2010 (12) TMI 955 - HC - Income Tax

Agro subsidy held capital receipt; disallowance under section 40A(2) deleted as payments matched market and quality.

HC upheld the Tribunal's decision that the agro-based subsidy received by the assessee, engaged in manufacture of yarn, was a capital receipt, as it was ... Nature of the Agro based subsidy received - tax free - capital or revenue receipt - assessee is engaged in manufacture of yarn - addition on account of excess payment made to sister concern - purchases within the meaning of provisions of sec.40A(2) - Held that:- It is clear from the findings recorded by the CIT(A), as affirmed by the Tribunal that the subsidy was given for setting up of industrial unit in backward area of Haryana and was to be determined with reference to capital investment. In such a situation, the plea of the assessee was supported by the view taken by the Hon'ble Supreme Court in CIT v. Ponni Sugars and Chemicals Ltd.[2008 (9) TMI 14 - SUPREME COURT] which has been followed by the Tribunal. Excess payment made to sister concern on account of purchases within the meaning of provisions of sec.40A(2) - CIT(A) upheld the plea of the assessee that the payment was not higher than the normal rate. It was held that the goods purchased at lesser rate were of inferior quality. - Tribunal affirmed the said finding - HELD THAT:- Thus, we do not find any ground to interfere with the same. Issues:1. Treatment of agro-based subsidy as tax-free capital receipt.2. Excess payment made to sister concern under Section 40A(2) of the Income Tax Act.Issue 1 - Treatment of Agro-based Subsidy:The appeal by the revenue challenged the ITAT's deletion of an addition of Rs. 12,16,090/- regarding an agro-based subsidy received by the assessee. The subsidy was claimed to be exempt as a capital receipt. The Assessing Officer disallowed the claim citing precedents like Sahney Steels and Press Works Ltd. v. CIT. However, the CIT(A) allowed the appeal, emphasizing that the subsidy was for setting up an industrial unit in a backward area and thus a capital receipt. The Tribunal upheld this view, relying on the purpose and nature of the subsidy, as in Ponni Sugars and Chemicals case. The High Court affirmed this decision, noting that the subsidy was indeed for an industrial unit and thus capital in nature, following Ponni Sugars and Chemicals Ltd. v. CIT.Issue 2 - Excess Payment to Sister Concern:The second issue involved an addition of Rs. 7,16,511/- due to alleged excess payment made to a sister concern for purchases, invoking Section 40A(2) of the Act. The CIT(A) overturned this, stating that the payments were not higher than the normal rate and that the goods purchased at a lesser rate were of inferior quality. The Tribunal concurred, noting that the sister concerns were taxed at the same rate, indicating no reason for higher rates. The High Court upheld this finding as a fact, not warranting interference, and dismissed the appeal, stating no substantial question of law arose.In conclusion, the High Court upheld the Tribunal's decision on both issues, affirming the treatment of the agro-based subsidy as a tax-free capital receipt and the rejection of the addition related to excess payments to a sister concern under Section 40A(2) of the Income Tax Act.