2015 (4) TMI 443 - HC - Income Tax

Special investment subsidy - subsidy received from the state govt. for employing persons belonging to scheduled caste and scheduled tribe categories of M.P. State at its industrial unit, established in the selected backward districts of Madhya Pradesh - whether was not in the nature of capital receipt in view of the judgment of Sahney Steels and Press Works Ltd. vs. CIT 1997 (9) TMI 3 - SUPREME Court as held by Tribunal - Held that - No hesitation in holding that the subsidy in the hands of the assessee in the present case M/s Veener & Plywood P. Ltd. are of revenue in nature and would be liable to tax accordingly. The Apex Court decision was passed in the year 1997 still holds the field and there is no valid reason urged to deviate from the ratio laid down by the Apex Court. - Decided in favour of assessee.

Issues involved:
1. Interpretation of special investment subsidy received by the assessee.
2. Determination of the nature of the subsidy as capital or revenue receipt for tax purposes.
3. Applicability of previous court decisions and legal principles in assessing the subsidy.

Analysis:

1. The case involved a special investment subsidy received by the assessee from the state government for employing individuals from scheduled caste and scheduled tribe categories in their industrial unit located in selected backward districts of Madhya Pradesh. The main issue was whether this subsidy should be considered a capital or revenue receipt for tax assessment purposes.

2. The facts of the case revealed that the subsidy was granted as a percentage of the fixed capital investment made by the assessee and was aimed at encouraging job opportunities for marginalized communities in specific areas. The Income Tax Assessment Officer treated the subsidy as a revenue receipt, leading to a dispute regarding the nature of the subsidy and its taxability.

3. The assessee appealed to the Commissioner of Income Tax (CIT), citing precedents such as CTT vs. Dusad Industries and CIT vs. Ruby Rubber Works Ltd., to argue that the subsidy should not be taxable as it was an incentive for capital investment and not an addition to profits. However, the CIT upheld the tax treatment of the subsidy as a revenue receipt.

4. The High Court referred to the decision of the Apex Court in Sahney Steel and Press Works Ltd. vs. CIT, where it was established that subsidies given to assist in carrying on trade or business are considered trade receipts. The court emphasized that the purpose of the subsidy determines its nature, with subsidies for business operations being treated as revenue in nature and subject to taxation.

5. The court distinguished the present case from previous decisions by highlighting that the subsidy was granted only after the commencement of production, indicating assistance for ongoing business operations rather than capital investment. Therefore, the court concluded that the subsidy received by the assessee was of revenue nature and should be taxed accordingly based on the principles laid down by the Apex Court.

6. Ultimately, the court upheld the tax treatment of the subsidy as a revenue receipt, in line with the Apex Court decision and rejected the appellant's arguments. The reference was answered in the affirmative, affirming the tax liability of the subsidy. The judgment was to be communicated to the Income Tax Appellate Tribunal for further action.

This detailed analysis outlines the key legal issues, factual background, court interpretations, and the final decision regarding the tax treatment of the special investment subsidy in the case.

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