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Facts
In the first round of litigation, the Tribunal remitted the issue of Sales Tax/VAT subsidy to the AO to determine if it was a capital receipt. The AO treated the subsidy as revenue, but the CIT(A) later directed it to be treated as a capital receipt, relying on past tribunal decisions in the assessee's own case for earlier assessment years (AY 2011-12 and 2012-13).
Held
The Tribunal upheld the CIT(A)'s decision, following the 'purpose test' established by the Supreme Court in Ponni Sugars & Chemicals Ltd., which states that the character of the receipt depends on the purpose for which the subsidy is given. Since the subsidy aimed at promoting industrialization and establishing new units in backward areas, it was held to be a capital receipt.
Key Issues
Whether the Sales Tax/VAT subsidy received by the assessee is a capital receipt or a revenue receipt for income tax purposes.
Sections Cited
35E, 40A(9), 115JB
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SMT. BEENA PILLAI, HONBLE
The captioned appeals by the revenue are preferred against the order of the ld. CIT(A)-54, Mumbai, pertaining to AY 2005-06 to AY 2009-10. 2. Since common issues are involved, these appeals were heard together and are disposed off by this common order for the sake of convenience and brevity.
The solitary grievance relates to the treatment of Sales Tax/VAT subsidy received by the assessee as a capital receipt on the ground that subsidy received by the assessee is purely linked to production of goods and not to capital expenditure undertaken by the assessee.
Briefly stated, the facts of the case are that in the first round of litigation, the quarrel travelled up to the Tribunal and the Tribunal in ITA No. 5751/Mum/2009 for AY 2005-06 with regard to the assessee's appeal gave relief on the additions/disallowance relating to claim of deduction u/s 35E of the Act, disallowance u/s 40A(9) of the Act and claim of depreciation in respect of badminton court. The claim in respect of Sales Tax/VAT subsidy was taken before the Tribunal by way of an additional ground and the claim of the assessee was that the said subsidy is a capital receipt. While deciding the issue on additional ground, the Tribunal set aside the issue and remitted it back to the file of the AO to examine the claim of the assessee, in accordance with law.
Pursuant to the decision of the Tribunal, the AO issued showcause notice to the assessee calling for the details with regard to the claim of Sales Tax/VAT subsidy from Government of Madhya Pradesh. The assessee furnished a detailed reply explaining the nature of subsidy and its claim to be capital receipt, drawing support from various judgments of the Hon'ble Supreme Court.
After considering the submission of the assessee, the AO was of the firm belief that the ratio laid down by the Hon'ble Supreme Court in the case of Commissioner of Income-tax, Madras v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392 (SC), does not apply on the facts of the case in hand and concluded by holding that the impugned subsidy is of revenue in nature and taxed the same accordingly. The assessee challenged the assessment before the ld. CIT(A) and reiterated its claim of capital receipt drawing support from the decision of the Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra) and CIT vs. Chaphalkar Brothers [2018] 400 ITR 279 (SC). It was also brought to the notice of the ld. CIT(A) that on identical set of facts, the Tribunal in assessee's own case in AY 2011-12 and 2012-13 has decided the issue in favour of the assessee and against the revenue. After considering the facts and the submissions, the ld. CIT(A) was convinced with the claim of the assessee and directed the AO to treat the subsidy as capital receipt and excluded the same from computation of book profit u/s 115JB of the Act.
Before us the ld. D/R strongly supported the findings of the AO but could not bring any distinguishing decision in favour of the revenue nor could point out any factual error or infirmity in the findings of the ld. CIT(A). The ld. Counsel for the assessee reiterated what has been stated before the lower authorities.
We have carefully considered the orders of the authorities below. The undisputed fact is that, in the assessee's own case, the Co-ordinate Bench has decided the issue in favour of the assessee and against the revenue. It is also not in dispute that the ld. D/R could not point out any error or infirmity in the findings of the ld. CIT(A). We are of the considered view that the AO has mis-interpreted the decision of the Hon'ble Supreme Court in the case of Ponni Sugars & Chemicals Ltd. (supra). The judgment clearly indicates that the purpose of the subsidy is the crucial determining factor. Since the exemption scheme was aimed at promoting industrialization and creating employment in under-developed areas, the subsidy was intended to support the establishment of new units.
The Madhya Pradesh General Sales Tax Act, is exhibited at pages 72 to 74 and pages 75 to 104 of the paper book, exemption schemes for units with capital investment in fixed investment of Rs. 100 Crores, or more has been exhibited. There is no dispute that the assessee is eligible for the subsidy. The class of dealers exempt from the payment of tax in the State Government and Central Government Act, are mentioned in the Schedule.
The objectives of the Industrial Promotion Policy are as under:- • To make state administration industry friendly by simplifying rules and procedures • To accelerate the pace of industrialization and make Madhya Pradesh industrially a leading state. • To maximise employment prospects • To attract NRI and foreign investment by developing world-class infrastructure • To create congenial environment for the development of small, medium and large industries. • To ensure balanced regional development by generating employment in the non-farm sector • To integrate the different employment oriented schemes in order to provide employment opportunities on a sustainable basis • To rationalize commercial tax rates to make the state's industries competitive vis-à-vis industries in other states • To provide direction to industrialization, keeping in view the available local resources and the existing industrial base. • To ensure private sector participation in the state's industrialisation • To financially strengthen the undertakings of Department of Industries, enabling them to play a pivotal role in the promotion of industries"
On the aforementioned scheme for the aforementioned objectives, the Co-ordinate Bench in ITA No. 804 & 805/Mum/2018 for AY 2011-12 &2012-13, has held as follows:- “19. We have heard rival contentions and gone through the finding given in the impugned orders. The subsidy given by the MP Government in pursuance of "Madhya Pradesh Udyog Nivesh Samvardhan Yogna" was for setting-up of an industrial unit in the backward area of state of Madhya Pradesh and subsidy offered was in the form of refund of VAT / CST paid. The said subsidy was purely for investment in the setting-up of industrial unit. The Ld. CIT(A) and the AO have treated it as a „revenue receipt" on the ground that subsidy has been granted to promote industries in the state and in the form of a refund of commercial taxes paid. Since the subsidy was for augment of profit and hence it has to be treated as revenue receipt. While adjudicating such kind of cases, what is to be seen is the purpose for which subsidy is given and not the form or manner in which subsidy is given. The Honble Supreme Court in the case of Ponni Sugar Mills (supra) has laid down a very important proposition that the test of character of the receipts in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. Hence, the "purpose test" has to be applied. The point of time at which subsidy is paid is not relevant, neither the source nor the form of subsidy is material. In that case, the Honble Supreme Court held that if the subsidy has been given for setting up of new units or substantial expansion of the existing unit, then same is to be treated as capital account. If the object of the subsidy scheme is to enable the assessee to run the business more profitably then the receipts is on revenue account. Hence in this case if we see the "Preface" of the "Madhya Pradesh Udyog Nivesh Samvardhan Yogna" of Industrial Promotion Policy of 2004 of the Madhya Pradesh Government, it provides that the subsidy would be given for setting up of a new industrial units at various places for employment generation and to accelerate the pace of industrialization in Madhya Pradesh. From the reading of the entire scheme, it is absolutely clear that the subsidy provided is not for assisting the assessee for augmenting the profit or help in running of the business, albeit it is for setting up of new industrial unit, for promotion of employment, growth, infrastructure in the backward areas of Madhya Pradesh. Thus, such a subsidy though given in the form of refund of VAT or CST is on capital account. Accordingly, we hold that the subsidy received by the assessee cannot be taxed as revenue, as it is on capital account, hence capital receipt. Accordingly, ground no. 4 is allowed.”
Respectfully following the decision of the Co-ordinate bench (supra), we hold that the subsidy received by the assessee cannot be taxed as revenue as it is on capital account hence capital receipt.
In the result, captioned appeals by the revenue are dismissed. Order pronounced in the Court on 13th December, 2024 at Mumbai. (BEENA PILLAI) JUDICIAL MEMBER (NARENDRA KUMAR BILLAIYA) ACCOUNTANT MEMBER Mumbai, Dated 13/12/2024 आदेश की प्रतिलिपि अग्रेषित/Copy of the Order forwarded to : 1. 2. 3. 4. 5. 6. अपीलार्थी / The Appellant प्रत्यर्थी / The Respondent संबंधित आयकर आयुक्त / Concerned Pr. CIT आयकर आयुक्त (अपील)/ The CIT(A)- विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण, मुंबई /DR,ITAT, Mumbai, गार्ड फाई / Guard file. आदेशानुसार / BY ORDER,