2017 (1) TMI 772 - HC - Income Tax

Transport subsidy for industrial growth deemed capital receipt, not taxable. Purpose test applied.

M/s. Shiv Shakti Flour Mills (P) Ltd. Versus Commissioner of Income Tax, Dibrugarh

The court concluded that the transport subsidy received by the assessee is a capital receipt, intended to promote industrial growth in backward regions, ... Transport subsidy received taxability - revenue receipt or capital receipt - Held that:- The transport subsidy received by the assessee during the assessment year 2001-02 is intended to stimulate industrial activity in the backward region, to generate employment opportunities and bring about developments in the N.E. States and it is not meant to provide higher profit for the entrepreneur. It is intended to encourage investment in difficult and far flung states and the sum received under subsidy head cannot be treated as revenue receipt. Instead such incentives should be treated as capital receipt and thus not taxable, in the hands of the assessee. Accordingly the substantial question of law in this appeal is answered against the revenue and in favour of the assessee. Issues Involved:1. Whether the transport subsidy received by the assessee is a revenue receipt or a capital receipt.2. The applicability of the purpose test to determine the nature of the subsidy.3. The relevance of accounting practices in determining the nature of the subsidy.4. The impact of prior judgments on the current case.Issue-wise Detailed Analysis:1. Whether the transport subsidy received by the assessee is a revenue receipt or a capital receipt:The core issue in this case is the classification of the transport subsidy received by the assessee during the assessment year 2001-02. The original assessing authority considered the subsidy as a revenue receipt, thus taxable. However, the Commissioner of Income Tax (Appeals) deemed it a capital receipt, intended for the promotion and growth of industries in the North-Eastern Region, and thus not taxable. The Income Tax Appellate Tribunal, influenced by the majority opinion and a prior jurisdictional High Court decision in CIT vs. Meghalaya Steels Ltd., upheld the subsidy as a revenue receipt.2. The applicability of the purpose test to determine the nature of the subsidy:The purpose test, as established in Sahney Steel & Press Works Ltd. and Ponni Sugars & Chemicals Ltd., is pivotal in determining the nature of the subsidy. According to this test, if the subsidy is intended to enable the assessee to set up a new unit or expand an existing one, it is a capital receipt. Conversely, if it is meant to assist in running the business more profitably, it is a revenue receipt. The court emphasized that the object of the subsidy scheme, rather than the timing or source of the subsidy, determines its nature.3. The relevance of accounting practices in determining the nature of the subsidy:The court referenced the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, which states that the question of whether a receipt is taxable should be decided based on legal principles rather than accounting practices. Thus, the assessee's method of crediting the subsidy to the reserve and surplus account is not determinative of its nature as a capital or revenue receipt.4. The impact of prior judgments on the current case:The court reviewed several prior judgments, including CIT vs. Meghalaya Steels Ltd., Shree Balaji Alloys vs. CIT, and Jai Bhagwan Oil and Flour Mills vs. Union of India. These cases applied the purpose test and generally found that subsidies intended to promote industrial development in backward regions are capital receipts. The court also noted that the Supreme Court's decision in Rajaram Maize Products, which classified power subsidy as a revenue receipt, does not directly apply to transport subsidies, as each subsidy must be assessed on its own merits.Conclusion:Applying the purpose test and considering the intent behind the Transport Subsidy Scheme, the court concluded that the transport subsidy received by the assessee is a capital receipt. The subsidy is intended to stimulate industrial activity in backward regions, generate employment, and encourage investment, rather than augment the profits of the entrepreneur. Therefore, it is not taxable in the hands of the assessee. The substantial question of law was answered in favor of the assessee and against the revenue, leading to the disposal of the appeal with no costs awarded.