By TIOL News Service

CHANDIGARH, SEPT 21, 2018: THE ISSUE IS - Whether purpose and object of the scheme under which subsidy is given by govt decides its true nature and the sales tax subsidy for setting up new manufacturing unit is capital receipt. YES IS THE VERDICT.

Facts of the case

The assessee company had filed return for relevant AY. During the relevant year, the assessee received sales tax subsidy and incentive from the Government under the scheme of State government for setting up a manufacturing unit of the assessee at Jhagadia District Baroch in Gujarat. The AO after examining the scheme and nature of the subsidy received by the assessee observed that under the scheme the incentive is given by the Government after unit starts its commercial production. That the scheme provides for subsidy in the form of sales tax exemption or deferment for a period of few years after commencement of the commercial production by the unit. The AO further observed that the scheme did not fund specially part of capital investment for setting up the industry in backward areas and, hence, the same were Revenue in nature. The AO made addition accordingly. On appeal, CIT(A) held that the sales tax subsidy received by the assessee was a capital receipt and not chargeable to tax. Aggrieved the Revenue filed appeal before the Tribunal.

Tribunal held that,

++ the CIT(A) has allowed the claim of the assessee while following the decision of the Tribunal in earlier assessment year in the own case of the assessee wherein the subsidy received by the assessee has been held to be a 'capital receipt'. The purpose of scheme was to encourage new investment in core sector of the industry, to accelerate the development of the backward area of the state and to create large scale employment opportunities. The issue under consideration is now settled by the decision of the Supreme Court in the case of 'CIT-I Vs. M/s Chaphalkar Brothers, Pune' and Others. It was held that to hold whether any of such receipts are capital or Revenue in nature, 'purpose test' is to be applied. If the purpose is for the setting up of new industry, then the receipts are to be considered as capital in nature. However, if the receipts are in the nature of facilitation/helping hand to the trade, the same are to be construed as Revenue in nature. What is important is the object for which the subsidy/ incentive is granted. In view of this proposition of law laid down by the Supreme Court, the receipts of the assessee on account of subsidy, excise duty refund and interest refund are held to be capital in nature and not taxable. Since the receipts have been held to be capital in nature, hence, no addition is attracted on account of these receipts into the income of the assessee. No infirmity was found in the order of the CIT(A) and, therefore, ground raised by the Revenue is dismissed.

(See 2018-TIOL-1605-ITAT-CHD)