31. Taxability of subsidy – Revenue receipt or capital receipt – “10 per cent Central Outright Grant of Subsidy Scheme, 1971”
1. The Board had occasion to consider whether the amount of subsidy received under 10 per cent Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.
2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme, the quantum of subsidy is determined with reference to the fixed capital and not the profits. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of five years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient.
Circular : No. 142 [F. No. 204/25/74-IT(A-II)], dated 1-8-1974.
JUDICIAL ANALYSIS
EXPLAINED IN – In CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39 (AP) the above circular was explained with the following observations :
“A perusal of the circular makes it clear that it was issued with respect to a particular scheme, viz., 10% Central Outright Grant of Subsidy Scheme of 1971. It is not a circular applicable to all types of subsidy schemes. This much is conceded by Mr. Anjaneyulu also. But what he argues is that inasmuch as our scheme is in the same terms as the Central Scheme of 1971, the principle of the said circular should be applied. We are unable to accede to this contention. We cannot extend the scope of the circular by analogy. Secondly, on a perusal of the Central Scheme of 1971, we find that the scheme concerned therein was not in the same terms as the State Scheme with which we are concerned herein. The subsidy under the Central Scheme was available only to the industrial units with a capital of less than fifty lakhs whereas the State Scheme is applicable to units with a capital up to five crores. The circular was applicable only to those industrial units which were located in the specified districts/areas called ‘selected districts/areas’ whereas the State Scheme is applicable to industries located throughout the State. To those industries which are located in the specified backward districts, certain additional incentives are provided under the State Scheme. Paras 5 to 7 of the Central Scheme would show that it prescribed a particular procedure which had to be followed by the industrial units for availing of the benefits thereunder which is at variance with the procedure prescribed under the State Scheme. Moreover, the Central Scheme did not provide for refund of sales tax or other taxes and charges paid but provided for an outright grant to the extent of 10% of the estimated fixed capital investment. We are, therefore, of the opinion that the said circular is absolutely of no help to the assessee herein.” (pp. 61-62)
EXPLAINED IN – In CIT v. Malayalam Plantations Ltd. [1987] 168 ITR 63 (Ker.) the abovesaid circular was explained with the following observations :
“We may also in this context refer to a Circular No. 142, dated August 1, 1974, issued by the Central Board of Direct Taxes. By this circular, the Board stated that 10% Central Outright Grant of Subsidy Scheme, 1971, was given for helping the growth of industries in selected backward districts/areas and not for supplementing the profits of the recipient. The subsidy was accordingly not treated by the Board as a revenue receipt for the purpose of income-tax. In so deciding, the Board acted on the principle that amounts paid specifically for beneficial purposes are not to be treated for the purpose of income-tax as a revenue receipt.” (p. 70)
EXPLAINED IN – In U.P. State Handloom Corpn. Ltd. v. Dy. CIT [1992] 42 ITD 436 (All.-Trib.) it was held that in the Board’s Circular No. 142, dated August 1, 1974, the only clarification is that the amount of subsidy received under “10 per cent Central Outright Grant of Subsidy Scheme, 1971”, for industrial units to be set up in certain selected backward districts has to be treated as capital receipt in the hands of the recipient. It must be noted that in that case of 10 per cent Central Outright Grant, the payment was primarily given for the growth of industries and not for supplementing profits
