Focus Product Scheme Incentives Are Capital Receipts, Not Taxable Income : ITAT Delhi

The Income Tax Appellate Tribunal, Delhi Bench 'B', has clarified that export incentives received under the Focus Product Scheme (FPS) constitute capital receipts and are not taxable as income under the Income Tax Act, 1961. This ruling resolves a recurring dispute in export-oriented industries and aligns with established judicial principles on the nature of government subsidies.

Background & Facts

The Dispute

The appellant, M/s Bharat Rasayan Ltd., a private limited company engaged in the manufacturing of agrochemicals and technical grade pesticides, claimed an export incentive of Rs. 31,68,529/- received under the Focus Product Scheme (FPS) during Assessment Year (A.Y.) 2013-14. The company contended that this incentive was a capital receipt, not revenue income, and therefore should not be included in its taxable income under normal provisions or in the computation of book profit under Section 115JB of the Act.

Key Facts

• The assessee filed its original return for A.Y. 2013-14 on 27.09.2013, declaring a loss of Rs. 2,43,85,120/- and short-term capital gains of Rs. 47,531/- under normal provisions, and a book profit of Rs. 14,11,08,823/- under Section 115JB.
• During assessment proceedings, the assessee submitted a letter dated 15.12.2016, along with a copy of the Focus Market Scheme, to claim the FPS incentive as a capital receipt.
• The Assessing Officer (AO) rejected the claim on the ground that it was not raised in the original or revised return, relying on the Supreme Court’s decision in Goetze India Ltd. v. CIT (284 ITR 323).
• The AO completed the assessment under Section 143(3) on 23.12.2016, disallowing the claim and including the incentive in taxable income.
• The assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], which was dismissed on 30.08.2025.
• The assessee then filed the present appeal before the Income Tax Appellate Tribunal (ITAT).

Procedural History

• 27.09.2013: Original return filed for A.Y. 2013-14
• 15.12.2016: Additional claim submitted during assessment proceedings
• 23.12.2016: Assessment order passed by AO under Section 143(3)
• 30.08.2025: CIT(A) dismissed the appeal
• 06.04.2026: Hearing held before ITAT Delhi
• 22.04.2026: Judgment pronounced by ITAT Delhi

The Parties' Positions

For the Appellant

The appellant argued that:

• The FPS incentive was granted by the Government of India under the Foreign Trade Policy to encourage exporters to explore new international markets, not to augment regular business profits.
• The nature of the incentive was akin to a subsidy for market expansion, which the Supreme Court in Ponni Sugars & Chemicals Ltd. v. CIT (306 ITR 392) held to be a capital receipt.
• The Hon’ble Rajasthan High Court in PCIT v. Nitin Spinners Ltd. (116 Taxmann.com 26) had already held that FPS incentives are capital receipts.
• The Supreme Court had dismissed the SLP against the Rajasthan High Court’s decision, thereby affirming the principle.
• A coordinate bench of the ITAT Delhi, in ITA No. 1231/Del/2019 for A.Y. 2014-15, had allowed the same claim on identical facts.

For the Respondent

The Revenue contended that:

• The claim was not made in the original or revised return, and therefore, under Goetze India Ltd. (supra), the CIT(A) and AO were justified in rejecting it.
• The incentive was received in the course of business and should be treated as revenue income under Section 28 of the Act.
• The assessee had not sought leave to amend its return or raise the claim before the AO.

Relief Sought

The appellant sought:

• Allowance of the claim for Rs. 31,68,529/- as a capital receipt
• Deletion of the addition made by the AO
• Setting aside of the CIT(A)’s order
• Direction to the AO to compute taxable income without including the FPS incentive

The Legal Issue

The central question was whether an export incentive received under the Focus Product Scheme (FPS), granted by the Government of India to encourage market expansion, constitutes a capital receipt or a revenue receipt for income tax purposes.

Arguments Presented

For the Appellant

The appellant relied on Ponni Sugars & Chemicals Ltd. v. CIT (306 ITR 392), where the Supreme Court held that subsidies are capital receipts if their object is to enable the assessee to set up a new unit or expand an existing one, rather than to enhance day-to-day profitability. The appellant argued that FPS was designed to incentivize exploration of new global markets, thereby expanding the business footprint - a classic capital purpose. The decision of the coordinate bench in ITA No. 1231/Del/2019 for A.Y. 2014-15, which allowed the same claim, was cited as binding precedent. The appellant further emphasized that the Foreign Trade Policy explicitly linked FPS to long-term market development, not short-term profit enhancement.

For the Respondent

The Revenue relied on Goetze India Ltd. v. CIT (284 ITR 323), arguing that claims not raised in the original or revised return cannot be entertained at the appellate stage. It contended that the incentive was received as part of regular export operations and should be treated as income under Section 28. The Revenue did not dispute the nature of the scheme but insisted on procedural compliance as a bar to substantive consideration.

The Court's Analysis

The Tribunal acknowledged the Revenue’s reliance on Goetze India Ltd. but distinguished its applicability. While Goetze addressed the procedural bar to raising new claims, the Tribunal emphasized that the appellate authority under Section 250 has the power to consider new grounds if the facts are on record and the issue is one of law or fact that affects the correct computation of income.

"The question arises for consideration is when the assessee was given incentive for exploring the new markets across the globe, whether such incentive would be a capital receipt or revenue receipt? The Apex Court in the case of Ponni Sugars & Chemicals Ltd. (supra) had an occasion to examine an identical situation and observed that if the object of the subsidy was to enable the assessee to carry on the business more profitably, then the receipt is on the revenue account. On the other hand, if the object of assistance was to enable the assessee to set up a new unit or expand the existing unit, then the receipt is on the capital account."

The Tribunal found that the FPS was not intended to subsidize routine export profits but to incentivize entry into new, untapped markets - a strategic, long-term expansion. The scheme’s language, as cited from the Foreign Trade Policy, explicitly tied the incentive to "market diversification" and "expanding employment opportunities," indicating a capital purpose. The Tribunal further noted that the Rajasthan High Court’s decision, affirmed by the Supreme Court via dismissal of the SLP, had already settled the issue in favor of the assessee.

Crucially, the Tribunal observed that the facts and legal framework in the current case were identical to those in ITA No. 1231/Del/2019 for A.Y. 2014-15, where the same coordinate bench had allowed the claim. Following the doctrine of consistency and the principle that coordinate benches must follow each other’s decisions in identical circumstances, the Tribunal held that the claim must be allowed.

The Tribunal rejected the Revenue’s procedural objection, holding that where the facts are undisputed and the legal issue is squarely covered by binding precedent, the appellate authority is not only empowered but duty-bound to correct the error.

The Verdict

The appeal of the assessee is allowed. The order of the CIT(A) dated 30.08.2025 is set aside. The addition of Rs. 31,68,529/- made by the AO is deleted. The incentive received under the Focus Product Scheme for A.Y. 2013-14 is held to be a capital receipt and shall not be included in taxable income under any provision of the Income Tax Act, 1961. The AO is directed to recompute the total income and book profit accordingly, without including the FPS incentive, and to pass a fresh order within 8 weeks.

What This Means For Similar Cases

Export Incentives Are Not Automatically Revenue Income

• Practitioners must now argue the nature of government incentives based on their purpose - expansion vs. profit enhancement - not merely their receipt during business operations.
• The Ponni Sugars test remains the governing standard: if the subsidy enables market expansion, infrastructure development, or long-term capacity building, it is a capital receipt.

Coordinate Bench Precedents Are Binding in Tax Appeals

• ITAT benches must follow decisions of coordinate benches on identical facts, unless there is a clear error or contrary Supreme Court ruling.
• A decision allowing FPS incentives in A.Y. 2014-15 binds the same bench in A.Y. 2013-14 when facts are identical.

Procedural Non-Compliance Does Not Bar Substantive Justice

• While returns must be filed correctly, appellate authorities under Section 250 are not bound by technicalities when the facts are on record and the legal issue is settled.
• Taxpayers may successfully raise new claims at the appellate stage if supported by binding precedent and undisputed facts.