2016 (1) TMI 783 - AT - Income Tax

Nature of Subsidy under the Quality Upgradation and Product Diversification Scheme - whether the subsidy received by the Assessee was capital in nature not chargeable to tax or was revenue in nature chargeable to tax? - Held that - Quality Awareness programme for upgrading the quality of tea produced by the Bought leaf factories (processing the green leaf supplied by small growers) A detailed list of machinery items eligible for subsidy and their basic cost is annexed as annexure-1. A perusal of annexure-1 would show that the purpose of the scheme is to ensure better working of the tea manufacturing unit plucking practices adopted in the tea garden etc. Subsidy is given for improving the infrastructure of the existing tea manufacturing unit. The predominant purpose of the scheme is to ensure that tea manufactures function more profitably and not for setting up of a new unit or expansion of the existing unit. We are therefore the view that the subsidy in question is revenue subsidy and was rightly brought to tax. - Decided against assessee

Summary

Issues Involved:
1. Nature of the subsidy received (capital vs. revenue).
2. Reduction of subsidy from the actual cost of machinery for depreciation purposes.
3. Applicability of the amendment to Section 2(24)(xviii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Nature of the Subsidy Received (Capital vs. Revenue):
The primary issue addressed was whether the subsidy of Rs. 23,26,506 received by the Assessee under the "Quality Upgradation and Product Diversification Scheme" was capital or revenue in nature. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] held that the subsidy was revenue in nature, thus taxable. The CIT(A) noted that the scheme aimed to improve the quality of tea through technology upgradation and replacement of old machinery, which did not involve setting up a new unit or expanding an existing one. The Tribunal upheld this view, emphasizing the "Purpose Test" established by the Supreme Court in CIT vs. Ponni Sugars & Chemicals Limited, which determines the nature of a subsidy based on its objective. Since the scheme's purpose was to enable the Assessee to run its business more profitably, the subsidy was deemed revenue in nature.

2. Reduction of Subsidy from the Actual Cost of Machinery for Depreciation Purposes:
The AO reduced Rs. 3,48,976 (15% of Rs. 23,26,506) from the depreciation allowed to the Assessee under Explanation 10 to Section 43(1) of the Income Tax Act, which mandates that any subsidy received towards the acquisition of an asset should be deducted from the actual cost of the asset for depreciation purposes. The Assessee contended that if the subsidy was considered a revenue receipt, it should not reduce the cost of the asset. However, the Tribunal noted that the Assessee did not challenge this aspect before the CIT(A), and thus, the reduction of the subsidy from the actual cost was upheld.

3. Applicability of the Amendment to Section 2(24)(xviii) of the Income Tax Act, 1961:
The Assessee argued that the amendment to Section 2(24)(xviii), effective from 01/04/2016, which includes subsidies as income, should be applied retrospectively to avoid double taxation. The Tribunal, however, held that the amendment is prospective, as it creates a charge to tax and does not provide retrospective relief. The amendment was designed to align with the Income Computation and Disclosure Standards (ICDS) and to provide clarity on the treatment of government grants. The Tribunal concluded that prior to this amendment, a subsidy regarded as revenue would be taxable, and its value would be reduced from the actual cost of depreciable assets if the conditions of Explanation 10 to Section 43(1) were met.

Conclusion:
The appeal by the Assessee was dismissed. The Tribunal upheld the AO and CIT(A)'s decision that the subsidy received was revenue in nature and taxable. It also confirmed the reduction of the subsidy from the actual cost of the machinery for depreciation purposes. The amendment to Section 2(24)(xviii) was deemed prospective and not applicable to the assessment year in question.