ORDER
Rama Kanta Panda, Vice President.- This appeal filed by the Revenue is directed against the order dated 08.12.2023 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC”], for assessment year 2016-2017.
2. None appeared on behalf of the assessee at the time of hearing. A perusal of the order sheet shows that this appeal was fixed for hearing seven times and in none of the occasions the assessee bothered to either appear before the Tribunal or seek adjournment. Notice was also issued through the Departmental Representative’s Office which was duly served on the assessee and a copy of the acknowledgment of the same was also placed on record. Under these circumstances, we deem it proper to decide the appeal on the basis of the material available on record and after hearing the Learned DR.
3. Facts of the case, in brief, are that the assessee is a limited company engaged in the business of Unit manufacturing homogenized and pasteurized milk and manufacturing of milk products like Ghee Butter, milk powder and other milk products. It filed it’s return of income on 30.11.2016 declaring total income of Rs.10,59,85,260/-. The said return was processed u/sec.143(1) of the Income Tax Act, 1961 (in short “the Act”). Subsequently, the case was selected for scrutiny under CASS and notices u/sec.143(2) and 142(1) were issued and served upon the assessee, in response to which, the learned Authorised Representative of the Assessee appeared before the Assessing Officer from time to time and filed the requisite details.
3.1. During the course of assessment proceedings, the Assessing Officer noted that the assessee has received Rs.2,50,00,000/- as government grant-in-aid on 04.07.2015. He observed that the relevant part of the accounting policy reads as under :
“Scheme of cold chain, value Addition and Preservation Infrastructure under National Mission on Food Processing sanctioned in earlier year noe released partly: The company had applied for Financial aid under the above scheme against EOI dated 10/07/2012. The company has subsequently vide reference No. 945622002662015 been sanctioned with total Financial Aid for Rs.10,00,00,000/-(Ten Crores) as per the scheme guidelines. The company has completed & commenced the cold chain facility during preceding financial year on 15.03.2015 and become eligible for receipt of as capital Reserves under Note No.3 ‘Reserves & Surplus’ since earlier year. During the year under report the company has received the aid of Rs.2,50,00,000/- on 04.07.2015 out of the sanctioned amount and the balance receivable as on 31.03.2016 is Rs. 7.50 crore.”
3.2. The Assessing Officer observed that assessee-company has completed and commenced the cold chain facility and subsequent thereto, grant-in-aid was received which is nothing but revenue receipt. He, therefore, asked the assessee to explain as to why the grant-in-aid should not be taxed as revenue receipt. The assessee, relying on various decisions, submitted that the subsidy received by the assessee-company is not a revenue receipt but is a capital receipt.
3.3. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee-company and held that the subsidy granted falls under the test of revenue subsidy by observing as under :
“6. Submission of the assessee is duly considered. The taxation of the subsidy depends on the purpose for which it is given. If it is given for running day to day business, then it is revenue receipt and if it is given to meet capital cost then it is capital receipt. So in any case, a subsidy can be either a capital subsidy or a revenue subsidy. When the subsidy is given year on year after setting up of undertaking to assist the assessee in carrying out its trade or business then such subsidy is of revenue nature. Besides such subsidy should not be given for setting up the plant but it should be given for efficient and profitable running of industry and its growth. In the instant case, it is seen that assessee states that the subsidy as received is for developing integrated cold chain facility for dairy units and it is a capital subsidy. Assessee further states that provisions of explanation 10 to section 43(1) are not applicable. Assessee states that it is not a revenue subsidy but a capital subsidy wherein the provisions of explanation 10 to section 43(1) are not applicable.
6.1. In the instant case, assessee contends that the subsidy is received in the form of value addition and preservation of infrastructure of diary industries. Assessee further states that the objective of the scheme is to provide integrated and complete cold chain and preservation of infrastructure facilities without any break.
6.2. The Central question, from the point of view of taxation, is whether such subsidies constitute a capital or a revenue. Subsidies are granted by the Government to meet certain requirements which are essential for the progress and development of the nation. For example, subsidies are provided for the establishment of industries in areas which are declared by the Government as industrially backward, for export-oriented industries, small-scale industries and so on. Whatever may be the purpose of the subsidy, we have to see from the point of view of income-tax whether the subsidy received is a capital receipt or a revenue receipt, Where subsidy received is relatable to the setting up of the industry, it would be a capital receipt and if it is give benefits in any other form then it increase the profit margin of an industry which is already running, it would be treated as a revenue receipt. In the instant case, it is seen that the assessee has not received any subsidy towards setting of the industry or towards acquisition of the cost of the asset.
The subsidy is received for providing integrated and complete cold chain and preservation infrastructure facilities without any break. Assessee company has completed and commenced the cold chain facility and subsequent there to grant in aid was received which is nothing but revenue receipt. It does mean that subsidy is received to run the business more profitably.
6.3. It is agreed that the subsidy is not received on account of refund of sales tax, power subsidy etc which would directly tax the subsidy as revenue subsidy. But does it mean that the subsidy received on this account is only revenue subsidy. The character of the subsidy will be decided on the basis for which it is given. If we consider the purpose test as specified by the Hon’ble Supreme court in the case of Sahney Steels & Press Works V/s CIT (Supreme Court of IndiaFor the instant case, it would lead to a conclusion that the subsidy is given to run the business with more profitably. It is clear that the assessee unit was not given subsidy for setting up of Industry nor towards cost of cold chain facility.
6.4. For the reasons mentioned above subsidy granted to the assessee is to encourage the business by giving providing integrated and complete cold chain and preservation infrastructure facilities without any break.
This in turn will yield more profits to the assessee. Hence the subsidy granted falls under the test of revenue subsidy.”
3.4. He further noted that the subsidy in question was not given to the assessee for establishment of business i.e. it was not meant to be used prior to commencement of commercial business so as to make the same as capital one i.e. in the form of fixed assets but it was given to the assessee after they commenced the business i.e. for running the business. If the assessee is given any subsidy for running their business, then such subsidy is never regarded as capital but it is regarded as revenue receipt. Distinguishing the various decisions relied before him by the assessee-company, the Assessing Officer treated the subsidy received by the assessee as revenue in nature and brought the same to tax by adding the same to the total income of the assessee within the meaning of sec.28(iv) of the Act.
4. In appeal, the Ld. CIT(A), deleted the addition by observing as under :
“Decision:
6. The appellant in its grounds of appeal assailed the AO in assessing the subsidy of Rs 2.50 crore as the revenue receipt and also not granting the MAT credit u/s 115.JAA of the Act The AO in Para 2 of the assessment order noted that the assessee had received Rs. 2.50 crore a government grant in aid which it had not offered as income. The AO asked the assessee to explain the same. The assessee in his reply reproduced in Para 5 of the assessment order submitted that it had got grant in aid from the government for setting up the cold chain value addition under National Mission for Food Processing which it has credited in the ‘Capital reserve Account’ being a capital receipt. The assessee further relied on a number of case laws to strengthen its case before the AO. However, the AO not satisfied with the submission of the appellant invoked Explanation 10 to sub-section (1) of section 43 of the Act and following the decision of Sahney steels & Presswork’s, Sundram Exhibitions and Merino Ply treated the grant in aid as the revenue receipt and assessed accordingly.
6.1. The appellant filed detailed submission and the copy of the scheme and also relied on a number of case laws. The submissions of the appellant are examined. The Hon’ble High Court of the Himachal Pradesh inITR 512 (Himachal Pradesh) in case of H.P. Nursing Registration Council v. PCIT held where assessee received one time grant-in-aid from Government of India with a specific purpose of upgradation and strengthening of institutions, which nowhere suggested scope of profit generation or revenue for assessee, said amount received by assessee could not be termed to be revenue receipt. The relevant part of the order is reproduced below:
“14. In Kalpana Place v CIT(Allahabad), the Allahabad High Court examined the fall out of the grant-in-aid and incentives etc. provided by the government. It was held that grant-in-aid received by assessee, in that case, was capital receipt. The grant-in-aid, in that case, was provided by the State Government for construction of permanent Cinema Halls during a specified period. The Court after analyzing the facts found that since the grant-in-aid was only for specific purpose of construction of Cinema Halls in the rural areas, it could not be termed as revenue receipt.
15. Similarly, in CIT v. Ponni Sugars & Chemicals Ltd the Hon’ble Supreme Court has held as under :-
“14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel and Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended 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, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also 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 contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of 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. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel case lies in the fact that it has discussed and analyzed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of koans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably than the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.”
Applying the purpose test to the facts of that case, it was held that the payment received by assessee under the scheme was not in the course of a trade but was of a capital nature. In Ponni Sugars case (supra), the incentive conferred was in the nature of higher free sale sugar quota and allowance to collect excise duty even on the sale price of free sale sugar.
The purpose obviously was to promote the concerned business.
16. Reference can also be made to a decision in Karnataka Municipal Data Society v. ITO (Karnataka) wherein the Karnataka High Court has held that the amount given by the Government for a specified purpose and the government having control on its expenditure cannot be said to be income accrued to the assessee.
17. ITAT has definitely not considered the matter in the above noted context. The fact that the assessee received only one time grant with a specific purpose which nowhere suggested scope of profit generation or revenue for the assessee, the amount received by the assessee by way of grant-in-aid thus could not be termed to be revenue receipt. Substantial questions of law Nos. (c) and (d) are accordingly decided in favour of the assessee and against the revenue.
18. Since, we have already held that the amount received by the assessee by way of grant-in-aid from Government of India was not the income accrued to the assessee, the substantial questions Nos. (a) & (b) are rendered redundant.
19. In the light of the above discussion, there is merit in the instant appeal and it is accordingly allowed Consequently, order dated 20-1-2016 passed by the Income- tax Appellate Tribunal, Division Bench, Chandigarh, in H.P. Nursing Registration Council (supra) affirming the order dated 20th January, 2016, passed by the Commissioner of Income-tax (Appeals), Shimla in Appeal No. IT/76/13-14/Sml and assessment order dated 18-5-2013 are set aside. No order as to the costs. Pending application(a), if any, shall also stand disposed of.
6.1.1. After carefully examining the facts of the case, the scheme and submission of the appellant and the above judicial decisions the grant in aid is a capital receipt and not the revenue receipt. The addition of Rs. 2.50 crore made by the AO is deleted. The ground of appeal is allowed.
5. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds :
1. “On the facts and circumstances of the case and in law, the learned CIT(A) is not justified in holding that the subsidy granted in aid is a capital receipt and not a revenue receipt.
2. On the facts and circumstances of the case and in law, the learned CIT(A) is not justified in relying upon the judgment of Hon’ble High Court of the Himachal Pradesh in the case of Kalpana Place v. CIT case, which, in turn, referred to the judgments of Hon’ble Supreme Court in CIT v. Sahney Steel & Press Works Ltd. and CIT v. Ponni Sugars & Chemicals Ltd., without considering the specific facts of the instant case.
3. On the facts and circumstances of the case and in law, the learned CIT(A) is not justified in categorizing the subsidy grant as capital receipt when the subsidy was actually being granted in instalments for running of business and not for commencement of new business and therefore, the same be categorized as revenue receipt as per criteria of Purpose test’ laid down by Hon’ble SupremeCourt in CIT v. Sahney Steel case.
4. The appellant craves leave to add, amend, or alter any ground(s) of appeal at the time of hearing before the Hon’ble Tribunal.”
6. Learned DR at the time of hearing filed a copy of the decision of Hon’ble jurisdictional Bombay High Court in the case of Serum Institute of India Private Limited, Pune v. Union of India & Others vide Writ Petition No.3735 of 2021 Order dated 04.12.2023 and submitted that the Hon’ble High Court after considering the decisions of Hon’ble Supreme Court in the case of Sahney Steel & Press Works Ltd., v. CIT (SC)(SC), CIT v. Ponni Sugars and Chemicals td. (SC)(SC), CIT v. Chaphalkar Brothers(SC), CIT v. Shree Balaji Alloys 7 ITR-OL 50 (SC) and various other decisions has held that if the subsidy’s purpose was to help the assessee to run the business more profitably or meet daily business expenses, then it is to be considered as a revenue receipt and thus taxable. Conversely, if the subsidy is aimed at setting up a new unit or expanding an existing unit, then it was deemed to be a capital receipt and not taxable.
6.1. He submitted that the Finance Act, 2015, significantly altered the landscape by introducing sub-clause (xviii) to Section 2(24) of the Act, according to which, any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement provided by the Central or State Government is income, hence taxable, unless used to determine the actual cost of an asset. He submitted that in the instant case the subsidy was granted after the assessee set-up it’s business. Therefore, in view of the decision of Hon’ble jurisdictional Bombay High Court in the case of Serum Institute of India Private Limited, Pune v. Union of India & Others (supra), the order of the Ld. CIT(A) has to be reversed and that of the Assessing Officer be restored.
7. We have heard the Learned DR and perused the material available on record. We find the assessee company in the instant case has completed and commenced the cold chain facility during the preceding financial year on 15.03.2015 and became eligible for receipt of the financial aid from the Government. We find the amount of financial aid was accounted for as “capital reserves” under Note No.3 Reserves and Surplus. During the impugned assessment year, the company has received aid of Rs.2,50,00,000/- on 04.07.2015 and treated the same as capital receipt. We find the Assessing Officer treated the same as revenue receipt and brought to tax u/sec.28(iv) of the Act and the reasons of the same has already been reproduced in the preceding paragraphs. We find the Ld. CIT(A) deleted the addition, the reasons of which, have also been reproduced in the preceding paragraphs. We find the issue now stands decided in favour of the Revenue by the decision of Hon’ble Bombay High Court in the case of Serum Institute of India Private Limited, Pune v. Union of India & Others (supra), wherein the Hon’ble High Court, after considering various decisions of Hon’ble Supreme Court and other High Courts, at para-21 of the order has observed as under :
“21. Before the amendment through the Finance Act, 2015, the Supreme Court applied the “purpose test” to determine whether a subsidy was a capital or revenue receipt. In the landmark cases of Sahney Steel and Press Works Ltd. (supra) and Ponni Sugars and Chemicals Ltd. (supra), the Court held that if the subsidy’s purpose was to help the assessee run the business more profitably or meet daily business expenses, it was considered a revenue receipt (and thus taxable). Conversely, if the subsidy aimed at setting up a new unit or expanding an existing unit, it was deemed a capital receipt (and not taxable). The Finance Act, 2015, significantly altered the landscape by introducing sub-clause (xviii) to Section 2(24) of the Act. This amendment defined any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement provided by the Central or State Government as income, hence taxable, unless used to determine the actual cost of an asset. This amendment sought to end disputes by making all subsidies taxable unless they fell under an exclusion category;”
7.1. Similarly, at para-33 of the order the Hon’ble High Court observed as under :
“33. The chronology of events is pivotal in assessing the merits of petitioner’s arguments against the constitutional validity of Section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. This timeline is not merely incidental but is of substantive significance for several reasons. Firstly, petitioner, being engaged in business activities, is presumed to have conducted due diligence and engaged in careful planning, which would undoubtedly include an assessment of tax implications on all fiscal benefits, including subsidies. The amendment was public knowledge, and the implications of the inclusion of subsidies within the ambit of taxable income were clear and unambiguous. Therefore, petitioner, at the time of application, was having full knowledge or ought to have had full knowledge of the tax treatment of such subsidies post-amendment. Secondly, the act of applying for a subsidy after the amendment came into force indicates an acceptance of the prevailing tax regime.
It is reasonable to infer that by choosing to partake in the subsidy scheme, petitioner implicitly acknowledged and consented to the accompanying tax obligations as legislated by the amendment. Thirdly and furthermore, it is a well-settled principle that ignorance of the law is no excuse. Petitioner cannot claim ignorance of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions.
7.2. Similarly, in para-43 of the order the Hon’ble High Court has observed as under :
“43. In light of the above, in our view, the amendment to Section 2(24) by the insertion of sub-cause (xviii) of the Finance Act, 2015, is a perfect example of a legislative endeavour to align the definition of “income” with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term. The submissions of petitioner though appear to be of fiscal concern were, in our view, more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded. The submissions of petitioner fall short of appreciating the overarching legislative intent to foster a comprehensive and equitable taxation regime.
The amendment to Section 2(24) by insertion of the impugned sub-clause that includes various subsidies and concessions only indicates the well established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation’s fiscal machinery. As submitted by ASG, it is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources.”
7.3. Thus, we find that the issue stands decided in favour of the Revenue by the decision of Hon’ble jurisdictional Bombay High Court in the case of Serum Institute of India Private Limited, Pune v. Union of India & Others (supra). We, therefore, set aside the order of the Ld. CIT(A) and restore the order of the Assessing Officer. The grounds raised by the Revenue are accordingly allowed.
8. In the result, appeal of the Revenue is allowed.