2012 (7) TMI 660 - HC - Income Tax

Subvention assistance received from Holding Company - Revenue contested against considering the receipt as a revenue receipt - Held that - The amount subvention money was received by the assessee from its holding company not as trader, but to recoup the losses likely to be suffered by it. The amount was received by virtue of their relationship of parent and subsidiary company and not stemming from any business considerations. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is to the revenue account. On the other hand under the subsidy scheme, if the object is to enable the assessee to set up a new unit or expand it then the receipt of the subsidy is to the capital account, thus as it is not in dispute that the assessee did incur losses , thus amount infused by BHW Holding AG, Germany to the assessee by way of subvention assistance, is taxable as a revenue receipt - in favour of assessee.

Issues Involved:
1. Taxability of subvention assistance as revenue receipt.
2. Classification of subvention assistance as capital or revenue receipt.
3. Applicability of previous judicial decisions on similar matters.

Detailed Analysis:

1. Taxability of Subvention Assistance as Revenue Receipt:
The primary issue in this case was whether the subvention assistance amounting to Rs. 11,22,38,874 received by the assessee from its holding company, BHW Holding AG, Germany, should be classified as a revenue receipt and thus taxable under Section 2(24) of the Income Tax Act, 1961. The Assessing Officer initially treated this subvention assistance as a casual receipt aimed at supporting the assessee's business operations. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the money received could not be taxed as it was akin to a gift, and Gift Tax had been abolished. The CIT(A) emphasized that the money was provided to recoup the financial health of the Indian subsidiary and thus should be treated as a capital receipt, not chargeable to income tax.

2. Classification of Subvention Assistance as Capital or Revenue Receipt:
The ITAT upheld the CIT(A)'s decision, stating that the subvention assistance was meant to restore the net worth of the assessee company, which was expected to be eroded by the losses incurred. The ITAT referenced the balance sheet and profit and loss account, noting that the assessee had significant operational income but also substantial expenditures, leading to a notable loss. The assistance from the holding company was intended to recoup these losses, and the holding company did not claim the subvention payment as an expenditure in their return of income. This support was considered a voluntary payment arising out of the parent-subsidiary relationship, not stemming from any business considerations, thus classifying it as a capital receipt.

3. Applicability of Previous Judicial Decisions:
The ITAT and the High Court both relied heavily on the precedent set by the case of Handicrafts & Handloom Export Corporation of India v. CIT, where similar assistance was deemed a capital receipt. The High Court noted that the assistance in the Handicrafts case was considered a voluntary payment akin to a gift from a parent to a child, aimed at ensuring business survival rather than stemming from any business considerations. The Revenue's argument that the purposive test from Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd. should apply was acknowledged. However, the court found that the facts of the present case aligned more closely with the Handicrafts case, as the assistance was to recoup anticipated losses and not to boost profits. The court concluded that the ITAT's decision was sound and did not warrant interference.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming that the subvention assistance received by the assessee from its holding company was a capital receipt, not taxable as income under Section 2(24) of the Income Tax Act, 1961. The court reiterated that the assistance was intended to recoup losses and was a voluntary payment arising from the parent-subsidiary relationship, thus aligning with the principles established in the Handicrafts case.

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