or town or panchayat area other than the one in which
the existing unit was located. The incentives comprised of refund
Page No. 16 of 36
Megha 401_itxa_505_2023_fc.docx
of sales tax on raw material, machinery and finished goods;
subsidy on power consumed for production; exemption from
payment of water rate, etc. The Apex Court has decided the issue
of treatment of the subsidy received under the said scheme by
holding as under :-
19. For example, if the scheme was that the assessee will be
given refund of sales tax on purchase of machinery as well as
on raw materials to enable the assessee to acquire new plants
and machinery for further expansion of its manufacturing
capacity in a backward area, the entire subsidy must be held
to be a capital receipt in the hands of the assessee. It will not
be open to the Revenue to contend that the refund of sales tax paid on
raw materials or finished products must be treated as revenue receipt
in the hands of the assessee. In both the cases, the Government is
paying out of public funds to the assessee for a definite purpose. If
the purpose is to help the assessee to set up its business or
complete a project as in Seaham Harbour Dock Co. case [16 TC
333] , the monies must be treated as to have been received for
capital purpose. But if monies are given to the assessee for
assisting him in carrying out the business operation and the money is
given only after and conditional upon commencement of production,
such subsidies must be treated as assistance for the purpose of the
trade.
(emphasis and underlining added)
24. The Apex Court thus held in Sahney Steel & Press
Works Ltd. that if the Assessee was given refund of sales tax on
purchase of machinery as well as raw material to enable it to
acquire new plant and machinery for further expansion of its
manufacturing capacity in the backward area, the entire subsidy
must be held to be capital receipt. It further held that if monies
are given to the Assessee for assisting him in carrying out the
business operation and the money is given only after and
conditional upon the commencement of such production, such
subsidy must be treated as assistance for the purpose of trade.
Page No. 17 of 36
Megha 401_itxa_505_2023_fc.docx
25. The judgment of the Apex Court in Sahney Steel &
Press Works Ltd. is relied upon by the Revenue in support of
contention that in every case where assistance is given subject to
the condition of commencement of production, the subsidy must
be treated as assistance for the purpose of trade and needs to be
necessarily treated as revenue receipt. On the other hand, it is
contended on behalf of the Assessees that the Apex Court has
clearly drawn a distinction in cases where the subsidy is given for
setting up an industrial unit and subsidy given for assistance in
carrying out the business operation.
26. The judgment of the Apex Court in Sahney Steel &
Press Works Ltd. (supra) has been further explained in the
judgment in CIT, Madras vs. Ponni Sugars and Chemicals
Ltd. (supra). In case before the Apex Court, the Assessee had
received subsidy under the Incentive Subsidy Scheme, 1980. The
incentive was in the nature of higher free sale sugar quota and
allowing the manufacturer to collect the excise duty on sale price
of free sale sugar in excess of normal quota but to pay to the
Government excise duty payable on price of levy sugar. Under
the scheme, the Assessee was under obligation to utilize the
subsidy only for repayment of term loans undertaken by it for
setting up a units/expansion of existing business. In these
circumstances, the Assessee claimed that the incentive received
by it was a capital receipt, whereas according to the Revenue,
since incentives were given through price and duty differentials,
Page No. 18 of 36
Megha 401_itxa_505_2023_fc.docx
the character of the incentive was that of revenue receipt. In the
light of the above factual position, the Apex Court formulated two
questions in paragraph 2 of the judgment as under:-
2. In the above batch of civil appeals, based on the arguments
addressed before us, we are mainly concerned with the following two
questions, namely:
(i) Whether the incentive subsidy received by the assessee is a
capital receipt not includible in the total income?
(ii) Whether the assessee was entitled to exemption under
Section 80-P(2)(a)(i) of the Income Tax Act, 1961 in respect of
interest received from the members of the society?
27. The Apex Court thereafter formulated the exact key
question in paragraph 9 of the judgment as under :-
9. The key question which arises for determination is : what is
the character of the incentive subsidy under the said Schemes?
28. The Apex Court thereafter referred to the judgment in
Sahney Steel & Press Works Ltd. (supra) and held in
paragraphs 13, 14, 15, 16 and 17 as under:
13. The main controversy arises in these cases because of the reason
that the incentives were given through the mechanism of price
differential and the duty differential. According to the Department,
price and costs are essential items that are basic to the profit-making
process and that any price-related mechanism would normally be
presumed to be revenue in nature. In other words, according to the
Department, since incentives were given through price and duty
differentials, the character of the impugned incentive in this case was
revenue and not capital in nature. On the other hand, according to
the assessee, what was relevant to decide the character of the
incentive is the purpose test and not the mechanism of payment.
Page No. 19 of 36
Megha 401_itxa_505_2023_fc.docx
14. In our view, the controversy in hand can be resolved if we
apply the test laid down in the judgment of this Court
in Sahney Steel and Press Works Ltd. [(1997) 7 SCC 764 : (1997)
228 ITR 253] In that case, on behalf of the assessee, it was contended
that the subsidy given was up to 10% of the capital investment
calculated on the basis of the quantum of investment in capital and,
therefore, receipt of such subsidy was on capital account and not on
revenue account. It was also urged in that case that subsidy granted
on the basis of refund of sales tax on raw materials, machinery and
finished goods were also of capital nature as the object of granting
refund of sales tax was that the assessee could set up new business or
expand his existing business. The contention of the assessee in that
case was dismissed by the Tribunal and, therefore, the assessee had
come to this Court by way of a special leave petition. It was held by
this Court on the facts of that case and on the basis of the analyses of
the Scheme therein that the subsidy given was on revenue account
because it was given by way of assistance in carrying on of trade or
business. On the facts of that case, it was held that the subsidy given
was to meet recurring expenses. It was not for acquiring the capital
asset. It was not to meet part of the cost. It was not granted for
production of or bringing into existence any new asset. The subsidies
in that case were granted year after year only after setting up of the
new industry and only after commencement of production and,
therefore, such a subsidy could only be treated as assistance given for
the purpose of carrying on the business of the assessee.
Consequently, the contentions raised on behalf 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 utilised 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
Page No. 20 of 36
Megha 401_itxa_505_2023_fc.docx
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 of
the mechanism through which the subsidy is given is
irrelevant.
15. In the decision of the House of Lords in Seaham Harbour Dock
Co. v. Crook [(1931) 16 TC 333] Harbour Dock Co. had applied for
grants from the Unemployment Grants Committee from funds
appropriated by Parliament. The said grants were paid as the work
progressed; the payments were made several times for some years.
Dock Co. had undertaken the work of extension of its docks. The
extended dock was for relieving the unemployment. The main
purpose was relief from unemployment. Therefore, the House of
Lords held that the financial assistance given to the Company for
dock extension cannot be regarded as a trade receipt. It was found by
the House of Lords that the assistance had nothing to do with the
trading of the Company because the work undertaken was dock
extension. According to the House of Lords, the assistance in the form
of a grant was made by the Government with the object that by its
use men might be kept in employment and, therefore, its receipt was
capital in nature. The importance of the judgment lies in the fact that
the Company had applied for financial assistance to the
Unemployment Grants Committee. The Committee gave financial
assistance from time to time as the work progressed and the
payments were equivalent to half the interest for two years on
approved expenditure met out of loans. Even though the payment was
equivalent to half the interest amount payable on the loan (interest
subsidy) still the House of Lords held that money received by the
Company was not in the course of trade but was of capital nature.
The judgment of the House of Lords shows that the source of
payment or the form in which the subsidy is paid or the mechanism
through which it is paid is immaterial and that what is relevant is
the purpose for payment of assistance. Ordinarily such payments
would have been on revenue account but since the purpose of
the payment was to curtail/obliterate unemployment and
since the purpose was dock extension, the House of Lords
held that the payment made was of capital nature.
16. One more aspect needs to be mentioned. In Sahney Steel and
Press Works Ltd. [(1997) 7 SCC 764 : (1997) 228 ITR 253] this Court
Page No. 21 of 36
Megha 401_itxa_505_2023_fc.docx
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 Seaham Harbour Dock Co. [(1931) 16 TC 333]
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
utilise the subsidy only for repayment of term loans undertaken by
the assessee for setting up new units/expansion of existing business.
17. 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. Accordingly, the first question is
answered in favour of the assessee and against the Department.
(emphasis and underlining added)
29. Thus in CIT vs. Ponni Sugars & Chemicals Ltd.
(supra), the Apex Court has explained the ratio of the judgment
in Sahney Steel & Press Works Ltd. (supra) by holding that the
judgment lays down the basic test to be applied in judging the
character of subsidy and holding that the real test is character of
the receipt in the hands of the Assessee which has to be
determined with respect to the ‘purpose’ for which the subsidy is
given. The Apex Court thereafter held that one has to apply the
“purpose test” and the point at which the subsidy is paid becomes
irrelevant and the source is also immaterial. It is also held that
the form of subsidy is also immaterial. It is held that 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 Assessee to set up a new unit or
Page No. 22 of 36
Megha 401_itxa_505_2023_fc.docx
expand the existing unit, then the receipt of subsidy was on
capital account. Thus, the object for which the subsidy is given
determines the nature of receipt in the hands of the Assessee.
Most importantly, the Apex Court held that the form or the
mechanism through which the subsidy is paid is irrelevant.
Applying the above test, the Apex Court held that the payment
received by the Assessee therein under the scheme was not in the
course of a trade, but was of capital nature.
30. Another vital judgment on the issue which discusses
the judgments in Sahney Steel & Press Works Ltd. as well as
CIT vs. Ponni Sugars & Chemicals Ltd., is the judgment in
CIT vs. Chaphalkar Brothers (supra). In case before the Apex
Court, the Government of Maharashtra provided for exemption
from payment of entertainment duty in Multiplex Theatre
Complexes which were newly set up, for a period of three years
and thereafter scheme envisaged payment of entertainment duty
at 25% for subsequent years. The object of introducing the
scheme was to arrest the falling average occupancy in cinema
theatres and also to encourage setting up of new cinema theatres.
The assessment order held that the scheme was to support
ongoing activities of multiplex and not for its construction and
therefore treated the assistance under the scheme as revenue
receipt. The ITAT however reversed the finding of the Assessing
Officer holding that the scheme was meant to promote
construction of new multiplex cinema halls and an incentive for
construction purpose. After High Court upheld the order of ITAT,
Page No. 23 of 36
Megha 401_itxa_505_2023_fc.docx
the revenue filed appeal before the Apex Court. The Apex Court
held as under:
What is important from the ratio of this judgment in Ponni
Sugars case is the fact that Sahney Steel was followed and the
test laid down was the “purpose test”. It was specifically held
that the point of time at which the subsidy is paid is not
relevant; the source of the subsidy is immaterial; the form of
subsidy is equally immaterial.
Applying the aforesaid test contained in both Sahney Steel as well
as Ponni Sugars , we are of the view that the object, as stated in the
Statement of Objects and Reasons, of the amendment ordinance was
that since the average occupancy in cinema theatres has fallen
considerably and hardly any new theatres have been started in the
recent past, the concept of a complete family entertainment centre,
more popularly known as multiplex theatre complex, has emerged.
These complexes offer various entertainment facilities for the entire
family as a whole. It was noticed that these complexes are highly
capital intensive and their gestation period is quite long and
therefore, they need government support in the form of incentives qua
entertainment duty. It was also added that the Government with a
view to commemorate the birth centenary of late Shri V. Shantaram
decided to grant concession in entertainment duty to multiplex
theatre complexes to promote construction of new cinema houses in
the State. The aforesaid object is clear and unequivocal. The object
of the grant of the subsidy was in order that persons come
forward to construct multiplex theatre complexes, the idea
being that exemption from entertainment duty for a period of
three years and partial remission for a period of two years
should go towards helping the industry to set up such highly
capital intensive entertainment centres. This being the case, it
is difficult to accept Mr Narasimha’s argument that it is only the
immediate object and not the larger object which must be kept in
mind in that the subsidy scheme kicks in only post construction, that
is when cinema tickets are actually sold. We hasten to add that the
object of the scheme is only one–there is no larger or immediate
object. That the object is carried out in a particular manner is
irrelevant, as has been held in both Ponni Sugars and Sahney
Steel .
Mr Ganesh, learned Senior Counsel, also sought to rely upon a
judgment of the Jammu and Kashmir High Court in Shree Balaji
Alloys v. CIT [Shree Balaji Alloys v. CIT, 2011 SCC OnLine J&K 269 :
(2011) 333 ITR 335] . While considering the scheme of refund of
excise duty and interest subsidy in that case, it was held that the
scheme was capital in nature, despite the fact that the incentives
were not available unless and until commercial production hadPage No. 24 of 36
Megha 401_itxa_505_2023_fc.docxstarted, and that the incentives in the form of excise duty or interest
subsidy were not given to the assessee expressly for the purpose of
purchasing capital assets or for the purpose of purchasing machinery.
After setting out both the Supreme Court judgments referred to
hereinabove, the High Court found that the concessions were issued
in order to achieve the twin objects of acceleration of industrial
development in the State of Jammu and Kashmir and generation of
employment in the said State. Thus considered, it was obvious that
the incentives would have to be held capital and not revenue. Mr
Ganesh, learned Senior Counsel, pointed out that by an order dated
19-4-2016 [CIT v. Shree Balaji Alloys, (2018) 13 SCC 373] , this Court
stated that the issue raised in those appeals was covered, inter alia,
by the judgment in Ponni Sugars , and the appeals were, therefore,
dismissed.
We have no hesitation in holding that the finding of the Jammu and
Kashmir High Court on the facts of the incentive subsidy contained
in that case is absolutely correct. In that once the object of the
subsidy was to industrialise the State and to generate
employment in the State, the fact that the subsidy took a
particular form and the fact that it was granted only after
commencement of production would make no difference.
(emphasis and underlining added)
31. Thus, in CIT vs. Chaphalkar Brothers (supra), the
Apex Court held that the scheme was to promote construction of
new multiplexes and that therefore though the incentive was to
be provided only after actual sale of cinema tickets, the said
mechanism made no difference as the purpose still remained the
same viz. promotion of construction of new multiplexes. The
Apex Court thus held that mere form in which the incentive
under the scheme is to be ultimately paid becomes irrelevant
once the objective of the scheme is to industrialize the State.
F.2 PRINCIPLES DEDUCIBLE
Page No. 25 of 36
Megha 401_itxa_505_2023_fc.docx
32. After considering the ratio of judgments in Sahney
Steel & Press Works Ltd., CIT vs. Ponni Sugars &
Chemicals Ltd. and CIT vs. Chaphalkar Brothers following
principles are deducible:
(i) While determining the nature of receipt under a
particular incentive subsidy scheme, what needs to be
applied is “purpose test” i.e. to determine the purpose
for which the incentive is offered;
(ii) If the incentive is offered for the purpose of setting up of
new industrial unit or for expansion of existing unit, the
receipt of incentive would be on account of capital. On
the other hand, if the incentive is given for enabling the
Assessee to run business more profitably, then the
receipt would be on revenue account;
(iii) Since purpose of incentive scheme is the determinative
factor, the form or mechanism through which the
incentive is actually provided becomes irrelevant;
(iv) Even if actual payment/grant of the incentive is linked
to production or sale activity after completion of
construction of the industrial unit, the receipt of
incentive would still be on capital account so long as
purpose of grant of incentive is to promote
industrialization.
33. Having broadly discussed the conclusions deducible from
various judgments of the Apex Court it is now time to consider
Page No. 26 of 36
Megha 401_itxa_505_2023_fc.docx
the nature of schemes involved in the present appeals and to
apply above principles to the facts of the present case for
examining whether the incentive received by the Assessees is on
capital account or on revenue account?
F. 3 APPLICABLE SCHEME IN RELIANCE INDUSTRIES
34. The Government of Maharashtra, Industries, Energy
and Labour Department issued Government Resolution dated 5
January 1980 revising the package of scheme of incentives for
dispersal of industries. In order to achieve the target of dispersal
of industries out of Mumbai-Thane-Pune belt, the Government
had started giving a package of incentives comprising of refund
of sales tax, relief in electricity charges, octroi etc. to the
industrial units coming up in developing areas of the scheme
since 1964. The Government decided to revise and integrate
various schemes and to make them more broadbased and
effective so as to speed up pace of industrialisation in the
developing regions of the State. Accordingly, a Modified Package
Scheme of Incentives-1979 was introduced, which was to remain
in operation till 31 March 1983. For the purpose of
implementation of the scheme, the areas of the State of
Maharashtra were classified into Groups A, B, C and D,
depending on the extent of industrial development, Group D
representing the areas where least development had occurred.
The industrial units were categorized as existing units, new
units, pioneer units and resource-based units. The implementing
agency for the scheme was State Industrial and Investment
Page No. 27 of 36
Megha 401_itxa_505_2023_fc.docx
Corporation of Maharashtra Ltd. (SIICOM), who was
empowered to issue Certificate of Eligibility, under the Scheme.
The application for eligibility could be filed by the industrial unit
only after it had taken the initial effective steps. The major
incentives introduced by 1979 Scheme included sales tax
incentive in Part I and Part II. The incentive in Part I was by
way of exemption from payment of sales tax, whereas incentive in
Part II was in the form of interest free unsecured loan repayable
after 12 years. The incentive in Part I was available only to a
new area, which could include a new pioneer unit. The period of
eligibility was differently fixed under Part I scheme for small,
medium and large scale units.
35. Reliance Textiles Industries Ltd. made an application
on 16 December 1980 stating that it did not have any industrial
unit in Maharashtra and that it was proposing to set up a new
unit at Patalganga Industrial Area for manufacture of polyester
filament yarn. It represented that it had spent Rs.1.40 crores on
acquisition of land and its total investment towards fixed assets
for the project was in the range of Rs.1.50 crores. The expected
date of commencement of production was indicated as 31 March
1983. The aggregate cost of the project was estimated at Rs.
66.21 crores. The implementing agency (SIICOM) issued Letter
of Intent to the Assessee on 27 January 1981 showing
willingness to issue eligibility certificate under Part I of the 1979
Scheme. SIICOM issued Eligibility Certificate dated 6 June 1983
to the Assessee under Part-I of the 1979 Scheme for a period of
Page No. 28 of 36
Megha 401_itxa_505_2023_fc.docx
five years from 8 June 1983 to 7 June 1988. The capital cost of
the project was indicated in the Certificate at Rs.73.80 crores and
the entitlement for exemption under the scheme was worked out
at Rs.59.04 crores at the rate of 80% of the Gross Value of Fixed
Capital Investment. SIICOM imposed various conditions
including employment of personnel from Scheduled Castes and
Scheduled Tribes and local candidates. Later, SIICOM issued
amended certificate on 14 September 1984 increasing the
amount of exemption entitlement to Rs.79.6 crores being 80% of
enhanced capital cost of the project at Rs.99.08 crores.
36. Towards implementation of the 1979 Scheme, the State
Government adjusted the amount of incentive/subsidy payable
against the sales tax liability incurred by the Assessee after
commencement of production. Thus, instead of the State
Government actually paying the subsidy/incentive to the
industrial unit, the scheme envisaged adjustment of the
Government’s liability to pay the incentive against industrial
unit’s liability to pay sales tax on manufactured products in the
newly set up industrial unit.
F. 4. APPLICABLE SCHEME IN BAJAJ AUTO LIMITED.
37. Case of Assessee-Bajaj Auto Limited is governed by the
1983 Scheme introduced vide Government Resolution dated 4
May 1983, which again was introduced for decongesting the
industrial belt of Mumbai-Thane-Pune and to attract
Page No. 29 of 36
Megha 401_itxa_505_2023_fc.docx
industrialisation towards underdeveloped and backward areas of
the State. The 1983 Scheme was almost similar to the 1979
Scheme. The Assessee set up a new industrial unit at MIDC,
Industrial Area, Waluj, District Aurangabad for manufacture of
Scooters with capacity of three lakh per annum and involving
fixed capital investment of Rs.156.88 crores. SIICOM issued
Eligibility Certificate dated 1 February 1986 holding the
Assessee eligible for 90% of gross value of fixed capital
investment. Thus, the eligibility of the Assessee for application of
incentive scheme was determined on the basis of gross value of
fixed capital investment made for setting up of the new industrial
unit.
F. 5 APPLICATION OF PRINCIPLES TO THE INCENTIVE
GRANTED UNDER THE SCHEMES
38. The 1979 Scheme applicable in the case of the Assessee-
Reliance Industries Ltd. and 1983 Scheme applicable in the case
of Assessee-Bajaj Auto Limited were almost similar. Both the
schemes were introduced to promote industrialisation in
backward areas in Maharashtra State with a view to decongest
the industrial belt of Mumbai-Thane-Pune. The Schemes were
aimed that promoting setting up of new industries in other areas
of the State. An entity setting up a new industrial unit in
developing areas were provided incentive in the form of sales tax
subsidy under both the schemes. The eligibility of an industrial
unit was determined based on the value of fixed capital
investment made for setting up of the concerned unit. However
Page No. 30 of 36
Megha 401_itxa_505_2023_fc.docx
instead of actual payment of incentive by the Government to the
Assessees, the scheme provided for adjustment of amount of such
incentive against the liability of the Assessee to pay the sales tax
to the Government after commencement of the production.
39. In our view therefore, the incentives/subsidy granted by
the State Government under both the 1979 as well as 1983
Schemes were for the purpose of setting up of new industrial
units. The incentive/subsidy was not granted for the purpose of
enabling the Assessees to run the business more profitably. After
applying the “purpose test” it is clear that the incentive provided
to the Assessee under both the Schemes was for promoting
setting up of new industrial units in developing areas of the
State. The incentive was aimed at promoting industrialization in
the State.
40. As held by the Apex Court in CIT vs. Ponni Sugars &
Chemicals Ltd., (supra), the form or the mechanism through
which the subsidy is given is irrelevant. Similarly, it is held by
the Apex Court in CIT vs. Chaphalkar Brothers (supra) that
the factum of subsidy taking a particular form and granted only
after commencement of production, would make no difference.
Therefore, the mere fact that the amount of subsidy payable
under the scheme was adjusted against the liability of the
Assessees to pay sales tax to the Government after
commencement of production, makes no difference to the purpose
Page No. 31 of 36
Megha 401_itxa_505_2023_fc.docx
for which the incentive was granted. The incentive was not aimed
at saving the amount of sales tax on products manufactured with
a view to earn higher profits by the manufacturer. The incentive
was granted to promote setting up of the new industrial units at
backwards areas of the State. The manner of provision of
incentive by adjusting the same against sales tax liability post-
production was merely a form or the mechanism, through which
the subsidy was routed and the same has absolutely no relevance
for determining the ‘purpose’ for which the incentive was
provided.
41. ln the case of CIT vs. Chaphalkar Brothers, though
the incentive was provided for promoting construction of new
cinema halls/multiplexes, the actual incentive became payable
only on sale of tickets after the construction was complete.
Despite this, the Apex Court held that the form of payment of
incentive was irrelevant so long as the purpose of giving
incentive was to industrialize the State. Similarly in CIT vs.
Ponni Sugars & Chemicals Ltd. also, the incentive was
actually paid in the twin forms of – (i) allotting higher quota for
free sale sugar and (ii) by allowing the manufacturer to collect
excise duty on sale price of free sale sugar in excess of normal
quota but to pay Government only the excise duty payable on
price of levy sugar. The differential amount of sales tax, so
collected and retained by the manufacturer, was to be utilized for
repayment of term loan availed for setting up of new
units/expansion of existing business. Thus the incentive was
Page No. 32 of 36
Megha 401_itxa_505_2023_fc.docx
ultimately payable upon actual manufacture of sugar. Despite
this, the Apex Court held that the purpose of grant of incentive
under the scheme was to promote setting up of new units or
expansion of existing units, as the amount of subsidy was
compulsorily required to be utilised only for repayment of term
loans availed for setting up of a new units. In the present cases
as well, mere grant of incentive by adjusting the same against
Assessee’s sales tax liability upon commencement of production,
did not alter the purpose of the Scheme. In our view, the issue
involved in the present Appeals is squarely answered by the
judgments of the Apex Court in CIT vs. Ponni Sugars &
Chemicals Ltd. and CIT vs. Chaphalkar Brothers.
42. The Delhi High Court had the occasion of considering
the issue of treatment of sales tax subsidy receipt under the 1993
Scheme introduced by the Government of Maharashtra in CIT
IV vs. M/s. Indo Rama Textiles Ltd. (supra). The Division
Bench of Delhi High Court rejected the contention of the
Revenue that the sales tax subsidy/incentive was granted to
assist the Assessee in carrying of the business/operations or to
make the industry more profitable. The Division Bench held in
paragraphs 24 and 25 as under:-
24. Therefore, the argument that the sales tax
subsidy/incentive was granted to assist in carrying on business
operations and thereby help make the industries more
profitable, both on facts and in law is untenable.
Page No. 33 of 36
Megha 401_itxa_505_2023_fc.docx
25. At the risk of repetition, it must be stated that the sole
purpose of the 1993 Scheme was to set up new units and/or
expand existing units in underdeveloped and developing areas ;
an aspect which also emerges on perusal of classification of
areas given in paragraph 1.3 of the 1993 Scheme.
25.1 In the categorisation, a clear distinction has been drawn
between developed areas [Group A] and those where some
development has taken place [Group B] or are less developed
than those falling under Group B [Group C], those which are
the least developed areas of the State not covered under Group
A/ Group B/ Group C [Group D] and the areas which are least
developed lacking basic infrastructure and covered under
Group A, Group B, Group C and Group D [Group D+].
43. In fact, the very same issue arose in the case of Deputy
CIT vs. Reliance Industries Limited11 before the Special
Bench of ITAT Mumbai, which has answered the issue in
following terms:
The scheme framed by the Government of Maharashtra in
1979 and formulated by its resolution dated January 5, 1980,
has been analysed in detail by the Tribunal in its order in RIL
for the assessment year 1985-86 which we have already
referred to in extenso. On an analysis of the scheme, the
Tribunal has come to the conclusion that the thrust of the
scheme is that the assessee would become entitled for the sales
tax incentive even before the commencement of the production,
which implies that the object of the incentive is to fund a part
of the cost of the setting up of the factory in the notified
backward area. The Tribunal has, at more than one place,
stated that the thrust of the Maharashtra scheme was the
industrial development of the backward districts as well as
generation of employment thus establishing a direct nexus
with the investment in fixed capital assets. It has been found
that the entitlement of the industrial unit to claim eligibility
for the incentive arose even while the industry was in the
process of being set up. According to the Tribunal, the scheme
was oriented towards and was subservient to the investment in
fixed capital assets. The sales tax incentive was envisaged only
as an alternative to the cash disbursement and by its very
nature was to be available only after production commenced.
Thus, in effect, it was held by the Tribunal that the subsidy in
11
[2004] 88 ITD 273Page No. 34 of 36
Megha 401_itxa_505_2023_fc.docxthe form of sales tax incentive was not given to the assessee for
assisting it in carrying out the business operations. The object
of the subsidy was to encourage the setting up of industries in
the backward area.
44. The Division Bench of this Court upheld the above
findings in CIT-3 Mumbai vs. Reliance Industries Limited12
holding that object of the subsidy was to set up new unit in
backward areas to generate employment and that therefore the
subsidy was clearly on capital account. Therefore, substantial
question of law on this issue was not framed by the Division
Bench while admitting the Appeal on other questions of law. It is
contended by the Revenue that in Special Leave Petition filed by
the Revenue challenging order of the Division Bench, the Appeal
has been remanded for deciding framing of question of law on the
above issue and the matter is pending. We need not delve deeper
into this aspect as we are convinced after consideration of ratio of
various judgments as quoted above that the purpose of both the
Schemes was to promote setting up of new industries and not to
assist the Assessee to make the business more profitable.
Incentive/subsidy received under the scheme would therefore be
on capital account and not on revenue account.
G. CONCLUSION
45. Question of law No.3 in Income Tax Appeal No.156 of
2003 and both the Questions of law in Income Tax Appeal No.505
of 2003 are answered by holding that the incentive/subsidy
12
[2011] 339 ITR 632 (Bombay)
Page No. 35 of 36
Megha 401_itxa_505_2023_fc.docx
received by the Assessees under 1979 Scheme and 1983 Scheme
were on the capital account not chargeable to tax.
H. ORDER
46. Income Tax Appeal No.156 of 2003 filed by the Revenue
is accordingly dismissed. Income Tax Appeal No.505 of 2003
filed by the Assessee is accordingly allowed by setting aside the
judgment and order dated 31 December 2002 passed by the ITAT.
Consequently the orders passed by the Assessing Officer as well
as by the CIT-Appeals in respect of disallowing Appellant’s claim
in respect of incentive/subsidy received under the Scheme are set
aside and the Revenue, is directed to treat the amount of
incentive/subsidy as capital receipt not chargeable to tax.
47. With the above directions both the Appeals are
disposed of.
(SANDEEP V. MARNE, J.) (CHIEF JUSTICE)
Signed by: Megha S. Parab Page No. 36 of 36
Designation: PA To Honourable Judge
Date: 03/07/2025 16:09:03