2022 (2) TMI 533 - HC - Income Tax

Tax Court affirms Tribunal's decision on subsidy taxability under West Bengal Incentive Scheme

The Court upheld the Tribunal's decision regarding the taxability of the subsidy granted under the West Bengal Incentive Scheme 2000, emphasizing the ... Subsidy granted in terms of the West Bengal Incentive Scheme 2000 - Taxation in the assessment years under consideration -Tribunal dismissed the appeal of the revenue holding, that the subsidy cannot be the subject matter of taxation in the years under appeal as the same got released/sanctioned only in the financial year 2009-2010 - HELD THAT:- Subsidy is immaterial and the main eligibility condition of the scheme has to be looked into and if the same is taken note of it is evidently clear from the scheme that the subsidy was for the purpose of encouraging establishment of large, medium and small scale industrial units in the State of West Bengal. As pointed out by the Hob’ble Supreme Court the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit and, therefore, the receipt of the subsidy was on capital account. The test to be applied is the object for which the subsidy/assistance is given under the incentive scheme and the form or mechanism through which the subsidy is given would be irrelevant. The decision in Ponni Sugars and Chemicals Ltd. [2008 (9) TMI 14 - SUPREME COURT] was taken note of and this court has granted relief to the assessee in Rasoi Ltd.[2011 (5) TMI 23 - CALCUTTA HIGH COURT]. Subsequently in the case of Principal Commissioner of Income Tax-I, Kolkata Vs. Shyam Steel Industries Ltd. [2018 (5) TMI 702 - CALCUTTA HIGH COURT] following the decision in Ponni Sugars and Chemicals Ltd. it was pointed out that the scheme in the said case being available only to new units and units which have undergone an expansion, the real purpose of the incentive has to be seen as capital subsidy and has to be recorded as such, as capital receipt and not a revenue receipt. That apart we also take note of the communication sent by the Joint Secretary to the Government of West Bengal, Commerce and Industries Department to the Managing Director, West Bengal Industrial Development Corporation dated 23rd March, 2007 wherein it has been stated that the State Government has approved the package for the assessee for setting up an Edible Oil Refinery Plant and Captive Power Generation unit and the reimbursement of 75% of the sales tax paid has been termed as Industrial Promotion Assistance. Thus, we have no hesitation to hold that the Tribunal had rightly rejected the appeal filed by the revenue and granted relief to the assessee. Invoking Section 41(1) - Tribunal rightly held that the said provision could be invoked only when assessee had claimed deduction in earlier year at the time of creation of liability and if the said liability ceases to exist then the provision of Section 41(1) of the Act could not be invoked. Taking note of the facts of the assessee’s case the Tribunal has held assessee has not claimed any deduction in the earlier year towards the sales tax portion of the subsidy and hence the provision of Section 41(1) of the Act cannot be invoked in the facts of the assessee’s case. The findings rendered by the Tribunal clearly point out the correct legal position. - Decided against revenue. ISSUES PRESENTED AND CONSIDERED 1. Whether subsidy granted under a State industrial incentive scheme (reimbursement of 75% of Sales Tax/VAT) is taxable in the assessment years where subsidy sanction/receipt occurs later, i.e., whether such subsidy is a revenue receipt or a capital receipt for income-tax purposes. 2. Whether Section 41(1) of the Income Tax Act can be invoked to tax the subsidy amount where there was no earlier-year deduction corresponding to the subsidy-related liability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of incentive/subsidy (revenue v. capital) and timing of taxation Legal framework: The character of a subsidy/assistance is to be determined by applying the 'purpose test' - i.e., by reference to the object for which the subsidy is given. The point of time of payment, source or form of the subsidy is immaterial in determining whether the receipt is capital or revenue in nature. Precedent treatment: The Court considered and applied the principle in Sahney Steel (Supreme Court) which articulated the purpose test; the decision in Ponni Sugars (Supreme Court) and subsequent Calcutta High Court decisions (including Rasoi Ltd. and Shyam Steel Industries Ltd.) were examined and relied upon insofar as they interpret the purpose test in comparable factual settings. The Tribunal's approach was consistent with Ponni Sugars and Rasoi Ltd.; Sahney Steel was treated as having been explained in Ponni Sugars on its facts. Interpretation and reasoning: The incentive scheme under consideration was designed to accelerate industrial development by encouraging establishment/expansion of industrial units. The quantification mechanism (reimbursement of 75% of Sales Tax/VAT actually paid post-commencement) is a mechanism of calculation, but does not alter the underlying object of the assistance. The scheme's main eligibility condition - that the incentive must be utilized for setting up new units or substantial expansion - demonstrates that the assistance is directed to enable capital formation (setting up/expanding industrial units), i.e., a capital purpose. The Court also placed weight on administrative communications characterising the reimbursement as 'Industrial Promotion Assistance', supporting a capital-object conclusion. The Tribunal applied the purpose test and correctly concluded that the subsidy is capital in nature despite being computed by reference to sales tax paid after commencement; the timing of release/sanction in a later financial year did not convert the character of the subsidy into a revenue receipt for the assessment years under challenge. Ratio vs. Obiter: Ratio - the character of a subsidy is determined by its object; where the object is to enable establishment or expansion of industrial units the subsidy is a capital receipt even if quantified as reimbursement of sales tax paid after commencement and even if paid later. Obiter - observations on immateriality of form/source and on administrative nomenclature are ancillary but support the ratio. Conclusions: The subsidy under the State incentive scheme is a capital receipt and not taxable as revenue in the assessment years under consideration. The Tribunal's dismissal of the revenue's appeal on this point was justified and correctly followed applicable precedents applying the purpose test. Issue 2 - Applicability of Section 41(1) where no prior-year deduction was claimed Legal framework: Section 41(1) applies where an assessee had claimed a deduction in an earlier year in respect of an amount, and that liability ceases to exist wholly or partly; on cessation, the amount becomes income of the year in which it ceases to exist. Thus invocation of Section 41(1) requires a prior-year deduction corresponding to the liability. Precedent treatment: The Tribunal's approach aligned with the statutory text and established principle that Section 41(1) cannot be invoked absent a previous deduction. No precedent was identified that mandates invoking Section 41(1) in the absence of an earlier deduction; the Court endorsed the Tribunal's legal conclusion. Interpretation and reasoning: On facts, the assessee had not claimed any deduction in the earlier year relating to the sales tax portion that formed the basis of the subsidy. Consequently, there was no earlier-year reduction of income that could be reversed under Section 41(1). The Tribunal therefore correctly concluded that Section 41(1) was inapplicable. Ratio vs. Obiter: Ratio - Section 41(1) is inapplicable where there is no prior-year deduction corresponding to the liability; absent such deduction, no addition can be made under Section 41(1). Obiter - none material. Conclusions: The Tribunal correctly held that Section 41(1) could not be invoked against the assessee in the facts of the case because no earlier-year deduction had been claimed; the revenue's contention under Section 41(1) was rightly rejected. Cross-reference and consolidation The two issues are related: the characterisation of the subsidy as capital obviates its treatment as revenue in the relevant years, and independently, absence of any earlier deduction precludes use of Section 41(1) to tax the subsidy. The Tribunal's dual findings - subsidy being capital in nature (purpose test) and inapplicability of Section 41(1) for lack of prior deduction - together support dismissal of the revenue's appeal.