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2016 (1) TMI 783 - ITAT KOLKATA

2016 (1) TMI 783 - ITAT KOLKATA - TMI - Nature of Subsidy under the “Quality Upgradation and Product Diversification Scheme” - whether the subsidy received by the Assessee was capital in nature not chargeable to tax or was revenue in nature, chargeable to tax? - Held that:- Quality Awareness programme for upgrading the quality of tea produced by the Bought leaf factories (processing the green leaf supplied by small growers) A detailed list of machinery items eligible for subsidy and their basic .....

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ew that the subsidy in question is revenue subsidy and was rightly brought to tax. - Decided against assessee - ITA No.854/Kol/2014 - Dated:- 15-1-2016 - Shri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM For The Appellant : Shri J.M.Thard, Advocate For The Respondent : Shri Pinaki Mukherjee, JCIT, Sr.DR ORDER Per Shri N.V.Vasudevan, JM This is an appeal by the Assessee against the order dated 10.1.2014 of CIT(A)- IV, Kolkata, relating to AY 2006-07. 2. The Assessee is a company. It carries on t .....

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the subsidy received by the Assessee was capital in nature not chargeable to tax or was revenue in nature, chargeable to tax. The AO held that the subsidy in question received by the Assessee under the Scheme was revenue in nature and was therefore taxable. Over and above that the AO also reduced the value of subsidy from the actual cost of the machinery on which depreciation has to be allowed. Under Explna-10 to Sec.43(1) of the Act, which defines Actual Cost for the purpose of allowing depreci .....

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on, in the form of a subsidy or grant or reimbursement (by whatever name called), then so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee:- Provided - that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to .....

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including it as part of the total income of the Assessee. The AO reduced ₹ 3,48,976 which is 15% of ₹ 23,26,506 from the depreciation that has to be allowed to the Assessee under the Income Tax Act,1961 (Act) in accordance with Expln.10 to Sec.43(1) of the Act. 4. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). The CIT(A) after noticing the objective of the Scheme upheld the order of the AO. The CIT(A) held that the scheme is only for Tea quality up-gr .....

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ved by the Assessee was revenue in nature, chargeable to tax. In doing so, the learned CIT(A) followed the ruling the Hon ble Supreme Court in the case of Sahani Steel & Press Works Ltd. 220 ITR 253 (SC). 5. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. 6. The learned counsel for the Assessee firstly pointed out that the subsidy received by the Assessee was ₹ 23,26,506. The AO however took the difference in the opening and clos .....

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) of the Act. According to him, once the AO comes to the conclusion that the subsidy received was utilized for acquiring depreciable asset than the inevitable conclusion is that the subsidy in question is capital subsidy and therefore the same cannot be brought to tax. According to him the subsidy in question is to facilitate the tea factories to upgrade/replace/renovate the old and worn out machinery by purchasing new machines in order to manufacture quality tea and therefore the subsidy in que .....

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of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the Purpose Test . The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. 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. On the other hand, if the object of the as .....

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wherein it was held that one time subsidy received as a percentage of sales tax paid for modernization and expansion purposes would constitute a capital receipt not subject to the rigours of tax under the Income Tax Act, 1961. 8. The total value of machinery purchased/installed by the Assessee was ₹ 93,06,024. The machineries were installed during the financial year 2003-04 relevant to AY 04-05. 25% of the cost of the machinery viz., ₹ 23,26,506 was received by the Assessee as subsi .....

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ment or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called) and therefore Explanation 10 to Sec.43(1) of the Act will not be attracted. 10. He drew our attention to the fact that the Finance Act, 2015 with effect from 01/04/2016 has inserted of Sub-Clause (xviii) in Section 2(24) of the Income Tax Act, 1961 providing an inclusive definition of the expression Income . The relevant portio .....

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10 to clause (1) of section 43. 11. The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. According to him prior to the aforesaid amendment, if a subsidy was regarded as revenue subsidy and was given for the purpose of meeting the cost of acquiring fixed assets than the Assessee will suffer the burden of having to pay tax on the subsidy and further the cost of fixed assets will also be reduced by virtue of Explanation 10 to Sec.43(1) of the Act. According to him one of the purp .....

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nd in the grounds of appeal before Tribunal, is with regard to the question whether the subsidy is capital or revenue. The Assessee has accepted the fact that the subsidy will go to reduce the cost of acquisition of the fixed assets and therefore the question that needs to be answered only as to whether the subsidy in question is capital or revenue. He placed reliance on the order of the CIT(A) on the issue. 13. We have given a very careful consideration to the rival submissions. The only issue .....

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ns of Hon ble Supreme Court and Hon ble High Courts. The Hon ble Supreme in CIT , Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) has held that, It is the object for which subsidy/assistance is given, that truly determines nature of subsidy. 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. In other words, in such cases one has to apply the Pur .....

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e, it is the object for which the subsidy/assistance is given which determines the nature of incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 15. It would also be of immense merit to refer to another judgement of the Hon ble Calcutta High Court in the case titled Commissioner of Income Tax vs. Rasoi Limited [2011] 335 ITR 438, wherein it has been held by the Hon ble Court by making a due reference to the judgement of the Hon ble Apex Court in the cas .....

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rm of refund of sales tax paid and exigible to tax. Hence one time subsidy received from the State Government under the scheme of industrial promotion for expansion of its facilities and for modernization purposes is capital receipt and cannot be brought into tax net. 16. Keeping in mind the principles laid down in the aforesaid decisions referred to by the learned counsel for the Assessee, we shall now see the objects of the Scheme under which the Assessee received subsidy in the present case. .....

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d receive greater attention as with efflux of time not only there is need to modernize factories but take up new technologies developed in the recent years in the fields of automation, electronics and use energy saving devices. Since there is always good demand for the quality teas, modernization and technology upgradation assumes added significance. Accordingly this scheme has been formulated to provide financial assistance to the needy tea gardens/factories for renovating as well as augmenting .....

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eas, ready to drink teas etc. Towards this end, it is proposed to provide for subsidy for the packaging machineries and creating facilities for product diversification. Because of the high variability in the quality of tea produced, there is a greater need for evolving appropriate quality-market matching. For this the process of manufacture needs to undergo changes to suit to the emerging new markets. Moreover, quality assurance should be the USP in the emerging completive environment. To facili .....

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ubsidy @ 25% of the actual cost. Tea Board s role being that of a catalyst towards accelerating the production growth rate, the funds provided under this scheme are not meant to meet the entire needs of the industry. 75% of the total funds required for undertaking the developmental activities have to be mobilized by the industry itself either from its internal generation or by borrowings from financial institutions/commercial banks. Eligibility: All the tea growers, manufacturers and others who .....

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crop and its marketing in the free market economy, subsidy in post-harvest handling of the crop and its marketing in the free market economy, subsidy at the aforementioned rates will be provided for the following activities through this scheme: 1. Setting up of modern blending, processing and packaging facilities for producing internationally acceptable quality and price competitive teas 2. Electronic monitoring devises for the control of tea processing 3. Electronic sorters and mechanical sort .....

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f machinery items eligible for subsidy and their basic cost is annexed as annexure-1. 17. A perusal of annexure-1 would show that the purpose of the scheme is to ensure better working of the tea manufacturing unit, plucking practices adopted in the tea garden etc. Subsidy is given for improving the infrastructure of the existing tea manufacturing unit. The predominant purpose of the scheme is to ensure that tea manufactures function more profitably and not for setting up of a new unit or expansi .....

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oncession or reimbursement (by whatever name called) by the Central Government or a State Government or any other authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43. 19. The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. Explanatory Notes to Provisions of Finance .....

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after wide public consultations. The ICDS-VII relating to Government grants provides that all Government grants except relating to depreciable asset shall be recognised as income in accordance with the provisions of the said ICDS. The existing provisions of Explanation 10 to clause (1) of section 43 of the Income-tax Act already contained the guidance for treatment of Government grants relating to acquisition of an asset. However, there was no specific guidance available under the provisions of .....

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ng certainty in this matter may be examined. In order to avoid any future litigation and controversy in this matter, the definition of income under clause (24) of section 2 of the Income-tax Act has been amended so as to provide that the income shall include assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or .....

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ession carried on by him.. 5.3 Applicability:- This amendment takes effect from 1st April, 2016 and would accordingly apply to assessment year 2016-17 and subsequent assessment years. 20. The debatable points referred to in the explanatory notes referred to above, is to various judicial precedents that brought out debatable principles for tax treatment of the subsidies received by an assessee. The dispute between the Revenue and the taxpayers about the treatment of the subsidy received from the .....

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sh or kind to an assessee (other than one considered under Explanation 10 to Section 43(1)) would be included in the total income of the assessee. Thus, any subsidy/grant/reimbursement, which is taken into account and reduced from the actual cost of depreciable assets while determining the same under Section 43(1) shall not be treated as income. 21. The question is as to whether the aforesaid amendment to Sec.2(24)(xviii) of the Act, can be considered as having retrospective operation. The afore .....

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a charge to tax and unless the legislature specifically imposes a charge to tax, retrospectivity cannot be given. Therefore the 1st part cannot be regarded as having retrospective operation. The second part of the amended provision of Sec.2(24)(xviii) of the Act gives a relief in the form of relieving double taxation, one in the form of the subsidy being taxed as income and again the value of subsidy being reduced from the actual cost of fixed assets on which depreciation is to be allowed. It i .....

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y is regarded as revenue subsidy, it would be taxable besides the value of the subsidy getting reduced form the actual cost of depreciable assets for the purpose of allowing depreciation, if the conditions laid down in Explanation 10 to Sec.43(1) of the Act are satisfied. In the present case there is no dispute that the other conditions laid down in Explanation 10 to Sec.43(1) of the Act are satisfied. 22. The learned counsel for the Assessee has also placed reliance on the decision of the ITAT, .....

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