Income-tax Reference No. 657 of 1979

Decided on January 20, 1982 and January 21, 1982

The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this reference under s. 256 (1) of the I.T Act, 1961, we are concerned with two years, viz., assessment years 1967-68 and 1968-69. For the assessment year 1967-68 the following two questions, apart from one question for both these years to which we shall refer, have been referred to us:

“1. Whether, on the proper interpretation of entry (2) of the Fifth Schedule to the Income-tax Act, 1961, the Tribunal was right in holding that the expression ‘aluminium’ occurring therein denoted merely the ‘aluminium metal and not aluminium articles?

2. Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 80E read with entry (2) of the Fifth Schedule to the Income-tax Act, 1961, the Tribunal was justified in holding that the business of manufacture and sale of aluminium articles could not be considered as priority industry within the meaning of the said provision of the said Act and that the assessee-company was not entitled to relief under section 80E of the said Act?”

2. For the assessment year 1968-69 also, the following two questions have been referred to us:

“1. Whether, on the proper interpretation of entry (2) of the Fifth Schedule to the Income-tax Act, 1961, the Tribunal was right in holding that the expression ‘Aluminium’ occurring therein denoted merely the aluminium metal and not aluminium articles?

2. Whether, on the facts and in the circumstances of the case, and on a proper interpretation of section 80B(7) read with entry (2) of the Fifth Schedule to the Income-tax Act, 1961, the Tribunal was justified in holding that the business of manufacture and sale of aluminium articles could not be considered as priority industry within the meaning of the said provision of the said Act and that the assessee-company was not entitled to relief under section 80-I of the said Act?”

3. So far as the first two questions for the assessment year 1967-68 as mentioned in para. 11 of the statement of the cases are concerned, these must be answered in the affirmative and in favour of the Revenue in view of the decision of this court in the case of the same assessee, being Income-tax Reference No. 78 of 1976 (Jeewanlal (1929) Ltd. v. CIT) judgment delivered on 9th March, 1978 (see Appendix at p. 460 infra)). So far as the first two questions for the assessment year 1968-69 are concerned these two questions must also be answered by the aforesaid judgment referred to hereinbefore in the affirmative and in favour of the Revenue.

4. It appears in respect of both these questions for both the years, on an oral application made before this court, in respect of the judgment in I.T.R No. 78 of 1976 (see Appendix at p. 460 infra) just referred to hereinbefore, this court has granted a certificate for leave to appeal to the Supreme Court. Accordingly, on the oral application made on behalf of the assessee, in this case also we certify that the present case involves important questions which require to be decided by the Supreme Court. We, accordingly, grant a certificate under s. 261 of the I.T Act, 1961. Let a separate certificate be issued and the records be transferred to the Supreme Court as expeditiously as possible. Let this order be drawn up expeditiously.

5. The next question that falls for consideration, which is common to both these years, is as follows;

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the cash assistance of Rs. 1,50,044 and Rs. 2,38,944 received from the Government for the assessment years 1967s 68 and 1968-69, respectively, constituted revenue receipt and not capital receipt?”

6. In order to appreciate this question, we will have to refer to certain facts which have been set out in the statement of case as also in the order of the Appellate Tribunal. The assessee-company carries on the business of manufacture and sale of aluminium utensils and articles. It also exports such products. Its sales turnover was Rs. 2.93 crores for the year 1966 relevant to the assessment year 1967-68 and Rs. 3.14 crores for the year 1967 relevant to the assessment year 1968-69. It received cash assistance from the Govt. of India on exports to the tune of Rs. 1,50,044 for 1966 and Rs. 2,38,944 for 1967 at the rate of 10 per cent. of the F.O.B value of the exports of specified engineering products. The value of such products had thus worked out to Rs. 15 lakhs from 6th June, 1966, to 31st December, 1966, and Rs. 23.86 lakhs for the year 1967. The Govt. of India by a communication, on the subject No. 1(51)/66-EAC dated 17th August, 1966, issued by the Ministry of Commerce to the Engineering Export Promotion Council, stated that the Government has decided to grant cash assistance against exports effected from 6th June, 1966, of specified engineering products, as per list, such cash assistance, at that time, was fixed at 10 per cent. of F.O.B value of export. It would be relevant to refer to that letter because that letter has been referred to subsequently by one Member of the Tribunal, which appears at p. 243 of the paper book as follows:

“Circular No. EPC/REC/34/66-67August 24, 1966.

To All Members of the Council.

To All Registered Exporters in Eastern Region.

To All Regional Officers, Delhi/Bombay/Madras.

As members are aware, the Special Export Promotion Scheme for engineering goods was abolished by the Government with effect from 6th June, 1966. The Government have since announced the new scheme under which exporters will get cash assistance against exports effected from 6th June, 1966. In addition, exporters would also be eligible for replenishment of the imported materials to the extent of single import content. A list of products against which cash assistance and import licences would be available is annexed for your information.

The detailed procedure to be followed for applying for cash assistance and the licences under the new scheme will be communicated shortly.”

7. Thereafter, a number of items in respect of which such assistance was given has been mentioned in the said circular. It is not necessary, however, for us to set out in detail those items. The assessee-company originally included the amount of cash assistance for exports in its taxable income. In its revised return, however, the assessee-company claimed that cash assistance on export was not liable to tax being a casual and non-recurring receipt and being capital receipts. The assessee-company had claimed that the cash assistance was bounty and was benevolent and it was given by the Govt. of India for the national purpose of earning substantially the much needed foreign exchange. It was claimed that cash assistance was not granted with the object of enabling the company to carry on export business or to cover losses arising out of export business. The ITO held that the cash assistance received was incidental to the business and was of a revenue nature and, therefore, taxable.

8. There was an appeal before the AAC and before him a copy of the circular issued by the Commerce Ministry to the (Engineering Export Promotion Council was produced. The AAC held that it was quite clear that the assessee-company received cash assistance from the Government against exports effected and it was correlated to the exports effected and it was in the nature of subsidy and the same constituted revenue receipt.

9. The assessee went up in appeal before the Tribunal. Large number of authorities were cited. The Judicial Member of the Tribunal was, inter alia, of the view that if cash was given to a trader with the object wholly unconnected with the business of the trader then such cash assistance could not be regarded as trading receipt and he took the view that this cash assistance in question in the instant case, was of such a nature. He further observed that the cash assistance was given in the larger interests of the country to boost up exports and earning more foreign exchange for the nation and that was wholly unconnected with the business of the assessee-company. He, therefore, observed that the assessee-company incidentally benefited thereby but the benefit was wholly independent of the assessee's business. He, however, held that the exporter could get benefit whether he carried on any business or not. According to the Judicial Member the cash assistance on exports received by the assessee-company from the Government did not constitute trading receipt. The Accountant Member, however, could not agree with this view. According to him, the scheme of cash assistance was promulgated by the Government for the mutual benefit of both the exporter and the Government and such cash assistance was inextricably linked up with the assessee's carrying on of its export business. He held, by implication, that such cash assistance was given by the Government to assist the trader in his business and such receipts were therefore supplemental trading receipts. According to him, such cash assistance went to swell the export receipts of the assessee-company and it was not rendered to him for any specific purpose unconnected with his carrying on the business. Therefore, the Accountant Member took the view that the assessee-company received such incentives by way of cash assistance from the Government for rendering services to the Government for an augmentation of the Government's foreign exchange resources by exporting more of certain products listed by the Government. According to him, the primary purpose of the scheme was to render assistance to specified export industry and in the course thereof the Government was incidentally benefited. The Accountant Member accordingly held that the amount received was a revenue receipt.

10. The two Members having differed, the point was referred to the third Member, the vice President of the Tribunal under s. 255(4) of the I.T Act, 1961. The following question was referred to him:

“Whether, on the facts and in the circumstances of the case, the cash assistance received from the Government constituted a revenue receipt or a capital receipt for the assessment years 1967-68 and 1968-69?”

11. After hearing both sides, the learned vice President passed the order dated 19th May, 1978, and agreed with the conclusion arrived at by the Accountant Member. He took into consideration the circular issued by Government as well as the communication dated 11th May, 1978, written by the Engineering Export Promotion Council to the authorised representative of the Revenue. The said letter was as follows:

“Office of the Authorised Representative,

Income Tax Appellate Tribunal,

Calcutta.

225-C, Acharya Jagadish Bose Road, Calcutta-20.

Dear Sirs:

Sub : Cash Assistance.

With reference to your letter No. 278/78-79 dated 5th May, 1978, and discussion with your inspector, Shri A.C Nath, we are sending herewith a copy of Government letter dated 17th August, 1966.

We would confirm that after devaluation of the rupee, which took place on 6th June, 1966, Government announced cash assistance scheme for compensation loss to the exporters for exports of engineering goods from the country in the above letter. This scheme was announced for the first time and it was not in replacement of any existing scheme in operation.”

12. A point was sought to be urged on behalf of the assessee that the matter was originally heard by two Members of the Tribunal in or about October, 1975, and then the specified question had been referred to a third Member, which we have set out hereinbefore and, long after that hearing, just a few days after the letter aforesaid, the order of the third Member was passed on the 19th May, 1978. But it appears that the 11th May, 1978 letter, which was filed before the same date of the letter written by the Export Promotion Council. It was sought to be urged that in considering the additional facts or the said letter, the third Member had committed an error because his jurisdiction was limited and it was improper to say that the decision of the third Member, which was rendered after consideration of additional facts which the other two Members of the Tribunal had no occasion to consider, the decision of the Tribunal was u/s. 255(4) of the Act. This question has not been specifically referred to us but it was submitted that this matter was embedded in the question already referred to us. This might or might not have some consequence which it is not necessary to consider in this case. But it appears that subsequently when the letter dated 11th May, 1978, was produced before the third Member, neither party objected and that is so recorded in the order dated 19th May, 1978. Therefore, the assessee cannot now object to such a procedure. Quite apart from that it appears that the said letter only referred to the previous letter which is dated 17th August, 1976, which we have set out hereinbefore, written by the Government to the Export Promotion Council and that letter was considered originally by the other two Members of the Tribunal. It, therefore, appears that really this view or conclusion of the learned third Member was taken not on any new facts. So, we need not detain ourselves to consider whether the decision of the third Member was the decision of the Tribunal in the facts and circumstances of the case.

13. There is also another aspect to which reference was made on behalf of the Revenue for considering the nature of the assistance. It was submitted that we should take into cognizance whether the assessee had treated this amount as the business income or not. In this connection reference was made to the report of the board of directors mentioned in para. 5 of the annual report for the year 1966 which is set out in the order of the Tribunal. In that report, it was, inter alia, stated as follows:

“5. Consequent upon devaluation of the rupee and withdrawal of the Special Export Promotion Scheme, the Government of India introduced the cash assistance scheme for exporters to meet their losses. Under the said scheme the company received cash assistance for exports effected by it from June 6, 1966, to December 31, 1966

(underlined* by us).”

14. The aforesaid view was also reiterated in the subsequent order. It is true that how the recipient has treated the amount, may be relevant piece of evidence. It is true. But as to how a party had treated the amount was not determinative to ascertain the character of a particular sum. It must be determined by the true character on legal principle and not merely, by the conduct of the party, in whichever way the party might have treated the sum. Therefore, it was submitted, whether the sum was given as cash assistance to the exporter to meet their losses or whether it was given to promote the export industries or not, must be determined on the general nature because one assessee might have treated it as a compensation for losses suffered and another might have treated it differently. We are inclined to accept this contention of the assessee that, it must be determined on the true basis and character of the cash assistance and the true nature of the receipt. It is, therefore, necessary for us to determine what is the true character of the receipt. On a consideration of all the facts it should be determined whether the cash assistance received was revenue receipt or not. A large number of authorities were cited before us on this aspect of the matter.’

15. We may first, however, refer to the decision of the Supreme Court in the case of Shri Ambica Mills Ltd. v. Textile Labour Association, (1973) 3 SCC 787 : AIR 1973 SC 1081; [1973] 43 FJR 150. That was a decision, however, under the Payment of Bonus Act and the question was whether a subsidy shall be taken into consideration for the purposes of the Act. The Supreme Court further observed that subsidy did hot cover indirect assistance but would only include direct cash payments. It is instructive how the expression “subsidy” has been defined in the dictonary. The Supreme Court referred to that fact at p. 1083 of the report as follows (see also p. 153 of 43 FJR):

“We find ourselves in agreement with this view. The various definitions given in the dictionaries, in so far as they are relevant, are as follows:

Webster's New World Dictionary, 1962:—‘…….a grant of money, specifically (a) … (b) a government grant to a private enterprise considered of benefit to the public.’

Shorter Oxford English Dictionary:— ‘Help, aid, assistance ……Financial aid furnished by a state or a public corporation in furthering of an undertaking or the upkeep of a thing……’

Chamber's Twentieth Century Dictionary, Revised Edn.:— ‘assistance, aid in money……a grant of public money in aid of some enterprise, industry, etc., or to keep down the price of a commodity…….’

The Reader's Digest Great Encyclopaedic Dictionary. Vol. II (M-Z):— 2. Financial aid given by government towards expenses of an under taking or institution held to be of public utility, money paid by govern ment to producers of a commodity so that it can be sold to consumers at a low price……’

In addition our attention has been drawn to the definition given in “Words and Phrases, Permanent Edition, Vol. 40” where subsidy is described as follows:

‘A subsidy is a grant of funds or property from a government, as of the state or municipal corporation to a private person or company to assist the establishment or support of an enterprise deemed advantageous to the public; a subvention.’ Reference is made to 60 Corpus Juris. Corpus Juris Secundum, Vol. 83, page 760, gives the following under the heading of subsidy:

‘Something, usually money, donated or given or appropriated by the government through its proper agencies, a grant of funds or property from a government, as of the state or a municipal corporation, to a private person or company to assist in the establishment or support of an enterprise deemed advantageous to the public; a subvention.

Pecuniary premiums offered by the government to persons enlisting in the public service, or engaging in particular industries, or performing specified services for the public benefit are treated in Bounties.’”

16. The Supreme Court Court noted that the emphasis in every one of these definitions was on something given or donated; indirect assistance was not mentioned. However, in view of the specific provision of the items which would go to the computation of payment of bonus, the Supreme Court did not accept the view that the grant of a subsidy would include computation of profit out of which bonus was liable to be paid to the workers. But it may be instructive in order to determine the true character of the sums received in this case to refer to the observations of the Supreme Court. There, at p. 1086, the Supreme Court observed as follows (p. 157 of 43 FJR):

“The mere fact that the Government is interested in encouraging exports and, therefore, offers many incentives for export, of which any manufacturer could take advantage, does not mean that any such manufacturer is rendering any service to Government. These are schemes intended by the Government for the benefit of the country and, therefore, any person would be entitled to take advantage of that scheme and be entitled to subsidy or assistance promised by the Government. Such payments do not become either payments for service rendered or cease to be subsidy merely on the ground that any number of persons coming under that category would be entitled to that benefit or payment.”

17. On behalf of the assessee our attention was drawn to the circular on the taxability of subsidy. There the CBDT had issued a circular being Circular No. 142 dated August 1, 1974 : “10 per cent. Central outright grant of subsidy scheme, 1971”. Our attention was drawn to the circular in order to submit that the Government had not treated this amount as amount of revenue payments. Such circular appears at p. 151 of the statute portion reported in [1974] 95 ITR. It would be instructive in this connection to refer to the observations of Viscount Simon which have been referred to in the several other decisions in the case of Pontypridd and Rhondda Joint Water Board v. Ostime (H.M Inspector of Taxes), [1946] 14 ITR (Suppl.) 45 (HL). There, Viscount Simon observed in this connection as follows (p. 47):

“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 (Lincolnshire Sugar Co. v. Smart, [1937] 20 TC 643 (HL)) 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 Inland Revenue Commissioners v. Forth Conservance Board, [1931] 16 TC 103 (HL), and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills, [1932] 16 TC 430 (HL).”

18. The first proposition which Viscount Simon referred, as would be apparent from the observation of the aforesaid, was that except for certain exceptional payments, 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 were trading receipts. Reliance was placed on the observations of Lord Buckmaster in the case of Seaham Harbour Dock Co. v. Crook (H.M Inspector of Taxes), [1931] 16 TC 333 at p. 352 (HL). There, a dock company contemplating an extension of its dock applied to the Unemployment Grants Committee for financial assistance. The committee consented to sanction grants from time to time, as the work progressed and was paid for, equivalent to half the interest for two years (not exceeding an average rate of 5½ per cent. per annum) on approved expenditure met out of loans. Payments were made on this basis several times a year for some years. Assessments to income-tax were made on the company upon the footing that these payments were a part of its annual profits or gains. It was held that the payments were not annual profits or gains liable to income-tax. Lord Buckmaster observed at p. 353 of the report as follows:

“Now I do not myself think that the matter can be put more succinctly than it was put by Mr. Hills when he said : “Was this a trade receipt?” and my answer is most unhesitatingly: No. It appears to me that it was nothing whatever of the kind. It was a grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paid to and received by the dock company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. I find myself quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade receipt. It appears to me to have been simply a grant made by the Government for the purposes which I have mentioned, and in those circumstances cannot be included in revenue for the purposes of tax.”

19. It was submitted on behalf of the assessee that the dominant purpose in the instant case for grant of the amounts was promotion of exports. It was irrespective of the profit or loss and it was not made by the Government in order to meet any trading obligation. These questions, not the question of cash assistance but in respect of import entitlements as well as the question of cash subsidy, have been considered by different courts in several decisions and our attention was drawn to some of these cases. It appears to us that what is decisive in these matters is the nature of the business, the nature of the income and the nature of the right to receive and also the relation inter se, that is the key to resolve the issue in the light of the general principles which are to be followed in such cases. In this connection we may refer to the observations made by us in Income-tax Reference No. 4 of 1977 (Jeewanlal (1929) Ltd. v. CIT, judgment delivered on March 2, 1981— [1983] 139 ITR 865). If on an examination of the nature of the receipts of the amounts it is found that these amounts were supplemental trading receipts or were connected with the business, even though they did not arise actually from any positive operation of the traders, then, in our opinion, it should legitimately be considered to be business receipts. In this case the Government announced cash assistance for encouraging exports; but it was only the exporters, who did, in fact, export, got the assistance. It was by the exportation or making favourable exports that the assessee received those amounts. This, in our opinion, is the true nature of the assistance. If that is the postion then it is incidental to and supplemental to the trading receipts and should, therefore, be considered to be revenue receipts. These principles, as we have mentioned before, have been considered by the different authorities. We may incidentally note some of the decisions. Our attention was drawn to the decision in the case of Dhrangadhra Chemical Works Ltd. v. CIT, [1977] 106 ITR 473 at p. 480 (Bom); in the case of CIT v. Wheel & Rim Co. of India Ltd., [1977] 107 ITR 168 at p. 172 (Mad); the decision of the Allahabad High Court in the case of H.R Sugar Factory (P.) Ltd. v. CIT, [1970] 77 ITR 614 (All); a decision of this court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT, [1978] 115 ITR 143; decision in the case of Bengal Textiles Association v. CIT, [1960] 39 ITR 723 (SC), and the decision in the case of V.S.S.V Meenakshi Achi v. Commissioner Of Income Tax, Madras, [1966] 60 ITR 253 at p. 260 (SC). In the view we have taken about the nature of the receipts in the instant case, that is to say, by exportation, the assessee got the assistance from the Government for the purpose of encouraging export market, that may be the motive of the Government, it is connected inextricably with the act of exportation and, therefore, supplemental to the earnings by exportation. Our attention was also drawn to the unreported judgment of this court in Income-tax Reference No. 4 of 1977 (Jeewanlal (1929) Ltd. v. CIT, judgment delivered on March 2, 1981—since reported in [1983] 139 ITR 865). There, however, we were concerned with the provisions of the Special Export Promotion Scheme and not of cash assistance as such. But we have referred to the principles enunciated in the said judgment.

20. In the view we have taken, we are, therefore, of the opinion that the majority of the members of the Tribunal arrived at the correct conclusion and the question must, therefore, be answered in the affirmative and in favour of the Revenue. In the facts and circumstances of the case, parties will pay and bear their own costs.

Suhas Chandra Sen, J.:— I agree.