Subsidy to set up a New Unit or Expand existing unit is Capital Receipt: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Pune Bench ruled that the subsidy to set up a new unit or expand existing unit is Capital Receipt.

The assessee, Inox Air Products Pvt. Ltd., is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and selling Industrial / Medical gases. The return of income for the AY 2014-15 was filed declaring a total income of Rs.1,32,98,33,950/-. Against the said return of income, the assessment was completed by the Assessing Officer at a total income of Rs.141,87,22,120/-.

The disparity between the returned income and the assessed income is on account of the  Addition of subsidy received considering new industrial sales from State Governments of Rs.8,81,44,464/- treating as a revenue receipt as against the assessee’s claim of capital receipt.

In respect of the Jejuri Unit, the assessee company had made investments towards expansion of the existing plant at Jejuri. The cost of investment on the expansion is eligible for subsidy under Industrial Promotion Subsidy under Package Scheme of Incentives 2007 issued by the Government of Maharashtra for a period of 3 1⁄2 years. The subsidy was accounted for on an accrual basis and the same is credited to the Capital Reserve account.

On appeal before the CIT(A), considering the scheme of the subsidy in all the three States, CIT(A) has concluded that the subsidy was given for capital investment and the same is also linked to the capital investment. He further concluded that the fact that part of the subsidy was given by way of refund of sales tax paid by the appellant will not change the character of the subsidy and therefore held that it is a capital receipt. However, the CIT(A) , considering the provisions of Explanation 10 of Section 43(1) of the Income Tax Act, directed the Assessing Officer to reduce the amount of the subsidy received from the respective block of assets.

The assessee submitted that the issue is squarely covered by the decision of this Coordinate Bench of the Tribunal in assessee’s own case for A.Y. 2013-14 wherein the Coordinate Bench of the Tribunal considering the Scheme of the subsidy concluded that the purpose of subsidy is only to accelerate the industrial development in the concerned States and by applying ‘purpose test’ in determining the nature of the subsidy, held that the same cannot be construed as a revenue receipt in nature.

The two-member bench of Judicial Member Parth Sarthi Choudhary and Accountant Member Inturi Rama Rao ruled that on perusal of the respective schemes of the subsidy, it is clear that the subsidy is only granted in order to accelerate the industrial development and promote the employment opportunities. It is a settled position of law that to determine the true nature of the subsidy, a “purpose test” has to be applied as held by the Supreme Court in the case of CIT Vs. Ponni Sugars and Chemicals Ltd.

“The Co-ordinate Bench of the Tribunal has rightly applied the “purpose test” and had come to conclusion that the nature of subsidy is only in capital nature and we do not see any reason to differ with the reasoning of the Coordinate Bench of the Tribunal in assessee’s own case and accordingly, we do not find merit in the grounds of appeal filed by the Revenue,” the ITAT ruled.

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Inox Air Products Private Limited vs Addl.Commissioner of Income Tax , 2021 TAXSCAN (ITAT) 274 , Shri C.H. Naniwadekar , Shri Deepak Garg