2019 (3) TMI 1721 - HC - Income Tax

Subsidy or incentive - characterization of income - capital or revenue receipt - HELD THAT - Tribunal has simply referred to the subsidy scheme without specifying the scope, purport or the details of it. Simply because the subsidy scheme has been declared by the Tribunal to be capital receipt in the case of other assessees, it pronounced the decision in this case that it was to be treated as such. In our view, that was not the correct approach. The subsidy scheme had to be analysed threadbare. The question whether the subsidy incentive was being utilized for the purpose of meeting the interest liability of the company on loans and advances taken by it to set up its plant and machinery had to be investigated and a firm conclusion ought to have been arrived at. Only if it was so utilized, possibly, the subsidy incentive could be described as a capital receipt. Otherwise it had to be treated as a revenue receipt. We remand the matter back to the Tribunal to decide this particular issue upon hearing the parties and by a reasoned order within three months from the date of communication of this order. Tribunal will not be bound by its earlier factual finding on any scheme for subsidy/incentive whatsoever and will make its own enquiry and decision on the scheme in question and come to a legal conclusion. The impugned order of the tribunal on this issue is set aside.

Summary

Issues:
Determining whether a subsidy or incentive received by the assessee company should be classified as a capital or revenue receipt.

Analysis:
The High Court of Calcutta, comprising Justice I. P. Mukerji and Justice Md. Nizamuddin, heard an appeal under Section 260A of the Income Tax Act, 1961. The central issue before the Court was the classification of a subsidy or incentive received by the assessee company. The contention put forth by the learned Advocates for both parties revolved around the nature of the receipt - whether it should be considered capital or revenue. The Advocate for the assessee argued that the receipt was capital in nature as it was utilized to repay interest liabilities on loans and advances for setting up plant and machinery. On the other hand, the Advocate for the appellant contended that the subsidy scheme primarily aimed at discharging interest liabilities without resulting in long-term gains or asset creation.

Upon reviewing the Tribunal's order, the Court noted that the Tribunal had not provided a detailed analysis of the subsidy scheme in question. The Court emphasized that a thorough examination of the subsidy scheme was necessary to determine if the incentive was being used to meet interest liabilities on loans related to plant and machinery setup. The Court highlighted the importance of reaching a firm conclusion on the utilization of the subsidy to ascertain its classification as a capital or revenue receipt. Consequently, the Court held that the Tribunal's decision, based on precedents without a detailed analysis, was incorrect.

In light of the above, the Court remanded the matter back to the Tribunal for a fresh decision on the specific issue. The Tribunal was directed to conduct a detailed inquiry, hear both parties, and provide a reasoned order within three months. The Court explicitly stated that the Tribunal should not be bound by its previous findings on any subsidy scheme and must independently evaluate the scheme in question to arrive at a legal conclusion. The Court set aside the Tribunal's order on this issue and disposed of the appeal (ITA 15 of 2019) accordingly.