Bombay H.C : Special capital incentive given to assessee by State Government to enable assessee to set up a new unit in State would be capital receipt

High Court Of Bombay

CIT vs. Kirloskar Oil Engines Ltd.

Assessment Year : 1997-98

Section : 4

S.C. Dharmadhikari And Girish S. Kulkarni, JJ.

IT Appeal No. 2646 Of 2011

April 17, 2014

JUDGMENT

1. This appeal challenges the order passed by the Income-tax Appellate Tribunal, Pune Bench, dated June 30, 2011, in Income Tax Appeal No. 82/ PN/2001. The assessment year in question is 1997-98.

2. Mr. Singh, learned counsel appearing for the appellant-Revenue, submits that this appeal raises a substantial question of law. He submits that the Income-tax Appellate Tribunal was not justified in holding that the special capital incentive amounting to Rs. 20 lakhs received by the predecessor-in-title of the assessee from the Government of Maharashtra through the State Industrial Corporation of Maharashtra (for short “SICOM”) was capital receipt in the hands of the assessee.

3. It is urged that the assessee is a company engaged in the business of manufacturing of internal combustion engines of 3 horse power. The assessee filed the return of income for the assessment year 1997-98 on November 30, 1997, declaring the total income of Rs. 41,93,64,490. The assessment was undertaken and the Assessing Officer made an order on December 31, 1999, under section 143(3) of the Income-tax Act, 1961. He assessed the income at Rs. 61,74,05,557. Aggrieved thereby, the assessee filed the appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has allowed the appeal of the assessee resulting in the Revenue/Department preferring an appeal to the Income-tax Appellate Tribunal.

4. Mr. Naniwadekar, learned counsel appearing for the respondent-assessee, would urge that the question raised in this appeal is fully covered by the judgment of the Division Bench of this court in the case of CIT v. Chaphalkar Bros. [2013] 351 ITR 309/215 Taxman 145 (Mag.)/33 taxmann.com 431. He submits that the predecessor-in-title was given the incentive so as to set up a new industry. If the industry was to be set up and established and the incentive was given by the State Government through its industrial corporation, then, as the Division Bench held, the purpose of the same is relevant factor. If the object is to enable the assessee to set up a new unit then the receipt of subsidy would be on capital account. In these circumstances, Mr. Naniwadekar submits that the issue is squarely covered not only by the judgment of the Division Bench but equally by the judgment of the honourable Supreme Court in the case of CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87.

5. Having heard the learned counsel appearing for the parties at some length and perusing with their assistance the concurrent orders of the Commissioner of Income-tax (Appeals) and that of the Income-tax Appellate Tribunal, we find that the only question raised in this appeal is covered by the judgment of the honourable Supreme Court and equally that of the Division Bench of this court. Undisputedly, the capital incentive was given to the assessee. That was to enable the assessee’s predecessor-in-title to set up a new unit. This was under the incentive package offered by the State Government for setting up new industries in the State. The predecessor-in-title of the assessee applied for such special capital incentive from the SICOM. That was in the form of loan of Rs. 20 lakhs in the year 1992. Since the actual disbursement was to take place from the receipt of funds from the Government of Maharashtra, the predecessor-in-title of assessee took bridge loan from the SICOM. Later on, that bridge loan was converted together with the outstanding interest of Rs. 5 lakhs into special capital incentive by the SICOM. That being in the nature of capital receipt, it was directly credited to the capital receipt reserve account. The assessee claimed the receipt as a capital receipt. It is that stand of the assessee which was not accepted by the Assessing Officer. The matter was carried in appeal and the assessee succeeded.

6. We are of the opinion that repeatedly the Revenue has misunderstood and misconstrued the nature of receipts. Whenever new industries are to be set up in the State, there are incentives offered by the State Governments. They are offered directly or through some canalizing agencies like SICOM. Initially, they are termed as loan but later on converted into incentive and offered with a view to enable the assessee to set up a new unit. Then, despite the honourable Supreme Court addressing the issue and the Division Benches of this court holding that these could not have been assessed in the manner done by the Assessing Officers, the Revenue persists with its above stand. Here also we are told that the matter is not covered by the Division Bench judgment. When Mr. Singh was asked to explain as to how it is not so covered, all that he would urge is that the Assessing Officer has taken the facts from the narration of the respondent’s predecessor-in-title. It is in that light he submits that the scheme under which such incentives are offered is not in issue and under which the assistance was given to the assessee. We are unable to accept this stand. In the case of in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/94 Taxman 368 (SC) and in Ponni Sugars & Chemical Ltd.’s. case (supra), the honourable Supreme Court has emphasized that the character of 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. The point of time at which the subsidy is given is not relevant. The source is immaterial. The form of subsidy is immaterial. The main condition and with which the court should be concerned is that the incentive must be utilized by the assessee to set up a new unit or for substantial expansion of the existing unit. If the object of the subsidy scheme is to enable the assessee to run the business more profitably then the receipt is on the 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 then the receipt of subsidy was on the capital account.

7. We do not find any justification for the Revenue questioning the con-current findings of fact in the present case. The concurrent findings of fact do not raise any substantial question of law. There is no perversity in rendering such findings and the purpose of assistance given by the Government through SICOM. In such circumstances the Revenue should not have questioned the concurrent orders in the case of the present assessee. Once the undisputed facts point towards the object and that being to enable the assessee to set up a new unit then the matter is squarely covered by the judgments of the Division Bench of this court and equally that of the honourable Supreme Court.

8. We are afraid that if the Revenue persists with such stand and as has been turned down repeatedly, that would defeat the very object and purpose of the schemes and packages devised by the States. That would also result in frustrating the entrepreneurs and defeating the purpose of setting up new industries and particularly in backward areas. The Revenue, there-fore, should bear in mind that in every such case and whenever the funds or receipts are from the schemes and packages devised by the State, it should note the object and purpose of the same. If that is of the nature specified in the judgments of this court and equally that of the honourable Supreme Court then the Revenue must act accordingly. We hope that this much is enough so as to dissuade the Revenue from bringing such matters repeatedly to this court. Ordinarily and for wasting judicial time and which is precious, we would have imposed heavy costs on the Revenue while dismissing this appeal but we refrain from doing so by giving last opportunity to the Revenue. This appeal does not raise any substantial question of law. It is dismissed. No order as to costs.

[Citation : 364 ITR 88]