June 11, 2018

TaxBuzz - Sales tax incentive/subsidy from Haryana Government - ‘capital’ in nature

Recently, the Hon’ble Supreme Court vide order dated 8.05.2018[1] dismissed the appeals preferred by the Revenue against the judgment of the Gujarat High Court[2] holding subsidy availed in form of concession/ deferment in sales tax under the scheme framed by the Government of Haryana to be in the nature of a capital receipt, not liable to tax.
Brief facts and background:-
  • The assessee (Munjal Auto Industries Ltd.) received subsidy in form of concession/ deferment in sales tax, under the scheme framed by the Government of Haryana through Chapter IV-C of Haryana General Sales Tax Rules, 1975 (‘the Scheme’). Under the Scheme, benefit was available to a new industrial unit or a unit undertaking ‘expansion’ and holding a valid entitlement certificate. The Scheme prescribed different rates of concession on the basis of fixed capital investment (eg. For Category A- concession was prescribed @ 125% of fixed capital investment to be availed within 9 years). The concession was computed on the sale of goods manufactured by such unit and could be availed post commencement of production.
  • The assessing officer treated the aforesaid subsidy as revenue receipt primarily on the ground that the amount of incentive was received with reference to the sales made after setting up/ expansion of the unit. The Tribunal, applying the ratio laid down in the case of Ponni Sugars[3] held that the aforesaid subsidy to be capital in nature, which was challenged by the Revenue before the Gujarat High Court.
Decision of the Gujarat High Court2:
  • The Court observed that if the purpose of the Scheme is to help the assessee in setting up its business or complete a project, the subsidy/ monies must be treated as having been received for capital purposes and if benefit is extended for assisting the business operations, the same are to be treated as revenue receipts.
  • The Court held that the Scheme clearly provide that subsidy, though computed in terms of sales tax deferment or waiver, was in essence meant for the capital outlay expended by assessee: (i) in setting up of a unit in case of a new industrial unit; and (ii) for expansion and diversification of an existing unit. The subsidy received was thus held to be capital in nature.
  • The Court, referring to the decision in the case of Ponni Sugars4, reiterated the principle that the form and mechanism in which subsidy is granted is irrelevant. The Court further held that since subsidy was computed in terms of sales tax deferment, the same would necessarily accrue only once the commercial production commences and hence dismissed the contention of the Revenue that since the subsidy was received after the start of commercial production, the same constituted revenue receipt.
  • Aforesaid decision was challenged by the Department before the apex Court:
Decision of the Supreme Court
  • The Supreme Court dismissed the appeals filed by the Revenue, following its judgment in the case of Chaphalkar Brothers[4].
  • In the case of Chaphalkar Brothers, the Court, while confirming the decision of the Bombay High Court[5], held that where the object of the entertainment tax subsidy/ exemption granted by the State Government was to encourage development of Multiple Theatre Complexes, incentive was capital in nature.
VA Comments:
  • Despite fundamental “purpose test” having been laid down in various decisions[6] of the apex Court, the issue of taxability of subsidy has been a subject matter of protracted legal debate/ dispute.
  • The apex Court has repeatedly held that the taxability of the receipt/ benefit by way of subsidy essentially boils down to the “character”/ “purpose” for which thesubsidy is granted. If the grant of subsidy is for industrialization, promotion of a particular sector/ industry, industrial development, public welfare, for meeting the capital expenditure and to encourage development and employment generation, the same would be in the nature of a capital receipt not liable to tax. On the other hand, if the subsidy is granted to supplement trading receipts/profits, the subsidy is taxable as revenue receipt.
All other factors like the manner of giving the incentive (whether it be linked to purchase of a capital asset like machinery, etc., or to purchase of a circulating asset like raw material or by way of sales tax exemption/ rebate, etc.), the time of giving the incentive (whether prior to start of operations or after that date) and the source of the subsidy are, it has been repeatedly held, totally irrelevant.
  • In the recent decision in the case of Chaphalkar Brothers (supra) the Supreme Court clarified that the fact that the subsidy is not tied up with any loan/ finance and is not required to be utilized for repayment of loans, is immaterial. In Munjal Auto, the apex Court reiterated the aforesaid legal position.
  • The recent decision in the case of Munjal Auto assumes significance since it is the first decision of the apex Court in the context of Scheme floated by the Haryana Government. Accordingly, the said decision may be useful for various companies/ assessee/ industries availing benefit/ subsidy from the Haryana Government.
For any details and clarifications, please feel free to write to:
Mr. Rohit Jain[email protected]
Mr. Deepesh Jain[email protected]

[1] DCIT v. Munjal Auto Industries Ltd. (Civil Appeal No. 6226 of 2013) (SC) dated 8.5.2018
[2] DCIT v. Munjal Auto Industries Ltd. : 218 Taxman 135 (Guj.)
[3] CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87
[4] CIT v. Chaphalkar Brothers Pune: 400 ITR 279 (SC) dated 7.12.2017
[5] CIT V. Chaphalkar Brothers: 351 ITR 309 (Bom)
[6] Sahney Steel & Press Works Ltd. v. CIT: 228 ITR 253 (SC); CIT v. Ponni Sugars & Chemicals Ltd. 306 ITR 392 (SC); V.S. S.V. Meenakshi Achi: 60 ITR 253 (SC); CIT v. Chaphalkar Brothers Pune: 400 ITR 279 (SC)