TMI Blog2009 (12) TMI 1037X X X X Extracts X X X X X X X X Extracts X X X X ..... that consideration also the grant of ₹ 24,44,38,406/- was not in the nature of revenue income. It be so held now. 2.2 The ld. CIT(A) has erred in not appreciating the contention that nature of grant would not defer either received in form of cash or in kind. It is submitted that grant has been accepted as a capital receipt and on that premises grant received in cash form should also be held to be capital in nature. It be so held now. 3. The ld. CIT(A) has erred in confirming the lease rent expenses of ₹ 7,84,704/- paid for leasehold land situated at Narela considering same as capital expenditure. It is submitted that in the facts and circumstances of the case, lease rent paid of ₹ 7,84,704/- ought to have been held to be revenue expenditure. It is submitted that it be so held now. 4. The ld. CIT(A) has erred in not directing the ld. AO to allow depreciation on actual cost of the assets transferred from National Dairy Development Board worth ₹ 5,55,61,594/- as grant. It is submitted that in the facts and circumstances of the case, pursuant to explanation 2 to section 43(1) of the IT Act, depreciation ought to have been granted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering grant of ₹ 24,44,38,406/- received as revenue receipt. 7. The facts of the case are that the assessee company is engaged in manufacturing and trading in various edible oils and food products under the brand name Dhara . One of the objects incidental or ancillary to the main objects of the assessee company was to acquire, take-over and manage the on-going and other agricultural products in operation in NDDB with all assets or liabilities held in connection with the production of vegetable oil by NDDB. The NDDB is a body corporate established under an Act of Parliament i.e. National Dairy Development Board Act, 1987. NDDB has been authorised to form one or more subsidiary companies for implementation of its objects after obtaining necessary approval of the Central Government under section 43(1) of the NDDB Act. Accordingly NDDB obtained prior approval of the central Govt. under section 43(1) of its Act and transferred all its oil related activities carried out by a separate division of NDDB to assessee company under section 43(2) of the NDDB Act. Accordingly vide agreement dated 23rd March, 2001 NDDB transferred its separate division carrying out its oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e market. Therefore, this research activity is being carried out for the betterment of products and hence the same is very much a part of assessee s business. 3.8 Moreover, there is no prohibitory clause whereby it is intended that if assessee company does not apply the amount to research and development work and utilizes this fund in any other manner, all securities and grant will be recovered back. No prohibitory or restrictive conditions have been provided in the clause 10 of the agreement. The total control over the investments and the right for changing the nature of investment is of assessee company and for all legal purposes, the ownership on the fund of ₹ 24,44,38,406/- is of DOFCO, therefore, considering all the facts, the same constitutes revenue receipts in the hands of assessee company. 3.9 Any grant may whatever be the nature, granted to a company after it has started production, is a revenue receipt. The payment of subsidy to assist an assessee in carrying on trade or business as distinct from the subsidy to help the assessee to set up an industry or complete a project is production incentive or operational subsidy is not a capital subsidy. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... started production. (ix) That the use of Accounting Standard it was mandatory and under it the grant was treated as capital receipt. (x) That therefore, for all these reasons the grant was a capital receipt in the hands of the appellant. 10. The CIT(A) rejected these arguments. He has held as under :- (1) Nomenclature given by the transacting party is not conclusive to understand the true and real character of a particular receipt. Therefore, above arguments of assessee as covered in para 6(i), 6(ii) and 6(iii) are not acceptable. (2) The nature of funds in the hands of payer is nondeterminative of character of the receipt in the hands of recipient. A capital receipt in the hands of one may become income in the hands of receiver. He referred to the decision in the case of CIT vs. Presidency Co-op. Housing Society Ltd. (1995) 216 ITR 321,325 (Bom); CIT vs. Kamal Behari Lal Singha (1971) 82 ITR 460 (SC). (3) An obligation to use the income in a particular manner does not remove it from the category of income. Even when the obligation to use it in a particular manner forms a part of an original contract/agreement giving ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cap of ₹ 120 crores. The loan would bear interest at the rate of SBIPLR plus 1.5%.; (iv) interest free loan of ₹ 135 crores as support funds; and (v) Research and Development Grants of ₹ 30 crores specifically for research and development in oilseeds, oil and food related activities. ₹ 5,55,61,594/- in the form of fixed assets and balance in the form of Fixed Deposit as corpus fund. 13. The ld. Authorised Representative drew our attention to clause 10 of the agreement according to which assessee had agreed to amount received in cash as a earmarked corpus and keep the amount invested in the long term financial instrument. The assessee also agreed to utilize the amount of interest earned thereon for the research and development activities. Thus the grant of ₹ 24.44 crores was out of capital funds of NDDB and transferred to the assessee company for carrying out research and development activities out of interest earned from the investment of such cash. There is specific stipulation in the agreement to use the interest for the said purpose. Interest earned thereon has been treated as income and taxed accordingly while expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observations of the Supreme Court in Sahney Steel Press Works Ltd. s case (supra) also showed that the Tribunal was alive to the distinction between the character of the subsidy given with the object of promoting industrial growth in a particular area and the subsidy given conditional upon the commencement of production and after actual commencement of production. It is not correct to understand the judgement as laying down the broad proposition that wherever the subsidy is given after the commencement of production and conditional upon the same, it should be treated as a revenue receipt in the hands of the assessee, irrespective of the object for which the subsidy is granted. The object for which the subsidy is granted takes primacy over the fact that it is given after the commencement of production and conditional upon the same. That the Supreme Court itself recognized that position had been amply made clear in its observation. Thus the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy is received after the commencement of production or conditional upon it. Hence, the Tribunal in the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money for research and development. Further the nature of receipt is to be decided at the point of transfer and it is immaterial how it is subsequently preserved, safeguarded, utilized entirely whether the principal or the interest thereon. Conduct of the assessee company cannot become the condition for giving grant by NDDB which has given the grant as a part of entire scheme of creating a subsidiary and then for encouraging research and development in such subsidiary. It is one thing to give grant as a condition and it is another thing to accept a grant with a condition. In the former ld. Departmental Representative submitted that condition will decide the nature of the grant but in the latter its imposed conditions are inconsequential in determining the nature of grant. 15. We have heard the rival submissions and perused the material on record. In our considered view assessee deserves to succeed. The undisputed facts are already narrated above. The NDDB has given various grants and loans to assessee company after it being created as 100% subsidiary. ₹ 5.55 crores being the value of assets involved in research and development are transferred to the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only the assessee which is treating it as capital in nature and agreeing to utilize the interest thereon for revenue purposes (for research and development activities). Investments in long term financial instruments are shown in the balance sheet from year to year and interest there from has been taxed as income by the revenue. There is no protective assessment of such interest income. They are taxed substantively by the Department. It is not disputed that research and development activities constitute activities on which expenditure incurred would be revenue in nature but that does not automatically lead to the inference that funds earmarked for such activities would also be revenue in nature. Further it is incorrect to say that funds of ₹ 30 crores including fixed assets of ₹ 5.55 crorres were given to the assessee during the course of production. They were given at the time of creation of assessee company when assessee company had not taken over the ongoing operation of the oil unit of NDDB. The transfer of asset took place on 1.4.2001 as per clause 1 of the agreement whereas agreement to transfer the funds took place on 22nd March, 2001. 17. The argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term investment which is the subsidy of revenue in nature and not the principal sum over which NDDB has kept a direct control by not permitting the assessee company to utilize it at its free will. 19. In view of above discussion, we hole that receipt of ₹ 24.44 crores is capital in nature and therefore is not taxable. As a result, this ground of assessee is allowed. 20. Ground No.3 relates to lease rent expenses of ₹ 7,84,707/-. It was disallowed treating it as capital in nature. Assessee company had taken on lease at Kandla (for 30 years), at Narela ( perpetual lease) Kolkata ( for 30 years ). Initial amount paid for lease hold land rights was capitalized. Subsequently lease rent was paid. The Assessing Officer disallowed the claim on the ground that assessee has acquired rights which provide enduring benefits. It was claimed before ld. CIT(A) that amount was paid for use of the assets and not for acquiring the assets. Ld. CIT(A) held that lease rent in respect of Kandla and Kolkata is revenue in nature as no ownership rights are granted to the assessee. However, lease rent paid in respect of Narela is for acquiring perpetual leasehold rights for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said decision had considered judgment of Madras High Court in the case of CIT vs. Madras Auto Service Ltd. (1985) 166 ITR 740 (Mad), which had since been confirmed by the Apex Court in the case of CIT vs. Madras Auto Service Ltd. (1998) 233 ITR 468 (Supreme Court). That the Apex Court decision in case of CIT vs. Madras Auto Services (P) Ltd. (supra) as well as earlier decision of the Apex Court in the case of Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 1 (Supreme Court) has been applied and followed by the Tribunal. Thus, the Tribunal having applied the ratio of Apex Court decisions had made and order in accordance with law which was not required to be interfered with. (6) The facts are not in dispute. The lease agreement entered into between the assessee and GIDC has been analysed and relevant terms summarized by the Tribunal. It is not necessary to refer to the said terms in detail in the present proceedings. Suffice it to state that the Tribunal on appreciation of the Deed in question, has recorded following findings of fact : It is not disputed that the land which has been leased out to the assessee did not cease to be belonging to GIDC, the lessor. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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