Interest Subsidy is Capital Receipt, not chargeable to Income Tax; ITAT Kolkata [Read Order]

The Income Tax Appellate Tribunal of Kolkata Bench has recently held that the interest subsidy received by the assessee as part of the West Bengal Incentive Scheme, 2000 is capital receipt and hence, income tax cannot be imposed on such income.

In the instant case, the assessee is primarily engaged in the business of providing consultancy services in the specialized field of management, finance and tax. The services rendered are classified as Management Consultancy Services (MCS), Financial Advisory Services (FAS) and Tax and Regulatory Services (TRS). MCS division apart from management consultancy services caters to the software solutions of various clients. FAS provides business advisory services on corporate finance, restructuring and other related services. TRS largely caters to compliance, advice, litigation and planning of various tax and other regulatory issues. The assessee was in receipt of interest subsidy from West Bengal Industrial Development Corpora1tion (WBIDC) under the West Bengal Incentive Scheme, 2000 for new investment in Salt Lake, Kolkata. As per Clause 9.1 & 9.2 of the Scheme, an eligible industrial unit for its approved project would be entitled to Interest Subsidy to the extent of 50% of the annual interest liability on the loan borrowed from a commercial bank / financial institution / NBFC approved by the Reserve Bank of India for implementation of the approved project, subject to a limit of Rs 100 lakhs per year depending on the location of the unit. The assessee treated the interest subsidy as a capital receipt by directly crediting it to reserves and surplus in the original return of income. Later on based on the assessment order framed u/s 143(3) of the Act dated 18.3.2003 for the Asst Year 2002-03 , the assessee made a revised claim before the ld AO by crediting the interest subsidy to the cost of asset and claimed reduced depreciation accordingly. The ld AO observed that in the assessment proceedings u/s 143(3) of the Act for the Asst Year 2002-03, he had treated the capital subsidy to be reduced from the cost of the asset and had given reduced depreciation accordingly and with respect to interest subsidy, the same were treated as revenue receipt by crediting the same to interest expenditure account. The ld AO accordingly observed that the interest subsidy is clearly given on the annual interest liability year to year on the loan borrowed by the assessee. He held that any interest payment on loan taken forbusiness purpose is always revenue expenditure. Therefore by following the principle laid down by the Hon’ble Supreme Court in the case of Sahney Steel and Press Works Ltd vsCIT reported in (1997) 228 ITR 253 (SC) , the interest subsidy received by the assessee should also be treated as revenue receipt.

On first appeal, the ld CITA held that the interest subsidy should not be taxed as revenue receipt but the same needs to be reduced from the cost of the asset and assessee is entitled to claim reduced depreciation accordingly.Therefore, the assessee filed second appeal before the Appellate Tribunal.

While allowing the appeal, the Tribunal discussed the object of the West Bengal Incentive Scheme 2000 and held that the interest subsidy of Rs. 86,90,000/- is to be treated as capital receipt. Consequentially the assessee need not reduce the same from the cost of the asset for the purpose of claiming depreciation.

Read the full text of the order below.