Case Law Details
Issue Under Consideration
1. That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing assessee’s claim of interest subsidy as capital receipt and thereby deleting the addition of Rs.1,50,03,609/- without appreciating the fact that the amount is in the nature of revenue receipt.
Brief Facts of the Case
2. The Assessee is a company engaged in the business of manufacture, sale and export of jute. During the previous year the assessee received subsidy of Rs.1,50,03,609/- comprising of a sum of Rs.1,29,87,383/- received from West Bengal Industrial Development Corporation Ltd., on account of subsidy under the West Bengal Incentive Scheme 2000 (WBIS 2000)and Rs.20,16.,226/- received from IFCI Ltd on account of interest subsidy refund under the Technology Up-gradation Fund Scheme (TUFS). These amounts were credited in the profit and loss account under the head “Other income“. However, in the computation of total income the Assesee excluded the aforesaid subsidies on the ground that these were capital receipts not chargeable to tax.
3. The AO called upon the assessee to explain as to how the aforesaid subsidies were capital receipts not chargeable to tax. The assessee explained before the AO that the aforesaid subsidies were capital receipts not chargeable to tax for the following reasons:-
1. Subsidy received under TUFS of Rs.20,16,226/-:
“(a) The Assessee explained the objective of TUFS was to meet the challenges of post quota regime which requires industry to become more competitive, cost effective and quality oriented. With this background, Govt. of India launched a Technology Upgradation Fund Scheme (TUFS) for textile and jute industries w.e.f. 01/04/1999 for a period of 5 years i.e. upto 31/03/2004 which was subsequently extended upto 31/03/2007.
(b) The Assessee explained that TUF Scheme aims at meeting part of the capital investment of the eligible undertakings in modernizing the plant and machinery for existing units by way of contribution towards the total capital outlay on eligible assets for new units. The focus of such incentive was to induce the entrepreneur to undertake investment in modernizing plant and machinery and other assets for overall development of the industry. It was essential for the textile industry to have access to timely and adequate capital at internationally comparable rates of interests in order to upgrade its technology level.
(c) The incentive/subsidy under the TUF Scheme was provided with the basic intention of development /modernization of textile industry and to provide financial support for heavy capital outlay required in such modernizations by industries.
(d) W.e.f 01/01/2002 an option was provided to the eligible entrepreneurs to avail the incentive either in the form of Credit Linked Capital Subsidy (CLCS) or by way of 5% interest reimbursement under Technology Upgradation Scheme. This according to the Assessee was Conclusive proof that the incentive under TUF scheme was a capital subsidy which may be availed either under the 12% CLCS scheme or as 5% interest reimbursement. The mode of disbursement shall not change the nature of an incentive from capital to revenue.
(e) The interest charged in respect of ‘SBI Rupee Term Loan’ for meeting the objectives of TUFS was given as incentive to the Assessee. According to the Assessee since the said incentives was granted to encourage additional investment for expansion and modernization of the industrial undertaking, the same was in the nature of a capital receipt and is, not chargeable to tax under the provisions of Income Tax Act, 1961 (Act).
2. Interest Subsidy of Rs.1,29,87,383/- granted under the WBIS 2000:
(a) The Assessee explained the nature of Interest subsidy under West Bengal Incentive Scheme (WBIS), 2000 as one to encourage creation of new capacity by way of setting up or expansion of industries in the backward areas of the state.
(b) Interest subsidy under WBIS 2000 was received for industries to be set up in group B and group C areas and not to industries in group A area which means subsidy is basically granted for promotion of industries in backward area and not for running the industry
(c) The Assessee drew attention of the AO to para no. 11.2A of WBIS 2000, which provided that additional interest subsidy will be granted if the eligible industrial unit is able to generate direct employment of 200 or more which clearly shows that the basic motive for giving the subsidy was promotion of industry for development of the backward region where there is scarcity of employment opportunity.
(d) The Assessee submitted that the object for which the subsidy was given is decisive as to whether its capital or revenue in nature. If the subsidy is given for setting up or expansion of the industry, it will be capital receipt, irrespective of the modality or the source of funds through or from which it is given and if monies are given for assisting the assessee in carrying out the business operations only after, and conditional upon, the commencement of production, it shall be revenue receipt.
3. The AO however rejected the plea of the Assessee for regarding interest subsidies as in the nature of capital receipt not chargeable to tax for the reason that under both the schemes, the assessee is eligible for subsidy only after the commencement of production and not before setting up of the industry which is a prerequisite for considering a subsidy as a capital receipt. He also held that the judicial pronouncements relied by the assessee are not identical to the issue before the AO. According to the AO, in the cases cited by the Assessee, subsidies were allowed as reimbursement or to assist the setting up of industries or acquiring the assets. According to the AO, in the assessee’s case subsidies were incidental to carrying on of the business and to lessen the burden of the cost of revenue expenditure incidental to operation of the industry. Specifically with regard interest subsidy received under WBIS, 2000, the AO held that the subsidy has been granted for setting up/expansion of industrial unit in backward area and for running the business more efficiently and profitably. The AO also observed that in the case of Sahney Steel & Press Works Ltd. & Others-vs.- CIT (1997) 228 ITR 253, the Apex court held that if payment in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipt. The character of the subsidy in the hands of the recipients whether revenue or capital will have to be determined having regard to the purpose for which the subsidy is given. If the purpose is to help the assessee to set up his business or complete a project, the monies must be treated as having been received for capital purpose. If monies are given only after commencement of business, such subsidies must be treated as assistance for the purpose of trade. According to the AO, the object of the TUFS under which the Assessee received subsidy was to make available sufficient capital at internationally comparable rates of interests. It was therefore amply clear that the subsidy was to be allowed for the period of 5 years and after the commencement of production. Hence, the subsidy has to be regarded as revenue receipt and therefore the deduction of the subsidy amount is not allowed.
Held by CIT (A)
4. On appeal by the assessee the CIT(A) held that the subsidies were capital subsidies not chargeable to tax. As far as subsidy received under TUFS is concerned the CIT(A) observed as follows :-
“On perusal of the objective of the ‘The Technology Upgradation Fund Scheme (TUFS)’ issued by the Ministry of Textiles, Govt. of India, it is seen that to improve the overall health of the textile industry which contributes significantly to the Indian economy and provides sizable employment opportunity it was decided to provide adequate capital to textile companies at internationally comparable rates so that major modernization programme through technology up gradation could be carried on by them. Hence the interest subsidy was not provided to the Appellant to carry out or support its day to day business operations but was for capital expenditure made in modernizing its existing plant & machinery through technology upgradation so that they could compete with global textile industries and contribute to the Indian economy.
The Hon’ble Supreme Court in the case of Ponni Sugars had categorically held that the character of the subsidy is determined with respect to the purpose for which it is granted. The point of time at which the subsidy is paid and its source or mode of disbursement is immaterial. Similar view has also been expressed by the Jurisdictional High Court in the case of Balarampur Chilli Mills. The purpose of this test is satisfied in the case of the Appellant as grant of interest subsidy was for the overall development of the textile industry by modernising its existing infrastructure. Hence, the subsidy received by the Appellant is on capital account and not liable to tax. The fact that subsidy was linked to interest and granted subsequent to commencement of production could not change the basic character of the subsidy .
This Ground of the appellant is therefore valid and is allowed.”
As far as the subsidy received under West Bengal Incentive Scheme 2000 The CIT(A) was of the view that the aforesaid scheme was to encourage creation of new capacity by way of setting up or expansion of industries in the backward areas of the state and therefore incentive granted under the scheme were to be treated as capital receipts not chargeable to tax.
5. Aggrieved by the order of CIT(A) the revenue has raised ground no.1 before the Tribunal. We have heard the submissions of the ld. DR, who reiterated the stand of the AO as contained in the order of assessment. The ld. Counsel for the assessee submitted as far as interest subsidy received under TUFS is concerned, the issue has been decided in Assessee’s own case for AY 2006-07 in ITA No.94/Ko1/11 order dated 27.7.2016 wherein the very same subsidy was held by the Tribunal to be a capital receipt not chargeable to tax by following the decision of the Hon’ble Punjab & Haryana High Court in the case of Sh.Sham Lal Bansal (infra) the tribunal held that interest subsidy received under TUFS was a capital receipt not chargeable to tax. It was submitted that the interest subsidy received under WBIS 2000 was also held to be capital receipt not chargeable to tax in Assessee’s own case for: A.Y.2005-06 in ITA No.687/K/10 order dated 15.1.2016 by ITAT Kolkata Bench. It was submitted that the ITAT in the assessee’s own case for AY 2007-08 [ITA.828/Ko1/12 in appeal arising out of order u/ s 263 has held that State Capital Investment Subsidy received under WBIS 2000 is capital in nature. It was submitted that identical subsidy was held to be capital receipt by ITAT Kolkata in DCIT -vs.- M/s Pricewaterhouse Coopers Pvt. Ltd. ITA No. 2033/Ko1/2013 order dated 13.7.2016 wherein it was held that WBIS, 2000 was intended to accelerate industrial development of the state. The incentive given under the scheme was for setting up of industries in West Bengal. Hence interest subsidy received under WBIS 2000 shall be treated as capital receipt. Reference was made to several other decisions of the Hon’ble Apex Court in the case of CIT -vs.- Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392(SC) wherein it has been held that it is the purpose of the incentive which decides its nature and not the modality or the source thereof. Reference was also made to the decision of Jurisdictional High Court in CIT – – Rasoi Ltd. (2011) 335 ITR 438 (Cal) wherein it has been held that subsidy received for expansion of capacities, modernization and improving the marketing capabilities to tide over the crises for promotion of industry in the state is to be treated as capital in nature. Reference was also made to the following other decisions in the case of Shree Halaji Alloys & Ors. -vs.- CIT (2011) 333 ITR 35 (J&K) wherein it has been held that Excise Duty Refund and Subsidy received for the purpose of eradication of unemployment in the state by acceleration of industrial development and removing backwardness of the area that lagged behind in industrial development is to be treated as capital receipt. The said decision has since been confirmed by the Apex Court in CIT -vs.- Shree Balaji Alloys (2016) 138 DTR 36 (SC). It was submitted that similar view was given in following decisions :‑
– JCIT(OSD) -vs.- Ws. Keventer Agro Ltd (IT A No. 1663- 1665/KoV2011 dtd. 30-062014)
– DCIT – vs.- Ankit India Ltd. (ITA. No. 1330/Ko1/2010 dtd. 16-11-2010]
– DCIT -vs.- Reliance Industries. (2004) 88 ITD 273 (Mum)(SB)
– CIT -vs.- Chaphalkar Brothers (2013) 351 ITR 309 (Bom)
-CIT -vs.- Birla VXL Ltd. (2013) 90 DTR 376 (Guj) (HC)
6. We have given a very careful consideration of the rival submissions. As far as the interest subsidy received by the assessee under TUFS is concerned, we find that in assessee’s own case in A.Y.2006-07 in ITA No.94/Ko1/2011 this Tribunal following the decision of the Hon’ble Punjab and Haryana High Court in the case of Sham Lal Bansal (supra) held that the this interest subsidy was not taxable. The following observations of the Tribunal are as under :-
“7. We have heard the rival submissions and perused the material available on record. As rightly pointed out by the Ld.AR that the issue on hand was covered by the order 02-07-2014 of ‘B’ BENCH, KOLKATA in I.T.A. No.766/Kol./2010 assessment year: 2005- 2006 and the Tribunal relied on decision of the Hon’ble Punjab & Haryana High Court in the case of CIT -vs.- Sh. Sham Lal Bansal in ITA No. 472 of 2010 and held that the subsidy received for modernising assessee’s existing infrastructure is capital in nature.”
7. As far as the subsidy received under the West Bengal Incentive Scheme 2000 is concerned we find that the following is the object of the West Bengal Incentive Scheme 2000 :‑
“The foreword to the West Bengal Incentive Scheme 2000 reads thus :-
“West Bengal Incentive Scheme 1999 Scheme had an attractive provision of Sales Tax related by way of “remission” of “deferment “. But in pursuance of the National Policy, the State Govt. had to discontinue the Sales Tax related Incentives from 1st January, 2000. However, as there is a strong need for fiscal support for the promotion of industry in the State, the State Govt. -decided to introduce the West Bengal Incentive Scheme, 2000 with different and new features, quite attractive for industries in large, medium, small scale and tourism sectors.
For the purpose of the incentives, districts have been grouped as “A” (Calcutta Municipal Coportation) “B” (Howrah, Hooghly, North 24-Parganas, South 24 Parganas, Burdwan, Nadia & Midnapore districts and “C” (Murshidabad, Birbhum, Purulia, Bankura, Malda, Cooch Behar, North Dinajpur, South Dinajpur, Jalpaiguri and Darjeeling districts).”
Some of the special features of the 2000 Scheme:
1. Capital Investment Subsidy for all categories of units.
Industrial units to get State Capital Investment Subsidy on the investment made in the fixed capital depending on the location: Group B – @ 15% to the limit of Rs.150.00 lakhs Group C – @ 25% to the limit of Rs.250.00 lakhs
2. Interest Subsidy
@ 50% of interest liability to the limit of Rs.100.00 lakhs per year for:
Group B – 5 years
Group C – 7 years
…………………
There are several subsidies provided under the WBIS 2000. In the present case we are concerned with the “Interest Subsidy” which is contained in para-2 of the Foreward to the WBIS 2000 referred to above.
8. The law with regard to circumstances under which subsidy received can be treated as capital receipt not chargeable to tax has been laid down in several judicial pronouncements. The Hon’ble Supreme Court in the case of Ponnisugars Ltd. (supra) has emphasized the need to look into the purpose for which subsidy in question is granted and if the purpose is to enable the assessee to run a business from profitability then the receipt is on revenue account. On the other hand, if the object of assistance under the subsidy scheme is to enable the assessee to set up a new unit or expand the existing unit, then the receipt of the subsidy will be on capital account. The manner in which the subsidy is quantified has been held to be irrelevant and the purpose of the scheme i.e., the purpose test has been held to be the most relevant criteria to decide whether the subsidy is capital subsidy or revenue subsidy.
9. Applying the aforesaid test and looking into the purpose of the scheme we have no doubt in our mind the subsidy in question is a capital subsidy. The question whether Sales tax subsidy under a scheme under which the Assessee has received sales tax remission was considered by this tribunal in the case of Keventor Agro Ltd. (2014) 40 CCH 425 (Kol-ITAT) and it was held as follows:
“26.We have heard rival submissions and gone through facts and circumstances of the case. We find that the CIT(A) has considered the legal aspect as to whether the sales tax remission was a revenue or capital receipt in the hands of the assessee. He found that the sales tax remission given under West Bengal Incentive Scheme 1993 and 1999 was not for assisting the assessee in carrying out its business operation but incurred the promotion of industries in the State of West Bengal and consequently, following the decision of Hon’ble Supreme Court in the case of Sahaney Steel & Press Works Ltd. Vs. CIT 228 ITR 253 holding the sales tax remission as capital receipt. Ld. counsel also drew our attention to the fact that the sales tax remission under West Bengal Incentive Scheme, 1993/1999 was revenue or capital has already been examined and decided by ITAT, Kolkata Bench in the following appeals:
“1. In the case of ITO, Ward-1(3) Kol Vs. Ws. DuroPlast India Pvt. Ltd. in ITA No. 1983, 1984, 1985/Ko1/2008 dated 16.01.2009 for Asstt. Years 1999-2000 to 2001-02.
2. In the case of DCIT, Cir-12, Kol Vs. M/s. Teesta Agro Industries Ltd. in ITA No. 1237/Ko1/2010, ITA No. 1053/Ko1/2010 & ITA No. 1753/Ko1/2010 dated 07.01.2011 for Asstt. Years 2003-04, 2006-07 & 2007-08 respectively.”
We find that the West Bengal Incentive Scheme 1993 and 1999 categorically encouraged the promotion of industries in the State of West Bengal and in such circumstances the issue i clearly covered by the decision of Hon’ble Supreme Court in the case of Sahaney Steel & Pres Works Ltd., supra. The issue is also covered by the Tribunal’s decision as noted above Accordingly, we confirm the order of CIT(A) and this issue of revenue’s appeals for both th years is dismissed.”
10. The Hon’ble Calcutta High Court in case of CIT Vs. Rasoi Ltd. [335 ITR 438] has in a similar case of receipt of subsidy held as follows:
“In the case before us, the object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and thus, those are for assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent. of the sales tax paid by the beneficiary does not imply that the same was in the form of refund of sales tax paid. As pointed out by the Supreme Court in the case of Senairam Doongarmall v. CIT reported in [1961] 42 ITR 392 (SC) ” MR 1961 SC 1579, it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, in the case before us, the amount paid as subsidy was really capital in nature. “
11. Identical subsidy under the West Bengal Incentive Scheme 2000 was held to be capital receipt not chargeable to tax by this tribunal in the case of DCIT vs PWC Pvt. Ltd. (supra). Following the aforesaid decisions we hold that the receipt of subsidy under the West Bengal Incentive Scheme 2000 is a capital receipt not chargeable to tax. Accordingly ground no.1 raised by the revenue is dismissed.
