2013 (7) TMI 807 - HC - Income Tax

Court deems power subsidies as taxable revenue; transit house deduction disallowed. Precedents cited.

Commissioner of Income-tax Versus Rassi Cements Ltd. and Deccan Cements Ltd.

Commissioner of Income-tax Versus Rassi Cements Ltd. and Deccan Cements Ltd. - [2013] 351 ITR 169 Issues Involved:1. Nature of power subsidy received by the assessee-company - whether it is taxable as a revenue receipt or a capital receipt.2. Deduction claimed under maintenance of transit house in light of section 37(3), (4), and (5) of the Income-tax Act.Issue-wise Detailed Analysis:1. Nature of Power Subsidy:The primary issue was whether the power subsidy received by the assessee-company should be considered a revenue receipt and thus taxable, or a capital receipt and thus non-taxable. The court examined the facts and circumstances of the cases, including the Government Orders (G. O. Ms. No. 455, dated May 3, 1971, and G. O. Ms. No. 224, dated March 9, 1976) that facilitated the grant of power subsidies.- Facts and Circumstances:- M/s. Raasi Cements Ltd. and M/s. Deccan Cements Ltd. treated the power subsidy as a capital receipt in their tax returns, which was contested by the Assessing Officer, who classified it as a revenue receipt.- The Appellate Commissioner and the Appellate Tribunal initially sided with the assessee, considering the subsidy a capital receipt based on precedents like Senairam Doongarmall v. CIT and CIT v. Godavari Plywoods Ltd.- The Revenue, however, sought a reference under section 256(1) of the Income-tax Act, arguing that the subsidy should be taxed as a revenue receipt, citing CIT v. Rajaram Maize Products.- Legal Principles:- The court noted that the classification of a receipt as capital or revenue depends on the purpose for which the subsidy is given, as established in cases like Sahney Steel and Press Works Ltd. v. CIT and CIT v. Ponni Sugars and Chemicals Ltd.- The 'purpose test' is crucial: if the subsidy is for setting up an industry (capital purpose), it is a capital receipt; if it is for operational assistance (revenue purpose), it is a revenue receipt.- Judgment:- The court concluded that the power subsidy/rebate in question was linked to production and operational efficiency, not to the initial establishment of the industry.- Referring to CIT v. Sahney Steel and Press Works Ltd., the court highlighted that subsidies given after the commencement of production are typically revenue receipts.- The court also referenced CIT v. Rajaram Maize Products, where power subsidies were deemed revenue in nature.- Consequently, the court ruled that the power subsidies received by the assessees were trading receipts and thus taxable as revenue receipts.2. Deduction under Maintenance of Transit House:In R. C. No. 273 of 1996, an additional issue was whether the deduction of Rs. 96,765 claimed under maintenance of a transit house was allowable under section 37(3), (4), and (5) of the Income-tax Act.- Legal Context:- The Supreme Court's decision in Britannia Industries Ltd. v. CIT clarified that expenses towards rents, repairs, and maintenance of premises used as a guest house are not deductible under section 37(4).- Judgment:- The court applied the precedent from Britannia Industries Ltd. v. CIT, ruling that such expenses are not deductible.- Therefore, the question was answered in favor of the Revenue, disallowing the deduction claimed by the assessee.Conclusion:All questions referred in the three cases were answered in the negative, in favor of the Revenue and against the assessee. The power subsidies were deemed taxable as revenue receipts, and the deduction for the maintenance of the transit house was disallowed. The referred cases were disposed of without any order as to costs.