Sales tax incentives granted under state schemes for setting up industries in backward areas constitute capital receipts & so not taxable: Bombay HC
Bombay High Court: Bajaj Auto (ITA 505/2003) Reliance Industries (ITA 156/ 2003) has held that Sales tax incentives are capital in nature-Bombay High Court aligns with purpose test doctrine.
Citation: Bajaj Auto Ltd. & Reliance Industries Ltd. (ITA Nos. 505 & 156 of 2003)
In a landmark judgment dated 3 July 2025, the Bombay High Court ruled that sales tax incentives received by Bajaj Auto Ltd. and Reliance Industries Ltd. under the Maharashtra Government’s 1979 and 1983 industrial promotion schemes are to be treated as capital receipts, not taxable under the Income Tax Act.
Key Issue:
Whether sales tax incentives granted under state schemes for setting up industries in backward areas constitute capital receipts (non-taxable) or revenue receipts (taxable).
In this landmark ruling, the Bombay High Court held that sales tax incentives received by Bajaj Auto Ltd. and Reliance Industries Ltd. under Maharashtra’s 1979 and 1983 industrial promotion schemes are capital receipts-not taxable under the Income Tax Act. The Court applied the “purpose test” laid down by the Supreme Court in Ponni Sugars and Chaphalkar Brothers, emphasizing that the form or timing of the incentive is irrelevant. What matters is the intent: promoting industrialization in backward areas. This judgment reinforces a critical principle-subsidies aimed at capital formation must not be taxed as operational income.
The copy of the order is as under:
