Subsidy Received for Repayment of Term Loans Undertaken for Setting Up New Unit was Non-Taxable as Capital Receipt

Facts of the case:

• Assessee is a textile manufacturer.
• Assessee received subsidies Rs. 7,08,60,525/- towards Technology Upgradation Fund; Rs. 1,67,84,009/- under the Focus Market Scheme; and Rs. 26,52,890/- under Electricity Duty Subsidy. Assessee claimed all these to be capital receipts.
• Assessing Officer (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.

Contention of the Assessee:

• As per scheme by Union Textile Ministry and agreement thereto, the capital subsidy 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.

Contention of the Department:

• The amount received by assessee was in the nature of revenue and till production actually took place the receipts in the hands of the assessee had to be treated as revenue.

Judgement of High Court of Rajasthan:

• 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.
• Thus, the amount from Technology Upgradation Fund was received as capital stream and therefore, not taxable.
• 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.
• With regard to the electricity subsidy, it was held to be a capital receipt by the CIT(A). It was held that this was granted in larger public interest and it was linked to capital interest.

Conclusion:

Whenever subsidy is received by the Assessee, the purpose for which such subsidy is given would determine the nature as revenue or capital.

Source: [2020] 116 taxmann.com 26 – Principal Commissioner of Income Tax, Ajmer v. Nitin Spinners Ltd.