The Income Tax Appellate Tribunal, Delhi, has clarified a critical distinction between capital and revenue receipts in the context of government subsidies under export promotion schemes, significantly impacting corporate tax planning for manufacturing and export-oriented businesses. The ruling affirms that incentives granted to promote employment and industrial growth in rural areas do not constitute taxable income under the Minimum Alternative Tax regime.
Background & Facts
The Dispute
The dispute involves M/s Jindal Saw Limited, a manufacturer of steel pipes and related products, and the Department of Income Tax, Circle-13(2), New Delhi. The core contention revolves around the tax treatment of three categories of receipts: (1) corporate guarantee commissions paid by overseas associates, (2) government grants received under the Focus Product Scheme (FPS) of the Foreign Trade Policy, and (3) interest income earned on deposits held as surety with the Government of Rajasthan for mining operations. The Assessing Officer treated these receipts as revenue items, leading to additions under Sections 14A read with Rule 8D, Section 115JB (MAT), and as income from other sources. The Commissioner of Income Tax (Appeals) partially allowed the assessee’s appeals, which both parties challenged before the Tribunal.
Key Facts
The assessee received Rs. 5,28,08,142/- as government grant under the Focus Product Scheme (FPS) during the assessment years 2012-13 and 2013-14.
The FPS was introduced under the Foreign Trade Policy, 2006, with the objective of incentivizing exports of products with high employment intensity in rural and semi-urban areas.
The assessee initially treated the FPS grant as a revenue receipt and included it in its profit and loss account.
The assessee also earned interest income of Rs. 50.63 lakhs on deposits made with the Government of Rajasthan as surety for mining operations.
The assessee had no exempt income in A.Y. 2013-14 and only Rs. 16,685/- in A.Y. 2012-13.
The assessee had suo moto disallowed Rs. 7,10,318/- and Rs. 7,18,726/- under Section 14A read with Rule 8D, exceeding the actual exempt income.
The assessee had previously challenged the tax treatment of FPS grants in A.Y. 2011-12 and 2014-15, where the Tribunal had ruled in its favor.
The Tribunal had previously held in Narayana Industries v. ACIT (ITA No. 6153/Del/2017) that FPS grants are capital receipts.
Procedural History
31.01.2018: CIT(A) passed two separate orders (No. 07/2017-18/CIT(A)-44 and 09/2017-18/CIT(A)-44) partially allowing the assessee’s appeals.
25.05.2026: Hearing held before the ITAT Delhi Bench.
13.07.2026: Judgment pronounced.
ITA Nos. 2383 & 2384/Del/2018: Revenue’s appeals against CIT(A)’s order disallowing Section 14A/8D addition and reducing guarantee commission to 0.5%.
ITA Nos. 2747 & 2748/Del/2018: Assessee’s cross-appeals challenging disallowance of leave encashment provision, taxation of carbon credit sales, and treatment of FPS grants and interest income.
ITA No. 463/Del/2019: Assessee’s appeal on interest income, deemed a duplicate of ITA No. 2748/Del/2018.
Relief Sought
The assessee sought:
Exclusion of FPS grants from total income as capital receipts.
Exclusion of carbon credit sales from Section 115JB MAT computation.
Exclusion of interest income from Rs. 50.63 lakhs as income from other sources.
Reversal of Section 14A/8D disallowance.
Rejection of the 1.30% corporate guarantee commission rate in favor of 0.5%.
The Revenue sought:
Restoration of the 1.30% corporate guarantee commission rate.
Upholding of Section 14A/8D disallowance.
Taxation of FPS grants and interest income as revenue receipts.
The Legal Issue
The central questions were: (1) Whether government grants received under the Focus Product Scheme constitute capital receipts not includible in total income under the Income Tax Act, 1961; (2) Whether interest earned on deposits held as surety for mining operations qualifies as income from other sources; and (3) Whether the assessee’s carbon credit sales are capital receipts exempt from Section 115JB MAT computation.
Arguments Presented
For the Appellant/Petitioner
The assessee relied on the Supreme Court’s "purpose test" laid down in Sahney Steel and Press Works v. CIT (228 ITR 252) and CIT v. Ponni Sugars & Chemicals Ltd. (306 ITR 392), arguing that the FPS grants were provided to promote employment generation and industrial growth in rural areas, not to offset operational costs. It cited the Rajasthan High Court’s decision in PCIT v. Nitin Spinners Ltd. (2020) 116 Taxmann.com 26 and the ITAT Delhi’s own order in Narayana Industries (30.05.2022), both holding FPS grants as capital receipts. It further contended that the interest income arose from deposits held as statutory surety for mining, not from commercial lending, and thus fell outside "other sources" under Section 57. For carbon credits, it relied on CIT v. My Home Power Ltd. (365 ITR 82) and the prospective nature of Section 115BBG inserted by the Finance Act, 2017.
For the Respondent/State
The Revenue argued that the FPS grants were received as part of normal business operations and were credited to the profit and loss account, indicating revenue character. It contended that the assessee had not raised the capital receipt claim in its original return and that the additional ground should not be entertained. It also argued that the interest income was clearly derived from bank deposits and should be taxed as income from other sources, citing general principles of income taxation. It opposed the 0.5% rate for corporate guarantees, relying on the Transfer Pricing Officer’s findings.
The Court's Analysis
The Tribunal undertook a detailed analysis of the statutory and judicial framework governing capital receipts. It emphasized that the nature of a receipt is determined by the purpose for which it is granted, not by the accounting treatment adopted by the assessee. The Tribunal quoted from its own prior order in Narayana Industries: "The object of the subsidy under this scheme was not to enable the assessee to run the business more profitably. The object was primarily to provide encouragement and support, which would create benefits of enduring nature, for the Industry as a whole in certain sectors of economy."
"The Government of India notified the Foreign Trade Policy, 2009-14... with the objective to continuously increase our percentage share of global trade and expanding employment opportunities, especially in rural and semi-urban areas."
The Tribunal noted that the Supreme Court in Goetz India Ltd. v. CIT (284 ITR 323) and the Bombay High Court in CIT v. Prithvi Brokers (349 ITR 336) have permitted the admission of additional grounds where the claim is based on a legal interpretation not previously raised, provided it is supported by evidence and law. The Tribunal held that the FPS grants were not compensation for expenses incurred but were intended to create long-term industrial and employment benefits, satisfying the "purpose test".
Regarding the interest income of Rs. 50.63 lakhs, the Tribunal relied on the Supreme Court’s decision in CIT v. Bokaro Steel Ltd. (236 ITR 315), which held that interest earned on deposits held as surety for statutory obligations cannot be treated as income from other sources. The Tribunal observed that the deposits were not idle funds but were mandated by law for mining operations, and thus the interest was incidental to the primary activity.
For carbon credits, the Tribunal noted that Section 115BBG, which taxes such income at 10%, came into effect only from A.Y. 2017-18. Since the assessment years in question were 2012-13 and 2013-14, the income was not taxable under any specific provision and, as held in My Home Power Ltd., was capital in nature.
The Tribunal also rejected the Revenue’s Section 14A/8D addition, noting that the assessee had already disallowed more than the actual exempt income, rendering the addition redundant. It upheld the CIT(A)’s reduction of the corporate guarantee commission to 0.5%, citing CIT v. Everest Kanto Cylinder Ltd. (378 ITR 57).
The Verdict
The Revenue’s appeals ITA Nos. 2383 & 2384/Del/2018 were dismissed. The assessee’s appeals ITA Nos. 2747 & 2748/Del/2018 were partly allowed. The appeal ITA No. 463/Del/2019 was dismissed as duplicate. The Tribunal directed that the government grants received under the Focus Product Scheme be treated as capital receipts, excluded from total income and Section 115JB MAT computation. The interest income of Rs. 50.63 lakhs was excluded from "other sources" and to be recomputed upon verification of surety documents. The corporate guarantee commission was fixed at 0.5%. The Section 14A/8D disallowance was set aside. The Assessing Officer was directed to give effect to this order within 8 weeks.
What This Means For Similar Cases
Government Subsidies Are Capital If Purpose Is Structural
Practitioners must now analyze the statutory objective behind any government grant, not merely its accounting treatment.
Grants tied to employment generation, infrastructure development, or export promotion are likely to be classified as capital receipts.
The "purpose test" from Sahney Steel and Ponni Sugars is now firmly established as the governing standard.
Interest on Statutory Deposits Is Not "Other Income"
Interest earned on deposits held as surety for statutory obligations (e.g., mining, environmental compliance, licensing) cannot be taxed as income from other sources.
The Bokaro Steel precedent now applies broadly to any industry where deposits are legally mandated.
Tax officers must distinguish between commercial deposits and statutory sureties.
Additional Grounds Can Be Admitted for Legal Interpretation
Assessees may raise new legal arguments on appeal even if not raised in the return, provided they are grounded in judicial precedent.
The Tribunal’s willingness to admit the FPS claim in this case reinforces that procedural technicalities yield to substantive justice in tax appeals.
Practitioners should not hesitate to raise novel legal interpretations in appeals, especially where binding precedents exist.
