- Often we hear that fate of our country, India lies in growth of its economy. Indian government in order to promote the growth of industries provides assistance in various forms. Assistance are given in 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.
- There was no provision in the Income-tax Act, 1961 (hereinafter, referred as the “Act”) prior to the Finance Act, 2015 which explicitly dealt with taxability of subsidies. 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.
- Position prior to the Finance Act, 2015
- 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 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. 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 (“FA 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.
- Position after the Finance Act, 2015
- An amendment was made in the definition of income u/s 2(24) of the Act by the FA 2015. A new sub-clause (xviii) was inserted to the said section which came into force w.e.f. 01.04.2016 and shall accordingly apply to 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 the assistance is taken into account for determination of actual cost of asset in accordance with the provision of Explanation 10 to Section 43(1) of the Act. The sub-clause (xviii) to Section 2(24) of the Act as inserted by FA 2015 was amended by the Finance Act, 2016, where one more exception was inserted that the subsidy or grant received 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.
- Important point to note here is that under Section 2(24)(xviii) of the Act, there is no distinction in the nature/kinds of assistances to consider the same as income of an Assessee. 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.
- The amendment under Section 2(24)(xviii) of the Act, has been made in order to align the provision of Income Computation and Disclosure Standard-VII, Governments Grants (“ICDS-VII”, in short) with the provisions of the Act. ICDS-VII is applicable w.e.f. A.Y. 2017-18 and hence, from the said A.Y., for computing income under the Act, the government grants shall be recognised and dealt with as per the provisions of the said ICDS.
Recognition of Government Grants
- As per ICDS-VII, government grants shall 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.
- It should be noted in order to align the recognition principles laid in various Income Computation and Disclosure Standards with the provisions of the Act, Section 145B of the Act is inserted vide the Finance Act, 2018. As per clause (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.
- It should be noted that Assessee would recognize 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) as applicable. Government grants available to an Assessee are recognized 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. Further, AS-12 provide for postponement of government grant beyond the date of actual receipt where condition attached to the grant are not fulfilled. Similar provisions are in Ind-AS 20.
- 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 the recognition of subsidy by an Assessee in its books of account does not match with the recognition under the provisions of the Act read with ICDS-VII.
Treatment of Government Grants
- 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 specified persons, 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 not be allowed depreciation on cost of the asset which has been met by way of the subsidy/grant amount received.
- 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.
- Since, ICDSs are applicable only for the purpose of computing taxable income whereas Accounting Standards or Indian Accounting Standard 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.
- 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 01st April, 2016 (A.Y. 2016-17). Therefore, no more the principle of determining the ‘purpose’ for which subsidy is given to the Assessee holds good. With these strict provisions, is the Government, really giving benefit in form of assistance/subsidies or it is just like another source of tax collection for the government.