Subvention from holding company to offset subsidiary losses is capital receipt, not taxable revenue.

(Judgment of the Court was delivered by Dr.G.Jayachandran J.)

This Tax Case Appeal is filed by the Revenue, being aggrieved by the order of Income Tax Appellate Tribunal, Bench “C”, Chennai, dated

24.02.2012, passed in I.T.A.No.2189/Mds/2008, holding that transfer of Rs.9.00 crores from holding company to subsidy company, which is the assessee herein, is capital receipt and not revenue receipt, as contended by the Department. 2. The facts of the case : The assessee company is engaged in the business of manufacturing and marketing of leather and chemicals. On verification of the return filed, it was noticed that the assessee had received an amount of Rs.9.00 crores from its holding company and further subsidy of Rs.12.16 lakhs from SIPCOT. Explanation was, therefore, sought from the assessee as to why the said amount should not be treated as revenue receipt. The assessee explained that the amount of Rs.9.00 crores which the assessee had received from the holding company was to mitigate the loss incurred prior to 31.03.2000. There was a debit therein in the profit and loss account comprising opening balance a loss of Rs.19,37,000/-, therefore, the holding company had funded by way of subsidy to reduce the said loss. The debit balance in the profit and loss account was shown under Schedule-XII to the account. The company had not received it as the revenue subsidy from the holding company. It was stated by the assessee that it was a funding from the holding company for the prior year losses incurred and that the application of funds was towards reducing the losses and, therefore, it was not income.

3. According to the Department, the assessee had received a sum of Rs.9.00 crores from the holding company for reducing its losses and for such receipt, there was no transfer of shares or quid pro quo. Therefore, the same had to be treated as revenue receipt and liable to be taxed. The said contention had gained favour before the Assessing Officer, but was negatived before the Appellate Authority as well as by the Tribunal.

4. At the time of admission of this appeal, the following substantial questions of law were framed for consideration :

1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that receipt of Rs.9.00 crores from the holding company for reducing the losses was purely not a revenue account ?

2. Whether on the facts placed before the Tribunal especially when the assessee had shown an amount of Rs.9.00 crores received from the holding company in Schedule-XII in the profit and loss appropriate account is in the nature of contribution to capital ?

5. We are of the view that the above substantial questions of law are no more res integra, in view of the finding given by the Hon’ble Supreme Court in Siemens Public Communication Networks (P) Ltd. v. Commissioner of Income Tax, (2017) 244 TAXMAN 188 (SC), wherein the subvention payments made to the assessee Indian company by the parent company were held as capital receipts and the contention of the Department that it was a revenue receipt was negatived. For better appreciation of the facts, the finding of the Hon’ble Supreme Court in the said case is extracted below :

“2. The assessment years in question are 1999-2000, 2000-

01 and 2001-02. The point involved in the present appeals is short and precise. The subvention received by the assessee-company from its parent company in Germany in a situation where the assessee company was making losses has been treated to be a revenue receipt by the A.O. Though the first appellate authority [CIT(A)] and the learned Tribunal has reversed the said finding, the High Court, by the orders under