Calcutta High Court
Merinoply And Chemicals Ltd. vs Commissioner Of Income-Tax on 20 August, 1993
Equivalent citations: [1994]209ITR508(CAL)
JUDGMENT Ajit Kumar Sengupta, J.
1. The two references--one under Section 256(2) of the Income-tax Act, 1961, both at the instance of the assessee were heard together as both involve one issue relating to the assessability of transport subsidy received by the assessee from the State Government of Assam during the previous years relevant to the three assessment years 1980-81 to 1982-83.
2. In this reference petition filed before the Tribunal on the same issue the assessee sought for reference on five questions, all touching the basic issue as aforesaid. The Tribunal, however, thought fit to refer only the first question presumably considering the other questions subsidiary and mere ramifications of the first question. The assessee, however, obtained a rule from this court directing the Tribunal to prepare a statement of case on one more question correlated with the question granted by the Tribunal in its reference under Section 256(1) of the said Act. In fine, this court is required to answer two questions as follows :
"Question under Section 256(1) :
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Transport Subsidy granted by the Director of Industry, Assam, in terms of Notification of the Government of India, Ministry of Industrial Development dated July 23, 1971, were a receipt of revenue nature and were rightly added to the income of the assessee ?
Question under Section 256(2) :
Whether the finding of the Tribunal that the transport subsidies were inseparably connected with the business carried on by the assessee was unjust, unreasonable and perverse ?"
3. Briefly stated the facts are that the assessee during the previous years relevant to the assessment years 1980-81 to 1982-83 carried on the business of manufacture and sale of plywood and blockboards at Makum, Assam. It received Rs. 3,04,392, Rs. 1,27,569 and Rs. 2,00,982, respectively, as transport subsidy from the Central Government, in terms of Notification of the Government of India, Ministry of Industry, Department of Industrial Development, dated July 23, 1971, known as Transport Subsidy Scheme, 1971. The assessee's contention before the Income-tax Officer was that the subsidy in question was granted for the specific purpose of encouraging the setting up and development of industries in backward regions and, therefore, these grants were of capital nature not liable to tax under the Income-tax Act. The plea did not find favour with the Income-tax Officer who held that the amounts granted represented reimbursement of a certain portion of the transport expenditure actually incurred by the assessee and cannot be treated as capital receipt. The transport subsidy was added to the income of the assessee for each of the three assessment years under consideration. The Commissioner of Income-tax (Appeals) held that the subsidy being of revenue account were taxable. According to him, the subsidy was compensation paid at the rate of 50 per cent. of the transportation cost actually incurred and had a direct relationship with the expenses incurred. The subsidy supplemented the trading receipt and was given to recoup the revenue expenses. The Commissioner of Income-tax (Appeals) held that the subsidy was a revenue receipt in the hands of the assessee. He, accordingly, confirmed the orders of the Income-tax Officer.
4. Aggrieved the assessee preferred a second appeal and pleaded before the Tribunal that the transport subsidy scheme as published in the Official Gazette dated July 23, 1971, with the subsequent amendments was formulated with a view to promoting growth of industries in selected backward areas. Subsidies were granted as recompense for the hardships and inconveniences the entrepreneurs encountered while setting up industries in backward areas. It was only as a measure of determining the cash subsidy, that 50 per cent. of the transport cost of raw materials and finished goods was adopted under the scheme. The subsidy being conditional upon capital investment by the entrepreneurs in backward areas could not be treated as a revenue receipt. The assessee relied upon the decisions of the High Courts of Madhya Pradesh and Andhra Pradesh in the cases of CIT v. Dusad Industries [1986] 162 ITR 784 and CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632, respectively.
5. On behalf of the Revenue reliance on the decisions of the Kerala High Court in CIT v. Malayalam Plantations (India) Ltd. [1988] 169 ITR 237 and CIT v. Malayalam Plantations Ltd. [1987] 168 ITR 63.
6. The Appellate Tribunal examined the transport subsidy scheme and the objects of the same and found that under the Scheme 50 per cent. of the transportation cost of raw materials and finished goods was to be paid to the new units set up in backward areas as well as to the existing units which made substantial expansion or diversification after the commencement of the scheme. The Tribunal, while agreeing that the said subsidy scheme was formulated and subsidy granted for promotion and growth of industry in backward areas and subsidies were granted to obviate to some extent the extra hardship and difficulties faced by the entrepreneurs in the backward areas, however, held that that fact was not a decisive factor and the subsidy could not be treated as a capital receipt not liable to tax on that ground alone. The Tribunal distinguished the decision of the Madhya Pradesh High Court as well as of the Andhra Pradesh High Court and in our view rightly held that the said decisions do not advance the assessee's case.
7. The decisions which have been relied upon are on subsidies which are given on the capital investment made by the assessee in setting up a new industry in the backward areas. It is not in dispute that these cases were different as the subsidies were towards capital outlay. Therefore, the decisions were rightly what they ought to be.
8. In Dusad Industries' case [1986] 162 ITR 784, the Madhya Pradesh High Court held as follows (at page 787) :
"There being no dispute that the subsidy is given on the basis of a particular scheme for a specified period in respect of the industries situated in backward areas only, obviously the same is given by way of an incentive for capital investment and not by way of addition to the profit of the assessee as is clear from the facts and circumstances of the case as found by the Tribunal. In this situation, in our opinion, the reference has to be answered in favour of the assessee and against the Department."
9. On the facts of this case, we are unable to hold that the subsidies granted did not make an addition to the profits of the assessee. The above decision is, therefore, clearly distinguishable.
10. In the case of CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632, the Andhra Pradesh High Court observed as under (at page 644) :
"The nature of subsidies, particularly the refund of sales tax paid, provided by G. O. Ms. Nos. 1225 and 455 was considered by a Bench of this court in CIT v. Sahney Steel and Press Works ltd. [1985] 152 ITR 39. It was held, for the reasons stated in the judgment, that the amounts so refunded constitute income of the recipient. The Bench had also granted leave to appeal to the Supreme Court against the said judgment ; we are told that the appeal is now pending in the Supreme Court. The correctness of the said judgment is not in question before us. Indeed, where similar questions have arisen, we are answering the same in favour of the Revenue and against the assessees, following the said decision (see our judgments being pronounced today in R. C. No. 144 of 1985 and R. C. No. 148 of 1985). The question before us is entirely different and it is this: whether the amount of subsidy received by the assessee should be deducted from the value of the assets while determining the 'actual cost' for the purpose of allowing depreciation ?"
11. In CIT v. Sahney Steel and Press Works Ltd. (1985] 152 ITR 39, the Andhra Pradesh High Court in respect of sales tax refund received by the assessee under a Government order issued by the State Government of Andhra Pradesh held that the payment would constitute the income of the assessee. As the assessee had a right and was entitled to recover the incentives through a court of law, the refund allowed was inseparably connected with the business carried on by the assessee. The benefits were available only from the date the industrial undertaking commenced production and for a period of five years. There was no room or basis for dissociating the subsidy from the business of the assessee as the subsidy was given for setting up and development of business and not for any other unrelated purpose. The subsidy granted was also to attract industries to enhance employment potential, economic prosperity and income of the State.
12. In the case of CIT v. Malayalam Plantations Ltd. [1987] 168 ITR 63, the Kerala High Court held that the money given by the State to recoup revenue expenses is a revenue receipt and accordingly taxable under the Income-tax Act. After considering almost the same case-law, both English and Indian, the Calcutta High Court in the case of Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 observed as follows (headnote) :
"In deciding the nature of a subsidy paid by the Government to encourage exports, what is decisive 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, which is the key to resolve the issue in the light of the general principles. If, on an examination of the nature of the receipts, it is found that the amounts are supplemental to the trading receipts or are connected with the business, even though they did not arise actually from any positive operation of the trader, it should legitimately be considered to be business receipts."
13. Thus, for determining whether a particular subsidy is taxable or not, the test to be applied is one fairly laid down, viz., the motive behind the grant of subsidy is not conclusive.
14. Factually the case here is different. It is transparent that there is a difference between subsidising the capital outlay and subsidising the running of the business. Viewed straightforwardly the Tribunal's approach rests on this distinction. To our mind, it is pre-eminently tortuous to argue that there is hardship or entrepreneurial hazard in setting up a new industry in the backward areas. The purpose of the subsidy is to mitigate such hardship. Now, mitigation can take two forms--one of the forms may be that the very capital outfit is subsidised either wholly or partly out of the public fund. There is no question to be asked as to whether such subsidy should be a capital receipt. But where the subsidy is meant to fill the whole or the shortfall in the return from the industry so set up as recompense for undertaking the known risk and odds in establishing industries in backward areas, the subsidy would definitely be in the form of replenishment of the profit to remove its deficiency attributable to the backwardness of the areas where the industry operates. In both the cases, the entrepreneur is meant to be assisted by lending financial support so that the industry so set up can stand on its legs and overcome the handicap.
15. Where the subsidy is a one-time support by supply of part of capital, the subsidy cannot come in for taxation as revenue but where it is a recurrent recoupment of profit insufficiency it has but to be treated as a payment for augmentation of the Revenue of the undertaking set up.
16. A question may arise whether it is equitable to distinguish between revenue and capital where the subsidies have the common character of an incentive to entrepreneurial venture in the backward areas.
17. We, however, find no inequities in such a distinction. Every entre-preneurship has two-fold hazards. One hazard is in the capital outlay. If the business by virtue of being set up in a backward area goes on the rocks, the capital investment will be lost to the entrepreneur. So, if the State shares the burden of the capital outlay the same cannot but be brought to capital account because the capital sum, if expended solely on the entrepreneur's own account, would not be a revenue expenditure. Therefore, its reimbursement could not as well be a revenue receipt. This is a simple and forthright view. Thus, the advantage which the entrepreneur would secure by the subsidy is on capital account and has to be treated as such, but where the State decides to give a running support to hold the stability of the revenue of the unit set up and run in the backward areas, the support will be part of the profit. Taxing such supporting revenue would not result in inequity to such unit in a backward area as the support is intended to maintain the return to the entrepreneur year by year in line with the return to a similar unit in non-backward area. It would not be fair for the unit in a backward area to ask for the running subsidy and then to turn around and say that subsidy given is for mitigation of its unequal position inter se, the industrial undertakings in general. The inequity or the demerit of the situation having been mitigated, it can be no more fair to seek for immunity from taxation.
18. The basic question is whether the subsidy is intended artificially to supplement the trading receipts, so as to enable the recipients to maintain their trading solvency, if so, there is no escape from taxation by pleading that the receipt in any case should be capital since its purpose is promotion of growth of industries in backward areas or creation of employment in less attractive zones of industrial operation. In this connection, it would be relevant to refer to IRC v. Corporation of London [1953] 34 TC 293. The following passage from Lord Reid's judgment at page 327 of the Reports would show that subsidies which are supplementary profit or income are assessable as taxable income.
"The Lincolnshire Sugar Company's case (1937] 20 TC 643 (HL) was concerned with payments by the Treasury to the company under the British Sugar (Subsidy) Act, 1925, and the British Sugar Industry (Assistance) Act, 1931. It was admitted that payments under the former Act were trade receipts, but it was contended that payments under the latter Act, which were called advances, were really loans and should not be taken into account at all for income-tax purposes ; the company had not needed to use these payments and had not carried them to its profit and loss account. I think that the grounds of the decision of the House are to be found in the following passages from the speech of Lord Macmillan, with which the other noble and learned Lords agreed :
'What, to my mind, is decisive is that these payments were made to the company in order that the money might be used in their business. ... If the company had not happened to be able to pay for its raw material otherwise it could properly have used the "advances" for this purpose. It was with the very object of enabling them to meet their trading obligations that the "advances" were made ; they were intended artificially to supplement their trading receipts so as to enable them to maintain their trading solvency'."
19. Any way, where the payment is for the purpose of meeting the deficits in the profit, there is no alternative to looking at it as the receipt of the trade entering into its profit.
20. A reference is also to be made to the following observations by Viscount Simon (at page 328 of 34 TC) :
"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, i.e., are to be brought into account in arriving at the balance of profits or gains under case I of Schedule D." (see Ostime v. Pontypridd and Rhondda Joint Water Board [1946] 28 TC 261, 278 (HL).
21. In any case, we are of the view, that the transport subsidy is a sum which went to make up the profits or gains of the trade of the assessee, is so far as it recoups the expenditure on account of transport. The judiciary is also very clear on the treatment of subsidies or grants from public funds. There is a clear principle discernible in V.S.S.V. Meenakshi Achi v. CIT that where subsidies or grants are given by the Government to assist the trader to earn profit in his business, they are, generally speaking, payments of a revenue nature. As we have seen above, the English judiciary has gone to the length of saying that even where the supplementary trade receipts are in the form of advances which are subject to contingencies of repayment they are still to be treated as supplementary trade receipts.
22. The Tribunal has carefully examined the transport subsidy scheme. The scheme is available not only to a new unit but also to existing units which had made substantial expansion or diversification after the commencement of the scheme. The Tribunal noted in particular the mode of computation of the transport charges as the clue to the intention underlying the scheme. Clause XIII of the Scheme requires strict check to ensure actual consumption of the raw materials and finished goods for transport of which the subsidy has been given. It requires a system of scrutinizing the consumption of the raw materials and the output of the finished goods. So, this shows that the scheme is related not only to the transport charges incurred but indirectly also to consumption of raw materials and the ultimate output of the final product. Of course, there can be an argument, as has indeed been argued, that the amount of the subsidy is merely a relation of the transport expenditure incurred for consumption of raw materials and the output. But, this relation is for merely measuring the amount of subsidy to be given. The mode of measuring does not decide the character of what is measured. This line of reasoning would have force if the subsidy had not been a recurrent payment. Of course, recurrence of a payment by itself is not also decisive. But, the totality of the circumstances, i.e., subsidy being expenditure related and again paid recurrently, obviously furnishes the key factor to resolve the issue.
23. Before us, learned counsel for the Revenue referred to the Full Bench decision of the Kerala High Court in CIT v. Ruby Rubber Works Ltd. [1989] 178 ITR 181. The Kerala High Court in that case held that if a subsidy or any amount is paid for a beneficial purpose, such as keeping men in employment or starting an industry in a backward area or electrifying a remote area, which could not be undertaken but for the grant of such a payment being of a beneficial character, it cannot be taxed as income. On this basis, the court further held that it is difficult to say that the subsidy given to rubber growers for replanting is not for a beneficial purpose. It is for the definite purpose of encouraging rubber growers to undertake replanting of old and uneconomic plantations and for that the Rubber Board is offering them assistance under its replanting subsidy scheme. This economic assistance is offered by the Board under stringent conditions for implementing a scheme that seeks to achieve development of the rubber plantation on efficient and economic lines. It is done to promote public interest. Thus, it is difficult to hold that the replantation subsidy given to the rubber growers is to swell the profits of the growers. So replanting subsidy received from the Rubber Board under the Replantation Subsidy Scheme of 1967 by the assessee-grower is not a revenue receipt.
24. But, this decision to our mind is not consistent with the decision in V.S.S.V. Meenakshi Achi's case . In that case, the assessee owned rubber plantations in Malaya. Out of the fund into which the collection of cesses on rubber produced and rubber exported from the Federation of Malay States were paid, proportionate parts of the cesses so collected, after defraying the expenses, were credited to the accounts of the assessees, corresponding to the amount of rubber produced by them, and payments were made to the assessees from the amounts so credited against expenditure incurred on the maintenance of the plantations. On this fact, it was held that the fund created for the assessee on the basis of the rubber produced by them were paid against the expenditure incurred by them for maintaining the rubber plantations and producing the rubber. The amounts received were revenue receipts. The idea running through the decision, as earlier said, is that wherever ordinarily payments are made to a trader to assist him in his trade, the payments should be of revenue nature.
25. With respect, the Full Bench decision of the Kerala High Court also omits to take note that a subsidy received by the assessee who grows or manufactures tea in India for replantation or replacement of tea bushes is expressly exempted under Section 10(30) under certain circumstances. This conversely proves that subsidy for replantation is a revenue receipt. That is what the Legislature thinks of the nature of replantation subsidy. Otherwise, there was no occasion for inserting a statutory exemption under Section 10(30).
26. However, our attention has been drawn by learned counsel for the Revenue to the decision of a Division Bench of this court in Kesoram. Industries and Cotton Mills Ltd. v. CIT [1991] 191 ITR 518, where the assessee installed a cement factory in the State of Andhra Pradesh. Under the incentive scheme drawn up by the Government of Andhra Pradesh, the assessee was entitled to the refund of sales tax on raw materials, machinery and finished goods levied by the State Government subject to a maximum of ten per cent. of the equity capital paid up in the case of a public limited company. The incentive was given primarily to small-scale industries for the purpose of countering the prevalent slowing down of industrial growth and accelerating industrialisation throughout the State. So, there also the grant was for development in an inhospitable economic climate. This court has elaborately discussed the possible treatment of subsidies and the various principles emerging from the decisions on the subject including the English decisions. The decision of the Andhra Pradesh High Court has also been examined. The following observations from the said decision are extracted (at page 531 of 191 ITR):
"The State is interested in its industrial development ; it wants to attract industries to enhance the employment potential, economic prosperity and the income of the State. It is to attract new entrepreneurs that the Government had come forward with the said incentives. The payments could not be considered to be voluntary contributions. The assessee and for that matter any other person setting up an industry in the State of Andhra Pradesh was entitled to the facilities and incentives provided by the said Government Order as a matter of right which, if denied, he could enforce in a court of law. The fact that the Government reserved to itself the power to withdraw the Government Order or to amend it, did not mean that so long as the Government Order was in operation, the persons concerned did not have a right to enforce the same. The source as well as the payments were both certain and definite. The payments were inseparably connected with the business carried on by the assessee. The benefits were available only from the date the new industrial undertaking commenced production and for a period of five years therefrom. The refund of the subsidy, as it may be called, was dependent upon the industry continuing in production. There was no room or basis for dissociating the subsidy from the business of the assessee, inasmuch as the subsidy was given for development of the business and not for any unrelated purposes. The payment was not a subsidy for setting up the plant, but a subsidy given for the efficient and profitable running of the industry and its growth. The receipt was, therefore, of a revenue nature. All the three items comprised in the payment constituted income of the assessee. It was also held that the refund of sales tax on purchases of raw materials and on sale of finished goods fell within Section 41(1) and was assessable as gains of business."
27. We find that the principles that are properly applicable to the facts of the instant case are the same principles which this court applied to the case of Kesoram Industries and Cotton Mills Ltd. [1991] 191 ITR 518.
28. All in all, the payment of transport subsidies are meant to augment the profit and make the industry viable economically.
29. We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error.
30. For the reasons stated, we answer the first question in the affirmative and against the assessee and the second question in the negative and also against the assessee.
31. There will be no order as to costs.
Shyamal Kumar Sen, J.
32. I agree.