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Reimbursement of Commercial Taxes under Bihar Incentive Scheme is a Capital Receipt, Not Taxable: ITAT Mumbai [Read Order]

compensation - ITAT - Ahemdabad - taxscan

On an appeal filed by the Revenue against the Order of the CIT(A) in the case Dy. Commissioner of Income Tax – 4(2) v.M/s Harinagar Sugar Mi l ls Ltd., the Tribunal held that capital subsidy being 10% of investment in machinery and equipment is not required to be deducted from the cost of plant and machinery and also the subsidy received as excise duty reimbursement cannot be taken as revenue receipt and the A.O. is not entitled to add the above two items to the book profit computed u/s 115JB of the Income Tax Act. The decision was based on the Tribunal’s decision in the own case of the assessee for earlier years.

The assessee company is engaged in the business of manufacturing of sugar, alcohol, biscuit and wind energy. The assessee company also own sugarcane farms in which the sugar cane is grown and which is consumed by the sugar mills of the assessee company. The A.O. observed that the assessee company has received a capital subsidy of Rs. 4,11,43,000/- being 10% of investment in machinery and equipment and subsidy of Rs. 2,26,70,311/- by way of compensation Excise duty under Bihar Incentive Package – 2006 for undertaking the expansion of its capacity from 8500 TCD to 10000 TCD in the previous year 2007-08 (the assessment year 2008-09). The assessee company has treated the said subsidy as capital receipt and credited the amount to the capital reserve account, without crediting the same to the Profit & Loss account. However, the AO has rejected the claim of the assessee company by treating the said receipt as capital receipts and the capital subsidy of Rs. 4,11,43,000/- being 10% of investment in machinery and equipment was reduced from the cost of Plant and Machinery and proportionate depreciation was disallowed, and also subsidy of Rs. 2,26,70,311/- by way of reimbursement of Excise duty was treated as revenue in nature and added to the income of the assessee company by the AO vide assessment orders u/s 143(3) of the Act for the assessment year 2008-09. Similarly, the A.O. observed that the assessee company had received a capital subsidy of Rs. 3 crores under Bihar Incentive Package – 2006 for setting up of the distillery unit being 10% of investment in machinery and equipment for the establishment of distillery plant and subsidy of Rs. 4,13,51,468/- by way of compensation of Excise duty under Bihar Incentive Package 2006 for undertaking an expansion of its capacity from 8500 CTD to 10000 TCD in the previous year 2008-09 (the assessment year 2009-10). Again, the AO held that capital subsidy of Rs. 3 crores being 10% of investment in machinery and equipment is to be reduced from the cost of plant & machinery and proportionate depreciation was disallowed and subsidy of Rs. 4,13,51,468/- by way of reimbursement of Excise duty was treated as revenue in nature and was added by the AO to the total income of the assessee company for the assessment year 2009-10 vide assessment orders passed u/s 143(3) of the Income Tax Act.

The Main Issues brought before the Tribunal was the following:

  1. Whether the capital subsidy received under the Bihar Incentive package is not to be deducted from WDV of the plant and machinery?
  2. Whether the subsidy received by the way of compensation of commercial Tax (VAT) is a revenue receipt?

Regarding the first issue, the Tribunal found that in the instant assessment year, the assessee company has received subsidy by way of compensation of commercial taxes(VAT) paid under Bihar Incentive Scheme 2006 of Rs.43,89,465/- on purchase of molasses. It is not disputed that the subsidy scheme formulated by the Government of Bihar is for the purpose of attracting capital investment and to encourage setting up the industry/expand the existing unit. It is pertinent to mention that the character of a subsidy in the hands of the tax-payer has to be determined with respect to the purpose for which the subsidy is given. The point of time at which the subsidy is paid and the source or the forms of subsidy are immaterial. If the object of the subsidy scheme is to enable the tax-payer in setting up the new unit or to expand the existing unit, then the receipt of the subsidy is to be treated on capital account. We have observed that the learned CIT(A) has also allowed the claim of the assessee company in treating reimbursement of commercial taxes(VAT) based upon the decision of the Tribunal for earlier years with respect to the reimbursement of excise duty holding that the subsidy received by the assessee by way of reimbursement of commercial taxes(VAT) is for setting up of a new unit/expansion of existing unit and is a capital receipt not eligible to tax.

It was further observed that compensation of commercial taxes (VAT) on purchase of Molasses under the Bihar incentive Package 2006 is given to promote the establishment of new units and for expansion of capacity of existing units. As per this scheme, the distillery is entitled to compensation of commercial taxes(VAT) paid on the purchase of molasses for the production of alcohol and the said benefit will be available for five years from the date of establishment of distillery unit. In view of this, it was observed that there is no valid reason to interfere with the order of the learned CIT(A) with respect to this issue also as this scheme of compensation of commercial taxes(VAT) on purchase of Molasses under Bihar Incentive Package 2006 is similar to scheme of compensation of excise duty under Bihar Incentive Package 2006 and therefore it was held that this is a capital receipt which is not chargeable to tax.

Read the full text of the order here.

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