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TMI Blog2008 (9) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... 5707/08 (arising out of S.L.P.(C) No. 3112/06), Civil Appeal No. 5708/08 (arising out of S.L.P.(C) No. 11963/07), Civil Appeal No. 5709/08 (arising out of S.L.P.(C) No. 14407/07), Civil Appeal No. 5710/08 (arising out of S.L.P.(C) No. 14050/07), Civil Appeal No. 5711/08 (arising out of S.L.P.(C) No. 8290/07), Civil Appeal No. 5712/08 (arising out of S.L.P.(C) No. 6686/08), Civil Appeal No. 5713/08 (arising out of S.L.P.(C) No. 7643/08), Civil Appeal No. 5714/08 (arising out of S.L.P.(C) No. 9584/08) and Civil Appeal No. 5715/08 (arising out of S.L.P.(C) No. 17149/08) JUDGMENT S. H. KAPADIA, J. Leave granted. 2. In the above batch of civil appeals, based on the arguments addressed before us, we are mainly concerned with the following two questions, namely: (i) Whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income? (ii) Whether the assessee was entitled to exemption under Section 80 P(2)(a)(i) of the Income Tax Act, 1961 in respect of interest received from the members of the society? 3. At the outset, it may be noted that this batch of civil appeals covers four incentive subsidy Schemes of 1980 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held by the High Court. He further contended that similarly retention of the collective excise duty on the sale price of free sale sugar in excess of the normal quota and paying to the Government only the excise duty payable on the price of levy sugar resulted in revenue generation in the hands of the assessee which contention of the Department has been erroneously rejected by the High Court. According to the learned counsel, under the Scheme, there were two distinct concepts, namely, the concept of accrual of income in the hands of the assessee and the concept of application of additional funds generated thereunder. According to the learned counsel, application of additional funds is neither material nor relevant for deciding the character of the incentive subsidy. In this connection, learned counsel placed reliance on the judgment of this Court in the case of Sahney Steel and Press Works Ltd. and Ors. v. CIT reported in (1997) 228 ITR 253. 8. Shri Ganesh, learned senior counsel appearing on behalf of the assessee submitted that the benefits were conferred on the assessee under the 1980 and 1987 Schemes, namely, additional price by reason of enhancement of free sale sugar quota, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the term loans. Under Para 21.0 the said Committee stated that five possible incentives for making a sugar plant economically viable unit could be provided for, namely, capital subsidy, allowing a larger percentage of free sale sugar, high levy sugar price, allowing rebate on excise duty and remission of purchase tax. In this case, we are concerned with allowability of a larger percentage of free sale sugar and rebate on excise duty. Following the said Report of the Sampat Committee, the above Schemes came to be formulated. 11. We have examined in this case the 1980 and 1987 Schemes. Essentially all the four schemes are similar except in the matter of details. Four factors exist in the said Schemes, which are as follows: (i) Benefit of the incentive subsidy was available only to new units and to substantially expanded units, not to supplement the trade receipts. (ii) The minimum investment specified was Rs. 4 crores for new units and Rs. 2 crores for expansion units. (iii) Increase in the free sale sugar quota depended upon increase in the production capacity. In other words, the extent of the increase of free sale sugar quota depended upon the increase in the product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly the matter was decided against the assessee. 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 respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though the payment was equivalent to half the interest amount payable on the loan (interest subsidy) still the House of Lords held that money received by the company was not in the course of trade but was of capital nature. The judgment of House of Lords shows that the source of payment or the form in which the subsidy is paid or the mechanism through which it is paid is immaterial and that what is relevant is the purpose for payment of assistance. Ordinarily such payments would have been on revenue account but since the purpose of the payment was to curtail/obliterate unemployment and since the purpose was dock extension, the House of Lords held that the payment made was of capital nature. 16. One more aspect needs to be mentioned. In Sahney Steel and Press Works Ltd. (supra) 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. (supra) 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 oblige ..... X X X X Extracts X X X X X X X X Extracts X X X X
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