2020 (2) TMI 720 - AT - Income Tax

Nature of income - characterization of income - interest subsidy received - revenue or capital receipt - HELD THAT - Technology levels were benchmarked in terms of specified machinery for each sector of the Textile Industry. It is thus clear that even though the subsidy in question under TUF Scheme was given in the form of reimbursement of the interest, the objective of giving the said subsidy was to upgrade its technology level by the eligible unit by induction of state-of-the-art or near-state-of-the-art technology and such technology level was benchmarked in terms of specified machinery for each sector of the Textile Industry. The purpose of giving incentive in the form of interest subsidy under the TUF Scheme thus was to encourage capital investment by the eligible unit in the form of specified machinery in order to induct state-of-the-art or near-state-of the-art technology or at least a significant step up from the present technology level to a substantially higher one. In our opinion, going by this purpose of the interest subsidy as specified under the TUF Scheme, the amount of interest subsidy in question received by the assessee was a receipt of capital in nature. Utilization of the amount of incentive in question for the purpose of meeting the interest liability of the Company on loans and advances taken by it to set up its plant and machinery - HELD THAT - Hon ble Calcutta High Court has directed us to examine or investigate before arriving at any conclusion as regards the nature of the interest subsidy whether capital or revenue, it is observed that neither the Assessing Officer nor the ld. CIT(Appeals) has given any finding on this aspect. In this regard, the ld. D.R. has submitted that this matter requires verification and an opportunity may be given to the Assessing Officer to verify the same from the relevant record. We are inclined to accept this contention of the ld. D.R. and since assessee has also not raised any objection in this regard, we restore this issue to the file of the Assessing Officer for the limited purpose of verifying the issue of utilisation of amount of subsidy in question by the assessee. If it is found by the Assessing Officer on such verification that the subsidy amount in question was utilized by the assessee for the purpose of meeting the interest liability on loans and advances taken by it to set up its plant and machinery, the subsidy incentive could be considered as a capital receipt not chargeable to tax. Otherwise, as observed by the Hon ble Jurisdictional High Court, it has to be treated as a revenue receipt.

Summary

Issues Involved:
1. Treatment of interest subsidy received under the Technology Upgradation Fund Scheme (TUFS) as capital receipt not chargeable to tax.
2. Verification of the utilization of the subsidy amount for meeting the interest liability on loans and advances taken to set up plant and machinery.

Detailed Analysis:

1. Treatment of Interest Subsidy as Capital Receipt:
The primary issue in this case revolves around whether the interest subsidy received by the assessee under the TUFS should be treated as a capital receipt not chargeable to tax. The assessee, a company, filed its return declaring a loss and later claimed that the interest subsidy should be treated as a capital receipt. The CIT(Appeals) admitted this additional ground and directed the Assessing Officer to treat the interest subsidy as a capital receipt, not chargeable to tax, referencing the decision of the Kolkata Bench of ITAT in the case of DCIT vs. M/s. Gloster Jute Mills Limited. The Tribunal initially upheld this view, but the High Court remanded the matter back to the Tribunal, directing a thorough analysis of the subsidy scheme and its utilization.

2. Verification of Subsidy Utilization:
The High Court emphasized that the subsidy scheme needed to be analyzed in detail to determine whether the subsidy was utilized for meeting the interest liability on loans and advances taken to set up plant and machinery. The Tribunal, upon remand, examined the objective and scope of the TUFS, noting that the scheme aimed to upgrade technology levels in the textile industry by providing a reimbursement on interest charged by financial institutions. The Tribunal concluded that the purpose of the interest subsidy was to encourage capital investment in specified machinery, making the subsidy a capital receipt. However, the Tribunal also recognized that the actual utilization of the subsidy needed verification.

Remand for Verification:
The Tribunal noted that neither the Assessing Officer nor the CIT(Appeals) had provided findings on the utilization of the subsidy amount. The Department Representative requested verification of this aspect, which the Tribunal accepted. The issue was restored to the Assessing Officer for the limited purpose of verifying whether the subsidy was used to meet the interest liability on loans for setting up plant and machinery. If verified, the subsidy would be considered a capital receipt; otherwise, it would be treated as a revenue receipt.

Conclusion:
The appeal of the Revenue was treated as allowed for statistical purposes, pending the verification by the Assessing Officer regarding the utilization of the subsidy amount. The Tribunal directed that if the subsidy was used for meeting the interest liability on loans for setting up plant and machinery, it should be treated as a capital receipt; otherwise, it should be treated as a revenue receipt.

Order Pronounced:
The order was pronounced in the open Court on February 14, 2020.