TMI Blog2005 (12) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... 003 in assessee's own case in ITA Nos. 1167 1168/Chandi./97 for assessment years 1992-93 and 1994-95 respectively and vide order dated 12-10-2004 in ITA No.929/Chandi./2000 for assessment year 1996-97. 4. The aforesaid contention of the Ld. Counsel for the assessee was not controverted by the Ld. D.R. for the revenue. 5. After considering the rival submissions and the material available on record, it is noticed that for the year under consideration the assessee made certain advances to Steel Strips Alloys Ltd., sister concern. The Assessing Officer, was of the opinion that the funds had been diverted to the sister concern for non-business consideration. He, therefore, calculated the interest @ 18 per cent on the funds given to the sister concern and made the addition of Rs. 23,58,000. 6. When the matter was taken to the Ld. CIT(A), addition so made was deleted by following the earlier orders for assessment years 1990-91 to 1992-93 and 1994-95. 7. The aforesaid orders of Ld. CIT(A) were subject-matter of the appeal by the department before the ITAT and the Tribunal confirmed the action of the Ld. CIT(A) vide order dated 16-102003 for assessment years 1992-93 and 1994-95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he actual cost under section 43(1) for the purpose of calculation of depreciation etc. Ld. CIT(A) further observed that since the High Court decision available was on the exact point to which the issue related, so, it would be proper to follow the judgment of Hon'ble High Court. According to him, the issue involved in the case decided by the Hon'ble Gauhati High Court in the case of Assam Asbestos Ltd. was also related to the transport subsidy. He, therefore, directed the Assessing Officer to treat the transport subsidy as capital receipt. Now the department is in appeal. 10. Ld. D.R. for the revenue strongly supported the order of Assessing Officer and submitted that the assessee incurred freight expenses and then lodged claim with the State Government for getting reimbursement of freight expenses on periodical basis and the State Industry Department had powers to check proper use of that subsidy, it was not a generous Act or a gift by the State Government which fact was clear from the Gazette Notification dated 29-9-1995 by Government of India. He further submitted that the transport subsidy was recurring benefit and was reimbursed to the assessee against the freight paid which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94 order dated 27-2-2004]; Jt. CIT v. Sidheshwari Paper Udyog Ltd [2005] 94 ITD 187 (Delhi) (TM); Arvindbhai H Shah v. Asstt. CIT [2004] 91 ITD 101 (Ahd.) (SB); Shreejee Chitra Mandir v. CIT [2005] 275 ITR 494 (MP); Assam Asbestos Ltd 's case; Virender Agro Chemicals Ltd v. Asstt. CIT [IT Appeal Nos. 19, 142, 347 (Chd.)/1997 assessment years 1992-93, 1993-94 and 1994-95 order dated 26-5-2004]. 12. We have considered the rival submissions and carefully gone through the material available on record. In the present case as regards to the facts of the case are concerned, there is no dispute that the assessee received transport subsidy against the transport cost of raw material and finished goods. The issue to be decided is whether the subsidy was of capital nature or of revenue nature. To ascertain the nature of the subsidy it is relevant to discuss the nature of scheme under which the subsidy had been granted. 12.1 The present scheme had been notified on 23-7-1971 and had been published in Part I section 1 of the Gazette of India, Extraordinary dated 27-7-1971 (No. 102) vide Notification No. F. 6(26) 71-1C dated 23-7-1971 and amended vide Notification No. 6(26) 71-1C dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade." In the present case also the payment of subsidy had been made to the assessee to assist it in carrying on its trade, so the subsidy was trade receipt. The purpose of giving the subsidy was to reduce the cost of raw material, since the expenditure incurred on purchase of the raw material had been reimbursed, the another purpose was to reduce the cost of sale since the expenditure incurred on freight of the goods sold had been reimbursed. So the nature of receipt was of revenue and not capital. 12.3 On a similar issue Hon'ble Calcutta High Court in the case of Merinoply Chemicals Ltd. has held as under: "That the Tribunal had carefully examined the Transport Subsidy Scheme. The Scheme was available not only to a new unit but also to existing units which had made substantial expansion or diversification after the commencement of the scheme. The Tribunal noted, in particular, the mode of computation of the transport charges as the clue to the intention underlying the scheme. The scheme required strict check to ensure actual consumption o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the present case. Therefore, Ld. CIT(A) was not justified in treating the subsidy received by the assessee as capital in nature. 12.5 As regards to the judgment of Hon'ble Gauhati High Court in the case of Assam Asbestos Ltd. followed by the Ld. CIT(A), is concerned, the facts were that the Tribunal held that the subsidy was generous Act of the State rather grant of gift to the assessee for the sole purpose of assisting the assessee for the growth of industry and therefore, could not be considered as trading or revenue receipt liable to be taxed. It is also noticed that in the said case, judgment of Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd. had not been considered. Moreover, it is not clear from the facts of the case of Assam Asbestos Ltd. whether a new industry was set up and the transport subsidy was in respect of new assets purchased, but in the present case the transport subsidy was related to freight paid for purchase of raw material and the sale of finished goods. Therefore, the subsidy was definitely related to the trading activities so it was revenue in nature. 12.6 As regards to the decision relied on by the Ld. Counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upment of the transport expenditure incurred by the assessee and at best it could only be said that a part of the expenditure had been reimbursed. It could not be considered as income in the first instance. Certainly, it could not be considered as income derived from the industrial undertaking. The immediate source of the income was the transport subsidy scheme and not the industrial undertaking." From the above, it is crystal clear that the view had been taken that at the best by receiving the transport subsidy it can only be said that part of expenditure had been reimbursed. It is true that nature of the expenses relating to transportation of purchase of raw material and sale of finished goods, is revenue in nature and so the reimbursement of those expenses definitely is of revenue nature. Therefore, the decision of the Third Member in the aforesaid referred to case, goes against the assessee. Moreover, in the said case the issue related to deduction under section . 80-IA wherein it has been held that the transport subsidy received by the assessee will have to be included in the qualifying amount for the purpose of deduction under section 80-IA. Since the deduction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditional upon commencement of production such subsidies must be treated as assistance for the purpose of the trade." From the above observations, it is crystal clear that if subsidy is given to the assessee for assisting him in carrying out different business operations and the money is given only after and conditional upon commencement of production such subsidies must be treated as assistance for the purpose of trade. 13.2 In the present case also, since the assessee was carrying on the business and money was given as subsidy for the transportation of raw material so that would decrease the cost of raw material and assistance was also given against freight incurred for sale of finished goods that will also reduce the expenses, therefore, nature of subsidy in the instant case was revenue in nature and the Ld. CIT(A) was not justified in deleting the addition made by the Assessing Officer. 13.3 In the case of Shreejee Chitra Mandir, Indore Bench of Hon'ble Madhya Pradesh High Court has held as under: "The question whether a particular subsidy is a capital receipt of a revenue receipt is required to be decided keeping in view the nature of subsidy received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 143(3) at an income of Rs. 7,14,45,062 and after adjustment of brought forward loss of Rs. 6,79,92,417, the balance income was determined at Rs. 34,52,645. Deduction under sections 80-I and 80HH restricted to the amount of Rs. 34,52,645 and accordingly the income was assessed at nil. 3. During the course of assessment proceedings, the Assessing Officer observed that in the computation of income, the assessee had claimed deduction of Rs. 1.19 crores on account of transport subsidy credited and receivable from the Himachal Pradesh Government under the Transport Subsidy Scheme, 1971 of Government of India. The said amount included claim of Rs. 85.50 lakhs for the year under appeal and the claim of earlier years of Rs. 33.86 lakhs. The assessee treated this amount as capital receipt in the books of account for the first time. In earlier years, the transport subsidy was treated as a revenue receipt. It was claimed by the assessee that in earlier years, the assessee was not aware of the correct position of law. The assessee had referred to the decision of the Gauhati High Court in the case of Assam Asbestos Ltd, and that of the Kerala High Court in the case of Ruby Rubber Wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. It cannot be disputed that all the schemes formulated by the Government of India are intended to luring the entrepreneurs for setting up industries, which generates production as well as employment. Since nature of the subsidy granted by the Government of India varies from scheme to scheme, it is necessary to examine the scheme under which the subsidy is received by the assessee for determining the nature of the receipt for the purpose of taxation under the provisions of Income-tax Act, 1961. 6. In the case of P.J. Chemicals Ltd., their Lordships of Hon'ble Supreme Court had the occasion to consider as to whether the subsidy granted to the assessee for setting up an industry in backward area could be considered as cost of assets met by the Government for setting up the industry. The issue in that case was to determine the actual cost with reference to section 43(1) of the Income-tax Act, 1961 for the purposes of grant of depreciation. Their Lordships of the Supreme Court in that case held that the character and nature of the subsidy has got to be determined with reference to the scheme under which the subsidy has been granted. On examination of the scheme in that case, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the "actual cost". We should prefer the reasoning of the majority of the High Courts to the one found acceptable by the High Court of Punjab Haryana." From the above observations, it appears that if the subsidy is granted for the purpose of meeting a portion of the cost of the assets, then a different conclusion would follow. Therefore, in my considered view, the decision of the Hon'ble Supreme Court in the case of P.J. Chemicals Ltd. does not support the view expressed by the CIT(A) and on the contrary supports the view of the Assessing Officer. 8. As pointed out earlier, the issue before the Hon'ble Supreme Court in the case of P.J. Chemicals Ltd. was not similar to the one involved in the present case before us. On the contrary there is a direct decision of Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd., where the issue about the nature of subsidy was subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would not be a revenue expenditure. Therefore, the reimbursement could not be a revenue receipt. This is a simple and forthright view. Thus, the advantage which the entrepreneurs would secure by the subsidy is on capital account and has to be treated as such, but where the State decides to give a running support to hold the stability of the revenue of the unit set up and run in backward areas, the support will be part of the profit. Taxing such supporting revenue would not result in inequity to such unit in a. backward area as the support is intended to maintain the return to the entrepreneur year by year in line with the return to a similar unit in a non-backward area. The inequity or the demerit of the situation having been mitigated, it can be no more fair to seek for immunity from taxation." 10. In the case of Sarda Plywood Industries Ltd., the assessee had been granted a subsidy of Rs. 3,26,912 under the Transport Subsidy Scheme, 1971. This amount was held to be a revenue receipt by the Tribunal agreeing with the departmental . authorities. On a reference, the Hon'ble Calcutta High Court held as under:- "Held, that the Transport Subsidy Scheme came into force for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Their Lordships of the Gauhati High Court held as under:- "Where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, then it is capital expenditure. The question where the expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment, can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to producing profits it is revenue expenditure. The aim and object of the expenditure would determine the character of that expenditure whether it is capital expenditure or revenue expenditure. The source or the manner of the payment would then be of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple laid down by the Hon'ble Supreme Court and reiterated by various High Courts may, therefore, be summarized as under:- The character of the subsidy in the hands of the recipient, whether revenue or capital, will have to be determined having regard to the purpose for which the subsidy is given. The source of fund is quite immaterial. If the purpose is to help the assessee to set up its business or complete a project, the moneys must be treated as having been received for capital purposes. But if the subsidy is given to the assessee for assisting him in carrying out the business operations and money is given only after and conditional upon commencement of production, such subsidy is to be treated as assistance for the purpose of trade. If the intention of the Government is to grant subsidy to share the burden of capital outlay, the same has got to be treated as on capital account. However, where the State decides to give a running support to hold the stability of the revenue of the unit set up and run in backward area, the support will be part of the profit. 16. It may not be out of place to mention that all the subsidies granted by the Government are for the purpose of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refund of sales tax" but was a development subsidy in the nature of a capital receipt. The High Court held that the amount was assessable." On these facts, the Hon'ble Supreme Court dismissing the appeal held that under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. 17. In that case though the subsidy was also granted with the objective of promoting the growth of the industry, the same was held to be of revenue nature. Therefore, what has to be considered for the purposes of determination of the nature of the subsidy is not the objective behind the grant of subsidy but the kind of subsidy which is granted for the growth of the industry. If the subsidy is granted to enable the assessee to establish the industry i.e., to compensate for the capital expenditure invested for setting up of the industry, whatever may be the measure for determination of the quantum of the grant, such type of subsidy would be on capital account on the basis of the principle laid down by the Hon'ble Supreme Court in the case of Sahney Steel Press Works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Sahney Steel Press Works Ltd.:- "1. Short title.- The scheme may be called the Transport Subsidy Scheme, 1971. 2. @ Commencement and duration.-It comes into effect from 15-7-1971, for selected areas (A), with effect from 24-6-1973 for selected areas (B), with effect from 1-12-1976 for selected areas (C) and with effect from 5-12-1976 for selected areas (D) and will remain in operation till 31-3-1979. 3. @ It is applicable to all industrial units (barring plantations, refineries and power generating units) both in the public and the private sectors, irrespective of their size in the selected areas (A), (B), (C) and (D). For a period of 5 years from the commencement of commercial production. 4. Definitions.-(a) "Industrial Unit" means an industrial unit where a manufacturing programme is carried on. (b) 'New Industrial Unit' means a new industrial unit which has set up manufacturing capacity and comes into production on or after the date of commencement of the scheme. (c) 'Existing industrial unit' means an industrial unit which has set up manufacturing capacity and came into production before the date of commencement of scheme. (d) 'Substantial expansion' m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of transport/transshipment rates fixed by the Central Government/State Government/Union Territory Administration concerned from time to time or the actual freight paid whichever is less. (viii) Cost of loading or unloading and other handling charges to or from railway station to the site of the industrial unit will not be taken into account for the purpose of determining transport costs. (ix) All new industrial units located in the selected areas will be eligible for transport subsidy equivalent to 50 per cent of the transport costs of both raw materials as well as finished goods. (x) Existing industrial units in the selected area are also eligible for transport subsidy in respect of the additional transport costs of raw materials and finished goods arising as a result of substantial expansion or diversification effected by them after the commencement of the Scheme Transport Subsidy in such cases will be restricted to 50 per cent of the transport costs of the additional raw materials acquired and finished goods produced as a result of the substantial expansion or diversification. (xi) .. .. .. (xii) The State Government/Union Territory Administration will set up a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of industrial units which are eligible for transport subsidy. At the time of registration the Directors of Industries will fix and indicate the capacity of such units. They will also lay down procedure to ensure regular inflow of information regarding the movement of raw material and finished goods to and from the industrial units. The Directorate of Industries of the States and Union Territories should also lay down that statistics of production and utilization of raw materials should be maintained and kept open for inspection on request by the Directorate of Industries." 20. When the above scheme is tested on the principles of law laid down by the Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd., it becomes abundantly clear that though the intention for grant of subsidy, as in all cases is the growth of the industry in particular areas, yet the grant in the form of transport subsidy is specifically to support the assessee in running the unit in the specified areas. Such type of subsidy on the basis of law laid down by the Hon'ble Supreme Court in Sahney Steel Press Works Ltd is a revenue, receipt. 21. The decisions cited on behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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