Gujarat HC Upholds Nirma’s Sales-Tax Incentive As A Capital Receipt, Dismisses Revenue Appeal

The Revenue appealed under Section 260A of the Income Tax Act, 1961, against the ITAT Ahmedabad’s order dated 13 July 2009 concerning Assessment Year 2002–03.

The appeal challenged the Tribunal’s treatment of interest on Deep Discount Bonds, sales-tax incentives, sales tax and excise duty in “total turnover” for Section 80HHC, and net interest in computing business profits under Section 80HHC.

The appeal was admitted on four substantial questions of law.

1. Whether the Tribunal erred in deleting the disallowance of ₹40,72,70,261 relating to interest on Deep Discount Bonds, Series A and B

2. Whether the Tribunal was correct in treating the sales-tax incentive received by the assessee as a capital receipt

3. Whether sales tax and excise duty were to be excluded from “total turnover” for Section 80HHC notwithstanding the insertion of Section 145A

4. Whether 90% of net interest was to be excluded from business profits for computing the deduction under Section 80HHC

Section 260A provides for an appeal to the High Court on a substantial question of law; Sections 80HHC and 145A were relevant to the turnover and interest-computation questions.

For determining whether a subsidy or incentive is capital or revenue in nature, the governing principle is to examine its purpose: the source and mode of payment are not decisive, and the fact that an incentive becomes available after production begins is not, by itself, conclusive.

An incentive directed towards setting up, expanding, modernising, or developing an industrial unit may be capital in nature, as reflected in Sahney Steel and Press Works Ltd. v. CIT, 228 ITR 253 (SC), and the Gujarat High Court decisions in CIT v. Birla VXL Ltd., (2013) 32 Taxmann.com 330 (Guj), and DCIT v. Munjal Auto Industries Ltd., (2013) 37 Taxmann.com 115 (Guj).

On the Deep Discount Bond interest issue, the Court followed its decision of the same date in Tax Appeal No. 209 of 2010 and answered the question for the assessee.

For the remaining questions, it held that the issues were covered by its decision in Tax Appeal No. 226 of 2010 and allied matters.

In that decision, the Tribunal’s findings on the sales-tax schemes showed that the incentives were intended to attract capital investment, develop backward areas or core-sector industries, and generate employment; the Court therefore treated the incentives as capital receipts under the purpose-based test.

The Court applied that decision to the turnover and net-interest questions as well, without separately restating their detailed reasoning.

It accordingly dismissed the Tax Appeal.