The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that the amount of subsidy received towards investment made in the expansion of industrial units shall be characterized as capital receipt.
The assessee is a private limited company engaged in the business of manufacturing Press parts, Engineering goods, Fabrication, and Trading thereof. A return was filed declaring a total income of Rs.12,77,358/-.
During the course of assessment proceedings, the Assessing Officer observed that the assessee received a subsidy of Rs.3,22,200/- in the year under consideration, which was taken to “Reserve and Surplus” in the balance sheet.
The Assessing Officer did not accept the contention of the assessee on the ground that the amount was standing on the liability side of the balance sheet.
The assessee proposed to expand its industry by investing Rs.2.54 lakh in Building and Rs.33.25 lakh in Plant and machinery, totaling Rs.35.80 lakh, against which subsidy of Rs.8.055 lakh was sanctioned by means of an Eligibility Certificate issued by the General Manager, District Industries Centre, Jalgaon.
In the judgment of the Supreme Court in Sahney Steel Works Ltd. which has laid down the criterion for determining if the subsidy is a Capital or a Revenue receipt. The relevant test is to see the ‘purpose’ or object of the subsidy. If the purpose is to enable the carrying on the business operations more profitably by means of some assistance against certain expenses incurred or taxes paid, then it should be treated as a ‘Revenue’ receipt.
The Single-member bench comprised of R.S. Syal (Vice-President) held that the amount of subsidy received by the assessee is towards the investment made in the expansion of its industrial unit under the Package Incentive Scheme 2001. Applying the ‘purpose’ test, it would be characterized as a ‘Capital’ receipt. Further, it is not the case of the Assessing Officer that Explanation 10 to section 43(1) is attracted.
Thus, section 2(24)(xviii) would be attracted, in principle, but would not apply as the assessment year under consideration is prior to the insertion of the proviso. It is, therefore, held that the authorities below were not justified in treating the amount of subsidy as a ‘Revenue’ receipt chargeable to tax. Therefore, the appeal of the assessee was allowed.
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