This tax alert summarizes a recent ruling of the Delhi High Court (HC) in the case of Handicrafts and Handlooms Export Corporation of India Ltd. (Taxpayer) on the taxability of subvention payments received by the Taxpayer from its holding company, under the Indian Tax Laws (ITL).
The HC, while placing reliance on its own earlier rulings in the Taxpayer’s own case, held that the amount received by the Taxpayer was to recoup its losses, and not for supplementing its trading receipts. Having regard to the “purpose” test espoused by the Supreme Court (SC) in various rulings, the HC held that the receipt was capital in nature and not taxable under the ITL.
The present controversy has been a contentious issue wherein the Tax Authority has attempted to tax such grants/subvention as taxable receipts. In the past, various Courts in India have held that amounts received by a subsidiary company from its holding company for recouping its loss is a non-chargeable capital receipt. However, the “purpose” for which the amount is received largely determines the tax implication i.e., revenue or capital in nature.
The present decision of the HC reiterates that where the sum has been received voluntarily and is for enabling the ailing subsidiary to restore its net worth or to recoup its losses or when payment by the parent is for protecting its own investment in the subsidiary, the same is capital in nature and, accordingly, not taxable.
While the amount may not be taxable in normal computation of income, the Taxpayer may need to evaluate the impact while computing its books profits for the purposes of levy of minimum alternate tax if such receipt is required to be credited to profit and loss account.
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