2016 (12) TMI 1854 - SC - Income Tax

Characterization of income - subvention received by the Assessee - Company from its parent Company in Germany in a situation where the Assessee - Company was making losses - revenue or capital receipt - whether subvention was capital or revenue receipt, was sought to be answered by the High Court by making a reference to two decisions of this Court in Sahney Steel Press Works Ltd. 1997 (9) TMI 3 - SUPREME COURT and Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Limited 2008 (9) TMI 14 - SUPREME COURT - HELD THAT - The view expressed by this Court that unless the grant-in-aid received by an Assessee is utilized for acquisition of an asset, the same must be understood to be in the nature of a revenue receipt was held by the High Court to be a principle of law applicable to all situations. The aforesaid view tends to overlook the fact that in both Ponni Sugars (supra) and Sahney Steel (supra) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the present cases. The above apart, the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts. We also find such a view in a recent pronouncement in Commissioner of Income Tax v. Handicrafts and Handlooms Export Corporation of India Ltd. 2014 49 Taxmann.com 488 Delhi (Delhi High Court) with which we are in respectful agreement. We allow the present appeals; set aside the order of the High Court and answer the liability of the Assessee for the Assessment Years in question in the above manner.

Summary

Issues:
1. Classification of subvention received by the Assessee - Company from its parent Company as a revenue or capital receipt.

Analysis:
In the present case, the primary issue revolves around the treatment of subvention received by the Assessee - Company from its parent Company in Germany. The Assessing Officer categorized this subvention as a revenue receipt due to the Assessee - Company's losses. However, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal overturned this decision. The High Court, in contrast, upheld the Assessing Officer's view, prompting the Assessee to appeal to the Supreme Court.

The High Court based its decision on the premise that unless the grant-in-aid received by an Assessee is utilized for acquiring an asset, it should be considered a revenue receipt. However, the Supreme Court disagreed with this interpretation, highlighting the distinction between subsidies from public funds and voluntary contributions from a parent Company. The Court emphasized that voluntary payments made by the parent Company to support the capital investment of the Assessee Company cannot be treated as revenue receipts.

Furthermore, the Supreme Court referenced a recent judgment to support its stance, emphasizing that payments made by the parent Company to the Assessee Company were intended to safeguard the capital investment. Consequently, the Court concluded that the subvention received by the Assessee - Company for the Assessment Years in question should not be classified as revenue receipts. As a result, the Supreme Court allowed the appeals, overturned the High Court's order, and determined the Assessee's liability for the relevant Assessment Years accordingly.