Delhi Tribunal rules on timing of taxation of taxing subsidy in year of sanction of claim by relevant authorities and not earlier

In the case of Jindal Poly Films Ltd. (Taxpayer)^[1] , the issue arose on timing of taxation of subsidy receivable for promotion of industry under Maharashtra Package Scheme of Incentives (PSI) 2001/2007 (PSI) scheme. 

The Taxpayer, engaged in manufacturing of fertilisers earned subsidy on making capital investment and tax payments like Value Added Tax (VAT)/Central Sales Tax (CST) over a seven-year period. To earn the subsidy, the Taxpayer had to meet several conditions like employment generation, technology upgrades, quality certification, cleaner protection measures, patent registration, asset inspections, and providing periodical statements to the Directorate of Industries, etc. In the financial statements of the Taxpayer, it recorded the subsidy as a Deferred Government Grant under non-current liabilities and recognized it on deferred basis over seven-year period in the Profit and Loss Account. For tax purposes, the Taxpayer consistently offered the subsidy income to tax either when it was recognized in its financial statements or when actually received, whichever was earlier.

However, the tax authority argued that the full subsidy was taxable during the year in which application was made since there was a "reasonable assurance" that the Taxpayer may fulfill the relevant conditions. The first appellate authority confirmed the addition stating that while accounting standards (i.e., Ind AS 20) allows deferral of recognition, but Income Computation and Disclosure Standards (ICDS-VII) which are used to compute the taxable income does not allow this treatment.

On further appeal by the Taxpayer, the Delhi Income Tax Appellate Tribunal held that subsidy under PSI scheme is not taxable in the year in which application is made but held that it is taxable on accrual basis when the claim is verified by authorities and liability is admitted resulting in perfected entitlement for Taxpayer. The Tribunal noted that the Taxpayer was not automatically entitled to subsidy on making required capital investment/employment generation, etc. The Taxpayer was required to fulfil continuing conditions like payment of taxes, technology upgrades, periodic verification and other compliance measures each year. The government authorities would undertake verification of claim by demanding additional documents. The Tribunal held that there is uncertainty of receipt of subsidy until stage of complete verification of documents. The subsidy amount crystallizes and accrues as income for the Taxpayer when the concerned authorities approve the subsidy after due verification of application and not before.

Further, it also noted that the issue relating to timing of taxation of subsidy income is neutral as the Taxpayer was subjected to uniform tax rates across the relevant tax years.

^[1] [TS-309-ITAT-2025(DEL)]