Subsidy received from AE for specific purpose can't be treated as income until it is spent

Facts:

1)    Assessee was a wholly owned subsidiary of Canon Singapore Pvt. Ltd (hereafter ‘CSPL’). It was engaged in purchase and resale of 'Canon' products for its holding company ‘CSPL’ in India.

2)    Assessing Officer (AO) made certain additions to the income of assessee which reflected unutilised subsidy received by assessee from its holding company.

3)    AO observed that the subsidies received by the assessee become its property notwithstanding that the same had not been spent for the purposes for which they were received.

4)    On appeal, tribunal reversed the observation taken by AO; aggrieved-revenue filed instant appeal before the High Court.

The High Court held in favour of assessee as under:

a)    Revenue's contention that the unutilised subsidy was required to be recognised as income of the assessee in the year of its receipt was not acceptable as this would be contrary to the matching concept.

b)    The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period.

c)    In the instant case, assessee could credit the profit and loss account with the quantum of subsidy only if the corresponding expenditure was also debited to the profit and loss account maintained by the assessee.

d)    Thus, where an assessee follows the accrual/mercantile system of accounting, income can be recognised only when the matching expenditure is also accounted for irrespective of the cash outflows/inflows during the year.

e)    Therefore, it would not be correct to recognise the subsidies received as income if it had not been spent for specific purposes. [2016] 66 taxmann.com 88 (Delhi)