2019 (3) TMI 397 - HC - Income Tax

Subsidy or incentive - purpose tests for grant of subsidy/incentive - incentives received in the form of Sales Tax and Central Excise benefit - characterization of income - revenue or capital receipt - HELD THAT - The subsidy was granted under schemes framed by the State and the Central Government to be given to the assesses who set up new industry in Kutch District. The scheme was envisaged to encourage investment which would in turn provide fresh employment opportunity in the district which had suffered due to devastating earthquake. The computation of subsidy may be on the basis of sales tax or excise duty. Nevertheless the purpose test would ensure that the subsidy was capital in nature. Adjustment of subsidy - Subsidy not to be considered as payment directly or indirectly to meet any portion of the actual cost - whether such subsidy would be adjustable towards assessee s costs of acquisition of capital assets? - If the subsidy is treated as a capital in nature the same must bring down assessee s costs of acquisition of plant and machinery - HELD THAT - Similar question was considered in case of CIT v/s. Grace Paper Industries Pvt. Ltd. 1990 (3) TMI 66 - GUJARAT HIGH COURT . The Court noted that the subsidy was granted by the Government for development of industries in backward areas. It was not part of the actual cost of plant or machinery. The Court therefore held that it could not have been deducted towards costs of acquisition. Also as decided in SWASTIK SANITARY WORKS LIMITED. 2006 (4) TMI 89 - GUJARAT HIGH COURT basis for determining the subsidy was only a measure adopted under the scheme to quantify the financial aid and it was not a payment directly or indirectly to meet any portion of the actual cost of acquisition of capital asset. No question of law. Disallowance u/s. 14A if the assessee has own surplus funds - HELD THAT - Question itself records that the issue at hand is covered by the decision of this Court in case of HDFC v/s. DCIT 2014 (8) TMI 119 - BOMBAY HIGH COURT but that the department has not accepted the decision of the High Court. In that view this question also is not required to be entertained.

Summary

Issues Involved:
1. Treatment of incentives received as capital or revenue receipts.
2. Adjustment of subsidy towards the cost of acquisition of capital assets.
3. Application of Section 14A disallowances in light of existing jurisprudence.

Issue-wise Detailed Analysis:

1. Treatment of Incentives Received as Capital or Revenue Receipts:
The primary issue was whether the incentives received by the assessee in the form of Sales Tax and Central Excise benefits should be treated as capital receipts or revenue receipts. The Revenue argued that these incentives were meant to enable the assessee to run the business more profitably by reducing costs and should thus be taxed as revenue receipts. Conversely, the Assessee contended that these incentives were capital in nature, granted to promote industrial investment in the Kutch District post the 2001 earthquake.

The court noted the purpose of the subsidy schemes, which were aimed at encouraging new investments in the Kutch District to revive its economy after the earthquake. The court referenced the Supreme Court's decision in CIT v. Chaphalkar Brothers, where it was held that the purpose of the subsidy is crucial in determining its nature. The court concluded that the subsidies were intended to promote large-scale investments and were thus capital receipts.

2. Adjustment of Subsidy Towards the Cost of Acquisition of Capital Assets:
The second issue was whether the subsidy, if treated as a capital receipt, should reduce the cost of acquisition of the assessee's plant and machinery, thereby affecting the depreciation claim. The Revenue argued that the subsidy should reduce the cost of assets as per Explanation 10 to Section 43(1) of the Income Tax Act.

The court held that the subsidy had no direct relation to the acquisition of plant or machinery. It was granted to industries setting up new units in the Kutch District, not specifically for acquiring assets. The court cited the Gujarat High Court's decision in CIT v. Grace Paper Industries Pvt. Ltd., which held that subsidies granted for industrial development in backward areas were not part of the actual cost of plant or machinery. Therefore, the subsidy could not be adjusted towards the cost of acquisition of capital assets.

3. Application of Section 14A Disallowances:
The third issue was whether disallowances under Section 14A were warranted if the assessee had own surplus funds. The Tribunal had directed to follow the decision of the High Court in HDFC Bank Ltd., which held that no disallowances under Section 14A were warranted if the assessee had sufficient surplus funds.

The court noted that the issue was already covered by the decision in HDFC Bank Ltd., and despite the department's non-acceptance and pending SLP, the principle laid down in that case was applicable. Therefore, the court did not entertain this question further.

Conclusion:
The court dismissed all the appeals, affirming that the incentives received were capital receipts, not to be adjusted towards the cost of acquisition of capital assets, and upheld the existing jurisprudence on Section 14A disallowances.