Budget - subsidy

[CA DEV KUMAR KOTHARI]

Budget 2016 – Government subsidies must be specifically excluded from income.

General discussion:

Basically subsidies are given to provide a support a socio –economic cause and public welfare. Subsidies which provide long-term benefits improves infrastructure. For example, education subsidies to educational institutions and students improve education, knowledge and as a result ‘improved human resources in society.’ Similarly subsidies to business and industry also improve infrastructure and job opportunities. All these have long-term impact on capital of recipient and also the society and nation at large.

Subsidy paid in times of distress are also basically to support capital – maintenance and creation. When in distress, unless a support is extended, the existing infrastructure and capital base may erode. Therefore, we find government as well as private philanthropists extend   subsidies to  distressed people and business. For example, recent extension of help and subsidy to sugar industry, by way of concessional loan, subsidy to pay sugar cane price, in times of distress has result of saving sugar industry from collapse. If during distress subsidy is not provided, many in industry would be forced to close sugar factories leading to unemployment, and loss to farmers.

Without subsidy, many educational institutions will not be able to run, many students will have to discontinue educational courses.

Therefore, subsidy given during normal times as well as  during  distress has effect to save and maintain capital base from erosion and to tide over difficult times.

Subsidies are basically for public welfare:

All subsidies to any section of society and economy of country has basic purpose of public welfare and creation of long-term capital in society by way of infrastructure, economic power and human resources. Subsidies also help in maintaining and improving capital base.

Therefore, subsidies must be specifically considered as capital receipt and not to be included in income directly ( e.g by S. 2 (24) (xviii) ( a new provision to unsettle settled legal position by NAMO government through Shri Arun Jaitely FM) , S. 28, S. 41 and S.50 etc.

If taxed the purpose of subsidy will be lost:

As noted earlier subsidies are given for specific purposes, if a tax is imposed on subsidy, the purpose of granting subsidy will stand diluted to that extent. Suppose a subsidy is given for say Rs. One lakh, and if tax of Rs .30000/- is imposed on it then in effect,  subsidy towards the purpose  shall be only ₹ 70000/- because ₹ 30000/- are taken back by government.

There is no purpose in giving subsidy by one hand of government and taking back as tax by other hand of government.

Private subsidies including gifts are capital receipts:

Private subsidies and also gifts are given for specific long-tem purposes.  Even subsidies during duress are for long-term benefit of recipient. These also help in overall socio-economic development. For example, gifts receive at the time of marriage help in creation of capital base of newly- wed couple. Even gifts received at the time of birth of child, helps in creating a capital base fo child.

Litigation:

Our government through its various departments and agencies is biggest litigator. Unfortunately even at level of Ministers (acting for legislators) there is tendency of incorporating provisions which are prone to litigation. There is also continuous tendency to make provisions to unsettle settled things. For example  S. 2 (24) (xviii)  to treat subsidies as income,  a new provision to unsettle settled legal position). This must come to an end.   

Long drawn litigations took place about nature of subsidies and there treatment as income of revenue for purpose of imposing tax by way of income tax. Now we find a new provision to treat all subsidies as income (directly or indirectly).

This provision is UNCONSTITUTIONAL because THE CONSTITUTION PERMITS TO IMPSE TAX ON INCOME AND NOT ON CAPITAL RECEIPTS.

Few important observations from judgments:

In CIT vs. Reliance Industries Ltd.” 2009 (4) TMI 516 - Bombay High Court  wherein the Hon’ble Bombay High Court, while relying upon the decision of the Hon’ble Supreme Court in the case of “CIT vs. Ponni Sugars and Chemicals Ltd.” 2008 (9) TMI 14 - SUPREME COURT, has held that if the object of the subsidy was to set up a new unit in a backward area to generate employment therein, then the subsidy was to be treated on capital account and the sales tax incentive was to be treated as capital receipt.

In DCIT vs. Rasoi Ltd.” 2014 (4) TMI 1084 - ITAT KOLKATA, while relying upon the decision of the Hon’ble Supreme Court in the case of “CIT vs. P.J. Chemicals Ltd.” 1994 (9) TMI 1 - SUPREME Court, has held that for computation of deprecation, no part of government subsidy for encouragement for setting up of industrial projects could be deducted from actual cost of WDV of fixed assets, if same is not relatable to acquisition of assets.

M/s. Uni Deritend Limited Versus The Additional Commissioner of Income Tax, Range – 1 (3) , Mumbai  2016 (2) TMI 117 - ITAT MUMBAI

In this case, Tribunal held that the subsidy received on installation and working of wind mills , subject to several conditions was a capital receipt and it was not to meet cost of windmill but for specific purposes. The Tribunal held that  such subsidy will not be deducted from cost of asset for the purpose of allowing deprecation and it is not taxable as income. In nut shell, as per reading and understanding of the author, as per ruling of Tribunal such subsidy cannot be considered as income directly ( u/s 2 , 28, 50, 56 etc.) by including it in income or indirectly by deducting it from cost of assets (windmill) or by disallowing loss while computing loss under section50.

Suggestion for budget 2016:

Clause (xviii) in sub-section (24) of section 2 which provide meaning of income should be deleted with retrospective effect.

Specific provision should be made to exclude capital receipts from scope of income so that un-necessary litigation is avoided and purpose of subsidy is achieved to full extent.

Discussions to this article

[K T Rao]

Sir,

In case of Commissioner of Income Tax, Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008 (9) TMI 14 - SUPREME COURT] it is well settled that “OBJECT” of receipt of subsidy is very important for treating the subsidy as revenue receipt or capital receipt. In case of revenue receipt it is appropriate to tax the receipt.

Object of receipt of subsidy is very important and the purpose test must be applied before deciding whether it is taxable income or not. Excluding all subsidies from the tax net may not be appropriate. Take for example “fertilizer subsidy” received by the manufactures’ of nitrogenous fertilizer viz. Urea the amount is disbursed as “subsidy” by Government and accounted in the books of accounts as “subsidy”. This subsidy is determined as follows: “Normative Cost of production + 12% post tax return on net worth – Price charged to formers”. Therefore fertilizer subsidy is not capital receipt and also includes element of notional profit also.

This is my personal views.

K T Rao