2014 (5) TMI 586 - HC - Income Tax

Special capital incentive deemed capital receipt, court cautions against hindering industrial growth

The Commissioner of Income Tax Versus Kirloskar Oil Engines Ltd.

The High Court upheld the Income Tax Appellate Tribunal's decision that a special capital incentive received by the predecessor in title of the assessee ... Special capital incentive - to set up a new unit - revenue receipt or capital receipt – Held that:- Following Commissioner of Income Tax v/s Ponni Sugars & Chemicals Limited [2008 (9) TMI 14 - SUPREME COURT] - The Revenue has misunderstood and misconstrued the nature of receipts - Whenever new industries are to be set up in the State, there are incentives offered by the State Governments - They are offered directly or through some canalizing agencies like SICOM – also in Sahney Steel and Press Works Limited v/s Commissioner of Income Tax [1997 (9) TMI 3 - SUPREME Court] it has been that the character of receipt in the hands of the Assessee has to be determined with respect to the purpose for which the subsidy is given - The purpose test has to be applied - The point of time at which the subsidy is given is not relevant - The source is immaterial - The form of subsidy is immaterial - The main condition and with which the Court should be concerned is that the incentive must be utilized by the Assessee to set up a new unit or for substantial expansion of existing unit - If the object of the subsidy scheme is to enable the Assessee to run the business more profitably, then, the receipt is on the revenue account – no substantial question of law arises for consideration – Decided against Revenue. Issues:Challenge to order of Income Tax Appellate Tribunal regarding special capital incentive as capital receipt.Analysis:The appellant challenged the Income Tax Appellate Tribunal's order concerning a special capital incentive received by the predecessor in title of the assessee. The Tribunal held the incentive to be a capital receipt in the hands of the assessee. The appellant argued that the Tribunal was unjustified in this decision, claiming the incentive was not a capital receipt. The assessee, a company engaged in manufacturing internal combustion engines, had filed its income return for the assessment year 1997-98, declaring total income. The assessing officer later assessed the income at a higher amount, leading to an appeal by the assessee. The Commissioner of Income Tax (Appeals) ruled in favor of the assessee, prompting the Revenue to appeal to the Income Tax Appellate Tribunal.The respondent, representing the assessee, contended that the issue raised was covered by a Division Bench judgment and a Supreme Court judgment. The purpose of the special capital incentive was to enable the predecessor in title to set up a new industry, aligning with the judgments cited. The High Court, after hearing both parties and examining the orders of the Commissioner of Income Tax (Appeals) and the Tribunal, found that the issue was indeed covered by the Supreme Court and Division Bench judgments. The incentive was given to facilitate setting up a new unit, and thus, it was considered a capital receipt. The Revenue's persistent misunderstanding of such receipts was highlighted, emphasizing the need to determine the nature of receipts based on the purpose for which subsidies are given.The High Court rejected the Revenue's challenge to the concurrent findings of fact, stating that there was no substantial question of law raised. The purpose of the assistance provided by the Government through SICOM was clear, aiming to enable the assessee to establish a new unit. The court warned the Revenue against persisting with such challenges, as it could hinder the objectives of schemes designed by the States to promote industrial growth. The judgment dismissed the appeal, emphasizing the importance of understanding the purpose behind subsidies and incentives in assessing their nature correctly.