Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs S.V. Earths And Chemicals (P.) Ltd. on 16 April, 1986
Equivalent citations: [1986]18ITD196(HYD)
ORDER
K.S. Viswanathan, Accountant Member
1. In this departmental appeal two points are urged for consideration. The first is whether the subsidy received from the Government of Andhra Pradesh could be considered as a revenue receipt. The second is whether the assessee is entitled to deduction under Section 80HHA of the Income-tax Act, 1961 ('the Act').
2. The assessee-company carries on business of manufacture of activated bleaching earth and carbons. It had established its factory in a backward area. As per the Government Order G.O. No.2241 dated 9-3-1976, any assessee establishing industrial units in backward areas would be entitled to an investment subsidy. Under this scheme, the assessee would be eligible on the fixed capital cost at 10 per cent of the fixed capital subject to a ceiling of Rs.10 lakhs. This would be admissible provided the fixed capital cost on land, buildings, plant and machinery did not exceed Rs.1 crore. The assessee, on the basis of this Government Order, received during the year Rs.23,380 as investment subsidy. The ITO was of the opinion that this amount should be treated as revenue receipt. According to him, the subsidy is taxable as it was earned by the assessee only because it started the business, which entitled it to earn the subsidy.
3. On appeal, the Commissioner (Appeals) held that it cannot be treated as part of business income. The subsidy was meant for stimulation of rapid industrial development in the State and was intended to be a contribution towards capital outlay. He then referred to a circular issued by the CBDT which stated that if the subsidy is intended to be a contribution towards capital outlay, it should be treated as a capital receipt.
4. Against this finding, the department is on appeal. It was submitted by Shri Pradhan for the department that as per the decision of the Andhra Pradesh High Court in the case of CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39, this would be a taxable receipt. We are unable to accept this submission. This decision of the Andhra Pradesh High Court referred to the subsidies received by the assessees according to the Government Order in G.O. No.1225 dated 31-12-1968 and G.O. No.455 dated 3-5-1971. As per these Government Orders, the subsidy is related to an expenditure of the assessee in the shape of sales tax and electricity bills. As per the scheme envisaged in these Government Orders, the Government will reimburse such expenditure. On these facts, the High Court held that the provisions of Section 41(1) of the Act, would be applicable and such reimbursements would be taxable. The scheme of the subsidy given in the Government Order, 1976 is entirely different. This subsidy scheme is more in the, nature of subsidies of the Central Government. The CBDT themselves have accepted that such subsidies, which are towards the capital contribution, are not revenue receipts. We may also state that the decision cited by the department itself recognises that in law the subsidy would not always be taxable. They have pointed out at p.59 that it is the quality of the payment that is decisive of the character of the payment and not the method of payment or its measure. We therefore, uphold the findings of the Commissioner (Appeals) on this point.
5. The second ground is regarding the claim for deduction under Section 80HHA. This deduction is available for newly established small-scale industry in a rural area. One of the conditions to be satisfied is that the production should be started after 30-9-1977. According to the department, the assessee had started production before 30-9-1977. Now the facts are as follows : There was in existence a firm by name 'S.V. Industries'. This firm was also doing business in the same field. The assessee-company was incorporated to take over the business of the firm. But there was some time lag. In the meanwhile for the period before 30-9-1977, the assessee had purchased raw materials and made it over to the firm, who had processed them. Such products were sold by the assessee-company. On this basis, the case made out is that the assessee has already started production before 30-9-1977 and so they were not entitled to the deduction. The full reasons are contained in the order for the assessment year 1979-80. The ITO had merely referred to that order in his order for this year. On appeal, the Commissioner (Appeals) accepted the assessee's contentions. He found that though the company was incorporated in July 1977, they could take over the business of the firm only in January 1978 and only thereafter the assessee has started manufacture on their own account. They had fabricated and erected the carbon plant which was commissioned on 27-6-1978. Therefore, the conditions required have been satisfied.
6. The department's case is that for the assessment year 1979-80, the assessee had accepted the findings of the department that they are not entitled to this deduction. It is also pointed out that insofar as the assessee had got the raw materials processed in another undertaking and sold the same, it must be held that, in law, the assessee had manufactured the same. Admittedly, the said manufacture was before 30-9-1977. Therefore, one of the conditions of the section is not satisfied.
7. We are unable to accept this submission. Section 80HHA exempts a part of the profits and gains derived from a small-scale undertaking provided the conditions in Sub-section (2) therein are satisfied. The first condition is that the small-scale undertaking should start production after 30-9-1977. Now it is an admitted position that there is a dichotomy between the assessee and the undertaking. The assessee may have several undertakings. Out of the several undertakings, if any one of the undertaking satisfies the conditions of Section 80HHA, the relief will be available. This dichotomy between an undertaking and the assessee has been well brought out by the Special Bench of the Tribunal in their decision in the case of Amor Dye-chem. Ltd. v. ITO [1983] 3 SOT 384 (Bom.). We must keep this distinction in mind and examine whether it was the assessee, who had sent the raw materials for processing with the firm or whether it was the industrial undertaking which sent the raw materials for processing. It is an accepted fact that during this period, the machineries and plant were under erection and the commissioning was only sometime in 1978. The small-scale undertaking has its own plant and machineries and these plant and machineries, which were erected and commissioned later by the assessee. On these facts, it is not possible to accept that the undertaking as such has sent the raw materials for processing to S.V. Industries, the firm. That was done by the assessee. We accept the department's contention that a person, who sends the raw materials to a third party and gets the same processed therefrom can also be considered as producing those articles. This has been laid down by several authorities and we may refer only to one of them, i.e., of the Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879. But then, the issue is whether the assessee did it or the industrial undertaking did it. On the facts found by us, the industrial undertaking to which Section 80HHA applies has not done this manufacturing by a proxy. So, this reasoning cannot stand against the assessee.
8. It was next submitted by Shri Pradhan that in the industrial undertaking set up, second-hand machineries and plant had been used and that constitutes more than 20 per cent and, therefore, the requirement that the undertaking should not have formed by transfer to a new business of machinery and plant previously used for any purpose is not satisfied. Now the Commissioner (Appeals) has found that the value of the plant and machinery received from the existing firm was Rs.82,409 and the total value of the machineries used in the business was Rs.4,70,438. On this basis, the second-hand machinery constitutes less than 20 per cent. Shri Pradhan, however, does not accept these figures as correct. He had referred to the depreciation statement as on 31-12-1977, according to which, the value of the total machineries under erection was only Rs.1,83,178 and the value of the old machinery was Rs.82,409. As per these figures, the old machineries account for more than 20 per cent.
9. Now, we find that the figures relied upon by the department are the figures as on 31-12-1977. We are concerned with the accounting year ended 30-6-1979. It is an admitted position that during this year, the assessee had added to the block of plant and machinery. The depreciation allowed by the ITO is Rs.1,19,229. As per the balance sheet of the company, the figures given by the Commissioner (Appeals) appears to be correct. We would, therefore, prefer to follow the figures given by the Commissioner (Appeals).
10. Shri Pradhan then submitted that for the first year, the old machineries constituted more than 20 per cent of the total value of machineries and, therefore, the assessee was not entitled to the deduction for the first year of production. If the assessee was not entitled to the deduction for the first year, it would not be entitled to the deduction in any of the subsequent years. We are unable to accept this submission either. It may be that for the first year the assessee did not satisfy the conditions. But that does not mean that in an year when the assessee satisfies the conditions, they should be denied the relief. This is now well accepted by the decision of the Gujarat High Court in the case of CIT v. Satellite Engg. Ltd.[1978] 113 ITR 208. We, therefore, dismiss the departmental appeal.