1997 (7) TMI 69 - HC - Income Tax

Government corporation subsidy not taxable under Income-tax Act; deemed capital, not revenue receipt

The court held that the subsidy received by the government corporation was not assessable under the Income-tax Act as it covered only supervision charges ... Subsidy, Capital Or Revenue Issues Involved:1. Assessability of subsidy received by the assessee under the Income-tax Act.2. Legitimacy of Tribunal's findings regarding the nature of expenses and the character of the subsidy.Issue-wise Detailed Analysis:1. Assessability of Subsidy Received by the Assessee:The primary issue was whether the subsidy received by the Kerala Land Development Corporation Ltd. from the Government is assessable under the Income-tax Act. The Revenue contended that the subsidy constitutes a revenue receipt and is therefore taxable. Several precedents were cited to support this view, including Pontypridd and Rhondda Joint Water Board v. Ostime, Raghuvanshi Mills Ltd. v. CIT, Dhrangadhra Chemical Works Ltd. v. CIT, and CIT v. Swadeshi Cotton Mills Co. Ltd. These cases generally held that subsidies received to assist in business operations are revenue receipts and thus taxable.However, the court distinguished the current case from these precedents. It noted that the assessee, a government corporation, was not engaged in trading activities but was discharging statutory duties without a profit motive. The court emphasized that the subsidy covered only the supervision charges and overhead expenses incurred in the execution of land development schemes, which are public interest activities. Consequently, the court held that the subsidy received by the assessee could not be treated as a trade receipt and thus was not taxable.2. Legitimacy of Tribunal's Findings:The second issue involved the legitimacy of the Tribunal's findings regarding the nature of expenses and the character of the subsidy. The Tribunal had held that:- 'The cost of work was not to include charges for establishment and supervision.'- 'These expenses have to be borne by the assessee.'- 'There was always a deficit in the revenue account.'- 'It was for this reason that the Government had agreed to pay to the assessee the subsidy.'- 'It does not spring from any activity carried on by the assessee.'- 'The amount so received would not partake of the character of a revenue receipt.'- 'Without grants from the Government there would be no possibility of the assessee carrying on its activity for long.'- 'The contribution made by the Government therefore was to augment the capital of the assessee.'- 'This is not a trading receipt.... it was not received... in the character of a trader.'- 'It is for that reason the subsidy is granted by the Government.'The court affirmed these findings, noting that the statutory framework under the Kerala Land Development Corporation Ltd. (Special Powers) Act, 1974, did not envisage profit-making activities. The subsidy was necessary to cover the statutory duties of the Corporation, which were in the public interest and not for profit. Therefore, the subsidy was deemed a capital receipt rather than a revenue receipt.The court also referenced the decision in Crook v. Seaham Harbour Dock Company, where a grant received for specific purposes was not considered part of the company's profits or gains. This principle was applied to the present case, reinforcing that the subsidy was not a revenue receipt.Conclusion:The court concluded that the Tribunal correctly held that the subsidy received by the assessee-Corporation would not partake of the character of a revenue receipt. Therefore, the subsidy was not assessable under the Income-tax Act. The court answered question No. 1 in the negative, against the Revenue, and question No. 2 in the affirmative, in favor of the assessee. The judgment was ordered to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.