Explanation 10 of clause (1) to section 43 of the Income Tax Act, 1961 (‘the Act’ for short) explains that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. It has been, also, provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee.
Recently, in an appeal before Delhi ITAT in respect of AY. 2008-09, LG Electronics India Pvt. Ltd. vs. ACIT [ITA No.2163/Del/2015, decided on 19.04.2017], briefly, the facts of the case were that a return declaring total income of Rs.337.00 crore and odd was filed by the assessee on 25.9.2008. Assessment was completed under section 143(3) read with section 144C of the Act on 27.11.2012 at a total income of Rs.654.97 crore. During the year under consideration, the assessee received, inter alia, subsidy amounting to Rs.49,38,00,503/- from the Government of Maharashtra which was treated as a capital receipt not chargeable to tax. The Assessing Officer(AO), while framing the assessment, accepted the treatment given to it by the assessee. However, the CIT, invoking jurisdiction under section 263 of the Act, came to hold that such subsidy received from the Government of Maharashtra was a revenue receipt and hence chargeable to tax. Characterizing the assessment order as erroneous and prejudicial to the interests of the Revenue, he revised the assessment order and directed the AO to include the amount of such subsidy in the total income. The assessee thereupon filed appeal before Delhi ITAT.
The learned Members of the ITAT on going through the relevant clauses of the Incentive Scheme and MoU, observed that it emerges that the assessee agreed to make additional investment in the Maharashtra State and also undertook to give additional employment and, as a quid pro quo, the Government agreed to allow exemption from payment of electricity duty and subsidy to the extent of 75% of the fixed capital of investment, in the form of relief from taxes on the increased turnover as a result of the proposed additional investment. It, thus, becomes abundantly vivid that the objective of the Scheme is to accelerate the flow of investment in industry and also to create large-scale employment opportunities and the resultant subsidy is in the shape of exemption from payment of taxes on the increased turnover. The question as to whether a subsidy is a capital or revenue receipt largely depends on the `purpose’ of the grant and not the mode of its discharge. The relevant consideration in this regard is, therefore, the ‘purpose test.’ If the purpose or object of a Scheme is the setting up new industry or its expansion, then, the subsidy so received assumes the character of a capital receipt irrespective of the form in which it is disbursed. The Hon’ble Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC), has laid down to this extent. On the other hand, an operational subsidy given after the commencement of production, for enabling the assessee to run the business more profitably and not for setting up of the industry is a revenue receipt as has been laid down by the Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd. vs. CIT (1997) 228 ITR 253 (SC). On a conjoint reading of the two judgments coming from the Hon’ble Summit Court on this issue, it is manifest that any subsidy received for setting up of or expansion of industry falls in the realm of ‘Capital receipt’ which is not chargeable to tax.
The learned Members of the Delhi ITAT held that the assessee received the extant subsidy for accelerating flow of investment in industry in the State of Maharashtra i.e., for expansion of the industry. The subsidy resulting from such industrial expansion is ex consequenti governed by the judgment of the Hon’ble Supreme Court in the case of Ponni Sugars and Chemicals Ltd. (supra) and, hence, a capital receipt.
The learned Members of the ITAT also observed that the Package Scheme of Incentive 2001, under which the assessee received the above subsidy, was a successor of the 1993 Scheme of Maharashtra Government and 1979 Scheme of Maharashtra Government. All these schemes were/are aimed at increasing the pace of industrialization and the incentive was based on the amount of investment in fixed assets. While considering 1993 Scheme of Maharashtra Government, the Mumbai Bench of the Tribunal in Everest Industries Ltd. vs. ACIT (ITA No.814/Mum/2007), vide its order dated 04.12.2009, has held such subsidy to be capital in nature. Similar view had been taken by the Pune Bench of the Tribunal in the case of Rohit Exhaust Pvt. Ltd. vs. ACIT in ITA No.1880/Pn/2013. The Delhi Bench of the Tribunal in Indo Rama Synthetics (I) Ltd. vs. ACIT (ITA No.2002/Del/2008) had also taken a similar view vide its order dated 22.06.2012.
It was an admitted position that the assessee treated the amount of subsidy as a capital receipt, but, did not reduce it from the value of fixed assets and eventually claimed depreciation on the higher value of assets without reduction of such subsidy. To deal with such a situation, the Finance Act, 2015, w.e.f. 1-4-2016, has enlarged the definition of income given under section 2(24) of the Act by inserting sub-clause (xviii), which reads as under:-
“(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43;”
A bare reading of the above provision makes it explicit that now subsidy given by the Central Government or a State Government or any authority etc. for any purpose, except where it is taken into account for determination of the actual cost of the asset under Explanation 10 section 43(1) of the Act, has become chargeable to tax.
Even if a subsidy is given to attract industrial investment or expansion, which is a otherwise a capital receipt under the pre- amendment era, shall be treated as income chargeable to tax, except where it has been taken into account for determining the actual cost of assets in terms of Explanation 10 to section 43(1) of the Act. This amendment is patently prospective. The learned Members of the ITAT held that as the assessment year under consideration was 2008-09, section 2(24) (xviii) shall have no operation. The subsidy received by the assessee from the Government of Maharashtra was a capital receipt and accordingly not chargeable to tax. The view taken by the AO in treating subsidy received from the Maharashtra Government as a capital receipt, in any case, being a possible view, could not be interfered with in the proceedings under section 263 of the Act.