The court determined that the purpose of the subsidy and the flexibility of its use by the assessees indicated that the subsidy was revenue in nature, not a capital receipt.

S. RAVINDRA BHAT, J.

1. The following common question arises in these batch of nine appeals arising from orders of the Income Tax Appellate Tribunal (“ITAT”) hereafter:

“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?”

2. The main order- in the case of the assessee/respondent, Bhushan Steel, was made for AY 1995-96 and was followed in all succeeding assessment years; the same is the case with the appeals relating to the other assessee, M/s. Vardhman Industries Ltd. [hereafter “Vardhman”] – where the ITAT followed its decision in M/s. Bhushan Steels and Strips Ltd. [hereafter “Bhushan”] appeals. For the purpose of easy reference and convenience, the facts which are stated comprehensively in Bhushan’s case (and which includes the relevant parts of the same industrial policy of the State of UP for 1990 as amended in 1991) are discussed from appeals arising out of the first order for AY 1995-96 (in Bhushan’s case).

3. Bhushan was running the business of manufacture of cold rolled/galvanized steel strips and sheets etc. Its two units, namely, cold rolling, coal units and galvanized unit was located at Sahibabad (Distt. Ghaziabad – UP). The area was noticed as a “backward” area. The assessees Bhushan and Vardhman, claimed that in terms of Notification No.ST-2-7558/X- 1981-UP Act-XV/48-Order 85 dated 26.12.1983, the UP Government, in exercise of powers under Section 4-A of the UP Sales Tax Act, 1948 read with Section 221 of UP General Clauses Act, 1904 granted exemption from payment of the sales tax 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. It was stated, by both assessees, that new units went into production on and w.e.f. 01.04.1990; the eligibility certificate in respect of these units effective from 07.03.1990 was issued by the Industries Department on 03.07.1992. In the batch of cases relating to the assessee Vardhman, the existing unit was expanded through a ghee manufacturing unit at Chhutmalpur, District Saharanpur, which commenced production on 20.09.1994. The assessees claimed that in terms of Notification No.STs.T.2-1093/11-7(42)/86-UP-Act-XV-48 Order-91 dated 27.07.1991 issued by the Government in exercise of powers under Section 4-A of UP Sales Tax Act read with Rule 25 of the UP Sales Tax Rules, certain exemption of sales-tax was granted to the industries set up in the specified backward area. Bhushan’s galvanizing unit started production in January 1994, the eligibility certificate in respect of this unit was issued by the Industries Department effective from 19.01.1994. The exemption in terms of the notification dated 27.07.1991, in respect of the galvanizing unit was available up to a period of 8 years based in fixed capital investment.

4. As the units were located at Sahibabad (Dist. Ghaziabad and Saharanpur,) which was such a specified area, while filing the return of income, the grant of exemption given by the State Government through the said notifications with the object of promotion and development of industries was claimed by Vardhman. In Bhushan’s case, it was not taken into consideration at the time of filing the original return, notwithstanding the fact that the subsidy allowed in the form of exemption was in the nature of a capital grant according to it. However, subsequently, Bhushan revised its return of income claiming that such amount of sales tax was in the nature of capital subsidy. Such amount was Rs.7,27,71,570/-. During the course of assessment proceedings, the assessee also relied on decisions of the Andhra Pradesh High Court (in Commissioner of Income Tax v Godavari Plywoods 168 ITR 632); Bomb