Taxability of Grant, Subsidy or Any Assistance

Introduction

1. Often we hear that fate of our country, India, lies in the growth of its economy. Indian government in order to promote the growth of industries provides assistance in various forms. Assistance is given in different forms like capital investment subsidy, production subsidy, cash assistance, export subsidy, duty drawback etc. For the sake of brevity, all forms of assistance are hereinafter referred to as the 'subsidy'. A common question of litigation over a period of time has been that whether receipt of subsidy in the hands of an Assessee is taxable as income or not under the provisions of Income-tax Act, 1961 (hereinafter, referred as the 'Act').

Analysis of Provisions of law

2. There was no provision in the Act prior to the Finance Act, 2015 which explicitly dealt with taxability of subsidy. However, litigation in this regard was settled on the basis of various judicial pronouncements. In this write-up, analysis is done regarding taxation of subsidies under the Act in two parts (a) Position prior to the Finance Act, 2015 and (b) Position after the Finance Act, 2015.

(a) Position prior to the Finance Act, 2015

3. Through a plethora of cases adjudicated and settled upon by the various High Courts and the Hon'ble Supreme Court of India, a principle was drawn to examine whether the receipt of subsidy in the hands of an Assessee would be taxable under the Act or not. The principle was that the taxability of subsidy shall be determined by analysing whether the subsidy is a capital receipt or revenue receipt in the hands of the Assessee. Simple logic behind the said principle was that generally revenue receipts are chargeable to tax, on the other hand, capital receipts are not chargeable to tax unless specifically made taxable under the Act. Principle of examining nature of subsidy receipt in the hands of Assessee has evolved from various landmark judgments like Sahney Steel & Press Works Ltd.(1997) 228 ITR 253 (SC) and Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC). The underlying principle is to examine 'purpose' for which subsidy is granted. Also, the Central Board of Direct Taxes ('CBDT', in short) issued a Circular No. 142 [F. No. 204/25/74-IT(A-II)], dated 01.08.1974, wherein purpose for which the subsidy was given was decisive factor to determine nature of receipt of the subsidy in the hands of the recipient.

4. In view of the above-mentioned judgments and Circular, it is worthwhile to note that subsidies are given for various purposes like for promoting construction of new industries, expansion of existing industries or support for working capital requirements etc. For instance, if the object of the subsidy scheme was to enable the assessee to run the business more profitably or to meet day to day business expenditure then the receipt shall be treated as a revenue receipt. 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 shall be a capital receipt not chargeable to tax. Therefore, the taxability of subsidies was determined using the 'purpose test'. It should be noted that prior to Finance Act, 2015, the purpose for which subsidy was given was relevant and not the point of time of receiving the subsidy or the form in which the same was received.

(b) Position after the Finance Act, 2015

5. An amendment was made in the definition of income u/s 2(24) of the Act by the Finance Act, 2015. A new sub-clause (xviii) was inserted to the said section, which reads as under:-

'assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than subsidy or grant or reimbursement which is taken into account for determination of actual cost of the asset in accordance with the provision of Explanation 10 to clause (1) of section 43'

6. The aforesaid amendment in the definition of income came into force w.e.f. 01.04.2016 and shall accordingly apply from A.Y. 2016-17. As per the amendment, assistance of any sort (by whatever name called) given by the Central Government or a State Government or any authority or body or agency, shall be considered as income of the Assessee except where subsidy or grant or reimbursement is considered for determination of the actual cost of the asset, in accordance with the provisions of Explanation 10 to Section 43(1) of the Act. As per Explanation 10 to Section 43(1) of the Act, in case if subsidy is received towards an asset, then the amount of the subsidy shall be reduced from the total cost of the Asset, while determining the actual cost of such asset, for the purpose of calculating depreciation u/s 32 of the Act. Purpose of doing so is that the depreciation will be allowed on the amount as reduced by the amount of assistance i.e. no depreciation shall be allowed on the cost of the Asset that is not met by the Assessee.

7. Sub-clause (xviii) to Section 2(24) of the Act as inserted by the Finance Act, 2015, was amended by the Finance Act, 2016, wherein one more exception was inserted that the subsidy or grant provided by the Central Government for the purpose of the corpus of a trust/institution established by the Central or State Government, shall not be considered as income. Therefore, any subsidy, other than the one specifically excluded from the definition of income shall be recognised as income of the Assessee, irrespective of the fact such subsidy is a capital receipt or revenue receipt. Let's take few examples to understand the provisions of Section 2(24)(xviii) of the Act. The same are given hereunder:

(1) The government of Chhattisgarh introduces a scheme under the name of Industrial Promotional Scheme, 2018. As per the scheme, the eligible recipient/manufacturer would get reimbursement of the amount of VAT paid by it for a period of 10 years. In view of the said facts, a question arises that can the assistance given by the Chhattisgarh Government in form of reimbursement of the amount of VAT paid by the eligible recipient/manufacturer, be classified as income u/s 2(24)(xviii) of the Act?

Under the Industrial Promotional Scheme, 2018, the recipient is eligible to get the benefit from the Chhattisgarh Government in form of reimbursement of VAT paid by it. Under this scheme, firstly, the recipient is required to make payment of VAT to the Department and then the Department will reimburse the amount of VAT to the recipient. Hence, the benefit is in the form of reimbursement. The newly inserted clause (xviii) of Section 2(24) of the Act covers within its scope, 'the assistance in the form of reimbursement', therefore, the benefit of reimbursement of VAT paid under this scheme, would squarely fall in the scope of the said Section and accordingly the same shall be included in 'income'.

(2) The Central Government introduces a new scheme to promote indigenous production in the name of Infrastructure & Industrial Investment Policy. Under the said scheme, the new manufacturers would be eligible for interest free loan from the Central Government for setting up new plant and machinery, which is to be repaid after a period of ten years. Now, a question arises that whether such non-chargeability of interest by the Central Government from the manufacturer can fall within the scope of income under Section 2(24)(xviii) of the Act.

The interest free loan would tantamount to relinquishment of right of receipt of interest by the Central Government and consequently it would be considered as waiver of interest in the hands of the manufacturer. Therefore, the said assistance is in the form of 'waiver' as mentioned in Section 2(24)(xviii) of the Act. However, it is worthwhile to note that in the absence of computational provisions for calculating notional interest, the same would not be chargeable to income tax.

(3) According to Uttrakhand Industrial Policy, 2003, the new manufacturers in the state of Uttrakhand will be entitled for exemption from payment of 100% amount of excise duty for ten years. In view of the said fact, can exemption from excise duty fall under the scope of assistance as given in Section 2(24)(xviii) of the Act.

It should be noted that, as per Section 2(24)(xviii) of the Act, only 'subsidy, grant, cash incentive, duty drawback, waiver, concession and reimbursement' are covered under the definition and shall be considered as income. However, 'exemption' is not specified in the definition as given in Section 2(24)(xviii) of the Act. As per Black's Law Dictionary (Sixth edition), exemption means:

'Exemption: Freedom from a general duty or service; immunity from a general burden, tax, or charge. Immunity from service of process or from certain legal obligations, as jury duty, military service, or the payment of taxes.'

In view of the aforesaid definition and facts of the case, the excise duty exemption is a freedom from payment of excise duty or immunity from general burden, tax, or charge. Therefore, the following points need to be considered for examining taxability of the excise duty exemption received by the manufacturer under the provisions of this scheme:

a) The term 'exemption' is nowhere mentioned in clause (xviii) of Section 2(24) of the Act.

b) Since, 'exemption' is not explicitly mentioned, whether the same can be treated as a 'waiver' or 'concession'. In case of excise duty exemption, the excise duty is not levied and it is being made exempt by the government by exercise of its power granted under the law. On the other hand, in case of concession or waiver, the power to levy remains, but the benefit is given in the form of relinquishment of right to receive the tax/duty. Hence, it can be said that there is difference between waiver, concession and exemption. Accordingly, exemption cannot be treated as a waiver or concession.

Hence, in view of the above, exemption from excise duty will not fall within the ambit of section 2(24)(xviii) of the Act and will not be treated as income.

8. On the basis of the aforesaid examples, it is apparent that scope of Section 2(24)(xviii) of the Act is very vast and for the purpose of determining the taxability of the subsidy receipt, no distinction is made in the nature/kinds of subsidy. Therefore, all sorts of subsidy received by an assessee from the specified persons, irrespective of its nature as capital or revenue shall be taxable as income of the assessee unless the same falls in the exclusion category. The impact of the aforesaid amendment shall be that principle laid down by the Apex Court in Sahney Steel and Ponni Sugars (supra) laying down the 'purpose test' to classify it as capital or revenue receipt, shall no more hold good for subsidies received on or after 01.04.2015. Hence, once any receipt falls within the purview of the provisions of Section 2(24)(xviii) of the Act, then the same would be treated as 'Income' irrespective of its revenue or capital nature as such receipt has been specifically included in the definition under legislative competence.

9. It is worthwhile to note that any income as defined in the definition of income u/s 2(24) of the Act, is to be taxed under any one of the heads of income as discussed in Section 14 of the Act. Therefore, firstly the income should be chargeable and then the head of income under which it will be taxed should be defined. However, with respect to amendment in definition of income through insertion of clause (xviii) to Section 2(24) of the Act, law-makers have not made any corresponding amendment in any head of income. In view of this, a question arises that whether such income can be taxed as business income or income from other sources even in case where there is no amendment in the provisions of Section 28 and 56 of the Act. In this respect, it is imperative to refer Section 56 of the Act. Sub-section (1) of Section 56 of the Act clearly states that income of every kind, which is not chargeable to tax in any other heads of the income and which is not excluded from the total income under this Act, shall be chargeable to tax under Section 56 of the Act, under the head 'Income From Other Sources'. Thus, the legal position is that if any income is not chargeable under any other heads of income and is not to be excluded from the scope of the chargeability, then the same would be chargeable as income from other sources under Section 56 of the Act. However, it goes without saying that an assessee generally receives subsidies or any kind assistance for the purpose of his business activities, therefore such income should be taxed as Profits and Gains from Business and Profession and not under the head 'Income From Other Sources'. In this regard, a clarification from CBDT can help for gaining clarity regarding the head of income in which subsidy shall be chargeable to tax.

10. Further, the CBDT in pursuance of its power conferred under Section 145(2) of the Act issued ten Income Computation and Disclosure Standards ('ICDS', in short). ICDS are applicable only for the purpose of computation of taxable income and not for the purpose of maintenance of books of accounts. The CBDT notified the applicability of ICDS w.e.f. A.Y. 2016-17, vide Notification No. SO 892(E) dated 31.03.2015. Later, the applicability of ICDS was deferred vide Press Release dated 06.07.2016 by one year and ICDS have been made applicable w.e.f. A.Y. 2017-18. ICDS-VII deals with Governments Grants. Through Circular No. 19/2015 dated 27.11.2015, it was clarified that amendment under Section 2(24)(xviii) of the Act was made in order to align the provisions of ICDS-VII with the provisions of the Act. As per ICDS-VII, government grants shall not be recognised until it meets the recognition criteria given under the said ICDS and after recognition, the treatment of the government grant shall be done as per the method given under the said ICDS.

• Recognition of Government Grants

11. As per Para 4(1) of ICDS-VII, government grants should not be recognised until (a) there is reasonable assurance that the person in receipt of the government grant shall comply with the conditions attached to them and (b) the grants shall be received. Further, Para 4(2) of the Act, states that recognitionofgovernmentgrantshallnotbepostponedbeyondthedateofactualreceipt.It is worthwhile to note that as per Para 4(1) of the Act, government grant shall be recognised only when there is reasonable assurance that the conditions attached to the government grant will be met/complied with 'and' such government shall be received. However, as per Para 4(2) of ICDS-VII, recognition shall not be postponed beyond the date of actual receipt. Through bare perusal of the provisions of Para 4 of the ICDS-VII, it is apparent that recognition of government grant cannot be deferred beyond the date of receipt even if there is no reasonable assurance that the conditions attached to the government grant will be met/complied by the recipient.

12. It should be noted in order to align the recognition principles laid in various ICDS with the provisions of the Act, Section 145B of the Act is inserted vide the Finance Act, 2018. As per sub-section (3) of Section 145B of the Act, income referred in sub-clause (xviii) of Section 2(24) of the Act shall be deemed to be the income of the previous year in which it is received, if it is not charged to income tax in any earlier previous year. Therefore, Section 145B(3) of the Act provides that subsidy should be deemed to be the income of the previous year in which it is received, which may have not accrued.

13. Therefore, from the combined reading of Section 2(24)(xviii) and 145B(3) of the Act and ICDS-VII, it would be right to state that :-

o Subsidy shall be recognized as income of an Assessee as per Section 2(24)(xviii) of the Act, unless the same falls in the exclusion part the Section 2(24)(xviii) of the Act.

o As per Section 143B(3) r.w. ICDS-VII, recognitions of the subsidy as income shall not be postponed beyond the date of receipt. Therefore, even if the subsidy has not accrued but the same is received then it shall be recognised as income of the previous year in which it is received.

14. It should be noted that Assessee would be recording receipt of subsidy in the books of accounts as per Accounting Standard-12, Accounting of Government Grants ('AS-12', in short) or Indian Accounting Standard-20, Accounting for Government Grants and Disclosure of Government Assistance ('Ind-AS 20', in short). Government grants available to an Assessee are considered in books of accounts as per AS-12, when (a) there is reasonable assurance that the Assessee will comply with the conditions attached to it and (ii) where such benefits have been earned by the Assessee and it is reasonably certain that the ultimate collection will be made. Therefore, mere receipt of government grant is not sufficient unlike Section 145B of the Act and ICDS-VII. AS-12 provides for postponement of government grant beyond the date of actual receipt where conditions attached to the grant are not fulfilled. Similar provisions are given in Ind-AS 20.

15. Since, ICDSs are applicable only for the purpose of computation of taxable income whereas Accounting Standards are applicable for the purpose of maintenance of books of accounts, therefore, it should not be surprising, if recognition of subsidy by an Assessee in its books of account does not match with the recognition under the provisions of the Act.

• Treatment of Government Grants

16. Under the provisions of the Act, only Explanation 10 to Section 43 of the Act discusses about treatment of subsidy, where a portion of the cost of an asset acquired by an assessee has been met directly or indirectly, in the form of a subsidy or grant or reimbursement (by whatever name called) by the Central Government or a State Government or any authority established under any law or by any other person, then so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. Implication of said treatment is that assessee would be allowed depreciation only on the amount which is actually incurred by him towards such asset.

17. However, under ICDS-VII, Para 5 to 10 deals with treatment of Government Grants under various circumstances. Like, how the government grants would be treated if it relates to depreciable assets, non-depreciable assets, compensation for expenses/losses, grant in form of non-monetary assets, given at concessional rate etc. Apart from ICDS-VII, AS-12 and Ind-AS 20 has also given methods for the treatment of Government Grants. Brief distinctions with respect of treatment of Government Grants in ICDS-VII, AS-12 and Ind-AS 20 are as under:

18. As mentioned above, since ICDSs are applicable only for the purpose of computing taxable income whereas AS or Ind-AS are applicable for the purpose of maintenance of books of accounts, therefore treatment of government grant under while computation of taxable income may not match with the treatment in books of accounts.

Whether amendment in definition of income with respect to assistance is retrospective in nature?

19. In the case of Limtex Tea & Industries Ltd. v. Assistant Commissioner of Income-tax [2016] 156 ITD 900 (Kolkata Tribunal), the Assessing Officer's argument was that amendment to the Section 2(24)(xviii) of the Act is retrospective in nature and hence, subsidy received by the Assessee in assessment year 2006-07 should be considered as its income. However, the Hon'ble ITAT Kolkata Bench held that insertion of clause (xviii) to section 2(24) by the Finance Act, 2015 with effect from 01.04.2016 does not have retrospective effect. Therefore, prior to the amendment, 'purpose test' shall be applied to examine whether the receipt of subsidy is capital receipt or revenue receipt and accordingly its taxability shall determined.

A sigh of relief for layman

20. After amendment to the definition of income u/s 2(24)(xviii) of the Act, a common question arose that whether due to this amendment, LPG Subsidy given by the Government on the use of LPG cylinders to the Assessee would also be considered as income of the recipient. In order to address the said query, the CBDT through a Press Release dated 05.05.2015, informed that amended definition of 'income' u/s 2(24)(xviii) of the Act shall not include LPG Subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection to the business or profession carried on by him. Hence, any welfare subsidy received by an individual in his personal capacity like LPG subsidy shall be not considered as income of such individual.

Ambiguity in the provisions of Section (24)(xviii) of the Act and ICDS-VII

21. After analyzing the amended provisions of Section 2(24)(xviii) of the Act, it seems that there are some areas where ambiguity lies, such as:

a) The amendment in Section 2(24)(xviii) of the Act applies only to assistance given by way of subsidy, grant etc. provided 'by central government or state government or any authority or body or agency'. By applying the principle of ejusdem generis, the words 'authority or body or agency' shall take its colour from the earlier words, namely, central government or state government. In other words, if the authority or body or agency is a privately held company and not in the nature of a government or a statutory authority, the amended provisions may not apply to it. However, clarity from CBDT is required on this issue.

b) As per Section 2(24)(xviii) of the Act, all subsidies shall be considered as income of the Assessee, except the subsides mentioned in exclusion part of Section (24)(xviii) of the Act. On the other hand, in ICDS-VII, there is no exclusion/exemption in considering any receipt of subsidy as income of the Assessee. The Assessing Officer by placing reliance exclusively on the provisions of the ICDS-VII can consider all receipts of subsidy as income of the Assessee, even if any subsidy pertains to the exclusion part of Section 2(24)(xviii) of the Act. In such a case, submission of the Assessee should be that, as per Notification No.32/2015 dated 31.03.2015, in case of conflict between the provisions of the Act and ICDS-VII, provisions of the Act will prevail over ICDS. Hence, even if no exclusion is given in ICDS, exclusion given in the Section of the Act shall apply while examining taxability of subsidy as income.

c) As per Section 2(24)(xviii) of the Act, income of the Assessee shall include assistance in the form of a 'subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called)'received from specified authorities, unless the assistance falls in any of the exceptions given in the said section. One of the exceptions, is given in clause (a) of Section 2(24)(xviii) of the Act, which states that in case where 'subsidy or grant or reimbursement'is taken into account for determination of the actual cost of asset in accordance with Explanation 10 to Section 43(1) of the Act, then such subsidy or grant or reimbursement shall not be treated as income. Thus, it can be interpreted that assistance only in the form of subsidy or grant or reimbursement, which is taken into account for determination of the actual cost of the asset shall not be considered as income of the Assessee. Therefore, a view can be taken that assistance other than subsidy or grant or reimbursement towards the cost of an asset say, in form of waiver or concession, shall not fall under clause (a) of Section 2(24)(xviii) of the Act and accordingly will be considered as income of the recipient.

Conclusion

22. It is to be appreciated that the evergreen litigation concerning the taxability of subsidy has been dealt by the Finance Act, 2015, by amending the definition of income u/s 2(24)(xviii) of the Act with effect from 01.04.2016. Therefore, the principle of determining the 'purpose' for which subsidy is given to the Assessee does not hold good anymore. With these strict provisions, is the Government really giving benefit in form of assistance/subsidies or is it just like another source of tax collection for the government.