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.
