Calcutta High Court
Vishnu Sugar Mills Ltd. vs Deputy Commissioner Of Income Tax on 30 September, 1997
Equivalent citations: (1998)62TTJ(CAL)275
ORDER
S. C. TIWARI, AM.
The first ground of appeal is general and no specific submission made in respect thereof during the hearing given by us.
2. The second ground of appeal is directed against the assessment of a sum of Rs. 6,72,820 as representing revenue income. The facts of the case in this respect are discussed at length in para 6 of the impugned order of the learned CIT(A). In brief, as a result of scheme framed by the Govt. of India on recommendation of an Export Committee headed by S.V. Sampat, the assesseecompany received incentive in the form of higher free sale quota and excise duty rebate. The assessee quantified this incentive and credited to capital reserve account and claimed that this amount being capital receipt in the hands of the assessee was not liable to tax. The AO held that this particular subsidy was in the nature of revenue receipt and relied on this behalf on the decision of Supreme Court in the case of V.S.S.V Meenakshi Achi & Anr. vs. CIT (1966) 60 ITR 253 (SQ) and some other High Court judgments. During the course of hearing before the learned CIT(A) the assessee submitted that these arguments of the AO are covered by the judgment of Tribunal "A-Bench", Calcutta in the case of Balarampur Chini Mills Ltd. vs. ITO in ITA Nos. 2032 and 2033 (Cal) of 1988. The Tribunal in that case after traversing various Court pronouncements came to the conclusion that the incentive received by the assessee was in the nature of capital receipt and, accordingly, the same could not be assessed as business income. The learned CIT(A), however, held that in the case of Balarampur Chini Mills Ltd. (supra), it was never argued that the case of the assessee fell under s. 28(iv) of the Act, which makes such income taxable. Decidedly the assessee had received a benefit arising from the business by way of free sale of entitlement of sugar at a certain percentage of recovery. In case any term loans were due to certain financial institutions, the assessee had to utilise the surplus fund generated on sale of incentive sugar, for payment of such outstanding loans. The learned CIT(A) opined that remission of liability was also a benefit which arose to the assessee from business. As the provisions of s. 28(iv) had not been argued before the Tribunal in the case of Balarampur Chini Mills Ltd. (supra), the learned CIT(A) held that there was no need to interfere in respect of assessment of this amount as business income by the AO.
3. During the course of hearing before us, the learned counsel for the assessee pointed out that the decision of Tribunal in the case of Balarampur Chini Mills Ltd. (supra) was reiterated by the Tribunal "E-Bench", Calcutta in the case of Babhnan Sugar Mills Ltd. order, dt. 5th Nov., 1996, in ITA No. 711 (Cal) of 1996. Thus, the finding of the AO that the incentive did not represent capital receipt in the hands of the assessee have to be rejected. The learned counsel pointed out that in both these cases, the Tribunal have considered at length the scheme framed by the Government of India on the recommendation of Sampat Committee and the facts of the case of the assessee are pari materia with those cases.
4. Regarding the argument of the learned CIT(A) pertaining to the provisions of s. 28(iv) of the Act, the learned counsel of the assessee pointed out that these provisions have been considered in scholarly treatise of Sampat Iyengar's "Law of Income-tax" 9th Edn., p. 482. The learned author referred to the judgment in the case of Lachit Film vs. CIT (1992) 195 ITR 402 (Gau) and held that for applicability of provisions of s. 28(iv) the receipt should signify "Income" and should be a product of the normal working of the business. The learned counsel also relied on the judgment in the case of CIT vs. Chetnaben B. Sheth (1993) 110 CTR (Guj) 294 : (1993) 203 ITR 24 (Guj) to the effect that all money received from business is not chargeable under s. 28(iv). Reference was also made to the decisions in CIT vs. Peermade Tea Co. Ltd. (1995) 123 CTR (Ker) 554 : (1995) 213 ITR 116 (Ker), CIT vs. Tirumala Bricks & Tiles Factory (1996) 131 CTR (AP) 211 : (1996) 217 1TR 547 (A-P), CIT vs. M Sahalahan (1996) 135 CTR (Ker) 221 1. (1996) 221 1TR 594 (Ker), CIT vs. Gogte Minerals (1996) 136 CTR (Kar) 497: (1996) 222 1TR 245 (Kar) and Ludhiana Steel Ltd. vs. Dy. CIT (1996) 56 ITD 394 (Chd) and argued that subsidy received which is in the nature of capital receipt in the hands of the recipient cannot be subjected to tax as business income.
5. The learned Departmental Representative argued that the effect of this Scheme was that the 4ssessee had larger volume of free sale sugar available with it. Hence, the receipt should be considered to be revenue receipt. He also placed reliance on the decisions in (1966) 60 ITR 253 (SQ) (supra) and Motilal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SQ) 195: (1991) 190 ITR 1 (SQ).
6. We have carefully considered the rival submissions and perused the orders of the authorities below. The Tribunal Calcutta Benches have in the cases of Balarampur Chini Mills Ltd. (supra) and Babhnan Sugar Mills Ltd. (supra), held that the incentive as received by the assessee in the present appeal, constitutes capital receipt in the hands of the assessee and is, therefore, not chargeable to income-tax. The learned CIT(A) has in the impugned order relied upon the provisions of s. 28(iv) of the Act. We are unable to accept the broad proposition canvassed by the learned CIT(A) that the capital receipts arising to an assessee during the course of business would nonetheless be liable to tax under the provisions of s. 28(iv) of the Act. Various authorities cited by the learned counsel of the assessee clearly refute this line of argument.
7. Learned Departmental Representative has relied upon the decisions in (1966) 60 ITR 253 (SQ) (supra) and (1991) 94 CTR (SQ) 195 : (1991) 190 1TR 1 (SQ) (supra). As far as the first case is concerned i.e. Meenakshi Achi vs. CIT (supra) the same has been duly considered by the Tribunal in the case of Balarampur Chini Mills Ltd. (supra). Coming now to the judgment of HonIle Supreme Court in the case of Moti La] Chhadanii Lal Jain vs. CIT (supra), the learned Departmental Representative has emphasised the observations at p. 10 of this judgment and argued that the obligation of the assessee to repay the loans taken from the financial institutes was obligation to apply out of his income and not before it reached the assessee. It was, therefore, not the case of diversion of income but of application of income. It is seen that in the orders of Calcutta Benches of Tribunal in the cases Balarampur Chini Mills Ltd. (supra) and Babhnan Sugar Mills Ltd. (supra) it has been held that the incentive income arising to the assessee was the receipt of capital nature. We, therefore, do not find that this judgment of HonIle Supreme Court in (1991) 94 CTR (SQ) 195 : (1991) 190 ITR 1 (SQ) (supra) is of much assistance to the case of the Department.
8. In view of the discussion in the foregoing paragraphs and relying on the earlier orders of the Tribunal on this point as referred to by us in the earlier part of this order, we direct the deletion of this sum of Rs. 6,72,820 from the total income of the assessee.
9. The third ground of appeal is directed against the authorities below not allowing the assessee carry forward of investment allowance. This aspect has been discussed in the impugned order by the learned CIT(A) in para 9. The facts briefly are that the assessee claimed deduction of investment allowance pertaining to the asst. yrs. 1989-9d and 1990-91 on the ground that investment allowance reserve was created by the assessee during the previous year under assessment. The AO rejected the claim of the assessee relying on the judgment of Hon'ble Supreme Court in the case of Subhalaxn2i A1111S Ltd. vs. CIT (1989) 77 CTR (S0 31 : (1989) 177 ITR 193 (SC) and held that it was obligatory on the assessee to create the reserve in the years of installation of plant or machinery or in the immediately succeeding year when the plant and machinery was first put to use even if there was no profits in those years. The learned CIT(A) held that unless reserves were created the claim of the assessee was not allowable and, therefore, no interference was called for on this point in the assessment order.
10. During the course of hearing before us, the learned counsel of the assessee placed reliance on CBDT's Circular No. 572, dt. 3rd Aug., 1990. This circular has been issued by the CBDT in the wake of Supreme Court judgment in the case of Subhalaxmi MEs Ltd. vs. CIT (supra) and amendment of the provisions of s. 32A and 34 thereafter. Hence, in considering whether the conditions regarding creation of reserve is fulfilled or not, the reserve created in the year in which the deduction is to be allowed and in earlier year, will be taken into account. In view of this, the insistence of the authorities below that the assessee should have created investment allowance reserve in the years of installation of plant and machinery even when profits were insufficient in those years is not correct. We, therefore, direct the AO to allow the assessee investment allowance claimed by the assessee during this year on the basis of reserve created during this year subject to fulfilment of other conditions.
11. Ground of appeal No. 4 is directed against the directions of the learned CIT(A) that an addition of Rs. 93,26,845 should be made to the income of the assessee. The learned CIT(A) has considered this matter in para 11 of the impugned order. According to the learned CIT(A) the AO has allowed the assessee deduction of this amount on account of addition made by him to the value of closing stock in the asst. yr. 1990-91. Since on appeal the learned CIT(A) for the asst. yr. 1990-91 had decided the matter in favour of the assessee, the adjustment made by the AO during this year to the extent of Rs. 93,26,845 was required to be withdrawn.
12. During the course of hearing before us, the learned counsel of the assessee argued that in the asst. yr. 1990-91 the learned CIT(A) had only directed the AO to decide the closing stock valuation on the basis of the directions for the asst. yr. 1989-90. The learned counsel of the assessee also argued that the directions in the impugned order have been given by the learned CIT(A) without giving any opportunity to the assessee to explain the issue regarding stock valuation.
13. On consideration of the matter, we find that the assessment order was made when the effect to the appellate orders of the earlier assessment years had not been given. The learned CIT(A) has also given his directions merely on the assumption that the AO had wrongly allowed the assessee a deduction of Rs. 93,26,845 based on earlier years. In these circumstances we are of the view that the question regarding the valuation of closing stock is required to be looked into once again after taking into consideration the final position as emerging in the earlier assessment years and after taking into consideration the submissions of the assessee in respect of facts of his case. We, therefore, restore the question of valuation of closing stock and the adjustment to be made in computation of total income in respect thereof, if any, to the file of the AO to be decided afresh after allowing the assessee reasonable opportunities of being heard in the matter.
14. For statistical purposes, this appeal shall be treated as allowed.