Sales tax allowed to be retained for production in backward area held revenue receipt-High Court

Sales tax allowed to be retained for production in backward area held revenue receipt in the absence of any condition towards capital utilization-Delhi High Court

ABCAUS Case Law Citation:
ABCAUS 1292 (2017) (07) HC

The Question framed for determination:
Whether the ITAT was correct in law in holding that the amount received by the assessee by way of exemption of sales tax payments was not a trading receipt but was a capital receipt, hence not liable to tax?

Important Case Laws Cited/relied upon:
Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax: 1997 (228) ITR 253(SC)
Commissioner of Income Tax v. Ponni Sugars & Chemicals [2008] 306 ITR 392 (SC)

Grounds raised by the appellant Revenue:
The revenue in its appeal argues that the source of the funds and the manner it is collected from the public and also permitted to be retained by the assessee is immaterial for determination as to whether in the hands of the tax payer, it is a capital or revenue receipt.

It was submitted that in the present case the encouragement to enterprises through the incentive granted by the scheme was to set up a new business or expanding it in the backward area concerned. It no way conditioned the enterprise, to recoup the capital. The expansion of the unit meant that the expenditure had to be incurred by the assessee in this case. It was only thereafter that upon production and sale of goods that sales tax liability arose, which was suspended by the scheme (which permitted the assessee to collect the amounts though not pass it on to the revenue). The form of the subsidy was collection as tax with permission of the State to retain the amount. The purpose of the subsidy, therefore, clearly was revenue augmentation to ensure greater profitability and economic viability in the particular backward area of Uttar Pradesh aimed at greater growth and higher levels of employment. Therefore, the impugned decision is clearly contrary to law.

Brief Facts of the Case:
The UP Government under UP Sales Tax Act, 1948 read with Section 221 of UP General Clauses Act, 1904 granted exemption from payment of the sales tax collected in respect of any goods manufactured in an industrial unit which is a new unit located in a specified backward area, and that such exemption was allowed for a period of six years. 

The respondent companies, in their income tax returns  had claimed that such amount of sales tax was in the nature of capital subsidy and not revenue receipt. However the However, the assessee’s claim was not accepted by the Assessing Officer (‘AO’). 

On appeal, the CIT(A) allowed the assessee’s claim. The CIT(A) held that the amount of sales tax collected as incentive for setting up industries in backward areas was not subject to tax as a trading receipt; but rather was to be towards establishment of the new unit and to buy machinery. The revenue’s appeal before the ITAT was dismissed. 

Observations made by the High Court:
The Hon’ble High Court observed that the object of providing subsidy by way of permission to not deposit amounts collected (as sales tax liability) which meant that the customer or servicer user concerned had to pay sales tax, but at the same time, the collector (i.e. the assessee) could retain the amount so collected, undoubtedly was to achieve the larger goal of industrialization.

The Hon’ble High Court noted that the relevant notification of the State Government merely stated that the collection could be retained to the extent of 100% of capital expenditure. The Court opined that whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit, but also implying an underlying intention that the capital expenditure would thereby be recouped, however, in the absence of any such condition it restrained from concluding so.

The Hon’ble High Court opined that the absence of any condition towards capital utilization would meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the state, ensuring greater employment. Thus clearly, the subsidy was revenue in nature.

Held:
The common question of law, was answered in favour of the revenue and against the assessees.