COMMISSIONER OF INCOME TAX-III vs NIRMA LTD

C/TAXAP/230/2010 JUDGMENT DATED: 15/10/2026
(GJHC240460312010)
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 230 of 2010

FOR APPROVAL AND SIGNATURE:


HONOURABLE MR. JUSTICE BHARGAV D. KARIA

and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

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Approved for Reporting Yes No
✓
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COMMISSIONER OF INCOME TAX-III
Versus
NIRMA LTD
==========================================================
Appearance:
MS MAITHILI D MEHTA(3206) for the Appellant(s) No. 1
MR SN SOPARKAR WITH MR BS SOPARKAR FOR MRS SWATI
SOPARKAR(870) for the Opponent(s) No. 1
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CORAM: HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRZAR S. DESAI

Date : 15/10/2026

JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1.Heard learned Senior Standing Counsel Ms.
Maithili D. Mehta for the appellant and
learned Senior Advocate Mr. S.N. Soparkar
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with learned advocate Mr. B.S. Soparkar for
the respondent.
2.This Tax Appeal is filed by the Revenue under
section 260A of the Income Tax Act, 1961 (For
short “the Act”) against the judgment and
order dated 13.07.2009 passed by the Income
Tax Appellate Tribunal, “A” Bench, Ahmedabad
(For short “the Tribunal”) in ITA No.
1245/Ahd/2006 for Assessment Year 2002-2003.
Tax Appeal was admitted by this Court vide
order dated 04.07.2011 raising the following
substantial questions of law:
"[A] Whether the Appellate Tribunal
is right in law and on facts in
reversing the order passed by CIT(A)
and thereby deleting the
disallowance of Rs.40,72,70,261/-
being interest relating to Deep
Discount Bonds (DDBs)- Series A & B?
[B] Whether the Appellate Tribunal
is right in law and on facts in
reversing the order passed by CIT(A)
and thereby holding that amount of
Sales-tax incentive received by the
assessee is a capital receipt?
[C] Whether on the facts and in the
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circumstances of the case, the
Appellate Tribunal is justified in
holding that the 'total turnover'
for the purposes of deduction u/s.
80HHC will not include Sales Tax and
Excise Duty even after insertion of
section 145A?
[D] Whether the Appellate Tribunal
is right in law and on facts in
directing to exclude 90% of the net
interest from the profits of the
business for the purpose of
computation of deduction u/s.80HHC
of the Act?"
3.So far as question no.(A) is concerned, same
is answered in favour of the assessee and
against the Revenue in view of order of even
date passed in Tax Appeal No.209/2010 by this
Court.
4.So far as questions (B), (C) and (D) are
concerned, the issue is no more res integra
in view of decision of this Court in case of
the assessee in Tax Appeal No.226 of 2010 and
allied matters wherein it is held in favour
of the assessee by the Court as under:
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“7. So far as second issued as to
Whether the Appellate Tribunal was
right in law and on facts in
upholding the decision of the CIT
(A) and in directing the Assessing
Officer to consider the Sales-tax
exemption benefit of
Rs.5,45,81,171/- as capital receipts
is concerned, Mr.Mehta contended
that in view of the decision of the
Calcutta and Punjab High Court, the
Tribunal has committed an error in
reversing the view taken by CIT
(Appeals) so far as Tax Appeal
No.226 of 2010 is concerned, wherein
the CIT (A), after discussing the
evidence has held in favour of the
department. In this regard, he has
relied upon the decision of High
Court of Bombay in the case of
Commissioner of Income Tax v.
Reliance Industries Ltd., (2011) 339
ITR 0632, wherein it is held that
object of subsidy being to set up
new units in backward area is a
capital receipt and another decision
of High Court of Calcutta in the
case of Commissioner of Income Tax
v. Chhindwara Fuels, 245 ITR 0009,
wherein it is held that subsidy in
the form of refund of sales-tax
received after commencement of
production cannot be treated as
capital receipt.
8. On the other hand, Mr.Soparkar,
learned counsel appearing for the
respondent contended that so far as
Tax Appeal No.226 of 2010 is
concerned, after discussing the
evidence on record, the Tribunal has
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followed earlier decision and
discussed the issue in detail in
para 54 and 55 of its decision,
which reads as under:-
“54. Per contra, the learned
D.R. Supported the orders passed
by the Assessing Officer and the
learned CIT (A). Referring to
the judgment in Sahney Steel and
Press Works Limited v. CIT, 228
ITR 253 (SC), he submitted that
the impugned sales tax exemption
increased the profits of the
assessee by eliminating the
expenses which the assessee
would have had to incur later
and therefore the impugned
receipts were in the revenue
field. He also referred to
Explanation (10) to Section 43
(1) of the Income Tax Act
inserted in with effect from
01/04/99 to emphasise that the
action of the assessee in not
reducing the cost of assets by
the amount of subsidy for
working out the Written Down
Value was indicative of the fact
that the impugned receipts were
not in the nature of capital
receipts.
55. We have heard both the
parties and considered their
rival submissions. Perusal of
the scheme extending the
aforesaid incentives to
“prestigious” units announced by
Government of Gujarat on
26/07/91 makes it amply clear
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that the scheme was announced to
attract investment in core
sector industry having
potential, to spur industrial
growth in ancillary, tertiary
and secondary sector of the
economy. The other scheme
announced by the Government of
Gujarat as Capital Investment
Incentive Scheme on 11th
September 1995 was intended to
attract investments to generate
greater employment in less
industrially developed areas of
Gujarat and also to secure
balanced development of
industries in Gujarat through
dispersal of industries in the
most backward area and backward
areas. It is thus clear that the
object of both the scheme was to
ensure development of backward
areas or for development of core
sector industries in the State
or for generating the
employment. Perusal of both the
schemes shows that the
incentives extended to the
eligible units were, inter alia,
through exemption from payment
of Sales Tax. Thus, the object
of both the schemes was to
attract capital investment to
ensure development of backward
areas and the modality or
mechanism chosen to attract such
investment was, inter alia,
through exemption from payment
of sales tax.”
9. He further contended that in view
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of decisions of this Court in
Commissioner of Income-tax v. Birla
VXL Ltd. reported in (2013) 32
Taxmann.com 330 (Gujarat) and in
Deputy Commissioner of Income-tax v.
Munjal Auto Industries Ltd. reported
in (2013) 37 Taxmann.com 115
(Gujarat) the issue is squarely
covered and the decisions which are
sought to be relied upon by learned
advocate for the appellant are not
applicable in the facts of the
present case. In the case of
Commissioner of Income-tax v. Birla
VXL Ltd. (supra), this Court has
observed as under:-
“12. It can thus be straightaway
seen that the benefit, though
computed in terms of the Sales
Tax liability in the hands of
the recipient, the same was not
mean to give any benefit on day-
to-day functioning of the
business, or for making the
industry more profitable. The
principle aim of the scheme was
to cover the capital outlay
already made by the assessee in
undertaking special
modernization of its existing
industry.
13. In a recent decision dated
28th January 2013 in Tax Appeal
No. 450 of 2012 and connected
appeals, we had an occasion to
examine the nature of incentives
received by the assessee from
the State Government in the form
of entertaining tax waiver for
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setting up multiplexes. In such
context, we had in wake of the
revenues contention that the
receipt was revenue in nature,
held and observed as under :
”From the provisions of the
said scheme, it clearly
emerges that the subsidy
though computed in terms of
sales tax deferment or
waiver, in essence it was
meant for capital outlay
expended by the assessee for
set up of the unit in case
of a new industrial unit and
for expansion and
diversification of an
existing unit. As noted,
such subsidy was available
only to a new industrial
unit or a unit undertaking
expansion or
diversification. Fixed
capital investment has been
defined as to include
various investments in land
under use, new construction,
plant and machinery etc. The
entitlement was related to
percentage of fixed capital
investment. It is
undoubtedly true that such
subsidy was computed in
terms of sales tax deferment
and necessarily therefore,
would accrue to an industry
only once the commercial
production commences.
However, this by itself
would not be either a sole
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or concluding factor. In
case of Sahney Steel and
Press Works Ltd. and others
v. Commissioner of Income-
tax reported in 228 ITR 253,
the Apex Court held and
observed that the character
of the subsidy in the hands
of the recipient whether
revenue or capital will have
to be determined, having
regard to the purpose for
which the subsidy is given.
The source of fund is quite
immaterial. If the purpose
is to help the assessee to
set up its business or
complete a project the
monies must be treated as
having been received for
capital purposes. But, if
monies are given to the
assessee for assisting him
in carrying out the business
operations and given after
the satisfaction of the
conditions of commencement
of production, such subsidy
must be treated as
assistance for the purpose
of the trade.”
14. In the result, we do not
find that the Tribunal has
committed any error. No question
of law, therefore, arises. Tax
Appeals are therefore
dismissed.”
10. In the case of Deputy
Commissioner of Income-tax v. Munjal
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Auto Industries Ltd. (supra), this
Court has observed as under:-
“7. From the provisions of the
said scheme, it clearly emerges
that the subsidy though computed
in terms of sales tax deferment
or waiver, in essence it was
meant for capital outlay
expended by the assessee for set
up of the unit in case of a new
industrial unit and for
expansion and diversification of
an existing unit. As noted, such
subsidy was available only to a
new industrial unit or a unit
undertaking expansion or
diversification. Fixed capital
investment has been defined as
to include various investments
in land under use, new
construction, plant and
machinery etc. The entitlement
was related to percentage of
fixed capital investment.
8. It is undoubtedly true that
such subsidy was computed in
terms of sales tax deferment and
necessarily therefore, would
accrue to an industry only once
the commercial production
commences. However, this by
itself would not be either a
sole or concluding factor. In
case of Sahney Steel and Press
Works Ltd. and others v.
Commissioner of Income-tax
reported in 228 ITR 253, the
Apex Court held and observed
that the character of the
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subsidy in the hands of the
recipient whether revenue or
capital will have to be
determined, having regard to the
purpose for which the subsidy is
given. The source of find is
quite immaterial. If the purpose
is to help the assessee to set
up its business or complete a
project the monies must be
treated as having been received
for capital purposes. Such But
if monies are given to the
assessee for assisting him in
carrying out the business
operations and given after the
satisfaction of the conditions
of commencement of production,
such subsidy must be treated as
assistance for the purpose of
the trade.”
11. He also submitted that in view of
above decisions, these appeals may not
be entertained.
12. We have heard both the learned
counsel and perused the record. We have
also gone through the decisions cited
before us. After considering the
material on record, we are of the view
that the issues involved in these
appeals are squarely covered by the
decisions of this Court in Commissioner
of Income- tax v. Birla VXL Ltd.
reported in (2013) 32 Taxmann.com 330
(Gujarat) and in Deputy Commissioner of
Income-tax v. Munjal Auto Industries
Ltd. reported in (2013) 37 Taxmann.com
115 (Gujarat). Therefore, the questions
of law posed for our consideration in
these appeals are answered in favour of
the assessee and against the
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department. Accordingly, all these
appeals are dismissed.”
5.In view of above dictum of law, questions(B)
(C) and (D) are answered in favour of the
assessee and against the Revenue.
6.Tax Appeal is accordingly dismissed.

(BHARGAV D. KARIA, J)
(NIRZAR S. DESAI,J)
RAGHUNATH R NAIR
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