2002 (9) TMI 66 - HC - Income Tax

Guest house depreciation and government excise-duty incentives: s.37(4) blocks depreciation; free-sale quota subsidy treated as capital, not taxable

Depreciation on a guest house was held barred by s.37(4) notwithstanding the general allowance under s.32, because Parliament expressly denied ... Depreciation on guest house - disallowance under section 37(4) - Whether, the Tribunal was right in-law in holding that the incentives given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipt and hence no tax was exigible thereon? - HELD THAT:- If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating 'capital' from 'revenue' is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital field or in the revenue field. The fact that section 32 deals with depreciation does not imply that the subject of the depreciation should not be dealt with in any other provision of the Act. It is open to the Legislature to deal with different aspects of the same subject matter in more than one provision in the statute. Section 32 is not to be regarded as a code with regard to depreciation which is unaffected by what is provided in other provisions with regard to depreciation. The absence of reference to section 32 in section 37(4) is not of any materiality, as the legis lative intent to deal with depreciation is clear to the extent that section denies depreciation on the depreciable assets specified therein. The legislative prohibition must be given full effect and not defeated in its entirety by allowing what is prohibited under section 37(4), under section 32 of the Act. It is well settled that a statute must be read as a whole and all its provisions read harmoniously. The court should not by a process of interpretation render the specific provision made in the law otiose and purposeless by allowing what is prohibited under the later special provision with regard to specified assets by falling back on an earlier general provision with regard to depreciation. As observed by the apex court in the case of Utkal Contractors and Joinery Pvt. Ltd. v. State of Orissa, [1987 (5) TMI 369 - SUPREME COURT] 'It is again important to remember that Parliament does not waste its breath unnecessarily. Just as Parliament is not expected to use unnecessary expressions, Parliament is also not expected to express itself unnecessarily'. The first question is answered against the assessee and in favour of the Revenue. Issues Involved:1. Depreciation on guest house disallowance under section 37(4) of the Income-tax Act.2. Treatment of incentives given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax as capital receipt.Issue-wise Detailed Analysis:1. Depreciation on Guest House Disallowance under Section 37(4):The primary issue here is whether the Tribunal was correct in holding that depreciation on guest houses should not be disallowed under section 37(4) of the Income-tax Act.Legal Provisions and Interpretation:Section 37(4) of the Income-tax Act, as it stood for the relevant assessment year, explicitly states:- Clause (i): No allowance shall be made for any expenditure incurred on the maintenance of any residential accommodation in the nature of a guest house.- Clause (ii): No allowance shall be made for depreciation of any building used as a guest house or depreciation of any assets in a guest house.The court held that the language of section 37(4) is unambiguous and clearly denies any depreciation for buildings used as guest houses or assets therein. The court rejected the argument that the absence of a reference to section 32 in section 37(4) implies that depreciation could still be claimed under section 32. The court emphasized that section 37(4) overrides section 37(1) and (3), and the legislative intent is to deny depreciation for guest houses.Conclusion:The court answered this issue against the assessee, affirming that depreciation on guest houses is disallowed under section 37(4).2. Treatment of Government Incentives as Capital Receipt:The second issue is whether the incentives given by the Government in the form of higher free sale quota of sugar towards excise duty and purchase tax should be treated as capital receipts and hence not taxable.Facts and Previous Rulings:The assessment year in question is 1989-90. The court noted that similar questions had been previously considered and answered against the Revenue in several decisions, including those of the Calcutta High Court and the Supreme Court.Scheme and Its Purpose:The scheme under consideration aimed to provide incentives to new sugar factories and expansion projects to compensate for the higher capital costs. The incentives included a higher free sale sugar quota and allowing manufacturers to collect excise duty on the sale price of free sale sugar in excess of the normal quota but pay the government only the excise duty on levy sugar.Legal Analysis:The court analyzed the true object of the scheme, which was to enable sugar factories to become viable by using additional funds generated through incentives for loan repayments. The incentives were intended to meet capital costs, not to provide additional disposable income post-production. The court referred to the Supreme Court's observation in K.C.P. Limited v. CIT, stating that the true character of the receipt determines its taxability.Distinguishing from Revenue Receipts:The court distinguished this case from others where post-production receipts were treated as trading receipts, emphasizing the specific purpose and object of the scheme to meet capital costs.Conclusion:The court concluded that the incentives given by the Central Government in the form of higher free sale quota of sugar and excise duty should be treated as capital receipts. However, the subsidy linked to purchase tax extended by the State Government was considered a revenue receipt, as it was not linked to the expenditure incurred in setting up the industry and could be used at the assessee's discretion.Final Answer:- The incentives given by the Central Government in the form of higher free sale quota of sugar and excise duty are capital receipts.- The subsidy linked to purchase tax extended by the State Government is a revenue receipt.Summary of Judgment:The court delivered a comprehensive judgment addressing two key issues. On the first issue, the court held that depreciation on guest houses is disallowed under section 37(4) of the Income-tax Act, rejecting the Tribunal's view. On the second issue, the court distinguished between the nature of incentives provided by the Central and State Governments, concluding that incentives related to higher free sale quota of sugar and excise duty are capital receipts, while subsidies linked to purchase tax are revenue receipts.