Difference between capital subsidy and revenue subsidy
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It is prevalent that either the Central Government or State Governments grant subsidies to certain industries to encourage for the development of products or export. The issue to be discussed in this article is whether the subsidy received by the Companies from the Government is to be treated as revenue receipt or capital receipt.
In ‘Sahney Steel and Press Works Limited V CIT’ – 1997 -TMI - 5620 – (SUPREME Court) the Supreme Court held that if the object of the subsidy scheme was to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account. In this case it was contended by the assessee that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and therefore such receipt of subsidy was on capital account and not on revenue account. The subsidy granted was on the basis of refund of sales tax on raw materials, machinery and finished goods which were of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The Supreme Court on analyzing the facts of the case held that the subsidy gives was on revenue account because it was given by way of assistance in carrying on trade or business. It was not for acquiring the capital asset. The subsidies in this case were granted year after year only after setting up the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee.
Thus the nature of subsidy is to be considered on the object for which the subsidy is given. In ‘Senairam Doongarmall V. CIT’ – 1961 -TMI - 49504 – (SUPREME Court)the Supreme Court held that it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure and makes it fall within capital or revenue.
In ‘CIT V. Abhishek Industries Limited’ – 2006 -TMI - 9839 – (PUNJAB AND HARYANA High Court) the High Court held that in the absence of any document or policy of the State Government to show the kind of subsidy it had granted it should be treated as a revenue receipt.
In ‘Commissioner of Income Tax V. Rasoi Limited’ – 2011 -TMI - 203507 – (CALCUTTA HIGH COURT) the West Bengal Government considered it necessary to formulate a scheme of industrial promotion to certain industries which are in need of financial assistance for expansion of their capacities, modernization and improving their marketing capabilities. According to this policy the dealer shall be entitled to a payment of a sum equal to 90% of the amount of sales tax paid by him for any quarter under the sales tax act in respect of sales of such goods, as industrial promotion assistance. The assessee showed the subsidy granted by the State Government as ‘other income’. The assessee was advised that the said receipt of subsidy was of the nature of capital receipt for the purpose of computation of taxable income and in the return filed by the assessee, it claimed the amount to be in the nature of capital receipt
In ‘Sahney Steel and Press Works Limited V CIT’ – 1997 -TMI - 5620 – (SUPREME Court) the Supreme Court held that if the object of the subsidy scheme was to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account. In this case it was contended by the assessee that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and therefore such receipt of subsidy was on capital account and not on revenue account. The subsidy granted was on the basis of refund of sales tax on raw materials, machinery and finished goods which were of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The Supreme Court on analyzing the facts of the case held that the subsidy gives was on revenue account because it was given by way of assistance in carrying on trade or business. It was not for acquiring the capital asset. The subsidies in this case were granted year after year only after setting up the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee.
Thus the nature of subsidy is to be considered on the object for which the subsidy is given. In ‘Senairam Doongarmall V. CIT’ – 1961 -TMI - 49504 – (SUPREME Court)the Supreme Court held that it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure and makes it fall within capital or revenue.
In ‘CIT V. Abhishek Industries Limited’ – 2006 -TMI - 9839 – (PUNJAB AND HARYANA High Court) the High Court held that in the absence of any document or policy of the State Government to show the kind of subsidy it had granted it should be treated as a revenue receipt.
In ‘Commissioner of Income Tax V. Rasoi Limited’ – 2011 -TMI - 203507 – (CALCUTTA HIGH COURT) the West Bengal Government considered it necessary to formulate a scheme of industrial promotion to certain industries which are in need of financial assistance for expansion of their capacities, modernization and improving their marketing capabilities. According to this policy the dealer shall be entitled to a payment of a sum equal to 90% of the amount of sales tax paid by him for any quarter under the sales tax act in respect of sales of such goods, as industrial promotion assistance. The assessee showed the subsidy granted by the State Government as ‘other income’. The assessee was advised that the said receipt of subsidy was of the nature of capital receipt for the purpose of computation of taxable income and in the return filed by the assessee, it claimed the amount to be in the nature of capital receipt
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