CIT vs. Bhushan Steels And Strips Ltd (Delhi High Court)

DATE: July 13, 2017 (Date of pronouncement)
DATE: July 17, 2017 (Date of publication)
AY: 1995-96
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Whether subsidy is a capital receipt or a revenue receipt: If the recipient has the flexibility of using it for any purpose and is not confined to using it for capital purposes, it means that the policy makers envision greater profitability as an incentive for investors to expand units. Such subsidy is revenue in nature and is taxable as profits

The High Court had to consider the following question of law at the instance of the Revenue:

Whether the ITAT was correct in law in holding that the amount received by the assessee by way of exemption of sales tax payments was not a trading receipt but was a capital receipt, hence not liable to tax?

HELD by the High Court allowing the appeal:

(i) In the present case, the provisions of the original scheme (i.e. the original policy of 1990) and its subsidy scheme are relevant; they have quite correctly been relied upon by the revenue. Paras 6 (A) and 6(B) of that scheme specifically provided for capital subsidy to set up prestige units; the amounts indicated (Rupees fifteen lakhs) were to be towards capital expenditure. Now, if that was the scheme under which the assessees set-up their units, undoubtedly it contained specific provisions that enabled capital subsidies. Whether the assessees were entitled to it, or not, is not relevant. The assessees are now concerned with the sales tax amounts they were permitted to retain, under the amended scheme (dated 27.07.1991) which allowed the facility of such retention, after the unit (established and which could possibly claim benefit under the first scheme) was already set up. This subsidy scheme had no strings attached. It merely stated that the collection could be retained to the extent of 100% of capital expenditure. Whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit, but also implying an underlying intention that the capital expenditure would thereby be recouped, the absence of any such condition should restrain the court from so concluding.

(ii) How a state frames its policy to achieve its objectives and attain larger developmental goals depends upon the experience, vision and genius of its representatives. Therefore, to say that the indication of the limit of subsidy as the capital expended, means that it replenished the capital expenditure and therefore, the subsidy is capital, would not be justified. The specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) meant that the recipient, i.e. the assessee had the flexibility of using it for any purpose. Unlike in Ponni Sugars (supra), the absence of any condition towards capital utilization meant that the policy makers envisioned greater profitability as an incentive for investors to expand units, for rapid industrialization of the state, ensuring greater employment. Clearly, the subsidy was revenue in nature.

Cases referred:

Commissioner of Income Tax v Godavari Plywoods 168 ITR 632)
Commissioner of Income Tax v Elys Plastics (1991)188 ITR 11)
Commissioner of Income Tax v P.J. Chemicals 210 ITR 830 (SC)
Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax: 1997 (228) ITR 253(SC)
Commissioner of Income Tax v. Ponni Sugars & Chemicals [2008] 306 ITR 392 (SC)
Commissioner of Income Tax v. Shree Balaji Alloys 2016 (287) CTR 459 (SC) Shri Balaji Alloys vs. Commissioner, Income Tax (2011) 333 ITR 335
Commissioner of Income Tax vs. Bougainvilla Multiplex Entertainment Centre Pvt. Ltd. (2015) 373 ITR 14

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