2013 (7) TMI 522 - HC - Income Tax

Whether grant-in-aid received by the assessee is an incentive for conducting research so as to be treated as capital receipt and not as revenue receipt - Held that - The grant-in-aid is given to the assessee for research in the field of telecommunications, which in-turn would benefit the Nation and public at large the income is only a capital receipt and not a revenue receipt - Court relied upon the judgement of Commissioner of Income-Tax Vs. Ponni Sugars & Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT) - the object of the grant-in-aid is for the specific purpose of conducting research in the field of telecommunications, so that the benefit thereof would ensure to the Nation - the grant-in-aid is not given to the assessee for carrying on its day-to-day business - if the assessee is able to acquire new ideas or new knowledge and use the same in its manufacturing activity it would be a case of acquisition of such new idea which in itself would constitute an intellectual property - It is to acquire such capital asset the grant-in-aid is given - It also helps in the growth of the assessee generally in public interest as the said grant-in-aid is given to the assessee so as to assist the assessee to acquire the new capital asset and the said benefit may be incidental to the business of the assessee appeal decided against revenue

Summary

Issues:
1. Appeal against Tribunal's order on tax liability of grant-in-aid received by the assessee.
2. Determination of whether the grant-in-aid should be treated as a capital or revenue receipt.

Analysis:

Issue 1:
The revenue appealed against the Tribunal's decision that the grant-in-aid received by the assessee for research purposes was not taxable as a revenue receipt. The Commissioner sought to tax the grant-in-aid received by the assessee, invoking Section 263 of the Income-Tax Act, 1961. The Tribunal, however, reversed the Commissioner's decision based on the nature of the grant-in-aid and its purpose for research. The High Court considered the appeal challenging the tax liability on the grant-in-aid.

Issue 2:
The key question before the High Court was whether the grant-in-aid of Rs. 38,02,801 received by the assessee should be categorized as a 'capital receipt' or a 'revenue receipt.' The Revisional authority argued that since the grant-in-aid was treated as revenue in the assessee's accounts and was spent on scientific research, it should be taxed under Section 41 of the Act. However, the Tribunal disagreed, emphasizing that the grant-in-aid was specifically for research purposes and not for trading activities. The High Court referred to the Supreme Court's judgment in Commissioner of Income-Tax Vs. Ponni Sugars & Chemicals Ltd., which highlighted the importance of the purpose for which the subsidy or grant is given in determining its tax treatment. In this case, the grant-in-aid was intended for conducting research in telecommunications, leading to the improvement of existing systems and benefiting the nation. Therefore, the High Court concluded that the grant-in-aid constituted a capital receipt, not subject to tax as a revenue receipt.

In conclusion, the High Court dismissed the appeal, ruling in favor of the assessee and holding that the grant-in-aid received for research purposes should be treated as a capital receipt, exempt from taxation as a revenue receipt.