TaxTMI 
TaxTMI 
2013 (7) TMI 807
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.... account. The Assessing Officer completed the assessment denying the claim and held that the power rebate given by the Electricity Department cannot be capitalized as the same is given as rebate which is in the nature of a revenue receipt and cannot be treated as a capital receipt. The Appellate Commissioner, however, considered the Government Order, being G. O. Ms. No. 455, dated May 3, 1971, which enabled the grant of the power subsidy/rebate and in the light of the law laid down in Senairam Doongar mall v. CIT [1961] 42 ITR 392 (SC), S. R. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 (SC) and CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP) came to the conclusion that the subsidy is a capital receipt which is not taxable. This view received the approval of the Appellate Tribunal, who dismissed the Revenue's appeal on September 27, 1994. Aggrieved thereby, the Revenue sought reference under section 256(1) of the Act. In R. C. Nos. 273 of 1996 and 63 of 1997, the contention of M/s. Deccan Cements Ltd. (the assessee) that the power subsidy/rebate received by them is a capital receipt was accepted by the Appellate Commissioner following the decision of the Appellate Tribu....
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....ale industries and 12.5 per cent. in the case of small industries ; (iv) exemption from payment of water rates ; and (v) concession in the land revenue or taxes on land. In addition to these, additional incentives are also allowed in certain areas with which we are not concerned. The referred cases of Raasi Cements relate to the assessment year 1983-84 and those of Deccan Cements relate to 1988-89 and 1990-91. There is also no dispute that in all these cases power subsidy/rebate was allowed to the assessee as per G. O. Ms. No. 455, dated May 3, 1971. Therefore, the question to be decided is as to what is the nature of the power subsidy given to these assessees is with reference to the executive orders referred to hereinabove. Principles of law Whether the amount received by an assessee is a capital receipt or a revenue receipt ? It is perennially a vexed question. As of now there is no definite test or universally accepted theory to conceptualise the nature of the receipt. Of late, however, definite principles have emerged from the decided cases which help in the classification of money receipts. In Advanced Law Lexicon by P. Ramanatha Aiyar, third edition, reprint 2007, "....
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....ts for quantifying as are geared to percentage of such costs". In Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC), the apex court ruled that : "the character of the subsidy in the hands of the recipient.... will have to be determined having regard to the purpose for which the subsidy is given.... if the purpose is to help the assessee to set up its business or complete a project the moneys must be treated as having been received for capital purposes. If the moneys are given to the assessee for assessing him in carrying out the business operations and the money is given only after condition upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade". In CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC), referring to Sahney Steel, the Supreme Court pointed out that one has to apply the purpose test or basic test (purpose for which the subsidy is given) to determine the nature of the receipt. It is apt to quote the following (page 400) : "The importance of the judgment of this court in Sahney Steel lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic....
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....ature of the subsidies in each of the three cases is separate and distinct. There is no strait jacket principle of distinguishing a capital receipt from a revenue receipt. It depends upon the circumstances of each case. As stated above, in Sahney Steel and Press Works Ltd., this court has observed that the production incentive scheme is different from the scheme giving subsidy for setting up industries in backward areas." (emphasis1 supplied) From the above four decisions of the Supreme Court, in so far as the power subsidy is concerned, the following may be taken as well settled. If the subsidy is given for setting up of an industry in the backward areas or it is given for repayment of the term loan undertaken by the assessee for setting up a new industry, it should be treated as a capital asset (Ponni Sugars and Mepco). The power subsidy given as part of an incentive scheme, after commencement of production, it should be treated as subsidy linked to production, and, therefore, it is a revenue receipt, because such assistance is given for the purpose of carrying of business by the assessee (Sahney Steel). Further, the production incentive scheme is always different from the sch....
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....d backward areas including investment subsidy. The Bench recorded a finding that :"the subsidy is granted more as a recompense for the hardships and inconvenience, whose entrepreneurs may encounter while setting up industries in backward areas. It was not a case of any incentive being granted year after year like in the case of power subsidy". In CIT v. Tirumala Bricks and Tiles Factory [1996] 217 ITR 547 (AP), the assessee received investment subsidy which was treated as a revenue receipt for the purpose of computing profits from business. Applying the principle in Sahney Steel, the Appellate Commissioner agreed with the Assessing Officer. But the Tribunal reversed holding that it is not a trading receipt. In the reference under section 256(1), this court having regard to the nature of the investment subsidy held that the investment subsidy given for setting up new industries in the backward areas is not a trading receipt and answered the question in favour of the assessee. We may reiterate that Sahney Steel is a case concerning incentives (including power subsidy) granted year after year which were treated as supplementary trade receipts. Even with regard to the power subsi....