2013 (9) TMI 299 - HC - Income Tax

Capital or Revenue receipt - Nature of Subsidy received from holding company State Trading Corporation of India (STC) - Held that - In the present case, Rs.25 lakhs was not paid by a third party or by a public authority but by the holding company. It was not on account of any trade or a commercial transaction between the subsidiary and holding company. The holding company was a shareholder and the shares partake and were in nature of capital. Share subscription money received in the hands of the respondent assessee was a capital receipt. The intention and purpose behind the said payment was to secure and protect the capital investment made by STC Ltd. in the respondent. The payment of grant by STC and receipt thereof by the respondent was not during the course of trade or performance of trade, thus, could be categorised or classified as a gift or a capital grant and did not partake character of a trading receipts. - The receipt is capital in nature - Decided in favor of assessee. The findings recorded by the Delhi High Court in their earlier decision in the case of the respondent/assessee 1981 (12) TMI 25 - DELHI High Court is the grant given by the holding company was of capital nature and not revenue or contributing to the trading income of the respondent. Even when we apply the purpose test applied in the case of Sahney Steel & Press Works Ltd. (1997 (9) TMI 3 - SUPREME Court) as explained in Ponni Sugar and Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT). It cannot be said that the earlier decision of the Delhi High Court 1981 (12) TMI 25 - DELHI High Court has been overturned or overruled by the Supreme Court in the two decisions mentioned above. - Decided against Revenue.

Issues Involved:

1. Whether the grant of Rs. 25 Lakhs received by the assessee was a revenue receipt.
2. Application of the Supreme Court's decision in Sahney Steel and Press Works Ltd. vs. Commissioner of Income Tax.
3. The nature of the grant received from the holding company, State Trading Corporation of India (STC).

Issue-wise Detailed Analysis:

1. Whether the grant of Rs. 25 Lakhs received by the assessee was a revenue receipt:

The core issue was whether the grant of Rs. 25 Lakhs received by the respondent assessee from its holding company, State Trading Corporation of India (STC), should be classified as a revenue receipt and thus taxable as income. The Income Tax Appellate Tribunal had previously decided in favor of the respondent, stating that the grant was not a revenue receipt but a capital contribution intended to recoup losses incurred by the respondent corporation.

2. Application of the Supreme Court's decision in Sahney Steel and Press Works Ltd. vs. Commissioner of Income Tax:

The Revenue contended that the decision in the respondent's case had been implicitly overruled by the Supreme Court's decision in Sahney Steel and Press Works Ltd. vs. Commissioner of Income Tax. The Supreme Court in Sahney Steel had established a test to determine whether a subsidy received by an assessee is taxable as a capital or revenue receipt. Subsidies received on revenue account are taxable, whereas those on capital account are not. The Supreme Court emphasized that the purpose of the subsidy is crucial in determining its nature. If the subsidy is meant to assist in carrying on the business, it is a revenue receipt; if it is for setting up or expanding a business, it is a capital receipt.

3. The nature of the grant received from the holding company, State Trading Corporation of India (STC):

The High Court examined the nature of the grant and concluded that it was not paid by a third party or public authority but by the holding company, STC. The grant was not related to any trade or commercial transaction but was intended to protect the capital investment made by STC in the respondent. The High Court reiterated its earlier decision that such grants were capital in nature and not revenue receipts. The grant was seen as a capital contribution to recoup the losses incurred by the respondent and enable it to meet its liabilities, akin to a gift or voluntary payment motivated by the relationship between the holding company and its subsidiary.

The High Court also referred to the full bench decision of the Kerala High Court in CIT vs. Ruby Rubber Works Ltd., where a subsidy received for the acquisition of an asset was held to be capital in nature. Similarly, in CIT vs. Ponni Sugars and Chemicals, the Supreme Court had clarified that the purpose of the subsidy determines its nature. If the subsidy is for setting up or expanding a business, it is a capital receipt.

Conclusion:

The High Court concluded that the earlier decision in the respondent's case, which classified the grant as a capital receipt, remained valid and had not been overturned by the Supreme Court's decisions. The purpose of the grant from STC was to protect its capital investment and not to assist in the trading operations of the respondent. Therefore, the grant did not constitute a revenue receipt.

Judgment:

The High Court answered the question of law in favor of the respondent assessee and against the appellant Revenue. The appeal was disposed of without any order as to costs.

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