The classification of sales tax incentives under state schemes hinges on the purpose of the subsidy, determining whether they constitute capital or revenue receipts.

JUDGMENT :

SANDEEP V. MARNE, J.

A. THE CHALLENGE

1. These Appeals, filed under Section 260A of the INCOME TAX ACT ,1961, (the Act) raise a common question of law as to whether an incentive received in sales tax liability under a Scheme formulated by the State Government would be on capital account, exempt to taxation, or on revenue account, liable for taxation. The State Government had introduced schemes from time to time for encouraging setting up of industries in specified backward areas of the State, by providing sales tax incentives. In Income Tax Appeal No.156 of 2003 filed by the Revenue, the Income Tax Appellate Tribunal (ITAT) has treated the amount received towards such incentive to be capital receipt, exempt from taxation, whereas in Income Tax Appeal No.505 of 2003 filed by the Assessee, the amount forming part of similar incentive is treated as revenue receipt, liable for taxation.

2. Income Tax Appeal No.156 of 2003 is filed by the Revenue challenging judgment and order dated 25 July 2002 passed by the ITAT allowing the Appeal preferred by the Assessee-Reliance Industries Ltd. relating to Assessment Year 1985-86 and setting aside the assessment order by directing the Assessing Officer to treat the amount received under sales tax incentive scheme as capital receipt in the hands of the Assessee and to exclude the same from the title ‘income chargeable to tax’.

3. Income Tax Appeal No.505 of 2003 is filed by the Assessee-Bajaj Auto Ltd. challenging the judgment and order dated 31 December 2002 passed by the ITAT partly dismissing its Appeal in respect of assessment year 1987-88 and upholding the order of Commissioner of Income Tax-Appeals (CIT(A)) to the extent of treatment of sales tax incentives as revenue receipt and not as capital receipt.

B. SUBSTANTIAL QUESTIONS OF LAW FORMULATED

4. Appeal No.156 of 2003 filed by the Revenue has been admitted by order dated 11 October 2004 on following substantial questions of law:

(i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in directing to capitalize the expenses incurred on account of foreign exchange fluctuation and interest thereon in respect of foreign currency loans availed by the assessee, although out of the total amount directed to be capitalized an amount of Rs.82,77,221/- represented interest accrued but no payment was made during the year?

(ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding and allowing assessee’s claim for deduction of entire amount of ‘Traveling Expenses’ on account of foreign travel by company executives accompanied by spouses, although there was no material on record to show that visit of the spouses was necessary in order to facilitated negotiation at top level with foreign corporation?

(iii) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding allowing assessee’s claim for deduction as in respect of notional sales tax liability holding it as capital subsidy?

(iv) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenses incurred on the maintenance of guest house and depreciation will not be covered within the mischief of section 37(4) of the I.T. Act.

5. Income Tax Appeal No.505 of 2003 has been admitted on 19 October 2004 on following substantial questions of law:-

(i) Whether on the facts and in the circumstances of the case and in law, the ITAT was justified in treating an amount of Rs.31,56,48,643/-, being the amount of sales-tax exempted from payment under the Scheme of incentives to the Government of Maharashtra for setting up a new industrial unit in the specified backward area at Waluj, Aurangabad as trading receipt, chargeable