R. Jayasimha Babu, J.:— The two questions referred to us for our consideration, at the instance of the Revenue are:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that depreciation on guest house should not be disallowed under section 37(4) of the Act?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the incentives given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipt and hence no tax was exigible thereon?”
2. The assessment year is 1989–90.
3. We may take the second question first. It is submitted by learned senior counsel for the assessee, Mr. V. Ramachandran, that a similar question has already been considered and answered against the Revenue in two decisions of this court as also in the decision of the Calcutta High Court in the case of Commissioner Of Income-Tax v. Balarampur Chini Mills Ltd., [1999] 238 ITR 445, decided on March 30, 1999. The two decisions of this court relied on by counsel were rendered in T.C Nos. 777 and 778 of 1995, decided on September 11, 2001, and T.C Nos. 582 and 583 of 1995, decided on October 15, 2001. The scheme under consideration here is one for providing for incentives to new sugar factories licensed during the sixth five year plan period and expansion of existing units. That scheme is a revised scheme which had been preceded by the scheme of 1980 and which scheme in turn had been framed with the object of augmenting indigenous sugar production and to provide incentives to new sugar factories and expansion projects.
4. In the scheme formulated in the year 1980, which offers incentives which are similar to that in the revised scheme of the year 1987 except for the difference in the amount of capital invested and number of years for which the incentives are to be enjoyed, it is stated that the scheme is meant for ensuring that the new factories and expansion projects should, over a period of a specified number of years from the date of commencement of production/completion of expansion, be compensated for the shortfall likely to be incurred on account of the burden imposed by the higher capital cost. The scheme of the year 1987 referring to the earlier schemes, states that “the scheme enabled sugar factories to become viable by utilising the additional funds generated through such incentives for repayment of loans advanced to them by the Central financial institutions”. It also notes that “the scheme of 1987 was being formulated on the request of the Central financial institutions to review the 1980 scheme due to the changes in the parameters governing it”.
5. The incentives conferred under that scheme are twofold. First, in the nature of a higher free sale sugar quota and second, in allowing the manufacturer to collect the excise duty on the sale price of the free sale sugar in excess of the normal quota, but to pay to the Government only the excise duty payable on the price of levy sugar. The period for which the sugar mill was to enjoy that benefit depended upon the location in the high, medium or low recovery areas and the duration for which the benefit could be enjoyed varied from five to ten years depending on the location. Clause 7 of that scheme is material and that clause reads thus:
“The beneficiaries of the incentive scheme shall ensure that the surplus funds generated through sale of the incentive sugar are utilised for the repayment of term loans, if any, outstanding from the Central Financial Institutions. The sugar factories should submit utilisation certificates annually from a chartered/cost accountant, holding certificate of practice. Utilisation certificate in respect of each sugar season during the incentive period should be furnished on or before the 31st December of the succeeding year. Failure to submit utilisation certificate within the stipulated time may result not only in the termination of release of incentive free sale quota, but also in the recovery of the incentive free sale releases already made, by resorting to adjustment from the free sale releases of future years”.
6. Thus, it was vital for the sugar mills seeking the benefit of the scheme, to utilise the amount accrued to them by way of incentives provided under the scheme exclusively for the purpose of repayment of the loans borrowed from public financial institutions. A certificate from a chartered accountant or a cost accountant was required to be produced in respect of each sugar season to show that the monies had been so utilised. Failure to submit such certificates would result in penalties being imposed by way of termination of release of incentive free sale quota and also recovery of the incentive free sale release already made by resorting to adjustment from the free sale releases of future years.
7. The judgment of the Calcutta High Court in Commissioner Of Income-Tax v. Balarampur Chini Mills Ltd., [1999] 238 ITR 445 interpreting the scheme of the year 1980, wherein it was held that the amount of the incentive so accrued to the mill did not constitute a trading receipt, but was a revenue receipt, has apparently been accepted by the Revenue. It is apparently on the basis of that judgment that counsel had made submissions before this court in the decisions of this court referred to earlier but by referring to the decision rendered by the Supreme Court in the case of K.C.P Limited v. CIT, [2000] 245 ITR 421, wherein it had, inter alia, been observed that in a case where the receipt of the amount by the assessee was clearly associated with a liability to refund the amount, which liability was ascertainable and quantified, such receipt would not constitute a trading receipt.
8. Mr. Ramanujam, learned senior standing counsel for the Revenue, however, submitted that the decisions relied on for the assessee are erroneous. His submission was that any incentive or subsidy received by an assessee after the commencement of the production has the character of trading receipt; that the character of the receipt is determined at the time of its accrual and that subsequent application would not make any difference to any of those receipts. Counsel in this context referred to the decisions of the apex court in the cases of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, [1997] 227 ITR 172 and Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253. Reference was also made to the decisions of the Calcutta High Court in the cases of Jeewanlal (1929) Ltd. v. CIT, [1983] 142 ITR 448 and Jeewanlal (1929) Ltd. v. CIT, [1983] 139 ITR 865.
9. In the scheme which provides for incentive here, it has been set out that the scheme was intended to compensate assessees establishing new sugar mills or expanding existing ones, for the shortfall likely to be incurred on account of the burden to be incurred on the higher capital costs. That in fact is the true object of the scheme. It is this object that must be kept in mind while deciding the character of the incentive received by the assessee. The scheme was one which had been made known to those intending to set up new units as also those intending to expand their existing ones. A promise was held out to them under the scheme that a part of the capital cost which they will have to incur would be defrayed by the incentives which they were promised would be allowed to them, after they commence production. The fact that the cost had to be initially met by borrowings from the financial institutions was only to reduce the burden of the Government, which burden would have been considerable, had the Government itself undertaken to pay those amounts directly to every new unit or a unit engaged in expansion, either by way of an outright grant or by way of a loan. The device adopted by the Government to enable the assessee to receive the incentive after the commencement of production, and to apply that amount of incentive to discharge the loans made available to it through public financial institutions, was wholly intended to meet the capital cost incurred by the assessee in setting up the unit. The intention of the Government was not to provide the assessee with additional disposable sums to be disposed of in the manner of its liking after the commencement of production, but to place in the hands of the assessee the means to meet a part of the capital cost, which the assessee had been enabled to meet by securing loans from the public financial institutions.
10. The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the desired development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the scheme for discharging such loans, it cannot be said that the incentive given being post production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P Ltd. v. CIT, [2000] 245 ITR 421, it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling within the capital field or out of it.
11. If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating “capital” from “revenue” is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital field or in the revenue field.
12. The assessee has produced ample material to show that the monies accrued to it by way of incentives are in fact properly applied for the purpose of discharging the term loans obtained by it in accordance with the terms of the loan agreement. The Assessing Officer and other authorities have also not found that any part of the incentives accrued in favour of the assessee has not been used for the purpose of discharging those loans which had admittedly been obtained for purchasing capital equipment without which the industry could not have been established.
13. The purpose and object of the scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merely on the ground that post production receipts are normally regarded as trading receipts.
14. In the case of Sahney Steel and Press Works Ltd. v. CIT, [1997] 228 ITR 253 (SC), the court in the context of the facts before it which did not show that there was any compulsion on the assessee which had received the subsidy to apply that amount for a specific purpose, or, within any specified time frame, held that the monies which the assessee had received therein was for the purpose of operating the business or running the same and was not a receipt which could be regarded as falling within the capital field. After considering the scheme before it, the court noted that the scheme was not to make any payment directly or indirectly for the setting up of the industries. The court clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries. As the payments in that case had been made post-production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced. Such receipts were held to be taxable.
15. In the case of Tuticorin Alkali Chemicals, [1997] 227 ITR 172 the apex court held that interest received by an assessee from the borrowed funds invested in short-term deposits in the bank, at a time when the factory was in the process of being set up and production had not commenced, was a revenue receipt. The court rejected the assessee's claim that such interest should go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions which would be capitalised after the commencement of commercial production. The court, thus, did not regard the commencement of commercial production as the dividing line for determining whether the true character of a receipt is capital or revenue.
16. In the cases of Jeewanlal, [1983] 139 ITR 865 and [1983] 142 ITR 448, it was held by the Calcutta High Court that import entitlements and cash assistance received by an exporter in terms of a scheme framed by the Government for encouraging exports is connected with the act of exportation and are to be treated as trading receipts. The scheme considered in those cases was not similar to the one before us.
17. The reference to the production having commenced, is not therefore to be regarded as constituting a rigid and inflexible line which separates the “capital receipt” from a “revenue receipt”. The incentive in the scheme under consideration here, which provides for indirect assistance in the setting up of the industry, by enabling the assessee to acquire through the incentives given solely for the purpose of repayment of term loans, the means to discharge the loan obtained from the public financial institutions for acquiring the capital assets, is capable of being regarded as an indirect assistance provided for the setting up of the industries to the extent the incentive so given is used to discharge the term loans.
18. The question referred also refers to the purchase tax benefit enjoyed by the assessee. So far as this concession extended by the State Government is concerned, it was in no way linked to the expenditure incurred in setting up the industry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy equivalent to the quantum of the purchase tax for the period for which it was given for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government.
19. Our answer to the second question, therefore, in so far as the incentive given by the Central Government in the form of higher free sale quota of sugar and the excise duty are concerned is in favour of the assessee. In so far as the subsidy linked to the purchase tax extended by the State Government is concerned the answer is in favour of the Revenue and against the assessee.
20. Coming to the first question, section 37(4) of the Income-tax Act, as it stood in the relevant assessment year, reads thus:
“(4) Notwithstanding anything contained in sub-section (1) or subsection (3),—
(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest house (such residential accommodation being hereafter in this sub-section referred to as ‘guest house’),
(ii) in relation to the assessment year commencing on the first day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest house or depreciation of any assets in a guest house.”
21. Clause (ii) under sub-section (4) is unambiguous and does not admit of any doubt. It clearly denies to the assessee any depreciation on and after April 1, 1971, for any building used as guest house as also for the assets therein. Despite such clear language in that provision, it was submitted by learned counsel for the assessee that depreciation is nevertheless allowable as the opening part of section 37(4) does not in its non obstante clause exclude the application of section 32, but only provides for overriding sub-sections (1) and (3) of section 37.
22. Counsel placed reliance on the case of Commissioner Of Income-Tax v. Chase Bright Steel Ltd. (No. 1). (No. 1), [1989] 177 ITR 124 (Bom). It dealt with section 37(3). That decision was relied upon and applied to section 37(4) in the case of Century Spinning and Manufacturing Co. Ltd. v. CIT, [1991] 189 ITR 660 (Bom). It was held therein that having regard to the reference to sub-sections (1) and (3) only in section 37(4), if an expenditure is allowable under other sections of the Income-tax Act, the allowance should not be withdrawn or denied because of the prohibitory provisions of section 37(4). With great respect we are unable to agree.
23. Chapter IV, section D of the Income-tax Act, 1961, is titled “profits and gains of business or profession”. Section 28 sets out the types of income which shall be chargeable to tax under that head. Section 29 states that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to section 43D. Section 32 deals with depreciation. Section 37 is titled “General”. Sub-section (1) thereof provides that, “any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
24. Sub-section (3) of section 37 which was on the statute book from April 1, 1964, to April 1, 1998, limited the expenditure allowable under advertisement or maintenance of residential accommodation including any accommodation in the nature of a guest house or in connection with the travelling by an employee or by any other person including hotel expenses, only to the extent and subject to the conditions that may be prescribed.
25. Sub-section (4) of section 37 of the Act which was on the statute book from April 1, 1970, till April 1, 1998, in clause (ii) provides that in relation to the assessment year commencing on the first day of April, 1971, or any subsequent year, “… no allowance shall be made in respect of the depreciation of any building used as a guest house or depreciation of any assets in a guest house, provided…”
26. Section 37(1) allows expenditure laid out wholly and exclusively for the purpose of the business or profession, if such expenditure is not personal expenses of the assessee, is not an expenditure of a capital nature, and is not expenditure of the nature described in sections 30 to 36. A claim for depreciation cannot, therefore, be made under section 37(1). Sub-section (4) of section 37 overrides sub-section (1) of section 37 as also sub-section (3) thereof. The object of overriding section 37(1), inter alia, is to make known the legislative intention of dealing in section 37(4) with the topic of depreciation which had been dealt with in section 32 and which section along with other sections 30 to 36 had been excluded from the scope of section 37(1). The absence of any reference to section 32 in section 37(4), therefore, does not imply that the prohibition against the grant of depreciation for a building used as a guest house or the assets in a guest house, is to be disregarded and such a claim allowed under section 32. Any claim for depreciation has necessarily to be made under section 32 which is the specific provision for depreciation. When such a claim is made, the prohibition, if any, against the grant of the same, set out in the later provisions of the Act, are not required to be disregarded, but such later provisions must be given their full effect.
27. The fact that section 32 deals with depreciation does not imply that the subject of the depreciation should not be dealt with in any other provision of the Act. It is open to the Legislature to deal with different aspects of the same subject matter in more than one provision in the statute. Section 32 is not to be regarded as a code with regard to depreciation which is unaffected by what is provided in other provisions with regard to depreciation. The absence of reference to section 32 in section 37(4) is not of any materiality, as the legislative intent to deal with depreciation is clear to the extent that section denies depreciation on the depreciable assets specified therein. The legislative prohibition must be given full effect and not defeated in its entirety by allowing what is prohibited under section 37(4), under section 32 of the Act. It is well settled that a statute must be read as a whole and all its provisions read harmoniously. The court should not by a process of interpretation render the specific provision made in the law otiose and purposeless by allowing what is prohibited under the later special provision with regard to specified assets by falling back on an earlier general provision with regard to depreciation. As observed by the apex court in the case of Utkal Contractors and Joinery Pvt. Ltd. v. State of Orissa, (1987) 3 SCC 279 : AIR 1987 SC 1454, 1459:
“It is again important to remember that Parliament does not waste its breath unnecessarily. Just as Parliament is not expected to use unnecessary expressions, Parliament is also not expected to express itself unnecessarily”. With great respect, we are unable to agree with the reasoning set out in the decisions of the Bombay High Court relied upon by counsel for the assessee.
28. The first question is answered against the assessee and in favour of the Revenue.