Tax not leviable on Subsidy from State Govt under ‘Capital Investment Subsidy’

ACIT Vs Pasadensa Foods Ltd (ITAT Delhi)

It is seen, as an admitted position, that the subsidy of Rs. 2.50 crore was given for setting up of unit in West Bengal and the same has been characterized as `Capital investment subsidy’. The Hon’ble Supreme Court in Sahney Steel and Press Works vs. CIT (1997) 228 ITR 253 (SC), has held that the operational subsidy which is received after commencing the business is taxable income. The Hon’ble Apex Court has further laid down in this case that the purpose of subsidy should be examined. If such subsidy is for encouraging the establishment of new units, then, it is capital, but, the operational subsidies allowed after commencing of business, are taxable in nature. The Hon’ble Supreme Court in CIT vs. Ponni Sugar & Chemicals Ltd. (2008) 306 ITR 392 (SC) has again laid down that the ‘purpose test’ should be applied for determining the character of subsidy. If the subsidy is given for expansion etc., then, it is a capital receipt irrespective of the fact that it is given in the form of more open quotas etc. Turning to the facts of the instant case, we find it as an admitted position that the assessee received this amount as a quid pro quo for setting up of its unit in West Bengal. The same, being, allowed for setting up of industry has been rightly held by the ld. CIT(A) to be capital receipt. The impugned order is confirmed. This ground fails.

Full Text of the ITAT Order is as follows:-