NaFAC and JAO hold valid jurisdiction for faceless reassessments, but natural justice demands remanding ex-parte additions due to assessee’s mental illness.
Issue
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Whether National Faceless Assessment Centre (NaFAC) and Jurisdiction Assessment Officer (JAO) possess valid jurisdiction under Section 144B and Section 151A read with CBDT circulars/notifications to conduct faceless reassessment proceedings under Section 147 of the Income-tax Act, 1961.
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Whether ex-parte additions made under Section 147 read with Section 144 regarding unexplained cash payments under Section 69C and rental income should be remanded back for fresh adjudication when non-compliance was due to the assessee’s ongoing mental illness.
Facts
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Non-Filing & Info: The assessee (an individual) did not file a return of income under Section 139(1) for AY 2017-18. Annual Information Return (AIR) flagged cash payments for goods/services amounting to ~₹9.32 lakhs and rental income of ~₹69.31 lakhs.
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Reassessment Notice: JAO issued a notice under Section 148 based on AIR information. The assessee initially failed to file a return in response.
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Belated Return: The assessee subsequently filed a belated return under Section 139(4) read with Section 119(2)(b) declaring an income of ~₹4.37 lakhs.
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Proceedings & Ex-Parte Order: Notices under Section 142(1) and show-cause notices were issued first by JAO and later by NaFAC. Due to total non-compliance, NaFAC completed an ex-parte best judgment assessment under Section 147 read with Sections 144 and 144B, making additions for cash payments and rental income.
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First Appeal: CIT(A)/NFAC confirmed the additions made in the reassessment order.
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Reason for Non-Compliance: On further appeal, the assessee submitted evidence that non-compliance during assessment proceedings occurred because he had been suffering from mental illness since 2011.
Decision
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On Jurisdiction (In favour of Revenue): NaFAC, along with JAO, validly assumed jurisdiction under Section 147 read with Sections 144, 144B, 147A, and 151A. The legal framework of Section 144B and the CBDT Circular dated 22.09.2021 empowers faceless assessment and completion of orders by NaFAC, notwithstanding CBDT Notification No. 18/2022.
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On Merits / Additions (Matter Remanded): In the interest of natural justice, the ex-parte additions relating to cash payments for goods/services (Section 69C) and rental income (Section 22) were set aside and remanded to the file of the CIT(A) for fresh adjudication. The CIT(A) was directed to afford the assessee three effective opportunities to present his case.
Key Takeaways
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Faceless Jurisdiction Upheld: Co-existence and coordination between JAO (for issuance of initial notices) and NaFAC (for completion of faceless reassessment) are legally valid under Section 144B read with Section 151A.
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Natural Justice Overrides Ex-Parte Orders: Genuine physical or mental incapacity (such as documented mental illness) preventing participation in assessment proceedings constitutes a valid ground for restoring the matter to grant a fair hearing.
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Conditional Remand: Procedural defaults driven by bona fide medical conditions warrant a fresh opportunity on merits rather than sustaining strict ex-parte additions.
IN THE ITAT MUMBAI BENCH ‘SB’
Deputy Commissioner of Income-tax
v.
Aarti Drugs Ltd.
JUSTICE (RETD.) C.V. BHADANG, President
Pawan Singh, Judicial Member
and Vikram Singh Yadav, Accountant Member
Pawan Singh, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal Nos. 2873, 3069 & 3138 (Mum.) of 2023
CO No. 134 (Mum.) of 2025
[Assessment years 2016-17 and 2017-18]
CO No. 134 (Mum.) of 2025
[Assessment years 2016-17 and 2017-18]
AUGUST 25, 2026
Ajay Chandra, CIT-DR for the Appellant. Ajay Vohra, Sr. Adv., S.S. Nagar, Akash Shukla, Advs. and Vipul Jain, CA for the Respondent.
ORDER
Justice (Retd.) C.V. Bhadang, President. – This Special Bench is constituted to decide the following issue :-
“Whether in view of the amended provisions of Section 2(24) introducing clause (xviii) w.e.f. AY 2016-17, the amount received by the assessee under the MEIS of the Foreign Trade Policy, 2015 is taxable as a revenue receipt.”
2. This reference arises out of ITA No. 3069/Mum/2023 (assessment year 201617) filed by the Revenue with Cross Objection no. 134/Mum/2025 by the assessee and two cross-appeals – one each by the Revenue and the assessee in ITA No. 3138/Mum/2023 and ITA No. 2873/Mum/2023 (assessment year 2017-18).
Brief facts :-
3. The assessee is a company engaged in the business of manufacturing of specialty chemicals and bulk drugs.
4. It is necessary to note that in the Return of Income (RoI) filed by the assessee, the assessee had claimed the amount (assistance) received under the Merchandise Exports from India Scheme (MEIS) under the Foreign Trade Policy, 2015 (FTP) as revenue receipt.
5. The Assessing Officer (‘AO’ for short) passed the assessment order dated 10.12.2018 (assessment year 2016-17) and 06.09.2019 (assessment year 2017-18). The assessee challenged the assessment orders before the Commissioner of Income Tax (Appeals) (‘CIT(A)’ for short). Insofar as the assistance received under the MEIS is concerned, an additional ground was raised before the First Appellate Authority that the said receipt was a capital receipt. The learned CIT(A) by order dated 20.06.2023 and 21.06.2023 for assessment years 2016-17 and 2017-18 respectively has allowed this part of the challenge holding that the receipt under the MEIS was of a capital nature.
6. The Revenue has filed these appeals challenging the same, inter alia, alongwith other grounds. It is the principal contention that after the amendment to Section 2(24) of the Act by introduction of clause (xviii), the assistance given under the MEIS, in the nature of a ‘reward’, is essentially a revenue receipt in the hands of the assessee.
7. When the appeal came up before the Division Bench, reliance was placed on behalf of the assessee, on the following decisions of the co-ordinate Benches of this Tribunal :-
| (i) | Asstt. CIT v. Eastman Exports Global Clothing (P.) Ltd (Chennai – Trib.)/ITA No. 3326/CHNY/2019 dated 20.09.2024 |
| (ii) | Leshark Global LLP v. Dy. CIT (Mum-Trib.)/ITA Nos. 3177 to 3183 and 3184/MUM/2025 dated 31.07.2025 |
| (iii) | Dhanuka Laboratories Ltd. v. ACIT [IT Appeal No. 826 (Delhi) of 2023, dated 5-3-2025] |
| (iv) | Mayur Uniquoters Ltd. v. CIT [IT Appeal No. 2 (JP) of 2022, dated 9-11-2022]. |
8. This was countered on behalf of the Revenue, inter alia, by placing reliance on the Explanatory notes to Finance Act, 2015 explaining the purpose behind introduction of clause (xviii) in Section 2(24) of the Act. The Division Bench found that a plain reading of Section 2(24)(xviii) “certainly gives an impression that the legislature intended to treat all kinds of government assistance as revenue in nature”. The Bench found that the expression “by whatever name called” used in Section 2(24)(xviii) makes the definition of income “very wide”. The Bench further found that the issue regarding taxability of the amount received under MEIS in the light of provisions of Section 2(24)(xviii) of the Act on and from assessment year 2016-17 having wide ramifications needs to be decided by a Special Bench. In that view of the matter, the Division Bench by an order dated 23.09.2025 has required the aforesaid issue to be placed before the Special Bench.
9. The President by order dated 06.11.2025 has constituted the present Bench to decide the issue.
Submissions of the parties:
10. We have heard parties. Perused record. The parties have also filed written submissions. We have gone through the same.
11. It is submitted by the learned CIT-DR that the objective of the Foreign Trade Policy, 2015 (FTP 2015) is to reduce the costs associated with the infrastructural inefficiencies for the Indian exporters, so as to provide them with a level playing field vis-a-vis exporters in other countries. Therefore, such a benefit/assistance given to Indian exporters (like the assessee) is in the nature of assistance which would be revenue in nature, notwithstanding the nomenclature of ‘reward’ given in FTP 2015/MEIS. Reliance in this regard is placed on the reply given by the Commerce Minister on the floor of the house stating that MEIS provides assistance to encourage exporters. The learned CIT-DR has referred to the meaning of government assistance in Advanced Law Lexicon as under:-
“Assistance – the act of assisting, help, aid, succor, support.
Government Assistance – action by government designed to provide an economic benefit specific to an enterprise or range of enterprises qualifying certain criteria.”
12. It is submitted that MEIS clearly falls within the meaning of government assistance which is given to exporters for facilitating export of notified products to notified markets. It is submitted that such assistance clearly falls within the provisions of Section 2(24)(xviii) as introduced by Finance Act, 2015. It is submitted that the phrase ‘by whatever name called’ is wide enough to include all assistance received from the government, irrespective of the mechanism or modalities of the scheme under which the assistance is given. It is submitted that the Division Bench in Eastman Exports Global Clothing (P) Ltd. (supra) has merely relied upon the nomenclature of the assistance as ‘reward’ in FTP-2015 without examining the nature and scope of the scheme in detail. It is pointed out that the subsequent decision in Dhanuka Laboratories Ltd. (supra) and Leshark Global LLP (supra) merely rely upon the decision in the case of Eastman Exports Global Clothing (P) Ltd. (supra). It is submitted that the nomenclature of the assistance is not decisive and what is relevant is the nature, purpose and the scope of the scheme and the assistance given which, if considered in the context of the amended provisions under Section 2(24)(xviii) of the Act, would clearly bring such assistance within the scope of income.
13. It is submitted that the assistance under the MEIS is taxable under Section 28 as ‘profits and gains of business or profession’ as held by the Supreme Court in Meghalaya Steels Ltd 383 ITR 217 (SC). Further reliance is placed on the decision of this Tribunal in case of Hyundai Motors India Ltd. v. ACIT [IT (TP) Appeal No. 39 (Chny) of 2021, dated 22-12-2021] and Oricon Enterprises Ltd. v. Dy. CIT (Mum-Trib.). The learned CIT-DR has referred to the modalities of the scheme in detail in order to submit that the assistance under the said scheme is essentially for enhancing the export competitiveness of the Indian exporters. It is submitted that the assistance would clearly be in the nature of revenue receipt by applying the principles laid down by the Supreme Court in Sahney Steel & Press Works Ltd. v. CIT 228 ITR 253 (SC) and CIT v. Ponni Sugars & Chemicals Ltd. 306 ITR 392 (SC). It submitted that in Hyundai Motors India Ltd. (supra) the Division Bench of the Tribunal at Chennai has already held the assistance to be taxable in nature as a revenue receipt. Without prejudice to the contention that the assistance provided by the government to the assessee under the MEIS is taxable, within the meaning of provisions of Section 2(24)(xviii) of the Act, it is submitted that the MEIS is taxable as an incentive received under the MEIS. Reliance was also placed on the decision of the Bombay High Court in Serum Institute of India (P.) Ltd. v. Union of India [2024] 463 ITR 582 (Bom), the decision of Division Bench in case of Dy. CIT v. Eris Lifesciences Ltd [2025] (Ahd-Trib.)/ITA No. 847-850/Ahd/2025 dated 09-12-2025 and the decision of the Division Bench in case of India Cements Ltd v. Dy. CIT (Chennai – Trib.)/ITA No. 2174/CHY/2024 dated 02-01-2026 .
14. The learned Counsel for the assessee has made the following submissions :-
| (i) | The FTP under which the MEIS was introduced is intended to provide a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in keeping with the “Make in India” vision of the Prime Minister. |
| (ii) | The policy is aimed at supporting both the manufacturing and services sector, with a special emphasis on improvement of ease of doing business. |
| (iii) | The objective of the scheme is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, especially those having high export intensity, employment potential and thereby to enhance the country’s export competitiveness. |
| (iv) | It is submitted that thus the dominant object is to improve the export competitiveness of the ‘country as a whole’ and not an individual assessee. Therefore, the amount received under the said scheme would be a capital receipt not liable to be taxed. |
| (v) | For this purpose, reliance is placed on the decision of the Supreme Court in Ponni Sugars & Chemicals Ltd. (supra), CIT v. Chaphalkar Brothers 400 ITR 279 (SC), DCIT v. Munjal Auto Industries Ltd. , 404 ITR 616 (SC) and the decision of Jammu & Kashmir High Court in Shree Balaji Alloys v. CIT 333 ITR 335 (J&K), which is confirmed by the Supreme Court in CIT v. Shree Balaji Alloys 287 CTR 459 (SC). |
| (vii) | It is submitted that MEIS was introduced for export of specified goods to specified markets without any conditions attached thereto and, therefore, cannot be regarded as a revenue receipt in terms of Section 28(i) and 28(iv) of the Act. |
15. It is submitted that the concept of ‘income’ as defined in Section 2(24) of the Act, was artificially enlarged by introduction of clause (xviii), which envisages a deeming fiction for certain categories such as subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called). It is submitted that in order to bring a particular assistance within the meaning of clause (xviii) of Section 2(24) of the Act it has to answer one or the other categories mentioned therein. The learned counsel pointed out that the term “by whatever name called” used in conjunction with subsidy, grant, cash incentive, duty drawback, waiver, concession, reimbursement, has to be construed and interpreted ejusdem generis, i.e, when particular words pertaining to a class, category or genus are followed by general words, then the general words are construed as limited to things of the same kind as those specified.
16. It is pointed that the decision of the Bombay High court in Serum Institute of India (supra), on which reliance is placed by the Revenue, is subject matter of challenge before the Supreme Court. It is submitted that the said decision is confined to the facts therein wherein the challenge was with respect to violation of fundamental rights under Article 14, 19 and 21 of the Constitution of India. It is pointed out that the High Court did not express any opinion on the merits of the matter. Reliance is placed on the decision of Supreme Court in CIT v. Sun Engineering Works (P.) Ltd 198 ITR 297 (SC) in order to submit that a decision is only an authority for what it actually decides.
17. It is submitted that the benefit under the MEIS does not answer any of the categories as enumerated in Section 2(24)(xviii) of the Act for which the learned counsel has referred to various Dictionary meanings. It is submitted that MEIS, on the other hand, is in the nature of a ‘reward’ as noted in para 3.04 of the FTP as under:-
“3.04 Entitlement under MEIS
Exports of notified goods/products with ITC[HS] code, to notified markets as listed in Appendix 3B, shall be rewarded under MEIS. Appendix 3B also lists the rate(s) of rewards on various notified products [ITC(HS) code wise). The basis of calculation of reward would be on realised FOB value of exports in free foreign exchange, or on FOB value of exports as given in the Shipping Bills in free foreign exchange, whichever is less, unless otherwise specified.”
18. It is submitted that ‘reward’ is defined in Black’s Law Dictionary as “something of value, money, given in return for some service or achievement”, which in the present case is achievement, fulfilment of the target and subject to the realization of export proceeds without any other conditions. It is submitted that an exporter does not export goods in expectation of the receipt of MEIS and it is no inducement for the exporter for such exports being made.
19. It is submitted that Section 2(24)(xviii) of the Act would not be applicable to MEIS as it does not qualify as an assistance as claimed by the Revenue. Reliance is placed in this regard on the decision of the Tribunal in Leshark Global LLP (supra). It is submitted that the MEIS scrips are reward based on achievement and MEIS scrips are not available to those exporters who are availing direct tax benefit.
20. Reliance is placed on the decision of Supreme Court in Mc Dowell & Co. Ltd. v. CTO 154 ITR 148 (SC)/(1985) 3 SCC 230 wherein the Supreme Court had an occasion to interpret a similar provision viz. “by whatever name called” in Section 43B(a) of the Act.
21. The learned counsel has placed reliance on the following decisions (in addition to those referred in para 7 above) of the Tribunal wherein, according to the learned counsel, consistent view is taken to hold that a ‘reward’ is not covered in the definition of ‘income’ after the introduction of clause (xviii) of Section 2(24) of the Act :-
| (i) | Dy. CIT v. Alembic Pharmaceuticals Ltd. (Ahd-Trib.). |
| (ii) | Dy. CIT v. P.C. Jeweller Ltd. (Delhi – Trib.). |
22. It is submitted that the Jammu & Kashmir High Court in Pr. CIT v. Gravita Metal Inc. 1 (J&K and Ladakh) has upheld the order of the Tribunal in in Asstt. CIT v. Gravita Metal Inc [IT Appeal No. 594 (Asr) of 2019 ,dated 15-6-2023] holding that the moneys retained by the assessee under Excise Duty Exemption scheme was not taxable under Section 2(24)(xviii) of the Act. It is submitted that the decision in Gravita Metal Inc., (Supra) being the only decision of the High Court, will be binding in the absence of any other binding precedent, for which reliance is placed on the decision of Delhi High Court in All India Lakshmi Commercial Bank Officers’ Union v. Union of India [1984] 150 ITR 1 (Delhi).
23. It is submitted that a Constitution Bench of the Supreme Court in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Company 69 GST 239/361 ELT 577 (SC) has held that any ambiguity in a charging provision needs to be construed in favour of the tax payer. It is submitted that without prejudice to the submission that MEIS scrips do not fall within the scope and ambit of Section 2(24)(xviii) of the Act even in view of the conflicting decisions rendered by the different Benches, the same has to be resolved in favour of the respondent-assessee.
24. Lastly, it is submitted that a deeming provision has to be strictly construed as held by the Supreme Court in Cape Brady Syndicate v. IRC (1921) 1 KB 64 (SC), CIT v. Ajax Products Ltd. , [1965] 55 ITR 741 (SC) and Hansraj Gordhandas v. CCE and Customs AIR 1970 SC 755.
25. It is submitted that the learned CIT(A) has rightly come to the conclusion that the MEIS scrips are in the nature of a ‘reward’ which is not taxable as a revenue receipt and the question be answered accordingly.
Consideration:-
26. We have carefully considered the rival submissions made. MEIS is a part of the Foreign Trade Policy, 2015-20 notified under the Foreign Trade (Development and Regulation) Act, 1992. The FTP – 2015-20 was launched on April 1, 2015 introducing a slew of measures by providing a framework for increasing exports of goods and services, generation of employment and increasing value addition, in keeping with the “Make in India” vision of the government.
MEIS envisages providing “reward” to exporters of notified goods to notified markets in the form of “duty credit scrips” for offsetting infrastructural inefficiencies and associated costs, involved in export of goods/products which are produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing the country’s export competitiveness. The duty credit scrips and the goods imported/domestically procured against them shall be freely transferable. The duty credit scrips can also be utilised for a wide range of duty/taxes/fee payments.
27. All the erstwhile schemes, viz. Focus Product Scheme (FPS), Focus Market Scheme (FMS), Vishesh Krishi Gramin Udyog Yojana (VKGUY), Market Linked Focus Product Scheme (MLFPS), Agri Infrastructure Incentive Scheme, and Incremental Export Incentive Scheme (offering separate duty credit scrips with varying conditions) have been merged into a single scheme, i.e. MEIS with no conditions attached thereto (for getting the assistance) except realization of export proceeds/foreign exchange.
28. The principal issue before us is about the nature of benefit received by the assessee under the MEIS. While the assessee is harping on the ‘duty credit scrips’ being termed as “reward” in the scheme itself, the Revenue maintains that it is essentially in the nature of an “assistance”. The issue has to be principally examined in the context of the decision of Supreme Court in the case of Sahney Steel Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) which lay down the ‘purpose test’ for determining the nature of any such assistance or reward and secondly, in the context of the introduction of clause (xviii) to Section 2(24) of the Act. We would first propose to place certain historical aspects in the context of the perennial dispute between the Revenue and the tax payer, about treatment of any such benefit under a scheme being either revenue or capital in nature.
29. In Sahney Steel Press Works Ltd. (supra), the Government of Andhra Pradesh had extended certain facilities and incentives to certain new industrial undertakings, which commenced production on or after 01.01.1969. The incentives were in the nature of refund of sales tax on raw material, finished goods and machinery and a subsidy on power ‘consumed for production’. The Supreme Court found that all the incentives were essentially ‘production incentives’, in the sense that the undertaking was entitled to the incentives only after commencement of production and were operational subsidies. Although the subsidies were given to encourage the setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the state more profitable, the Supreme Court found that the incentives and the subsidies were essentially of a revenue nature liable to tax.
30. In the case of Ponni Sugars & Chemicals Ltd. (supra), the assessee-company had received subsidy under the Incentive Subsidy Scheme, 1980. The incentives were in the nature of a higher free sale sugar quota and secondly to allow the manufacturers to collect excise duty on the sale price of free sale sugar in excess of the normal quota, however, restricting the payment to the government to the extent of the excise duty payable on the price of the levy sugar. As per the scheme, the benefit of the incentive subsidy was available only to new units and to substantially expanded units, the minimum investment specified was Rs 4 crores for new units and Rs 2 crores for expansion units, increase in the free sale quota depended upon increase in the production capacity and the assessee was obliged to utilize the subsidy only for the repayment of the term loans undertaken by it for setting up of new units/substantial expansion of the existing business. There was a dispute as to the nature of the incentive being capital or revenue in nature. The High Court found that the incentive/subsidy received by the assessee was a capital receipt. When the matter reached the Supreme Court, the Supreme Court after taking a survey of several decisions holding the field, including the decision in case of Sahney Steel Press Works Ltd. (supra) held that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given, which is better known as the “purpose test”. The Supreme Court, inter alia, found that the point of time when the subsidy is paid or the source from which it is paid is not material, not even the form of subsidy is material. The “purpose test” envisages that where the object of the subsidy/assistance or any other benefit is to enable the assessee to run the business more profitably, then the receipt was of a revenue nature. On the other hand, if the object of the scheme was to enable the assessee to set-up a new unit or to expand its existing unit, then the same is of a capital nature. The form or mechanism through which the subsidy is given is irrelevant (see para 14 of the judgment).
31. The “purpose test” as laid down by the Supreme Court has been holding field since long and is relevant for determining the nature of any government aid “by whatever name called”. The question is whether any change in this regard is brought about by the introduction of clause (xviii) to Section 2(24) of the Act. It is contended on behalf of the assessee that the “purpose test” still continues to be applicable even after introduction of Section 2(24)(xviii) of the Act w.e.f. 01.04.2016. On the contrary, it is contended on behalf of the Revenue that the amendment introducing clause (xviii) to Section 2(24) of the Act is wide enough to take into its ambit all types of government aid, the nomenclature notwithstanding, which would partake of the nature of an ‘income’ especially going by the intent of the legislature. For this purpose, reliance is placed on the decision of the Bombay High Court in the case of Serum Institute of India (supra).
32. In order to appreciate the rival contentions, it is necessary to deal with the decision in the case of Serum Institute of India (supra) in some details. That was a case where the petitioner-assessee had challenged the constitutional validity of sub-clause (xviii) of Section 2(24) of the Act, inter alia, on the ground that the said amendment seeks to tax a ‘capital receipt’ as ‘income’ which is constitutionally impermissible. It was contended that the amendment obliterates the clear, well established and fundamental distinction between income and capital receipt which runs counter to the constitutional scheme that a tax can be imposed only on income and the nature of any such government aid has to be determined on the basis of a “purpose test”. In short, the material contention before the High Court was that the impugned subclause is contrary to the scheme of Income Tax Act, which is to levy tax on ‘income’. It was contended that the expression “income” as defined in Section 2(24) read with Section 4 of the Act is a “monetary return coming in”. In the case of a capital subsidy, there is no monetary return coming in. It was contended that only the real income can be taxed under the Act. The constitutional validity of Section 2(24)(xviii) of the Act was challenged on the ground of violation of Articles 12, 14, 19, 246, 265 and 289 of the Constitution of India. A perusal of the judgment indicates that on behalf of the Petitioner, reliance was, inter alia, placed on the decision of the Supreme Court in Sahney Steel Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) in order to contend that the nature of any such government aid/subsidy/incentive has to be determined on the basis of the “purpose test”.
33. The Bombay High Court has refused to accept the challenge as made. The following observations in para 21, 32, 33 and 41 to 43 are relevant :-
“21. Before the amendment through the Finance Act, 2015, the Supreme Court applied the “purpose test” to determine whether a subsidy was a capital or revenue receipt. In the landmark cases ofSahney Steel and Press Works Ltd. (supra) and Ponni Sugars and Chemicals Ltd. (supra), the Court held that if the subsidy’s purpose was to help the assessee run the business more profitably or meet daily business expenses, it was considered a revenue receipt (and thus taxable). Conversely, if the subsidy aimed at setting up a new unit or expanding an existing unit, it was deemed a capital receipt (and not taxable). The Finance Act, 2015, significantly altered the landscape by introducing subclause (xviii) to Section 2(24) of the Act. This amendment defined any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement provided by the Central or State Government as income, hence taxable, unless used to determine the actual cost of an asset. This amendment sought to end disputes by making all subsidies taxable unless they fell under an exclusion category;
32. Taxation is an economic reality that every business entity must contend with. The interplay between taxation and profitability is a complex one, subject to numerous variables beyond merely the taxation of subsidies. The mere fact that a tax falls more heavily on certain goods or persons may not result in its invalidity. The policy of a tax, in its effectuation, might, of course, bring in some hardship in some individual cases. But that is inevitable, so long as law represents a process of abstraction from the generality of cases and reflects the highest common factor. Every cause, it is said, has its martyrs. Then again, the mere excessiveness of a tax or even the circumstance that its imposition might tend towards diminution of the earnings or profits of the persons of incidence, like in the case at hand – savings get reduced resulting in lower profitability, does not, per se, and without more, constitute violation of the rights under Part III of Constitution of India.
33. The chronology of events is pivotal in assessing the merits of petitioner’s arguments against the constitutional validity of section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. This timeline is not merely incidental but is of substantive significance for several reasons. Firstly, petitioner, being engaged in business activities, is presumed to have conducted due diligence and engaged in careful planning, which would undoubtedly include an assessment of tax implications on all fiscal benefits, including subsidies. The amendment was public knowledge, and the implications of the inclusion of subsidies within the ambit of taxable income were clear and unambiguous. Therefore, petitioner, at the time of application, was having full knowledge or ought to have had full knowledge of the tax treatment of such subsidies post-amendment. Secondly, the act of applying for a subsidy after the amendment came into force indicates an acceptance of the prevailing tax regime. It is reasonable to infer that by choosing to partake in the subsidy scheme, petitioner implicitly acknowledged and consented to the accompanying tax obligations as legislated by the amendment. Thirdly and furthermore, it is a well-settled principle that ignorance of the law is no excuse. Petitioner cannot claim ignorance of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions.
41. Matters of economic policy should be best left to the wisdom of the legislature. In the context of a changed economic scenario the expertise of the people dealing with the subject should not be lightly interfered with. While dealing with economic legislation, this court would interfere only in those few cases where the view reflected in the legislation is not possible to be taken at all. The case of petitioner certainly does not fall within this exception. We also do not find that by inserting the impugned sub clause there is any perversity or gross disparity resulting in clear or hostile discrimination.
42. As noted earlier it is trite that the legislature is the best forum to weigh different problems in the fiscal domain and form policies to address the same including to create a new liability, exempt an existing liability, create a deduction or subject an existing deduction to new regulatory measures. In the very nature of taxing statutes, legislature holds the power to frame laws to plug in specific leakages. The mere fact that the institution of tax by virtue of the impugned sub clause falls more heavily on petitioner cannot result in its invalidity.
43. In light of the above, in our view, the amendment to Section 2(24) by the insertion of sub-cause (xviii) of the Finance Act, 2015, is a perfect example of a legislative endeavour to align the definition of “income” with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term. The submissions of petitioner though appear to be of fiscal concern were, in our view, more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded. The submissions of petitioner fall short of appreciating the overarching legislative intent to foster a comprehensive and equitable taxation regime. The amendment to Section 2(24) by insertion of the impugned sub-clause that includes various subsidies and concessions only indicates the well established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation’s fiscal machinery. As submitted by ASG, it is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources.”
34. Reliance placed by the Revenue on the decision of Bombay High Court in Serum Institute of India (supra) has been countered on behalf of the assessee on the ground that it was essentially a challenge to the constitutional validity of the section and the judgement cannot be read to mean that the “purpose test” is no longer relevant. Reliance is placed on the decision of the Constitution Bench of the Supreme Court in Dilip Kumar & Co. (supra).
35. There cannot be any manner of dispute with the proposition, that any decision is an authority for what it actually decides. However, reliance placed on the decision of Supreme Court in Dilip Kumar & Co. (supra), in our view, is misplaced on facts. That was a case which arose on a reference to the Constitution Bench as a Bench of three Judges, expressed their inability to agree with the conclusion reached by an earlier coordinate Bench of the Supreme Court in Sun Export Corporation v. Collector of Customs, vb1997 93 ELT 641 (SC). The issue was essentially as to the interpretation to be placed when there is an ambiguity noticed in an exemption provision/notification. The Supreme Court held that any ambiguity in a charging section where there are two views equally possible, has to be resolved in favour of the assessee. However, when it comes to extending the benefit of an exemption provision/notification, in case of an ambiguity, the same should be resolved in favour of the Revenue. This is on account of the fact that it is for the assessee to establish that his case clearly comes within the ambit of the exemption provision/notification.
36. Incidentally, Dilip Kumar & Co. (supra) was a case where the question was regarding the interpretation of an exemption notification, unlike in the present case where we are concerned with the issue as to whether the benefit flowing under the MEIS scheme would come within the ambit of ‘income’ or whether it would be of a capital nature.
37. We do find that the judgment in the case of Serum Institute of India (supra) was rendered in the context of the challenge to the constitutional validity of Section 2(24)(xviii) of the Act on the ground that it is arbitrary and seeks to do away with the basic and fundamental distinction between ‘income’ and a ‘capital receipt’ (which is non taxable). The Bombay High Court upheld the constitutional validity and held that the amendment to Section 2(24) by the insertion of sub-cause (xviii) of the Finance Act, 2015, is a clear legislative endeavour to align the definition of “income” with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term.
38. Faced with a situation where the “purpose test” has been holding field since long and the constitutional validity of Section 2(24)(xviii) of the Act, being upheld by the jurisdictional High Court, in our humble opinion, the issue as referred to this Bench, has to be resolved on facts as to the nature of the benefit which is extended under the MEIS scheme We therefore proceed to decide it in the backdrop of both, i.e. the provisions of Section 2(24)(xviii) of the Act as introduced w.e.f. 01.04.2016, taking into consideration the legislative intent behind the said amendment and the “purpose test”.
Examination in the context of Purpose Test:
39. We have already referred to the decisions of the Supreme Court in case of Sahney Steel Press Works Ltd (supra) as well as in case of Ponni Sugars and Chemicals Ltd (supra) wherein the legal proposition relating to purpose test has been elaborately discussed and laid down. The nature of the assistance, given in the form of ‘reward’ under MEIS needs to be tested in the context of the “purpose test”.
40. Chapter III of the Foreign Trade Policy 2015-20 talks about Exports from India Scheme and the objective of the scheme as so laid down under this chapter is to provide rewards to exporters to offset infrastructural inefficiencies and associated cost involved and to provide exporters a level playing field and it talks about two schemes for exports of merchandise and services, namely Merchandise Export from India Scheme (MEIS), and Service Exports from India Scheme (SEIS). We are limiting our discussion to the MEIS scheme, being the subject matter of reference before this Special Bench.
41. As we have noted earlier, various erstwhile export promotion schemes have been merged into a single and unified MEIS Scheme. In that background, it may be relevant to see in some details the historical context and objectives of the earlier schemes and how they align with the present scheme.
42. Focus Market Scheme (FMS) was launched w.e.f. 1.4.2006 for offsetting high freight cost and other externalities to select international markets with a view to enhance India’s export competitiveness in the countries. Exporters of all products to notified countries shall be entitled for Duty Credit Scrip equivalent to 3% of FOB value of exports.
43. Focus Product Scheme (FPS) was launched w.e.f 1.4.2006 to incentivize export of such products which have high export intensity / employment potential, so as to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. Under the said scheme, exports of notified products to all countries (including SEZ units) shall be entitled for Duty Credit Scrip equivalent to 2% or 5% of FOB value of exports (in free foreign exchange) for exports made from 27.8.2009 onwards.
44. The objective of Vishesh Krishi and Gram Udyog Yojana (VKGUY) scheme was to promote employment generation in rural and semi -urban areas. Duty Credit Scrips are granted with an aim to compensate high transport costs, and to offset other disadvantages. The scheme was gradually expanded to include export of agricultural products and their value added products; minor forest produce and their value added variants; gram udyog products; and other products, from time to time.
45. The objective of the Incremental Export Incentivize Scheme (IEIS) was to grant incentive on incremental exports made during the period January-March 2013 over the base period January-March 2012. The incentive would be granted to an IEC holder at the rate of 2% on the incremental growth of exports made to USA, EU and Asian Countries (Latin American and African countries have been added subsequently) during this particular quarter i.e., January-March 2013 which was extended for the year 2013-14.
46. Now, coming to MEIS Scheme, in para 3.03, it specifically defines the objective of the Merchandise Exports from India Scheme (MEIS), wherein it is provided that the objective of the said scheme is to offset infrastructural inefficiencies and associated cost involved in export of goods/products which are produced/manufactured in India, especially those having high export intensity, employment potential, and thereby enhancing India’s export competitiveness.
47. In terms of entitlement under the MEIS scheme, para 3.04 provides that the export of notified goods/products to notified markets as listed in Appendix-3B shall be rewarded under MEIS. Appendix 3B also lists the rate of rewards on various notified products. It provides for entitlement of 2%/3%/5% of FOB value of notified goods exported to notified markets based on three distinct categories framed and covered under Appendix 3B, wherein different scrips offered to different sectors as well as for different markets have been realigned into a single comprehensive list of specified goods/products to be exported to specified markets. The basis of calculation of rewards would be on the realized FOB value of exports in free foreign exchange, or on FOB value of exports as given in the shipping bills in free foreign exchange, whichever is less unless otherwise specified.
48. At the time of introduction, MEIS scheme covered 4914 tariff lines at 8 digits. Keeping in mind the global economic downturn and the adverse environment faced by exporters, it was expanded to include additional lines and later on, it was expanded to cover 7914 lines, all with global coverage. Exporters were initially required to submit landing certificate as a proof of landing of consignment in the destination country for certain tariff lines for which global coverage was not provided. Obtaining landing certificate was an avoidable cost and exporters requested doing away with the Landing Certificate. On 4th May, 2016, global coverage was extended to the notified MEIS products that have only regional coverage till then thereby dispensing with the requirement of landing certificate.
49. Major product groups covered under MEIS are: Agricultural products, fruits, flowers, vegetables, tea, coffee, spices, value added and packaged products, handicraft, handloom, jute products, textile and garments, pharmaceuticals, surgical, herbals, project goods, auto components, telecom, computer, electrical and electronics products, railway, transport equipment, industrial machinery, IC engines, machine tools, parts, hand tools, pumps of all types, automobiles, two wheelers, bicycles, ships, planes, chemicals, plastics, rubber, ceramic and glass, leather garments, saddlery items, footwear, steel furniture, prefabs, lighters wood, paper, stationary, iron, steel, and base metals, products
50. In para 3.02, it talks about the nature of rewards, and it provides that the duty credit scrips shall be granted as rewards under MEIS (and SEIS) scheme. The duty credit scrips and goods imported/domestically procured against them shall be freely transferable. The duty credit scrips can be used for payment of customs duty for import of inputs or goods except items listed in Appendix 3A, payment of excise duties on domestic procurement of inputs or goods, including capital goods as per DOR notification, payment of service tax on procurement of services as per DOR notification, and payment of customs duty and fee as per paragraph 3.18 of the Foreign Trade Policy.
51. It is equally important to note as to who are eligible to claim the rewards under the MEIS scheme which is provided in para 3.17 under the heading “Transfer of Export Performance”. Clause (b) of para 3.17 provides that MEIS rewards can be claimed either by the supporting manufacturer, (along with disclaimer from the company/firm who has realized the foreign exchange directly from overseas), or by the company/firm who has realized the foreign exchange directly from overseas. In other words, both manufacturer, exporter as well as merchant exporter, are eligible for MEIS rewards and then it talks about certain ineligible categories which we need not elaborate.
52. The Supreme Court in case of Ponni Sugars (Supra) has laid down what is commonly called as “the purpose test”. The Supreme Court held that where the object of the scheme is to enable the assessee to run the business more profitably (assistance in carrying on trade/business, meeting operating/recurring costs), the amount received under the scheme would be in the nature of a revenue receipt. Where, however, the object is to enable the assessee to set up a new unit or expand an existing unit, (assistance tied to creation/expansion of capital asset, or repayment of capital borrowings for that purpose), the receipt would be capital in nature. A related and reinforcing user/application test is also observed in the said ruling in case of Ponni Sugars & Chemicals Ltd. (Supra), drawing from its earlier ruling in case of Sahney Steel & Press Works Ltd. (Supra) ruling by the House of Lords in case of Crook (HM Inspector of Taxes) v. Seaham Harbour Dock Co. [1931] 16TC 333.. The Supreme Court held that in Sahney Steel & Press Works Ltd. (Supra), the assessee was free to use the money in its business entirely as it liked (not obliged to spend the money for a particular purpose), which was taken as a marker of a revenue receipt and in Ponni Sugars & Chemicals Ltd. (Supra), and in case of Seaham Harbour Dock Company, the assessee was obliged to apply the money for a specific capital purpose (the repayment of term loans taken for setting up/expansion of units, dock extension), which is taken as a marker of a capital receipt. The Supreme Court treated this earmarking/utilization obligation as an important corroborative evidence of the scheme’s true object. Another feature which the Supreme Court observed, referring to its earlier decision in Sahney Steel & Press Works Ltd. (Supra) case, in terms of whether the subsidy was granted only after commencement of production on a recurring year-on-year basis tied to ongoing operations which points to revenue character as opposed to being tied to capital investment thresholds and production capacity expansion with a necessary nexus to setting up/enlarging the unit, pointing to capital character of the receipt.
53. Applying the aforesaid legal proposition so laid down by the Supreme Court to the MEIS scheme under consideration, as we have noted earlier, the stated objective of the MEIS scheme is to offset infrastructure inefficiencies and associated costs involved in export of goods to improve India’s export competitiveness. We find that the MEIS scheme rewards are provided to compensate for cost inherent in the ordinary course of exporting, such as freight, logistic, other related forseen/unforeseen transaction cost in relation to export of goods and thus to compensate for infrastructural handicaps/challenges in relation to export of goods, which, at times are beyond the control of the exporters and thus leading to inefficiencies, both in terms of time and cost. The objective is thus to compensate the exporters for such costs and to encourage them in maintaining their export competitiveness vis-a-vis other exporters. This is qualitatively identical to Sahney Steel fact pattern, where the subsidy was meant to meet recurring expenses and was not for acquiring the capital asset and not granted for production of or bringing into existence any new asset. We find that there is nothing in the MEIS objective which speaks of setting up of new unit, capacity expansion, or capital investment, the touchstone that made the Supreme Court treat the sugar schemes as capital in Ponni Sugars(Supra) case. We therefore find that on the purpose test, MEIS scheme aligns with the revenue side of the Ponni Sugars (Supra) decision.
54. Further, we find that one of the decisive fact before the Supreme Court in Ponni Sugars (Supra) case (para 16 and 17) was that the assessee was obliged to use the incentive only for repayment of term loan undertaken for setting up new units/expansion. The MEIS rewards, by contrast, are freely available scrips/credits with no statutory or scheme-mandated obligation to apply them towards any capital purpose, as they can be used to pay taxes and duties, or monetized (being transferable) and used exactly as an exporter common business funds. This is precisely the “free-to-use entirely as it liked position”, the Court in Sahney Steel (Supra) treated as a character of a revenue receipt. Under the Ponni Sugars (Supra) case, this earmarking is a strong indicator for holding the incentive as capital receipt which is clearly absent, in the instant case.
55. Further, we note that the Supreme Court found it significant that in Sahney Steel, the subsidy was paid year after year only after setting up of the new industry and only after commencement of production, which made it assistance given for the purposes of carrying on the business. The MEIS scheme operates identically. The reward is computed as a percentage of FOB value on each qualifying export shipment already made. It is not a one-time grant tied to project cost or capacity building/enhancement, but a recurring transaction-by-transaction benefit contingent on ongoing trading operations. Under Ponni Sugars, the point of time at which the subsidy was paid was held not relevant as an isolated fact, but here in the present case, timing corroborates purpose. It confirms that the reward is bound to the conduct of trade(exports) and not to the creation of productive capacity.
56. Further, we find that in para 11, the Supreme Court identified four factors that tipped the 1980/1987 sugar schemes towards capital, i.e, (i) benefit confined to new/substantially expanded units, not to supplement trade receipts; (ii) a minimum capital investment threshold; (iii) quantum of benefit linked to increase in production capacity; (iv) mandatory utilization for loan repayment. We find that none of these four factors are present in the MEIS scheme, as the scheme is available to exporters generally (not conditioned on being a new/expanded unit), including to merchant exporters, has no capital investment eligibility threshold, computes the reward as a function of export turnover, (not production capacity increase) and imposes no repayment/capital application condition. This absence is significant, as it was precisely this factual matrix, and not the mere fact that the incentives were routed through price/duty mechanism, that led the Supreme Court to override the Revenue’s “price is inherently revenue” argument.
57. We therefore find that applying the ratio so laid down by the Supreme Court and comparison of the schemes against the criteria identified by the Supreme Court in terms of object test, we find that under the Sugar Incentive Scheme, the object was to set up/expand the unit, whereas under the MEIS Scheme, the object is to offset export cost and improve competitiveness. Secondly, in terms of utilization obligation, under the Sugar Incentive Scheme, it was mandatory to be utilized for loan repayment for new/expanded unit, however, in the MEIS Scheme, it is freely usable and transferable and can be monetized. In terms of eligibility criteria, under the Sugar Incentive Scheme, it was for new units or the units undertaking substantial expansion, whereas under the MEIS Scheme, all qualifying exporters, both manufacturer-exporters as well as the merchant exporters, are eligible to claim the benefit under the MEIS Scheme. In terms of nexus criteria, under the Sugar Incentive Scheme, the quantum of benefit was linked to increase in production capacity, whereas under the MEIS scheme, it is linked to the value of exports already made and lastly, in terms of timing, under the sugar incentive scheme, it was investment-linked and project-related, whereas under the MEIS scheme, it is recurring and on export shipment basis.
58. We, therefore, find that on every criterion so laid down in terms of purpose test, the MEIS rewards align with a revenue character rather than the capital character and the object of the scheme is to defray costs incidental to carrying on business of exporting and to make exports more competitive i.e, to help the Indian exporters run their export business more profitably and not to fund the creation, acquisition, or expansion of capital assets and there is no obligation to apply the reward towards any capital purpose.
59. In the context of pharmaceuticals industry in particular, as per the Foreign Trade Policy Statement which explains the vision, goals and objectives underpinning the Foreign Trade Policy for the period 2015-2020, as updated through the mid-term review completed in December 2017, access to many advanced markets remain constrained by Non-Tariff Barriers (NTB) such as regulatory hurdles in the form of prolonged and unpredictable timelines for registering Indian drugs, compliance mandates, or safety standards affecting India’s pharmaceutical export dynamics. It has been stated that the pharmaceutical sector is beset with several challenges and these challenges include the following: (i) Campaigns to malign generic products as being in violation of India’s IPR commitments; (ii) Alleged lack of compliance of generic medicines coming out of India, with quality standards; (iii) India’s over dependence on some sources for its active pharmaceutical ingredients (APIs); (iv) India not being party to the PIC/S22 Convention and Indian Pharmacopeia being not recognized yet in major markets; and (v) The practice by some countries to link the domestic pricing policies to export prices forcing Indian exporters to price their products with extremely low margins. We therefore find that in this context of non-tariff barriers and related hurdles/challenges and to overcome the same and to maintain their product competitiveness and at the same time, allowing reasonable margins and profitability, the incentives have been provided to pharmaceutical companies in general and the assessee company in particular. In the instant case, it is not even the case of the assessee that by virtue of the MEIS Scheme, it has led to setting up of new manufacturing units or the expansion of the existing manufacturing units. The assessee, being a manufacturer of pharmaceutical drugs and already in the business of manufacture and exports (having availed the benefits of earlier export promotion schemes in the earlier years), and being eligible to avail the MEIS scheme and by virtue of export of specified goods to specified export markets, has been granted the duty credit scrips under the MEIS Scheme. We therefore find that from the perspective of “purpose test” so laid down by the Supreme Court in the Ponni Sugar (Supra) case, the MEIS rewards are clearly classifiable as revenue receipts forming part of the assessee’s business income and not as capital receipts.
Examination in the context of Section 2(24)(xviii) of the Act :
60. Section 2(24)(xviii) of the Act as introduced w.e.f. 01.04.2016 reads as under :-
“2(24) “income” includes —
………………………………..
(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than, —
| (a) | the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or |
| (b) | the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be; |
61. A literal construction of the aforesaid provision would mean that the assistance could be in the form of either a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement or the assistance could be in any other form by whatever name called. In other words, there are certain specific instances/form of assistance and at the same time, it has been provided that there could be other instances/form of assistance which could not be forseen/comprehended presently or may arise in future and thus, it has been provided by way of any other assistance by whatever name called i.e, irrespective of the nomenclature of such assistance. The exact nomenclature of assistance is thus not relevant to fall in the definition of income subject to two exceptions carved out in terms of sub-clause (a) and (b). We find that the definition is inclusive to cover “specific form of assistance” and at the same time, elastic enough to cover “any other form of assistance”. We also find that the said construction is also in tune with the intent of the legislature while introducing the said provisions in the statute and reference can be drawn to the CBDT Circular No 19/2015 (supra) wherein it has been provided as under:
“5.1 Sub-section (2) of section 145 of the Income-tax Act provides that the Central Government may notify Income Computation and Disclosure Standards (ICDS) for any class of assessees or for any class of income. The Central Board of Direct Taxes (CBDT) notified ICDS-I to ICDS-X vide Notification No.S.O. 892(E) dated 31st March, 2015 after wide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to depreciable asset shall be recognised as income in accordance with the provisions of the said ICDS. The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidance for treatment of Government grants relating to acquisition of an asset. However, there was no specific guidance available under the provisions of the Income-tax Act for treatment of other Government grants. During the public consultations for ICDS, the stakeholders suggested that in order to avoid any future controversy in this matter, there should be specific provision in the Income-tax Act for treating these Government grants as income. The Accounting Standard Committee, which drafted the ICDS, has also examined the suggestions/comments received during public consultations and suggested that the issue of legislative amendment for bringing certainty in this matter may be examined. In order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section 2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act.
5.2 As mentioned in Press Release dated 5th May, 2015, the amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him.”.
5.3 Applicability:- This amendment takes effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years.”
62. As can be seen from the aforesaid CBDT circular, the legislature felt that though there has been amendment in the machinery provisions, in tune with ICDS standards, where all government grants except relating to depreciable assets shall be recognised as income, there is no specific guidance/provisions in the charging provisions for treatment of government grants other than grants relating to depreciable assets and in view of the absence of specific charging provision in the Act for treating the government grants as income, it was felt necessary and essential to bring in legislative amendment for bringing certainty and avoiding future litigation/controversy and to provide for the aforesaid definition of income to include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with explanation (10) to section 43(1) of the Act.
63. Notably, the intention of the legislature is clear where it provides that the amended definition of income shall not apply to LPG Subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried out by him. Therefore, any welfare subsidy provided by the Central or state government or any local authority/body/agency and which is received by an individual in his/her personal capacity will not be construed as income in terms of the amended definition of income in terms of section 2(24)(viii) of the Act, besides the two exceptions specifically carved out.
64. Now, coming to Rule of ejusdem generis, which has been pressed in support by the ld Counsel for the assessee. In this regard, we can refer to the decision of the Supreme Court in case of D. N. Singh v. CIT 454 ITR 595 (SC), available as part of the legal compilation submitted by the assessee (pages 46-79) wherein the Supreme Court referred to its earlier decisions in case of CIT v. Smifs Securities Ltd 348 ITR 302 (SC)/13 SCC 488, Rohit Pulp and Paper Mills Ltd. v. CCE (SC)/3 SCC 447 and Rainbow Steels v. CST (SC)/2 SCC 141 and has laid down how the aforesaid rule of construction should be applied in a particular case and has held in para 73-76 as under:
“73. Section 69A provides for unexplained ‘money, bullion, jewellery’. It is thereafter followed by the words ‘or other valuable articles’. Does this mean that the words ‘other valuable articles’ must be read ejusdem generis? The principle applies when the following conditions are present [Principles of Statutory Interpretation by Justice G P Singh, 14th Edition]:
| “ | (1) the statue contains an enumeration of specific words; |
| (2) | the subjects of enumeration constitutes a class or category; |
| (3) | that class or category is not exhausted by the enumeration; |
| (4) | the general terms follow the enumeration; and |
| (5) | there is no indication of a different legislative intent”. If the subjects of enumeration belong to a broad based genus as also to a narrower genus, there is no principle that the general words should be confined to the narrower genus.” |
74. In the context of Explanation 3(b) to Section 32(1) of the Act, this Court in Commissioner of Income Tax, Kolkata v. SMIFS Securities Limited, held as follows:
“8. We quote hereinbelow Explanation 3 to Section 32(1) of the Act:
“Explanation 3.—For the purposes of this sub-section, the expressions ‘assets’ and ‘block of assets’ shall mean—
(a) tangible assets, being buildings, machinery, plant or furniture;
(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.” Explanation 3 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature”. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
9. In the circumstances, we are of the view that “goodwill” is an asset under Explanation 3(b) to Section 32(1) of the Act.”
75. In Rohit Pulp and Paper Mills Limited v. Collector of Central Excise, Baroda, the Court was dealing with an exception clause in an exemption notification and considered the applicability of the Principle of Noscitur a Sociis, to the facts:
“12. The principle of statutory interpretation by which a generic word receives a limited interpretation by reason of its context is well established. In the context with which we are concerned, we can legitimately draw upon the “noscitur a sociis” principle. This expression simply means that “the meaning of a word is to be judged by the company it keeps.” Gajendragadkar, J. explained the scope of the rule inState of Bombay v. Hosptial Mazdoor Sabha [(1960) 2 SCR 866 : AIR 1960 SC 610 : (1960) 1 LLJ 251] in the following words: (SCR pp. 873-74)
“This rule, according to Maxwell, means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. The same rule is thus interpreted in “Words and Phrases” (Vol. XIV, p. 207): “Associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it; such doctrine is broader than the maxim ejusdem generis”. In fact the latter maxim “is only an illustration or specific application of the broader maxim noscitur a sociis”. The argument is that certain essential features of attributes are invariably associated with the words “business and trade” as understood in the popular and conventional sense, and it is the colour of these attributes which is taken by the other words used in the definition though their normal import may be much wider. We are not impressed by this argument. It must be borne in mind that noscitur a sociis is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention of the legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the present rule of construction can be usefully applied. It can also be applied where the meaning of the words of wider import is doubtful; but, where the object of the legislature in using wider words is clear and free of ambiguity, the rule of construction in question cannot be pressed into service.” This principle has been applied in a number of contexts in judicial decisions where the court is clear in its mind that the larger meaning of the word in question could not have been intended in the context in which it has been used. The cases are too numerous to need discussion here. It should be sufficient to refer to one of them by way of illustration. In Rainbow Steels Ltd. v. CST [(1981) 2 SCC 141 : 1981 SCC (Tax) 90] this Court had to understand the meaning of the word ‘old’ in the context of an entry in a taxing traffic which read thus:
“Old, discarded, unserviceable or obsolete machinery, stores or vehicles including waste products………………………….” Though the tariff item started with the use of the wide word ‘old’, the court came to the conclusion that “in order to fall within the expression ‘old machinery’ occurring in the entry, the machinery must be old machinery in the sense that it has become non-functional or non-usable”. In other words, not the mere age of the machinery, which would be relevant in the wider sense, but the condition of the machinery analogous to that indicated by the words following it, was considered relevant for the purposes of the statute.”
76. About Noscitur a Sociis and how it compares with ejusdem generis, the following statement in G.P. Singh (supra) on Statutory Interpretation is apposite:
“It is a rule wider than the rule of ejusdem generis; rather the latter rule is only an application of the former.”
65. As held by the Supreme Court, the principle of ejusdem generis applies where the statue contains enumeration of specific words, the subject of enumeration constitutes a class or category, that the class or category is not exhaustive by the enumeration, that the general terms follow the enumeration and there is no indication of a different legislative intent. The same principle applies while construing rule of noscitur a sociis which is wider than the rule of ejusdem generis and the latter being the application of the former. It was held that the rule of noscitur a sociis is only a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It was held that it is only where the intention of the legislature in associating wider words with words of narrower significance is doubtful or otherwise not clear, that the present rule of construction can be usefully applied. It was further held that it can also be applied where the meaning of the words of the wider import is doubtful, however, where the object of the legislature in using the wider words is clear and free of ambiguity, the said rule of construction cannot be pressed into service.
66. In the instant case, we find that the intention of the legislature is clear and unambiguous whereby it has provided certain specific forms of assistance, followed by any other form of assistance, by whatever name called, without limiting the latter assistance by any nomenclature, which will be construed as income. Any other form of assistance has been kept open, elastic and wide enough to factor in any other form of assistance which is either in existence and couldn’t be forseen/comprehended given under multiplicity of such schemes – by the Central/state government/agencies, while introducing the amendment or which can be provided at any future point in time without necessitating bringing-in further legislative amendments to the definition. We accordingly are of the considered opinion that the said rule of construction cannot be pressed into service considering the facts and circumstances of the present case.
67. The learned counsel for the appellant submitted that, following the principle of ejusdem generis, the residuary phrase “by whatever name called” would apply only when the government aid falls in one or the other categories, as enumerated before viz. (i) subsidy, or (ii) grant, or (iii) cash incentive, or (iv) duty drawback, or (v) waiver, or (vi) concession, or (vii) reimbursement. We are unable to agree. This according to us is not the proper import of the principle or context of ejusdem generis. We find that if a particular aid falls clearly within one or the other of the seven categories as enumerated above (appearing prior to the phrase “by whatever name called”), then there is no occasion for application of the residuary part, viz. “by whatever name called”. The principle of ejusdem generis essentially envisages that anything falling under the residuary clause, should be similar in nature or of similar species to one or the other clauses appearing before and not identical with it. For if it is identical, there is no occasion to apply the residuary clause.
68. We now propose to deal with the contentions based on the ‘definition’ of the various clauses as relied upon by the ld Counsel for the assessee in the context of “reward” under the MEIS Scheme which is subject matter of consideration before us.
69. In our considered view, ‘reward’ would take into its ambit one or the other categories as set out in Section 2(24)(xviii) of the Act. For instance, ‘grant’ which is defined as “grant which is made by the government to any enterprise whose promotion is considered to be in public interest” in as much as the objective of the MEIS, as noticed earlier, is enhancing country’s export competitiveness. Thus, in our view, applying the principle of ejusdem generis, the phrase “by whatever name called” at the end of the seven categories as set out in clause (xviii) of Section 2(24) of the Act would certainly include assistance given under MEIS as a reward. The only condition for getting such assistance/reward is realisation of export proceeds/foreign exchange. We are also unable to accept the contention on behalf of the appellant-assessee that the dominant object of the scheme being improvement of export competitiveness of the “country as a whole” and not as an individual assessee would militate against the same being covered by clause (xviii) of Section 2(24) of the Act. It is significant to note, for instance, that ‘subsidy’ as defined in Wharton’s Law speaks of grant being made by government to any private enterprise whose promotion is considered to be in public interest. The improvement of export competitiveness of the country as a whole has necessarily to be in the public interest as a whole. Further, MEIS reward is literally structured and administered as a percentage of FOB value of exports and therefore is a nature of an incentive given to the exporters, thus falls in the description of cash incentive even though not styled as a formal cash incentive. We therefore find that MEIS rewards fit comfortably within at least three of the alternative description in the clause. The phrase “by whatever name called” was specifically drafted to take into consideration schemes irrespective of particular label or mechanism or nomenclature. In other words, the principle in Ponni Sugar case (form is immaterial) is now redeployed by the legislature in terms of specific amendment. Further, admittedly, neither of the two exclusion applies in the instant case. Exclusion (a) talks about subsidy to be netted off against the actual cost of a depreciable asset. MEIS is not tied to acquisition of any specific asset, it is computed on export turnover, not capital expenditure, so there is no actual cost adjustment under Explanation 10 to Section 43(1) in which it could be absorbed. Secondly, exclusion (b) is plainly inapplicable, not being a corpus grant to a trust or an institution. In the event, if we exclude the assistance under the MEIS, we would be enlarging the scope of clause (a) and (b) of Section 2(24) of the Act, which is not permissible.
70. We, therefore, find that Section 2(24)(xviii) of the Act, as introduced w.e.f. 01.04.2016, and particularly, the phrase ‘assistance by whatever name called’ is all pervasive and would take into its ambit the nature of assistance extended under the MEIS, the mere use of the word ‘reward’, notwithstanding.
71. In fact, we find that both the aforesaid analysis happens to converge here and both point to taxability, but they do so for different reasons. Applying the Ponni Sugar “purpose test”, it would tax MEIS as revenue receipts as its object is revenue in character, and Section 2(24)(xviii) would tax it as income by statutory deeming definition which is all pervasive enough to take into consideration the assistance by way of rewards extended under the MEIS Scheme.
72. Now, coming to the decisions relied upon by both the ld. Senior Counsel and ld CIT-DR for the Revenue. In Mayur Uniquoters Ltd. (supra), the following question no. 7 was raised by the assessee :-
“7. On the facts and circumstances of the case, the appellant wishes to lodge claim of Export Incentives availed in the form of MEIS of Rs.2,89,31,297/-as capital receipt in computing tax liability under the normal provision of the Act.”
73. The Division Bench dealt with the said ground in para 21 onwards. The Bench noted the objective of the scheme and particularly relied upon the term ‘reward’ as used therein, which according to the Division Bench was different from the term ‘assistance’. The Bench has also noticed the decision of Jammu & Kashmir High Court in Shree Balaji Alloys (supra), wherein it was held that the excise duty refund, interest subsidy and insurance subsidy received with the object of creating avenues for perpetual employment in the State for accelerated industrial development is a capital receipt. In our opinion, the Division Bench of this Tribunal has not considered the import of the clause ‘by whatever name called’ as introduced by Section 2(24)(xviii) of the Act.
74. The Bench has noticed the decision of Jammu & Kashmir High Court in Shree Balaji Alloys (supra) and the decision of Rajasthan High Court in Pr. CIT v. Nitin Spinners Ltd. (Raj). It is necessary to note that both these decisions arose prior to the introduction of clause (xviii) to Section 2(24) of the Act. In M/s. Shree Balaji Alloys (supra), the question was whether the excise refund and interest subsidy received by the appellant-assessee in pursuance to the incentive announced by the government, (which was part of the strategy and action plan for development of industries and generation of employment in the State of Jammu & Kashmir) was capital or revenue in nature. The Jammu & Kashmir High Court, after taking note of the memorandum dated 14.06.2002, came to the conclusion that the excise refund and interest subsidy cannot be considered as a revenue receipt. It can be seen that the principal object was development of industry and generation of employment in Jammu and Kashmir.
75. Nitin Spinners (supra) was again a case relating to assessment year 2013-14, much prior to the introduction of clause (xviii) of Section 2(24) of the Act w.e.f. 01.04.2016. In that case, three subsidies, viz. technology upgradation fund, focus market scheme and electricity duty, were claimed to be of capital nature. The Rajasthan High Court found that subsidy for technology upgradation was of a capital nature. So far as the focus market scheme is concerned, the High Court found that the amount was not an export incentive, but a capital receipt unlike in the present case where the assistance given under MEIS is for encouraging exports and improving the export competitiveness of the country as a whole. So far as subsidy for electricity under the Rajasthan Investment Promotion scheme is concerned, the same was held to be capital receipt granted in larger public interest as being linked to capital interest. In our considered view, the decisions relied upon are distinguishable on facts apart from being rendered prior to the introduction of clause (xviii) of Section 2(24) of the Act.
76. In Leshark Global LLP (supra), reliance was placed on behalf of the assessee on the following observations of the Bench in para 85:-
“85. We find considerable force in the above argument. The legislature, in its wisdom, has adopted a wide and inclusive language in Section 2(24)(xviii), covering a range of governmental aids from subsidies to reimbursements. Yet, despite its expansive sweep, the provision does not include “reward.” The use of the phrase “by whatever name called” in clause (xviii) does not automatically encompass every form of State support, especially where the scheme itself is distinct in substance and form. The MEIS scheme was conceptualised not as a profit-linked assistance or costreimbursement mechanism, but as a policy instrument to reward exports to incentivised markets, framed under the Foreign Trade Policy. This distinction is not merely semantic but structural. The tradable duty credit scrips awarded under MEIS are not calculated based on cost, loss, or business exigency, but rather as a fixed percentage of FOB value of eligible exports. Such scrips, granted to stimulate economic activity and trade flows, partake the nature of a capital accretion rather than a revenue inflow.”
77. We find that the Division Bench noticed that the legislature in its wisdom has adopted a wide and inclusive language in section 2(24)(viii) covering a range of government aids and subsidies has principally gone by the use of word ‘reward’ in the scheme. The Bench has also noticed that clause (xviii) of Section 2(24) of the Act was introduced around the same time when the MEIS was introduced and, therefore, the omission to include ‘reward’ in clause (xviii) was conspicuous. With respect, we are unable to accept that the mere non-inclusion of the term ‘reward’ in the array of terms included in clause (xviii) of Section 2(24) of the Act would be decisive, particularly when after examining the nature of the term ‘reward’ in the context of the MEIS Scheme applying the principle of ejusdem generis, the term ‘reward’ would be covered by the residuary clause “assistance by whatever name called”. It is necessary to note that a legislation, particularly a complex one, operating in the realm of business, commerce and industry cannot foresee or fathom all the terms used. It is in this context that the use of the phrase “assistance by whatever name called” has to be interpreted. We are unable to agree with the conclusion as reached in the decision in Leshark Global LLP (supra).
78. The case of Dhanuka Laboratories Ltd. (supra), particularly relies upon the decision of Division Bench in the case of Eastman Exports Global Clothing (P) Ltd. (supra). In case of Eastman Exports (supra), the Division Bench in para 31 has held as under:
“31. On careful reading of the above judgements along with written note of the ld. AR, we note that the meaning of an unclear or ambiguous word or phrase can be determined by the words surrounding it and the words surrounding the words “by whatever name called” are the words subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement. Therefore, in our opinion, that the words “by whatever name called” only qualifies the words “subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement” and not the word “assistance”. As canvassed by the ld. AR, we note that the principle of ejusdem generis focuses on interpreting a general term in a list based on specific accompanying terms, taking support from the decision of Hon’ble Supreme Court in the case of Lokmat Newspaper Pvt. Ltd. v. Shankar Prasad (supra), Municipal Corporation of Greater Bombay v. Bharat Petroleum Corporation Ltd. (supra) and Grasim Industries Ltd. v. Collector of Customs (supra), in our opinion, the words “by whatever name called” do not expand the scope of the word “assistance”, but, only expands the scope of the words “subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement”. We thus, hold that the word “assistance” is independent of the words “by whatever name called” and words “by whatever name called” are not qualifying the word “assistance”. By applying the same finding, let us see the difference between the words “reward” and “assistance”. As per the note given by the ld. AR, the term “reward” is defined as a “thing given in recognition of service, efforts or achievement”, whereas, the term “assistance” is defined as the provision of money, resources or information to help someone, thus, we find a “reward” is granted in a recognition of services, an assistance is given to someone as a help, but not in recognition of a service rendered. Therefore, in our opinion, there is a clear difference between the words “reward” and “assistance”, thus, we hold the “reward” as in the Foreign Trade Policy – 2015 and the “assistance” as found in the provisions under section 2(24)(xviii) of the Act are different from each other, the “reward” does not fall within the definition of sub-clause (xviii) of sub-section (24) of section 2 of the Act.”
79. With respect, we are unable to subscribe to the view of the Division Bench that there is any ambiguity or lack of clarity where the legislature has used the phrase “by whatever name called”. The said phrase has been used to keep the meaning of assistance as wide/open and all pervasive and the same cannot be read as ambigious or unclear. Secondly, we find that the Division Bench has held that the phrase “by whatever name called” only qualifies the word “subsidy, grant or cash incentive, etc” and not the word “assistance”. In this regard, we find that the legislature has used a continuous sentence “assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee” and there is no punctuation mark in-between whereby one can read “by whatever name called” qualifying the earlier specific form of assistance. As we have held supra, the definition of income has been amended to provide for specific instances of assistance and at the same time, it has been provided that there could be other form/instances of assistance which could not be comprehended presently or may arise in future and thus, it has been provided by way of any other assistance irrespective of the nomenclature of such assistance and the definition is thus inclusive to cover specific form of assistance and at the same time elastic and wide enough to cover any other form of assistance. Further, we find that the issue before the Division Bench was in context of sale of scrips already granted to the assessee under the erstwhile MLFPS Scheme (which later merged into MEIS scheme) rather than grant of scrips by the government and the Division Bench has gone by the earlier decisions of the Coordinate Benches in assessee’s own case for years prior to the amendment.
80. The case of Gravita Metal Inc. (supra) is clearly distinguishable on facts. In that case, the assessee firm had set up a unit in Kathua, to avail the benefits of new industrial policy launched by the Ministry of Commerce & Industry to accelerate industrial development for the state of Jammu & Kashmir and as per which, the new industrial units were entitled to 100% excise duty exemption for period of ten years from date of commencement of commercial production. In that factual background, cross-appeals were filed and taken up by the Coordinate Bench and the additions were deleted following the principle of hypothetical income and going by the fact that “exemption” is not specified in the amended definition of income u/s 2(24)(xviii). It can be seen that the predominant object of the exemption was the overall industrial development of a region. In our considered view, the case turned on its own facts.
81. In Hyundai Motors (supra), the Division Bench has held that the effect of the amendment by way of introduction of section 2(24)(viii) is that various concessions etc. provided by specified authorities by whatever name called will be included within the meaning of income subject to exceptions stated therein. It was held that the phrase “by whatever name called” captures the essence of the amendment as brought out by the legislature and the same in crystal clear terms expresses the intention of the legislature which is to bring to all kinds of assistance irrespective of their nature, manner of receipt and agency from whom it was received. The said decision has thereafter been followed in case of India Cements (supra).
82. In case of Eris Life Sciences Ltd(supra), the Division Bench has again held that the amendment introduced by the Finance Act, 2015 is substantive and unambiguous wherein the legislature has expressly provided that any subsidy, grant, waiver, concession or reimbursement “by whatever name called” constitutes income and has simultaneously carved out only two narrowly defined exclusions. It was held that where the statue expressly lays down what is to be excluded, anything not excluded must necessarily be included applying the principle of expression unius est exclusio alterius. It was further held that it is a settled proposition that when the language of the statue is plain and unambiguous, one must give effect to it irrespective of any perceived hardship or inequity to the assessee.
83. We respectfully approve of the decisions in Hyundai Motors (supra), India Cements (supra) and in Eris Life Sciences Ltd. (supra).
Conclusion:
84. In light of aforesaid discussion and considering the entirety of facts and circumstances of the case, the Question so raised for our consideration is answered in the affirmative and in view of the amended provisions of Section 2(24) introducing clause (xviii) w.e.f. AY 2016-17, the amount received by the assessee under the MEIS of the Foreign Trade Policy, 2015 is held taxable as a revenue receipt.
85. The appeals shall be placed before the regular bench for disposal according to law.