2015 (7) TMI 1026 - HC - Income Tax

Sales Tax Subsidy - revenue v/s capital receipt - tribunal had decided the issue against the assessee - Held that - Apex Court in CIT vs. Ponni Sugars and Chemicals Limited, (2008 (9) TMI 14 - SUPREME COURT) and Sahney Steels & Press Works Limited and others vs. CIT, (1997 (9) TMI 3 - SUPREME Court) adjudicated similar issue and held that for determining the nature of receipt of subsidy, the purpose test is to be applied. In other words, it has been laid down that the purpose for which subsidy has been paid will be the determinative factor for ascertaining the nature of receipt i.e. capital or revenue. The aforesaid decision was followed by this Court in ITA No.679 of 2010, The Commissioner of Income Tax v. Siya Ram Garg HUF 2010 (12) TMI 955 - Punjab and Haryana High Court . Accordingly, the matter is remanded to the Tribunal to pass a fresh order after hearing the parties in view of the decision of the Apex Court in Ponni Sugars s case (supra) in accordance with law. - Decided in favour of assessee for statistical purposes. Disallowing the interest under section 36(1) (iii) on interest free loans granted to sister concern - Held that - Hon ble Apex Court in S.A.Builders s case (2006 (12) TMI 82 - SUPREME COURT) held that the commercial expediency is to be seen for allowing or disallowing the deduction under Section 36(1) (iii) of the Act where interest free loans had been advanced to sister concern. In the present case, since the Tribunal had not decided the issue by recording any finding whether there was commercial expediency or not, the matter requires to be remitted back to the Tribunal to decide this issue also afresh.- Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Determination of whether sales tax subsidy received by the assessee is a revenue receipt or not.
2. Disallowance of interest under section 36(1)(iii) of the Income Tax Act on interest-free loans granted to sister concern.

Analysis:

Issue 1:
The first issue pertains to the nature of the sales tax subsidy received by the assessee. The appellant argued that the Tribunal's decision against the assessee did not consider the purpose for which the subsidy was paid, as per precedents like CIT vs. Ponni Sugars and Chemicals Limited. The appellant contended that the Tribunal should have applied the purpose test to determine if the subsidy was capital or revenue in nature. Citing relevant judgments, the appellant requested a remand for the Tribunal to reevaluate the issue in light of the purpose for which the subsidy was granted. On the contrary, the revenue's counsel supported the Tribunal's orders. The High Court referred to the decision in Ponni Sugars' case, emphasizing that the purpose for which a subsidy is granted determines its nature. Following this principle, the Court remanded the matter to the Tribunal for a fresh decision based on the purpose test, as laid down by the Apex Court.

Issue 2:
Regarding the second issue in ITA No.422 of 2007, the appellant argued that the Tribunal failed to consider the commercial expediency aspect as mandated by the Supreme Court in S.A.Builders' case. The appellant contended that without a finding on commercial expediency, the issue of disallowance under section 36(1)(iii) of the Act for interest-free loans to a sister concern needed further examination. Consequently, the High Court set aside the Tribunal's orders in ITA Nos.420, 421, 422 of 2007, and ITA No.1 of 2008. The Court remanded the matters to the Tribunal for fresh consideration, directing a review in light of the decisions in Ponni Sugars and S.A.Builders' cases to ensure a comprehensive and lawful determination of the issues involved.

In conclusion, the High Court's judgment highlighted the importance of considering the purpose behind subsidies and the aspect of commercial expediency in determining the nature of receipts and allowances under the Income Tax Act. The remand to the Tribunal for a fresh decision aimed at ensuring a just and legally sound resolution based on established legal principles.