1985 (6) TMI 69 - AT - Income Tax

Summary

Issues Involved:

1. Taxability of subsidy received by the assessee from the State Government.
2. Nature of the subsidy as capital or revenue.
3. Applicability of the Andhra Pradesh High Court decision in the case of Sahney Steel & Press Works Ltd.
4. Adjustment of subsidy against the cost of assets for depreciation purposes.

Issue-wise Detailed Analysis:

1. Taxability of Subsidy Received by the Assessee:

The main issue in this appeal is whether the subsidy received by the assessee from the State Government could be considered as income for the assessment year under consideration. The ITO was of the opinion that the subsidy received is taxable, pointing out that the assessee had directly credited the subsidy amount to the partners' accounts in their profit and loss sharing ratio and had not utilized the subsidy for business purposes. The Commissioner (Appeals) agreed with the ITO, citing the Andhra Pradesh High Court decision in the case of Sahney Steel & Press Works Ltd. The Commissioner noted that the subsidy was an incentive to strengthen the industry and ensure industrial growth, and since it was payable only after the commencement of production, it was considered a financial assistance in the nature of income receipt.

2. Nature of the Subsidy as Capital or Revenue:

The assessee argued that the subsidy received under the GO Ms. No. 224 of 1976 was not linked to any expenditure incurred and thus could not be considered a revenue receipt. The Tribunal noted a vital distinction in the quantification of the subsidy compared to earlier GOs, where the subsidy was directly linked to expenditure incurred by the assessee. In the current scheme, the subsidy is not linked to any expenditure but is available for setting up new industrial units or effecting substantial expansion of existing units. The Tribunal emphasized that the purpose of the subsidy is crucial in determining its nature. The subsidy under the 1976 GO is given to set up a plant, making it a capital receipt rather than a trading receipt.

3. Applicability of the Andhra Pradesh High Court Decision in the Case of Sahney Steel & Press Works Ltd.:

The Tribunal examined the principles laid down by the Andhra Pradesh High Court in the Sahney Steel & Press Works Ltd. case. The High Court had framed the issue as whether the refund of sales tax paid by the assessee constituted income. The High Court concluded that the subsidy was given to assist the business and was thus of a revenue nature. However, the Tribunal distinguished the current case by noting that the subsidy under the 1976 GO is not linked to expenditure but is intended for setting up new industrial units, making it a capital receipt. The Tribunal also referred to the Supreme Court decision in V.S.S.V. Meenakshi Achi v. CIT, which emphasized the purpose of the subsidy in determining its nature.

4. Adjustment of Subsidy Against the Cost of Assets for Depreciation Purposes:

The Tribunal noted that the assessee's counsel conceded that the amount received as a subsidy could be adjusted against the cost of depreciable assets under the proviso to section 43(1) of the Income-tax Act, 1961, and depreciation could be reduced accordingly. In view of this concession, the Tribunal held that the ITO would be justified in making such adjustments in depreciation.

Conclusion:

For the reasons given above, the Tribunal concluded that the receipt is capital in nature and not taxable as income. However, the subsidy can be adjusted against the cost of the assets for the purpose of calculating depreciation. The appeal is partly allowed.