TMI Blog1981 (1) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 14,665 as under : Rs. -- Refund of sales tax on purchase of machines during the year 1971-72 5,839.93 -- Refund of sales tax on purchases of raw materials during the year 1971-72 390.79 -- Refund of sales tax paid on sale of finished goods during the year 1971-72 8,434.98 ---------------- 14,665.70 ---------------- He proceeded to state that the aforesaid amounts were received as incentive by way of subsidy consequent to two orders of the Government of Andhra Pradesh, i.e,, G.O. Ms. No 1225 of the Industries Department, dated 31-12-1968 and G.O. Ms. No. 455 of the Industries and Commerce Department dated 3-5-1971. The Commissioner (Appeals) has set out in his order the contents of the G.O. dated 31-12-1968 and the portion which he considered relevant of the subsequent G.O. dated 3-5-1971. The Cornmissioner (Appeals) then referred to the contention of the assessee that the amounts received were of the nature of capital grant received from the Government of Andhra Pradesh for development of industry and that the receipts, therefore, were not of income nature. The argument of the assessee was that though the quantum of the grant made by the Government was det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t represented a capital grant and the same could not be taken to represent business income of the assessee under any circumstances. 6. When the case first came up for hearing, it was noticed by the Bench that there was an earlier decision of the Hyderabad Bench 'B' in IT Appeal Nos. 1209 and 1210 (Hyd.) of 1975-76 dated 9-8-1978 where the conclusion was that similar receipts could not be treated as trading receipts. There was, however, a subsequent decision in IT Appeal No. 238 (Hyd.) of 1978-79 of the Hyderabad Bench 'B' dated 7-8-1979 where a contrary view was taken. In view of the conflict in decisions, the matter was referred to the President of the Tribunal under section 255(3) for constitution of a Special Bench. A Special Bench was accordingly constituted by the President, and it is in the aforesaid circumstances that the appeal has come to be heard by this Bench. 7. The learned counsel for the assessee submitted that he would put forth his arguments both in support of the proposition that the amount of Rs. 14,665 did not represent receipt of an income nature and also that the provisions of section 41(1) were not attracted as far as the receipt in question was concerned. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be allowed in each case for a period of 5 years from the date of commencement of production. 3. Any entrepreneur wishing to avail himself of the above concessions will apply to the Director of Industries who will issue the necessary eligibility certificate indicating the various concessions be is entitled to. On the basis of the eligibility certificate, the concerned authority will arrange to grant the concessions. The detailed procedure for the various concessions will be issued separately. 4. Government, however, reserve the right to withdraw at any time all of the concessions mentioned above in relation to a class or classes of industries without assigning any reasons. 5. This order issues with the concurrence of Finance (Expr. Ind.) vide U.O. No. 3567/68 I, dated 29-11-1968." He emphasised that the incentives given under the aforesaid G.O. were 'to stimulate rapid industrialisation throughout the State' and were granted to 'entrepreneurs wishing to set up industries'. In particular, he pointed out that as far as the incentive falling under clause (a) was concerned, the quantum of incentive was measured with reference to the sales tax paid, but it was actually given wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if not, he could direct forfeiture of the same. 10. Under the aforesaid scheme, the assessee was issued an eligibility certificate dated 27-9-1972 (page 45 of the paper book). The assessee was entitled to a maximum subsidy of Rs. 1,75,496 representing 10 per cent of the capital outlay which was described in certificate as 'refund of sales tax' and was for the period of 5 years commencing from the date of production, i.e., 13-12-1971. In pursuance of the aforesaid incentive eligibility certificate, the assessee received from the Director of Industries a letter dated 31-7-1973 sanctioning the amount of Rs. 14,665 of which the break-up was, to repeat, as under : Rs. Sales tax paid on purchase of machinery during the year 1971-72 5,839.93 Sales tax paid on purchase of raw materials during the year 1971-72 390.79 Sales tax paid on sale of finished goods during the year 1971-72 8,434.98 ---------------- 14,665.70 ---------------- 11. The learned counsel submitted that the amount of Rs. 14,665 was, by the letter dated 31-7-1973, placed by the Director of Industries at the disposal of the Assistant Director of Industries for drawal and disbursement to the assessee. In par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue." The learned counsel went on to state that the principle enunciated in the aforesaid case was noticed and reiterated by the Supreme Court in the case of S.R.Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 where, referring to the observations in the case of Senairam Doongarmall, the Court stated : " . . . In the course of the judgment, Mr. Justice Hidayatullah, J. (as he then was), speaking for the Court, observed : 'The compensation which was paid in the two years was no doubt paid as an equivalent of the likely profits in those years ; but, as pointed out by Lord Buckmaster in Glenboig Union Fireclay Co. Ltd. v. Commissioners of Inland Revenue [1922] 12 TC 427(HL) and affirmed by Lord Macmillan in Van den Berghs Ltd. v. Clark [1935] 3 ITR (Eng. Cas.) 17 (HL), "there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test". This proposition is as sound as it is well-expressed, and has been followed in numerous cases under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that the proposition laid down by the Bombay High Court was that it was well settled that where subsidies or grants are given by the Government to assist a trader in his business, they were, generally speaking, payments of a revenue nature and they represented supplementary trade receipts and not capital payments although they might be called advances or might even be subject to the contingency of repayment. In the present case, however, it was reiterated that the amount given was not to assist the assessee in its business, but it was given as an incentive for setting up the business and the amounts received further had to be ploughed back for developing and expanding the business. This, according to the learned counsel, was not assistance in the day to day carrying on of the business and the receipt would clearly be capital in nature. The decision of the Bombay High Court in Mehboob Productions (P.) Ltd. v. CIT [1977] 106 ITR 758 was next cited and particular attention was drawn to the definition of 'income' which Vimadalal, J. had set out in that decision which was as under : "Income is a monetary return expected by the assessee for the labour and/or skill bestowed, and/or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x and, therefore, the provisions of section 41(1) clearly applied. Even in respect of the amount of Rs. 5,839 which is described as representing sales tax paid on purchase of machinery, the submission of the learned departmental representative was that the provisions of section 41(1) would be attracted, because even if the said amount had gone to increase the capital cost of machinery, the assessee would have secured some benefit by way of depreciation, etc., which were allowances, and subsequently a remission was obtained. 17. Referring to the decision of the Andhra Pradesh High Court in the case of Panyam Cements Mineral Industries, the learned departmental representative referred to the portion of the judgment at page 774 where the High Court had referred to the first contention of the counsel for the assessee in that case, viz., that the power subsidy did not form part of the assessee's income. His contention was that the court had come to the conclusion that the subsidy received in that case was taxable after due consideration of the plea of the counsel that the subsidy was not of income nature. To this extent, be submitted that certain observations in the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot anticipate the receipt, whereas in the present case there were Government orders by which the assessee knew that it would be entitled to the subsidies and, therefore, there was receipt from an expected source and it constituted income. Adverting to the decision in Dhrangadhra Chemical Works Ltd. our attention was drawn to the observations at page 481 that where subsidies were granted to assist a trader in his business, they were held to be payments of revenue nature. According to the learned departmental representative, the present subsidy also resulted clearly in assisting the assessee in the carrying on of the business and, therefore, it was of income nature. Submitting that the subsidy in the present case was by way of refund of sales tax, was relatable to the trading activities of the assessee, and, therefore, they constituted revenue receipts, it was contended that the facts were on a par with those cases where import entitlements received were held to be revenue receipts, such as Agra Chain Mfg. Co. v. CIT [1978] 114 ITR 840 (All.) and Kesoram Industries Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.). In the latter case, the learned departmental representative submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the true nature of the receipts, i.e., whether they would be of income nature or capital nature. 23. G.O. No. 1225, dated 31 12-1968, which spelt out for the first time the reasons which promoted the Government of Andhra Pradesh to grant incentives, speaks of the concern of the Government of Andhra Pradesh about the slow pace of industrialisation and, in particular, the inadequate private sector investment and the urgent need for rapid industrialisation. Incentives were, therefore, to be given to those willing to set up industries. It is clear that the object of the Government was only one in the present case, viz., to give an incentive to those willing to set up industries, i.e., those willing to start industries for the first time. In the case of Panyam Cements Mineral Industries Ltd., the High Court has referred to G.O. No. 678 dated 27-4-1961, whereby the Government decided to grant subsidy in respect of power rates, because it had adverse effect on competitive capacity of local manufacturers as well as the growth and expansion of industry in the State. The concession was thus granted for a deal purpose and the purposes were not ex facie separable. The subsidy was primaril ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 47,74,000 ----------------- 53,03,000 ----------------- The incentive under consideration in the 5 year period subsequent to commencement of production was not to exceed Rs. 53,03,000. The aforesaid facts clearly show that the Government's intention was definitely to give a grant for development and thus to attract investment from entrepreneurs for setting up or commencing new industries. This only reinforces the conclusion that the receipt was capital in nature. The Government further sought to ensure that the new industries would not only be set up but there would be effective industrialisation in that the newly set up industries would show further rapid growth in the subsequent 5 year period and would not fold up. Thus in-built provisions were incorporated for withdrawal or even recovery of the incentive if the grants were misused or not used. 26. The Government had to fix a preliminary criterion for the grant of the incentives. One such criterion was the payment of sales tax. Sales tax was payable in respect of cost of machinery, purchase of raw material and sale of finished goods. By making payment of sales tax as aforesaid a prerequisite for the grant of subsidy n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke of completeness, we may state that in any view of the matter the sales tax paid relating to the purchase of machinery, even if considered, as refund, will not be hit by the provisions of section 41(1), because there was no allowance of the same in earlier years, and merely because this amount may have gone to enhance the value of certain capital assets on which depreciation may have been allowed, the provisions of section 41(1) cannot be attracted. Therefore, the amount of Rs. 5,839 can in no view be brought to tax under the provisions of section 41(1). The amounts which were received from the Government had to be utilised by the assessee for development. The assessee did not have an unbridled power of disposition over the amounts which were received. In case of non-user for the specified purposes, the Government had powers to recoup the amounts given. [A perusal of the G.O. dated 27-4-1961 regarding grant of refund of power charges which had come up for consideration in the case of Panyam Cements Mineral Industries Ltd. shows that there were no such restrictions there.] Even if it was considered for argument's sake that what was received back as far as the remaining items, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state that the Committee are prepared to sanction grant equivalent to half the interest at a rate not exceeding an average up to 51 per cent per annum on approved expenditure met out of loan (not exceeding pound 1,52,000) for a period of two years from the date or dates on which the payments are made.' I think that the pound 1,52,000 was arrived at by doubling the pound 75,000 and making possibly a little further allowance. At any rate, the whole point of the letter is that a grant is to be made on a basis that is to be determined by considering what is half the interest paid on the average for the loans for the execution of the work, with a limit of 51 per cent. Moneys were accordingly paid by the Unemployment Grants Committee in pursuance of that letter, and it is sought now to include the receipt of those moneys as part of the revenue of the Dock Company for purposes of assessments to income-tax. Now I do not myself think that the matter can be put more succinctly than it was put by Mr. Hills when he said : '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 Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of 5 years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient. 3. Contents of this circular may kindly be brought to the notice of all the officers working in your charge." The argument of the learned departmental representative was that the circular was not in force on the first day of the assessment year 1974-75 and further that it related to Central Outright Grant of Subsidy which was a different subsidy from that which obtained in the present case. According to him, therefore, the circular was not binding on the ITO and, in any event, the circular could not fetter his judicial discretion. There is the Full Bench decision of the Kerala High Court in CIT v. B.M. Edward, India Sea Foods [1979] 119 ITR 334 which sets out the effect of the circulars. The Court, after referring to various pronouncements of other High Courts and the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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