Per R.V. Easwar, J.M. - The following question has been referred to the Special Bench by the Hon’ble President, Income Tax Appellate Tribunal, for decision :—

"Whether, on the facts and in the circumstances of the case and in law the assessee-company is justified in its claim that the Sales Tax incentive allowed to it during the previous year in terms of the relevant Government Order constitutes capital receipt and is not to be taken into account in computation of total income?"

2. The question came to be referred to the Special Bench in the following circumstances. One of the grounds of appeal in the appeal filed by the assessee in ITA No. 3890/Bom./91 for the assessment year 1986-87 is that the CIT(A) erred in "not directing the learned Dy.CIT to consider the appellant’s claim for an amount of Rs. 14,70,40,220 being the amount exempted from payment to the Government of Maharashtra as part of subsidy quantified for setting up a new Industrial Unit in the Specified Backward Area, being Patalganga at Raigad District pursuant to the eligibility certificate issued under the 1979 Scheme. The appellant submits that the said subsidy is of capital nature and is a grant which is not actually repayable by the appellant, but represents the incentives provided by the Government of Maharashtra with relation to the cost of the project". This appeal in which there were various other grounds also was consolidated with the appeal filed by the department in ITA No. 4045/Bom./91 and both the appeals were posted for hearing. At this stage, the CIT-3, Mumbai by letter dated 27-1-2003 addressed to the Hon’ble President, ITAT, made a request for constituting a Special Bench. The relevant portion of the letter is reproduced below :—

"Sub. : Request for Constitution of Special Bench - Appeal before the ITAT in the case of M/s. Reliance Industries Ltd. - Assessment year 1986-87 - reg.

Ref. : ITA Nos. 4045 and 3896/N/91

Kindly refer to above.

The revenue’s appeal in the case of M/s. Reliance Industries Ltd. for assessment year 1986-87 is pending before the Hon’ble ITAT, ‘J’ Bench, Mumbai. The main issue relates to the claim of notional sales-tax as capital receipt by the assessee company.

In terms of the Incentive Scheme the company is not required to pay sales-tax to the State Government. In the statement of computation, the assessee claims these amounts as capital receipts. For assessment years 1984-85 and 1985-86 this issue was decided by the ITAT in favour of the assessee. Against these orders the Department has filed a reference to the Bombay High Court and the same is pending.

In a recent decision in the case of M/s. Bajaj Auto Ltd. (ITR 49/Bom./91 and 1101/Bom./1991) dated 31-12-2002 the ld. ITAT ‘D’ Bench, Bombay has virtually over-ruled the decision taken by the ITAT in the case of M/s. Reliance Industries Ltd. for assessment year 1985-86.

In view of the importance of the issue and its very huge revenue implications, I, the undersigned, under the direction of CC-II, Bombay request you to kindly consider constituting a Special Bench for hearing the appeal in the case of M/s. Reliance Industries Ltd. for assessment year 1986-87, considering the decision in the case of M/s. Bajaj Auto Ltd., over-ruling the view taken in the case of the assessee for assessment year 1985-86. The case is posted for hearing on 4-3-2003."

The Hon’ble President, accepting the request, was pleased to constitute a Special Bench to decide the question which has been reproduced above.

3. Before deciding the question, it is necessary to refer to certain facts constituting the background of the matter. We are concerned with the assessment year 1986-87. The assessee is a company deriving income from the manufacture of yarn, synthetic fabrics, etc. During the year, the assessee also commenced manufacture of polyester staple fibre in its unit in Patalganga. In the return of income filed by the assessee for the year under consideration, a copy of which is at pages 47 to 57 of the ass