2010 (12) TMI 955 - HC - Income Tax

Subsidy received - ITAT deleted the addition by treating the Agro based subsidy received by the assessee as tax free capital receipt - assessee is engaged in manufacture of yarn - AO disallowed the claim of the assessee by holding that subsidy was granted on 27.1.1995 while operations of the assessee commenced on 16.11.1994 Held that - Subsidy was given for setting up of industrial unit in backward area of Haryana and was to be determined with reference to capital investment. In such a situation, the plea of the assessee was supported by the view taken by the Hon ble Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT) which has been followed by the Tribunal Excess payment made to sister concern on account of purchases within the meaning of provisions of sec.40A(2) - addition on the ground that the assessee had paid higher rate to its sister concern while purchasing cotton and waste Held that - CIT(A) upheld the plea of the assessee that the payment was not higher than the normal rate. It was held that the goods purchased at lesser rate were of inferior quality, the details filed by the assessee showed that its sister concerns were being taxed at the same rate at which the assessee was being taxed, proving that there was no reason for the assessee to show higher rate purchases made by the assessee from its sister concerns. The assessee s sister concern had offered their income from such sales, which fact has not been disputed, AO erred in invoking the provisions of S.40A(2)and the CIT(A) has correctly deleted the disallowance, no substantial question of law arises, appeal is dismissed

Summary

Issues:
1. Treatment of agro-based subsidy as tax-free capital receipt.
2. Excess payment made to sister concern under Section 40A(2) of the Income Tax Act.

Issue 1 - Treatment of Agro-based Subsidy:
The appeal by the revenue challenged the ITAT's deletion of an addition of Rs. 12,16,090/- regarding an agro-based subsidy received by the assessee. The subsidy was claimed to be exempt as a capital receipt. The Assessing Officer disallowed the claim citing precedents like Sahney Steels and Press Works Ltd. v. CIT. However, the CIT(A) allowed the appeal, emphasizing that the subsidy was for setting up an industrial unit in a backward area and thus a capital receipt. The Tribunal upheld this view, relying on the purpose and nature of the subsidy, as in Ponni Sugars and Chemicals case. The High Court affirmed this decision, noting that the subsidy was indeed for an industrial unit and thus capital in nature, following Ponni Sugars and Chemicals Ltd. v. CIT.

Issue 2 - Excess Payment to Sister Concern:
The second issue involved an addition of Rs. 7,16,511/- due to alleged excess payment made to a sister concern for purchases, invoking Section 40A(2) of the Act. The CIT(A) overturned this, stating that the payments were not higher than the normal rate and that the goods purchased at a lesser rate were of inferior quality. The Tribunal concurred, noting that the sister concerns were taxed at the same rate, indicating no reason for higher rates. The High Court upheld this finding as a fact, not warranting interference, and dismissed the appeal, stating no substantial question of law arose.

In conclusion, the High Court upheld the Tribunal's decision on both issues, affirming the treatment of the agro-based subsidy as a tax-free capital receipt and the rejection of the addition related to excess payments to a sister concern under Section 40A(2) of the Income Tax Act.