2026 (2) TMI 816 - HC - Income Tax

Capital Receipt treatment confirmed for excise-duty subsidy; not deducted from asset block for depreciation computation.

Whether an excise-duty reimbursement under an investment-linked incentive scheme is capital or revenue: the subsidy operates as a capital receipt because ... Nature of receipt - capital receipt or a revenue receipt - subsidy on the excise duty paid, which the respondent-assessee received under the excise duty exemption provided by the Central Government - HELD THAT:- This issue is covered by the judgment of Hon’ble the Supreme Court rendered in Ponni Sugars & Chemicals Limited [2008 (9) TMI 14 - SUPREME COURT ]wherein it has been categorically held that Sales Tax & Excise Duty refund or the subsidy which is linked to Capital Investment made, is a capital receipt. We also do not find any substance in alternative argument that such subsidy should be reduced from the block of assets. On going through the facts available on record, we are of the considered opinion that since the subsidy which the respondent-assessee had received under the scheme of 2001 was in the nature of capital receipt independent of the cost of any asset, the only correlation with the asset was in the sense that an industry was supposed to make a particular investment. Otherwise, there was no nexus with the excise duty paid with the cost of the cost of a particular machine. Hence, the contention of the appellant-Department that the subsidy so received should be reduced from the block of assets is untenable in law. We have this view because, the subsidy was not in the nature of capital investment subsidy and it was in the form of reimbursement of the excise duty paid by the unit. Unless the subsidy is directly linked to the cost of purchase of the particular asset, the same cannot be reduced from the block of assets. Decided in favour of assessee. Issues: (i) Whether the subsidy received under the Incentive Scheme 2001 for Economic Development of Kutch District, being refund/reimbursement of excise duty, is a capital receipt or a revenue receipt for income-tax purposes; (ii) Whether, if treated as a capital receipt, the subsidy amount must be reduced from the block of assets for depreciation purposes.Issue (i): Whether the subsidy received as refund/reimbursement of excise duty under the Scheme of 2001 is a capital receipt or a revenue receipt.Analysis: The subsidy was granted under a government incentive scheme linked to making investments in the specified district and operated as a reimbursement of excise duty paid. The subsidy was not directly linked to the cost of purchase of any particular asset but was contingent on an industry making qualifying investment. The decision follows the principle that refunds or subsidies which are linked to capital investment qualify as capital receipts.Conclusion: The subsidy is a capital receipt and not taxable as revenue receipt.Issue (ii): Whether the subsidy, being a capital receipt, must be reduced from the block of assets for computing depreciation.Analysis: The subsidy is not shown to be a capital investment subsidy directly attributable to the cost of any specific asset. There is no direct nexus between the subsidy amount and the cost of a particular machine or asset in the block. Absent a direct link to the purchase cost of a specific asset, the subsidy does not operate to reduce the depreciable amount of the asset block.Conclusion: The subsidy amount is not required to be reduced from the block of assets for depreciation.Final Conclusion: The Tribunal's order dismissing the Revenue's appeal is upheld; the subsidy is a capital receipt and need not be reduced from the block of assets for depreciation computation.Ratio Decidendi: A subsidy or refund of excise duty that is linked to capital investment but not directly attributable to the cost of a particular asset constitutes a capital receipt and cannot be deducted from the block of assets for depreciation unless it is directly linked to the purchase cost of that specific asset.