ITAT: Subsidy Granted as an Incentive for Encouraging to Setup Industries Not to be Treated as Revenue Receipt

ITAT: Subsidy Granted as an Incentive for Encouraging to Setup Industries Not to be Treated as Revenue Receipt

The Income Tax Appellate Tribunal (ITAT), Pune, coram comprising of Partha Sarathi Chaudhury (Judicial Member) and Inturi Rama Rao (Accountant Member) has held that subsidies granted as incentives for encouraging the establishment of industries in less developed and backward areas cannot be treated as revenue receipts.

In the present case, Parag Milk Foods Pvt. Ltd. (assessee) disputed the estimation of sales tax benefits received under the package scheme of incentive 2007.

The Assessing Officer (AO) deemed the sales tax benefit as a revenue receipt and included it in the taxable net profit.

However, the Commissioner of Income Tax (Appeals) (CIT[A]) directed the AO to reduce the amount of subsidy from cost of acquisition/WDV on fixed assets of eligible project by allocating subsidy amount to different assets proportionately as per Explanation 10 to Section 43(1) of the Income Tax Act and re-compute the depreciation allowance.

The ITAT referred to the case of DCIT v. Haldex India Pvt. Ltd. (2022), wherein the Pune Tribunal, applying the Supreme Court's ruling in Commissioner of Income Tax-I, Kolhapur vs. Chaphalkar Brothers Pune (2017), held that the subsidy granted as an incentive for the development and formation of industries in less developed areas of Maharashtra could not be considered as a revenue receipt.

The bench, after going through the contents of the incentive scheme, observed that such incentives have been provided to encourage and develop the industries in less developed and backward areas. For the same reasons, the Pune Tribunal in the following cases has held that subsidy received by the assessee under the PSI 2007 from Maharashtra Government is capital in nature, stated the ITAT.

Following the aforesaid judicial pronouncements, the ITAT reckoned that the consistent legal view that emerges in such circumstances, where the subsidy was granted actually as an incentive for encouraging to setup industries, such subsidy cannot be treated as revenue receipt.

In light of the above observations, the bench set aside the order of the CIT (A) and ruled in favor of the assessee, allowing their grounds of appeal.