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Vishnu Sugar Mills Ltd. v. Deputy Commissioner Of Income Tax
Structured Summary of the Opinion (S. C. Tiwari, AM)
Factual and Procedural Background
The matter is an appeal concerning assessments made under the Income-tax provisions. The appeal raises multiple grounds: a general first ground (with no specific submissions before the court), and substantive grounds dealing with (i) the characterisation for tax purposes of an incentive amounting to Rs. 6,72,820 received by the assessee pursuant to a Government of India scheme (Sampat Committee recommendations) consisting of higher free sale quota and excise duty rebate, (ii) the denial of carry forward / deduction of investment allowance on account of reserve creation requirements, and (iii) an addition of Rs. 93,26,845 related to closing stock valuation adjustments made by the assessing officer (AO) in light of appellate orders in earlier years.
Procedurally: the AO treated the Rs. 6,72,820 incentive as revenue income and taxed it, relying on prior Supreme Court and High Court decisions. The assessee had credited the amount to a capital reserve and contended it was a capital receipt not chargeable to tax. The learned Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's view invoking s. 28(iv) of the Income-tax Act. The assessee relied heavily on earlier Tribunal (Calcutta Benches) decisions in Balarampur Chini Mills Ltd. and Babhnan Sugar Mills Ltd., which held analogous incentives to be capital receipts. The present appellate bench considered the rival contentions and the authorities cited and rendered the decisions summarized below.
Legal Issues Presented
- Whether the incentive of Rs. 6,72,820 received by the assessee under the Sampat Committee scheme is a capital receipt (not taxable) or a revenue receipt taxable as business income.
- Whether the provisions of section 28(iv) of the Income-tax Act operate to tax capital receipts that arise in the course of business (i.e., whether capital receipts arising during business are nonetheless chargeable under s. 28(iv)).
- Whether the assessee is entitled to carry forward / claim investment allowance for relevant assessment years where reserves were not created in the years of installation or immediately succeeding year, in light of Subhalaxmi MEs Ltd. (SC) and subsequent CBDT guidance.
- Whether an addition of Rs. 93,26,845 should be made to the assessee's income on account of closing stock valuation adjustments carried out in the assessment year, given the effect of appellate orders in earlier years.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The incentive granted under the Sampat Committee scheme (higher free sale quota and excise duty rebate) was quantified by the assessee and credited to capital reserve and therefore constituted a capital receipt not chargeable to tax.
- The assessee relied on Tribunal Calcutta Bench decisions in Balarampur Chini Mills Ltd. and Babhnan Sugar Mills Ltd., where the Tribunals held that comparable incentives were capital receipts.
- On the applicability of s. 28(iv), the assessee relied on doctrinal exposition (Sampat Iyengar's treatise) and case law (including Lachit Film and CIT vs. Chetnaben B. Sheth) to submit that s. 28(iv) applies only where the receipt is "income" and is a product of the normal working of the business; not every receipt from business is taxable under s. 28(iv).
- The assessee relied on multiple decisions (Peermade Tea, Tirumala Bricks & Tiles, M. Sahahanan, Gogte Minerals, Ludhiana Steel, and others cited) as supporting the proposition that a subsidy/incentive of capital nature cannot be taxed as business income.
- On investment allowance, the assessee relied on CBDT Circular No. 572 (3 Aug 1990) issued after the Supreme Court decision in Subhalaxmi MEs Ltd. to show that reserves created in the year in which the deduction is to be allowed (and in earlier years) should be taken into account; thus the insistence on reserve creation only in installation years was incorrect.
- Regarding the closing stock adjustment, the assessee argued that the CIT(A)'s directions were given without affording an opportunity to the assessee to explain stock valuation and that the CIT(A) had only directed the AO to apply principles from the prior year and not made a final determination.
Departmental Representative's Arguments
- The scheme gave the assessee a larger volume of free sale sugar; the benefit therefore should be considered a revenue receipt.
- The AO relied on V.S.S.V. Meenakshi Achi vs. CIT (1966) and Motilal Chhadami Lal Jain vs. CIT (1991) to support the proposition that such incentives/benefits ought to be treated as income.
- With reference to Motilal Chhadami Lal Jain, it was argued that where an assessee was obliged to repay loans, the obligation to apply funds for repayment was effectively an application of income rather than a diversion prior to receipt — supporting the view that the benefit was to be treated in the income stream.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| V.S.S.V. Meenakshi Achi & Anr. vs. CIT (1966) 60 ITR 253 (SC) | Relied on by AO to treat a subsidy/incentive as revenue receipt. | The court noted this decision was considered by the Tribunal in Balarampur Chini Mills Ltd. and did not find it persuasive enough to overturn the Tribunal decisions holding the incentive to be capital in nature. |
| Balarampur Chini Mills Ltd. vs. ITO (ITA Nos. 2032 & 2033 (Cal) of 1988) (Tribunal) | Held that the incentive under the Sampat Committee scheme constituted a capital receipt and was not assessable as business income. | The bench regarded this Tribunal decision as directly on point and relied on it to conclude that the incentive in the present appeal is a capital receipt; this supported directing deletion of the amount from total income. |
| Babhnan Sugar Mills Ltd. (E-Bench, Calcutta) order dt. 5 Nov 1996 (ITA No. 711 (Cal) of 1996) (Tribunal) | Reiterated the Balarampur view that the incentive under the Sampat Committee scheme is a capital receipt. | The court treated this decision as corroborative of Balarampur and persuasive for deleting the impugned amount from the assessee's income. |
| Lachit Film vs. CIT (1992) 195 ITR 402 (Gau) | Cited for the proposition that for s. 28(iv) to apply, the receipt must signify "income" and be a product of the normal working of the business. | The court noted this principle (as relied on by the assessee) to counter the broad view that s. 28(iv) taxes capital receipts arising in business; it formed part of the authorities which refuted the CIT(A)'s position. |
| CIT vs. Chetnaben B. Sheth (1993) 110 CTR (Guj) 294 : (1993) 203 ITR 24 (Guj) | Authority for the proposition that not all money received from business is chargeable under s. 28(iv). | The court treated this decision as supporting the assessee's contention that s. 28(iv) does not automatically capture capital receipts merely because they arise in the course of business. |
| CIT vs. Peermade Tea Co. Ltd. (1995) 123 CTR (Ker) 554 : (1995) 213 ITR 116 (Ker) | One of several High Court/tribunal decisions cited to support that certain subsidies/incentives are capital in nature. | Included among the authorities relied upon by the assessee; the court regarded these authorities as collectively refuting the CIT(A)'s broad proposition on s. 28(iv). |
| CIT vs. Tirumala Bricks & Tiles Factory (1996) 131 CTR (AP) 211 : (1996) 217 ITR 547 (A-P) | Another authority cited in support of the assessee's position that some receipts are capital and not taxable as business income. | Counted among the authorities the court found persuasive in rejecting the CIT(A)'s broad characterization under s. 28(iv). |
| CIT vs. M. Sahalahan (1996) 135 CTR (Ker) 221 : (1996) 221 ITR 594 (Ker) | Authority cited to support the assessee's contention about characterisation of receipts. | Regarded by the court as part of the body of authorities undermining the generality of the CIT(A)'s position on s. 28(iv). |
| CIT vs. Gogte Minerals (1996) 136 CTR (Kar) 497 : (1996) 222 ITR 245 (Kar) | Another decision cited for the proposition that certain subsidies/incentives may be capital receipts. | The court treated it as supportive authority for the assessee's position. |
| Ludhiana Steel Ltd. vs. Dy. CIT (1996) 56 ITD 394 (Chd) | Tribunal decision cited in the catalogue of authorities supporting capital characterisation of certain receipts. | Considered among the authorities relied upon by the assessee and regarded as reinforcing the Tribunal line of decisions. |
| Motilal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SC) 195 : (1991) 190 ITR 1 (SC) | Relied on by the Department to argue that obligations to repay loans represent application of income and support treating the benefit as income. | The court examined this Supreme Court decision but concluded it was not of much assistance to the Department in the present facts, given the earlier Tribunal findings that the incentive was capital in nature. |
| Subhalaxmi MEs Ltd. vs. CIT (1989) 77 CTR (?) 31 : (1989) 177 ITR 193 (SC) | Supreme Court decision relied upon by the AO (and accepted by CIT(A)) to require reserves to be created in years of installation or immediately succeeding year for investment allowance claims. | While the AO/CIT(A) relied on Subhalaxmi to deny the investment allowance (for lack of reserve creation in the specified years), the bench noted subsequent CBDT Circular No. 572 (3 Aug 1990) and directed the AO to allow the investment allowance where reserves were created in the year of claim (subject to compliance with other conditions). |
Court's Reasoning and Analysis
The court considered the rival submissions and the records of the authorities below. Its analysis proceeded in the following steps (as reflected in the opinion):
- The court observed that the Tribunal (Calcutta Benches) in Balarampur Chini Mills Ltd. and Babhnan Sugar Mills Ltd. had carefully examined the Sampat Committee scheme and concluded that incentives of the kind in issue are capital receipts and therefore not chargeable to income-tax. Those Tribunal findings were regarded as directly on point.
- The court rejected the learned CIT(A)'s broad proposition that capital receipts arising to an assessee in the course of business would nonetheless be taxable under s. 28(iv). The court found that the various authorities cited by the assessee refute the broad contention that s. 28(iv) captures all such capital receipts.
- In relation to the Department's reliance on Meenakshi Achi (1966), the court noted that the Tribunal had already considered that authority in Balarampur and that it did not overturn the Tribunal conclusion. As to Motilal Chhadami Lal Jain (1991), the court noted the Department's emphasis on certain observations but concluded that, given the Tribunal findings that the incentive was capital in nature, that Supreme Court decision did not materially assist the Department's case.
- On the investment allowance issue, the court acknowledged the AO and CIT(A)'s reliance on Subhalaxmi (1989) but took into account the subsequent CBDT Circular No. 572 dated 3 August 1990. The court interpreted the circular as permitting reserves created in the year in which the deduction is to be allowed (and in earlier years) to be taken into account when assessing compliance with the reserve-creation condition. Consequently, the court directed the AO to allow the investment allowance claimed by the assessee for the year in question, subject to fulfillment of other conditions.
- Regarding the alleged addition of Rs. 93,26,845 relating to closing stock valuation, the court found procedural and factual inadequacies: the assessment order was made without giving effect to appellate orders in earlier years, and the CIT(A)'s directions appeared to be made on assumptions without affording the assessee an opportunity to explain stock valuation. Therefore, the court restored the issue to the AO to be decided afresh after considering the final positions in earlier assessment years and after giving the assessee reasonable opportunity to be heard.
Holding and Implications
Core Rulings:
- On Ground 2 (Incentive of Rs. 6,72,820): The court directed the deletion of Rs. 6,72,820 from the total income of the assessee, holding that the incentive in question is a capital receipt and not assessable as business income under the facts and authorities considered.
- On Ground 3 (Investment Allowance / Reserve Creation): The court directed the AO to allow the investment allowance claimed by the assessee for the relevant year on the basis of reserves created during that year (and taking into account earlier years as applicable), subject to fulfillment of other statutory conditions — having regard to CBDT Circular No. 572 issued after Subhalaxmi.
- On Ground 4 (Closing Stock Adjustment of Rs. 93,26,845): The court restored the question of closing stock valuation and any resultant adjustment to the AO for fresh decision, directing that the AO decide afresh after taking into account final positions emerging from earlier assessment years and after giving the assessee reasonable opportunities to be heard.
- Other Procedural Note: The first ground of appeal was general with no specific submissions. For statistical purposes the appeal is to be treated as allowed.
Implications:
The direct effects on the parties are: (a) deletion of the Rs. 6,72,820 from the assessee's total income; (b) allowance of the claimed investment allowance subject to conditions and verification by the AO; and (c) remand of the closing stock valuation issue to the AO for rehearing and fresh decision. The opinion relied on existing Tribunal decisions and statutory/circular guidance and did not purport to lay down a novel legal principle binding beyond its facts; it followed and applied prior authorities to the facts of this case. No wider new precedent was created by this order beyond its application of existing authorities and administrative guidance.
Statistical result: For statistical purposes the appeal is treated as allowed.
S. C. TIWARI, AM.
The first ground of appeal is general and no specific submission made in respect thereof during the hearing given by us.
2. The second ground of appeal is directed against the assessment of a sum of Rs. 6,72,820 as representing revenue income. The facts of the case in this respect are discussed at length in para 6 of the impugned order of the learned CIT(A). In brief, as a result of scheme framed by the Govt. of India on recommendation of an Export Committee headed by S.V. Sampat, the assesseecompany received incentive in the form of higher free sale quota and excise duty rebate. The assessee quantified this incentive and credited to capital reserve account and claimed that this amount being capital receipt in the hands of the assessee was not liable to tax. The AO held that this particular subsidy was in the nature of revenue receipt and relied on this behalf on the decision of Supreme Court in the case of V.S.S.V Meenakshi Achi & Anr. vs. CIT (1966) 60 ITR 253 (SQ) and some other High Court judgments. During the course of hearing before the learned CIT(A) the assessee submitted that these arguments of the AO are covered by the judgment of Tribunal "A-Bench", Calcutta in the case of Balarampur Chini Mills Ltd. vs. ITO in ITA Nos. 2032 and 2033 (Cal) of 1988. The Tribunal in that case after traversing various Court pronouncements came to the conclusion that the incentive received by the assessee was in the nature of capital receipt and, accordingly, the same could not be assessed as business income. The learned CIT(A), however, held that in the case of Balarampur Chini Mills Ltd. (supra), it was never argued that the case of the assessee fell under s. 28(iv) of the Act, which makes such income taxable. Decidedly the assessee had received a benefit arising from the business by way of free sale of entitlement of sugar at a certain percentage of recovery. In case any term loans were due to certain financial institutions, the assessee had to utilise the surplus fund generated on sale of incentive sugar, for payment of such outstanding loans. The learned CIT(A) opined that remission of liability was also a benefit which arose to the assessee from business. As the provisions of s. 28(iv) had not been argued before the Tribunal in the case of Balarampur Chini Mills Ltd. (supra), the learned CIT(A) held that there was no need to interfere in respect of assessment of this amount as business income by the AO.
3. During the course of hearing before us, the learned counsel for the assessee pointed out that the decision of Tribunal in the case of Balarampur Chini Mills Ltd. (supra) was reiterated by the Tribunal "E-Bench", Calcutta in the case of Babhnan Sugar Mills Ltd. order, dt. 5th Nov., 1996, in ITA No. 711 (Cal) of 1996. Thus, the finding of the AO that the incentive did not represent capital receipt in the hands of the assessee have to be rejected. The learned counsel pointed out that in both these cases, the Tribunal have considered at length the scheme framed by the Government of India on the recommendation of Sampat Committee and the facts of the case of the assessee are pari materia with those cases.
4. Regarding the argument of the learned CIT(A) pertaining to the provisions of s. 28(iv) of the Act, the learned counsel of the assessee pointed out that these provisions have been considered in scholarly treatise of Sampat Iyengar's "Law of Income-tax" 9th Edn., p. 482. The learned author referred to the judgment in the case of Lachit Film vs. CIT (1992) 195 ITR 402 (Gau) and held that for applicability of provisions of s. 28(iv) the receipt should signify "Income" and should be a product of the normal working of the business. The learned counsel also relied on the judgment in the case of CIT vs. Chetnaben B. Sheth (1993) 110 CTR (Guj) 294 : (1993) 203 ITR 24 (Guj) to the effect that all money received from business is not chargeable under s. 28(iv). Reference was also made to the decisions in CIT vs. Peermade Tea Co. Ltd. (1995) 123 CTR (Ker) 554 : (1995) 213 ITR 116 (Ker), CIT vs. Tirumala Bricks & Tiles Factory (1996) 131 CTR (AP) 211 : (1996) 217 1TR 547 (A-P), CIT vs. M Sahalahan (1996) 135 CTR (Ker) 221 1. (1996) 221 1TR 594 (Ker), CIT vs. Gogte Minerals (1996) 136 CTR (Kar) 497: (1996) 222 1TR 245 (Kar) and Ludhiana Steel Ltd. vs. Dy. CIT (1996) 56 ITD 394 (Chd) and argued that subsidy received which is in the nature of capital receipt in the hands of the recipient cannot be subjected to tax as business income.
5. The learned Departmental Representative argued that the effect of this Scheme was that the 4ssessee had larger volume of free sale sugar available with it. Hence, the receipt should be considered to be revenue receipt. He also placed reliance on the decisions in (1966) 60 ITR 253 (SQ) (supra) and Motilal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SQ) 195: (1991) 190 ITR 1 (SQ).
6. We have carefully considered the rival submissions and perused the orders of the authorities below. The Tribunal Calcutta Benches have in the cases of Balarampur Chini Mills Ltd. (supra) and Babhnan Sugar Mills Ltd. (supra), held that the incentive as received by the assessee in the present appeal, constitutes capital receipt in the hands of the assessee and is, therefore, not chargeable to income-tax. The learned CIT(A) has in the impugned order relied upon the provisions of s. 28(iv) of the Act. We are unable to accept the broad proposition canvassed by the learned CIT(A) that the capital receipts arising to an assessee during the course of business would nonetheless be liable to tax under the provisions of s. 28(iv) of the Act. Various authorities cited by the learned counsel of the assessee clearly refute this line of argument.
7. Learned Departmental Representative has relied upon the decisions in (1966) 60 ITR 253 (SQ) (supra) and (1991) 94 CTR (SQ) 195 : (1991) 190 1TR 1 (SQ) (supra). As far as the first case is concerned i.e. Meenakshi Achi vs. CIT (supra) the same has been duly considered by the Tribunal in the case of Balarampur Chini Mills Ltd. (supra). Coming now to the judgment of HonIle Supreme Court in the case of Moti La] Chhadanii Lal Jain vs. CIT (supra), the learned Departmental Representative has emphasised the observations at p. 10 of this judgment and argued that the obligation of the assessee to repay the loans taken from the financial institutes was obligation to apply out of his income and not before it reached the assessee. It was, therefore, not the case of diversion of income but of application of income. It is seen that in the orders of Calcutta Benches of Tribunal in the cases Balarampur Chini Mills Ltd. (supra) and Babhnan Sugar Mills Ltd. (supra) it has been held that the incentive income arising to the assessee was the receipt of capital nature. We, therefore, do not find that this judgment of HonIle Supreme Court in (1991) 94 CTR (SQ) 195 : (1991) 190 ITR 1 (SQ) (supra) is of much assistance to the case of the Department.
8. In view of the discussion in the foregoing paragraphs and relying on the earlier orders of the Tribunal on this point as referred to by us in the earlier part of this order, we direct the deletion of this sum of Rs. 6,72,820 from the total income of the assessee.
9. The third ground of appeal is directed against the authorities below not allowing the assessee carry forward of investment allowance. This aspect has been discussed in the impugned order by the learned CIT(A) in para 9. The facts briefly are that the assessee claimed deduction of investment allowance pertaining to the asst. yrs. 1989-9d and 1990-91 on the ground that investment allowance reserve was created by the assessee during the previous year under assessment. The AO rejected the claim of the assessee relying on the judgment of Hon'ble Supreme Court in the case of Subhalaxn2i A1111S Ltd. vs. CIT (1989) 77 CTR (S0 31 : (1989) 177 ITR 193 (SC) and held that it was obligatory on the assessee to create the reserve in the years of installation of plant or machinery or in the immediately succeeding year when the plant and machinery was first put to use even if there was no profits in those years. The learned CIT(A) held that unless reserves were created the claim of the assessee was not allowable and, therefore, no interference was called for on this point in the assessment order.
CTR (S0 31 : (1989) 177 ITR 193 (SC) and held that it was obligatory on the assessee to create the reserve in the years of installation of plant or machinery or in the immediately succeeding year when the plant and machinery was first put to use even if there was no profits in those years. The learned CIT(A) held that unless reserves were created the claim of the assessee was not allowable and, therefore, no interference was called for on this point in the assessment order.
10. During the course of hearing before us, the learned counsel of the assessee placed reliance on CBDT's Circular No. 572, dt. 3rd Aug., 1990. This circular has been issued by the CBDT in the wake of Supreme Court judgment in the case of Subhalaxmi MEs Ltd. vs. CIT (supra) and amendment of the provisions of s. 32A and 34 thereafter. Hence, in considering whether the conditions regarding creation of reserve is fulfilled or not, the reserve created in the year in which the deduction is to be allowed and in earlier year, will be taken into account. In view of this, the insistence of the authorities below that the assessee should have created investment allowance reserve in the years of installation of plant and machinery even when profits were insufficient in those years is not correct. We, therefore, direct the AO to allow the assessee investment allowance claimed by the assessee during this year on the basis of reserve created during this year subject to fulfilment of other conditions.
11. Ground of appeal No. 4 is directed against the directions of the learned CIT(A) that an addition of Rs. 93,26,845 should be made to the income of the assessee. The learned CIT(A) has considered this matter in para 11 of the impugned order. According to the learned CIT(A) the AO has allowed the assessee deduction of this amount on account of addition made by him to the value of closing stock in the asst. yr. 1990-91. Since on appeal the learned CIT(A) for the asst. yr. 1990-91 had decided the matter in favour of the assessee, the adjustment made by the AO during this year to the extent of Rs. 93,26,845 was required to be withdrawn.
12. During the course of hearing before us, the learned counsel of the assessee argued that in the asst. yr. 1990-91 the learned CIT(A) had only directed the AO to decide the closing stock valuation on the basis of the directions for the asst. yr. 1989-90. The learned counsel of the assessee also argued that the directions in the impugned order have been given by the learned CIT(A) without giving any opportunity to the assessee to explain the issue regarding stock valuation.
13. On consideration of the matter, we find that the assessment order was made when the effect to the appellate orders of the earlier assessment years had not been given. The learned CIT(A) has also given his directions merely on the assumption that the AO had wrongly allowed the assessee a deduction of Rs. 93,26,845 based on earlier years. In these circumstances we are of the view that the question regarding the valuation of closing stock is required to be looked into once again after taking into consideration the final position as emerging in the earlier assessment years and after taking into consideration the submissions of the assessee in respect of facts of his case. We, therefore, restore the question of valuation of closing stock and the adjustment to be made in computation of total income in respect thereof, if any, to the file of the AO to be decided afresh after allowing the assessee reasonable opportunities of being heard in the matter.
14. For statistical purposes, this appeal shall be treated as allowed.
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