2013 (10) TMI 650 - HC - Income Tax

Nature of Receipt Capital OR Revenue Receipt - Whether a certain subsidy received by the respondent assessee under the scheme framed by the Government of Haryana under Chapter IV-C of Haryana General Sales Tax Rules, 1975 should be treated as a capital receipt or a revenue receipt Held that - The subsidy though computed in terms of sales tax deferment or waiver, in essence it was meant for capital outlay expended by the assessee for set up of the unit in case of a new industrial unit and for expansion and diversification of an existing unit - such subsidy was available only to a new industrial unit or a unit undertaking expansion or diversification - Fixed capital investment has been defined as to include various investments in land under use, new construction, plant and machinery etc. - The entitlement was related to percentage of fixed capital investment. Following Sahney Steel and Press Works Ltd. and others v. Commissioner of Income-tax 1997 (9) TMI 3 - SUPREME Court - The subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business - the subsidy given was to meet recurring expenses - The subsidies were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test - The point of time at which the subsidy is paid is not relevant - The source is immaterial - The form of subsidy is immaterial - The main eligibility condition in the scheme is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units - it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy - The form of the mechanism through which the subsidy is given is irrelevant there was no error in view of the Tribunal Decided against Revenue.

Issues Involved:
1. Classification of sales tax incentive as capital receipt or revenue receipt.
2. Applicability of the subsidy to the cost of fixed assets for depreciation calculation.

Detailed Analysis:

Issue 1: Classification of Sales Tax Incentive
Question: Whether the sales tax incentive received by the assessee under the Government of Haryana's scheme should be treated as a capital receipt or a revenue receipt.

Judgment Analysis:
The Tribunal relied on the Supreme Court's decision in Commissioner of Income-tax v. Ponni Sugars and Chemicals Ltd., which emphasized the "purpose test" to determine the nature of the subsidy. The Tribunal concluded that the sales tax incentive was a capital receipt. The scheme provided concessions for new industrial units or units undertaking expansion/diversification, linking the subsidy to fixed capital investments such as land, new construction, and machinery. Despite being computed in terms of sales tax deferment, the subsidy aimed to cover capital outlay, thus qualifying as a capital receipt.

Issue 2: Applicability to Fixed Assets for Depreciation
Question: Whether the subsidy should be deducted from the cost of fixed assets for calculating depreciation.

Judgment Analysis:
The Tribunal directed that if the subsidy is considered a capital receipt related to fixed assets, it should be deducted from the cost of fixed assets for depreciation purposes as per Section 43(1) of the Income Tax Act. This aligns with the initial proposition by the Assessing Officer during the assessment proceedings. The Tribunal instructed the Assessing Officer to recalculate depreciation after reducing the subsidy amount from the cost of fixed assets, ensuring compliance with legal provisions and providing the assessee a reasonable opportunity to be heard.

Additional Considerations:
Revenue's Argument: The Revenue contended that the subsidy, being a sales tax deferment, should be treated as a revenue receipt since it was available only after the unit commenced production.

Respondent's Argument: The respondent argued that the subsidy, though computed based on sales tax liability, was intended to cover capital outlay, thus qualifying as a capital receipt. The respondent cited the Supreme Court's decision in Ponni Sugars and Chemicals Ltd. and a similar judgment by the Gujarat High Court in DCIT-Circle1(2)-Baroda v. Inox Leisure Ltd., where tax waivers linked to capital investments were deemed capital in nature.

Court's Conclusion: The court upheld the Tribunal's view, emphasizing that the purpose of the subsidy was to aid in setting up or expanding the business, thus classifying it as a capital receipt. The court dismissed the Revenue's appeals, affirming the Tribunal's decision.

Conclusion:
The High Court dismissed the Revenue's appeals, affirming that the sales tax incentive under the Government of Haryana's scheme is a capital receipt and should be deducted from the cost of fixed assets for depreciation calculation. The judgment underscores the importance of the purpose test in determining the nature of subsidies.

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