TaxTMI 
TaxTMI 
1997 (9) TMI 3
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....encement of production. Concession is also available for subsequent expansion of 50 per cent. and above of existing capacities provided, in each case, the expansion was located in a city or town or panchayat area, other than that in which the existing unit is located. The incentives were : " (a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent. of the equity capital paid-up in the case of public limited companies and the actual capital in the case of others ; (b) Subsidy on power consumed for production to the extent of 10 per cent. in the case of medium and large scale industries and 121/2 per cent. in the case of small scale industries. This concession will not apply to cases where concessional tariffs are allowed by the Electricity Board ; (c) Exemption from payment of water rate on water drawn from sources not maintained at the cost of Government or any local body ; (d) Refund of water rate in respect of water drawn from a Government source or from a source maintained by any local body but returned purified to it ; (e) Liability on account of assessment of land revenue or taxes on land us....
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....ssee, has contended that the incentive scheme was for setting up new industrial undertakings in the State and also for the purpose of stimulating substantial expansion of the industries. The primary object was rapid industrialisation of the State. This object was sought to be. achieved by the various incentives. It was further contended that the subsidy given by the State was up to 10 per cent. of the capital investment in the undertakings. Since the subsidy was calculated on the basis of the quantum of investment in capital such subsidy cannot be considered to have been received by the assessee on revenue account. It was further contended by Mr. Ganesh that grant of subsidy was on the basis of refund of sales tax on raw materials, machinery and finished goods already paid for by the assessee. These subsidies would be enjoyed by the assessee for a period of five years and were of a capital nature. The object of granting refund of sales tax was that the assessee could set up new business or expand substantially his existing business. Before we examine these propositions advanced by Mr. Ganesh, we will examine the facts of the case a little more. The assessee-company, Sahney Steel ....
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....dustries a helping hand for five years to enable them to be viable and competitive. Sales tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably. The basic principle to be applied for determination as to whether a subsidy payment is in the nature of capital or revenue, has been stated by Viscount Simon in Ostime v. Pontypridd and Rhondda joint Water Board [1946] 14 ITR (Suppl.) 45, 47 ; [1946] 28 TC 261 (HL) in the following words : " The first proposition is that, subject to the exception hereafter mentioned, payments in the nature of a subsidy from public funds made to an undertaker to assist in carrying on the undertaker's trade or business are trading receipts, that is, are to be brought into account in arriving at the balance of profits or gains under Case I of Schedule D. It is sufficient to cite the decision of this House in the sugar beet case (Smart v. Lincolnshire Sugar Co. Ltd. [1937] 20 TC 643 ; 156 LT 215) as an illustration. The second proposition constitutes an exception. If the undertaker is a rating authority and the subsidy is the proceeds of rat....
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....by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. " Mr. Ganesh strongly relied on Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) which does not come to the assistance of his contention in any way. In that case application for assistance was made even before the work of expansion of dock commenced. The money was for extension of the docks of the company. The extension would have enabled some persons to be kept in employment who would otherwise have lost their jobs. Money was given in several instalments as the work of extension of the dock continued. Money was given for the express purpose which was named. It was found by the House of Lords that it had nothing to do with the trading of the company. 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....
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....ed out after discussing the Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) as well as that of Lincolnshire Sugar Co.'s case [1937] 20 TC 643 (HL) that subsidy given by the Canadian Government to encourage construction of dry docks was " an aid to the construction of dry dock and not an operational subsidy ". That precisely is the question raised in this case. By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies. Mr. Ganesh's further argument was that of the three types of refunds contemplated in the scheme, the refund of sales tax on purchase of machinery must be treated as capital. The payment for the purchase of machinery must be of capital nature and the entire payment of sales tax must have been treated as capit....
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....assistance for the purpose of the trade. In Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) which appears to be the sheet-anchor of the argument of Mr. Ganesh, the company in contemplation of an expansion of its docks had applied for financial assistance to the Unemployment Grants Committee. The Committee gave financial assistance from time to time as the work progressed and the payment was equivalent to half the interest for two years (not exceeding average rate of 51/2 per cent. per annum) on approved expenditure made out of loans. Even though the payment was equivalent to half the interest amount payable on the loan which might have been a revenue expenditure, the House of Lords had no difficulty in holding that the money received by the company was not in the course of trade but was of capital nature. We shall now see how our courts have dealt with the problem. This court in V.S.S.V. Meenakshi Achi v. CIT [1966] 60 ITR 253 followed the same principle and relied upon and approved of an English decision in the case of Higgs v. Wrightson [1944] 26 TC 73. There a dairy farmer had received a grant in respect of the ploughing and bringing into a state of cleanliness and ferti....
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.... v. State of Kerala [1963] 48 ITR 83 (SC) and Travancore Rubber and Tea Co. Ltd. v. Commr. of Agrl. I.T [1961] 41 ITR 751 (SC). " So far as the scheme is concerned, the Full Bench further observed : " The subsidy scheme makes it very clear that the amount of subsidy has to be spent ' for the acquisition of an asset ' by replanting rubber plants of high-yielding varieties. " It will be seen from this decision that the Full Bench relied upon the decision of the House of Lords in Seaham Harbour Dock Co.'s case [1931] 16 TC 333 and pointed out that a beneficial scheme had been evolved for replanting of the trees and as a result of replanting, the assessee acquired an asset which was of capital nature. It was further pointed out in that judgment that the scheme was definitely only for one purpose, viz., replanting. It was not for the purpose of upkeeping and maintaining mature or immature rubber plants. This was the vital factor on the basis of which the Full Bench of the Kerala High Court came to the conclusion that the subsidy given for replanting of old rubber trees cannot be included as a revenue receipt of the rubber company. Our attention was drawn to the case of Sadichha Chit....
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.... by the State Government for producing new regional films. It was held that the entitlement to the subsidy sprang from the business carried on by the assessee and the amount was received during the course of conduct of the business. What was received by the assessee was not a capital receipt but a subsidy. The facts of this case have not been clearly stated in the judgment. But, it appears that subsidy was granted after making of the film. The Bombay judgment in the case of Sadichha Chitra [1991] 189 ITR 774, proceeded on the footing that subsidies were granted as and when the film was being completed which resulted in creation of a capital asset. A similar view was taken by the Andhra Pradesh High Court in the case of CIT v. Chitra Kalpa [1989] 177 ITR 540, where it was held that subsidy was for making a film and was to be treated as a capital receipt because the film was a capital asset in the hands of the producer. The view taken by the Bombay and Kerala High Courts appears to be correct and accords with the principle laid down in Seaham Harbour Dock Co.'s case [1931] 16 TC 333 (HL) that assistance given by the Government for completion of a project must be of capital nature. ....