Bombay Bajaj Auto Ltd. Case: Sales Tax Incentive Capital Receipt Decision

Issue:

In Bombay Bajaj Auto Ltd. vs Deputy Commissioner of Income-tax, the key question was about the sales tax incentive under a State Government scheme. The issue was whether it should be treated as a capital receipt, exempt from income tax, or as revenue, liable to taxation. This case clarifies the difference between incentives for day-to-day business operations and those for capital investment.

Facts:

The facts of the Bombay Bajaj Auto Ltd. sales tax incentive case are as follows:

(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.

(d) The Assessee filed its return of income treating the sales tax incentive as capital receipt.

(e) The Assessing Officer held that incentive was granted to assist Assessee in carrying on its business operations and, thus, same was to be treated as revenue receipt.

(f) On Appeal to Commissioner (Appeals), held that the incentive should be treated as revenue receipt liable to income tax.

(g) On further appeal, the Tribunal directed treatment of incentives received under sales tax scheme as capital receipt not liable to payment of income tax.

Decision:

Appeal filed under Section 260A of the Income Tax Act,1961, (the Act) for the above matter by the revenue to the High Court.

For determining nature of receipt under a particular incentive subsidy scheme, what needs to be applied is ‘purpose test’ i.e. to determine purpose for which incentive is offered; if incentive is offered for purpose of setting up of new industrial unit or for expansion of existing unit, receipt of incentive would be on account of capital, on other hand, if incentive is given for enabling assessee to run business more profitably, then receipt would be on revenue account.

In this case, Maharashtra State Government introduced a scheme for encouraging setting up of industries in specified backward areas of State by providing sales tax incentives. The Assessee set up a new manufacturing unit in such notified area and received incentive under said scheme. The Assessee was allowed adjustment of amount of sales tax incentives against its liability to pay sales tax to Maharashtra State Government after commencement of production. ensuring proper recording in line with corporate tax compliance practices.

Given the above, the purpose of the scheme was to promote setting up of new industrial units and not to assist assessee to make business more profitable. Proper transaction testing services help organizations ensure that such incentives are accurately recorded under capital accounts. It has been held that the revenue’s appeal is dismissed. Consequently, the orders passed by the Assessing Officer as well as by the Commissioner (Appeals) in respect of disallowing Appellant’s claim in respect of incentive/subsidy received under the Scheme are set aside.