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2018 (9) TMI 714 - HC - Income TaxAmount received from the State Government in the form of grant-in-aid - whether to be treated as revenue receipt, on the basis of application of funds so received, which was utilized for clearing salary, Provident Fund dues and flood relief? - Held that - There is no separate business consideration on record between the grantor, that is the State Government and the recipient thereof being the assessee. The principle of law as laid down in the case of Siemens Pub. Communication Network P. Ltd. 2016 (12) TMI 507 - SUPREME COURT is that voluntary payments made by the parent company to its loss making Indian subsidiary can also be understood to be payments made in order to protect the capital investment of the assessee company. Though the grant-in-aid in this case was received from public funds, the State Government being 100% shareholder, in our opinion, its position would be similar to that of, or at par with a parent company making voluntary payments to its loss making undertaking. No other specific business consideration on the part of the State has been demonstrated before us in this appeal. The assistance extended appears to us to be measures to keep the assesse company floating, the assessee being, for all practical purposes an extended arm of the State. Though large part of the funds were applied for salary and provident fund dues, the object of extension of assistance, it was argued before us, to ensure survival of the company. As regards the funds extended for flood relief, the same cannot constitute revenue receipt. Flood relief does not constitute part of business of the assessee. - Decided in favour of the assessee
Issues Involved:
1. Whether the grant-in-aid of ?4,60,00,000/- received by the Assessee from the State Government should be treated as revenue receipt or capital receipt for the assessment year 2006-07. Issue-wise Detailed Analysis: 1. Nature of the Grant-in-Aid: The primary issue in this case is the classification of ?4,60,00,000/- received by the Assessee from the State Government. The Assessee argued that this amount should be treated as a capital receipt, whereas the Assessing Officer classified it as a revenue receipt. The grant was utilized for clearing salary (?3,00,00,000/-), Provident Fund dues (?60,00,000/-), and flood relief (?1,00,00,000/-). The Assessing Officer's decision was based on the application of funds for revenue purposes and the historical treatment of similar receipts as revenue by the Assessee. 2. Tribunal's Decision: The Tribunal considered the character of the Assessee as a government company and the nature of the grantor (State Government), along with the financial status of the Assessee. It relied on the Delhi High Court's judgment in CIT vs. Handicrafts & Handlooms Export Corporation of India Ltd. (2014) 360 ITR 130 (Delhi), which led to the conclusion that the grant should not be isolated from its factual context. The Tribunal allowed the Assessee's appeal, treating the grant as a capital receipt. This decision was consistent with the Tribunal's earlier decision for the assessment year 2005-06, which was also under appeal. 3. Supreme Court Precedents: The judgment referenced several Supreme Court cases, including Sahney Steel and Press Works Ltd. vs. CIT (1997) 228 ITR 253 (SC) and C.I.T. vs. Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392. These cases established principles for distinguishing between capital and revenue receipts in the context of government grants. The Supreme Court emphasized examining the nature of the subsidy and its purpose. In Sahney Steel, subsidies for operational costs were treated as revenue receipts, whereas in Ponni Sugars, subsidies for loan repayment were considered capital receipts. 4. Financial Status and Intention: For the Assessee's case, the grant was not part of a general subsidy scheme but was given by the State Government to a wholly-owned company facing a cash crunch. The financial status of the company was acknowledged, and the grant aimed to keep the company operational and protect employment. This context distinguished it from typical revenue receipts. 5. Siemens Public Communication Network Case: The Supreme Court in Siemens Pub. Communication Network P. Ltd. vs. CIT (2017) 390 ITR 1 (SC) held that voluntary payments by a parent company to a loss-making subsidiary to protect capital investment should be treated as capital receipts. This principle was applied to the Assessee's case, considering the State Government's role as a 100% shareholder akin to a parent company. 6. Flood Relief Funds: The ?1,00,00,000/- allocated for flood relief was deemed not to constitute revenue receipt as flood relief is not part of the Assessee's business activities. Conclusion: The court concluded that the grant-in-aid of ?4,60,00,000/- should be treated as a capital receipt, considering the intention behind the grant and the financial context of the Assessee. The appeal was dismissed, and the Tribunal's decision was affirmed, with no order as to costs.
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