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2022 (5) TMI 1633 - AT - Income TaxNature of receipt - subsidy received from Government of Maharashtra under Package Scheme of Incentives of 2007 ( PSI 2007 ) - Applicability of Amended Provision of Section 2(24)(xviii) of the Income Tax Act - whether the said subsidy is capital receipt or a revenue receipt? - HELD THAT - The whole purpose and the grant of subsidy under PSI 2007 by Government of Maharashtra was to promote industrial growth in the less developed areas of the State and also to provide employment in the area. Once this purpose is established the subsidy has to be a capital receipt. However, the position has changed w.e.f. 01.04.2016 relevant to A.Y. 2017-18 onwards with the amended provision of sub-clause (xviii) to sec. 2(24) of the Act. However, at present, we are concerned with A.Y. 2011-12 to 2015-16. Therefore, the amended provision of sec. 2(24) sub-clause (xviii) is not applicable to the years under consideration and thus as a natural consequence the subsidy received by the assessee would therefore, not form part of its total income. Subsidy received by the assessee was capital in nature and not chargeable to tax. Decided against revenue.
Issues Involved:
1. Nature of subsidy received under the Package Scheme of Incentives (PSI) 2007 by the Government of Maharashtra: whether it is a capital receipt or a revenue receipt. 2. Applicability of Explanation 10 to Section 43(1) for calculating depreciation. Summary: Nature of Subsidy: The primary issue in these appeals was whether the subsidy received by the assessee under the Government of Maharashtra's PSI 2007 is a capital receipt or a revenue receipt. The assessee, a private limited company engaged in manufacturing steel, received capital incentive subsidies over various years which were credited to the capital reserve in the balance sheet. The Assessing Officer (AO) initially treated the subsidy as a capital receipt but reduced it from the fixed assets for depreciation calculation u/s 43(1). The CIT(A) later held the subsidy as a revenue receipt chargeable to tax. However, the ITAT Mumbai Bench, relying on the Hon'ble Bombay High Court's decision in Reliance Industries Ltd. (339 ITR 632), determined that the subsidy was a capital receipt not chargeable to tax and not to be reduced from the value of assets for calculating depreciation. Purpose Test: The assessee argued that the "purpose test" should be applied to determine the nature of the subsidy, emphasizing that the PSI 2007 aimed at industrial dispersal to less developed areas and sustained industrial growth. The Hon'ble Apex Court in CIT Vs. Chapalkar Brothers (400 ITR 279) and CIT Vs. Shree Balaji Alloys (138 DTR 36) supported this view, holding that the object of the subsidy is crucial in determining its nature. The ITAT Pune Bench concurred, noting that the purpose of the PSI 2007 subsidy was industrial development in backward areas, making it a capital receipt. Explanation 10 to Section 43(1): The Tribunal observed that the subsidy was not intended to meet any portion of the cost of assets directly or indirectly. The quantification of the subsidy was linked to the investment in fixed capital assets but was meant to cap the maximum subsidy amount, not to offset the asset cost. Therefore, Explanation 10 to Section 43(1) was deemed inapplicable. Judicial Precedents: The Tribunal referred to several judgments, including CIT vs. Reliance Industries Ltd. (339 ITR 632), CIT vs. Ponni Sugars & Chemicals Ltd. (306 ITR 392), and CIT vs. Shree Balaji Alloys (287 CTR 459), which consistently held that subsidies aimed at encouraging industrial development are capital receipts. The Tribunal also noted the amendment in the Finance Act 2015, which introduced clause (xviii) to Section 2(24) effective from A.Y. 2017-18, making such subsidies taxable as income. However, this amendment was not applicable to the assessment years in question (2011-12 to 2015-16). Conclusion: The Tribunal upheld the CIT(A)'s decision, treating the subsidy as a capital receipt not chargeable to tax and not to be reduced from the cost of fixed assets for depreciation purposes. Consequently, the appeals of the Revenue for all assessment years were dismissed. Order Pronounced: The order was pronounced in the open Court on 6th May 2022.
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