Case Law Details
Subsidy to set up a new unit or to expand an existing unit is capital receipts, purpose test will prevail
Brief of the Case
ITAT Delhi held in the case of M/s. Shivalik Prints Limited vs. ACIT that in the judgment of CIT vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC), the Hon’ble Supreme court have held that the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted i.e. one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on the revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account. In the case in hand, subsidy was given in the form of capital cost to encourage upgrading the textile industry and the purpose and object was for capital investment, as such, is clearly a capital receipt.
Facts of the Case
The assessee is engaged in the business of dying printing and processing of fabrics. The return of income was filed on 26.10.2007 declaring a loss of Rs.1,79,12,287/-.The return was processed u/s 143(1) and thereafter, the assessment was completed u/s143(3) computing loss at Rs.99,37,978/- as against returned loss of Rs.1,79,12,287/- as declared by the assessee after making certain addition/disallowance. The AO observed the assessee had received subsidy of Rs.74, 02,161/- which was claimed as Capital Subsidy and this subsidy was received from Ministry of Textiles for purchase of machinery. The AO treated the aforesaid amount of Rs.74, 02,171/- as revenue receipt and added back to the income of the assessee.
Contention of the Assessee
The ld counsel of the assessee submitted that this is a scheme from textile Ministry for modernization of textile industries and the scheme is known as Credit Linked Capital Subsidy under TUFS (Technology Up-gradation Fund Scheme). He submitted that under this scheme, the Government gives the fund straightway to the designated bank and the bank has to give a certificate to the effect that the Plant & Machinery was purchased and in assessee’s case, the bank has given a certificate dated 26.08.2006. He submitted that the AO treated the same as revenue receipt on the ground that the same was released as profit supplement. However, he submitted that the AO has not given any detailed reason for treating the grant as revenue receipt and not capital receipt.
He further submitted that the scheme indicates that the assessee would get 10% of the total P&M installed during the year. He submitted that the assessee’s case is squarely covered by the decision of Hon’ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd reported in 306 ITR 392 (SC) wherein the Hon’ble Supreme Court has held that, “The character of the receipt of subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account.” He submitted that the capital subsidy paid in assessee’s case is clearly within the purpose and object to promote capital investment, as such the same is clearly a capital receipt as per the said case law relied upon by the assessee. Further, he relied on the CBDT Circular No.142 dated 01.08.1974, the capital subsidy involved is a capital receipt.
Contention of the Revenue
The ld counsel of the revenue relied on the orders of the authorities below and submitted that the lower authorities rightly held the subsidy as revenue receipt.
Held by CIT (A)
The CIT (A) confirmed the addition. CIT (A) held that this is essentially a question of fact. The grant was received from the Textile Ministry would by itself will not make the issue either in favour of the Revenue or the appellant. We have to go behind the documents and to see the nature of grant given by the Govt Authority. The examination of document shows that the State has given the appellant enterprise a running support to continue its business activity. The fact that the scheme indicates that the appellant would get 10% of the total P&M installed during the year would not make the nature of payment as capital. The fact of the matter is that this is a profit substitute as rightly observed by the AO and he has referred decisions which are identically suitable for the case under review. The decision supports this contentions are Merinopli & Chemicals Ltd v CIT (1994) 209 ITR 508 (Cal), V.V.S.V. Meenakshi Achi v CIT (1996) 60 ITR 253 (SC) and Saroja Mills Ltd v CIT (1997) 220 ITR 626 (Mad).
Held by ITAT
ITAT held that we find force in the contention of the ld. AR that in a similar case, the Hon’ble Punjab & Haryana High Court in CIT vs. Sham Lal Bansal (2011) 11 taxmann.com 369 (P&H), the facts being similar, wherein the assessee received subsidy for repayment of loan taken for building and plant and machinery under the Credit Linked Capital Subsidy Scheme under the TUF Scheme of the Ministry of Textiles was held as capital in nature. We find that the objective of the subsidy scheme was to enhance the technology apparatus of the assessee by assisting in acquiring machinery and since it was the intention of the subsidy for the purpose for which it was given was for TUF Scheme by the Ministry of Textiles to the assessee, so the AO and the CIT (A) erred in determining that the receipt is revenue and that the receipt is a profit substitute of the assessee.
Further in the judgment of the Hon’ble Supreme Court in CIT vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC), the Hon’ble Lordships have held that the character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. In other words, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. If the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is on the revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit then the receipt of the subsidy would be on capital account.
We find that in the facts of this case, where the subsidy was given on the capital account in the form of capital cost to encourage upgrading the textile industry and the purpose and object was for capital investment, as such, is clearly a capital receipt.
Accordingly appeals of the assessee allowed.
