2019 (3) TMI 914 - HC - Income Tax

Diversion of Income - Capital Subsidy for infusion of additional capital by the appellant in the joint venture company as per the terms of Letter of Intent - business link or services rendered by the Assessee to the UK based Company RSA - Nature of receipt - revenue or capital receipt - HELD THAT - The Agreement between the two parties in question clearly stipulated that both intended to set up a new joint venture company to enter into the insurance sector and since, for making the investment in the share capital, the Indian Company SFL the Assessee before us fell short of money, the UK Company RSA gave the capital subsidy to the Assessee Company to contribute its share in the share capital of the joint venture company in terms of the Letter of Intent. 74% of the total subscription share capital was to be invested by the Indian Companies including the Assessee company and only 26% of share capital was to be invested by the RSA (UK Company). There is no material on record to show that the said capital subsidy received by the Assessee Company during the year in question was diverted by the Assessee company for any other purpose except for being invested in the share capital of the joint venture company. This money has not been utilised as subscribing the share capital of the UK Company, RSA itself though the Assessee Company SFL. There is no evidence on record brought by Revenue to establish that the insurance business of the joint venture company had already started and the said remittance of ₹ 2,11,75,000/- was made by the UK company RSA against any such services rendered by the Assessee Company SFL to the said UK based Company RSA. Therefore, we are unable to accept the contention of the Revenue that the said subsidy or remittance was received for any business link or services rendered by the Assessee to the UK based Company RSA. It is undoubtedly, a capital receipt in the hands of the Assessee Company and cannot be brought to tax as Revenue Receipt, particularly in the face of the finding of the Assessing Authority himself that the subsidy or remittance so received from RSA had been invested by the Assessee Company in the share capital of the joint venture Company M/s. Royal Sundaram Alliance Insurance Company Limited. - Decided in favour of assessee.

Summary

Issues:
1. Capital subsidy received from a foreign company - Revenue receipt or capital receipt?
2. Taxability of bad debts recovered by the appellant.
3. Direction to reexamine the issue of bad debts recovered.
4. Treatment of contingent deposit as income.

Issue 1 - Capital subsidy received from a foreign company - Revenue receipt or capital receipt:

The appellant received a capital subsidy for investing in a joint venture company as per the terms of an agreement. The Assessing Authority treated the subsidy as a revenue receipt, subject to tax. The Tribunal also upheld this decision, questioning the necessity for the subsidy when the joint venture partners had already committed to a specific capital contribution. However, the High Court analyzed the agreement between the parties and concluded that the subsidy was intended for the appellant to fulfill its share of the joint venture's capital requirements. The court found no evidence of diversion of the subsidy for other purposes and determined it to be a capital receipt, not taxable as revenue. The court emphasized that the subsidy was invested in the joint venture company's share capital, supporting its capital nature.

Issue 2 - Taxability of bad debts recovered by the appellant:

The appellant also contested the taxability of bad debts recovered, which were previously written off and allowed as deductions. The Tribunal did not address this issue, as it was not pressed by the appellant. However, the High Court referred to relevant case law and observed that recovered amounts from bad debts could be considered revenue receipts. Citing precedents, the court highlighted that such recoveries were taxable as income, particularly when they arose from ordinary trading transactions. The court did not delve further into this issue due to the appellant not pressing it before the court.

Issue 3 - Direction to reexamine the issue of bad debts recovered:

The Tribunal directed the assessing officer to reexamine the allowability of bad debts recovered under specific sections of the Income Tax Act. However, this issue was not pursued by the appellant during the proceedings, leading to the court not addressing it in detail. The court did not provide further analysis on this issue due to the lack of emphasis from the appellant.

Issue 4 - Treatment of contingent deposit as income:

The Tribunal treated a contingent deposit towards disputed sales tax as income of the appellant. This issue was not pressed by the appellant during the proceedings. Therefore, the court did not delve into this matter, and no detailed analysis or judgment was provided regarding the treatment of the contingent deposit as income.

In conclusion, the High Court ruled in favor of the appellant regarding the capital subsidy received, determining it to be a capital receipt and not subject to tax as revenue. The court did not extensively address the issues related to bad debts recovered or the treatment of contingent deposits as income due to the appellant not pursuing these matters during the proceedings.