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2023 (7) TMI 1281 - AT - Income TaxNature/Character of receipt - subsidy receipt - revenue or capital receipt - Applicability of purpose test - HELD THAT - The amount of subsidy received by the assessee is towards the investment made in expansion of its industrial unit under the Package Incentive Scheme 2001. Applying the purpose test, it would be characterised as a Capital receipt. Further, it is not the case of the AO that Explanation 10 to section 43(1) is attracted. Thus, section 2(24)(xviii) would be attracted, in principle, but would not apply as the assessment year under consideration is prior to the insertion of the proviso. It is, therefore, held that the authorities below were not justified in treating the amount of subsidy as a Revenue receipt chargeable to tax.
Issues Involved:
1. Whether the subsidy received by the assessee is a 'Capital' or 'Revenue' receipt. Summary: 1. Nature of Subsidy: The primary issue in this appeal is the classification of a subsidy amounting to Rs. 3,22,200/- received by the assessee. The Assessing Officer (AO) treated the subsidy as a revenue receipt, thereby making it taxable. The assessee argued that the subsidy was granted under the Package Scheme for the expansion of industry in an approved backward area and should be considered a capital receipt. The AO, relying on the judgment in Sahney Steel Works Ltd. Vs. CIT (1997) 228 ITR 253 (SC), held the subsidy as a revenue receipt because it was reflected in the 'Reserve and Surplus' account. 2. Purpose Test: The Tribunal emphasized the 'purpose' test to determine the nature of the subsidy. It was noted that if the subsidy is meant to enable the business operations more profitably, it is a revenue receipt. Conversely, if the subsidy is for setting up or expanding an industry, it is a capital receipt. The Tribunal found that the subsidy in question was granted for making capital investments in Building and Plant and Machinery, thus qualifying as a capital receipt. 3. Legal Precedents: The Tribunal referred to the Supreme Court's judgments in Sahney Steel Works Ltd. and CIT Vs. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) to elucidate the criteria for determining the nature of subsidies. The Tribunal also discussed Explanation 10 to section 43(1) and section 2(24)(xviii) of the Income-tax Act, 1961, which were relevant for subsidies related to the cost of assets. 4. Applicability of Section 2(24)(xviii): The Tribunal noted that section 2(24)(xviii), which includes subsidies as income, was inserted by the Finance Act, 2015, and is applicable prospectively from 01-04-2016. Since the assessment year under consideration is 2010-11, this provision does not apply. Conclusion: The Tribunal concluded that the subsidy received by the assessee for the expansion of its industrial unit is a capital receipt and not a revenue receipt. Therefore, the authorities below were not justified in treating the subsidy as taxable income. The appeal was allowed in favor of the assessee. Order: The appeal is allowed, and the order was pronounced in the Open Court on 28th July, 2023.
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