Subsidy Received From The Government In The Form Of Refund Of VAT And CST, To Encourage Industrial Growth, Is A Capital Receipt: Pune ITAT

The Bench, consisting of S. S. Viswanethra Ravi (Judicial Member) and Inturi Rama Rao (Accountant Member), reiterated that for considering whether a subsidy is a capital receipt or a revenue receipt, the purpose for which the subsidy has been granted has to be considered and not the manner of its disbursal.

The assessee company Haldex India Pvt. Ltd. is engaged in the business of manufacturing and sale of engineering goods. The assessee received subsidy in the form of octroi refund from the Government of Maharashtra under the Package Scheme of Incentives, 2007. The Assessing Officer (AO) opined that the said subsidy received by the assessee was a revenue receipt. Hence, the AO invoked the provisions of Section 28(iv) of the Income Tax Act, 1961 and sought to tax the said subsidy received by the assessee. The assessee filed an appeal against the assessment order before the Commissioner of Income Tax (Appeals) (CIT(A)).

The CIT(A) held that the subsidy received by the assessee in the form of octroi refund from the Government of Maharashtra was capital in nature, since the said subsidy was granted as an incentive to encourage establishment of industries in less developed areas of the State. Also, the CIT(A) held that the provisions of Section 28(iv) of the Income Tax Act have no application to the monetary benefits received by the assessee. Against this order, the revenue department filed an appeal before the ITAT.

The revenue department submitted before the ITAT that the subsidy in the form of octroi refund was granted to the assessee company only to meet its cost of operation. Therefore, the revenue department contended that the amount of subsidy received by the assessee should be treated as a revenue receipt.

The assessee Haldex India averred that the subsidy was paid by the Government of Maharashtra only to encourage the establishment of industries in less developed areas of the State of Maharashtra, and therefore, the said subsidy should be treated as a capital receipt in the hands of the assessee. Thus, the assesee contended that the said subsidy received by it was not taxable under the Income Tax Act, 1961.

Section 28 (iv) of the Income Tax Act, 1961 provides that the value of any benefit or perquisite, whether convertible into money or not, arising from the business or exercise of a profession by the assesee, shall be chargeable to income tax under the head "Profits and gains of business or profession".

The ITAT observed that the subsidy was granted under the Package Scheme of Incentives, 2007 with the objective of encouraging industrial growth in less developed areas of the State.

The ITAT added that the quantification of subsidy under the said Scheme was linked with the amount of investment made in setting up the industrial units under the Scheme. The ITAT noted that the subsidy under the Scheme was disbursed in the form of refund of Value Added Tax (VAT) and Central Sales Tax (CST) paid by the industrial units.

The ITAT held that for considering whether a subsidy is a capital receipt or a revenue receipt, the purpose for which the subsidy has been granted has to be considered and not the manner of its disbursal.

The ITAT observed that the Supreme Court in the case of Sahney Steel & Press Works Ltd. versus CIT (1997) had laid down the 'purpose test' for ascertaining the nature of the subsidy.

The ITAT noted that the Supreme Court in the case CIT versus Ponni Sugars & Chemicals Ltd. (2008) had reiterated the 'purpose test' and had ruled that it is the purpose of the subsidy, and not its source or mode of payment, which is relevant for determining the nature of the subsidy.

The ITAT held that the subsidy was disbursed under the Package Scheme of Incentives, 2007 with the purpose of industrial growth, and that the amount of subsidy was linked with the amount of investment made in the industrial units. The ITAT held that merely because the subsidy was disbursed in the form of refund of VAT and CST, it would not alter the purpose of granting the said subsidy.

Thus, the ITAT ruled that the subsidy received by the assessee was a capital receipt, which was not chargeable to tax under the Income Tax Act.

The ITAT observed that the Finance Act, 2015 had inserted clause (xviii) to Section 2(24), with effect from 1^st April, 2016. As per the said clause, any assistance in the form of subsidy or grant of cash incentives shall be included in the taxable income of the assessee, except the subsidy which is taken into consideration for determining the cost of an asset, as specified.

The ITAT noted that since the relevant assessment year under consideration was prior to the coming into force of the amended Section 2(24)(xviii), thus the subsidy received by the assessee would not form a part of its total income.

Thus, the ITAT held that since the subsidy was granted as an incentive for encouraging the establishment of industries in the less developed areas of the State of Maharashtra, the subsidy could not be treated as a revenue receipt.

The ITAT ruled that the monetary benefits received by the assessee were not covered by provisions of Section 28(iv) of the Income Tax Act, since the said section only envisages benefits received in kind.

Hence, the ITAT dismissed the appeal of the revenue department.

Case Title: DCIT versus Haldex India Pvt. Ltd.

Dated: 19.05.2022 (ITAT Pune)

Representative for the Appellant/ Revenue Department: Mr. S. P. Walimbe

Representative for the Respondent/ Assessee: Mr. R. D. Onkar & Mr. Viksit Bhargava

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