Interest subsidy for repayment of loan acquired for acquisition of capital assets, is capital receipts
Citation of the Case: DCIT vs. M/s J.K. Cement Ltd. (ITAT Lucknow), ITA No.499/LKW/2010, ITA No.247 / LKW/2011, ITA No.180/LKW/2012, ITA No.570/LKW/2012 & ITA No.668/LKW/2014, AY 2007-08 to 2011-12, Date of Judgment: 30/10/2015
Brief of the Case
ITAT Lucknow held in the case DCIT vs. M/s J.K. Cement Ltd. that certain conditions are made in the subsidy scheme, which is required to be fulfilled by the corporate sector in order to avail the benefit of subsidy. One such condition was that the subsidy amount is utilized for repayment of loans and there should not be any defaults in repayment of dues to the banks in respect of these loans. In the case of Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC), the apex court held that the nature of subsidy is to be determined in respect of purpose for the subsidy is granted. Further in the case of ACIT Vs. Shree Cement Ltd ITA No. 614, 615 & 635/JP/2010, an identical fact that the interest subsidy was considered to be the capital subsidy was delivered. Therefore, in the light of aforesaid judgments, we are of the view that the CIT (A) has rightly treated the interest subsidies as a capital receipt as it was received only for repayment of loan acquired for acquisition of capital assets.
Facts of the Case
The assessee has purchased cement division of J.K. Synthetics Ltd. The assessee company has taken loan from various financial institutions in order to buy cement division, which are already engaged in production of cement. As per the scheme of the Rajasthan Government known as Raj Investment Promotion Policy- 2003, assessee has applied for subsidy and Rajasthan Government has granted 5% interest subsidy and 50% exemption from electricity duty. The exemption granted for electricity duty has declared as Revenue receipt whereas interest subsidy was declared as capital receipt. The interest subsidy has been granted by the Rajasthan Government against 50% payment of RST/CST and VAT paid by the assessee company. The assessee company has utilized the interest subsidy in payment of loan taken from financial institutions. The assessee has treated receipt of interest subsidy as capital receipt but the Assessing Officer was not convinced with treatment given by the assessee and he was of the view that subsidy has been granted as incentive to the assessee company to run the business of manufacturing of cement in the State of Rajasthan. He accordingly treated the interest subsidy received by the assessee as a Revenue receipt.
Contention of the Assessee
The ld counsel of the assessee submitted that the main object of the subsidy was to assist the assessee in the repayment of loan. He also tried to demonstrate that the object of the subsidy was to assist the assessee in acquiring the capital assets. Therefore, the nature of subsidy is a capital receipt in the light of the judgment of the Hon’ble Apex Court in the case of Sahney Steel Works Ltd. Vs. CIT reported in 228 ITR 253 (S.C.) and in the case of Ponni Sugars and Chemicals Ltd. Vs. CIT reported in 306 ITR 392 (SC). Besides Ld. counsel for the assessee has also placed reliance upon the following judicial Pronouncements – ACIT Vs. Shree Cement Ltd. ITA No.614, 615& 635/JP/2010, DCIT Vs. Sutlej Textiles and Industries Ltd. ITA No. 5142/Del/2013, Sutlej Textiles and Industries Appeal No.386/11-12, Shree Balaji Alloys Vs. CIT reported in 198 Taxman 122, CIT Vs.Sham Lal Bansal ITA No. 472 of 2010, CIT Vs. Birla VXL Ltd. 215 Taxman 117 and Maruti Suzuki India Ltd. Vs. ACIT ITA No. 5120/Del/2010.
Contention of the Revenue
The ld counsel of the assessee supported the order of AO.
Held by CIT (A)
The assessee has placed reliance on various Tribunal orders before the CIT (A), in support of his contention that since the subsidy was received for the repayment of the loans obtained for acquiring the capital assets it should be treated to be capital receipt. The CIT (A) has reexamined the issue in the light of detailed submission of the assessee. Being convinced with it, the CIT (A) has treated the receipt of interest subsidy as capital receipt. Accordingly, the addition made by the AO was deleted. It was held that it is an admitted position that the appellant was not having any manufacturing unit it acquired these sick units through the scheme of the BIFR and to acquire such units, the appellant had admittedly made considerable borrowings (on which it was paying interest). As I have understood the Scheme of subsidy (formulated by the Govt. of Rajasthan), one of the eligibility conditions in the scheme in the instant case was that the there has been no default in repayment of dues against term loan of concerned financial institution(s) and/or Bank(s). The AO has also confirmed in the assessment order that the impugned subsidy amount had been utilized for repayment of loans taken from Financial Institutions. Thus, it can be concluded that the Assessee claim to treat the subsidy received by it from Government of Rajasthan as Capital Receipt is justified.
Held by ITAT
ITAT held that as per Raj Investment Policy 2003, the subsidy shall be available to the investors for seven years from the date of first repayment of interest in case of interest subsidy and first payment of wages/employment in case of wage employment subsidy. Various conditions are spelt out in the scheme which are required to be fulfilled by the assessee for claiming the subsidy. We also find that scheme was launched to assist to the corporate sector in acquiring or expending their units. Certain conditions are also made in this scheme, which are required to be fulfilled by the corporate sector in order to avail the benefit of subsidy. One such condition was that the subsidy amount is utilized for repayment of loans and there should not be any defaults in repayment of dues to the banks in respect of these loans.
In the case of Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC), the apex court held that the nature of subsidy is to be determined in respect of purpose for the subsidy is granted. The character of subsidy is to be determined with respect to subsidy is granted. In other words one has to apply the purpose test. The point of time as subsidy paid is not relevant. The source is immaterial if the object of the subsidy is to enable the assessee to run the business more profitably then the receipt is of revenue receipt. On the other hand, object of the assistance under the subsidy scheme is to enable the assessee to setup a new unit or to expend an existing unit then the receipt of the subsidy is a receipt in capital account. The apex court has further held that after reversing the judgment of the High Court that main eligibility condition in the schemes was that the incentive had to be utilized for repayment of loans taken by the assessee to setup new units or for substantial expansion of an existing unit. Accordingly, held that the subsidy received by the assessee was not in the course of trade but was of capital nature.
Further ITAT held that in the case of ACIT Vs. Shree Cement Ltd ITA No. 614, 615 & 635/JP/2010 an identical fact that the interest subsidy was considered to be the capital subsidy was delivered. Therefore, in the light of aforesaid judgments, we are of the view that the CIT (A) has rightly treated the interest subsidies as a capital receipt as it was received only for repayment of loan acquired for acquisition of capital assets.
Accordingly appeals of the revenue dismissed.
