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March 2014

Income: Capital or revenue: A. Y. 1985-86: Subsidiary of Government company receiving subsidy from holding company to protect capital investment of parent company: Subsidy is capital receipt and not income:

By K. B. Bhujle Advocate
Reading Time 2 mins
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CIT vs. Handicrafts and Handlooms Export Corporation of India Ltd.; 360 ITR 130 (Del):

The assessee, a Government company was a subsidiary of the State Trading Corporation of India. It operated as channelising agency for sale of handicrafts and handlooms abroad. In the relevant year, it received subsidy of Rs. 25 lakh from its holding company. The Assessing Officer rejected the claim of the assessee that the receipt is a capital receipt and not income. He held that it is income assessable to tax. The Tribunal held that it was a capital receipt.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The sum of Rs. 25 lakh was not paid by a third party or by a public authority but by the holding company. It was not on account of any trade or a commercial transaction between the subsidiary and the holding company. The holding company was a shareholder and the shares were in the nature of capital. Share subscription received in the hands of the assessee was a capital receipt.

ii) The intention and the purpose behind the payment was to secure and protect the capital investment made by the holding company in the assessee. The payment of the grant by the holding company and receipt thereof by the assessee was not during the course of trade or performance of trade, and could be categorised or classified as a gift or a capital grant and did not partake of the character of trading receipt.”

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