Case summary

Inox Air Products Pvt Ltd vs Asst. CIT

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The assessee is engaged in manufacturing and selling of Industrial/Medical Gases. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee received capital subsidy from the State Governments which was taken directly to the Capital Reserve in the balance sheet. Since this amount was not offered for taxation, the AO called upon the assessee to state reasons for this stand. The assessee precisely put forth that it received subsidy for setting up new industrial units, which was a capital receipt and hence not chargeable to tax. Not convinced, the AO treated the amount as revenue subsidy and included it in the total income. 

On a perusal of the schemes under which such subsidy was provided, it clearly emerges that the object of the subsidy was to accelerate industrial development in the concerned States. By applying `purpose test’ in determination of the nature of subsidy, the same cannot be construed as revenue in nature. The order passed by the Tribunal in assessee’s own case for the immediately preceding assessment year has neither been modified nor reversed by the Hon’ble High Court. Respectfully following the precedent, this issue is determined in favour of the assessee and uphold the impugned order to this extent. The Hon’ble Bombay High court in Pr. CIT Vs. M/s. Welspun Steel Ltd. has taken similar view and held that the Tribunal was justified in holding that subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost. CIT(A) was not justified in directing to exclude the amount of subsidy allowed to the assessee by the States of Jharkhand and Maharashtra from the cost of assets for the purposes of allowing depreciation. In the result, the appeal of the assessee is allowed.

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