Commissioner Of Income Tax v. Tirumala Bricks & Tiles Factory

Syed Shah Mohammed Quadri, J.:— At the instance of the Revenue the following question is referred to this Court for opinion under Section 256(1) of the Income-Tax Act.

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the subsidy received under G.O Ms. No. 224 dt. 9-3-1976 is not a trading receipt?” It would be necessary to note the facts giving rise to the question.

2. In the accounting year relevant to the assessmen tyear 1980–81 the assessee received subsidy in a sum of Rs. 66,475/- called investment subsidy. The Income-tax Officer treated the subsidy as addition to the net profits earned by the assessee and assessed the same accordingly. On appeal the Commissioner confirmed the order of the I.T.O relying upon the judgment of this Court in Sahney Steels and Press Works Ltd. v. C.I.T . 152 I.T.R 39.. The assessee went in appeal before the Income-tax Appellate Tribunal. The Tribunal distinguished that judgment and held that the subsidy received was not a trading receipt and consequently deleted the addition, representing the subsidy.

3. On these facts the above stated question is referred to this Court for opinion.

4. Learned Standing Counsel for the Income-tax submits that when subsidy was granted by the Government pursuant to G.O Ms. 1225 dt. 31-12-68 and G.O Ms. No. 455 dt. 3-5-71, this Court held that the subsidy is a revenue receipt so it is income and liable to tax, as such there is no rational basis for the Tribunal to take a different view of the matter; the learned counsel prays that the question be answered in the negative, in favour of the Revenue.

5. None appears for the assessee.

6. We may notice here that the Government of Andhra Pradesh granted from time to time incentives for setting up new industries in the State of Andhra Pradesh with due emphasis to set up industries in backward areas of the State and for that purpose incentives were granted by the State. G.O Ms. No. 1225 dt. 31-12-68 and G.O Ms. No. 455 dt. 3-5-71 offered incentives by way of refund of sales tax paid by the assessees who acted pursuant to the said G. Os. On revising the policy of granting incentives fresh orders were issued in G.O Ms. No. 224 dt. 9-3-76 superseding the incentives granted under the said earlier G. Os. Under the new scheme of incentives we are concerned with the incentive granted as investment subsidy. The relevant portion of G.O Ms. No. 224 reads as follows:

“Investment Subsidy: Under this scheme, enterpreneurs setting up new industrial units and/or effecting substantial expansion of the existing units will be eligible for investmentsubsidy on the fixed capital cost at 10% of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which have been declared as backward under the Six-Point formula by the Government (vide Annexure I) and excluding those covered by the Central Subsidy Scheme or the list of Scheduled (Tribal) Areas.”

7. From a perusal of the extract of the scheme it is clear that the incentive was granted for purpose of setting up new industrial units and/or effecting substantial expansion of the existing units. The quantum of subsidy offered was 10% of the fixed capital subject to a maximum of Rs. 10 lakhs. This, in our view, clearly suggests that the incentive granted by the State is a capital receipt in the hands of the assessee.

8. However, the learned Standing Counsel relying upon G.O Ms. No. 224 contends that as the amount would be granted on proof of relevant expenditure, the subsidy has to be considered as revenue receipt. The relevant portion of the G.O relied upon reads as under:

“Sanctions and disbursements will be done by the Director of Industries. The amount will be disbursed annually on the production of necessary documents, bills, vouchers, assessment orders etc. in proof of the relevant expenditure incurred/taxes paid.”

9. A plain reading of the above extract, discloses that it deals with the procedure of disbursement of the subsidy and in that connection it is noted that the amount of subsidy would be disbursed on proof of relevant expenditure incurred/taxes paid. This in our view does not indicate that the amount paid as subsidy, is a revenue receipt.

10. We shall refer to the judgment of this Court in C.I.T v. Godavari Plywoods Ltd. . 168 I.T.R 632. relied upon by the learned Standing Counsel. In that case the provisions of the said G.O Ms. No. 224 fell for consideration of this Court but in a different context. The question there was whether the subsidy granted by the State under the said G.O has to be deducted from the cost of machinery etc. in calculating the actual cost of the fixed assets for the purpose of calculating the depreciation allowance. The Court held that the subsidy was granted more as recompense for the hardships and inconveniences which the enterpreneur might encounter while setting up industries in backward areas and therefore the subsidy could not be deducted from the actual cost of the assets for computing depreciation allowance which should be allowed on the actual cost of the assets without reducing the same by the amount of subsidy granted. We may point out here that in that case the contention of the Revenue was that the subsidy was a capital receipt and therefore it had to be deducted from the actual cost of the assets on which the depreciation was to be granted.

11. Now reverting to Sahney Steels and Press Works Ltd. v. C.I.T (1 supra) wherein the Tribunal recorded a finding that the nature of receipt by way of subsidy under the said earlier G.O 455 was capital receipt, but this Court opined that it was a revenue receipt. Having regard to the nature of the subsidy offered under G.O Ms. 224 it cannot be said, in this case, that receipt here is not a capital receipt. On terpretation of the G. Os. 1225 and 455, in Sahney's Case, the Bench held that the nature of receipt, by way of refund of sales tax, could be deemed to be profits and gains of the business and as such not capital receipt. But from a reading of G.O Ms. No. 224 there cannot be any doubt that the subsidy was granted for setting up of plant or substantial expansion of the plant with reference to fixed capital cost, so in our view, the nature of receipt is a capital receipt. There are observations by the Division Bench in Sahney Steels' case to the effect that the payment of the amount given as incentive under the earlier Governemnt Orders (G.O Ms. 1225 and G.O Ms. 455) was not subsidy for setting up plant but subsidy given for efficient and profitable running of the industry and its growth. From the above, observation also it is clear that if the subsidy as in the instant case, is in the nature of amounts for setting up of the plant/for expansion of the plant, that would be a capital receipt. In this view of the matter deletion of the amount of subsidy by the Tribunal cannot be said to be illegal.

12. For the above reasons we answer the question in the affirmative i.e in favour of the assessee and against the Revenue. The reference is accordingly answered.