The two-judge bench of the Supreme Court of India held that the amount of voluntary subvention (subsidies) paid by a Parent Company to its subsidiary company is Capital Receipt and the same is not taxable in the hands of the subsidiary company under the provisions of the Income Tax Act.
While reversing the order of the Karnataka High Court, which was based on the apex Court decisions in Sahney Steel & Press Works Ltd., Hyderabad v. Commissioner of Income Tax, A.P.-I, Hyderabad and Commissioner of Income Tax, Madras v. Ponni Sugars and Chemicals Limited, the Court observed that the decision does not apply to voluntary subventions.
In the instant case, the assessing officer completed assessment against the assessee by treating the amount of subvention received by them from their parent company in Germany, at the time when they were facing financial problems, as revenue receipt.
Though the first appellate authority and the appellate tribunal reversed the order, the High Court restored the original assessment order relying upon the decisions in Sahney Steel Ponni Sugars, wherein the Apex Court held that unless the grant-in-aid received by an Assessee is utilized for acquisition of an asset, the same must be understood to be in the nature of a revenue receipt.
The bench comprising of Justice Ranjan Gogoi and Justice N.V Ramana also observed that, “The aforesaid view tends to overlook the fact that in both Ponni Sugars (supra) and Sahney Steel (supra) the subsidies received were in the nature of grant-in-aid from public funds and not by way of voluntary contribution by the parent Company as in the present cases. The above apart, the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts. We also find such a view in a recent pronouncement in Commissioner of Income Tax versus Handicrafts and Handlooms Export Corporation of India Ltd. 3 (Delhi High Court) with which we are in respectful agreement.”
Read the full text of the order below.
