2020 (10) TMI 242 - AT - Income Tax

Characterization of income - Revenue receipt or capital receipt - subsidy on account of Octroi refund - revenue receipt treated by AO - Assessee claimed the said subsidy granted by the Government of Maharashtra as per the scheme of PSI-2007 Scheme to set up plant or development of plant in backward areas - HELD THAT - In the light of decision of Chaphlkar Brothers Pune 2017 (12) TMI 816 - SUPREME COURT we hold that the assessee is entitled to treat the Octroi refund as capital in nature and it is not chargeable to tax. Thus, the order of CIT(A) fails and it is set aside. - Decided in favour of assessee.

Summary

Issues:
1. Nature of subsidy received as Octroi Duty refund - whether revenue or capital in nature.

Analysis:
The appeal pertains to the nature of subsidy received by the assessee as Octroi Duty refund for the assessment year 2014-15. The primary issue raised by the assessee questions the action of the Commissioner of Income Tax (Appeals) in confirming the order of the Assessing Officer (AO) regarding the treatment of the subsidy as revenue in nature. The assessee, engaged in manufacturing automobile components, received the subsidy under the PSI-2007 Scheme to set up or develop plants in backward areas. The AO treated the subsidy as revenue and added it to the total income of the assessee, a decision upheld by the CIT(A) leading to the appeal.

The assessee argued that the subsidy is a capital contribution by the Government of Maharashtra to establish industrial units in industrially backward areas. The subsidy was credited to Capital Reserve and shown in financial statements, indicating its capital nature. Referring to a previous tribunal decision in the assessee's favor for the A.Y. 2013-14, the assessee contended that the subsidy should be treated as capital, not taxable. The Departmental Representative, however, argued that the subsidy was granted for business operations and should be considered revenue in nature, supporting the CIT(A)'s decision.

Upon examination, the Tribunal noted that the subsidy was granted to encourage industrial growth in backward regions and promote employment. Citing the previous decision in the assessee's favor for A.Y. 2013-14, the Tribunal held that the subsidy is capital in nature and not taxable. The Tribunal also referenced the decision of the Hon'ble High Court of Bombay in a similar case, emphasizing that subsidies aimed at setting up new units or expanding existing ones should be treated as capital. The Tribunal further cited a detailed decision by the Hon'ble Supreme Court, affirming that subsidies for industrialization and employment generation are capital in nature.

Based on the legal precedents and the nature of the subsidy received, the Tribunal concluded that the Octroi refund subsidy should be treated as capital in nature, not subject to tax. Consequently, the order of the CIT(A) was set aside, and all grounds raised by the assessee were allowed, resulting in the appeal being allowed in favor of the assessee.