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Tamilnadu Sugar Corporation Ltd. v. Commissioner Of Income-Tax And Another
Judgment Summary — N.V. Balasubramanian, J.
Factual and Procedural Background
The petitioner challenged an order passed by the Commissioner of Income-tax under section 264 of the Income-tax Act concerning assessment of the petitioner's income for the assessment years 1986-87 and 1987-88. The point before the Commissioner was whether a purchase tax subsidy received from the Government of Tamil Nadu, which the assessee had earlier returned as part of total income, was required to be excluded from income by treating it as a capital receipt. The Commissioner held that the subsidy was a revenue receipt and dismissed the revision petitions filed by the assessee. Against that order, the petitioner filed the present writ petitions.
The Government Order relied upon (G.O. Ms. No. 1294, Industries Department, dated October 24, 1975) records that a Committee recommended remission of purchase tax on cane and that the State Government decided to grant, as relief to eligible new sugar factories, an annual subsidy equivalent to the quantum of purchase tax on cane for a period of five years from the date of going into production.
The petitioner asserted that the subsidy had been returned as business income by mistake for the assessment years in question and sought exclusion on the ground that the subsidy was a capital receipt. The Commissioner did not allow the revision; the present writ petitions challenge that decision.
Legal Issues Presented
- Whether the purchase tax subsidy paid to the petitioner should be treated as a capital receipt (and excluded from taxable income) or as a revenue receipt (taxable as income).
- Whether the Commissioner of Income-tax was correct in holding that the purchase tax subsidy is a revenue receipt and dismissing the petitioner's revision petitions under section 264 of the Income-tax Act.
Arguments of the Parties
Petitioner's Arguments (Mr. P.P.S. Janarthana Raja)
- The subsidy was for the setting up of sugar factories and therefore should not be classified as a revenue receipt.
- That the subsidy is not for a specific liability and the fact that it is equivalent to purchase tax does not make it a revenue receipt; the object of the scheme is determinative.
- Reliance was placed upon the Supreme Court decision in Sahney Steel and Press Works Ltd. v. CIT ([1997] 228 ITR 253) to support the proposition that a subsidy given for setting up a factory is not a revenue receipt.
Respondent's Arguments (Mr. C.V. Rajan)
- The subsidy was paid only after commencement of production and was not given for setting up the industry; therefore it is a revenue receipt.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253 (Supreme Court) | Payments/subsidies made after commencement of production, and not for setting up industry, are to be treated as revenue receipts. | The court held that Sahney Steel applies: in that case payments were made after production commenced and were held to be revenue receipts. The present subsidy scheme likewise provided payments only after commencement of production and was therefore production-oriented and revenue in nature. |
Court's Reasoning and Analysis
The court began with a textual and purposive reading of the Government Order (G.O. Ms. No. 1294). The G.O. establishes that the subsidy equivalent to purchase tax was payable for a period of five years "from the date of their going into production." The court interpreted this timing as critical to the nature of the payment: the subsidy was given as assistance to sugar factories upon commencement of production to help tide over initial operating difficulties, not as a grant for setting up the factory.
The court emphasized several connected points from the G.O. and the scheme:
- The subsidy was linked to the commencement and continuity of production (payable for five years from start of production), indicating a production-oriented objective.
- The measure of subsidy was closely interlinked with the purchase of sugarcane by the factory, reinforcing that the subsidy related to ongoing business operations rather than capital formation.
- The subsidy was not tied to the purchase of capital items, nor conditioned to be used for acquisition of machinery or future expansion; it could be utilized by the recipient for any purpose, including business uses.
Applying the principle from Sahney Steel (where payments made after production commenced were held to be revenue receipts), the court concluded that the present subsidy similarly constituted a revenue receipt. The court also noted that although the Commissioner might have erred in reasoning by describing the subsidy as reimbursement of purchase tax and citing section 41(1) of the Income-tax Act, the Commissioner's ultimate conclusion — that the subsidy is a revenue receipt — was correct on the basis of the scheme's nature and objectives. Because the Commissioner's ultimate finding was sustainable in law, the court found no necessity to remit the matter back for reconsideration on different reasoning.
Holding and Implications
Holding: The court concluded that the subsidy received by the petitioner was a revenue receipt. Accordingly, the court held as follows:
The writ petitions are dismissed.
Direct consequences and procedural outcomes recorded in the opinion:
- The court upheld the Commissioner's conclusion that the subsidy is a revenue receipt and therefore taxable as income.
- Although the Commissioner’s specific reasoning (reference to section 41(1) as reimbursement of purchase tax) may have been inaccurate, the ultimate conclusion was sustained and no remand was ordered.
- Both writ petitions fail and are dismissed; there will be no order as to costs; W.M.P. Nos. 24864 and 24865 of 1990 are closed.
The opinion does not purport to lay down a novel legal principle beyond applying the established approach (as illustrated by Sahney Steel) that timing and object of a subsidy — whether it is linked to setting up capital formation or to production/operational support — are determinative of its character as capital or revenue.
N.V Balasubramanian, J.:— The petitioner has filed both the writ petitions challenging the order passed by the Commissioner of Income-tax under section 264 of the Income-tax Act, 1961, hereinafter referred to as “the Income-tax Act”, relating to the assessment of the petitioner's income for the assessment years 1986-87 and 1987-88.
2. The only point that arose before the Commissioner of Income-tax was whether the purchase tax subsidy received by the assessee, which was returned as part of total income had to be excluded treating it as a capital receipt, and the Commissioner held that it was a revenue receipt and dismissed the revision filed by the petitioner herein.
3. It is against the said order, the present writ petitions have been filed.
4. The assessee, a writ petitioner herein, filed revision petitions before the Commissioner of Income-tax for two assessment years 1986-87 and 1987-88 and the point that was raised by the petitioner was that the purchase tax subsidy given to the petitioner by the Government of Tamil Nadu which was earlier returned as business income was liable to be treated as a capital receipt. In G.O Ms. No. 1294, Industries Department, dated October 24, 1975, it is stated that the Government of India had constituted a Committee to go into the question of viability of sugar factories of 1,250 tcd. established at high cost and the said Committee observed that sugar factories of 1,250 ted. established at such high cost would lose heavily unless adequate reliefs as recommended by them are granted by the Central and State Governments. The G.O also says that the Committee recommended, among other recommendations, remission of purchase tax levied on the purchase of cane and the State Government considered the recommendation of the Committee in the light of the projected profitability of the new sugar factories and decided in favour of the grant of relief to new sugar factories yet to be commissioned in the co-operative and public sectors. In the G.O it is also stated that the State Government has decided that the abovementioned relief would be in the form of an annual subsidy equivalent to the quantum of purchase tax on cane due from the sugar factories for a period of five years from the date of their going into production.
5. The case of the assessee, a writ petitioner herein, was that for the assessment years 1986-87 and 1987-88 it received purchase tax subsidy from the State Government and returned the same as part of its income by mistake and hence claimed the same to be excluded in the computation of the total income. As already found, the Commissioner of Income-tax did not accede to the request of the petitioner and dismissed the revision filed by it.
6. Mr. P.P.S Janarthana Raja, learned counsel appearing for the petitioner, submitted that the subsidy paid was for the setting up of sugar factories and merely because the subsidy given is equivalent to the purchase tax on cane, it does not mean that it is a revenue receipt. Learned counsel submitted that the subsidy is not for a specific liability and the yardstick cannot override the object of the scheme. Learned counsel referred to the order of the Commissioner of Income-tax and submitted that the Commissioner has proceeded on wrong basis and the view of the Commissioner that the purchase tax subsidy is a revenue receipt is erroneous. Learned counsel brought to the notice of this court the decision of the Supreme Court in Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253 and submitted that on the basis of the decision of the Supreme Court, the subsidy which was given for setting up of the factory is not a revenue receipt and hence not liable to be taxed as such.
7. Mr. C.V Rajan, learned senior standing counsel appearing for the respondents, submitted that the subsidy was given only after the commencement of production of sugar and it was not given for the setting up of the industries and, therefore, the Commissioner was correct, in holding that the subsidy is a revenue receipt.
8. I have carefully considered the submissions of learned counsel for the petitioner and learned senior standing counsel appearing for the respondents. A fair reading of the Government order, cited supra, clearly shows that the subsidy equivalent to the quantum of purchase tax was given to the sugar factories for a period of five years from the date of the commencement of production. In other words, the subsidy was given by way of giving assistance to the sugar factories on the commencement of production and it is not given for the setting up of the factories, and the subsidy is given only to tide over the difficulties that may be experienced by the management in the actual running of the sugar factories. Though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the factory efficiently, in other words, the subsidy is given so that the management may not be in trouble in running of the sugar factories in the initial years.
9. I am of the view the decision of the Supreme Court in Sahney Steel and Press Works Ltd.'s case, [1997] 228 ITR 253 would apply to the facts of the case as in that case also under the scheme, the payments were made directly or indirectly not for the setting up of the industries, but the payments were made only after the production was commenced and the subsidy received was held to be revenue receipt. On the facts of the case, under the scheme, the payments of subsidy were made not for the purchase of capital items, and it was not tied up with the purchase of machinery or for future expansion of the industry. In other words, it was given without any prior condition attached to it and it is open to the petitioner to utilize the same for any of its purposes including its business purposes. The fact that the payments-made might have been utilized for the purchase of capital equipments is not relevant as there is no embargo imposed on the sugar factory not to utilize the subsidy received for business purposes. The subsidy, in other words, is granted to tide over the teething troubles that the sugar factory may face soon after the commencement of production and it is not for the setting up of the factory. I also hold that the fact that the sugar factory is eligible to get the subsidy for a period of five years from the date of the commencement of production clearly indicates that the payment of subsidy is linked to the production of sugar in the factory. It is further strengthened by the fact that the measure of payment of subsidy is also closely interlinked with the purchase of sugarcane by the sugar factory which shows that the subsidy was granted for the continuous running of its business and it is not granted for the setting up of the sugar factory. Hence, I am not able to accept the submission of learned counsel for the petitioner that the object of the grant of subsidy was for setting up of the sugar factory. Though the Commissioner may not be correct in his view that the subsidy granted is the reimbursement of the purchase tax as he referred to section 41(1) of the Income-tax Act, yet, while considering the scheme under which the subsidy was granted, it is clear that it is a production oriented subsidy and not for the establishment of the factory.
10. Though I agree with Mr. P.P.S Janarthana Raja, learned counsel, that the reasoning given by the Commissioner may not be quite accurate, a fair reading of the scheme clearly shows that the ultimate conclusion arrived at by the Commissioner that the subsidy amount is a revenue receipt is sustainable in law and since his ultimate conclusion is correct, it is not necessary to remit the same to him to arrive at the same conclusion by a different process of reasoning. I, therefore, hold that the subsidy received by the petitioner was rightly held by the Commissioner of Income-tax as revenue receipt. Both the writ petitions fail and are dismissed. However, in the circumstances there will be no order as to costs. Consequently, W.M.P Nos. 24864 and 24865 of 1990 are closed.
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