TMI Blog2002 (8) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... pute in favour of the assessee and his successor CIT(A) held the issue against the assessee for the assessment year 1997-98. 3. The assessee Co-operative society carries on business in manufacture and sale of Sugar. It had filed its return for assessment year 1996-97 on 31-10-1996 admitting taxable income of Rs. 4,04,92,680. Subsequently it filed a revised return on 10- 12-1999 admitting income of Rs. 1,48,37,680. The resultant reduced income was due to the claim of incentive received of Rs. 2,56,55,000 as capital receipts, which was earlier shown as revenue receipt. For the assessment year 1997-98 the assessee had filed return on 29-10-1997 admitting income of Rs. 3,55,43,612. In this year the assessee had claimed the incentive received as capital receipt in the return itself. 4. At the outset it would be pertinent to give in brief the background of the case as gathered from the documents furnished. When the factory was set up its capacity for manufacture of Sugar was 1000 tons per day. Subsequently, it was expanded to 1600 tons per day in the year 1975-76. Its capacity was further expanded from 1600 tons to 2500 tons per day in the year 1991. This installed capacity was incre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale sugar quota, which it was entitled to sale in the open market. The difference of price between the levy sugar and non-levy sugar sold in the open market is the amount of incentive allowed by the Government of India for setting of new project or expansion project. This incentive so received has to be utilised by the sugar mills for the repayment of term loans outstanding if any at the time of receipt of incentive. 6. To avail the benefit of the scheme, the assessee had taken loans of Rs. 624 lakhs from Financial Institutions out of the expansion project cost of Rs. 836 lakhs. The balance of Rs. 212 lakhs was met from internal sources. The term loans were taken from Financial Institutions like IFCI, IDBI, ICICI and IRBI and Sugar Development Fund. Out of the total loan of Rs. 624 lakhs, Rs. 379 lakhs was obtained in assessment year 1990-91 and the balance of Rs. 245 lakhs was obtained in assessment year 1991-92. As per the terms and conditions of the loan agreement with the Financial Institutions, the loan was to be repaid in 20 quarterly instalments starting from 15-4-1991, in case of default in the loan repayment there was provision for penal charges @ 29% per annum by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the nature of the receipt heavily relied on paragraph 12 of the incentive notification dated 10-3-1993 which states that the beneficiaries of the incentive scheme shall ensure that the surplus funds generated through sale of incentive sugar are utilised for the repayment of term loans, if any, outstanding from the Central Financial Institutions/Sugar Development Fund. 9.1 The Assessing Officer held that the scheme could be availed only by those assessees who have outstanding loans from Financial Institutions as on the date of availing incentive out of sale of sugar in open market. In the case of the assessee by the time incentives were availed it had already repaid the loans and was under no obligation to spend the money for a particular purpose. As such it did not utilize the surplus funds generated by way of higher free sale sugar in the manner suggested by the Government. He further held that the assessee was free to use the surplus funds and it had nothing to do it with the setting up of the industry. The incentive given to the assessee had gone only to supplement its profit and therefore it was in the nature of revenue. In support of his conclusion the Assessing Officer r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) (vi) V.S.S.V. Meenakshi Achi's case (vii) CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 (SC) (viii) Sahney Steel Press Works Ltd.'s case (ix) CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) 10. While completing the assessment for the assessment year 1997-98 the Assessing Officer followed his own order in the preceding assessment year and treated the entire incentive amount as revenue receipt. Against this the assessee went on appeal before the CIT(A). During this year, the successor CIT(A) took a different stand and decided the issue in favour of the Revenue. He held that the assessee had not availed the incentive scheme immediately on expansion. On the other hand, it had already discharged most of the loans of Central Financial Institutions before availing the scheme. In view of this he held that the belated availing of the subsidy was only due to financial constraints and the amount of subsidy was mostly used for repayment of cash credit loans. Admittedly the loans are repaid from the accruals in the course of day-to-day business much before availing the incentive scheme. Referring to certain correspondences with the Directorate of Sugar the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was held that the subsidy given by way of reimbursement of purchase tax constituted revenue receipts. Accordingly he upheld the action of the Assessing Officer treating the incentive received to be in the nature of revenue receipt. 11. During the course of hearing the learned AR of the assessee strongly relied on the order of CIT(A) in assessment year 1996-97 in which the incentive was held to be capital receipt. At the same time he vehemently argued against the order of CIT(A) in assessment year 1997-98 in which the incentive was held to be revenue receipt. It was submitted that in the assessment year 1996-97 the CIT(A) has passed a very well reasoned order after appreciating the scheme as a whole whereas in the subsequent assessment year the successor CIT(A) has taken a very narrow view of the matter and has decided the issue against the assessee by wrongly interpreting case laws and relying on certain case laws which are not at all applicable to the facts of the assessee's case. 11.1 It was submitted by the learned AR that the incentive allowed through the scheme was not to meet any recurring cost or to meet revenue expenses or to meet losses of sugar mills caused due to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e A.P. High Court in the case of Ramakrishna Cine Studio v. CIT [1998] 233 ITR 277. Similarly, subsidy received for recoupment of revenue expenditure has been held to be revenue receipt, like expenses incurred on maintenance of rubber plants V.S.S.V. Meenakshi Achi's case and transportation subsidy received to meet a part of cost of Transport of Raw Material and Finished Goods Merino Ply Chemicals Ltd. v. CIT [1994] 209 ITR 508 (Cal.). In view of these facts it was argued that the benchmark to decide a receipt whether it is capital or revenue would squarely depend on the character of receipt. In other words if the incentive or grant is received to recoup the revenue expenditure or revenue loss it will be revenue receipt and the other category of receipt other than this would fall in the nature of capital receipt. 11.4 It was submitted by the learned AR that while treating the receipt as revenue receipt both the Assessing Officer and the CIT(A) in 1997-98 have relied heavily on Clause No. 12 of the notification. They are of the view that the re-payment of loans to the Financial Institutions should have been done only out of the incentive received. In this regard it is stated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon'ble Supreme Court in the case of Bijli Cotton Mills (P.) Ltd. In this case the Hon'ble Apex Court has laid down that if the amounts are collected as part of trading receipt but with express legal obligation to utilize the amounts for a particular purpose or to be spent for a particular purpose, these amounts do not constitute part of the trading receipt notwithstanding the fact that they are collected as part of trading receipt. What is relevant is not how the amount is collected and when it is collected but with what obligation it is collected. 11.5 Regarding the reasons for making the repayment of loans before the incentive was availed, it was submitted that as per the agreement with Financial Institutions the loan amount had to be paid in 20 quarterly instalments commencing from 10-4-1991 whereas incentive was received in financial year 1995-96. It was also submitted that if the loans were not paid as stipulated in the loan agreements the assessee would have incurred heavy expenditure by way of payment of penal interest. By submitting an interest calculation sheet it was pointed out by the learned AR that if the assessee was to pay the loan instalments only after rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the stipulation as regards the repayment of loans could not be held as applicable to it. It was further submitted that in view of the elaborate discussion made by the CIT(A) in his order for the assessment year 1997-98 the incentive should be treated as revenue receipt. 13. We have carefully considered the submissions made by the rival parties, the documents produced before us, the case laws relied upon by both the parties and the facts and circumstances of the case. We have also perused the Government notification dated 10-3-1993 regarding the incentive scheme for new sugar factories and expansion projects licensed/to be licensed during the period from 7-9-1990 to 31-3-1994 under which the assessee has received the incentive in question. The object of the scheme has been given in Clause 1 of the notification under the head "Introduction" which is reproduced as under: "With the object of augmenting indigenous sugar production and with a view to mitigating hardship of the entrepreneurs involved in the execution of high cost sugar projects as well, as to enable them to become viable by utilising surplus funds generated through higher free sale quota for repayment of te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the order of Madras ITAT in this regard. 13.1 The Assessing Officer and CIT(A) in assessment year 1997-98 have held that since the assessee had repaid the term loans before receipt of incentive it had not fulfilled the conditions. It was further been held that since most of the loans were already repaid through internal resources there was no longer any obligation to repay the term loans and hence the incentive received later on was only meant for running business and not for setting up of capital assets and therefore, the incentive has to be treated as revenue receipt. We find no merit in such contention. The repayment of loans to Financial Institutions could not be held back as such repayments are guided by separate agreements as per which the repayments had to be made within stipulated dates which co-incidentally were prior to the receipt of incentive. Besides as pointed out earlier, if the assessee had delayed in repayment of loans it would have incurred a heavy internal burden. As argued by the learned AR the receipt of incentive was not in the hands of the assessee and it did not purposely delay the same. On the other hand, it entirely depended on the Government, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Balarampur Chini Mills Ltd. but this judgment is not helpful to the assessee as it revised the incentive subsidy much after the repayment of most of the loans to the Financial Institution. But we have already held the repayment of term loans to be in line with the terms and conditions of the scheme, which has also been accepted by the Government on the basis of utilisation certificate issued by the assessee. Hence, the judgment of the Hon'ble Calcutta High Court in Balarampur Chini Mill's case is of definite help to the assessee. The CIT(A) while holding the receipt to be revenue receipt has relied on the judgment of Hon'ble Calcutta High Court in the case of Kesoram Industries Cotton Mills. But in this case subsidy was for carrying on business and not for setting up a capital asset for which the Hon'ble High Court held the receipt to be revenue receipt. Hence, the facts are distinguishable and the ratio of this judgment is not applicable to the case of the assessee. The learned CIT(A) has also relied on the judgment of Hon'ble Supreme Court in the case of Sahney Steel Press Works Ltd. In this case subsidy granted in the form of sales tax refund, exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was transferred to export quota loss account in the assessment year 1996-97. In view of the facts it was urged by the assessee before the Assessing Officer that the loss crystallised in the assessment year 1996-97. The Assessing Officer was not convinced with the reply. He held that the intimation regarding loss was received vide letter dated 13-3-1991, therefore, it should have been claimed during the previous year ending on 31-3-1991 and not in the year under consideration as it did not crystallise during this year. 14.1 On appeal, the learned CIT(A) deleted the addition under the following observation contained in para-9 of his order. "9. On going through the submissions raised on behalf of the appellant and the facts on record, I am of the opinion that the contention raised for the appellant as above must prevail. It is true that as per letter dated 13-3-1991 of A.P. State Federation of Co-operative Sugar Factories Ltd., the appellant had to pay a sum on account of export loss, but such sum was estimated at 50% of allotted quantity of export quota sugar. Only in September, 1994 when the Indian Sugar and General Industry Export Import Corporation, finally intimated the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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