SUBSIDY – WHETHER REVENUE RECEIPT OR CAPITAL RECEIPT?

[Mr. M. GOVINDARAJAN]

                        It is prevalent that either the Central Government or State Governments grant subsidies to certain industries to encourage for the development of products or export.  The issue to be discussed in this article is whether the subsidy received by the Companies from the Government is to be treated as revenue receipt or capital receipt. 

                        In ‘Sahney Steel and Press Works Limited V CIT’ – 1997 -TMI - 5620 – (SUPREME Court) the Supreme Court held that if the object of the subsidy scheme was to enable the assessee to run the business more profitably the receipt is on revenue account.   On the other hand, if the object of the assistance under the subsidy scheme was enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account.  In this case it was contended by the assessee that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and therefore such receipt of subsidy was on capital account and not on revenue account.  The subsidy granted was on the basis of refund of sales tax on raw materials, machinery and finished goods which were of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business.   The Supreme Court on analyzing the facts of the case held that the subsidy gives was on revenue account because it was given by way of assistance in carrying on trade or business.  It was not for acquiring the capital asset.  The subsidies in this case were granted year after year only after setting up the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. 

                        Thus the nature of subsidy is to be considered on the object for which the subsidy is given.  In ‘Senairam Doongarmall V. CIT’ – 1961 -TMI - 49504 – (SUPREME Court) the Supreme Court held that 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. 

                         In ‘CIT V. Abhishek Industries Limited’ – 2006 -TMI - 9839 – (PUNJAB AND HARYANA High Court) the High Court held that in the absence of any document or policy of the State Government to show the kind of subsidy it had granted it should be treated as a revenue receipt.  

                         In ‘Commissioner of Income Tax V. Rasoi Limited’ – 2011 -TMI - 203507 – (CALCUTTA HIGH COURT) the West Bengal Government considered it necessary to formulate a scheme of industrial promotion to certain industries which are in need of financial assistance for expansion of their capacities, modernization and improving their marketing capabilities.  According to this policy the dealer shall be entitled to a payment of a sum equal to 90% of the amount of sales tax paid by him for any quarter under the sales tax act in respect of sales of such goods, as industrial promotion assistance.  The assessee showed the subsidy granted by the State Government as ‘other income’.  The assessee was advised that the said receipt of subsidy was of the nature of capital receipt for the purpose of computation of taxable income and in the return filed by the assessee, it claimed the amount to be in the nature of capital receipt. 

                        The Assessing Officer turned down the contention of the assessee and concluded that the subsidy had been utilized for meeting revenue disbursements of the assessee and considered it as revenue receipts and added the same as income of the assessee.  The assessee filed appeal before the Commissioner of Income Tax (Appeals) against the order of the Assessing Officer.   The Commissioner of Income Tax (Appeals) affirmed the order passed by the Assessing Officer.   Again the assessee filed appeal before the Tribunal which set aside the order passed by the Commissioner of Income Tax (Appeals) and held that the subsidy was in the nature of capital receipt and the sane was not taxable. 

                        The Department, aggrieved against the order of the Commissioner of Income Tax (Appeals) filed the present appeal before the High Court and raised the following questions of law: 

                        Whether the Tribunal was justified in law- 

• in holding that the assistance received by the assessee from the Government of West Bengal is of the nature of capital receipt and non taxable;
• in deleting the addition made by the Assessing Officer received by the assessee as subsidy from the West Bengal Government;
• in not appreciating and considering that the subsidy received by the assessee being a non refundable grant earned through exercise of business is, therefore, taxable business income and is a revenue receipt and not a capital receipt; 

The Department submitted the following contentions before the High Court: 

• For the purpose of deciding whether a subsidy received by an assessee comes within the purview of revenue receipt or not:
  • Whether the benefit of subsidy was available only to new units or expanded units without any intention to supplement the trade receipts or it was in the nature of a help with an intention to supplement the trade receipts to an existing undertaking;
  • Whether the benefit is given before the start of production or after the start of production;
  • Whether the scheme, by which benefit is given, permits the beneficiary to utilize the money according to its wish or whether it restricts or put any limit on the utilization of the amount;
• The assessee by virtue of the scheme got back the sales tax payable by it to the State Government and thus, the same should be treated as revenue receipt; 

The assessee opposed the arguments put forth by the Department.  The High Court after hearing both sides held that from the objects and reasons of the scheme as well as the entitlement it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of the capacities, modernization and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to 90% of the amount of sales tax paid by the industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods.  It should not be inferred that the same was in the form of sales tax paid.  The High Court upheld the decision of the Tribunal that the subsidy received by the assessee is in the nature of capital receipt. 

                        Thus to decide whether the subsidy is of revenue receipt or capital receipt the object of the subsidy scheme is to be considered and the form of mechanism through which the subsidy given is irrelevant.