TMI Blog2011 (3) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... right in holding that the subsidy received by the assessee is to be treated as capital receipt and the same is not tax- able ?" 2. At the outset, it must be pointed out that the assessee took an objection as regards the maintainability of the appeal, having regard to the fact that the assessee is a loss making company and under section 260A of the Income-tax Act, as per the then prevailing the Board's Instruction, the monetary limit for filing an appeal under section 260A of the Income-tax Act, 1961, was at Rs. 2 lakhs and in 2008, the monetary limit for filing an appeal before the High Court was revised to Rs. 4 lakhs. Having regard to the very low tax effect and the Board's circular binding on the Revenue, the appeal is liable to be dismissed. Learned counsel appearing for the assessee pointed out that the issue raised in this appeal does not fall under any of those excepted circumstances to maintain an appeal ; consequently, the appeal has to be dismissed as not maintainable, having regard to the low tax effect. 3. It is seen from the instructions given in the said circulars, particularly that of the year 2007 where the substantial question of law involved is of recurring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal was dismissed. Aggrieved by the same, the assessee went on further appeal before the Income-tax Appellate Tribunal, which considered the issue at length, to ultimately hold in favour of the assessee. The Tribunal held that the subsidy was given only to encourage setting up of new industries in a backward area. Consequently, the subsidy received was capital in character. Thus, the claim of the asses- see was allowed. Aggrieved by the same, the Revenue has come on appeal before this court. 6. Learned standing counsel appearing for the Revenue, taking us through the scheme on the power subsidy granted, contended that going by the decision of this court reported in CIT v. Super Spinning Mills Ltd. [2008] 296 ITR 168 (Mad) and the decisions of the apex court reported in CIT v. Rajaram Maize Products [2001] 251 ITR 427 (SC) and CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC), unless and until the assessee is able to establish that the subsidy given was for the purpose of setting up of industry, the question of granting any relief as a capital receipt did not arise in this case. Learned standing counsel further pointed out that having regard to the categorical dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng unit was located. The incentives contemplated refund of sales tax on raw materials, machi- nery and finished goods, levied by the State Government subject to a maximum of 10 per cent. of the equity capital. Apart from that, there was also subsidy on the power consumed for production and further incentives as narrated therein. The Supreme Court pointed out that these incentives are production incentives that the assessee would be entitled to the incen- tives only after it went in for production. The Supreme Court pointed out that the incentives given by way of sales tax refund and subsidy of power consumed for production were only operational subsidies hence, the pay- ments not being made up for setting up of industries and were of the character of the supplementary receipts which could not be used for dis- tribution as dividend to the shareholders. Consequently, the Supreme Court held that these subsidies were not capital subsidies. The apex court pointed if any subsidy is given, the character of the subsidy in the hands of the recipient will have to be determined by having regard to the purpose for which subsidy is given. If it is given by way of assistance to the asses- see in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Engineer, Electricity, could make appropriate deduction in the current consumption bills of the eligible industrial units, as certified by the Direc- tor of Industries, regarding the percentage of subsidy allowed to each industrial unit. Following this Government order, yet another Govern- ment order in G. O. Ms. No. 9/91 Ind, Pondicherry, dated February 11, 1991, was issued, wherein, it was pointed out that even though at the time of formulation of the scheme, the intention was to encourage the proli- feration of industry within the territory, in actual practice, the scheme had attracted many power intensive units which are using power as one of the inputs for production. It was helping only large industries with limited employment, hence, on the suggestions made by the planing commission, it was felt the scheme should be modified so as to reduce the heavy drain on the plan funds. It was also found that the present scheme ended in the growth of large medium industries which instead of promoting more labour industries, were using power as raw materials for production. Taking note of the need for modification, the Government modified the scheme. It was observed that the modified s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given only after the commencement of pro- duction, such subsidies must be treated as assistance for the purpose of carrying on the business. 12. The said decision was applied by this court in the decision reported in CIT v. Super Spinning Mills Ltd. [2008] 296 ITR 168 (Mad), to which, one of us is a party. This court held that the amount taken for obtaining a loan for the purpose of setting up a unit is only a capital expenditure. 13. In the recent decision reported in CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC), the apex court once again applied the deci- sion reported in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC) only to reiterate that the character of the receipt of subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted and in such cases, one has to apply the pur- pose test. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt is on the revenue account. However, if the object under the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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