2009 (12) TMI 87 - HC - Income Tax

Respondent-assessee had received a sum of Rs. 3,73,000 as a subsidy granted by the State to encourage a hotel industry set up by the assessee - Admittedly, the subsidy has been announced by the State of Karnataka to encourage the hotel industry and the State is in the habit of releasing subsidy amount depending upon the budgetary allocation in each year. This court has come across in several cases that the State has released subsidy amount even after ten years of the commencement of the project. Therefore, the contention of the Revenue that since the assessee received the amount of subsidy after completion of the hotel project and commencing of the business, such receipt had to be taken as revenue receipt and not a capital receipt, cannot be accepted held that, the subsidy received had to be treated as a capital receipt not liable to tax - Decided in favor of the assessee

Summary

Issues:
Interpretation of subsidy as revenue or capital receipt for tax purposes.

Analysis:
The judgment involves the interpretation of whether a subsidy received by an assessee for setting up a hotel industry should be treated as a revenue or capital receipt for tax purposes. The assessee received a subsidy from the State to encourage the hotel industry setup. The Assessing Officer disallowed the subsidy claimed by the assessee towards capital investment for the assessment year 1994-95. The Commissioner of Income-tax (Appeals) allowed the appeal, considering the subsidy as an incentive towards investment, not a revenue receipt. The Income-tax Appellate Tribunal upheld the Commissioner's decision.

The Revenue appealed to the High Court, arguing that the subsidy should be considered a revenue receipt based on a Supreme Court judgment. The Revenue contended that the subsidy, received after completing the hotel project and starting the business, should be treated as revenue and not capital investment. The Revenue sought to set aside the lower authorities' orders and win the appeal.

The assessee's counsel argued that the facts of the present case differed from the Supreme Court case cited by the Revenue. In the referenced case, the Government refunded sales tax to aid business profitability post-production commencement. However, in the present scenario, the State announced subsidies to promote tourism, leading to the establishment of the hotel industry by the assessee. The subsidy was released based on budgetary allocations in subsequent years, indicating a different context from the cited judgment.

The High Court considered the nature of the subsidy announced by the State to encourage the hotel industry and observed that subsidies were released even years after project commencement based on budgetary allocations. The court rejected the Revenue's argument, emphasizing the unique circumstances of the case. Consequently, the court answered the questions of law against the Revenue and dismissed the appeal, affirming the lower authorities' decisions regarding the treatment of the subsidy as a capital receipt not liable to tax.