2002 (8) TMI 289 - AT - Income Tax

Assessee prevails in capital receipt case; export loss disallowance deletion upheld.

Additional Commissioner Of Income-Tax. Versus Chodavaram Co-op. Sugars Ltd.

The Tribunal ruled in favor of the assessee, determining that the incentive received was a capital receipt. Additionally, the Tribunal upheld the deletion ... Business Income Issues Involved:1. Whether the incentive received by the assessee is to be treated as a capital receipt or revenue receipt.2. Deletion of addition made on account of disallowance of loss on export quota sugar.Detailed Analysis:1. Treatment of Incentive as Capital or Revenue Receipt:The main point of dispute in both the appeals is whether the incentive received by the assessee should be treated as a capital receipt or revenue receipt. The Assessing Officer (AO) treated the incentive received from the Government of India as revenue expenditure, whereas the assessee claimed it as a capital receipt. The CIT(A) had differing opinions for the assessment years 1996-97 and 1997-98.The assessee, a Co-operative society engaged in the manufacture and sale of sugar, expanded its factory capacity by availing loans from financial institutions under a Government of India incentive scheme aimed at augmenting indigenous sugar production. The scheme allowed sugar mills to generate additional funds through higher free sale quotas to repay term loans.The AO considered the incentive as revenue receipt, arguing that the surplus funds from the sale were trading in nature and that the incentive was given by way of sale proceeds. The AO relied on the Supreme Court judgment in the case of Sahney Steels & Press Works Ltd. v. CIT.The CIT(A) for the assessment year 1996-97 analyzed the purpose of the incentive scheme and concluded that the incentive was extended to meet the capital cost of setting up or expanding sugar mills. The CIT(A) held that the purpose of the subsidy determines its nature, and since the incentive was meant for capital assistance, it should be treated as a capital receipt. The CIT(A) relied on several judgments, including V.S.S. Meenakshi Achi v. CIT and CIT v. Balarampur Chini Mills Ltd.For the assessment year 1997-98, the successor CIT(A) took a different stand, holding that the incentive was a revenue receipt. The CIT(A) reasoned that since the assessee had already repaid most of the loans before availing the scheme, the incentive was used for running the day-to-day business, thus constituting a revenue receipt. The CIT(A) relied on judgments such as Kesoram Industries & Cotton Mills Ltd. v. CIT and the Supreme Court judgment in Sahney Steels & Press Works Ltd.During the hearing, the assessee argued that the incentive was meant to extend capital assistance and not to meet recurring costs or revenue expenses. The assessee pointed out that similar subsidies are treated as capital receipts under the Income-tax Act, and the incentive should be treated likewise. The assessee also highlighted that the incentive was used to repay term loans, as evidenced by the utilisation certificate accepted by the Government.The Tribunal considered the submissions, documents, and case laws. It noted that the incentive scheme aimed to meet prohibitive capital costs and encourage entrepreneurs to set up sugar mills. The Tribunal found that the repayment of loans before receiving the incentive was in line with the scheme's terms and conditions, and the Government had accepted the utilisation certificate. The Tribunal held that the incentive was a capital receipt, relying on the Supreme Court judgment in Bijli Cotton Mills (P.) Ltd. v. CIT.2. Deletion of Addition on Account of Disallowance of Loss on Export Quota Sugar:The second issue pertains to the deletion of an addition made on account of disallowance of loss on export quota sugar. The assessee had paid an estimated amount for export loss, which was kept under suspense account. The final loss amount was determined later, and the balance was refunded to the assessee. The assessee claimed the loss in the assessment year 1996-97, arguing that the loss crystallised during that year.The AO disallowed the claim, stating that the loss should have been claimed in the year the intimation was received. The CIT(A) deleted the addition, observing that the loss was adjusted in the books of account during the relevant assessment year after receiving the necessary approval from the competent authority.The Tribunal upheld the CIT(A)'s order, agreeing that the loss crystallised during the assessment year 1996-97 and was rightly deductible in computing the income for that year.Conclusion:The Tribunal decided in favor of the assessee, holding that the incentive received was a capital receipt and upholding the deletion of the addition made on account of disallowance of loss on export quota sugar. The appeal of the Revenue for the assessment year 1996-97 was allowed, and the appeal of the assessee for the assessment year 1997-98 was also allowed.