2013 (11) TMI 1249 - HC - Income Tax

Incentive as Revenue, Not Capital: High Court Decision on Cooperative Society Subsidy

The High Court held that the incentive received by the Cooperative Society was a revenue receipt, not a capital receipt, as it was not used for expansion ... Incentive/ subsidy on sale of sugar – Capital receipt or not – Held that:- The amount of subsidy received under the Sampath Scheme was capital in nature - The object and the application of subsidy was relevant - The Sampath Scheme may have provided for incentive for expansion or for setting up new unit but no such expansion or new unit was in contemplation - The subsidy under the scheme was given for repayment of the term loans as the incentive to carry on business in the essential commodity - The receipt was revenue receipt – Decided in favour of Revenue. Issues:Interpretation of incentive/subsidy as capital or revenue receipt under Income Tax Act, 1961.Analysis:1. The case involved the interpretation of whether an incentive/subsidy received by a Cooperative Society manufacturing sugar was a capital or revenue receipt for the assessment year 1988-89.2. The assessee claimed deduction towards the incentive received under a Central Govt. Scheme, stating it was in the form of additional quota of sugar meant for repayment of term loans, while the AO considered it as a revenue receipt taxable under the Income Tax Act, 1961.3. The CIT (A) confirmed the AO's view, but the Income Tax Appellate Tribunal allowed the appeal, holding that the incentive received was capital in nature and not liable to be taxed.4. The Tribunal referred to the Supreme Court's decision in Commissioner of Income Tax Vs. Ponni Sugars and Chemicals Ltd, emphasizing the purpose test to determine if the subsidy is on revenue or capital account.5. The Court in Commissioner of Income Tax v. Kisan Sahkari Chini Mills Ltd held that incentives received for recoupment of capital employed and repayment of loans were revenue receipts, following the Ponni Sugars case.6. The Supreme Court in MEPCO Industries Limited vs. Commissioner of Income Tax reiterated the need to examine the nature of the subsidy in each case to decide if it's a capital or revenue receipt.Conclusion:1. The High Court found that the incentive received by the assessee was in the nature of a revenue receipt, as there was no evidence of the subsidy being used for expansion or setting up a new unit.2. The respondent-assessee treated the receipt as a revenue receipt by showing it in the profit and loss account, supporting the view that it was not a capital receipt.3. The Court emphasized the importance of the purpose for which the subsidy was given in determining its nature as a revenue or capital receipt.4. The Income Tax Reference was allowed in favor of the revenue department, indicating that the subsidy received was a revenue receipt and should be taxed accordingly.