Kerala High Court
Commissioner Of Income-Tax vs Kerala Land Development Corporation ... on 25 July, 1997
Equivalent citations: [1998]232ITR575(KER)
Author: G. Sivarajan
Bench: G. Sivarajan
JUDGMENT K.K. Usha, J.
1. These reference applications under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue arise from a common order of the Income-tax Appellate Tribunal, Cochin Bench, dated May 29, 1992, in I. T. A. Nos. 922, 923 and 924/Coch of 1986. The relevant assessment years are 1980-81, 1981-82 and 1983-84. The following are the questions raised for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case and also considering the decision in Kesaria Tea Co. Ltd. v. CIT [1989] 180 ITR 134 the subsidy received by the assessee is not assessable under the Income-tax Act ?
2. Whether, on the facts and in the circumstances of the case and also considering the objects of the assessee-company the terms of relevant draft schemes, with or without modification, the Tribunal is right in law and fact in holding--
(i) 'the cost of work was not to include charges for establishment and supervision' ;
(ii) 'these expenses have to be borne by the assessee' ;
(iii) 'there was always a deficit in the revenue account' ;
(iv) 'it was for this reason that the Government had agreed to pay to the assessee the subsidy' ;
(v) 'it does not spring from any activity carried on by the assessee';
(vi) 'the amount so received would not partake of the character of a revenue receipt' ;
(vii) 'without grants from the Government there would be no possibility of the assessee carrying on its activity for long' ;
(viii) 'the contribution made by the Government therefore were to augment the capital of the assessee . . .' ;
(ix) 'this is not a trading receipt .... it was not received . . in the character of a trader' ;
(x) 'it is for that reason the subsidy is granted by the Government' and are not the above findings wrong, unreasonable and inconsistent with the draft schemes and the object of the assessee-company ?"
2. The relevant facts are as follows ; The assessee, the Kerala Land Development Corporation Ltd., is a Government company registered under the Companies Act, 1956. Under the provisions of the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974, the assessee-Corporation has been vested with certain powers to facilitate the execution of land development schemes in the State of Kerala. Section 3 directs the assessee to prepare a draft scheme, if it is of opinion that it is expedient and in the public interest to execute a scheme in any area. After the preparation of the scheme, it would be enquired into and objections would be invited from the general public. Ultimately, if it is decided to execute the same, the Corporation shall submit the same to the Government for appropriate orders. The scheme would be then published for information of the general public. Thereafter, it is the duty of the Corporation to get the work executed. Section 10 provides that every owner of the land included in the scheme shall pay the cost or part of the cost, as the case may be, of the work which under the scheme, is carried out by the Corporation and has benefited his land. There is a liability to pay contribution by persons other than the owners of the land included in the scheme, if they are also benefited by such work. The persons who are thus liable to pay contribution towards cost, have an obligation to pay interest also. But there is no provision under the Act which would enable the Corporation to receive contribution by the beneficiaries towards cost of overhead charges expended by the Corporation. As a result, the assessee-Corporation was always on a deficit in the revenue account and the Government had agreed to pay the assessee a subsidy to set off the deficit. The Income-tax Officer treated the amount received as subsidy from the Government as a revenue receipt and it was brought to tax.
3. Aggrieved by the assessment orders as above, the assessee filed appeals before the Commissioner of Income-tax (Appeals) who upheld the contention of the assessee that the subsidy received could not be treated as an income. The matter was taken up in appeal by the Revenue before the Tribunal, which did not accept the contention of the Revenue that subsidy received by the assessee from the Government to meet the revenue expenditure is an income liable to be taxed. Dismissing the appeals, the Tribunal held that the receipt was in the nature of a capital receipt and would not partake of the character of a revenue receipt. The above finding is under attack in these tax reference cases at the instance of the Revenue.
4. Before we go into the issue raised in these cases, we will first examine the nature of the duties cast on the assessee-Corporation by the statute, its activities and its right to get subsidy from the State Government. The Kerala Land Development Corporation Limited (Special Powers) Act, 1974, invests the assessee-Corporation with certain powers to facilitate execution of land development schemes in the State of Kerala. The Act came into force with effect from November 21, 1973. Section 3 of the above statute provides that whenever the Corporation is of opinion that it is expedient and in public interest to execute a scheme in any area, it may prepare a draft scheme containing necessary particulars as provided under the Act. The scheme may relate to control and prevention of soil erosion, preservation and improvement of soil, reclamation of waste, saline or water-logged areas etc. The scheme will be published inviting objections from the public and an enquiry officer appointed by the Corporation or the Government would enquire into the objections received. He would submit those objections to the Corporation together with his report thereon and his recommendations, if any, for the modification of the draft scheme. After considering the objections and report, etc., the Corporation may either decide to execute the same with or without modification or abandon the scheme. The Government has the power to sanction the draft scheme with or without modification or reject the same. The scheme thus finally decided to be executed will be published and thereafter, the Corporation would go ahead with the work either directly or through the owner of the land on which the work is to be executed or through a committee constituted under the Kerala Land Development Act, 1964, or through any other person. Section 10 provides that every owner of the land included in the scheme shall pay the cost or part of the cost, as the case may be, of the work which, under the scheme, is carried out by the Corporation and has benefited his land. Persons other than the owners of the land who are benefited by the scheme have also to make payment to the Corporation by way of contribution. Provision is made for interest under Section 11 on such cost, part of the cost, contribution or expenses, as the case may be, at such rate and with effect from such date as may be prescribed. The provisions contained under the Kerala Land Development Corporation Limited (Special Powers) Rules, 1976, issued by the Government of Kerala in exercise of the powers conferred by Sub-section (1) of Section 25 of the Kerala Land Development Corporation Limited (Special Powers) Act, 1974, would show that in computing the contribution as provided under Section 10 of the Act, establishment charges and supervision charges of the Corporation shall not be taken into consideration. There is no provision under the Act or the Rules regarding payment of subsidy by the Government. Since the establishment charges and supervision charges were to be borne by the Corporation itself, it always had a deficit in the revenue account. The Government, therefore, agreed to pay to the Corporation a subsidy which may or may not be equal to the amount which the asses-see-Corporation had to spend, but it could not collect from its beneficiaries. These facts are not in dispute. It is in the light of the above undisputed facts, we have to proceed to consider the rival contentions regarding the exigibility to tax of the subsidy paid by the Government.
5. It is contended on behalf of the Revenue that the subsidy received by the assessee constitutes revenue receipt and it is income in its hands. In support of the above contention, learned standing counsel for the Revenue relied on the following decisions : Pontypridd and Rhondda Joint Water Board v. Ostime (H. M. Inspector of Taxes) [1946] 14 ITR (Supp.) 45 (HL); Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484 (SC); Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 (Bom) ; CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747 (All) and Kesaria Tea Co. Ltd. v. CIT [1989] 180 ITR 134 (Ker).
6. In Pontypridd and Rhondda Joint Water Board v. Ostime [1946] 14 ITR (Suppl.) 45 (HL), the question that arose for consideration was whether sums received by Pontypridd and Rhondda Joint Water Board to meet the estimated deficiency in the result of what were admittedly trading activities can be taken into account in computing the profits and gains of the Board's trade. It was held that since assistance was given for the purpose of being used in the business carried on by the Board so as to enable them to meet the trading obligations, the amounts so given are trading receipts. Even though the main judgment was written by Lord Thankerton, the often quoted words from the concurring judgment of Viscount Simon are as follows : (page 47) ". . . 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".
7. In Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484, the Supreme Court considered the question whether the amount received by the assessee-company under an insurance policy known as "consequential loss policy" was income and, therefore, taxable. The assessee-company had insured its mills with certain insurance companies and had also taken out certain insurance policies of the type known as "consequential loss policy" which insured against loss of profit, standing charges and agency commission. The mills were completely destroyed as a result of fire and the assessee-company received certain amounts from the insurance companies. The amounts thus received by the company were treated as part of the assessee's income and they were taxed accordingly. The contention raised by the assessee was that the amounts thus received cannot be called profits because the money is only payable if and when there was a loss or partial loss and that something received from an outside source in such circumstances is not money which is earned in the business and if there are no earnings and no profits, there cannot be any income. The above contention was not accepted by the Supreme Court. It was held that Section 4 of the Indian Income-tax Act, 1922, was so widely worded that everything which is received by a man and goes to swell the credit side of his total account is either an income or a profit or a gain. It was also held that the assessee cannot get the benefit of the provisions contained under Section 4(3)(vii) so as to contend that such receipt is not a taxable income. The assessee being a business company and its aim being to make profits and to insure against loss, it is indubitable that the money received from the insurance company is a receipt and in so far as it represents loss of profits, as opposed to loss of capital and so forth, it is an item of income in any normal sense of the term. It was also held that the receipt was inseparably connected with the ownership and conduct of the business and it arose from it. Under these circumstances, the assessee was found not entitled to exemption under Section 4(3)(vii).
8. In Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473, the Bombay High Court had occasion to consider the nature of the subsidy allowed to the manufacturers of soda ash as per a decision of the Government in February, 1950. During the years 1950-51 and 1951-52, there was a glut in the market of soda ash because of large imports thereof. On representations made to the Government by those who were engaged in the manufacture of soda ash, the Government took a decision to allow subsidy of Re. 1 per cwt. on soda ash produced by the companies mentioned and sold from the date of the resolution, provided the Government was satisfied that the companies actually sold the soda ash at the fair selling price recommended by the Tariff Board. The Income-tax Officer brought to charge the amount received by the assessee as subsidy from the Government. The above view was affirmed by the appellate authorities. On a reference, the High Court of Bombay did not accept the contention of the assessee that the receipt of subsidy was of a casual and non-recurring nature and, therefore, not includible in ascertaining the profits or gains of the business. It was held that where subsidies or grants are given by the Government to assist a trader in his business, they are payments of a revenue nature. They are supplementary trade receipts and not capital payments, although they might be called advances or might be subject to contingency of repayment. When subsidy is paid to enable the assessee to carry on its business profitably, such receipt can be only a revenue receipt and had to be taken into account in arriving at the income, profits and gains of the business. In the facts of that case, the court found that the sole object underlying the grant of subsidy was that the assessee-company may be able to carry on their business of manufacture of soda ash profitably in competition with the price of imported soda ash. Reliance had been placed on the decision of the House of Lords in Pontypridd and Rhondda Joint Water Board v. Ostime [1946] 14 ITR (Suppl.) 45.
9. In CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747, a decision of the Allahabad High Court, the question that came up for consideration was whether" a subsidy received under an export incentive scheme of the Government of India can be treated as a revenue receipt and not a receipt of casual nature. The assessee was a manufacturer of cloth and exported the same outside India. As per the export incentive scheme of the Government of India, mills exporting cloth or yarn in excess of the standard prescribed therefor, were entitled to import entitlement equal to 66-2/3 per cent. of the free on board value on such excess export. 35 per cent. of the import entitlement can be utilised by the mills for importing raw cotton for its own use and the balance had to be surrendered to the Textile Commissioner. In consideration of such surrender of import entitlement, the assessee received a sum as subsidy from the export promotion fund. The assessee contended that the above amount could not be taxed as its income. The above contention was not accepted by the Department. On a reference, the High Court held that the subsidy received by the assessee would come under Section 28(1) of the Income-tax Act, 1961. The export subsidy would not have been paid to the assessee had he not manufactured cloth and yarn and exported it. The payment being directly proportionate to the quantity of goods exported was a revenue receipt, for, it was an additional payment received for the goods sold by way of export. Therefore, the amount received by the assessee as export subsidy was held to be the assessee's income.
10. The assessee, on the other hand, would contend that none of the decisions relied on by the Revenue have application in the facts of this case. We find merit in this submission. In all those cases, the assessees were involved in trading activities whereas in the case of the Corporation, trading activity is not one of its objects or at any rate, the duties cast on the Corporation as per the provisions contained under the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974, are not in the nature of a trading activity. There is no question of profit motive when the Corporation discharges its statutory functions. This is clear from the provisions contained under Sections 3, 10 and 11 of the Act. Apart from the above, the subsidy granted by the Government covers only the supervision charges and overhead expenses of the Corporation while it discharges its statutory duties. Therefore, subsidy received by the assessee cannot be treated as trade receipt.
11. In Crook v. Seaham Harbour Dock Company [1931] 16 TC 333 ; [1931] 48 TLR 91, the House of Lords considered the liability to pay income-tax on a grant received by the company from the Unemployment Grants Committee. A dock company, contemplating an extension of its dock, applied to the Unemployment Grants Committee for financial assistance. The Committee made payments as grant from time to time as the work progressed equivalent to half the interest for two years on approved expenditure met out of loans. Assessments to income-tax were made upon the company on the ground that these payments were part of its annual profits or gains. Holding that receipt of such grant cannot be included in the revenue for the purpose of income-tax, Lord Atkin observed as follows (page 353) :
"It appears to me that when these sums were granted, and when they were received, they were received by the appropriate body not as part of their profits or gains or as a sum which went to make up the profits or gains of their trade. It is a receipt which is given for the express purpose which is named, and it had nothing to do with their trade in the sense in which you are considering the profits or gains of the trade. It appears to me, with respect, to be quite irrelevant whether the money, when received, is applied for capital purposes or is applied for revenue purposes ; in neither case is the money properly said to be brought into a computation of the profits or gains of the trade."
12. The principle contained in the above decision was referred to and followed by a Full Bench of this court in CIT v. Ruby Rubber Works Ltd. [1989] 178 ITR 181. This court held that the subsidy scheme framed by the Rubber Board was designed to achieve development of the rubber plantation industry on efficient and economic lines. It cannot be held that the replantation subsidy given to the rubber growers was to swell the profits of the assessee growers and, therefore, it was not a revenue receipt assessable under the Income-tax Act, 1961.
13. In the present case, while the assessee discharges its statutory duties, no profit is contemplated. It is not engaged in a trading activity. Therefore, the subsidy received by the Corporation cannot be treated as a "trade receipt". The subsidy is received by the Corporation to enable it to discharge its statutory duties in public interest. Under these circumstances, we are not able to accept the contention raised by learned counsel for the Revenue that the principle laid down in the decision of the Supreme Court in CIT v. G.R. Karthikeyan [1993] 201 ITR 866 should apply in this case also.
14. Now, we will consider whether the decision in Kesaria Tea Co. Ltd. v. CIT [1989] 180 ITR 134 (Ker) has any application to the facts of the present case. In that case, the assessee, who was carrying on the business of export of tea, received cash assistance from the Government of India. Such cash assistance was given to customers like the assessee in order to help them to carry on the export business in a profitable manner. The quantum of the assistance was fixed at 10 per cent. of the free on board value of instant tea, packet tea and tea bags. The assessing authority held that the cash assistance thus received would be income for the purpose of assessment to income-tax. This court also affirmed the view. It was found that the amount was received during the course of the conduct of the business. The payment of subsidy or cash assistance was directly proportionate to the quantity of the goods exported. Therefore, the amount received by the assessee was supplementary income as it was by way of additional payment for goods exported. That was not a case where the subsidy was given or the assistance was given for a specific or specified purpose. Therefore, this court took the view that the cash assistance received can be included in the taxable income. The facts of the above case would clearly show that the assessee therein was carrying on a business and the amount received was a trade receipt unlike in the case of Kerala Land Development Corporation. We, therefore, find that the above decision is of no help to support the contention put forward by the Revenue.
15. Thus, we come to the conclusion that the Tribunal has correctly held that the subsidy received by the assessee-Corporation would not partake of the character of a revenue receipt.
16. We, therefore, answer question No. 1 in the negative, against the Revenue and in favour of the assessee. Question No. 2 is answered in the affirmative, in favour of the assessee and against the Revenue.
17. A copy of this judgment under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.