Question And Answer
Subject: Subsidy received under PSI 2007 and Explanation 10 To Sec.43
Querist: Prakash Kulkarni
Answered by:
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Date: November 3, 2022
Query asked by Prakash Kulkarni

Assessee is a Private limited co engaged in manufacturing of dairy products. In the year 2012-13, assessee co has received subsidy from the Govt of Maharashtra, in respect of investment in Plant at back ward area in the status of Mega Project under the Package Scheme of Incentives, 2007, (‘PSI’).

As per the Eligibility Certificate, assessee co shall be entitled to:

  1. Electricity Duty exemption for the period of 7 years from the date of commencement of commercial production.


  1. 100% exemption from payment of stamp duty under relevant Government Resolution of Revenue and Forest Department.


  1. Industrial Promotion Subsidy (`IPS’) equivalent to the lower of, but not exceeding 1NR 1181 million


  1. 100 percent of the eligible investment under the PSI made within       5years from the date of application i.e. 2 May 2009; or amount of net taxes payable by the Project under State Value Added Tax Act, 2002 (`VAT Act’) and Central Act in respect of sale of finished products eligible for incentives i.e. net tax paid after adjustment of set off or other credit available, within a period of 7 years.

A.O. consider subsidy received as the revenue receipt.

CIT (A) deleted the addition mainly on the ground that the impugned incentive scheme was primarily to encourage setting up of new industries or expansion of existing industrial units in backward areas and the subsidy given was directly dependent upon the new investments made in the backward area by relying up on following decisions:

  1. CIT vs Ponni Sugars and chemicals Ltd 174 taxmann 87
  2. Reliance Industries Ltd (TM) 88 ITD 273
  3. CIT vs Tripati Menthol Industries 35 515
  4. CIT vs Chaphalkar Brothers 351 ITR 309 and given the directions to AO to reduce amount of subsidy from the cost of acquisition / WDV of fixed assets in view of Explanation 10 to Sec.43(1)of the Act.

Assessee as well as Department filed an appeal before the ITAT. Department has taken the stand that the relief given by CIT(A) is incorrect as CIT (A) has deleted the addition ignoring the fact that incentive was given only after start of commercial production and was linked with normal operational efficiencies. and the decision of Reliance Industries Ltd (TM) 88 ITD 273 is set aside by the HC and there is Delhi HC decision which is against the assessee and also relying up on the following decisions

a. LG electronics 134 329

b. Sahany still 228 ITR 253

c. Rajaram Maise products 119 Taxman 492

d.  Colourman Dyechem 377 ITR 411

Issues :

  1. Is the action of the department is legally justified?
  2. Whether still assessee can rely on the following decision in support of its claim that the subsidy received is a capital receipt.
  3. CIT vs Ponni Sugars and chemicals Ltd 174 taxmann 87
  4. CIT vs Tripati Menthol Industries 35 515
  5. CIT vs Chaphalkar Brothers 351 ITR 309

In support of the contention that explanation 10 to 43(1) is not applicable to assessee company on the following grounds:-

  • That the scheme of State Govt.  is for the encouragement of setting up of industrial project or expansion of existing industrial projects.
  • that the maximum limit of the subsidy was restricted with reference to the value of fixed capital investment in land, building, plant & machinery but no part of the subsidy was specifically intended to subsidized the cost of the any fixed assets, therefore, it cannot be said that subsidy was to meet a portion of cost of asset.
  • In order to invoke Explanation 10, it is necessary to show that the subsidy was directly or indirectly used for acquiring an asset.
  • Explanation 10 and the proviso thereto do not dilute the finding of the Hon’ble Supreme Court in the case of CIT vs P. J. Chemicals Ltd. (210 ITR 830)

pl guide .

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Answer given by

Whether the subsidy is taxable or not depends upon the scheme . Unless one studies the scheme and order of Assessing Officer and CIT(A) one may not be in a position to answer the quarries raised . In LG Electronics v. PCIT (2022) 134 329 (SC ) the matter was set aside hence no ratio is decided hence the Revenue cannot rely to the proposition that the subsidy is revenue receipt .
In Tata Chemicals Ltd. v. Dy.CIT (2022) 95 ITR 134/ 216 TTJ 402 (Mum) ( Trib) The Tribunal, following the decision of the Supreme Court in the case of CIT v. Ponni Sugar & Chemicals Ltd (2008)306 ITR 392 (SC) , noted that the object for which the subsidy/assistance is given determines the nature of the incentive subsidy, and the mechanism is irrelevant. In the present case, once the object of subsidy is to industrialize the state, it is capital receipt.
In Kinfra Export Promotion Industrial Parks Ltd. v .JCIT (2022) 444 ITR 608/ 215 DTR 233/ 287 Taxman 353 (Ker)(HC) the Court held that subsidy received from Government . Proviso and Explanation 10 to Section 43(1) by Finance (No. 2) Act, 1998 is not retrospective in operation . Matter remanded for verification .

Issue has to be decided on facts of the case .

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