2015 (10) TMI 2566 - AT - Income Tax

Interest subsidy - nature of receipt - revenue or capital subsidy - repayment of loan acquired for acquisition of capital assets - Held that - In the case of Ponni Sugars and Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT their lordship has held that the nature of subsidy is to be determined in respect of purpose for the subsidy is granted. The character of subsidy is to be determined with respect to subsidy is granted. In other words one has to apply the purpose test. The point of time as subsidy paid is not relevant. The source is immaterial if the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is of revenue receipt. On the other hand, object of the assistance under the subsidy scheme is to enable the assessee to setup a new unit or to expend an existing unit then the receipt of the subsidy is a receipt in capital account. Their lordship has further held that after reversing the judgment of the High Court that main eligibility condition in the schemes was that the incentive had to be utilized for repayment of loans taken by the assessee to setup new units or for substantial expansion of an existing unit. Their lordship accordingly held that the subsidy received by the assessee was not in the course of trade but was of capital nature. Carefully perused the orders of the Tribunal referred by the assessee and we find that in the case of ACIT Vs. Shree Cement Ltd 2011 (9) TMI 561 - ITAT JAIPUR an identical fact that the interest subsidy was considered to be the capital subsidy. Therefore, in the light of aforesaid judgments, we are of the view that the CIT(A) has rightly treated the interest subsidies as a capital receipt as it was received only for repayment of loan acquired for acquisition of capital assets. Accordingly, the Revenue fails on this issue.

Summary

Issues Involved:
1. Depreciation on goodwill.
2. Nature of interest subsidy received by the assessee.
3. Preliminary or pre-operative expenses.

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill:
The Revenue contested the allowance of depreciation on goodwill claimed by the assessee. The Tribunal had previously ruled in favor of the assessee for AYs 2005-06 and 2006-07, stating that the assessee is entitled to depreciation on goodwill. The Tribunal's decision was based on the interpretation of Explanation 3 to Section 32(1) of the Income Tax Act, which includes goodwill as an intangible asset eligible for depreciation. The Tribunal cited several judgments, including the Supreme Court's decision in CIT vs. Smifs Securities Ltd., which held that goodwill acquired in amalgamation is a depreciable asset. The Tribunal reaffirmed its earlier decision, finding no contrary view presented by the Revenue, and confirmed the CIT(A)'s order allowing depreciation on goodwill.

2. Nature of Interest Subsidy Received by the Assessee:
The assessee received an interest subsidy from the Rajasthan Government under the Raj Investment Promotion Policy-2003, which it treated as a capital receipt. The Assessing Officer (AO) treated it as revenue receipt, arguing it was an incentive for running the business. The CIT(A) examined the scheme and concluded that the subsidy aimed to assist the assessee in repaying loans taken to acquire a cement division, thus classifying it as a capital receipt. The CIT(A) relied on the Supreme Court's judgments in Sahney Steel Works Ltd. vs. CIT and Ponni Sugars and Chemicals Ltd. vs. CIT, which emphasize the purpose of the subsidy in determining its nature. The Tribunal upheld the CIT(A)'s decision, noting the subsidy was linked to loan repayment for acquiring capital assets, thus qualifying as a capital receipt.

3. Preliminary or Pre-operative Expenses:
The AO disallowed Rs. 4,20,000 claimed by the assessee as preliminary or pre-operative expenses under Section 35D of the Act. The CIT(A) allowed the claim, referencing its earlier decision for AY 2005-06, which was accepted by the Revenue. The Tribunal found no reason to deviate from the CIT(A)'s order, as the Revenue had not contested this issue previously. Consequently, the Tribunal confirmed the CIT(A)'s decision, allowing the preliminary expenses claimed by the assessee.

Conclusion:
The Tribunal dismissed the Revenue's appeals, confirming the CIT(A)'s orders on all issues. The assessee was entitled to depreciation on goodwill, the interest subsidy was treated as a capital receipt, and the preliminary expenses were allowed as claimed.