Taxability of MEIS Scrips as Revenue Receipts: A Comprehensive Analysis of the ITAT Special Bench Ruling
The classification of export incentives and government subsidies as either capital or revenue receipts has been a subject of protracted litigation in Indian tax jurisprudence. The introduction of Section 2(24)(xviii) to the Income Tax Act 1961 via the Finance Act, 2015, aimed to bring clarity to this domain by expanding the definition of "income." However, the specific tax treatment of rewards granted under the Merchandise Exports from India Scheme (MEIS) continued to generate conflicting judicial opinions.
To resolve this critical issue, a Special Bench of the ITAT Mumbai was constituted in the landmark case of DCIT Vs Aarti Drugs Ltd. The central question before the Special Bench was whether the financial benefits received by an assessee under the MEIS of the Foreign Trade Policy 2015 qualify as taxable revenue receipts, particularly in light of the amended statutory provisions effective from Assessment Year (AY) 2016-17.
Factual Matrix of the Dispute
The assessee, Aarti Drugs Ltd., is a corporate entity engaged in the manufacturing of bulk drugs and specialty chemicals. During the filing of its Return of Income for the relevant assessment years, the assessee initially offered the assistance received under the MEIS as a revenue receipt.
However, during the appellate proceedings before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee raised an additional ground, asserting that the MEIS scrips were actually capital receipts and thus not liable to income tax. The CIT(A) ruled in favor of the assessee for AY 2016-17 and AY 2017-18, reclassifying the MEIS benefits as capital receipts. Aggrieved by this reclassification, the Revenue department escalated the matter to the Income Tax Appellate Tribunal (ITAT).
Given the conflicting decisions by various coordinate benches on the exact nature of MEIS rewards, the Division Bench referred the matter to the President of the ITAT, leading to the constitution of a Special Bench to settle the legal position definitively.