2013 (11) TMI 1488 - HC - Income Tax

Subvention payment - Revenue receipt or capital receipt - Held that - Huge amounts were paid by the parent company not only to make good the loss, but also to see that the assessee would run more profitably - The monies paid were not utilized either for repayment of the loan undertaken by the assessee for setting up their unit or for expansion of existing unit/business - The main eligibility condition with which we are concerned is that the amount ought to have been utilized by the assessee to meet recurring expenses and/or to run their business more profitably and so also to get out of the loss that they were suffering at the relevant time - It is the object which is relevant for the financial assistance which determines the nature of such assistance The character of the receipts in the hands of the assessee has to be determined with respect to the purpose for which payment was made. If the financial assistance is extended for repayment of the loan undertaken by the assessee for setting up new unit or for expansion of existing business then the receipt of such aid could be termed as capital in nature - If the financial assistance is extended to run business more profitably or to meet recurring expenses, such payment will have to be treated as revenue receipt - In the present case, the financial assistance was extended neither for setting up any unit or expansion of existing business or for acquiring any assets - Decided in favour of Revenue.

Issues Involved:
1. Whether the income received by the assessee from Siemens AG Germany should be treated as revenue receipt or capital receipt.
2. The relevance of the purpose test in determining the nature of the subsidy received.
3. The validity of the findings of the Income Tax Appellate Tribunal and the first appellate authority.

Detailed Analysis:

Issue 1: Nature of Income Received by Assessee
The primary issue was whether the income of Rs.1,33,45,000/- (for the assessment year 2000-2001), Rs.21,28,40,000/- (for 1999-2000), and Rs.2,95,84,556/- (for 2001-2002) received by the assessee from Siemens AG Germany should be treated as revenue receipt or capital receipt. The assessee argued that the payment was a "subvention payment" from the principal shareholder to make good the losses and hence should be treated as a capital receipt. The Income Tax Appellate Tribunal and the first appellate authority had accepted this contention and treated the payments as capital receipts. However, the High Court disagreed, stating that the payments were made not only to cover losses but also to ensure the company could run profitably, thereby classifying the payments as revenue receipts.

Issue 2: Application of the Purpose Test
The court applied the "purpose test" as laid down by the Supreme Court in the case of Ponni Sugars & Chemicals Ltd. and Sahney Steel & Press Works Ltd. The purpose test determines the nature of the subsidy based on the objective for which the payment was made. If the subsidy is meant to assist in running the business more profitably, it is considered a revenue receipt. Conversely, if it is for setting up or expanding a business, it is a capital receipt. The court found that the payments from Siemens AG were intended to help the assessee run its business more profitably and meet recurring expenses, thus classifying them as revenue receipts.

Issue 3: Validity of Tribunal and Appellate Authority Findings
The court scrutinized the findings of the Tribunal and the first appellate authority, which had treated the payments as capital receipts. The Tribunal had concluded that the payments were to augment the capital base and improve the net worth eroded by losses. However, the High Court found that the facts indicated otherwise, as the assessee had only suffered losses in the assessment year 1999-2000 and had made profits in subsequent years. The court emphasized that the payments were not used for setting up new units or expanding existing ones but were instead used for running the business, thereby supporting the revenue's case.

Conclusion:
The High Court ruled in favor of the revenue, stating that the payments received by the assessee from Siemens AG were revenue receipts. The court set aside the orders of the Tribunal and the first appellate authority, concluding that the financial assistance was extended to help the assessee run its business more profitably and meet recurring expenses, not for capital purposes.

Disposition:
The appeals were disposed of in favor of the revenue, with no costs awarded.

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