High Court Of Andhra Pradesh
CIT vs. Rassi Cements Ltd. & Anr.
Section 37
Asst. Year 1983-84
V. V. S. Rao & B. N. Rao Nalla
Referred Case Nos. 141 & 273 of 1996 & 63 of 1997
6th January, 2012
Counsel appeared
S. R. Ashok, J. V. Prasadfor the Petitioner.:C. Kondandaramfor the Respondent
V.V.S.Rao, J.
1. These three referred cases under Section 256(1) of the Income Tax Act, 1961 (the Act) are at the instance of the revenue. The questions referred by the Income Tax Appellate Tribunal, in all the three cases require the consideration of the same point, namely, whether in the facts and circumstances of the cases, the power subsidy received by the assessee company is taxable as a revenue receipt in the computation of the income. To begin with, we would briefly narrate – in the ensuing paragraph; the facts and circumstances leading to referred case No.141 of 1996. M/s.Raasi Cements Limited (the assessee) filed their tax return declaring Nil income duly treating an amount of Rs.35,57,859/- received from the Government as a power rebate as capital receipt, which was transferred to the Reserve Account. The assessing officer completed assessment denying the claim and held that power rebate given by the Electricity Department cannot be capitalized as the same is given as rebate which is in the nature of revenue receipt and cannot be treated as capital receipt. The appellate Commissioner, however, considered the Government Order being G.O.Ms.No.455, dated 03.05.1971 which enabled the grant of power subsidy/rebate and in the light of the law laid down in SanairamDoongarmull v CIT(1961) 42 ITR 392 (SC), S.R.Sivarama Prasad Bahadur v CIT,(1971) 82 ITR 527 (SC)and CIT v Godavari Plywoods Limited, (1987) 168 ITR 632 (AP) came to the conclusion that the subsidy is a capital receipt which is not taxable. This view received the approval of the appellate Tribunal who dismissed the revenue’s appeal on 27.09.1994. Aggrieved thereby, the revenue sought reference under Section 256(1) of the Act.
In R.C.Nos.273 of 1996 and 63 of 1997, the contention of M/s.Deccan Cements Limited (the assessee) that the power subsidy/rebate received by them is a capital receipt was accepted by the appellate Commissioner following the decision of the appellate Tribunal itself in the assessee’s own case. Following the same, when the revenue’s appeal was dismissed, they sought reference.
The senior standing counsel for the revenue would place strong reliance on the decision of the Supreme Court in CIT v Rajaram Maize Products, (2001) 251 ITR 427 (SC) in support of the contention that power subsidy being of revenue nature has to be taxed and it cannot be treated as a capital receipt. According to the counsel, the Government of Andhra Pradesh ordered power subsidy/rebate to the assessees for the purpose of continued sustenance of the industry and therefore, it ceases to be a capital receipt. Per contra, the senior counsel for Raasi Cements and the senior counsel for Deccan Cements would contend that the Government gave subsidies to encourage entrepreneurs to move to backward areas to set up enterprises with an object of achieving rapid industrialization; the general proposition that all subsidies are revenue receipts cannot be accepted and unless the
receipt satisfies the twin tests, namely, purposive test and nature test, it cannot be treated as revenue receipt. They would urge that deferment of quantification or method of quantification cannot be relevant or determinative of the nature of the subsidy. Both the sides relied on various decisions to which we would advert to at appropriate place infra.
The point for consideration The Government of Andhra Pradesh so as to stimulate rapid industrialization issued orders in G.O.Ms.No.1225, dated 31.12.1968 providing incentives to entrepreneurs wishing to set up industries in the State. The said order was superseded by G.O.Ms.No.455, dated 03.05.1971 with similar object. Again in 1976 by their order in G.O.Ms.No.224, dated 09.03.1976, the Government of Andhra Pradesh offered financial incentives to persons who set up new industries or going for substantial expansion of existing industries. The incentives offered (with minor changes from time to time) are – (i) investment subsidy on the fixed cost at 10 percent of the fixed capital cost of the project subject to certain ceiling; (ii) refund of sales tax on raw materials, machinery and finished goods subject to a maximum 10 percent of the paid up equity capital; (iii) subsidy and power consumed for production to the extent of 10 percent in the case of medium/large scale industries and 12.5percent in the case of small industries; (iv) exemption from payment of water rates; and (v) concession in the land revenue or taxes on land. In addition to these, additional incentives are also allowed in certain areas with which we are not concerned.
The referred cases of Raasi Cements relate to assessment year 1983-84 and those of Deccan Cements relate to
1988-89 and 1990-91. There is also no dispute that in all these cases power subsidy/rebate was allowed to the assessee as per G.O.Ms.No.455, dated 03.05.1971. Therefore, the question to be decided is as to what is nature of the power subsidy given to these assessees is with reference to the executive orders referred to hereinabove. Principles of law Whether the amount received by an assessee is a capital receipt or a revenue receipt? It is perennially vexed question. As of now there is no definite test or universally accepted theory to conceptualise the nature of the receipt. Of late, however, definite principles have emerged from the decided cases which help in the classification of money receipts. In ‘Advanced Law Lexicon’ by P.Ramanatha Aiyar, 3rd Edition, Reprint 2007, ‘capital receipts’ and ‘revenue receipts’ are defined as follows. Capital Receipts – Receipts of an organisatioin which create liability or reduce assets are called capital receipts e.g., money obtained by way of loan, from debentures. They are generally of a non-recurring nature. Capital receipts are exempt from income tax unless they are expressly taxable whereas Revenue Receipts are taxable unless they are expressly exempt from tax. (Book 1) Revenue Receipts – Moneys obtained in the normal course of business are called revenue receipts, e.g., sale proceeds, interest on deposits, and dividends on investment. Revenue receipts are normally of recurring nature and are not meant for any specific purpose. (Book 4)
The nature of the receipt has to be decided always as a question of fact. Generally, the capital receipt is not taxable, unless and until otherwise exempt all revenue receipts are brought to tax as income of the assessee. The concessions, financial assistance, rebate and subsidies are provided by the State with a view to generate more wealth by inducing production of goods which play a definite role in the economic development of the Nation. Industrial subsidies – at least some of them; are indispensable for various reasons. Though the macro economists are sharply divided on the issue of continuation of subsidies, the growing economy cannot achieve higher growth trajectory without subsidies. The issue, therefore, is whether these subsidies always are capital receipts or they can be treated as revenue receipts for the purpose of income tax.
The incentive by way of subsidy is given for each item separately and it would not be open to the assessee to appropriate the subsidy for the purpose other than that for which it was given to him. Even if the assessee wrongly maintains the account books and utilized the entire subsidy against the value of the amount to reduce its cost, the income tax officer would overlook the matter and would appropriate in reducing the cost of the machinery, plant and building for which the subsidy was specifically granted. (CIT v Jindal Brothers and Mills, (1989) 179 ITR 470 (Mad)). This was approved by the Supreme Court in CIT v P.J.Chemicals, (1994) 210 ITR 830 (SC). Their Lordships also observed that, ‘the Government subsidy is an incentive not for the specific purpose of meeting a portion of the cost of the assets for quantifying as are geared to percentage of such costs’.
In Sahney Steel and Press Limited v CIT, (1997) 228 ITR 253 (SC), the apex Court ruled that, “the character of the subsidy in the hands of the recipient will have to be determined having regard to the purpose for which the subsidy is given … if the purpose is to help the assessee to set up its business or complete a project the moneys must be treated as having been received for capital purposes. If the moneys are given to the asseessee for assessing him in carrying out the business operations and the money is given only after condition upon commencement of production, such subsidies must be treated as assistance for the purpose of trade”.
In CIT v Ponni Sugars and Chemicals Limited, (2008) 306 ITR 392 (SC), referring to Sahney Steel, the Supreme Court pointed out that one has to apply the purpose test or basic test (purpose for which the subsidy is given) to determine the nature of the receipt. It is apt to quote the following.
The importance of the judgment of this Court in Sahney Steellies 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 utilized 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 a 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. (emphasis supplied)
In MEPCO Industries Limited v CIT, (2009) 319 ITR 208 (SC), a three Judge Bench of the Supreme Court inter alia considered whether the power subsidy received by the assessee was of revenue receipt or not, and whether the Commissioner could invoke Section 154 and rectify assessment order reversing the power subsidy allowed as a capital receipt. In the facts and circumstances of the case, Supreme Court held that as there was change of opinion rectifying the mistake under Section 154 is not permissible. On making reference to Sahney Steel, the Supreme Court observed as under. Sahney Steel and Press Works Limited was a case which dealt with production subsidy, Ponni Sugars and Chemicals Limited dealt with subsidy linked to loan repayment whereas the present case deals with a subsidy for setting up an industry in the backward area. Therefore, in each case, one has to examine the nature of the subsidy. The judgment of this Court in Sahney Steel and Press Works Limited was on its own facts; so also the judgment of this Court in Ponni Sugars and Chemicals Limited. The nature of the subsidies in each of the three cases is separate and distinct. There is no strait jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel and Press Works Limited, this Court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas. (emphasis supplied)
From the above four decisions of the Supreme Court, insofar as power subsidy is concerned, the following may be taken as well settled. If subsidy is given for setting up of industry in the backward areas or it is given for repayment of term loan undertaken by the assessee for setting up new industry, it should be treated as a capital asset (Ponni Sugars and MEPCO). The power subsidy given as part of incentive scheme, after commencement of production, it should be treated as subsidy linked to production, and therefore, it is a revenue receipt, because such assistance is given for the purpose of carrying of business by the assessee (Sahney Steel). Further, the production incentive scheme is always different from the scheme giving subsidy for setting up industries in backward areas and the distinction cannot be lost sight of while deciding the question whether it is a capital receipt or a revenue receipt.
The finding and reasons The nature and purpose of subsidy rather than method of quantification or time of sanction are relevant for determining whether it is capital receipt or revenue receipt. The case of Raasi Cement relates to the assessment year 1983-84 and that of Deccan Cements of the assessment year 198889 and 1990-91. By the time the assessments were made, the three Government Orders referred to were applicable to the extent relevant is considered and these would determine the nature and purpose of giving incentive. This Court in CIT v Sahney Steel and Press Works Limited, (1985) 152 ITR 39 (AP) (a decision affirmed by the Supreme Court) considered G.O.Ms.No.1255, dated 31.12.1968 and the subsequent order being G.O.Ms.No.455, dated 03.05.1971. After analyzing these, the Division Bench held that the incentive given under its two Government Orders “is not a subsidy given for setting up the plant, but a subsidy given for efficient and profitable running of the industry and its growth”. Indeed, a perusal of the two Government Orders quoted by the Bench would show that the incentive is available only to those industries which commenced production and no such incentive was given even before the industry was set up. The view of Andhra Pradesh High Court that the incentive is for efficient and profitable running of the industry was affirmed by the Supreme Court. The Supreme Court indeed observed that, “incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production; the scheme was not to make any payment directly or indirectly for setting up of the industries … subsidies were granted year after year only after setting up of the new industry and commencement of production” and therefore it is a revenue receipt. In Godavari Plywoods – a decision which was quoted with approval in P.J.Chemicals – this Court considered G.O.Ms.No.224, dated 09.03.1976 which “superseded the incentive scheme covered by the earlier two Government Orders dated 31.12.1968 and 03.05.1971″. It was a case of financial incentive for industries established in selected backward areas including investment subsidy. The Bench recorded a finding that, “the subsidy is granted more as a recompense for the hardships and inconvenience, whose entrepreneurs may encounter while setting up industries in backward areas. It was not a case of any incentive being granted year after year like in the case of power subsidy”. In CIT vTirumala Bricks and Tiles Factory, (1996) 217 ITR 547 (AP), the assessee received investment subsidy which was treated as a revenue receipt for the purpose of computing profits from business. Applying the principle in Sahney Steel,the appellate Commissioner agreed with the assessment officer. But the Tribunal reversed holding that it is not a trading receipt. In the reference under Section 256(1), this Court having regard to the nature of the investment subsidy held that the investment subsidy given for setting up new industries in backward areas is not a trading receipt and answered the question in favour of the assessee.
We may reiterate that Sahney Steel is a case concerning incentives (including power subsidy) granted year after year which were treated as supplementary trade receipts. Even with regard to the power subsidy granted after commencement of production, the rebate is to the extent of 10percent or 12.5percent as the case may be. This is given on actual power consumption and is nothing to do with the investment subsidy given for establishment of industries or expanding industries in backward areas. Therefore, the amount of power subsidy/rebate is certainly a trading receipt not a capital receipt. This view also derives support from Rajaram Maize Products wherein their Lordships held that, “the power subsidies are of revenue nature and have to be taxed accordingly”. After noticing the three Government Orders found mentioned/quoted in the decision cited hereinabove, we are convinced that the power subsidies received by the assessees in these cases are in the nature of trading receipts and are liable to be taxed accordingly.
In the result, the questions referred regarding the nature of power subsidy have to be answered in favour of the revenue.
In R.C.No.273 of 1996, another question is as to whether on the facts and circumstances of the case, the ITAT was correct in law in allowing the deduction of Rs.96,765/- claimed under maintenance of transit house, in spite of the provisions of Section 37(3)(4) and (5) of the Income Tax Act? This question is now settled in view of the decision in Britannia Industries v CIT, (2005) 278 ITR 547 (SC) : (2006) 1 SCC 646. Construing these provisions, the Supreme Court held that, “the intention of the legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purpose of a guest house of the nature indicated in sub-section (4) of Section 37”.
In view of the same, the question has to be answered in favour of the revenue.
In the result, all the questions referred in three Referred Cases are answered in the negative in favour of the revenue and against the assessee. The Referred Cases shall stand disposed of without any order as to costs.
[Citation : 351 ITR 169]
