TMI Blog2002 (9) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... RAJA PANDIAN. JUDGMENT The judgment of the court was delivered by R. JAYASIMHA BABU J.-The two questions referred to us for our consideration, at the instance of the Revenue are: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation on guest house should not be disallowed under section 37(4) of the Act? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in-law in holding that the incentives given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipt and hence no tax was exigible thereon?" The assessment year is 1989-90. We may take the second question first. It is submitted by learned senior counsel for the assessee, Mr. V. Ramachandran, that a similar question has already been considered and answered against the Revenue in two decisions of this court as also in the decision of the Calcutta High Court in the case of CIT v. Balarampur Chini Mills Ltd. [1999] 238 ITR 445, decided on March 30, 1999. The two decisions of this court relied on by counsel were rendered in T.C. Nos. 777 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of term loans, if any, outstanding from the Central Financial Institutions. The sugar factories should submit utilisation certificates annually from a chartered/cost accountant, holding certificate of practice. Utilisation certificate in respect of each sugar season during the incentive period should be furnished on or before the 31st December of the succeeding year. Failure to submit utilisation certificate within the stipulated time may result not only in the termination of release of incentive free sale quota, but also in the recovery of the incentive free sale releases already made, by resorting to adjustment from the free sale releases of future years". Thus, it was vital for the sugar mills seeking the benefit of the scheme, to utilise the amount accrued to them by way of incentives provided under the scheme exclusively for the purpose of repayment of the loans borrowed from public financial institutions. A certificate from a chartered accountant or a cost accountant was required to be produced in respect of each sugar season to show that the monies had been so utilised. Failure to submit such certificates would result in penalties being imposed by way of termination of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known to those intending to set up new units as also those intending to expand their existing ones. A promise was held out to them under the scheme that a part of the capital cost which they will have to incur would be defrayed by the incentives which they were promised would be allowed to them, after they commence production. The fact that the cost had to be initially met by borrowings from the financial institutions was only to reduce the burden of the Government, which burden would have been considerable, had the Government itself undertaken to pay those amounts directly to every new unit or a unit engaged in expansion, either by way of an outright grant or by way of a loan. The device adopted by the Government to enable the assessee to receive the incentive after the commencement of production, and to apply that amount of incentive to discharge the loans made available to it through public financial institutions, was wholly intended to meet the capital cost incurred by the assessee in setting up the unit. The intention of the Government was not to provide the assessee with additional disposable sums to be disposed of in the manner of its liking after the commencement of produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entives are in fact properly applied for the purpose of discharging the term loans obtained by it in accordance with the terms of the loan agreement. The Assessing Officer and other authorities have also not found that any part of the incentives accrued in favour of the assessee has not been used for the purpose of discharging those loans which had admittedly been obtained for purchasing capital equipment without which the industry could not have been established. The purpose and object of the scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts. In the case of Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC), the court in the context of the facts before it which did not show that there was any compulsion on the assessee which had received the subsidy to apply that amount for a specific purpose, or, within any specified time frame, held that the monies which the assessee had received therein was for the purpose of operating the business or running the same and was not a receipt wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assistance provided for the setting up of the industries to the extent the incentive so given is used to discharge the term loans. The question referred also refers to the purchase tax benefit enjoyed by the assessee. So far as this concession extended by the State Government is concerned, it was in no way linked to the expenditure incurred in setting up the industry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy equivalent to the quantum of the purchase tax for the period for which it was given for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government. Our answer to the second question, therefore, in so far as the incentive given by the Central Government in the form of higher free sale quota of sugar and the excise duty are concerned is in favour of the assessee. In so far as the subsidy linked to the purchase tax extended by the State Government is concerned the answer is in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "General". Sub-section (1) thereof provides that, "any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Sub-section (3) of section 37 which was on the statute book from April 1, 1964, to April 1, 1998, limited the expenditure allowable under advertisement or maintenance of residential accommodation including any accommodation in the nature of a guest house or in connection with the travelling by an employee or by any other person including hotel expenses, only to the extent and subject to the conditions that may be prescribed. Sub-section (4) of section 37 of the Act which was on the statute book from April 1, 1970, till April 1, 1998, in clause (ii) provides that in relation to the assessment year commencing on the first day of April, 1971, or any subsequent year, "...no allowance shall be made in respect of the depreciation of any building used as a guest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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