S. 4 : Charge of income-tax-Capital or revenue-Sales Tax Incentive- Purpose test-Incentive for setting up industrial unit in backward area- Sales tax incentive under 1979 and 1983 Schemes is capital receipt, not chargeable to tax. [S. 28(i), 43B, 1979 Scheme, 1983 Scheme]
For the assessment year 1987–88, Bajaj Auto Ltd. set up a new industrial unit in Waluj, Aurangabad, a backward area designated by the Maharashtra Government. To promote industrial growth in such regions, the State had introduced the 1983 Sales Tax Incentive Scheme, offering eligible businesses either a sales tax exemption or deferral. Bajaj Auto chose the exemption and received an eligibility certificate from SIICOM, granting it benefits worth Rs.31.56 crores for a three-year period starting 1 February 1986. In its tax return, the company treated the incentive as a capital receipt, arguing it subsidized the cost of setting up the unit and was not taxable. However, the Assessing Officer treated it as a revenue receipt, as it became applicable only after production began. This view was upheld by the CIT(A), and although the ITAT provided partial relief, it maintained the incentive was taxable. Bajaj Auto subsequently appealed to the Bombay High Court under Section 260A of the Income Tax Act, 1961. The Bombay High Court allowed Bajaj Auto’s appeal, holding that the sales tax exemption received under the state’s incentive scheme qualified as a capital receipt and was not subject to income tax. The Court relied on the “purpose test” established by the Supreme Court in cases in Sahney Steel and Press Works Ltd (1997) 228 ITR 253 (SC), CIT v. Ponni Sugars and Chemicals Ltd (2008) 174 Taxman 87 /306 ITR 392 (SC) and CIT v. Chaphalkar Brothers ( 2018) 400 ITR 279 / 252 Taxman 360 ( SC) stating that the key to determining the nature of a subsidy lies in its purpose. Since the scheme aimed to promote industrial development in backward areas by supporting the setup of new units, the Court concluded that the incentive was capital in nature, regardless of how or when it was disbursed. Applying the purpose test, the Court found that the 1983 Sales Tax Incentive Scheme was primarily aimed at encouraging industrial development in underdeveloped regions of Maharashtra by promoting capital investment. The Court ruled that although the sales tax exemption was granted after production began, its true purpose was to support the establishment of new industrial units, not regular business operations. Therefore, the method of benefit delivery didn’t alter its nature as a capital receipt. Citing Supreme Court precedents, the Court held that such subsidies tied to starting production qualify as capital receipts. Accordingly, Bajaj Auto’s Rs.31.56 crore sales tax incentive was deemed a capital receipt and not taxable income. (ITA No.505 of 2003 dt.3-7-2025, ITA No. 156 of 2003, dt.3-7-2025) (AY. 1987 -88)
Bajaj Auto Ltd. v. Dy. CIT (Bom)(HC) www.itatonline.org
CIT v. Reliance Industries Ltd. (Bom.)(HC) www.itatonline.org
[Coram : Hon’ble The Chief Justice Alok Aradhe & Hon’ble Shri Justice Sandeep V. Marne]