Interest subsidy for repayment of loan acquired for acquisition of capital assets, is capital receipts

Brief of the Case

ITAT Lucknow held in the case DCIT vs. M/s J.K. Cement Ltd. that certain conditions are made in the subsidy scheme, which is required to be fulfilled by the corporate sector in order to avail the benefit of subsidy. One such condition was that the subsidy amount is utilized for repayment of loans and there should not be any defaults in repayment of dues to the banks in respect of these loans. In the case of Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC), the apex court held that the nature of subsidy is to be determined in respect of purpose for the subsidy is granted. Further in the case of ACIT Vs. Shree Cement Ltd ITA No. 614, 615 & 635/JP/2010, an identical fact that the interest subsidy was considered to be the capital subsidy was delivered. Therefore, in the light of aforesaid judgments, we are of the view that the CIT (A) has rightly treated the interest subsidies as a capital receipt as it was received only for repayment of loan acquired for acquisition of capital assets.

Facts of the Case

The assessee has purchased cement division of J.K. Synthetics Ltd. The assessee company has taken loan from various financial institutions in order to buy cement division, which are already engaged in production of cement. As per the scheme of the Rajasthan Government known as Raj Investment Promotion Policy- 2003, assessee has applied for subsidy and Rajasthan Government has granted 5% interest subsidy and 50% exemption from electricity duty. The exemption granted for electricity duty has declared as Revenue receipt whereas interest subsidy was declared as capital receipt. The interest subsidy has been granted by the Rajasthan Government against 50% payment of RST/CST and VAT paid by the assessee company. The assessee company has utilized the interest subsidy in payment of loan taken from financial institutions. The assessee has treated receipt of interest subsidy as capital receipt but the Assessing Officer was not convinced with treatment given by the assessee and he was of the view that subsidy has been granted as incentive to the assessee company to run the business of manufacturing of cement in the State of Rajasthan. He accordingly treated the interest subsidy received by the assessee as a Revenue receipt.

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