TMI Blog2002 (12) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... to explain as to why this sum be not disallowed. It was stated on behalf of the assessee that it had provided for Rs. 97.07 lacs towards interest @ 14% on the loan amounting to Rs. 6,93,39,000 outstanding on the date when the undertaking was handed over to it by the Government. It was further stated that as per letter No. 14/3/86-NSU/Sugar-Desk-I dated 25-10-1989 of the Department of Food, Ministry of Food and Civil Supplies, the interest on loan was liable to be treated as Capital Subsidy to enable the assessee unit to rehabilitate and improve its functioning. The Ld. Assessing Officer observed that the assessee was not liable to pay any interest on the outstanding Government loan and in fact it had received a Capital Subsidy of the equivalent amount. The claim of deduction for Rs. 97.07 lakhs was jettisoned as in the opinion of the Assessing Officer the assessee had neither incurred any expenditure nor there was any liability to pay in this regard. The book entries made by the assessee claiming deduction were held to be irrelevant for the purpose of computing the taxable income. The first appeal did not change the fortune of the assessee. 3. Before us the Ld. counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven on behalf of the Government placed at pages 50 to 55 of the Paper Book. It was contended that the perusal of these letters clearly revealed that the subsidy granted was capital in nature enabling the assessee company to improve its functioning by modernization and expansion etc. It was contended that the claim of the assessee before the authorities below was that the assessee was liable to deduction for Rs. 97.07 lacs being the interest liability incurred by the assessee and also no amount of this count was taxable in view of the fact that the subsidy was capital in nature. While referring to the decision of Hon'ble AP High Court in the case of CITV. Chitra Kalpa [1989] 177 ITR 540 and that of Bombay High Court in the case of Sadichha Chitra v. CIT [1991] 189 ITR 774 it was pointed out that the subsidy granted by the Government in connection with the capital assets could not be taxed. A further reliance was placed on the decision of the Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd. v. CIT[1997] 228 ITR 253 to assert that only the subsidy received on account of revenue expenses was liable to be taxes and not otherwise. It was contended that the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) was in accordance with the law and did not warrant any interference. 7. We have considered the rival submissions in the light of material placed before us and precedents relied upon. There is no dispute about the fact that the undertaking of the assessee which was earlier taken over by the Government was handed over to the assessee-company and as a result of the agreement entered into by the Government of India with the assessee on 31-1-1986 and its modification thereafter, the assessee was liable to make repayment of loan to the tune of Rs. 693.39 lakhs outstanding on the date of handing over. It was an interest bearing loan and was to be repaid in twenty equal yearly instalments after a moratorium period of five years. The agreement specifically provides that the interest accruing @ 14% per annum during the period of moratorium will be credited as subsidy to the mill by the Government. There is also no quarrel about the fact that the interest was not to be physically paid and then received back as subsidy, but was to be book adjusted. In order to decide the controversy in this appeal we have to examine the issue from two angles viz., (i) whether the assessee was entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Food, Government of India to the Bank placed at page 11 clearly stipulates that "it has been agreed that the interest @ 14% on loan of Rs. 693.39 lakhs may be charged and given back as subsidy through book adjustment". The letter written by the Director, Ministry of Food to the assessee on 25-101989 placed at page 52 of the Paper Book clearly reads that "the outstanding loan bears an interest from the date of handing over of the mill @ 14 per annum . It is therefore crystal clear that the assessee was liable to pay interest @ 14% per annum on the amount of loan, which in the year under consideration amounted to Rs. 97.07 lacs. As the liability to pay such interests was there upon the assessee, we do not see any reason as to why the claim for deduction of interest should be negatived. 9. The second aspect of the controversy is the decision on the nature of subsidy. If it is found out that the subsidy was revenue in nature then it has to be taxed in accordance with the provisions of the Act, and in the converse situation the same cannot be considered for taxation, being capital in nature. Both the sides have heavily relied upon the decision of theApex Courtin Sahney Steel Pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Government, Subsequently on12-10-1989a letter was addressed by the assessee to the Ministry of Food, seeking clarification as regards the purpose for which the subsidy was to be utilized. Thereafter on25-10-1989a letter was written by the Ministry of Food and Civil Supplies.Para2 of the said letter provides that the interest due and actually paid by the mill during the period of moratorium will be paid back to the factor as capital subsidy. The purpose of utilization of the subsidy is stated to be "in order to enable the factory to improve its functioning and rehabilitate it financially by modernization, expansion, etc." A further clarification was given by the Ministry of Food Civil Supplies on 8-12-1989 stating that "the objective of granting moratorium on the payment of loan and thus for the subsidy amount, as being to enable the factory to improve its financial performance and take steps towards rehabilitation and meeting the various essential and other items including those of capital expenditure for modernization and expansion etc. and to boost up the cane development activity in the area of operation of the factory as required for rehabilitation of the factory. The purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paper Book unequivocally states that the sum of Rs. 97.07 lacs was spent on expansion and modernization work. 13. A close study of the legal position as enunciated by various courts emerging from catena of cases discussed above manifestly draws a line of distinction between a capital subsidy and revenue subsidy. Whereas the former is directed towards the expansion of the capital base and accordingly falls beyond the ambit of taxation, the later helps the recipient in recouping the revenue expenses and cannot escape the taxation. When the facts of the instant case are decided on the touchstone of the distinction between a capital and revenue subsidy, it becomes palpable that the case of the assessee falls in the former category and hence the amount of subsidy cannot attract tax. 14. On consideration of the matter from both the angles, namely, the existence of the liability of the assessee to pay interest and the nature of the subsidy, being the revenue, we can't sustain the action of the first appellate authority. 15. Before parting with the matter, we would like to deal with another contention raised by theLd. DRto the effect that the interest was waived by the Government and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DR on the case of Colaba Central Cooperative is misconceived as the facts of that case and distinguishable and bear no resemblance to the factual scenario prevailing in the present case, in as much as that case was on diversion of income by overriding title, where it was held that the assessee had not incurred any expenditure at all. Around four decades ago, the Hon'ble Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 considered the doctrine of diversion of income and held it to be applicable when by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed. In contrast the facts of the instant case lie in different compartment where the liability to pa', interest was an ascertained liability and had no connection with the receipt of capital subsidy. These were two related but entirely different transactions. 16. In view of the legal position as discussed above in the lights of the facts of the present case, we are satisfied that the Ld. CIT(A) was not justified in confirming the addition of Rs. 97.07 lacs on account of interest to the Government of India. 17. In the result the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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