TMI Blog1997 (9) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears from the notification issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after January 1, 1969, with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession is also available for subsequent expansion of 50 per cent. and above of existing capacities provided, in each case, the expansion was located in a city or town or panchayat area, other than that in which the existing unit is located. The incentives were : " (a) 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 paid-up in the case of public limited companies and the actual capital in the case of others ; (b) Subsidy on power consumed for production to the extent of 10 per cent. in the case of medium and large scale industries and 121/2 per cent. in the case of small scale industries. This concession will not apply to cases where concessional tariffs are allowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable. Mr. Ganesh, appearing on behalf of the assessee, has contended that the incentive scheme was for setting up new industrial undertakings in the State and also for the purpose of stimulating substantial expansion of the industries. The primary object was rapid industrialisation of the State. This object was sought to be. achieved by the various incentives. It was further contended that the subsidy given by the State was up to 10 per cent. of the capital investment in the undertakings. Since the subsidy was calculated on the basis of the quantum of investment in capital such subsidy cannot be considered to have been received by the assessee on revenue account. It was further contended by Mr. Ganesh that grant of subsidy was on the basis of refund of sales tax on raw materials, machinery and finished goods already paid for by the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of stimulating the setting up and expansion of industries in the State cannot be upheld, because of the subsidy scheme itself. No financial assistance was granted to the assessee for setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for five years to enable them to be viable and competitive. Sales tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda joint Water Board [1946] 14 ITR (Suppl.) 45, 47 ; [1946] 28 TC 261 (HL) in the following words : " The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... named, and it has nothing to do with their trade in the sense in which you are considering the profits or gains of the trade." Lord Buckmaster observed as under : " Was this a trade receipt ?, and my answer is most unhesitatingly: No. It appears to me that it was nothing whatever of the kind. It was a grant which was made by a Government department with the idea that by its use men might be kept in employment, and it was paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. " Mr. Ganesh strongly relied on Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) which does not come to the assistance of his contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given in several instalments as the work of extension ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... St. John Dry Dock and Ship Building Co. Ltd. v. Minister of National Revenue, 4 DLR 1, which has close similarity to the case of Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL). In that case, it was held that where subsidies were given under statutory authority, the statutory purpose for which they are authorised is relevant and may even be decisive in determining whether it is taxable income in the hands of the recipient. In that case, it was pointed out after discussing the Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) as well as that of Lincolnshire Sugar Co.'s case [1937] 20 TC 643 (HL) that subsidy given by the Canadian Government to encourage construction of dry docks was " an aid to the construction of dry dock and not an operational subsidy ". That precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL), the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. In Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) which appears to be the sheet-anchor of the argument of Mr. Ganesh, the company in contemplation of an expansion of its docks had applied for financial assistance to the Unemployment Grants Committee. The Committee gave financial assistance from time to time as the work progressed and the payment was equivalent to half the interest for two years (not exceeding average rate of 51/2 per cent. per annum) on approved expenditure made out of loans. Even though the payment was equivalent to half the interest amount payable on the loan which might have been a revenue expenditure, the House of Lords had no difficulty in holding that the mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the subsidy scheme, the Full Bench observed : " We are tempted to say that the subsidy received by the assessee is used to acquire an asset by replanting high-yield variety of rubber trees. The difference is, as said by Bowen L.J., the expenditure in the acquisition of the concern will be capital expenditure and the expenditure in carrying on the concern is revenue expenditure. This makes the vital difference between the cases in Karimtharuvi Tea Estates Ltd. v. State of Kerala [1963] 48 ITR 83 (SC) and Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T [1961] 41 ITR 751 (SC). " So far as the scheme is concerned, the Full Bench further observed : " The subsidy scheme makes it very clear that the amount of subsidy has to be spent ' for the acquisition of an asset ' by replanting rubber plants of high-yielding varieties. " It will be seen from this decision that the Full Bench relied upon the decision of the House of Lords in Seaham Harbour Dock Co.'s case [1931] 16 TC 333 and pointed out that a beneficial scheme had been evolved for replanting of the trees and as a result of replanting, the assessee acquired an asset which was of capital nature. It was further po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77) : " The said subsidy was released to the assessee so as to assist the assessee to acquire a new capital asset so as to meet part of the cost of the new film in public interest. " On the basis of that vital distinction, the court held that the ratio of the judgment of this court in Meenakshi Achi's case [1966] 60 ITR 253 was not applicable in the facts of the case before it. In the case of CIT v. Udaya Pictures (P.) Ltd. [1997] 225 ITR 394 (Ker) subsidy was granted by the State Government for producing new regional films. It was held that the entitlement to the subsidy sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. What was received by the assessee was not a capital receipt but a subsidy. The facts of this case have not been clearly stated in the judgment. But, it appears that subsidy was granted after making of the film. The Bombay judgment in the case of Sadichha Chitra [1991] 189 ITR 774, proceeded on the footing that subsidies were granted as and when the film was being completed which resulted in creation of a capital asset. A similar view was taken by the Andhra Pradesh High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the industries and could not be taxed as revenue receipts. In that case, 75 per cent. of the sales tax paid in a year for a period of five years from the date of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee as was clear from the facts and circumstances of the case. The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but as an assistance after the industry commenced production. The view taken by the Madhya Pradesh High Court is erroneous. In view of the aforesaid, it is not necessary to discuss the point relating to applicability of section 41(1) of the Income-tax Act, 1961, in this case. The appeal fails and is dismissed. There will be no or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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