The Short Issue, Which Falls For Consideration, Is Whether Subsidygranted To The Respondent Assessee In Terms Of The West Bengal Incentive v. Vs. Ponni Sugars And Chemicals Ltd. The Relevant Portion Of The Judgement

Form No. IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE PRESENT:THE HON’BLE JUSTICE T.S. SIVAGNANAMAnd THE HON’BLE JUSTICE HIRANMAY BHATTACHARYYA ITAT/261/2017IA NO:GA/2/2017 [OLD NO:GA/2231/2017] PRINCIPAL COMMISSIONER OF INCOME TAX, CENTRAL-1, KOLKATAVS.M/S BUDGE BUDGE REFINERIES LTD. ……… For the appellant: Mr. P.K. Bhowmick, Adv. For the respondent: Mr. Ananda Sen, Adv. Heard on : February 8, 2022. Judgement on : February 8, 2022. T.S. SIVAGNANAM, J. : This appeal by the revenue filed underSection 260A of the Income Tax Act, 1961 (the ‘Act’ in brevity) is directedagainst the order dated 14[th] October, 2016 passed by the Income TaxAppellate Tribunal, “C” Bench, (Tribunal) in ITA No.1552/Kol/2010 and ITANo. 577/Kol/2011 for the assessment years 2007-2008 and 2008-2009. The revenue has raised the following substantial questions of lawfor consideration: i) Whether on the facts and in the circumstances of the case theLearned Tribunal was justified in law to dismiss the appeal of therevenue holding, inter–alia, that the subsidy cannot be thesubject matter of taxation in the years under appeal as the samegot released/sanctioned only in the financial year 2009-2010. ii)Whether on the facts and in the circumstances of the case theLearned Tribunal was justified in law to upheld the order of theCIT(A) by deleting the additions made under Section 41(1) of thesaid Act towards the subsidy by relying upon a decision of thisHon’ble High Court in the case of CIT –vs- Rasoi Limited withoutconsidering the settled proposition of law as held by the Hon’bleApex Court in the case of Sahney Steel and Press Works LimitedReported in 228 ITR 253 S.C. wherein it has been held that thesales tax incentive/subsidy eligible to be received as a revenuereceipt and thereby the same to be treated as income underSection 41(1) of the said Act. We have heard Mr.P. K. Bhowmick, learned counsel for theappellant/revenue and Mr. Ananda Sen, learned counsel appearing for therespondent/assessee. The short issue, which falls for consideration, is whether subsidygranted to the respondent assessee in terms of the West Bengal Incentive Scheme 2000 could be taxed in the assessment years under consideration.The other question which would fall for consideration is whether the decisionin the case of Sahney Steel and Press Works Limited Vs, CIT reported in 228ITR 253 S.C. has to be applied. The Tribunal perused the West BengalIncentive Scheme 2000 and noted that the scheme was intended to accelerateindustrial development in the State of West Bengal and incentive was given forsetting up industries in the State and for such purpose the amount of subsidywhich was given, was in the nature of reimbursement of 75% of the SalesTax/VAT actually paid by the assessee. The Tribunal rightly applied the“purpose test” and found that the quantification of the subsidy alone is basedon reimbursement of 75% of Sales Tax/VAT actually paid by the assesseeafter the commencement of the project and that such quantification would berelevant for the taxability of the same going by the objects of the incentivescheme. The Tribunal taking note of the decision of the Hon’ble SupremeCourt in the case of Commissioner of Income Tax Vs. Ponni Sugars andChemicals Ltd.: [2008] 306 ITR 392 (SC) as also the decision of this case in thecase of Commissioner of Income Tax Vs. Rasoi Ltd : [2011] 335 ITR 438 (Cal.)dismissed the appeal filed by the revenue. Before us, the learned Counselwould place heavy reliance on the decision of the Hon’ble Supreme Court inthe case of Sahney Steel and Press Works Limited (supra) and submitted thatTribunal ought to have followed the said decision and allowed the appeal filedby the revenue. As rightly pointed out by Mr. Sen, learned Counsel appearingfor respondent the decision in Sahney Steel and Press Works Limited (supra)was explained considering the facts of the case in Commissioner of Income-Tax Vs. Ponni Sugars and Chemicals Ltd. The relevant portion of the judgement reads as follows :- “On the facts of that case, it was held that the subsidygiven was to meet recurring expenses. It was not for acquiringthe capital asset. It was not to meet part of the cost. It was notgranted for production of or bringing into existence any newasset. The subsidies in that case were granted year after yearonly after setting up of the new industry and only aftercommencement of production and, therefore, such a subsidycould only be treated as assistance given for the purpose ofcarrying on the business of the assessee. Consequently, thecontentions raised on behalf of the assessee on the facts of thatcase stood rejected and it was held that the subsidy received bySahney Steel could not be regarded as anything but a revenuereceipt. Accordingly, the matter was decided against theassessee. The importance of the judgement of this court inSahney Steel case lies in the fact that it has discussed andanalysed the entire case law and it has laid down the basic testto be applied in judging the character of a subsidy. That test isthat the character of the receipt in the hands of the assessee hasto be determined with respect to the purpose for which thesubsidy is given. In other words, in such cases, one has to applythe purpose test. The point of time at which the subsidy is paidis not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme withwhich we are concerned in this case is that the incentive must beutilized for repayment of loans taken by the assessee to set upnew units or for substantial expansion of existing units. On thisaspect there is no dispute. If the object of subsidy scheme wasto enable the assessee to run the business more profitably thenthe receipt is on revenue account. On the other hand, if the objectof the assistance under the subsidy scheme was to enable theassessee to set up a new unit or to expand the existing unit thenthe receipt of the subsidy was on capital account. Therefore, it isthe object for which the subsidy/assistance is given whichdetermines the nature of the incentive subsidy. The form or themechanism through which the subsidy is given are irrelevant.” The above decision clearly points out that form of subsidy isimmaterial and the main eligibility condition of the scheme has to be lookedinto and if the same is taken note of it is evidently clear from the scheme thatthe subsidy was for the purpose of encouraging establishment of large,medium and small scale industrial units in the State of West Bengal. Aspointed out by the Hob’ble Supreme Court the object of the assistance underthe subsidy scheme was to enable the assessee to set up a new unit and,therefore, the receipt of the subsidy was on capital account. The test to beapplied is the object for which the subsidy/assistance is given under theincentive scheme and the form or mechanism through which the subsidy is given would be irrelevant. The decision in Ponni Sugars and Chemicals Ltd.(supra) was taken note of and this court has granted relief to the assessee inRasoi Ltd.(supra) . Subsequently in the case of Principal Commissioner ofIncome Tax-I, Kolkata Vs. Shyam Steel Industries Ltd.[2018] 93 taxmann.Com 495 (Calcutta), following the decision in Ponni Sugars and Chemicals Ltd.it was pointed out that the scheme in the said case being available only tonew units and units which have undergone an expansion, the real purpose ofthe incentive has to be seen as capital subsidy and has to be recorded assuch, as capital receipt and not a revenue receipt. given would be irrelevant. The decision in Ponni Sugars and Chemicals Ltd.(supra) was taken note of and this court has granted relief to the assessee inRasoi Ltd.(supra) . Subsequently in the case of Principal Commissioner ofIncome Tax-I, Kolkata Vs. Shyam Steel Industries Ltd.[2018] 93 taxmann.Com 495 (Calcutta), following the decision in Ponni Sugars and Chemicals Ltd.it was pointed out that the scheme in the said case being available only tonew units and units which have undergone an expansion, the real purpose ofthe incentive has to be seen as capital subsidy and has to be recorded assuch, as capital receipt and not a revenue receipt. That apart we also take note of the communication sent by the JointSecretary to the Government of West Bengal, Commerce and IndustriesDepartment to the Managing Director, West Bengal Industrial DevelopmentCorporation dated 23[rd] March, 2007 wherein it has been stated that the StateGovernment has approved the package for the assessee for setting up anEdible Oil Refinery Plant and Captive Power Generation unit and thereimbursement of 75% of the sales tax paid has been termed as IndustrialPromotion Assistance. Thus, we have no hesitation to hold that the Tribunalhad rightly rejected the appeal filed by the revenue and granted relief to theassessee. Furthermore, on the other issue where Section 41(1) of the Act couldhave been invoked the Tribunal rightly held that the said provision could beinvoked only when assessee had claimed deduction in earlier year at the timeof creation of liability and if the said liability ceases to exist then the provisionof Section 41(1) of the Act could not be invoked. Taking note of the facts of the assessee’s case the Tribunal has held assessee has not claimed any deductionin the earlier year towards the sales tax portion of the subsidy and hence theprovision of Section 41(1) of the Act cannot be invoked in the facts of theassessee’s case. The findings rendered by the Tribunal clearly point out thecorrect legal position. In the result, the appeal filed by the revenue is dismissed andsubstantial question of law are answered against the revenue. Connected application stands dismissed. (T.S. SIVAGNANAM, J.) I agree. (HIRANMAY BHATTACHARYYA, J.) GH/NMAR(CR)