U.P. EXPORT CORPORATION LTD. v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -1987-LL-0629-3]

Citation 1987-LL-0629-3
Appellant Name U.P. EXPORT CORPORATION LTD.
Respondent Name INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 29/06/1987
Assessment Year 1982-83
Judgment View Judgment
Keyword Tags computation of income • foreign tour expenses • packing credit loan • weighted deduction • state government • accrued interest • export promotion • interest accrued • revenue account • trading receipt • capital account • unspent amount • credit balance
Bot Summary: Out of the other accounts, which had been received by the assessee, the assessee had not spent anything till the end of the year. The case of the assessee is that these amounts had not become the property of the assessee. According to the assessee, when the amount had not become the property of the assessee, it could not be considered to be the income of the assessee. The case of the Department is that these amounts are the trading receipts of the assessee and hence they were required to be taken by the assessee to its profits and loss account. In these cases, the amounts had come to belong to the assessee had the assessee and the assessee had become richer by these amounts. What we have to decide in the present case is whether on account of the grants, which had been received by the assessee to be spent on specified purposes and which in case of remaining unspent were required to be returned to the Government, would constitute the gain of the assessee. If the enhancement made by the CIT(A) for the year under consideration was to be confirmed, the result would be that the assessee would be asked upon to pay tax on the amounts which had never come to belong to the assessee and at the same time no deduction would be admissible to the assessee when the assessee incurs expenditure for the implementation of the schemes for which the grants had been received.


R.N. PURI, A.M. appeal, filed by assessee, is directed against order dt. 27th March, 1986 of CIT(A). This appeal has arisen out of assessment of assessee for asst. yr. 1982-83. previous year relevant to this assessment year ended on 31st March, 1982. first ground taken up by assessee in its appeal is that CIT(A) erred in enhancing income of assessee as determined by IAC(Assessment) by sum of Rs. 63,84,520. assessee, M/s U.P. Export Corporation Limited. is U.P. State Government Undertaking. It was constituted in year 1966 as company under Companies Act, 1956, primarily with purpose of serving as channel for exports and to act as promotional body f o r developing various handicrafts of State. State Government implements certain schemes from time to time to promote development of handicrafts and export sector of State. assessee is made model agency for co-ordinating various activities on this behalf. State Government issues specific orders highlighting objectives and laying down modus operandi for implementation of various schemes to attain such objectives. State Government allocates funds for implementation of schemes. funds sanctioned by Government are placed at disposal of assessee in form of grants to be utilised in manner laid down in particular Government order. During year, assessee received total sum of Rs. 66,14,544 by way of grants as under: Grant for Carpet Weaving Training Scheme (U.P. Govt.) Rs. 44,84,000.00 Grant for Development of Chikan Training Scheme Rs. 4,55,000.00 Grant for Retail-cum-outlet of Warehouse Scheme at Bhadohi Rs. 10,10,000.00 Grant under Export Award Scheme Rs. 1,00,000.00 Grant under Buyer Seller Meet Scheme Rs. 1,00,000.00 Grant under overseas Handloom Exports Scheme Rs. 2,50,000.00 Grant under Export overseas publicity scheme Rs. 2,10,000.00 Grant received during year under Carpet Weaving training Scheme. Rs. 5,544.63 Total Rs. 66,14,544.63 grant of Rs. 44,84,000 was received from State Government for tunning carpet weaving training centres at various places in State, where training in weaving of carpets was to be imported to trainees. grant of R s . 4,55,000 was received for running of Chikan training centres. This scheme was initiated by government for imparting training in making of Chikan to weaker sections of society. Each trainee was paid stipend of Rs. 120 per month for period of one year. basic aim of scheme was to free small craftsmen and artisans engaged in Chikan industry from clutches of middlemen and to keep this art of making Chikan alive and to maintain quality of production. sum of Rs. 2,50,000 was received by assessee for organising exhibition of handlooms of U.P., in Australia. assessee received sum of Rs. 2,10,000 from State Government for preparing catalogues and for organising publicity in foreign magazines and newspapers. sum of Rs. 10,10,1000 was given by Government for construction of office-cum-show-room building in Varanasi. construction construction of office-cum-show-room building in Varanasi. construction was to be taken up by Public Works Department. assessee received grant of Rs. 1 lakh for organising buyer seller meet. grant of Rs. 1 lakh was received by assessee for giving awards to honour famous artisans and craftsmen. This amount was to be spent by Commissioner and Director of Industries. Out of above grants, assessee had spent only sum of Rs. 2,60,050 till end of year. sum of Rs. 1,32,838 was spent out of grant of Rs. 4,55,000 for Chikan Training Scheme, sum of Rs. 79,976 was spent out of grant of Rs. 2,50,000 received for organising exhibition in Australia and sum of Rs. 42,201 was spent out of Rs. 2,10,000 which had been received for conducting publicity in foreign countries. Out of other accounts, which had been received by assessee, assessee had not spent anything till end of year. IAC(Asst.) completed assessment of assessee for asst. yr. 1982-83 on 14th Dec., 1984. He did not include unspent amount of these grants in computation of income of assessee. Against order of IAC(Asst.), in respect of certain issues, assessee had gone in appeal before CIT(A). When CIT(A) heard appeal, he felt that enhancement of total income, as determined by IAC (Asst.), was called for insofar as grants received by assessee from State Government were required to be included in computation of total income of assessee. He gave notice of enhancement to assessee. He did not accept contentions of assessee that these amounts did not constitute his income. In all, assessee had received total sum of Rs. 66,44,544 by way of various grants. Out of this amount, assessee had merely spent sum of Rs. 2,60,015 during year, mentioned above. CIT(A) held that balance amount of Rs. 63,84,520 was required to be included in computation of income of assessee. Being aggrieved by this decision of CIT(A), assessee has come up in appeal before us. It was pointed out by authorised representative of assessee at time of hearing of appeal that similar question had arisen in it assessment for asst. yr. 1978-79. It was pointed out that Tribunal by its order dt. 10th Aug., 1983 in ITA No. 1824 (Alld) of 1981 had held that these grants did not constitute income of assessee. It was pointed out that Tribunal had come to conclusion that assessee was only acting as agent or trustee for these amounts which had been received from Government and these amounts did not constitute income of assessee. It was contended that CIT(A) was not justified in giving finding which ran counter to decision of Tribunal for asst. yr. 1978-79. On other hand, it was pointed out by Departmental Representative that principle of res-judicata or estoppel does not apply to income-tax proceedings. It was stated by Departmental Representative that in view of fresh light thrown on subject by CIT(A), it should be held that grants received by assessee should be taken into consideration while computing total income of assessee. assessee maintains its accounts on mercantile basis. Whenever assessee received grants from State Government they were credited in accounts opened under heads under which they were received. assessee did not debit expenditure which was incurred on implementation of various schemes, for which grants were received, to its profit and loss account. Such expenditure was debited in account which had been maintained in respect of respective grant. It has been stated by assessee that these grants had been placed by Government at its disposal t o be spent for specified schemes and whatever remained unspent was required to be returned to Government. assessee had not carried credit balance in respective accounts of various grants to its profit and loss account drawn at end of year. This has become bone of contention. assessee had shown these balances in balance sheet as amounts outstanding in respective accounts of various grants. According to Department, credit balances were required to be taken to profit and loss account. question in short, hence, to be resolved is whether assessee should have taken credit balances to its profit and loss account. case of assessee is that these amounts had not become property of assessee. It has been stated by assessee that these grants had not been stated by assessee that these grants had not been given to had not been stated by assessee that these grants had not been given to him outright. It was pointed out that State Government had specified scheme and particular grant was given by State Government to assessee for purpose of implementing scheme. It was stated that whatever amount remained unspent was required to be returned by assessee to State Government. According to assessee, when amount had not become property of assessee, it could not be considered to be income of assessee. It was pointed out that it was Government's money which was handed over to assessee to be spent strictly in accordance with instructions of Government and whatever had remained unspent was required to be returned to Government. It was thus pointed out that unspent amounts out of grants received by assessee could not by any stretch of imagination be regarded as gain of assessee. case of Department is that these amounts are trading receipts of assessee and hence they were required to be taken by assessee to its profits and loss account. We have considered matter carefully. amounts received by assessee are not of income character. If assessee has not become richer by these amounts, how can it be said that these amounts are profit of assessee. unspent amounts remained property of State Government. assessee is liable to return them. assessee has merely got possession of money, ownership of money still vests in State government. How can assessee be considered to have gained that which never came to belong to it. This aspect of matter has not been taken into consideration by CIT(A) at all. CIT(A) has referred to number of decided cases. issues that were dealt with in those cases were different. questions which were considered in those cases, were like whether subsidy or incentive for exports or any payment received to compensate for loss in profit on account of sale of commodity by assessee at rate fixed by Government, constituted as trading receipt of assessee or not. But in case under consideration, question that had arisen is different. Here, question that has arisen is whether grants, which have been placed by State Government at disposal of assessee to be spent by assessee for specific purpose and unspent amounts to be returned to Government, constituted profit or gain of assessee. It is not that each and every amount that is received is profit or gain of recipient. When it is said that person had gained some amount, it is meant that he has become absolute owner of that amount and hence has become richer by that amount. Supposing, person received loan from someone, it cannot be said that he has gained amount which he has received on loan. credit balance in account of person, from whom loan has been received, cannot be taken to profit and loss account. On other hand, credit balance will be shown in balance sheet as amount payable to that person. In cases mentioned by CIT(A) in his order, this was not in dispute that assessee had gained amount which it had received. In these cases, amounts had come to belong to assessee had assessee and assessee had become richer by these amounts. amounts in question were without dispute gain of assessee. What were considered in those cases were supplementary issues like whether gain was in capital account or of revenue account or whether gain had arisen in course of business of assessee and hence whether it had constituted his trading receipt or not. But here basic issue, whether grants received by assessee constituted gain of assessee or not, itself was first required to be resolved. We find that no attention has been paid by CIT(A) to this basic issue. Needless to say that ratio of decisions, on which CIT(A) has relied, will be of no help in deciding question arising in this appeal. Let us glance at some of cases relied upon by CIT(A). CIT(A) has referred to decisions of Allahabad High Court in case of Ratna Sugar Mills Co. Ltd. vs. CIT (1958) 33 ITR 644 (All). In that case, payment was made by Government of India in form of subsidy with object of compensating assessee for loss of profits arising to it from being compelled to pay additional wages to workmen by order of Government. I t was held that payment was for purposes of business of company and hence being trading receipt was taxable. In that case, assessee had debited expenditure on payment of additional wages to its profit and loss account. Thus, there was loss of profit to assessee. payment had been made by Government of India for loss of profits thus incurred by assessee. In that case, decided by Allahabad High Court, there was no dispute about there resulting gain to assessee on account of payment received from Government of India. dispute was only whether this gain was trading receipt and, as such, taxable or not. Let us suppose that in that case, assessee had debited in its profit and loss account normal wages which it had been paying to workmen. Let us suppose that Government of India had given some funds to assessee to be utilised for payment of additional wages to workmen and in case funds remained unutilised, they were to be returned to Government. assessee had made some expenditure on payment of additional wages and this expenditure had not been debited by assessee to its profit and loss account. Could it be held that unspent amount out of grant received from Government, which was liable to be returned to Government, would constitute gain of assessee. Obviously, assessee could not be said to have gained amount which it was still required to return to Government. Hence, whether receipt gives rise to gain will depend on facts of individual case and on way various entries have been passed. It is thus obvious that decision in case of Ratna Sugar Mills Co. Ltd. (supra) on which CIT(A) had relied, is not applicable to facts of case under consideration. There was no dispute in that case about arising of gain to assessee. dispute in that case was whether gain could be taxed as trading gain. That was secondary issue, whereas what we have to decide in present case is whether any gain had arisen to assessee or not. Let us now examine another case on which CIT(A) has relied. This is case of CIT vs. Swadeshi Cotton Mills Co. Ltd. (1980) 15 CTR (All) 81: (1980) 121 ITR 747 (All). In that case, assessee received certain import entitlements by way of incentive on exports of textiles. In consideration of surrender of import entitlements, assessee received subsidy from Export Promotion Fund. assessee credited amounts in its accounts under head 'misc. receipts' and claimed that amount received could not be taxed as its income. assessee claimed that amount was non-taxable. assessee's case was rejected by Allahabad High Court on ground that export subsidy would not have been paid to assessee had he not manufactured cloth and exported it. Hence, as would be apparent, in this case also there was no dispute whether subsidy received by assessee had constituted gain of assessee. only issue involved was whether gain was business gain and, as such, taxable or not. Hence, decision of this case will also be of no help in deciding t h e question with which we are confronted. What we have to decide in present case is whether on account of grants, which had been received by assessee to be spent on specified purposes and which in case of remaining unspent were required to be returned to Government, would constitute gain of assessee. In other cases also, which have been mentioned by CIT(A) there was no dispute about fact that amounts received had constituted gain of assessee. Whenever assessee received grants from State Government, they were credited in accounts opened under heads under which they were received. If any expenditure was incurred, it was not debited by assessee to its profit and loss account but it was debited to account of grant. grants had been given by Government for certain specified purposes. unspent amount of grant was required to be returned to Government. As mentioned above, assessee had received grants under various heads amounting to Rs. 66,14,544. assessee had spent by end of year only sum of Rs. 2,60,015. Hence, in various accounts, there were credit balances totalling to Rs. 63,84,529 in all. assessee had taken these credit balances to balance sheet and had shown them as amounts outstanding in respective accounts of grants. Department is of view that these credit balances were instead required to be taken to profit and loss account. simple yardstick is that if credit balance of any account is payable, it is obviously liability and hence it should appear in balance sheet. On other hand, if it is not payable, it is gain and hence should be taken to profit and loss account. As would be clear from above discussion, these amounts being payable by assessee to State Government, had constituted liability and hence assessee had rightly taken these amounts to balance sheet. These amounts could not be considered to be gain of assessee. We have already stated above as to how various cases, on which CIT(A) had relied to come to conclusion that these amounts were taxable being profit of assessee, are irrelevant to issue being considered here. assessee had at no stage debited expenditure which had been incurred by it on specified projects for which grants had been received to its profit and loss account. Hence, when assessee had not debited expenditure to its own profit and loss account, question of crediting amounts received by way of grants to its profit and loss account does not arise. We have been informed that in subsequent assessment years, when expenditure was in fact incurred, no deduction for such expenditure had been allowed by Department in computation of taxable income of assessee for those years. Hence, if enhancement made by CIT(A) for year under consideration was to be confirmed, result would be that assessee would be asked upon to pay tax on amounts which had, in fact, never come to belong to assessee and at same time no deduction would be admissible to assessee when assessee incurs expenditure for implementation of schemes for which grants had been received. amounts of grants had never become property of assessee, there was no increase in net assets of assessee on account of receipt of grants. Under circumstances, we fail to understand as to how amount of grants can be considered to be income of assessee. These receipts are not of income nature. We hence set aside order of CIT(A) on this behalf. We vacate enhancement of Rs. 63,84,529 as made by CIT(A). next ground of appeal is that CIT(A) was not justified to uphold addition as made by ITO of sum of Rs. 37,138 being interest accrued on advances made against packing credit loan scheme. contention of assessee is that principal amounts were doubtful of recovery and there was hardly any chance of realisation of any interest from parties to whom these amounts had been advanced. authorised representative of assessee drew attention to following resolution which was passed on 24th July, 1973: "The Board resolved that in view of uncertainty as regards quantum of interest which may be awarded by Arbitrator and time it would take to have Arbitrator's Award executed and recover interest there was no point in continuing to have this interest shown in Profit and Loss Accounts of Company and keep on paying income-tax thereon. Income-tax would be Company and keep on paying income-tax thereon. Income-tax would be paid in year in which interest was realised. Board further added that note to this effect should be recorded in Profit & Loss Account as suggested by one Income-tax Adviser. This decision will apply to following cases: M/s Har Narayan Gopi Nath, Delhi. M/s P.C. Bhandari & Co., Kanpur/Delhi. M/s Rampco Rubber Industries, Dehradun. M/s Chandra & Co., Farrukhabad. M/s Handicrafts India (P) Ltd., Delhi. M/s Hindustan Industrial Corporation, Kanpur. M/s Bhalla Enterprises, Kanpur. M/s Sand Overseas Corporation, Varanasi." assessee follows mercantile system of accounting. We will draw attention to decision of Supreme Court in case of State of Travancore vs. CIT (1986) 50 CTR (SC) 290: (1986) 158 ITR 102 (SC). It was held by Supreme Court that mere improbability of recovery of debt cannot be ground for not charging interest and not treating it as assessee's income. Keeping in view this decision of Supreme Court, it is held by us that claim of assessee that no addition by way of accrued interest on loans was required to be made is not acceptable. We hence uphold order of CIT(A) on this behalf. next ground of appeal is that CIT(A) was not justified in not allowing claim of assessee for bad debts of Rs. 4,35,671. We find that neither IAC (Asst.) in his order of assessment nor CIT(A) has given any details of debts deduction in respect of which had been claimed by assessee. We will on this behalf restore assessment to IAC (Asst.) for fresh adjudication after going into various details. next ground of appeal was that CIT(A) was not justified in not allowing claim of assessee for weighted deduction under s. 35B for s u m of Rs. 5,67,189. At time of hearing of appeal, authorised representative of assessee confined its claim for deduction under s. 35B in respect of foreign tour expenses only. He did not prove its claim in respect of other items of expenditure. On this matter, we will restore assessment to IAC (Asst.). We direct him to decide this matter afresh after looking into details. In result, appeal is partly allowed. *** U.P. EXPORT CORPORATION LTD. v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
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