Subsidy Received By Nestle India As Incentive To Establish Industrial Unit Is Capital Receipt: Delhi High Court

“Since the subsidy in this case was not intended as a payment to meet, directly or indirectly, a part of the cost of the assets, no adjustment could have been ordered, as was directed by CIT(A). The Tribunal, on this score, in our view, reached the correct conclusion” the division bench of Justices Rajiv Shakdher and Girish Kathpalia observed.

The case dates back to the Assessment Year 2009-10, when Nestle India filed its Return of Income, declaring a total income of Rs. 728,92,72,770/-. Following a scrutiny assessment, the assessed income was revised to Rs. 798,95,13,887/- due to various additions made by the assessing officer.

The additions included Rs. 61,01,74,000/- disallowed as license fee, Rs. 39,25,411/- disallowed under Section 14A of the Income Tax Act, Rs. 8,01,12,224/- awarded as interest under Section 244A of the Act, Rs. 1,39,152/- disallowed as depreciation claimed on UPS, Rs. 33,90,330/- disallowed as depreciation on energy-saving and pollution control devices, and Rs. 25,00,000/- disallowed as a subsidy received from the Government of Goa.

Following these assessments, Nestle India appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. While the CIT(A) allowed some of the appeals, such as the deletion of disallowances concerning license fees, expenses incurred for earning exempt dividend income, and depreciation claimed on UPS and energy-saving devices, the addition of Rs. 8,01,12,224/- as interest was confirmed.

Regarding the subsidy of Rs. 25,00,000/- received from the Government of Goa, the CIT(A) acknowledged it as a capital receipt and directed its reduction from the block of assets proportionately, treating it as an incentive for asset acquisition. This decision led both the revenue appellant and Nestle India to file appeals with the Tribunal against the CIT(A)'s order.

The main issue addressed by the court concerned the treatment of the subsidy received by Nestle India. The court observed that the Tribunal agreed with the CIT(A) that the subsidy constituted a capital receipt. However, it ruled that the subsidy could not be adjusted against the block of assets since it was not intended to meet any part of the actual asset costs.

The court further noted that the Tribunal distinguished between the calculation of the subsidy's quantum and its purpose. Considering that the subsidy was provided as an incentive to establish an industrial unit in a backward area and generate local employment, the court agreed with the Tribunal and CIT(A) that the subsidy should be regarded as a capital receipt.

“Similarly, insofar as the other limb of the issue is concerned, we agree with the Tribunal that the measure for calculating the subsidy, which was 25% of the fixed capital cost, cannot determine the purpose for which the subsidy was given, and, thus, as directed by CIT(A), adjusted proportionately against the cost of the assets,” said while dismissing the appeal.

Case Title: Principal Commissioner Of Income Tax Vs Nestle India Ltd

Citation: 2023 LiveLaw (Del) 572

Appearance:

Appellants: Mr Abhishek Maratha, Sr. Standing Counsel with Mr Akshat Singh, Advocate

Respondents: Mr Ajay Vohra, Sr Advocate with Mr Aniket D. Agarwal, Advocate.

Click Here To Read/Download Order