2016 (10) TMI 1307 - AT - Income Tax

Addition u/s 41(1) towards subsidy - accrual of subsidy / receipt of subsidy - Year of assessment - assessee had shown a sum being 75% of sales Tax / VAT as Sales Tax Incentive Receivable under the scheme of State Government. This sum was correspondingly credited to General Reserve of the assessee - quantification of subsidy was in the form of reimbursement of sales tax / VAT paid by the assessee on sale of its finished products to the extent of 75 % of the same after the commencement of production - CIT -A deleted the additions on the ground that the subsidy was actually released / sanctioned to the assessee which falls in the financial year 2008-09 relevant to Asst Year 2009-10 and hence the accrual of subsidy / receipt of subsidy had to be seen only in that year - HELD THAT - Assessee had to first set up its project in the State of West Bengal and start manufacturing operations. The finished goods manufactured should be sold after payment of sales tax / VAT. The assessee has to produce the evidence for payment of sales tax / VAT. Thereafter, WBIDCL on satisfactory compliance made by the assessee in this regard, would release the subsidy by reimbursing 75% of the sales tax / VAT paid by the assessee. We have gone through the relevant pages of the paper book of the assessee containing the evidence in the form of tax paid challans for sales tax / VAT. Hence we hold that the ld AO had factually erred in stating that the sales tax / VAT were not paid by the assessee. AO had erred in invoking the provisions of section 41(1) of the Act. It is well settled that the said provision could be invoked only when the assessee had claimed deduction in earlier years at the time of creation of liability and if the said liability ceases to exist, then the provisions of section 41(1) of the Act could be invoked. In the instant case, admittedly, the assessee had not claimed any deduction in the earlier years towards the sales tax portion of the subsidy. Hence, the provisions of section 41(1) of the Act could be invoked in the facts of the instant case. Keeping in view the objects of the West Bengal Incentive Scheme 2000 and various judicial precedents relied upon hereinabove, we hold that the subsidy is to be treated as capital receipt not chargeable to tax in the hands of the assessee and not in the years under appeal - Subsidy cannot be the subject matter of taxation in the years under appeal as the same got released / sanctioned only in the financial year 2008-09 relevant to Asst Year 2009-10. Accordingly, the grounds raised by the revenue for both the years are dismissed.

Issues Involved:
1. Whether the CIT(A) was justified in deleting the addition made under section 41(1) of the Income Tax Act towards subsidy.

Issue-wise Analysis:

1. Justification of CIT(A) in Deleting the Addition under Section 41(1) of the Income Tax Act:
The primary issue in both appeals is whether the CIT(A) was justified in deleting the addition made under section 41(1) of the Income Tax Act towards subsidy. The assessee had shown a sum of ?3,72,95,124/- as Sales Tax Incentive Receivable under the scheme of the State Government, which was credited to the General Reserve. The AO questioned why this should not be taxed under section 41(1) of the Act. The assessee argued that the subsidy represented "Industrial Promotion Assistance" under the West Bengal Incentive Scheme 2000, intended to promote industrial growth in West Bengal, and thus should be treated as a capital receipt, not chargeable to tax.

2. Nature and Purpose of the Subsidy:
The subsidy was quantified as a reimbursement of 75% of sales tax/VAT paid by the assessee on the sale of its finished products. The AO considered this a revenue receipt based on the decision in Sahney Steel & Press Works Ltd, treating it as income under section 41(1) due to remission of liability. However, the CIT(A) deleted the additions, stating that the subsidy was sanctioned in the financial year 2008-09, relevant to the assessment year 2009-10, and thus not applicable to the years under appeal.

3. Object of the Incentive Scheme:
The Tribunal examined the object of the West Bengal Incentive Scheme 2000, which aimed to accelerate industrial development in the state. The purpose of the subsidy was to set up industries in West Bengal, and the quantification was based on reimbursement of sales tax/VAT paid. The Tribunal emphasized the "Purpose Test," which determines the taxability of the subsidy based on its objective. The Tribunal referred to the Supreme Court's decision in CIT vs. Ponni Sugars & Chemicals Ltd, which held that if the subsidy is for setting up or expanding a unit, it is a capital receipt.

4. Judicial Precedents:
The Tribunal also considered the Calcutta High Court's decision in CIT vs. Rasoi Ltd, which held that subsidies for setting up or expanding units are capital receipts. The Tribunal noted that the West Bengal Industrial Development Corporation Ltd had acknowledged the assessee's new unit and sanctioned the subsidy under the West Bengal Incentive Scheme 2000. The Tribunal referred to several decisions, including those of the ITAT Kolkata, which consistently treated such subsidies as capital receipts.

5. Applicability of Section 41(1):
The Tribunal concluded that section 41(1) could only be invoked if the assessee had claimed a deduction in earlier years for the liability that ceased to exist. In this case, the assessee had not claimed any deduction for the sales tax portion of the subsidy in earlier years, making section 41(1) inapplicable.

Conclusion:
The Tribunal held that the subsidy of ?3,72,95,124/- and ?8,05,58,316/- should be treated as a capital receipt, not chargeable to tax. Additionally, the subsidy could not be taxed in the years under appeal as it was sanctioned in the financial year 2008-09, relevant to the assessment year 2009-10. Therefore, the appeals of the revenue were dismissed.

Order Pronounced:
The appeals of the revenue were dismissed, and the order was pronounced in the open court on 14.10.2016.

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