TMI Blog2005 (5) TMI 234X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1996-97 was completed under s. 143(3) on, 19th March, 1999 on total income of ₹ 20,49,465, but later on the same was re-opened by issuing notice under s. 148 of the Act on 5th March, 2001 on the ground that the subsidy received by the assessee of ₹ 20 lacs was taxable and had escaped assessment. Income for asst. yr. 200102 was first computed under s. 143(1)(a) of the IT Act on 30th Oct., 2002, but later on, proceedings for making assessment under s. 143(3) were initiated by issuing notice under s. 143(2) of the Act. 3. During the course of assessment proceedings, for both the years (as stated above), the assessee pleaded that the subsidy received by it in both the assessment years was capital subsidy and, therefore, was not liable to be taxed. The AO, however, came to the conclusion that the subsidy was not capital subsidy rather was given to earn the income and, therefore, it was in the nature of revenue. The reasons stated by the AO for considering the subsidy in asst. yr. 1996-97 as revenue receipt read as under: It has been observed that one of the conditions for grant of subsidy was that the unit should supply dies and moulds to vendors within Gujarat. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee had received two subsidies of ₹ 20 lakhs each from the Gujarat State Government, which was not reflected in the P L a/c. On being asked about the same, the assessee replied vide letter dt. 24th March, 2003 that the amounts had been received as assistance for setting up the industry in backward area (i.e. Thai Village, Kadi). Hence, the same was treated as capital receipts. The details of the subsidies were called for. The assessee submitted copies of the sanction order of the subsidy dt. .19th May, 1999 and 14th Aug., 2000 respectively. The order mentions that the base for which the subsidy is granted is the value of fixed capital investment. In the case of assessee, the total value of fixed capital investment of ₹ 2.64 crores and ₹ 1.77 crores consists mainly of dies and moulds. The notes to the sanction order specify the conditions of subsidy which read as under: Notes: 1. Fixed capital investment should be increased by not less than 25 per cent of the net fixed assets of existing project and increased in the production to the extent of atleast 25 per cent of the original installed capacity should be achieved before disbursement. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities and consequently, holding the subsidy as a revenue income, the provisions of s. 28(iv) are applicable. The condition of the subsidy being received in pursuance to exercise of business or profession is satisfied and hence, the amount of subsidy received from the State Government is treated as revenue receipt as per the provisions of s. 28(iv) and added to the income of the assessee. 5. The assessee went in appeals before the CIT(A) who allowed the assessee's claim by observing as under: For asst. yr. 1996-97 After carefully considering the observation made by the AO and submission given by the appellant and also various case laws relied by the counsel of the appellant, I am of the view that the subsidy received by the appellant is actually the assistance to the appellant in setting up an industry in the backward area in its expansion project. The assets which are acquired and paid for during the operative period of this scheme are eligible for subsidy and the State Government's Resolution has defined expansion as follows: Expansion means increase in the value of fixed capital investment by not less than 25 per cent of the net fixed assets of the exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is granted for setting up an industrial unit in backward area and that it cannot be in any event be linked With revenue activities. It was further submitted by the counsel of the appellant that while deciding similar issue in appeal for asst. yr. 1996-97, the CIT(A) has decided the issue in favour of the appellant. 3.3 I have carefully considered the observation of the AO as well as the submission of the appellant along. I have also perused the appellate order passed for asst. yr. 1996-97, wherein after discussing the issue in detail, it was observed by the undersigned that the subsidy to the appellant has been granted as per the Government's policy prevalent as that time, it was nothing but a capital subsidy granted by the State Government to help the appellant-company to develop the declared backward area. The stand of the AO to treat the same as revenue receipt is not in order and accordingly, the same is reversed and it is held that it is a capital subsidy. In view of the observations made by the undersigned in the order for asst. yr. 1996-97, I hold that the subsidy received by the appellant from the State Government amounting to ₹ 40,00,000 is to be treated as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on arrived at by the CIT(A) while passing the order for asst. yr. 1991-92, I hold that the appellant is entitled to depreciation @ 40 per cent as claimed by the appellant on plastic moulds and, therefore, the AO is directed to delete the disallowance of ₹ 42,08,947. 6. It was, in view of the facts and circumstances of the case, that the learned Departmental Representative after referring to the reasons stated by the AO in both the years, submitted that the subsidy received by the assessee was of revenue nature and, therefore, liable to be taxed. 7. On the other hand, learned counsel for the assessee has supported the order of the CIT(A) after drawing our attention to the following documents: 1. Letter dt. 27th Oct., 1993 from Member Secretary State Level Committee, informed the assessee about sanctioning subsidy for asst. yr. 1996-97. 2. Copy of resolution No. INC/10861706/(i)I, dt. 5th May, 1986. 3. Letter of disbursement of cash subsidy for asst. yr. 2001-02. 4. Copy of office order dt. 9th June, 2000. 5. Copy of order dt. 19th May, 1999. 6. Copy of resolution of Government of Gujarat dt. 16th Oct., 1990. 7. We have considered the rival submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ensure that priority is given to local persons for employment in the State as well as Central public sector undertakings and private industrial units. As per the guidelines of the New Employment Policy, a person domiciled in Gujarat State for minimum 15 years will be considered a local person. The industrial unit will be required to employ minimum 80 per cent of all the posts and minimum 50 per cent of managerial or supervisory posts from local persons. 2. A scheme to provide capital investment subsidy is necessary to attract investments to generate greater employment in industrially less developed and rural areas. With a view to secure balanced development of industries in Gujarat through dispersal of industries in remote and less developed areas, Government of Gujarat has approved a package of incentives. As a part of this package, Government of Gujarat is pleased to introduce the following scheme. 10. After having gone through the details of Scheme (resolutions as stated above), we are of the opinion that the subsidy to be allowed to the assessee was capital investment subsidy, meaning thereby - that subsidy was given for establishing the industry and not for carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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