2016 (7) TMI 1662 - AT - Income Tax

Character of receipt - Addition of subsidy by way of refund/exemption of excise duty/VAT - HELD THAT - In some and substance receipt in hands of the assessee has to be determined with respect to purpose for which the subsidy is given. One has to apply the purpose test. However, lower authorities misdirected in holding that since subsidy was to be received only after commencement of commercial production, the same was revenue in nature. Hon‟ble Supreme Court in the case of Ponni Sugar Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT had clearly held that character of receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. Merely because subsidy was to be paid after commencement of production will not alter the nature of receipt, insofar as the point of time at which the subsidy paid or the source from which the subsidy is paid is immaterial, even the form in which subsidy is paid is also immaterial as observed by the Hon‟ble Supreme Court in the case of Ponni Sugars Chemicals Ltd.(supra). Applying the proposition of law laid down we have no hesitation to hold that various incentives received by assessee was in nature of capital receipt and the same was meant for establishing new unit. Accordingly, we set aside orders of lower authorities and direct the AO to treat various incentives received by assessee as capital receipts not liable to tax.Appeals of the assessee are allowed.

Summary

Issues Involved:
1. Classification of subsidy received by the assessee as revenue receipt or capital receipt.
2. Eligibility and purpose of the subsidy schemes provided by the Central and State Governments.
3. Application of judicial precedents to determine the nature of the subsidy.

Detailed Analysis:

Issue 1: Classification of Subsidy as Revenue Receipt or Capital Receipt:
The primary grievance of the assessee was the treatment of the subsidy received by way of refund/exemption of excise duty and sales tax as revenue receipt instead of capital receipt. The assessee argued that these subsidies were meant for setting up new industrial units in earthquake-prone areas, thus qualifying as capital receipts. The Assessing Officer (AO) rejected this claim, stating that the subsidies were production incentives, granted only after the commencement of production, and hence should be classified as revenue receipts. The AO cited the Supreme Court decision in Shaney Steels and Press Works Ltd., which held that subsidies granted after the commencement of production were revenue in nature.

Issue 2: Eligibility and Purpose of the Subsidy Schemes:
The assessee set up industries in Anjar-Kutch, Gujarat, and became eligible for subsidies under the Central and State Government schemes aimed at developing earthquake-prone areas. The schemes provided excise duty refunds and VAT exemptions to new industrial units. The AO examined the provisions of these schemes and concluded that the benefits were linked to commercial production, thus treating them as revenue receipts. The CIT(A) upheld this view, emphasizing that the subsidies were available only after the commencement of commercial production and were linked to the purchase of raw materials and sale of finished goods.

Issue 3: Application of Judicial Precedents:
The assessee cited several judicial precedents, including decisions from the High Courts of Jammu and Kashmir, Calcutta, and Bombay, which held that subsidies for setting up new industries were capital receipts. The AO distinguished these cases on facts, relying instead on the Supreme Court's decision in Shaney Steels and Press Works Ltd. The CIT(A) also supported the AO's view, stating that the subsidies were linked to production activities and thus were revenue receipts.

Tribunal's Findings:
The Tribunal considered the rival contentions and judicial precedents. It noted that the subsidy schemes were aimed at encouraging the establishment of new industrial units in earthquake-prone areas, thereby qualifying as capital receipts. The Tribunal emphasized the purpose test laid down by the Supreme Court in CIT vs. Ponni Sugar and Chemicals Ltd., which states that the nature of the subsidy should be determined based on the purpose for which it is given. The Tribunal found that the subsidies were intended to enable the assessee to set up new units, thus qualifying as capital receipts.

The Tribunal also referred to various High Court decisions, including Reliance Industries Ltd., which held that sales tax incentives for setting up new industries were capital receipts. It concluded that the AO and CIT(A) had erred in treating the subsidies as revenue receipts. The Tribunal directed the AO to treat the subsidies as capital receipts not liable to tax.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the subsidies received by way of excise duty refunds and VAT exemptions were capital receipts, meant for setting up new industrial units in earthquake-prone areas. The Tribunal set aside the orders of the lower authorities and directed the AO to treat the subsidies as capital receipts not liable to tax. The decision was pronounced in the open court on 13th July, 2016.