TIRUMALESA BRICKS & TILES FACTORY v. INCOME TAX OFFICER
[Citation -1985-LL-0628]

Citation 1985-LL-0628
Appellant Name TIRUMALESA BRICKS & TILES FACTORY
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 28/06/1985
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags commencement of production • voluntary contribution • plant and machinery • revenue expenditure • actual expenditure • investment subsidy • state government • incentive scheme • municipal limits • registered firm • revenue receipt • subsidy scheme • revenue nature • capital cost • actual cost • sales tax • new unit
Bot Summary: The actual paragraph dealing with the grant of subsidy is quoted below: A. Investment subsidy: Under this scheme, entrepreneur setting up new industrial units and/or effecting substantial expansion of the existing units will be eligible for investment subsidy on the fixed capital cost at 10 per cent of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which have been declared as backward under the six point formula by the government and excluding those covered by the central subsidy scheme or the list of scheduled areas. No investment subsidy is admissible in the areas not declared as backward either under the central subsidy scheme or under the six-point formula including the municipal limits of Hyderabad and Secunderabad, Vijayawada and Visakhapatnam. After considering the meaning of the expression 'development of the unit' in the GO, the High Court gave a finding that there was no room or basis for dissociating the subsidy with the business of the assessee inasmuch as the subsidy is given for the development of the business and not for any other unrelated purpose. Later, the High Court stated that the subsidy being given to assist the business of the undertaking, the receipt of the said subsidy or refund is of revenue nature and cannot be called a capital receipt. In our opinion, the subsidy we are considering under the 1976 GO is a subsidy given to set up a plant. Now, there is distinction between the purpose for which a subsidy is given and the condition under which the subsidy would be given. We have to emphasise this distinction, because, in the law regarding subsidies, the purpose of the subsidy has a dominant role to play.


main issue in this appeal is whether subsidy received by assessee from state government could be considered as income for assessment year under consideration. 2. assessee, registered firm, has business of manufacture and sale of tiles. It would appear that assessee has applied to director of industries for payment of subsidy which is available to industries started in backward areas under GO Ms. No. 224, dated 9-3-1976. subsidy was received by assessee on 7-4-1979 amounting to Rs. 66,475. This falls within accounting year. 3. abovementioned GO is in supersession of two earlier GOs, GO No. 1225 of 31-12-1968 and GO No. 455 of 3-5-1971. earlier two case of CIT v. Sahney Steel & Press Works Ltd. [1985] 152 ITR 39. In earlier two GOs, government have granted subsidies to industrialists wishing to set up new industries. amount was equivalent to refund of sales tax on raw materials, machinery and finished goods levied by state government subject to maximum of 10 per cent of equity capital. Subsidy was also given no power consumed for production to extent of 10 per cent in case of medium-and large-scale industries and 12 1/2 per cent for small scale industries. 4. GO Ms. No. 224 with which we are concerned states that in light of developments and needs of present situation, government have been considering revision of earlier incentives so as to more effectively serve purpose of bringing about rapid industrial growth in state and along with that to serve purpose of bringing about this growth in all parts of state with particular attention to backward taluks. GO Ms. No. 224 superseded earlier two GOs. new incentives are offered to all new industries which will go into regular production on or after 1-1-1976. Those industries which go into substantial expansion, i.e., add fixed capital cost of value not less than 25 per cent of undepreciated value of existing units capital cost would also be eligible. actual paragraph dealing with grant of subsidy is quoted below: "A. Investment subsidy: Under this scheme, entrepreneur setting up new industrial units and/or effecting substantial expansion of existing units will be eligible for investment subsidy on fixed capital cost (i) at 10 per cent of fixed capital cost subject to ceiling of Rs. 10 lakhs in all areas which have been declared as backward under six point formula by government (vide Annexure) and excluding those covered by central subsidy scheme or list of scheduled (Tribal) areas. (ii) At 20 per cent of fixed capital cost subject to ceiling of rs. 15 lakhs in all Scheduled (Tribal) areas (vide Annexure II). In such Scheduled (Tribal) areas where Central subsidy is admissible, balance to make up total of 20 per cent will be given by State Government. No investment subsidy is admissible in areas not declared as backward either under central subsidy scheme or under six-point formula including municipal limits of Hyderabad and Secunderabad, Vijayawada and Visakhapatnam. investment subsidy is admissible provided fixed capital cost on land, building, plant and machinery does not exceed Rs. 1 crore. Cases where fix e d capital cost exceeds Rs. 1 crore can be considered in exceptional circumstances on merits based on criteria of relevance of industry to economy of area and subject to ceiling of Rs. 10 or 15 lakhs, as case may be." 5. As stated earlier, assessee had applied for incentive and was granted Rs. 66,475. this represents 10 per cent of fixed capital. 6. ITO was of opinion that subsidy received is taxable. He pointed out that assessee had directly credited profits partners' accounts in their profit and loss sharing ration. This would appear, according to him, to show that it is part of profits. It is also noted by him that assessee had not utilised subsidy so received in any way for business purposes. On these reasons, he added amount as income. 7. Commissioner (Appeals) agreed with him. He pointed out that question whether subsidy is taxable or not has been decided by Andhra Pradesh High Court in case of Sahney Steel & Press Works Ltd. (supra). He pointed out that although subsidy is received under different GO it is only revision of earlier GOs. first condition of state incentive scheme under later GO is that industry should go into production non or after 1-1- 1976 and GO will be in operation for period of five years. For units which went into production prior to 1-1-1976 earlier GOs will be operative. These differences, according to Commissioner (Appeals), were only differences inform and not in substance. What is granted is only incentive to strengthen industry to ensure industrial growth. critical point to notice, as per learned commissioner, is that grant is payable only after commencement of production. idea of linking growth with production is to ensure that funds shall be Utilised to strengthen industry after it started production. Financial assistance, he opined, given to industry after starting of production is in nature of income receipt. He, therefore, upheld order of ITO. 8. assessee is in further appeal before us. Shri Ramachandra Rao, learned counsel for assessee, submitted that there is difference between GO considered by Andhra Pradesh High Court in case of Sahney Steel & Press Works Ltd. (supra) and GO under which assessee received subsidy. He submitted that whereas earlier GOs linked subsidy to actual expenditure incurred by assessee like payment of sales tax and electricity charges, it cannot be considered as revenue receipt. Shri Ramachandra Rao conceded that amount received could be adjusted against cost of depreciable assets under proviso to section 43(1) of Income-tax act, 1961 ('the act') and depreciation could be reduced. 9. Shri Raghvendra Rao, for department, submitted that principle involved has been laid down by Andhra Pradesh High Court and it should be applied. 10. We have considered submissions. As pointed out by Shri Ramachandra Rao, there is difference in method of evaluating subsidy as obtained in earlier GOs considered by Andhra Pradesh High Court and GO of 1976. Under earlier GOs, subsidy is directly linked to expenditure incurred by assessee. What is available to assessee is refund of sales tax on raw materials, machineries, etc., levied by state government. If assessee had ot paid any sales tax, he was not entitled to any subsidy. There is ceiling with reference to equity capital but this operates only as limiting factor. subsidy on account of electricity consumed is directly referable to expenditure incurred on power consumption. In scheme we are considering, there is no link with expenditure at all. For any entrepreneur setting up new industry, GO authorises payment of 10 per cent of fixed capital cost subject to ceiling of Rs. 10 lakhs. It will be seen that assessee need not incur any expenditure at all in order to be eligible for subsidiary. 11. Although we have noted above vital distinction in quantification of subsidy, that by itself cannot determine issue before us. We have to consider in detail decision of Andhra Pradesh High Court to see whether larger principles laid by them will be applicable to facts of case. main issue before them had been framed as follows: "Whether refund of amount of Rs. 14,665.70 in terms of GO Ms. No. 45, represents refund of sales tax paid by assessee or whether it was voluntary contribution by state unrelated to character of assessee and whether said amount constitutes income in hands of recipient, viz., assessee." High Court then stated that this question has four aspects: (i) whether refund of said amount was voluntary contribution, (ii) whether contribution was unrelated to character and business of assessee, (iii) whether nature of receipt is capital or revenue, and (iv) whether it can be called income. As far as two of these issues are concerned, i.e., first two issues, findings to be given will be governed by Andhra Pradesh High Court's decision. Even this subsidy received under GO Ms. No. 224 of 1976 is n o t voluntary contribution and assessee has right to get it once it satisfies condition. Secondly, it is not unrelated to character and business of assessee. third issue to be considered whether it is revenue or capital and fourth issue is connected with that, i.e., if it is capital, certainly it is not income. 12. This will take us to discussion regarding third issue. After considering meaning of expression 'development of unit' in GO, High Court gave finding that there was no room or basis for dissociating subsidy with business of assessee inasmuch as subsidy is given for development of business and not for any other unrelated purpose. Later, High Court stated that subsidy being given to assist business of undertaking, receipt of said subsidy or refund is of revenue nature and cannot be called capital receipt. As we have pointed out earlier, basic fact in earlier GOs was linking of subsidy with expenditure. In absence of such linking in GO we are considering, we will have to go into question whether it is capital or revenue. 13. Before going into issue, we may clear misconception. Andhra Pradesh High Court has not held that all subsidies will be revenue in nature. following extract from decision would make this clear. After stating two propositions laid down by viscount simon in case of Ostime v. Pontypride and Rhondda Joint Water Board [1946] 28 TC 261 (HL), they observed: "We are not inclined to read said proposition in such wide fashion as department wants us to do. state may give subsidy to person to set up new plant. In such case, it cannot be said that subsidy is trading receipt. At time, we must say that subsidy to assist business of assessee may be given in many manner. There are several ways of subsidising industrial undertaking." 14. In our opinion, subsidy we are considering under 1976 GO is subsidy given to set up plant. Therefore, even according to Andhra Pradesh High Court, this is not trading receipt. We have already extracted in paragraph 4 paragraph from GO authorising payment of subsidy. It will b e seen that it is available for entrepreneur who is effecting substantial expansion of existing units. Thus, either in case of new unit or in case of expansion of unit, it is case of capital receipt. 15. One of objections of Commissioner (Appeals) was based on condition that industry should go into regular production on or after 1-1-1976 and, therefore, grant is only after commencement of production and not before. He went on to say that financial assistance given to industry; after starting of production is in nature of income receipt and not capital receipt. It is true, as we have noted, that GO contains following condition: "The incentives are available for new units going into regular production on or before 1-1-1976. Units which went into production prior to 1-1-1976 and who are eligible to avail themselves of incentives under GO No. 1225, Industries, dated 31-12-1968 and GO Ms. No. 455, Industries and Commerce department, dated 3-5-1971 must register with Director of Industries within 3 months from date of issue of this order to avail themselves of incentives offered in above two GOs." Now, there is distinction between purpose for which subsidy is given and condition under which subsidy would be given. purpose for which subsidy is given qualifies its nature. conditions imposed could be safeguards to see that subsidy is properly utilised. We have to emphasise this distinction, because, in law regarding subsidies, purpose of subsidy has dominant role to play. In this connection, we may refer to decision of Supreme Court in case of V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253. In that case, assessee owned rubber plantations in Federated Malay States (as it then was). Out of fund into which ceases collected under Rubber Industry Fund Ordinance on rubber produced and rubber exported were paid, proportionate parts of cess so collected were credited to accounts of assessee corresponding to amount of rubber produced by them and payments were made from amounts so credited against expenditure incurred on maintenance of plantation. assessee therein has received such payments and question before Supreme Court referred to decision in case of Higgs v. Wringhtson 26 TC 73 and stated that payments to planters were made against expenditure incurred for maintaining rubber plantations. Since amounts earmarked for assessee were on basis of rubber produced by them and were paid against expenditure incurred by them for maintaining rubber plantations, it was revenue receipt. It will be seen that underlying principle plantations, it was revenue receipt. It will be seen that underlying principle laid down by Supreme Court was purposes for which subsidy is given to recoup revenue expenditure, it will take same colour and will be deemed to be revenue receipt in hands of assessed. It is purpose for which it is given which is material and is determining factor ......" (p. 830)- Chaturvedi and Pithisaria's income-tax Law, Vol. 1, 3rd edn. In view of above analysis, condition that assessee should have gone into production after 1-1-1976 is only safeguard and does not influence purpose and, therefore, is not relevant is determining character. Therefore, we are of opinion that decision of Andhra Pradesh High Court in case of Sahney Steel & Press Works Ltd. (supra) does not govern issue in this case. 16. For reasons given above, we are of opinion that receipt is capital in nature. 17. next question would be whether these receipts could be considered for purpose of actual cost under proviso to section 43(1). Shri Ramachandra Rao had conceded before us that subsidies can be adjusted against cost of assets. In view of concession, we hold that ITO would be justified in making such adjustments in depreciation. 18. No other issue is pressed. appeal is partly allowed. *** TIRUMALESA BRICKS & TILES FACTORY v. INCOME TAX OFFICER
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