CHAITANYA STEELSHAPE PRIVATE LIMITED,JALGAON vs. INCOME TAX OFFICER, WARD-1(2), JALGAON, JALGAON

आदेश / ORDER

PER R.S. SYAL, VP:

This appeal by the assessee emanates from the order dated

11-05-2023 passed by the CIT(A) in National Faceless Appeal

Centre, Delhi u/s.250 of the Income-tax Act, 1961 (hereinafter also

called ‘the Act’) in relation to the assessment year 2010-11.

addition of Rs.3,22,200/- made by the Assessing Officer (AO)

treating the amount of subsidy as a revenue receipt.

limited company engaged in the business of manufacturing of Press

parts, Engineering goods, Fabrication and Trading thereof. A return

2 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

was filed declaring total income of Rs.12,77,358/-. During the

course of assessment proceedings, the AO observed that the assessee

received a subsidy of Rs.3,22,200/- in the year under consideration,

which was taken to “Reserve and Surplus” in the balance sheet. On

being called upon to explain as to why the amount should not be

charged to tax as a revenue receipt, the assessee submitted that it

received Incentive under the Package Scheme for expansion of

industry in the approved backward area. In support of its contention,

the assessee also furnished a copy of the Agreement for disbursement

of Special Capital incentive and Package Scheme of Incentive. The

AO opined that the amount of subsidy was transferred by the

assessee to ‘Reserve and Surplus’ account, which indicated that it

was not utilised for incurring or setting up a new unit or for

expansion of the existing one. Relying on the judgment in Sahney

Steel Works Ltd. Vs. CIT (1997) 228 ITR 253 (SC), he held the

amount chargeable to tax. The ld. CIT(A) did not provide any

succour to the assessee, against which the extant appeal has been

instituted.

material on record, it is seen that the assessee received subsidy of

Rs.3,22,200/- in the year under consideration, which was transferred

3 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

to “Reserve and Surplus’ on the liability side of the balance sheet.

The assessee explained to the AO that the subsidy was granted for

making investment in Building and Plant and machinery. The AO

did not accept the contention on the ground that the amount was

standing on the liability side of the balance sheet. In my view,

receipt of subsidy is one transaction and purchase of an asset another.

Subsidy, if of the revenue nature, is taken to the credit side of the

Profit and loss account; and if of the capital, then to the balance

sheet. In the latter case, if subsidy is relatable to a particular asset,

then it reduces the cost of the concerned asset and if not, it is taken to

Reserve and surplus account on the liability side. On the other hand,

transaction of purchase of the corresponding asset etc. continues

independently. The mere fact that the assessee reflected the amount

of subsidy in `Reserve and Surplus’ of its balance sheet is just an

indicator that it was not a revenue receipt from the stand point of the

assessee. Such a reflection per se is not determinative of the

taxability or otherwise of the subsidy. The decisive test for

determining whether subsidy is `revenue’ and hence taxable; or

‘capital’ and consequently not taxable during the year is to ascertain

purpose and object and not how it is reflected in the accounts.

4 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

assessee proposed to expand its industry by investing Rs.2.54 lakh in

Building and Rs.33.25 lakh in Plant and machinery, totalling to

Rs.35.80 lakh, against which subsidy of Rs.8.055 lakh was

sanctioned by means of Eligibility Certificate dated 18-10-2006

issued by the General Manager, District Industries Centre, Jalgaon.

A copy of the Certificate has been placed on record. Para 2 of the

Certificate states that: “On the basis of the information/details

furnished by you, under the application form for Eligibility

Certificate under the Package Scheme of Incentives, 2001....., the

Gross Value of Fixed Capital Investment proposed to be made for the

above indicated thereunder is found to be of the order of Rs.35.80

lacs.” Para 6 of the Certificate states that: “The holder of Eligibility

Certificate shall - (i) Complete all the Final Effective Steps as are listed under the 2001 Scheme by 31st March, 2007 and furnish the

complete documentary evidence in respect thereof to the satisfaction

of IMPLEMENTING AGENCY.” On going through the relevant

paras of the Eligibility Certificate, it clearly transpires that the

incentive of Rs.8.055 lakh was sanctioned as a quid pro quo for the

Gross Value of Fixed Capital Investment of Rs.35.80 lakh agreed to

be made by the assessee. This fact is further corroborated from para 3

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of the Eligibility Certificate stating that: “Accordingly subject to

fulfilment of all the terms and conditions of the 2001 Scheme

Procedure made thereunder of this Eligibility Certificate the

following entitlements by way of incentive admissible under the

scheme are provisionally worked out on the basis of actual

investment indicated by the unit for the project”. It is, therefore,

amply manifest that the sanction of incentive of Rs.8.055 lakh, out of

which incentive of Rs.3,22,200/- was actually received by the

assessee during the year, was sanctioned for making Capital

Investment in Building and Plant and Machinery to the tune of

Rs.35.80 lakh. Now the moot question is whether such subsidy

received by the assessee is a ‘Capital’ or ‘Revenue’ receipt?

Hon’ble Supreme Court in Sahney Steel Works Ltd. (supra) which

has laid down the criterion for determining if the subsidy is a Capital

or a Revenue receipt. The relevant test is to see the ‘purpose’ or

object of the subsidy. If the purpose is to enable the carrying on the

business operations more profitably by means of some assistance

against certain expenses incurred or taxes paid, then it should be

treated as ‘Revenue’ receipt. In the case of Sahney Steel (supra), the

assessee received subsidy by way of reduction of Sales Tax on

6 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

purchase of machinery after commencement of the production. The

Hon’ble Supreme Court held that the subsidy given after

commencement of production to enable the assessee to run the

business more profitably was ‘operational subsidy’ and hence a

‘Revenue’ receipt. It, therefore, follows that when the Government

comes forward to help the existing businesses de hors the setting up

or expansion of new industrial units, it becomes a ‘Revenue’ receipt

chargeable to tax. Au contraire, if the subsidy does not satisfy the

above conditions, or, in other words, the purpose of the subsidy is not

to subsidize the expenses incurred or taxes paid, but to encourage the

industrial growth, then it assumes the character of ‘Capital’ receipt.

To simply put, if the subsidy is received for setting up of a new

industry or expansion, then it ceases to be ‘operational subsidy’ and

becomes a ‘Capital’ receipt. The crux of the matter is that one needs

to ascertain the ‘purpose’ for which the subsidy was granted and not

the timing or the manner of quantification. If the ‘purpose’ of the

subsidy is to accelerate the industrial growth by setting up new units

or the expansion of the existing units, then it becomes a ‘Capital’

receipt. The manner of disbursement of subsidy, that is, whether by

means of cash paid or bank loans on soft terms or reduction in

expenses or taxes etc. is absolutely alien to the question of

7 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

determination of the nature of subsidy as a ‘Capital’ or a ‘Revenue’

receipt. It is quite possible that a scheme of the Government makes

an assessee eligible for subsidy on setting up or expansion of

industry in a particular backward area and such subsidy is granted

after the commencement of production in the shape of reduction in

Sales Tax or Electricity bill etc. In such circumstances, even though,

the subsidy is in the nature of reduction in Sales Tax or Electricity

bills etc. after the commencement of production, still it will be a

capital receipt, because ‘purpose’ of the subsidy is to set up a new

units or expansion of the existing units. Thus, it is evident that one

needs to examine the purpose of subsidy and not the manner of its

quantification or disbursement. If subsidy is in the nature of a

‘Revenue’ receipt as is the case of Sahney Steel Works Ltd. (supra), it

becomes ‘Revenue’ receipt chargeable to tax. If, however, the

subsidy assumes the character of a ‘Capital’ receipt, then other

provisions of the Act get triggered. In holding the subsidy a revenue

receipt, the Hon’ble Apex Court in Sahney Steel (supra) found that :

`No financial assistance was granted to the assessee for setting up of

the industry. It is only when the assessee had set up its industry and

commenced production that various incentives were given for the

limited period of five years. It appears that the endeavour of the State

8 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

was to provide the newly set up industries a helping hand for 5 years

to enable them to be viable and competitive.’ It is in this backdrop of

the facts that the subsidy was held to be chargeable to tax as a

revenue receipt. The Hon’ble Summit Court also added a word of

caution by remarking in para 8 that : `If the purpose is to help the

assessee to set up its business or complete a project, as in Saeham

Harbour Dock Co.’s case (supra), the monies must be treated as to

have been received for capital purpose.’ Justifying the taxability of

subsidy as a revenue receipt in that case, the Hon’ble Supreme Court

observed in para 13 that : `In the case before us, subsidies have not

been granted for production of or bringing into existence any new

asset. The subsidies were granted year after year only after setting up

of the new industry and commencement of production. Such a

subsidy could only be treated as assistance given for the purpose of

carrying on of the business of the assessee.’ The nitty gritty of the

above discussion is that if subsidy is given to an already operational

unit and there is no link between the setting up of the industry and

the grant of subsidy in the form of reduction in expenses incurred or

taxes paid etc., then it becomes revenue subsidy; but where it is given

for setting up of industry or expanding existing industry, such

subsidy becomes a capital receipt.

9 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

Hon’ble Supreme Court in CIT Vs. P.J. Chemicals Ltd. (1994) 210

ITR 830 (SC) in which the assessee was granted Central Subsidy

which was admittedly of the ‘Capital’ nature. The Hon’ble Supreme

Court held that the amount of subsidy was not for the specific

purpose of a portion of the cost of the asset, though quantified as a

percentage of such cost and hence it did not partook of the character

of a payment intended either directly or indirectly to meet the ‘actual

cost’. Resultantly, the capital subsidy was held to be not deductible

from the cost of assets in terms of section 43(1) of the Act. The

Finance (No.2) Act, 1998 inserted Explanation 10 to section 43(1)

w.e.f. 01-04-1999 to the effect that where a portion of the cost of an

asset acquired by the assessee has been met directly or indirectly by

the Central Govt. or a State Govt. etc. in the form of a subsidy or

grant, then so much of the cost as is relatable to such subsidy or grant

etc. shall not be included in the actual cost of an asset to the assessee.

Proviso to the Explanation further provides that where such subsidy

or grant etc. is of such a nature that it cannot be directly related to the

asset acquired, then, so much of the amount which bears to the total

subsidy the same proportion as such asset bears to all the assets in

respect of which the subsidy is so received, shall not be included in

10 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

the actual cost of the asset to the assessee. It is palpable that

Explanation 10 to section 43(1) has the effect of neutralizing the

decision of P.J. Chemicals (supra) by making it clear that where a

portion of cost of an asset acquired by the assessee has been met

directly or indirectly by means of some subsidy, then it should be

reduced from the cost of asset whether or not it is directly relatable to

the asset acquired. Ergo, it is manifest that the Explanation covers all

the cases of receipt of grant towards cost of an asset acquired

provided it is for meeting the cost or a portion of the cost of the asset.

There can be other scenarios where the subsidy is otherwise of a

capital nature but is not given to meet the cost of assets as such,

thereby not magnetizing the mandate of Explanation 10 to section

43(1) of the Act. The ‘purpose’ test as laid down in Sahney Steel

Works Ltd. (supra) would come into play thereby not permitting to

treat the amount of subsidy as a ‘Revenue’ receipt. Such subsidy of

capital nature would spare the rod of taxation. In order to plug such

a loophole, the Finance Act, 2015 has amended the definition of

`income’ u/s.2(24) by inserting clause (xviii) w.e.f. 01-04-2016

providing that the subsidy or grant etc. given in cash or kind by the

Government or any authority etc. would be `income’ except where,

11 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

inter alia, such subsidy has been taken into account for determining

the actual cost as per Explanation 10 to section 43(1) of the Act.

Works Ltd. (supra); Explanation 10 to section 43(1); and section

2(24)(xviii), the position which now emerges is that if the ‘purpose’

of the subsidy is to extend a helping hand by the Government etc.

towards the expenses incurred or taxes paid etc. to a continuing

business, unlinked with its setting up or expansion, it would be of the

‘revenue’ nature and chargeable to tax. Where the subsidy is granted

otherwise than for the above, such as, for setting up a new industry or

expansion of an existing industry, then it would be chargeable to tax

as `income’ in terms of section 2(24)(xviii), provided it is not given

directly or indirectly to meet the cost of an asset acquired by the

assessee. If the subsidy is so given for meeting the cost of an asset,

then it would be reduced from the cost of an asset u/s.43(1) of the

Act and would not be separately chargeable to tax as income. The

crux of the matter is that the hitherto Capital subsidy would now

either be reduced from the cost of asset in terms of Explanation 10 to

section 43(1) or would be directly chargeable to tax as `income’ u/s

2(24)(xviii) of the Act. However, it is pertinent to note that clause

(xviii) to section 2(24) has been inserted by the Finance Act, 2015

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w.e.f. 01-04-2016 which is prospective in nature and cannot apply to

earlier assessment years.

amount of subsidy received by the assessee is towards the investment

made in expansion of its industrial unit under the Package Incentive

Scheme 2001. Applying the ‘purpose’ test, it would be characterised

as a ‘Capital’ receipt. Further, it is not the case of the AO that

Explanation 10 to section 43(1) is attracted. Thus, section

2(24)(xviii) would be attracted, in principle, but would not apply as

the assessment year under consideration is prior to the insertion of

the proviso. It is, therefore, held that the authorities below were not

justified in treating the amount of subsidy as a ‘Revenue’ receipt

chargeable to tax.

Sd/- (R.S.SYAL) VICE PRESIDENT पुणे Pune; िदनांक Dated : 28th July, 2023 सतीश

13 ITA No.792/PUN/2023 Chaitanya Steelshape Private Limited

आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent 2. 3. The Pr.CIT concerned 4. DR, ITAT, ‘SMC’ Bench, Pune गाड� फाईल / Guard file. 5.

आदेशानुसार/ BY ORDER,

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 27-07-2023 Sr.PS 2. Draft placed before author 28-07-2023 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *