High Court Of Allahabad
K.M. Sugar Mills Ltd. VS. CIT –II
Section : 4
Ashok Bhushan And Mahesh Chandra Tripathi, JJ.
IT Appeal Nos. 215 To 217 Of 2005
January 23, 2014
JUDGMENT
1. Heard Shri Ashish Bansal for the assesses and Shir Bhananjay Awasthi for the Revenue.
2. All these appeals have been heard together and are being decided by this common judgment.
3. In all these appeals the only question of law which has been pressed is :
“(i) Whether, on a true and correct interpretation of charging section 4 read with section 28 of the Act, the Tribunal was legally correct in holding that the sum of Rs. 9,98,966 as had been received by the assessee by way of ‘grant-in-aid’ out of Sugar Development Fund, from the Government of India, was in the nature of revenue receipt liable for taxation ?”
4. The aforesaid question is common in all these appeals which relate to different assessment years. It is sufficient to refer to the case of Appeal No. 215 of 2005 for deciding all the appeals. The appeal has been filed under section 260A of the Income-tax Act, 1961, against the order of the Tribunal dated January 31, 2005. The assessee in the relevant assessment year has claimed deduction of Rs. 9,98,966 on account of buffer stock subsidy received from the Central Government. The subsidy was given by the Central Government from the Sugar Development Fund, 1983, to compensate the burden on account of interest, storage and insurance, etc., for holding the buffer stock of sugar. The Assessing Officer did not accept the assessee’s contention that it was a capital receipt. Appeal filed by the assessee was dismissed by the appellate authority. The Commissioner (Appeals) has confirmed the order of the Assessing Officer denying that it was not a capital receipt. It is useful to refer to paragraph 7.1 of the Commissioner (Appeals) Order dated March 30, 1999, which is quoted below :
“7.1. The appellant’s next objection is that the Assessing Officer erred in not accepting its claim that the ‘buffer stock subsidy’ amounting to Rs. 9,98,966 could not have been treated as its income. It was submitted that the subsidy in question had been given by the Central government from the Sugar Development Fund, 1983, solely for serving a public cause and the same could not have been treated as the income of the appellant. The Assessing Officer disallowed the appellant’s claim on the ground that subsidy or grant given by the Central government to compensate or reimburse the expenses was a revenue and taxable receipt. She also relied upon the order of the Commissioner (Appeals) for the assessment year 1996-97 in the appellant’s case in which the Assessing Officer’s action was upheld. I find that in the assessment year 1996-97 my learned predecessor in office decided this issue against the appellant in view of the following reasons :
‘This was an amount of subsidy granted for holding buffer stock by the appellant and to meet expenditure incurred to hold on the buffer stock as required. Since the appellant would have obviously debited all expenses relatable to maintaining the buffer stock the subsidy received will not be covered by the ratio of CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830 (SC) and will only be a revenue receipt. Therefore, the Assessing Officer was correct in treating this as revenue income’.”
The assessee’s appeal filed before the Tribunal also went to the same fate, against which the present appeals have been filed.
Shri Dhananjay Awasthi, learned counsel appearing for the Revenue at the very outset, submitted that the issues raised in all these appeals are fully covered by the apex court judgment in CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87.
We have heard the learned counsel for the parties and have perused the record.
From the order of the Commissioner (Appeals) as quoted above, it is clear that the subsidy was received for holding buffer stock by the appellant and to meet the expenditure incurred to hold on the buffer stock as required and all expenses relatable to maintaining buffer stock were debited. The subsidy given by the Central Government to compensate or reimburse the expenses was a revenue and taxable receipt. The apex court in the aforesaid judgment has laid down that test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. The purpose test has to be applied to find out the nature of the subsidy. The object of the subsidy scheme was to enable the assessee to run the business more profitably which clearly indicates that it was on revenue account.
It is useful to quote paragraph 14 of the said judgment which is quoted below (page 399) :
“In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this court in the case of Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent. of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this court by way of a special leave petition. It was held by this court on the facts of that case and on the basis of the analysis of the scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilised for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant’.”
5. Findings have been recorded by all the authorities that the subsidy was given to compensate the burden on account of interest, storage and insurance, etc., for holding the buffer stock of sugar, i.e., to compensate the assessee in running his business which is clearly revenue receipt. No substantial questions of law arises in these appeals.
6. All the appeals are dismissed.
[Citation : 361 ITR 637]
