2019 (9) TMI 1154 - HC - Income Tax

Characterization of income - subsidy received - revenue or capital receipt - HELD THAT - This Court notices that the Punjab and Haryana High Court took into account the previous binding ruling of the Supreme Court in Commissioner of Income Tax vs. Ponni Sugars Chemicals Ltd. Ors. 2008 (9) TMI 14 - SUPREME COURT and Sahney Steel Press Works Ltd. Ors. vs. Commissioner of Income Tax 1997 (9) TMI 3 - SUPREME COURT . In these circumstances, the Court is of the opinion that the amount was received as capital stream and therefore, not taxable. Focus Marketing Scheme - apparently the Central Government gave the subsidy to enhance indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. ITAT took note of judgment in Ponni Sugars Chemicals Ltd.(supra) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. This Court is of the opinion that there is no infirmity with the reason. As far as the electricity subsidy is concerned, the third ground i.e. electricity subsidy under the Rajasthan Investment Promotion Scheme was held to be a capital receipt by the CIT(A). It was held that this was granted in larger public interest and it was linked to capital interest, a similar scheme was that the amounts received in the similar scheme have to be capital receipt by a Division Bench of this Court in Commissioner of Income Tax, Ajmer vs. Shree Cement 2017 (8) TMI 1336 - RAJASTHAN HIGH COURT . This Court notices that the ratio of the rulings in Ponni Sugars Chemicals Ltd.(supra) and Sahney Steel Press Works Ltd. Ors. (supra), applied. Consequently, we find no infirmity with the approach of the ITAT on this aspect as well.

Summary

Issues:
1. Taxability of subsidies received by the assessee as capital receipts.

Analysis:
The primary issue in this case was the taxability of subsidies received by the assessee as capital receipts. The Revenue contended that the subsidies claimed by the assessee, including the Technology Upgradation Fund, Focus Market Scheme subsidy, and Electricity Duty Subsidy, should be treated as income and taxed accordingly. The assessee, a textile manufacturer, argued that these subsidies were capital receipts and not taxable.

The Technology Upgradation Fund received by the assessee was subject to deferred repayment of interest, as per the scheme drawn by the Union Textile Ministry. The agreement specified that the subsidy would be treated as a non-interest bearing term loan by the Bank, to be adjusted against the term loan account of the beneficiary after a lock-in period of three years. The ITAT allowed the assessee's appeal, rejecting the Revenue's contention that the subsidy should be treated as revenue until production took place.

The ITAT referred to the judgment of the Punjab and Haryana High Court in a similar case, emphasizing the purpose test to determine whether a subsidy payment should be considered a revenue or capital receipt. The Court observed that the subsidies in question were received as capital streams and hence not taxable, citing previous rulings by the Supreme Court and other High Courts.

Regarding the Focus Market Scheme subsidy, the Court upheld the ITAT's decision that the subsidy was not an export incentive but a capital receipt, as it was granted to enhance Indian export potential in the international market. Similarly, the Electricity Duty Subsidy under the Rajasthan Investment Promotion Scheme was deemed a capital receipt by the CIT(A) and upheld by the Court, as it was linked to capital interest and granted in larger public interest.

The Court found no legal question warranting consideration and dismissed the appeal, affirming that the subsidies received by the assessee were capital receipts and not subject to taxation. The judgments cited in support of this conclusion provided a strong legal basis for the decision, ensuring consistency with established legal principles in tax law.