I-T - Whether government subsidies in form of 'reimbursement of sales tax' can be treated as 'trading receipt' in hands of assessee - NO: ITAT
By TIOL News Service
KOLKATA, NOV 10, 2016: THE ISSUE IS - Whether the government subsidy in the form of 'reimbursement of sales tax/VAT' can be treated as trading receipt in the hands of the assessee, so as to to make it taxable. NO IS THE VERDICT.
Facts of the case:
The AO in the course of assessment proceedings observed that the assessee had shown a sum of Rs. 3,72,95,124/ being 75% of sales Tax/VAT as Sales Tax Incentive Receivable under the scheme of State Government. This sum was correspondingly credited to General Reserve of the assessee. The AO had invoked same by invoking the provisions of section 41(1). The AO had held that the sales tax incentive / subsidy eligible to be received is a revenue receipt and would be treated as income u/s 41(1) on the ground that remission of liability which was allowed as a deduction in the earlier years and added the sums of Rs. 3,72,95,124/ and Rs. 8,05,58,316/ for the A/Ys 200708 and 2008-09 respectively. The CIT(A) deleted the additions on the ground that the subsidy was actually released / sanctioned to the assessee vide letters of WBIDCL only which falls in the financial year 2008-09 relevant to A/Y 2009-10 and hence the accrual of subsidy/receipt of subsidy had to be seen only in that year and not in the years under appeal. The CIT(A) did not give any finding as to whether the said subsidy is to be treated as a capital receipt or revenue receipt.
On appeal, the ITAT held that,
++ it is found that the assessee in the instant case is eligible for State Capital Incentive Subsidy in the form of reimbursement of 75% of Sales Tax/VAT paid on sale of finished products. A careful perusal of the West Bengal Incentive Scheme 2000 shows that the scheme was intended to accelerate industrial development of the state and the incentive was given for setting up of industries in West Bengal and for the purpose of determining the amount of subsidy to be given, sales tax/VAT paid by the assessee on its finished products after setting up of the unit was taken as the basis. It is found that the 'Purpose Test' is to be seen while ascertaining the taxability of subsidy in the facts and circumstances of the case. The Purpose Test clearly proves that the subsidy herein is contemplated for setting up of the industry/eligible unit for promotion of industries in the State of West Bengal . The quantification of subsidy alone is based on reimbursement of 75% of sales tax/VAT actually paid by the said eligible unit after commencement of the project;
++ it is also found that the Apex Court in the case of CIT vs Ponni Sugars & Chemicals Ltd & Ors had held that t he character of the receipt of a subsidy in the hands of the assessee under a scheme has to be determined with respect to the purpose for which the subsidy is granted. The point of time at which the subsidy is paid is not relevant. The source is immaterial. It is also find that the Calcutta High Court in the case of CIT vs Rasoi had held that the object of a subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit, the receipt of the subsidy is on capital account. It is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure. The object of the subsidy was the expansion of business capacities, modernization, and improving marketing capabilities and thus, those were for assistance on capital account;
++ it is held that the AO had erred in invoking the provisions of section 41(1). It is well settled that the said provision could be invoked only when the assessee had claimed deduction in earlier years at the time of creation of liability and if the said liability ceases to exist, then the provisions of section 41(1) could be invoked. In the instant case, admittedly, the assessee had not claimed any deduction in the earlier years towards the sales tax portion of the subsidy. Hence, the provisions of section 41(1) could not be invoked in the facts of the instant case. Keeping in view the objects of the West Bengal Incentive Scheme 2000 and various judicial precedents,, it is held that the subsidy of Rs. 3,72,95,124/ and Rs. 8,05,58,316/ is to be treated as capital receipt not chargeable to tax in the hands of the assessee. It is held that in any case, the subsidy cannot be the subject matter of taxation in the years under appeal as the same got released/sanctioned only in the financial year 2008-09 relevant to A/Y 2009-10.
(See 2016-TIOL-1901-ITAT-KOL)
