LIMTEX TEA & INDUSTRIES LTD,,KOLKATA vs. ACIT, CIR-4, KOLKATA, KOLKATA

The Assessee is a company. It carries on the business of manufacturing Tea. The Assessee manufactures and sells tea. The Assessee procures tea leaves from tea gardens and produces tea in its factory. During the previous year the Assessee received a sum of Rs.23,26,506 as subsidy under the “Quality Upgradation and Product Diversification Scheme” (hereinafter referred to as “the Scheme”). The Scheme was introduced by the Tea Board and Ministry of Commerce & Industry, Government of India. The question before the AO was as to whether the subsidy received by the Assessee was capital in nature not chargeable to tax or was revenue in nature, chargeable to tax. The AO held that the subsidy in question received by the Assessee under the Scheme was revenue in nature and was therefore taxable. Over and above that the AO also reduced the value of subsidy from the “actual cost” of the machinery on which depreciation has to be allowed. Under Explna-10 to Sec.43(1) of

The subsidy received by the Assessee was Rs.23,26,506. The AO however took the difference in the opening and closing balance of Profit and Loss account in the balance sheet of Rs.3,84,60,617 and Rs.3,64,11,186, which is a sum of Rs. 20,49,431 as the value of the subsidy and brought to tax the aforesaid sum by including it as part of the total income of the Assessee. The AO reduced Rs.3,48,976 which is 15% of Rs.23,26,506 from the depreciation that has to be allowed to the Assessee under the Income Tax Act,1961 (Act) in accordance with Expln.10 to Sec.43(1) of the Act.

Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). The CIT(A) after noticing the objective of the Scheme upheld the order of the AO. The CIT(A) held that the scheme is only for Tea quality up-gradation. It does not envisage any setting up of a new unit or expansion of the existing unit. It aims to improve the quality of tea through technology upgradation. It also envisages replacement of old and worn out machinery and equipment. Therefore by virtue of the scheme a new unit or expansion of an existing unit does not happen. The scheme and the subsidy given thereunder is only for the purpose of enabling the Assessee to carry on its business more profitably and therefore, the subsidy received by the Assessee was revenue in nature, chargeable to tax. In doing so, the learned CIT(A)

Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal.

The learned counsel for the Assessee firstly pointed out that the subsidy received by the Assessee was Rs.23,26,506. The AO however took the difference in the opening and closing balance of Profit and Loss account in the balance sheet of Rs.3,84,60,617 and Rs.3,64,11,186, which is a sum of Rs. 20,49,431 as the value of the subsidy and brought to tax the aforesaid sum by including it as part of the total income of the Assessee.

He next pointed out that the AO reduced Rs.3,48,976 which is 15% of Rs.23,26,506 from the depreciation that has to be allowed to the Assessee under the Income Tax Act,1961 (Act) in accordance with Expln.10 to Sec.43(1) of the Act. According to him, once the AO comes to the conclusion that the subsidy received was utilized for acquiring depreciable asset than the inevitable conclusion is that the subsidy in question is capital subsidy and therefore the same cannot be brought to tax. According to him the subsidy in question is to facilitate the tea factories to upgrade/replace/renovate the old and worn out machinery by purchasing new machines in order to manufacture quality tea and therefore the subsidy in question has to be regarded as capital receipt not chargeable to tax. He drew our attention to the Scheme under which subsidy was granted to highlight the purpose of the scheme. He placed reliance on the following decisions: (i) The Hon’ble Supreme in CIT , Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) wherein it was that, `It is the object for which subsidy/assistance is given, that truly determines nature of subsidy. The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the `Purpose Test’. The point of time when the subsidy

The total value of machinery purchased/installed by the Assessee was Rs.93,06,024. The machineries were installed during the financial year 2003-04 relevant to AY 04-05. 25% of the cost of the machinery viz., Rs.23,26,506 was received by the Assessee as subsidy.

His next submission was that, if the value of the subsidy is treated as revenue receipt chargeable to tax, than the value of the subsidy in question cannot be reduced from the block of depreciable assets and depreciation allowed on the value as so reduced, which will reduce the claim of depreciation which the Assessee had made. His submission was that the amount given as subsidy cannot be said to be “cost of an asset acquired by the assessee met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called)” and therefore Explanation 10 to Sec.43(1) of the Act will not be attracted.

He drew our attention to the fact that the Finance Act, 2015 with effect from 01/04/2016 has inserted of Sub-Clause (xviii) in Section 2(24) of the Income Tax Act,

The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. According to him prior to the aforesaid amendment, if a subsidy was regarded as revenue subsidy and was given for the purpose of meeting the cost of acquiring fixed assets than the Assessee will suffer the burden of having to pay tax on the subsidy and further the cost of fixed assets will also be reduced by virtue of Explanation 10 to Sec.43(1) of the Act. According to him one of the purpose of the aforesaid amendment was to ensure that the Assessee does not suffer such double detriment. Since the purpose of the amendment is to remove hardship and difficulty the same should be held to be applicable retrospectively. In this regard reliance was placed by him on the decision of the Hon’ble Supreme Court in the case of Alom Extrusion 319 ITR 306(SC).

The learned DR relied on the order of the CIT(A). According to him, the only issue that was raised by the Assessee before CIT(A) and in the grounds of appeal before Tribunal, is with regard to the question whether the subsidy is capital or revenue. The Assessee has accepted the fact that the subsidy will go to reduce the cost of acquisition of the fixed assets and therefore the question that needs to be answered only as to whether the subsidy in question is capital or revenue. He placed reliance on the order of the CIT(A) on the issue.

We have given a very careful consideration to the rival submissions. The only issue to be decided in this appeal, as rightly contended by the learned DR, is as to

The tests to be applied to decide the question whether a subsidy received by an Assessee has to be regarded as capital or revenue subsidy has been laid down in several decisions of Hon’ble Supreme Court and Hon’ble High Courts. The Hon’ble Supreme in CIT , Madras vs. Ponni Sugars & Chemicals Limited, Civil Appeal No.5694 to 5715 of 2008, [2008] 174 Taxman 87 (SC) has held that, `It is the object for which subsidy/assistance is given, that truly determines nature of subsidy. The character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the `Purpose Test’. The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt was on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand its existing units, then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.

It would also be of immense merit to refer to another judgement of the Hon’ble Calcutta High Court in the case titled Commissioner of Income Tax vs. Rasoi Limited [2011] 335 ITR 438, wherein it has been held by the Hon’ble Court by making a due reference to the judgement of the Hon’ble Apex Court in the case titled Commissioner of Income Tax vs. Ponni Sugars & Chemicals Ltd [2008] 174 Taxman 87 (SC) that one time subsidy received as a percentage of sales tax paid for modernization and expansion purposes would constitute a capital receipt not subject to the rigours of tax under the Income Tax Act, 1961. The Hon’ble Calcutta High Court further held that merely because subsidy received was equivalent to a substantial percentage of the

Keeping in mind the principles laid down in the aforesaid decisions referred to by the learned counsel for the Assessee, we shall now see the objects of the Scheme under which the Assessee received subsidy in the present case. Objective of the Scheme: Objective of the scheme is to facilitate the tea gardens/factories towards production of good quality of tea suiting eminently to the tastes and preferences of the consumers. In order to fetch remunerative returns for the tea sold, the processing of it in the tea factories should be geared up by replacement of old and worn out machinery and equipment. Replacement of machineries has to be regular exercise depending upon the working condition of the machineries. This should receive greater attention as with efflux of time not only there is need to modernize factories but take up new technologies developed in the recent years in the fields of automation, electronics and use energy saving devices. Since there is always good demand for the quality teas, modernization and technology upgradation assumes added significance. Accordingly this scheme has been formulated to provide financial assistance to the needy tea gardens/factories for renovating as well as augmenting the processing capabilities including, creation of facilities for packaging and bagging, and produce diversification. At present, only 35 to 40% of tea is sold in package form and the rest in the form of loose tea. During the 10th plan period, thrust would be on more value realization. For this purpose, proper infrastructure needs to be created for improving not only the packaging standards but also for increasing the volume of value added teas and specialty teas such as green teas, flavoured teas, ready to drink teas etc. Towards this end, it is proposed to provide for subsidy for the packaging machineries and creating facilities for product diversification. Because of the high variability in the quality of tea produced, there is a greater need for evolving appropriate quality-market matching. For this the process of manufacture needs to undergo changes to suit to the

A perusal of annexure-1 would show that the purpose of the scheme is to ensure better working of the tea manufacturing unit, plucking practices adopted in the tea garden etc. Subsidy is given for improving the infrastructure of the existing tea manufacturing unit. The predominant purpose of the scheme is to ensure that tea manufactures function more profitably and not for setting up of a new unit or expansion of the existing unit.

We are therefore the view that the subsidy in question is revenue subsidy and was rightly brought to tax.

The Finance Act, 2015 with effect from 01/04/2016 has inserted of Sub-Clause (xviii) in Section 2(24) of the Income Tax Act, 1961 providing an inclusive definition of the expression `Income’. The relevant portion of Sub-Clause (xviii) is produced below:- “2(24)(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any other authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43. 19. The aforesaid amendment is prospective and applicable w.e.f. 1-4-2016. Explanatory Notes to Provisions of Finance Act, 2015 reads thus:

The debatable points referred to in the explanatory notes referred to above, is to various judicial precedents that brought out debatable principles for tax treatment of the subsidies received by an assessee. The dispute between the Revenue and the

The question is as to whether the aforesaid amendment to Sec.2(24)(xviii) of the Act, can be considered as having retrospective operation. The aforesaid amendment is in two parts. The first part says that any subsidy whether it is capital or revenue will be regarded as “income”. The second part is that, if the value of the subsidy is reduced from the value of actual cost u/s.43(1) of the Act for allowing depreciation, than the subsidy will not be taxed as “income”. If, we were to hold that the amendment is retrospective than the 1st part of the amendment by which any subsidy, whether capital or revenue, is to be regarded as “Income” will create a charge to tax and unless the legislature specifically imposes a charge to tax, retrospectivity cannot be given. Therefore the 1st part cannot be regarded as having retrospective operation. The second part of the amended provision of Sec.2(24)(xviii) of the Act gives a relief in the form of relieving double taxation, one in the form of the subsidy being taxed as income and again the value of subsidy being reduced from the actual cost of fixed assets on which depreciation is to be allowed. It is not possible to regard one part of an amended provision as having retrospective operation and the other part having only prospective operation. If the legislature wanted the amendment to be applicable in the manner as contended by the learned counsel for the Assessee, it would have so provided in the Finance Act, 2015. By a process of interpretation it would not be

The learned counsel for the Assessee has also placed reliance on the decision of the ITAT, Kolkata in the case of DCIT Vs. M/S.Gloster Jute Mills Ltd., ITA No.766/Kol.2010 dated 2.7.2014. We have perused the aforesaid decision of the Tribunal. In that case the subsidy in question was given to persons engaged in the manufacture of jute and jute products and generation of power. The subsidy was given for the purpose of investment in specified plant and machinery, factory building etc., using funds borrowed from certain banks/financial institutions then out of the interest paid on such borrowed funds, 5% is refunded by the government. The tribunal placed reliance on the decision of the Hon’ble Punjab & Harayana High Court in the case of CIT Vs. Sh.Sham Lal Bansal ITA No.472 of 2010 dated 17.1.2011 whereby the Hon’ble High Court upheld the order of the Tribunal. The tribunal had held that the subsidy was utilized for repayment of loans taken by the Assessee to set up a new unit, as was the intention of the subsidy. On such finding the Tribunal held that the subsidy was capital subsidy. The Hon’ble Punjab and Haryana High Court affirmed the order of the Tribunal. In our view the purpose of the subsidy has to be seen in the light of the scheme in each case. We do not find that the subsidy in question in the present case is similar to the subsidy in the case decided by the Tribunal in the case of M/S.Gloster Jute Mills Ltd. (supra).

For the reasons given above, we do not find any merit in this appeal by the Assessee. The appeal is therefore dismissed.