2025 (7) TMI 1162 - AT - Income Tax

Grant received by the assessee company from UP Government for payment to cane growers - Remission of liability in terms of section 41(1) - whether the grant in aid is revenue receipt or it is causing a remission or cessation of liability in terms of section 41(1)? - Whether aid or grant received from the shareholder to meet out the liability constitute income? - HELD THAT - The intent/purpose of the said grant by the U.P. Government was clearly to protect the intrinsic value of the share capital (before the sale of these shares or the disinvestment of the shares as the case may be of the assessee company in which the 100% shares were held by the UP State Government) that it held on 100% basis in the assessee company and therefore the intent or the object of the said grant was capital in nature and not revenue in nature. Even though it helped the assessee in repaying the outstanding arrears of the cane growers which was the liability of the assessee and to that extent it got a benefit but the said benefit was not main purpose of the grant by the Government of Uttar Pradesh as it was sanctioned by the Hon ble Governor for the payment of the outstanding cane price for the Uttar Pradesh State Sugar Corporation Limited s sugar mills for the previous crushing season 2007-08 in view of the sales/disinvestment of the state s shares in the Corporation. Further in this case the amount sanctioned to the assessee is by way of a grant and not as a subsidy under any subsidy scheme approved/sanctioned by the Government of Uttar Pradesh. Therefore as discussed above this grant is for a specific purpose in the hands of the assessee to pay the outstanding arrears of the cane growers and if the Department s view is accepted that either it is a revenue receipt or it is a benefit to the assessee to recoup the expenses towards purchase of cane from the cane growers allowed as deduction in earlier years will be taxable during the year in the given facts of the case will negate/defeat the very purpose of the grant for which the grant was sanctioned i.e. for the payment of outstanding arrears of the cane-growers whose cash flow generally speaking is under stress. Coming to the submission of the Department that it is the utilisation in the hands of the assessee that will determine its taxability the facts in the present case are more similar to the facts of the case in PCIT Vs State Fisheries Development Corporation Ltd. 2018 (9) TMI 714 - CALCUTTA HIGH COURT wherein it was held that where a significant portion of the grant was used to pay salaries and provident funds which are in the nature of revenue expenses the grant so stated remained capital. The SLP filed by the Department was dismissed by the Hon ble Apex Court in the case of PCIT Vs State Fisheries Development Corporation Ltd. 2019 (1) TMI 482 - SC ORDER . Therefore even if the utilization of the funds is for revenue expenditure purposes as in the case of the assessee by utilizing the funds for payment of outstanding dues of the cane growers which was a revenue expenditure but keeping in view the facts and decision in the above cited case this amount will not be a revenue receipt in the hands of the assessee company. Therefore we are of the considered view that the grant to the assessee company is held to be not as a revenue receipt and therefore not taxable. Action of AO in taxing the said amount u/s 41 - Whether there is any remission or cessation of liability of the assessee towards the outstanding dues of the cane growers or not the answer is categorical No because the grant received by the assessee was paid in entirety towards the outstanding arrears of the cane growers as directed in the letter dated 16.07.2008 granting the said amount to the assessee company. In fact the assessee is only a pass through entity in the given facts of the case which the Government of Uttar Pradesh had granted for the payment of outstanding cane prices of the cane growers. In fact in this case the government itself decided the object/purpose of the grant and the mandate for its utilization. The explanation of the assessee company that the amount received by the assessee from its shareholder which is state of UP and when a shareholder provides the money to his company for payment to the creditors of the company it cannot be treated as remission or cessations of liability is acceptable. In the case of of Rollationers Ltd. 2011 (8) TMI 447 - DELHI HIGH COURT relied by the AO there was a part waiver of debts by the financial institutions whereas no such waiver has taken place in the case of the assessee company. Therefore we are of the considered view that this amount is not taxable u/s 41(1) of the Act also. Therefore we are of considered view that the action of the AO in treating as revenue receipt and or remission/cessation of liability being taxable under section 41(1) of the act and confirmed by the CIT(A) in not sustainable and the same is deleted. Ground no.1 to 3 of the appeal is allowed.

Summary

ISSUES:

1. Whether the grant of Rs. 17,44,85,000 received from the State Government constitutes a revenue receipt or a capital receipt in the hands of the recipient company.

2. Whether the grant can be treated as a "remission or cessation" of a trading liability or a "benefit obtained" in respect of such liability under Section 41(1) of the Income Tax Act, 1961.

3. Whether financial assistance provided by a government shareholder to its wholly-owned company for payment of outstanding dues to third-party creditors can be taxed as income under the Act.

4. The applicability and interpretation of the "purpose test" in determining the nature (capital or revenue) of government grants or subsidies.

RULINGS / HOLDINGS:

1. The grant received from the State Government was held to be a capital receipt and not a revenue receipt, as it was given in consideration of disinvestment of shares to enhance the intrinsic value of the company, notwithstanding that it was utilized to pay outstanding cane dues.

2. The grant provided by the shareholder (State Government) cannot be construed as a remission or cessation of liability by the creditors (farmers) under Section 41(1) of the Act, since the liability was fully discharged and no waiver or reduction by creditors occurred.

3. Financial assistance from a government shareholder to its wholly-owned company, aimed at protecting the capital investment and ensuring survival of the company, is not taxable as income under the provisions relating to remission or cessation of trading liabilities.

4. The "purpose test" as established by Supreme Court precedents dictates that the character of a subsidy or grant depends on the purpose for which it is given; assistance to carry on business operations is revenue in nature, whereas assistance to protect or enhance capital investment is capital in nature.

5. The Assessing Officer's and CIT(A)'s treatment of the grant as taxable revenue receipt under Section 41(1) and Section 28 of the Act was held to be unsustainable and reversed.

RATIONALE:

1. The Court applied the statutory provisions of the Income Tax Act, particularly Sections 2(24), 28, and 41(1), alongside the principle of the "purpose test" articulated in landmark Supreme Court decisions such as Sahney Steel & Press Works Ltd. v. CIT and CIT v. Ponni Sugars & Chemicals Ltd.

2. The Court distinguished between grants from public funds given as part of general subsidy schemes and voluntary contributions from a parent or shareholder company to its wholly-owned subsidiary facing financial distress.

3. The Court relied on recent authoritative rulings including Siemens Public Communication Network P. Ltd. v. CIT and PCIT v. State Fisheries Development Corporation Ltd., which held that voluntary payments by a parent company (or government shareholder) to protect capital investment are capital receipts, even if used for revenue expenditures.

4. The Court rejected the Assessing Officer's reliance on Section 41(1) for treating the grant as remission or cessation of liability, emphasizing that remission requires waiver or reduction by creditors, which was absent here since the full liability was discharged.

5. The Court gave weight to the intent and purpose of the grantor (State Government) as expressed in official communications, which clearly linked the grant to disinvestment of shares and enhancement of intrinsic value, indicating capital nature.

6. The Court noted that the utilization of the grant for payment of outstanding dues, although a revenue expenditure for the company, does not convert the capital nature of the grant into revenue receipt.

7. The Court acknowledged the principle that the source of the grant (public funds or shareholder) is not solely determinative, but the purpose and character of the grant in the hands of the recipient are decisive.

8. The Court observed that prior judicial decisions relied upon by the revenue were distinguishable on facts or superseded by later authoritative rulings.