2011 (5) TMI 23 - HC - Income Tax

Whether the subsidy granted by the Government of West Bengal in favour of the assessee to the extent of Rs.5,34,86,887/- should be treated to be a capital receipt or not - held that if the object of the Subsidy Scheme was to enable the assessee to run the business more profitably the receipt is on revenue account - if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account - merely because the amount of subsidy was equivalent to 90% of the sales tax paid by the beneficiary does not imply that the same was in the form of refund of sale tax paid - Supreme Court in the case of Senairam Doongarmall Vs. Commissioner of Income-tax, Assam, reported in (1961 -TMI - 49504 - SUPREME Court), it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue - Accordingly decided in the favour of the assessee

Issues Involved:
1. Whether the subsidy received by the assessee from the Government of West Bengal amounting to Rs.5,34,18,887/- is of the nature of capital receipt and hence non-taxable.
2. Whether the Income Tax Appellate Tribunal was justified in deleting the addition made by the Assessing Officer amounting to Rs.5,34,18,887/- received by the assessee from the Government of West Bengal as subsidy.
3. Whether the subsidy received by the assessee being a non-refundable grant earned through exercise of business is therefore taxable business income and is a revenue receipt and not a capital receipt.
4. Whether the conclusion arrived at by the Income Tax Appellate Tribunal in allowing the appeal of the assessee by deleting the addition made by the Assessing Officer towards subsidy received by the assessee amounting to Rs.5,34,18,887/- is perverse.

Detailed Analysis:

Issue 1: Nature of Subsidy as Capital Receipt
The primary question was whether the subsidy granted by the Government of West Bengal should be treated as a capital receipt. The Assessing Officer considered the subsidy as a revenue receipt, arguing it was supplementary trade receipts used for meeting revenue disbursements. This view was supported by the Supreme Court decision in Sahney Steel and Press Works Ltd. Vs. CIT, which held that subsidies granted to meet recurring expenses are revenue in nature. However, the Tribunal reversed this decision, holding that the subsidy was a capital receipt, thus non-taxable. The Tribunal's decision was based on the object of the subsidy scheme, which aimed at financial assistance for expansion, modernization, and improving marketing capabilities, aligning with the Supreme Court's decision in CIT Vs. Ponni Sugars and Chemicals Ltd., where subsidies for setting up or expanding units were deemed capital receipts.

Issue 2: Justification of Deleting the Addition
The Tribunal's deletion of the addition made by the Assessing Officer was justified based on the nature of the subsidy. The Tribunal referred to the scheme's objective, which was to assist industries in financial crisis for expansion and modernization, indicating a capital purpose. This interpretation was consistent with the Supreme Court's ruling in Ponni Sugars and Chemicals Ltd., which emphasized the purpose of the subsidy over the method of payment.

Issue 3: Taxable Business Income or Capital Receipt
The Revenue contended that the subsidy should be treated as taxable business income, arguing it was a non-refundable grant earned through business exercise. However, the Tribunal and the subsequent analysis highlighted that the subsidy aimed at capital investment rather than supplementing trade receipts. The object of the subsidy scheme was to support industries in financial distress for capital enhancements, thus classifying it as a capital receipt.

Issue 4: Perverse Judgment
The Revenue argued that the Tribunal's decision was perverse, misinterpreting the Supreme Court's ruling in Sahney Steel and Press Works Ltd. However, the Tribunal's decision was aligned with the subsequent Supreme Court decision in Ponni Sugars and Chemicals Ltd., which clarified that subsidies for capital purposes are capital receipts. The Tribunal's view was based on a reasonable interpretation of the subsidy scheme's objectives, making the decision not perverse.

Conclusion:
The Tribunal's decision to classify the subsidy as a capital receipt and not taxable was upheld. The object of the subsidy scheme, aimed at financial assistance for expansion and modernization, indicated a capital nature. The Tribunal's interpretation was consistent with the Supreme Court's rulings, and the appeal by the Revenue was dismissed, affirming the Tribunal's decision.

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