Kalpana Palace v. Commissioner Of Income-Tax

R.K Agrawal, J.:— In Income-tax Reference No. 46 of 1995 the Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as “the Act”, for the opinion to this court:

“Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the grant-in-aid of Rs. 3,06,711 received by the assessee under the scheme of the State of U.P introduced with the object to promote the construction of permanent cinema buildings in the backward areas as revenue receipt in the hands of the assessee ?”

2. In the Income-tax Appeal No. 5 of 2001, the appellant had raised five questions of law which, according to it, are substantial questions of law. However, the decision on the question referred by the Tribunal under section 256(1) of the Act would also decide the aforementioned income-tax appeal. The reference and the appeal, as they raise a common question of law, have been heard together and are being decided by a common judgment. For the sake of brevity, the facts of Income-tax Reference No. 46 of 1995 are given below:

The applicant is a registered partnership firm and is engaged in the business of cinema exhibition. During the relevant assessment year 1990-91, the cinema building was completed and business was started. For the assessment year 1990-91, it had filed the return on August 29, 1990, showing a loss of Rs. 2,57,830 and subsequently it had filed a revised return under section 139(5) of the Income-tax Act showing a loss of Rs. 3,01,820. The Income-tax Officer vide order dated March 5, 1991 completed the assessment at the income of Rs. 21,921. The Income-tax Officer has disallowed the supervision charges for construction of cinema building, depreciation on cinema building at 33.33 per cent and has also held that the grant-in-aid of Rs. 3,06,752, received by the assessee from the State Government for the construction of permanent cinema building in backward area, is a revenue receipt and not a capital receipt as claimed by the assessee.

3. Being aggrieved by the order dated March 5, 1991, it filed an appeal before the Commissioner of Income-tax (Appeals)-I, Kanpur. The Commissioner of Income-tax (Appeals), Kanpur, vide his order dated November 22, 1991, allowed the appeal in part, granted the relief with regard to the supervision charges, depreciation on building and also held that the grant-in-aid was a capital receipt and hence directed the Assessing Officer to treat the grant-in-aid as capital receipt.

4. Feeling aggrieved by the order passed by the Commissioner of Income-tax (Appeals), Kanpur, the Income-tax Officer filed an appeal before the Tribunal which has been partly allowed on November 26, 1993. The Tribunal has held that the grant-in-aid received by the applicant is a revenue receipt.

5. The income-tax appeal relates to the subsequent assessment year 1991-92 and the amount of subsidy involved is Rs. 4,50,276.

6. We have heard Sri Rakesh Kumar, learned counsel for the assessee, and Sri Shambhu Chopra, for the Revenue.

7. Learned counsel for the applicant submitted that the State Government with a view to encourage construction of permanent cinema theatre during a specified period vide Government order dated July 21, 1986, had announced a scheme of subsidy/grant-in-aid. Acting on the said scheme, it had constructed a permanent cinema building in a backward area, namely, Bharuwa Sumerpur in the District Hamirpur and was allowed grant-in-aid in terms of the aforementioned Government order. According to him, the grant-in-aid/subsidy was nothing but a capital receipt as it related to the construction of permanent cinema building in a backward area and, therefore, a capital receipt, in support whereof he relied upon the following decisions:

(1) Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253 (SC);

(2) CIT v. Meat Products of India Ltd., [1999] 238 ITR 987 (Ker); and

(3) CIT v. Balarampur Chini Mills Ltd., [1999] 238 ITR 445 (Cal).

8. Sri Shambhu Chopra, learned counsel for the Revenue, however, submitted that as the grant-in-aid/subsidy was correlated with the amount of entertainment tax it was nothing but a trade receipt and the Tribunal was justified in holding so. He also relied upon the decision of the apex court in the case of Sahney Steel and Press Works Ltd., [1997] 228 ITR 253.

9. Having heard learned counsel for the parties we find that the State Government had issued the Government order dated July 21, 1986, for providing grant-in-aid and incentives for construction of permanent cinema halls during a specified period. The subject of the Government order dated July 21, 1986, is reproduced below:

“STHAYEE CINEMA GRIHON KE NIRMAN KO PROTSAHAN DIVE JANE KE VISHISHTA AVADHI MEN BANAYE GAYE STHAYEE CINEMA BHAVANON KO SAHAYAK ANUDAN SWEEKRITA KIYE JANE KI YOJANA KA VISTAR.”

10. In paragraph 1 of the aforesaid Government order it has been specifically stated that the intention for grant-in-aid is for encouraging construction of new cinema halls. However, grant-in-aid is related to the amount of entertainment tax. The question as to whether subsidy received from the Government is capital receipt or revenue in nature, is no more res integra. The apex court in the case of Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253 has held as follows (page 259):

“… The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda Joint Water Board, [1946] 14 ITR (Suppl.) 45, 47 (HL); [1946] 28 TC 261 (HL) in the following words (p. 278):

The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D. It is sufficient to cite the decision of this House in the sugar beet case (Smart v. Lincolnshire Sugar Co. Ltd., [1937] 20 TC 643; 156 LT 215) as an illustration.

The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising—See, for example, Lord Buckmaster's explanation in IRC v. Forth Conservancy Board, [1931] AC 540, at page 546; [1931] 16 TC 103 (HL), at page 117 and compare what Lord Macmillan said in Municipal Mutual Insurance, Ltd. v. Hills, [1932] 16 TC 430 (HL), at page 448.”

11. In the case before the apex court, a notification was issued by the 1: Andhra Pradesh Government providing certain facilities and incentives to new industrial undertakings which commenced production on or after January 1, 1969, with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession was also available for subsequent expansion of 50 per cent, and above of existing capacities, provided, in each case, the expansion was located in a city or town or Panchayat area, other than that in which the existing unit was located. The incentives were (page 256):

“(a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent, of the equity capital paid-up in the case of public limited companies and the actual capital in the case of others;

(b) Subsidy on power consumed for production to the extent of 10 per cent in the case of medium and large-scale industries and 121/2 per cent, in the case of small-scale industries. This concession will not apply to cases where concessional tariffs are allowed by the electricity board;

(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body;

(d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it;

(e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used;

(f) The following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochamad and K.C Canal in the Ramagundam-Kothagudem areas and in the following eight backward districts ……”

12. The apex court has held as follows (page 257):

“The salient feature of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available, unless and until production had commenced. The availability of the incentives would be limited to a period of five years from the date of commencement 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 other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable.”

13. The apex court found that the first proposition of Viscount Simon applies. The amount paid to the assessee in the instant case (Sahney Steel and Press Works Ltd., [1997] 228 ITR 253 (SC) 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 and 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.

14. The apex court further held as follows (page 261):

“In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries……..

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.”

15. Applying the principles laid down by the apex court in the aforementioned case to the facts of the present case, we find that the grant-in-aid was given in order to promote construction of cinema buildings in small towns having population up to one lakh according to the 1981 census. Thus, it was for the establishment/setting up of cinema halls and the manner in which the grant-in-aid related to the amount of entertainment tax is of no consequence. Thus, even though the grant-in-aid was given after the business has been set up, it would still be relatable to the construction of cinema halls. Thus, it would be a capital receipt.

16. In the case of Balarampur Chini Mills Ltd., [1999] 238 ITR 445 the Calcutta High Court had held that the additional free sale quota of sugar was available to the assessee only in case the assessee repaid the term loans taken from the Central financial institutions and the realisation of sale of additional free sale quota sugar under the incentive scheme was in the nature of capital receipt.

17. In the case of Meat Products of India Ltd., [1999] 238 ITR 987, the Kerala High Court after applying the principles laid down by the hon'ble Supreme Court in Sahney Steel and Press Works Ltd., [1997] 228 ITR 253 had remanded the matter to the Tribunal for recording a clear finding as to whether the purpose of the subsidy was to set up a new project or whether the purpose was to run business operations successfully after the commencement of production. In the present case in order to promote construction of buildings in small towns having population up to one lakh according to the 1981 census, the State Government had announced the incentive in the form of grant-in-aid, thus, it was for the establishment/setting up of cinema halls and the grant-in-aid even if it was co-related to the amount of entertainment tax is of no consequence. Thus, it would still be relatable to the construction of cinema halls and, therefore, it would be a capital receipt.

18. In view of the foregoing discussion, we are of the considered opinion that the grant-in-aid received by the applicant was a capital receipt and not a trade receipt. We, therefore, answer the question referred to us in the negative i.e, in favour of the assessee and against the Revenue. In view of the answer given by us to the question of law referred, the order passed by the Tribunal dated August 31, 2000, which is the subject-matter of challenge in the income-tax appeal to this limited extent cannot be sustained and is hereby set aside.

19. The appeal succeeds and is allowed.