Income Tax--Current Issues

Practice Update

V.K. Subramani

TAXATION OF SUBSIDY FROM CENTRAL OR STATE GOVERNMENT

The definition of the term 'income' in section 2(24) keeps on expanding as the taxpayers and counsels keep on inventing new situations not addressed by law and claim that what is not intended by legislature cannot be taxed by adding words or intentions by tax administration. This has made the job of lawmakers more onerous in the recent times to remain alert to judicial decisions which went uncovered thus far and set right the matters, in the next budget.

Presently there are 18 sub-clauses to section 2(24) and the last one by way of insertion of sub-clause (xviii) by the Finance Act, 2015 w.e.f. 1.4.2016. Any assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement by the Central Government or State Government or any authority or body or agency whether in cash or kind is chargeable to tax as income. However, there are two exceptions to it viz: (i) subsidy or grant or reimbursement which is considered for determination of actual cost as per Explanation 10 to section 43(1); and (ii) subsidy or grant from Central Government received by way of corpus of a trust or institution established by the Central or State Government.

Before the insertion of this sub-clause by the Finance Act, 2015 the 'purpose' of the subsidy and/or the like was considered. Refer Sahney Steel & Press Works Ltd v CIT (1997) 228 ITR 253 (SC) : 1997 TaxPub(DT) 1342 (SC) and Ponni Sugars and Chemicals Ltd (2008) 306 ITR 392 (SC) : 2008 TaxPub(DT) 2302 (SC).

With the insertion of sub-clause (xviii) to section 2(24) any waiver of loan or grant or subsidy would be taxable unless it falls in the exception. Section 43(1) deals with 'actual cost' and when cost or portion of cost is met by any person, such amount has to be reduced for the purpose of reckoning the actual cost. In case, the supplier of machine waives any amount payable in respect of capital asset (to buyer), then still there is an apparent lacuna in law that it cannot be taxed as income nor would there be any reduction in actual cost/depreciation in respect of that asset. May be, that also requires proper plugging in the tax legislation.