2008 (9) TMI 14 - SC - Income Tax

Incentive subsidy treated as capital receipt; s.80P(2)(a)(i) exemption requires factual proof of cooperative's specified businesses

Commissioner of Income Tax, Madras Versus Ponni Sugars & Chemicals Ltd.

SC held the incentive subsidy paid under the Scheme was capital in nature, not revenue, because receipt was conditioned on repayment of term loans for ... Co-operative Sugar Mill - character of the incentive subsidy under the said Schemes - includible in the total income - entitled to exemption under Section 80 P(2)(a)(i) - interest received from the members of the society - whether the incentive subsidy received by the assessee is a capital receipt - HELD THAT:- According to the Department, price and costs are essential items that are basic to the profit making process and that any price related mechanism would normally be presumed to be revenue in nature. In other words, according to the Department, since incentives were given through price and duty differentials, the character of the impugned incentive in this case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. In Sahney Steel and Press Works Ltd. [1997 (9) TMI 3 - SUPREME COURT] this Court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. assessee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business. Applying the above tests to the facts of the present case and keeping in mind the object behind the payment of the incentive subsidy we are satisfied that such payment received by the assessee under the Scheme was not in the course of a trade but was of capital nature. Accordingly the first question is answered in favour of the assessee and against the Department. In order to earn exemption under Section 80 P(2) a co-operative society must prove that it had engaged itself in carrying on any of the several businesses referred to in sub-section (2). In that connection, it is important to note that under sub-section (2), in the context of co-operative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the Memorandum of Association, the Articles of Association, the Return of Income filed with the Department, the status of business indicated in such Returns etc.. This exercise had not been undertaken at all. Thus, we set aside the impugned judgments of the High Court and remit the matters to the Tribunal for de novo consideration in accordance with law. All the contentions on both sides are expressly kept open. Accordingly, the appeals filed by the Department are partly allowed. Issues Involved:1. Whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income.2. Whether the assessee was entitled to exemption under Section 80 P(2)(a)(i) of the Income Tax Act, 1961, in respect of interest received from the members of the society.3. Whether the area development funds collection by sugar mills would be a trading receipt.Detailed Analysis:Issue 1: Incentive Subsidy as Capital ReceiptThe primary question was whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income. The court examined four incentive subsidy schemes from 1980, 1987, 1988, and 1993, which were similar except in details. The schemes aimed to make new sugar factories economically viable by providing benefits such as higher free sale sugar quotas and excise duty rebates.The Department argued that the additional revenue from higher free sale sugar quotas and retained excise duty should be considered revenue receipts, citing the case of Sahney Steel and Press Works Ltd. The assessee contended that the subsidies were capital receipts meant for repaying loans to set up or expand units, applying the 'purpose test' from the same case.The court noted that the schemes were designed to address economic viability issues due to high costs and lack of financial institution support. The subsidies were intended to enable the establishment or expansion of sugar factories, not to supplement trade receipts. The court applied the 'purpose test' and concluded that the subsidies were capital in nature as they were meant for repaying term loans for setting up new units or expanding existing ones.Issue 2: Exemption under Section 80 P(2)(a)(i)The second question was whether the assessee was entitled to exemption under Section 80 P(2)(a)(i) of the Income Tax Act, 1961, for interest received from society members. The court found that none of the authorities, including the High Court, had examined the Memorandum of Association, Articles of Association, or the Return of Income filed by the assessee. The court emphasized that to earn exemption under Section 80 P(2), a co-operative society must prove it is engaged in the business of banking or providing credit facilities to its members. The court remitted the matter to the Tribunal for de novo consideration, instructing it to examine the necessary documents to determine eligibility for the exemption.Issue 3: Area Development Funds as Trading ReceiptIn the civil appeal arising out of SLP (C) No. 573/07, the question was whether the area development funds collected by sugar mills would be considered a trading receipt. The court referred to the judgment of the Bombay High Court in CIT v. Chhatrapati Sahakari Sakhar Karkhana Ltd. and remitted the matter to the Tribunal for de novo consideration in accordance with the law and the directions given in the cited case.Conclusion:The Supreme Court concluded that the incentive subsidies were capital receipts and not includible in total income, remitted the question of exemption under Section 80 P(2)(a)(i) for further examination, and directed a de novo consideration for the classification of area development funds. The appeals filed by the Department were partly allowed with no order as to costs.