2018 (6) TMI 1238 - HC - Income Tax

Treatment of a subsidy pursuant to a scheme promulgated by the State Government - revenue receipt or a capital receipt - Held that - As decided in Principal Commissioner of Income Tax Vs. Shyam Steel Industries Limited 2018 (5) TMI 702 - CALCUTTA HIGH COURT since the scheme provided for an incentive for enlarging the manufacturing facility or acquiring more equipment however the money may have been paid or adjusted in terms of the scheme the same had to be regarded as a capital receipt. The distinction that was made was that a revenue receipt would be when money is received for the day to day running of an assessee but a capital receipt would be one which goes towards funding the capital assets of a company like the enhancement of its manufacturing facility or the acquisition of more advanced equipment and the like. - Decided in favour of assessee Deduction of the interest paid on obtaining a loan u/s 36 - Held that - Both the Commissioner (Appeals) and the Appellate Tribunal noticed an agreement between the assessee the National Dairy Development Board and the West Bengal Cooperative Mill Producers Federation Limited to set up a joint venture company for the production of milk. The assessee is engaged in the business of the manufacture and sale of fruit juice and like products. The setting-up of a joint venture company with a Central Government agency and a State Government entity cannot be said to be beyond the purview of the business operations of the assessee. Thus the amount of interest paid in respect of the funds borrowed by the assessee had to be regarded as a payment made for the purpose of the business of the assessee and a permissible deduction under Section 36(1)(iii) of the Act.

Summary

Issues:
1. Deduction of interest for obtaining a loan under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Treatment of a subsidy under a scheme promulgated by the State Government as a revenue receipt or a capital receipt.

Analysis:

Issue 1: Deduction of Interest for Obtaining a Loan
The judgment dealt with the deduction of interest paid on obtaining a loan under Section 36(1)(iii) of the Income Tax Act, 1961. The Commissioner (Appeals) and the Appellate Tribunal considered an agreement between the assessee, a Central Government agency, and a State Government entity to set up a joint venture company for milk production. The assessee, engaged in the manufacture and sale of fruit juice, justified the interest payment as part of its business operations. The Commissioner (Appeals) noted that in previous assessment years, Assessing Officers had accepted similar interest payments as deductions. The Court upheld the deduction, stating that the investment made by the assessee with borrowed funds aligned with its business activities, and thus, the interest payment was a permissible deduction under Section 36(1)(iii) of the Act.

Issue 2: Treatment of Subsidy under State Government Scheme
Regarding the treatment of a subsidy received under a State Government scheme, the Court analyzed whether it should be classified as a revenue receipt or a capital receipt. Referring to a previous judgment, the Court emphasized that the purpose of the grant under the scheme determines its nature. Citing Supreme Court decisions, the Court differentiated between revenue and capital receipts based on whether the funds were for day-to-day operations or for capital assets like expanding manufacturing facilities or acquiring equipment. Relying on the precedent set in another case, the Court concluded that the subsidy received by the assessee was a capital receipt, as it was intended to incentivize the enhancement of manufacturing facilities or acquisition of advanced equipment. The Court upheld the view in favor of the assessee, as supported by the Appellate Tribunal, and dismissed the appeals.

In conclusion, the judgment clarified the treatment of interest deductions and subsidies under the Income Tax Act, providing detailed reasoning based on legal precedents and the specific circumstances of the case.