Gauhati High Court Holds Excise Duty Exemption as Capital Receipt, Excludable From MAT Computation Under Section 115JB

Prefatory Note

The decision by the Gauhati High Court in the case of Principal Commissioner of Income-tax v. Greenply Industries Ltd.[i] addresses two pivotal questions in income tax law: first, the taxability of excise duty exemptions received under an industrial incentive scheme, and second, whether such exemptions, even if exempt under normal provisions, should be included when computing book profits under s.115JB of the Income-tax Act, 1961 (‘Act’).

The Court, affirming the findings of the ITAT, ruled that excise duty exemptions granted under a notified industrial policy, with the intention of promoting investment, employment, and regional development, qualify as capital receipts and are neither taxable under the regular provisions nor includible in the computation of MAT.

The ruling is based on the ‘purpose test’ established by the Supreme Court in a series of precedents, providing significant clarity for corporations that avail themselves of tax incentives under state and central policy frameworks.

Facts of the Case

• Greenply Industries Ltd. (‘Assessee’) had established two industrial units in Uttarakhand. These units were eligible for a 100% excise duty exemption for 10 years under the New Industrial Policy, as issued via an Office Memorandum dated 07.01.2003 by the Ministry of Commerce and Industry, Government of India. The policy aimed to incentivize industrial development, foster employment, and promote the use of local resources in backward regions such as Uttarakhand and Himachal Pradesh.

• For the assessment year (‘AY’) 2014-15, the Assessee filed its return, declaring an income of Rs. 49.12 crore, treating the excise duty exemption as a revenue receipt. The case was selected for scrutiny, and the Assessing Officer (‘AO’) passed an assessment order under s.143(3) of the Act, determining a total income of Rs. 54.42 crore. Notably, no dispute was raised at this stage regarding the character of the excise duty exemption.

• In appeal before the Commissioner of Income Tax (Appeals) (‘CIT(A)’), the Assessee raised an additional ground, contending that the excise duty exemption received should be treated as capital receipt, based on jurisprudence such as Sahney Steel, Ponni Sugars, and Shree Balaji Alloys. The CIT(A) accepted this plea and directed the AO to treat the exemption as a capital receipt under s. 4 of the Act. However, he did not render any finding on whether such amount should be excluded while computing book profit under s.115JB.

• Aggrieved, both parties filed cross appeals before the Income Tax Appellate Tribunal (‘ITAT’). The Assessee argued for the exclusion of the amount from minimum alternate tax (‘MAT’) computation under s.115JB, while the Principal Commissioner of Income-tax (‘Revenue’) challenged the recharacterization of the receipt as capital.

• The ITAT allowed the Assessee’s claim and dismissed the Revenue’s appeal. This led to the present appeals before the Gauhati High Court.

Decision of the High Court

The High Court dismissed the Revenue’s appeals and affirmed the order of the ITAT, holding as follows:

Excise Duty Exemption Is a Capital Receipt

Applying the ‘purpose test’ as laid down by the Supreme Court in Sahney Steel & Press Works Ltd. v. CIT[ii]  and CIT v. Ponni Sugars & Chemicals Ltd.[iii], the Court held that the character of a subsidy or incentive must be determined based on its object. Since the exemption in this case was granted for the purpose of industrialization, employment generation, and industrial investment in backward regions, the exemption was held to be capital in nature, irrespective of the timing, form, or source of the subsidy.

The Court further relied on Shree Balaji Alloys v. CIT[iv], a decision by the Jammu and Kashmir High Court and later affirmed by the Supreme Court, which involved an identical scheme of excise duty refunds and upheld the treatment of such incentives as capital receipts.

Exemption Not to Be Included in Book Profits Under s.115JB

Addressing the second question of law, the Court held that once the receipt is held to be capital in nature and not taxable under the normal provisions, it cannot be added back for computing book profits under s.115JB, unless specifically provided for in the Explanation to s.115JB. The Court concurred with the view of the Bombay High Court in CIT v. Harinagar Sugar Mills Ltd.[v], and clarified that capital receipts fall outside the purview of s.115JB unless expressly brought within its fold.

Legitimacy of Raising Additional Grounds Before CIT(A)

The Revenue contended that since the Assessee had not raised the capital receipt claim before the AO, the CIT(A) ought not to have entertained it. The Court rejected this argument, affirming that appellate authorities under the Income-tax Act have wide powers to admit additional grounds, especially when the issue is a pure question of law, and all necessary facts are already on record.

No Interference Warranted With ITAT’s Factual and Legal Findings

The Court noted that the Revenue had not seriously challenged the finding of CIT(A) on the capital nature of the receipt before the ITAT, nor had it produced any contrary evidence to rebut the applicability of the policy or its purpose. Hence, no case for interference was made out.

Accordingly, both substantial questions of law, on the capital nature of the receipt and its exclusion from MAT computation, were answered in favour of the Assessee and against the Revenue.

Our Analysis

The Gauhati High Court’s decision is a sound and well-reasoned application of settled legal principles governing the taxability of government subsidies and incentives, particularly in the context of regional industrial policies. The Court's adherence to the ‘purpose test’ as the decisive factor in characterising a subsidy or exemption is in line with precedents laid down by the Supreme Court in Sahney Steel, Ponni Sugars, Meghalaya Steels[vi], and Chaphalkar Brothers[vii].

The judgment is also significant for its clear affirmation that capital receipts, when not chargeable under the normal computation provisions, cannot be introduced into the MAT computation under s.115JB unless expressly required. This interpretation safeguards the integrity of capital incentives and prevents unintended taxation under alternative mechanisms.

From a procedural standpoint, the Court correctly upheld the right of the Assessee to raise new legal grounds before the first appellate authority, thereby reinforcing the flexible, substantive approach of appellate forums in Indian tax jurisprudence. This aspect is particularly relevant in cases where the return treatment may be inconsistent with subsequent legal developments or judicial pronouncements.

In effect, the ruling provides valuable clarity and relief to companies operating in special economic zones, backward areas, or industrial promotion schemes, reaffirming that statutory incentives granted to promote public policy objectives are not to be construed as revenue receipts unless the dominant purpose is profit-oriented rather than investment-oriented.

End Notes

[i] 2025 SCC OnLine Gau 1640 dated 04.03.2025.

[ii] [1997] 94 Taxman 368.

[iii] [2008] 174 Taxman87.

[iv] [2011] 9 taxmann.com255.

[v] IT appeal No.1132 of 2014, dated 4-1-2017.

[vi] CIT v. Meghalaya Steels Ltd.[2016] 67 taxmann.com 158.

[vii] CIT v. Chaphalkar Brothers [2017] 88taxmann.com 178.

Authored by the Metalegal Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.