2021 (11) TMI 98 - AT - Income Tax

Nature of income - MAT - Computation of book profit u/s 115JB - Subsidy received under the Industrial Promotion Policy of the Assam Government - application of object/purpose test to the subsidy received contention of the assessee that the impugned subsidy is capital in nature and therefore not exigible to income-tax, both under normal computational provisions as well as book profit u/s 115JB - HELD THAT - Hon ble Supreme Court in the cases of Sahaney Steel Press Works 1997 (9) TMI 3 - SUPREME COURT and Ponni Sugar Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT had held that the object or purpose for which the subsidy was given is what matters, and the source of subsidy is immaterial, form of subsidy is equally immaterial and the time at which the subsidy is paid is also immaterial. Therefore, we need to examine as to what was the purpose of the scheme which enabled the grant of subsidy to the assessee. Gainful reference may also be made to the decision of this Tribunal in the case of DCIT vs. M/s. Century Plyboards (I) Ltd. 2020 (12) TMI 55 - ITAT KOLKATA wherein the excise VAT subsidies received by the assessee post commencement of commercial production, from the Central Government and State Government for setting up new units in the States of Assam and West Bengal respectively, was held to be capital in nature We find merit in the claim of the assessee that the VAT subsidy received by it for undertaking substantial expansion at their unit was in the nature of capital receipt not liable to tax, since the object of granting of subsidies was to bring about industrial development, encourage fixed capital investment and generate employment in the State of Assam. Allow the grounds taken by the assessee and direct the AO to deduct the VAT subsidy both while computing income under normal computational provisions and book profit u/s 115JB of the Act for the relevant AY 2014-15.- Decided in favour of assessee.

Issues Involved:
1. Nature of VAT subsidy received under the Industrial Promotion Policy of Assam.
2. Taxability of VAT subsidy as capital or revenue receipt.
3. Inclusion of VAT subsidy in the computation of book profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Nature of VAT subsidy received under the Industrial Promotion Policy of Assam:

The primary issue in this case is whether the VAT subsidy of ?8,78,84,902 received by the assessee under the Industrial Promotion Policy of Assam is capital in nature and, therefore, not exigible to income tax. The assessee argued that the subsidy was intended to encourage industrial development and generate employment in Assam, and thus it should be considered a capital receipt. The assessee relied on the Supreme Court's decision in CIT vs. Ponni Sugar and Chemicals Limited, which held that the nature of the subsidy depends on its purpose. If the subsidy is meant for setting up or expanding an industrial unit, it is capital in nature.

2. Taxability of VAT subsidy as capital or revenue receipt:

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the VAT subsidy as a revenue receipt, taxable under the Income Tax Act. The AO argued that since the subsidy was received after the commencement of production, it was intended to assist in running the business more profitably, thus making it a revenue receipt. The AO relied on the Supreme Court's decision in M/s. Sahney Steel & Press Works vs. CIT, which held that subsidies granted after the commencement of production are revenue in nature.

The Tribunal, however, referred to the Supreme Court's decision in CIT vs. Chaphalkar Brothers Pune, which emphasized the "purpose test" to determine the nature of the subsidy. The Supreme Court held that the object of the subsidy is crucial, and if it is to promote industrial development and generate employment, it is capital in nature, irrespective of the timing or form of the subsidy. The Tribunal noted that the Assam Industrial Policy aimed to accelerate industrial development and generate employment, and the VAT subsidy was granted to attract capital investment. Therefore, the VAT subsidy should be considered capital in nature.

3. Inclusion of VAT subsidy in the computation of book profit under Section 115JB of the Income Tax Act:

The assessee argued that since the VAT subsidy is a capital receipt, it should not be included in the computation of book profit under Section 115JB. The Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, which held that the AO can rework book profits if they are not computed in accordance with the Companies Act. The Tribunal also cited the Calcutta High Court's decision in Pr.CIT vs Ankit Metal and Power Ltd, which held that capital receipts should be excluded from book profit computation under Section 115JB.

The Tribunal concluded that since the VAT subsidy is capital in nature, it should not be included in the book profit computation under Section 115JB. The Tribunal directed the AO to exclude the VAT subsidy from the computation of total income and book profit for the relevant assessment year.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the VAT subsidy received under the Industrial Promotion Policy of Assam is capital in nature and not taxable as a revenue receipt. The Tribunal also directed that the VAT subsidy should be excluded from the computation of book profit under Section 115JB of the Income Tax Act.

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