Allahabad High Court
Commissioner Of Income Tax vs Kisan Sahkari Chini Mills Ltd. on 28 April, 2005
Equivalent citations: [2006]284ITR418(ALL)
Bench: R.K. Agrawal, Rajes Kumar
JUDGMENT
1. The Tribunal, Allahabad has referred the following questions of law under Section 256(1) of the IT Act, 1961 ('the Act') for opinion to this Court :
1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the incentive of Rs. 2,10,67,677 received by the assessee by way of additional quota for free sale sugar which is directly connected with the business activities of the assessee, was on capital account and hence not taxable as a revenue receipt ?
2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in deleting the disallowance of Rs. 13,98,899 made under Section 43B in respect of unpaid production incentive bonus covered under Section 36(1)(ii) of the IT Act?
2. The reference relates to the asst. yr. 1990-91.
Briefly stated, the facts giving rise to the present reference are as follows :
The assessee is a cooperative society engaged in the business of manufacture and sale of sugar. For the year ending 31st March, 1990, relevant to the asst. yr. 1990-91, it filed its return on 16th Oct., 1990 declaring a loss of Rs. 4,00,64,360. In the P&L a/c total sales were shown at Rs. 15,20,83,667 which included an amount of Rs. 2,10,67,677 received as incentive earned from sale of sugar. The assessee gets this incentive by way of additional free sugar quota wherein excise duty is leviable at a reduced rate but the sugar is available for being sold at the market price. The resultant benefit is required to be used for repayment of term loans obtained from financial institutions for setting up the plant and other capital expenses in due time. This incentive scheme is based on the recommendation of the Sampat Committee report.
While in the accounts the above receipt on account of incentive was treated as revenue receipt and formed part of the sales in appeal filed before the CIT(A) on other grounds, an additional ground was raised that the AO had erred in facts and in law in not treating the sum of Rs. 2,10,67,677 being the incentive received under the 'Sampat Incentive Scheme' by way of additional free sale of sugar quota as a capital receipt in the hands of the assessee.
The CIT(A) obtained a report from the AO on the above issue who objected to the admission of the fresh grounds. However, CIT(A) admitted the fresh ground. After adjudicating the issue on merits, vide paras 4 and 5 of his order dt. 9th Feb., 1994, the C1T(A) rejected the objection of the assessee by observing that the benefit received by the assessee under the Sampat Scheme was in the nature of revenue receipt as it had not been received to meet out the capital cost.
3. Aggrieved by the order of CIT(A), the assessee filed an appeal before the Tribunal. The Tribunal has held that the said incentive received by the assessee was on capital account and that it was not taxable as a revenue receipt.
4. In the assessment proceedings, while examining the accounts, the AO noticed that the assessee had debited to the P&L a/c a sum of Rs. 17,80,342 on account of production incentive bonus. Out of this amount a sum of Rs. 13,98,899 remained unpaid at the end of the year. The assessee contended that production incentive bonus has been paid by the mill society in accordance with the special scheme promulgated by the U.P. Co-operative Sugar Factory Federation Ltd., Lucknow, under the power conferred to it under Section 123 of the U.P. Co-operative Society Act and is paid for improved productivity and achievement of various production efficiency targets irrespective of profit of the industrial undertaking. It was also argued that the expenditure should be allowed under Section 37(1) as having been incurred wholly and exclusively for the purpose of business. The AO did not accept the assessee's arguments and was of the opinion that the payments covered under Section 36(l)(ii) of the IT Act and the unpaid excess provision amounting to Rs. 13,98,899 was added to the income of the assessee.
In appeal, the CIT(A) observed that the incentive bonus was to be paid in the case only after the verification and approval from the U.P. Co-operative Sugar Factories Federation which had not been obtained and, therefore, the liability for payment of bonus had not crystallized during the relevant previous year. The CIT(A) held that the deduction could not be allowed to the assessee to the extent of unpaid incentive bonus and accordingly, confirmed the said disallowance. Feeling aggrieved by the order of the CIT(A), the assessee preferred an appeal before the Tribunal. The Tribunal held that the amount in question was productivity linked bonus relating to the business and has been allowed earlier in the case of assessee itself. The issue was, therefore, decided in favour of the assessee.
5. On the question of bonus, the Department's view is that payment being specifically covered under Section 36(l)(ii), provisions of Section 37 were not applicable and the unpaid bonus was obviously disallowed in view of Clause (c) of Section 43B r/w Section 36(l)(ii) of the IT Act, which permits deduction of bonus only on actual payment basis.
6. We have heard Sri A.N. Mahajan, learned standing counsel for the Revenue. Nobody has appeared on behalf of the respondent-assessee.
Learned standing Counsel submitted that the amount of Rs. 2,10,67,677 received by the respondent-assessee by way of incentive in the form of additional quota for free sale sugar was assessable as revenue receipt because it was integrally connected with the business activities. Relying upon the provisions of Section 28(iv) of the Act even otherwise the value or any benefit arising from the business or the exercise of a profession is to be treated as income chargeable under the head "Profits and gains of business or profession". He further relied upon two decisions of the apex Court in the cases of Sahney Steel & Press Works Ltd. v. CIT and CIT v. Rajaram Maize Products , wherein, it has been held that the amount of subsidy received as incentive for production or establishment of an industry is of a revenue nature.
7. So far as second question is concerned, he submitted that under Section 43B(c) of the Act, any sum referred to in Clause (ii) of Sub-section (1) of Section 36 of the Act is to be allowed in the previous year when the same is actually paid by the assessee. According to him, under Section 36(l)(ii) of the Act any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission has been mentioned. As incentive bonus falls under Clause (ii) of Sub-section (1) of Section 36 of the Act, therefore, its deduction can only be allowed in the previous year in which it had actually been paid and a sum of Rs. 13,98,899 has not been paid during the previous year relevant to the assessment year in question. The Tribunal was not justified in deleting the disallowance.
8. Having given our anxious consideration to the submissions made by the learned standing Counsel, we find that the respondent-assessee had earned a sum of Rs. 2,10,67,677 on the sale of free sale sugar allowed as incentive by payment of reduced excise duty. It is clearly a trading receipt and the apex Court in the case of Sahney Steel & Press Works Ltd. (supra) has held that :
If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient--whether revenue or capital--will have to be determined, having regard to the purpose for which the subsidy is given. The source of the fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.
... that, under the notification in question the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It was true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose. The subsidies had not been granted for production of, or bringing into existence any new asset. The subsidies were granted year after year, only after the setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. The subsidies were of revenue nature and would have to be taxed accordingly.
The apex Court further held that :
(a) Refund of sales-tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent of the equity capital paid-up in the case of public limited companies and the actual capital in the case of others;
(b) Subsidy on power consumed for production to the extent of 10 per cent in the case of medium and large scale industries and 12-1/2 per cent in the case of small-scale industries. This concession will not apply to cases where concessional tariffs are allowed by the Electricity Board;
(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body;
(d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it;
(e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used;
(f) The following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochamad and K.C. Canal in the Ramagundam Kothagudem areas and in the following eight backward districts,....
The salient feature of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available, unless and until production had commenced. The availability of the incentives would be limited to a period of five years from the date of commencement of production. The incentives were to be given by way of refund of sales-tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemption was given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in this case.
The important point to note is that all the incentives are production incentives in the sense that the company will be entitled to these incentives only after it goes into production. The scheme was not to make any payment directly or indirectly for the setting up of the industries. It is only after the industries had been set up and production had been commenced that the incentives were to be given.
The second important thing to note is that the manner in which the incentives were given is of no consequence for determination of the question raised in this case. Incentives were given by way of refund of sales-tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will, not be given. Refund of sales-tax will also be in respect of taxes levied after commencement of production and upto a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operational subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable."
xxxxxxxx "... The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Pontypridd & Rhondda Joint Water Board v. Ostime (H.M. Inspector of Taxes) (1964) 14 ITR 45 (HL)(Suppl) : (1946) 28 Tax Cases 261 (HL) in the following words :
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 Sch. D. It is sufficient to the cite the decision of this House in the sugar beet case [Smart v. Lincolnshire Sugar Co. Ltd.(1937) 20 Tax Cases 643; 156 LT 215) 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 Forth Conservancy Board v. IRC (1931) AC 540 at p. 546 : 16 Tax Cases 103, at p. 117 and compare what Lord Macmillan said in Municipal Mutual Insurance Ltd. v. Hills (1932) 16 Tax Cases 430, at p. 448.
xxxxxxxx In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries.
xxxxxxxx ... By no stretch of imagination can the subsidies whether by way of refund of sales-tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies.
9. The aforesaid decision has been subsequently followed by the apex Court in the case of Rajaram Maize Products (supra). Respectfully following the aforesaid decisions, we are of the opinion that the 'Tribunal was not correct in holding that incentive of Rs. 2,10,67,677 was a capital amount.
10. We accordingly, answer question No. 1 referred to us in the negative, i.e., in favour of the Revenue and against the assessee.
11. So far as, the second question is concerned, we find that admittedly, a sum of Rs. 13,98,899 which represented unpaid production incentive bonus was in respect of services rendered by the employee. It is a production linked incentive bonus. In Sub-clause (ii) of Sub-section (1) of Section 36 of the Act, any sum paid to an employee as bonus or commission for services rendered is allowable and in view of the provisions contained in Clause (c) of Section 43B of the Act which has been introduced by Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989, it can only be allowed deduction on actual payment in the previous year relevant to the assessment year. As the amount has not been paid over during the assessment year in question, i.e., 1990-91, the deduction could not have been allowed. Thus, the Tribunal was not correct in deleting the disallowance of Rs. 13,98,899.
12. We, accordingly, answer the second question referred to us in the negative, i.e., in the favour of the Revenue and against the assessee. Both the questions are answered in favour of the Revenue. However, there shall be no order as to costs.