M/S. SAHNEY STEEL AND PRESS WORKS LTD., HYDERABAD ETC, ETC. versus COMMISSIONER OF INCOME TAX, ANDHRA PRADESH-I, HYDERABAD

M/S. SAHNEY STEEL AND PRESS WORKS LTD., HYDERABAD ETC, ETC. v. COMMISSIONER OF INCOME TAX, ANDHRA PRADESH-I, HYDERABAD

SEPTEMBER 19, 1997

[SUHAS C. SEN AND D.P. WADHWA, JJ.]

A

B

Income Tax Act, 1961-Sections 28, 41-Subsidy-Whether taxable- C

Determination of nature-Subsidy granted by State Government for jive years from the date of co_mmencement of production-All incentives are production incentives, to be given only after start of production-Held, object of subsidy is decisive not the manner or source of payment--,-lncentives like sales tax refand, electricity charges were intended to enable the assessee to run business more profitably and not for the purpose of selling the business-Hence, the D subsidies are operational subsidies and not capital subsidies and are of revenue character and to be taxed accordingly.

The Andhra Pradesh State Government was giving subsidy under a notification, in the form of certain facilities and incentives to new industrial underlakings, which commenced production on or after l.l.1969, with E investment capital not exceeding a certain limit. The incentives were to be given by way of refund of sales tax, subsidy on power consumed. for production, exemptions from payment of water rate and also refund for water rate in respect of water drawn from the Government sources.

The Assessee-Company set up a factory, which went into production in F

the year 1973. In the assessment year 1974-75 the assessee received refund under the subsidy. The Income Tax Officer, while making the assessment, included the amount of refund in the assessable income of the assessee company which was also confirmed by the Commissioner of Income Tax (Appeals). However, the Tribunal in appeal held that the said amount cannot G be deemed to be the income of the assessee under section 41 (1) of the Act.

The question in these appeals filed by the assessee company as well as the Revenue before this Court was whether the subsidy so received by the assessee company in the relevant accounting year was taxable as a revenue- receipt or not.

189

H

190

A

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

Disposing of the appeals, this Court

HELD : 1. All the incentives in question are production incentives in the ~ense that the Assessee-company will be entitled to these incentives only after it goes into production. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power B was confined to "power consumed for production", i.e. if power is consumed for any other purposes like setting up the plant and machineries, the incentives will not be given. Refund of sales tax will also be in respect of Taxes levied after commencement of production and up to a period of five years from the date of commencement of production. So, the subsidies are operational

C subsidies and not capital subsidies. (192-G-H; 193-A)

Ostime v. Pontypridd and Rhondda Joint Water Board, 28 T.C. 262,

relied on.

Seaham Harbour Dock Company's Case, 16 T.C. 333; Smart v ..

Lincolnshire Sugar Company Ltd., 20 T.C. 643 and St. John Dry Dock & Ship

D Building Co., v. Minister of National Revenue, 4 D.R.L. 1, referred to.

2. The character of the subsidy in the hands of the recipient, 'whether revenue or capital' will have to be determined by having regard to the purpose for which the subsidy is given. If it is given IJy way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading-receipt. E In the instant case subsidies have not been granted for production of or bringing into existence any new assets. The subsidies were granted year after year only after setting up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the purpose of carrying on of the business of the assessee. Therefore, it must be held that the subsidies are of revenue character and will have to be taxed accordingly. (198-C; 202-B-C)

F

G

V.S.S. V. Meenakshi Achi & Anr. v. Commissioner of Income Tax, Madras,

60 ITR 253, relied on.

Commissioner of Income Tax v. Dusad Industries, 162 ITR 784, overruled.

Higgs v. Wrightson, (1944) 26 T.C. 73; Commissioner of Income Tax, v. Ruby Rubber Works Ltd., 178 ITR 181; Sadichha Chitra v. Commissioner of Income Tax, 189 ITR 774; Commissioner of Income Tax v. Udaya Pictures (P) Ltd., 225 ITR 394; Commissioner of Income Tax v. Chitra Ka/pa, 177 ITR 540 and Kosram Industries and Cotton Mills Ltd. v. Commissioner of Income

H Tax, 191ITR518, referred to.

SAHNEY STEEL PRESS WORKS LTD. v. C.l.T. [SEN, J.]

191

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2193of1985 A

Etc. Etc.

From the Judgment and Order dated 3.11.83 of the Andhra Pradesh High

Court in R.C. No. 68of1982.

WITH

B

C.A. Nos. 10091/95, 5279/96, 2008/88, 425/85 and 1664-65/97.

B.B. Ahuja, (S. Ganesh, Mrs, Verma) for Mis JBD & Co. A.V. Rangam A. Rangandhan, G. Gopalakrishnan, Buddy A. Ranganadhan, S. Rajappa, Ms. Lakshmi Iyenger, (Arvind Kr.) fpr Mrs. M. Karanjawala for the appearing C parties.

The Judgment of the Court was delivered by

SEN, J. The question in this case is whether the subsidy received by the assessee-Company from the Andhra Pradesh Government it taxable as D revenue receipt or not. It appears from the notification issued by the Andhra Pradesh Government that certain facilities and incentives were to be given to all the new industrial undertakings which commenced production on or after 1.1.1969 with investment capital (excluding working capital) not exceeding Rs. 5 crores. The incentives were to be allowed for a period of five years from the date of commencement of production. Concession is also available for E subsequent expansion of 50 per cent and above of existing capacities provided in each case, the expansion was located in a city or town or panchayat area other than that in which the existing unit is located. The incentives were :

"(a) Refund of sales tax on raw materials, machinery and finished F

goods, levied by the State Government subject to a maximum of 10% of the equity capital paid up in the case of public limited companies and the actual capital in the case of others;

(b) Subsidy on power consumed for production to the extent of 10% in the case of medium and large scale industries and 12 1/2% in G the case of small scale industries. This concession will not apply to cases where concessional tariffs are allowed by the Electricity Board;

(c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body;

(d) Refund of water rate in respect of water drawn from a H

192

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A

B

c

Government source or from a source maintained by any local body but returned purified to it;

( e) Liability on account of assessment of land revenue or taxes on land used for establishment of any industry, shall be limited to the amount of such taxes payable immediately before the land is so used.

(f) The following additional incentives will be allowed to new industrial units set up in the ayacut areas of Nagarjunasagar, Pochampad and K.C. Canal in the Ramagundam-Kothagudem areas and in the following eight backward districts:

·

xxx

xxx

xxx

xxx''

The salient features of the scheme formulated by the Andhra Pradesh Government was that the incentives were not available unless and until production had commenced. T"~ availability of the incentives would be limited to a period of five years from the date of commencement of production. The D incentives were to be given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemptions were given also from payment of water rate. Refund was also provided for water rate. in respect of water drawn from Government sources. There were certain additional incentives with which we are not concerned in

E this case.

The important point to note is that all the incentives are production incentives in the sense that the Company will be entitled to these incentives 'only after it goes into production. The scheme was not to make any payment directly or indirectly for setting up of the industries. It is only after the F industries had been set up and production had been commenced that the

incentives were to be given.

The second important thing to note is that the manner in which the incentives were given is of no consequence for determination of the question G raised in this case. Incentives were given by way of refund of sales tax on raw material, machinery and finished goods. Similarly, subsidy on power was confined to "power consumed for production". In. other words, if power is consumed for any other purpose like setting up the plant and machineries, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and upto a period of five H years from the date of commencement of production. It is difficult to hold

SAHNEY STEEL PRESS WORKS LTD. vo C.I.T. [SEN, J.]

193

these subsidies as anything but operational subsidies. These subsidies were A given to encourage setting up of industries in the State of Andhra Pradesh · by making the business of production and sale of goods in the State more

profitable.

Mr. Ganesh appearing on behalf of the assessee has contended that the incentive scheme was for setting up new industrial undertakings in the State B and also for the purpose of stimulating substantial expansion of the industries. The primary object was rapid industrialisation of the State. This object was sought to be achieved by the various incentives. It. was further contended that the subsidy given by the State was upto I 0% of the capital investment in the undertakings. Since the subsidy was calculated on the basis of quantum C of investment in capital such subsidy cannot be considered to have been received by the assessee on revenue account.

It was further contended by Mr. Ganesh that grant of subsidy was on the basis of refund of sales tax on raw materials, machineries and finished goods already paid for by the assessee. These subsidies would be enjoyed D by the assessee for a period of five years and was~ of a capital nature. The object for granting refund of sales tax was that the assessee could set up new business or expand substantially his existing business.

Before we examine these propositions advanced by Mr. Ganesh, we will E

examine the facts of the case a little more. The assessee-Company Mis. Sahney Steel & Press Works Ltd., set up a factory at Patancheru in Medak District, which went into production in the year 1973. The assessee maintains its accounts according to the calendar year. It was, therefore, entitled to the benefits of the said G.O. in the calendar year 1973, which means the assessment year 1974-75. In the said accounting year, the 11ssessee obtained refund of the F following three items totalling Rs. 14,665.70 in terms ofG.O. Ms. No. 455. The three items are:

•

(i) Refund of sales tax on purchase of machines

during 1971-72

(ii) Refund of sales tax on purchase of raw materials during the year 1971-72

(iii) Refund of sales tax paid on sale of finished

goods during the year 1971-72

Rs.

G

5,839.93

390.79

8,423.98

H

194

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A

The Income Tax Officer, while making the assessment for the year 1974-' 75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the Commissioner of Income Tax (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs. 14,665.70, refunded to the assessee in terms of B the said G.O. "did not represent refund of sales tax" but was a development subsidy in the nature of a capital receipt. The Tribunal also held that the said amount cannot be deemed to be the income of the assessee under section 41(1) either. Thereupon the Revenue asked for and obtained the reference of the following question:

C

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was not liable to be included in the total income assessable for the assessment year 1974-75?"

D

The contention of Mr. Ganesh that the subsidies were of capital nature and were given for the purpose of stimulating setting up and expansion of industries in the State cannot be upheld because of the subsidy scheme itself. No financial assistance was granted to the assessee for setting of the industry. It is only when the assessee had set up its industry and commenced production E that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to prcvide the newly set up industries a helping hand for 5 years to enable them to be viable and competitive. Sales tax refund and the relief on ac~ount of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably. The basic principle to be applied for F detem1ination as to whether a subsidy payment is in the nature of capital or revenue has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda Joint Water Board, 28 T.C. 262, in the following words :

#

"The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipt, that is, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D. It is sufficient to cite the decision of this House in the sugar beet . case (Smart v. Lincolnshire Sugar Co., Ltd., 20 T.C. 643; 156 L.T. 215, as an illustration.

G

H

SAHNEY STEEL PRESS WORKS LTD. v. C.l.T. [SEN, J.] .

195

The second proposition constitutes an exception. If the undertaker A

is a rating authority and the subsidy is the proceeds of rates imposed by it or comes from a fund belonging to the authority, the identity of the source with the recipient prevents any question of profits arising- see, for example, Lord Buckmaster's explanation in Forth Conservancy Board v. Commissioner of Inland Revenue, (1931) A.C. 540, at page B 546 (16 T.C. 103, at page 117) and e-0mpare what Lord Macmillan said in Municipal Mutual Insurance Ltd., v. Hills, 16 T.C. 430, at page 448."

In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is in the nature C of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the Notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably.

D

In the judgment delivered by Viscount Simon with whom Lord Thankerton agreed two earlier decision were re lied on. The first of these two decisions was the case of Seaham Harbour Dock Company v. Crook, 16 T.C. 333. In this case, the Harbour Dock Company had applied for and obtained grants from the Unemployment Grants Committee from funds appropriated by E Parliament. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. The payments were made several times a year for some years. The Dock Company had undertaken an extension of its docks. The extended dock was also for relieving unemployment problem. Because the work undertaken was extension of the dock and the main purpose was relief of unemployment, the House of Lords F held that the financial assistance given to the company for extension of the dock cannot be regarded as receipt of the trade. Lord Atkin explained the position by saying that :

"It is a receipt which is given for the express purpose which is named, and it has nothing to do with their trade in the sense in which you G are considering the profits or gains of the trade."

Lord Buckmaster observed as under :

"Was this a trade receipt?, and my answer is most unhesitatingly : No. It appears to me that is was nothing whatever of the king. It was a H

196

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed."

B

Mr. Ganesh strongly relied on Seaham Harbour Dock Company's Case (supra) which does not come to the assistance of his contention in any way. It that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of C the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given in several instalments as the work of extension of the dock continued. Money was given for the express purpose which was named. It was found by House of Lords that it had nothing to do with the trading of the Company.

D

In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to

E a competitive level with other established industries.

The second case is Lincolnshire Sugar Company Ltd. v. Smart, 20 T.C. 643. In that case it was found that Lincolnshire Sugar Company Ltd., carried on the business of manufacturing sugar from home grown beet. The Company F was paid various sums under British Sugar Industry (Assistance) Act, 1931, out of monies provided by Parliament. The question was whether these monies were to be taken into account as trade receipts or not. The object of the grant was that in the year 1981, in view of heavy fall in prices of sugar, sugar industries were in difficulty. The Government decided to give financial assistance to certain industries in respect of sugar manufactured by them G from home-grown beet during the relevant period. Lord Macmillan held that:

"What to my mind is decisive is that these payments were made to the Company in order that the money might be used in their business.'' ...

He further observed that :

H

"I think that they were supplementary trade receipts bestowed upon

SAHNEY STEEL PRESS WORKS LTD. v. C.I.T. [SEN, J.]

197

the Company by the Government and proper to be taken into A computation in arriving at the balance of the Company's profits and gains for the year in which they were received."

In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the B assessee could not· use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like exten5ion of docks as in the Seaham Harbour Dock Company's Case.

c

· There is a Canadian case St. John Dry Dock & Ship Building Co. Ltd. v. Minister of National Revenue, 4 D.L.R. I., which has close similarly to the case of Seahn Harbour Dock Company's Case (supra). In that case, it was held that where subsidies were given under statutory authority, the statutory purpose for which they are authorised is relevant and may even be decisive D in determining whether it is taxable income in the harids of the recipient. In that case, it was pointed out after discussing the Seaham Harbour Dock Company's Case (supra) as well as that of Lincolnshire Sugar Company's Case (supra) that subsidy given by the Canadian Government to encourage construction of dry docks was "an aid to the construction of dry dock and not an operational subsidy".

E

This precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to setting up of the industry of the assessee. As we have seen earlier, the payments were F to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assesse.e's factory. The subsidies are operational subsidies and not capital subsidies.

Mr. Ganesh's further argument was that of the three· types of refunds G

contemplated in the scheme, the refund of sales tax on purchase of machinery must be treated as capital. The payment for the purchase of machineries must · . be of capital nature and the entire payment of sales tax must have been treated as capital expenditure of the Company. If any refund of sales tax paid on purchase of capital goods is made, the refund will partake of the character which it had originally borne. Such refund cannot in any circumstances be H

198

SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A treated as trade receipts or supplementary trade receipts. This argument, though attractive at first blush, does not bear close scrutiny. This argument overlooks the basic principle laid down in the cases discussed abu ve. It is not the source from which the amount is paid to the assessee which is determinative of the question whether the subsidy payments are of revenue B or capital nature. The first proposition stated by Viscount Simon in Ostime 's Case (supra) is that if payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The sales tax upon collection forms part of the public funds of the State. If any subsidy is given, the character of the subsidy in ·the hands of the recipient-whether revenue or capital-will have to be C determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial.

E

For example, if the scheme was that the assessee will be given refund D of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plants and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the Rev~nue to contend that the refund of sales tax paid on raw materials or finisherl products must be treated as revenue receipt in ·the hands of the assess~e. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Company's Case (supra), the monies must be treated as to have been received for capital purpose. But if monies are given to the assessee for F assisting him in carrying out the business operation and the money is given only after a~d conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.

In Seaham Harbour Dock Company's Case (supra) which appears to be G the sheet-anchor of the argument of Mr. Ganesh, the company in contemplation of an expansion of its docks had applied for financial assistance to the Unemployment Grants Committee. The Committee gave financial assistance from time to time as the work progressed and the payment was equivalent to half the interest for two years (not exceeding average rate of 5 Yi per cent per annum) on approved expenditure made out ofloans. Even though the payment H was equivalent to half the interest amount payable on the loan which might

SAHNEY STEEL PRESS WORKS LTD. v. C.I.T. [SEN, J.]

199

have been a revenue expenditure the House of Lords had no difficulty in A holding that the money received by the Company was not in course of trade but was of capital nature.

We shall now see how our Courts have dealt with the problem.

This Court in V.S.S. V. Meenakshi Achi & Anr. v. Commissioner of B

Income Tax, Madras, 60 !TR 253, followed the same principal and relied upon and approved of an English decision in the case of Higgs v. Wrightson, (1944) 26 T.C. 73. There a dairy farmer had received grant in respect of the ploughing and bringing into a state of cleanliness and fertility land previously under grass for seven years or more. Macnaghten, J. held that since the amount of C the grant depends on the area ploughed, the grani was towards the expenditure of ploughing and, therefore, a revenue receipt in the hands of the assessee. It was observed in Meenakshi Achi's Case (supra) by Subba Rao, J. (as His Lordship then was) :

"So too, in the instant case, the payments to the planters were made D against the expenditure incurred for maintaining the rubber plantations.

Having regard to the aforesaid facts, we, must hold that the amounts from the fund earmarked for the ·appellants on the basis of the rubber produced by them were paid against .the expenditure incurred by them for maintaining the rubber plantation and producing the r:.ibber."'

E;

A full Bench of the Kerala High Court examined the question of subsidy received for replanting rubber trees in the case of Commissioner of Income Tax v. Ruby Rubber Works Ltd., 178 !TR 181. It dealt with a scheme of subsidy framed by the Rubber Board in 1967 for replanting rubber plants. The ~ubsidy F was not given for budding immature unselected plants but was restricted to replanting only of old and uneconomic trees. The subsidy was not for the purpose of upkeep or maintenance of mature or immature rubber trees. On these facts, the Full Bench came to the conclusion that the object of the Scheme was replanting and the subsidy was being paid for planting high G yielding variety of rubber plants which the Rubber Board and the Government thought was necessary for the development of the rubber industry. What was sought to be achieved was a public purpose of vital public interest.

The Full Bench pointed out that the economic assistance offered by the Board was under stringent conditions for implementing a scheme designed to H

200

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A achieve development of rubber plantation industry on efficient and economic lines. After an exhaustive review of the case law and the subsidy scheme, the Full Bench observed :

B

c

D

"We: are tempted to say that the subsidy received by the assessee is used to acquire an asset by replanting high-yield variety of rubber trees. The difference is, as said by Bowen L.J., the expenditure in the acquisition of the concern will be capital expenditure and the expenditure in carrying on the concern is revenue expenditure. This makes the vital difference between the cases reported in Karimtharuvi Tea Estates Ltd., v. State of Kera/a, (1963) 48 ITR SC 83, and Travancore Rubber and Tea Co. Ltd., v. Commr. of Agrl. I.T. (1961), 41 !TR 751 SC.''

So far as the scheme is concerned, the Full Bench further observed :

~

"The subsidy scheme makes it very clear that the amount of subsidy has to be spent 'for the acquisition of an asset' by replanting rubber plants of high-yielding varieties."

It will be seen from this decision that the Full Bench relied upon the decision of the House of Lords in Seaham Harbour Dock Company's Case E (supra) ~nd pointed out th~t a beneficial scheme had been evolved for replanting of the trees aud as a result of replanting, the assessee acquired an asset which was of capital nature. It was further pointed out in that judgment that the scheme was definitely only for one purpose, viz., replanting. It was not for the purpose of upkeeping and maintaining mature of immature rubber plants. This was the vital factor on the basis of which the Full Bench of the F Kerala High Court came to the conclusion that the subsidy given for replanting of old rubber trees cannot be included as a revenue receipt of the rubber company.

Our attention was drawn to the case of Sadichha Chitra v. Commissioner G of Income Tax, 189 ITR 774. In that case, it was noted that in a given case subsidy may be granted with the object of supplementing trade receipts and profits of the recipient. In another case, the scheme of subsidy may have been formulated by the authority to assist the assessee in acquiring a capital asset or for the growth of the industry generally in public interest without any objective of supplementing trade receipts or recbupment of revenue expenditure

H already incurred by the assessee.

SAHNEY STEEL PRESS WORKS LTD. v. C.l.T. [SEN, J.]

201

In that case, the Government of Maharashtra sanctioned a subsidy A

scheme for grant of financial assistance to Marathi film producers to promote production of better Marathi films and help Marathi colour films in preference to black and white films. It will be seen from-the facts noted in the judgment of the Bombay High Court that any producer of Marathi film could apply to the Collector of Bombay (Entertainment Duty Department) for grant of a certificate of eligibility for getting the grant. The Collector after holding B necessary enquiry in respect of various matters referred in the scheme would recommend the release of the amount to the applicant. One of the pre conditions of the grant was that the applicant must prepare adequate plants for production new film and also fulfil financial and technical requirements for production of the film. Financial assistance was to be given in four equal C instalments in the following manner. The first instalment was to be released after completion of one third of the proposed footage of the film, the second instalment had to be released on completion of two third of the proposed footage in a final shape and the third· instalment on the completion of the entire film ready for censors and the final instalment had to be released immediately after the new film had crossed the hurdle of censorship and D actual release. It was noted in the judgment :

"The said subsidy was released to the assessee so as to assist the assessee to acquire a new capital asset so as to meet part of the cost of the new film and public interest."

'

E

On the basis of that vital distinction, the Court held that the ratio of the judgment of this Court in Meenakshi A chi's Case was not applicable in the facts of the case before it.

In the case of Commissioner of Income Tax v. Udaya Pictures (P) Ltd., 225 !TR 394, subsidy was granted by the State Government for producing new F regional films. It was held that the entitlement to the subsidy sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. What was received by the assessee was not capital receipt but a subsidy.

The facts of this case have not been clearly stated in the judgment. But it appears that subsidy was granted after making of the film. The Bombay judgment in the case of Sadichha Chitra (supra), proceeded on the footing that subsidies were granted as and when the film was being completed which resulted in creation of a capital asset. A similar view was taken by the Andhra Pradesh High _Court in the case of Commissioner of Income Tax v. Chitra H

G

202

SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R.

A Ka/pa, 177 !TR 540, where it was held that subsidy was for making a film and was to be treated as a capital receipt because the film was capital asset in the hands of the producer. The view taken by the Bombay and Kerala High Courts appears to be correct and accords with the principle laid down in Seaham Harbour Dock Company's Case (supra) that assistance given by the

B Government for completion of a project must be of capital nature.

In the case before us, subsidies have not been granted for production of or bringing into existence any new asset. The subsidies were granted year after year only after se#ing· up of the new industry and commencement of production. Such a subsidy could only be treated as assistance given for the C purpose of carrying on of the business assessee. Applying the test of Viscount Simon in the case of Ostime, it must be held that these subsidies are of revenue character and will have to be taxed accordingly.

A Division Bench of the Calcutta High Court in the case of Kesoram Industries and Cotton Mills Ltd v. Commissioner of Income Tax, 191 !TR 518, D also examined a scheme of refund of sales tax framed by Andhra Pradesh Government to assist newly set up industries. There the assessee had set up a cement plant. The Calcutta High Court held that receipt of the incentives from the State Government was incidental to carrying on the business of the assessee. Such subsidies were received year after year by refund of sales tax. E The benefit was received in course of carrying on the assessee's business. It was benefit incidental to its business. The subsidy was not intended to be contribution towards capital outlay of the industry. Therefore, it was held that the subsidy received by the assessee in that case could not be regarded as anything but a revenue receipt.

F

The Madhya Pradesh High Court in the case of Commissioner of Income Tax. v. Dusad Industries, 162 !TR 784, dealt with a case where Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was riot to supplement the profits made by industries. In that view of the G matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent of the sales tax paid in a year for a period of five years from the day of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously H the subsidy was given by way of an incentive for capital investment and not

SAHNEY STEEL PRESS WORKS LTD. v. C.l.T. [SEN. J.]

203

by way of addition to the profits of the assessee as was clear from the facts A and circumstances of the case. The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was act'.rnlly commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting B up of the industry which was already there but as an assistance after the industry commenced production. The view taken by the Madhya Pradesh High Court is erroneous.

In view of the aforesaid, it is not necessary to discuss the poin,t relating to applicability of Section 41 (I) of the Income Tax Act, 1961 in this case. C

The Appeal fails and is dismissed. There will be no order as to costs.

CA. Nos. 10091195, 5279196, 2008188, 425185

In view of our above decision, these appeals also stand dismissed with D

no order as to costs.

CA. Nos. 1664-65197.

These appeals by the Revenue are allowed with no order as to costs.

C.A. Nos. 2 I 93/85, I 0091/95, 5279/96, 2008/88; 425/85, dismissed. E

B.K.S.

C.A. Nos. 1664-65/97, allowed.

Appeals disposed of.