| SooperKanoon Citation | sooperkanoon.com/66435 |
| Court | Income Tax Appellate Tribunal ITAT Madras |
| Decided On | Oct-18-1993 |
| Judge | T Rangarajan, V A Satyanarayana |
| Reported in | (1994)48ITD345(Mad.) |
| Appellant | Tamilnadu Sugar Corpn. Ltd. |
| Respondent | income-tax Officer |
2. The assessee is a company, being a Government of Tamilnadu undertaking engaged in the production of sugar. The Government of India set up a Committee to examine the economic viability of the establishment of new sugar factories under the Chairmanship of Shri S.V. Sampath, Joint Secretary (Sugar), Department of Sugar on 5-4-1974.
The terms of reference included the requirement to suggest various incentives and other measures for bringing the new sugar factories as economically viable units. In the report of the Sampath Committee, the following possible incentives were examined: After examining the suitability of these incentives, the Committee recommended a rebate on excise duty and exemption from purchase tax as the only expedient whereby it may be possible to have the new sugar factories to establish even under the present high block cost. After examining this Report, the Government of India by order dated 6-12-1975 laid down incentives for establishing new sugar factories as well as for expanding the existing sugar factories. These incentives were higher free sale quota and excise duty rebate. These incentives were linked to the actual cost of the standard plant and were available only if the capital investment exceeded Rs. 200 lakhs. The incentives were available for a period of five years, and it was particularly mentioned that the beneficiaries of these schemes should ensure that the surplus fund available by these incentives are utilised only for the repayment of term loans from Central financial institutions in accordance with the repayment schedule prescribed by them. It was also stipulated that the factories should submit a certificate to that effect from the statutory auditors. Additional incentive with reference to additional production was also granted by the order of the Government dated 15-11-1980. It is in this background that the assessee was able to obtain additional price of Rs. 87,85,989 and excise duty rebate of Rs. l1,98,644 totalling Rs. 99,84,583 in the previous year ending 30-9-1984, corresponding to the assessment year 1985-86. The figures for the next assessment year 1986-87 were: Rs. 23,14.743 (additional free sale of sugar) and Rs. 32,064 (excise duty rebate). The assessee claimed that these amounts should be treated as capital receipts being tied down by the incentive scheme for recovery of the capital invested in the establishment of the factory and, therefore, should not be included in the total income liable to income-tax. The Assessing Officer was of the view that these receipts being trading receipts and brought into the P & L A/c by the assessee cannot be treated as capital receipts. He was also of the view that in the Government Order dated 15-11-1980 the utilisation of the incentive "for payment of term loans, if any outstanding", indicated no compulsion, and could, at best be limited to the repayment of the loan. He was of the view that such utilisation was also not proved and he accordingly rejected the claim of the assessee.
3. On appeal the CIT(A) noted that these receipts were not given by way of subsidy by the Government, but were received in the course of the business of the assessee. He was also of the view that such income, which has accrued to the assessee, could not be treated as capital simply because it was applied for discharge of any loan. He accordingly confirmed the assessments.
4. In the further appeals before us it was contended on behalf of the assessee that even though the amounts were received in the course of business, the origin of the receipts was the incentive granted in the background of the Sampath Committee Report. It was submitted that without the specific linking with the establishment of the factory and the capital investment, the assessee would not be able to get these receipts at all, and since these funds were granted only to recoup the capital employed, they should not be subject to income-tax, as revenue receipts. It was also pointed out that this issue had been decided by the Calcutta Bench of the Income-tax Appellate Tribunal, in favour of the assessee, in the case of Balrampur Chini Mills Ltd. (I.T. Appeal Nos. 2032 and 2033 (Cal.) of 1988, dated 14-5-1992]. It was further pointed out that representations had been made by the Sugar Industry to the Minister of State for Finance for suitable instructions to the Department not to tax an incentive which was meant to be absorbed as capital.
5. On the other hand, it was contended on behalf of the Revenue that indirect assistance, such as customs draw back, would not fall within the meaning of subsidy as held by the Supreme Court in the case of Shri Ambica Mills Ltd. [1973] 3 SC 787, and, therefore, the amounts received by the assessee could not be regarded as subsidy not intended to be taxed. It was also argued that these receipts came to the assessee in the course of business as revenue receipts and could not be treated as capital merely because it was applied for repayment of term loans.
Again, it was submitted that such an application could not also be regarded as diversion by overriding title so as to exclude the amount from the total income.
6. We have considered the submissions of both sides and we have also perused the orders of the Government granting incentive scheme. In the order dated 6th December, 1975 there is a clear indication that the surplus funds generating must be utilised only for repayment of term loans. In the order dated 15th November, 1980 the same condition is repeated and further underlined by the requirement that the factory should submit a certificate to that effect from the statutory auditor.
The reference to the "payment of term loans, if any" could at best mean that in the recoupment of capital the repayment of outstanding term loan will get priority. However, the basic thrust of both the orders is that the additional funds generated to the sugar mills by additional free sale quota and rebate on excise duty was intended only to recoup the capital employed in establishing or expanding the factory.
7. The contention of the Revenue that these incentives were not given directly as cash by the Government and could not be considered as subsidy, which may have the character of capital receipt, is quite off the mark. The claim of the assessee is not that there was a capital receipt from the Government but that these incentives transformed the regular business receipts into a capital receipt by reason of the compulsion to repay the term loan. The decision of the Supreme Court in the case of Shri Ambica Mills Ltd. (supra) was rendered in connection with the computation of bonus under the Payment of Bonus Act. The section, as it stood at that time, provided that subsidy may be deducted in arriving at the distributable surplus. The company claimed that duty draw back and excise rebate should also be deducted. The Supreme Court held that the word "subsidy", not being defined, could not take in such excise duty rebate. However, we find that the Payment of Bonus Act has since been amended allowing deduction in the First Schedule: (g) Cash subsidy, if any, given by the Government or by any body corporate established by any law for the time being in force or by any other agency through budgetary grants, whether given directly or through any agency for specified purpose and the proceeds of which are reserved for such purposes.
it will be seen that Parliament was aware of the system of granting subsidies indirectly by way of rebates and has also referred to the specific purpose and the application of the proceeds reserved for such purpose. It is stated on behalf of the assessee that in the assessee's case for the purpose of Payment of Bonus Act these receipts had been deducted in arriving at the distributable surplus. In other words, under the labour legislation it has been recognised that these receipts are in the nature of subsidies and, therefore, capital receipts not available for distribution as bonus. Therefore, we are of the opinion that even though these incentives are not cash subsidies directly received from the Government, they have been recognised as subsidies in the nature of capital receipt.
8. The other objection of the Revenue was that if the amounts were received as revenue, the subsequent application of such receipts cannot alter the character at the time of receipt. Reliance was placed on the decision in Kishinchand Chellaram v. CIT [1962] 246 ITR 640 (SC), but that was a case where a payment of dividend was held not to lose the character merely because it was paid out of capital. The Revenue also referred to the decision in Kesoram Industries & Cotton Mills Ltd. v.CIT [1978] 115 ITR 143 (Cal.), where under an export promotion scheme an exporter was eligible for grant of export licence. The assessee in that case obtained premium in respect of those import licences and claimed it as a capital receipt. The High Court pointed out that it was received in the course of business and observed that the fact that the amount might be used as capital in the hands of the assessee was irrelevant. That case is distinguishable because there was no compulsion for using the premium to recoup the capital. The next case referred to is that of Jeewanlal (1929) Ltd. v. CIT [ 1983] 142 ITR 448 (Cal.) where cash incentive received by an exporter from Government was held to be a revenue receipt. The assessee pointed out Parliament's intention in amending the Act was to provide that such cash incentives will be deemed to be income, thus accepting the view of the I.T.A.T. in Gedore Tools (India) (P.) Ltd. v. IAC [1988] 25 ITD 193 (Delhi)(SB) that cash assistance were in the nature of capital receipts. In any case, that related to cash received from the Government and it is not appropriate for the present case.
9. The Revenue next referred to a series of decisions, such as Chowringhee Sales Bureau (P.) Ltd. v. CIT [ 1973] 87 ITR 542 (SC) Sinclair Murray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) and General Fibre Dealers Ltd. v. CIT [1970] 77 ITR 23 (SC) to point out that excise duty and sales tax collections were regarded as part of trading receipts and would, therefore, be revenue in nature. But these propositions will not be applicable to the facts of the present case where such receipts had their genesis in the incentive scheme.
Excise duty collection normally would be a revenue receipt, but when it is received only because the Government has granted the right to retain that collection for recouping the capital, the character of the receipt has been changed by the circumstances of the case even at the moment of receipt.
10. The last objection of the revenue was that the direction to use these receipts for paying off the long-term loans could only be regarded as application of income and not as diversionof income. The Revenue relied on the decision in Vibhuti Glass Works v. CIT [1989] 177 ITR 439 (SC). In that case on a reading of the agreement between the parties the Court held that a profit had accrued and was merely applied to discharge an obligation of the assessee. This was because there was a stipulation in the agreement that if and when profit exceeded the prescribed limit one-half share will go to the State Government. The present case, is however, quite different because the very right to receive the excess price and the excess excise duty was based on the obligation to recoup the capital employed. Since the amount could not have been received without that obligation, there is a clear nexus and consequently a diversion of income. As pointed out by the assessee, such diversion has been accepted by the Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. Similarly, Supreme Court has held in CIT v. Bijli Cotton Mills (P.) Ltd. [ 1979] 116 ITR 60 that if the amounts are collected with express legal obligation to utilise the same for a particular purpose, or to be spent for a particular purpose, they do not constitute part of the trading receipt notwithstanding the fact that they are collected in the course of the business. Hence, we are convinced that from any point of view the amounts received took the nature of capital receipt by reason of the incentive scheme and could also be regarded as a diversion for the stated purpose, and hence, cannot be treated as part of the income of the assessee.
11. Applying this principle to the facts of this case we find that there is also on record a certificate issued by the statutory auditor asserting that these receipts were wholly utilised for repayment of the long term loans due to the financial institutions. Thus the condition prescribed in the incentive scheme has been demonstrated to be fully satisfied.
12. We, accordingly, set aside the orders of the authorities below on this point and direct the Assessing Officer to exclude these amounts from the total income of the assessee. The appeals are allowed.