Textile manufacturer receiving subsidy under TUFS scheme is a capital receipt or revenue receipt for income Tax purposes ?
Short Overview : Where Central Government granted the subsidy to enhance Indian export potential in the international market and it was not granted to meet the cost of expenditure to meet the competition of the Indian textile market, therefore, amount was not an export incentive, but rather capital receipt and therefore, not taxable.
Assessee was a textile manufacturer and it received Technology Upgradation Fund, pursuant to a scheme drawn by Union Textile Ministry. The payment of invasion of amounts by deferred repayment of interest, as it were. Technology Upgradation Fund programme, amounts were to be treated as non-interest bearing term loans by the Bank and the repayment was to be worked out excluding the subsidy amount and the subsidy to be adjusted against the term loan account of the beneficiary after a lock in period of three years. AO disallowed the amount and sought to tax it under the ground that the subsidy was a taxable income as it fell into revenue stream.
It is held that : Central Government gave the subsidy to enhance Indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. Tribunal held that amount was not an export incentive, but rather capital receipt and therefore, not taxable. Court was of the opinion that amount was received as capital stream and therefore, not taxable.
Decision: In assessee’s favour.
Referred: CIT v. Ponni Sugars & Chemicals Ltd. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC), Sahney Steel And Press Works Limited & Ors. v. CIT (1997) 94 Taxman 368 (SC) : 1997 TaxPub(DT) 1342 (SC), CIT v. Gloster Jute Mills Ltd. (2018) ITL 3046 (CAL)(HC) : 2018 TaxPub(DT) 5370 (Cal-HC)
IN THE RAJASTHAN HIGH COURT
S. RAVINDRA BHAT AND PUSHPENDRA SINGH BHATI, JJ.
Principal CIT v. Nitin Spinners Ltd.
D.B. ITA No. 31/2019
19 September, 2019
Appellant(s) by: Kamal Kishore Bissa
Respondent(s) by:
JUDGMENT
1. The revenue’s grievance in this appeal under section 260A of the Income Tax Act, 1961 is that the amount claimed as capital receipts, by the assessee are taxable and have to be treated as income. These involved the first subsidy of Rs.7,08,60,525 (towards Technology Upgradation Fund); second subsidy of Rs.1,67,84,009 (under the Focus Market Scheme); and the third subsidy of Rs.26,52,890 (under Electricity Duty Subsidy). The assessee claimed all these to be capital receipts.
2. The assessee is a textile manufacturer. For the relevant year i.e. 2013-14, it received the Technology Upgradation Fund, pursuant to a scheme drawn by the Union Textile Ministry. The payment of invasion of amounts by deferred repayment of interest, as it were. Under para 8 of the Technology Upgradation Fund programme (the amounts which were released under an agreement dt. 12-7-2005) the amounts were to be treated as non-interest bearing term loans by the Bank and the repayment was to be worked out excluding the subsidy amount and the subsidy to be adjusted against the term loan account of the beneficiary after a lock in period of three years. The agreement pertinently provided as follows:
“Para 8. to prevent mis-utilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non interest bearing term loan by the Bank/Fis. The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock in period of three years on a pro-rate basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount.”
3. The assessing officer disallowed the amount and sought to tax it under the ground that the subsidy was a taxable income as it fell into revenue stream. The Commissioner(Appeals) granted partial relief; the ITAT allowed assessee’s appeal and rejected the revenue’s appeal.
4. It is argued on behalf of the revenue that the ITAT’s approach is incorrect given that till production actually took place the receipts in the hands of the assessee had to be treated as revenue.
5. In its order, the ITAT took note of several previous Bench ruling as well as judgment of the Punjab and Haryana High Court in CIT v. Shyam Lal Bansal (2011) 200 Taxman 14 (P&H) HC) : 2011 TaxPub(DT) 1562 (P&H HC). In Shyam Lal Bansal (supra) the Punjab and Haryana High Court observed as follows:
“6. The purpose of scheme under which the subsidy is given, has been discussed by the Tribunal. To sustain and prove the competitiveness and overall long term viability of the textile industry, the concerned Ministry of Textile adopted the TUFS scheme, envisaging technology upgradation of the industry.
Under the scheme, there were two options, either to reimburse the interest charged on the lending agency on purchase of technology upgradation or to give capital subsidy on the investment in compatible machinery. In the present case, the assessee has taken term loans for technology upgradation and subsidy was released under agreement dt. 12-7-2005 with Small Industry Development Bank of India. The relevant clause of the agreement under which the subsidy was given is as under:-
“Para 8 to prevent mis-utilization of capital subsidy and to provide an incentive for repayment, the capital subsidy will be treated as a non interest bearing term loan by the Bank/Fis.
The repayment schedule of the term loan however will be worked out excluding the subsidy amount and subsidy will be adjusted against the term loan account of the beneficiary after a lock in period of three years on a pro-rate basis in terms of release of capital subsidy. There is no apparent or real financial loss to a borrower since the countervailing concession is extended to the loan amount.”
7. In view of the above, the view taken in Sahney Steel & Press Works Ltd. & Ors., could not be applied in the present case, as in said case the subsidy was given for running the business. For determining whether subsidy payment was ‘revenue receipt’ or ‘capital receipt’, character of receipt in the hands of the assessee had to be determined with respect to the purpose for which subsidy is given by applying the purpose test, as held in Sahney Steel & Press Works Ltd. & Ors. itself and reiterated in later judgment in CIT v. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC), referred to in the impugned order of the Tribunal.”
6. This Court notices that the Punjab and Haryana High Court took into account the previous binding ruling of the Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd. & Ors. (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC) and Sahney Steel & Press Works Ltd. & Ors. v. CIT (1997) 94 Taxman 368 (SC) : 1997 TaxPub(DT) 1342 (SC). In these circumstances, the Court is of the opinion that the amount was received as capital stream and therefore, not taxable.
7. A similar view was taken by the Calcutta High Court in CIT v. Gloster Jute Mills Ltd. (2018) ITL 3046 (CAL)(HC) : 2018 TaxPub(DT) 5370 (Cal-HC).
8. As far as the question with regard to Focus Marketing Scheme was concerned, apparently the Central Government gave the subsidy to enhance indian export potential in the international market. It was not granted to meet the cost of expenditure to meet the competition of the Indian textile market. The ITAT took note of judgment in Ponni Sugars & Chemicals Ltd. (supra) and held that the amount was not an export incentive, but rather capital receipt and therefore, not taxable. This Court is of the opinion that there is no infirmity with the reason.
9. As far as the electricity subsidy is concerned, the third ground i.e. electricity subsidy under the Rajasthan Investment Promotion Scheme was held to be a capital receipt by the Commissioner(Appeals).
It was held that this was granted in larger public interest and it was linked to capital interest, a similar scheme was that the amounts received in the similar scheme have to be capital receipt by a Division Bench of this Court in CIT, Ajmer v. Shree Cement (D.B. Income Tax Appeal No.204/2010, decided on 22-8-2017) : 2018 TaxPub(DT) 4686 (Raj-HC). This Court notices that the ratio of the rulings in Ponni Sugars & Chemicals Ltd. (supra) and Sahney Steel & Press Works Ltd. & Ors. (supra), applied. Consequently, we find no infirmity with the approach of the ITAT on this aspect as well.
10. For the above reasons, no question of law arises for consideration.
11. The appeal is therefore dismissed.