Madras H.C : the subsidy received by the assessee is to be treated as capital receipt and the same is not taxable

High Court Of Madras

CIT vs. Karaikal Chlorates Ltd.

Assessment Year : 1995-96

Section : 4

Mrs. Chitra Venkataraman And P. P. S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 918 Of 2004

March 21, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The Revenue has preferred this appeal under section 260A of the Income-tax Act, 1961, raising the following substantial question of law :

“Whether, in the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received by the assessee is to be treated as capital receipt and the same is not taxable ?”

2. At the outset, it must be pointed out that the assessee took an objection as regards the maintainability of the appeal, having regard to the fact that the assessee is a loss making company and under section 260A of the Income-tax Act, as per the then prevailing the Board’s Instruction, the monetary limit for filing an appeal under section 260A of the Income-tax Act, 1961, was at Rs. 2 lakhs and in 2008, the monetary limit for filing an appeal before the High Court was revised to Rs. 4 lakhs. Having regard to the very low tax effect and the Board’s circular binding on the Revenue, the appeal is liable to be dismissed. Learned counsel appearing for the assessee pointed out that the issue raised in this appeal does not fall under any of those excepted circumstances to maintain an appeal ; consequently, the appeal has to be dismissed as not maintainable, having regard to the low tax effect.

3. It is seen from the instructions given in the said circulars, particularly that of the year 2007 where the substantial question of law involved is of recurring nature to be decided by the court, without recourse to the monetary limit, an appeal could be considered on the merits. It is seen that instructions were also issued to that effect in Board’s Instruction No. 1979, dated March 27, 2000, was clarified subsequently on June 29, 2000, and again on October 24, 2005.

4. Learned counsel appearing for the assessee placed reliance on the decision of the Delhi High Court as regards the maintainability reported in CIT v. Nanak Ram Jaisinghania [2009] 317 ITR 302. We do not think that the said decision would be of any assistance to the assessee. Admittedly, in the assessee’s case for the assessment year on the very same issue as to the character of the power subsidy receipt, figured in as a disputed question before the Tribunal. It held that the power subsidy is a revenue receipt and the same was accepted by the assessee and no further appeal was taken up before this court. Taking note of the abovesaid circumstances, we hold that the appeal is maintainable in this case.

5. The facts herein are as follows :

In respect of the return, for the assessment year 1995-96, the assessee declared nil income after claiming set off of unabsorbed depreciation. Subsequently, the assessee filed a covering latter along with the revised return, wherein the assessee pointed out that by mistake, it had treated the power subsidy receipt from the Pondicherry Government as revenue receipt instead of capital receipt. Thus, the assessee claimed subsidy received for a sum of Rs. 62,34,800 as a capital receipt and consequently declared a net income of Rs. 39,11,437, as against the originally computed income of Rs.1,01,46,237. The assessing authority, after considering the arguments of the assessee, passed the assessment order, treating the same as revenue receipt. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income-tax (Appeals). Considering the effect of the Government’s scheme dated February 11, 1991, as applicable to Karaikal and Mahe Region as regards the low tension and high tension industries which were energised on or after March 1, 1991, the Commissioner of Income-tax (Appeals) held that the consumption expenses are nothing but revenue expenses and the corresponding concession received by the assessee could not assume any character other than revenue receipts. Thus holding, the appeal was dismissed. Aggrieved by the same, the assessee went on further appeal before the Income-tax Appellate Tribunal, which considered the issue at length, to ultimately hold in favour of the assessee. The Tribunal held that the subsidy was given only to encourage setting up of new industries in a backward area. Consequently, the subsidy received was capital in character. Thus, the claim of the assessee was allowed. Aggrieved by the same, the Revenue has come on appeal before this court.

6. Learned standing counsel appearing for the Revenue, taking us through the scheme on the power subsidy granted, contended that going by the decision of this court reported in CIT v. Super Spinning Mills Ltd. [2008] 296 ITR 168 and the decisions of the apex court reported in CIT v. Rajaram Maize Products [2001] 251 ITR 427/119 Taxman 492 and CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87, unless and until the assessee is able to establish that the subsidy given was for the purpose of setting up of industry, the question of granting any relief as a capital receipt did not arise in this case. Learned standing counsel further pointed out that having regard to the categorical decision of the apex court reported in Sahney Steel & Press Works Ltd. v. CIT [1997] 228 ITR 253/94 Taxman 368, and the object with which the subsidy was granted, the receipt should be assessed only as revenue receipt. He further pointed out that the purpose of granting the subsidy was not as regards setting up of the industries, but it was only for carrying out the day-to-day business operations. Thus, applying the decision of the Supreme Court which has been consistently followed by this court, the order of the Tribunal has to be reversed, thereby confirming the order of the assessing authority.

7. Per contra, learned counsel appearing for the assessee placed reliance on the decision reported in CIT v. Kanyakumari Distt. Co-op. Spg. Mills Ltd. [2003] 264 ITR 684/128 Taxman 544 (Mad) as well as Sahney Steel & Press Works Ltd. (supra), only to contend that going by the scheme of power subsidy, the receipt could only be taken as capital receipt and not as revenue receipt. He further pointed out to the Government order in G. O. Ms. No. 47/87-Ind, Development Department (Ind.), Pondicherry, dated August 12, 1987, as well as to G. O. Ms. No. 9/91, Ind, Pondicherry, dated February 11, 1991, that the intention of granting the power subsidy was to reduce the heavy drain of funds as well as to encourage engaging of more labour. Thus, the scheme, which only enabled industries to become power oriented, need to be labour oriented, by generating more employment. Going by the said object of the scheme, the view of the Tribunal could not be taken as an unexceptional one. Consequently, he prayed for confirming the order of the Tribunal.

8. Heard the learned counsel appearing for both sides and perused the material on record.

9. A perusal of the decision of the Supreme Court reported in Sahney Steel & Press Works Ltd., (supra) shows that the company assessee therein was a beneficiary of a notification issued by the Andhra Pradesh Government granting certain incentives to the new industrial undertakings which commence production on or after January 1, 1969, with investment capital (excluding working capital) not exceeding Rs. 5 crores. Concession is available to the subsequent expansion of the industry also and such expanded units were to be located in a city or town or panchayat area, other than that in which the existing unit was located. The incentives contemplated refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent. of the equity capital. Apart from that, there was also subsidy on the power consumed for production and further incentives as narrated therein. The Supreme Court pointed out that these incentives are production incentives that the assessee would be entitled to the incentives only after it went in for production. The Supreme Court pointed out that the incentives given by way of sales tax refund and subsidy of power consumed for production were only operational subsidies hence, the payments not being made up for setting up of industries and were of the character of the supplementary receipts which could not be used for distribution as dividend to the shareholders. Consequently, the Supreme Court held that these subsidies were not capital subsidies. The apex court pointed if any subsidy is given, the character of the subsidy in the hands of the recipient will have to be determined by having regard to the purpose for which subsidy is given. If it is given by way of assistance to the assessee in carrying on its trade or business, it has to be treated as trading receipt. After considering the catena of decisions the apex court rejected the plea of the assessee, and held that the same subsidies were capital in character.

10. The decision reported in Kanyakumari Distt. Co-op. Spg. Mills Ltd. (supra) relates to grant of subsidy for giving employment to workers belonging to Adi Dravida community. The court held that the taking into account the welfare of the Adi Dravida community and their poor representation in the assessee’s firm, the Government of Tamil Nadu sanctioned certain financial assistance under special component to recruit 70 Adi Dravidas. On the basis of the special component plan, the Government sanctioned 10.50 lakhs to recruit 70 additional workers from Adi Dravidas community. Referring to the decision of the apex court, reported in Sahney Steel & Press Works Ltd. (supra), this court held that the grant was made under special and benevolence scheme for the welfare and upliftment of the weaker sections of the society and the amount received had nothing to do with the trade or business of the assessee. Consequently, this court upheld the view of the Tribunal that the amount received by way of subsidy under the scheme was capital in nature. The facts in the present case show that the Government of Pondicherry introduced a scheme of power subsidy to new industries both low tension and high tension consumers to be set up in the Union Territory of Pondicherry in order to foster growth of industries. The subsidy was made available to all new industries set up on or after January 1, 1975, and would be payable for a period up to the end of V plan period. The subsidy was granted by way of a subsided rate chargeable on the consumption of energy at particular percentage from the first three years to the fifth year. On August 12, 1987, in G. O. Ms. No. 47/87-Ind, an amendment was made to the effect that the scheme on power subsidy was entrusted to the Superintending Engineer, Electricity Department, Pondicherry, so that he could make appropriate deductions in the current consumption bills of the eligible industrial units based on the certificate to be issued by the Director of Industries, allowing subsidies from time to time. The circular further pointed out that the Superintending Engineer, Electricity, could make appropriate deduction in the current consumption bills of the eligible industrial units, as certified by the Director of Industries, regarding the percentage of subsidy allowed to each industrial unit. Following this Government order, yet another Government order in G. O. Ms. No. 9/91 Ind, Pondicherry, dated February 11, 1991, was issued, wherein, it was pointed out that even though at the time of formulation of the scheme, the intention was to encourage the proliferation of industry within the territory, in actual practice, the scheme had attracted many power intensive units which are using power as one of the inputs for production. It was helping only large industries with limited employment, hence, on the suggestions made by the planing commission, it was felt the scheme should be modified so as to reduce the heavy drain on the plan funds. It was also found that the present scheme ended in the growth of large medium industries which instead of promoting more labour industries, were using power as raw materials for production. Taking note of the need for modification, the Government modified the scheme. It was observed that the modified scheme would enable more labour industries to come. Accordingly, the Government order was passed, whereby the power subsidy was given, subject to a ceiling of Rs. 1 lakh per month. The subsidy herein was worked out in actual consumption of energy for Pondicherry and Yanam regions and a different set of subsidy was given for Karaikal and Mahe regions. All the new low tension and high tension industries that were energized on or after March 1, 1991, were brought under the power subsidy scheme, subject to the limit of Rs.1 lakh per month on a graded percentage. Paragraph 6 of the said circular further states that the existing power subsidy scheme during the VII plan period would cover large and medium industries which had been issued with power feasibility certificate before March 1, 1991, and had taken 60 per cent. of the capital issued had been paid up and a substantial portion of the factory building had been constructed and a firm order had been placed for plant and machinery required for industrial unit.

11. A perusal of the subsidy scheme, thus announced in the modified form, makes it clear that the subsidy is available at the percentage as given in the notification as regards the energy consumed. Contrary to the contention of the assessee herein, a perusal of the Government order shows that the same had no relevance for establishing the industry. Whatever might have been the relevancy or otherwise of the notification prevailing prior to the Government order dated February 11, 1991, as far as the relevant notification relating to the assessment is concerned, the power subsidy limited to Rs. 1 lakh per month was on actual consumption of electricity in the working or functioning of the industry. Thus, the Government thought fit to give the assistance by specifying the percentage of subsidy for each year on the power consumption for a period of five years. As held in the decision reported in Sahney Steel & Press Works Ltd. (supra), the purpose for which the subsidy is given assumes significance in deciding the character of the subsidy in the hands of the recipient. If the purpose is to help the assessee to set up its business or complete a project, the subsidy granted must be treated as to have been received for capital purpose. If the money is given for assisting the assessee in carrying out the business operation and it is given only after the commencement of production, such subsidies must be treated as assistance for the purpose of carrying on the business.

12. The said decision was applied by this court in the decision reported in Super Spinning Mills Ltd. (supra), to which, one of us is a party. This court held that the amount taken for obtaining a loan for the purpose of setting up a unit is only a capital expenditure.

13. In the recent decision reported in CIT v. Ponni Sugars & Chemicals Ltd. (supra), the apex court once again applied the decision reported in Sahney Steel & Press Works Ltd. only to reiterate that the character of the receipt of subsidy in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is granted and in such cases, one has to apply the purpose test. If the object of the subsidy scheme was to enable the assessee to run the business more profitably, then the receipt is on the revenue account. However, if the object under the subsidy scheme is to enable the assessee to set up a new unit or to expand the existing unit, then the receipt of subsidy would be on capital account. Applying the said decisions to the facts of this case, as already pointed out, a reading of the Government order makes it clear that the subsidy granted is for production and it is not for setting up of industry.

14. A reading of the notification dated February 11, 1991, makes it clear that what has been granted is the subsidy on power consumption with a ceiling limit of Rs. 1 lakh per month. The subsidy was given for a period of five years at a particular percentage on the actual consumption. It is not doubt true that in the preface to the notification, there is a reference to the need for cutting of heavy drain of public funds and to encourage labour intensive industries. This, however, does not mean that the purpose of granting the subsidy was for encouraging the setting up of a labour intensive industry. On the other hand, the notification merely puts a ceiling on the consumption of energy as a raw material in production and the need to engage labour that the industries set up shall pave the way for more employment to labour and that the power subsidy granted on the consumption of energy would enable the industry to have a better cash flow. The case on hand does not stand on the same footing as that of the decision reported in CIT v. Kanyakumari Distt. Co-op. Spg. Mills Ltd. (supra)

15. Whatever might have been the intention in the earlier notification which persuaded the Government to grant the subsidy, yet, a reading, particularly from paragraph 5 of the relevant notification, leaves no manner of doubt that the subsidy granted was on the power consumption in the manufacturing activities and not for setting up of the industry. Thus, applying the decision of the apex court in Sahney Steel & Press Works Ltd. (supra), to the facts of the case, we do not find that the assessee is entitled to have the receipt treated as a capital receipt. In the circumstances, accepting the submission of the learned standing counsel appearing for the Revenue, we have no hesitation in setting aside the order of the Tribunal, thereby holding the receipt as a revenue receipt and not as capital receipt. Consequently, we allow this tax case appeal. No costs.

It is stated that subsequent to the assessment, in the year 1996-97, the assessee-company was amalgamated with M/s. Mepco Industries Pvt. Ltd., which was formerly known as Industrial Diamond India Limited. The amalgamation had taken effect from April 1, 1995.

[Citation : 341 ITR 624]

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