2016 (9) TMI 1269 - AT - Income Tax

Addition made on account of interest subsidy - revenue or capital subsidy - Held that - The subject subsidy is a capital receipt. See Commissioner of Income-tax Versus Sham Lal Bansal 2011 (1) TMI 409 - PUNJAB AND HARYANA HIGH COURT , CIT v. Ponni Sugars & Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT , DCIT Versus M/s GLOSTER JUTE MILLS LTD 2014 (7) TMI 172 - ITAT KOLKATA

Summary

Issues:
1. Treatment of interest subsidy as capital or revenue receipt.

Analysis:
The appeals were filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for the assessment years 2011-12 and 2012-13. The primary issue raised was the deletion of the addition made by the Assessing Officer on account of interest subsidy, treating it as a capital receipt. The Revenue contended that the subsidy should be considered a revenue item as it related to interest, which is a revenue expenditure under the Income Tax Act. The assessee, a company engaged in manufacturing and trading of cloth and yarn, availed the Technology Upgradation Fund Scheme (TUFS) and received interest subsidy. The Assessing Officer relied on the Supreme Court decision in the case of Sahney Steel and Press Works Ltd. to treat the subsidy as a revenue receipt since it was not reduced from the capital assets for depreciation purposes.

The ld. CIT(A) reviewed the AO's order and the submissions of the assessee, citing the judgment of the Hon'ble Punjab & Haryana High Court in a similar case and the decision of the Hon'ble Supreme Court in Ponni Sugar and Chemicals Ltd. The CIT(A) concluded that the subsidy was a capital receipt, aligning with the objective of the subsidy scheme to enhance technology apparatus by assisting in acquiring machinery. The Tribunal upheld the CIT(A)'s decision based on the principles established in various legal precedents, including the purpose test for determining the character of subsidy receipts.

The Tribunal analyzed the nature of the subsidy scheme, emphasizing its objective to upgrade technology in the textile industry. Referring to legal judgments such as Sahney Steel and Press Works Ltd., Sham Lal Bansal, M/s SVG Fashions Ltd., and Gloster Jute Mills Ltd., the Tribunal affirmed that the subsidy received by the assessee was capital in nature. The decisions highlighted the distinction between operational subsidies and capital subsidies, emphasizing that subsidies to enhance business operations are of revenue character, while those aimed at setting up or expanding units are capital receipts. Therefore, based on the consistent legal interpretation, the Tribunal dismissed the Revenue's appeal for the assessment years 2011-12 and 2012-13.