Whether voluntary cash assistance received from non-resident parent for recouping losses and restoring negative net worth, is a capital receipt, exempt from tax - YES: Delhi HC

THE issues before the Bench are - Whether voluntary cash assistance received from parent company for recouping losses and restoring negative net worth, is a capital receipt, exempt from tax; Whether only assistance or voluntary payments received from government out of public funds and not from private parties, is considered as capital receipt and whether it is only the purpose of the assistance and not the mechanism, is the conclusive test to determine the nature of such receipts. And the verdict goes in favour of the assessee.

Facts of the case

The assessee is a 100% subsidiary of a BHW Holding AG, Germany ('Holding Company') and is engaged in the activity of

housing finance. The assessee had operational income and some other income totaling to Rs.50,99,81,185 against an expenditure of Rs.61,04,33,338, which included depreciation of Rs.1,34,50,656. Hence, for the purpose of restoring the net worth of the assessee which would have been coroded, otherwise, the Holding Company granted subvention assistance for an amount of Euro two million, into two tranches at different times in the financial year 2004-05. The AO was of the opinion that such amount was by way of casual receipt in order to assist the assessee to continue its business operation and therefore, rejected the assessee's contention. The assessee preferred an appeal to the CIT (A) who was of the opinion that the money received by the assessee company cannot be taxed as it was akin to a gift, and Gift Tax had been abolished. CIT(A) held that the amount was in the nature of capital receipt not chargeable to income-tax.

Aggrieved, the Revenue appealed before the Tribunal. The Tribunal observed that the subvention assistance was sent by the Holding Company towards restoration of the net worth of the assessee. It also observed that, the Holding Company had clearly confirmed and certified that the amount was paid for the purpose of restoration of net worth and such amount was not claimed as expenditure in their return of income and no tax benefit was availed. The Tribunal relied on the judgements in the case of Handicraft & Handloom Corporation, Lurgi India Company Ltd., Handicrafts & Handloom Export Corporation of India Vs. CIT, wherein it was held that grants received by companies from their parent companies for recouping loss was a nature of gifts or voluntary payments between private parties motivated by personal relationship and not stemming from any business considerations, hence to be treated as capital receipts. Whereas, the grants made by a Government or from public funds generally to assessee with a view to help them in the trade or to supplement their general revenues or trading receipts and not ear-marked for any specific or particular purpose were trading receipts.

Before the Tribunal, the DR contended that, definition of income in terms of section 2(24) did not distinguish between capital and revenue receipts and included receipts of this kind. He distinguished the facts of the case of Handicrafts & Handloom Export Corporation of India v. CIT, relied upon by the ITAT and contended that the same was not applicable, since the cash grant given was public in nature and not included within the definition of income. Th DR relied upon several judgements including Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd. wherein, it was held that the true and correct test to be applied was the purposive test. He stronlgy relied upon the observation laid out in this judgement that if subsidy scheme was to enable the assessee to run the business more profitably then the receipt was on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it was the object for which the subsidy/assistance was given which determined the nature of the incentive subsidy. The form or the mechanism through which the subsidy was given are irrelevant.

Having heard the parties, the HC held that,

++ this Court is of the opinion that there is no shift in the nature of the determinative test, to decide whether a receipt is revenue or capital. The Revenue is undoubtedly correct in urging that the income under Section 2(24) makes no difference between the nature and character of receipt. It is however the individual facts of each case which are decisive. The decision in Handicrafts & Handloom Export Corporation of India of this Court spelt out the relevant test i.e. whether the subsidy or the assistance is in order to ensure the recouping of losses. In that case the facts were sparker and the assessee was incurring losses year after year. STC as holding company and also the trading arm of the Government decided and infused cash assistance. No doubt there are observations in that judgment stating that the character of public funds was an important factor which persuaded the Court to hold that such assistance did not fall within the definition of income;

++ however, we see no difference in a present case. It is not in dispute that the assessee did incur losses a fact noticed by the ITAT in its narration of facts. In fact the assistance was given at point of time when the losses were anticipated, through the letters which were relied upon. So far as the decision in Ponni Sugar and Chemicals Ltd. is concerned, no doubt the Court clarified how a subsidy should be treated i.e. by purposive test. The Court presciently held if the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is to the revenue account. On the other hand under the subsidy scheme, if the object is to enable the assessee to set up a new unit or expand it then the receipt of the subsidy is to the capital account. Therefore, it is the assessee's action which determines whether subsidy is to avoid losses and liabilities or boost its profits. On a proper application of the above test we see no difference between the facts of the present case and those in Handicrafts & Handloom Export Corporation of India. The assessee was inevitable on the road to incurring losses; its holding company decided to intervene and render assistance. The ITAT has also recorded that, keeping aside the depreciation which the assessee would have been entitled to actual losses amounted to Rs.8.7 crores;

++ having regard to all these circumstances, this Court is of the opinion that the impugned order of the ITAT is based on sound reasoning and does not call for any interference. The appeal is dismissed.