CIT v Deutsche Post Bank Home Finance Ltd. (ITA No. 312 OF 2012 (dtd 2.7.2012) (Delhi HC)

Background:

Assessee is a 100% subsidiary of one BHW Holding AG, Germany (‘Holding Company’) and is engaged in the activity of housing finance. By two letters dated 24.09.2004 and 04.02.2005, the Holding Company granted subvention assistance to the assessee to an extent of Euro two million i.e. equivalent to Rs. 11,22,38,874/-. This was done on the evaluation of the Holding Company, that the assessee was likely to incur losses which would be substantially if not entirely eroded.

The AO held that the subvention receipt was by way of casual receipt in order to assist the assessee to continue its business operation and therefore rejected the assessee’s contention. The assessee preferred an appeal to the CIT(A) who accepted the assessee’s contention holding that the money received could not be taxed as it was akin to a gift, and Gift Tax had been abolished.

The Revenue appealed to the ITAT. The ITAT held as under:

• The loss suffered by the assessee during the year under consideration was Rs. 10,04,52,153. The holding company vide their letter dated 24.09.2004 informed the assessee that a sum of Euro 2 Million will be paid to Birla Home Finance Ltd. as subvention payment towards restoration of the net worth of the company expected to be partly eroded by the losses suffered/ projected by the assessee company for the financial year 2004-05.
• Assessee had filed copy of confirmation received through email wherein the holding company has certified that they have not claimed the subvention payment as expenditure in their return of income and no tax benefit has been received by them in respect of subvention payment.  
• These are voluntary payments arising out of personal relationship of parent and subsidiary company and not stemming from any business considerations. Therefore, the assessee’s case is squarely covered by the decisions of Hon’ble Delhi High Court in the case of Handicraft & Handloom Export Corporation [1983] 140 ITR 532 and the ITAT in the case of Lurgi India (supra).

Tax Authority’s arguments:

• The case of Handicrafts & Handloom Export Corporation of India was not applicable since the facts of this case were different.
• It was held that where public funds are used as an incentive or in order to assist, or give subsidy to recoup a unit’s losses or to provide against or financial liability, the Courts have taken the view that such an assistance would not qualify as income.
• The true and correct test to be applied is to be the purposive test, spelt out in the decision of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87 (SC).
• If the real purpose of the assistance is rendered to protect investment or to ensure that the liabilities which may adversely implicate the accounts of the company are to be met then and then only the assistance would fall outside the ambit of taxation.

HELD:

• The High Court in the case of Handicrafts & Handloom Export Corporation of India  held that amount given by the father will only be in the nature of gifts/or voluntary payment and not stemming from any business consideration. The position is similar here.
• The decision in Handicrafts & Handloom Export Corporation of India (supra) of this Court spelt out the relevant test i.e. whether the subsidy or the assistance is in order to ensure the recouping of losses. In that case the facts were sparker and the assessee was incurring losses year after year. STC as holding company and also the trading arm of the Government decided and infused cash assistance.
• Assessee did incur losses a fact noticed by the ITAT in its narration of facts. In fact the assistance was given at point of time when the losses were anticipated, through the letters which were relied upon.
• So far as the decision in Ponni Sugar & Chemicals Ltd. (supra) is concerned, no doubt the Court clarified how a subsidy should be treated i.e. by purposive test. The Court presciently held if the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is to the revenue account. On the other hand under the subsidy scheme, if the object is to enable the assessee to set up a new unit or expand it then the receipt of the subsidy is to the capital account. Therefore, it is the assessee’s action which determines whether subsidy is to avoid losses and liabilities or boost its profits.
• On a proper application of the above test we see no difference between the facts of the present case and those in Handicrafts & Handloom Export Corporation of India (supra). The assessee was inevitable on the road to incurring losses; its holding company decided to intervene and render assistance.