TMI Blog2005 (4) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... which is directly connected with the business activities of the assessee, was on capital account and hence not taxable as a revenue receipt? 2. Whether on the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal was legally correct in deleting the disallowance of Rs. 13,98,899 made under section 43B in respect of unpaid production incentive bonus covered under section 36(1)(ii) of the Income-tax Act?" The reference relates to the assessment year 1990-91. Briefly stated, the facts giving rise to the present reference are as follows: The assessee is a co-operative society engaged in the business of manufacture and sale of sugar. For the year ending March 31, 1990, relevant to the assessment year 1990-91 it filed its return on October 16, 1990, declaring a loss of Rs. 4,00,64,360. In the profit and loss account total sales were shown at Rs. 15,20,83,667 which included an amount of Rs. 2,10,67,677 received as incentive earned from sale of sugar. The assessee gets this incentive by way of additional free sugar quota wherein excise duty is leviable at a reduced rate but the sugar is available for being sold at the market price. The resultant benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure should be allowed under section 37(1) as having been incurred wholly and exclusively for the purpose of business. The Assessing Officer did not accept the assessee's arguments and was of the opinion that the payments covered under section 36(1)(ii) of the Income-tax Act and the unpaid excess provision amounting to Rs. 13,98,899 was added to the income of the assessee. In appeal, the Commissioner of Income-tax (Appeals) observed that the incentive bonus was to be paid in the case only after the verification and approval from the U.P. Co-operative Sugar Factories Federation which had not been obtained and, therefore, the liability for payment of bonus had not crystallized during the relevant previous year. The Commissioner of Income-tax (Appeals) held that the deduction could not be allowed to the assessee to the extent of unpaid incentive bonus and accordingly, confirmed the said disallowance. Feeling aggrieved by the order of the Commissioner of Income-tax (Appeals), the assessee preferred appeal before the Tribunal. The Tribunal held that the amount in question was productivity linked bonus relating to the business and has been allowed earlier in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns made by learned standing counsel, we find that the respondent-assessee had earned a sum of Rs. 2,10,67,677 on the sale of free sale sugar allowed as incentive by payment of reduced excise duty. It is clearly a trading receipt and the apex court in the case of Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 has held that: "If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. 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 the fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the 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 the trade ... that under the notification in question the payments were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of production. The incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemption was given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in this case. The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for the setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given. The second important thing to note is that the manner in which the incentives were given is of no consequence for determination of the question raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries ... By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, 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 subsidies are operational subsidies and not capital subsidies." The aforesaid decision has been subsequently followed by the apex court in the case of CIT v. Rajaram Maize Products [2001] 251 ITR 427. Respectfully following the aforesaid decisions, we are of the opinion that the Tribunal was not correct in holding that incentive of Rs. 2,10,67,677 was a capital amount. We accordingly, answer question No. 1 referred to us in the negative, i.e., in favour of the Revenue and against the assessee. So far as the second question is concerned, we find that admittedly, a sum of Rs. 13,98,899 which represented unpaid production incentive bonus was in respect of services rendered by the employee. It is a production linked ..... X X X X Extracts X X X X X X X X Extracts X X X X
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