2015 (7) TMI 515 - AT - Income Tax

Treatment to interest subsidy - revenue v/s capital - 3% Central Interest Subsidy under the Central Interest Subsidy Scheme, 2002 of Government of India in favour of Kathua unit; 2.5% interest subsidy under Rajasthan Investment Promotion Scheme, 2003 by Rajasthan Government in favour of Bhawanimandi unit and Interest subsidy under Technology Up-gradation Fund Scheme by Ministry of Textiles, Government of India in favour of all the units of the company - Held that - With regard to interest subsidy, under the Interest Subsidy Scheme 2002, Ld. CIT(A) noticed that the assessee company had received interest subsidy to the extent of 3% of the working capital advanced by the banks / financial institutions. The amount of subsidy so received was shown as part of miscellaneous income in Schedule XV. The subsidy was granted for industrial development in the State of Jammu & Kashmir for creating employment opportunities. By applying the purpose test , laid down by Hon ble Apex Court in the case of Ponni Sugars & Chemicals Ltd. (2008 (9) TMI 14 - SUPREME COURT ) and also in the light of other judgements, which have considered the schemes, Ld . Commissioner observed that primary consideration of Central Government in granting incentives was to generate employment through acceleration of industrial development and thus each incentive can be said to have been designed to achieve public purpose and therefore, it is not by any stretch of imagination constitute as production incentive for the benefit of assessee alone. Therefore, the interest subsidy is in the nature of capital receipt. With regard to 2.5% capital investment subsidy, under Rajasthan Investment Promotion Scheme, 2003, Ld. CIT(A) observed that subsidy was provided for promoting investment in the State of Rajasthan and was linked to capital investment/ and hence the scheme was in the larger public interest, therefore, it constitutes capital receipt and not liable to tax. Similarly, with regard to 5% interest subsidy granted by Ministry of Textiles, Ld. CIT(A) perused the objects of the scheme while coming to the conclusion that it was introduced to promote technological upgradation in the Indian Textile Industry and also noted that the issue is squarely covered by Punjab & Haryana High Court decision in the case of Shyam Lal (2011 (1) TMI 409 - PUNJAB AND HARYANA HIGH COURT ) wherein it was held that such subsidy received under the said scheme is capital in nature. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of additions made by the A.O. on account of recruitment and training expense.
2. Treatment of subsidies received under various government schemes as capital or revenue receipts.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made by the A.O. on Account of Recruitment and Training Expense:
The Revenue contested the deletion of additions amounting to Rs. 15,84,215/- made by the A.O. on account of recruitment and training expenses. However, this issue was not elaborated upon in the judgment, as the primary focus was on the treatment of subsidies received by the assessee.

2. Treatment of Subsidies Received Under Various Government Schemes:
The core issue revolved around whether the subsidies received by the assessee under different schemes should be treated as capital receipts or revenue receipts.

a. 3% Central Interest Subsidy:
The assessee received a 3% interest subsidy under the Central Interest Subsidy Scheme, 2002, for industrial development in Jammu & Kashmir. The subsidy aimed to create employment opportunities and accelerate industrial development. By applying the "purpose test" from the Supreme Court's decision in Ponni Sugars and Chemicals Ltd. Vs CIT, it was determined that the subsidy was capital in nature. The Jammu and Kashmir High Court's decision in the case of Balaji Alloys Vs CIT also supported this view, emphasizing that such subsidies aim to generate employment and industrial development, thus qualifying as capital receipts.

b. 2.5% Interest Subsidy Under Rajasthan Investment Promotion Scheme, 2003:
The subsidy under this scheme was provided to promote investment in Rajasthan and was linked to capital investment and additional wages. The Ld. CIT(A) concluded that since the subsidy was granted in the larger public interest and aimed at promoting investment, it constituted a capital receipt and was not liable to tax.

c. 5% Interest Subsidy Under Technology Upgradation Fund Scheme (TUFS) by Ministry of Textiles:
The TUFS aimed to promote technological upgradation in the textile industry, leading to capacity expansion, modernization, and employment generation. The Ld. CIT(A) determined that the subsidy was capital in nature, as it was intended to incentivize technological advancements and promote public interest. This conclusion was supported by the Punjab & Haryana High Court's decision in the case of Shamlal Bansal, which held that subsidies under the TUFS scheme are capital receipts.

Conclusion:
The Ld. CIT(A) found that the subsidies received by the assessee under various schemes were capital receipts based on the "purpose test" and relevant judicial precedents. The Appellate Tribunal affirmed the Ld. CIT(A)'s order, dismissing the Revenue's appeal and upholding the treatment of subsidies as capital receipts. The Tribunal emphasized that the subsidies aimed at public interest, such as employment generation and industrial development, should be treated as capital receipts rather than revenue receipts.