Grant against working capital is taxable

Q.I had set up a unit in rural area and received a subsidy of Rs 5 lakh under Prime Minister Employment Generation Programme. The details of the subsidy are as under:

1. 35% (Rs 140,000) against building investment of Rs 4 lakh

2. 35% (Rs 4.2 lakh) against machinery investment of Rs 12 lakh

3. 35% (Rs 2.80 lakh) against working capital of Rs 8 lakh

What should be the treatment of subsidy in the books of accounts? Please refer to Sec 2(24) xviii  also.                       — Narinderjit Singh 

A. The subsidy would be covered within the term 'Government Grants' defined by Paragraph 3.1 of Accounting Standard (AS) 12 which deals with Accounting for Government Grants. Paragraph 8 of the said Standard deals with the issue of Grants received for specific fixed assets. 

Paragraphs 8.1 to 8.5 prescribe two methods for dealing with such Grants. One of the methods prescribed is to deduct such Grants from the gross value of the assets concerned in arriving at its book value. The second method which has been prescribed is to treat such Grants as deferred income and recognise the same in the profit and loss account on a systematic and rationale basis over the useful life of the asset. Such allocation of income is usually made over the periods in proportion to the charge of depreciation on related asset.

The amount of Grant which is received for working capital can be classified as compensation for expenses incurred in the accounting period and can therefore be recognised as income in the statement of profit and loss account for the period in which it becomes receivable.

I may add that for income-tax purposes, the treatment will have to be in accordance with the Income Computation and Disclosure Standard VII dealing with Government Grants.  According to the said Standard, the Government Grants relating to depreciable fixed assets shall be deducted from the actual cost of the asset concerned or from the written down value of the block of assets to which asset concerned or assets belonged to. The Grants against working capital will be treated as income of the period for which it is receivable.

Section 2(24) (xviii) of the Income-tax Act, 1961 (The Act) would not apply to the above case as the subsidy against building and machinery will be deducted from the cost of the related assets and therefore, would be excluded as per the provisions of Explanation 10 to Sub-section (1) of Section 43 of the Act.  Further, the subsidy has not been given for the purposes of corpus to the institutions specified in the said clause and therefore the above section is not applicable to the grants received in respect of fixed assets. The amount of grant received against working capital should be taxable under Section 28(iv) of the Act.

Q. My father bought an agricultural land in 1980 which has come within municipal limit now. He sold his land in March 2017 and bought NHAI bonds too. But still he is left with some money and wants to do some business (not interested in buying agricultural land) and spend some money on home as well as on his two two children. Please advise (a) Whether capital gains tax applicable to him is of 1981 or he can adopt the base year of 2001?  (b) Can he gift some money (in case yes, up to what amount) to his unmarried daughter or her wife or his son (me)? (c) Can he also sell some of his ancestral land and what will be the base year for that land?                                         —amar teja

A. a) The agricultural land having been sold in March 2017, your father has an option to adopt fair market value as on 1.4.81. The amendment with regard to change in base year is applicable for assessment year 2018-19 which would cover the period from April 2017 to March 2018 and onwards.

b) Your father can gift any amount to his children. There is no taxability with regard to the amount so gifted either in the hands of a donor or in the hands of a donee. However, any gift to his wife would not involve any tax, but any income earned on such gifted amount would be clubbed with the income of your father.

c) In case your father sells his ancestral land after March 2017, the applicable date for adoption of fair market value would be 1.4.2001.

Q.Our father was allotted a house (91-E, Hussainpura (West), Gali No.2, Amritsar) in lieu of the property left in Pakistan, after migration.  He died on 28.07.1979.  We are two brothers, a widow of the third brother and four sisters. But none of us has sales deed exhibiting the occupant of this house. However, the following documents give support to our contention of our late father being the owner of the house under discussion:

1. Death certificate of our father (27.8.1979)

2. Property tax of the house showing occupant being my father.

3. Antkal certificate of neighbour in House No. 91-F showing location of our House No. 91-E/13 in the East.

4. Electricity bill payment depicting the name of my deceased father.

5. A letter obtained under RTI from the Public Information Officer-cum- Deputy Director Land Record, Punjab, Jalandhar, pressing the inability of the office to trace the sales deed of the house. These documents are with me and a photocopy can be sent, if advised. — Dr inder Mohan Talwar

A. I have gone through the contents of your query. You have stated that your father was allotted a house in lieu of the property he left in Pakistan. It seems this is a case of allotment of an evacuee property which had been left behind by the persons who migrated from Pakistan. The allotment having been made by the Government of India, there should be an allotment letter prescribing the details on the basis of which your father was allotted the property at Amritsar. In case you do not have the original letter, a copy thereof should be obtained from the department concerned.  There may not be any sale/ conveyance deed in such cases.