2009 (10) TMI 948 - AT - Income Tax

Summary

Issues Involved:
1. Whether the subsidy received by the assessee from the Government of Gujarat for the specific purpose of repayment of loans taken for the construction of tube wells and lift-irrigation schemes, and the interest capitalized during the construction period, is a capital receipt or income chargeable to tax.

Judgment Summary:

Issue 1: Nature of Subsidy - Capital Receipt or Income

The common issue in both appeals is whether the subsidy received by the assessee from the Government of Gujarat for the specific purpose of repayment of loans taken for the construction of tube wells and lift-irrigation schemes, and the interest capitalized during the construction period, is a capital receipt or income chargeable to tax.

The assessee, a State Government undertaking, showed Rs. 12,97,46,000/- as subsidy received for loan repayment and Rs. 1 crore as capitalized interest in its balance sheet. The Assessing Officer (AO) treated the subsidy as income based on the Supreme Court judgment in Sahaney Steel and Press Works Ltd. vs. CIT, 228 ITR 253, arguing that the subsidy was incidental to the assessee's business. The AO added Rs. 13,97,46,000/- to the assessee's income for the assessment year 1996-97 and Rs. 1,48,15,000/- for the assessment year 1998-99.

The CIT(A) upheld the AO's decision. The assessee contended that the subsidy was for capital purposes and should not be assessed as income, citing the Supreme Court judgments in Sahaney Steel and CIT vs. Ponni Sugars, (2008) 306 ITR 392. The assessee argued that the subsidy was for constructing capital assets (tube wells and lift irrigation schemes) and should be treated as capital receipt.

The Tribunal noted that the subsidy was granted to meet the cost of constructing tube wells and lift irrigation schemes, which are capital assets. The Tribunal applied the "purpose test" from the Supreme Court judgments, determining that the subsidy was for capital purposes and should be treated as capital receipt. The Tribunal allowed the assessee's appeals on this ground.

Other Grounds:

Grounds relating to the disallowance of the cost of failed tube wells, previous year's expenses, and depreciation on the tube wells were dismissed as not pressed. Similarly, the ground questioning the AO's decision in not considering the revised statement of income filed in response to notice u/s 139(9) was also dismissed as not pressed.

Conclusion:

Both appeals were partly allowed, treating the subsidy as a capital receipt and not as income chargeable to tax. No costs were awarded.

Order pronounced in the open court on 16th October, 2009.