1997 (9) TMI 3 - SC - Income Tax

State government subsidies for new industrial units after production begins held taxable as revenue, not capital receipt

The dominant issue was whether the subsidy/incentives received from a State Government by a newly established industrial undertaking constituted a capital ... Taxability of Subsidy - incentives to new industrial undertakings - Whether the subsidy received by the assessee-company from the Andhra Pradesh Government is taxable as revenue receipt or not - HELD THAT:- In the instant case, the first proposition of Viscount Simon clearly applies. The amount paid to the assessee in the instant case is in the nature of subsidy from public funds. The funds were made available to the assessee to assist it in carrying on its trade or business. In our view, having regard to the scheme of the notification, there can be little doubt that the object of various assistances under the subsidy scheme was to enable the assessee to run the business more profitably. In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries. The Madhya Pradesh High Court in the case of CIT v. Dusad Industries [1985 (11) TMI 43 - MADHYA PRADESH HIGH COURT], dealt with a case where the Government had framed a scheme for granting sales tax subsidies to industries set up in backward areas. The High Court was of the view that the object of the scheme was not to supplement the profits made by industries. In that view of the matter, the High Court held that the subsidies given under the said scheme by the Government to newly set up industries were capital receipts in the hands of the industries and could not be taxed as revenue receipts. In that case, 75 per cent. of the sales tax paid in a year for a period of five years from the date of starting of production was to be given back by the Government to the industry concerned. The High Court was of the view that obviously the subsidy was given by way of an incentive for capital investment and not by way of addition to the profits of the assessee as was clear from the facts and circumstances of the case. The Madhya Pradesh High Court, however, failed to notice the significant fact that under the scheme framed by the Government, no subsidy was given until the time production was actually commenced. Mere setting up of the industry did not qualify an industrialist for getting any subsidy. The subsidy was given as help not for the setting up of the industry which was already there but as an assistance after the industry commenced production. The view taken by the Madhya Pradesh High Court is erroneous. Appeal fails and is dismissed. Issues Involved:1. Whether the subsidy received by the assessee-company from the Andhra Pradesh Government is taxable as revenue receipt or not.2. Whether the amount of Rs. 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was liable to be included in the total income assessable for the assessment year 1974-75.Issue-wise Detailed Analysis:1. Taxability of Subsidy as Revenue Receipt:The core issue is whether the subsidy received by the assessee-company from the Andhra Pradesh Government should be treated as a revenue receipt and thus taxable. The Andhra Pradesh Government provided various incentives to new industrial undertakings commencing production after January 1, 1969, with investment capital not exceeding Rs. 5 crores. These incentives included a refund of sales tax on raw materials, machinery, and finished goods, a subsidy on power consumed for production, exemption from payment of water rate, and other concessions.The judgment emphasizes that these incentives were production incentives, available only after the commencement of production and not for setting up the industries. This indicates that the subsidies were operational in nature, aimed at making the business of production and sale of goods more profitable. The court referenced the principle stated by Viscount Simon in Ostime v. Pontypridd and Rhondda Joint Water Board, which asserts that subsidies from public funds to assist in carrying on a trade or business are trading receipts.The court also examined similar cases, such as Seaham Harbour Dock Co. v. Crook and Lincolnshire Sugar Co. Ltd. v. Smart, to determine the nature of the subsidy. It concluded that the subsidies in question were operational subsidies, as they were given to assist the assessee in carrying on its business post-commencement of production, and thus should be treated as revenue receipts.2. Inclusion of Rs. 14,665 in Assessable Income:The specific amount of Rs. 14,665 received by the assessee, comprising refunds of sales tax on machinery, raw materials, and finished goods, was initially included in the assessable income by the Income-tax Officer. However, the Tribunal held that this amount was a development subsidy of a capital nature and not taxable under section 41(1) of the Income-tax Act.The court rejected the Tribunal's view, stating that the subsidies were not for setting up the industry but were given after the commencement of production to assist the business. The court emphasized that the purpose of the subsidy determines its nature-if it assists in carrying on the business, it is a trading receipt. The court found that the subsidies in question were operational and aimed at making the business profitable, thus should be included in the assessable income as revenue receipts.Conclusion:The court dismissed the appeal by the assessee, holding that the subsidies received were of revenue character and taxable. The subsidies were not for the creation of new assets but to assist in the business operations post-commencement of production. The appeals by the Revenue were allowed, reinforcing the view that such subsidies are taxable as revenue receipts.