Subsidy received in the form of Octroi refund is Capital reciept for Income Tax: ITAT
Briefly, the facts of the case are that the respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and sale of connecting rods assembling and other engineering goods. The return of income for the assessment year 2014-15 was filed on 28.11.2014 declaring total income of Rs.14,41,63,860/-. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Circle-1, Nashik (‘the Assessing Officer’) vide order dated 21.12.2016 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at total income of Rs.19,00,04,860/-.
While doing so, the Assessing Officer brought to tax the subsidy received in the form of octroi refund of Rs.4,58,41,000/- as revenue receipts invoking the provisions of section 28(iv) of the Act. The subsidy was received from the Government of Maharashtra under the Package Scheme of Incentives, 2007.
Aggrieved by the above assessment of order, an appeal was filed before the ld. CIT(A), who vide impugned order held that the subsidy in the form of octroi refund received under the Package Scheme of Incentives, 2007 announced by the Government of Maharashtra is capital in nature as the subsidy was granted as incentives to encourage the dispersal of Industries to the less developed area of the State placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs. Ponni Sugars & Chemicals Ltd., 306 ITR 392 (SC). Further, the ld. CIT(A) held that the provisions of section 28(iv) have no application to the monetary benefits received by the respondent-assessee
In our considered opinion, the decisive factor for considering the nature of subsidy as a capital or revenue receipt is the ‘purpose’ for which the subsidy has been granted and not the manner of its disbursal. The Hon’ble Supreme Court in Sahney Steel & Press Works Ltd. v. CIT  94 Taxman 368/228 ITR 253 has held in the facts of that case that the operational subsidy received after the commencement of business was a revenue receipt but simultaneously laid down the ratio decidendi of applying the ‘purpose test’ for ascertaining the true nature of subsidy. The purpose test has been reiterated by the Hon’ble Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd.  174 Taxman 87/306 ITR 392 by holding that the relevant consideration should be the purpose of subsidy and not its source or mode or payment. When we apply such a test on the facts and circumstances of the case, it demonstrably emerges that the purpose of subsidy is industrial growth; it is linked with the setting up of industrial units; and the amount of subsidy is linked with the amount of investment made in the eligible unit. Simply because the subsidy has been disbursed in the form of refund of VAT and CST, it will not alter the purpose of granting the subsidy, which is nothing but establishment of new industrial units in less developed areas of the State. The authorities below have been swayed by the fact that the subsidy was granted post commencement and is in the nature of refund of VAT and CST and overlooked the purpose of its granting, which is nothing but momentum in industrial pace in less developed parts of the State. Testing the factual panorama on the touchstone of the ratio laid down by the Hon’ble Supreme Court in the above referred cases, we are of the considered opinion that the subsidy of Rs.4,58,41,000/- is a capital receipt and not chargeable to tax.