TMI Blog2017 (7) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme (dated 27.07.1991) which allowed the facility of such retention, after the unit (established and which could possibly claim benefit under the first scheme) was already set up. This subsidy scheme had no strings attached. It merely stated that the collection could be retained to the extent of 100% of capital expenditure. Whilst it might be tempting to read the linkage with capital expenditure as not only applying to the limit, but also implying an underlying intention that the capital expenditure would thereby be recouped, the absence of any such condition should restrain the court from so concluding. How a state frames its policy to achieve its objectives and attain larger developmental goals depends upon the experience, vision and genius of its representatives. Therefore, to say that the indication of the limit of subsidy as the capital expended, means that it replenished the capital expenditure and therefore, the subsidy is capital, would not be justified. The specific provision for capital subsidy in the main scheme and the lack of such a subsidy in the supplementary scheme (of 1991) meant that the recipient, i.e. the assessee had the flexibility of using it for any pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hman, claimed that in terms of Notification No.ST-2-7558/X- 1981-UP Act-XV/48-Order 85 dated 26.12.1983, the UP Government, in exercise of powers under Section 4-A of the UP Sales Tax Act, 1948 read with Section 221 of UP General Clauses Act, 1904 granted exemption from payment of the sales tax in respect of any goods manufactured in an industrial unit which is a new unit located in a specified backward area, and that such exemption was allowed for a period of six years. It was stated, by both assessees, that new units went into production on and w.e.f. 01.04.1990; the eligibility certificate in respect of these units effective from 07.03.1990 was issued by the Industries Department on 03.07.1992. In the batch of cases relating to the assessee Vardhman, the existing unit was expanded through a ghee manufacturing unit at Chhutmalpur, District Saharanpur, which commenced production on 20.09.1994. The assessees claimed that in terms of Notification No.STs.T.2-1093/11-7(42)/86-UP-Act-XV-48 Order-91 dated 27.07.1991 issued by the Government in exercise of powers under Section 4-A of UP Sales Tax Act read with Rule 25 of the UP Sales Tax Rules, certain exemption of sales-tax was granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w for the time being in force , can be allowed such sum is actually paid by the assessee. The assessee has admittedly not paid the amount of sales tax collection to the State Govt. (c) The assessee‟s assertion that it is entitled to claim deduction in view of subsidy by virtue of notifications issued by the State a Govt. does not help its case as, provisions of Sec.43-B are clear and non ambiguous as well as overriding in nature. (d) The assessee‟s reference to several judgements of the High Courts and judgment of Supreme Court in the case of PJ Chemicals is not relevant as the issue before the courts was determination of Actual Cost of capital assets for the purpose of grant of depreciation and not the grant of deduction in respect of Sales-tax collections which had not been paid in accordance with the provisions of sec.43-B of the IT Act. (e) No objection on the issue whether the assessee‟s industrial undertaking was set up in a backward area, notified by the Central Govt. for the purpose of benefit under provisions of Chapter VI-A of Income-tax is necessary at this state as the issue concerning assessee‟s claim is clearly covered by se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional upon commencement of the production, such subsidy must be treated as assistance for the purpose of trade. But in so far as the case before us is concerned, the subsidy is granted to appellant company by the State Govt. not for the purposes of carrying out its business in a more profitable manner but merely in consideration of setting up the production units in backward areas. The purpose of the Govt in granting subsidy is clear from the preamble portion of the two notifications under which the appellant company became entitled to exemption in respect of sales tax amount. 22. Though the subsidy/grant allowed by the Govt. appears to be in the nature of exemption/reduction in the amount of sales tax payable by the appellant company, actually, however, the sales tax amount is simply a measurement of the subsidy to be allowed by the State Govt. The subsidies are purely gratuitous in nature and cannot be considered to be an assistance provided to the appellant company for carrying on its business operation in a day to day manner. On the other hand as discussed earlier, the subsidy has been granted specially for the purpose of promotion and development of the industries in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount received by the assessee was capital receipt and not liable to tax up to the limits computed in accordance with the notification of the state government. While upholding the finding of the CIT(A), we dismiss the ground of appeal raised by the revenue. 23. In the result, the appeal directed by the revenue is dismissed. Parties‟ contentions 7. The revenue in its appeal argues that the source of the funds and the manner it is collected from the public and also permitted to be retained by the assessee is immaterial for determination as to whether in the hands of the tax payer, it is a capital or revenue receipt. Acknowledging that this position is recognized and well established in law, learned counsel relied upon the decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax: 1997 (228) ITR 253(SC) 8. The counsel analyzed various provisions of the Uttar Pradesh (UP) subsidy scheme to say that the earlier scheme of 1982 was expanded in 1985 to promote industrial development in the State. Thereafter, in the year 1990, various elements of the existing scheme were subsumed and a new subsidy regime for industrial promotion was evolved. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose for which the subsidy was given. Although the source is immaterial, the purpose should be examined; if the purpose was to help the assessee to set up its business or to complete the business, the moneys had to be treated as having received for capital purposes. Conversely, if moneys were given to the assessee for assisting it in carrying on business operations and if the money was given only after and conditional upon production, subsidies had to be treated as assistance for the purpose of the trade. 11. It was stated that there are two strong reasons for this Court to follow the rule in Sahney Steel (supra). One is that, like the enunciation of the principle, the purpose for the grant of tax exemption was industrial production and industrial development generally; no strings were attached with respect to the expenditure and secondly, there were specific parts to the scheme that dealt with capital subsidy. It was submitted that the presence of specific provisions for capital subsidy which in turn contained conditions that were to be complied with and had a cap as to the capital subsidy limit meant that the other parts which conferred advantages by way of retention of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 29.01.1985 which had extended the existing Government Order of 30.09.1982. The incentive available to the newly established coal mill which was considered and classified as Prestige unit, involving fresh investment of over Rs. 2 crores under the Government Orders was in the form of sales tax exemption from the period of this exemption from the date of sale. The State of U.P. formulated the industrial policy of 1990. Reliance was placed upon the preamble to the policy which envisioned large scale industrialization of the State with special facilities and incentives for setting up industrial and manufacturing units in the State. It was submitted that the 1990 scheme was amended so as to expand its ambit to existing units if they expanded their capacity. The assessee then set up a new galvanizing unit by way of expansion of its existing business that went into production from January, 1994 and was eligible for incentive in the form of sales tax exemption. The incentive for this diversification or expansion was in the form of sales tax exemption for 8 years limited to 100% of the fixed capital investment in the graded manner set out in the notification. 15. Learned counsel took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Commissioner of Income Tax vs. Bougainvilla Multiplex Entertainment Centre Pvt. Ltd. (2015) 373 ITR 14. There too, the Court held that subsidy given at the point of time after the commencement of production did not mean that the State ruled out capital utilization of the funds received. On the other hand, the very concept of grant of subsidy meant that the assessee was free to use it either to augment its profit or to recoup its capital. Therefore, the purpose test in this case had to be interpreted in the manner it was done in Ponni Sugars (supra) and it leaves no room for doubt that assistance in the form of tax rebate, which permitted amounts to be collected by the assessee was to assist it to set up the new unit and recoup the capital expenditure. The periodicity of the subsidy or its source and the form, i.e. collection and retention were immaterial as in the case of Ponni Sugars (supra) or even the other decisions cited in it. Analysis and reasoning 18. Before considering the submissions of the parties, it would be necessary to extract the relevant parts of the supplementary notification dated 27.07.1991 issued by the State of UP, in the present case. The subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Location of Unit Total period of exemption Reduction in the rate of tax Rate of tax applicable (denoted as percentage of the rate of tax normally applicable under the Act to the goods concerned) Year in Case of ib case of Units with other a fixed units Capital investment Exceeding 50 Crores Monitory limit upto which exemption from or reduction in the rate of tax is admissible 1 2 3 4 5 A B C ( iii ) The Taj Trapezium Area 1. The district of Agra (excluding Taj Trapezium Area) Aligarh (excluding Taj Trapezium area) Allahabad (excluding the area in south of Rivers Jamuna Confluent Ganga but including the area included under Nagar Mahapalika, Allahabad) Bareilly, Bijore, Firozabad (Taj Trapezium Area) Ghaziabad, Gorakhpur, Haridwar, Kanpur (Nagar), Lakhmpur-Kheri, Lucknow, Maharajganj, Meerut, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e period of 1.4.90 to 31.3.95, the first industrial unit to be established from the fixed capital investment of ₹ 5 crore or more, shall be treated as Tehsil Level Pioneer Unit. The special state capital subsidy of ₹ 10 lakh shall be granted to the Pioneer Unit. If pioneer unit encourage to the ancillary units for the supply of requirement of 30% of its own purchased parts and components, then the further additional special capital subsidy of ₹ 10 lakh shall be available to it. This scheme shall be applied with effect from 1.4.90 and the facility of raw material shall not be admissible in the district under the scheme, where any unit of the capital investment of ₹ 5 crore has already been established prior to 1.4.90. 20. Predictably, the rival positions of parties are that according to the revenue, the amounts retained were not towards capital subsidy, but were revenue or trade subsidies, to ensure greater profitability. The assessee naturally, takes the opposite position: it succeeded before the tribunal, which ruled that the amount was towards capital subsidy. The question is which of these two positions is correct in law, according to the auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 TC 430, at page 448. In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably. Mr. Ganesh strongly relied on Seaham Harbour Dock Co.‟s case [1931] 16 TC 333 (HL) which does not come to the assistance of his contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given in several instalments as the work of extension of the dock continued. Money was given for the express purpose which was named. It was found by the House of Lords that it had nothing to do with the trading of the company. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in Sahney Steel (supra) as follows: The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is 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. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the subsidy operated only after expansion, i.e. after the capital expenditure was incurred and capacity expanded. 24. Both parties have used different passages from Sahnay Steel (supra) and Ponni Sugars (supra). In the former, the court was persuaded to hold that the amounts were revenue subsidies and operational , not capital, because the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee‟s factory. The added feature was that the assessee was free to use the amounts for any purpose. In Ponni Sugars (supra), the following was highlighted specifically: In Sahney Steel and Press Works Ltd. this court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. the assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he common question of law, is answered in favour of the revenue and against the assessees, in both cases. 28. In the Bhushan Steel batch of appeals, another question of law, i.e. whether the assessee was entitled to claim depreciation under Section 32 of the Income Tax Act, despite not owning the property or not being the owner and being a lessee during the years under consideration, arises for consideration. 29. During the course of hearing, this court was informed that this question is now covered against the revenue/appellant, in the assessee s favour, in this court s order for AY 1994-95 in ITA 314/2003 (Commissioner of Income Tax v Bhushan Steels and Strips, decided on 1st December, 2016). In that decision, this court held that the judgments of the Supreme Court in Mysore Minerals Ltd v Commissioner Income Tax 1999 (239) ITR 75 (SC) and Commissioner Income Tax v Poddar Cement Ltd 1997 (226) ITR 625 (SC) are conclusive that a lessee can claim depreciation. Therefore, the second question of law, arising in the Bhushan Steel batch of appeals, is decided in the assessee s favour and against the revenue. 30. As a result, the revenue s appeals are partly allowed, in view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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