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TMI Blog2023 (7) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... serve and Surplus" in the balance sheet. On being called upon to explain as to why the amount should not be charged to tax as a revenue receipt, the assessee submitted that it received Incentive under the Package Scheme for expansion of industry in the approved backward area. In support of its contention, the assessee also furnished a copy of the Agreement for disbursement of Special Capital incentive and Package Scheme of Incentive. The AO opined that the amount of subsidy was transferred by the assessee to 'Reserve and Surplus' account, which indicated that it was not utilised for incurring or setting up a new unit or for expansion of the existing one. Relying on the judgment in Sahney Steel Works Ltd. Vs. CIT (1997) 228 ITR 253 (SC), he held the amount chargeable to tax. The ld. CIT(A) did not provide any succour to the assessee, against which the extant appeal has been instituted. 4. Having heard both the sides and gone through the relevant material on record, it is seen that the assessee received subsidy of Rs. 3,22,200/- in the year under consideration, which was transferred to "Reserve and Surplus' on the liability side of the balance sheet. The assessee explained to the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Certificate, it clearly transpires that the incentive of Rs. 8.055 lakh was sanctioned as a quid pro quo for the Gross Value of Fixed Capital Investment of Rs. 35.80 lakh agreed to be made by the assessee. This fact is further corroborated from para 3 of the Eligibility Certificate stating that: "Accordingly subject to fulfilment of all the terms and conditions of the 2001 Scheme Procedure made thereunder of this Eligibility Certificate the following entitlements by way of incentive admissible under the scheme are provisionally worked out on the basis of actual investment indicated by the unit for the project". It is, therefore, amply manifest that the sanction of incentive of Rs. 8.055 lakh, out of which incentive of Rs. 3,22,200/- was actually received by the assessee during the year, was sanctioned for making Capital Investment in Building and Plant and Machinery to the tune of Rs. 35.80 lakh. Now the moot question is whether such subsidy received by the assessee is a 'Capital' or 'Revenue' receipt? 6. The law on the point is trite by virtue of the judgment of the Hon'ble Supreme Court in Sahney Steel Works Ltd. (supra) which has laid down the criterion for determining if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose' of the subsidy is to set up a new units or expansion of the existing units. Thus, it is evident that one needs to examine the purpose of subsidy and not the manner of its quantification or disbursement. If subsidy is in the nature of a 'Revenue' receipt as is the case of Sahney Steel Works Ltd. (supra), it becomes 'Revenue' receipt chargeable to tax. If, however, the subsidy assumes the character of a 'Capital' receipt, then other provisions of the Act get triggered. In holding the subsidy a revenue receipt, the Hon'ble Apex Court in Sahney Steel (supra) found that : `No financial assistance was granted to the assessee for setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for 5 years to enable them to be viable and competitive.' It is in this backdrop of the facts that the subsidy was held to be chargeable to tax as a revenue receipt. The Hon'ble Summit Court also added a word of caution by remarking in para 8 that : `If the purpose is to help the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such asset bears to all the assets in respect of which the subsidy is so received, shall not be included in the actual cost of the asset to the assessee. It is palpable that Explanation 10 to section 43(1) has the effect of neutralizing the decision of P.J. Chemicals (supra) by making it clear that where a portion of cost of an asset acquired by the assessee has been met directly or indirectly by means of some subsidy, then it should be reduced from the cost of asset whether or not it is directly relatable to the asset acquired. Ergo, it is manifest that the Explanation covers all the cases of receipt of grant towards cost of an asset acquired provided it is for meeting the cost or a portion of the cost of the asset. There can be other scenarios where the subsidy is otherwise of a capital nature but is not given to meet the cost of assets as such, thereby not magnetizing the mandate of Explanation 10 to section 43(1) of the Act. The 'purpose' test as laid down in Sahney Steel Works Ltd. (supra) would come into play thereby not permitting to treat the amount of subsidy as a 'Revenue' receipt. Such subsidy of capital nature would spare the rod of taxation. In order to plug such a l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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