2005 (7) TMI 302 - AT - Income Tax

Assessment Year 1996-97: Subsidy as Capital Receipt, Remand for Asset Cost Adjustment

The tribunal partly allowed the revenue's appeal for the assessment year 1996-97. The subsidy received by the assessee was treated as a capital receipt. ... Chargeable As Issues Involved:1. Treatment of subsidy received by the assessee from the government.2. Applicability of section 43(1) of the Income-tax Act regarding the reduction of the actual cost of assets by the amount of subsidy received.Issue-wise Detailed Analysis:1. Treatment of Subsidy Received by the Assessee from the Government:The primary issue revolves around the subsidy of Rs. 22,82,966 received by the assessee for setting up a sugar mill. The assessee argued that this subsidy should be excluded from the total income as it was an incentive specifically meant for the repayment of long-term loans taken for setting up the plant. The Assessing Officer (AO) rejected this claim, treating the subsidy as a trading receipt and taxable under section 28(2)(iv) of the Income-tax Act. The AO emphasized that the purpose of the subsidy (repayment of loans) did not affect its taxability as income.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, stating that the subsidy had a direct nexus with the capital goods employed by the assessee and should be treated as a capital receipt, not a revenue receipt. The CIT(A) relied on the judgments of the Calcutta High Court in CIT v. Balarampur Chini Mills Ltd. [1999] 238 ITR 445 and the Supreme Court in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253.During the tribunal hearing, the assessee's counsel argued that multiple High Court and Tribunal decisions supported the view that the subsidy should be treated as a capital receipt. The tribunal agreed with the CIT(A) that the subsidy could not be assessed as part of the assessee's total income by way of trading or revenue receipt. However, the tribunal noted that the CIT(A) had erred by not considering the further implications of this decision on the assessee's tax liability.2. Applicability of Section 43(1) of the Income-tax Act:The tribunal raised the question of whether the subsidy should reduce the actual cost of the assets under section 43(1) of the Income-tax Act. The assessee's counsel argued that Explanation 10 to section 43(1), introduced with effect from April 1, 1999, did not apply to the assessment year 1996-97. The Departmental Representative (DR) contended that the main provision of section 43(1) was sufficient to require the cost of assets to be reduced by the amount of the subsidy.The tribunal referred to the Supreme Court's judgment in CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830, which discussed the definition of 'actual cost' and the legislative intent behind it. The tribunal concluded that the CIT(A) should have considered whether the subsidy should reduce the cost of the assets within the meaning of section 43(1). Therefore, the tribunal restored this limited question to the file of the AO for a fresh decision, allowing the assessee a reasonable opportunity to be heard.Conclusion:The tribunal partly allowed the revenue's appeal for the assessment year 1996-97. The subsidy was treated as a capital receipt, but the question of reducing the actual cost of the assets by the subsidy amount under section 43(1) was remanded to the AO for a fresh decision.