2016 (3) TMI 726 - AT - Income Tax

Treatment to subsidy received - revenue v/s capital receipt - Held that - Hon ble Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT ), wherein held that the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on the revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account. We find that in the facts of this case, where the subsidy was given on the capital account in the form of capital cost to encourage upgrading the textile industry and the purpose and object was for capital investment, as such, is clearly a capital receipt as per the case laws relied upon by the ld. AR before us. Therefore, we direct that the receipt to be treated as receipt of capital nature and not to be taxed in the hands of the assessee. - Decided in favour of assessee

Summary

Issues:
1. Whether the subsidy received by the assessee from the Ministry of Textile is a capital receipt or a revenue receipt?

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi involved a dispute regarding the nature of a subsidy received by the assessee from the Ministry of Textile. The assessee, a company engaged in dying printing and fabric processing, had received a subsidy of Rs. 74,02,161 under the Technology Upgradation Fund Scheme for the purchase of machinery. The Assessing Officer treated this subsidy as a revenue receipt, adding it back to the assessee's income. The CIT (A) upheld this decision, considering the subsidy as a profit supplement. The assessee contended that the subsidy was a capital receipt, citing the purpose test and relevant case laws. The Tribunal analyzed the purpose of the subsidy, emphasizing that if the subsidy aims to enhance technology or promote capital investment, it should be treated as a capital receipt. Relying on the judgment in CIT vs. Ponni Sugars and Chemicals Ltd, the Tribunal held that the subsidy in question was for capital investment in the textile industry and, therefore, should be treated as a capital receipt. Consequently, the Tribunal allowed the appeal of the assessee, directing that the subsidy be treated as a receipt of capital nature and not taxed in the assessee's hands.

This case highlights the importance of determining the purpose for which a subsidy is granted to classify it as a capital or revenue receipt. The Tribunal's decision aligned with the principle that subsidies aimed at promoting capital investment should be treated as capital receipts. The judgment emphasized the need to apply the purpose test in such cases, irrespective of the timing or source of the subsidy. By considering the objective of the subsidy scheme and the intention behind the subsidy received by the assessee, the Tribunal concluded that the subsidy was indeed a capital receipt, supporting the assessee's position and overturning the lower authorities' classification as a revenue receipt.