THE issue before the Bench is - Whether when the subsidy sanctioned by the State is not for buying capital assets and same was received after commencement of production it is to be construed as revenue receipt. YES is the answer.
Facts of the case
The assessee is a company. It had filed return of income for A.Y. 1996-1997 declaring the total loss of Rs.35,60,619/-. After that, a notice u/s 142(1) along with the detailed questionnaire was issued. During the course of assessment proceedings and as per the balance-sheet of the assessee, it revealed that the assessee received state subsidy of Rs.19,82,600/- in the AY under consideration. As the aforesaid subsidy was not offered as revenue receipt in the return, vide notice u/s 142(1), assessee was asked to furnish the approval letter, sanctioned letter of subsidy and the scheme under which, the subsidy was received. That the assessee furnished the letter according to which, the capital investment subsidy of Rs.21,97,000/- was sanctioned to the assessee vide letter of Gujarat State Financial Corporation on behalf of the State Government. It also revealed that the said subsidy was to be disbursed in installment after fixed assets of the proposed project was acquired and paid before 01.04.1986. The condition as per the approval letter of the subsidy shall be discussed hereinafter. That thereafter, AO treated the subsidy of Rs.19,82,600/- as revenue receipt and it added to the income of the assessee, relying upon the decision of the SC in the case of Sahney Steel and Press works Ltd. and others V/s. CIT 2002-TIOL-11-SC-IT. On appeal, CIT(A) confirmed the order passed by AO treating the subsidy amount as revenue receipt. On further appeal, Tribunal, had allowed the appeal preferred by the assessee by quashing and setting aside the order of assessment passed by the AO confirmed by the CIT(A) treating the subsidy amount of Rs.19,82,600/- as revenue receipt by holding that the amount of subsidy was a capital investment/capital in nature.
Held that,
++ as per the sanctioned letter, it appears that the above subsidy was to be disbursed in installment after fixed assets of the proposed project was acquired and paid before 01.04.1986. One of the conditions as per the approval letter of the subsidy was that the sanctioned subsidy shall be disbursed only if the unit shows increase of 25% of the production over the existing installed capacity within one year at any point of time after implementing the expansion scheme. It has come on record that the assessee received the amount of Rs.19,82,600/- by way of subsidy from the Gujarat State Financial Corporation on behalf of the State in the current AY under consideration. It has come on record that out of the aforesaid amount of Rs.19,82,600/-, which was paid to the assessee by way of subsidy, Rs.8,82,600/- was deducted directly as interest on loan from the Gujarat State Financial Corporation and a sum of Rs.11 lacs was paid to the Gujarat Industrial Coopertive Bank Ltd., Ankleshwar on 13.02.1996. It has also come on record that thus, the assessee received subsidy after production was commenced. The purpose of subsidy does not seem to buy any capital asset or for establishment of project. In the backdrop of the aforesaid facts, the substantial question of law raised/involved in the present tax appeal is required to be considered;
++ in the case of Sahney Steel and Press works Ltd., while considering the similar question, SC has observed and held that if payments in nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are, therefore, trade receipts. It has observed that the character of the subsidy in the hands of the recipient-whether revenue or capital-will have to be determined having regard to the purpose for which the subsidy is given. It has observed that source of the fund is quite immaterial. It has further observed that, however, if the purpose is to help the assessee to set up its business or complete a project, the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of trade. In the case before SC, the amounts of subsidy were granted year after year, only after setting up of the new industry and commencement of production and to that, it has observed and held that such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee and thus, the subsidies were of revenue nature and would have to be taxed accordingly;
++ applying the ratio laid down by SC in the case of Sahney Steel and Press works Ltd., the subsidy amount of Rs.19,82,600/- received by the assessee in the year under consideration is to be treated as revenue receipt/revenue in nature and the same was required to be included in the income of the assessee. From the impugned order passed by the Tribunal, it appears that the Tribunal has allowed the appeal preferred by the assessee and has held the amount of subsidy of Rs.19,82,600/- as capital in nature solely relying upon and considering its earlier decision in ITA No.3565/Ahd/2003 and 1721/Ahd/2005. However, the Tribunal has materially erred in not properly appreciating the distinguishable facts in both the cases. Under the circumstances and considering the facts and circumstances of the case narrated hereinabove, we are of the opinion that the Tribunal has materially erred in not following and/or distinguishing the decision of the SC in the case of Sahney Steel and Press works Ltd. We are of the opinion that the substantial question of law raised/involved in the present tax appeal is squarely covered against the assessee and in favour of the Revenue in view of the decision of SC in the case of Sahney Steel & Press works Ltd. Under the circumstances, the Tribunal has materially erred in treating the amount of subsidy of Rs.19,82,600/- as capital in nature and has materially erred in quashing and setting aside the order passed by AO confirmed by the CIT(A). In view of the above and for the reasons stated above, the present appeal succeeds. The substantial question of law raised in the present tax appeal is accordingly held in favour of the Revenue and against the assessee and the order passed by the AO treating the amount of subsidy of Rs.19,82,600/- as revenue receipt is hereby restored and confirmed.
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