When subsidy through refund of excise duty is not taxable as income

The word “subsidy” is of vital importance. It is defined as monetary assistance given by a government to a person or group to help an enterprise involved in the public interest.

Even since the beginning of mankind, there has been support extended from the executive to raise the standard of the society for the benefit of mankind.

There have been debates over the issue of the relative taxability on subsidy.

The Hon’ble Supreme Court in the case of CIT vs. Shree Balaji Alloys, Civil Appeal No. 10061 of 2011 with Civil Appeal No. 8491 OF 2012, Civil Appeal No. 8495 OF 2012 and others have held that subsidy through refund of excise duty is a capital receipt not taxable as income.

The bench consisted of J. Kurian Joseph and J. Banumathi passed the aforesaid judgment on 19.4. 2016 and the judgment was published on 7.7.2016.

Backgrounds of the case:

The assessee after announcement of the New Industrial Policy for the State of Jammu and Kashmir received excise refund and interest subsidy which it demanded to be a capital receipt.

Alternatively it was claimed that the refund amount was eligible for deduction under section 80-IB of the Income tax Act.

The Assessing Officer, CIT (A) and the Tribunal rejected the claim made by the assessee and held that the receipts were revenue in nature on the ground that the subsidy was for established industry and not in connection with the establishment of a new one and the subsidy was available after commercial production and the same was recurring and was not for the purpose of purchasing capital assets and moreover it was for running the business on profit.

The assessee filed an appeal before the Hon’ble High Court (333 ITR 335) which reversed the order of the authorities below and held that the ratio of Sahney Steel 228 ITR 253 (SC) and Mepco Industries 319 ITR 208 (SC) was that to determine whether subsidies are revenue in nature or are capital receipts. The purpose behind the subsidy was actually the determination test.

If the object of the subsidy was to help the assessee to run the business in a better way, the receipt shall be of revenue in nature.
If the object of the subsidy is to help the assessee to set up a new unit or to modify the existing one, the subsidy shall be a capital one.

It is in fact the object for which the subsidy is provided, determines the nature of the incentive subsidy. The form through which the subsidy is provided is not relevant.

In the instant case, the object of the subsidy was to accelerate industrial development in and to generate employment in the state. Such subsidy given for public purpose cannot be construed as production incentives for the benefit of only the assesses. For the said reason it cannot be construed as only production or trade Incentives.

The issue whether the subsidy receipts are eligible for deduction under section 80-IB of the Income tax Act was not decided.

The judgment:

On further appeal by the department to the Hon’ble Apex Court it was held the issue raised in the appeals were covered against the Revenue by the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madras vs. Ponni Sugars and Chemicals Ltd., 2008, 9 SCC 337, or in the case of Commissioner of Income Tax vs. M/s Meghalaya Steels Ltd. 2016, 3 SCALE 192 (383 ITR 217 (SC)).

Mr. K. Radhakrishnan, learned senior counsel appearing on behalf of the Revenue and Mr. Ajay Vohra, learned senior counsel appearing for the respondents were both heard at length.

The appeals were accordingly dismissed by the Hon’ble Apex Court.