Judgment:
1. Since both these appeals by the Revenue are in the case of same assessee and are with respect to common issue, we, for the sake of convenience, dispose of both these appeals by this common/consolidated order.
2. The brief facts relating to the common issue involved in these appeals and as have been revealed from the records are that during the period relevant to asst. yrs. 1996-97 arid 2001-02, the assessee had received subsidy of Rs. 20 lacs and Rs. 40 lacs, respectively, from the State Government of Gujarat. Returns of income for asst. yrs. 1996-97 and 2001-02 were filed by the assessee declaring loss of Rs. 8,33,788 (for asst. year 1996-97) and at Rs. Nil (for asst. yr. 2001-02), on 30th Nov., 1996 and 31st Oct., 2001 respectively. In these two returns of income, the assessee had claimed the subsidy received from the State Government, exempt from income-tax. Assessment, for asst. yr. 1996-97 was completed under Section 143(3) on, 19th March, 1999 on total income of Rs. 20,49,465, out later on the same was re-opened by issuing notice under Section 148 of the Act on 5th March, 2001 on the ground that the subsidy received by the assessee of Rs. 20 lacs was taxable and had escaped assessment. Income for asst. yr. 2001-02 was first computed under Section 143(1)(a) of the IT Act on 30th Oct., 2002, but later on, proceedings for making assessment under Section 143(3) were initiated by issuing notice under Section 143(2) of the Act, 3. During the course of assessment proceedings, for both the years (as stated above), the assessee pleaded that the subsidy received by it in both the assessment years was capital subsidy and, therefore, was not liable to be taxed. The AO, however, came to the conclusion that the subsidy was not capital subsidy rather was given to earn the income and, therefore, it was in the nature of revenue. The reasons stated by the AO for considering the subsidy in asst. yr. 1996-97 as revenue receipt read as under: It has been observed that one of the conditions for grant of subsidy was that the unit should supply dies and moulds to vendors within Gujarat. Hence, the link between the production as well as sales to the subsidy is clear through this clause. The cash subsidy is received subject to sales to a particular class of buyers only. It can thus be said that this subsidy adds to the revenue received by the assessee through sales made by it. It is also directly connected with the activity of production and sales made by the assessee.
Therefore, it takes on the character of a revenue receipt, as the nexus between the subsidy and sales activity is established.
Further, this subsidy has been received after the commencement of business by the assessee. As one of the conditions of providing subsidy was that production was necessary, the subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee and the same were of revenue nature [Sahney Steel & Press Works Ltd., Etc. v. CIT }. This view of the Hon'ble Supreme Court affirmed the stand taken by the Hon'ble Andhra Pradesh High Court in the same case, as also approved the following judgments : The fact that the benefit of this subsidy is flowing in from exercise of a business or profession, in this case setting up of the industry, and should be taxed Under Section 28(iv) is upheld in Addl. CIT v. Ram Kripal Tripathi .
In view of the facts of the case and the case laws upholding the point of the linkage of subsidy received with the revenue activities and consequently holding the subsidy as a revenue income, the provisions of Section 28(iv) are applicable.
The condition of the subsidy being received in pursuance to exercise of business or profession is satisfied and hence, the amount of subsidy received from the State Government is treated as revenue receipt as per the provisions of Section 28(iv) and added to the income of the assessee.
4. Reasons for considering the subsidy in question for asst. yr.
2001-02 as revenue receipt, as given by the AO read as under : Subsidies : During the course of assessment proceedings, it was noticed that the assessee had received two subsidies of Rs. 20 lakhs each from the Gujarat State Government, which was not reflected in the P&L a/c. On being asked about the same, the assessee replied vide letter dt. 24th March, 2003 that the amounts had been received as assistance for setting up the industry in backward area (i.e.
Thol Village, Kadi). Hence, the same was treated as capital receipts.
The details of the subsidies were called for. The assessee submitted copies of the sanction order of the subsidy dt. 19th May, 1999 and 14th Aug., 2000 respectively. The order mentions that the base for which the subsidy is granted is the value of fixed capital investment. In the case of assessee, the total value of fixed capital investment of Rs. 2.64 crores and Rs. 1.77 crores consists mainly of dies and moulds. The notes to the sanction order specify the conditions of subsidy which read as under : 1. Fixed capital investment should be increased by not less than 25 per cent of the net fixed assets of existing project and increased in the production to the extent of atleast 25 per cent of the original installed capacity should be achieved before disbursement.
2. The unit should supply dies and moulds to produce components to the vendor unit located only within the State of Gujarat, the unit shall have to give undertaking that it would not shift any moulds, dies or its part to outside the State of Gujarat.
3. The claiming unit should have to carry out assembly or sub-assembly works for the final products in its own factory located in backward area and shall have to carry out the production i.e., assembling and sub-assembling alongwith engineering processes in its own factory so as to evolve some value addition.
4. Inspection will have to be carried out twice in a year by disbursing authority.
It has been observed that one of the conditions for grant of subsidy was that the unit should supply dies and moulds to vendors within Gujarat. Hence, the link between the production as well as sales to the subsidy is clear through this clause. The cash subsidy is received subject to sales to a particular class of buyers only. It can thus be said that this subsidy adds to the revenue received by the assessee through sales made by it. It is also directly connected with the activity of production and sales made by the assessee.
Therefore, it takes on the character of a revenue receipt, as the nexus between the subsidy and sales activity is established.
Further, this subsidy has been received after the commencement of business by the assessee. As one of the conditions of providing subsidy was that production was necessary, the subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee and the same were of revenue nature [Sahney Steel & Press Works Ltd. v. CIT ]. This view of the Hon'ble Supreme Court affirmed the stand taken by the Hon'ble Andhra Pradesh High Court in the same case, as also approved the following judgments : The fact that the benefit of this subsidy is flowing in from exercise of a business or profession, in this case setting up of the industry, and should be taxed under Section 28(iv) is upheld in Add], CIT v. Ram Kripal Tripathi (supra).
In view of the facts of the case and the case laws upholding the point of the linkage of subsidy received with the revenue activities and consequently, holding the subsidy as a revenue income, the provisions of Section 28(iv) are applicable.
The condition of the subsidy being received in pursuance to exercise of business or profession is satisfied and hence, the amount of subsidy received from the State Government is treated as revenue receipt as per the provisions of Section 28(iv) and added to the income of the assessee.
5. The assessee went in appeals before the CIT(A) who allowed the assessee's claim by observing as under : After carefully considering the observation made by the AO and submission given by the appellant and also various case laws relied by the counsel of the appellant, I am of the view that the subsidy received by the appellant is actually the assistance to the appellant in setting up an industry in the backward area in its expansion project. The assets which are acquired and paid for during the operative period of this scheme are eligible for subsidy and the State Government's Resolution has defined expansion as follows : Expansion means increase in the value of fixed capital investment by not less than 25 per cent of the net fixed assets of the existing project, and accompanied by an increase in the production to the extent of at least 25 per cent of the original installed capacity.
The original existing unit of the appellant is located at Ahmedabad and the unit which has come into existence at Khadi, Dholka (viii), is declared backward area by the Gujarat State Government. The investment in plant and machinery and building by the appellant is Rs. 1,08,12,083 and 20 per cent of the same has been granted by the State Government as capital subsidy under the scheme expansion project. The resolution of the State of Gujarat and the order of the Jt. Commr. of Industries, granting the subsidy has been carefully gone through by me and I do not see any ambiguity in this. The subsidy to the appellant has been granted as per the Government's policy prevalent at that time, it was nothing but a capital subsidy granted by the State Government to help the appellant-company to develop the declared backward area. The stand of the AO to treat the same as revenue receipt is not in order and accordingly, the same is reversed and it is held that it is a capital subsidy. Addition of Rs. 20,00,000 accordingly is deleted.
3.1 The second ground of appeal relates to treating State cash subsidy of Rs. 40,00,000 as revenue receipt. A perusal of assessment order reveals that the assessee had received two subsidies of Rs. 20 lakhs each from the Gujarat State Government, which was not reflected in the P&L a/c and in response to query, the assessee has explained that the amounts had been received as assistance for setting up the industry in backward area (i.e. Thol Village, Kadi and hence the same was treated as capital receipts. This issue has been discussed by the AO in detail in the body of the assessment order and by relying upon various judicial pronouncements, the AO has observed that the benefit of this subsidy is flowing in from exercise of a business or profession, in this case setting up of the industry and should be taxed under Section 28(iv) and since the condition of the subsidy being received in pursuance to exercise of business or profession is satisfied, the amount of subsidy received from the State Government is treated as revenue receipt and added to the income.
3.2 The counsel of the appellant, during the course of appellate proceedings, has submitted that the subsidy is granted for setting up an industrial unit in backward area and that it cannot be in any event be linked with revenue activities. It was further submitted by the counsel of the appellant that while deciding similar issue in appeal for asst. yr. 1996-97, the CIT(A) has decided the issue in favour of the appellant.
3.3 I have carefully considered the observation of the AO as well as the submission of the appellant along. I have also perused the appellate order passed for asst. yr. 1996-97, wherein after discussing the issue in detail, it was observed by the undersigned that the subsidy to the appellant has been granted as per the Government's policy prevalent as that time, it was nothing but a capital subsidy granted by the State Government to help the appellant-company to develop the declared backward area. The stand of the AO to treat the same as revenue receipt is not in order and accordingly, the same is reversed and it is held that it is a capital subsidy. In view of the observations made by the undersigned in the order for asst. yr. 1996-97,1 hold that the subsidy received by the appellant: from the State Government amounting to Rs. 40,00,000 is to be treated as capital subsidy and therefore, the addition made in this respect is directed to be deleted.
4.1. The second ground of appeal relates to disallowance of Rs. 42,08,947 in respect of moulds. A perusal of assessment order reveals that the assessee has claimed 40 per cent depreciation on moulds used in plastic and rubber industries instead of 25 per cent and the AO has observed that the assessee is engaged in manufacturing electrical items which are not wholly made of plastic or rubber, the air coolers contain a motor which is made neither of plastic nor of rubber, number of other parts of the products are metal products and as only part of the raw materials used by the assessee are made of plastic/rubber, the activity cannot be classified as plastic or rubber industry and hence the depreciation on moulds is restricted to the rate of 25 per cent. Accordingly, the AO has revised the calculation and disallowed an amount of Rs. 42,08,947 being the difference.
4.2. The counsel of the appellant, during the course of appellate proceedings, has submitted that similar issue was involved during asst. yrs. 1991-92 and 1996-97 and in appeal the CIT(A) has decided the issue in favour of the appellant.
4.3. I have considered carefully the observation of the AO and the submission of the counsel alongwith the appellate order passed for asst. yr. 1991-92. The CIT(A)-XIV while deciding the issue for asst.
yr. 1991-92 has discussed the matter at length and observed that in the present "case, instead of having a separate division, the appellant is having plastic components manufactured using its own moulds and under its supervision at the factories of its vendors who are exclusive plastic goods factories, applying the same ratio that the moulds have in fact been used in plastic goods factories, the appellant would also be entitled to depreciation at the higher rate of 50 per cent on such moulds, the view taken by the Karnataka High Court has also been followed in the decision of the Tribunal Delhi Bench, wherein, though the end product, viz. vacuum glass was not a plastic product, it was held that the plastic moulds used for manufacturing plastic covers of the vacuum glasses in exactly the same manner as manufacturing is carried out by any other plastic factory, were entitled to depreciation at the higher rate under Appendix-I of the IT Rules. In view of the conclusion arrived at by the CIT(A) while passing the order for asst. yr. 1991-92, I hold that the appellant is entitled to depreciation @ 40 per cent' as claimed by the appellant on plastic moulds and, therefore, the AO is directed to delete the disallowance of Rs. 42,08,947.
6. It was, in view of the facts and circumstances of the case, that the learned Departmental Representative after referring to the reasons stated by the AO in both the years, submitted that the subsidy received by the assessee was of revenue nature and, therefore, liable to be taxed.
7. On the other hand, learned counsel for the assessee has supported the order of the CIT(A) after drawing our attention to the following documents : 1. Letter dt. 27th Oct., 1993 from Member Secretary State Level Committee, informed the assessee about sanctioning subsidy for asst.
yr. 1996-97 (copy placed at page No. 7 of the assessee's paper book).
2. Copy of resolution No. !NC/1086/706/(i)I, dt. 5th May, 1986 (copy placed at page Nos. 8 to 23 of assessee's paper book).
3. Letter of disbursement of cash subsidy for asst. yr. 2001-02 (copy placed at page No. 62 of assessee's paper book).
4. Copy of office order dt. 9th June, 2000 (copy placed at page No. 66 of the paper book).
5. Copy of order dt. 19th May, 1999 (copy placed at page No. 68 of the paper book) 6. Copy of resolution of Government of Gujarat dt. 16th Oct., 1990 (copy placed at page No. 74 of the paper book).
7. We have considered the rival submissions, facts and circumstances of the case and reasons given by both the Revenue authorities and copies of resolution/Government orders which define the nature of subsidy.
8. After careful consideration of the resolutions, we have noticed as under : Resolution, dt. 5th May, 1986 the first paragraph which gives the title of the Scheme reads as under : This Scheme shall be known as "Capital Investment Subsidy Scheme for New Industries, 1986".
2. The second paragraph of this Scheme defines operative period of the Scheme and reads as under : This Scheme shall come into operation w.e.f. 1st April, 1986 and shall remain in force for a period of 5 years upto 31st March, 1991.
3. Clause (d) of para. No. 4 which defines various terms reads as under : "Eligible fixed capital investment" means investment in land : the actual price paid for the land to the extent, needed but excluding land development charges.
4. Clause (d)(iii) of paragraph defines the assessment qualifying for taking into consideration and reads as under: Only those assets which are acquired and paid for during the operative period of the Scheme will be eligible for subsidy.
5. Para. No. 5 of the Scheme at page No. 12 of the paper book reads as under : New industrial units set up in eligible areas during the operative period of the Scheme will be eligible for capital investment subsidy as per the rates mentioned in Annex. 'D1 to this resolution.
6. Para. No. 13 of the Scheme placed at p. No. 14 of the paper book reads as under : The disbursement of subsidy will be done in proportion to the creation of fixed asset. In this manner, subsidy upto 85 per cent of the sanctioned amount will be disbursed. The remaining 15 per cent will be disbursed only after the unit commences production. If the unit fails to commence commercial production within two years after receiving 85 per cent of the subsidy, the amount of the subsidy will be liable to be recovered as an arrear of land revenue.
9. Similarly, para. No. 1 of the resolution dt. 16th Oct., 1990, copy placed at page No. 74 which defines the title of the Scheme reads as under : Government of Gujarat is committed to generate more employment opportunities to absorb the unemployed youth into gainful economic activities. State Government has announced the New Employment Policy in order to ensure that priority is given to local persons for employment in the State as well as Central public sector undertakings and private industrial units. As per the guidelines of the New Employment Policy, a person domiciled in Gujarat State for minimum 15 years will be considered a local person. The industrial unit will be required to employ minimum 80 per cent of all the posts and minimum 50 per cent of managerial or supervisory posts from local persons.
2. A scheme to provide capital investment subsidy is necessary to attract investments to generate greater employment in industrially less developed and rural areas. With a view to secure balanced development of industries in Gujarat through dispersal of industries in remote and less developed areas, Government of Gujarat has approved a package of incentives. As a part of this package, Government of Gujarat is pleased to introduce the following scheme.
10. After having gone through the details of Scheme (resolutions as stated above), we are of the opinion that the subsidy to be allowed to the assessee was capital investment subsidy, meaning thereby - that subsidy was given for establishing the industry and not for carrying on the main business after establishing the industry. In other words, the subsidy as per Scheme, as well as the basis on which the subsidy under this Scheme was to be allowed as capital invested by the assesses and, therefore, was in the nature of capital subsidy directly related to the capital investment and was not revenue subsidy. Consequently, in view of decision of Hon'ble High Court of Allahabad in the case of Kalpna Palace v. CIT (2004) 191 CTR (All) 466, decision of Punjab & Haryana High Court in the case of Ludhiana Central Co-operative Consumers Stores Ltd. v. CIT , the decision of Madras High Court in the case of CIT v. Kanyakumari District Co-operative Spinning Mills Ltd. (2003) 182 CTR (Mad) 151, and Full Bench decision of High Court of Kerala in the case of CIT v. Ruby Rubber Works Ltd. which have been relied upon by the learned counsel for the assessee, we are of the opinion that subsidy received by the assessee in both the years, was capital subsidy not liable to tax. Orders of the CIT(A), in our opinion, therefore, do not require any interference and the same are confirmed.
11. So far claim of depreciation on moulds, in asst. yr. 2001-02 is concerned, the same is decided in favour of assessee after following Tribunal's decision in assessee's own case for asst. yr. 1996-97 - in ITA No. 2310/Ahd/1998 dt. 27th Aug., 2004 where the Tribunal had dismissed Revenue's appeal and upheld the order of the CIT(A) allowing depreciation at a higher rate.