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M/s. Shiv Shakti Flour Mills (P) Ltd. Versus Commissioner of Income Tax, Dibrugarh

2017 (1) TMI 772 - GAUHATI HIGH COURT

Transport subsidy received taxability - revenue receipt or capital receipt - Held that:- The transport subsidy received by the assessee during the assessment year 2001-02 is intended to stimulate industrial activity in the backward region, to generate employment opportunities and bring about developments in the N.E. States and it is not meant to provide higher profit for the entrepreneur. It is intended to encourage investment in difficult and far flung states and the sum received under subsidy .....

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nt : Mr. S. Sarma, SC, Income Tax. Advocate JUDGMENT [ Hrishikesh Roy, J. ] Heard Mr. R.P. Agarwalla, the learned senior counsel along with learned advocate Mr. R. Goenka for the appellant (assessee). Also heard Mr. S. Sarma, the learned standing counsel, Income Tax Department on behalf of the respondent. 2. This appeal is filed under Section 260A of the Income Tax Act, 1961 (here-in-after referred to as the I.T. Act ), against the common order dated 13.12.2013 (Annexure-G), of the Income Tax Ap .....

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ing the assessment year 2001-02 was in the nature of revenue receipt and not capital receipt and thus taxable in the hands of the assessee? 4. The appellant is a company and is assessed to income tax within the jurisdiction of the Commissioner of Income Tax (CIT), Dibrugarh. On 22.10.2001 they submitted their return of income disclosing total income at ₹ 1,82,940/- for the Assessment Year 2001-02. A non-scrutiny assessment was then made under sub-section (1) of Section 143 of the I.T. Act .....

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e assessee and accordingly assessment to tax was made by the Asstt. Commissioner of Income Tax, Circle Tinsukia on 30.03.2004 (Annexure-A). 6. The aggrieved assessee then preferred Appeal before the Commissioner of Income Tax (Appeals), where they disputed the inclusion of the transport subsidy sum towards income of the assessee. After due consideration of their contention, the 1st Appellate Authority noted that the transport subsidy received by the assessee was under the Transport Subsidy Schem .....

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ibunal, where the Judicial Member and the Accountant Member differed in their views. According to the Judicial Member, the main object of the scheme/industrial policy is to boost industrial development in the backward areas of the North Eastern States, which is lagging behind other parts of the country. He then opined that although the transport subsidy is disbursed after commencement of production, since the object of the scheme is to boost industrial development and the transport subsidy is an .....

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e, for the purpose of assessment. 8. On account of the differences between the two learned Members of the Appellate Tribunal, the matter was referred to a 3rd Member for his opinion. While the issue was under consideration by the 3rd Member, the first decision of 16.09.2010 of the jurisdictional High Court in CIT vs. Meghalaya Steels Ltd. (Gauhati), reported in 332 ITR 91, was rendered whereby, the transport subsidy was declared to be a revenue receipt. Following this decision of the jurisdictio .....

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, was upheld for the Assessment Year 2001-02. 10. At this stage, it may be relevant to point out that the above decision in Meghalaya Steels Ltd.(supra) was reviewed subsequently and the earlier judgment of September 16, 2010 was recalled. The later decision is reported in 358 ITR 551, whereby adjudication of the substantial question of law after due formulation was ordered by the High Court in the Review proceeding. Exercise of the review power by the High Court was challenged by the Revenue in .....

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subsidy sanctioned under the scheme, was intended for generating industrial activity in the backward region in order to offset the deterrent cost for the new entrepreneurs and also for those who wish to expand the production capacity, for the already established industries. He also refers to the Transport Subsidy Scheme, 1971 (hereinafter referred to as the Scheme ) notified on 23.07.1971 to project that scheme was intended to promote growth and expansion of industries in the Northeast region an .....

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ermine the nature of the receipt of transport subsidy, whether it is revenue or capital receipt, the purposive test has to be applied and if this testing criterion is applied, it is clear enough that the sum received by the assessee cannot be characterized as revenue receipt, subject to taxation under the I.T. Act. 11.3 The Sr. counsel for the appellant cites Jai Bhagwan Oil and Flour Mills Vs. Union of India reported in (2009)14 SCC 63 to argue that the character of transport subsidy under the .....

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eipt of the transport subsidy is submitted to be capital inflow. 12.1 On the other hand, Mr. S. Sarma, the learned standing counsel for the Income Tax Department submits that the assessee had credited the sum received as transport subsidy in their reserve and surplus account, but such accounting procedure is inconsistent with the method of accounting, specified under Section 145 and 145A of the I.T. Act. He submits that subsidy amount reimbursed to the assessee must be deemed as income for the y .....

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3. The submission made by the learned counsel for the parties have received our attentive consideration. 14. In order to answer the substantial question of law framed in this appeal, it is necessary to refer to the history of this litigation. The original assessing authority after noting the accounting procedure followed by the assessee, who credited the transport subsidy amount to the reserve and surplus head in their balance sheet for the assessment year 2001-02, referred to the decision in De .....

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total income of the assessee for the assessment year 2001-02 and the payable tax was computed on that basis. 15. However, the Commissioner of Income Tax (Appeals) while deciding the appeal filed by the aggrieved assessee referred to the purpose of the Transport Subsidy Scheme, 1971 of the Govt. of India and noted that it was intended for promotion and growth of industries in the North-Eastern States which are considered to be backward and difficult areas, for development. Proceeding on this bas .....

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e ratio in Sahney Steel & Press Works Ltd. (supra) and in Ponni Sugars & Chemicals Ltd. (supra) and also the decision of the Jammu and Kashmir High Court in Shree Balaji Alloys Vs. CIT reported in (2011) 333 ITR 335 (Jammu & Kashmir), where the purposive tests were applied. But by that time, the judgment of the jurisdictional High Court in CIT Vs. Meghalaya Steels Ltd. reported in (2011) 332 ITR 91 (Gauhati) was pronounced and in this case the Court declared that the transport subsid .....

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013, whereby it was declared that transport subsidy should be treated as revenue receipt and is taxable, in the hands of the assessee. 17. However, as earlier noted when the assessee applied for review of the judgment in Meghalaya Steels Ltd. (supra) rendered on 16.09.2010, the Division Bench recalled the earlier order by observing that the substantial question of law was not framed in the earlier proceeding and thus through the judgment dated 08.04.2013 in the Review case filed by the assessee .....

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e High Court in CIT Vs. Meghalaya Steels Ltd. reported in (2013) 356 ITR 235 (Gauhati). But in this case, the parties were in agreement that the subsidies are revenue receipt to help an industrial undertaking to earn profit and make gains and accordingly the Court declared that such undertaking is entitled to seek deduction of the sum received under subsidy head, under Section 80-IB or 80-IC of the I.T. Act. 19. Similar industrial policy and concessions intended for accelerating the growth and d .....

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Court applied the purpose test formulated in Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) and noted that the object of the assistance under the subsidy scheme was to enable the assessee, to set up a new unit or to expand the production of an existing unit. It was observed that the scheme was intended for growth of industries and employment, creation of new assets and industrial environment in the State and thus the High Court declared that such sum re .....

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by declaring that the issue is covered against the revenue, by the decision in Ponni Sugars & Chemicals Ltd. (supra) and in CIT Vs. Meghalaya Steels Ltd. reported in (2016) 383 ITR 217 (SC), where the purpose test was applied to clinch the issue. 20. What follows from the above discussion is the relevance and applicability of the purpose test to determine the nature of the receipt towards transport subsidy in the hand of the assessee. But before we proceed further with the matter, the Court .....

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ther a receipt of money is taxable or not or whether certain deduction from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with the accountancy practice. It was thus declared by the Supreme Court that accounting practice cannot overwrite the provision of the Income Tax law as the taxation law does not keep step in the footprints of the accountancy profession. If we apply the ratio of this verdict to the matter i .....

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upra) after analyzing the relevant case laws declared that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given or in other words, one has to apply the purpose test. It was further declared by the Court that the point of time at which, the subsidy is paid is not relevant, the source also is immaterial and the form of subsidy has no relevance for determination of the issue. The Court declared that if the object o .....

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ich the subsidy is received by the assessee, is wholly irrelevant for deciding the issue. 22. Endorsing the purpose test enunciated in Sahney Steel & Press Works Ltd. (supra), the Apex Court in Ponni Sugars & Chemicals Ltd. (supra) reiterated that it is the object for which subsidy is given, that will determine the nature of the incentive subsidy and bearing in mind the objective behind the payment of incentive subsidy, the payment received by the assessee under the concerned head was de .....

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other parts to bring about economic development of the remote and backward regions. The ratio of this case makes it clear that the amount received towards transportation cost in the hand of the assessee is capital receipt and the same cannot be subject to taxation in the hand of assessee, under the I.T. Act. 24. Before we part with the records, we must take into account implication of Rajaram Maize Products (supra) cited by the departmental lawyer. In this case, the Supreme Court declared that t .....

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