MEIS / MLFPS Scrip Sale Proceeds Held as Capital Receipts: ITAT Chennai Explains Scope of Section 2(24)(xviii)

1. Background of the Consolidated Appeals

The Chennai Bench of the ITAT adjudicated a group of eight connected appeals involving the Department and multiple assessees for Assessment Years 2017-18, 2018-19 and 2020-21. The central dispute revolved around:

  • The tax treatment of export-linked benefits, particularly sale proceeds of licences/scrips under Market Linked Focus Product Scheme (MLFPS) and Merchandise Exports from India Scheme (MEIS); and
  • The nature of expenditure incurred on construction of buildings on leasehold land – whether capital or revenue.

The Revenue’s appeal in ITA No. 3326/Chny/2019 for AY 2017-18 in the case of ACIT Vs Eastman Exports Global Clothing Pvt. Ltd. was treated as the lead case, as the core legal issues and factual pattern were common across the batch.

Eastman Exports Global Clothing Pvt. Ltd. is engaged in manufacture and export of knitted hosiery garments and generation/sale of power through windmills. For AY 2017-18, the assessee filed a return declaring total income of ₹.8,99,90,600/-, and tax was paid on book profits. Assessment under Section 143(3) resulted in the Assessing Officer (AO) determining total income at ₹.36,61,77,500/- after, inter alia:

  • Treating MLFPS licence sale proceeds as taxable business income;
  • Capitalising expenditure on construction of building on leasehold land by invoking Explanation 1 to Section 32; and
  • Making disallowance under Section 35(2AB).

In appeal, the CIT(A) granted relief on two counts relevant to this discussion:

  1. Allowed the assessee’s claim that MLFPS receipts/scrip sale proceeds were not taxable; and
  2. Treated expenditure on construction on leasehold land as revenue expenditure.

The Department contested these findings before the ITAT.

2. Core Issue 1: Whether MEIS / MLFPS Scrip Sale Proceeds Are Taxable Income

2.1 Revenue’s Contention

The Department argued that incentives under MLFPS/MEIS are taxable post insertion of Section 2(24)(xviii) by the Finance Act, 2015 with effect from 01.04.2016.

Key Revenue arguments:

  • Section 2(24)(xviii) broadens the scope of “income” to include assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement (by whatever name called).
  • MLFPS / MEIS scrips are, according to the Department, a form of “cash incentive” or assistance squarely covered by this provision.
  • Reliance was placed on:
    • Serum Institute of India (P.) Ltd. v. Union of India [2023] 157 taxmann.com 107 (Bombay) – upholding constitutional validity of Section 2(24)(xviii);
    • Hyundai Motor India Ltd. v. ACIT, ITA No. 3192/Chny/2017, AY 2013-14, where a Coordinate Bench of ITAT had treated Focus Market Scheme (FMS) benefits as revenue receipts; and
    • Provisions of Section 28(iiia)–(iiie) dealing with business income from various export-linked incentives.

The Department also contended that once the legislature had specifically brought such “assistance” within the ambit of income, prior Tribunal decisions in assessee’s own earlier years needed reconsideration for post-2016 assessment years.

2.2 Assessee’s Position

The assessee submitted that MEIS/MLFPS benefits under the Foreign Trade Policy (FTP) 2015-20 were in the nature of “rewards”, not “assistance” as contemplated in Section 2(24)(xviii).

Key submissions:

  • Chapter 3 of Foreign Trade Policy-2015 expressly describes MEIS as a reward aimed at:
    • Offsetting infrastructural inefficiencies and associated costs; and
    • Providing Indian exporters a level playing field in global markets.
  • The assessee relied heavily on earlier ITAT orders in its own case for AYs 2011-12, 2012-13, 2013-14, 2014-15 and 2016-17, wherein MLFPS receipts had already been held to be capital in nature, applying the “purpose test” laid down by the Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd., 306 ITR 392 (SC).
  • It was argued that Section 28(iiib) covers cash assistance (by whatever name called) received or receivable by any person against exports, whereas, in the present case, there was no cash assistance – only duty credit scrips that were in the nature of capital receipt.
  • The assessee also relied on PCIT v. Nitin Spinners Ltd., ITA No. 31 of 2019 (Rajasthan High Court) where benefits under Focus Market Scheme (FMS) were held to be capital receipt; the SLP against this decision had been dismissed by the Supreme Court, lending further weight to the capital-receipt view.

On Section 2(24)(xviii), the assessee emphasised: