1982 (4) TMI 40 - HC - Income Tax

High Court rules subvention payment not taxable under Rule 10(ii)

The High Court ruled in favor of the assessee, holding that the subvention payment of pounds 3,00,000 should not be considered a trading receipt and ... Income Deemed To Accrue Or Arise In India Issues Involved:1. Whether the subvention payment of pounds 3,00,000 received by the assessee-company was liable to be taken into account in the computation of the profit liable to tax in India u/r 10(ii) of the Income-tax Rules, 1962.Summary:Issue 1: Nature of Subvention PaymentThe core issue revolves around the nature of the subvention payment made u/s 20 of the Finance Act, 1953 (U.K.). The relevant provisions of s. 20 state that a subvention payment is treated as a trading receipt for the payee-company and an allowable deduction for the paying-company. However, the Indian Income-tax Act, 1961, does not have a corresponding provision. The Tribunal held that the subvention payment should not be treated as income in the hands of Platt Bros. (Sales) Ltd. The High Court agreed, stating that the receipt of pounds 3,00,000 is intrinsically linked with the loss suffered by the company due to bad debts, which are not deductible under the Indian I.T. Act. Therefore, the subvention payment cannot be considered a trading receipt.Issue 2: Comparison with SubsidyThe Department argued that a subvention payment is similar to a subsidy, which is usually included in the income of the company. However, the Court differentiated between the two, stating that a subsidy is generally given to assist in trading activities, whereas a subvention payment is for adjusting profits and losses among associated companies for tax purposes. The Court concluded that a subvention payment cannot be treated as a trading receipt under Indian law.Issue 3: Rule 10(ii) of the I.T. Rules, 1962The income of the assessee-company was determined by applying r. 10(ii), which involves computing the total income of Platt Bros. (Sales) Ltd. by applying the provisions of the I.T. Act, 1961. The Court held that r. 10(ii) requires the calculation of the ratio of the assessee's receipts in India to its total world receipts. This ratio must be applied to the total world income to determine the income in India. The Court rejected the argument that transactions unconnected with Indian business activities could be ignored, stating that such an interpretation would defeat the purpose of r. 10(ii).Conclusion:The High Court answered the question in the negative, ruling in favor of the assessee and against the Department. The subvention payment of pounds 3,00,000 cannot be treated as a trading receipt and thus is not liable to be included in the computation of the profit liable to tax in India u/r 10(ii) of the Income-tax Rules, 1962. The applicant was ordered to pay the costs of the reference to the respondent.