TMI Blog2009 (10) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 12,97,46,000/- as subsidy received to enable the assessee to repay the loans taken for the purpose of construction of tube wells. Another sum of ₹ 1 crore was also shown as capitalised interest on the loans. Thus a total amount of ₹ 13,97,46,000/- was shown under the head Reserves and Surplus in the balance sheet. 3. The Assessing Officer took the view that the subsidy represented income in the hands of the assessee on the basis of the judgment of the Supreme Court in the case of Sahaney Steel and Press Works Ltd. and Others Vs. CIT, 228 ITR 253. The assessee however submitted that the aforesaid judgment did not apply to its case and in the detailed written submissions dated 9-3-1999 raised the following points: a) The projects for construction of tube-wells and lift irrigations scheme are part of the developmental activities of the State of Gujarat. b) The projects are to be sanctioned by the State Government. The financial costs are to be borne by the State Government. Since sanction of finance may take sometime, bridging arrangements were made to the effect that any borrowings made by the assessee in the interregnum would be repaid by the government an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. He pointed out that it is relevant to consider the object for which the subsidy was given and it has also been recognised to be the correct legal position in the judgment of the Supreme Court cited above as also in the recent judgment of the Supreme Court in CIT Vs. Ponni Sugars, (2008) 306 ITR 392. He drew our attention to the accounting treatment given to the subsidy and in this connection referred to the balance sheet and profit and loss account of the assessee for the year ended 31- 3-1996 at pages 5, 7, 8, 9, 16 and 45 of the paper book. He also filed a copy of the government resolution dated 6-3-1996 as a specimen and pointed out that para-2 contained a clear stipulation that the grants released should only be utilised for the purpose mentioned above . He submitted that a similar stipulation was provided for in all the government resolutions/circulars authorising the subsidy. It was further contended by the learned counsel for the assessee that the departmental authorities were wrong in saying that the subsidy was referable to the day-to-day operations of the assessee and was hence to be treated as income. He submitted that the business of the company was to provide wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of ₹ 148.15 lakhs is credited to deferred income account which is subject to reassessment to the extent refund of the same to the Government of Gujarat . However, in the new paragraph in page 3 of the statement of facts filed before the CIT(A), the assessee has stated that since the amount was received from the promoters the appellant transferred the same to the capital reserve account . The statement made by the assessee in the statement of facts filed before the CIT(A) has not been challenged. In fact it actually accords with accounts of the assessee. We may refer to page 7 of the paper book relating to the assessment year 1998-99 filed by the assessee. The balance sheet as on 31-3-1998 at page 2 shows the reserves and surplus at ₹ 70,11,83,728 and the break-up for the same is shown in schedule-2 to the balance sheet at page 7 of the paper book. Here the opening balance of the capital reserve is shown at ₹ 4,50,38,267/- to which the subsidy of ₹ 1,48,15,000/- received during the year has been added. The accounting treatment thus clearly shows that the statement of the assessee before the AO was factually wrong and that the subsidy was actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 333 (HL) that assistance given by the Government for completion of a project must be of capital nature . It will thus be seen that the purpose for which the subsidy is granted is relevant and decisive. Applying the judgment of the Supreme Court in Sahaney steels (supra) and Seaham Harbour Dock (supra) the Supreme Court held in CIT Vs. Ponni Sugars Chemicals Ltd. (supra) that . The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that 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 purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orandum issued by the office of the Superintending Engineer, Ahmedabad Irrigation Project Circle, on 30-3-1996 relating to budget grant for the accounting year 1995-96, the assessee was granted subsidy of ₹ 1297.46 lakhs for repayment of the loan for tube wells and ₹ 100 lakhs as grant of capitalisation of interest. These grants have been taken to the capital reserve account. The balance sheet as on 31-3-1996 shows that the total subsidy of ₹ 13,97,46,000/- has been added to the opening balance of the capital reserve. There is proper accounting and control of the utilisation of the grants also. This is clear from pages 8 and 9 of the paper book for the assessment year 1996-97. This is a schedule which shows the utilisation of the capital grant for the construction of the tube wells. The opening balance is first brought down to which the capital outlay is added. From this figure, the cost of failed tube wells (Rs.14,00,777/- for this year) is deducted. There is a separate column showing unutilised grants received for works. In the schedule explaining the secured loans, the assessee has also shown a sum of ₹ 4,37,88,269/- as term loans from banks secured by fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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