1. This is an appeal filed by the Tamilnadu Tourism Development Corporation Ltd., Madras, against the order of the Commissioner (Appeals), upholding an addition of Rs. 5 lakhs in the assessment on the assessee for the assessment year 1974-75 under section 143(3) of the Income-tax Act, 1961 ("the Act").
2. The assessee is a company, whose shares are owned by the Government of Tamil Nadu, established with a view to promote tourism in the State.
Its main activity consisted of construction of tourist bungalows at places of tourist interest with share capital and loans (interest-free and otherwise) made available by the State Government. The assessee's accounting year relevant for the assessment year 1974-75 is the year ending 31-3-1974 and it is the third year of the assessee's existence.
3. The only dispute in the appeal relates to an addition of Rs. 5 lakhs to the assessee's income. This amount stands as "Fairs and Exhibition Fund" in the assessee's balance sheet for the year ending 31-3-1974 and Note No. 6 annexed to the balance-sheet explains : "Fairs and exhibition fund represents the special ad hoc grant given to the Corporation by Government for setting up a permanent exhibition wing and for utilizing the funds as rolling capital towards organising tourism oriented exhibition and fairs as per G. O. Ms. No. 1070 Public (Tourism) Department dated 28-3-1974." "During the year under report, the Corporation has successfully under taken the stupendous task of conducting a Trade Fair with the co-operation of State Government in January 1974 and from this venture, a net profit of Rs. 1.61 lakhs has been realised. As the gesture of appreciation of the results achieved, the Government have converted the refundable advance of Rs. 5 lakhs given to the Corporation to an outright grant to conduct exhibition in future." G. O. Ms. No. 1070 Public (Tourism) Department dated 28-3-1974 referred to in the note to balance-sheet is reproduced below : "In the G. O. third read above the Government sanctioned a sum of Rs. 5 lakhs to the Tamil Nadu Tourism Development Corporation for organising the Pongal Tourist Fair, 1974 and ordered that the entire amount of Rs. 5 lakhs should be refunded to the Government immediately after the fair is over after retaining the profits, if any.
The Government have reviewed the organization of the Pongal Tourist Fair, 1974, by the Tamil Nadu Tourism Development Corporation and in supersession of the orders issued in paragraph 2 of the G. O. third read above they are pleased to direct that the amount of Rs. 5 lakhs sanctioned to the Tamil Nadu Tourism Development Corporation for organising the Pongal Tourist Fair, 1974, will be treated as a special ad hoc grant to the Corporation for setting up a permanent exhibition wing in the Corporation and for utilising the funds as rolling capital towards organising tourism-oriented exhibitions and fairs in the State and for participation in the fairs and exhibitions organised in other States and abroad with a view to highlighting the tourist potentialities of Tamil Nadu." The above Government order itself summarises the earlier G. O. Ms. No.3147/Public (Tourism-I) Department dated 30-11-1973 which in its turn summarises a still earlier G. O. Ms. No. 1877 Public (Tourism-I) Department dated 10-7-1973. Both the earlier circulars deal with the history of the provision of funds to the extent of Rs. 5 lakhs which ultimately became "Fairs and Exhibition Fund". Since the case for the department is that the alleged original intention of the Fund makes it taxable, we consider it necessary to reproduce the substantive parts of both. The material part of the first G. O. Ms. No. 1877 dated 10-7-1973 reads as under : "The Pongal Tourist Festival week was celebrated in January, 1973 with success and has evoked a favourable response from the tourist trade and particularly foreign tourists. The travel trade representatives felt that the importance with advance publicity and planning (sic). It has, therefore, been proposed for the next year celebrations, i.e., 1974, planning can be done from now and the Pongal Festival committee may go into action straightway to chalk out a comprehensive plan for publicity as well as actual details of the programme.
2. The Government have carefully examined the proposal and decided to celebrate the Pongal tourist Festival during 1974 in Madras city and at the district centres of Madurai, Ootacammund, Kanyakumari and Tiruchirapalli.
3. Sanction is accorded for the grant of Rs. 10 lakhs towards the expenditure, for conduction the Pongal Tourist Festival during 1974 as indicated broadly in the annexure to this order by the Tamil Nadu Tourism Development Corporation. The details of the programme will be worked out by the Tamil Nadu Tourism Development Corporation in consultation with the Government in Public (Tourism) Department. The items of the expenditure will be decided by the Tamil Nadu Tourism Development Corporation under the advice of the finance Secretary who is also a member of the Board of Directors of the Corporation.
4. The Managing Director, Tamil Nadu Tourism Development Corporation and the Additional Secretary to Government Public (Tourism) Department is authorised to draw the 1st installment grant of Rs. 5 lakhs in advance from the total grant sanctioned in paragraph 3 above for advance planning and publicity by the Tamil Nadu Tourism Development Corporation. The Government direct that the need for releasing the rest of Rs. 5 lakhs may be considered in October 1973, and orders issued.
5. The above grant is sanctioned subject to the following conditions : (a) The accounts together with all the relevant papers should be produced for inspection by Audit Department if so required by Accountant General.
(b) Any portion of the amount, which is not ultimately required for expenditure should be duly surrendered to Government.
(c) A final report on the celebration with audited statements of accounts should be submitted to Government as soon as the function is over." The material part of the second G. O. Ms. No. 3147 dated 30-11-1973 reads as under : "In the G. O. first read above the Government sanctioned a special grant of Rs. 10 lakhs to the Tamil Nadu Tourism Development Corporation towards expenditure connected with the conduct of the Pongal Tourist Festival during January, February 1974 and ordered that a sum of Rs. 5 lakhs may be drawn as 1st installment by the Corporation and that the withdrawal of the remaining sum of Rs. 5 lakhs may be considered later in October 1973. Accordingly, in the G. O. second read above, the Government authorised the sanction of the above sum of Rs. 5 lakhs from the Contingency Fund. It was subsequently decided by the Government that a Tourist Trade Fair should also be organised to synchronise with the Pongal Festival celebrations and accordingly constituted a Special Administrative Committee in the G. O. last read above with the Chairman, Tamil Nadu Tourism Development Corporation, the Special Secretary to Government, Finance Department, the Managing Director, Tamil Nadu Tourism Development Corporation and the Director of Information and Public Relations as its members and placed the entire conduct of the festival as well as the fair in its charge.
2. The Government has reviewed the proposal relating to the organisation of the Pongal Tourist Festival and Fair 1974 in consultation with the Special Administrative Committee referred to in paragraph 1 above and they have decided that the sum of Rs. 5 lakhs already sanctioned to the Tamil Nadu Tourism Development Corporation in the G. O. second read above for organising the Tourist Trade Fair shall be refunded by the Tamil Nadu Tourism Development Corporation to the Government out of the net income from the fair after retaining the profit, if any." The above three G. Os., the Directors' Report, and the balance sheet with the notes thereto, give the complete facts relevant to the issue before us.
4. The ITO noticed that the assessee had offered Rs. 1.61 lakhs as profits of Exhibition and Trade Fair at Madras mainly out of gate-collections and stall rents and also relatively minor collections for entertainment, recoveries for electricity charges, sales of materials after the fair was over, etc. Expenditure related to cost of construction of stalls, electricity charges, advertisement expenses, salaries, etc. He noticed that the amount of grant was not utilised for acquiring any capital assets and that it was made to meet the assessee's expenditure. All the three G. Os. according to him related to a waiver of a refundable advance to meet revenue expenses and, therefore, constituted revenue receipt.
5. Before the Commissioner (Appeals), it was the assessee's case that the assessee merely undertook to conduct the Pongal Festival on behalf of the Government and was entrusted with Rs. 5 lakhs to spend on behalf of the Government as is evident from the G. O. dated 10-7-1973. It was later that the idea of conducting a Tourist Fair arose It was made clear in the second G. O. dated 30-11-1973, while communicating the new development, that the funds sanctioned in the first G. O. will be refunded out of profits and that the assessee Corporation was entitled to retain the profits from the fair. In the final G. O. dated 28-3-1974, the refundable advance became a fund available to the assessee for setting up a permanent exhibition wing and for utilising the funds as "rolling capital towards organising tourism oriented exhibitions and fairs in the State" and that it was a capital receipt by way of grant of gift and not income in the nature of revenue receipt. According to the first appellate authority, the subsequent versions of "refundable advance" in the second G. O. dated 30-11-1973 and the conversion of the same as a grant towards a "capital fund" in the final G. O. dated 28-3-1974 cannot take away the effect of the first G. O. dated 10-7-1973, which according to him, was a pure and simple grant given to the Corporation "for the purpose of its business to be used in the conduct of the business as a trade receipt". In this view, he upheld the assessment.
6. In the grounds of appeal before us, the stand taken before the ITO and the first appellate authority are repeated. It was claimed that the rationale of the decisions in the cases of CIT v. Kamal Behari Lal Singh [1971] 82 ITR 460 (SC) and Sri Dwarkadheesh Charitable Trust v.ITO [1975] 98 ITR 557 (All.) has not been considered by the ITO. The learned departmental representative relied upon the orders of authorities below. He laid great stress on the first G. O. which according to him revealed the true intent of reimbursing the assessee's business expenditure. Its subsequent description as "refundable advance" or "grant" as a capital fund would not, according to him, take away the legal effect of the original purpose, he claimed.
7. We have carefully considered the relevant facts, the assessee's grounds of appeals and the arguments of the learned departmental representative.
8. It is clear from the first Government order dated 10-7-1973 that the State Government wanted to celebrate "Pongal Tourist Festival Week" during January 1974 as its celebration of a similar week in January 1973 was successful. The sanction was not of Rs. 5 lakhs but for Rs. 10 lakhs of which Rs. 5 lakhs was to be an advance. It was called a grant because the whole amount was expected to be spent by the State Government on celebration of Pongal Festival. The money was merely made available to the assessee through whom the money was to be spent by the State Government. Actually all that the assessee was called upon to do was to decide upon items of expenditure under the advice of the Finance Secretary for celebration of the week in Madras city, Madurai, Ootacammund, Kanyakumari and Tiruchirapalli. Celebrating Pongal Festival was not the assessee's business and expenditure thereon was not the assessee's expenditure and much less the assessee's business expenditure. The grant contemplated by the First G. O. had nothing to do with the running of a Trade Fair whose receipts were trading receipts, the surplus of which has been offered for tax. There is a mix-up in the minds of the authorities as between the duty of running of the Trade Fair entrusted to the assessee by second G. O. dated 30-11-1973 and the grant by the first G. O. dated 10-7-1973 of moneys for meeting the expenditure on celebration of Pongal week. This mix-up is responsible, in our view, for the wrong inference drawn by the authorities. It is only because the first G. O. contemplated that the expenditure on celebration of Pongal is by the Government that it was made subject to Government Audit and return of any moneys left over. 9.
It is G. O. No. 3147 dated 30-11-1973 which contemplated organising a "Tourist Trade Fair" to synchronise with the "Pongal Festival Celebrations". Even this Tourist Fair was to be organised by a Special Administrative Committee consisting of not only officer of the assessee Corporation but also Special Secretary to Finance Department and Director of Information and Public Relation. It is this Special Administrative Committee which advised the Government to treat the advance already sanctioned by G. O. dated 10-7-1973 be made available to the assessee-Corporation for organising the Tourist Trade Fair with the condition that it is "refunded out of the net income from the fair after returning the profit, if any". It is clear from this circular dated 30-11-1973 that Trade Fair was contemplated only then and that amount sanctioned as advance for conducting Pongal celebration on behalf of Government was now to be utilised as "refundable advance" for running a Tourist Fair, the profits of which will be available to the assessee. Here again no part of the expenditure was reimbursable, though the loss, if it had occurred, would have been, in all probability, been borne by the State Government, since the advance had to be returned "out of net profits" only. In any case, the issue relating to loss is hypothetical. Since there was, only a profit G. O.dated 28-3-1974, which is well within the accounting year makes it unnecessary for the assessee to return the advance, though it made profits. It is made clear therein that it would be the assessee's capital for "setting up a permanent exhibition". It is represented as "Fair and Exhibition Fund" in the balance sheet. It is stated in the note to the balance sheet that it is a fund out of grant for a exhibition vide G. O. Ms. No. 1070 dated 28-3-1974. Directors' report also categorically states that the funds provided as refundable advance for conducting a Trade Fair was converted as a grant for the purpose specified. The manner in which the Funds were represented in the balance-sheet, the note therefor and the directors' report only confirm the position emerging from all the three g. Os. and not something conflicting as between the first and the later Government orders as imagined by the authorities. The moneys were originally intended to cover expenses on Pongal celebration and such expenses were not the assessee's trade expenses. At any rate the amount of Rs. 5 lakhs were actually later converted as "refundable advance" for conducting a Trade Fair which actually became the assessee's business. But a loan to enable assessee to meet the assessee's expenses can never become income. If it does, all loan by banks to traders as working capital would be income. Such a proposition is certainly absurd. When the Government waived its right to repayment, the loan does not get converted into revenue receipt. It is a capital accretion especially when such conclusion is under terms that it should be treated as a capital fund for setting a permanent exhibition wing. Hence, we find that a proper reading of the G. Os., balance sheet and directors' report could not give rise to an inference that what was received was only to meet the assessee's business expenditure by way of reimbursement as wrongly assumed by the authorities.
10. To sum, up we find that the amount of Rs. 5 lakhs was given to the assessee as capital fund. Even earlier it was only a loan and not a grant to cover trading expenses as wrongly assumed. The first G. O.dated 10-7-1973 merely refers to a grant made for the purpose of celebration of Pongal Festival, on behalf of the Government and not for meeting the assessee's trading expenses, though, at any rate, this Government Circular is only of historical importance and has no relevance to the issue before us. It is because the amount of Rs. 5 lakhs became the property of the assessee only on the third G. O. dated 28-3-1974 within the accounting year.
11. In the view we have taken on facts, it is hardly necessary for us to discuss any law. A capital grant received from the Government is a capital receipt. This proposition is too well-established. As pointed out by the assessee in the grounds of appeal, the Allahabad High Court in Sri Dwarkadheesh Charitable Trust v. ITO (supra) held that voluntary contributions received towards corpus could not be income even in the case of a charitable trust where such voluntary contributions are treated as income for purposes of requirements of application of income under section 12. The assessee has also relied upon the decision of the Supreme Court in the case of CIT v. Kamal Behari Lal Singha (supra) for the proposition that the payment of a revenue nature in the hands of the giver need not necessarily constitute income in the hands of the recipient. In this case though it may be the Government's expenditure, it is the claim that it is capital receipt in the assessee's hand. We further find that the Supreme Court in CIT v. Groz-Beckert Saboo Ltd. [1979] 116 ITR 125 has considered even gift of raw materials and semi-processed goods used for the manufacture by the assessee received from its foreign collaborator as a capital receipt. It was pointed out therein that the High Court held that the value of these goods could not be treated as revenue receipt because they had been received by way of gift and, in any event, even if they constituted revenue receipt they could "in no sense be income", since they were taken out of the ambit of taxability by sub-section (3) of section 10. The Supreme Court, on the finding of the Tribunal, that these were received as gifts and, therefore, as "capital assets", allowed the market value of the same as cost of such goods and, therefore, as a deduction from the income on the date of conversion of such "capital assets" to "stock-in-trade". The assessee is in a much stronger position because the amount of Rs. 5 lakhs was not only received as gifts but also as capital fund. Under the circumstances, we have to allow the appeal and delete the addition of Rs. 5 lakhs.
12. In the result, the appeal is allowed. Relief due : Rs. 5 lakhs as reduction from income.