2016 (5) TMI 1465 - AT - Income Tax

Nature of income - power subsidy received as grant for promotion of industrial unit - revenue receipt OR capital receipt - diversion of views by members judicial and accountant - Held that - Hon ble President, ITAT, in his capacity as Third Member, has concurred with the conclusions arrived at by the learned Accountant Member that the power subsidy received by assessee in the above facts and circumstances is capital in nature. In accordance with the majority view, therefore, the appeals filed by the assessee are allowed.

Summary

Issues Involved:
1. Whether the power subsidy received by the assessee is a capital receipt or a revenue receipt.

Issue-wise Detailed Analysis:

1. Nature of Power Subsidy:
The primary issue in both appeals was whether the power subsidy received by the assessee should be classified as a capital receipt or a revenue receipt. The assessee argued that the power subsidy was a capital receipt, granted for the expansion and repayment of term loans for new and expanding industrial units. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT(A)) held that the subsidy was a revenue receipt, as it was received after the commencement of production and was considered an operational subsidy.

Arguments by the Assessee:
The assessee contended that the subsidy was granted as per the Notification of the Government of West Bengal, which provided incentives to power-intensive industries for setting up new units or expanding existing ones. The subsidy was intended to attract entrepreneurs to set up industries in backward areas and was used for the repayment of loans taken for capital outlay. The assessee relied on several judicial precedents, including CIT v. Rosoi Ltd., CIT v. Ponni Sugars & Chemicals Ltd., and CIT v. Balarampur Chini Mills Ltd., to argue that the subsidy should be treated as a capital receipt.

Arguments by the Revenue:
The Revenue argued that the subsidy was a revenue receipt, relying on the decisions of the Hon'ble Supreme Court in CIT v. Rajaram Maize Products and Sahney Steel & Press Works Ltd. v. CIT. The Revenue emphasized that the subsidy was received after the commencement of production and was intended to reduce the cost of electricity, thereby aiding in the operational expenses of the assessee.

Tribunal's Analysis:
The Tribunal considered the Notification dated 19-05-2005 from the Government of West Bengal, which outlined the subsidy scheme. The Notification indicated that the subsidy was granted to new and expanding industries to attract entrepreneurs to set up industries in backward areas. The Tribunal noted that the subsidy was not specifically granted for the acquisition of fixed assets or for meeting the capital cost of the project. The Tribunal also observed that the subsidy was computed based on the consumption of electricity and was reimbursed to the assessee.

Judicial Precedents:
The Tribunal referred to the decision of the Hon'ble Supreme Court in Ponni Sugars & Chemicals Ltd., which laid down the "purpose test" to determine the nature of the subsidy. According to this test, if the subsidy was granted to enable the assessee to set up a new unit or expand an existing unit, it would be considered a capital receipt. However, if the subsidy was granted to assist in carrying on the business, it would be a revenue receipt. The Tribunal also referred to the decision of the Hon'ble Calcutta High Court in CIT v. Rosoi Ltd., which held that subsidies granted for expansion, modernization, and improving marketing capabilities were capital receipts.

Conclusion by the Judicial Member:
The Judicial Member concluded that the subsidy received by the assessee was a revenue receipt, as it was granted after the commencement of production and was intended to reduce the cost of electricity, thereby aiding in the operational expenses of the assessee.

Conclusion by the Accountant Member:
The Accountant Member disagreed with the Judicial Member and concluded that the subsidy was a capital receipt. The Accountant Member emphasized that the subsidy was granted to attract entrepreneurs to set up industries in backward areas and was used for the repayment of loans taken for capital outlay. The Accountant Member relied on the decisions of the Hon'ble Supreme Court in Ponni Sugars & Chemicals Ltd. and the Hon'ble Calcutta High Court in CIT v. Rosoi Ltd. to support the conclusion that the subsidy was a capital receipt.

Third Member's Decision:
The Hon'ble President, ITAT, acting as the Third Member, concurred with the conclusion of the Accountant Member. The Third Member applied the "purpose test" from the decision in Ponni Sugars & Chemicals Ltd. and held that the subsidy was granted for setting up a new unit in a backward area, thereby making it a capital receipt.

Final Order:
In accordance with the majority view, the appeals filed by the assessee were allowed, and it was held that the power subsidy received by the assessee was a capital receipt.