TRANSPORT SUBSIDY – REVENUE RECEIPT OR CAPITAL RECEIPT?

[Mr. M. GOVINDARAJAN]

Transport subsidy scheme

Government of India had introduced Transport Subsidy Scheme on 23.7.1971 to develop industrialization in the remote, hilly and inaccessible areas. The scheme was applicable to all industrial units (barring plantations, refineries and power generating units both in public and private sectors irrespective of their size). Under the scheme, subsidy on the transport cost for transportation of raw material and finished goods to and from the location of the unit and the designated rail-head was reimbursed for a period of 5 years from the date of commencement of commercial production. For North Eastern states, subsidy is 90%. However, for the movement of goods within NER, the subsidy is 50% on finished goods and 90% on raw material. The scheme was modified and notified as ‘Freight Subsidy Scheme (FSS) – 2013’, with effect from  22.1.2013 for a period of 5 years. The Scheme has been discontinued with effect from 22.11.2016. However, industrial units registered under the scheme prior to the date of issue of Department of Promotion  of Industry and International Trade’s notification dated 22.11.2016 will be eligible for the benefits of the residual period under the scheme.

The office memorandum dated 24.12.1997, whereby incentive packages were provided for stimulating growth and development of industries in the North-Eastern States and the transport subsidy sanctioned under the scheme, was intended for generating industrial activity in the backward region in order to offset the deterrent cost for the new entrepreneurs and also for those who wish to expand the production capacity, for the already established industries. The Transport Subsidy Scheme, 1971 notified on 23.07.1971 was intended to promote growth and expansion of industries in the Northeast region.

Transport subsidy – revenue receipt or capital receipt?

Subsidy is of many types.  Generally subsidy is given exemption from income tax.   Many a case law has been there in deciding the subsidy whether the subsidy is revenue receipt or capital receipt.  The question whether the subsidy is revenue receipt  or capital receipt is to be decided on the object of the subsidy given to the assessee but not otherwise.

In ‘Shiv Shakthi Flour Mills (P) Limited  v. Commissioner of Income Tax, Dibrugarh’ – 2017 (1) TMI 772 - GAUHATI HIGH COURT, the assessee is a company. On 22.10.2001 the assessee submitted their return of income disclosing total income at ₹ 1,82,940/- for the Assessment Year 2001-02.  A non-scrutiny assessment was then made under Section 143 (1) of the Act and the intimation under that provision was issued to the assessee on 12.03.2002, by accepting their return and granting refund.  This case was taken up for scrutiny under section 143(2) of the Act and an assessment order was passed on 30.03.2004 adding ₹ 17,45,470/- towards transport subsidy holding it as supplementary trade receipt.  The Assessing Authority after noting the accounting procedure followed by the assessee, who credited the transport subsidy amount to the reserve and surplus head in their balance sheet for the assessment year 2001-02, referred to the decision in ‘Deputy Commissioner of Income Tax Vs. Assam Asbestos Ltd.’ - 2003 (7) TMI 63 - GAUHATI HIGH COURT but noted that while incurring transportation cost for importing raw material from outside the State, the spent sum was debited as revenue expenses and if the same analogy is applied when the government subsidizes a part of the transportation expenses on a later date, that should be considered as supplementary trade receipt of revenue nature. With this understanding, the transport subsidy amount was added to the total income of the assessee for the assessment year 2001-02 and the payable tax was computed on that basis.

The aggrieved assessee then preferred Appeal before the Commissioner of Income Tax (Appeals).  The Commissioner (Appeals) noted that the transport subsidy received by the assessee was under the Transport Subsidy Scheme, 1971 of the Govt. of India and the purpose of the subsidy was for promotion and growth of industries in the North Eastern Region, which is considered to be a backward and difficult area for development. Thus the nature of the receipt towards transport subsidy was declared to be capital in nature and hence not taxable, through the order dated 27.10.2014.

Against the order of the Commissioner (Appeals) the Revenue filed appeal before the Appellate Tribunal.  The Members of the Tribunal differed in their views.    According to the Judicial Member, the main object of the scheme/industrial policy is to boost industrial development in the backward areas of the North Eastern States, which is lagging behind other parts of the country. He then opined that although the transport subsidy is disbursed after commencement of production, since the object of the scheme is to boost industrial development and the transport subsidy is an incentive to set up industry. Therefore it was construed to be capital receipt for the purpose of assessment to tax.  The Accountant Member opined that since the transport subsidy is provided for assisting the assessee in carrying out his business operation after commencement of production, such receipt is revenue receipt and not capital in nature and therefore the amount in the hand of the assessee is to be construed as income, for the purpose of assessment.

Because of the different views, the case was referred to third member for his opinion.  The Third Member opined that the transport subsidy in the present case is a revenue receipt and therefore liable to tax.  The Third Member, in this regard, relied on the judgment of High Court in ‘Commissioner of Income Tax  v.  Meghalaya Steels Ltd. (Gauhati), - 2010 (9) TMI 679 - GAUHATI HIGH COURT, By majority, the Appellate Tribunal by its impugned order dated 13.12.2013 declared that transport subsidy is required to be treated as revenue receipt and thus the assessment to tax for the amount received, was upheld for the Assessment Year 2001-02.

Being aggrieved against the order of the Appellate Tribunal, the assessee filed the present appeal before the High Court.  The appellant contended the following before the High Court-

• The transport subsidy scheme was intended to promote growth and expansion of industries in the Northeast region and accordingly the reimbursement of the transportation cost for the permitted extent, is nothing but incentives provided for generation of industrial activity and the same cannot be construed as revenue receipt to augment the profit of the concerned entrepreneur.
•  In order to determine the nature of the receipt of transport subsidy, whether it is revenue or capital receipt, the purposive test has to be applied and if this testing criterion is applied, it is clear enough that the sum received by the appellant cannot be characterized as revenue receipt, subject to taxation under the Income Tax Act.

• The character of transport subsidy under the scheme applicable for North-East region, was examined by the Apex Court and it was declared that the object of the Transport Subsidy Scheme is not augmentation of revenue but to improve trade and commerce between the remote parts of the country and also to make it attractive for industrial entrepreneurs, to start and operate industries in remote region, by providing them a level playing field, so that they could compete with their counterparts in the non-remote areas of the country. 
• Thus the receipt of the transport subsidy is submitted to be capital inflow.

The Revenue submitted the following before the High Court-

•  The assessee had credited the sum received as transport subsidy in their reserve and surplus account, but such accounting procedure is inconsistent with the method of accounting, specified under Section 145 and 145A of the Income Tax Act.
• The subsidy amount reimbursed to the assessee must be deemed as income for the year in which it is received.
• Therefore it is taxable as revenue receipt, in the hand of the assessee.
• In ‘Commissioner of Income Tax v. Rajaram Maize Products’ - 2001 (8) TMI 13 - SC ORDER the Apex Court had held that power subsidy received by the assessee was a revenue receipt and the same is subject to taxation under the Income Tax  Act and the  transport subsidy should be similarly construed in the hands of the assessee.

The High Court heard the arguments of both the sides.    The High Court framed the following question to be considered-

“Whether on the facts and circumstances of the case, the Tribunal was justified in holding that the transport subsidy received by the assessee during the assessment year 2001-02 was in the nature of revenue receipt and not capital receipt and thus taxable in the hands of the assessee?”

The High Court observed that in ‘Meghalaya Steels Ltd.’ (supra) rendered on 16.09.2010, the Division Bench recalled the earlier order by observing that the substantial question of law was not framed in the earlier proceeding and thus through the judgment dated 08.04.2013 in the Review case filed by the assessee in Meghalaya Steels Ltd. Vs. CIT reported in (2013) 2013 (12) TMI 369 - GAUHATI HIGH COURT a fresh determination with formulation of the substantial question of law, was ordered by the Court. The resultant challenge of the revenue in the Supreme Court, we may note here, was dismissed on 05.08.2015 and this decision of the Supreme Court is reported in COMMNR. OF INCOME TAX, GUWAHATI-I VERSUS M/S. MEGHALAYA STEELS LTD.  2015 (8) TMI 525 - SUPREME COURT.

The High Court considered the arguments put forth by the Revenue that   the assessee cannot apply certain accounting method, in order to treat the received sum as capital receipt by including the amount in the reserve and surplus head, in the balance sheet. For this the High Court relied on the judgment of Supreme Court in ‘Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income Tax’ - 1997 (7) TMI 4 - SUPREME COURT in which the Supreme Court held that when the question is whether a receipt of money is taxable or not or whether certain deduction from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with the accountancy practice.  Therefore the High Court decided that the question formulated for consideration need not be answered on the basis of the accounting procedure followed by the assessee but question has to be decided on the basis of the applicable principles of law.

In order to determine as to whether the transport subsidy received by the assessee from the Government is taxable as revenue receipt or not, the purpose of the incentive scheme will have to be considered.  The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given or in other words, one has to apply the purpose test.   If the object of the subsidy scheme was to enable the assessee to have a more profitable business, then the receipt is on revenue account.  But on the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new industrial unit or to expand the existing facilities, then the receipt of the subsidy was on capital account.

The High Court considered that the object of the Transport Subsidy Scheme is not for augmentation of revenue but to improve trade and commerce between the remote parts of the country with other parts to bring about economic development of the remote and backward regions.  Therefore the High Court held that the amount received towards transportation cost in the hand of the assessee is capital receipt and the same cannot be subject to taxation in the hand of assessee, under the Income Tax Act.  The High Court allowed the appeal filed by the appellant. 

The Revenue filed appeal against the order of High Court before the Supreme Court in M/S SHIV SHAKTI FLOUR MILLS (P) LTD. VERSUS COMMISSIONER OF INCOME TAX 2020 (3) TMI 182 – Supreme Court.  The Supreme Court observed that the High Court in Income Tax Appeal No.6/2014 for the subsequent assessment year 2001-2002 has answered the question on the basis of the exposition of this Court in particular in ‘Jai Bhagwan Oil & Flour Mills vs. Union of India & Ors.’ reported in 2009 (5) TMI 630 - SUPREME COURT. Admittedly, this decision is accepted by the Department and no appeal is preferred against the same.   The said decision in the case of the same assessee which has been allowed to become final, the view expounded therein must apply proprio vigore even for the assessment years in question. As a result, in the facts of the present case, these appeals succeed on the same terms.