1981 (3) TMI 59 - HC - Income Tax

Summary

Issues Involved
1. Whether tax credits under section 280ZB of the Income-tax Act, 1961, are in the nature of income.
2. Whether such tax credits require reduction of capital by the application of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1973-74.

Detailed Analysis

1. Nature of Tax Credits under Section 280ZB of the Income-tax Act, 1961

The primary issue is whether the tax credits received by the assessee under section 280ZB of the Income-tax Act, 1961, constitute income. The court analyzed the scheme of Chapter XXII-B and section 280ZB of the Income-tax Act to ascertain the true nature of these tax credits.

Section 280ZB was designed to provide tax concessions to companies engaged in manufacturing or production to encourage industrial development, export promotion, and the manufacture of specified goods. The tax credits were issued as an incentive for these activities and were not to be included in the total income of the assessee under section 10(28) of the Income-tax Act.

The court observed that the tax credits were in the nature of a refund of a portion of the tax payable by the assessee, serving as an incentive rather than income. The tax credits had specific conditions for their use, such as repayment of loans, redemption of debentures, or acquisition of capital assets, which further indicated that they were not to be considered as income. The court concluded that tax credits do not have the taint of "income" and should not be regarded as income in the real sense of the term.

2. Reduction of Capital by Application of Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964

The second issue was whether these tax credits should be taken into account for diminishing the capital base of the assessee as per rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. Rule 4 mandates that any part of the income not includible in the total income under the Income-tax Act should be used to diminish the capital base of the company.

The court noted that while the tax credits were exempt from tax under section 10(28) of the Income-tax Act, this exemption alone did not make them income. The court emphasized that the true nature of the tax credits must be considered. Since the tax credits were not income, they should not be used to diminish the capital base under rule 4.

The court also addressed the argument that the tax credits were received in respect of earlier assessment years (1966-67 to 1970-71) and should not be considered for the assessment year 1973-74. However, this argument was rendered moot by the court's primary finding that the tax credits were not income.

Conclusion

The court concluded that the tax credits received by the assessee under section 280ZB of the Income-tax Act, 1961, were not in the nature of income. Consequently, they should not be used to reduce the capital base by the application of rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964, for the assessment year 1973-74. The Tribunal's decision was overturned, and the question was answered in the negative, in favor of the assessee.