2018 (2) TMI 2024 - AT - Income Tax

Disallowance on account of sale of tax subsidy and refund of interest on Term Loan - nature of receipt - revenue or capital receipt - HELD THAT - Hon ble Supreme Court in case of CIT Vs. Pooni Sugars chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT has held that character of the receipt in the hands of the assessee has to be ascertained looking at the purpose for which the subsidy is provided. Therefore Hon ble Supreme Court held that for ascertaining the true character of the subsidy the purpose of the subsidy i.e. purpose test needs to be looked into. Hon ble Supreme Court further stated that source of the subsidy time of the subsidy is not relevant. According to the Hon ble Supreme Court if the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt was on revenue account - if the object of the subsidy was to set a new unit or to expand existing unit then such receipt is on capital account. Hence it was held that the object for which the subsidy is given necessarily determines the nature of the subsidy. The form or the mechanism through which the subsidy is given is irrelevant. The ld CIT(A) has decided the issue based on the above decision of the Hon ble Supreme Court. The ld CIT(A) has discussed the whole issue in para No. 4 of his order wherein he has decided the issue as per the guidelines the decision of the Hon ble Supreme Court. In view of this we do not find any infirmity in the order of the ld CIT(A) in holding that subsidy received by the assessee is capital in nature. Appeal of the revenue is dismissed.

Summary

Issues:
- Disallowance of sale of tax subsidy and refund of interest on Term Loan
- Nature of subsidy as capital or revenue receipt

Analysis:
1. The appeal was filed by the revenue against the order of the ld IT(A)-4, New Delhi for the Assessment Year 2012-13. The revenue raised grounds challenging the deletion of disallowance made on account of sale of tax subsidy and refund of interest on Term Loan. The ld Assessing Officer did not accept the claim of the assessee regarding the subsidy, considering it as revenue in nature based on the decision of the Hon'ble Supreme Court in a specific case. The AO noted that the assessee had previously treated the subsidy as revenue receipt in earlier assessment years but claimed it as a capital receipt for the first time in the current assessment year.

2. The assessee contended before the ld CIT(A) that the subsidy should be treated as a capital receipt according to the scheme. The ld CIT(A) agreed with the assessee's argument, citing that the subsidy was an incentive from TUFF and should be considered as a capital receipt. The revenue, dissatisfied with this decision, appealed to the tribunal.

3. The ld Departmental Representative argued that the VAT refund and interest on term loan subsidy should be considered revenue receipts. Referring to an amendment in the Income Tax Act and a decision of the Hon'ble Delhi High Court, the representative contended that the subsidy should be treated as revenue in nature. Despite notice, no one appeared on behalf of the assessee, and the issue was decided based on the information on record.

4. The tribunal carefully considered the contentions of both parties and reviewed the orders of the lower authorities. Citing the decision of the Hon'ble Supreme Court in a specific case, the tribunal emphasized that the purpose of the subsidy determines its nature - whether it is on revenue or capital account. The tribunal noted that the object of the subsidy scheme, such as enabling the business to run more profitably or setting up/expanding units, is crucial in determining the nature of the subsidy. The tribunal found no fault in the ld CIT(A)'s decision, especially considering that the decision of the Hon'ble Delhi High Court, relied upon by the revenue, had been stayed by the Hon'ble Supreme Court.

5. Consequently, the tribunal dismissed the appeal of the revenue, upholding the decision of the ld CIT(A) that the subsidy received by the assessee was capital in nature. The order was pronounced in open court on 09/02/2018.