2016 (12) TMI 507 - SC - Income Tax

Supreme Court distinguishes subvention as capital payment, not revenue.

The Supreme Court ruled that the subvention received by the Assessee - Company from its parent Company in Germany should not be classified as revenue ... Subvention received - Grant-in-aid - Revenue receipt or capital receipt - amount received by the assessee on revenue account as held by HC [2013 (11) TMI 1488 - KARNATAKA HIGH COURT] - Held that:- The view expressed by this Court that unless the grant-in-aid received by an Assessee is utilized for acquisition of an asset, the same must be understood to be in the nature of a revenue receipt was held by the High Court to be a principle of law applicable to all situations. The aforesaid view tends to overlook the fact that in both Ponni Sugars (2008 (9) TMI 14 - SUPREME COURT ) and Sahney Steel (1997 (9) TMI 3 - SUPREME Court) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the present cases. The above apart, the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts. We also find such a view in a recent pronouncement in Commissioner of Income Tax versus Handicrafts and Handlooms Export Corporation of India Ltd. [2013 (9) TMI 299 - DELHI HIGH COURT] with which we are in respectful agreement. - Decided in favour of assessee. Issues:1. Nature of subvention received by the Assessee - Company from its parent Company in Germany.2. Whether the subvention should be treated as a capital or revenue receipt for the Assessment Years 1999-2000, 2000-2001, and 2001-2002.Issue 1: Nature of subvention received by the Assessee - CompanyThe Supreme Court addressed the issue of whether the subvention received by the Assessee - Company from its parent Company in Germany should be considered a revenue or capital receipt. The Assessing Officer treated the subvention as a revenue receipt, which was reversed by the First Appellate Authority and the Income Tax Appellate Tribunal. However, the High Court restored the Assessing Officer's view. The Assessee contended that the voluntary payments made by the parent Company to the loss-making Indian company were to protect the capital investment of the Assessee Company, indicating that the payments should not be considered revenue receipts.Issue 2: Classification of subvention as capital or revenue receiptThe High Court referred to two decisions of the Supreme Court in Sahney Steel & Press Works Ltd. and Ponni Sugars and Chemicals Limited to determine whether the subvention should be classified as a capital or revenue receipt. The High Court applied a principle that unless the grant-in-aid received by an Assessee is utilized for acquiring an asset, it should be considered a revenue receipt. However, the Supreme Court differentiated the present case from the cited decisions, highlighting that the subsidies received in those cases were from public funds, unlike the voluntary contributions made by the parent Company in this case. The Court emphasized that the payments made by the parent Company to the Assessee Company could be seen as protecting the capital investment, leading to the conclusion that the subvention should not be treated as a revenue receipt. The Court also referenced a recent decision in Commissioner of Income Tax versus Handicrafts and Handlooms Export Corporation of India Ltd. to support its stance.In conclusion, the Supreme Court allowed the appeals, set aside the High Court's order, and determined that the subvention received by the Assessee - Company from its parent Company for the Assessment Years in question should not be considered revenue receipts but rather payments made to protect the capital investment of the Assessee Company.