Andhra HC (Pre-Telangana)
Commissioner Of Income Tax vs Tirumala Bricks & Tiles Factory on 3 July, 1995
Equivalent citations: [1996]217ITR547(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. At the instance of the Revenue, the following question is referred to this Court for opinion under s. 256(1) of the IT Act, 1961 : "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. 9th March, 1976, is not a trading receipt ?"
2. It would be necessary to note the facts giving rise to the question.
3. In the accounting year relevant to the asst. yr. 1980-81, the assessee received subsidy in a sum of Rs. 66,475 called investment subsidy. The ITO treated the subsidy as an addition to the net profits earned by the assessee and assessed the same accordingly. On appeal, the CIT confirmed the order of the ITO relying upon the judgment of this Court in CIT vs. Sahney Steel & Press Works Ltd. . The assessee went in appeal before the 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. On these facts, the above stated question is referred to this Court for opinion.
4. Learned standing counsel for income-tax submits that when subsidy was granted by the Government pursuant to G. O. Ms. No. 1225, dt. 31st Dec., 1968, and G. O. Ms. No. 455, dt. 3rd May, 1971, 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; 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 Govt. 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. 31st Dec., 1968, and G. O. Ms. No. 455, dt. 3rd May, 1971, 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. 9th March, 1976, 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, entrepreneurs setting up new industrial units and/or effecting substantial expansion of the existing units will be eligible for investment subsidy on the fixed capital cost at 10 per cent 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 Govt. (vide annexure I) and excluding those covered by the Central Subsidy Scheme or the list of Scheduled (Tribal) Areas."
From a perusal of the extract of the scheme, it is clear that the incentive was granted for the purpose of setting up new industrial units and/or effecting substantial expansion of existing units. The quantum of subsidy offered was 10 per cent 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.
7. However, 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 disbursement 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."
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.
8. We shall refer to the judgment of this Court in CIT vs. Godavari Plywoods Ltd. relied upon by 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 entrepreneur 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 depreciation was to be granted.
Now, reverting to CIT vs. Sahney Steel & Press Works Ltd. (supra) wherein the Tribunal recorded a finding that the nature of the receipt by way of subsidy under the said earlier G. O. Ms. No. 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. No. 224, it cannot be said, in this case, that the receipt here is not a capital receipt. On interpretation of the G. Os. 1225 and 455, in Sahmey's case (supra), 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 a 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 the receipt is a capital receipt. There are observations by the Division Bench in Sahney Steel's case (supra) to the effect that the payment of the amount given as incentive under the earlier Govt. Orders (G. O. Ms. No. 1225 and G. O. Ms. No. 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.
9. 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.