2019 (7) TMI 1762 - AT - Income Tax

Characterization of income - treatment of subsidy received by assessee - capital or revenue receipt - HELD THAT - The scheme of State of Jharkhand wherein State Policy for Mega Projects was announced vide Notification No.2371 i.e. Jharkhand Mega Project Incentive Rules 2005. The said scheme was promulgated to boost industrial development in the State of Jharkhand for setting up new industrial units or industrial units undertaking expansion diversification and modernization on or after 15.11.2000. The purpose of above scheme was to establish new units in Jharkhand and hence purpose of scheme was in capital field i.e. to establish manufacturing unit in Jharkhand. Merely because the incentives were received in the form of sales tax waiver would not change the purpose of grant of subsidy. The assessee has also received subsidy under the Maharashtra PSI 2007 Scheme for Jejuri plant. In view thereof where the purpose of subsidy was to establish units was in capital field hence the subsidy received is capital receipt. We accordingly reject the grounds of appeal raised by Revenue.

Summary

Issues Involved:
1. Treatment of subsidy received by the assessee: whether it is capital or revenue in nature.

Issue-wise Detailed Analysis:

1. Treatment of Subsidy Received by the Assessee:

The core issue in the appeal was determining whether the subsidy received by the assessee should be treated as a capital receipt or a revenue receipt. The Assessing Officer (AO) had treated the subsidy as a revenue receipt, relying on the Supreme Court's decision in Sahney Steel & Press Works Ltd. Vs. CIT, asserting that the subsidy was received after the commencement of commercial production and was essentially a refund of sales tax, thus revenue in nature.

The assessee contended that the subsidy received under the Jharkhand Industrial Policy, 2001, and the Maharashtra Package Scheme of Incentives, 2007, was a capital receipt. The CIT(A) agreed with the assessee, noting that the subsidies were linked to capital investment and aimed at promoting industrial development, which qualified them as capital receipts.

The Tribunal referred to several Supreme Court judgments, including CIT Vs. Chaphalkar Brothers and Ponni Sugars & Chemicals Ltd., emphasizing the "purpose test" to determine the nature of the subsidy. The purpose test focuses on the objective of the subsidy rather than the form or timing of the payment. If the subsidy aims to establish or expand industrial units, it is considered a capital receipt, regardless of whether it is received post-production or in the form of tax refunds.

In the case of the Jharkhand subsidy, the scheme was designed to boost industrial development by providing capital investment subsidies and sales tax refunds to new or expanding units. The Tribunal concluded that the purpose of the subsidy was to establish manufacturing units, making it a capital receipt.

Similarly, for the Maharashtra subsidy received under the PSI 2007 Scheme, the Tribunal had previously ruled in favor of the assessee in similar cases, affirming that such subsidies were capital receipts.

The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's grounds of appeal and confirming that the subsidies received by the assessee were capital receipts.

Conclusion:

The Tribunal concluded that the subsidies received by the assessee under the Jharkhand and Maharashtra schemes were capital receipts, as their purpose was to promote industrial development and establish new units. The appeal by the Revenue was dismissed, affirming the CIT(A)'s order.