Delhi High Court: Subsidy Received by Nestle India to Establish Industrial Unit in Backward Area is ‘Capital Receipt’

Delhi High Court: Subsidy Received by Nestle India to Establish Industrial Unit in Backward Area is ‘Capital Receipt’

The Delhi High Court while dismissing the appeal filed by the Revenue, affirmed that the subsidy received by Nestle India Ltd. (assessee/respondent) from the Government of Goa, was a capital receipt.

The division judge’s bench of Justices Rajiv Shakdher and Girish Kathpalia upheld the decisions of the Income Tax Appellate Tribunal (ITAT) and Commissioner of Income Tax (Appeals) (CIT[A]), stating that the subsidy was given as an incentive to establish an industrial unit in a backward area and generated employment for local inhabitants.

The brief background of the case is that the assessee had filed a Return of Income (ROI), reporting a total income of Rs. 728,92,72,770.

The ROI underwent scrutiny assessment, resulting in an assessed income of Rs. 798,95,13,887. This assessment included disallowances for various items, such as license fee, expenses incurred to earn exempt dividend income under Section 14A of the Income Tax Act, 1961 depreciation claimed on UPS, depreciation on energy saving and pollution control devices, and subsidy received from the Government of Goa.

The assessee appealed to CIT(A) challenging these disallowances.

The CIT(A) partially allowed the appeal. In regard to the subsidy received from the Government of Goa, amounting to Rs. 25,00,000, the CIT(A) acknowledged it was a capital receipt and ordered a proportionate reduction of the subsidy from the block of assets. The CIT(A) treated the subsidy as an incentive received for purchasing assets.

The ITAT concurred with the CIT(A) that the subsidy was indeed a capital receipt, but, ruled that it should not be adjusted against the block of assets. This was because the subsidy was not a sum paid to the assessee to meet, directly or indirectly, any part of the actual cost of the assets in question.

The Court firstly dealt with the issue concerning the rate at which depreciation can be claimed by the respondent/assessee on UPS.

The Court noted that in the present case there was nothing on record to suggest that the UPS equipment, in this case, was used for purposes other than running a computer.

The Court held, “UPS equipment, as the acronym goes, is a piece of equipment which ensures that there is an uninterrupted power supply, to prevent loss of data in the event of a power outage. If anything is crucial to the working of a computer, it is UPS equipment, which ensures that important data that is being handled or dealt with by the user is not lost on account of sudden power failure.”

However, the bench clarified that, by this, it did not intend to suggest that any and every piece of equipment which, generally, acts as a UPS contraption, say for an industrial unit, and in this context also supports a computer system would fall in this category and thus, be amenable to depreciation at the rate of 60 per cent, as against the rate provided in the residuary entry which was 15 per cent.

Thus, for the foregoing reasons, the Court was not inclined to entertain the aforementioned question of law.

The second issue that came up for consideration before the bench was regarding the treatment of the subsidy received by Nestle India.

The Court observed that the ITAT had agreed with the CIT(A) that the subsidy constituted a capital receipt. However, it ruled that the subsidy could not be adjusted against the block of assets since it was not intended to meet any part of the actual asset costs.

Moreover, it was noted by the bench that the ITAT distinguished between the calculation of the subsidy’s quantum and its purpose.

Considering that the subsidy was provided as an incentive to establish incentive to establish an industrial unit in a backward area and generate local employment, the Court agreed with the ITAT and CIT(A) that the subsidy should be regarded as a capital receipt.

The Court observed, “Similarly, insofar as the other limb of the issue is concerned, we agree with the Tribunal that the measure for calculating the subsidy, which was 25% of the fixed capital cost, cannot determine the purpose for which the subsidy was given, and, thus, as directed by CIT(A), adjusted proportionately against the cost of the assets.”

Given that the subsidy was not intended to cover any part of the cost of the assets, the Court ruled that no adjustment should have been made as directed by the CIT(A).

The Court upheld the conclusion passed by the ITAT.