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TMI Blog2018 (1) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case, VAT subsidy received by the assessee from the Government of Bihar is a capital receipt and accordingly not chargeable to tax - Decided in favour of assessee. - D. B. Income Tax Appeal No. 300 -301 / 2017 - - - Dated:- 2-1-2018 - K. S. Jhaveri And Vijay Kumar Vyas, JJ. For the Appellant : Mr. Siddarth Bapna for Mr. Anil Mehta For the Respondent : Mr. Sanjay Jhanwar with Ms. Archana Mr. Amol Vyas JUDGMENT 1. In both these appeals common question of law and facts are involved, hence, they are decided by this common judgment. 2. By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee and dismissed the appeal of the department. 3. This Court while admitting the appeals on 20.11.2017 framed following substantial question of law: In appeal No. 300/2017 (I) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of ₹ 5,40,69,558/- made by the AO on accout of disallowance of claim of VAT reimbursement. In appeal No.301/2017 (I) Whether on the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of capital nature. 16. One more aspect needs to be mentioned. In Sahney Steel and Press Works Ltd. (supra) this Court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. (supra) assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business. 2. Shree Balaji Alloys vs. Commissioner of Income Tax and Anr. [2011] 333 ITR 335 (JKHC), wherein it has been observed as under: 26. In this view of the matter, the incentives provided to the Industrial units, in terms of the New Industrial Policy, for accelerated Industrial development in the State, for creation of such industrial atmosphere and environment, which would provide additional Permanent source of Employment to the unemployed in the State of Jammu and Kashmir, were in fact, in the nature of creation of New A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove discussion, the legal proposition which has been laid down by the Special Bench in case of Reliance Industries after taking into consideration the decision of the Honb le Supreme Court in case of Sahney Steel Press Works Ltd and by the subsequent decision of the Hon ble Supreme Court in case of Ponni Sugar and Chemical Ltd, the character of the subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is not relevant. The source is immaterial. The form or the mechanism through which the subsidy is given is immaterial. If the object of the subsidy scheme was to enable the assessee to run business more profitably, then the receipt is on revenue account. On the other hand, if the object of the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of subsidy was on capital account. 5.16 In the instant case, the subsidy in the form of VAT reimbursement is provided to the assessee company in terms of the Industrial Incentive Policy of state of Bihar formulated in the year 2006. The objective of the policy was to establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antum of subsidy is linked to capital invested and also the disbursement thereof is linked to VAT which is collected and deposited on goods actually produced and sold. By its very nature, the subsidy would thus be payable after the commencement of production but that would not make it a revenue receipt as it was only a mode of disbursement and had nothing to do with the object for which the subsidy was given. The object for which the subsidy is granted, would takes primacy over the fact that it was given after the commencement of production and conditional upon the same. The subsidy is thus on capital account. 5.18 It is noted that a similar view has been taken by the Coordinate Bench in case of Harinagar Sugar Mills (supra) while examining the reimbursement of VAT on molasses under the Bihar Incentive Package 2006. 5.19 Further, we have noticed that the Finance Act, 2015 w.e.f. 1-4- 2016, has enlarged the definition of income given u/s 2(24) by inserting sub-clause (xviii), which reads as under:- (xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X
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